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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Kaveri Agro Foods Ltd engages its statutory auditor, M/s Rao & Co., to also perform the company's internal audit and design its ERP financial system. Considering the Companies Act, 2013 and the ICAI Code of Ethics, what is the correct position?

This is not permitted. The Companies Act, 2013 prohibits the statutory auditor from providing internal audit and design or implementation of financial information systems to the audited company or its holding or subsidiary companies, as these create self-review threats to independence. Separate engagement letters or audit committee approval cannot override the prohibition.

  1. APermitted, as long as a separate engagement letter is signed for each service
  2. BPermitted if the audit committee approves the fees
  3. CNot permitted, as rendering internal audit and design or implementation of financial information systems to the audited company is a prohibited service for the statutory auditorCorrect
  4. DPermitted for internal audit but prohibited only for ERP design

Explanation

The Companies Act, 2013 bars the statutory auditor from rendering services such as internal audit and design and implementation of financial information systems to the company, its holding or subsidiary companies, because of threats to independence. Separate letters or audit committee approval do not cure this prohibition, and both services are covered.

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