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CA Intermediate · Auditing and Ethics · Ethics and Terms of Audit Engagements

Meera, a practising CA, is the statutory auditor of Orchid Pharma Ltd. Her firm's partner has just been offered a loan by Orchid Pharma Ltd, which is an audit client, on terms not available to the public. Under the Code of Ethics and the Companies Act, 2013, how should this be viewed?

This is not permissible. A loan from an audit client on terms not available to the public creates a self-interest threat and impairs independence. The Companies Act also prohibits an auditor, and persons connected to the firm, from taking such loans from the audited company, so disclosure or small amounts do not cure it.

  1. APermissible, since the loan is at a market rate and personal
  2. BPermissible if disclosed to the audit committee in the notes
  3. CNot permissible, as it creates a financial interest or loan threat that impairs independenceCorrect
  4. DPermissible if the loan is below Rs 5 lakh

Explanation

A loan to or from an audit client on non-public terms creates a self-interest threat. The Companies Act restricts an auditor from taking loans from or giving guarantees to the company, and the Code of Ethics treats it as impairing independence. Disclosure to the audit committee or a small amount does not remove the prohibition.

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