Skip to content

CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Governance Influencers

Meridian Textiles Ltd, a listed company, wants its statutory auditor to also design and implement its internal financial control software for a fee. The audit committee asks the Company Secretary whether this is acceptable from a governance viewpoint. Which advice is correct?

The arrangement is not acceptable. An auditor must stay independent, and designing and implementing financial information or control systems for the audited company is a prohibited service because the auditor would review its own work. Disclosure, board approval or a different partner does not remove the prohibition.

  1. AIt is acceptable if the fee is disclosed in the annual report
  2. BIt is acceptable if the board approves it by a simple majority
  3. CIt is not acceptable, because designing and implementing systems for the audited entity impairs the auditor's independence and is a prohibited non-audit serviceCorrect
  4. DIt is acceptable if the work is done by a different partner of the same audit firm

Explanation

Under the Companies Act, 2013 an auditor cannot render certain services to the company, including design and implementation of financial information systems, because of the self-review threat to independence. Disclosure, board approval or using another partner of the same firm does not cure the prohibition. The gatekeeper role depends on independence.

Did you get it right without looking?

One question tells you little. A timed set on Governance Influencers shows your real accuracy, how long you take and where you lose marks.

Practise Governance InfluencersFree diagnostic mock

More Governance Influencers questions