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CMA Intermediate · Business Laws and Ethics · Operational and Financial Control

M/s Rao & Co., a firm of chartered accountants, is the statutory auditor of Kaveri Textiles Ltd. Rao & Co.'s partner has significant influence over Rao Advisory LLP, which provides internal audit services to Kaveri Textiles Ltd. How does Section 144 of the Companies Act, 2013 treat this arrangement?

The arrangement is prohibited. Internal audit is a barred service, and for an audit firm the indirect rendering covers services through any entity in which a partner has significant influence or control. Board approval cannot override the bar, and use of the firm's name is not required.

  1. APermitted, because the internal audit is done by a separate entity and not by the firm itself
  2. BPermitted, if the Board approves, since internal audit is a non-audit service
  3. CProhibited, since 'directly or indirectly' covers services through an entity in which a partner has significant influence or controlCorrect
  4. DProhibited only if the LLP uses the name of the audit firm

Explanation

Internal audit is a barred service. For a firm, the Explanation says indirect rendering includes services through any entity in which the firm or any partner has significant influence or control, or whose name or brand the firm or a partner uses. The significant influence alone is enough, and the name use is only an alternative test, and Board approval cannot permit a barred service.

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