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

M/s Rao & Co., Chartered Accountants, have been asked by Kaveri Textiles Ltd to audit its financial statements. Before accepting, the firm learns that the previous auditor, Mr. Iyer, was replaced at the company's AGM. What should the incoming auditor do first, as a matter of professional ethics, before accepting the appointment?

The incoming auditor should write to the previous auditor, Mr. Iyer, before accepting the appointment to ask whether there are any professional reasons why the engagement should not be accepted. This is required by the Code of Ethics, and acceptance followed by later intimation does not satisfy it.

  1. AAccept the appointment and inform Mr. Iyer afterwards
  2. BCommunicate with Mr. Iyer in writing to ascertain whether there are any professional reasons why the appointment should not be acceptedCorrect
  3. CObtain a no-objection certificate from the company's board of directors only
  4. DAsk the company's management for the reasons for the change and rely on their reply

Explanation

Under the Code of Ethics, an incoming auditor must communicate with the existing auditor in writing to find out whether there are professional reasons not to accept the engagement. Informing the predecessor after acceptance is too late. Relying only on management's explanation does not meet this requirement.

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