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CA Final · Advanced Auditing, Assurance and Professional Ethics · Internal Audit

Sagar Agro Ltd's statutory auditor, Rao & Co, wishes to avoid the bar on internal audit. The company proposes that Rao & Co's associate entity, Rao Advisory LLP, in which the firm's partners have significant influence, be appointed as internal auditor. What is the correct position?

Not allowed. The Explanation to section 144 treats services rendered through the audit firm's associate entity, or an entity where the firm or its partners have significant influence, as indirect services. Since internal audit is prohibited, the LLP's appointment would breach the Act despite separate legal identity.

  1. AAllowed, because the LLP is a separate legal entity from the audit firm
  2. BAllowed, if the audit committee approves the LLP's appointment
  3. CNot allowed, because the Explanation to section 144 treats services rendered through an associate entity as indirect renderingCorrect
  4. DAllowed, if the LLP's fee is below the statutory audit fee

Explanation

The Explanation to section 144 says that for a firm, 'directly or indirectly' includes services through its associate entity or any entity in which the firm or a partner has significant influence or control. So the LLP route is caught. Separate legal personality does not help, and audit committee approval cannot override the prohibition.

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