Docstoc

Define Chartered Accountant - PDF

Document Sample
Define Chartered Accountant - PDF Powered By Docstoc
					                                                ACCOUNTING

                       REVISED GUIDANCE NOTE ON
                       INDEPENDENCE OF AUDITORS
The following is the text of the revised Guidance Note on Independence of Auditors issued by the Council of the
Institute of Chartered Accountants of India.
                                              fused with the superficial and                 conclude a firm’s, or a
1. INTRODUCTION                               visible standards of independ-                 member of the assurance
                                              ence which are sometimes imp-                  team’s, integrity, objectivity
1.1 This Guidance Note aims to                osed by law. These legal stan-                 or professional skepticism
    clarify the meaning of indepen-           dards may be relaxed or streng-                had been compromised.”
    dence while performing their              thened but the quality of inde-      1.4 Independence of the auditor has
    duties as Auditors. Profe-                pendence remains unaltered.               not only to exist in fact, but also
    ssional integrity and indepen-        1.3 There are two interlinked per-            appear to so exist to all reason-
    dence is an essential character-          spectives of independence of              able persons. The relationship
    istic of all the professions but is       auditors, one, independence of            between the auditor and his
    more so in the case of accoun-            mind; and two, independence               client should be such that
    tancy profession. Indepen-                in appearance.                            firstly, he is himself satisfied
    dence implies that the judg-              The Code of Ethics for                    about his independence and
    ment of a person is not subordi-          Professional      Accountants,            secondly, no unbiased person
    nate to the wishes or direction           issued     by     International           would be forced to the conclu-
    of another person who might               Federation of Accountants                 sion that, on an objective
    have engaged him, or to his               (IFAC) defines the term                   assessment of the circum-
    own self-interest. This docu-             ‘Independence’ as follows:                stances, there is likely to be an
    ment shall provide guidance to                                                      abridgement of the auditors’
    members about the specific cir-       “Independence is:                             independence.
    cumstances and relationships              (a) Independence of mind –           1.5 In all phases of a Chartered
    that may create threats to inde-              the state of mind that per-           Accountant’s work, he is
    pendence. The Guidance Note                   mits the provision of an              expected to be independent, but
    also provides safeguards that                 opinion without being                 in particular in his work as audi-
    should be employed by the                     affected by influences that           tor, independence has a special
    auditors to mitigate the risk ari-            compromise professional               meaning and significance. Not
    sing from such circumstances                  judgment, allowing an                 only the client but also the
    and relationship leading to the               individual to act with                stakeholders, prospective inve-
    threats to independence.                      integrity, and exercise               stors, bankers and government
1.2 It is not possible to define                  objectivity and profes-               agencies rely upon the accounts
    “independence”          precisely.            sional skepticism; and                of an enterprise when they are
    Rules of professional conduct             (b) Independence in appear-               audited by a Chartered Acco-
    dealing with independence are                 ance – the avoidance of               untant. As statutory auditor of a
    framed primarily with a certain               facts and circumstances               limited company, for example,
    objective. The rules them-                    that are so significant a rea-        the Chartered Accountant
    selves cannot create or ensure                sonable and informed third            would cease to perform any
    the existence of independence.                party, having knowledge               useful function if the persons
    Independence is a condition of                of all relevant information,          who rely upon the accounts of
    mind as well as personal char-                including any safeguards              the company do not have any
    acter and should not be con-                  applied, would reasonably             faith in the independence and

THE CHARTERED ACCOUNTANT                                  1090                                          FEBRUARY 2005
                                                ACCOUNTING

    integrity of the Chartered                himself whether or not he can                  tivity, Confidentiality and
    Accountant. In such cases he is           act independently in the given                 Professional Behaviours.
    expected to be objective in his           circumstances of a case and                (b) Skills and Competence:
    approach, fearless, and capable           quite apart from legal rules, in               The firm is to be staffed by
    of expressing an honest opinion           no case to place himself in a                  personnel who have att-
    based upon the performance of             position which would compro-                   ained and maintained the
    work such as his training and             mise his independence.                         Technical Standards and
    experience enables him to do so.      1.9 The auditor should be straight-                Professional Competence
1.6 The objective of an audit of              forward, honest and sincere in                 required to enable them to
    financial statements, prepared            his approach to his professional               fulfill their responsibilities
    within a framework of recog-              work. He must be fair and must                 with Due Care.
    nized accounting policies and             not allow prejudice or bias to             (c) Assignment: Audit work
    practices and relevant statutory          override his objectivity. He                   is to be assigned to person-
    requirements, if any, is to               should maintain an impartial                   nel who have the degree of
    enable an auditor to express an           attitude and both be and appear                technical training and pro-
    opinion on such financial state-          to be free of any interest which               ficiency required in the cir-
    ments. The auditor’s opinion              might be regarded, whatever its                cumstances.
    helps determination of the true           actual effect, as being incom-             (d) Delegation: There is to be
    and fair view of the financial            patible with integrity and                     sufficient direction, super-
    position and operating results            objectivity. This is not self evi-             vision and review of work at
    of an enterprise. The user, how-          dent in the exercise of the                    all levels to provide reason-
    ever, should not assume that the          reporting function but also                    able assurance that the work
    auditor’s opinion is an assur-            applies to all other professional              performed meets appropri-
    ance as to the future viability of        work. In determining whether a                 ate standards of quality.
    the enterprise or the efficiency          member in practice is or is not            (e) Consultation: Whenever
    or effectiveness with which               seen to be free of any interest                necessary, consultation
    management has conducted the              which is incompatible with                     within or outside the firm is
    affairs of the enterprise.                objectivity, the criterion should              to occur with those who
1.7 The idea of independence is               be whether a reasonable per-                   have appropriate expertise.
    instilled in the minds of                 son, having knowledge of rele-             (f) Acceptance and Retention
    Chartered Accountants from the            vant facts and taking into                     of Clients: An evaluation of
    commencement of their training            account the conduct of the                     prospective clients and a
    under articles or audit service. It       member and the member’s                        review, on an ongoing basis,
    has to be applied in their day-to-        behaviour under the circum-                    of existing clients is to be
    day work and their success is             stances, could conclude that the               conducted. In making a
    dependent entirely upon their             member has placed himself in a                 decision to accept or retain a
    integrity, competence and inde-           position where his objectivity                 client, the firm’s indepen-
    pendence of approach.                     would or could be impaired.                    dence and ability to serve
1.8 Dependent as it is on the state of    1.10 While performing audit func-                  the client properly are to be
    mind and character of a person,           tions, maintaining quality con-                considered.
    independence, is a very subjec-           trol is the objective of the quality       (g) Monitoring: The contin-
    tive matter. One person might             control and policies to be                     ued adequacy and opera-
    be independent in a particular            adopted by an Auditor shall ordi-              tional effectiveness of
    set of circumstances, while               narily incorporate the following:              quality control policies
    another person might feel he is           (a) Professional Require-                      and procedures is to be
    not independent in similar cir-                 ments: Personnel in the                  monitored.
    cumstances. It is therefore the                 firm are to adhere to the        1.11A member not in practice has a
    duty of every Chartered                         principles of Independ-              duty to be objective in carrying
    Accountant to determine for                     ence, Integrity, Objec-              out his or her professional

THE CHARTERED ACCOUNTANT                                   1091                                          FEBRUARY 2005
                                              ACCOUNTING

    work whether or not the appear-     2.THREATS TO                                promotes, or is perceived
    ance of professional inde-            INDEPENDENCE                              to promote, a client’s opin-
    pendence is attainable. Thus a      2.1 The Code of Ethics for                  ion to a point where people
    member performing profes-               Professional Accountants, pre-          may believe that objectiv-
    sional work must recognize the          pared by the International              ity is getting compro-
    problems created by personal            Federation of Accountants               mised, e.g. when an audi-
    relationships or financial              (IFAC) identifies five types of         tor deals with shares or
    involvement, which by reason            threats. These are:                     securities of the audited
    of their nature or degree might         1. Self-interest threats, which         company, or becomes the
    threaten his independence.                  occur when an auditing              client’s advocate in litiga-
1.12 Standing alone, the word                   firm, its partner or associate      tion and third party dis-
    “Independence” may lead                     could benefit from a finan-         putes.
    observers to suppose that a per-            cial interest in an audit        4. Familiarity threats are
    son exercising professional                 client. Examples include (i)        self-evident, and occur
    judgment ought to be free from              direct financial interest or        when auditors form rela-
    all economic, financial and                 materially significant indi-        tionships with the client
    other relationships. This is                rect financial interest in a        where they end up being
    impossible, as every member                 client, (ii) loan or guarantee      too sympathetic to the
    of society has relationships                to or from the concerned            client’s interests. This can
    with others. Therefore, the sig-            client, (iii) undue depen-          occur in many ways: (i)
    nificance of economic, finan-               dence on a client’s fees and,       close relative of the audit
    cial and other relationships                hence, concerns about los-          team working in a senior
    should also be evaluated in the             ing the engagement, (iv)            position in the client com-
    light of what a reasonable and              close business relationship         pany, (ii) former partner of
    informed third party having                 with an audit client, (v)           the audit firm being a
    knowledge of all relevant                   potential employment with           director or senior empl-
    information would reasonably                the client, and (vi) contin-        oyee of the client, (iii) long
    conclude to be unacceptable.                gent fees for the audit             association between spe-
1.13Many different circumstances,               engagement.                         cific auditors and their spe-
    or combination of circum-               2. Self-review threats, which           cific client counterparts,
    stances, may be relevant and                occur when during a                 and (iv) acceptance of sig-
    accordingly it is impossible to             review of any judgment or           nificant gifts or hospitality
    define every situation that cre-            conclusion reached in a             from the client company,
    ates threats to independence                previous audit or non-audit         its directors or employees.
    and specify the appropriate                 engagement, or when a            5. Intimidation         threats,
    mitigating action that should               member of the audit team            which occur when auditors
    be taken. In addition, the nature           was previously a director           are deterred from acting
    of assurance engagements may                or senior employee of the           objectively with an ade-
    differ and consequently differ-             client. Instances where             quate degree of profes-
    ent threats may exist, requiring            such threats come into play         sional skepticism. Basi-
    the application of different                are (i) when an auditor             cally, these could happen
    safeguards. A conceptual                    having recently been a              because of threat of
    framework that requires char-               director or senior officer of       replacement over dis-
    tered accountants to identify,              the company, and (ii) when          agreements with the appli-
    evaluate and address threats to             auditors perform services           cation of accounting prin-
    independence, rather than                   that are themselves subject         ciples, or pressure to dis-
    merely comply with a set of                 matters of audit.                   proportionately reduce
    specific rules in the public            3. Advocacy threats, which              work in response to
    interest.                                   occur when the auditor              reduced audit fees.

THE CHARTERED ACCOUNTANT                                1092                                    FEBRUARY 2005
                                               ACCOUNTING
3.SAFEGUARDS TO INDE-                            prohibit the appointment of a             which the director of the com-
  PENDENCE                                       person as auditor in certain              pany is a director or member.
3.1 The Chartered Accountant has                 circumstances or place cer-               In the case of such a person he
    a responsibility to remain inde-             tain restrictions on his                  may be appointed as auditor
    pendent by taking into account               appointment as auditor or                 of a company only if such
    the context in which they prac-              put third parties on guard                appointment is approved with
    tice, the threats to indepen-                against the possibility of an             the consent of the company in
    dence and the safeguards avail-              abridgement of indepen-                   general meeting obtained by a
    able to eliminate the threats.               dence by requiring certain                special resolution.
3.2 To address the issue, Members                disclosures to be made.             3.3.5 It will be observed from the
    are advised to apply the fol-                These provisions are briefly              above that the Act has specif-
    lowing guiding principles: -                 outlined below:                           ically provided for cases
    ● For the public to have confi-      3.3.2 Section         226      of     the         where the independence of an
       dence in the quality of audit,            Companies Act, 1956 pro-                  auditor may be affected by his
       it is essential that auditors             hibits the appointment of a               connection with the company
       should always be and appears              Chartered Accountant as                   and prohibited or restricted
       to be independent of the enti-            auditor of a Company if he is:            him from acting as auditor
       ties that they are auditing.        (i) an officer or employee of the               under those circumstances.
    ● In the case of audit, the key              Company;                            3.3.6 A question often arises as to
       fundamental principles are          (ii) a partner of a person in the               whether an indebtedness (as
       integrity, objectivity and pro-           employment of an officer or               referred in para (iii) above)
       fessional skepticism, which               of an employee of the                     arises in cases where in
       necessarily require the audi-             Company;                                  accordance with the terms of
       tor to be independent.              (iii) a person who is indebted to               his engagement by a client
    ● Before taking on any work,                 the company for an amount                 (e.g. resolution passed at the
       an auditor must conscien-                 exceeding Rs. 1000;                       general meeting) the auditor
       tiously consider whether it         (iv) a person who has given any                 recovers his fees on a pro-
       involves threats to his inde-             guarantee or provided any                 gressive basis as and when a
       pendence.                                 security in connection with               part of the work is done with-
    ● When such threats exist, the               the indebtedness of any third             out waiting for the comple-
       auditor should either desist              person to the company for an              tion of the whole job. In these
       from the task or, at the very             amount exceeding Rs. 1000;                circumstances, where in
       least, put in place safe-           (v) a person holding any secu-                  accordance with such terms
       guards that eliminate them.               rity of that company.                     the auditor recovers his fees
       All such safeguards mea-          3.3.3 A person who is disqualified                on a progressive basis he can-
       sure needs to be recorded in              from becoming auditor of                  not be said to be indebted to
       a form that can serve as evi-             any body corporate under the              the company at any stage.
       dence of compliance with                  above rules is also disquali-       3.3.7 A question of indebtedness
       due process.                              fied from appointment as                  may also be raised where an
    ● If the auditor is unable to                auditor of such body’s sub-               auditor of a company pur-
       fully implement credible and              sidiary, co-subsidiary or                 chases goods or services
       adequate safeguards, then he              holding company.                          from a company audited by
       must not accept the work.         3.3.4 Section 314 of the Companies                him. In such a case, if the
                                                 Act, 1956 makes separate                  amount outstanding exceeds
3.3 Provisions contained under                   provision for the case where              Rs. 1000/- irrespective of the
    the Companies Act, 1956                      an auditor of a Company                   nature of the purchase or
3.3.1 In order to ensure indepen-                (whether public or private) is            period of credit allowed to
      dence, the law has made cer-               a relative of a director, or man-         other customers the provi-
      tain provisions which either               ager of a private company of              sions concerning disqualifi-

THE CHARTERED ACCOUNTANT                                  1093                                          FEBRUARY 2005
                                              ACCOUNTING

      cation of auditor as con-               percentage of profits or oth-            which exempts members
      tained in Section 226 (3)(d)            erwise dependent on the                  from the operation of this
      of the Companies Act, 1956              finding or the results of                Clause in certain profes-
      will be attracted.                      employment.                              sional services. The said
3.3.8 Another question which            3.4.2 What distinguishes a profes-             Regulation 192 is repro-
      arises for consideration is             sion from a business is that             duced below: -
      whether a partner is disquali-          professional service is not
      fied from appointment as                rendered with the sole pur-              192. Restriction on fees
      auditor when the firm of                pose of a profit motive.                 No chartered accountant in
      which he is a partner is                Personal gain is one but not             practice shall charge or offer
      indebted to the company in              the main or the only objec-              to charge, accept or offer to
      excess of the limit prescribed          tive. Professional opinion,              accept, in respect of any pro-
      and whether the firm is dis-            therefore, frowns upon                   fessional work, fees which
      qualified from appointment              methods where payment is                 are based on a percentage of
      as auditor when a partner of            made to depend on the basis              profits, or which are contin-
      the firm is indebted in excess          of results. It is obvious that a         gent upon the findings, or
      of the prescribed limit. In             person who is to receive pay-            results of such work:
      both cases, the disqualifica-           ment in direct proportion to             Provided that:
      tion will apply, because when           the benefit received by his             (a) in the case of a receiver or
      a firm is appointed as auditor,         client, may be tempted to                   a liquidator, the fees may
      each partner is deemed to be            exaggerate the advantage of                 be based on a percentage
      so appointed and when a firm            his service or may adopt                    of the realisation or dis-
      is indebted, each partner is            means which are not ethical.                bursement of the assets;
      deemed to be indebted.                  It will have the effect of              (b) in the case of an auditor of
3.3.9 There may also be situations            undermining his integrity                   a co-operative society, the
      in which, though the appoint-           and impairing his indepen-                  fees may be based on a
      ment is in the individual               dence. Therefore, the mem-                  percentage of the paid up
      name of a partner, the work,            bers are prohibited from                    capital or the working
      is, in fact, carried out by the         charging or accepting any                   capital or the gross or net
      firm and the fees are credited          remuneration based on a per-                income or profits; and
      to the account of the firm. In          centage of the profits or on            (c) in the case of a valuer for
      such situations, the firm will          the happening of a particular               the purposes of direct
      be deemed to be acting as               contingency such as, the suc-               taxes and duties, the fees
      auditor and the disqualifica-           cessful outcome of an appeal                may be based on a per-
      tion will be attracted.                 in revenue proceedings.                     centage of the value of the
                                        3.4.3 Professional services should                property valued.
3.4 Provisions contained under                not be offered or rendered         3.4.5 Attention of the members is
    the Chartered Accountants                 under an arrangement where-              invited to the provisions of
    Act, 1949, Chartered Accou-               by no fee will be charged                Clause (4) of Part I of the
    ntants Regulations, 1988 and              unless a specified finding or            Second Schedule to the
    under Code of Ethics to ensure            result is obtained or where the          Chartered Accountants Act,
    Independence of Auditors                  fee is otherwise contingent              1949 which provides that a
3.4.1 Clause (10) of Part I of the            upon the findings or results of          Chartered Accountant in
      First Schedule to the                   such services. However, fee              practice shall be deemed to
      Chartered Accountants Act,              should not be regarded as                be guilty of professional mis-
      1949 prohibits acceptance               being contingent if fixed by a           conduct if he expresses his
      of, what have been described            Court or other public authority.         opinion on financial state-
      as contingent fees, i.e., fees,   3.4.4 The Council of the Institute             ments of any business or any
      which are either based on               has framed Regulation 192                enterprise in which he, his

THE CHARTERED ACCOUNTANT                                1094                                        FEBRUARY 2005
                                               ACCOUNTING

      firm or a partner in his firm            should not place themselves                employed, even though he
      has a substantial interest,              in positions which would                   holds certificate of practice
      unless he discloses his inter-           either compromise or jeopar-               and that such certification can
      est also in his report.                  dise their independence.                   be done by any chartered
3.4.6 If the opinion of auditors are     3.4.9 A Member must take care to                 accountant in practice. This
      to command respect and the               see that he does not get into              restriction would not however
      confidence of the public, it is          situations where there could               apply where the certification
      essential that they must dis-            be a conflict of interest and              is permitted by any law, e.g.
      close every factor which is              duty. For example, where a                 Section 228 (iv) of the
      likely to affect their indepen-          Chartered Accountant is                    Companies Act, 1956 and the
      dence. Since financial inter-            appointed the liquidator of a              Companies (Branch Audit
      est in the business can be one           company, he should not him-                Exemption) Rules made
      of the important factors,                self audit the Statement of                thereunder. The Council has
      which may disturb indepen-               Account to be filed under                  decided that a chartered
      dence, the clause provides               Section 551 (1) of the                     accountant should not by him-
      that the existence of such an            Companies Act, 1956. The                   self or in his firm name:-
      interest direct or indirect              audit in such circumstances              (i) accept the auditorship of a
      should be disclosed. This is             should be done by a Chartered                 college, if he is working as
      intended to assure the public            Accountant other than the one                 a part-time lecturer in the
      as regards the faith and confi-          who is the liquidator of the                  college.
      dences that could be reposed             company. Attention of the                (ii) accept the auditorship of a
      on the independent opinion               members is drawn to the audit                 trust where his partner is
      expressed by the auditors.               assignments where appoint-                    either an employee or a
3.4.7 The words “financial state-              ment is done by the                           trustee of the trust.
      ments” used in this clause               Comptroller & Auditor               3.4.11Many new areas of profes-
      would cover both reports and             General of India (C&AG),                   sional work have been added,
      certificates usually given after         Reserve Bank of India (RBI)                e.g., Special Audit under the
      an examination of the                    and such other authorities. In             Statutes,        Tax     Audit,
      accounts or the financial state-         addition to ensuring indepen-              Concurrent Audit of Banks,
      ment or any attest function              dence during the assignment,               Concurrent         Audit      of
      under any statutory enact-               it is also essential to avoid any          Borrowers of Financial insti-
      ment or for purposes of                  situation in near future which             tutions, Audit of non-corpo-
      income-tax assessments. This             may be interpreted as a threat             rate borrowers of banks and
      would not however, apply to              to independence, as for exam-              financial institutions, audit of
      cases where such statements              ple, he or any other partner of            stock exchange, brokers etc.
      are prepared by members in               his firm should not accept any             The Council wishes to emph-
      employment purely for the                other assignment such as                   asise that the requirement of
      information of their respec-             internal audit, system audit               Clause (4) of Part I of the
      tive employers in the normal             and management consultancy                 Second Schedule to the Char-
      course of their duties and not           services within one year from              tered Accountants Act, 1949
      meant to be submitted to any             the completion of audit                    is equally applicable while
      outside authority.                       assignment.                                performing all types of attest
3.4.8 Public conscience is expected      3.4.10A Chartered Accountant in                  functions by the members.
      to be ahead of the law.                  employment should not cer-          3.4.12 Some of the situations
      Members, therefore, are                  tify the financial statements of           which may arise in the applic-
      expected to interpret the                the concern in which he is                 ability of Clause (4) of Part I
      requirement as regards inde-             employed, or of a concern                  of the Second Schedule to the
      pendence much more strictly              under the same management                  Chartered Accountants Act,
      than what the law requires and           as the concern in which he is              1949 are discussed below for

THE CHARTERED ACCOUNTANT                                 1095                                          FEBRUARY 2005
                                       ACCOUNTING

    the guidance of members:-          member, in the opinion of                 undertake such job and/or
    1.Where the member, his            Council, in the performance               express opinion on the finan-
    firm or his partner or his         of professional duties.                   cial statements of that com-
    relative has substantial           Therefore, the member may,                pany.
    interest in the business or        for the same reasons as not to            (ii) Where a partner or rela-
    enterprise.                        compromise his indepen-                   tive of the member is a direc-
    The independence of mind is        dence, desist from undertak-              tor in the company who has
    a fundamental concept of           ing the audit of financial                a substantial interest.
    audit and/or expression of         statements of such business               In such cases for the reason
    opinion on the financial           or enterprise. However,                   as not to compromise with
    statements in any form and,        where a member undertakes                 the independence of mind,
    therefore, must always be          the audit of such business or             the member may desist from
    maintained. Nothing can            enterprise, he should disclose            undertaking the audit of
    substitute for the essential       such interest in his report               financial statements and/or
    and fundamental require-           while expressing his opinion              expression of opinion
    ments of independence.             on the financial statements of            thereon. However, if a mem-
    Therefore, the Council's           such business or enterprise.              ber feels that his indepen-
    views are clarified in the fol-    (2) Where the member or                   dence is not affected and
    lowing circumstances.              his partner or relative is a              undertakes the audit of such
    (i) An enterprise/concern          director or in the employ-                company, he should disclose
    of which a member is either        ment of an officer or an                  such interest in his report
    an owner or a partner              employee of the company                   while expressing his opinion
    The holding of interest in the     Section      226      of      the         on the financial statements of
    business or enterprise by a        Companies Act, 1956 specif-               such company.
    member himself whether as          ically prohibits a member                 The meaning of the words
    sole-proprietor or partner in a    from auditing the accounts of             "relative" and "substantial
    firm, in the opinion of the        a company in which he is a                interest" shall be the same as
    Council, would affect his          director or in the employment             are contained in the Res-
    independence of mind in the        of an officer or an employee              olution passed by the Council
    performance of professional        of the company. Although the              in pursuance to Regulation
    duties in conducting the audit     provisions of the aforesaid               190A of Chartered Acco-
    and/or expressing an opinion       section are not specifically              untants Regulations, 1988
    on financial statements of         applicable in the context of              (Appendix 9 of 2002 edition).
    such enterprise. Therefore, a      audits performed under other        3.4.13An accountant is expected to
    member should not audit            statutes, e.g. tax audit, yet the         be no less independent in the
    financial statements of such       underlying principle of inde-             discharge of his duties as a tax
    business or enterprise.            pendence of mind is equally               consultant or as a financial
    (ii) Where the partner or          applicable in those situations            adviser than as auditor. In fact,
    relative of a member has           also. Therefore, the Council's            it is necessary that he should
    substantial interest               views are clarified in the fol-           bear the same degree of
    The holding of substantial         lowing situations.                        integrity and independence of
    interest by the partner or rela-   (i) Where a member is a                   mind in all spheres of his work.
    tive of the member in the          director                                  Unless this is done, the
    business or enterprise of          In cases where the member is              accounts of companies
    which the audit is to be car-      a director of a company the               audited       by     Chartered
    ried out and opinion is to be      financial statements of                   Accountants or statements
    expressed on the financial         which are to be audited                   made by them during the
    statement, may also affect the     and/or opinion is to be                   course of assessment proceed-
    independence of mind of the        expressed, he should not                  ings would not be relied upon

THE CHARTERED ACCOUNTANT                         1096                                          FEBRUARY 2005
                                              ACCOUNTING

      as correct by the authorities.               ness of any third person           audit      of     the    same
3.4.14 The Members are not per-                    to the company for an              Undertaking/company.
      mitted to write the books of                 amount exceeding one         3.4.19 The Council has issued a
      accounts of their auditee                    thousand rupees;                   Notification No.1-CA(7)/
      clients.                                            OR                          63/2002 dated 2nd August,
3.4.15A statutory auditor of a com-          II. after his appointment as             2002 whereby a member of
      pany cannot also be its inter-             Cost Auditor, he becomes             the Institute in practice shall
      nal auditor, as it will not be             subject to any of the dis-           be deemed to be guilty of
      possible for him to give inde-             abilities stated in items I          professional misconduct, if
      pendent and objective report               (a) to (e) above and contin-         he accepts appointment as
      issued under sub-Section 4A                ues to function as a cost            auditor of a concern while he
      of Section 227 of the                      auditor thereafter.                  is indebted to the concern or
      Companies Act, 1956 read          3.4.17 The Council has issued a               has given any guarantee or
      with the Companies (Audi-               Notification No.1-CA(39)/70             provided any security in con-
      tors' Report) Order, 2003.              dated 16th October, 1970                nection with the indebted-
3.4.16 The Council has issued a               whereby a member of the                 ness of any third person to
      Notification No.1-CA(37)                Institute in practice shall be          the concern, for limits fixed
      /70 dated 23rd May, 1970                deemed to be guilty of pro-             in the statute and in other
      whereby a member of the                 fessional misconduct, if he             cases for amount exceeding
      Institute in practice shall be          accepts the appointment as              Rs. 10,000/-.
      deemed to be guilty of pro-             auditor of a company under        3.4.20 To ensure that the profes-
      fessional misconduct, if-               Section 224 of the Com-                 sional independence of a
     I. he accepts appointment as             panies Act, 1956, while he is           member doing attest func-
        Cost auditor of Company               an employee of the cost audi-           tion does not appear to be
        under Section 233B of the             tor of the Company appo-                jeopardized he should, as far
        Companies Act, 1956                   inted under Section 233B of             as possible, take care to see
        while he -                            the Companies Act, 1956.                that the professional fees for
       (a) is an auditor of the com-    3.4.18 The Council has issued a               audit and other services
           pany appointed under               Notification No.1-CA(7)/                received by the firm in which
           Section 224 of the                 60/2002 dated 8th March,                he is a partner, by him and his
           Companies Act; or                  2002 whereby a member of                partners individually and by
       (b) is an officer or employee          the Institute in practice shall         firm or firms in which he or
           of the company; or                 be deemed to be guilty of               his partner are partners from
       (c) is a partner, or is in the         professional misconduct, if             one or more clients or com-
           employment of an offi-             he accepts the appointment              panies under the same man-
           cer or employee of the             as statutory auditor of Public          agement does not exceed
           company; or                        Sector Undertaking(s)/ Gov-             40% of the gross annual fees
       (d) is a partner or is in the          ernment Company (ies)/Listed            of the firm, firms and part-
           employment of the Com-             Company(ies) and other                  ners referred to above.
           pany's auditor appointed           Public Company(ies) having              'Companies under the same
           under Section 224 of the           turnover of Rs. 50 crores or            management' here would
           Companies Act, 1956; or            more in a year and accepts              refer to the definition of this
       (e) is indebted to the com-            any other work(s) or assign-            expression as provided in
           pany for an amount                 ment(s) or service(s) in                section 370(1-B) of the
           exceeding one thousand             regard to the same Und-                 Companies Act, 1956.
           rupees, or has given any           ertaking(s)/ Company(ies)               Provided that no such ceiling
           guarantee or provided              on a remuneration which in              on the gross annual profes-
           any security in connec-            total exceeds the fee payable           sional fees of a member
           tion with the indebted-            for carrying out the statutory          would be applicable where

THE CHARTERED ACCOUNTANT                               1097                                        FEBRUARY 2005
                                                ACCOUNTING

      such fees do not exceed two                of mandatory communica-                     point of accepting the posi-
      lakhs of rupees in respect of a            tion with the previous auditor              tion of an auditor.
      member or firm including                   in all types of audit viz., statu-
      fees received by the member                tory audit, tax audit, internal      4. CONCLUSION
      or firm for other services ren-            audit, concurrent audit or any       4.1 The Council feels that there are
      dered through the medium of                kind of audit and it is equally          adequate safeguards provided
      a different firm or firms in               applicable to audits of both             in the Companies Act, 1956 as
      which such member or firm                  government and non-govern-               well as in the Chartered
      may be a partner or proprietor.            ment entities.                           Accountants Act, 1949. The
         Provided further that no         3.4.23 Clause (9) of Part I of First            Council is of the view that inde-
      such ceiling on the gross                  Schedule to the Chartered                pendence, being a state of the
      annual professional fees of a              Accountants Act, 1949 pro-               mind, is not necessarily affected
      member would be applicable                 vided that an auditor of the             by the fact of mere relationship
      in the case of audit of govern-            company before accepting                 any more than it should be exis-
      ment companies, public                     the appointment, should                  tence if the relationship did not
      undertakings, nationalized                 ascertain from the auditor               exist. In any case, lest there may
      banks, public financial insti-             whether the requirements of              be any feeling in the public
      tutions or where appoint-                  Section 225 of the Comp-                 mind that relationship would
      ments of auditors are made                 anies Act, 1956 in respect of            affect the independence of audi-
      by the Government.                         such appointment have been               tors, the Council suggests that
3.4.21 Members' attention is also                duly complied with. Section              where, due to near relationship
       drawn to Clauses (8) & (9)                224 of the Companies Act,                of an auditor, with a Managing
       of Part I of the First                    1956 contains several provi-             or a Whole-Time Director the
       Schedule to the Chartered                 sions in the matter of                   independence of an auditor is
       Accountants Act, 1949: -                  appointment of auditors in               likely to be jeopardized, he
       "A Member shall be deemed                 different circumstances and              should use his good sense, and
       to be guilty of professional              situations whereas Section               acting in the best traditions of
       misconduct, if he:                        225 laid down the procedure              the profession, refrain from
      X XX           XXX XXXX                    which must be followed                   accepting the appointment.
                                                 whenever a company desires           4.2 If the opinion of chartered
       (8) accepts a position as                 to change its auditor. Also              accountant is to command
       auditor previously held by                that the validity of the app-            respect and the confidence of
       another chartered accoun-                 ointment of an auditor is not            the public, it is essential that
       tant or a restricted state audi-          challenged or objected to by             they must ensure their indepen-
       tor without first communi-                shareholders or the retiring             dence to assure the public as
       cating with him in writing;               auditors at a later date, it has         regards the faith and confi-
       (9) accepts an appointment                been made obligatory to                  dence that could be reposed on
       as auditor of a company                   ascertain from the company               them. The Chartered Acco-
       without first ascertaining                that the appropriate proce-              untant should ensure his inde-
       from it whether the require-              dure in the matter of appoint-           pendence in all assurance ser-
       ments of Section 225 of the               ment has been faithfully fol-            vices including concurrent
       Companies Act, 1956 in                    lowed. Independence of                   audit, tax audit and internal
       respect of such appoint-                  auditor is a concept to be               audit. The chartered accoun-
       ment have been duly com-                  addressed through its all the            tant should make it certain that
       plied with."                              possible aspects and the                 his independence is not jeopar-
3.4.22 Clause (8) of Part I of First             message of Clause (8) & (9)              dized. Where he feels that his
       Schedule to the Chartered                 is to ensure that an auditor             independence is jeopardized,
       Accountants Act, 1949                     should be conscious about                he should refrain from accept-
       emphasized the requirement                this aspect from the very                ing the assignment.              ■


THE CHARTERED ACCOUNTANT                                   1098                                           FEBRUARY 2005

				
DOCUMENT INFO
Description: Define Chartered Accountant document sample