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Noc time limit from previous auditor

Ajay Sharma (Article Assistant) (28 Points)

07 March 2013  

We have been appointed as a statutory auditor of a pvt ltd comapny. We have sent the NOC to the previous auditor in the month of October 2012. But we haven't received any reply from him till date. On verbal communication with him, he is of the opinion that had he any objection, he would have replied.

How much time at the maximum we should wait for his reply?

Is there any risk that can occour if we start the audit now?


 7 Replies

Giridhar S Karandikar (Team Lead) (7320 Points)
Replied 07 March 2013

pls confirm the same with the Institute first. Only after receiving satisfactory reply from institute you can proceed else it would amount to professional misconduct.

Pawan Mittal (CA Final) (685 Points)
Replied 08 March 2013

New auditor is required to take NOC as per Clause 8 of Part 1 of Schedule 1 of Chartered Accoutancy Act. This is because if the undisputed fees of the previous auditor is not paid to him than no auditor can accept the audit of the company.

If there is no such reason than the new auditor can accept the audit even without getting the NOC from the previous auditor.

But care should be taken that the new auditor must communicate with the previous auditor by Registered Post and must have the receipt with him because non compliance of CA Act would result into misconduct by the new auditor and even his degree can be on stake.

1 Like

CA Deepak Rathore (EXPERT) (281 Points)
Replied 12 March 2013

 

 
Clause 8 of Part 1 of Schedule 1 of Chartered Accoutancy Act.
 
auditor who has been
issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing;

It must be pointed out that professional courtesy alone is not the major reason for requiring a member to communicate with the existing accountant who is a member of the Institute or a certified auditor. The underlying objective is that the member may have an opportunity to know the reasons for the change in order to be able to safeguard his own interest, the legitimate interest of the public and the independence of the existing accountant. It is not intended, in any way, to prevent or obstruct the change. When making the enquiry from the retiring auditor, the one proposed to be appointed or already appointed should primarily find out whether there are any professional or other reasons why he should not accept the appointment. It is important to remember that every client has an inherent right to choose his accountant; also that he may, subject to compliance with the statutory requirements in the case of limited Companies, make a change whenever he chooses, whether or not the reasons which had
impelled him to do so are good and valid. The change normally occurs where there has been a change of venue of business and a local accountant is preferred or where the partner who has been dealing with the clients affairs retires or dies; or where temperaments clash or the client has some good reasons to feel dissatisfied. In such cases, the retiring auditor should always accept the situation with good grace.

The existence of a dispute as regards the fees may be root cause of an auditor being changed. This would not constitute valid
professional reasons on account of which an audit should not be accepted by the member to whom it is offered. However, in the case of an undisputed audit fees for carrying out the statutory audit under the Companies Act, 1956 or various other statutes having not been paid, the incoming auditor should not accept the appointment unless such fees are paid. In respect of other dues, the incoming auditor should in appropriate circumstances use his influence in favour of his predecessor to have the dispute as regards the fees settled. The professional reasons for not accepting an audit would be: 

(i) Non-compliance of the provisions of Sections 224 and 225 of the Companies Act as mentioned in Clause (9);

(ii) Non-payment of undisputed audit fees by auditees other than in case of sick units for carrying out the statutory audit
under the Companies Act, 1956 or various other statutes; and

(iii) Issuance of a qualified report. In the first two cases, an auditor who accepts the audit would be guilty of professional misconduct. In this connection, attention of members is invited to the Council Guidelines No. 1-CA/(7)/02/2008 dated 08.08.08 appearing in Chapter-3 of the book and also published at page 686 of October, 2008 issue of the Journal. 

 
In the said guidelines, Council has explained that the provision for audit fee in accounts signed by both the auditee or the auditor shall be considered as “ undisputed” audit fee and “ sick unit” shall mean where the net worth is negative.

In the last case, however, he may accept the audit if he is satisfied that the attitude of the retiring auditor was not proper and justified. If, on the other hand, he feels that the retiring auditor had qualified the report for good and valid reasons, he should refuse to accept the audit. There is no rule, written or unwritten, which would prevent an auditor from accepting the appointment offered to him in these circumstances. However, before accepting the audit, he should ascertain the full facts
of the case. For nothing will bring the profession to disrepute so much as the knowledge amongst the public that if an auditor is found to be “inconvenient” by the client, he could readily be replaced by another who would not displease the client and this point cannot be too overemphasised. What should be the correct procedure to adopt when a prospective client tells you that he wants to change his auditor and wants you to take up his work? There being two persons involved, the Company and the old auditor, the former should be asked whether the retiring auditor had been informed of the intention to change. If the answer is
in the affirmative, then a communication should be addressed to the retiring auditor. If, however, it is learnt that the old auditor has not been informed, and the client is not willing to make the first move, it would be necessary to ask him the reason for the proposed change. If there is no valid reason for a change, it would be healthy practice not to accept the audit. If he decides to accept the audit he should address a communication to the retiring auditor. As stated earlier, the object of the incoming auditor, in communicating with the retiring auditor is to ascertain from him whether there are any circumstances which warrant him not to accept the appointment. For example, whether the previous auditor has been changed on account of having qualified his report or he had expressed a wish not to continue on account of something inherently wrong with the administration of the business. The retiring auditor may even give out information regarding the condition of the accounts of the client or the reason that impelled him to qualify his report. In all these cases it would be essential for the incoming auditor to carefully consider the
facts before deciding whether or not he should accept the audit, and should he do so, he must also take into account the information while discharging his duties and responsibilities. Sometimes, the retiring auditor fails without justifiable cause except a feeling of hurt because of the change, to respond to the communication of the incoming auditor. So that it may not create a deadlock, the auditor appointed can act, after waiting for a reasonable time for a reply.

The Council has taken the view that a mere posting of a letter under certificate of posting is not sufficient to establish communication with the retiring auditor unless there is some evidence to show that the letter has in fact reached the person communicated with. A Chartered Accountant who relies solely upon a letter posted under certificate of posting therefore does so at his own risk. The view taken by the Council has been confirmed in a decision by the Rajasthan High Court in J.S. Bhati vs. The Council of the Institute of the Chartered Accountants of India and another. (Pages 72-79 of Vol. V of Disciplinary Cases published by the Institute - Judgement delivered on 29th August, 1975). The following observations of the Court are relevant in this context:- “Mere obtaining a certificate of posting in my opinion does not fulfill the requirements of clause (8) of Schedule I as the presumption under Section 114 of the Evidence Act that the letter in due course reached the addressee cannot replace that positive degree of proof of the delivery of the letter to the addressee which the letters of the law in this case require. The expression ‘in communication with’ when read in the light of the instructions contained in the booklet ‘Code of Conduct’ cannot be interpreted in any other manner but to mean that there should be positive evidence of the fact that the communication addressed to the outgoing auditor by the incoming auditor reached his hands. Certificate of posting of a letter cannot,
in the circumstances, be taken as positive evidence of its delivery to the addressee.” 

Members should therefore communicate with a retiring auditor in such a manner as to retain in their hands positive evidence of the delivery of the communication to the addressee. In the opinion of the
Council, communication by a letter sent “Registered Acknowledgement due” or by hand against a written acknowledgement would in the normal course provide such evidence.
The Council is of the opinion that it would be a healthy practice to communicate with the member who had done the work previously in every case where a Chartered Accountant is required to give a certificate or in respect of a verification of the books of account for special purpose as well as in cases where he is appointed as a Liquidator, Trustee, or Receiver and his predecessor was a Chartered Accountant. As a matter of professional courtesy and professional obligation it is necessary for the new auditor appointed to act jointly with the earlier auditor and to communicate with such earlier auditor. It would also be a healthy practice if a tax auditor appointed for conducting special audit under the Income-tax Act, communicates with
the member who has conducted the statutory audit. It is desirable that a member, on receiving communication from the
auditor who has been appointed in his place, should send a reply to him as soon as possible setting out in detail the reasons, which according to him had given rise to the change and other attendant circumstances but without disclosing any information as regards the affairs of the client which he is not competent to do. 

The Council has taken the view that it is not obligatory for the auditor appointed to conduct a Special Audit under Section 233A of
Companies Act, 1956 to communicate with the previous auditor who had conducted the regular audit for the period covered by the Special Audit. The Council has also laid down the detailed guidelines on the subject as under:- 

1. The requirement for communicating with the previous auditorbeing a Chartered Accountant in practice would apply to all
types of audit viz., statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. 

2. Various doubts have been raised by the members about the terms “audit”, “previous auditor”, “Certificate” and “report”,
normally while interpreting the aforesaid Clause (8). These terms need to be clarified.

3. As per para 2 of the Institute’s publication viz. Standard on Auditing (SA) 200, “Basic Principles Governing an Audit”, an

“audit” is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of
its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. 

4. The term “previous auditor” means the immediately preceding auditor who held same or similar assignment comprising
same/similar scope of work. For example, a Chartered Accountant in practice appointed for an assignment of physical verification of inventory of raw materials, spares, stores and finished goods, before acceptance of appointment, must
communicate with the previous auditor being a Chartered Accountant in practice who was holding the appointment of
physical verification of inventory of raw materials, stores, finished goods and fixed assets. The mandatory communication with the previous auditor being a Chartered Accountant is required even in a case where the previous auditor happens to be an auditor for a year other than the immediately preceding year. 

5. As explained in para 2.2 of the Institute’s publication viz., ‘Guidance Note on Audit Reports and Certificates for Special
Purposes’, a “certificate” is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion. A “report”, on the other hand, is a formal statement usually made after an enquiry, examination or review of specified matters under report and includes the reporting auditor’s opinion thereon. Thus, when a reporting auditor issues a certificate, he is responsible for the factual accuracy of what is stated therein. On the other hand, when a reporting auditor gives a report, he is responsible for ensuring that the report is based on factual data, that his opinion is in due accordance with facts, and that it is arrived at by the application of due care and skill. 

6. A communication is mandatorily required for all types of audit/report where the previous auditor is a Chartered
Accountant. For certification, it would be healthy practice to communicate. In case of assignments done by other professionals not being Chartered Accountants, it would also be a healthy practice to communicate. 

7. Although the mandatory requirement of communication with previous auditor being Chartered Accountant applies, in
uniform manner, to audits of both government and non “audit” is the independent examination of financial information
of any entity, whether profit oriented or not-government entities, yet in the case of audit of government Companies/banks or their branches, if the appointment is made well in time to enable the obligation cast under this clause to be fulfilled, such obligation must be complied with before accepting the audit. However, in case the time schedule given for the assignment is such that there is no time to wait for the reply from the outgoing auditor, the incoming auditor may give a conditional acceptance of the appointment and commence the work which needs to be attended to immediately after he has sent the communication to the previous auditor in accordance with this clause. In his acceptance letter, he should make clear to the client that his acceptance of appointment is subject to professional objections, if any, from the previous auditors and that he will decide about his final acceptance after taking into account the information received from the previous auditor.
 
2 Like

PARAS CHHAJED (CA Practice ) (652 Points)
Replied 18 September 2013

What is the reasonable time to wait for response from the previous auditor ? 

VRAJESH PARIKH (CA) (36 Points)
Replied 13 April 2015

Normally, while asking for NOC from previous auditor, normally new auditor should mention in NOC itself that if no reply is received within 7 days from receipt of NOC, it would be presumed that you do not have any objection and we will accept the assignment. This will not only safeguard the new auditor, but also compel the previous auditor to reply if he has any objection, within a reasonable time.

 

2 Like

Jitender Singh Patyal (INCOME TAX EXPERT) (56 Points)
Replied 29 March 2016

waiting for the reasonable time for the previous auditor

 

Indira Priyadarsini Kota (Student) (590 Points)
Replied 29 January 2021

In the present case, can the current auditor ask the previous auditor to give a written NOC even though he said it verbally?

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