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Query regarding disqualification of auditor.

Ankit Hinduja (Student) (1227 Points)

20 March 2012

If an auditor recovers fees from a company on advance basis before his audit has been completed ( which exceeds Rs. 1000.) then is he disqualified as per Sec. 226(3). Of the Companies Act.. ?

Also i wanted to know the reason why is the limit kept at Rs. 1000 for indebtness.

Please solve my query.

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6 Replies

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 20 March 2012

Hi,

As per my understanding fees received on advance basis would not disqualify auditor because it is in the nature of approved fees in accordance with his terms of appointment and with the approval of board.

According to me the reason of keeping low limit of Rs. 1000 is not to encourage auditors to have bigger monetary transactions with the company apart from his statutory fees. So if auditor opts for an indebtedness of more than Rs. 1000 he will become disqualify for appointment.

Regards

1 Like

CA ROSHAN (Partner) (93 Points)
Replied 03 April 2012

Agree with Mr. Ankur.

If advance fee received is as per terms of Appointment of Auditor.

The low limit of Rs.1000 for indebtness has been made for Virtually cover all types of Monetary Indebtness of Auditor to company.

CA SURENDRA KUMAR RAKHECHA (Practising CA at Surat) (26258 Points)
Replied 03 April 2012

Meaning of Indebtness according to Webster Dictionary :

(a.) Placed under obligation for something received, for which restitution or gratitude is due; as, we are indebted to our parents for their care of us in infancy; indebted to friends for help and encouragement.

(b.) Brought into debt; being under obligation; held to payment or requital; beholden.

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An Auditor can’t accept fee in advance because if he does so; he would not be in a position to remain independent. The amount of Rs.1,000/- was fixed in the year 1956 when this amount was good enough.

Unfortunately the same has not been amended.

The theme behind not amending is :

He should not accept fee in advance except some out of pocket expenses.

The profession of Accountancy and Lawyers are altogether different. Lawyers generally accept fee in advance because chance of winning the case is only 50% ! Once a client loses his case in the courts of law; he would not be interested to pay fee to the advocate. That is why fee is paid/accepted in advance.

Auditing profession is altogether different. After conducting audit only; the fee becomes due. That is why auditors are entitled to lien books of account if his fee is not paid. Otherwise there would be no such need to make provisions in the statute like this.

The concept of making such provisions is to discourage accepting fee in advance. The provision is important when now-a-days fees are paid in certain lacs or even crores.

Whether an auditor would “feel” independent if he accepts fee is advance say Rs.50 Lacs !

So law says if he is indebted exceeding Rs.1,000/- he is disqualified from auditing.

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Ankit Hinduja (Student) (1227 Points)
Replied 04 April 2012

Thanks sir for such a detailed explanation.!

But sir i did not understand this line : He should not accept fee in advance except some out of pocket expenses.

Sir the topic is very imp. then why aren't these points included in the reference books which we students refer ? Actually i am asking this because in one of the books(auditing) by a well known author it is clearly written. '" If an auditor recovers fees from the company on progressive basis , even though the audit has not been completed, he cannot be said to be indebted to the company, and therefore, he shall not vacate the office held by him."

While the conclusion is : After conducting audit only; the fee becomes due. An Auditor can’t accept fee in advance because if he does so; he would not be in a position to remain independent.

So sometimes it can be misleading..Am i right ??

Please do comment sir..!!

CA SURENDRA KUMAR RAKHECHA (Practising CA at Surat) (26258 Points)
Replied 04 April 2012

There is a difference between charging fee on progressive basis and the fee accepted in advance. In progressive basis; the fee is collected when certain predecided stages of audit is completed. This may be accepted.

It means at every completed stage; that part of audit is completed and these completions can be identified. Here progressive means; to that extent work has been carried out. Hence to that extent fee can be received/collected.

In the wordings used in the abovementioned author's book; it is clear that some words are deemed. Like "eventhough audit has not been completed" means audit is not "fully" completed *(but surely a part thereof is completed).

It seems your firm has accepted the fee in advance and now it is trying to escape from the provisions which will hold good till one is not caught.

Let's hope for the good.

1 Like

CA SURENDRA KUMAR RAKHECHA (Practising CA at Surat) (26258 Points)
Replied 04 April 2012

Important :

Now I hope you will find the ways to escape your company from the above problem with the help of raising progressive bills and out of pocket expenses.