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Statutory Auditor & Internal Auditor

Satish (FM) (51 Points)

09 November 2010

What is the position of statutory auditor if the internal auditor is a partner with the same firm. ?

For Example - Mr. A who is a partner of firm ABC & Co. ( partners A,B, &C )

whether Mr. A can accept statutory audit of XYZ limited in the name of firm ABC & Co., if Mr. B who is internal auditor of XYZ Limited thru his other firm called M/S B & Associates ?

Please can you mention relevant sections of companies act while answering this question.

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7 Replies

Devendra (Chartered Accountant) (4780 Points)
Replied 09 November 2010

THE STATUTORY AUDITOR WILL HAVE TO DISCLOSE THE ABOVE FACT IN HIS AUDIT REPORT.

Anil Kumar Meena (Assistant Manager) (475 Points)
Replied 10 November 2010

i think if we appoing the stat auditor in which firm internal auditor is also the partner..then it violate the independency of the stat auditor ...which is most important..

thanks,

Anil

Yogesh Shah (Managing Corporate Finance) (1051 Points)
Replied 10 November 2010

Hi Satish,

You will not find the answer to your question in Companies Act because it is covered in 'Professional Ethics'.

According to ethics, appointment of Mr. A as a Statutory Auditor of XYZ Ltd. (where his partner is Internal Auditor) is INVALID. This is because independence of an Auditor will be hurt.

As his appointment itself is not proper, question of disclosing it in Audit Report doesn't arise.

Ameet (L) (1678 Points)
Replied 10 November 2010

It will attract the independency norms as per Professional ethics.

It does not cover under Companies Act since CA's are mainly covered by CA Act and Professional ethics.

Max Payne (employed) (2574 Points)
Replied 10 November 2010

The internal auditor is disqualified from being appointed since he is not in a position to express an independent opinion.

This was clarified by the DCA

Circular No. 29 of 1976, dated 27-8-1976 states that the internal auditor is appointed by the management and hence is in the position of an employee, whereas the statutory auditor is appointed by the company under section 224 and is required to perform the duties imposed on him under section 227 and the Rules/Orders issued thereunder.

The circular issued in 1976 was amended by circular 5/77 dtd 8.4.77, which clarified that the statutory auditor should not accept the job of an internal auditor.

Being an employee the internal auditor is disqualified from appointment.

Mr. B Stands disqualfied.

Since B is a parter in ABC, ABC is also disqualified from taking the engagement by virtue of the provisions of the companies act.

Other views solicited.

CA ravi kisore (Assistant Manager Finance) (54 Points)
Replied 10 November 2010

an internal auditor cannot be a statutory auditor of the same company even though one partner is internal auditor and the other is statutory auditor the same position still remains the same

erigineniprasad (ca final) (21 Points)
Replied 10 June 2013

yes i agree with ravi sir that the same person/firm which in the position of internal auditor of a company should not be the stat auditor of the same company as it attracts disqualification of auditor u/s 224.