a) Mr. Kumar, a practicing Chartered Accountant was ordered to surrender his Certificate of Practice and he was suspended for one year on certain professional misconduct against him. During the period of suspension, Mr. Kumar, designating himself as Tax Consultant, did the work of filing of tax returns and made appearance as a consultant before various related authorities. He contended that there is nothing wrong in it as he, like any other tax consultant, could take such work and his engagement as such in no way violates the order of suspension inflicted on him.
b) A Ltd. has the total Assets of Rs. 1.2 Arab up to Chaitra end 2075 for financial year 2075/76. It has been estimated that its total assets would be Rs.1.5 Arab for FY 2075/76. A Ltd. has appointed Ramesh & Associates, the B class audit firm for the audit of financial year 2075/76, during its AGM held on 2nd Baishakh 2076.
c) H Ltd. declared dividend amounting to Rs. 3 lakhs out of profits for the year ended 2074/75. Subsequently, it was noticed that company had failed to make provisions for outstanding expenses of Rs. 4.2 lakhs and the stock were also overvalued, which was not reported auditors of the company. Management of H Ltd. held auditors responsible for this situation.
A chartered accountant not holding certificate of practice cannot take up any other work in the capacity of Chartered Accountant in practice because it would amount to violation of the relevant provisions of the Nepal Chartered Accountants Act, 2053 and Code of Ethics. In case a member is suspended and is not holding Certificate of Practice, he cannot in any other capacity to practice as a member of the Institute. This is because once a person becomes a member of the Institute; he is bound the provisions of the Act and its Regulations.
In the instant case, Mr. Kumar was a practicing-chartered accountant and he was ordered to surrender his certificate of practice and was suspended for one year. Mr. Kumar is doing the work of filing tax
returns and has appeared as a consultant before various related authorities as tax Consultant which is not in capacity of a practicing-chartered accountant rather in capacity of authorized representative. Any person who has been authorized to act as a tax practitioner on behalf of the concerned registered person can become authorized representative. Thus, filing tax return and appearing as tax consultant Mr. Kumar is not professional misconduct under Nepal Chartered Accountants Act, 2053 and Regulation therein and the code of ethics. Therefore, Mr. Kumar will not be held guilty for misconduct.
As per rule 53 of ICAN Rule 2061 (amended in 2075), the B class registered auditor is allowed to carry out the audit of company having total assets or liabilities up to Rs. 1Arab. In the light of such changes in ICAN Rule, since A Ltd. has actual total Assets of Rs. 1.2 Arab during the financial year 2075/76 till Chaitra end 2075 and total estimated assets would be Rs. 1.5 Arab for FY 2075/76, the appointment of Ramesh & Associates, the B class audit firm for the audit of financial year 2075/76 is invalid.
Failure to detect incorrect financial position of a company: In the given case, profit of the company has been inflated non-provisioning for expenses of Rs. 4.2 lakhs and overvaluation of stock and based on such inflated profit, the company has declared and paid dividend of Rs. 3 Lakhs. Thus, it can be said that dividend has not been paid out of real profit. If there is insufficient profit after adjustment of outstanding expenses and correctness of stock valuation and there is no past reserve, it would amount to payment of dividend out of capital.
It was the duty of auditor to ascertain whether the Balance sheet and Statement of Profit and Loss of the company show a true and fair view of the financial position and its performance. For that, he has to exercise proper audit procedure of substantive test and evaluation of various items of Balance sheet and Statement of profit and loss. The auditor should have checked whether all the outstanding expenses have been provided or not and whether closing stock has been properly valued as per set standards. If he was not satisfied, he should have issued a qualified report or adverse report.
In the instant case, the auditor has failed to do so; he will be guilty of gross negligence in the performance of his duty.