Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Richak & Associates, a chartered accountant firm, was appointed as an auditor of a company on 15 Aswin 2069 for the year 2068/69 where Ram Lal, one of the partners of the audit firm, was holding 5% shares of the company since 2065. But Ram Lal sold all his shares of the company on 30 Aswin 2069. It was further noted that the audit report was signed another partner of the firm on 15 Falgun 2069 only.
Answer
A person or a firm in which such person has substantial shareholding of the company or a shareholder holding one percent or more of the paid-up capital of the company or his/her close relative is not qualified for appointment as an auditor as per section 112(1) of the Companies Act. So, in the present case since Ram Lal, a partner of Richak & Associates, holds 5% shares of the company, Richak & Associates is disqualified from appointment as an auditor as on 15 Asoj 2069. But Ram Lal disposes all his shares after appointment of his firm as an auditor and audit report is signed after his disposal of shares. Despite this fact as per section 112(4) of the Companies Act since the appointment of auditor is in contravention of the provisions of the Companies Act, the audit cannot be considered as valid.



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