Section 112 of Companies Act, 2063 has explained the disqualification of auditor as follows:
i. A director, advisor appointed with entitlement to regular remuneration or cash benefit, a person or employee or worker involved in the management of the company or a partner of any of them or an employee of any of such partners or a close relative of a director or partner, out of them, or an employee of such relative;
ii. A debtor who has borrowed moneys from the company in any manner, or a person who has failed to pay any dues payable to the company within the time limit and is in such arrears or close relative of such person;
iii. A person who has been sentenced to punishment for an offense pertaining to audit and a period of Three years has not elapsed thereafter;
iv. A person who has been declared insolvent;
v. A substantial shareholder of the company or a shareholder holding one percent or more of the paid-up capital of the company or his/her close relative;
vi. A person who has been sentenced to punishment for an offense of corruption, fraud or a criminal offense involving moral turpitude and a period of five years has not elapsed thereafter;
vii. A person referred to in Sub-section (3) of Section 111;
viii. In the case of a public company, any person who works, whether full time or part time, for any governmental body or anybody owned fully or partly by the Government of Nepal or any other company or a partner of such person or a person who is working as an employee of such partner or a person who is authorized to sign any documents or reports to be prepared by the management of the company;
ix. A company or corporate body with limited liability;
x. A person having interest in any transaction with the company or his/her close relative or a director, officer or substantial shareholder of another company having any interest in any transaction with the company.
The auditor shall, prior to his/her appointment, give information in writing to the company that he/she is not disqualified pursuant to Subsection (1).
Where any auditor becomes disqualified to audit the accounts of a company or there arises a situation where he/she becomes disqualified for appointment or can no longer continue to act as an auditor of the company, he/she shall immediately stop performing audit which is required to be performed or is being performed by him/her and give information thereof to the company in writing.
The audit performed by an auditor who has been appointed in contravention of this Section shall be invalid.
Thus, even though M Khatri is a Chartered Accountant, company cannot be appointed as auditor of KC Textile Limited.