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In all phases of a Chartered Accountant's (CA) work, he is expected to be independent, but in particular, in his work as an auditor, independence has a special meaning and significance. Not only the client but also other users of a financial statement like stakeholders, prospective investors, bankers, and government agencies rely upon the accounts of an enterprise when they are audited by a Chartered Accountant.
SA200?overall objectives of the independent auditor, require that the auditor has to comply with relevant ethical requirements, relating to financial statement audit engagements including those pertaining to independence.
The term "independence" cannot be defined precisely. Independence is a condition of mind as well as personal character and while dealing with independence we should not be confused with the superficial and visible standards of independence that are imposed by law. The legal standards on independence may be relaxed or strengthened but the quality of independence remains unaltered. The auditor should be independent not only in his mind but also in his appearance.
i.?Independence of mind
It is a state of mind which permits the auditor to provide an opinion without being affected by influences that may compromise professional judgment, allow him to act with integrity, and exercise objectivity and professional scepticism.
ii.?Independence in appearance
It is like avoidance of any facts and circumstances which are significant and, having knowledge of all relevant information, including any safeguards applied, that would reasonably conclude the firm, or its team member's, integrity, objectivity or professional scepticism had been compromised
The relationship between the auditor and his client should be such that, he should himself satisfied with his independence and, no unbiased person would be forced to the conclusion that, on an objective assessment of the circumstances, there is likely to be an abridgement of his independence.
Section 141(3)(e) of the Companies Act 2013, disqualifies a firm to appoint as statutory auditor of an entity that has a business relationship with the company, or its subsidiary, its holding company or associate company, or with a subsidiary of such holding company or associate company.
Rule 10(4) of the Companies (Audit and Auditors) Rules, 2014, defines the business relationship, for this purpose, it includes any commercial transaction except only those professional services that can be rendered by an auditor in terms of Section 144.
Also, section 141(3)(i) disqualifies an auditor who renders any service prohibited by Section 144. Section 141(4) further says that where an existing auditor incurs any of the disqualifications listed in Section 141(3) after his appointment, he shall immediately vacate his office as such auditor, the vacation being treated as a casual vacancy.
Further, section 177 of the Companies Act states that the Audit Committee has the responsibility to review and monitor the independence of the statutory auditor. If auditor provides non-audit services as laid down under Section 144, he has to obtain the prior approval of the Audit Committee. The Audit Committee is not a mere delegate of the Board of Directors. It is, on the other hand, a statutory body. In addition to whatever the board may choose to include in its terms of reference, the Audit Committee has independent statute-granted powers and functions relating, inter alia, to the independence of auditors, the audit process etc.
However, while referring to the?"Audit Quality Review Report"?(AQRR) issued by the "National Financial Reporting Authority" (NFRA), the following instances were reported wherein the Audit Firm failed to comply with the provisions regarding auditor's independence.
?a) The audit firm provided the non-audit services directly or indirectly in violation of section 144 of the Companies Act. These non-audit services also posed threats to independence, which the audit firm did not consider at all. Hence, the audit firm was not considered independent.
?b) The auditor accepted the audit engagement which posed threats to the independence.
?c) Due to the self-interest and self-review threats, the Audit Firm's compliance with the fundamental principles of the ICAI Code of Ethics was compromised.
?d) The Audit Firm failed to comply with Para 14 of SA 200 and SQC 1. The violations had undoubtedly fatally compromised the independence in mind and independence in appearance. Independence in appearance stood destroyed since no unbiased person could conclude, on an objective assessment of the circumstances, that there had been no abridgement of the auditor's independence.
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?e) The Audit Firm violated the provision of Rule 10 (4) of the Companies (Audit and Auditors) Rules, 2014. The engagements covered services prohibited under Section 144 and attracting the provision of Section 141 (4) of the Companies Act, 2013, and accordingly, the Audit Firm should have vacated its office as the statutory auditor.
?f) Since the approval of the audit committee was not obtained for providing non-audit services. The auditor was disqualified as per sections 141 (2) (e) and 143 (2) (i) to be appointed as auditor hence the acceptance of the appointment by the audit firm was illegal.
?g) The Auditor violated the Companies Act by accepting and continuing with this engagement. Therefore, the auditor has failed to conduct the audit in accordance with the standards and failed to achieve the objectives of the audit.
That’s it from us for today! Stay Tuned for more updates from?Taxmann.com
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?? 1st September 2022 (Thursday) | ?? 11:00 AM – 12:00 PM (IST)
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?? Presentation and disclosure of assets in the financial statements
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?? Recognition of various components of the statement of profit and loss
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Mr Patel is a partner of Naresh J. Patel & Co., Chartered Accountants, Ahmedabad. He has 20 years of post-qualification experience in Accounting Standards (Ind AS/IFRS/US GAAP), Company Law, and Taxation. He has authored a book on Ind AS & ICDS published by Taxmann. He has also delivered more than 500 presentations at various seminars/conferences. He is a Regional Council Member of WIRC of ICAI and Past Chairman of the Ahmedabad Branch of WIRC of ICAI.
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2 年NICE...BUT BIDEN TAX ATTACK IS IMPORTANT...NOT AUDITING.