Page 437 - CA Final PARAM Digital Book.

and Schedules thereto.
Answer Part I -- Relevant Standards & Laws
▪ Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949

Part II -- Requirements of Relevant Standards & Laws
➢ Clause (4) of Part I of the Second Schedule
It states that expressing an opinion on financial statements of any business or enterprise in which
he, his firm or a partner in his firm has a substantial interest would constitute misconduct.

Also, the Council of the Institute of Chartered Accountants of India has stated that in cases where
a member of the Institute is a director of a company, or the firm in which the said member is a
partner, should not express any opinion on its financial statements.

Part III – Case Discussion
➢ As per facts of the case, the firm has been retained to evaluate the cost of products manufactured
by it for its information system. It is a part of management consultancy service of the firm
and moreover its partner was on the Board.
Part IV – Conclusion
➢ Hence, the firm can perform this assignment and it will not constitute misconduct. However, the
firm while accepting the position as auditor in future would have to consider whether it would be
possible to act in independent manner and express opinion on financial statements

Authors Note:
• Reference of companies’ act shall be given only when specifically asked by question.

QNO Second Schedule, Part I, Cl 4 --Not Covered in Definition of Relative Old Course-- (N12E, PM17)
745.000 TITANIUM CNO – PE.1520
Mr. A has been appointed statutory auditor of a private limited company where his spouse’s sister's

husband is having 75% ownership
Answer Part I -- Relevant Standards & Laws
▪ Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
▪ Guidance Note of ICAI over Substantial Interest.
▪ AS 18 - Related Party Disclosures
Part II -- Requirements of Relevant Standards & Laws
➢ Clause (4) of Part I of the Second Schedule
It states that if an auditor expresses his opinion on the financial statements of any business or
enterprises in which he, his firm or a partner in his firm has a substantial interest, he is committing
professional misconduct.

➢ AS 18
Further as per Council General Guidelines, a member of the Institute shall not express his opinion
on financial statements of any business or enterprise in which one or more persons, who are his
“relatives” within the meaning of AS 18 have, either by themselves or in conjunction with such
member, a substantial interest in the said business or enterprise.
Part III – Case Discussion
➢ In the given case Mr. A, has been appointed as statutory auditor of a private limited company
where his spouses’ sisters’ husband is having 75 % ownership i. e. substantial interest.
Part IV – Conclusion
➢ As per AS 18, spouses’ sisters’ husband is not covered in the definition of the term relative.
Therefore, appointment of Mr. A as statutory auditor in such company would not amount to
professional misconduct as per Clause (4) of Part I of Second Schedule to the Chartered
Accountants Act, 1949.
Authors Note:
• Refer note in QNO 747.000

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