Page 438 - CA Final PARAM Digital Book.

QNO Second Schedule, Part I, Cl 4 Substantial Interest by Relative (Brother) Old Course-- (M09E, PM17)
746.000 TITANIUM CNO – PE.1520
P, a Chartered Accountant in practice, accepts appointment as statutory auditor for LMN Pvt. Ltd. Q,

brother of P has substantial interest in LMN Pvt. Ltd.
Answer Part I -- Relevant Standards & Laws
▪ Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
▪ Section 141(3)(f) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Clause (4) of Part I of the Second Schedule
A CA in practice is deemed to be guilty of professional misconduct if he expresses his opinion on
financial statements of any business or enterprise in which he, his firm or a partner in his firm has
a substantial interest.
The above restriction is also made applicable for relatives of the members.

➢ Section 141(3)(f) of the Companies Act, 2013
Further, as per Section 141(3)(f) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor of a company whose relative is a director or is in the employment of
the company as director or key managerial personnel.
Part III – Case Discussion
➢ In the instant case, since Q, a relative has a substantial interest in LMN Pvt. Ltd
Part IV – Conclusion
➢ Thus, P will be guilty of misconduct in terms of above clause. P cannot conduct the audit and
needs to vacate the office.
Authors Note:
• Refer note in QNO 747.000

QNO Second Schedule, Part I, Cl 4 --Substantial Interest by Relative (Wife) Old Course-- (M04E, PM17)
747.000 TITANIUM CNO – PE.1520

Mr. Shah, a Chartered Accountant certified the financial statements of a company in which his wife is a

Director holding substantial interest.
Answer Part I -- Relevant Standards & Laws
▪ Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949

▪ AS 18 - Related Party Disclosures
▪ Section 141(3)(f) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws

➢ Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
It states that if an auditor expresses his opinion on the financial statements of any business or
enterprise in which he, his firm or partner in his firm has a substantial interest, he is committing
professional misconduct.
➢ AS 18
Further 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.

The Council also emphasizes that the aforesaid requirement of Clause (4) is equally applicable
while performing all types of attest functions by the members

➢ Section 141(3)(f) of the Companies Act, 2013
This is further a contravention of section 141(3)(f) of the Companies Act, 2013, which requires that
a person shall not be eligible for appointment as an auditor of a company whose relative is a
director or is in the employment of the company as director or key managerial personnel.
Part III – Case Discussion
➢ In the given case, Mr. Shah, Chartered Accountant, has certified the financial statements of a
company in which his wife is a director with substantial interest.
Part IV – Conclusion
➢ Hence, this amounts to professional misconduct which attracts Clause (4) of Part I of Second
www.auditguru.in PARAM 19.80 | P a g e