Page 439 - CA Final PARAM Digital Book.

Schedule to the Chartered Accountants Act, 1949 and Mr. Shah shall have to vacate the office
accordingly.
Author’s Note
➢ Where Auditor and Company are related (744.000/745.000/746.000/747.000)
Where Auditor and Company are having relation of any kind, Clause (4) of Part I of the Second
Schedule should be referred in all questions and if substantial interest is not found conclusion
should be given not guilty but mentioning the clause is must.

➢ Further where Auditor and Company are having relation of any kind should be referred in all
questions

➢ AS 18 (always when relative is involved)
As per AS 18 Relative" means the spouse, son, daughter, brother, sister, father and mother who
may be expected to influence, or be influenced by that individual in his/her dealings with the
reporting enterprise

➢ Also along with above, Companies Act section shall also be referred. (if question mentions the
following)
• If CA himself or relative is director or is in employment with company as director or KMP -
Section 141(3)(f) of the Companies Act, 2013
• If CA himself or relative is holding shares in company and question tells about the face
value of the shares held by relative - Section 141(3)(d) of the Companies Act, 2013.
• And where section 141(3) applies Clause (9) of Part I of the First Schedule also applies.

QNO Second Schedule, Part I,Cl,4 --Substantial Interest By Relative (Wife) Old Course-- (N16M)
747.050 TITANIUM CNO – PE.1520

Mr. Rajkumar, the director of Unite Ltd., is holding 25% shares in the company. His daughter-in-law,
CA. Rani, is in practice for 15 years where she provides consultancy services and conduct
statutory audits. She has created her niche in statutory audits. The company wanted to appoint her as
the statutory auditor of the company for the five consecutive financial years. Consequently, she was
appointed by Unite Ltd. Examine the validity of appointment of CA. Rani.
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

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