Page 442 - CA Final PARAM Digital Book.

▪ Clause (5) of Part I of the Second Schedule to the Chartered Accountants Act, 1949

▪ Supreme Court Case: -Kishorilal Dutta vs. P. K. Mukherjee
Part II -- Requirements of Relevant Standards & Laws
➢ Clause (5) of Part I of the Second Schedule
A Chartered Accountant in practice is deemed to be guilty of professional misconduct under
Clause (5) of Part I of the Second Schedule if he “fails to disclose a material fact known to him
which is not disclosed in a financial statement but disclosure of which is necessary to make the
financial statement not misleading”.
➢ Kishorilal Dutta vs. P. K. Mukherjee
On similar facts it was held by the Supreme Court in Kishorilal Dutta vs. P. K. Mukherjee that it was
the duty of the Chartered Accountant to have disclosed the irregularities and contravention to the
beneficiaries of the fund in the statement of accounts signed by him.
Part III – Case Discussion
➢ In this case, the Chartered Accountant was aware of the contraventions and irregularities
committed by the trust as these were referred to in the confidential report given by the Chartered
Accountant to the trustees of the company. However, he had issued the annual accounts
without any qualification.
Part IV – Conclusion
➢ Accordingly, in the present case also it has to be held that the Chartered Accountant is guilty of
professional misconduct if the amount of irregularities is proved material.

QNO Second Schedule, Part I, Cl 5 --Loan from PF Fund Old Course-- (M04E, PM17, N21M,)
749.000 TITANIUM CNO – PE.1540 New Cours -(SM23)
Mr. Joe, a Chartered Accountant during the course of audit of M/s XYZ Ltd. came to know that the
company has taken a loan of 10 lakhs from Employees Provident Fund. The said loan was not
reflected in the books of account. However, the auditor ignored this information in his report
Answer Part I -- Relevant Standards & Laws
▪ Clause (5) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
Part II -- Requirements of Relevant Standards & Laws
➢ A chartered Accountant in practice will be held liable for misconduct if he fails to disclose a
material fact known to him, which is not disclosed in the financial statements but disclosure of
which is necessary to make the financial statements not misleading.
Part III – Case Discussion
➢ In this case, Mr. Joe has come across information that a loan of `10 lakhs has been taken by the
company from Employees Provident Fund. This is contravention of Rules and the said loan has not
been reflected in the books of accounts.
Part IV – Conclusion
➢ Further, this material fact has also to be disclosed in the financial statements. The very fact that
Mr. Joe has failed to disclose this fact in his report, he is attracted by the provisions of professional
misconduct under Clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
Author’s Note
In SA’s misstatement include Omission, But this is old Law both are covered in different Clauses. Let’s
Stick to it.

Second Schedule, Part I,Cl,5 --Loan from PF Fund Old Course-- (M09E, N11E, PM17, SM17,
QNO (Communicated to Trustees But Not Reported) M18E, N18E, M19M)
750.000
TITANIUM CNO – PE.1540
In the course of his audit assignment in M/s Bailey Ltd., CA Soft came to know that the company, due to
financial crunch and unable to meet employee’s salary, has taken a loan of Rs 50 lacs from Employees

Gratuity Fund. The said loan was not reflected in the book of account of the company and the
auditor ignored this transaction in his report.
Answer Part I -- Relevant Standards & Laws
▪ Clause (5) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
Part II -- Requirements of Relevant Standards & Laws
➢ A chartered Accountant in practice will be held liable form is conduct if he fails to disclose a

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