ACC311 Fundamentals of Auditing Assignment 1 Solution Fall 2012

You have recently qualified your Chartered Accountancy exam and you are now working with M/S Chartered Accountants Associates. During your academic life, you purchased the stocks of different companies to finance your study so that you could sell them immediately whenever you were in need of money. You also availed financial services from different companies to maintain your living standards including car leasing facility, personal loans and credit cards. Companies Ordinance 1984 provides different clauses regarding the qualification and disqualification of an auditor. Entrepreneurship Company Limited (ECL), a public limited company wants to appoint your firm as external auditor.

You are required to elaborate qualification/disqualification of an auditor in the given Cases. You are also required to provide legal rationale to support your answer. (3 x 5)

Case # 01: You purchased a car on lease from ECL last year and you are paying lease installments regularly. Directors of ECL want to appoint you as an auditor but International Audit Standards (IAS) disqualifies such an auditor who is indebted to Client Company. Case # 02: You are indebted to ECL through personal loan. Do you think you are qualified to be an auditor of the company? Case # 03: ECL wants you to appoint as an auditor but one of your minor children has 5% share of ECL. Case # 04: ECL wants to appoint you as an auditor but recently you have been disqualified to be the auditor of its holding company. Case # 05: An associated company of ECL wants you to hire as an auditor but one of your partners has 10,000 shares in ECL.

Solution:

Case # 01: You purchased a car on lease from ECL last year and you are paying lease installments regularly. Directors of ECL want to appoint you as an auditor but International Audit Standards (IAS) disqualifies such an auditor who is indebted to Client Company.

The restriction imposed by the company’s ordinance 1984 is that person indebted to a company cannot be appointed as auditor of the company. However, under the current scenario an exception is mentioned in the companies ordinance is that the person is indebted to a company not more than 500,000 rupees can be appointed as auditor. However, as this is a lease arrangement between auditor and client that creates a significant interest of auditor in the business and therefore, will restrict the appointment of such a person as auditor.

 

Case # 02: You are indebted to ECL through personal loan. Do you think you are qualified to be an auditor of the company?

No in this case company cannot appoint me as an auditor. A person indebted to a company cannot be appointed as auditor of the company.

Case # 03: ECL wants you to appoint as an auditor but one of your minor children has 5% share of ECL.

If an auditor carries any interest in a company in the form of shares then he cannot be appointed as auditor of the company. However, if after getting knowledge of the interest in the company and appointed as an auditor then he can only retain his appointment if he disposes of such interest with in a period of 90 days from the date of appointment.

Case # 04: ECL wants to appoint you as an auditor but recently you have been disqualified to be the auditor of its holding company.

Under this case the scenario will be rechecked and simply disqualification as auditor of the holding company does not disqualify him for the appointment of subsidiary.

Case # 05: An associated company of ECL wants you to hire as an auditor but one of your partners has 10,000 shares in ECL.

The answer will be the same as Case # 03.

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