An auditor is precluded from making inquiries and sending feelers to appoint him as the auditor. The proposal should come from the client and should not be initiated by the auditor. Several professional and legal requirements are to be considered while accepting a new audit. Code of conduct, auditing and assurance standards, the Indian Contract Act and the Companies Act contain legal provisions about the appointment and acceptance of an audit.
Code of conduct: The ICAI’s code of conduct prohibits a member from soliciting any professional work. The auditor should stand erect by himself and should not be made to stand erect. Therefore, an auditor is precluded from making inquiries and sending feelers to appoint him as the auditor. The proposal should come from the client and should not be initiated by the auditor. It would be proper for a member to reply to an inquiry from a company.
Skill and competence: These are a set of basic principles governing an audit. At the proposal stage, when an assignment is offered to a chartered accountant, he should consider, before giving consent, if he possesses the required skills and competence to carry out the assignment. Unless he possesses the wherewithal, he should not accept the assignment.
This is determined by the previous experience in similar lines, exposure to the industry, availability of staff and time, size and area of operations, and a host of such factors.
Background of the promoters: AAS 17 requires the auditor to examine the background of the promoters before accepting an assignment. This helps the auditor to understand their perceptions. Promoter’s reputation in the industry, performance of other units under the same management, their social standing, etc., help the auditor to prima facie form an opinion on the promoters. This is useful in determining the degree of independence with which he can work.
Independence: Independence is another basic principle governing an audit. Several provisions have been incorporated in the Companies Act to safeguard the independence of the auditor. Section 226(3) states disqualifications of a member to be appointed as an auditor. If the auditor is sure that he possesses the necessary skills and competence, he has to consider whether he would be able to work with the required level of independence. He should not take up any assignment if his independence is at stake.
This independence can be considered to be impaired if the promoter is the next of kin — siblings, parents, spouse, spouse’s siblings, spouse’s parents, etc. Though there is no legal restriction on taking up an assignment where relatives are in key positions, the auditor should exercise his judgment to decide if his independence is restricted in any manner.
The ICAI has issued a guidance note on independence of the auditor. The ICAI opined that the auditor should consider the degree of his independence before accepting professional assignments where close relatives are in key position or hold a substantial interest.
Substantial interest: Code of conduct requires the auditor to state in his report while reporting on an assignment where the auditor or his partner or the firm in which he is a partner hold substantial interest in an entity.
Even the promoters not being relatives may exert an influence on the auditor be it political power, muscle power, celebrity status, etc. Independence of the auditor is impaired to that extent.
Ceiling on the number of audits: Company law as well as the ICAI has regulations on the ceiling of the number of audits that can be undertaken by an auditor. Taking up assignments over and above the ceiling would be bad in law and should not be taken up. It would amount to professional misconduct on the part of the auditor.
Audit firms are required to maintain registers regarding the audits undertaken by them. Such register would be conclusive evidence regarding the number of audits already held by the firm.
Disqualifications under Sections 226(3), 226(4): The auditor should consider if he is disqualified under any one or more of the clauses under Section 226(3). If he is disqualified to be the auditor of a company under Section 226(3), he is also disqualified to be the auditor of holding company or subsidiary company of that company. He cannot also take up the audit of a fellow subsidiary company.