Page 57 - DCOM204_AUDITING_THEORY

Unit 4: Section 226, 314 and Code of Ethics

Objectives Notes

After studying this unit, you will be able to:
Know qualifications of auditors as per Section 226;
Discuss about disqualifications of auditors as per Section 226;
Explain Section 314;
Identify auditor’s code of ethics.

Introduction

The qualifications and disqualifications of auditors are provided in Section 226 of the Companies
Act. The main purpose of this section is to ensure that only qualified person possessing the
requisite knowledge and technical skill acts as the auditor of the company so that he may discharge
his duties effectively. This is to ensure that the auditor is independent in carrying out his work so
that he is able to give an unbiased opinion based on the objective assessment of the facts.
Auditors’ Qualifications: Sub-sections (1) and (2) of Section 226 enumerate the qualifications
required to be an auditor. A person who is a Chartered Accountant within the meaning of the
Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership firm whereof
all the partners are Chartered Accountants holding certificates of practice may be appointed as
auditor, of a company. In the latter case, the appointment of an auditor may be made in the firm
name and any of its partners may act in the name of the firm. Sub-section (2) provides for
recognition of certain persons though not Chartered Accountants or possessed of similar
qualifications, for appointment as auditors, if they have been functioning as such in the erstwhile
Part ‘B’ States, or in Jammu and Kashmir, subject to the Rules framed in this behalf.

Auditors’ Disqualifications: Sub-section (3) of Section 226 enumerates the categories of persons
who are disqualified for appointment as auditors. The object of these disqualifications is to
make the position of auditors as independent as possible from the affairs if the companies
whose affairs they handle. Also, if under the Chartered Accountants Act any other disqualifications
are added, they shall also apply. None of the following persons are qualified for appointment as
auditor of a company:
1. a body corporate;

2. an officer or employee of the company;
3. a person who is a partner, or who is in employment of an officer or employee of the
company;

4. a person indebted to the company for an amount exceeding one thousand rupees, or who
has given any guarantee or provided any security in connection with indebtedness of any
third person to the company for an amount exceeding one thousand rupees;
5. a person who is director or member of a private company, or a partner of a firm, which is
the managing agent or the secretaries and treasurers of the company;

6. a person holding any security of that company after a period of one year from the date of
commencement of the Companies (Amendment) Act, 2000.
Further, a person disqualified for appointment as auditor under the above disqualifications of
any other body corporate which is that company’s subsidiary or holding company or a subsidiary
of that company’s holding company, or would be disqualified if that body corporate were a
company Section 226(5) further provides that “if an auditor becomes subject, after his appointment, to
any of the disqualifications, he shall be deemed to have vacated his office”.

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