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Unit 4: Section 226, 314 and Code of Ethics

Sub-section (3) of Section 226 enumerates the categories of persons who are disqualified for Notes
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: a body corporate; an officer or employee of the company; a person who is
a partner, or who is in employment of an officer or employee of the company; 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; 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; 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.
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”.
Apart from the disqualifications laid down in Section 226, the Institute of Chartered
Accountants of India has prepared its own code of ethics which is mandatory for its
members.
In order to ensure independence of the auditors and also to prevent conflict of interest and
duty, the Council has decided not to permit a Chartered Accountant in employment to
certify the financial statements of the concern in which he is employed, or of a concern
under the same management as the concern in which he is employed, even though he is
holding a certificate of practice and even though such certification can be done by any
chartered accountant in practice. This restriction does not apply where the certification is
permitted by any law.
It has also been decided that a chartered accountant should not by himself or in his firm
name: accept the auditorship of a collage, if he is working as a part-time lecturer in the
college; accept the auditorship of a trust where his partner is either an employee or a
trustee of the trust.
Auditors’ Code of Ethics is a system or code of behavior based on moral responsibility
and obligation to explain how an auditor must behave.

Auditors are expected to apply and uphold the following principles: integrity; objectivity;
and confidentiality competency.

4.5 Keywords

Auditors’ Code of Ethics is a system or code of behavior based on moral responsibility and
obligation to explain how an auditor must behave.
Competency: Auditors must apply the knowledge, skills, and experience needed in the
performance of auditing services.
Confidentiality: Auditors must do not disclose information without appropriate authority unless
there is a legal or professional obligation to do so.

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