Disqualification of auditor

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ramesh (Querist)
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10 March 2012 I have a query about disqualification of auditors.The firm where i am doing articleship gives consultation services in addition to statuatory audit to some of its clients .Some of the clients account show that we have credit balances from the clients.(say 10,000)(i.e.the firm owes the clients or the firm has the liability to pay or has got payments for future works).does this mean that according to companies act,section 226 we are disqualified for performing audit? Or should we ignore that amount(that we are owing to clients) taking them as transctions in normal course of business (assuming them as mere advances ). Please clarify (if there is any case of ignoring the indebtness)

CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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10 March 2012 As per Section 226 (3) (d) of the Companies Act, 1956 'a person who is indebted to the Company for an amount exceeding one thousand rupees, or who has given any gurantee or provided any security in connection with the indebtedness of any third person to the company for any amount exceeding one thousand rupees shall not be qualified for appointment as auditor of a company'.
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By virtue of the aforesaid provision it is clear that if a person who is indebted to the Company for an amount exceeding Rs.1,000/- he/ she shall not be qualified to act as an Auditor of the concerned company.
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In my opinion, the intention of the legislature at the time of adding the disqualifications of the auditors seems to keep the interested auditors away from the giving their view on the financial performance (accounts) of the Company. That's why they had putted a limit of an amount exceeding sum of Rs. 1000/-.
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In your case, as the Auditors owe a sum of Rs. 10,000/-, and this amount is outstanding.
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Hence they are disqualified even if they have taken advance fee.
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Auditors' fee is due only when he has completed his audit.
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In practice; an auditor is not allowed to take advance fee from his clients till he completes his services.

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