Module: | Statutory Audit, NFRA & ICAI Standards
Q56: Consider the following statements regarding the prohibition of non-audit services by a statutory auditor under Section 144 of the Companies Act:
1. A statutory auditor is strictly prohibited from providing internal audit and actuarial services to the company they are auditing.
2. The prohibition on providing non-audit services applies only to the company being audited, allowing the auditor to freely provide these services to the company's holding and subsidiary companies.
3. Any non-audit service that is not explicitly prohibited under Section 144 can only be rendered by the auditor after obtaining prior approval from the company's Audit Committee or the Board of Directors.
Which of the above statements is/are incorrect?
2. The prohibition on providing non-audit services applies only to the company being audited, allowing the auditor to freely provide these services to the company's holding and subsidiary companies.
3. Any non-audit service that is not explicitly prohibited under Section 144 can only be rendered by the auditor after obtaining prior approval from the company's Audit Committee or the Board of Directors.
Which of the above statements is/are incorrect?
✅ Correct Answer: B
🎯 Quick Answer:
B. Only 2 is incorrect.Structural Breakdown: Statement 1 is correct; internal audit and actuarial services are explicitly on the banned list.
Statement 2 is incorrect; the law explicitly extends the prohibition to the holding company and subsidiary companies of the auditee to ensure comprehensive group-level independence.
Statement 3 is correct; even for permissible services, the auditor must clear the safeguard of prior approval from the Audit Committee.
Historical/Related Context: The global collapse of Enron (and its auditor Arthur Andersen) highlighted the danger of audit firms making more money from consulting the client than from auditing them.
Section 144 was drafted to physically separate the roles of a financial checker and a business consultant.
Causal Reasoning: If an auditor designs a financial system or provides internal audit services to a subsidiary, and then conducts the statutory audit of the consolidated group, they are effectively auditing their own work, destroying the core principle of objective verification.