Module: | Specialized Audits, Tech & ESG Disclosures
Q79: Consider the following statements regarding the internal rotation of audit partners within an audit firm conducting a statutory audit:
1. The Companies Act legally mandates that the audit partner and their engagement team must be rotated at such intervals as may be resolved by the shareholders of the company.
2. Under the ICAI Code of Ethics, the engagement partner auditing a listed entity must be rotated after a pre-defined number of years to mitigate the familiarity threat.
3. If an audit firm is appointed for two consecutive terms of five years, the same individual audit partner is legally permitted to sign the audit report for all ten years to ensure continuity.
Which of the above statements is/are incorrect?
2. Under the ICAI Code of Ethics, the engagement partner auditing a listed entity must be rotated after a pre-defined number of years to mitigate the familiarity threat.
3. If an audit firm is appointed for two consecutive terms of five years, the same individual audit partner is legally permitted to sign the audit report for all ten years to ensure continuity.
Which of the above statements is/are incorrect?
✅ Correct Answer: C
🎯 Quick Answer:
C. Only 3 is incorrect.Even if the firm retains the client, the specific human being leading the audit must step down to ensure a fresh set of eyes reviews the accounts.
Structural Breakdown: Statement 1 is correct; Section 139(3) explicitly allows shareholders to pass a resolution demanding the rotation of the audit partner and team.
Statement 2 is correct; the ICAI Code enforces mandatory rotation for engagement partners of listed entities to break personal bonds with management.
Statement 3 is incorrect; the ICAI guidelines strictly cap the tenure of a key audit partner (usually at 7 years, adjusting alongside firm rotation limits), making it a disciplinary violation for the exact same partner to sign the financials of a listed entity for 10 consecutive years.
Historical/Related Context: Global audit regulators realized that firm rotation (changing from KPMG to Deloitte) was easily bypassed if the new firm simply hired the exact same audit partner who was previously auditing the client.
Internal partner rotation limits break this circumvention.
Causal Reasoning: A partner who has audited the same CFO for ten years loses their professional skepticism.
They begin to trust the client's verbal explanations over hard evidence, leading to catastrophic oversight of slowly escalating accounting manipulations.