Whether the purchase, by an auditor, of goods and properties under the hire purchase

system from a company will disqualify him as auditor of that company.

1. X, a chartered accountant in practice, after having been appointed as the auditor of MNO Limited, purchased a car from that company under the hire-purchase scheme run by the company on the same terms and conditions as applicable to all other customers. The cash down price of the car was Rs. 80,000. The initial payment of 25% was made on signing the hire-purchase agreement and the balance is payable in 24 monthly instalments of Rs. 3,000 each.

2. The querist has sought the opinion of the Expert Advisory Committee, whether the auditor, in the above facts and circumstances of the case, will be disqualified to act as an auditor. The querist has requested the Committee to arrive at its opinion in the light of the Research Committee’s pronouncement on the subject of ‘Independence of Auditors’, that the auditor becomes indebted if the auditor purchased goods on credit for a sum exceeding Rs. 1,000 from his client on normal credit terms allowed to others.

3. The querist has drawn the attention of the Committee to the fact that the Hire Purchase Act, 1972, passed by the Parliament, has not yet been put into effect.

Opinion1 December 12,1988

1. It was noted that the guidance Note on ‘Independence of Auditors’ (Compendium of Guidance Notes, Volume I) makes the following recommendation in this regard:

“A question of indebtedness may also be raised where an auditor of company purchases goods or services from a company audited by him. In such a case, if the amount outstanding exceeds Rs. 1,000/-, irrespective of the nature of the purchase or period of credit allowed to other customer the provisions concerning disqualification of auditor as contained in Section 226 (3) (d) will be attracted.”

2. It is hereby opined that above mentioned paragraph is applicable in case of goods purchased on hire purchase by an auditor of a company on normal terms and conditions of the business of the company if the amount of instalment outstanding exceeded Rs. 1,000/- and that the provisions concerning disqualification of auditor as contained in Section 226(3) (d) will be attracted.

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1 This query was referred by the Expert Advisory Committee to the Council as it was felt that this matter was of importance to the members. This opinion is, therefore, the opinion of the Council of the Institute.