Professional Ethics – CA Final Audit Question Bank

Professional Ethics – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Professional Ethics – CA Final Audit Question Bank

Fundamental Principles to be followed by an Accountant

Question 1.
What are the fundamental principles as per code of ethics of ICAI? What are the threats involved while complying with the fundamental principles? [Nov. 16 (4 Marks)]
Answer:
Fundamental Principles as per Code of Ethics:

1. Integrity: A professional accountant should be straightforward and honest in all professional and business relationships.

2. Objectivity: A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional judgments.

3. Professional Competence and Due Care: A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards while providing professional services.

4. Confidentiality: A professional accountant should respect the confidentiality of information acquired as a result of professional and employment relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose.

5. Professional Behaviour: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Threats involves in compliance:

Self-interest threats: It may occur as a result of the financial or other interests of a professional accountant or of a relative
Self-review threats: It may occur when a previous judgment needs to be re- evaluated by the professional accountant responsible for that judgment.
Advocacy threats: It may occur when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised.
Familiarity threats: It may occur when, because of a relationship, a professional accountant becomes too sympathetic to the interests of others.
Intimidation threats: It may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived.

Question 2.
What is self-review threat. List the circumstances that may create self-review threats.
Answer:
Self Review Threats:
As per Section 100 of Code of Ethics, self-review threats occur when a previous judgment needs to be re- evaluated by the professional accountant responsible for that judgment.

Circumstances that may create self-review threats are:
(a) Reporting on the operation of financial information systems after being involved in their designing or implementation.
(b) Having prepared the original data used to generate records that are the subject matter of the engagement.
(c) A member of the engagement team is being associated with the client as a director or officer.
(d) A member of the engagement team is being employed by the client in a position to exert direct and significant influence over the subject matter of the engagement.

Question 3.
Distinguish: Self- interest threat from self – review threat in an assurance engagement. [May 18 – New Syllabus (4 Marks)]
Answer:
Self Interest Threat:
Self-interest threat may occur as a result of the financial or other interests of a professional accountant or of a relative. Various circumstances in which self-interest threats may arise are:
(a) A financial interest in a client or jointly holding a financial interest with a client.
(b) Undue dependence on total fees from a client.
(c) Having a close business relationship with a client.
(d) Concern about the possibility of losing a client.
(e) Potential employment with a client
(f) A loan to or from an assurance client or any of its directors or officers.

Self Review Threats:

As per Section 100 of Code of Ethics, self-review threats occur when a previous judgment needs to be re- evaluated by the professional accountant responsible for that judgment.
Circumstances that may create self-review threats are:
(a) Reporting on the operation of financial information systems after being involved in their designing or implementation.
(b) Having prepared the original data used to generate records that are the subject matter of the engagement.
(c) A member of the engagement team is being associated with the client as a director or officer.
(d) A member of the engagement team is being employed by the client in a position to exert direct and significant influence over the subject matter of the engagement.

Question 4.
A professional accountant in public practice is always subject to various threats in compliance with fundamental principles of his profession and you, as a professional accountant, is worried about engagement specific threat in your audit assignment of M/s Soft Ltd. and want to implement some measures to eliminate and reduce the same. Enumerate some engagement specific safeguards which you may introduce in your work environment to ward off such threats. [May 19 – New Syllabus (5 Marks)]
Answer:
Engagement-specific safeguards in the work environment:
(a) Involving an additional professional accountant to review the work done or otherwise advise as necessary.
(b) Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant.
(c) Discussing ethical issues with TCWG of the client.
(d) Disclosing to TCWG of the client the nature of services provided and extent of fees charged.
(e) Rotating senior assurance team personnel.

Relevant Provisions of CA Act, 1949

Question 5.
Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethics and Schedules to the Act: P, a Chartered Accountant in practice provides management consultancy and other services to his clients. During 2019-20, looking to the growing needs of his clients to invest in the stock markets, he also advised them on Portfolio Management Services whereby he managed portfolios of some of his clients.
Or
Mr. P, a Chartered Accountant in practice, provides guidance on post-issue activities to his clients : e.g. follow up steps which include listing of instruments, dispatch of certificates and refunds etc. 1 with the various agencies connected with the work. During the year 2019- 20, looking to the grow- j ing needs of his clients to invest in the stock markets, he also started advising them on Portfolio Management Services whereby he managed portfolios of some of his clients.
Answer:
Advising on Portfolio Management Services:

The Council of the ICAI pursuant to Section 2(2)(iv) of the CA Act, 1949 has passed a resolution permitting “Management Consultancy and other Services” by a CA in practice.

A clause of the aforesaid resolution allows CAs in practice to act as advisor or consultant to an issue of securities including such matters as drafting of prospectus, filing of documents with SEB1, preparation of publicity budgets, advice regarding selection of brokers, etc.

It is, however, specifically stated that CAs in practice are not permitted to undertake the activities of broking, underwriting and portfolio management Services. Thus, a CA in practice is not permitted to manage portfolios of his clients.

Conclusion: P would be guilty of misconduct under the Chartered Accountants Act, 1949 as a practicing CA is not permitted to render portfolio management services.

Question 6.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. A, a practicing Chartered Accountant agreed to select and recruit personnel, conduct training programmes for and on behalf of a client. [Nov. 07 (5 Marks), May 15 (4 Marks)]
Answer:
Selection and Recruitment of Personnel:

Under Section 2(2)(iv) of the CA Act, 1949, a member of the Institute shall be deemed “to be in practice” when individually or in partnership with CAs in practice, he, in consideration of remuneration received or to be received renders such other services as, in the opinion of the Council, are or may be rendered by a CA in practice.

Pursuant to Section 2(2)(iv) above, the Council has passed a resolution permitting a CA in practice to render entire range of “Management Consultancy and other Services”.
The definition of the expression “Management Consultancy and other Services” includes Personnel recruitment and selection.
Personnel Recruitment and selection includes, development of human resources including designing and conduct of training programmes, work study, job description, job evaluation and evaluations of workloads.

Conclusion: There is no misconduct on part of Mr. A, as personnel recruitment and selection is
covered under management consultancy and other services.

Question 7.
Mr. S, a practicing Chartered Accountant agreed to provide “Portfolio management Services” to his client M/s. D Limited. Comment with reference to the Chartered Accountants Act, 1949. [Nov. 15 (4 Marks)]
Answer:
Advising on Portfolio Management Services:

The Council of the ICAI pursuant to Section 2(2)(iv) of the CA Act, 1949 has passed a resolution permitting “Management Consultancy and other Services” by a CA in practice.

A clause of the aforesaid resolution allows CAs in practice to act as advisor or consultant to an issue of securities including such matters as drafting of prospectus, filing of documents with SEBI, preparation of publicity budgets, advice regarding selection of brokers, etc.

Conclusion: S would be guilty of misconduct under the Chartered Accountants Act, 1949 as a practicing CA is not permitted to render portfolio management services.

“ICAI Examiner Comments”
Examinees failed to point out that Chartered Accountants in practice are not permitted to undertake the activities of broking, underwriting and portfolio management services as per resolution of the Council pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949 , regarding “Management Consultancy and other Services.”

Question 8.
CA Natra), in practice, accepted an assignment as advisor and consultant to the public issue of shares by his client M/s Super Ltd. Besides helping the company as an advisor, he also underwrote the public issue of the company to the extent of 25% at a commission of 1%. Remaining shares were underwritten by banks and other financial institutions at the same rate of commission. He contends that above assignments are part of management consultancy work permitted by the council of the Institute. Do you agree with the view of CA Natraj? Decide in the light of applicable code of conduct. [May 19 – New Syllabus (4 Marks)]
Answer:
Advising on Portfolio Management Services:

The Council of the ICAI pursuant to section 2(2)(iv) of the CA Act, 1949 has passed a resolution permitting “Management Consultancy and other Services” by a CA in practice.

A clause of the aforesaid resolution allows CAs in practice to act as advisor or consultant to an issue of securities including such matters as drafting of prospectus, filing of documents with SEBI, preparation of publicity budgets, advice regarding selection of brokers, etc.

Conclusion: CA Natraj would be guilty of misconduct under the Chartered Accountants Act, 1949 as a practicing CA is not permitted to render underwriting services.

Question 9.
Discuss the following with reference to the CA Act, 1949 and schedules thereto: Mr. A, CA in practice ‘ has been suspended from practice for a period of 6 months & he had surrendered his COP for the said period. During the said period of suspension, though he did not undertake any audit assign-ments, he undertook representation assignments for income tax whereby he would appear before the tax authorities in his capacity as a CA. [Nov 02, Nov 11 (4 Marks)]
Answer:
Undertaking Tax Representation Work:

Sec. 6 of CA Act, 1949, requires that no member of the Institute shall be entitled to practice unless he has obtained from the Council a certificate of practice.

In case a person has been suspended from practice for a period, he remains a member of ICAI and abide by the provisions of CA Act and its regulations.

Such a member cannot take up in any other capacity, any practice separable from his capacity to practices as a member of the Institute. If he appears before the taxation and related authorities, he is only doing so in his capacity as a CA and a member of the Institute.

The particulars of this case are similar to case of A.C. Kaher, wherein COP has been cancelled by High Court for 6 months and ICAI informed the member that he continued to be member of the Institute but he was only suspended from practice under the order of the High Court for a period of six months, and that he should comply with the provision of the Act and the Regulations in so far as they were applicable to member of the Institute.

Conclusion: A would not be allowed to represent before the income tax authorities for the period
he remains suspended. Accordingly, in the present case, he is guilty of professional misconduct.

Question 10.
Mr. Dice, a practicing Chartered Accountant was ordered to surrender his certificate of practice and he was suspended for one year on certain professional misconduct against him. During the period of suspension, Mr. Dice, designating himself as GST consultant, did the work of filing GST returns and made appearance as a consultant before various related authorities.

He contended that there is nothing wrong in it as he, like any other GST consultant, could take such work and his engagement as such in no way violate the order of suspension inflicted on him. Is he right in his contention? [May 18 – New Syllabus (4 Marks)]
Answer:
Undertaking Tax Representation Work:

Sec. 6 of CA Act, 1949, requires that no member of the Institute shall be entitled to practice unless he has obtained from the Council a certificate of practice.
In case a person has been suspended from practice for a period, he remains a member of ICAI and abide by the provisions of CA Act and its regulations.
Such a member cannot take up in any other capacity, any practice separable from his capacity to practices as a member of the Institute. If he appears before the taxation and related authorities, he is only doing so in his capacity as a CA and a member of the Institute.
However, if a member of ICAI, is doing so in any other capacity such as GST Consultant wherein his capacity is not chartered accountant in practice, he will not be held guilty for misconduct.

In the instant case, Mr. Dice was a practicing chartered accountant and he was ordered to surrender his certificate of practice and was suspended for one year. Mr. Dice is doing the work of filing GST returns and has appeared as a consultant before various related authorities as GST Consultant which is not in capacity of a practicing chartered accountant rather in capacity of authorized representative. Any person who has been authorized to act as a GST Practitioner on behalf of the concerned registered person can become authorized representative. Thus, filing GST return and appearing as GST Consultant by Mr. Dice is not professional misconduct.

Conclusion: Contention of Mr. Dice is correct as long as he is not working in his capacity as a CA, during the period he was suspended from practice as CA.

Question 11.
Is there any misconduct on the part of a Chartered Accountant in the following circumstances: Mr. G, a Chartered Accountant in practice as a sole proprietor has an office in Mumbai near Church Gate. Due to increase in professional work, he opens another office in a suburb of Mumbai which is approximately 80 kilometres away from the municipal limits of the city. For running the new office, he employs three retired Income-tax Officers.
Answer:
Maintenance of Branch office:

In terms of Section 27 of the CA Act, 1949 if a chartered accountant in practice has more than one office in India, each one of these offices should be in the separate charge of a member of the Institute.

There is however an exemption for the above if the second office is located in the same premises, in which the first office is located; or the second office is located in the same city, in which the first office is located; or the second office is located within a distance of 50 kms from the municipal limits of a city, in which the first office is located.

Conclusion: As the second office is situated beyond 50 kms of municipal limits of Mumbai city, Mr. G would be liable for committing a professional misconduct and provisions of Clause 1, Part II, Second Schedule will be attracted.

Question 12.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: XY & Co., a firm of Chartered Accountant having 2 partners X & Y, one in charge of Head Office and another in charge of Branch at a distance of 80 kms, puts up a name-board of the firm I in both premises and also in their respective residences.
Answer:
Putting up of name Board:

The council of the Institute has decided that with regard to the use of the name-board, there will be no bar to the putting up of a name-board in the place of residence of a member with the designation of chartered accountant, provided, it is a name-plate or board of an individual member and not of the firm.

In the given case partners of X Y & Co., put up a name board of the firm in both offices and also in their respective residences.

Conclusion: The chartered accountants are guilty of misconduct, as name board of the firm cannot be put in place of residence.

Question 13.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs of Chennai. Due to increase in the income tax assessment work, he opens another office near the income tax office. For running the new office, he has employed a retired Income Tax Commissioner. [Nov. 12 (4 Marks)]
Answer:
Maintenance of Branch office:

There is however an exemption from the above if the second office is located in the same premises, in which the first office is located; or the second office is located in the same city, in which the first office is located; or the second office is located within a distance of 50 kms from the municipal limits of a city, in which the first office is located.

Conclusion: Assuming that the distance between new office and municipal limits of Suburbs (area where existing office is situated) is greater than 50 Km., Mr. K would be liable for committing a professional misconduct.

Question 14.
Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs of Chennai. Due to increase in the income tax assessment work, he opens another office near the income tax office, which is within the city and at a distance of 30 kms. from his office in the suburb. For running the new office, he has employed a retired Income Tax Commissioner who is not a Chartered Accountant. Comment. [Nov. 15, May 19-Old Syllabus (4 Marks)]
Answer:
Maintenance of Branch office:

Conclusion: As the distance between new office and municipal limits of Suburbs (area where existing office is situated) is less than 50 Km., Mr. K would not be liable for any mis-conduct.

Question 15.
M & Co., a sole proprietary Chartered Accountant firm in practice with an office in a busy belt of a city, had great difficulty in regularly attending to the consultancy needs of his client who are mostly located in an industrial cluster in a nearby outskirt which is situated at a distance of 26 kms from the office of the firm.

To mitigate the difficulty and to have ease of business, a facilitation centre was opened in the industrial cluster. The proprietor managed both the office and the facilitation centre, by himself. No intimation was made to the institute of chartered accountants of India. Examine whether there is any professional misconduct in this respect. [May 18 – New Syllabus (5 Marks)]
Answer:
Maintenance of Separate office:

Regulation 189 of CA Regulations, 1988 requires that a CA in practice or a firm of such CAs shall inform the Council within one month of the opening or closing of a branch office.

In the present case, a CA in practice has opened a new office with 26 Kms from the existing office and managing both offices by himself. However, no intimation was made to the ICAI.

Conclusion; Though there is no problem in managing both the offices, but misconduct arises due to non-intimation to Council of ICAI.

Question 16.
CA Sant, a newly qualified professional with certificate of practice, approached CA Pant, the auditor of his father’s company M/s Max Ltd., to allow him to have some practical and professional knowledge and experience in his firm before he can set up his own professional practice. CA Pant allowed him to sit in his office for 6 months and allotted a small chamber with other office infrastructure facility.

In the course of his association with CA Pant’s office, he used to provide tax consultancy independently to the client of the firm and also filed few IT and GST return and represented himself before various tax authorities on behalf of the firm although no documents were signed by him.

During his association in CA Pant’s office he did not get any salary or share of profit or commission i but only reimbursement of usual expenses like conveyance, telephone etc. was made to him After the end of the agreed period, he was given a lump sum amount of Rs. 3,00,000 by CA Pant for his , association out of gratitude.
Examine the case in the light of code of professional misconduct. [May 19 – New Syllabus (5 Marks)]
Answer:
Allowing Others to use firm’s name:

As per Clause (1) of Part 1 of First Schedule to the Chartered Accountants Act, 1949, a CA in Practice is deemed to be guilty of professional Misconduct if he allows any person to practice in his name as a Chartered Accountant, unless such person is also a Chartered Accountant in practice, and is in partnership with, or employed by himself.

This clause ensures that the work of the accountant will be carried out by a Chartered Accountant who may be his partner, or his employee and would work under his control and supervision.

In the present case, CA Pant allowed Mr. Sant, another Chartered Accountant, holding Certificate of Practice to practice in his firm for a period of 6 months, whereas Mr. Sant is not a partner or employee. Further after expiry of six months, Mr. Pant also gives Mr. Sant a lump sum amount of Rs. 3,00,000 for his association out of gratitude.
Conclusion: Mr. Pant will be guilty of professional misconduct by virtue of Clause 1 of Part I of First Schedule as he allows another practice to practice in his firm name, whereas other person (Mr. Sant) is neither a partner nor an employee.

Question 17.
A CA obtained a loan from a fi nance company for purchase of office building agreeing to pay interest at 6% p.a. and 10% of his gross professional receipts till the loan is repaid. [May 94 (5 Marks)]
Answer:
Sharing Professional Receipts with others:
As per Clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than

a member of the Institute or
a partner or
a retired partner or
the legal representative of a deceased partner,
or a member of any other professional body or
with such other persons having such qualification as may be prescribed,

for the purpose of rendering such professional services from time to time in or outside India. In the given case in substance the CA has agreed to share his receipt with a finance company from whom he has taken a loan, which is not permitted.

Conclusion: Mr. K will be deemed to be guilty of professional misconduct under Clause 2 of Part I of First Schedule.

Question 18.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: A CA Firm pays share of profits to widow of deceased partner. [May 09 (4 Marks)]
Answer:
Sharing of Profits with widow of deceased Partner:
As per Clause (2) of Parti of the First Schedule to the Chartered Accountants Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than

a member of the Institute or
a partner or
a retired partner or
the legal representative of a deceased partner,
or a member of any other professional body or
with such other persons having such qualification as may be prescribed,

for the purpose of rendering such professional services from time to time in or outside India.

However, it is further decided by the Council of the ICAI that widow or legal representative of a deceased partner can continue to receive a share of profit where the partnership agreement provides the same.

Conclusion: If the agreement so provides, there would not be any professional misconduct on part of the firm, otherwise, it amounts to professional misconduct.

Question 19.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: K, a practicing Chartered Accountant gave 50% of the audit fees received by him to L, who was not a Chartered Accountant, under the nomenclature of office allowance and such an arrangement continued for a number of years. [May 12 (4 Marks), MTP-Oct. 19]
Answer:
Sharing Fees with Employees:
As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than

a member of the Institute or
a partner or
a retired partner or
the legal representative of a deceased partner,
or a member of any other professional body or
with such other persons having such qualification as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India.

In the given case in substance the CA has shared his profit and therefore, is guilty of professional misconduct under the clause. It is not the nomenclature to a transaction that is material but it is the substance of the transaction, which has to be looked into.

Conclusion: Mr. K will be deemed to be guilty of professional misconduct under Clause 2 of Part I of First Schedule.

Question 20.
Mr. X who passed his CA examination of ICAI on 18th July, 2020 and started his practice from August 15, 2020. On 16th August 2020, one female candidate approached him for articleship. In addition to monthly stipend, Mr. X also offered her 1% profits of his CA firm.

She agreed to take both 1% profits of the CA firm and stipend as per the rate prescribed by the ICAi. The Institute of Chartered Accountants of India sent a letter to Mr. X objecting the payment of 1% profits. Mr. X replies to the ICAI stating that he is paying 1% profits of his firm over and above the stipend to help the articled clerk as the financial position of the articled clerk is very weak. Is Mr. X liable to professional misconduct. [Nov. 13 (4 Marks)]
Or
Mr. X, who passed his CA examination of ICAI on 18th July, 2020 had started his practice from 15th August, 2020. On 16th August, 2020 one candidate approached him for article ship. Mr. X decided to give her 1% profits of his CA firm in addition to monthly stipend. She agreed to take both 1% of profits and prescribed stipend. The ICAI had sent a letter to Mr. X objecting the payment of 1 % profits.
Mr. X replied stating that sharing 1% profits is over and above the stipend to help the articled clerk to overcome her financial crisis.
Is Mr. X liable for Professional misconduct? [May 16 (4 Marks)]
Answer:
Sharing Profits with Articled Clerks:
As per clause (2) of Part 1 of the First Schedule to the Chartered Accountants Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than

a member of the Institute or
a partner or
a retired partner or
the legal representative of a deceased partner,
or a member of any other professional body or
with such other persons having such qualification as may be prescribed,

for the purpose of rendering such professional services from time to time in or outside India.

Conclusion: Mr. X will be guilty of professional misconduct in terms of clause 2 of part I of First Schedule and reply of Mr. X that he is paying 1% profits over and above the stipend to help the article clerk is not tenable.

Question 21.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: A Chartered Accountant who was in practice since last 20 years died in a road accident. His widow sold the practice to another Chartered Accountant in practice for ₹ 30 lakhs. The price also included the right to use the firm name. [Nov. 12 (4 Marks)]
or
Mr. Qureshi, Chartered Accountant, in practice died in a road accident. His widow proposes to sell the practice of her husband to Mr. Pardeshi, Chartered Accountant, for ₹ 5 lakhs. The price also includes right to use the firm name-Qureshi and Associates. Can widow of Qureshi sell the practice and can Mr. Pardeshi continue to practice in that name as a proprietor? [Nov. 04 (4 Marks)]
Answer:
Sale of Practice by widow of deceased member:
With reference to Clause 2 of Part I of First Schedule to CA Act, 1949, in case of sole proprietorship firm, the Council of ICAI has resolved that the sale/transfer of goodwill shall be permitted in respect of cases where the death of the proprietor occurred on or after 30.08.1998 provided:

ICAI’s permission to practice in the deceased’s firm name is sought within a year of death. [In such a case, name of the firm is kept in abeyance till one year from the date of death].

In case there exist a dispute as to the legal heir of the deceased proprietor, information as to the existence of the dispute is received by the Institute within a year of the death. (In such a case, name of the firm is kept in abeyance till one year from the date of settlement of dispute).

Conclusion: Widow of deceased member can sell the goodwill provided sale is completed within one year from the death of member and permission of ICAI is obtained.

Question 22.
Mr. X is a practicing Chartered Accountant. Mr. Y is a practicing Advocate representing matters in the court of law. X and Y decided to help each other in the matters involving their professional expertise. Accordingly, Mr. X recommends Mr. Y in all litigation matters in the court of law and Y consults X in all matters relating to finance and other related matters, which comes to him in arguing various cases. Consequently, they started sharing profits of their professional work. Is Mr. X liable for professional misconduct? [May 16 (4 Marks), RTP-Nov. 18]
Answer:
Sharing Fees with Advocate or of Advocate:

As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualification as may be prescribed, for the purpose of rendering such professional services to time in or outside India.

As per Clause 3 of Part 1 of the First Schedule to the CA Act, 1949, a CA in Practice is deemed to be guilty of professional Misconduct if he accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute. However, such a restriction does not apply in respect of member of any other professional bodies or with such other persons having prescribed qualifications.

For the purpose of Clauses 2 & 3, Regulation 53A of CA Regulations, 1988 allows sharing of profit with an advocate.

Conclusion: Mr. X will not be deemed to be guilty of professional misconduct as Clauses 2 & 3 permits a CA in practice for profit sharing with members of any other professional bodies or with such other persons having prescribed qualifications and advocates are prescribed under Regulation 53A.

“ICAI Examiner Comments”
Handful of candidates failed to mention the exception and concluded wrongly.

Question 23.
CA. P is a newly qualified Chartered Accountant in practice and in order to increase his professional practice and client base, entered into an agreement with Mr. A, a qualified and experienced registered valuer to share 20% professional fees for all cases of valuation referred to him by CA. P. Based on this, CA. P received ₹ 1,20,000 during the year 2019-20 from Mr. A. Is CA. P guilty of ‘ misconduct under the Chartered Accountants’ Act, 1949? [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Sharing Fees of professional work of others:

As per Clause 3 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in Practice is deemed to be guilty of professional Misconduct if he accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute. However, such a restriction does not apply in respect of member of any other professional bodies or with such other persons having prescribed qualifications.

Regulation 53A of CA Regulations, 1988 prescribes the qualifications of persons with whom profits can be shared.

In this case, CA. P a practicing Chartered Accountant entered into an agreement with Mr. A, a qualified and experienced registered valuer to share 20% professional fees for all cases of valuation referred to him by CA. P. Based on this, CA. P received ₹ 1,20,000 during the year 2018-19 from Mr. A.

Conclusion: Mr. P will be deemed to be guilty of professional misconduct by virtue of Clause 3, Part I of First Schedule as he accepts professional fees from a person who is not a member of ICAI. Further, registered valuers are not recognised for profit sharing purpose under Regulations 53A and 53B.

Question 24.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: Mr. P, a Chartered Accountant in practice entered into a partnership with Mr. L, an advocate for sharing of fees for work sent by one to the other. However, due to some disputes, the partnership was dissolved after 1 month without any fees having been received. [Nov. 05 (4 Marks), RTP-Nov. 19]
Answer:
Partnership with an Advocate:
As per Clause 4, Part I of First Schedule, a CA in Practice is deemed to be guilty of professional Misconduct if he enters into partnership in or outside India with any person other than the following:

C.A. in practice, or
Member of any other professional body having prescribed qualifications, or
a person who but for his residence abroad would be entitled to be registered as member, or
a person whose qualifications are recognized by CG or Council for the purpose of permitting such partnerships.

As per Regulations 53A and 53B of Chartered Accountant Regulations, 1988, a member is permitted to enter into partnership with an advocate, member of Bar council of India, besides other qualified persons and members of other professional bodies.

Conclusion: Mr. P will not be deemed to be guilty of professional misconduct as clause 4 permits a CA in practice for entering into partnership with members of any other professional bodies or with such other persons having prescribed qualifications and members of bar council of India and persons having Bachelor of Law are prescribed.

Question 25.
Can a practicing CA be held guilty of professional misconduct under the following circumstance: Z, a Chartered Accountant wrote several letters to Government Department, pointing out seniority of his firm, sending his life sketch and stating that he had a glorious record of service to the country as well as to the organisation of accountancy profession with a view to get the audit work. [Nov. 03 (4 Marks)]
Answer:
Soliciting work directly or indirectly:

As per Clause 6 of Part 1 of First Schedule to the Chartered Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant in practice solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.

As per Council Guidelines for Advertisement for the members in practice, a member is not permitted to claim any superiority over any other Member(s)/Firm(s) or to include the names of the clients in any write up.

In the present case, Mr. Z, a practicing Chartered Accountant sent the letter to government departments, pointing out his seniority and stating his record of serving the nation, which seems to be indirect methods to adventure their professional practice with a view to solicit professional work.

Conclusion: Mr. Z will be deemed to be guilty of professional misconduct as per clause 6 of part I of First Schedule of the Chartered Accountants Act, 1949.

Note: Alternatively, answer may be based on Clause 7, Part I to First Schedule referring to advertisement of professional attainments.

Question 26.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: M/s XVZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The website besides containing details of the firm and bio-data of the partners also contains the photographs of all the partners of the firm. [May 05 (5 Marks)]
Answer:
Hosting Details on Website:

As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a firm of chartered accountant can create its own website using any format subject to guidelines.
However, the website should be so designed that it does not solicit clients or professional work and should not amount to direct or indirect advertisement.
The guidelines of the ICAI allows a firm to put up the details of the firm, bio-data of partners and display of a passport size photograph.

Conclusion: M/s XYZ had complied with all the guidelines and there does not appear any violation of the Chartered Accountants Act, 1949 and its Regulations.

Question 27.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: Mr. S, a Chartered Accountant published a book and gave his personal details as the author. These details also mentioned his professional experience and his present association as partner with M/s RST, a firm. [Nov. 05 (5 Marks)]
Answer:
Solicitation of Professional Work:

As per clause 6 of Part 1 of the First Schedule to the Chartered Accountants Act, 1949 a CA in practice will be deemed to be guilty of professional misconduct if he solicits client or professional work either directly or indirectly, by circular, advertisement, personal communication or interview or by any other means.

While elaborating forms of soliciting work, the Council has specified that a member is not permitted to indicate in a book or an article, published by him, the association with any firm of chartered accountants.

In the present case, Mr. S a Chartered Accountant published the book and mentioned his professional experience and his association as a partner with M/s RST, a firm of chartered accountants.

Conclusion: Mr. S has violated the restriction imposed under Clause 6 of Part I of First Schedule and hence held to be guilty of professional misconduct.

Question 28.
Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethics and Schedules to the Act: XYZ & Associates, a firm with 5 partners developed a website www.xyzas- sociates.com. The website also contained a link to “All India Chartered Accountants Association”, a voluntary association where X, a partner of the firm is currently the Vice-president. [May 06 (4 Marks)]
Answer:
Hosting Details on Website:

As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a chartered accountant or the firm of chartered accountants can create its own website using any format subject to guidelines.
As per guidelines, a website may provide a link to website of ICAI, its regional councils, branches and government departments and other professional bodies like AICPA, ICAEW etc.
In the present case, website provide a link to the “All India Chartered Accountants Association” which is not permitted.

Conclusion: The firm is guilty of professional misconduct by virtue of Clause 6 of Part I of First Schedule.

Question 29.
X Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethics and Schedules to the Act: M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government for computerization of land revenue records. For this purpose, the firm also paid ₹ 50,000 as earnest deposit as part of the terms of the tender. [May 06 (4 Marks), MTP – Aug. 18]
Answer:
Solicitation of Work:

Clause 6 of Part I of First Schedule allows solicitation of client or professional work through responding to tenders.
Further Guidelines are being issued by Council allowing therein a member to respond to tenders where minimum fees of the assignment is prescribed in the tender document itself or where the areas are open to other professionals along with Chartered Accountants.
Further, in respect of a non-exclusive area, members are permitted to pay reasonable amount towards earnest money/security deposits.
In the present case, since computerisation of property records does not fall within exclusive areas for Chartered Accountants, M/s LMN can respond to tenders as well as deposit ₹ 50,000 as earnest deposit and shall not have committed any professional misconduct.
Conclusion: There is no professional misconduct on part of M/s LMN.

Question 30.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: A chartered Accountant in practice created his own website in attractive format and colours and circulated information contained in the website through E-mail. [May 07 (5 Marks)]
Or
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. Brilliant, a chartered accountant in practice, created his own website in attractive format and highlighted the contents in blue colour. He also circulated the information contained in the website through E-mail to acknowledge public at large about his expertise. However, due to shortage of time, he could not intimate his website address to the Institute. [RTP-May 18, May 19]
Answer:
Solicitation of work through website:

As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means.

Guidelines issued by the ICAI under Clause 6 of Part I of First Schedule to the CA Act, 1949, for development of website by members in practice does not prescribe any standard format or restriction on use of colours.

However, it is a requirement that none of the information contained in the website be circulated on their own or through E-mail or by any other mode except on a specific pull request.
Further, there is no requirement to intimate the website address to the Institute. Members are only required to comply with the website guidelines issued by Council of ICAI.
In the present case, information is circulated through e-mail, hence it is a violation of guidelines.
Conclusion: Member would be held guilty of professional misconduct for circulation of information through e-mail.

Question 31.
CA. S and CA. M arc two partners of the CA firm SM & Co. Being very pious, CA. S organised a religious ceremony at his home for which he instructed his printing agent to add his designation “Chartered Accountant” with his name in the invitation cards. Later on, the invitations were distributed to all the relatives, close friends and clients of both the partners. [RTP – Nov 20]
Answer:
Using designation “Chartered Accountant” on invitation cards:

As per Clause 6, Part I of First Schedule of Chartered Accountants Act, 1949, a CA in practice shall be deemed to be guilty of professional misconduct if he solicits clients or professional work either directly or indirectly, by circular, advertisement, personal communication or interview or by any other means.

Guidelines issued by the Council of ICAI under Clause 6 allowed a member to use designation “Chartered Accountant” as well as name of firm in greeting cards, invitations for marriages and religious ceremonies and any invitation for opening or inauguration of office, or letters regarding change in office premises or telephone numbers provided these are sent only to clients, relatives and close friends of concerned member.

In the present case, CA. S is adding the designation Chartered Accountant with his name on invitation cards and these cards were distributed to his and his partner’s relatives, close friends and clients.

Conclusion: CA. S shall be deemed to be guilty of professional misconduct for sending the invitation cards using designation chartered accountant to partner’s relatives, close friends and clients.

Question 32.
Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules thereto: Mr. X, a CA in practice, provides part-time tutorship under the coaching organization of the Institute. On 30th June, 2020, he was awarded ‘Best Faculty of the year’ as gratitude from the Institute. Later on, he posted his framed photograph on his website wherein he was receiving the said award from the Institute.
Answer:
Posting other than passport size photo on website:

As per guidelines of the ICAI laid dovtfh in Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a chartered accountant or the firm of chartered accountants can create its own website using any format subject to guidelines.

As per the guidelines, a member is not permitted to display any photograph on the website, other than passport size photograph.
In the present case, Mr. X displayed his framed photograph on website wherein he was receiving “Best faculty of the year” award from the Institute.

Conclusion: Mr. X will be guilty of professional misconduct because as per the guidelines for the website issued under Clause 6 of Part I of First Schedule, no photograph of any sort (except passport size photograph of member) is permitted to be displayed on website.

Question 33.
Comment on the following with reference to the CA Act, 1949, and Schedules thereto: A special notice has been issued for a resolution at 6th AGM of F Ltd. providing expressly that CA. S shall not be re-appointed as an auditor of the company.

Consequently, CA. S submitted a representation in writing to the company as provided under section 140(4)(iii) of the Companies Act, 2013. In the representation, CA. S incorporated his independent working as a professional throughout the term of office and also indicated his willingness to continue as an auditor if reappointed by the shareholders of the Company.
Answer:
Sending representation to solicit the professional work:

Guidelines issued by the Council of ICAI under Clause 6 allowed a member to send representation to the company provided right of Representation should not be used to secure needless publicity. It need to be set out in a dignified manner how he has been acting independently through his term of office and his willingness to continue as an auditor if reappointed by shareholders.

In the present case, CA. S has submitted the representation u/s 140 (4) (iii) of Companies Act, 2013 in the proper manner.

Conclusion: No misconduct arises on Part of CA. S as guidelines issued under Clause 6 of Part I of First Schedule allows a CA in practice to make the representation u/s 140(4) of Companies Act, 2013 which is not used by the auditor to secure needless publicity.

Question 34.
Comment on the following with reference to the Chartered Accountants Act, 1949, and its Schedules to the Act: CA. N, in practice, started project consultancy work as a part of his practice and to advance the same, sent mail to all the CAs in the country informing them of his services and for securing professional work. [MTP-May 20]
Answer:
Soliciting the professional work from another chartered accountant:

As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means.

However, it is specifically provided under Clause 6, that noting contained in Clause 6 shall be construed as preventing or prohibiting any chartered accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice.

In the present case, CA. N sent mail to all the CAs in the country informing them of his services and for securing professional work.

Conclusion: There is no misconduct on Part of CA. N as exceptions to Clause 6 of Part I of First Schedule allows a CA in practice to secure professional work from another CA in practice.

Question 35.
M/s LMN & Associates, a firm of Chartered Accountants responded to a tender issued exclusively for Chartered Accountants by an organisation in the area of tax audit. However, no minimum fee was prescribed in the tender document. [RTP-May20]
Answer:
Responding to tenders in exclusive area:

Clause 6 of Part I of First Schedule allows solicitation of client or professional work through responding to tenders.

Further Guidelines are being issued by Council allowing therein a member to respond to tender where minimum fees of the assignment is prescribed in the tender document itself or where the areas are open to other professionals along with Chartered Accountants.

In the present case, M/s LMN & Associates responded to a tender of tax audit which is exclusively reserved for Chartered Accountants even though no minimum fee was prescribed in the tender document.

Conclusion: LMN & Associates shall be guilty of professional misconduct as responding to tenders in exclusive area in which minimum fees is not prescribed amounts to solicitation of work.

Question 36.
Discuss the following with reference to the Chartered Accountants Act, 1949 and the schedules thereto: M/s XYZ a firm of Chartered Accountants in practice develops a website “XYZ.com”. The colour chosen for the website was a very bright green and the website was to run on a “push” technology where the name of the partners of the firm and the major clients were to be displayed on the website without any disclosure obligation from any regulator. [RTP-May 20]
Answer:
Hosting Details on Website:

As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a chartered accountant of the firm can create its own website using any format subject to guidelines.

However, the website should be so designed that it does not solicit clients or professional work and should not amount to direct or indirect advertisement.

As per guidelines, there is no restriction on the use of colours. However, the website is required to run on a “pull” technology and not on “push” technology; and the name of clients and fees charged from them is not permitted to be appear on the website.

Disclosure of names of clients and/or fees charged, on the website is permissible only where it is required by a regulator, whether or not constituted under a statute, in India or outside India, provided that such disclosure is only to the extent of requirement of the regulator.

In the present case, M/s XYZ, a firm of Chartered Accountants in practice develops a website “XYZ.com”. The colour chosen for the website was a very bright green and the website was to run on a “push” technology where the name of the partners of the firm and the major clients were to be displayed on the website without any disclosure obligation from any regulator.

Conclusion: The firm would be liable for professional misconduct due to running website on Push Technology and displaying name of clients on website without any requirement of regulator.

Question 37.
Give your comments with reference to the Chartered Accountants Act, and schedules thereto; An advertisement was published in a Newspaper containing the photograph of Mr. X, a member of the institute wherein he was congratulated on the occasion of the opening ceremony of his office. [Nov. 09 (4 Marks)]
Answer:
Solicitation of Client or Professional Work:

In the given case, Mr. X published an advertisement in a Newspaper containing his photograph on the occasion of the opening ceremony of his office.
This kind of advertisement will amount to soliciting professional work by advertisement directly or indirectly.

Conclusion: Mr. X would be guilty under Clause 6 of Part-I of the First Schedule to the Chartered Accountants Act, 1949.

Question 38.
Give your comments with reference to the Chartered Accountants Act, and schedules thereto: Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several letters to the Assistant Registrar of Co-operative Societies stating that though his firm was on the panel of auditors, no audit work was allotted to the firm and further requested him to look into the matter. [Nov. 09 (4 Marks)]
Answer:
Soliciting Professional Work:

In the given case, Mr. X, a Chartered Accountant and proprietor of M/s X and Co, wrote several letters to the Assistant Registrar of Co-operative Societies, requesting for allotment of audit work.
The writing of continuous letter to ascertain the reasons for not getting the work is quite alright but request for allowing the work does not appears to be correct.

Conclusion: Mr. X would be held guilty under clause 6 of Part I of First Schedule of the CA Act, 1949.

Question 39
Comments with reference to the Chartered Accountants Act, 1949 and schedules thereto: PQR and Associates, Chartered Accountants have their website and on the letterhead of the firm it is mentioned that “Visit our website: www.pqr.com”. In the website the nature of assignments handled, names of prominent clients and fees charged is also displayed without any disclosure obligation by any regulator. [Nov. 10 (4 Marks)]
Answer:
Website Particulars:

The Council of the ICAI has issued guidelines for posting the particulars on Website by CA in practice and firms of CA in practice under Clause (6) of Part I of First Schedule to the CA Act, 1949.

According to the guidelines the details in the website should be so designed that it does not amount to soliciting client or professional work. It is permitted to mention the website address on letterhead but soliciting people to visit website is not permitted.

PQR and Associates letterhead invites to people to visit their website. Similarly, the website mentions the nature of assignments, names of the prominent clients and fees charged. The nature of assignments is permitted for display only on specific ‘Pull” request, and the name of clients, the fees charged is not permitted at all.

Conclusion: PQR & Associates will be held guilty of Professional Misconduct under Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949.

Question 40.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: Mr. Sodhi, a Chartered Accountant in practice, who is proposed to be removed as the auditor of a company makes unsubstantiated and derogatory remarks against the management of the company in his representation u/s 140 of the Companies Act,-2013. [May 11 (4 Marks)]
Answer:
Use of Right to representation u/s 140:

As per Clause 6 of Part I of the First Schedule to the CA Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he solicits clients or professional work, directly or indirectly, by circular, advertisement, personal communication or by other means.

Using unsubstantiated and derogatory remarks against the Management of the Company in his representation u/s 140 of the Companies Act, 2013 tantamount to securing professional work by undignified means.

The Council of the Institute has clarified that the right to make a representation u/s 140 of the Companies Act, 2013 does not mean that an auditor has any prescriptive right on a lien to an audit. The wording of this representation should be such that, apart from the opportunity not being abused to secure needless publicity, it does not tantamount directly or indirectly to canvassing or soliciting for his continuance as an auditor.

The letter should merely set out in a dignified manner how he has been acting independently and conscientiously through the terms of office and may, in addition, indicate if he so chooses, his willingness to continue as an auditor if reappointed by the shareholder.

Conclusion: In the present case, Mr. Sodhi is guilty of professional misconduct.

Question 41.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: A letter is sent by a Chartered Accountant in practice to the Ministry of Finance inquiring whether a panel of auditors is being maintained by the Ministry and if so to include his name in the panel (CV enclosed). [May 11 (4 Marks)]
Or
A CA firm M/s GST & Associates, has sent a letter to the Goods and Services Tax Council stating that the firm has 2 partners who specialize in the law of Goods and Services Tax and asked the said Council to include their name in the panel, whenever formed, for providing advisory to the Chartered Accountants Act, 1949. [Nov. 17 (4 Marks)]
Answer:
Roving Enquiries:

As per Clause 6 of Part 1 of the First Schedule to the CA Act, 1949, a CA in practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means.

Such a restraint has been put so that the members maintain their independence of judgment and may be able to command respect from their prospective clients.

In case of making an application for the empanelment for the allotment of audit and other professional work, the Council has opined that, “where the existence of such a panel is within the knowledge of the member, he is free to write to the concerned organization with a request to place his name on the panel.

However, it would not be proper for the member to make roving inquiries by applying to any such organization for having his name included in any such panel.”

Conclusion: The member is guilty of misconduct in terms of the above provision as he has solicited
professional work by making roving inquiries about the panel.

“ICAI Examiner Comments” ’
Majority of the examinees made correct reference of the relevant clause but few examinees wrongly concluded that the firm and its partners are not guilty. Some examinees failed to discuss the council’s opinion that “where the existence of such a panel is within the knowledge of the member, he is free to write to the concerned organization with a request to place his name on the panel.

Question 42.
Give your comments with reference to die Chartered Accountants Act, 1949 and Schedules thereto: M, a practicing Chartered Accountant sent a letter to another firm of Chartered Accountants, claiming himself to be a pioneer in liaisoning with Central Government Ministries and its allied Departments forgetting various Government clearances for which he had claimed to have expertise and had given a list of his existing clients and details of his staff etc. [May 12 (4 Marks)]
Answer:
Soliciting work directly or indirectly:

As per Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant in practice solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.

As per Council Guidelines for Advertisement for the members in ‘practice, a member is not
permitted to claim any superiority over any other Member(s)/Firm(s) or to include the names of the clients in any write up.

In the present case, Mr. M, a practicing Chartered Accountant sent the letter to another firm of Chartered Accountants, claiming himself to be a pioneer in liaisoning with Central Government Ministries and its allied Departments for getting various Government clearances for which he had claimed to have expertise and had also given a list of his existing clients and details of his staff etc. which seems to be indirect methods to adventure their professional practice with a view to gain publicity and thereby solicit clients or professional work.

Conclusion: Mr. M was guilty of professional misconduct as per clause 6 of part I of First Schedule of the Chartered Accountants Act, 1949.

Question 43.
Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered Accountants a firm of CA’s; requesting them to allot him some professional work. As he did not have a significant practice or clients, he also wrote a letter to M/s ABC, a firm of Chartered Accountants for securing professional work. Mr. Clever, another CA, informed 1CAI regarding Mr. Honest’s approach to secure the professional work. Is Mr. Honest wrong in soliciting professional work? [Nov. 13 (4 Marks)]
Answer:
Solicitation of professional work from another CA:

As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means.

However, nothing in clause 6 shall be construed as preventing or prohibiting any Chartered Accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice.

In the given case, Mr. Honest wrote letters only to other Chartered Accountants, M/s XY and M/s ABC requesting them to allot some professional work to him, which is not prohibited under clause 6.

Conclusion: Mr. Honest is not wrong in soliciting professional work from another CA, hence there
is no professional misconduct.

Question 44.
During the opening ceremony of a new branch office of CA. Young, his friend CA. Old introduced to CA. Young, his friend and client Mr. Rich, the owner of an Export House whose accounts had been audited by CA. Old for more than 15 years.

After few days, Mr. Rich approached CA. Young and offered a certification work which hitherto had been done by CA. Old CA. Young undertook the work for a fee which was not less than fee charged by CA. 01d in earlier period.
Comment whether CA. Young had done any professional misconduct. [Nov. 18 – New Syllabus (5 Marks)]
Answer:
Soliciting work directly or indirectly:

As per Council Guidelines for Advertisement for the members in practice, acceptance of original professional work emanating from a client introduced by another member is not permitted.

In the present case, during the opening ceremony of a new branch office of CA. Young, his friend CA. Old introduced to CA. Young, his friend and client Mr. Rich, the owner of an Export House whose accounts had been audited by CA. Old for more than 15 years.

After few days, Mr. Rich approached CA. Young and offered a certification work which hitherto had been done by CA. Old CA. Young undertook the work for a fee which was not less than fee charged by CA. Old in earlier period.
Conclusion: Mr. Young will be deemed guilty of professional misconduct under clause 6, Part I of First Schedule.

Question 45.
Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:
A special notice has been issued for a resolution at 3rd ACM of LED Ltd., providing expressly that CA. Anoop shall not be re-appointed as an auditor of the company. Consequently, CA. Anoop submitted a representation in writing to the company with a request to circulate to the members.

In the detailed representation, CA. Anoop included the contributions made by him in strengthening the control procedures of the company during his association with the company and also indicated his willingness to continue as an auditor if reappointed by the shareholders of the company. [Nov. 19 – New Syllabus (4 Marks)]
Answer:
Right of representation:
Section 140 (4) of the Companies Act, 2013 permits an auditor to make a representation in writing [not exceeding a reasonable length) to the company. The proposition of the partner to highlight contributions made by the firm in strengthening the control procedures in the representation is not acceptable because the representation letter should not be prepared in a manner so as to seek publicity,

The Code of Ethics issued by the Institute makes it amply clear that the right to make representation does not mean that an auditor has any prescriptive right or a lien on an audit.

The wording of his representation should be such that, apart from the opportunity not being abused to secure needless publicity, it does not tantamount directly or indirectly to canvassing or soliciting for his continuance as an auditor. The letter should merely set out in a dignified manner how he has been acting independently and conscientiously through the term of office and may in addition, indicate if he so chooses his willingness to continue as auditor if re-appointed by the shareholders.

Conclusion: Mr. Anoop will be guilty of professional misconduct under Clause [6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, as including contributions made by him in strengthening the control procedures of the company, amounts to solicitation of work which is not permitted.

Question 46.
Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethicsand Schedules to the Act: B, a Chartered Accountant in practice is a partner in 3 firms. While printing his personal letter heads, B gave the names of all the firms in which he is a partner. [May 09 (4 Marks)]
Or
Mr. B, a Chartered Accountant in practice, is a partner of 4 firms. While printing his personal letter heads, Mr. B gave the names of all the firms in which he is a partner. Comment. [Nov. 15 (4 Marks)]
Answer:
Mentioning Firm’s Name on Letter Heads:

Clause 7 of Part 1 of First Schedule to the CA Act, 1949 provides that a CA in practice is deemed to be guilty of professional misconduct if he

advertises his professional attainments or services or
uses any designation or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards.

However, a degree of a university established by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council is permitted to be mentioned.

There is no prohibition for printing names of all firms on the personal letter heads in which a member holding certificate of practice is a partner.
Conclusion: Mr. B is not guilty of any professional misconduct in the above case.

“ICAI Examiner Comments”
Many examinees wrongly referred to clause (6) of Part I of First Schedule to the Chartered Accountant Act, 1949, and wrongly concluded that by printing names of all 4 firms on the personal letter heads in which a member holding certificate of practice is a partner is guilty of any professional misconduct in the given case.

Question 47.
Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr. B, a practicing Chartered Accountant as well as a qualified lawyer, was permitted by the bar council to practice as a lawyer also. He printed his visiting card where he mentioned his designation as Chartered Accountant and Advocate. [May 13 (4 Marks)]
Answer:
Using designation other than Chartered Accountant;

As per clause 7 of Part 1 of First Schedule, a CA in practice is deemed to be guilty of professional misconduct if he

(i) advertises his professional attainments or services or

(ii) uses any designation or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards unless it be a degree of a university established by law in India or recognized by the Central Government ora title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council.

Members of the Institute in practice who are otherwise eligible may practice as advocates subject to the permission of the Bar Council but in such case, they should not use designation ‘chartered accountant’ in respect of the matters involving the practice as an advocate.

In respect of other matters, they should use the designation ‘chartered accountant’ but they should not use the designation ‘chartered accountant’ and ‘advocate’ simultaneously.

In the present case, Mr. B has printed his visiting card where he mentioned his designation as Chartered Accountant and Advocate which is prohibited under the clause 7.

Conclusion: Mr. B is guilty of professional misconduct due to use of designation of advocate in addition to Chartered Accountant.

Question 48.
Mr. Nigal, a Chartered Accountant In practice, delivered a speech in the national conference orga-nized by the Ministry of Textiles. While delivering the speech, he told to the audience that he is a management expert and his firm provides services of taxation and audit at reasonable rates.

He also requested the audience to approach his firm of chartered accountants for these services and at the request of audience he also distributed his business cards and telephone number of his firm to those in the audience. Comment. [Nov. 13 [4 Marks), MTP-Oct. 19]
Answer:
Solicitation of Professional Work and Advertisement:
Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means.

Section 7 of the Chartered Accountants Act, 1949 read with Clause 7 of Part I of the First Schedule to the said Act prohibits advertising of professional attainments or services of a member. It also restrains a member from using any designation or expression other than that of a Chartered Accountant in documents through which the professional attainments of the member would come to the notice of the public.

Guidelines issued under clauses 6 & 7 permits a practicing member to give lectures at forums and may give their names and describe themselves as Chartered Accountants, but no reference should be made, to the name and address or services of his firm.

In the present case, Mr. Nigal uses the designation of “Management Expert” and also made reference to the services provided by his firm of Chartered Accountants at reasonable rates and distribute business cards to audience.

Conclusion: Mr. Nigal will be held guilty of professional misconduct under clauses 6 & 7 of Part I of First Schedule to the CA Act 1949 due to solicitation of professional work and advertisement of services rendered by his firm.

Question 49.
Comment with respect to Chartered Accountant Act, 1949: Mr. SP, a Chartered Accountant obtains . registration as category IV merchant hanker under the SEBI’s Rules and Regulations and act as Ad-visor to a capital issue of MB Co. Ltd. He designated himself under the caption “Merchant banker” in client offer documents and ‘Advisor to issue’ in his own letterheads, visiting cards and professional documents. [May 15 (4 Marks)]
Answer:
Using designation other than Chartered Accountant:

As per clause 7 of Part 1 of First Schedule, a CA in practice is deemed to be guilty of professional misconduct if he

(i) advertises his professional attainments or services or

(ii) uses any designation or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter ) heads or sign boards unless it be a degree of a university established by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council.

A Chartered Accountant is allowed to act as advisor to a capital issue and offer document of client company may specify the name of address of chartered accountant under the caption “Advisor to issue”. However, it is specifically prohibited that member concerned should not use the designation either “Merchant Banker” or “Advisor to issue” in their own letterheads, visiting & cards and professional documents.

In the present case, Mr. SP designated himself urider the caption “Merchant banker” in client offer documents and ‘Advisor to issue’ in his own letterheads, visiting cards and professional documents.

Conclusion: Mr. SP is guilty of Professional Misconduct under Clause 7 of Part I of First Schedule due to use of designation other than Chartered Accountant.

Question 50.
Mr. M, a chartered accountant in practice, has printed visiting cards which besides other details also carries a Quick Response (QR) code. The visiting card as well the QR code contains his name, office and residential address, contact details, e-mail id and name of the firm’s website. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto. [May 17 (4 Marks), MTP-Aug. 18, RTP-May 19]
Answer:
Printing of Visiting Cards and using QR Code:
As per clause 7 of Part 1 of First Schedule, a CA in practice is deemed to be guilty of professional misconduct if he

(i) advertises his professional attainments or services or

(ii) uses any designation or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards unless it be a degree of a university established by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council.

As per guidelines issued under Clause 7, printing photograph on the visiting cards is not permissible. However Quick Response Code may be printed on visiting card provided that the Code does not contain information that is not otherwise permissible to be printed in their visiting card.

In the present case, Mr. M, a chartered accountant in practice, has printed visiting cards which besides other details also carries a Quick Response (QR) code. The visiting card as well the QR code contains his name, office and residential address, contact details, e-mail id and name of the firm’s website.

Conclusion: No misconduct arises on part of Mr. M as information printed on visiting card and information contained in QR Code are permissible.

“ICAI Examiner Comments”
Candidates wrongly mentioned Clause (6) Part I of First Schedule instead of Clause (7) of Part I of First Schedule to the Chartered Accountants Act, 1949.

Question 51.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: A Chartered Accountant in practice, empanelled as IP (Insolvency Professional) has mentioned the same on his visiting cards, letter heads and other communications also. Mr. A, who is residing in his neighbourhood has filed a complaint for professional misconduct against the said member for such mention of insolvency professional on circulations. [RTP-Nov. 18, May 19-Old Syllabus (4 Marks)]
Answer:
Using designation other than Chartered Accountant:

As per clause 7 of Part 1 of First Schedule, a CA in practice is deemed to be guilty of professional misconduct if he

(i) advertises his professional attainments or services or

(ii) uses any designation or expressions other than ‘Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards unless it be a dfegree of a university established by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council.

In the present case, a Chartered Accountant in practice, empanelled as IP (Insolvency Professional) has mentioned the same on his visiting cards, letter heads and other communications also. Mr. A, who is residing in his neighbourhood has filed a complaint for professional misconduct against the said member for such mention of insolvency professional on circulations.

Conclusion: A Chartered Accountant empanelled as IP (Insolvency Professional) can mention ’Insolvency Professional’ on his visiting cards, Letter heads and other communication, as this is a title recognised by the Central Government in terms of Clause-7 of Part-1 of First Schedule to the Chartered Accountants Act, 1949. Thus, complaint of neighbour is not enforceable/valid.

Question 52.
Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: R, a practicing Chartered Accountant, is a Director in X Ltd; a Public Company. The prospectus of X Ltd mentions the name of Mr. Rasa director alongwith his variousprofessional attainments, hisareas of specialization and expertise in the fields of international taxation. [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Advertisements of professional attainments:

As per clause 7 of Part 1 of First Schedule, a CA in practice is deemed to be guilty of professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than ‘Chartered Accountant’ on professional documents, visiting cards, letter heads or sign boards unless it be a degree of a university established by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council.

As per guidelines issued under Clause 7, name of CA acting as director in the company is permissible to appear in the prospectus of the company, however descriptions regarding his expertise, specialisation and knowledge in any particular field is not permitted.

In the present case, R, a practicing Chartered Accountant, is a Director in X Ltd. a Public Company. The prospectus of X Ltd. mentions the name of Mr. R as a director along with his various professional attainments, his areas of specialization and expertise in the fields of international taxation.

Conclusion: Mr. R will be deemed to be guilty of professional misconduct under Clause 7, Part I of First Schedule.

Question 53.
Mr. X a Chartered Accountant accepted his appointment as tax auditor of a firm under Sec. 44AB of the Income Tax Act and commenced the tax audit within two days of his appointment since the client was in a hurry to file return of income before the due date.

After commencing the audit, Mr. X realised his mistake of accepting this tax audit without sending any communication to the previous tax auditor. In order to rectify his mistake, before signing the tax audit report, he sent a registered post to the previous auditor and obtained the postal acknowledgement. Will Mr. X be held guilty under the CA Act?
Answer:
Prior Communication with the previous auditor:

As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in practice is deemed to be guilty of professional misconduct if he accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing.

This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit, concurrent audit, etc.

It is further provided that if time schedule given for the assignment is such that there is no time to wait for the reply from the retiring auditor, the incoming auditor may give conditional acceptance of the appointment and can commence the work immediately after he has sent the communication to the retiring auditor.

In the present case, Mr. X has commenced his work and thereafter he sent the letter to the predecessor auditor.
Conclusion: Mr. X is guilty of professional misconduct by virtue of clause 8 of Part I of First Schedule.

Question 54.
Can a practicing Chartered Accountant be held guilty of professional misconduct under the following circumstance: W, a Chartered Accountant has sent letters under certificate of posting to the previous auditor informing him his appointment as an auditor before the commencement of audit by him.
Answer:
Prior Communication with the previous auditor:

As per Clause 8 of Part 1 of First Schedule to the CA Act, 1949, a chartered accountant in practice is deemed to be guilty of professional misconduct if he accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing.

This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit, concurrent audit, etc.
It is further provided that incoming auditor is required to send his communication by Registered post acknowledgement due or by hand against an acknowledgement in writing. Mere posting of a letter under certificate of posting is not sufficient to establish communication.
In the present case, Mr. W has sent letter under Certificate of posting.

Conclusion: Mr. W will be guilty of professional misconduct by virtue of clause 8 of Part I of first schedule in accordance with which communication need to be sent “Registered Post Acknowledgement Due” or by “hand against a written acknowledgement”.

Question 55.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: BC & Co, a firm of Chartered Accountants, accepted an assignment for audit under CCST Act, without any prior communication with the previous auditor.
Answer:
Prior Communication with the previous auditor:

In the present case, BC & Co. accepted VAT Audit under State Level Act, carried out by another firm of chartered accountants in the previous year, without prior communication with the previous auditor.
A communication is mandatory requirement for all types of audit, if the previous auditor is a chartered accountant.

Conclusion: BC & Co., the firm is guilty of professional misconduct due to non-compliance of requirement as stated in Clause 8 of Part I of First Schedule.

Question 56.
M/s CD & Co., a firm of Chartered Accountants, accepted an assignment for audit under State level VAT Act and communicated the same over phone to the previous auditor, M/s AB & Co., Chartered Accountants. Comment.
Answer:
Prior Communication with the previous auditor:

As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing.

This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit,
concurrent audit, VAT audit etc.
It is further provided that incoming auditor is required to send his communication by Registered post acknowledgement due or by hand against an acknowledgement in writing.
In the present case, incoming auditor communicate his appointment to predecessor auditor over the phone.

Conclusion: M/S CD & Co. is guilty of professional misconduct, as they are required to send his communication by Registered post acknowledgement due or by hand against an acknowledgement in writing. Mere communication over phone is not sufficient to establish written communication.

Question 57.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. B was appointed as auditor of XYZ Ltd. in place of Mr. A. Mr. B had send a letter of communication to Mr. A under certificate of posting and proceeds to conduct the audit. A makes a complaint to the Institute on the basis of non-receipt of communication.
Answer:
Prior Communication with the previous auditor:

As per Clause 8 of Part I of First Schedule to the CA Act; 1949, a chartered accountant in practice is deemed to be guilty of professional misconduct if he accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing.

This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit, concurrent audit, etc.

It is further provided that incoming auditor is required to sent his communication by Registered post acknowledgement due or by hand against an acknowledgement in writing. Mere posting of a letter under certificate of posting is not sufficient to establish communication.

In the present case, Mr. B has sent letter under Certificate of posting.

Conclusion: Mr. B will be guilty of professional misconduct by virtue of clause 8 of Part I of first schedule in accordance with which communication need to be sent “Registered Post Acknowledgement Due” or by “hand against a written acknowledgement”.

Question 58.
Comment on the following with reference to the Chartered Accountants Act, 1949 and its Schedules: CA. T, in practice, was appointed to carry out internal audit of a stock broker, listed with BSE. However, he failed to intimate his appointment to the statutory auditors of the company. The statutory auditor feels this is violation of professional ethics. [MTP-March 19]
Answer:
Prior Communication with the previous auditor:

This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit, concurrent audit, etc.
Further the requirement of Clause 8 is applicable in situation of replacing of one auditor by another auditor and not in case of parallel positions.
In the present case, CA T was appointed as Internal Auditor, he owes no duty towards statutory auditor for prior communication.

Conclusion: There is no violation of professional ethics as Clause 8 of Part I of First schedule applies
in case of replacement positions and not in case of parallel positions.

Question 59.
Can a practicing Chartered Accountant be held guilty of professional misconduct under the following circumstance: P, a Chartered Accountant had accepted appointment as an auditor of QRS Company Limited without ascertaining from the company whether the requirements of Secs. 139 and 140 of the Companies Act, 2013 had beep complied with. However, he realised this defect only after acceptance.
Answer:
Non-observance of compliance of Sections 139 & 140 of Companies Act, 2013:

As per Clause 9 of Part I of First Schedule to Chartered Accountant’Act, 1949, a CA in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company, without ascertaining whether requirements ofSecs.224&225of Companies Act, 1956 (Secs. 139 & 140 of Companies Act, 2013), in respect of such appointment have been duly complied with.

In the present case, P, a Chartered Accountant had accepted appointment as an auditor of QRS Company Limited without ascertaining from the company whether the requirements of Secs. 139 and 140 of the Companies Act, 2013 had been complied with.

Conclusion: P will be held to be guilty of professional misconduct under clause 9 of Part I of First Schedule to the Chartered Accountants Act, 1949. Realisation of defect subsequent to acceptance of audit is immaterial.

Question 60.
Comment on the following with reference to the C. A. Act, 1949 and schedules thereto: CA X was appointed as the Auditor of ABC Ltd. for 2020-21. Since he declined to accept the appointment, the Board of Directors appointed CA Y as the auditor in the place of CA X, which was also accepted by CA Y. [Nov. 08 (4 Marks)]
Answer:
Violation of Clause 9:
Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of Sections 224 and 225 of the Companies Act, 1956 (now Sections 139 and 140 read with Section 141 of the Companies Act, 2013), in respect of such appointment have been duly complied with.

Board of Directors has been given powers u/s 13 9 (6) and u/s 139 (8) (i) to appoint first auditors and to fill casual vacancy respectively. The non-acceptance of appointment by CA. X does not constitute a casual vacancy to be filled by the Board. In this case, it will be deemed that no auditor was appointed in the AGM.

As per Sec. 139(10) of the Companies Act, 2013 when at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. Hence, the appointment of the auditor by the Board is not valid in law.

Conclusion: CA. Y is guilty of professional misconduct as per clause 9 of the First Schedule as he accepted the appointment without verification of statutory requirements.

Question 61.
XYZ Ltd. appoints you as the auditor of the company. You observe that previous auditor’s A & Co., resigned. Also Balance Sheet as at 31-03-2020 shows an audit fee payable of ₹ 25,000. What precautions you will take before commencing the audit work? [Nov. 10 (4 Marks)]
Answer:
Precautions before Commencing the Audit Work:

(i) Check whether a statement, in the prescribed form, has been filed by the resigning auditor within a period of 30 days from the date of resignation, to the company and the registrar, indicating the reasons and other facts as may be relevant with regard to the resignation, for the compliance of Section 140(2) of the Companies Act, 2013.

(ii) Ascertain that the appointment of new Auditor is in compliance with Section 139(8) of the Act as mentioned above i.e. the resolution appointing the new auditor has been approved by the company in the general meeting as it is case of casual vacancy by resignation.

(iii) The auditor should also refer the resignation statement file by the previous auditor and communicate with him (previous auditor) to ascertain the circumstances which led up him to retire.

(iv) The auditor must ascertain whether there exist any circumstances on account of which he should not accept the appointment. As per Section 139 of the Act, the auditor must ensure that before any appointment or reappointment of auditors is made at an AGM, a written certificate has been provided by him to the company that his appointment is in accordance with the limits specified in Section 141(3)(g).

(v) He should also satisfy himself that the notice provided for under Sections 139 and 140 has been effectively served on the outgoing auditor.

(vi) Further, Clause (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides that a member in practice shall be deemed to be guilty of professional misconduct if he accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing.

(vii) Moreover, Clause (9) of Part I of the same Schedule, provides that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of Sections 224 and 225 of the Companies Act, 1956 (now Sections 139 and 140 of the Companies Act, 2013), in respect of such appointment have been duly complied with.

Question 62.
Comment with reference to the CA Act, 1949 and schedules thereto: CA D, a Chartered Accountant prepared a project report for one of his clients to obtain bank finance (long-term) of ₹ 50 lakhs from a Commercial Bank. Consequent to the sanction of the loan by the bank CA. D raised a bill for his services @ 2% of the loan sanctioned. [Nov. 08 (4 Marks)]
Answer:
Charging fees on %age basis:
Clause 10 of Part I to First Schedule to the CA Act, 1949 prohibits a CA in practice to charge, or offers to charge, accept or offers to accept in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings or results of such employment.

However, this restriction is not applicable where such payment is permitted by the regulations made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain professional services from the operation of clause 10.

Conclusion: Mr. D is guilty of professional misconduct as he charges fees on % age basis.

Note: It is assumed that Bank finance is not covered within the meaning of fund-raising service. Alternatively, if it is presumed that bank finance is covered within the meaning of fund-raising services, charging fees on a %age of loan sanctioned will not amount to professional misconduct.

Question 63.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: An auditor of a cooperative society has agreed to charge fees @ 5% of the profits of the society.
Answer:
Charging Fees on Percentage Basis:
Clause 10 of Parti of First Schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to charge, accept or offer to accept in respect of any professional work, fees which are based on a percentage of profits or which are contingent upon the findings or result of work.

As per Regulation 192, in the case of an audit of a co-operative society, fees may be charged on a percentage of the paid up capital or the working capital or the gross or net income or profits.

Conclusion: Audit of Co-operative society is included in the exceptions stated in regulation 192, the auditor is not guilty of any professional misconduct.

Question 64.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: PQR Pvt Ltd. approached CA. Wahi, a Chartered Accountant in Practice, for debt recovery services. CA Wahi accepted the work and insisted for fees to be based on 2% of the debt recovered. [RTP-May 20]
Answer:
Charging Fees on Percentage Basis:

Clause 10 of Parti of First Schedule to CA Act, 1949, prohibits a CAin practice to charge or offer to charge, accept or offer to accept in respect of any professional work, fees which are based on a percentage of profits or which are contingent upon the findings or result of work.

As per Regulation 192, in the case of debt recovery services, fees may be charged on a percentage of amount of debt recovered.

Conclusion: Charging fees on a percentage of debt recovered in case of debt recovery services is included in the exceptions stated in regulation 192, Hence CA. Wahi is not guilty of any professional misconduct.

Question 65.
Comment with respect to Chartered Accountant Act, 1949: Mr. P a practicing chartered accountant acting as liquidator of AB & Co. charged his professional fees on percentage of the realization of assets. [May 15 (4 Marks), MTP-May 20]
Answer:
Charging Fees on Percentage Basis:

As per Regulation 192, in case of a receiver or a liquidator, the fees maybe charged on a percentage of the realisation or disbursement of the assets.

Conclusion: No Misconduct arises on part of Mr. P under Clause 10 of Part I to First schedule as charging fees as a percentage of realisation of assets while acting as a liquidator is permitted by Regulation 192.

“ICAI Examiner Comments”
Few candidates were not aware of the exception granted under Regulation to liquidator to charge fees on percentage basis on realization.

Question 66.
Efficient Ltd. is running into loses and in order to optimize resource utilization and cost reduction, approaches you to carry out the assignment and offers a fee of 5% of benefits derived from the sug-gestions made by you. Comment with respect to Chartered Accountants Act, 1949 and Regulations thereto. [May 18 – Old Syllabus (4 Marks)]
Answer:
Charging Fees on Percentage Basis:

Clause 10 of Part I of First Schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to charge, accept or offer to accept in respect of any professional work, fees which are based on a percentage of profits or which are contingent upon the findings or result of work.

As per Regulation 192, in the case of services related to cost optimization, fees may be charged on the basis of percentage of benefit derived.’

Conclusion: No Misconduct arises under Clause 10 of Part I to First schedule as charging fees as a percentage of benefit derived while providing services related to cost optimisation is permitted by Regulation 192.

Question 67.
Mr. J started his practice as Chartered Accountant in 2013. During 2020, he got an offer for the post of Chief Accountant of a Software Development Company, as a full-time employee for a salary of ₹ 60,000 p.m. On accepting the offer, Mr.J converted his practice into a partnership firm by taking a fresh Chartered Accountant as his partner. Mr. J neither intimated the Institute nor obtained permission from the Institute about his employment. Will Mr. J be held guilty under the CA Act?
Answer:
Engagement in other occupations:

Clause 11 of Part I of First Schedule to the CA Act, 1949 prohibits a member in practice to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.

In the present case Mr. J has accepted the full-time employment of a software company which requires prior approval from the council of ICAI.

Conclusion: Mr. J will be held guilty of professional misconduct by virtue of Clause 11 of Part I of First Schedule, as he has accepted the employment in addition to the practice without obtaining permission of the Institute.

Question 68.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr.J.J. a practicing Chartered Accountant engages himself as part time finance manager of Quick Return Securities Ltd. He is of the view that as both functions are independent, he need not take permission from the Institute.
Answer:
Engagement in other occupations:

Clause 11 of Part 1 of First Schedule to the CA Act, 1949 prohibits a member in practice to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.
It does not prohibit a CA from being a director of a company, except MD or a whole-time director. But if any of the partners is interested in such company as an auditor then he cannot be director of the said company.
In the present case Mr. JJ has accepted the part time employment of Quick Return Securities Ltd. which requires prior approval from the council of ICAI.

Conclusion: Mr. JJ will be held guilty of professional misconduct by virtue of Clause 11 of Part I of First schedule, as he has accepted the employment in addition to the practice without obtaining permission of the Institute.

Question 69.
Comment on-tlie following with reference to the Chartered Accountants Act, 1949 and schedules thereto: A chartered accountant in practice takes up the appointment as managing director of a public limited company.
Answer:
Engagement in other occupations:

It does not prohibit a CA from being a director of a company, except MD or a whole-time director. But if any of the partners is interested in such company as an auditor then he cannot be director of the said company. To accept the position of MD in a company, member is required to obtain prior permission from Council of ICAI.

In the present case, a CA in practice has taken up the appointment as managing director of a public limited company.

Conclusion: Appointment requires prior and specific approval from Council. In absence of such approval, member will be held to be guilty of professional misconduct (by virtue of clause 11 of Part I of First Schedule and Regulation 190AJ, otherwise not.

Question 70.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: M, a Chartered Accountant in practice, is the Statutory Auditor of S Ltd. for the year ended 31st March 2020. In January 2020, he was appointed as a Director in H Ltd., which is the holding Company of S Ltd.
Answer:
Appointment as Auditor in Holding Company:

As per clause 11 of Part I of the First Schedule to the CA Act, 1949, a CA in practice can be a director of a company wherein he or any of his partners is not interested in such company as auditor.
In the present case, Mr. M is statutory auditor of S Ltd. whereas he is appointed as director in H Ltd. which is holding of S Ltd. Such an appointment is not restricted under Clause 11 of Part I of First Schedule.
However, public conscience is expected to be ahead of law and to ensure and reflect independence, members should thus not place themselves in position which may affect their independence.

Conclusion: Auditor of a subsidiary should not accept the position as a director in holding company as it might affect his independence.

Question 71.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto Mr. A, a Chartered Accountant in practice has been appointed editor of a monthly journal which analyses performance of the Stock Market and Mutual Fund Schemes.
Answer:
Engagement in other occupations:

Clause 11 of Part 1 of First Schedule to the CA Act, 1949 prohibits a member in practice to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.
It does not prohibit a CA from being a director of a company, except MD or a whole-time director. But if any of the partners is interested in such company as an auditor then he cannot be director of the said company.
General permission is granted under Regulation 190Afor being appointed as editor of professional journal.
In the present case Mr. A has accepted the appointment as editor of a monthly journal which analyses the stock performance.

Conclusion: Clause 11 permits editorship of professional journals, but in the instant case journal related to performance analysis of stock market and mutual fund schemes cannot be treated as professional journal hence, Mr. A would be held guilty of professional misconduct by virtue of Clause 11 of Part I of First Schedule.

Question 72.
Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules thereto: CA. Sufi is practicing since 2008 in the field of company auditing. Due to his good practical knowledge, he was offered editorship of a ‘Company Audit’ journal which he accepted. However, he did not take any permission from the council regarding such editorship. [RTP – Nov 20]
Answer:
Engagement in other occupations:

Clause 11 of Part 1 of First Schedule to the CA Act, 1949 prohibits a member in practice to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.
It does not prohibit a CA from being a director of a company, except MD or a whole-time director. But if any of the partners is interested in such company as an auditor then he cannot be director of the said company.
General permission is granted under Regulation 190 A for being appointed as editor of professional journal.
In the present case CA Sufi has accepted the appointment as editor of a “Company Audit”, which is a professional journal.

Conclusion: Clause 11 permits editorship of professional journals, hence no misconduct arises on part of Mr. Sufi.

Question 73.
CA. Preeti is a leading Income Tax Practitioner in Delhi. She is very much fond of cooking. Due to this passion of her, she also wrote a cookery book “Delight your tummy” during the year. But, she didn’t take any permission from the Council of the Institute for engaging herself into authorship of such book. Comment.
Answer:
Engagement in other occupations:

Clause 11 of Part 1 of First Schedule to the CA Act, 1949 prohibits a member in practice to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.
It does not prohibit a CA from being a director of a company, except MD or a whole time director. But if any of the partners is interested in such company as an auditor then he cannot be director of the said company.
General permission is granted under Regulation 190A for authorship of any book or article.
In the present case CA. Preeti has authored a cookery book for which no specific permission is required.
Conclusion: Clause 11 permits authorship of any book, hence no misconduct arises on part of CA. Preeti.

Question 74.
Give your comments with reference to CA Act and schedules thereto: Mr. A, a practicing CA, took over as the executive Chairman of a software company on 01.04.2020. On 10.04.2020 he applied to the council for permission. [May 10 (4 Marks), RTP-May 18]
Answer:
Engagements in other occupations:

As per Clause 11 of Part I of First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he engages in any business or occupation other than the profession of Chartered Accountant unless permitted by the Council so to engage.

In the instant case, Mr. A took over as the executive chairman on 01.04.2020 and applied for permission on 10.04.2020.
On the basis of these facts, he was engaged in other occupation between the period 01.04.2020 and 10.04.2020, without the permission of the Council.

Conclusion: Mr. A is guilty of professional misconduct in terms of Clause 11 of Part I of First Schedule of the Chartered Accountants Act, 1949 as he accepted the employment without obtaining permission from Council.

Question 75.
Give your comments with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. B is a practising Chartered Accountant holding a valid certificate of practice. He accepted the appointment as Director of the Green World Co. Ltd. Mr. C, a partner of Mr. B is statutory auditor of the said company. [Nov. 10 (4 Marks)]
Answer:
Engagement in other occupations:

Clause 11 of Part 1 of First Schedule to the CA Act, 1949 prohibits a member to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.
It does not prohibit a CA from being a director of a company, except MD or a whole-time director.
But if any of the partners is interested in such company as an auditor then he cannot be director of the said company.
In the present case Mr. B has accepted the directorship in a Company where his partner Mr. C is an auditor without obtaining specific permission of the council.
As per Clause 4 of Part I of the Second Schedule to the CA Act, 1949, expressing an opinion on F.S. of any entity in which the auditor, his firm or a partner of his firm has a substantial interest would constitute misconduct.
Sec. 141 [3] (c) of the Companies Act, 2013 also disqualifies a person to be appointed as an auditor if he is a partner of an officer of the company. Sec. 141(4) of the Companies Act, 2013 requires the appointed auditor to vacate his office if he incurs any of the disqualifications mentioned under Sec. 141(3).

Conclusion: Mr. B will be held for Professional Misconduct under Clause 11 of Part 1 of First Schedule
to the Chartered Accountants Act, 1949.

Mr. C, a partner of Mr. B, should vacate the office as per requirement of Sec. 141(4) of Companies Act, 2013, being disqualified u/s 141(3)(c).

Question 76.
C.A Z, is a leading income tax practitioner and consultant for derivative products. He resides in Mumbai near to the ABC commodity stock exchange and does trading in commodity derivatives. Every day, he invests nearly 50% of his time settle the commodity transactions. Is C.A Z liable for ! professional misconduct? [Nov. 13 (4 Marks), RTP-May 18]
Or
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: CA Z who is a leading Income Tax Practitioner and consultant in Jaipur is also trading in derivatives.
[Nov. 08 [4 Marks)]
Or
Z, a Chartered-Accountant holding Certificate of Practice, is a leading Income Tax Practitioner in Gurugram. He is also trading in derivatives. Comment with reference to the Chartered Accountant
Act, 1949 and schedules thereto. [May 17 (4 Marks)]
Answer:
Engagement into other occupation:

As per clause 11 of Part I of First Schedule of CA Act, 1949, a Chartered Accountant is deemed to be guilty of professional misconduct if he “engages in any business or occupation other than the profession of Chartered Accountant unless permitted by the Council so to engage”.

However, the Council has granted general permission to the members to engage in certain specific occupation. In respect of all other occupations specific permission of the Institute is necessary.
In this case CA Z is engaged in the occupation of trading in commodity derivatives which is not covered under the general permission, hence specific permission of the Institute has to be obtained.

Conclusion: If Mr. Z has obtained specific permission of the council, then there is no misconduct, otherwise he will be deemed to be guilty of professional misconduct under clause 11 of Part I of First Schedule of CA Act, 1949.

Question 77.
Comment with respect to Chartered Accountant Act, 1949: A Chartered Accountant having COP entered into partnership with persons, who are not the members of the institute, for the purpose of carrying on business. The share of the chartered account in the profit and losses was 25%.

He was to take part in the business and was entitled to represent the firm before Govt, authorities etc. he was operating the bank account of the firm was receiving moneys from the customers and was also looking after the affairs of the partnership. [May 15 (4 Marks)]
Answer:
Entering into partnership with others and engagement into other occupation:

As per Clause 4 of Part I of First Schedule a CA in Practice shall be deemed to be guilty of professional Misconduct if he enters into partnership in or outside India with any person other than C.A. in practice or other recognised person.

As per Clause 11 of Part I of First Schedule of CA Act, 1949, a CA in practice shall be deemed to be guilty of professional misconduct if he “engages in any business or occupation other than the profession of Chartered Accountant unless permitted by the Council so to engage”.
In the present case, A CA entered into partnership with persons who are not covered under Clause 4 for the purpose of carrying on a business activity for which specific and prior permission of Council was required.

Conclusion: CA shall be guilty of Professional Misconduct by virtue of clauses 4 & 11 of Part I of First Schedule due to entering into partnership with persons other than prescribed under Clause 4 and carrying on a business without obtaining permission from Council of ICAI.

Question 78.
CA Raghu is practicing in the field of Income-tax over a period of 12 years. He has gained experience in this domain over others.
Sam, a student of Chartered Accountancy Course is very much impressed with the knowledge of CA Raghu. He approached CA Raghu to take guidance on some topics of Income-tax related to his course.

CA Raghu, on request decided to spare time and started providing private tutorship to Sam and some of his friends along with. However, he forgot to take specific permission from the ICAI, for such private tutorship,
Is CA Raghu, professionally liable for misconduct? [May 16 (4 Marks), MTP-April 18]
Answer:
Engagement into other occupation:

Regulation 190A of Chartered Accountants Regulations, 1988 allowed a CA in practice to engage in other occupations with the permission of Council. However, Council has granted general permission to the members to engage in certain specific occupation. In respect of all other occupations specific permission of the Institute is necessary.

In this case CA Raghu is engaged in4he occupation of private tutorship which is covered under
the general permission, hence specific permission of the Institute is not required. In order to be able to undertake attest functions, it is to be ensured that direct teaching hours should not exceed 25 in a week.

Conclusion: Mr. Raghu will not be liable for professional misconduct as for imparting private tutorship no specific permission is required to be obtained from Council of ICAI as provided under Regulations 190A.

“ICAI Examiner Comments”
Some of the candidates failed to differentiate specific and general permission and thus concluded wrongly.

Question 79.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: S. a practicing chartered accountant gives power of attorney to an employee chartered accountant to sign reports and financial statements, on his behalf.
Answer:
Delegation of Certification work:
As per clause 12 of Part I ofthe First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not being a member of the Institute in practice or a member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.

This clause should be read in conjunction with Section 26 of Chartered Accountants Act, 1949 which stipulates that no person other than a member of the Institute shall sign any document on behalf of a chartered accountant in practice or a firm of such chartered accountants in his or its professional capacity.

In this case CA ‘S’ gives power of attorney to an employee to sign reports and financial statements on his behalf, which is not permitted as such.
Conclusion: S is guilty of professional misconduct under clause 12 of Part I of First Schedule.

Question 80.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: CA Smart, a practicing Chartered Accountant was on Europe tour between 15-09-20 and 25-09-20. On 18-09-20 a message was received from one of his clients requesting for a stock certificate to be produced to the bank on or before 20-09-20. Due to urgency, CA Smart directed his assistant, who is also a Chartered Accountant to sign and issue the stock certificate after due verification, on his behalf. [May 11 (4 Marks)]
Answer:
Signing of Stock Certificate:
As per clause 12 of Part I of the First Schedule of the C.A. Act, 1949, a CA in practice is deemed to be guilty of professional misconduct “if he allows a person not being a member of the Institute in practice or a member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.

In this case CA Smart allowed his assistant who is not a partner but a member of the ICAI to sign stock certificate on his behalf and thereby commits misconduct.

Conclusion: CA Smart is guilty of professional misconduct under clause 12 of Part I of First Schedule of the CA Act, 1949.

Question 81.
Mr. ‘A’ is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for 3 months. He delegated the authority to Mr. ‘Y’ a Chartered Accountant his employee for taking care of routine matters of his office. During his absence Mr. ‘Y’ has conducted the under mentioned jobs in the name of M/s A & Co.

He issued the audit queries to client which were raised during the course of audit.
He issued production certificate to a client under GST Laws.
He attended the Income Tax proceedings for a client as authorized representative before Income Tax Authorities.

Please comment on eligibility of Mr. ‘Y’ for conducting such jobs in name of M/s A & Co. and liability of Mr. ‘A’ under the Chartered Accountants Act, 1949. [May 14 (5 Marks), MTP-April 18, RTP-Nov. 19]
Answer:
Delegation of Certification work:
As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not being a member of the Institute in practice or a member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.

In this case CA A’ proprietor of M/s A & Co., went to abroad and delegated the authority to another Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his office who is not a partner but a member of the Institute of Chartered Accountants.

The Council has clarified that the power to sign routine documents on which a-professional opinion or authentication is not required to be expressed, may be delegated and such delegation will not attract provisions of clause 12. Examples of such instances are issue of audit queries, asking for information or issue of questionnaire, attending to routing matters in tax practice etc.

Conclusion:

Issuing audit queries during the course of audit falls under routine work, which can be delegated by the auditor. Therefore, there is no misconduct in this case.
Issuance of production certificate to a client under GST Laws by Mr. “Y” is not a routine work and it is outside his authorities. Thus, CA A’ is guilty of professional misconduct under clause 12 of Part I of First Schedule of the
Attending Income tax proceedings for a client as authorized representative before Income Tax Authorities falls under routine work, hence Mr. Y, the employee of M/s A & Co. can attend to routine matter in tax practice. Therefore, there is no misconduct in this case.

Question 82.
Mr. ‘K’, a practicing Chartered Accountant is the proprietor of M/s K&Co. since 1995. He went abroad in the month of December 2020. He delegated the authority to Mr. ‘Y’ a Chartered Accountant, his employee for taking care of the important matters of his office.
During his absence Mr. ‘Y’ has conducted the under mentioned jobs in the name of M/s K & Co.

(i) He issued Net worth certificate to a client for furnishing to a Bank.
(ii) Heattended the GST proceedings for a client as authorized representative before GST Authorities.

Please comment on eligibility of Mr. ‘Y’ for conducting such jobs in name of M/s K & Co. and liability of Mr. ‘K’ under the Chartered Accountants Act, 1949. [Nov. 19 – New Syllabus (5 Marks)]
Answer:
Delegation of Certification work:
As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not being a member of the Institute in practice or a member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.

In this case CA ‘K’ proprietor of M/s K & Co., went abroad and delegated the authority to another Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his office.

The Council has clarified that the power to sign routine documents on which a professional opinion or authentication is not required to be expressed, may be delegated and such delegation will not attract provisions of clause 12. Examples of such instances are issue of audit queries, asking for information or issue of questionnaire, attending to routing matters in tax practice etc.

Conclusion:

(i) Issuance of Net Worth Certificate to a client for furnishing to Bank by Mr. “Y” is not a routine work and it is outside his authorities. Thus, CA ‘K’ is guilty of professional misconduct under clause 12 of Part I of First Schedule of the Chartered Accountants Act, 1949.

(ii) Attending GST proceedings for a client as authorized representative before GST Authorities falls under routine work, hence Mr. Y, the employee of M/s K & Co. can attend to routine matter in tax practice. Therefore, there is no misconduct in this case.

First Schedule, Fart II – Professional Misconduct in relation to Members in Service

Question 83.
Give your comments with reference to Chartered Accountants Act, 1949 and Schedules thereto: Mr. ‘C’, a Chartered Accountant holds a certificate of practice while in employment also, recommends a particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee received from employer paid a particular sum as referral fee to Mr. ‘C’. [May 14 (4 Marks)]
Answer:
Referral Fee from Lawyer:

As per Clause 2 of Part II of First Schedule of the Chartered Accountant Act, 1949, a member ofthe Institute (other than a member in practice) shall be guilty of professional misconduct, if he being an employee of any company, firm or person accepts or agrees to accept any part of fee, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

In the present case, Mr. C who besides holding a certificate of practice, is also an employee and by referring a lawyer to the company in respect of a case, he receives a particular sum as referral fee from the lawyer out of his professional fee.

Conclusion: Mr. C is guilty of professional misconduct by virtue of clause 2 of Part II of First schedule for accepting referral fees from the lawyer of his employer.

Question 84.
Mr. ‘C’, a Chartered Accountant employed as Senior executive in charge of Tax in a company, and not holding certificate of practice recommends a particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee received from the employer of Mr. ‘C’ paid a particular sum as referral fee to Mr. ‘C’. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto. [Nov. 19 – New Syllabus (5 Marks)]
Or
C, a member of the Institute of Chartered Accountants of India, not holding certificate of practice, is employed with a firm of Chartered Accountants. He recommends a particular lawyer to his firm for some client related litigation being handled by the firm.

The lawyer, out of the professional fee received by him from the said client, paid a certain sum as referral fee to C. Is A guilty of misconduct under the Chartered Accountants’ Act, 1949? [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Referral Fee from Lawyer:
As per Clause 2 of Part II of First Schedule of the Chartered Accountants Act, 1949, a member of the Institute (other than a member in practice) shall be guilty of professional misconduct, if he being an employee of any company, firm or person accepts or agrees to accept any part of fee; profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

In the present case, Mr. C, a Chartered Accountant is working in capacity of an employee and by referring a lawyer to the employer in respect of a case, he receives a particular sum as referral fee from the lawyer out of his professional fee.

Conclusion: Mr. C is guilty of professional misconduct by virtue of clause 2 of Part II of First Schedule for accepting referral fees from the lawyer of his employer.

First Schedule, Part III – Prolcssinnul Misconduct in Relation to Members Generally

Question 85.
Give your comments with reference to CA Act and schedules thereto: Mr. X, a Chartered Accountant, employed as a paid assistant with a Chartered Accountant firm. On 31st Dec. 2020, he leaves the services of the firm. Despite many reminders from ICAI he fails to reply regarding the date of leaving of the services of the firm. [May 10 (4 Marks)]
Answer:
Failed to supply information called for:
Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949, a member, whether in practice or not, will be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate authority.

In the given case, Mr. X has failed to reply to the letters of the Institute asking him to confirm the date of leaving the service as a paid assistant.
Conclusion: Mr. X is held guilty of professional misconduct as per Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949. „

Question 86.
Give your comments with reference to Chartered Accountants Act, 1949 and Schedules there to: Mr. ‘G’, while applying for a certificate of practice, did not fill in the columns which solicit information about his engagement in other occupation or business, while he was indeed engaged in a business. [May 14 (3 Marks)]
Answer:
Disclosure of Information:
As per Clause 2 of Part III of First Schedule to the Chartered Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant, in practice or not, does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority.

In the given case, Mr. “G”, a Chartered Accountant while applying for a certificate of practice, did not fill in the columns which solicit information about his engagement in other occupation or business, while he was indeed engaged in a business.

Details of engagement in business need to be disclosed while applying for the certificate of practice as it was the information called for in the application, by the Institute.
Conclusion: Mr. G will be held guilty for professional misconduct under the clause 2 of Part III of First Schedule for not providing the information to the Institute.

Question 87.
XYZ Associates, a Chartered Accountants Firm is having a relationship with a multi-national accounting firm in India. The ICAI required that all firms having networking relationship with any other entity need to furnish information online within the stipulated time. XYZ Associated failed to respond. Comment on this with reference to professional misconduct, if any. [Nov. 18-New Syllabus (4 Marks)]
Answer:
Failed to supply information called for:

Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949, a member, whether in practice or not, will be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate authority.

In the given case, XYZ Associates, a Chartered Accountants Firm is having a relationship with a multi-national accounting firm in India. The ICAI required that all firms having networking relationship with any other entity need to furnish information online within the stipulated time. XYZ Associated failed to respond.

Conclusion: XYZ Associates will be deemed to be guilty of professional misconduct as per Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949.

First Schedule, Part IV – Other Misconduct in relation to Members Generally

Question 88.
Write a short note on – Other Misconduct. [Nov. 10 (4 Marks)]
Or
A Chartered Accountant is liable for disciplinary action under section 21 of CA Act, 1949, if he is found guilty of any professional or other misconduct.
Explain the meaning of other misconduct with the help of two illustrative example. [Nov. 16 (4 Marks)]
Answer:
Other Misconduct:
As per Part IV of First Schedule to Chartered Accountant Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he

Is held guilty of any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months.
In the opinion of the Council brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

As per Part III of Second Schedule to Chartered Accountant Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is held guilty of any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.

Some illustrative examples, where a member may be found guilty of “Other Misconduct”, under the aforesaid provisions rendering, himself unfit to be member are:

Where a chartered accountant retains the books of account and documents of the client and fails to return these to the client on request without a reasonable cause.
Where a chartered accountant makes a material misrepresentation.
Where a chartered accountant uses the services of his articled or audit clerk for purposes other than professional practice.
Misappropriation by office-bearer of a Regional Council of the Institute, of a large amount and utilisation thereof for his personal use.
Non-replying within a reasonable time and without a good cause to the letter of the public authorities.
Where a chartered accountant had adopted coercive methods on a bank for having a loan sanctioned to him.

Question 89.
CA D, a chartered accountant in practice availed of a loan against his personal investments from a bank. He issued 2 cheques towards repayment of the said loan as per the instalments due. However, both the cheques were returned back by the bank with the remarks “Insufficient funds”. Comment with reference to the Chartered Accountants Act, 1949. [Nov. 17 [4 Marks)]
Answer:
Bringing disrepute to the profession:
As per Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if in the opinion of the council, that member brings disrepute to the profession or the Institute, as a result of his action, whether or not related to his professional work.

Accordingly, a Chartered Accountant is also expected to maintain the highest standards and integrity even in his personal affairs and any deviation from these standards calls for disciplinary action.

In the present case, two cheques were dishonoured and returned back with the remarks “Insufficient Funds”. Issuing cheques without having sufficient balance in the account is punishable offence under the Negotiable Instruments Act, 1881.

Conclusion: As the cheques were dishonoured due to insufficiency of funds, the drawer will be held guilty of offence under Negotiable Instruments Act, 1881 and consequently he would be held guilty of “Other Misconduct”.

“ICAI Examiner Comments”
Examinees answered the question referring to the relevant clause, hut only few examinees explained that as per Negotiable Instruments Act, 1881, where a cheque is dishonoured for insufficiency of funds the drawer of such a cheque shall be deemed to commit an offence.

Question 90.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules | thereto: Mr. P, CA, proprietor of M/s P & Co. requests the manager of a Bank branch to sanction him a loan for ? 10 lakhs. He also offers free services to the manager and the staff for filing Income-tax returns for 3 years.
Or
Comment on the following: Mr. P, a Chartered Accountant in practice approached Manager of a Nationalised Bank for a loan of ₹ 25 lakhs. He has also informed the Manager that if the loan is sanctioned, the Income Tax return of the Manager and staff will be filed without charging any fees, as quid Pro quo for the loan sanctioned. [Nov. 11 (4 Marks)]
Answer:
Coercive Method for Sanction of Loan:
Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that member of the Institute, whether in practice or not, shall be deemed guilty of other misconduct, if he in the opinion of the Council, brings disrepute to the profession or to the Institute as a result of his action whether or not related to his professional work.

Accordingly, a Chartered Accountant is also expected to maintain the highest standards and integrity even in his personal affairs and any deviation from these standards calls for disciplinary action.

In the present case, the action of Mr. P, a Chartered Accountant in practice offering free service in return to sanction of loan brings disrepute to the profession of a Chartered Accountant.

Conclusion: Mr. P will be held guilty of other misconduct under Clause 2 of Part IV of the First Schedule of the Chartered Accountants Act, 1949.

Question 91.
Give your comments with reference to the Chartered Accountants Act, 1949 and schedules thereto: YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a bank. YKS used his influence for getting some cheques purchased and thereafter failed to repay the loan/ovcrdraft. [Nov. 10 (4 Marks), MTP-March 19]
Answer:
Bringing disrepute to profession:
Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that member of the Institute, whether in practice or not, shall be deemed guilty of other misconduct, if he in the opinion of the Council, brings disrepute to the profession or to the Institute as a result of his action whether or not related to his professional work.

Accordingly, a Chartered Accountant is also expected to maintain the highest standards and integrity even in his personal affairs and any deviation from these standards calls for disciplinary action.

In the present case YKS & Co, being a concurrent auditor used his position to obtain the funds and failed to repay the same to the bank. This brings disrepute to the profession of a Chartered Accountant.

Conclusion: YKS & Co will be held guilty of other misconduct under clause 2 of Part IV of First Schedule of the Chartered Accountants Act, 1949.

Question 92.
Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr. A, a practicing Chartered Accountant, failed to return the books of account and other documents of a client despite many reminders from the client. The client had settled his entries fees dues also. [May 13 (4 Marks)]
Answer:
Non-return of Client’s Books:
As per Part IV of the First Schedule to the Chartered Accountants Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he

(1) is held guilty by any civil or criminal court for an offence’ which is punishable with imprisonment for a term not exceeding six months;
(2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

A member may be found guilty of “Other Misconduct”, as per clause 2, if he retains the books of account and documents of the client and fails to return these to the client on request without a reasonable cause.
In the given case, Mr. A failed to return the books of account and other documents of his client without any reasonable cause.

Conclusion: Mr. A would be guilty of Other Misconduct under Part IV of First Schedule and liable to disciplinary action under Section 21.

Question 93.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: CA Kumar who is contesting Central Council Elections of Institute, engages his Articled Assistant for his election campaigning promising him that he will come in contact with influential people which will help to enhance his career after completion of his training period. [RTP-Nov. 18, Nov. 19]
Answer:
Engaging Articled Assistance for personal work:

As per Part IV of the First Schedule to the Chartered Accountants Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he:

is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;
in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

A member may be found guilty of “Other Misconduct”, as per clause 2, if he uses the services of articles for personal work.

In the given case, CA Kumar who is contesting Central Council Elections of Institute, engages his Articled Assistant for his election campaigning promising him that he will come in contact with influential people which will help to enhance his career after completion of his training period.

Conclusion: CA Kumar would be guilty of Other Misconduct under Part IV of First Schedule and liable to disciplinary action under Section 21.

Question 94.
Ms. Preeto, a CA, had an account with a bank. The normal balance in this account remained at a level below ₹ 5,000. The bank inadvertently credited this account with a cheque of ₹ 2,70,000 belonging to another account holder. When CA Preeto came to know about this she withdrew the amount of ₹ 2,75,000 and closed the bank account. After 1 year the bank noticed the mistake and claimed ₹ 2,75,000 with interest. CA Preeto contested this claim. Can the bank approach the Institute of Chartered Accountants of India for disciplinary action against CA Preeto? [RTP-Nov. 20]
Answer:
Bringing disrepute to the Profession:

As per Clause 2 of Part IV of First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant will be deemed to be guilty of other misconduct if he in the opinion of the Council brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

In the instant case, CA Preeto, had an account with a bank from which she withdrew the amount of ₹ 2,75,000 and closed the account. This amount of ₹ 2,75,000 was pertaining to ₹ 5,000 minimum balance and ₹ 2,70,000 belonging to other account holder and inadvertently credited to his account by the bank.

The said act of CA Preeto to withdraw-the money which does not belongs to her will bring disrepute to the profession.

Conclusion: Bank can file a suitable complaint under Clause 2 of Part IV of First Schedule of the Chartered Accountants Act, 1949 with the Institute of Chartered Accountants of India for a case of “Other Misconduct”.

Second Schedule. Part I – “Professional Misconduct in relation to Members in Practice”.

Question 95.
A CA in practice was engaged by a businessman to represent him before the tax authorities on current matters and in the course of such employment he came across certain documents pointing of tax frauds in the preceding years for which the client was not represented by him.
Is the member liable to disclose the existence and contents of the documents to tax authorities?
Answer:
Disclosure of confidential information:
Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 states that a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he discloses information acquired in the course of his professional engagement to any person other than his client, without the consent of the client or otherwise than as required by law for the time being in force.

In respect of taxation matters, the code of conduct recommends that If the fraud discovered by the member, relates to the accounts or tax matters of the client for past year(s) for which the client was not represented by the member the client should be advised to make a disclosure. The member may however, continue to act for the client in respect of current matter, but is under no obligation so to continue.

Conclusion: Member is not liable to disclose the existence and contents of the documents to tax
authorities.

Question 96.
XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying the financial statements of the company notices that you are the auditor and requests you to call at the bank for a discussion. In the course of discussions, the bank asks for your opinion regarding the company and also asks for detailed information regarding few items in the financial statements. The information is available in your working paper file. What should be your response and why?
Answer:
Disclosure of Confidential Information:
Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 states that a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he discloses information acquired in the course of his professional engagement to any person other than his client, without the consent of the client or otherwise than as required by law for the time being in force.

In the instant case, the bank has asked the auditor for detailed information regarding few items in the financial statements available in his working papers. Having regard to the position stated earlier, the auditor cannot disclose the information in his possession without specific permission of the client.

As far as working papers are concerned, SA 230 on “Documentation” states “working papers are the property of the auditor. The auditor may, at his discretion, make portions of or extracts from his working papers available to his client”.

Conclusion: There is no requirement compelling the auditor to divulge information obtained in the course of audit and included in the working papers to any outside agency except as and when required by any law.

Question 97.
Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr. C, a practicing Chartered Accountant, in the course of the audit of a listed company discovered serious violations of the provisions of the Companies Act, 2013, informed the registrar of companies out of public interest. ’ [May 13 (4 Marks)]
Answer:
Disclosure of Confidential Information:
As per Clause 1 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 a member in practice will be guilty of professional misconduct if he discloses information acquired in the course of his professional engagement to any person other than his client so engaging him without the consent of his client or otherwise than as required by any law for the time being in force.

Further, Sec. 143(12) of Companies Act, 2013 requires that if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within 60 days of his knowledge and after following the prescribed procedure.

In the given case, Mr. C has disclosed serious violations of the provisions of the Companies Act, 2013 to Registrar of Companies without the consent of the client under the impression that it would be in public interest. It is not clear from the questions whether the violations of provisions involve fraud being committed by officers or employees of the company.

Hence, in the present case, instead of disclosing the violations to the ROC directly, auditor should mention the violations in his report in due compliance of SA 250 “Consideration of Laws and regulations in an audit of financial statements”.

Conclusion: Mr. C will be guilty of professional misconduct covered by clause 1 of Part I of Second Schedule to the Chartered Accountants Act, 1949.

Question 98.
Comment on the following: Mr. Z, a Chartered Accountant was invited by the Chamber of Commerce to present a paper in a symposium on the issues facing Indian Leather Industry. During the course of his presentation he shared some of the vital information of his client’s business under the impression that it will help the Nation to compete with other countries at international level. [Nov. 14 (4 Marks)]
Or
Mr. B, a chartered accountant in practice was invited to deliver a seminar on GST which was attended by professionals as well as by representatives of various industry to which it pertains. Mr. B enthusiastically explained the issue and elaborated how he actually solved this for his client facing the same issue with worked out examples from the computer storage device using the actual data of one of his clients with full identification of client details being displayed to the group for the sake giving clarity on a topic in a real life situation. Comment his acts in the light of code of conduct. [May 18 – New Syllabus (4 Marks)]
Answer:
Disclosure of Client’s Information:
Clause 1 of Part I of the Second Schedule to the CA Act, 1949 deals with the professional misconduct relating to the disclosure of information by a CA in practice relating to the business of his clients to any person other than his client without the consent of his client or otherwise than as required by any law for the time being in force would amount to breach of confidence.

The Code of Ethics further clarifies that such a duty continues even after completion of the assignment. The CA may, however, disclose the information in case it is required as a part of performance of his professional duties.

In the given case, Mr. Z has disclosed vital information of his client’s business without the consent of the client under the impression that it will help the nation to compete with other countries at International level.

Conclusion: Disclosing the client’s information without obtaining consent of client amounts to professional misconduct under clause 1 of Part I of Second Schedule to the CA Act, 1949.

Question 99.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: As a Chartered Accountant in practice, you are asked to conduct a review of the “Profit Forecast” prepared by a Company in connection with its application for a Term loans from a bank.
Answer:
Review of Profit Forecast:
As per Clause 3 of Part I, Second Schedule to the CA Act, Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he permits his name or the name of the firm to be used in connection with the estimates of earnings, contingent upon future transactions, in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

Further SAE 3400 “The Examination of Prospective Financial Information”, provides that the management is responsible for the preparation and presentation of the prospective financial information, including the identification and disclosure of the sources of information, the basis of forecasts and the underlying assumptions.

The auditor may be asked to examine and report on the prospective financial information to enhance its credibility, whether it is intended for use by third parties or for internal purposes. While making report on projection, the auditor need to mention that his responsibility is to examine the evidence supporting the assumptions and other information in the prospective financial information, his responsibility does not include verification of the accuracy of the projections, therefore, he does not vouch for the accuracy of the same.

Conclusion: Offer of review of profit forecast can be accepted subject to compliance of conditions
as stated in SAE 3400, otherwise it amounts to professional misconduct.

Question 100.
I, a chartered accountant prepares and certifies projected financial statements of his client Abacus Ltd. Abacus Ltd. forwarded the same to their banks to secure some loans and bank, on that basis sanctioned a loan. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto. [May 17 (4 Marks), MTP-Aug.18]
Answer:
Certification of Financial forecast:
As per Clause 3 of Part I, Second schedule to the CA Act, 1949, Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he permits his name or the name of the firm to be used in connection with the estimates of earnings, contingent upon future transactions, in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

Further SAE 3400 “The Examination of Prospective Financial Information” provides that the management is responsible for the preparation and presentation of the prospective financial information, including the identification and disclosure of the sources of information, the basis of forecasts and the underlying assumptions.

The auditor may be asked to examine and report on the prospective financial information to enhance its credibility, whether it is intended for use by third parties or for internal purposes.

Thus, while making report on projection, the auditor need to mention that his responsibility is to examine the evidence supporting the assumptions and other information in the prospective financial information, his responsibility does not include verification of the accuracy of the projections, therefore, he does not vouch for the accuracy of the same.

In the given case, Mr. L, a chartered accountant prepares and certifies projected financial statements of his client Abacus Ltd. Abacus Ltd. forwarded the same to their banks to secure some loans and bank, on that basis sanctioned a loan.

Preparing as well as certifying projected financial statements by the same chartered accountant is not in order.
Conclusion: Mr. L will be deemed to be guilty of professional misconduct under clause 3 of Part I of Second Schedule assuming that conditions stated in SAE 3400 not being fulfilled.

Question 101.
Give your comments with reference to Chartered Accountants Act, 1949 and Schedules thereto: Mr. ‘E’, a practicing Chartered Accountant, was requested by one of his client to prepare a projection for next five years and also a report on the same. Mr. ‘E’ after having prepared the same stated in his report the sources of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts. He also stated that he does not vouch for the accuracy of the forecasts. [May 14 (4 Marks)]
Answer:
Certification of Financial Forecast:
As per Clause 3 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be guilty of professional misconduct if he permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

In the given case, Mr. E is being engaged by the client to prepare and report the projection. Mr. E is required to ensure that the requirements of SAE 3400 have been fulfilled. Mr. E after having prepared the projections for next five years stated in his report, “the sources of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts.” He also stated that he does not vouch for the accuracy of the forecasts.
Conclusion: There is no violation of the Chartered Accountants Act, 1949 and its Regulations.

Question 102.
Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: D, a practicing Chartered Accountant examined and reported on the prospective financial statements for one of his clients to obtain a cash credit facility of Rs.75 lakhs from a Private Bank. The bank has sanctioned the cash credit facility for Rs. 60 lakhs to his client. Consequent to the sanction of loan by Bank, he charged a fees of Rs. 60,000 based on 1% of the credit facility sanctioned.
[Nov. 18-Old Syllabus (4 Marks}]
Answer:
Certification of Financial Forecast and charging fees on a %age basis:

As per Clause 3 of Part 1 of Second Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be guilty of professional misconduct if he permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

The auditor may be asked to examine and report on the prospective financial information to enhance its credibility, whether it is intended for use by third parties or for internal purposes. Thus, while making report on projection, the auditor need to mention that his responsibility is to examine the evidence supporting the assumptions and other information in the prospective financial information, his responsibility does not include verification of the accuracy of the projections, therefore, he does not vouch for the accuracy of the same.

Clause 10 of Part I to First Schedule to the CA Act, 1949 prohibits a CA in practice to charge, or offers to charge, accept or offers to accept in respect of any professional employment, fees which are based on a percentage of profits or which are contingent-upon the findings or results of such employment.

Conclusion: Mr. D will be deemed to be guilty of professional misconduct by virtue of clause 10 of part I of First schedule as he charges fees on %age of credit facility sanctioned.

Question 103.
Comment on the followings: A firm of chartered accountants were appointed by a company to evaluate the costs of the various products manufactured by it for their operation system. One of the partners of the firm of chartered accountants was a non-executive director of the company. [Nov. 14 (4 Marks)]
Or
AP & Co., a firm of Chartered Accountants, was appointed by D Ltd., to evaluate the cost of a new product manufactured by it for their information system and fixation of fair market price. Partner ‘P’ of the CA firm is a non-executive director of the Company. Comment with reference to Chartered Accountants Act, 1949 and Regulations there to. [May 18 – Old Syllabus (4 Marks)]
Answer:
Evaluation of Cost structure:
Clause 4 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 desists a chartered accountant in practice to express opinion on financial statements of an enterprise in which he, his firm or a partner in his firm has a substantial interest.

In the present case, the firm has been appointed to evaluate the costs of the various products manufactured by it for their operation system, not for expressing opinion on financial statements, so it cannot be construed to be misconduct, as it is a verification of facts and no opinion is expressed.

Conclusion: There is no professional misconduct in evaluating the costs of a company in which one of the partners of firm is a non-executive director.

Question 104.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. A was appointed by H Ltd. to audit the PF Trust maintained by the company. While conducting the audit he noticed that large number of loans have been given out of the trust to the employer company in contravention of the rules of the PF Trust. He disclosed the irregularities to the trustees and to the company but not to the individual subscribers of the PF. When queried on his omission to disclose, he explained that he owed no duty to the individual members.
Answer:
Failure to Disclose Material Facts:
As per Clause (5) of Part I of Second Schedule to the CA Act, 1949, a CA in practice will be held liable for misconduct if he fails to disclose a material fact known to him, which is not disclosed in the financial statements but disclosure of which is necessary to make the financial statements not misleading.

In this case, Mr. A has noticed that large numbers of loans were given out of the trust to the employer company in contravention of the rules of the PF Trust.

Mr. Ahas disclosed the irregularities to the trustees, but not to the subscribers. Mr. A was required to disclose such facts to beneficiaries of a fund just like he gives his report to the shareholders of a company.

Conclusion: Mr. A will be attracted by the provisions of professional misconduct under clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

Question 105.
Comment on the following with reference tojlbartered Accountants Act, 1949 and schedules thereto: Mr. I, a Chartered Accountant has identified that ABC Ltd. has taken a loan of ₹ 15 lakhs from Provident Fund Account, during the course of audit. The said loan was not reflected in the books of account and statements were prepared ignoring the same. . [Nov. 11 (4 Marks)]

In the course of his assignment in M/s Bailey Ltd., CA J came to know that the company, due to financial crunch and unable to meet employees salary, has taken a loan of Rs. 50 lacs from Employees Gratuity Fund. The said loan was not reflected in the books of account of the company and the auditor ignored this transaction in his report.
Comment with reference to the Chartered Accountants Act, 1949 and Regulations thereto. [May 18 – Old Course (4 Marks)]
Answer:
Failure to Disclose Material Facts:

As per Clause (5) of Part 1 of Second Schedule to the CA Act, 1949, a CA in practice will be held liable for misconduct if he fails to disclose a material fact known to him, which is not disclosed in the financial statements but disclosure of which is necessary to make the financial statements not misleading.

In this case, Mr. J has come across an information that a loan has been taken by the company from Employees PF and the said loan has not been reflected in the books of account and hence not disclosed in the financial statements.

Conclusion: If Mr. J fails to disclose the fact stated above in his report, he will be attracted by the provisions of professional misconduct under Clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949. However, if he discloses the fact in his report, there will not be any misconduct.

Question 106.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: The superannuation-cum-pension fund for the employees of a company was under a separate ‘trust’. Both the company and the trust were under the same management.

The auditor, who was auditing the accounts of the company as well as the trust noted some irregularities in the operation of the trust and commented upon these irregularities in the confidential report given to the trustees, but did not mention about these irregularities in his report on the Annual accounts of the Trust.
Or
Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: ENI Ltd; a company registered under the Companies Act, 2013 has created a separate Trust “ENI Employees Gratuity Fund Trust”. Both the Company and Trust arc under the same management. Mr. A is the auditor of both the entities.

Mr. A has observed that some part of the expenditure was not applied towards the objects of the Trust. He informed the matter to the Board of Trustees through a separate report but did not qualify the Audil Report of the Trust. [Nov. 18-Old Syllabus (4 Marks]]
Answer:
Non-disclosure of irregularities:

A Chartered Accountant in practice is deemed to be guilty of professional misconduct under clause 5 of Part I of the Second Schedule if he “fails to disclose a material fact known to him which is not disclosed in a financial statement but disclosure of which is necessary to make the financial statement not misleading”.

In this case, the Chartered Accountant was aware of the contraventions and irregularities committed by the trust as these were referred to in the confidential report given by the Chartered Accountant to the trustees of the company. However, he had issued the annual accounts without any qualification.

On similar facts it was held by the Supreme Court in Kishorilal Dutta vs. P. K. Mukherjee that it was the duty of the Chartered Accountant to have disclosed the irregularities and contravention to the beneficiaries of the fund in the statement of accounts signed by him.

Conclusion: Chartered Accountant is guilty of professional misconduct if the amount of irregularities is proved material.

Question 107.
Answer the following: Loans were given out of the funds of an Employees Provident Fund to the employer company in contravention of the applicable.rules. As the auditor of the said Provident Fund, M discloses the contraventions to the Trustees of the fund, but failed to do so to the members of the fund. Comment. ‘ [May 09 (5 Marks)]
Answer:
Failure to disclose the material facts:

As per clause 5 of Part 1 of Second Schedule to the Chartered Accountants Act, 1949, a member in practice will be deemed to be guilty of professional misconduct if he fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading, where he is concerned with that financial statement in a professional capacity.

In the given case, it is the duty of Mr. M to disclose material facts known to him so thatthe financial statement does not become misleading. Auditor should disclose such facts to beneficiaries of a fund just like he gives his report to the shareholders of a company.

Conclusion: Mr. M is guilty ofprofessional misconduct.

Question 108.
Mr. X partner ofX & Co. Chartered Accountants, has compiled and signed the balance sheet of False Limited., for submission to the bankers of the said company. Mr. X has also compiled and signed at the request of the company another balance Sheet inflating the value of assets by 20%, for submission to a term lending institution. Both the Balance Sheets were not in conformity with the books of account maintained by the company as they were not up-to-date. Comment on Mr. X liability.
Answer:
Failure to disclosure the material irregularities:

As per clause 5 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a member in practice will be deemed to be guilty of professional misconduct if he fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading, where he is concerned with that financial statement in a professional capacity.

As per clause 6 of Part I of Second Schedule, a member in practice will be deemed to be guilty of professional misconduct if he fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity.

In the present case, Mr. X partner of X & Co. Chartered Accountants, has compiled and signed the balance sheet of False Limited., for submission to the bankers of the said company. Mr. X has also compiled and signed at the request of the company another balance Sheet inflating the value of assets by 20%, for submission to a term lending institution. Both the Balance Sheets were not in conformity with the books of account maintained by the company as they were not up-to-date.

Conclusion: Mr. X would be held guilty under clauses 5 and 6 of Part I of Second Schedule to the CA Act, 1949 as Mr. X had compiled the two different balance sheets for the same date without reference to the actual books of account, but on instructions of the client. As per clause 5 he has failed to disclose material fact known to him and further, as per clause 6 he has also failed to report a material misstatement known to him.

Question 109.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: A practicing Chartered Accountant was appointed to represent a company before the tax authorities. He submitted on behalf of his client’s certain information and explanations to the authorities, which were found to be false and misleading.
Or
D, a Chartered Accountant In practice was appointed by Realty Limited to represent its cases before GST Authorities under a duty executed pow1r of representation. In the course of proceedings, he submitted certain statements – written as well asoral – which later found to be false and materially misleading. Comment this in the light of Professional Code. [Nov. 18-New Syllabus (4 Marks)]
Answer:
Failure to disclose the material facts:
As per clause 5 of Part I of Second Schedule, a member in practice will be deemed tobe guilty of professional misconduct if he fails to disclose a material fact known to him wh ¡ch is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading, where he is concerned with that financial statement in a professional capacity.

In given case, the Chartered Accountant had submitted the statements before the taxation authorities. These statements are based on the data provided by the management of the company. Although the statements prepared were based on incorrect facts and misleading, the Chartered Accountant had only submitted them acting on the instructions of his client as his authorized representative.
Conclusion: The Chartered Accountant would not be held liable for professional misconduct.

Question 110.
Mr. Fair a practldng CA, was appointed to carry out a Balance Sheet Audit of a Non-Profit Organisation. The Internal Auditors detected certain irregularities at one of the branches of the organization which Mr. Fair had failed to detect.
Answer:
Auditor’s Responsibilities in relation to branch audit:

As per clause 7 of Part-I of Second Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.
In the present case, internal auditor detected certain irregularities at one of the branches of the organisation which the statutory auditor Mr. Fair had failed to detect.
Statutory auditor has been appointed to carry out the balance sheet audit, he is not required to check the matters relating to branch in depth.

Conclusion: There is no professional misconduct on part of Mr. Fair.

Question 111.
A search under section 132 of Income Tax Act in the premises of a leading merchant led to the discovery of two sets of account books – one set to record all the income correctly and second to record only limited income. A CA has issued audit report on the basis of second set of books. What would be your answer if the first set of account books carried evidence of checking by the CA?
Answer:
Auditor’s negligence in performance of duties:
As per clause 7 of Part-I of Second Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

In the present case, it has been found that client has maintained two sets of account books – one set to record all the income correctly and second to record only limited income. CA has issued audit report on the basis of second set of books. In this case, there will not be any misconduct on part of CA if the auditor is not aware of the first set of books.

However, if there exist evidences that auditor is aware of first set of books also, then he will be deemed to be guilty of professional misconduct being grossly negligent in performance of his duties.

Conclusion: In the first case, he would not be deemed to be guilty of misconduct. But in the second case, he would be deemed to be guilty of misconduct.

Question 112.
Mr. X, a CA in practice and statutory auditor of True Ltd., advised the Managing Director of the company to include in sales, “Orders under negotiation” to reflect a better financial position for obtaining bank loan. Mr. X, thereafter, gave clean reports on the balance sheet prepared accordingly without examining the accounts. Comment with reference to Chartered Accountants Act, 1949 and Schedules thereto. [MTP-May 20]
Answer:
Auditor’s negligence in performance of duties:

As per clause 7 of Part-1 of Second Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

In the present case, Mr. X, a partner of X & Co., advised the M.D. of True Ltd. to include in sales, orders under negotiations to reflect a better financial position for obtaining bank loan.

Conclusion: Mr. X is guilty of professional misconduct under Clause 7 of Part I, Second Schedule to the CA Act, 1949, as he has acted in a negligent manner.

He will also be deemed guilty of other misconduct under Clause (2) of part IV of First Schedule for advising unethical practice to the client.

Question 113.
The Cashier of a company committed a fraud and absconded with the proceeds thereof. This happened during the course of the accounting year. The Chief Accountant of the company also did not know about fraud.

In the course of the audit, at the end of the year, the auditor failed to discover the fraud. After the audit was completed, however, the fraud was discovered by the Chief Accountant. Investigation made at that time indicate that the auditor did not exercise proper skill and care and performed his work in a desultory and haphazard manner. With this background, the Directors of the company intend to file disciplinary proceedings against the auditor. Discuss the position of the auditor with regard to the disciplinary proceedings.
Or
You were the statutory auditor of Speed Ltd., a PSU, for the year 2019-20. In the course of your audit, you did not observe any fraud having been committed during that year. However, the C & AG audit staffs during their routine inspection found that chief cashier of the Company have committed a fraud in Debtor’s ledger and absconded with the amount. Investigation made in the fraud revealed that the Auditor did not exercise proper skill and care and performed his work in an improper way.

Director of the Company, intends to file disciplinary proceeding against the Auditor with the ICAI. Discuss the position of the auditor with regard to the disciplinary proceeding under Chartered Accountants Act, 1949 and Regulations thereto. [May 18 – Old Course (4 Marks)]
Answer:
Failure to Exercise Reasonable Care and Skill:

As per clause 7 of Part-I of Second Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

In the present case, it appears that the auditor did not exercise proper skill and care and he performed his work in a desultory and haphazard manner. Cash is a very significant item in any situation and the fact that the cashier had left during the year without notice should have placed the auditor on alert as regards the cash book. In fact, the very fact that the cashier was absconding, i.e., left without any notice constituted sufficient circumstances to excite suspicion of the auditor to probe to the bottom.

Thus, having regard to this and a fraud has actually taken place during the year, committed by the absconding cashier, it is reasonable to think that prima facie there is a case against the auditor for gross negligence. Thus, such instances require reference to Disciplinary Committee of the Council of the Institute.

Question 114.
Comment on the following with reference to the Chartered Accountant Act, 1949 and schedules thereto: Mr. B a practicing CA expressed his opinion on the financial statements of M/s ABC Ltd. for the year ended on 31st March 2020. It was later found that the closing stock was valued arbitrarily by Management which was accepted by him without verification and large amount of revenue expenditure was capitalized.
Answer:
Auditor’s negligence in performance of duties:

In the present case, Mr. B a practicing CA expressed his opinion on the financial statements of M/s ABC Ltd. and it was found later that the closing stock was valued arbitrarily by Management which was accepted by him without verification and large amount of revenue expenditure was capitalized.

Thus, having regard to this, it is reasonable to think that prima facie there is a case against the auditor for gross negligence.
Conclusion: Mr. B is guilty of gross negligence by virtue of clause 7 of Part I of second schedule.

Question 115.
Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr. D, a practicing Chartered Accountant, did not complete his work relating to the audit of the accounts of a company and had not submitted his audit report in due time to enable the company to comply with the statutory requirements. [May 13 (4 Marks), RTP-Nov. 18, Nov. 19, MTP – Oct. 20]
Answer:
Failure to exercise due diligence:

Where a Chartered Accountant had not completed his work relating to the audit of the accounts a company and had not submitted his audit report in due time to enable the company to comply with the statutory requirement in this regard, it can be said that the work is carried out with gross negligence.
Conclusion: Mr. D is guilty of professional misconduct by virtue of clause 7 of Part I of Second Schedule to the CA Act, 1949.

Question 116.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules there to: CA Z who conducted ABC audit of a Marathi daily ‘New Era’ certified the circulation figures based on Management Information System Report (M.I.S Report) without examining the books of Account. [Nov. 08 (4 Marks)]
Or
Give your comments with reference to CA Act and schedules thereto: Mr. Z, a practicing Chartered Accountant; issued a circulation certificate for a periodical on the basis of outward memos, which was later found to be false. [May 10 (4 Marks)]
Or
Give your comments with reference to the (gartered Accountants Act, 1949 and schedules thereto: Mr. Z is a practicing Chartered Accountant. He issued a certificate of consumption which did not reflect the correct factual position of the consumption of raw material by the concerned entity. It is found that the certificate is given on the basis of data appearing in the minutes of meeting of the Board of Directors. [Nov. 10 (4 Marks), MTP-Oct. 18]
Or
Comment on the following with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr. Z, a Chartered Accountant certified the circulation of a weekly magazine without examining the records and relevant documents. [Nov. 11(4 Marks)]
Or
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: Z, a practicing Chartered Accountant issued a certificate of circulation of a periodical without going into the most elementary details of how the circulation of a periodical was being maintained i.e. by not looking into the financial records, bank statements or bank pass books, by not examining evidence of actual payment of printers bills and by not caring to ascertain how many copies were sold and paid for. [May 12 (4 Marks)]
Answer:
Failure to exercise due diligence and to obtain necessary information:
Clause 2 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be guilty of professional misconduct if he Certifies or submits in his name or in the name of his firm a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another CA in practice.

Clause 7 of Part I of Second Schedule of C A Act, 1949 states that a CA in practice shall be deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

Clause 8 of Part I of Second Schedule to CA Act, 1949 states that if a CA in practice fails to obtain sufficient information to warrant the expression of an opinion or its exceptions are sufficient material to negate the expression of an opinion, the CA shall be deemed to be guilty of a professional misconduct.

In the present case, Mr. Z, did not exercise due diligence and is grossly negligent in the conduct of his professional duties since he certified the circulation ligures without the examination of records and other required documents. He should not express his opinion before obtaining the required data and information.

As an auditor, Mr. Z ought to have verified the basic records such as print order, printer’s bill, number of copies sold and paid for, number of copies returned unsold to ensure the correctness of circulation figures.

Conclusion: Mr. Z will be held guilty of professional misconduct as per clauses 2, 7 and 8 of Part I of Second Schedule of Chartered Accountants Act, 1949.

Question 117.
Give your comments with reference to the Chartered Accountants Act, and schedules thereto: Mr. A, a Chartered Accountant was the auditor of ‘A Limited’. During the financial year 2020-21, the investment appeared in the Balance Sheet of the company of 10 lakhs and was the same amount as in the last year. Later on, it was found that the company’s investments were only 25,000r but the value of investments was inflated for the purpose of obtaining higher amount of Bank loan. (Nov. 09(4 Marks) MTP – Oct. 18, Oct. 201)
Answer:
Negligence in performance of duties:

As per Clause 2 Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA in practice shall be deemed to be guilty of professional misconduct, if he, certifies or submits in his name or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been mode by him or by a partner or an employee in his firm or by another chartered accountant in practice.

As per Clause 7 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA in practice shall be guilty of professional misconduct if does not exercise due diligence, or is grossly negligent in the conduct of his professional duties.

As per Clause 8 of Part I of Second Schedule, a CA in practice will be deemed to be guilty of professional misconduct if he fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion.

The primary duty of physical verification and valuation of investments ¡s of the management. However, the auditor’s duty is also to verify the physical existence and valuation of investments placed, at least on the last day of the accounting year.

In the instant case, it appears that auditors failed to conflrm the value of investments from any proper source and he simply relied on the management’s representation.

Conclusion: Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Question 118.
Comment on the following with reference to Chartered Accountants Act, 1949 and schedules there to: A charitable Institution entrusted 10 lakhs with its auditor’s M/s Ram and Co., a Chartered Accountant firm, to invest In a profitable portfolio. The auditors pending Investment of the money, deposited It In their Savings bank account and no investment was made In the next three months.
Answer:
Deposit of Client’s Money In Separate Bank account:

As per Clause 100f Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice will be deemed to be guilty of professional misconduct If he fails to keep moneys of his client other than the fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.

The term reasonable time would depend upon the circumstances of the case. Moneys which are intended to be spent within a reasonably short time need not be put in a separate bank account.

In the instant case, M/s Ram & Co. should have deposited the amount into a separate bank account. Further, they are not permitted to provide the service of portfolio management to the client.

Conclusion: M/s Ram & Co. will be held guilty of professional misconduct as he deposited the client money in his saving bank account.

Question 119.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: M/s XYZ a firm of Chartered Accountants received ₹ 2 lakhs in January, 2021 on behalf of one of their clients, who has gone abroad and deposited the amount in their Bank account, so that they can return the money to the client in July, 2021, when he is due to return to India. [RTP-Nov. 19]
Answer:
Deposit of Client’s Money in Separate Bank account:

As per Clause 10 of Part I of Second Schedule to the Chartered Accountant Act, 1949, a Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he fails to keep moneys of his client other than the fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.

The term reasonable time would depend upon the circumstances of the case. Moneys which are intended to be spent within a reasonably short time need not be put in a separate bank account.
In the instant case, M/s XYZ should have kept the amount in a separate bank account.

Conclusion: M/s XYZ will be deemed to be guilty of professional misconduct by virtue of clause 10 of Part I of Second Schedule as the money is required to be kept in a separate bank account.

Question 120.
Mr. Ram, a Chartered Accountant in practice, received ₹ 15,00,000 on 15th December, 2020 on behalf of one of his clients, who has gone to USA. Mr. Ram deposited the said amount in his saving bank account (SB Account). As per instruction of the client, the said amount is to be returned to the client on March 31, 2021 when he will return to India. On the occasion of birthday of his wife Sita, Mr. Ram withdrew ₹ 5,00,000 and spent on Birthday party. He re-deposited ₹ 5,00,000 in the said SB account on 25th March, 2021 and then returned the entire amount of ₹ 15,00,000 to the client on March 31, 2021.
Answer:
Deposit of Client’s Money in Separate Bank account:

As per Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he fails to keep moneys of his client other than the fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.

The term reasonable time would depend upon the circumstances of the case. Moneys which are intended to be spent within a reasonably short time need not be put in a separate bank account.

In the instant case, Mr. Ram should have deposited the amount into a separate bank account. Further, he was not supposed to spent the amount for personal purposes.

Conclusion: Mr. Ram will be guilty of professional misconduct for his failure to keep the client money in separate bank account and using the client money for personal purposes.

Question 121.
Give your comments with reference to CA Act and schedules thereto: Mr. Z, a practicing Chartered Accountant received a sum of ₹ 1 lac on 01.09.2020 from a client who intends to leave abroad for a period of year, with a request that his advance tax liabilities to be paid over the three instalments, on 15th Sep., 2020,15th Dec. 2020 and 15.03.2021. After remitting the 1st instalment of advance tax on 15.09.2020, Z did not keep the money in a separate bank account and he is of the opinion that he will remit the money within reasonable time as per schedule of advance tax. [May 10 (4 Marks)]
Answer:
Deposit of Client’s Money in Separate Bank account:

As per Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he fails to keep moneys of his client other than the fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.

The term reasonable time would depend upon the circumstances of the case. Moneys which are intended to be spent within a reasonably short time need not be put in a separate bank account.

In the instant case, Mr. Z should have kept the balance money after remitting the first instalment of advance tax into a separate bank account.

Conclusion: Mr. Z is guilty of professional misconduct as per Clause 10 of Part I of Second Schedule of the Chartered Accountants Act, 1949′.

Question 122.
Comment: M/s. ABC, a firm of Chartered Accountants received ₹ 2 lakhs in March, 2020 from a client to pay the Advance Tax. However, the firm hgs used that money for its own purpose and later on adjusted the same with the outstanding fee payable. [Nov. 14 (4 Marks)]
Answer:
Deposit of Client’s Money in separate Bank account:

Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that a p Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if “he fails to keep money of his clients other than fees or remuneration or money meant to be expended in separate banking account or to use such money for the purpose for which they are intended”.

In the present case, M/s. ABC received the money in March, 2015 for payment of the advance tax; hence it should be deposited in a separate bank account. However, firm has used that money for its own purposes.

Conclusion: Since M/s. ABC have failed to keep the sum of ₹ 2 lakhs received on behalf of their client in a separate Bank Account, it amounts to professional misconduct under clause 10 of part I of Second Schedule.

Question 123.
A film artist who was going abroad for long shooting, deposited a sum of Rs. 20 lakhs with his tax consultant Mr. G, a practicing chartered accountant for payment of GST monthly when they were due. Mr. G duly remitted all but one instalments. He utilized the amount of instalment which he did not pay, to remit his own advance of income tax. However, while filing return of GST of the film artist, he duly remitted on her behalf the tax payable with interest due for late payment of GST out of money lying with him. He also bore for himself the interest due to short fall in remittance of tax of his client. Comment on the above in the light of Code of Conduct. [May 18 – New Course (4 Marks)]
Answer:
Deposit of Client’s Money in separate Bank account:

Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if “he fails to keep money of his clients other than fees or remuneration or money meant to be expended in separate banking account or to use such money for the purpose for which they are intended”.

In the present case, a film artist who was going abroad, deposited a sum of Rs. 20 lakhs with Mr. G, a practicing chartered accountant for payment of GST monthly when they were due. Mr. G duly remitted all but one instalments. He utilized the amount of instalment which he did not pay, to remit his own advance of income tax. However, while filing return of GST of the film artist, he duly remitted on her behalf the tax payable with interest due for late payment of GST out of money lying with him.

Conclusion: Since Mr. G uses the client money for payment of personal taxes, he will be deemed to be guilty of professional misconduct under clause 10 of part 1 of Second Schedule.

Second Schedule, Port 11 “Professional Misconduct in relation lo the Members of the Institute Generally”

Question 124.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. Dheeraj, an aspiring student of ICA1, approached Mr. Murli, a practicing CA, for the purpose of articleship. Mr. Murli, the principal, offered him stipend at the rate of ₹ 2,000 p.m. to be paid every 6th month along with interest at the rate of 10% p.a. compounded monthly to compensate such late payment on plea that cycle of professional receipts from clients is 6 months. Mr. Dheeraj agreed for such late payment in the hope of getting extra stipend in the form of interest. Mr. Murli, however, used to disburse salary to all of his employees on time.
Or
CA X is a chartered accountant in practice. He has an articled trainee H. X has informed H that since his practice and receipt of fees is seasonal, the stipend would not be paid in the months of April to December, but would be paid from january to March and the shortfall for the earlier 9 months will be made good in these 3 months along with interest @ 5% p.a. Comment with reference to the Chartered Accountants Act, 1949. [Nov. 17 (4 Marks)}
Answer:
Contravening Provisions of the Act/Regulations:

As per Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct under, if he contravenes any of the provisions of this Act or the regulations made there under or any guidelines issued by the Council.

Regulation 48 of Chartered Accountants Regulations, 1988 requires that payment to articled clerks to be made on monthly basis.

In the present case, Chartered Accountant has failed to make the payments of stipend to articled assistant every month in accordance with Regulation 48. The fact that the articled assistant will be compensated with extra sum in the form of interest on late payment and the plea that his receipts are seasonal is of no relevance and hence not acceptable.

Conclusion: Regulation 48 of CA Regulations, 1988 has been violated, hence chartered accountant would be guilty of professional misconduct under Clause I, Part II of Second Schedule.

Question 125.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: The manager of ABC (P) Ltd. approached CA. X in the need of a certificate in respect of a consumption statement of raw material. Without having certificate of practice (COP), CA. X issued the certificate to the manager of the company, acting as a CA in Practice and applied for the COP to the Institute on very next day to avoid any dispute.
Answer:
Contravening Provisions of the Act:

As per Clause (1) of Part II of Second Schedule to the Chartered Accountants Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the Council.

Section 6 of Chartered Accountants Act, 1949 provides that no member of the Institute shall be entitled to practice (whether in India or elsewhere] unless he has obtained from the Council a certificate of practice.

In the given case, CA. X has issued a certificate in respect of a consumption statement of raw material to the manager of ABC (P) Ltd., as a Chartered Accountant in practice when he had not even applied for the COP to the Institute, thereby contravening the provisions of section 6 of the Chartered Accountants Act, 1949.

Conclusion: Mr. X has violated the provisions of Sec. 6 of CA Act, 1949 and hence would be guilty of professional misconduct under Clause 1, Part II of Second Schedule.

Question 126.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: PQ & Co., a firm of Chartered Accountants, included the name of R as a partner while filing an application for empanelment as auditor for Public Sector bank branches. It was subsequently noticed that on the date of application, P was not a partner with AB & Co. [Nov. 07 (4 Marks)]
Or
CAPand CAQare running a firm of chartered accountants in the name of M/s. PQ&Co. On 21.06.2020 they included the name of CA R a practicing CA, without his knowledge, as a partner while submitting an application for empanelment as auditors for public sector banks branches to the institute. Whether CA P and CA Q are professionally liable for misconduct? [May 16 (4 Marks)]
Or
Mr. P and Mr. Q are running a firm of Chartered ccountants in the name of M/s PQ& Co. On 23.05.2020, they included the name of Mr. R, a practicing Chartered Accountant, without his knowledge, as a partnerwhilesubmittinganapplicationforempanelmentasauditorforPublicSectorBankbranches to the Institute. However, they added Mr. R as a partner to their firm offering a share of 25% of the profits, on 25.05.2020. [MTP-April 18, RTP – May 20]
Answer:
Providing False information to ICAI:

As per clause 3 of Part II of second schedule, a Chartered Accountant whether in practice or not is guilty of professional misconduct if he includes in any information, statement, return or form to be submitted to the Institute, Council or any of its committees, Directors (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false.

In the instant case PQ & Co. included another Chartered Accountant name as partner in his firm, in his application for empanelment as Auditor of branches of Public Sector Banks submitted to the Institute. In fact, such a member was not a partner of the said firm on the date of application.

Conclusion: CA P & CA Q will be held guilty of professional misconduct as per Clause 3, Part II of Second Schedule for submitting false information with the Institute.

“ICAI Examiner Comments”
Most of the candidates failed to mention the correct clause and explain the same properly.

Question 127.
Mr. Brilliant, a practicing CA received a major professional assignment. To complete the said assignment, he was required to buy four computers. Due to his inability to provide funds for acquiring the same he borrowed money from a firm, where one of the articled clerk’s and his father were interested. What will be the Chartered Accountants Liability.
Answer:
Non-compliance of CA Regulations:

As per Clause 1 of Part II of Second Schedule to the Chartered Accountants Act, 1949 a member shall be held guilty of professional misconduct if he contravenes any of the provisions of the Act or the regulations made thereunder or any guidelines issued by the Council.

Regulation 47 of CA Regulations, 1988 provides that “No amount shall be charged from, or be payable by, an articled clerk or any other person on his behalf, directly or indirectly. Whether by way of premium or as loan or deposit or in any other form in connection with his engagement as an articled clerk.

Accepting a loan from an articled clerk in case of an engagement of an article clerk is prohibited under the Regulations. But, in the present case, it appears from the facts that the articled clerk is already been engaged and serving under him.

Conclusion: Mr. Brilliant will not be held guilty of professional misconduct under Clause 1 of Part II of Second Schedule of CA Act, 1949.

Question 128.
Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: X, a practicing Chartered Accountant in an application for permission to study submitted by his Articled Assistant to the council had confirmed that the normal working hours of his office were from 11 A.M. to 6 P.M. and the hours during which the Articled Assistant was required to attend classes are 7-00 A.M. to 9:30 A.M.

According to the information from College, the Articled Assistant attended the College from 10 A.M. to 1.55 P.M. on all week days. About the Articled Assistant attending the classes even during office hours, X pleaded ignorance. [May 12 (4 Marks)]
Answer:
Failure to Observe the Regulations:

As per Clause 3 of Part II of Second Schedule to the CA Act, 1949, a member is deemed to be guilty of professional misconduct if he includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false.

The chartered accountant, as per Regulations also, is expected to impart proper practical training. There is a specific circular issued which guides on timing for training for articleship.

In the instant case, the articled clerk must have not been attending office on a regular basis and the explanation of the Chartered Accountant cannot be accepted. It is also quite likely that the articled clerk would be availing leave quite often and coming late to the office. X knew about the college timing of his articled assistant and he had given information to the institute knowing them to be false.

Conclusion: Mr. X will be deemed to be guilty of professional misconduct under Clause 1 of Part II of Second Schedule for contravention of regulations of the Institute and under Clause 3 of Part II of Second Schedule for submission of false information to the ICAI.

Question 129.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: A Chartered Accountant in practice certified in requisite Form that an articled assistant was undergoing training with him, whereas, he was also employed in a company between 10 a.m. and 6 p.m. on a monthly salary of ₹ 17,000 and attended the office of the Chartered Accountant thereafter until 7 p.m. The Chartered Accountant pleaded that the articled assistant was on audit of the company. [MTP – Oct. 18, Oct. 19]
Answer:
Failure to Observe Regulations:

As per Clause 1 of Part II of Second Schedule to the Chartered Accountants Act, 1949, a member shall be held guilty of professional misconduct if he contravenes any of the provisions of the Act or the regulations made thereunder or any guidelines issued by the Council. The chartered accountant, as per Regulations also, is expected to impart proper practical training.

As per Clause 3 of Part Il of Second Schedule to the CA Act, 1949, a member is deemed to be guilty of professional misconduct if he includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false.

In the instant case, the articled assistant is not attending office on timely basis and the explanation of the Chartered Accountant that the articled assistant was on audit of the company cannot be accepted particularly in view of the fact that articled assistant is getting monthly salary from that company.

Conclusion: Chartered Accountant will be deemed to be guilty of professional misconduct under Clause 1 of Part Il of Second Schedule for contravention of regulations of the Institute and under Clause 3 of Part II of Second Schedule for submission of false information to the ICAI.

Question 130.
Comment: MIs. XYZ, a firm of Chartered Accountants has taken a loan for acquiring a home from company whose Managing Director’s son is an Articled Assistant with A, a partner of M/s. XYZ. The Articled Assistant had no direct interest In the Company and the loan was not related to his engagement. [Nov. 14 (4Marks)]
Answer:
Premium from Articled Clerks:
As per Clause 1 of Part II of Second Schedule to the Chartered Accountants Act, 1949, a chartered accountant is deemed to be guilty of professional misconduct if he contravenes any of the provisions of Chartered Accountants Act, 1949 or Regulations made there under.

Regulation 47 of the Chartered Acco’intant’s Regulations, 1988, prohibits a member from accepting any premiums or loans or any deposit in any form from an articled clerk directly or indirectly.

In the present case, M/s XYZ has taken loan from a company whose Managing Director happens to be father of articled clerk with Mr. A, a partner of M/s XYZ. However, the articled trainee has no direct interest In that company and the loan was not related to his engagement.

Conclusion: There will no professional misconduct on part of M/s XYZ as articles trainee had no interest in the company and the loan was not related to engagement.

Council General Guide lines, 2008

Question 131.
Comment on the followingwith reference to Chartered Accountants Act, 1949and schedules thereto: Mr. Shah, a Chartered Accountant certified the financial statements of a company in which his wife is a Director holding substantial interest. [May 04 (4 Marks)]
Answer:
Certification of Financial Statement of a related entity:

Clause (4) of Part I of Second Schedule to the CA Act, 1949 states that if an auditor expresses his opinion on the financial statements of any business in which he, his firm or a partner in his firm has substantial interest, he is committing professional misconduct.

Chapter IV of Council General Guidelines 2008 further provides that a member of the Institute shall not express his opinion on financial statements of any business or enterprise in which one or more persons who are his “relatives” within the meaning of AS 18 has/have, either by themselves or in conjunction with such member, a substantial interest in the said business or enterprise. As per AS 18, the term ‘Relative’ includes husband and wife. Violation of Council Guidelines amounts to professional misconduct under Clause 1 of Part II of Second Schedule.

Sec. 141(3)(f) of the Companies Act, 2013, requires that a person shall not be eligible for appointment as an auditor of a company whose relative is a director or is in the employment of the company as director or key managerial personnel.

Non-compliance of Secs. 139,140 & 141 amounts to professional misconduct under Clause 9 of Part I of First schedule.

In the given case Mr. Shah, Chartered Accountant, has certified the financial statements of a company in which his wife is a director with substantial interest.
Conclusion: Mr. Shah is guilty of professional misconduct under various clauses as mentioned above.

Question 132.
Comment with reference to the Chartered Accountants Act, 1949 and Schedules thereto: P, a Chartered Accountant in practice, accepts appointment as statutory auditor for LMN Pvt. Ltd. Q, brother of P has substantial interest in LMN Pvt. Ltd. [May 09 (5 Marks)]
Answer:
Appointment as Company Auditor:

As per Clause (4) of Part 1 of Second Schedule to the CA Act, 1949, a CA is deemed to be guilty of professional misconduct if he expresses his opinion on financial statements in which his firm or a partner has substantial interest.

Chapter IV of Council General Guidelines 2008 further provides that a member of the Institute shall not express his opinion on financial statements of any business or enterprise in which one or more persons who are his “relatives” within the meaning of AS 18 has/have, either by themselves or in conjunction with such member, a substantial interest in the said business or enterprise. As per AS 18, the term ‘Relative’ includes brother. Violation of Council Guidelines amounts to professional misconduct under Clause 1 of Part II of Second Schedule.

Further, as per Section 141(3)(d) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor of a company if his relative is holding shares in the company for face value exceeding ₹ 1 Lac. Non-compliance of Secs. 139,140 & 141 amounts to professional misconduct under Clause 9 of Part I of First schedule. Face Value of the shares held by brother is not given in the question. It may be assumed that it exceeds ₹ 1 Lac.

In the instant Case, since Q, a relative has a sub$tantial interest in LMN Pvt. Ltd, P cannot conduct the audit.
Conclusion: Mr. P will be guilty of professional misconduct under various clauses as mentioned above.

Question 133.
Give your comments with reference to the Chartered Accountants Act, and schedules thereto: Mrs. M is a Director of XYZ Private Limited, having 15% share-holdings in the company. During 2019, the company appointed C.A. Mr. N, Mrs. M spouse, as its statutory auditor. On Mr. N’s advice, the company issued fresh equity shares in 2020-21, in the ratio of one share for every two shares held by the shareholders of the company. Mr. N used to deliver audit report for subsequent years without any comments or disclosures, thereupon. [Nov. 09 (4 Marks)]
Answer:
Auditor’s disqualifications:
Clause 4 of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that if an auditor expresses his opinion on the financial statements of any business or enterprises in which he, his firm or a partner in his firm has substantial interest, he is committing professional misconduct.

Sec. 141(3)[f) of the Companies Act, 2013, requires that a person shall not be eligible for appointment as an auditor of a company whose relative is a director or is in the employment of the company as director or key managerial personnel. Non-compliance of Secs. 139,140 & 141 amounts to professional misconduct under Clause 9 of Part I of First schedule.

In the present case, Mrs. M is a Director of XYZ Private Limited and the company has appointed Mr. N, Chartered Accountant, Mrs. M’s spouse, as its statutory auditor. Though Mrs. M do not hold substantial interest in the company Mr. N should not accept the appointment as statutory auditor of the company, where his wife M is director.
Conclusion: Mr. N is guilty of professional misconduct under Clause 9 of Part I of First Schedule.

Question 134.
Give your comments with reference to the Companies Act, 2013 and the Chartered Accountants Act, 1949 and Schedules thereto: Mr. A has been appointed statutory auditor of a private limited company where his spouses’ sister’ husband is having 75% ownership. [Nov. 12 (4 Marks)]
Answer:
Appointment as an Auditor in a concern in which relative has substantial interest:

Clause 4 of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that if an auditor expresses his opinion on the financial statements of any business or enterprises in which-he, his firm or a partner in his firm has substantial interest, he is committing professional misconduct.

Council General Guidelines, 2008, specifies that a member of the Institute shall not express his opinion on financial statements of any business or enterprise in which one or more persons who are his “relatives” within the meaning of AS 18 has/have, either by themselves or in conjunction with such member, a substantial interest in the said business or enterprise.

As per AS 18 “Related Parties” the term relative, in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise.

As per Sec. 141(3)(d) of Companies Act, 2013, q person who, or-his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company; is also disqualified to be appointed as auditor of company. However relative may hold security or interest in the company of face value not exceeding ₹ 1,000 or such sum as may be prescribed (₹ One Lac has been prescribed under the Rules). The term relative as defined u/s 2(77) of Companies Act, 2013, does not include spouse sister husband.

In the present case, Mr. A has been appointed as auditor of private limited company in which spouse’ sister’ husband is having substantial interest. This relationship is not covered under AS 18 and Sec. 2(77) of Companies Act, 2013 and consequently no disqualification arises.
Conclusion: Mr. A is qualified to be appointed as auditor.

Question 135.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: Mr. P, a Chartered Accountant, did not maintain any books of account on the ground that his income did not exceed the limits prescribed u/s 44AA of the Income-tax Act, 1961.
Or
Comment on the following with reference to the CA Act, 1949, and Schedules thereto: CA. Ajit registered his proprietorship firm last year and started practicing in the name of “M/s Ajit & Co.”. He is of the view that a professional need to maintain books of account only if his earnings exceed the minimum prescribed limit as per Sec. 44AA of the Income Tax Act, 1961. Therefore, he decided not to maintain his books of account as his earnings are below the prescribed limit given u/s 44AA of the said Act.
Or
Mr. P, a CA in practice runs his proprietorship firm as “M/s P & Co.” His annual gross receipts are in excess of ₹ 50 Lakhs. He maintains a small pocket diary in which he writes the fees received from various clients. Based on his record, he prepares and files his income tax return.
Answer:
Maintenance of Books of Account:

As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of professional misconduct if he Contravenes any of the provisions of this act or the regulations made there under or any guidelines issued by the council.

Chapter V of the Council General Guidelines, 2008 specifies that a member of the Institute in practice or the firm of Chartered Accountants of which he is a partner shall maintain and keep in respect of his/its professional practice, proper books of account including the following:

a Cash Book
a Ledger

In the instant case, Chartered Accountant being in practice was required to maintain the books of account, but he does not maintain the books and writes the fees received from various clients in small pocket diary. A small pocket diary maintained by him cannot be books of account.
Conclusion: Mr. P will be held guilty for professional misconduct for violation of Council General Guidelines, 2008.

Question 136.
Mr. X, a Chartered Accountant in Practice filed his income tax return for the Assessment Year 2020-21 u/s 44ADA of the Income-tax Act? 1961, declaring his income on presumptive basis. In a disciplinary proceeding alleged against him for an alleged misuse of funds of his clients, it was asked that he should submit his books of account for the financial year ended on 31.03.2020.

Mr. X refused to submit books of account on the ground that-he had not maintained any books and even for income tax purposes, he submitted his Return of Income on a presumptive basis. Is he right in putting such a defence? Analyse the issue in the lights of Professional Code, if any. [Nov. 18-New Syllabus (5 Marks)]
Answer:
Maintenance of Books of Account:
As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of professional misconduct if he Contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the council.

In the instant case, Mr. X, a Chartered Accountant in Practice filed his income-tax return u/s 44ADA of the Income-tax Act, 1961, declaring his income on presumptive basis. In a disciplinary proceeding alleged against him for an alleged misuse of funds of his clients, it was asked that he should submit his books of account for the financial year ended on 31.03.2018. Mr. X refused to submit books of account on the ground that he had not maintained any books and even for income-tax purposes, he submitted his Return of Income on a presumptive basis.

Conclusion: Defence of Mr. X is not admissible and he will be held guilty of professional misconduct by virtue of Clause 1 of Part II of Second Schedule, due to contravention of Chapter V of Council General Guidelines, 2008 for non-maintenance of books of account.

Question 137.
A member of the institute shall not accept in a year more than the specified number of tax audits under section 44AB of the Income Tax Act.
Mr. Gaurav is a partner in M/s XYZ & Co., a firm of Chartered Accountants with 6 partners.
During the assessment year 2020-21, Mr. Gaurav alone had signed 290 tax audit reports consisting of both corporate and non-corporate assessees.
Answer:
Signing of Tax Audit Report:

As per Chapter VI of Council General Guidelines, 2008, a member of the Institute in practice shall not accept, in a financial year, more than the “specified number of tax audit assignments” u/s 44AB of the Income-tax Act, 1961.
In the case of a firm of CAs in practice, the “specified number of tax audit assignments” shall be construed as the specified number of tax audit assignments for every partner of the firm.
The specified number of tax audit assignments in the case of firm of CAs in practice, 60 tax audit assignments per partner in the firm, in a financial year, whether in respect of corporate or non-corporate assessees.
It is further clarified by the Council of ICAI that tax audit report accepted by the firm of Chartered Accountants can be signed by any partner on the behalf of the firm.
In the present case, there are six partners in the firm and hence the firm can accept 360 tax audit assignment and any partner can sign the tax audit report on the behalf of the firm.

Conclusion: Mr. Gaurav can sign the 29(ftax audit reports on behalf of the firm.

Question 138.
M/S PQR & Co. is a partnership firm of 3 partners P, Q and R. All partners are exclusively associated with the firm in practice and are not doing practice in individual capacity. For the year ended 31st March, 2020, the partners have undertaken audits and signed audit reports under section 44AB/44AD of the Income Tax Act, 1961 as under:

	Under Section 44AB	Under Section 44AD
P	10	15
Q	60	5
R	100	5

Discuss whether there is any professional misconduct by the firm in regard to the aforesaid audits.
[Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Signing of Tax Audit Report:

As per Chapter VI of Council General Guidelines, 2008, a member of the Institute in practice shall not accept, in a financial year, more than the “specified number of tax audit assignments” u/s 44AB of the Income-tax Act, 1961.
In the case of a firm of CAs in practice, the “specified number of tax audit assignments” shall be construed as the specified number of tax audit assignments for every partner of the firm.
The specified number of tax audit assignments in the case of firm of CAs in practice, 60 tax audit assignments per partner in the firm, in a financial year, whether in respect of corporate or non-corporate assessees.
The audits conducted under Sections 44AD, 44AE, 44AF ofthe Income Tax Act, 1961 shall not be taken into account for the purpose of reckoning the “specified number of tax audit assignments”.
It is further clarified by the Council of ICAI that tax audit report accepted by the firm of Chartered Accountants can be signed by any partner on the behalf of the firm.
In the present case, there are three partners in the firm and hence the firm can accept 180 tax audit assignment and any partner can sign the tax audit report on the behalf of the firm. Firm has accepted 170 tax audit assignments other than the audit under section 44AD.

Conclusion: No Misconduct arises on part of Firm or partners.

Question 139.
Mr. Z accepted the statutory audit of a sick unit -NCT Limited for the year ending 31.03.2021. During course of audit it was noticed by the statutory auditor that company’s net worth was negative for year ended 31.03.2020 and there was also a liability of tax audit fees of ₹ 35,000 in favour of the previous auditors. Comment. [Nov. 16 (4 Marks)]
Answer:
Accepting Appointment as an Auditor:

As per Chapter VII of Council General Guidelines, 2008, a member of the Institute in practice shall not accept the appointment as auditor of an entity in case the undisputed audit fee of another Chartered Accountant for carrying out the statutory audit under the Companies Act, 1956 or various other statutes has not been paid. As per the proviso, such prohibition shall not apply in case of a sick unit where a sick unit is defined to mean “where the net worth is negative”.

In the present case, Mr. Z accepted the audit of M/s PSU Ltd., though the undisputed fees of previous auditor remain unpaid.

Conclusion: Mr. Z would still not be guilty of professional misconduct since the M/s PSU Ltd. is a sick unit having negative net worth for the year 2019-20.

Question 140.
Write short note on: Record of Audit assignments.
Answer:
Record of Audit Assignments:
Chapter 8 of Council General Guidelines, 2008 requires a Chartered Accountant in practice as well as firm of Chartered Accountants in practice to maintain a record of the audit assignments accepted by him or by the firm of Chartered Accountants, or by any of the partners of the firm in his individual name or as a partner of any other firm, as far as possible, in the following format:

s. No.	Name of the Company	Registration No.	Date of Appointment	Date of Acceptance	Date on which Form ADT-1 Filed with ROC
1	2	3	4	5	6

Question 141.
J, a practicing Chartered Accountant has not maintained the records of audit assignments of the companies on the ground that he is conducting lesser number of audits prescribed under Section 141(3)(g) of the Companies Act, 2013. [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Record of Audit Assignments:

As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of professional misconduct if he Contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the council.

Chapter VIII of Council General Guidelines, 2008 requires a Chartered Accountant in practice as well as firm of Chartered Accountants in practice to maintain a record of the audit assignments accepted by him or by the firm of Chartered Accountants, or by any of the partners of the firm in his individual name or as a partner of any other firm, as far as possible, in the following format:

s. No.	Name of the Company	Registration No.	Date of Appointment	Date of Acceptance	Date on which Form ADT-1 Filed with ROC
1	2	3	4	5	6

In the present case, J, a practicing Chartered Accountant has not maintained the records of audit assignments of the companies on the ground that he is conducting lesser number of audits prescribed under Section 141(3)(g) of the Companies Act, 2013.

Conclusion: Ground of Mr. J is not admissible and he will be held guilty of professional misconduct by virtue of Clause 1 of Part II of Second Schedule, due to contravention of Chapter VIII of Council General Guidelines, 2008 for not maintaining of record of audit assignments.

Question 142.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: A is the auditor of Z Ltd., which has a turnover of ₹ 200 crores. The audit fee for the year is fixed at ₹ 50 lakhs. During the year, the company offers A an assignment of management consultancy within the meaning of Section 2(2)(iv) of the CA Act, 1949 for a remuneration of ₹ 1 crore. A seeks your advice on accepting the assignment.
Or
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. Moon is the auditor of M/s Sun Ltd., which has a turnover of ₹ 100 crores. The audit fee for the year is fixed at ₹ 25 lakhs. During the year the company offers Mr. Moon an assignment of Management Consultancy for a remuneration of ₹ 50 lakhs.
Answer:
Appointment as a statutory auditor of a PSUs’/Govt. company/listed company and other public company:

Council General Guidelines 2008, specifies that a member of the Institute in practice shall be deemed to be guilty of professional misconduct if he accepts the appointment as a statutory auditor of a PSUs’/Govt. companies/listed companies and other public company having a turnover of ₹ 50 crores or more in a year and accepts any other work(s) or assignment(s) or service(s) in regard to same undertaking(s) on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking.

Conclusion: In view of the above position it would be a misconduct on A’s part if he accepts the management consultancy assignment.

Note: Applicability of Chapter IX of Council General Guidelines, 2008 seems to be redundant in case of companies, because as per Section 144 of the Companies Act, 2013, auditor of a company cannot render management services to the company, its holding company or subsidiary company, directly or indirectly.

Question 143.
Comment with reference to the Chartered Accountants Act, 1949 and Schedules thereto: D, who conducts the tax audit u/s 44AB of the Income Tax Act, 1961 of M/s ABC, a partnership firm, has received the entire audit fees of ₹ 25,000 in April, 2020 in respect of the tax audit for the year ended 31.3.2020. The audit report was, however, signed on 25.05.2020.
What will be your answer if fees were recovered on progressive basis? [May 09 (4 Marks)]
Answer:
Appointment of an auditor when he is indebted to the concern:

Council General Guidelines, 2008 specifies that a member of the Institute in practice or a partner of a firm in practice or a firm shall not accept appointment as auditor of a concern while indebted to the concern or given any guarantee or provided any security in connection with the indebtedness of any third person to the concern, for limits fixed in the statute and in other cases for amount exceeding ₹ 10,000/-.

As per explanation to Sec. 288 to Income Tax Act, 1961, an individual who, or his relative or partner is indebted to the assessee cannot conduct tax audit, provided that the relative may be indebted to the assessee for an amount not exceeding ₹ 1,00,000.

In the instant Case, D is appointed to conduct a tax audit u/s 44AB of the Income Tax Act, 1961. In view of the above-mentioned provision, D is disqualified to be appointed as tax auditor of the company being indebted to the assessee.

Conclusion: Mr. D will be held guilty of professional misconduct by virtue of clause I of Part II of Second Schedule.
However, if fees were recovered on progressive basis, no professional misconduct arises.

Question 144.
Give your comments with reference to the Companies Act, 2013 and the Chartered Accountants Act, 1949 and Schedules thereto: Mr. E, proprietor of M/s. E & Co. is the statutory auditor of a company which owns a store dealing in computer equipment. During the year 2020-21, E purchased a computer from the store costing ₹ 25,000 for his son.
He did not make any payment for the same, but asked the company to adjust the same against the audit fees payable of ₹ 50,000. [Nov. 12 (4 Marks)]
Answer:
Auditor indebtedness:
As per Sec. 141(3)(d)(ii) of Companies Act, 2013 a person who, or his relative or partner is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company for an amount exceeding ₹ 5 Lacs is disqualified to be appointed as auditor of that company.

Further, it has been provided by Council General Guidelines 2008 that a member of the Institute in practice or a partner of a firm in practice or a firm shall not accept appointment as auditor of a concern while indebted to the concern or given any guarantee or provided any security in connection with the indebtedness of any third person to the concern, for limits fixed in the statute and in other cases for amount exceeding ₹ 10,000/-

The audit fees can be received on progressive basis, but not as an advance. Any advance received from the client amounts to indebtedness and brings disqualification.
Conclusion: Mr. E is permitted to continue the office as his indebtedness does not exceed ₹ 5 Lacs.

Question 145.
M/s ASKS, a firm of Chartered Accountants, having three partners accepts an audit assignment of a private limited company for a fee of ₹ 4,000 only. Comment. [May 09 (5 Marks), Nov. 15 (4 Marks)]
Answer:
Minimum Audit Fees:

Council of ICAI has prescribed minimum audit fees for the practicing members. However, prescribed minimum audit fee is recommendatory, not mandatory in nature.
Therefore, acceptance of audit assignment by M/s ASKS, a firm of Chartered Accountants having 3 partners of a private limited company for audit fees of ₹ 4,000 is not violation of any provisions.

Conclusion: M/s ASKS will not be held liable for guilty of misconduct.

“ICAI Examiner Comments” :
Some examinees related it to number of companies in which a CA can be appointed as an auditor.

Question 146.
Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules thereto: M (P) Ltd. appointed CA. P for some professional assignments like company’s ROC work, preparation of minutes, statutory register etc. For this, CA. P charged his fees depending on the complexity and the time spent by him on each assignment.

Later on, M (P) Ltd. filed a complaint against CA. P to the ICAI that he has charged excessive fees for the assignments comparative to the scale of fees recommended by the Committee as well as duly considered by the Council of ICAI. [MTP-April 18]
Answer:
Charging Excess Fees:

Prescribed scale of fees for the professional assignments done by the chartered accountants is recommendatory in nature. Fees in any professional assignment depend upon the mutual agreement and understanding between the member and the client.

Charging fee more than the fees recommended for a professional assignment does not constitute any misconduct in the context of the provisions of the Chartered Accountants Act, 1949 and regulation made thereunder.

In the given case, CA. P has charged excess fees comparative to the scale of fees recommended by the Committee as well as duly considered by the Council of ICAI.

Conclusion: Scale of fees recommended by the Committee as well as duly considered by the Council of ICAI is only recommendatory and not mandatory, hence no misconduct arise on part of Mr. P.

Self Regulatory Measures

Question 147.
Write short note on; Self-Regulatory Measures as recommended by Council of ICAI.
Answer:
Recommended Self-Regulatory Measures:

1. Branch Audits: The branch audits of a company should not be conducted by its statutory auditors consisting of ten or more members, but should be conducted by the local firms of auditors . consisting of less than ten members. This should not be understood to mean any restriction on the right of the statutory auditors to have access over branch accounts conferred under the Companies Act, 2013.

2. Joint Audit: In the case of large companies the practice of associating a practicing firm with less than five members as Joint auditors should be encouraged. Where a client desires to appoint such a firm as joint auditor, the senior firm should not object to the same.

3. Ratio Between Qualified and Unqualified Staff: In the Council’s view, a practicing firm of Chartered Accountants engaged in audit work should have at least one member for every five non-qualified members of the staff, excluding articled and audit clerks, typists, peons and other persons not engaged directly in such professional work.

4. Disclosure of Interest by Auditors in other Firms: The Council has decided that as a good and healthy practice, auditors should make a disclosure of the payments received by them for other services through the medium of a different firm or firms in which the said auditor may be either a partner or proprietor.

The wording of his representation should be such that, apart from the opportunity not being abused to secure needless publicity, it does not tantamount directly or Indirectly to canvassing or soliciting for his continuance as an auditor. The letter should merely set out in a dignified manner how he has been acting independently and conscientiously through the term of office and may in addition, indicate if he so chooses his willingness to continue as auditor if re-appointed by the shareholders.

Conclusion: Action proposed by a partner could not be approved since, it would lead to his being held guilty of professional misconduct under Clause (6) of Part 1 of the First Schedule to the Chartered Accountants Act, 1949.

KYC Norms

Question 148.
Write short note on: KYC norms for a Chartered Accountant in practice. [May 18 – Old Course (4 Marks)]
Answer:
KYC Norms for a Chartered Accountant in Practice:
A Chartered Accountant is required to observe certain KYC norms, in accordance with which he need to maintain certain details about his clients. Details required as per KYC norms are:
(A) Individual Client:
General Information: Name of the Individual, PAN No. or Aadhaar Card No. of the Individual, Business Description and Copy of last Audited Financial Statement
Engagement Information: Type of Engagement

(B) Corporate Entity:
General Information: Name an Engagement Information: Type of Engagement
Regulatory Information: Company PAN No., Company Identification No., Directors’ Names & Addresses, Directors’ Identification No.

(C) Non- Corporate Entity:
General Information: Name and Address of the Entity, Copy of PAN No., Business Description, Partner’s Names & Addresses (with their PAN/Aadhaar Card/DIN No.), Copy of last Audited Financial Statement
Engagement Information: Type of Engagement.

Question 149.
Write short note on: Importance of KYC requirements for a Chartered Accountant’s practice. [Nov. 14 (4 Marks)]
Answer:
Importance of KYC Norms for a practicing CA:
The financial services industry globally is required to obtain information of their clients and comply with KYC norms.

Keeping in mind the highest standards of Chartered Accountancy profession in India, the Council of ICAI recommended such norms to be observed by the members of the profession who are in practice.

Considering the spirit underlying these measures, it is expected that every Chartered Accountant carrying out attest function is encouraged to follow them and implementation of these measures would go a long way in ensuring equitable flow of work among the members and would also further enhance the prestige of the profession in the society.

These Know Your Client (KYC) Norms are also important in order to ensure a healthy growth of the profession and an equitable flow of professional work among the members.

Exercise Questions

Question 150.
A Chartered Accountant in service agrees to entrust the work of investment broker to Mr. X on the specific understanding that 20% of commission Mr. X earns would be paid to him.
Answer:
Sharing other’s emoluments by a CA in Service:

As per Clause 2 of Part II of First Schedule of the Chartered Accountants Act, 1949, a member of the Institute (other than a member in practice) shall be guilty of professional misconduct, if he being an employee of any company, firm or person accepts or agrees to accept any part of fee, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

In the present case, a CA in service agrees to entrust the work of investment broker to Mr. X on the specific understanding that 20% of commission Mr. X earns would be paid to him.

Conclusion: Concerned CA will be deemed to be guilty of professional misconduct by virtue of clause 2 of Part II of First Schedule.

Question 151.
Discuss whether the following action by a Chartered Accountant would amount to misconduct or not: A practising Chartered Accountant uses a visiting card in which he designates himself, besides as Chartered Accountant, as
(a) Tax Consultant
(b) Cost Accountant.
Answer:
Using designation other than Chartered Accountant:
Clause 7 of Part 1 of First Schedule to the CA Act, 1949 provides that a CA in practice is deemed to be guilty of professional misconduct if he

(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards.

As per Section 7 of Chartered Accountants Act, 1949, every member of the Institute in practice shall use the designation of a Chartered Accountant.
However, a degree of a university established ‘by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council is permitted to be mentioned.
In the given case, a practising Chartered Accountant uses a visiting card in which he designates himself, besides as Chartered Accountant, as Tax Consultant/Cost Accountant.

Conclusion: Concerned CA shall be held guilty of professional misconduct as per Clause (7) of Part I of First Schedule to the Chartered Accountants Act, 1949.

Question 152.
As a Practising CA do you approve the following: In a representation to be submitted to a company u/s 140(4) of the Companies Act, 2013, the partner of the firm of auditors wants to include the contributions made by the firm in strengthening the control procedures of the company during their association with the company. If not, why?
Answer:
Right of representation:

Section 140(4) of the Companies Act, 2013 permits an auditor to make a representation in writing (not exceeding a reasonable length) to the company. The proposition of the partner to highlight contributions made by the firm in strengthening the control procedures in the representation is not acceptable because the representation letter should not be prepared in a manner so as to seek publicity.

The Code of Ethics issued by the Institute makes it amply clear that the right to make representation does not mean that an auditor has any prescriptive right or a lien on an audit.

Question 153.
As a practising chartered accountant do you approve the following: The Chairman of an Audit Committee of a Bluechip Company, who Is a Chartered Accountant asked the firm in which he was previously a partner to quote their fee on a success fee basis so as to ensure that a professional work is assigned to such firm.
Answer:
Charging fees on %age basis:
Clause 10 of Part I to First Schedule to the CA Act, 1949 prohibits a CA in practice to charge, or offers to charge, accept or offers to accept in respect of any professional employments fees which are based on a percentage of profits or which are contingent upon the findings or results of such employment.

In the present case, the Chairman of an Audit Committee of a Bluechip Company, who is a Chartered Accountant asked the firm in which he was previously a partner to quote their fee on a success fee basis so as to ensure that a professional work is assigned to such firm.

Conclusion: Such quotation cannot be approved as it will amount to professional misconduct by virtue of clause 10 of Part I of First Schedule.

Question 154.
Is there any misconduct on the part of a Chartered Accountant in the following circumstances: The offer document of a listed company in which Mr. D, a practising Chartered Accountant is a director mentions the name of Mr. D as a director along with his various professional attainments and spheres of specialisation.
Answer:
Clauses 6 & 7 of Part I of First schedule:

If a public Company, in which a CA in practice is a Director issues a prospectus or gives any announcement that gives descriptions about the CA’s expertise, specialization and knowledge in any particular field, it will attract professional misconduct under clauses 6 & 7. In the given case, the CA is guilty of professional misconduct.

Question 155.
X & Co. Chartered Accountants were informed by True & Co. Ltd. that they have been appointed as auditor of the company in place of ABC & Co. who have been removed, subject however to the approval of the shareholders in the ensuing ACM. X & Co. accepted the appointment and commenced the work without their appointment being approved by the shareholders of the company.
Answer:
Non-observance of compliance of Sections 139 & 140 of Companies Act, 2013:

As per Clause 9 of Part I of First Schedule to Chartered Accountants Act, 1949, a CA in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company, without ascertaining whether requirements of Secs.224&225 of Companies Act, 1956 (Secs. 139 & 140 of Companies Act, 2013), in respect of such appointment have been duly complied with.

In the present case, X & Co. Chartered Accountants were informed by True & Co. Ltd. that they have been appointed as auditor of the company in place of ABC & Co. who have been removed, subject however to the approval of the shareholders in the ensuing AGM. X & Co. accepted the appointment and commenced the work without their appointment being approved by the shareholders of the company.
Commencing the work without being appointed as auditor in the AGM is clearly a non-compliance of Sec. 139.

Conclusion: X & Co. will be held to be guilty of professional misconduct under clause 9 of Part I of First Schedule to the Chartered Accountants Act, 1956.

Question 156.
Mr. X, a practicing Chartered Accountant, accepts appointment as a valuer of goodwill of a business for the purpose of taxation laws on the condition that he would be paid 5% of the value of the goodwill so determined as his fees.
Answer:
Charging Fees on Percentage Basis:

Clause 10 of Part I of First schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to charge, accept or offer to accept in respect of any professional work, fees which are based on a percentage of profits or which are contingent upon the findings or result of work.

As per Regulation 192, in the case of a valuer, for the purposes of direct taxes and duties, fees may be charged on a percentage of the value of property valued.

Conclusion: Charging fees on % age basis in the capacity of valuer for the purposes of taxation laws is included in the exceptions stated in regulation 192, Mr. X is not guilty of any professional m isconduct.

Question 157.
Is there any misconduct on the part of a Chartered Accountant in the following circumstances: Mr. X has charged a fee for representing his client in an income tax appeal based on the expected relief as a result of the appeal.
Answer:
Charging fees on %age basis:

The services rendered by X are not covered by any of exemptions provided under regulations 192.
Conclusion: Mr. X is guilty of professional misconduct.

Question 158.
A CA in practice, inspite of repeated requests from the secretary of the Institute, fails to submit Form 18. Is he liable for misconduct. [May 17 (4 Marks)]
Answer:
Failure to supply information called for:

In the given case, concerned CA has failed to submit form No. 18 inspite of several requests from Secretary of the Institute.

Conclusion: Concerned CA is held guilty of professional misconduct as per Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949.

Question 159.
Discuss the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. R, a Chartered Accountant in practice has been elected as the treasurer of a Regional Council of the Institute. The Regional Council had organized an international tour through a tour operator during the year for its members. During the audit of the Regional Council, it was found that Mr. R had received a personal benefit of ₹ 50,000 from the tour operator. [May 17 (4 Marks)]
Answer:
Bringing disrepute to profession:

Section 21 ofthe Chartered Accountants Act, 1949 provides that a member is liable for disciplinary action if he is guilty of any professional or “Other Misconduct.” Other misconduct has been defined in Part IV of the First Schedule and Part III ofthe Second Schedule.

Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that member of the Institute, whether in practice or not, shall be deemed guilty of other misconduct, if he in the opinion of the Council, brings disrepute to the profession or to the Institute as a result of his action whether or not related to his professional work.

Accordingly, a Chartered Accountant is also expected to maintain the highest standards and integrity even in his personal affairs and any deviation from these standards calls for disciplinary action.

In the present case, Mr. R [treasurer of regional council] had received a personal benefit of ₹ 50,000 from a tour operator who organised an international tour of the Regional Council. This brings disrepute to the profession of a Chartered Accountant.

Conclusion: Mr. R will be held guilty of other misconduct under clause 2 of Part IV of First Schedule of the Chartered Accountants Act, 1949.

Question 160.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: L, a Chartered Accountant, certifies a financial forecast of his client which was forwarded to the client’s bank based on which the bank sanctioned a loan to the Client.
Answer:
Certification of Financial forecast:

As per Clause 3 of Part I, Second Schedule to the CA Act, 1949 Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he permits his name or the name of the firm to be used in connection with the estimates of earnings, contingent upon future transactions, in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

SAE 3400 “The Examination of Prospective Financial Information” allows to a member to participate in the preparation of profit or financial forecasts and can review them subject to following conditions:
(a) He indicates the source of information.
(b) He indicates the basis of forecasts. ‘
(c) He gives in his report the major assumptions made in arriving at the forecasts.
(d) He does not vouch for the accuracy of the forecasts.

In the given case, L, a Chartered Accountant, certifies a financial forecast of his client which was forwarded to the client’s bank based on which the bank sanctioned a loan to the client.

Conclusion: Mr. L will be guilty of professional Misconduct by virtue of clause 3 of Part I of Second Schedule, if he has certified the financial forecast without taking adequate safeguards as specified in SAE 3400.

Question 161.
A chartered accountant holding certificate of practice and having lour articled clerks registered under him accepts appointment as a hill-time lecturer in a college. Also, he becomes a partner with his brother in a business. Examine his conduct in the light of CA. Act, 1949 and the regulations thereunder.
Answer:
Partnership with a relative and entering into business:
As per Clause 4, part I of First Schedule, a CA in Practice is deemed to be guilty of professional Misconduct if he enters into partnership in or outside India with any person other than the following:

C.A. in practice, or
Member of any other professional body having prescribed qualifications, or
a person who but for his residence abroad would be entitled to be registered as member, or
a person whose qualifications are recognized by CG or Council for the purpose of permitting such partnerships.

As per Clause 11 of Part 1 of First Schedule to the CA Act, 1949 a member in practice is prohibited to engage in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.

In the present case, A CA in practice entered into partnership with his brother in a business. And accepts appointment as a full time lecturer in a college which requires prior approval from the Council of the ICAI.

Conclusion: A CA in practice cannot engage in any business or occupation other than the profession of Chartered Accountant unless permitted by the council so to engage. Hence the CA will be guilty under clauses 4 & 11.

Question 162.
Comment on the following with reference to CA Act, 1949 and schedules thereto: A is a partner of 2 firms, M/s ABC & Company and M/s A & Associates. For most of the audits handled by him, the appointment is in the name of M/s ABC & Company. The visiting cards of A carries the names of both the firms.
Answer:
Mentioning Firm’s Name on Letter Heads:

Clause 7 of Part 1 of First Schedule to the CA Act, 1949 provides that a CA in practice is deemed to be guilty of professional misconduct if he

advertises his professional attainments or services or
uses any designation or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards.

However, a degree of a university established by law in India or recognized by the Central Government or a title indicating membership of the 1CAI or of any other institution that has been recognized by the Central Government or may be recognized by the council is permitted to be mentioned.

There is no prohibition for printing names of all firms on the personal letter heads in which a member holding certificate of practice is a partner.
Conclusion: Mr. A is not guilty of any professional misconduct in the above case.

Question 163.
Bahadur was an auditor of a firm M/s Manmeet Corporation. He retained the books of account and voucher files and failed to hand over them to the firm regardless of their repeated requests. Is he guilty of professional misconduct.
Answer:
Non-return of Client’s Books:

As per Part IV of the First Schedule to the Chartered Accountants Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he

is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;
in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

A member may be found guilty of “Other Misconduct”, as per clause 2, if he retains the books of account and documents of the client and fails to return these to the client on request without a reasonable cause.

In the given case, Mr. Bahadur failed to return the books of account and other documents of his client without any reasonable cause.

Conclusion: Mr. Bahadur would be guilty of Other Misconduct under Part IV of First Schedule and liable to disciplinary action under Section 21.

Question 164.
Ajay is a practising Chartered Accountant. Vijay is a practising Advocate representing matters in courts of law. Ajay and Vijay agree to help each other in matters involving their professional expertise. Accordingly, Ajay recommends Vijay in all tax litigations in courts of law. Vijay consults Ajay on all matters relating to finance and related matters, which come to him for arguing in various courts of law. Ajay seeks your advice on how he and Vijay should
(i) remunerate each other
(ii) ‘share’ the remuneration.’
Answer:
Sharing Fees with Advocate or of Advocate:

As per Clause 3 of Part I of the First Schedule to the CA Act, 1949, a CA in Practice is deemed to be guilty of professional Misconduct if he accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute. However, such a restriction does not apply in respect of member of any other professional bodies or with such other persons having prescribed qualifications.

For the purpose of Clauses 2 & 3, Regulation 53A of CA Regulations, 1988 allows sharing of profit with an advocate.

Conclusion: Ajay and Vijay can share the remuneration with each other with or without being entered into partnership as sharing of profits as well as partnership with Advocates are permitted by clauses 2, 3 and 4 of Part I of First Schedule.

Question 165.
A CA in practice entered into partnership with his uncle in Textile business, which, however, did not take off. Will he be held guilty of professional misconduct?
Answer:
Partnership with a relative and entering into business:
As per Clause 4, part I of First Schedule, a CA in Practice is deemed to be guilty of professional Misconduct if he enters into partnership in or outside India with any person other than the following:

C.A. in practice, or
Member of any other professional body having prescribed qualifications, or
a person who but for his residence abroad would be entitled to be registered as member, or
a person whose qualifications are recognized by CG or Council for the purpose of permitting such partnerships.

In the present case, A CA in practice entered into partnership with his uncle in Textile business. Conclusion: A CA in practice cannot engage in any business or occupation other than the profession of Chartered Accountant unless permitted by the council so to engage. Even if the agreement is not acted upon, the mere fact that he entered into partnership by such an agreement would constitute misconduct. Hence the CA will be guilty under clauses 4 & 11.

Question 166.
A CAin practice appearing on television on budget proposals was introduced to the viewers, on the basis of the bio- data furnished by him, as the Senior most partner of M/S Tick & Tag a leading firm of CA’s established in Delhi in 1978. See whether there is any professional misconduct in this case.
Answer:
Solicitation of Professional Work and Advertisement:

Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means.

Section 7 of the Chartered Accountants Act, 1949 read with Clause 7 of Part I of the First Schedule to the said Act prohibits advertising of professional attainments or services of a member. It also restrains a member from using any designation or expression other than that of a chartered accountant in documents through which the professional attainments of the member would come to the notice of the public.

In the given case –

Reference to name ofthe firm,
Use of adjective expressions such as “a leading firm of CA’s and Senior Most Partner”, and
Reference to the date of establishment of firm, violate of the code of conduct.
Conclusion: Concerned CA will be guilty of professional misconduct.

Question 167.
Z, a Chartered Accountant wrote several letters to Government Department, pointing out seniority of his firm, sending his life sketch and stating that he had a glorious record of service to the country as well as to the organization of accountancy profession with a view to get the audit work.

Question 168.
X & Co., CAs informed selected multinational organizations, who are not their clients that Mr. Y, the former Partner – in – charge of taxation of one of the largest accounting firms of the world, had joined them as a partner. Is this action liable for professional misconduct?
Answer:
Solicitation of Professional Work and Advertisement:

Section 7 of the Chartered Accountants Act, 1949 read with Clause 7 of Part I of the First Schedule to the said Act prohibits advertising of professional attainments or services of a member. It also restrains a member from using any designation or expression other than that of a chartered accountant in documents through which the professional attainments of the member would come to the notice of the public.

Conclusion: Issuing circular to persons who are not clients but may likely requires services of a CA would tantamount to advertisements since it is solicitation of professional work by making roving enquiries. Usage of the words “one of the largest accounting firms of the world” and the specification of specialization in Taxation would amount to advertisement and thus, constitute professional misconduct.

Question 169.
A junior CA in practice requests in writing to a senior member of his profession who is over-burdened with professional work to divert some of his work to him on profit sharing basis. Is there any offence in seeking professional work by a member from another member/Give reason for your answer?
Answer:
Solicitation of professional work from another CA:

In the given case, junior CA request to senior member to allot some professional work to him, which is not prohibited under clause 6.

Conclusion: There is nothing wrong in soliciting professional work from another CA, hence there is no professional misconduct.

Question 170.
T, a practicing CA uses the designation, ‘Municipal Councillor’ apart from the expression ‘FCA’ on his visiting card. Comment. ”
Answer:
Using designated other than CA:

As per clause (7) of Part I of the First Schedule to the CA Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he Advertises his professional attainments or services, or uses any designation or expressions other than the CA on professional documents, visiting cards, letter heads or sign boards.

However, a recognized degree of university or title indicating membership of ICAI or other recognized institution may be used.

It also restrains a member from using any designation or expression other than that of a CA in documents through which the professional attainments of the member would come to the notice of the public.

Conclusion: A member is not permitted to use the designation such as ‘Member of Parliament’, ‘Municipal Councillor’ or any other functionary in addition to that of CA. Therefore under this clause T is guilty of professional misconduct.

Question 171.
Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto: M/s ABC, a partnership firm carrying on business has complained to the Institute of Chartered Accountants of India (ICAI) that Mr. M, a Chartered Accountant has charged the firm excessive fees for a professional assignment.
Answer:
Excessive Fees:

The matter of fixation of actual fees charged in individual cases, depends upon the mutual agreements and understanding between chartered accountant and client. The scales of fees recommended by the council of the Institute is only recommendatory.

In the circumstances, the contention of the client of Mr. M that he has charged an excessive fee for a professional assignment, does not constitute professional misconduct in the context of the provisions of Chartered Accountants Act, 1949 and regulations made thereunder.

Conclusion: In view of the above Mr. M is not liable for any professional misconduct under the Chartered Accountants Act, 1949.

Question 172.
Comment on the following with reference to CA Act, 1949 and schedules thereto: M/S PQR a firm of Chartered Accountants responded to a tender from a State Government department for switching over to double entry system of accounting. For the purposes the firm also paid ₹ 20,000 as earnest money deposits as per the terms of the tender.
Answer:
Responding to tenders:

Clause 6 of Part I of First Schedule to the Chartered Accountant Act, 1949 prohibits solicitation of work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means, would constitute professional misconduct.
However, a member is permitted to respond to tenders or inquiries raised by various users of professional services or organizations.
Guidelines are being issued by Council under Clause 1 of Part II of Second Schedule allowing therein a member to respond to tenders where minimum fees of the assignment is prescribed in the tender document itself or where the areas are open to other professionals along with Chartered Accountants.
Further, in respect of a non-exclusive area, members are permitted to pay reasonable amount towards earnest money/security deposits.
In the present case, tenders were issued by state Government for switching over double entry system of accounting, which does not fall within exclusive areas for CAs, hence M/s LMN can respond to tenders as well as deposit ₹ 50,000 as earnest deposit.

Conclusion: M/S PQR have not committed any professional misconduct.

Question 173.
Comment on the following with reference to the Chartered Accountants’ Act, 1949 and schedules thereto: A Partner of a firm of Chartered Accountants during a T.V. interview handed over a bio-data of his firm to the Chairperson. Such bio-data detailed the standing with International firm and also his achievements and recognition as an expert in the field of Taxation. The bio-data was read out during the said interview.
Answer:
Prohibition on solicitation of work

Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949 prohibits solicitation of work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means, would constitute professional misconduct.

In the present case, partner of a firm handed over bio-data of firm which was read out during interview. The bio-data contains personal recognition and achievements of the partner as an expert in the field of taxation. Such an act would lead to the promotion of his name and publicity thereof to the firm.

Conclusion: Partner is guilty of professional misconduct under Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949.

Question 174.
Comment on the following with reference to CA Act, 1949 and schedules thereto: X was appointed statutory auditor in ABC Ltd. On inquiry X found that his wife had acquired before a few years, 100 shares in the said company. She was holding the shares with the name of X as joint holder. Can X accept the appointment?
Answer:
Certification of Financial Statement of a related entity:

Sec. 141(3)(d) of the Companies Act, 2013, disqualifies a person to be appointed as auditor of the company in which he or his partner or relative is holding shares of the same company. However relative may hold shares of face value upto ₹ 1,00,000.

In the given case Mr. X is joint shareholder in ABC Ltd and disqualify to be appointed as auditor.
Conclusion: X should decline the acceptance, as being disqualified u/s 141(3).

Question 175.
Is there a professional misconduct in the following case in the context to CA Act and its regulations: Mr. X, a CA in practice and a lawyer agree to pay to each other 12% of the gross fees received by them from clients referred to each other. It is agreed that both of them will maintain a record in respect of such clients and the account will be settled at the end of year. However, at the end of first year, CA refuses to pay the referral fees as per the agreement and tells the lawyer that the agreement stands terminated.
Answer:
Sharing Fees with Advocate or of Advocate:

As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in’practice is deemed to be guilty of professional misconduct if lie pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualification as may be prescribed, for the purpose of rendering such professional services to time in or outside India.

For the purpose of Clauses 2 & 3, Regulation 53A of CA Regulations, 1988 allows sharing of profit with an advocate.

Conclusion: Mr. X will not be deemed to be guilty of professional misconduct as clauses 2 & 3 permits a CA in practice for profit sharing with members of any other professional bodies or with such other persons having prescribed qualifications and members of bar council of India and persons having Bachelor of Law are prescribed.

Question 176.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. Rahul, a locally based CA, accepted an audit assignment at a fee lower than that charged by the previous auditor, who was stationed in another town and had to spend a lot of money on travel for which he did not charge separately.
Answer:
Undercutting of Fees:

Council of ICAI has prescribed minimum audit fees for the practicing members. However, prescribed minimum audit fee is recommendatory, not mandatory in nature.
Fees in any professional assignment depend upon the mutual agreement and understanding between the member and the client.
In considering whether variation in fees charged would constitute undercutting, the quantum of work; incidental and out of pocket expenses and other terms of appointment should be considered.
In this case, Mr. Rahul is a locally based Chartered Accountant, accepted an audit assignment at a fee lower than that charged by the previous auditor, who was outstation based Chartered Accountant and had to spend a lot of money on travel which was included in his audit fee and was not charged by him separately.
It appears that the motive of Mr. Rahul was not to get the work from previous auditor by accepting the audit assignment on lower fee i.e. undercutting of fee since the previous auditor was stationed in another town and therefore, had to incur higher cost on account of conveyance, and the previously the fee was decided on a composite basis inclusive of travelling expenses of the auditor.

Conclusion: No misconduct arises on part of Mr. Rahul towards undercutting of fees as it appears from the fact of the case that fees charged by previous auditor is inclusive of travel expenses.

Question 177.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Alora Pvt. Ltd. approached CA. Neha, a practicing Chartered Accountant since 1998, for recovery of debts amounting ₹ 20 crores. CA Neha accepted the work and requested to charge fees @ 1.5% of the debt recovered. Later on, she raised a bill for debts recovered and charged ₹ 27 lacs for recovering 90% of the debts
Answer:
Charging Fees on Percentage Basis:

Clause 10 of Part I of First schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to charge, accept or offer to accept in respect of any professional work, fees which are based on a percentage of profits or which are contingent upon the findings or result of work.
However, this restriction is not applicable where such payment is permitted by the regulations made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain professional services from the operation of clause 10.
As per Regulation 192, in the case of debt recovery services, fees may be charged on a percentage of amount of debt recovered.

Conclusion: Charging fees on a percentage of debt recovered in case of debt recovery services is included in the exceptions stated in regulation 192, Hence CA. Neha is not guilty of any professional misconduct.

Question 178.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: CA. Aman, a practicing Chartered Accountant, took over as the executive chairman of Signora IT Ltd. on 01.04.2020. However, realizing about obtaining prior approval from the Council of the ICAI for engaging into other business, he applied to Council for permission within 10 days
Answer:
Engagements in other occupations:

As per Clause 11 of Part I of First Schedule of the Chartered Accountants Act, 1949, a Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he engages in any business or occupation other than the profession of Chartered Accountant unless permitted by the Council so to engage.
In the instant case, CA. Aman took over as the executive chairman of Signora IT Ltd. on 01.04.2020 and applied for permission thereafter though within 10 days.
On the basis of these facts, he was engaged in other occupation between the period 01.04.2020 and 10.04.2020, without the permission of the Council.

Conclusion: CA. Aman will be deemed to be guilty of Professional Misconduct under Clause 11 of Part I of First Schedule as he accepts the position of chairman of a company for which prior permission from Council is required.

Question 179.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: INFRO Foundation decided to review its historical financial statements. For this, it proposed a tender exclusively for Chartered Accountants to obtain assurance, primarily by performing inquiry, and analytical procedures about whether the financial statements as a whole are free from material misstatement. However, the foundation did not prescribe the minimum fee in the tender document. M/s Soni & Sons, a Chartered Accountant firm, responded to such tender
Answer:
Responding to tenders in exclusive area:

Clause 6 of Part I of First Schedule allows solicitation of client or professional work through responding to tenders.
Further Guidelines are being issued by Council allowing therein a member to respond to tender where minimum fees of the assignment is prescribed in the tender document itself or where the areas are open to other professionals along with Chartered Accountants.
In the present case, M/s Soni & Sons responded to a tender of review of its historical financial statements which is exclusively reserved for Chartered Accountants even though no minimum fee was prescribed in the tender document.

Conclusion: Firm will be deemed to be guilty of Professional Misconduct under Clause 6 of Part I of FirstSchedule as responding to tender in exclusive area in which minimum fees is not prescribed is not permitted.

Question 180.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: CA. Raagi, a practicing Chartered Accountant, certifies a financial forecast of Capex Ltd. one of her clients, which was forwarded to the company’s bank based on which the bank sanctioned a loan amounting ₹ 2.5 crore to the Company. CA. Raagi, however, mentioned in the report that her responsibility is to examine the evidence supporting the assumptions and other information in the Prospective financial information, her responsibility does not include verification of the accuracy of the projections, therefore, she does not vouch for the accuracy of the same.
Answer:
Certification of Financial Forecast:

As per Clause 3 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be guilty of professional misconduct if he permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

In the given case, CA Raagi is being engaged by the client to certify a financial forecast. CA Raagi is required to ensure that the requirements of SAE 3400 have been fulfilled. CA. Raagi, mentioned in the report that her responsibility is to examine the evidence supporting the assumptions and other information in the Prospective financial information, her responsibility does not include verification of the accuracy of the projections, therefore, she does not vouch for the accuracy of the same.

Conclusion: No misconduct arises on part of CA. Raagi for certifying financial forecast under clause 3 of Part I of Second Schedule as she certifies the forecast in compliance of SAE 3400.

Question 181.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. Raj, a renowned practicing CA, decided to tie his knot with Ms. Anjali. While giving order for marriage invitation cards, Mr. Raj instructed to add his designation “Chartered Accountant” with his name. Later on, the cards were distributed to all his relatives, close friends and clients.
Answer:
Using designation “Chartered Accountant” on marriage invitation cards:

In the present case, Mr. Raj is adding the designation Chartered Accountant with his name on marriage invitation cards and these cards were distributed to his relatives, close friends and clients.
Conclusion: No misconduct arises on part of Mr. Raj.

Question 182.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto: WCP & Co LLP are the internal auditors of DEF Ltd. WCP & Co LLP also agreed to undertake Goods and Services Tax (GST) Audit of DEF Ltd simultaneously. [RTP-May 19]
Answer:
Accepting GST Audit by Internal Auditors:

The Council of the ICAI, while considering the issue whether an internal auditor of an entity can also undertake Tax Audit of the same entity as required under the Income Tax Act, 1961, decided, that internal auditor, whether working as employee or external to the organisation, cannot be appointed as his Tax auditor (under the Income Tax Act, 1961).

Upon consideration, the Council decided that based on the conflict in roles as statutory and internal auditor simultaneously, the bar on internal auditor of an entity to accept tax audit (under Income Tax Act, 1961) will also be applicable to GST Audit (under the CGST Act, 2017).

In the instant case, WCP & Co LLP are the internal auditors of DEF Ltd. and it also agreed to undertake Goods and Services Tax (GST) Audit of DEF Ltd simultaneously.

Conclusion: WCP & Co LLP will be held guilty for misconduct as Internal Auditor of an entity cannot undertake GST Audit of the same entity.

Professional Ethics – CA Final Audit Question Bank

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