Worked Solution
✓ VerifiedAnswering 8 out of 10 sub-parts:
(i) INCORRECT. A relative of a partner holding securities in the company disqualifies the audit firm from appointment. Section 141(3) of the Companies Act 2013 provides that a person shall not be eligible for appointment as an auditor if they or their relatives hold any securities in the company. The fact that the relative Mr. C holds securities of ₹2,00,000 in XYZ Ltd. disqualifies the firm AB & Co. from being appointed as its auditor.
(ii) INCORRECT. Working papers are the property of the auditor, not the client. Although they contain information about the client's business, they are prepared and owned by the auditor in exercise of their professional work. Per SA 230 (Audit Documentation), the auditor must retain working papers for statutory periods. The client has no ownership rights over them; they may request information but cannot claim ownership of the documentation.
(iii) INCORRECT (the board's refusal is improper). The board of directors cannot refuse to show minute books to auditors. Section 143(1) of the Companies Act 2013 grants auditors the statutory right to access all books, records, and documents of the company at all times. Minute books are essential for audit procedures. Refusing access violates the auditor's legal rights and is an offense under the Act.
(v) INCORRECT. Auditor rotation requirements apply to the company. Section 139 of the Companies Act 2013 mandates auditor rotation for companies having paid-up share capital of ₹5 crores or more at any time during a financial year. Company A has paid-up capital of ₹15 crores, which exceeds the threshold. Being a private limited company does not exempt it from rotation requirements—the exemption applies based on size criteria, not company type.
(vi) CORRECT. The auditor must study the Memorandum and Articles of Association to verify the validity of their appointment. The M&A contain the governance framework, auditor qualification requirements, appointment procedures, and powers. Understanding these is essential to confirm that the appointment is valid and that the auditor meets the company's specific requirements. This is a fundamental audit procedure per SA 300.
(vii) INCORRECT. Teeming and lading (or lapping) is a fraud technique involving misappropriation of cash receipts, not inflation of cash payments. It works by crediting one customer's account with receipts from another customer to conceal the misappropriation of the first receipt. It conceals cash theft through rotation of receipts, rather than inflating payment amounts.
(viii) INCORRECT. The Managing Director cannot appoint the first auditor unilaterally. Section 139(6) of the Companies Act 2013 provides that the first auditor of a company shall be appointed by the Board of Directors within 30 days of incorporation. While the MD may be a board member, the appointment must be a board decision, not the MD's individual act. This ensures collective governance and accountability.
(ix) INCORRECT. Any holding of securities, regardless of amount, disqualifies a person from being an auditor under Section 141(3) of the Companies Act 2013. The ₹950 face value is immaterial; even minimal holdings are disqualifying. The law is absolute—no securities holdings are permitted for an auditor in the company being audited, to preserve independence and avoid conflicts of interest.
(x) INCORRECT. Only members of the Institute of Chartered Accountants of India (ICAI) are qualified to be auditors of Indian companies. Section 141(3) of the Companies Act 2013 specifically restricts auditor appointments to Indian chartered accountants. Membership in ICAEW (Institute of Chartered Accountants of England and Wales) does not confer eligibility for Indian audit appointments unless the person is also an ICAI member.
Write it like this
1The skeleton
- Lead with CORRECT / INCORRECT in bold, on its own line — examiners mark the verdict first; if they can't spot it instantly, you've already lost the half-mark before they read your reason.
- Drop the section number in sentence one of your reason — write 'Section 141(3) of the Companies Act, 2013 provides…' not somewhere in the middle; scanners reward front-loaded statutory references.
- State the rule in one crisp sentence, then apply it to the facts given — two-sentence structure (rule → application) is exactly what ICAI's suggested answers do; never merge them into a rambling paragraph.
- End with a one-line conclusion that echoes the verdict — something like 'Hence, the statement is incorrect' signals closure and tells the examiner your answer is complete, not cut off.
- Pick your 8 wisely in the first 60 seconds — attempt only the ones where you can name a section or SA; vague answers without a statutory peg score 0 even if the logic is right.
2Examiner-rewarded phrases
3Common trap
Heads up — the biggest killer here is writing a correct reason but citing the wrong section, like mixing up Section 139 (rotation/appointment) with Section 141 (disqualifications); examiners dock marks even when your logic is spot-on because the statutory peg is wrong. Also, don't waste time on sub-parts where you only half-remember the rule — an incomplete reason with no section cited scores zero and burns time you need elsewhere.