As per the requirements of section 226(3) and 226(4) a person is disqualified from being appointed as a statutory auditor if he holds-

 Options:

a) Equity shares or debentures of the company b) Equity shares carrying voting of the company c) Shares carrying voting rights of the company d) Security carrying voting rights of the company

The Correct Answer Is:

d) Security carrying voting rights of the company

Correct Answer Explanation: d) Security carrying voting rights of the company

Section 226(3) and 226(4) of the Companies Act, which govern the eligibility criteria for the appointment of a statutory auditor, play a crucial role in ensuring the independence and impartiality of auditors.

The correct option among the provided choices is (d) Security carrying voting rights of the company. This means that a person is disqualified from being appointed as a statutory auditor if they hold securities that come with voting rights in the company.

The rationale behind disqualifying individuals holding securities carrying voting rights is rooted in the need for auditors to maintain objectivity and independence. Holding such securities could potentially create a conflict of interest, as individuals with voting rights may be influenced by their financial stake in the company’s decisions.

By prohibiting auditors from holding such securities, the legislation aims to safeguard the integrity of the audit process and ensure that auditors can provide an unbiased assessment of the company’s financial statements.

Now, let’s explore why the other options are not correct:

a) Equity shares or debentures of the company:

This option refers to ownership of equity shares or debentures without specifying voting rights. Owning equity shares or debentures signifies a financial interest in the company, but without the aspect of voting rights, it doesn’t directly influence the ability of an auditor to maintain independence or objectivity.

Holding these securities might reflect an investment in the company, but it doesn’t necessarily create a conflict of interest that could compromise the auditor’s impartiality during the audit process.

b) Equity shares carrying voting of the company:

Unlike option (a), this choice specifies ownership of equity shares that carry voting rights. While owning shares with voting rights might potentially create a conflict of interest, the disqualification criteria outlined in sections 226(3) and 226(4) encompass a broader range of financial instruments beyond just equity shares.

This option’s limitation to only “equity shares carrying voting rights” does not capture the entirety of securities that could impact an auditor’s independence, making it less comprehensive than the correct answer.

c) Shares carrying voting rights of the company:

Option (c) mirrors the concept in option (b) but uses slightly different wording. However, the subtlety in wording does not significantly alter the meaning or the scope of disqualification criteria outlined in the Companies Act.

Again, the term “shares carrying voting rights” specifically refers to shares but does not cover other types of securities that could potentially influence an auditor’s impartiality. This option is not as comprehensive as the correct answer, which includes a broader category of securities carrying voting rights.

In essence, the disqualification criteria for statutory auditors laid out in sections 226(3) and 226(4) are designed to prevent conflicts of interest that may arise due to financial stakes accompanied by voting rights.

The specificity of the correct answer, option (d) – “security carrying voting rights of the company,” encapsulates a wider range of financial instruments beyond just equity shares and encompasses any form of security that grants voting rights, ensuring a more comprehensive safeguard against potential conflicts of interest for auditors.

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