Who out of the following cannot be appointed as a statutory auditor of the company?
|a) Erstwhile director|
b) Internal auditor
c) Relative of a director
d) Only (b) and (c)
The Correct Answer Is:
- b) Internal auditor
The correct answer is “b) Internal auditor.” In the context of statutory auditors for a company, internal auditors are typically not eligible for appointment as statutory auditors. Let’s explore in detail why this answer is correct and why the other options are not suitable for the role of statutory auditors:
b) Internal auditor:
Internal auditors are responsible for conducting internal audits within a company. Their primary function is to assess and evaluate the company’s internal controls, processes, and financial operations to identify areas of improvement and ensure compliance with internal policies and procedures.
Internal auditors are part of the company’s internal management structure, and their independence may be compromised since they report to company management. Statutory auditors, on the other hand, are expected to be independent and provide an external and unbiased opinion on the company’s financial statements.
To maintain the integrity of the audit process, internal auditors are usually not appointed as statutory auditors. The role of statutory auditors is typically performed by external audit firms or individuals who are independent of the company’s management and reporting structure.
Now, let’s discuss why the other options are not correct for the role of statutory auditors:
a) Erstwhile director:
An erstwhile director, which refers to a former director of the company, can be appointed as a statutory auditor, but certain conditions and restrictions may apply. In many jurisdictions, there may be a cooling-off period, during which a former director cannot be appointed as a statutory auditor immediately after leaving the board.
This cooling-off period is designed to maintain the independence and objectivity of the audit process. Once the cooling-off period has elapsed, a former director may become eligible for appointment as a statutory auditor, provided they meet the relevant qualifications and independence requirements.
c) Relative of a director:
The eligibility of a relative of a director to be appointed as a statutory auditor depends on the specific laws and regulations governing the appointment of auditors in a particular jurisdiction. In some cases, regulations may restrict the appointment of relatives of company directors to maintain independence and avoid conflicts of interest.
However, in other cases, such appointments may be permitted as long as the auditor meets the necessary qualifications and does not have a direct financial interest in the company.
The key consideration is to ensure that the appointed auditor remains independent and objective in their assessment of the company’s financial statements. To avoid any potential conflicts of interest, some jurisdictions may prohibit close relatives of directors from being appointed as statutory auditors.
d) Only (b) and (c):
Option (d) suggests that both the internal auditor (option b) and the relative of a director (option c) cannot be appointed as statutory auditors. This is not entirely accurate, as the eligibility of a relative of a director varies by jurisdiction and depends on the specific regulatory framework in place.
As mentioned earlier, some jurisdictions permit the appointment of relatives of directors under certain conditions, while others may impose restrictions to ensure independence. Therefore, the correct answer is not “d” but rather “b” because internal auditors are generally not eligible for appointment as statutory auditors due to their role within the company’s internal management structure.
In summary, the correct answer is “b) Internal auditor” because internal auditors typically do not meet the independence and objectivity requirements necessary for the role of a statutory auditor.
While the eligibility of erstwhile directors and relatives of directors may vary by jurisdiction and is subject to specific regulations, internal auditors’ inherent connection to the company’s management makes them less suitable for the role of a statutory auditor.
Statutory auditors are expected to provide an unbiased and external perspective on the company’s financial statements, and the appointment of internal auditors may compromise this independence.