Section 520: Business Relationships

Section 520: Business Relationships · Complied AI

Notes, amendments & references (13)

141(3)(e) of Companies Act, 2013 read with Companies (Audit and Auditors) Rules, 2014, a firm, an individual practitioner, sole proprietor or partner (as the case may be) shall not, whether directly or indirectly, have business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed.

The term "business relationship" shall be construed as any

transaction entered into for a commercial purpose, except -

(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Companies Act, 2013 and the Chartered Accountants Act, 1949 or any other Act and the rules or the regulations made under those Acts;

(ii) commercial transactions which are in the ordinary course of business of the company at arm’s length price - like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses. 520.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship between the audit client or its management and the immediate family of an audit team member.

Common Interests in Closely-Held Entities

R520.5

A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not have a business relationship involving the holding of an interest in a closely- held entity when an audit client or a director or officer of the client, or any group thereof, also holds an interest in that entity, unless:

(a) The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;

(b) The financial interest is immaterial to the investor or group of investors; and

(c) The financial interest does not give the investor, or group of investors, the ability to control the closely-held entity.

Buying Goods or Services

520.6 A1 In addition to the provisions of paragraph R520.4, it is reiterated that the purchase of goods and services from an audit client by a firm, a network firm, an audit team member, or any of that individual’s immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length. However, such transactions might be of such a nature and magnitude that they create a self- interest threat. 520.6 A2 Subject to the provisions of Companies Act, 2013, examples of actions that might eliminate such a self-interest threat include: • Eliminating or reducing the magnitude of the transaction. • Removing the individual from the audit team.