Rights and Duties of the Auditor – Introduction
Section 143(1) which specifies rights and duties of auditors and auditing standards is applicable to all the companies alike, whether public or private. Sub-section (1) of section 128 provides that the books of account should give a true and fair view of the state of affairs of the company or its branch, as the case may be, and explain its transactions. The books should be kept on accrual basis and according to double entry system of accounting. Section 128 of the Act, requires that every balance sheet of a company should give a true and fair view of the state of affairs of the company as at the end of the financial year and every statement of profit and loss should give a true and fair view of the profit or loss of the company for the financial year and they should comply with the accounting standards. Therefore, to find out whether books of accounts as required by law have been kept by the company, whether rights of the Act in this regard have been complied with and whether the said financial statements are in agreement with the books of accounts and returns, rights and whether they represent a true and fair view, an auditor is appointed, who is required to, report on these aspects. The auditor owes a duty to shareholders of the company to ensure that the rights of the shareholders are safeguarded. The examination by an independent agency such as auditor is practically the only safeguard which shareholders have against the enterprise being carried on in a business like way or their money being misapplied or misappropriated without their knowing anything about it. The purpose of a statutory audit is:” to provide a mechanism to enable those having a proprietary interest in the company or being concerned with its management or control to have access to accurate financial information about the company. Provided that those persons have that information, the statutory purpose is exhausted. What those persons do with the information is a matter for them and falls outside the scope of the statutory purpose. In the present case the company based its case not upon any lack of information on the part of the director, who was the mind and will of the company, caused by negligent audit but rather upon the opportunity that the possession of the auditor’s certificate is said to have given for the company to continue to carry on business and to borrow money from third parties. Such matters do not fall within the scope of the duty of the statutory auditor”. The definition of an audit was thus stated in Australian case: “An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the auditor to verify the balance-sheet. The main objects of any audit are:
- To certify to the correctness of the financial position as shown in the balance-sheet, and the accompanying revenue statements.
- The detection of errors
- The detection of fraud. The detection of fraud is generally regarded as being of primary importance.”
In a decision of the Supreme Court the position of the auditor under the Companies Act is thus explained: “The audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the directors with a view to inform the shareholders of the true financial position of the company. The directors occupy a fiduciary position in relation to the shareholders and in auditing the accounting maintained by the directors, the auditor acts in the interests of the shareholders who are in the position of beneficiaries”. The duties cast upon the auditor are accompanied by certain powers to enable him to discharge these duties effectively. These duties and rights cannot be limited or abridged in any way. Thus, a resolution limiting the powers of the auditor or a provision to this effect in the Articles of Association will be void. Any regulations which preclude the auditors from availing themselves of all the information to which they are entitled, are inconsistent with the Act.
Audit and auditor
The shareholders of a company have mainly to depend upon the good faith and efficiency of the auditor appointed to check the accounts and certify the balance-sheet of the company, the auditors do have a chance to make a detailed check of the accounts, call for information and satisfy themselves that the accounts have been properly maintained and the balance-sheet fairly drawn up. The auditors are, therefore, under duly to safeguard the rights of the shareholders, the activities of the directors in the purported exercise of their powers in dealing with assets of the company. It is of the highest importance that auditors of companies, whose shareholders are dependent chiefly on the auditors’ skill and vigilance, should perform their duties with scrupulous care. They are bound to make a reasonable examination of the accounts to see that the dealings are not in any way illegal or improper, and it is their duty to uncover such activities. They must, therefore, assert independence and not bring loss to the members or the public by their complicity with the directors or persons in control of the company’s affairs in illegal or irregular transactions. It is, therefore, necessary that in addition to prescribing specifically the duties which have been suggested above, the Council of the Institute of Chartered Accountants should be called upon to formulate a code in regard to the audit of the accounts of public companies with special reference to safeguarding the interest of members of the public who have put their faith in the Board of Directors and contributed to the share capital.
Position of Auditor
An auditor has a fiduciary relationship vis-à-vis the shareholders as a body. However, he is not obliged to respond to letters from individual shareholders or disclose any information to individual shareholders. Therefore, if an individual shareholder has any query or questions regarding the accounts, he should address it to the company and not to the auditor. Auditor is not an officer of the company. Before the commencement of the Amendment Act of 2000, an auditor was an officer of the company and its shareholders, as such he is there having certain duties prescribed by the Act.
Auditor is not an advisor
An auditor is not concerned with the rights of the company. It is no part of an auditor’s duty to give advice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and the state the true financial position of the company at the time of the audit”.
Auditor is not an insurer
An auditor of a company is not an insurer and does not guarantee that the books of the company show the true position of its affairs or that its balance-sheet is accurate according to the books. But it is duty to ascertain and certify to the shareholders the true financial position of the company at the time of the audit.
Auditors as an agent
The extent to which an auditor can be regarded as an agent of the company or of the shareholders who appoint him was considered by the House of Lords in Spackman versus Evans where it was held that the auditors may well be regarded as agents of the members appointed to carry out certain duties as laid down by the Act and by a particular company’s articles. The House of Lords added that this status would be confined only to the purposes of audit and would not extend to impute to the shareholders a constructive notice of the facts coming to the knowledge of the auditors; nor they would be regarded as agents for acknowledging a debt on behalf of the company, nor their signature on the balance sheet or the statutory report will have the effect. When an auditor is in possession of the company’s books of account, etc. for audit purposes, then in reference to those books he would be an agent of the company for these purposes of section 217 for producing them to an investigator of the company’s affairs.
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