 |
Appointment, Duties, Rights and Liabilities of Auditor |
| << LEGAL CONSIDERATION REGARDING AUDITING |
| LIABILITIES OF AN AUDITOR >> |
Fundamentals
of Auditing ACC 311
VU
Lesson
07
RIGHTS,
DUTIES AND LIABILITIES OF
AUDITOR
Powers/Rights
of an Auditor (255)
i)
Right
of access to books of account and
vouchers 255(1).
ii)
Right
to receive information and
explanations.
iii)
Right
of access to books and papers of
branch 255(2).
iv)
Right
to receive notices of general
meetings and to attend those
meetings. (255(6)).
v)
Right
to make representation where another
person is being appointed as auditor.
(253(3)).
Duties of an
Auditor
a) Duties of
auditor under section. (255(3))
are:
i)
To give a
report to the members on the accounts,
books of account, balance sheet
and
profit
and loss account examined by
him. (255(3)).
ii)
Where
any matter reported upon is
answered in the negative or with a
qualification the
report
shall include reasons for
such qualification with
factual position.
iii)
To include in the
report of the company such
matters as directed by the
Federal
Government.
iv)
To attend
those general meetings of a listed
company, either himself or through
authorized
person,
in which the balance sheet,
profit and loss account
and the auditors' report are
to
be
considered.
b) To
make report for inclusion in
prospectus. (Section 53 read
with Part I of Schedule
II).
c) To
certify receipts and
payments account in the statutory report
(Section 157).
d) To
make report on declaration of solvency in
case of voluntary winding
up.
e) To
exercise reasonable care and
skill in carrying out his
duties and make such
inquiries as
considered
necessary.
Note:
Students
should know the contents of
report from examination
point of view. Please see section
255(3) of the
Companies
Ordinance, 1984
Reading and
Inspection of Auditors' Report
(Section-256)
Auditor's
report shall be read in
general meeting and shall be
open to inspection by the members.
Signature
& Date On Auditors' Report
(Section-257).
(a)
The person appointed as
auditor shall sign the auditors'
report or other documents required
under
the
law.
(b)
The report should indicate the date
and place.
Audit
of Cost Accounts
Where
a company is required to maintain any
records relating to its costs of
production etc., it will
also get
these
accounts audited. The
auditor, in this case, shall be a
Chartered Accountant or a Cost
and
Management
Accountant.
Auditors'
Liabilities
The
liabilities of auditors of a company can
be studied under following
heads:
Civil
Liabilities.
a)
Civil
liabilities mean the disputes
over losses caused to one
party by acts of another. The civil
liabilities of an
auditor
can be for:-
i)
Negligence
ii)
Misfeasance
i)
Liability
for Negligence (under law of
agency)
Auditor
being agent of the Shareholders is required to
carry out his duties
with reasonable care and
skill. If
he
fails to do so, he is liable to make
good any loss caused to the
third party.
Major
legal decision
1)
Arthur
E. Green & Company Vs Central
Advance & Discount Corporation
Ltd.
(1920).
It was
held that auditor is guilty of
negligence. Auditor accepted the
schedule of bad debts furnished by
the
client,
though it was apparent that
debts were not
recoverable.
19
Fundamentals
of Auditing ACC 311
VU
2)
The
London Oil Storage Co. Ltd.
Vs Sear Hasluck & Co.
In this
case, auditors were held liable for
negligence. Auditors failed to
verify the physical
existence
of cash in hand. Cash
balance as per books did not
agree with the
physical
balance,
the difference was misappropriated by the
cashier.
3)
Irish
Woolen Co. Ltd. Vs Tyson and
Others.
In this
case auditors were held liable for
negligence. Profits were
overstated by not
recording
purchase invoices. He was
held liable for having failed to
exercise reasonable
care
and skill.
4)
Kingston
Cotton Mills Co. Ltd.
In this
case auditors were not held
liable for negligence. It was
held that it is not the
duty
of auditors to
take stock, if they accept certificate in
the absence of any suspicion, he
has
carried
out reasonable care and
skill.
5)
In
Mckesson V Robbins (American
case).
It was
held that it was duty of auditors to
test check the physical
stock.
Conclusion:
Auditors
should inspect securities, test
check stock wherever it is
practicable and where it is
not he should
state
in his report that he has
accepted a certificate. In the light of
Part-A of Addendum to
ISA-8,
"Attendance
at Physical Inventory Counting"
and SAP - 3 "Verification of
Inventories", the position of
auditors as
held in Kingston Cotton
Mills Co. Ltd. is no longer
valid.
ii)
Liability
for Misfeasance
The
term misfeasance means breach of
duty. If auditor does
something wrong in the performance of
his
duties
resulting in a financial loss to the company, he is
guilty of misfeasance.
For
example auditor's duties are
laid down in section 255 of
the Companies Ordinance, 1984. If
auditor
does
not perform his duties
properly and the company
suffers loss he is liable for
misfeasance.
Major
Case Laws
1)
London
and General Bank
Ltd.
In this
case auditors were held liable for
misfeasance. The auditors failed to
report that Balance Sheet
was
not
properly drawn:-
Large
sums were advanced to the
customers and interest thereon
was accrued, in fact neither advance
nor
accrued
interest was receivable. No
provision for bad debts
was made and the company
paid dividend.
2)
Under
section 260 of the Companies Ordinance,
1984 if the auditors fail to report to
the members
material
misstatement of facts or give untrue
picture to the members, and the default
is willful, auditors
shall
be punishable with fine
which may extend to two
thousand rupees.
Criminal
Liabilities.
b)
Section
260
If
auditor fails to comply with the
requirements of Sections 157,
255 or 257, he shall be
punishable with fine
up to
Rs. 100,000/-. If he knowingly
makes a false report for
profit to himself or to put another
person to a
disadvantage
or loss for a material consideration, he
shall also be punishable
with imprisonment for a
period
of one
year.
417
If
charges of forgery are
brought against an auditor, he
may be liable to imprisonment for a term
which may
be
extended to 2 years or fine up to
Rs. 20,000 or both.
492
If in
any report the auditor makes
a false statement he shall be liable to
imprisonment for a term up to 3
years
and a fine not exceeding
Rs. 20,000.
20
Table of Contents:
- AN INTRODUCTION
- AUDITORS’ REPORT
- Advantages and Disadvantages of Auditing
- OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
- What is Reasonable Assurance
- LEGAL CONSIDERATION REGARDING AUDITING
- Appointment, Duties, Rights and Liabilities of Auditor
- LIABILITIES OF AN AUDITOR
- BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
- Contents of Balance Sheet
- ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
- Business Operations
- Risk Assessment Procedures & Sources of Information
- Measurement and Review of the Entity’s Financial Performance
- Definition & Components of Internal Control
- Auditing ASSIGNMENT
- Benefits of Internal Control to the entity
- Flow Charts and Internal Control Questionnaires
- Construction of an ICQ
- Audit evidence through Audit Procedures
- SUBSTANTIVE PROCEDURES
- Concept of Audit Evidence
- SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
- Control Procedures over Sales and Debtors
- Control Procedures over Purchases and Payables
- TESTING THE PURCHASES SYSTEM
- TESTING THE PAYROLL SYSTEM
- TESTING THE CASH SYSTEM
- Controls over Banking of Receipts
- Control Procedures over Inventory
- TESTING THE NON-CURRENT ASSETS
- VERIFICATION APPROACH OF AUDIT
- VERIFICATION OF ASSETS
- LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
- VERIFICATION OF EQUITY
- VERIFICATION OF BANK BALANCES
- VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
- AUDIT SAMPLING
- STATISTICAL SAMPLING
- CONSIDERING THE WORK OF INTERNAL AUDITING
- AUDIT PLANNING
- PLANNING AN AUDIT OF FINANCIAL STATEMENTS
- Audits of Small Entities
- AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
- MODIFIED AUDITOR’S REPORT