The auditor is responsible for the detection and prevention of errors and frauds, although this responsibility is limited to exercising reasonable skill and care. He understands his duty to identify errors and frauds and to recommend measures that can help prevent them in the future. However, in practice, it is not always easy to detect frauds because such acts are often committed by officers who are assumed to be honest and trustworthy.
An auditor must perform his work with due diligence by carefully completing vouching, verification, and routine checking. He should thoroughly examine books of accounts and other financial matters so that he can form a sound opinion regarding the accuracy of financial statements.
If the auditor has exercised reasonable skill and care in performing his duties, his responsibility is considered fulfilled, even if certain errors or frauds remain undetected. In such circumstances, he is generally free from liability, provided that he has acted honestly and professionally.
Duties of an Auditor
The duties of an auditor can be broadly divided into three main categories. These include duties under statutory provisions, duties defined through court decisions, and professional duties expected from an auditor.
Duties under Companies Ordinance 1984
1. Certify Statutory Report
The auditor is required to certify the statutory report at the time of company formation. This report includes details regarding shares allotted, cash received from shareholders, and the receipts and payments made by the company.
2. Report for Prospectus
The auditor prepares a report for inclusion in the prospectus when the company issues shares or financial instruments. This is a legal requirement and ensures that potential investors receive reliable financial information.
3. Report on Annual Accounts
The auditor prepares a report on the annual audited accounts of the company. This includes examining the trading account, profit and loss account, balance sheet, and cash flow statement, and expressing an opinion on whether they present a true and fair view.
4. Certify Solvency
When a company decides to wind up, the auditor may be required to certify its solvency. This certificate assures creditors that the company is capable of paying its liabilities in full.
5. Assist Public Prosecutor
The auditor has a legal duty to assist the public prosecutor in cases where directors are prosecuted. He must provide necessary financial information and evidence when required.
6. Help Inspectors
When government inspectors are appointed to investigate company affairs, the auditor must cooperate and provide accurate and complete information relevant to the investigation.
7. Sign Audit Report
The auditor must sign the audit report after completing the audit according to established standards. The report becomes valid only after it is signed and is then presented at the annual general meeting.
Duties under Court Cases
1. Examine Articles of Association
The auditor must examine the articles of association to ensure that accounts comply with the company’s rules. Failure to do so may result in liability for negligence, as established in the Leeds Estate Building case.
2. Duty to Outsiders
Generally, the auditor’s duty is owed to shareholders, not to outsiders. However, in certain situations involving fraud or negligence, third parties may suffer losses, which can create indirect responsibility.
3. Accuracy of Accounts
The auditor must ensure that the accounts are accurate and that financial statements present a true financial position. This principle was emphasized in the London and General Bank case.
4. Work without Initial Suspicion
The auditor should begin his work without suspicion. However, if doubts arise during the audit, he must investigate further to confirm or resolve those doubts, as highlighted in the Kingston Cotton Mills case.
5. Rely on Certificates with Care
The auditor may rely on certificates issued by responsible officers, but he must still apply reasonable care and skill to verify their accuracy to avoid reliance on incorrect information.
6. Verify Assets
The auditor must verify the existence of assets shown in the balance sheet. Failure to verify assets, even items like petty cash, may result in liability.
7. Complete Report
The auditor must prepare a complete report on the affairs of the company. Any attempt to restrict this duty through internal rules is not valid.
8. Exercise Reasonable Care
The auditor must verify transactions carefully and should not approve them without proper examination, even if they are certified by management.
9. Maintain Secrecy
The auditor has a duty to maintain confidentiality regarding business matters of the client and should not disclose information without proper authority.
10. Knowledge of Law
The auditor must have proper knowledge of company law and the articles of association. Ignorance of these documents is not accepted as a valid excuse.
11. Verify Securities
The auditor must verify company securities and ensure they are kept safely. Personal inspection may be necessary when there is doubt about custody.
12. Report on Secret Reserves
If secret reserves are used to manipulate profits, the auditor must report such practices to ensure transparency and fairness.
13. Qualify Audit Report
The auditor must qualify his report if there are errors or non-compliance with legal or contractual requirements.
14. Check Asset Valuation
The auditor must detect overvaluation or undervaluation of assets and liabilities when sufficient evidence is available, even if management provides valuation certificates.
15. Submit Report
The auditor’s duty is to submit his report to the company. It is not his responsibility to ensure that the report is presented at a general meeting.
16. No Obligation to Advise
The auditor is not required to provide advice to directors or members unless specifically agreed in the engagement terms.
Professional Duties of an Auditor
1. Application of Auditing Standards
The auditor must apply auditing standards issued by the relevant professional bodies. These standards ensure consistency, quality, and reliability in audit work.
2. Follow Ethical Principles
The auditor must follow ethical guidelines set by professional institutions. This includes maintaining integrity, objectivity, confidentiality, and professional behavior at all times.
3. Perform Duties under Agreement
The auditor must perform all duties in accordance with the terms of the engagement letter, in addition to statutory requirements. While additional duties may be agreed upon, legal responsibilities cannot be reduced.
Conclusion
The duties of an auditor are extensive and involve legal, professional, and ethical responsibilities. He must exercise reasonable care, maintain independence, and ensure that financial statements present a true and fair view of the business.
Although an auditor cannot guarantee the complete detection of all errors and frauds, he must perform his duties diligently and responsibly. By doing so, he plays a vital role in promoting transparency, accountability, and trust in financial reporting.
See Also: Qualities of an Auditor
