Duties of a Auditor
by Harish Chandra on 16 July 2011
1) STATUTORY DUTIES
(A) REPORT TO MEMBERS [SEC. 227 (2)] - The auditor is required to make a report to the members of the company on the following matters:
a. Whether in his opinion the Profit and Loss Account shows a `true and fair’ view of the profit or loss.
b. Whether in his opinion the Balance Sheet is properly drawn up so as to show a `true and fair’ view of the state of affairs of the business.
c. Whether he has obtained all the information and explanations, which were necessary for the purpose of audit.
d. Whether proper books of accounts as required by law have been maintained by the Company.
e. Whether the report on the accounts of any branch office audited by a person other than the company’s auditor has been forwarded to him and how he had dealt with the same in preparing the auditor’s report.
f. Whether the company’s Balance sheet and Profit and Loss Account are in agreement with books of accounts and returns.
(B) DUTY AS TO INQUIRY SEC. 227(1-A) - The following are the matters on which auditor has to make an inquiry.
a) Loans and advances: The auditor has to see whether loans and advances made by the company on the basis of security have been properly secured, and whether the terms on which they have been made are not prejudicial to the interests of the company or its members.
b) Transactions represented merely by book entries: He must see that transactions which are not supported by an facts or evidence, though recorded in the books, are not prejudicial to the interest of the company.
c) Sale of investments at less than purchase price: Where the company is not an investment company or a banking company, the auditor is required to see whether it has sold any shares, debentures or other securities at a price, which is lower than their price purchase.
d) Loans and advances shown as deposits: He has to see whether loans and advances made by the company have not been shown as deposits, so as to avoid scrutiny by the members or others.
e) Personal expenses: He should enquire whether any personal expenses have been charged to revenue accounts of the company, so as to improperly utilized the funds of the company for the individual benefit of any person directly or indirectly in control of the affairs of the company.
f) Allotment of shares for each: Where it is stated in the books and papers of the company that any shares have been allotted for cash, the auditor must enquire whether cash has actually been received in respect of such allotment, and if no cash has actually been received, whether the position as stated in the account books and the Balance Sheet is correct and regular.
(C) DUTY TO SIGN REPORT (SEC.229) - It is the duty, as well as right of the auditor to sign the report prepared by him.
(D) DUTY AS TO STATUTORY REPORT [SEC. 165(4)] - After the statutory report has been certified as correct by the required number of directors, the auditor of the company must certify it as correct to the extent it relates to:
a. share allotted by the company;
b. cash received in respect of such shares;
2) DUTIES UNDER PROFESSIONAL ETIQUETTE
Following are some of the duties arising from professional etiquettes:
a. An auditor is not to advertise or canvass, any
body for getting business.
b. An auditor is not to give any commission or share of his remuneration to any person for getting business.
c. Before accepting his appointment in place of any retiring auditor he must communicate to know the reasons why the outgoing auditor was not reappointed and to know his objections if any.
LIABILITIES OF AN AUDITOR
In the case of companies the liabilities of auditors can be Civil liabilities and Criminal liabilities.
THE CIVIL LIABILITIES of a company auditor can be for (i) negligence, (ii) misfeasance.
(1) Liability for negligence – A auditor performs his duties as an agent of the shareholders, so he is expected to safeguard the interests of his shareholders. He must exercise his reasonable care and diligence in the performance of his duties. If he fails to do so and in consequence the principal suffers any loss, he may be liable to compensate loss caused to the company resulting from his negligence.
(2) Liability for Misfeasance – Misfeasance means breach of duty or breach of trust. If the auditor does something wrongfully in the performance of his duties or he does not perform his duties properly resulting in a financial loss to the company, he may be held liable for misfeasance.
CRIMINAL LIABILITIES – The criminal liabilities of a company auditor under different sections of the Act are as follows: -
(1) Section 233 – If the auditor willfully makes a default in making his report to the shareholders according to the provisions of section 227 and 229, he will be punishable with fine, which may extent to Rs. 10,000.
(2) Section 240 – If the auditor fails to help an inspector appointed by the Central Govt. to investigate the affairs of the company, he is punishable with the imprisonment upto six months or with fine up to Rs. 20,000 or with both.
(3) Section 242 – When on the basis of the report of the inspector, Central Government prosecutes any person; the auditor is required to assist the prosecution. And if he fails to do so, he is punishable with imprisonment up to six months or with fine up to Rs. 5,000 or both.
(4) Section 477 – In the course of winding up of a company, the auditor is required to return to the court any documents in his possession. If the auditor fails to appears before the court, he can be arrested.
(5) Section 478 – On the application of the official liquidator the company auditor can be publicly examined in the High Court. The notes shall be taken down and be signed by the auditor. Such signed notes may be used in evidence against him in any civil or criminal proceedings.
(6) Section 539 – If the auditor is found guilty of destruction, alteration, falsification of any books, papers or securities, he can be held personally responsible. And if he makes any fraudulent entry in any register, books of accounts or documents of the company, he will be punishable with imprisonment up to 7 years and also be liable to fine.
(7) Section 545 – If the auditor is found to be guilty of any criminal offence during the course of winding up of the company, the liquidator can prosecute him.
(8) Section 628 – If the auditor makes a false statement in the returns, prospectus or other statements, etc. knowing it to be false or omits any material fact, he will be punishable with imprisonment upto 2 years and also be liable to fine.
Source. ICAI's Study Material