FUNDAMENTALS OF AUDITING ACC 311 Lec 7
Lesson 07
RIGHTS, DUTIES AND
LIABILITIES OF AUDITOR
LIABILITIES OF AUDITOR
Powers/Rights of an
Auditor (255)
Auditor (255)
i) Right of access to
books of account and vouchers 255(1).
books of account and vouchers 255(1).
ii) Right to receive
information and explanations.
information and explanations.
iii) Right of access to
books and papers of branch 255(2).
books and papers of branch 255(2).
iv) Right to receive
notices of general meetings and to attend those meetings. (255(6)).
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)).
representation where another person is being appointed as auditor. (253(3)).
Duties of an
Auditor
Auditor
a) Duties of auditor
under section. (255(3)) are:
under section. (255(3)) are:
i) To give a report to
the members on the accounts, books of account, balance sheet and
the members on the accounts, books of account, balance sheet and
profit and loss account
examined by him. (255(3)).
examined by him. (255(3)).
ii) Where any matter
reported upon is answered in the negative or with a qualification the
reported upon is answered in the negative or with a qualification the
report shall include
reasons for such qualification with factual position.
reasons for such qualification with factual position.
iii) To include in the
report of the company such matters as directed by the Federal
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
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
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).
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).
and payments account in the statutory report (Section 157).
d) To make report on
declaration of solvency in case of voluntary winding up.
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
reasonable care and skill in carrying out his duties and make such inquiries
as
considered
necessary.
necessary.
Note: Students should
know the contents of report from examination point of view. Please see section
255(3) of the
know the contents of report from examination point of view. Please see section
255(3) of the
Reading and Inspection
of Auditors’ Report (Section-256)
of Auditors’ Report (Section-256)
Auditor’s report shall
be read in general meeting and shall be open to inspection by the members.
be read in general meeting and shall be open to inspection by the members.
Signature & Date On
Auditors’ Report (Section-257).
Auditors’ Report (Section-257).
(a) The person appointed
as auditor shall sign the auditors’ report or other documents required under
as auditor shall sign the auditors’ report or other documents required under
the law.
(b) The report should
indicate the date and place.
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
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
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:
auditors of a company can be studied under following heads:
a)
Civil Liabilities.
Civil liabilities mean
the disputes over losses caused to one party by acts of another. The civil
liabilities of an
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
Misfeasance
i) Liability for Negligence
(under law of agency)
(under law of agency)
Auditor being agent of
the Shareholders is required to carry out his duties with reasonable care and
skill. If
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.
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.
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
is guilty of negligence. Auditor accepted the schedule of bad debts furnished
by the
client, though it was
apparent that debts were not recoverable.
apparent that debts were not recoverable.
19
2) The London Oil
Storage Co. Ltd. Vs Sear Hasluck & Co.
Storage Co. Ltd. Vs Sear Hasluck & Co.
In this case, auditors
were held liable for negligence. Auditors failed to verify the physical
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
hand. Cash balance as per books did not agree with the physical
balance, the difference
was misappropriated by the cashier.
was misappropriated by the cashier.
3) Irish Woolen
Co. Ltd. Vs Tyson and Others.
Co. Ltd. Vs Tyson and Others.
In this case auditors
were held liable for negligence. Profits were overstated by not
were held liable for negligence. Profits were overstated by not
recording purchase
invoices. He was held liable for having failed to exercise reasonable
invoices. He was held liable for having failed to exercise reasonable
care and skill.
4) Kingston Cotton
Mills Co. Ltd.
Mills Co. Ltd.
In this case auditors
were not held liable for negligence. It was held that it is not the duty
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
stock, if they accept certificate in the absence of any suspicion, he has
carried out reasonable
care and skill.
care and skill.
5) In Mckesson V
Robbins (American case).
Robbins (American case).
It was held that
it was duty of auditors to test check the physical stock.
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
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,
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
Inventory Counting” and SAP – 3 “Verification of Inventories”, the position of
auditors as held in
Kingston Cotton Mills Co. Ltd. is no longer valid.
Kingston Cotton Mills Co. Ltd. is no longer valid.
ii) Liability for
Misfeasance
Misfeasance
The term misfeasance
means breach of duty. If auditor does something wrong in the performance of his
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.
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
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.
duties properly and the company suffers loss he is liable for misfeasance.
Major Case Laws
1) London and General
Bank Ltd.
Bank Ltd.
In this case auditors
were held liable for misfeasance. The auditors failed to report that Balance
Sheet was
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
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.
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
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
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.
fine which may extend to two thousand rupees.
b)
Criminal
Liabilities.
Liabilities.
Section
260
If auditor fails to
comply with the requirements of Sections 157, 255 or 257, he shall be
punishable with fine
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
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
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
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.
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
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.
exceeding Rs. 20,000.
