Transcript
RIGHTS, DUTIES AND LIABILITIES OF AUDITOR
Powers/Rights of an Auditor (255)
Right of access to books of account and vouchers 255(1).
Right to receive information and explanations.
Right of access to books and papers of branch 255(2).
Right to receive notices of general meetings and to attend those meetings. (255(6)).
Right to make representation where another person is being appointed as auditor. (253(3)).
Duties of an Auditor
Duties of auditor under section. (255(3)) are:
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)).
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.
To include in the report of the company such matters as directed by the Federal Government.
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.
To make report for inclusion in prospectus. (Section 53 read with Part I of Schedule II).
To certify receipts and payments account in the statutory report (Section 157).
To make report on declaration of solvency in case of voluntary winding up.
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 theCompanies 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).
The person appointed as auditor shall sign the auditors' report or other documents required under the law.
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.
Civil liabilities mean the disputes over losses caused to one party by acts of another. The civil liabilities of an auditor can be for:-
Negligence
Misfeasance
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
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.
Fundamentals of Auditing
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.
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.
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.
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.
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
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 shillings.
b) Criminal Liabilities.
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.
LIABILITIES OF AN AUDITOR
Auditors’ Liabilities
Civil Liabilities (arising from law suits/Liability for negligence)
Under law of contract (initiated by the audit client)
Under law of tort (initiated by other users of FS)
Criminal Liabilities
– Under sections 157, 255, & 257
– Against charges of forgery (evidence created / documents forged etc.)
– Against false statement (regarding opinion in report)
Civil Liabilities
Civil liabilities arise in the situation when there is absence of reasonable care and skill that can be expected of a person in a set of circumstances.
When negligence of an auditor is being evaluated, it is in terms of what other competent auditors would have done in the same situation
-4445-9525
Duty of care under contract Law
The company has a contract with the auditor and hence can sue the auditor for breach of contract if the auditor is negligent in carrying out the terms of the contract. Note that only the company can sue the auditor in contract as other people, such as banks, creditors and shareholders are not in a contractual relationship with the company.
When carrying out their duties the auditors must exercise reasonable care and skill. This is required by the accountant’s rule of professional conduct.
Members should carry out their professional work with due skill, care diligence and expedition and with proper regard for the technical and professional standards expected of them as members.
The degree of skill and care expected of an auditor in a particular situation depends on the circumstances. There is no general standard of skill and care; the auditor is respected to react to the situation and circumstances he is facing
Breach of contract
A contract breaches when failure of one or both parties in a contract to fulfill the requirements of the contract arises.
An example is the failure of a CA firm to deliver a tax return on the agreed upon date.
Parties who have a relationship that is established by a contract are said to have privity of contract. Typically, CA firms and clients sign an engagement letter to formalize their agreement about the services to be provided, fee, and timing.
There can be privity of contract without a written agreement, but an engagement letter defines the contract more clearly
Tort action of negligence
Failure of auditors to meet their obligations, thereby causing injury to another party (other than audit client) A typical tort action against a CA firm is a bank’s claim that an auditor had a duty to uncover material misstatements in financial statements that had been relied on in making a loan.
-44451905
Jeb Fasteners v Marks Bloom (1980)
The plaintiff acquired the share capital of the company. The audited accounts, due to the negligence of the auditors, did not show a true and fair view of the state of affairs of the company. It was accepted that at the time of the audit the defendant auditors did know of the plaintiffs but did not know that they were contemplating a takeover bid.
HELD: whilst recognizing that the auditors owed a duty of care in this situation. It was decided that the auditors were not liable because the plaintiff had not suffered any loss. It was proved that the plaintiffs would have bought the share capital of the company at the agreed price whatever the accounts had said. Therefore, whether or not a duty of care existed was not directly relevant to the decision.
How to minimize the liabilities
Not being negligent
Following the ISAs
Agreeing the engagement letter
Defining in report the work undertaken
Defining the purpose for the report
By limiting liabilities to third parties
By defining the scope of professional competence
