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Fundamentals of Auditing

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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
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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:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT