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RIGHTS, DUTIES AND LIABILITIES OF AUDITOR

RIGHTS, DUTIES AND LIABILITIES OF AUDITOR. Lecture/Topic # 3. Powers/Rights of an Auditor. Right of access to books of account and vouchers Right to receive information and explanations. Right of access to books and papers of branch

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RIGHTS, DUTIES AND LIABILITIES OF AUDITOR

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  1. RIGHTS, DUTIES AND LIABILITIES OF AUDITOR Lecture/Topic # 3

  2. Powers/Rights of an Auditor • Right of access to books of account and vouchers • Right to receive information and explanations. • Right of access to books and papers of branch • Right to receive notices of general meetings and to attend those meetings.

  3. Duties of an Auditor • To give a report to the members after the evaluation of the accounts, books of account, balance sheet and profit and loss account. • If negative comments are given then report shall include reasons of actual position. • 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 certify receipts and payments account in the report. • To exercise reasonable care and skill in carrying out his duties while writing the report.

  4. Cont.…. • Reading and Inspection of Auditors' Report: Auditor’s report shall be read in general meeting and shall be open to inspection by the members. • Signature & Date On Auditors' Report : (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.

  5. Auditors’ Liabilities • Civil Liabilities (arising from law suits / Liability for negligence) • Under law of contract (initiated by the audit client) • Under law of unlawful act 2. Criminal Liabilities • Against charges of fake documents (evidence created etc.) • Against false statement (regarding opinion in report)

  6. 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:- i) Negligence ii) 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 • 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.

  7. Cont.…. • 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. • In Mckesson V Robbins (American case). It was held that it was duty of auditors to test check the physical stock.

  8. Civil Liabilities

  9. 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.

  10. Duty of care under contract Law • When carrying out their duties the auditors must exercise reasonable care and skill. • 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.

  11. 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.

  12. Tort action of negligence • Failure of auditors to meet their obligations, thereby causing damage 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.

  13. 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

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