Rights and Powers of Company Auditors

According to Section 227(7) of the Companies Act, a company auditor has the following rights:
1. Right of Access Books of Accounts: As per Section 227(1) of the Companies Act every auditor of the
company has the right to access at all times to the books of accounts and vouchers of the company,
whether kept at the head office of the company or elsewhere. Under section 209(1) (d), a company
auditor has the right to examine the cost records also which are required to be maintained by certain
companies relating to production sales, stores etc.
2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation
from different officers of the company which he may think necessary for the performance of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the
company to furnish without delay the information to the company auditor. If the directors or officers of
the company refuse to supply some information on the ground that in their opinion it is not necessary to
furnish it, then the auditor has the right to mention that in his audit report.

3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend
them: According to section 231, of the companies act an auditor of a company has the right to receive
notices and other communications relating to the general meetings in the same way as that of the
members of the company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at
those meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has
audited. But he auditor is not expected to answer questions in the general meeting.

4. Right to Visit Branches: According to section 228 of the companies act the auditor of the company
has the right to visit the branch office or offices of the company.
He can also audit such accounts of eh offices of the company provided that there is not qualified auditor
to audit the accounts of the branch office or offices of the company, in such cases, the auditor has the
right to access at all times to the books of accounts and vouchers that the company maintains at branch
office or offices.
Moreover section 226 of the companies act provides that in case of the company gets the branch
accounts audited by some of the local auditors, even the auditor has access at all times, to the books,
accounts an vouchers of the company and he can also visit the branches, if he feels necessary.

5. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the
members of the company on the accounts examined by him of the final accounts and the related
documents which are laid down before the company in the general meeting.

6. Right to sign the Audit Report: As per section 229 of the companies act only the person appointed as
auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India,
may sign the audit report or authenticate any other document of the company required by law to be
signed.

7. Right to Being Indemnified: Under Section 633 of the Companies Act, an auditor is considered to be
an officer of the company and he has the right to be indemnified out of the assets of the company
against any liability incurred by him in defending himself against any civil and criminal proceedings by
the company if it is proved that the auditor has acted honestly or the judgment is delivered in his favour.
8. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion
of the experts and to take their legal and technical advice so as to discharge his duties efficiently.

9. Right to Receive Remuneration: As per Section 224(8) of the Companies Act, the company auditor
has the right to receive remuneration provided he has completed the work which he has undertaken to
do so.

Duties and Liabilities of a Company Auditor (Section 227):

Duties towards the shareholders:
1. Report shareholders about true and fair state of affairs of the company
2. State that balance sheet and profit and loss a/c give all information required by law
3. State that balance sheet and profit and loss a/c agree with the books of account
4. State that balance sheet and profit and loss a/c agree with accounting standards
5. State that he has obtained all the necessary information 
6. State whether the company has maintained all books as required by law;
7. State the reasons of qualification in his report
8. State that he has received the audit report on the branch accounts audited by other auditor and how
he has dealt with the same in preparing his report
9. Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the
company
b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the
company

10. Transactions recorded as book entry are not against the interests of the company
11. Personal expenses of directors have not been charged to revenue a/c of company;
12. The company fulfills the requirements of CARO 2003.

Duties towards Company:

1. Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities
and dividend paid etc in the prospectus.

2. Statutory Report: Section 165 requires that the auditor has to certify the statutory report.

3. Public Deposits: Section 58AA requires the auditor to report about whether the company has
followed all rules and guideline of RBI in regard to public deposits or not.

4. Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.

5. Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to
prepare profit and loss a/c for the current period.

Duties towards Government:

1. CARO-2003: The auditor has to report para-wise that the company has fulfilled all the requirements
of CARO-2003.
2. Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s
237.

Duties towards General Public:

1. His office is of confidence and faith. He must be reliable in all respects.

2. He should reveal all material information regarding the state of affairs of the company to the
company as well as to the general public.

3. While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading
information or material. 

LIABILITIES OF AN AUDITOR
Liabilities of an auditor of a company differ from those appointed by a firm, The Companies Act has
defined the duties of a company auditor and the liabilities arise on account of these duties. For the sake
of convenience the liabilities are divided under the following headings:
A. Civil Liability;
B. Criminal Liability;
C. Liability towards third parties;
D. Liability for libel;
In all the four cases the auditor can be held liable for one or more causes given hereunder.
(a) Liability for Negligence under the law of Agency;
(b) Liability for Misfeasance under the Statutes—Companies Act and Indian Penal Code. Let us now
discuss these liabilities in some detail.
 
A. Civil Liability
Liability for Negligence: Under the law of Agency the auditor is liable for negligence and in such a case
has to pay damages to the aggrieved party or parties. If the company suffers a loss on account of the
acts of the auditor, he has to make good this loss. Here Suffering of loss is important. The auditor shall
not be held liable for negligence, if the company does not suffer any loss. He shall also not be held liable
for the loss suffered by the company without his negligence. In order to hold him responsible for
negligence, the following points are to be proved by the party .
(a) Auditor was negligent;
(b) As a result of his negligence the company has suffered the loss ; and
(c) The loss was suffered by the person to whom the auditor owed a duty. He cannot be relieved of his
liability by an agreement entered in between him and his client.
`Negligence' includes the following acts—
(a) Not to see the Articles of Association and not to object payment of dividends out of capital;
(b) Not to get statements of accounts from the creditors and find out the errors and frauds.
(c) Not to verify Cash and Petty Cash;
(d) Not to report to the client about the insufficient provision for bad and doubtful debts, which results
in inflating the profits for dividends, thus paying dividends out of capital.
Liabilities for Misfeasance : The term `misfeasance* implies a breach of trust or duty. Where the auditor
performs his duties negligently and the company suffers a loss on this account, the auditor is held liable
for Misfeasance and he has to indemnify the company for such loss. He is also liable for damages u/s
543 of the Companies Act. The court can, on application made by the liquidator of the Company, charge
the auditor for misfeasance and ask him to make good the loss. However, the auditor has a right to
appeal to the court u/s 633 of the companies Act and he can be excused partly or fully by the court if it
is satisfied that he has acted honestly and reasonably. Thus relief can be granted only in the case of Civil
liability and not in the case of Criminal liability.
B. Criminal Liability
Criminal liability of the auditor arises under the following Acts:
1. Under the Indian Penal Code ;
2. Under the Companies Act;
3. Under the Income-tax Act;
4. Under the Life Insurance Corporation Act;
5. Under the Banking Companies Act;
6. Under the Chartered Accountants Act.
1. Under the Indian Penal Code : He is criminally liable, when he issues or signs a certificate required by
law to be given or signed or relating to any fact for which such certificate is admissible as evidence,
knowing or believing that such certificate is false in any material point. He shall be punishable in the
same manner as if he has given false evidence. (Section 197).
2. Under the Companies Act: He is criminally liable for the following acts—
(a) for authorising the issue of a false prospectus. The penalty for this act is a fine upto Rs. 50.000/- or
imprisonment upto a period of 2 years, or both. (S. 63)
(b) for fraudulently inducing persons to invest money by purchasing shares or debentures of the
company. The punishment is imprisonment for a term extending upto 5 years or a fine extending upto
Rs. 1,00,000/- or both. (S. 68). 
(c) for making a fraudulent report required under section 227 i.e. if the report is made not in conformity
with the requirements of Section 227 or any document of the company is signed or authenticated by
him which is also not in conformity with the above section or the report is signed or any other document
is signed or authenticated by any person other than the auditor himself and such other person is not
authorised to do so. The punishment is a fine upto Rs. 10,000 in both the above cases.
(d) For falsification of books. If it is proved that the auditor has been guilty of destroying, mutilating,
altering, falsifying or secreting of any books, papers or securities or is privy to the making of any false or
fraudulent entry in any register, book of account or document belonging to the company, he shall be
punishable with imprisonment extending to seven years and also be liable to fine. (Section 539).
(e) for delinquency i.e. making a false statement wilfully, in the course of winding up of the company or
certifying a false return, report, balance-sheet or giving a false certificate or certifying a false document
in the course of winding up of a company. All these acts make him liable for criminal offences and the
liquidator can directly prosecute him or refer the matter to the Registrar. (Section 545).
(f) For rendering false statements either in the balance sheet or any other document or destroying or
mutilating any voucher or document, the auditor shall be punishable with imprisonment upto a period
of two years and also shall be liable to fine.
Criminal offences include the following acts, for which he is punishable with fine or imprisonment or
both—
(a) Wilfully submitting a false report;
(b) Concealment of frauds in the account books;
(c) Destroying the vouchers and documents concerning account books;
(d) damaging the property of the company;
(e) Abetting in the falsification of the account;
(f) Certifying willfully the false accounts;
(g) Making a false statement knowingly to be false;
(h) Accepting bribe during the course of discharging his duties as an auditor.
3. Under the Income tax Act: The auditor is criminally liable for encouraging or abetting his client to
make a false statement or declaration regarding his taxable income. The liability for such offence is
imprisonment upto 6 month or fine or both. (Section 278).
4. Under the Life Insurance Corporation Act: The auditor is criminally liable for making a false statement
willfully on a material point relating to the return, report, balance sheet or any document. The
punishment is imprisonment and fine. (Section 104).
5. Under the Banking Companies Act: The auditor is criminally liable, if he makes a false statement
knowingly relating to a return, report, balance sheet or any other document or conceals a fact. The
punishment is imprisonment upto a period of three years. (Section 46).
Auditor is treated like a public servant and shall be punishable like a public servant for criminal breach of
trust. (Section 46 A). He is also liable to Public Examination and if found guilty by a court can be declared
unqualified for appointment as an auditor for 5  years. (Section 46 A). 
6. Under the Chartered Accountant Act, 1949 : the auditor is liable for misconduct, which is defined
under section 122 of the Act. Cases of professional misconduct are dealt in the various schedules of the
Act.
C. Liabilities Towards Third Parties
Auditor is not liable to third party or parties as a general rule. He is liable to his employer only. However,
if the third parties are able to prove the following points he shall be liable towards thein too—
(a) that the statement was untrue in fact;
(b) that the person making it knew that it was untrue or was recklessly can consciously ignorant whether
it was true or not;
(c) that the statement was made with the intention that the third party should act upon it;
(d) that the third party did act on the faith of the statement in the prospectus.
The controversy whether the auditor is liable to the third party is now set at rest and the auditor is now
held liable on account of the following reasons—
(a) Certifying the improper accounting procedure due to which embezzlement of an 
employed of the client could not be detected.
(b) Negligence committed by the employee of the auditor;
(c) Errors committed in the preparation of final accounts,
However, to make an auditor liable for the loss suffered by any third party by relying on his report and
taking action thereafter, some principles normally accepted can be enunciated and they are:
(i) It is proved that the auditor showed negligence in his duty and as a result, the third party suffered a
loss, and/or
(ii) His report is fraudulent.
Thus, some liability may arise when the auditor performs his duty knowing that his work would be relied
upon by some third party which may suffer financial loss as a result thereof.
But it has always to be remembered that an auditor must be honest. He must exercise reasonable care,
caution and skill. Unless he is fully satisfied, he must not certify as correct the Profit and Loss Account or
Balance Sheet or any other Statement.
What amount of care and skill will be reasonable will depend upon the circumstances of an individual
case.
It is certain that if the negligence is proved in the Court and the company is put to a loss as an effect
thereof, he will be liable for damages.
He must be honest and submit his report after scrutiny of accounts in a free and frank way. This is all
that he can do.
1) Liability for Libel
A libelous or slanderous statement made by an auditor will not hold him liable if he has made such
statement bonafide and without any malice. But if he has made such a statement outside the scope of
his duties, he shall be held liable.
Liability of an honorary Auditor
An auditor, whether he is paid or honorary, is liable or his acts and omission. The agreement with his
client is very much valid in the eye of the law even though there is no monetary consideration involved.
Liability of a Joint Auditor
The Companies Act is silent over the issue. But the statement issued by the Institute of Chartered
Accountants of India, on the subject of the liability of Joint Auditors is to be followed in such cases. The
gist of this statement is ; the entire work pertaining to audit is to be divided in between the auditors and
they shall be responsible for their part only, where the work cannot be divided in any manner, all joint
auditors will be responsible.
Liability of Local Auditors
If a company has many branches in the country as well as abroad arid appoints local auditors for the
branches, the auditor of the Head Office shall not be held responsible for the acts of the local auditors,
provided the auditor at the Head Office states clearly in his audit report that he had completely relied
upon the statements and figure supplied by the local auditors. 
DIVISIBLEPROFITS:-
Profit which can be distributed legally in the form of dividends to the shareholders of the company are
called divisible profits. It is that part of profit which is legally available to the shareholder as dividend.
Normally the revenue profit is available as dividend to the shareholder. There is no any particular rule
about the determination of profit. Only it is indirectly mentioned in the section 205 of Company Acts
1956 that no dividend can be declared without charging depreciation. By company law has laid down
the following rules or principles which guide us to determine the divisible profits.
Principles of Divisible Profit / Factors affecting declaration of dividend:
1. Articles of Association
The articles of associations are the rules of the company for managing the business activities.
The articles prescribe the rules for divisible profit. The directors are entitled to distribute the
profits under the rules. The cannot exceed the prescribed limits.
2. Companies Ordinance
The companies ordinance 1984 states the rules and regulation for distribution of the profits to
the shareholders. The dividend can be paid out of revenue profit. The directors must follow the
rules of companies for distributing profits. They cannot violate the law.
3. Accountancy Principle
The accountancy principles must be followed for calculating the divisible profits. The
going concern, consistency, conservation matching concepts is applied. These principles must
be applied other wise the reliable result cannot be expected from the accounting books and
records.
4. Legal Decision
The legal decision must be kept in mind which calculating the divisible profits. The court cases relating to
auditing must be followed if applicable to the conditions of business. The auditor must know the
decision announced by the courts from time to time.
5. Capital Maintenance
The principles of capital maintenance must be applied. The capital cannot be used to pay dividend. The
revenue profits can be utilized for payments of dividend. The capital account must remain intact. It is
illegal it the directors pay dividend out of capital during any year.
6. Shareholders Approval
The divisible profits can be used to pay as dividend after approval of shareholders. The annual general
meeting is called and the shareholders approve rate recommended by directors. The rate of dividend
proposed cannot be increased at all.
7. Capital Profit
The capital profit can be used to pay dividend under certain conditions.
a) The capital profit should be realized.
b) All the assets should be revalued and even then there is surplus.
c) The articles of association allow the distribution of capital profit as dividend.
d) The depreciation on the revalued assets has been recorded in the books of accounts.
e) Past capital losses will be made good.

8. Directors Proposal

The directors have the right to propose the rate of dividend under certain conditions. The capital profit
should be realized. All the assets should be revalued and even then there is surplus. The articles of
association allow the distribution of capital profit as dividend. The depreciation on the revalued
assets has been recorded in the books of accounts.

9. Capital Loss

The dividend can be paid out of revenue profits even there is capital loss. There is no need to adjust old
capital loss before payment of dividends. The current year revenue profit can used to pay dividend. The
capital profit must be used to eliminate capital loss finest and then surplus can be used to pay dividend.

10. Depreciation

The dividend can be paid out revenue profits. The depreciation on fixed assets must be charge to profit
and loss before declaring revenue profits. In case of manufacturing company it is compulsory to charge
depreciation before declaration of profit or dividend.

11. Past Losses

The company may sustain a loss in one year. It can earn profit in the next year. The company may adjust
loss of previous year. The remaining profit of current year can be pay dividends. In 1918, Ammonia Soda
Co. V Chamberlain case the court decided that under the articles of association the directors can pay
dividend out of current year profit with out adjustment past losses.

12. Transfer to Reserve

The dividend can be paid of revenue profit remaining after transfer to reserves. The articles of
association empower the directors to create at a certain rate. In case of banks and financial
institutions it is obligatory to set up statutory reserves.

13. Secret Reserves

Management creates the secret reserves by various techniques. The financial institutions need such

reserves to develop the confidence of customers and owners. The reserves can be created and used to
pay dividend if allowed under the articles. The misuse of such reserves must not be allowed.

14. Undistributed Profit

The directors for declaring dividend can use undistributed profit or profit and loss appropriation
balance. It is revenue of the previous years. It is a right of the directors to used such profit for payment
of dividend at the end of the year.

15. Profit Prior to Incorporation

The profit prior to incorporation is a capital profit. It cannot be used for payment of dividend. It is a
profit earned before the registration of the company. It can be used to write off capital loss or issue of
bonus share by the company management.

16. Asset Revaluation

The management can revalue the assets. The surplus on revaluation of assets can be started on liability
side of balance sheet. It can be used after realization. The assets may be sold and profit may be realized.

17. Solvency of Company

The solvency of the business is very important than payment of dividend. The management must
determine cash needs of the company. If cash is surplus than business requirements then dividend then
can be paid is cash. In cash of storage of funds dividend should not be paid in cash.

18. Creditors Protection

It is a principle of divisible profits that dividend must be paid out of revenue profits. The correct
calculation is essential for all who depend upon business. The overstatement can disturb one section of
investors while understatement can upset another group.

Need for calculation of correct amount of Profit

1. True Disclosure
The accounting principle requires true disclosure of profit. The purpose of audit is also same. The
auditor can form and opinion of the financial statement when true disclosure is there. The true
disclosure may lead to show correct profits.
2. Consistency

The importance of correct profit is felt to settle the dispute among various sections of society. The
owners need high profits. The debentures holders demand low profits. The principle of consistency can
solve the problem by declaring true and correct profit instead of high or low profits for the year.

3. Follow Law

The calculation of correct profit is essential for the business. The calculation of profit depends upon law.
When the law is followed there is true profit available for the shareholders. The memorandum, articles
of association and companies ordinance must be followed to arrive at correct profit.
4. Protect Creditors

The calculation of true profit is necessary for protection of creditors. The true profit does not reduce the
value of assets. The creditors can collect their amount of loan and interest in goods and services.

5. Correct Valuation

The fair value of assets and liabilities is recorded. The correct valuation is desirable for other parties who
want to buy such business. The admission of new partner is possible. The amalgamation and merger can
take place on the basis of correct valuation of business concern.

6. Stable Share Prices

The benefit of correct profit is available in the shape of stable prices. The investigators in shares can
depend on the policies of the company. The management can attract large funds for expansion of
business activities. The auditors must try to calculate true profit every year.

7. Manager Remuneration

The benefit of correct profit is available in the shape of true remuneration of management. The
manager's commission may be based on profits. The correct profit can pay correct commission to the
managers. They can review their progress through their remuneration received.

8. No Undue Favour

The correct profit is useful for all sections of society. There is conflicting interest of shareholders
manager, creditors, lenders, investigators and debenture holders. The correct profit favours all parties
according to their interest in business.

9. No Dividend Out of Anticipated Profit

The anticipated profit cannot be used for dividends. The profit means profit realized. The unrealized
profits are excluded for calculation of correct profit. The shareholders can be allowed dividends out of
true realized profits only.
Audit Report
Audit report is a written opinion of an auditor regarding an entity's financial
statements. The report is written in a standard format, as mandated
by Generally Accepted Auditing Standards (GAAS). GAAS requires or allows
certain variations in the report, depending upon the circumstances of the
audit work in which the auditor engages. An auditor’s report is an evaluation that
provides the auditor’s opinion on the validity and reliability of an organization’s financial
statements. When preparing financial statements for companies, they must contain an auditor’s
report from an external accountant or auditor. This report evaluates the financial statement’s
validity and reliability. The ultimate intention of the auditor’s report is to provide a reasonable
assurance that there are no material errors exists within an organization’s financial statements. In
the audit report the auditor has to mention whether the books of accounts show a true and fair
picture or not. If not he has to mention to what extent it is incorrect.
The auditor shall make a report to the members of the company on the accounts and financial
statements examined by him. The auditor prepares the report after taking into account the
provisions of the Companies Act, the accounting standards and auditing standards. Also, he lays
the report before the company in the annual general meeting.
The following points are to be considered while drafting an auditor’s report
The auditor report should be based on the best of his information and knowledge. The auditor
shall ensure that accounts and financial statements give a true and fair view of the state of the
company’s affairs as at the end of its financial year. He shall comply with the auditing standards
and sign the auditor’s report of the company. The auditor’s report shall also state the following
facts –
Whether he has obtained all the information and explanations which to the best of
his knowledge were necessary for the purpose of his audit. If he is unable to collect
any information, the details thereof and the effect of such information on the financial
statements;
Whether, in his opinion, proper books of account as required by law have been kept by the
company. All information which is relevant for the purposes of his audit have been received
from branches not visited by him;
Whether the reports of all branches of a company which are audited by a person other than the
company’s auditor has been sent to him. He should consider all of these reports while preparing
his report;
Whether the company’s balance sheet and profit and loss account dealt with in the report are
according to the books of account and returns;
Whether, in his opinion, the financial statements comply with the accounting and auditing
standards;
The auditor’s report most contains the observations or comments of the auditors on financial
transactions or matters which have an adverse effect on the functioning of the company;
Auditors should ensure, whether any director is disqualified from being appointed as a director.
Any qualification, reservation or adverse remark relating to the maintenance of books of
accounts of the company.
Other important considerations
If any of the matters required to be included in the audit report is answered in the negative or
with a qualification, the auditor’s report shall also state the reasons for the same.
The observations or comments on financial transactions or matters, which have an adverse
effect on the functioning of the company mentioned in the auditor’s report, shall be read before
the company by the auditor in general meeting. Any member of the company can inspect it.
As per the Companies (Auditor’s Report) Order, 2015, an auditor should include a statement on
the following matters in his report on the account of companies covered under this order:
(i) Fixed assets
(ii) Inventory
(iii) Granting of loans to certain parties
(iv) Internal control system
(v) Acceptance of deposits
(vi) Maintenance of cost records
(vii) Deposit of statutory dues
(viii) Accumulated Losses and Cash Losses
(ix) Default in repayment of dues
(x) Guarantee for loans taken by others from financial institutions
(xi) Application of term loans
(xii) Fraud Reporting
Audit Working Papers/ Working Papers
Audit working papers include those papers and documents, which consist of details about accounts,
which are under audit. They are the written, private materials, which an auditor prepares for each audit.
They describe the accounting information, which he obtained from his client, the method of
examination used, his conclusions and the financial statements.The auditor has right to keep the
working papers.
Definition of Audit working papers
The Institute of Chartered Accountants of India insists on the preparation and keeping of adequate
working papers. According to the Institute of Chartered Accounts of India,
“Working papers must include audit programme, queries, explanations given for the queries, schedules
of important items like depreciation, inventories, confirmation from third parties, certificates issued by
the management, banks, etc”
Thus, the standard requires an auditor to maintain adequate working paper. Working papers
provide basic evidence of audit conducted in accordance with standard audit practices. They help the
auditor in writing the report. The quality of audit work performed by the auditor can be judged by the
character and contents of working papers prepared and maintained by the auditor.
According to Prof. Meigs,
“The term working papers is a comprehensive one and includes all the evidences gathered by the auditor
to show the work he has done, the methods and procedures he has followed and the conclusions he has
developed “.
From an analysis of above two definitions, it is clear that the working paper should specify
How the work was planned and supervised?
How the internal control system was reviewed and its reliability was assessed?
How the evidence was collected and what procedures were adopted to collect the evidence?
Whether the testing performed provided sufficient competent evidential matter to enable to form a
reasonable basis for an opinion or recommendation?
Thus the working papers constitute a valid evidence of the work done in the current audit.
Importance of audit working papers
Working papers are necessary in all audit assignments. The Institute of Chartered Accountants in its
Statement on Auditing Practices mentions,
“It is necessary to prepare and keep adequate working papers”.
Similarly, the Institute of Chartered Accountants of England and Wales suggests,
“Working papers are used to an auditor in controlling the current years audit work and planning the
audit for next year”.
The third Standard of Field Work pronounced by the AICPA requires that the auditor should accumulate
sufficient competent evidential matter on the financial statements.
From this it clear that there should be sufficient working papers to support independent auditor’s
opinion. Apart from the basic objectives, the working papers serve the following objectives and provide
several benefits.
Objectives of audit working papers
1. The working papers serve the auditor both as useful audit tool as well as a permanent record of the
audit work performed.
2. They are useful to the auditor to control the current year’s audit work.
3. They constitute a reliable guidance for planning the future audit assignments.
4. A review of the audit working papers gives an assurance that the audit work is both accurate and
complete.
5. The auditors arrange the data properly in the working papers. Hence, the data become more
meaningful and useful for the purpose of the,audit.
6. Working papers are necessary to corroborate the work and the findings of all the audit staff.
7. The chief auditor is assured that the opinion is supported by the findings of their audit staff.
8. The working papers constitute complete and conclusive evidence in future as to the entirety and
completeness of the audit work.
Contents of audit working papers
AAS 3 states working papers should record the auditor’s plan, the nature, timing and extent of the audit
procedures performed; and the conclusions drawn from the evidence obtained.
Generally, audit working papers consist of the following details:
Schedule of debtors and creditors.
Trial Balance.
Certificate of officials regarding certain important matters like bad debts, valuation of stock, unpaid
expenses, accrued incomes, etc.
Statement of depreciation.
Correspondence between the auditor and the debtors, creditors, etc. of the client.
Investment Schedules.
Confirmation by the bank regarding the bank balances of the client.
Bank Reconciliation Statement.
Important extracts from the minute books such as agreement with vendors, hire purchasers, selling
agents, etc.
Detail of cash balance checked.
Adjustment entries.
Contingent liabilities certified by the management.
Draft financial accounts.
Details of clarifications made during the course of audit.
A copy of the auditor’s book.
Letters of representation.
Correspondence from legal advisors
Pertinent memoranda relating to the audit.
Data relating to the review of internal control.
Stock holder equity and the minutes.
Test of transactions.

Audit Note Book

Meaning 
Audit Note Book is a register maintained by the audit staff to record important points observed, errors,
doubtful queries, explanations and clarifications to be received from the clients. It also contains definite
information regarding the day-to-day work performed by the audit clerks. In short, audit note book is
usually a bound note book in which a large variety of matters observed during the course of audit are
recorded. The note book should be maintained clearly, completely and systematically. It serves as
authentic evidence in support of work done to protect the auditor against any legal charge initiated
against him for negligence. It is of immense help to the auditor in preparing audit report. It also acts as a
valuable guide for conducting audit for future years.
Contents of Audit Note Book 
The following matters should have been incorporated in an Audit Note Book. 
1. A list of the account books normally used and maintained.
2. Names of the principal officers, their duties and responsibilities.
3. Nature of business carried on and important documents relating to the constitution of business like
Memorandum of Association, Articles of Association, Partnership deed etc.,
4. Extracts of minutes and contracts affecting the accounts.
5. Extracts of correspondence with statutory authorities.
6. Copy of audit programme.
7. Accounting methods, internal control and internal check system in operation.
8. Routine queries like missing receipts and vouchers etc.
9. Details of errors and frauds discovered during the course of audit.
10. Points to be included in audit report.
11. Details of all important information to be used as reference for future audits.
12. Date of commencement and completion of audit.
Advantages of Audit Note Book 
1.        Facilitates Audit Work: It facilitates the work of an auditor as all important details about the audit
are recorded in the note book which the audit clerk cannot remember everything at all the time. It helps
in remembering and recalling the important matters relating to the audit work. 
2.        Preparation of Audit Report: Audit note book helps in providing required data for preparing the
audit report. An auditor examines the audit note book before preparing and finalizing the audit report. 
3.        Serves as Documentary Evidence: Audit note book serves as a documentary evidence in the court
of law when a suit is filed against the auditor for his negligence. 
4.        Serves as a Guide: When a audit assistant is changed before the completion of audit work, audit
note book serves as a guide in completion of balance work. It also acts as a guide for carrying on
subsequent audits. 
5.        Evaluating Work of Audit Staff: It helps to assess the work performed by the audit staff and helps
in evaluating their level of efficiency. 
6.        Fixation of Responsibility: Audit note book helps in fixing responsibility on concerned clerk who is
responsible for any undetected errors and frauds in the course of audit. 
7.  No Dislocation of Audit Work: An audit note book contains all important details about audit hence
any change in the audit staff will not disturb or dislocate the audit work.
Disadvantages of Audit Note Book 
1.  Fault-finding Attitude: It leads to development of a fault-finding attitude in the minds of the staff. 
2.  Misunderstanding: Very often maintenance of audit note book creates misunderstanding between
the client’s staff and the audit staff. 
3.  Improper Preparation: Since it serves as evidence in the court of law, it needs to be prepared with
great caution. When the note book is prepared without due care it cannot be used as evidence against
the auditor for negligence. 
4.  Adverse Effects on Subsequent Audits: Since audit note book is used in performing subsequent
audits, any mistakes in the note book may have adverse impacts on the next audit.
 

The following report variations may be used:

A clean opinion, if the financial statements are a fair representation of an
entity's financial position.
A qualified opinion, if there were any scope limitations that were imposed
upon the auditor's work.
An adverse opinion, if the financial statements were materially misstated.
A disclaimer of opinion, which can be triggered by several situations. For
example, the auditor may not be independent, or there is a going
concern issue with the auditee.
The typical audit report contains three paragraphs, which cover the following
topics:
The responsibilities of the auditor and the management of the entity.
The scope of the audit.
The auditor's opinion of the entity's financial statements.
An audit report is issued to a user of an entity's financial statements. The
user may rely upon the report as evidence that a knowledgeable third party
has investigated and rendered an opinion on the financial statements. An
audit report that contains a clean opinion is required by many lenders before
they will loan funds to a business. It is also necessary for a publicly-held
entity to attach the relevant audit report to its financial statements before
filing them with the Securities and Exchange Commission.