Course Title : Audit, Risk and Control

Course Code : AIS 5204

Topics : Audit is a quasi-judicial task

Submitted To : Abdul Alim Baser (AAB)

Associate Professor
Department of Accounting & Information
Systems
University of Barishal

Submitted By : Md. Shahed Ali

Department of Accounting & Information
Systems
University of Barishal

Roll : 21 AIS 023

Year : MBA
Session : 2020- 2021
Date of Submission : 20/02/2023
 AUDIT IS A QUASI-JUDICIAL TASK

Introduction
An audit can be considered a quasi-judicial task in some contexts, but it is not always the case. An audit is
an independent and systematic examination of an organization’s financial records, accounting procedures,
and internal controls to determine whether the financial statements fairly represent the organization’s
financial position and performance. The purpose of audit is to provide an objective and independent
assessment of an organization’s financial activities.

In some case an auditor may be required to exercise judgement in determining whether certain accounting
practice comply with relevant accounting standards or regulations. This exercise of judgement can be
seen as a quasi-judicial in nature. For example, an auditor may need to determine whether a company’s
accounting treatment of a particular transaction is consistent with generally accepted accounting
principles or other relevant regulations.

However, an audit is not typically considered a purely judicial task because auditors do not have the
power to make legally binding decisions. Their role is to provide an independent assessment of an
organization’s financial activities and to make recommendations to improve internal control and financial
reporting practice.

Quasi-Judicial functions are performed by various entities such as administrative tribunals, regulatory
bodies and audit committees, among others. Moreover, auditors have the power to investigate and assess
any supported non-compliant activities, similar to the role of an investigator in a legal case. The gather
evidence, interview witness, and assess the credibility of the information presented to them. Based on
their findings, auditors have the power to make determination of whether the organization has complied
with the relevant laws and regulations. The role of an auditor in determining the compliance with laws
and regulations makes the audit function quasi-judicial. The auditor has the power to detect and report
any fraudulent or non-compliant activities, which can result in the imposition of penalties or legal action
against the organization. Audit reports as evidence can be used in legal proceedings, making the role of
the auditor similar to that of a judge. The audit report serves as a basis for the determination of financial
and operational activities of the organization, and the findings of the report can be used as evidence to
prove non-compliance or fraudulent activities.
Quasi-judicial theory

Under this theory, the auditor is considered as a judge in the financial distribution process. Nonetheless,
Hayes et al., (1999) points out several issues which counter balance these first premises. First of all, the
fact that auditor’s decisions and decision process are not publicly accessible. Indeed, as we will study
later in this paper, only the final audit opinion approving the financial statements is publicly available.
Secondly, the principle of precedence is not guaranteed in auditing. Finally, the auditor’s independence
cannot be considered as equal as a judge’s independence as a different reward system is involved (Salehi,
2011). However, the auditor’s independence is nowadays guaranteed by an elaborated legal framework
which gives the auditor a certain degree of authority.

As a concept, "quasi-judicial" creates a number of difficulties. Professor de Smith views it as "a

superfluous adjective which increases rather than diminishes confusion" (de Smith, 1973, p. 529). Other
academic writers also view it with distaste. For example; "Sir Ivor Jennings appears to regard it as one of
a number of pseudo analytical expressions derived from false premises as to the separation of powers"
Ovadia, 1949, p. 216). Wade, however, argues that "quasi-judicial" denotes an important concept that is
not a matter of words, 'but a matter of functions; functions which lie on the borderland between the
judicial and executive spheres of government and whose correct understandings are of practical interest
and significance" (Wade, 1949, p. 217). He suggests that the proper approach is to view a "quasi-judicial"
process as an administrative process to which one or more judicial elements have been added, rather than
a judicial process from which one or more elements are missing.

In the Supreme Court of Victoria, Smith J. held that an auditor appointed by the Governor in-Council
under the provisions of the Local Government Act 1946, was required to exercise quasi-judicial powers
and having that capacity, he owed no duty of care to anyone. On appeal to the High Court of Australia,
the decision of Smith J. was reversed and it was held that a municipal auditor was under a duty to exercise
reasonable care and skill in the conduct of his audit, and that duty was owed to the municipality. Fellagha
J. noted that although the Act gave the auditor certain powers that could be regarded as quasi-judicial,
including a power to hear evidence on oath, these powers were given to the auditor merely as a means to
an end and did not describe or define the real purpose of his appointment. That purpose was to conduct an
audit. This being the case what the plaintiff was complaining about was not negligent exercise of a quasi-
judicial power but the negligent doing of professional work.
 Quasi-Judicial and Independence
If, as has been argued, the "quasi-judicial" concept does not provide a complete or accurate description
of the role and function of the auditor, what is the significance and meaning of the accounting
profession's acceptance and reliance on the "quasihelical" notion? In what follows, it will be argued that
the real significance of "quasi-judicial" lies in emphasizing the importance of the attribute of
independence. These institutional interpretations of independence, according to Devine (1976) fail to
explain the essential reason for the auditor's lack of independence. If dependence on the client for his fee
was the main reason for the lack of independence, he argues, then in local government where the auditor
is paid by the State, there would be no disasters of compromised independence. Yet the fact of the
matter, he suggests, is that there are such disasters and the quality of local government auditors is not
conspicuously better than those in the private sector. The real reason why the auditor is not independent,
Devine argues, is that he is not psychologically free. The auditor sees himself as part of the system;
indeed, as the "bulwark of the system — a system of free enterprise and profit, of boards of directors
and workers, of 'them' and 'us' he therefore operates with intellectual concepts which restrain and
confine

An historical analysis of the development of the auditor's function reveals that one of the most important
characteristics of the audit function throughout history has been the notion of an independent check by or
on behalf of a person to whom an accounting was owed. The effect of the early Companies Acts in
Britain was to consolidate the importance of independent check and provide, or allow, for it to be
performed independently. The present-day Companies Act strives to establish the independence of the
auditor by limiting the financial relationships that he can have with his client and to reinforce that
independence by giving him security of tenure.

The Role of Audit

In consonance with Wallace’s work, three assumptions can emphasize the role of audit in free and
regulated markets, which can include different aspects according to the various environments .

The Monitoring Hypothesis

While delegating decision-making power to one party such as cited in the agency theory, the agent agrees
to be monitored only if the benefits from such activities overtake the related costs. This hypothesis
includes all relationships present in any organization, including for instance collaborating relationships
between creditors and shareholders, or even government and taxpayers (Wallace, 1980).
While public disclosures represent a way of controlling the monitoring hypothesis, the information
asymmetry between the participants might interfere with their valuable interpretation, thus requiring an
external audit to reduce the withholding of information.

Because auditors and the board of directors indubitably build some sort of relationships, which participate
to increase the monitoring ability of the board of directors, independent audit committees can be
considered as an additional tool to secure the auditor’s independence and thus guarantee an effective audit
engagement.

What is more, the regulating framework governing the auditing activity encourages more and more
monitoring influences from the auditors, by requiring for instance the issuance of internal control reports.
Such disclosure empowers the monitoring role of auditors over management.

The Information Hypothesis

A proposal for the demand of audited financial statements is the necessary procurement of information for
investments’ decisions. Investment decision models mainly value a company by calculating the net
present value of future cash flows, cash flows which are highly correlated with the financial statement
information. In this sense, the audit participates as a means of improving the quality of financial
information from an investor’s perspective (Wallace, 1980).

The access of information can have several beneficial aspects. First of all, it reduces risk, or at least it
facilitates its measurement. Investors have indeed a tendency to be risk averse, and will thus require a
higher return for higher levels of risk taken. Secondly, more information facilitates the improvement of
decision-making. Indeed, auditors raise management issues by finding errors or inaccurate data for
example. An audit can thus support management’s decision making by pointing out inefficiencies, which
will then impact employees’ activities and performance.

The third benefit of information is associated with the earning of trading profits. If we refer to the
efficient market hypothesis, asset prices reflect all publicly available information. Hence, the information
benefit of profits from trading is only realized by investors with private access to new information. By
making the announcement of audited information publicly available, the law guarantees a potential price
adjustment and confirms investors’ expectations and existing market valuations (Intone, 2010).
References

Berle, A. A. (1938) "Accounting and the Law", Accounting Review, March, vol. 13. PP. 9—15.

Binney, J. E. D. (1958) British Public Finance and Administration 1774—92, Clarendon Press, Oxford.

Chambers, R. J. (1973) Securities and Obscurities, Gower Press, Melbourne.

Chatfield, M. (1974) A History of Accounting Thought, Dryden Press, Illinois.

The Commission on Auditor's Responsibilities (Cohen Commission), (1977) Report of Tentative

Conclusions, A.I.C.P.A., New York.

REFERENCES

Dahrendorf, R. (1973) Homo Sociologicius, Routledge and Kegan Paul, London.

de Smith, S. A. (1973) Constitutional and Administrative Law, second edition, Penguin,

Hammondsworth.

Devine, A. (1976) "How Independent are Auditors?" Accountancy, December, vol. 87, pp. 49-51.

Forster, A. (1978) "Accounting and Auditing in the Search for a True and Fair View", paper presented at
the 1978 conference of the Accounting Association of Australia and New Zealand.

Jennings, Sir Ivor (1957) Parliament, second edition, Cambridge University Press.

Johnston, T. R., Jager, M. O. and Taylor, R. B. (1979) The Law and Practice of Company Accounting in
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Johnston, T. W. (1965) "The Company Auditor's Dilemma — Responsibility without Adequate

Authority", unpublished paper, University of Auckland, pp. 55-68.

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Morison, A. M. C. (1971) "Auditing: The Reasons Why" Journal of Accountancy, vol. 131. No. 4, pp.
59-62.
Normanton, E. L. (1966) The Accountability and Audit of Governments, Manchester University Press.

Spacek, L. (1958) "The Need for an Accounting Court", Accounting Review, July, vol. 33, pp. 368-379.