Rights and duties of an auditor

Rights
To carry out their duties effectively, auditors need sufficient rights. According to the Section
164 of the Companies Act 2007 auditors have following rights.

• To access accounting records and other documents of the company when necessary
• To obtain required information and explanations from officers if he thinks they are necessary
for the performance of the audit
• To take legal and technical advice. If needed, an auditor can get the service of experts from
outside. For example, to satisfy with the value of a computer auditor can get the technical
support from a computer expert.

Section 165 of the Act makes provision with regard to auditor’s attendance at shareholders’
meetings.
The Board of Directors of the company shall ensure that an auditor of the company-
i. is permitted to attend general meetings of shareholders of the company and explain necessary
matters. For example, if the auditor’s service is terminated, s/he can brief related matters to
shareholders.
ii. receives notices and a copy of any written resolution
(These provisions have protected auditors against unfair removal or termination of the service
by directors according to their desires.)

Duties
Auditors are required to check the company’s accounts in order to find out whether they are in
agreement with the accounting records. They need to carry out investigations to form an
opinion on financial statements. If the auditor fails to obtain necessary information, it is his/her
duty to state it in the audit report. If the system of record keeping or internal control is
unsatisfactory, it is auditor’s duty to make a suggestion regarding an alternation to the directors.
(Remember we noted that the auditor cannot force directors to follow his suggestions.) If the
directors do not follow those directions, the auditor’s duty is to state it in the audit report.
An auditor should have a commitment to his/her work. For example, if the auditor is doubtful
about a transaction, it is his/her duty to check relevant materials until s/he is satisfied with the
correctness or erroneousness.
For that, an auditor should examine the accounts to check:
• Compliance with legislation
• Truth and fairness of accounts
• Properness of records
• Agreement of accounts to records and
• Consistency of other information

Item External Audit Internal Audit

Recipient of Shareholders or members Board members and senior managers
reports
Objectives Add credibility and reliability to reports Provide the assurance that members
from the organization to its shareholders of the board and senior management
by giving and opinion use to fulfill their duties
Coverage Financial reports and related disclosures, All categories of risks, their
financial reporting risks and their management including the flow of
management information around the company,
and governance
Timing and Projects tied into financial reporting Ongoing and pervasive
frequency cycle, focused on objective of audit
opinion
Focus Mainly historical Ideally forward-looking
Responsibility None - duty to report control weaknesses Fundamental to the purpose
for improvement of internal auditing
Status and Statutory and regulatory framework International professional standards
authority and Code of Corporate Governance
Independence Professional ethical standards overseen Professional ethical standards
by audit committee and regulatory overseen by audit committee
framework

Matter Internal Audit External Audit

Appointment/Removal By Management By share holders
 Objectives Control & System Review Express on opinion
Independence Comparatively less Comparatively high
(Employer)
Reporting C.E.O /Higher Management Shareholders
Scope Decided by Management Laid down statutorily
Control Frame No legal requirement Statutory requirement
Remuneration Decided by Management Decided by shareholders
Report No specific Format Specific format

Independence
Independence implies acting without any fear or favour. An auditor should be independent of
all parties involved. Otherwise s/he cannot produce an unbiased opinion. Such factors as
a) dependence on the client
b) family relationships or
c) loan to and from clients might influence the independence of an auditor.

In order to protect the independence of an auditor, a number of provisions have been included
in the Companies Act. For example, according to Section 157, an auditor should not have any
financial involvement with the entity which is under audit. It is obvious that these provisions
are to avoid any biases due to close relationships.

Also, provisions are made to protect auditors who do not agree with the presentation of the
firm’s financial statements or other records. Directors, for their safe, cannot remove the auditor
in such situations. If the directors of a company discontinue the service of a statutory auditor
on the ground of discovering a fraud/misbehavior they may not be able to get the service of
another statutory auditor. The reason is that according to professional ethics, no member of
ICASL accepts a new audit without consulting the outgoing auditor.

Further, an auditor, who the company has decided to remove, has the right to make
representation to shareholders and explain matters to them. With this provision, it assures the
genuine work of auditors without fear of being removed in the case of disagreement with the
directors/managers.
An audit firm should review its clients annually to determine whether it is proper to accept or
continue audit engagements with them.

Integrity
Auditors should have the reputation for their honesty, carefulness and tactfulness. To make
sure that auditors attend their work properly, registered audit firms are supervised and inspected
by their professional bodies. For example, in Sri Lanka, this is done by the ICASL.

Objectivity
Objectivity imposes the obligation of auditors to be impartial and honest. i.e. an auditor should
have the ability to maintain an unbiased attitude in selecting and evaluating evidence.

Professional competence and due care

An auditor must be educated in the fields of accounting & auditing and should be thoroughly
trained before accepting an audit. S/he should be able to prove her/his capability. In Sri Lanka,
according to the Companies Act, only the members of Chartered Institute of Accountants are
eligible to conduct public company audits. Before giving membership, the institute develops
competence in their members by examinations and on-the-job training. Auditors should possess
not only technical skills but also communication skills. One can imagine how troublesome
auditing would be if there is no cordial relationship with the clients. Therefore qualified
auditors should carry out the audit work with due skill and care with regard to technical and
professional standards expected from them.

Confidentiality
Auditors have the right to acquire any information, even personal ones if they believe that such
information is necessary for audit work. But they should not disclose any information to the
third party unless there is a legal or professional duty to disclose.

Professional behavior
Professional accountants/auditors are required to observe proper standards of professional
conduct even if they are not written. i.e. any misbehavior which can damage the auditing
profession and professional bodies need to be avoided though they are not stated in the written
format.

Working papers can be kept in two files: Permanent file and Current file

The Permanent file contains documents and important matters which will be required for more
than one audit. For example, legal material, the rules and regulations, copies of documents of
continuing importance such as letter of engagement and minutes of appointment of the auditor,
a brief history of the client’s organization, List of books and documents, the place where they
are kept, and persons responsible for books and documents.

The current file contains the matters related to the current year’s audit. Some of the documents
in the current file are a copy of the accounts being audited, a description of the internal control
system, an audit programme, record of audit queries raised and a note about the answers during
the audit, copies of letters to the client indicating internal control weaknesses.

Fixed assets verification

In the previous section we discussed the verification of assets in general. Now, let us see the
Audit procedures in verifying the fixed assets.

First, make a request from the client’s staff for a schedule of assets.
Then divide assets as:
- assets acquired during the year and
- those already held

For first type of assets, it will be necessary to vouch their acquisition. Second type has been
dealt with in a previous year.
Then following procedures can be applied.
Opening balance – Verify by reference to previous year’s balance sheet and audit files
Acquisitions – Vouch the cost with documentary evidence, for example relevant invoices. At
the same time the auditor should vouch the authority for the acquisition with minutes or with
authorized delegated authority

Disposals – Vouch the authority by using minutes or company procedures. Then the auditor
can examine the documentation. Verify the reasonableness for the proceeds. Pay special
attention to scrapings. Then check the accounting treatment as well.

Depreciation, amortization and other write downs – in this case also, the auditor should
vouch the authorization of policy with minutes and examine the adequacy and appropriation of
the policy. If there are revaluations, then that should also be investigated. Accuracy of
calculations should also be checked.

Existence and ownership – these are treated together but note that existence doesn’t imply the
ownership of the assets. So, the verification procedures include: Physical verification and
Inspection of title deeds and certification of ownership.
For example, share certificates confirm the existence and ownership of shares. If the deeds are
held by a third party, then a certificate from the third party is required for the confirmation.

Ancillary evidence – the confirmation of the existence of an asset can be done by examination
of repair bills and other outgoings. In addition, investment ownership can be verified by the
receipts of dividends and interest.

Presentation– following procedures can be applied to verify the presentation of the assets.
The auditor should check whether the organization has adopted the appropriate accounting
policies and their adequacy of disclosure.
It is to be ensured that accounting standards have been followed properly.
Materiality is also another important factor to be considered by the auditor.
It is essential to check whether the organization has clearly understood the distinction between
revenue and capital. For example, sometimes repair expenditure is identified as revenue but
may at times be included as an element of improvement which is capital.
Apart from these procedures the auditor is able to use the following procedures as well.
Letters of representation
Sometimes the assets may have been pledged or mortgaged. In such situations the auditor
should check whether the liability is properly described as secured.
If tax charges are dealt with the assets, then tax and capital allowance computations should be
in accordance with the assets accounts.

With regard to the insured assets, the auditor would be put upon inquiry if there were no
correspondence between assets in the balance sheet and the assets insured.

The auditor must take special care to be assured that all assets held by third parties are included
in the balance sheet and verified.

There is an inverse relationship between detection risk and the combined level of inherent and
control risk. For example, when the inherent risk and control risk are high, the detection risk
should be at a very low level. Further, when the control risk and inherent risk are at a low level
then the detection risk will at the highest level. In this way an auditor adjust audit risk to an
acceptably low level.