Professional Documents
Culture Documents
Chapter 2—AUDITOR.
Meaning
Types of Auditor & Qualifications
Powers of Auditor
Duties Of Auditor
CHAPTER 1
MEANING OF AUDITING
The word audit is derived from the Latin word audire which means to hear. It is an
important tool of management. It is concerned with making an analytical and critical
analysis of the books of accounts, checking and verification of evidence in support of
entries appearing in the books of accounts, and ascertaining the authenticity of the
financial statements. It is also concerned with the examination of accounting data to
determine the extent of an audit examination is too made on the basis of evidential
document such as invoice, money receipts and other records by the authorized
representative of the client. Auditor has used to send for the accountants and hear
whatever they had to say in connection with the accounts. The auditor has to look into
the facts behind figures and he must certify their accuracy. Auditing is to ascertain the
balance sheet and profit and loss account that they show a true and fair view of the
financial state of affairs of a concern. The Institute of Charted Accountants of India has
issued a number of statements of standard auditing practices and accounting standards
for guidance of Auditor of India.
DEFINITION OF AUDITING
According to DICKSEE, “An audit may be said to be such an examination of the books,
accounts and vouchers of a business, as will enable the auditor to satisfy himself that
the balance sheet is properly drawn up, so as to exhibit a true and fair value of the state
of the affairs of the business, whether the profit and loss account gives a true and fair
value of the profit and loss for the financial year. According to the best of his information
and explanations given to him and as shown by the books, and if not, in what respect he
is not satisfy.”
Origin of Auditing
Auditing has its origin in the necessity in the development of some system to
put a check on the persons whose duties were to record receipts and disbursements of
money on the behalf of owners. In the ancient days auditing was confined to public
accounts only. With the development of trade and commerce, the need for recording
transactions was felt by businessman. This had necessitated the development of some
system of check upon the persons who recorded such transactions on the behalf of
businessman.
The audit in its present shape is the result of large-scale production in
consequence of Industrial Revolution during the 18th Century. With the development of
banking facilities, communication and transport means, the concept of corporate
management has taken birth. It necessitated the investors to know whether their
investment is safe or not. Shareholders need an independent person having expert
knowledge of accounts to report on the working of the company and truthfulness of the
profit or loss and financial position disclosed by the management.
RELATION OF ACCOUNTING AND AUDITING
Both accounting and auditing are closely related with each other as auditing reviews the
financial statements which are nothing but a result of the overall accounting process. It
naturally calls on the part of the auditor to have a thorough and sound knowledge of
GAAP before he can review the financial statements.
In fact, auditing as a discipline is also closely related with various other disciplines as
there is lot of linkages in the work which is done by an auditor in his day-to-day activities.
To begin with, it may be noted that the discipline of auditing itself is a logical construct
and everything done in auditing must be bound by the rules of logic. The knowledge of
language is also considered essential in the field of auditing as the auditor shall be
required to communicate, both in writing as well as orally, in day-to-day work .For
example, if the business has really earned a profit but because of wrong accounting, the
annual accounts show a loss, the proprietor may take the decision to sell the business at
a loss. Thus from the point of view of the management itself, authenticity of financial
statements is essential. It is more essential for those who have invested their money in
the business but cannot take part in its management, for example, shareholders in a
company, such persons certainly need an assurance that the annual statements of
accounts sent to them are fully reliable. It is auditing which ensures that the accounting
statements are authentic. In today’s economic environment, information and
accountability have assumed a larger role than ever before. As a result, the independent
audit of an entity’s financial statements is a vital service to investors, creditors, and other
participants in economic exchange.
Aspects to be covered in Audit
The rights of the company auditor can not be limited or abridged in any way. Any
resolution limiting the powers of the auditor or any such provision in articles of
association will be void. Following are powers/rights of auditors:-
Access to books and vouchers
Every auditor of company shall have a right to access at all times to the books and
accounts and vouchers, whether kept at head office of company or elsewhere. Auditor is
not required to wait for the closing of accounts for conducting the audit. The words all
times means only the normal business hours. All types of documents, agreements,
correspondences, financial books, statistical books, memorandum books, etc are
covered.
Right to obtain information and explanations
Auditor may require the officers of the company to provide such information as he may
think necessary for the permanence of his duties. It will be obligatory for the officers of
the company to furnish without delay the relevant information to the auditors.
Right to visit branch offices and access to branch accounts
Where accounts of any branch office are audited by another person, the company
auditor:-
Shall be entitled to visit the branch office, if he deems it necessary to do so for the
performance of his duties as auditor
Shall have a right to access at all times to books and accounts and vouchers of the
company maintained at the branch office.
Right to attend General Meeting
All the notices and other communications relating to any general meeting also be
forwarded to the auditors of a company along with shareholders/members. Auditors shall
be entitled to attend any general meeting and to be heard at any general meeting which
he attends on any part of the business which concerns him as auditor.
Auditor’s lien
Auditor’s lien on his client’s books and records is unconditional. Auditor can exercise lien
on books and documents subject to following conditions:-
Documents retained must belong to client
Such documents must be in possession of auditor on client’s authority
On such documents, some work must have been done
The fees for work performed must be outstanding.
Right to receive remuneration
Remuneration of the auditor of a company may be fixed by the authority which appoints
him. Therefore, Board of Directors will fix remuneration in case of first auditors or
auditors appointed to fill up casual vacancy. If he is appointed at the annual general
meeting his remuneration will be fixed by the company at the general meeting.
A separate disclosure of all the amounts paid to the auditor in whatever capacity and
whether as fees or expenses, is required to be made in profit and loss account,
classified as follows:-
(a) As auditor
(b) As advisor or in any other capacity in respect of:
Duties of Auditor
The statutory duties of an auditor cannot be limited in any way either by Articles of
Association or Directors or by members. However, a company may extend them. The
following are the duties that the auditor has to perform:-
Auditor has to state whether in his opinion and to the best of his information and
according to the explanations given to him, the accounts, give a fair and true view in the
case of the balance sheet, of the state of the company’s affairs as at the end of its
financial year and in the case of the profits and loss account, of the profits and losses for
its financial year. Following guidelines may be laid down in this regard:
Balance sheet and profit and loss account should be as per requirements of The
Companies Act, 1956
There should be no window dressing
All material facts should be properly disclosed
All usual, exceptional or non recurring items should be disclosed separately
The financial statements should convey the required information clearly
Auditor has to state whether he has obtained all the information and explanations
which to the best of his knowledge and belief were necessary for the purpose of his
audit.
He is required to state whether in his opinion, proper books of accounts as required by
law have been kept by the company, so far as appears from his examination of these
books, and proper returns adequate for the purpose of his audit have been received
from branches not visited by him.
Whether in his opinion the balance sheet and profit and loss account comply with the
accounting standards referred in Section 211 of The Companies Act, 1956.
Auditor is required to state whether any director is disqualified from being appointed as
director under Section 274
He will state whether the cess payable under Section 441A of the act has been paid by
the company and if the same remains to be paid, details thereof.
Whether the company’s balance sheet and profit and loss account dealt with by the
reports are in agreement with the books of accounts and returns.
He will state whether the report on the account of any branch office audited under
Section 228 by a person other than the company auditor has been forwarded to him and
how he was dealt with the same in preparing auditors report.