Page 22 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes Know auditing in depth;

Discuss about accounting/auditing statements.

Introduction

Audit plays a pivotal role in keeping proper legal check on those who carry on the business in a
fiduciary capacity. Shareholders not being legal experts, the auditor acts as a link between the
shareholders and the management. Statutory auditing, mandatory for all companies, is one of the
regulatory mechanisms designed to check abuses and irregularities in the financial aspects of the
companies. There are numerous provisions incorporated in the Companies Act, 1956 stipulating
the norms and rules to be followed in maintaining the accounts of the company. All companies are
statutorily required to prepare and maintain accounts which are then scrutinized by the auditor
who certify their correctness. For company accounts to be credible they must be true and fair and
this is more likely to happen if someone competent and independent of the company has vetted
the accounts. An auditor has a fiduciary relationship with the company. The statutory auditors are
often described as the watchdogs of the company. They have access to the book of accounts,
vouchers and documents, which no member of the company has. At the same time a number of
duties and responsibilities are cast upon them. While describing the position of the auditor
Ramaswamy J. has opined, “An audit is intended for the protection of the shareholders and the auditor is
expected to examine the accounts maintained by the directors with a view to inform the shareholders of the true
financial position of the company. The directors occupy a fiduciary position in relation to the shareholders and
in auditing the accounts maintained by the directors the auditor acts in the interest of the shareholders who are
in the position of beneficiaries. Thus, the auditor is like a trustee for the shareholders.” The auditor may be
an individual or a firm of many individuals wherein each one is qualified to be an “auditor”
individually also. The Companies Act, 1956 envisages independence in the office of the auditor
and therefore, elaborate provisions have been incorporated in the Companies Act to ensure the
same. Sections 224 to 226 of the Companies Act, 1956 provides for the appointment, qualifications,
disqualifications and payment of remuneration to the statutory auditor. Thus, the role of audit is
to provide a moral check on those who are entrusted with the task of running the business and
keeping and maintaining books of account of the company. Auditors are also regarded as the
agents of the members appointed to carry on certain duties as laid down in the statute and the
articles for the purposes of the audit. Of late, the role of the auditor has gained tremendous
importance.

2.1 Importance of Audit

The present structure of a modern company has the shareholder as the focal point of the legal
system governing them. This is evident in not only the present structures available but also the
concerns for the future. The single largest concern at the moment seems to be corporate
governance. The image of the company is of great concern to the company. Transparency in
accounts and an audit that will enforce the financial discipline is the most crucial aspect of
maintaining this public image. Audit is the examination of the financial accounts of the company.
There is a belief that the presence of independent, competent and vigilant authority exercising
strict audit control, ensuring that all the required disclosures have been made by the directors
from time to time, and the funds of the company have not been siphoned off for extraneous
purposes and so on. The aim is to get the company to present a true and fair view of the financial
position. Thus, the Companies Act, 1956 has provided for appointment, remuneration, removal,
etc. of the auditors. Also the listing agreements of various stock exchanges have made provisions
to ensure independent auditing.
The annual audit is one of the cornerstones of corporate governance. Given the separation
of ownership from management, the directors are required to report on their stewardship by

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