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Unit 11: Appointment, Right, Duties and Liabilities of an Auditor

matters of a vital character and it makes him liable, along with the directors, for misfeasance, if Notes
he fails to perform his duties as required by law and the approved audit procedure. The auditor,
being an appointee of the shareholders has a duty to take care of their interests and thus any
failure to report any major flaws and deficiencies may result in the non-fulfillment of the duties
of the Auditors.

11.5.4 Auditor as a Watchdog

The auditor is a watchdog and not a bloodhound. Beginning with In Re Kingston Cotton Mills
Case, the Courts have held that while it is true that the auditors primary function is to look into
the account books of the company, it is also the law of the land that where there is adequate
material before the auditor to arouse suspicion, he should probe into the matter in detail and
attempt to get under the skin of the problem and thus help resolve the issue. The Court held in
this case that “an auditor is not bound to be a detective or .... to approach his work with suspicion.
He is a watchdog and not a bloodhound. He is justified in believing the tried servants of the
company in whom confidence is placed by the company. He is entitled to assume that they are
honest and rely on their representations, provided he takes reasonable care. If there is anything
calculated to excite suspicion, he should probe it to the bottom, but in the absence of anything of
that kind he is only bound to be reasonably cautious and careful. His duty is verification and not
detection. If in the course of his sniffing around he detects something suspicious he must track it
down to verify it .” In the recent past, a higher standard has been applied to the auditor’s
requiring them to apply an “enquiring mind” to their task. This higher standard been discussed
in research paper while dealing with the standard of care expected of an auditor. The auditor is
an officer of the company only for limited purposes as given in Section 2(30) of the Companies
Act, 1956. As far as maintenance of the books of account, preparation of financial statements and
their audit is concerned, the auditor is not an officer of the company and therefore cannot be
prosecuted for contravention of the provisions of the Company Act, 1956 which are required to
be complied with by the management of the company. Numerous duties are owed by the
auditors to the company and its shareholders. The foremost of these duties is to check the
accuracy of accounts. But this duty is “not confined merely to the task of verifying the arithmetical
accuracy of the balance sheet, but also to inquire into its substantial accuracy, and to ascertain
that it was properly drawn up, so as to contain a true and correct representation of the state of the
company’s affairs”. The duties of the auditor do not include the giving of advise to the company
on the prudence or otherwise of giving loans. Whether or not the business of the company is
being conducted prudently is not a concern of the auditor. The sole duty of the auditors is to
ascertain the true financial position of the company at the time of the audit. Thus, the auditor is
not an adviser to the company or to the shareholders of the company. Neither does the auditor
sit in judgment on the management decisions and policies or the commercial prudence of
transactions. His primary function is to carry out what is termed a “verificatory audit“. This
position has been slightly modified by the introduction of the Section 227(1A) and the issuance
of the Order under Section 227(4A). The duty has been now extended to include making a
statement on various matters involving management functions like inventory control, adequacy
of internal audit procedures, etc. The auditor of a company is not the insurer and does not
guarantee that the books of account of the company show the true position of its affairs or that
its balance sheet is accurate according to its books. It is, however, the duty of the auditors to
ascertain and certify to the shareholders the true financial position of the company at the time of
the audit.

11.5.5 Classifying Duties of Auditor

In carrying out certain functions of which company audit is a prime example, the auditor is
subject to certain duties. The duties of an auditor may be effectively divided into three categories,
viz., statutory duties; contractual duties; and duties owed to third parties.

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