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Auditing Theory

Notes Statutory duties: The Companies Act, 1956 requires the appointment by a company of an
auditor and performance of certain duties by him. Section 227 of the Companies Act specifies the
powers and duties of the auditor. Section 209(1) requires every company to maintain ‘proper’
books of account with respect to matters stated therein. Section 209(3) provides that books of
account, to be proper, must provide a true and fair view of the state of the company or its
branches, as the case may be, and explain its transactions. To establish if the books of accounts
have been maintained as required, and whether the provisions of the Act have been complied
with, the auditor is appointed, and is required, inter alia, to report on these aspects. The examination
by an independent agency such as the auditor is practically the only safeguard which shareholders
have against the enterprise being carried on in an unbusiness-like way or their money being
misapplied or misappropriated. The purpose of statutory audit is to provide such a mechanism
to enable those who have a proprietary interest in the company or are concerned with its
management and control, to have access to accurate financial information about the company.
When those persons have such information, the statutory purpose is satisfied. It is the duty of the
auditor to protect the shareholders by examining the accounts maintained by the directors with
a view to informing the shareholders of the true financial position of the company.
While the directors occupy a fiduciary position in relation to the shareholders, in auditing the
accounts maintained by them, the auditor acts in the interest of the shareholders who are in the
position of beneficiaries. The duties cast upon the auditor are accompanied by certain powers;
for example, access to the books of account of the company, to enable him to discharge these
functions effectively. Any regulations which preclude the auditors from availing themselves of
all the information to which they are entitled are inconsistent with the Act.
Contractual duties: The contractual duties of the auditors depend upon the contract between the
auditor and the client. The contract will regulate the nature and extent of the task and the
standard of the performance. Even when the nature of the engagement is established as audit,
questions may arise as to whether the audit contract requires the taking of certain steps. Where
the extent of the audit is described in some detail, whether expressly in the contract of engagement
or in the case of statutory audit, in the statute concerned, these questions are less likely to arise.
Duties owed to third parties: Another important duty of the auditors is with regard to third
parties. An issue that has been addressed by the Courts in numerous cases is whether the
auditors owe any duty and are liable to third parties in the absence of any contractual relationship.
This issue has been examined in detail while discussing the liability of the auditors. The prevailing
view is that even in the absence of contractual relationship, in certain circumstances the auditor’s
could be held to be liable. The parameters of such responsibility are limited by the neighborhood
principle laid down by Lord Atkin in Donaghue v. Stevenson. The three broad aspects that the
duties of the auditor’s cover are (a) the duty to make certain enquiries; (b) the duty to make a
report to the members of the company on the accounts examined by him, and on every balance
sheet and profit and loss account including on all documents annexed thereto; and (c) the duty to
make statements in terms of the provisions of MAOCARO, 1988. The duties of the auditor can be
broadly classified as: General duties and Duty of care.

Duty to prepare auditor’s report: These duties are discussed in detail in the following chapters
of this research paper. An auditor of a company has, equally, rights and duties, which have to be
performed, in order to satisfy the position he is holding in the company. The duties of the
auditors has been discussed and elucidated by the Courts in numerous cases. While describing
the general duties of an auditor the Courts have opined: ”An auditor is not to be confined to the
mechanics of checking vouchers and making arithmetical computations. He is not to be written
off as a professional adder-upper or a subtractor. His vital task is to take care to see that errors
are not made, be the errors of computation or errors of omission or commission or downright
untruths. To perform this task, he must come to it with an inquiring mind —not suspicious of
dishonesty — but suspecting that someone may have made a mistake somewhere and that a
check must be made to ensure that there has been none.”

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