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

11.5.6 General Duties in carrying out Audit Notes

In exercise of his duty, an auditor must use reasonable care and skill, and must certify to the
shareholders only what he believes to be true. Essentially, an auditor should give a true and fair
view of the company’s annual financial statement. One of the earliest cases establishing this
principle is In Re London and General Bank, where the Court held: The duty of the auditor “is to
ascertain and state the true financial position of the company at the time of the audit, and his
duty is confined to that. He discharges his duty by examining the books the company. But he
does not discharge his duty by doing this without inquiry and without taking any trouble to see
that the books themselves show the company’s true position.”

11.5.7 True and Fair view

The phrase “true and fair” was inserted in the Companies Act, 1956 in place of the phrase “true
and correct” in the earlier Companies Act. This amendment was introduced since the term “true
and correct” could be interpreted as implying that the auditor had to merely examine whether
the financial statements were arithmetically correct and corresponded to the figures in the
books of account and was not required to examine whether these books reflected a fair view of
the affairs of the companies. With this amendment, the burden cast on the auditor is much
higher. The Auditor, in his report, has to show whether the accounts reflect a fair view of the
company’s financial position. The true and fair view may be taken to represent and signify that
the auditor gives an opinion as to whether the financial statements represent the actual financial
position. Thus, what constitutes a true and fair view is a matter of opinion of the auditor in the
circumstances of the case. There are certain broad indicators which the auditors are required to
take into consideration while determining whether the book of accounts represent a true and
fair view of the company’s financial position. These include: The balance sheet and profit and
loss account should be drawn up in conformity with the provisions of Schedule VI of the
Companies Act and/or as per requirements of the special provisions governing special categories
of companies. The balance sheet and profit and loss account should be drawn up in keeping with
the generally accepted principles of accounting which should be applied consistently. In the
event of any deviation from these principles, the reason and effect should be suitably disclosed.
The information should be so disclosed in the balance sheet and the profit and loss account that
there is neither an overstatement nor an understatement with regard to the financial position
and working results. The Auditor should see the situation as it exists at the end of the accounting
period. The audit or must also take into account post accounting period events, if material in
making a better assessment of the position as at the date of the balance sheet. The financial
statements should convey the requisite information clearly. In this context, it should be understood
by the auditor that information and means of information are not the same term. Thus, the duty
of the auditor to ascertain and state the true financial position of the company at the time of the
audit will be fulfilled if the above considerations are kept in mind while preparing the audit
report. ”An auditor is not bound to do more than exercise reasonable care and skill in making
inquiries and investigations. He is not an insurer; he does not guarantee that the books do
correctly show the true position of the company’s affairs, he does not even guarantee that the
balance sheet is accurate according to the books of the company....he must be honest, that is, he
must not certify what he does not believe to be true, and he must take reasonable care and skill
before he believes that what he certifies is true....Where there is nothing to excite suspicion very
little inquiry will be reasonably sufficient. Where suspicion is aroused more care is obviously
necessary; but still an auditor is not bound to exercise more than reasonable care and skill even
in case of suspicion, and he is perfectly justified in acting on the opinion of an expert where
special knowledge is required. ” Thus, it is not the auditor’s duty to give advice to members or
directors about giving loans or about the business prudence of the company but the true financial
position of the company must be state that the time of the audit. The auditor has the duty to take

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