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

This report should state whether the accounts are kept in accordance with the provisions of the Notes
Act and whether they give a true and fair view of the state of affairs of the company.

11.6.1 Legal Requirement

Sub-section (2) of Section 227 requires the Auditor to make a report to the members on the
findings of the Audit done by him. This Report is based on the accounts examined by them and
on every balance sheet and the profit and loss account and all group accounts, a copy of which is
laid before the company in general meeting during their tenure of office. In this report, the
auditors are required to state whether the accounts give the information required by the
Companies Act in the manner so required. Thus the duty cast on the auditors is not merely to
report on the balance-sheet but on the accounts which they are required to examine; and they are
also required to state whether in their opinion proper books of accounts as required by law have
been kept by the company. The requirement of law includes the requirement of Section 209 (3),
i. e., that the books should be so kept as to give a “true and fair view” of the state of affairs of the
company and explain its transactions. Furthermore, the law does not mandate that this Report
be sent to each and every shareholder. The Companies (Amendment) Act, 2000 have brought in
some amendments affecting the responsibilities of the auditors. Sub-section (3) of section 227
describes the scope of an audit report, and lays down the matters to be stated therein. Clauses (e)
and (f) have been inserted in this sub-section which provides that observation or comments of
auditors, which may have an adverse effect on the functioning of the company, are required to
be stated in thick type or italics in the auditor’s report. With this amendment, the responsibilities
of the auditor have been widened substantially; it is now not confined only to the accounts but
extends to the total functioning of the company. Further, as per this amendment the Report
should also state whether any director is disqualified from being appointed as director under
Section 274 of the Companies Act. For this, the auditor has to confirm and verify the details of
other directorships in public companies of all the directors of the company. Though under
Section 227(1A) of the Companies Act the Auditor is not required to make report on the results
of his inquiry, he will certainly have to mention in his report anything serious, which the
inquiry may have revealed, or give a warning. In his Report, the auditor is required to state the
reasons and the justifications if the report is in the negative or is qualified. This report is distinct
from a mere certificate. The distinction is that a certificate has no expression of opinion. The
report is a formal statement made after inquiry and examination of the records and includes the
opinion of the Auditor. In view of the above it is not enough for the report of the auditor merely
to repeat the language of the section and barely state that in his opinion and to the best of his
information and according to the explanations given to him the accounts of the company give the
information required by the Act in the manner so required. Under the Indian Companies Act,
1913, the report made by the auditor was in most cases a mere formality. The requirement in the
present Act that the report of the auditor shall state whether in his opinion the accounts give the
information required by the Act in the manner required and whether in his opinion proper books
of account as required by law have been kept by the company so far as appears from his examination
of those books would seem now to require from the auditor a more exacting duty as regards
verification than under the previous Act. In this connection, the Ninth Annual Report submitted to
the Parliament in pursuance of Section 638 is relevant. In this Report it was explained that the
Company Law Board has been of the view that it is necessary to ensure a high standard of audit of
companies because it is only by doing so that a high standard of integrity in company affairs could
be maintained. In order to attain this required standard it is necessary for auditors to be fully alert
and to satisfy themselves by examining such basic materials and documents as they consider
necessary, that the accounts which they certify really reflect a true and fair view of the state of
affairs of the company concerned Language of the Report.

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