Page 228 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes The auditor should be careful about the use of language in the report, which should be clear and
unambiguous. The Auditor while drafting the report must keep in mind that the shareholders,
whose agent he is and to whom he is submitting the report, and with whom he shares a fiduciary
relationship are ordinary persons who do not possess technical knowledge and skill of
accountancy or auditing. His opinions and observations should, therefore, be communicated in
no uncertain terms so that the reader of the report is able to know what they are. In London and
General Bank Ltd. the Court held that a person whose duty it is to convey information to others,
does not discharge that duty by simply giving them, so much information as is calculated to
induce them, or some of them, to ask for more. Information and means of information are by no
means equivalent terms. An auditor who gives shareholders means of information instead of
information in respect of a company’s financial position does so at his peril, and runs the very
serious risk of being held, judicially, to have failed to discharge his duty The duty of an auditor
is to convey information, not to arouse inquiry, and although an auditor might infer from an
unusual statement that something was seriously wrong, it by no means follows that ordinary
people would have their suspicions aroused by a similar statement if, as in this case, its language
expresses no more than any ordinary person would infer without it.
Report should be complete The auditor should give a complete report. If he gives his report,
subject to separate notes, those notes also should be given simultaneously. In Hitkarini
Mahavidyalaya, Jabalpur v. P.C. Madan where the auditor made his report on the accounts of an
institution subject to separate notes which were not submitted within a reasonable time, the
Court held him guilty of gross negligence. The reasoning for this was that any one going
through the report would assume that those notes were prepared and were ready at the time
when the report was signed by him. It could not be supposed that those notes were not in
existence at that time and were written at some later date on some facts, which were still to be
verified or ascertained. Though this was not a case of bad or vicious intention, it was still held to
be an act of gross negligence.

11.6.2 Qualified Opinion

Where an auditor gives a qualified opinion, that is, he expresses an opinion subject to certain
reservations; he should express clearly the nature of the qualification in the report. The reasons
for the qualification should also be stated. In the case of companies, this is a legal requirement
under Section 227(4) of the Companies Act, which requires that where the auditor answers any
of the statutory affirmations in the negative or with a qualification, his report should state the
reasons for such answers. Qualified audit reports may be classified into four categories:
1. Disclaimer: In a disclaimer of opinion the auditor states that he is unable to form an
opinion as to whether the financial statements give a true and fair view.
2. Adverse: In an adverse opinion the auditor states that in his opinion the financial statements
do not give a true and fair view.
3. ‘Subject to’: In a ‘subject to’ opinion the auditor effectively disclaims an opinion on a
particular matter which is not considered fundamental.

4. Exception: In an ‘except for’ opinion the auditor expresses an adverse opinion on a particular
matter which is not considered fundamental. Auditors who wrongfully fail to qualify
company accounts are not liable to the company for subsequent loss if the company did
not actually rely upon them and was not misled by the information contained in the
accounts. Certification of accounts by auditors does not on the basis of the Caparo principle
expose them to the risk of being sued by lenders who may rely on those accounts when
considering whether to make finance available to the company.

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