2. RIGHTS, DUTIES AND LIABILITIES OF AUDITOR Powers/Rights of an Auditor (255) i) Right of access to books of account and vouchers 255(1). Leeds Estate Building and Investment Co. Ltd. (Id. 2 German Commercial Code (HGB). Note that the auditors will not be held responsible if they do errors in judgement but this is not the same in case of dishonesty. 17(1).) iv) Right to receive notices of general meetings and to attend those meetings. It is his/her duty to seek opinions on legal matters or managerial matters from experts to give a better detailed report of the company. A person whose duty 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. (a) In contract, by persons to whom the accountant owes a contractual duty of care; (b) In tort, by persons with whom the accountant is not in a contractual relationship but to whom the accountant owes a duty in accordance with the Hedley Byrne decision. (1) The directors of the company were guilty of gross negligence and were a contributor to the cause of the loss. 10. If the statutory auditor is satisfied on an examination of the work of the internal auditor, that the internal audit has been efficient and effective, he may accept the checking/evaluation carried out by the internal auditor in the area of internal control, verification of assets and liabilities etc. Statutory liabilities of an auditor include _____. A man is entitled to be as negligent, as he pleases towards the whole world if he owes no duty to them. (1) An auditor is guilty of misfeasance if he fails to detect the omission of liabilities from the balance sheet even when such omission is apparent. investors, creditors, bankers, tax departments, etc.). art. Civilly, an auditor can be found liable either under the common law or a statutory law liability. When suspicion is aroused, more care is obviously necessary. (1) An auditor is liable where assets are mis-described in the balance sheet if the Company incurs damage as a result of such mis-description. … (i) There existed a general relationship as banker and customer, not as Solicitor and client; (ii) The bankers disclaimed liability under reference in clearly expressed words to the customer; and. He was utterly reckless and indifferent in his conduct as an auditor. Image Guidelines 4. He must take reasonable care to ascertain. Prohibited Content 3. The opinions expressed or the advice given by an auditor will not be liable to action for negligence merely because, in the light of later events, they prove to have been mistaken. Duty of care and diligence is important for an auditor though there is no remuneration for him. (vi) The liquidator argued that the auditor was negligent in his duties as he did not comply with the provisions laid down in the articles and as he certified a false balance sheet. An auditor is liable to be guilty of misfeasance for signing the balance sheet blindly and has to suffer the consequences if such balance sheet is found subsequently to be incorrect. Mr. Justice Wallis, in his judgment, remarked the following:-, (1) “Unless the auditors are to be held strictly to their legal liability, the object of legislature in requiring a certificate from them is absolutely defeated. The book-keeper had complete charge of the books of account including the preparation of wages sheets and payments therefor. : Accountants Liability to Third parties – The Hedly Byrne Decision. He is not an insurer and does not guarantee that the books do correctly show the true position of the company’s affairs or that the balance sheet is accurate according the books of the company. Vs. Heller & Partners Ltd. (1964): The brief outline of the case is that the advertising agents (the plaintiffs) entered into a contract with their party and made a reference to the merchant bankers (the defendants) for obtaining information as to the financial position of the party who also happened to be the client of the merchant bankers. It was no excuse that the auditor had not seen the Articles when he knew of their existence. According to Mr. Justice Romer (in Chancery Division): It was held in respect of the first charge that: (i) It was no part of the auditor’s duty to bring to the notice of the directors and shareholders about the mis-description of the debts; (ii) Such mis-description did not involve any damage to the company; (iii) The auditor need not specifically draw the attention of the shareholders of loans given to the brokers or others; and. There are several conflicting judgements over the auditor’s liability to third parties, i.e., the persons other than the client (e.g. Section 197 of Indian Penal Code deals with Issuing or signing false certificate. Authentication of Assets and Liabilities: Verification of assets and liabilities for checking their existence, valuation, completeness and disclosure in financial statements. Action can … (ii) The Company’s Articles further provided that: (a) The directors should cause true accounts to be maintained and statement of income and expenditure and balance sheet to be placed once a year before the company; (b) the directors were authorised to declare dividend out of profits; and (c) the auditors should state whether balance sheet exhibited a true and fair view of the state of affairs of the business. (2) In any affidavit, deposition or solemn affirmation in or about the winding up of any company shall be punishable with imprisonment for a term which may extend to seven years and shall also be liable to a fine. But still an auditor is not bound to exercise more than reasonable care and skill even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required. 12. As in case of optional audits company auditor is liable for his negligence. Liability of the Statutory Auditor completed in 1996, have shown that there is not yet a European market in audit services and that important differences remain between the national laws and regulations of Member States which deal with the statutory audit. Consequently, dividends were paid out of capital (not out of realised profits) in pursuance of a resolution of the shareholders based upon the directors’ recommendation and upon balance sheet certified by the auditor. Terms of Service 7. Under the Companies Act, the liabilities of a company auditor can be grouped under two heads. Summary: An auditor was guilty of misfeasance as he gave only the ‘means of information’ and not the ‘information’ to the shareholders in respect of the untrue and incorrect state of affairs of the company. Uploader Agreement, Read Accounting Notes, Procedures, Problems and Solutions, Learn Accounting: Notes, Procedures, Problems and Solutions, Difference between Internal Auditor and Cost Auditor, Valuation of Assets and Liabilities of a Company | Auditing, Verification of Assets and Liabilities of a Company | Auditing, Verification of Assets and Liabilities | Company | Auditing. Proprietorships and Partnership Firms shall undergo for tax audit if crosses the certain threshold of sales. It is nothing to him whether dividends are properly or improperly declared provided he discharges his own duty to the shareholders. Liabilities of a Company Auditor A Company Auditor is appointed under the Companies Act. Further, the auditors failed to highlight that some of the debts were time-barred. The auditor may be held liable for breach of trust or responsibility and for wilful misconduct and default, depending on the circumstances of each case. 9. 2. It is not his duty to consider what is good or what is bad policy. Who are eligible to appoint as statutory Auditor? The auditors denied the charge for negligence and put forth an argument that the alleged loss was the result of negligence on the part of the Company directors in entrusting so much money to the cashier and in not checking the petty cash from time to time. In Germany, for example, there are statutory caps of a fixed amount, but these do not apply for deliberate breaches of duty. Section 227 of Companies Act, 1956: Company auditor has to specify certain items in audit report. The Master of the Rolls, in the course of the judgment, said that “the auditor must take a certificate from a person who is in the habit of dealing with, and holding Securities and who he, on reasonable grounds, rightly believes to be, in the exercise of the best judgment, a trustworthy person to give such a certificate.”. He does not discharge his duty without inquiry and without taking any trouble to see that the books of the company themselves show the company’s true position. (6) The duty of an auditor is to convey in direct and express terms to the members any information which he thought proper to be communicated. Some important audit case laws relating to the liabilities of a statutory auditor. (1) The auditor’s duty was not to take stock unless there was something to arouse his suspicion as was held in the case of Kingston Cotton Mills. Audit of sole trading concerns, audit of partnership firms, etc. So there may be terms between auditor and client according to which auditor has to become liable on certain agreed occasions. (a) The extent to which an auditor accepts responsibility should be made clear beyond the scope of misunderstanding; (b) Where an auditor specifically restricts the scope of his report or expresses appropriate reservations in a note attached to and referred to in the financial statements he has prepared or the report which he has made thereon, this can constitute a disclaimer which will be effective against any action for negligence brought against him by third parties; (c) Where an individual shareholder uses the audited annual accounts for investment decisions no action would lie against the auditor as the accounts are not normally prepared for this purpose; (d) Where the audited accounts would be used for tax assessment purposes by the Revenue Department, no action would lie in case of reliance upon accounts negligently prepared since in fact the failure to recover tax is attributable to the death or insolvency or decamping of the taxpayer, not to the negligence of the auditor; (e) The third parties entitled to recover damages will be limited to those who by reason of accountants’ negligence in preparing reports, accounts, or financial statements on which the third parties place reliance suffer financial loss in circumstances where the accountants knew or ought to have known that the reports, accounts, and the financial statements in question were being prepared for the purpose specifically or transaction which gave rise to the loss and that they would be shown to and relied on by third parties in that particular connection. iii) Right of access to books and papers of branch 255(2). (i) Liability to Clients: Action for negligence can be-. The audit firms must make sure that in case of any negligence or bad faith. (2) An auditor is guilty of negligence if he fails to detect the over-valuation of work-in- progress when ample materials as evidence are available for testing the accuracy of the figures given to him. Liability of auditor for branch audit is followings: v Responsibility: Even though the statutory auditor is not responsible for the work performed by the branch auditor, it is suggested that there should be sufficient liaison between the two auditors to ensure that the work is performed expeditiously. Common law liability arises from negligence, breach of contract, and fraud. Superintendent and Remembrance of Legal Affairs, Bengal Vs. Akhil Bandhu Guha and Others (1936): (1) The managing directors of Dhakeswari Cotton Mills Ltd. were also the managing directors of a newly formed company named East Bengal Jute and Cotton Mills Ltd. (2) The amount against the item ‘Deposit by others’ shown in the balance sheet of the first Company was actually arrived at by deducting the loan amount advanced to the other new company. 40 Lakhs annually or has capital contribution more than 25 Lakhs. a) Liability under Companies Act 2013 b) Liability under the Indian Penal Code c) Both a&b d) None of the above 134. This Appeal was dismissed by the Court with cost. In the US auditors cannot limit liability for their own negligence. The company also alleged that the auditor entrusted the major work to his assistant who did not exercise reasonable skill and care to the audit. The noticeable feature of this legal decision and its practical application in auditing scene is that the Institute of Chartered Accountants in England and Wales came out with the following two statements concerning the auditor’s liability to third parties: (1) Statement no. (3) It was found that the book-keeper manipulated the wages sheets and embezzled money; but the auditors did not give due importance to the matter so as to bring it to the notice of the principal. When the overstatement was discovered, the banker (third party creditor) sued the auditors for both negligence and fraud. (iii) The directors trusted the dishonest manager for years and also the auditor’s report and declared dividends. An auditor is liable to pay damages for loss to his client in the event of non-fulfillment of the contract. An auditor who adopts such a course does so at his peril, and runs a very serious risk of being held judicially to have failed to discharge his duty. (3) If the auditor has called for the creditors’ statement of accounts upon which the payment was ordered and compared them with the ledger, he would have detected the suppression and carrying over to invoices. Auditing, India, Auditor, Types, Statutory Auditor, Liabilities of a Statutory Auditor. The auditor is prima facie liable for ultra vires payments but the extent of his liability for not detecting such payments depends on the existence of special circumstances. (4) An auditor need not be unnecessarily suspicious where there is nothing to excite suspicions. (2) The directors were bound to make good the losses arising out of the payment of dividend out of Capital and to the like amount the auditor and manager were for damages caused to the business. The loss arising out of auditor`s negligence should go to share holders. The Judge held that the auditor was guilty of negligence for not performing his duties with reasonable skill and care. The creditor-banker lent the firm about $ 165,000, based on the audited balance sheet which showed the assets at $ 2, 50,000 and the net worth at $ 1, 00,000. This report will basically discuss on the trend of auditor liability to third parties in United Kingdom (UK) and United States (US) as the liability pressure in these two countries is predominantly intense. Even if he does not issue an audit certificate, it does not relieve him from incurring liability. Armitage Vs. 15. The auditor may be held liable for his professional misconduct if he violates the professional code of conduct as instituted by the Chartered Accountants Act, 1949. Le Lievere and Dennes Vs. Gould (1893): The decision was – “The question of liability for negligence cannot arise at all until it is established that the man who has been negligent owed some duty to the person who seeks to make him liable for his negligence. (a) The debts due to the company, from Ellis and Co. (the stockbrokers of the company) and its General Manager were mis-described and shown under wrong account head, viz. The punishment under this act is same as for the giving or fabricating false evidence. 5. He is responsible on account of negligence in performance of his duties. (i) The auditor blindly signed the false Balance Sheet having been influenced by the dishonest manager and the secretary of the bank. 11. (2) “His duty with regard to the ascertainment of unrecorded liabilities must be determined by the nature of the business carried on. Key Words: Auditor, power, duties, liabilities Introduction: An auditor, to perform his duties must have certain powers, without which it may not be possible for him to perform his duties honestly and thereby, he might be held liable for any loss which the company might suffer. (iv) There was nothing to arise in the auditor’s mind any doubt as to the goodness of the debt. third parties), was not brought to light and reported by the auditors to the shareholders. Id. : Professional Liability of Accountants and Auditors. (2) Statement no. 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