Rights,Duties and Responsibilities of a Company Auditor - Auditing & Secretarial Practice

Rights of a Company Auditor

1. Right of access to books of account of Vouchers: An auditor of a company has a right of access to the books of accounts and vouchers of the company whether they are kept at the head office of the company or elsewhere.
2. Right to examine the cost records: An auditor of a company has a right to examine the cost records along with the quantitative records relating to production, sales, stocks etc.
3. Right to obtain information and explanations: An auditor of a company has a right to obtain from the directors and officers of the company such information and explanation as he may think necessary for the performance of his duties as an auditor.
4. Right to correct any wrong statement: An auditor of a company has a right to correct any wrong statement made by the Directors relating to the accounts to be laid before the company in the general meeting.
5. Right to comment on the inadequacy of the accounting system in his report: If the system of maintaining accounts is inadequate, he can advice the directors to amend the system of accounting.
6. Right to visit branches: The auditor of the company can visit the branch and examine the books and accounts and vouchers at the branch.
   
   MULTIPLE CHOICE QUESTION

   Try yourself: What is the right of an auditor regarding the books of accounts and vouchers of a company?

   A

   An auditor has the right to only access the books of accounts and vouchers kept at the head office of the company.

   B

   An auditor has the right to access the books of accounts and vouchers of the company, whether they are kept at the head office or elsewhere.

   C

   An auditor does not have the right to access the books of accounts and vouchers of the company.

   D

   An auditor can access the books of accounts and vouchers of the company, but only if they are kept at the head office.

   View Solution

   Correct Answer: BHide Explanation ⌃

   An auditor of a company has the right of access to the books of accounts and vouchers of the company, regardless of their location. This means that the auditor can examine these records whether they are kept at the head office or at any other location. This right ensures that the auditor can verify the accuracy and completeness of the financial records of the company, contributing to the overall transparency and reliability of the company's financial information.

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7. Right to receive notice and other communications of general meeting: - An auditor of a company has a right to receive notice and other communications relating to any general meeting, in the same way as a member of the company.
8. Right to attend the general meeting of the shareholders An auditor has the right to attend every general meeting of the shareholders.
9. Right to speak at the general meeting: - An auditor of a company has a right to speak at a general meeting where his certified accounts are discussed.
10. Right to sign the audit report: - An auditor has the right to sign the audit report.
11. Right to report to the members of the company: - An auditor has a right to report to the members of the company, if the accounts audited by him show an unsatisfactory state of affairs.
12. Right to report to the members of the company: - An auditor has a right to report to the members of the company, if the accounts audited by him show an unsatisfactory state of affairs.
13. Right to be indemnified: - An auditor of a company, being an officer of the company, has a right to be indemnified out of the assets of the company, for any liability incurred by him in defending himself against any proceedings by the company.
14. Right to receive any remuneration for his audit work: - An auditor of a company has a right to receive remuneration for his audit work provided he has completed the work which he undertook.
15. Auditor's right of lien: - An auditor has particular lien on the books of accounts audited by him for nonpayment of audit fees.

Duties and Responsibilities of a Company Auditor

The various duties of an auditor of a company can be grouped into four categories. They are:

1. Statutory duties.
2. Contractual duties
3. Certain duties imposed by legal or court decisions
4. Duties arising out of professional etiquette.

Statutory Duties: - Statutory duties refer to the duties imposed by the statute, i.e., by the Companies Act. The various statutory duties of an auditor under the Companies Act are:

(1) Duty to make certain enquiries: - An auditor of a Company should enquire:

1. Whether loans and advances have been properly secured.
2. Whether loans and advances have been shown as deposits.
3. Whether the transactions of the company are not prejudicial to the interests of the company.
4. Whether the personal expenses have been charged to revenue account.

(2) Duty to Report: - An auditor of a company should make a report to the shareholders on the accounts examined by him and balance sheet and profit and loss account. 

(3) Duty to comply with the directives of the Central Government: - The Central has been empowered to issue necessary directives to the auditors of certain companies to give specific reports on certain matters. When the central government issues any such directions, the auditors are required to comply with those directives.

(4). Duty to sign his audit report

(5). Duty to give a statement in prospectus: - A prospectus issued by an existing company should contain a statement from the auditor.

(6) Duty to certify the statutory report.

(7). Duty to certify the declaration of the solvency of the company.

(9). Duty to assist Central Government in connection with prosecution.

(10). Duty to make report on public deposits.

The important contractual duties of an auditor are:

1. An auditor has a duty to see that his appointment is in order.
2. He must perform all the duties under common law.

Duties imposed by legal or court decisions: -

1. An auditor must make himself fully acquainted with his duties under the Companies Act and the Articles of Association of the company.
2. He must not confine himself only to verify the arithmetical accuracy of the balance sheet but should also enquire into its real accuracy and fairness.
3. He should satisfy himself about the valuation of assets.
4. He should perform his duties with great care and skill.
5. It is the duty of a company auditor to check the stock properly.

Duties arising out of Professional Etiquette: -

1. Every auditor should carry on his duties with due regard to public interest.

2. An auditor should comply with the rules and regulations formulated by the Institute of Chartered Accountant of India.

3. He must be honest, sincere, technically competent and independent.

4. He should disclose full and fair information about the working and financial position of the company.

Liabilities of a Company Auditor

A Company Auditor is appointed under the Companies Act. So his liabilities are determined by the Companies Act.

Under the Companies Act, the liabilities of a company auditor can be grouped under two heads. They are

1. Civil Liabilities
2. Criminal liabilities

Civil liabilities: - Liability of an auditor to pay damages is known as civil liability. The civil liabilities of company auditor may be grouped under two heads. They are:

1. Liability for negligence
2. Liability for misfeasance

Liability for negligence: - An auditor of a company is appointed by the shareholders. As such, he becomes an agent of the shareholders; he must safeguard the interest of the shareholders and the company. To safeguard the interests of the shareholders and the company he must exercise reasonable care and skill in the performance of his duties .If he fails to do so, and shareholders or company suffers any loss, the auditor will be held liable to make good the loss.

The civil liability of an auditor for negligence has been confirmed in several leading cases. For instance

London Oil Storage Co. vs. Sears Hasluck and Co: - in this case, the auditor failed to verify the existence of assets as shown in the balance sheet; he is liable to pay damages to the company.

Liability for misfeasance: - Misfeasance means wrongful performance of a fiduciary duty. In other words, it means breach of duty imposed by law. If an auditor of a company does something wrongfully in the performance of his duties, resulting in financial loss, he is guilty of misfeasance.

If an auditor of a company does not comply with the provisions of section 227

(2) of the Companies Act, which deals with the statements the auditor has to make in his report to the shareholders, he is guilty of misfeasance and is liable to pay fine.

If an auditor signs the auditor's report in violation of the requirements of section 227 and 229 of the companies Act of 1956, he is guilty of misfeasance and becomes liable to pay fine.

An auditor who misapplies any money belong to the company he becomes guilty of misfeasance and liable for damages caused to the company.

If an auditor knowingly authorizes the issue of a prospectus which contains a false statement, he becomes liable to pay a fine and imprisonment.

The civil liability of an Auditor of a company for misfeasance has been confirmed in many cases. For instance:

In Re London and General Bank Ltd - in this case the assets of the company were overvalued. As a result, dividend was paid out of capital. The auditor was aware of the over valuation of the assets. But he did not report the matter to the share holders. It was held that an auditor is liable for misfeasance.

An auditor may be granted relief by the court from the liability for misfeasance if he proved that he has acted honestly and reasonably.

Criminal liability of a company auditor 

Criminal liability means liability for a crime. It arises out of an act constituting a crime. The criminal liabilities of an auditor may arise under the Companies Act, the India penal Code, the Indian Income Tax Act and Chartered Accountant Act.

Criminal liabilities of an Auditor under the Companies Act

Under the Companies Act an auditor is held criminally liable in the following cases.

1. Under section 63 for misstatement in prospectus.
2. Under section 68 for fraudulently inducing persons to invest money.
3. Under section 233, for on complaints with section 227 and 229 of the company's Act.
4. Under section 240 for failure to assist investigation
5. Under section 242 for failure to assist prosecution of guilty officers.
6. Under section 477, for failure to return property, books or papers.
7. Under section 539 for falsification of books
8. Penalty for deliberate act of commission or omission under section 628.

Criminal liability of an Auditor under Indian Penal Code. 

If an auditor issues signs any certificate believing that such a certificate is false in any material point, he becomes punishable.

Criminal liability of an Auditor under the income tax act of 1961.

An auditor may become criminally liable in the following circumstances

1. If has been committed of an offence in connection with taxation proceedings, he will be disqualified from representing an assessee for a certain period .
2. If an auditor submits knowingly any false statement in the form of account for the preparation income tax returns, he becomes liable for imprisonment

Criminal liability of an Auditor under a Chartered Accountants Act

1. If a person not being a chartered accountant acts as an auditor of a company and signs any document, he becomes liable for criminal prosecution.
2. A member of the Institute will be deemed to be guilty of professional misconduct if he submits any return, statements or form to the council knowing them to be false.