Rights, Duties and Liabilities of An Auditor
Rights, Duties and Liabilities of An Auditor
A) RIGHTS OF AN AUDITOR
According to the Companies Act, company auditor has the following rights:
4. Right to Signature on Audit Report: only the person appointed as auditor of the company, or
where a firm is so appointed, only a partner in the firm practicing in India, may sign the auditors
report, or sign or authenticate any other document of the company required by law to be signed or
authenticated by the auditor.
5. Right to receive Notice and other Communications relating to General Meeting and attend
them:
an auditor of a company has a right to receive notices and other communications relating to General
Meeting in the same way as a member of the company. He is also entitled to attend any General
Meeting which he attends or any part of the business which concerns him as an auditor.
According to the power of the auditor, he may make any statement or explanation with regard to the
accounts as he may desire. He need not, however, answer any questions.
Ordinarily, it is not necessary for the auditor to attend every General Meeting, but it will be good for
him to attend meetings in the following circumstances:
(a) When his report contains important qualifications directly affecting the management, so that his
remarks may not be misunderstood or misinterpreted.
(b) When he has received a notice from the company that someone else is going to be proposed for
appointment as auditor of the company at the Annual General Meeting.
(c) When he has been specially asked by the management to be present.
6. Right of being indemnified:
an auditor (being an officer of a company), has a right to be indemnified out of the assets of the
company against any liability incurred by him defending himself against any civil and criminal
proceedings by the company if it is proved that the auditor has acted honestly or the judgement
delivered is in his favour.
7. Right to have Legal and Technical Advice:
He has a right to seek the opinion of the experts and, thus, take legal and technical advice. This is
necessary to give his opinion in his report. (Re. London and General Bank Case, 1895).
8. He has a right to receive his remuneration provided he has completed the work which he
undertook to do.
9. He has a right to get lien on the books of accounts and documents already lying in his possession
if there is a default from the company side to make the payment of audit fees.
B) Duties of an Auditor:
I. According to the Companies Act:
To Enquire:
The auditor shall enquire:
(a) Whether loans and advances made by a company on the basis of security have been properly
secured and whether the terms on which they have been made are not prejudicial to the interests of
the company or its members.
(b) Whether transactions of the company which are represented merely by book entries are not
prejudicial to the interests of the company.
(c) Where the company is not an investment company or a banking company, whether so much of
the assets of the company, as consists of shares, debentures and other securities have been sold at
a price less than at within they were purchased by the company.
(d) Whether loans and advances made by the company have been shown as deposits.
1. it is the duty of an auditor to sign the report prepared by him. Only a partner in the firm practicing
in India may sign the Auditors Report or authenticate any other document.
2. the Prospectus issued by an existing company shall contain a report from the auditor of the
company regarding:
(i) Profits and losses;
(ii) Assets and liabilities of the company and its subsidiaries; and
(iii) Rates of dividends paid by the company for each of the five it is auditors duty to submit his
report.
3. the auditors of the company shall, in so far as the statutory report relates to the shares allotted by
the company, the cash received in respect of shares and the receipts and payments of the company,
certify it as correct after the same has been certified as correct by not less than two Directors of the
company, one of whom shall be a Managing Director.
(Every company shall within a period of not less than one month and not more than six months from
the date from which the company is entitled to commence business, hold a General Meeting of the
members which shall be called the statutory Meeting.)
4. When a company goes into its voluntary winding up and a declaration of solvency is made by its
Directors, such a declaration is to be accompanied by the report of the auditors of the company. It is
the duty of the auditors to make such a report.
5. it is the duty of an auditor to preserve and to produce to an inspector or any person authorized by
him in this behalf with the previous approval of the Central Government, all books and papers of, or
relating to the other body corporate which are in their custody or poser and otherwise to give to the
Inspector all assistance in connection with the investigation which they are reasonably able to give .
Duties of an Auditor:
II. Under the Legal Decisions
He must take reasonable care to ascertain that they do. Unless he does this, his duty will be worse
than a farce the auditor, however, is not bound to do more than exercise reasonable care and skill in
making the enquiries and investigations. He is not an insurer; he does not guarantee that the books
do correctly show the true position of the companys affairs. He must be honest..
5. Re: Kingston Cotton Mills Ltd. (1896):
The auditor is not an insurer and all that he is required to do is to exercise reasonable care and skill.
This reasonable care depends on the particular circumstances of each case.
Other Duties based on Case Laws
C} LIABILITIES
OF AN AUDITOR:
1. LIABILITY OF NEGLIGENCE:A person who is appointed auditor, he should perform his duties by using the reasonable skill and
diligence. If auditor is found negligent in performing his duty then he may be sued in the Civil Court for
damages.
Negligent liability arises when auditor has been negligent in examining the book of account. He is also
liable if he fails to detect deflections or does not discover the errors which he should discover. Because he
fails to exercise a reasonable care and skill in the performance of his duties.
i. Liability In Case Of Loss :Auditor will be liable to compensate the loss which is suffered by client due to his negligence.
2. LIABILITY FOR MISFEASANCE:Misfeasance means the breach of duty breach of trust involving the company in loss. The company may
proceed against the auditors by way of regular suit in case of misfeasance. Company can claim damages
suffered. Misfeasing proceedings can be taken against die auditor by the directors. Promoters, managing
agents when company is in liquidation.Generally misfeasance liability arises in the case of winding up a
company.
3. CRIMINAL LIABILITY:During the course of audit, auditor may commit various offenses and he becomes criminally liable.
Offenses Criminally Liable :1. If auditor's report does not comply with the requirements of law.
3. If it is proved that auditor has falsified the accounts or made any report, statement, balance sheet or
any document false he will be held criminally liable.
4. LIABILITY TO THE THIRD PARTY :Auditor has no contract with the third parties. He is not employed by the third party so he has no duty to
them. But the point is that as the accounts are audited by the audit, third party may also see the report,
third party rely the report without the further inquiry. For example bank only study the certified balance
sheet and lends the money to the company. Tax department and others also rely on the audited
statements. "Now the question is that whether the auditor is liable if they rely on the accounts certified by
him and suffered a loss should he compensate the loss.
Answer is that in following cases he will be responsible to the third party.
2. It was known to the auditor that statement was not true infect.
4. If the statement was made with the intention that the other party should act on it.
5. If auditor gave his consent for the inclusion of such statements in the prospectus.
******************************************************************