Auditors play a crucial role in the financial world, ensuring that companies adhere to regulations and maintain transparency. They are tasked with reviewing financial records and verifying their accuracy, a responsibility that is vital for maintaining corporate integrity. This article will explore the role of an auditor, their duties, and the laws that govern their work.
Who is an Auditor?
An auditor is a professional appointed to examine the financial records of a company to ensure compliance with regulations. The term “audit” originates from the Latin word “audire,” meaning “to hear.” Auditors are responsible for verifying the accuracy of a company’s financial statements and ensuring that they comply with established accounting standards. To become an auditor, one must be registered with the Institute of Chartered Accountants of India (ICAI) as a practicing Chartered Accountant (CA).
Each year, auditors prepare audit reports that outline a company’s financial position. These reports are crucial for maintaining transparency and ensuring that a company adheres to tax laws and accounting standards. Auditors can be internal, working as employees of the company, or external, providing an unbiased opinion on the company’s financial statements.
Duties of an Auditor
The role of an auditor comes with significant responsibilities. They must maintain the company’s financial records and ensure that these records meet the standards set by the Companies Act, 2013. This involves conducting thorough investigations, verifying financial statements, and reporting any discrepancies.
Enquiries as per Section 143(1) of the Companies Act, 2013
Auditors must carry out specific inquiries under Section 143(1) of the Companies Act, 2013. These include:
Loans and Advances Issued by the Company
Auditors must review and certify the fairness of the company’s loans and advances. They are responsible for ensuring that these records are accurate and secure, safeguarding stakeholder interests.
Transactions Recorded in Accounting Books
Auditors verify the accuracy of financial transactions recorded in the company’s books. They ensure that these records reflect the company’s values and objectives and are free from fabrications.
Sale of Investments
Auditors must verify the valuation of assets and ensure that investments are sold at a reasonable price. This involves confirming any transactions involving the liquidation of securities.
Loans and Advances as Deposits
Auditors must ensure that loans and advances are correctly classified in the company’s financial records. They must research and verify the origin and value of these records.
Charging of Personal Expenses to Revenue Account
Auditors must ensure that personal expenses are not included in the company’s financial records. These expenses must be kept separate to maintain accurate financial statements.
Allotment of Shares for Cash
Auditors must verify the records of shares allotted for cash, ensuring that the cash value received corresponds to the shares issued.
Creating an Audit Report
Section 143(3) of the Companies Act, 2013, mandates that auditors prepare a comprehensive audit report. This report must include an analysis of the company’s transactions, ensuring compliance with auditing standards. The audit report is crucial for showcasing the company’s financial position and must align with regulatory requirements.
Compliance with Auditing Standards
Auditors must adhere to auditing standards set by the Central Government, in consultation with the NFRA and ICAI. These standards guide auditors in conducting their duties and ensure consistency in the auditing process.
Addressing Fraud
If auditors detect fraud, they must report it to the Central Government as per Section 143(15) and Rule 13 of the Companies (Audit and Auditors) Rules, 2014. This involves notifying directors or the audit committee and seeking their response within a specified timeframe.
Branch Audits
Auditors may conduct branch audits, preparing reports based on branch records and sharing findings with the company’s internal auditors.
Responsibilities During Insolvency
During the winding up of a company, auditors must provide financial audits as required by Section 305 of the Companies Act, 2013. This ensures transparency and prevents fraudulent activities during the company’s closure.
Professional Conduct
Auditors must adhere to ethical standards, maintaining confidentiality and integrity in their work. They must avoid conflicts of interest and ensure fairness in all dealings.
Additional Statutory Duties
Auditors have additional statutory duties, such as certifying and signing audit reports, verifying the accuracy of information in the company’s prospectus, and ensuring compliance with accounting standards.
Rights of an Auditor
Auditors have several rights under the Companies Act, 2013, which support their duties and ensure they can perform their roles effectively.
Right to Access Company Accounts
Auditors have the right to access all financial records necessary for conducting an audit. This includes the authority to inspect records of subsidiary companies.
Right to Make Suggestions
Auditors can suggest improvements or changes to financial transactions and documentation. If suggestions are not followed, they can report non-compliance to the board.
Right to Sign the Audit Report
Auditors have the right to sign audit reports, certifying their accuracy. This is a significant responsibility, as it verifies the integrity of the financial statements.
Right to Conduct Branch Visits
Auditors can visit branch offices to inspect financial statements and accounts, ensuring accuracy across all company locations.
Right to Attend Meetings
Auditors have the right to receive notices and attend meetings, such as AGMs and board meetings, where financial matters are discussed.
Right to be Indemnified
Auditors are protected from personal liability if they perform their duties with due care and without negligence.
Right to Make Representation
Retiring auditors have the right to represent themselves in meetings discussing their removal or reappointment.
Right to be Remunerated
Auditors are entitled to reasonable remuneration for their work, as decided in the company’s AGM or by the board of directors.
Right to Seek Legal and Technical Support
Auditors can seek assistance from legal and technical experts for issues beyond their expertise, ensuring comprehensive audits.
Landmark Orders and Judgments
Several landmark cases have defined the duties and responsibilities of auditors:
Re: London and General Bank (No.2) (1895) Ch. 673
This case established that auditors must report crucial information to shareholders. The court held auditors liable for not disclosing imbalances in asset values.
Re: Allen Craig and Co. (London) Ltd. (1934) CH 483
The court ruled that auditors are responsible for notifying shareholders about the company’s financial position, even if not required to arrange meetings.
M/s BSR Associates LLP and Coffee Day Enterprises Ltd. (CDEL) (2024)
In this case, auditors were penalized for participating in fund diversion, highlighting the importance of maintaining professional conduct.
Tri-Sure India Ltd. vs. A.F. Ferguson And Co. And Others (1985)
The court ruled that auditors are not detectives and are not liable for fraud unless there is reason to suspect wrongdoing.
Liabilities of Auditors
Auditors can be held liable for failing to comply with their duties, facing civil and criminal penalties.
Civil Liability
Auditors may be fined for non-compliance with auditing provisions, with penalties ranging from ₹25,000 to ₹5 lakh.
Criminal Liability
In cases of intentional fraud, auditors face criminal charges, with penalties including imprisonment and fines.
Disqualification and Ban
Auditors found guilty of fraud can be disqualified and banned from auditing for five years, with additional penalties under Section 447 of the Act.
Penalties for Failure to Report Fraud
Auditors who fail to report fraud face penalties up to ₹25 lakh, emphasizing the importance of vigilance in their role.
Conclusion
Auditors are essential for maintaining transparency and integrity in a company’s financial dealings. They must adhere to strict regulations and conduct thorough audits to ensure compliance. Their role is vital for safeguarding stakeholder interests and supporting the company’s growth.
Frequently Asked Questions (FAQs)
What should every auditor know?
Auditors should have a thorough understanding of the company they audit, including its culture and operations. This knowledge helps them prioritize the company’s financial growth and stability.
Is an auditor the same as an accountant?
No, auditors and accountants have different roles. Accountants manage daily financial transactions and tax forms, while auditors investigate and verify the accuracy of these records, identifying potential fraud or discrepancies.
