Chapter two: Auditing Profession

2.1. The auditing profession

The audit function is carried out in a complex environment composed of interrelationships between
governmental and professional organizations and individual auditors and audit firms. These regular and
enduring relationships form the structure of a profession.

For cultural and historical reasons, individual statutory auditors have usually been designated rather than
firms. Increasingly, however, firms are being appointed as statutory auditors, including, CPA, French
accounting companies and professional auditing partnerships.

The function of auditors is to reassure users of financial statements that the facts are correct and to
highlight any problems with the statements or with the financial position, irrespective of compliance with
standards. If the profession cannot regulate itself, it shouldn't be a surprise that government agencies step
in.

2.2. Characterstic of a profession

What is the difference between a job and a profession? Obviously, most people identify doctors, lawyers,
and the clergy as professionals? How about engineers, librarians, architects, and accountants? How about
internal auditors? One can infer that being recognized, as a profession must be very important if so many
people want to attain it. Let us examine what a profession means and why it is important for auditing to
be recognized as one.

A profession is an organized group of people who possess a unique skill, which benefits society. Once
society recognizes a profession a special relationship develops in which the profession is allowed a degree
of self-regulation in exchange for serving the public good. This self-regulation takes the form of entrance
requirements for those wishing to enter the profession; ethics and standards to guide practitioners in
discharging their professional duties, and a quality control system to ensure that services performed are of
the highest quality. Do auditors meet this definition? For instance, auditors are organized and represented
by the professional associations. Any recognized profession has characteristics to be shared with other
professions. The most important of these characteristics are:

 Responsibility to serve the public: Acceptance of social responsibility

 Complex body of knowledge
 Standard of qualification for admission
 Need for public confidence/level of status recognition

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  Standard conduct of behavior
2.3. Auditing standards
To encourage auditor to conduct themselves at high level in auditing; auditing standards, professional
code of conducts and legal liabilities are established and recommended by various professional
institutions. These ways of encouraging quality of audit services are set by America Institutes of
Certified Public Accountants (AICPA), The Auditing Standards Board (ASB),
International Auditing
and Assurance Standards Board (IAASB); Public Company Accounting Oversight
Board (PCAOB), Securities and Exchange Commission (SEC), International Ethics
Standards Board for Accountants (IESBA) and Sarbanes –Oxley.

Auditing standards are general guidelines to aid auditors in fulfilling their professional responsibilities in
the audit of historical financial statements. They include consideration of professional qualities such as
competence and independence, reporting requirements, and evidence. The three main sets of auditing
standards are International Standards on Auditing, U.S. Generally Accepted Auditing Standards for
entities other than public companies, and PCAOB Auditing Standards.

2.3.1. International Auditing Standards

International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance
Standards Board (IAASB) of the International Federation of Accountants (IFAC). IFAC is the worldwide
organization for the accountancy profession, with 159 member organizations in 124 countries,
representing more than 2.5 million accountants throughout the world. The IAASB works to improve the
uniformity of auditing practices and related services throughout the world by issuing pronouncements on
a variety of audit and attest functions and by promoting their acceptance worldwide. ISAs do not override
a country’s regulations governing the audit of financial or other information, as each country’s own
regulations generally govern audit practices.

These regulations may be either government statutes or statements issued by regulatory or professional
bodies, such as the Australian Auditing & Assurance Standards Board or Spain’s Instituto de
Contabilidad y Auditoría de Cuentas. Most countries, including the United States, base their auditing
standards on ISAs, modified as appropriate for each country’s regulatory environment and statutory
requirements.

The Auditing Standards Board in the U.S. has revised most of its standards to converge with the
international standards. In addition, the PCAOB considers existing international standards in developing

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its standards. As a result, U.S. standards are mostly consistent with international standards, except for
certain requirements that reflect unique characteristics of the U.S. environment, such as legal and
regulatory requirements. For example, PCAOB Standard 5 (AS 5) addresses audits of internal control
over financial reporting required by the Sarbanes –Oxley Act.

2.3.2. U.S Generally Accepted Auditing Standards

Auditing standards for private companies and other entities in the United States are established by the
Auditing Standards Board (ASB) of the AICPA. These standards are referred to as Statements on
Auditing Standards (SASs). These Generally Accepted Auditing Standards (GAAS) are similar to the
ISAs, although there are some differences. If an auditor in the United States is auditing historical financial
statements in accordance with ISAs, the auditor must meet any ISA requirements that extend beyond
GAAS.

Prior to passage of the Sarbanes–Oxley Act, the ASB established auditing standards for private and public
companies. The PCAOB now has responsibility for auditing standards for public companies, while the
ASB continues to provide auditing standards for private companies and other entities.

2.3.3. PCAOB Auditing Standards

The PCAOB initially adopted existing auditing standards established by the ASB as interim audit
standards. In addition, the PCAOB considers international auditing standards when developing new
standards. As a result, auditing standards for U.S. public and private companies are mostly similar.
Standards issued by the PCAOB are referred to as PCAOB Auditing Standards in the audit reports of
public companies and when referenced in the text, and apply only to the audits of public companies.
International auditing standards as adopted by standard-setting bodies in individual countries
apply to audits of entities outside the United States. Generally accepted auditing standards are similar to
international auditing standards and apply to the audits of private companies and other entities in the
United States. PCAOB auditing standards apply to audits of U.S public companies and other SEC
registrants. There are more similarities than differences in the three sets of standards. When we refer to
“auditing standards,” the term applies to all audits unless otherwise noted.

2.4. Generally Accepted Auditing Standards (GAAS)

The broadest guidelines available to auditors are the 10 generally accepted auditing standards (GAAS),
which were developed by the AICPA. The 10 generally accepted auditing standards fall into three
categories:

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  General standards
 Standards of field work
 Reporting standards

These standards are not sufficiently specific to provide any meaningful guide to practitioners, but they do
represent a framework upon which the AICPA can provide interpretations.

2.4.1. General Standards

The general standards stress the important personal qualities that the auditor should possess.

Adequate Technical Training and Proficiency: The first general standard is normally interpreted as
requiring the auditor to have formal education in auditing and accounting, adequate practical experience
for the work being performed, and continuing professional education. Recent court cases clearly
demonstrate that auditors must be technically qualified and experienced in those industries in which their
audit clients are engaged.

In any case in which the CPA or the CPA’s assistants are not qualified to perform the work, a
professional obligation exists to acquire the requisite knowledge and skills, suggest someone else who is
qualified to perform the work, or decline the engagement.

Independence in Mental Attitude and appearance: The Code of Professional Conduct and SASs stress
the need for independence. CPA firms are required to follow several practices to increase the likelihood
of independence of all personnel. For example, there are established procedures on larger audits when
there is a dispute between management and the auditors.

The very demand for audit calls for integrity and objectivity in the person who is to be creditable by all
those who put trust and confidence in him and his work. Thus, maintaining independence is important
prerequisite for the auditor. The basic principle states that a member’s objectivity must be beyond
question if he is to report as auditor. That objectivity can only be assured if the member is, and is seen to
be independent. The most important areas of risk are considered as follows:

 Undue dependence on an audit client

o Fee paid by one client or group of connected clients should not exceed 15% [10% for
public interest] of the gross practice income.
 Family and other personal relationships
o Close relationship with employee, officer or have mutual business interest
o An officer/employee being closely connected with a partner of member of staff

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  Beneficial interests in shares and other investments
 Loans
 Hospitality: providing goods and services
 Provision of other services to audit clients
 Overdue fees
 Actual or threatened litigation
 Associated firms: influences outside the practice
 Voting on audit appointments
Every firm should establish review procedures [including an annual review] in order to guard against loss
of independence. These procedures should enable a firm to satisfy itself that each engagement may be
properly accepted or be continued, and to identify situations where independence may be at risk and
where appropriate safeguards should be applied. Such safeguards might include [dependent on the size
and circumstances of the practice/clients]:

 The inclusion of a manager or other qualified employee in the audit team;

 Rotation of the engagement partner;
 Rotation of senior staff members.
Due Professional Care: The third general standard involves due care in the performance of all aspects of
auditing. Simply stated, this means that auditors are professionals responsible for fulfilling their duties
diligently and carefully. Due care includes consideration of the completeness of the audit documentation,
the sufficiency of the audit evidence, and the appropriateness of the audit report. As professionals,
auditors must not act negligently or in bad faith, but they are not expected to be infallible.

2.4.2. standards of field works

The standards of field work concern evidence accumulation and other activities during the actual conduct
of the audit.

Adequate Planning and Supervision: The first standard requires that the audit be sufficiently planned to
ensure an adequate audit and proper supervision of assistants. Supervision is essential in auditing because
a considerable portion of the field work is done by less experienced staff members.

Understand the Entity and its Environment, Including Internal Control: To adequately perform an
audit, the auditor must have an understanding of the client’s business and industry. This understanding
helps the auditor identify significant client business risks and the risk of significant misstatements in the
financial statements. For example, to audit a bank, an auditor must understand the nature of the bank’s

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operations, federal and state regulations applicable to banks, and risks affecting significant accounts such
as loan loss reserves. One of the most widely accepted concepts in the theory and practice of auditing is
the importance of the client’s system of internal control for mitigating client business risks, safeguarding
assets and records, and generating reliable financial information.

If the auditor is convinced that the client has an excellent system of internal control, one that includes
adequate internal controls for providing reliable data, the amount of audit evidence to be accumulated can
be significantly less than when controls are not adequate. In some instances, internal control may be so
inadequate as to preclude conducting an effective audit.

Sufficient Appropriate Evidence: Decisions about how much and what types of evidence to accumulate
for a given set of circumstances require professional judgment. The auditor must concern with the type
and amount of evidence accumulation and the circumstances affecting the amount and types needed.

2.4.3. The standards of reporting

The reporting standards require the auditor to prepare a report on the financial statements taken as a
whole. The reporting result must indicate: (1) whether the statements are presented in accordance with
GAAP, (2) Adequacy of informative disclosures and (3) circumstances in which GAAP have not been
consistently applied in the current year compared with the previous one, and it must (4) express opinion
on financial statements.

2.5. Statements on auditing standards

The 10 generally accepted auditing standards are too general to provide meaningful guidance, so auditors
turn to the SASs issued by the ASB for more specific guidance. These statements interpret the 10
generally accepted auditing standards and have the status of GAAS and are often referred to as auditing
standards or GAAS, even though they are not part of the 10 generally accepted auditing standards.
Generally accepted auditing standards and SASs are regarded as authoritative literature, and every
member who performs audits of historical financial statements is required to follow them under the
AICPA Code of Professional Conduct. The ASB issues new statements when an auditing problem arises
of sufficient importance to warrant an official interpretation. At this writing, SAS 120 was the last one
issued and incorporated into the text materials, but readers should be alert to subsequent standards that
influence auditing requirements.

2.5.1. GAAS and Standards of Performance

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Although GAAS and the SASs are the authoritative auditing guidelines for members of the profession,
they provide less direction to auditors than might be assumed. A limited number of specific audit
procedures are required by the standards, and there are no specific requirements for auditors’ decisions,
such as determining sample size, selecting sample items from the population for testing, or evaluating
results. Many practitioners believe that the standards should provide more clearly defined guidelines for
determining the extent of evidence to be accumulated. Such specificity would eliminate some difficult
audit decisions and provide a line of defense for a CPA firm charged with conducting an inadequate audit.

However, highly specific requirements could turn auditing into mechanistic evidence gathering, devoid of
professional judgment. From the point of view of both the profession and the users of auditing services,
there is probably greater harm in defining authoritative guidelines too specifically than too broadly.
GAAS and the SASs should be looked on by practitioners as minimum standards of performance rather
than as maximum standards or ideals. At the same time, the existence of auditing standards does not mean
the auditor must always follow them blindly. If an auditor believes that the requirement of a standard is
impractical or impossible to perform, the auditor is justified in following an alternative course of
action. Similarly, if the issue in question is immaterial in amount, it is also unnecessary to follow the
standard. However, the burden of justifying departures from the standards falls on the auditor.

When auditors desire more specific guidelines, they must turn to less authoritative sources, including
textbooks, journals, and technical publications. Materials published by the AICPA, such as the Journal of
Accountancy and industry audit guides, furnish assistance on specific questions.

2.6. Quality control standards and practices

For a CPA firm, quality control comprises the methods used to ensure that the firm meets its
professional responsibilities to clients and others. These methods include the organizational structure of
the CPA firm and the procedures the firm establishes. For example, a CPA firm might have an
organizational structure that ensures the technical review of every engagement by a partner who has
expertise in the client’s industry.

Auditing standards require each CPA firm to establish quality control policies and procedures. The
standards recognize that a quality control system can provide only reasonable assurance, not a guarantee,
that auditing standards are followed. Quality control is closely related to but distinct from GAAS. To
ensure that generally accepted auditing standards are followed on every audit, a CPA firm follows
specific quality control procedures that help it meet those standards consistently on every engagement.

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Quality controls are therefore established for the entire CPA firm, whereas GAAS are applicable to
individual engagements.

2.6.1. Elements of Quality Control

Each firm should document its quality control policies and procedures. Procedures should depend on such
things as the size of the firm, the number of practice offices, and the nature of the practice. The quality
control procedures of a 150-office international firm with many complex multinational clients should
differ considerably from those of a five-person firm specializing in small audits in one or two industries.

2.6.1.1. peer review

Public accounting firms must be enrolled in an AICPA approved practice-monitoring program for
members in the firm to be eligible for membership in the AICPA. Practice monitoring, also known as
peer review, is the review, by CPAs, of a CPA firm’s compliance with its quality control system. The
purpose of a peer review is to deter - mine and report whether the CPA firm being reviewed has
developed adequate quality control policies and procedures and follows them in practice. Unless a firm
has a peer review, all members of the CPA firm lose their eligibility for AICPA membership.

The AICPA Peer Review Program is administered by the state CPA societies under the overall direction
of the AICPA peer review board. Reviews are conducted every three years, and are normally performed
by a CPA firm selected by the firm being reviewed, although the firm can request that it be assigned a
reviewer through the administering state society. Firms required to be registered with and inspected by
the
PCAOB must be reviewed by the AICPA National Peer Review Committee to evaluate the non-SEC
portion of the firm’s accounting and auditing practice that is not inspected by the PCAOB. After the
review is completed, the reviewers issue a report stating their conclusions and recommendations. Results
of the peer review are included in a public file by the AICPA.

Peer review benefits individual firms by helping them meet a quality control standard, which, in turn,
benefits the profession through improved practitioner performance and higher-quality audits. A firm
having a peer review can further benefit if the review improves the firm’s practice, thereby enhances its
reputation and effectiveness, and reduces the likelihood of lawsuits. Of course, peer reviews are
expensive to con - duct, so the benefits come at a cost.

2.7. Audit Practices and Quality Center

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The AICPA has established audit practice and quality centers as resource centers to improve audit
practice quality. The Center for Audit Quality (CAQ) is an autonomous public policy organization
affiliated with the AICPA serving investors, public company auditors and the capital markets. The
Center’s mission is to foster confidence in the audit process and to make public company audits even
more reliable and relevant for investors. The Private Companies Practice Section (PCPS) provides
practice management information to firms of all sizes.

In addition to these firm resources, the AICPA has established audit quality centers for governmental
audits and employee benefit plan audits.

2.8. Professional Ethics

Our society has attached a special meaning to the term professional. Professionals are expected to
conduct themselves at a higher level than most other members of society. For example, when the press
reports that a physician, clergyperson, U.S. senator, or CPA has been indicted for a crime; most people
feel more disappointment than when the same thing happens to people who are not labeled as
professionals. The term professional means a responsibility for conduct that extends beyond satisfying
individual responsibilities and beyond the requirements of our society’s laws and regulations. A CPA, as
a professional, recognizes a responsibility to the public, to the client, and to fellow practitioners, including
honorable behavior, even if that means personal sacrifice.
Thus, all recognized professions have developed codes of professional ethics or code of professional
conduct. Like auditing standards, the fundamental purpose of such codes is to provide members with
guidelines for maintaining a professional attitude and conducting themselves in a manner that will
enhance the professional stature of their discipline.
Code of professional coduct in any profession is established to build public confidence, to judge the
quality of work and means of grounding guidance of conduct for practitioners. code of professional
conduct will be developed by a particular professional body where by all memvber will be governed with
it. The advantages of prescribing professional code of conduct is to promote positive activity and
encourage high level of performance while preventing mal-practices. However, there is difficulty in
concretising them because:
The AICPA Code of Professional Conduct provides both general standards of ideal
conduct and specific enforceable rules of conduct. Ideal standards of ethical conduct stated in
philosophical terms and they are not enforceable.

Ethical Principles

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 1. Responsibilities In carrying out their responsibilities as professionals, members should exercise
sensitive professional and moral judgments in all their activities.
2. The Public Interest Members should accept the obligation to act in a way that will serve the
public interest, honor the public trust, and demonstrate commitment to professionalism.
3. Integrity To maintain and broaden public confidence, members should perform all professional
responsibilities with the highest sense of integrity.
4. Objectivity and Independence A member should maintain objectivity and be free of conflicts of
interest in discharging professional responsibilities. A member in public practice should be
independent in fact and appearance when providing auditing and other attestation services.
5. Due Care A member should observe the profession’s technical and ethical standards, strive
continually to improve competence and quality of services, and discharge professional
responsibility to the best of the member’s ability.
6. Scope and Nature of Services A member in public practice should observe the principles of the
Code of Professional Conduct in determining the scope and nature of services to be provided.

The enforceable rules of conduct of AICPA Code of Professional Conduct are Minimum
standards of ethical conduct stated as specific rules. The main areas covered in this headings are:

1. Independence: A member in public practice shall be independent in the performance of

professional services as required by standards promulgated by bodies designated by Council.
2. Integrity and objectivity: In performing any professional service, a member shall maintain
objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly
misrepresent facts or subordinate his or her judgment to others.
3. General standards: For all services, a member shall comply with the following professional
standards and interpretations thereof by bodies designated by Council: (1) undertake only those
professional services that the member can reasonably expect to complete with professional
competence, (2) exercise due professional care, (3) adequately plan and supervise all
engagements, and (4) obtain sufficient relevant data to afford a reasonable basis for all
conclusions or recommendations.
4. Compliance with standards: A member who performs auditing, review, compilation,
management consulting, tax, or other professional services shall comply with standards
promulgated by bodies designated by Council.
5. Accounting principles: A member shall follow the professional audit reporting standards
promulgated by bodies designated by Council in issuing reports about entities’ compliance with
generally accepted accounting principles.

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6. Confidential client information: A member in public practice shall not disclose any
confidential client information without the specific consent of the client, except for the some
specific situations. The auditor has neither a general right nor duty to make unauthorized
disclosures to the tax authorities, the police, or any other body. There are however circumstances
in which he is free to disclose information regardless of his client’s wishes, and circumstances in
which he has obligation to do so. For example;

 When the court orders him

 Where he suspects his client of offences of terrorism
 Where he suspects his client to be a drug trafficker to be laundering the proceeds of drug
trafficking
 Peer review
 Response to ethics division
 Obligations related to technical standards
Even if the member is wrong in his suspicions, he is protected against defamation claims
under the general legal principle of ‘qualified privilege’. If a member is approached by any
authority, where the prosecution of a client is concerned, he should act with caution. He
should establish what statutory authority they have for requiring the information and should
seek legal advice.
7. Contingent fees: A member in public practice shall not perform for a contingent fee any
professional service if the member also performs for the client an audit, review, or certain
compilations of financial statements, or an examination of prospective financial statements. A
member in public practice should also not prepare an original or amended tax return or claim for
a tax refund for a contingent fee for any client.
8. Acts discreditable: A member shall not commit an act discreditable to the profession.
9. Advertising and other forms solicitation: A member in public practice shall not seek to obtain
clients of by advertising or other forms of solicitation in a manner that is false, misleading, or
deceptive. Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited.
10. Commissions and referral fees: A member in public practice shall not receive or pay a
commission or referral fee for any client if the member also performs for the client an audit,
review, or certain compilations of financial statements, or an examination of prospective financial
statements. For non-prohibited commissions or referral fees, a member must disclose the
existence of such fees to the client.

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 11. Form of organization: A member may practice public accounting only in a form of and name
organization permitted by state law or regulation whose characteristics conform to resolutions of
Council and shall not practice public accounting under a firm name that is misleading.

Failure to follow the guidance may lead to disciplinary action by the Association which could lead to a
reprimand, fine or exclusion from the Association.

These ethical principles and rule of professional conduct are developed to guide the overall activities of
auditors. In addition to these general guidelines of audit service activities, specific auditing standards are
also set by different authoritative agencies.

2.9. Legal liability and responsibility

We live in an era of litigation, in which persons with real or fancied grievances are likely to take their
complaints to court. In this environment, investors and creditors who suffer financial reversals find
auditors, as well as attorneys and corporate directors, tempting targets for lawsuits alleging professional
‘malpractice.’ The responsibility of the auditor might be limited to the client based on the contractual
obligation. But through the common law the professional responsibility to non-client [third party] under
certain circumstances.

Auditors must approach every engagement with the prospect that they may be required to defend their
work in court. Even if the court finds in favor of the auditors, the costs of defending a legal action can be
astronomical. As a result, the cost of professional liability insurance has escalated at an alarming rate.

Costs are not the only concern in this area; lawsuits can be extremely damaging to a professional’s
reputation. In extreme cases, the auditors may even be tried criminally of malpractice. Every man and
woman considering a career in public practice should be aware of the legal liability inherent in the
practice of this profession.

Definition of terms:

Discussion of auditor’s liability is best prefaced by a definition of some of the common terms of business
law. The following are few to mention.

Ordinary negligence: is violation of a legal duty to exercise a degree of care that an ordinary prudent
person would exercise under similar circumstances with resultant damages to another party. For practical
purposes, ordinary negligence may be viewed as ‘failure to exercise due professional care.’

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Gross negligence: is the lack of even slight care, indicative of a reckless disregard for one’s professional
responsibilities. Substantial failures on the part of the auditor to comply with generally accepted auditing
standards might be interpreted as gross negligence.

Fraud: is defined as misrepresentation by a person of a material fact, known by that person to be untrue
or made with reckless indifference as to whether the fact is true, with the intention of deceiving the other
party and with the result that the other party is injured.

Constructive fraud: differs from fraud as defined above in that constructive fraud does not involve a
misrepresentation with intent to deceive. Gross negligence on the part of an auditor has been interpreted
by the courts as constructive fraud.

Privity: is the relationship between parties to contract. An audit firm is in privity with the client it is
serving, as well as with any third-party beneficiary.

Third-party beneficiary: is a person – not the promisor or promisee – who is named in a contract or
intended by the contracting parties to have definite rights and benefits under the contract.

Engagement Letter: is the written contract summarizing the contractual relationships between auditor
and client. The engagement letter typically specifies the scope of professional services to be rendered,
expected completion dates and the basis for determination of the audit fee.

Breach of Contract: is failure on one or both parties to a contract to perform in accordance with the
contract’s provisions. Negligence on part of the auditor constitutes a breach of contract.

Proximate cause: exists when damage to another person is directly attributable to a wrongdoer’s act. The
issue of proximate cause may be raised as a defense in litigation. Even though the auditor might have
been negligent in rendering services, it will not be liable for the plaintiff’s loss if its negligence was not
the proximate cause of the loss.

Plaintiff: is the party claiming damages and bringing suit against the defendant.

Contributory negligence: is negligence on the part of the plaintiff that has contributed to his/her having
incurred a loss. Contributory negligence may be used as a defense, because the court may limit or bar
recovery by a plaintiff whose own negligence contributed to the loss.

Comparative negligence: is a concept used by certain courts to allocate damages between negligent
parties based on the degree to which each party is at fault.

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Liability may arise from improper performance on any type of engagement – tax services, accounting
services, or management advisory services. However, accountants are never liable to any party if they
perform their services with due professional care. Having exercised due professional care [some times
called ‘due diligence’] is a complete defense against any charge of improper conduct. When auditors take
any type of engagement, they are obliged to render due professional care. This obligation exists whether
or not it is specifically set forth in the written contract with the client. The key factor in determining
whether the auditors are liable is not just whether the auditors failed to uncover fraud. Rather, the issue is
whether this failure stems from the auditor’s negligence.

Auditors must design their audits to provide reasonable assurance of detecting errors and
irregularities that are material to the financial statements. In doing so, they must exercise due
care and professional skepticism in planning, performing, and evaluating the results of audit
procedures. These requirements do not imply that auditors were negligent whenever errors or
irregularities are later found to exist in audited financial statements. An audit has certain
limitations; it does not involve a complete and detailed examination of all records and
transactions. When the audit firms’ work is made in accordance with accepted auditing
standards, the firms should not be held liable for failure to detect the existence of errors or
irregularities.
2.10. Auditors’ Rights and Duties

The auditor has various detailed duties to perform in order to achieve the overall duty to report on the true
and fair view. In order to fulfill these duties, various legal rights are given to the auditor.

Duties of the auditor:

The duties of the auditor under national legislation generally fall under the following headings:

 To report to the shareholders or directors on whether financial statements of the company show a
true and fair view or present fairly and have been properly prepared in accordance with
legislation
 To consider whether the information in the Management report is consistent with the financial
statement
 To give various details required by legislation in his report, if not given in the financial
statements themselves.
 To form an opinion as to whether:
o Proper accounting records have been kept by the company

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 o The profit for the year and balance sheet totals are fairly stated
o Such information and explanations as the auditor thinks necessary for the performance of
his duties have been received from the company’s officers
 To report on any violation of law or the company’s constitution
 To ma a statement of circumstances when he ceases to hold the office of auditor for any reason.
Rights of the auditor

The rights given to the auditor under national legislation are designed to ensure that he is able to fulfill his
duties and responsibilities to the members. These rights are fundamental to his independence. In countries
with a well-developed auditing profession, auditors generally have unrestricted rights of access to books
and records of a company, subject only perhaps, to considerations of national security. In those countries
where there is no tradition of reporting in true and fair terms, it often comes as a surprise to directors and
employees to find auditors asking for documents that previously, only the tax auditors had a right to see.
The list of rights set out below reflects the position in countries in which the profession is mature.

Legal rights:

 The rights of access to the books, records, documents and accounts of the company
 The right to require from the officers of the company such information and explanations as he
thinks necessary for the performance of his duties.
 The rights to:
o Receive all notices relating to any general meetings of the company
o Attend any general meetings, and
o Be heard at any general meeting on any part of the business, which concerns his as
auditor.
 The right to be sent by the company a copy of a notice of intention to propose his removal or
replacement and the right to make written or oral representations
 The right to require the directors to requisition a general meeting on his resignation and to attend
and be heard at that and any other meeting that concerns him.

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