The duties of auditors depend on the terms of the articles as well as on the statutory provisions. Their duties are summarized as follows:
1. To make a report to the member:
The principal duty of the auditors is to make a report to the members on the account examined by him and on every balance sheet, profit and loss account and on every other document annexed thereto which would be laid before the general meeting during his tenure of office. The report must state whether in his opinion and to the best of his information and according to the explanations given to his, the said accounts give the information in the manner required by this act, and give a true and fair view in the case of the balance-sheet, of the state of the company’s affaires as at the end of its financial years and in the case of the profit and loss account, of the profit or loss for its financial year.
The companies’ (amendment) act 1965 has imposed new duties upon auditor. Section 227 (I-A) requires the auditor to enquire into the following matters:
a) Whether loans and advances make by the 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 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 consist of shares, debentures and other securities have been sold at a price less than that at which they were purchases by the company.
d) Whether loans and advances made by the company have been shown as deposits.
e) Whether personal expenses have been charged to revenue account.
f) Where any shares have been allotted for cash, whether cash has been actually received in respect if such allotment and if no cash has been actually received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.
The auditor’s report must relate to the accounts examined by the auditor. It must contain statements on certain specified matters. In the report the auditor shall state:
(a) Whether he has obtained all the information and explanation which to the best of his knowledge and belief were necessary for the purposes of his audit.
(b) Whether in his opinion proper books of accounts as required by the act have been kept by the company so far as appears from his examination;
(c) Whether proper return adequate for the purposes of his audit have been received from branches not visited by him;
(d) Whether the report on the accounts of any branch office audited by a person other than the company auditor has been forwarded to his and how he has dealt with the same in preparing his report;
(e) Whether the company’s balance-sheet and profit and loss account are in agreement with the books of accounts and returns.
Where any of the above mentioned questions is answered in the negative or with a qualification the auditor’s report must state the reason for the answer.
Only the person appointed as the auditor of the company or where a firm is so appointed, only a partner in the firm practicing in Indian, may sign the auditor’s report. The auditor’s report must be read in the general meeting and must be open to inspection by any member of the company.
In addition to the above duty of an auditor in connection with the audit of the annual accounts, the auditor has to perform the following duties:
1. Duty to certify the statutory report:
The auditor has to certify the correctness of the statutory report as far as:
a. The number of the shares allotted by the company, whether against cash or for any other consideration;
b. The total amount of cash received by the company in respect of all the shares allotted, distinguishing as aforesaid;
c. An abstract of the receipts of the company and the payments made there out;
2. Duty to certify profit and loss account in a prospectus:
Section 56(I) provides that a prospectus issued by an existing company shall contain a statement of profits and losses, year-wise company shall contain a statement of profits and losses, year-wise for the previous five years showing the rate of dividend paid each year and a statement of assets and liabilities of the company. Such a statement has to be certified by the auditor of the company.
3. Duty to assist investigators:
An auditor is bound to assist the inspectors in every possible way when the affairs of the company are being investigated.
4. Duty as to declaration of solvency in members voluntary winding up :
In case of members’ voluntary winding up of a company, a copy or the report of the company’s auditor on the profit and loss account and the balance-sheet for the period commencing from the date by which the last account was prepared and up to the date of declaration is to be sent along with the declaration of solvency. In the said report a statement of the company’s assets and liabilities for the same period should also be included.
The statutory duties of the auditors as stated above can be expanded but they cannot be curtailed either by the articles of association or by the directors of the company.
Duty of reasonable care:
An auditor must act honestly and with reasonable care and skill; otherwise he may be sued for damages. Further, it is the duty of an auditor to verity with skill, care and caution which a reasonably competent, careful and cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective or to approach his work with a foregone conclusion that there is something wrong. He is a watch-dog but not a blood hound. He is justified in believing tried servants of the company and in assuming that they are honest provided he takes reasonable care.
On the other hand if there is anything calculated to excite suspicion, he should probe it to the bottom, and he must not confine himself merely to the task of verifying the arithmetical accuracy of the balance-sheet but should ascertain by comparison with the books of the company that it was properly drawn up so as to show the correct financial position.
An auditor must satisfy himself that the securities of the company in fact exist and are in safe custody. This duty is discharged by their making personal inspection of the securities in question.
Auditors are not concerned with the policy of the company or whether the company is well or ill managed. It is not his duty to give advice, either to directors or shareholders, as to what they ought to do.