Duties and Responsibilities of an Auditor

The article 'Duties and Responsibilities of an Auditor' explores the importance of auditors to corporate governance and their roles as well as responsibilities under Indian Laws to guarantee the accuracy and openness of the financial statement for the company.

Introduction

The duty and responsibility of an Auditor in the professional world add reliance and eminence to the financial statements and make it easy to operate the capital markets. Despite the legal necessity for the annual audits, dominance was necessary, as per U.S. auditing, in their tasks to achieve the goals, responsibilities, and roles. A self-definition of responsibilities and duties and separate financial statements were considered lawful. Having control over work and dominance in the definition of public is present to achieve power.

Corporate Governance is considered the basis for establishing openness, accountability, and ethical decision-making in the management and control of the company. Corporate governance is required for a swift change in the business world, marked by globalisation, sophisticated financial instruments, and increased public scrutiny. The guideline prepared in 1999 by the ‘Organisation for Economic Corporation and Development' (OECD) consists of the most influential principles of corporate governance. It was revised in 2004, and OECD was referred to in many countries as a local guideline.

The ‘United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting’ (“ISAR”) created practices in corporate governance disclosure that contained more than 50 practices, one of which was Auditing.

Legal Duties and Responsibilities of Auditors

Under the Companies Act of 2013, Chapter X talks about the auditors and audits, which includes the power and duties of auditors and auditing standards.

Access to the Company's Accounting Books: Auditors inspect these company account books, which include books related to statutes, financial records, stocks, costing records, etc. These books are recorded and maintained at the registered office and the company's main branch.

Right to acquire Information: The auditors have the right to acquire information and explanations from the officers of the company who might be required to perform their duties and inquiry about the access to the security of loans and advances, the fairness of transactions, the sale of assets, the accuracy of loans and advances, and the accuracy of company’s personal expenses. They also have the right to verify the accuracy of allotments for cash and exactness in the position in the account books and balance sheet. A holding company auditor has the right to access the records of every subsidiary mentioned in the financial statement.

Attend General Meetings: The auditor has the right to attend general meetings and shall receive notices of every discussion related to the auditors.

Legally Complying: The audits shall comply with the provisions stated in law for it, the auditing standard, the taxation laws, the relevant industry rules and the corporate governing regulations.

Maintaining of Documents: The auditors shall prepare a document that includes the plans related to audits, its paperwork, the notes on its proceedings, research and their conclusion.

Report of the Members: The auditor must report examined members of the company on the accounts and financial statements, also considering the provisions mentioned under the act, accounting standards, and other relevant laws. The report shall provide a fair view of the financial state including the company’s loss, profit, and cash flow. The auditor must include all the required information and explanations obtained for the audit, like:

• the proper conditions in which the record books are kept,
• the returns received from the not-visited branches,
• auditors’ behaviour,
• qualification of the director,
• internal financial controls system,
• the balance sheet of the company, which includes the profit, and loss account, compliance with the accounting standards, and
• they shall also consider the account maintenance and the effectiveness of these controls.

Control on Quality: The company should provide quality audit work, including employee reviews and guidelines to maintain quality audit work. The update on the work shall be taken on a day-to-day basis to identify faults and frauds. Another way to avoid mistakes and improve the quality is to communicate the findings to the Board of Directors, management, and shareholders; the audit report includes reviews about the audit's quality, objectivity, and concerns.

Fraud and Confidentiality: The auditors shall maintain the code of ethics, the responsibility for assessing fraud risks and detecting material fraud, the prevention of which lies with the company's management to handle primarily.

Statutory Auditors

Statutory auditors are essential to a company that ensures consistency and justifiable financial statements with honesty, objectivity, and independence that benefits the views. Stakeholders should prioritize their interests while preparing the financial report based on the auditor’s judgment. Recently, in the corporate world, outrageous behaviour in accounting has been highlighted for their lack of judgment and scepticism in auditing the companies. These have concerned researchers around the world. After extensive research, the reason behind the lack of independence of the statutory auditors was found, and a proposal was kept for the protection and the autonomy of stakeholders’ interests.

Rotation of Auditors 

Sections 139 and 140 of the Companies Act of 2013 regulate the rotation of auditors. As per Section 139 Companies must appoint auditors and rotate them every five years. Except for minor businesses, dormant corporations, and corporations exempt from the requirement of appointing auditors, the provisions of this section apply to all corporations. The requirements for auditor appointment and limitations on auditor reappointment are covered. A person is not permitted to serve as an auditor of a company for more than two terms of five years each, or, in the case of a partnership firm, for more than two terms of five years for the firm and each of its partners, under the conditions of this section.

The Companies Act of 2013 places limitations on the eligibility and reappointment of auditors and mandates the rotation of auditors every five years. Auditor rotation is required to ensure independence, objectivity, and impartiality in the audit process. When an auditor works with a client for an extended period, there is a risk that the auditor will become too familiar with the client and its management, resulting in a loss of objectivity and impartiality. Long-term connections between auditors and clients can also generate the perception of a conflict of interest, which can harm the auditor's image and the audit profession as a whole.

Case Studies

In a case where the Comptroller and Auditor-General of India appoints an auditor to audit the government’s accounts as per the Companies Act of 2013, the auditor must submit a copy of the audit report, including any directions issued by the Comptroller and the Auditor General of India, the action taken impacted the company’s accounts and financial statement. The Comptroller and the Auditor General have the right to conduct the supplementary audit within 60 days. They can demand additional information and comment upon or supplement the audit report. If required, they can test the audit. If the company has a branch office audited by the company’s auditor or someone other than the company’s auditor, the audited report shall be sent to the company’s auditor.

The Central Government shall prescribe the auditing standards, as per the guidelines provided by the Institute of Chartered Accountants of India, under the Chartered Accountants Act of 1949, and after consulting the National Financial Reporting Authority. The auditor’s report shall include a statement on specified matters like fraud. The provisions under the act apply to cost accountants and company secretaries in practice conducting cost audits. Not complying with the provisions can result in imprisonment for up to one year or a fine upto twenty-five lakh rupees.

In the case of the Satyam Scam, one of the elements that contributed to the fraud was a lack of auditor rotation. Price Waterhouse Coopers (PWC), Satyam's auditor, had been auditing the company for several years and was widely regarded as being too close to management. Because of PWC's tight relationship with Satyam's management, there was a lack of scepticism and critical inquiry, allowing the fraud to go undiscovered for several years. The fraud could have been discovered sooner, minimizing the damage to investors and other stakeholders. This case underlines the significance of maintaining independence, objectivity, and impartiality. Organizations may guarantee that auditors remain diligent and that the auditing process is fair, transparent, and effective by the auditors.

Similarly, the National Spot Exchange Limited (NSEL) scam involves the NSEL, an Indian commodity spot exchange, fraudulently reporting trades and failing to make payments. The scandal broke in 2013, and it was one of India's largest financial scandals at the time. The auditors for NSEL, BSR & Associates were chastised for their part in the incident because of their long-standing association with the corporation and lack of auditor independence. BSR & Associates had been NSEL's auditors for several years, and their close relationship with the company was perceived as a conflict of interest, preventing them from adequately reviewing the company's financial statements and uncovering fraudulent practices.

The case also highlights the lack of auditor rotation as a significant contributing element to the fraud's occurrence, as the auditors were unable to provide the level of objectivity and independence required for identifying and preventing fraud. The lack of auditor rotation in this case was seen as a significant contributing element to the fraud's occurrence, as the auditors were unable to provide the level of objectivity and independence required for identifying and preventing fraud. Following the NSEL incident, the Indian government strengthened the laws and regulations governing auditor's independence and rotation. To prevent similar fraudulent activities in the future, the Indian Institute of Corporate Affairs also suggested mandatory auditor rotation for all listed businesses.

Conclusion

In conclusion, the role of statutory auditors in the professional world is crucial for upholding the reliability and credibility of financial statements, ultimately contributing to the smooth functioning of capital markets. Corporate governance principles play a pivotal role in ensuring transparency, accountability, and ethical decision-making within companies, particularly in a rapidly changing business landscape. However, recent concerns regarding the lack of independence and scepticism in auditing have raised alarm bells in the corporate world. Researchers have identified the reasons behind these issues and proposed measures to protect the interests and autonomy of stakeholders.

While, the auditor rotation is critical for promoting independence, objectivity, and professionalism in the auditing process. In India, the Firms Act of 2013 mandates all companies to rotate their auditors after a specific amount of time to minimize long-term ties between auditors and their clients, which could lead to auditors becoming complacent or susceptible to undue influence.

The rotation of auditors also brings in new viewpoints and skills, which can lead to the identification of new risks and issues that prior auditors may have missed. In short, the importance of auditor rotation under the Companies Act 2013 resides in its ability to maintain the auditing process's independence and objectivity, improve audit quality, and promote accountability and transparency in financial reporting. This, in turn, adds to the overall growth and stability of the economy by increasing trust in the financial reporting system.

References

[1] Joni J. Young, Defining Auditors' Responsibilities, Available Here

[2] Sreeti Raut, Corporate Governance - Corporate and Issues, Available Here

[3] Companies Act, 2013

[4] Government provides clarity on CAG audit provision in new Companies Act, Available Here

[5] The Chartered Accountants Act, 1949

[6] Clause 49 of the Listing Agreement of SEBI

[7] M/S. Satyam Computer Services v. Directorate of Enforcement, W.A.No.133 of 2013

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