School of legal studies, Cusat, Ernakulam
A company carries on business with the capital furnished by persons who buy its shares. The contributors of capital are not in direct control of its application. The directors and superior officers of the Company utilize the funds contributed by the shareholders. Therefore, the company act provides for the employment of an auditor who is the servant of the shareholders and whose duty is to examine the Company’s affairs on their behalf at the end of a year and report to them that he has found. Auditing is an essential professional task carrying heavy responsibility and calling for commensurate skill and judgment.
The word Audit is derived from the Latin word “Audire,” which means to hear. Originally it was customary for the person responsible for maintaining accounts to go to some impartial and experienced persons. Ordinarily, judges who used to listen to these accounts and express their opinion about their correctness or otherwise such persons were known as “Auditors.” Thus, the term auditor means hearer literally. That one hears and is used ever since public accounts were accepted and approved based on hearing the accounts. The revenue and expenditure account of any enterprise should be carefully monitored, evaluated, and recorded. An Auditor commences the analysis of financial reports.
An Auditor is a watchdog but not a bloodhound. Chapter X Section (139 to 148) of the Companies Act,2013 deals with appointment, removal, remuneration, powers, duties of auditors of a company’s auditors. According to the act, an auditor is an autonomous proficient person eligible to present a study. An auditor is accountable for assessing the records and financial accounts required by the Company, after which it becomes certain.
By Section 139 of the act, every Company shall appoint an individual or a firm as an auditor at the first annual general meeting. The auditor so appointed shall hold office from the conclusion of that meeting until its sixth annual general meeting. After that, the auditor appointed by the members in the general meeting shall hold office till the conclusion of every sixth meeting.
Rights of Auditor
The companies act, 2013, has provided many rights to the auditor to ensure that he can effectively discharge the duties. The rights of an auditor are statutory. In the case Newton v. Birmingham small arms co. The court held that any provision contrary to the auditor’s rights is ultra vires and hence void. The Company’s auditor has a right to access the Company’s books and accounts, and vouchers. He has the right to sign the auditor’s report or sign or certify any other company documents. He is entitled to request from the Company’s officers information and explanation for his duties as auditor. He has a right to receive notice of any general meeting of the Company. He has a right to attend any general meeting. He has the right to receive remuneration. He has the right to audit any of the company branches directly or appoint any other person qualified for an auditor’s appointment. The branch auditor shall submit a report to the Company’s auditor.
Duties of an Auditor
All the rights available to an auditor under the Companies Act have a corresponding general duty to oversee that the Company’s financial statements are in order and present an accurate picture of its state of affairs. The act also prescribes specific mandatory responsibilities.
The auditor has to inquire whether the Company’s loans and advances based on security are adequately secured. Whether loans and advances made by the Company are shown as deposits. He should examine whether transactions of the company conflict with the interest of the Company. He has to enquire whether personal expenses are charged to the revenue account and has to end care whether cash is received on the issue of shares.
According to Section 143 (11), auditors are required to prepare a report of their findings after examining the financial statements and other documents, which are to be laid down in the Company’s general meeting. Accounts examined, and every financial information laid before the Company should be reported to the auditor’s company members. An auditor should prepare an accurate and fair examination report of the Company’s affairs at the end of the financial year and the profit and loss and cash flow for the financial year.
Report based on the Company’s profit and loss should be made in each of the five financial years, including in the Company’s prospectus.
He has to enquire whether the books of accounts are correctly maintained. The auditor has to produce all the books and papers of records during the company inspection or any government proceedings.
According to the provisions of section 143 (12), if any offence of fraud of rupees one crore or more has been committed against the Company by officers or employees of the Company, the auditor has an obligation to report it to the central government.
An auditor should act in accordance with the auditing regulations and standards. He should carry on all accounting undertakings in an honest and bonafide manner. He should not be a person having any personal interest in any holding company. He should not render services such as banking services, investment advisory, Internal audit, or bookkeeping to the enterprise.
An auditor must be ensured that the credit and allowances have been procured
systematically and are to the organizations’ and members’ advantage. The auditor owes a duty to check the accuracy of accounts. He is not bound to be a detective or to approach his work with suspicion. He can believe the servants of the Company. He is entitled to assume that they are honest and only reasonably cautious and careful.
In the case of a government company, India’s comptroller and auditor general shall appoint the auditor and give him direction as to how the accounts are required to be audited and shall submit a copy of the audit report comptroller and auditor general of India.
The auditor places an essential role in company affairs. Their role can never be undermined in the context of a company. The companies act laid down the roles and responsibilities, and it is the duty vested upon them to act in accordance with it. Those provisions in the act make auditing transparent and make auditors more efficient and effective.