A thorough assessment of a company’s financial information, statements, and records is undertaken in order to determine their accuracy and adherence to accounting standards, criteria, and rules. Such action enhances transparency and accountability, and in some instances, enables the detection of irregularities, fraud, and errors. An independent expert looks at financial statements and gives an opinion. By means of audits, auditors add credibility to the financial statements to strengthen stakeholder confidence in the financial condition of the company.
Who is an Auditor?
An auditor is a third-party, objective professional who reviews and certifies the financial system to guarantee the correctness, dependability, and adherence to accounting standards and laws. Statements, records, and accounts of a corporation.
The primary objective of an auditor is to give an opinion on whether the financial statements accurately and fairly represent the financial condition and performance of the company.
Auditors guarantee financial transactions have been properly recorded, spot fraud or faults, and examine internal controls. Indian auditors under the Institute of Chartered Accountants of India (ICAI) are guided by the Companies Act 2013.
Duties of an Auditor
An auditor is meant to make sure the company’s financial statements are truthful, open, and dependable. Mostly, he declares his opinion about whether the financial statements of the company fairly and accurately reflect the financial performance and position of the entity.
1. Legal Responsibilities of an Auditor
Under the Companies Act 2013, these are legislative duties.
- To verify correct records, auditors examine a business’s ledgers, vouchers, and supporting papers. They have to make sure accounts follow established accounting criteria and principles.
- Section 143 of the Companies Act, 2013 demands that auditors create and give to shareholders an audit report. One must indicate whether or not the profit/loss account and balance sheet give a true and fair picture; whether or not the financial statements are as per accounting standards or not depends on the way the books of account are expected to have been kept.
- The auditor has to check all assets and liabilities listed in the balance sheet. He has to ascertain such items’ existence, ownership, worth, and correct disclosure.
- The auditor must find any mistakes or fraud by testing the adequacy and efficacy of the internal control mechanism. He has to reveal significant internal control deficiencies.
- While auditors are not responsible for discovering every case of fraud, they should exercise professional scepticism and apply due care to remark on any suspect or unusual activity.
- Along with other pertinent rules, the auditor confirms compliance with laws, legislations, and best practices of sound corporate governance—namely, the Companies Law and tax law.
- Under Section 143(12) of the Companies Act, 2013, accountants must notify the Central Government of any fraudulent activity costing ₹1 crore or more.
2. Professional Responsibilities of an Auditor
They are governed by auditing standards and professional ethics.
- The auditor is expected to perform their task with competence and reasonable care, reflecting the skills and diligence required.
- The auditor must remain independent and free from bias or conflict of interest in the process of conducting the audit.
- Auditors must maintain strictly confidential all information obtained during audits and disclose it only when they are statutorily obliged to do so.
- The auditors must have complete working records and evidence supporting their opinion and conclusions.
- The auditor is required to abide by the Institute of Chartered Accountants of India’s Standards on Auditing (SAs).
3. Ethical and Fiduciary Obligations
In addition to the ones prescribed by legislation and professional codes, an auditor also has the following ethical responsibilities towards the firm and its stakeholders:
- Duty to Shareholders: The auditor is a trustee of the shareholders and owes a duty to them to report truthfully, since the shareholders rely on such reports in making their investment decisions.
- Duty to Management: The auditor must provide constructive suggestions with the intention of improving accounting procedures and internal control mechanisms, without compromising on independence.
- Duty to the Public Interest: The actions of the auditor contribute a great deal toward instilling confidence in financial markets in the eyes of the public. Therefore, he has the responsibility of maintaining transparency, integrity, and honesty.
4. Additional Duties (Special Situations)
- Tax Audit: Section 44AB of the Income Tax Act requires auditors to check income, deductions, and tax calculations.
- Cost Audits are necessary in certain industries to verify the accuracy of cost records.
- Secretarial Audit: It verifies compliance with the corporate laws and regulations of certain companies.
Liabilities of an Auditor
An auditor’s responsibilities not only involve a number of obligations but also a high amount of professional and legal risks, so any minor negligence, fraud, or dishonesty during carrying out duties can lead to civil, criminal, or professional liability.
The liabilities of an auditor may be categorised mainly in terms of civil, criminal, and misconduct at the professional level.
A. Civil Liabilities of Auditors
Civil responsibility results from an auditor’s failure to use appropriate care, skill, or diligence, causing financial loss to the business, its owners, or outside parties.
1. Obligation to the Company
- The firm is responsible for any losses resulting from carelessness or failure to act on duty.
- Should the auditor fail to find fraud or misstatements by carelessness, so that the business might reclaim losses.
- Auditors are accountable for any losses resulting from carelessness or dishonesty in the carrying out of responsibilities under Section 147(2) of the Companies Act, 2013.
2. Obligation to Shareholders
- The stockholders pay the auditor, who is also responsible to them
- Should they sue auditors for false information, they could lose money depending on reliance on erroneous audit findings, such as overclaimed profits or hidden obligations.
- Unless such losses are a direct result of his negligent misstatements, the auditor is not liable for typical business losses resulting from management decisions.
3. Liability to third parties
- Audited financial reports enable third parties—such as investors, creditors, or banks—to make investment or financing choices.
- If the auditor signs an inaccurate or false report and third parties suffer from such reliance, the auditor might be liable for misstatement or carelessness—especially if it can be shown that he knew such outside parties would be relying on his report.
- This obligation often kicks in, however, when evidence of gross negligence, deliberate misrepresentation, or fraud has been found.
B. Criminal Liabilities of an Auditor
Criminal liability is applied when the auditor is guilty of doing something dishonest or fraudulent while carrying out their professional duties.
1. Under the Companies Act 2013
- Section 147(4): Providing false information in audit reports can attract a one-year imprisonment and/or fine of ₹25,000 to ₹5,00,000.
- Section 147(5) penalizes fraud-committing auditors with a maximum of 10 years of imprisonment and a fine which is double the amount involved in the fraud. For fraud in a public interest company, the punishment begins from three years.
2. Sections 197, 420, and 477A of the IPC are for auditors who fraudulently alter accounts, fabricate documents, or abet the concealment of fraud.
- Some offences, such as cheating and fraudulently inducing the delivery of property (Section 420) and forgery of accounts (Section 477A), can lead to imprisonment and fines.
3. Auditors, who willfully certify false returns or report non-compliance, can be punished, imprisoned, and blacklisted under some acts like the Income Tax Act, GST regulations, or the Securities law.
C. Professional Misconduct Liability
Auditors are enrolled members of the Institute of Chartered Accountants of India (ICAI) and are bound by its Code of Ethics and the Chartered Accountants Act of 1949.
1. Professional Misconduct under the Chartered Accountants Act 1949.
Auditor misconduct may involve failing to disclose relevant facts, failure to report known misstatements, breach of confidence, and signing financial reports without sufficient scrutiny or allowing their name to be used fraudulently, which is likely to invoke a finding of professional misconduct.
2. Disciplinary Action for Misconduct
Depending upon the gravity of the offence, the ICAI may impose:
- Remondition or warning,
- Fine (up to ₹5 lakh in the case of individuals),
- Striking off the register of members, leading to suspension or cancellation of the auditor’s practising license.
D. Liability of Joint Auditors
- Joint auditors have joint and several liability, which means that each auditor will be responsible for their own work and can be held liable for overall negligence if they do not detect or report anything wrong.
- When responsibilities are clearly distributed among them, an auditor is responsible only for the specific part of the work assigned to them.
E. Restrictions on Auditor Liability
Even though the auditor is liable for negligence and fraud, there are some limitations:
- He does not guarantee the financial success of the company.
- He cannot be held liable for hidden management fraud unless he ignored warning signs.
- His duty is to see that the financial statements are true and fair, not absolutely accurate.
F. Prevention of Liability
- In order to limit liability, auditors are required to strictly adhere to auditing standards.
- Provide proper documentation and audit evidence.
- Apply professional scepticism and diligence.
- Maintain independence and objectivity.
- Include proper disclaimers in the audit report.
Conclusion
Financial openness and corporate accountability rest on auditors and their jobs. Auditors confirm the financial statements of a firm are true and equitable by a close examination of accounting records, transaction verification, and internal control confirmation. They foster corporate ethics and build investor confidence beyond finding fraud or errors. If auditors are to do their jobs effectively, they must conduct themselves independently, maintain integrity, and show professionalism. Auditors, therefore, play a very important role in ensuring the honesty, correctness, and equality of financial reporting throughout all companies.
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