Auditors Meaning, Appointment and Qualities

An auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies comply with tax laws. They protect businesses from fraud, point out discrepancies in accounting methods and, on occasion, work on a consultancy basis, helping organizations to spot ways to boost operational efficiency. Auditors work in various capacities within different industries.

An auditor is responsible for judging the validity and reliability of a company by evaluating evidence and financial reports with established standards.

The person doing the audit and who is ultimately responsible for the results of the audit is called an auditor.

An auditor multiple his hand by employing the assistance for doing the work, but still, he alone is responsible for what he does and others do for him.

So, an auditor is a professional that accumulates and evaluates evidence to report on the degree a company’s assertions that they comply with an established set of procedures or standards (criteria).

The following statements of famous Judges have been made from time to time, regarding the qualities of an auditor;

“An auditor is not bound to be detective, or to approach his work with suspicion, or with the foregone conclusion that there is something wrong. He is a watch-dog but not a blood-hound. He is justified in believing servants of the company, and is entitled to rely upon their representations, provided he takes reasonable care.” (Lopes, L.G. in re Kingston Cotton Mills case, 1896).

“An auditor is not bound to assume when he comes to do his duty that he is dealing with fraudulent and dishonest people…………………………………. if circumstances of suspicion arise…… it is his duty to probe them to the bottom,” – Lord Alverstone , C.J. The London Oil Storage Co., Ltd, vs. Seear Hasluck and Co. (1904).

“If the course of these long and arduous audits the auditor has in even one instance fallen short of the strict duty of an auditor, he cannot, I apprehend, be excused merely because in general, he displayed the highest degree of care and skill.” Romer J., in The City and Equitable Fire Insurance Co., Ltd. (1924)

Appointment of Auditors

Within thirty days from the date of the registration of the Company other than the Government Company, it’s Board of Directors need to appoint an individual or a firm as the first auditor of the company. The members shall ratify the appointment of the first auditor in the first annual general meeting of the company.

The first auditor of the company holds office from the conclusion of the first annual general meeting until the conclusion of the sixth annual general meeting and after this until the conclusion of every sixth meeting. However, the members of the company ratify the appointment of auditors at every annual general meeting.

However, in a case where the Board of Directors fails to appoint the first auditors of the company they shall inform the members of the Company. Thus, the members shall appoint the first auditors of the company within ninety days at an extraordinary general meeting. The auditor so appointed shall hold the office until the conclusion of the first AGM.

The Board of Directors shall fill any casual vacancy in the office of the auditor of a company other than a Government Company within thirty days. This does not include any casual vacancy arising out of the resignation of an auditor. However, in case of a casual vacancy arising out of the resignation of an auditor, the Board of Directors shall fill the vacancy within thirty days. But, the company needs to approve this appointment at a general meeting within three months of the Board’s recommendation. Such an auditor shall also hold the office till the conclusion of the next annual general meeting.

Re-appointment of a Retiring Auditor

The members can re-appoint the retiring order at the annual general meeting of the company:

• If he is not disqualified for re-appointment.
• If he has not given a notice in writing to the company expressing his unwillingness to be re-appointed.
• When a special resolution has not been passed by the members at that meeting appointing some other auditor or expressly providing that he should not be re-appointed.

It is noteworthy here that if at any annual general meeting the members do not appoint or re-appoint any auditors, the existing auditor shall continue to be the auditor of the company.

Appointment of Auditors of Government Companies

Government Company refers to the companies that are owned or controlled, directly or indirectly, by the Central Government or by any State Government or Governments, or partly by the Central and State Government.

In the case of a Government Company, the Comptroller and Auditor-General of India shall appoint the first auditor within sixty days from the date of registration of the company.

If the Comptroller and Auditor-General of India fail to appoint such auditor within the period of sixty days, the Board of Directors shall appoint the first auditors within the next thirty days.

However, if the Board of Directors also fails to appoint the first auditors within thirty days they shall inform the members of the Company.

Thus, the members shall appoint the first auditors of the company within sixty days at an extraordinary general meeting. Also, the auditor so appointed shall hold the office until the conclusion of the first AGM.

In respect of a financial year, the Comptroller and Auditor-General of India shall appoint an auditor within a period of one hundred and eighty days from the commencement of the financial year. Such auditor shall hold office until the conclusion of the annual general meeting.

Also, the Comptroller and Auditor-General of India shall fill any casual vacancy in the office of the auditor of the Government Company within thirty days. If the Comptroller and Auditor-General of India fail to fill such vacancy within the period of thirty days, the Board of Directors shall fill such vacancy within next thirty days.

Qualities of an Auditor

An efficient auditor must have certain qualities besides Professional qualification. He needs to carry out the audit efficiently and smoothly.

• An auditor needs to be well versed in the fundamental principles and theory of all branches of accounting, e.g., general accounting, cost accounts, income-tax, etc. A person can’t audit the accounts unless he knows how to prepare them. He should be aware of the latest development of the technique of accounting so that he may modify his procedure of work.
• He should not pass a transaction unless he knows that it is correct. This is possible only when one knows thoroughly well the principles of accounting.
• He should be able to grasp quickly the technical details of the business whose accounts he is auditing. If possible, he should pay a visit to the works of his client, before he commences his work.
• He should be prepared to seek elucidation on technical questions rather than show a false pride or fear of displaying his ignorance.
• He should be quite familiar with the company and mercantile laws and must be complete master of the principles of auditing.
• He must be tactful and scrupulously honest. He must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes what he certifies is true.
• He must not be influenced, directly or indirectly, by others in the discharge of his duties.
• Sometimes he is put in a very awkward position when his duty to his client is opposed to his interests, in which case he must have the courage to carry out his duty faithfully and honestly, even if such a step harms him. In the long run, this policy will be of immense value to him. He will acquire a reputation for his honesty, which will bring more business to him.
• He must be prepared to resign, rather than sign a balance sheet, which he knows does not exhibit a true and fair view of the state of affairs of the concern and thus give a false report.
• He should not disclose the secrets of his clients.
• He must have the tact to put intelligent questions to extract full information.
• He must not adopt an attitude of suspicion.
• He must be prepared to hear arguments and must be reasonable.
• He must be vigilant, cautious, methodical and accurate.
• He should have the ability to write the report, correctly, concisely and forcefully.
• He should have an understanding of the general principles of economics.
• He should have thorough training in a business organization, management, and finance.
• Last but not least, he should have “Common Sense”.