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Civil Liabilities

Liability For Negligence of Assistants

An auditor is entitled to rely on the work performed by the assistants. But he should ensure that his assistants are not negligent and the audit is conducted with due care and skill. However, he will continue to be responsible for forming and expressing his opinion on the financial information.

Liability for Unaudited Statements

A chartered accountant may accept assignments other than his audit work. For example, a chartered accountant may accept to write the books of accounts and prepare the financial statements for a client. He may not have actually audited the client’s accounts.

However, since he has associated himself in the preparation of financial statements, there is every possibility of a third party to presume that he is the auditor of the company to which he had prepared financial statements and that the books of accounts were duly audited.

Liability under Consumer Protection Act

The following points should be borne in mind:

• The auditor gives his opinion or advice on payment of fees. Therefore, they come under the purview of Consumer Protection Act.
• If any chartered accountant gives opinion or advice contrary to the provisions of law or any opinion not supported by any judicial decisions, he may be called upon to compensate by paying damages for the loss suffered as a result of his opinion or advice.

Liability Under Companies Act

Under Section 477, the court may summon and examine the auditor (or any officer of the company) and order him to produce books or documents of the company that are kept under his custody. This power is enforceable only after the appointment of liquidator or passing of winding up order of the company.

When a company is wound up by the order of the court and if the Official Liquidator is of the opinion that a fraud has been committed and has made a report thereon, the court may examine the auditor (or any officer of the company) in public on an appointed day.

Misfeasance

Misfeasance implies breach of duty or negligence in the performance of duties.

The liability for misfeasance arises only if any loss is suffered due to negligence or breach of duty. If no loss is suffered due to misfeasance, liability does not arise. Action for misfeasance can be initiated within 5 years:

• From the date of order of winding up.
• From the first appointment of the liquidator or
• Of the cause of action having arisen, whichever is longer.

Liability for Negligence

An auditor is expected to perform his duties with reasonable care and skill. Of course, no person can promise to always use highest degree of skill and display extraordinary knowledge while discharging their duties.

An auditor is liable to the following persons for negligence while discharging his duties.

• To Third parties, if the auditor knows or had reasonable opportunity to know that he (the third party) is relying on the skill and judgement of the auditor.
• To his client, with whom he has contractual relationship.
• In case of Fraud, the auditor is liable to all persons

Criminal Liabilities of Auditors

If any person issues or signs any certificate relating to any fact which such certificate is false, he is punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the auditor is similarly liable for falsification of any books, materials, papers that belongs to the company.

Penalty for deliberate act of commission or omission section 448:

If any officer including auditor of the company deliberately make a statement in any return, report, certificate, balance sheet, prospectus etc. which false or which contains omission of material facts he shall be punishable with imprisonment for a  term not less than 6 months extendable to 10 years and fine not less than amount involved in fraud extendable to 3 times of such amount.

Penalty for falsification of books section 336: Any officer including auditor of a company which is being wound up, with an intention to defraud or deceive any person, destroys, mutilates, alters, falsifies any books, papers or securities. He shall be punishable with imprisonment for a term not less than 3 years extendable to 5 years and with fine not less than 1 lakh extendable to three lakhs.

Failure to assist in the investigation section 217 (6):

Where the central Government appoints an inspector to investigate the affairs of the company, it is the duty of the auditor to preserve and produce to the inspector all books and papers relating to the company. If an auditor fails to assist the inspector in investigation, he shall be punishable with imprisonment up to 1 year and with fine not less than twenty-five thousand extendable to 1 lakh.

Noncompliance by auditor with section 143 and 145:

If the auditor does not comply with section 143 and 145 regarding making his report or signing or authentication of any document and makes willful neglect on his part, he shall be punishable with imprisonment up to 1 year and with fine not less than twenty thousand extendable to five lakhs. In case an auditor knowingly or willfully with the intension to deceive the company or Shareholders or creditors or tax authorities, he shall be punishable with imprisonment up to 1 year and fine not less than 1 lakh extendable up to twenty-five lakhs.

Mis-statement in prospectus section 34:

Where an auditor makes false statement with material particulars in returns, reports, prospectus or other statements knowingly it to be false or omits any material facts knowing them to be false, he shall be punishable with imprisonment for a minimum term of 6 months extendable to 10 years

There are two terms ‘Procedure and techniques’, which are often used interchangeably, in fact, however a distinction does exist. “Procedure may comprise a number of techniques and represents the broad frame of the manner of handling the audit work. Techniques stands for the methods employed for carrying out the procedure.” For example procedure Known as vouching which would involve techniques of inspection and checking computation of documentary evidence.

Audit Procedures:

As per AAS-1 on basic principles governing an audit states, the auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedure to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information. Therefore, audit procedure is broadly classified in two categories compliance; procedure and substantive procedure.

1) Compliance procedure are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. In obtaining audit evidence from compliance. Procedures, the auditor is concerned with assertions that the control exists, the control is operating effectively and the control has so operated through the period of intended reliance. So the auditor is concerned with the existence effective and continuity of the control system.

2) Substantive procedure are tests designed to obtain evidence as to the competences, accuracy and validity of the data produced by accounting system. They are of two types:

a) Tests of details of transactions and balances.

b) Analysis of significant ratios and trends including the resulting investigation of unusual fluctuations and items.

Audit Techniques:

Audit techniques on the other hand refers to collection and accumulation of audit evidence some of the techniques commonly adopted by the auditors are the following:

• Posting checking
• Casting checking
• Physical examination and count
• Confirmation
• Inquiry
• Year-end scrutiny
• Re-computation
• Tracing in subsequent period bank reconciliation.

Special Audit Techniques:

In an absence of audit trail, the auditor needs the assurance that the programmes are functioning correctly in respect of specific items by using special audit techniques. The absence of input documents or the lack of visible audit trail may require the use of computer assisted audit techniques (CAATs) i.e. using the computers an audit tool. The auditor can use the computer to test.

• The logic and controls existing within the system.
• The records produced by the system.

Depending upon the complexity of the application system being audited, the approach may be fairly simple or require extensive technical competence on the part of the auditor. The effectiveness and efficiency of auditing. Procedure may be enhanced through the use of CAATs. Properly two common types of CAATs are in vogue, viz, test pack or test data and audit software or computer audit programmes.

EDP means (Electronic Data Processing) for the audit or a computer-based systems. For audit process of enterprise.

General EDP Controls: The purpose of general EDP controls is to establish a framework of overall control over the EDP activities and to provide a reasonable level of assurance that the overall objectives of internal control are achieved.

Organization and management control are designed to establish an organizational framework over EDP activities, including:

• Policies and procedures relating to control functional.
• Appropriate segregation of incompatible functions.

Application systems development and maintenance controls are designed to establish control over:

• Testing, conversion, implementation and documentation of new or revised system.
• Changes to application systems.
• Access to system documentation
• Acquisition of application systems from third parties

Computer operation controls are designed to control the operation of the systems and to provide reasonable assurance that:

• The systems are used for authorized purposes only
• Access to computer operations is restricted to authorized personnel.
• Only authorized programs are used.
• Processing errors are detected and corrected.

Systems Software Controls include:

• Authorization, approval, testing, implementation and documentation of new systems software and systems software modifications.
• Restrictions of access to systems software and documentation to authorize.

Data entry and program controls are designed to provide reasonable assurance that:

• An authorization structure is established over transactions being entered into the system.
• Access to data and programmes is restricted to authorized personal.
• Offsite back-up of data and computer programmes.
• Recovery procedures for use in the event of theft, loss or international or accidental destruction.
• Provision for offsite forecasting in the event of disaster.

Vouching of cash receipts (debit side of cash book)

(i) Opening Balance of Cash Book

Opening balance of cash book represents cash in hand at the start of the year and should verified from the balance sheet of last financial year.

(ii) Cash Received from Debtors

Consider the following points for verification of cash received from debtors:

• The carbon copies or counterfoils of cash receipt book should be verified.
• Cash receipt should be serially numbered.
• Cash received should be entered on the same date when the cash is actually received.
• The discount allowed to customers should be properly authorized by a responsible officer.
• Correspondence with customer and ledger account should be tallied.

Following are the different ways used for misappropriation of cash:

• Cash received from customer not recorded in books and no cash receipt may be issued.
• Issuance of receipt for lesser amounts than amount actually received.
• Using teeming and lading method; it is a very common method to misappropriate the money, in which the cash received from any customer not recorded in the books and the cash received from same customer at a later instance or another customer recorded in the books and so on.

(iii) Repayment of Loan by Others

Repayment of loan by others may be verified in the following ways:

• Calculation of interest received and interest should be credited to interest received account.
• Verification from bank statement if directly deposited by party into bank.
• Checking of carbon copies or counterfoils of cash receipts.
• To ensure that there should be no violation of Income Tax rules as payment of loan exceeding Rs. 20,000/- cannot be repaid in cash. It should be through Cheques, Demand Draft, NEFT, RTGS or any other available banking channels.

(iv) Rent Received

• To check rental agreement or lease deed
• In case where the rental income is received from more than one property, separate account for each property should be maintained.
• The Auditor should verify that the rent for all the twelve month is received or not.
• The amount of rent should be verified from the rent deed or the lease deed.
• If TDS (Tax Deducted at Source) is deducted by the party, there should be proper accounting of TDS.

(v) Sale of Investments

• To check bank statement if the sales proceeds have reached the bank account.
• To verify broker commission, note or debit note, if investments are sold through broker.
• To ensure separate accounting is being done for capital receipts and revenue receipts. Dividend or profit or loss on sale of investment is a revenue receipt and the sales proceeds of the investment cost should be booked as capital receipt.

(vi) Subscription

Subscriptions are received from the members of a club and the following points need to be considered by the Auditor while vouching subscription:

• Subscription register should be verified.
• Verification of subscription received during the year and the subscription receivable.
• Counterfoil of cash receipt should be verified.

(vii) Sale of Fixed Assets

• To check minutes of the meetings of the Board of Directors.
• Sale agreement or sale contract.
• Verification of agent account if sale is made through an agent.
• Profit or Loss on sale of fixed assets should be booked to revenue account.
• Authorization of sale of fixed assets.
• Sale proceed of fixed assets should be credited to fixed assets account after deducting expenses on sale of fixed assets if any.

(viii) Interest and Dividend Received

• Verification of the dividend warrant letter along with the covering letter for verification of dividends in case of dividends received through cheque.
• Verification of bank statement, if the dividend is directly credited to the bank account
• Interest on security can be vouched from the securities schedule.
• Interest on fixed deposit can be verified from bank statement and TDS certificates
• Interest received from outsiders to whom company has granted loan could be verified from statement of account of party along with TDS certificates.
• Provision should be made for interest accrued but not due
• All interest received and accrued should be properly accounted for in the books of accounts

(ix) Commission Received

• Verification of agreement on the basis of which the commission is received
• Calculation of the commission receivable
• The commission received should be verified from counterfoils, bank statements, cash receipts, etc. and the provision for commission receivable should be rightly accounted for in the books of accounts
• Commission receivable on “sale of goods sent on consignment” should be verified from sale account

(x) Installments Received on Hire-Purchase Sale

• Study of the Hire-Purchase agreement for hire-purchase-sale price, number of installment, rate of interest etc.
• Segregation of principle amount and interest amount should be done and both should separately account for
• Profit on sale on hire-purchase should be duly calculated on the basis of installment received during the year

Vouching of cash payments (credit side of cash book)

All the payment made to creditors, expenses incurred in cash and all other payments done appear on the credit side of cash book and the Auditor is required to vouch cash payments because chances of cash misappropriation are very high.

Following points need to be considered for different types of cash payment:

(i) Opening Balance

The opening balance of cash book can never be credited because cash of company cannot be in negative but the credit bank balance represents the overdraft account from bank or utilization of cash credit limit as sanctioned from bank.

(ii) Payment to Creditors

Payment to creditors may be examined by the following:

• Receipt issued by the creditors
• If the creditor is paid amount as full and final settlement, the balance amount, if any stands in the ledger account of the creditor; this amount should be credited to discount received
• If any advance payment is made to creditor that should be clearly mention
• Statement of account of creditor

(iii) Payment of Salaries

Depending upon the adequacy of internal control system in an organization Auditor will decide his audit Program. It is very important for Auditor to check the following:

• Attendance record of employee and salary register
• Appointment letter of new employees
• Comparison of current month salary with last month’s salary and if there is any abnormal change in amount, Auditor should verify the same
• Alteration in amount of deductions on account of advance, loan, fine, funds, insurance, TDS, etc.

(iv) Payment of Wages

At the time of vouching of wages paid, the Auditor should verify the following points to avoid misappropriation of cash:

• Adequacy of Internal Control System
• Payment of wages at higher rate than allowed
• Payment shown to ex-workers in the current month
• Lower or non-deduction of advance or other deductions due
• Payment to fictitious workers
• Payment to workers who were absent from duty
• Wages sheet should compare with wages register
• Comparison of current month wages with last month’s wages and proper verification should be there for extra ordinary changes
• Detailed verification for payment to casual workers
• Vouching and verification of treatment accounting treatment for unpaid wages

(v) Purchase of Plant and Machinery

The Auditor should pay attention to the following:

• Purchase invoice of machinery
• Freight inward charges, installation charges, erection and commissioning charges should be capitalized
• Treatment of Excise duty according to the excise rules

(vi) Purchase of Land & Building

Purchase of Land and Building can be vouched as follows:

• Study of Lease hold agreement, if land is purchased on lease hold basis
• Payment should be as per lease term
• All the expenses incurred to acquire lease hold property should be debited to respective property account
• Auditor should study the conveyance deeds in case property is purchased under free hold basis
• For verification of payment, the Auditor can check the payment receipt and the conveyance deed

(vii) Rent Paid                   

Consider the following points for the verification of rent by the auditor:

• Rent Deed
• Rent receipt from Land lord
• Provision for unpaid rent at the end of the year

(viii) Insurance Premium

Consider the following points for the verification of Insurance Premium:

• Insurance policy issued by the Insurance Company
• Insurance premium receipt
• Insurance premium should not be related to any official of the company

(ix) Income Tax

Consider the following for the verification of Income:

• Advance Tax Challan
• Self-Assessment Tax challan
• Income Tax demand notice
• Assessment order

(x) Excise Duty

Consider the following for the verification of Excise Duty:

• Rate of Excise Duty
• Excise records and sale invoice for verification of excise duty

An auditor’s report is a written letter from the auditor containing their opinion on whether a company’s financial statements comply with generally accepted accounting principles (GAAP) and are free from material misstatement.

The audit report is the report that contains the audit’s opinion, which independent auditors issue after they examine the entity’s financial statements and related reports. Those including financial statements, management accounts, management reports. Or others report like compliant reports. Mostly, those reports are issued based on auditors’ professional examination against the measurement criteria or standards.

The independent and external audit report is typically published with the company’s annual report. The auditor’s report is important because banks and creditors require an audit of a company’s financial statements before lending to them.

Constitutes:

• The audit report is important because banks, creditors, and regulators require an audit of a company’s financial statements.
• The auditor’s report is a document containing the auditor’s opinion on whether a company’s financial statements comply with GAAP and are free from material misstatement.
• An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn’t adhere to GAAP.
• A clean audit report means a company followed accounting standards while an unqualified report means there might be errors.

Types

Unqualified Audit Report (Clean Audit Report):

The auditor issued an unqualified audit report to financial statements when auditors found no material misstatements after their testing. Therefore, this report contains an unqualified opinion from an independent auditor.

The report showed that the entity financial statements are prepared and present true and fair and complying with the accounting framework being used.

This is a good sign for all kinds of stakeholders that willing to uses the financial statements. You might find whether the audit report is clean or not in the opinion paragraph.

Qualified Audit Report:

The qualified Audit report is the reported issue by auditors to the financial statements that found material misstatements. But those material misstatements are not pervasive.

Adverse Audit Report:

An adverse Audit Report is a type of audit report issued to the financial statements when auditors found material misstatements in the financial statements.

Disclaimer Audit Report:

The disclaimer audit report is the report that issues the financial statements where there is matter to auditor’s independence and those mater cause auditors not be able to obtain sufficient audit evidence to support their opinion.

This has happened when auditors are prevented to access to certain information related to items or accounts in financial statements while those items or accounts are believed to be materially misstated and pervasive.

Auditors might not issue the disclaimer opinion if the restrictions are made only the items or accounts that material misstated but not pervasive.

Advantages of Audit Reports:

Prove management integrity on their shareholders. As an auditor is independent of management, the report could prove whether managements are honest to their shareholders or not. But, again, this is related to principle and agency theory.

Assure Financial Statements. Audit reports are issued by a professional and independent auditor who is operational independent from the entity’s management. The report issued from them could help the financial statement users to assure that financial information is correct.

It is the requirement of law and regulation. Most countries required the entities that have the specific criteria to have their financial statements audited by independent auditors those criteria like annual turnover, the value of assets, and the number of employees. The auditor is the evidence that could prove to the government that the entity complies with the law.

Parent company’s requirement. Many parent companies that have subsidiaries operating in other countries or even in the same country normally required their subsidiaries’ financial statements to be audited. This report could help them manage the subsidiary even more effectively.

It is the requirement of shareholders. Most of the corporate shareholders want their entity’s financial statements to be audited. This report is examined by the experts and express in the easy words that could be understood by most of the shareholders who do not have financial or audit background.

Help stakeholders to understand about entity’s financial and operational situation. This is probably the most important point. The auditor is required to state the auditor report whether the entity has any going concern problem or not. This includes financial and non-financial problems that could lead the entity to face bankruptcy in the next foreseeable period from the audit report date.

Limitation of Audit Reports:

Time too constraints for auditors. In practice, auditor normally faces time constraints which do not provide them enough time to perform their testing as they should be.

The scope of the audit might be limited by management. This is a popular discussion about audit’ issues. In the audit standard, auditors should have the full right to access information that could help them obtain audit evidence to express their opinion. However, in practice, management might try their best to prevent auditors from obtaining some sensitive information. These are probably the management don’t fully trust auditors ethic related to confidentiality or management themselves have integrity problems. These problems might prevent auditors from providing the best quality of audit opinion that it should be.

Auditors’ Independence. The code of ethics required auditors to stay independent from their audit clients. This is to ensure that auditors do not bias when they perform their works and issue audit opinion.

Auditors Qualification and Competency. This is also an important point. To run an audit firm, we all know that someone who represents the firm needs to hold a CPA qualification. But the thing is because of the competition, and because of the number of works, the quality of the audit report might have some problems. As you may know.

Risks that might not detect by auditors: Inherent Risks and Fraud Risks. The audit standard requires auditors to have proper audit planning as well as risk assessment. This ensures that the auditing quality is maintained and audit risks are identified and minimized. However, these things could not auditor eliminate all kinds of material misstatement risks from financial statements. For example, inherent risks and fraud risks.

Heading	Contents
Title	Title should mention that it is an ‘Independent Auditor’s Report’.
Addressee	Should mention clearly as to whom the report is being given to. For example Members oMentions that it is the Management’s responsibility to Prepare the Financial Statements. f the company, Board of Directors
Management’s Responsibility for Financial Statements
Auditor’s Responsibility	Mention that responsibility of the Auditor is to express an unbiased opinion on the financial statements and issue an audit report.
Opinion	Should mention the overall impression obtained from the audit of financial statements. For example Modified Opinion, Unmodified Opinion
Basis of the Opinion	State the basis on which the opinion as reported has been achieved. Facts of the basis should be mentioned.
Other Reporting Responsibility	If any other reporting responsibility exists, the same should be mentioned. For example Report on Legal or Regulatory requirements
Signature of the Auditor	The engagement partner (auditor) shall sign the audit report.
Place of Signature	The city in which audit report is signed.
Date of Audit Report	Date on which the audit report is signed.