Introduction: Qualities of an Auditor

Introduction: Qualities of an Auditor:

1. It is very important for an auditor5 to be well versed in the fundamental principles and theory of all branches of accounting, e.g., general accou7nting, cost accounts, income-tax, etc. it is not possible for a person to audit the accounts unless he himself 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.
2. 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.
3. He should be able to grasp quickly the technique 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.
4. He should be prepared to seek elucidation on technical questions rather than show a false pride or fear of displaying his own ignorance.
5. He should be quite familiar with Company and Mercantile Laws and must be a complete master of the principles of auditing.
6. He must be tactful and scrupulously honest, as Lord Justice Lindley has said, “An auditor must be honest, i.e., 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.” (In re London and General Bank, 1895)
7.   He must not influenced, directly or indirectly, by others in the discharge of his duties.
8.      He must 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.
9. He should not disclose the secrets of his clients.
10. He must have the tact to put intelligent questions to extract full information.
11. He must not adopt an attitude of suspicion.
12. He must be prepared to hear arguments and must be reasonable.
13.   He must be vigilant, cautious, methodical and accurate.
14. He should have the ability to write the report clearly, correctly, concisely and forcefully.
15. He should have an understanding of the general principles of economics.
16. He should have thorough training in business organization, management and finance.
17. Last but not the least, he should have ‘Common Sense’.

 

The following Obiter dicta of famous Judges have been made from time to time, in regard to the qualities of an auditor:-

“An auditor is not bound to be a 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 tried 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).

“He is a watch-dog and not a blood-hound”. (Lord Justice Lopes)

“He is not an insurer; he does not guarantee that the books do correctly show the true position of the company’s affairs. (Lord Justice Lindley).

Introduction: Auditing and Investigation

Auditing and Investigation:

            Sometimes students get an impression that auditing and investigation mean the same thing. There is a lot of difference between the two. Investigation means a searching inquiry into the profit-earning capacity or the financial position of a concern or to find out the extent of the fraud if there is any suspicion about it and so on.

1. Audit is conducted to find out whether the balance sheet is properly drawn up and exhibits a true and fair view of the state of affairs of a concern while investigation is carried out with a certain object in view, e.g., to find out the profit-earning capacity, or the financial position of a concern or a fraud and the extent thereof.           
2. investigation covers several years, say, 3, 5, or 7 years to find out the average earning capacity, financial position, etc., of a concern while audit usually relates to one year.
3. Investigation may be carried out on behalf of outsiders while audit is conducted on behalf of the proprietors only. However, investigation may also be carried out on behalf of proprietors in some cases where fraud or defalcation is suspected.

We shall, however, deal with this topic in detail, in the chapter on “investigation”.

Introduction: Difference between Book-keeping, Accountancy and Auditing

Difference between Book-keeping, Accountancy and Auditing:

            Before we proceed further, it is considered necessary that one should understand the difference between Book-keeping, Accountancy and Auditing:

1. Book-keeping is an art of recording the business transactions in the books of original entry and the ledgers.

On the other hand accountancy means the compilation of accounts in such a way that one is in a position to know the state of affairs of the business.

But auditing means the verification of book entries and accounts to find out their accuracy. It is neither book-keeping, nor accountancy.

2. The spade work is done by the book-keeper and the accountant while the finishing touch is given by the auditor or, as has been said, that where the work of an accountant ends, the work of an auditor begins.
3. Sometimes an auditor is asked to prepare from a set of books the trial balance, profit and loss account and balance sheet in which case he would be acting as an accountant and he would not be required to give his certificate at the foot of the balance sheet. He has simply to put his signature in token of his having prepared such a profit and loss account and balance sheet. On the other hand, an auditor has not to prepare the trial balance, profit and loss account and balance sheet. He is to report whether the profit and loss account and the balance sheet prepared by the accountant exhibit a true and fair view of the state of affairs of the concern and in the case of a company, they are drawn up according to the Companies Act.
4. A book-keeper and an accountant has to record the transactions in the books of accounts while an auditor has to check and verify such transactions and accounts and send a report to the persons who appointed him.