Question

The auditor is required to express an opinion on a set of financial statements. Audit risk is the probability that the auditor will express an incorrect opinion resulting in financial loss to persons acting upon the audit opinion given. There are laws and regulations in place which provide protection for stakeholders who suffer losses from reliance on the auditor’s report which may be found “lacking”.

In reference to the legal and regulatory framework of the auditing profession, what are the circumstances under which you may consider the audit report to be “lacking” and the auditor liable for financial losses suffered by stakeholders? Do you believe that the laws and regulations provide sufficient protection for the auditor carrying out his/her professional duty with due diligence and care or do you perceive an imbalance in favor of the stakeholders?

Discuss the issues outlined above in relation to the rights, responsibilities and obligations / liabilities of the auditor.

Answer 1

The audit report is the final outcome of the entire effort put in by the auditor to achieve the audit objectives. In fact, the auditor communicates his funding through the audit report.The objective of audit of financial statements is to express an opinion. The objective of the audit of the financial statements is to enable an auditor to express an opinion on such financial statements.

The auditor is required to express his opinion on the following points:-

(a). Whether books of accounts as required by law have been kept by the company so far as it appears from the examination of the books and proper returns adequate for the purpose of audit have been received from branches not visited by them.

(b). Whether the accounts give the information required by the act in the manner so required

(c). Whether the accounts give a fair view in case of the balance sheet, the state of the companies affairs and in case of the profit and loss account of the profit and loss for the year.

The auditor is responsible for firming and expressing his opinion on the financial statements. However the responsibility for their preparation is that of the management of the enterprise. Management responsibilities include the maintenence of adequate accounting records and internal controls, the selection and application of accounting policies and the safeguarding of the assets of the enterprise.

The duties of auditor are not limited to the verification of the arithmetical accuracy of the books of accounts kept by his client. Because, the verification of arithmetical accuracy would Amount to certification of accounts only which not serve much purpose since the auditor is required to report on the manner of selection of accounting policies and to assess the judgement made by the enterprise on arriving at certain accounting estimatestandards or how the final accounts have been ultimately prepared to portray the financial statements. The auditor must satisfy himself by performing substantive audit procedures to vouchers, invoices, minutes of meetings, correspondence and the documentary evidence must verify that there exists a proper authentication of the transactions.

He must verify that there exists a proper authority in respect of each transaction and that they are properly recorded. An important aspect would involve valuation of different assets and liabilities shown in balance sheet. Finally, the auditor must verify that the firm in which the Final accounts have been drawn up is the one prescribed by law and as per professional pronouncements and exhibit a true and fair view.

The auditor suffers from control risk on account of inherent limitations of internal control and detection Risk on account of test nature of audit and judgement and estimates involves in formulating accounting policies. Statutory audit is not free from risks. The auditor takes a calculated risk in expressing his opinion on the financial statements. He should minimise the effect of risks in his opinion by exercising proper care and diligence. Various audit procedures are applied to obtain sufficient appropriate audit evidence towards the assertions in the financial statements.