The Gazette 1992

MARCH 1992

GAZETTE

Auditing Company Accounts - Watchdog or Bloodhound?

In this article Muirís Ó Céidigh reviews recent case law in the UK on the liability of auditors that has introduced new, narrower limits of liability in respect of financial misstatements. He argues that, given the perception of the public as to the role of the auditor, the duty of care should be set at a high level. By section 163 of the Companies Act, 1963, auditors are under a statutory duty to report to the shareholders on the accounts which they have examined, and on every balance sheet, profit and loss account and all group accounts laid before the company in general meeting during their term of office. There are essentially five elements to the statements required of an auditor: (a) whether they have obtained all the information and explanations which to the best of their knowledge and belief were necessary for the purposes of the audit; (b) whether, in their opinion, proper books of account have been kept by the company, so far as appears from their examination of those books, and proper returns adequate for the purposes of their audit have been received from the branches visited by them. sheet and (unless it takes the form of a consolidated profit and loss account) profit and loss account dealt with by the report are in agreement with the books of account and returns. (d) whether, in their opinion and to the best of their information and according to the explanations given to them, the accounts give the (c) whether the company's balance The function of auditors re company accounts 1

directors in their report is consistent with the accounts for the relevant year. 2 The report of the auditors should be based on their own judgement and express their own opinion. If they are not satisfied with any of the matters set out above, they are under a duty to make a qualified statement. Where they make such a qualification, they will be held to have discharged their statutory duty, if in the making of the qualification, they use the skill and The subjectivity of accounts and the responsibility of the auditor Although many SSAPs 3 (Statements of Standard Accounting Practice) are in existence, all accounts are inherently subjective in that they reflect the perspective of the accountant, be it conservative or liberal. The assessment of items such as inventory, bad debts, and depreciation are still highly dependent on the, to some extent, subjective approach of the accountant. In this context the task of the auditor is a difficult one. The degree to which he will be able to make in-depth assessments of primary information will be limited. In reality the auditor will try to identify errors in the accounts and ensure that they are not misleading. There is no starting assumption that the accounts reflect dishonesty. In Re Kingston Cotton Mill Co (No. 2) 4 the position of an auditor was said to be as follows: " An auditor is not bound to be a detective, or . . . to approach his work . . . with a foregone conclusion that there is something wrong. He is a watch-dog not a bloodhound". 5 care which might reasonably be expected of them as careful and competent auditors.

by Muiris Ó Céidigh, B.A., LL.B, M.B.A. information required by the Acts in the manner required and give a true and fair view, in the case of the balance sheet, of the state of the company's affairs as at the end of the financial year and, in the case of the profit and loss account, of the profit and loss for the relevant financial year. (e) where the company is a holding company submitting group accounts whether, in their opinion, the group accounts have been prepared in accordance with the Acts so as to give a true and fair view of the state of affairs and profit and loss of the company and its subsidiaries dealt with thereby, so far as concerns members of the company, or as the case may be. In the case of issues (d) and (e) the assessment may be subject to the non-disclosure (which must be indicated in the report) of any matters which are not required to be disclosed in the case of banking and discount companies, assurance companies and other companies prescribed by the Minister.

In addition the auditors will assess whether the information given by the

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