Introduction:
An auditor may be a person authorized to review and verify the accuracy of monetary records and make sure that companies suits tax laws. They protect businesses from fraud, means discrepancies in accounting methods and, once in a while , work on a consultancy basis, helping organizations to identify ways to spice up operational efficiency. Auditors add various capacities within different industries.
The Audit committee given here is as per Companies Act, 1956. there’s also requirement for forming Audit committee as per Clause 49 of Listing agreement with Stock exchanges. As per listing agreement, a professional and independent audit committee shall be found out , giving the terms of reference subject to following:
1. The audit committee should have minimum three directors as members. Two thirds of the members of audit committee shall be independent directors.
2. All members of audit committee should be financially literate and a minimum of one member shall have accounting or related financial management expertise.
3. The Chairman of the audit committee should be an independent director The Chairman of the audit committee should be present at AGM to answer share holder queries.
4. the corporate secretary should act as secretary of the committee Besides this audit committee should meet a minimum of fourfold during a year and less than four months should have elapsed between two meetings. The quorum should be either two members or one third of the members of the committee whichever is great er, but there should be minimum of two independent members present.
An audit committee is established by the board of directors of a corporation for the aim of overseeing the financial and accounting processes of the corporate and is monitoring, whether a corporation maintains the financial discipline. Audit committees are established to help the board of directors to discharge their fiduciary responsibilities. “All listed companies should establish an audit committee in raising standards of corporate governance.”
Statutory Rights of Auditors:
1. A right of access in the least times to the books, accounts and vouchers of the corporate.
2. A right to need from the company’s officers such information and explanations as they think necessary for the performance of their duties ad auditors.
3. A right to attend any general meetings of the corporate and to receive all notices of and communications concerning such meetings which any member of the corporate is entitled to receive.
4. A right to be heard at general meetings which they attend on any a part of the business that concerns them as auditors.
5. A right to receive a replica of any written resolution proposed.
6. A right to offer notice in writing requiring that a general meeting be held for the aim of laying the accounts and reports before the corporate.
Duties of an Auditor:
1. To offer a report back to the members on the accounts, books of account, record and profit and loss account examined by him.
2. Where any matter reported upon is answered within the negative or with a qualification the report shall include reasons for such qualification with factual position.
3. To incorporate within the report of the corporate such matters as directed by the Federal Government.
4. To attend those general meetings of a listed company, either himself or through authorized person, during which the record , profit and loss account and therefore the auditors’ report are to be considered:
• To form report for inclusion in prospectus.
• To certify receipts and payments account within the statutory report.
• To form report on declaration of solvency just in case of voluntary completing.
• To exercise due care and skill in completing his duties and make such inquiries as needed.
Auditor’s Liabilities:
The liabilities of auditors of a corporation are often studied under following heads:
1. Civil Liabilities:
Civil liabilities mean the disputes over losses caused to at least one party by acts of another. The civil liabilities of an auditor are often for:-
• Liability for Negligence (under law of agency):
Auditor being agent of the Shareholders is required to hold out his duties with due care and skill. If he fails so, he’s susceptible to observe any loss caused to the third party.
• Liability for Misfeasance:
The term misfeasance means breach of duty. If auditor does something wrong within the performance of his duties leading to a loss to the corporate , he’s guilty of misfeasance. If auditor doesn’t perform his duties properly and therefore the company suffers loss he’s responsible for misfeasance.
2. Criminal Liabilities:
If auditor makes some false report he are often responsible for an offence of forgery.
Case Laws:
1. Arthur E. Green & Company Vs Central Advance & Discount Corporation Ltd .
It was held that auditor is guilty of negligence. Auditor accepted the schedule of bad debts furnished by the client, though it had been apparent that debts weren’t recoverable.
2. The London Oil Storage Co. Ltd. Vs Sear Hasluck & Co .
In this case, auditors were held responsible for negligence. Auditors did not verify the physical existence of money in hand. Cash balance as per books didn’t accept as true with the physical balance, the difference was misappropriated by the cashier.
3. Irish Woolen Co. Ltd. Vs Tyson and Others .
In this case auditors were held responsible for negligence. Profits were overstated by not recording purchase invoices. He was held responsible for having did not exercise due care and skill
4. Kingston Cotton Mills Co. Ltd .
In this case auditors weren’t held responsible for negligence. it had been held that it’s not the duty of auditors to require stock, if they accept certificate within the absence of any suspicion, he has administered due care and skill.
The Provisions of Sec 292A of the Companies Act, 1956 regarding the Constitution and Functioning of an Audit Committee:
1. Every public co having paid up capital of not but 5 crores of rupees shall constitute a committee of the Board referred to as “Audit committee”.
2. The committee shall constitute of not but three directors of which a minimum of two thirds should be directors aside from Managing and Whole time director.
3. The members of the committee shall elect a md amongst themselves. The chairman should be present at the AGM to supply any clarification on the audit.
4. The auditor, internal auditors, if any, and therefore the director responsible of finance shall participate at the committee meetings but shall haven’t any right to vote.
5. The committee shall have the powers to research into the affairs of the corporate and for this purpose shall have access to records of the co and external professional advice.
Benefits of Audit Committee:
1. Improves the standard of monetary reporting ,by reviewing the financial statements on behalf of the board.
2. Create a climate of discipline and control , which can reduce the chance for fraud.
3. Enable the non-executive directors to contribute an independent judgment and play a positive role.
4. Strengthen the position of the external auditor by providing a channel of communication and forum for problems with concern.
5. Increase public confidence within the credibility and objectivity of monetary statements
6. Strengthen the position of the interior audit function by providing a greater degree of independence from management.
Importance of Audit of Committee:
1. Assets are safeguarded and used for business purposes.
2. Business information is accurate.
3. Employees suits laws and regulations.
Role of Audit Committee:
1. Overseeing financial reporting and audit process.
2. Providing an efficient counterbalance to executive.
3. Uphold the independence of both internal and external auditors.
4. Maintaining accounting statements to offer a real and fair view of organization’s financial position and performance.
Functions and Rights of Audit committee:
1. Towards Shareholders.
2. Towards Board of Directors.
3. Towards internal Auditors.
4. Towards external Auditors.
References:
1. Daniel Libretto, Auditor, Investopedia, (Nov 13, 2020) https://www.investopedia.com/terms/a/auditor.asp
2. Arthur E. Green & Company Vs Central Advance & Discount Corporation Ltd (1920)
3. 4 The London Oil Storage Co. Ltd. Vs Sear Hasluck & Co 1958 34 ITR 43 Cal (India)
4. 5 Irish Woolen Co. Ltd. Vs Tyson and Others [1900] 26 Acct LR 13.
5. Kingston Cotton Mills Co. Ltd (No 2) [1895] 1 Ch 331.
About the Author:-
This Article has been written by Aryan Sinha, 5th Year law (BBA+LLB(H) student at Galgotias University, Greater Noida.
