Auditing refers to inspection and examination of financial books of an organization in a systematic manner to ascertain whether the financial statements present a true and fair view of the concern.
In observing the above the auditor is required to make a report to the members on the account examined by him and on every balance sheet, profit and loss account and on every other document annexed thereto which would be laid before the general meeting during his tenure of office. The report must state whether in his opinion and to the best of his information and according to the explanations given to his, the said accounts give the information in the manner required by this act, and give a true and fair view in the case of the balance-sheet, of the state of the company’s affaires as at the end of its financial years and in the case of the profit and loss account, of the profit or loss for its financial year.
Auditor is responsible for protecting the interest of those who appointed him but the auditor will presume that servants of the company are honest and will rely on their statements. The auditor should investigate thoroughly but he is also not expected to be of suspicious mind.
Justice Lopes in case of Kingston Cotton Mill quoted “Auditor is a watchdog, not a bloodhound.” A watchdog is defined by the American Heritage dictionary as “One who serves as a guardian or protector against waste, loss, or illegal practices.” A bloodhound is defined informally by the same dictionary as “A relentless pursuer.”
Watchdogs keep watch and protect against waste and abuse. They remain aware of their surroundings, act upon suspicious behavior or activity and may defer to the bloodhound when a relentless pursuit is necessary. Bloodhounds fixate on the scent of the animal and follow the trail through water, rain, sleet and snow until they detect the animal or collapse of fatigue. Obviously, this approach will result in additional fees, added time and client relationship management issues as they may often perceive our efforts as unnecessary, intrusive, and expensive. Judging by our definitions above, it would appear that auditors fall more into the role of a watchdog who possesses the ability to determine when a bloodhound is needed.
The auditors’ job is merely to provide a check on management by expressing an opinion as to whether the financial statements present a ‘true and fair’ view of a company’s affairs. Simply put, they have to ensure that the financial statements are prepared in accordance with the relevant accounting standards and do not contain material misstatements.
However, in arriving at their opinions, auditors are required to perform their work in such a way that they will have a reasonable, not absolute, chance of detecting fraud. So, an auditor will not be legally liable for failing to spot material misstatements resulting from fraud, as long as he can prove that he has undertaken reasonable procedures in trying to detect it.
Management and employees are intimately involved in the day-to-day affairs of their business, while auditors are on a client’s premises for only a few weeks or months a year. It is unrealistic and unreasonable to expect auditors to be as knowledgeable as their clients.
As such, in doing their job, auditors are heavily reliant on management, who could potentially mislead them. To cover themselves, auditors obtain a letter from management testifying that the financial statements are fairly stated.
The audit profession stands at a major crossroad. It can continue with business as usual and await, with near certainty, the consequences of the next major audit disaster and yet more pull by the regulators toward a new and better audit model. Alternatively, it can embrace the need for radical reform and push itself toward a new, improved audit model that provides motivation for better quality audits; ameliorates, if not eliminates, the self-serving audit bias; and goes a long way towards addressing the public interest.