The Gazette 1992

GAZETTE

MARCH 1992

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

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

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

directors in their report is consistent

with the accounts for the relevant

year.

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

care which might reasonably be

expected of them as careful and

competent auditors.

The subjectivity of accounts and the

responsibility of the auditor

Although many SSAPs

(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.

Re Kingston Cotton Mill Co (No.

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".

role of the auditor, the duty of care

should be set at a high level.

The function of auditors re company

accounts

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.

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