Auditors

Role, Duties, and Responsibilities

Auditors are expected to be the watchdogs of the organizations Often they are bought in by the management Recent history of frauds perpetuated by firms reveal very poor standards of auditing. They themselves got involved in unethical practices. Indian government and regulatory bodies have come up with many regulations for re-establishing corporate accountability and reinforcing investor confidence.

Auditors may fail to notice and report: Window dressing, manipulation of profit and loss accounts, hedging and fudging of unexplainable expenditures, and resorting to continuous upward revaluation of assets to conceal poor performances are some of the things that go unnoticed by the auditors. The auditors are expected to certify the veracity of accounts maintained by the firms for the benefit of all stakeholders.

Defining Audit

The Institute of Chartered Accountants of India (ICAI) defines audit as: The independent examination of any entity, whether profit oriented or not and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon

Objectives of an Audit

The objective of an audit of financial statements is to enable an auditor to express an opinion on financial statements which are prepared within a framework of recognized accounting policies and practices and relevant statutory requirements - ICAI

Types of Audit
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Financial Statement audit: conducted to determine whether the balance sheet, the income statement, the cash flow statement, and the statement of stockholders responsibility are stated in accordance with specified criteria. Compliance audit: to determine whether the audited firm is following specific procedures , rules or regulations set down by some higher competent authority Operational audit: could be a review of any part of the firms operating procedures and methods for the purpose of evaluating effectiveness and efficiency

Responsibility Statement
To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group, and the interim management report of the group includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and risks associated with the expected development of the group for the remaining months of the financial year. Leverkusen, July 26, 2011 Bayer Aktiengesellschaft The Board of Management
Dr. Marijn Dekkers Werner Baumann Prof. Dr. Wolfgang Plischke Dr. Richard Pott

Auditor
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Auditor is a person appointed by a company to perform an audit Is required to certify that the accounts subjected to the audit are prepared in accordance with acceptable accounting standards Certify that the accounts reflect a true and fair of the company Usually chartered accountants are appointed as auditors An auditor is a representative of the shareholders forming a link between government agencies, stockholders, investors, and creditors

Types of Auditors
Internal Auditors: responsibilities may vary and include financial statement audits, compliance audits, and operational audit They may be required to assist the external auditors They may be outsiders or appointed by the firms for conducting audits; in the latter case they cannot expected to be quite independent as long as employer-employee relationship would exist

Independent Auditors: Chartered Accountants firms or Certified Public Accountants firms (as in the U.S.A.) Their report (opinion) may gain more credibility and is likely to provide important value and confidence to investors, bankers, labor unions, government agencies, and the public.

Government Auditors: work in various local, state, and central agencies performing financial, compliance, and operational audits. Such auditors may be employed to verify collection and remittance of sales tax, excise duty, etc. by business firms to governmental agencies

Duties of an Auditor
Under Section 227 (1A) of the Companies Act of 1956:

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Loans and advances made by the company are secured 2. Transactions made by the company which are mere book entries are they prejudicial to the interests of the company? 3. Where the company is not an investment company within the meaning of Section 372 or a banking company, whether so much of the assets of the company as consists of shares, debentures, and other securities have been sold at a price less than that at which they were purchased by the company

4. Whether loans and advances made by the company have been shown as deposits 5. Whether any personal expenses have been charged to revenue account

6. Verifying that the statement of accounts drawn up on the basis of the books of business 7. Verifying that the statement of accounts drawn up on the basis of books of accounts exhibit a true and fair state of the affairs of the company 8. Confirming that the management has not exceeded the financial/administrative powers vested in it by the Articles of Association of the Company and/or resolutions of shareholders

Responsibilities of Auditor
As per the guidelines of the Chartered Accountants of India:

Auditor is responsible for forming and expressing his opinion on the financial statements should assess the reliability and sufficiency information contained in the accounts and other related records Should study the accounting systems and internal controls in existence Should determine whether proper disclosures are made in the financial statements

Should ensure that the audit involves exercise of judgment checking of all details or on random basis whether the transactions have been properly summarized and events recorded Is not expected to perform duties outside the scope of the audit such as certifying the physical condition of an asset that may best be left to a technical expert

Responsibilities of an Audit Firm

Firms need to implement quality control practices and procedures conforming to Standard Auditing Practices: Professional requirements of personnel adhering to principles of independence, integrity, objectivity, confidentiality, and professional behavior Skills and competence personnel who possess necessary technical and professional competence

Delegation - sufficient direction, supervision, and review of work at all stages of the audit Consultation with personnel within or outside the firm with appropriate expertise Acceptance and retention of clients - should be after evaluation of prospective clients and retaining existing ones based on a thorough review on an ongoing basis assess the firms ability to act independently and effectively Monitoring adequacy and operational effectiveness of quality control procedures

Audit Failures

In 2001, Enron filed for bankruptcy under chapter 11 its auditor Arthur Anderson faced investigation by the SEC for fudging official documents and for not being able to detect accounting jugglery perpetuated by Enron. Arthur Anderson had colluded with Enron managers and destroyed financial documents related to the audit - Arthur Anderson had collected $ 25 million as audit fees and another $ 27 million for consulting services

US based Deloitte & Touche, another accounting firm in the Big Five League had given a clean chit to Arthur Anderson had landed in trouble in 2002 - for applying a valuation model for fast food franchisees misleading bankers to extend credit and incurring a colossal bad debt of $10 billion US based accounting firm Ernst & Young had to pay in 1999 $35 million to settle a lawsuit KPMG attracted censure from SEC for engaging in improper professional practices

Laws governing Auditors responsibilities

Sarbanes Oxley Act in 2002 establishing Public Company Accounting Oversight Board (PCAOB), Dealt with Audit committee , Conflict of interest , Audit partner rotation , prohibition of non-audit services , responsibility for Financial reports. Improper influence on conduct of audits

In India, four committees R D Joshi Committee, Kumar Mangalam Birla Committee, Narayana Moorthy Committee, and Naresh Chandra Committee played important roles in framing responsibilities for auditors

Companies (Amendment) Bill, 2003

Chief Accounts Officer every company with a minimum Rs. 3 crore paid up capital should have a qualified Chief Accounts Officer who shall be a member of ICAI or ICWAI Disqualification of auditors - any person who has a direct financial interest in a company , who receives a loan or guarantee from the company, who has any business relationship , or who was an employee of the company in prior times

Prohibited services for an auditor

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Accounting and book keeping Internal audit Financial system design and implementation Actuarial services As a broker. Investment advisor, or offering Investment banking services Management functions Any form of staff recruitment Valuation services and fairness opinion