Legal Aspects of Audit Flashcards
What is the process of obtaining an audit engagement?
The process involves: 1. The company appointing an auditor at the Annual General Meeting (AGM). 2. Directors appointing auditors in exceptional circumstances (e.g., filling a casual vacancy). 3. The Registrar of Companies appointing auditors if no appointment is made at the AGM.
Who can appoint an auditor under the Companies Act?
- Shareholders at the AGM. 2. Directors in exceptional cases (e.g., casual vacancy or first auditor). 3. Registrar of Companies if no appointment is made.
What are the qualifications required for an auditor under the Companies Act and Public Accountants and Auditors Act?
- Must be a member of a Recognized Supervisory Body (e.g., Malawi Accountants Board). 2. Cannot be an officer, employee, shareholder, or partner of the company. 3. Must not be disqualified from acting as an auditor for any corporate body within the same group.
What are the duties of an auditor under the Companies Act 1984?
- Report on financial statements presented at the AGM. 2. Ensure accounts comply with the Act and show a true and fair view. 3. Report if proper accounting records are not kept or if financial statements disagree with the books. 4. Investigate material errors or fraud if suspicions arise.
What are the rights of an auditor under the Companies Act 1984?
- Access to books, accounts, and documents at all times. 2. Require information from directors and employees. 3. Attend meetings and report on matters concerning them. 4. Receive reasonable remuneration. 5. Right of lien (hold property until debts are settled).
What is the significance of the Caparo Industries v Dickman and Touche Ross (1989) case?
The case established that auditors owe a duty of care to the company as a whole, not to individual shareholders or potential investors. Auditors are not liable for investment decisions made by third parties based on audited accounts.
What is negligence in the context of auditing?
Negligence occurs when an auditor fails to exercise reasonable care and skill, resulting in financial loss to the client or third parties. Examples include failing to detect material misstatements or fraud.
What are the consequences of auditor negligence?
- The client or third party may sue for financial loss. 2. The auditor may be required to compensate for the loss. 3. Reputational damage and potential loss of professional license.
What is money laundering
and what are the auditor’s responsibilities?
What is whistleblowing
and when should an auditor report unlawful acts?
What is insider dealing
and why is it illegal?
What are the implied terms in an auditor’s contract?
- Duty to exercise reasonable care and skill. 2. Duty to carry out work with reasonable expediency. 3. Right to reasonable remuneration.
What is the Re Thomas Gerrard & Son (1968) case about?
The case involved an auditor failing to detect falsified accounts. The court ruled that the auditor was negligent because altered invoices should have prompted further investigation.
What are the arguments for extending auditor liability to third parties?
- Third parties rely on audited accounts. 2. Auditors are paid professionals and should be accountable. 3. Extending liability ensures auditors exercise due care.
What are the arguments against extending auditor liability to third parties?
- Liability would be unlimited and unpredictable. 2. Audit fees would increase significantly. 3. The primary duty of auditors is to the company, not third parties.
What is misfeasance liability?
Misfeasance occurs when an auditor breaches their duty, causing loss to the company. After liquidation, misfeasance proceedings can be initiated against the auditor to recover losses.
What are the criminal liabilities of an auditor?
- Making false statements in reports or financial statements. 2. Accepting appointment when ineligible. 3. Misappropriating client property. 4. Falsifying accounting records.
What is the Hedley Byrne v Heller & Partners (1964) case about?
The case established that a duty of care exists when there is a special relationship between parties. Auditors may be liable to third parties if they knew the third party would rely on their work.
What is the Jeb Fasteners v Marks Bloom (1983) case about?
The case involved an auditor’s negligence in auditing accounts. The court ruled that the auditor was not liable because the plaintiff did not suffer any loss.
How can auditors minimize liability?
- Follow auditing standards. 2. Define the scope of work in the engagement letter. 3. State limitations in the audit report. 4. Obtain indemnity from the client or third parties.
