Auditor’s Duty when put on inquiry
An auditor must not be seen to be negligible, he must be thorough in his work and if the auditor’s suspicions are aroused, he has to probe the matter to the bottom. He can do this by carrying out detailed tests to his personal satisfaction to either confirm or dismiss the suspicion.
In recent times, auditors have been held to be negligent in the following circumstances as they failed to carry out further tests when they were put on inquiry.
Knowledge of dishonesty in an employee of a company:
TODD MOTOR CO VS GRAY (1928). In this case, the knowledge in the auditor of the fact that an employee had taken some of his employer’s money was held to bear directly upon the nature and detail of the checks the auditor ought to have performed in relation to matters with which that employee was concerned.
Increasing or unusually large cash balances:
LONDON OIL STORAGE CO VS SEEAR, HASLUCK & CO. (1904). In this case, Lord Alverstone C.J in the course of his summing up to the jury said: “If the auditor finds for a series of years, larger amount that have been left in the hands of the cashier than bat first sight would seem to be required, I do not think there is prima facie duty upon him to inquire into that. It is a matter of policy and not of audit. If it becomes suspicious, then you will understand that different considerations arise.
Thus it may be said that such large or increasing cash balances ought to put the auditor upon inquiry when they earlier rise disproportionately from year to year or are excessive for the reasonable requirements of the business.
Entries in the books other than the relevant date:
IRISH WOOLLEN CO VS TYSON & OTHERS (1900). In this case, the auditor were held o be negligent for not being put upon inquiry by entries that the auditors knew were raised after the books had been ruled off at the balance sheet date but dated previous thereto.
Reliance of Management Representation:
The auditors can rely on representations given to them by the management of an enterprise In the absence of suspicious circumstances: RE: KINGSTON COTTON MILL CO (1896). But where they still go ahead to rely on management’s representations in the light of suspicious circumstances, it is believed that it is a defeat of common law and sense- RE: Thomas GERRARD & SONS LTD (1967.
In this case, justice Pennycuick said: “I will assume in the auditor’s favour that he was entitled to rely on he assurances of officers of the company until he first came upon the altered invoices, but once these were discovered, he was clearly put on inquiry and I do not think he was then entitled to rest content with the assurances of such officers however implicitly he may have trusted one of them.”
Therefore, the auditor will not be justified in accepting the explanations of a director or other responsible official however trustworthy such a person may appear to be, in a case where he is put upon inquiry. Hje must undertake some independent investigations so as to enable him to assess for himself whether the explanations he receives are satisfactory.
Alteration of Documents
RE: THOMAS GERRARD & SONS LTD (1967)
In this case, the auditors were held to be negligent in that after they had discovered alterations in the dates of the invoices they failed to make exhaustive inquiry as to the explanations and to inform the board of directors.
ARMITRAGE VS BREWER, KNOTT (1936).
In this case the auditor was held negligent in view of the special duties of vigilance he was held to have undertaken in not detecting a fraud evidenced clearly by altered figures in the petty cash book.
The need to report suspicious circumstances to management:
TENANTS CORPORATION VS MAX ROTHENBORG & CO (1970). In this American case, it was said: “That even if the defendants were hired to perform only “write up” services, it is clear beyond dispute that it did become aware that material invoices were missing and accordingly, had a duty to at least inform the plaintiff of this”.
The Existence or Possibility of Deficiencies:
BROW AND WRIGHT VS THOMSON, PLUCKNETT & CO (1939).
In this case, the auditor was held negligent in that on striking the trial balance in successive years he discovered a deficiency of a large amount which he put down to bookkeeping error rather than tracking down the real cause, which was fraud.