Saturday, December 15, 2012


There has been a recent newspaper report wherein banks have been advised to file disciplinary case against auditors in case of default by the borrower. It is appears that there is a significant gap in the understanding among various regulators, government and society about the actual and real role of an auditor and how to effectively utilize the audit work undertaken by the Auditors and the Audit report
issued on the financial statements. Auditors clearly understand that there is an expectation of the society that once an audit is undertaken, it will prevent occurrence of frauds and manipulation in the books of account or in the financial statements and the audit will ensure true and fair presentation of financial statements and statement of affairs of the audited entity. It may, however, be clearly noted that the transactions, documents or actions which are not brought on record, are extremely difficult for an auditor to identify. More particularly, when a fraud or manipulation is undertaken with the active connivance of top management team, it may still become more difficult to identify and pin point the fraud. Even the documentation, supporting vouchers as well as approval of the competent authorities are brought on record by such fraud team. Auditor is not a blood hound nor is the Auditor
an investigator. The following points are necessary to be kept in mind by all the users of the audit services:

  • Auditors do not undertake verification of all the transactions (100%) and highly rely on testing of internal control mechanism and scientific audit sampling. Auditor is present at the time of transactions and he has to rely on documentary and circumstantial evidence.
  • Audit will ensure detection and prevention of most of  the fraudulent and manipulative practices. However, it  cannot guarantee a complete absence of fraud.
  • The audit report, notes to accounts and other disclosures in the financial statements authenticated by the auditors are very important to be examined and understood carefully, If necessary, with the help of an expert who understand such documents and disclosures and their implications.
  • There are large numbers of instances where some miscreants may even forge the signatures and / or stamp of the auditors. It may therefore, be very necessary to confirm from the chartered accountant concerned as to whether he has authenticated such certificate or financial statements.
  • Only a full-fledged audit provide a safety from the risk and compilation of accounts or a copy of certified financial statements, without a proper audit report is of no value.
  • Obtaining the signatures of a chartered accountant on provisional/draft financial statements or obtaining similar signatures on projected balance-sheets/ financial statements are completely foolish on the part of the user, as in the absence of full-fledged audit report, such certification has no legal validity.
  • In case a client (Borrower) , subject to audit is not able to repay debt, it may arise due to genuine business reasons or siphoning of funds by the promoters through colorful devices. It is, therefore, very important for all lenders to not only verify the audited financial statements but also to physically examine the progress of the project, verification of relevant assets, documents, papers.
  • In desirable cases, may be beyond a specified size of exposure, the lenders should appoint special auditors to examine the books of accounts and records of the borrower at the time of disbursement as well as during the currency of loan with a well defined scope, coverage and reporting requirement, so that all the requirement of lenders are duly met.
  • It has been noted that in certain cases the lenders are not undertaking due diligence and their credit monitoring is very poor. It is also important to undertake detailed training program for all the lenders' officials, in consultation with the Institute of Chartered Accountants of India so that lack of knowledge and diligence should not result into non performing assets.

In all those cases where any chartered accountant is 
found to be a party to fraud or is grossly negligent, in 
any case is being severely punished by the CA Institute 
very actively.


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