Connect with us

Discuss the auditor’s position as regards provisions and reserves.

auditor position as regards provisions and reserves.

Uncategorized

Discuss the auditor’s position as regards provisions and reserves.

An auditor has a special duty and responsibility as regards provisions. It is no part of the auditor’s duty to make the provisions he considers necessary: he has no power to do so unless so instructed by his client, in which case he acts in the capacity of accountant. The auditor, however, must inquire into the provisions most carefully with a view to satisfying himself that they appear to be adequate and reasonable.

Where the provisions made are, in his opinion, materially inadequate, and he cannot persuade his client to increase them, he should make express reference thereto in his report. If he fails to do so, the auditor may be held liable for negligence and breach of duty as the court decided in Arthur & Green & Co. case. As regards general reserves, it is not the duty of the auditor to be concerned with the adequacy or otherwise of the amounts of profits set aside to reserve.

It is a matter of the company’s financial policy and therefore rests entirely with the management. The auditor, however, must see that the amounts have been properly taken, and do show a bona fide surplus. He must also see that the reserves are clearly and properly stated in the Balance Sheet and Profit and Loss Account. Sometimes fictitious reserves may be created through overvaluation of stock or the insufficient provision for depreciation and bad debts. Under such circumstances the auditor must deal with the whole question in his report. If the accounts are in order and disclose profits, the auditor cannot insist upon the creation of revenue reserves, for that is a matter entirely outside his province. In the case of a limited company, the auditor is to see the Articles of Association in order to ensure that its provisions have been complied with. In case of specific reserves, however, the auditor has special duty and responsibility. He should see that the amount set aside to specific reserve is adequate and reasonable. He should also see that specific reserve is utilised for the purpose for which it is created. Finally, he must consult the company’s Articles and Directors’ Minutes and recommendation in regard to specific reserve. Where the reserve made is, in his opinion, materially inadequate, and he cannot persuade his client to increase it, he should report the fact to the members.

Provision for Bad and Doubtful Debts

Is an auditor required to satisfy himself as to the adequacy of the provisions made for bad and doubtful debts? Discuss the legal decisions bearing upon this question.

It is no part of the auditor’s duty to make the provisions he deems necessary. But the verification of the sufficiency of provisions for bad and doubtful debts is a most important part of auditor’s duties, since it directly affects accuracy of the Profit and Loss Account and Balance Sheet. He is to report whether, in his opinion, the Balance Sheet which he signs does show the true and fair view of the state of the company’s affairs. Sundry Debtors are assets of the company and hence he must exercise utmost care and vigilance in verifying them. If, after careful investigation, the auditor is of opinion that provision for bad debts is not adequate and reasonable, he should try to persuade his client to make additional provision which he considers necessary.

If, however, he is not successful, he should then point out in his audit report that, in his view, the provision is inadequate. If he fails to do so, the auditor may be held guilty of negligence and breach of duty. The duty of an auditor acting for a firm or individual, of course, will depend upon his specific instructions.

But where he has “general” instructions, his duty is similar to that explained above, since “he must be honest, that is, he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true” (re London and General Bank). Corporation Ltd., (1920, the auditors were charged with negligence that In Arthur E. Green and Co. v. The Central Advance and Discount Auditing 148 the profits of the company were considerably overstated, owing to the provision for bad debts being insufficient.

The book debts included a large number of very old debts many of which were statute-barred but the auditors relied upon manager’s certificate of the provision for bad debts. The court held that the auditors had been negligent in their duties. This case clearly points out how important is it that an auditor should carefully examine the book debts with a view to ascertaining that the provision for bad debts is sufficient to meet all bad and doubtful debts.

Continue Reading
You may also like...
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

More in Uncategorized

To Top