AUDIT is the term applied to an investigation of accounts, including therein an examination of their form and substance and a scrutiny of the figures. The object of the audit is to see that the accounts trulN represent the state of affairs purporting to be represented by them. The person who engages in such investigations is called an auditor. An audit may, in most cases, be conducted by any private individual, but the practice is to place such matters in the hands of public accountants who combine with account ancy the profession of an auditor. In certain statutory cases the auditor is bound to be one who practises the profession publicly. For example, in the case of building societies, one of the auditors of each society must be a public accountant. For Friendly and Industrial Societies the accounts must be audited, in certain events, by public auditors appointed by the Treasury, But, as a rule, the statutes which make auditing compulsory do not at the same time necessitate the employment of professional auditors. Such is the case in regard to the auditing of accounts under statutes relating e.g. to Public Health, Municipal Corporations, Sheriff;, Local Government Bodies, Educational Authorities, Lunacy, Railway Companies, the Oxford and Cam bridge Universities, and the Housing of the Working-Classes. With regard to Companies under the Limited Liability Acts, there is express provision necessitating the appointment of auditors. The Articles of Association, however, generally provide for an audit on the lines of the provision suggested by TABLE A (q.v.). For the provisions of the Acts relating to audits, reference should be made to the article on DIRECTORS. We will briefly set out the purport of the provisions of Table A on this topic, as even it a company has articles of its own, the provisions thereunder would be the some in general. At the same time these provisions will afford a hint to private traders as to the need and method of an audit, and will save separate treat ment of this subject for their especial case.
In the first place, the audit must be made once in every year. The accounts of the company will then be examined and the correctness of the balance-sheet ascertained by the auditor. A member of the company may be an auditor, but not a director, nor any one who is interested in the company otherwise than as a member. The auditor should be supplied %%ith a copy of the balance-sheet, and it will be his duty tc examine it, together with the accounts and vouchers relating thereto. Ile should also have delivered to him a list of all books kept by the company, and should have at all reasonable times access to the books and accounts. If necessary he may, at the expense of the company, employ accountants or other persons to assist him in investigatinpi the accounts, and may, in relation to such accounts, examine the directors or any other officer of the company. The auditor will thereupon make a report to the members upon the balance-sheet and accounts. In every such report his opinion must be given whether the balance-sheet is a full and fair balance-sheet, containing all necessary particulars. He must
also state whether the balance-sheet is drawn up, so as to vx14:bit a true and correct view of the state of the company's affairs. If the auditor has found it necessary to call for explanation or information from the directors. he must state whether the same were duly given to him, and whether they were satisfactory. For the particulars which must be shown by the BALANCE-SHEET, the reader should refer tc the article under that heading. From the above the shareholder in a company will see what lies within the duty of the auditor ; and the private trader will see, when he finds it necessary to have his books of account and balance-sheet checked, the place and method of an auditor with regard thereto.
Duties and Liabilities of an Auditor.—An auditor is an instance of an agent, and as such comes within the law relating to agents. He must do his work properly ; if negligent and damage results, he would be liable to an action. But more than that, an auditor when engaged on behalf of a company is an officer of the company, and as such may be liable to the shareholders. But it is no part of an auditor's duty to give advice, either to directors or shareholders, as to what they ought to do. Nor has he anything to do with the prudence or imprudence of making loans with or without security. Nor whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. Nor whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. He does this by examining the books of the company. But he does not discharge his duty by doing this without inquiry and w ithout taking any trouble to see that the books themselves show the company's true position. He must take reasonable care to ascertain that they do so ; for unless this were so, his audit would be worse than an idle farce. Ile must be honest ; that is to say, 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. He must check the cash, examine vouchers for payment, see that bills and securities are in order and safe custody, and even take reasonable pains to ascertain their value and validity.
Such, briefly and generally, is a statement of the duties and liabilities of an auditor. The legal standard is doubtless a very high one ; but fortunately the profession of auditors and accountants has risen to it, and even taken upon their shoulders a share in the burden of its maintenance. There is therefore no reason why any man of business should go without an accurate investigation and determination of his financial position. The only question remaining is that of the remuneration of an auditor. This is always a matter of agreement, and its extent depends upon the nature of the audit. In any case, the general rule is to fix upon one inclusive fee. See ACCOUNTANT, and articles in Supplementary Volumes.