Professional Documents
Culture Documents
The following are the steps of a prospective auditor should take before deciding whether to accept or not
his/her nomination as the auditor:
i) Consider qualification for the appointment i.e. validly appointed as an auditor in accordance with the
Companies Act e.g. have attained the minimal qualification as identified in the first column of the
Accounts Act:
• He is not a body corporate,
• He is not an officer or servant of the company, not a person who is a partner or in the
employment of an officer or servant of the company,
• He is not disqualified to be an auditor in a parent, subsidiary etc. Professional ethics do not
block him from being an auditor.
ii) Meet with the management and know exactly what the assignment involves to ascertain:
• The size, location and nature of his potential client and evaluate his ability to serve her/him
in terms of resources.
• The number, qualification and experience of the personnel to be used in such audit.
• To know the timing of the audit i.e. the year end of his potential client and the time the
report is required not to delay. AGM.
• The current commitment of the firm e.g. the listing of the firm in the stock exchange,
mergers, acquisition etc to enable the auditor to assess his liability.
iii) Request the client to give permission to communicate with the retiring auditor to find out whether there
are reasons professional or otherwise as to why he should not accept the appointment such as:
• Reason for his removal
• Integrity of the management and their management styles e.g. centralized, decentralized,
democratic etc.
• Areas of potential risk to put more emphasis while auditing
• Nature of the internal control systems to know whether they can be relied upon.
NB: Depending on the assessment of the potential client, the auditor can decide to accept or reject the
appointment.
Once the auditor has accepted the appointment, he should communicate this to the client through a letter
of engagement.
NB: For the client to succeed in a claim for financial loss he must satisfy the court in relation to three
matters:
i) That there existed a duty of care enforceable by the law
ii) That where the duty existed the auditor was negligent in the performance of that duty judged by
acceptable professional standards
iii) That the client suffered some financial loss as a direct consequence of the auditor’s negligence.
LIABILITITY TO THIRD PARTIES (USERS OF FINANCIAL STATEMENTS)
An auditor may be liable for negligence not only under the law of contract but also in the law of tort i.e. if a person
to whom he owed a duty of care has suffered financial loss as a result of the auditor’s negligence. For the third party
to succeed he must prove the following:
• The auditor owed him a duty of care
• The auditor was negligent
• He has suffered financial loss resulting from the auditor’s negligence.
DUTY OF CARE
In Hedley Byrno V. Heller
A duty of care exists where there is a special relationship between the parties i.e. where the auditor knows or ought
to have known that the audited accounts would be made available to and would be relied on by a particular person.
Auditors owe a duty of care if the following conditions are met:
• He is fully aware of the nature of transactions which the plaintiff had in contemplation e.g. during the issue
of prospectus.
• He knew that the advice or information would be communicated to the plaintiff either directly or indirectly
• He knew that it was very likely that the plaintiff would rely on that advice or information in deciding
whether or not to engage in the transaction in contemplation.