Important Case Laws in Development of Auditing

1. Notes on Auditing & Assurance
Tapan Jindal
CA Intermediary – IPCC
Bharat Law House
Important Case Laws in Development of Auditing
----------------------------------------------------------------Royal Mail Steam Packet Co.
As a result of the decision in this case the reporting requirement was amended from “True and
Correct” to “True and Fair” in the English and Indian Companies Act.
Kingston Cotton Mills Case
It was held that the auditor is not a detective or an insurer and it is not the duty of the auditor to
make roving inquiries to detect frauds and errors. Detection of Frauds and Errors is not the main
objective of an Audit. The auditor is only a watchdog and not a bloodhound. The auditor should
exercise reasonable care and diligence, which a man of ordinary prudence will exercise. If
suspicion is aroused then he should perform additional procedures (investigate) either to confirm
or dispel his suspicion.
London And General Bank Case
It was held that the auditor should be honest, so to say; he should not certify what he does not
believe to be true and should exercise reasonable skill and care before he certifies what he
believes to be true. It is no part of the auditor's duty to give advice to the shareholders or
directors. The auditor is not concerned with the efficiency or effectiveness of the management in
conducting the affairs of the enterprise. The auditor’s duty is confined to examination of financial
information and expressing an opinion on the financial statements.
City Equitable Fire Insurance Co. Case
It was decided that an Auditor should conduct physical verification of investments when persons
who should not held such investments in the normal course hold such investments. The auditor
can rely only on the certificate of persons like bankers who hold investments on behalf of an
entity.
Newton vs. Burmingham Small Arms Co.
It was held that the duties/powers of the auditor cannot be limited by resolution of directors or
shareholders or by Articles but such duties can be extended by passing a resolution in a general
meeting or by Articles.
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