Auditor - A watchdog or A Bloodhound? | Auditing | Audit | IPCC | BCom Sem 5 #himanshunandwani

It was decided in the famous case of Kingston Cotton Mills Co. Ltd. that an auditor is a watch dog and not a blood hound. This clarifies the position of an auditor with respect to detection of frauds and errors. He should examine the accounts with reasonable care and skill. He is not a blood hound i.e. he has to detect frauds and errors but he is not expected to approach his work with the presumption that there are errors and frauds. He is only a watch dog in the sense that he should care for the interests of his client and he should leave no stone unturned to detect frauds or errors. If there are circumstances which arouse suspicion, then he should be extremely careful. If he exercises reasonable care and skill and is not able to detect well-concealed frauds, then he is not liable to his client. (1) Exercise of Reasonable Care and Skill An auditor, while doing his work of audit should exercise that skill, care and caution which a reasonable, competent, careful and cautious auditor would use. What is reasonable skill, care and caution depends on the particular circumstances of each case. The Kingston Cotton Mills case makes it clear that the auditor is not responsible for not detecting carefully laid schemes of frauds, if he has exercised reasonable care and skill. However, if there is anything to excite his suspicion, he should probe it to the bottom. (2) Work Honestly: An auditor is expected to be honest in his work in the sense that he should not certify,what he does not believe to be true. He should exercise reasonable care and skill before he believes what he certifies to be true. He should very clearly specify in his report the defects found while examining accounts. He cannot be relieved from his responsibility, simply by using words which would arouse suspicion of shareholders. (3) Not to be Suspicious : An auditor is a watch dog and not a blood hound. He is not bound to be a detective or to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is justified in believing the tried servants of the company. If there is anything which excites suspicion, then he should probe it to the bottom. But in the absence of anything of that kind, he is only bound to be reasonably cautious and careful. (4) Not Liable for Detecting Carefully Laid Frauds: An auditor is not bound to do more than exercise reasonable care and skill in making inquiries and investigations. When there is nothing to excite suspicion, then reasonable care and skill is quite sufficient. (5) No Guarantee for Correctness of Accounts : The auditor can not guarantee that the accounts are correct in all respects. From the legal decisions discussed above, it can be said that if the auditor has performed audit work with reasonable skill, care and caution, then he is not liable for not detecting frauds or errors in accounts. #auditing #auditor #audit #watchdogs #bloodhound #bcomhonours #bcomsem5 #bcom #tybcomsem5 #icai #ipcc #himanshunandwani #learnwithhimanshunandwani