AUDITING AND COMPUTERISED ACCOUNTING

Write about the appointment, qualities, remuneration, removal,

rights and liabilities resignation of an auditor i.e
Appointment of an auditor of a financial institution The
qualities of an auditor of a financial institution The remuneration
of an auditor of a financial
institution The removal of an auditor of a financial institution
The rights and liabilities of an auditor of a financial
institution Resignation of an auditor of a financial
institution

.
APPOINTMENT OF AN AUDITOR OF A FINANCIAL
INSTITUTION
Appointment of Auditor
Introduction
An audit is an unbiased examination and valuation of the
financial statements of an organization to form an independent
opinion. The objective of audit of financial statements is to
enable the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
An audit under the regulations is conducted in accordance with the
provisions of auditing standards as applicable, and based on the
audit, the auditor expresses an opinion on such financial
statements in accordance with requirements of the regulations.
Defining an Auditor? An auditor is a person who is assigned
the job to audit the financial statements of a company. He is
appointed under section 252 of the regulations by a company to
audit its financial statements. The preparation and presentation
of financial statements is the responsibility of management of

the company and auditor is only responsible for audit of financial

statements and giving an opinion on the fairness of the financial
statements.
The auditor of a financial institution is an external auditor who is
appointed according to the Financial Institutions (External
Auditors), Regulations, 2010
How an Auditor of a financial institution is appointed
Regulatory Requirements According to the Financial Institutions
(External Auditors), Regulations, 2010, PART II section 4.(1) A
financial institution shall nominate for appointment annually, from
a pre-qualified list to be published by the Central Bank a firm of
qualified external auditors whose duty shall be to perform an audit
of the annual financial statements of the financial institution. (2)
The Central Bank shall publish a list of approved
auditors by 31stof December of each year from which
financial institutions shall nominate for appointment their
respective external auditors.
(3) The following criteria shall be used by the Central Bank in
evaluating external auditors and drawing up the list referred to in
subregulation (1)
(a) the staff strength of the firm taking into account the

number of staff, their qualifications and experience in audit;

(b) the history and experience of the audit firm basing on the
firm's date of establishment and its experience in auditing
financial institutions;
(c) the tests, procedures and audit methodology employed by the
firm; and
(d) the legal status of the firm which shall consist of proper
registration of the firm and practicing certificates of partners
issued by the Institute of Certified Public Accountants of Uganda.
th(4)

An Audit firm that wishes to be included on the list of

prequalified external auditors shall apply in writing to the Central
Bank not later than 30September of each year.
(5) The Central Bank shall require the applicant firm to supply
the necessary information to enable it to carry out the necessary
evaluation. (6) Audit firms on the pre-qualified list shall keep
the Central Bank informed of any changes in partnerships,
directors and audit managers and any disciplinary or legal
actions taken against the firm or their staff on an ongoing basis.

Approval of external auditor (1) A financial institution

shall, within thirty days after
the nomination for appointment of an external auditor, apply
in writing to the Central Bank for the approval of the
appointment.
(2) Within thirty days after receipt of an application from a
financial institution on the appointment of an external auditor, the
Central Bank may in writing
(a) approve the appointment; (b) approve the appointment
subject to such conditions as
shall be specified in the approval; or (c) decline to approve
the appointment stating reasons, in
which case a financial institution shall nominate another firm
as external auditors and shall apply to the Central Bank for
approval of the appointment.
(3) Where a financial institution fails to nominate or obtain
approval of an external auditor within two months after the lapse
of the term of its previous external auditor, or fails to fill a
vacancy for an external auditor, the Central Bank may appoint a
qualified firm of external auditors whose remuneration shall be
paid by the financial institution.
(4) A person appointed as an external auditor by the Central
Bank shall be deemed to have been appointed

as an external auditor at the immediately preceding annual

general meeting of the financial institution and shall be
deemed to be an external auditor appointed by the financial
institution and approved by the Central Bank.
(5) An audit firm shall not be approved by the Central Bank to
serve as an external auditor of a financial institution for a
continuous period exceeding four years.
(6) A firm of external auditors approved for appointment by the
Central Bank shall, have in force before the commencement of
the audit, a valid professional indemnity insurance cover for
negligence in the performance of its duties.
(7) The Central Bank may for sufficient cause withdraw its
approval of the appointment of an external auditor previously
granted.
(8) Sufficient cause referred to under subregulation (7) relate to
failure to comply with the requirements of the Financial
Institutions Act, 2004, breach of duty as imposed by the Act,
inability to perform to the prescribed standard or any other reason
that the Central Bank may, in its discretion consider applicable.
(9) Where the Central Bank withdraws its approval under
subregulation (7), the auditor concerned shall vacate office.

(10) A financial institution shall not change its external auditors

except with the prior written approval of the Central Bank.
(11) An external auditor of a financial institution who decides to
resign from office, or does not seek reappointment, shall give
adequate written notice of not less than twenty eight days to the
financial institution and the Central Bank of his or her decision
to resign from office or not seek re-appointment, and the reasons
for doing so.
First Auditor The directors appoint the first auditor of the
company
within sixty days of the date of incorporation of the company
under section 252 (3) of the regulations. The first auditor holds
office until the conclusion of the first annual general meeting of
the company. If the directors fail to appoint first auditor, the
members in general meeting of the company may appoint the first
auditor. In case, the first auditor is not appointed within one
hundred and twenty days of the date of incorporation of the
company, the Commission may appoint the auditor to fill the
vacancy.
Subsequent Auditor On the conclusion of first annual general
meeting, first

auditor stands retired. Thereafter, the auditor is appointed by the

members at an annual general meeting and such auditor holds the
office until the conclusion of the next annual general meeting. The
retiring auditor of the company is, however, eligible for reappointment. A notice shall be required for a resolution at a
companys annual general meeting appointing as auditor a person
other than a retiring auditor, in accordance with the provisions of
Section 253 of the regulations.

A company is required to send intimation thereof to the registrar

concerned, on Form-29 under section 205 of the regulations,
within fourteen days from the date of appointment of an auditor,
along with the consent in writing of the auditor concerned as per
requirement of section 253 (5) of the regulations. The Form- 29
to be submitted to the Commission shall include particulars of
auditor as required in Section 205 of the regulations and Rule 14
C of the Companies (General Provisions and Forms) Rules, 1985
(the Rules).
How an Auditor is appointed in case of casual vacancy
Casual vacancy of the auditor is filled by the directors but the
surviving auditor may continue to hold office till

vacancy is filled. Auditor appointed to fill up the casual vacancy

holds office till the conclusion of the next annual general meeting.
A company is required to send intimation thereof to the registrar
concerned, on Form-29 under section 205 of the regulations,
within fourteen days from the date of appointment of an auditor,
along with the consent in writing of the auditor concerned. In
case, a casual vacancy in the office of an auditor is not filled
within thirty days after the occurrence of the vacancy, the
Commission may appoint the auditor.
When the Commission appoints the Auditor The Commission
has the power to appoint auditor under the following
circumstances: - (1) If first auditor is not appointed within one
hundred and twenty days of the date of incorporation of a
company.
(2) Auditor is not appointed at an annual general meeting and
directors also fail in filling the vacancy within thirty days
thereafter. (3) Auditor appointed is unwilling to act as auditor of
the company. (4) A casual vacancy in the office of an auditor is
not filled within thirty days after the occurrence of the vacancy.

(5) Auditor is removed by the members through special

resolution in a general meeting.
(6) Where a company appoints an unqualified person as auditor or
a person who is subject to any disqualifications to act as an
auditor. 7. What is the company required to do when the
Commissions power becomes exercisable for the appointment of
auditor? The company is required to give notice of the fact to the
Commission, within one week from the date on which the
Commissions power to appoint auditors becomes exercisable. As
soon as the auditor is appointed by the Commission, the company
is required to send intimation thereof to the registrar concerned on
Form 29 within fourteen days from the date of the appointment of
auditor along with copy of order by the Commission. Which
documents are required to be submitted to the SECP for
appointment of auditors?
Following documents are required to be submitted by a
company to the Commission for appointment of auditor:
Notice to the Commission under Section 252(6) of the
regulations, Reasons as to how the Commissions power to
appoint auditors becomes exercisable, Period of audit for which
auditor is to be appointed; and Consent letter from the proposed
auditor.

In case of removal of an auditor, the following additional

documents are required to be submitted:
Justification for removal of existing auditor, Copy of the notice
of the general meeting sent to the members and outgoing auditors,
mentioning the agenda to remove the auditor, Minutes of the
general meeting in which resolution to remove the existing
auditor is passed, Copy of special resolution on Form-26,
certified by the registrar concerned; and Copy of the Form 29
notifying the removal of auditor, duly certified by the registrar
concerned.

THE QUALITIES OF AN AUDITOR OF A FINANCIAL

INSTITUTION
An Auditor must have: due education and qualification
minimum experience and expertise needed for the
job unquestionable
integrity unshakeable
honesty
courage to report truth and even when his superiors are
involved
will to work hard and in a time bound manne

r
excellent communication and reporting skills ability to
report on dynamic basis meaning he must
report important issues as and when they occur and not
report in a routine manner so as to prevent further value
loss
Education: All auditors performing audits must have minimum
prescribed relevant education
Work experience: The auditor shall have a minimum of five
years knowledge and working experience of the work being
audited. Auditors must have knowledge of relevant legislative
requirements and thorough understanding of quality assurance,
quality management principles.
Auditor Qualifications: if the stream requires due qualifications
from certification bodies or the relevant trade or regulatory body,
then the auditor must be duly qualified./ certified for example:
Chartered accountant, etc
Auditor Training & Continued Training Auditors shall
remain updated on category best practice, they must remain
abreast with the latest developments and have access to and be
able to apply relevant laws and regulations and shall maintain
written records of all

relevant training undertaken.

Auditor communication skills: The Certification Body shall
have a system in place to ensure that auditors conduct themselves
in a professional manner at all times.
Auditors should preferably be native speaking in the countries
where sites are to be audited. Exceptions to this rule must be
consulted beforehand with the scheme owner.
Auditors must conduct themselves in a professional manner and
observe professional code of conduct. Based on their
experience auditors must be able to act independently.
Conclusions must be based on common sense in combination
with a logical and technical/professional approach.
Independence and Confidentiality: the Auditors of a financial
institution as well as other Auditors are not permitted to carry
out any activities which may affect their independence or
impartiality, and specifically shall not carry out consultancy or
training customized activities for companies on whom they
perform audit or inspections. Auditors must strictly observe the
auditees and the Certifying Bodys procedures to maintain the

confidentiality of information and records.

Responsibility of the Certification Body wherever applicable :
It is the responsibility of the Certification Body to ensure
processes are in place to monitor and maintain the competence of
the auditor to the level required.
I ntegrity: While important in any business setting, its especially
vital in internal audit, the report says. Internal auditors need to be
trustworthy but also have confidence and resilience when faced
with complex problems.
Relationship building: Credibility must be built over time, so
dont start getting to know someone right before the audit
engagement. Trust and collaboration are more likely when people
know each other well.
Partnering: The ability to partner enables internal auditors to
execute effectively, balancing a customer service orientation with
the ability to meet regulatory requirements.
Communication: Concise, compelling reports are part of this
skill, as well as the ability to listen and to know the best format
in which to present information.

Teamwork: Working well with others is required in a

collaborative environment. I dont want someone here if they
cannot function on a team, Karl Erhardt, senior vice president
and general auditor at MetLife, said in the report. Diversity:
Internal auditors must take on a global mindset and be cognisant
of cultural norms.
Continuous learning: Nonstop curiosity helps even the most
experienced auditors gain new insight. As business needs shift,
professionals should be proactive about developing new areas of
expertise. If you want to be successful, you have to be willing to
invest in yourself
THE REMUNERATION OF AN AUDITOR OF A
FINANCIAL INSTITUTION
Remuneration of a financial institutions Auditor In case an
auditor is appointed by the company directors
or the Commission, the directors or the Commission, as the case
may be, shall fix the remuneration. In all other cases, by the
company members in general meeting or in such manner as the
general meeting may determine.

Statutory Provision (Section 142) The statutory provision in

relation to remuneration of Auditors is contained in section 142 as
under: (1) The remuneration of the auditor of a financial
institution shall be fixed in its general meeting or in such manner
as may be determined therein, provided that the Financial
Institutions Board may fix remuneration of the first auditor
appointed by it. (2) The remuneration under sub-section (1) shall,
in addition to the fee payable to an auditor, include the expenses, if
any, incurred by the auditor in connection with the audit of the
company and any facility extended to him but does not include
any remuneration paid to him for any other service rendered by
him at the request of the company. 1) The remuneration of the
Auditor of a financial
institution shall be fixed in the Annual General Meeting or in
such manner as may be determined in that meeting. Thus,
either the AGM itself shall decide the remuneration or it may
determine in some other manner.
2) In case of first auditor appointed by the Board under clause
139, the board may decide the remuneration of such auditor.
3) Any sum paid by the company in respect of auditors

expenses shall be deemed to be included in the remuneration

which may be a directly incurred expense or a case of
reimbursement of expenses. This implies that where a fixed
sum is approved as remuneration of the auditor, remuneration
will include such fixed sum (fees) and expenses shall also be
included in the expression remuneration. Not only this,
remuneration will also include any facility provided to them as
auditors. But any sum paid to auditor for other service
rendered by him on request of the company shall not form part
of the remuneration i.e. non audit fee.
THE REMOVAL OF AN AUDITOR OF A FINANCIAL
INSTITUTION
How can an auditor be removed?
Members may remove an auditor from office during their tenure
through passing special resolution in a general meeting. There
should be a proper justification for removing the auditor in
compliance with Section 253(3) of the regulations.
A company is also required to send intimation thereof to the
registrar concerned, on Form-29, under section 205 of

the regulations within fourteen days from the date of removal.

Disqualification of external auditor A person shall not qualify to
be appointed or to act as an external auditor of a financial
institution where (a) that person is not on the pre-qualified list
published by
the Central Bank; (b) that person, and in case of a firm, every
partner in
the firm is not a registered member of the Institute of Certified
Public Accountants of Uganda established under the
Accountants Act;
(c) that person, either directly or indirectly has a material interest
in the financial institution or its affiliates;
(d) in the opinion of the Central Bank, circumstances exist which
may impair the independence or impartiality of that person in the
performance of his or her duties as an external auditor of the
financial institution;
(e) that person is an officer or servant of the financial institution;
(f) that person is a partner, or associate of a director or substantial
shareholder of the financial institution;
(g) that person by himself or herself, together with his or her
partners or employees, performs the duties of secretary or bookkeeper for the financial institution; or

(h) that firm or its partners or audit managers serve the financial
institution in any other capacity other than that of external auditors
or provision of professional tax services.
Qualification and Disqualification of Auditor
A chartered accountant is qualified to become the auditor of a
public company or a private company which is a subsidiary of a
public company or a private company having paid up capital three
million rupees or more. An association not for profit under
section 42 of the regulations and companies limited by guarantee
under section 43 of the regulations, are also required to appoint an
auditor, qualified as chartered accountant.
Who is disqualified for appointment as auditor?
Following persons are ineligible for appointment as auditor of a
company:(1) Present or past director, officer or employee of the company
during the preceding three years.
(2) A partner or person in the employment of a director, officer or
employee of the company.
(3) Spouse of a director of the company.

(4) A person who is indebted to the company. A person who owes

a sum of money not exceeding five hundred thousand rupees to a
credit card issuer or a sum to a utility company in form of unpaid
dues for a period not exceeding ninety days, shall not be deemed
to be indebted to the company.
(5) A body corporate.
(6) A person or his spouse or minor children, or in case of a firm,
all partners of such firm who holds any shares of an audit client
or any of its associated companies provided that if such a person
holds shares prior to his appointment as auditor, whether as an
individual or a partner in a firm, the fact shall be disclosed on his
appointment as auditor and such person shall disinvest such
shares within ninety days of such appointment. Such listed
company shall take measures to ensure that the auditor disclose
the interest in listed company within fourteen days of
appointment.
(7) A person who is disqualified for appointment as auditor of
the companys subsidiary or holding company or a subsidiary of
that holding company.
(8) Cost auditor, if appointed by the company. Requirements of
Listing Regulations

(9) No listed company shall appoint or continue to retain any

person as an auditor, who has been found guilty of professional
misconduct, by the Commission or by Court of Law for a period
of three years unless a lesser period is determined by the
Commission.
Requirements of Code of Corporate Governance
(10) No listed company shall appoint as external auditors a firm of
auditors which has not been given a satisfactory rating under the
Quality Control Review programme of the Institute of Chartered
Accountants of Pakistan.
(11) No listed company shall appoint as external auditors a firm
of auditors
which firm or a partner of which firm is non-compliant with the
International Federation of Accountants' (IFAC) Guidelines on
Code of Ethics, as adopted by the Institute of Chartered
Accountants of Pakistan.
(12) All listed companies in the financial sector shall change
their external auditors every five years. All listed companies
other than those in financial sector shall, at a minimum, rotate
the engagement partner after every five years. The appointment
as auditor of a company of an unqualified person, or of a person
who

is subject to any disqualifications to act as such, shall be void.

An auditor shall deem to have vacated his office as an auditor
with effect from the date on which he becomes so disqualified.
n auditor is not infallible. He is human. This is why the law cannot
hold him responsible for pure errors of judgment. However, the
law requires of him to exercise all due diligence and skills that a
reasonable Auditor will deem necessary in the performance of his
statutory duties.
This is because by law, he shares a special fiduciary relationship
with the company for which he is rendering his professional
service. Being a professional giving his opinion upon which his
clients have placed reliance, he is required to apply adequate skill
with reasonable care and diligence. This is because he shall be
held liable for acts resulting from his negligence, bad faith or
dishonesty.
This principle has been statutorily provided for in section 368 of
the CAMA . It provides that:
(1) A company's auditor shall in the performance of his duties,
exercise all such care, diligence and skill as is reasonably
necessary in each particular circumstance

.
(2) Where a company suffers loss or damage as a result of the
failure of its auditor to discharge the fiduciary duty imposed on
him by subsection (1) of this section, the auditor shall be liable for
negligence and the directors may institute an action for negligence
against him in the court.
(3) If the directors fail to institute an action against the auditor
under subsection (2) of this section, any member may do so after
the expiration of thirty days notice to the company of his intention
to institute and action.
The above statutory provisions are clear and succinct. Similarly,
the general principle of negligence under the common law has
been made to apply to statutorily appointed Auditors. The
operative element is the presence of a fiduciary duty. Any
negligence on the part of an auditor, being a breach of the legal
duty to take care, shall result in his liability to the person(s) who
suffer(s) any consequent damage.
Types of Liabilities
Increasingly, clients are suing their auditors for alleged failure to
carry out their duties with reasonable expediency. This is to be
expected. Clients rely on their auditors to detect errors and
irregularities, if any, in audited financial statements. Whether by
failing to deliver

financial statements or tax assessments before the deadline, or for

alleged errors in the tax returns and financial statements they
prepare, auditors can be sued by clients whose financial interest
may have been affected premised on such reliance.
Taken from a proper perspective, the liabilities of the auditor can
be seen to be of two kinds: liability under common law and
liability under statute. Common law involves civil liabilities such
as breach of contract and the tort of misfeasance against a client,
and liability to third parties.
Under statutes, we have criminal liabilities, Misfeasance, being an
aspect of civil liability, is the improper performance of some
lawful act. Where there exist facts to this effect, a company is
entitled in law to file a court action against the Auditor. Damages
may be awarded against the auditor.
Under the statutes, an Auditor may also be criminally liable
where he, in his report to a company makes a statement, which
is false, knowing that the statement is false. Where established,
the law provides that such an Auditor is liable on conviction, by
a High Court of Justice, to Two (2) years imprisonment or,
alternatively, on

conviction by lower court such as a Magistrate Court, to a fine or

imprisonment or both.

The Rising Incidence of Auditor's Liability to Third Parties

Where an auditor fails to exercise the required duty of care,
diligence and skill and such results in loss or damage suffered by
the company, it is the directors that may institute an action for
negligence. It is only when the directors fail to do so that any
member may institute an action after the expiration of 30 days.

From the provision above, it is clear that only the company who
has a binding contract with the auditor can sue him, not any other
party.
Where then lies the safeguard of the interest of third parties, who
may also have suffered determinable losses as a result of their
reliance on the auditor's skills?
The Landmark Decision in Donoghue v. Stevenson: the
Principle of Negligence and the Duty of Car

e
Interestingly, today, a greater percentage of litigation is now
instituted by third parties, strangers to the contract between the
company and the auditor. There are some celebrated cases outside
our jurisdiction such as those of Baring (UK) and Enron (USA).

Without any privity of contract, such third parties include potential

investors, customers, government institutions like tax authorities
and suppliers.
The question is on what legal principle can such action by third
parties be based in the absence of a contractual relationship with
the auditor? The celebrated case of Donoghue v. Stevenson
[1932] All ER Rep 1; [1932] AC 562; House of Lords provides a
logical and legal premise upon which third parties can rely. In
this English case, the court awarded damages against the
manufacturer of a ginger beer bottle (not against the vendor)
which content contained a decomposed snail taken by a lady.
Although there was no privity of contract between the
manufacturer and the lady, the court held that the defendant did
owe the plaintiff or any other unknown person who happens to

consume the ginger beer a duty of care and had breached that duty.

In relation to auditor's liability to third parties, it used to be the

case that in the absence of a contract, unless fraud is alleged, an
auditor was not liable to damages in favour of third parties; the
presence of negligence or otherwise being immaterial. See
Chandler v. Crane Christmas & Co. [1951] 2 KB 164; [1951] 1
All ER 426, where the Court of Appeal held that auditors who had
negligently prepared a set of draft accounts on which investors had
relied without any contractual relationship were not liable.
The tide changed, flowing from the sound reasoning in
Donoghue v. Stevenson, and probably the important dissenting
judgment of Denning LJ who had argued for a duty of care for
negligent statements in the Chandler case, the House of Lords in
the latter case of Hedley Byrne & Co Ltd. v. Heller & Partners
[1963] 2 All ER 575 held in favour of auditor's liability to third
parties

.
The Protection of Auditors through Certain Requirements for
Liability to Arise
However, to avoid a situation where auditors would have to suffer
for every financial misfortune of investors, the courts have not
been unconcerned, otherwise auditors risk becoming the easy
black sheep in the financial industry. From the cases generally,
there have been certain qualifications aimed at helping to
determine what constitutes liability to third parties such as:
(1) The auditor has been proven to be negligent;
(2) Financial loss has been suffered;
(3) There is a direct causal relationship between the financial loss
suffered and the auditors negligence;

(4) There is or are no other traceable cause(s) apart from the

proven negligence of the auditor; and
(5) The auditor had knowledge or ought to have had knowledge
that the document prepared and issued by him was to be relied
upon in that particular context

.
The Circumstances of Each Case is Important in Determining
Liability
Having stated the above qualifications, it must be pointed out here
that the determination of an auditor's liability cannot be done with
mathematical exactitude. Perhaps, Lord Hodson was making the
same point in the case of Hedley Byrne & Co Ltd v. Heller &
Partners Ltd [1964] AC 465 when he said at p. 514:

"I do not think it is possible to catalogue the special features

which must be found to exist before the duty of care will arise in a
given case."

Similarly, Lord Devlin said, at pp. 529-530:

"I do not think it possible to formulate with exactitude all the

conditions under which the law will in a specific case imply a
voluntary undertaking any more than it is possible to formulate
those in which the law will imply a contract."
I also agree with their Lordships

.
Limitations to the Scope of Auditor's Liability to Third Parties
Interestingly however, in the recent case of Caparo Industries Plc
v. Dickman & Others [1990] 2 AC 605, the courts have tended to
move towards a more exact conclusion.

The decisions in both the lower courts and the House of Lords in
this case were that auditors are not liable to shareholders who base
investment decisions on accounts prepared for stewardship
purposes. The case in effect limited the scope of auditors' liability
to third parties.
Therefore, the provision of information by auditors of a
company was not intended to help shareholders, or any third
party for that matter, make decisions as to future investment in
the company, but as contemplated by statutes were meant to
enable shareholders exercise their class rights in general
meetings

.
Lord Bridge, in analysing the particular facts of the case based
upon principle of proximity, said, inter alia, that there could not be
a duty owed in respect of "liability in an indeterminate amount for
an indeterminate time to an indeterminate class" ( Ultramares
Corp v Touche, [1931] 174 N.E. 441 at 441 per Cardozo C.J. New
York Court of Appeals).
Applying those principles, the defendants owed no duty of care
to potential investors in the company who might acquire shares
in the company on the basis of the audited accounts. Where any
loss is suffered by a company or member of the particular
company as a result of the proven negligence of the auditor, the
right of action given to such company or member is reasonably
sufficient. To avoid the clumsy situation where auditors would
become easy scapegoats in the hands of strangers, this current
position of the law may have found it more convenient to see
third parties as being on a frolic of their own

.
How Can an Auditor Defend Himself Against Liabilities Upon
Litigation?

To be sure, if every auditor had been complying strictly to

standards and regulations, ensuring quality control, avoiding too
much reliance on client's and third parties representation,
obtaining legal advice to help make letters of engagements clearer
or draft disclaimer statements and taking indemnity insurance,
there would have been little need for the question above. But of
course, "to err is human", they say, and to raise defences, legal (if I
may add).
The law is sometimes like the " God" we often come across in the
obituaries: it gives and takes. The following are possible defences
that an auditor may rely on upon a potential or real suit:
(1). Absence of duty of care where there is no fiduciary
relationship.
(2). That auditing standards and best practices of the profession
have been complied with and applied in the preparation of audit.
E.g. GAAS (Generally Accepted Auditing Standards)

.
(3). Show as much as you can that the alleged negligence had
nothing to do with the ascertainable loss suffered. Once you are
able to show a lack of causal connection, there can be no liability
on this basis.
(4). The auditor can point accusing fingers at the client, citing
contributory negligence. Once you can show that such negligence
by the company affected your own professional judgment, your
negligence becomes extinguished.
RIGHTS, POWERS AND DUTIES OF AUDITOR
An auditor has right of access to the books, papers, accounts and
vouchers of the company, whether kept at registered office of the
company or elsewhere. He is entitled to require from the company
and the directors and other officers of the company such
information and explanation as he thinks necessary for the
performance of the duties of the auditor.
In the case of a company having a branch office outside
Pakistan, it shall be sufficient if the auditor is allowed access to
such copies of, and extracts from, the books and papers of the
branch as have been transmitted to the principal office of the
company.

The auditor of a company is entitled to attend any general meeting

of the company and to receive all notices and any
communications relating to any general meeting which any
member of the company is entitled to receive. He is entitled to be
heard at any general meeting which he attends, on any part of the
business concerning him as auditor.
Duties of an auditor
The auditor of the financial institution is required to make a report
to the members of the company on the financial statements and
books of account of the company and on every balance sheet and
profit and loss account or income and expenditure account. His
report covers all other documents forming part of the balancesheet and profit and loss account or income and expenditure
account, including notes, statements or schedules annexed with
the financial statements and which are laid before the members of
company in general meeting during his tenure of office.
The primary duty of an external auditor of a financial institution
is to perform an audit of the financial statements of a financial
institution and to give an opinion in accordance with the
Financial Institutions Act, 2004,

the Companies Act, and international standards on auditing as

adopted in Uganda on the following (a) annual balance sheet,
profit and loss account and other
financial statements required to be submitted by the financial
institution to the Central Bank; (b) compliance of the financial
institution with the requirements of the Financial Institutions Act,
2004; and (c) compliance of the financial institution with the
requirements of the Companies Act. (2) In carrying out its
functions, an external auditor has the following duties to the
financial institution (a) to warn the board of directors of a
financial institution of (i) the ability or inability of a financial
institution to meet it's capital requirements; (ii) the ability or
inability of the financial institution to meet the reserve and
liquidity requirements; (iii) the credit, foreign exchange and
operations risks of the
financial institution; and (iv) any other matter which the auditor
becomes aware of in the performance of his or her functions as
an external auditor which may prejudice the ability of the
financial institution to continue conducting business as a going
concern, be detrimental to the interest of the depositors,

or violate the principles of sound financial management or the

maintenance of adequate internal controls and systems by the
financial institution;
(b) to obtain sufficient, relevant and reliable evidence to satisfy
themselves of the various matters necessary to form their opinion;
(c) to carefully plan, supervise and review all their work including
work performed by subordinate staff; (d) to ascertain, evaluate and
test internal controls before placing audit reliance on them; (e) to
exercise reasonable care and skill in accordance with the current
professional standards and practices and to perform the audit in
accordance with international standards on auditing and such other
regulations, directives, policies and guidelines as the Central Bank
may issue; and (f) to assess, and in writing comment on, the
report of the board of
directors before the report is tabled at the annual general
meeting; (3) In carrying out its functions, an external auditor has
the following duties to the Central Bank (a) to inform the
Central Bank if there are reasonable grounds to

believe that (i) the financial institution is insolvent, or there

is a significant risk that the financial institution will become
insolvent; or (ii) the financial institution has contravened a
prudential
standard, a requirement in the Financial Institutions Act, 2004,
Regulations, notice or directive issued under the
Act, or a condition imposed on its licence; (b) to verify all
quarterly returns and other reports of the financial institution
which the Central Bank may from time to time require to be
verified; (c) to submit to the Central Bank a management letter;
(d) upon request, to submit such information about the financial
institution and its subsidiaries or affiliates if the Central Bank
considers that the information will assist it in performing its
functions; and (e) to perform any other functions as the Central
Bank may by notice assign to them.
(4) The external auditor of a financial institution shall have a
right of access at all times to books, accounts, computer
systems, vouchers, financial records and securities of the
financial institution and shall be entitled to receive from the
officers and staff of the financial institution all information and
explanations as he or she may require in

the performance of his or her duties.

References The financial institutions act Uganda, 2004 The

company act, 2000 Bhadmus, Y. H., Y. H. Bhadmus on
Corporate Law and Practice , Chenglo, Enugu, 2009
Companies and Allied matters Act, Laws of the Federation of
Nigeria (LFN) 2004 O. I. Wale-Awe, Auditor's Laibility to
Third Parties in Nigeria , published in UNAD International
Journal of Accounting Vol 2, No 1, 2003 pp1-5. RE: London &
General Bank (No. 2) [1895] Ch.D 673 @ 683 Donoghue v.
Stevenson [1932] All ER Rep 1; [1932] AC 562 Chandler v.
Crane Christmas & Co. [1951] 2 KB 164; [1951] 1 All ER 426,
Hedley Byrne & Co Ltd. v. Heller & Partners [1963] 2 All ER
575 p. 514, and pp. 529-530: Caparo Industries Plc v. Dickman
& Others [1990] 2 AC 605 Ultramares Corp v Touche, [1931]
174 N.E. 441 at 441 per Cardozo C.J. New York Court of
Appeals)