Auditor is a watchdog, not a bloodhound. Critically examine the statement.

The perception of auditor’s duty with regards to detection and prevention of frauds and errors was initially based on the decision given in Kingston Cotton Mills Co. (1896) case. The learned fudge Lopes summed up auditor’s duty by stating, “Auditor is a watchdog, not a bloodhound.”

The statement implies:

An auditor is appointed by the shareholders in case of a limited company. He is expected to play the role of a watchdog on their behalf and should look after their interests.

Unlike a bloodhound the duty of the auditor is verification and not detection. If he discovers something suspicious, during the course of audit, he should probe the matter thoroughly and appraise the shareholders about it. In the absence of such suspicious circumstance, he is fully justified in believing and relying on representations made by the ‘tried servants’ of the company. In short, in case of frauds and errors, the auditor has a duty of ‘reasonable care only.

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Again in Westminster Road Construction and Engineering Co. (1932) case the court emphasized the adoption of audit procedures to confirm the facts stated through management representations. Thus, it widened the scope of auditor’s duty with regards to frauds and errors the and laid down more strict standards of reasonable care.

In recent years, his scope has been further extended to include auditor’s duty in such cases, besides shareholders, to third parties also provided his negligence is proved. the judgment in Hedley Byrne and Co. Ltd. v. Heller and Partners Ltd. Co. [19631 the court recognized the liability of company auditors towards third parties. The Caparo’s [1990] ease has also upheld the principle of auditor’s duty towards third parties for detection and prevention of frauds and errors in case of his negligence.

Being a watchdog, he is justified in believing the company’s Officers provided he takes reasonable care. He is guilty of negligence if he accepts the certificate of a responsible officer in the absence of any suspicious circumstances. However, if he feels suspicious, he should probe the matter sincerely and report such matter to the shareholders.

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