Auditor responsibilities - Rights of auditors

Learning Outcomes

After reading this article, you will be able to explain the statutory and practical rights granted to external auditors and illustrate how these rights support the auditor’s ability to fulfil their duties. You will also identify the main legal provisions, understand the connection with auditor independence, and apply your knowledge to exam-style questions.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the authority given to auditors to carry out an audit effectively. In particular, you should focus on:

• The legal rights of auditors as conferred by statute
• The auditor’s right of access to a company’s books, records, and documents at all times
• The power to obtain information and explanations from company officers
• The entitlement to receive notices of, attend, and speak at shareholders’ meetings on matters relating to the audit
• The right to be notified of proposed dismissal or resignation and to make representations
• The relationship between auditor rights and auditor duties

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which statutory right allows auditors to inspect a company’s financial records without restriction?
   1. To issue tax advice
   2. To access all books and records at any time
   3. To prepare the financial statements
   4. To sign bank cheques

2. True or false? Auditors must accept management’s explanations without further investigation if records are incomplete.

3. Which individuals must provide auditors with explanations and information on request?
   1. Only shareholders
   2. Any company officer (e.g., directors, secretary)
   3. The general public
   4. Customers and suppliers

4. Why is the right to attend shareholders’ meetings important for auditors?

5. What action can an auditor take if denied access to company documentation?

Introduction

Auditors are responsible for independently reviewing a company’s financial statements and expressing an opinion to shareholders. To perform this function with professional competence, auditors are granted specific rights by law. These rights enable auditors to obtain all information necessary for their work, maintain independence, and fulfil regulatory requirements.

Failure to secure these rights would risk the reliability of the audit and undermine stakeholder confidence. Therefore, all ACCA candidates must be able to clearly describe and apply auditor rights, both for regulatory compliance and exam success.

Rights of Auditors: Core Statutory Provisions

Auditors are entrusted with significant responsibilities, such as giving an opinion on the truth and fairness of financial statements. To meet these duties, auditors are provided with essential statutory rights, which include:

Right of Unrestricted Access

Auditors have unrestricted access to all the books, records, accounts, and documents of the company at any time. This right exists throughout the audit, not just at year-end.

Key Term: Right of Access
The statutory authority given to auditors to examine all company records, books, and documents at any time deemed necessary during the audit.

This ensures auditors are not limited in their investigations and can verify any transactions or balances as required.

Power to Request Information and Explanations

Auditors can demand from the company’s officers (such as directors, company secretary, and other responsible officials) any information and explanations required for their duties.

Key Term: Right to Require Information and Explanations
The legal power of auditors to obtain necessary information and explanations from company officers for audit purposes.

Company officers must respond fully and truthfully. Refusing to provide information, or intentionally supplying false statements, may be a criminal offence.

Key Term: Officer of the Company
Any individual holding a position of responsibility in a company, including directors and company secretary, who may be required by law to provide auditors with information.

Right to Attend and Speak at Shareholders’ Meetings

Auditors have the right to receive notice of, attend, and be heard at any general meetings of the company on business affecting them as auditors. This ensures that issues relevant to the audit may be raised directly with shareholders.

Key Term: Right to Attend Shareholders’ Meetings
Auditors’ legal entitlement to receive notice of, attend, and speak at company general meetings where audit-related matters are discussed.

This right preserves the independent communication channel between auditors and shareholders and allows auditors to present concerns or clarify matters in public forum if necessary.

Additional Legal Rights

Auditors also have related rights that protect the integrity of their appointment, including:

• The right to receive notice of resolutions proposing their removal or replacement
• The right to make written representations to shareholders if removal is proposed
• The right to require the directors to convene an extraordinary general meeting upon resignation in certain cases

These powers ensure auditors can alert shareholders to any attempted interference with their independence or any improper removal.

Purpose and Importance of Auditor Rights

These rights function together to enable the auditor to fulfil their statutory duties—that is, to carry out an effective, independent audit and report their findings honestly.

If an auditor is denied access, explanations, or meeting notices, they may not be able to complete necessary audit work or to communicate critical issues to shareholders. In such cases, auditors may:

• Refuse to express an audit opinion (qualified/disclaimer)
• Consider resigning
• Include details of limitation in the audit report

Exam Warning It is a common exam error to confuse the rights of auditors (which allow them to obtain information) with their duties (which require them to express an opinion). Always state both the right and its purpose in answers.

Relationship Between Auditor Rights and Duties

Auditors’ duties include examining the company’s financial statements and forming an opinion. Without statutory rights, auditors would have no authority to demand the evidence or cooperation needed to carry out these obligations.

Companies are legally required to cooperate with auditors—both by granting access and providing truthful information. Where rights are obstructed, auditors must consider how this affects the reliability of financial statements and may have to modify their audit opinion.

Worked Example 1.1

The auditor of ABC Ltd notifies the directors that access to payroll records is required as part of audit evidence. The finance manager declines the request, claiming the records are confidential.

Question:
How do the auditor’s statutory rights assist them in this situation?

Answer:
The auditor has a legal right of access to all company records, including payroll. Directors cannot refuse this request. By law, denying access may result in a qualification of the audit opinion or even auditor resignation. Furthermore, refusing access could constitute a statutory offence for the responsible officer.

Worked Example 1.2

During an audit, the auditor finds that several key account balances cannot be reconciled. When explanations are sought from relevant managers, replies are vague or misleading.

Question:
What action can the auditor take regarding their rights?

Answer:
The auditor’s right to require information means all company officers must provide sufficient, clear, and truthful explanations. If this requirement is not met, the auditor should record the limitation, raise the issue with the board, and consider modifying or disclaiming their opinion due to scope limitation.

Worked Example 1.3

The management of XYZ Plc is unhappy with the current auditors and organizes their removal, failing to give notice of the intended resolution to the auditors.

Question:
Are there any auditor rights being breached, and what recourse does the auditor have?

Answer:
The law requires that the auditor is informed in advance of any proposal for their removal and given an opportunity to make written and (if they wish) oral representations to shareholders. Failing to notify the auditor breaches this right. The auditor may insist on this right and, if not honoured, can report the breach both to the shareholders and regulators.

Summary

Auditors’ statutory rights—access to records, demanding explanations, attending meetings, and making representations—are fundamental for fulfilling their duties objectively and independently. These powers are designed to ensure the audit can be performed effectively and that any attempts to restrict the audit process are identified and reported.

Key Point Checklist

This article has covered the following key knowledge points:

• List and define the main statutory rights of auditors
• Explain how these rights support the auditor’s ability to fulfil their duties
• Describe what actions an auditor may take if their rights are restricted
• Distinguish between the rights and duties of auditors
• Recognize the importance of auditor rights for maintaining independence and communication with shareholders

Key Terms and Concepts

• Right of Access
• Right to Require Information and Explanations
• Officer of the Company
• Right to Attend Shareholders’ Meetings