The Companies Act of 1948 outlined the professional qualifications required by auditors of joint stock companies in which limited liability exists (much like the U.S. corporate form).(n93) The Companies Acts of 1967 and 1976 effectively reinforced the 1948 Act.(n94) The Companies Acts require that "statutory" audits be performed for every limited liability company by a professional auditor. The Acts define "certain areas upon which the auditor is expected to express an opinion."(n95) Auditors may also perform "private" audits on behalf of an interested party such as a sole proprietorship or partnership where no statutory obligation exists. These audits may be defined as "widely or narrowly as the parties involved desire."(n96)
In the United Kingdom (U.K.), like the U.S., the preparation of the company's financial statements is the responsibility of management. The board of directors is responsible for ensuring that the "company keeps proper accounting records and that its annual financial statements give a true and fair view of the company's state of affairs"(n97) and profitability. However, unlike the United States, the statutory auditor in the U.K. is not permitted to perform "accountancy, taxation, or management consulting activities [for the client] while employed [by it] as an auditor, since these [services] fall outside the scope of his audit."(n98)
In a statutory audit, the auditor is engaged by the shareholders in order to protect their interests; therefore, although the contract of engagement is with the company's management, the auditor does not necessarily operate in the best interests of management or the board of directors. Hence, professional independence is crucial.
Some audit responsibilities exist whether the audit is statutory or private. The auditor has some responsibility for detecting errors and fraud but the duty is ill-defined.
If the inaccuracy of a set of accounts is linked to a well disguised fraudulent scheme then it seems particularly likely that normal audit procedures may fail to detect it. The extent to which an auditor would be responsible to detect fraud is uncertain, both because the law can give little guidance as to the precise circumstances in which an auditor should be able to discover a fraud, and because the law is unclear. It would seem that the auditor does not have to be suspicious, but if he encounters anything calculated to excite suspicion, he should probe it to the bottom.(n99)
To this extent, the situation is quite similar to that in the United States; however, the British accounting organization, CCAB, has published a draft of an Auditing Guideline entitled "The auditor's responsibility for detecting and reporting fraud and other illegal acts."(n100) Such a guideline if it were to become an actual standard would tend to reduce ex ante the gap between what the accounting profession believes is the scope of its duty to detect fraud and what the judicial profession is likely to assess as its duty of care ex post.(n101) In the United States, the accounting profession has declined to adopt specific fraud detection standards.(n102)
The auditor also has particular responsibilities for statutory audits. Under the Companies Act of 1948, the auditor must express his view regarding: (1) whether the balance sheet gives a true and fair view of the state of the company's affairs at that date; (2) whether the profit/loss account gives a true and fair view of the profit or loss for the year; and (3) whether the accounts have been properly prepared in accordance with the provisions of the Companies Acts.(n103) In addition, the auditor must indicate by exception only, those areas where the company has not met