Trisure India Ltd. v. A.F. Ferguson

Quick Summary

In Trisure India Ltd. v. A.F. Ferguson, the Bombay High Court discussed what auditors must do when company numbers look unusual. The case involved sales booked in one year while goods went out in the next year, which increased reported profits. The Court underlined a simple rule: management prepares accounts; auditors examine and report with reasonable diligence. Where figures raise doubt, auditors must apply their mind and ask questions.

Issues

• Did the auditors fail to apply their mind and make needed inquiries?
• Were the sales and other figures correctly shown?
• Did the published report (year ended 31 Aug 1974) harm the company’s credibility or goodwill?
• Would reasonable diligence have uncovered the manipulations?
• Did the audit follow accepted accounting and auditing principles?
• Has the company suffered damages, and are auditors liable to compensate?

Rules

Companies Act Auditors oversee the company’s financial reporting, access books and records, and give an independent opinion on financial statements. Management, not auditors, prepares the accounts and runs internal controls.

• Auditors must understand the client’s accounts and internal controls enough to plan the audit, but they do not run the controls.
• Where numbers look odd (e.g., year-end sales spikes), auditors must inquire and obtain support.
• Standard: reasonable skill, care, and diligence consistent with accepted auditing principles.

Arguments

The Court noted that the fraud involved more than top management. Many departments played a role. The Court restated the auditor’s role: check whether the financial report fairly shows the true position and act with reasonable care. The case stresses that when documents show timing inconsistencies (like delivery after year-end but sales before year-end), the auditor should question and seek proof.

Ratio Decidendi

• Auditors owe a duty of reasonable skill and diligence to judge whether statements fairly present reality.
• Management has primary responsibility for preparation and internal control; auditors do not replace management.
• Where simple checks reveal mismatches (delivery vs. billing dates), auditors must ask, examine, and verify.

Why It Matters

This case is a classroom classic for separating management responsibility and auditor responsibility. It guides how to handle year-end sales surges, cut-off testing, and credibility of published reports. For exams, remember: apply mind + reasonable inquiries + fair presentation.

Key Takeaways

1. Auditors are watchdogs, not managers—but they must bark when numbers look odd.
2. Cut-off testing around year-end is essential for sales and inventory.
3. Reasonable care means asking for delivery proof, not blind reliance.
4. Widespread internal manipulation can hide issues; auditors should stay professionally skeptical.

Mnemonic + 3-Step Hook

Mnemonic: “AIM FAIR”

• Apply mind
• Inquire on odd figures
• Management prepares accounts
• Fair presentation focus
• Audit principles followed
• Internal manipulation may exist
• Reasonable diligence is the standard

3-Step Hook:

1. Spot unusual year-end spikes.
2. Trace delivery vs. billing dates.
3. Document inquiries and evidence.

IRAC Outline

Glossary

Reasonable Diligence

Care and skill expected from a competent auditor in similar circumstances.

Cut-off Testing

Checking that sales and purchases are recorded in the correct accounting period.

Fair Presentation

Financial statements reflect the true state of affairs without misleading users.

FAQs

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