The Auditor's Lien on Working Papers and on the Client's Books
Chapter Twenty-Nine
Syllabus topic 3, "Audit Working Papers – Meaning, importance, Factors determining Form and Contents, Main Functions / Importance, Features, Contents of Permanent Audit File, Temporary Audit File, Ownership, Custody, Access of Other Parties to Audit Working Papers, Auditors Lien on Working Papers, Auditors Lien on Client’s Books."
Pages 74 to 76 of 98
What a lien is
A lien is the right of a person in possession of another's goods to retain them until a debt due to him is paid. It is a particular lien where it secures only a debt arising out of those goods, and a general lien where it secures any debt of the owner.
Section 171 of the Indian Contract Act 1872 gives a general lien to certain persons, and the list is closed: bankers, factors, wharfingers, attorneys of a High Court and policy brokers. An auditor is not in that list.
Lien on the working papers
No lien is needed, because they are already the auditor's own property.
| The papers belong to the auditor, on the authority of Chantrey Martin v Martin | |
| A person cannot have a lien over his own property; a lien presupposes possession of another's | |
| So the question of retaining them for unpaid fees does not arise; he simply keeps them |
Say that in two sentences and move on. The whole of the first half of MU's topic is the proposition that no lien is required.
The one qualification. Where the file contains original documents belonging to the client, those are the client's, and whether the auditor may retain those is the second question below.
Lien on the client's books and documents
Here the auditor is in possession of somebody else's property, so a lien is at least arguable. The position is doubtful, and the answer is a set of conditions.
The conditions generally stated, all of which must be satisfied:
| Condition | |
|---|---|
| 1 | The documents must belong to the client who owes the fee, not to a third party |
| 2 | They must have come into the auditor's possession with the client's authority |
| 3 | Some work must have been done on the documents, and a fee must be outstanding for that work, not for other work |
| 4 | The documents must be retained lawfully, and their retention must not defeat a statutory duty |
And the objection that outweighs all four, for a company.
The books of account of a company must be kept at its registered office. Section 128(1) requires it, and permits another place in India only by a Board decision notified to the Registrar within seven days. An auditor who retains the statutory books prevents the company from complying with section 128 and prevents the next auditor from working.
So the practical position is:
| Books of account required by section 128 | The auditor should not retain them; the statutory duty on the company defeats the claim |
| The client's own working schedules and correspondence | A lien is arguable on the conditions above |
| Documents received from third parties on the client's behalf | Not the client's alone; retention is unsafe |
| In every case | The safer professional course is to return the books and sue for the fee |
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