1

UNIT – 3
CONTEMPRARY AUDIT
B.COM(H) 6 SEM
QUALIFICATION OF AN AUDITOR [Section 141(1) & (2)]
Section 141

(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered
accountant within the meaning of the Chartered Accountants Act, 1949. [CA means a Chartered
Accountant who holds valid Certificate of PRACTICE – Section 2(17)]

A firm whereof majority of partners practising in India are qualified for appointment as aforesaid
may be appointed by its firm name to be auditor of a company.

In case of a partnership firm – Company appoints the “Firm” not the partner in individual capacity.

(2) Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a
company, only the partners who are chartered accountants shall be authorised to act and sign
on behalf of the firm. [Section 141(2)]

DISQUALIFICATIONS OF AUDITOR
[Section 141(3) and Rule 10 of Companies (Audit and Auditors) Rules, 2014]:

The following persons shall not be eligible for appo intment as an auditor of a company, namely:

(a) “a body corporate other than a limited liability partnership (LLP) registered under the
Limited Liability Partnership Act, 2008”;

Explanation

It means – If chartered accountants form a company (Whether public /private – like RK Private
Ltd./RK Limited) – This Company of CAs cannot be qualified for appointment as auditor of another
company.

What is body corporate?

Body corporate u/s 2(11) includes a company as per the Companies Act, 2013 and a foreign
company which is incorporated outside India.

Logic behind why a body corporate is not eligible to be an auditor?

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As you know a Limited company has “limited liability” & Separate legal entity – The members of
the company are responsible only to the extent of unpaid ca pital (if any). In case of any issue – We
cannot make members personally responsible.

In case of LLP, at least one partner will have unlimited liability; hence it is allowed to be auditor.

(b) an officer or employee of the company;

Explanation

As per Section 2(59), ‘Officer’ includes

 Any director;

 Manager;

 Key managerial personnel (KMP); or

 Any person in accordance with whose directions or instructions the BOD or

any one or more of the directors is or are accustomed to act.

As per Section 2(51), ‘Key Managerial Personnel’, in relation to a company, means:

 the chief executive officer (CEO) or the managing director or the manager;

 the company secretary;

 the whole-time director;

 the chief financial officer (CFO); and

 such other officer as may be prescribed. Like Chief Operating Officer (COO),
etc.

Reason

An officer or employee – cannot be independent – If those are appointed as auditors of the

company, they cannot express independent opinion on the financial statements.

(c) a person who is a partner, or who is in the employment (employee), of

an officer or employee of the company;

Explanation

In this case, two relations are possible i.e.,

Reason

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These people have indirect relationship; hence they are not independent and cannot be appointed
as auditor.

Clause (d) has three sub-clauses

(d) a person who, or his relative or partner

(i) is holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company;

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a
subsidiary of such holding company, in excess of ` 5 Lacs; OR

(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, or its subsidiary, or its holding or associate company or a subsidiary
of such holding company, in excess of ` 1 Lac;

Who is relative as per the Companies Act, 2013?

As per section 2(77) & Rules

“Relative” includes

 Members of Hindu Undivided family;

 Step father, Step mother, Step brother, Step sister & Step son (except Step
daughter).

This sub-section should be read with the rules (Follow instructions for better understanding).

First read the above sub-section (3) clause (i);

It says Auditor (himself) or his Relative or Partner should NOT hold

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There is an exception to the above point- As per Rule 10 of the Company (Audit and Auditors)
Rules, 2014,

 The relative may hold security or interest in the company of FACE

VALUE ≤ ` 1,00,000; (Remember this exception is applicable only to relative
but NOT to the auditor & Partner and also, this exception is not applicable if a
relative holds security in any other group company such as H Co. /S Co./A
Co. Fellow S Co.)

 If the relative acquires any security or interest greater than ` 1,00,000 face
value – Corrective action can be taken by the auditor within 60 days of such
acquisition or interest.

What do you mean by Security as per the Securities Contracts (Regulation) Act, 1956?

The word “Securities” include – All Shares, scrips, bonds, debentures, stock, derivatives etc.

I hope you understood, clause (i); Let us get into clause (ii)

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a
subsidiary of such holding company, in excess of ` 5 Lacs; OR

(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, or its subsidiary, or its holding or associate company or a subsidiary
of such holding company, in excess of ` 1 Lac.

I hope you understood the clause. Let us get into clause ( e) of sub-section (3) of section 141- It
says

(e) a person (auditor) or a firm who, whether directly or indirectly (through agent/relation), has
business relationship with the company, or its subsidiary, or its holding or associate company or
subsidiary of such holding company or associate company;

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It says – Auditor or Firm should not have business relationship with the group either directly or
indirectly.

What is business relationship? (As per rules)

‘Business relationship’ shall be understood as any transaction entered into for a commercial
purpose, except (means the following are not treated as business relationship)

(i) commercial transactions which are in the nature of professional services permitted to be
rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and
the rules or the regulations made under those Acts;

(ii) commercial transactions which are in the ordinary course of business of the company at
arm’s length price – like sale of products or services to the auditor, as customer, in the ordinary
course of business, by companies engaged in the business of telecommunications, airlines,
hospitals, hotels and such other similar businesses.

Just think,

Mr. A is a chartered accountant in practice – His wife (relative) is a director in ABC Ltd. and she
has ` 50,000 face value equity shares in the company.

Can Mr. A be appointed as auditor for ABC Ltd.?

Answer is YES – as per so far clauses discussed. BUT your answer will be “NO” after reading the
below clause.
(f) A person

(In simple words – a person who’s relative is a director or key managerial person of the company is
disqualified)

(g) This clause has two points

Point (i) – A person who is in full time employment elsewhere;

Explanation – When a member is in full time employment – he cannot be in practice as per CA Act,
1949. If a person is not in practice – he is not eligible to be appointed as an auditor of a company.

OR

Point (ii) – A person or a partner of a firm holding appointment as its auditor, if such persons or
partner is at the date of such appointment or reappointment holding appointment as auditor of
more than 20 companies;

It means company cannot appoint a person as auditor if he is alr eady auditor for 20 companies. It
further means – one member cannot be auditor for more than 20 companies simultaneously.

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(h) A person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction.

(i) A person who directly or indirectly rendered any service referred to in section 144 to the
company, its holding or its subsidiary.

Section 141(4)

If a person appointed as an auditor of a company incurs any of the disqualifications s pecified in

Section 141(3), he shall be deemed to have vacated his office . Such vacation shall be deemed to
be a casual vacancy in the office of the auditor.

It means – he must not attract disqualifications u/s 141(3) throughout the tenure of his office. A t
any time, if he does attract ANY disqualification, it is deemed that NO auditor exists in office.
Auditor shall vacate the office immediately and no one need to serve any notice to auditor.

APPOINTMENT OF AUDITORS [SECTION 139]

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Appointment of the First Auditor [Sec. 139(6)]

 The first auditor of a company, other than a Government company, shall be
appointed by the Board of Directors (only by BOD) within 30 days from the date of
registration (i.e., Date of Incorporation) of the company.

 In the case of failure of the Board to appoint such auditor, it shall inform the
members of the company, who shall appoint within 90 days at an extraordinary
general meeting (EGM).

 The first auditor shall hold office from the date of appointment
to till the conclusion of the first AGM.

Appointment of the First Auditor of Government Company [Sec. 139(7)]

For a government company; or

 First auditor shall be appointed by the CAG within 60 days from the date of
registration of the company.

 In case the CAG does not appoint such auditor within the said period, the Board of
Directors of the company shall appoint such auditor within 30 days.

 In the case of failure of the Board to appoint such auditor, it shall inform the
members of the company within the next 30 days and who shall appoint such
auditor within the 60 days at an EGM.

 The auditor so appointed shall hold office from the date of appointment till the
conclusion of the 1st AGM.

8. Appointment of Subsequent Auditor/Reappointment of Auditor

[Section 139(1) & Rules 3 and 4 of Companies (Audit and Auditors) Rules, 2014]

(1) Every company shall, at the First AGM, appoint an individual or a firm (includes LLP) as an
auditor of the company.

 Every company means ALL the companies incorporated under the Act which
includes one-person company, Sec. 8 company, etc.;

 Ordinary resolution is sufficient to appoint an auditor.

(2) The auditor shall hold office from the conclusion of 1st AGM till the conclusion of its 6th
AGM (i.e., for 5 years); Appointment takes place only for 5 years, i t means – No company can
appoint auditor for less than 5 years. The AGM, in which he is appointed is counted as 1 st AGM.

Manner and Procedure for Appointment

[Rule 3 of Companies (Audit and Auditor’s) Rules, 2014]
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The competent authority to appoint auditor is Audit committee of the company (if the company
has); If it does not have audit committee, Board of directors are competent authority.

 The entity should obtain written consent and a certificate before the appointment
is made at AGM. Auditor should certify that

(a) Individual/firm is eligible for appointment and is not disqualified for appointment under

a. the Companies Act, 2013(i.e., compliance of Sec. 141);

b. the Chartered Accountants Act, 1949; and

c. the Rules or Regulations made there under;

(b) the proposed appointment is as per the term provided under the Act;

(c) the proposed appointment is within the limits laid down by or under the authority of the Act;

(d) the provided list of proceedings relating to professional matters of conduct against the
auditor or audit firm or any partner of the audit firm pending with respect to is true and correct.

After this

Company appoints the auditor at AGM by passing ordinary resolution and thereafter, the
company should

1. Give the information of appointment to the auditor i.e., it should write a letter to
the auditor by attaching “extract of resolution in the minutes of AGM”; and

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2. File Form ADT-1 of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed. Form ADT -1 will be filed by the company
only once in 5 years.

We must note that:

Where a company is required to constitute an Audit Committee u/s 177, all appointments,
including the filling of a casual vacancy of an auditor under this section shall be made after takin g
into account the recommendations of such committee.

Additional information

Which company should constitute audit committee? [Sec.177]

1. ALL Listed companies; and

2. The following classes of companies

i. All public companies with a paid-up capital ≥ ` 10 crore;

ii. All public companies having turnover ≥ ` 100 crore;

iii. All public companies, having in aggregate, outstanding loans or borrowings or debentures or
deposits >` 50 crore.

Explanation– The paid-up share capital or turnover or outstanding loans, or borrowings or

debentures or deposits, as the case may be, as existing on the date of last audited Financial
Statements shall be taken into account for the purposes of this rule.

10. Term & Rotation of Auditor

Sec. 139(2) & Rule 5 of Companies (Audit and Au ditors) Rules, 2014

Rotation of auditors is a new topic introduced in the Companies Act, 2013. As per the section, a
company should rotate auditors after specified time. It means, the same auditor cannot continue
forever. Let us get into the details of the section.

TERM

Rotation is applicable only to

(1) Listed companies;

(2) Other prescribed class of companies (except One person & small companies)

(a) all unlisted public companies having paid up share capital ≥ ` 10 crore;

(b) all private limited companies having paid up share capital ≥ ` 50 crore; or

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(c) all companies having public borrowings from financial institutions, banks or public deposits ≥
` 50 crores.

The above companies shall not appoint or re-appoint:

(a) an individual as auditor for more than ONE term of five consecutive years; and

(b) an audit firm as auditor for more than TWO terms of five consecutive years

Cooling off Period

An auditor who completed the term as discussed above i.e., Individual (one term of 5 years)/Firm
(two terms of 5 years each) is NOT eligible for re-appointment as auditor for 5 years.

Example: XYZ Ltd. which is a listed company appoints Mr. R (Individual) as an auditor in its AGM
dated 29 th September, 2014. Mr. R will hold office of Auditor from the conclusion of this meeting
up to conclusion of sixth AGM i.e., AGM to be held in the year 2019. Now as per Section 139(2),
Mr. R shall not be re-appointed as Auditor in XYZ Ltd. for further term of five years i.e., he cannot
be appointed as Auditor up to year 2024.

Example: XYZ Ltd. which is a listed company appoints M/s R & Associates as an audit firm in its
AGM dated 29 th September, 2014. M/s R & Associates will hold office from the conclusion of this
meeting up to conclusion of sixth AGM to be held in the year 2019. Now as per Section 139(2),
M/s R & Associates can be appointed or re -appointed as auditor for one more term of five
years i.e., up to year 2024. It shall not be re-appointed as Audit firm in XYZ Ltd. for further term of
five years i.e., up to year 2029.
An audit firm having a common partner(s) to the other existing audit firm, CANNOT be
appointed after the tenure has expired in a company. Such firm can be appointed only after
cooling period of 5 years.

Example: Say M/s XYZ & Co., is an audit firm having partner Mr. X, Mr. Y and Mr. Z and the other
firm M/s ABZ & Co. where Mr. Z is the common partner.

Assume XYZ & Co. is the auditor for Reliance Industries Ltd., for the last 2 terms i.e., 10 years and
hence M/s XYZ & Co., cannot be reappointed. In addition to that M/s ABZ & Co., also cannot be
appointed as auditor as Mr. Z is a common partner. Both the firms can be appointed only after 5
years of cooling period of 5 years.

Transitional period (Right now this point not applicable to the companies – but for information
provided)

Appointment of Subsequent Auditors in case of Government Company [Sec 139(5)]

For a government company; or

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 Auditor shall be appointed by C&AG within 180 days from the commencement of
the financial year;

 Tenure of office: From the date of appointment till the conclusion of the next AGM;

It means there is no concept appointment of 5 years/10 years; Rotation is also NOT applicable for
government auditors.

As per section 2(45), a ‘Government Company’ means a company in which

(a) not less than 51% of the paid-up share capital is held by the CG or by any SG(s) or partly by the
CG and partly by one or more SG(s); and

(b) includes a subsidiary company of a government company.

Section 139(9) – Re-Appointment of Retiring Auditor

A retiring auditor may be re-appointed at an AGM, if:

(a) he is not disqualified for re-appointment;

(b) he has not expressed unwillingness to be re-appointed; and

(c) a resolution has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed. This is like unwillingness of members.

Section 139(10) – No Auditors Appointed at AGM

If at any AGM, an auditor is NOT appointed or re -appointed, the existing auditor shall continue to
be the auditor of the company.

This is an exception to the basic rule. This will not be considered as an appointment for five years
as it is not an appointment at AGM; So, the tenure will be till the conclusion of next AGM. If the
auditor is not interested to continue, he can resign and automatica lly power goes to the Board of
directors’ u/s 139(8) as it amounts to casual vacancy.

Section 139(8) – Filling Up Casual Vacancy

What is casual vacancy?

The word “Casual vacancy” has not been defined in the Act.

In the general sense, it means

(a) An Auditor is validly appointed as per the Act;

(b) Such appointment is accepted by the auditor; and

(c) Subsequently, the auditor vacated the office.

General reasons for such vacancy could be death, disqualification, resignation, etc.

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Tenure of office: From the date of appointment to till the conclusion of next AGM

In case of a company whose accounts are subject to audit by an auditor appointed by CAG

(a) Casual vacancy should be filled by CAG only within 30 days;

(b) In case of failure in appointing – BOD shall fill the vacancy within next 30 days.

We must note that

(1) When the auditor appointed to fill up a casual vacancy but if he refuses to accept the same –
this appointment is not fully complete. It shall be deemed that the casual vacancy continues and
has not been filled up. It means filling casual vacancy will be complete after auditor accepted the
appointment.

POWERS AND DUTIES OF AUDITORS IN COMPANIES ACT 2013

POWERS

1. Right to access: Every auditor of a company shall have right to access at all time to book of
accounts and vouchers of the company. The Auditor shall be entitled to require from officers of the
company such information and explanation as he may consider necessary for performance of his
duties. There is an inclusive list of matter for which auditor shall seek information and explanation.
The list includes issues related to: (a) Proper security for Loan and advances, (b) Transaction by
book entries, (c) Sale of assets in securities in loss, (d) Loan and advances made shown as deposits,
(e) Personal expenses charged to revenue account, (f) Case received for share allotted for cash. The
auditor of holding company also has same rights.
2. Auditor to sign audit reports: The auditor of the company shall sign the auditor’s report or sign or
certify any other document of the company and financial transactions or matters, which have any
adverse effect on the functioning of the company mentioned in the auditor’s report shall be read
before the company in general meeting and shall be open to inspection by any member of the
company.
3. Auditor in general meeting: It is a prime requirement under section 146, that the company must
send all notices and communication to the auditor, relating to any general meeting, and he shall
attend the meeting either through himself or through his representative, who shall also be an

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auditor. Such auditor must be given reasonable opportunity to speak at the meeting on any part of
the business which concerns him as the auditor.
4. Right to remuneration: The remuneration of the auditor of a company shall be fixed in its general
meeting or in such manner as may be determined therein. It must include the expenses, if any,
incurred by the auditor in connection with the audit of the company and any facility extended to
him but does not include any remuneration paid to him for any other service rendered by him at
the request of the company.
5. Consent of auditor: As per section 26, the company must mention in their prospectus the name,
address and consent of the auditors of the company.

DUTIES

Make report: The auditor shall make a report to the members of the company on accounts examined by
him on every financial statement and shall state:(a) Whether he has sought and obtained all the necessary
information and explanations, (b) Whether proper books of account have been kept, (c) Whether
company’s balance sheet and profit and loss account are in agreement with books of accounts and returns.

1. Audit report of Government Company: The auditor of the government company will be appointed
by the Comptroller and Auditor-General of India and such auditor shall act according to the
directions given by them. He must submit a report to them which should include the action taken
by him and impact on accounts and financial statement of the company. The Comptroller and Audit
– General of India shall within 60 days of receipt of the report have right to (a) conduct a
supplementary audit and (b) comment upon or supplement such audit report. The Comptroller and
Audit – General of India may cause test audit to be conducted of the accounts of such company.
2. Liable to pay damages: As per section 245, the depository and members of the company have right
to file an application before the tribunal if they are of the opinion that the management or conduct
of the affairs of the company are being conducted in a manner prejudicial to the interests of the
company. They also have right to claim damages or compensation from the auditor for any
improper or misleading statement made in his audit report or for any fraudulent or unlawful
conduct.
3. Branch Audit: Where a company has a branch office, the accounts of that office shall be audited
either by the auditor appointed for the company, or by any other person qualified for appointment
as an auditor of the company. The branch auditor shall prepare a report on the accounts of the
branch examined by him and send it to the auditor of the company who shall deal with it in his
report in such manner as he considers necessary.
4. Auditing Standards: Every auditor shall comply with the auditing standards. The Central
Government shall notify these standards in consultation with National Financial
reporting Authority. The government may also notify that auditors’ report shall include a statement
on such matters as notified.
5. Fraud Reporting: If an auditor of a company, in the course of the performance of his duties as
auditor, has reason to believe that an offence involving fraud is being or has been committed
against the company by officers or employees of the company, he shall immediately report the
matter to the Central Government within such time and in such manner as may be prescribed.
6. Winding up: As per section 305, at the time of voluntary winding up of a company it is a mandatory
requirement that auditor should attach the copy of the audits of the company prepared by him.

LIABILITIES OF AN AUDITOR

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A Chartered Accountant is associated with the valuable profession. His primary duty is to present a report
on the accounts and statements submitted by him to members of the company. He is responsible not only
to the members of the company but also to the third parties of the company, i.e., creditors, bankers etc.

Normally the liability of auditor based on the work done by him as professional accountant and carry out his
work due care, caution and diligence. The nature of liabilities of an auditor is discussed below:
1. Civil Liability:
1. Liability for Negligence:
Negligence means breach of duty. An auditor is an agent of the shareholders. He has to perform his
professional duties. He should take reasonable care and skill in the performance of his duties. If he fails to do
so, liability for negligence arises. An auditor will be held liable if the client has suffered loss due to his
negligence. It should be noted that an auditor will not be liable to compensate the loss or damage if his
negligence is not proved.
2. Liability for Misfeasance:
Misfeasance means breach of trust. If an auditor does something wrongfully in the performance of his duties
resulting in a financial loss to the company, he is guilty of misfeasance. In such a case, the company can
recover damages from the auditor or from any officer for breach of trust or misfeasance of the company.
Misfeasance proceedings can be initiated against the auditor for any untrue statement in the prospectus or
in the event of winding up of the company.
2. Liabilities under Companies Act
The following are the liabilities of an auditor under the provisions of the Companies Act.
(1) Liability for Misstatements in the Prospectus [Sec.35]:

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An auditor shall be held liable to compensate every person who subscribes for any shares or debentures of
a company on the faith of the prospectus containing an untrue statement made by him as an expert. The
auditor shall be liable to compensate him for any loss or damages sustained by him by reason of any untrue
statement included therein. The auditor may escape from liability if he proves that:
· The prospectus is issued without his knowledge or consent.
· He withdrew his consent, in writing before delivery of the prospectus for registration.
· He should have withdrawn his consent after issue of prospectus but before allotment of shares and
reasonable public notice has given by him regarding this.
(ii) Criminal Liability of Auditor under Companies Act:

1. Untrue statement in Prospectus [Sec.34]

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The auditor is liable when he authorizes a false or untrue prospectus. When a prospectus includes any untrue
statement, every person who authorizes the issue of prospectus shall be imprisoned for a period of six
months to ten years or with a fine, which may be three times the amount involved in the fraud or with both.
2. Non-compliance by auditor [Sec. 143 and 145]:
If the auditor does not comply regarding making his report or signing or authorization of any document and
makes wilful neglect on his part, he shall be punishable with imprisonment up to one year or with fine not
less than ₹. 25,000 extendable to ₹. 5,00,000.
3. Failure to assist investigation [Sec.217 (6)]:
When Central Government appoints an Inspector to investigate the affairs of the company, it is the duty of
the auditor to produce all books, documents and to provide assistance to the inspectors. If the auditor fails
to do so he shall be punishable with imprisonment up to one year and with fine up to ₹.1,00,000.
4. Failure to assist prosecution of guilty officers [Sec.224]:
An auditor is required to assist prosecution when Central Government takes any action against the report
submitted by the Inspector. If he fails to do so, he is found guilty and is punishable.
5. Failure to return property, books or papers [Sec.299]:
When a company is wound up the auditor is supposed to be present and subject himself to a private
examination by the court and is also liable to return to the court any property, books or papers relating to
the company. If the auditor does not comply, he may be imprisoned.
6. Penalty for falsification of books [Sec.336]:
An auditor when destroys, mutilates, alters or falsifies or secrets any books of account or document belonging
to the company. He shall be punishable with imprisonment and also be liable to fine.
7. Prosecution of auditor [Sec.342]:
In the course of winding up of a company by the Tribunal, if it appears to the Tribunal that an auditor of the
company has been guilty of an offence, it shall be the duty of the auditor to give all assistance in connection
with the prosecution. If he fails to give assistance, he shall be liable to fine not less than ₹ 25,000 extendable
up to ₹.1,00,000.
8. Penalty for deliberate act of commission or omission [Sec.448]: If an auditor deliberately makes a
statement in any report, certificate, balance sheet, prospectus, etc which is false or which contains omission
of material facts, he shall be punishable with imprisonment for a period of six months to ten years and fine
not less than amount involved in fraud extendable to three times of such amount.
3. Criminal Liability under Indian Penal Code
If any person issues or signs any certificate relating to any fact which such certificate is false, he is punishable
as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the auditor is similarly liable for
falsification of any books, materials, papers that belongs to the company.
4. Liability under Income Tax Act [Sec.278]
· For tax evasion exceeds ₹.1,00,000, rigorous imprisonment of six months to seven years.

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· A person who induces another person to make and deliver to the Income Tax authorities a false
account, statement or declaration relating to any income chargeable to tax which he knows to be false, he
shall be liable to fine and imprisonment of three months to three years. An auditor may also be charged in
case of wrong certification of account.
· A Chartered Accountant can represent his clients before the Income Tax Authorities. However, if he is
guilty of misconduct he can be disqualified from practicing.
· An auditor can face imprisonment up to two years for furnishing false information.
5. Liability for Professional Misconduct
The Chartered Accountant Act, 1949 mentions number of acts and omissions that comprise professional
misconduct in relation to audit practice. The council of ICAI may remove the auditor’s name for five years or
more, if he finds guilty of professional misconduct.
6. Liability towards Third Parties
There are number of persons who rely upon the financial statements audited by the auditor and enter into
transactions with the company without further enquiry viz. creditors, bankers, tax authorities, prospective
shareholders, etc.
1. Liability for Negligence:
It has been held in the court that auditor is not liable to third parties, as there is no contract between auditor
and third parties. He owes no duty towards them.
2. Liability for Frauds:
The third parties can hold the auditor liable, if there is fraud on the part of auditor even if there is no
contractual relationship between auditor and third parties. In certain cases, negligence of auditor may
amount to fraud for which he may be held liable to third parties. But it must be proved that auditor did not
act honestly and he knew about it.

Auditing Notes by Manish Srivastava