Auditor's Liabilities, Liabilities of an Auditor

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Chapter 5 - Auditor's Liabilities

Liabilities of an Auditor

(A) Civil Liabilities

Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the following types

1. Liability of Negligence

Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is expected to perform his duties as an agent of the shareholders by exercising care and diligence in the implementation of statutory requirements for the maintenance and presentation of the financial statement. Auditor must be kept himself up to date with the information if he commits some negligence the purpose of audit is failed.

2. Liability of Liable

In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor. On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the report is based on facts and is prepare with good intention.

3. Liability of the Third Party

The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts. Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his reports. So if he makes any type of error or fraud, he is liable to pay the damages.

4. Misstatement in Prospectus

According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of the prospectus for any loss or damage be may reason of any untrue statements.

5. Breach of Contract

If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view to the owner, he is liable to pay to the owner if sustain any financial loss.

(B) Criminal Liabilities

Since for certain purpose of the companies Act, and auditor is deemed to be an officer of the company, he is a liable for such. Act of omission or commission constituting offense under the Act.

6. Misstatement in Prospectus (Sec-63)

Here a prospectus containing any untrue or misstatement is issued with the consent of auditor who shall be punished the with imprisonment which may extend up to two years or with fine which may extend up to Rs. 5,000/- or both.

7. Requirements of Reports (Sec-225)

Here the auditor does not confirm to the requirement of reports as per sec-229 he shall be punished with fine, which may extend up to Rs. 1,000.

8. Assistant to Investigate (Sec-240).

Auditor has statutory duty to assist any investigator appointed by the central Government in collecting any information of the company otherwise he shall be punished with imprisonment which may extend up to six month or with a fine up to Rs. 2,000/- or both for continuous default Rs. 200/- per day may also be charged.

9. Assistance to Prospectus (Sec-242)

On the basis of report of an inspector control Government may prosecute any officer. Auditor is to assist in such prosecution otherwise he is to be punished for contempt of court.

10. Return Books, Papers Property etc. (Sec-477)

At the time of winding up of a company, court may ask the auditor to return any property books or papers of the company otherwise he can be arrested.

11. Public Examination (Sec-478)

On the report of official liquidation, the audition of the companies to the publicly examined. Notes of such examination shall be used as evidence in any civil or criminal proceeding against the auditor.

12. Falsification of Books of Accounts (Sec-539)

Where the auditor is guilty of destruction, mutilation, alteration, falsification of any books papers securities, he shall be imprisoned which may extend up to 7 years and shall also be liable to fine.

13. Prosecution of Auditor (Sec-545)

Where auditor is found be guilty of any criminal offense by the liquidator of the company, he shall be prosecuted.

14. False Statement In Any Return

Where the auditor makes any false statements in any material respect in any return report, certification, balance sheet etc, he shall be imprisoned which may extend up to 2 year and shall also be liable to fine.

15. Disqualified Auditor (Sec-254(6))

The company ordinance has clearly stated the persons who are not qualified as auditor, but if an unqualified auditor may act as auditor of the company. He is liable to fine up to Rs. 5,000/- rupees.

16. Non-Compliance (Sec-260)

In case when the auditor makes any report or signed against the legal requirement and the report may be not true the auditor is liable to fine for Rupees 2,000/- if it is willful fault.

17. Auditor Report

If the auditor make the report with the extent to profit himself and the third party for any loss for a material consideration it is a criminal liability. He may be punished for six months and fine upto 2,000/- rupees.

18. Assist Inspector (Sec-268)

The auditor has to give all the necessary assistance in connection with investigation to the inspector. Some times the auditor may fail to give it. In this case he shall be punishable up to one year and fixed up to ten thousand rupees.

19. Auditor Account (Sec-384(4))

The auditor is liable to submit his report after or within he two months at the end of the period to which account relates. If he fails there is a fine up to rupees 5,000/-

20. False Evidence (Sec-419)

If any person provides false evidence he is punishable up to two years and liable for fine also. The evidence may be affidavit oath or some affirmation etc.

21. Winding (Sec-420)

The criminal liability of company officers including auditor may be composed may year before or during liquidation of company of criminal offences like concealing or removing property, concealing or falsifying document and papers. The liquidation can go to the court of law for proving the breach of duty.

22. False Statement (Sec-492)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.

23. Pakistan Penal Code (Sec-197)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.

24. Professional Misconduct

If the auditor fails to follow the rules of their own profession he is liable for the criminal liability. For this default the council can with draw the certificate of practice. The council can also go to the court of law for prosecuting the concerned auditor. The auditor can suffer the jail or fine or both.

(C) Other Liabilities

25. Honorary Audit

The auditor on the honorary basis may also accept an audit work. After the completion of the audit work he is bound to submit his report.

26. Joint Audit

When the two auditors carried out the work of audit it is called as the joint audit. It is possible by the two independent auditors under the agreement. Sometimes, a business concern may have two or more than two business places in different cities or countries conduct the audit by one auditor. So this audit is conduct the responsibilities lies on the head of every auditor who had done the work of audit. It is also stated in the audit report.