256. Reading and inspection of auditors’ report Auditing Help

The auditors’ report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

257. Signature on audit report, etc.

1. Only the person appointed as auditor of the company, or where a firm is so appointed in pursuance of subsection (2) of section 254, only a partner in the firm practicing in Pakistan, shall sign the auditors’ report or sign or authenticate any other documents of the company required by law to be signed or authenticated by the auditor.

2. The report of auditors shall be dated and indicate the place at which it is signed.


Auditor’s report: Auditor’s signatures on financial statements.

The auditor issues audit report as the only document and is required to sigh this report only, the financial statements are the responsibility of the entity’s management. For the purpose of identification only, the auditor may initial or stamp the original set of financial statements on which they have expressed their opinion.

The auditors may sign financial statements in case of specialized entities covered by special. tatutes or directives of relevant authority.

258. Audit of cost accounts

1. Where any company or class of companies is required under  clause (e) of subsection (1) of section 230 to include in its books of account the particulars referred to therein, the Federal Government may direct that an audit of cost accounts of the company shall be conducted in such manner and with such stipulations as may be specified in the order by an auditor who is a chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961), or cost and management accountant within the meaning of the Cost and Management Accounts act, 1966 (XlV of 1966), and such auditor shall have the same powers, duties and liabilities as an auditor of a company an such other powers, duties and liabilities as may be prescribed.

259. Penalty for non – compliance with provisions by companies

If default is made by a company in complying with any of the provisions of sections 252 to 254 or 256 to 258, the company and every officer of the company who is knowingly and willfully a party to the default shall be punishable with fine which may be extended to two thousand rupees.

260. Penalty for non – compliance with provisions by auditors

2. If any auditor’s report is made, or any document of the company is signed or authenticated otherwise than in conformity with the requirements of section 157, section 255 or section 257 or is otherwise untrue or fails to bring out material facts about the affairs of the company or matters to which it purports to relate, the  auditor concerned and the person, if any, other than the auditor who signs the report or signs authenticates the document, and in the case of a firm all partners of the firm, shall, if the default is willful, be punishable with fine which may extend to two thousand rupees.

3. the auditor’s report to which subsection (1) applies is made with  the intent to profit such auditor or any other person or to put another person to a disadvantage or loss or for a material consideration, the auditor shall, in addition to the penalty provided by that subsection, be punishable with imprisonment for a term which may extend to six months and with fine which may extend to two thousand rupees.

Some case laws regarding auditor’s duties and liabilities in
certain cases

Cash and bank balances

The auditor should verify cash on hand (London Oil Storage company v. Seear, Hasluck & Co. (1940).

Accounts receivable

The auditor has a duty to review accounts receivable so that they are not reflected in the balance sheet beyond their realizable value (Scarborough Harbour Commissioners v. Robinson, Co. oulson Kirby & Co. (1934).

Auditor has the duty to satisfy himself as to the adequacy of the provision for bad debts (Arthur E Green & Co. v. The Central Advance and Discounts Corporation Ltd. (1920)


Auditors should observe physical stock taking and perform test counts (McKesson & Roins vs Allied Crude Vegetable Oil (USA).

Construction work in progress

The auditor has a duty to satisfy himself that nothing is included in the value of work in progress on the balance sheet date which was done after that date.

The auditor should also verify the concept of matching in this regard. It means that if anything was included in the work in progress it was also shown as expenditure, and if not paid for at the balance sheet date then it was included in liabilities on the balance sheet date. The matching concept ensures that the duality of those transactions is properly recorded in the same accounting period.

This requires careful examination of the documentary evidence which the auditor should look for and inquire into and check thoroughly, with especial attention to the date on the items of the evidence. (The West minister Road Construction & Eng Company Ltd. (1932).


Securities held by third parties should be verified by the auditor unless it is reasonable for such securities to be held by such a third party (City Equitable Five Insurance (1912).


The auditor should verify that all liabilities relating to accounting period under review have been recognized by carrying on post balance sheet review and cut off tests. (West minister Road Construction (1932).

The auditor should check the suppliers’ statements wit the entries in the suppliers’ accounts in the purchases ledger to detect understatement of liabilities (The Irish Woolen Co. Ltd. v Tyson and others (1900).


Revenues should not be recognized unless there is clear evidence that contractual obligations have been established (SEC v Peat Marwick Mitchell)

Auditor’s liability to third parties

Auditors owe duty of care to the shareholders in respect of their investment at the balance sheet date. They also owe a duty of care to third parties if the auditor is surely aware that his report might be relied upon for a purpose. Where the duty of care is established, proof is required of actual audit negligence, actual and reasonable degree of reliance upon the negligently prepared accounts, and that actual loss has been suffered. (Caparo Industries pic v Ddickman and others (UK 1990)

Divisible profits

Fixed capital may be sunk and lost, and yet that the excess of current receipts over current payments may be divided but that floating or circulating capital must be kept up (Verner v General and Commercial investment Trust (1894).

Where a company has made losses in the past years and then makes a profit out of which it pays dividend, such a dividend is not paid out of paid up capital, (Arthur Chamberlain and others (1918)

It is not legally necessary to provide for deprecation on wasting assets. (Lee v, Neuchatel AsphaJte Co. Ltd. (1889).

Depreciation on plant and machinery should be provided before arriving at net profit. (Crabtree. v, Crabtree (1912).

Posted on November 3, 2015 in Legal Provisions Relating to Auditors

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