Chapter 13 – Auditor

by • 27/08/2011 • part 2 AuditingComments (0)936

Qualification of an Auditor (Section 226 (1) and (2)

Following persons are qualified to be appointed as auditor of a company.

1. Practicing Chartered Accounts (Sec 226 (1)J)

A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the chartered accountant act 1949.

A chartered accountant means a person who is the member of the institute of chartered accountant of Pakistan. He will be Deemed to be in practice. When individually or in partnership with other chartered accountants in practice he for consideration received or to be received.

Practice of Accountancy

He engages himself in the practice of accountancy.


He offers to perform or performs the services involving the auditing or verifications of the financial transactions, books of accounts or records or the preparation, verification or certification of financial accounting and related statement or holds himself out to the public as an accountant.

Professional Services

He renders the professional services or assistance in or about matters of principal or detail relating to accounting procedure to the recording, presentation or certification of financial facts or data.

Renders the Services

Renders the services as, in the opinion of the council are or may be renders by a chartered accountant in practice.

2. Certified Auditor (Sec 226 (2))

A part from practicing chartered accountants, a person holding a certificate under the restricted auditor’s certificate rules, 1965 is also qualified to be appointed as auditor of a company. Such certified auditors are subject to the rules framed in this behalf by the central Government.

The object of the provisions as to qualified is to ensure that only persons of proven worth and standing and under the discipline of a statutory body, are appointed as auditor.

Disqualification {Sec 226 (3)(4)(5)}

The following person cannot become the auditor of the company according section 254.

  • A body corporate
  • An officer or employee of the company
  • A person who is the employment of an officer or employee of the company.
  • A person who is indebted to the company for an amount exceeding Rs. 1000 or who has given any guarantee of any third person to the company for an amount exceeding Rs. 1000.
  • The spouse of a director of the company.
  • A person who was a director other officer or employee of the company at any time during the preceding three years.
  • A person who is a partner of a director, officer or employee of a company

According to Section 226(4) a person shall not be qualified for appointment as auditor of any body corporate. Further if the auditor already holds the appointment as auditor in the specified number of companies as per Section {Section 224(1-13)}, he will be disqualified for further appointment as auditor in any other company.


Section 252 throws light upon the appointment of an auditor:

Appointment of First Auditor By Directors


First Auditor

The co-operative law authority can appoint the first auditor of a company if the company in the general meeting does not appoint the first auditor within 120 days of the date of incorporation of a company.

Casual Vacancy

The board of directors is empowered to fill any casual vacancy in the office of an auditor except one, which is caused by prior resignation.

Appointment By Shareholders

In case the board of directors fails to appoint the auditor, the company can appoint the first auditor within 120 days of the date incorporation of the company.

Removal of an Auditor

According to Section 224(3)of the Companies Act, any auditor may be removed from the office before the expiry of his term but it can be done only by the company in it general meeting and with the previous approval of the control Government.

The auditor may be removed in the following cases.

1. Removal of First Auditor

The first auditor can be removed by the members in the general meeting of the company. It is immaterial whether the auditor has completed his term of appointment or not. Another person can be appointed in place of first auditor in the general meeting. Notice of nomination of such other person to be appointed, as auditor must be given at least 14 days prior to the general meeting.

2. Removal of Other Auditor

Other than the member in the general meeting of the company prior approval of the central Government to remove can remove the first auditor the auditor must be obtained in that behalf.

Rights Or Power of an Auditor

Following are the important rights of the auditor

Access To Books

According to Section 227(1) the auditor of a company has a right of access, at all items to the books and accounts and voucher of the company, whether kept at the head office of the right of access to books etc is an absolute right and is not subject to any restriction exception or qualification. This means that the auditor can examine the books vouchers etc at any time during normal working hours.

Right of Inspection

It is a right of the auditor that he can inspect the record of the company at any time. He can visit without any notice and verify the cash or any document.

Right of Information

According to Section 227(1) the auditor has the right to obtain any information and explanation from the officers or directors of the company as he may think necessary for the performance of his duties as an auditor. If any information or explanation is refused on the ground that it is not necessary for the performance of his duties as auditor. He may report to the members accordingly.

Access to Branches

According to Section 228(2) the auditor has aright to visit the branch office of the company if any, if a duly qualified auditor has not audited the accounts of company branch and if he deems it necessary to do so for the performance of his duties as auditor.

Receiving Notices

According to Section 231 a company auditor has a right to receive all notices and other communications relating to any general meeting of the company, which any member of the company is either to have sent to him.

Right of Attending the Meeting

According to Section 231 the auditor has a right to attend any general meeting and to be heard there at any part of the business, which concerns him as auditor, however, the right to attend a general meeting and to speak there at in not mandatory.

Report to Member

According to Section 227(2) the auditor has a right to make a report to the members on the account examined by him and to state whether the said account give the information required by the companies act in the manner which is required.

Sign Audit Report

According to Section 229, the auditor has a right to sign the auditor’s report or authenticate any other document of the company.

Seek Legal and Technical Advice

The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is not expert in all the areas.

Receive Remuneration

According to Section 224(8) the auditor has a right to receive remuneration for auditing the accounts of the company after he has completed the work of audit even if he is dismissed in the middle he has a right to get full remuneration of the year.


The auditor has a right that he can speak in the annual general meeting for the explanation of some matters, which are related, with the accounts of business.

Present in Meeting

For the safeguard of his right the auditor has a right to remain present in the meetings of the company. Sometimes the business accounts may not be presented before the shareholders for the approval. In this time the auditor can protect himself.


The auditor has also a right to consult the experts for some matters. In order to clear the doubt he may get the help of the technical services. So the auditor has also a right of seek the opinion.


The auditor has also a right of correction. He can make correction in the written or spoken matters. Even that he can make a revised statement if he founds any written mistake in it.


The auditor has also a right to defend himself if he is asked to leave the office in the meeting. So he can make the representation in meeting. He has a right to remain in business for the full tenure.

Important Note

It is clear that the right of an auditor cannot be limited either by the articles of association or by the resolution of the members.

Essential Qualities of an Auditor

Following are the essential qualities of an auditor:

1. Professionally Competent

It is the basic quality of an auditor. He must have a complete and thorough knowledge of the accountancy. To understand the accounting details he can apply his knowledge and skill. It is only possible if he has a sound background in accountancy and he is professionally competent.

2. Honest

This is the personal quality of an auditor. He should have the high moral standard. It is his duty to report on the fact basis. The auditor must be honest and sincere with his profession. He is responsible not to sign any paper which is no correct under his observation.

3. Up to Date Knowledge

An auditor’s knowledge of auditing must be up to date. He must know the techniques of auditing. He must have the knowledge of other subjects relating auditing.

4. Knowledge of Business/Mercantile Law

It is the professional quality of an auditor to aware of the mercantile law, he has a complete knowledge of Contract Act, Sales of Good Act, Agency, Negotiable instruments Act, Partnership Act etc.

5. Knowledge of Taxation Law

It is also a professional quality of an auditor. He is aware of income tax ordinance 1979, sales tax and excise act and wealth tax etc this is helpful in checking the correct return of income etc.

6. Intelligent

It is also important quality of an auditor that he should be intelligent.

7. Qualification

For a professional auditor it is necessary that he should be charted accountant. According the company’s ordinance 1984 it is essential qualification for auditor.

8. Tactful

It is also the personal quality of an auditor. Technical information is required to comment and criticize the policies of management. In case of missing can collect it from the client.

9. Maintain Secrecy

It is another basis personal quality of an auditor. In the business world there is a keen competition and if the auditor does not care of the secrecy of the business, then the client of the auditor has to face a lot of difficulties. So, the auditor must maintain the cent percent secrecy among the clients.

10. Patience

It is also the personal quality of auditor when any document is received by him he cannot make hurry to sign it or express or implied promise to provide the proof later on. In spite of it he personality check the records to know the true views.

11. Critical Attitude

The attitude of an auditor must be positive. By this quality he can get the desirable results due to favorable thinking. If he is confused about some matters he can go into the details to clear it.

12. Bold and Courageous

Auditor should be bold and courageous person. Any authority should not influence him. He should possess the courage to face the difference of opinion between him and client on any issue.

13. Courteous

It is an important quality, which the auditor should possess. His attitude towards the staff of client should be very humble and polite. He should also stress on his own staff to be courteous with the client.

14. Budget Preparation

The auditor has a quality of preparing the budget. According to the facts and figures of the Previous year, the estimates are established for the next year. The auditor can check that these budgets are according to their facts and corrects.

Personal Qualities

15. Independence

Independence is the personal quality of an auditor. This quality is desirable for independent opinion on business activities. He cannot be influence directly or indirectly by other people. An auditor must be independent at the time of programming investigation and reporting. He cannot change his programme due to management interference.

16. Vigilance

This is also the quality of an auditor. By this quality the auditor can discover the errors arid frauds. The auditor can also watch and check that if accounting staff has made any fraud or error. Because he has to be alert minded so that he cannot avoid errors and work well.

17. Judgement

An auditor must have the qualities of judgement. Judgement is involved in selecting depreciation, provision for bad debts, inventory valuation. The auditor can apply professional knowledge; experience and ethics to make decisions, which have no, prescribe areas.

18. Common Sense

An auditor must have common sense. He can make difference between essential and non-essential information. An item, which can influence the decision of other people, is considered as material. The auditor can use common sense to declare it as important rather then application of principles.

19. Prudence

Prudence is the personal quality of an auditor he can be asked to give advise on financial matters. He can be allowed to suggest improvement in accounting methods and techniques. There is a need to use prudence for guiding the businessman when he is asked to do so.

20. Practical

An auditor must have practical training. He can seek training in the field of finance, management and business organization. An audit staff is able to pass through a comprehensive training. This practical training is part of this professional life.

21. Self Control

An auditor must have qualities of self-control. The balance work shows regular progress on the part of audit. There is no over work or less work every day. A discipline is created in every work. The quality of audit work is improved due to discipline.

22. Initiative

An auditor must have the quality of initiative. He can start and complete an audit work without any help. The auditor must have experience, qualification and courage to complete the auditor work. He has courage to deal with audit work even in difficult situations.

23. Leadership

An auditor must have leadership. He is the working under his leadership. He must have communication ability. He can motivate and control the audit staff. As a team leader he can guide the auditor through practical-demonstration.

24. General Knowledge

It is also a professional quality of an auditor. He is aware of the economic and political conditions. He is also aware of the latest knowledge, which affects the business concern.

25. Electronic Data Processing

The auditor should also aware of the use of computer in the business for getting the information. He is must also trained in handling the data through the computers.

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