Proofreading activity of Pol III is due to
High-fidelity replication by Pol III relies critically on epsilon subunit, potent 3' to 5' exonuclease belonging to DnaQ family. When alpha polymerase misincorporates base causing mismatch and frayed terminus, primer moves from polymerase site to epsilon active site where phosphodiester bond hydrolyzed releasing monophosphate. Epsilon requires two Mg2+ ions and prefers single-stranded mismatched ends over duplex. Mutator dnaQ mutants lacking epsilon exhibit 1000-fold increased spontaneous mutation rates illustrating proofreading contribution. Theta subunit wraps around epsilon protecting from heat denaturation enhancing activity.
Ref: Lodish et al., Molecular Cell Biology, 9th ed., Chapter 11: Epsilon subunit proofreading in Pol III fidelity