Examine the constitution of

the organisation
9

OVERVIEW
Examine the bye laws or rules CHAPTER
and regulations or trust deed.

Examine the powers of the

members of the management

organisation
and other oficers

Constitution of the
Examine the minute books of
managing committee and of
members general meetting the
case may be

Evaluate the internal Control

System in the organisation.

Examine the accounting

policies followed and the
accounting records maintained

Check the various receipts of

Audit of Different Entities

the organisation in the form of
fees, rent, income on investment,
donations and grants

Check the various expenditure

of the organisation like to staff,
common expenses..

Veriication of assets and Institution, Charitable Institutions, Cinema, Hospital etc., are:)
liabilities
(major points that must be kept in mind while performing the audit of Educational
Different Types of Entities
Special Features of Audit of
 Scrambling for his television remote one day, Sameer accidentally pushed button of “Sansad TV”.
Although not fond of keenly watching Parliamentary debates, his attention was drawn to pandemonium
being caused in one Houses of Parliament over a report of the Comptroller and Auditor General of
India (CAG). Anxious to know about importance of reports of CAG, he wanted to first know about
this constitutional office. What is nature of duties of Comptroller and Auditor General of India as
envisaged in Constitution of India? What makes position of CAG unique?
Astonished to learn that Comptroller and Auditor General is known as “Supreme Audit Institution
of India”, he wanted to know more about scope of duties performed by such an important institution.
Not only audits of receipts and expenditure of Union of India and States are performed by CAG of India,
this institution is also responsible for audit of receipts and expenditure of bodies mainly financed by
Union or State Revenues.
Besides above, it is responsible for ensuring that public funds are being collected and used
effectively and efficiently. Does CAG have a role to play in audits of government companies? What are
law provisions in this regard? He was also thinking that Constitution must have included provisions
to ensure independence of such an institution. What are such provisions?
Knowing importance of local bodies governing cities, Sameer also wanted to know how control
over expenditure of local bodies is exercised. Who exercises such control and what are main objectives
of such an audit? How financial administration of such urban local bodies is run?
Are there some other sets of entities which merit special audit considerations by virtue of their
nature or structure? For example, an NGO works in a totally different environment. It may work in social
or environmental areas. What critical points are to be kept in mind by auditor of an NGO? Similarly,
clubs, hotels and hospitals may involve audit considerations peculiar to their nature of working.
Sameer had also noticed sign boards of some organizations with LLP written at the end. What does
it denote? How does it differ from a partnership firm? What are regulatory requirements in respect of
LLP? As an auditor, what special considerations apply in case of audit of LLP?

Notes to Add

Special Features of Audit of Different Types of Entities 679

 GOVERNMENT AUDIT
BACKGROUND
(1) Government Audit

Revenue Expenditure
↓
Control

Parliament State Legislature (SL)

Insistence up on Grant
‰ No expenditure can be incurred → unless voted up on by

Parliament State Legislature (SL)

‰ Funds for such expenditure must be provided out of ‘consolidated Fund of’

India (CFI) State (CFS) Union Territory with Legislative

Assembly (CFUT + LA)

‰ After expenditure is incurred + A/c. are closed
↓
Appropriation A/c. are prepared
↓
Scrutinized by ‘Public Accounts Committee’ (PAC)
‰ Initially → Govt. Audit was → Expenditure oriented
‰ Gradually → Audit of Receipts was taken up
‰ With rapid growth of public Enterprises → ‘Commercial Audit’ Came into Being
‰ Large no. of Non-commercial autonomous Bodies → Field of

Financed by Govt.
Development Academic Scientific Social Research
↓
Required to be Audited
 Deinition  Govt. Audit  U.N. Handbook

Objective Systematic Professional Independent

Examination

Financial Administrative Other

Operations

Of Public entity

680 Auditing & Ethics PW

 ¯
Made subsequently ® To their execution
¯
Evaluating
For the purpose
Verifying
¯
Presenting

Report Explanatory Audit Conclusions Recommendation

Comments indings

By Responsible
oficials
 Objective of Govt. Audit

Accounting for Appraisal of Govt. Base for

Public funds Policies corrective Action

 Main objectives of Govt. Audit

Ensuring Functioning as an
Accountability 
 Aid to Administration
of Administration

To legislative
Neither equipped
‰ Govt. is To → function is an → investigative Agency
Nor Intended ↓
To pursue every irregularity or misdemeanour
The comptroller & Auditor General (Duties, Powers & Conditions of Services) Act, 1971
 Govt. Audit  Conducted by  Independent Statutory Authority
 
In India The controller & Auditor General of India (C & AG)
 
Through  The Indian Audit & Accounts Department
 
in accordance with

Constitution of Laws made by Rules & Orders

India Parliament

Government Audit is as old as organised governments and has fairly long pedigree even in
developing countries. The concept, content and scope of government audit have developed in tune
Special Features of Audit of Different Types of Entities 681
with the political, social and economic development of the countries. It has also responded to the
needs of the administration. It aims to ensure accountability of the executive in respect of public
revenue and expenditure. Primarily, the Parliament and in case of States, the State legislatures control
all government expenditure through insistence upon demand for grants. The main idea underlying
this control is that no expenditure can be incurred unless it has been voted upon by the Parliament or
State Legislatures and funds for every such expenditure must be provided from out of the Consolidated
Fund of India or of the State.
(As per Article 266, the Consolidated Fund of India consists of all the revenue received from direct
and indirect taxes, all the loans taken by the Govt. of India and all the amount of repayment of loans
received by the Govt. of India)
After the expenditure has been incurred and the accounts are closed, the Appropriation Accounts
are prepared which are scrutinised by the Public Accounts Committee (The Public Accounts Committee
(PAC) is a committee of selected members of parliament, constituted by the Parliament of India, for the
purpose of auditing the revenue and the expenditure of the Government of India). Thus, Parliamentary
or Legislative control is exercised before spending and after the expenditure is actually incurred.
Since independence there has been a tremendous spurt in governmental activities with the
attendant increase in expenditure, revenue and capital, and in receipts and borrowings to match the
expenditure. Government has entered the business field and government in business is not the same
as government administering law and order and attending to regulatory functions.
Independent India witnessed a steady growth of state commercial enterprise. The change in the
character of government and the complex nature of its activities, including regulatory functions in an
international environment called for a change in the nature and scope of audit. Audit has evolved from
accountancy and regularity check to evaluation of the end results of the operations of government.
Initially, government auditing in India as elsewhere was primarily expenditure- oriented. Gradually,
audit of receipts-tax and non-tax was taken up. With the rapid growth of public enterprises, another
major area of specialisation, i.e., commercial audit, came into being. There are also a large number of
non-commercial autonomous bodies financed by government in diverse fields of development and
of academic study and scientific or social research which are also required to be audited from the
viewpoint of public accountability.
Government audit has not only adopted the basic essentials of auditing as known and practised
in the profession to suit the requirements of governmental transactions but has also added new
concepts, techniques and procedures to the audit profession.
The U.N. Handbook on Government Auditing and Developing Countries defines government
auditing in a comprehensive manner which is as follows:
Government auditing is
‰ the objective, systematic, professional and independent examination
‰ of financial, administrative and other operations
‰ of a public entity
‰ made subsequently to their execution
‰ for the purpose of evaluating and verifying them,
‰ presenting a report containing explanatory comments on audit findings together with conclusions
and recommendations for future actions
‰ by the responsible officials
‰ and in the case of examination of financial statements, expressing the appropriate professional
opinion regarding the fairness of the presentation.

682 Auditing & Ethics PW

OBJECTIVES:
(a) Accounting for Public Funds: Government audit serves as a mechanism or process for public
accounting of government funds.
(b) Appraisal of Government policies: It also provides public accounting of the operational,
management, programme and policy aspects of public administration as well as accountability
of the officials administering them.
(c) Base for Corrective actions: Audit observations based on factual data collection also serve
to highlight the lapses of the lower hierarchy, thus helping supervisory level officers to take
corrective measures.
Administrative accountability: Government audit is neither equipped nor intended to function
as an investigating agency, to pursue every irregularity or misdemeanour to its logical end. The main
objective of audit is a combination of ensuring accountability of administration to legislature and
functioning as an aid to administration. In India, the function of Government Audit is discharged by
the independent statutory authority of the Comptroller and Auditor General through the agency of
the Indian Audit and Accounts Department. Audit is a necessary function to ensure accountability of
the executive to Parliament, and within the executives of the spending agencies to the sanctioning or
controlling authorities. The purpose or objectives of audit need to be tested at the touchstone of public
accountability. The Comptroller and Auditor General (C&AG), in the discharge of his functions, watches
that the various authorities act in regard to financial matters in accordance with the Constitution and
the laws made by Parliament, and conform to the rules or orders made thereunder.

LEGAL FRAMEWORK AND COMPTROLLER & AUDITOR GENERAL

‰ Appointed by → The president of India
‰ Shall not be Removed Except → on proven → misbehaviour → in capacity
↓
> 2/3 Majority → of Both houses of Parliament → Present & Voting
‰ After appointment → salary cannot be varied

↓
To his disadvantage
‰ Salary = Supreme Court Judge
‰ President to Consult C & AG → for appointing any person in Indian Audit & Accounts Department
→ for deciding Administrative Power of C & AG
‰ Article 149 → of the constitution of Indian → Gives powers to C & AG
 The C & AG (Duties, Powers & Conditions of Service) Act, 1971 → Defines the powers
‰ Article 150 → Format of Accounts of Union & States→ Decided by President → Advice of C&AG

‰ Article 151 → C & AG to provide Report an A/c. → Submitted to

President Governor
They Will laid before

House of Parliament State Legislature

The Constitution of India contains specific provisions regarding the appointment, salary and duties
and powers of the C&AG.
Special Features of Audit of Different Types of Entities 683
(1) Appointment & Removal: The Constitution guarantees the independence of the C&AG of India
by prescribing that he shall be appointed by the President of India and shall not be removed from
office except on the ground of proven mis-behaviour or incapacity. As in the case of a Judge of the
Supreme Court, he can be removed only when each House of Parliament decides to do so by a
majority of not less than 2/3rd of the members of the House present and voting. The Parliament
is competent to make laws to determine salary and other conditions of service and they cannot
be varied to his disadvantage after his appointment.
The Constitution further provides that the conditions of service of person serving in the Indian
Audit and Accounts Department and the administrative powers of the C&AG shall be determined
by the President after consultation with him.
(2) Tenure: The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act,
1971 passed in pursuance of the provisions of the Constitution lays down a fixed tenure of the
office prescribing that he shall be paid a salary which is equal to the salary of the Judge of the
Supreme Court thereby further strengthening his independence.
(3) Various Constitutional Provisions
(i) Article 149 states that the C&AG shall perform such duties and exercise such powers in
relation to the accounts of the Union and of the States and of any other authority or body as
may be prescribed by or under any law made by the Parliament. The Comptroller & Auditor
General’s (Duties, Powers and Conditions of Service) Act, 1971 defines these functions and
powers in detail.
(ii) Article 150 of the Constitution provides that the accounts of the Union and of the States shall
be kept in such form as the President may on the advice of the C&AG prescribe.
(iii) Article 151 requires that the reports of the C&AG relating to the accounts of the Union/State
shall be submitted to the President / Governor who shall cause them to be laid before House
of Parliament / State Legislature.

QUESTIONS

Correct/Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:
1. Article 150 of the Constitution provides that the accounts of the Union and of the States shall be
kept in such form as the Finance Minister may on the advice of the C&AG prescribe.
Ans. Incorrect: Article 150 of the Constitution provides that the accounts of the Union and of the States
shall be kept in such form as the President may on the advice of the C&AG prescribe.
Notes to Add

684 Auditing & Ethics PW

 COMPTROLLER AND AUDITOR GENERAL’S — DUTIES AND POWERS
Duties of C & AG (7 Duties)
(i) Compile + Submit → A/c.’s of Union + State
Rendered to Audit & AccountsOficers → From Initial & Subsidiary A/c.

Treasury Ofices Show Annual

Departments

Receipts Disbursements

of

Union State UT with LA

↓ ↓ ↓
President Governor Administrator of UT
→ As per the Act → It is not the responsibility of C&AG→ to → Give Info. → Prepare A/c.
(ii) General Provisions Relating to Audit Report

All expenditure from All transactions of FS & Other

CFI / CFS / CFUT + LA Union+State Subsidiary A/c.
+ ↓ ↓
Ascertain whether Relating to Kept in any
department of

Contingency Public A/c.

Fund Union State

Money shown having Expenditure Service

been disbursed ↓
↓ Conforms the authority
Were legally available for + ↓
Applicable to Which governs it
↓
To which they have been Purpopse
appled
(iii) Audit of Receipts & Expenditure

Body
Where any is substantially inanced Grant/Loan
Authority ↓
By Grants/Loans ≥ ` 25,00,000/-
↓ and
≥ 75% of total expenditure
From CFI/CFS/CFUT+LA of Body/Authority

Special Features of Audit of Different Types of Entities 685

 Audit
C & AG Receipts + Expenditure
Report

Eg: College Loan = 76,0 0,000/-

Substantially Financed ↓
Total Expenditure 1,00,00,000/-
(iv) Audit of Grants / Loans → for specific purpose → from CFI/CFS/CFUT + LA
↓ Foreign state
to any authority / body → NOT
C&AG
International organisation

Scrutinize the procedure Have a right of access

↓ ↓
By which sanctioning Authority By giving prior notice
↓ ↓
Satisies itself as tofulilment of Books of A/c
conditions ↓
of that Body / Authority
(v) Audit of Receipts of Union + State + Satisies himself that → Rules & Procedures
→ Designed to secure an effective check on

Assessment Collection Allocation

of Revenue

686 Auditing & Ethics PW

 Prices paid are reasonable +in agreement → with those shown in contract
(3) Ensures Inspecting
Quality
Certiicates of By Units
Quantity Receiving
(4) Periodical Veriication

The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 defines
functions and powers in detail. The relevant provisions are discussed hereunder—
Duties of the C&AG:
(i) Compile and submit Accounts of Union and States: The Comptroller and Auditor General shall
be responsible for compiling the accounts of the Union and of each State from the initial and
subsidiary accounts rendered to the audit and accounts offices under his control by treasuries,
offices or departments responsible for the keeping of such account. The Comptroller and Auditor
General shall, from the accounts compiled by him or [by the Government or any other person
responsible in that behalf] prepare in each accounts (including, in the case of accounts compiled
by him, appropriation accounts) showing under the respective heads the annual receipts and
disbursements for the purpose of the Union, of each State and of each Union Territory having a
Legislative Assembly, and shall submit those accounts to the President or the Governor of a State
or Administrator of the Union Territory having a Legislative Assembly, as the case may be, on or
before such dates as he may, with the concurrence of the Government concerned, determine.
NOTE: The C&AG Act of 1971 has provisions for relieving him of this responsibility to give
information and render assistance to the Union and States: The Comptroller and Auditor General
shall, in so far as the accounts, for the compilation or keeping of which he is responsible, enable
him so to do, give to the Union Government, to the State Government or to the Governments of
Union Territories having Legislative Assemblies, as the case may be, such information as they
may, from time to time, require and render such assistance in the preparation of the annual
financial statements as they may reasonably ask for.
(ii) General Provisions Relating to Audit: It shall be the duty of the Comptroller and Auditor
General—
(a) to audit and report on all expenditure from the Consolidated Fund of India and of each
State and of each Union Territory having a Legislative Assembly and to ascertain whether
the moneys shown in the accounts as having been disbursed were legally available for and
applicable to the service or purpose to which they have been applied or charged and whether
the expenditure conforms to the authority which governsit;
(b) to audit and report all transactions of the Union and of the States relating to Contingency
Funds and Public Accounts;
(c) to audit and report on all trading, manufacturing and profit and loss accounts and balance-
sheets and other subsidiary accounts kept in any department of the Union or of a State.
(iii) Audit of Receipts and Expenditure: Where anybody or authority is substantially financed by
grants or loans from the Consolidated Fund of India or of any State or of any Union Territory having
a Legislative Assembly, the Comptroller and Auditor General shall, subject to the provisions of
Special Features of Audit of Different Types of Entities 687
 any law for the time being in force applicable to the body or authority, as the case may be, audit all
receipts and expenditure of that body or authority and to report on the receipts and expenditure
audited by him.
Meaning of Substantially financed: Where the grant or loan to a body or authority from the
Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly
in a financial year is not less than ₹ 25 lakhs and the amount of such grant or loan is not less than
75% of the total expenditure of that body or authority, such body or authority shall be deemed,
for this purpose to be substantially financed by such grants or loans as the case may be.
(iv) Audit of Grants or Loans: Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly
to any authority or body, not being a foreign State or international organisation, the Comptroller
and Auditor General shall scrutinise the procedures by which the sanctioning authority satisfies
itself as to the fulfillment of the conditions subject to which such grants or loans were given and
shall for this purpose have right of access, after giving reasonable previous notice, to the books
and accounts of that authority or body.
(v) Audit of Receipts of Union or States: It shall be the duty of the Comptroller and Auditor General
to audit all receipts which are payable into the Consolidated Fund of India and of each State and
of each Union Territory having a Legislative Assembly and to satisfy himself that the rules and
procedures in that behalf are designed to secure an effective check on the assessment, collection
and proper allocation of revenue and are being duly observed and to make for this purpose such
examination of the accounts as he thinks fit and report thereon.
(vi) Audit of Accounts of Stores and Inventory: The Comptroller and Auditor General shall have
authority to audit and report on the accounts of stores and inventory kept in any office or
department of the Union or of a State.
(vii) Audit of Government Companies and Corporations: The duties and powers of the Comptroller
and Auditor General in relation to the audit of the accounts of government companies shall be
performed and exercised by him in accordance with the provisions of the Companies Act, 2013.
The Comptroller and Auditor- General of India shall appoint the auditor under section 139(5)
or 139(7) (i.e. appointment of First Auditor or Subsequent Auditor) and direct such auditor
the manner in which the accounts of the Government company are required to be audited and
thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller
and Auditor-General of India which, among other things, include the directions, if any, issued
by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the
accounts and financial statement of the company.

Notes to Add

688 Auditing & Ethics PW

 POWERS OF C & AG

Powers of C&AG
The C&AG Act gives the following powers to the C&AG in connection with the performance of
his duties-
(a) To inspect any office of accounts under the control of the Union or a State Government including
office responsible for the creation of the initial or subsidiary accounts.
(b) To require that any accounts, books, papers and other documents which deal with or are otherwise
relevant to the transactions under audit, be sent to specified places.
(c) To put such questions or make such observations as he may consider necessary to the person in
charge of the office and to call for such information as he may require for the preparation of any
account or report which is his duty to prepare.
(d) In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of
any accounts or class of transactions and to apply such limited checks in relation to such accounts
or transactions as he may determine.

QUESTIONS

Correct/Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:
2. The Comptroller and Auditor General does not have any authority to audit the accounts of stores
and inventory kept in any office or department of the Union or of a State.
Ans. Incorrect: The Comptroller and Auditor General shall have authority to audit and report on the
accounts of stores and inventory kept in any office or department of the Union or of a State.
Theory Questions
3. Explain in detail the duties of Comptroller and Auditor General of India.
Ans. Duties of C&AG: The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service)
Act, 1971 lays down duties of the C&AG as under-

Special Features of Audit of Different Types of Entities 689

 (i) Compile and submit Accounts of Union and States - The C&AG shall be responsible
for compiling the accounts of the Union and of each State from the initial and subsidiary
accounts rendered to the audit and accounts offices under his control by treasuries, offices
or departments responsible for the keeping of such account.
(ii) General Provisions Relating to Audit - It shall be the duty of the C&AG –
(a) to audit and report on all expenditure from the Consolidated Fund of India and of each
State and of each Union
Territory having a Legislative Assembly and to ascertain whether the moneys shown
in the accounts as having been disbursed were legally available for and applicable to
the service or purpose to which they have been applied or charged and whether the
expenditure conforms to the authority which governs it;
(b) to audit and report all transactions of the Union and of the States relating to Contingency
Funds and Public Accounts;
(c) to audit and report on all trading, manufacturing profit and loss accounts and balance-
sheets and other subsidiary accounts kept in any department of the Union or of a State.
(iii) Audit of Receipts and Expenditure - Where any body or authority is substantially financed
by grants or loans from the Consolidated Fund of India or of any State or of any Union
Territory having a Legislative Assembly, the Comptroller and Auditor General shall, subject
to the provisions of any law for the time being in force applicable to the body or authority,
as the case may be, audit all receipts and expenditure of that body or authority and to report
on the receipts and expenditure audited by him.
(iv) Audit of Grants or Loans - Where any grant or loan is given for any specific purpose from
the Consolidated Fund of India or of any State or of any Union Territory having a Legislative
Assembly to any authority or body, not being a foreign State or international organisation, the
Comptroller and Auditor General shall scrutinise the procedures by which the sanctioning
authority satisfies itself as to the fulfillment of the conditions subject to which such grants
or loans were given and shall for this purpose have right of access, after giving reasonable
previous notice, to the books and accounts of that authority or body.
(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller and Auditor
General to audit all receipts which are payable into the Consolidated Fund of India and of
each State and of each Union Territory having a Legislative Assembly and to satisfy himself
that the rules and procedures in that behalf are designed to secure an effective check on the
assessment, collection and proper allocation of revenue and are being duly observed and to
make this purpose such examination of the accounts as he thinks fit and report thereon.
(vi) Audit of Accounts of Stores and Inventory - The Comptroller and Auditor General shall
have authority to audit and report on the accounts of stores and inventory kept in any office
or department of the Union or of a State.
(vii) Audit of Government Companies and Corporations - The duties and powers of the
Comptroller and Auditor General in relation to the audit of the accounts of government
companies shall be performed and exercised by him in accordance with the provisions of
the Companies Act, 2013. The comptroller and Auditor-General of India shall appoint the
auditor under sub-section (5) or sub-section (7) of section 139 (i.e. appointment of First
Auditor or Subsequent Auditor) and direct such auditor the manner in which the accounts
of the Government company are required to be audited and thereupon the auditor so
appointed shall submit a copy of the audit report to the Comptroller and Auditor- General
of India which, among other things, include the directions, if any, issued by the Comptroller
and Auditor-General of India, the action taken thereon and its impact on the accounts and
financial statement of the company.
690 Auditing & Ethics PW
 4. In case of Government entities, audit of accounts of stores and inventories has been developed
as a part of expenditure audit. Discuss about the duties and responsibilities entrusted to C&AG.
Ans. Audit of Accounts of Stores and Inventories in Government Companies:
Audit of the accounts of stores and inventories has been developed as a part of expenditure audit
with reference to the duties and responsibilities entrusted to C&AG. Audit is conducted:
(i) To ascertain whether the Regulations governing purchase, receipt and issue, custody, sale
and inventory taking of stores are well devised and properly carried out.
(ii) To bring to the notice of the government any deficiencies in quantities of stores held or any
defects in the system of control.
(iii) To verify that the purchases are properly sanctioned, made economical and in accordance
with the Rules for purchase laid down by the competent authority.
(iv) To ensure that the prices paid are reasonable and are in agreement with those shown in
the contract for the supply of stores, and that the certificates of quality and quantity are
furnished by the inspecting and receiving units. Cases of uneconomical purchase of stores
and losses attributable to defective or inferior quality of stores are specifically brought by
the audit.
(v) To check the accounts of receipts, issues and balances regarding accuracy, correctness and
reasonableness of balances in inventories with particular reference to the specified norms
for level of consumption of inventory holding. Any excess or idle inventory is specifically
mentioned in the report and periodical verification of inventory is also conducted to ensure
their existence. When priced accounts are maintained, the auditor should see that the prices
charged are reasonable and have been reviewed from time to time.
The valuation of the inventories is seen carefully so that the value accounts tally with the
physical accounts and that adjustment of profits or losses due to revaluation, inventory
taking or other causes is carried out.
Notes to Add

Special Features of Audit of Different Types of Entities 691

 EXPENDITURE AUDIT

 Quasi-Judicial work  involves  interpretation

Constitution Statues Rules Regulations Orders

 Final power  interpretation  C&AG
Rules
 Categories Regulation
Orders

Power Presentation  Claims Govt. Servants

+ Consolidated Fund
incur Sanction Withdrawl Contingency Fund
Public A/c
Expenditure

Condition of Service Pay Allowances Pensions

CFI CFS CFUT+LA

 Executive Authorities  To see

Rules Regulations Orders

Not Inconsistent Not In Conlict Not Separately Consistent

 approved 
Orders / Rules Essential Req.
Prov. Of Laws 
Constitution Higher Authorities
Audit A/cs

692 Auditing & Ethics PW

(ii) Audit of Sanctions
There is Sanction  accorded by  competent authority

General Speciic
(iii) Audit against provision of funds
There is provision of funds  out of which expenditure can be incurred

Authorized by competent authority Amount does not exceed appropriation

(iv) Propriety Audit Broad Principles of
Expenditure incurred  with due regard to

General Financial Propriety

(v) Performance Audit / Full Scope Audit

Eficiency Audit Economy Audit Effectiveness Audit Eficiency cum

  Performance Audit
Schemes Programs Govt. acquired Appraise 
 Objective Examination
Resources Progress Projects Schemes 
Execution Operation Performance
Economical Sanctioning 
Manner + Target objective + Eficiency
Running Yielding Greater
Economically Results Spending
 Economy Effectiveness
Authority

Observed economy

The audit of government expenditure is one of the major components of government audit. The basic
standards set for audit of expenditure are to ensure that there is provision of funds authorised by
competent authority fixing the limits within which ex-penditure can be incurred. These standards
are—
Special Features of Audit of Different Types of Entities 693
 (i) that the expenditure incurred conforms to the relevant provisions of the statutory enactment
and in accordance with the Financial Rules and Regulations framed by the competent authority.
Such an audit is called as the audit against ‘rules and orders’.
(ii) that there is sanction, either special or general, accorded by competent authority authorising the
expenditure. Such an audit is called as the audit of sanctions.
(iii) that there is a provision of funds out of which expenditure can be incurred and the same has been
authorised by competent authority. Such an audit is called as audit against provision of funds.
(iv) that the expenditure is incurred with due regard to broad and general principles of financial
propriety. Such an audit is also called as propriety audit.
(v) that the various programmes, schemes and projects where large financial expenditure has been
incurred are being run economically and are yielding results expected of them. Such an audit is
termed as the performance audit.
Each of the above audits is discussed in detail in the following paragraphs.
1. Audit against Rules & Orders: Audit against rules and orders aims to ensure that the expenditure
conforms to the relevant provisions of the Constitution and of the laws and rules made thereunder.
It also seeks to satisfy that the expenditure is in accordance with the financial rules, regulations
and orders issued by a competent authority. Audit of expenditure against regularity is of a
quasi-judicial type of work performed by the audit authorities. It involves interpretation of the
Constitution, statutes, rules, regulations and orders. The final power of interpretation of these,
however, does not vest with the C&AG.
These rules, regulations and orders against which regularity audit is conducted mainly fall under
the following categories:
(i) Rules and orders regulating the powers to incur and sanction expenditure from the
Consolidated Fund of India or of a State (and the Contingency Fund of India or of a State);
(ii) Rules and orders dealing with the mode of presentation of claims against government,
withdrawing moneys from the Consolidated Fund, Contingency Fund and Public Accounts of
the Government of the India and of the States, and in general the financial rules prescribing
the detailed procedure to be followed by government servants in dealing with government
transactions; and
(iii) Rules and orders regulating the conditions of service, pay and allowances, and pensions of
government servants.
It is the function of the executive government to frame rules, regulations and orders, which are to
be observed by its subordinate authorities. The job of audit is to see that these rules, regulations and
orders are applied properly by the subordinate authorities. It is, however, not the function of audit to
prescribe what such rules, regulations and orders shall be.
But, it is the function of audit to carry out examination of the various rules, regulations and orders
issued by the executive authorities to see that:
(a) they are not inconsistent with any provisions of the Constitution or any laws made thereunder;
(b) they are consistent with the essential requirements of audit and accounts as determined by
the C&AG;
(c) they do not come in conflict with the orders of, or rules made by, any higher authority; and
(d) in case they have not been separately approved by competent authority, the issuing authority
possesses the necessary rule-making power.

694 Auditing & Ethics PW

 2. Audit of sanctions: The auditor has to ensure that each item of expenditure is covered by
a sanction, either general or special, of the competent authority. The audit of sanctions is
directed both in respect of ensuring that the expenditure is properly covered by a sanction,
and also to satisfy that the authority sanctioning it is competent for the purpose by virtue of the
powers vested in it by the provisions of the Constitution and of the law, rules or orders made
thereunder, or by the rules of delegation of financial powers made by an authority competent
to do so.
3. Audit against provision of funds: Audit against provision of funds aims at ascertaining that the
expenditure incurred has been on the purpose for which the grant and appropriation had been
provided and that the amount of such expenditure does not exceed the appropriation made.
4. Propriety audit: According to ‘Propriety audit’, the auditors try to bring out cases of improper,
avoidable, or ineffective expenditure even though the expenditure has been incurred in
conformity with the existing rules and regulations. With the passage of time, it was felt that
regularity audit alone was not sufficient to protect properly the public interest in the spending of
money by the executive authorities. A transaction may satisfy all the requirements of regularity
audit insofar as the various formalities regarding rules and regulations are concerned, but may
still be highly wasteful. e.g.:- A building may be constructed for installing a telephone exchange
but may not be used for the same purpose resulting in unproductive expenditure or a school
building may be constructed but used after five years of its completion is a case of avoidable
expenditure.
Audit should, therefore, try to secure a reasonably high standard of public financial morality by
looking into the wisdom, faithfulness and economy of transactions. These considerations have led
to the evolution of audit against propriety which is now being combined by the audit authorities
with their routine function of regularity audit. It is hard to frame any precise rules for regulating
the course of audit against propriety. Such an objective of audit depends for its acceptance on
its appeal to the common sense and straight logic of the auditors and of those whose financial
transactions are subjected to propriety audit.
However, some general principles have been laid down in the Audit Code, which have for long
been recognised as standards of financial propriety. Audit against propriety seeks to ensure that
expenditure conforms to these principles which have been stated as follows:
(a) The expenditure should not be prima facie more than the occasion demands. Every public
officer is expected to exercise the same vigilance in respect of expenditure incurred from
public moneys as a person of ordinary prudence would exercise in respect of expenditure of
his own money.
(b) No authority should exercise its powers of sanctioning expenditure to pass an order which
will be directly or indirectly to its own advantage.
(c) Public moneys should not be utilised for the benefit of a particular person or section of the
community unless:
(i) the amount of expenditure involved is insignificant; or
(ii) a claim for the amount could be enforced in a Court of law; or
(iii) the expenditure is in pursuance of a recognised policy or custom; and

Special Features of Audit of Different Types of Entities 695

 Audit against Audit of Audit against Propriety Performance
Rules & Orders: Sanctions: The Provision Audit: To ensure Audit: This
The auditor has auditor has to of Funds: It compliance with involves that
to see that the ensure that contemplates general principles the various
expenditure each item of that there is of financial programmes,
incurred expenditure a provision propriety and to schemes and
conforms to is covered by of funds out bring out cases projects where
the relevant a sanction, of which of improper, large financial
provisions of either general expenditure can avoidable, or expenditure has
the statutory or special, be incurred and infructuous been incurred
enactment and accorded by the amount of expenditure are being run
is in accordance the competent such expenditure even though the economically
with the authority, does not expenditure has and are yielding
financial rules authorising such exceed the been incurred in results expected
and regulations expenditure. appropriations Conformity with of them.
framed by the made. the existing rules
competent and regulations.
authority.

5. Performance audit: The scope of audit has been extended to cover efficiency, economy and
effectiveness audit or performance audit, or full scope audit:-
Efficiency audit looks into whether the various schemes/projects are executed and their
operations conducted economically and whether they are yielding the results expected of them,
i.e., the relationship between goods and services produced and resources used to produce them;
and examination aimed to find out the extent to which operations are carried out in an economical
and efficient manner.
The procedure for conducting performance audit covers
 identification of topic,

 preliminary study,

 planning ,

 execution of audit, and

 reporting.

696 Auditing & Ethics PW

 QUESTIONS

Correct/Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:
5. According to ‘propriety audit’, the auditors try to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity with the
existing rules and regulations.
Ans. Incorrect: According to ‘propriety audit’, the auditors try to bring out cases of improper, avoidable,
or infructuous expenditure even though the expenditure has been incurred in conformity with
the existing rules and regulations.
Theory Questions
6. Define Government Audit & explain its objectives.
Ans. Government Audit is the objective, systematic, professional and independent examination of
financial, administrative and other operations of a public entity ,made subsequently to their
execution for the purpose of evaluating and verifying them, presenting a report containing
explanatory comments on audit findings together with conclusions and recommendations for
future action by the responsible officials and in the case of examination of financial statements,
expressing the appropriate professional opinion regarding the fairness of the presentation.
OBJECTIVES:
(1) Accounting for Public Funds:- It serves as a mechanism or process for public accounting of
government funds.
(2) Appraisal of Govt. Policies:- It also provides public accounting of the operational, management,
programme and policy aspects of public administration as well as accountability of the
officials administering them.
(3) Corrective Actions:- Audit observations based on factual data collection also serve to
highlight the lapses of the lower hierarchy, thus helping supervisory level officers to take
corrective measures.
(4) Administrative Accountability:- The main objective of audit is a combination of ensuring
accountability of administration to legislature and functioning as an aid to administration
7. The audit of Government expenditure is one of the major components of Government audit. Briefly
explain the basic standards set in relation to audit of Government expenditure.
Ans. Expenditure Audit: The audit of government expenditure is one of the major components of
government audit.
The basic standards set for audit of expenditure are to ensure that there is provision of funds
authorized by competent authority fixing the limits within which expenditure can be incurred.
These standards are—
(i) that the expenditure incurred conforms to the relevant provisions of the statutory enactment
and in accordance with the Financial Rules and Regulations framed by the competent
authority. Such an audit is called as the audit against ‘rules and orders’.
(ii) that there is sanction, either special or general, accorded by competent authority authorising
the expenditure. Such an audit is called as the audit of sanctions.
Special Features of Audit of Different Types of Entities 697
 (iii) that there is a provision of funds out of which expenditure can be incurred & the same has
been authorised by competent authority. Such an audit is called as audit against provision
of funds.
(iv) that the expenditure is incurred with due regard to broad and general principles of financial
propriety. Such an audit is also called as propriety audit.
(v) that the various programmes, schemes and projects where large financial expenditure has
been incurred are being run economically and are yielding results expected of them. Such
an audit is termed as the performance audit.
Notes to Add

698 Auditing & Ethics PW

 AUDIT OF RECEIPTS
Revenue Assessed
(i) All Due to Govt. → Correctly Realised
Debts Credited

Regulations
(ii) Adequate Have been framed
Procedures

Regulations
(iii) Such Actually been carried out
Procedures
(iv) Adequate checks are imposed
Systems
(v) Review of
Procedures

The audit of receipts is neither all pervasive or as old as audit of expenditure but has come to stay
in some countries. Such an audit provides for checking;
(i) whether all revenues or other debts due to government have been correctly assessed, realised
and credited to government account by the designated authorities;
(ii) whether adequate regulations and procedures have been framed by the department/agency
concerned to secure an effective check on assessment, collection and proper allocation of cases;
(iii) whether such regulations and procedures are actually being carried out;
(iv) whether adequate checks are imposed to ensure the prompt detection and investigation of
irregularities, double refunds, fraudulent or forged refund vouchers or other loss of revenue
through fraud or willful omission or negligence to levy or collect taxes or to issue refunds; and
(v) review of systems and procedures to see that the internal procedures adequately secure correct
and regular accounting of demands collection and refunds and pursuant of dues up to final
settlement and to suggest improvement. The basic principle of audit of receipts is that it is more
important to look at the general than on the particular, though individual cases of assessment,
demand, collection, refund, etc. are important within the area of test check. A review of the judicial
decisions taken by tax authorities is done to judge the effectiveness of the assessment procedure.
(vi) The extent and quantum of audit required to be done under each category of audit are determined
by the C&AG. These are neither negotiable nor questioned. The prescribed extent and quantum
of audit are structured in accordance with the design of test check, random sampling, general
review, in-depth study of specified areas, etc.

Special Features of Audit of Different Types of Entities 699

 as may be warranted by the nature of transactions, its importance in the scheme of activities of a
department and the totality of its transactions, the frequency of check and total plan of audit to
be executed during a period. Institutional mechanism provides for primary check by the auditor,
test check by the supervisor and control and direction by the group leader. Planning, executing
and reporting of work is directed and monitored at middle and top levels of the audit hierarchy.
There are built-in arrangements within the C&AG to ensure that the work assigned to each
employee is carried out as prescribed. The audit is conducted both centrally where accounts and
original vouchers are kept and locally where the drawing and disbursing functions are performed
depending on the organisational and institutional arrangements obtaining.

Notes to Add

700 Auditing & Ethics PW

 AUDIT OF STORES AND INVENTORIES
Audit of the accounts of stores and inventories has been developed as a part of expenditure audit with
reference to the duties and responsibilities entrusted to C&AG. Audit is conducted :-
‰ to ascertain whether the Regulations governing purchase, receipt and issue, custody, sale and
inventory taking of stores are well devised and properly carried out.
‰ to bring to the notice of the government any deficiencies in quantities of

‰ stores held or any defects in the system of control.

‰ to verify that the purchases are properly sanctioned, made economical and in accordance with the
Rules for purchase laid down by the competent authority.
‰ to ensure that the prices paid are reasonable and are in agreement with those shown in the contract
for the supply of stores, and that the certificates of quality and quantity are furnished by the
inspecting and receiving units. Cases of uneconomical purchase of stores and losses attributable
to defective or inferior quality of stores are specifically brought by the audit.
‰ to check the accounts of receipts, issues and balances regarding accuracy, correctness and
reasonableness of balances in inventories with particular reference to the specified norms for level
of consumption of inventory holding. Any excess or idle inventory is specifically mentioned in the
report and periodical verification of inventory is also conducted to ensure their existence. When
priced accounts are maintained, the auditor should see that the prices charged are reasonable and
have been reviewed from time to time. The valuation of the inventories is seen carefully so that
the value accounts tally with the physical accounts and that adjustment of profits or losses due to
revaluation, inventory taking or other causes is carried out.

Notes to Add

Special Features of Audit of Different Types of Entities 701

 AUDIT OF COMMERCIAL ACCOUNTS
Categories

Departmental Enterprises Statutory Bodies, Govt. Co.

 Corporations 
Engaged in commercial / trading  Under the
activities Created by speciic statutes companies
  Act. 2013
Subject to same laws, inancial & other Mostly inanced by Govt. 
regulations as other Govt. Dept agencies  Have their
 In form of loans & Advances own auditor
Audit is undertaken in the same manner  appointed by
as any Dept. of Govt. where commercial Audit depends upon nature C & AG
A/c. are kept & type of statutes

C & AG conducts  Test Audit of + Periodical inancial Audit

+ Performance Audit + Issue direction to Co. Auditor

Public enterprises are required to maintain commercial accounts and are generally classified under
three categories—
(a) Departmental enterprises engaged in commercial and trading operations, which are subject to
the same laws, financial and other regulations as other government departments and agencies;
(b) Statutory bodies, corporations, created by specific statutes mostly financed by government in
the form of loans, grants, etc.; and government companies set up under the Companies Act, 2013.
The audit of :-
‰ Departmental concerns is undertaken in the same manner as any department of government
where commercial accounts are kept.
‰ Statutory bodies or corporations depends on the nature and type of the statute governing the
bodies or corporations. Both financial and accounts audit are conducted by the C&AG, and where
compilation of accounts is vested with the C&AG, functions, norms and standards of works usually
followed by the professional auditors are adopted mutatis mutandis.

702 Auditing & Ethics PW

‰ Government companies is conducted by their own auditors under the statute appointed by C&AG.
In addition, the C&AG conducts a supplementary test audit of the accounts, as well as periodical
financial audit and appraisal of performance. The C&AG also issues direction to the company
auditors for reporting on specific aspects of their audit work. These are reviewed, and condensed
in the audit reports to the government/legislatures. C&AG has adopted the mechanism of an Audit
Board-comprising of representatives of the audit and nominees of government including functional
specialists to process reviews or appraisals on performance.
Role of C&AG is prescribed under sub section (5), (6) and (7) of section 143 of the Companies
Act, 2013.
(1) Power to appoint Government Company Auditor: Section 143(5) of the Act states that, in the
case of a Government company or any other company owned or controlled, directly or indirectly,
by the Central Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, the comptroller and Auditor-General
of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 i.e.
appointment of First Auditor or Subsequent Auditor and direct such auditor the manner in which
the accounts of th e Government company are required to be audited and thereupon the auditor
so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of
India which, among other things, include the directions, if any, issued by the Comptroller and
Auditor-General of India, the action taken thereon and its impact on the accounts and financial
statement of the company.
Itor under sub-section (5) or sub-section (7) of section 139 i.e. appointment of First Auditor or
Subsequent Auditor and direct such auditor the manner in which the accounts of th e Government
company are required to be audited and thereupon the auditor so appointed shall submit a copy
of the audit report to the Comptroller and Auditor-General of India which, among other things,
include the directions, if any, issued by the Comptroller and Auditor-General of India, the action
taken thereon and its impact on the accounts and financial statement of the company.
(2) Power to conduct Supplementary Audit & comment thereupon:- The Comptroller and
Auditor-General of India shall within 60 days from the date of receipt of the audit report have a
right to,
(a) conduct a supplementary audit under section 143(6)(a), of the financial statement of the
company by such person or persons as he may authorize in this behalf; and for the purposes
of such audit, require information or additional information to be furnished to any person
or persons, so authorised, on such matters, by such person or persons, and in such form, as
the Comptroller and Auditor-General of India may direct; and
(b) comment upon or supplement such audit report under section 143(6)(b). Any
comments given by the Comptroller and Auditor-General of India upon, or supplement to,
the audit report shall be sent by the company to every person entitled to copies of audited
financial statements under sub-section of section 136 i.e. every member of the company, to
every trustee for the debenture-holder of any debentures issued by the company, and to all
persons other than such member or trustee, being the person so entitled and also be placed
before the annual general meeting of the company at the same time and in the same manner
as the audit report.

Special Features of Audit of Different Types of Entities 703

(3) Test Audit: Further, without prejudice to the provisions relating to audit and auditor, the
Comptroller and Auditor- General of India may, in case of any company covered under sub-section
(5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be
conducted of the accounts of such company and the provisions of section 19A of the Comptroller
and Auditor- General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the
report of such test audit.
As stated above, in the case of a government company, audit is conducted by professional auditors
appointed on the advice of the C&AG and the later is authorised under section 143 of the Companies
Act, 2013 to conduct supplementary or test audit.
The C&AG shall direct the manner in which the company’s accounts shall be audited by the statutory
auditors and give such auditors instructions in regard to any matter relating to the performance of his
functions as such. The directions under section 143(6) broadly covers the system of book-keeping and
accounts, internal control etc.
The C&AG has power to conduct a supplementary or test audit of the company’s accounts by such
person as he may authorise in this behalf and for the purposes of such audit require information or
additional information to be furnished to any person or persons so authorised on such matters by
such person or persons and in such form as the C&AG may by general or special order, direct.
The statutory auditors shall submit a copy of their audit report to the C&AG who shall have a
right to comment upon or supplement the audit report submitted by the statutory auditors in such
manner as he may think fit. Section 134(3) of the Companies Act, 2013 imposes a duty on the board of
directors of a company to give an explanation or comments on every reservation, or adverse remarks
or disclaimer contained in the auditors’ report and secretarial audit report of the Company Secretary
in practice. In the absence of similar provisions requiring the company to give reply on the reservation
made by the C&AG, the board of directors of such a company is not bound to give information or
explanation in respect of such comments.
The general standards, principles, techniques and procedures for audit adopted by the C&AG are a
mixture of government audit and commercial audit as known and practiced by professional auditors.
The concepts of autonomy and accountability of the institution / bodies / corporations / companies
have influenced the nature and scope of audit in applying the conventional audit from the angle of
economy, efficiency and effectiveness.

Notes to Add

704 Auditing & Ethics PW

 REPORTING PROCEDURES
 Reporting Procedure  As per article 151  C & AG shall report on A/c.

Union  President of India State  Governor

Publish Report in Legislature + Newspaper (Generally) + Create a climate for public Opinion

The effectiveness of an audit depends on reporting results to the proper authority so that
appropriate action may be taken to rectify the irregularities or impropriety where possible or to
prevent re-occurrence. The right as also the obligation to report on the results of audit findings is
inherent to the institution of the Auditor General and is usually safeguarded in the Constitution and
related enactments. Article 151 of the Indian Constitution enjoins that the C&AG shall report on the
accounts of the Union and of each of the States to the President or the Governor concern and the letter
shall cause the report to be laid before the legislatures. The reports should not only be presented to
the legislatures but thereafter also publicised adequately in order to create a proper climate of public
opinion for taking remedial action where necessary, on the findings of the Auditor General. This may
also constitute a more effective safeguard in the future.
In India, the reporting is factual and the conclusions are left to be drawn by the reader. This is
presumably to ensure total objectivity. Nothing debars C&AG from making recommendations in the
audit report but traditionally this has been left to be done by the Public Accounts Committee.
Test Your Understanding
1. It is the duty of Comptroller and Auditor General of India to audit and report on all expenditure
from the Consolidated Fund of India and of each State and of each Union Territory having a
Legislative Assembly and to ascertain whether the moneys shown in the accounts as having
been disbursed were legally available for and applicable to the service or purpose to which they
have been applied or charged and whether the expenditure conforms to the authority which
governs it. Discuss, in above context, what is understood by “Consolidated Fund of India”? What
is its importance?
Ans. Consolidated Fund of India consists of all the revenue received from direct and indirect taxes,
all the loans taken by the Govt. of India and all the amount of repayment of loans received by
the Govt. of India. Its importance lies in the fact that all government expenditure is incurred
from this fund. No moneys out of the Consolidated Fund of India shall be appropriated except
in accordance with law and for the purposes and in the manner provided in the Constitution.

Notes to Add

Special Features of Audit of Different Types of Entities 705

 AUDIT OF LOCAL BODIES
Background
Deinition  Municipality  Local self Govt.  Urban areas
Municipal Authorities (MA)

Municipal Municipal Notiied Area Town Area Cantonment

Corporations Councils Committee committee committee

Tax powers
 Wider range  Optional in nature + subject
Limited to few Regulatory to procedure  requiring SG Sanctions
items

Functions of MA Maintenance

Development

Expenditure incurred by MA

General Public Public Education Public Works Others

Administrative Health Safety 
& Revenue Such as Interest
Collection Payment
Revenue
Property Tax, Octroi, Profession Tax, Non-Mechanised Vehicle Tax,
Taxes on Advertising, Taxes on animals & Boats, Tolls, Show-Tax, etc.
Types of Grants

General Purpose Grant Statutory & Compensatory Grant

Speciic
  On A/c. of loss of revenue on
purpose
Bridges gap b/w  Needs  taking over a tax by SG
Grant
Available Resources

(1) A Municipality can be defined as a unit of local self-government in an urban area. By the term
‘local self-government’ is ordinarily understood the administration of a locality – a village, a
town, a city or any other area smaller than a state – by a body representing the local inhabitants,
possessing fairly large autonomy, raising at least a part of its revenue through local taxation and
spending its income on services which are regarded as local and, therefore, distinct from state
and central services.

The discussion in following paragraphs is based on an article “Audit of Municipal Administration”
by R. Chandra Sekharan.

706 Auditing & Ethics PW

 By 1947, the year of independence of India, most of the urban and semi-urban areas had been
constituted into municipalities of one kind or another. Among them were the premier corporations
of Mumbai, Chennai and Kolkata each with a special kind of constitutional structure, better
financial resources and subject to less state control than other municipal bodies. The service
which the local bodies had to render was restricted to education, public health, sanitation,
medical relief, roads and a few public works. This was so because these bodies were considered
to be inefficient and they lacked adequate financial resources. These bodies derived their
revenues from a number of sources – taxes on property, taxes on trade, taxes on persons; fees and
licences, non- tax resources such as rent of land, houses, income from commercial undertakings;
government grants, etc.
(2) Municipal government in India covers five distinct types of urban local authorities-
 the municipal corporations,

 the municipal councils,

 the notified area committees,

 the town area committees and

 the cantonment committees.

(3) Municipal authorities are endowed with specific local functions covering
(a) regulatory,
(b) maintenance and
(c) development activities.
(4) Expenditure incurred by the municipalities and corporations can be broadly classified
under the following heads:
(a) general administration and revenue collection,
(b) public health,
(c) public safety,
(d) education,
(e) public works, and
(f) others such as interest payments, etc.
(5) Property taxes and octroi are the major sources of revenue of the municipal authorities;
other municipal taxes are profession tax, non-mechanised vehicles tax, taxes on advertisements,
taxes on animals and boats, tolls, show-tax, etc. The taxation powers of the corporations are
confined to a few items and are of a generally compulsive nature; on the other hand, the
tax powers of other types of urban local authorities cover a wider range, optional in nature
and subject to a procedure for their imposition requiring the final sanction of the state
governments.
(6) Local bodies may receive different types of grants from the state administration as well.
Broadly, the revenue grants are of three categories:
(a) General purpose grants: These are primarily intended to substantially bridge the gap
between the needs and resources of the local bodies.
(b) Specific purpose grants: These grants which are tied to the provision of certain services or
performance of certain tasks.

Special Features of Audit of Different Types of Entities 707

 (c) Statutory and compensatory grants: These grants, under various enactments, are given to
local bodies as compensation on account of loss of any revenue on taking over a tax by state
government from local government.

QUESTIONS

Theory Questions
8. CA Sevak is appointed as an auditor of a Municipal Corporation of a big smart city. He wants to
verify various expenditures of the Municipality.Define the term “Municipality” and state what
are the heads under which expenditures incurred by the Municipalities and Corporations can be
broadly classified?
Ans. Definition of Municipality & Expenditure incurred by it: Definition: A Municipality can be defined
as a unit of local self-government in an urban area. By the term ‘local self- government’ is ordinarily
understood the administration of a locality – a village, a town, a city or any other area smaller than
a state – by a body representing the local inhabitants, possessing fairly large autonomy, raising at
least a part of its revenue through local taxation and spending its income on services which are
regarded as local and, therefore, distinct from state and central services Expenditure incurred
by the municipalities and corporations can be broadly classified under the following heads:
(a) general administration and revenue collection,
(b) public health,
(c) public safety,
(d) education,
(e) public works, and
(f) others such as interest payments, etc.
Notes to Add

708 Auditing & Ethics PW

 FINANCIAL ADMINISTRATION

items

SG
(2) Expenditure Control  Clear demarcation
CG

Legislature Executive

Integration  Municipal Council


External Audit by SG because

Diff. to function Cannot accommodate

 
As inquisitorial body Independent Finance Oficer

Accounting
(3) Accounting System®Municipal Formats
Budget ¯
CRITICISED

Neither simple
Nor Comprehensible

Sometimes Provides

Inadequate Surfeit
Info

It would be imminent on the part of the auditor to understand financial administration of local bodies
before embarking upon the audit. Some of the aspects are as under:

Special Features of Audit of Different Types of Entities 709

(a) Budgetary Procedure: This is geared to subserve the twin considerations of financial
accountability and control of expenditure. The main objective is to ensure that funds are
raised and moneys are spent by the executive departments in accordance with the rules and
regulations and within the limits of sanction and authorisation by the legislature or council.
Budget preparation is usually the occasion for determining the levels of taxation and rates and
the ceilings on expenditure.
Municipal budget formats and heads of accounts vary from state to state. There are variations
between the corporation and municipalities. One important feature of the municipal budgets
is that there is no strict separation between revenue and capital items; usually there is a ‘head’
called extraordinary items which cover most of the capital transactions. There are, however, a
number of special funds (e.g. roads) or in some cases separate budgets for specific municipal
functions (e.g. education) or enterprise activities (e.g., water supply and sanitation, transport,
electricity, etc.)
(b) Expenditure Control: The system of financial control existing in the state and central government
level is conditioned by the fact that there is a clear demarcation between the legislature and
executive. The integration of legislation and executive powers in the municipal council makes it
difficult for its executive to function as its inquisitorial body as well.
Moreover the separation of executive powers and functions in municipal government cannot
accommodate the existence of an independent finance officer responsible to the municipal
council or its executive committee. This leaves the system of external audit by state government
as the only instrument of controlling municipal expenditure.
(c) Accounting System: Municipal accounting and budget format have been criticised as neither simple
nor comprehensible, sometimes providing inadequate information and at other times a surfeit of
information. Both these situations are not conducive to a proper system of managementinformation.

QUESTIONS

Correct/Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:
9. Expenditure incurred by the municipalities and corporations can be broadly classified under the
following heads:
(a) general administration and revenue collection,
(b) public health,
(c) public safety,
(d) education,
(e) public works, and
(f) others such as interest payments, etc.
Ans. Incorrect: Expenditure incurred by the municipalities and corporations can be broadly classified
under the following heads: (a) general administration and revenue collection, (b) public health,
(c) public safety, (d) education, (e) public works, and (f) others such as interest payments, etc.
10. The external control of municipal expenditure is exercised by the Central Government through
the appointment of auditors to examine municipal accounts.
Ans. Incorrect: The external control of municipal expenditure is exercised by the Central Government
through the appointment of auditors to examine municipal accounts.
710 Auditing & Ethics PW
 OBJECTIVE OF AUDIT OF LOCAL BODIES
 Objective of Audit

Reports on Detection & Prevention of F/E & Misuse of resources

The fairness + Strength + Weakness Adherence to Legal / Whether Value is

Content + of system of inancial Administrative being fully received
Presentation of F.S. control Requirements on money spent

The external control of municipal expenditure is exercised by the state governments through the
appointment of auditors to examine municipal accounts. However, the municipal corporations of
Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external audit.
The important objectives of audit are:
(a) reporting on the fairness of the content and presentation of financial statements;
(b) reporting upon the strengths and weaknesses of systems of financial control;
(c) reporting on the adherence to legal and/or administrative requirements;
(d) reporting upon whether value is being fully received on money spent; and
(e) detection and prevention of error, fraud and misuse of resources.
Audit is another method of financial control on local governments. This provision is coupled with
the privilege of ultra vires. An action of the local authority if it is beyond legal authority can result in
‘surcharge’ by audit. This procedure is a legacy of colonial days and even in England it is being resorted
to less and less. This may well be because of the increasing competence of the local government
authorities.
In addition to the external audit, it is also opined by the learned author that there should be
a system of internal audit in all municipal institutions. Internal audit should be provided by the
institutions’ own staff. It should be performed on a continuous basis according to a well-defined
programme. The external auditor should be able to rely upon the work of the internal audit as
forming part of a complete system of internal financial control. Where there is no internal audit, as
may happen in the case of small or poorly staffed municipalities, the external auditor himself has to
do detailed checking.
As described under government audit above, increasing attention is being given, to what is
described as ‘value for money’ audit. This kind of audit focuses upon assessment of whether urban
institutions are fulfilling their responsibilities with efficiency, economy and effectiveness (sometimes
known as ‘the three Es’).

QUESTIONS
Theory Questions
11. State the important objectives of Local bodies Audit.
Ans. Objective of Audit of Local Bodies: The important objectives of audit of local bodies are:
(a) reporting on the fairness of the content and presentation of financial statements;
(b) reporting upon the strengths and weaknesses of systems of financial control;
Special Features of Audit of Different Types of Entities 711
 (c) reporting on the adherence to legal and/or administrative requirements;
(d) reporting upon whether value is being fully received on money spent; and
(e) detection and prevention of error, fraud and misuse of resources.
Audit Programme for local Bodies
(1) Smaller Municipal Authority  Local fund Audit wing  of SG  is generally incharge
of Audit of Municipal A/c.
Bigger Municipal Authority  have power to appoint their own auditor

(2) Auditor to report on

Fairness + Strength + Expenditure Sanctions Provision of Different schemes +

Content + Weakness of incurred accorded by funds + Programmes +
Presentation System of Financial conforms competent Expenditure is Projects
of F.S Control authority incurred from 
it + authorized Running
by competent economically
Relevant Rules & authority 
Provisions of Regulations Yielding results
Laws framed

(i) APPOINTMENT: The Local Fund Audit Wing of the State Govt. is generally in-charge of the audit
of municipal accounts. Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc. have
power to appoint their own auditors for regular external audit. So the auditor should ensure his
appointment.
(ii) AUDITOR’S CONCERNS: The auditor while auditing the local bodies should report on the
 fairness of the contents and presentation of financial statements,

 the strengths and weaknesses of system of financial control,

 the adherence to legal and/or administrative requirements;

 whether value is being fully received on money spent.

 His objective should be to detect errors and fraud and misuse of resources.

(iii) RULES & REGULATIONS: The auditor should ensure that the expenditure incurred conforms to
the relevant provisions of the law and is in accordance with the financial rules and regulations
framed by the competent authority.
(iv) AUTHORISATIONS: He should ensure that all types of sanctions, either special or general,
accorded by the competent authority.
(v) PROVISIONING: He should ensure that there is a provision of funds and the expenditure is
incurred from the provision and the same has been authorized by the competent authority.
(vi) PERFORMANCE: The auditor should check that the different schemes, programmes and projects,
where large financial expenditure has been incurred, are running economically and getting the
expected results.

712 Auditing & Ethics PW

 QUESTIONS

Theory Questions
12. Local Fund Audit Wing of a State of a State Government has appointed you to audit the accounts
of one of the Local body governed by it. As an auditor, what will be your reporting areas?
Ans. Reporting areas in audit of Local Fund:
The external control of municipal expenditure is exercised by the state governments through the
appointment of auditors to examine municipal accounts. However, the municipal corporations of
Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external
audit.
(a) Reporting on the fairness of the content and presentation of financial statements;
(b) Reporting upon the strengths and weaknesses of systems of financial control;
(c) Reporting on the adherence to legal and/or administrative requirements;
(d) Reporting upon whether value is being fully received on money spent; and
(e) Detection and prevention of error, fraud and misuse of resources.
Notes to Add

Special Features of Audit of Different Types of Entities 713

 AUDIT OF NON-GOVERNMENTAL ORGANISATION (NGO’S)
Background

(1) NGOs can be defined as non-profit making organisations which raise funds from members,
donors or contributors apart from receiving donation of time, energy and skills for achieving
their social objectives like imparting education, providing medical facilities, economic assistance
to poor, managing disasters and emergent situations.

(2) Therefore, this definition of NGO would include religious organisations, voluntary health and
welfare agencies, charitable organisations, hospitals, old age homes, research foundations etc.
The scope of services rendered by NGOs is extremely wide and as such cannot be covered in a
small definition. Some examples of NGOs operating in India include Child Relief and You (CRY),
NORAD, UNICEF, Godhuli, Vidya, Concern India Foundation., etc.

(3) Non-Governmental Organisations are generally incorporated as societies under the Societies
Registration Act, 1860 or as a trust under the India Trust Act, 1882, or under any other law

714 Auditing & Ethics PW

 corresponding to these Laws enforced in any part of India. NGOs can also be incorporated as a
company under section 8 of the Companies Act, 2013. None of the above mentioned Act warrant a
mandatory registration under them for an NGO. But if an NGO is created as a trust and trust relates
to immovable property worth more than one hundred rupees, the provision of Section 17(1)}
of the Registration Act, 1908 read with Section 123 of the Transfer of Property Act, 1882 must
be complied with and the registration of trust becomes mandatory. In some states, such as the
states of Maharashtra and Gujarat, where Public Trusts Acts have been passed, such as the
Bombay Public Trusts Act 1950, all charitable trusts have to be registered under these specific
Public Trusts Acts. Registration under the Income Tax Act, 1961 and the Foreign Contribution
(Regulation) Act, 2010 would also be invoked in many cases.
NGOs registered under the Companies Act, 2013 must maintain their books of account under
the accrual basis as required by the provisions of section 128 of the said Act. If the accounts
are not maintained on accrual basis, it would amount to non-compliance of the provision of the
Companies Act, 2013. The NGOs which are not registered under the Companies Act, 2013 are
allowed to maintain accounts either an accrual basis or cash basis.

Notes to Add

Special Features of Audit of Different Types of Entities 715

 SOURCES AND APPLICATIONS OF FUNDS
Sources  of Funds  Application
 
(1) Promoter’s Contribution (1) Est. Cost
 (2) Ofice & Administration
Either (3) Maintenance
(4) Prog.
Corpus Contribution Revolving Fund (5) Project
  (6) Charity, etc.
Capital Temp. Loan
+
Voluntary  With Speciic direction

(2) Contribution in kind

(1) The main sources of funds include grants and donations, fund raising programmes, advertisements,
fees from the members, technical assistance fees / fee for services rendered, subscriptions, gifts,
sale of produce or publications, etc.
(a) Donations and grants received in the nature of promoter’s contribution are in the nature of
capital receipts and shown as liabilities in the Balance Sheet of NGO. These may either be
in the form of corpus contribution or a contribution towards revolving fund. A contribution
made towards the capital or the corpus of an NGO is known as corpus contribution. The
donors are generally required to specify whether the donation/grant given by him shall
form part of the corpus of the NGO. Such contributions are generally given with reference to
the total funds required by an NGO.
(b) Section 11(1)(d) of the Income Tax Act 1961 also states that income in the form of voluntary
contributions made with a specific direction that they shall form part of the corpus of the
trust or institution shall not be included in the computation of total income.
(c) The objective of a contribution or grant towards a Revolving Fund is to rotate the amount
by giving temporary loans from the fund to other NGO or beneficiaries for their projects and
then recover the loan so as to give temporary loans again and so on. However, any interest
earned from the beneficiary on such temporary loans from the revolving fund could be either
added back to the fund or credited to the Income and Expenditure Account depending on
restrictions laid down by the authority providing the contribution (for the revolving fund)
or by the rules and regulations laid down by the concerned NGO in this regard.
(d) Donations and grants received for acquisition of specific fixed assets are those grants whose
primary condition is that an NGO accepting them should purchase, construct or otherwise
acquire the assets for which the grant is given.
(e) Many a times NGOs receive contributions in kind. These contributions include assets such as
land, buildings, vehicles, office equipment, etc. and articles related to programmes / projects
such as food, books, building materials, clothes, beds, and raw material for training purposes,
e.g., Wool, reeds, cloth, etc.
(2) The areas of application of funds for an NGO include Establishment Costs, Office and Administrative
Expenses, Maintenance Expenses, Programme / Project Expenses, Charity, Donations and
Contributions given, etc.
716 Auditing & Ethics PW
 QUESTIONS

Correct/Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:
13. NGOs may be defined as non-profit making organisations which raise funds from members, donors
or contributors apart from receiving donation of time, energy and skills for achieving their social
objectives.
Ans. Incorrect: NGOs may be defined as non-profit making organisations which raise funds from
members, donors or contributors apart from receiving donation of time, energy and skills for
achieving their social objectives.
Theory Questions
14. An NGO operating in Delhi had collected large scale donations for Tsunami victims. The donations
so collected were sent to different NGOs operating in Tamil Nadu for relief operations. This NGO
operating in Delhi has appointed you to audit its accounts for the year in which it collected and
remitted donations for Tsunami victims. Draft audit programme for audit of receipts of donations
and remittance of the collected amount to different NGOs. Mention six points each, peculiar to the
situation, which you will like to incorporate in your audit programme for audit of said receipts
and remittances of donations. (ICAI Study Material)
Ans. (d) Receipt of Donations:
(i) Internal Control System: Existence of internal control system particularly with reference
to division of responsibilities in respect of authorised collection of donations, custody of
receipt books and safe custody of money.
(ii) Custody of Receipt Books: Existence of system regarding issue of receipt books, whether
unused receipt books are returned and the same are verified physically including checking
of number of receipt books and sequence of numbering therein.
(iii) Receipt of Cheques: Receipt Book should have carbon copy for duplicate receipt and signed
by a responsible official.
All details relating to date of cheque, bank’s name, date, amount, etc. should be clearly stated.
(iv) Bank Reconciliation: Reconciliation of bank statements with reference to all cash deposits
not only with reference to date and amount but also with reference to receipt book.
(v) Cash Receipts: Register of cash donations to be vouched more extensively. If addresses are
available of donors who had given cash, the same may be cross-checked by asking entity to
post thank you letters mentioning amount, date and receipt number.
(vi) Foreign Contributions, if any, to receive special attention to compliance with applicable laws
and regulations.
Remittance of Donations to Different NGOs:
 Mode of Sending Remittance: All remittances are through account payee cheques. Remit-
tances through Demand Draft would also need to be scrutinised thoroughly with reference
to recipient.
 Confirming Receipt of Remittance: All remittances are supported by receipts and ac-
knowledgements.
 Identity: Recipient NGO is a genuine entity. Verify address, 80G Registration Number, etc.
Special Features of Audit of Different Types of Entities 717
  Direct Confirmation Procedure: Send confirmation letters to entities to whom donations
have been paid.
 Donation Utilisation: Utilisation of donations for providing relief to Tsunami victims and
not for any other purpose.
 System of NGOs’ Selection: System for selecting NGO to whom donations have been sent.
Notes to Add

718 Auditing & Ethics PW

 PROVISIONS RELATING TO AUDIT
Auditor of NGO ® Registered under

The Societies Registration Act, 1860 The Companies Act, 2013

OR ¯
The Indian Trust Act, 1882 Sec.8
¯ ¯
Appointed Mgt. of Society / Trust Appointed by Members of Co.

Compulsory Audit as per :-

• The Companies Act, 2013
• The Foreign Contribution (Regulation) Act, 201 0 ® Prescribed format
¯
Ministry of Home Affairs ®30 May
• The Income Tax Act, 1961

NGO Private Development

Assistance (PDA)

The auditors of an NGO registered under the Societies Registration Act, 1860 (or under any law
corresponding to this Act, in force in any part of India) or the Indian Trusts Act, 1882 are normally
appointed by the Management of the Society or Trust. The auditors of NGO registered under section
8 of the Companies Act, 2013 are appointed by the members of the company. Some of the statues
such as the Companies Act, 2013, Foreign Contribution (Regulation) Act, 2010, Income Tax Act, 1961
required that the accounts of the NGO be audited and submitted to the prescribed authorities and
failure to do so could lead to forfeiture of certain exemptions and benefits. In the case of NGO/PDA’s
different statutes have specified certain audit reports. The Foreign Contribution (Regulation) Act,
2010 has prescribed the format and requires that the same be furnished to the Ministry of Home
Affairs within 60 days from the close of the financial year i.e. by May 30 each year.

Special Features of Audit of Different Types of Entities 719

 While planning the audit, the auditor may concentrate on the following:
(i) Knowledge of the NGO’s work, its mission and vision, areas of operations and environment
in which it operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent amendments,
circulars, judicial decisions viz. Foreign Contribution (Regulation) Act 2010, Societies
Registration Act, 1860, Income Tax Act 1961 etc. and the Rules related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles
of Association, Rules and Regulations.
(iv) Reviewing the NGO’s Organisation chart, then Financial and Administrative Manuals, Project
and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies
if any.
(v) Examination of minutes of the Board/Managing Committee/Governing Body/ Management
and Committees thereof to ascertain the impact of any decisions on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal checks existing for
the NGO and verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year’s Audit Report.
The audit programme should include in a sequential order all assets, liabilities, income and
expenditure ensuring that no material item is omitted.
(i) Corpus Fund: The contributions / grants received towards corpus be vouched with special
reference to the letters from the donor(s). The interest income be checked with Investment
Register and Physical Investments in hand.
(ii) Reserves: Vouch transfers from projects / programmes with donors letters and board
resolutions of NGO. Also check transfer of gross value of asset sold from capital reserve to
general reserve and adjustments during the year.
(iii) Ear-marked Funds: (Earmarking refers to a fund allocation practice in which an entity, a
government, or an individual sets aside a determined amount of funds to use for a specific
goal). Check requirements of donors institutions, board resolution of NGO, rules and
regulations of the schemes of the ear- marked funds.
(iv) Project / Agency Balances: Vouch disbursements and expenditure as per agreements with
donors for each of the balances.
(v) Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
(vi) Fixed Assets: Vouch all acquisitions / sale or disposal of assets including depreciation and
the authorisations for the same. Also check donor’s letters/ agreements for the grant. In the
case of immovable property check title, etc.
(vii) Investments: Check Investment Register and the investments physically ensuring that
investments are in the name of the NGO. Verify further investments and dis- investments for
approval by the appropriate authority and reference in the bank accounts for the principal
amount and interest.
(viii) Cash in Hand: Physically verify the cash in hand and imprest balances, at the close of the
year and whether it tallies with the books of account.

720 Auditing & Ethics PW

 (ix) Bank Balance: Check the bank reconciliation statements and ascertain details for old
outstanding and unadjusted amounts.
(x) Inventory: Verify inventory in hand and obtain certificate from the management for the
quantities and valuation of the same.
(xi) Programme and Project Expenses: Verify agreement with donor / contributor(s)
supporting the particular programme or project to ascertain the conditions with respect to
undertaking the programme / project and accordingly, in the case of programmes / projects
involving contracts, ensure that income tax is deducted, deposited and returns filed and
verify the terms of the contract.
(xii) Establishment Expenses: Verify that provident fund, life insurance premium, employees
state insurance and their administrative charges are deducted, contributed & deposited
within the prescribed time. Also check other office and administrative expenses such as
postage, stationery, travelling, etc.
The receipt of income of NGO may be checked on the following lines:
(i) Contributions and Grants for projects and programmes: Check agreements with donors
and grants letters to ensure that funds received have been accounted for. Check that all
foreign contribution receipts are deposited in the foreign contribution bank account as
notified under the Foreign Contribution (Regulation) Act, 2010.
(ii) Receipts from fund raising programmes: Verify in detail the internal control system
and ascertain who are the persons responsible for collection of funds and mode of receipt.
Ensure that collections are counted and deposited in the bank daily.
(iii) Membership Fees: Check fees received with Membership Register. Ensure proper
classification is made between entrance and annual fees and life membership fees. Reconcile
fees received with fees to be received during the year.
(iv) Subscriptions: Check with subscription register and receipts issued. Reconcile subscription
received with printing and dispatch of corresponding magazine / circulars / periodicals.
Check the receipts with subscription rate schedule.
(v) Interest and Dividends: Check the interest and dividends received and receivable with
investments held during the year.

QUESTIONS

Theory Questions
15. You have been appointed as an auditor of an NGO, briefly state the points on which you would
concentrate while planning the audit of such an organisation?
Ans. (a) While planning the audit of an NGO, the auditor may concentrate on the following:
(i) Knowledge of the NGO’s work, its mission and vision, areas of operations and environment
in which it operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent amendments,
circulars, judicial decisions related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles
of Association, Rules and Regulations.

Special Features of Audit of Different Types of Entities 721

 (iv) Reviewing the NGO’s Organisation chart, then Financial and Administrative Manuals, Project
and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies
if any.
(v) Examination of minutes of the Board/Managing Committee/Governing Body/Management
and Committees thereof to ascertain the impact of any decisions on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal checks existing for
the NGO and verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year’s Audit Report.
Notes to Add

722 Auditing & Ethics PW

 AUDIT OF SOLE TRADER
Audit of Sole Trader
(i) Under No Legal obligation to appoint auditor
(ii) Audit due to Regulatory Requirements → Like Bank Loan, Stock Audit etc.
(iii) Proprietor can determine → Scope → Conditions → of audit
(iv) Auditor to communicate with previous auditor
(v) Contract of Appointment → Desirable → To prevent misunderstanding
A sole trader is under no legal obligation to have his accounts audited. However, many such
individuals get their financial statement audited due to regulatory requirements, such as inventory
brokers or on a specific instructions of the bank for approval of loans, etc.

Appointment of Auditor: Auditors of sole- proprietary concern shall be appointed by the sole
proprietor himself. In case of change of auditor, it would be duty of incoming auditor to communicate
with the previous auditor. As such, sole proprietor can determine the scope of the audit as well as the
conditions under which it will be carried out.
Example: He can stipulate that only a partial audit shall be carried out, that certain parts of the
accounts shall not be checked or that the auditor also shall prepare the final statements of account. He
can also decide whether the audit shall be carried out continuously or at the end of the year.
On these considerations, it is desirable that the contract of appointment of auditor in such a case
should be in writing; also that it should clearly define the scope of the work which the auditor is
expected to carry out. This helps to prevent misunderstanding. If the appointment of the auditor is
not in writing, the auditor should write to his client explaining the scope of his duties.
While doing so, he should state the limitations, if any, placed upon his work to obtain the client’s
confirmation.
The advantages and audit procedure discussed in following paragraphs of audit in case of
partnership firm would be similar in case of proprietorship.

Notes to Add

Special Features of Audit of Different Types of Entities 723

 AUDIT OF FIRM

Advantages of an Audit irm

Provides Effective Safeguard


Against
Convenient Reliable 
Under advantage being taken

Means of settling A/c’s By working partner

Dispute Admission Bank Death /

Loan Retirement

724 Auditing & Ethics PW

 Appointment of Auditors: The auditor to a firm is usually appointed by the partners either on
the basis of a decision taken by them or to comply with a condition in the partnership agreement.
His remuneration is also fixed by the partners. It is important that the letter of appointment should
clearly state the nature and scope of audit which is to be carried out and particulars of limitations, if
any, under which he would have to function. In case of change of auditor, it would be duty of incoming
auditor to communicate with the previous auditor.
The auditor may, particularly, ensure application of accounting standards prescribed by the
Institute of Chartered Accountants of India. In case the firm is required to get its accounts audited
under the requirements of any statute, the auditor will have to qualify the report in case of non-
compliance with the accounting standards. Alternatively, only disclosure of non- compliance with the
accounting standards, would be sufficient without making it a subject matter of qualification.
Matters to be considered before starting audit: Also, before starting the audit, he should examine
the partnership agreement and note the provisions therein as regards the following matters:
(1) The name and style under which the business shall be conducted.
(2) The duration of the partnership, if any, that has been agreed upon.
(3) The amount of capital that shall be contributed by each partner—whether it will be fixed or could
be varied from year to year.
(4) The period at the end of which the accounts of the partnership will be closed periodically and
the proportions in which the profit shall be divided among the partners or losses shall have to
be contributed by them; whether the losses shall be borne by the partners or whether any of the
partners will not be required to do so.
(5) The provisions as regards maintenance of books of account and the matters which must be taken
into account for determining the profits of the firm available for division among the partners e.g.,
creation of reserves, provision for depreciation, etc. also the period within which accounts can
be reopened for correcting a manifest error.
(6) Borrowing capacity of the partnership (when it is not implied as in the case of non-trading firms).
(7) The rate at which interest will be allowed on the capitals and loans provided by partners and the
rate at which it will be charged on their drawings and current accounts.
(8) Whether any salaries are payable to the partners or withdrawals are permitted against shares of
profits and, if so, to what extent?
(9) Duties of the partners as regards the management of business of the firm; also, the partners who
shall act as managing partners.
(10) Who shall operate the bank account of the firm? How will the surplus funds of the partnership be
invested?
(11) Limitations and restrictions that have been agreed upon, the rights and powers of partners and
on their implied authority to pledge the firm’s credit or to render it liable.
Advantages of Audit of a Partnership Firm - On broad considerations, the advantages of audit of
accounts of a partnership could be stated as follows:
(1) Disputes:- Audited accounts provide a convenient and reliable means of settling accounts
between the partners and, thereby, the possibility of occurrence of a dispute among them is
mitigated. On this consideration, it is usually provided in and accepted by the partners, shall

Special Features of Audit of Different Types of Entities 725

 be binding upon them, unless some manifest error is brought to light within a specified period
subsequent to the accounts having been signed.
(2) Dissolution:- On the retirement or death of a partner, audited accounts, which have been
accepted by the partners, constitute a reliable evidence for computing the amounts due to the
retiring partner or to the representative of the deceased partner in respect of his share of capital,
profits and goodwill.
(3) Reliable:- Audited statement of accounts are relied upon by the banks when advancing loans, as
well as by prospective purchasers of the business, as evidence of the profitability of the concern
and its financial position.
(4) Admission:- Audited statements of account can be helpful in the negotiations to admit a person
as a partner, especially when they are available for a number of past years.
(5) Control:- An audit is an effective safeguard against any undue advantage being taken by a working
partner or partners especially in the case of those partners who are not actively associated with
the working of the firm.
Matters which should be specially considered in the audit of accounts of a partnership:
(i) Letter of Appointment:- Confirming that the letter of appointment, signed by a partner, duly
authorised, clearly states the nature and scope of audit contemplated by the partners, specially
the limitation, if any, under which the auditor shall have to function.
(ii) Partnership Documents:- Studying the minute book, if any, maintained to record the policy
decision taken by partners specially the minutes relating to authorisation of extraordinary and
capital expenditure, raising of loans; purchase of assets, extraordinary contracts entered into and
other such matters as are not of a routine nature.
(iii) Objects of Partnership:- Verifying that the business in which the partnership is engaged is
authorised by the partnership agreement; or by any extension or modification thereof agreed to
subsequently.
(iv) Books of Account:- Examining whether books of account appear to be reasonable and are
considered adequate in relation to the nature of the business of the partnership.
(v) Mutual Interest:- Verifying generally that the interest of no partner has suffered prejudicially by
an activity engaged in by the partnership which, it was not authorised to do under the partnership
deed or by any violation of a provision in the partnership agreements.
(vi) Provision for Taxes:- Confirming that a provision for the firm’s tax payable by the partnership has
been made in the accounts before arriving at the amount of profit divisible among the partners.
(vii)Division of Profits:- Verifying that the profits and losses have been divided among the partners
in their agreed profit-sharing ratio.
From the foregoing steps involved in the audit of a partnership it would be observed that like the
audit of every other commercial undertaking, it culminates in the verification of the Balance Sheet and
the Statement of Profit and Loss to ensure that these exhibit a true and fair state of affairs of the firm.
The object of examining the partnership agreement, which is an important feature of such an
audit, is that the auditor may be able to report to the partners if the interest of any partner has been
prejudicially affected, on account of the firm having engaged itself in an activity which it was not
authorised to do or violation of any provision of the partnership agreement.

726 Auditing & Ethics PW

Test Your Understanding
2. CA Akash Virmani is auditor of a partnership firm consisting of 4 partners. During the year, one
of the partners has retired and another partner has joined the next day. Discuss, any one point,
which shall be considered by you to ensure that financial statements of firm are not misstated
due to change of constitution of firm.
Ans. The auditor shall consider provisions of retirement deed/partnership deed for date of retiring
and joining of partners. It should be ensured that profits are appropriately distributed up to date
of retirement. Further, profits after retirement should have been distributed among partners as
per terms of new partnership deed.

Notes to Add

Special Features of Audit of Different Types of Entities 727

 BASICS OF LIMITED LIABILITY PARTNERSHIPS (LLP) AUDIT

Returns to be maintained and filed by an LLP :-

Prepare → Statement of Accounts & Solvency (SAS)
↓
In prescribed form → Form 8
↓
728 Auditing & Ethics PW
File with RoC every year → 30 days from the end of 6 months of F.Y. to which it relates
LLP to file → Annual Return → In Form 11 → with RoC
↓
Public Document
Within 60 days of close of F.Y.
Appointment of Auditor  By designated partner

First Auditor Subsequent Auditor Casual Vacancy

  
Any time before the At least 30 days prior to Caused by
end of First F.Y. end of each F.Y. (Other
than First F.Y)
Auditor Firm
 If designated partner fails  Other partners may appoint

Auditor’s Duty Regarding Audit of LLP

Engagement Letter Minutes Book LLP Agreement

Reporting
  Nature Of Business
Writing Refer Amount Of Capital
 Interest Records Obtained Restriction?
Resolutions Drawings Info.
PSR Correct Reliable Explanation

LLP is governed by Limited Liability Partnership Act, 2008. It is a form of business organisation
which enshrines in itself the advantages of both the Company and Partnership forms of Organisation.
Minimum of 2 Partners can form an LLP and atleast two partners would be Designated Partners who
would be required to take DPIN (Designated Partner Identification Number) The Partners in an LLP
and their rights and duties are governed by way of an agreement between them.
It defines a Small Limited Liability Partnership to denote any LLP:
(a) the Contribution of which, does not exceed twenty-five lakh rupees (INR 25,00,000) or such
higher amount, not exceeding five crore rupees, as may be prescribed; and
(b) the Turnover of which, as per the Statement of Accounts and Solvency for the immediately
preceding financial year, does not exceed forty lakh rupees (INR 40,00,000) or such higher
amount, not exceeding fifty crore rupees, as may be prescribed;
Whether LLP is required to maintain Books of Accounts:- An LLP shall be under obligation to
maintain annual accounts reflecting true and fair view of its state of affairs. LLP’s are required to
maintain books of accounts which shall contain-
(1) Particulars of all sums of money received and expended by the LLP and the matters in respect of
which the receipt and expenditure takes place,
(2) A record of the assets and liabilities of the LLP,
(3) Statements of costs of goods purchased, inventories, work-in-progress,
(4) Finished goods and costs of goods sold,
Special Features of Audit of Different Types of Entities 729
 (5) Any other particulars which the partners may decide.
Audit of the Accounts of an LLP:- The accounts of every LLP shall be audited in accordance
with Rule 24 of LLP, Rules 2009. Such rules, inter-alia, provides that any LLP, whose turnover does
not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty
five lakh rupees, is not required to get its accounts audited. However, if the partners of such limited
liability partnership decide to get the accounts of such LLP audited, the accounts shall be audited only
in accordance with such rule.
Advantages / Purpose / Need of Audit
(1) Detection of Errors:- Auditing the accounts of a LLP helps in detecting errors & frauds &
verification of financial statements.
(2) Disputes:- Disputes, if any between any partners in the matter of accounts can be settled with
the help of audited accounts.
(3) Reliability:- Banks & financial institutions lend money to the firms only on the basis of audited
accounts.
(4) Better Compliance and Management:- Periodical visits & suggestions by the auditor will be
helpful in improving the management of the LLP.
(5) Reconstitution:- For settling accounts between partners at the time of admission, death,
retirement, insolvency, insanity, etc. audited accounts are accepted by those concerned who have
dealings with the LLP.
Returns to be maintained and filed by an LLP :-
‰ Every LLP would be required to file annual return in Form 11 with ROC within 60 days of closer of
financial year. The annual return will be available for public inspection on payment of prescribed
fees to Registrar.
‰ Every LLP is also required to submit Statement of Account and Solvency in Form 8 which shall
be filed within a period of thirty days from the end of six months the financial year to which the
Statement of Account and Solvency relates.
Appointment of Auditor: The auditor may be appointed by the designated partners of the LLP –
(1) At any time for the first financial year but before the end of first financial year,
(2) At least thirty days prior to the end of each financial year (other than the first financial year),
(3) To fill the casual vacancy in the office of auditor,
(4) To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed to appoint them.
Auditor’s Duty Regarding Audit of LLP
(1) Engagement Letter:- The auditor should get definite instructions in writing as to the work to be
performed by him.
(2) Minutes Book :- If partners maintain minute book he shall refer it for any resolution passed
regarding the accounts
(3) LLP Agreement:- The auditor should read the LLP agreement & note the following provisions
(a) Nature of the business of the LLP.
(b) Amount of capital contributed by each partner.
(c) Interest – in respect of additional capital contributed.
(d) Duration of partnership.
730 Auditing & Ethics PW
 (e) Drawings allowed to the partners.
(f)Salaries, commission etc. payable to partners.
(g) Borrowing powers of the LLP.
(h) Rights & duties of partners.
(i)Method of settlement of accounts between partners at the time of admission, retirement,
admission etc.
(j) Any loans advanced by the partners.
(k) Profit sharing ratio
(4) Reporting :- The auditor should mention
(a) Whether the records of the firm appear to be correct & reliable.
(b) Whether he was able to obtain all information & explanation necessary for his work.
(c) Whether any restriction was imposed upon him.

QUESTIONS

Correct/Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:

16. The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules 2009.
Ans. Incorrect: Rule 24 of LLP Rules 2009 provides that any LLP, whose turnover does not exceed,
in any financial year, forty lakh rupees, or whose contribution does not exceed twenty five lakh
rupees, is not required to get its accounts audited. However, if the partners of such limited liability
partnership decide to get the accounts of such LLP audited, the accounts shall be audited only in
accordance with such rules.
17. The auditor of an LLP may be appointed by the Designated Partners or other Partners whosoever
is available at the time of appointment.
Ans. Incorrect: The auditor is to be appointed by the designated partners of the LLP. However , the
Partners may appoint the auditors only if the Designated Partners have failed to appoint them.
Theory Question
18. Ban LLP is formed during the year 2021-22. They are not sure about the type of books of accounts
to be maintained. What are the books of accounts that the LLP is required to maintain?
Ans. Books of Accounts Ban LLP is required to maintain: An LLP shall be under obligation to maintain
annual accounts reflecting true and fair view of its state of affairs. LLPs are required to maintain
books of accounts which shall contain-
1. Particulars of all sums of money received and expended by the LLP and the matters in respect
of which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress, finished goods and
costs of goods sold,
4. Any other particulars which the partners may decide.

Special Features of Audit of Different Types of Entities 731

 AUDIT OF CHARITABLE INSTITUTION
Constitution  Study
(1) General System of I.C.
Trust Deed/ Regulation
Membership  Annual /Life
(2) Subscription/ Control  Unused
Donation Receipts Counter foils
List Subscription
Donation
Figures
(3) Legacies  Corresponding
Info.
Amt. Recd.  Minute Book + Receipt
(4) Grants
Certiicate
Dividend
Counter foils
(5) Investment Calculation Ex Interest
Dividend
Cum
Agreement
(6) Rent Amount
Due Date

(7) Income Tax Refunds

In the case of audit of a charitable institution, attention should be paid to the following matters-
(1) General
(i) Studying the constitution under which the charitable institution has been set up.
(ii) Verifying whether the institution is being managed in the manner contemplated by the law
under which it has been set up.
(iii) Examining the system of internal check, especially as regards accounting of amounts
collected.
732 Auditing & Ethics PW
 (iv) Verifying in detail the income and confirming that the amounts received have been deposited
in the bank regularly and promptly.
(v) Examine the Trust Deed or the Regulations as laid down.
(2) Subscriptions and donations
(i) Ascertaining, if any, the changes made in amount of annual or life membership subscription
during the year.
(ii) Whether official receipts are issued;
(a) confirming that adequate control is imposed over unused receipt books;
(b) obtaining all receipt books covering the period under review;
(c) test checking the counterfoils with the cash book; any cancelled receipts being specially
looked into;
(d) obtaining the printed list of subscriptions and donations and agreeing them with the
total collections shown in the accounts;
(e) examining the system of internal check regarding moneys received from box collections,
flag days, etc. and checking the amount received from representatives, with the
correspondence and the official receipts issued; paying special attention to the system
of control exercised over collections and the steps taken to ensure that all collections
made have been accounted for; and
(f) verifying the total subscriptions and donations received with any figures published in
reports, etc. issued by the charity.
(3) Legacies – Verifying the amounts received by reference to correspondence with any figures and
other available information.
(4) Grants
(i) Vouching the amount received with the relevant correspondence, receipts and minute books.
(ii) Obtaining a certificate from a responsible official showing the amount of grants received.
(5) Investments Income
(i) Vouching the amounts received with the dividend and interest counterfoils.
(ii) Checking the calculations of interest received on securities bearing fixed rates of interest.
(iii) Checking that the appropriate dividend has been received where any investment has been
sold ex-dividend or purchased cum-dividend.
(iv) Comparing the amounts of dividend received with schedule of investments making special
enquiries into any investments held for which no dividend has been received.
(6) Rent
(i) Examining the rent roll and inspecting tenancy agreements, noting in each case:
(a) the amounts of the rent, and
(b) the due dates.
(ii) Vouching the rent on to the rent roll from the counterfoils of receipt books and checking the
totals of the cash book.
(7) Special function, etc. - Vouching gross receipts and outgoings in respect of any special functions,
e.g. concerts, dramatic performance, etc., held in aid of the charity with such vouchers and cash
statements as are necessary. In particular, verifying that the proceeds of all tickets issued have
been accounted for, after making the allowance for returns.

Special Features of Audit of Different Types of Entities 733

(8) Income Tax Refunds - Where income-tax has been deducted at source from the Investment
income, it should be seen that a refund thereof has been obtained since charitable institutions
are exempt from payment of Income- tax. This involves:
(i) vouching the Income-tax refund with the correspondence with the Income- tax Department;
and
(ii) checking the calculation of the repayment of claims.
(9) Expenditure
(i) Vouching payment of grants, also verifying that the grants have been paid only for a charitable
purpose or purposes falling within the purview of the objects for which the charitable
institution has been set up and that no trustee, director or member of the Managing
Committee has benefited there from either directly or indirectly.

QUESTIONS

Theory Questions
19. CA A is appointed as the auditor of a charitable institutions. Discuss the audit procedure undertaken
by him while auditing the Subscription and Donation received by the charitable institution.
Ans. Audit Procedure in audit of Subscriptions & donations:
Audit Procedure to be undertaken by CA A in respect of Subscriptions and donations received by
a Charitable Institution is:
(i) Ascertaining, if any, the changes made in amount of annual or life membership subscription
during the year.
(ii) Whether official receipts are issued;
(a) Confirming that adequate control is imposed over unused receipt books;
(b) Obtaining all receipt books covering the period under review;
(c) Test checking the counterfoils with the cash book; any cancelled receipts being specially
looked into;
(d) Obtaining the printed list of subscriptions and donations and agreeing them with the
total collections shown in the accounts;
(e) Examining the system of internal check regarding moneys received from box collections,
flag days, etc. and checking the amount received from representatives, with the
correspondence and the official receipts issued; paying special attention to the system
of control exercised over collections and the steps taken to ensure that all collections
made have been accounted for; and
(f) Verifying the total subscriptions and donations received with any figures published in
reports, etc. issued by the charity.
Notes to Add

734 Auditing & Ethics PW

 AUDIT OF EDUCATIONAL INSTITUTIONS (SCHOOL, COLLEGE OR UNIVERSITY)
School/College®Trust Deed/ Regulation
(1) General University®Act/ Regulation
MoM
Student Register
Counter foils
(2) Fee Advance Fee + Irrecoverable
Studentship + Concession
Fines + Dues
Caution Deposit
Rent rolls
(3) Grants/ Donation Endowment + Legacies
Disallowed®Reason
P.F.
Speciic purpose donation
(4) Expenditure Capital Expenditure®MoM
Increases in salaries
Old arrears
Caution Money
(5) Assets & Liabilities System of Inspection
Furniture + Stationery
IT Refunds
(6) Compliances
Funds

Poor Boys Games Hostel Provident

The special steps involved in their audit are the following-

(A) General :-
(1) Examine the Trust Deed or Regulations, in the case of school or college andnote all the
provisions affecting accounts. In the case of a university, refer to the Act of Legislature and
the Regulation framed thereunder.
(2) Read through the minutes of the meetings of the Managing Committee or Governing Body,
noting resolutions affecting accounts to see that these have been duly complied with, specially
the decisions as regards the operation of bank accounts and sanctioning of expenditure.

Special Features of Audit of Different Types of Entities 735

(B) Fee from Students :-
(1) Check names entered in the Students Fee Register for each month or term, with the respective
Class Registers, showing names of students on rolls and test amount of fees charged; and
verify that there operates a system of internal check which ensures that demands against
the students are properly raised.
(2) Check fees received by comparing counterfoils of receipts granted with entries in the Cash
Book and tracing the collections in the Fee Register to confirm that the revenue from this
source has been duly accounted for.
(3) Total up the various columns of the Fees Register for each month or term to ascertain that
fees paid in advance have been carried forward and that the arrears that are irrecoverable
have been written off under the sanction of an appropriate authority.
(4) Check admission fees with admission slips signed by the head of the institution and confirm
that the amount has been credited to a Capital fund, unless the Managing Committee has
taken a decision to the contrary.
(5) See that free studentship and concessions have been granted by a person authorised to do
so, having regard to the Rules prepared by the Managing Committee.
(6) Confirm that fines for late payment or absence, etc. have been either collected or remitted
under proper authority.
(7) Confirm that hostel dues were recovered before student’s accounts were closed and their
deposits of caution money refunded.
(C) Other Receipts/Grants & Donations :-
(1) Verify rental income from landed property with the rent rolls, etc.
(2) Vouch income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
(3) Verify any Government or local authority grant with the memo of grant. If any expense has
been disallowed for purposes of grant, ascertain the reasons thereof.
(D) Expenditure :-
(1) Verify that the Provident Fund money of the staff has been invested in appropriate securities.
(2) Vouch donations, if any with the list published with the annual report. If some donations
were meant for any specific purpose, see that the money was utilised for the purpose.
(3) Vouch, all capital expenditure in the usual way and verify the same with the sanction for the
Committee as contained in the minute book.
(4) Vouch, in the usual manner, all establishment expenses and enquire into any unduly heavy
expenditure under any head. If there was any annual budget prepared, see that any excess
under any head over the budgeted amount was duly sanctioned by the Managing Committee.
If not, bring it to the Committee’s notice in your report.
(5) See that increase in the salaries of the staff have been sanctioned and minuted by the
Committee.
(E) Assets & Liabilities :-
(1) Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing
Committee.
(2) Confirm that caution money and other deposits paid by students on admission, have been
shown as liability in the balance sheet not transferred to revenue, unless they are not
refundable.
736 Auditing & Ethics PW
 (3) See that the investments representing endowment funds for prizes are kept separate and
any income in excess of the prizes has been accumulated and invested along with the corpus.
(4) Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs,
clothing and other equipment is efficient and all bills are duly authorised and passed before
payment.
(5) Verify the inventories of furniture, stationery, clothing, provision and all equipment etc.
These should be checked by reference to Inventory Register or corresponding inventories
of the previous year and values applied to various items should be test checked.
(F) Compliances :-
(1) Confirm that the refund of taxes deducted from the income from investment (interest on
securities etc.) has been claimed and recovered since the institutions are generally exempted
from the payment of income-tax.
(2) Finally, verify the annual statements of account and, while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games Fund, Hostel
and Provident Fund of staff, etc.
(3) Finally, verify the annual statements of account and, while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games Fund, Hostel
and Provident Fund of staff, etc.

Test Your Understanding

3. You are auditor of a school operating in your city. During audit of a year, it is noticed that fees
concessions to students have been provided in substantial number of cases. Discuss, how, you
as an auditor, would proceed to verify the same?
Ans. The fees concessions have to be under proper authority of school management. The
auditor would verify internal controls in this regard. Besides, detailed checking of few cases
needs to be undertaken to ensure genuineness of fees concessions and proper management
approvals.

QUESTIONS

Theory Questions
20. Mention the special points to be examined by the auditor in the audit of a charitable institution
running hostel for students pursuing the Chartered. Accountancy Course and which charges only
Rs 500 per month from a student for his lodging/boarding.
Ans.
(i) Study the constitution under which the charitable institution has been set up whether under
the Society Registration Act, as a trust or as a company limited by guarantee. Verify whether
it is managed as contemplated by the law and rules and regulations made thereunder.
(ii) Examine the internal control structure particularly with reference to admission to hostel,
expenses incurred on different kinds of activities.
(iii) Verify the broad nature of expenses likely to be incurred with reference to the previous
year’s annual audited accounts.

Special Features of Audit of Different Types of Entities 737

 2. Verification of the receipts
(i) Check the amounts received on account of, monthly rentals, etc., and receipts issued for the
same.
(ii) Ascertain that there is adequate internal control over the issue of official receipts, custody
of unused receipt books, printing of receipt books, etc.
(iii) Cross - tally the rent received along with the number of students (from the student register)
staying in the hostel during the year.
(iv) Check the amounts received from additional services rendered like guest fees, receipts for
breakage, fines, penalties, etc.
3. Verification of expenses
(i) Check the day-to-day administration expenses incurred along with the necessary vouchers,
supporting for the same like salary registers, repairs register, etc.
(ii) Verify whether the expenses incurred are in conformity with the budgets prepared internally
or filed with the relevant authorities.
(iii) Check the amount spent on provisions of hostel facilities with reference to bills, etc.
(iv) See that whenever heavy expenditure has been incurred on renovation of the hostel,
computer centre, etc. the same is accounted for properly (if such facilities are being provided
by the hostel).
4. Verify investments made from surplus funds as well as existing investments by physically verifying
the same and that they are in the name of the institution and that there is no charge/pledge against
the same.
5. Verify all capital expenditure and expenditure on repairs, etc., incurred with the vouchers and
also whether proper tenders, etc., were invited for the same. See that all furniture, glass, cutlery,
kitchen utensils, liner, etc. are adequately depreciated.
6. Library Facilities: See that proper library register are maintained. The system regarding issue
and receipt of books is in order. Late fee fines and money received on account of lost book is
accounted for properly. Obsolete books are written off only after proper authorisation. Expenses
incurred on newspapers and weekly magazines as compared to Journals and periodicals have
been accounted for properly.
7. Check the provision of other additional facilities like computer facilities, etc. Ensure that proper
registers are maintained for charging fees, based on monthly or hourly basis. In case such facility
is extended to each room, whether the charges are payable on lump-sum basis or on actual usage
basis. Also ensure that amounts spent have been allocated properly.
8. Verify whether the institution is eligible for income tax exemption and if not, whether provision
for taxation has been made.

Notes to Add

738 Auditing & Ethics PW

 AUDIT OF HOSPITAL
Copies of Bills
(1) Register of Patients Attendance
Amount Recoverable
Entered®Cash Book
(2) Collection of Cash Counter foils
Rent
Investment Register
Rents
(3) Income Dividends
Interest
(4) Legacies + Donations
Trustees
(5) Authorisation + Sanctions
Managing Committees

(6) Internal Check ® Medicine + Linen + Apparatus + Instruments

(7) Depreciation

(8) Inventories

The special steps involved in such an audit are stated below-

1. Register of Patients: Vouch the Register of patients with copies of bills issued to them. Verify
bills for a selected period with the patients’ attendance record to see that the bills have been
correctly prepared. Also see that bills have been issued to all patients from whom an amount was
recoverable according to the rules of the hospital.
2. Collection of Cash: Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patients bills, counterfoils of dividend
and other interest warrants, copies of rent bills, etc.
3. Income from Investments, Rent etc: See with reference to the property and Investment
Register that all income that should have been received by way of rent on properties, dividends,
and interest on securities have been collected.
Special Features of Audit of Different Types of Entities 739
 4. Legacies and Donations: Ascertain that legacies and donations received for a specific purpose
have been applied in the manner agreed upon.
5. Reconciliation of Subscriptions: Trace all collections of subscription and donations from the
Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by the
Subscription Register and the amount collected and that still outstanding).
6. Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capital
expenditure was incurred only with the prior sanction of the Trustees or the Managing Committee
and that appointments and increments to staff have been duly authorised.
7. Grants and TDS: Verify that grants, if any, received from Government or local authority has been
duly accounted for. Also, that refund in respect of taxes deducted at source has been claimed.
8. Budgets: Compare the totals of various items of expenditure and income with the amount
budgeted for them and report to the Trustees or the Managing Committee, significant variations
which have taken place.
9. Internal Check: Examine the internal check as regards the receipt and issue of stores; medicines,
linen, apparatus, clothing, instruments, etc. so as to insure that purchases have been properly
recorded in the Inventory Register and that issues have been made only against proper
authorisation.
10. Depreciation: See that depreciation has been written off against all the assets at the appropriate
rates.
11. Registers: Inspect the bonds, share scrips, title deeds of properties and compare their particulars
with those entered in the property and Investment Registers.
12. Inventories: Obtain inventories, especially of stocks and stores as at the end of the year and
check a percentage of the items physically; also compare their total values with respective ledger
balances.
13. Management Representation and Certificate: Get proper Management Representation and
Certificate with respect to various aspects covered during the course of audit.

QUESTIONS

Theory Questions
21. The general transactions of a hospital include patient treatment, collection of receipts, donations,
capital expenditures.

You are required to mention special points of consideration while auditing such transactions of
a hospital?
Ans. Special points of consideration while auditing certain transactions of a hospital are stated below-
(i) Register of Patients: Vouch the Register of patients with copies of bills issued to them. Verify
bills for a selected period with the patients’ attendance record to see that the bills have been
correctly prepared. Also see that bills have been issued to all patients from whom an amount
was recoverable according to the rules of the hospital.

740 Auditing & Ethics PW

 (ii) Collection of Cash: Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patients bills, counterfoils of dividend
and other interest warrants, copies of rent bills, etc.
(iii) Legacies and Donations: Ascertain that legacies and donations received for a specific purpose
have been applied in the manner agreed upon.
(iv) Reconciliation of Subscriptions: Trace all collections of subscription and donations from the
Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by
the Subscription Register and the amount collected and that still outstanding).
(v) Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capital
expenditure was incurred only with the prior sanction of the Trustees or the Managing
Committee and that appointments and increments to staff have been duly authorised.
22. M/s T & Co. Chartered Accountants, a partnership firm, is appointed as an auditor of Treatment
Hospital run by Smile Foundation, a charitable trust. Over and above the receipts of treatment
of patients, during the year trust has received donations from various donors to treat COVID-19
patients and also incurred some capital expenditure for further development of the hospital. On
some of the investment income, income tax has been deducted. What are the special points to be
considered by M/s T & Co. while auditing such transactions of Treatment Hospital?
Ans. Audit of a Hospital:
(A) Receipts from treatment of patients
1. Register of Patients: Vouch the Register of patients with copies of bills issued to them.
Verify bills for a selected period with the patients’ attendance record to see that the
bills have been correctly prepared. Also see that bills have been issued to all patients
from whom an amount was recoverable according to the rules of the hospital.
2. Collection of Cash from patients: Check cash collections as entered in the Cash Book
with the receipts, counterfoils and other evidence for example, copies of patient’s bills.
(B) Donations from donors to treat the patients: Ascertain those legacies and donation received
for a specific purpose have been applied in the manner agreed upon.
(C) Capital Expenditure Incurred: Verify the Capital Expenditure was incurred only with the
prior sanction of the Trustees or the Managing Committee.
(D) Where income-tax has been deducted from the Investment income, it should be seen that a
refund thereof has been obtained since charitable institutions are exempt from payment of
Income-tax. This involves:
(i) vouching the Income-tax refund with the correspondence with the Income-tax
Department; and
(ii) checking the calculation of the repayment of claims/refund claim.
Notes to Add

Special Features of Audit of Different Types of Entities 741

 AUDIT OF CLUB
(1) Entrance Fee + Counter foils
(2) Subscriptions
(3) Arrears of Subscriptions
(4) Arithmetical Accuracy
(5) Irrecoverable Member Dues
Food
(6)
(6) Price
Price
Drinks
(7) Purchase → Furniture + Sports items + Crockery
(8) Management Powers

The special steps involved in such an audit are stated below:

1. Entrance Fee: Vouch the receipt on account of entrance fees with members’ applications,
counterfoils issued to them, as well as on a reference to minutes of the Managing Committee.
2. Subscriptions: Vouch members’ subscriptions with the counterfoils of receipt issued to them,
trace receipts for a selected period to the Register of Members; also reconcile the amount of total
subscriptions due with the amount collected and that outstanding.
3. Arrears of Subscriptions: Ensure that arrears of subscriptions for the previous year have been
correctly brought over and arrears for the year under audit and subscriptions received in advance
have been correctly adjusted.
4. Arithmetical accuracy: Check totals of various columns of the Register of members and tally
them across.
5. Irrecoverable Member Dues: See the Register of Members to ascertain the Member’s dues
which are in arrear and enquire whether necessary steps have been taken for their recovery; the
amount considered irrecoverable should be mentioned in the Audit Report.
6. Pricing: Verify the internal check as regards members being charged with the price of foodstuffs
and drinks provided to them and their guests, as well as, with the fees chargeable for the special
services rendered, such as billiards, tennis, etc.
7. Member Accounts: Trace debits for a selected period from subsidiary registers maintained in
respect of supplies and services to members to confirm that the account of every member has
been debited with amounts recoverable from him.
8. Purchases: Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into
the respective inventory registers.
9. Margins earned: Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price so as
to confirm that the normal rates of gross profit have been earned on their sales. The inventory
of unsold provisions and stores, at the end of year, should be verified physically and its valuation
checked.
10. Inventories: Check the inventory of furniture, sports material and other assets physically with
the respective inventory registers or inventories prepared at the end of theyear.
11. Investments: Inspect the share scrips and bonds in respect of investments, check their current
values for disclosure in final accounts; also ascertain that the arrangements for their safe custody
are satisfactory.
12. Management Powers: Examine the financial powers of the secretary and, if these have been
exceeded, report specific case for confirmation by the Managing Committee.

742 Auditing & Ethics PW

 QUESTIONS

Theory Questions
23. State the points which merit consideration in the audit of a CLUB w.r.t its members.
Ans. The points which merit consideration in the audit of a CLUB w.r.t its members:-
1. Entrance Fee :- Vouch the receipt on account of entrance fees with– members’ applications
and counterfoils issued to them, on a reference to minutes of the Managing Committee.
2. Member Subscriptions :- Vouch members’ subscriptions with – the counterfoils of receipt
issued to them, trace receipts for a selected period to the Register of Members;
also reconcile the amount of total subscriptions due with the amount collected and that
outstanding.
3. Subscription Arrears/in Advance :- Ensure that – arrears of subscriptions for the previous
year have been correctly brought over, arrears for the year under audit and subscriptions
received in advance have been correctly adjusted.
Subscriptions received in advance should have been properly accounted for.
4. Arithmetical accuracy:- Check totals of various columns of the Register of members and tally
them across.
5. Register of Members:- See the Register of Members to ascertain – the Member’s dues which
are in arrear and enquire whether necessary steps have been taken for their recovery;
the amount considered irrecoverable should be mentioned in the Audit Report.
6. Member Accounts :- Trace debits for a selected period from subsidiary registers maintained
in respect of supplies and services to members to confirm that the account of every member
has been debited with amounts recoverable from him.
Notes to Add

Special Features of Audit of Different Types of Entities 743

 AUDIT OF CINEMA

(3) Free passes

(4) Tax Collected
(5) Advertisement
(6) Depreciation
(7) Adv. Paid to distributors
(8) Restaurant Income

The special steps involved in its audit are stated below-

(1) Verify the internal control mechanism-

(a) that entrance to the cinema-hall during show is only through printed tickets;
(b) that they are serially numbered and bound into books;
(c) that the number of tickets issued for each show and class, are different though the numbers
of the same class for the show on the same day, each week, run serially;
(d) that for advance booking a separate series of tickets is issued; and
(e) that the inventory of tickets is kept in the custody of a responsible official.
(2) Confirm that at the end of show, a statement of tickets sold is prepared and cash collected is
agreed with it.
(3) Verify that a record is kept of the ‘free passes’ and that these are issued under proper authority.
(4) Reconcile the amount of Tax collected with the total number of tickets issued for each class and
vouch and verify the tax returns filed each month.
(5) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for different
shows on a reference to Daily Statements which have been test checked as aforementioned with
record of tickets issued for the different shows held.
(6) Verify the charges collected for advertisement slides and shorts by reference to the Register of
Slides and Shorts Exhibited kept at the cinema as well with the agreements, entered into with
advertisers in this regard.
(7) Vouch the expenditure incurred on advertisement, repairs and maintenance. No part of such
expenditure should be capitalized.

744 Auditing & Ethics PW

 (8) Confirm that depreciation on machinery and furniture has been charged at an appropriate rate.
(9) Vouch payments on account of film hire with bills of distributors and in the process, the agreements
concerned should be referred to.
(10) Examine unadjusted balance out of advance paid to the distributors against film hire contracts
to see that they are good and recoverable. If any film in respect of which an advance was paid has
already run, it should be enquired as to why the advance has not been adjusted. The management
should be asked to make a provision in respect of advances that are considered irrecoverable.
(11) The arrangement for collection of the share in the restaurant income should be enquired into
either a fixed sum or a fixed percentage of the taking may be receivable annually. In case the
restaurant is run by the Cinema, its accounts should be checked. The audit should cover sale of
various items of foodstuffs, purchase of foodstuffs, cold drink, etc. as in the case of club.

QUESTIONS

Theory Questions
24. You are auditing the Books of accounts of Karla Multiplex which runs 15 Film shows everyday.
One of the major issues which are of concern to you as an auditor is the Agreement entered into
the Multiplex owners with the Film Distributors. State what points would you check as an auditor
in this respect
Ans. Agreement with the Distributors :-
(a) Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
(b) Examine unadjusted balance out of advance paid to the distributors against film hire contracts
to see that they are good and recoverable. If any film in respect of which an advance was paid
has already run, it should be enquired as to why the advance has not been adjusted. The
management should be asked to make a provision in respect of advances that are considered
irrecoverable.
25. M/s PQ & Co., Chartered Accountants have been appointed as statutory auditor of CBD Multiplex
Cinema Ltd. The audit team started the audit and verified the ledger and other books of accounts
for the F.Y 2021-2022. However, one of the team members is of the view that the internal control
mechanism of the company should also be verified.
Can you guide the audit team about the areas that will be covered in verifying the internal control
mechanism?
Ans. Areas to be covered while verifying the Internal Control Mechanism in Multiplex: Audit Team of
M/s PQ & Co. should cover the following areas to verify the internal control mechanism of CBD
Multiplex Cinema Ltd.-
(i) that entrance to the cinema-hall during show is only through printed tickets;
(ii) that they are serially numbered and bound into books;
(iii) that the number of tickets issued for each show and class, are different though the numbers
of the same class for the show on the same day, each week, run serially;
(iv) that for advance booking a separate series of tickets is issued; and
(v) that the inventory of tickets is kept in the custody of a responsible official.
Special Features of Audit of Different Types of Entities 745
26. Cinescreen Multiplex Ltd. is operating cinemas in different locations in Mumbai and has appointed
you as an internal auditor. What are the areas that need to be verified in relation to receipts from
sale of Tickets?
Ans. Audit of Cinema: The special steps involved in the audit of receipts from sale of tickets are stated
below:
(i) Verify that entrance to the cinema-hall during show is only through printed tickets;
(ii) Verify that they are serially numbered and bound into books;
(iii) Verify that the number of tickets issued for each show and class, are different though the
numbers of the same class for the show on the same day, each week, run serially;
(iv) Verify that for advance booking a separate series of tickets is issued;
(v) Verify that the inventory of tickets is kept in the custody of a responsible official.
(vi) Confirm that at the end of show, a statement of tickets sold is prepared and cash collected is
agreed with it.
(vii) Verify that a record is kept of the ‘free passes’ and that these are issued under proper
authority.
(viii) Reconcile the amount of Entertainment Tax collected with the total number of tickets issued
for each class.
(ix) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for different
shows on a reference to Daily Statements which have been test checked as aforementioned
with record of tickets issued for the different shows held.
Notes to Add

746 Auditing & Ethics PW

 AUDIT OF HIRE PURCHASE & LEASING COMPANIES
Hire Purchase:
Goods are let-out on Hire  Hirer has the option to purchase then

In accordance with T & C of agreement

Possession of Goods Property in Goods to Pass Hirer has the right

  
Transferred by owner On Payment of Last To terminate the agreement
 Instalment 
On condition of Periodic Anytime before the property
Instalments passes

regularly received

Special Features of Audit of Different Types of Entities 747

  Finance Lease Modalities
(i) Lessee  select equipment
Approach Lessor Functional itness + Speciications
Lessor  No Participation
Directly Broking Agency
that they can take a inancial
Negotiated
(ii) Lease Agreement
Rates Finalised
(iii) Manufacturer  Delivers equipment  Lessee

Notice of Acceptance
(iv) Lease Agreement  Detailed terms
allowed?
(v) Lease Tenure  Lessee
Pay Rentals Regularly
Repaired
Keep equipment
Working
Entitled to

Manufacturer’s After Sales Service

warranty
(vi) End of Lease pd.  Equipment Returned
Renewal Right
Purchase Option

Not in Original lease Agreement

748 Auditing & Ethics PW

(4) Examine → Lease Proposal form
(5) Ensure → Invoices of Equipment are retained safely
(6) Examine → Acceptance letter of lessee
(7) Any Board Resolution regarding lease
(8) Copies of Insurance Policy
Operating Lease Financial Lease
Ownership Remains with the lessor Transfer option
Accounting Treatment Renting arrangement. Treated Loan arrangement. Appears on the
as operating expenses balance sheet of the lessee
Purchase Option Lessee does not have any option Lessee to have a purchase option
Lease Term Generally < 75 % → useful life Generally ≥ estimated economic life

(A) HIRE - PURCHASE:

(1) A Hire-purchase agreement means an agreement under which goods are let on hire and
under which the hirer has an option to purchase them in accordance with the terms of the
agreement and includes an agreement under which-
(i) possession of goods is delivered by the owner thereof to a person on condition that
such person pays the agreed amount in periodical instalments,
(ii) the property in the goods is to pass to such person on the payment of the last of such
instalments, and
(iii) such person has a right to terminate the agreement at any time before the property
so passes.
(2) Hirer means the person who obtains or has obtained possession of goods from an owner
under a hire- purchase agreement and owner means the person who lets or has let, delivers
or has delivered possession of goods to a hirer under a hire- purchase agreement in order to
complete the purchase of, or the acquisition of property in the goods of which the agreement
relates; and includes any sum so payable by the hirer under the hire- purchase agreement
by way of a deposit or other initial payment.
(3) While checking the hire- purchase transaction, the auditor may examine the following:
(i) Hire purchase agreement is in writing and is signed by all parties.
(ii) Hire purchase agreement specifies clearly-
(a) The hire-purchase price of the goods to which the agreement relates;
(b) The cash price of the goods, that is to say, the price at which the goods may be
purchased by the hirer for cash;
(c) The date on which the agreement shall be deemed to have commenced;

Special Features of Audit of Different Types of Entities 749

 (d) The number of instalments by which the hire- purchase price is to be paid, the
amount of each of those instalments, and the date, or the mode of determining
the date, upon which it is payable, and the person to whom and the place where
it is payable; and
(e) The goods to which the agreement relates, in a manner sufficient to identify them.
(iii) Ensure that instalment payments are being received regularly as per the agreement.
(B) LEASES :-
(1) In a lease agreement, a party (called ‘lessee’) acquires the right to use an asset for an agreed
period of time in consideration of payment of rent to another party (called ‘lessor’).
(2) In certain lease agreements, the legal ownership of the asset remains with the lessor (the
leasing company), but in substance, all the risks and rewards of ownership of the asset are
transferred to the lessee. In other words, the lease is, in effect, a financing arrangement.
Such leases are termed as finance leases. An operating lease, on the other hand, is a simple
arrangement where, in return for rent, the lessor allows the lessee to use the asset for a
certain period.
(3) A normal finance lease transaction usually goes through the following modality:
(i) The lessee will select the equipment, and satisfy himself about its functional fitness
and specifications, the lessor has no participation at this stage.
(ii) Having chosen the equipment, the lessee approaches a lessor, either directly or through
a lease-broking agency.
(iii) The lease agreement is broadly negotiated and the rates are finalised. The lessor places
an order on the manufacturer as chosen by the lessee.
(iv) The manufacturer delivers the equipment at the site of the lessee, and the latter gives
notice of acceptance to the lessor.
(v) The lease agreement giving detailed terms of contract is signed between the parties.
Leases will normally be full pay-out, with term varying as per requirements.
(vi) During the lease period, the lessee:
¾ Will pay rentals regularly at periods agreed-upon, which are usually each calendar
month;
¾ Will keep the equipment in good repair and working condition, etc.

¾ Will be entitled to any manufacturer’s warranties or after-sales services.

(vii) At the end of the lease period, the equipment shall retreat to the lessor. The lessee may,
however, be given a renewal right, or may be allowed to participate in purchase of the
equipment when the lessor intends to sell it. No purchase option shall be given to the
lessee in the lease agreement itself.
(4) Auditor’s Procedures:- In respect of leasing transaction entered into by the leasing company,
the following procedures may be adopted by the auditor:
(1) The object clause of leasing company to see that the goods like capital goods, consumer
durables etc. in respect of which the company can undertake such activities. Further, to
ensure that whether company can undertake financing activities or not.
(2) Whether there exists a procedure to ascertain the credit analysis of lessee like lessee’s
ability to meet the commitment under lease, past credit record, capital strength, availability
of collateral security, etc.
(3) The lease agreement should be examined and the following points may be noted:

750 Auditing & Ethics PW

 (i) the description of the lessor, the lessee, the equipment and the location where the
equipment is to be installed. (The stipulation that the equipment shall not be removed
from the described location except for repairs. For the sake of identification, the lessor
may also require plates or markings to be attached to the equipment).
(ii) the amount of tenure of lease, dates of payment, late charges, deposits or advances
etc. should be noted.
(iii) whether the equipment shall be returned to the lessor on termination of the agreement
and the cost shall be borne by the lessee.
(iv) whether the agreement prohibits the lessee from assigning the subletting the equipment
and authorises the lessor to do so.
(4) Examine the lease proposal form submitted by the lessee requesting the lessor to provide him
the equipment on lease.
(5) Ensure that the invoice is retained safely as the lease is a long-term contract.
(6) Examine the acceptance letter obtained from the lessee indicating that the equipment has been
received in order and is acceptable to the lessee.
(7) See the Board resolution authorising a particular director to execute the lease agreement has
been passed by the lessee.
(8) See that the copies of the insurance policies have been obtained by the lessor for his records.
Students need to pay attention that AS-19 define that lease arrangements could be of 2 types
i.e. 1 Finance Lease and 2 Operating Lease.
Finance Lease: An arrangement with the following attributes qualifies as a Finance Lease:
‰ The lease arrangement transfers ownership of the asset to the lessee at the end of the lease term;

‰ The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower
than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the
inception of the lease, that the option will be exercised;
‰ The lease term is for the major part of the economic life of the asset even if title is not transferred;

‰ At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset; and
‰ the leased assets are of such a specialized nature that only the lessee can use them without major
modifications
Operating Lease
An arrangement that does not transfer substantially all the risks and rewards incidental to ownership
qualifies as an Operating Lease. In other words, an operating lease is a lease arrangement “Other than
finance lease”.
The below table captures the broad differences under both the above said types of lease
arrangements:
Operating Lease Financial Lease
Common examples Lease of Projector, Computers, Lease of Plant and Machinery,
Laptops, Coffee Dispensers etc. Land, Office Building etc.
Ownership Ownership of the asset remains Ownership transfer option at the
with the lessor for the entire period end of the lease period is with the
of lease. lessee. Title may or may not be
eventually transferred.

Special Features of Audit of Different Types of Entities 751

Accounting treatment Operating lease is generally treated Financial lease is treated like loan
like a renting arrangement. That arrangement. Hence, the asset
means, the lease payments are ownership is considered of that of
treated as operating expenses and the lessee and thus appears on the
the asset does not appear as an asset balance sheet of the lessee.
on lessee’s balance sheet.
Purchase Option Under operating lease, the lessee Financial lease allows the lessee to
does not have any option to buy the have a purchase option at less than
asset during the lease period. the fair market value of the asset.
Lease Term Lease term generally extends to less Lease term is generally more than
than 75% of the projected useful lifeor equal to estimated economic
of the leased asset. life of the asset under the lease
arrangement.
Operating/ running Lessee pays only the monthly Lessee generally bears insurance,
expenses lease payments. No running or maintenance and taxes.
administration costs are to be borne
for example: registration, repairs
etc. since it gives only right to use
the asset.
Tax benefit Since operating lease is as good as Lessee can claim both interest and
renting, lease payment is considered depreciation expense as financial
as expense. No depreciation can be lease is treated like a loan.
claimed by the lessee.

Notes to Add

752 Auditing & Ethics PW

 AUDIT OF HOTELS
Pilfering  Greatest Problem
(1)
(1) Internal Control K.O.T. Collected
Taxes
Paid

(2) Room sales + Hall Booking

(3) Inventories
(4) Fixed Assets
(5) Casual Labours
(6) Shops

The special considerations in a hotel audit can be summarised as follows:

(1) Internal Controls- Pilfering is one of the greatest problems in any hotel and the importance
of internal control cannot be undermined. It is the responsibility of management to introduce
controls which will minimise the leakage as far as possible. Evidence of their success is provided
by the preparation of regular perhaps weekly, trading accounts for each sales point and a detailed
scrutiny of the resulting profit percentages, with any deviation from the anticipated form being
investigated. The auditor should obtain these regular trading accounts for the period under
review, examine them and obtain explanations for any apparent deviations.
The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen Order Tickets) or
basic record. This would enable the auditor to ensure that controls regarding revenue cycle are
inorder.
The auditor should satisfy himself that all taxes collected from occupants on food and occupation
have been paid over to the proper authorities. If the internal control in a hotel is weak or perhaps
breaks down, then a very serious problem exists for the auditor. As a result of the transient nature
of many of his clients’ records, the auditor must rely to a very large extent on the gross margin
shown by the accounts. As a result, the scope of his audit tests will necessarily be increased
and, in the event of a material margin discrepancy being unexplained, he will have to consider
qualifying his audit report.
(2) Room Sales & Hall Bookings - The charge for room sales is normally posted to guest bills by
the receptionist/ front office or in the case of large hotels by the night auditor. The source of
these entries is invariably the guest register and audit tests should be carried out to ensure that
the correct numbers of guests are charged for the correct period. Any difference between the
charged rates used on the guests’ bills and the standard room rate should be investigated to
ensure that they have been properly authorised.
In many hotels, the housekeeper prepares a daily report of the rooms which were occupied the
previous night and the number of beds kept in each room. This report tends not to be permanently
retained and the auditor should ensure that a sufficient number of reports are available for him
to test both with the guest register and with the individual guest’s bill. The auditor should ensure
that proper valuation of occupancy-in-progress at the balance sheet date is made and included in
the accounts.

Special Features of Audit of Different Types of Entities 753

 The auditor should ensure that proper records are maintained for booking of halls and other
premises for special parties and recovered on the basis of the tariff.
(3) Inventories - The inventories in any hotel are both readily portable and saleable particularly
the food and beverage inventories. It is therefore extremely important that all movements and
transfers of such inventories should be properly documented to enable control to be exercised
over each individual stores areas and sales point. The auditor should carry out tests to ensure
that all such documentation is accurately processed.
Areas where large quantities of inventory are held should be kept locked, the key being
retained by the departmental manager. The key should be released only to trusted personnel
and unauthorised persons should not be permitted in the stores areas except under constant
supervision. In particular, any movement of goods in or out of the stores should be checked.
Many hotels use specialised professional valuers to take and value the inventories on a continuous
basis throughout the year. Such a valuation is then almost invariably used as the basis of the
balance sheet inventory figure at the year end. Although such valuers are independent of the
audit client, it is important that the auditor satisfies himself that the amounts included for such
inventories are reasonable. In order to satisfy himself of this, the auditor should consider attending
the physical inventory taking and carrying out certain pricing and calculation tests. The extent of
such tests could well be limited since the figures will have been prepared independently of the
hotel.
(4) Fixed Assets - The accounting policies for fixed assets of individual hotels are likely to differ.
However, many hotels account for certain quasi-fixed assets such as silver and cutlery on inventory
basis. This can lead to confusion between each inventory items and similar assets which are
accounted for on a more normal form on assets basis. In such cases, it is important that very
detailed definitions of inventory items exist and the auditor should carry out tests to ensure
that the definitions have been closely followed. The auditor should see that costs of repairs and
minor renovation and redecoration are treated as revenue expenditure, where as costs of major
alterations and additions to the hotel building and facilities capitalised.
(5) Casual Labour - The hotel trade operates to very large extent on casual labour. The records
maintained of such wage payments are frequently inadequate. The auditor should ensure that
defalcation on this account does not take place by suggesting proper controls to the management.
(6) Travel Agents & Shops -
(i) For ledgers coming through travel agents or other booking agencies the bills are usually
made on the travel agents or booking agencies. The auditor should ensure that money are
recovered from the travel agents or booking agencies as per the terms of credit allowed.
(ii) Commission, if any, paid to travel agents or booking agents should be checked by reference
to the agreement on that behalf.

754 Auditing & Ethics PW

 QUESTIONS

Theory Questions
State with reasons (in short) whether the following statements are correct or incorrect:

27. An auditor should ensure that proper valuation of occupancy-in-progress at the balance sheet
date is made and included in the accounts in the case of audit of a Hotel.
Ans. Incorrect: The auditor should ensure that proper valuation of occupancy-in- progress at the
balance sheet date is made and included in the accounts for proper recording of closing and
opening entries and maintenance of accounts on Accrual basis as per the Matching concept.
28. As an auditor, what would be your areas of consideration while auditing the element of ROOM
SALES during the audit of a 5-Star Hotel.
Ans. Following points merit consideration while auditing the element of ROOM SALES during the audit
of a Hotel :-
(a) The charge for room sales is normally posted to guest bills by the receptionist/ front office
or in the case of large hotels by the night auditor.
(b) The source of these entries is the guest register and audit tests should be carried out to
ensure that the correct numbers of guests are charged for the correct period.
(c) Any difference between the charged rates used on the guests’ bills and the standard room
rate should be investigated to ensure that they have been properly authorised.
(d) In many hotels, the housekeeper prepares a daily report of the rooms which were occupied
the previous night and the number of beds kept in each room. This report tends not to be
permanently retained and the auditor should ensure that a sufficient number of reports are
available for him to test both with the guest register and with the individual guest’s bill.
(e) Ensure compliance with the provisions of FEMA and RBI if receipts are in foreign currency.
Ensure application of proper Conversion rate.
(f) Special emphasis to be laid on receipts through Credit Cards.
(g) The auditor should ensure that proper valuation of occupancy-in- progress at the balance
sheet date is made and included in the accounts.
29. Pilfering is one of the greatest problems in any hotel and the importance of internal control cannot
be undermined explain.
Ans. Pilfering is one of the greatest problems in any hotel and the importance of internal control cannot
be undermined.
It is the responsibility of management to introduce controls which will minimise the leakage as
far as possible.
Evidence of their success is provided by the preparation of regular perhaps weekly, trading
accounts for each sales point and a detailed scrutiny of the resulting profit percentages, with any
deviation from the anticipated form being investigated. The auditor should obtain these regular
trading accounts for the period under review, examine them and obtain explanations for any
apparent deviations.
Special Features of Audit of Different Types of Entities 755
 The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen Order Tickets)
or basic record. This would enable the auditor to ensure that controls regarding revenue cycle
are in order.
The auditor should satisfy himself that all taxes collected from occupants on food and occupation
have been paid over to the proper authorities. If the internal control in a hotel is weak or perhaps
breaks down, then a very serious problem exists for the auditor. As a result of the transient nature
of many of his clients’ records, the auditor must rely to a very large extent on the gross margin
shown by the accounts. As a result, the scope of his audit tests will necessarily be increased and, in
the event of a material margin discrepancy being unexplained, he will have to consider qualifying
his audit report.
30. You have been appointed as an auditor of ABC Hotel, a three star hotel, for Financial Year 2021-22.
As an auditor what are the special points that need to be considered in verifying the Inventories
in the nature of food and beverages?
Ans. Verification of inventories in the nature of food and beverages: The inventories in any hotel are
both readily portable and saleable particularly the food and beverage inventories. It is therefore
extremely important that all movements and transfers of such inventories should be properly
documented to enable control to be exercised over each individual stores’ areas and sales point.
The auditor should carry out tests to ensure that all such documentation is accurately processed.
Therefore, following points may be noted in this regard:
(a) All movement and transfer of inventories must be properly documented.
(b) Areas where inventories are kept must be kept locked and the key retained by the
departmental manager.
(c) The key should be released only to trusted personnel and unauthorized persons should not
be permitted in the stores area.
(d) Many hotels use specialized professional valuers to count and value the inventories on a
continuous basis throughout the year.
(e) The auditor should ensure that all inventories are valued at the year end and that he should
himself be present at the year-end physical verification, to the extent practicable, having
regard to materiality consideration and nature and location of inventories.
Notes to Add

756 Auditing & Ethics PW

 AUDIT OF CO-OPERATIVE SOCIETIES

Co operative
Co-operative Autonomous AOP®untitled voluntarily
Co–op ¯
Coop To meet common

Economic Social Cultural

Needs
+
Aspirations
¯
Through Jointly owned Enterprise
Audit of Cooperative Societies

Business organisations

Special mode of doing business

By co-operation

By pooling together all Elimination of middlemen Elimination from Exploitation

means of production from outside sources

Special Features of Audit of Different Types of Entities 757

 BACKGROUND
A Cooperative (also known as co-operative, co-op, or coop) is “an autonomous association of persons
united voluntarily to meet their common economic, social, and cultural needs and aspirations
through a jointly-owned enterprise”. The Co-operative Societies Act, 1912, a Central Act, contains the
fundamental law regarding the formation and working of the co-operative societies in India and is
applicable in many states with or without amendments. In many states, viz., Maharashtra, West Bengal,
Orissa, the co-operative societies are governed by specific state Acts. An auditor of a co-operative
society should be familiar with the provisions of the particular Act governing the society under audit.
Co-operative society is a business organisation with a special mode of doing business, by pulling
together all the means of production co-operatively, elimination of middlemen and exploitation from
outside forces.
A chartered accountant has to play a significant role in the development of co-operative
organisations on scientific lines. In this Unit, it is proposed to give a few guidelines in the matter of
audits of co-operative societies.
Apart from audit, some other professional services could be rendered by chartered accountants
such as-
(1) guidance in accounts writing,
(2) installation of accounting system,
(3) internal audit,
(4) management accounting services,
(5) taxation etc.
However, the main focus is to give some guidelines about the audit of co-operative societies
in general. The special features of audit applicable to all societies will be considered first, and
subsequently a few special points with reference to audit programmes of specific types of societies
will be considered.

Notes to Add

758 Auditing & Ethics PW

 AUDIT AS PER SECTION 17 OF THE CO-OPERATIVE SOCIETIES ACT, 1912
Audit
(1) Registrar Shall A/c’s of society  Once at least every year
Authorize

Some other person to audit

General Special

Order

In writing
Examination  of overdue debts
(2) Audit Includes
Veriication  of Assets & Liabilities
(3) Auditor shall have access  at all times  to

Books of A/c. Papers Securities of Every oficer shall

Society furnish info.
Points to be kept in mind for appointing Auditor
(1) Qualiication of Auditor  A CA or Some state acts allow persons having

Govt. Diploma in Co- Govt. Diploma in Co-

operative Accounting operation & Accountancy

Served as an Auditor in Co-operative Dept. of Govt.

(2) Appointment of Auditor  By Registrar of Co-operative Societies

Audit Report to be submitted to him
 Audit fee  paid by society

Prescribed by Registrar

(3) Books, A/c’s & Other Records → of Co-operative Society (Sec. 43(h) of Central Act)
Generally →
(i) Daily cash sales summary Register
(ii) Register for collection from Debtor
(iii) Register for Recovery of Loans
(iv) Register for Loan Disbursements
(v) Any other Columnar Register
Special Features of Audit of Different Types of Entities 759
(4) Restriction on share Holdings (Sec. 5)
on each member to be ≤ 20% of paid up share capital or ≤ ₹ 1000/-
↓
Prov . Of By-Laws → Not Contradictory
Limits in State acts may be different
(5) Restrictions on Loans (Sec.29)

Only to members are Can be given to another society

allowed 
With special sanction of Registrar
(6) Restriction on Borrowings (Sec.30)
Allowed up to limits mentioned in By-laws of society
(7) Investment of funds (Sec.32)
Allowed in

Central or state Securities Securities of Other Permitted by

Cooperative Bank Or speciied in Sec. Societies
Co-operative or other banks 20 of the Indian 
approved by Registrar Trust Act, 1882 With Limited CG SG
Liability
(8) Appropriation of proits (Sec.33)  % age of proits should be transferred to 
Reserve Fund  Before Distribution as

Dividend Bonus

To members

With sanction of Registrar

(9) Contribution to charitable Purpose (Sec.34)
Registered Societies May transfer  < 10% of NP

For any charitable purpose
After transfer to Reserve fund
Investment Outside business
(10) Reserve fund Promote Object of Society Only if state Act provides
Utilization as W.C.
(11) Contribution to Education fund  only if state Act Provides

(1) The Registrar shall audit or cause to be audited by some person authorised by him by general or special
order in writing in this behalf the accounts of every registered society once at least in every year.
(2) The audit under sub-section (1) shall include an examination of overdue debts, if any, and a
valuation of the assets and liabilities of the society.

760 Auditing & Ethics PW

(3) The Registrar, the Collector or any person authorised by general or special order in writing in
this behalf by the Registrar shall at all times have access to all the books, accounts, papers and
securities of a society, and every officer of the society shall furnish such information in regard to
the transactions and working of the society as the person making such inspection may require.
“Registrar” means a person appointed to perform the duties of a Registrar of Co- operative
Societies under this Act.
The following points should be kept in mind in connection with the audit of a co-operative
society:
(1) Qualifications of Auditors- Apart from a chartered accountant within the meaning of the
Chartered Accountants Act, 1949, some of the State Co-operative Acts have permitted persons
holding a government diploma in co-operative accounts or in co-operation and accountancy and
also a person who has served as an auditor in the co-operative department of a government to
act as an auditor.
(2) Appointment of the Auditor- An auditor of a co-operative society is appointed by the Registrar of
Co-operative Societies and the auditor so appointed conducts the audit on behalf of the Registrar
and submits his report to him as also to the society. The audit fees are paid by the society on the
basis of statutory scale of fees prescribed by the Registrar, according to the category of the society
audited.
(3) Books, Accounts and other records of Co-operative Societies- Under section 43(h) of the
Central Act, a state government can frame rules prescribing the books and accounts to be kept
by a co-operative society.
For example, in Maharashtra, the co-operative societies are required to maintain books of account
in terms of the instructions of the Registrar as following:
(i) All sums of money received and expended by the society and the matters in respect of which
receipts and expenditure take place.
(ii) All sales and purchases of goods by the society.
(iii) Assets and liabilities of the society.
In order to maintain proper financial accounting records so as to disclose full financial results of
working of the society, the statutory or mandatory provisions provide a directive, but they are not
conclusive. The society is at liberty to maintain such additional records according to its convenience and
which it thinks more useful for clarity and detailed explanation. Ultimately the financial transactions
and the results thereof must be presented very clearly and in the best possible manner.
Depending upon the nature and object of the society, different kinds of books and registers will be
maintained, so as to disclose a proper and fair picture of financial transactions. In case of large scale
co-operative organisation, different subsidiary books and registers shall be maintained and the daily
summary totals will be transferred to main Cash Book. For example:
(a) Daily cash sales summary register.
(b) A register of collection from debtors if credit sales are allowed by bye-laws of society.
(c) A register of recovery of loans from salaries and directly by receipts from members in case
of credit society.
(d) Loan disbursement register in case of credit society.
(e) Any other columnar subsidiaries depending upon the nature and functions of society.

Special Features of Audit of Different Types of Entities 761

 4. Restrictions on share holdings - According to section 5 of the Central Act, in the case of a
society where the liability of a member of the society is limited, no member of a society other
than a registered society can hold such portion of the share capital of the society as would exceed
a maximum of twenty percent of the total number of shares or of the value of shareholding to
₹ 1,000/-. The auditor of a co-operative society will be concerned with this provision so as to
watch any breach relating to holding of shares. One should also watch whether any provision in
the bye-laws of the society is not contrary to this statutory position. The State Acts may provide
limits as to the shareholding, other than that provided in the Central Act.
5. Restrictions on loans - Section 29 of the Central Act puts restriction on loan. It states that a
registered society shall not make a loan to any person other than a member. However, with the
special sanction of the Registrar, a registered society may make a loan to another registered society.

The State Government may further put such restrictions as it thinks fit on the loaning powers of
the society to its members or to other societies in the interest of the society concerned and its
members.
6. Restrictions on borrowings - Section 30 of the Central Act further puts restriction on borrowings.
According to this section, a registered society shall accept loans and deposits from persons who
are not members subject to the restrictions and limits of the bye-laws of the society. The auditor
will have to examine the bye-laws in this respect.
7. Investment of funds - According to section 32 of the Central Act, a society may invest its funds in
any one or more of the following:
(a) In the Central or State Co-operative Bank.
(b) In any of the securities specified in section 20 of the Indian Trusts Act, 1882.
(c) In the shares, securities, bonds or debentures of any other society with limited liability.
(d) In any co-operative bank, other than a Central or State co-operative bank, as approved by the
Registrar on specified terms and conditions.
(e) In any other moneys permitted by the Central or State Government.

In the principal provision relating to the investments of funds of a co-operative society, the Central
as well as State Acts does not mention anything about the investment of reserve fund outside the
business specifically.
8. Appropriation of profits - According to section 33 of the Central Act, a prescribed percentage
of the profits should be transferred to Reserve Fund, before distribution as dividends or bonus
to members.
9. Contributions to Charitable Purposes - According to section 34, a registered society may, with
the sanction of the Registrar, contribute an amount not exceeding 10% of the net profits remaining
after the compulsory transfer to the reserve fund for any charitable purpose as defined in section
2 of the Charitable Endowments Act, 1890.
10. Investment of Reserve Fund outside the business or utilisation as working capital - Some
of the State Acts provide that a society may use the Reserve Fund:
(a) in the business of a society, as working capital (subject to the rules made in this behalf).
(b) may invest as per provisions of the Act.
(c) may be used for some public purposes likely to promote the object of the society. The auditor
should ensure strict compliance with the State Act and Rules in this regard.
762 Auditing & Ethics PW
11. Contribution to Education Fund - Some of the State Acts provide that every society shall
contribute annually towards the Education Fund of the State Federal Society, at the appropriate
rate as per the class of the society. Contribution to Education Fund is a charge on profits and not
an appropriation.
Apart from statutory provisions relating to Reserve Fund, the auditor may have regard to the
provisions in bye-laws and Rules and Regulations of the society regarding the appropriation of profits.
Transfers to other reserves, dividends to members etc. are the other appropriations.
Appropriations of profits must be approved by the General Body of the society, which is the supreme
authority in the co-operative management. Further, it may be noted that necessary accounting entries
for the appropriation of profits must be passed after the date of approval by the General Body. Here
there is a departure from corporate accounting practice, where entries are passed for proposed
appropriations, subject to approval of Annual General Meeting.
According to certain State Acts, transfers to Dividend Equalization Reserve and Share Capital
Redemption Fund are stated as charges against profits. According to the generally accepted principles
of accountancy these items are not charges, but appropriation of profits. The auditor should point
out such spots where statutory provisions of any law are in contradiction with the generally accepted
accounting principles.

Notes to Add

Special Features of Audit of Different Types of Entities 763

 SPECIAL FEATURES OF CO-OPERATIVE AUDIT
 Special features for conducting an audit : (10 points) Affecting working capital
(1) Examination of overdue debts
Proper
6 months to 5 years > 5 years
Provision Classiication
accrued
(2) Overdue Interest  Interest On A/c’s  where even principal
amount is overdue
accruing

Should not be included in In practice, Overdue Interest Reserve A/c. is

calculation of Interest O/s created  Any credit of overdue Interest 
credited to Interest A/c.  is Reduced

(3) Certification of Bad Debts by → Managing Committee → Auditor

(4) Valuation of Assets & Liabilities
(5) Adherence to Co-operative principles → Objectives have been achieved?
(6) Observation of the provisions of → Laws → Regulations
(7) Verification of Members register + Examining their Pass Books
Regarding Loans Given

(8) Special Report to Registrar  In case of irregularities

Personal Fraud Disproportionate

Proiteering Mismanagement advance to vested
Interest Groups

The general processes of auditing involved in audit work such as checking of posting, ascertainment
of arithmetical accuracy, vouching, verification of assets and liabilities and final scrutiny of Balance
Sheet are well known to the students, and the same are to be applied in co-operative audit as well. It
need not be discussed in detail.

764 Auditing & Ethics PW

 Discussion of draft
audit report with Examination of
managing committee overdue debts

Audit Overdue Interest

classification of
Society

Certification of
Special features of Co-operative Bad Dobts
Special report to
the Registrar Audit (to be borne in mind while
auditing)

Verification of Valuation of Assets

Members’ Register and Liabilities
and examination of
their pass books Adherence to
Observations of the Co-oporativo
provisions of the Principles
Act and Rules

However, the special features of co-operative audit, to be borne in mind in general while conducting
the audit are as follows:
1. Examination of overdue debts - Overdue debts for a period from 6 months to 5 years and more
than 5 years will have to be classified and shall have to be reported by an auditor. Overdue debts
have far reaching consequences on the working of a credit society. It affects its working capital
position. A further analysis of these overdue debts from the viewpoint of chances of recovery
will have to be made, and they will have to be classified as good or bad. The auditor will have
to ascertain whether proper provisions for doubtful debts are made and whether the same is
satisfactory.
2. Overdue Interest - Overdue interest should be excluded from interest outstanding and accrued
due while calculating profit. Overdue interest is interest accrued or accruing in accounts, the
amount of which the principal is overdue. In practice an overdue interest reserve is created and
the credit of overdue interest credited to interest account is reduced.
3. Certification of Bad Debts - A peculiar feature regarding the writing off of the bad debts as per
Maharashtra State Co-operative Rules, 1961, is very interesting to note. As per the said rules,
bad debts can be written off only when they are certified as bad by the auditor. Bad debts and
irrecoverable losses before being written off against Bad Debts Funds, Reserve Fund etc. should
be certified as bad debts or irrecoverable losses by the auditor where the law so requires. Where
no such requirement exists, the managing committee of the society must authorise the write-off.
4. Valuation of Assets and Liabilities - Regarding valuation of assets there are no specific provisions
or instructions under the Act and Rules and as such due regard shall be had to the general

Special Features of Audit of Different Types of Entities 765

 principles of accounting and auditing conventions and standards adopted. The auditor will have
to ascertain existence, ownership and valuation of assets. Fixed assets should be valued at cost
less adequate provision for depreciation. The incidental expenses incurred in the acquisition and
the installation expenses of assets should be properly capitalised. If the difference in the original
cost of acquisition and the present market price is of far reaching significance, a note regarding
the present market value may be appended; so as to have a proper disclosure in the light of
present inflatory conditions. The current assets be valued at cost or market price, whichever is
lower. Regarding the liabilities, the auditor should see that all the known liabilities are brought
into the account, and the contingent liabilities are stated by way of a note.
5. Adherence to Co-operative Principles - The auditor will have to ascertain in general, how far
the objects, for which the co-operative organisation is set up, have been achieved in the course
of its working. The assessment is not necessarily in terms of profits, but in terms of extending
of benefits to members who have formed the society. Considered from the viewpoint of social
benefits it may be looked into that how far the sales could be affected at lower prices. For the
achievement of these activities, cost accounting methods, store control methods, techniques of
standard costing, budgetary control etc. should be adopted. However, these modern techniques
are mostly not in application and as such in practice a wide gap is found in the goals to be achieved
and the actual achievements. While auditing the expenses, the auditor should see that they are
economically incurred and there is no wastage of funds.
Middlemen commissions are, as far as possible, avoided and the purchases are made by the
committee members directly from the wholesalers. The principles of propriety audit should be
followed for thepurpose.
6. Observations of the Provisions of the Act and Rules - An auditor of a co- operative society is
required to point out the infringement with the provisions of Co-operative Societies Act and Rules
and bye-laws. The financial implications of such infringements should be properly assessed by
the auditor and they should be reported. Some of the State Acts contain restrictions on payment
of dividends, which should be noted by the auditor.
7. Verification of Members’ Register and examination of their pass books - Examination of
entries in members pass books regarding the loan given and its repayments, and confirmation of
loan balances in person is very much important in a co-operative organisation to assure that the
entries in the books of accounts are free from manipulation.
Specifically in the rural and agricultural credit societies, members are not literate and as such
this is a good safeguard on their part. Of course this checking will be resorted to on a test basis,
which is a matter of judgement of the auditor.
8. Special report to the Registrar - During the course of audit, if the auditor notices that there
are some serious irregularities in the working of the society he may report these special matters
to the Registrar, drawing his specific attention to the points. The Registrar on receipt of such a
special report may take necessary action against the society. In the following cases, for instance,
a special report may become necessary:
(i) Personal profiteering by members of managing committee in transactions of the society,
which are ultimately detrimental to the interest of thesociety.
(ii) Detection of fraud relating to expenses, purchases, property and stores of the society.
(iii) Specific examples of mis-management. Decisions of management against co- operative
principles.
766 Auditing & Ethics PW
 (iv) In the case of urban co-operative banks, disproportionate advances to vested interest groups,
such as relatives of management, and deliberate negligence about the recovery thereof. Cases
of reckless advancing, where the management is negligent about taking adequate security
and proper safeguards for judging the credit worthiness of the party.
9. Audit classification of society - After a judgement of an overall performance of the society, the
auditor has to award a class to the society. This judgement is to be based on the criteria specified
by the Registrar. It may be noted here that if the management of the society is not satisfied about
the award of audit class, it can make an appeal to the Registrar, and the Registrar may direct to
review the audit classification. The auditor should be very careful, while making a decision about
the class of society.
10. Discussion of draft audit report with managing committee - On conclusion of the audit, the
auditor should ask the Secretary of the society to convene the managing committee meeting to
discuss the audit draft report. The audit report should never be finalised without discussion with
the managing committee. Minor irregularities may be got settled and rectified. Matters of policy
should be discussed in detail.

Notes to Add

Special Features of Audit of Different Types of Entities 767

 AUDIT, INQUIRY AND INSPECTION OF MULTI-STATE CO-OPERATIVE SOCIETIES
Audit, Inquiry&&Inspection
Audit, Inquiry Inspectionof of Multi
Multi State
State Cooperative
Cooperative Society
Society
Funds of MSCoS  Cannot be utilized (MSCoS)

for any Political Purpose
 Books of A/c.
Received
(1) All sum of Money
(2) Sale Expended
Purchase of goods
(3) Assets + Liabilities Production
(4) If engaged in
Processing Particulars of material & Labour

Manufacturing

The Multi-State Co-operative Societies Act, 2002, which came into force in August, 2002 applies to
co-operative societies whose objects are not confined to one State. The Act contains detailed provisions
regarding registration, membership and management of such societies. The funds of a Multi-State co-
operative society cannot be utilised for any political purpose. The Act contains detailed provisions
regarding the investment of funds and restrictions on loans, borrowings, etc.

Books of Accounts - As per Multi-State Co-operative Society Rules 2002, every Multi- State Co-
operative society shall keep books of account with respect to-
(a) all sum of money received and expended and matters in respect of which the receipt and
expenditure take place;
(b) all sale and purchase of goods;
(c) the assets and liabilities;
(d) in the case of a Multi-State Co-operative society engaged in production, processing and
manufacturing, particulars relating to utilization of materials or labour or other items of
cost as may be specified in the bye-hours of such a society.
Books of Accounts– Multi State Cooperative Society

All sums All sales If engaged in

of money and Assets and production, processing
received and purchase Liabilities and manufacturing,
expended of goods then books relating to
utilization of materials
or labour or other
relevant items

768 Auditing & Ethics PW

Diagram showing the Books of Accounts to be maintained by Multi State Co-operative Society
Audit of MSCOS (Sec.72 of the MSCOS Act, 2002)

Special Features of Audit of Different Types of Entities 769

 Determined by CG
 Expenses  of special audit
 To be paid by MSCOS
Report to CG

If CG  Does not take any action  Within 4 months
 copy
Circulate to members
send extract
comment Read in GM
(9) Inquiry by Central Registrar (Sec.78) Central Registrar  Communicate
+ 
Within 3 months
Inspection of MSCOS (Sec. 79)

 on receipt of Report
On request by

Federal cooperative Creditor > members of > members of MSCOS

 Board
To which MSCOS
is afiliated
 15 days notice must be given to MSCOS
 Auditing & Ethics PW
770
Within 3 months of date of date of receipt of Report

Communicate to MSCOS
Federal cooperative Creditor > members of > members of MSCOS
 Board
To which MSCOS
is afiliated
 15 days notice must be given to MSCOS

Within 3 months of date of date of receipt of Report

Communicate to MSCOS
1. Qualification of Auditors - Section 72 of the Multi-State Co-operative Societies Act, 2002 states
that a person who is a Chartered Accountant within the meaning of the Chartered Accountants
Act, 1949 can only be appointed as auditor of Multi-State co-operative society.

However the following persons are not eligible for appointment as auditors of a Multi- State co-
operative society-
(a) A body corporate.
(b) An officer or employee of the Multi-State co-operative society.
(c) A person who is a member or who is in the employment, of an officer or employee of the
Multi-State co-operative society.
(d) A person who is indebted to the Multi-State co-operative society or who has given any
guarantee or provided any security in connection with the indebtedness of any third person
to the Multi-State co-operative society for an amount exceeding one thousand rupees.

If an auditor becomes subject, after his appointment, to any, of the disqualifications specified
above, he shall be deemed to have vacated his office as such.
2. Appointment of Auditors - Section 70 of the Multi-State Co-operative Societies Act, 2002
provides that the first auditor or auditors of a Multi-State co- operative society shall be appointed
by the board within one month of the date of registration of such society and the auditor or
auditors so appointed shall hold office until the conclusion of the first annual general meeting. If
the board fails to exercise its powers under this sub-section, the Multi-State co-operative society
in the general meeting may appoint the first auditor or auditors.
The subsequent auditor or auditors are appointed by Multi-State co-operative society, at each
annual general meeting. The auditor or auditors so appointed shall hold office from the conclusion
of that meeting until the conclusion of the next annual general meeting.
3. Power and duties of Auditors – Section 73 of the Multi-State Co-operative Societies Act, 2002
discusses the powers and duties of auditors. According to this, every auditor of a Multi-State
co-operative society shall have a right of access at all times to the books accounts and vouchers of
the Multi-State co-operative society, whether kept at the head office of the Multi-State co-operative
society or elsewhere, and shall be entitled to require from the officers or other employees of
the Multi- State co-operative society such information and explanation as the auditor may think
necessary for the performance of his duties as an auditor.
As per section 73(2), the auditor shall make following inquiries:
(a) Whether loans and advances made by the Multi-State co-operative society on the basis of
security have been properly secured and whether the terms on which they have been made
are not prejudicial to the interests of the Multi- State co- operative society or its members,
(b) Whether transactions of the Multi-State co-operative society which are represented merely
by book entries are not prejudicial to the interests of the Multi-State co-operative society,

Special Features of Audit of Different Types of Entities 771

 (c) Whether personal expenses have been charged to revenue account, and
(d) Where it is Stated in the books and papers of the Multi-State co-operative society that any
shares have been allotted for cash, whether cash has actually, been received in respect of
such allotment, and if no cash has actually been so received, whether the position as stated
in the account books and the balance sheet as correct regular and not misleading.
4. Content of Auditor’s Report - As per sub-section (3) & (4) of section 73 of Multi- state Co-operative
Societies Act, 2002, the auditor shall make a report to the members of the Multi-State co-operative
society on the accounts examined by him and on every balance-sheet and profit and loss account
and on every other document required to be part of or annexed to the balance-sheet or profit
and loss account, which are laid before the Multi-State co-operative society in general meeting
during his tenure of office, and the report shall state whether, in his opinion and to the best of his
information and according to the explanation given to him, the said account give the information
required by this act in the manner so required, and give a true and fair view:
(a) In the case of the balance-sheet, of the state of the Multi-State co-operative society’s affairs
as at the end of its financial year; and
(b) In the case of the profit and loss account, of the profit or loss for its financial year. The
auditor’s report shall also state:
(i) Whether he has obtained all the information and explanation which to the best of his
knowledge and belief were necessary for the purpose of his audit.
(ii) Whether, in his opinion, proper books of account have been kept by the Multi-State
co-operative society so far as appears from his examination of these books and proper
returns adequate for the purpose of his audit have been received from branches or
offices of the Multi-State co- operative society not visited by him.
(iii) Whether the report on the accounts of any branch office audited by a person other than
the Multi-State co-operative society’s auditor has been forwarded to him and how he
has dealt with the same in preparing the auditor’s report.
(iv) Whether the Multi-State co-operative society’s balance sheet and profit and loss account
dealt with by the report are in agreement with the books of account and return.
Where any of the matters referred to in sub-section (3) or (4) is answered in the negative
or with a qualification, the auditor’s report shall state the reason for the answer.
5. Power of Central Government to direct special audit in certain cases - Under section 77 of
the Multi-State Co-operative Societies Act, 2002, where the Central Government is of the opinion:
(a) that the affairs of any Multi-State co-operative society are not being managed in accordance
with self-help and mutual deed and co-operative principles or prudent commercial practices
or with sound business principles; or
(b) that any Multi-State co-operative society is being managed in a manner likely to cause serious
injury or damage to the interests of the trade industry or business to which it pertains; or
(c) that the financial position of any Multi-State co-operative society is such as to endanger its
solvency.

772 Auditing & Ethics PW

 Power of Central Government to Direct Special Audit

Affairs Not Managed in Managed as it would

Financial Position is
Accordance With Cause Injury to Interest
such as would
Prudent Commercial of Trade or Industry or
endanger its Insolvency
Practices Business

1. Central Government’s Order:- The Central Government may at any time by order direct that a
special audit of the Multi-State co-operative society’s accounts for such period or periods as may
be specified in the order shall be conducted.
2. Appointment of the Auditor:- It may appoint either a chartered accountant or the Multi-State
co-operative society’s auditor himself to conduct the special audit.
3. Shareholding Restriction:- However, Central Government shall order for special audit only if
that Government or the State Government either by itself or both hold fifty-one percent or more
of the paid-up share capital in such Multi-State co-operative society.
4. Special Auditor’s Powers, Duties & Report:- The special auditor shall have the same powers
and duties in relation to the special audit as an auditor of a Multi- State co-operative society has
under section 73.
However the special auditor shall instead of making his report to the members of the Multi-State
co-operative society make the report to the Central Government. The report of the special auditor
shall, include all the matters required to be included in the auditor’s report under section 73 and
any other matter as directed by the Central Government.
5. Action by the Central Government:- On receipts of the report of the special auditor the Central
Government may take such action on the report as it considers necessary in accordance with the
provision of the Act or any law for the time being in force. However, if the Central Government does
not take any action on the report within four months from the date of its receipt, that Government
shall send to the Multi- State Co-operative society either a copy of, or relevant extract from, the
report with its comments thereon and require the Multi-State Co-operative society either to
circulate that copy or those extracts to the members or to have such copy or extracts read before
the Multi-State Co-operative society at its next general meeting.
6. Expenses pertaining to the Special Audit:- The expenses of, and incidental to, any special audit
under this section (including the remuneration of the special auditor) shall be determined by the
Central Government which determination shall be final and paid by the Multi-State Co-operative
society and in default of such payment, shall be recoverable from the Multi-State Co-operative
society as an arrear of land revenue.

Notes to Add

Special Features of Audit of Different Types of Entities 773

 INQUIRY BY CENTRAL REGISTRAR UNDER SECTION 78
1. When:- The Central Registrar may, on a request from:-
 a federal co-operative to which a Multi- State Co-operative society is

 affiliated or

 a creditor or not less than one-third of the members of the board or

 not less than one-fifth of the total number of members of a Multi-state co-operative society,

2. How:- hold an inquiry or direct some person authorized by him by order in writing in his
behalf to hold an inquiry into the constitutions, working and financial condition of a Multi-State
Co-operative society.
3. Opportunity of being Heard:- However, before holding such inquiry fifteen days notice must be
given to the Multi-State co-operative society.
4. Powers given:- The Central Registrar or the person authorized by him shall have the following
powers, namely:
(a) He shall at all reasonable times have free access to the books, accounts, documents, securities,
cash and other properties belonging to or in the custody of the Multi-State co-operative
society and may summon any person in possession or responsible for the custody of any
such books, accounts, documents securities, cash or other properties to produce the same
at any place specified by him.
(b) He may, notwithstanding any bye-law specifying the period of notice for a general meeting
of the Multi-State co-operative society, require the officers of the society to call a general
meeting of the society by giving notice of not less than seven days at such time and place
at the head quarters of the society to consider such matters as may be directed to him, and
where the officers of the society refuse or fail to call such a meeting, he shall have power to
call it himself.
(c) He may summon any person who is reasonably believed by him to have any knowledge of
the affairs of the Multi-State co-operative society to appear before him at any place at the
headquarters of the society or any branch thereof and may examine such person on oath.
5. Follow up:- The Central Registrar shall, within a period of three months of the date of receipt
of the report, communicate the report of inquiry to the Multi-State co- operative society, the
financial institutions, if any, to which the society is affiliated, and to the person or authority, if any
at whose instance the inquiry is needed.

Notes to Add

774 Auditing & Ethics PW

 INSPECTION OF MULTI-STATE CO-OPERATIVE SOCIETIES UNDER SECTION 79
1. When:- The Central Registrar may, on a request from
 federal co-operative to which a Multi- State Co-operative society is
 affiliated or a creditor or
 not less than one-third of the members of the board or
 not less than one-fifth of the total number of members of a Multi-State co-operative society
2. How:- By general or special order in writing in this behalf inspect or direct any person authorized
by him by order in writing in this behalf to make an inspection into the constitution, working and
financial condition of a Multi- State co-operative society.
3. Opportunity of Being heard:- No inspection shall be made unless a notice of not less than fifteen
days has been given to the multi-state co-operative society.
4. Powers available:- The Central Registrar or the person authorized by him shall have the following
powers:
(a) He shall at all times have access to all books, accounts, papers, vouchers, securities, stock
and other property of that society and may, in the event of serious irregularities discovered
during inspection, take them into custody and shall have power to verify the cash balance
of the society and subject to the general or special order of the central registrar to call a
meeting of the society where such general meeting is, in his opinion necessary.
(b) Every officer or member of a Multi-State Co-operative society shall furnish such information
with regard to the working of the society as the central registrar or the person making such
inspection may require.
5. Inspection Report:- A copy of the report of inspection under this section shall be communicated
to the Multi-State Co-operative society within a period of three months from the date of completion
of such inspection.
Test Your Understanding
4. A society has been formed by pan India employees of a public sector bank. The purpose of
society is to promote savings habits of members and to grant loan to them up to a small specified
amount. Small savings are promoted amongst members by way of compulsory contribution
from monthly salary. Identify type of society and also discuss nature of books of accounts to be
maintained by such a society.
Ans. The society is in nature of Multi-state cooperative society as it serves interests of members in
more than one state. It accepts small savings from its members and grants loan to members. As
per Multi-State Co-operative Society Rules 2002, every Multi- State Co-operative society shall
keep books of account with respect to: -
(a) all sum of money received and expended and matters in respect of which the receipt and
expenditure take place
(b) the assets and liabilities

Special Features of Audit of Different Types of Entities 775

 QUESTIONS

Theory Questions
31. Central Govt. hold 55% of the paid up share Capital in Kisan Credit Co- operative Society, which
is incurring huge losses. Advise when the Central Government can direct Special Audit under
Section 77 of the Multi State Co- operative Society Act.
Ans. Central Government shall order for special audit only if that Government or the State Government
either by itself or both hold fifty-one percent or more of the paid-up share capital in such Multi
-State co-operative society. Under section 77 of the Multi-State Co-operative Societies Act, 2002,
where the Central Government is of the opinion:
(i) that the affairs of any Multi-State co-operative society are not being managed in accordance
with self-help and mutual deed and co- operative principles or prudent commercial practices
or with sound business principles; or
(ii) that any Multi-State co-operative society is being managed in a manner likely to cause serious
injury or damage to the interests of the trade industry or business to which it pertains; or
(iii) that the financial position of any Multi-State co-operative society is such as to endanger its
solvency.

Thus, in the given case since Central Govt is holding 55% shares and financial position of Kisan
Credit co- operative society is in danger, Central government can direct for special audit.
32. No inspection under Section 79 of Multi-State Co-operative Societies Act, 2002 shall be made unless
a notice has been given to the multi-state co-operative society. Explain stating clearly when and
how such inspection can be made. Also state the powers available with the Central Registrar in
this regard along with provisions relating to communication of the inspection report under the
said section.
Ans. Inspection of Multi-State Co-operative societies under Section 79
(1) When: The Central Registrar may, on a request from
(i) federal co-operative to which a Multi-State Co-operative society is affiliated or a creditor
or
(ii) not less than one-third of the members of the board or
(iii) not less than one-fifth of the total number of members of a Multi-State co-operative
society
(2) How: By general or special order in writing in this behalf inspect or direct any person
authorized by him by order in writing in this behalf to make an inspection into the constitution,
working and financial condition of a Multi-State co-operative society.
(3) Opportunity of Being heard: No inspection shall be made unless a notice of not less than
fifteen days has been given to the multi-state co-operative society.
(4) Powers available: The Central Registrar or the person authorized by him shall have the
following powers:
(a) He shall at all times have access to all books, accounts, papers, vouchers, securities,
stock and other property of that society and may, in the event of serious irregularities
discovered during inspection, take them into custody and shall have power to verify
776 Auditing & Ethics PW
 the cash balance of the society and subject to the general or special order of the central
registrar to call a meeting of the society where such general meeting is, in his opinion
necessary.
(b) Every officer or member of a Multi-State Co-operative society shall furnish such
information with regard to the working of the society as the central registrar or the
person making such inspection may require.
(5) Inspection Report: A copy of the report of inspection under this section shall be
communicated to the Multi-State Co-operative society within a period of three months from
the date of completion of such inspection.
Notes to Add

Special Features of Audit of Different Types of Entities 777

 AUDIT OF TRUST & SOCIETIES

778 Auditing & Ethics PW

There are three basic legal forms of charitable entities under Indian law: trusts, societies, and section 8
companies. The legal framework governing the charitable institution will depend on the form of
business organization the charitable institution takes.
‰ If the charitable institution is formed as a Public Trust, it will be governed by the Public Trust
Act applicable in the relevant State. However, if no Public Trust Act exists in that state, then the
applicable legislation will be the Indian Trusts Act, 1882.
‰ If the charitable institution is formed as a Society, it will be governed by the Societies Registration
Act, 1860.
‰ The charitable institution can also be formed as a non-profit company under section 8 of the
Companies Act, 2013.
‰ Apart from the above legislations, the Income Tax Act 1961 will be applicable to charitable
institutions.
‰ And in the case of foreign contributions to these charitable institutions, the Foreign Contribution
(Regulation) Act, 2010 will be applicable.

BOOKS OF ACCOUNT:- Charitable and religious trusts should maintain regular books of account.
This will enable management to demonstrate due discharge of responsibilities they assume. The
Auditor is required to report whether the Trust has maintained proper books of accounts, including
the following, namely: -
(i) cash book;
(ii) ledger; journal;
(iii) copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills
are issued by the trust, and copies or counterfoils of machine numbered or otherwise serially
numbered receipts issued by the trust;
(iv) original bills wherever issued to the person and receipts in respect of payments made by the
person;
(v) any other book that may be required to be maintained in order to give a true and fair view of the
state of the affairs of the person and explain the transactions effected;
FINANCIAL STATEMENTS:- Every year the trust has to prepare financial statements like the
Balance sheet and Income and expenditure statements based on its books of accounts. The format
for preparation and presentation of financial statements is prescribed under respective state laws.
Charitable Organisations are governed by different laws as well as different forms of organisations
also necessitate different accounting aspects to be complied.

Special Features of Audit of Different Types of Entities 779

Auditor’s Responsibility
The auditor should obtain the list of the books and records maintained by the Trust. The list should
be matched with the above requirement for maintaining mandatory books and records as may be
applicable in each case. The auditor should then verify the records for the purpose of its audit. He has
to comply with the Accounting Standards (AS) and Standards on Auditing (SA) prescribed and made
mandatory by the Institute of Chartered Accountants of India.
In giving his report the auditor will have to use his professional skill and expertise and apply such
audit tests as the circumstances of the case may require, considering the contents of the audit report.
He will have to conduct the audit by applying the generally accepted auditing procedures, which are
applicable for any other audit. He can apply the test checks depending on the evaluation of internal
control procedures followed by the assessee. The auditor will also have to keep in mind the concept
of materiality depending upon the circumstances of each case.
He should keep detailed notes about the evidence on which he has relied upon while conducting
the audit and also maintain all his working papers.
Such working papers should include his notes on the following, amongst other matters:
(a) work done while conducting the audit and by whom;
(b) explanation and information given to him during the course of the audit and by whom;
(c) decision on the various points taken;
(d) the judicial pronouncements relied upon by him while drafting the audit report; and
(e) certificates issued by the client / management letters.
It is important that the audit working papers prepared and/or obtained by the auditor
provide evidence that:
(i) the opinion expressed by the auditor is based on the examination made by him;
(ii) in arriving at his opinion, the auditor has given due cognizance to the information and explanations
given by the assessee and that his opinion is not arbitrary;
(iii) the information and explanations obtained were full and complete that is, the auditor has called
for all the information and explanations which were necessary to be considered before arriving
at his opinion; and
(iv) the auditor did not merely rely upon the information or explanations given by the assessee but
that he subjected such information and explanations to reasonable tests to verify their accuracy
and completeness

Notes to Add

780 Auditing & Ethics PW

 TRUST
 TRUSTS  Auditor to ascertain

A/c Receipt Cash Amount Max. Meetings Trustee

 + + 
Regularly Disbursement Bal. Vouchers O/S w/off Min. Regular Debtor creditor
Maintained  > 
Properly 1 Year No. of Trustee Of Trust
Custody
+
Correctly
 Manager Trustee
Shown

The auditor has to ascertain

(a) whether accounts are maintained regularly and in accordance with the provisions of the applicable
Act and the rules;
(b) whether receipts and disbursements are properly and correctly shown in the accounts and
money received in the form of donations is being applied as per the objects of the trust and as
per the specific direction by the donor, if any.
(c) whether the cash balance and vouchers in the custody of the manager or trustee on the date of
audit were in agreement with the accounts;
(d) whether all books, deeds, accounts, vouchers or other documents or records required by the
auditor were produced before him;
(e) whether a register of movable and immovable properties is maintained, the changes therein
are communicated from time to time to the regional office, and the defects and inaccuracies
mentioned in the previous audit report have been duly complied with and rectified.
(f) whether the manager or trustee or any other person required by the auditor to appear before
him did so and furnished the necessary information required by him;
(g) whether any property or funds of the Trust were applied for any object or purpose other than the
object or purpose of the Trust;
(h) the amounts of outstanding for more than one year and the amounts written off, if any;
(i) whether any money of the public trust has been invested contrary to the provisions of applicable
Act which have come to the notice of the Auditor.
(j) all cases of irregular, illegal or improper expenditure, or failure or omission to recover monies or
other property belonging to the public trust or of loss or waste of money or other property thereof,
and whether such expenditure, failure, omission, loss or waste was caused in consequence of
breach of trust or misapplication or any other misconduct on the part of the trustees or any other
person while in the management of the trust.
(k) whether the maximum and minimum number of the trustees is maintained;
(l) whether the meeting are held regularly as provided in such instrument.
(m) whether the minute books of the proceedings of the meeting is maintained.
(n) whether any of the trustees has any interest in the investment of the trust.

Special Features of Audit of Different Types of Entities 781

(o) whether any of the trustees is a debtor or creditor of the trust.
(p) whether anonymous donations received are properly accounted for and donations in cash are
not received by the Trust over and above the prescribed limit of accepting cash donations.
(q) whether the irregularities pointed out by the auditors in the accounts of the previous year have
been duly complied with by the trustees during the period of audit –
(r) any special matter which the auditor may think fit or necessary to bring to the notice of the
Deputy or Assistant Charity Commissioner.

Notes to Add

782 Auditing & Ethics PW

 SOCIETIES
 SOCIETIES  Auditor’s Consideration

Governing
Procedure Object Registration Understanding Appro. A/c Inquiries
Legislation of under  Policies 
object Soc. I.C. Registrar

The foreign contribution (Regulation) Act, 2010 The Income Tax Act, 1961

The auditor’s considerations:-

(a) The auditor should ascertain governing legislation of society i.e. Societies Registration act, 1860
or any applicable state law under which it has been registered.
(b) Object of society needs to be ascertained from its memorandum of association/bye laws. Its
activities may include charitable, social, cultural or educational activities.
(c) Ascertain whether society has obtained registration under Foreign Contribution (Regulation)
Act, 2010 in case foreign contributions are received.
(d) Ascertain whether it is also registered under relevant provisions of Income Tax Act which may
make it eligible for tax exemption on its income.
(e) Obtain an understanding of internal control to design audit procedures with special reference to
donations and various expenditures incurred in relation to achievements of objects of society.
(f) Evaluate appropriateness of accounting policies with special reference to donations and grants.
Also evaluate accounting policies in relation to specific grants.
(g) In case some expenses incurred by society are reimbursed by donors, ascertain how these are
recognized in financial statements.
(h) Ascertain, if any inquiry has been held by Registrar under applicable law in the working or
financial condition of society and its implications for auditor’s opinion.
(i) Ascertain all cases of irregular, illegal or improper expenditure or failure or omission to recover
monies or other property belonging to society or of loss or waste of money or other property
thereof.
(j) Ascertain whether such expenditure or waste was caused in consequence of breach of trust or
misapplication or any other misconduct on the part of governing body.

CASE STUDY
Consider the following five descriptions: -
(A) Audit of “Implementation of Nagpur Metro Rail Project” was conducted by the Comptroller
and Auditor General of India.
Following is extract of few audit findings placed on website cag.gov.in.
“The location of New Airport station was not ideal from the viewpoint of ridership due to
sparse population in and around the station and also from the accessibility point of view.

Special Features of Audit of Different Types of Entities 783

 Cotton Market station, the second additional station was projected to have high peak hour
peak direction trips but the work was kept on hold midway citing fund crunch due to
non-release of pending contribution from stakeholders. However, the situation could have
been managed through prioritization of works.”
(B) Another set of audit findings in respect of audit of Haryana Power Generation Corporation
Limited, a wholly owned government company responsible for operation of power generation
plants in state of Haryana is as under: -
“The main reason for low generation was higher variable cost of thermal power stations which
resulted in backing down of plants.”
(C) A report was tabled in Parliament highlighting main features of direct taxes administration of
country as mandated in Constitution of India. This report primarily discussed compliance to the
provisions of the Income Tax Act, 1961 and the associated rules and procedures etc. as applied
to administration of direct taxes including irregularities noticed in finalizing assessments etc.
(D) Radial finance corporation Limited is a government company. The audit of the company is
conducted by statutory auditors appointed by Comptroller and Auditor General of India.
(E) Bharat Insurance Company Limited is a general insurance government owned company. The
statutory auditor is appointed by Comptroller and Auditor General of India.
The annual report for a particular year also contains comments of statutory auditors on matters
such as whether company has carried out reconciliations in respect of its inter-company
balances with other government owned insurance companies.

QUESTIONS

Theory Questions
Based on above, answer following questions:
33. Based upon plain reading of audit findings stated at Para (A), identify type of audit carried out
by office of the Comptroller and Auditor General of India.
(a) Audit against provision of funds (b) Propriety audit
(c) Performance audit (d) Compliance audit
Ans. (c)
34. Keeping in view audit findings in respect of Haryana Power Generation Corporation Limited,
identify type of audit carried out.
(a) Audit of Government Company (b) Audit against rules and orders
(c) Compliance audit (d) Performance audit
Ans. (d)
35. Which of the following is the most appropriate statement in context of report tabled in Parliament
regarding administration of direct taxes?
(a) It is likely to be a report prepared for submission to the President under Article 151 of the
Constitution of India by Comptroller and Auditor General of India.
784 Auditing & Ethics PW
 (b) It is likely to be a report prepared for submission to the Prime Minister under Article 151 of
the Constitution of India by an independent task force of experts.
(c) It is likely to be a report prepared for submission to the President under Article 151 of the
Constitution of India by Central Board of Direct Taxes.
(d) It is likely to be a report prepared for submission to the Prime Minister under Article 151 of
the Constitution of India by Central Board of Direct Taxes.
Ans. (a)
36. Who is empowered to conduct “supplementary audit” in case of Radial finance Corporation
Limited, a government company?
(a) Central Government
(b) Another independent auditor appointed by CAG
(c) CAG
(d) Another independent auditor appointed by Ministry of Corporate Affairs
Ans. (c)
37. As regards comments of auditors specified in respect of audit report of above insurance company,
which of the following is likely to be most appropriate statement?
(a) Such are likely to be comments of test audit carried out by CAG.
(b) Such are likely to be comments in respect of directions to statutory auditor by CAG for
reporting on specific aspect of their audit work.
(c) Such are likely to be comments of supplementary audit carried out by CAG
(d) Such are likely to be comments of statutory auditors in accordance with requirements of
Standards on Auditing
Ans. (b)
Multiple Choice Questions (MCQ)
1. The audit of municipal corporation of a large metro city is in progress. Which of the following
is not likely an objective of such as audit?
(a) To report on the adherence to legal and administrative requirements
(b) To report on whether value is being fully received for money spent
(c) To report on the weakness of systems of financial control
(d) To provide better civic amenities to residents of metro city
Ans. (d)
2. “Save Democracy” is an NGO working in cause of promoting democracy and democratic
institutions in many countries including India. Its Indian counterpart has received funds from
a renowned “Flower Trust” of US. As auditor of NGO, which of the following laws/orders would
be relevant to you in context of above information?
(a) Income Tax Act, 1961
(b) Foreign Contribution Regulation Act, 2010
(c) Companies Act, 2013
(d) Orders issued by Ministry of Social Justice and Empowerment
Ans. (b)

Special Features of Audit of Different Types of Entities 785

 3. The appointment of first auditor of a multi-state cooperative society is made by: -
(a) Central Registrar (b) Board of society
(c) Members of society (d) Central Government
Ans. (b)
4. Consider following revenue sources of Union Government.
(P) Revenues from direct taxes
(Q) Revenues from Goods and Services Tax
(R) Revenues from Custom Duties
(S) Revenues from Excise Duties

Out of P, Q, R and S, which of the following flow to “Consolidated Fund of India”?
(a) P, Q and R (b) P, Q and S
(c) P and Q (d) P, Q, R and S
Ans. (b)
5. An LLP files compliance returns with: -
(a) Registrar of firms & societies (b) Central Registrar
(c) Registrar of Companies (d) Local fund audit wing
Ans. (c)
qqq

786 Auditing & Ethics PW