Chapter 12 -

• Audit of Difference type of Entity

CHAPTER 12 Audit of Items in Financial Statements SHORT NOTES

1 Audit of Educational Institution/College
2 Audit of Hospital
3 Audit of Cinema Hall
4 Audit of Charitable Institute
5 Audit of Club
6 Audit of Hotel
7 Audit of Publishers
8 Audit of Hire Purchase Company
9 Audit of Local Bodies
10 Audit of Leasing Companies
11 Audit of Non-Government Organisations
12 Audit of a Partnership Firm
13 Audit of Small Companies

14 Audit of Incomplete Records

15 Government Audit
16 Duties of Comptroller & Auditor General
17 Powers of Comptroller & Auditor General

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18 Audit of Various Items Under Govt. Audit
19 Audit of LLP
20 Appointment of Auditor as per Rule 24 of LLP
21 Advantages or Purposes Audit of LLP
22 Auditor’s Duties Regarding Audit of LLP
23 Audit of Co-operative Societies
24 Multi State Co-operative Societies Act 2002

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 COMMON POINTS ii. Verify ownership & existence of fixed assets by examining records &
conducting physical verification respectively.
Preliminary work
iii. Verify whether depreciation has been properly calculated w.r.t each
i. Study the provisions of applicable statute as per the legal status of the class of fixed assets.
institute.
iv. Obtain WR w.r.t existence, ownership & valuation of assets.
ii. Examine the trust deed or regulation.
Liability
iii. Study the minutes of meetings of governing body / trustee to gain
knowledge of any important decision which may affect the accounts i. Verify corpus / capital fund with special attention to any increase in
for e.g., purchase of computer etc. the same as compared to that of previous year.
iv. Evaluate the system of internal control. ii. Check that any deposit paid by the student on admission, if
refundable, is shown as a liability & not transferred to P&L account.
v. Obtain list of accounting records & accounting policy adopted by the
management. AUDIT OF EDUCATIONAL INSTITUTION /COLLEGE
Receipts Receipts
Rent Fee from students
i. Examine agreement with tenants to know rates of rent & their due i. Check the admission fee to confirm whether amount has been credited
dates etc.
to a separate account. Refundable money is shown as liabilities.
ii. Verify rent received by comparing counterfoils of receipts issued with
the bank pass book. ii. Check whether demands for fee are raised against all students.
Income on Investment iii. Ascertain whether the amounts demanded from student are as per rates
i. Verify investment registers to check whether interest w.r.t. same has specified according to their course.
been duly accounted for. iv. Verify the fee received by comparing fee collection register and copy of
ii. Interest and dividend received should be checked with reference to receipts issued to students, for cheque received, examine passbook and
entries in bank pass book. for cash received, check entries in cashbook.
Donations & grants v. Check authorisation for fee concessions.
i. Donations may be of two types, for specific use or for general use. vi. Ensure that in case of late payment of fee, fine has been properly
Check recording of such amount in separate accounts.
imposed, collected & accounted for.
ii. Vouch counterfoils of receipts issued to donors.
vii. Ascertain accounting & authorisation for fee received in advance.
iii. Verify grant from government or any local authority with reference to
sanction letter. viii. In case hostel facility is also granted to students, check whether hostel
Expenses – Refer Audit of Item of financial statement dues are properly demanded & collected on timely basis. Also ascertain
whether all hostel dues have been properly accounted for.
Assets
i. Examine whether all fixed assets are properly accounted for.

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Expenses iv. Special attention should be given to purchase of high value medicines
Towards students & injections. Also check whether there is strict control over their
purchases and issues.
i. Check the basis for providing scholarships to students, verify
acknowledgement letter from students. v. Obtain WR regarding abnormal item of expenses if any.

ii. Examine payment w.r.t. prize distribution ceremonies. AUDIT OF CINEMA HALL
iii. Examine whether expenses on books in library & sports item are Receipts
properly authorised & accounted for. From shows
AUDIT OF HOSPITAL i. Check that tickets to be issued are serially numbered & kept in proper
Receipts custody.

From Patients ii. Perform compliance procedures to check whether there is strict
internal control on entry to cinema hall which should be only against
i. Check copies of bills issued to the patients with reference to register of show of the ticket.
patients to ensure that all patients have been billed properly.
iii. Check internal control w.r.t. issuance of free passes.
ii. Check calculation of few bills.
iv. Check collection shown in cash book with number of tickets sold for
iii. Examine whether bills are raised properly bifurcating into rent charges, each show.
services charges & payments regarding medicine.
v. Check internally generated daily report with number of tickets sold
iv. Check internal control & authorisation for bills raised at concessional for each category (balcony, first class etc.).
rates.
vi. For advance booking, ensure that different series of tickets are issued.
v. Check cash collected shown in cash book with duplicate copies of receipts
issued to the patients. vii. Reconcile total entertainment tax collected with total number of
tickets sold for each category'.
Payments
From Advertisement
With respect to purchases & various expenses
i. Study agreement entered into for advertisement.
i. Ensure authorisation of various payments specially capital
expenditure. ii. Ascertain whether income w.r.t slides shorts exhibited has been
properly recognised & collected.
ii. Compare various items of expenditure with those of previous year
(ARP), iii. Check calculations of it with reference to agreement.

iii. Check few calculations w.r.t staff salary to check whether these are in Restaurant Income
accordance with the pay rules. i. Study the agreement entered into by cinema hall with restaurant run
in the premises.

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 ii. Check collection of share in restaurant income. v. If any grant has been received for some particular purpose, examine
iii. Stall may be run by cinema hall. In this case, ensure about recognition whether the same has been utilised for designated use only.
& accounting of stall incomes, also consider control over stock of Payment
foodstuff, cold drinks, ice creams etc. Expenses
Payments i. Vouch all expenses, especially to check whether expenses have been
Towards Expenditure made towards object of the trust.
i. Examine whether expenditure incurred has been properly classified ii. Check payment to staff towards salary etc.
into Capital & Revenue. iii. Compare other expenses like stationery telephone etc. with those of
ii. Vouch the payment made for repairs & maintenance of infrastructure. previous year (ARP).
iii. Examine expenditure incurred on advertisements or any promotional iv. Verify that all payments are made after proper sanction by proper
campaign. authority.
iv. Vouch payments towards film hire with the bills given by distributors. AUDIT OF CLUB
v. Check agreement entered into with distributors. Receipts
Advance paid to Distributor Admission fee
i. Check whether all advance paid relating to films already run has been i. Vouch admission fee with members list & copies of cash receipts
properly adjusted. issued to them.
ii. Obtain WR & confirmation from distributors. ii. Check the accounting policy of club regarding recognition of
admission fee, as it is normally treated as a capital receipt.
AUDIT OF CHARITABLE INSTITUTION
Subscription
Receipts
i. Examine subscription register with members list & copies of receipts
Donations & grants issued to them.
i. Examine donations received as shown in cash book with reference to ii. Reconcile total subscription due with collections & arrears w.r.t same.
copies of receipts issued.
iii. Check subscription in arrears to ensure whether amount irrecoverable
ii. Ensure that all donations received has been taken into account. has been written off.
iii. Check periodic internal report w.r.t. donations received during that iv. Check adjustment w.r.t. subscription received in advance.
period (monthly or quarterly).
From Services provided to members
iv. Donation may also be received in kind, ensure their proper
i. Examine the rate criteria enlisted in rules for different services like
recognition in books of account.
sports, swimming pool and restaurant etc.

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 ii. Examine whether charges has been recovered form members w.r.t. iii. Check a few bills with order books to ensure their correctness.
special services provided to them. Other Incomes
iii. Vouch revenue from sale of cigars, wines etc. i. In case, hotel provides banquet hall for various functions, study tariff
Payments structure.
Purchases ii. Ensure correctness of billing for letting out banquet hall.
i. Examine whether payment w.r.t. different sports items & furniture iii. In case spaces have been let out to shopkeepers or travel agencies etc.,
etc. has been made after proper sanction. check agreement entered into with them.
ii. Ensure that bulk purchases of food items, sports material etc. have iv. Vouch collections from above and ensure their correct postings.
been made from approved vendors. Payment
iii. Check entries in cash book regarding payments on account of Purchase of Various items
purchases.
i. Check authorisation for purchase of stock such as food, beverages,
AUDIT OF HOTEL linens, crockery etc.
Receipts ii. Vouch payment w.r.t. same with copies of bills issued by vendors.
Room rents/ sales To Staff
i. Study daily occupancy report prepared by the management. i. Test Check a few' salary payments made to permanent staff with
ii. Ensure properness of billing. Also verify whether appropriate rates entries in cashbook.
have been charged according to category of rooms. ii. Regarding casual labour, check attendance records & wage payment
iii. Check whether bills have been raised to all parties listed in guest registers. Also ensure adequacy of internal controls over this area to
register. In case it is not so, obtain Reconciliation. rule out possibility of dummy labour.

iv. If receipts are in foreign currency, ensure compliance with FEMA. iii. Compare payment to staff with that made in previous period (ARP).

v. Vouch receipts from room rents. Also ensure their correct posting in Taxes
relevant accounts. i. Hotels charge various taxes from customers such as luxury tax, service
vi. Special attention is given to receipts accepted through credit cards. tax etc.
ii. Ensure that same has been deposited to authorities on timely basis.

Restaurant Income Commission

i. Examine a few bills issued to customers to ensure their correctness. i. Normally hotels pay commission to various travel agents for bookings
received through them.
ii. Perform compliance procedures to check internal controls in
restaurant. ii. Inspect the agreement entered into with them.

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 iii. Check whether payments have been made as per agreement. Other liabilities
iv. Ensure appropriateness of accounting of commission in correct i. Check whether all liabilities have been taken into account.
account and period. ii. Ensure whether outstanding expenditures has been properly shown
Expansion Expenses as liabilities.
i. Ensure whether room addition expenses / major additions to hotel AUDIT OF PUBLISHERS
buildings (construction of new health club etc.) have been properly
Preliminary
capitalised.
As usual
ii. However, redecoration & daily maintenance expenses should be
charged to revenue. Receipts
iii. Vouch payments with respect to it. Trace entries in relevant accounts. Income from sale
Assets i. Vouch the receipts w.r.t. number of book sold.
Fixed Assets ii. Ensure that books sold on approval are properly adjusted & not shown
as sales.
As usual
iii. In case books have been distributed free of cost (Sample copies),
Stock
check authorisation.
i. Check whether valuation methods are consistently applied.
iv. Similarly check authorisation for discount on sold copies.
ii. Attend physical stock taking.
Income from advertisement
iii. Ensure that stocks are kept under appropriate authority.
i. In case of publication of magazines & newspapers, a major source of
Cash and foreign currency income is through advertisement.
i. Physically check the cash. ii. Ensure that bills have been raised for all advertisements published.
ii. Ensure application of proper conversion rate in case of foreign iii. Examine bills raised with subsequent receipts.
currency.
Payments To Authors
iii. Obtain Bank reconciliation statement.
i. Inspect agreement entered into w.r.t. mode of computations &
Liabilities payment of royalties.
Loans ii. Vouch payments made to author’s w.r.t. royalties.
i. In case hotel has taken any long term loan from bank, inspect the loan iii. Trace corresponding entries in cashbook.
agreement.
iv. Auditor may seek confirmation from authors as well.
ii. Check regularity of payment of interest charges.

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 v. If any advance has been made to the authors, examine whether these ii. Ensure the terms & conditions specified therein specifically w.r.t.
are properly adjusted in accounts. - the asset in question
Assets & liabilities - hire purchase price
Stock - no. of instalments
i. Attend physical stock taking of books conducted by management - amount of instalments
ii. Check whether these are shown in financial statements at a proper Purchase of asset
value.
i. Check whether purchase of assets is properly authorised.
iii. Special attention should be given to internal controls w.r.t. movement
of books. ii. Vouch payment made for the same.

Others - In usual way. iii. Trace entries in relevant ledger.

Liabilities iv. Ensure that client has valid title over the said asset.

i. If any case has been filed against client for breach of copyright as at Examine hire purchase transaction
B/s date, check adequacy of disclosure in financial statements. i. Check whether payments are regularly received from the hire
ii. In this case, he may seek expert’s opinion as well. purchaser.
ii. Examine whether instalments have been properly apportioned
AUDIT OF HIRE PURCHASE COMPANY
between -
Preliminary
(a) Principal &
i. Obtain knowledge of business in usual way.
(b) Interest
ii. Special attention is given to the provisions stated in MOA and AOA.
vi. Examine accounting policy adopted by the client to ensure whether
iii. Understand the nature of Hire purchase transaction as well as the these are in accordance with generally accepted accounting
accounting treatment adopted by client for the same. principles.
iv. Note: - Hire purchase transaction is one where vii. Check adequacy of provision for doubtful debts.
- Possession of goods is transferred to purchaser. Repossession of goods
- On payment of just a part of total price. i. Sometimes, due to non-payment of instalments by hire purchaser, the
- But title is passed to him, client may repossess the goods as per agreement.

- Only on full payment of balance instalments. ii. Check valuation of goods repossessed, if any.

Examine hire purchase agreement iii. Verify second sale of the goods, so repossessed

i. Whether these are properly dated & signed by concerned parties.

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 AUDIT OF LOCAL BODIES (a) Reporting on the fairness of the content and presentation of financial
statements;
Background
(b) Reporting upon the strengths and weaknesses of systems of financial
i. A municipality can be defined as a unit of local self-government in an
control;
urban area.
(c) Reporting on the adherence to legal and/or administrative
ii. ‘Local self-government’ ordinarily means the administration of a
requirements;
locality - a village, a town, a city or any other area smaller than a
state. (d) Reporting upon whether value is being fully received on money spent;
and
iii. It raises its revenue through local taxation and spends its income on
local services. (e) Detection of error, fraud and misuse of resources.

iv. These bodies generally follow the cash basis of accounting. AUDIT PROCEDURE

Financial administration Preliminary Understand

Budgetary Procedure Auditor should obtain basic information about the constitution, functions and
financial status of the local body.
Budget preparation is determining the levels of taxation, rates and the
ceilings on expenditure. Financial Administration

The objectives of local bodies budgetary procedure are: ■ Obtain sufficient knowledge about their budget and accounting system.

■ Financial Accountability. ■ The auditor should obtain complete knowledge about the budget as it
is an important tool of financial planning and control for urban local
■ Control of expenditure, and
bodies.
■ To ensure that funds are raised and money is spent in accordance with the
Vouch income and expenditure
rules and regulations.
■ The revenue items may include property tax, collection from public
Expenditure Control
places, grants, etc.
Matters of regular revenues and expenditures are generally delegated to the
■ The expenditure may include salary and wages, allowances to
executives for example, commissioners. Thus, it should be seen whether
employees, rem, printing and stationery, repairs and maintenance, etc.
expenditure is within limits.
■ He should vouch income and expenditure account in the usual manner.
Accounting System
Audit report
Municipal accounting system is usually kept as per the cash system.
Finally, he expresses opinion on financial statements. He should also
Objectives of audit of local Bodies
communicate the comparisons of budgeted and actual figures
The important objectives of audit are:

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 AUDIT OF LEASING COMPANIES ■ Examine the accounts of lessees to identify those from whom lease
rentals are overdue. Review the action taken by the company to recover
Meaning
the dues.
Lease is a contract between the 'Lessor’ who is legal owner of the asset and
■ Ascertain the adequacy of provisions for doubtful debts against lessees.
the ‘Lessee’, who acquires the right to use the specific asset on payment of
fixed rentals. ■ Examine the cases where the items given on financial lease have been
re-possessed. Verify the second lease or outright sale of these items.
Types
a) Operating lease: It is a lease arrangement where, in return of rent,
AUDIT OF NON-GOVERNMENTAL ORGANISATIONS
the lessor allows the lessee to use the asset for a certain period. (NGO’S)
b) Financial lease: Here, the ownership of asset is retained with the Background
lessor but in substance, all the risks and rewards of ownership of the i. NGOs can be defined as non-profit making organisations which raise
asset are transferred to the lessee. funds from members, donors or contributors.
Audit procedure ii. They also receive donation of time, energy and skills for achieving
■ Ensure that provisions of 'The Companies Act’ and ‘Reserve Bank of India their social objectives like imparting education, providing medical
Act’ have been compiled with. facilities etc.
■ Examine compliance with Accounting Standard 19. iii. NGO would include religious organisations, voluntary health and
welfare agencies, hospitals, old age homes, research foundations etc.
■ Study the MOA & AOA of leasing companies to know the kind of assets
it can lease-out. iv. Some examples of NGOs operating in India include Child Relief and
You (CRY), UNICEF, Vidya, etc.
■ Check the board resolution authorizing the lease agreement.
Legal form
■ Examine the lease proposal form submitted by the lessee.
■ Non-Governmental Organisations are generally incorporated as
■ Study lease agreements to confirm details such as amount of lease-
societies or as a trust.
rentals, tenure of lease, dates of payment etc.
■ NGOs can also be incorporated as a company under section 8 of the
■ Copies of the insurance policies should also be examined.
Companies Act, 2013.
■ Examine the invoices for the purchases of assets given on lease and
Sources of funds
check whether the leasing company has proper title over asset.
■ The main sources of funds include grants and donations, fund raising
■ Examine whether the lease-rentals received from lessees have been
programmes, advertisements, subscriptions, gifts, sale of product or
properly accounted for.
publications, etc.
■ Ensure that transaction in regard to ‘Sale and Lease back’ have been
■ Donations and grants received in the nature of capital receipts are
properly identified and disclosed in Accounts.
shown as liabilities in the Balance Sheet of NGO.

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 ■ These may either be in the form of corpus contribution or a contribution Programme and Project Expenses. Verify agreement with
towards revolving fund. donor/contributor supporting the particular programme or project. Vouch
■ A contribution made towards the capital or the corpus of an NGO is various disbursements w.r.t. same
known as corpus contribution. Other Expenses: Verify that provident fund, life insurance premium,
■ The grant towards a Revolving Fund is used to rotate the amount by employee’s state insurance and other administrative charges are properly
giving temporary loans from the fund to other NGO or beneficiaries for accounted for
their projects. Receipts
■ Donations and grants are also received for acquisition of specific fixed i. Contributions and Grants for projects and programmes:
assets or for running some specific project. For example, it may be received Check agreements with donors and grants letters to ensure that funds
for running flood relief camp in certain area. received have been accounted for. Examine relevant entry in pass
Audit program book.

Balance sheet items ii. Receipts from fund raising programmes: Verify in detail the
internal control system and obtain confirmations from the persons
■ Corpus Fund: The contributions/ grants received towards corpus who are responsible for collection of funds and mode of receipt.
should be examined with reference to the letters from the donor. The
interest income should be checked with Investment Register. iii. Membership Fees: Check fees received with Membership Register.
Reconcile fees received with fees to be received during the year.
■ Reserves: Examine board resolutions of NGO.
iv. Subscriptions: Examine them with subscription register and
■ Ear-marked Funds: Check requirements of donors, board resolution receipts issued.
of NGO and rules and regulations of the schemes of the ear-marked
funds. v. Interest and Dividends: Check the interest and dividends
received and receivable with investments held during the year
■ Loans: Examine loans with loan agreements.
AUDIT OF A PARTNERSHIP FIRM
■ Fixed Assets: Vouch all acquisitions / sale or disposal of assets
including depreciation in usual way. Basics
■ Investments: Check Investment Register and the investments i. The auditor is usually appointed by the partners either on the basis of
physically. Also examine that investments are in the name of the NGO. a decision taken by them or to comply with a condition in the
partnership agreement.
■ Cash in Hand: Physically verify the cash in hand.
ii. His remuneration is also fixed by the partners.
■ Bank Balance: Check the bank reconciliation statements.
iii. The letter of appointment should clearly state the nature and scope of
■ Stock in Hand: Attend physical verification of stock in hand and
audit.
obtain adequate WR for the quantities and valuation of the same.
iv. The Indian Partnership Act, 1932 does not prescribe audit of a
Expenses
partnership firm.

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 v. Before starting the audit, auditor should examine the partnership vii. Verifying that the profits and losses have been divided among the
agreement and note the provisions therein. partners in their agreed profit sharing ratio
Advantages
i. Audited accounts provide a reliable means of settling accounts AUDIT OF SMALL COMPANIES
between the partners and thus, the possibility of occurrence of a
Letter of engagement
dispute among them is mitigated.
 It is advisable for the auditor to submit to their client and to receive an
ii. On the retirement or death of a partner, audited accounts constitute
acknowledgement of the scope of their responsibilities both in respect of
a reliable evidence for computing the amounts due to the retiring
the audit and any additional work to be undertaken.
partner or to the representative of the deceased partner in respect of
his share of capital, profits and goodwill.  This should subsequently be confirmed in writing, possibly in the
engagement letter.
iii. The audited accounts are generally accepted by the Income Tax
Department as the basis for computing the assessable income of the Internal control
partners.  Auditors should take care to bring to the directors’ attention their
iv. Audited statements of accounts are relied upon by the banks when findings on the system of internal control.
advancing loans.  Shortcomings in internal control arise because of small number of
v. Audited statements of account can be helpful in the negotiations to employees.
admit a person as a partner.  This will require them to increase the amount of testing of
vi. An audit is an effective safeguard against any undue advantage being transactions and to extend the procedures for the verification of
taken by a working partner. liabilities and assets.
Audit Considerations Letter of representations
i. Confirming that the letter of appointment, signed by a partner, duly  Letter of representation on the company’s letter head addressed to the
authorised, clearly states the nature and scope of audit. auditors should be obtained.
ii. Studying the minute book.  The purpose of such letter is to place on record representation of
management on significant matters affecting the account
iii. Verifying that the business in which the partnership is engaged is
authorised by the partnership agreement.  For example, it can be obtained for ownership of asset and basis of
valuation and disclosure of assets, liabilities and contingent liabilities.
iv. Examining whether books of account appear to be reasonable.
v. Verifying generally that the interest of no partner has suffered
prejudicially by an actively engaged partner
vi. Confirming that a provision for the firm's tax payable by the
partnership has been made in the accounts at proper value

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 AUDIT OF INCOMPLETE RECORDS 4. Verification of assets and liabilities

Incomplete records- meaning: Those accounting records which do not  Verification of assets and liabilities can be done by performing
satisfy the requirements of being proper books of account. appropriate procedures. For example, to verify inventory, the auditor
can observe the physical verification carried out by the management,
Incomplete records- instances: Accounting records kept by the entity
obtain stock register and management representation letter.
on single entry system, or accounting records may have been destroyed by
Analytical procedures can also be used to verify inventory.
fire, flood, etc. or seized by Government authorities.
 Capital can be examined on the basis of previous year’s audited
Audit procedures if records are incomplete at client’s site.
balance sheet, if available. Bank loan can be examined by obtaining
1. Request the management to convert it to double entry basis confirmation from Bank.
 If books of account have been maintained on single entry system, the 5. Audit opinion
auditor should request the client to convert them to double entry
 On the basis of evidence collected and conclusions drawn there from,
basis.
the auditor should formulate his opinion.
 In case, books of account are not available for audit, he should make
 If he cannot get sufficient and appropriate evidences even after
sure that management reconstructs the records from available
performing procedures as above, he may provide a qualified audit
documents in hand.
report or issue a disclaimer of opinion.
 For example, trading transactions can be accounted on the basis of
third party confirmations and bank statements.
GOVERNMENT AUDIT
2. Check opening state of affairs Government audit-meaning

 Ensure that statement of affairs at the beginning of the year is 1. Government audit means
prepared and all the accounts are opened in the ledger. ■ the systematic and independent examination,
3. Vouch transactions ■ of financial, administrative and other operations of a public entity,
 External evidence should be obtained to check authenticity of various ■ For evaluating and verifying them.
transactions. 2. Its objective is to ensure the accountability of the government entity
 Examine the relevant documents and perform analytical procedures in respect of public revenue and expenditure.
 Confirmation from debtors and lenders should also be obtained. 3. Auditor presents a report containing audit findings along with
 To vouch expenses, bank statements can be used. recommendations for future actions.

 Same ways, income can be traced from bank statements. 4. In India, the function of government audit is performed by
Comptroller and Auditor General
COMPTROLLER & AUDITOR GENERAL - Certain Provisions

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Appointment a. Rs. 25 lakhs, and
The President of India shall appoint CAG. b. 75% of the total expenditure of that body or authority.
Removal or resignation 3. To audit grants and loans
 He can be removed from the office only on the ground of proven mis-  He shall audit specific purpose loan or grant given to anybody other
behaviour or incapacity. than a foreign state or international organization, out of the
 Moreover, he can be removed from office only when each house of Consolidated Fund of India/ State/Union Territory.
parliament decides to do so by a majority of at least two third of 4. To audit receipts of union or states
members present and voting.  He shall audit all receipts payable in to the Consolidated Fund of
 He can resign any time through a resignation letter addressed to the India/ State/Union Territory.
President of India. 5. To audit accounts of stores and stock
Remuneration  He shall audit the accounts of stores and stock kept in any office or
 He shall be paid a salary equivalent to that of a Judge of the Supreme department of the union or state.
Court. 6. To audit accounts of government companies & corporations
 The parliament is competent to make laws to determine salary and  CAG shall exercise powers and observe duties as per the provisions of
other conditions of service. the Companies Act, 1956 in relation to the Government Companies or
Terms Corporations.
 He shall hold office for six years or up to age of 65 years, whichever 7. To audit and report
is earlier.  CAG shall audit and report:
DUTIES OF COMPTROLLER & AUDITOR GENERAL a. All expenditure from Consolidated Fund of India/ State/Union
1. Compile and submit accounts Territory.

 He shall compile the accounts of the Union/State/Union Territory and b. All transactions of Union State relating to the ‘Contingency Funds and
submit those accounts to the President/Governor/Administrator Public accounts.’
respectively. c. All Trading, Manufacturing, Profit and Loss account and Balance
2. To audit receipts and expenditure Sheet and other subsidiary accounts kept in any department of the
Union/ State
 He shall audit all receipts and expenditure of any body, which has
been substantially financed from the Consolidated Fund of 8. Submission of accounts
India/State/Union Territory.  He shall submit his report relating to the accounts of the Union or
Note: A body or authority shall be treated as substantially financed if States to the President/ Governor who will subsequently lay them
the amount of grant or loan in one year is greater than; before the Parliament/State Legislature.

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POWERS OF COMPTROLLER & AUDITOR GENERAL ■ CAG may authorise such person(s) to obtain such infoπnation as may be
required for conduct of supplementary audit.
General Powers
Supplement I comment
1. He can inspect any office of accounts under the control of the Union
or State Government. CAG may comment upon the audit report.

2. He may require that any accounts, books, papers and other ■ CAG may supplement the audit report.
documents, which are relevant to the transactions under audit, be ■ Any such comments or supplement shall be sent by the company to
sent to specified places. every person entitled to copies of audited financial statements.
3. He can put such questions, as he may consider necessary, to the ■ Any such comments or supplement shall also be placed before the
person in charge. members in the AGM at the same time and in the same manner as the
4. He can call for such information as he may require for the preparation audit report.
of any account or report Test audit [Sec. 143(7) of the companies act, 2013]
Directions by CAG to the auditor [Sec. 143(5)] of The companies CAG may. by an order, cause test audit to be conducted of the accounts of a
act, 2013] Government company.
1. In the case of a Government company, CAG shall direct the auditor AUDIT OF VARIOUS ITEMS UNDER GOVT AUDIT
the manner in which the accounts of the Government Company are
required to be audited. Expenditure audit

2. The auditor shall submit a copy of his audit report to CAG The auditor examines the fulfilment of conditions for incurring government
expenditure. It involves examination of following:—
3. The audit report shall, among other things, include the directions, if
any, issued by CAG, the action taken thereon and its impact on (a) Audit of rules and orders
the accounts and financial statement of the company. (b) Audit of sanctions
Right of CAG to conduct supplementary audit or supplement the (c) Audit against provision of funds
audit report [Sec. 143(6) of the companies act, 2013] (d) Propriety audit
CAG shall, within 60 days from the date of receipt of the audit report, have (e) Performance audit
the following rights:
Audit of Rules and Orders/Audit of Regularity and Legality
Supplementary audit
1. Its objective is to ensure whether the expenditure is in accordance
■ CAG may order conduct of a supplementary audit of the financial with:
statement of the company.
a) relevant provisions of the Constitution and of the laws and rules,
■ Supplementary audit shall be conducted by such person(s) as CAG
may authorise in this behalf. b) The rules, regulations issued by CAG.

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 c) The orders of, or rules made by, any higher authority. 1. According to propriety audit, the auditor examines the cases of
2. In this connection, auditor should have sound knowledge of rules and improper or wasteful expenditure even though the expenditure has
orders w.r.t. following: been incurred as per the existing rules and regulations.

a) The powers to incur and sanction expenditure from the 2. A transaction may satisfy all the requirements of regular audit, but
Consolidated Fund/ contingency fund of India / State; may still be highly wasteful.

b) The mode of presentation of claims against government, 3. For e.g. a building may be constructed for running a school but may
withdrawing moneys from the Consolidated Fund, Contingency not be used for the same purpose, resulting in wasteful expenditure.
Fund and the financial rules prescribing the procedure to be 4. Auditor should try to examine public financial morality by looking in
followed by government; and to the wisdom, faithfulness and economy of transactions.
c) Regulating the conditions of service, pay and allowances, and 5. No hard and fast rules can be laid down regarding the standards of
pensions of government servants. financial propriety.
Audit of Sanctions 6. Here, the auditor should examine that:—
1. Its objective is to ensure whether the expenditure is: a) The authorities have made the expenditure with same degree of
a) Properly covered by a sanction, either general or special. vigilance, as a person of ordinary prudence would exercise in respect
of his own money.
b) Sanctioned by authority, which is authorized to do so.
b) The expenditure is not prima facie more than the occasion demands.
2. Thus auditor should consider following:
c) No authority exercises its power of sanctioning expenditure to pass
a) He should have knowledge of the sanctioning powers of various an order, which will directly or indirectly accrue to its own
authorities. advantage.
b) He should examine whether all sanctions are adequately noted in d) Public money is not utilised for the benefit of a particular person
the prescribed register. /section of the community.
c) For petty expenditure, the signature of the competent authority Performance Audit/Full Scope Audit
on a bill can be regarded as a sanction.
1. Here, auditor tries to ensure that government programmes have
Audit against provision of funds achieved the desired objectives at the lowest cost and given the
Its objective is to ensure whether the expenditure: intended benefits.
(a) Is made for the purpose to which the grant and appropriation has been 2. Performance audit includes efficiency, economy and effectiveness
provided. audit.
(b) Does not exceed the appropriation made. 3. Performance audit is an objective examination of the financial and
Propriety Audit operational performance. It seeks to identify opportunities for greater
economy and effectiveness.

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 4. Efficiency audit 7. Accounts of receipts, issues and balances are checked regarding
It examines whether: accuracy, correctness and reasonableness of balances in stocks.

■ The various schemes/projects are executed, and 8. Any excess or idle stocks should be specifically mentioned in the
report.
■ Their operations are carried out in efficient manner, and
9. Auditor should ensure their existence by attending physical
■ They are yielding the expected results. verification of stock.
5. Economy audit 10. The valuation of the stocks is also examined properly.
It examines whether: Audit of receipts
■ The government has acquired the financial, human and physical The government audit also covers receipts payable in to the Consolidated
resources in an economical manner, and Fund of India and of each State/Union Territory. The auditor examines
■ The sanctioning and spending authority have observed economy. whether :—
6. Effectiveness audit 1. Internal checks are imposed for prompt detection and investigation of
It examines whether: irregularities.

■ Programmes and projects are performing well. 2. Internal procedures adequately ensure proper accounting of demands
collection.
■ Overall targeted objectives are being achieved.
3. There is effective check on assessment, collection and proper
Audit of stores and stocks allocation of revenue.
1. Auditor should ascertain whether the internal controls over purchase, 4. Such regulations and procedures are actually being carried out.
receipt, and issue of stores are well designed and properly carried out
during the year. 5. All revenues have been correctly assessed, realized and credited to the
government account
2. He should bring to the notice of the government any deficiencies in
the system of control. 6. There is no leakage of revenue

3. The audit of purchase of stores is conducted in the same manner as AUDIT OF LLP- DISCLOSURE, AUDIT AND FILING
audit of expenditure. REQUIREMENTS
4. The auditor has to ensure that the prices paid are reasonable. What are main features of LLP
5. Cases of uneconomical purchase of stores and losses due to defective 1. It is governed by Limited Liability Partnership Act, 2008 and various
or inferior quality of stores are specifically examined. rules made there under.
6. The certificates of quality and quantity given by expert should be 2. LLP is to be registered with Registration.
examined.
3. LLP Agreement contains main provisions relating to the firm.

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 4. Minimum 2 Partners are required to start LLP. Whether any provisions in respect of 'mandatory insurance' are
5. Liability of partners is limited to the extent of their contribution, being proposed in the Act
except in case of intentional fraud or wrongful act done by partners, No mandatory insurance has been proposed in the Act. It would be difficult
6. At least 2 partners should be the designated partners and they are to assess insurance requirements of different types and sizes of LLPs. This
required to obtain DPIN (Designated Partner Identification Number). would depend upon the nature of commercial risk attached with work or
assignment handled by each. Applying common insurance requirements
7. LLP is having almost all the benefits like that of a Pvt. Ltd. Co. with across a class of LLPs would result in increasing their costs of operation.
less compliances. Therefore, the underlying concern as to the credit worthiness of the LLP in
Whether LLP is required to maintain books of accounts the event of a contractual default is being addressed through statutory
LLP’s are required to maintain books of accounts containing the provisions for solvency declaration, disclosure of financial information and
following - audit.

1. Particulars of all sums of money received and expended by the LLP & Whether any Annual Return would be required to be filed by an
the matters in respect of which the receipt & expenditure takes place, LLP.

2. A record of the assets and liabilities of the LLP, Every LLP would be required to file annual return in Form 1 1 with ROC
within 60 days of closer of financial year. The annual return will be available
3. Statements of costs of goods purchased, inventories, work-in- for public inspection on payment of prescribed fees to Registrar.
progress, finished goods and costs of goods sold,
Whether the Registrar would have any power to call for
4. Any other particulars which the partners may decide. information from LLPs
Whether every LLP would be required to maintain and file Registrar would have power to obtain such information which he may
accounts consider necessary for the purposes of carrying out the provisions of the Act,
An LLP shall be under obligation to maintain annual accounts reflecting true from any designated partner, partner or employee of the LLP. He would also
and fair view of its state of affairs. A “Statement of Accounts and Solvency” have power to summon any designated partner, partner or employee of any
in prescribed form shall be filed by every LLP with the Registrar every year. LLP before him for any such purpose, in case the information has not been
Whether audit of all LLPs would be mandatory furnished to him or in case the Registrar is not satisfied with the information
furnished to him.
The accounts of every LLP shall be audited in accordance with Rule 24 of LLP,
Rules 2009. Which documents will be available for public inspection in the
office of Registrar
Such rules, inter-alia, provides that any LLP, whose turnover does not
exceed, in any financial year, forty lakh rupees, or whose contribution does The following documents/information will be available for inspection by any
not exceed twenty five lakh rupees, is not required to get its accounts person:-
audited. However, if the partners of such limited liability partnership decide ■ Incorporation document,
to get the accounts of such LLP audited, the accounts shall be audited only ■ Names of partners and changes, if any, made therein,
in accordance with such rule.

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■ Statement of Account and Solvency The designated partners may appoint an auditor or auditors—
■ Annual Return a) at any time for the first financial year but before the end of the First
The fees for such inspection of an LLP is Rs 50/- and fees for certified copy financial year,
or extract of any document u/s 36 shall Rs. 5/- per page. b) at least 30 days prior to the end of the each financial year (other than
How would compliance management (i.e. ensuring that LLPs file the first financial year),
their documents with Registrars comply with other procedural c) to fill a casual vacancy in the office of auditor, including in the
requirements under the Act) be ensured in the Act case when the turnover or contribution of a limited liability
The provisions of the Act require LLPs to file the documents like Statement of partnership exceeds the limits specified under sub-rule (8), or
Account and Solvency (SAS) and Annual Return (AR) and notices in respect d) To fill up the vacancy caused by removal of an auditor.
of changes among partners etc. within the time specifically indicated in If designated Partner fails to appoint Auditor
relevant provisions. The Act contains provisions for allowing LLPs to file such
documents after their due dates on payment of additional fees. It has been The partners may appoint an auditor or auditors where the designated
provided that in case LLPs file relevant documents after their due dates with partners have power to appoint under sub-rule (11) & have failed to appoint.
additional fees up to 300 days, no action for prosecution will be taken against Tenure of Auditor
them. In case there is delay of 300 days or more, the LLPs will be required to An auditor or auditors of an LLP shall hold office in accordance with the terms
pay normal filing fees, additional fee and shall also be liable to be prosecuted. of his or their appointment and shall continue to hold such office till the
The Act also contains provisions for compounding of offences which are period-
punishable with fine only. a) the new auditors are appointed, or
APPOINTMENT OF AUDITOR AS PER RULE 24 OF b) They are re-appointed
LIMITED LIABILITY PARTNERSHIP RULES, 2009 ADVANTAGES OR PURPOSES OF AUDIT OF LLP
Exemption from Audit
Audited financial statements help the government to judge the
A limited liability partnership whose turnover does not exceed, in any appropriateness of various taxes by the LLP during the year.
financial year, forty lakh rupees, or whose contribution does not exceed
Audit of financial statements of LLP helps in detecting errors & frauds thus
twenty-five lakh rupees shall not be required to get its accounts audited.
enabling the management to take corrective actions on a timely basis.
However, if partners of such LLP decide to get its accounts audited, audit
Audit is a useful mean to settle the dispute, if any, between the partners.
shall be done in accordance with the rules.
Banks & financial institutions lend money to the firms after obtaining audited
Appointment for each F.Y.
accounts. It helps them to judge the creditworthiness of the firm and
An auditor or auditors of a limited liability partnership shall be appointed for recoverability of loans.
each financial year of the LLP for auditing its accounts.
The auditor can provide useful suggestions (for example, how to overcome
Appointment by Designated Partner internal control deficiencies) to the management.

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Employees of firm generally relies on audited accounts while negotiating  Interest on loans obtained by LLP from the partners
relating to salaries.
Refer to the Minute Book
Audited accounts are accepted for settling accounts between partners at the So as to gain understanding about resolution relating to books of accounts.
time of admission, death, retirement, insolvency, etc.
Conclusion and reporting
AUDITOR’S DUTIES REGΛRDING AUDIT OF LLP
He shall obtain sufficient and appropriate evidences so as to reach the
Letter of Engagement conclusions and expressing an opinion on the financial statements of LLP.
The auditor shall prepare a letter of terms of engagement and get it The auditor should mention in his audit report whether:
acknowledged by TCWG.
 He was able to obtain all information & explanation necessary for
He should obtain instructions in writing from them as to the work to be his work
performed.  The accounting records appear to be reliable
It is necessary so as to avoid any misunderstanding between auditor and  Any restrictions were imposed on him by the management.
auditee. AUDIT OF CO-OPERATIVE SOCIETIES
Studying the LLP Agreement
SPECIAL FEATURES
The auditor should carefully study the LLP agreement & note important
Audit under section 17 of the cooperative societies act 1912:
provisions therein including:
1. The Registrar shall audit or cause to be audited by some person
 Nature of the business run by LLP
authorised by him by general or special order in writing in this behalf
 Duration of partnership the accounts of every registered society once at least in every year.
 Profit sharing ratio 2. The audit under sub- section (1) shall include an examination of
 Rights & duties of partners overdue debts, if any, and a valuation of the assets and liabilities of
the society.
 Capital contributed by each partner
3. The Registrar, the Collector or any person authorised by general or
 Provisions regarding payment of interest in respect of additional special order in writing in this behalf by the Registrar shall at all times
capital contributed have access to all the books, accounts, papers and securities of a
 Salaries, commission etc. payable to partners society, and every officer of the society shall furnish such information
in regard to the transactions and working of the society as the person
 Drawings allowed to the partners
making such inspection may require.
 Borrowing powers of the LLP
Examination of overdue debts
 Mode of settlement between partners at the time of admission,
Overdue debts for a period from six months to five years and more than five
retirement, death etc.
years shall be classified and shall have to be reported by an auditor. The

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auditor will have to ascertain whether proper provisions for doubtful debts 3. It may accept loans & deposits from member and others subject to the
are made. conditions specified in by laws.
Overdue Interest 4. A central co-operative society may invest its funds only in the
Overdue interest should be excluded from interest outstanding and accrued following:
while calculating profit. Overdue interest is interest accrued in accounts of i. Shares, securities, bonds or debentures of any other society with
which the amount is overdue. limited liability.
Certification of Bad Debts ii. Securities specified in Section 20 of the Indian Trusts Act, 1882.
A peculiar feature regarding the writing off of the bad debts in case of co- iii. Central or State Co-operative Bank.
operative societies is that bad debts can be written off only when they are iv. Co-operative bank, other than a Central or State co-operative
certified as bad by the auditor or managing committee. bank, as approved by the Registrar.
Verification of Assets and Liabilities v. Others as permitted by the Government.
The auditor shall examine existence, ownership and valuation of assets. Fixed Verification of Members’ Register and examination of their pass
assets should be valued at cost less provision for depreciation. The current books
assets should be valued at cost or market price, whichever is lower. All the
known liabilities should brought into the account and not merely disclosed as Auditor should carry out examination of entries in members pass books
contingent ones. regarding the loan given and its repayments. Confirmation of loan balances
should also be obtained in accordance with SA 505.
Adherence to Co-operative Principles
Special report to the Registrar
While auditing the expenses the auditor shall ensure that they are
economically incurred and there is no wastage of funds. The principles of In case auditor notices serious irregularities in the working of the society he
propriety audit should be followed for the purpose. may report these special matters to the Registrar, The Registrar on receipt of
such a special report may take necessary action against the society. In the
Observations of the Provisions of the Act and Rules following cases, a special report may become necessary:
Auditor shall also examine the non-compliance with the provisions of Co- a. Personal profiteering by members of managing committee.
operative Societies Act and Rules and bye-laws.
b. Detection of fraud.
Restrictions on cooperative societies
c. Specific cases of mis-management. Decisions of management against
1. In case of a society having limited liability of member, no member co-operative principles.
other than a registered society can hold share capital exceeding 20%
or Rs. 1,000. d. In the case of urban co-operative banks, disproportionate advances
to vested interest group.
2. A registered society can provide loan to its members. However it may
provide loan to another registered society only with special section of e. Reckless advancing without evaluating the credit worthiness of the
the Registrar. party.

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Audit classification of society materials or labour or other term of cost as may be specified in the
After a judgment of an overall performance of the society, the auditor shall bye laws of such a society.
award a class to the society. However if the management of the society is Others:
not satisfied about the award of audit class, it can make an appeal to the  Stock register containing Information as regards receipts, issues
Registrar, and the Registrar may direct to review the audit classification.
and balances of stock-in-trade.
Discussion of draft audit report with managing committee
 Cash book: To record cash receipts and expenses under suitable
The audit report should be finalized only after discussion with the managing heads capital and revenue items.
committee. Minor irregularities may be rectified.
 Register of loan: detailing to record particulars regarding loans
Distribution of profit sanctioned by the society, the dates of disbursement and recovery.
25% of profit should be transferred to Reserve Fund before distribution to  Register of fixed deposits: which contains details of dates of
members. Registrar may reduce it but at least 10% is even then required. acceptance, maturity, interest, etc. in the case of a co-operative credit
Society may use Reserve fund in business of a society or for some public society, or a cooperative bank, or any other society accepting deposits.
purpose.
 Register of assets and investments: Particulars regarding
Schedule to this report immovable and movable assets, types of assets, location, date of
■ Transaction contrary to Act, rules and Bye-laws acquisition, cost, depreciation etc.

■ Sums not brought into accounts.  Register of sureties: In the case of a co-operative credit society,
loans are given against personal security of members as also
■ Material/property appearing as doubtful/bad.
guarantee is provided by two other members. It contains particulars
■ Material irregularity in expenses/realization of money. about the borrowers in respect of which a member has stood surety
■ Any other matter specified by registrar. Qualification of Auditors (Sec. 72)
MULTI STATE CO-OPERATIVE SOCIETIES ACT, 2002 A chartered accountant.
Books of A/c Disqualification:
Every multi state co-operative society shall keep books of accounts for- ■ Body corporate.
 All sales and purchases of goods. ■ Officer Z Employee of MSCOS.
 The assets and liabilities of the society. ■ Partner / Employee of Officer 1 Employee of MSCOS.
 All sum of money received and expended and the matters in respect ■ Indebted I Guarantor for amount > 1000/-
of which the receipt and expenditure took place.
 In the case of Multi State Co-operative Society engaged in production,
processing and manufacturing, particulars relating to utilisation of

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Appointment of auditors (Sec. 70) allotment, and if no cash has actually been so received, whether
■ First auditor to be appointed by board within one month of registration the position as stated in the account books and the balance-sheet
date to hold office until conclusion of 1st AGM. If board fails to appoint is correct, regular and not misleading.
first auditor then appointment shall be mad e in general meeting. Audit report
■ Subsequent auditor shall be appointed at each AGM. He shall hold office iii. The auditor shall make a report to the members of the multi-State
from conclusion of that meeting until conclusion of next AGM. cooperative society on the accounts examined by him and on every
Power & Duties of Auditors (Sec. 73) balance-sheet and profit and loss account and on every other
document required to be part of or annexed to the balance-sheet or
Powers of auditor profit and loss account, which are laid before the multi-State co-
i. Every auditor of a multi-State co-operative society shall have a right operative society in general meeting during his tenure of office, and
of access at all times to the books, accounts and vouchers of the multi- the report shall state whether, in his opinion and to the best of his
State co-operative society, whether kept at the head office of the information and according to the explanations given to him, the said
multi-State co-operative society or elsewhere, and shall be entitled to accounts give the information required by this Act in the manner so
require from the officers or other employees of the multistate co- required and give a true and fair view,—
operative society such information and explanations as the auditor a. in the case of the balance-sheet, of the state of the multi-State
may think necessary for the performance of his duties as an auditor. cooperative society’s affairs as at the end of its financial year; &
"Inquiry by auditor b. In the case of the profit and loss account, of the profit or loss for
ii. Without prejudice to provisions of sub-section (1), the auditor shall its financial year.
inquire,— iv. The auditors’ report shall also state—
a) whether loans and advances made by the multi-State co- a. whether he has obtained all the information and explanations
operative society on the basis of security have been properly which to the best of his knowledge and belief were necessary for
secured and whether the terms on which they have been made the purposes of his audit;
are not prejudicial to the interests of the multi-State co-operative
society or its members; b. whether in his opinion, proper books of account have been kept
by the multi-State co-operative society so far as appears from his
b) whether transactions of the multi-State co-operative society examination of those books, and proper returns adequate for the
which are represented merely by book entries are not prejudicial purposes of his audit have been received from branches or
to the interests of the multi-State co-operative society; offices of the multi-State co-operative society not visited by him;
c) whether personal expenses have been charged to revenue c. whether the report on the accounts of any branch office audited
account; and by a person other than the multi-State co-operative society’s
d) Where it is stated in the books and papers of the multi-State co- auditor has been forwarded to him and how he has dealt with
operative society that any shares have been allotted for cash, the same in preparing the auditor’s report;
whether cash has actually been received in respect of such

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 d. Whether the multi-State co-operative society’s balance-sheet ■ Free access to books / A/c / Cash 1 Properties in custody of MSCOS.
and profit and loss account dealt with by the report are in In event of serious irregularity, take them into custody. Summon
agreement with the books of account and returns. any person to produce the same at any place specified by him.
Special Audit of MSCOS (Sec. 77) ■ Require the officer to call GM by giving notice of at least 7 days or
1. In case, Central Government or State Government either alone or both if officers fail / refuses, he may call it himself.
hold 51% or more of paid-up share capital in such MSCOS. ■ Summon any person having knowledge to appear before him &
2. Central Government may direct either a C.A or MSCOS’s auditor to examine him on oath.
conducts special audit & make a report to it. 3. Central Registrar within 3 months of receipt of report communicates
3. If Central Government is of opinion that: the report of enquiry to society, Financial Institution & to person at
whose instance it is needed.
■ Affairs of MSCOS aren’t being managed in accordance with self-help
& Cooperative principles or sound business principles or:
■ MSCOS is managed in manner likely to cause serious injury I
damage to interest of trade / industry or business to which it
pertains or
■ The financial position of any MSCOS is such as to endanger its
solvency.
4. Auditor has same powers & duties as in Sec. 73.
5. On receipt of report of special audit, Central Government may take
such action as it considers necessary.
Inquiry and inspection by Central Registrar (Sec. 78 and 79)
1. Central Registrar may on request from
 Federal co-operative to which MSCOS is affiliated or
 A creditor or
 At least 1/3 of member of board or
 At least 1/5 of total member of MSCOS,
Hold an enquiry or direct some person to enquire into constitutions, working
& financial condition of MSCOS. However, before inquiry, 15 days’ notice is
to be given to MSCOS
2. Central Registrar or person authorised, shall have following powers:

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