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Chapter 13 Audit of Different types of Entities

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OBJECTIVES

1. Accounting for Public Funds:-Government audit serves as a mechanism or process for public
accounting of government funds.
2. 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.
3. 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.

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. Explain stating clearly the definition of Government
auditing as discussed in U.N. Handbook on Govt Auditing and Developing Countries and also state
Objectives of Govt audit. ICAI RTP May 2021

Legal Framework and Comptroller & Auditor General

The Constitution of India contains specific provisions regarding the appointment, salary and duties and powers
of the C&AG.

Appointment
The President of India shall appoint CAG.

Removal or resignation
● He can be removed from the office only on the ground of proven misbehavior or incapacity.

● Moreover, he can be removed from office only when each house of parliament decides to do so by a

majority of at least two third of members present and voting.

Remuneration
● The parliament is competent to make laws to determine salary and other conditions of service.
● 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.

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Duties and Power

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.

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.

Question - Correct / Incorrect Marks 2 MTP April 2021

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.

Reporting Procedures

Article 151 of the Indian Constitution states 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 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.

Study Plan

We will study the audit of following items in Government for CA Intermediate

1. Expenditure audit
2. Audit of Receipts
3. Audit of Stores

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Expenditure Audit

Expenditure Audit The auditor examines the fulfillment of conditions for incurring government expenditure. It
involves examination of following:—
1. Audit of rules and orders
2. Audit of sanctions
3. Audit against provision of funds
4. Propriety audit
5. Performance audit

Audit of Rules and Orders/Audit of Regularity and Legality

( ख़र्चा Constitution, law CAG और higher authority क़े हिसाब स़े होना चाहिए) ये चेक करने के लिए auditor को कुछ चीज़ों की
Sound knowledge होनी चाहिए)

1. Its objective is to ensure whether the expenditure is in accordance with:

○ Relevant provisions of the Constitution and of the laws and rules.

○ The rules, regulations issued by CAG.

○ The orders of, or rules made by, any higher authority.

2. In this connection, auditor should have sound knowledge of rules and orders w.r.t. Following:

○ The powers to incur and sanction expenditure from the Consolidated Fund/ contingency fund
of India / State;

○ The mode of presentation of claims against government, withdrawing moneys from the
Consolidated Fund, Contingency Fund and the financial rules prescribing the procedure to be
followed by government; and (HOW CLAIMS ARE PRESENTED & HOW MONEY IS
WITHDRAWAN)

○ Regulating the conditions of service, pay and allowances, and pensions of government
servants.

Question

What is the function of audit while examining various rules, regulations and orders with regard to
Audit against Rules & Orders by C&AG?

November 2020 - 3 Marks

Audit of Sanctions
(हर ख़र्चा sanctioned होना चाहिए है , और sanction proper authority से होना चाहिए )

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Its objective is to ensure whether the expenditure is:

1. Properly covered by a sanction, either general or special.

2. Sanctioned by authority, which is authorized to do so.

Thus auditor should consider following

● He should have knowledge of the sanctioning powers of various authorities.

● He should examine whether all sanctions are adequately noted in the prescribed register.

● For petty expenditure, the signature of the competent authority on a bill can be regarded as a
sanction.

Audit against provision of funds

Its objective is to ensure whether the expenditure

● Is made for the purpose for which the grant and appropriation has been provided.

● Does not exceed the appropriation made.

Propriety Audit(M.imp)
● The Propriety audit is to check the expenditure in accordance with financial wisdom and uprightness.

● It is to check to bring out the improper, avoidable, expenditure even though such expenditure has
been incurred in conformity with the existing rules and regulations.

● A transaction may satisfy all the requirements of regularity audit in so far as the various formalities
regarding rules and regulations are concerned but may still be highly wasteful.

● It is not audit of sanction or against rules.

● It is a qualitative, opinion-based expression of auditor's findings.

In this regards, the following main points should be kept for consideration:

● The expenditure should not be prima facie more than what the occasion demands. Public money
should be spent by the officers, as of their own with utmost diligence and care.

● No order for sanction of expenditure should be made by an authority which results in gains directly or
indirectly to that authority

● Public money should not be utilised for the benefit of a particular person or section of the community
unless
○ the amount of expenditure involved is insignificant; or

○ a claim for the amount could be enforced in a Court of law; or

○ the expenditure is in pursuance of a recognized policy or custom; and

● The cost of administering should not eat off the benefits of the expenditure.

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Performance audit / Full Scope Audit

● Here, auditor tries to ensure that government programmes have achieved the objectives at the lowest
cost and given the intended benefits. (Achieved Objectives, Lowest Cost, Intended Benefits)
● This involves 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.
● Includes efficiency, economy and effectiveness audit.
● It seeks to identify opportunities for greater economy and effectiveness.

Question
The audit of government expenditure is one of the major components of government audit. Explain the
basic standards set for such audit of expenditure. (4 Marks)

MTP March 2021

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Audit of Stores and Stocks

● Auditors should ascertain whether the internal controls over purchase, receipt, and issue of stores
are well designed and properly carried out during the year.

● He should bring to the notice of the government any deficiencies in the system of control.

● The audit of purchase of stores is conducted in the same manner as audit of expenditure.

● The auditor has to ensure that the prices paid are reasonable.

● Cases of uneconomical purchase of stores and losses due to defective or inferior quality of
stores are specifically examined.

● The certificates of quality and quantity given by expert should be examined.

● Any excess or idle stocks should be specifically mentioned in the report.

● Auditor should ensure their existence by attending physical verification of stock.

● The valuation of the stocks is also examined properly.

Audit of Receipts
The government audit also covers receipts payable in to the Consolidated Fund of India and of each
State/Union Territory. The auditor examines whether: —

● Internal checks are imposed for prompt detection and investigation of irregularities. .
● Internal procedures adequately ensure proper accounting of demands collection.
● There is effective check on assessment, collection and proper allocation of revenue.
● Such regulations and procedures are actually being carried out.
● All revenues have been correctly assessed, realized and credited to the government account.
● There is no leakage of revenue.

Question

The audit of receipts of the government is not as old as audit of expenditure but with the rapid growth of
public enterprises audit of receipts tax or non-tax has come to stay. Discuss audit of receipts with respect to
Government Audit.

November 2020 - 4 Marks

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Duties of Comptroller & Auditor General:

The Comptroller & Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 lays down duties of the
C&AG as under:

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 rendered
■ to the audit and accounts offices under his control
■ by treasuries, offices or departments responsible for the keeping of such account.

General Provisions Relating to Audit

○ It shall be the duty of the C&AG -

■ 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;
■ to audit and report
➢ all transactions
✓ of the Union and of the States relating to Contingency Funds and Public
Accounts;
■ to audit and report on
➢ all trading, manufacturing profit and loss accounts and balance-sheets and other
accounts kept in any department of the Union or of a State.

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,

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■ 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.

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,
■ the Comptroller and Auditor General shall
➢ scrutinize 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.

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.

Audit of Accounts of Stores and Stock

○ The Comptroller and Auditor General shall have authority
○ to audit and report on the accounts of stores and stock kept in any office or department of the
Union or of a State.

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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 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. Explain. MTP 1 May
2021 (4 Marks)

Power of Comptroller and Auditor General of India in performance of

duties. (November 2014)

Powers of the Comptroller and Auditor General of India in performance of duties: The Comptroller and Auditor
General's (Duties, Powers and Conditions of Service) Act, 1971 gives the following powers to the C&AG in
connection with the performance of his duties-

1. Inspect
● 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.

2. Require (ABPO)
● 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.

3. Put Question / Make Observations / Call Info

● 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.

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.

Miscellaneous Question

Question
Government audit is neither equipped nor intended to function as an investigating agency, to pursue
every irregularity or misdemeanour to its logical end. Explain ICAI RTP May 2021

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Answer as given by ICAI in RTP (www.icai.org)

Government audits are 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 the 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.

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Audit of Local Bodies

Background
State the background of 'Local Bodies". Draft an audit programme for audit of local bodies. (8 Marks)

Answer- Background of Local Bodies: 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.

Municipal government in India covers five distinct types of urban local authorities, viz., the municipal
corporations, the municipal councils, the notified area committees, the town area committees and the
cantonment committees.

Audit Programme For Local Body

Audit Programme for local bodies

1. 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 authenticity of his appointment.
2. The auditor while auditing the local bodies should report on the
a. fairness of the contents and presentation of financial statements,
b. the strengths and weaknesses of the system of financial control,
c. adherence to legal and/or administrative requirements;
d. upon whether value is being fully received on money spent.
e. His objective should be to detect errors and fraud and misuse of resources.
3. 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.
4. He should ensure that all types of sanctions, either special or general, accorded by the competent
authority.
5. 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.
6. 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.

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Features of Financial Administration of Local bodies

Describe the salient features of Financial Administration of Local Bodies

Salient Features of Financial Administration of Local Bodies

1. Budgetary Procedure: The objective of local bodies budgetary procedure are

a. financial accountability,
b. control of expenditure,
c. and 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.

Different aspects covered in budgeting are determining the level of taxation, fees, rates, and laying
down the ceiling on expenditure, under revenue and capital heads.

2. Expenditure Control: At the State and Central level, there is a clear demarcation between the legislature
and executive. In the local body, legislative powers are vested in the Council whereas executive powers
are delegated to the officers, e.g., Commissioners. All matters of regular revenue and expenditures are
generally delegated to the executive wing. For special situations like, reduction in property taxes, refund
of security deposits, etc., sanction from the legislative wing is necessary.

3. Accounting System: Municipal Accounting System has been conventionally prepared under the cash
system. In the recent past however, it is being changed to the accrual system of accounting. The
accounting system is characterized by (a) subsidiary and statistical registers for taxes, assets, cheques
etc., (b) separate vouchers for each type of transaction, (c) compulsory monthly bank reconciliation, (d)
submission of summary reports on periodical basis to different authorities at regional and state level.

Types of Grants Received by Local Authority

Local bodies may receive different types of grants from the state administration as well. Broadly, the revenue
grants are of three categories

1. General purpose grants: These are primarily intended to substantially bridge the gap between the
needs and resources of the local bodies.
2. Specific purpose grants: These grants which are tied to the provision of certain services or performance
of certain tasks.
3. 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.

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Question
Explain the different types of revenue grants which local bodies may receive.
November 2020 - 3 Marks

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Auditing of Leasing Transaction

What procedure may be adopted by an auditor, while auditing leasing transactions entered into by the
leasing company? (8 Marks)

Answer

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:
a. 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).
b. the tenure of lease, dates of payment, late charges, deposits or advances etc. should be noted.
c. whether the equipment shall be returned to the lessor on termination of the agreement and the
cost shall be borne by the lessee.
d. 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.

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Auditing of Hire Purchasing Companies

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

While checking the hire- purchase transaction, the auditor may examine the following

1. Check Memorandum of Association - Object clause to ascertain whether the hire purchase business
can be carried on by company
2. Hire purchase agreement is in writing and is signed by all parties.
3. Before signing the HP agreement credit worthiness must be evaluated, auditor will check whether
proper policy and procedure exist for the same and whether they are followed are not.
4. 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;
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, upon which it is payable, and the person to whom and the
place where it is payable.
5. Ensure that instalment payments are being received regularly as per the agreement
6. Ensure that adequate resolution has been passed authorizing a particular director to execute the hire
purchase agreement.
7. Explain the adequacy of provision for doubtful debts against the hire purchase debtors
8. Examine the case of repossession of goods and their treatment afterwards. Check how and when they
were sold or disposed.
9. Check whether accounting treatment of amount due, amount received, loss on repossession and other
related items are done as per applicable financial reporting framework.

Auditor should also understand the following w.r.t Hire Purchase and design his audit procedures accordingly

1. Possession of goods is delivered by the owner thereof to a person on condition that such person pays
the agreed amount in periodical instalments,
2. The property in the goods is to pass to such person on the payment of the last of such instalments.
3. Such person has a right to terminate the agreement at any time before the property so passes

Homework - Difference between Operating (Right to use ) and Finance lease. (Risk and Reward) Study AS
19 For more details and also cover Difference between OL and FL from ICAI Auditing Study Material
Chapter 13.

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Audit of Partnership

You are approached by a partnership firm to list out the advantages that will accrue to them, if the
accounts are audited. State five important advantages.

Advantages of audit of accounts of a partnership firm: Advantages are as follows (any five):

1. Audited accounts provide a convenient and reliable means of settling accounts between the partners
and thereby possibility of dispute among them is mitigated.
2. On the retirement/death of a partner, audited accounts constitutes a reliable evidence for computing
the
amount due to the retiring partner or representative of deceased partner.
3. Audited accounts are generally accepted by the Income tax authorities for computing the assessable
income.
4. Audited accounts are relied upon by banks for advancing loan.
5. Audited accounts can be helpful in the negotiation for sale or admission of a new partner.
6. It is an effective safeguard against any undue advantage being taken by a working partner

Mention important points which auditors will consider while conducting audit of accounts of a
partnership firm

Important points which auditors will consider while conducting audit of accounts of a partnership firm are:

1. 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.
2. 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.
3. 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.
4. Examining whether books of account appear to be reasonable and are considered adequate in relation
to the nature of the business of the partnership.
5. 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.
6. 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.
7. Verifying that the profits and losses have been divided among the partners in their agreed
profit-sharing ratio.

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Audit of Hospitals

The special steps involved in such an audit are as follows:

1. 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. Check cash collections as entered in the Cash Book with the receipt, counterfoils and other evidence for
example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of rent bills,
etc.
3. See by 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 settled on the hospital has
been collected.
4. Ascertain that legacies and donations received for a specific purpose have been applied in the manner
agreed upon.
5. Trace all collections of subscription and donations from the Cash Book to the respective Registers
Reconcile that total subscriptions due (as shown by the Subscription Register and the amount
collected and that still outstanding).
6. Vouch all purchases and expenses and verily 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. Verify that grants, if any, received from Government or local authority have been duly accounted for.
Also that refund in respect of taxes deducted at source has been claimed.
8. 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. Examine the internal check as regards the receipts and issue of stores; medicines, lines, apparatus,
clothing, instruments, etc. so as to insure that purchases have been properly recorded in the Stock
Register and that issues have been made only against proper authorisation.
10. See that depreciation has been written off against all the assets at the appropriate rates.
11. Inspect the bonds, share scripts, title deeds of properties and compare their particulars with those
entered in the Property and Investment Register.
12. Obtain inventories, specially 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.

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Audit of Cinemas

The special steps involved in its audit are as follows:-

1. Verify
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 for advance booking a separate series of tickets is issued;
d. and that the stock 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 Entertainment Tax collected with the total number of tickets issued for each
class.
5. Verify the charges collected for advertisement slides by reference to the Register of Slides kept at the
cinema as well with the agreements, entered into with advertisers in this regard.
6. Vouch the expenditure incurred on advertisement, repairs and maintenance. No part of such
expenditure should be capitalised except redecoration, and that should be adjusted as deferred
revenue expenditure the expenditure on extensive redecoration, and that should be adjusted as
deferred revenue expenditure.
7. Vouch payments on account of film hire with bills of distributors and in the process, the agreements
concerned should be referred to.
8. 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 enquire 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.
9. 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, cigarettes, etc. as in the case of club.

Question - Descriptive Question Marks 4 MTP April 2021

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?

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NGO

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Question - Descriptive Question Marks 4 January 2021 Exam Question

As an Auditor of NGO, how do you check/verify at least four receipts of income during the year?

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Audit of LLP
Audit of LLP - Basics

Question

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Every LLP is required to submit a Statement of Account and Solvency in Form 8, which shall be filed
within a period of sixty days from the end of three months of the financial year to which the Statement
of Account and Solvency relates. - Correct / Incorrect

November 2020 - 2 Marks

Question -
Correct / Incorrect Marks 2 MTP April 2021 LLP need not file a “Statement of Accounts and
Solvency”.

Incorrect - A LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its
state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed by every LLP with
the Registrar every year.

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.

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Audit of LLP - Appointment of Auditor

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Advantage or purpose of Audit

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Auditor’s duty regarding Audit of LLP

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Audit of Co-Operative Society -

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The Multi-State Co-operative Societies Act, 2002

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Power and duties of Auditors Section 73

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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 MultiState 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,
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.

Content of Auditor’s Report

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:
■ 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
■ 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

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● 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.
● 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 cooperative society not visited by him.
● 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.
● 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 above is answered in the negative or with a qualification, the auditor’s
report shall state the reason for the answer.

Power of Central Government to direct special audit in certain cases -

Section 77

Where the Central Government is of the opinion

● 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
● 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
● that the financial position of any Multi-State co-operative society is such as to endanger its solvency.

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.

It may appoint either a chartered accountant or the Multi-State co-operative society’s auditor himself to
conduct the special audit.

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.

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
MultiState co-operative society has under section 73.

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A special auditor makes 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.

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 MultiState 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.

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.

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Inquiry by Central Registrar under Section 78

When & Who?

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,
● 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.

Opportunity of being Heard - OOBH

However, before holding such inquiry fifteen days notice must be given to the Multi-State co-operative society.

Powers in case of investigation

The Central Registrar or the person authorized by him shall have the following powers, namely:
Free access and Summon
○ 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.

Call General Meeting

○ 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 headquarters of the society

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○ 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.
Summon
○ 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.

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 MultiState 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.

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Inspection of Multi-State Co-operative societies under

Section 79

When & Who?

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

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.

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.

Powers available

The Central Registrar or the person authorized by him shall have the following powers:

Access, Taking into custody , Verify, Calling of Meeting

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.

Entitled to Required Information

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.

Inspection Report

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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.

Question

You are appointed as an auditor of the co-operative society. State the special features of the co-operative
audit to be borne in mind by the auditor, concerning:

1. Audit classification of society.

2. Discussion of draft audit report with the management committee.

November 2020 - 4 Marks

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