CHAPTER 9.

AUDIT OF DIFFERENT TYPES OF ENTITIES

➔ WHAT TO STUDY?
I] Charitable Institution
II] Educational Institution
III] Audit of club
IV] Audit of Hospital
V] Audit of Cinema
VI] Audit of Hotel
VII] Audit of Hire Purchase
VIII] Leasing Co.
IX] Audit of LLP
X] Audit of Cooperative Societies
XI] Government Audit
XII] Partnership Audit
XIII] Audit of Local Bodies
XIV] Audit of Sole Trader
XV] NGO’s
XVI] Audit of Trusts & Societies

Basis I) Charitable Institution II) Educational Institution III) Audit of club

A] Preliminary
Points
(i) Legal Status Studying the Studying the Studying the
constitution under constitution under constitution under
which, charitable which, educational which, club has
institution has been set up institution has been set up been set up

(ii) Examine the Examine Guiding Examine Trust Deed or Examine the financial
Guiding Doc. document of the Regulations powers of secretary with
institution (Like Trust Note: -All the provisions the help of agreement
Deed) affecting accounts. or document

(iii) Evaluate the Examine the system of __ Verify the internal

ICS ICS, regarding check & ICS of the
➔ Accounting of club.
amount collected.
➔ Unused receipt book
➔ Moneys received
Audit सार – By CA Khushboo G Sanghavi 9.1
 from box collections,
flag days etc.

(iv) Review the Examine the minutes of Read through the Examine the minutes
minutes the meeting, to note minutes of the meetings of the meeting, to note
decision which may of the managing decision which may
affect the audit work. committee or governing affect the audit work.
body

(v) Accounting Followed Consistently Followed Consistently Followed Consistently

policies records

B] Receipts Main Income Main Income Main Income

{Subscription, Donation 1. Fees - a) Check names 1. Vouch the receipt on
& Grants} entered in the students account of entrance fee
1. Obtain all receipt fee register for each subscriptions with
books month or term, with the member application
2. Obtaining the respective class register. 2. Reconcile the
printed list of b) Verify cash book, amount of total
subscriptions & tracing the collections subscriptions.
donation & reconcile in the fee register 3. Ensure that arrears
with total collection c) Check admission fee of subscriptions for the
show in the accounts with admission slips previous year have been
with figure published signed by the head of correctly forward &
in reports the institution. current year arrears
3. Obtaining a 2. Confirm hostel dues have been correctly
certificate from a were recovered before adjusted.
responsible official students accounts were 4. Confirm that the
showing the amount of closed. account of every
grant received member has been
Ancillary Income Ancillary Income debited with amount
1. Investments Income 1. Verify rental income recoverable from him.
➔ Vouching the from land property
Interest/ Dividend which is rented
Counter folio 2. Vouch Income from: -
➔ Checking investment Endowments &
has been sold ex- Legacies
dividend or purchase Interest & Dividend

Audit सार – By CA Khushboo G Sanghavi 9.2

 cum dividend. 3. Verify Grant from
2. Rent: - Examine the Govt./Local Authority
rent received by with the memo of grant.
inspecting
tenancy agreements 4. Vouch donation, if
3. Vouching Gross any with the list
Receipts in respect of published with the
Special functions (i.e. annual report.
Concerts, Dramatic 5. Vouching the income
Performance etc.) tax refund with the
4. Vouching the income tax debt.
income tax refund with
the income tax dept.

C] Payments 1. Vouching payment of 1. Vouch all capital 1. Vouch Purchase of

Grant Expenditure & all exp. sports items, furniture,
2. Grants used for the authorised by the crockery & trace the
object of the institution authority entry with inventory
3. Capital expenditures 2. Vouch the payment register
are authorised by the of salaries, see the 2. Vouch purchase of
authority. increase in the salaries Foods stuffs, Cigar.
of the staff have been
sanctioned by the
committee.

D] Assets 1. Verifying the Cash & 1. Verifying the cash & 1. Physical verification
Bank balance Bank balance of inventories of
2. Verifying the 2. Verifying the furniture, sports
securities securities materials & other
- Inventories Inventories assets
- Properties (Movable & - Properties (Movable & 2. Inspect the share
Immovable) Immovable) scrips & bond in
(Title deed/ Physical (Title deed/Physical respect of investments,
Verification) Verification) check the current
3. Ascertaining that 3. Ascertaining that value for disclosures in
any funds contributed any funds contributed final account
for a special purpose for a special purpose
have been utilized for have been utilized for

Audit सार – By CA Khushboo G Sanghavi 9.3

 the purpose. the purpose.

E] Liabilities Reconcile the amount of Confirm the caution Verify the completeness
the dues & verify money other deposits of the liabilities &
the tax return filed paid by students on dues.
every month. admission, have been
shown as liability in
the balance sheet.

F] Other Points - - -

Basis IV) Audit of Hospital V) Audit of Cinema VI) Audit of Hotel

A] Preliminary
Points

(i) Legal Status Ascertain the legal Ascertain the legal Ascertain the legal
status of Hospital [i.e. status of the cinema [i.e. status of the hotel [like
whether it is trust/ firm whether it is sole whether it is sole
or body corporation etc.] proprietor/ firm/ body proprietor/ partnership
corporation] firm/ body corporation

(ii) Examine the Examine the AOA/ Examine the AOA/ Examine the AOA/
Guiding MOA/ Partnership MOA/ Partnership MOA/ Partnership
Document Deed, Trust Deed, etc. Deed, etc. Deed, etc.

(iii) Evaluation the Examine the internal Evaluate the ICS: PEQ Nov’22 Evaluate the system of
ICS control system & (a) That entrance of ICS with regards to
internal check as cinema hall during system billing the
regard the receipt & show is only through guests from laundry,
issue of stores, printed ticket. bar & restaurants etc.
medicines, lines, (b) They are serially
apparatus, clothing etc. numbered & bound
into books.
(c) That the No. of
tickets issued for each
show.
(d) That for advance

Audit सार – By CA Khushboo G Sanghavi 9.4

 booking a separate series
of tickets is issued.
(e) That the inventory of
the tickets is kept in
the custody of a
responsible official.

(iv) Review the Examine the minutes of Examine the minutes of Examine the minutes
minutes meeting, to note meeting, to note of BOD to note
decision which may decision which may decision which may
affect the audit work. affect the audit work. affect the audit work.

(v) Accounting Ensure that A/c policies Ensure that A/c policies Ensure that A/c policies
Policies & are applied consistently are applied consistently are applied consistently
Records

B] Receipts Main Income Main Income Main Income

1. Vouch the register of 1. Confirm that at the 1.Verify the room sales
patients with copies of end of the show a collections with the
bills issued to them Statement of tickets sold guest register
also see that bills have Is prepared & cash 2. If standard room
been issued to all Collected is agreed with rate changed from
patients from whom it. various guests then, it
an amount was 2. Vouch the entries in should be investigated
resumable according to Cash book in respect of to ensure that they
the rules of the Cash collected on sale have been properly
hospital. of tickets. authorised.
2. Check cash collection 3. Test Check daily
as entered in the cash occupancy reports.
book with the receipt

Ancillary Income Ancillary Income Ancillary Income

1. Verify the investment 1. The arrangement for 1. Examine the bills
register, that rental collection of the share in raised for letting out of
income, of property, the restaurant income banquet hall with
dividend & interest on should be enquired into reference to agreement,
security have been either a fixed cash book, Bank
collected. commission or a statement & relevant

Audit सार – By CA Khushboo G Sanghavi 9.5

 2. Ascertain that fixed % of the taking register.
legacies & donation may be receivable 2. Examine the bills
received for a specific annually. raised to agencies
purpose have been issuing space & other
applied in their manner facilities of hotel eg.
agreed upon. Tour operator,
3. Trace all collections Shopkeeper
of subscription &
donation from the cash
book to the respective
register.

C] Payments 1. Vouch all purchase & 1. Vouch all expenditure 1. Ensure that wages
expenses incurred on the paid to casual labours
2. Verify that capital advertisement, repair & are shown properly.
expenditure was maintenance. 2. Vouch the
incurred only with the 2. Vouch payments on commission paid to
prior sanction of the account of film hire agent.
trustees or the with bills of distributors 3. Ensure that proper
managing committee. in the process. distinction is made
between capital &
revenue expenditure
4. Whether depreciation
has been properly
charged on furniture,
which include other
Assets

D] Assets 1. Depreciation has been 1. Depreciation has been 1. Physical verify the
Written off against all Written off against all fixed assets & find the
the assets at the the assets at the discrepancies between
Appropriate rates. Appropriate rates. the result of physical
2. Inspect the Bond, 2. Inspect the Bond, verification in the
scrips, title deeds scrips, title deeds books of account
of the properties. of the properties. 2. Examine whether all
3. Obtain inventories, 3. Obtain inventories, the assets are
especially of stock & especially of stock & properly disclosed.
stores as at the end of stores as at the end of 3. Depreciation

Audit सार – By CA Khushboo G Sanghavi 9.6

 the year. the year. has been written off
4. Verify the Grants if 4. Verify the Grants if against all the assets
any received from the any received from the at the appropriate rates.
government. government. 4. Inspect the Bond,
scrips, title deeds
of the properties.
5. Obtain inventories,
especially of stock &
stores as at the end of
the year.
6. Verify the Grants if
any received from the
government.

E] Liabilities Verify the completeness Reconcile the amount of Verify the completeness
of the liabilities entertainment tax of the liabilities
collected with the total
number of ticket issued
for each class & vouch
& verify the
entertainment tax
returns filed each
month
F] Other Points Compare the total of Verify whether various
various items of taxes like GST, etc.
expenditure & income have been timely
with the amount deposited.
budget for them.

Basis VII) Audit of Hire Purchase VIII) Leasing Co.

A] Preliminary
Points
(i) Legal Status

(ii) Examine the Guiding ➔ Examine HP agreement in ➔ Lease agreement should be

Documents writing & is signed by all parties examined.
➔ Hire Purchase (HP) agreement Following points may be noted

Audit सार – By CA Khushboo G Sanghavi 9.7

 specifies clearly. 1. The descriptions of the lessor,
a. The HP price of the goods the lessee, the equipment & the
b. The cash price of the goods location, when the equipment is
c. Date of commencement of to be installed
agreement 2. The amount of revenue of
d. The number of instalment lease, date of payment, late
by which the HP price to be paid. charges, deposit or advances, etc.
e. The goods to which the should be noted.
agreement relates in a manner 3. Whether the equipment shall
sufficient to identify them. be returned to the lessor on
termination of the agreement.
4. Whether the agreement
prohibits the lessee from
assigning the subletting the
equipment authorise the lessor
to do so.

(iii) Evaluation of procedure ➔ Whether they exist a procedure

to ascertain the credit analysis
of lessee like lessee’s ability to
meet the commitment under
lease, past credit records, capital
Strength, etc.

B] Receipts Ensure that instalment Ensure that instalment

payments are being received payments are being received
regularly as per the agreement. regularly as per the agreement.

Difference Between (PEQ)

Operating Lease Financial Lease

(i) Common examples Lease of Projector, Computers, Lease of Plant & Machinery,
Laptops, Coffee Dispensers etc. Land, Office Building, etc.

(ii) Ownership Ownership of the asset remains Ownership transfer option at the
with the lessor for the entire end of the lease period is with
period of lease. the lessee. Title may or may not
be eventually transferred.

Audit सार – By CA Khushboo G Sanghavi 9.8

(iii) Accounting treatment Operating lease is generally Finance lease is treated like loan
treated like a renting arrangement. Hence, the asset
arrangement. That means the ownership is considered of that
lease payments are treated as of the lessee and thus appears
operating expenses and the asset on the balance sheet of the
does not appear as on lessee’s lessee.
balance sheet

(iv) Purchase Option Under operating lease, the lessee Financial lease allows the lessee
does not have any option to buy to have a purchase option at
the asset during the lease period. less than the fair market value
of the asset

(v) Lease Term Lease term generally extends to Lease term is generally more
less than 75% of the projected than or equal to estimated
useful life of the leased asset. economy life of the asset under
the lease arrangement.

(vi) Operating/ running Lessee pays only the monthly Lessee generally bears insurance,
expenses lease payments. No running or maintenance & taxes.
administration costs are to be
borne for example registration,
repairs, etc. since it gives only
right to use the asset.

(vii) Tax Benefit Since operating lease is as good Lessee can claim both interest &
as renting, lease payment is depreciation expenses as
considered as expense. No financial lease is treated like a
depreciation can be claimed by loan.
the lessee.

Students Note:

Audit सार – By CA Khushboo G Sanghavi 9.9

IX] Audit of LLP
(PEQ Nov’22)
A] LLP shall be under obligation to maintain annual accounts reflecting True & Fair view
of its state of affair.
A statement of Accounts & solvency in Form 8 shall be filled
by LLP with ROC every year.
B] The accounts of every LLP

Shall be audited in accordance with Rule 24 of LLP Rules, 2009

It provides following LLP shall not get it account audited whose (in any FY)

T/o ≤ ₹ 40 Lakhs OR Contribution ≤ ₹ 25 Lakhs

C] i) As its difficult to assess insurance requirements of different types

of sizes of LLP’s, there is no mandatory requirement of
insurance under this Act.

Every LLP to file

Annual Return
Statement of Account &
In Form 11 within 60
Solvency in Form 8 within 30
days from closer of FY.
days from the end of 6 months
of FY>

ii) Default in filing

Upto 300 days More than 300 days

Normal + Additional Late Fees Normal + Additional Late
Fees also liable for
prosecution

Audit सार – By CA Khushboo G Sanghavi 9.10

D] Appointment of Auditor by Designated Partner

1st Auditor Casual Vacancy Subsequent Auditor

Including Removal
Any time before the Atleast 30 days prior to the
end of the 1st FY end of each financial year

In case designated partner fails, other partner may appoint.

E] Duty of Auditor : - a) To obtain definite instruction in writing
b) To refer Minutes Book
c) To read LLP agreement

Method of Profit
Nature Interest Drawings Borrowing
Settlement Sharing
Ratio

Amount of Duration Salaries, Right & Any loans

Capital Commission etc. Duties Advanced

F] Reporting :- Auditor should mention

Records are Correct & Able to Obtain All Whether Any

Reliable Information Restriction

G] Power of Registrar

Obtain such information Summon designated Call for documents for

as considered necessary partner inspection

Audit सार – By CA Khushboo G Sanghavi 9.11

X] AUDIT OF COOPERATIVE SOCIETIES
A] SPECIAL FEATURES
(i) Overdue debits: - period from 6 months to 5 years and > 5 years shall be classified.
(ii) Overdue interest: - such interest shall be excluded from interest outstanding.
(iii) Classification of bad debts: - bad debts can be written off only where they are certified
(iv) Committee in (case of company. → BOD)
(v) Verification of assets and liabilities:- current assets should valued of lower of cost or market
value. All known liabilities should be bought into accounts not merely and contingent
(vi) Adhere to co-operative principles: - the auditor shall ensure that expenses are included
economically and principles of property are followed.
(vii) Observations of the provisions of act and rules → Cooperative Societies Act
(viii) Restrictions on co-operative societies:
1. No member other than registered society can invest capital exceeding 20% or ₹ 1,000
2. It can provide loan to members and for providing loans to other registered societies
special sanction from registrar is required.
3. It may accept loans or deposits from members as well as others subject to conditions
specified in bye laws.
4. Co-operatives societies may invest its fund in followings: -
• Securities in any other societies
• Specified securities mentioned u/s 20 of Indian Trust Act.
• Central as state co-operative banks
• Any other as permitted by govt.
(ix) Special report to registered: - In all cases a special report may become necessary on
receipt of which registered way take necessary actions:
• Personal profiteering
• Fraud
• Mismanagements
• Disproportionate actions
• Reckless advancing
(x) Classifications of societies: - On the basis of overall performances of the society, the
auditor shall award a class to the societies.
(xi) Discussion of draft audit report will managing committee
(xii) Distribution of profit: -
• (25%) of profit should be transferred to reserves before distribution
• However, registrar way reduce it but atleast 10% will still be required.
(xiii) Schedules to the report: -
• Transaction contrary to Act, rules and Bye-laws
• Sums not brought into accounts.

Audit सार – By CA Khushboo G Sanghavi 9.12

 • Material/property appearing as doubtful/bad.
• Material irregularity in expenses/realization of money.
• Any other matter specified by registrar.
(xiv) Contribution to education fund: -
• Some State Acts provide that every society should annually contribute towards
education fund
• Also, transfer to Dividend equalisation reserve & CRR are treated as charge
against profit.

B] MULTI STATE CO-OPERATIVE SOCIETIES ACT, 2002

i) BOOKS OF ACCOUNT:
• All sum of money received & expended & matters of receipt/expenses.
• All sale & Purchase of goods.
• All assets & liabilities.
• For MSCOS engaged in production, processing & manufacturing, their utilization of
materials or labour or other items of cost as may be specified in by-laws of society.

ii) QUALIFICATION OF AUDITORS (SEC. 72)

• A Chartered Accountant or as specified under State Co-operative Act. is qualified to be
appointed as auditor: -
• Disqualification:
• Body corporate.
• Officer/Employee of MSCOS.
• Partner/Employee of Officer/Employee of MSCOS.
• Indebted/Guarantor for amount > ₹ 1,000/-

iii) APPOINTMENT OF AUDITORS (SEC. 70)

• First auditor by board meeting within one month of registration date to hold office
until conclusion of 1st AGM. If board fails to appoint, then in general meeting until
conclusion of next AGM.]

iv) POWER & DUTIES OF AUDITORS (SEC. 73)

Right to access at all times to books, Accounts & Vouchers, to require information &
explanation from employee/officers, to attend GM, to send representation on removal.

v) Following inquiries shall be made

Loans & advances made by MSCOS on basis of security, properly secured & whether
terms aren’t prejudicial to interest of MSCOS/members.
• Transaction of MSCOS represented merely by book entries are not prejudicial to interest
of MSCOS.
Audit सार – By CA Khushboo G Sanghavi 9.13
 • Whether personal expenses have been charged to revenue.
• In case it is stated in Books of MSCOS that any shares have been allotted for cash
whether cash actually been received & if no cash has been so received, whether positions
stated in books & B/S are correct & not misleading.

C] SPECIAL AUDIT OF MSCOS (SEC. 77) (PEQ CA Inter May 19)

(i) In case, Central Government or State Government either alone or both hold 51% more of
paid-up share capital in such MSCOS.
(ii) Central Government may direct either a C.A or MSCOS’s auditor to conducts special
audit & make a report to it.
(iii) If Central Government is of opinion that:
• Affairs of MSCOS aren’t being managed in accordance with self-help & Co-operative
principles or sound business principles or:
• MSCOS is managed in manner likely to cause serious injury/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.
(iv) Auditor has same powers & duties as in Sec. 73.
(v) On receipt of report of special audit, Central Government may take such action as it
considers necessary.

D] INQUIRY AND INSPECTION BY CG

Request to
hold inquiry

A federal co-operative Central Registrar

society or
A creditor or Appoints a person
> 1/5 of member or sends 15 days’ notice
> 1/3 of BOD to MSCOS and
holds investigation

Within 3 months committee

report of enquiry

Audit सार – By CA Khushboo G Sanghavi 9.14

XI] GOVERNMENT AUDIT

A] DEFINITION & OBJECTIVE OF GOVERNMENT AUDIT (PEQ July’ 21)

Government auditing is
• the objective, systematic, professional and independent examination
• of financial, administrative and other operations
• of a public entity
• made subsequently to their execution
• for the purpose of evaluating and verifying them,
• presenting a report containing explanatory comments on audit findings together with
conclusions and recommendations for future actions
• by the responsible officials
• and in the case of examination of financial statements, expressing the appropriate
professional opinion regarding the fairness of the presentation.

Objectives :- (PEQ)
(i) Accounting for Public Funds :- Government audit serves as a mechanism or process for
public accounting of government funds.
(ii) 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.
(iii) Base for Corrective actions :- Audit observations based on factual data collection also serve
highlight the lapses of the lower hierarchy, thus helping supervisory level officers to take
corrective measures.

B] PURPOSE :

1. Mechanism or Process -> Public Accounting

2. Operational, Mgmt. Programme and Policy Aspects.
3. Factual data, serve to highlight lapses of lower hierarchy -> helps supervisory level officer to
take corrective measures.
4. Neither equipped nor intended to function as investigating agency.

C] LEGAL FRAMEWORK AND CAG

1. Appointment & Removal
• Constitution guarantees the independence of the CAG by prescribing that he shall be
appointed by PRESIDENT of India.

Audit सार – By CA Khushboo G Sanghavi 9.15

 • He shall be removed only on the basis of proved misbehaviour or incapacity.
• He can be removed only when each House of Parliament decided to do so by MAJORITY
(> 2/3 of members present & voting).

2. Various constitutional Provision

Article 148 Article 149 Article 150 Article 151

• CAG shall be appointed Powers & duties- Accounts of the Report of CAG

by President of India prescribed under CAG Union and States shall be

• Tenure – 6 years or 65 (Duties, Powers and will be maintained submitted to

years whichever is earlier Conditions of Service as per description President/

• Remuneration – equivalent Act, 1971.) given by President Governor.

to that of a SC judge. on advice of CAG.

• Removal – only on grounds

of proven misbehaviour

or incapacity

D] DUTIES OF CAG :

1. Compile and Submit Accounts :-

(i) Who is responsible for Compiling :- The CAG of India. Accounts are compiled by him or
by any other person responsible in that behalf.
(ii) Accounts compiled are submitted to :– The President or the Governor of the State or
Administration of Union Territory having legislative assembly as the case may be.
(iii) When such accounts are submitted :- Such accounts are submitted on before the date
as case may determined.
(iv) Where CAG provide information & render assistance to Union & State :-
The CAG shall, in so far as the accounts for compilation or keeping of which he is
responsible, unable him so to do, give to Union Territory, State Government or Government of
Union Territory as they may require from time to time in preparation of annual financial
statements.

Audit सार – By CA Khushboo G Sanghavi 9.16

2. General Provisions Relating to Audit & report (Expected MCQ)

a) on all expenditure b) to all transaction c) on all trading, P/L, B/S,

-> Expenditure from :- the -> Transactions :- of the Manufacturing accounts
consolidated fund of India union and of the states & other subsidiary
& of each state & of each relating to contingency accounts.
Union Territory having a funds & public accounts.
legislative assembly (will be
denoted as # for further
explanation)
-> To ascertain :- Whether
the money disbursed were
legally available for &
applicable to service/ purpose
to which they have been
applied or charged.

3. Audit of Receipts & Expenditure

Audit receipts & expenditure of any Body or Authority [BA] substantially financed* by
loan or grant from fund (Refer Note B #)
Note A :- *Substantially financed

Amount AND Expenditure

Not less than Not less than 75%

Rs. 25 Lakh of total expenditure

Note B :- # Consolidated fund of India and of each state and of each Union Territory
having a legislative Assembly.
Author’s Note :- Pictorial Presentation of Audit of Receipts & Expenditure for Understanding
# Fund ₹ Substantial
Financed

Body/Authority

CAG -> Audit of receipts and exp. of Body authority.

Subject to prov. of law

Audit सार – By CA Khushboo G Sanghavi 9.17

4. Audit of Grants & Loans
CAG shall scrutinise the procedures by which the sanctioning authority satisfied itself
as to the fulfilment of the conditions subjects to which such grant or loans were given.
Grants or loan given to :- any Body or Authority [BA], not being foreign state or
International organisation.
Grant or loan given from :- #
5. Audit of Receipts of Union or States
CAG shall appoint first auditor & subsequent auditor of Government Companies as
explained under section 139(5) & 139(7).
The Auditor of Government Company shall submit his audit report to CAG as explained
under section 143(5), (6), (7).

Powers of CAG is to

Inspect Require Question or Call for Dispense with Apply Limit

Make Information any part of Check
Observation detailed audit of
any accounts or
Any Any Books, As he may As required class of To any
office of accounts, consider for transaction account or
accounts paper & necessary preparation transaction
under other to person of accounts
the documents in-charge or report
control be sent to
of union required
& state place

Students Note

Audit सार – By CA Khushboo G Sanghavi 9.18

E] AUDIT OF EXPENDITURE (Key - RS P3)

a) Audit b) Audit of c) Audit d) Propriety e) Performance

against Rule Sanction against Audit

& Order Provision

The auditor The auditor It To ensure This involves

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

Students Note

Audit सार – By CA Khushboo G Sanghavi 9.19

i) Audit against Rule & Order
➔ Rule, Regulation & Order against which regulatory audit is conducted :

Rules & Order

regulating the powers to dealing with the mode of regulating the

incur and sanction presentation of claims against conditions of service,
expenditure from the government, withdrawing moneys pay and allowances,
Consolidated Fund of from the Consolidated Fund, and pensions of
India or of a State (and Contingency Fund and Public government servants.
the Contingency Fund of Accounts of the Government of the
India or of a State) India and of the States, and in
general the financial rules
prescribing the detailed procedure
to be followed by government
servants in dealing with
government transactions

It is the function of the executive government to frame rules, regulations and orders, which are
to be observed by its subordinate authorities. The job of audit is to see that these rules,
regulations and orders are applied properly by the subordinate authorities. It is, however, not
the function of audit to prescribe what such rules, regulations and orders shall be.
But, it is the function of audit to carry out examination of the various rules, regulations and
orders issued by the executive authorities to see that:

(a) they are not (b) they are (c) they do not (d) in case they have
inconsistent with consistent with the come in conflict not been separately
any provisions of essential with the orders of, approved by competent
the Constitution or requirements of or rules made by, authority, the issuing
any laws made audit and any higher authority possesses the
thereunder accounts as authority necessary rule-making
determined by the power.
CAG

ii) Audit of Sanctions

The auditor has to ensure that each item of expenditure is covered by a sanction, either
general or special, of the competent authority.

Audit सार – By CA Khushboo G Sanghavi 9.20

iii) Audit against Provision of Funds
It contemplates that there is a provision of funds out of which expenditure can be incurred &
the amount of such expenditure does not exceed the appropriations made.

iv) Propriety Audit

Propriety Audit stands for verification of transaction on the tests of public
(i) Propriety Audit stands for verification of transaction on the tests of public interest
commonly accepted customs and standards of conduct and particularly as applied to
professional performance, requirements of law, government regulations and professional
codes.
(ii) In ‘Propriety audit’, the auditors may try to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity with the
existing rules and regulations.
(iii) 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.
(iv) Audit should, therefore, try to secure a reasonably high standard of public financial
morality by looking into the wisdom, faithfulness and economy of transactions.
(v) Some general principles have been laid in the Audit Code
→ The expenditure > (should not be more than) occasion demand.
→ No authority should exercise its power of sanctioning expenditure to get any personal
advantage.
→ Public money should not be utilised for the benefit of particular person or community
unless

the amount of a claim for the the expenditure the amount of allowances,
expenditure amount could is in pursuance such as travelling
involved is be enforced in of a recognised allowances, granted to meet
insignificant a Court of law policy or custom expenditure of a particular
type should be so regulated
that the allowances are not,
on the whole, sources of profit
to the recipients

Audit सार – By CA Khushboo G Sanghavi 9.21

v) Performance audit (Key - E3)

ECONOMY EFFICIENCY EFFECTIVENESS

It is reducing the It is reducing input to achieve maximum It is achieving the expected

cost of inputs used output How? output with intended
for activity i.e. best a) Sound procurements Practice or qualities
price for appropriate b) Maintaining & protecting Resources of input. How to assess
quantity, quality of c) Optimum utilisation of Resources effectiveness, assessing,
goods (Most d) Best operating process checking, verifying :
economical) e) Objectives are met cost effectively a) Whether objective
. f) Programmes are managed regulated are within legal

organised & executed efficiently frame.

. b) Programs set to
achieve desired target
. c) Factors inhibiting
satisfactory goal
d) Effectiveness of
Individual program
. e) Component

F] AUDIT OF RECEIPTS

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

Audit सार – By CA Khushboo G Sanghavi 9.22

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

Students Note

Audit सार – By CA Khushboo G Sanghavi 9.23

G] AUDIT OF STORES & INVENTORIES

Audit is conducted to

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

Audit सार – By CA Khushboo G Sanghavi 9.24

H] AUDIT OF COMMERCIAL ACCOUNTS

Govt. Department managed Govt. Company Corporation under specific

Undertaking E.g. Railways, u/s 2(45) of Companies Act E.g. LIC, UTI etc.
Postal Services, Securities, Act, 2013
Canteen etc.

Section 143(5) Section 143(6) Section 143(7)

Appointed of auditor by C&AG as C&AG’s right to – Without prejudice to the

per section 139(5) or 139(7). • Conduct provisions relating to
+ supplementary audit. audit & auditor, the
Directions by C&AG, the manner • Comment upon or C&AG of India may,
in which accounts shall be supplement such in case of any
audited. audit report. Government Company,
+
if he considers necessary,
Submission of Auditor’s Report to
by an order, cause test
C&AG including-
audit to be conducted
• Directions issued, if any
of the accounts of such
• Action taken thereon
company & the
• Impact on Accounts
provisions of section 19A
of the C&AG (Duties,
Powers & Conditions of
Service) Act, 1971, shall
apply to the report of
such test audit.

I] REPORTING

(i) Introduction – Containing general view of working results of Govt. Co. deemed Govt.
Co. & Corporation.
(ii) Results of comprehensive appraisals of selected undertaking.
(iii) Resume of company auditors, report submitted by them under their direction.
(iv) Comments of CAG.
(v) Significant results of audit of undertaking not taken for appraisal by the audit board.
(vi) Article 151 of Constitutions enjoys that CAG shall reports on the states of the presidents
on governor concern & the letter shall cause the report to be laid before legislature.
(vii) The report is factual & conclusion are left on reader to be drawn.

Audit सार – By CA Khushboo G Sanghavi 9.25

XII] PARTNERSHIP AUDIT

A] APPOINTMENT OF AUDITORS

(i) The auditor to a firm is usually (ii) His remuneration is also fixed by the partners.
appointed by the partners either on the
basis of a decision taken by them or to
comply with a condition in the
partnership agreement.
(iii) It is important that the letter of (iv) In case of change of auditor, it would be duty
appointment should clearly state the of incoming auditor to communicate with the
nature & scope of audit which is to be previous auditor.
carried out & particulars of limitations, if
any, under which he would have to
function.
(v) The auditor may, particularly, ensure (vi) In case the firm is required to get its accounts
application of accounting standards audited under the requirements of any statute,
prescribed by the Institute. the auditor will have to qualify the report in case
of non-compliance with the accounting
standards.
(vii) Alternatively, only disclosure of non-compliance with the accounting standards, would be
sufficient without making it a subject matter of qualification.

B] MATTERS TO BE CONSIDERED BEFORE STARTING AUDIT

Also, before starting the audit, he should examine the partnership agreement and note the
provisions therein as regards the following matters:
(i) The name and style under which (ii) The duration of the partnership, if any, that
the business shall be conducted. has been agreed upon.
(iii) The amount of capital that shall (iv) The period at the end of which the accounts of
be contributed by each partner whether the partnership will be closed periodically & the
it will be fixed or could be varied from proportions in which the profit shall be divided
year to year among the partners or losses shall have to be
contributed by them; whether the losses shall be
borne by the partners or whether any of the partners
will not be required to do so.
(v) The provisions as regards (vi) Borrowing capacity of the partnership (when it
maintenance of books of account & the is not implied as in the case of non-trading firms).
matters which must be taken into
account for determining the profits of

Audit सार – By CA Khushboo G Sanghavi 9.26

 the firm available for division among
the partners e.g., creation of reserves,
provision for depreciation, etc. also the
period within which accounts can be
reopened for correcting a manifest error.
(vii) The rate at which interest will be (viii) Whether any salaries are payable to the
allowed on the capitals and loans partners or withdrawals are permitted against
provided by partners & the rate at which shares of profits and, if so, to what extent?
it will be charged on their drawings &
current accounts.
(ix) Duties of the partners as regards the (x) Who shall operate the bank account of the
management of business of the firm; firm? How will the surplus funds of the partnership
also, the partners who shall act as be invested?
managing partners.
(xi) Limitations and restrictions that have been agreed upon, the rights & powers of partners
& on their implied authority to pledge the firm’s credit or to render it liable.

Students Note

Audit सार – By CA Khushboo G Sanghavi 9.27

C] ADVANTAGES OF AUDIT OF A PARTNERSHIP FIRM

On broad considerations, the advantages of audit of accounts of a partnership could be

stated as follows:

Audited accounts On the retirement Audited Audited An audit is an

provide a or death of a statement of statements of effective safeguard
convenient and partner, audited accounts are account can against any
reliable means of accounts, which relied upon by be helpful in undue advantage
settling accounts have been accepted the banks when the being taken by a
between the partners by the partners, advancing negotiations working partner or
, thereby, the constitute a reliable loans, as well as to admit a partners especially
possibility of evidence for by prospective person as a in the case of
occurrence of a computing the purchasers of the partner, those partners who
dispute among amounts due to business, as especially are not actively
them is mitigated. the retiring partner evidence of the when they are associated with
On this or to the profitability of available for the working of the
consideration, it is representative of the the concern & a number of firm
usually provided in deceased partner in its financial past years.
and accepted by the respect of his share position.
partners, shall be of capital, profits &
binding upon them, goodwill.
unless some
manifest error is
brought to light
within a specified
period subsequent to
the accounts
having been signed.

Students Note

Audit सार – By CA Khushboo G Sanghavi 9.28

 MATTERS WHICH SHOULD BE SPECIALLY CONSIDERED IN THE AUDIT
OF ACCOUNTS OF A PARTNERSHIP

Confirming Studying the Verifying Examining Verifying Confirming Verifying

that the minute book, that the whether generally that a that the
letter of if any, business in books of that the provision for profits
appointment, maintained which the account interest of the firm’s and
signed by a to record the partnership appear to no partner tax payable losses
partner, duly policy is engaged be has suffered by the have
authorised, decision is reasonable prejudicially partnership been
clearly states taken by authorised and are by an has been divided
the nature partners by the considered activity made in the among
and scope of specially the partnership adequate engaged in accounts the
audit minutes agreement; in relation by the before partners
contemplated relating to or by any to the partnership arriving at in their
by the authorisation extension or nature of which, it the amount agreed
partners, of modificatio the was not of profit profit-
specially the extraordinary n thereof business of authorised divisible sharing
limitation, if and capital agreed to the to do under among the ratio.
any, under expenditure, subsequently partnership the partners.
which the raising of . . partnership
auditor shall loans; deed or by
have to purchase of any
function. assets, violation of

extraordinary a provision

contracts in the

entered into partnership

and other agreements.

such matters
as are not of
a routine
nature.

Audit सार – By CA Khushboo G Sanghavi 9.29

 AUDIT OF LOCAL BODIES
XIII]

A] MEANING & BACKGROUND: - (PEQ Nov’22)

a) A municipality can be defined as a unit of local self-government in an urban area.
b) By 1947 almost every urban & semi urban area constituted local bodies & the services
that local bodies rendered was restricted to education, public health, sanitation, medical
relief, roads & few other public works. These bodies derived their revenues from a number
of sources as taxes on property, person, licenses & other non-tax revenues.

c) Municipal government in India covers five distinct types of urban local

authorities-

the municipal the municipal the notified the town area the cantonment
corporations, councils, area committees, committees and committees.

d) Specific local functions

regulatory, maintenance and development activities.

e) Heads of expenditure

general administration public health, public safety, education, public

and revenue collection, works, and
others such as interest
payments, etc.
f) Major source of revenue

Property Taxes Octroi Other municipal taxes, e.g., Professional tax, Non-
Mechanical Vehicle tax, Tax on Advertisement,
Tolls, Show tax etc.

Audit सार – By CA Khushboo G Sanghavi 9.30

 g) Local bodies may receive different types of grants from the state administration
Categories of grants

General purpose grants: Specific purpose grants: Statutory and compensatory

These are primarily These grants which are grants: These grants, under
intended to tied to the provision of various enactments, are given to
substantially bridge the certain services or local bodies as compensation on
gap between the needs performance of certain account of loss of any revenue on
and resources of the tasks. taking over a tax by state
local bodies. government from local
government.

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

Budgetary procedure Expenditure control Accounting system

➔ BUDGETARY PROCEDURE: This is geared to subserve the twin considerations of financial

accountability and control of expenditure. The main objective is to ensure that funds are
raised and moneys are spent by the executive departments in accordance with the rules and
regulations and within the limits of sanction and authorisation by the legislature or council.
Budget preparation is usually the occasion for determining the levels of taxation and rates
and the ceilings on expenditure. Municipal budget formats and heads of accounts vary
from state to state. There are variations between the corporation and municipalities. One
important feature of the municipal budgets is that there is no strict separation between
revenue and capital items; usually there is a ‘head’ called extraordinary items which cover
most of the capital transactions. There are, however, a number of special funds (e.g. roads) or
in some cases separate budgets for specific municipal functions (e.g. education) or enterprise
activities (e.g., water supply and sanitation, transport, electricity, etc.)

➔ EXPENDITURE CONTROL: The system of financial control existing in the state and central
government level is conditioned by the fact that there is a clear demarcation between the
legislature and executive. The integration of legislation and executive powers in the municipal
council makes it difficult for its executive to function as its inquisitorial body as well.
Moreover the separation of executive powers and functions in municipal government
cannot accommodate the existence of an independent finance officer responsible to the

Audit सार – By CA Khushboo G Sanghavi 9.31

 municipal council or its executive committee. This leaves the system of external audit by state
government as the only instrument of controlling municipal expenditure.

➔ ACCOUNTING SYSTEM: - Municipal accounting and budget format have been criticised
as neither simple nor comprehensible, sometimes providing inadequate information and at
other times a surfeit of information. Both these situations are not conducive to a proper
system of management information.

C] IMPORTANT OBJECTIVE OF AUDIT

After knowing financial aspects, now let’s know the objective local body audit:
a) reporting on the fairness of the content and presentation of financial statements;
b) reporting upon the strengths and weaknesses of systems of financial control;
c) reporting on the adherence to legal and/or administrative requirements;
d) reporting upon whether value is being fully received on money spent; and
e) detection and prevention of error, fraud and misuse of resources.

D] AUDIT PROGRAMME
(i) APPOINTMENT: The Local Fund Audit Wing of the State Govt. is generally in- charge of
the audit of municipal accounts. Sometimes bigger municipal corporations e.g. Delhi,
Mumbai etc have power to appoint their own auditors for regular external audit. So the
auditor should ensure his appointment
(ii) AUDITOR’S CONCERNS: The auditor while auditing the local bodies should report on the
• fairness of the contents and presentation of financial statements,
• the strengths and weaknesses of system of financial control,
• the adherence to legal and/or administrative requirements;
His objective should be to detect errors and fraud and misuse of resources.
(iii) RULES & REGULATIONS: The auditor should ensure that the expenditure incurred
conforms to the relevant provisions of the law and is in accordance with the financial
rules and regulations framed by the competent authority.
(iv) AUTHORISATIONS: He should ensure that all types of sanctions, either special or
general, accorded by the competent authority.
(v) PROVISIONING: He should ensure that there is a provision of funds and the
expenditure is incurred from the provision and the same has been authorized by the
competent authority.
(vi) PERFORMANCE: The auditor should check that the different schemes, programmes and
projects, where large financial expenditure has been incurred, are running economically and
getting the expected results.

Audit सार – By CA Khushboo G Sanghavi 9.32