9.

AUDIT OF DIFFERENT TYPES OF ENTITIES

COMMON POINTS TO BE USED IN EVERY ANSWER
Examine the constitution of the organization
Examine the bye laws or rules and regulations or trust deed
Examine the powers of the members of the management and other officers
Examine the minute books of managing committees and of members general meeting as the case
may be
Evaluate the internal Control System and accounting system in the organisation
Examine the accounting policies followed and the accounting records maintained
Check the various receipts of the organisation in the form of fees, rent, income on investment,
donations and grants
Check the various expenditures of the organization like Salary, Rent, General Expenses etc.
Verification of assets and liabilities

GOVERNMENT AUDIT
MEANING
o 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 withconclusions 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.

SIMPLE MEANING
Government auditing is a process to review the financial, administrative, and
other activities of a government organization. This review happens after the
actions have been completed, with the goal of checking whether everything
was done correctly and efficiently.

CAG then creates a report that explains what they found during the review.
They also give suggestions on how to improve things in the future.

If the audit includes financial statements, they give a professional opinion on

whether those statements are accurate and fairly represent the
 organization's financial situation.

OBJECTIVES:

o Accounting For Public Funds: Government audit serves as a mechanism or process for
public accounting of government funds.

o Appraisal Of Government Policies: It also provides public accounting of the

operational, management, programme, and policy aspects of public administration as
well asaccountability of the officials administering them.

o 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 totake corrective measures.

o Administrative Accountability: Government audit is neither equipped nor intended to

function as an investigating agency, to pursue every irregularity or misdemeanors to its
logical end. The main objective of audit is a combination of ensuring accountability of
administration tolegislature 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.

DUTIES OF CAG
 Compile and submit Accounts of Union and States:
o The C&AG shall be responsible for compiling the accounts of the Union and of each State
and union territory from the initial and subsidiary accounts rendered to the audit and
accounts offices under his control by treasuries, offices or departments responsible for
the keeping of such account.

 The C&AG to give information and render assistance to the Union and States:
The Comptroller and Auditor General shall, give to the Union Government, to the State
Government or to the Governments of Union Territories having Legislative Assemblies, as the
case may be, such information as they may, from time to time, require and render such
assistance in the preparation of the annual financial statements as they may reasonably ask
for.

 It shall be the duty of the C&AG –

o To audit and report on all expenditure from the Consolidated Fund of India and of each
State and of each Union Territory.

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

 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, theCAG shall audit all receipts and
expenditure of that body or authority and to report.

Meaning of Substantially financed:

Where the grant or loan to a body or authority from theConsolidated Fund of India or of any State
or of any Union Territory having a Legislative Assembly in a financial year is not less than Rs. 25
lakhs and the amount of such grant or loan is not less than 75% of the total expenditure of that
body or authority, such body or authority shallbe deemed, for this purpose to be substantially
financed by such grants or loans as the case maybe.
 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 to any authority or body,
notbeing a foreign State or international Organisation, the CAG shall verify the procedures and
the conditions under which the grant is sanctioned.

 Audit of Receipts of Union or States: It shall be the duty of the CAG to audit all receipts which
are payable into the Consolidated Fund of India and of each State and of each Union
Territoryand 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 report thereon.

 Audit of Accounts of Stores and Inventory: The CAG shall have authority to audit and report on
the accounts of stores and inventory kept in any office or department of the Union or of a
State.
 Audit of Government Companies and Corporations:

o The duties and powers of the CAG in relation to the audit of the accounts of Government
Companies shall be performed and exercised by him in accordance with the provisions
ofthe Companies Act, 2013.
o The Comptroller and Auditor- General of India shall appoint the auditor under section
139(5) or 139(7) (i.e. appointment of First Auditor or Subsequent Auditor) and direct
such auditor the manner in which the accounts of the Government company are
requiredto be audited and thereupon the auditor so appointed shall submit a copy of
the audit report to the Comptroller and Auditor-General of India which, among other
things, include the directions, if any, issued by the Comptroller and Auditor-General of
India, the action taken thereon and its impact on the accounts and financial statement
 of the company.

Q5) What are the powers of C&AG

 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.
 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.
 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
anyaccount 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.

TYPES OF GOVT EXPENDITURE AUDIT

The audit of Government Expenditure is one of the major components of government audit. The
basic standards set for audit of expenditure are as follows:

 AUDIT AGAINST RULES & ORDERS:

o The auditor has to see that the expenditure incurred confirms to the relevant
provisions of the statutory enactment and is in accordance with the financial rules and
regulations framedby the competent authority. Audit of expenditure against regularity
is of a quasi-judicial typeof work performed by the audit authorities.
o It involves interpretation of the Constitution, statutes, rules, regulations and orders. The
finalpower of interpretation of these, however, does not vest with the C&AG. These
rules, regulations and orders against which regularity audit is conducted mainly fall
under the following categories:

 Audit Of Sanctions:
The auditor has to ensure that each item of expenditure is covered by a sanction and
authorised by the competent authority, authorizing such expenditure. The audit ofsanctions is
directed both in respect of ensuring that the expenditure is properly covered by a sanction,
and also to satisfy that the authority sanctioning it is competent for the purpose by virtue of
the powers vested in it by the provisions of the Constitution and of the law, rules or orders
made thereunder, or by the rules of delegation of financial powers made by an authority
competent to do so. Generally, these expenses are sanctioned from consolidated fund of Indiaor State.

 Audit Against Provision Of Funds:

It contemplates that there is a provision of funds out ofwhich expenditure can be incurred
and the amount of such expenditure does not exceed the appropriations made.
  Propriety Audit:
The auditor aims to bring out cases of improper, avoidable expenditure eventhough the
expenditure has been incurred in conformity with the existing rules and regulations.

 Performance Audit:

This involves that the various programmes, schemes and projects in which huge expenditure
has been incurred, are being run economically and are yielding expected results. It is an
objective examination of the financial and operational performance ofan Organisation or
programme and is oriented towards identifying opportunities for greater economy, and
effectiveness.

Propriety Audit
 To identify improper, avoidable, or wasteful expenditure.
 Regularity audit alone was not sufficient to protect properly the public interest in the
spending of money because even though expenditure has been incurred in conformity with
the existing rules and regulations but still it may be highly wasteful.
 Therefore, the Auditor should look into the financial propriety of the transaction with
respect to reasonableness, faithfulness and economy of expenditure.

 It is difficult to frame anyprecise rules for regulating the course of audit against propriety. It
purely depends on the common sense and logic applied by the auditor depending on the
circumstances.

 However, some general principles have been laid down as follows:

 The expenditure should not be prima facie more than the occasion demands. Every public
officer is expected to exercise the same prudence in respect of expenditure incurred from
public moneys as a person of ordinary prudence would exercise in respect of expenditure of
his own money.
 No authority should pass an order for sanctioning an expenditure which will be directly or
indirectly to its own advantage.
 Public moneys should not be utilized for the benefit of a particular person or section of the
community.

 Exceptions:
 The amount of expenditure involved is insignificant.
 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
 The amount of allowances granted to meet expenditure of a particular type shouldbe so
regulated that the allowances are not become sources of profit to the recipients.

 The expenditure should:

  Pass down to the beneficiary without corruption.
 Bring out optimum, enduring benefits instead of mere spending the public money on
meeting day to day needs.
 Should not exceed the benefits derived from the expenditure.
 Should not become profits when it is only compensatory in nature.

PERFORMANCE AUDIT

 To ensure that that the various programmes, schemes and projects where large financial
expenditure has been incurred are being run economically and are yieldingresults expected of
them. It is an objective examination of the financial and operational performance of a programme
or a project and is oriented towards identifying opportunities for greater economy and
effectiveness.

 It includes the following:

 Efficiency audit: It looks into whether the various schemes/projects are executed and their
operations conducted economically and whether they are yielding the results expected of
them, i.e.,
 The relationship between goods and services produced and resources used to
produce them; and
 Examination aimed to find out the extent to which operations are carried out in an
efficient manner.
 Economy audit: It looks into whether the entity has acquired the financial, human and
physical resources in an economical manner, and whether the sanctioning and spending
authorities have observed economy.
 Effectiveness audit: It is an appraisal of the performance of programmes, schemes, projects
with reference to the overall targeted objectives as well as efficiency of the means adopted
for the attainment of the objectives.

 The procedure for conducting performance audit covers:

 Identification of topic,
 Preliminary study,
 Planning and execution of audit, and
 Reporting.

AUDIT OF GOVT RECEIPTS

 It aims to ensure that there is no leakage of revenue which should legally come to the
Government. 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.

 Proper assessment and realization: Whether all revenues or other debts due to Government
 have been correctly assessed, realised and credited to Government account by the authorities.

 Adequate rules and procedures: Whether adequate rules and procedures have been
designed, by the concerned department to ensure an effective check on assessment,
collection and proper allocation of cases.

 Adequate controls: Whether adequate controls are imposed for prompt detection of
irregularities regarding double refunds, fraudulent or forged refund vouchers or other loss of
revenue.

 Actual implementation: Whether such regulations and procedures are actually being carried
out.

 Review of assessment orders:

 Review of systems and procedures to see that the internal procedures adequately
secure correct and regular accounting of demands collection and refunds and pursuant
of dues up to final settlement and to suggest improvement.
 The basic principle of audit of receipts is that it is more important to look at the
general than on the particular, though individual cases of assessment, demand,
collection, refund, etc. are important within the area of test check.

 A review of the judicial decisions taken by tax authorities is done to judge the
effectiveness of the assessment procedure.

AUDIT OF STORES AND INVENTORY

To ensure that purchases of stores and inventories are properly sanctioned, made economical
and in accordance with the Rules for purchase laid down by thecompetent authority. Audit of
the accounts of stores and inventories has been developed as apart of expenditure audit.

 To ascertain whether the Regulations governing purchase, receipt and issue, custody, sale and
inventory taking of stores are well devised and properly carried out.
 To ensure that the prices paid are reasonable and are in agreement with those shown in the
contract for the supply of stores, and that the certificates of quality and quantity are furnished
by the inspecting and receiving units.

 Cases of uneconomical purchase of stores and losses attributable to defective or inferior quality
of stores are specifically brought to the notice by the auditor.

 Accounts of receipts, issues and balances are checked regarding accuracy, correctness and
reasonableness of balances in inventories with particular reference to the specified norms for
level of consumption of inventory holding.

 Any excess or idle inventory is specifically mentioned in the report and periodical verification of
inventory is also conducted to ensure their existence.
  The valuation of the inventories is seen carefully so that the value accounts tally with the
physical accounts and that adjustment of profits or losses due to revaluation, inventory taking or
other causes is carried out.

AUDIT OF GOVT COMPANIES

 The CAG has the power to appoint First Auditor u/s 139(5) or Subsequent Auditor u/s 139(7)
and
 He can also direct such auditor the manner in which the accounts of the Government
Company are required to be audited and later on, the auditor so appointed shall submit a
copy of the audit report to the CAG. [section 143(5)].

 The Comptroller and Auditor-General of Indiashall within 60 days of receipt of the audit report
have a right to:

 Conduct a Supplementary Audit of the financial statement of the company by any persons
authorized by him. And he can ask for any additional information for the purposes of such
audit from such person appointed.

 CAG can comment on supplement audit report and it any comments given by the CAG upon,or
supplement to, the audit report shall be

 Sent by the company to every person entitled to copies of audited financial

statements under sub-section (1) of section 136 i.e.,
 Every member of the company,
 To every trustee for the debenture-holder of any debentures issued by thecompany,
and
 To all persons other than such member or trustee, being the person soentitled
and

 Be placed before the annual general meeting of the company at the same time and inthe
same manner as the audit report.

 Note: Supplementary audit is not a separate audit but an extension to original audit
carried under Sec.139 of the act. The statutory auditors shall submit a copy of their audit
report to the
 C&AG who shall have a right to comment upon or supplement the audit report submitted by
the
 statutory auditors in such manner as he may think fit.

 Section 134(3) of the Companies Act, 2013 imposes a duty on the board of directors of a
company to give an explanation or comments on every reservation, or adverse remarks or
disclaimer contained in the auditors’ report and secretarial audit report of the Company
 Secretary in practice.

 In the absence of similar provisions requiring the company to give reply on the reservation
madeby the C&AG, the board of directors of such a company is not bound to give
information or explanation in respect of such comments.

 If CAG considers necessary, it may order test audit to be conducted onthe accounts of the
Government Company.
 The provisions of section 19A of the Comptroller and Auditor-General's (Duties, Powers and
Conditions of Service) Act, 1971, shall apply to the report of such test audit.

 It is done by the CAG himself.

 Thus, it is seen that there is a two-layer audit of a government company, by the statutory
auditors, being qualified chartered accountants, and by the C&AG.

The Government also engages in commercial activities and for the purpose it may incorporate
following types of entities:
Departmental enterprises engaged in commercial and trading operations, which are
governed by the same regulations as other Government departments such as defense
factories, mints, etc.
Statutory corporations created by specific statues such as LIC, Air India, etc.
Government Companies set up under the Companies Act, 2013.
 9.
4

Audit of local body

These bodies derived their revenues from a number of sources – taxes on
property, taxes on trade, taxes on persons; fees and licences, non- tax resources
such as rent of land, houses, income from commercial undertakings; government
grants, etc.

(1) Municipal government in India covers five distinct types of urban local
authorities-
 the municipal corporations,
 the municipal councils,
 the notified area committees,
 the town area committees and
 the cantonment committees.
(2) Municipal authorities are endowed with specific local functions covering
(a) regulatory,
(b) maintenance and
(c) development activities.
(3) Expenditure incurred by the municipalities and corporations can be
broadly classified under the following heads:
(a) general administration and revenue collection,
(b) public health,
(c) public safety,
(d) education,
(e) public works, and
(f) others such as interest payments, etc.
(4) Property taxes and octroi are the major sources of revenue of the
municipal authorities; other municipal taxes are profession tax, non-mechanised
vehicles tax, taxes on advertisements, taxes on animals and boats, tolls, show-tax,
etc.
(5) Local bodies may receive different types of grants from the state
administration as well. Broadly, the revenue grants are of three categories:
(a) General purpose grants: These are primarily intended to substantially bridge
the gap between the needs and resources of the local bodies.
(b) Specific purpose grants: These grants which are tied to the provision of
certain services or performance of certain tasks.
(c) Statutory and compensatory grants: These grants, under various enactments,
are given to local bodies as compensation on account of loss of any revenue on
taking over a tax by state government from local government.

Financial administration

(a) Budgetary Procedure: This is geared to serve 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.

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 mostof 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.)
 9.
6

(b) Expenditure Control:

In both state and central governments, there’s a clear separation between those who
make the laws (legislature) and those who implement them (executive). This
separation allows for checks and balances, especially when it comes to managing
finances.

However, in a municipal council (local government), the law-making and executive

functions are combined. This makes it harder for the executive branch to also
monitor itself effectively. Additionally, since municipal governments don’t separate
executive powers like state or central governments, they can’t have an independent
finance officer who reports to the council or executive committee.

As a result, the only way to control how municipal governments spend money is
through external audits done by the state government.

(c) Accounting System:

The way municipal governments (local governments) handle accounting and

budgeting has been criticized for being confusing and hard to understand.
Sometimes, they don't provide enough information, making it difficult to make
decisions. Other times, they provide too much information, which can also be
overwhelming and unhelpful.

Both of these problems—too little or too much information—make it hard for

managers to get the right data they need to run things efficiently and make informed
decisions. This makes the system less effective for managing resources.
OBJECTIVE OF LOCAL BODY AUDIT
The important objectives of audit are:
(a) reporting on the fairness of the content and presentation of financial
statements;
(b) reporting upon the strengths and weaknesses of systems of financial control;
(c) reporting on the adherence to legal and/or administrative requirements;
(d) reporting upon whether value is being fully received on money spent; and
(e) detection and prevention of error, fraud and misuse of resources.

Audit is a tool used to control the finances of local governments by reviewing their
actions and spending. If a local government takes actions that go beyond its legal powers
(known as "ultra vires"), the auditors can impose a financial penalty called a
"surcharge."

This method of control dates back to colonial times and is used less frequently today,
even in places like England. One reason for this decline could be that local governments
have become more competent in managing their responsibilities, reducing the need for
such strict oversight.
 9.
8 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;
 whether value is being fully received on money spent.
His objective should be to detect errors and fraud and misuse of resources.
(iii) RULES & REGULATIONS:- The auditor should ensure that the expenditure
incurred conforms to the relevant provisions of the law and is in accordance
with the financial rules and regulations framed by the competent authority.
(iv) AUTHORISATIONS:- He should ensure that all types of sanctions, either
special or general, accorded by the competent authority.
(v) PROVISIONING:- He should ensure that there is a provision of funds and the
expenditure is incurred from the provision and the same has been authorized
by the competent authority.

(i) 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 OF NGO
SOURCE AND APPLICATION OF FUNDS

(1) The main sources of funds include grants and donations, fund raising
programmes, advertisements, fees from the members, technical assistance fees /
fee for services rendered, subscriptions, gifts, sale of produce or publications, etc.
(a) Donations and grants received in the nature of promoter’s contribution are
in the nature of capital receipts and shown as liabilities in the Balance Sheet
of NGO. These may either be in the form of corpus contribution or a
contribution towards revolving fund. A contribution made towards the
capital or the corpus of an NGO is known as corpus contribution. The
donors are generally required to specify whether the donation/grant given
by him shall form part of the corpus of the NGO. Such contributions are
generally given with reference to the total funds required by an NGO.

(b) Section 11(1)(d) of the Income Tax Act 1961 also states that income in the
form of voluntary contributions made with a specific direction that they
 9.
10
shall form part of the corpus of the trust or institution shall not be included in the
computation of total income.
(c) The objective of a contribution or grant towards a Revolving Fund is to
rotate the amount by giving temporary loans from the fund to other NGO or
beneficiaries for their projects and then recover the loan so as to give
temporary loans again and so on. However, any interest earned from the
beneficiary on such temporary loans from the revolving fund could be either
added back to the fund or credited to the Income and Expenditure Account
depending on restrictions laid down by the authority providing the
contribution (for the revolving fund) or by the rules and regulations laid down
by the concerned NGO in this regard.

(d) Donations and grants received for acquisition of specific fixed assets are those
grants whose primary condition is that an NGO accepting them should purchase,
construct or otherwise acquire the assets for which the grant is given.
(e) Many a times NGOs receive contributions in kind. These contributions
include assets such as land, buildings, vehicles, office equipment, etc. and
articles related to programmes / projects such as food, books, building
materials, clothes, beds, and raw material for training purposes, e.g., Wool,
reeds, cloth, etc.
(2) The areas of application of funds for an NGO include Establishment Costs,
Office and Administrative Expenses, Maintenance Expenses, Programme / Project
Expenses, Charity, Donations and Contributions given, etc.

While planning the audit, the auditor may concentrate on the following:
(i) Knowledge of the NGO’s work, its mission and vision, areas of operations and
environment in which it operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent
amendments, circulars, judicial decisions viz. Foreign Contribution
(Regulation) Act 2010, Societies Registration Act, 1860, Income Tax Act 1961
etc. and the Rules related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of
Association, Articles of Association, Rules and Regulations.
(iv) Reviewing the NGO’s Organisation chart, then Financial and Administrative
Manuals, Project and Programme Guidelines, Funding Agencies
Requirements and formats, budgetary policies if any.
(v) Examination of minutes of the Board/Managing Committee/Governing Body/
Management and Committees thereof to ascertain the impact of any
decisions on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal
checks existing for the NGO and verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year’s Audit Report.
Audit programme
(i) Corpus Fund: The contributions / grants received towards corpus be vouched
with special reference to the letters from the donor(s). The interest income be
checked with Investment Register and Physical Investments in hand.
 9.
12

(ii) Reserves: Vouch transfers from projects / programmes with donors letters
and board resolutions of NGO. Also check transfer of gross value of asset sold
from capital reserve to general reserve and adjustments during the year.
(iii) Ear-marked Funds: (Earmarking refers to a fund allocation practice in which
an entity, a government, or an individual sets aside a determined amount of
funds to use for a specific goal). Check requirements of donors institutions,
board resolution of NGO, rules and regulations of the schemes of the ear-
marked funds.

(iv) Project / Agency Balances: Vouch disbursements and expenditure as per

agreements with donors for each of the balances.
(v) Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
(vi) Fixed Assets: Vouch all acquisitions / sale or disposal of assets including
depreciation and the authorisations for the same. Also check donor’s letters/
agreements for the grant. In the case of immovable property check title, etc.
(vii) Investments: Check Investment Register and the investments physically
ensuring that investments are in the name of the NGO. Verify further
investments and dis- investments for approval by the appropriate authority
and reference in the bank accounts for the principal amount and interest.

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

(i) Studying the constitution under which the charitable institution has
been set up.
(ii) Verifying whether the institution is being managed in the manner
contemplated by the law under which it has been set up.
(iii) Examining the system of internal check, especially as regards
accounting of amounts collected.
(iv) Verifying in detail the income and confirming that the amounts received
have been deposited in the bank regularly and promptly.
(v) Examine the Trust Deed or the Regulations as laid down.
(2) Subscriptions and donations
(i) Ascertaining, if any, the changes made in amount of annual or life
membership subscription during the year.
(ii) Whether official receipts are issued;

(a) confirming that adequate control is imposed over unused receipt

books;
(b) obtaining all receipt books covering the period under review;
(c) test checking the counterfoils with the cash book; any cancelled
receipts being specially looked into;

(d) verifying the total subscriptions and donations received with any
figures published in reports, etc. issued by the charity.
(3) Legacies – Verifying the amounts received by reference to correspondence
with any figures and other available information.
(4) Grants –
Obtaining a certificate from a responsible official showing the amount of
grants received.
(5) Investments Income
(i) Vouching the amounts received with the dividend and interest
counterfoils.
(6) Rent
 9.
22
(i) Examining the rent roll and inspecting tenancy agreements, noting in
each case:

(a) the amounts of the rent, and

(b) the due dates.
(ii) Vouching the rent on to the rent roll from the counterfoils of receipt
books and checking the totals of the cash book.
(7) Special function, etc. - Vouching gross receipts and outgoings in respect of
any special functions, e.g. concerts, dramatic performance, etc., held in aid of
the charity with such vouchers and cash statements as are necessary. In
particular, verifying that the proceeds of all tickets issued have been
accounted for, after making the allowance for returns.

(8) Income Tax Refunds - Where income-tax has been deducted at source from
the Investment income, it should be seen that a refund thereof has been
obtained since charitable institutions are exempt from payment of Income-
tax. This involves:
(i) vouching the Income-tax refund with the correspondence with the
Income- tax Department; and
(ii) checking the calculation of the repayment of claims.
(9) Expenditure
(i) Verifying the cash and bank payments.
(ii) Ascertaining that any funds contributed for a special purpose have been
utilised for the purpose.
 9.
56

AUDIT OF TRUST
LEGAL FRAMEWORK OF CHARITABLE ENTITIES IN INDIA

There are three basic legal forms of charitable entities under Indian law: trusts,
societies, and section 8 companies. The legal framework governing the charitable
institution will depend on the form of business organization the charitable
institution takes.
 If the charitable institution is formed as a Public Trust, it will be governed by
the Public Trust Act applicable in the relevant State. However, if no Public
Trust Act exists in that state, then the applicable legislation will be the Indian
Trusts Act, 1882.

 If the charitable institution is formed as a Society, it will be governed by the

Societies Registration Act, 1860.
 The charitable institution can also be formed as a non-profit company under
section 8 of the Companies Act, 2013.
 Apart from the above legislations, the Income Tax Act 1961 will be applicable
to charitable institutions.
 And in the case of foreign contributions to these charitable institutions, the
Foreign Contribution (Regulation) Act, 2010 will be applicable.
 AUDIT WORKING PAPERS
Such working papers should include his notes on the following, amongst other
matters:
(a) work done while conducting the audit and by whom;
(b) explanation and information given to him during the course of the audit and
by whom;
(c) decision on the various points taken;
(d) the judicial pronouncements relied upon by him while drafting the audit
report; and
(e) certificates issued by the client / management letters.
It is important that the audit working papers prepared and/or obtained by the
auditor provide evidence that:
(i) the opinion expressed by the auditor is based on the examination made by
him;
(ii) in arriving at his opinion, the auditor has given due cognizance to the
information and explanations given by the assessee and that his opinion is
not arbitrary;
(iii) the information and explanations obtained were full and complete that is, the
auditor has called for all the information and explanations which were
necessary to be considered before arriving at his opinion; and
(iv) the auditor did not merely rely upon the information or explanations given
by the assessee but that he subjected such information and explanations to
reasonable tests to verify their accuracy and completeness

AUDIT PROCEDURES - TRUST

(a) whether accounts are maintained regularly and in accordance with the
provisions of the applicable Act and the rules;
(b) whether receipts and disbursements are properly and correctly shown in the
accounts and money received in the form of donations is being applied as
 9.
58
per the objects of the trust and as per the specific direction by the donor, if
any.
(c) whether the cash balance and vouchers in the custody of the manager or
trustee on the date of audit were in agreement with the accounts;
(d) whether all books, deeds, accounts, vouchers or other documents or records
required by the auditor were produced before him;
(e) whether a register of movable and immovable properties is maintained, the
changes therein are communicated from time to time to the regional office,
and the defects and inaccuracies mentioned in the previous audit report have
been duly complied with and rectified.
(f) whether the manager or trustee or any other person required by the auditor
to appear before him did so and furnished the necessary information required
by him;
(g) whether any property or funds of the Trust were applied for any object or
purpose other than the object or purpose of the Trust;
(h) the amounts of outstanding for more than one year and the amounts written
off, if any;
(i) whether any money of the public trust has been invested contrary to the
provisions of applicable Act which have come to the notice of the Auditor
(j) all cases of irregular, illegal or improper expenditure, or failure or omission
to recover monies or other property belonging to the public trust or of loss
or waste of money or other property thereof, and whether such expenditure,
failure, omission, loss or waste was caused in consequence of breach of trust
or misapplication or any other misconduct on the part of the trustees or any
other person while in the management of the trust
(k) whether the maximum and minimum number of the trustees is maintained;
(l) whether the meeting are held regularly as provided in such instrument
(m) whether the minute books of the proceedings of the meeting is maintained
(n) whether any of the trustees has any interest in the investment of the trust
(o) whether any of the trustees is a debtor or creditor of the trust.
(p) whether anonymous donations received are properly accounted for and
donations in cash are not received by the Trust over and above the prescribed
limit of accepting cash donations.
(q) whether the irregularities pointed out by the auditors in the accounts of the
previous year have been duly complied with by the trustees during the period
of audit 
(r) any special matter which the auditor may think fit or necessary to bring to
the notice of the Deputy or Assistant Charity Commissioner

AUDIT PROCEDURES - SOCIETY

(a) The auditor should ascertain governing legislation of society i.e. Societies
Registration act, 1860 or any applicable state law under which it has been
registered.
(b) Object of society needs to be ascertained from its memorandum of
association/bye laws. Its activities may include charitable, social, cultural or
educational activities.
(c) Ascertain whether society has obtained registration under Foreign
Contribution (Regulation) Act, 2010 in case foreign contributions are
received.
(d) Ascertain whether it is also registered under relevant provisions of Income
Tax Act which may make it eligible for tax exemption on its income.
(e) Obtain an understanding of internal control to design audit procedures with
special reference to donations and various expenditures incurred in relation
to achievements of objects of society.
(f) Evaluate appropriateness of accounting policies with special reference to
donations and grants. Also evaluate accounting policies in relation to specific
grants.
(g) In case some expenses incurred by society are reimbursed by donors,
ascertain how these are recognized in financial statements.
(h) Ascertain, if any inquiry has been held by Registrar under applicable law in
 9.
60

the working or financial condition of society and its implications for auditor’s
opinion.
(i) Ascertain all cases of irregular, illegal or improper expenditure or failure or
omission to recover monies or other property belonging to society or of loss
or waste of money or other property thereof.
(j) Ascertain whether such expenditure or waste was caused in consequence of
breach of trust or misapplication or any other misconduct on the part of
governing body.
 9.
28

AUDIT OF CLUB
(1) Entrance Fee :- Vouch the receipt on account of entrance fees with members’
applications, counterfoils issued to them, as well as on a reference to minutes
of the Managing Committee.
(2) Subscriptions :- Vouch members’ subscriptions with the counterfoils of
receipt issued to them, trace receipts for a selected period to the Register of
Members; also reconcile the amount of total subscriptions due with the
amount collected and that outstanding.
(3) Arrears of Subscriptions :- Ensure that arrears of subscriptions for the
previous year have been correctly brought over and arrears for the year under
audit and subscriptions received in advance have been correctly adjusted.
(4) Arithmetical accuracy :- Check totals of various columns of the Register of
members and tally them across.
(5) Irrecoverable Member Dues :- See the Register of Members to ascertain the
Member’s dues which are in arrear and enquire whether necessary steps have
been taken for their recovery; the amount considered irrecoverable should be
mentioned in the Audit Report.
(6) Pricing :- Verify the internal check as regards members being charged with
the price of foodstuffs and drinks provided to them and their guests, as well
as, with the fees chargeable for the special services rendered, such as billiards,
tennis, etc.
(7) Member Accounts :- Trace debits for a selected period from subsidiary
registers maintained in respect of supplies and services to members to confirm
that the account of every member has been debited with amounts recoverable
from him.

(8) Purchases :- Vouch purchase of sports items, furniture, crockery, etc. and trace
their entries into the respective inventory registers.
(9) Margins earned :- Vouch purchases of foodstuffs, cigars, wines, etc., and test
their sale price so as to confirm that the normal rates of gross profit have
been earned on their sales. The inventory of unsold provisions and stores, at
the end of year, should be verified physically and its valuation checked.
(10) Inventories :- Check the inventory of furniture, sports material and other
assets physically with the respective inventory registers or inventories
prepared at the end of theyear.
(11) Investments :- Inspect the share scrips and bonds in respect of investments,
check their current values for disclosure in final accounts; also ascertain that
the arrangements for their safe custody are satisfactory.
(12) Management Powers :- Examine the financial powers of the secretary and,
if these have been exceeded, report specific case for confirmation by the
Managing Committee.
 AUDIT OF HOTELS

INTERNAL Pilferage is one of the greatest problems in any hotel and it is extremely
CONTROL: important to have a proper internal control to minimize the leakage. The
following points should be checked:
Effectiveness of arrangement regarding receipts and disbursements of
cash.
. Procedure for purchase and inventory stocking of various commodities
and provisions
Procedure regarding billing of the customers in respect of room service,
telephone, laundry, etc.
System regarding recording and physical custody of edibles, wines,
cigarettes, crockery andcutlery, linen, furniture, carpets, etc.

 ROOM SALES AND CASH COLLECTIONS:

 The charge for room sales is made from the guest register, and tests are to be
carried out to ensure that the correct numbers of guests are charged for the exact
period of stay.
 The total sales reported with the total bills issued at various sales points have to be
reconciled.
 Special care must be taken in respect of bills issued to customers who are staying in
the hotel, because they may not be required to pay the bills immediately in cash but
at a future date or by credit cards.
 Billing is to be done room-wise. It must be ensured that all customers pay their bills
on leaving the hotel or within specified dates.
 The auditor should verify the restaurant bills with reference to KOT (Kitchen order
Ticket).
 The occupancy rate should be worked out, and compared with other similar hotels,
and with previous year. Material deviations should be investigated.
 The compliance with all statutory provisions and compliance with the Foreign
Exchange Regulations must also be verified by the auditor, especially because hotels
offer facility of conversion of foreign exchange to rupees.

 RECEIPTS FROM FUNCTION HALLS: Special receipts on account of letting out of

auditorium, banquet hall, spaces for shops, boutiques, and special shows should be
verified with the arrangements made.

 SHARING INCOME FROM TRAVEL AGENTS: It is common that hotels get their bookings
done through travel agents. The auditor should ensure that the money is recovered
from the travel agents as per credit terms allowed. Commission paid to travel agents
should be checked by reference to the agreement on that behalf.

 INVENTORY: The inventories in a hotel are all saleable item like food and beverages.
Therefore, following may be noted in this regard:
  All movement and transfer of inventories must be properly documented.
 Areas where inventories are kept must be kept locked and the key
retained by the departmental manager. The key should be released only to
trusted personnel and unauthorized persons should not be permitted in
the stores area.
 The auditor should ensure that all inventories are valued at the year end
and that he shouldhimself be present at the year-end physical verification,
to the extent practicable, having regard to materiality consideration and
nature and location of inventories
 Apart from control over inventory of edibles, control over issue and
physical inventory of linen crockery, cutlery, glassware, silver, toilet items,
etc. should be verified
 .

 FIXED ASSETS: The fixed assets should be properly depreciated, and the Fixed Assets
Register should be updated.

 CASUAL LABOUR: In case the hotel employs a casual labour, the auditor should
consider, whether adequate records have been maintained in this respect and there is
no manipulation taking place. The wages payment of the casual labour must also be
checked thoroughly.

 EXPENDITURE:
 Consumption shown in various physical inventory accounts must be
traced to the customers’
 bills to ensure that all issues to the customers have been billed.
 All payments to the foreign collaborator, it any, are to be checked.
 Expenses and receipts are to be compared with figures of the
previous year, having regard to the average occupancy of visitors and
changes in rates.
 Expenses for painting, decoration, renovation of building, etc. are to be
properly checked.
 Computation and payment of salaries and wages vis-a-vis
number of employees must be checked.
 9.
26
AUDIT OF HOSPITAL

1. Register of Patients: Vouch the Register of patients with copies of bills issued
to them. Verify bills for a selected period with the patients’ attendance record
to see that the bills have been correctly prepared. Also see that bills have been
issued to all patients from whom an amount was recoverable according to the
rules of the hospital.

2. Collection of Cash: Check cash collections as entered in the Cash Book with
the receipts, counterfoils and other evidence for example, copies of patients
bills, counterfoils of dividend and other interest warrants, copies of rent bills,
etc.

3. Income from Investments, Rent etc: See with reference to the property and
Investment Register that all income that should have been received by way
of rent on properties, dividends, and interest on securities have been
collected.

4. Legacies and Donations: Ascertain that legacies and donations received for
a specific purpose have been applied in the manner agreed upon.

5. Reconciliation of Subscriptions: Trace all collections of subscription and

donations from the Cash Book to the respective Registers. Reconcile the total
subscriptions due (as shown by the Subscription Register and the amount
collected and that still outstanding).

6. Authorisation and Sanctions: Vouch all purchases and expenses and verify
that the capital expenditure was incurred only with the prior sanction of the
Trustees or the Managing Committee and that appointments and increments
to staff have been duly authorised.

7. Grants and TDS: Verify that grants, if any, received from Government or local
authority has been duly accounted for. Also, that refund in respect of taxes
deducted at source has been claimed.

8. Budgets: Compare the totals of various items of expenditure and income with
the amount budgeted for them and report to the Trustees or the Managing
Committee, significant variations which have taken place.

9. Internal Check: Examine the internal check as regards the receipt and issue
of stores; medicines, linen, apparatus, clothing, instruments, etc. so as to insure
 that purchases have been properly recorded in the Inventory Register and that
issues have been made only against proper authorisation.

10. Depreciation: See that depreciation has been written off against all the assets
at the appropriate rates.

11. Registers: Inspect the bonds, share scrips, title deeds of properties and
compare their particulars with those entered in the property and Investment
Registers.

12. Inventories: Obtain inventories, especially of stocks and stores as at the end
of the year and check a percentage of the items physically; also compare their
total values with respective ledger balances.
13. Management Representation and Certificate: Get proper Management
Representation and Certificate with respect to various aspects covered during
the course of audit.
 AUDIT OF CO-OPERATIVE SOCIETIES
 Co-operative society is a business organisation with a special mode of doing business,
by pulling together all the means of production co-operatively, elimination of
middlemen and exploitation from outside forces.

 A chartered accountant has to play a significant role in the development of cooperative

organisations on scientific lines. Apart from audit, some other professional services could
be rendered by chartered accountants such as:
 Guidance in Accounts Writing,
 Installation of Accounting System,
 Internal Audit,
 Management Accounting services,
 Taxation etc.

Q2) Write about audit of cooperative societies as per sec 17 of cooperative societies
act, 1912?

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

 The Registrar, the Collector or any person authorised by general or special order in writing
shall:
 At all times have access to all the books, accounts, papers and securities of a society,
and
 Every officer of the society shall furnish such information in regard to the
transactions and working of the society as the person making such inspection may
require.

 “Registrar” means a person appointed to perform the duties of a Registrar of

Co- operative Societies under this Act.

Q3) What are the special features of audit of co-operative society?

 EXAMINATION OF OVERDUE DEBTS:

 Classification: Overdue debts for a period from 6 months to 5 years and more than 5
years must be classified and shall have to be reported by an auditor.

 Comparison with previous year: The auditor should compare the amount of current year’s
 overdue debts and its ratio to total working capital with the previous year.
  Assessing the recovery: A further analysis of these overdue debts from the
viewpoint of chances of recovery must be made, and they must be classified as
good or bad.

 Ensuring making of provisions: The auditor must ascertain whether proper

provisions for doubtful debts are made and whether the same is satisfactory.

 OVERDUE INTEREST:
 Meaning: Overdue interest is interest accrued or accruing in accounts, the amount of
which the principal is overdue.

 Accounting Treatment:
 Overdue interest should be excluded from Recognition of Interest Income
while calculating profit.
 Such interest will be credited to overdue interest reserve and transferred to profit
and loss a/c when realised.

 CERTIFICATION OF BAD DEBTS: Check the authority for writing off the bad debts.
 Authorisation by auditor: Some state acts may require that the Bad debts can be
written off only when they are certified as bad by the auditor. For example,
Maharashtra State Co- operative Rules, 1961.
 Authorisation by the managing committee: Where no such requirement exists,
the managing committee of the society must authorise the write-off.

 VALUATION OF ASSETS AND LIABILITIES:

 Assets:
  Ascertain existence, ownership and valuation of assets.
 Fixed assets should be valued at cost less adequate provision for depreciation.
 The incidental expenses incurred in the acquisition and the installation
expenses of assets should be properly capitalised.
 The current assets should be valued at cost or market price, whichever is lower.

 Liabilities: The auditor should see that all the known liabilities are brought into the
account, and the contingent liabilities are stated by way of a note.

 ADHERENCE TO CO-OPERATIVE PRINCIPLES:

 Ensure the Functioning of society towards achieving objectives: The auditor must
ascertain how far the objectives, for which the co-operative organisation is set up, have
been achieved in the course of its working.

 Criteria for assessment: The assessment is not necessarily in terms of profits, but in terms
of extending of benefits to members who have formed the society.

 Principle of Propriety: While auditing the expenses, the auditor should see that they
are economically incurred and there is no wastage of funds. Middlemen commissions
are, as faras possible, avoided and the purchases are made by the committee members
directly from the wholesalers. The principles of propriety audit should be followed for
the purpose.

 ENSURING COMPLIANCE WITH THE PROVISIONS OF THE ACT AND RULES: An auditor of
a co- operative society is required to identify the non-compliance with the provisions of
Co-operative Societies Act and Rules and bye-laws.

 VERIFICATION OF MEMBER’S REGISTER AND EXAMINATION OF THEIR PASS BOOKS:

Examination of entries in members pass books regarding the loan given and its
repayments, and confirmation of loan balances in person. Specifically in the rural and
agricultural credit societies, members are not literate and as such this is a good safeguard
on their part.

 SPECIAL REPORT TO THE REGISTRAR: During the course of audit, if the auditor notices
the following serious irregularities in the working of the society, then he may report
these special matters to the Registrar, drawing his specific attention to the points.

 Personal profiteering by members of managing committee in transactions of the

society, which are ultimately detrimental to the interest of the society.

 Detection of fraud relating to expenses, purchases, property and stores of the society.
  Specific examples of mis-management i.e., decisions of management against
cooperative principles like cases of reckless advancing, where the management is
negligent about taking adequate security and proper safeguards for judging the credit
worthiness of the party

 AUDIT CLASSIFICATION OF SOCIETY: After a judgement of an overall performance of the

society, the auditor has to award a class to the society. This judgement is to be based on
the criteria specified by the Registrar. It may be noted here that if the management of the
society is not satisfied about the award of audit class, it can make an appeal to the
Registrar, and the Registrar may direct to review the audit classification. The auditor should
be very careful, while making a decision about the class of society

 DISCUSSION OF DRAFT AUDIT REPORT WITH MANAGING COMMITTEE: On conclusion

of the audit, the auditor should ask the Secretary of the society to convene the
managing committee meeting to discuss the audit draft report. The audit report should
never be finalised without discussion with the managing committee.

Q4) Write about points to be kept in mind while audit of a cooperative society as per
cooperative societies act, 1912?

 QUALIFICATIONS OF AUDITORS: Apart from a chartered accountant within the

meaning of the Chartered Accountants Act, 1949, some of the State Co-operative Acts
have permitted:
 Persons holding a government diploma in co-operative accounts or in co-
operation and accountancy and also

 A person who has served as an auditor in the co-operative department of a

government to act as an auditor.

 APPOINTMENT OF THE AUDITOR:

 An auditor of a co-operative society is appointed by the Registrar of Co-operative
Societies and the auditor so appointed conducts the audit on behalf of the Registrar
and submits his report to him as also to the society.

 The audit fees are paid by the society on the basis of statutory scale of fees prescribed
by the Registrar, according to the category of the society audited.

 BOOKS, ACCOUNTS AND OTHER RECORDS OF CO-OPERATIVE SOCIETIES:

 Under section 43(h) of the Central Act, a state government can frame rules
prescribing the books and accounts to be kept by a co-operative society. For example,
in Maharashtra, the
  co-operative societies are required to maintain books of account in terms of the
instructions of the Registrar as following:
 All sums of money received and expended by the society and the matters in
respect of which receipts and expenditure take place.
 All sales and purchases of goods by the society.
 Assets and liabilities of the society.

 In order to maintain proper financial accounting records so as to disclose full financial

results of working of the society, the statutory or mandatory provisions provide a
directive, but they are not conclusive. The society is at liberty to maintain such
additional records according to its convenience and which it thinks more useful for
clarity and detailed explanation. Ultimately the financial transactions and the results
thereof must be presented very clearly and in the best possible manner.

 In case of large-scale co-operative organisation, different subsidiary books and registers

shallbe maintained and the daily summary totals will be transferred to main Cash Book.
For example:
 Daily cash sales summary register.
 A register of collection from debtors if credit sales are allowed by bye-laws of society.
 A register of recovery of loans from salaries and directly by receipts from
members in case of credit society.
 Loan disbursement register in case of credit society.
 Any other columnar subsidiaries depending upon the nature and functions of society.

 RESTRICTIONS ON SHAREHOLDINGS (Sec. 5):

 In the case of a society where the liability of a member of the society is limited, no
member of a society other than a registered society can hold such portion of the share
capital of the society as would exceed
 a maximum of 20% of the total number of shares or
 of the value of shareholding to ₹ 1,000/-.

 The auditor of a co-operative society will be concerned with this provision so as to

watch anybreach relating to holding of shares.

 The State Acts may provide limits as to the shareholding, other than that provided
in the Central Act.

 RESTRICTIONS ON LOANS (Sec. 29):

 Society shall not make a loan to any person other than a member.
 However, with the special sanction of the Registrar, a registered society may make a
loan to another registered society.
 RESTRICTIONS ON BORROWINGS (Sec. 30): A society shall not accept loans and
deposits from persons who are not members unless otherwise provided by the bye-laws
of the society.

 INVESTMENT OF FUNDS (Sec. 32): A society may invest its funds in any one or more
of the following:
 In the Central or State Co-operative Bank.
 In any bank, other than a Central or State co-operative bank, as approved by the
Registrar on specified terms and conditions.
 In any of the securities specified in section 20 of the Indian Trusts Act, 1882.
 In the shares, securities, bonds or debentures of any other society with limited liability.
 In any other moneys permitted by the Central or State Government.

 APPROPRIATION OF PROFITS TO RESERVE FUND (Sec. 33): Every society shall transfer
prescribedpercentage of the profits to Reserve Fund, before distribution as dividends or
bonus to members.

 CONTRIBUTIONS TO CHARITABLE PURPOSES (Sec. 34): A society may, with the

sanction of the Registrar, contribute an amount not exceeding 10% of the net profits
remaining after the compulsory transfer to the reserve fund for any charitable purpose.

 INVESTMENT OF RESERVE FUND OUTSIDE THE BUSINESS OR UTILISATION AS

WORKING CAPITAL: Some of the State Acts provide that a society may use the
Reserve Fund:

 In the business of a society, as working capital (subject to the rules made in this behalf).

 May invest as per provisions of the Act.

 May be used for some public purposes likely to promote the object of the society.

 CONTRIBUTION TO EDUCATION FUND: Some of the State Acts provide that every
society shall contribute annually towards the Education Fund of the State Federal
Society, at the prescribed rates. Contribution to Education Fund is a charge on profits and
not an appropriation.

 ANY OTHER APPROPRIATIONS: Apart from statutory provisions relating to Reserve Fund,
the auditor may have regard to the provisions in bye-laws and Rules and Regulations of
the society regarding the appropriation of profits:

 Transfers to other reserves, dividends to members etc. are the other appropriations.
  Appropriations of profits must be approved by the General Body of the society, which
is the supreme authority in the co-operative management.

 Further, it may be noted that necessary accounting entries for the appropriation of
profits must be passed after the date of approval by the General Body.
 Note: Here there is a departure from corporate accounting practice, where
entries are passed for proposed appropriations, subject to approval of Annual
General Meeting.

 According to certain State Acts, transfers to Dividend Equalization Reserve and Share
CapitalRedemption Fund are stated as charges against profits. According to the
generally accepted principles of accountancy these items are not charges, but
appropriation of profits.

 The auditor should point out such spots where statutory provisions of any law are in
 contradiction with the generally accepted accounting principles.

Q5) Write about form of audit report of a cooperative society under cooperative
societies act, 1912?
FORM OF AUDIT  On completion of audit, the auditor has to submit his audit report to
REPORT: the society, and copies thereof to the respective authorities such as
District Special Auditor, District Deputy Registrar etc.
 The audit report has to be submitted in the prescribed form specified
by the Registrar or asgiven in the related Rules.

MATTERS TO According to the present prescribed form in some of the States, the
BE STATED IN auditor has to state:
AUDITORS  Whether he has obtained all the necessary information and
REPORT IN explanations which to the best of his knowledge and belief were
GENERAL: necessary for the purpose of audit.
 Whether in his opinion and to the best of his information and
according to the explanations given to him, the said accounts give all
the information required by the Act.
 Whether the Profit and Loss Account of the society gives a true and
fair view of the Profit and Loss made by the society.
 Whether the Balance Sheet drawn up as at the end of the year gives
a true and fair view of the state of affairs of the society as on the
given date.
 Whether in his opinion, proper books of account as required by the
Act, the Rules and the bye-laws of the society have been properly
maintained.
 Whether the Balance Sheet and the Profit and Loss Account
examined by him are in agreement with the books of account and
returns of the society.
 Note: The auditor will have to give qualifying observations, if any of the answers to the
above- mentioned matters are negative.

SCHEDULES In addition to the above, the auditor will have to attach schedules to the
TO AUDIT report regarding the following information:
REPORT:  All transactions which appear to be contrary to the provisions of the
Act, the rules and bye- laws of the society.
 All sums, which ought to have been, but have not been brought into
account by the society.
 Any material, or property belonging to society which appears to the
auditor to be bad or doubtful of recovery.
 Any material irregularity or impropriety in expenditure or in the
realisation or monies due to society.
 Any other matters specified by the Registrar in this behalf

Note: In the case of Nil report in any of the above matters, the auditor will have to
give a Nil report.

FILL AUDIT Further in addition to the audit certificate in the prescribed form and
MEMOS: various schedules stated above, the auditor of co-operative society in the
applicable State has to answer 2 sets of questionnaires called as audit
memos:
 The first set of audit memo or questionnaire is of general nature and
is applicable to all types of societies such as urban banks, consumers’
stores, credit societies etc.
 The second set of questionnaires is specific for a particular type of
society. These questionnaires are drafted in detail and serve the
practical purpose of audit programme.

AUDIT The audit report in a narrative form is also required to be submitted by the
REPORT IN auditor addressed to the Chairman of the society. Generally, the narrative
NARRATIVE audit report as per convention is divided into 2 parts styled as Part I and Part
FORM: II:
 PART I OF THE REPORT: Which throws a light on
 Capital structure,
 The profitability or otherwise of the society.
 Comparative financial position
 Solvency position and
 It may contain comments on the working of the society and the
suggestions forfuture improvements. It must be suitably divided
into paragraphs.
 Mistakes having an impact on the profitability of society should be
pointed out in Part Ias it has got a consequential effect on the financial
position of society.
 PART II OF THE REPORT: Points out the observations of routine
nature, which are the finished products of the routine vouch and
 post audit such as missing vouchers, loan bonds, inadequacies of
documents, mistakes of principles in accounting etc
 .

Q6) Write about multistate cooperative societies under mscs act, 2002 and accounts
to be maintained by them?

 OVERVIEW OF MSCS:
 The Multi-State Co-operative Societies Act, 2002, which came into force in August,
2002 applies to co-operative societies whose objects are not confined to one State.

 The Act contains detailed provisions regarding registration, membership and

management of such societies.

 The funds of a multi-State co-operative society cannot be utilised for any political purpose.

 The Act contains detailed provisions regarding the investment of funds and
restrictions on loans, borrowings, etc.

 BOOKS OF ACCOUNTS: As per Multi-State Co-operative Society Rules 2002, every Multi-
State Co- operative society shall keep books of account with respect to:
 All sum of money received and expended and matters in respect of which the
receipt and expenditure take place.

 All sale and purchase of goods.

 The assets and liabilities.

 In the case of a multi-state co-operative society engaged in production, processing and

manufacturing, particulars relating to utilization of materials or labour or other items of
cost as may be specified in the bye-laws of such a society.

Q7) Write about qualifications and disqualifications of auditors of multi state cooperative
society?
 QUALIFICATION OF AUDITORS: Section 72 of the Multi-State Co-operative Societies Act,
2002 states that a person who is a Chartered Accountant within the meaning of the
Chartered Accountants Act, 1949 can only be appointed as auditor of multi-State co-
operative society.

 DISQUALIFICATION OF AUDITORS: The following persons are not eligible for

appointment as auditors of a multi-State co-operative society-
 A body corporate.

 An officer or employee of the multi-State co-operative society.

 A person who is a member or who is in the employment, of an officer or employee

 of the multi-State co-operative society.

 A person who
 is indebted to the multi-State co-operative society or
 has given any guarantee or
 has provided any security in connection with the indebtedness of any third person
to the multi-State co-operative society for an amount exceeding Rs.1000.

 VACATION OF OFFICE: If an auditor becomes subject, after his appointment, to any,

of the disqualifications specified above, he shall be deemed to have vacated his office
as such.

 APPOINTMENT OF FIRST AUDITORS (SEC. 70):

 Authority to appoint:
 By the board within one month of the date of registration of such society.
 If the board fails to exercise its powers under this sub-section, the multi-State co-
operative society in the general meeting may appoint the first auditor.

 Tenure of first auditor: Till the conclusion of the first annual general meeting.

 APPOINTMENT OF SUBSEQUENT AUDITORS (SEC. 70):

 Authority to appoint: by the members of the multi-State co-operative society, at
each annual general meeting.

 Tenure of subsequent auditor: from the conclusion of that meeting until the
conclusion of the next annual general meeting.

Q8) What are the powers of auditor of multi- state co-operative society?

 He shall have a right of access at all times to the book’s 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

 He can inquire the officers or other employees of the multi-State co-operative society
andrequire such information and explanation as the auditor may think necessary.

Q9) What are the duties of auditor of multi state co-operative society?

 DUTY OF AUDITORS TO MAKE INQUIRY (SEC. 73(2)): The auditor shall make following
inquiries:

 Whether loans and advances made by the multi-State co-operative society on the
basis of security.
  Have been properly secured and
 Whether the terms on which they have been made are not prejudicial to the
interests of the multi-State cooperative society or its members,

 Whether transactions which are represented merely by book entries are not
prejudicial to the interests of the multi-State co-operative society,

 Whether personal expenses have been charged to revenue account, and

 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 is
correct regular and not misleading.

 DUTY TO REPORT U/S SEC. 73(3):

 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 including notes to account.
 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 accounts give the information
requiredby this act in the manner so required, and give a true and fair view of:
 The state of affairs of the multi-State co-operative society’s affairs as at the end of
its financial year (Balance sheet); and
 The profit or loss for its financial year (profit and loss a/c).

 DUTY TO STATE SOME MATTERS REQUIRED U/S SEC. 73(4): The auditor’s report shall also
state:

 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 and proper returns adequate for the purpose of his audit have
been received from branches or offices of the multi-State co-operative society not
visited by him.

 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.

Q10) Explain the power of central government to direct special audit in case of audit of
multi-state co-operative society.
POWER OF CENTRAL GOVERNMENT TO DIRECT SPECIAL AUDIT (SECTION 77):

 PASSING AN ORDER BY CG:

 CIRCUMSTANCES NECESSITATING THE NEED FOR SPECIAL AUDIT:
 That the affairs of any multi-State co-operative society are not being
managed in accordance with co-operative principles or prudent commercial
practices 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.
 CONDITION FOR PASSING AN ORDER: However, Central Government shall order for
special audit only if that Government or the State Government either by itself or both
hold 51 % or more of the paid-up share capital in such multi-State co-operative society.

 PROCEDURE FOR CONDUCTING SPECIAL AUDIT:

 APPOINTING SPECIAL AUDITOR: The Central Government may direct that a special
audit of the multi-State co-operative society’s accounts shall be conducted and appoint
either a chartered accountant or the multi-State co-operative society’s auditor himself
to conduct the special audit.

 POWERS OF SPECIAL AUDITOR: The special auditor shall have the same powers and
duties in relation to the special audit as an auditor of a multi-State co-operative society
has under section 73.

 REPORTING BY SPECIAL AUDITOR: The special auditor shall make the report to the
Central Government. The report of the special auditor shall, include all the matters
required to be included in the auditor’s report under section 73 and any other matter
as directed by the Central Government.

 Action taken by CG: On receipt 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.

 Situation where no action is taken by CG: if the Central Government does not take
any action on the report within 4 months from the date of its receipt,
 That Government shall send to the Multi-State Co- operative society, 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.
 Q11) Explain the powers of central registrar to make an inquiry u/s 78 of multi-state
co-operative societies act, 2002.

INQUIRY (U/S.78) BY CENTRAL REGISTRAR:

 ELIGIBILITY TO MAKE AN APPLICATION FOR INQUIRY

 A Creditor or
 Not less than 1/3rd of the members of the board or
 Not less than 1/5th of the total number of members of a multi-state co-operative society

 AUTHORITY TO WHOM THE APPLICATION IS TO BE MADE: The Central Registrar.

 INQUIRY BY WHOM:
 Either by the registrar himself or
 Some other person authorized by him

 NOTICE TO THE SOCIETY: However, before holding such inquiry fifteen days’ notice must be
 given to the multi-State co-operative society.

 POWERS OF THE PERSON MAKING THE INQUIRY

 To Access to the books: Right of access to the books, accounts, documents, and
other properties belonging to and may require 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.

 To call general meeting:

 He may 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 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.

 To issue summons: 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 atany place at the headquarters of the society or any branch thereof and
may examine such person on oath.
 SENDING THE INQUIRY BY CENTRAL REGISTRAR: The Central Registrar shall, within a
period of 3 months of the date of receipt of the report, communicate the report of inquiry
 To the Multi-State co-operative society, and
 To the person or authority, if any at whose instance the inquiry is needed.

Similar ans to be written for inspection u/s 79

 9.
18

AUDIT OF LLP

The Partners in an LLP and their rights and duties are governed by way of an
agreement between them.

Small Limited Liability Partnership

a) the Contribution of which, does not exceed twenty-five lakh rupees
(INR 25,00,000) or such higher amount, not exceeding five crore rupees, as
may be prescribed; and
b) the Turnover of which, as per the Statement of Accounts and Solvency for
the immediately preceding financial year, does not exceed forty lakh rupees
(INR 40,00,000) or such higher amount, not exceeding fifty crore rupees,
as may be prescribed;
BOOKS OF ACCOUNTS OF LLP
1. Particulars of all sums of money received and expended by the LLP and the
matters in respect of which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress,
finished goods and costs of goods sold,
4. Any other particulars which the partners may decide.
Audit of the Accounts of an LLP:- The accounts of every LLP shall be audited in
accordance with Rule 24 of LLP, Rules 2009. Such rules, inter-alia, provides that any
LLP, whose turnover does not exceed, in any financial year, forty lakh rupees, or
whose contribution does not exceed twenty five lakh rupees, is not required to get
its accounts audited. However, if the partners of such limited liability partnership
decide to get the accounts of such LLP audited, the accounts shall be audited only
in accordance with such rule.
Advantages / Purpose / Need of Audit
1. Detection of Errors:- Auditing the accounts of a LLP helps in detecting errors
& frauds & verification of financial statements.
2. Disputes:-Disputes, if any between any partners in the matter of accounts
can be settled with the help of audited accounts.
3. Reliability:- Banks & financial institutions lend money to the firms only on the
basis of audited accounts.
4. Better Compliance and Management:-Periodical visits & suggestions by the
auditor will be helpful in improving the management of the LLP.
5. Reconstitution:- For settling accounts between partners at the time of
admission, death, retirement, insolvency, insanity, etc. audited accounts are
accepted by those concerned who have dealings with the LLP.
Returns to be maintained and filed by an LLP :-
 Every LLP would be required to file annual return in Form 11 with ROC within
60 days of closer of financial year. The annual return will be available for
public inspection on payment of prescribed fees to Registrar.
 Every LLP is also required to submit Statement of Account and Solvency in
Form 8 which shall be filed within a period of thirty days from the end of six
months the financial year to which the Statement of Account and Solvency
relates.

Appointment of Auditor: The auditor may be appointed by the designated

partners of the LLP –
1. At any time for the first financial year but before the end of first financial year,
2. At least thirty days prior to the end of each financial year (other than the first
financial year),
3. To fill the casual vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed to
appoint them.
 9.
20

Auditor’s Duty Regarding Audit of LLP

1. Engagement Letter :- The auditor should get definite instructions in writing

as to the work to be performed by him.

2. Minutes Book :- If partners maintain minute book he shall refer it for any
resolution passed regarding the accounts

3. LLP Agreement:- The auditor should read the LLP agreement & note the
following provisions

(a) Nature of the business of the LLP.

(b) Amount of capital contributed by each partner.

(c) Interest – in respect of additional capital contributed.

(d) Duration of partnership.

(e) Drawings allowed to the partners.

(f) Salaries, commission etc. payable to partners.

(g) Borrowing powers of the LLP.

(h) Rights & duties of partners.

(i) Method of settlement of accounts between partners at the time of

admission, retirement, admission etc.

(j) Any loans advanced by the partners.

(k) Profit sharing ratio

4. Reporting :- The auditor should mention

(a) Whether the records of the firm appear to be correct & reliable.

(b) Whether he was able to obtain all information & explanation necessary
for his work.

(c) Whether any restriction was imposed upon him.

 AUDIT OF HIRE PURCHASE COMPANY
(1) While checking the hire- purchase transaction, the auditor may examine the
following:

(i) Hire purchase agreement is in writing and is signed by all parties.

(ii) Hire purchase agreement specifies clearly-
(a) The hire-purchase price of the goods to which the agreement relates;
(b) The cash price of the goods, that is to say, the price at which the goods
may be purchased by the hirer for cash;
(c) The date on which the agreement shall be deemed to have commenced;
(d) The number of instalments by which the hire- purchase price is to be
paid, the amount of each of those instalments, and the date, or the
mode of determining the date, upon which it is payable, and the person
to whom and the place where it is payable; and
(e) The goods to which the agreement relates, in a manner sufficient to
identify them.
(iii) Ensure that instalment payments are being received regularly as per the
agreement.

AUDIT OF LEASING COMPANY

Auditor's Procedures:- In respect of leasing transaction entered into by the leasing

company, the following procedures may be adopted by the auditor:
(1) The object clause of leasing company to see that the goods like capital goods,
consumer durables etc. in respect of which the company can undertake such
activities. Further, to ensure that whether company can undertake financing
activities or not.

(2) Whether there exists a procedure to ascertain the credit analysis of lessee like
lessee’s ability to meet the commitment under lease, past credit record,
capital strength, availability of collateral security, etc.
(3) The lease agreement should be examined and the following points may be
noted:
(i) the description of the lessor, the lessee, the equipment and the location
 9.
34
where the equipment is to be installed. (The stipulation that the
equipment shall not be removed from the described location except for
repairs. For the sake of identification, the lessor may also require plates
or markings to be attached to the equipment).

(ii) the amount of tenure of lease, dates of payment, late charges, deposits
or advances etc. should be noted.
(iii) whether the equipment shall be returned to the lessor on termination of
the agreement and the cost shall be borne by the lessee.
(iv) whether the agreement prohibits the lessee from assigning the
subletting the equipment and authorises the lessor to do so.
(4) Examine the lease proposal form submitted by the lessee requesting the lessor
to provide him the equipment on lease.
(5) Ensure that the invoice is retained safely as the lease is a long-term contract.
(6) Examine the acceptance letter obtained from the lessee indicating that the
equipment has been received in order and is acceptable to the lessee.
(7) See the Board resolution authorising a particular director to execute the lease
agreement has been passed by the lessee.
(8) See that the copies of the insurance policies have been obtained by the lessor
for his records.
The below table captures the broad differences under both the above said types of
lease arrangements:

Operating Lease Finance Lease

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