Rent received

1 Internal check examine the system of internal check

2 Lease agreement examining lease agreement with the tenant to ascertain the total

yearly rent receivable and see that it is accordingly received

3 Rent register vouching the rent received with reference to carbon copy of the rent

receipt and rent register

4 Agentrsquos statement rent receivedcollected through agent should be checked with

carbon copy of receipt agentrsquos statements etc

5 Adjustment for rent receivable see that rent received in advance is not credited to

rent received account See that proper adjustment entries are passed for rent receivable

6 Arrears investigate into all arrears of rent for a long time to avoid the possibility of

defalcation The auditor should write to the tenants to confirm the arrears

7 Authority for bad debts write off of irrecoverable rent is to be authorized

8 Entry in cash book see that rent received is recorded in the cash book on the same

date

9 Provision for outstanding rent see that a reasonable provision for doubtful

outstanding rent is made Vouch the outstanding with the reference to rent bills and

confirmatory letters from tenants and list of properties occupied

10 Certified list get a certified list from a responsible officer in respect of a vacant

property

11 Rent against deposits verify adjustment of rent against deposits

12 Examine the counterfoils of pay slips

13 Disclosure see that rent is disclosed separately

14 Reconciliation prepare a statement of rent accrued and reconcile with rent receipts

15 Adjustment see that adjustment is made for advance rent rent deposit and rent

receivable

Page 1 of 31

Telephone expenses

1 Internal control manual get a complete list of telephone connections in the

name of the company and find out the nature ie Landline mobile WLL etc

2 Bills amp statements of accounts obtain telephone bills and see that they are

in the name of the company

3 Deposit receipts see whether any deposit is kept with Telephone Company

and it is properly accounted for

4 Payment voucher trace the payment made in the bank statement

5 Personal expenses ensure that personal expenses of the directors partners

have not been debited to profit and loss account

6 Recovery from staff if the company has paid telephone expenses on behalf

of the employees see that it has been recovered from the concerned employee

7 Service tax returns see whether service tax input credit has been availed by

the company on the basis of telephone bills

8 FBT returns any liability in respect of fringe benefit tax on telephone

expenses has been properly computed

9 Year-end adjustment verify that year-end adjustments are made in respect

of outstanding telephone expenses

Page 2 of 31

Furniture amp fixtures

1 Internal control ensuring that a suitable internal control system exists for

recording purchases and inspection of furniture amp fixture

2 Serial no see that each item of furniture is given stock register serial

number and the same is painted on that item

3 Schedule of furniture obtain a schedule of furniture which shows details

of furniture location cost date of acquisition etc

4 Physical examination conducting physical examination to verify the

existence

5 Verify cost verifying the cost of furniture with reference to the invoices

received Any expenditure regarding purchases is capitalized

6 Depreciation see that adequate depreciation is provided on the furniture

and fixture

7 Verify the existence observing the physical verification being conducted

by the management

8 Verify ownership examining the purchases invoices freight bill insurance

and installation charges relating to furniture and fixtures

9 Verify disclosure as per AS10 the furniture and fixture has to be disclosed

Examining the compliance of schedule VI of the companies Act and CARO 2003

Page 3 of 31

Loans borrowed

1 Power to borrow money examining the partnership deed or memorandum and

articles of association to find out the powers of the client to borrow money

2 Validity examining the loan agreement and correspondence relating to loans

3 Entries checking the cash received along with the receipts issued and checkup the

same in the cash book

4 Scrutiny of agreement scrutinsing the agreement made with the bank in case of

overdraft

5 Security enquiring into the details of the security given against loan in case the loan

is secured ensuring that such a fact has been disclosed in the balance sheet

6 In the interest of the company finding out the reason of borrowing see that it is

in interest of the client

7 Registration of mortgage see that the mortgage is registered with the registrar of

companies under section 125 of the companies Act 1956 Ensuring that entry is made

in the register of mortgages

8 Payments made verifying the payment of interest and installments with the

receipts issued by the lender and confirm that they are paid in accordance with the

time schedule mentioned in loan agreement

9 Compliance with Companies Act ensuring that the provisions of Companies

Act regarding the maximum amount of the loan that the company can raise have been

complied with

10 Utilization ascertaining the purpose for which the loan is taken and see that it is

utilized for the right purpose

11 Confirmation obtain confirmation letters from the parties

12 Reconciliation reconciling and making sure that the book balance agrees with the

statement sent by the lenders

Page 4 of 31

Audit of hotels

The business of a hotel is very much dissimilar to running say a manufacturing unit It is

a service oriented business and may have some element of production of food stuff and

sales thereof However this business is characterized by handling of liquid cash stocking

and providing a large variety of items mostly of relatively low value in good quantity

keeping watch on customers to ensure that they do not leave the hotel without settling

the hotel dues etc In view of these the following matters deserve special attention of

the auditor in auditing Hotel

1) Internal Control Pilfering is one of the greatest problems in any hotel and the

importance of internal control in this regard cannot be overstressed The auditor

should evaluate the internal control system particularly with regard to the following

i Effectiveness of arrangement regarding receipts and disbursement of

cash

ii Procedure for purchase and stocking of various commodities and

provisions

iii Procedure regarding billing the customers Specially the system may be

tested for room service and sundry services like telephone laundry etc

iv System regarding recording and physical custody of edibles wines

cigars cigarettes crockery cutlery linen furniture carpets etc

2) Cash collection There are various sales point scattered in a hotel which make

cash sales In view of this control of cash assumes great proportions in any hotel

The auditor should reconcile the total sales reported with the total bills issued at

each sales point Special care has to be taken in respect of the bills issued to

customers who are staying in the hotel because they may not be required to pay the

Page 5 of 31

bills in cash Billing may be done room-wise The auditor should see that there exists

numerical control over the bills to ensure that all bills are included in the total

3) Stocks the stock in any hotel are both readily portable and saleable particularly the

food and the beverage stocks It is therefore extremely important that all

movements and transfer of such stocks should be properly documented to enable

control to be exercised over such individual areas and sales point The auditor

should carry out tests to ensure that all such documentation is accurately processed

The areas where stocks are kept should be locked under the supervision of the

departmental managers The auditor should see that the movement of goods in or

out of the stores takes place only after proper authorization and recording

Valuation of stock is another important aspect that has to be considered Normally

many hotels use specialized professional valuers to count and value the stock on a

continuous basis throughout the year Such a valuation is the almost invariably used

as a basis for the balance sheet stock figure at the year end Although such valuers

are appointed by the management it is important that the auditor satisfies himself

regarding this the auditor should consider attending at the physical stock taking and

check certain pricing calculation

4) Fixed assets the accounting policies for valuation of fixed assets are likely to differ

from one hotel to another Certain hotels may count silver cutlery as a stock item

while other may treat it as fixed assets In such cases it is important that a

comprehensive definition of stock items exists and the auditor should consider

whether or not the same have been closely followed in reality The fixed asset

should be properly depreciated

5) Casual labor as any hotel generally operates to very large extent with the help of

casual labor the auditor should consider whether adequate records have been

Page 6 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Telephone expenses

1 Internal control manual get a complete list of telephone connections in the

name of the company and find out the nature ie Landline mobile WLL etc

2 Bills amp statements of accounts obtain telephone bills and see that they are

in the name of the company

3 Deposit receipts see whether any deposit is kept with Telephone Company

and it is properly accounted for

4 Payment voucher trace the payment made in the bank statement

5 Personal expenses ensure that personal expenses of the directors partners

have not been debited to profit and loss account

6 Recovery from staff if the company has paid telephone expenses on behalf

of the employees see that it has been recovered from the concerned employee

7 Service tax returns see whether service tax input credit has been availed by

the company on the basis of telephone bills

8 FBT returns any liability in respect of fringe benefit tax on telephone

expenses has been properly computed

9 Year-end adjustment verify that year-end adjustments are made in respect

of outstanding telephone expenses

Page 2 of 31

Furniture amp fixtures

1 Internal control ensuring that a suitable internal control system exists for

recording purchases and inspection of furniture amp fixture

2 Serial no see that each item of furniture is given stock register serial

number and the same is painted on that item

3 Schedule of furniture obtain a schedule of furniture which shows details

of furniture location cost date of acquisition etc

4 Physical examination conducting physical examination to verify the

existence

5 Verify cost verifying the cost of furniture with reference to the invoices

received Any expenditure regarding purchases is capitalized

6 Depreciation see that adequate depreciation is provided on the furniture

and fixture

7 Verify the existence observing the physical verification being conducted

by the management

8 Verify ownership examining the purchases invoices freight bill insurance

and installation charges relating to furniture and fixtures

9 Verify disclosure as per AS10 the furniture and fixture has to be disclosed

Examining the compliance of schedule VI of the companies Act and CARO 2003

Page 3 of 31

Loans borrowed

1 Power to borrow money examining the partnership deed or memorandum and

articles of association to find out the powers of the client to borrow money

2 Validity examining the loan agreement and correspondence relating to loans

3 Entries checking the cash received along with the receipts issued and checkup the

same in the cash book

4 Scrutiny of agreement scrutinsing the agreement made with the bank in case of

overdraft

5 Security enquiring into the details of the security given against loan in case the loan

is secured ensuring that such a fact has been disclosed in the balance sheet

6 In the interest of the company finding out the reason of borrowing see that it is

in interest of the client

7 Registration of mortgage see that the mortgage is registered with the registrar of

companies under section 125 of the companies Act 1956 Ensuring that entry is made

in the register of mortgages

8 Payments made verifying the payment of interest and installments with the

receipts issued by the lender and confirm that they are paid in accordance with the

time schedule mentioned in loan agreement

9 Compliance with Companies Act ensuring that the provisions of Companies

Act regarding the maximum amount of the loan that the company can raise have been

complied with

10 Utilization ascertaining the purpose for which the loan is taken and see that it is

utilized for the right purpose

11 Confirmation obtain confirmation letters from the parties

12 Reconciliation reconciling and making sure that the book balance agrees with the

statement sent by the lenders

Page 4 of 31

Audit of hotels

The business of a hotel is very much dissimilar to running say a manufacturing unit It is

a service oriented business and may have some element of production of food stuff and

sales thereof However this business is characterized by handling of liquid cash stocking

and providing a large variety of items mostly of relatively low value in good quantity

keeping watch on customers to ensure that they do not leave the hotel without settling

the hotel dues etc In view of these the following matters deserve special attention of

the auditor in auditing Hotel

1) Internal Control Pilfering is one of the greatest problems in any hotel and the

importance of internal control in this regard cannot be overstressed The auditor

should evaluate the internal control system particularly with regard to the following

i Effectiveness of arrangement regarding receipts and disbursement of

cash

ii Procedure for purchase and stocking of various commodities and

provisions

iii Procedure regarding billing the customers Specially the system may be

tested for room service and sundry services like telephone laundry etc

iv System regarding recording and physical custody of edibles wines

cigars cigarettes crockery cutlery linen furniture carpets etc

2) Cash collection There are various sales point scattered in a hotel which make

cash sales In view of this control of cash assumes great proportions in any hotel

The auditor should reconcile the total sales reported with the total bills issued at

each sales point Special care has to be taken in respect of the bills issued to

customers who are staying in the hotel because they may not be required to pay the

Page 5 of 31

bills in cash Billing may be done room-wise The auditor should see that there exists

numerical control over the bills to ensure that all bills are included in the total

3) Stocks the stock in any hotel are both readily portable and saleable particularly the

food and the beverage stocks It is therefore extremely important that all

movements and transfer of such stocks should be properly documented to enable

control to be exercised over such individual areas and sales point The auditor

should carry out tests to ensure that all such documentation is accurately processed

The areas where stocks are kept should be locked under the supervision of the

departmental managers The auditor should see that the movement of goods in or

out of the stores takes place only after proper authorization and recording

Valuation of stock is another important aspect that has to be considered Normally

many hotels use specialized professional valuers to count and value the stock on a

continuous basis throughout the year Such a valuation is the almost invariably used

as a basis for the balance sheet stock figure at the year end Although such valuers

are appointed by the management it is important that the auditor satisfies himself

regarding this the auditor should consider attending at the physical stock taking and

check certain pricing calculation

4) Fixed assets the accounting policies for valuation of fixed assets are likely to differ

from one hotel to another Certain hotels may count silver cutlery as a stock item

while other may treat it as fixed assets In such cases it is important that a

comprehensive definition of stock items exists and the auditor should consider

whether or not the same have been closely followed in reality The fixed asset

should be properly depreciated

5) Casual labor as any hotel generally operates to very large extent with the help of

casual labor the auditor should consider whether adequate records have been

Page 6 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Furniture amp fixtures

1 Internal control ensuring that a suitable internal control system exists for

recording purchases and inspection of furniture amp fixture

2 Serial no see that each item of furniture is given stock register serial

number and the same is painted on that item

3 Schedule of furniture obtain a schedule of furniture which shows details

of furniture location cost date of acquisition etc

4 Physical examination conducting physical examination to verify the

existence

5 Verify cost verifying the cost of furniture with reference to the invoices

received Any expenditure regarding purchases is capitalized

6 Depreciation see that adequate depreciation is provided on the furniture

and fixture

7 Verify the existence observing the physical verification being conducted

by the management

8 Verify ownership examining the purchases invoices freight bill insurance

and installation charges relating to furniture and fixtures

9 Verify disclosure as per AS10 the furniture and fixture has to be disclosed

Examining the compliance of schedule VI of the companies Act and CARO 2003

Page 3 of 31

Loans borrowed

1 Power to borrow money examining the partnership deed or memorandum and

articles of association to find out the powers of the client to borrow money

2 Validity examining the loan agreement and correspondence relating to loans

3 Entries checking the cash received along with the receipts issued and checkup the

same in the cash book

4 Scrutiny of agreement scrutinsing the agreement made with the bank in case of

overdraft

5 Security enquiring into the details of the security given against loan in case the loan

is secured ensuring that such a fact has been disclosed in the balance sheet

6 In the interest of the company finding out the reason of borrowing see that it is

in interest of the client

7 Registration of mortgage see that the mortgage is registered with the registrar of

companies under section 125 of the companies Act 1956 Ensuring that entry is made

in the register of mortgages

8 Payments made verifying the payment of interest and installments with the

receipts issued by the lender and confirm that they are paid in accordance with the

time schedule mentioned in loan agreement

9 Compliance with Companies Act ensuring that the provisions of Companies

Act regarding the maximum amount of the loan that the company can raise have been

complied with

10 Utilization ascertaining the purpose for which the loan is taken and see that it is

utilized for the right purpose

11 Confirmation obtain confirmation letters from the parties

12 Reconciliation reconciling and making sure that the book balance agrees with the

statement sent by the lenders

Page 4 of 31

Audit of hotels

The business of a hotel is very much dissimilar to running say a manufacturing unit It is

a service oriented business and may have some element of production of food stuff and

sales thereof However this business is characterized by handling of liquid cash stocking

and providing a large variety of items mostly of relatively low value in good quantity

keeping watch on customers to ensure that they do not leave the hotel without settling

the hotel dues etc In view of these the following matters deserve special attention of

the auditor in auditing Hotel

1) Internal Control Pilfering is one of the greatest problems in any hotel and the

importance of internal control in this regard cannot be overstressed The auditor

should evaluate the internal control system particularly with regard to the following

i Effectiveness of arrangement regarding receipts and disbursement of

cash

ii Procedure for purchase and stocking of various commodities and

provisions

iii Procedure regarding billing the customers Specially the system may be

tested for room service and sundry services like telephone laundry etc

iv System regarding recording and physical custody of edibles wines

cigars cigarettes crockery cutlery linen furniture carpets etc

2) Cash collection There are various sales point scattered in a hotel which make

cash sales In view of this control of cash assumes great proportions in any hotel

The auditor should reconcile the total sales reported with the total bills issued at

each sales point Special care has to be taken in respect of the bills issued to

customers who are staying in the hotel because they may not be required to pay the

Page 5 of 31

bills in cash Billing may be done room-wise The auditor should see that there exists

numerical control over the bills to ensure that all bills are included in the total

3) Stocks the stock in any hotel are both readily portable and saleable particularly the

food and the beverage stocks It is therefore extremely important that all

movements and transfer of such stocks should be properly documented to enable

control to be exercised over such individual areas and sales point The auditor

should carry out tests to ensure that all such documentation is accurately processed

The areas where stocks are kept should be locked under the supervision of the

departmental managers The auditor should see that the movement of goods in or

out of the stores takes place only after proper authorization and recording

Valuation of stock is another important aspect that has to be considered Normally

many hotels use specialized professional valuers to count and value the stock on a

continuous basis throughout the year Such a valuation is the almost invariably used

as a basis for the balance sheet stock figure at the year end Although such valuers

are appointed by the management it is important that the auditor satisfies himself

regarding this the auditor should consider attending at the physical stock taking and

check certain pricing calculation

4) Fixed assets the accounting policies for valuation of fixed assets are likely to differ

from one hotel to another Certain hotels may count silver cutlery as a stock item

while other may treat it as fixed assets In such cases it is important that a

comprehensive definition of stock items exists and the auditor should consider

whether or not the same have been closely followed in reality The fixed asset

should be properly depreciated

5) Casual labor as any hotel generally operates to very large extent with the help of

casual labor the auditor should consider whether adequate records have been

Page 6 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Loans borrowed

1 Power to borrow money examining the partnership deed or memorandum and

articles of association to find out the powers of the client to borrow money

2 Validity examining the loan agreement and correspondence relating to loans

3 Entries checking the cash received along with the receipts issued and checkup the

same in the cash book

4 Scrutiny of agreement scrutinsing the agreement made with the bank in case of

overdraft

5 Security enquiring into the details of the security given against loan in case the loan

is secured ensuring that such a fact has been disclosed in the balance sheet

6 In the interest of the company finding out the reason of borrowing see that it is

in interest of the client

7 Registration of mortgage see that the mortgage is registered with the registrar of

companies under section 125 of the companies Act 1956 Ensuring that entry is made

in the register of mortgages

8 Payments made verifying the payment of interest and installments with the

receipts issued by the lender and confirm that they are paid in accordance with the

time schedule mentioned in loan agreement

9 Compliance with Companies Act ensuring that the provisions of Companies

Act regarding the maximum amount of the loan that the company can raise have been

complied with

10 Utilization ascertaining the purpose for which the loan is taken and see that it is

utilized for the right purpose

11 Confirmation obtain confirmation letters from the parties

12 Reconciliation reconciling and making sure that the book balance agrees with the

statement sent by the lenders

Page 4 of 31

Audit of hotels

The business of a hotel is very much dissimilar to running say a manufacturing unit It is

a service oriented business and may have some element of production of food stuff and

sales thereof However this business is characterized by handling of liquid cash stocking

and providing a large variety of items mostly of relatively low value in good quantity

keeping watch on customers to ensure that they do not leave the hotel without settling

the hotel dues etc In view of these the following matters deserve special attention of

the auditor in auditing Hotel

1) Internal Control Pilfering is one of the greatest problems in any hotel and the

importance of internal control in this regard cannot be overstressed The auditor

should evaluate the internal control system particularly with regard to the following

i Effectiveness of arrangement regarding receipts and disbursement of

cash

ii Procedure for purchase and stocking of various commodities and

provisions

iii Procedure regarding billing the customers Specially the system may be

tested for room service and sundry services like telephone laundry etc

iv System regarding recording and physical custody of edibles wines

cigars cigarettes crockery cutlery linen furniture carpets etc

2) Cash collection There are various sales point scattered in a hotel which make

cash sales In view of this control of cash assumes great proportions in any hotel

The auditor should reconcile the total sales reported with the total bills issued at

each sales point Special care has to be taken in respect of the bills issued to

customers who are staying in the hotel because they may not be required to pay the

Page 5 of 31

bills in cash Billing may be done room-wise The auditor should see that there exists

numerical control over the bills to ensure that all bills are included in the total

3) Stocks the stock in any hotel are both readily portable and saleable particularly the

food and the beverage stocks It is therefore extremely important that all

movements and transfer of such stocks should be properly documented to enable

control to be exercised over such individual areas and sales point The auditor

should carry out tests to ensure that all such documentation is accurately processed

The areas where stocks are kept should be locked under the supervision of the

departmental managers The auditor should see that the movement of goods in or

out of the stores takes place only after proper authorization and recording

Valuation of stock is another important aspect that has to be considered Normally

many hotels use specialized professional valuers to count and value the stock on a

continuous basis throughout the year Such a valuation is the almost invariably used

as a basis for the balance sheet stock figure at the year end Although such valuers

are appointed by the management it is important that the auditor satisfies himself

regarding this the auditor should consider attending at the physical stock taking and

check certain pricing calculation

4) Fixed assets the accounting policies for valuation of fixed assets are likely to differ

from one hotel to another Certain hotels may count silver cutlery as a stock item

while other may treat it as fixed assets In such cases it is important that a

comprehensive definition of stock items exists and the auditor should consider

whether or not the same have been closely followed in reality The fixed asset

should be properly depreciated

5) Casual labor as any hotel generally operates to very large extent with the help of

casual labor the auditor should consider whether adequate records have been

Page 6 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Audit of hotels

The business of a hotel is very much dissimilar to running say a manufacturing unit It is

a service oriented business and may have some element of production of food stuff and

sales thereof However this business is characterized by handling of liquid cash stocking

and providing a large variety of items mostly of relatively low value in good quantity

keeping watch on customers to ensure that they do not leave the hotel without settling

the hotel dues etc In view of these the following matters deserve special attention of

the auditor in auditing Hotel

1) Internal Control Pilfering is one of the greatest problems in any hotel and the

importance of internal control in this regard cannot be overstressed The auditor

should evaluate the internal control system particularly with regard to the following

i Effectiveness of arrangement regarding receipts and disbursement of

cash

ii Procedure for purchase and stocking of various commodities and

provisions

iii Procedure regarding billing the customers Specially the system may be

tested for room service and sundry services like telephone laundry etc

iv System regarding recording and physical custody of edibles wines

cigars cigarettes crockery cutlery linen furniture carpets etc

2) Cash collection There are various sales point scattered in a hotel which make

cash sales In view of this control of cash assumes great proportions in any hotel

The auditor should reconcile the total sales reported with the total bills issued at

each sales point Special care has to be taken in respect of the bills issued to

customers who are staying in the hotel because they may not be required to pay the

Page 5 of 31

bills in cash Billing may be done room-wise The auditor should see that there exists

numerical control over the bills to ensure that all bills are included in the total

3) Stocks the stock in any hotel are both readily portable and saleable particularly the

food and the beverage stocks It is therefore extremely important that all

movements and transfer of such stocks should be properly documented to enable

control to be exercised over such individual areas and sales point The auditor

should carry out tests to ensure that all such documentation is accurately processed

The areas where stocks are kept should be locked under the supervision of the

departmental managers The auditor should see that the movement of goods in or

out of the stores takes place only after proper authorization and recording

Valuation of stock is another important aspect that has to be considered Normally

many hotels use specialized professional valuers to count and value the stock on a

continuous basis throughout the year Such a valuation is the almost invariably used

as a basis for the balance sheet stock figure at the year end Although such valuers

are appointed by the management it is important that the auditor satisfies himself

regarding this the auditor should consider attending at the physical stock taking and

check certain pricing calculation

4) Fixed assets the accounting policies for valuation of fixed assets are likely to differ

from one hotel to another Certain hotels may count silver cutlery as a stock item

while other may treat it as fixed assets In such cases it is important that a

comprehensive definition of stock items exists and the auditor should consider

whether or not the same have been closely followed in reality The fixed asset

should be properly depreciated

5) Casual labor as any hotel generally operates to very large extent with the help of

casual labor the auditor should consider whether adequate records have been

Page 6 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

bills in cash Billing may be done room-wise The auditor should see that there exists

numerical control over the bills to ensure that all bills are included in the total

3) Stocks the stock in any hotel are both readily portable and saleable particularly the

food and the beverage stocks It is therefore extremely important that all

movements and transfer of such stocks should be properly documented to enable

control to be exercised over such individual areas and sales point The auditor

should carry out tests to ensure that all such documentation is accurately processed

The areas where stocks are kept should be locked under the supervision of the

departmental managers The auditor should see that the movement of goods in or

out of the stores takes place only after proper authorization and recording

Valuation of stock is another important aspect that has to be considered Normally

many hotels use specialized professional valuers to count and value the stock on a

continuous basis throughout the year Such a valuation is the almost invariably used

as a basis for the balance sheet stock figure at the year end Although such valuers

are appointed by the management it is important that the auditor satisfies himself

regarding this the auditor should consider attending at the physical stock taking and

check certain pricing calculation

4) Fixed assets the accounting policies for valuation of fixed assets are likely to differ

from one hotel to another Certain hotels may count silver cutlery as a stock item

while other may treat it as fixed assets In such cases it is important that a

comprehensive definition of stock items exists and the auditor should consider

whether or not the same have been closely followed in reality The fixed asset

should be properly depreciated

5) Casual labor as any hotel generally operates to very large extent with the help of

casual labor the auditor should consider whether adequate records have been

Page 6 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

maintained in this respect or not I would ensure that manipulation on this account

did not take place

6) Compliance with statutory provisions invariably all types of hotels are

governed by various rules and regulations by different authorities The department

of tourism also prescribes various conditions to be fulfilled by the hotels Foreign

exchange is another important area because in large hotels have a very common to

have the facility of exchanging foreign currency into Indian rupees I would see that

the various applicable provisions of foreign exchange regulations act 1973 and the

rules framed by foreign exchange dealers association have been complied with

Compliance with conditions of license for running the hotel should also be seen

7) Travel agents it is very common that the hotels get their bookings through travel

agents or other booking agencies I would ensure that money is recovered from

travel agents as per the terms of credit allowed Commission if any paid to travel

agents should be checked by reference to the agreement on that behalf

Page 7 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

8) Vouching and verification the special points are as follows

i Consumption shown in the various physical stock accounts may be traced

to customerrsquos bills on a sampling basis wherever practicable or to

appropriate consumption account to ensure that all issues have been

billed or accounted for

ii All payments made to foreign collaborator if any are in accordance with

the terms of agreement

iii Adequate depreciation has been provided on various fixed assets

iv Expenses and receipts may be compared with the figures of the previous

year having regard to the average occupancy of visitors and changes in

the rates

v Special receipts on account of letting out of the auditorium space and

other spaces for shops and boutiques and for special shows etc should

be verified with reference to the respective agreements Agreements

with travel agents etc should be noted and deviations if any brought to

the notice of the management

vi The customerrsquos ledger should be examined on a sample basis but in

depth to see that all charges that should be made to customers are in

fact made

vii The occupancy rate should work out and compared with other similar

hotels and with the previous year Material deviation should be

investigated Whether the value of services rendered including room

charges but not yet billed to customers still in occupancy on the closing

day have been accounted for checked

viii Checking proper reserves area maintained for redecoration and

renovation of buildings and facilities Also see that provision for

replacement of current assets like carpets linen etc is also made

Page 8 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

9) Minute books examine the minute book of the meeting of BoDManagement

committeeFinance committee and note the relevant points

10) List of Books obtain a list of books of accounts and other registers and records

11) Audit report examine the previous audit report along with internal audit reports

if any

12) Letting of premises examine the system relating to letting out of premises and

other facilities for conferences marriages etc

13) Recovery of charges ensure that the charges are recovered from the licenses

promptly as they become due in respect of renting out facilities like shops restaurants

swimming pool travel agency counter etc

14) Material Deviations workout the occupancy rate and compare the same with

similar hotels and also with the previous year

15) Ratios make comparisons of various input-output ratios for the current year with

the corresponding figures for previous year

Page 9 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Audit of a Partnership Firm

1 Appointment the Indian partnership act 1932 does not prescribe audit of a

partnership firm The auditor to a firm is usually appointed by the partners either on

the basis of a decision taken by them or to comply with a condition in the

partnership agreement His remuneration is also fixed by the partners It is

important that the letter of appointment should clearly state the nature and scope

of audit which is to be carried out and particulars of limitations if any under which

he would have to be function

2 Provisions of law and AS I should have a knowledge of the provisions of the

Partnership act for the verification of adjustment in the accounts of partners made

in respect of profits and losses interest and remuneration of partners their

contribution to capital etc especially that of powers and audit of partners and their

right to profit and capital under different situations and circumstance I may

particularly ensure application of accounting standards prescribed by the institutes

In case the firm is required to get its accounts audited under the requirements of

any the auditor will have to qualify the report in case of non-compliance with the

accounting standards

3 Partnership deed I would study the partnership deed to know

i The name and the style under which the business shall be conducted

ii The duration of the partnership if any that has been agreed upon

iii The amount of capital that shall be contributed by each whether it will be

fixed or could be varied from year to year

iv The period at the end of which the accounts of the partnership will be

closed periodically and the proportions in which the profit shall be divided

Page 10 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

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 provision as regards maintenance of books of account and the matters

which must be taken into account for determining the profits of the firm

available for division among the partners eg creation of reserves

provisions for depreciation etc also the period within which accounts can

opened for correcting a manifest error

vi Borrowing capacity of the partnership

vii The rate at which interest will be allowed on the capitals and loans

provided by partners and the rate at which it will charged on their

drawings and current accounts

viii Whether any salaries are payable to the partners or withdrawals are

permitted against shares of profits and if so to what extent

ix Duties of the partners are regards the management of business of the

firm also the partners who shall act as managing partners

x Who shall operate the bank account of the firm How will the surplus

funds of the partnership be invested

xi Limitation and restriction that have been agreed upon the rights and

powers of partners and on their imp[lied authority to pledge the firmrsquos

credit or to render it liable

4 Partnership act in the absence of a partnership agreement the provisions of the

act which concerns the auditor are the following

i Each partner is required to contribute an equal amount of capital

ii The partners share equally in profits and losses

iii The partners are not entitled to any interest on capital

iv Where a partner is entitled to his capital it will be payable only out of

profits

v A partner is entitled to interest at 6 pa on his advances and loans

Page 11 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

vi Every partner can take part in management of the business A partner is

however not entitled to receive any remuneration for taking part in the

conduct of the business

vii Every partner has the right to inspect and to take copy of any the books

of the firms

viii A partner is entitled to be indemnified for all payments made and

liabilities incurred by him in the ordinary course of business or in the

preservation of firmrsquos property

ix The property of firm must be held and used by the partners exclusively

for the purpose of the business

x If a partner derives any profit for himself from any transaction of the

firm or from the use of the property or business connections of the firm

or the firm name he must account for that profit and pay it to the firm

also the profit from any competing business carried on by a partner

without other partnerrsquos consent must also be accounted for and paid to

the firm

xi In the absence of any usage or custom of trade to the contrary the

implied authority of partner does not empower him to submit a dispute

relating to the business of the firm to arbitration open a bank account

on behalf of the firm in his own name compromise or relinquish any

claim or portion of a claim by the firm withdraw a suit or proceeding

filed on behalf of the firm admit any liability in a suit or proceeding

against the firm acquire immovable property on behalf of the firm

transfer immovable property belonging to the firm or enter into

partnership on behalf of the firm

xii The firm is liable to third parties if a partner acting within the scope of

his apparent authority receives money and misapplies it or if the firm in

the ordinary course of the business receives money which is misapplied

by a partner

Page 12 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

xiii No person can be introduced as a partner without the consent of the

other partners

xiv Any difference arising as to ordinary matters connected with the

business are to be decided by the majority of the partners but no

change can be made in the nature of the business without the consent

of all the partners

xv If on the death or retirement of a partner no final settlement has been

effected and the business is carried on by the surviving or continuing

partners the outgoing partner or his estate has the option of claiming

(a) such share of profits as may be attributable to his share of the assets

or (b) interest at 6 per cent per annum on his share of partnership

assets

xvi On dissolution of the partnership every partner has the right to have the

goodwill of the business sold for the common benefit of all the partners

xvii On a dissolution of the firm the losses including deficiencies of capital

must be made good first out of profits next out of capital and lastly by

the partners individually in the proportion in which they share profits

xviii On the dissolution of the firm assets are to be applied in the following

order

a In paying the firms liabilities to third parties in

repaying partnerrsquos advance and loans

b In repaying partnerrsquos capital and the residue if any

is to be divided amongst the partners in the

proportion in which they share profits

Page 13 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Special points I would consider in the audit of accounts of a

partnership

1) Letter of appointment confirming that the letter of appointment signed by a

partner duly authorized clearly states the nature and scope of audit contemplated

by the partners specially the limitation

2) Minutes studying the minute book if any maintained to record the policy decision

taken by the partners specially the minute relating to authorization of extraordinary

and capital expenditure raising of loans purchase of assets extraordinary contacts

entered into and other such matters as are not of a routine nature

3) Authorized business verifying that the business in which the partnership is

engaged I s authorized by the partnership agreement or by any extension or

modification thereof agreed to subsequently

4) Books examining whether books of account appear to be reasonable and are

considered adequate in relation to the nature of the business of the partnership

5) Authorized actions verifying generally that the interest of no partner has

suffered prejudicially by an activity engaged in by the partnership which it was not

authorized to do under the partnership deed or by any violation of a provision in the

partnership agreements

6) Tax provision Confirming that a provision for the firmrsquos tax payable by the

partnership has been made in the accounts before arriving at the amount of profit

divisible among the partners

7) Division of profits verifying that the profits and losses have been divided among

the partners in their agreed profit-sharing ratio

Page 14 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

TAX AUDIT

S 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession Section 44AB reads as under

Audit of accounts of certain persons carrying on business or profession

Every person-

a) Carrying on business shall if his total sales turnover or gross receipts as the case

may be in business exceed or exceeds sixty lakh rupees in any previous year or

b) Carrying on profession shall if his gross receipts in profession exceed fifteen lakh

rupees in any previous year or

c) Carrying on the business shall if the profits and gains from the business are deemed

to be the profits and gains of such person under section 44AD or section 44AE or

section 44AF or section 44BB or section 44BBB as the case may be and he has

claimed his income to be lower than the profits or gains so deemed to be the profits

and gains of his business as the case may be in any previous year

Get his accounts of such previous year audited by an accountant before the specified

date and furnish by that date the report of such audit in the prescribed form duly signed

and verified by such accountant and setting forth such particulars as may be prescribed

Provided that this section shall not apply to the person who derives income of the

nature referred to in section 44AB or section 44BBA on and from the 1st day of April

1985 or as the case may be the date on which the relevant section came into force

whichever is later

Provided further that in a case where such person is required by or under any other

law to get his account audited it shall be sufficient compliance with the provisions of

this section if such person gets the accounts of such business or profession audited

Page 15 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

under such law before the specified date and furnishes by that date the report of the

audit as required under such other law and a further report by an accountant in the

form prescribed under this section

Explanation ndash For the purposes of this section

i ldquoaccountantrdquo shall have the same meaning as in the Explanation below sub-section

(2) of section 288

ii ldquoSpecified daterdquo in relation to the accounts of the assesse of the previous year

relevant to an assessment year means the 30th September of that Assessment Year

Scope of Auditorrsquos role Under Income Tax Act

The role of the auditor under Income tax Act is summarized into

a) Conduct of tax audit under section 44 AB

b) Certification for claiming various deductions under the Income Tax Act

c) Conducting selective Audit under section 142 (2A)

d) Giving tax advice and tax planning consultancy

Tax auditor

A tax auditor has to be a chartered accountant even if statutory audit has been conducted

by a person other than a chartered accountant Section 44 AB does not stipulate that only

the statutory auditor appointed under the companies act or other similar statute should

perform the tax audit Hence tax audit can be performed either by the statutory auditor or

by any other Chartered Accountant in practice

Page 16 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means

chartered accountant the statement of audit can be done by a firm of chartered

accountants In such a case the name of the partner be mentioned along with membership

number below the signature

Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who

had done tax audit in the earlier year as specified by the chartered accountants Act

Letter of appointment

As per section 44 AB the tax auditor must obtain from the assesse a letter of appointment

for conducting the audit The letter of appointment must be signed by the assesse who signs

the return of Income

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assesse before

he proceeds to verify the same

Report

The tax auditor has to submit the report to the assessee

Page 17 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Performance audit

Performance audit aims to ascertain that government programmes have achieved the

desired objectives at the lowest cost and given the intended benefits Performance audit

includes efficiency economy and effectiveness

1 Efficiency Audit

It looks into whether

The various schemeprojects are executed and

Their operations are carried out in an economical way and efficient

manner and

They are yielding the expected results

2 Economy audit

It looks into whether

The government has acquired the financial human and physical resources

in an economical manner and

The sanctioning authority and spending authority have observed economy

3 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

Efficiency cum performance audit is an objective examination of the financial and

operational performance of an organization authority or function and is oriented

towards identifying opportunities for greater economy and effectiveness

Page 18 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Performance audit may

a) Assess whether the objectives and the means provided are proper consistent

suitable or relevant to the policy

b) Assess the effectiveness of public sector programmes

c) Assess whether social and economic impacts of a policy are due to the policy

d) Identify factors inhibiting satisfactory performance or goal fulfillment

e) Assess whether the programme complements duplicates overlaps or contracts

other related programmes

f) Assess the adequacy of the management control system for measuring monitoring

and reporting the effectiveness of the programme

g) Identify way of making the programme more effective

Procedure

The procedure of conducting performance audit covers

Identification of topic

Preliminary study

Planning

Execution of audit

Reporting

The performance appraisal of an activity can be done in the light of the objectives which

it is directed to achieve Objectives spell out the results desired Emphasis is placed on

the output to be achieved

Page 19 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Tremendous amount of efforts is required to measure the output

Page 20 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Controller amp Audit General of India

The duties and powers of the Comptroller and Auditor General of India are

enshrined in Chapter V of Part V of the Constitution of India in Articles 148 to 151

and Elaborated under CAGs (Duties Powers and Conditions of Service) Act1 1971

AUDIT FUNCTIONS

The duties of Comptroller and Auditor General includes audit of

all expenditure from the Consolidated Fund of India of Union of each State and of

each Union Territory having a Legislative Assembly with the objective to ascertain

whether the moneys shown in the accounts as having been disbursed were legally

available for and applicable to the service or purpose to which they have been

applied or charged and whether the expenditure conforms to the authority which

governs it

all transactions of the Union and of the StatesUnion Territory having a Legislature

elating to Contingency Funds and Public Accounts

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 and in each

case to report on the expenditure transactions or accounts so audited by him

receipts and expenditure of bodies or authorities substantially financed from Union

or State revenues

grants or loans given to other authorities or bodies

revenue of the Union and of the State Governments

accounts of stores and stock

Government Companies and Corporations under the Companys Act 1956 read with

CAGs (DPC) Act 1971 and

Accounts of other authorities or bodies as per their statute or upon request by the

Governor of a State or the Administrator of a Union Territory having a Legislative

Assembly

Page 21 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Duties of comptroller and auditor general of India

The c amp AG of India has to perform the following duties

1 To compile and submit accounts the comptroller and auditor general of

India shall compile the accounts relating to the annual receipts and

disbursements of the UnionStateUnion Territory He shall submit those

accounts to the PresidentGovernoradminister He shall give to

UnionstateUnion territory such information as they may from time to time

require and render such assistance in the preparation of the annual financial

statements as they reasonably ask for

2 To audit receipts and expenditure the C amp AG shall audit and report on

all receipts and expenditure of any body or authority which has been

substantially financed from the consolidated fund of IndiaStateUnion territory

For this purpose a body or authority shall be treated as financed if the amount

of a grant or loan in one year is

i Greater than INR 25 lakhs and

ii Such amount is greater than 75 of the total expenditure

of that body or authority

3 to audit Grants and loans this applies to any specific purpose loan and grant

given from the Consolidated Fund of IndiaStateUnion territory to any body other

than a foreign state or international organization C amp AG shall scrutinize the

procedures by which the sanctioning authority satisfies him as to the fulfillment of

the conditions of giving such loans and grants

4 To audit receipts of union or states C amp AG shall audit all receipts payable

into the Consolidated Fund of IndiaStateUnion Territory He shall satisfy himself

that rules and procedures are designed to secure any effective check on the

assessment collection and proper allocation of revenue and are being duly

observed

Page 22 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

5 To audit accounts of stores and stock the C amp AG shall have the authority

to audit and report on the stores and stock kept in the office or department of

the Union or State

6 To audit accounts of government companies and Corporations The C

amp AG shall exercise such powers and observe such duties as per the provisions of

the Companies Act 1956 in relation to the Government Companies and

Corporations

7 To audit and report the C amp AG shall audit and report

a) All expenditure from Consolidated Fund of IndiastateUnion Territory

to ascertain whether the money disbursed were legally available for

and applicable to service or purpose to which they have been applied

or charged and Whether the expenditure confirms to the authority

which governs it

b) All transactions of Unionstate relating to the lsquoContingency Funds and

Public Accountsrsquo

c) All trading manufacturing profit and Loss account and balance Sheet

and other subsidiary accounts kept in any department of the

UnionState

Page 23 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

AUDIT REPORTS

CAG presents a number of Audit Reports on the basis of audit of the Union

Government and the State Governments to the Parliament and State Legislature

respectively under Article 151 of the Constitution of India In addition CAG certifies

the Appropriation Accounts and Finance Accounts of the Union Government and of

the State Governments and forwards them to the President Governors of States for

being laid on the Table of Parliament and State Legislature respectively CAG also

submits Separate Audit Reports on all statutory corporations and autonomous

bodies for which he is the sole auditor

The sectors under which CAG presents one or more volumes of his

Audit Reports to Parliament are

Civil

Autonomous Bodies

Scientific Departments

Defense Services

Railways

Direct Taxes

Indirect Taxes and

Commercial

CAG presents the following reports to State Legislature and Union

Territories with Legislative Assemblies in one or more volumes

Civil

Revenue and

Commercial

Page 24 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

With a view to ensuring the accountability of the executive of the Government

Companies and Corporations to the Parliament and State Legislature the Act

envisages that the Comptroller and Auditor General of India shall have powers to

conduct the audit of the accounts of the Government Companies an

Corporations3

These provisions are consistent with the Companies Act 1956 and the acts

establishing the Corporations

The Companies Act 1956 empowers the Controller and Auditor General of India

to

o appoint re-appoint the auditors of a Government Company

o direct the manner in which accounts shall be audited

o give such instructions to the auditors in regard to any matter relating to

audit

o to conduct a supplementary or test audit of the accounts and

o to comment upon or supplement the audit report of the statutory auditors

The Act also prescribes the authority of the Comptroller and Auditor General of India

in respect of production of documents and information by the audited entities The

Act provides the authority to the Comptroller and Auditor General of India to

determine the manner and scope of audit

As per the CAGs (DPC) Act 1971 the Comptroller and Auditor General shall be

responsible for compiling and keeping the accounts of the Union and of each State

any particular services or departments of the Union Under the Act the President

Governor after consultation with the Comptroller and Auditor General can relieve

him from the responsibility for compiling of such accounts

Page 25 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Auditing Standards

With a view to maintaining high quality of audit the Comptroller and Auditor

General of India has promulgated Auditing Standards that prescribes the standards

of professional conduct of the officers and staff of the Indian Audit and Accounts

Department both in terms of professional competence and ethics It also prescribes

the principles of the entire spectrum of audit The Standards are consistent with

the Act prescribing the duties and powers of the Comptroller and Auditor General

of India These are also consistent with the contemporary global best practices

including those of International Organization of Supreme Audit Institutions

(INTOSAI) Apart from the Standards of professional conduct the Auditing Standards

also lay down the quality assurance system within the institution overall framework

for the steps to be followed by auditors in conducting and managing audit work

and framework for reporting the result of audit

With a view to ensuring that the audit works within the Indian Audit and Accounts

Department conform to the standards set for itself the Comptroller and Auditor

General of India has issued standing orders and various guidelines

Page 26 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Guidelines and practice notes

In the light of widely varying complex and vast auditee environment CAG has

issued detailed subject and technique specific guidelines for each sector of audit

viz Civil Commercial Defence Post amp Telecommunications and Railways etc

These guidelines contain step-by-step proceduremethodology and techniques for

conduct of audit in pursuit of the Act and Auditing Standards established for conduct

Of audit as well development of the professional competence of the officers and

Staff

Consultative procedure

While the audit is conducted in the background of the Constitution of India and the

Act made there-under CAG has also established a framework of a consultative

arrangement for audit The inputs suggestions by the Public Accounts Committee

and Committee on Public Undertakings of the Parliament are also taken into account

for audit planning

emsp

Page 27 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Organisation structure

Page 28 of 31

Comptroller and Auditor

General of India

Headquarters

Deputy Comptrollers and Auditors General

Additional Deputy Comptrollers and Auditors General

Directors General Principal Directors

DirectorsDeputy Directors

Auditing function Accounts and Entitlement functions

Field Audit Offices

1048664 Civil

1048664Post amp Telecommunications

1048664 Railways

1048664Defence

1048664Commercial and

1048664Overseas

These offices are headed by

1048664Directors General

1048664 Principal Accountants General

(Audit)

Accounts and Entitlement offices headed by

1048664Accountants General

1048664Sr Deputy Accountants General

Training establishments

1048664iCISA and

1048664NAAA each headed by

Director General Regional Training Institutes

headed by

1048664 Principal Directors

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

Scrutiny of Creditors Ac

XYZrsquos Ledger

ABCrsquos Account

Dr Cr

Date Particulars F Rs Date Particulars F Rs

2011 2011

hellip APR

01

By Balance

bd

400

2012 2012

Mar02 To

Purchase

Return

A 1 1000 Mar01 By

Purchases

A 1 5000

Mar07 To

Payment

A 2 4000 Mar05 By

Purchases

B 3 4500

Mar07 To

Purchase

return

B 3 900 Mar26 By

Purchases

C 6 9000

Mar09 To

Payment

B 5 3000 Mar27 By

Purchases

C 2 5000

Mar31 To Balance

cd

15000

23900 23900

Page 29 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

1) Nature of account Mr ABC is a creditor of Mr XYZ This account will appear in the

creditorrsquos ledger

2) Object of scrutiny the scrutiny of Mr ABCrsquos account is to be done to obtain audit

evidence that ndash (a) the closing balance shown in the account is really due and payable (b)

the balance of Rs15000 is properly valued ie neither more nor less (c) The balance is

properly classified and disclosed in the balance Sheet

3) Check opening balance Opening balance of the account [Rs 400] will be verified from

the schedule of creditors for the year ended 3132011 available in the audit file

4) Check posting scrutiny of the postings in the account shows that-

a) The postings are on the correct side of the account (eg purchases are posted on the

credit side of the account)

b) all entries are posted in sequence of dates ie chronological order

c)No entry is inserted in between two entries afterwards

d) no entry is altered

e) Against each entry there is a reference of the folio of the original book or register

5) Check casting the total [Rs 23900] of the account is correct

6) Mark bill against payment Each bill will be marked against its corresponding

payment and the credit notedebit note if any This is done as follows

A Mark Purchases [Rs 5000] against Purchase Return [Rs 1000] and Payment [Rs4 000]

No balance

B Mark Purchases [Rs 4500] against Purchase Return [Rs 900] and Payment [Rs3 000]

[Rs600] balance

Page 30 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31

7) Closing balance composition the closing balance of the account [Rs 15000]

is made up of opening balance Rs 400 + Purchaseon53 partly unpaid Rs 600 + purchases

on 263 and 273 fully unpaid [9000 + 5000]

8) Closing Balance-Nature the closing balance of the account [Rs15 000] is a credit

balance (which is normal for a creditors account)

9) Closing balance-paid during next year if the entire amount pending on 3132012 are

paid in the next year 2012-13 this confirms that the balance as on 3132012 is genuine

10) Closing balance- goods returned Next year if the goods (eg received on 263 and

273) were returned immediately in the beginning of the next year there is a possibility

that these are bogus purchases recorded only to show higher costs and less profit so as to

pay less income-tax

11) Closing balance- still unpaid if any dues on 3132012 are not paid in the next year (till

the date of audit) confirmation letters should be sent to the party If the party does not

confirm the balance a certificate should be obtained from the management that such

balance is payable Auditor should judge whether such amounts are really payable If the

balance remains outstanding auditor should enquire whether there is any dispute

12) Stock reconciliation the receipt of goods pertaining to the last two bills should be

checked in the stock book as this transaction is close to the year-end (cut-off transaction)

13) Check into Schedule The final balance of this account should be checked into the

schedule of creditors`

Page 31 of 31