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