COMMERCE GURUKUL: AUDITING AND ASSURANCE

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PERFORMANCE AUDIT

Performance audit -

The scope of audit has been extended to cover eﬃciency, economy and eﬀectiveness audit or performance audit, or full scope audit.
Eﬃciency audit looks into whether the various schemes/projects are executed and their operations conducted economically and whether they are yielding the results expected of them, i.e., the relationship between goods and services produced and resources used to produce them; and examination aimed to ﬁnd out the extent to which operations are carried out in an economical and eﬃcient manner.
Economy audit looks into whether government have acquired the ﬁnancial, human and physical resources in an economical manner, and whether the sanctioning and spending authorities have observed economy.
Eﬀectiveness audit 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, wherever used, is an objective examination of the ﬁnancial and operational performance of an organisation, programme, authority or function and is oriented towards identifying opportunities for greater economy, and eﬀectiveness. The procedure for conducting performance audit covers identiﬁcation of topic, preliminary study, planning and execution of audit, and reporting.
While the trend towards a comprehensive approach for conducting performance of full scope audit is visible, the coverage and depth of evaluation vary according to the statutory limitations, and the organisational constraints of C&AG.

PROPRIETY AUDIT

Propriety audit -

According to ‘propriety audit’, the auditors try to bring out cases of improper, avoidable, or infructuous expenditure even though the expenditure has been incurred in conformity with the existing rules and regulations. With the passage of time, it was felt that regularity audit alone was not suﬃcient to protect properly the public interest in the spending of money by the executive authorities.
A transaction may satisfy all the requirements of regularity audit insofar as the various formalities regarding rules and regulations are concerned, but may still be highly wasteful. A building may be constructed for installing a telephone exchange but may not be used for the same purpose resulting in infructuous expenditure or a school building may be constructed but used after ﬁve years of its completion is a case of avoidable expenditure.
Audit should, therefore, try to secure a reasonably high standard of public ﬁnancial morality by looking into the wisdom, faithfulness and economy of transactions. These considerations have led to the evolution of audit against propriety which is now being combined by the audit authorities with their routine function of regularity audit. It is hard to frame any precise rules for regulating the course of audit against propriety.

Such an objective of audit depends for its acceptance on its appeal to the common sense and straight logic of the auditors and of those whose ﬁnancial transactions are subjected to propriety audit. However, some general principles have been laid down in the Audit Code, which have for long been recognised as standards of ﬁnancial propriety. Audit against propriety seeks to ensure that expenditure conforms to these principles which have been stated as follows:

(a) The expenditure should not be prima facie more than the occasion demands. Every public oﬃcer is expected to exercise the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in respect of expenditure of his own money.

(b) No authority should exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage.

(c) Public moneys should not be utilised for the beneﬁt of a particular person or section of the community unless:

(i) the amount of expenditure involved is insigniﬁcant; or

(ii) a claim for the amount could be enforced in a Court of law; or

(iii) the expenditure is in pursuance of a recognised policy or custom; and

(iv) the amount of allowances, such as travelling allowances, granted to meet expenditure of a particular type should be so regulated that the allowances are not, on the whole, sources of proﬁt to the recipients.

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AUDIT AGAINST PROVISION OF FUNDS

Audit against provision of funds -

Audit against provision of funds aims at ascertaining that the expenditure incurred has been on the purpose for which the grant and appropriation had been provided and that the amount of such expenditure does not exceed the appropriation made.

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AUDIT OF SANCTIONS

Audit of sanctions -

The auditor has to ensure that each item of expenditure is covered by a sanction, either general or special, of the competent authority.
The audit of sanctions is directed both in respect of ensuring that the expenditure is properly covered by a sanction, and also to satisfy that the authority sanctioning it is competent for the purpose by virtue of the powers vested in it by the provisions of the Constitution and of the law, rules or orders made thereunder, or by the rules of delegation of ﬁnancial powers made by an authority competent to do so.

EXPENDITURE AUDIT

Expenditure Audit

The audit of government expenditure is one of the major components of government audit. The basic standards set for audit of expenditure are to ensure that there is provision funds authorised by competent authority ﬁxing the limits within which ex- penditure can be incurred. These standards are

(i) that the expenditure incurred conforms to the relevant provisions of the statutory enactment and in accordance with the Financial Rules and Regulations framed by the competent authority. Such an audit is called as the audit against ‘rules and orders’.

(ii) that there is sanction, either special or general, accorded by competent authority authorising the expenditure. Such an audit is called as the audit of sanctions.

(iii) that there is a provision of funds out of which expenditure can be incurred and the same has been authorised by competent authority. Such an audit is called as audit against provision of funds.

(iv) that the expenditure is incurred with due regard to broad and general principles of ﬁnancial propriety. Such an audit is also called as propriety audit.

(v) that the various programmes, schemes and projects where large ﬁnancial expenditure has been incurred are being run economically and are yielding results expected of them. Such an audit is termed as the performance audit.

POWERS OF C & AG

Powers of C&AG

The C&AG Act gives the following powers to the C&AG in connection with the performance of his duties-

(a) To inspect any oﬃce of accounts under the control of the Union or a State Government including oﬃce responsible for the creation of the initial or subsidiary accounts.

(b) To require that any accounts, books, papers and other documents which deal with or are otherwise relevant to the transactions under audit, be sent to speciﬁed places.

(c) To put such questions or make such observations as he may consider necessary to the person in charge of the oﬃce and to call for such information as he may require for the preparation of any account or report which is his duty to prepare.

In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of any accounts or class of transactions and to apply such limited checks in relation to such accounts or transactions as he may determine.

COMPTROLLER AND AUDITOR'S GENERAL- DUTIES AND POWERS

Comptroller and Auditor General’s — Duties and Powers
The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 deﬁnes functions and powers in detail. The relevant provisions are discussed hereunder—
Duties of the C&AG:

(i) Compile and submit Accounts of Union and States - The Comptroller and Auditor General shall be responsible for compiling the accounts of the Union and of each State from the initial and subsidiary accounts rendered to the audit and accounts oﬃces under his control by treasuries, oﬃces or departments responsible for the keeping of such account. The Comptroller and Auditor General shall, from the accounts compiled by him or [by the Government or any other person responsible in that behalf] prepare in each accounts (including, in the case of accounts compiled by him, appropriation accounts) showing under the respective heads the annual receipts and disbursements for the purpose of the Union, of each State and of each Union Territory having a Legislative Assembly, and shall submit those accounts to the President or the Governor of a State or Administrator of the Union Territory having a Legislative Assembly, as the case may be, on or before such dates as he may, with the concurrence of the Government concerned, determine.

The C&AG Act of 1971 has provisions for relieving him of this responsibility to give information and render assistance to the Union and States: The Comptroller and Auditor General shall, in so far as the accounts, for the compilation or keeping of which he is responsible, enable him so to do, give to the Union Government, to the State Government or to the Governments of Union Territories having Legislative Assemblies, as the case may be, such information as they may, from time to time, require and render such assistance in the preparation of the annual ﬁnancial statements as they may reasonably ask for.

(ii) General Provisions Relating to Audit - It shall be the duty of the Comptroller and Auditor General
(a) to audit and report on all expenditure from the Consolidated Fund of India and of each State and of each Union Territory having a Legislative Assembly and to ascertain whether the moneys shown in the accounts as having been disbursed were legally available for and applicable to the service or purpose to which they have been applied or charged and whether the expenditure conforms to the authority which governs it;

(b) to audit and report all transactions of the Union and of the States relating to Contingency Funds and Public Accounts;

(c) to audit and report on all trading, manufacturing and proﬁt and loss accounts and balance- sheets and other subsidiary accounts kept in any department of the Union or of a State.

(iii) Audit of Receipts and Expenditure - Where any body or authority is substantially ﬁnanced by grants or loans from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly, the Comptroller and Auditor General shall, subject to the provisions of any law for the time being in force applicable to the body or authority, as the case may be, audit all receipts and expenditure of that body or authority and to report on the receipts and expenditure audited by him.

Where the grant or loan to a body or authority from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly in a ﬁnancial year is not less than rupees twenty-ﬁve lakhs and the amount of such grant or loan is not less than seventy-ﬁve per cent of the total expenditure of that body or authority, such body or authority shall be deemed, for this purpose to be substantially ﬁnanced by such grants or loans as the case may be.

(iv) Audit of Grants or Loans - Where any grant or loan is given for any speciﬁc purpose from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly to any authority or body, not being a foreign State or international organisation, the Comptroller and Auditor General shall scrutinise the procedures by which the sanctioning authority satisﬁes itself as to the fulﬁllment of the conditions subject to which such grants or loans were given and shall for this purpose have right of access, after giving reasonable previous notice, to the books and accounts of that authority or body.

(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller and Auditor General to audit all receipts which are payable into the Consolidated Fund of India and of each State and of each Union Territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an eﬀective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks ﬁt and report thereon.

(vi) Audit of Accounts of Stores and Inventory - The Comptroller and Auditor General shall have authority to audit and report on the accounts of stores and inventory kept in any oﬃce or department of the Union or of a State.

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

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LEGAL FRAMEWORK AND COMPTROLLER & AUDITOR GENERAL

Legal Framework and Comptroller & Auditor General

The Constitution of India contains speciﬁc provisions regarding the appointment, salary and duties and powers of the C&AG. The constitution guarantees the independence of the C&AG of India by prescribing that he shall be appointed by the President of India and shall not be removed from oﬃce except on the ground of proven mis-behaviour or incapacity.
As in the case of a Judge of the Supreme Court, he can be removed only when each House of Parliament decides to do so by a majority of not less than 2/3rd of the members of the House present and voting.
The Parliament is competent to make laws to determine salary and other conditions of service and they cannot be varied to his disadvantage after his appointment. The Constitution further provides that the conditions of service of person serving in the Indian Audit and Accounts Department and the administrative powers of the C&AG shall be determined by the President after consultation with him.
The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 passed in pursuance of the provisions of the Constitution lays down a ﬁxed tenure of the oﬃce prescribing that he shall be paid a salary which is equal to the salary of the Judge of the Supreme Court thereby further strengthening his independence.

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GOVERNMENT AUDIT

GOVERNMENT AUDIT

Background

Government Audit is as old as organised governments and has fairly long pedigree even in developing countries. The concept, content and scope of government audit have developed in tune with the political, social and economic development of the countries. It has also responded to the needs of the administration.
It aims to ensure accountability of the executive in respect of public revenue and expenditure. Primarily, the Parliament and in case of States, the State legislatures control all government expenditure through insistence upon demand for grants.
The main idea underlying this control is that no expenditure can be incurred unless it has been voted upon by the Parliament or State Legislatures and funds for every such expenditure must be provided from out of the Consolidated Fund of India or of the State.
After the expend- iture has been incurred and the accounts are closed, the Appropriation Accounts are prepared which are scrutinised by the Public Accounts Committee. Thus, Parliamentary or Legislative control is exercised before spending and after the expenditure is actually incurred.
Since independence there has been a tremendous spurt in governmental activities with the attendant increase in expenditure, revenue and capital, and in receipts and borrowings to match the expenditure. Government has entered the business ﬁeld and government in business is not the same as government administering law and order and attending to regulatory functions. Independent India witnessed a steady growth of state commercial enterprise.
The change in the character of government and the complex nature of its activities, including regulatory functions in an international environment, called for a change in the nature and scope of audit. Audit has evolved from accountancy and regularity check to evaluation of the end results of the operations of government.
Initially, government auditing in India as elsewhere was primarily expenditure-oriented. Gradually, audit of receipts-tax and non-tax was taken up. With the rapid growth of public enterprises, another major area of specialisation, i.e., commercial audit, came into being.
There are also a large number of non-commercial autonomous bodies ﬁnanced by government in diverse ﬁelds of development and of academic study and scientiﬁc or social research which are also required to be audited from the viewpoint of public accountability.

FORMAT OF REPORT

Format of Report

The auditors, central as well as branch, should also ensure that the audit report issued by them complies with the requirements of Standards on Auditing discussed in Chapter 11 on Audit Report. The auditor should ensure that not only information relating to number of unaudited branches is given but quantiﬁcation of advances, deposits, interest income and interest expense for such unaudited branches has also been disclosed in the audit report. Such disclosure in the audit report is not only in accordance with the best international trends but also provides useful information to users of ﬁnancial statements.

It may be noted that, in addition to the aforesaid, the auditor of a banking company is also required to state in his report in respect of matters covered by Section 143 of the Companies Act, 2013. However, it is pertinent to mention that the reporting requirements relating to the Companies (Auditor’s Report) Order, 2016 is not applicate to a banking company as deﬁned in clause (c) of section 5 of the Banking Regulation Act, 1949.

AUDITOR'S REPORT

AUDITOR’S REPORT

In the case of a nationalised bank, the auditor is required to make a report to the Central Government in which he has to state the following:

(a) whether, in his opinion, the balance sheet is a full and fair balance sheet containing all the necessary particulars and is properly drawn up so as to exhibit a true and fair view of the aﬀairs of the bank, and in case he had called for any explanation or information, whether it has been given and whether it is satisfactory;

(b) whether or not the transactions of the bank, which have come to his notice, have been within the powers of that bank;

(c) whether or not the returns received from the oﬃces and branches of the bank have been found adequate for the purpose of his audit;

(d) whether the proﬁt and loss account shows a true balance of proﬁt or loss for the period covered by such account; and

(e) any other matter which he considers should be brought to the notice of the Central Government.

The report of auditors of State Bank of India is also to be made to the Central Government and is almost identical to the auditor’s report in the case of a nationalised bank

POWER OF AUDITOR

POWERS OF AUDITOR

The auditor of a banking company or of a nationalised bank, State Bank of India, a subsidiary of State Bank of India, or a regional rural bank has the same powers as those of a company auditor in the matter of access to the books, accounts, documents and vouchers.

REMUNERATION OF AUDITOR

REMUNERATION OF AUDITOR
The remuneration of auditor of a banking company is to be ﬁxed in accordance with the provisions of section 142 of the Companies Act, 2013 (i.e., by the company in general meeting or in such manner as the company in general meeting may determine). The remuneration of auditors of nationalised banks and State Bank of India is to be ﬁxed by the Reserve Bank of India in consultation with the Central Government.

APPOINTMENT OF AUIDITOR

APPOINTMENT OF AUDITOR

As per the provisions of the relevant enactments, the auditor of a banking company is to be appointed at the annual general meeting of the shareholders, whereas the auditor of a nationalised bank is to be appointed by the bank concerned acting through its Board of Directors.
In either case, approval of the Reserve Bank is required before the appointment is made. The auditors of the State Bank of India are to be appointed by the Comptroller and Auditor General of India in consultation with the Central Government.
The auditors of the subsidiaries of the State Bank of India are to be appointed by the State Bank of India. The auditors of regional rural banks are to be appointed by the bank concerned with the approval of the Central Government.

AUDIT OF ACCOUNTS

AUDIT OF ACCOUNTS
Sub-section (1) of section 30 of the Act requires that the balance sheet and proﬁt and loss account of a banking company should be audited by a person duly qualiﬁed under any law for the time being in force to be an auditor of companies.

FORM AND CONTENT OF FINANCIAL STATEMENTS

FORM AND CONTENT OF FINANCIAL STATEMENTS
Sub-sections (1) and (2) of section 29 of the Act deal with the form and content of ﬁnancial statements of a banking company and their authentication. These sub- sections are also applicable to nationalised banks, State Bank of India, subsidiaries of the State Bank of India, and Regional Rural Banks.

Every banking company is required to prepare a Balance Sheet and a Proﬁt and Loss Account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance Sheet and Form B contains the form of Proﬁt and Loss Account.

INCOME RECOGNITION POLICY

INCOME RECOGNITION POLICY

The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations.

Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received.

BANK AUDIT APPROACH

BANK AUDIT APPROACH
Based on the nature and thrust of operations, nature of adverse features, level of compliance of previous reports, and audit risks based on lack of, inadequacy in or breach of internal controls/ discipline and the familiarization exercise carried out, an audit plan should be drawn up.

A bank should have appropriate controls to manage its risks, including eﬀective segregation of duties (particularly, between front and back oﬃces), accurate measurement and reporting of positions, veriﬁcation and approval of transactions, reconciliation of positions and results, setting of limits, reporting and approval of exceptions, physical security and contingency planning.

UNDERSTANDING OF ACCOUNTING SYSTEM IN BANKS

UNDERSTANDING OF ACCOUNTING SYSTEM IN BANKS

From the time that customers had to physically visit and deal with a bank , there is a sea change in banking as use of technology and its continuous evolution has enabled banks to reach their customers in providing them the convenience and comfort of anytime-anywhere-banking by letting them access their information/data on real time basis, as stored in a safe and secure environment on the bank’s servers.
With many customers having access to Internet and mobile connectivity, monetary transactions from inception to ﬁnish have become expeditious through E banking; and but for Core banking technology and extensive advancement therein and the availability and extensive use of technology tools, Banks could not have achieved such phenomenal and accelerated growth, and could not have ventured into and oﬀered a wide range of innovative products and services to their customers.
The transactions in banks have become voluminous and it needs to be ensured that in the system of recording , transmission and storage of information/ data, integrity thereof is optimally maintained and control systems ensure that the same is free of risks of errors, omissions, irregularities and frauds; and considering the challenges of technology , bank managements continuously endeavour to make the internal control systems robust , safe and secure as well as convenient and expeditious for the customers.
In the Computerised environment, it is imperative that the auditor is familiar with, and is satisﬁed that, all the norms/parameters as per the latest applicable RBI guidelines are incorporated and built into the system that generates information/data having a bearing on the classiﬁcation/ provisions and income recognition.
The auditor should not go by the assumption that the system generated information is correct and can be relied upon without evidence that demonstrates that the system driven information is based on validation of the required parameters for the time being in force and applicable.

REGULATORY FRAMEWORK

Regulatory Framework

Banking Regulation Act, 1949.	State Bank of India Act, 1955.
Companies Act, 2013.	State Bank of India (Subsidiary Banks) Act 1959.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Regional Rural Banks Act, 1976.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
Information Technology Act, 2000.	Prevention of Money Laundering Act, 2002.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Credit Information Companies Regulation Act, 2005.
Payment and Settlement Systems Act, 2007.

Besides, the above enactments, the provisions of the Reserve Bank of India Act, 1934, also aﬀect the functioning of banks. The Act gives wide powers to the RBI to give directions to banks which also have considerable eﬀect on the functioning of banks.

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