AUDIT OF PUBLIC SECTOR UNDERTAKINGS - ICAI · PDF fileAudit of Public Sector Undertakings ......

Audit of Public Sector Undertakings

Final Course Paper 3 Advanced Auditing & Professional Ethics Chapter18

CA. B.Ganesh

Learning Objectives

Public Sector Enterprises

Government Audit

Comptroller & Auditor General (C & AG)

Propriety Audit

Performance Audit

Sample – C & AG Report

Gauging the understanding

Public Sector Enterprises

Public Sector Companies

Public Sector Companies are organized in any one of the following modes:

Departmentally managed undertakings: Indian Railways Postal Services Security Printing

Press Canteen Stores

Department

Government Companies and deemed Government Companies set up under the Companies Act, 1956, where Government or Government owned entities own 51% or more of paid up capital

Corporations set up under specific Acts of Legislature: Ex: Life Insurance

Corporation (LIC) Unit Trust of India

(UTI)

Objective and Scope of Public Enterprises Audit

The Scope and extent of audit is determined by C & AG.

It is not restricted to financial and compliance audit, but extends to efficiency, economy and effectiveness with which these organizations fulfill their objectives and goals.

It is also directed towards examination of management decisions in sales, purchases, sales contracts etc , to see whether these have been undertaken in the interests of the undertakings.

One of the main purposes of audit of public sector companies in India is to help the Government and the Enterprise’s management improve their efficiency and effectiveness.

The Objectives are achieved by bringing out financial and operational deficiencies, shortfalls in performance by analyzing the causes of shortfall from acceptable standards of performance.

Broadly, Government audit encompasses the following:

• Fiscal Accountability – Funds, sanctions, compliances, • Managerial Accountability – Efficiency, economy and effectiveness.

Government Audit An Intro.

Framework of Government Audit

In India, Government Audit is performed by Independent Constitutional Authority, i.e., Comptroller and Audit General of India (C& AG).

The C& AG is appointed by President of India and can be removed only in a manner / grounds as a Judge of supreme Court.

The Organizations which are subject to C & AG audit are:

• About 1200 Public Commercial Enterprises controlled by Union or State Governments.

• About 400 non-commercial autonomous body owned or controlled by Union or State Government.

• Over 4400 authorities substantially financed from Union or State revenues.

Audit of Government Companies

Appointment of Auditors u/s 619(2) of the Companies Act, 1956

• The Statutory auditors of a Government Company are appointed or reappointed by C & A G.

• Whereas the auditors of private sector companies are appointed or reappointed by the Members at the Annual General Meeting (AGM).

Supplementary Audit u/s 619(4) of the Companies Act, 1956

• In addition to the audit conducted by auditors of the Government Company, the C & AG is authorized to conduct supplementary or test audit.

• It is empowered to comment upon or supplement the report submitted by the auditors.

• C & AG has power to authorize a person to conduct a supplementary or test audit of Company’s accounts by general or special order.

Audit of Government Companies (Contd..)

Right to Comment on Auditor’s Report: • The statutory auditor shall submit a copy of his report to the C& AG. • The C & AG has a right to comment upon or supplement the audit

report submitted by the statutory auditors in such manner as he may deem fit.

• As per the provisions of Section 217(3), the Board of Directors are required to give explanations to the adverse remarks / qualifications given by the auditors in their report

• In absence of specific provisions, the Board of Directors are not required to give reply to the reservations/ adverse remarks made by the C & AG, in the Directors Report u/s 217(3).

• However, the comments of C & AG are required to be placed before the AGM of a Government Company pursuant to provisions of Sec.619(5) of the Act.

Comprehensive Audit of Public Enterprises

There are host of areas covered under comprehensive audit, which include but are not limited to investment decision, organizational effectiveness, capacity utilization etc. The areas covered vary from enterprise to enterprise depending on its nature, objectives and operations:

Some of the issues examined are:

• Comparison of overall capital cost of the project with the approved planned costs. • Production or operational outputs vis-à-vis under utilization of the installed capacity. • Systems of project formulation and implementation. • Planned rate of return • Cost control measures • Research and development programmes. • System of repairs and maintenance • Adequate purchase policies

Comprehensive Audit of Public Enterprises (Contd..)

Effective and economical procedures

Project planning

Undue waste, unproductive time for men and machines, wasteful utilization or even non-utilization of resources.

The starting point of comprehensive appraisal of public enterprise is preparation of audit programme based on the study of decisions relating to setting up of the enterprise, its objectives, the areas of operation, organization, financial and operational details available in the annual reports and accounts, capital and operational budgets, deliberations of board of directors, materials in other audit / inspection reports .

The audit programmes identify the areas/aspects which require further detailed audit analysis and criteria, the data required for such analysis and the sources of such data, the extent of the audit analysis including the test checks to be applied and the instructions to the audit parties assigned to the work.

CAG

Comptroller & Auditor General of India

ACCOUNTANT GENERAL (AUDIT) (HEAD OF DEPARTMENT)

SR. DEPUTY ACCOUNTANT GENERAL (AUDIT)

Sr. Audit Officer Report and ECPA Secretary to the

Accountant General AG’s Cell

Sr. DAG’s Cell

Sr. Audit Officer QA Civil Revenue

Works and Commercial

Sr. Audit Officer Class (1 & 2) and 4

Central Audit Parties

Sr. Audit Officer Admn , EDP and

Training Cell

Structure of Comptroller and Auditor General (C& AG) Hierarchy

Report of C & AG

The reports of C & AG are presented to the Parliament in several parts consisting of the following: • Introduction containing a general review of the working results of

the Government companies, deemed Government Companies and Corporations/

• Results of comprehensive appraisals of selected undertakings conducted by the Audit Board.

• Resume of the Company’s auditors submitted by them under the directions issued by C & AG and that of comments on the accounts of the Government Companies.

• Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.

Propriety Audit

Propriety Audit

Propriety Audit stands for verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct.

On an analysis, the tests boils down to tests on economy, efficiency and faithfulness.

It focuses more on substance of transactions rather than documentary evidence and looks into appropriateness thereof on a consideration of financial prudence, public interest and prevention of wasteful expenditure.

Thus propriety audit is concerned with scrutiny of executive actions and decisions impacting financial situation of the company with special regard to public interest and commonly accepted customs and standards of conduct.

Propriety Audit (Contd..)

Principles of Propriety Audit:

Propriety requires the transactions, more particularly expenditure to conform to certain general principles: • Expenditure is not more than what the occasion demands. • Every official exercises same degree of prudence in respect of

expenditure as in respect of his own money. • Authority sanctioning the expenditure does not approve the same to its

own advantage. • Funds are not used for benefit of a person or group of persons. • Apart from remuneration, the managerial personnel do not derive any

other indirect benefits.


Relevant provisions in the Companies Act, 1956 • Sec.209(1)(d) relating to cost accounting records. • Sec.227(1A) requiring enquiry into certain specified

matters. • Sec.227(4A) requiring a supplementary statement on

matters specified in the Companies (Auditor’s) Report Order.

• Sec.233B relating to requirements of cost audit. • Sec.619(3)(a) requiring a supplementary statement in

respect of Government Companies on matters specified.


Areas of propriety under the provisions of Sec.227(1A): • Whether the terms on which secured loans and secured advances have been

made are not prejudicial to the interests of the company or its members. • Whether transactions of the company which are represented merely by book

entries are not prejudicial to the interests of the company. • Whether investment of companies, other than a banking or an investment

company, in the form of shares, debentures and other securities have been sold at a price lower than the cost.

• Whether loans and advances by the company have been shown as deposits. • Whether personal expenses have been charged to revenue. • In case it is stated in the books and papers of the company that shares have

been allotted for cash, whether cash has been received in respect of such allotment, and if no cash actually received, whether the position in books of account and balance sheet so stated is correct, regular and not misleading.


Propriety elements in CARO, 2003 • If the Company has given or taken loans, secured or unsecured, to/from

companies, firms or other parties listed in the register maintained u/s 301 of the Companies Act, whether the rate of interest is and other terms and conditions of such loans are prima facie prejudicial to the interest of the company.

• If the overdue amount if loan given or taken from companies, firms or other parties listed in register maintained u/s 301 of the Act is more than ` 1 lakh, what reasonable steps have been taken by the Company for recovery/payment of the principal and interest.

• Whether the transactions needed to be entered in the register maintained u/s 301 of the Act have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time.

• Is the company regular in depositing undisputed statutory dues including PF, Investor Education and Protection Fund, ESI, Income Tax, Sales tax , Wealth tax and any other statutory dues with appropriate authorities.


Propriety elements in CARO, 2003 (Contd..) • Whether the company has made any

preferential allotment of shares to parties and companies covered in the register maintained u/s 301 of the Act and if so whether the price at which shares have been issued is prejudicial to the interest of the company.

Performance Audit

Performance Audit

A performance audit is an objective and systematic examination of evidence for the purpose of providing an independent assessment of the performance of a government organization, program, activity or function in order to provide information to improve public accountability and facilitate decision- making by parties with responsibility to oversee or initiate corrective actions.

Performance Audit

Economy and Efficiency Audits include - Whether: The entity is acquiring,

protecting and using its resources.

Causes of inefficiencies or uneconomical practices

The entity has complied with laws and regulations of economy and efficiency.

Program audits include determining: The extent to which the desired

results or benefits established by the legislature are being achieved.

The effectiveness of organizations, programs, activities.

The entity has complied with significant laws and regulations applicable to the programs

Performance Audit (Contd..)


Economy and Efficiency audits may consider whether the entity:

• Is following sound procurement practices • Is acquiring the appropriate type, quality of resources at appropriate costs • Is properly protecting and maintaining its resources • Is avoiding duplication of effort by employees • Is avoiding idleness and overstaffing • Is using efficient operating procedures • Is using optimum amount of resources in producing/delivering goods and

services in a timely manner • Is complying with applicable laws and regulations • Has an adequate management control system for measuring, reporting,

and monitoring a programs economy and efficiency. • Has reported measures of economy and efficiency that are valid and

reliable.


Program audits may, for example: • Assess whether the objectives of a new or ongoing program are proper,

suitable, or relevant. • Determine the extent to which a program achieves a desired level of

program results. • Assess the effectiveness of the program and/or of individual program

components. • Identify factors inhibiting satisfactory performance. • Determine whether management has considered alternatives for carrying

out the programs yielding desired results more effectively at lower cost. • Identify ways of making programs work better. • Assess compliance with laws and regulations applicable to the program. • Assess the adequacy of the management control system for measuring,

reporting and monitoring program’s effectiveness.


Objectives of Performance Audit: • The objectives include evaluation of economy, efficiency and

effectiveness of policy, programmes, organization and management. • Policy is defined as an effort to achieve certain aims with certain

resources and perhaps within a certain time. • A programme is a set of interrelated means – legal, financial etc to

implement a given policy. • Organization means the aggregate of people, structures and

processes that have the aim of achieving particular objectives. • The auditor shall evaluate the economy, efficiency and effectiveness, in

the systems being audited. • Auditor shall also point out lacuna, if any in the existing legal

framework or enforcement mechanism to strengthen the objective of legislation.

Understanding the entity – collection of documents , information and data, understanding the expected objectives , inputs, processes, outputs and outcomes

Preliminary Survey

Assessment of skill/knowledge and external sources of skill and expertise

required

Presentation by/ discussion with

entity

Setting audit objectives and scope of audit

Determine audit criteria consistent with audit

objectives

Evidence – types of evidences consonant with audit objectives, sources and methods of collection and

sampling techniques to be used for evidence

Audit test programme –Entity units to be audited, sampling technique used for selection of units ,organizational relationship of the units selected for test, etc. along with the objective of

audit of each selected unit and time schedule, etc.

Planning for Performance Audit

Planning for Performance Audit (Contd..)

(1) Work is to be adequately planned: In performance audit, the auditors should consider the following: • Significance and needs of potential users of the audit report. • Obtain an understanding of program to be audited. • Legal and regulatory requirement. • Management controls. • Identify criteria needed to evaluate matters subject to audit. • Identify significant findings and recommendations from previous audits

that could affect the current audit objectives. • Identify potential sources of data that could be used as audit evidence. • Provide sufficient staff and other resources to do the audit. • Draft a written audit plan.


(2) Significance and user needs : The significance of a matter is its relative importance to the audit objectives and potential users of audit report, both qualitative and quantitative. Qualitative factors can include: • Visibility and sensitivity of program under audit. • Newness of the program or changes in its conditions. • Role of audit in providing information that can improve public accountability

decision-making • Level and extent of review or other forms of independent oversight.

The potential users could be Government officials, media, other stakeholders, and individual citizens. An awareness of these potential users interests and influence can help auditors understand why the program operates the way it does.


(3) Understanding the Program: The following are the individual aspects of the program which are to be understood: • Laws and regulations: The Government programs are usually subject

to more specific laws and regulations than the private sector. Understanding the laws establishing a program can be essential to understanding the program itself.

• Purpose and goals: Purpose is the resultant or effect that is intended or desired, and can exist without being expressly stated. Goals quantify the level of performance intended or desired. Auditors may use the purpose and goals as criteria for assessing program performance.

• Efforts: Efforts are the amount of resources (money, material, personnel) that are put into the program. Measures of efforts can have a number of dimensions such as cost, timing and quality.


Program operations: Program operations are strategies, processes and activities, the auditee uses to convert efforts into output.

Outputs: Outputs are the quantity of goods and services provided.

Outcome : Outcomes are accomplishments or results that occur because of services provided. Outcomes can be viewed as ranging from immediate outcomes to long-term outcomes. Auditors may use approaches drawn from the field of program evaluation to isolate the effects of the program from those of other influences.


(4) Criteria : These are the standards used to determine whether a program meets or exceeds expectations. The following are examples of possible criteria: • Purpose of goals prescribed by law or regulations or set by

management. • Technically developed standards or norms. • Expert opinions • Prior years performance • Performance of similar entities • Performance of private sector


• Auditors should follow up on significant findings and recommendations from previous audits that could effect the audit objectives. They should determine whether timely and appropriate corrective action have ben taken by the entity. The audit report shall disclose the status of uncorrected significant findings and recommendations from prior audits that affect the audit objectives.

(5) Audit follow-up :

• Whether other auditors have done performance audits of financial audits, they may be useful sources of information for planning and performing the audit. If auditors intend to rely on the work of other auditors, they should perform procedures that provide a sufficient basis for that reliance. Auditors can obtain evidence of other auditors qualification and independence through prior experience, enquiry, and/or review of other auditors external quality control review report.

(6) Considering Other work:

Strategic goals and objectives of

SA

Strategic planning

Planning the individual performance audits

Preliminary study

Implementation of performance audits for individual subjects

Report approval process

Draft performance audit report to the

Entity-in-Chief

Performance Audit report

Follow –up process and impact assessment

Strategic plan document and annual operational plan

Draft performance audit report

Individual performance audit plan

Discussion papers, audit observations, working papers

Field audit report to the field entity and their response

Performance Audit Cycle

SAMPLE - C & AG REPORT

FORM FOR COMMUNICATION OF COMMENTS UNDER SECTION 619 (4) OF THE COMPANIES ACT

Format for Comments

COMMENTS OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA UNDER SECTION 619(4) OF THE COMPANIES ACT, 1956 ON THE ACCOUNTS OF ……………………………………………………………………………………..………………………………………………... FOR THE YEAR ENDED 31ST MARCH ………….……... The preparation of financial statements of ………………………………………..………… ……… … …………………………………………………….for the year ended ………………………..…….. in accordance with the financial reporting framework prescribed under the Companies Act, 1956 is the responsibility of the management of the company. The statutory auditor/auditors appointed by the Comptroller and Auditor General of India under Section 619(2) of the Companies Act, 1956 is/are responsible for expressing opinion on these financial statements under section 227 of the Companies Act, 1956 based on independent audit in accordance with the auditing and assurance standards prescribed by their professional body the Institute of Chartered Accountants of India. This is stated to have been done by them vide their Audit Report dated ………………… I on the behalf of the Comptroller and Auditor General of India have conducted a supplementary audit under section 619(3) (b) of the Companies Act, 1956 of the financial statements of…………… …for the year ended ……………………..…. This supplementary audit has been carried out independently without access to the working papers (in case of non-review of working papers) of the statutory auditors and is limited primarily to inquiries of the statutory auditors and company personnel and a selective examination of some of the accounting records. Based on my supplementary audit, I would like to highlight the following significant matters under section 619(4) of the Companies Act, 1956 which have come to my attention and which in my view are necessary for enabling a better understanding of the financial statements and the related Audit Report: A Comments on Profitability B Comments on Financial Position C Comments on Disclosure D Comments on Auditors’ Report E Other Comments (May be arranged in order of decreasing importance)

For and on the behalf of the Comptroller & Auditor General of India

Place: Date:

Accountant General

Gauging the Understanding

Question Whether the Company has to give explanation for the adverse remarks / reservations of the C & AG made in his report, in its Director’s Report pursuant to the provisions of Sec.217 of the Companies Act, 1956. A. No, the Company need not disclose the same

B. Yes, the Company shall give explanation in its Directors Report

1

Answer

Whether the Company has to give explanation for the adverse remarks / reservations of the C & AG made in his report, in its Director’s Report pursuant to the provisions of Sec.217 of the Companies Act, 1956.

A. No, the Company need not disclose the same

B. Yes, the Company shall give explanation in its Directors Report

Question

The Public Sector Companies need not appoint auditors as the same is subject to audit of C & A G. A. Yes, the auditor is not required to be appointed separately

B. No, the Company shall appoint auditors in its AGM

2

Answer The Public Sector Companies need not appoint auditors as the same is subject to audit of C & A G.

B. No, the Company shall appoint auditors in its AGM

A. Yes, the auditor is not required to be appointed separately

Question Which of the following is not the principle of propriety

A. The authority exercises its power of sanctioning expenditure to pass an order which will no directly or indirectly accrue to its own advantage. B. The funds are not utilized for the benefits of a particular person or group of persons.

C. Apart from the agreed remuneration or reward, no other avenue is kept open to indirectly benefit the management personnel, employees and others.

D. The entity shall have a set standard operating procedure for expenditure

3

Answer

Which of the following is not the principle of propriety

A. The authority exercises its power of sanctioning expenditure to pass an order which will no directly or indirectly accrue to its own advantage.

B. The funds are not utilized for the benefits of a particular person or group of persons.

C. Apart from the agreed remuneration or reward, no other avenue is kept open to indirectly benefit the management personnel, employees and others.

D. The entity shall have a set standard operating procedure for expenditure

Question Propriety audit includes economy and efficiency, program audits:

A. True

B. False

4

Answer

Propriety audit includes economy and efficiency, program audits:

A. True

B. False

Question

“Comprehensive Audit of public enterprises is restricted to financial and compliance audit”

A. True

B. False

5

Answer

“Comprehensive Audit of public enterprises is restricted to financial and compliance audit”

A. True

B. False

Thank You

AUDIT OF PUBLIC SECTOR UNDERTAKINGS - ICAI · PDF fileAudit of Public Sector Undertakings ......

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