Audit Repot in India

8/8/2019 Audit Repot in India

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UNIT 22 AUDITING SYSTEM IN INDIAStructure

ObjectivesIn t roduct ionAudi t ing: Def in i t ion and ImportanceEvolut ion of Audit ing in IndiaS t a t u t o ry and In t erna l Aud i tTypes of Audi tIndependence of AuditResults of Audit-Audit Repo rts an d their Follow-up with Adm inistrat ionLet Us S u m UpKey WordsReferencesAnswers t o Check You r Progress Exerci ses

22.0 OBJECTIVESAfter s tudying th i s uni t, you should be ab le to : .

explain the meaning and importance of audi tdescribe the differences between Internal and Statutory auditanalyse the features of Regularity audit and Perform ance auditunderstand the ut i l i ty of audit reports and their impact on administrat ion.

22.1 INTRODUCTIONAudit deals with papers and figures. I t is in the nature of a post-mortemexam ination of accounting an d financial t ransact ions of a fi rm or a com pany o r adepar tment of Government .An a ud ito r has a vi tal role to play in modern economy. W ith the growth of joint-stock companies with limited liability, there is divorce between owners (share-holders) an d m anagers (Board of Directors). This has made i t importan t tha t thereshould be an independent auditor to check the correctness of the financialt ransact ion s of a l imited l iabil i ty comp any on behalf of the shareholders, as a mean sof managerial accountabi l i ty to thc owners. Likewise, on the basis of audi tedaccou nls , cert i fied by an au ditor . the tax authori t ies can be reasonably certain thatthe profi t o r loss, disclosed by a n assessee, is reasonably t rue an d correct , instead of

* undertak ing a che ck of ac counts of the assessees.In the ca se of govern menta l act ivi t ies , aud it acts a s a 'watchdog' oE the nat ion'sfinancial interests . T he adm inistrat ive structure of the Sta te is so vast an d i tsoperat ions so complex that it i s imposs ib le for an ord inary tax payer to know thatthe m oney contributed by him / her to the running of the state is being misused.Audit helps to highlight losses, waste an d under-ut i l isat ion of capaci ty, due toimproper deci s ions a t the approp r ia te l evels . Above a l l , Par l i ament IS ta teLegisla tures vote suppl ies but they have n o m eans to know that the moneys ' havebeen spent for the purposes for which they were voted and also not in excess thereof.It is for the proper exercise of these important aspects of control that Parl iamentL-- L--- ----A ...:.L - ---- :. . . . :---I --A:. -.. L--:... :- .L- .r 4 ~ - - - - t - , . i i . . ~


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Accounts md Audit

.>- -In this unit , you will s tudy the meaning a n d impo;tance of audi t and the ev olut io @,,of audi t ing in India. Yo u will know the various types of audi t conducted by theCompt ro l ler an d Audi tor Gene ral for effect ing economy and ef fi c iency inadministrat ion. This uni t wil l also explain the importance of audi t reports and theirexaminat ion by the Publ ic Accounts Commit tee of the Lok Sabha.

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22.2 AUDITING :D E F IN I TI O N A N D I M P O R T A N C ETh e wor ld Audit i s der ived f ro m the Lat in word Audire to hear. Original ly, theaccou nt ing part i es were required to a t t end before the audi tor , who heard theaccounts . I n the ear ly s tages of c iv il isa tion, the m ethods of a ccounts were so crudeand the num ber of t ransact ions to be recorded so few that each ind iv idual was ab leto check for himself/ herself a l l his / her t ransact ions. But soon with the establ ishmentof empires, a system was establ ished to record account t ransact ions and audi t them.Th e person whose duty , i t was to check such accounts came to be kno wn a s theAuditor.An audi t i s a n examina t ion of account ing records under taken wi th a v iew toestabl ishing, yh eth er o r no t they correct ly an d complete ly reflec t the t ransact ions towhich they purp ort to relate. I ts purpose is to see that expe nditu re has been incurredwi th the sanct ions of the competen t au thor i ty and appl ied f or the purpose for whichit was sanct ione d. I t should be duly supporte d by vouchers , a s a safeguard ag ainstf raud and misappropr ia t ion .Audit is an instrument of f inancial control . In i ts relat ion to commercialt ransact ions, i t acts a$ a safe guard, on behalf of the proprietor, against extrava gance,carelessness o r fraud o n the part of the proprietor 's em ployees in the real isat ion anduti l isat ion of his / her moen y o r othe r assets . I t ensures on proprietor 's behalf , that theaccounts maintained t ruly, represent facts an d that expendi ture has been incurredwi th due regularity and propriety. ( ,The financial t ransact ions of a government need to be s imilarly 'watched. The agencyemployed for the purpose should be independent from the employees ofGove rnmen t , who ar e entrusted with the real isat ion an d ut i lisation of publ ic moneyor o ther assets , This t ask i s en t rus ted , in Ind ia , to the Ind ian Audi t and AccountsDepar tment . S o far as i t s audi t du t ies are concerned , the pos i tion of the Ind ianAudi t and Accounts D epar tme nt in re la tion to government t ransactions, i s to a l argeextent . s imilar to that of an auditor. In this contex t , P arl iament1 Legislatures may beregarded i s the shareholders of the Government concern and the ExecutiveGovernment as i ts directors . Th e object of this concern is. however. not profit-making .Audit is one of the fo ur pi l lars of democra cy viz.. ( i ) Pa rl iament (i i ) Judiciary(i ii ) Press and (iv)'Audit. Firs t ly, Parl iam ent is the most impo rtant organ of democracy .It is composed of people's representatives, elected on the basis of adult franchise.Th e members belonging to the major i ty par ty in P ar l i ament form the Government .All laws necessary for the running of the Government have to be passed by the !~ a r ~ ~ d m e n t .gain, i t votes taxes which provide go vernm ent the resources, necessaryfor running the administrat ive machinery and also votes funds for meet ing theexpenses. Second ly, judiciary and the press ar e the othe r two pi l lars which arenecessary for administrat ion of just ice and funct ioning of a heal thy democracy.Last ly, a F i t is a vi tal instrument of ensuring effect ive supremacy of Pa rl iament ove rthe executive. Parl iam entary con trol consists not only in vot ing suppliers andapproving the imposi t ion of taxes but also in ensuring that actual ly the funds havebeen appl ied to the purpose for which these werc voted.Audit is a v aluable aid t o administrat ion. 1nBH countries , audi t is not just toleratedas a necessary evil but is looked upo n a s a valued al ly, which brings to not iceprocedural and technical i rregulari t ies and lapses on the part of individuals , whetherthey may be error s of judgme nt , negl igence or acts and intents of dishonesty. Th e -1complementary ro les of audi t a nd adminis t ra tion are now accepted a s a fac t , beingessent ial for toning up th e machinery of govern me nt-In the ul t imate ana!ysis , audi t ' a..-A ..A-:-:-.-...:..- --- .L.-.-------.s &I.- ....L:-L. ,F ~,..,+..-~..t' ~t := ALii;:


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223 EVOLUTION OF AUDITING IN INDIA

I The evolution of auditing in India, as well as in other countries, has been a gradualprocess. It has been closely related to the activities undertaken by the government,1 the internal control and management systems available in government departments.i; In the pre-war era, the main functions of government were collection of revenue,maintenance of law and order, defence and execution of public works of certain

kinds. Few governments undertook commercial activities. In such a situation, thefunctioh of audit was largely one of regularity and compliance audit. The principalcomponents of audit in the re-war era were (a) audit against budget provisions(b) audit against sanctions (c) audit of accounts and appropriations (d) expenditureaud'it and (e) propriety audit. Audit against budget provisions and against sanctions

I constituted what was known as complhnce.or regularity audit [See Section 22.5 (i)].The highest form of audit within the traditional framework. was considered to bepropriety audit. A transaction. which was otherwise in order and in conformity withrules and regulations, could still be objected to on the ground that it breached broad\

I concepts of financial ethics.In the post-war era, the welfare state had to undertake several socioeconomic,commercial and industrial programmes to speed up development and improve thequality of life of the people. Correspondingly. audit had to shift its emphasis so thatit was io a position to report to Parliament. whether or not theseprogrammesiactivities had achieved their objectives. New areas of audit had to becovered and new techniques had to be developed. With increasing activity.government departments and agencies had to build up their own systems of internalcontrol.The transition from the traditional type of audit to the audit of economy, efficiencyand effectiveness of activities (the three E's audit) was achieled. through anintermediate stage of value for money audit. which covered the economy andefficiency aspects. Broadly. it can be said that economy audit is aimed at ensuringthat the activities are undertaken and completed at the lowest possible cost.Efficiency audit is concerned with ascertaining that an activity is completedaccording to a pre-determined output to input ratio and according to a pre-determined time table. In the audit of effectiveness of programmes, it is necessary todetermine whether the objectives for which the-programmes were undertaken, havebeen achieved and whether the programmes had the intended effect on the social andeconomic life of the people. Thus, broadly, it can be stated, that in the earlier stage.

. traditional audit was concerned with economy. at the intermediate stage. it Wasconcesned with economy and efficiency and that today it is concerned with economy,efficiency and effectiveness.As already mentioned. the evolution of government auditing in India has been agradual process. coinciding with the changes in the functions of government. Until1950. government audit was mairJy expenditure oriented. Appropriarion audit;regularity audit , sanction audit, propriety audit etc. were conducted by the IndianAudit and Accounts Department, in so far as they related to individual transactionsof government. The techniques and procedures prescribed for conducting audit, byand large. fulfilled the task of transaction audit of government expenditure.The concept and practice of audit of expenditure has undergone radical changes inthe post-independent era (after 1950). Following the development of parliamentarydemocracy and introduction of successive Five Year Plans for nationaldevelopment-social, economic and industrial-massive investments have been madeby the government at the centre and in the states. .When the pattern of government

( ex&dituredimension underwent a radical and rapid transformation in the wake ofsuccessive national plans, it was felt that the scrutiny of individual transactions was.inadequate, as it tended to mistake the tree for the woods. It became. therefore,essential for audit to ascertain whether the various developmeilt programmes andwelfare activities were being properly executed and their operations conductedeconomically, whether they were producing the results expected of them. Hence sheconcept of efficiency audit was introduced to meet the changing requirements in the- - r - - - - -P r A ..--


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Accounts iunl Audit Introduction of performance budgeting and functional classification in governmentaccounting gave a new dimension to efficiency-cum-performance audit. Since 1962,when the technique of efficiency-cum-performance audit was develcped, it has beenapplied to the transactions connected with the development programmes. Theintroduction of comprehensive appraisal of the public sector undertakings andevolution of the mechanism of Audit Boards with built-in external expertise, saw yetanother extension of the technique of eff iciency-~um~performanceudit. In addition,audit also covered new areas i.e. audit of tax receipts, audit of scientific departmentsetc.With the shift in approaches in audit, changes have been introduced in the contentand presentation of audit reports. Thus, the evolution of auditing in India has been agradual process, matching with the changes in the functions of government.

22.4 STATUTORY AND INTERNAL AUDITStatutory AuditStatutory audit refers to the audit conducted by the Comptroller and AuditorGeneral, through the agency of the Indian Audit'and Accounts Department. As perthe Constitution as well as by the CAG CDPC) Act, 1971, it is the function of theComptroller and Auditor General to (i) audit all expenditure from the ConsolidatedFund of India of the Union, of each State and of each Union Territory, having aLegislative Assembly and to ascertain whether the money shown in the accounts ashaving been disbursed were legally available and applicable to the service or purposeto which they have been applied of charged and whether the expenditure conformsto the authority who governs it and (ii) to audit all transactions of the Union and ofthe states relating to the contingency functs and public accounts. The Comptrollerand Auditor General has been given, under the Constitution, access to the accountsof expenditure incurred against appropriations granted by Parliament. The CAG isempowered to inspect any office connected with the tr ansac t iv to which his/ herauthority extends.Statutory audit has a three-fold purpose. First, it is an accountancy audit to checkthe accuracy of arithmetical calculations and to see that all payments are sttpportedby receipted vouchers. In its essence, it is no different from the limited audit ofprivate auditors. Its objects are ( i ) detection of fraud (ii) the detection of technicalerrors and (iii) the detection of errors of principles. It is usually a continuous audit.but of a small percentage of transactions.Secondly, it is an appropriation audit to check the classification of expenditure, inorder to make sure that the items have been charged to the proper heads of accountsand further that the apprcpriation for these heads have not been exceeded.Thirdly it is an administrative audU or audit of sanctions to check that expenditurehas been incurred according to the rules and regulations or where not so covered, ithas been sanctioned by the competent authority.Statutory audit, can assure the Parliament, that appropriations have been utilised inaccordance with the rules and regulations and within limits specified. I t can vouchfor the accuracy of ac,tounts and detect misapplication of funds, frauds, anddefalcations. IInternal Auditlnternaiaudit, on the other hand, is internal to the organisation. Internal audit isconducted by an agency or departmeyt created by the management of theorganisation. It is an integral part of the organisation and functions directly underthe Chief Executive. It is in the nature of an internal service to the Executive forsmooth and efficient functioning and for reviewing and improving its performance.The common objectives of an internal audit. inter-alia are to ( i ) check the adequacy,soundness and applicability of the systems of internal controls (Accounting, financialand other operating controls); ( i i ) prevent and detect frauds (iii) check on the- 2 --..--.. - - A ..-1:-L:I:... . .L.. .---..- .:-..-A --- .-... ..m+-..-..l . I : . \ .A


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performance-cum-efficiency audi t of an operation1 programme1 activity of a n entity as AudltIIIg SW&I III na whole, or its parts designed to different levels for any of the objective, set by themanagement.Internal audit, in any organisation, does not possess the same kind of independenceas is available to the external audit, conducted by the Indian Audit and AccountsDepartment. There is, however, no conflict between internal and external orstatutory audit. Where internal audit is adequate, the extent of statutory audit islimited to test checking of internal audit work.Check Your Progress 1Note: i) Use the space given below for your answers.

ii) Check your answers with those given at the end of the unit.1) Explain the meaning and importance of audit in a democracy.

2) Explain the difference between Statutory audit and Internal audit.................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

22.5 TYPES OF AUDITThe broad aim of audit is to safeguard the financial interests of the tax payer and toassist the Parliament1 Statel Union territory legislatures in exercising financial controlI over the executive. It is the function of the Comptroller and Auditor General toensure that the various authorities set up by or under the Constitution, act in regardto all financial matters, in accordance with the Constitution and the laws ofParliament and appropriate legislatures and rules and orders issued thereunder. Inorder to discharge the auditorial duties entrusted by the Constitution to him/ her, theComptroller and Auditor General (CAG) conducts various types of audit viz.,Financial audit, Regularity audit, Receipts audit, Commercial audit, Audit of storesand stock, Petformance audit etc. In the performance of this stupenqous task, theCAG is assisted by the accounting authorities in various ministries and by thePrincipal Accounts Officers functioning in various states. Some of the features ofFinancial audit, Regularity audit, Receipts aadi t, Performance audit are explained ini the following paragrahps.Financial AuditFinancial audit is the audit conducted by the Indian Audit and AccountsDepartment to see whether the administrative action of the executive is not only inconformity with prescribed law, financial rules and procedures, but it is also properand does not result in any extravagance. Finaircia1 audit does not concern itself withthe audit of administrative organisations and procedures and is different fromadministrative audit. It is the duty or the function of the executive government toframe rules. regulations and orders. which are to be observed bv its subordinate


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Accounts and Audit in waste. extravagance o r !mproper expenditure. i t is certainly the dut y o l audi t tocal l specif ic at tent ion to m at ters of that k ind and to bring the lacts to the not ice ofParl iament . For ins tance, in a canal project construct ion. audi t would not concerni tsel f wi th the adminis t rat ive set -up for the actual construct ion of the canal andwhether i t should pass through a part icular part of the country or not . These aremat ters of adminis t rat ion and no scrut iny of these processes wi l l be done by theaudi t . But if i t is found that the al ignmen ts had been dr aw n up on insufficient data.necess i tat ing a subsequent change involving addi t ional expendi ture or that thefinan cial results were less tha n what had been an ticipat ed, then it is the du ty of aud itto ex amin e the ci rcumstances which resul ted in the wron g al ignments resul t ing inloss o r avo idab le expend i tu re to the tax payer. Audi t in terferes only whenadminis t rat ive act ion has serious f inancial impl icat ions and is not in comformity wi thprescribed law, f inancial rules and procedures . Financial au di t also includes audi tagainst propriety o r broad principles of orth od ox f inance. Thu s, financial aud i tsafeguards the in teres ts of tax-payer by bringing to the not ice of Parl iament , wastagein government exp end i tu re .Regularity AuditRegulari ty audi t consis ts mainly In checking that the payments have been dulyauthorised and are supported by proper vouchers in the prescribed form. I ts mainpurpose has been to ensure conformity wi th the relevant adminis t rat ive, f inancialbudgetary and account ing rules and regulat ions provided for in the Const i tu t ion orthe laws made by Parl iament .The object ives of a u d ~ t gains t regulari ty as specif ied in the A udi t code , in ter-al ia ,a r e t o e n s u r e :

I *\i) that there is provis ion of funds for the expendi ture, duiy authorised bycompeten t au thor i ty ;i i ) that the expendi ture is in accordance wi th a sanct ion properly accorded and isincurred by an officer competent to incur i t ; , Iiii) that the claims are made in accorda nce wi th the rules and in proper form ;iv ) that al l prescribed prel iminaries to expendi ture are observed, such as proper

es timateq f ramed and approved by competen t au thor i ty fo r worksex pe nd i t he , a heal th cert i f icate obtain ed, where necessary, beforeS t' .edisbursement of pay to a government servant ;

V ) that the ex pend i ture sanct ioned fo r a l imi ted period is not admit te d in audi tbeyond that period without further sanct ion;vi ) that the rules regulat ing the method of payment have been duly observed bythe disburs ing officer;vii) that paymen t h as been made to the person and. that i t has been acknow ledgeda n d r e c or d e d 50 t s econd c l a im aga ins t government o n the same acco un t ,

is not possible; anviii) that the payments have been correct ly brought in to account in the original

d o c u m e n t s .Audi t agains t provis ion of funds , aim s at determining that the expendi ture incurredhas been on the purpose fo r wh ich the g ran t and appropr i a t ion had been p rov ided 'an d tha t t he am oun t o f such expend i tu re does no t exceed the appropr i a t ion made .Audi t , in relat ion to aud i t 'of expe ndi ture, i s to ensure that each i tem of expend i tureis covered by a sanct ion of the competent authori ty . Audi t agains t rules and orders isa n impo r tan t aspec t o f regu lar i ty aud i t . I t ensu res tha t t he expend i tu re confo rms tothe relevant provis ions of the Const i tu t ion and of the laws and rules madethereunder. Audi t of e xpen di ture against regularity is a quasi - judicial type of w ork,performe d by the audi t authori t ies . I t involves in terpr etat ion of the Const i tu t ion, ,ru les an d o rders .Receipts AuditReceip t s aud i t i nvo lves the aud i t o f income- tax a nd cus tom a nd exc ise rece ip t s a tA - 1 1. . . ' . . . A . a . A > . A . . . - & I ~ A ~


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level. From the late fifties, receipts audit has been conducted by the Indian Audit Auditing System in I?dinand Accounts Department,In receipts audit, the function of audit department is to ensdre that adequateregulations and procedures have been framed and are being observed by the revenuedepartm ent, to secure an effective check on assessment, collection and prope rallocation of revenue. Since the assessments in a revenue departm ent are of a quasi-judicial nature, au dit shou ld ensure that the discretion used has been exercised in ajudicious manner.Performance AuditFinancial aud it an d Regularity audit generally involve scrutiny of individualtransactions. They do not focus on the evaluation of a scheme or a programme towhich these transactions relate. Therefo re, both types of audits have been foun dinadequ ate for an evaluation of the performance of an organisation in terms of itsgoals or objectives.Ever since the Gov ernme nt launched Five-Year Plans, investment on a large scalehas been made on developmental activities for acceleration of socio-economicdevelopment of the coun try. In many cases, the investments did n ot give theexpected returns. Therefore, public has a right to know whether the results achievedhad been commensurate with the resources invested. The public concern has foundexpression in the introduction of performance budgeting in government.Th e change in the thinking of government, In recent tunes, abou t the need to relateexpenditure to corresponding physical accomplishments made i t also t o think a bou tthe functions of audit. It has been accepted that Regularity audit/Propriety audit isessential for parliamentary control of expenditure. However, in view of theincreasing developmental expen diture, under th e successive Five Year Plans, a%ditshould ex amine the achievements of specific programmes, activities and projects interms of their goals or objectives. It has been felt tha t audit sho uld bring o ut thosecases where utilisation of resources has been sub-optimal. This has resulted in aserious thought being given to the need for performance audit which is also calledefficiency u nit.Perform ance aud it seeks to find o ut whether the resources have been utilisedefficiently by deploying them in an optimu m m anner. It highlights the extent towhich resources are put t o p roductive uses. It also highlights a s to what e xtentquantified benefits could be expected f rom such deployment of resources.Although the technique of performance audit is sound and useful, there are manyproblems in conducting such an audit. Firstly, performance evaluation of an activitycan be made only in the light of the objectives, which is expected to achieve.Objectives spell ou t the results desired fro m an activity. W hereas inpu ts are easy tomeasure for an activity, tremendous effort is required to quantify and measure theresulting output, particularly when this output has a social context.Secondly, according to the concept of Net Welfare, the utilisation of resourceshas to be optimised not only at the point where they are deployed but also at otherpoints, where the effects of such investments ar e carried. In other w ords, investment .decisions need to be justified by the application of the technique of social cost- .*benefit analysis.Thirdly, the objectives of investment are often a com bination of financial an d n on-financial factors. There may be situations, when these objectives of public investmentwhich are otherwise considered socially desirable, are foun d incom patible with.immediate financial objectives. Fo r instance, a pub lic undertaking engaged in theho du ct io n of fertilisers, may have to sell its ou tpu t at a low price fixed by thegovernment to suppo rt agricultural programmes. If the u ndertaking does not getadequ ate sub sidy from governm ent, its financial results may present a discouragingpicture. The undertaking may have served a long-range national objective ofachieving self-sufficiency in food production. But in the process, its profits getreduced con siderably or it may incur losses. In situations, where the objectives actagainst financial performance of a public undertaking, it would not be proper to


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Fourthly, performance audit presupposes a good information system. A goodinformation system is necessary, to furnish information about what has been actuallyachieved and at what cost, as against what was planned to be accomplished at aparticular cost.Lastly, effectiveness of p erforma nce audit w ould depen d o nt ho w best the yardsticksof performance have been evolved. The technique of performance audit can beapplied successfully in cases, where norm slstan dard s are available for application. I tis easier to apply in manufacturing organisations, than in the case of governmentalorganisat ons.In India, the concept of performance audit is of recent origin. Its scope is unlimited.T o conduct perform ance audit of public undertakings, Au dit Boards have been setup. These Boards have been functioning, under the Comptroller and AuditorGeneral, since April, 1969.The utility of Performance audit can hardly be over-emphasised. It, however,requires exp ertise in identifying quantifiable objectives in g overnment. It alsonecessitates framing of precise yardsticks against which the use of resources can beevaluated. In view of these problems, the scope of performance audit in government,appears to be at present limited.

22.6 INDEPENDENCE OF AUDITIn India, independence of the audit has been ensured by the Constitution in manyways. Firstly, the Constitution had made audit of the accounts of the Union and ofthe States a Un ion subject, by virtue of En try 76 in the Union List under Article 246of the Constitution. There is, thus, a common auditor of both the UnionGovernment as well as the States and this is a unique feature of the IndianConstitution.Secondly, the Cons titution provides that the Parliamen t shall have exclusive power tomake laws on the subject of audit of the accounts of the Union an d of the States. Atthe same time, the Constitution has not made the Comptroller and Auditor Generalof India a n officer of Parliament or of the Ho use of the People. In practice also, theStates d o not regard him as an officer of the Union but a functionary created by theConstitution for purposes of both the States and the Union Government.Thus, the Comptroller and Auditor General of India occupies a unique place. Hecertifies the sh are of the States of the taxes collected by the U nion a nd theam ou lts so certi fied a re accepted by the State Governments without demur. Hecertifies the expenditure incurred by the States on public expenditure programmesinitiated and financed by the Union and the Union Government accepts the figureswithout question. The Comptroller and Auditor General of India, thus plays afiduciary role in the sensitive Union-State relations.Thirdly, the Constitution guarantees the independence of the Comptroller andAuditor General of India by prescribing that he shall be appointed by the Presidentof India by warrant, under his hand and seal, and cannot be removed from officeexcept on the ground of proved misbehaviour or incapacity.Fourthly, while Parliament will be competent to make laws to determine his salaryand other conditions of service, they cannot be varied to his disadvantage, after hisappointment.Fifthly, on retirement, resignation or removal, the Comptroller and Auditor Generalis prohibited from holding any further office either under the Government of Indiaor under the Government of any State. %Sixthly, the salary and allowances of the Comptroller and Auditor General, thepension etc., payable to retired Auditors General and the administrative expenses ofCom ptroller an d A udito r General 's personal office, shall be charged on theConsolidated Fund of India. That is, they will not be subjected to the vote of- ..


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Lastly, the Co nstitution furtliir p rovides that thd cond itions of service of personsserving in the Indian-Audit and Accounts General shall be determined by thePresident after consultation with him. The Constitution, thus, provides adequatesafeguards to the Comptrol ler an d A uditor G eneral to enable him/ her performhis'/ her constitutional functions, without any fear fro m the Executive. (These issuesare dealj-with in d etail in assessing the role of Comp troller and A uditor General inUnit 23.)An independent judiciary and an independent audit are two of the more importantelements of democracy. On them, devolves in varying degrees, the responsibility ofprotecting democracy from authoritarian trends and executive excesses. OurConstitution has taken, therefore, reasonable care to safeguard their independence.

22.7 RESULTS OF AUDI T-AUDI T REPORTS A N DTHEIR FOLLOW U P WITH A DMINISTRATIONAudit conducted by the Indian Audit and Accounts Department is in the nature ofex-post facto exam ination. In some cases, certain classes of paym ents are made afterthe claims have been aud ited an d passed by audit. B ut these paym ents comprise anegligible percentage of the to tal exp enditure of government. Since audit isconducted after the events have occurred, it cannot prevent an overpayment or non-observance of the financial rules an d regulations. Also, it cannot stop the executiveauthorities from the commission of any irregularity or impropriety during the courseof t 'ransactions. But the effectiveness of aud it depend s upo n its right to report theresults of audit to the proper authorities, which may be a departmental authority, theGovernment itself, or Parliament through the Public AccoOnts Committee. Thesebodies can then take appropriate action to rectify the irregularity or impropriety.The results of audit are required to be reported by the Audit Officer to theadministrative authorities concerned at the earliest opportunity. These authoritiesthen become responsible for th e settlement of objections raised by au dit authorities.It is also the responsibility of the administrative autho rities to effect recovery of an yam ou nt disbursed w rongly. Th e Audit officers keep pursuing the objections raised bythem till these are settled to their satisfaction by the adm inistration. Finally, aftercomp letion of a year's acco unts, the results of audit are reported to the concernedGovernment and their legislatures through the instrument of Audit Reports.Thou gh A udit Rep orts appear post mo rtem, they serve many purposes:

They are a n a id to administration/management to ensure that irregularities arenot repeated in future.They help the planning process in not conceiving faulty schemes.They give the right signals for mid-course corrections in on-going schemes.They also serve the basis for taking ap pro priate disciplinary action by theadministrative authorities concerned against the persons w ho have caused loss to

, the exchequer by their acts of omission and commission to act as a deterrent.Audit Reports should, however, be largely current and should be able to bring outthe failures, drawb acks o r the deficiencies as quickly as possible, so tha t pr om pt. remedial measures can be taken by the administration.The Constitution has prescribed the procedure to be followed by the Comptroller

I and Auditor General for presentation pf the audit reports. The reports of the CAGin regard to the Union Gov ernme nt accounts shall be submitted to the president an dthe State Government accounts, shall be submitted to Governor of the State. Atpresent, the Comptroller and Auditor General submits three reports viz., i) AuditReport on the Ap propriat ion Accounts, ii) Audit Report o n the Finance Accountsand iii) Audit Report on the commercial and public sector enterprises and revenuereceipts on Union and state governments.

Auditing System inJndin

The responsibility of the Comptroller and Auditor General ceases with thesubmission of the audit reports to the President/Governor who causes them t o belaid before the P arliam entlS tate legislatures respectively. In actual practice, the aud itrenorts of various novernments are received hv the Ministrv nf Finance on hehalf of


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- - - -the President. The Finance Minister lays them on the table of each House ofParliament. Regarding Audit Reports of states, similar procedure is followedgenerally.The authority of Parliament and state legislature to grant supplies to be effective,will require that Parliament and legislature should assure itself thdt the money isspent by the executive on purposes for which it was granted. And that theexpenditure incurred does not exceed the amount sanctioned by them.The details of these are contained in the accounts and audit reports presented by theComptroller and Auditor General for both Union and State governments. It isimpossible for parliament and legislatures to examine in detail. the accounts andaudit reports thereon which are technical and voluminous documents. The Housesare unable to spare the time that a proper examination requires. Parliament (LokSabha) and state legislatures have, therefore, set up a Committee known as theCommittee on Public Accounts and have entrusted t~ it the detailed examination ofaccounts (appropriation and Finance) and audit reports thereon.An important function of the Public Accounts Committee is to ascertain that themoney granted by Parliament has been spent by the government within the scope ofthe demand. This implies that the money recorded as spent against the grant, mustnot be more than the amount granted and the grant should be spent on purposes,which are set out in detailed demand. The functions of the committee extend,however, beyond the formality of expenditure to its wisdom , faithfulness andeconomy. When any case of proven negligence, resulting in loss or extravagance, isbrought to the notice of the committee, it calls upon the Ministry/Departmentconcerned to explain what action, it has taken to prevent a recurrence. In such cases,it might record its opinion in the form of disapproval or pass strictures against theextravagance or lack of proper control by the Ministry/ Department concerned. TheCommittee is, however, not concerned with questions of policy in the broad sense.The efficient functioning of the Public Accounts Committtee depends largely on theassistance given to it by the Comptroller and Auditor General and other officers.Apart from providing the basic material, audit assists the Committee in many ways.It provides notes to the members of the Committee which explain the significance ofan irregularity or impropriety commented upon in the Audit report. Also, theauditors brief the members orally so that they can seek clarification and additionalinformation in the course of oral examination of departmental witnesses. They alsoassist the committees in drafting reports, after considering the oral and documentaryevidence. They also help the Committee in keeping a watch over implementation ofthose recommendations, which have been accepted by Government.The Public Accounts Committee of ParliamentIState submits its report embodyingthe findings on the audit reports of the Comptroller and Auditor General toMinistry/Department for implementation. The ministries are required to inform theCommittee of the action taken by them on these recommendations within a period ofsix months from the date of the presentation of the Report. The Committee'srecommendations are generally accepted by the Government. In cases, where therecommendations of the Committee are not acceptable to the Government, thereasons for Government's disagreement are placed before the Committee.check Your Progress 2Note : i) Use the space given below for your answers.ii) Check your answers with those given at the end of.the unit.1) Distinguish between Regularity Audit and Receipts Audit.


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Auditing System ~ Indla

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2) Explain the meaning and scope of Performance Audit in India.............................................................................................................................................................................................................................................................

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3) Discuss the importance of Audit Reports and their utility to administration........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... ('..............................................................................................................................

Audit is an examination of accounting records, undertaken with a view toestablishing whether they correctly and completely reflect the transactions to whichthey purport to relate. Its purpose is to see that expenditure has been incurred withthe sanction of the comp etent autho rity, applied for the pu rpose for which it wassanctioned, and is duly supported by vouchers, as a safeguard against fraud andmisapp ropriation. A udit is one of the four pillars of democracy. It is a vitalinstrument of ensuring effective supremacy of Parliament over the Executive. It isalso a valuable ally to administration.Th e evolution of auditing in Ind ia has been a grad ual process, coinciding with thegrowth in the fun ctions of Governm ent. Initially, aud iting was primarily expend itureoriented. Gradually, audit of receipts was taken up. With the growth of publicenterprises, commercial audit cam e into being. Recently, audit has gone into theevaluation of the performance of organisations, activities, projects etc.The Comptroller and Auditor General of India is responsible for conducting audit ofthe accou nts of the Union, states and union territories with legislature. H e/ Shecondu cts regularity audit, receipts aud it, commercial audit, performance au dit etc.The Constitution has provided adequate safeguards to protect the independence ofthe Com ptroller and Aud itor General from the Executive. H e/ She will be appointedby the President but can be removed only by the Parliament. His/ Her tenure,cond itions of service can no t be varied to his/ her disadv antage, after h is/ herappoin tment. He/ Sh e canno t accept emp loyment after retirement o r dismissal, eitherunde r the Union G overnment or und er the state government. His/ Her salary,allowan ces and pension as well as his/ her establishmen t will be charged u po n theConsolidated Fund of India and not voted.Audit Report is the final destination of audit. The Comptroller and Auditor Generalsubmits three reports i.e. Audit report on appropriat ion accounts, au ditr epo rt o nfinance accounts, and audit report on the commercial and public sector enterprisesand revenue receipts on U nion and State Governments, to the President/Go vernor ofry with legisla\turs, who causes them to bee legislatures resp'ectively. The Audit reportsomm ittee. Besides providing the material, thes the committee, by preparing memos-on . /'ommittee to conduct oral e,xamination and alsoittee. In fact, the Comptroller and Auditor

d guide of the committee. The Public Accountsstry on the basis of the findings made in . .t h ~ ~nrnrnenA~t innrf thp r n r n r n i t t ~ ~


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- - - -Accounts and Au&

- - ---- --are accepted By the Government. In case some recommendations are not acceptableto Governm ent , the Com mittee examines the same and submits Adion -taken Repo rtto the Parliament.T o sum u p, audit is not a n inquisition an d its mission is not one of fault-finding. Itspurpose is to bring to the notice of the administration lacunae in the rules andregulations, irregularities and lapses and to suggest wherever possible, ways andmeans fo r the execution of plans and projects with greater expedition, efficiency andeconomy.

22.9 KEY W OR DSAudit Reports: Comments on the regularity and propriety of expenditure as deemednecessary and proper on the results of audit investigation.Corporation Audit: Audit of the accounts of corporation either by or under lawmade by Parliament.

22.10 REFERENCESChanda, Asok, 1958. Indian Administration. George Allen Unwin Ltd.: London.Chanda, Asok, 1960. Aspects of Audir Co ntrol, Asia Publishing House: om bay.Handa, K.L., 1979. Programme and Performance Budgeting, Uppal PublishingHouse: New Delhi.Krishan Y., 1990. Audit in India's Democracy, Clarion Books: New Delhi.Mookerjee Sameer C., 1989. Role of Com ptroller and Aud itor General in IndianDemocracy, Ashish Publishing House: New Delhi.Ramayyar M.S. , 1967. Indian Audir and Accounts Department, The Indian Inst i tuteof Public Administration: New Delhi.

22.11 AN SW ER S TO CHECK YOUR PRO GR ESSEXERCISESCheck Your Progress 11) Your answer shou ld include the following points

Audit is an examination of accounting records with a view to establishingwhether they correctly and completely reflect the transaction to which theypurpo rt to relate.Audit is an instrument of financial control.

.Audi t is an aid to administration.Audit is one of the fo ur pillars of democracy. It watches the interests of.tax -payer an d also helps Parliament to exercise contro l over the Executive.

2) Your answer should include the following points :I Statutory aud it is an au dit conducted by the C AG of the transaktions of

the Government of the Union and of each state and Union territory withlegislature.St;(tutdry aud it serves a three-fold purpose. It is an accountancy aud it,appropriation audit as well as admidistrative audit.Internal audit is conducted by an agency within the organisation and%integral to management .Intern al audit concerns itself with the ex amination of accounting , financialand other operations within the organisation.Th ere is no conflict between internal and ex ternal audit.


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-- --.. -Check Your Progress 21) Your answer should include the following points :

Regularity audit consists in checking that payments have been dulyauthorised and supported by proper vouchers. It ensures conformity with therelevant rules and regulations provided in the Constitution or the laws madeby Parliament.Receipts audit involves t'he audit of income-tax and customs receipts.P.urpose of receipts audit is to ensure that adequate regulations andprocedures have been framed and are being observed by the revenuedepartments to secure an effective check on assessment and collection ofrevenue.

2) Your answer should include the following points:Regularity audit involves the audit of individual transaction. It is not anevaluation of performance of an organisation, in terms of its goals orobjectives. .The change in thinking of Government to link expenditure toaccomplishments led audit also to examine the performance of anorganisation in terms of its goals or objectives. This is done by theperformance audit.There are difficulties in the application of Performance audit viz., difficultiesin determination of objectives at micro-level, difficulties in assessingperformance in the case of public undertakings, where there are financial aswell as non-financial objectives, difficulties in evolving norms/standards forGovernmental activities etc.

3 ) . Your answer should include the following points :Results of audit find expression in Audit Reports.Audit Reports are examined by the Public Accounts Committee and theCAG assists the Committee. The CAG is the friend, philosopher and guideof the Committee.The Public Accounts Committee forwards Report to Government forimplementation of its recommendations. Where there is disagreement withthe recommendations of the Committee, the Government should forward itsviews to the Committee within a period of six months which will, afterexamination, submit an Action-taken Reportto the House.

Auditing System in !ndia

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Audit Repot in India