Module V

GOVERNMENT AUDIT

- Government audit is undertaken for various government departments.

- It is mainly carried out to ensure that all the expenditures have been duly authorized,
before they are incurred.
- Under it, the auditor has to see that all the payments have been classified into capital
and revenue and have been made to the right persons.
- The government audit is not done by professional auditors but by junior and senior
auditors of the department. The duties and liabilities of such auditors are not defined
by statute. They are not public auditors and so cannot be appointed auditors for public
concerns. They are meant for Government departments.
Objectives
1. To see that whether there is a provision of fund for the expenditure.
2. To make sure that the expenditure is incurred out of the funds sanctioned by a competent
authority.
3. To see that the expenditure has been properly sanctioned according to the rules and
regulations
4. To see whether the expenditure is not more than the occasion demands.
5. To see that (the sanctioned expenditure has been incurred by a competent officer)
6. To see that the payments have been properly and correctly classified as capital and revenue,
7. To ensure that the payments have been made to the right person and they are duly entered
in the books of accounts.
8. To verify the existence and valuation of the stores and the stock.
9. To ensure that a proper system of stock-taking has been adopted.
10. To see that the amount of allowances like travelling allowance is permissible according to
the rules.
Classification of Government Audit
a) Audit of Government DepartmentsThe Government maintains a separate department in
the name of Accounts and Audit Department. This department is headed by the Comptroller
and Auditor General of India. It performs the audit of the different departments and offices of
the Government.
b) Audit of Statutory Corporations
For the audit of statutory corporations, in most of the cases, the Comptroller and Auditor
General is required to audit the books of accounts. But in some cases like Life Insurance
Corporation, State Bank of India, Industrial Finance Corporation, etc. the accounts are audited
by professional Chartered Accountants.
c) Audit of Government Companies
According to the Companies Act, 2013, the auditor of a Government company is to be
appointed by the Company Law Board on the advice of the Comptroller and Auditor General
of India. The auditor of a Government company shall submit a copy of his audit report to the
Comptroller and Auditor General of India (C & AG).

Procedure of Government Audit

1. Audit of Expenditure- This includes five items as given below:

 Audit against Rules and Orders: The C&AG shall examine whether the rules,
regulations and orders dealing with incurring, sanctioning and disbursement of
the expenditure have been followed.
 Audit of Sanctions: The financial powers of the sanctioning authority for
incurring the expenditure should be checked.
 Audit against provision of funds: This ensures that the expenditure incurred is
well within the amount provided for in this respect.
 Propriety audit: In propriety audit of expenditure, the auditor sees that the
expenditure is incurred economically and for the common good.
 Performance audit: The performance of projects, activities or operations are
critically examined in this auditing aspect.
2. Audit of Receipts; Audit of receipts is done for ensuring:
 Whether all revenues due to the Government are fairly assessed, collected and
(credited to relevant accounts.
 Whether adequate regulations and procedures have been framed to secure an
effective check on assessment, collection and proper allocation of receipts.
 Whether such regulations and procedures are actually being carried out.
 Whether there is a checking system to ensure the prompt detection and
investigation of irregularities, forged refunds etc. or other loss of revenue.
 Whether the system of internal procedures are adequate, secure and correct or
whether they require any improvement
3. Audit of Stores and Stocks
Audit of accounts of stores and stocks has been developed as a part of expenditure audit.
This is conducted to ascertain whether the regulations governing purchase, receipt and
issue, custody, sale and stock-taking of stores are well devised and properly carried out. It
intends to bring to the notice of the government any deficiencies in quantities of stores held
or any defects in the system of control.
 Difference between Government Audit and Financial Audit
Basis Government Audit Financial Audit
Nature It is an expenditure audit It is both income and expenditure
audit
Auditor Done by the staff of Accounts Done by the Professional Chartered
and Audit Department Accountant
Scope Done by Govt. Departments, Done by Commercial concerns
Govt. Companies and Public owned by private individuals
Corporations
Payment Treasury Officer is the paying The firm makes the payment
authority authority
Continuous It is conducted continuously It is conducted at the end of financial
audit throughout the year year
Internal It is like internal audit It is purely an external audit
Audit
Preparation The Accounts and Audit The Auditor is not responsible for
of Department is responsible for preparation of Account
Accounts preparation of accounts

Comptroller and Auditor General of India (C & AG)

- The Comptroller and Auditor General of India is an authority appointed under the
constitution of India.
- He shall be appointed by the President of India.
- He shall not be removed from office except on the ground of proven misbehavior or
incapacity.
- The approval of both the houses of Parliament signified by 2/3 majority of persons
present and voting is required to remove him.
- His salary, terms of service etc. are fixed by the Comptroller and Auditor General's
(Duties, Powers and Conditions of Service) Act, 1971.
Duties and Powers of Comptroller and Auditor General
- The Comptroller and Auditor General's (Duties, Powers and Conditions of Service)
Act, 1971 defines the duties and powers of the C & AG in detail. According to Article
149, the C & AG shall perform such duties and exercise such powers in relation to the
accounts of the Union and the States as may be prescribed by or under any law made
by the Parliament. Article 150 specifies that his report shall be submitted to the
President of India.The following are the main duties of C & AG.
1. Duty to compile compile accounts accounts of Union and States: The Comptroller and Auditor
General shall be responsible for compilation of accounts, of the Union and the States. He may
also provide such information as may be necessary to the Union or the States in the preparation
of the financial statements.
2. Duty to audit the expenditure from the consolidated fund of India: The C & AG shall be
responsible for making audit and submitting report on all expenditure from the Consolidated
Fund of India, Contingency Fund and Public Accounts.
3. Duty to audit the financial statements of Departmental Undertakings: The C & AG shall also be
responsible for auditing the trading, manufacturing, profit and loss account and balance sheet
of any department of the Union or State.
4. Duty to audit the accounts of body or authority substantially financed by Government: Where
any authority or body is substantially financed by grants or loans from the Consolidated Fund
of India or of any State, the C & AG, shall audit the receipts and expenditure of such body or
authority.
5. Duty to audit the Grants or Loans: Where any grants or loans are given from the Consolidated
Fund of India, the C & AG shall scrutinize the procedures subject to which such loans or grants
are given.
6. Duty to check Receipts into Consolidated Fund: The C & AG shall audit that the rules and
procedures are followed to secure an effective check on the assessment, collection and proper
allocation of revenue.
7. Duty to audit stores and stocks: The C & AG shall audit the accounts of stores and stocks kept
in any office or department of Union or State.
8. Duty to audit Government Companies and Corporations: The C & AG shall audit the accounts
of government companies and corporations in accordance with the provisions of the Companies
Act, 2013 or other relevant legislations.
9. Duty to audit the accounts of other bodies or authorities: The C & AG, shall audit the accounts
of certain other bodies or authorities at the request of the President/Governor/Administrator of
a Union territory having a legislative assembly.
10.Miscellaneous Audit procedure: Audit of Charitable Organizations- Institutions which are
established to perform social works or to help the disabled are known as charitable institutions
.Such institutions must make audit of books of accounts every year. An auditor should perform
following works;
A. Conducting the audit of charitable institutions:
 The auditor should examine the legal status of the organization and ascertain
whether it is a private charity or a public charity
 In case of a public charity/ he should study the relevant provisions) of any
legislation concerning accounts and audit.
 In case of a private charity, he should examine the trust deed and ascertain the
objects of the organization.
 The auditor should make sure that all expenses are in accordance with the rules
contained in the relevant document.
 He should see that the funds for specific purposes have been dealt with according
to the rules.)
 He should vouch the receipts of donations and subscriptions as shown in the cash
book with the counterfoils of the receipt book, register of subscribers and any
other documentary evidence available.
 He should vouch the income from investments from the Investments Register.
 He should make sure that any taxes paid on revenues exempted from taxes are
reimbursed.
 He should also vouch the receipt of rents from the properties of the charitable
organizations, with the rent roll, agreements with the tenants, etc.
  He should ascertain that the organization has strictly applied procedures for
receiving and acknowledging all gifts, donations, grants, etc.
 The auditor should ascertain whether all expenses have been incurred according
to the relevant rules.
 He should vouch all expenses in the usual manner.
 He should verify all fixed assets in the usual way and make sur that proper
provision has been made for depreciation.
 He should verify the cash in hand and balance with the bank/the usual way.
 He should inspect the relevant minute books in order to confirm all important
matters concerning the accounts.
 He should also ascertain whether the final accounts have been prepared in
accordance with the regulations.
 If any special Act has been passed by any State relating to the charitable
organizations, he should see that the form of accounts and the auditor report are
drawn up according to the special laws.
B. Conducting audit of Educational Institutions (Colleges)
Educational institutions include schools, colleges, training centers and universities.
The main activities of these types of institutions are more or less similar. As a result,
the types of problems the auditor usually faces in conducting audit of these types of
institutions are also the same. However, the audit procedure of colleges has been
discussed in detail here. On the basis of financial support and affiliation from the
government and the university, colleges can be divided into five types. They are:
1. Government colleges,
2. Government aided colleges,
3. Self-financing colleges,
4. Autonomous colleges, and
5. Private colleges.
The auditor should pay attention to the following points, while auditing the accounts of
colleges:
Following General Matters should be considered;
1. The auditor should examine the rules, statutes and regulations of the University
Grants Commission (UGC), the Government, and the University to which the
college is affiliated.
2. He should study the minute books of the executive body or the managing committee
of the college for sanctions and confirmations of transactions affecting the accounts
3. He should examine the internal check system and ensure how far it is satisfactory.
The auditor should examine the following points regarding Income
1. He should check the fees received with the register of students and carbon copies of the
receipt books.
2. He should see that fees received in advance and fees outstanding are accounted for and
adjusted.
 3. He should also verify that extra fees for laboratory, examination, sports, etc. are
properly accounted.
4. He should also see that irrecoverable fees fines and other charges are written off by the
person authorized by the Managing-Committee.
5. For free studentship and concessions, he should see, that they are duly authorized by a
responsible officer.
6. The admission fees should be checked with the register of new entrants.
7. He should verify the government's grants by examining Correspondence, etc.
8. Receipts on account of caution money or securities should be shown on the liability side
of the balance sheet.
9. Receipts from donations and subscriptions, etc should be verifie with the cash book and
counterfoils of receipt book.
The auditor should examine the following points regarding Payments
 The auditor should vouch the payment of salaries to the staff by reference to the salary
register, the cash book, and the pass book.
 Capital expenditure should be vouched as usual but see that the necessary sanction is
there.
 He should verify the efficiency of the internal check system regarding the purchase of
provisions, linen, etc. for the boarders.
 He should verify the stock of provisions, furniture, stationary, etc and see that it is
properly preserved.
 He should confirm that an adequate reserve is being maintained for contingencies
 Distinction should clearly be made between capital and revenue income and
expenditure.
 He should verify the cash in hand and the balance at bank as usual.
 He should see that the outstanding assets and liabilities are taken into account.
Hospitals- The auditor should pay attention to the following points, while auditing the
accounts of a hospital

- The auditor should see relevant documents to ascertain the legal status of the hospital
- He should examine the constitution of the management
- He should inspect the minutes of the meetings of Managing Committee
- He should examine the internal check system
- He should identify the activities of the hospital Income
- He should check the cash collections with the counterfoils and other evidences
- He should also check the bill registers of patients
- The auditor should vouch all the payments with relevant vouchers
- He should also vouch the payment of salaries to the staff and other expenses as usual
- He should see that the expenditure under different heads
- He should also see that proper distinction has been made in the accounts between
capital and revenue expenditure
- The auditor should see that all fixed assets have been acquired under proper authority
and that proper registers are maintained to record their particular
- He should verify the closing stock and stores like medicines, test tubes, cleaning
material, etc
- Finally, the auditor should examine the financial statements and see whether they give
a true and fair view of the financial position of the hospital
Clubs- The auditor should pay attention to the following points, while conducting audit of
accounts of a club
1. Examine the constitution and bye laws of the club in order to ascertain its legal status
and the power of the managing committee
2. Examine the minute books of the club.
3. Vouch the admission fees and annual subscriptions with the counterfoils in the receipt
books and the list of members.
4. Make sure that proper appropriation is made of life membership fees.
5. Vouch the income from sale of refreshments, wines, cigars, billiard and swimming, etc.
6. Vouch cash received from social functions, hire of the facilities of the club, etc and
make sure that there is proper control over such cash receipts.
7. Where some special donation is received, ensure that it is utilized for the specified
purpose
8. Ensure that all purchases of the club are duly sanctioned.

EDP environment
- EDP environment signifies computerization of the accounting system in an office
instead of manual accounting system
- . EDP environment can exist where a computer of any type or size is involved in the
processing of financial information
- Under EDP environment, there is virtual elimination of errors like calculation mistakes,
posting errors, totaling etc .The following are the basic features of EDP environment
1. EDP infrastructure- This includes hardware, operating systems and application
software. Hardware consists of central processing unit, monitor printer mouse and
 keyboard Operation systems include window, microsoft office, disc operating
system, etc Application software is a set of computer programmes such as Tally …
2. Lack of documents and transaction trail- In electronic data processing there are
often no transaction documents and no visible transaction trail
3. Concentration of processing of information in few hands-In EDP environment, only
a small number of persons process the entire information. So, they may use their
exclusive control over electronic data processing systems to commit fraud by
changing data
4. Reduced of errors- EDP environment reduces human errors

INVESTIGATION
Investigation means an enquiry into the accounts and records of a business concern for a
special purpose. In most cases, the purpose of such enquiry is to ascertain the true financial
position of the concern or its normal profit-earning capacity or the extent of fraud, if any.
Thus, it is a kind of special audit with a particular object in view. Investigation is neither
accountancy nor auditing.
Definition
Spicer and Pegler: "The term investigation implies an examination of accounts and
records for some special purpose."

INVESTIGATION V/S AUDITING

Basis Auditing Investigation

Nature of work It is an examination of accounts Investigation is not only an
examination of accounts but
also an inquiry into other
factors affecting the business
Conduct It is conducted on behalf of It is conducted on behalf of
shareholders outsiders
Compulsory It is legally compulsory It is not legally compulsory
Time It is generally conducted at the end It is generally conducted at any
of the financial year time of the financial year

Duration It is generally conducted at the end It covers a period of 3-7 yearsa

of the financial year

Accounts Audited accounts are not audited Audited accounts can

again investigate again
Profit treatment There is adjustment in the net It is a thorough examination of
profit for finding out the actual the books of accounts for a
earning capacity of the concern year or number of years

Report The report of the auditor is sent to The report of the investigator is
the Managing Director/Chairman sent to the party which
of the company appointed him
Qualification An auditor of a company must be An investigator invest is
a practicing Chartered Accountant not necessarily be a
Chartered Accountant