Unit 3
Special Audit
A special audit is a tightly-defined audit that only looks at a specific area of an organization’s activities. This type of audit may be initiated by a government agency, but could be authorized by any entity, or even internally. Examples of special audits are:
Compensation audits Compliance audits Controls audits
Cost audits Fraud audits Royalty audits
Audit of Banking Companies, Insurance companies.
Banks are the cornerstone of our economy. They handle huge amounts of public deposits and savings, so they have to be closely monitored and reviewed. A bank audit is one important process of this monitoring.
An auditor carrying out this bank audit have to verify the financial statements of such a banking institution. They have to ensure that the final accounts truly represent the financial position and condition of the bank.
Other than this, there are other special transactions that a bank audit must cover. These include the provisions for NPA’s (non-performing assets), maintaining credit ratios, fulfilling RBI’s statutory requirements etc.
Insurance Audit
Just like a bank audit, an insurance audit is also important since insurance companies are providing a public service. Again the auditor will check for financial accuracy of their accounting records.
They will also ensure that customers have paid an appropriate premium for their insurance coverage. He will ensure the company follows all rules laid out in the Insurance Regulatory and Development Act of 1999.
Audits of Educational Institutions
A large number of educational institutions are registered under the India Society Registration Act, 1860. The purpose behind the formation of educational institutions is to spread education and not just earn profits. The following table lists out the sources for collection of amount and also the different types of expenses incurred by the educational institutions:
Main Source of Collection
Admission fees, tuition fees, examination fees, fines, etc. Securities from students.
Donations from public
Grants from Government for building, prizes, maintenance, etc. Types of Expenses / Payments
Salary, allowances and provident fund contribution for teaching and non-teaching staff. Examination expenses
Stationery & printing expenses Distribution of scholarships and stipends Purchase and repair of furniture & fixture
Prizes
Expenses on sports and games Festival and function expenses Library books
Newspaper and magazines Medical expenses
Audit fees and audit expenses Electricity expenses Telephone expenses
Laboratory running & maintenance Laboratory equipment
Building Repair & maintenance
Preliminary Audit of Educational Institutions
Following points need to be considered by an Auditor while conducting audit of educational institutions:
It is to be confirmed whether the letter of his appointment (the Auditor’s) is in order.
The Auditor should obtain a list of books, documents, register and other records as maintained by the educational institutions.
He should examine the audit report of last year and should note down the observation and qualification, if any.
He should note down the important provisions regarding to accounts and audit from the Trust Deed, Charter of Regulations.
He should examine the Minutes of Meetings of the Board of Trustee or the Governing Body for important decisions regarding the sale or purchase of fixed assets, investments or delegation of finance power.
In case of colleges and university, the Grants Commission provides Grants to them subject to
certain conditions. The Auditor should study all the conditions concerning grants. The Auditor should examine the Code of State regarding grant-in-aid.
He should be aware of all the provisions and rules of related laws concerning books of account and audit.
Internal Control System
The Auditor should independently check the internal control system regarding authorization procedures, record maintenance, safeguarding of assets, rotation and division of staff duty, etc. Following are some of the important aspects that need to be considered by an Auditor to keep a check on the internal control system:
Whether internal control and internal check system is working, if yes, how effectively.
Is there is any system to physically verify the fixed assets, stores and consumables at regular interval.
An Auditor should verify the control system concerning proper authorization, obtaining quotations, proper maintenance of accounts and record regarding purchase of fixed assets, purchase of material, investment, etc.
Whether bank reconciliation statement is prepared at regular intervals and what kind of action is taken for uncleared cheque which were pending since long.
Whether waiver of fees is properly sanctioned by appropriate authorities.
The person who is collecting fees and the cashier should not be the same person. Class wise fees receivable and the actual fees received reconcile or not.
Whether collected fees is deposited in bank on a daily basis. Fees collection register should be maintained on a daily basis.
Whether approved list of supplier of sports material, stationery, lab items are readily available. Whether control system for payment is adequate or not.
The system of letting out conference hall and class rooms, etc. for seminars and conventions. Whether fees structure is properly authorized along with change in fee structure if any.
Audit of Assets and Liabilities
The following points need to be considered while conducting an audit of Assets and Liabilities:
Verification of Assets register should be done considering grants on purchase of assets, if any received from State Government/ University Grant Commission (UGC).
Verification of depreciation is very important; it should be according to useful life of assets or as per the Companies Act, whichever is applicable.
If educational institution is running under Indian Public Trust Act, it is must for an Auditor to check, where investments have been made, because as per the Indian Public Trust Act, investment can be made in specific securities only.
If donation is received in the form of investment, an Auditor has to check all related correspondence with the donor.
All the applicable requirements of law should be fulfilled for the purchase of investments and fixed assets.
An Auditor should read and note down the state code and provisions relating to the conditions and procedures of Grants. He should also verify the requirements of State/UGC which are to be fulfilled by educational institutions for receiving Grants and also for continuations of Grants.
Audit of Income of Educational Institutions
The following points need to be considered by an Auditor while conducting audit of the Income of Educational Institutions:
Fees and charges received on account of admission fees, tuition fees, sports fees, examination fees etc. should be verified based on the approved fees structure.
Verification of counterfoil copies of fees receipt with fees received register should be done.
Prescribed conditions by the State Government and the University Grants Commission should be verified whether fulfilled or not.
Cash book should be verified with counterfoil of receipt book and fees register. Fees receivable and actual fees received should be reconciled.
Charges and fees received and receivable should be examined on account of hostel
accommodation, mess, housekeeping and clothing, etc.
Cash book should be verified with the donation received register.
Donation received should be accounted for according to the nature of donation means careful distinction should be there for revenue nature donation and capital nature donations; the same procedure is to be followed for Grants received.
The purpose and utilization of grant should be same.
Investment register and cash book should be verified for income received on account of interest on investment and dividends, etc.
Audit of Expenses of Educational Institutions
The following points need to be considered by an Auditor while conducting audit of Expenses of Educational Institutions:
Electricity expenses, telephone expenses, water charges, stationery and printing, purchase of sports items should be properly verified with quotation, purchase bills, inward register and Bills received from service providers, etc. All purchases should be authorized by appropriate person.
In case where hostels purchase food items, provisions, clothing, etc. should be properly verified.
Verification of Tax Deducted at Source, Employee State Insurance and Provident Fund should be checked. It is also very important that all deducted amount should be deposited in appropriate Government accounts well within time without any default. These can be verified from relevant bank challans.
Payment made on account of salary should be verified from terms of appointment and increment policy. Auditor should verify the computation of salary and check whether all required deductions are made out of it or not like advance salary, loan installment, absence from duty, ESI (Employee State Insurance), PF (Provident Fund), etc. The Net Salary Payable amount will be verified from cash book and bank pass book for salary paid.
Terms and conditions, cash book, voucher and receipts should be the basis for the verification of scholarship paid.
Appropriate provision should be made on account of outstanding payments
Audit of Cooperative Societies
Any ten persons who are competent to enter into contract may make an application to the Registrar of Co-operative Societies as per section 6 of the Co-operative Societies Act, 1912. By- laws may be framed by each society and should be registered with Co-operative Societies.
Effectiveness of change in by-laws of societies is applicable only when changes are approved by Registrar of Societies. There are two types of society’s, limited liabilities and un-limited liabilities societies. Any member is not liable to pay more than the nominal value of share held by them and no member can own more than 20% of shares of societies.
Government is encouraging co-operative societies to help society. Co-operative societies are operative in various sections like consumer, industrial, service, marketing, etc.
Under accounting system of Co-operative societies, the terms receipt and payment are used for two-fold aspect of double entry system.
Members are elected at the annual general meeting of the society. Day-to-day work of cooperative society is managed by the managing committee.
Audit of Co-operative Society
Let us now discuss the provisions for Audit as Per Section 17 of the Co-operative Society Act, 1912:
The Registrar shall audit or cause to be audited by some person authorized by him by general or special order in writing on his behalf, the accounts of every registered society once at least every year.
The Audit under sub-section (1) shall include an examination of overdue debts, if any, and a valuation of the assets and liabilities of the society.
The Registrar, the Collector or any person authorized by general or special order in writing on his behalf by the Registrar, shall at all-time have access to all the books, accounts, papers and
securities of a society, and every officer of the society shall furnish such information concerning the transactions and working of the society as the person making such inspection may require.
Qualification of Auditor
A chartered accountant within the meaning of the Chartered Accountant Act-1949, Or,
A person who holds a government diploma in Co-operative Accounts or in Cooperation and Accountancy; or,
A person who has served as an Auditor in the co-operative society department of the State Government and whose name has been included by the Registrar on the Panel of Certified Auditors maintained and published by him in the official Gazette at least once every year.
Appointment of Auditor
The appointment of an Auditor is done by Registrar of Co-operative Societies. The Auditor conducts his audit on behalf of the Registrar. The Audit fees is paid by co-operative society according to the statutory scale of fees prescribed by the Registrar in this regard according to the category of society. The Auditor is required to submit his audit report directly to the Registrar and one copy of the audit report is submitted to the concerned society.
Rights of an Auditor
As per Section 17, an Auditor can access all the books, accounts, documents and securities of the society.
He has to see that Balance-sheet of the society shows a true and fair view of a business according to information and explanation given to him.
Every officer of the society is bound to give all information regarding working and transactions of the society.
Duties of an Auditor
An Auditor needs to consider the following points to be able to perform his duties in an efficient way:
An Auditor should be well-versed with the Co-operative Society Act, 1912 and the by-laws of the society.
If there is any type of irregularities and improprieties found by an Auditor during his audit regarding Co-operative Societies Act, 1912 and by-laws, he should immediately point out the same.
An Auditor should ascertain that how many shares are held by each member of the society; for this, he should check the member ship registers.
An Auditor should be well aware of power of officers regarding loan, investment, borrowings, advancing of the funds.
He should thoroughly check and vouch the cash book and bank book.
An Auditor should check all the receipts and payments of the society according to standard auditing practice.
He should go through the agreements between society and borrower to check the interest due on loan and repayment schedule. An Auditor should also check and compare the actual interest received and the repayment of loan received with dues from them.
He should carefully vouch and verify that loan given to members of the society is according to agreement, regulation and resolution passed by the Managing Committee of the society or not.
An Auditor has to assure that a loan given to a non-member is not without the permission of the Registrar.
He should verify the loan given by Co-operative bank should be according to the prescribed limit. An Auditor should physically examine and verify the assets of a society.
He should adopt different methods for different kind of societies.
Balance-sheet, profit and loss account and Auditor report should be according to the proforma given by the Chief Auditor of the Co-operative Society of the State.
Accounts should be according to the Co-operative Society Act and also with the provision of Income Tax Act.
All the assets, expenses, income, cash-in-hand, etc. should be vouched and verified according to standard accounting procedures and principles.
Books, Accounts and Other Records of the Society
Under Section 43(h) of the Co-operative Society Act, 1912, the Government of a state can frame rules prescribing the books of accounts to be kept by a Co-operative society. Following books and accounts are prescribed by the Maharashtra Government.
Cash Book General Ledger Stock register Personal Ledger
Register of Members
Register of Shares and debentures
Minutes books of general body meeting and committee meetings Property Register
Register recording loan applications
Maintenance of register of audit objections and their rectifications Special Features of Co-Operative Audit
The checking of posting, arithmetical accuracy, vouching, verification of assets and liabilities and scrutiny of balance sheet are same as Auditor do in any other case. We will now discuss a few important aspects related to the Audit of Co-operative societies.
Examination of Overdue Debts
An Auditor has to examine and classify overdue debts
from six months to five years and,
overdue above five years in two categories and shall have to report it in his audit report. Overdue Interest
While calculating the profit of Co-operative society overdue amount of interest outstanding should be excluded.
Valuation of Assets and Liabilities
General principles of accounting and auditing conventions and standard are adopted at the time of valuation of assets and liabilities. No specific provisions or instructions under the Act and Rules are provided.
Adherence to Co-operative principles
An Auditor should ascertain how far the objectives, for which the Co-operative society is set up, have been achieved in course of its working. It is not necessarily in terms of profit, but in terms of extending of benefits to members who have formed the Society.
Certification of Bad-debts
As per Rule No.49 of the Maharashtra State Co-operative Rules, 1961, it is very interesting to note that no bad debts can be written off unless they are certified as bad debts by the Auditor. Where no such requirement of law exists, the managing committee of the society must authorize the write-off.
Observation of the Provisions of the Act and Rules
An Auditor should be well versed with the Provisions of the Act and Rules of the Cooperative Society and the by-laws thereof. If the Auditor finds any irregularity, it should be immediately assessed and reported to the next level.
Verification of Members Register and Examination of their Pass Books
This is essential especially in rural and agricultural credit society where members are illiterate, the Auditor should verify the pass book and members register to verify the amount of loan granted and their repayments. It will help to ensure that the books of accounts are free from any manipulation.
Special Report to the Registrar
During audit if any irregularities are found by the Auditor that should be reported to the Registrar and an appropriate action may be taken by the Registrar against the society.
Audit Classification of Society
After assessing the overall performance, an Auditor has to award a class to the society. Judgement of Auditor should be based on the criteria fixed by the Registrar. The Auditor should be very careful when making decisions related to the classes in the society; if management is not satisfied by the award he may file an appeal to the Registrar and the Registrar may direct to review the audit classification.
Discussion on Audit Draft
After completion of audit, minor irregularities may be settled and rectified; matters concerning policies should be discussed in detail. The audit report can never be finalized without discussing with the managing committee.
By-laws
Each registered society is required to frame its own by-laws which have to be registered with the Registrar of Co-operative societies. According to Section 11 of the Act, the amendment of
the by-laws of a registered society shall not be valid until the same has been approved by the Registrar of the Co-operative societies.
Investment of Funds
A registered society can invest or deposit its funds only in:
Saving bank account of Government Banks.
Any of the securities specified under Section 20 of the Indian Trust Act, 1882. The shares or in the security of any other registered society.
Any bank or person carrying on the business of banking approved for this purpose by the Registrar.
Any other mode permitted by the Section 32 of the Co-operative Societies Act. Restriction on Co-operative Society
Let us now understand the restrictions that are imposed on co-operative society.
Restriction on Shareholding
According to Section 5 of the Act, where liabilities of the members of a society is limited, no member other than a registered society can hold more than 20% of the shares capital or shares of the society worth more than Rupees one thousand.
Restriction on Transfer of Share
A member of registered society with unlimited liability, cannot transfer any shares held by him or his interest in the capital of the society unless −
He has held that share for at least one year, and
The transfer and change is made to the society or to a member of the society. Restriction on Loan
According to Section 29 of the Act, a registered society cannot advance any loan to any person other than a member except with the prior permission of the Registrar.
A society with unlimited liability cannot lend money on the security of a movable property except with the sanction of the Registrar of Co-operative society.
The State Government has the power and can prohibit or restrict loans against mortgage of immovable property by any registered society or class of registered societies.
Restriction on Borrowings
A registered society can receive deposits and loans from persons who are not members of the society, only such an extent and under such condition as may be prescribed by the rules of the Co-operative Societies Act or by-laws of the concerned society.
Exemptions
According to Section 28 Central Government may exempt any registered societies or class of registered societies from Income Tax (Payable on the profits of the society or on dividends or other profit related to payments received by the members of the society). Stamp duty or registration fees.
Reserve Fund, Contribution to Charitable Funds and Distribution of Profit
According to Section 33, the first 25% of the net profit earned during the year should be transferred to a Reserve Fund.
10% of Balance amount of net profit after transferring 25% to Reserve fund, a registered society
can contribute for charitable purpose with the sanction of Registrar.
Under such conditions as may be prescribed by the rules or by-laws, the balance amount of current profit plus past years profit can be distributed to members of the society.
Dividend can be distributed according to rules and by-laws but cannot be more than 6.25%.
Only after special order of the State Government, unlimited liability society can distribute his profit otherwise not.
Efficiency Audit
Efficiency is the level of productivity of an organization. Essentially, it is the ratio of productivity,
i.e. the levels of inputs (raw materials) we need to achieve the desired output (finished goods).
So efficiency indicates how well the company is using its resources. The aim is the optimum use of resources by the company. Let us understand a few important terms in relation to efficiency,
Input: Resources of any kind, example: Human resources, Finances, Raw material, Assets, Machinery etc
Output: Goods and services produced by the company to meet the needs of the customers Quantity: Amount of goods/services produced
Productivity: A ratio of goods produced to the amount of resources needed to produce them
So an efficiency audit will help the organization measure its efficiency in many ways. There is financial efficiency, technical efficiency, production efficiency etc. Two of the main objectives of an efficiency audit are to make sure that the organisation has
Optimum utilization of the investments in the organization
That the organization channels the investment in their most profitable ventures
One thing to understand is that efficiency is a relative concept. So the efficiency of an organization is measured against certain industry standards, a target or the norms. After the
audit, the management can then focus on improving its efficiency. The way to do it is to achieve more output from the same amount of input as before.
Social Audit and Social Responsibility of Business
Social Audit
A social audit is a formal review of a company’s endeavors in social responsibility. A social audit looks at factors such as a company’s record of charitable giving, volunteer activity, energy use, transparency, work environment, and worker pay and benefits, to evaluate what kind of social and environmental impact a company is having in the locations where it operates.
Social audits are optional. Companies can choose whether to perform them and whether to release the results publicly or only use them internally.
A social audit is an internal examination of how a particular business is affecting a society. It serves as a way for a business to see if the actions being taken are being positively or negatively received and relates that information to the company’s overall public image.
A social audit examines issues regarding internal practices or policies and how they affect the identified society. The activities included tend to pertain to the concepts of social responsibility. This can include activities affecting the financial stability of a region, any environmental impact resulting from standard operations and issues of transparency in reporting.
There is no standard regarding what must be considered as the society during the audit. This allows a business to expand or contract the scope based on its goals. While one company may wish to understand the impact it has on a small-scale society, such as a particular city, others may choose to expand the range to include an entire state, country or the world as a whole.
Social Responsibility of Business
Social responsibility of business implies the obligations of the management of a business enterprise to protect the interests of the society.
According to the concept of social responsibility the objective of managers for taking business decisions is not merely to maximize profits or sharehold ers’ value but also to serve and protect the interests of other members of a society such as workers, consumers and the community as a whole.
Thus, Sachar Committee on Companies and MRTP Acts appointed by Government of India states, “In the development of corporate ethics we have reached a stage where the question of social responsibility of business to the community can no longer be scoffed at or taken lightly. In the environment of modern corporate economic development, the corporate sector no longer functions in isolation. If the plea of the companies that they are perform ing a social purpose is to be accepted, it can only be judged by the test of social responsiveness shown to the needs of the society”.
But in today’s world the interest of other stakehold ers, community and environment must be protected and promoted. Social responsibility of business enterprises to the various stakeholders and society in general is considered to be the result of a social. Responsibility of Business Enterprises towards Stakeholders and Society in General contract.
Social contract is a set of rules that defines the agreed interrelationship between various elements of a society. The social contract often involves a quid pro quo (i.e. something given in exchange for another). In the social contract, one party to the contract gives something and expects a certain thing or behaviour pattern from the other.
In the present context the social contract is concerned with the relationship of a business enterprise with various stakeholders such as shareholders, employees, consumers, government and society in general. The business enterprises happen to have resources because society consisting of various stakeholders has given them this right and therefore it expects from them to use them to for serving the interests of all of them.
Though all stakehold ers including the society in general are affected by the business activities of a corporate enterprise, managers may not acknowledge responsibility to them.
Social responsibility of business implies that corporate managers must promote the interests of all stakeholders not merely of shareholders who happen to be the so called owners of the business enterprises.
1.
Responsibility
to Shareholders
In the context of good corporate governance, a corporate enterprise must recognise the rights of shareholders and protect their interests. It should respect shareholders’ right to information and respect their right to submit proposals to vote and to ask questions at the annual general body meeting.
The corporate enterprise should observe the best code of conduct in its dealings with the shareholders. However, the corporate Board and management try to increase profits or shareholders’ value but in pursuing this objective, they should protect the interests of employees, consumers and other stakeholders. Its special responsibility is that in its efforts to increase profits or shareholders’ value it should not pollute the environment.
2.
Responsibility
to Employees
The success of a business enterprise depends to a large extent on the morale of its employees. Employees make valuable contribution to the activities of a business organization. The corporate enterprise should have good and fair employment practices and industrial relations to enhance its productivity. It must recognise the rights of workers or employees to freedom of association and free collective bargaining. Besides, it should not discriminate between various employees.
The most important responsibility of a corporate enterprise towards employees is the payment of fair wages to them and provides healthy and good working conditions. The business enterprises should recognise the need for providing essential labour welfare activities to their employees, especially they should take care of women workers. Besides, the enterprises should make arrange ments for proper training and education of the workers to enhance their skills.
However, it may be noted that very few companies in India follow many of the above good
practices. While the captains of Indian industries generally complain about low productivity of their employees, little has been done to address their problems. Ajith Nivard Cabraal rightly writes, “It should perhaps be realised that corporations can only be as effective and efficient as its employees and therefore steps should be taken to implement such reforms in a pro-active manner, rather than merely attempting to comply with many labour laws that prevail in the country. This is probably one area where good governance practices could make a significant impact on the country’s business environment.”
3.
Responsibility
to Consumers:
Some economists think that consumer is a king who directs the business enterprises to produce goods and services to satisfy his wants. However, in the modern times this may not be strictly true but the companies must acknowledge their responsibilities to protect their interests in undertaking their productive activities.
Invoking the notion of social contract, the management expert Peter Drucker observes, “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To meet the wants and needs of a consumer, the society entrusts wealth-producing resources to the business enterprise”. In view of above, the business enterprises should recognise the rights of consumers and under stand their needs and wants and produce goods or services accordingly.
The following responsibilities of business enterprises to consumers are worth mentioning:
They should supply goods or services to the consumers at reasonable prices and do not try to exploit them by forming cartels. This is more relevant in case of business enterprises producing essential goods such as life-saving drugs, vegetable oil and essential’ services such as electricity supply and telephone services.
They should not supply to the consumers’ shoddy and unsafe products which may do harm to them.
They should provide the consumers the required after-sales services.
They should not misinform the consumers through inappropriate and misleading advertise ments.
They should make arrangements for proper distribution system of their products so as to ensure that black-marketing and profiteering by traders do not occur.
They should acknowledge the rights of consumers to be heard and take necessary measures to redress their genuine grievances.
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