Auditing BBA VI Sem BBA N 605 Unit 3rd Notes
Special Audit
A Special Audit can be defined as a tightly defined type of audit that is conducted in order to probe into a specific area of the organization’s activities.As a matter of fact, it can be seen that this type of audit is mainly initiated by a third party, like a government agency or the tax authority.
However, it can also be authorized by any other relevant entity, including any internal authorities that might be in a position to do so.
Examples of special audits include Compensation audits, control audits, cost audits, fraud audits, and royalty audits.
The Need for A Special Audit
Special Audits are mostly needed when some abnormal behavior is suspected within the organization.
Mostly, they are called for when it is suspected that the laws and regulations have been overlooked pertaining to finances, or financial management within the organization. However, they are not only restricted to cases pertaining to fraud.
They can also be conducted when there are other institutional violations that might include pertaining to duties, authorizations, internal control procedures or responsibilities of the Senior Management.
In the same manner, Special Audits can also be related to corporate reorganization or bankruptcy.
Scope of Special Audit
As mentioned earlier on, it can be seen that a special audit is conducted out of routine, with a specific or a special purpose.
However, these special purposes are quite varied in their nature, and the overall outcomes based on those special audits.
- Compliance Audit – This is mainly conducted when there is a need to examine the policies and procedures to check if they follow internal or regulatory standards.
- Construction Audit – This analyzes the costs that occur for a given construction project. In the same manner, this also tracks down the actual amount that is paid to contractors, suppliers, and other reimbursement that takes place in this regard.
- Information Systems Audit. Information System Audit is mainly conducted when there is a need to review the overall controls present in software development. Additionally, it also involves a review of controls regarding software development, data processing and the overall access to computer systems.
- Investigative Audit. Investigative Audits take place when there is a need to find details of a specific event or an incident within the company, that was suspicious.
- Tax Audit. This Audit is mainly initiated to analyze the overall tax returns that are submitted by an individual or business entity. The main rationale is to see if the paid tax is actually valid
Audit and Auditors of Banking Company
Special audit of Banking Company
As per provisions of Section 30 (1B) of BR Act, RBI can order special audit of the banking company’s accounts if it is of opinion that it is necessary in the public interest or in the interest of the banking company or its depositors by a person duly qualified under any law to be an auditor of companies. The auditor has to submit the special audit report to RBI and forward a copy to the banking company concerned. Any expenses incidental to the special audit have to be borne by the banking company
Powers and Functions of Audit and Auditors
The auditors drive its powers and functions, discharge the duties and subject to the liabilities and penalties as defined in section 227 of the Companies Act, 1956. The auditors have to prepare the audit report in a manner as specified in Companies Act. The banking company incorporated in India, the auditor is required to state additional information as stated below:
- whether or not the information and explanation required by him have been found to be satisfactory
- whether or not the transactions of the banking company which have come to his notice have been within the powers of the banking company
- whether or not the returns received from branch offices of the banking company have been found adequate for the purposes of his audit
- whether the profit and loss account shows a true balance of profit or loss for the period covered
- any other matter which he considers should be brought to the notice of the shareholders of the company
The insurance audit is a process typical to the insurance industry. As your business operations change, so may your insurance premium. The need for Insurance audits arises because many insurance policies are based on estimation when underwritten. These policy types provide for an adjustment of the premium according to the exposures incurred during the policy term.
- Accounting Book of Accounts
- Checking Taxation of Insurance Policies
- Coverage Disputes
- Complex Insurance Litigation
- Public Policy
- Trade Association Work
- Technology Risk Consulting Services.
- Residual Insurance Associations
he insurance audit service applies to all types of insurance contracts, either it is for individuals or companies.
Some of the types of insurance where insurance audit is applicable are as follows:
- Property insurance that can be of stock, buildings, reserves, home.
- Liability Insurance such as employer’s liability, public liability, professional indemnity, environmental liability, product liability, etc.
- Business Interruption as well as employee embezzlement insurance.
- Insurances related to the theft of money and property.
- Transit Insurance that includes sea, air, or land.
- Life Insurances such as Permanent Insurance, Term Insurance, etc.
- Health Insurance that is individual or group insurance.
- Employees benefit Insurance Plan that includes life, accident, and health.
- Pension Insurance that includes individual or group pension insurance.
- Vehicle Insurance consisting of individual and vehicle fleet.
What is the Role of Insurance Auditors in Insurance Audit?
- The Central and Branch Auditors of an insurance company is appointed at the Annual General Meeting of the Company.
- Before making the appointment an appointment from the Comptroller and Auditor General must be received.
- The insurers as per the guidelines of the Insurance Act, 1938, and the Companies Act, 2013 must comply with the provisions with regard to the appointment of auditors.
- As per the recommendation of the Audit Committee, the board appoints the statutory auditors, subject to the shareholder's approval at the general meeting of the Indian Insurance Company.
- The appointment of branch auditors is made to conduct the audit of the divisions having the same rights and obligations as per the statute. The branch auditors submit their report to the statutory auditors.
- However, at the division level, the branch auditors certify the Trial balance and incorporate the financial statements of the branches under the divisions.
- The insurer does not have the power to remove the statutory auditor without taking the approval of the authority.
- An audit firm cannot audits of more than three insurers (Life insurance or Health Insurance or Reinsurer or Non-Life Insurance) at a time.
- They made an appointment that can be canceled if it is found that the appointment of auditors by the insurers is not as per the proposed guidelines.
Verification of Premium
- In a separate bank account, the premium collections are credited. No withdrawals are generally permitted from that account for the purpose of a general expenditure.
- As prescribed in the policy of insurance company, the collections are transferred to the Regional Office or Head office.
- According to Section 64VB of the Insurance Act, 1938, the insurer shall assume no risk without the receipt of premium.
- It is of utmost importance to an auditor to verify a premium because the insurance premium is collected upon issuing policies.
- It is a consideration for bearing the risk of the insurance company.
The auditor shall apply the below-mentioned procedures:
- Before starting the verification of premium income, the auditor must look into the internal controls and compliance, which is laid down for the collection and recording of premiums.
- The cover notes must be numbered serially.
- The auditor needs to check if the premium registers are maintained chronologically, providing complete details including GST charged according to the acceptance advice daily.
- The auditor must verify if they figured the premium amount mentioned in the register tally with those shown in General Ledger.
- The auditor will also verify that the installments that are due on or before the balance sheet date has been received or not, have been accounted as premium income for the year under audit.
Verification of Claims
The auditor from each division or branch must obtain the information for all classes of business.
The auditor shall determine the total number of documents that is to be checked, providing due importance to claims of higher value.
The claim account gets debited with all the payments that include the repair charges, survey fees, photograph charges etc. The auditor shall verify:
- Check the provision for unsettled claims.
- Check if the provision is made for such claims for which the company is legally liable.
- Check if the provision that is made is not more than the insured amount.
- Check the Co-insurance arrangements; the company has made provisions with respect to its own share of anticipated liability.
Verification of Commission
The remuneration paid to an agent is made through commission. The remuneration amount is calculated by applying a percentage to the premium collected by the agent.
The commission is paid to the agents for the business procured, and it is then debited to commission on Direct Business Account. Insurance agents usually solicit the insurance business. The auditor shall verify:
- Voucher disbursement entries with regard to the disbursement vouchers with the copies of commission bills and statements.
- Check if the vouchers are authorized by the officers-in-charge as per the rules and also income tax is deducted at source.
- Check the amount of commission allowed.
- Check the accounting period of commission.
Verification of Operating Expenses
The auditor must check the following operating expenses:
- Expenses that are more than Rs. 5 lakhs or 1% of the net premium, whichever is higher. This must be shown separately.
- Expenses that are not directly related to insurance business must be shown separately, for example, costs made in the investment department or bank charges etc.,
Audit of Educational Institutions
Maintenance of Accounts 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 Charitable Trust
The following points need to be considered by an Auditor while conducting audit of Charitable Institutions −
He should know about the constitution and the legal status of Charitable Institutions.
An Auditor should study the Rules and Regulations of the State Government, Central Government and other applicable law to such institutions.
He should obtain a list of accounts, correspondence and all related documents which are required for the purpose of audit.
To know the detail which may affect important decisions of institutions, Auditor should study the Minutes Book of Governing Body.
Auditor should obtain list of members to verify the amount of subscriptions and list of regular donors to know the nature and purpose of donation of regular donors.
Auditor should vouch the amount of subscription and donations from counterfoils of receipts, members list, donation register and cash book, etc.
He should ensure that the funds received for a specific purpose are being utilized for the same purpose or not.
He should verify nature of donation and accounting treatment of such donations. Capital and revenue donations should be treated separately.
He should study the state code to verify whether any grant is applicable to the concerned institutions or not.
He should verify the provisions for subscription due but not received. Subscription receivable for last year whether received or not in the current year should also be verified.
Investments should be verified according to the rules of Institutions, whether investments are in approved fund.
Investments should be checked in the Investment register along with physical verification.
Income on investments in form of interest and dividends, etc. should be vouched carefully.
Title deed and other related documents of Land & Building should be verified.
Legacies can be verified with receipts book and legacies register.
An Auditor should verify assets and liabilities on institutions on the date of Balance-sheet.
He should verify the cash in hand and the cash at bank.
All the related expenses should be vouched carefully according to general auditing practices and principles
Audit of Co-Operative 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
Efficiecny audit is also known as ‘Performance Audit’ and ‘Profitability Audit’. Efficiency audit may be defined as a systematic examination of management’s effort to accomplish goals efficiently and effectively in order to determine adherence to the management policies and stated requirements.
Efficiency audit is undertaken to point out actual and potential areas which create trouble in the operations and working of the company and due to which the company may not be able to achieve its pre-determined goals.To detect such trouble areas in efficiency audit, following points are examined by the cost auditor:
- Utilisation of the resources in the form of manpower and equipment.
- The organisational structure of the company and its adequacy to carry out the work for achieving the set goals.
- Adequacy and reliability of controls created for smooth functioning of various operations.
- Implementation of policies and procedures.
- Extent to which co-operation exists among various departments and also in the staff working at different levels.
- Methods of operations used in the company and whether they are satisfactory or not.
- Variances between the targets fixed and the actual performance and the causes due to which the variances have occured and the extent to which variances have been reduced due to actions taken by the management.
Efficiency audit brings to notice uneconomic use of resources, idle and wasted capacity of the machinery and equipments, improper decisions and loss suffered due to such decisions, existence of rivalry among departments and lack of cooperation which results in lower performance and inadequate staff-both in number and knowledge – in certain departments.
The cost auditor also suggests ways and means through which these deficiencies can be removed and performance of the company can be improved.
Objectives of Efficiency Audit
Objectives of the efficiency audit can be explained as under:
- To understand the objectives pre-determined for the organization.
- To find out the variance between planned objectives & achieved objectives.
- To find out the reasons due to which the variance has occurred.
- To recommend to the management the action to be taken to reduce the causes that have resulted into waste and inefficiency.
Purpose of Efficiency Audit
The basic purpose of the efficiency audit is to reveal defects or irregularities in any of the elements examined. Its aim is to assist management in achieving the most efficient and effective administration of the operations performed. The intent is to examine and appraise the methods and performance in all areas.
Scope of Efficiency Audit
Efficiency Audit does it to make a judgement regarding the efficiency of existing practices. It shall, however include an enquiry into, whether, in carrying out its responsibilities, the audited entity is giving due consideration to conserving its resources and using the minimum effort to do its work.
Efficiency Audit Report
The Report should be written in good English and lucid style so that it may not be misunderstood. The following are some of the important aspects of audit report:
- Significance
- Timeliness
- Carrying Convictions
- Accuracy & Adequacy
- Clarity & Simplicity
- Objectivity & Perspective
- Conciseness
- Completeness
Propriety Audit
Propriety audit is the second phase of the cost audit. The term propriety means ‘justness’ or ‘rightness’. When the term propriety audit is used it implies audit or verification of rightness of the expenditure incurred or rightness of the decisions taken by the management or rightness of actions and plans of management having a bearing on finances and expenditure of the company.
Basis of social audit
Social audit as a term was used as far back as the 1950s. There has been a flurry of activity and interest in the last seven to eight years in India and neighboring countries. Voluntary development organizations are also actively concerned.
Social audit is based on the principle that democratic local governance should be carried out, as far as possible, with the consent and understanding of all concerned. It is thus a process and not an event.
What is a social audit?
A social audit is a way of measuring, understanding, reporting and ultimately improving an organization’s social and ethical performance. A social audit helps to narrow gaps between vision/goal and reality, between efficiency and effectiveness. It is a technique to understand, measure, verify, report on and to improve the social performance of the organization.
Social auditing creates an impact upon governance. It values the voice of stakeholders, including marginalized/poor groups whose voices are rarely heard. Social auditing is taken up for the purpose of enhancing local governance, particularly for strengthening accountability and transparency in local bodies.
The key difference between development and social audit is that a social audit focuses on the neglected issue of social impacts, while a development audit has a broader focus including environment and economic issues, such as the efficiency of a project or programme.
Objectives of social audit
- Assessing the physical and financial gaps between needs and resources available for local development.
- Creating awareness among beneficiaries and providers of local social and productive services.
- Increasing efficacy and effectiveness of local development programmes.
- Scrutiny of various policy decisions, keeping in view stakeholder interests and priorities, particularly of rural poor.
- Estimation of the opportunity cost for stakeholders of not getting timely access to public services.
Advantages of social audit
(a) Trains the community on participatory local planning.
(b) Encourages local democracy.
(c) Encourages community participation.
(d) Benefits disadvantaged groups.
(e) Promotes collective decision making and sharing responsibilities.
(f) Develops human resources and social capital
To be effective, the social auditor must have the right to:
- seek clarifications from the implementing agency about any decision-making, activity, scheme, income and expenditure incurred by the agency;
- consider and scrutinize existing schemes and local activities of the agency; and
- access registers and documents relating to all development activities undertaken by the implementing agency or by any other government department.
This requires transparency in the decision-making and activities of the implementing agencies. In a way, social audit includes measures for enhancing transparency by enforcing the right to information in the planning and implementation of local development activities.
Social audit committees
Social audit can also be used for auditing the performance of all three PRI tiers with a social audit committee at each level. These committees should not be permanent, but can be set up depending on the nature of programmes/schemes to be audited.
Social audit committee members can be drawn from among programme stakeholders. It is advisable to use the services of retired functionaries of different organizations, teachers or persons of impeccable integrity living in the Zilla Panchayat/Block Panchayat/Gram Panchayat jurisdiction. Both facilitators and social audit committee members can be trained by social audit experts.
Steps in social audit in local bodies
- Clarity of purpose and goal of the local elected body.
- Identify stakeholders with a focus on their specific roles and duties.
Social auditing aims to ensure a say for all stakeholders. It is particularly
important that marginalized social groups, which are normally excluded, have
a say on local development issues and activities and have their views on the
actual performance of local elected bodies.
- Definition of performance indicators which must be understood and accepted
by all. Indicator data must be collected by stakeholders on a regular basis.
- Regular meetings to review and discuss data/information on performance
indicators.
- Follow-up of social audit meeting with the panchayat body reviewing
stakeholders’ actions, activities and viewpoints, making commitments
on changes and agreeing on future action as recommended by the stakeholders.
- Establishment of a group of trusted local people including elderly people,
teachers and others who are committed and independent, to be involved in the
verification and to judge if the decisions based upon social audit have been
implemented.
- The findings of the social audit should be shared with all local stakeholders. This encourages transparency and accountability. A report of the social audit meeting should be distributed for Gram Panchayat auditing. In addition, key decisions should be written on walls and boards and communicated orally.
Key factors for successful social audit
- Level of information shared with and involvement of stakeholders, particularly of the rural poor, women, and other marginalized sections.
- Commitment, seriousness and clear responsibilities for follow-up actions by elected members of the Gram Panchayat.
- Involvement of key facilitators in the process.
How to enhance local capacities for social audit
- Organization of a mass campaign to increase public awareness about the meaning, scope, purpose and objectives of social audit.
- Establishment of a team of social audit experts in each district who are responsible for training social audit committee members (stakeholders).
- Implementation of training programmes on social auditing methods - conducting and preparing social audit reports, and presentation at Gram Sabha meetings.
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