Chapter 19. Audit of the Accounts of Government and Public Sector Undertakings – Auditing: Principles and Techniques

Chapter 19

Audit of the Accounts of Government and Public Sector Undertakings

CHAPTER OUTLINE
19.1 INTRODUCTION

The audit of government accounts and the accounts of public sector undertakings has a special significance and importance in view of the public accountability of government and innumerable transactions involving large sums of public money. Government audit is totally different from audit of commercial firms and the audit of public sector undertakings has the features of both commercial audit and government audit.

19.2 AUDIT OF PUBLIC SECTOR UNDERTAKINGS

Special statutes have been set up for audit of several public sector undertakings. In many of such undertakings the C&AG has to conduct statutory audit. In some of the undertakings though professional accountants conduct the statutory audit, the C&AG is empowered to conduct separate audit, independent of statutory audit. Moreover, in government companies, which are governed by the Companies Act, the C&AG has the power to direct the manner in which the accounts shall be audited by the statutory auditor and the C&AG can conduct test audit or supplementary audit in government companies.

In fact, public sector undertakings are of three different types, which are as follows:

  • Departmental commercial undertakings
  • Statutory corporations
  • Government companies

Departmental commercial undertakings are those concerns, which are directly controlled by a ministry or department of the government. Examples of these are Indian Railways, Post and Telegraph, Bharat Sanchar Nigam Limited etc. Statutory corporations have been set up by special Acts of parliament and they are governed by such Acts. Examples of such corporations are the Life Insurance Corporation of India, the Reserve Bank of India, the State Bank of India, and the nationalised banks. Government companies are the third type of public sector undertakings. These companies are registered under the Companies Act and are also governed by the said Act. There are innumerable central and state level public sector undertakings in our country.

19.2.1 Some Special Features of Public Sector Undertakings

The public sector undertakings differ from private sector undertakings in many ways and it is necessary to keep them in mind before actually undertaking the audit of such undertakings. Some important features of public sector undertakings affecting audit are as follows:

1. Different forms

These undertakings have been set up mainly in three forms, viz. departmental commercial undertakings, statutory corporations and government companies. All these three forms differ substantially from the point of view of their establishment, operations and operational autonomy.

2. Governing Acts and provisions

Majority of these undertakings have been set up as government companies under the Companies Act, 1956 just like any other company in the private sector. These companies are governed by the provisions of the Companies Act. A few undertakings have been set up as departmental undertakings and their operational autonomy is quite limited as they are under the direct control of the government. Statutory corporations are governed by the special statute and Act.

3. Profit motive

These undertakings are desired to observe business and commercial principles and are also required to earn profits. However, the profit motive cannot be the overriding factor in their case as it is in private companies.

4. Managerial personnel

Several managerial personnel in these undertakings come from the government departments and not from the commercial or industrial fields. As a result, the approach of the management is not the same as we find in case of private commercial undertakings.

5. Accountability

The autonomy of the management of these undertakings is severely restricted due to stricter control and accountability of the management to the government and to the parliament and several other agencies. The managing director of a public sector undertaking is not as free to act as in case of a private undertaking.

6. Government policy

For several matters, the management of these undertakings is guided and directed by the concerned ministry. The minister concerned controls them formally as well as informally. The government is empowered to lay down policies, issue directions, appoint or replace top officials, approve capital expenditures beyond a prescribed limit, sanction borrowings and investments etc.

7. Reporting

Every undertaking is required to submit its annual report in detail in the parliament every year. There is a parliamentary committee known as committee on public undertakings, which examines their workings in detail. On the basis of the report submitted to the parliament, action has to be taken on it within the stipulated period. The report on action taken is also submitted in the parliament.

8. Audit

The professional accountants normally undertake the audit of these undertakings, but the Comptroller and Auditor General of India has the power to conduct an efficiency-cum-propriety audit of these undertakings.

19.3 DISTINCTION BETWEEN AUDIT OF PUBLIC SECTOR UNDERTAKINGS AND AUDIT OF PRIVATE SECTOR UNDERTAKINGS

The auditor should keep in mind the distinction between the audit of private sector undertakings and that of public sector undertakings. This is quite necessary, as the professional accountants are required to audit the accounts of both types of undertakings.

The auditor of a private sector undertaking is, in general, required to undertake the verificatory audit and has to give his opinion as to whether the profit and loss account and the balance sheet exhibit true and fair state of affairs of the undertakings. He has nothing to do with the impropriety of the actions of the management. He is not required to question the points of inefficiency of the management.

The auditor of a public sector undertaking has to adopt some of the techniques of the government audit and at the same time should follow the standard practices and techniques of audit of a private concern. It seeks to verify whether the expenditure conforms to the various provisions of the law and the rules and whether every officer has exercised the same vigilance in respect of expenditure incurred from public money, as a person of ordinary prudence would exercise in respect of expenditure of his own money. It also seeks to verify whether the expenditure was necessary and whether the individual items of expenditure give the best results.

It has been found in practice that the auditors of the public sector undertakings have been adopting bolder approach as compared to those of private sector undertakings. A qualified report by the auditors of private sector undertakings is given only in very exceptional circumstances and is rare. But it is not so in case of public sector undertakings.

We have three forms of public sector undertakings as already mentioned earlier. They are departmental commercial undertakings, statutory corporations and the government companies. Let us discuss the provisions and procedures of audit of these different types of undertakings separately.

19.3.1 Audit of Departmental Commercial Undertakings

Several central government commercial undertakings have been set up in the country as departmental commercial undertakings. They are administered as a part of the department, like any government department. The departmental commercial undertakings have been defined as those, which are maintained mainly for the purpose of rendering services or providing supplies of certain special kinds on payment for the services rendered or the articles supplied. They are required to work to a financial result determined through accounts maintained on commercial principles. The examples of these undertakings are: Indian Railways, Indian Security Press, Chittaranjan Locomotive Works, Post and Telegraph Department etc.

The main features of departmental commercial undertakings are as follows:

  • The enterprise is financed by annual appropriations from the treasury and a major share of its revenue is paid into the treasury.
  • The enterprise is subject to the budget, accounting and audit controls applicable to other government activities.
  • The enterprise is generally organised as a major sub-division of one of the central departments of government.
  • The employees of these types of enterprises are civil servants.
  • The enterprise possesses the sovereign immunity of the state and may be sued without the consent of the government.

Under Article 149 of the Constitution of India, the Comptroller and Auditor General of India is empowered to conduct audit of departmental undertakings. The audit is primarily in the nature of commercial audit, but it is extended to include the examination of the regularity and propriety of transactions, authority of expenditure etc. The commercial audit of the C&AG mainly aims at verifying the adoption of commercial principles in the preparation and presentation of statements showing financial result and financial position of the undertaking, the completeness and accuracy of the preparation and presentation, the correctness of the allocation of expenditure between capital and revenue, the fairness of the valuation of the assets and liabilities, the adequacy of the provisions for depreciation, bad debts etc.

The function of the auditor in this case is also to ensure that the subsidiary accounts are so prepared as to render it possible to compare the relative efficiency of government trading and manufacturing institutions with one another or with similar non-government institutions. The audit of such undertakings is more than the verificatory audit and efforts are made to analyse the workings of these undertakings in details so that weaknesses, if any, may be brought to light and remedial measures may be taken in future.

19.3.2 Audit of Statutory Corporations

A few statutory corporations have also been set up in the country to undertake the commercial and industrial activities. For the establishment of these corporations, special Acts have to be enacted through Parliament. There are several corporations in financial areas, such as Reserve Bank of India, State Bank of India and Life Insurance Corporation of India. Some of these corporations such as Oil and Natural Gas Commission, Air India etc. are also working in the non-financial areas.

The main features of statutory corporations are given below.

  • It is generally established by a special law defining its powers, duties and obligations.
  • It is wholly owned by the state.
  • As a body corporate it has a separate entity for legal purposes.
  • Statutory corporations are usually independently financed.
  • It is not ordinarily subject to the budget, accounting and audit laws and procedures, applicable to non-corporate agencies.

The enabling statutes of these corporations have made provision for the audit of these corporations. In some cases, the auditor general is fully empowered to undertake their audit and in some cases, the audit is undertaken by the professional accountants. In fact, the audit of each statutory corporation is conducted as per provisions contained in the applicable Act and such provisions vary from one corporation to another.

The form and the contents of the audit report, as prescribed for different corporations, are similar to those prescribed under the Companies Act, 1956. Besides, the nature of audit and the powers and responsibilities of the auditor in the case of statutory corporations are almost similar to those as in case of company audit.

19.3.3 Audit of Government Companies

A government company is one in which not less than 51% of the paid-up share capital is held by the central government, one or more state governments or jointly by the central government and one or more state governments.

Audit of government companies is governed by Section 619 of the Companies Act, 1956. The important provisions relating to the audit of government companies as contained in Section 619 are given below:

1. Appointment of auditor

The auditor of a government company is appointed or reappointed by the central government on the advice of the C&AG of India [Section 619(2)].

The limits of company audit as specified in Sub-sections (1B) and (1C) of Section 224 also apply in relation to the appointment or reappointment of an auditor of a government company.

2. Remuneration

The Act is silent about the fixation of remuneration of an auditor of a government company. As the central government is the appointing authority, it is natural that the remuneration of the auditor will be fixed by the central government.

3. Audit procedure

C&AG requires that the auditor gives specific answers to questions, which are contained in a questionnaire that the auditor gets from the C&AG. This is in addition to the report to be submitted by the auditor under Section 224 of the Companies Act. In fact, the C&AG has the power to direct the manner in which the accounts of the government companies shall be audited by the auditor and to give such instructions in regard to any matter relating to the performance of his functions as such [Section 619(3)(a)].

The direction of the C&AG as per Section 619(3)(a) in questionnaire form includes specific questions on the following matters:

  • System of accounts and book-keeping
  • Internal control
  • Manufacturing and production accounts
  • Profit and loss account
  • Balance sheet
  • General review
  • Accounting policies
  • Financial notes

Therefore, the auditor of a government company first of all conducts a full company audit, which concludes in giving a report as per provisions of Section 224 of the Companies Act. In addition to the audit report, the auditor is required to send a special report containing the answers to the questions of the questionnaire of the only. This is not within the scope of company audit or duties of the company auditor under the Companies Act.

4. Supplementary audit by the C & AG

The C&AG has the power to conduct the supplementary audit of the accounts of the government companies by his authorised person [Section 619 (3)(b)]. The C&AG also conducts another type of audit in government companies on a regular interval on the basis of the power under Section 619 (3)(b). This audit is in the nature of propriety-cum-efficiency audit under which the activities of the company, its performance, various transactions, utilisation of assets and other facilities, managerial effectiveness etc. are examined.

5. Audit report

The statutory auditor of these types of companies has to submit a copy of his audit report to the C&AG who has the right to comment upon the report. Any comments of the C&AG to the audit report are required to be placed before the annual general meeting of the company at the same time and in the same manner as the audit report [Section 619(5)].

19.4 GOVERNMENT AUDIT

Government audit means the audit of accounts of departments and offices of the central government, the state governments and the union territories. Under Article 149 of the constitution of India, the C&AG of India is empowered to conduct complete audit of accounts of governments and of those undertakings, which are directly under a ministry or government department.

Objectives

An introduction to Indian government accounts and audit, a book issued under the authority of the C&AG of India, states that the main objectives of the government audit are to ensure the following:

  1. That there is provision of funds for the expenditure duly authorised by a competent authority.
  2. That the expenditure is in accordance with a sanction properly accorded and is incurred by an officer competent to incur it.
  3. That the payment has, as a fact, been made and has been made to the proper person and that it has been so acknowledged and recorded that a second claim against the government on the same account is impossible.
  4. That the charge is correctly classified and that if a charge is debitable to the personal account of a contractor, employee or other individual, or is recoverable from him under any rule or order, it is recorded as such in a prescribed account.
  5. That in the case of audit of receipts of sums due are regularly recovered and checked against demand and sums received are duly brought to credit in the accounts.
  6. That in the case of audit of stores and stock, where a priced account is maintained, stores are priced with reasonable accuracy and that the rates initially fixed are reviewed from time to time, correlated with market rates and revised when necessary.
  7. That the articles are counted periodically and otherwise examined for verification of the accuracy of the quantity balances in the books and that the total of the valued account tallies with the physical numerical balance of stock materials at the rates applicable to the various classes of stores.
  8. That expenditure conforms to the following general principles which have, for long, been recognised as standards of financial propriety:
    1. That the expenditure is not prima facie more than the occasion demands, and that every government servant exercises the same vigilance in respect of expenditure incurred from public money as a person of ordinary prudence would exercise in respect of expenditure of his own money.
    2. That no authority exercises its powers of sanctioning expenditure to pass an order which will be, directly or indirectly, to its own advantage.
    3. That public money is not utilised for the benefit of a particular person or section of the community unless
      • the amount of expenditure involved is insignificant, or
      • a claim for the amount could be enforced in a court of law, or
      • the expenditure is in pursuance of a recognised policy or custom.
    4. That the amount of allowances granted to meet expenditure of a particular type is so regulated that the allowances are not, on the whole, sources of profit to the recipients.

In a nutshell, government audit encompasses two main elements. These are as follows:

  1. Fiscal accountability—audit of provision of funds, sanctions, compliance and propriety
  2. Managerial accountability—audit of efficiency, economy and effectiveness
19.5 DISTINCTION BETWEEN GOVERNMENT AUDIT AND COMMERCIAL AUDIT

Government audit is not same as commercial audit. Certain special aspects are required to be covered under government audit, which are not required for commercial audit.

The distinction between government audit and commercial audit can be outlined in the following ways, as shown in Table 19.1.

 

TABLE 19.1 Distinction between government and commercial audit

Points of distinction Government audit Commercial audit

1. Nature of audit

Government audit is conducted almost continuously throughout the year, because the number of transactions is many and involves large sums of money.

Commercial audit is mostly periodical in nature.

2. Auditor

The audit officers of the Indian Audit and Accounts Department do government audit.

Mostly professional chartered accountants conduct commercial audit.

3. Dominating factor

Propriety-cum-efficiency audit is predominant in government audit.

This aspect is not strictly adhered in case of commercial audit.

4. Preparation of accounts

In this case, the indian Audit and Accounts Department and its field offices prepare or compile the major part of government accounts and also audit the accounts.

In commercial audit, the auditor audits the accounts prepared by others. The auditor is not at all responsible for the preparation and/or compilation of accounts.

5. Method of accounting

In government audit, the auditor has to see whether the accounts have been prepared according to the prescribed rule of government accounts.

In commercial audit, the auditor has to see whether the accounts have been prepared on the basis of double entry system.

6. Objective

Government audit is concerned with examining the propriety of expenditure.

The primary objective of this audit is to see whether the balance sheet prepared gives a true and fair views of the state of affairs of the enterprise and the profit and loss account gives a true and fair view of the profit or loss of the enterprise.

7. Vouching of payment

Government spending is done by the treasury officer or disbursement officer, who makes a detailed scrutiny of the bills before payment. So, government auditor is relieved of detailed checking of payments.

In commercial offices, the cashier does not have to make such a scrutiny before payment. So, payments require proper vouching in commercial audit.

In fact, the government auditor, unlike the independent financial auditor, is concerned with examining the economy, efficiency and effectiveness (i.e. three E’s) of various schemes or projects. The government auditor seeks to get the following answers.

  • Whether the projects have been completed at the minimum cost, i.e. whether the project cost is economical or not.
  • Whether the project has efficiently been completed, i.e. whether the projects are suffering from deficiencies or not.
  • Whether the projects have been performed in the most effective way, i.e., whether the projects become successful projects or not.

It can, thus, be seen that the objectives of government audit are much wider than those of independent financial audit. In government audit, there is a greater emphasis on examining compliance with standards of financial propriety, compliance with rules and procedures and the efficiency and performance of various projects or schemes than in an independent financial audit. The difference in objectives of audit generates from the consideration of public interest and the urge to exercise stringent financial controls over public money.

19.6 COMPTROLLER AND AUDITOR GENERAL OF INDIA

Under the Constitution of India the position of the C&AG of India is similar to that of the judge of the Supreme Court of India. He enjoys an independent status under the Constitution of India. The C&AG is appointed as per constitutional provision and his terms and conditions of service, powers and duties, rights and responsibilities are governed by the relevant Act of parliament.

The Constitution of India gives a special status to the C&AG and contains provisions to safeguard his independence. Following are the important provisions with regard to C&AG:

1. Appointment and removal

Article 148 of the Constitution provides that the C&AG shall be appointed by the President of India and can be removed from office only in a like manner and on the like grounds as a Judge of the Supreme Court. Thus, the C&AG can be removed only on the ground of proven misbehaviour or incapacity and only through an order of the President of India after each house of Parliament has recommended the removal by the required majority.

2. Remuneration

The salary and other terms of service of the C&AG are determined by the Parliament. His term of office is six years, unless within this term he reaches the age of 65 years, in which case his term will extend only up to 65 years. However, he can resign from his office at any time by submitting a resignation letter to the President of India.

3. Duties

The Act assigns the C&AG the following duties with regard to audit:

  • To audit and report on all expenditures from the consolidated fund of India and the consolidated fund of each state/union territory with a legislative assembly.
  • To audit and report on all receipts which are payable into the consolidated fund of India and consolidated fund of each state/union territory with a legislative assembly.
  • To audit and report on all transactions of the union and of the states relating to contingency funds and public accounts.
  • To audit the accounts of stores and stocks kept in any office or department of the union or of a state.
  • To audit and report on all trading, manufacturing and profit and loss accounts, balance sheets and other subsidiary accounts kept in any department of the union or of a state.
  • To audit and report on all receipts and expenditures of any body or authority if it is substantially financed by grants or loans from the Consolidated Fund of India or from the Consolidated Fund of any state/union territory that has a legislative assembly, subject to the provisions of any applicable law in force.
  • To scrutinise the procedure by which the sanctioning authority satisfies itself regarding the fulfilment of the conditions of any grant or loan given for any specific purpose from the consolidated fund of India or from the consolidated fund of any state/union territory that has a legislative assembly.
  • To audit the accounts of government companies and corporations in accordance with the provisions of the Companies Act, 1956 or other relevant legislation.
  • To audit the accounts of certain other bodies or authorities at the request of the President of India/governor of any state/administrator of a union territory having a legislative assembly.
  • To conduct audit in any body or authority not within his auditing jurisdiction, if he considers that such an audit is necessary in view of substantial government investment or advances. However, it has to be proposed to the President of India or governor of the concerned state or administrator of the concerned union territory in public interest and get the approval before such audit takes place.

4. Powers

To discharge the above duties, the C&AG will be given the following powers:

  • He can visit any office of the government, where principal or subsidiary accounts are kept.
  • He can require that the books of accounts, supporting papers and documents relating to the transactions under audit are to be sent to a place to be specified by him for the purpose of examination.
  • He can call for any information from appropriate persons, which he may require for the performance of his duties.
  • He can make any such queries or observations to the persons in charge of affairs in an office, as he may consider necessary.
  • In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of any accounts and class of transactions and to apply such limited checks in relation to such accounts or transactions as he may determine.

5. Audit report

Article 151 of the constitution requires that the audit reports of the C&AG relating to the accounts of the central/state government should be submitted to the President of India/ governor of the concerned state who shall cause them to be laid before the parliament/state legislature.

POINTS TO PONDER
  • The audit of government accounts and the accounts of public sector undertakings has a special significance and importance in view of the public accountability of government and innumerable transactions involving large sums of public money.
  • Government audit is totally different from audit of commercial firms and the audit of public sector undertakings has the features of both commercial audit and government audit.
  • Special statutes have been set up for audit of several public sector undertakings. In many such undertakings, the C&AG has to conduct statutory audit. In some of the undertakings though professional accountants conduct the statutory audit, the C&AG is empowered to conduct separate audit.
  • Public sector undertakings are of three different types: departmental commercial undertakings, statutory corporations and government companies. Public sector undertakings differ from private sector undertakings in many ways and it is necessary to keep them in mind before actually conducting the audit of such undertaking.
  • The audit of a public sector undertaking has to adopt some of the techniques of the government audit and at the same time should follow the standard practices and techniques of a private concern. The auditors of the private sector undertakings are adopting bolder approach as compared to those of private sector undertakings.
  • The Comptroller and Auditor General of India is empowered to conduct audit of departmental undertakings. The audit is primarily in the nature of commercial audit, but it is extended to include the examination of the regularity and propriety of transactions, authority of expenditure etc.
  • In case of statutory corporations the auditor general is fully empowered to undertake their audit and in some cases, the professional accountants undertake the audit. In fact, the audit of each statutory corporation is conducted as per the provisions contained in the applicable Act and such provisions vary from one corporation to another.
  • The provisions of the Companies Act govern audit of government companies. The C&AG has the power to conduct supplementary audit of the accounts of the government companies. The statutory auditor of these types of companies has to submit a copy of his audit report to the C&AG who has the right to comment upon the report.
  • Under the Constitution of India the position of the C&AG of India is similar to that of the judge of the Supreme Court of India. His terms and conditions of service, powers and duties, rights and responsibilities are governed by the relevant Act of the Parliament.
  • Article 151 of the Constitution requires that the audit reports of the C&AG relating to the accounts of the central/state government should be submitted to the President of India/ governor of the concerned state who shall cause them to be laid before the parliament/ state legislature.
REVIEW QUESTIONS

Short-answer Questions

  1. How is the auditor of a government company appointed?
  2. What are the basic features of statutory corporation?
  3. State the objectives of government audit.
  4. Who conducts government audit? How is he appointed?
  5. What is a government company?
  6. What do you mean by ‘supplementary audit’ by C&AG?
  7. State the main features of departmental undertakings.
  8. State the appointment procedure and terms of office of C&AG of India.

Essay-type Questions

  1. Describe the procedure of auditing for government accounts and the accounts of public sector undertakings.
  2. How does government audit differ from commercial audit? Describe the broad objectives of government audit.
  3. Indicate the main features of public sector undertaking. How is it different from private sector undertakings?
  4. Define government company. How is the auditor of a government company appointed and removed? What are the powers and duties of the auditor?
  5. Describe the manner in which the Comptroller and Auditor General controls the audit of government companies.
  6. State the objectives of audit of government accounts and compare them with those of the audit under the Companies Act.
  7. Describe the provisions of the Companies Act relating to the audit of government companies.
  8. Describe the main features which affect auditing of public sector undertaking.
  9. Describe the procedure for audit of (a) departmental undertakings and (b) statutory corporations.