Chapter-7. Auditing. For Internal Circulation Only 1

Transcription

1 Chapter-7 Auditing 1

2 The different types of Audit in BSNL are: C&AG AUDIT - STATUTORY AUDIT Internal audit Statutory audit CAG audit Tax audit Cost audit The above are discussed in detail in the following sections. Internal Audit This is the audit conducted internally by the management by using their own resource persons or by outsourcing chartered accountants. The area of coverage by the internal audit is defined by the management. Statutory audit This is the audit conducted by the statutory auditor appointed by the CAG under the provisions of the section 619 under company act. CAG Audit CAG also conducts its own commercial audit on the various aspects of the working of the company through its own audit wing and come up with its observations. Tax Audit Section 44 AB makes it obligatory for a company carrying on business whose turnover or gross receipts in the previous year exceeds Rs 40 lakhs to get its accounts duly verified and signed by the chartered accountant in prescribed form for the tax audit within a specified date. Cost Audit It is the audit conducted under section 233B of the companies act with a focus on the cost accounting records and other related information required to be maintained by the specific industries. The objective is to have report with independent opinion whether the cost records prescribed by the law have been maintained or not and the cost statement gives true and fair view of the cost of production. BSNL will be subject to cost audit from the current financial year onwards. 2

3 Ideally the internal control system is designed to prevent any financial impropriety by the employees. The thrust is not on detection of such a happening, but to prevent it. When implemented a proper control system automatically hints at the weakness of the major policies with respect to managing cash, receivables, discounts, investments etc. Implementation of effective system of accounting and controls deters the people from committing any act of fraud. The very fact that their actions are being monitored will prevent them from committing any such acts. Of course people inclined to steal/misappropriate will go elsewhere where they have easy access. Audit Process A typical audit process in the BSNL context can be visualized as shown in the following figure. Audit Process Internal Audit Management Driven Statutory Audit C&AG / Companies Act driven Whether the accounts are in compliance with various Accounting Statutory audit report with qualifications / disclaimer " Statutory audit report with no qualifications / disclaimer C&AG supplementary audit, if any C&AG review and comments C&AG Audit Report after discussions with the company / ministry Submission For Internal to Circulation Parliament Only Committees 3

4 Auditing: Government Enterprises 1. Under Section 617 of Government Act, a Govt. Company is a company in which not less than 51% of paid up share capital is held by the Central Government. The Govt. of India Enterprise will be wholly owned by Govt. with its full paid up share capital. o Bharat Sanchar Nigam Limited (B.S.N.L.) was formed as Govt. of India Enterprise (a Govt. company) under provisions of Company Law by an administrative order. o The relevant sections of Company Law (Viz., 224 to 233) dealing with "Auditing" of a company applies to B.S.N.L. in accordance with Section 619 of the Act. 2. The following agencies are involved in Auditing of a Govt. Company: i. Internal Auditors ii. Statutory Auditors / Branch Auditors iii. Comptroller & Auditor General of India The Internal Auditors are being appointed by the Management to review and report about accounts and other matters as directed by it. The Statutory Auditor of Govt. Company shall be appointed or reappointed only by the C&AG as enjoined in Section 619 of Companies Act. As empowered under Section 619(3) of the said Act, the C&AG can direct the Statutory Auditors "in which the company's accounts shall be audited and shall give such auditor instructions in regard to any manner relating to the performance of his functions as such. The Statutory auditor is required to answer the points of special questionnaire issued by the CAG in this connection along with his report and send this information to the CAG within 2 months of signing of accounts." (Some of directions issued by the C.A.G. pertinent to SSAs/Circles of BSNL for answering by the Statutory Auditor are reproduced in Annexure - I) Relevant Extract of Section 619 of Companies Act The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act which came into effect in 1971 and regulates his duties and functions also lays down (Section 19(1) that is relation to audit to accounts of Government Companies, his duties and powers will be in accordance with the provisions in Companies Act. 4

5 Section 619 of the Indian Companies Act provides: 1. The Auditor of a Government Company shall be appointed or reappointed by the Central Government on the advice of the Comptroller and Auditor General. 619(2) The Comptroller and Auditor General shall have power - a. To direct the manner in which the Company's accounts shall be audited by the auditor appointed in pursuance of sub section (2) & Section (619) and to give such auditor instructions in regard to any matter relating to the performance of his functions. b. To conduct a supplementary or test audit of a company's account by such person or persons as he may authorize on his behalf, and for purposes of such audit, to require information or additional information to be furnished to any person or persons so authorized on such matters by such person or persons, and in such form, as the Comptroller and Auditor General, may be general or special order direct. 619 (3) The auditor aforesaid shall submit a copy of his audit report to the Comptroller and Auditor General of India who shall have a right to comment upon or supplement the audit report in such manner as he may think fit. 619 (4) any such comments upon or supplement to the audit report shall be placed before the general meeting of the company as the audit report. Section 619A of the Companies Act further provides that the annual report to the Government companies together with audit reports thereon shall be placed before the Parliament / Legislature every year. 3. Auditing of Annual Accounts As enjoined in Section 227 (2) to 227 (4) of Companies Act, the audit of Annual Financial Accounts (P&L Account and Balance Sheet etc) will be conducted by the Statutory Auditor duly appointed by the C.A.G. A person, who is a Chartered Accountant within the meaning of Chartered Accountants Act 1949, is only qualified for such appointment as an Auditor of Statutory Auditing. o The Statutory Auditor confines himself to examine mostly whether the Company has compiled with "technical requirements" of Company Law (Viz., Accounting Standards, Provisions, Fixed Assets, Depreciation etc) and guidelines issued by 5

6 Institute of Chartered Accountants. Thus the Statutory Auditing is legally fulfilled once the company has made adequate "Disclosures" in the "Notes" to the Accounts". Thereby the Statutory Auditor has got some limitations to comment on the propriety of managerial decision. o In this connection, the remarks of Public Accounts Committee in its Seventh Report (Third Lok Sabha) are pertinent in respect of Govt. Enterprises, about necessity of having separate Efficiency cum Propriety Audit by C.A.G. in addition to Statutory Auditing. "Whatever be the utility of such certificates in the case of private companies, it is considered that so far as government companies are concerned it is impossible to form a judgment of the efficiency of these government companies only from the Balance Sheet and Profit and Loss Account. The capital structure, pricing policy, production standards, labor relations, etc. of government companies differ materially from those of their counterparts in private sector. Quite often concessions are given to these companies in the shape of interest-free loans which an ordinary commercial concern in not allowed to get. Unlike private companies the maximization of profits is neither the primary motive nor is it the only index of the success of government companies. If the balance sheet and the profit and loss account are not a true measure of their success, there must be some other way of satisfying the Parliament that they are run efficiently. It is necessary, therefore, to prescribe some tests by which it may be possible to have a more correct appreciation of their financial working. Partly, some idea can be obtained from the Efficiency cum Propriety Audit conducted by the Comptroller and Auditor General." 4. Auditing of Govt. Company: Action by CAG i. The CAG will review the Financial Report of Statutory Auditor and comment upon such Audited Accounts under Section 619 (4) of Companies Act. The said Review of Accounts made by CAG will be forwarded to the BSNL Corporate Office for publishing as an "Annexure to the Director's Report." The acceptance or otherwise of these comments by the Management will also be published by the BSNL in its Report, along with the comments of C&AG. ii. In addition to the above, the C.A.G. can arrange through Director of Audit and Accounts to test check or conducting separate supplementary audit of the Company Accounts. Accordingly, DAA P&T will conduct his Regulatory Audit in normal course for SSAs/Circles. During the course of this regulatory audit, DAA P&T can issue Audit memos and frame Audit Paras on important irregularities for inclusion in Audit Report - (Commercial) of C.A.G. 6

7 OPENING MEETING : The opening meeting usually represents the first chance to meet with audit clients in a formal setting, and it often sets the tone for the rest of the engagement. Members of the audit group should plan to discuss the meaning of internal control and risk to ensure that every one shares a common understanding of these fundamental concepts. If the auditors and management differ on their interpretation of these terms, the audit is unlikely to be a success. Instead of asking about problem areas or weaknesses auditors should ask management to explain major risks they face in achieving business objectivities. Framing the discussion in this way focuses attention on challenges and opportunities for improvement rather than on how managers are performing. Auditors may want to use the word results rather than findings to describe the information to be provided. Because findings often carries a negative connotation, using this term may give the impression that the audit group intends primarily to look for deficiencies in management's work. The term results however carries a more favorable connotation and using it can help establish a positive starting point for the audit. Because managers are often pressed for time, they will likely be anxious to know how long the audit will last. Auditors should either set a firm exit meeting date or offer a target date for the conclusion of the audit. CLOSING MEETING: The closing or exit meeting represents the final chance for internal auditing to present its professionalism and presentation skills as well as an opportunity to maintain relationship with the client. Therefore there should be no surprises in the exit meetings. This is possible if all issues are discussed before the meeting begins with the executives concerned. Written material followed by discussion increases the level of understanding of any topic and can lead to more useful dialogue during the meeting. If a full draft is not available for advance distribution, auditors should instead prepare a formal list of findings both negative and positive for management's review. Effective strategies for opening and closing meetings can go a long way toward helping audits proceed smoothly. With the right approach auditors can use these meetings to maintain positive relationships wit their clients and ensure that both parties benefit from the engagement. SOME SALIENT DIRECTIONS OF C.A.G. FOR VERIFICATION & AUDIT BY STATUTORY AUDITORS [UNDER SECTION 619 (3)] I. System of Accounts In respect of the following matters, the Statutory Auditor has to offer his observations on the basis of his examination of the books of accounts of the Company. 7

8 1. Are there any important deficiencies in the accounting system for the purpose of "auditing in depth and in the manuals and other instructions laying down the detailed accounting procedures and specifying the financial powers, duties and responsibilities of the different officer?" 2. Is there an effective system of reconciliation of the books by taking out periodical Trial Balances and is the reconciliation of the bank account, control accounts and subsidiary accounts (including those pertaining to the branches and units) up-to-date? 3. Are Asset Registers kept up-to-date and reconciled with the financial books? Important cases of failure to report to the Accounts Department regarding the disposal of items of property, plant and equipment may be mentioned. 4. Is the allocation of expenditure between capital and revenue properly done during construction so that cost of an identifiable unit can be ascertained? If not, defective cases should be indicated. II. Internal Control 1. "Has a Manual outlining the scope and programme of work for the internal audit been drawn up? If so, had the programme been kept up? 2. Are you satisfied that the important points thrown up by the internal auditor have been considered by the Administration and necessary actions taken? If not, indicate the more important points on which consideration / action are outstanding. Have any drawbacks in the system of internal control been noticed? 3. Is the procedure for write off, discounts, refunds etc., adequate? Have any receipts been forgone in the shape of unusual concessions involving material amounts allowed to customers, in the term of discount, rebate, wastage etc.? If so, instances may be given indicating the amount involved." 4. Is there an adequate procedure in force for recovery of charge for materials issued in respect of major construction works? Have you noticed cases where charges for materials etc. issued have not been recovered? If so, instances may be given indicating the amount involved. 5. In what classes of cases does the company's purchasing procedure provide for the calling of the open tenders? Is the prescribed for the calling of open tenders considered adequate? Give instances exceeding Rs... individually, if any, which have come to your notice, in the course of your audit (a) where such procedure has not been followed, and (b) where lowest tender has not been accepted though open tenders were called for. Reasons given by the management in both type of cases should be indicated. (ii) what is the purchasing procedure followed in regard to other 8

9 items which open tenders are not invited, e.g. whether quotations are obtained from a panel of suppliers maintained. 6. Does the company prepare capital, revenue, budget for a financial year with the adequate details and sufficiently in advance. If so, the actual performance, in relation. III. Profit and Loss Account 1. Is the method of valuation of closing stock and work-in-progress acceptable? Defects, if any, may be indicated with any suggestions for improvement. 2. Indicate the method of depreciation adopted and your comments, if any. 3. Were there any special features in the year which have affected the results shown by Profit and Loss account substantially? IV. Balance Sheet A. Sundry Debtors 1. Mention important cases of failure to obtain confirmation of outstanding debts. 2. Mention the details of debts outstanding for more than one year in the following form:...govt. Departments / Others a. Debt over 1 year but less than 2 years... b. Debts outstanding for 2 years but less than 3 years... c. Debts outstanding for 3 years and above Is the system of allowing credit reasonable? Are the debts vigorously pursued? B. Apparatus & Plant: Have all items of A & P costing more than Rs.... Lakhs each was installed and commissioned? In case of Non-commissioning of such plant, what are the reasons given by the management? 9

10 Internal Audit TRADITIONALLY 'INTERNAL AUDITING ' is considered as audit conducted on behalf of the management to ensure that (a) the existing internal controls are adequate and effective. (b) the financial and other records and reports show the results of actual operations accurately and promptly. (c) each unit of the organization follows the policies and procedures as laid down by the top management. The internal auditor used to be engaged in routine checking of stock records, purchase invoices, cash receipts and payments, sales bills and other similar records and documents. In the modern concept, the internal audit goes far beyond the traditional limits. It is defined as " an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. It should assist the members in the effective discharge of their responsibilities. Internal auditor should review the measures of safeguarding assets. They should verify the existence of assets. They should comment on economical and efficient use of resources. They should review the operations or programmes to ascertain whether results are consistent with established objectives and goals and whether the operations or programmes are being carried out as planned. RELATION SHIP BETWEEN INTERNAL AUDITOR AND STATUTOTY AUDITOR. Both the internal auditor and the Statutory auditor examine the same set of accounting documents and carry out similar physical and other checks. They have a common interest of ensuring that an effective system of internal control exists and that the accounting system is adequate to generate true and fair financial statements. But there are some fundamental differences with regard to the status, responsibility, approach and the scope of the operations. The internal auditor is a representative of the management. 10

11 The nature and scope of his operations are determined by the management and hence may differ from organization to organization. The internal auditor dies not therefore enjoy a totally detached position. The internal auditor's approach is to report on matters vital from the point of view of management. Where as - The rights and duties of the statutory auditor are defined by the company's act, 1956 which lays down details provisions which are statutory in nature. The statutory auditor is independent of the management. The statutory is primarily concerned with the truth and fairness of financial statements presented to the share holders. INTERNAL AUDIT IN THE CONTEXT OF BSNL In BSNL, the internal auditors are appointed by the corporate Office every year. Chartered Account firms are selected and their details are communicated to the circles. Constitution of internal audit party It should contain one qualified professional and four semi-qualified professionals. Semi qualified will mean only those audit staff who have not passed the final examination of CA/ICWA. Fees payable are decided and communicated by the corporate office in a graded scale depending upon the status of the office to be inspected. The fees are payable in two instalments on completion of each spell of auditing. The effectiveness of internal audit parties is to be assessed as below and the result intimated to corporate office. 1. Auditor's role in training staff in maintenance of records and effecting timely reconciliation: 1.5 points. 2. Pro- active role in effecting improvement of accounts points. 3. Quality of report in terms of management summary and involvement of the firm in their interaction with branch auditors points. 4. Auditor's role in carrying out proprietary audit points 5. Rest of the items in the scope of work points. 11

12 The internal audit will be done in two phases i.e. from April to Sep and Oct to March As per the present instructions from the corporate office, the following are some of the items which should be commented upon in their report by the internal auditors: CASH: 1. Whether totals of All schedules tally with the general ledger 2. Closing balances of Broad sheet of loans and advances agrees with the trail balance. 3. Whether bank reconciliation statements are properly prepared and that they are submitted regularly on month to month basis to the corporate office. 4. There is no delay in remittance of cheques in to the bank. 5. Whether the money in the collection account is remitted promptly by the bank in to the central account. 6. Whether dishonoured cheques are promptly returned by the bank. 7. Whether the office has taken prompt action to obtain payment fresh payments. 8. Age-wise analysis of un reconciled items of bank debits and credits is given. 9. They should carry out surprise check of cash at least twice in a year.they should also comment whether cash and imprest balances are checked by the higher officers. 10. They carry out proprietary check for vouchers pertaining to temporary advances and imprest accounts. Abnormal delays in settlement of temporary advances and imprest balances are brought to the notice of the head of the office. At least 25% of cases should be test checked either by personal or verification over phone. 11. Medical bills for indoor treatment are supported by verification report by an officer. 12. Cash Book, Bank Book, Journal Book, Sub-Ledger, and general ledger are properly maintained. 13. RRS and temporary advance registers are properly maintained. 14. Service tax and other statutory dues are remitted in time. 15. Payment and realization of IUC payments. 16. Payments to DOT are made in time. INVENTORY: 12

13 Whether the inventory is valued on weighted average method. Physical verification is done periodically. Stock registers are properly maintained. The status of computerization of inventory accounts should also be commented. 1. Reconciliation of closing inventory balance with trial balance. 2. Identify the obsolete and non-moving items of stores. CAPITALIZATON: 1. Whether capitalization is done on a regular basis. 2. Depreciation is calculated and accounted correctly. 3. List out CWIP cases and analyse reasons for delays in capitalization. 4. The fixed asset registers and CWIP registers are maintained. 5. There are no cases of cost over run. 6. The observations by Branch Auditors and C&AG are complied with. WORKS &PLANNING: 1. Procurement of stores has been reasonable. 2. There are no unsanctioned works/projects INTERNAL CHECK/INTERNAL AUDIT BY DEPARTMENTAL OFFICERS Main items of audit by the internal auditors of the department as indicated in corporate office letter No. 9-58/02-03/IA/BSNL dated REVENUE: 1. Whether revenue due has been billed, recovered and accounted for properly. 2. Identify the cases of non-billing and short billing. 3. Prompt disconnection of services for non-payment. 4. Reconciliation of cash accounted for vis-a- vis cash ealised as per TR records. 5. Bank reconciliation work. 6. Proper accounting of expenditure on various projects. 7. Proper exercise of delegation of financial powers. STORES: 1. Whether procurement of materials has been as per actual requirement/ demand. 2. Whether materials procured have been properly accounted for or not. 3. Identify materials not utilized and lying idle for the last two years. 4. Whether the procurements were on competitive rates and whether prescribed procedures have been followed. 13

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15 C & AG Statutory Audit 1. What are the legal provisions governing auditing of annual accounts? 2. How the audit of government companies is carried out? 3. What are general remarks often made in Auditor s report with respect to BSNL? 4. What do you understand by Supplementary Audit by C&AG? 5. What are the responsibilities of Unit Officer with reference to Audit Inspect? 6. What are the various parts of Audit Inspection Reports? 7. Brief about Draft Audit Para. 8. What is the role of IFA with respect of Audit? 15