FINANCIAL ADMINISTRATION IN INDIA

• Subject code : 18BPA53C

• Prepared By : DR. P.MAGUDAPATHY

Asst.professor

• Department : PG & Research Department of Public

• Contact No. : 9994672379

Administration

The content is prepared according to the text book and reference book

given in the syllabus.

Year Subject Title Sem. Sub Code

2018 -19

Onwards

Core 8: Financial Administration in India V 18BPA53C

UNIT – I: INTRODUCTION

Nature, Scope and Significance of Public Financial Administration – Meaning- Principle and

types Budget – Modern Techniques of Public Financial Administration.

UNIT – II: BUDGETARY PROCESS AND PUBLIC BUDGETING IN INDIA

Aspects of Indian Budgetary system – Preparation and Enactment of Budget – Execution of

Budget - Control Over Public Expenditure in India – Finance Ministry.

UNIT – III: FINANCIAL COMMITTEES OF PARLIAMENT

Public Accounts Committee – Estimate Committee – Committee on Public Undertakings –

Committee on Subordinate Legislation - Standing Committees of Departments.

UNIT – IV: ACCOUNTING AND AUDITING

Meaning of Accounting and Auditing- Types of Accounts and Audit- Audit in India –

Comptroller and Auditor General of India – Separation of Accounts from Audit.

UNIT – V: PUBLIC FINANCE AND FINANCIAL RELATIONS

Finance Commission of India – Union - State Financial Relations– Resource Mobilization –

Tax Administration in India – Public Debt Administration in India – Local Finances in India

– State Finance Commission.

Reference Books

1. Sarapa.A. Public Finance In India, Kanishka Publishers, Distributros, New Delhi,2004.

2. R.Duff And K.P. Sundharam, Indian Economy, S.CDhand&Company,New Delhi,2004.

3. Goel.S.L, Public Financial Administration, Deep & Deep Publishers,New Delhi,2004

4. M.Lamikanth, Public administration, McGraw Hill publishers, New delhi, 2013.

FINANCIAL ADMINISTRATION IN INDIA

Degree: III B.A Subject Code: 18BPA53C

Semester: V

UNIT – IV

ACCOUNTING AND AUDITING

MEANING OF ACCOUNTING AND AUDITING:

Auditing refers to financial statement audits or an objective examination and

evaluation of a company’s financial statements – usually performed by an

external third party. Audits can be performed by internal parties also, as well as

by a government entity such as the Internal Revenue Service (IRS).

Importance of Auditing

Audit is an important term used in accounting that describes the examination

and verification of a company’s financial records. It is to ensure that transactions

are represented fairly and accurately.

Also, audits are performed to ensure that financial statements are prepared in

accordance with the relevant accounting standards. The three primary financial

statements are:

1. Income statement

2. Balance sheet

3. Cash flow statement

Financial statements are prepared internally following relevant accounting

standards, such as International Financial Reporting Standards (IFRS) or

Generally Accepted Accounting Principles (GAAP), and are developed to provide

useful information to the following:

• Shareholders

• Creditors

• Government entities

• Customers

• Suppliers

• Partners

• Financial statements capture the operating, investing, and financing

activities of a company through various transactions that are recorded.

Because the financial statements are developed internally, there is a high

risk of fraudulent behavior by the preparers of the statements.

• Without proper regulations and standards in place, preparers can easily

misrepresent their financial positioning to make the company appear more

profitable or successful than they actually are.

• Auditing is crucial to ensure that companies represent their financial

positioning fairly and accurately, and in accordance with accounting

standards.

Types of Audits

There are three main types of audits:

1. Internal audits

Internal audits are performed by internal employees of a company or

organization. The audits are not distributed outside the company. Instead, they are

prepared for the use of management and other internal stakeholders.

Internal audits are used to improve decision-making within a company by

providing managers with actionable items to improve internal controls. They also

ensure compliance with laws and regulations and maintains timely, fair, and

accurate financial reporting.

Management teams can also utilize internal audits to identify flaws or

inefficiencies within the company before allowing financial statements to be

reviewed by external auditors.

2. External audits

Performed by external organizations and parties, external audits provide an

unbiased opinion that internal auditors might not be able to give. External

financial audits are utilized to determine whether there are any material

misstatements or errors in a company’s financial statements.

When an auditor provides an unqualified opinion or clean opinion, it reflects

that the auditor provides confidence that the financial statements are represented

with both accuracy and completeness.

External audits are important for allowing various stakeholders to

confidently make decisions surrounding the company being audited.

The key difference between an external auditor and an internal auditor is

that an external auditor is independent. It means that they represent a more honest

opinion rather than an internal auditor who may be biased.

There are many well-established accounting firms that typically complete

external audits for various corporations. The most well-known are the Big Four –

Deloitte, KPMG, Ernst & Young (EY), and PricewaterhouseCoopers (PwC).

3. Government audits

Government audits are performed by entities that relate to ensuring that financial

statements have been prepared accurately in order not to misrepresent the amount

of taxable income of a company.

Within the U.S., the Internal Revenue Services (IRS) performs audits that verify

the accuracy of a taxpayer’s tax returns and transactions. The IRS’s Canadian

counterpart is known as the Canada Revenue Agency (CRA).

Audit selections are made to ensure that companies are not misrepresenting their

taxable income. Misstating taxable income, whether intentional or not, is

considered tax fraud. The IRS and CRA now use statistical formulas and machine

learning to find taxpayers that are at high risk of committing tax fraud.

Performing a government audit may result in a conclusion that there is:

1. No change in the tax return

2. A change that is accepted by the taxpayer

3. A change that is not accepted by the taxpayer

If a taxpayer ends up not accepting a change, the issue will go through a legal

process of mediation or appeal.

Accounting and auditing are both related to finance, but they are not the same

thing, and the distinction between them is important to understand. Generally

speaking, accounting is defined as managing an individual’s or company’s

monetary records and reporting their financial affairs. Auditing, on the other

hand, examines an individual’s or company’s accounting records to determine if

the information they contain is legitimate and accurate.

Accounting or accountancy is the measurement, processing,

and communication of financial and non financial information about economic

entities such as businesses and corporations. Accounting, which has been called

the "language of business", measures the results of an organization's economic

activities and conveys this information to a variety of users,

including investors, creditors, management, and regulators. Practitioners of

accounting are known as accountants. The terms "accounting" and "financial

reporting" are often used as synonyms.

Accounting can be divided into several fields including financial

accounting, management accounting, external auditing, tax accounting and cost

accounting. Accounting information systems are designed to support accounting

functions and related activities. Financial accounting focuses on the reporting of

an organization's financial information, including the preparation of financial

statements, to the external users of the information, such

as investors, regulators and suppliers; and management accounting focuses on the

measurement, analysis and reporting of information for internal use by

management. The recording of financial transactions, so that summaries of the

financials may be presented in financial reports, is known as bookkeeping, of

which double-entry bookkeeping is the most common system.

Even though accounting has existed in various forms and levels of

sophistication throughout many human societies, and the double-entry accounting

system in use today was developed in medieval Europe, particularly in Venice,

and is usually attributed to the Italian mathematician and Franciscan friar Luca

Pacioli. Today, accounting is facilitated by accounting organizations such as

standard-setters, accounting firms and professional bodies. Financial

statements are usually audited by accounting firms, and are prepared in

accordance with generally accepted accounting principles (GAAP). GAAP is set

by various standard-setting organizations such as the Financial Accounting

Standards Board (FASB) in the United States and the Financial Reporting Council

in the United Kingdom. As of 2012, "all major economies" have plans

to converge towards or adopt the International Financial Reporting

Standards (IFRS).

Definition:

Audit is the examination or inspection of various books of accounts by an

auditor followed by physical checking of inventory to make sure that all

departments are following documented system of recording transactions. It is

done to ascertain the accuracy of financial statements provided by the

organisation.

Description:

Audit can be done internally by employees or heads of a particular

department and externally by an outside firm or an independent auditor. The idea

is to check and verify the accounts by an independent authority to ensure that all

books of accounts are done in a fair manner and there is no misrepresentation or

fraud that is being conducted.

All the public listed firms have to get their accounts audited by an

independent auditor before they declare their results for any quarter.

Who can perform an audit? In India, chartered accountants from ICAI or The

Institute of Chartered Accountants of India can do independent audits of any

organisation. CPA or Certified Public Accountant conducts audits in USA.

There are four main steps in the auditing process. The first one is to define the

auditor’s role and the terms of engagement which is usually in the form of a letter

which is duly signed by the client.

The second step is to plan the audit which would include details of deadlines

and the departments the auditor would cover. Is it a single department or whole

organisation which the auditor would be covering. The audit could last a day or

even a week depending upon the nature of the audit.

The next important step is compiling the information from the audit. When

an auditor audits the accounts or inspects key financial statements of a company,

the findings are usually put out in a report or compiled in a systematic manner.

The last and most important element of an audit is reporting the result. The results

are documented in the auditor’s report.

Accounting:

Francis Oakey defines the term as “Accounting is the science of

producing promptly and presetting clearly the facts relating to financial

conditions and operations that are required as a basis of management.”

In the words of L. D. White “The primary functions of a system of accounts are

to make a financial record) to ‘protect those handling funds to reveal the

financial condition of the organization in all its branches or purposes at any time

to facilitate necessary adjustments in rate of expenditure, to give information to

those in responsible positions on the basis of which plans for future financial

and operating programs can rest, and to aid in the marking of an audit.”

Auditing:

Audit is a systematic examination, of the books and records of a

business or other organization in order to ascertain or verify, and to report

upon, the facts regarding its financial operation and the results thereof.

Audit is a process of ascertaining whether the administration has spent or is

spending its funds in accordance with the terms of the legislature which

appropriated the money.

Thus the main purpose of audit is to fix the responsibility of the officers of the

government for any illegal or improper use of funds. An independent audit is

necessary because it protects the state against misappropriation of funds.

TYPES OF ACCOUNTING:

There are several types of accounting that range from auditing to the

preparation of tax returns. Accountants tend to specialize in one of these

fields, which leads to the different career tracks noted below:

• Financial accounting.

This field is concerned with the aggregation of financial information into

external reports. Financial accounting requires detailed knowledge of the

accounting framework used by the reader of a company's financial statements,

such as Generally Accepted Accounting Principles (GAAP) or International

Financial Reporting Standards (IFRS). Or, if a company is publicly-held, it

requires a knowledge of the standards issued by the government entity

responsible for public company reporting in a specific country (such as the

Securities and Exchange Commission in the United States). There are several

career tracks involved in financial accounting. There is a specialty in external

reporting, which usually involves a detailed knowledge of accounting

standards. There is also the controller track, which requires a combined

knowledge of financial and management accounting.

• Public accounting.

This field investigates the financial statements and supporting accounting

systems of client companies, to provide assurance that the financial statements

assembled by clients fairly present their financial results and financial

position. This field requires excellent knowledge of the relevant accounting

framework, as well as an inquiring personality that can delve into client

systems as needed. The career track here is to progress through various audit

staff positions to become an audit partner.

• Government accounting

This field uses a unique accounting framework to create and manage funds,

from which cash is disbursed to pay for a number of expenditures related to

the provision of services by a government entity. Government accounting

requires such a different skill set that accountants tend to specialize within this

area for their entire careers.

• Forensic accounting.

This field involves the reconstruction of financial information when a

complete set of financial records is not available. This skill set can be used to

reconstruct the records of a destroyed business, to reconstruct fraudulent

records, to convert cash-basis accounting records to the accrual basis, and so

forth. This career tends to attract auditors. It is usually a consulting position,

since few businesses require the services of a full-time forensic accountant.

Those in this field are more likely to be involved in the insurance industry,

legal support, or within a specialty practice of an audit firm.

• Management accounting.

This field is concerned with the process of accumulating accounting

information for internal operational reporting. It includes such areas as cost

accounting and target costing. A career track in this area can eventually lead to

the controller position, or can diverge into a number of specialty positions,

such as cost accountant, billing clerk, payables clerk, and payroll clerk.

• Tax accounting.

This field is concerned with the proper compliance with tax regulations, tax

filings, and tax planning to reduce a company's tax burden in the future. There

are multiple tax specialties, tracking toward the tax manager position.

• Internal auditing.

This field is concerned with the examination of a company's systems and

transactions to spot control weaknesses, fraud, waste, and mismanagement,

and the reporting of these findings to management. The career track progresses

from various internal auditor positions to the manager of internal audit. There

are specialties available, such as the information systems auditor and the

environmental auditor.

Accounting is a vast and dynamic profession and is constantly adapting itself to

the specific and varying needs of its users. Over the past few decades,

accountancy has branched out into different types of accounting to cater for the

diversity of needs of its users.

Financial Accounting

Financial accounting is the process of producing information for external

use usually in the form of financial statements. Financial Statements reflect an

entity’s past performance and current position based on a set of standards and

guidelines known as GAAP (Generally Accepted Accounting Principles). GAAP

refers to the standard framework of guideline for financial accounting used in any

given jurisdiction. This generally includes accounting standards (e.g. International

Financial Reporting Standards), accounting conventions, and rules and regulations

that accountants must follow in the in the preparation of the financial statements.

Management Accounting

Management accounting produces information primarily for internal use by

the company’s management. The information produced is generally more detailed

than that produced for external use to enable effective organization control and

the fulfillment of the strategic aims and objectives of the entity. Information may

be in the form budgets and forecasts, enabling an enterprise to plan effectively for

its future or may include an assessment based on its past performance and results.

The form and content of any report produced in the process is purely upon

management’s discretion. Cost accounting is a branch of management accounting

and involves the application of various techniques to monitor and control costs. Its

application is more suited to manufacturing concerns.

Governmental Accounting

Also known as public accounting or federal accounting, governmental

accounting refers to the type of accounting information system used in the public

sector. This is a slight deviation from the financial accounting system used in the

private sector. The need to have a separate accounting system for the public sector

arises because of the different aims and objectives of the state owned and

privately owned institutions. Governmental accounting ensures the financial

position and performance of the public sector institutions are set in budgetary

context since financial constraints are often a major concern of many

governments. Separate rules are followed in many jurisdictions to account for the

transactions and events of public entities.

Tax Accounting

As the name implies, tax accounting refers to accounting for the tax related

matters. It is governed by the tax rules prescribed by the tax laws of a jurisdiction.

Often these rules are different from the rules that govern the preparation of

financial statements for public use (i.e. GAAP). Tax accountants therefore adjust

the financial statements prepared under financial accounting principles to account

for the differences with rules prescribed by the tax laws. Information is then used

by tax professionals to estimate tax liability of a company and for tax planning

purposes.

Forensic Accounting

Forensic accounting is the use of accounting, auditing and investigative

techniques in cases of litigation or disputes. Forensic accountants act as expert

witnesses in courts of law in civil and criminal disputes that require an assessment

of the financial effects of a loss or the detection of a financial fraud. Common

litigation where forensic accountants are hired include insurance claims, personal

injury claims, suspected fraud and claims of professional negligence in a financial

matter (e.g. business valuation).

Project Accounting

Project accounting refers to the use of accounting system to track the

financial progress of a project through frequent financial reports. Project

accounting is a vital component of project management. It is a specialized branch

of management accounting with a prime focus on ensuring the financial success

of company projects such as the launch of a new product. Project accounting can

be a source of competitive advantage for project-oriented businesses such as

construction firms.

Social Accounting

Also known as Corporate Social Responsibility Reporting and

Sustainability Accounting, social accounting refers to the process of reporting

implications of an organization’s activities on its ecological and social

environment. Social Accounting is primarily reported in the form of

Environmental Reports accompanying the annual reports of companies. Social

Accounting is still in the early stages of development and is considered to be a

response to the growing environmental consciousness amongst the public at large.

The important systems of accounting followed at present are:

1. Double-entry Book-keeping: It is the system of accounting in which every

item of expenditure is entered at two places. One entry remains with the

operating service while another is sent to the Accounts Office if there is a

separate department of the Government or to the controlling officer of the

same service.

2. Cost Accounting: It is the determination of inclusive costs per unit. It may

be applied in production, e.g., the unit cost of commodity manufactured in a

government factory. This system is mostly made use of in the Public Works

Department because this Department had a reputation for extravagance. By this

system costs may be compared in a single institution or a single operation over

successive periods of time and the comparative costs of similar operations in

different agencies or in different jurisdictions may be determined.

3. Cash System: The cash system of accounts records transaction only when

cash has been actually received or disbursed, while the accrual system records

transactions at the time of commitment is made. Thus cash system disregards

all operations of the actual type and seeks to record only those operations in

which an actual transfer of cash has taken place. It gives us no information

regarding the accrual of assets and liabilities but gives data regarding

liquidation alone. Government mostly make use of the cash accounting system

because it is simple.

4. Accrual Accounting System: It is that system of accounting by which the

right to a receipt, or the obligation to make a payment, is established or is

technically called, accrues. Under this system appropriate entry is made in the

account books of all actions having for their result an undertaking with the

right to an asset or placing it under an obligation to pay. This system is

followed in France.

Audit may be broadly classified as Audit of Appropriations Accounts and

Audit of Public Undertakings. Appropriations Audit is to ensure that the

funds voted by the legislature are utilized by the executive for the purposes

for which they were intended with due regard to economy and efficiency. It

comprises:

(a) audit from the point of view of accountancy and classification;

(b) audit from the point of view of authority;

(c) audit appropriation and finance accounts; and

(d) audit from the point of view of propriety.

Audit of accountancy is to see that the final accounts give a complete and

true picture of the financial transactions. It is meant to check and detect frauds

and technical errors in accounts. The booking of expenditure against the

appropriate head and checking of supporting vouchers are part of this

responsibility.

Audit of authority is meant to ensure that those who incurred the

expenditure had the requisite authority. Cases where expenditure has been

incurred in the absence or in excess of the requisite authority are highlighted in

the audit report. Audit of appropriation is the most important part of obligatory

audit. The primary duty is to see that the amounts authorized by the legislature

are utilized for the purposes for which they are intended. Appropriations audit

is to draw the attention of the legislature about overspending and under

spending.

Audit of propriety is to detect cases of extravagance and waste even

when expenditure formally conforms to legality and regularity. Improper

use of stocks and stores, unsound canons of financial administration, etc.,

fall within the audit of such ‘higher audit’.

Audit of public sector undertakings pertains to statutory corporations and

government companies which have grown in number and variety both at

the centre and in the states. These enterprises were given greater

operational freedom.

AUDIT IN INDIA:

Economic decisions in every society must be based upon the information

available at the time the decision is made. For example, the decision of a bank to

make a loan to a business is based upon previous financial relationships with that

business, the financial condition of the company as reflected by its financial

statements and other factors. If decisions are to be consistent with the intention of

the decision makers, the information used in the decision process must be

reliable. Unreliable information can cause inefficient use of resources to the

detriment of the society and to the decision makers themselves. In the lending

decision example, assume that the barfly makes the loan on the basis of

misleading financial statements and the borrower Company is ultimately unable

to repay. As a result the bank has lost both the principal and the interest. In

addition, another company that could have used the funds effectively was

deprived of the money.

As society become more complex, there is an increased likelihood that

unreliable information will be provided to decision makers. There are several

reasons for this: remoteness of information, voluminous data and the existence of

complex exchange transactions. As a means of overcoming the problem of

unreliable information, the decision-maker must develop a method of assuring

him that the information is sufficiently reliable for these decisions. In doing this

he must weigh the cost of obtaining more reliable information against the

expected benefits. A common way to obtain such reliable information is to have

some type of verification (audit) performed by independent persons. The audited

information is then used in the decision making process on the assumption that it

is reasonably complete, accurate and unbiased.

The term audit is derived from the Latin term ‘audire,’ which means to hear. In

early days an auditor used to listen to the accounts read over by an accountant in

order to check them Auditing is as old as accounting. It was in use in all ancient

countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas

contain reference to accounts and auditing. Arthasashthra by Kautilya detailed

rules for accounting and auditing of public finances. The original objective of

auditing was to detect and prevent errors and frauds Auditing evolved and grew

rapidly after the industrial revolution in the 18th century With the growth of the

joint stock companies the ownership and management became separate. The

shareholders who were the owners needed a report from an independent expert on

the accounts of the company managed by the board of directors who were the

employees. The objective of audit shifted and audit was expected to ascertain

whether the accounts were true and fair rather than detection of errors and frauds.

In India the companies Act 1913 made audit of company accounts compulsory

With the increase in the size of the companies and the volume of transactions the

main objective of audit shifted to ascertaining whether the accounts were true and

fair rather than true and correct. Hence the emphasis was not on arithmetical

accuracy but on a fair representation of the financial efforts The companies

Act.1913 also prescribed for the first time the qualification of auditors The

International Accounting Standards Committee and the Accounting Standard

board of the Institute of Chartered Accountants of India have developed standard

accounting and auditing practices to guide the. accountants and auditors in the day

to day work The later developments in auditing pertain to the use of computers in

accounting and auditing. In conclusion it can be said that auditing has come a long

way from hearing of accounts to taking the help of computers to examine

computerised accounts

India's Company law prescribes four different kinds of audit for companies,

namely internal audit, statutory audit, cost audit, and secretarial audit. Further,

section 44AB of the Income Tax Act, 1961, lays down the provisions for

income tax audit.

The term auditing has been defined by different authorities.

1. Spicer and Pegler:

"Auditing is such an examination of books of accounts and vouchers of

business, as will enable the auditors to satisfy himself that the balance sheet is

properly drawn up, so as to give a true and fair view of the state of affairs of

the business and that the profit and loss account gives true and fair view of the

profit/loss for the financial period, according to the best of information and

explanation given to him and as shown by the books; and if not, in what

respect he is not satisfied."

2. Prof. L.R.Dicksee.

"auditing is an examination of accounting records undertaken with a view to

establish whether they correctly and completely reflect the transactions to

which they relate. 3 The book "an introduction to Indian Government

accounts and audit" "issued by the Comptroller and Auditor General of India,

defines audit “an instrument of financial control. It acts as a safeguard on

behalf of the proprietor (whether an individual or group of persons) against

extravagance, carelessness or fraud on the part of the proprietor's agents or

servants in the realization and utilisation of the money or other assets and it

ensures on the proprietor's behalf that the accounts maintained truly represent

facts and that the expenditure has been incurred with due regularity and

propriety. The agency employed for this purpose is called an auditor."

FEATURES OF AUDITING

• Audit is a systematic and scientific examination of the books of

accounts of a business;

• Audit is undertaken by an independent person or body of persons who

are duly qualified for the job.

• Audit is a verification of the results shown by the profit and loss

account and the state of affairs as shown by the balance sheet.

• Audit is a critical review of the system of accounting and internal

control.

• Audit is done with the help of vouchers, documents, information and

explanations received from the authorities.

• The auditor has to satisfy himself with the authenticity of the financial

statements and report that they exhibit a true and fair view of the state

of affairs of the concern.

The auditor has to inspect, compare, check, review, scrutinize the vouchers

supporting the transactions and examine correspondence, minute books of

share holders, directors, Memorandum of Association and Articles of

association etc., in order to establish correctness of the books of accounts.

• OBJECTIVES OF AUDITING

• There are two main objectives of auditing. The primary objective and

the secondary or incidental objective. a. Primary objective – as per

Section 227 of the Companies Act 1956, the primary duty (objective)

of the auditor is to report to the owners whether the balance sheet gives

a true and fair view of the Company’s state of affairs and the profit and

loss A/c gives a correct figure of profit of loss for the financial year. b.

Secondary objective – it is also called the incidental objective as it is

incidental to the satisfaction of the main objective. The incidental

objective of auditing are: i. Detection and prevention of Frauds, and ii.

Detection and prevention of Errors. Detection of material frauds and

errors as an incidental objective of independent financial auditing

flows from the main objective of determining whether or not the

financial statements give a true and fair view. As the Statement on

auditing Practices issued by the Institute of Chartered Accountants of

India states, an auditor should bear in mind the possibility of the

existence of frauds or errors in the accounts under audit since they may

cause the financial position to be mis-stated. Fraud refers to intentional

misrepresentation of financial information with the intention to

deceive. Frauds can take place in the form of manipulation of accounts,

misappropriation of cash and misappropriation of goods. It is of great

importance for the auditor to detect any frauds, and prevent their

recurrence. Errors refer to unintentional mistake in the financial

information arising on account of ignorance of accounting principles

i.e. principle errors, or error arising out of negligence of accounting

staff.

Audits are generally classified into two types:

Statutory audits and Internal audits.

Social audit is a process of reviewing official records and determining whether

state reported expenditures reflect the actual monies spent on the ground.

Statutory audit refers to the audit based on the laws applicable on the entity for

the time being in force. It is governed by the Indian Accounting Standards (Ind-

AS) issued by Institute of Chartered Accountants of India from time to time. A

Chartered accountant holding a certificate of practice in India is qualified to be

a statutory auditor of an 2013. This is as per convention of Companies Act

2013.

COMPTROLLER AND AUDITOR GENERAL OF INDIA:

The Comptroller and Auditor General (CAG) of India is the

Constitutional Authority in India, established under Article 148 of the

Constitution of India. He is empowered to Audit all receipts and expenditure of

the Government of India and the State Governments, including those of

autonomous bodies and corporations substantially financed by the Government.

The CAG is also the statutory auditor of Government owned corporations and

conducts supplementary audit of government companies in which the

Government has an equity share of at least 51 per cent or subsidiary companies

of existing government companies.

The reports of the CAG are laid before the Parliament/Legislatures and

are being taken up for discussion by the Public Accounts Committees (PACs)

and Committees on Public Undertakings (COPUs), which are special

committees in the Parliament of India and the state legislatures. The CAG is

also the head of the Indian Audit and Accounts Department, the affairs of which

are managed by officers of Indian Audit and Accounts Service, and has 43,576

employees across the country (as on 01.03.2020). In 1971 the central

government enacted the Comptroller and Auditor

General of India (Duties, Powers, and Conditions of Service) Act, 1971.

In 1976 CAG was relieved from accounting functions.

Article 148 – 151 of the Constitution of India deal with the institution of

the CAG of India

Appointment

The Comptroller and Auditor-General of India is appointed by the President of

India

Oath or affirmation

"I,(name of the person being appointed), having appointed Comptroller and

Auditor-General of India do swear in the name of God/solemnly affirm that I will

bear true faith and allegiance to the Constitution of India as by law established,

that I will uphold the sovereignty and integrity of India, that I will duly and

faithfully and to the best of my ability, knowledge and judgement perform the

duties of my office without fear or favour, affection or ill-will and that I will

uphold the Constitution and the laws."

Duties of the CAG

As per the provisions of the constitution, the CAG's (DPC) (Duties, Powers and

Conditions of Service) Act, 1971 was enacted. As per the various provisions, the

duties of the CAG include the audit of:

• Receipts and expenditure from the Consolidated Fund of India and of the State

and Union Territory having legislative assembly.

• Trading, manufacturing, profit and loss accounts and balance sheets, and other

subsidiary accounts kept in any Government department; Accounts of stores

and stock kept in Government offices or departments.

• Government companies as per the provisions of the Companies Act, 2013.

• Corporations established by or under laws made by Parliament in accordance

with the provisions of the respective legislation.

• Authorities and bodies substantially financed from the Consolidated Funds of

the Union and State Governments. Anybody or authority even though not

substantially financed from the Consolidated Fund, the audit of which may be

entrusted to the C&AG.

• Grants and loans given by Government to bodies and authorities for specific

purposes.

• Entrusted audits e.g. those of Panchayati Raj Institutions and Urban Local

Bodies under Technical Guidance & Support (TGS).

Compensation

The salary and other conditions of service of the CAG are determined by

the Parliament of India through "The Comptroller and Auditor-General (Duties,

Powers and Conditions of Service) Act, 1971". His salary is same as that of judge

of the Supreme court of India. Neither his salary nor rights in respect of leave of

absence, pension or age of retirement can be varied to his disadvantage after his

appointment. The CAG is not eligible for further office either under

the Government of India or under the Government of any State after he has ceased

to hold his office. These provisions are in order to ensure the independence of

CAG.[

Removal

The CAG can be removed only on an address from both houses of parliament on

the ground of proved misbehaviour or incapacity. The CAG vacates the office on

attaining the age of 65 years or 6 year term, which ever is earlier or by

impeachment process

Indian Audit and Accounts Services

Main article: Indian Audit and Accounts Services

The Constitution of India [Article 148] provides for an independent office to the

CAG of India. He or she is the head of Indian Audit and Accounts Department.

He/she has a duty to uphold the Constitution of India and laws of the Parliament

to safeguard the interests of the public exchequer. The Indian Audit and Accounts

Service aids the CAG in the discharge of his/her functions.

Scope of audits

"CAG is not a munimji or an accountant or something like that... He is a

constitutional authority who can examine the revenue allocation and matters

relating to the economy. CAG is the principal auditor whose function is to go into

the economy, effectiveness and efficiency of the use of resources by the

government. If the CAG will not do, then who else will do it"

– Observation of a bench of Supreme Court of India while dismissing a petition

challenging CAG reports on 2G spectrum, Coal Blocks Allotment, etc.

Audit of government accounts (including the accounts of the state governments)

in India is entrusted to the CAG of India who is empowered to audit all

expenditure from the Consolidated Fund of the union or state governments,

whether incurred within India or outside, all revenue into the Consolidated Funds

and all transactions relating to the Public Accounts and the Contingency Funds of

the Union and the states. Specifically, audits include:

• Transactions relating to debt, deposits, remittances, Trading, and

manufacturing

• Profit and loss accounts and balance sheets kept under the order of

the President or Governors

• Receipts and stock accounts. CAG also audits the books of accounts of the

government companies as per Companies Act.

In addition, the CAG also executes performance and compliance audits of various

functions and departments of the government. Recently, the CAG as a part of

thematic review on "Introduction of New Trains" is deputing an auditors' team on

selected trains, originating and terminating at Sealdah and Howrah stations, to

assess the necessity of their introduction.[22] In a path-breaking judgement, the

Supreme Court of India ruled that the CAG General could audit private firms in

revenue-share deals with government.

CAG has been elected the Chairman of the United Nations' Board of

Auditors. CAG has been appointed as external auditor of eleven UN

organisations:

• World Intellectual Property Organization (WIPO)

• United Nations Secretariat (Volume 1)

• United Nations Children's Fund (UNICEF)

• United Nations Escrow (Iraq) Account

• United Nations Joint Staff Pension Fund (UNJSPF)

• Strategic Heritage Plan (SHP)

• United Nations Compensation Commission (UNCC)

• International Trade Centre (ITC)-Capital Master Plan (CMP)

• United Nations Office for Project Services (UNOPS),

• Information Communication Technology (OICT)

• Umoja

Omkar Goswami is an Indian who is presently one of the External Auditors of the

UN organisation World Food Programme (WFP) headquartered at Rome, Italy.

In 2012 CAG was complimented for its professionalism, training & infrastructure

by its US counterpart

Reforms suggested by former CAG Vinod Rai

In November 2009, the CAG requested the government to amend the 1971 Audit

Act to bring all private-public partnerships (PPPs), Panchayti Raj Institutions and

societies getting government funds within the ambit of the CAG. The amendment

further proposes to enhance CAG's powers to access information under the Audit

Act. In the past, almost 30% of the documents demanded by CAG officials have

been denied to them. The PPP model has become a favourite mode of executing

big infrastructure projects worth millions of rupees and these projects may or may

not come under the audit purview of the CAG, depending on sources of funds and

the nature of revenue sharing agreements between the government and the private

entities. As of 2013, it is estimated that 60 percent of government spending does

not come under the scrutiny of the CAG.

SEPARATION OF ACCOUNTS FROM AUDIT:

A considerable controversy has arisen with regard to the Indian practice

of combining accounts and audit functions, which on the face seems highly

incongruous. The system of combination of Accounting and Auditing in

India has been the legacy of the British Administration, who had introduced

it here on the grounds of economy and expediency contrary to the system

followed in their own country.

Although the system had come under review and attack from every reform

committee, but it has continued, even after the adoption of the Republican

Constitution. During the early fifties various pronouncements were made by the

Public Accounts Committee to the effect that the existing system was

fundamentally wrong in. principles, and recommended that the CAG should be

relieved of his accounting responsibilities.

It argued that the present arrangement under which the spending

authorities are not responsible for the maintenance of a complete and up-to-

date account relating to the transactions for which they are themselves

accountable, and the responsibility for ‘which should lie on outside

authority, is highly defective. As a result the Government in 1955 accepted

in principle the separation of audit and accounts.

A considerable controversy has arisen with regard to the Indian practice of

combining accounts and audit functions, which on the face seems highly

incongruous. The system of combination of Accounting and Auditing in India has

been the legacy of the British Administration, who had introduced it here on the

grounds of economy and expediency contrary to the system followed in their own

country. Although the system had come under review and attack from every

reform committee, but it has continued, even after the adoption of the Republican

Constitution. During the early fifties various pronouncements were made by the

Public Accounts Committee to the effect that the existing system was

fundamentally wrong in. principles, and recommended that the CAG should be

relieved of his accounting responsibilities. It argued that the present arrangement

under which the spending authorities are not responsible for the maintenance of a

complete and up-to-date account relating to the transactions for which they are

themselves accountable, and the responsibility for ‘which should lie on outside

authority, is highly defective. As a result the Government in 1955 accepted in

principle the separation of audit and accounts.

The Comptroller and Auditor General’s (Duties, Powers and Conditions of

Service) Act which was passed in 1971 visualised the need for separating

accounts from audit. In June 1975, the Government of India approved a scheme of

departmentalization of accounts in a phased manner in all the Central Ministries

and Departments. It was completed by October 1976. The requisite accounting

personnel were transferred from the CAG’s establishment from 1978, the CAG is

relieved of the duty of maintaining the accounts of the Union Government. The

accounts of the State governments, continues to be compiled by the CAG.

Under the New system, the Secretary of the Ministry is the Chief Accounting

Authority for all transactions of the Ministry and its attached and subordinate

offices. He discharges this responsibility through and with the assistance of the

Financial Adviser. The Secretary, as the Chief Accounting Authority, has a total

and overall responsibility for the efficient working of the payment and accounting

set up.

On behalf of the Chief Accounting Authority the Financial Adviser is

responsible for the preparation of the budget of the Ministry and its department,

for arranging payments sanctioned by the Ministry, for consolidation of the

accounts for the Ministry as a whole, for the preparation of Appropriation

Accounts for the Grants Controlled by the Ministry, for ensuring accuracy of

accounts and efficiency of operation, and for the introduction of an efficient

system of management best suited to the functional requirements of the Ministry

and its departments.

Under the Financial Adviser, there is the Principal Accounts Officer of the

Ministry/ Department of appropriate status heading on Accounts Department. His

office is not only the Pay and Accounts office for the Headquarters Secretariat but

also in charge of consolidation of accounts rendered by subordinate Pay and

Accounts Offices. The attached and field offices of the Ministry are grouped

under one or more Pay and Accounts Offices depending upon their size and

spread. Each Pay and Accounts Officer is under the charge of an Accounts Officer

and is manned by trained accounts staff.

The Pay and Accounts offices render monthly compiled accounts to the Principal

Accounts Officer of the Ministry. He prepares the accounts of the Ministry as a

whole by the end of the subsequent month. When approved by the Financial

Adviser, these accounts are sent to the Controller General of Accounts in the

Ministry of Finance who is responsible for establishing and maintaining a

technically sound accounting system in the departmentalized offices, administer

the accounting cadres and consolidate the monthly civil accounts which is now

being done by the Accountant General, Central Revenues.

Controller General of Accounts The Controller General of Accounts is the apex

accounting authority of the Central Government and exercises the powers of the

President under Article 150 of the Constitution for prescribing the forms of

Accounts of the Union and State Governments on the advice of Comptroller and

Auditor General of India. The Controller General of Accounts is responsible,

interalia, for:

1. Preparation and presentation to the Parliament of the Annual Appropriation

Accounts (Civil) and Finance Accounts of the Union Government.

2. Ensuring a sound and effective internal audit and pre-check system in the Civil

Ministries.

3. Preparation and consolidation of the Union Government Monthly Accounts.

4. Government disbursements and banking arrangements of the Ministries/

Departments of Government of India. It closely, monitors the extant system by

means of periodical interaction with the Reserve Bank of India and Public Sector

Banks on an ongoing basis.

5. Monitoring of expenditure in Civil Ministries through prompt and accurate

accounting.

6. Enabling the effective utilisation of accounts as a tool of management by

constant up-gradation of the quality of accounts, leading to improved financial

control within the Government.

7. Ensuring effective and close monitoring of receipts of the Government of India

especially those relating to Income Tax, Custom and Central Excise.

In order to maintain the requisite technical standard of accounting the CGA has

power to inspect the Departmentalised Accounts Offices to ensure that the

accounts are maintained accurately. For this purpose an Inspection Wing has,

therefore, been set up in the Office of the Controller General of Accounts to carry

out the duties entrusted to it under the Departmentalised Accounting System.

Besides a selective inspection of Public Sector banks handling Government

transactions is also conducted through the Controller/Controller of Accounts in

order to ensure that they follow the relevant procedure.

The Controller General of Accounts is also responsible for evaluating and

processing the proposals relating to the capital restructuring of various public

sector undertakings (PSUs) of the Union Government. Generally, the proposals

involve appraisal of the strategy proposed for reviewing the Unit. Each proposal is

evaluated on the basis of company specific options available. In evaluating these

proposals a clear distinction is made between the Government’s role as a regulator

and its commercial interests as owner of an industry participant. The appraisal of

these proposals is a comprehensive one involving the following:

1. Appraisal of the Rehabilitation scheme prepared by the Operating Agency

appointed by the Board of Industrial and Financial Restructuring.

2. Analysis of the stock returns-PE ratios, PB ratios and PCF ratios for the PSUs

vis-avis private sector competitors, where the proposal is for conversion of equity

into debt in order to improve returns to private stockholders.

3. Bench marking the performance of the company vis-a-vis its peers from the

private sector and public sector.

4. Audit of the financial model prepared by the PSU.

5. Preparation of detailed financial model containing projections and sensitivities.

6. Detailed analysis of the financials of the PSU, especially its operating costs.

The Controller General of Accounts presents a detailed analytical review of Union

Government Accounts to the Finance Minister every month.

The review covers major aspects of receipts, expenditure, fiscal deficit, sources of

financing to facilitate decision making at the highest level. In addition, accounting

data is also supplied to Central Statistical Organisation, Reserve Bank of India

and other agencies. A provisional Account (un -audited) for the year is also

prepared at the end of the financial year.

The Controller General of Accounts also brings out every year, a booklet

entitled ‘Accounts at a Glance’ bringing out broad and significant features of

Government Receipts and Expenditure.