Financial Audit of Government Companies

Handout 4.1.1 Procedure relating to Audit of Annual Accounts Supplementary Audit under section 619(3) of the Companies Act 1956 : Instructions for conducting supplementary audit u/s 619(3)9b) of the Companies Act 1956 has been given. A detailed check list (enclosed as annexure-A) as a guide for the comprehensive checks to be exercised during such audit. Field parties may use this as an illustrative list only during such audit, which must be conducted with reference to the following : a. b. c. d. Provisions of the Companies Act, 1956 (on the relevant statues governing the Corporation concerned). Memorandum & Articles of Association of the Company. Instructions of the Government of India. ICAIs following pronouncements : i. Accounting Standards. ii. Guidance Notes & Opinions. iii. Statements on Standard Auditing Practices (SAPs). IA&ADs Auditing Standards. International Accounting Standards and International Auditing Guidelines, wherever ICAIs standards/guidelines are not available. Companies (Auditors Report) Order 2003 Companies (Auditors Report) (Amendment) Order 2004 Scrutiny of Auditors Report:

e. f. g. h. 2.

The Auditors Report will undoubtedly be perused by the Audit. It should be remembered that the statement included in the Auditors Report , in compliance of the Companies (Auditors Report) Order 2003 which came into force on 1st July 2003. is a constituent part of the Auditors Report and has to be scrutinized in the same manner as the rest of the Auditors Report. Amendments as per Companies (Auditors Report) (Amendment) Order 2004 (given in Appendix ) which came into force 25 November 2004 should also be kept in view. Further, in respect of every reservation, qualification or adverse remark contained in the Auditors Report which is not accepted as correct by the Management, the Management may be asked to offer their explanation so that the field party can examine the matter reference to the records and determine whether the reservation,

RTI, Jaipur

120

qualification or adverse remark which is contested by the Management need to be commented upon. A. Interaction with Staff: In order to ensure uniformity of approach in conducting the audit of annual accounts, it has been decided that MABs/AsG should have periodical meetings with their Group Officers and Sr.Aos/Aos/AAOs/Sos, at least once a year, and use this opportunity to exchange experiences and information based on last cycle of accounts audit and with reference to recent developments like new International or ICAI standards, opinions, Government instructions or notifications (depreciation for example). For such meetings, the Headquarters section of the Office of the MAB/AG should prepare a digest of important and interesting cases noticed during the last cycle of audit. These meetings should also be utilized to draw attention of field parties to and preferably discuss the implications of new standards, ICAI opinion, Government notifications, instructions from Headquarters Office, etc. B. Planning the Audit : 1. Create a data bank: A Register of Important Points and an Audit Notebook in respect of each auditee organization should be maintained at the Headquarters of MAB/AG Offices for handing over to the field party going for audit of that organization. It may kindly be ensured that these records that these records are maintained carefully. In addition, it has been decided that each MAB/AG Office should maintain a Data Bank of each auditee organisation containing inter alia the annual accounts for the last three years, Memorandum and Articles of Association of the Company Audit Reports (including supplementary reports from statutory auditors) relating to the auditee, and weak areas of accounting as assessed from past experience. This Data Bank should be a prime document based on which the audit plan for the year can be drawn up. It has also been decided that MABs/AsG should prepare a compendium of all the orders applicable to the units they audit in particular, the instructions issued by the Administrative Ministry and the Department of Public Enterprises should be collected. MABs/AsG should also ensure that such orders/instructions are available easily to all audit parties assigned to do accounts audit. Audit parties should also be provided with the latest copies of the ICAIs. Compendia of Statements and Standards AUDING and

121

ACCOUNTING; other relevant Guidance Notes and Opinions and some standard textbooks relating to ratios and financial statements analysis should also be supplied. Progressively, each office should also try to keep these data banks electronically also, i.e. circulars, instructions, etc. could be kept as word processed documents while statistical data could be stored in spreadsheets or data bases as convenient. 2. Pre-audit analysis : The audit planning process should include analysis of the accounts of the auditee for the earlier two years, together with the statutory auditors report (including the supplementary report); the analysis should be used to decided, before the accounts season, the possible areas for intensive scrutiny. This can also be used to formulate appropriate sub-directions under section 619(3) of the Companies Act, 1956 to the statutory auditors. 3.Meeting with Statutory Auditors: Regular meetings with statutory auditors and the management is very important. MABs/AsG should ensure that the areas of weaknesses to be enquired into by the auditors, identified by the pre-audit analysis mentioned earlier, are brought to their notice before they take up the audit and written sub-directions are also issued in time. Besides drawing up the time schedule, these meetings should focus on areas where special attention is called for. In the case of Joint Statutory Auditors, the distributions of work among the auditors should also be ascertained and kept on record to ensure their accountability and assess their performance. 4.Allocation of work: Audits should be planned and executed with care. The Group Officers involvement is essential if the audit is to be effective. Therefore, it has been decided that, before the start of any audit, the group officer should indicate in writing the special checks to be exercised by the party, if any. The SAO/AO in charge of the party should be responsible for allotting the work to individual members, supervising the executing of the work and ensuring that work done is properly documented. Any item of work not specifically allotted shall be deemed to be the work of the SAO/AO himself. After the completion of the audit, the SAO/AO in charge of the audit party should send along with the inspection report and other documents a statement showing the checks out

122

of the check list which were not exercised during the audit indicating also the reasons for not carrying out the checks. 5. Review accounting policies in advance. Para 2.7 of ICAIs Statement of Auditing Practices stipulates that while conducting the audit, the auditor should critically examine the accounting policies adopted by the Company and test them for conformity with recommendations of the Institute. Para 2.13 ibid stresses that disclosure is not a substitute for proper accounting and that the use of improper or unsound methods is not cured by mere disclosure. Nevertheless, several instances have been noticed where the auditee has departed from accepted accountings principles by introducing an accounting policy which covered the erstwhile practice they were following and the Statutory Auditors did not comment on it.It has now been decided that, in such cases a comment should be made, even if disclosure exists. These instructions shall also be applicable to Notes on accounts MABs/AsG may also ensure that accounting policies of all the units under their audit jurisdiction are reviewed for conformity with accounting principles, standards, etc. on a regular basis.

C. After the Audit : 1. Performance appraisal of Statutory Auditors :

Statutory Auditors may be asked to submit the report under Section 619(3) of the Companies Act, 1956 within one week of the certification of the account of the company and, in case the report is not received in time, the delay may be considered as one of the reasons for poor performance of the auditor. During meetings with the statutory auditors and the management of the company for deciding the schedule of preparation and audit of annual accounts, the importance of statutory auditors submitting replies to the audit observations within the time schedule fixed should be stressed, so that the comments on the accounts can be finalized within time. In case replies are not received from the auditors in time, the delay in submission may be considered as one of the reasons for p oor performance of the auditors were evaluating their work.

123

D. General Advice sought by statutory auditors : Under Section 619(3)(a), CAG has the power to direct the manner in which in accounts shall be audited and to given instructions in regard to any matter relating to the performance of the Auditors functions. Accordingly, MABs/AsG have been authorized to issue sub-directions to auditors. If MABs/AsG should be approached by any of the auditors for advice on any problem area during the course of audit. MAB/AG should seek the query in writing and furnish the reply also in writing. 1. Revision of Accounts : According to instructions by CAG Office suitable comments should be taken under section 619(4) of the Companies Act, 1956 in case the auditor does not disclose the full impact of revision of accounts in the notes/auditors reports on the accounts. However, it has been noticed that companies are giving only the net effect on the profitability of the company of revisions made in the accounts, instead of giving the full or gross impact. In order that the reader of the accounts may gauge the extent of inaccuracies in the pre-revised accounts fully, it has been decided that where accounts are revised at the instance of CAGs audit, the gross of full impact of CAGs observations should be disclosed in the notes on accounts by the company or auditor; else, a comment should be made to bring out the full impact. 1. Arrears in Accounts of State Government Companies

Arrears in finalizing the account of Public Sector Undertakings on the State side pose a grave problem. Inter action of various AsG (Commercial) with the respective State Governments had not led to any substantial improvement. In order to improve the situation, it has been decided that the AG concerned should brief the Chairman of the Committee on Public Undertakings about the gravity of the problem together with statistical details so that COPU could call the Chief Secretary to explain the action taken by the Government in tackling and overcoming the arrears. Gist of important instructions for timely completion of audit of annual accounts of PSUs under section 619(4) of the Companies Act 1956.

1. Before the start of accounts audit MsAB should have interaction with Managements and Statutory Auditors to draw a time bound plan to complete the audit of accounts so that Company can hold the AGM in time.

124

2. Time schedule for finalisation of accounts may be fixed in such a way that audit is completed and approved audit comments issued within six weeks of the receipt of certified accounts from the management (including 7 days to be kept for examination of draft comments by Headquarters (CAG office) before the proposed date of AGM) . 3. Directions/sub-directions under section 619(3) of the Companies Act, 1956 may be issued to the Statutory Auditors. Branch auditors immediately on receipt of appointment letters of auditors so that the auditors can submit their report well in time. 4. Half margins should be issued by the head of the Audit part i.e. Sr.AO/AO to the local management/ statutory auditors and provisional comments by Group Officers to the Top management and the Statutory Auditor. 5. After receipt of reply to the provisional comments from the Management/Auditor the decision as to the merit of their inclusion as draft comment may be taken with the approval of MAB. 6. In respect of multi unit Company or big PSUs, adit of annual accounts can be started on receipt of copy of annual accounts more or less simultaneously along with the Statutory Auditors. However, the preliminary comments or audit observations on such accounts should be issued to the Management/Staturoy auditors only after the certified accounts along with Auydit Report are made avialalbe to MAG. 7. In respect of PSUs where more than two MsAB are auditing the accounts, discussions may be held with the top management at Director (Finance)s level by the MAB who is the Principal Auditor of the Company. As such the MAG who is the sub auditor of the Company may send his/here observations reply of the Management/Auditor and his/her further comments in an annotated form immediately after completion of audit to the Principal MAB. In case it becomes necessary the Sub Ar. MAB may hold discussions with the chief executive or head of Finance of local unit of PSU. 8. In case pf Multi unit PSUs, MAB who is the principal auditor of the Company will have power to drop or retain the comments proposed by other MsAB. However, in such cases where there are no clear guidelines/rules for dropping the comments the matter may be referred to the Headquarters. 9. With a view to watching the progress of audit of annual accounts of PSUs, a fortnightly report in the enclosed format (Annexure C) may be sent to Headquarters on 1st & 16th of every month from June to December anmd during the remaining period the report in the format may be sent monthly along with the Monthly Progress Report.

125

Performance Report of Statutory Auditors In case of companies, where the performance of auditor is considered satisfactory, half yearly report ending 31 March/30September may be sent to Headquarters in the existing proforma (copy enclosed as Annexure D) by 5th May/November. 11. Principal Auditor (MAB) should bet the report from Sub-Auditor (s) (MABs) and then only give the final performance report as Principal Auditor. The Principal Auditor can prescribe the due dates for receipt of the Reports from their SubAuditors 12. In case of unsatisfactory performance of Statutory Auditors, the case may be sent to Headquarters as per instruction issued vide No.CA.V/F/WKSP/98-99 dated 18.08.1998. In such cases the performance report of the Principal Auditor should be sent to Headquarters with the copies of the reports of the sub-auditors, if any. 13. If there are areas of disagreement between the Principal Auditor and subauditor(s) irrespective of whether the case falls under 10 or 12 the former should explain in the covering letter to Hqrs, the reasons and justification for his views/assessment as contained in the performance report to be submitted by Principal Auditor to Hqrs. 14. The Performance Report should be signed by the MAB. 10.

126

127