Overview of Public Sector Auditing in India Constitutional arrangement Organizational arrangement Audit process and products

Public Sector Auditing Public sector audit is a form of legislative oversight under constitutional arrangement over the executive that ▫ seeks to enhance accountability and promote improvement in use of public resources Accountability is answerability for the way one exercised power and control, mediated rights and used discretions vested by law in public interest.

Constitution of India entrusted the responsibility of public sector auditing in India to the C&AG, assisted by IAA&D through Audits, CAG seeks to provide assurance to the Legislature about the functioning of the executive Constitution-Legislature-C&AG of India Constitution of India Article 148 to 151 Duties and Power of C&AG Act 1971 (DPC Act) Public Sector Auditing in India – Constitutional arrangement

CAG of the Union and the States Other Federal Countries Supreme Audit Institutions -SAIs INTOSAI “mutual experience benefits all” UN Resolution 22 Dec 2011 – “strengthening Supreme Audit Institutions contributes in promoting the efficiency, accountability, effectiveness & transparency of public administration” India- INTOSAI – Governing Board, 1 of the 4 Committees

broadly the SAI/Public Sector Auditing looks at the Executive/ Government in the following way.

Union Government comprises of about 50 Ministries with about 100 Demands for Grants and Railways grouped into following sectors ▫ Revenue Services Sector (Tax Departments) ▫ Economic Services Sector (Oil & Gas, Coal, other Minerals, Industries, Power, Transport) ▫ Social Service Sector (Health, Education, Culture, Social Welfare, Food Security, Rural Develop) ▫ General Services Sector (Defence, Paramilitary, Administration, Legislature) It is same in a smaller scale for all State Governments

Public Sector Audit looks at the departments as follows A public sector entity is created to deliver a service. Primary function is to fulfil its service delivery mandate efficiently. Their operational performance is expected to efficient- first responsibility Entity to carry out their operations - provided with financial resources, budget. acquires all other resources like men, material, assets, land, building etc that they need for their activities. Procurement rules, GFR, FR&SR, Travel Conduct Rules, Budget Rules -to safeguard from- theft, loss, misuse, abuse, mismanage Safeguard of resources at all the times by following the related rules is the second responsibility. Entities to keep an ‘account’ of all financial transactions and related administrative records ( sanctions) Keeping an account of financial ‘transactions’ in the books of accounts --reporting within financial reporting framework – the third responsibility

Audited with an objective to examine ‘ to what extent the entities service delivery operations are efficient and economical’ is performance audit. ‘to what extent entity could safeguard all the resources with which it is entrusted or responsible for - from theft, loss, mismanage, misuse, abuse, waste, by complying with rules compliance audit. (also natural resources) ‘to what extent the entity’s financial reporting is reliable’ i.e., to what extent correctly recognised, measured, the figures are classified, captured, reported in the financial statements is financial audit.

Audit of Central Government Departments is organized in the following lines (about 50 Ministries with about 100 Demands for Grants ) ▫ Economic Services Sector (Oil & Gas, Coal, other Minerals, Industries, Power, Transport-Railways) ▫ General Services Sector (Defence, Administration) ▫ Social Service Sector (Health, Education, Culture, Social Welfare, Food Security, Rural Develop) ▫ Revenue Services Sector (Tax Departments) Audit of Central Government Departments

Audit of Economic Services Sector Departments Audit of Railways 18 offices headed by Principal Directors (PDs) 14 cities Assisted by 24 Directors /Dy dedicated cadre of Audit Officers, Asst AOs,Auditors Posts and Communications 1 office in Delhi headed by Director General (DG) 14 Dir/Dy at 12 locations dedicated cadre AO,AAO Audit of all Economic Services Departments (Power, Transport etc) by 13 offices headed by Principal Directors assisted by 34 Dir/Dy – dedicated cadre AO, AAO, Auditors > 400 central PSUs – Financial Audit of Annual Financial Statements- “supplementary audit”- Commercial Audit

Audit of General, Social Services Sectors Departments Audit of Defence Ministry - 6 offices headed by DG/PDs Army, Air Force, Navy, Ordinance Fact- dedicated cadre Audit of all other General, Social Service Departments by 11 offices headed by DG/PDs at 9 cities 48 Dir/Dy Dir ( PD Central) Most of the Autonomous Bodies (IIT, IIM, Museums etc about 350) fall under this. Financial Audit of their Annual Accounts- SAR ( Separate Audit Reports ) Above PD Central Offices also carry out Revenue Audit (Income Tax, CE, ST, Customs) – cadre of the State AG

Audit of State Governments Audit of 28 State Governments is carried out by 39 Accountants Generals (AGs)/PAGs assisted by 140 DAGs (Deputy AGs/Senior DAGs) organized into Economic, Social, Revenue Services Departments each State has its own cadre of AOs, AAOs, Auditors etc AG (A&E) - Compilation of Accounts of the States and Entitlements (Pension, PF of State Govt. Employees) in 25 States is by 27 AGs assisted by 75 DAGs. (in some only DAGs) These office have their own cadre of Accounts Officers, Asst. Accounts Officers, Accountants, Clerks etc.

Audit Assignments The entire Audit activity is carried out in the form of Audit Assignments (Audits); i.e., audit of entities, subordinate offices etc of the Department/Ministries carried out by Audit Teams (Audit Parties). It is lead by of 1 Audit Officer having 2 to 4 members -AAO, Auditors Duration of the Audit Assignment or an Audit would vary from 1 week to 2, 4, 6 or 8 weeks depending on the size & type of unit & type of audit. A larger Audit Assignment like Disaster Management would consist of several Audits carried out by a number of Audit Parties- locations

An Audit Assignment Each Audit starts by having an Audit Objective 3 broad audit objectives; to what extent service delivery operations of the entity are efficient -Performance Audit to what extent its accounting, book keeping and Financial Reporting is reliable – Financial Audit to what extent entity could safeguard its resources from theft, loss, misuse, abuse, mismanage by complying the related Rules and instructions - Compliance Audit Audit Objectives in turn will have sub-objectives Whether procurement was as per prescribed rules? Audit Criteria (against which measured)- related Rules

An Audit Assignment or An Audit After identifying Audit Objective, Sub-Objectives and Audit Criteria; the Audit Party selects the Sample (4 of 15 purchase contracts - 2 years, sample of transactions) Entry Conference : Audit Party explains the above to the Executive to the Head of the Dept./Office. Less formal in smaller audits (1 to 2 weeks). explains period to be covered in audit & duration of audit Pre-requisites: audit party to have necessary audit skills, have knowledge of functioning of the entity, objective in approach, display professional ethical behavior

Conducting an audit assignment consists of Identifying the audit objective- which aspect to be seen/checked Audit criteria – on what criteria it should be checked Audit checks- substantive testing, analytical procedures Material significance of deviation- materiality Audit evidence – to prove either way Audit observations – communicating, replies Exit Conference – Discussion Audit conclusions- Audit Findings Documentation of the entire process and evidence Reports of the Audit Parties- Draft Inspection Reports Vetted by Dir/DAGs formally issued - Inspection Reports Significant audit findings processed through rigorous quality control Field & HQs –to include in Draft Audit Report the final approved version of which is CAG’s Audit Report

Audit Planning – Audit Output each office has a number of audit parties – Dir/DAGs each office has medium term 3 year Audit Plan Annual Audit Plan at the beginning of the Year – which departments, which offices, how many days for each Mandatory- Audit of Annual Accounts –Govts, PSUs, ABs In all about 1500 audit parties – Central Govt. Depts. who audit about 15,000 ‘offices’ (units) in a year About 2500 parties for State Govt. Depts. who audit about 35,000 ‘offices’ (units) in a year In all 4000 teams produce about 50,000 Inspection Reports (IRs)- (Local Audit Reports) in a year.

Audit Output Very significant & high monetary value audit findings in the Inspection Reports are processed for Audit Report It goes through rigorous quality control process In an year about 40 Audit Reports ( Union Government ) and 120 Audit Reports ( State Reports ) are presented to the Parliament and the Legislatures. Could be Performance Audit, Compliance Audit, Financial, mix.. Discussed by Public Accounts Committees (PAC)-ATN Audit Reports feature about 10% of the audit findings rest 90% remains in IRs - correspondence between the audited entity and the field audit office- ongoing

Audit Quality – Control Quality & consistency in Quality – Auditing Standards Auditing Standards IA&AD 1994 revised in 2002 Audit Manuals, Auditing Guidelines for each type audit First Edition of Defence Audit Manual 1922, P&T 1928 Railway Audit 1931, Revenue Audit 1961, MSO 1963 International standards for public sector auditing - INTOSAI I nternational S tandards of S upreme A udit I nstitutions- ISSAIs ( इसाईस ) Perquisites- Ethics, Independence, Objective & unbiased Audit Quality Management Framework (AQMF)- Peer Reviews

(Book-keeping in public sector) Government Accounting Financial reporting in public sector (State Union (+ Rly) Finance Accounts ABs, LBs Financial Auditing (Book-keeping in private sector) Commercial Accounting Financial reporting in private sector (Commercial-Accounting Standards) 2 subjects in Semester-I2 subjects in Semester-II 1 subject in Semester-II

Public Finance with introductory Economics (inhouse + NIPFP, RBI,TISS) Compliance Auditing Performance Auditing IT Skills IT Audit Public Expenditure, Revenue and Resource Management Public Policy and Administration Financial Management – 2 week IIM A