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2. 2 Definition by International Auditing Practices Committee –  “The independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size, or legal form, when such an examination is conducted with a view to expressing an opinion thereon.” 2

3. 3  Another definition - “Concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statements and reports”. Auditing, therefore: Verifies accounting data; and report on accuracy and reliability of accounting statements. 3

4. 4 Verification involves: evaluation of evidence in support of transactions  Internal evidence, e.g. the records, vouchers, books of accounts  External evidence, e.g. Confirmation of balances as from Bank, data from other department/agencies. Includes assessment and evaluation of relevant system in the organisation. 4

5. 5  Audit is not limited to only financial and accounting records.  It also includes review of costing records, operational and managerial performance, HR policies, issues of corporate governanace, etc. 5

6. 6  Propriety Audit  Certification Audit/Account Audit Propriety Audit can again be divided into two categories:  Compliance/Regularity audit  Performance Audit/3E Audit/VFM Audit 6

7. 7  A compliance audit is a comprehensive review of an organization's adherence to laws, statutes, rules and regulatory guidelines.  Each transactions is audited separately in isolation to verify compliance with rules and regulations affecting that particular transaction  What, precisely, is examined in a compliance audit will vary depending upon the nature of transaction 7

8.  It involves examination of transactions relating to receipts and expenditure, assets and liabilities of government companies and corporations to ensure compliance with all applicable laws, rules and regulations and procedures. (Compliance/Regularity Audit)  It also involves the evaluation of transactions for observance of principles of financial propriety. (Propriety Audit) 8

9. 9  Various statutes require compliance of relevant provisions. In each case, the organization must be able to demonstrate compliance by producing an audit trail, often generated by data from records (manual or electronic).  E.g.- GFR, internal rules/circulars of department, rules of financial prudence, Companies Act, Environmental laws, Factory Act, Minimum Wages Act, Contractual obligations, etc.  Organisations need not only to comply with the provisions of laws/rules but also to keep records to show the compliance. 9

10. 10 Principles of Financial propriety (a) Expenditure should not be prima facie more than what the occasion demands. (b) to apply the same vigilance on public expenditure as on expenditure from personal funds. (c) sanction of expenditure should not result in financial advantage to sanctioning authority. (d) public money not to be spent for the benefit of a particular person or a section or a community. (e) allowances should not be a source of personal profit. 10

11. 11  Performance audit is an independent assessment or evaluation of an entity’s programme or activity with reference to the laid down goals, objectives and targets, taking into account relevant criteria for assessment of efficiency, economy and effectiveness of operations.  This is done for government departments as well as PSUs  In case of Central PSUs, this is done mainly through the Audit Board mechanism, chaired by the Deputy Comptroller and Auditor General (Commercial), with senior officers of the C&AG and two technical experts inducted as special invitees, if necessary.

12. 12  Main objective - to assist people’s representatives in exercising effective legislative control and oversight over the policy objectives and their implementation.  Performance audit involves understanding the activities of the organisation, risk assessment, systems and controls, and brings out systemic deficiencies, absence of controls or their ineffective functioning and compliance failures.  The Audit probe goes into the root causes of the problems and suggests constructive recommendations to the executives for improvement.

13. 13  As per the provisions of the Companies Act, 1956 read with Section 19 of the ‘Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971’ and the C&AG’s Regulations 2007, the C&AG is vested with audit of the financial statements of all the Government companies.

14. 14  Section 19 of CAG’s (DPC) Act, 1971 (1) duties and powers of CAG for audit of accounts of Govt Companies, in accordance with provisions of Companies Act, 1956.

15. 15 SEC 617: Definition of government company SEC 619: Application of Sections 224 to 233 (relating to audit) (2) Auditors to be appointed and re-appointed by the CA&G. (3) C&AG shall have power – (a) to direct the manner in which the company’s accounts shall be audited by the statutory auditors. (b) to conduct a supplementary or test audit of the company’s accounts by such person(s) as he may authorise in this behalf; and for the purpose of such audit, to require information in such form as CAG directs. (4) Auditor to submit report to CAG. CAG may comment upon or supplement the audit report in such manner as he may think fit. (5) Such comments or supplement to the audit report to be placed before AGM along with the audit report.

16. 16  Thus, in order to discharge this responsibility, he is empowered to appoint the auditors as well as issue directions to the auditors specifying the manner in which the accounts of government companies are to be audited, keeping in view his overall responsibility of ensuring public accountability.

17. 17  As the Supreme Audit Institution of the country, the C&AG plays an oversight role ensuring that the statutory auditors discharge their assigned responsibilities with due diligence on his behalf by exercising the power to supplement or comment upon the statutory auditors’ report.

18. 18  By conducting audit of PSEs by three frameworks viz. financial audit, performance audit and transaction audit, which are interlinked and complementary to one another, C&AG prepares three distinct audit reports on the functioning of the PSEs, commenting upon their state of financial affairs, operational efficiency, governance and compliance issues.  These reports are placed in the Parliament and the selected reports are discussed comprehensively by COPU recommending remedial measures for improvement.

19. 19  Appointment of Auditors by CAG  Issuing directions/sub-directions by CAG to SAs  Preparation of financial statements by management  Audit by statutory auditors  Board’s approval of audited accounts  Supplementary audit by CAG under section 619(3)(b) of Companies Act  Comments on accounts/certificate by CAG

20. 20  Appointment of independent statutory auditors with proven track record and credentials;  Issuing general directions and industry specific sub- directions to statutory auditors;  Overall responsibility being vested upon C&AG, he should not only guide, direct, monitor, oversee, review, supplement and complement the financial attestation functions of the statutory auditors but also safeguard the independence of auditors against unethical practices and conflicting demands from the management.

21. 21  The supplementary audit by CAG has withstood years of criticism but so far deterred the management frauds like Satyam.  The supplementary audit by the C&AG has deterrent effects on company’s management and statutory auditor as well.

22. 22  The significance of C&AG’s supplementary audit can be gauged from the fact that every year several PSEs revise their accounts after supplementary audit and comments are issued to number of PSEs.  In 2006-07, twelve Central PSEs revised their accounts after supplementary audit and comments were issued in respect of 72 Central PSEs besides number of state government PSEs as well.

23. 23  Audit Planning  Audit Execution  Reporting  Follow up (Governed by CAG’s Auditing Standards)

24. 24  Collection of information about the Auditee  Activities/operations/projects/Plans/revenue and expenditure details/targets vs. achievements/previous audit results and outstanding audit objections/internal controls/etc.  Risk Assessment  materiality/topicality/internal controls/criticality/etc.  Audit Plan  Categorization of audit entities based on risk assessment/periodicity/allocation of mandays)  Quarterly audit programme  allocation of mandays and party personnel  Audit entity wise audit planning  High risk areas/methodolgy/sampling/ records for scrutiny/inspection/etc.

25. 25  Field audit (auditing at the premises of auditee)  Audit work programme  Compliance testing – to ensure reliance on internal controls  Direct substantive testing – for detailed test check of records  Issue of audit memo  Reply from management and evaluation thereof  Settlement/Inclusion of audit observation in Audit Inspection Report

26.  Audit report is finalised at the respective HQ offices  Issue of lack of considered reply by audited entity  Mechanism of ACM (Audit Committee Meetings)  Conversion of IR/LAR para into Factual Note (FN)/ Potential Draft Para (PDP)  Conversion of FN into Draft Para (DP) 26

27. 27  Standard formats of reporting have been established  The views or explanation of the audited entity is invariably incorporated  Chapter-1 generally gives the overall situation of the government in respect of the aspects covered in that particular report e.g. Financial situation, overview of all PSUs, overview of receipts etc.

28. 28 THANK YOU 28