BCom 3rd Year Different Audit Notes Study Material

EDUCATIONAL INSTITUTIONS

(Schools, Colleges, or Universities)

General

1. The Charters, Trust Deeds, Acts of various Universities, etc., containing Rules and Regulations should be examined and those Rules which relate to accounts, in particular, should be taken note of in detail.
2. The auditor should inspect the Minutes of the Board of Management to ascertain from them any resolution specially passed in respect of accounts. He should confirm how far such resolutions have been complied with.
3. He should examine the internal check system and ensure how far it is satisfactory.

Income

The sources of income of an educational institution are fees from students, grants from the Government or the local authorities, subscriptions and donations, income from Investments, etc. (BCom 3rd Year Different Audit Notes Study Material)

The auditor should note the following points:

4. He should check the cash receipts on accounts of fees by reference to the counterfoils of the Fee Receipt Books used and, if necessary, the Students’ Register should also be inspected. For free studentship, he should see that it is duly authorized by a responsible officer.
5. Admission fee or examination fee received ordinarily once a year should be vouched with reference to the proper documentary evidence. He should ensure that such fees have been properly recorded in the relevant books and registers.
6. If there is a part of the fee that is totally not recoverable, he should see that it is written off by the person duly authorized for it. If he comes across something unfair, he should make the fact known to the Committee of Management.
7. He should see that the fees unpaid for a part of the academic year but exempted to that extent have been properly accounted for or adjusted.
8. It should be seen that the fees paid in advance have been duly carried forward and adjusted in the accounts subsequently.
9. He should vouch for the grant received from the Government or a local body with the help of correspondence or any other documentary evidence.
10. Receipts from donations and subscriptions, etc., should be verified with the statements in the Annual Report. Such receipts should be checked with the counterfoils of receipts issued in this respect. The cash book should also be checked. The auditor should ascertain that such receipts are being utilized for purposes for which they have actually been received.
11. If the institution has some landed property, endowments, securities, etc., the income therefrom should be verified by reference to proper vouchers. Investments may be vouched by reference to the Bank’s Certificate.
12. Any other income should similarly be vouched with the help of proper vouchers.

Expenditure

13. The auditor should vouch for all items of capital expenditure and ensure that such an expenditure is duly sanctioned. In case of some abnormal expenditure, its checking should be done very carefully. He should confirm that distinction between capital and revenue has been clearly made. (BCom 3rd Year Different Audit Notes Study Material)
14. The sanction of increases in the salary of the staff should be checked by reference to the Minutes of the Committee of Management.
15. He should examine the internal check system with regard to the purchases of materials, etc., for the boarders, proper control has to be exercised on the purchase, issue, and preservation of such provisions.
16. He should verify the stock of provisions, furniture, stationery, etc., and see that it is properly preserved.
17. He should confirm that an adequate reserve is being maintained for contingencies.
18. He should ascertain that all outstanding assets and liabilities have been taken into account.

Miscellaneous

19. He should further see that the provident fund money of the staff is being regularly invested outside in proper securities. The such fund is to appear separately on the liabilities side and investment on the assets side of the Balance Sheet.
20. He should see that all taxes which are deducted at source are properly refunded. Educational institutions are not subject to Income-tax payment.

EMPLOYEES’ PROVIDENT FUND

The Provident Fund is a matter of concern for all employees engaged in different capacities and in different enterprises. Some relevant points in regard to the auditor Employees’ Provident Fund are given below:

General

1. The auditor should, first of all, examine the Provident Fund Rules to ensure that the transactions regarding Fund have been within the powers of the trustees and accordingly, accounts have been prepared.
2. It should be seen that monthly deductions in regard to wages and salaries have been made correctly and as per rules in force in the unit from time to time. The amounts so deducted have been deposited in the Scheduled Bank pending investment.
3. The employees’ contribution and also the contribution of the unit or company have been credited to their accounts properly.
4. If the employees have taken loans from their Provident Fund Accounts, it is to be ensured that such loans have been repaid within the time-limit fixed and loans of retiring employees have been deducted before the amount of Fund has been paid to them.
5. It should be seen that each year a statement is invariably prepared and sent to every member of the Fund showing the contribution made by the employee, the contribution of the employer, the interest credited and the balance standing to his credit at the end of the year. Such a balance should be confirmed by the members and in case of dispute, proper investigations should be made into the reasons therefor.
6. The auditor should examine the minutes of the meetings of the Governing/Management bodies and check that the decisions are in accordance with rules and are also put into effect properly. (BCom 3rd Year Different Audit Notes Study Material)

Regarding Investment

7. The auditor should vouch for the purchase of investments which should always be in approved securities.
8. If some of such investments have been sold to meet the large claims, their sale should be vouched with reference to the authority for sale and the broker’s sold notes. It is to be seen that the profit or loss on such sales is correctly arrived at and treated as such in the books of account.
9. The interest on investments should be properly accounted for and proper adjustments should also be made for the outstanding interest or investments correctly. (BCom 3rd Year Different Audit Notes Study Material)
10. It should be ensured that the amount of interest has been properly credited to the members’ accounts and that such amounts have been actually earned.

Miscellaneous

11. If necessary, the personal files of employees should be referred to and the authorities should be asked to explain the matters under doubt.
12. The lapses and forfeiture on account of resignations or dismissals of employees should be verified by the auditor and it should be ensured that their amounts have been correctly settled according to rules.
13. There should be a proper reconciliation of the total balances of members’ ledgers with the control account which is maintained in the general ledger. (BCom 3rd Year Different Audit Notes Study Material)
14. The auditor should vouch for the payment of the amount of the Provident Fund to the retired employees and ensure that such payments have been made in time, are correct, and are admissible under the rules.

CO-OPERATIVE SOCIETIES

A cooperative society is framed under the provisions of the Co-operative Societies Act, of 1912, and hence, its accounts are prepared under the Rules and Regulations laid down for the purpose. The auditor of such a society is appointed by the Registrar of Co-operative Societies. He conducts the audit on behalf of the Registrar and also submits his report to the Registrar. The fees of the auditor are paid by the society as per the status of the society. Sometimes the fees are determined on the basis of the turnover or business that the society transacts.

Formerly, books and records were maintained by society as prescribed by the Central Co-operative Societies Act of 1922 but now they are governed by the State Co-operative Societies Act, of 1912 and State Legislation has provided for the maintenance of books and accounts as on the lines stipulated under section 128 of the Companies Act, 2013. However, much depends upon the size, nature, and business transacted by a particular society in this regard. No specific formula can be laid down in this respect. It is also laid down that a member cannot hold more than 10 percent of the share capital of the Society.

The following points may be noted in the audit of the Co-operative Society:

General

1. The auditor should go through the rules and regulations of Society and see how far they are being followed by it.
2. He should examine the capital structure of the Society and find out the number of its members and also their shareholdings. He should inspect the Minutes of the Members. (BCom 3rd Year Different Audit Notes Study Material)
3. He should also examine the internal check system in operation in society.

Income

4. He should vouch for the receipt of cash on account of share capital with the Register of the Shareholders and also on account of deposits with the Cash Book and counterfoils of receipts issued. If it is a Consumer Society, its sales should be vouched with the summaries and Sales Account.
5. He should vouch for the receipt of interest and return of loans from the borrowers. Proper records must always be maintained for this purpose.

Expenditure

6. He should vouch for the loans granted to the borrowers by reference to the agreements.
7. Other management and establishment expenses should also be checked by him.

Miscellaneous

8. A Co-operative Society pays dividends to its members as per the rules and regulations. It should be ascertained how such a dividend is calculated and recorded in the books. The rate should not exceed 6.5%.
9. He should verify the assets and see that the stock is properly valued.
10. He should especially verify the cash in hand and investments of such a society.
11. He should note that 25 percent of the profit is transferred to the Reserve Fund and 10 percent is carried to the Welfare Fund.
12. He should ensure that the accounts of such a society are prepared in accordance with the provisions of the Co-operative Societies Act, of 1912.

AUDIT OF NON-PROFIT ORGANISATIONS

Non-profit making organizations raise funds from members, donors, or contributors apart from receiving donations of time, energy, and skills for achieving their social objectives like imparting education, providing medical facilities, economic assistance to the poor, and managing disasters and emergent situations. Therefore, this definition of non-profit organizations would include religious organizations, voluntary health and welfare agencies, charitable organizations, hospitals, old age homes, research foundations, etc.

The scope of services rendered by non-profit organizations is extremely wide and as such cannot be covered in a small definition. Some examples of non-profit organizations operating in India include Child Relief and You (CRY). NORAD, UNICEF, Godhuli, Vidya, Concern India Foundation., etc. (BCom 3rd Year Different Audit Notes Study Material)

Sources and applications of funds

The main sources of funds include grants and donations, fundraising programmes, advertisements, fees from the members, technical assistance fees/fees for services rendered, subscriptions, gifts, sale of products or publications, etc.

Donations and grants received in the nature of the promoter’s contribution are in the nature of capital receipts and shown as liabilities in the Balance Sheet of a non-profit organization. These may either be in the form of a corpus contribution or a contribution towards a revolving fund. A contribution made towards the capital or the corpus of a non-profit organization is known as a corpus contribution. The donors are generally required to specify whether the donation/grant given by him shall form part of the corpus of the non-profit organization.

Such contributions are generally given with reference to the total funds required by a non-profit organization. Section 11(1)(d) of the Income Tax Act 1961 also states that income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the computation of total income. The objective of a contribution or grant towards a Revolving Fund is to rotate the amount by giving temporary loans from the fund to other non-profit organizations or beneficiaries for their projects and then recovering the loan so as to give temporary loans again and so on.

However, any interest earned from the beneficiary on such temporary loans from the revolving fund could be either added back to the fund or credited to the Income and Expenditure Account depending on restrictions laid down by the authority providing the contribution (for the revolving fund) or by the rules and regulations laid down by the concerned non-profit organization in this regard.

Donations and grants received for the acquisition of specific fixed assets are those grants whose primary condition is that a non-profit organization accepting them should purchase, construct or otherwise acquire the assets for which the grant is given.

Many times non-profit organizations receive contributions in kind. These contributions include assets such as land, buildings, vehicles, office equipment, etc., and articles related to programmes/projects such as food, books, building materials, clothes, beds, and raw material for training purposes, e.g., Wool, reeds, cloth, etc. (BCom 3rd Year Different Audit Notes Study Material)

The areas of application of funds for a non-profit organization include Establishment Costs, Office and Administrative Expenses, Maintenance Expenses, Programme/Project Expenses, Charity, Donations and Contributions given, etc.

Provisions Relating to Audit of Non-profit Organisations

The auditors of a non-profit organization registered under the Societies Registration Act, 1860 (or under any law corresponding to this Act, in force in any part of India) or the Indian Trusts Act 1882 are normally appointed by the Management of the Society or Trust. The auditors of non-profit organizations registered under section 25 of the Companies Act, 1956 are appointed by the members of the company.

While planning the audit of a non-profit organization, the auditor may concentrate on the following:

(i) Knowledge of the non-profit organization’s work, its mission, and vision, areas of operations, and environment in which it operates.

(ii) Updating knowledge of relevant statutes especially with regard to recent amendments, circulars, and judicial decisions viz. Foreign Contribution (Regulation) Act 1976, Societies Registration Act, 1860, Income Tax Act 1961, etc., and the Rules related to the statutes.

(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of Association, Rules, and Regulations.

(iv) Reviewing the non-profit Organisations chart, then Financial and Administrative Manuals, Project and Programme Guidelines, Funding Agencies Requirements and formats, and budgetary policies if any.

(v) Examination of minutes of the Board/Managing Committee/Governing Body/Management and Committees thereof to ascertain the impact of any decisions on the financial records.

(vi) Study the accounting system, procedures, internal controls, and internal checks existing for the non-profit organization and verify their applicability.

(vii) Setting of materiality levels for audit purposes.

(viii) The nature and timing of reports or other communications.

(ix) The involvement of experts and their reports.

(x) Review the previous year’s Audit Report.

The audit programme should include in sequential order all assets, liabilities, income, and expenditures ensuring that no material item is omitted.

(i) Corpus Fund: The contributions/grants received towards corpus be vouched with special reference to the letters from the donor(s). The interest income is checked with Investment Register and Physical Investments in hand.

(ii) Reserves: Vouch transfers from projects/programmes with donor letters and board resolutions of a non-profit organization. Also, check the transfer of gross value of assets sold from capital reserve to general reserve and adjustments during the year.

(iii) Ear-marked Funds: Check requirements of donors institutions, board resolution of a non-profit organization, rules and regulations of the schemes of the earmarked funds. (BCom 3rd Year Different Audit Notes Study Material)

(iv) Project/Agency Balances: Vouch for disbursements and expenditures as per agreements with donors for each of the balances.

(v) Loans: Vouch for loans with loan agreements, counterfoil of receipt issued.

(vi) Fixed Assets: Vouch for all acquisitions/sales or disposal of assets including depreciation and the authorizations for the same. Also, check donors’ letters/agreements for the grant. In the case of immovable property check title, etc.

(vii) Investments: Check the Investment Register and the investments physically ensuring that investments are in the name of the non-profit organization. Verify further investments and dis-investments for approval by the appropriate authority and reference in the bank accounts for the principal amount and interest. (BCom 3rd Year Different Audit Notes Study Material)

(viii) Cash in Hand: Physically verify the cash in hand and imprest balances, at the close of the year and whether it tallies with the books of account.

(ix) Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding and unadjusted amounts.

(x) Stock in Hand: Verify stock in hand and obtain a certificate from the management for the quantities and valuation of the same.

(xi) Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting the particular programme or project to ascertain the conditions with respect to undertaking the programme/project and accordingly, in the case of programmes/projects involving contracts, ensure that income tax is deducted, deposited and returns filed and verify the terms of the contract.

(xii) Establishment Expenses: Verify that provident fund, life insurance premium, Employees State insurance, and their administrative charges are deducted, contributed, and deposited within the prescribed time. Also check other office and administrative expenses such as postage, stationery, traveling, etc.

The receipt of income of a non-profit organization may be checked on the following lines:

(i) Contributions and Grants for projects and programmes: Check agreements with donors and grant letters to ensure that funds received have been accounted for. Check agreements with Check that all foreign contribution receipts are deposited in the foreign contribution bank account as notified under the Foreign Contribution (Regulation) Act, 1976.

(ii) Receipts from fundraising programmes: Verify in detail the internal control system and ascertain who are the persons responsible for the collection of funds and the mode of receipt. Ensure that collections are counted and deposited in the bank daily.

(iii) Membership Fees: Check fees received with the Membership Register. Ensure proper classification is made between the entrance and annual fees and life membership fees. Reconcile fees received with fees to be received during the year.

(iv) Subscriptions: Check with the subscription register and receipts issued. Reconcile subscription received with printing and dispatch of corresponding magazines/circulars/periodicals. Check the receipts with the subscription rate schedule.

(v) Interest and Dividends: Check the interest and dividends received and receivable with investments held during the year.

AUDIT OF GENERAL INSURANCE COMPANIES

Under section 12 of the Insurance Act of 1938, the financial statements of every insurer are required to be audited annually by an auditor. Section 2(4) of the Insurance Act of 1938 defines the term ‘auditor’ as a person qualified under the Chartered Accountants Act of 1949 to act as an auditor of a company. The auditor, for audit of financial statements, has the powers to exercise the rights vested in, discharge the duties and be subject to the liabilities and penalties imposed on auditors of companies under the Companies Act, 1956.

The provisions of Section 12 of the Insurance Act 1938 apply only in a case where the financial statements of the insurer are not subject to audit under the Companies Act 1956. A company carrying on general insurance business is subject to audit requirements laid down under the Companies Act 1956. (BCom 3rd Year Different Audit Notes Study Material)

The financial statements under section 12 include the Balance Sheet, Profit, and Loss Account, and Revenue Account. Section 12 of the Insurance Act, of 1938 does not cover the requirement for audit of the Receipts and Payments Account of an insurer. It may be noted that the Insurance Regulatory and Development Authority Act, of 1999 inserted a new sub-section (1A) in Section 11 of the Insurance Act, of 1938.

The sub-section has an overriding effect over sub-section (1) of section 11 which prescribed the financial statements to be prepared by an insurer. The new sub-section requires that after the commencement of the OT IRDA Act, 1999, every insurer, in respect of insurance business transacted by him and in respect of his shareholder’s funds, should prepare, at the end of each financial year, a balance Sheet, a Profit and Loss Account, a Separate Account of Receipts and Payments and a Revenue Account in accordance with the regulations made by the IRDA. (BCom 3rd Year Different Audit Notes Study Material)

Since Receipts and Payments Account has been made a part of the financial statements of an insurer. It is implied that the Receipts and Payment Account is also required to be audited. (BCom 3rd Year Different Audit Notes Study Material)

The Authority, in the exercise of the powers conferred by the Insurance Act, of 1938, issue the IRDA (Preparation of Financial Statements and Auditor’s Report of Insur Companies) Regulations, 2000. These Regulations require the auditor of an insurance company to report whether the Receipts and Payments Account of the insurer is in agreement with the books of account and returns.

The auditor is also required to express an opinion as to whether the Receipts and Payments Account has been prepared in accordance with the provisions of the relevant statutes and whether the Receipts and Payments Account gives a true and fair view of the receipts and payments of the insurer for the period under audit. This also implies that the auditor is required to audit the Receipts and Payments Account of the insurer. (BCom 3rd Year Different Audit Notes Study Material)

Appointment of auditors

The appointment of statutory auditors in the General Insurance Corporation of India, its subsidiaries, and the divisions is made by the Comptroller and Auditor General of India, as in the case of other public sector undertakings. The appointment of auditors of the agencies abroad is made by the Board of Directors of each company. (BCom 3rd Year Different Audit Notes Study Material)

Rights and duties of Branch Auditors

It is a practice that the divisional offices prepare a trial balance in a manner that provides information required to be included in the various formats of financial statements prescribed in the Insurance Act. Each trial balance, in which are incorporated the figures relating to the branches of the divisions, is required to be audited and the report thereon is furnished to the statutory auditors.

The divisions of the companies carrying on general insurance business are treated for the purposes of the Companies Act, 1956 as their branches. It follows that the branch auditors appointed to conduct the audit of the divisions have the same rights and obligations under the statute as those of the statutory auditors to whom they are expected to submit their reports.

Auditors’ Report

The Authority has prescribed the matters to be dealt with by the Auditors’ Report vide Regulation 3 under Schedule C of IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2000. The Schedule C is reproduced below:

“The report of the auditors on the financial statements of every insurer shall deal with the specified herein:

1. (a) That they have obtained all the information and explanations which, to the best of their knowledge and belief, were necessary for the purposes of their audit and whether they have found them satisfactory;

(b) Whether proper books of account have been maintained by the insurer so far as appears from an examination of those books;

(c) Whether proper returns, audited or unaudited, from branches and other offices, have been received and whether they were adequate for the purpose of their audit;

(d) Whether the Balance Sheet, Revenue Accounts, and Profit and Loss Account dealt with by the report and the Receipts and Payments Account is in agreement with the books of account and returns;

(e) Whether the actuarial valuation of liabilities is duly certified by the appointed actuary, including to the effect that the assumptions for such valuation are in accordance with the guidelines and norms, if any, issued by the authority and/or the Actuarial Society of India in concurrence with the Authority. (BCom 3rd Year Different Audit Notes Study Material)

2. The auditors shall express their opinion on:

(a) (i) Whether the Balance Sheet gives a true and fair view of the insurer’s affairs as at the end of the financial year/period;

(ii) Whether the Revenue Account gives a true and fair view of the surplus or the deficit for the financial year/period;

(iii) Whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial year/period;

(iv) Whether the Receipts and Payments Account gives a true and fair view of the receipts and payments for the financial year/period.

(b) The financial statements stated (a) above are prepared in accordance with the requirements of the Insurance Act. 1938 (4 of 1938), the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), and the Companies Act, 1956 (1 of 1956), to the extent applicable and in the manner so required. (BCom 3rd Year Different Audit Notes Study Material)

(c) Investments have been valued in accordance with the provisions of the Act and the Regulations.

(d) The accounting policies selected by the insurer are appropriate and are in compliance with the applicable Accounting Standards and with the accounting principles, as prescribed in these Regulations or any order or direction issued by the Authority on this behalf.

3. The auditors shall further certify that:

(a) they have reviewed the management report and there is no apparent mistake or material inconsistencies with the financial statements; and

(b) the insurer has complied with the terms and conditions of the registration stipulated by the Authority.

4. A certificate signed by the auditors (which is in addition to any other certificate or report which is required by law to be given with respect to the balance sheet) certifying that:

(a) they have verified the cash balances and the securities relating to the insurer’s loans, reversions, and life interests (in the case of life insurers) and investments;

(b) the extent, if any, to which they have verified the investments and transactions relating to any trusts undertaken by the insurer as trustee; and

(c) no part of the assets of the policyholders’ funds has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investments of the policyholders’ funds.”

BCom 3rd Year Different Audit Notes Study Material

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