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AUDIT OF SERVICE UNITS

AUDIT OF SERVICE UNITS. AUDIT OF BANKING COMPANIES. A bank is required to get its accounts audited Section 30 of the banking Regulation Act, 1949 deals with the audit of the accounts of a banking company as well as a nationalized bank

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AUDIT OF SERVICE UNITS

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  1. AUDIT OF SERVICE UNITS

  2. AUDIT OF BANKING COMPANIES • A bank is required to get its accounts audited • Section 30 of the banking Regulation Act, 1949 deals with the audit of the accounts of a banking company as well as a nationalized bank • The Balance sheet and the Profit and Loss account of the banks must be audited by a person duly qualified to be an auditor of companies. • The auditor of the bank is appointed by a bank concerned acting through its board of Directors with the approval of the Reserve Bank Of India • The powers, duties and liabilities of a bank auditor shall be same as that of company statutory auditor • The auditor has to draft a audit report stating his opinion about the financial statements • in case of nationalised banks, he has to submit report to the central government (i.e. President of India) with copies to RBI and bank concerned

  3. Special Features of Audit of Banking Companies • Verification of cash balances: - should attend the bank at the closing date of the financial year to verify the cash in hand at that date - should count the coins, notes, cheques etc. that may remain with the bank on that date • Examine confirmation certificates: - should obtain and examine the confirmation certificates for the cash deposited with the RBI and other bank • Examine securities deposited by the customers • Securities deposited against the loans, overdrafts and acceptances • Verify whether all the loans are duly covered

  4. 4. Verify money at call and short notice: - verify money at call and short notice with the call deposit receipts 5. Check the bills in hand: - should check and verify the bills on hand which are not matured and see that they agree with the general ledger 6. Examine the rebate on bills discounted: - should examine the rebate on bills discounted and see that proportion of rebate on bills due after the date of balance sheet has been carried forward to the subsequent year 7. Check loan ledgers: - auditor should examine the balances of the loan ledger 8. Verify investments: - should verify investments and see that interest on such investments has been duly received

  5. 9. Confirmation of investments: - the auditor should obtain confirmation certificates from other banks for the investments in their custody 10. Provision on investments if book value is higher: - auditor should see that the provisions have been made if the book value of the investment is higher than its market value 11. Examine Branch returns: - auditor should see that the branch returns are duly certified and are properly incorporate in the books of the head office 12. Foreign currency Transactions - the auditor should examine the foreign currency transactions and should see that any loss arising out of such foreign currency transactions properly accounted in the books of accounts

  6. 13. Transfer of at least 20% to the reserve fund: - auditor should examine that at least 20% of the annual profits before paying any dividends is transferred to the reserve fund - if it is not transferred by the bank than the RBI should examine in this respect 14. Examine the borrowings: - the auditor should examine whether borrowings have been properly authorised and internal control procedure have been followed - he should examine the certificates of confirmation obtained from the lenders and try to tally it with banks records 15. Audit Report: - the auditor of the bank should submit the report to the central government or the management - the public, private and foreign banks have to obtain a separate report called ‘the Long Form Audit Report’ (LFAR) in addition to the main report from the statutory auditors

  7. Audit of General Insurance Company • Examine the internal check in operation: - the auditor should examine the efficiency and reliability of the internal check in operation in business - since it may not be possible to do detail checking due to large number of transactions of the insurance companies, a strong internal check will reduce the work to a great extent 2. Examine the premium receipt: - the auditor should check the amount of premium receipt - should examine the policy register and compare the counterfoils of the receipt with the premium cash book to see that all premium receipts have been credited in the books of account

  8. 3. Vouch the amount of claims: - should vouch the amount of claims paid and outstanding from the cash book, claims register, directors minutes book, reports, cancelled policies, receipts, correspondence and other available evidence 4. Claims covered under Re-insurance: - should see that the proportion of the claims covered under re-insurance is not included under the normal claims paid 5. Examine claims admitted but not paid: - claims admitted but not paid on the date of balance sheet should be shown as liabilities and must be debited to revenue account 6. Examine expenses incurred in claim settlement: - should see that expenses incurred in settlement of claims should be debited to the claims account and should not be charged to some other head

  9. 7. Examine receipts on account of interest, dividend and rent: - should vouch the receipt on account of interest, dividend and rent - must see that accrued income from these sources are taken into account 8. Examine the expense of management: - should see that expenses of management given as one item in the revenue accountwhich should give details of following expenditures a)Directors fees b) Salary c)Gratuity d) Provident Fund e) Bonus f) Travelling Expenses g) Printing and Stationery h) Postage and Telegram i) Advertising j) Audit Fees k) Legal Expenses l) Rent etc. 9. Examine Actual Valuation: - auditor should satisfy with the actual data used in calculation which is also reflected in the accounting records - the auditor should discuss with the Actuary the process used for actual valuation

  10. 10. Vouch Bonus paid: - the auditor should vouch the amount of bonus paid with the cash bonus register 11. Provision of Unexpired Risk: - should see that due provision is made for all unexpired risk - it is 50% of the premium receipt in a year less reinsurance if any in case of fire and miscellaneous and 100% in case of marine insurance 12. Vouch the amount of commission paid to agents: - auditor should vouch the amount of commission paid to agents with the terms of their appointment letters, relevant commission vouchers and the receipts given by the agents - he must ensure that the amount of commission should not exceed the limit laid down by sec 140 A of the Insurance Act i.e. @ 20 % in case of fire and miscellaneous and 15% in case of marine insurance company

  11. 13. Report: - the auditor after having carefully examination of all the details should submit the report to the shareholders of the insurance company

  12. AUDIT OF EDUCATIONAL INSTITUTIONS • Many educational institutions are run as societies under the Societies Registration Act 1860 or run by Public trust registered under the Public Trust Act of the state if any • Auditors of schools or colleges are generally appointed by the management of the society, or the trust, and in case of university, appointment of auditor is as per the statute governing it

  13. While conducting audit of educational institutions, auditor should pay attention to the following points: • Examine the constitution: - In order to find out the legal status of the educational institution, the auditor should examine the Constitution, Trust Deed or Charter in case of schools and colleges - in case of university, the auditor should see the statute governing it 2. Inspection of minutes book: - auditor should inspect the minute book of the managing committee or governing body for the minutes of the meeting - should examine all the resolutions passed affecting the accounts and see that they are complied with the prescribed rules and regulations

  14. 3. Operation of bank accounts: - the auditor should from the minutes book find out the decisions taken regarding the operation of bank account and should see that the bank account is operated by authorised person only 4. Examine the internal check system: - the auditor should examine the internal check system in operation and judge its adequacy and efficiency 5. Receipt from admission fees: - the auditor should check the fees receipts on account of admission and should compare the same with admission form duly sign by the head of the institution 6. Monthly or term fees: - Auditor should check the name entered in the students attendance register to find out the total strength of the students enrolled - should compare the student attendance register with the fees register for each month or term to verify the amount of fees charged

  15. 7. Hostel dues: - Auditor should confirm that all hostel dues have been recovered from students before their accounts were closed 8. Rental or any other income: -Auditor should vouch the rental income from letting out of school or college premises after school or college hours or during vacations - Similarly interest or dividend income received from investments held should be vouched 9. Grants from Govt. or Local Body: - Auditor should check the grants received from Govt. or Local Body and see that such grants were utilised only for the purpose for which it has been granted 10. Vouching of Donations: - Auditor should verify the amount of donation received - should also check whether list of donors published in the annual report of educational institutions

  16. 11. Vouch payment of salary to staff: - The auditor should vouch the payment of salary to staff with reference to salary or wage register - should pay special attention on increment earned by the staff after verifying whether the competent authority has sanctioned increment - should see that TDS is immediately deducted into Govt. Ex-chequer 12. Provident Fund Deduction: - Auditor should see that provident Fund has been deducted properly from the salaries of the staff and deposited it into the Govt. account 13. Scholarships and fee concession to students: - Auditor should vouch the Scholarship paid to the students with scholarship register. - should also check the concessions and fees granted to needy students is authorised by proper authority

  17. 14. Verifications of assets and equipment's: - Auditor should physically verify the stocks of sport goods, laboratory equipment's, stationery and library books - should also check whether proper stock register have been maintained for the same 15. Verify cash in hand and cash at bank: - should verify the cash in hand by physically counting the same and vouch the bank balances with available documentary evidence on the date of balance sheet

  18. AUDIT OF HOTELS To conduct the audit of the hotel is a challenging job. Therefore auditor has to consider important points while auditing the accounts of hotels. • Examine the Constitution: - To ascertain the legal status of hotel, the auditor should check the constitution of the hotel, whether it is a proprietary concern or a partnership firm or a corporate entity - should examine Partnership deed or MOA or AOA as the case may be and note down the points with regards to maintenance of accounts and provisions of audit. • Examine the minute book: - should check the minute book of the Board of Directors or Partners with a view to access to important and relevant resolution passed in the past

  19. Evaluation of internal control system: - Pilferage is a major problem in hotel business - if internal control is not sound, it would be impossible for the management to prevent or minimise this problem. - should examine the internal control system of the hotel in respect of the following: a) Billing system b) facilities availed by guest from beauty parlour, health gym, laundry, shop, restaurant, swimming pool, transportation etc. c) letting out of banquet hall for arranging marriage parties or for any other purpose. d) compliance of provisions of Foreign Exchange Management Act, in respect of amount of bills received from Foreign guest e) Any amount received through credit cards etc.

  20. 4. Verify the bills raised: - The auditor should go through the guest register, bills raised and counterfoils of bills receipts issued to guest - he should verify that the bills raised were in accordance with the tariff structure of the hotel and discount allowed to guest are properly authorised. • Examine Banquet Sales: - Auditor Should check the bills raised by banquet dept. for arranging marriage or any other function. - should examine the agreement signed by the customer and the rate of tariff for letting out banquet hall - if it is hire at concessional rate, than its authorisation should be checked • Verify Taxes Collected: - Auditor should verify that various taxes collected from customers are timely deposited in the govt. ex-chequer

  21. Examine Disposal of Old Assets: - auditor should examine the quotations and cheques to see whether items (old furniture, carpets, electrical equipment) were sold to the highest bidder and the same was properly entered into the books of account 8. Examine the purchases of Crockery etc. : - Auditor should examine the purchases specially of crockery, cutlery, silver utensils, consumable stores etc. - should verify the purchases with the bills of suppliers for such supply. • Examine the depreciation provided: - Auditor should assess whether depreciation charges on furniture, vehicles, crockery, cutlery etc. is adequate

  22. 10. Ensure proper distinction between capital and revenue expenditure: - should check that expenses are supported by proper vouchers - should also ensure that proper distinction is made between capital and revenue expenditure 11. Examine the payment of Salary and Wages: - Should examine salary and wages register maintained by the worker - Check calculation of salary and wages • Check entries made in the ledgers with bank statement 12. Proper disclosure of assets and liabilities: - should examine whether all the assets and liabilities have been properly disclosed in the books of accounts

  23. Audit of co-operative societies • A co-operative is an autonomous association of persons united voluntarily to meet their common , economic, social, ad cultural needs through a jointly owned and democratically – controlled enterprise • A minimum of ten members are required to form a co-operative society • Registrar of co-operative societies has the power of appointing the auditor of the co-operative societies • The co-operative societies shall arrange to get their accounts audited at least once in a year

  24. Audit of co-operative societies • Special features of Audit of co-operative societies • Familarise himself with Co-operative societies Act of 1912: - the auditor should familiarise with the provisions of the Co-operative societies Act of 1912 • Examine the organisational set up of the society: - auditor should examine the organisational structure of the society, system of keeping accounts and adequacy of internal check system in operation • Examine the register of members: - auditor should examine the register of members, counterfoils of receipts issued, entries in the cash book to vouch the share capital subscription received from the members - should also vouch the amount of any grants received from the Govt. if any

  25. Vouch borrowings of the Co-operative society: - Auditor should vouch the borrowings of the society with relevant entries in the cash book and other relevant documentary evidence such as correspondence with the member • Examine the “Thrift Fund” maintained by the society: - Auditor should examine the thrift fund maintained by the society - should see if any loan is granted out of the thrift fundand if so , he should ensure that the amount of loan is realized in a regular manner along with the interest - such amount of interest is to be credited to the fund. • Examine the payments made: - Auditor should see that a responsible officer has duly authorised all the payments made by the co-operative society

  26. Vouch the cash and bank balance: - Auditor should vouch the cash and bank balance, investments held, stock and other assets of the society with available documentary evidence and through physical inspection as well • Examine assets and liabilities: - Auditor should verify whether all the assets and liabilities have been properly accounted for and proper disclosure is made in the books of accounts • Legal requirement regarding appropriation of profits: - Auditor should see that all legal requirements as to appropriations of profits to reserves, making provisions and distributions of dividends etc. have been duly fulfilled by the society

  27. Accomplishment of primary object of society: - Auditor should satisfy himself that the principal object for which the co- operative society was formed are being accomplished in the course of its working. • Discuss draft report with members: - Auditor should finally discuss his draft report with the members of the managing committee. 12. Submission of his report: - Auditor should finalize and submit his report to the Registrar of Co-operative Societies of the concerned state and forward a copy of the same to the co- operative society under audit

  28. Audit of Mutual Funds Meaning of Mutual Funds A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Types of mutual funds: • Open ended mutual fund - are the mutual funds which offer new units to the investors on a continuous basis - these funds are available throughout the year for subscription. - traded by mutual fund itself • Close ended mutual fund - are the mutual funds, which offer new units to investors for a limited period only. - These funds are available only during specified days for subscription. - traded in Stock Exchange

  29. Special features of audit of mutual funds: 1) Examine the books of account - Auditor should examine all the books of accounts maintained by mutual funds to ascertain whether it displays a true and fair view of the holdings of different investors • Verify transactions of purchase/sale of investment: - any transactions related to purchase and sale of investment to be recognized as of trade date and not as of settlement date • Verify interest on investment: - when interest on investment has not been received for 12 months beyond due date, provision is to be made for income as accrued

  30. 4) Familiarise himself with structure and various entities associated with MF: - Auditor should develop good understanding of structure of mutual fund as well as various entities such as Asset management company, custodian, investors etc. Asset management company: It is a non-banking finance company established for the management of the mutual fund investment for the benefit of the investors. custodian : A custodian is a trust, company, bank or similar financial institution responsible for holding and safeguarding the securities owned within a mutual fund • Develop good understanding about mutual fund regulations: - Auditor should have a good understanding about MF Regulations like composition of board of Trustees and AMC, minimum number of investors, maximum holding by investors which is prescribed by SEBI

  31. 6) Understand functioning of securities markets: - he should aware about the different types of instruments in the securities markets like listed equity, Debt, money market instruments and so on. - he should also how the particular securities market is performing • Examine the operations of custodian, Registrar, and Transfer Agent: - auditor should examine the duties and the various activities carried out by the different entities of mutual fund • Examine the process of unit allotment: - he should examine the process of units allotment with respect to cut off time, applicable NAV, funds availability for deployment

  32. One scheme is completely different than the other scheme: - auditor must ensure himself that one scheme is completely different than the other scheme of the same mutual fund with respect to investors, investment objectives, fees, maturity, Fund Manager etc. • Compliance with SEBI (MF) Regulations: - auditor should see that mutual fund is complied with all the rules and regulations prescribed by SEBI (MF) Regulations

  33. AUDIT OF STOCK BROKERS • A stock broker is a regulated professional individual, usually associated with a brokerage firm, who buys and sells stocks and other securities for both retail and institutional clients through a sock exchange or over the counter in return for a fee or commission • Trading members (stock brokers) and clearing members are required to appoint an internal auditor for carrying out complete internal audit in all segments of the exchange in which they are enabled for trading/ clearing • They are directed to carry out Internal audit on a half yearly basis by any chartered accountant, company secretary, or cost or management accountant who is in practice and who does not have any conflict of interest

  34. Audit of stock Brokers Special features of audit of stock brokers: 1) Auditor should ensure that the books of account, records and documents have been maintained in the manner required under Securities Exchange Board of India Act 1992, SEBI (Stock Brokers and sub-Brokers) Regulations 1992, Securities contracts (Regulation), 1957 • He should ascertain whether adequate internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfil its obligations under the Act • He should ascertain whether any circumstances exist which would render the intermediary unfit or ineligible for dealing in securities market • Auditor should ascertain whether the provisions of the securities laws, and the directions and/or circulars issued there under by SEBI have been complied with.

  35. 5) He should ascertain whether the provisions of the bye laws, notices, circulars, instructions or orders issued by stock exchanges have been complied with. 6) clients funds are routed through designated ‘client account’ only and there needs to be a proper segregation of stock broker and client transactions in separate bank account 7) He needs to check whether unique client code (UCC) is assigned to all the clients and the same is to be registered with the Exchange 8) He should ensure that clients funds are not used for own purposes or should not be misutilised or transferred from one clients account to another clients account 9) Periodicity of actual settlement of funds/securities is not more than 3 months/1 month in cases wherein client has consented for quarterly/monthly settlement respectively

  36. 10) Auditor should ensure that all the transactions are needs to be executed on the Bolt/Neat except for the off-market trades allowed in BSE, which is required to be reported to the exchange within prescribed time limit 11) He has the power to inquire into such matters which he deemed fit in the interest of investors or the securities market. 12) He has to see whether the brokerage charges are within the permissible limits 13) The internal auditor should submit a report to the respective stock Broker. Then the stock Broker shall forward the audit report along with para-wise/point wise comments to respective stock exchanges within 3 months from the end of the relevant half year audit period 14) Non submission of the audit report or if the quality of reporting is not satisfactory ; the exchange reserves the right to advise the concerned Broker to change the auditors and or submit revised reports

  37. GOVERNMENT AUDIT MEANING AND SCOPE: • Government audit is a control measure for public accounting of government funds. It covers audit of all expenditure and receipts done by the government executives. • Government audit can be broadly classified into three categories: 1) Departmental undertakings 2) Statutory corporations financed by government 3) Government companies set up under the Companies Act, 2013 Who conducts Government audit: • In India, the Accounts and Audit Department of the Government of India, headed by the Comptroller and Audit General of India(CAG), who carries out the audit work

  38. The CAG’s duties have been specified by the Comptroller and Auditor General’s (Duties, Powers and Condition of service) Act, 1971 and can be classified as under: • to audit the receipts and expenditures of the union and state governments along with departmental undertakings • To audit the accounts of statutory bodies or corporations depending upon the nature of state governing them • To audit the accounts of government companies in accordance with the Companies Act of, 2013. n case of Government companies, the CAG appoints the statutory auditor. But he has the power to give directions to such auditors for reporting on specific aspects of their audit work and to conduct supplementary test audit of accounts

  39. Submission of Audit Report: • The audit reports of the CAG on accounts of the Union or States and certified finance and Appropriations Accounts are submitted to the President or Governor for being laid Parliament or State Legislature. • These audit reports include matters such as wasteful expenditure, non-observance of rules, cases of financial impropriety, etc. • The reports of the CAG on public enterprises of the central Government are presented to Parliament and of the State Governments, to respective State Legislature

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