22

CHAPTER 22

ACCOUNTING AND AUDIT OF 
DEPARTMENTAL COMMERCIAL UNITS

22.1 The undertakings, whether of the Central or State Governments, which are run on commercial lines can be broadly grouped into any one of the following three categories:

 (i) Departmentally managed undertakings which form part and parcel of government activities;

 (ii) Government companies and deemed government companies set up under the Companies Act where Government or Government - owned and controlled institutions own 51 per cent or more of the paid up capital;

(iii) Corporations set up under the specific Acts of the Legislature.

1. How many broad categories are there for government undertakings run on commercial lines?
A. One
B. Two
C. Three
D. Four

Answer: C

2. Departmentally managed undertakings are:
A. Private companies controlled by government
B. Part and parcel of government activities
C. Corporations set up under specific Acts
D. Non-commercial units

Answer: B

3. Government companies are those in which:
A. Private entities hold majority shares
B. Government or government-owned institutions hold 51% or more of paid-up capital
C. Only the High Court supervises them
D. Departmental officers manage all operations

Answer: B

4. Corporations set up under specific Acts of the Legislature form:
A. The first category of government undertakings
B. The second category
C. The third category
D. An informal category not recognized by law

Answer: C

5. Which of the following is NOT a category of commercial government undertakings?
A. Departmentally managed undertakings
B. Government companies under Companies Act
C. Corporations under specific Acts of Legislature
D. Private companies with no government shareholding

Answer: D

22.2 The principal difference between departmental concerns and the other types of concerns is in the degree and extent of autonomy allowed to them. Departmentally managed concerns are directly under a Ministry or Department of Government and are subject to Government rules and procedure (sometimes with minor modifications). Government corporations and companies, on the other hand, are governed by separate Acts of Parliament/legislature which contain detailed provisions regarding their scope and functions etc. or by the Companies Act, 1956.

The succeeding paragraphs describe the provisions relating to Departmental Commercial Units^*.

1. The principal difference between departmental concerns and other types of government concerns is:
A. The type of products they produce
B. The degree and extent of autonomy allowed
C. The number of employees
D. The location of the office

Answer: B

2. Departmentally managed concerns are directly under:
A. Private companies
B. A Ministry or Department of Government
C. High Court supervision
D. Local municipalities

Answer: B

3. Departmentally managed concerns are subject to:
A. No government rules
B. Government rules and procedures (sometimes with minor modifications)
C. Only corporate laws
D. Supreme Court directives only

Answer: B

4. Government corporations and companies are governed by:
A. Ministry rules only
B. Separate Acts of Parliament/Legislature or the Companies Act, 1956
C. Departmental procedures
D. Local government guidelines

Answer: B

5. The key distinction in governance between departmental units and corporations/companies is:
A. Size of the workforce
B. Autonomy and governing laws
C. Types of products
D. Geographical jurisdiction

Answer: B

Accounts

 22.3 An accounting system must be framed in such manner as will provide the management of the concerns with information as to the details of the transactions of the concerns as well as the financial results of the operations.

22.4 In the case of departmental undertakings the responsibility for the introduction of a commercial Accounting System rests with the Finance Ministry or Department of the Government of India or of the State but a Commercial Accounting system will not be introduced without consultation with the Audit Officer concerned. The Audit Officer is responsible for seeing that the system that may be adopted conforms to the fundamental principles of accounts and audit.

22.5 Departmental concerns maintain accounts on a single entry system (as distinct from the double entry system in vogue in commercial accounts) and on a cash basis i.e. their accounts only show the actual receipts and disbursements during the accounting period and do not include assets or liabilities accrued during the period.

22.6 For the purpose of ascertaining the profit or loss arising out of the year’s transactions, these concerns prepare a proforma Trading and Profit and Loss Account and Balance Sheet annually. For this purpose, it is necessary, first, to put the accounts on a double-entry basis; this is usually done by entering the total figures of receipts and expenditure under each head (such as establishment, stores etc.) in a journal and thereafter into various ledger accounts; and secondly, to bring in the additional liabilities and assets (such as debts and claims) accrued during the year (e.g. including debts acquired for purchases made during the year, excluding payments made during the year of debts acquired in previous years etc.). These will also be journalised and posted to the relevant ledger accounts. The trial balance is then compiled from the totals of the various ledger accounts and the Profit and Loss Account and the Balance Sheet prepared in the usual way.

22.7 For the purpose of determining the capital to be shown on the Balance Sheet, the net cash withdrawals from the treasury and the net book adjustments made for services rendered by other departments are taken into account, as also the Profit and Loss up to the date of the Balance Sheet.

^* Government Corporations Companies are dealt with in Chapter 31.

1. The accounting system of a departmental concern must provide:
A. Only receipts during the year
B. Only disbursements during the year
C. Detailed information of transactions and financial results of operations
D. Employee payroll only

Answer: C

2. Responsibility for introducing a commercial accounting system in departmental undertakings rests with:
A. The High Court
B. The Finance Ministry or Department of Government
C. Subordinate Judge
D. District Collector

Answer: B

3. Before introducing a commercial accounting system, consultation is required with:
A. Auditor General
B. Audit Officer concerned
C. High Court
D. District Judge

Answer: B

4. Departmental concerns maintain accounts on which system?
A. Double-entry system only
B. Single-entry system and cash basis
C. Accrual system only
D. Only computerized accounts

Answer: B

5. The single-entry cash basis accounting system records:
A. All assets and liabilities
B. Only actual receipts and disbursements during the period
C. Accrued income and expenditure
D. Both cash and accrual transactions

Answer: B

6. To prepare Trading and Profit & Loss Account and Balance Sheet, departmental accounts are first converted to:
A. Single-entry basis
B. Double-entry basis
C. Cash-basis only
D. Manual ledger only

Answer: B

7. In double-entry conversion, total receipts and expenditure are first entered into:
A. Trial balance
B. Journal and then ledger accounts
C. Balance Sheet directly
D. Cash book only

Answer: B

8. Additional assets and liabilities accrued during the year (like debts and claims) are:
A. Ignored in accounting
B. Journalised and posted to relevant ledger accounts
C. Recorded only in cash book
D. Only estimated

Answer: B

9. The trial balance is compiled from:
A. Receipts only
B. Disbursements only
C. Totals of various ledger accounts
D. Cash book alone

Answer: C

10. Capital shown on the Balance Sheet is determined by:
A. Only cash withdrawals from treasury
B. Net cash withdrawals, net book adjustments for inter-department services, and Profit & Loss up to Balance Sheet date
C. Total receipts only
D. Total disbursements only

Answer: B

Audit

22.8 The duties of the auditor commence when those of the accountant have been completed. The accountant and his staff write up the books of accounts and prepare therefrom at the end of the year or half-year, as the case may be, the manufacturing, Trading, Profit and Loss Accounts and the Balance Sheet which are placed eventually before the auditor. It is impossible to lay down rules or regulations which are applicable without exception to all audits and auditors must, therefore, use their own judgement whether the general rules are applicable to the audit in which they are engaged.

The main functions of audit, however, are:

(a) to secure that the commercial accounts present a full and true picture of the financial results of the undertaking in terms of commercial ideas of liability and assets, debit and credit, profit and loss;

(b) to ensure that subsidiary accounts are so prepared as to render it possible to compare, as far as may be, the relative efficiency of Government trading and manufacturing institutions with one another or with similar institutions not controlled by Government;

 (c) to verify the correctness of the allocation of expenditure between capital and revenue, the valuation of assets upon a reasonable basis, and the adequacy of provision for depreciation and bad debts.

1. The duties of the auditor commence when:
A. The accounts are first opened
B. The accountant and staff have completed writing up the books of accounts
C. The High Court issues directions
D. The Ministry provides funds

Answer: B

2. The accountant and staff prepare the following for the auditor:
A. Payroll only
B. Manufacturing, Trading, Profit & Loss Accounts, and Balance Sheet
C. Only cash book
D. Only ledger accounts

Answer: B

3. Auditors must:
A. Follow one fixed rule for all audits
B. Use their own judgment if general rules are not applicable
C. Prepare accounts for the accountant
D. Approve all expenditures automatically

Answer: B

4. One main function of audit is to:
A. Reduce the workload of accountants
B. Ensure commercial accounts present a full and true picture of financial results
C. Collect taxes from government undertakings
D. Supervise day-to-day operations

Answer: B

5. Auditors ensure subsidiary accounts are prepared to:
A. Obscure financial performance
B. Compare relative efficiency of government trading and manufacturing institutions with one another or with similar non-government institutions
C. Only record cash transactions
D. Avoid reporting profit or loss

Answer: B

6. Auditors verify the correctness of allocation of expenditure between:
A. Capital and revenue
B. Cash and receipts
C. Assets and liabilities
D. Government and private funds

Answer: A

7. Auditors check the valuation of assets:
A. On any arbitrary basis
B. On a reasonable basis
C. Only for physical assets
D. Only for cash

Answer: B

8. Auditors ensure adequate provision for:
A. Only salaries
B. Depreciation and bad debts
C. Payroll taxes only
D. Legal fees only

Answer: B

9. The purpose of audit includes:
A. Preventing any commercial activity
B. Presenting the financial results in commercial terms of debit, credit, profit, and loss
C. Avoiding preparation of accounts
D. Supervising staff discipline

Answer: B

10. Auditors’ work is necessary because:
A. Accountants are not qualified
B. No single rule applies to all audits, and judgment is needed to ensure accuracy
C. The High Court demands it
D. The Finance Ministry does not maintain records

Answer: B

22.9 An auditor has frequently to accept the results of what is known as ‘internal control’. The following are examples of what are known as internal checks: a periodical examination by the Superintendent of a concern of cash book vouchers or petty cash vouchers, including the additions of the cash book and petty cash book, and the balancing of the cash book periodically with the bank or treasury pass book, a periodical examination of debtor’s accounts; the calling over of the postings of the day books and journal into ledger by clerks who have no duty connected with the writing up of these books and the posting of them into ledger accounts; a system of continuous stock verification; or the checking of pay rolls by clerks who are in no way connected with the preparation of the rolls.

1. An auditor often has to rely on the results of:
A. External audits only
B. Internal control
C. Court orders
D. Cash deposits

Answer: B

2. Which of the following is an example of an internal check?
A. Continuous stock verification
B. Daily newspaper reading
C. Writing personal letters in office
D. Supervising only government schools

Answer: A

3. Periodical examination of cash book vouchers by the Superintendent is an example of:
A. External audit
B. Internal check
C. Fraud
D. Stock verification

Answer: B

4. Balancing the cash book periodically with the bank or treasury pass book is done to:
A. Avoid preparing accounts
B. Ensure accuracy and reliability of cash transactions
C. Create extra work for clerks
D. Increase revenue

Answer: B

5. Periodical examination of debtor’s accounts is an example of:
A. Internal control
B. External control
C. Legal procedure
D. Asset mismanagement

Answer: A

6. Calling over postings of day books and journals into ledger by clerks unconnected with writing up is meant to:
A. Delegate work
B. Ensure independent verification of entries
C. Avoid accounting
D. Only prepare reports for the High Court

Answer: B

7. Continuous stock verification helps in:
A. Improving staff salaries
B. Preventing errors and fraud in inventory management
C. Supervising legal cases
D. Preparing cash book only

Answer: B

8. Checking of payrolls by clerks unconnected with preparation ensures:
A. Accuracy and impartiality in payments
B. Delay in salary distribution
C. Creation of new accounts
D. Mismanagement of funds

Answer: A

9. Internal checks are essential because:
A. Auditors cannot verify anything themselves
B. They provide assurance of accuracy and reliability of accounts
C. They reduce government expenditure
D. They replace external audits

Answer: B

10. Internal control systems generally include:
A. Daily monitoring of cash and stock, independent verification of postings, and verification of payroll
B. Weekly newspaper reports
C. Personal opinions of staff
D. Only bank reconciliations

Answer: A

22.10 It is an important part of an auditor’s duty to scrutinize the system of internal control in order to see that it is adequate in itself and as independent in character as circumstances permit, and to assure himself that the system is being applied efficiently. The extent of the scrutiny to be applied should depend on the adequacy of the system of internal control and on the completeness and accuracy with which it is being applied.

1. A key part of an auditor’s duty is to:
A. Prepare the accounts personally
B. Scrutinize the system of internal control for adequacy and independence
C. Approve government budgets
D. Only verify cash balances

Answer: B

2. The auditor must assure himself that the internal control system is:
A. Being applied efficiently
B. Being ignored
C. Only partially used
D. Being applied externally

Answer: A

3. The extent of scrutiny by an auditor depends on:
A. The size of the staff
B. The adequacy of the system of internal control and its accurate application
C. The number of accounts only
D. The location of the office

Answer: B

4. Auditor’s scrutiny is necessary to ensure that internal control is:
A. Independent in character as far as circumstances permit
B. Fully automated only
C. Only documented
D. Supervised by a private company

Answer: A

5. Efficient application of internal control by staff helps in:
A. Delaying audit reports
B. Ensuring completeness and accuracy of financial transactions
C. Avoiding preparation of Balance Sheet
D. Increasing government taxes

Answer: B

22.11 Authority for audit of all Trading and Manufacturing and Profit and Loss Accounts and Balance Sheet of departmental concerns vests with the Comptroller and Auditor General.

Results of Audit

22.12 A synopsis of the results shown by the Proforma Profit and Loss Accounts and Balance Sheets of Departmental concerns together with audit reviews of selected concerns incorporating also their proforma accounts in a simplified form, and any salient feature of the Financial Review drawn up by the Administration are included in the Comptroller and Auditor General’s Audit Reports which are presented to Parliament/State Legislature each year.

1. The results of audit for departmental concerns are included in:
A. Ministry annual budgets
B. Comptroller and Auditor General’s (CAG) Audit Reports
C. High Court judgments
D. Local government records

Answer: B

2. The audit reports presented to Parliament/State Legislature include:
A. Only the Balance Sheet
B. Synopsis of Proforma Profit and Loss Accounts and Balance Sheets of departmental concerns
C. Only cash receipts
D. Only internal memoranda

Answer: B

3. Audit reviews of selected concerns may incorporate:
A. Personal staff reports
B. Proforma accounts in simplified form
C. Only government circulars
D. Legal notices

Answer: B

4. Salient features of the Financial Review drawn up by the Administration are:
A. Included in the CAG Audit Reports
B. Ignored in audits
C. Published only in newspapers
D. Recorded in personal diaries

Answer: A

5. CAG Audit Reports are presented:
A. Monthly to the Finance Ministry
B. Annually to Parliament or State Legislature
C. Only during special occasions
D. Weekly to departmental heads

Answer: B

Parliamentary Control

22.13 Parliamentary Control over departmental undertakings is the same as over any Government Department. These concerns derive their finances from the Budget allocations of the Administrative Ministries/ Departments; their receipts go into the Consolidated Fund of the Union/State and their payments have to be made from the fund within the grant voted for the purpose by Parliament/ State Legislature.

1. Parliamentary control over departmental undertakings is:
A. Different from control over government departments
B. The same as control over any government department
C. Only exercised by the Finance Ministry
D. Not applicable

Answer: B

2. Departmental undertakings derive their finances from:
A. Private donations
B. Budget allocations of the Administrative Ministries /Departments
C. Loans from commercial banks
D. Profits from foreign trade

Answer: B

3. The receipts of departmental undertakings go into:
A. Ministry petty cash
B. Consolidated Fund of the Union/State
C. Local municipality fund
D. Private accounts of officials

Answer: B

4. Payments by departmental undertakings must be made from:
A. Any available cash
B. The Consolidated Fund within the grant voted by Parliament/State Legislature
C. Loans from banks
D. Foreign aid

Answer: B

5. Parliamentary control ensures:
A. Departmental undertakings can spend without limits
B. Financial discipline and accountability for funds allocated from the budget
C. Accounts are kept secret
D. Only private auditing

Answer: B

6. Budget allocations for departmental undertakings are provided by:
A. The High Court
B. Administrative Ministries/Departments
C. Local bodies
D. Private investors

Answer: B

7. Receipts of departmental undertakings are credited to:
A. State treasury only
B. Consolidated Fund of the Union/State
C. Auditor General’s office
D. Ministry petty cash

Answer: B

8. The payments of departmental undertakings must remain within:
A. Approved budget grants voted by Parliament/State Legislature
B. Any discretionary fund
C. Loans from banks
D. Cash reserves only

Answer: A

9. Parliamentary control over finances of departmental undertakings helps to:
A. Avoid maintaining accounts
B. Ensure transparency and accountability in fund utilization
C. Increase personal discretion of officials
D. Allow unlimited borrowing

Answer: B

10. Departmental undertakings are financially integrated with:
A. Local municipal funds
B. Consolidated Fund of the Union/State
C. Private companies
D. Foreign banks

Answer: B