CHAPTER 31
AUDIT OF GOVERNMENT COMPANIES
AND CORPORATIONS
31.1
Before independence, Government concerns were few and were, as a rule,
departmentally managed. The Posts and Telegraphs department, the Nationalized
Railways and the Ordnance factories were the most important; apart from these,
there were a number of Central and State concerns (e.g. All India Radio, Light
houses and Light Ships, Government Presses, Opium Factories etc.,) which were
run largely on the same lines as other Departments of Government and were
subject to the same service rules and procedural regulations. Profit making was
not their primary object and some of them were deliberately run on a no-profit,
no-loss basis e.g. State Trading Schemes in food grains and essential
commodities.
................is a Commercial Department of Government of India.
(A) Railways
(B) All India Radio
(C) Postal Department
(D) All the above
Correct Answer:- Option-(D)
31.2 After independence, the national objective
of establishing a socialistic pattern of society coupled with the endeavour to
have a planned economic development of the country has led to a steady growth
of state owned enterprises of diverse nature with huge capital investments.
31.3 During the last two decades the public
enterprises in India have penetrated into various industrial activities leading
to an unprecedented expansion of the public sector. Some of the socio-economic
objectives which the Public sector enterprises in India are called upon to fulfil
are:
i) to promote self-relianance in strategic
sectors of the national economy;
(ii) to help in the rapid economic growth and
industrialization of the country, there-by creating infrastructural facilities
for promoting a balanced and diversified economic structure in development;
(iii) to promote re-distribution of income and
wealth and prevent concentration of economic powers;
(iv) to reduce the regional imbalances and to
increase employment;
(v) to generate surplus for re-investment;
(vi) to enforce social control on trade and
industry by ensuring equitable distribution of goods and services; and
(vii) to promote import substitution to save and
earn foreign exchange for the national economy.
Organizational Form
Government Companies are governed by the Companies Act, 1956 and in which the ..................of the paid up share capital.
(A) Central or State Government or both together hold not less than 50%
(B) State Government hold not less than 50%
(C) Central or State Government or both together hold not less than 51%
(D) Central or State Government or both together hold not less than 60%
Correct Answer:- Option-(C)
31.5 Government Corporations are governed by
respective, Acts of Legislature which contain detailed provisions regarding
their scope and functions etc. These corporations usually have the power to
make regulations regarding service conditions of their staff and all other
matters with the prior approval of Government; however, in certain specified
matters of importance, rule making power vests with Government. In practice,
there is generally close co-ordination between these Corporations and
Government, but Government does not interfere in the day-to day affairs of the
Corporations. The members of the Boards are appointed and are removable by the
Central and/ or State Government concerned.
31.6 In general, statutory Corporations and
Government Companies are given maximum autonomy (within the ambit of the
relevant Act of Parliament or Memorandum and Articles of Associations)
consistent with the needs of “Public Accountability”.
Accounts
31.7 The accounts of the Government Companies
follow the requirement of the Companies Act, 1956, and the generally accepted
principles of commercial accountancy. Orders are issued from time to time by
the Department of Company Affairs with a view to making the accounts more
informative or to promote uniform practice in all the Government companies.
The accounts of the Government Companies follow the requirement of the :
(A) Accounts Rules prescribed by Central Finance Department
(B) Accounts Formats suggested by comptroller and Auditor General
(C) Finance Act
(D) Companies Act, 1956
Correct Answer:- Option-(D)
31.8 Government Corporations generally maintain
accounts on commercial lines. The Government determines, in consultation with
the Comptroller and Auditor General as necessary, the detailed forms in which
the annual accounts and Balance Sheet should be prepared by the Corporation.
The detailed forms of Annual Accounts and Balance Sheet of a
Government Corporation is determined by :
(A) State Government
(B) Union Government
(C) Corporation itself
(D) Government in Consultation with C & AG
Correct Answer:- Option-(D)
Authority
31.9 The Constitution of India recognize the
principle of public accountability for all activities of the State including
those carried out by the agency of public enterprises. It provides that the
Comptroller and Auditor General is to report on, in addition to the accounts of
the Union and States, the accounts of authorities and bodies (which term
includes public enterprises) as may be prescribed by Parliament. One of the
purposes of setting up Company/ Corporation form of public enterprises was
ensure to a degree of administrative and financial autonomy that would give
them operational flexibility to rum on
business principles. Nevertheless, it is accepted that this can not impair
their public accountability since the investments in these are from government
funds. The companies Act 1956,
accordingly, defines government companies as those companies where the State
has majority share holding and also provides for their audit by the Comptroller
and Auditor General of India. The legislations setting up public corporations,
barring a few exceptions, similarly provide for his audit.
31.10 The Comptroller and Auditor General’s
(Duties, Powers and Conditions of Service) Act 1971 provides that audit of the
accounts of government companies shall be conducted by the Comptroller and
Auditor General in accordance with the provisions of the respective
legislatures. The accounts of corporations established by or under law made by
Parliament in accordance with the provisions of the respective legislature. The
audit of the accounts of corporations established by or under law made by the
legislature of a state or of a Union Territory could also be entrusted to him
by the Governor/ Administrator.
31.11 The accounts of government companies are
audited by firms of Chartered Accountants as is the case with companies in the
private sector. However, there are some important differences. The auditors of
government companies are appointed/re-appointed by the Company Law Department
on the advice of the Comptroller and Auditor General who makes his
recommendations on the basis of their competence and performance. This system
of appointment gives them a far greater degree of independence as they are not
dependent on company management for their appointment or re-appointment.
Further, considering the need for an in-depth examination, the Act gives the
Comptroller and Auditor General authority to issue directions to these auditors
regarding the manner in which the company’s accounts shall be audited; such
directions have been issued. In accordance with these directions, the auditors
have to submit a supplementary report (i.e. in addition to the report required
to be submitted to the share-holders) on the adequacy and efficiency of system
of accounts, internal control, cost accounts, inventory management, internal
audit etc. This report is intended to ensure that the professional auditor’s
performance is adequate and that their report throws up useful data and
information for a better appreciation of the financial working of the
companies. And, finally the Comptroller and Auditor General has the right to
comment upon or supplement the report of the auditors. Hence, broad checks are
applied to ensure that the companies have followed the generally accepted
accounting and reporting standards and that the accounts as certified by
statutory auditors represent a true and fair view of the company’s financial
position and working. The Comptroller and Auditor General also conducts a
supplementary or test audit in the nature of efficiency-cum-performance
appraisal.
The accounts of Govt. Companies are audited and certified by :
(A) Accountant General
(B) Auditors appointed by the Board of Directors of the Company
(C) Firms of Chartered Accountants appointed by the Company Law Department on the advice of the Comptroller and Auditor General
(D) Audit Board
Correct Answer:- Option-(C)
31.12 As regards government corporations
established by or under Acts of legislature, he conducts audit either as a sole
auditor or super-imposed auditor.
Objectives and Scope of Audit
31.13 Under the Act of 1971, the scope and
extent of audit is determined by the Comptroller and Auditor General. Audit of
public enterprises in India is not restricted to financial and compliance
audits; it extends also to the efficiency, economy and effectiveness with which
these operate and fulfil their objectives and goals. Another aspect of audit
relates to questions of propriety; this audit is directed towards an
examination of the management decisions in the areas of sales, purchases,
contracts, etc. to see whether these have been taken in the best interest of
the undertaking and conform to accepted principles of financial propriety.
31.14 One of the purposes of setting up
company/corporation form of enterprises was to give their managements autonomy and
flexibility with in the overall control and accountability system to run on
competitive and commercial terms. Audit is accordingly so conducted as not to
interfere with their autonomy or to inhibit their decision-making authority.
Being an ex-post-facto activity, audit does not affect either the authority to
take decisions or the decisions themselves. In examining the decisions of a
management, it ensures that these were taken by the competent authority after
examination of all aspects on the basis of all the relevant information
available at that time and taking into consideration the different alternatives
available to the management, and that the decisions were consistent with the
aims and objectives of the enterprise. Audit is an instrument of accountability.
But an equally important purpose of public enterprises audit in India is to
help the government and the enterprise managements to improve their efficiency
and effectiveness. This is achieved by bringing out the financial and
operational deficiencies, inadequacies or ineffectiveness of systems,
shortfalls in performance, etc. and by analysing causes of non-attainment of
acceptable standards of performance. Financial performance is linked with the
physical performance and issues of efficient and economic operations and
management of resources are highlighted.
31.15 The audit of public enterprises in India
broadly covers three aspects; financial statements, systems and performance. In
addition, a horizontal study of the overall working results of companies/
corporations with reference to important indices of financial performances and
that of accounting systems and procedures is also made. The horizontal study
provides a bird’s eye view of overall performance of Union/State enterprises.
31.16 The objectives of audit of financial
statements and audit techniques are the same as used for auditing private
enterprises. For purposes of comments upon or supplement to the Auditor’s
Report, the work of professional auditor is reviewed by applying broad checks on
the balance sheet, profit and loss accounts, etc. as certified by them. It is
aimed at ensuring that the accounts as certified by the Auditors, represent a
true and fair view and are in conformity with the provisions of the Companies
Act. Any deficiencies noticed in this regard are issued as comments upon or
supplement to the Auditor’s Report; which are required to be placed before the
Annual General Meeting and the Legislature. The comments ensure, by and large,
uniformity in accounting and develop healthy conventions of appropriate
disclosure requirement. Additionally, a review of accounts is also prepared by
the Audit Department and this review brings out in a summarized form certain
key data and financial highlights of company’s operations indicating the trend
for 3 years. It is published as part of Director’s Report by the Government
Company.
31.17 Audit of transactions is continuous in the
case of major enterprises and annual in the case of others. Increasingly, more
attention is being paid to the soundness of the systems and their effective
operation. Comprehensive audit appraisals are conducted periodically. A number
of public enterprises, both of the Union Government and of the State
Governments, are selected each year for comprehensive appraisal.
31.18 Audit is expost-facto and is conducted
both in the headquarters of the concerned public enterprise as well as its
units. Depending on the size and complexity of the enterprise, it is either
conducted through resident audit teams located within the premises of the
public enterprises or through audit teams deputed for a certain number of days.
31.19 The results of audit are reported to and
discussed with the management before finalizing the audit observations. Only
the significant results of these audits along with the views of the management/
government are included in the audit reports.
Comprehensive Audit
31.20 Chartered Accountants conduct what is
known as Accountancy Audit, and
Regularity Audit. This may be sufficient for a commercial concern in the
private sector, but the importance of the accountability of public sector
enterprises to the citizen via the Legislature needs no emphasis. Audit
conducted by the professional auditors may not be adequate to secure this
accountability which differs considerably in quality and content, compared to
accountability in a private sector enterprise. It is here that the Comptroller
and Auditor General plays an important role and assists the Legislature in
reviewing the performance of public undertakings. The audit conducted by the
Comptroller and Auditor General does not really cover again the field which has
already been covered by either the internal audit of the individual concerns or
by the professional auditors. He conducts an appraisal or an efficiency-cum-performance
audit. He sees whether the undertakings have fulfilled the objectives for which
they have been established, whether ‘value for the money’ spent has been
obtained, whether the targets have been achieved as scheduled, whether
avoidable delays either in construction or production have occurred and whether
infructuous or extravagant expenditure has been incurred. He locates areas of
weakness and extravagance for managements’ information. All this involves a
review of the decisions taken by the management, including the Board of
Directors, and a comprehensive appraisal of the performance of the undertaking.
Chartered Accountants conduct Accountancy Audit and.......
(A) Test Audit
(B) Appropriation Audit
(C) Propriety Audit
(D) Regularity Audit
Correct Answer:- Option-(A)
31.21 The areas covered by comprehensive audit
are those of investment decisions, project formulation and management,
organization, delegation of powers and management information systems,
organizational effectiveness, capacity utilization, management of equipment,
plant and machinery, production performance, use of materials, productivity of
labour, idle capacity, costs and prices, development of complementary ancillary
small scale industries, materials management, sales and credit control,
budgetary and internal control systems, etc. The areas covered in comprehensive
audit will naturally vary from enterprise to enterprise depending on the nature
of the enterprise, its objectives and operations.
31.22 Some of the issues which are examined in
audit are:
(a) whether overall capital cost of the project
compares with the approved planned costs; were there any substantial increases
and if so, what are these and whether there was evidence of extravagance or
unnecessary costs;
(b) whether the accepted production or
operational output have been achieved; whether there has been under-utilization
of installed capacity or shortfall in performance and if so, what has caused
this;
(c) whether the planned rate of return has been
achieved;
(d) whether systems of project formulation and
execution are sound; whether there are inadequacies and what has been the
effect of the gestation period and capital costs;
(e) whether there is absence of cost control
measures and there are inefficiencies, wastages in raw-materials consumption,
etc;
(f) whether there are inadequacies in the
purchase policies leading to piling up of inventory and redundancy in respect
of stores and spares;
(g) whether the enterprise has research and
development programme and what has been the performance in adopting new
processes, technologies, improving projects and in reducing costs through
technological progress;
(h) whether the enterprise has got adequate
systems of repairs and maintenance;
(i) whether the procedures are effective and
economical;
(j) whether there has been poor planning and
insufficient or inefficient project planning;
(k) whether there has been undue waste,
unproductive time, for men and machine, wasteful utilization or even
non-utilization of resources and the reasons for such a state of affairs.
31.23 The efficiency and effectiveness audit of
public enterprises is conducted on the basis of certain standards and criteria.
Public enterprises have been set up with certain socio-economic purposes and
for fulfilment of certain objectives. The objectives vary from enterprise to
enterprise. The audit appraisal analyses the performance of an enterprise to
bring out the extent to which the objectives for which the enterprise was set
up, have been served. This, is a complex task but basic to effectiveness
appraisal. The feasibility/detailed project reports give the basic of
investment, capacity, costs and time schedules, gestation period and built up
of capacities, parameters and norms of consumption, yields, productivity,
costs, rate of return, etc. These provides yardsticks by which the performance
is measured. Some of the parameters may change due to external or even internal
factors subsequent to the setting up of the enterprise/project. Due account is
taken of the changes effected by valid studies, in conducting efficiency audit.
Then enterprises are required to have their long and short term capital and
operational plans and these provide set of reference points for assessment of
the performance. Where appropriate, rated capacity of the unit provides an
acceptable benchmark against which physical performance is evaluated.
Utilization of the rate capacity, is however, assessed, along with norms for
consumption of raw materials and utilities, yields and rejections as well as
requirements for proper maintenance and servicing of equipment. Cost efficiency
is another important basis for appraising performance. Standard or target costs
are determined on the basis of norms of capacity utilization, consumptions,
productivity, yields etc. given in the detailed project reports moderated in
many cases by expert studies to take care of later constraints and changes. The
guidelines issued by the Bureau of Public Enterprises in respect of general
management, financial management, materials management, production management
and construction management and the standards laid down by internal and
external experts in their industrial engineering and other Technical study
Reports also provide another basis for
appraising enterprise performance and its systems.
31.24 While there are several criteria and
sources of criteria for conducting the efficiency and effectiveness audit of
public enterprises, the basic task in audit is to carefully identify the
acceptable criteria for assessing the efficiency and effectiveness of an individual
enterprise so that the appraisal by audit is valid and meaningful.
Audit Board System
31.25 The system of comprehensive appraisal of
the companies/ corporations of the Union Government through Audit Board was
introduced from April 1969. The composition of the Audit Board differs from
enterprise to enterprise. The Chairman, Audit Board is common to all
enterprises selected for appraisal. There are four other members of the Audit
Board for each such enterprise. Two of them are officers of the Indian Audit
and Accounts Department including the Member, Audit Board who has the primary
responsibility for the audit and appraisal and two part time members are
appointed by the administrative Ministry responsible for the enterprise to be
reviewed, in consultation and with the concurrence of the Comptroller and
Auditor General. Part-time members of the audit boards are selected having in
view the technical knowledge, experience and expertise in the area of operation
of the enterprises to be reviewed. They are very closely associated with the
appraisals at the various stages and especially help the Audit Board in
analysing areas where technical expertise in required.
Part-time members of the Audit Board for evaluation of Companies/Corporations are appointed by:
(A) Administrative Ministry concerned with the concurrence of C&AG
(B) Ministry of Finance :
(C) C &AG
(D) Company Law Board
Correct Answer:- Option-(A)
Audit Board' system for Corporations /Companies of the Union Government introduced from April 1969 is meant for :
(A) Effective supervision of audit
(B) Comprehensive appraisal
(C) Over-seeing the functioning of the enterprise
(D) Monitoring progress of audit.
Correct Answer:- Option-(B)
31.26 The system of appraisal by the Audit Board
has two distinct advantages. Firstly, the audit Board has the very valuable
help of the expert technical members in understanding and analysing the working
of the selected enterprise in all its aspects. Secondly, the appraisal is
finalized only after it has been discussed with the Management of the
enterprise under appraisal and with the Administrative Ministry, During these
discussions, the managements and the ministries give their views on the various
issues highlighted in the draft appraisals, explain the problems and
circumstances under which certain decisions were taken, the operational and
other constraints, their policies, plans and projects, etc. Thus, the appraisal
that is finally presented to the Parliament after approval by the Comptroller
and Auditor General of India, becomes an objective, balanced and constructive
appraisal of the performance of the enterprise.
31.27 The audit Board is an internal mechanism
of the Indian Audit Department for conducting appraisal of the performance of
public enterprise. It has no separate legal entity and works under the
supervision and control of the Comptroller and Auditor General.
. .............. is an internal mechanism of the Indian Audit and Accounts Department for conducting appraisal of the performance of public enterprises.
(A) Test Audit
(B) Audit Board
(C) Local Audit
(D) Central Audit
Correct Answer:- Option-(B)
The Audit Board functioning for conducting the comprehensive appraisal of the performance of public enterprises of the Union Government:
(A) As an independent body
(B) Is not an independent body, works under the supervision of C & AG -
(C) Is under the control of the Public Undertakings Committee.
(D) None of the above
Correct Answer:- Option-(B)
Audit Board is constituted for appraisal of the performance of public enterprises as :
(A) an authority assisting C&AG
(B) an independent organisation
(C) functioning to assist P.U.C.
(D) functioning to assist PAC
The Audit Board is :
(A) A Statutory body
(B) A legal entity
(C) A departmental body
(D) An internal mechanism of Indian Audit Department
Correct Answer:- Option-(D)
31.28 The proposal of the Comptroller and
Auditor General for extension of the Audit Board system to State Government
enterprises as well has received a good response and so far, the Governments of
Madhya Pradesh, Rajasthan and Tamil Nadu have adopted it. Currently, each
Accountant General selects each year some of the State Government’s companies/
corporations for an audit appraisal of their performance.
Audit Reports
31.29 The accounts of Government Companies are
certified by the statutory Auditors. A copy of their Audit Report and any
comments thereon or supplement thereto made by the Comptroller and Auditor
General are placed before Parliament/State Legislature along with the annual
report under section 619 A of the Companies Act. From the year 1970 the Audit
Report (Commercial) of the Central Government is being prepared in separate
parts. The first part would contain a brief summary of the overall working of
all Government companies and statutory corporations and summarized financial
results of these undertakings. Other part would contain the result of
comprehensive appraisal of performance conducted by the Audit Board, of the
selected undertakings during that year. One part of the report would contain
individual irregularities noticed in the undertakings not taken up for
comprehensive appraisal by the Audit Board and another part would contain the
results of the reports of the company’s auditors submitted under the directions
issued by the Comptroller and Auditor General of India.
The Audit Report of company of a State Government is placed before :
(A) State Legislature
(B) The Registrar of Company
(C) The Reserve Bank of India
(D) None of the above
Correct Answer:- Option-(A)
A brief summary of the overall working of all Central Govt. Companies and Statutory Corporations and summarised financial results of these undertakings are included in the :
(A) Audit Report (Commercial) of the Central Govt., 1st Part.
(B) Finance Accounts
(C) Appropriation Accounts
(D) Audit Report of Statutory Auditors
Correct Answer:- Option-(A)
31.30 In the case of Statutory Corporations,
certified copies of their annual accounts along with the Audit Reports are
required to be placed through the Ministry concerned before Parliament/ State
Legislature. The Comptroller and Auditor General may also include a synopsis of
the results of their working together with a detailed review of selected units,
comments on major irregularities and other matters of importance in his
Conventional Audit Report.
31.31 In the case of companies other than
Government Companies, in which Government have invested more than 25 per cent
but less than 51 per cent of the paid up capital or Rs. 5 lakhs. Whichever is
less, the annual report of the concerns together with the balance sheet,
trading and profit and loss account and any other subsidiary statements of
accounts prepared by the companies and any observations made by the statutory
auditors is obtained and examined with a view to draw conclusions about the
financial stability of the concern and the adequacy of the return on the money
invested by the Government. In cases where the companies are continuously
running at a loss for several years, the position is brought to the notice of
Government and commented upon in the Audit Report, if necessary.