CHAPTER 6
GOVERNMENT
AND COMMERCIAL
SYSTEMS OF ACCOUNTS
& AUDIT
(A) ACCOUNTS
6. The principles of Commercial and Government Accounting differ in
certain essential points. The difference is due to the fact that, while the
main function of a commercial concern is to take part in the production,
manufacture or inter-change of goods or commodities between different groups or
individuals and thereby to make profit, Government is to govern a country and,
in connection therewith, to administer the several departments of its
activities in the best way possible.
Principles and Methods of Commercial Accounting
6.1 A non-Government commercial concern deals primarily with the
utilization of Capital for the purpose of making a profit; and it is interested
to see at intervals how it stands in relation to its debtors and creditors,
whether it is gaining or losing, what are the sources of its gain or loss, and
whether it is solvent or insolvent.
6.2 In order to obtain ready answers to these questions the concern
has to keep a system of detailed accounts. In respect of each person dealt
with, each class of asset held, each article dealt in, and each department of
its activities, it maintains a separate account so that the result of the
transactions in each case may be ascertained. It then becomes necessary for it
to collect the result of all these accounts in one place in order to record the
assets and liabilities under different heads and finally to prepare the
manufacturing. Trading and Profit and Loss Accounts and a Balance Sheet, which
shall show what is the gain or loss of the concern as a whole and whether it is
solvent or insolvent.
6.3 It is the generally accepted practice in the commercial world to
maintain account books on the Double Entry System, which is based on the fact
that in every transaction or financial change two parties or accounts are
involved, one giving and other receiving. Under that system, every transaction,
therefore, requires two entries in the books, one against the party or account
receiving. Further, if the concern is a manufacturing one, it has also to
maintain sets of books for (a) costing and (b) stores accounting in order to
ascertain, as regards (a) the cost of production of each article so as to
control Costs or increase price suitably provided of course the market permits,
and as regards (b) that there is an efficient system of stores control.
6.4 The main
concepts applicable to commercial accounts are:
(1) Financial conditions- This is represented by
the assets, liabilities and shareholders equity and refers to the impressions
or conclusions one might draw from a balanced array of the Company’s assets and
claims against those assets i.e. a balance sheet and other associated accounts
indicating long range and current positions and solvency and liquidity.
(2) Results of operations- The economic results
of operations aimed to show what the enterprise has accomplished and at what
cost, are generally reflected by the Profit and Loss accounts. In arriving at
the net income, financial conservatism dictates that all foreseeable losses
should be provided for, no credit should be taken for unearned profits.
(3) True and fair view- As accounting statements
contain subjective evaluation the results presented to the shareholders should
be a fair view of the affairs for the company. Such fairness is assured by:
- Generally accepted accounting principles which include a number of
conventions and practices which have over a period of time been found to be
most useful.
- Consistency in treatment accorded to various items which are
material to the statements to make comparisons with the earlier years possible
and meaningful.
- Full disclosure to enable informed readers to come to appropriate
conclusions.
Principles of Government Accounting
6.5 The activities of a good Government in any country are determined
by the needs of the country. The main branches of its activities being known,
it is a matter for decision what expenditure will be necessary during any year
in carrying out these activities. After a decision has been reached on this
point, it becomes necessary to determine how to raise sufficient money to meet
that expenditure.
6.6 With a Five-tier classification of Government Expenditure under
Sectors, major heads, minor heads, sub-heads and detailed heads of account, the
accounting is more elaborate than that followed in commercial accounts. But the
immediate objective of Government accounting is not to ascertain the gain or
loss on the transactions of the Government as a whole in carrying out its
activities. The method of budgeting and accounting under the service heads is
not designed to bring out the relation in which Government stands to its
material assets in use, or its liabilities due to be discharged at more or less
distant dates. The accounting methods adopted for commercial concerns, and the
preparation of Manufacturing Trading and Profit and Loss Accounts and a Balance
Sheet, in the commercial sense, are, therefore, unsuitable and unnecessary. In
its Budget for a year, Government is interested to forecast with the greatest
possible accuracy what is expected to be received or paid during the year, and
whether the former together with the balance of the past year is sufficient to
cover the latter. Similarly, in the compiled accounts for that year, it is
concerned to see to what extent the forecast has been justified by the facts,
and whether it has been justified by the facts, and whether it has a surplus or
deficit balance as a result of the year’s transactions. On the basis of the
budget and the accounts, Government determines (a) whether it will be justified
in curtailing or expanding its activities (b) whether it can and should
increase or decrease taxation accordingly.
6.7 In the field of government accounting, the end products are the
monthly accounts and the annual accounts. The monthly accounts serve the needs
of the day-to-day administration, while the annual accounts present a fair and
correct view of the financial stewardship of the government during the year.
സർക്കാർ അക്കൗണ്ടിംഗ് രംഗത്ത്, അന്തിമ ഉൽപ്പന്നങ്ങൾ പ്രതിമാസ അക്കൗണ്ടുകളും വാർഷിക അക്കൗണ്ടുകളുമാണ്. പ്രതിമാസ അക്കൗണ്ടുകൾ ദൈനംദിന ഭരണത്തിന്റെ ആവശ്യകതകൾ നിറവേറ്റുന്നു, അതേസമയം വാർഷിക അക്കൗണ്ടുകൾ വർഷത്തിൽ സർക്കാരിന്റെ സാമ്പത്തിക കാര്യവിചാരത്തെക്കുറിച്ച് ന്യായവും കൃത്യവുമായ വീക്ഷണം നൽകുന്നു.
Purpose of Government and of Commercial Accounts
6.8 Government Accounts are designed to enable Government to determine
how little money it need take out of the pockets of the tax-payers in order to
maintain its necessary activities at the proper standard of efficiency. Non
Government Commercial accounts on the other hand are meant to show how much
money the concern can put into the pockets of the proprietors consistently with
the maintenance of a profit-earning standard in the concern.
Commercial Undertakings of Governments
6.9 The operations of some departments of Government, however,
sometimes include undertakings of a commercial or a quasi-commercial character,
e.g. an industrial factory or a store. Even though these may be maintained
almost entirely for the benefit of the department, it is still necessary that
the financial results of the undertakings should be expressed in the normal
commercial form so that the cost of the service or undertaking may be
accurately known. This implies the maintenance of suitable capital,
Manufacturing, Trading and Profit and Loss Accounts, and as the Government
system of accounts, being on a purely cash basis, is unsuitable for such
commercial accounts, these are usually kept on a Performa basis outside the
general accounts of Government. The actual transactions adjusted on a liability
basis find a place primarily in the regular accounts and the commercial
accounts are additional as well as separate.
Methods of Government Accounting
പണത്തിന്റെ അടിസ്ഥാനത്തിലുള്ള സർക്കാർ അക്കൗണ്ടുകളുടെ മുഖ്യഭാഗം
സിംഗിൾ എൻട്രിയിൽ സൂക്ഷിക്കുന്നു. എന്നിരുന്നാലും, ഇരട്ട എൻട്രി സിസ്റ്റത്തിൽ സൂക്ഷിച്ചിരിക്കുന്ന അക്കൗണ്ടുകളുടെ ഒരു ഭാഗം ഉണ്ട്, ഇതിന്റെ പ്രധാന ഉദ്ദേശ്യം കൂടുതൽ ശാസ്ത്രീയമായ ഒരു മാർഗ്ഗത്തിലൂടെ ഗവൺമെൻറ് ബാങ്കർ അല്ലെങ്കിൽ റിമിറ്റർ അല്ലെങ്കിൽ കടം വാങ്ങുന്നയാളായി പ്രവർത്തിക്കുന്ന അക്കൗ ണ്ടുകളുടെ ബാലൻസ് പുറത്തെടുക്കുക എന്നതാണ്. അല്ലെങ്കിൽ കടം കൊടുക്കുന്നയാൾ. അത്തരം ബാലൻസുകൾ തീർച്ചയായും സിംഗിൾ എൻട്രി സമാഹാരങ്ങളുടെ സബ്സിഡിയറി അക്കൗണ്ടുകളിൽ പ്രവർത്തിക്കുന്നുണ്ടെങ്കിലും ഇരട്ട എൻട്രി അക്കൗണ്ടുകളിൽ വരുത്തിയ ബാലൻസുമായി ഒരു ആനുകാലിക പരിശോധനയിലൂടെ മാത്രമേ അവയുടെ കൃത്യത ഉറപ്പാക്കാൻ കഴിയൂ.
(B) AUDIT
Principles of Audit
6.11 As stated in paragraph 1.12, audit should be conducted by an
agency independent of the authority charged with the duty of carrying on the
business and of keeping accounts of the transactions which pass through his
hands. This principle is strictly observed in commercial audit.
6.12 In Commercial Audit at the present day the main object is to
present before the proprietor or proprietors of the business an accurate
statement of the position of affairs together with a Profit and Loss Account
showing how this position has been reached. In the case of Companies the duty
of an auditor is mainly in the interest of the shareholders, who are
practically sleeping partners in the business. The directors are the active
partners. And the auditor on behalf of the sleeping partners- the shareholders-
has to examine the accounts and the balance sheet prepared by the directors and
to report to the shareholders whether in his opinion those accounts give a true
and fair view of the state of affairs of the company and of its profit or loss
or in what respect they fail to do so.
6.13 On pages 32-33 of Dicksee’s “Auditing” (Seventeenth Edition) will
be found a set of instructions to commercial auditors. The procedure of
commercial audit as detailed there may be summarized thus:
The first
step is to ascertain the authorities competent to sanction expenditure, to
receive or pay money, or to incur liabilities, on behalf of the business.
The second
is to understand the system of account followed/
The third
is to check as far as possible the accuracy of the original record, namely, the
cash book.
The fourth
is to see that all transactions are in accordance with the minutes of the
meetings of the Board of Directors or the orders of competent authorities.
The fifth
is to investigate unusual items.
The sixth
is to check the compilation of the accounts from the original record and to
suggest corrections in the classification of transactions.
The seventh
is to review the procedure of stock taking and of pricing the goods in hand.
The eight
is to check the financial results, that is the Manufacturing, Trading and
Profit and Loss Accounts, and the Balance Sheet, which will indicate accurately
the progressive position of affairs. This necessitates also the investigation
of depreciation of property (building, machinery, furniture etc.) the soundless
of investments, debts due to the firm and the correct allocation of expenditure
to Capital Account.
Difference between a Government and a Commercial Firm
necessitating differences in Audit Procedure
6.14 Unlike commercial audit, the audit of Government transactions in
and outside India is entrusted to the Indian Audit and Accounts Department
which is, as has already been stated, also responsible for the compilation of
the major portion of the accounts which it audits. As explained in paragraph
6.17 below, part of the work incidental to audit is, however, also performed by
the spending departments.
6.15 India is so vast a country and Government activities are so
varied that it is impossible for independent Audit Officers, working (as they
do) almost entirely at headquarters to be as closely in touch with the facts to
which the accounts refer as the officer of the department in which the revenue
is realized and the expenditure is incurred. Thus, the Audit has no personal
knowledge of the quantity or quality of goods supplied by a supplier, of the
number of labourers employed each day on a work, or of the agreement between
the stores accounts and the stock of stores. The payments are in many cases
made at treasuries the officers in charge of which are not members of Indian
Audit and Accounts Department; while in others the bills are either presented
to, or are prepared by disbursing officers of other departments. Thus the
preliminary examination of bills which are paid at treasuries or by disbursing
Officers is primarily left to them.
6.16 Another point of difference between commercial and Government
audit is that, whereas the former is more often than not periodical, the latter
is almost entirely continuous.
Government
Audit as compared with Commercial Audit
6.17 It is obvious that these differences in conditions must alter in
detail the system of audit; and it is interesting to compare with the main
factors of commercial audit, set out in paragraph 6.13 above with the main
objects of Government audit which are to ensure that:
(a) there is provision of funds for the
expenditure dully authorized by a competent authority;
(b) the
expenditure is in accordance with a sanction properly accorded and is incurred
by an officer competent to incur it;
(c) payment has, as a fact, been made and has
been made to the proper person, and that it has been so acknowledged and
recorded that a second claim against Government on the same account is
impossible;
(d) the charge is correctly classified, and that
(as in the case of Public Works and Forest accounts) if a charge is debitable
to the personal account of a contractor, employee or other individual, or is
recoverable from him under any rule or order, it is recorded as such in a
prescribed account;
(e) In the case of audit of receipts (i) sums
due are regularly recovered and checked against demand and (ii) sums received
are duly brought to credit in the accounts;
(f) In the case of audit of stores and stock,
where a priced account is maintained, stores are priced with reasonable
accuracy, and that the rates initially fixed are reviewed from time to time,
correlated with market rates and revised when necessary;
(g) the articles are counted periodically and
otherwise examined for verification of the accuracy of the quantity balances in
the books and that the total of the valued account tallies with the outstanding
amounts in the general accounts and that the numerical balance of stock
materials is reconcilable with the total of value balances in the account at
the rate applicable to the various classes of stores; and
(h) expenditure conforms to the following
general principles which have, for long, been recognized as standards of
financial propriety, namely-
(1) the expenditure is not prima face more than
the occasion demands and that every Government servant exercises the same
vigilance in respect of expenditure incurred from public moneys as a person of
ordinary prudence would exercise is respect of expenditure of his own money.
(2) No authority exercises its powers of
sanctioning expenditure to pass an order which will be directly or indirectly
to its own advantage.
(3) Public moneys are not utilized for the benefit
of a particular person or section of the community unless-
(i) the amount of expenditure involved is
insignificant, or
(ii) a claim for the amount could be enforced in
a court of law, or
(iii) the expenditure is in pursuance of a
recognized policy or custom, and
(4) The amount of allowances such as travelling
allowances granted to meet expenditure of a particular type is so regulated
that the allowances are not on the whole, sources of profit to the recipients.
6.18 This
comparison is made as detailed below:
(a) The first and fourth steps in commercial
audit to ascertain the authorities competent to sanction expenditure or to
receive or pay money, etc. and to see that the transactions are in accordance
with the minutes or orders.
They
correspond with clauses (a) and (b) of paragraph 6.20 in Government accounts
the minutes and orders are represented by the Constitution of India, (hereafter
referred to as “the Constitution”), the laws made by Parliament or the
Legislature of a State/Union Territory and the rules, directions and orders of
a financial character issued by the President/Governor of a State/
Administrator of Union Territory and other competent authorities.
(b) Second step of Commercial audit- Understanding the system of
account followed.
It is
unnecessary to put this forward as a main object of Government audit, because
in India the form in which the initial accounts should be kept and that in
which the accounts should be rendered to the Indian Audit and Accounts
Department are largely determined after consultation with the agency which
audits them. The system of accounts followed is described in the Account Code
and in the relevant Departmental Codes and Manuals
(c) Third step of Commercial audit- check of the accuracy of the
original record.
Clause (C)
of paragraph 6.20 may be held to correspond to this. But, as stated in
paragraphs 6.18 and 6.19, the check of the accuracy of the original records is
left to a great extent to the executive officers of the spending departments,
and this check is supplemented by a test audit at regular intervals by officers
of the Indian Audit and Accounts Department.
(d) Fifth step of Commercial audit- investigation of unusual items.
This corresponds with clause (b) of Paragraph 6.20
(e) Sixth step of Commercial audit – check of the compilation of
accounts and of the classification of transactions.
Checking of
the compilation of accounts is not specifically mentioned in the list of
objects of Government audit. As stated in clause (b) of this paragraph, the
greater number of the accounts are, after a certain point, built up by the
auditing agency itself and the preliminary accounts are checked by the Audit
Office as explained in clause (c). The compilation made in the Audit Office is
test-checked within the department; and in the cases where accounting is
separate from audit and the compilation of accounts is left to the
administrative departments, every process of compilation leading up to the
final account is test-checked by the Indian Audit and Accounts Department.
In
Government audit the classification is thoroughly checked by the Indian Audit
and Accounts Department where that department is responsible for the keeping of
accounts and is test-checked where the keeping of accounts is left to the
administrative department.
(f) Seventh step of Commercial audit- check of the accuracy of the
accounts of stores or goods.
This
corresponds with clauses (f) and (g) of paragraph 6.20.
(g) Eight step of Commercial audit- the preparation of the
manufacturing, Trading and Profit and Loss Accounts and the Balance Sheet,
necessitating the investigation of depreciation of property, the soundness of
investment, debt due to the firm, and the correct allocation of expenditure of
Capital Accounts.
In the
ordinary accounts of Government there is nothing to compare with these accounts
which form the summary of the financial transactions of a commercial firm
during a certain period. Their place may be said to be taken by the annual
Budget Statements and by the Annual Finance Accounts of the Union and the
States. However, in the case of Government undertakings of a quasi commercial
character, the financial results are ascertained and reviewed outside the
regular accounts through Performa accounts which are prepared separately for
the purpose, and these Performa accounts are prepared on a commercial basis.
In the
regular Government accounts, the correct allocation of expenditure to revenue
or capital heads of accounts is checked by Indian Audit and Accounts
Department.
6.19 The main objective of Commercial audit is to conduct an
independent review of the financial statements and offer an opinion about their
reliability in representing the organizations financial condition and working
results. The incidental objects of commercial audit, flowing automatically, may
be said to be threefold:
(1) Detection/prevention of fraud
(2) Detection/prevention of technical errors.
(3) Detection of errors of principles.
Here again
due allowance has to be made for the difference in conditions between
Government and Commercial firms, and the differences between the agencies which
prepare and audit the accounts in the two cases. Thus in Government audit there
is little scope for detection of errors of principles (that is in the system of
accounts adopted) as the responsibility for advising as to the form in which
accounts should be kept devolves upon the Comptroller and Auditor General of
India. The other two objects are, however, sufficiently provided for under the
Government system as explained below.
6.20 As regards the detection and prevention of fraud, it must be
remembered that, as explained in paragraph 6.18 part of the work in connection
with the scrutiny of expenditure is entrusted to the officers of the spending
departments, for the sake of convenience and economy. A fraud in respect of
expenditure would in some cases indicate a payment to which the payee is not
legally entitled or in others a payment made in respect of a claim which is not
a accordance with facts. Under the existing arrangements the certification as
to the initial facts is left to the executive officers and the Indian Audit and
Accounts Department verifies a certain percentage of them at local inspections.
Most of the frauds are thus checked or detected in the course of the scrutiny
by the executive officers. The Audit officers also render valuable assistance
in indicating directly or indirectly to the executive officers defects or
irregularities which require their attention.
Thus the
checks prescribed for the executive officers, supplemented by occasional local
audit and continuous central audit sufficiently provide for the detection and
prevention of fraud in the Government system of audit. As to the detection to
technical errors, a good number of the objections raised in Audit fall under
this category. The prevention of frauds and errors is also effected by reasons
of deterrent and moral check imposed by audit.
1. To whom, the Auditors of a company after examination of the books of accounts report whether in his opinion those accounts give a true and fair view of the state of affairs of the company and of its profit or loss or in what respect they fail to do so?
(A) To the Directors
(B) To the Shareholders
(C) To the Finance Manager
(D) None of these