Edited Audit Manual.pdf - Co-operative Societies Audit...

Unformatted text preview: Co-operative Societies Audit Manual [CO-OPERATIVE AUDIT MANUAL CHAPTER I I-1 INTRODUCTORY 1. Background and objectives. -Maharashtra has always been in the forefront in the field of co-operation. Be it simple agricultural credit societies, urban banks, housing or large industrial undertakings like sugar factories or spinning mills, Maharashtra has always led the way. The first co-operative society in the country was started in a small village in the erstwhile Mumbai state nearly century ago. From then onward, it has been a success story and the time has now come when co-operators have establishing their own fertilizer complex, Oil Complex and dairy complex. 2. Historical retrospect. - Audit of co-operative societies, traditionally has been audit by the officers of the co-operative Department working under the control of the Registrar on whom is cast the statutory responsibility for the annual audit of all co-operative societies. It is perhaps due to the fact when the select committee appointed to draft the first Cooperative Societies Act, considered the question, it had only two alternatives either to provide for audit by Government officials or leave the societies to themselves to get their accounts audited by unqualified auditors, as even the Companies Act then in force did not prescribe any qualifications for the auditors. In fact, there was no professional body of auditors then in existence. Sir Fredric Nicholson, whose monumental report paved the way for enactment of a special statute for registration of co-operative societies, was of the firm opinion that the “law should not only provide for establishment of an audit, but for efficiency of such audit.” The Select Committee reporting as early as the beginning of last century, realizing that the co-operatives would require a number of privileges and concessions, stressed the need for a compulsory annual Government audit “for all registered societies. Such an audit is necessary to prevent fraud on unintelligent ryots, which, apart from the immediate hardship, which it would cause, could not fail to have a most fatal effect in discrediting the system of co-operatives. We, therefore, consider that an annual Government audit should be obligatory in the case of all registered cooperative associations and that such audit should include (a) an examination of all books, registers and accounts with particular attention to overdue debts and (b) a valuation of the assets and liabilities of the associations”. The consideration behind this view is to safe guard of interest of Government investments in these societies, and unavailability of qualified accountants, as well as the members of the societies are not aware of financial transactions and business practices. 3. Statutory provisions for compulsory official audit. -Presenting the new legislation (the Co-operative Societies Bill) Sir D. Ibbetson, in his admirable memorandum, had observed that since co-operative societies were to enjoy exemption from the general Law and facilities of a special nature, it was necessary “to take such precautions as may be needed in order to prevent speculators and capitalists from availing themselves, under colorable pretexts, of privileges which were not intended for them”. He added, “It has been considered advisable that an official audit should be compulsory in all cases and this has been provided in Section 21. There is no doubt that such an audit will give the outside public and the members, more confidence in management, and even when no financial assistance may be received from Government, the societies will obtain valuable privileges under the Act and it is reasonable that they should at the same time be 1 Co-operative Societies Audit Manual obliged to submit their accounts too some check, which must in this country take the form of an official audit”. 4. Developments during 1974-2012. - In view of the above considerations, the provisions in the old Act passed in 1904, regarding the system of audit of co-operative societies through the agency of Government officers responsible to the Registrar, found a place also in the 1912 Act and subsequent State Legislations. So far as Maharashtra is concerned, the same provisions with further amplifications were contained in the 1925 Act, which brought into operation a system of State controlled and State managed audit, continue to exist even to-day, in spite of later developments in the concept and the technique of audit and the setting up of a statutory body for regulating the profession of audit. A host of committees and commissions, both at the State and all-India level as well as a number of conferences of co-operators have considered the question of the agency for audit and have largely come to the conclusion that audit of co-operative societies should continue to be State controlled and that the Registrar of co-operative Societies, should continue to shoulder the responsibility for arranging for the annual audit of co-operative societies, burdened as he is with numerous other important duties and functions. This is because, every body is agreed that audit should not only be efficiently conducted, but should also be independent of the co-operative societies to be audited. The time has changed, the burden on the Registrar has taken a huge mounting position as the number of societies has been increased tremendously, and has crossed the number of lacs of societies. The Registrar is unable to audit the all societies, within the prescribed time limit, that the every society must be audited once in the year. The changes have taken place in 1986 by amending the Cooperative Societies Act. The Section 81 has been amended as 81 (1) (b) introducing the concept that, the societies should got their accounts audited themselves, as the qualified auditors are available, for those societies to which no Government Assistance or any finance from Financial Institutes is not available. These societies have to get their accounts audited once in a year from the panel of auditors maintained by the Registrar, or by a Chartered accountant holding a certificate in cooperative audit issued by the institute of Chartered Accountants of India. However, the right of auditing these societies has been reserved by the Registrar in case he ascertains the reasons for the same, and can assign the audit to the Government Auditors, by recording in writing the reasons for such audit. The task of audit of Government Auditors has been limited by the Section 81(1) (A), to the audit of societies which have been given financial assistance including guarantee by the State Government, or Government undertakings, from time to time, and the accounts of the Apex Societies, State, and District Level Federal Societies, District Central Cooperative Banks, Cooperative Sugar Factories, Urban Cooperative Banks, Cooperative Spinning Mills, District and Taluka Cooperative Sale and Purchase organizations, and any such Society or class of Societies which the State Government may, from time to time, by notification specify. Then after, the Government had specified the Urban Cooperative Credit Societies, Salary Earner’s Cooperative Societies, and Primary Agriculture Cooperative Credit Societies by a Notification No. CSL. 1096/ CR146/ 15-C, dated 11.11.1996. 4.a) 97th Constitution amendment :-The Government of India has amended the Constitution of India, in 2009 by adding Article 243Z, under which the State Government is required to amend their cooperative societies Act, as provided in the Constitution. The provision in Constitution allows the Societies to get their accounts audited once in a year from the panel of Auditors prepared by the Registrar and approved by State Government. 2 Co-operative Societies Audit Manual Accordingly the Section 81 of the Maharashtra Cooperative Societies Act is entirely amended, authorising the societies to get their accounts audited from the Panel of auditor, approved by the State Government and prepared by the Registrar or an authority authorized by State Government in this behalf, possessing required qualifications and experience as may be prescribed. 4b) This has given the societies to choose auditor from the panel approved by the State Government. The professional auditor includes the Chartered Accounts and their firms, Certified auditors and Government auditors as explained under the section 81 of the Act. I –2 AUDITING 1. Financial accounting and auditing. -Accounting is the art of recording and classifying business transactions in terms of money. In other words, it is the job of the accountant to record the multitude of business transactions from original documents like vouchers, statements, receipts, etc., and also their accumulation in books of original entry like the cashbook and the journal and also the ledgers. Auditing is the verification of the accuracy, genuineness or authenticity and correctness of the accounting records and statements and reporting on these to the proprietors. Auditing may be done by internal auditors or by statutory auditors or by both. The internal auditors maintain a continuous check while the outside statutory auditor provides periodical review as an outsider. Financial accounting and auditing is primarily concerned with the determination of income earned and ascertaining financial position as on a particular date. Financial audit is concerned with the critical review and interpretation of financial statements, namely, the profit and loss account and the balance sheet, together with the supporting schedules furnishing particulars of the various assets and liabilities. The aim of financial auditing is to safeguard the interests of the proprietors and the creditors of the business. 2. Auditing as a tool of management. -It has now been realized that accounting and auditing, which is the review aspect of accounting, can also be regarded as a method of management or as a tool for improving the efficiency or effectiveness of management. Although managerial or administrative accounting and auditing deals with the same data collected from the financial accounts and records, they are not confined to information of a business transaction. Its object is to bring about scientific managerial planning and ensure sound managerial decisions. This it does by furnishing complete historical data and pointing out consequences of alternative decisions and helps to prevent errors of judgment. It makes possible comparison of performance with anticipated results. 3. Financial auditing is a review of the results of past actions. Administrative auditing is a critical review of the soundness and propriety of the decisions taken in the past and helps management to correct mistakes and improve methods. Societies, which have undertaken manufacturing or processing activities, are required to maintain cost accounts in order to ascertain the costs of their products. Cost accounts to be reliable, must be reconciled with financial accounts. Although cost accounts are primarily meant for furnishing information to the management about the costs under different heads incurred for manufacturing or processing, review or auditing of cost accounts forms part of regular auditing and auditors in charge of societies, which have undertaken manufacturing and processing activities, must be conversant with cost accounts so as to be able to intelligently criticize them. 3 Co-operative Societies Audit Manual 4. Cost Auditing - Section 81 (2A) and (2B) was introduced in 1986 regarding Cost Audit for the societies, or class of societies to whom the cost accounts are to be maintained and cost audit from the member of Institute of Cost and works Accountants of India should be done. In case the Government has opinion that it is necessary in the public interest and in relation to any society, or class of societies, for ensuring management thereof in accordance with sound business principles or prudent commercial practices, the cost audit may be ordered. However, the cost audit rules are not framed till this date or no such order has been issued by the Government. The Central Government has made compulsory for the cooperative Sugar Factories to maintain Cost Accounts and get done the Cost Audit from the Cost Accountant. In 2013, the above cost audit provisions are amended with respect to “society’s interest” instead of “public interest” and the responsibility of cost audit is cast on “the Society” instead of “the Registrar”. 5. Operational efficiency and Ratio Analysis :- Operational efficiency is measured by working out of number of ratios connected with the various aspects of financial management. In order to fulfill adequately his role as friend, philosopher and guide of the societies, the auditor should be able to report to the management not only what has happened but how it has happened and also to predetermine and point out what would happen, so as to assist the management in arriving at sound decisions. Ratio analysis is a vast subject and involves a close study of not only methods of financial accounting and cost accounting, but also knowledge of the technical aspects of the business transactions. It has, however, to be observed that the audit of Co-operative Societies as at present conducted, though wide in scope in fact wider than the field covered by auditor of joint stock companies is still basically financial in nature and very few auditors attempt to conduct what may be termed an efficiency audit or methods audit. The number is increasing as the auditors are being trained for efficiency and methods of audit. Since most of the Societies, which have undertaken manufacturing and processing activities, do not maintain some sort of cost accounts which can be reconciled with the financial accounts so that their accuracy can be tested, auditors of large manufacturing undertaking like cooperative sugar factories or spinning mills, will have themselves to carry out what can be termed as “efficiency audit”. 6. Various types of audit. - The concept of audit has undergone many changes during the past few years and very few auditors can now be content with merely reporting on the balance sheet and the profit and loss account. The diversity of activities undertaken by Cooperative societies and the complexity of their transactions, necessitate that the auditor should not only have a sound theoretical ground in the writing up of accounts and their scrutiny in audit, but also call for a high degree of skill and discernment so as to be able to comment on the financial as well as technical aspects of the transactions. The various aspects of audit work enumerated in the foregoing paragraphs provide a glimpse of what is expected of the future auditor. Various types of audits are introduced in the past two decades, such as Social Audit, Energy Audit, Technical Audit, Policies, Procedures and systems audit, Information System audit, M-VAT Audit, Tax Audits, etc. these are also to be get acquaintanced by the auditors. 7. Recent changes in Cooperative Audit :- After 97th constitutional amendment, the Maharashtra Cooperative Societies Act is amended to give effect to the constitutional amendment. There are many changes in the Act to provide autonomy to the societies, member economic participation, principle of democratic control, appointment of 4 Co-operative Societies Audit Manual professional independent auditor and to remove the control of Registrar and Government. The Societies has been empowered to appoint their auditor from the panel of auditors prepared by the Registrar and approved by the State Government. The auditor has to carry out the audit as provided in Section 81, Rule 69 and Auditing standards as notified by State Government. The audit fees shall be as prescribed and notified by the State Government for such audit. I-3 MANUAL 1. Need for the updating Manual. - Since 1962, the audit wing of the Department was separated from its administrative wing primarily with a view to attract better talent and to ensure better quality of audit from those who had opted for the audit line. During these years, there has not only been a steep rise in the number of Co-operative Societies of different types, but there has also been a well marked diversification in their activities and a vast expansion of their business operations. It has always been of policy of the State Government of encourage Co-operatives to take up new and varied activities. Besides granting them a number of privileges and tax concessions, the State has also been granting them liberal financial assistance not only by granting them loans and subsidies, but also by contributing towards their share capital. The state has become a business partner sharing their profits as well as their losses. Auditors have thus an added responsibility of safeguarding the interest of the State by ensuring that the funds provided by it, are not misappropriated or misutilised. It is, therefore, necessary that audit should be not only strict, but also efficient and for this purpose, the auditors have to equip themselves with necessary knowledge and apply due skill and diligence in the performance of their duties. The techniques of accounting and auditing have not remained during the period, but have undergone numerous changes and have developed significantly over the years. Co-operatives are rather slow in adopting new and improved system of accounting and look to their auditors to guide and assist them to maintain systematic accounts. This manual attempts to set out in detail the practices and procedures which are appropriate in light of present day circumstances having due regard to the handicaps suffered by the Cooperatives arising out of their small size limited resources and democratic set up. During the years following independence, there has been a vast increase in the number and types of Co-operative Societies and a considerable expansion of their transactions. Whereas the auditor of the good old days had to audit accounts of simple rural and a few urban Societies, with small turnovers, the auditor of today has to audit complicated transactions of a variety of Societies, like Sugar Factories, Spinning Mills, Co-operative Banks, Industrial Estates. Housing Colonies, etc. Although he might have adequate theoretical grounding and basic skill, he would still require guidance on a number of important matters. After the insertion of Section 81 (1)(b) in the year 1986, the statutory audit is carried out by the certified auditors and chartered accountants. The auditors are appointed by the societies as per amendment made in 2013. The need for a sort of handbook containing instructions and guideline on all-important aspects of his work is being keenly felt. This manual is meant to give him practical guidance in the dayto-day performance of his duties. No attempt is made to impart any theoretical knowledge regarding auditing to him as there are many books on audit which he can refer for his guidance. However the auditors need to avail additional information and reference material from various sources from time to time as may be required. The first audit manual was prepared in 1974 for the guidance of the auditors. Since then, several changes have taken place, in Accounting and Auditing. The conventions of accounting became the accounting standards. The standards for Auditing are also formed 5 Co-operative Societies Audit Manual at National and International level by concerned accounting bodies. The recording of accounts has been computerized, which need different methods of audit. The Cooperative Societies have also changed there accounting policies, and accounting procedures, and have computerized their accounts and management information systems, which requires to introduce the guidance to the auditors. The contemporary knowledge of auditing is required to be introduced. In view of the 97th constitutional amendment, the Maharashtra Co-operative Societi...
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