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Unformatted text preview: Co-operative Societies Audit Manual [CO-OPERATIVE AUDIT MANUAL
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
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