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planning execution and reporting processes in financial attest audit 1 2 The Manual is based on the existing instructions within the Indian Audit and Accounts Department Auditing Standards of the CAG of India and the best practices of the Supreme Audit Institutions SAIs of other countries The Manual also seeks to incorporate the international best practices in respect of financial
ISSUED BY THE AUTHORITY OF,THE COMPTROLLER AND AUDITOR GENERAL OF INDIA. Table of Contents,1 Introduction,Nature of financial attest audit. Different types of auditee entities,Statutory provisions. 2 Concepts and Overview,Auditing Standards,Audit objectives. The general financial audit objectives assertions in financial. statements,Nature of assurance by the CAG of India. Audit materiality,Materiality by value,Materiality by nature. Materiality by context,Materiality with regard to planning. Reporting materiality,Types of error,Most likely error. Risk based audit approach,Risk model,Audit evidence. Analytical procedures,Systems based approach SBA,Direct substantive testing DST approach. Audit sampling,Right of access to information,Overview of the financial attest audit process. Cash vs accrual based accounts,Audit certificate,The audit opinion and basis of accounting. 3 Audit Planning,Audit plan for the entire office,Audit plan for individual financial attest audits. Purpose of planning,Planning process,Understanding the entity and its operations. Preliminary analytical procedures,Account areas,Significant vs non significant audit areas. Planning materiality,Risk assessment, Planning considering the need for sampling techniques. Use of VLC data in audit planning in case of State. Government accounts, Decision regarding the audit approach to be adopted. Level of substantive procedures to be adopted,Designing audit approach. Performing the audit procedures at interim date,Number of locations. Role of internal auditors,Classification of computer use. Using services of outside experts,Preparation of audit planning memorandum. Preparation of detailed audit programmes,Good communication with auditee entity. Creation of data bank,Planning in the case of State Government accounts. Planning in the case of Union Government accounts,Planning in the case of other entities. 4 Field Audit,Letter of understanding audit engagement letter. Entry conference,Nature of evidence,Obtaining audit evidence. Use of interview for gathering evidence,Audit testing. Tests of control,Substantive analytical procedures. Tests of detail,Sampling techniques for tests of detail. Accounting estimates,Investigating errors and control failures. Auditor s right of access to information,Exit conference. Updating the audit plan,Documentation of field work. Quality assurance in field work,5 Audit Completion. Overall review of financial statements,Review of subsequent events. Going concern,Management representation,Summarising the audit. 6 Documentation,Importance of adequate documentation. Document files, Submission of audit documentation for review and accounts. for certification,Broad characteristics of working papers. Use of electronic documentation,Quality assurance,Annexe 1 Layout of working papers. Annexe 2 Account area lead schedule,Annexe 3 Summary of matters for attention. 7 Reporting,Opinion and basis of accounting,Format of certificates. Unqualified opinion,Qualified opinion,Corresponding amounts from preceding periods. Signing and dating,Place for the certificate while printing. Management letters,Confidentiality of communication. Submission of audit reports, Annexe Illustration on qualified opinion due to likely. aggregate error crossing the materiality threshold. 8 Supervision and review,Supervision,Quality assurance for supervision and review. 9 Quality assurance,Requirement of auditing standards. Quality assurance and quality control,Quality assurance system in the Department. Quality assurance review programme, Annual training and professional development programme. Annexe Review Sheet,10 Some issues of audit interest. Using the work of other auditors and specialists,Using the work of internal auditors. Using audit certificates supporting grant and subsidy. Using the work of specialists,Opening balances and comparatives. Other information published with financial statements. Forewords to accounts,Position of audit in relation to fraud. 11 Financial attest audit in different auditee entities. Different types of auditee entities,Accounting environment. Financial attest audit of accounts of State Governments. Financial attest audit of accounts of Union Government. Financial attest audit of accounts of autonomous bodies. Financial attest audit of accounts of Government Companies. and Corporations, Financial attest audit of externally assisted projects. Technical procedures,Format of audit certificates,12 Organisational arrangements. Responsibility for financial attest audit, Responsibility for audit of entities of State Governments. Responsibility for audit of entities of Union Government. Liaison with other sub auditors at the audit planning stage. Cell on financial attest audit,13 Summary of issues. Appendix Planning for financial audit in the context of Government. I Accounts,Appendix Financial attest audit in IT environment. Some common abbreviations,Introduction, 1 1 The present Manual contains a framework for the process of financial attest. audit within the Indian Audit and Accounts Department headed by the Comptroller and. Auditor General CAG of India It indicates the best practices to be followed in. planning execution and reporting processes in financial attest audit. 1 2 The Manual is based on the existing instructions within the Indian Audit and. Accounts Department Auditing Standards of the CAG of India and the best practices of. the Supreme Audit Institutions SAIs of other countries The Manual also seeks to. incorporate the international best practices in respect of financial attest audit with the. objective of bringing the Indian practice at par with the international best practices as far. as applicable in the context of the Indian Audit and Accounts Department. Nature of Financial attest audit, 1 3 Financial attest audit is primarily concerned with expression of audit opinion on. a set of financial statements It includes, examination and evaluation of financial records and expression of opinions on. financial statements, audit of financial systems and transactions including an evaluation of compliance. with applicable statutes and regulations which affect the accuracy and completeness of. accounting records and, audit of internal control and internal audit functions that assist in safeguarding. assets and resources and assure the accuracy and completeness of accounting records. 1 4 The audit responsibilities of the CAG of India CAG are wider than providing. opinion on the financial statements of Government and extend to examination of risks to. regularity propriety and financial control A significant portion of the audit work. presently carried by CAG is termed transaction audit which essentially seeks to address. the issues of risks to regularity propriety and financial control. 1 5 Whereas the opinion on financial statements provides a positive annual assurance. on the financial statements to the Parliament or Legislature examination of risks to. regularity propriety and financial control generally referred to as transaction audit in the. Indian Audit and Accounts Department is not linked to a specific assurance on an. individual set of financial statements in a particular year. It does not result in a formal audit opinion on financial statements but rather in. reports either to management or Parliament or Legislature. It focuses on the Government Department or its units rather than on the financial. statements, It does not cover all the units of Government Departments every year but seeks to. cover them over a period of time, It seeks to cover risks of significant irregularity which may not be material for. the purpose of qualifying audit opinion on the financial statements. Different types of auditee entities, 1 6 The Indian Audit and Accounts Department carries out financial attest audits of. the following entities resulting in certification of financial statements as well as. preparation of separate audit reports on transactions and accounts of the entities. Entity Types of Financial Statements audited, Union Government Finance Accounts Appropriation Accounts. Union Territory Governments Finance Accounts Appropriation Accounts. State Governments Finance Accounts Appropriation Accounts. Autonomous Bodies Balance Sheet Income and Expenditure Account. Revenue Account, Statutory Corporations Balance Sheet Profit and Loss Account Revenue. Government Companies Balance Sheet Profit and Loss Account. This is a supplementary audit after the work of the. Statutory Auditor is completed and comments of, CAG if any are issued audit certificate is given by. the Statutory Auditor, World Bank Aided Projects Statements of Expenditure relating to Projects aided. by World Bank, 1 7 In case of Government Companies the financial attest audit is carried out by. Chartered Accountants Statutory Auditors appointed by the CAG in accordance with. the provisions of the Companies Act 1956 The CAG carries out a supplementary audit. and comments if any are issued The audit opinion is issued by the Statutory Auditors. This is covered in more detail in Chapter 11 of the Manual. 1 8 Separate instructions are available in respect of the financial attest audits of. entities like Autonomous Bodies Statutory Corporations and Government Companies. and Externally Assisted Projects which may be updated from time to time However the. provisions in this Manual are generally applicable for any kind of financial attest audit. and may be suitably adapted for audit of these entities The provisions in this Manual are. also applicable irrespective of the basis of accounting cash or accrual. 1 9 The present Manual replaces the paragraphs 1 6 1 12 2 9 formats of CAG s. Certificates in Appendix I of Chapter I page 13 and Appendix IV of Chapter II. page 20 of Manual of Standing Orders Accounts Entitlements Volume II. 1 edition It will also supersede any instructions to the contrary in the Manuals of the. SAI India regarding financial attest audit of the Civil Departments of the Union State. and Union Territory Governments, 1 10 The Manual seeks to guide and direct rather than wholly substitute for the. initiative judgement and professionalism of the officials entrusted with the duties of. financial attest audit, 1 11 The Manual is intended to be gender neutral Words or expressions conveying. masculine gender should be taken to include feminine gender also. Statutory Provisions, 1 12 The statutory provisions relating to financial attest audit by CAG as. contained in the Comptroller and Auditor s General s Duties Powers and. Conditions of Service Act 1971 hereafter referred to as the Act are briefly. indicated in the subsequent paragraphs, 1 13 Section 13 of the Act enjoins on the CAG the duty to audit all expenditure from. the Consolidated Fund of India of each State and each Union Territory having a. Legislative Assembly all transactions of the Union of the States and of the Union. Territories having a Legislative Assembly relating to the Contingency Funds and Public. Accounts and to audit all trading manufacturing profit and loss accounts and balance. sheet and other subsidiary accounts kept in any department of the Union or of a State or a. Union Territory This Section also enjoins on the CAG the duty to report on the. accounts expenditure or transactions so audited, 1 14 The Act has made provisions in Sections 14 and 15 for the audit of the accounts. of authorities and bodies receiving financial assistance in the form of grants and or loans. from the Government of India or a State or Union Territory subject to certain conditions. and criteria specified in those Sections Authority has been interpreted to mean a person. or body exercising power or command Body has been interpreted to mean an aggregate. of persons incorporated or unincorporated, 1 15 Section 20 is another enabling provision of the Act in terms of which audit of. the accounts of certain bodies or authorities not covered by Section 19 or whose. audit has not been entrusted by or under any law made by Parliament to the CAG. can be entrusted to the CAG, 1 16 Under Sub section 1 of Section 20 the CAG has the duty to audit the. accounts of such authority or body if the CAG is requested in this behalf after prior. consultation by the President or the Governor of State Administrator of a Union. Territory having a Legislative Assembly on such terms and conditions as may be. agreed upon between the CAG and the Government concerned For the purpose of. audit the CAG has the right of access to the books and accounts of the authority or. 1 17 Sub section 2 of Section 20 empowers the CAG to propose to the President. or the Governor of a State or the Administrator of a Union Territory having a. Legislative Assembly to authorize the CAG to undertake the audit of the accounts of. any body or authority not entrusted to the CAG for audit if the CAG is of the. opinion that such audit is necessary because a substantial amount has been invested. in or advanced to the body or authority by the Government concerned. 1 18 Audit under Sub sections 1 and 2 of Section 20 of the Act can be. entrusted to the CAG only in public interest and only after giving a reasonable. opportunity to the concerned authority or body to represent in respect of the. proposal for such audit,Audit of Receipts, 1 19 Section 16 of the Act provides for audit by the CAG of all receipts which are. payable into the Consolidated Fund of India and of each State and of each Union. Territory having a Legislative Assembly It also requires the CAG to be satisfied. that the rules and procedures in that behalf are designed to secure an effective check. on the assessment collection and proper allocation of revenue and are being duly. observed and to make for this purpose such examination of the accounts as the CAG. thinks fit and report thereon,Audit of Stores and Stock. 1 20 Section 17 of the Act vests in the CAG the authority to audit and report on. the accounts of the stores and stock kept in any office or department of the Union or. a State or a Union Territory,Audit of Government Companies and Corporations. 1 21 Section 19 of the Act deals with the duties and powers of the CAG in relation. to the audit of the accounts of Government Companies and Corporations These. duties and powers are to be performed and exercised under Sub sections 1 and 2. of Section 19, in the case of Government Companies in accordance with the provisions of the. Companies Act 1956 contained in Sections 617 and 619 thereof and. in the case other Corporations set up by or under law made by the Parliament in. accordance with provisions of the respective Legislations. 1 22 However the position of a Corporation established by a law made by the. Legislature of a State or of a Union Territory is different Under the Constitution only. Parliament can prescribe by law the duties and powers of the CAG Sub section 3 of. Section 19 of the Act provides that audit of a Corporation established by law by the. Legislature of a State or Union Territory can be entrusted to the CAG in the public. interest by the Governor of the State or the Administrator of the Union Territory. concerned after consultation with the CAG and after giving a reasonable opportunity to. the concerned Corporation to make representations in respect of the proposal for such. 1 23 Under Section 19A of the Act the reports of the CAG in relation to the. accounts of a Government Company or a Corporation audited under Section 19 are. to be submitted to the Government or Governments concerned for being laid before. the Parliament legislature,Powers in connection with performance of duties. 1 24 By virtue of the provisions in Sub section 1 of Section 18 of the Act the. CAG has in connection with the performance of his duties under the Act the. a to inspect any office of accounts under the control of the Union or of a State. including treasuries and such offices responsible for the keeping of initial and subsidiary. accounts as submit accounts to the CAG, b to require that any accounts books paper and other documents which deal with or. form the basis of or are otherwise relevant to the transactions to which his duties in. respect of audit extend shall be sent to such place as the CAG may appoint for his. inspection and, c to pose such questions or make such observations as the CAG may consider. necessary to the person in charge of the office and to call for such information as the. CAG may require for the preparation of any account or report which it is his duty to. 1 25 Sub section 2 of Section 18 requires the person in charge of the office or. department the accounts of which are to be inspected and audited by the CAG to afford. all facilities for such inspection and to comply with requests for information in as. complete a form as possible and with all reasonable expedition. Miscellaneous Powers, 1 26 Under Section 23 of the Act the CAG is authorised to make regulations for. carrying into effect the provisions of the Act in so far as they relate to the scope and. extent of audit including laying down for the guidance of the Government. departments the general principles of Government accounting and the broad. principles in regard to audit of receipts and expenditure The instructions relating. to audit as contained in this Manual and other departmental publications issued. under the authority of the CAG are covered under the provisions of this Section. 1 27 The CAG is also authorised under Section 24 of the Act to dispense with. when circumstances so warrant any part of detailed audit of any account or class of. transactions and to apply such limited checks in relation to such accounts or. transactions as the CAG may determine The provisions in the present Manual and. and other circulars instructions issued from time to time under the authority of the. CAG on the quantum and extent of audit also derive their authority from this. Section of the Act,Duties of Indian Audit and Accounts Department. 1 28 The Indian Audit and Accounts Department functioning under the CAG. derives its authority and the powers for performance of its duties on his behalf. under the provisions of Section 21 of the Act Under the special and general. directions given by the CAG from time to time the Accountants General and other. officers and establishments of the Indian Audit and Accounts Department perform. such duties and functions as are imposed on or undertaken by the CAG under the. provisions of the Constitution or of any law made by Parliament. 1 29 The term Accountant General occurring in this Manual includes Principal. Accountant General Audit Director General Audit Accountant General Audit. Principal Director Audit and Accountant General A E unless the context denotes. General Concepts and Overview, 2 1 This chapter explains the general concepts about financial attest audit and also. provides an overview of the financial attest audit process. Auditing Standards, 2 2 A number of far reaching changes have occurred in the realm of Finance and. Governmental activities over the years and auditing has had to keep pace with these. changes This process has resulted in statements covering almost every aspect of auditing. being brought together to become Auditing Standards for use by the profession These. Standards aim to improve the auditing practices The Auditing Standards provide a. framework for the auditing steps and procedures Moreover the fact that an audit has. been conducted in accordance with certain standards gives necessary reassurance to. people making use of the financial statements and audit reports. IFAC Standards, 2 3 The accounting bodies of various countries established the International. Federation of Accountants IFAC in 1977 to develop and enhance a co ordinated. worldwide accountancy profession The International Auditing Practices Committee. IAPC is a standing committee of the Council of IFAC and has been assigned the. specific responsibility and authority to issue standards on auditing and related services. The IFAC has issued a number of International Standards on Auditing ISAs The ISAs. do not override the statutory regulatory or professional regulations in a country Though. the ISAs are by themselves not binding on the auditors in a particular country they. nevertheless provide an authoritative view of what are internationally recognised as. generally accepted auditing practices Some countries have adopted the ISAs without. any changes while some others have adopted them with such modifications as are. considered appropriate in the context of the local conditions. ICAI Standards, 2 4 The Institute of Chartered Accountants of India ICAI issued a number of. Auditing and Assurance Standards AASs which are generally based on the. corresponding ISAs issued by IFAC taking into consideration the applicable laws. customs usages and business environment in India Since under the Companies Act. companies in India are required to be audited by Chartered Accountants these Standards. have a significant effect on the way audit of companies is conducted in India. INTOSAI Standards, 2 5 The Auditing Standards Committee of the International Organisation of Supreme. Audit Institutions INTOSAI issued the Auditing Standards at the XIVth Congress of. INTOSAI in 1992 in Washington D C as amended by the XVth Congress of INTOSAI. in 1995 in Cairo Egypt The Auditing Standards Committee of the International. Organisation of Supreme Audit Institutions INTOSAI issued Code of Ethics for. auditors in the public sector in 1998 While they do not have mandatory application they. reflect a best practices consensus among the Supreme Audit Institutions SAIs and. each SAI is required to judge the extent to which the Standards are compatible with the. achievement of its mandate,Bridging Document, 2 6 Recently INTOSAI issued a INTOSAI Auditing standards Bridging Document to. provide a link between INTOSAI Auditing Standards and International Standards on. Auditing ISAs issued by IFAC s IAASB INTOSAI Standards will continue to provide. the necessary framework and overriding principles for financial audit by SAIs INTOSAI. plans development of its own implementation guidelines or Practice Notes by building. on the more detailed value of the additional guidance contained in ISAs in so far as it is. relevant to the work of SAIs While the Bridging Document and Practice Notes aim to. support INTOSAI members in the application of ISAs it will the responsibility of each. SAI to consider the relevance of each ISA to its own particular circumstances. Auditing Standards of the CAG of India, 2 7 In SAI India Auditing Standards of the CAG of India were first issued in 1994. The Standards were comprehensively restructured and updated in a second edition of the. Auditing Standards issued in 2002 These Standards are in harmony with the INTOSAI. Auditing Standards, 2 8 The Auditing Standards of the CAG of India comprise of. General Standards,Field Standards and,Reporting Standards. 2 9 The General Standards should be distinguished from Field Standards and. Reporting Standards The former are concerned with the relationship of the auditor to. the audited organisation and with the personal conduct of the auditor in carrying out the. audit the latter are concerned with the audit itself Field Standards regulate the audit. activity Reporting Standards regulate what the auditor has to say after completing. the audit For details the text of the Auditing Standards of the CAG of India should be. taken as the principal reference, 2 10 The Auditing Standards of the CAG of India are mandatory in Audit and. Accounts Department Every member of the audit team should be conversant with them. Consequences of failing to observe Auditing Standards. 2 11 An auditor s failure to observe the audit standards set by the CAG of India will. render the auditor answerable for such failure, 2 12 Failure to observe Auditing Standards may affect the quality of the audit work. done If the auditor s work were ever called into question in a court of law or. otherwise compliance with the Auditing Standards governing the audit would be an. important factor in deciding whether the auditor had acted with reasonable care and skill. Hence any decision to depart from the Standards in a given situation should be taken at. an appropriately high level with the approval of the Headquarters Office of the CAG of. India and it should be clearly documented, General Principles and Practices of financial attest audit. 2 13 The directions provided in this Chapter or in the subsequent Chapter are by. no means exhaustive They should not be taken as limiting the scope of audit rigidly. to the lines indicated therein It is of considerable importance that the audit checks. prescribed should be observed in spirit and not merely in the letter. Audit Objectives, 2 14 In relation to Financial Attest Audit it is necessary to clarify the following. the primary objective of financial audit, objectives which might be set by the CAG or Statute. the general audit objective of any financial audit. The primary objective of financial attest audit, 2 15 Financial audit may be defined as a process of attestation of financial. accountability of accountable entities involving examination and evaluation of financial. records and expression of opinions on financial statements. 2 16 The Primary objective of financial audit is therefore the expression of an. opinion on the financial statements,Objectives set by CAG or Statute. 2 17 While the primary objective of financial attest audit is to give an opinion on the. financial statements accounts the CAG s objectives may determine the way the. financial audit is carried out The objectives set by the CAG would reflect his audit. mandate and policy For example the CAG of India may set his audit objectives taking. into account the provisions of the Constitution of India the CAG s Duties Powers and. Conditions of Service Act 1971 and any governing legislation like the Companies Act. 1956 in the case of Government Companies and any special governing legislation in the. case of a Statutory Corporation like the Damodar Valley Corporation Act 1948 For. instance while carrying out financial audit of Finance and Appropriation Accounts of a. State Government verification of the adequacy of the internal controls in the systems. followed in the compilation of accounts leading to the preparation of Finance Accounts. and Appropriation Accounts in the Office of the Accountant General A E may be. specified as an objective Sometimes the Statute the legislation governing the audit. may also lay down the audit objectives, 2 18 In the case of supplementary audit of Government Companies the provisions of the. Companies Act 1956 and the orders instructions issued thereunder and the instructions. issued by the Headquarters Office of the CAG from time to time should be kept in view. while framing the audit objectives, The general financial audit objectives Assertions in Financial Statements. 2 19 It is the responsibility of an auditor before certifying an account to make sure. that competent relevant and reasonable evidence was obtained to support the auditor s. judgement and conclusions There are some general audit objectives designed to ensure. that the right sort of evidence is obtained for example to show whether the accounts are. complete and whether the recorded transactions have properly occurred and are properly. classified, 2 20 For the purpose of expressing an opinion on the financial statements being. audited an Auditor collects evidence To be relevant audit evidence must relate to the. general audit objectives also called assertions Assertions are positive statements. about the state of being For example an assertion may be that all receipts were. accounted for or that all the investments shown in accounts were really owned by the. entity These general audit objectives assertions are designed to ensure that the auditor. obtains evidence to support all aspects of the opinion required to be expressed on an. General Financial Audit Objectives Assertions, For receipts and payments or income and expenditure account items. 2 21 There are five general audit objectives as indicated below. Completeness,Occurrence,Measurement,Disclosure,Regularity.