Financial Administration and Management M A Public Administration
Financial Administration and Management M. A. (Public Administration ) Unit II-Account and Audit System Presentation on Accounting , Auditing and CAG Prof. Mohd. Nafees Ahmad Ansari Dept. of Political Science Aligarh Muslim University
Account System Introduction: Ø Accounting: means maintaining a proper record of the finances of the organisation. Ø Proper maintenance of accounts also shows the legal use of funds Ø Accounting has to ensure that funds have been legally used for the purpose for which the Parliament sanctioned it. Ø Accounts should furnish data regarding the financial operations and should also secure fidelity on the part of spending authorities. Ø The spending authorities should produce receipts or vouchers concerning every penny which they spend. Ø Accounting is a discipline which records, classifies and summaries data and presents it in a convenient form to various levels of management in an organisation for decision-making purposes. Ø It also helps outsiders i. e. shareholders/ government, to know the working of the business firm, by presenting data about its activities, profit or loss and its assets and liabilities.
• • • In government, accounting provides information for the preparation of annual budgets. It helps budget planners to determine, in advance, the taxes to be levied for meeting the committed expenditure, or to reduce the expenditure, wherever possible. It provides information to managers about the expenditure involved annually, on pay, allowances, materials etc. and also the expenditure incurred on Plan Schemes. provides information regarding expenditure incurred on functions, programmes, activities, for the speedy development of performance budgeting in all departments of government.
Accounting has a dual function to perform: • • The determination of the fidelity of all officers who handle the fund. the furnishing of information needed regarding financial condition and operation of policy-determination and administrative purposes. Importance of Accounting: • • accounting is a scientific procedure of collecting, classifying, recording, summarizing, and interpreting all the financial transactions including revenues and expenditures of all the government offices. It keeps the record of public funds. The Following reason of its importance: a) Information about Revenues − One of the most important functions of the Government accounting is to maintain the transactions generation ofcollection and revenues of financial during the maintain (and the year all past years’ financial data). Underthe‘Rightto. Information. Act, ’ifsomeoneaskstohavetheinformationregarding the financial transactions of a government office, it is oblige to provide that.
• Information about Expenditures − One of the most important objectives of the Government accounting is to provide information about the expenditures incurred on various heads. It is checked by the Parliament in case of Central Government and state legislature in case of the State Government. • Information about Deposits and Loans − Government has to provide information about the loan granted by the Government to others and repayment of the deposits. • Information about Availability of Cash − It has to provide information about the present and the future cash availability.
Government Fund: Government of India, three types of Funds or Accounting system a) b) c) • Consolidated Funds of India Contingency Funds of India Public Account Consolidated Funds of India As per the Clause 1 of the Article 266 of the Indian Constitution − “All revenues received by the Government by way of taxes like Income Tax, Central Excise, Customs and other receipts flowing to the Government in connection with the conduct of Government business i. e. Non. Tax Revenues are credited into the Consolidated Fund constituted. Similarly, all loans raised by the Government by issue of Public notifications, treasury bills (internal debt) and loans obtained from foreign governments and international institutions (external debt) are credited into this fund. All expenditure of the government is incurred from this fund and no amount can be withdrawn from the Fund without authorization from the Parliament. ”
• Contingency Funds of India As per the Article 267 of the Indian Constitution − “The Contingency Fund of India records the transactions connected with Contingency Fund set by the Government of India. The corpus of this fund is Rs. 50 crores. Advances from the fund are made for the purposes of meeting unforeseen expenditure which are resumed to the Fund to the full extent as soon as Parliament authorizes additional expenditure. Thus, this fund acts more or less like an imprest account of Government of India and is held on behalf of President by the Secretary to the Government of India, Ministry of Finance, and Department of Economic Affairs. ” • • Public Account • “The transactions relate to debt other than those included in the Consolidated Fund of India. The transactions under Debt, Deposits and Advances in this part are those in respect of which Government incurs a liability to repay the money received or has a claim to recover the amounts paid. The transactions relating to ‘Remittance’ and `Suspense’ shall embrace all adjusting heads. The initial debits or credits to these heads will be cleared eventually by corresponding receipts or payments. The receipts under Public Account do not constitute normal receipts of Government. Parliamentary authorization for payments from the Public Account is therefore not required. ” The Public Account is constituted under Clause 2 of Article 267 of the Indian Constitution, which says −
Agencies of Accounting System: • Government departments, initially compile their receipt and payment accounts on monthly basis for central government and state government separately and then send to respective Accountant General of India. • Collection of revenue and disbursement are directly made by Railway, Defense, Post & Telegraphs, Forest, and public departments and lump sum payments are made by treasury through the departmental officers. • • Detail of accounts on monthly basis is maintained by the departmental Accounts officers. • • The compiled report shows progressive figure of each month from 1 st April to 31 st March of every year. Monthly accounts submitted by the treasury and account officer are compiled by the Accountant General, for the central government as a whole and for each state separately. Complied accounts along with appropriation accounts are submitted by Comptroller and Auditor General of India to the President of India, to the Governor of each state, or to the Administrator of the Union Territory accordingly.
Auditing Introduction • Audit is nothing but an independent and systematic examination of statutory records, books of accounts, documents and vouchers of an organization. • To ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. • Audit is an activity that attempts to ensure that the books of accounts are properly maintained by the concern as required by law. • • Auditing has become an ubiquitous phenomenon in the corporate as well as the public sector. Auditor obtains evidence and formulates an opinion on the basis of his judgement which is communicated through their audit report. • Areas which are commonly audited such as Secretarial & Compliance Audit, Internal Controls, Quality Management, Project Management, Water Management, and Energy Conservation etc. • Financial audits are beneficial in highlighting areas of success or concern in a business or in public sector, organisation and help the management team find greater pathways to future success.
• Audit is a process of ascertaining whether the administration has spent or is spending its funds in accordance with the terms of the legislature which appropriated the money. • The main purpose of audit is to fix the responsibility of the officers of the government for any illegal or improper use of funds. • An independent audit is necessary because it protects the state against misappropriation of funds. Benefits of Legal and Financial Audit • • Better rate of securing financing Preparation for business growth Lower interest rates on business loans Identifying business weaknesses to avoid future tax penalties
Importance of Legal and Financial Auditing • This includes obtaining reliable financial reporting on its operations, prevention of fraud and misappropriation of its assets, and minimizing its cost of capital. • To facilitate supervision and monitoring, prevent and detect irregular transactions, measure ongoing performance, maintain adequate business records and to promote operational productivity. • • It also enables further investigation by management if it is warranted under the circumstances. Risk of Misstatement is assessed by the Auditor in a financial reports. Fraud Prevention can be obtained internal audit as it serves an important role for companies. Maintenance of rigorous systems of internal controls can prevent and detect various forms of fraud and other accounting irregularities. • Deterrence is one of the important part of fraud prevention. It may prevent an employee in the organisation from attempting a scheme to defraud. • • Cost of Capital is an important aspect for every organisation taking size into consideration. Strong audit systems has the ability to reduce various forms of risk in an enterprise which also risk of information.
Agency of Audit: • Controller General of Accounts: It is the apex accounting authority of the Central Government and exercises the powers of the President under Article 150 of the Constitution for prescribing the forms of Accounts of the Union and State Governments on the advice of Comptroller and Auditor General of India. • In addition, accounting data is also supplied to Central Statistical Organisation, Reserve Bank of India and other agencies. A provisional Account (un -audited) for the year is also prepared at the end of the financial year. Controller General of Accounts is responsible, interalia, for: • Ensuring a sound and effective internal audit and pre-check system in the Civil Ministries. • Monitoring of expenditure in Civil Ministries through prompt and accurate accounting. • Ensuring effective and close monitoring of receipts of the Government of India especially those relating to Income Tax, Custom and Central Excise. • In order to maintain the requisite technical standard of accounting the CGA has power to inspect the Departmentalised Accounts Offices to ensure that the accounts are maintained accurately. • The Controller General of Accounts is also responsible for evaluating and processing the proposals relating to the capital restructuring of various public sector undertakings (PSUs) of the Union Government. • In evaluating the proposals a clear distinction is made between the Government’s role as a regulator and its commercial interests as owner of an industry participant.
These proposals is a comprehensive one involving the following: • Appraisal of the Rehabilitation scheme prepared by the Operating Agency appointed by the Board of Industrial and Financial Restructuring. • • • Bench marking the performance of the company vis-a-vis its peers from the private sector and public sector. Audit of the financial model prepared by the PSU. Detailed analysis of the financials of the PSU, especially its operating costs. The Controller General of Accounts presents a detailed analytical review of Union Government Accounts to the Finance Minister every month.
THREE FUNDAMENTAL CONCEPTS while CONDUCTING AN AUDIT • Materiality: A misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities would be changed or influenced by such misstatement or the aggregate of all misstatements. • Audit risk: Audit risk is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated • Evidence: Evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor.
INTERNAL AND EXTERNAL AUDITING • It is important to understand recognize the differences and commonalities between internal and external audit. Internal and external auditor should work closely together, in particular to coordinate activity and maximize effectiveness and where appropriate external audit may rely on the work of internal audit. However, there are number of fundamental differences in their objectives, scope and responsibility. Internal auditing External Audit Objectives To advise management on whether the organization has sound systems of internal controls to protect the organization against loss To provide an opinion on whether the financial statements provide a true and fair view Scope All areas of the organization, operational as well as financial Financial focus Approach Increasingly risk base Assess risks Evaluate system of controls Test operation of system Make recommendation for improvements Increasingly risk based Test underlying transactions that form the basis of the financial statements Responsibility To advice and make recommendations on the internal control and corporate governance To form opinion on whether the financial statements provide a true and fair view.
CAG: Comptroller and Audit General of India • Comptroller and Audit General (CAG) is an independent Constitutional body. Special status has been given to safeguard his independence and enable him to discharge his duty without fear or favor. • As per the Article 148 of the Constitution of India, the comptroller and Auditor-General will be appointed by the President of India. The provision of removal of CAG is the same as of the judges of the Supreme Court. He can be removed only on the basis of proven misbehavior or incapacity. • As per the Article 150 of the Constitution of India — the accounts of the Union and of the States shall be kept in such form as the President may prescribed, on the advice of the Comptroller & Auditor General. • Article 151 of the Constitution provides that the audit reports of the Comptroller & Auditor General relating to the accounts of the Union shall be submitted to the President, who shall cause them to be laid before each House of Parliament.
CAG as Auditor • As an auditor of the transactions and accounts of the Central and State Governments, CAG acts as the watchdog and conscience keeper of the nation. • The results of the audit serve the twin purpose of enforcing accountability of the executive to the legislature and providing an independent and informed critique of the administrative practices and implementation of the developmental schemes and programmes. • • The report on the accounts of the Union Government highlighted the alarming public debt scenario. • In the states also innumerable instances of mismanagement, wastage, inadequate financial control and other serious cases of bad governance have been brought to light by CAG. The report on direct and indirect taxes revealed the impropriety of the highest levels in the Revenue department in interfering with assessment proceedings and the failure to detect the massive evasion of taxes, both in respect of Income Tax and the Central Excise and Customs Duty.
Things to Ponder: • • The Office of the Comptroller and Auditor General -1858 – in East India Company. • • • The Government of India Act, 1935 also laid down the provisions for appointment and service conditions of the Auditor General. The first Auditor General (Sir Edward Drummond) was appointed in 1860 and had both accounting and auditing functions. Departments of Accounts and Audit were created (reorganized) in 1862. The Government of India Act, 1919 provided for ‘Auditor General in India’ responsible for the audit of expenditure in India from the revenues of India. the first Auditor General of India was Shri V. Narahari Rao for a period of 5 years. the CAG of India is an independent constitutional authority who is neither part of the legislature nor executive, though appointed by the President on the advice of the Prime Minister and can be removed only through a motion of impeachment. • The accounting functions were taken away in the case of the Centre in 1976 and handed over to the Controller General of Accounts (the Principal Accounting Authority of the Go. I) while accounts of the States continue to be compiled by the CAG. • The CAG set up an Audit Advisory Board in March 1999.
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