Role and Significance of Internal Audit Internal Audit

Role and Significance of Internal Audit (Internal Audit Mechanism in MOD, Role of DAD – Interface with Test Audit) ACIA (Fys)

SALIENT POINTS COVERED IN THIS PRESENTATION � What is Audit? � What is Internal Audit? Its objectives � Different types of Audit, Advantage of DAD Audit � Agencies of Audit in DAD : IA cell, LAO/RAOs etc. � Annual Audit Certificate � MFAI/IAR Reports (sample cases) � Reorientation Initiatives of DAD � Super Review by IDAS � Interface with Test -Audit

What is Audit ? o Audit is screening of a transaction with certain norms as per the job requirement. It is part of an analytical study of a given transaction. The process of Audit affects every walk of life. The function of audit is not merely to see that the authority for expenditure exists, but also on legitimate occasions to investigate the necessity for it. o Audit is done for both receipt and expenditure. Audit can be of many types: o Domestic expenditure - foreseen/unforeseen o Pre-Audit (before the transaction) - or Post Audit (after the transaction)

What is Internal Audit ? � Internal Audit is an independent and objective organisational function that adds value to and improves the overall effectiveness and efficiency of an organization. � Internal Audit is essentially an aid to Management. � The objective of Internal Audit should be ‘How things could be done better rather than finding faults. ’ � Internal Audit should be viewed as an activity with value addition component.

What is Internal Audit ? � Contd. . An effective managerial tool for continuous appraisal of all activities (financial and non-financial) to identify areas of weakness in systems and control. � Internal Audit has been recognized because of its dual capacity 1. Pre-auditing of transaction and accounting of payments made by CDA Office as paying authority and 2. Auditing of accounts maintained by units/formations by the LAOs/RAOs.

Objectives of Internal Audit � The basic objective of Internal Audit is to give reasonable assurance to the Management about adequacy of Internal control systems. � Flexibility to adjust to the environment to get best outcomes. The focus has shifted from Transaction Audit to System Audit. � Focus is on high priority areas based on risk assessment. � Scarce Audit Resource should be deployed on High Risk areas based on Materiality, Consequences, Complexity and Sensitiveness. � Collaborative and not critical approach

ROLE OF INTERNAL AUDIT Internal Audit can be divided into: � Audit of Sanctions � Audit of Receipts � Audit of Expenditures

Audit of Sanctions � All sanctions issued by authorities lower than the Govt. of India are susceptible to audit by Internal Audit i. e. Def. Accts. Deptt. � Internal Audit ensures that sanction accorded by the Competent authority is in accordance with the delegated financial powers laid down in the rule. � In case of Govt. orders, internal audit will play its role to ensure that the order is followed up. � Ink signed copy of the sanction will be verified during audit.

AUDIT OF RECEIPTS � Receipts are properly and correctly compiled under various heads of Accounts and finally credited to Govt. through treasury receipts. � Recoveries on account of various funds and advances are supported with proper schedules etc. so that no difficulties are experienced at the time of final settlement of funds dues to the retiring employees or next of kin in case of deaths. � Correct recoveries and accounting are very important from the view point of budgeting as they gives proper guidelines for each requirements’ estimate.

AUDIT OF RECEIPTS (Contd) � Recoveries of fund account helps Union Govt. in providing proper allotment for various projects. � In case of receipt of stores, it is the primary duty of Internal Audit to see that the stores are correctly received for which the payments have been made. � Store vouchers are received by LAOs/ RAOs from their counterparts for linking (verification of credit in consignee’s account). � Non-verification of credits is a very serious objection and these items are reported through AAC to the Parliament.

AUDIT OF EXPENDITURE � The audit of all expenditure debitable to Defence Services Estimates is conducted by the Cs. DA either centrally in their own offices or locally through the agency of the LAOs. � The standards of Financial propriety enunciated in para 39 of Defence Audit Code are the basic rules on which all audit is conducted as regards propriety of expenditure.

AUDIT OF EXPENDITURE (contd. . ) Canons of financial propriety : � Every officer is expected to exercise the same vigilance in respect of expenditure incurred from public money as a person of ordinary prudence would exercise in respect of expenditure of his own money. � The expenditure should not be prima facie more than the occasion demands. � No authority should exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage.

AUDIT OF EXPENDITURE (contd. . ) � Expenditure from public moneys should not be incurred for the benefit of a particular person or a section of the people, unless – (a) a claim for the amount could be enforced in a Court of Law, or (b) the expenditure is in pursuance of a recognised policy or custom. � The amount of allowances granted to meet expenditure of a particular type should be so regulated that the allowances are not on the whole a source of profit to the recipients.

AUDIT OF EXPENDITURE (contd. . ) � The responsibility and accountability of every authority delegated with financial powers to procure any item or service on Government account is total and indivisible. Government expects that the authority concerned will have the public interest uppermost in its mind while making a procurement decision. This responsibility is not discharged merely by the selection of the cheapest offer but must conform to the following yardsticks of financial propriety: (1) Whether the offers have been invited in accordance with governing rules and after following a fair and reasonable procedure in the prevailing circumstances.

AUDIT OF EXPENDITURE (contd. . ) (2) Whether the authority is satisfied that the selected offer will adequately meet the requirement for which it is being procured. (3) Whether the price on offer is reasonable and consistent with the quality required. Above all, whether the offer being accepted is the most appropriate one taking all relevant factors into account and in keeping with the standards of financial propriety. � Wherever called for, the concerned authority must place on record in precise terms, the considerations which weighed with it while taking the procurement decision.

AUDIT OF STORE ACCOUNTS � Audit of Store Accounts is a very important part of Audit procedure. There are two important aspects of Store Audit: - a) It is to be ensured that the stores have been correctly procured as per the supply orders i. e. stores have been received for the amounts paid for the procurement, and b) More important part is to see that the stores are consumed/incorporated in the works for which they have been procured.

SCOPE OF INTERNAL AUDIT � Adequacy of internal controls; � Quality of performance in carrying out assigned responsibilities; � Reliability and integrity of financial and operating information; � Compliance with policies, plans, procedures, laws and regulations; � Verification and safeguard of assets; � Economy and efficiency in use of resources and � Effectiveness of operations and programmes.

FUNCTIONS OF INTERNAL AUDIT SECTION � Interface with various audit agencies to ensure internal audit of sanctions/expenditure and local audit of stores accounts/inspection of cash accounts etc. are carried out effectively and results thereof are reported and followed up � Receipt, examination and circulation of Govt. letters � Examination of important Internal Audit points emerging from audit of sanctions/points received from LAOs/RAOs/M. O. � Tendering Financial Advice to the Local Administrative authorities and rendition of Quarterly Report to HQ.

FUNCTIONS CONTD. . � Disposal of special reports and o/s objections of units and formations moving out of command or disbanded. � Monitoring of LTAR’s � To monitor follow-up action on Test Audit Objections. � Consolidation and editing of the quarterly report on the Major Financial& Accounting Irregularities. � Consolidation and rendition of the Annual Audit Certificate to the CGDA.

FUNCTIONS CONTD. . � Audit/higher audit of Loss Statements and preparation of statement of Losses for inclusion in the Appropriation Accounts- Para 547 Audit Code. � Approval of Half Yearly Local Audit Programmes & scrutiny of completion certificates. � � Action on Consolidated annual accounts of Cantt. Boards. Compilation and submission of half yearly Internal Audit Reports to HQ Office.

ROLE & FUNCTIONS OF LAO/RAO � Internal check by DAD It is the duty and responsibility of the DAD to conduct locally the internal check of the accounts i. e. ledgers, returns, stock and due sheet and other records connected with the receipt & issue of stores, required to be maintained by the various Army supply and store depots including units/formations as prescribed in the various books of regulations and other Govt. Orders issued from time to time. This internal check is distinct from the statutory audit conducted by Director of Audit, Defence Services. (Para 1 ALAM Pt I Vol I).

Agencies by which Local Audit is conducted Amongst other duties PCDA/CDA is also responsible for local audit of the stores and MES Accounts of units and formations under their audit jurisdiction. This responsibility is discharged locally through LAOs/RAOs. As such a constant link is maintained with LAOs/RAOs over his function through various sections of Main office of PCDA/ CDA. It is organized under two categories, viz: � Audit/Review by the Local Audit staff /Officers (Para 2 ALAM Pt I Vol I) � Review of local audit by IDAS officers (Appendix II to OM Part I)

FUNCTIONS OF LAO/RAO (Contd. . ) Scope of Audit: � Verification of ‘casting’, ‘closing book balance’ and ‘opening book balance’ � Linking on the receipt side of the transfers inward and of purchases and on the issue side of transfers out words � Audit of final receipts and final issues Extent of Audit: The extent to which local audit of store account would be done by the LAOs as laid down in ALAM Part I

FUNCTIONS OF LAO/RAO (Contd. . ) List of accounts and registers to be audited: � To ensure that no accounts are omitted in audit, a list of all accounts and registers required to be maintained by each unit is maintained by LAO and sent to the PCDA/CDA for approval. Any addition and alteration are carried out under the orders of the PCDA/CDA (Para 11 ALAM Pt I Vol I) � Store Account audit

FUNCTIONS OF LAO/RAO (Contd. . ) � Carry out periodical cash inspection of Public Fund A/c, Imprest A/c, maintained by army units and formations � Rendition of AAC, MFAI, IAR, Appropriation Accounts (DS) relating to losses of stores and cash Scale Audit : � LAO has to ensure that the quantity of stores/ equipment held by the unit/ formations does not exceed the prescribed limit � Rendering financial advice to the units/formations and render a report every quarter for inclusion in the financial advice report rendered by Main Office. (Para 15 ALAM Pt I Vol I)

ROLE & FUNCTIONS OF LAO/RAO (Contd. . ) � Audit of MES store accounts Various rules/regulations/points observed during the audit of store accounts in respect of any units/formations equally apply to the MES store accounts also. In addition to them, some more points are to be seen during the audit of the stores held by MES units/formations which are prescribed in the following books: a) MES Local Audit Manual and b) Unit Accountant's Manual

ROLE & FUNCTIONS OF LAO/RAO (Contd. . ) Functions of Regional Audit Officer (MES) � Advises GE(MES) on all matters of finance dealing with MES works including revenue � Audit the accounts where CDA’s office cannot audit completely � Ensures primary accounts/documents are maintained in correct formats and accuracy is maintained. � Inspection of Public Fund accounts

ROLE & FUNCTIONS OF LAO/RAO (Contd. . ) � Local audit of MES formations � Rendering of financial advice � Settlement of audit objection by using waiver power as delegated/vested with him � Discuss with MES executives, the outstanding Test Audit Objections/Draft paras for early settlement.

ANNUAL AUDIT CERTIFICATE � The Annual Audit Certificate is rendered to HQ Office every financial year. � It consists of 4 Annexures & 13 statements with sub-parts. � It is a consolidation of reports received from LAOs/RAOs/Audit Sections in M. O. � Demands/cases O/s as on 31 st March and its position as on 30 th June is furnished through this report to HQrs office by 31 st July.

Follow Up Reports � Further progress of the AAC report is rendered in 3 quarterly follow up reports on 30 th Sept, 31 st Dec and 31 st March. � Only clearance can be reflected in the quarterly reports (i. e present position of the items shown in the original AAC only can be shown). New/Fresh items/cases can be included only in the original AAC.

MFAI REPORT � IA Sn deals with consolidation and editing of quarterly MFAI report based on the reports rendered by LAOs /RAOs as well as audit sections of MO. � MFAI report deals with matters relating to units and formations in various arms and services which are worth bringing to the notice of HQrs commands or administrative authorities.

MFAI REPORT deals with A: Types of Irregularities � Cases of irregular maintenance or non-maintenance of accounts having serious implications. � Cases of monetary value of financial irregularity or loss involved is Rs. 5 lac and above. � Serious irregularities which cannot be translated into financial terms but in personal opinion of PCDA worth to bring to the notice of Army Commanders/Higher executives

MFAI REPORT deals with B: Special attention � Utilisation of plant and machinery, the purpose for which purchased or installed. � � � Slow moving and non-moving stores items Deterioration in condition due to long/ inadequate storage. Defective planning and implementation of projects of significant investments-highlighting major deviations from original time and cost targets.

RENDITION OF REPORT � Report to be rendered for QE June, Sept, Dec & March by 20 th of the following month to our HQrs Office by PCDA for the Command as a whole. Sub-offices to submit reports by 5 th of the month following the QE regarding progress of old items and new items as when deleted. � It is in two parts- � Part –I : fresh inclusion � Part – II: Old o/s items � Both parts consist Section A for cash irregularities & Section B – store irregularities.

Write up for fresh cases � Narration of report should be concise, to the point, highlighting specific irregularity, its seriousness and amount involved, precise point at which it revealed and reference to the exact rules and orders etc. � Care should be taken that narration normally does not exceed two pages � It is to be mentioned: i) whether case detected during percentage audit or process of selected items or is a case of erroneous certification by executives.

Write up for fresh cases Contd. . ii) Precise point at which and the extent to which failure on the part of executives is revealed. � Refer note under para 669 of OM Pt. II vol-I � Items included in MFAI reports which are subsequently included in CGDAs certification to printed Appropriation Accounts will be formally taken out of MFAI report but to be pursued to finality. Other items should continue to be exhibited till the cases are finally settled.

INTERFACE WITH TEST AUDIT � Interface between internal and statutory audit will help in achieving best results as well as avoid duplication of efforts. � This can be achieved through periodic meetings between the two agencies to discuss audit Programmes and areas of audit. � Training Programmes and exchange of man power on deputation basis � To monitor follow-up action on Test Audit Objections. � The Internal Audit Section should also maintain a record of the action taken on LTARs, Draft Paras and Audit paras and render progress reports to the HQrs office on monthly/quarterly basis.

TEST AUDIT REPORTS � All facilities possible will be given to the Test Audit Staff � All Reports/Objections issued will be dealt with fully and expeditiously � In the event of difference of opinion by the Test Audit authorities and the PCDA in regard to objections raised by the former, the PCDA should take action to give effect to the objections and should report the matter for the orders of the CGDA , alongwith forwarding copies of the Test Audit Objections and copies of all subsequent correspondence connected therewith.

TEST AUDIT REPORTS Where a difference of opinion exists in regard to a matter of audit or office procedure, it will rest with the DADS to report the case to the DGADS, if necessary. � TAOs should be analysed /divided into the following broad categories, with a view to dispose them off speedily at appropriate level: (i) Items are merely queries. (ii)Items relates to production of certain documents �

TEST AUDIT REPORTS (iii) Expressions of opinion on basic principles (iv) Expressions of opinion on the propriety of administrative or Accounting Authorities. � Replies to items (i) & (ii) should not normally take more than 7 days and should go over the signature of the Officer-in-charge of the Section. � Items under (iii) and (iv) should be examined by the PCDA/JCDA and the settlement of such objections progressed under their direct supervision. These items should be reported to the Command HQ also.

TEST AUDIT REPORTS � The DADS will indicate in LTARs the serious/important objections which deserve to be reported to Command HQ. In case, where the PCDA does not agree with this, the issue will be mutually discussed before a final decision is taken whether to extract the LTAR to the Command HQ or not.

TEST AUDIT REPORTS � PCDA should have periodical meetings with the Command Officers of the Test Audit Dept with a view to analyse the outstanding statutory audit objections and ensure their early settlement. �A record of all cases reviewed /discussed with the local Test Audit authorities should be kept to review the cases at higher level, if necessary.

TEST AUDIT REPORTS � Where the office of the particular DDA/AO DS is not situated at the same station as the HQ of the PCDA, a monthly list of such objections will be forwarded by the Test Audit office to the Command Offices situated at the HQ of the PCDA to enable him to settle the same by personal discussion with the PCDA. � Only in rare cases, it will be necessary for LAOs to discuss cases with the originating Command Officer of the Test Audit Department.

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