Auditing Standards -  2nd Edition, 2002

Introduction

1.1   The Comptroller and Auditor General of India (CAG), who is the head of the Supreme Audit Institution of India (SAI) derives his duties and powers mainly from Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. Under the provisions of the Constitution of India and the Act, the CAG is the sole auditor of the accounts of the Central (Union) Government and the State Governments. CAG is also responsible for the audit of local bodies (i.e. Panchayati Raj institutions and urban local bodies) under the provisions of some of the State Acts and provides technical and administrative guidance for accounting and audit functions in all States as per orders issued by Ministry of Finance, Government of India. The reports of the CAG relating to the accounts of the Union and the States are submitted to the President/Governor of the State for being laid before the Parliament/State Legislature. The CAG is also responsible for ensuring a uniform policy of accounting and audit in the Government sector as a whole. The Act authorises the CAG to lay 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.

1.2   The mandate of CAG includes audit of:

• Receipts and expenditure from the Consolidated Fund of India and of the State and Union Territories.

• Transactions relating to the Contingency Funds and Public Accounts.

• Trading, manufacturing, profit and loss accounts and balance sheets, and other subsidiary accounts kept in any Government department.

• Accounts of stores and stock kept in Government offices or departments.

• Government companies as per the provisions of the Companies Act, 1956.

• Corporations established by or under laws made by Parliament in accordance with the provisions of the respective legislation.

• Authorities and bodies substantially financed from the Consolidated Funds.

• Any Body or Authority even though not substantially financed from the Consolidated Fund, the audit of which may be entrusted to SAI.

• Grants and loans given by Government to Bodies and Authorities for specific purposes.

• Panchayati Raj Institutions and Urban Local Bodies

1.3    The audit mandate also provides for the periodic inspection of records and accounts of the Government departments to supplement the audit of vouchers and sanctions that are with the accounts compiling offices.

2.1   Auditing Standards prescribe the norms of principles and practices, which the Auditors are expected to follow in the conduct of Audit. They provide minimum guidance to the Auditor that helps determine the extent of auditing steps and procedures that should be applied in the audit and constitute the criteria or yardstick against which the quality of audit results are evaluated.

2.2   The auditing standards of the International Organisation of Supreme Audit Institutions (INTOSAI) have been suitably adapted with due consideration of the Constitution of India, relevant Statutes and rules for the auditing standards for the Supreme Audit Institution of India (SAI).

2.3   The auditing standards consist of four parts:

(a) Basic postulates

(b) General Standards

(c) Field Standards

(d) Reporting Standards

3.   Basic Postulates

3.1   The basic postulates for auditing standards are basic assumptions, consistent premises, logical principles and requirements which help in developing auditing standards and serve the auditors in forming their opinions and reports, particularly in cases where no specific standards apply.

3.2   The basic postulates are:

(a)   The SAI should comply with the INTOSAI auditing standards in all matters that are deemed material.

(b)   The SAI should apply its own judgement to the diverse situations that arise in the course of Government auditing.

(c)   With increased public consciousness, the demand for public accountability of persons or entities managing public resources has become increasingly evident so that there is a need for the accountability process to be in place and operating effectively.

(d)   Development of adequate information, control, evaluation and reporting systems within the Government will facilitate the accountability process, Management is responsible for correctness and sufficiency of the form and content of the financial reports and other information.

(e)   Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the Government, and audited entities should develop specific and measurable objectives and performance targets.

(f)   Consistent application of acceptable accounting standards should result in the fair presentation of the financial position and the results of operations.

(g)   The existence of an adequate system of internal control minimises the risk of errors and irregularities.

(h)   Legislative enactment's would facilitate the co-operation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit.

(i)    All audit activities should be within the SAI's audit mandate.

(j)   SAIs should work towards improving techniques for auditing the validity of performance measures.

(k) SAIs should avoid conflict of interest between the auditor and the entity under audit.

4.   The following paragraphs elaborate on the above basic postulates for auditing standards.

• The SAI should establish a policy by which the standards are followed for the various types of work carried out by the SAI to ensure that the work and products are of high quality.

• In general terms, a matter may be judged material if knowledge of it would be likely to influence the user of the audit report.

• Materiality is often considered in terms of value but the inherent nature of an item or a group of items may also render a matter material as for example mandatory disclosure requirements of statutes regardless of the amounts involved.

• In addition to materiality by value and by nature, a matter may be material because of the context in which it occurs, for example, considering an item relating to:

(a) The overall view given to the financial information;

(b) The total of which it forms a part;

(c) Associated terms;

(d) The corresponding amount in previous years.

• It would be impracticable to establish a code of rules, sufficiently elaborate, to cater to all situations and circumstances which an Auditor might encounter. In the observance of Auditing Standards, therefore, the Auditor must exercise his judgement in determining the auditing procedures necessary in the circumstances, to afford a reasonable basis for his opinion and the content of his report.

• In regard to audit of financial statements of public sector enterprises, the SAIs audit objectives may be akin to the objectives of audit in private sector. Correspondingly, for the audit of financial statements of the corporate sector, the government auditor may apply standard audit practices issued by the Institute of Chartered Accountants.

• The broad aim of SAI is to safeguard the financial interests of the State and to uphold and promote public accountability and sound and economical financial management practices.

• Audit assists the legislatures in the exercise of financial control over the executive Government.

• The executive Government and not Audit is responsible for enforcing economy and efficiency in the expenditure of public money. It is, however, the duty of Audit to bring to light wastefulness, failures, system weaknesses, deficiencies and the circumstances leading to infructuous expenditure.

• The entities managing public resources include commercial undertaking, e.g., entities established by statute or public sector undertakings established under the Companies Act in which the Government has a controlling interest. Irrespective of the manner in which they are constituted, their functions, degree of autonomy or funding arrangements, such entities are ultimately accountable to the Supreme law making body.

• Management of the audited entity is responsible for correctness and sufficiency of the form and content of the financial reports and other information.

• As a special arrangement dictated by mandate, the Accounts and Entitlement offices working under the SAI compile the financial reports of the State Governments based on the initial accounts rendered to them by the respective State Government agencies. Such offices also, in some states, maintain the accounts of long term loans given to Government servants the Provident Fund accounts and the Entitlement accounts of Government personnel. Also, the SAI advises the President of India on the form of Government accounts.

• SAI shall advise the Government for the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of Government. The audited entities should develop specific and measurable objectives and performance targets.

• The Auditor often expresses an opinion on the performance of an auditee and based on comparison of the information given in the financial statements over a period of time. Consistency in following the accounting standards will facilitate expression of a fair opinion.

• It is the responsibility of audited entity to develop adequate internal control systems to protect its resources. It is also its obligation to ensure that controls are in place and functioning to help ensure that applicable statutes and regulations are complied with and that probity and propriety are observed in decision making. However, this does not relieve the auditor from submitting proposals and recommendations to the audited entity where controls are found to be inadequate or missing.

• Auditors should make use of the INTOSAI guidelines on evaluation of Internal Controls and reporting thereon.

• An Auditor has a right to inspect any office of accounts of the Union or of a State, to require that any books, papers and other documents which are relevant to the transactions to be sent to him and to put such questions to the persons in charge of the office or make such observations and call for such information as he may require for the preparation of any account or report which it is his duty to prepare.

• Information about an audited entity acquired in the course of fie Auditor's work must not be used for purposes outside the scope of audit. and formation of an opinion or in reporting not in accordance with the 'Auditor's responsibility. It is essential that Audit maintain confidentiality regarding audit matters and the information obtained while carrying out audit engagements.

• The term 'Audit' includes Financial Audit, Regularity Audit and Performance Audit. In pursuance of the Constitutional responsibility, the SAI is empowered to decide the nature, scope, extent and quantum of audit including the form and content of the audit reports in respect of audit to be conducted by him or on his behalf.

• The expanding audit role of the auditors will require them to improve and develop new techniques and methodologies to assess whether reasonable and valid performance measures are used by the audited entity. Wherever practicable the auditors should acquaint themselves with techniques and methodologies of other relevant disciplines.

• The SAI performs its role by carrying out audits of the various public sector entities and by reporting the results in conformity with Reporting Standards. To fulfill this role, the SAI needs to maintain its independence and objectivity. The application of appropriate general auditing standards assists the SAI in satisfying these requirements.