INCOME TAX NOTES

CA IPCC Chapter - Special Audit Very important Chapter

CHAPTER - 9
SPECIAL AUDITS
CA IPCC Chapter - Special Audit Very important Chapter

STATISTICS OF THE CHAPTER Tentative Weightage of Chapter: 10 to20 Marks IMPORTANCE OF THE CHAPTER The Chapter covers the audits of miscellaneous organizations having different legal forms.
COVERAGE OF THE CHAPTER
(1) Government Audit
(2) Audit of Local Bodies
(3) Audit of NGOs
(4) Audit of Partnership Firm
(5) Compilation Engagement
(6) Audit of Charitable Institutions
(7) Audit of Educational Institutions
(8) Audit of Hire Purchase & Leasing Companies




(120) What do you mean by Government Audit? Who conducts Government Audit?
► Government auditing is:
the objective, systematic, professional and independent examination of
financial, administrative and other operations of a public entity
for the purpose of evaluating and verifying them,
presenting a report on audit findings
along with recommendations for future actions
and expressing opinion on fairness of the financial statements.
► It aims to ensure accountability of the executive in respect of public revenue and expenditure
► In India government audit is performed by the Comptroller and Auditor General through the agency of Indian Audit and Accounts Department. C&AG watch that in regard to financial matters various authorities act in accordance with Constitution and laws made by Parliament.

(121) What is the legal framework regarding Comptroller & Auditor General?
► Appointment: He shall be appointed by the President of India.
► Salary: He shall be paid salary equivalent to that of a Judge of Supreme Court. The Parliament can make laws to determine salary and other conditions of service.
► Tenure: He shall hold office for 6 years or up to the age of 65 years, whichever is earlier.
► Removal: He shall not be removed from office except on the ground of proven misbehavior or incapacity. He can be removed only when each House of Parliament decides to do so by a majority of not less than 2/3rd of the members of the House present and voting.
► Resignation: He can resign at any time through a resignation letter addressed to the President.

► Powers & duties: C & AG shall perform such duties and exercise such powers as may be prescribed by the Parliament. The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 defines these functions and powers in detail.
► Accounts: Article 150 of the Constitution provides that accounts of the Union/States shall be kept in such form as the President may on the advice of C & AG prescribed.
► Reports: Reports of C & AG relating to accounts of the Union/State /Union Territory having legislative assembly shall be submitted to the President/Governor/ Administrator who shall cause them to be laid before House of Parliament/State Legislature/Legislative Assembly.


(122) What are the duties and powers of Comptroller and Auditor General?
The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 defines functions and powers in detail. The relevant provisions are discussed hereunder: —
DUTIES OF THE C & AG:
1. Compile and submit Accounts of Union and States: CAG shall be responsible for compiling accounts of the Union/State/Union Territory having a Legislative Assembly, and shall submit those accounts to President/Governor of State/Administrator of the Union Territory, on or before such dates as he may determine with concurrence of the Government concerned.
2. Audit of Receipts and Expenditure: He shall audit all receipts and expenditure of any body which has been substantially financed by grants or loans from Consolidated Fund of India/State/Union Territory. A body/authority shall be deemed to be substantially financed if:
such grant/loan in a FY is not less than Rs. 25 lakhs, and
amount of such grant/loan is not less than 75% of total expenditure of that authority/body.
3. Audit of Grants or Loans: Where any grant/loan is given for any specific purpose from the Consolidated Fund of India/any State/any Union Territory to any authority/body other than a foreign State or international organisation, he shall scrutinise the procedures by which the sanctioning authority satisfies itself as to the fulfillment of conditions for giving such grants or loans and may access books & accounts of that authority/body, after giving reasonable previous notice.
4. Audit of Receipts of Union or States: He shall audit all receipts payable into the Consolidated Fund of India/each State/each Union Territory and ensure existence of an effective check on assessment, collection and proper allocation of revenue.
5. Audit of Accounts of Stores and Stock: He shall audit and report on the accounts of stores and stock kept in any office or department of the Union or of a State.
6. Audit of Government Companies and Corporations: Duties and powers of CAG in relation to the audit of government companies & corporations shall be performed and exercised by him in accordance with the provisions of the Companies Act, 1956.
7. General Provisions Relating to Audit: It shall be the duty of the CAG to audit and report:—
a. on all expenditure from the Consolidated Fund of India/each State/each Union Territory and to ascertain whether sum disbursed was appropriately applied for the designated purpose and whether expenditure conforms to the authority which governs it;
b. all transactions of the Union/States relating to Contingency Funds and Public Accounts;
c. on all trading, manufacturing P&L A/c, B/S and other subsidiary accounts kept in any department of the Union or of a State.

POWERS OF C & AG
1. Inspect any office of accounts under the control of the Union or State Government.
2. Require that any accounts, books, papers and other documents relevant to the transactions under audit, be sent to specified places.
3. Ask such questions or make such observations as he may consider necessary to the person in charge of the office.
4. Call for such information as he may require for the preparation of any account or report.
5. Some powers are granted u/s 619(3) of The Companies Act, 1956.


(123) How does an auditor audit Government Expenditure?
Audit of government expenditure is one of the major components of government audit. It involves the following:
1. AUDIT AGAINST RULES & ORDERS / REGULARITY AUDIT: It aims to ensure that the expenditure conforms to the relevant provisions of the Constitution, laws and rules made there under and is as per the financial rules, regulations and orders issued by a competent authority.
► It involves interpretation of the Constitution, statutes, rules, regulations and orders.
► These rules, regulations and orders are mainly made in relation to the following:
a. Powers to incur and sanction expenditure from Consolidated Fund/Contingency Fund of India or of a State.
b. The mode of presentation of claims against government;
c. withdrawing moneys from the Consolidated Fund, Contingency Fund & Public Accounts of Government of India/States.
d. The conditions of service, pay and allowances, and pensions of government servants.
► Auditor should see that the rules, regulations and orders issued by executive authorities are applied properly by the subordinate authorities and see that:
are consistent with the provisions of Constitution or any laws made there under.
are consistent with essential requirements of audit & accounts as determined by C & AG.
are not in conflict with the orders or rules made by any higher authority.
have been approved by the competent authority or an authorized person.
2. AUDIT OF SANCTIONS: It aims at ensuring that:
► the expenditure is properly covered by a sanction, either general or special
► the authority sanctioning it is competent for the purpose by virtue of
powers vested in it by provisions of Constitution and law, rules/ orders made thereto, or
by the rules of delegation of financial powers.
3. AUDIT AGAINST PROVISION OF FUNDS: It aims at ascertaining that:
the expenditure is incurred on the purpose for which grant/appropriation had been provided
the amount of such expenditure does not exceed the appropriation made.
4. PROPRIETY AUDIT: While conducting propriety audit, auditors identify cases of improper or avoidable expenditure even though the expenditure has been incurred in conformity with the existing rules and regulations.
► A transaction may satisfy all the requirements of regularity audit insofar as the various formalities regarding rules and regulations are concerned, but may still be highly wasteful.
► For e.g., a school building may be constructed but used after 5 years of its completion a case of avoidable expenditure.
► Propriety audit seeks to ensure that expenditure conforms to the following principles:
a. The expenditure should not be prima facie more than the occasion demands.
b. Every public officer should exercise the same vigilance for incurring expenditure from public moneys as a person of ordinary prudence would exercise for spending his own money.
c. No authority should sanction expenditure, directly/indirectly to its own advantage.
d. Public moneys is not utilised for the benefit of a particular person/section of community.
► It is the responsibility of executive departments to enforce economy in public expenditure and auditor is only required to bring to the notice of the proper authorities of wastefulness in public administration and cases of improper, avoidable & infructuous expenditure.
5. PERFORMANCE AUDIT: Performance audit involves 3E’s efficiency, economy and effectiveness audit. It is an objective examination of financial and operational performance oriented towards identifying opportunities for greater economy, and effectiveness.
► Efficiency audit aims at examining relationship between goods & services produced and resources used to produce them. Thus, it looks into whether:
various schemes/projects are executed
their operations are conducted in a way to yield the expected results.
► Economy audit looks into whether:
government has acquired all resources in an economical manner, and
the sanctioning and spending authorities have observed economy.
► Effectiveness audit is an appraisal of
the performance of programmes, schemes & projects, and
the achievement of overall targeted objectives.

(124) How does an auditor audit Government Receipts?
While auditing government receipts the auditor checks whether:
a. All revenues have been correctly assessed and credited to government account.
b. Adequate regulations have been framed & carried on to secure an effective check on assessment, collection and proper allocation of cases.
c. Adequate checks exist for prompt detection & investigation of irregularities, double refunds, fraudulent refund and other modes of leakages of revenue.
d. Internal procedures ensure correct and regular accounting of demands collection, refunds & other dues and to suggest improvement.

(125) How does a Government auditor perform audit of stores & stocks?
► Audit of the accounts of stores and stocks involves :
Ascertaining whether Regulations governing purchase, receipt, issue, custody, sale and stock taking of stores are well devised & properly carried out.
Bringing to the notice of government any deficiencies in quantities of stores held or any defects in the system of control.
► Audit of purchase of stores is conducted to ensure that:
these are properly sanctioned, made economical and as per the Rules laid down
the prices paid are reasonable and as per the contract for supply of stores
the certificates of quality and quantity are furnished by the inspecting and receiving units.
► Cases of uneconomical purchase and losses due to inferior quality are specifically examined.
► Any excess or idle stock is specifically mentioned in the report.
► Periodical verification of stock is conducted to ensure their existence.
► Valuation of stocks is examined.

(126) What do you mean by audit of Commercial Accounts w.r.t. to Government Audit?
► Government may carry out commercial activities and be required to maintain commercial accounts for such public enterprises. Such enterprises are generally classified as follows:
a. departmental enterprises engaged in commercial and trading operations, which are subject to the same laws, financial and other regulations as other government departments and agencies;
b. statutory bodies, corporations, created by specific statutes mostly financed by government in the form of loans, grants, etc. and
c. government companies set up under the Companies Act, 1956.
► The audit of departmental concerns is undertaken in the same manner as any department of government where commercial accounts are kept.
► Audit of statutory bodies or corporations depends on the nature and type of the statute governing the bodies or corporations. Its audit is conducted by the C&AG.
► In the case of a government company, audit is conducted by professional auditors appointed on the advice of the C&AG and the C&AG is authorized u/s 619(4) of the Companies Act, 1956 to conduct supplementary or test audit.
The C&A G shall have following powers u/s 619(3):
a. to direct the manner in which company’s accounts shall be audited and to give such auditor instructions in regard to any matter relating to the performance of his functions.
b. to conduct a supplementary or test audit of the company’s accounts by such person or persons as he may authorise in this behalf.
c. to require information or additional information to be furnished to person conducting supplementary audit, on such matters and in such form, as C&A G may direct.
Auditor aforesaid shall submit a copy of his audit report to the C&A G who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit.

(127) What do you mean by Local bodies?

► A municipality can be defined as a unit of local self-government in an urban area.
► Local self-government refers to:
administration of a locality, a village, a town, a city or any other area smaller than a state
by a body representing the local inhabitants, possessing fairly large autonomy,
raising at least a part of its revenue through local taxation and
spending its income on services regarded as local and distinct from state & central services.
► Municipal government in India covers 5 distinct types of urban local authorities, viz., the municipal corporations, the municipal councils, the notified area committees, the town area committees and the cantonment committees.
► Municipal authorities are endowed with specific local functions covering regulatory, maintenance and development activities.
► Expenditure incurred by the municipalities and corporations can be broadly classified as general administration and revenue collection, public health, public safety, education, public works, and others such as interest payments, etc.
► Property taxes and octroi are the major sources of income of the municipal authorities; other municipal taxes are profession tax, tax on advertisement, tolls, etc.
► Local bodies may receive different types of grants from state administration as well. Broadly, the revenue grants are of three categories:
a. General purpose grants: These are primarily intended to substantially bridge the gap between the needs and resources of the local bodies.
b. Specific purpose grants: These grants which are tied to the provision of certain services or performance of certain tasks.
c. Statutory and compensatory grants: These grants are given to local bodies as compensation on account of loss of any revenue on taking over a tax by state govt. from local govt.
► Accounting System: Municipal accounting system is usually kept as per the cash basis.


(128) How will an auditor perform audit of Local bodies?
► The important objectives of audit are:
a. reporting on the fairness of the content and presentation of financial statements
b. reporting upon the strengths and weaknesses of systems of financial control
c. reporting on the adherence to legal and/or administrative requirements
d. reporting upon whether value is being fully received on money spent
e. detection and prevention of error, fraud and misuse of resources.
► Auditor should obtain an understanding of the financial administration of the body including the knowledge of budgets, accounting systems and internal controls.
► He should vouch the income and expenditure in the usual manner.
► He should examine transactions which are ultra vires and beyond legal authority of local body.


(129) What do you mean by Non-Governmental Organisations (NGO’s)?
► MEANING: NGOs can be defined as
non-profit making organisations
which raise funds from members, donors or contributors
also receive donation of time, energy and skills
for achieving their social objectives like imparting education, providing medical facilities, economic assistance to poor, managing disasters and emergent situations.
► EXAMPLES: Some examples of NGOs operating in India include Child Relief and You (CRY), UNICEF, Godhuli, Vidya, Concern India Foundation., etc.
► LEGAL FORM: NGO’s can be incorporated in either of the following ways:
societies under the Societies Registration Act, 1860
a trust under the India Trust Act, 1882
a company u/s 25 of the Companies Act, 1956.
► SOURCES OF FUNDS: The main sources of funds include grants and donations, fund raising programmes, advertisements, fees from the members, fee for services rendered, subscriptions, gifts, sale of produce or publications, etc.
Contribution made towards the capital/corpus of an NGO is known as corpus contribution.
Donations and grants may also be received for acquisition of specific fixed assets.
Contributions may also be received in kind including assets e.g. land and articles related to programmes/projects e.g. food, books, and raw material for training purposes, e.g. Wool.
► APPLICATION OF FUNDS: The areas of application of funds for an NGO include Establishment Costs, Office and Administrative Expenses, Maintenance Expenses, Programme / Project Expenses, Charity, Donations and Contributions given, etc.


(130) How will an auditor perform audit of Non-Governmental Organisations?
1. PRELIMINARY WORK: While planning audit, the auditor may concentrate on the following:
a. Knowledge of NGO’s work, mission, vision and areas of operations.
b. Updating knowledge of relevant statutes.
c. Reviewing legal form of Organisation, its MOA, AOA, Rules and Regulations.
d. Reviewing NGO’s Organisation chart, Manuals, Project and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.
e. Examination of minutes of Board/Managing Committee/Governing Body/Management, etc.
f. Study the accounting system, internal controls and checks and verify their applicability.
g. Review the previous year’s Audit Report.
2. AUDIT OF RECEIPTS: Income of NGO may be checked on the following lines:
a. Contributions and Grants for projects & programmes: Check agreements with donors and grants letters to ensure that funds received have been accounted for. Check that all foreign contribution receipts are deposited in the foreign contribution bank account.
b. Receipts from fund raising programmes: Verify in detail the internal control system and ascertain the persons responsible for collection of funds and mode of receipt. Ensure that collections are counted and deposited in the bank daily.
c. Membership Fees: Check fees received with Membership Register. Reconcile fees received with fees to be received during the year. Ensure proper classification is made between entrance fees, annual fees and life membership fees.
d. Subscriptions: Check with subscription register and receipts issued. Check the receipts with subscription rate schedule.
e. Interest and Dividends: Check interest and dividends received and receivable with investments held during the year.
3. AUDIT OF EXPENDITURE:
a. Programme & Project Expenses: Verify agreement with donor/contributor(s) for particular programme / project and for contracts ensure that income tax is deducted, deposited and returns filed and verify the terms of the contract.
b. Establishment Expenses: Verify that PF, life insurance premium, ESI and other administrative charges are properly accounted for and deposited within prescribed time. Also check other office & administrative expenses such as postage, stationery, etc.
4. AUDIT OF BALANCE SHEET ITEMS:
a. Corpus Fund: Vouch with reference to the letters from the donor(s). The interest income be checked with Investment Register and Physical Investments in hand.
b. Reserves: Vouch with reference to donor’s letters and board resolutions. Also check transfers from capital reserve to general reserve and adjustments during the year.
c. Loans: Vouch loans with loan agreements, receipt counter-foil issued.
d. Fixed Assets: Vouch all acquisitions, sale or disposal of assets including depreciation in the usual way. Also check donor’s letters/agreements for the grant.
e. Investments: Check Investment Register and physically verify investments to ensure that investments are in the name of NGO. Verify approval by appropriate authority and refer to bank accounts for the principal amount and interest.
f. Cash in Hand: Physically verify the cash in hand and imprest balances.
g. Bank Balance: Check bank reconciliation statements and ascertain old outstanding.
h. Stock in Hand: Obtain certificate from management for quantities & valuation of the same.


(131) How will an auditor perform audit of a Firm?
► APPOINTMENT OF AUDITOR: The auditor is appointed by the partners and his remuneration is also fixed by them. The letter of appointment should clearly state the nature and scope of audit to be carried out and limitations, if any, under which he would have to function.
► The Indian Partnership Act, 1932 does not prescribe audit of a partnership firm. The auditor should have knowledge of the provisions of the Partnership Act.
► Before starting audit, he should examine partnership agreement and note the provisions as regards the following matters :
a. The duration of the partnership, if any, that has been agreed upon.
b. The amount of capital to be contributed by each partner, whether it will be fixed or not.
c. Accounting period and ratio for sharing profit/losses among partners.
d. Provisions for maintenance of books of account and basis of calculation of profits for division among partners e.g., creation of reserves, provision for depreciation, etc.
e. Borrowing capacity of the partnership.
f. The rate at which interest will be allowed on capital and loans provided by partners and the rate at which it will be charged on their drawings and current accounts.
g. Provisions relating to salaries or withdrawals.
h. Provisions regarding operation of bank account of the firm & investment of surplus funds.
► In the absence of a partnership agreement the auditor should refer to the provisions of the Partnership Act.
► Matters which should be specially considered in the audit of accounts of a partnership:
Confirming that appointment letter is signed by a partner duly authorized and clearly specifies the nature and scope of audit and limitation, if any.
Studying the Minute Book and examining matters which are not in routine nature.
Verifying that the business carried on is authorized by the partnership deed.
Examining if proper books of accounts are being maintained.
Confirming that provision for tax payable has been made before arriving at the amount of profit divisible among the partners.
Verifying that profits/losses are divided among partners as per agreed profit-sharing ratio.

(132) Write a note on compilation engagement? (SRS 4410)

In the compilation engagement the member has to use accounting expertise and not auditing expertise, to collect, classify and summarise financial information. The procedures employed are not designed and do not enable member to express any opinion on financial information.
A compilation engagement would ordinarily include preparation of financial statements but may also include the collection, classification and summarisation of other financial information.
When an engagement to compile financial statements is undertaken, the form and content of report issued in connection with such a compilation should be such that the association of the name of member with financial statements is not misconstrued by a user of the statements as the same having been audited by him.
Engagements to provide limited assistance to a client in preparation of financial statements like selection of appropriate accounting policy, do not constitute a compilation engagement.
The member should clearly bring out the nature of association with the financial statements and the work performed by him. The following recommendations are made in this regard
a. The title of the report should be ‘ACCOUNTANT’S REPORT ON UNAUDITED FINANCIAL STATEMENTS’ and not ‘AN AUDITOR’S REPORT’.
b. The report should be addressed to the appointing authority.
c. The report should identify the financial information compiled; also stating that it is based on the information provided by the management.
d. The report should clearly state that the financial statements are not audited.
e. In describing the engagement, ambiguous terms such as ‘review’, ‘general review’, ‘check’ etc., should not be used.
f. Date of the report should be mentioned.
g. Name and address of firm of member appointed for carrying out compilation engagement should be mentioned.
h. Signatures, designation and membership number should appear in the report.
An example of the report is given below:
Accountant’s Report on Unaudited Financial Statements
To.......
On the basis of information provided by management we have compiled the balance sheet of......... (Name of the entity) as of March 31, XXXX and the statement of profit and loss for the period then ended. The balance sheet and the statement of profit and loss are in agreement with the books of account. We have not audited or reviewed these financial statements and accordingly express no opinion thereon.
Date:
For A & Co.
Signature (Name of the partner and membership number)
Partner
Chartered Accountants


(133) How will an auditor perform audit of Charitable Institutions?
1. PRELIMINARY WORK:
a. Study the constitution under which the charitable institution has been set up. It may be registered as a society, company limited by guarantee or trust.
b. Verify whether it is being managed as per the law under which it has been set up.
c. Examine internal control system, especially as regards accounting of amounts collected.
d. Verify in detail the income and confirm that amounts received are regularly deposited in bank.
2. AUDIT OF RECEIPTS:
3. Subscriptions and donations
a. Ascertain changes, if any, made in amount of annual/life membership subscription.
b. Confirm that adequate control is imposed over unused receipt books.
c. Test check the counterfoils of receipts issued with the cash book.
d. Obtain list of subscriptions and donations and tally them with total collections.
e. Verify total subscriptions and donations received with any figures published in reports, etc. issued by the charity.
2. Legacies: Verify amounts received with correspondences and other available information.
3. Grants
a. Vouch amount received with the relevant correspondence, receipts and minute books.
b. Obtain a certificate from a responsible official showing the amount of grants received.
4. Investments Income
a. Vouch the amounts received with the dividend and interest counterfoils.
b. Check the calculations of interest received on securities bearing fixed rates of interest.
c. Compare amounts of dividend received with schedule of investments.
5. Rents:
a. Examine rent roll and tenancy agreements noting amounts of rents and due dates.
b. Vouch rents on to the rent roll from counterfoils of receipt books and check totals of cash book.
6. Special function, etc.: Vouch gross receipts and outgoings for special functions like concerts, held in aid of charity with such vouchers and cash statements as are necessary. Verify that proceeds of all tickets issued have been accounted for.
7. Income Tax Refunds: Where income-tax has been deducted from the Investment income, it should be seen that a refund thereof has been obtained since charitable institutions are exempt from payment of Income-tax. Income Tax Refund may be vouched with correspondence with Income-tax Department.
3. AUDIT OF EXPENDITURE
a. Vouch payment of grants, also verify that grants have been paid only for a charitable purpose or for purposes for which charitable institution has been set up and that no trustee, director or member of the Managing Committee has benefited there from.
b. Verify schedules of securities held and inventories.
c. Carry physical verification of inventories, securities and other movable properties.
d. Verify the cash and bank balances.
e. Ascertain that funds contributed for a special purpose have been utilised for the purpose.


(134) How will an auditor perform audit of Educational Institutions (School, College or University)?
1. PRELIMINARY WORK:
a. Constitution: Examine Trust Deed/Regulations for school/college and note all provisions affecting accounts. For university, refer to Act of Legislature and Regulation framed.
b. Minutes: Examine minutes of meetings of Managing Committee/Governing Body, note the resolutions affecting accounts and ensure their compliance, as regards the operation of bank accounts and sanctioning of expenditure.
2. AUDIT OF RECEIPTS:
a. Fees from Students:
i. Check names entered in Students Fee Register for each month/term, with respective Class Registers, test amount of fees charged and verify that there operates a system of internal check which ensures that demands against the students are properly raised.
ii. Check fees received by comparing counterfoils of receipts with entries in Cash Book and trace collections in Fee Register.
iii. Examine Fees Register for each month/term to calculate fees paid in advance which have been carried forward and ensure that arrears that are irrecoverable have been written off under the sanction of an appropriate authority.
iv. Check admission fees with admission slips signed by head of institution and confirm that amount has been credited to a Capital fund, unless the Managing Committee has taken a decision to the contrary.
v. See that free studentship and concessions have been granted by a person authorised to do so, having regard to the Rules prepared by the Managing Committee.
b. Other Incomes:
i. Confirm that fines have been either collected or exempted under proper authority.
ii. Confirm that hostel dues were recovered before student’s accounts were closed and their deposits of caution money refunded.
iii. Verify rental income from landed property with the rent receipts, etc.
iv. Vouch income from endowments and legacies, as well as interest and dividends from investment; also inspect the securities in respect of investments held.
v. Verify any Government or local authority grant with the memo of grant.
vi. Report old heavy arrears for fees, dormitory rents, etc. to the Managing Committee.
vii. Vouch donations with the list published with annual report. Ensure that donations for any specific purpose have been utilised for the purpose only.
viii. Confirm that refund of taxes deducted from income from investment, etc. has been claimed and recovered as institutions are generally exempted from income-tax.
3. AUDIT OF EXPENDITURE:
a. Vouch all capital expenditure in the usual way and verify it with the sanction of the  Managing Committee as contained in the minute book.
b. Vouch all establishment expenses in usual manner and enquire into any unduly heavy expenditure. In case of annual budget, see that any excess over amount budgeted was duly sanctioned by Managing Committee.
c. See that increase in salaries of staff have been sanctioned and minuted by Committee.
d. See if there is effective check over receipt and issue of provisions, foodstuffs, clothing and other equipment and all bills are duly authorised and passed before payment.
4. AUDIT OF BALANCE SHEET ITEMS:
a. Confirm that caution money and other deposits paid by students on admission, have been shown as liability in B/S and not transferred to revenue, unless they are not refundable.
b. See that investments representing endowment funds for prizes are kept separate and any income in excess of the prizes has been accumulated and invested along with the corpus.
c. Verify that Provident Fund money of staff has been invested in appropriate securities.
d. Verify inventories of furniture, stationery, clothing, provision and all equipment etc. by reference to Stock Register or corresponding inventories of previous year and values applied to various items should be test checked.

(135) How will an auditor perform audit of Hospitals?
1. PRELIMINARY WORK:
a. Constitution: Examine the legal form of the Hospital, whether it is a society, partnership, company, etc. and study the applicable rules & regulations in relation thereto.
b. Internal Check: Examine internal check on receipt and issue of stores, medicines, linen, apparatus, clothing, instruments, etc. and ensure that purchases have been properly recorded in Stock Register and issues made only against proper authorisation.
2. AUDIT OF RECEIPTS:
a. Collections from patients:
i. Vouch Register of patients with copies of bills issued to them.
ii. Verify bills for a selected period with patients’ attendance record to see that the bills have been correctly prepared and issued to all patients as per rules of the hospital.
iii. See if timely settlements have been made in case of mediclaim policies.
iv. Trace cash collections in Cash Book with receipts and copies of patient’s bills.
b. Other Incomes:
i. Examine property and Investment Register to see that all income receivable by way of rent on properties, dividends and interest on securities has been collected.
ii. Ascertain that legacies and donations received for a specific purpose have been applied in the manner agreed upon.
iii. Trace all collections of subscription and donations from Cash Book to respective Registers. Reconcile the total subscriptions due from Subscription Register.
iv. Verify that grants received from Government/local authority has been duly accounted for and utilised in the manner agreed upon.
v. See that refund in respect of taxes deducted at source has been claimed.
3. AUDIT OF EXPENDITURE:
a. Vouch all purchases and expenses in usual manner, pay special attention to purchase of high value items like injections, medicines, etc.
b. Verify that capital expenditure was incurred only with due sanction of authorised person.
c. Ensure that appointments and increments to staff have been duly authorised.
d. Compare various items of expenditure and income with amount budgeted for them and report significant variations to the Trustees or the Managing Committee.
4. AUDIT OF BALANCE SHEET ITEMS:
a. See that depreciation has been written off against all the assets at the appropriate rates.
b. Inspect bonds, share scrips, title deeds of properties and compare their particulars with those entered in the property and Investment Registers.
c. Obtain inventories, especially of stocks and stores as at the end of the year and check a percentage of items physically and compare total values with respective ledger balances.

(136) How will an auditor perform audit of Club?
1. PRELIMINARY WORK:
a. Constitution: Study the legal form of the club, generally club is constituted as company limited by guarantee. Ensure compliance with rules & regulations of applicable statute.
b. Internal Check: Verify internal check as regards members being charged with the price of foodstuffs and drinks provided to them and their guests, as well as, with the fees chargeable for the special services rendered, such as billiards, tennis, etc.
c. Powers: Examine financial powers of the secretary and report to the Managing Committee if powers have been exceeded.
2. AUDIT OF RECEIPTS:
a. Entrance Fees: Vouch entrance fees received with members’ applications, counterfoils issued to them, as well as on a reference to minutes of the Managing Committee.
b. Subscriptions:
i. Vouch member’s subscriptions with counterfoils of receipt issued to them.
ii. Trace receipts for a selected period in Register of Members.
iii. Reconcile total subscriptions due with the amount collected and that outstanding.
iv. Ensure that appropriate adjustments have been made for arrears of subscriptions and subscriptions received in advance.
v. Check totals of various columns of the Register of members and tally them across.
vi. Ascertain member’s dues in arrear and enquire if necessary steps have been taken for their recovery and report amount considered irrecoverable.
c. Charges recovered from members:
i. Examine the criteria on the basis of which different services are charged to members.
ii. Trace debits for a selected period from subsidiary registers in respect of supplies and services to members and confirm that account of every member has been debited with amounts recoverable from him.
3. AUDIT OF EXPENDITURE:
a. Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the respective stock registers.
b. Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price so as to confirm that normal rates of gross profit have been earned on their sales.
c. Compare various expenses with that of previous year and carry out audit in usual way.
4. AUDIT OF BALANCE SHEET ITEMS:
a. Stock of unsold provisions and stores at year end should be verified physically and its valuation checked.
b. Check the stock of furniture, sports material and other assets physically with the respective stock registers or inventories prepared at the end of the year.
c. Inspect share scrips and bonds in respect of investments, check their current values for disclosure in final accounts; also ascertain that satisfactory arrangements are made for their safe custody.

(137) How will an auditor perform audit of Cinema?
1. PRELIMINARY WORK:
a. Constitution: Study the legal form of cinema hall and the applicable rules & regulations. Study the minutes of meetings of the governing body/trustee to gain knowledge of important policy decisions concerning the accounts.
b. Internal control: Evaluate the system of internal control.
2. AUDIT OF RECEIPTS:
a. Revenue from tickets:
i. Verify that entrance to the cinema-hall during show is only through printed tickets.
ii. Tickets should be serially numbered and bound into books.
iii. See that for advance booking a separate series of tickets is issued.
iv. Stock of tickets should be kept in the custody of a responsible official.
v. Confirm that at the end of show, a statement of tickets sold is prepared and cash collected is agreed with it.
vi. Vouch entries in Cash Book for cash collected on sale of tickets by reference to Daily Statements for the different shows held.
vii. Verify that a record is kept of free passes and they are issued under proper authority.
b. Tax collected: Reconcile the amount of Entertainment Tax collected with the total number of tickets issued for each class.
c. Advertisements: Verify charges collected for advertisement slides and shorts from the Register of Slides and Shorts Exhibited and the agreements with advertisers in this regard.
d. Restaurant income: Examine the arrangement for collection of share in the restaurant income; either a fixed sum or a fixed percentage of the taking may be receivable annually. If restaurant is run by Cinema, its accounts should be checked. The audit should cover sale of various items of foodstuffs, purchase of foodstuffs, cold drink, cigarettes, etc.
3. AUDIT OF EXPENDITURE:
a. Vouch expenditure incurred on advertisement, repairs and maintenance.
b. See that expenditure is properly classified between capital and revenue.
c. Vouch payments on account of film hire with bills of distributors and the agreements concerned should be referred to.
4. AUDIT OF BALANCE SHEET ITEMS:
a. Confirm that depreciation on machinery & furniture has been charged at appropriate rates.
b. Examine unadjusted balance out of advance paid to distributors against film hire contracts to see that they are good and recoverable. If any film in respect of which an advance was paid has already run, it should be enquired as to why the advance has not been adjusted.
c. Management should be asked to make a provision in respect of irrecoverable advances.


(138) How will an auditor perform audit of Hotels?
1. PRELIMINARY WORK:
a. Constitution: Study the legal form of hotel and applicable rules & regulations including the condition of licence for running the hotel. Study the minutes of meetings of the governing body/trustee to gain knowledge of important policy decisions concerning the accounts.
b. Internal Control:
i. Evaluate internal control over sales made through various sales point in hotel.
ii. See that adequate controls exist to minimise pilfering/leakage as far as possible.
iii. Regular (weekly) trading accounts should be prepared for each sales point and a detailed scrutiny of resulting profit percentages be done. The auditor should review these regular trading accounts and obtain explanations for any apparent deviations.
2. AUDIT OF RECEIPTS:
a. Sales:
i. Almost all sales points in a hotel make both cash and credit sales. The auditor should reconcile total sales reported with total of bills issued by sales point.
ii. Check cash sales with the cash records and credit sales with the guest’s bills.
iii. The charge for room sales is normally posted to guest bills by the receptionist or in case of large hotels by night auditor. Any difference between rates charged on guests’ bills and standard room rate should be investigated.
iv. Study the daily occupancy report and exit report, if prepared, and test check with the guest register or individual guest’s bill.
v. In many hotels, housekeeper prepares a daily report of rooms which were occupied the previous night and the number of beds kept in each room. This report tends not to be permanently retained and the auditor should ensure that a sufficient number of reports are available for him to test both with guest register and with individual guest’s bill.
b. Booking of halls: The auditor should ensure that proper records are maintained for booking of halls and other premises for special parties and recovered on the basis of the tariff.
c. Restaurant income: The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen Order Tickets)/basic record to ensure that controls on revenue cycle are in order.
d. Forex Conversion booth: In case of a booth to facilitate conversion of foreign currencies, auditor should ensure compliance with various applicable provisions of Foreign Exchange Regulation Act, 1973 and the rules framed by Foreign Exchange Dealer’s Association.
e. Travel agents: Auditor should see that money are recovered from the travel agents or booking agencies as per the terms of credit allowed.
3. AUDIT OF EXPENDITURE:
a. Auditor should ensure that adequate records are maintained for wages paid to casual labour and proper controls exist over the wages paid.
b. Check commission paid to travel agents/booking agents with the agreement on that behalf.
c. See that expenses are properly classified as revenue & capital.
d. See that all taxes collected from occupants on food, etc. have been paid to proper authority.
4. AUDIT OF BALANCE SHEET ITEMS:
a. Stocks:
i. Ensure that effective internal control exists over receipt and issue of stocks of each individual stores areas and sales point as hotel stock are readily portable and saleable.
ii. Areas where large quantities of stock are held should be kept locked, the key being retained by the departmental manager and issued only to trusted personnel.
iii. The auditor should consider attending the physical stock taking.
iv. Verify the basis of valuation adopted for stock.
b. Fixed Assets: Examine the accounting policies for fixed assets and see that appropriate classification is made between fixed assets and quasi-fixed assets like silver and cutlery. In such cases see if very detailed definitions of stock items exist and ensure that definitions have been closely followed.
c. Occupancy-in-Progress: The auditor should ensure that proper valuation of occupancy-in- progress at the balance sheet date is made and included in the accounts.


(139) How will an auditor perform audit of Hire Purchase and Leasing Companies?
HIRE PURCHASE:
1. Auditor should examine the hire purchase agreement and see if it is signed by all parties.
2. Hire purchase agreement should specify clearly:
a. The hire-purchase price of goods to which the agreement relates.
b. The cash price of goods i.e., the price at which goods may be purchased by hirer for cash.
c. The date on which the agreement shall be deemed to have commenced.
d. Number of installments to be paid for hire- purchase price, amount of each installment, due date for payment and the person to whom it is payable.
e. The goods covered by such agreement, in a manner sufficient to identify them.
3. Ensure that payments are being received regularly as per the agreement.

LEASE:
1. Auditor should study object clause of leasing company to ascertain goods & activities in respect of which the company can undertake leasing activities.
2. See if proper procedure exists to perform credit analysis of lessee like lessee’s ability to meet the commitment under lease, past credit record, availability of collateral security, etc.
3. The lease agreement should be examined and the following points may be noted:
a. the description of lessor, lessee, equipment and location where equipment is to be installed.
b. agreement has been signed by the authorized persons.
c. the amount & tenure of lease, dates of payment, late charges, deposits or advances etc.
d. whether the equipment shall be returned to lessor on termination of agreement and cost shall be borne by the lessee.
e. conditions in relation to subletting of property.
4. Examine the lease proposal form submitted by lessee requesting lessor to provide him the equipment on lease.
5. Ensure that the invoice is retained safely as lease is a long-term contract.
6. Examine the acceptance letter obtained from lessee indicating that equipment has been received in order and is acceptable to him.
7. See that the copies of the insurance policies have been obtained by lessor for his records.


Practical Questions - Chapter 9: Special Audits

Q1. Discuss the provision of the Constitution of India to safeguard the independence of the
Comptroller and Auditor general of India.
Q2. Mention the special points to be examined by the auditor in the audit of a charitable institution running hostel for students pursuing chartered accountancy course and which
charges only Rs. 500 p.m. from a student for his lodging/boarding.
Q3. State with reasons whether true or false:
(a) CAG may be removed by President.
(b) A partnership firm must have a duly registered partnership agreement.
(c) Regularity audit refers to audit against rules & regulations.
(d) In a compilation engagement, member has to use auditing expertise.
(e) In a hotel sale is made through various sales points.
(f) Hire Purchase and Lease is one and the same thing.