13

AUDIT OF PUBLIC SECTOR

UNDERTAKINGS

LEARNING OUTCOMES

After studying this chapter, you will be able to:

 Understand & explain the concept of Compliance Audit, Performance
Audit, Comprehensive Audit & Propriety Audit in relation to C&AG of India.
 Apply & analyse the above-mentioned concepts in moderately complex
scenarios.

CHAPTER OVERVIEW

Audit of Public Sector

Undertakings (PSUs)

Objective
Framework
and Scope Audit of Compliance Comprehensive
for Financial Performance Propriety Audit
of Audit of Government Audit Audit
Government Audit Audit Audit Report
Public Companies
Audit
Enterprises

Elements of Principles of
PSU Audits PSU Audits

© The Institute of Chartered Accountants of India

 13.2 ADVANCED AUDITING AND PROFESSIONAL ETHICS

1. INTRODUCTION
Public sector undertakings in India are fundamentally owned or controlled by central government, or any
state government or governments, or partly by the central government and one or more state
governments. The public enterprises have been assigned a key
role in the socio-economic development of the country. These
enterprises are industries supplying basic inputs to industry and
agriculture, such as coal, oil, steel, minerals and metals,
cement, chemicals and fertilizers and heavy equipment. Public
utilities like the railways, postal and telecom services, electricity
generation and supply, road transport, etc. constitute another
class of public enterprises. Though in the past, the public sector
in India has achieved a dominant role in the national economy,
the private sector is also now actively allowed in various sectors
like electricity generation, telecom services, etc.
Fig.: Audit of PSUs ∗

For example,
Departmentally managed
Indian Railways, Postal
undertakings which form part
Services, Security Printing
and parcel of government
Press, Canteen Stores
activities
Department, etc.

Categories for Government companies and

deemed government
organisation of companies set up under the
PSUs Companies Act, 2013

Corporations set up under For example,

the specific Acts of the Life Insurance Corporation,
legislature Unit Trust of India, etc.

2. FRAMEWORK FOR GOVERNMENT AUDIT

As defined under section 2(45) of the Companies Act, 2013, a “Government Company” is a
company in which not less than 51% of the paid-up share capital is held by the Central Government
or by any State Government or Governments or partly by the Central Government and partly by one

∗
Source of image: Times of India

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.3

or more State Governments, and includes a company which is a subsidiary company of such a
Government company.

Government Company
[section 2(45)]

Includes subsidiary
≥ 51% of the paid-up company of a
share capital held by Government company

Any State Government Partly by the Central Government and

Central Government
or Governments partly by one or more State Governments

In India, audit of the above government companies is performed by an independent constitutional

authority, i.e. Comptroller and Auditor General of India (C&AG), through the Indian Audit and
Accounts Department. The Constitution of India gives a special status to the C&AG and contains
provisions to safeguard his independence.
Article 148 to 151 of the Constitution prescribes the role of C&AG as follows:

• Appointment of C&AG by the President.

Article • Special procedure for removal of C&AG, only on the ground of proven
148 misbehaviors or incapacity.
• Salary and other conditions of service to be determined by the Parliament.

• Perform such duties and exercise such powers in relation to the accounts of
the Union and States and of any other authority or body as may be pre-
Article scribed by or under any law made by the Parliament.
149 • The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 defines
these functions and powers in detail.

Article • On the advice of the C&AG, President to prescribe such form in which
150 accounts of the Union and States shall be kept.

Article • Audit reports of the C&AG relating to the accounts of the Central/ State
Government should be submitted to the President/Governor of the State who
151 shall cause them to be laid before Parliament/State Legislative Assemblies.

The Comptroller and Auditor General’s (Duties, Power and Conditions of Services) Act, 1971,
prescribes that the C&AG shall hold office for a term of six years or upto the age of 65 years,
whichever is earlier. He can resign at any time through a resignation letter addressed to the
President. The Act also assigns the duties regarding the audit to be followed by C&AG.

© The Institute of Chartered Accountants of India

 13.4 ADVANCED AUDITING AND PROFESSIONAL ETHICS

The number of organisations subject to the audit of the Comptroller and Auditor General of
India is very large. This includes:

Public commercial
All the Union and State
enterprises controlled by
Government departments
the Union and State
and offices including the
governments, i.e.
Indian Railways and Posts
government companies
and Telecommunications.
and corporations.

Non-commercial
autonomous bodies and Authorities and bodies
authorities owned or substantially financed from
controlled by the Union or Union or State revenues.
the States.

As a result of these numerous audits carried out every year, the Comptroller and Auditor General of
India has been issuing a large number of audit reports.
Audit of Government Companies (Commercial Audit) – There is a special arrangement for the
audit of companies where the equity participation by Government is 51 percent or more. The auditors
of these companies are firms of Chartered Accountants, appointed by the Comptroller & Auditor
General, who gives the auditor directions on the manner in which the audit should be conducted by
them. He is also empowered to comment upon the audit reports of the auditors. In addition, he has
a right to conduct a supplementary audit of such companies and cause test audit if considered
necessary, by an order.
[Note: Audit of Government companies is discussed separately under Para 4]
Audit Board Setup in Commercial Audit – A unique feature of the audit conducted by the Indian
Audit and Accounts Department is the constitution of Audit Boards for conducting comprehensive
audit appraisals of the working of Public Sector Enterprises engaged in diverse sectors of the
economy.
These Audit Boards associate with them experts in disciplines relevant to the appraisals. They discuss their
findings and conclusions with the managements of the enterprises and their controlling ministries and
departments of government to ascertain their view points before finalisation.
The results of such comprehensive appraisals are incorporated by the Comptroller and Auditor
General in his reports.
These Audit Boards have no separate legal entity and work under the supervision and control of the
Comptroller and Auditor General.
Action on Audit Reports – The scrutiny of the Annual Accounts and the Audit Reports thereon by
the Parliament as a whole would be an arduous task, considering their diverse and specialised

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.5

nature, besides imposing excessive demands on the limited time available to the Parliament for
discussion of issues of national importance.
Therefore, the Parliament and the State Legislatures have, for this purpose, constituted specialized
Committees like the Public Accounts Committee (PAC), Estimates Committee and the Committee
on Public Undertakings (COPU), to which these audit Reports and Annual Accounts automatically
stand referred.
Public Accounts Committee (PAC) – It is the duty of the Public Accounts Committee to satisfy
itself:
(i) that the moneys were disbursed legally on the service or purpose to which they were applied;
(ii) that the expenditure incurred was authorised;
(iii) that re-appropriation has been made in accordance with the provisions made (i.e. distribution
of funds).
It is also the duty of the PAC to examine the statement of accounts of autonomous and semi-
autonomous bodies, the audit of which is conducted by the Comptroller & Auditor General either
under the directions of the President or by a Statute of Parliament.
Estimates Committee – The Committee examines the estimates with a view to:
(i) report what economies, improvements in organization, efficiency or administrative reform,
consistent with the policy underlying the estimates may be effected;
(ii) suggest alternative policies;
(iii) examine whether the money is well laid out within the limit; and
(iv) suggest the form in which the estimates shall be presented to Parliament.
The Committee does not comment upon a policy approved by Parliament, but where there is
evidence that a particular policy is not leading to the desired results, or is leading to waste, it is the
duty of the Committee to bring it to the notice of the House.
Committee on Public Undertakings (COPU) – The Committee on Public Undertakings exercises
the same financial control on the public sector undertakings as the PAC exercises over the
functioning of the Government departments. The functions of the Committee are -
(i) to examine the reports and accounts of public undertakings.
(ii) to examine the reports of the C&AG on public undertakings.
(iii) to examine the autonomy and efficiency of public undertakings and to see whether they are being
managed in accordance with sound business principles and prudent commercial practices.
(iv) to exercise such other functions vested in the PAC and the Estimates Committee as are not
covered above and as may be allotted by the Speaker from time to time.

© The Institute of Chartered Accountants of India

 13.6 ADVANCED AUDITING AND PROFESSIONAL ETHICS

The examination of public enterprises by the Committee takes the form of comprehensive appraisal
or evaluation of performance of the undertaking. It involves a thorough examination, including
evaluation of the policies, programmes and financial working of the undertaking.
The objective of the Financial Committees, in doing so, is to focus not only on the individual
irregularity, but also on the defects in the system which led to such irregularity, and the need for
correction of such systems and procedures.
C&AG's Role – The Comptroller & Auditor General of India plays a key role in the functioning of the
financial committees of Parliament and the State Legislatures. He has come to be recognised as a
'friend, philosopher and guide' of the Committees.
(i) His Reports generally form the basis of the Committees' working, although they are not
precluded from examining issues not brought out in his Reports;
(ii) He scrutinises the notes which the Ministries submit to the Committees and helps the
Committees to check the correctness of submissions to the Committees and facts and figures
in their draft reports;
(iv) The Financial Committees present their Report to the Parliament/ State Legislature with their
observations and recommendations.
The various Ministries / Department of the Government are required to inform the Committees
of the action taken by them on the recommendations of the Committees (which are generally
accepted) and the Committees present Action Taken Reports to Parliament / Legislature;
(v) In respect of those Audit Reports, which could not be discussed in detail by the Committees,
written answers are obtained from the Department / Ministry concerned and are sometimes
incorporated in the Reports presented to the Parliament / State Legislature.
This ensures that the Audit Reports are not taken lightly by the Government, even if the entire
report is not deliberated upon by the Committee.

3. OBJECTIVE AND SCOPE OF PUBLIC ENTERPRISES

AUDIT
The C&AG’s (Duties, Power and Conditions of Services) Act, 1971 specifies the entities that come
under audit purview of C&AG at the Union and State level. However, the scope and extent of audit
is determined by the C&AG itself.

Audit Conducted by C&AG

Financial Compliance Performance

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.7

(1) Audit of PSUs not constrained to Financial and Compliance Audit: Audit of public
enterprises in India is not restricted to financial and compliance audit; it extends also to
performance (efficiency, economy and effectiveness with which these operate and fulfill their
objectives and goals).
(2) Propriety Audit: Another aspect of audit relates to questions of propriety. This audit is
directed towards an examination of management decisions in sales, purchases, contracts,
etc. to see whether these have been taken in the best interests of the undertaking and
conform to accepted principles of financial propriety.
(3) Comprehensive Audit: Under comprehensive audit, the C&AG do not really cover again the
field which has already been covered. He conducts an appraisal or an efficiency-cum-
performance audit. He sees whether the undertakings have fulfilled the objectives for which
they have been established, whether value-for-money spent has been obtained, whether the
targets have been achieved, etc. He locates the areas of weakness including review of the
decisions taken by the management and a comprehensive appraisal of the performance of
the undertaking.
(4) Organisation’s Decision to be taken by Competent Authority: In examining the decisions
of a management, the auditor examines that these were taken by the competent authority
after examination of all aspects (economic, technological, public interest) on the basis of all
the relevant information available at that time and taking into consideration the different
alternatives available to management and that the decisions were consistent with the aims
and objectives of the enterprise.
(5) Helping Government: Audit is an instrument of accountability. But an equally important
purpose of audit of public enterprises in India is to help the Government and the enterprise
managements improve their efficiency and effectiveness. This is achieved by bringing out
financial and operational deficiencies, inadequacies or ineffectiveness of systems, shortfalls
in performance, etc. and by analysing the causes of shortfall from acceptable standards of
performance.
(6) Highlighting Issues of Efficient and Economic Operations: Financial performance is
linked with physical performance and issues of efficient and economic operations and
management of resources are highlighted. There is an increasing emphasis on audit being
an instrument of improvement.
(7) Fiscal and Managerial Accountability: In the broader context, Government audit
encompasses two main elements, viz., (a) Fiscal Accountability: It includes audit of
provisions of funds, sanctions, compliances and propriety; and (b) Managerial
Accountability: It includes audit of efficiency, economy and effectiveness (This is often
referred to as efficiency-cum-performance audit).

© The Institute of Chartered Accountants of India

 13.8 ADVANCED AUDITING AND PROFESSIONAL ETHICS

3.1 Elements of PSU Audits

Public sector auditing augments the confidence of the intended users by providing relevant
information and independent and objective assessments concerning deviations from accepted
standards or principles of good governance.
Audit of all public-sector undertakings has the following basic elements:

Basic Elements
of PSU Audits

Subject matter,
criteria and Types of
Three parties
subject matter engagement
information

Direct
Responsible Attestation
Auditor Intended users Reporting
party Engagements
Engagement

(a) The Three parties - Auditor, Responsible Party and Intended Users.
Auditor: The role of auditor is fulfilled by Supreme Audit Institution (SAI), India and by its
personnel delegated with the duty of conducting audits. The Comptroller and Auditor General
of India (CAG) and the Indian Audit and Accounts Department (IAAD) functioning under him,
constitute the Supreme Audit Institution of India
Responsible Party: The relevant responsibilities are determined by constitutional or
legislative arrangement. Generally, auditable entities and those charged with governance of
the auditable entities would be the responsible parties. The responsible parties may be
responsible for the subject matter information, for managing the subject matter or for
addressing recommendations.
Intended Users: Intended users are the individuals, organizations or classes thereof for
whom the auditor prepares the audit report.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.9

(b) Subject matter, criteria and subject matter information.

• This refers to the information, condition or activity that is

Subject matter
measured or evaluated against certain criteria.

Criteria • These are the benchmarks used to evaluate the subject matter.

Subject matter • This refers to the outcome of evaluating or measuring the subject
information matter against the criteria.

(c) Types of engagement - Attestation Engagements and Direct Reporting Engagement.

Attestation Engagements:
In attestation engagements, the responsible party measures the subject matter
against the criteria and presents the subject matter information, on which the
auditor then gathers sufficient and appropriate audit evidence to provide a
reasonable basis for expressing a conclusion.

Direct Reporting Engagement:

In direct reporting engagements, it is the auditor who measures or evaluates the

subject matter against the criteria.

Financial audits are always attestation engagements, as they are based on financial information
presented by the responsible party.
Performance audits and compliance audits are generally direct reporting engagements.

3.2 Principles of PSU Audits

The principles of PSU Audits constitute the general standards that apply to SAI India’s personnel as
auditors and are fundamental to the conduct of all types of PSU Audits.
The principles are categorized into two distinct groups as below:
I. General Principles
II. Principles related to the Audit Process

© The Institute of Chartered Accountants of India

 13.10 ADVANCED AUDITING AND PROFESSIONAL ETHICS

General Principles

Audit
Professional
Ethics & Team
Judgement, Quality Documen- Commun-
Indepen- Manage- Audit Risk Materiality
due care and Control tation ication
dence ment &
skepticism
Skill

Principles related to the Audit Process

Planning the Audit
Conducting the Audit Reporting & Follow-up

• Establish the terms of the audit.

• obtain understanding of the • Perfom the planned audit • Prepare a report based on
entity. procedures to obtain audit the conclusions reached.
• Conduct Risk assessment of evidence. • Follow-up on reported
problem analysis. • Evaluate audit evidence and draw matters as relevant.
• Identify risks of fraud. conclusions.
• Develop an audit plan.

4. AUDIT OF GOVERNMENT COMPANIES

The following steps are involved in the audit of government companies:
(a) Appointment of Auditors under Section 139(5) and 139(7) read with section 143(5) of the
Companies Act, 2013 - Statutory auditors of Government Companies are appointed or re-
appointed by the C&AG. There is thus, a departure from the practice in vogue in the case of private
sector companies where appointment or re-appointment of the auditors and their remuneration
are decided by the members at the annual general meetings. In the case of government
companies, though the appointment of statutory auditors is done by the C&AG, the remuneration
is left to the individual companies to decide based on certain guidelines given by the C&AG in this
regard.
The C&AG may direct the appointed auditor on the manner in which the accounts of the
Government company are required to be audited and the auditor so appointed has to submit
a copy of the audit report to the Comptroller and Auditor-General of India. The report, among
other things, includes the directions, if any, issued by the C&AG, the action taken thereon
and its impact on the accounts and financial statement of the company.
The report under section 143(5) is in addition to the reports issued by the Statutory Auditors
under various other clauses of section 143.
(b) Supplementary audit under section 143(6)(a) of the Companies Act, 2013 - The
Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the
audit report have a right to conduct a supplementary audit of the financial statements of the
government company by such person or persons as he may authorize in this behalf and for
the purposes of such audit, require information or additional information to be furnished to

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.11

any person or persons, so authorised, on such matters, by such person or persons, and in
such form, as the C&AG may direct.
(c) Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013 - Any comments given by the C&AG upon, or in supplement to, the
audit report issued by the statutory auditors shall be sent by the company to every person
entitled to copies of audited financial statements under sub-section (1) of section 136 of the
said Act i.e. every member of the company, to every trustee for the debenture-holder of any
debentures issued by the company, and to all persons other than such member or trustee,
being the person so entitled and also be placed before the annual general meeting of the
company at the same time and in the same manner as the audit report.
(d) Test audit under section 143(7) of the Companies Act, 2013 - Without prejudice to the
provisions relating to audit and auditor, the C&AG may, in case of any company covered
under sub-section (5) or sub-section (7) of section 139 of the said Act, if he considers
necessary, by an order, cause test audit to be conducted of the accounts of such company
and the provisions of section 19A of the Comptroller and Auditor-General's (Duties, Powers
and Conditions of Service) Act, 1971, shall apply to the report of such test audit.

Audit of Government Companies

Section 143(5)
Section 143(6)
↓ Section 143(7)
↓
Appointment of auditor by C&AG as per section 139(5) or ↓
139(7) C&AG's right to-
* Conduct supplementary C&AG may, by
+ an order, cause
Directions by C&AG, the manner in which accounts shall be audit
test audit
audited * Comment upon or
+ supplement such audit
report
Submission of Auditor's Report to C&AG including-
* Directions issued, if any
* Action taken thereon
* Impact on Accounts

Diagram showing provisions of the Companies Act, 2013 related to Government Audit

5. FINANCIAL AUDIT
Financial audit is primarily conducted to:
express an audit opinion on the financial statements; and
enhance the degree of confidence of intended users in the financial statements.
The C&AG shall express an opinion as to whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.

© The Institute of Chartered Accountants of India

 13.12 ADVANCED AUDITING AND PROFESSIONAL ETHICS

In the case of financial statements prepared in accordance with a fair presentation financial reporting
framework, whether the financial statements are presented fairly, in all material respects, or give a
true and fair view, in accordance with that framework.

6. COMPLIANCE AUDIT
Compliance audit is the independent assessment of whether a given subject matter is in
compliance with the applicable criteria.
This audit is carried out by assessing whether activities, financial transactions and information
comply in all material respects, with the regulatory and other rules which govern the audited entity.
Compliance audit is concerned with:
(a) Regularity- adherence of the subject matter to the formal criteria emanating from relevant
laws, regulations and agreements applicable to the entity.
(b) Propriety- observance of the general principles governing sound financial management and
the ethical conduct of public officials.
While regularity is emphasized in compliance auditing, propriety is equally pertinent in the public-
sector context, in which there are certain expectations concerning financial management and the
conduct of officials.
Perspective of Compliance Audit: Compliance Audit is part of a combined audit that may also
include other aspects. Compliance auditing is generally conducted either-
(i) in relation with the audit of financial statements, or
(ii) separately as individual compliance audits, or
(iii) in combination with performance auditing.

(i) with audit of financial statements, or

Compliance Auditing is (ii) separately as individual compliance

generally conducted either: audits, or

(iii) in combination with performance

auditing.

When compliance auditing is part of a performance audit, compliance is seen as one of the aspects
of economy, efficiency and effectiveness. Noncompliance may be the cause of, an explanation for,
or a consequence of the state of the activities that are the subject matter of the performance audit.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.13

7. PERFORMANCE AUDIT
A performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization,
program, activity, or function in order to provide information to improve public accountability and
facilitate decision-making by parties with responsibility to oversee or initiate corrective action.
Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
subordinate offices of Indian Audit and Accounts Department (IAAD).
In conducting performance audit, the subordinate offices are guided by manual and auditing
standards prescribed by C&AG.
This audit promotes accountability by assisting those charged with governance and oversight
responsibilities to improve performance through an examination of whether:
(a) decisions by the legislature or the executive are efficiently and effectively prepared and
implemented; and
(b) tax payers or citizens have received value for money.
According to the guidelines issued by the C&AG, Performance Audits usually address the issues of:

Economy

Effectiveness Efficiency

(i) Economy- It is minimising the cost of resources used for an activity, having regard to
appropriate quantity, quality and at the best price.
Judging economy implies forming an opinion on the resources (e.g. human, financial and
material) deployed. This requires assessing whether the given resources have been used
economically and acquired in due time, in appropriate quantity and quality at the best price.
(ii) Efficiency- It is the input-output ratio. In the case of public spending, efficiency is achieved
when the output is maximised at the minimum of inputs, or input is minimised for any given
quantity and quality of output.
Auditing efficiency embraces aspects such as whether:
(a) sound procurement practices are followed;
(b) resources are properly protected and maintained;

© The Institute of Chartered Accountants of India

 13.14 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(c) human, financial and other resources are efficiently used;

(d) optimum amount of resources (staff, equipment, and facilities) are used in producing or
delivering the appropriate quantity and quality of goods or services in a timely manner;
(e) public sector programmes, entities and activities are efficiently managed, regulated,
organised and executed;
(f) efficient operating procedures are used; and
(g) the objectives of public sector programmes are met cost-effectively.
(iii) Effectiveness- It is the extent to which objectives are achieved and the relationship between
the intended impact and the actual impact of an activity.
In auditing effectiveness, performance audit may, for instance:
(a) assess whether the objectives of and the means provided (legal, financial, etc.) for a
new or ongoing public sector programme are proper, consistent, suitable or relevant
to the policy;
(b) determine the extent to which a program achieves a desired level of program results;
(c) assess and establish with evidence whether the observed direct or indirect social and
economic impacts of a policy are due to implementation of the policy or to other
causes;
(d) identify factors inhibiting satisfactory performance or goal-fulfilment;
(e) assess whether the programme complements, duplicates, overlaps or counteracts
other related programmes;
(f) assess the effectiveness of the program and/or of individual program components;
(g) determine whether management has considered alternatives for carrying out the
program that might yield desired results more effectively or at a lower cost;
(h) assess the adequacy of the management control system for measuring, monitoring
and reporting a programme's effectiveness;
(i) assess compliance with laws and regulations applicable to the program; and
(j) identify ways of making programmes work more effectively.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.15

Performance Audit Cycle

7.1 Provisions contained in Companies Act, 2013 and C&AG’s (Duties,

Powers, and Conditions of Service) Act, 1971
According to section 19(1) of the Comptroller and Auditor General (Duties, Powers, and Conditions
of Service) Act, 1971, the duties and powers of the Comptroller and Auditor General in relation to
the audit of the Accounts of Government companies shall be performed and exercised by him in
accordance with the provisions of the Companies Act.
Sub-section (6) and (7) of section 143 of the Companies Act, empowers Comptroller and Auditor
General of India to conduct supplementary audit or test audit of Government companies.
The supplementary or test audit conducted by the Comptroller and Auditor General is in the
nature of efficiency-cum-performance appraisal.

© The Institute of Chartered Accountants of India

 13.16 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Section 143(5) of Companies Act requires the statutory auditor (chartered accountant appointed by
C&AG under section 139(5) or 139(7) of the Act) to submit a copy of his audit report on the accounts
of the Government company to C&AG.
Thus, section 143(6) and 143(7) of the Companies Act empowers C&AG to conduct supplementary
audit and test audit respectively of annual accounts of a Government company.
In so far as statutory corporations are concerned, the respective Statutes provide for audit by C&AG.
The scope includes conducting performance audit of these corporations also though specifically not
stated so.
7.2 Objectives of Performance Auditing
The objectives of performance auditing are evaluation of economy, efficiency, and effectiveness of
policy, programmes, organization and management. It also promotes accountability by assisting
those charged with governance and oversight responsibilities to improve performance; and
transparency by affording taxpayers, those targeted by government policies and other stakeholders
an insight into the management and outcomes of different government activities.
Performance auditing focuses on areas in which it can add value which have the greatest potential
for development. It provides constructive incentives for the responsible parties to take appropriate
action.
Regulations on Audit And Accounts issued by C&AG lay down that the responsibility for the
development of measurable objectives and performance indicators as also the systems of
measurement rests with the Government departments or Heads of entities. They are also required
to define intermediate and final outputs and outcomes in measurable and monitorable terms,
standardise the unit cost of delivery and benchmark quality of outputs and outcomes.

1. Performance Audit of enforcement mechanism for administering the

provision of Minimum Wages Act (a social welfare legislation)
The auditors, who undertake performance audit of a program or unit, must possess
knowledge of the industries or labor contracts where these provisions are applicable and also
identify the population thereof before carrying out audit program. He shall evaluate the standard
of living before implementation and after implementation of the Act.
Further, the auditor shall have to evaluate the evidence available as to nature of returns
prescribed and obtained for taking appropriate action.
The Performance Auditor shall also have to evaluate the economy, efficiency and effectiveness
in the welfare systems to be audited. He can then study the shortcomings in the coordination
between different agencies like labor department, EPF and ESI organization and the control
systems and point out a set of relevant problems.
The auditor shall also have to point out lacuna, if any in the existing legal frame work or
enforcement mechanism to strengthen the objective of legislation. Another possible area of critical
audit may be to study actual level of compensation required in each area keeping in mind the

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.17

local living conditions and where the minimum wages prescribed in the statute is demonstrably
different from this level he may report the same to the Government for taking appropriate action.
In this manner, the performance audit can not only examine the reasons for such vagaries but
also ensures that the legislation serves the intended purpose. By reporting the same to the
legislature, the corrective is made possible.
[Note: Interested students may refer to Background Material on Performance Audit of Public
Sector Enterprises in India published by the CPE Committee of ICAI for further reference].

7.3 Planning for Performance Audit

Understanding the entity/programme

Defining the objectives and the scope of audit

Determining audit criteria

Deciding audit approach

Planning for Developing audit questions

Performance Audit
Assessing audit team skills and whether outside
expertise required

Preparing Audit Design Matrix

Establishing time table and resources

Intimation of Audit programme to audit entities

The following steps are suggested to the auditors for planning while conducting the performance
audit:
(A) Understanding the Entity/Programme - It is the starting point for planning individual
performance audit.

Sources for Understanding

the Entity

Academic Special
Documents Legislative Policy Media
or special Past audits focus
of the entity documents documents coverage
research groups

© The Institute of Chartered Accountants of India

 13.18 ADVANCED AUDITING AND PROFESSIONAL ETHICS

The auditor may use the following sources for understanding the entity:
(i) Documents of the entity: Documents on administration and functions of the entity,
policy files, annual reports, budget documents, accounts, minutes of meetings,
information on the website, internal audit reports, electronic databases and MIS
reports, RTI material etc.
(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of
the Public Accounts Committee, the Committee on Public Undertakings, the Estimates
Committee and letters from Members of Parliament.
(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.
(iv) Academic or special research: Independent evaluations on the entity, academic
research and similar work done by other governments and other SAIs.
(v) Past audits: Past financial and performance audits of the entity provide a major
source of information and understanding.
(vi) Media coverage: Print and electronic media - their systematic documentation on
regular basis in a transparent manner.
(vii) Special focus groups: Audit Advisory Committee concerns, annual and special
reports of World Bank, Reserve Bank of India, reports by special interest groups,
NGOs, etc.
(B) Defining the Objectives and the Scope of Audit - The audit objectives should be defined
in a succinct manner as they will impact the nature of the audit, govern its conduct and affect
audit conclusions. Setting audit objectives ensures good quality performance audits. It
facilitates clarity, demonstrates consistent quality of audit and serves as a measure of quality
assurance of the audit.
Defining the scope constricts the audit to significant issues that relate to the audit objectives.
It mainly focuses the extent, timing and nature of the audit.
(C) Determining Audit Criteria - Audit criteria are the standards used to determine whether a
program meets or exceeds expectations. It provides a context for understanding the results
of the audit. Audit criteria are reasonable and attainable standards of performance against
which economy, efficiency and effectiveness of programmes and activities can be assessed.
The audit criteria may be sought to be obtained from the following sources:
(i) procedure manuals of the entity.
(ii) policies, standards, directives and guidelines.
(iii) criteria used by the same entity or other entities in similar activities or programmes.
(iv) independent expert opinion and know how.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.19

(v) new or established scientific knowledge and other reliable information.

(vi) general management and subject matter literature and research papers.
(D) Deciding Audit Approach - There is no uniform audit approach prescribed that can be
applicable to all types of subjects of performance audits. Selection of approach also
determine methods and means used for conducting the audit.
Some of the methods which could be used in conducting performance audits include:

Analysis of Use of
Case studies
procedures existing data

Analysis of Quantitative
Surveys
results analysis

(i) Analysis of procedures: It involves review of the systems in place for planning,
conducting, checking and monitoring the activity. This would consist of examination of
documents such as financial reports, budgets, programme guidelines, procedure
manuals, etc.
(ii) Case studies: A case study is a descriptive analysis of an entity, scheme or a
programme. It involves analysis of a particular issue within the context of the whole
area under review.
(iii) Use of existing data: The audit staff should investigate the data held by entity
management and by other relevant sources. Audit conclusions based on testing of
available data for correctness and completeness enhances the assurance level.
(iv) Surveys: Survey is a method of collecting information from members of a population
to assess the interrelation of events and conditions. Surveys on predetermined
parameters can supplement the audit findings and conclusions adding value to the
performance audits.
(v) Analysis of results: It requires the auditor to carry out actual output-input analysis to
determine the efficiency of the programme.
(vi) Quantitative analysis: It involves examination of available data relating to financials
like earnings, revenue, or data relating to programme implementation like details of
beneficiaries etc. However, it may not be possible for the auditor to work with complete
data due to its high volume. In such cases, sampling techniques are required to be used.
(E) Developing Audit Questions - Subsequent to designing of audit objectives and
determination of audit criteria, the audit team is required to prepare a list of questions to which

© The Institute of Chartered Accountants of India

 13.20 ADVANCED AUDITING AND PROFESSIONAL ETHICS

they would seek answers. The questions should be framed in comprehensive manner
involving detailed hierarchy of questions.
(F) Assessing Audit Team Skills and whether Outside Expertise required - It is essential that
the performance auditors possess special aptitude and knowledge. The Auditing Standards
of C&AG of India provide that the audit institution should develop and train the auditors to
enable them to perform their tasks effectively & efficiently and should prepare manuals &
other written guidance notes & instructions concerning conduct of audits.
Given the diverse range of subjects of performance auditing, the audit team needs to develop
sound understanding of the programme or entity proposed to be audited.
The audit team needs to decide at the planning stage on which aspect expertise is required.
Though, the Accountant General may use the work of an expert, he retains full responsibility
for the expression of opinion in the auditor’s report.
(G) Preparing Audit Design Matrix (ADM) - Having determined the audit objective, audit criteria,
audit approach, data collection etc., audit team should prepare an Audit Design Matrix. It is
a structured and highly focused approach to designing a performance audit study.
The ADM highlights the data collection and analysis method as well as the type and sources
of evidence required to support audit opinion/findings.
A specimen of ADM is given as under:
Audit Objective Audit Questions Audit Criteria Evidence Data Collection and
Analysis Method
(1) (2) (3) (4) (5)

An ADM is prepared on the basis of information and knowledge obtained during the planning
stage. A well-designed ADM leads to effective audits thus providing highest assurances to
the auditing entities. It is desirable to prepare ADM for each of the audit objectives.
(H) Establishing Time Table and Resources - It is significant to determine the timetable and
desirable resources. Selection of appropriate audit team is the most vital component in
planning an audit. Considerations for selection of an appropriate audit team should be
recorded along with the proposed timelines for various activities to be undertaken as a part
of audit process. The progress should also be monitored against these timelines. The
Accountant General would be liable for ensuring that the performance audit is completed on
time. The variations between the required and actual time spent should be compared and
approved from the competent authority.
The team should build time for translation, approval and possible delays in their own schedule
in order to meet the targets.
(I) Intimation of Audit Programme to Audit Entities - Audited entities must be intimated about
the intention of taking up planned performance audit with the scope and extent of audit

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.21

including the constitution of audit team and the tentative time schedule, well before the
commencement of Audit. Acknowledgement of this may be requested and placed on record.
It may be required to refine an audit's objectives as the audit progresses for gathering the
requisite information to fulfill the audit. The reasons for such changes in the objectives should
also be recorded and approved from the competent authority.
The audit programme should be flexible and reviewed from time to time as it is not possible
to anticipate all the contingencies at the early stage.
The Accountant General should share all significant refinements in the approach and
additional tests and findings, concurrently with other audit teams when different persons
conduct the audit at different locations. The system of sharing of the significant field audit
experience should be documented and reviewed.
Illustration 1
The objectives of audit in connection with a State Electricity Distribution Company
were to ascertain whether the:
(i) total cost of providing electricity is being recovered by timely submissions to
the State Electricity Regulatory Comission;
(ii) tariff orders, sales circulars and sales instructions were issued timely, without
any ambiguity. They were implemented in time;
(iii) metering, billing and collection was managed efficiently and effectively;
(iv) monitoring and internal controls were efficient.
What kind of audit is this? Prepare two sample observations which could be part of
the audit report.
This is a performance audit. Sample observations could be:
(i) Non replacement of defective/ burnt meters: Large number of meters, much in
excess of the permitted limit of 1% of the total meters were defective and their
replacement was not completed within the stipulated time of 1 month. This
resulted in billing on average basis for a continuous period of several months.
This could result in losses as well as administrative hassles and disputes with
consumers.
(ii) Under charging of meter rent: As per Schedule of Charges, the Company is
required to charge meter rent of `30 per month for a single phase meter and
`40 per month for three phase meter. It was observed that the Company had
short charged meter rent of `60 lakh from 3 lakh consumers in 5 lakh bills
during the period.

© The Institute of Chartered Accountants of India

 13.22 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Performance Audit Planning

Specimen (abridged) Performance Report issued by

the Comptroller and Auditor General of India
Report No.5 of 2020 (Performance Audit)
Performance Audit on the Merchandise Exports from India Scheme (MEIS) and Service
Exports from India Scheme (SEIS) was conducted to seek an assurance on the success of
facilitation measures introduced for simplifying the process of issuance of scrips and to
examine effective linkage of rules and procedures of the Schemes in Director General of
Foreign Trade (DGFT) Electronic Data Interchange (EDI) system.
This audit covered analysis of pan-India data received from DGFT for the period April 2015 to
October 2018. It was noticed that 5,94,653 (5,84,650 MEIS and 10,003 SEIS) scrips amounting
to `76,416 crore were issued by 38 Regional Authorities (RAs) and Nine Development
Commissioners (DCs) of SEZs. In view of prevalent manual processes, a sample of 25 RAs
(66 per cent of total RAs) and seven DC offices (77 per cent of total DC offices) was selected
for this audit. These 32 units covered 5,53,726 (5,43,803 MEIS and 9,923 SEIS) scrips (93.12
percent) amounting to `72,743 crore (95.19 percent).
Further, in these selected units, 6,205 Scrips (5747 MEIS Scrips and 458 SEIS Scrips),
representing 1.7 per cent of the total scrips in these units, were selected for detailed

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.23

examination. Audit also selected Customs field offices from where exports relating to these
sampled scrips were effected. Results of data analysis carried out on Pan-India data were
suitably included in the report along with audit findings based on examination of the scrips
selected for detailed examination.
Structure of the Report: This report is divided into three chapters. Chapter 1 presents an
overview of both the schemes along with the Audit Objectives, Scope, Sample, Audit Criteria
and Audit Methodology used for conducting this Performance Audit. Chapter 2 presents Audit
Findings, Conclusions and Recommendations relating to gaps in integrating the policy and
procedures of the schemes with the automated module, observed during analysis of pan-
India data and key features of automation. The fact that many of the intermediate procedures
were still being handled manually, necessitated test checks in selected units to examine the
manual checks exercised by the RAs and DC offices. The Audit Findings, Conclusions and
Recommendations relating to manual scrutiny in the randomly selected samples in the
selected units are presented in Chapter 3. As some of the audit findings are based on test
check, there is every likelihood that such errors of omission and commission might exist in
other cases also. Department may therefore, check all the remaining transactions also on the
lines of audit findings reported and take appropriate corrective action.
This report has 48 Audit paragraphs with a revenue implication of `364.32 crores. Of these,
44 observations involving a money value of `233.02 crore have been accepted by the
department and recovery of `7.82 crore has been reported till date in respect of seven
observations. Four paras amounting to `131.30 crore have not been accepted by the
department. Similarly, eight of the total 14 recommendations made in the report, have been
accepted.
Responses received from Department of Commerce (September 2019/March 2020) and
Department of Revenue (October 2019/March 2020) have been included in the report.

8. COMPREHENSIVE AUDIT
The Comptroller and Auditor General assists the legislature in reviewing the performance of public
undertakings. He conducts an efficiency-cum-performance audit other than the field which has
already been covered either by the internal audit of the individual concerns or by the professional
auditors. He locates the area of weakness and extravagance for managements’ information.
The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered areas
are those of investment decisions, project formulation, organisational effectiveness, capacity
utilisation, management of equipment, plant and machinery, production performance, use of
materials, productivity of labour, idle capacity, costs and prices, materials management, sales and
credit control, budgetary and internal control systems, etc.

© The Institute of Chartered Accountants of India

 13.24 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Some of the issues examined in comprehensive audit are:

(a) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is evidence
of extravagance or unnecessary expenditure?
(b) Have the planned production or operational outputs been achieved? Has there been under-
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
(c) Has the planned rate of return been achieved?
(d) Are the systems of project formulation and execution sound? Are there inadequacies? What
has been the effect on the gestation period and capital cost?
(e) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(f) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
(g) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing
costs through technological progress?
(h) If the enterprise has an adequate system of repairs and maintenance?
(i) Are procedures effective and economical?
(j) Is there any poor or insufficient or inefficient project planning?
The Bureau of Public Enterprises has issued guidelines to be followed by the public sector
enterprises in respect of general management, financial management, materials management,
production management, construction management, etc. and these guidelines provide another basis
for appraising enterprise performance and its systems. Another source of criteria is industrial
engineering and other technical studies by internal and external experts and the standards given in
these. Then there are standards of financial propriety.
The starting point of a comprehensive appraisal of a public enterprise, which covers aspects of
economy, efficiency and effectiveness, is the preparation of an audit programme based on the study
of decisions relating to the setting up of the enterprise, its objectives, the areas of operation,
organisation, financial and operational details available in the annual reports and accounts, capital
and operational budgets, deliberations of the board of directors, material in the earlier audit
inspection reports on the enterprise and other relevant available papers. These audit programmes
(or guidelines) identify the areas/aspects which require further detailed audit analysis and criteria,
the data required for such analysis and the sources of such data, the extent of the audit analysis
including the test checks to be applied and the instructions to the audit parties assigned to the work.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.25

9. PROPRIETY AUDIT
Auditing, as a composite concept, looks into accounting and arithmetical accuracy, adherence to
applicable rules and regulations, propriety and the ‘’truth and fairness’’ of the end result. According
to the varied requirements, the emphasis on each of the aforesaid factors differs between various
types of audit. All the requirements of section 143 of the Companies Act, 2013 are also applicable
to a Government Company. The analysis that follows shows that some of the provisions of section
143 really are propriety based. In addition, the Companies (Auditor’s Report) Order, 2020 issued
under section 143(11) of the Companies Act is also applicable to a Government Company, provided
the Government Company belongs to any of the categories of companies to which the Order applies.
Propriety aspects in an audit already exists in the audits carried on by the C&AG.
9.1 Definition and Principles
Propriety audit stands for verification of transactions on the tests of public interest, commonly
accepted customs and standards of conduct.
E.L. Kohler has defined the term propriety as “that which meets the tests of public interest,
commonly accepted customs, and standards of conduct, and particularly as applied to
professional performance, requirements of law, Government regulations and professional
codes”.
On an analysis, the tests boil down to tests on economy, efficiency and faithfulness. Instead of too
much dependence on documents, vouchers and evidence, it shifts the emphasis to the substance
of transactions and looks into the appropriateness thereof on a consideration of financial prudence,
public interest and prevention of wasteful expenditure.
Thus, propriety audit is concerned with scrutiny of executive actions and decisions bearing on
financial and profit and loss situation of the company, with special regard to public interest and
commonly accepted customs and standards of conduct. It is also seen whether every officer has
exercised 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 under similar
circumstances.
In ‘propriety audit’, the auditors try to bring out cases of improper, avoidable, or infructuous
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.
2. For example, a building may be constructed for installing a telephone exchange but
may not be used for the same purpose resulting in infructuous expenditure or a school
building may be constructed but used after five years of its completion is a case of
avoidable expenditure.

© The Institute of Chartered Accountants of India

 13.26 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Audit should, therefore, try to secure a reasonably high standard of public financial morality by
looking into the wisdom, faithfulness and economy of transactions. These considerations have led
to the evolution of audit against propriety which is now being combined by the audit authorities with
their routine function of regularity audit. It is hard to frame any precise rules for regulating the course
of audit against propriety. Such an objective of audit depends for its acceptance on its appeal to the
common sense and straight logic of the auditors and of those whose financial transactions are
subjected to propriety audit. However, some general principles have been laid down in the Audit
Code, which have for long been recognised as standards of financial propriety.
Propriety requires the transactions, and more particularly expenditure, to conform to certain
general principles. These principles are:
(i) that the expenditure is not prima facie more than the occasion demands and that every official
exercises the same degree of vigilance in respect of expenditure as a person of ordinary
prudence would exercise in respect of his own money;
(ii) that the authority exercises its power of sanctioning expenditure to pass an order which will
not directly or indirectly accrue to its own advantage;
(iii) that funds are not utilised for the benefit of a particular person or group of persons and
(iv) that, apart from the agreed remuneration or reward, no other avenue is kept open to indirectly
benefit the management personnel, employees and others.
It may be stated that it is the responsibility of the executive departments to enforce economy in
public expenditure. The function of audit is to bring to the notice of the proper authorities of
wastefulness in public administration and cases of improper, avoidable and infructuous expenditure.
9.2 Relevant Provisions in the Companies Act, 2013
The Parliament and Government, with a view to knowing the standards of efficiency, propriety, cost
consciousness and economy, have also come up with some provisions in the Companies Act, having
direct or indirect bearing on propriety. These provisions are:
1. Section 143(1) requiring enquiry into certain specified matters.
2. Section 143(6) and 143(7) requiring a supplementary audit and test audit respectively in
respect of the Government companies on matters specified.
3. Section 148 relating to Cost Records and Audit.
4. Additional information in Part II of Schedule III.
All these are applicable to Government Companies. The requirement of the provisions of section
143(1) is essentially propriety-oriented as much as some specific dubious practices are required to
be looked into by the auditor. Areas of propriety audit under the provisions of Section 143(1) may
be following:

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.27

(a) Whether the terms on which secured loans and secured advances have been made are
prejudicial to the interests of the company or its members.
It may be appreciated that the terms of loans include such matters as security, interest,
repayment period and other business considerations. The auditor has to inquire whether the
terms are such that they can be adjudged as prejudicial to the legitimate interest of the
company or of its shareholders. This is a process of judging a situation by reference to certain
objective standards or reasonableness whether the terms entered into are prejudicial or not,
not only to the company but also to the shareholders.
(b) Whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company.
This proposition has got to be inquired into by reference to the effects of the book entries,
unsupported by transactions, on the legitimate interests of the company. The auditor has to
exercise his judgment based on certain objective standards. It is also possible that some
transactions may not adversely affect the interests of the company. The auditor has to
judiciously consider what does and does not constitute the interest of the company.
(c) Whether investment of companies, other than a banking or an investment company, in
the form of shares, debentures and other securities have been sold at a price lower
than the cost.
Apparently, this is a matter of verification by the auditor. The intention, however, is not to
know whether loss has occurred due to the sale. The auditor is required to inquire into
circumstances of sale of investments that resulted in loss. Obviously, the duty cast on him is
propriety based, i.e., reasonableness of the decision to sell at a loss. It involves exercise of
judgment having regard to the circumstances in which the company was placed at the time
of making the sale.
(d) Whether loans and advances made by the company have been shown as deposits.
Again, considering the propriety element, rationalizing the proper disclosure of loans
and advance given by company is made.
(e) Whether personal expenses have been charged to revenue.
It is an accepted principle that expenses which are not business expenses should not be
charged to revenue. The effect of charging personal expenses to the business is to distort
the profitability of the company and to secure a personal gain at the cost of the company.
Obviously, propriety is involved in this; charging personal expenses to business account is
highly improper and abusive hence this provision.
(f) In case it is stated in the books and papers of the company that shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash actually received, whether the position in books of account and balance
sheet so stated is correct, regular and not misleading.

© The Institute of Chartered Accountants of India

 13.28 ADVANCED AUDITING AND PROFESSIONAL ETHICS

A control has been set up to verify the receipt of cash in case of allotment of shares for cash.
Further, if cash is not received, whether the books of accounts and statement of affairs shows
the true picture.
Cost records and the provisions of cost audit are designed to inculcate cost consciousness in the
management and to know whether productivity is of acceptable order and whether undue wastage
or loss etc. has occurred. It would be useful to go into some of the specific requirement of cost audit
report in this context. Some of the matters in the additional information sought through the Statement
of Profit and Loss (i.e., Part II of Schedule III) provide a basis for making more searching enquiries
into such vital matters as consumption of raw materials under broad heads, goods purchased under
broad heads, work in progress under broad heads, any item of income or expenditure which exceeds
one percent of the revenue from operations or ` 1,00,000, whichever is higher, etc.
The implications of the Companies (Auditor’s Report) Order, 2020 and the provisions of the section
143(6) and the directions issued by the Comptroller and Auditor General also contain significant
elements of propriety. For CARO 2016 students are advised to refer Chapter 5 on Company Audit.
9.3 Propriety Elements under CARO, 2016
(a) If the company has granted any loans, secured or unsecured, to companies, firms limited
liabilities partnerships or other parties covered in the register maintained under section 189
of the Companies Act, whether the terms and conditions of the grant of such loans are not
prejudicial to the company’s interest, whether the repayment of the principal amount and
interest are stipulated and whether repayments or receipts are regular. For this, the auditor
should take note of repayment schedule. If loan agreements are not executed, any other
equivalent documents may be referred to arrive at the terms of receipt of interest, for example,
letters of understanding, acknowledgement by the party of the terms and conditions
communicated by the company, etc. The dates of receipt of principal amount and interest
thereof needs to be verified with reference to the books of accounts of the company to come
to the conclusion whether such receipts are regular.
(b) If the amount is overdue, state the total amount overdue for more than ninety days, and
whether reasonable steps have been taken by the company for recovery of the principal and
interest. In making this examination, the auditor would have to consider the facts and
circumstances of each case, including the amounts involved. It is not necessary that steps to
be taken must necessarily be legal steps. Depending upon the circumstances, period of delay
and other similar factors, issue of reminders or sending of advocate’s or solicitor’s notice may
amount to reasonable steps. The auditor should ask the management to give in writing the
steps which have been taken. The auditor should arrive at his opinion only after consideration
of the management’s representations.
(c) In respect of loans, investments, guarantees, and security whether provisions of section 185
and 186 of the Companies Act, 2013 have been complied with. If not, provide the details
thereof.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.29

(d) Whether maintenance of cost records has been specified by the Central Government under
section 148(1) of the Companies Act, 2013 and whether such accounts and records have
been so made and maintained.
(e) Whether the company is regular in depositing undisputed statutory dues including provident
fund, employees' state insurance, income-tax, sales-tax, service tax, duty of customs, duty
of excise, value added tax, cess and any other statutory dues to the appropriate authorities
and if not, the extent of the arrears of outstanding statutory dues as on the last day of the
financial year concerned for a period of more than six months from the date they became
payable, shall be indicated; by the auditor. In addition, where dues of income tax or sales tax
or service tax or duty of customs or duty of excise or value added tax have not been deposited
on account of any dispute, then the amounts involved and the forum where dispute is pending
shall be mentioned by the auditor. It may be noted that mere representation to the concerned
Department shall not be treated as a dispute.
(f) If the company has defaulted in repayment of loans or borrowing to a financial institution,
bank, Government or dues to debenture holders? If yes, the period and the amount of default
to be reported (in case of defaults to banks, financial institutions, and Government, lender
wise details to be provided). The auditor should obtain a schedule of repayments to banks,
financial institutions and debenture holders from the management of the company. He should
examine the agreement or other documents containing the terms and conditions of the loans
and borrowings of the company from banks and financial institutions. The auditor should also
examine the debenture trust deed. This examination would enable the auditor in verifying the
amount and due dates of the payments mentioned in schedule of repayments provided by the
management of the company. The auditor should then verify whether the repayments as per
the books of account are in accordance with the terms and conditions of the relevant
agreement. The auditor should also satisfy himself that the repayment have actually been
made to the party concerned.
(g) Whether the term loans were applied for the purpose for which the loans were obtained. The
auditor should examine the terms and conditions subject to which the company has obtained
the term loans. The auditor may also examine the proposal for grant of loan made to the
bank. The auditor should compare the purpose for which term loans were sanctioned with the
actual utilisation of the loans. He should obtain sufficient appropriate audit evidence regarding
the utilisation of the amounts raised.
(h) Whether moneys raised by way of initial public offer or further public offer (including debt
instruments) and term loans were applied for the purposes for which those are raised. If not,
the details together with delays or default and subsequent rectification, if any, as may be
applicable, be reported;
(i) Whether any fraud by the company or any fraud on the Company by its officers or employees
has been noticed or reported during the year; If yes, the nature and the amount involved is
to be indicated;

© The Institute of Chartered Accountants of India

 13.30 ADVANCED AUDITING AND PROFESSIONAL ETHICS

For this, while planning the audit, the auditor should discuss with other members of the audit
team, the susceptibility of the company to material misstatements in the financial statements
resulting from fraud. The auditor should examine the reports of the internal auditor with a
view to ascertain whether any fraud has been reported or noticed by the management. The
auditor should examine the minutes of the audit committee, if available, to ascertain whether
any instance of fraud pertaining to the company has been reported and actions taken thereon.
The auditor should also discuss the matter with other employees of the company.
This reporting for any fraud committed by the company is in addition to the reporting required
under section 143(12) wherein the auditor has to directly report to the central government on
certain types of frauds.
(j) Whether managerial remuneration has been paid or provided in accordance with the requisite
approvals mandated by the provisions of section 197 read with Schedule V to the Companies
Act? If not, state the amount involved and steps taken by the company for securing refund of
the same;
(k) Whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio
of 1: 20 to meet out the liability and whether the Nidhi Company is maintaining ten per cent
unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
(l) Whether the company has made any preferential allotment or private placement of shares or
fully or partly convertible debentures during the year under review and if so, as to whether
the requirement of section 42 of the Companies Act, 2013 have been complied with and the
amount raised have been used for the purposes for which the funds were raised. If not,
provide the details in respect of the amount involved and nature of non-compliance;
(m) Whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so, whether the provisions of section 192 of Companies Act, 2013
have been complied with;
From the above analysis, it is clear that under the Companies Act, we already have tools which bring
about a blending of propriety audit. However, a word of caution is necessary in this context. The
audit conducted by the C&AG is a rule, procedure and propriety-based one; and often it is said that
the desired flexibility is lacking in the system and this has contributed in a large measure to the lack
of rapport between the auditor and the audit-units. Honesty is open to question, if that honesty has
deviated from laid down rules and procedures. In turn, this has tended to foster a tendency amongst
Government officials to just conform to the rules and provide a show of compliance with the
standards of propriety. This is not intended to be little the contribution of this audit in ensuring
appropriate use of fund of the Government. In Government, because of the enormous amounts
involved and the massive volume of transactions and in view of public interest, it is but necessary
that compliance with rules should be insisted upon and non-compliance enquired into. But the benefit
derived is at least partly offset by the element of distrust and often the truth remains buried.

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.31

As mentioned earlier, excepting the directions of the C&AG under the Companies Act, the rest of
the provisions are applicable equally to Government and Non-Government companies. Whatever
elements of propriety are discernible in them are also present in the audit of Non-Government
companies. The directions generally known as C&AG’s directions, however, are exclusively
applicable to the audit of Government companies.
Propriety Audit-Problems - Problems in propriety audit, however, arise mainly because of its
distinct nature. The expression “propriety” is a moral term and can be understood by reference to
the concept of morality accepted by the society at a given time. In any auditing, the essential test
lies in formulation of auditing propositions. In the audit of financial accounts by reference to financial
and legal requirements, propositions are built up about happening of events, existence, accuracy,
title, ownership, compliance with law and internal regulations etc., which are all verifiable. In
propriety audit the formulation of verifiable auditing propositions poses the problem.
Propriety audit has an inherent element of subjectivity because it is very difficult to establish
standards of public interest, commonly accepted customs, standards for conduct which are not firm
basis for audit evaluation. To take care of this situation, the C&AG has developed the norms of
propriety for expenditure of public funds in our country. By laying down the standards of propriety
for Government expenditure the C&AG has really tried to tackle in a practical way the complex
problem of subjectivity inherent in a situation calling for propriety consideration.
The norms so developed provide the basis of verifying expenditure incurred by various Government
departments. It may be appreciated that the norms of propriety applicable to governmental
transactions may not ipso facto apply to transactions of private sector which have distinct and more
limited, objectives suited to them. Each private sector entity may have its unique objectives related,
to its management philosophy and the transactions should be geared to achieve those. For example,
a management which is operating for maximization of profits without infringing, any legal regulations
may follow certain policies while another management believing in a wider measure of social justice
may follow different policies. Despite these clear angularities, certain commonness can also be
discerned in the policies and approaches of different managements. They include efficient
operations, higher productivity and higher profit, reduction of wasteful expenditure etc. Above all,
each entity has its impact on the society and building up propriety audit propositions becomes of
paramount importance.
It is felt that if the management of each entity, irrespective of any legal requirements, formulates
norms of propriety for the entity, taking full note of wider social repercussions inherent in its
operations; a formidable hurdle in the way of wider introduction of propriety audit can be removed.
The element of subjectivity in propriety evaluation will get reduced.
Propriety as a moral element should be a matter of evaluation based on objectives and prevailing
circumstances. For example, a travel by air as such should not be considered wasteful unless it is
proved that a travel by rail would have been feasible in the circumstances and would have brought
the same results brought by the air travel.

© The Institute of Chartered Accountants of India

 13.32 ADVANCED AUDITING AND PROFESSIONAL ETHICS

The element of subjectivity has sometimes resulted in proper discharge of duty very delicate and
which demands discretion, but wisdom of taking commercial decisions under dynamic environment
(the economic, social and political) must be evaluated with reference to the circumstances in which
these were taken (and not on hindsight) and therefore, the auditor in his field must reconstruct such
circumstances. The judgment of the auditor must be objective as otherwise it would dampen the
initiative of management and others in taking commercial decisions and propriety audit would prove
itself to be counter-productive.

10. AUDIT REPORT OF THE COMPTROLLER AND

AUDITOR GENERAL
To facilitate a proper consideration, the reports of the C&AG on the audit of PSUs are presented to
the Parliament in several parts consisting of the following:
(a) Introduction containing a general review of the working results of Government companies,
deemed Government companies and corporations;
(b) Results of comprehensive appraisals of selected undertakings conducted by the Audit Board;
(c) Resume of the company auditors’ reports submitted by them under the directions issued by
the C&AG and that of comments on the accounts of the Government companies; and
(d) Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.
For certain specified states, the C&AG submits a separate audit report (commercial) to the
legislature, while for other States/Union Territories with legislature, there is a commercial chapter in
the main audit report. The State audit reports, contains both the results of audit appraisal of
performance of selected companies/corporations as well as important individual instances of
financial irregularities, wasteful expenditure, system deficiencies noticed by the statutory auditors,
and a general review of the working results of Government companies and corporations.

TEST YOUR KNOWLEDGE

Theoretical Questions
1. What are the principles involved regarding “Propriety audit’ in the case of Public Sector
Undertaking?
2. Write a short explanatory note on –
(a) Areas of propriety audit under Section 143(1) of the Companies Act, 2013.
(b) Role of C&AG in the Audit of a Government company.
3. ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance
audit of a Sugar Industry. What factors should be considered by ABG & Co., while planning
a performance audit of Sugar Industry?

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.33

4. Sunlight Limited is a public sector undertaking engaged in production of electricity from solar
power. It had commissioned a new project near Goa with a new technology for a cost of
` 5,750 crore. The project had seen delay in commencement and cost overrun. State the
matters that a Comprehensive Audit by C&AG may cover in reporting on the performance
and efficiency of this project.
5. Ceta Ltd. is a company in which 54% of the paid up share capital is held by Rajasthan
Government. The company is engaged in the business of providing consultancy services in
relation to construction projects. The audit of the financial statements of Ceta Ltd. for the
financial year ended 31 March 2020 got completed with lot of intervention of Comptroller &
Auditor General of India, wherein C&AG was giving directions to the auditors on the manner
in which audit should be conducted in respect of certain areas. Further, it also received
comments from C&AG on the audit report of the auditors. Ceta Ltd is seeking advice to go
against C&AG so that they can avoid unnecessary interference of C&AG. You are required
to advise Ceta Ltd. with respect to role of C&AG in the audit of a Government company.
6. “A performance audit is an objective and systematic examination of evidence for the purpose
of providing an independent assessment of the performance of a government organization,
program, activity, or function in order to provide information to improve public accountability
and facilitate decision-making by parties with responsibility to oversee or initiate corrective
action.” Briefly discuss the issues addressed by Performance Audits conducted in accordance
with the guidelines issued by C&AG.
7. BT Ltd , a company wholly owned by central government was disinvested during the previous
year, resulting in 40% of the shares being held by public. The shares were also listed on the
BSE. Since the shares were listed, all the listing requirements were applicable, including
publication of quarterly results, submission of information to the BSE etc.
Sam, the FM of the company is of the opinion that now the company is subject to stringent
control by BSE and the markets, therefore the auditing requirements of a limited company in
private sector under the Companies Act 2013 would be applicable to the company and the
C&AG will not have any role to play. Comment.
8. You have been appointed as auditor of AKY Ltd. After having determined the audit objectives,
now you have been requested to draft audit criteria. What are the sources that you will use
while doing the task?
Answers to Theoretical Questions
1. Companies Act, lays down special provisions regarding audit of accounts of public sector
undertakings registered as Government Companies. Section 143 of the Companies Act, 2013
empowers C&AG to conduct supplementary or test audit. Audit of public enterprises in India
is not restricted to financial and compliance audit; it extends also to efficiency, economy and
effectiveness with which these operate and fulfill their objectives and goals. Another aspect
of audit relates to questions of propriety; this audit is directed towards an examination of

© The Institute of Chartered Accountants of India

 13.34 ADVANCED AUDITING AND PROFESSIONAL ETHICS

management decisions in sales, purchases, contracts, etc. to see whether these have been
taken in the best interests of the undertaking and conform to accepted principles of financial
propriety. Propriety audit stands for verification of transactions on the tests of public interest,
commonly accepted customs and standards of conduct. On an analysis, these tests boil down
to tests of economy, efficiency and faithfulness. Instead of too much dependence on
documents, vouchers and evidence, it shifts the emphasis to the substance of transactions
and looks into the appropriateness thereof on a consideration of financial prudence, public
interest and prevention of wasteful expenditure. Thus, propriety audit is concerned with
scrutiny of executive actions and decisions bearing on financial and profit and loss situation
of the company, with special regard to public interest and commonly accepted customs and
standards of conduct. It is also seen whether every officer has exercised 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 under similar circumstances. Some
general principles have been laid down in the Audit Code, which have for long been
recognised as standards of financial propriety. Audit against propriety seeks to ensure that
expenditure conforms to these principles which have been stated as follows:
(i) The expenditure should not be prima facie more than the occasion demands. Every
public officer is expected to exercise the same vigilance in respect of expenditure
incurred from public moneys as a person of ordinary prudence would exercise in
respect of expenditure of his own money.
(ii) No authority should exercise its powers of sanctioning expenditure to pass an order
which will be directly or indirectly to its own advantage.
(iii) Public moneys should not be utilised for the benefit of a particular person or section
of the community.
(iv) Apart from the agreed remuneration or reward, no other avenue is kept open to
indirectly benefit the management personnel, employees and others.
It may be stated that it is the responsibility of the executive departments to enforce economy
in public expenditure. The aim of propriety audit is to bring to the notice of the proper
authorities of wastefulness in public administration and cases of improper; avoidable and
infructuous expenditure.
2. (a) Areas of Propriety Audit under Section 143(1): Section 143(1) of the Companies
Act, 2013 requires the auditor to make an enquiry into certain specific areas. In some
of the areas, the auditor has to examine the same from propriety angle as to -
(i) whether loans and advances made by the company on the basis of security
have been properly secured and whether the terms on which they have been
made are prejudicial to the interests of the company or its members;

© The Institute of Chartered Accountants of India

 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 13.35

(ii) whether transactions of the company which are represented merely by book
entries are prejudicial to the interests of the company;
(iii) where the company not being an investment company or a banking company,
whether so much of the assets of the company as consist of shares, debentures
and other securities have been sold at a price less than that at which they were
purchased by the company;
(iv) whether loans and advances made by the company have been shown as
deposits;
(v) whether personal expenses have been charged to revenue account;
(vi) where it is stated in the books and documents of the company that any shares
have been allotted for cash, whether cash has actually been received in respect
of such allotment, and if no cash has actually been so received, whether the
position as stated in the account books and the balance sheet is correct, regular
and not misleading.
A control has been set up to verify the receipt of cash in case of allotment of shares
for cash. Further, if cash is not received, whether the books of accounts and statement
of affairs shows the true picture.
(b) Role of C&AG in the Audit of a Government company: Role of C&AG is prescribed
under sub section (5), (6) and (7) of section 143 of the Companies Act, 2013.
In the case of a Government company, the comptroller and Auditor-General of India
shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 i.e.
appointment of First Auditor or Subsequent Auditor and direct such auditor the manner
in which the accounts of the Government company are required to be audited and
thereupon the auditor so appointed shall submit a copy of the audit report to the
Comptroller and Auditor-General of India which, among other things, include the
directions, if any, issued by the Comptroller and Auditor-General of India, the action
taken thereon and its impact on the accounts and financial statement of the company.
The Comptroller and Auditor-General of India shall within sixty days from the date of
receipt of the audit report have a right to:
(i) conduct a supplementary audit of the financial statement of the company by
such person or persons as he may authorize in this behalf; and for the purposes
of such audit, require information or additional information to be furnished to
any person or persons, so authorised, on such matters, by such person or
persons, and in such form, as the Comptroller and Auditor-General of India may
direct; and
(ii) comment upon or supplement such audit report.

© The Institute of Chartered Accountants of India

 13.36 ADVANCED AUDITING AND PROFESSIONAL ETHICS

It may be noted that any comments given by the Comptroller and Auditor-
General of India upon, or supplement to, the audit report shall be sent by the
company to every person entitled to copies of audited financial statements
under sub-section (1) of section 136 i.e. every member of the company, to every
trustee for the debenture-holder of any debentures issued by the company, and
to all persons other than such member or trustee, being the person so entitled
and also be placed before the annual general meeting of the company at the
same time and in the same manner as the audit report.
Test Audit: Further, without prejudice to the provisions relating to audit and
auditor, the Comptroller and Auditor- General of India may, in case of any
company covered under sub-section (5) or sub-section (7) of section 139, if he
considers necessary, by an order, cause test audit to be conducted of the
accounts of such company and the provisions of section 19A of the Comptroller
and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971,
shall apply to the report of such test audit.
3. Factors to be considered while planning the Performance Audit: Refer Para 7.3.
4. Refer Para 8.
5. Refer Para 4.
6. Refer Para 7.
7. Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company
in which not less than 51% of the paid-up share capital is held by the Central Government or
by any State Government or Governments or partly by the Central Government and partly by
one or more State Governments, and includes a company which is a subsidiary company of
such a Government company. The auditors of these government companies are firms of
Chartered Accountants, appointed by the Comptroller & Auditor General, who gives the
auditor directions on the manner in which the audit should be conducted by them. The listing
of company’s shares on a stock exchange is irrelevant for this purpose and hence Sam’s
opinion is not correct.
9. Refer Para 7.3.

© The Institute of Chartered Accountants of India