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AUDIT AND SETTLEMENT OF

AUDIT OBSERVATIONS

IFTIKHAR AHMAD
DIRECTOR GENERAL
AUDIT WORKS (PROVINCIAL)
LAHORE
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 AUDITING
1. Definition
Audit is an independent examination of the
financial statements of an organization /
enterprise by an appointed auditor in pursuance
of his appointment and in compliance with the
relevant statutory obligations.

In general, audit is a mechanism within the

process of accountability where the performance
of the resources of an organization is checked on
behalf of interested parties.

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2. Origin of Audit

3. Objectives of Auditing
i. Detection of errors and omissions.

ii. Detection of loss caused to the organization by reason

of fraud.

iii. Expression of independent opinion on accounting.

iv. Moral check.

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4. Scope of Audit

The scope of auditing depends on

many things like:
i. Constitutional Provisions.
ii.Statutory obligations.
iii.Regulations of relevant entity.
iv.Terms of reference defined in the
letter of engagement.

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5. Types of Audit
i. Internal Audit (Audit conducted by the Internal Auditors)

ii. External Audit (Audit conducted by the External Auditors)

iii. Performance Audit (About the performance of the organization)

iv. Certification Audit (Certification of Accounts).

v. System based Audit (To review the working of internal control)

vi. Policy Audit (Economic, financial and social costs of govt. policies)

vii. Management Audit (Audit the decisions of management)

viii.Programme Audit (Audit of Projects)

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6. List of Auditable Documents
i. Cash book
ii. Stock Register
iii. Pay bills / Acquaintance Rolls
iv. Contingent Register
v. Service Books
vi. Log Books
vii. Contingent Bills
viii. Auction File
ix. Monthly Expenditure Statement

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7. Qualities of an Auditor
i. Professional Knowledge
ii. Integrity
iii. Intelligence and tact
iv. Impartiality
v. Courtesy
vi. Confidentiality

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7. Qualities of an Auditor (conti….)
vii. Vigilance
viii. Positive attitude
ix. Diligence
x. Communication Skill

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8. Audit Procedure (How Audit Paras are Prepared?)
i. Audit & Inspection Report (AIR) a result of an audit activity.

ii. Ordinary Paras and Advance Paras

iii. Proposed Draft Paras

iv. Draft Paras and Audit Report

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9. Nature of Audit Observations
i. Misappropriation (embezzlement)

ii. Recoverable

iii. Overpayments

iv. Violation of Rules

v. Non-Production of Records

vi. Others

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10. Settlement of Audit Paras

i. DAC (Departmental Accounts Committee)

ii. SDAC (Special Departmental A/cs Committee)

iii. PAC (Public Accounts Committee)

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i. DAC (Departmental Accounts Committee)
It is constituted by the orders of the President, in case of
Federation and by the Governor, in case of Province.

Brief History of DAC:

The first DAC in Punjab was constituted in Nov.1959 by the
orders of the Governor West Pakistan. The same orders were
reiterated in Dec.1982 for strict compliance.

Purpose of DAC:
Prompt action by the department for attendance /
settlement of irregularities notices in audit and reported in
Inspection Reports issued by the Audit Department.

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Members of DAC in Punjab
i. Secretary to the Govt. of the concerned department (Chairman)

ii. A representative of Finance Department (Member)

iii. A representative of the Audit Department concerned (Member)

iv. If the Secretary is unable to preside over the meeting, the

Additional Secretary / Deputy Secretary of the Department should
chair the meeting.

v. The participation of the representative of Administrative Secretary

not below the rank of Deputy Secretary is essential.

vi. The notice and working papers for the meeting should be sent to
Audit Office concerned at least a week before the date of meeting.
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Meeting of the DAC
Periodic meeting of each of each committee will be
convened by the chairman at regular intervals in connection
with Finance Department and Audit Department concerned.

Function of DAC
i. The Committee will examine the irregularities pointed out by
Audit through their Inspection Reports or otherwise and
recommend action to be taken in respect of irregularities.

ii. It will be the duty of Secretary of the Administrative

Department concerned to obtain Govt. orders ordinarily
within one month of the date of recommendation made by
the Committee.

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SDAC: (Special Departmental Accounts Committee)

Purpose:
Prompt action by the department for attendance /
settlement of Advance Paras / Proposed Draft Paras.

Members:
i. Secretary or Additional Secretary of the Department
concerned. (Chairman)

ii. A representative of the Finance Department of

appropriate level. (Member)

iii. A representative of the Audit Department of appropriate

level. (Member)

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Working Papers:

i. Working paper of at least 25 Audit Papers.

ii. Working paper duly supported by relevant support

documents will be submitted to the Director General
Audit concerned.

iii. Working paper should contain a certificate that no

Draft Paras has been included therein.

iv. Settlement of paras takes place if the department

shows compliance.

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PAC: (Public Accounts Committee)
Constitutional Role of PAC
i. The main function of the PAC Committee is to see that the
money granted by the legislature has been spent by the
executive within the scope of the demand. The Committee
has, therefore, to satisfy itself by:

a. The money recorded as spend against the grant was

actually spent and was not larger than the amount
granted.

b. The money has not been spent for a purpose not

approved by the legislature.

c. There are no other irregularities in the spending of the

public money by the executive.

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ii. Where the Auditor General Audit Accounts
of receipts and of stores and stocks, the
Committee also considers the audit report
there on in much the same details as in
the case of expenditure. The commercial
Accounts of the Public Commercial and
Industrial Organizations are also
considered in the same way.

iii.The committee has the power to examine

the representatives of the departments
concerned and to summon the officers
move directly responsible, where
necessary.
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iv.The Committee is entitled to offer
criticism and recommendations
upon any matter discussed in the
appropriation accounts or in the
audit report thereon;

v. The report and recommendations of

the Committee are discussed in the
National Assembly / Provincial
Assembly.

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Limitations of Audit
i. Advisory role.
ii. No authority to penalize the auditee.
iii. Orthodox methods of auditing.
iv. Incompetent audit staff.
v. Late consideration of Audit Report in PAC
vi. Element of corruption / dishonesty by the
auditors.
vii. Non-availability of facilities incentives to
the Auditors.
viii. Non-availability of safety protection
against threats from auditees especially
Police Deptt.
ix. Efficiency of the Auditors depends on the
number of paras not on quality of paras. 21
Appropriation Accounts

The Appropriation Accounts and the

Report thereon consist of the Appropriation
Account proper and the Audit Report
thereon. The Audit Report giver the general
view of the results of audit and draws
attention to important matters, if any,
outstanding from the previous Reports. The
Appropriation Accounts proper consist of: -

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a). a grand summary giving a general view of the
total expenditure under each Grant / Appropriation
compared with the total Grant / Appropriation
sanctioned there under.
b). audited accounts of all the expenditure of the
year, whether “Authorized” or “Charged” in the
form of a separate appropriation account for each
Grant / Appropriation, with any important
observations which it is considered necessary to
make as a result of audit investigation, and
c). the financial irregularities, including cases
relating to any previous year that become ripe for
inclusion since the last report was written, which
are of sufficient consequence to justify inclusion.

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Finance Accounts
The Finance Accounts and Report thereon deal with
the Accounts of the Province as a whole including
transactions relating to debt, deposits, sinking funds,
advances suspense accounts and remittance business
and general financial matters that do not strictly fall within
the functions of the Public Accounts Committee as laid
down in rule 15 of the rules of Procedure of the Provincial
Assembly of the Punjab which have been reproduced in
Part II of Appendix A. This document though laid before the
Provincial Assembly is not referred to the Public Accounts
Committee. After it is laid before the Provincial Assembly,
the Finance Department should examine it and take action
wherever it is called for and report the action taken to
Accountant General, Punjab.

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Statutory Obligations of Audit
The private registered companies are legally
bound to get their accounts audited from
independent auditors. The government accounts
are audited by the Auditor General of Pakistan.
The Auditor General of Pakistan is appointed
under Article 68 of the Constitution of Pakistan.
He is responsible for keeping the accounts of
federation and each province other than
departmentalize offices like Defence, Railway,
Postal Services, Pakistan Telecommunication,
Pakistan Mint, National Savings, Foreign Affairs,
Food Wing, Forest, Pak PWD.
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Duties / Functions / Powers of the Auditor General of Pakistan

1. It shall be the duty of Auditor General to: -

i. Audit all the expenditure and ascertain that

the money is legally available and
expenditure conform to the authority;

ii. Audit all transactions of public accounts of

the federation and each province;

iii. Audit all trading, manufacturing and profit &

loss account and balance sheets; and

iv. Audit the accounts of any body or authority

of federation and provinces.
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2. Auditor General may audit and report on:-
i. The receipts of any department.
ii. The accounts of stores & stocks.
The Auditor General has the power to inspect any
treasury or office (Para-15 of A&A Order- 1973).
3. The Auditor General has the power to call for any
information from any office under this jurisdiction.
4. Auditor General can frame Rules and to give
directions in all matters to audit of expenditure,
transactions and accounts. These directions,
methods and extent of audit are contained in the
codes and manuals.

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Settlement of Audit paras in District Government Financial System
Under Local Government Ordinance 2001, Article 115 deals with audit
of the District Govt.

1. The Director Local Fund Audit shall conduct regular annual audit of
the Local Funds and the Director-General Audit of the Province
shall undertake audit of the District, Tehsil and Town Provincial
Accounts during a financial year.
2. Upon request of a Nazim, the Provincial Director, Local Fund Audit,
shall cause to be conducted an audit of the respective Local Fund.
3. Upon request of a Zila Nazim, Tehsil Nazim or Town Nazim the
Director-General Audit of the Province shall cause the audit of
District Provincial Account, Tehsil Provincial Account or, the case
may be, Town Provincial Account and shall forward his report to
the concerned Nazim and Council.
4. The report of the Local Fund Audit shall be placed before the
concerned Nazims and the Accounts Committee of the respective
Councils for necessary action.

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5. The Provincial Director-General Audit shall conduct
the external audit of each District Government,
Tehsil Municipal Administration, Town Municipal
Administration and Union Administration, in the prescribed
manner, once in a financial year and place the report
before the Public Accounts Committee of the
Provincial Assembly and the Accounts Committee of
the respective Council.
6. The Local Government Commission of a Province
may cause for a special audit of the accounts of a
local government as provided for in section 132.
7. The Provincial Director-General Audit or an officer
appointed by him, or Director, Local Fund Audit for
conducting an audit of a local government and shall have
access to all the books and documents pertaining to the
accounts, and may also examine any member, servant or
premises of the local government concerned.
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How to avoid Audit Objections & Financial Irregularities

i. be well versed with financial rules.

ii. Expenditure be incurred within the valid sanction.

iii. Availability of budget be ensured.

iv. Documentation be proper.

v. Proper maintenance of Accounts record be ensured.

vi. Internal audit be started in the organization.

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vii. Up-dation of budgetary figures with the
Headquarter be ensured.
viii. Purchase procedure laid down by the
department be followed.
ix. Audit observations once taken by the audit
in a year should be repeated next year.
x. Reply of audit observations be given within
stipulated period.
xi. Follow the advisory remarks of the audit
about the organization.
xii. Expenditure be made in the public interest.

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 Advantages of Auditing

1. Detection and prevention of errors and frauds become easier

2. Audited accounting information, greater reliability and

authenticity

3. Acceptability by the authorities

4. Speedy processing of loans

5. Settlement of disputes in partnership

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 Advantages of Auditing (cont….)

6. Facilitates calculations of net worth and good will of business

7. Professional advice available

8. Settlement of issuance claims

9. Useful to compare the financial performance

10.Keeps accounts department vigilant

11.Identifies the weak areas

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 Audit Exercise

Mr. ABC is working as DDO in an organization. What

steps he should exercise while making the budgetary

spending under each head in his office?

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 Solution

1. Provision of funds

2. Sanctions of expenditures

3. Claims on proper format

4. Period of sanction

5. Rules of payment

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 Solution (Conti…..)

6. Payment mode (cheque or cash)

7. Classification of expenditure

8. Payment on prescribed rates

9. Accounting of payments

10.Reconciliation with accounts office

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Thank
You
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