16 AUDIT OF PUBLIC SECTOR UNDERTAKINGS (PSU)

 CATEGORIES FOR ORGANIZATION OF PSUS

1. DEPARTMENTALLY MANAGED UNDERTAKINGS

 which form part & parcel of Government activities.
 For Ex-Indian Railways, Postal Services, Security Printing Press, CSD.
2. GOVERNMENT COMPANIES & DEEMED GOVERNMENT COMPANIES,
 Set up under the Companies Act, 2013
3. CORPORATIONS SET UP UNDER SPECIFIC ACTS of legislature.
 For example- LIC, UTI, etc.

 FRAMEWORK FOR GOVERNMENT AUDIT

1. GOVERNMENT COMPANY-Sec-2(45) of Co. Act, 2013

 Not less than 51% of paid-up share capital is held by CG/SG/partly by CG & partly by one
or more SG, & Subsidiary of such Govt. company.
2. PERFORMED BY C&AG (Indian Audit & Accounts Department).
3. ROLE OF C&AG-Article 148 to 151 of Constitution prescribes
A. Article 148-
 Appointment of C&AG by President.
 Special procedure for removal of C&AG, only on ground of proven
misbehaviours/incapacity.
 Salary & other conditions of service to be determined by Parliament.
 Hold office- 6 YEARS OR UP TO AGE OF 65 YEARS, WHICHEVER IS EARLIER
B. Article 149-
 C&AG’s (Duties, Powers & Conditions of Service) Act, 1971 defines powers & duties
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 C. Article 150-
 On advice of C&AG, President to prescribe such form in which a/c of Union & States
shall be kept
D. Article 151-
 Audit reports of C&AG should be submitted to President/Governor-laid before
Parliament/State Legislative Assemblies
4. ORGANIZATIONS SUBJECT TO AUDIT OF C&AG, INCLUDES-
 All Union & State Govt. departments & offices + Indian Railways & Posts &
Telecommunications.
 Public commercial enterprises controlled by Union & State Govt., i.e., Govt. Companies &
Corporations.
 Non-Commercial Autonomous Bodies & authorities owned/controlled by Union/States.
(ICAI/ICSI/UPSC-union public service commission/Election Commission)
 Authorities & bodies substantially financed from Union or State revenues.

 ANNUAL ACCOUNTS & AUDIT REPORTS THEREON ARE REFERRED FOR SCRUTINY BY
SPECIALIZED COMMITTEES

1. PUBLIC ACCOUNTS COMMITTEE (PAC) - (control over govt. dept.)

 Functions of committee are to examine-

1) That moneys were disbursed for purpose to which they
were applied.
2) That expenditure incurred was authorized.
3) That re-appropriation has been made as per provisions (i.e.,
Distribution of funds)
4) Statement of A/c’s of autonomous & semi-autonomous
bodies audited by C&AG.

2. ESTIMATES COMMITTEE

 Functions of committee are to examines estimates with view to-

1) Report Economies, improvements, efficiency, consistent with policy may be affected
2) Suggest alternative policies
3) Examine whether money is well laid out within limit &
4) Suggest form in which estimates shall be presented to
Parliament

3. COMMITTEE ON PUBLIC UNDERTAKINGS (COPU)- (control over PSU’s)

 Functions of Committee are

1) Examine reports & accounts of public undertakings.
2) Examine reports of C&AG on public undertakings.
3) Examine autonomy & efficiency of public undertakings &

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 4) See they are managed as per sound biz principles & prudent commercial practices.
5) Exercise functions vested in PAC & Estimates Committee not covered above.

 OBJECTIVE & SCOPE OF PUBLIC ENTERPRISES AUDIT

 Financial Audit- Expression of opinion on financial statements.
 Compliance Audit- Compliance of statutory & legal requirements w.r.t. financial transactions.
 Performance Audit-
 Systematic examination of evidence &
 Independent assessment of performance in order
 Improve public accountability &
 Decision making for initiating corrective action.
 Propriety Audit- Verification of transactions on test of
public interest, commonly accepted customs & standards of conduct.
 Comprehensive Audit- It involves assessing overall appraisal of a public enterprise, which
covers aspects of economy, efficiency & effectiveness.
 Organization’s Decision to be taken by Competent Authority- Examining decisions of
Management were taken by competent authority.
 Helping Government- Purpose of audit of public enterprises is to help Government by
bringing out financial & operational deficiencies etc. & identifying their causes.
 Highlighting Issues of Efficient & Economic Operations
 Fiscal Accountability- It includes audit of provisions of funds, sanctions, compliances &
propriety.
 Managerial Accountability- It includes audit of efficiency, economy & effectiveness-This is
often referred to as efficiency-cum-performance audit.

 ELEMENTS OF PSU AUDITS

1) 3 PARTIES- AUDITOR, RESPONSIBLE PARTY & INTENDED USERS.

a) AUDITOR-Role of auditor is fulfilled by C&AG-
 Like Supreme Audit Institution of India & by its personnel
 delegated with duty of conducting audits. (Indian Audit & Accounts
Dept)
b) RESPONSIBLE PARTY
 Auditable entities & TCWG of auditable entities would be responsible parties.
c) INTENDED USERS- Individuals, Organizations /classes thereof for whom auditor prepares
audit report.

2) SUBJECT MATTER, CRITERIA & SUBJECT MATTER INFORMATION.

a) SUBJECT MATTER- Refers to info, condition/activity that is measured/evaluated against

certain criteria.
b) CRITERIA- Benchmarks used to evaluate subject matter.

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 c) SUBJECT MATTER INFO- Refers to outcome of evaluating/measuring subject matter against
criteria.

3) TYPES OF ENGAGEMENT-

a) ATTESTATION ENGAGEMENTS- In attestation engagements,

 Responsible party measures subject matter against criteria &
 Presents it based on which auditor gather SAAE to provide basis for expressing
conclusion.
 Financial audits are attestation engagements, as are based on financial info of responsible
party.

b) DIRECT REPORTING ENGAGEMENT-

 Auditor measures/ evaluates subject matter against criteria.
 Performance audits & compliance audits are generally direct reporting engagements.

 PRINCIPLES OF PSU AUDITS

1) GENERAL PRINCIPLES-
 Ethics & Independence, Professional Judgement, Due Care & Skepticism, Quality Control,
Audit Team Management & Skill, Audit Risk, Materiality, Documentation & Communication.

2) PRINCIPLES RELATED TO AUDIT PROCESS-

a) PLANNING AUDIT
 Establish terms of audit.
 Obtain understanding of entity.
 Conduct Risk assessment of problem analysis.
 Identify risks of fraud.
 Develop audit plan
b) CONDUCTING AUDIT
 Perform planned audit procedures to obtain audit evidence.
 Evaluate audit evidence & draw conclusions
c) REPORTING & FOLLOW-UP
 Prepare report based on conclusions reached.
 Follow-up on reported matters as relevant

 AUDIT OF GOVERNMENT COMPANIES (POWERS OF C&AG)

1) APPOINTMENT OF AUDITORS U/S 139(5) & 139(7) READ WITH SEC-143(5) OF CO. ACT, 2013-
1) Appointment of auditor by C&AG as per Sec-139(5) or 139(7) +
2) Directions by C&AG, manner in which a/c shall be audited +

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 3) Submission of Auditor's Report to C&AG including-
a) Directions issued, if any
b) Action taken thereon
c) Impact on Accounts

2) SUPPLEMENTARY AUDIT U/S 143(6)(A) OF CO. ACT, 2013 –

 C&AG shall within 60 days from date of receipt of audit report
 have right to conduct supplementary audit of Financial Statements of govt. company
 by such person/persons as he may authorize in this behalf
 He may require information or additional information to be furnished on such matters &
 in such form as C&AG may direct.

3) COMMENT UPON/SUPPLEMENT SUCH AUDIT REPORT U/S 143(6)(B) OF COMPANIES ACT,

2013-
 Comments-sent by Company to every person entitled to copies of audited Financial
Statements u/s 136(1) of said Act.

4) TEST AUDIT U/S 143(7) OF THE COMPANIES ACT, 2013 –

 C&AG may by an order,
 Cause test audit to be conducted of accounts of Government company &
 Provisions of Sec-19A of C&AG (Duties, Powers & Conditions of Service)
Act, 1971,
 Apply to report of such test audit.

 FINANCIAL AUDIT
 Financial audit is primarily conducted to-
 EXPRESS an OPINION ON THE FINANCIAL
STATEMENTS &
 ENHANCE the DEGREE OF CONFIDENCE of INTENDED
USERS in financial statements .

 COMPLIANCE AUDIT

1) INDEPENDENT ASSESSMENT of whether-

 Given subject matter is in compliance with applicable authorities identified as criteria.
Compliance audit is carried out by assessing whether -
 Activities, financial transactions & info
 Comply in all material respects with regulatory & other authorities which govern audited
entity.
2) Compliance audit is concerned with-
a) REGULARITY -
 Compliance of subject matter to formal criteria resulting from
 Relevant laws, regulations & agreements applicable to entity.

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 b) PROPRIETY -
 General principles governing sound financial management & ethical conduct of public
officials.
3) PERSPECTIVE OF COMPLIANCE AUDIT- (PFI)
 It can be part of combined audit & generally it is conducted either-
a) In combination with Performance auditing or
b) In relation with audit of Financial Statements or
c) Separately as Individual compliance audits.

 PERFORMANCE AUDIT
a) Objective & systematic examination of evidence
b) For purpose of providing independent assessment of performance of
 Government organisation/ program/ activity/ function
c) Improve public accountability & facilitate decision-making by parties
 with responsibility to oversee or initiate corrective action.

PERFORMANCE AUDITS USUALLY ADDRESS ISSUES OF-

1) ECONOMY -
 It is minimizing cost of resources used for activity,
 Having regard to appropriate quantity, quality & best price.

2) EFFICIENCY -
 input-output ratio.
 Achieved when output is maximized at minimum of inputs, OR
 input is minimized for given quantity & quality of output.
AUDITING EFFICIENCY EMBRACES ASPECTS SUCH AS WHETHER-
 Sound procurement practices are followed
 Resources are properly protected, maintained & efficiently used
 Efficient operating procedures are used &
 Objectives of public sector programmes are met cost-effectively.

3) EFFECTIVENESS -
 It is extent to which objectives are achieved &
 Relationship between intended impact & actual impact of
activity.
AUDITING EFFECTIVENESS EMBRACES ASPECTS SUCH AS-
 Determine extent to which program achieves desired level of
program results
 Assess effectiveness of the program &/or of individual program
components

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  Determine whether Management has considered
 Alternatives for carrying out program that might yield desired results more
effectively/at lower cost
 Assess adequacy of Management Control system
 For measuring, monitoring & reporting programme's effectiveness
 Assess compliance with laws & regulations applicable to program.

PLANNING FOR PERFORMANCE AUDIT-

Factors to be considered while planning Performance Audit-

1) UNDERSTANDING ENTITY/PROGRAMME -
 Starting point for planning individual
performance audit.
2) DEFINING OBJECTIVES OF AUDIT –
 Ensure good quality performance
audits.
 It facilitates clarity, demonstrates
consistent quality of audit &
 Serves as measure of quality
assurance of audit.
3) DEFINING SCOPE OF AUDIT - Mainly focuses on Nature, Timing & Extent of audit.
4) DETERMINING AUDIT CRITERIA - Standards used to determine program meets expectations
5) DECIDING AUDIT APPROACH - There is no uniform audit approach
 Prescribed that can be applicable to all types of subjects of performance audits.
6) DEVELOPING AUDIT QUESTIONS -Audit team is required to
 Prepare list of questions to which they would seek answers.
7) ASSESSING AUDIT TEAM SKILLS & WHETHER OUTSIDE EXPERTISE REQUIRED -
 Performance auditors must possess special aptitude and knowledge.
8) PREPARING AUDIT DESIGN MATRIX (ADM) - Structured & highly focused approach
 Designing performance audit study.
 Highlights data collection & analysis method as well as
 Type & sources of evidence required to support audit opinion/findings.
9) ESTABLISHING TIMETABLE & RESOURCES - Selection of appropriate audit team is most vital
component in planning an audit.
10) INTIMATION OF AUDIT PROGRAMME TO AUDIT ENTITIES - Audited entities must be
intimated-
 about intention performance audit with scope & extent of audit well
 before commencement of Audit.

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 METHODS WHICH COULD BE USED IN CONDUCTING PERFORMANCE AUDITS INCLUDE-

1) ANALYSIS OF PROCEDURES -
 Review of systems in place for planning, conducting, checking & monitoring activity.
 Consist of examination of documents –
 Financial reports, budgets, programme guidelines, procedure manuals, etc.
2) CASE STUDIES -
 Descriptive analysis of entity, scheme/programme.
 Analysis of particular issue within context of whole area under
review.
3) USE OF EXISTING DATA -
 Audit staff should investigate data held by entity management
& by other relevant sources. Conclusions based on testing of
available data For correctness & completeness - enhances
assurance level.
4) SURVEYS -
 Method of collecting information -population to assess correlation of events & conditions.
 Surveys on predetermined parameters supplements audit findings & conclusions.
 Adding value to performance audit.
5) ANALYSIS OF RESULTS -
 It requires auditor to carry out actual output-input analysis
 To determine efficiency of programme.
6) QUANTITATIVE ANALYSIS -
 Examination of available data relating to financials like earnings, revenue, or data Relating
to programme implementation like details of beneficiaries etc.
 It may not be possible for auditor to work with complete data due to its high volume. In
such cases, sampling techniques are required to be used.

 COMPREHENSIVE AUDIT
 Involves ASSESSING OVERALL APPRAISAL of public enterprise,
 Covers aspects of ECONOMY, EFFICIENCY & EFFECTIVENESS.
 Covers audit into UNNECESSARY EXPENDITURE FOR MANAGEMENT INFORMATION
 INITIAL STARTING -
 PREPARATION OF AUDIT PROGRAMME based on study of decisions relating to
 Setting up of enterprise, objectives, areas of operation, organization, financial & operational
details & other relevant available papers.

AREAS TO BE COVERED IN COMPREHENSIVE AUDIT-

1) COMPARISON OF OVERALL CAPITAL COST of project WITH APPROVED PLANNED COSTS to

check extravagance.
2) PRODUCTION/OPERATIONAL OUTPUTS & UNDER-UTILISATION OF INSTALLED CAPACITY

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 3) ACHIEVEMENT of PLANNED RATE OF RETURN.
4) SOUNDNESS of systems of PROJECT FORMULATION & EXECUTION.
5) ADEQUACIES of COST CONTROL MEASURES.
6) ADEQUACIES of PURCHASE POLICIES.
7) EXISTENCE & PERFORMANCE OF R & D PROGRAMMES.
8) ADEQUACIES of system of REPAIRS & MAINTENANCE.
9) EFFECTIVENESS & ECONOMY of PROCEDURES.
10) INSUFFICIENT / INEFFICIENT PROJECT PLANNING.

 PROPRIETY AUDIT
MEANING & SCOPE-

 VERIFICATION OF TRANSACTIONS
 On tests of public interest, commonly accepted customs & standards of
conduct.
 SUBSTANCE of transaction is MORE IMPORTANT THAN ITS FORM
 LOOKS INTO APPROPRIATENESS OF TRANSACTION
 By considering financial prudence, public interest & prevention of
wasteful expenditure.
 BRING OUT CASES of IMPROPER, AVOIDABLE, OR INFRUCTUOUS EXPENDITURE
 Even though expenditure has been incurred in conformity with existing rules &
regulations.

PRINCIPLES-

 Expenditure is NOT PRIMA FACIE MORE than the occasion demands &
 Every official exercise the SAME DEGREE OF VIGILANCE in respect of expenditure as a person
of ordinary prudence would EXERCISE IN RESPECT OF HIS OWN MONEY
 Authority exercises power of SANCTIONING EXPENDITURE which will NOT FOR OWN
ADVANTAGE. FUNDS ARE NOT UTILISED for BENEFIT OF A PARTICULAR PERSON or group of
persons & Apart from agreed remuneration or reward, NO OTHER AVENUE is kept OPEN TO
INDIRECTLY BENEFIT MANAGEMENT PERSONNEL, employees & others.

PROPRIETY ELEMENTS IN CO. ACT, 2013-

Sec-143(1) - Requiring ENQUIRY INTO CERTAIN SPECIFIED MATTERS.

Sec-143(6) - SUPPLEMENTARY AUDIT &
Sec-143(7) - TEST AUDIT related to Govt. Company on matters specified.
Sec-148 - Relating to COST RECORDS & AUDIT.
Part II of Schedule III - ADDITIONAL INFORMATION

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AREAS OF PROPRIETY AUDIT U/S 143(1)- (INQUIRY INTO CERTAIN SPECIFIED MATTERS)

1. LOANS & ADVANCES -

 Whether terms on which SECURED loans/secured advances have been made are
 PREJUDICIAL TO INTERESTS of company or its members.
2. BOOK ENTRIES -
 Whether transactions represented by book entries are PREJUDICIAL TO INTERESTS of
company.
3. SECURITIES SOLD AT PRICE LOWER THAN ITS COST -
 Whether investment of Co. (other than a banking or an investment company)
 In the form of shares, debentures & other securities
 Have been SOLD AT A PRICE LOWER THAN COST.
4. DEPOSITS -
 Whether LOANS & ADVANCES made by Company have been
SHOWN AS DEPOSITS.
5. PERSONAL EXPENSES -
Whether personal expenses have been CHARGED TO REVENUE.
6. SHARES ALLOTTED OTHER THAN CASH -
 If shares allotted for CASH, whether cash has ACTUALLY BEEN RECEIVED &
 If NO CASH RECEIVED then POSITION IN BOOKS IS CORRECT, regular & not misleading.

PROPRIETY ELEMENTS UNDER CARO, 2020

1. LOANS TO PARTIES COVERED U/S 189 of Co Act,

 Whether terms & conditions are not prejudicial,
 Whether repayment of principal & interest is stipulated
&
 Whether repayments are regular.
 State total amount overdue for MORE THAN 90 DAYS &
 whether reasonable steps have been taken by company
for recovery of principal & interest.

2. In respect of LOANS, INVESTMENTS, GUARANTEES, AND SECURITY

 Whether PROVISIONS OF SEC 185 & 186 of Co. Act, 2013
 have been complied with.
 If not, provide the details thereof.

3. Whether MAINTENANCE OF COST RECORDS has been specified by CG u/s 148(1) of Co. Act,
2013 & whether such accounts & records have been so made & maintained.
4. Whether company is regular in depositing UNDISPUTED STATUTORY DUES
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 5. Whether company has DEFAULTED IN REPAYMENT OF LOANS OR BORROWING to a financial
institution, bank, Government or dues to debenture holders?
6. Whether MONEYS RAISED BY WAY OF IPO/FPO & TERM LOANS were Applied for the
purposes for which those are raised.
7. Whether any FRAUD BY COMPANY OR ON COMPANY BY ITS
OFFICERS OR EMPLOYEES has been noticed or reported during the
year.
8. Whether MANAGERIAL REMUNERATION has been paid As per
provisions of Sec-197 read with Schedule V to Co Act?
9. Whether NIDHI COMPANY has complied with
 NET OWNED FUNDS TO DEPOSITS RATIO OF 1:20 to meet out liability &
 whether the Nidhi Company is MAINTAINING 10% UNENCUMBERED TERM DEPOSITS
 As specified in Nidhi Rules, 2014 to meet out liability.
10. Whether company has made any PREFERENTIAL ALLOTMENT OR PRIVATE PLACEMENT of
shares
 or fully or partly convertible debentures during the year &
 if so, whether requirement of sec 42 of Company Act, 2013 have been complied with &
 Amount raised have been used for the purposes for which funds were raised.

11. Whether company has entered into

 NON-CASH TRANSACTIONS WITH DIRECTORS or
 persons connected with him & if so, whether provisions of Sec-192
of Co Act, 2013 have been complied with.

 CONTENTS OF AUDIT REPORT OF C&AG

 Reports of C&AG on audit of PSUs are presented to Parliament in 4
parts consisting of –
1. Introduction containing GENERAL REVIEW of Government
Company.
2. RESULTS OF COMPREHENSIVE APPRAISALS of selected
undertakings conducted by audit board.
3. RESUME OF COMPANY AUDITOR’S REPORTS & comments
thereon.
4. SIGNIFICANT RESULTS of audit of undertakings not selected for appraisal by audit board.

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