AUDIT AND SETTLEMENT

OF AUDIT OBJECTIONS

Faizan Ch
MBA, MS - Finance
The Superior University, LAHORE
 1. AUDITING

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.
2. Origin of Audit

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.

3. 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.
4. 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)

5. 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
6. Qualities of an Auditor

i. Professional Knowledge
ii. Integrity
iii. Intelligence and tact
iv. Impartiality
v. Courtesy
vi. Confidentiality
vii.Vigilance
viii. Positive attitude
ix. Diligence
x. Communication Skill
7. 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

8. Nature of Audit Observations

i. Misappropriation (embezzlement)
ii. Recoverable
iii. Overpayments
iv. Violation of Rules
v. Non-Production of Records
vi. Others
9. Settlement of Audit Paras

i. DAC (Departmental Accounts Committee)

ii.SDAC (Special Departmental A/c Committee)

iii.PAC (Public Accounts Committee)

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.
 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.
 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.
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)
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.
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.
PAC: (Continue …

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.
PAC: (Continue …

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.
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.
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:
Appropriation Accounts

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.
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.
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 Defense, Railway,
Postal Services, Pakistan Telecommunication, Pakistan Mint, National
Savings, Foreign Affairs, Food Wing, Forest, Pak PWD.
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.
Duties / Functions / Powers of the Auditor General of Pakistan

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.
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.
Settlement of Audit paras in District
Government Financial System

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.
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.
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.
 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
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
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?

Solution

1. Provision of funds
2. Sanctions of expenditures
3. Claims on proper format
4. Period of sanction
5. Rules of payment
6. Payment mode (Cheque or cash)
7. Classification of expenditure
8. Payment on prescribed rates
9. Accounting of payments
10. Reconciliation with accounts office