13.

Audit of PSU’s (Public Sector Undertakings)

PSU a) C&AG shall hold office for a term of 6 years or upto the age of
65 years, whichever is earlier. The C & AG of India plays a key role in the functioning of the financial committees
Public sector undertakings in India are fundamentally owned or b) He can resign at any time through a resignation letter addressed of Parliament and the State Legislatures. He has come to be recognised as a
controlled by central government, or any state government or to the President. 'friend, philosopher and guide' of the Committees.
governments, or partly by the central government and one or more (i) His Reports generally form the basis of the Committees' working,
state governments. Organisations subject to the audit of the C&AG although they are not precluded from examining issues not brought out
All the Union and State Public commercial enterprises in his Reports;
Govt. co Government departments and controlled by the Union and State (ii) He scrutinises the notes which the Ministries submit to the Committees
Govt co. offices including the Indian governments, i.e. government
and helps the Committees to check the correctness of submissions to the
Railways and Posts and companies and corporations.
Committees and facts and figures in their draft reports;
≥ 51% of the paid-up share Telecommunications.
(iii) The Financial Committees present their Report to the Parliament/ State
capital held by Includes Non-commercial autonomous Authorities and bodies
Legislature with their observations and recommendations. The various
subsidiary bodies and authorities owned or substantially financed from
company of a controlled by the Union or the Union or State revenues. Ministries / Department of the Govt. are required to inform the
CG
or Any State or partly by CG government States. Committees of the action taken by them on the recommendations of the
Government and one or more company Committees (which are generally accepted) and the Committees present
or state govts. Action Taken Reports to Parliament / Legislature;
Governments,
(iv) In respect of those Audit Reports, which could not be discussed in detail by
the Committees, written answers are obtained from the Department /
Public Accounts Committee (PAC): Ministry concerned and are sometimes incorporated in the Reports
To check whether the company is government company or not – presented to the Parliament / State Legislature.
listing of company share is irrelevant. (i)that the moneys were disbursed legally on purpose to which
they were applied;
Article 148 to 151 of the Constitution - (ii)that the expenditure incurred was authorised;
(iii)that re-appropriation has been made in accordance with the The Three parties
(Prescribes the role of C&AG) •Auditor: The role of auditor is fulfilled by Supreme Audit
provisions made (i.e. distribution of funds).
Institution (SAI), India and by its personnel delegated with the
duty of conducting audits.
Estimates Committee
• Appointment of C&AG by the President. •Responsible Party: Generally, auditable entities and those
• Special procedure for removal of C&AG, only on the ground of (i)report what economies improvements in organization, charged with governance of the auditable entities would be the
proven misbehaviors or incapacity. efficiency or administrative reform, consistent with the policy responsible parties.
148
• Salary and other conditions of service to be determined by the underlying the estimates may be effected; •Intended Users: Intended users are the individuals, organizations
Parliament. (ii)suggest alternative policies; or classes thereof for whom the auditor prepares the audit
report.
(iii)examine whether the money is well laid out within the limit;
• Perform such duties and exercise such powers in relation to the and
accounts of the Union and States and of any other authority or Subject matter, criteria and subject matter information
body as may be prescribed by or under any law made by the
(iv)suggest the form in which the estimates shall be presented to
Parliament. •Subject matter: This refers to the information, condition or
149 Parliament. activity that is measured or evaluated against certain criteria.
• The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 Committee on Public Undertakings (COPU) • Criteria :These are the benchmarks used to evaluate the subject
defines these functions and powers in detail. matter.
(i)to examine the reports and accounts of public undertakings.
• Subject matter information: This refers to the outcome of
(ii)to examine the reports of the C&AG on public undertakings. evaluating or measuring the subject matter against the criteria.
150 • Onthe advice of the C&AG, President to prescribe such form in (iii)to examine the autonomy and efficiency of public
which accounts of the Union and States shall be kept.
undertakings and to see whether they are being managed in Types of engagement
accordance with sound business principles and prudent •Attestation engagements:In attestation engagements, the
commercial practices. responsible party measures the subject matter against the
•Audit reports of the C&AG relating to the accounts of the (iv)to exercise such other functions vested in the PAC and the criteria and presents the subject matter information, on which
151 Central/ State Government should be submitted to the
Estimates Committee as are not covered above and as may be the auditor then gathers sufficient and appropriate audit
President/Governor of the State who shall cause them to be laid evidence to provide a reasonable basis for expressing a conclusion.
allotted by the Speaker from time to time.
before Parliament/State Legislative Assemblies.
•Direct reporting engagements:In direct reporting engagements, it
is the auditor who measures or evaluates the subject matter
against the criteria.

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Types of Audit

1.Financial Audit Issues examined in comprehensive audit are: Areas of propriety audit- (under the Section 143(1) of Companies at,2013):
1) Does the enterprise have research and development
is primarily conducted to express an audit opinion on the financial
programmes? What has been the performance in adopting new (a) Whether the terms on which secured loans and secured advances have been made are
statements; and enhance the degree of confidence of intended
processes, technologies, improving profits and in reducing costs prejudicial to the interests of the company or its members.
users in the financial statements.
through technological progress?
(b) Whether transactions of the company which are represented merely by book entries
2) Are the systems of project formulation and execution sound? Are
2.Compliance Audit are prejudicial to the interests of the company.
there inadequacies? What has been the effect on the gestation
period and capital cost? (c) Whether investment of companies, other than a banking or an investment company, in
is the independent assessment of whether a given subject matter the form of shares, debentures and other securities have been sold at a price lower
3) Is there any poor or insufficient or inefficient project planning?
is in compliance with the applicable criteria. Audit is carried out than the cost.
4) How does the overall capital cost of the project compare with the
by assessing whether activities, financial transactions and approved planned costs? Were there any substantial increases and, (d) Whether loans and advances made by the company have been shown as deposits.
information comply in all material respects, with the regulatory and if so, what are these and whether there is evidence of Again, considering the propriety element, rationalizing the proper disclosure of loans
other rules which govern the audited entity. extravagance or unnecessary expenditure? and advance given by company is made.
5) Has the planned rate of return been achieved? (e) Whether personal expenses have been charged to revenue.
Compliance audit is concerned with:
6) Are the purchase policies adequate? Or have they led to piling up
(f) In case it is stated in the books and papers of the company that shares have been
Regularity Adherence of the subject matter to the of inventory resulting in redundancy in stores and spares?
allotted for cash, whether cash has actually been received in respect of such
formal criteria coming from relevant laws, 7) Have the planned production or operational outputs been
allotment, and if no cash actually received, whether the position in books of account and
regulations and agreements applicable achieved? Has there been under- utilisation of installed capacity
balance sheet so stated is correct, regular and not misleading.
to the entity. or shortfall in performance and, if so, what has caused it?
8) Are cost control measures adequate and are there inefficiencies,
Propriety Observance of the general principles wastages in raw materials consumption, etc.? Propriety Audit-Problems
governing sound financial management and 9) If the enterprise has an adequate system of repairs and
the ethical conduct of public officials. maintenance?  “propriety” is a moral term and can be understood by reference to the concept of
10) Are procedures effective and economical? morality accepted by the society at a given time.
 In the audit of financial accounts by reference to financial and legal requirements,
Perspective of compliance audit: Compliance auditing is generally propositions are built up about happening of events, existence, accuracy, title,
conducted either
4. Propriety Audit ownership, compliance with law and internal regulations etc., which are all verifiable.
In propriety audit the formulation of verifiable auditing propositions poses the
separately as in combination Propriety audit stands for verification of transactions on the tests of
with audit of problem.
individual with public interest, commonly accepted customs and standards of
financial
compliance performance  Propriety audit has an inherent element of subjectivity because it is very difficult to
statements, or conduct.
audits, or auditing.
establishstandards of public interest, commonly accepted customs, standards for conduct
Emphasis to the substance of transactions and consideration of financial
which are not firm basis for audit evaluation.
prudence, public interest and prevention of wasteful expenditure.
 Norms of propriety applicable to governmental transactions may not ipso facto apply
Principles:
to transactions of private sector which have distinct and more limited, objectives suited
3.Comprehensive audit: 1) that the expenditure is not prima facie more than the occasion
to them.
demands and that every official exercises the same degree of
 The C&AG assists the legislature in reviewing the  Propriety as a moral element should be a matter of evaluation based on objectives
vigilance in respect of expenditure as a person of ordinary
performance of public undertakings. and prevailing circumstances. For example, a travel by air as such should not be
prudence would exercise in respect of his own money;
considered wasteful unless it is proved that a travel by rail would have been feasible
 He conducts an efficiency-cum-performance audit other than 2) that the authority exercises its power of sanctioning expenditure
in the circumstances and would have brought the same results brought by the air
the field which has already been covered either by the to pass an order which will not directly or indirectly accrue to
travel.
internal audit of the individual concerns or by the professional its own advantage;
auditors. 3) that funds are not utilised for the benefit of a particular person Propriety Elements mentioned in CARO 2020:
or group of persons and Refer clause 3(b), (c), (d), (f)
 He locates the area of weakness.
4) that, apart from the agreed remuneration or reward, no other avenue Clause 4,8,9,10,11,13,15,18
is kept open to indirectly benefit the management personnel,
employees and others.

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 Planning for Performance Audit (Q- while planning a performance audit of
3. Performance Audit: D) Deciding Audit Approach Some of the methods which could be
Sugar Industry?)
A performance audit is an objective and systematic examination of evidence for the purpose used in conducting performance audits include:
of providing an independent assessment of the performance of a government The following steps are suggested to the auditors for planning while conducting
organization, program, activity, or function in order to provide information to improve public the performance audit: (i) Analysis of procedures: Review of the systems in
accountability and facilitate decision-making by parties with responsibility to oversee or place for planning, conducting, checking and monitoring
A) Understanding the Entity/Programme - The auditor may use the following
initiate corrective action. the activity.
sources for understanding the entity:
(ii) Case studies: Descriptive analysis of an entity, scheme
Performance Audits usually address the issues of: a. Documents of the entity: policy files, annual reports, budget
or a programme. It involves analysis of a particular
documents, accounts, minutes of meetings, information on the
Economy minimising the cost of resources used for an activity, having issue within the context of the whole area under
website, internal audit reports, electronic databases and MIS
regard to appropriate quantity, quality and at the best price. review.
reports, RTI material etc.
Efficiency It is the input-output ratio. Efficiency is achieved when the output (iii) Use of existing data: Audit staff should investigate
b. Legislative documents: Legislation, parliamentary questions and
is maximised at the minimum of inputs for any given quantity and the data held by entity management and by other
debates, reports of the Public Accounts Committee, the Committee
quality of output. relevant sources
on Public Undertakings, the Estimates Committee and letters from
Auditing efficiency embraces aspects such as whether: (iv) Surveys: Collecting information from members of a
MP.
 sound procurement practices are followed; population to assess the interrelation of events and
 efficient operating procedures are used; c. Policy documents: Documents of Planning Commission, Ministry of
Finance etc. conditions.
 resources are properly protected and maintained;
d. Academic or special research: Independent evaluations on the (v) Analysis of results: Auditor to carry out actual
 human, financial and other resources are efficiently used;
 optimum amount of resources (staff, equipment, and entity, academic research and similar work done by other output-input analysis to determine the efficiency of
facilities) are used in producing or delivering the governments and other SAIs. the programme.
appropriate quantity and quality of goods or services in a e. Past audits: Past financial and performance audits of the entity (vi) Quantitative analysis: Examination of available data
timely manner; provide a major source of information and understanding. relating to financials like earnings, revenue, or data
 the objectives of public sector programmes are met f. Media coverage: Print and electronic media - their systematic relating to programme implementation like details of
cost-effectively. beneficiaries etc.
documentation on regular basis in a transparent manner.
g. Special focus groups: Audit Advisory Committee concerns, annual
Effectiveness
It is the extent to which objectives are achieved and the and special reports of World Bank, Reserve Bank of India, reports E) Audit Questions
relationship between the intended impact and the actual impact
by special interest groups, NGOs, etc. F) Assessing Audit Team Skills and whether Outside Expertise
of an activity.
G) Preparing Audit Design Matrix (ADM)
In auditing effectiveness, performance audit may, for instance: H) Establishing Time Table and Resources –
B) Defining the Objectives and the Scope of Audit
 assess whether the objectives of and the means provided I) Intimation of Audit Programme to Audit Entities
(legal, financial, etc.) for a new or ongoing public sector
programme are proper, consistent, suitable or relevant to
C) Determining Audit Criteria - Audit criteria are the standards used to
the policy; determine whether a program meets or exceeds expectations.
 assess the effectiveness of the program and/or of The audit criteria may be sought to be obtained from the following sources:
individual program components;
 determine the extent to which a program achieves a procedure manuals of the entity.
desired level of program results;
 identify factors inhibiting satisfactory performance or criteria used by the same entity or other entities in
goal-fulfilment; similar activities or programmes.
 determine whether management has considered
alternatives for carrying out the program that might policies, standards, directives and guidelines.
yield desired results more effectively or at a lower
cost;
independent expert opinion and know how.
 identify ways of making programmes work more
effectively.
new or established scientific knowledge and other
 assess compliance with laws and regulations applicable to reliable information.
the program.
general management and subject matter literature
and research papers.

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Objective And Scope Of Public Enterprises Audit of Government Companies
Audit:
1) Audit of PSUs not constrained to Financial and Compliance Audit: Appointment of Govt co : In the case of government companies, though the
Auditors under appointment of statutory auditors is done by the C&AG, the
As it extends also to performance audit (efficiency, economy and
Section 139(5) remuneration is left to the individual companies to decide based on To facilitate a proper consideration, the reports of the C&AG on the audit
effectiveness with which these operate and fulfill their objectives
and 139(7) certain guidelines given by the C&AG in this regard. of PSUs are presented to the Parliament in several parts consisting of the
and goals). read with following:
2) Propriety Audit: Examination of management decisions in sales, section 143(5) Other companies: Appointment or re-appointment of the auditors o Introduction containing a general review of the working results of
of the and their remuneration are decided by the members at the AGM.
purchases, contracts, etc. to see whether these have been taken in Government companies, deemed Government companies and
Companies
the best interests of the undertaking and conform to accepted corporations;
Act, 2013 The C&AG may direct the appointed auditor on the manner in
principles of financial propriety. which the accounts of the Govt. company are required to be o Results of comprehensive appraisals of selected undertakings conducted by
audited and the auditor so appointed has to submit a copy of the the Audit Board;
3) Comprehensive Audit: He conducts an appraisal or an efficiency-cum-
audit report to the Comptroller and Auditor-General of India. The o Resume of the company auditors reports submitted by them under the
performance audit. He sees whether the undertakings have fulfilled
report, among other things, includes the directions, if any, issued directions issued by
the objectives for which they have been established, whether value-
by the C&AG, the action taken thereon and its impact on the the C&AG and that of comments on the accounts of the
for-money spent has been obtained, whether the targets have been accounts and financial statement of the company. Government companies; and
achieved, etc. He locates the areas of weakness including review The report under section 143(5) is in addition to the reports o Significant results of audit of the undertakings not taken up for
of the decisions taken by the management and a comprehensive issued by the Statutory Auditors under various other clauses of appraisal by the Audit Board.
appraisal of the performance of the undertaking. section 143.
For certain specified states, the C&AG submits a separate audit report
4) Highlighting Issues of Efficient and Economic Operations: Supplementary The C&AG of India shall within 60 days from the date of receipt (commercial) to the legislature, while for other States/Union Territories
Financial performance is linked with physical performance and audit under
of the audit report have a right to conduct a supplementary audit
issues of efficient and economic operations and management of section with legislature, there is a commercial chapter in the main audit report.
of the financial statements of the government company by such
resources are highlighted. 143(6)(a) of
person or persons as he may authorize in this behalf and for the
the Companies The State audit reports, contains both the results of audit appraisal of
5) Fiscal and Managerial Accountability: Government audit purposes of such audit, require information or additional
Act, 2013
encompasses two main elements, viz., information to be furnished to any person or persons, so authorised. performance of selected companies/corporations as well as important
(a) Fiscal Accountability: It includes audit of provisions of Comment upon Any comments given by the C&AG upon, or in supplement to, the
individual instances of financial irregularities, wasteful expenditure, system
funds, sanctions, compliances and propriety; and or supplement deficiencies noticed by the statutory auditors, and a general review of the
audit report issued by the statutory auditors shall be sent by the
such Audit
company to every person entitled to copies of audited financial working results of Govt. companies and corporations.
(b) Managerial Accountability: It includes audit of efficiency, Report under
statements under section of section 136(1) of the said Act i.e.
economy and effectiveness (This is often referred to as section
every member of the company, to every trustee for the debenture-
efficiency-cum-performance audit). 143(6)(b) of
holder of any debentures issued by the company, and to all persons
the Companies
6) Helping Government: Audit is to help the Government and other than such member or trustee, being the person so entitled
Act, 2013
enterprise to improve their efficiency and effectiveness. This is and also be placed before the annual general meeting of the
achieved by bringing out financial and operational deficiencies, company at the same time and in the same manner as the audit
inadequacies or ineffectiveness of systems, shortfalls in report.
performance, etc. and by analysing the causes of shortfall from
Test audit C&AG may, in case of any company covered under sub-section (5) or
acceptable standards of performance.
under section sub-section (7) of section 139 of the said Act, if he considers
143(7) of the necessary, by an order, cause test audit to be conducted of the
Companies accounts of such company.
Act, 2013

The supplementary or test audit conducted by the Comptroller and Auditor

General is in the nature of efficiency-cum-performance appraisal.

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 Q. C&AG appointed Sambhav & Associates, a CA, to conduct (i) Non replacement of defective/ burnt meters: Large number of meters, much Principles of PSU Audit:
Performance audit of MAP Ltd., a PSU of Govt. The firm in excess of the permitted limit of 1% of the total meters were defective and  General Principles:
conducted the audit with a view to check all the expenses of the their replacement was not completed within the stipulated time of 1  Ethics & Independence
unit are in conformity with the public interest and publicly month. This resulted in billing on average basis for a continuous period of  Documentation
accepted customs. The audit report submitted by audit firm was several months. This could result in losses as well as administrative hassles  Communication
rejected by C&AG. Give your opinion on the action of C&AG. and disputes with consumers.  Audit risk
(Nov 22 RTP) (ii) Under charging of meter rent: As per Schedule of Charges, the Company
 Quality control
is required to charge meter rent of `30 per month for a single phase
 Materiality
In the given scenario, C&AG appointed Sambhav & Associates, a meter and 40 per month for three phase meter. It was observed that the
chartered accountant firm, to conduct Performance Audit of Company had short charged meter rent of `60 lakh from 3 lakh
MAP Ltd., a PSU of Government of India. The firm conducted consumers in 5 lakh bills during the period.
 Principles related to audit process:
audit with a view to check all the expenses of the unit are in Refer : “Planning for Performance Audit.”
conformity to the public interest and publicly accepted Planning the audit:
ICAI Illustrations- 2
customs which is not Performance Audit. 1.Establish the terms of the audit.
Performance Audit of enforcement mechanism for administering the
A performance audit is an objective and systematic examination 2. Obtain understanding of the entity.
provision of Minimum Wages Act (a social welfare legislation)
of evidence for the purpose of providing an independent 3. Conduct Risk assessment of problem analysis.
assessment of the performance of a government organization,  The auditors must possess knowledge of the industries or labor 4.Identify risks of fraud.
program, activity, or function in order to provide information to contracts where these provisions are applicable.
5. Develop an audit plan.
improve public accountability and facilitate decision-making by  Evaluate the standard of living before implementation and after
parties with responsibility to oversee or initiate corrective implementation of the Act.
action. Conducting the audit :
 Evaluate the evidence available as to nature of returns prescribed.
Performance audit in PSUs is conducted by the C&AG 1.Perfom the planned audit procedures to
(Supreme Audit Institutions) through various subordinate  E valuate the economy, efficiency and effectiveness in the welfare obtain audit evidence.
systems to be audited.
offices of Indian Audit and Accounts Department (IAAD). 2.Evaluate audit evidence and draw
Therefore, the objectives of performance auditing are  Study the shortcomings in the coordination between different conclusions.
agencies like labor department, EPF and ESI organization and the
evaluation of economy, efficiency, and effectiveness of policy,
control systems and point out a set of relevant problems.
programmes, organization and management.
Performance auditing focuses on areas in which it can add  Another possible area of critical audit may be to study actual level of Reporting & Follow up:
compensation required in each area keeping in mind the local living
value which have the greatest potential for development. 1.Prepare a report based on the conclusions
conditions and where the minimum wages prescribed in the statute.
It provides constructive incentives for the responsible parties reached.
to take appropriate action. 2.Follow-up on reported matters as
Thus, rejection of audit report (submitted by audit firm) by relevant.
C&AG is in order as audit with a view to mere check all the
expenses of the unit are in conformity to the public interest and
publicly accepted customs done by audit firm is not
performance audit in all aspects.
ICAI Illustration- 1

The objectives of audit in connection with a State Electricity Distribution

Companywere to ascertain whether the:

(i) total cost of providing electricity is being recovered by timely

submissions tothe 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.

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