Summarized Chapters: Principles of

Public Sector Audit

Chapter 2 and 6 of regulations 2020. (refer: Page 47: Scope and extent of
audit)
however, the powers of the CAG to conduct Performance Audits have been challenged on
many occasions. The CAG has also been criticized for commenting on policy matters and
going beyond the constitutional mandate. Such criticism is the result of inadequate
understanding of the constitutional and legislative framework of the CAG, international
trends and role of audit by SAIs in modern democracies. like most of the prominent
INTOSAI members with parliamentary democratic governance framework, the SAI of India
(CAG) has also been conducting three types of audits — Financial Audit, Compliance Audit
and Performance Audit. The united Nations General Assembly (uNGA) in its resolutions
66/209 of 2011 and 69/228 of 2014 recognized the important role of SAIs in promoting the
efficiency, accountability, effectiveness and transparency of public administration, which is
conducive to the achievement of national development objectives and priorities as well as
the internationally agreed development goals. The resolutions encouraged the Member
States to promote good governance by ensuring efficiency, accountability, effectiveness and
transparency through strengthened SAIs. The resolutions also acknowledged the role of
SAIs in fostering governmental accountability for the use of resources and their
performance in achieving development goals. Department of Economic Affairs, Ministry of
Finance, issued a clarification on whether Performance Audit falls within the scope of audit
by the CAG under the CAG’s (DPC) Act, 1971, through instructions dated 13th June, 2006. It
clarified that Performance Audit, which is concerned with the audit of economy, efficiency
and effectiveness in the receipt and application of public funds is deemed to be within the
scope of audit by the CAG. The instructions are given in Annexure 3. In Arvind Gupta versus
union of India case, decided by the Supreme Court, the petitioner submitted that CAG of
India has no power to give Performance Audit report and the provisions in the regulations
framed under the CAG’s (DPC) Act, 1971 empowering the CAG to conduct Performance
Audit violate the Constitution. The Supreme Court held that the CAG’s functions to carry out
examination into economy, efficiency and effectiveness with which the Government has
used its resources, is in-built in the 1971 Act. Performance Audit reports prepared under
the regulations have to be viewed accordingly. The Court observed no unconstitutionality in
the regulations. In Association of Unified Tele Services Providers & Others Versus Union of
India case, the Supreme Court held that Constitution is a living organic thing and must be
applied to meet the current needs and requirements. Constitution, therefore, is not bound to
be understood or accepted to the original understanding of the constitutional economics.
Parliamentary Debates, referred to by service providers to argue against the powers of CAG
to audit them, may not be the sole criteria to be adopted by a court while examining the
meaning and content of Article 149, since its content and significance has to vary from age
to age. The court went on to say that CAG can carry out examination into the economy,
efficacy and effectiveness with which the union of India has used its resources. Sections
related to audit: Audit of bodies and authorities other than Government establishments and
companies The audit of bodies and authorities, other than Government establishments and
companies, by the CAG is governed by the provisions contained in Sections 14, 15, 19(2),
19(3), 19A and 20 of the Act. The expression ‘authority’ means a person or body exercising
power or command vested in it by virtue of the Constitution or any law made by the
legislature. The expression ‘body’ means an aggregate of persons, whether incorporated or
unincorporated, and includes an institution or organisation set up as an autonomous
organisation under a specific statute or as a society registered under the Societies
registration Act, 1860 or Indian Trusts Act, 1882 or any other statute, voluntary
organisation or non-Government organisation, urban or rural local self-Government
institution, co-operative society, society or club, etc. Section 14: Audit of receipts and
expenditure of bodies or authorities substantially financed from Union or State revenues
Where any body or authority is substantially financed by grants or loans from the
Consolidated Fund of India or of any State or of any union Territory having a legislative
Assembly, the CAG shall, subject to the provisions of any law for the time being in force
applicable to the body or authority, as the case may be, audit all receipts and expenditure of
that body or authority and to report on the receipts and expenditure audited by him.
explanation: Where the grant or loan to a body or authority from the Consolidated Fund of
India or of any State or of any union Territory having a Legislative Assembly in a financial
year is not less than rupees twenty- five lakhs and the amount of such grant or loan is not
less than seventy- five percent of the total expenditure of that body or authority, such body
or authority shall be, deemed, for the purposes of this sub-section, to be substantially
financed by such grants or loans as the case may be. Notwithstanding anything contained in
sub-section (1) the CAG may with the previous approval of the President or the Governor of
a State or the Administrator of a union Territory having a legislative Assembly, as the case
may be, audit all receipts and expenditure of any body or authority where the grants or
loans to such body or authority from the Consolidated Fund of India or of any State or of any
union Territory having a legislative Assembly, as the case may be, in a financial year is not
less than rupees one crore. Where the receipts and expenditure of any body or authority are
by virtue of the fulfilment of the conditions specified in sub-section (1) or sub-section (2)
audited by the CAG in a financial year, he shall continue to audit the receipts and
expenditure of that body or authority for a further period of two years notwithstanding that
the conditions specified in sub-section (1) or sub- section (2) are not fulfilled during any of
the two subsequent years. Under section 14(2) with prior consent of President/ Governor if
the financing is below 75% of their expenditure but is > ` 1 crore CAG shall continue to audit
the receipts and expenditure of that body or authority for a further period of two years
notwithstanding that the conditions specified in sub-section (1) or sub-section (2) are not
fulfilled during any of the two subsequent years. Computation of quantum of Government
assistance For arriving at the quantum of Government assistance for the purpose of
ascertaining auditability under Section 14 of the Act: The aggregate of the amounts of
grant(s) and loan(s) paid to a body or authority shall be reckoned together; The amounts of
grant(s) and loan(s) paid to a body or authority by the Union Government, the State
Government(s) and the union Territory Government(s) shall be aggregated; and The
amounts of grant(s) and loan(s) paid during a year shall include any amounts remaining
unspent out of grant(s) and loan(s) paid to the body or authority during preceding year(s)
but not refunded to the Government. Section 15: Functions of CAG in the case of grants or
loans given to other authorities or bodies Where any grant or loan is given for any specific
purpose from the Consolidated Fund of India or of any State or of any union Territory
having a legislative Assembly to any authority or body, not being a foreign State or
international organisation, the CAG shall scrutinize the procedures by which the sanctioning
authority

CHAPTER 8 OF THE REGULATIONS 2020)

As per Section 19(2) of the Act, the duties and powers of the CAG in relation to audit of
accounts of corporations established by or under law made by Parliament are performed
and exercised in accordance with the provisions of the respective legislations. As per
Section 19(3) of the Act, the Governor/Administrator may, in the public interest, request
the CAG to audit the accounts of a corporation established by law made by the legislature of
the State or of the union Territory, as the case may be, and where such request has been
made, the CAG shall audit the accounts of such corporation and shall have, for the purposes
of such audit, right of access to the books and accounts of such corporation. No such request
shall be made except after consultation with the CAG and after giving reasonable
opportunity to the corporation to make representation with regard to the proposal for such
audit. Thus, Section 19 (2) deals with corporations established by law made by Parliament
and Section 19 (3) deals with corporation established by law made by the legislature of the
State or of the union Territory. Applicable standards and verifications required in audit of
accounts Where the CAG is the sole auditor of a corporation, the financial audit is conducted
in accordance with the auditing standards issued by the CAG. Audit shall verify whether
systems and procedures are in place and implemented to ensure that the accounts: Comply
with the requirements of the applicable law(s), rules and administrative instructions;
Comply with the accounting standards prescribed by the Institute of Chartered Accountants
of India; Contain adequate disclosures in respect of financial transactions; and Present a
true and fair view of the corporation’s financial position. Sole auditor means that as per the
Act, only CAG is responsible for auditing the said corporation. e.g. The Institute of
Technology Act (IITs) provides audit by only CAG Audit certificate and Separate Audit
Report Audit certificate is issued where CAG is the sole auditor. The audit certificate may be
subject to such observations and qualifications as the circumstances may warrant. An
adverse certificate may be given if the observations and qualifications are of such nature as
may not warrant certification of accounts as presenting a true and fair view of the financial
position of the corporation. Apart from Audit certificate, on the completion of financial
audit, the audit office shall send to the chief executive officer a draft separate audit report
(SAR) that will form part of the audit certificate on the accounts. A copy of the same shall
also be sent to the Government in case it contains any observation on which reply of the
Government is necessary. The audit office shall consider the reply received from the
corporation (and the Government if a copy is sent to it) before finalizing the audit certificate
and the separate audit report. The audit certificate and the SAR, which will form part of the
audit certificate on the accounts of the corporation, is sent to the Secretary to Government
of the concerned department with a copy to the chief executive officer of the corporation.
The chief executive officer has to place audit certificate and SAR before the governing body
and intimate to the Accountant General (Audit) the date on which these are presented to the
governing body. The Government shall cause every audit certificate and separate audit
report to be laid before appropriate legislature(s) in accordance with Section 19A of the Act.
The Secretary shall intimate to the Accountant General (Audit) the date of presentation of
the audit certificate and the separate audit report to the legislature. Audits other than
financial audit of accounts by the CAG In addition to the financial audit of accounts of a
corporation, the CAG may conduct any other type of audit including the following: Test
check of transactions entered into by the corporation with a view to examining their
legality, competence and propriety and report on cases of infraction, waste,
mismanagement, frauds and other irregularities; and Performance Audit with a view to
ascertaining the extent to which the corporation operates economically, efficiently and
effectively for the achievement of the stated objectives. Section 20: Audit of accounts of
certain authorities or bodies Save as otherwise provided in section 19, where the audit of
the accounts of any body or authority has not been entrusted to the CAG by or under any
law made by Parliament, he shall, if requested so to do by the President, or the Governor of
a State or the Administrator of a union Territory having a legislative Assembly, as the case
may be, undertake the audit of the accounts of such body or authority on such terms and
conditions as may be agreed upon between him and the concerned Government and shall
have, for the purposes of such audit, right of access to the books and accounts of that body
or authority: Provided that no such request shall be made except after consultation with the
CAG. The CAG may propose to the President or the Governor of a State or the Administrator
of a union Territory having a legislative Assembly, as the case may be, that he may be
authorised to undertake the audit of accounts of any body or authority, the audit of the
account of which has not been entrusted to him by law, if he is of opinion that such audit is
necessary because a substantial amount has been invested in, or advanced to, such body or
authority by the Central or State Government or by the Government of a union Territory
having a legislative Assembly, and on such request being made, the President or the
Governor or, the Administrator, as the case may be, may empower the CAG to undertake the
audit of the accounts of such body or authority. The audit referred to in sub-section (1) or
sub-section (2) shall not be entrusted to the CAG except where the President or the
Governor of a State or the Administrator of a union Territory having a legislative Assembly,
as the case may be, is satisfied that it is expedient so to do in the public-interest and except
after giving a reasonable opportunity to the concerned body or authority to make
representation with regard to the proposal for such audit. Sections containing
miscellaneous provisions Section 21: Delegation of power of CAG Any power exercisable by
the CAG under the provisions of this Act, or any other law may be exercised by such officer
of his department as may be authorised by him in this behalf by general or special order.
Provided that except during the absence of the CAG on leave or otherwise, no officer shall be
authorised to submit on behalf of the CAG any report which the CAG is required by the
Constitution or the Government of union Territories Act, 1963 (20 of 1963) to submit to the
President or the Governor of a State or the Administrator of a union Territory having a
legislative Assembly, as the case may be. Section 22: Power to make rules The Central
Government may, after consultation with the CAG, by notification in the official Gazette,
make rules for carrying out the provisions of this Act in so far as they relate to the
maintenance of accounts. In particular, and without prejudice to the generality of the
foregoing power, such rules may provide for all or any of the following matters, namely- the
manner in which initial and subsidiary accounts shall be kept by the

Chapter 4 of regulations 2020 deals with the audit’s access to records.

Audit may be conducted with reference to the data, information and
documents,
as may be available in the audit office and/or in the accounts office, as may be accessed by
or received in the audit office and/or in the accounts office, in the office of the auditable
entity, at the site where the relevant records or data for audit are available at such other
place as may be decided by Audit. Audit comprises elements of offsite/remote access/onsite
audits combined with visits to auditable entity. Audit may requisition basic records, data,
information and documents, from the auditable entity, as soon as intimation for audit is
given, to enable a systematic review and commence the audit assignment remotely by
accessing such information ahead of visits to the auditable entity. In case information and
data as requested cannot be made available in advance, the officer in charge at the auditable
entity shall ensure that the basic records, data, information and documents as required in
the requisition sent to him by the Audit, are kept ready before the arrival of the audit team.
Audit may requisition basic records, data, information and documents for audit planning
purposes, as deemed necessary. Responsibilities of the auditable entity It is the statutory
obligation, of the officer-in-charge of the auditable entity, as per Section 18 of the Act, to
comply with requests by Audit for data, information and documents, whether in advance or
during the course of audit, within the specified time. The time within which data,
information and documents are to be furnished to Audit, will be mentioned in the
requisition. (reasonable time is determined considering the nature and quantum of the data,
information and documents requested by Audit and the urgency of the matter). The
auditable entity is responsible for ensuring completeness and reliability of data provided to
Audit. The auditable entity has to provide access to its information systems and data as
requested by Audit, irrespective of the fact whether the systems are owned, maintained and
operated by the auditable entity or by any other agency on behalf of the auditable entity.
Such access may be through interfacing the IT system of the audit office with the audited
entity‘s IT systems or establishing alternative equivalent methods of data access for the
audit office. Confidentiality of information and protection of personally identifiable/
sensitive information Paragraph 20 of Regulations 2020 states that the documents
classified as “confidential” or “secret” or “top secret” shall be made available to Audit and
shall be dealt with by Audit in accordance with the standing laws and instructions of the
Government for handling and custody of such documents and information. If certain
privileged or confidential information or Personally Identifiable Information (PII)
prohibited from general disclosure by law is obtained in course of an audit, Audit should
maintain confidentiality of that information and ensure that any audit products do not
become a means of compromising such privilege or confidentiality of the information.
However, this does not preclude Audit from including the names of departments,
organisations, parties concerned in audit reports, as per extant orders of the CAG and
consistent with applicable laws. Information about an auditable entity acquired in the
course of audit shall not be used for purposes other than the discharge of CAG’s audit
mandate. however, Audit is not precluded from reporting offences against the law to
appropriate prosecuting authorities wherever necessary. Instances of fraud or corruption,
as noticed during Audit, shall be reported to concerned authorities by Audit, as per
instructions issued by the CAG. Failure to provide data, information and documents Cases of
failure to provide data, information and documents shall be immediately reported by the
audit office to the controlling officer and suitably to the concerned Government/ Ministry,
including Secretary of the Department in case of Government of India or Chief Secretary of
the State for appropriate action. These authorities shall ensure that requisite access to data,
information and documents is provided to Audit within the prescribed time frame and
inform the concerned Audit office accordingly. Cases of failure to provide data, information
and documents to audit is a violation of the statutory obligation of the officer-in-charge at
the auditable entity. The implications of such a situation would be as follows: The audit
product/report shall report withholding/non-production of data, thus informing
Parliament/State legislature of the lack of transparency in public expenditure/revenue, and
CAG’s inability to assure the Parliament/ State legislature of the correctness, or even
appropriateness of the expenditure or revenue related action/decision; If data is withheld
or not made available in a manner that, in CAG’s opinion, amounts to audit being thwarted
from carrying out its constitutional and statutory obligations, a stand-alone or a single
paragraph report should be submitted to the Parliament/State legislature bringing out
clearly the facts of the issue and the implications; Contingencies as above may lead to non-
certification or qualification (including disclaimers) as part of CAG’s audit
opinion/conclusions. Supplementary Reading: CAG’s Auditing Standards 2017:
https://cag.gov.in/content/cag’s-auditing- standards Performance Audit Guidelines 2014:
https://cag.gov.in/sites/default/files/ guidelines/PA_Guidelines2014.pdf Compliance Audit
Guidelines 2016: https://cag.gov.in/sites/default/files/
guidelines/Compliance_Guidelines_approved_final_preface.pdf Financial Attest Audit
Guidelines 2015: https://cag.gov.in/sites/default/files/
guidelines/Financial_Attest_Audit_Guidelines.pdf Financial Attest Audit Manual:
https://cag.gov.in/sites/default/files/cag_pdf/ Financial_Attest_Audit_Manual.pdf Manual
of Standing Orders (Audit) Audit effort culminates in audit reporting. An audit report is a
clear written expression of significant observations and recommendations that arises after
the audit is over. It is one of the most significant parts of the audit process as it
communicates to the user the end results of the entire audit process. Its content should be
easy to understand, free from ambiguity and supported by sufficient, competent and
relevant audit evidence and be independent, objective, fair, complete, accurate, constructive
and concise. A large number of users place reliance on audit reports. Different users require
a different level of detail. Audit reports, therefore, have to engage a wide set of users such
as: Elected representatives who are our primary stakeholder; Government officials; Citizens
and citizen groups; Policy analysts, researchers, think tanks, and academicians; Government
research organisations, universities; and Other SAIs, international organisations and
professionals. Characteristics of a good audit report or product The key consideration in
report writing is to keep focus on the reader of the report. It is helpful to know the audience
and understand and answer the questions relating to: Who will be the most important
readers of the report? How much will they know about the subject? How is the report likely
to be used for any follow up action? How do the findings impact the user? The central aim is
to get the key message across simply and effectively and provide the bigger picture of why a
report matters by helping the reader understand what the audit findings mean. An audit
report should enable the following: Highlight significant issues Provide key perspectives
that focus on the risks that matter Add insight through emphasis Identify potential
opportunities for improvements Help fix accountability and aid transparency Link similar
findings and align them with recommendations help in making informed decisions In the
above context, a good audit report should be: Complete: all pertinent information required
to satisfy the audit objective, including the information relating to the scope, criteria,
evidence, conclusions and recommendations should be available in the report; the principle
requires that auditor has to consider all relevant audit evidence before issuing a report.
Objective: Objectivity is ensured through fair conclusions and an unbiased attitude.
balanced reporting is also an attribute that contributes to objectivity. A report is balanced if
it does not focus on criticism alone but contains fair assessment or evaluation, which would
mean that good performance, should also be reported; Convincing: the results of audit are