CHAPTER 2

Government System of Accounts and Audit and Commercial System

A. ACCOUNTS

10. Difference between Government and Commercial Functions. The principles of Commercial and Government Accounting differ in certain essential points. The difference is due to the fact that, while the main function of a com- mercial concern is to trade, that is to take part in the production, manufacture or inter-change of goods or commodities between different groups or individuals and thereby to make profit, that of a Government is to govern a country and in connection therewith to administer the several departments of its activities in the best way possible.

11. Principles and Methods of Commercial Accounting. A non-Govern- ment commercial concern deals primarily with the utilisation of Capital for the purpose of making a profit; and it is interested to see at intervals how it stands in relation to its debtors and creditors, whether it is gaining or losing, what are the sources of its gain or loss, and whether it is solvent or insolvent.

12. In order to obtain ready answers to these questions the concern has to keep a system of detailed accounts. In respect of each person dealt with, each class of asset held, each article dealt in, and each department of its activi- ties, it maintains a separate account so that the result of the transactions in each case may be ascertained. It then becomes necessary for it to collect the results of all these accounts in one place in order to record the assets and liabilities under different heads and finally to prepare the Manufacturing, Trading and Profit and Loss Accounts, and a Balance Sheet, which shall show what is the gain or loss of the concern as a whole and whether it is solvent or insolvent.

13. It is the generally accepted practice in the commercial world to main- tain account books by the Double Entry system, which is based on the fact that in every transaction or financial change two parties or accounts are involv- ed, one giving and other receiving. Under that system every transaction, there- fore, requires two entries in the books, one against the party or account giving and the other against the party or account receiving. Further, if the concern is a manufacturing one, it has also to maintain sets of books for (a) costing and (b) stores accounting in order to ascertain as regards (a) the cost of pro- duction of each article so that its selling price may be fixed accordingly, and as regards (b) that there is an efficient system of stores control.

14. Principles of Government Accounting. The activities of a good Gov- ernment in any country are determined by the needs of the country. The main branches of its activities being known, it is a matter for decision what expenditure will be necessary during any year in carrying out these activities. After a decision has been reached on these points it becomes necessary to deter- mine how to raise sufficient money to meet that expenditure

18-21] GOVT. SYSTEM OF ACCOUNTS & AUDIT & COMMERCIAL SYSTEM

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18. Methods of Government Accounting. The mass of the Government accounts is kept by Single Entry. There is, however, a portion of the accounts which is kept on the Double Entry System, the main purpose of which is to bring out by a more scientific method the balances of accounts in regard to which Government acts as banker or remitter, or borrower or lender. Such balances are, of course, worked out in the subsidiary accounts of the single entry compilations as well but their accuracy can be guaranteed only by a periodical verification with the balances brought out in the double entry ac- counts.

B. AUDIT

19. Principles of Audit. As stated in paragraph 8, audit should be conduct- ed by an agency independent of the authority charged with the duty of carrying on the business and of keeping accounts of the transactions which pass through his hands. This principle is strictly observed in commercial audit, although when auditing small concerns the auditor often finds the accounts so badly prepared as to render it necessary for him to build up a very large portion of the fabric of the accounts from the initial records. This work is, however, incidental to and not an essential part of his duties as an auditor.

20. Purpose and Procedure of Commercial Audit. In commercial audit at the present day the main object is to present before the proprietor or pro- prietors of the business an accurate statement of the position of affairs together with a profit and loss account showing how this position has been reached. In the case of Companies the duty of an auditor is mainly in the interest of the shareholders, who are practically sleeping partners in the business. The direc- tors are the active partners; and the auditor on behalf of the sleeping partners- the shareholders-has to examine the accounts and the balance sheet prepared by the directors and to report to the shareholders whether in his opinion those accounts are correct, and fully and fairly disclose the position of affairs, or in what respects they fail to do so.

21. On pages 40-43 of Dicksee’s “Auditing” (Fifteenth Edition) will be found a set of instruotions to commercial auditors. The procedure of com- mercial audit as there detailed may be summarised briefly thus-

The first step is to ascertain the authorities competent to sanction expendi- ture, to receive or pay money, or to incur liabilities, on behalf of the firm.

The second is to understand the system of accounts followed.

The third is to check as far as possible the accuracy of the original record, namely, the cash book.

The fourth is to see that all transactions are in accordance with the minutes of the meetings of the Board of Directors or the orders of competent authorities.

The fifth is to investigate unusual items.

CHAP. 2]

GOVT. SYSTEM OF ACCOUNTS & AUDIT & COMMERCIAL SYSTEM [21-25

The Sixth is to check the compilation of the accounts from the original records and to suggest corrections in the classification of transactions.

The seventh is to review the procedure of stock-taking and of pricing the goods on hand.

The eighth is to check or prepare the financial results, that is the Manufac- turing, Trading and Profit and Loss Accounts, and the Balance Sheet, which will indicate accurately the progressive position of affairs. This necessitates also the investigation of depreciation of property (buildings, machinery, furni- ture, etc.), the soundness of investments, debts due to the firm, and the cor- rect allocation of expenditure to Capital Account.

22. Difference between a Government and a Commercial Firm necessitat- ing differences in Audit Procedure. Unlike commercial audit, the audit of Government transactions in and outside India is entrusted to the Indian Audit and Accounts Department which is independent of the spending departments. This Department is, as has already been stated, also responsible for the compi- lation of the major portion of the accounts which it audits. As explained in paragraph 24, part of the work incidental to audit is, however, also performed by the spending departments.

23. India is so vast a country and Government activities are so various that it is impossible for independent Audit Officers, working (as they do) almost entirely at headqters, to be as closely in touch with the facts to which the accounts refer as the officers of the department in which the revenue is realised and the expenditure is incurred.

24. Thus, the Audit Officer has no personal knowledge of the quantity or quality of the work done by a contractor, of the quantity or quality of goods supplied by a supplier, of the number of coolies employed each day on a work, or of the agreement between the stores accounts and the stock of stores. The payments are in many cases made at treasuries the officers in charge of which are not members of the Indian Audit and Accounts Department; while in others the bills are either presented to, or are prepared by, disbursing officers of other departments. Thus the preliminary examination of bills which are paid at treasuries or by disbursing officers of other departments is primarily left to Treasury Officers, or to officers of those other departments. The exact nature of the work done by these agencies will be discussed later when we attempt to deal with the details. For the present it is sufficient to remember that under the Government system of audit, the executive officers of the spending departments, as well as officers in charge of treasuries, take an important share in the scrutiny of expenditure.

25. Another point of difference between commercial and Government audit is that, whereas the former is more often than not periodical, the latter is almost entirely continuous. This is due to the greater volume of work to be done and to the fact that a large part of it is concerned with personal claims which have to be finally adjusted with the utmost promptitude.

26. Government Audit as compared with Commercial Audit. It is obvious that these differences in conditions must alter in detail the system of audit; and it is interesting to compare with the main factors of commercial audit, set out in paragraph 21 above, the main objects of Government audit, which, as set out in the Audit Code, are to ensure-

(a) that there is provision of funds for the expenditure duly authorised by competent authority;

(b) that the expenditure is in accordance with a sanction properly ac- corded and is incurred by an officer competent to incur it;

(c) that payment has, as a fact, been made and has been made to the proper person, and that it has been so acknowledged and recorded that a second claim against Government on the same account is impossible;

(d) that the charge is correctly classified, and that (as in the case of Public Works and Forest accounts) if a charge is debitable to the personal account of a contractor, employee or other individual, or is recoverable from him under any rule or order, it is recorded as such in a prescribed account;

(e) that in the case of audit of receipts, (i) sums due are regularly re- covered and checked against demand and (ii) sums received are duly brought to credit in the accounts;

(f) that in the case of audit of stores and stock, where a priced account is maintained, stores are priced with reasonable accuracy, and that the rates initially fixed are reviewed from time to time, correlated with market rates and revised when necessary;

(g) that the articles are counted periodically and otherwise examined for verification of the accuracy of the quantity balances in the books and that the total of the valued account tallies with the outstand- ing amount in the general accounts and that the numerical balance of stock materials is reconcileable with the total of value balances in the account at the rate applicable to the various classes of stores; and

(h) that expenditure conforms to the following general principles which have for long been recognised as standards of financial propriety, namely,-

(1) that the expenditure is not prima facie more than the occasion demands, and that the every Government servant exercises the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in res- pect of expenditure of his own money,

(2) that no authority exercises its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage,

(3) that public moneys are not utilised for the benefit of a particular person or section of the community unless-

(i) the amount of expenditure involved is insignificant, or

(ii) a claim for the amount could be enforced in a court of law, or

(iii) the expenditure is in pursuance of a recognised policy or custom, and

(4) that the amount of allowances such as travelling allowances grant- ed to meet expenditure of a particular type is so regulated that the allowances are not on the whole sources of profit to the recipients.

27. This comparison is made in detail below-

(a) The first and fourth steps of commercial audit, to ascertain the authorities competent to sanction expenditure or to receive or pay money, etc., and to see that the transactions are in accordance with the minutes or orders.

These correspond with clauses (a) and (b) of paragraph 26. In Govern- ment accounts the minutes and orders are represented by the Constitution of India, hereafter referred to as “the Constitution”, the laws made by Parliament or the Legislature of a State, and the rules, directions and orders of a financial character issued by the Governor of a State, and other competent authorities. The volume of such orders is immense, and this portion of audit is so important quantitatively and qualitatively that it tends to overshadow all the other branches.

(b) Second step of commercial audit, understanding the system of account

followed

It is unnecessary to put this forward as a main object of Government audit, because in India the form in which the initial accounts should be kept and that in which the accounts should be rendered to the Indian Audit and Accounts Department are largely determined by the agency which audits them and, after a certain point, also compiles the major portion of them. The system of accounts followed is described in the Account Code and in the relevant Depart- mental Codes and Manuals.

(c) Third step of commercial audit-check of the accuracy of the original record

Clause (c) of paragraph 26 may be held to correspond with this. But, as stated in paragraphs 23 and 24, the check of the accuracy of the original records is left to a great extent to the executive officers of the spending depart- ments, and this check is supplemented by a test audit at regular intervals by officers of the Indian Audit and Accounts Department.

(d) Fifth step of commercial audit, investigation of unusual items

This corresponds with clause (h) of paragraph 26.