Financial Audit Manual for ULBs of M.P. - English

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Financial Audit Manual For Madhya Pradesh Urban Loc al Bodies 1

ABBREVIATIONS

ADB Asian Development Bank

AMA Authorised Medical Attendant

CAA Constitution Amendment Act

CAAT Computer Assisted Auditing Techniques

CAG Comptroller And Auditor General of India

COBIT Central Objectives for Information and Related Technology

DEAS Double Entry Accounting System

DPC Duties, Power and Conditions

ECPA Efficiency cum Performance Audit

EDP Electronic Data Processing

EFC Eleventh Finance Commission

FIFO First In First Out

GAAP Generally Accepted Accounting Principles

Government State Government

HUDCO Housing and Urban Development Corporation Limited

INTOSAI International Organization of Supreme Audit Institute

IT Information Technology

JNNURM Jawaharlal Nehru National Urban Renewal Mission

LBG Local Body Grants

LIC Life Insurance Corporation of India

LIC Life Insurance Corporation of India

MB Measurement Book

MoUD Ministry of Urban Development

MPMAM Madhya Pradesh Municipal Accounts Manual

MPMCAct Madhya Pradesh Municipal Corporation Act, 1956

MPUADD Madhya Pradesh Urban Administration and Development Department

PFMA Public Financial Management and Accounting

RTI Right To Information

TA Travelling Allowance

TFC Twelfth Finance Commission

TGS Technical Guidance and Supervision

ULBs Urban Local Bodies

VFM Value for Money


SECTION – 1 CHAPTER – 1

INTRODUCTION The Backdrop

1.1.1 A recent study by the World Bank regarding “Synthesis Study of Public Financial Management and Accounting (PFMA) in Urban Local Bodies” points out that India is witnessing rapid urbanization. The urban population of the country has grown five fold since 1947 and more than 27 percent of India’s people now live in urban areas. This urban influx of population has been consistently rising upward. The trend is not likely to abate.

1.1.2 There has also been a constant rise in the level of awareness of the populace about health, sanitation and urban needs like proper traffic circulation and other necessary amenities.

1.1.3 A well entrenched democratic order in the country has also given extra fillip to people’s aspiration for an organized and better urban life style.

1.1.4 In this backdrop of increasing urbanization and rising aspirations of the people most of the urban settlements in the country have been facing short falls in housing and water supply, inadequate sewerage, congested traffic and pollution.

1.1.5 To help the Urban Local Bodies (ULBs), to meet these and other growing challenges, it has become imperative that they are more systematic and organized, structurally stronger and competent to be able to deliver. This Manual is a sequel to the strides being made in the direction under various programmes undertaken by the Central and State Governments.

Existing Accounting Practices and New Initiatives.

1.1.6 Presently, the ULBs in the country are generally following the cash basis of accounting coupled with single entry accounting system. The system is highly rudimentary, non-transparent and fails to facilitate the purpose of accounting.

1.1.7 Under this system the transactions are recorded when the related cash receipts, or cash payments take place. The revenue for example from property tax, water charges etc. is recognised when each is collected. Similarly expenditure on acquisition and maintenance of assets as well as on employee’s remuneration and other items is recorded when the related payments take place. The end product of the cash basis of accounting is a statement of receipts and payments that classifies cash receipts and payments. A statement of assets and liabilities may or may not be prepared and attached to it. This cash basis of accounting fails to meet most of the financial objectives.

1.1.8 In the early 1990, with the onset of the first generation economic reforms, there was a paradigm change in the perception about the Government role in the Indian economy. All the three tiers of Government viz Central, State and Urban Administration and Development Department felt need to make themselves more accountable. One of these reforms included amendment to the constitution of India i.e. The Constitution Seventy Fourth Amendment Act, 1992 (74th CAA). It provided constitutional status to the ULBs and vested them with powers to function as institution of Urban Administration and Development Department (UADD). Simultaneously the Ministry of Urban Development (MoUD) Government of India took several leads to make ULBs self sustainable and viable Self Government Institutions.

1.1.9 On recommendations of the Eleventh Finance Commission and guidelines given by the Ministry of Finance, Government of India a Task Force was constituted by the Comptroller and Auditor General of India (CAG) to recommend budget and accounting formats for ULBs in India. The CAG’s Task Force interalia suggested adoption of accrual based double entry accounting system by the ULBs. The switching over to the accrual based double entry accounting system besides upgrading the capacities of the ULBs is also expected to bring in more transparency and accountability in the municipal transactions and the overall accounting structure.

1.1.10 The switching over of the account to accrual based double entry accounting system is afoot in some of the ULBs. The process may take sometime as the ULBs which have taken it up are in the process of training and attuning themselves to the new system. The Accounting Standard for ULBs are also at formation stage with the Institute of Chartered Accountants of India. This is, however, no constraint as the accounts meanwhile may be given final shape on the basis of Generally Accepted Accounting Principles (GAAP) to the extent feasible and suitable in the context or State Government may adopt Accounting Standards formulated by


the C&AG for ULBs and Panchayti Raj Institutions. The excerpts from the standards referred to later are reproduced in the Appendix I .

Audit

1.1.11 The study undertaken by the World Bank under the caption “Public Financial Management and Accountability (PFMA) in ULBs in India”, infers that the main constraints to strong PFMA in ULBs are the weak legal framework, less demand for accountability, lack of incentives for compliance with existing rules and limited use of guidelines.

1.1.12 The World Bank report recommends strengthening the audit function in urban local bodies through technical guidance, supervision and imposition of penalties for non-compliance. It is also desirable that besides internal controls and external audit, possibilities of public oversight be ensured. For this purpose financial performance report, managements analysis etc. for the year be issued within three months of the year end to the authorities of the ULBs and such other officers as is decided by the Govt. under Section 8 of Madhya Pradesh Local Fund Audit Act 1973.

1.1.13 Similar views are resonated in the recommendations of the Eleventh Finance Commission. Finance Commission, amongst other things recommended that (a) the Comptroller and Auditor General of India (C&AG) should be entrusted with the responsibility of exercising control and supervision over proper maintenance of accounts and audit of Urban Local Bodies (b) the Director, Local Fund Audit or any other agency made responsible for the audit of local bodies, should work under the Technical Guidance and Supervision (TGS) of the C&AG in the same manner as the Chief Electoral Officers of the States operate under the control and supervision of the Central Election Commission.

1.1.14 Under the Constitution Local Bodies are listed in the State List. There is practically no power with the centre to do effectively much in this regard. Given the sensivity and reluctance of the State Government to let any other authority enter into their areas it is remarkable that the States mostly agreed to the Technical Guidance and C&AG’s new role in this regard in the field of audit and accounting of local bodies. Suitable enactment or amendment to existing provisions are, however, yet to be materialised.

1.1.15 Mandate and Practices

Madhya Pradesh Municipal Corporation Act 1956, chapter X “Audit and Accounts” reads that there shall be an auditor specially appointed by the Government to examine and audit accounts of the Corporation. The auditor shall from time to time examine and audit accounts in accordance with the arrangements approved by the Government in this behalf.

1.1.16 Pursuant to the provision, the Director Local Fund Audit Madhya Pradesh is the auditor appointed to carry on the audit of ULBs. The audit is regulated in accordance with the provisions of the Madhya Pradesh Local Fund Audit Act 1973, Madhya Pradesh Local Fund Audit Rules 1974 and Madhya Pradesh Local Fund Audit Departmental Regulations 1981.

1.1.17 As per Section – 9 of the Madhya Pradesh Local Fund Audit Act of 1973, the Auditor shall also include in his Report following points :-

(a) All such payments which appear to be unlawful. (b) Such shortages and losses which appear to have been incurred due to negligence

and fraudulently. (c) Sums, which should have figured in accounts, have not been accounted for. (d) Any other material impropriety or irregularity, fraud, mis-appropriation which have

been noticed in the accounts

1.1.18 The “Mayor in Council” shall cause to be laid before the Corporation every report made by the auditor and every statement of the views of the auditor on any matter effecting the pursuance and exercise of the duties and powers assigned to him under the Act which the auditor may require the “Mayor in Council” to place before the Corporation, together with a report by the “Mayor in Council” upon such report or statement, and the Corporation may take such action in regard to the matters aforesaid as Corporation may consider necessary.

1.1.19 As soon as may be, after the commencement of each financial year, the auditor shall deliver to the “Mayor in Council” a report upon the whole of the municipal account for the previous financial year.

1.1.20 The Commissioner of the Corporation shall cause the said report to be printed and forward a copy of it to each councillor along with the printed copy of the Administrative Report and Statement of Accounts as referred to in section 127 of the Act.


1.1.21 The Corporation shall forthwith remedy any defects or irregularities that may be communicated by the auditor and shall send report to the Government of the action taken by the municipal authorities concerned. If there is difference of opinion between the municipal authority and the auditor, or if the municipal authority does not remedy any defect or irregularity within a period considered reasonable by the auditor, matter shall be referred to the Government within such time and in such manner as may be prescribed and the Government may pass such order as it thinks fit.

Failure to comply with Government order may attract the provisions of Section 419 with all the necessary modifications as if order has been issued under Section 418 of the Act.

1.1.22 The Act has also provision for constituting a Municipal Accounts Committee in the first meeting of the Corporation during the year. The committee alongwith its other functions shall consider the report of the auditor, appointed under section 129 of the Act.

1.1.23 Section 130-A of the Act refers to Social Audit as well. However, it did not appear that the Government, who is to arrange for Social Audit and prescribe the manner in which it is to be carried has devised any system or modalities for it so far.

1.1.24 Need for Re-organising and Updating the System

Audit being conducted by the Local Fund Audit Department in the Municipal Corporations falls under the Concurrent Audit or Resident Audit Scheme of the organization. The system implies that all payments made in the Auditee Institution shall be preaudited. The acquittances shall be checked at post audit stage every month. If the ULB acts with alacrity on Reports issued by the Local Fund Audit the efficiency and capacity of the ULB can consistently improve.

1.1.25 Switching over to accrual based double entry accounting system has, however, rendered it imperative to review the auditing parameters and to revise them suitably so that these are compatible with the new accounting system. The annual accounts of the ULBs shall be requiring certification by Statutory Auditors and for that purpose the Local Fund Audit Department shall have also to suitably equip itself.

1.1.26 Accountability has lately emerged as a key element of the new philosophy of governance. The new language of public administration requires that public officials should be held responsible and accountable for providing high quality, timely and cost effective services to tax payers. Just testifying veracity of a transaction or a group of transactions is not enough. The trend and the wisdom is towards accountability in terms of standard of performance and service delivery of public agencies to the citizen groups they are required to serve. It has, therefore, become imperative that audit adopts itself to new methods and technique to cope up with the emerging scenario. The revamping of the system can further be achieved by updating it and consistently rediscovering it to keep pace with the time.

1.1.27 Applicability:

All the provisions of "Madhya Pradesh Sthaniya Nidhi Sampariksha Adhiniyam 1973 and "Revised Adhiniyam 1978 and 1979", "Madhya Pradesh Sthaniya Nidhi Sampariksha Niyam 1974" and "Manual Local Fund Audit Department – 1981" shall remain applicable for the audit of Urban Local Bodies. For meeting the fiduciary requirements of audit of accounts of Urban Local Bodies to be maintained on Accrual Based Double Entry Accounting System with effect from 1st April, 2008 and Annual Financial Statements thereunder this Supplementary Manual, which will prove useful for the guidance of the Officers / Employees of the Directorate of Local Fund Audit, has been prepared.

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SECTION – 2 GENERAL PRINCIPLES AND PRACTICES OF AUDIT

CHAPTER - 1 GENERAL PRINCIPLES AND PRACTICES

2.1.1 Introduction

This section deals with the general principles and practices to be followed in regard to audit of expenditure, receipts, procurement and inventory control, annual accounts statement etc. The principles and devices contained in this section and the sections to be followed are by no means exhaustive. They should not be taken as limiting the scope of audit to the lines indicated thereunder. The audit checks should be observed in spirit and not merely in the letter. In the ever changing world, the audit has to evolve itself in a manner that it could be adapt to any situation and perspective as it may arise.

2.1.2 Auditing Standards

Auditing standards prescribe the norms, principles and practices which the auditors are expected to follow in the conduct of audit. They provide minimum guidance to the Auditor that helps him to determine the extent and quality of auditing steps and procedures that should be applied in the audit and constitute the criteria or norms against which the quality of audit results are evaluated.

2.1.3 The Comptroller and Auditor General of India who is the Supreme Audit Institution of India (SAI) has adopted with due consideration of the Constitution of India, statutes and rules, the auditing standards of the International Organization of Supreme Audit Institutions (INTOSAI). The Urban Local Bodies (ULBs) are operating in the public domain and handling public funds. These auditing standards are, therefore, equally relevant in their sphere also with minor changes and as briefly described hereunder.

2.1.4 The auditing standards consist of four parts :

(a) Basic Postulates (b) General Standards (c) Field Standards (d) Reporting Standards

2.1.5 Basic Postulates

The basic postulates for auditing standards are basic assumptions, consistent premises, logical principles and requirements which help in developing auditing standards and serve the auditors in forming their opinion and reports particularly in cases where no specific standards apply.

2.1.6 The postulates are :

(a) The audit applies its own judgment to the diverse situations that arise in the course of ULB auditing.

(b) With increased public accountability of persons or entities managing public resources has become increasingly evident so that there is a need for the accountability process to be in place and operating effectively.

(c) Development of adequate information control, evaluation and reporting systems within the ULBs will facilitate the accountability process. Management is responsible for corrections and sufficiency of the form and content of the financial reports and other information.

(d) Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the ULB and audited entities should develop specific objective and performance targets.

(e) Consistent application of acceptable accounting standards should result in fair presentation of the financial position and results of operations.

(f) The existence of an adequate system of internal control minimizes the risk of errors and irregularities.

(g) All audit activities should be within the audit mandate. (h) The audit should work towards improving techniques for auditing the validity of

performance measure.


(i) The auditing authority should avoid conflict of interest between the auditors and the entity under audit.

The above postulates for auditing standards are further elaborated in the following paragraphs :-

2.1.7 The Audit applies its own judgment to the diverse situations :

(i) It would be impractical to establish a code of rules, sufficiently elaborate, to cater to all situations and circumstances which an auditor might encounter in the observance of Auditing Standards. Therefore, the audit must exercise its judgment in determining the auditing processes necessary in the circumstances to afford reasonable basis for its opinion and the content of its report.

(ii) In regard to audit of Annual Account Statements of ULB, the audit objective may be akin to the objectives of audit as being practiced and prescribed under the Standard Audit Practices issued by the Institute of Chartered Accountants of India, as may be applicable in similar situations.

2.1.8 Demand of Public Accountability

(i) The broad aim of audit is to safeguard the financial interests of the ULB and to uphold and promote public accountability and sound and economical financial management practices.

(ii) Audit assists the elected representatives in the exercise of financial control over the management.

(iii) The management and not audit is responsible for enforcing economy and efficiency in the expenditure of public money. It is, however, the duty of Audit to bring to light wastefulness, failures, system weaknesses, deficiencies and the circumstances leading to infructuous expenditure.

2.1.9 Development of adequate information control, evaluation system.

Management of the auditing entity is responsible for correctness and sufficiency of the form and content of the financial reports and other informations. If there are any inadequacies in it they are to be pointed out. Audit may also suggest a more comprehensive approach in the matter.

2.1.10 Authorities should ensure the promulgation of acceptable accounting standards.

The Audit shall advise the ULB for the promulgation of acceptable accounting standards for financial reporting and disclosure relevant of the needs of ULB. The audited entities should develop specific and measurable objectives and performance targets.

2.1.11 An adequate system of internal control minimizes the risk of errors.

It is the responsibility of audited entity to develop adequate internal control systems to protect its resources. It is also obligatory for it to ensure that the controls are in place and operational. The applicable statutes and regulations are being complied with and that probity and propriety are observed in decision making where controls are found to be inadequate or missing altogether.

2.1.12 All audit activities shall be within the mandate.

The term ‘Audit’ includes Financial Audit, Regularity Audit and Performance Audit. In pursuance of responsibility, the audit is empowered to decide the nature, scope, extent and quantum of audit and content of the audit reports in respect of audit to be conducted by him or on his behalf.

2.1.13 Towards improving technique for auditing the validity of performance measure.

The expanding audit role of the auditors will require them to improve and develop new techniques and methodologies to assess whether reasonable and valid performance measures are used by the audited entity. Wherever practical the auditors should acquaint themselves with techniques and methodologies of relevant disciplines.

2.1.14 Avoiding conflict of interest between the auditors and entity under audit.

The Audit performs its role by carrying out audits of various ULBs and by reporting the results in conformity with Reporting Standards. To fulfill this role, the audit needs to maintain its independence and objectivity. The application of appropriate general auditing standards assist the audit in satisfying these requirements.

2.1.15 The General, Field and Reporting Standards are suitably dealt within the subsequent sections and chapters.


2.1.16 Audit Objectives and Scope

The audit objectives are clearly defined in the Madhya Pradesh Local Fund Audit Departmental Regulations 1981. The audit activities should be directed in consonance with these objectives.

The broad objectives of audit shall be:

(i) to provide an unbiased, impartial and objective assessment of the reliability and fair presentation of the financial activities and financial status of the ULB in their reports ;

(ii) to provide an assessment of the due observance of the laws, rules, procedures and systems in keeping with the financial interest and propriety in the overall functioning of the ULB ; and

(iii) to provide an assessment of economy, efficiency and effectiveness, (value for money) in the implementation of the mandated activities by the ULB.

In the process, audit aims to :- (a) safeguard the financial interests of taxpayer ; (b) assist the Mayor in Council and the elected representatives in exercising

financial control over the executives ; and (c) watch that various authorities and branches of the ULB act as per the

mandate and laws of the land.

2.1.17 It is the function of the management to make financial rules and orders and put in place an adequate internal control mechanism that will guard against misuse of public funds. The audit is to verify that the administrative departments properly apply these internal control but also to point out weaknesses, if any, as may be noticed in the functioning of the control mechanisms.

2.1.18 The management of the ULB and not the Audit is responsible for enforcing economy in the expenditure of public moneys. It is, however, the duty of Audit to bring to notice wastefulness in administration and infructuous expenditure in its report.

2.1.19 The auditing authority itself shall decide the nature and extent of audit to be conducted by it or in its behalf.

Approach To Audit

2.1.20 Right of access to information

In the course of scrutiny of accounts and transactions, audit is entitled to make such queries and observations and to call for all records, statements, returns and explanations as it may consider relevant and necessary in discharge of its duties. All such quarries and observations should be couched in courteous and impersonal language without innuendo or insinuation.

2.1.21 It is the statutory obligation of the management of the ULB to afford all facilities for inspection / audit and to comply with request for information in a complete form as may be possible and with all reasonable expedition.

2.1.22 In the event of non-production of vital record or documents the audit should bring the complacency to the notice of the chief Executive and in case the problem is not resolved the matter should be suitably highlighted in the Audit Report and brought to the notice of the Municipal Council.

2.1.23 Audit Evidence

The principal source of evidence for audit findings will be the records of the auditee organization. The Audit should ensure that the audit findings about working of the ULB, its various projects and programmes, activities, transactions etc. are based on sufficient, competent, sustainable and relevant evidence. Evidence should be planned, gathered and analysed before any conclusion is reached. This may be gathered by :

(i) review of physical verification reports ; (ii) review of documents ; (iii) evaluation of the quality of internal control mechanism ; and (iv) discussions with the executives.

However, evidence may not be obtained by making independent enquiries from private individuals or members of the general public.


2.1.24 Commonly used Audit Procedures

Following three audit procedures are commonly used to obtain audit assurance.

(i) Compliance testing (ii) Analytical review (iii) Direct substantive testing of transactions.

A. Compliance Testing

2.1.25 Compliance testing is an audit procedure for evaluating internal controls. The objective is to locate deviations from control procedures.

2.1.26 Initially the auditor should make a preliminary assessment of the internal controls in the ULB and determine whether adequate reliance can be placed on the internal control mechanism. Actual compliance testing of the controls can be undertaken in the execution stage of audit.

2.1.27 Steps involved in compliance testing are as follows:-

(i) The first step in conducting compliance test will be to identify the sub-system in which the controls are to be tested eg. if property taxes are to be audited one of its segment could be ‘Assessment of Tax’.

(ii) The next step will be to identify the control objectives. The control objective for the sub-system ‘Assessment of Property Tax’ could be the tariff applied for the purpose. Whether it is in accordance with the approved rates and the norms.

(iii) The third step will be to identify key control that have been established to achieve the control objectives for the sub-system. Whether necessary checks are being exercised in the proportion these are prescribed.

(iv) In addition, evidence gathering techniques like review of performance physical achievement, shortfall etc. are to be used to arrive at a conclusion.

Auditor may categorically identify the infirmities and failures in the system and may also suggest additional control to plug the loopholes.

B. Analytical Review

2.1.28 Analytical review is a procedure that involves analysis of significant ratios and trends including fluctuations that are inconsistent with other relevant data or which deviates from norms and general expectations. This can be examined with reference to other relevant financial and non-financial information. “The commonly used analytical review techniques are (a) comparisons involving a single component; (b) comparison across components (c) system analysis (d) predictive analysis (e) regression analysis and (f) business analysis”.

2.1.29 Comparison involving a single component : This procedure may be used at both the planning and execution stages of audit. It is commonly used to analyse statement of accounts. In attempting a comparision with budget the following questions will arise in the context :

(i) are the budgets of the entity prepared on a reliable basis, using reliable and adequate information.

(ii) have the budgets been reliable indicators of the results in the past.

In trend analysis, it is preferable to compare figures of a few previous years than just the immediately preceding year.

2.1.30 Comparison Across Components: This procedure may be used at both the planning and execution stages of audit. It is crucial that the definition of the ratios used is consistent with that used for prior years or with that of similar entities, as the case may be. This procedure is generally more effective than single component comparisons because it considers the inter relationship among different components. This can also provide assurance simultaneously for more than one component.

2.1.31 System analysis: The approach would be to scan or analyse individual entry in transaction listings so as to locate unusual entries or abnormalities. This procedure may be fruitfully used during execution stage if the data is computerized, use of appropriate auditing software can facilitate this procedure conveniently.

2.1.32 Independent Test of reasonableness: This procedure i.e predictive testing can be used only where sufficient information independent of accounting system is available. For example volume of property tax proceeds and the applicable rate may be used to predict the likely revenue of the ULB from this particular source.


2.1.33 Regression analysis: This is a statistical technique that creates an equation to reveal how one variable is related to one or more other variables. It is generally used in execution stage.

2.1.34 Business or result analysis: This is a macro level analysis of financial statement involving critical ratios related to returns, liquidity, financial stability, debt etc. It is useful technique for identification of risk areas during planning and audit completion stages and also for a better understanding of the entity and its operations. It is likely to prove a useful tool for more experienced members of the audit team who can apply their cumulative knowledge of the particular entity being audited.

C. Direct Substantive Testing of Transactions

2.1.35 Direct substantive testing of transactions and balances which seek to provide evidence as to the completeness, accuracy and validity of information in the accounting of financial statement. The testing involves examining of samples of transactions or account balances and is a form of inductive reasoning. Where the reasonableness of the aggregate results is inferred from the evidence of reliability of the individual details and have been tested. If the auditor wants to test whether purchases are made by following established procedures and have been accounted correctly in the records, he may test check some purchase transactions. If the transactions tested conform to procedure it can be inferred that the purchase or procurement procedure has been adhered to.

2.1.36 Steps involved in performing direct substantive tes ting are as follows :-

(i) Identification of the sub-systems to be tested ; (ii) Identification of the sub-audit objective to be tested for selected sub-system. The sub-

audit objectives could be to check whether the transactions are accurately reflected in the accounts and completely recorded in the accounts;

(iii) Identification of the technique for gathering evidence; (iv) Determination of the sample size and performing test check using the identified

technique for evidence gathering; (v) Formulation of conclusions.

2.1.37 Audit Planning

The audit plan should be an active rolling plan. It should be an annual exercise prepared in accordance with the availability of manpower resources and the priorities of audit during the year. The main objectives of the audit plan will be to:

(i) provide assurance that all deserving and significant auditable units have been considered while determining priorities;

(ii) provide a framework for identifying the segments, programmes, functions etc. which are significant and are vulnerable to risks and serious financial irregularities;

(iii) optimise the use of available resources for achieving the short term and long term audit objectives; and

(iv) minimize redundant audit activities.

- - - - - - -


CHAPTER – 2 AUDIT OF RECEIPTS

Audit Objectives and Scope

2.2.1 Audit of receipts embraces audit of all tax and non-tax receipts of the ULB. Audit is required to satisfy itself that the rules and procedures in that behalf are designed to secure an effective check on assessment, collection and proper allocation of revenues and are being duly observed and to make, for this purpose, such examination of the accounts as it thinks fit and report thereon.

2.2.2 Audit should satisfy itself that the requirements of legality and regularity are observed in individual assessments.

2.2.3 It is not the part of audit function to review a judicial decision nor it is to review the judgment exercised by officers in individual cases in areas purely in the ambit of their discretion. But it must be recognised that an examination of such cases is important for judging the effectiveness of assessment procedures, recovery process etc.

2.2.4 Any obvious errors in assessment, computation etc. can be pointed out in audit leaving it to the administrative authorities to set right the errors by adopting such action as they may consider appropriate.

2.2.5 Key areas of scrutiny as discussed elaborately in subsequent paragraphs shall include :

(i) scrutiny of regulations and procedures of assessment, collection and refunds. (ii) audit of arrangements for detection / prevention of frauds and other irregularities. (iii) scrutiny of effectiveness of rules and orders governing collection of receipts. (iv) audit should carefully review outstanding dues and look into the reasons and failures

in its realization. The audit may also suggest feasible means for their recovery. Wherever any dues appear to be irrecoverable, orders for their waiver and adjustment should be sought.

(v) the most important function of audit and the area of audit concern in relation to assessments and refunds is to satisfy itself by such check as it may consider necessary that internal procedures adequately provide for proper safeguards against loss of revenue and leakages therefrom.

2.2.6 General Principles of Audit of Receipts

The following general principles should be borne in mind:-

(a) It is primarily the responsibility of the ULB to see that all the items of revenue and other dues which have to be brought to account are correctly and promptly assessed, realised and credited to the Municipal Fund. It is one of the important functions of audit to see that all sums due to the ULB have been realised and properly accounted for. It should also see that the initial amount of demand have been entered in the accounts; that the demands arrived at in the case of taxes and fees are correct; and that adequate steps have been taken to enforce recovery. Any investigation by audit in this regard should be so conducted as not to interferer with the executive responsibility.

(b) Audit should ascertain that adequate regulations and procedures have been framed to secure an effective check on the assessment and collection of revenue and such regulations and procedures are being observed, and that demand, collection and balance statements are prepared according to rules and agreed with the subsidiary registers of demand and collection and that the balances are regularly reviewed or checked in the manner specified by the statutory rules, orders or regulations, if any.

(c) Audit should ascertain checks imposed against irregularities at the various stages of assessment, demand, collection and accounting and to suggest any appropriate improvement in the procedure. Audit might, for instance, suggest that a test inspection should be carried out by comparing a sample set of receipt counterfoils (duplicate copy) with the receipts actually in the hands of the tax-payers and the result of such an inspection being made available to audit.

(d) The audit of receipts should be regulated mainly with reference to the statutory provisions or financial rules or orders which may be applicable to the particular receipts. If the test check reveals any shortcoming in such rules or orders the advisability of amendment should be brought to notice of the ULB.


(e) It is not the duty of audit to question an authoritative interpretation of rules or orders and review a judicial decision or a decision given by ULB in a quasi-judicial capacity. This instruction does not, however, debar an auditor from bringing to notice any conclusion deducible from the examination or the results of a number of such decisions.

(f) Where any financial rule or order applicable to the case prescribes the scale or periodicity of recoveries it will be the duty of audit to see, as far as possible, that there is no deviation without proper authority from such scale or periodicity. The aim should be to see that the disregard of rules or defects of procedure are not such as to lead to leakage of revenue rather than to see that a particular sum due to the ULB was not realised at all or on due date.

(g) Audit will see that no amounts due to ULB are left outstanding on their books without sufficient reasons. Audit will continue carefully to watch such outstanding and suggest feasible means for their recovery. Whenever any dues appear to be irrecoverable, provision for remission thereof has been made under the orders of competent authority.

2.2.6 Audit of Receipts

Following instructions should be borne in mind during audit :-

(i) that adequate regulations and procedures have been framed to serve as effective check on the assessment, collection and allocation of revenue;

(ii) that such regulations and procedures are being observed; (iii) that where any financial rule or order prescribe the scale or periodicity, there is no

deviation without proper authority from such scale or periodicity ; (iv) that a demand collection and balance register of all recurring or/and non-recurring

demands is kept in accordance with the rules and collections watched against it; (v) that arrangements for collections are satisfactory and that there are no outstandings

requiring special notice; (vi) that the receipts are not directly appropriated for expenditure except with prior

approval of the competent authority. (vii) that if remissions are granted, they are duly supported by the sanction of the

competent authority; (viii) that moneys received are brought to account immediately and that there is no delay

in their remittances into the Bank. (ix) that return of the counterfoils of used receipt books is properly watched and that the

counterfoils are recorded after check so as to ensure that there had been no delay or omission in bringing the receipt to account ;

(x) that for cancelled receipts, both the original and duplicate foils are on record; (xi) that the amount realised on a receipt has been clearly written in words and figures.

Any indistinct or doubtful entry should be viewed seriously and further proof regarding the amount actually realised should be demanded from the officer concerned ;

(xii) that the amount realised as per the receipt issued has been correctly noted in the daily collection statement and the demand, collection and balance register;

(xiii) that reversible carbon has been used for the issue of receipt. (xiv) that receipt for realisation of money by cheque has been issued on its realisation

unless the rules of ULB provide otherwise. (xv) that receipts are given in the prescribed printed form duly machine numbered and

that no manuscript forms are used; (xvi) that the levy of taxes, rents, fees etc. is duly authorised and that recoveries are

effected according to the sanctioned scale and periodicity; (xvii) that surcharge has been recovered as per rules for the delay in payment of taxes

etc.; (xviii) that the demands are correctly assessed punctually and fully realised; (xix) that the refund / remissions granted are admissible under the rules and that they

have been duly sanctioned; (xx) that the income during the year derived from each source compares favorably with

that of the previous year and omission in realisation and marked decreases in income, if any, are fully explained;


2.2.8 Assessment and collection of taxes - It should be s een that :-

(a) the tax levied is authorised by the Act governing the ULB; (b) the prescribed procedure such as the obtaining of sanction and the publication of

proper notification has been observed wherever a new tax is levied or the rate of an existing tax is revised;

(c) the assessment is in accordance with the scale, if any, fixed in the Act or Rules; (d) exemption has been granted only in case entitled to exemption under the provisions

of the Act or the Rules; (e) all taxable items have been entered in the appropriate Demand, Collection and

Balance Register (Form F&A 15) required to be maintained. The total demand for the year has been arrived at and certified by the executive authority;

(f) an abstract of demand, collection and balance has been prepared in the register at the end of the year;

(g) the collection as noted in the Demand Collection and Balance Register agrees with the collection as entered in the daily collection statement;

(h) the writes off are supported by competent sanction and there is a record to show that the items are really irrecoverable;

(i) the grant of remissions is in accordance with the rules and orders; (j) the arrears of demand at the end of the year have been transferred to the new

Demand, Collection and Balance Register; (k) the arrears are not time-barred.

2.2.9 In case; where demand notices are issued in advance it should be ensured in audit that-

(i) demands issued for collection are in the prescribed form and are serially numbered; (ii) a stock account of demand books, receipt books etc., is maintained and also

account of the books issued for collection with provision therein for noting the date of issue, the person to whom issued and his initials and the date of return;

(iii) the demand agrees with the amount in the Demand, Collection and Balance Register;

(iv) collections have been promptly remitted to the zonal office or Treasury of ULB and have not been remained unduly in the hands of collecting agency / ward;

2.2.10 Revenue from Taxes

(A) The ULBs, subject to Section 132 of Municipal Corporation Act 1956 and general or special orders of the Sate Government, may impose the following taxes :-

(a) a tax payable by the owners of buildings or lands situated within the city, with reference to the gross annual letting value of the buildings or lands, called the property tax (Refer Para 2.2.21).

(b) water tax , in respect of lands and building to which water supply is furnished from or which are connected by means of pipe with ULB water works.

(c) a general sanitary cess , for the construction and maintenance of public latrines and for removal and disposal of refuge and general cleanliness of the city.

(d) a general lighting tax , where the lighting of public streets and places is undertaken by the ULB.

(e) a general fire tax , for the conduct and management of the fire service and for the protection of life and property in the case of fire.

(B) The water tax shall be charged:-

(a) on buildings and lands, which are exempted from property tax, at a rate as shall be determined by the Council.

(b) on buildings and lands, which are not exempted from property tax, at a rate as determined in clause (a) plus such percentage of the property tax as shall be determined by the ULB.

Provided that the water tax shall not be levied on buildings and lands owned by freedom fighters during their life time, if they are exempted from income tax and water connection is for domestic purpose and does not exceed half inch connection.

(C) The sanitary cess, lighting tax and fire tax shall be levied at a consolidated rate as under :-


(a) on buildings and lands, which are exempted from property tax, at a rate as determined by the Council.

(b) on buildings and lands, which are not exempted from property tax, at a rate prescribed under clause (a) plus such percentage of the property tax, as may be determined by the ULB.

(D) In addition to the taxes specified above the ULB may, subject to any general or special order of the State Government, impose any of the following taxes, namely:-

(a) a latrine or conservancy tax payable by the occupier or owner upon private latrines, privies or cesspools or open premises or compounds cleaned by ULB agency;

(b) a drainage tax where a system of drainage has been introduced; (c) a tax on persons exercising any profession or art or carrying on any trade or

calling within the city; (d) fees on the registration of cattle sold within the city; (e) market dues on persons exposing goods for sale in any market or in any

place belonging to or under the control of the Government or of the ULB; (f) a betterment tax on properties whose value may have improved as a result of

town planning scheme undertaken by the ULB; (g) a tax on pilgrims resorting periodically to a shrine within the limits of the ULB

according to their circumstances and property; (h) a tax on persons occupying houses, buildings or lands within the limits of the

ULB according to their circumstances and property; (i) a toll on new bridge constructed by the ULB; (j) a tax on advertisements other than advertisement published in newspapers; (k) a tax on theatres, theatrical performances and other shows for public

amusement; (l) a terminal tax on goods or animals exported from the limits of the ULB; and (m) any other tax, which the State Government has power to impose under the

Constitution of India, with the prior approval of the State Government.

2.2.11 Power to impose additional stamp duty on transfer of immovable property : -

(a) The duty imposed by the India Stamp Act, 1899 on instruments of sale, gift and usufructuary mortgage, respectively, of immovable property, shall in the case of instruments affecting immovable property situated within the limits of ULB be increased by one per- centum on the value of the property so situated, or in the case of an usufructuary mortgage on the amount secured by the instrument, as set forth in the instrument.

(b) The State Government shall every year pay to ULB from the Consolidated Fund of the State a grant-in-aid approximately equal to the extra duty realized after making such deductions on account of cost of collection as the State Government may determine.

2.2.12 Daily Collection Statement (Form F&A 3)

Audit should see that :-

(a) daily collection statements have been prepared in prescribed Form F&A 3 of MPMAM separately for each type of collection like property tax, water tax, trade license, rental etc. to facilitate accounting.

(b) these have been prepared by each collection center and cash counter of the ward to record all receipts - cash, cheques (including drafts).

(c) each authorised collection center and cash counter of ward has filled in the statement after receiving the money from assessees and users/beneficiaries of the municipal services.

(d) details of collection concerning current year, arrears, interest, and penalty have been recorded separately in the statement.

(e) account head wise collection details have been recorded. (f) the collection counters and centers have sent copies of the statements to the

concerned ward for consolidation.


(g) consolidated collection statement has been prepared by each ward for the collection made by its collection centers and counters with denominations for cash, cheques and drafts on daily basis.

(h) these have also been prepared by other sections and departments of the ULB authorised to collect revenue or receipts.

(i) collection summary has been prepared by each ward in form prescribed by ULB from consolidated daily collection statement separately for each type of collection like property tax, water tax, trade license, rental etc. to facilitate accounting.

(j) collection summary for each ward has included the collection of all the collection centers and counters in the ward on a daily basis.

(k) details of arrear collection, current period collection, interest, penalty, etc. have been provided against each account head.

(l) collection summary has also been prepared by other sections and departments of ULB from its daily collection statements.

(m) the daily collection statements alongwith summary have been submitted by each ward alongwith the details of cash, cheques and drafts to its zone office whereas the sections and departments have submitted the same to the concerned zone office or treasury for remittance and deposit in the bank.

(n) the cash, cheques and drafts collected by each ward/section/department have been deposited in the zone office/treasury on the same day or latest on next working day.

(o) arrangements for the safe custody of unremitted amount exist in each ward/section/department.

(p) the duty for collection of taxes has been performed by the authorized personnel under the written order of the Commissioner.

(q) the receipt has been tendered for every sum paid on account of tax, fee, levy etc. by the official of ULB receiving payment stating the sum and nature of tax etc. on account of which it has been paid and the postings thereof in the Daily Collection Statement have been traced / tallied from the counterfoils of the receipts.

2.2.13 Ward wise Collection Summary (Form F&A 4)


(a) collection summary has been prepared in prescribed Form F&A 4 of MPMAM by each zone office from collection summary received from wards/other sections and departments of ULB.

(b) each zone office has prepared the collection summary to summarize the collection of all the wards/sections/departments of the ULB. Treasury of ULB has also prepared the collection summary of the collections received by it from the sections and departments.

(c) the cash, cheques, drafts etc. received by the zone office/treasury of ULB have been deposited in the bank on the same day or latest on the next working day.

(d) Arrangements for safe custody of unremitted amount exist in the zone office/treasury. (e) details for the amount remitted and cheques/drafts deposited in the bank have been

entered. (f) a copy of the collection summary has been sent by the zone office and the treasury to

the accounts section of ULB for further summarization.

2.2.14 Zone wise Collection Summary (Form F&A 5)


(a) collection summary has been prepared in prescribed Form F&A 5 of MPMAM in account section from collection summary received from each zone and treasury of ULB.

(b) the accounts section has consolidated the zone wise and treasury collection summary showing total collections of the ULB on a daily basis for each type of collection and break-up for each zone and the treasury.

(c) it has been taken as the basis for preparing the receipt voucher concerning the collection entry by the accounts section of ULB.

2.2.15 Acknowledgment of Cash / Cheque Received (Form F&A 6)


(a) it has been prepared in prescribed Form F&A 6 of MPMAM.


(b) it has been issued as receipt document by each collection center and cash counter of the ward or any other section/department of ULB as a proof of receipt to any payer of taxes, fees, charges, or any other collection.

(c) the receipts have been machine numbered and generated in two copies, one for the payee and the other for the office record.

(d) a register of receipt books in the form prescribed by ULB has been maintained by the central store of the ULB showing the receipt books printed and details of ward/section/department/treasury wise issues.

(e) a register of receipt books in the form prescribed by ULB has also been maintained by each ward/section/department/treasury for the receipt books received from central stores.

(f) the receipt books issued by the central stores have been accounted for by the ward/section/department/treasury in the prescribed register.

(g) a register of receipts books has been maintained by each collection centre and cash counter for the receipt books received from the ward and its subsequent return to the ward after use.

(h) there is no misuse or pilferage of the receipt books from the initial stage of printing to the last stage of issue from whom money is received.

(i) reversible carbon has been used for the issue of receipts to the payee. (j) amount of each receipt has been properly accounted for and also posted in the

demand, collection and balance register, daily collection statement and in any other subsidiary register.

(k) all the unused receipt books have been kept under the personal custody of the authorised officer.

2.2.16 Cheque/Draft Receipt Register (Form F&A 11)


(a) cheque / draft receipt register has been maintained in prescribed Form F&A 11 of MPMAM by each zone office and treasury.

(b) details of all cheques and drafts received, cheques and drafts deposited in the bank and their status of collection has been recorded therein from the bank statement.

(c) dishonoured cheques, if any, have been entered in the Cheques Dishonoured Register.

2.2.17 Bank Reconciliation (Receipts)


(a) bank statement has been collected from the bank by the zone/treasury of ULB at the end of each week and reconciled with the cash remittance and cheques / drafts deposited.

(b) the dates for collection of cheques and drafts as shown in bank statement have been noted in the register of cheques and drafts.

(c) dishonoured cheques have been entered in the cheques dishonoured register and returned to the ward / section / department for realization in cash alongwith the surcharge, if any, for the delay in payment and the penalty for dishonoured cheque. The amount of discount, if any, allowed has also been recovered.

(d) there is no undue delay by the bank in the collection of cheques / drafts. (e) there is no other discrepancy in the bank statement except cheques / drafts under

collection. (f) the bank has not recovered any collection charges. (g) there is no difference in the amount of cash remitted and credited by bank.

Cheques Dishonoured Register (Form F&A 12)

2.2.18 Audit should see that :-

(a) cheques dishonoured register has been maintained in prescribed Form F&A 12 of MPMAM by each zone office and the treasury.

(b) it has been maintained to record all the information pertaining to the dishonoured cheques received from the respective bank branch and details concerning subsequent collection.


(c) the amount of dishonoured cheque has been realized in cash alongwith the penalty, rebate, if any, allowed at the time of receiving payment and surcharge, if any, recoverable due to delay in payment.

(d) the information of dishonoured cheques has been collected by the zone office and treasury from the respective bank branch on daily basis.

(e) the payment has not been accepted by cheque from the party concerned whose cheque was dishounoured.

2.2.19 Notice of Demand (Form F&A 13)


(a) Notice of Demand has been prepared in prescribed Form F&A 13 of MPMAM. (b) it has been used for raising demand for all dues, other income or any further demand

after scrutiny of the self assessment returns for property tax. (c) penalty/surcharge has been mentioned in the notice for non-payment of demand by

the specified date. (d) it has been prepared from the Demand, Collection and Balance Register. (e) In case of a demand (new assessment) raised for a period earlier to the financial year

in which assessment is made, was the demand split in the accounts according to the period to which it related to earlier period and the same was accounted as “Prior Period Income”.

2.2.20 Warrant of Distress –

(a) It should be seen that warrants in the prescribed form signed by the Commissioner have been issued to the person or persons who have not paid the sum as demanded in the notice of demand within 30 days of the service of such notice under section 175 of Madhya Pradesh Municipal Corporation Act, 1956.

(b) The total number of warrants issued with the amount involved, the warrants executed and the amount recovered and the warrants pending with the amount involved should be checked. The delay in either issuing or execution of the warrants should be commented upon also be seen.

2.2.21 Self-Assessment Property Tax Form (Form F&A 14)


(a) self assessment property tax return for payment of property tax has been filed in by the assesses in the prescribed Form F&A 14 of MPMAM and as revised by the ULB from time to time.

(b) the arithmetical accuracy of the computation of the annual letting value, property tax and other taxes has been ensured.

(c) the tax has been imposed on the annual letting value of the lands and buildings. Annual letting value of the building or land whether revenue paying or not, has been determined on the basis of per square meter of the built up area of the building or land taking into consideration the area in which building or land is situated, its location, purpose for which it is used, quality of construction etc.

Note:- (1) Previously it was “Carpet Area” which was substituted by “Built up Area” by MP. Act No. 2 of 2005 published in M.P. Rajpatra (Asadharan) dated. 20/01/2005.

(2) Built up area is approximately 20% more than the carpet area and in the property tax return for the year 2005-06 the area of the building should be 20% more than the area shown in the return for the year 2004-05.

(d) the computation of the annual letting value, property tax and other taxes is in accordance with the prescribed norms.

(e) service charge on the buildings owned by the Central Government has been levied as per prescribed norms.

(f) the built up area of the building, area of vacant land and its use viz commercial or residential shown in the return has been checked by the ward officer and the Revenue Inspector.

Note:- (1) If the assessment made by the owner found to be incorrect by the ULB and the variation is more than 10% the penalty equal to five times of the difference of self assessment made by the owner and the assessment made by ULB has been recovered.

(2) The property tax is based on the built up area of building, area of vacant land and its use viz commercial or residential.


(g) discount not exceeding six and a quarter percent has been allowed on the amount of property tax by whom it has been paid before such date as the ULB has fixed.

(h) surcharge, if any, has been recovered on the payment received after such date as the ULB has fixed.

(i) city development cess collected by the ULB on behalf of the State Government has been remitted.

2.2.22 Exemptions -

The property tax is not leviable in respect of the following properties, namely:

(a) buildings and lands owned by or vesting in (i) the Union Government;

(ii) the State Government; (iii) the Corporation;

(b) buildings and lands the annual value of which does not exceed six thousand rupees in case of Municipal area having population of one lakh or above and four thousand eight hundred rupees in case of Municipal area having population below one lakh; Provided that, if any such building or land is in the ownership of a person who owns any other building or land in the same city, the annual value of such building or land shall for the purposes of this clause be deemed to be the aggregate annual value of all buildings or lands, owned by him in the city;

(c) buildings and lands or portions thereof used exclusively for educational purposes including schools, boarding houses, hostels and libraries, if such buildings and lands or portions thereof are either owned by the educational institutions concerned or have been placed at the disposal of such educational institutions without payment of any rent;

(d) public parks and play grounds which are open to the public and building and land attached thereto if the rent derived therefrom is exclusively spent for the administration of parks and playgrounds to which they are attached;

(e) buildings and lands or portions thereof used exclusively for public worship or public charity such as mosques, temples, churches, dharmashalas, gurdwaras, hospitals, dispensaries, orphanages, alms houses, drinking water fountains, infirmaries for the treatment and care of animals and public burial grounds, or other places for the disposal of the dead; Provided that the following buildings and lands or portions thereof shall not be deemed to be used exclusively for public worship or for public charity namely:- (i) buildings or lands on which any trade or business is carried on unless the

rent derived from such buildings or lands is applied exclusively to religious purposes or to public charitable institutions aforesaid;

(ii) buildings or lands in respect of which rent is derived and such rent is not applied exclusively to religious purposes or public charitable institutions aforesaid;

(f) buildings or lands owned by widows or minors or persons subject to physical disability or mental infirmity owing to which they are incapable of earning their livelihood, where the main source of maintenance of such widows or minors or persons is the rent derived from such buildings and lands; Provided that such exemption shall, relate only to the first twelve thousand rupees or the annual value of such buildings and lands whichever is less;

(g) buildings and lands owned by freedom fighters, retired members of Defence Services and their widows during their life time if they are exempted from income tax;

(h) buildings and lands owned by blind persons, abandoned women and mentally incapacitated persons if sufficient proof is produced in this behalf and if the main source of their maintenance is the rent derived from such buildings and lands;

(i) buildings and lands in occupation of owner for his residence shall be exempted from property tax to the extent of fifty percent;

(j) the electric pole erected by the Madhya Pradesh Electricity Board; (k) property owned by such political party in the State which has been recognised by the

Election Commission of India. (l) water tax on buildings and lands owned by freedom fighters during their life time, if

they are exempted from income tax and the water connection is for domestic purpose and which does not exceed half-inch connection.


2.2.23 Demand, Collection and Balance Register (Form F&A 1 5)

Audit should ensure that :-

(a) separate demand, collection and balance register has been maintained in prescribed Form F&A 15 of MPMAM by each ward for each type of tax, levy etc. and for each financial year;

(b) the amount received from the assessees has been promptly posted in the register from the carbon copy of the receipt;

(c) details of demands, which the ULB raises, have been recorded; (d) information relating to past dues, demand for the current year, current and arrear

collections, and the closing balance of arrears, and advance collection, if any, have been recorded;

(e) it has been maintained dedicating separate page for each assessee; (f) it has been balanced periodically (quarterly/half-yearly/yearly), as the ULB may

decide; (g) the amount of current and arrear collection shown in the register agrees with the

amount mentioned in the receipts issued to the assessee; (h) the levy, demand and collection of taxes made as per prescribed rules and bye-laws; (i) the Parishad has framed any regulations specifying the occasions for imposition of

levy, rate of levy and mode of collection; (j) the Parishad has imposed any charges for any specific services rendered in

pursuance of Madhya Pradesh Nagar Palik Nigam Adhiniyam 1956; (k) the State Government have prescribed the scale for levy of fees or imposition of

charges; (l) the valuation of all municipal holdings reviewed at the termination of specified period; (m) all the changes in the demands entered in the register; (n) the Ward Officer made necessary postings in the register from the counterfoil receipt

and daily collection statement; (o) remissions, write offs to be checked to see that these were authorised by the

competent authority and are as per the approved accounting policies; (p) the officer authorized by the Commissioner has carefully checked the entries after the

total has been struck and signed the register in token of having made the check; (q) a list of all Parshad (including Mayor and the Speaker) is prepared by the

Commissioner as required by section 26 of the M.P. Municipal Corporation Act, 1956 within fifteen days from the expiration of each calendar quarter who have failed to pay any tax due by them to the ULB within six months from the date on which such tax became due; that a notice of demand is issued to every Parshad requiring him to pay the arrears within three months from the date of service of such notice and that a copy of the list is submitted to the Government;

(r) the entries in the register are checked by the Ward Officer and that he has placed his initials on each page in token of this examination;

(s) the outstandings are bona fide and that collections, if any, made against them have not been misappropriated.

(t) frequent scrutiny is exercised during the course of the year and also at the end of the year of all outstanding dues for prompt recovery;

(u) the closing balances of the previous demands have been correctly brought forward; (v) all the amounts shown in the counterfoils of receipts granted to parties have been

correctly noted in the register; (w) all sums due are realised with reasonable promptitude and checked against

demands.

2.2.24 Receipt Voucher (Form F&A 7)


(a) receipt voucher has been prepared in prescribed Form F&A 7 of MPMAM by accounts section of the ULB from the collection summary received from each zone office and the treasury of ULB;

(b) it has been used as voucher document by the ULB to account for the daily collections duly supported by zone wise and treasury collection summary;

(c) separate receipt voucher for each type of collection has been prepared.


2.2.25 Levy and Collection of Fees - The levy and collection of fees, that ULB is authorised to levy, should be examined to ensure:-

(i) that there is a sufficient authority for the levy of fees; (ii) that notification, if any, required regarding the levy of fees has been duly published in

the manner prescribed in the Act or Rules or Regulations; (iii) that fees are levied at the approved rates not exceeding the maximum, if any,

prescribed; (iv) that a record of fees due and realised is maintained; (v) that fees due have promptly been realised and have not been allowed to become

time-barred.

2.2.26 Leases - With regard to leases of property belonging to ULB or managed by it, it should be seen in audit that-

(a) every property usually leased out has been leased out;

Note : The Demand, Collection and Balance Register for the previous year should be examined to see that all items have been leased out during the current year and in case of omission a record of reasons for such omission is available.

(b) ordinarily the leases have been sold in public auction after due publicity and the amount of bid has been accepted by competent authority;

(c) indenture for the lease in the prescribed form has been executed setting forth the conditions of lease;

(d) security has been taken for the due fulfilment of the terms and conditions of the lease;

(e) the payment of instalments is watched through the Demand, Collection and Balance Register;

(f) penal interest, if any, due under the agreement for belated payments has been correctly calculated and recovered;

(g) in cases of persistent default action has been taken to terminate the lease as provided for in the agreement;

(h) record to keep watch for the renewal of lease has been maintained; (i) remissions, if any granted, satisfy the conditions prescribed in the rules or orders; (j) physical verification of leased properties has been done to ensure that there is no

subletting.

2.2.27 Cattle Registration Fees - The entries in daily collection statement should be checked with the counterfoils of receipts. It should be seen that the fees are recovered according to the rates, sanctioned by the ULB.

2.2.28 Cattle Pound (Goverdhan Project) - The prescribed pound registers should be otained and the entries in the register should be checked with the counterfoils of receipts, and it should be seen that the feeding charges are realised in accordance with the approved rates and that all entries regarding animals not released or otherwise disposed of at the end of the month are shown in red ink in the next month’s or next year’s register. The totals in the register should he checked and it should be seen that the collections are remitted promptly by pound keepers.

It should be seen that sales of unclaimed cattle, except cows which are transferred to nearby Gaushala, are justified and that the provisions of the Cattle Trespass Act are observed.

2.2.29 Fees from Vendors -

(a) In case of casual vendors it should be seen tha t :-

(i) the dues are realised according to the rates in the sanctioned bye-laws and that the rules prescribed are generally followed;

(ii) the passes are kept in the personal custody of the prescribed authority; (iii) proper account of receipt, issues and realization of money value of passes has been

maintained; (iv) the collection should he checked with the value of the money value passes issued

and traced into daily collection statement; (v) the stock account should be checked at the commencement of audit and the balance

of the money value passes should be verified.


(b) In case of regular vendors it should be seen th at :-

(i) the leasing is permissible by law; (ii) it is properly sanctioned; (iii) lease money has been realised as per terms and conditions of the indenture; (iv) the highest bid is accepted or adequate reasons are placed on record rejecting the

highest offer; (v) indenture in prescribed form have been duly obtained from the lessee; (vi) the terms of the indenture are duly enforced; and (vii) the defaulters of previous years are not given the lease again.

2.2.30 Water Charges


(a) water charges have been recovered at the prescribed rate for domestic, or commercial or industrial purpose;

(b) new connections allowed and old connections cut off during the year are as per applications, fitter’s diaries and with the register of house connections;

(c) meter-reading as recorded in the meter register has been traced for water supplied by meter to see that the charge is correctly made;

(d) the total collections for the year agree with the total of daily collection statement and the arrears at the close of the year have been scrutinized;

(e) previous year’s arrears have been brought forward.

Note :- Freedom fighters are exempt during their life time from payment of water tax and not water charges (Proviso to Section 132(4)(b) of Madhya Pradesh Municipal Corporation Act, 1956).

2.2.31 Licence Fee – In auditing the receipts from all sources in which licences are issued, it should be seen that –

(a) the fees realised are according to the scale in the bye-laws sanctioned by Government or competent authority;

(b) the receipts; issues and balances of the licence forms as shown in the stock account are correct;

(c) in the case of licences for hackney carriages, flour mills, mutton shops, shops under Gumashta Act, pet dogs etc., the number of licences issued during the year compares favourably with the figure of the previous year and that there is no remarkable deficiency;

(d) record to keep watch for the renewal of license / registration has been maintained; (e) renewal fee alongwith penalty, if any, has been recovered from the licencee; (f) suitable action is taken in cases in which licences are required to be taken out but

has neither been applied for nor taken out;

2.2.32 Building Permission


(a) register for forms for building permission, registration of architect and registration of colonizer showing source of receipt, indent number and date, quantity received and sale thereof has been maintained.

(b) sale proceeds of forms have been shown in the register as well as included in the daily collection statement.

(c) registration fees has been realized from the architect / colonizer as per prescribed scale.

(d) register for registered architects and colonizers has been maintained in the prescribed form.

(e) building permission fee as per prescribed scale has been recovered. (f) labour welfare cess recovered alongwith building permission fee has been remitted

to the concerned authority and acknowledgement obtained. (g) renewal fees has been recovered, wherever necessary, from the architect / colonizer

at the prescribed scale. (h) fees for the permission of development of colony has been deposited by the

colonizer at the prescribed scale.


(i) revalidation charges of building permission have been recovered if the building has not been erected / re-erected within the period specified in the building permission.

(j) copy of completion certificate issued under section 301 of Madhya Pradesh Municipal Corporation Act, 1956 has also been endorsed to the ward concerned for recovery of property tax.

(k) dismantling charges of any unauthorized construction have been recovered from the colonizer, owner of the building.

Fees for Birth / Death Certificate


(a) application has been received in the prescribed form. (b) registration fees for birth / death certificate has been received as laid down in the

Madhya Pradesh Birth and Death Registration Rules 1969 and receipt therefor has been issued.

(c) certificate has been issued only on receipt of the registration fees. (d) ULB share of registration fees has been included in the daily collection statement

and remitted into treasury of ULB. (e) Government share of registration fee has been deposited in Government treasury

and receipted chalan has been kept in record.

2.2.34 Fees from Slaughter House –

(a) It should be seen that the fees are realised according to the sanctioned rates; (b) The number of animals slaughtered should be checked with that shown in the

register maintained by the Passing officer, Veterinary Assistant Surgeon; (c) The fees realized from slaughter of buffalos on behalf of the State Government has

been properly accounted for and remitted to the Veterinary Department; (d) Proper receipt has been obtained from Veterinary Department for the amount

remitted.

2.2.35 Rent of land and buildings – Audit should see that register of rent of land and buildings has been maintained in the form prescribed by ULB. Separate page has been allotted for each building. Rent has been recovered as per rules and scale prescribed by ULB from the pay of the employee and posted in the register. Reasons for vacant buildings, if any, be ensured. Leased land and buildings have been noted in the Demand, Collection and Balance Register.

Miscellaneous Sales

2.2.36 In the case of miscellaneous sales it should generally be seen (1) that they have been conducted and confirmed by competent authorities; (2) that earnest money deposit is received wherever necessary and the balance is recovered promptly (3) that the sale proceeds have been recovered generally before the articles sold out are allowed to be removed; (4) that printed receipts have been issued in all cases of collection, (5) that the amounts realised have promptly been brought to account through daily collection statement; and (6) that the demand in such cases which could not be promptly realized has been entered in Miscellaneous Receipts Register prescribed for the purpose to watch the recovery thereof.

Miscellaneous Sales generally include sale of solid waste, trees, fruits, grass, nursery plants, flowers, tender forms, ration card and other forms (Registration of contractors, colonizers, architects, building permission), obsolete store, obsolete assets, scrap, old newspaper, water supply through tankers etc).

2.2.37 Miscellaneous Receipts – These generally consist o f -

(a) Copying fees (b) Sarai, Guest House, Dharmashala, etc. receipts (c) Hire charges of ULB property. (d) Recoveries for services rendered (e) Receipts pertaining to Water Works Department such as fees for cutting pipe

connections, etc. (f) Fines creditable to Municipal Fund, compounding fees under the Madhya Pradesh

Municipal Corporation Act, 1956. (g) School fees.


(h) Property transfer (mutation) charges. (i) Membership fees (library, swimming pool) (j) Hire charges of vehicles, hearse (Shanti Vahan), ambulance etc. (k) Hire charges of tractor trolley, hydraulic machine for cleaning septic tank and other

equipments. (l) Fees for cutting of roads. (m) Fees collected under Right To Information Act. (n) Toll tax (o) Penalties and compounding fee collected by encroachment section. (p) Fines by mobile or sitting court.


(a) register has been maintained to watch the recovery of each type of miscellaneous receipt.

(b) miscellaneous receipts have been recovered in accordance with the rules and the sanctioned scale.

(c) register has been maintained at Sarai, Guest House, Dharmashala etc. and fee recovered as per rules;

(d) the receipt has been issued for each sum received and entered in the daily collection statement by the collecting agency;

(e) hire charges of hearse and ambulance received after office hours entered in Control Room Revenue Register have been deposited on next working day and regular receipts have been issued. Receipt number and date has been noted in the register.

(f) the amount has been promptly remitted to the zonal office or treasury of ULB; (g) moneys are received in advance for private works undertaken; the cost incurred is

debited against it; and the accounts are balanced and prompt steps are taken to recover the outstanding, if any;

(h) school fees agree with monthly attendance rolls; the rates of fees and cases of free ships, etc., are with reference to the standing orders on the subject; and tuition fee due to exemption under different categories has been got reimbursed from the Government.

(i) fines collected by mobile or sitting court under the provisions of the act has been received by the ULB from the court.

2.2.38 Refund – Audit should see that refund of any tax, revenue etc. to any person is in accordance with the provisions of rules and bye laws made under Madhya Pradesh Municipal Corporation Act, 1956.

2.2.39 Subscriptions – Whenever ULB undertakes the collection of voluntary subscription for some public purposes, it should be seen that :-

(i) a register is maintained showing the names of subscribers, amount promised and amount recovered, etc.;

(ii) a receipt is granted in acknowledgement of the subscription; (iii) the register is signed by the authorised officer of ULB and steps taken to realise the

promised subscriptions. (iv) that the amount of subscription has been remitted to the organisation on whose

behalf it was collected.

2.2.40 Account of Receipts Book, Licence Books, Forms etc -

(a) The stock of receipt books, tickets, licences, etc., is in the personal custody of an authorised officer, who is entrusted with this work who should maintain the stock account thereof in the prescribed form;

(b) When the receipt books are received from the press the total number of receipt contained in each book are examined and a certificate thereof recorded on the fly leaf by a responsible officer. It should also be seen that the receipts are stamped with the seal of the ULB at the time of issue of the books;

(c) The purchases of receipt books are traced into the stock register of Receipt Books from the payment vouchers;

(d) The receipts and licence forms are bound, machine numbered consecutively and the common seal of the ULB affixed on each form and counterfoil;


(e) A warning is printed on the receipts that the affixing of common seal on the receipt does not constitute acquaintance for the money and that the signature of the tax collector or other authorised person actually receiving the money is also necessary on the receipt;

(f) The opening balance of receipt books of various categories is agreed with the previous year’s register;

(g) No receipt book issued unless it is immediately required for use and that when a fresh receipt book is brought into use it is started from that date only or if there is no receipt on that date, on the day the first receipt is passed. It should also be seen that the receipt books are issued in serial order. Each receipt is issued under the full signature of the official issuing it by means of reversible carbon process;

(h) All the receipt book issued and used during the year agree with those shown in the stock register of receipt books;

(i) The used receipt books are immediately returned to office for being stocked in the personal custody of the officer who issued them. Before issuing a new one, the entries therein are duly scrutinised to see that no page has been removed from the receipt book; erasures or corrections, if any, are critically scrutinized; and the unused form are promptly cancelled so as to prevent their misuse;

(j) The closing balance of each type of receipt book is checked and carried forward to the next year’s register correctly;

(k) Separate account has been kept of all saleable forms, Credits of sale-proceeds of such forms should be traced into the daily collection statement;

(l) There is evidence of annual verification of the stock of forms etc. by the authorized officer;

(m) No form of monetary value, has been taken out in the office by means of a duplicator as they can easily be misused.

2.2.41 Audit of Receipt Books and all Other Valuable Forms

Audit of Receipt Books and all other valuable forms will consist in seeing that:-

(i) the number of books and all other valuable forms received and entered in the prescribed register agree with the bills of suppliers and the books alongwith all other valuable forms are kept in store under lock and' key in the custody of an authorised officer;

(ii) receipt books / forms have been issued by the store to the various departments/ sections against the proper indent showing the utilization of books / forms previously issued.

(iii) the register for issues shall be maintained department / section /ward wise showing indent number and date, date of issue, quantity, date of receipt from the department / section.

(iv) register for receipt books and priced forms / publications has been maintained by each department / section / ward to account for the books / forms etc. received from central store.

(v) periodical reconciliation of books / forms issued by central store has been done with the various departments / sections / wards to which issued.

(vi) the number of receipt forms contained in each book is recorded on the cover page under the initials of a responsible officer and that all forms are machine numbered and stamped with seal of ULB;

(vii) receipt books are issued only to officers authorised to issue receipts and that their acknowledgements are on record;

(viii) each receipt book has been entered separately in the register showing the date of receipt from central store, date of issue, name of employee, dates on which first and last receipt issued and date of return of completed receipt book.

(ix) in the case of defaced or cancelled receipts both the original and duplicate are recorded together with the reason for defacement or cancellation;

(x) priced forms and publications received in bulk by the department / section have been entered in a separate register showing the date of receipt, date of sale, quantity and amount.

(xi) a periodical verification is conducted of both the used and unused receipt books and other valuable forms with the closing balance in the account of stores as well as in each section / department / zone / ward;


(xii) the amounts shown as having been realised on the counterfoils of receipts and sale of other valuable forms have been correctly entered in the daily collection statement;

(xiii) the return of .counterfoils of used Receipt Books is properly watched and the counterfoils are recorded after check so as to ensure that there had been no delay or omission in bringing the receipts to account.

(xiv) completed receipt book shall be returned to the central store by each department / section / ward at the close of each financial year after the audit is completed.

2.2.42 Assignment of Revenue and other Concessions involving relinquishm ent of Revenue

All orders which involve assignment of revenue, or concession, grant, lease, or a right to water power, or any easement or privilege in respect of any such concession ; or which in any way involve a relinquishment of revenue, come within the purview of audit as they have financial implications.

- - - - - - -


CHAPTER - 3 AUDIT OF EXPENDITURE

Introductory

2.3.1 The instructions in this chapter are general and deal with the important records of accounts which are common to all ULBs. Peculiarities in ULB having special sets of books of accounts or any other special features have been dealt with in separate chapters. The principles given in this chapter are explanatory and supplementary to the rules and instructions issued by the ULB / Urban Administration and Development Department of State Govt., Finance Department and Director Local Fund Audit. These are by no means exhaustive and are meant simply for guidance of the Audit whose intelligence or discretion is not attempted to be fettered.

2.3.2 The primary object of audit is to ensure that the original data on which the accounts are based, are correct and complete. All possible attention should, therefore, be paid to this object of audit. It should also be ascertained whether the rules framed by the State Govt. and under Municipal Corporation Act 1956 are properly followed by the ULBs.

For an intelligent and efficient audit, the Audit should have an intimate knowledge of various Acts, Codes and Manuals and any special rules relating to such accounts.

Before taking up, the audit of an ULB, the audit should make itself conversant with the general set-up of ULB, the nature and volume of transactions it deals in the system of accounts, the account books prescribed, the budget, manual and the administrative report or any other publications, arrangements for internal audit by ULB in order to make audit both intelligent and useful instead of allowing it to become merely a routine process of checking registers in a disconnected and mechanical way.

2.3.3 It is the duty of the Audit to see that the incurring of expenditure from the Municipal Fund of the ULB is governed by the following essential conditions-

(a) there should be provision of funds authorised by competent authority fixing the limits within which expenditure can be incurred ;

(b) the expenditure incurred should conform to the relevant provisions of the M.P Municipal Corporation Act 1956 and rules made thereunder and should also be in accordance with the financial rules and regulations framed by ULB; and

(c) there should exist sanction, either special or general accorded by competent authority, authorising such expenditure.

2.3.4 The expenditure should be incurred with due regard to broad and general principles of financial propriety. Any case involving breach of these principles and thereby resulting in improper expenditure or waste of money should be treated by Audit in the same manner as cases of irregular or unauthorised expenditure.

2.3.5 No expenditure shall be incurred from the Municipal Fund except for the purposes of ULB. The power to sanction money from the Municipal Fund, including power to dispose of property and store of the ULB, is vested in the Council whose sanction, given directly or by persons to whom powers for it have been delegated, is necessary.

2.3.6 Audit against Budget Grant

Audit against budget grant should be directed primarily to ascertaining that the money expended has been applied to the purpose or purposes for which the budget grant is sanctioned by the Council and that the amount of expenditure does not exceed the amount allocated for it.

Following items shall be, however, exception to the provision as aforesaid:

(a) sums of which the expenditure has been sanctioned by the Mayor-in-Council; (b) refunds of taxes and other moneys which the Commissioner is by the Act authorised

to make; (c) repayments of moneys belonging to contractors or other persons held in deposit and

of money collected or credited to the Municipal Fund by mistake; (d) sums which the Commissioner is by the Act or any other enactment required or

empowered to pay by way of compensation;


(e) sums payable :- (i) by order of the Government or under an award made under the Arbitration

Act 1940. (ii) under a decree or order of a civil or criminal court passed against the

Commissioner. (iii) under the compromise of any suit or other legal proceedings or claim.

(f) expenses incurred by the ULB due to outbreak of dangerous infectious diseases. (g) On the occurrence of any accident or unforeseen event or on the threatened

occurrence of any disaster, involving or likely to involve extensive damage to any property of ULB or danger to human or animal life, the Commissioner shall take such immediate action as the emergency shall appear to him to justify and require reporting it forthwith to the Mayor-in-Council, when he has done so, the action he has taken and his reasons for taking the same and the cost, if any, incurred or likely to be incurred in consequence of such action.

2.3.7 Audit of Sanctions to Expenditure

One of the important functions of Audit in relation to the audit of expenditure is to see that each item of expenditure is covered by the sanction of the authority competent to sanction it. Here Audit has not only to see that the expenditure is covered by a sanction, either general or special order but it has also to satisfy itself (1) that the authority sanctioning it is competent to do so by virtue of the powers vested in it by the provisions of the Act, or of the Rules or Orders made thereunder or by the delegation of financial authority and (2) that the sanction is definite and needs no reference either to the sanctioning authority itself or to any higher authority. Audit has further to see that the expenditure conforms to the provisions of the sanction.

2.3.8 Utmost care and attention should be given to the work connected with the audit of sanctions to expenditure as once a sanction has been accepted in audit expenditure may continue to be incurred against it.

2.3.9 In the audit of sanctions to expenditure, the guiding principles should be:-

(i) If the sanctioning authority is vested with full powers in respect of a certain class of expenditure, a sanction accorded under those powers can be challenged by audit only on grounds of propriety ;

(ii) If the authority is vested with powers which may be exercised subject to certain criteria which are expressed in a general term, sanctions accorded under these powers can be challenged by Audit – (a) If the disregard of the criteria is so serious as to make the sanction perverse,

or (b) If the facts of the case are such as to make the Audit confident that one or

more of the criteria has been disregarded: (iii) If it is vested with powers which are expressed in precise terms, the Audit is to

ascertain that the order defining its powers is obeyed exactly in every instance ; (iv) For the purpose of financial sanction a group of works which form one project shall

be considered as one work. The sanction of a higher authority to a project in such cases should not be avoided by reason of the fact that the cost of each particular work in the project does not require such sanction ;

Note – A preliminary enquiry, survey or experiment which must necessarily precede the preparation of any project or scheme, need not be considered for the purpose of this rule as forming part of that project or scheme. (v) If any one item of a scheme requires sanction of a higher authority, Audit should

object expenditure on that item until sanction to it is obtained. In determining whether objection should also be raised to expenditure on any other portion of the scheme prior to the receipt of such sanction it should be seen that the expenditure is not likely to exceed, at a latter date, the limit upto which sanction can be accorded by the original sanctioning authority.

2.3.10 In scrutinising sanctions and orders for the grant of additions to pay and other special concessions and allowances, the Audit besides considering the competency of the authority in relation to the provisions of the Act should examine carefully the reasons for the grant of the special pay, allowance or concession, as recorded in the sanction order and should question the propriety of such sanction if it appears to him that the principles laid down in the relevant service rules for the grant of such special pay, concession, etc., have not been observed.


2.3.11 If it is known that the expenditure will entail a recovery from a third party, or such a recovery has been ordered by the sanctioning authority, recovery thereof should be checked.

2.3.12 Sanction with a long period of currency, as well as sanctions of a permanent nature, would require to be reviewed periodically so that the authority concerned may be addressed to review the sanction, if necessary, in the emerging context.

2.3.13 Audit against Rules and Orders (Audit against Regul arity)

Audit against regularity consists in verifying that the expenditure conforms to the provisions of the Act or of the rules made thereunder and is also in accordance with the financial rules, regulations and orders issued by a competent authority either in pursuance of provisions of the Act or by virtue of powers formally delegated to it by a higher authority. The rules, regulations and orders against which audit is conducted mainly fall under the following categories:-

(a) rules and orders regulating the powers to incur and sanction expenditure from the Funds of the ULB.

(b) rules and orders dealing with the mode of presentation of claims against ULB, withdrawing moneys from the banks and in general the financial rules prescribing the detailed procedure to be followed by employees in dealing with ULB transactions : and

(c) rules and orders regulating the conditions of service and pay and allowances and pension of employees.

2.3.14 The work of Audit in relation to regularity of expenditure is of a quasi-judicial character. It implies the interpretation of statute, rules and orders with reference to the case-law of previous decisions and precedents. Audit has not the final power of interpretation; this resides in the authority specified in the Act, or, where the Act is silent, in the Council. Interpretation by Audit should be based on the plain meaning of the section, rule, or order, except where this is inconsistent with another section, rule or order. In such a case the inconsistency should be referred to the competent authority for its resolution or removal.

2.3.15 Audit of expenditure against regularity implies examining all financial rules and orders affecting expenditure and other transactions and to see that the rules etc. are themselves intra vires.

2.3.16 In the course of scrutiny of the rules and orders it should be seen-

(a) that they are not inconsistent with provisions of the Act or Orders issued there under; (b) that they are consistent with the essential requirements of audit and accounts; (c) that they do not conflict with the orders of, or rules made by the Government; and. (d) that the issuing authority possesses the necessary rule making power.

2.3.17 The principle to be observed should be that the discretion vested in authorities empowered to make rules is not unnecessarily fettered merely because difficulties may arise in the application of the audit checks or the maintenance of proper accounts. If the audit and accounts procedure can be amended without loss of efficiency or extra expense, the rule should be accepted and procedure amended accordingly.

2.3.18 If the Audit has reason to believe that undue advantage may be taken of the provisions of any rule under which the order is issued, it may bring the case to the notice of the Government, e.g. a provision benefiting the rule maker itself.

2.3.19 All orders of delegation of financial authority should be scrutinised carefully, as once they have been accepted, audit of sanctions as well as of expenditure or other transactions may be conducted against them till the time they are inforce.

2.3.20 Cases may arise in which, Audit feels that the order is likely to impair seriously the efficiency of financial control. For instance, the principle of authorising disbursing officers themselves to sanction special charges may be carried too far or extended to cases in which some sort of control by higher authority seems specifically advisable. If such cases are important, the Audit should make a suitable representation to the Commissioner, and give the latter the opportuni-ty of reviewing the orders.

2.3.21 Audit against Propriety

It is an essential and inherent function of Audit to bring to light not only cases of clear irregularity but also every matter which in its judgment appears to involve improper expenditure or waste of public money or store, even though the accounts themselves may be


in order and no obvious irregularity has occurred ; such audit often called “Propriety Audit”. It is thus not sufficient to see that sundry rules or orders of competent authority have been observed. It is of equal importance to see that the broad principles of orthodox finance are borne in mind not only by disbursing officers but also by sanctioning authorities.

2.3.22 No precise rule can be laid down for regulating the course of audit against propriety. Its object is to support a reasonably high standard of public financial morality, of sound financial administration, and devotion to the financial interests of the ULB. Audit in the performance of its duties should in any case apply the following general principles which have for long been recognised as standards of financial propriety :-

(a) The expenditure should not be prima facie more than the occasion demands. Every officer is expected to exercise the same vigilance in respect of expenditure incurred from ULB Fund as a person of ordinary prudence would exercise in respect of expenditure of his own money;

(b) No authority should exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage;

(c) ULB Fund should not be utilised for the benefit of a particular person or section or 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;

(d) The amount of allowances, such as travelling allowance, granted to meet expenditure of a particular type, should be so regulated that it is not on the whole source of profit to the recipient. Proper discharge of duties by Audit in this field is a very delicate matter and requires much discretion and tact. A challenge against expenditure should not be expressed as based on “canons of financial propriety” but as transgressing a universally accepted standard of official conduct or financial administration.

(e) Briefly, the spirit which should animate propriety audit could be explained in the following terms:- In place of the formal examination of authorities and of rules, the audit should be conducted with greater regard to the broad principles of legitimate public finance. The audit will not only see whether there is quoted authority for expenditure, but will also investigate the necessity for it. It will ask whether individual item was in furtherance of the scheme for which the budget provided; whether the same results could have been obtained otherwise with greater economy, whether the rate and scale of expenditure was justified in the circumstances, in fact, they will ask every question that might be expected from an intelligent tax payer bent on getting the best value for his money. The Audit will also devote more of its time to look into the manner in which the various executive officers are undertaking its more important financial responsibilities.

2.3.23 Economy, efficiency and effectiveness audit (a) Three basic elements of value for money are economy, efficiency and effectiveness.

Economy is concerned with minimizing the cost of resources acquired or used, having regard to quality; Efficiency is the relationship between the output of goods or services or other results and the resources used to produce them; Effectiveness is concerned with the relationship between the intended results and the actual results of a scheme, project or programme.

(b) Besides the scrutiny of individual transactions with a view to detect cases of improper, extravagant, wasteful or uneconomical expenditure, an important function of audit is to examine how far the agency or authority whose transactions are under audit is adequately discharging its financial responsibility in regard to the various schemes undertaken by it. The pattern of municipal expenditure has undergone a vital change in the context of development programmes and welfare activities and it is essential that expenditure incurred on different schemes should be examined in audit to ascertain whether (a) such schemes are being executed and their operations conducted economically and efficiently; and (b) they are producing the results expected of them.

(c) Since these concepts including the concept of ‘value for money’ have lately attracted most of attention, these are discussed in chapter 2 of section 3 of this Manual comprehensively.


2.3.24 General Examination of Accounts:-

Immediately on taking up audit, all accounts registers and records including the accounts of receipts and of stores, cash book, vouchers, measurement books, muster rolls and works accounts for the entire period covered by the audit should be generally examined with a view to see :-

(i) that they have been written uptodate, are complete in all respects and are susceptible to audit ;

(ii) that they have been maintained in accordance with the provisions of Madhya Pradesh Municipal Accounts Manual ;

(iii) that the writings do not indicate any attempt to tamper with record or to evade the requirement of the rule. The recorded transactions have been periodically reviewed intelligently by a responsible officer and the abnormal and doubtful features investi-gated in detail.

(iv) that subsidiary registers of cash and store accounts have been properly maintained and the totals and balances are correctly taken over to the main registers / accounts. The period of accounts to be audited should, unless otherwise specified, be the period falling between the month upto which the accounts were last audited' and the month preceding in which the present audit takes place.

2.3.25 The Audit of expenditure shall interalia ensure tha t:-

(i) the expenditure is in accordance with a sanction properly accorded and is incurred by an officer competent to incur it ;

(ii) register for settlement of service bills (Form F&A 26) has been maintained to record all bills for service or utility expenses like telephone, electricity etc.;

(iii) all prescribed preliminaries to expenditure are observed, such as proper estimates framed and approved by competent authority for works expenditure, a health certificate obtained, where necessary, before disbursement of pay to an employee, etc. ;

(iv) the rules regulating the method of payment have been duly observed by the disbursing officer ;

(v) 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 ULB on the same account is impossible ;

(vi) the charge is correctly classified, and that 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 ;

(vii) recurring charges which are payable on the fulfilment of certain conditions or uptil the occurrence of a certain event should be admitted in audit on the certificate recorded by the officer to the effect that the necessary conditions have been duly fulfilled or the event has not yet occurred, as the case may be.

(viii) the rates paid for work done and supplies made have been checked with great diligence and care. Individual abnormalities in rates should be pointed out.

(ix) a proper voucher complete in all respects and in proper form, where one is prescribed, exists in support of every item of expenditure and it bears evidence of due scrutiny of the claim and “Pay Order” by the authorised officer ;

(x) full details of each item of expenditure are available in payment advice prepared in form F&A 16 of MPMAM and voucher has been prepared in form F&A 17 of MPMAM.

(xi) the vouchers, sub vouchers and muster rolls have been duly cancelled or defaced after payment in such a way that they cannot be used again to prefer a second claim;

(xii) the expenditure sanctioned for or required to be incurred within a limited period has not been incurred beyond that period without proper sanction;

(xiii) the rates paid for work done or supplies made are in accordance within scale or schedule prescribed by competent authority and, where no such scale has been prescribed, are the lowest obtainable in the market conditions prevailing locally;

(xiv) store paid for has been properly accounted for in the various inventory registers and their quality and specifications have been certified as conforming to those of the goods ordered and paid for;


(xv) open competitive tenders have been invited as enjoined by the rules for the purchase of articles required and in case of non-acceptance of the lowest tender, the reasons, therefore, have been duly recorded and whether contract agreements have been promptly executed by the competent authority ;

(xvi) where formal written contracts have not been entered into, at least written agreements as to price have been entered into before orders are placed for supplies etc.

(xvii) there is no undue rush of expenditure at the fag end of the financial year, and, if there is any such rush, it does not lead to financial irregularities such as failure to obtain supplies at all or according to desired specifications for payments made etc. and that the charges incurred in one year has not been met from the budget grant of the next year.

(xviii) the details given in the sub-vouchers agree with the entries in inventory register and other subsidiary registers or record maintained.

(xix) the charges paid are of obvious necessity and the rates are not excessive. (xx) the certificate/revised certificate of reasonableness of rent issued by the

Collector of the District in the case of private accommodation hired for ULB use should invariably : - (a) mention the amount of monthly rent certified to be reasonable ; (b) bear issue number and date of the Collectorate ; (c) the special reasons for revision of rent in case of revised certificate

(xxi) where expenditure on rent, taxes or charges for the consumption of electricity and water, relating to buildings used wholly or in part for residential purposes, has been incurred initially from ULB Fund, the share of such expenses payable by the persons who reside in the building has been correctly assessed and realised from them;

(xxii) bill register has been maintained for the verification and payment of bills of street light, low tension connection, and other connections of Madhya Pradesh Vidhyut Vitran Companies. Similarly telephone register has been maintained for each telephone connection for verification and payment of telephone bill.

(xxiii) bills for repairs and maintenance of vehicles, machineries, equipments etc. have been verified from the concern log book before payment.

(xxiv) payment to supplier has been made on acceptance and approval of the material supplied and on receipt of the processed bill from the Store Department.

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CHAPTER – 4 AUDIT OF PROCUREMENT AND INVENTORY MANAGEMENT


The store and stock accounts form part of the initial and subsidiary accounts of an organization. The audit of this part of the account shall be directed towards ascertaining that the rules governing procurement, receipt and issue, custody, condemnation, sale and physical verification of store are well devised and implemented. Audit should bring to the notice of the ULB management any important deficiencies in the quantities of store held or infirmities and defects in the system of control.

2.4.2 To fulfil the objective the Audit is expected to be fully conversant with the general rules and its responsibilities in relation to store and stock accounts. It is imperative in the context that besides general purchase rules the auditors should study instructions peculiar to the ULB under scrutiny. It is also to be ensured that the specific rules and instructions are well devised and applied properly and effectively and there are no shortcomings in the system itself.

Note:- The term “Procurement” applies to all articles and material purchased or otherwise acquired for the use of ULB including not only expendable and issuable articles in use or accumulated for specific purposes, but also movable and immovable fixed assets viz plant, machinery, instruments, furniture, equipment, fixtures buildings, land; etc.

2.4.3 As regards purchase of store, it should· be seen that :-

(i) these are properly sanctioned, are made economically in accordance with the purchase rules and orders made by ULB for purchase of store. In particular when store is purchased from firms of repute the system of open competitive tender is adopted and the purchase is made from the lowest tenderer unless there are recorded reasons to the contrary;

(ii) a Tender Committee has been set up for each department of ULB where purchases are made exceeding Rs. 10,000 (ten thousand) in value per annum; that purchases made by the Tender Committee, are according to Store Purchase Rules and the instructions of ULB on the subject;

(iii) tax clearance certificate in Form 64 of the concerned Commercial Tax Officer has been obtained from the supplier if the supply order is for more than rupees three lakh and one of the office of the supplier is stationed in Madhya Pradesh;

(iv) the rates paid agree with those shown in the contract or agreement made for the supply of the store;

(v) certificates of quality and quantity have been furnished by the passing and receiving employee before payment is made ;

(vi) purchase orders have not been split up to avoid the necessity of obtaining the sanction of higher authority;

(vii) register of settlement of supplier bills Form F&A 25 has been maintained to record invoices / bills received from the suppliers; and

(viii) the payments for the purchase of store is conducted according to the rules prescribed in regard to the audit of expenditure and tax has been deducted-at-source.

Note :- Audit may call attention to cases of uneconomical purchases of store and to losses, which may be clearly and definitely attributable to the defective or inferior nature of store which were accepted and certified to be satisfactory in quality.

2.4.4 In scrutinising store accounts it should be seen th at:-

(a) the quantity account has been kept in the inventory register (Form F&A 43) for each article / material showing receipts, issues and balances;

(b) every article purchased or otherwise obtained is entered therein; (c) issues are supported by indents approved by the proper authority for issue ; (d) proper acknowledgements of the recipients exist on the indent ; (e) an accurate and detailed account of consumption has been maintained by the

subordinate to whom the articles / material issued; (f) where a scale has been prescribed by ULB for issue of store of any particular kind,

the same has not been exceeded ;


(g) the entries have not been tampered with ; that the closing balances as per previous accounts have been correctly carried forward; and that at the closing there exists a certificate of check of balance;

(h) all transactions and balances in the inventory registers have been attested by an authorised officer;

(i) articles / material have been counted, weighed or otherwise examined at prescribed periodical intervals by some responsible employee other than the custodian of the store or the person responsible for keeping the account thereof or a subordinate of either and verified with the balances in the Inventory Register;

(j) a certificate of such verification indicating the results thereof is recorded by the responsible employee ; the excess found in physical verification has been taken as receipt whereas the shortages have been reported for investigation. The shortages will be reduced from stock only under the orders of competent authority ;

(k) adequate action has been taken to investigate and regularise, under the orders of competent authority, any differences between book and physical balances found in physical verification;

(l) if a reserve limit of stock bas been fixed by ULB as a safe guard against unnecessary accumulation of store, the balance in hand has not exceeded the maximum limit so prescribed and was not in excess of requirement for a reasonable period;

(m) adequate action has been taken to survey, segregate and arrange for disposal of surplus, obsolete, scrap and unserviceable store in accordance with the procedure prescribed by ULB;

(n) the disposal of store has been done in accordance with the prescribed rules and procedure;

(o) sanction for write off of store has been accorded by the competent authority; (p) material at site account for final consumption of articles / material has been

maintained by the subordinate in Engineering, Health, Horticulture Department etc.; in case of material issued for the repairs and maintenance of street light the subordinate has maintained the account in the street light material replacement register were as in case of water treatment plant Daily, Log Water Purification Plant, has been maintained to keep the account of articles / material received and consumed;

(q) player wise account has been maintained by Sports Cell for the kit supplied to him to watch recovery / return;

(r) consumption of alum and other chemicals for water filtration was not in excess of the prescribed norms;

(s) where the value of store purchased has been debited to “Stock” priced account shall be maintained and audit should see that :- (i) the store has been priced with reasonable accuracy and the rates initially

fixed have been reviewed from time to time and revised where necessary, so as to take them to the level of market rate. Issues from store have been valued on the basis of “First in and First out”;

(ii) the value of material issued on indent has been adjusted by debit to work concerned by credit to “stock”;

(iii) that the total of the value account agrees with the outstanding amount in the general accounts and that the numerical balance of stock material is reconcilable with the total of value balances in the accounts at the rates applicable to the various classes of store;

(iv) steps have been taken for the adjustment of profit and loss due to revaluation, stock taking or other causes and these are not indicative of any serious disregard of rules; and

(v) numerical account has been maintained by the subordinate to whom material was issued from store and proper consumption thereof has been shown.

2.4.5 Stock account of fodder – The receipts and issues of fodder shown in Diet Register for cattle impounded should be checked with reference to the prescribed scale and the number of animals impounded as per Cattle Pound Register.


2.4.6 Petrol Account – The receipts of petrol, diesel oil, lubricants, etc., should be checked with the vouchers or sub-vouchers with a view to seeing that all purchases have been duly accounted for. The log book should be checked with a view to examining that petrol consumed is proportionate to mileage shown by the speedometer. Unusual variations in average consumption of petrol should be enquired into in order to satisfy that they are justifiable.

2.4.7 Stock Register of Medicines


(i) bulk purchase of medicines required for the dispensary has been made as per rules; receipts from suppliers; and issues to dispensary as per requirement through the indents duly signed by the Medical Officer have been entered in the inventory register;

(ii) the balances in the stock register and medicines issued for consumption to the dispensary should be checked. It should be also seen that the perishable medicines are not purchased more than the requirement;

(iii) numerical account of medicines received from store has been maintained by the dispensary in which consumption / issue has been shown on the basis of entries made in the patient register.

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CHAPTER – 5 AUDIT OF ANNUAL ACCOUNT FINANCIAL STATEMENTS

2.5.1 Introduction

This chapter contains the audit procedure relating to the Annual Financial Statements. According to section 125 of the Madhya Pradesh Municipal Corporation Act 1956 “Accounts of receipts and expenditure of the Corporation shall be kept in such manner and in such form as may be prescribed by the State Government”. Madhya Pradesh Municipal Accounts Manual has been prepared on Accrual Based Double Entry Accounting System which is to be implemented in the State under order dated 25th July 2007 of the State Government (Urban Development Department) from 01.04.2008.

The Madhya Pradesh Municipal Accounts Manual contemplates Financial Statements consisting of :-

- Balance Sheet; - Income and Expenditure Statements - Statement of Cash Flows - Receipts and Payments Account - Notes to Accounts and - Financial Performance Indicators

The Municipal Commissioner shall get prepared the Annual Financial Statements for the previous financial year and get them audited by the “Qualified Auditors” appointed by the State Government. The Auditor shall deliver to the Municipal Commissioner a report on the entire municipal accounts for the previous financial year. The Municipal Commissioner shall prepare a compliance report on the qualification and comments made by the Auditor. This report shall be the integral part of the Annual Report. The Annual Financial Statements and Administration Report shall be placed by the Municipal Commissioner along with the report of the Auditor before the Mayor-in-Council on or before such dates as may be prescribed. The Mayor-in-Council may approve the Annual Financial Statements, Administration Report and Report of the Auditor and shall cause it to be laid before the Municipal Council on such date as may be specified. The Council shall adopt the Annual Report not later than the specified date.

Thereafter, the Commissioner shall cause the Annual Financial Statements and report of the Auditor to be printed and forward a copy thereof to each Councillor alongwith the printed copy of the Administration Report.

2.5.2 Trial Balance

The process of preparation of the Financial Statements shall be preceded by preparation of a Trial Balance. A Trial Balance is a list of debit and credit balances appearing under various accounting heads and codes in the ledger and cash / bank balances at the year end (31st March) as per cash / bank, books. The total of the debit and credit balances in the trial balance should agree. It will ensure the arithmetical accuracy of the accounting transactions.

The following audit checks shall be exercised in re gard to it: Entries in each ledger account shall be checked from the books of original entries i.e cash book, bank book and journal. Total debits and credits for each entry in the journal with the ledger. Totalling of each ledger account for arithmetical accuracy. Balance of each account head in ledger to be checked with entries in the trial balance. Cash and bank balance of all the banks as per cash / bank book to be checked with the balances in trial balance. Totalling of both debit and credit sides of trial balance for arithmetical accuracy.

Note : In case of computerized accounts, totals need not to be checked.

2.5.3 Income and Expenditure Account

The Income and Expenditure Account discloses the financial results of the working of the ULB during the period covered by the account. It shows income and expenditure of the ULB for the accounting period (year) and the excess of income over expenditure or vice-versa for that period.


The following audit checks shall be exercised at th e stage :-

That the Income and Expenditure Account has been prepared in the prescribed form.

That all the heads of account relating to Income and Expenditure Account have been posted from the trial balance in the respective schedules of Income and Expenditure Account.

Since the account is prepared on accrual basis, it shall be verified that all the income earned during the year irrespective whether actually received or not and all the expenditure incurred whether actually paid or not have been incorporated in the Income and Expenditure Account, except as specified in Chapter – 4 of Madhya Pradesh Municipal Accounts Manual.

That income received or payment made, relating to previous year(s), for which no provision could be made during that year(s), are exhibited under “Prior Period Items”.

2.5.4 Balance Sheet

The Balance Sheet is a statement, which reflects the financial position of the ULB as on a particular date. It includes the assets, liabilities, funds and reserves of the ULB as on a specified date.

Audit Checks

- that the balance sheet has been prepared in the format prescribed in MPMAM. - that all the accounts relating to the balance sheet i.e Assets, Liabilities, Reserves etc.

have been transferred from the trial balance and exhibited in the respective schedules of the balance sheet and the amount shown in schedules agrees with that shown in balance sheet.

- that the excess of income over expenditure / excess of expenditure over income has been correctly carried forward from the Income and Expenditure Account in balance sheet.

2.5.5 Special Funds

Special Funds created from Municipal Fund are treated as liability.

Audit Checks

- that income on investments made from special fund is credited to special fund. - that profit / loss, if any, arising on disposal of investments made from the special fund

is credited / debited to Special Fund Account. - that expenditure of revenue nature relating to special fund is charged to that Special

Fund. - that on completion of the construction of a fixed asset / or on acquisition of a fixed

asset out of a special fund the amount equivalent to the cost of such fixed asset is transferred from the special fund to a separate account head ‘Grant against Asset Account’.

- that depreciation on fixed asset constructed or acquired from special fund has been deducted from the fixed asset as well as from ‘Grant against Asset Account’ and it has not been charged in Income & Expenditure Account.

- that accounts of funds for different purposes have not been mixed up and accuracy of each fund account has been maintained.

A. Borrowings or Loans

2.5.6 Loans are of two categories i.e Secured Loans and Un-secured Loans.

A schedule showing the following details of borrowings shall be annexed with the balance sheet.

(a) the amount and date of loans raised by the municipal corporation and the annual loan charges ;

(b) accumulation in the sinking fund at the close of the year and amount paid to the credit of the fund in the year;

(c) the amounts of loans repaid during the year and the balance due at the close of the year.

(d) the particulars of securities in which the sinking fund has been invested or have been set aside for the investment.


2.5.7 Audit Checks -

- that the loan register has been maintained in prescribed form F&A 44 of MPMAM. - that schedule of borrowing of loans showing the details required under section 123 of

Madhya Pradesh Municipal Corporation Act 1956 has been annexed to it. - in case of secured loans particulars of guarantee given should be checked. If

guarantee has been given by the State Govt., payment of guarantee fees shall be checked with reference to orders of the State Government in this regard.

- that interest on borrowings directly attributable to acquisition or construction of fixed assets upto the date of commissioning of the asset has been capitalised and after commissioning of the asset, it has been charged to Income and Expenditure Account.

- that expenses incurred for issuing debentures or bonds have been deferred and amortised in equal installments over a period of 5 years or the tenure of the loan whichever is earlier. In case, the debenture or bonds are prematurely redeemed, the balance of deferred amount has been charged to Income and Expenditure Account, as expenses of the year..

- that payment of principal amount of loan / bond / debentures and interest thereon has been made as per the terms and conditions of redemption.

- that the amount of loan / bonds / debentures has been utilized only for the purpose for which it was taken.

- in case of payment of commitment charges, reasons for non-utilization of amount as per schedule of loan agreement shall be investigated.

B. Grants

2.5.8 It is to be seen that the ULB has drawn a distinction between annual maintenance / revenue grants and grants for specific / capital purposes. The unspent grants refundable / repayable to Government / other agencies as may be required under the conditions stipulated in the grants, have been distinctly shown as “returnable” in the liability side of the Balance Sheet.

2.5.9 Provision for Expenses, Interest and Other Assets :-

Since the accounts are prepared on accrual based double entry accounting system, provisions for payable expenses to be checked by audit as under :-

- that provision has been made for pay and allowances remained unpaid at the close of the financial year.

- that provision has been made at the close of financial year for all bills of other expenses received up to a cut off date as laid down in para 7.2 (b) of chapter 4 of Madhya Pradesh Municipal Account Manual (MPMAM).

- that provision has been made for the interest accrued between the date of last payment of interest and closing date of financial year and has been charged to Income and Expenditure Account.

- that the value of assets received but remained unpaid have been accounted for on the basis of amount given in the bill. If the bill has not been received up to the cut off date, the value as given in the purchase order has been taken.

2.5.10 Fixed Assets

Fixed assets include land, Buildings, Roads and Streets, Bridges, Flyover, Sub-way and cause way, Ponds and lakes, Statues and heritage, Plant and machinery, Software, Drains including underground drains, Public Lighting System, Furniture & Fixtures, Office equipment, Computers and Peripherals, Vehicle etc.

Audit Checks

It is to be seen in audit :- (a) that the registers of fixed assets item wise as well as location wise have been

maintained in Form No. F&A 28 to 41 of Madhya Pradesh Municipal Accounts Manual. Similar registers of fixed assets have also been maintained in the various departments / sections / zones / ward of Corporation to which fixed assets issued. In case of immovable property i.e land and buildings, map of each property has been prepared and kept on record. It should be seen that details of all immovable property of the ULB have been published and also supplied to the Councillors in the budget meeting of the Council;

(b) that cost of fixed assets includes money spent in acquisition / installation / construction, interest on borrowings directly attributable to acquisition or


construction up to the date of commissioning and other incidental and indirect expenses incurred upto that date.

(c) that additions to or improvements to fixed asset adding to its utility or life has been capitalised and included in the cost of fixed asset.

(d) that fixed asset, if any, acquired free of cost or no payment made, has been accounted for at nominal value of Re. 1/-.

(e) that all assets costing less than Rs.5,000 (Rupees Five thousand) or such sum as decided by the Municipal Council have been charged to Income & Expenditure Account.

(f) that increase in net book value due to revaluation has been credited to a separate account head 'Revaluation Reserve Account'. Whereas decrease in net book value on revaluation has been charged to Income and Expenditure Account.

(g) that depreciation has been provided at Straight Line Method at the prescribed rates as referred to in appendix 2 of Madhya Pradesh Municipal Accounts Manual.

(h) that depreciation has been provided at full rate for assets purchased / constructed before 1st October of Financial Year and depreciation has been provided at half the rates for assets purchased / constructed on or after 1st October of the Financial Year.

(i) that depreciation has been provided at full rate for assets, disposed on or after 1st October and depreciation at half the rate, if disposed on or before 30th September of Financial Year.

(j) that physical verification of assets has been done at least once in a year and action for write off has been taken for the assets which were not found during the course of physical verification as per provisions of Para 5.2 (i) of Chapter 4 of Madhya Pradesh Municipal Accounts Manual.

(k) that expenditure on repairs and maintenance of the asset and to sustain its functioning or the benefit of which is for less than a year, has been classified as revenue expenditure in the Income and Expenditure Account.

(l) that the fixed asset acquired / constructed from special fund has been shown separately and amount of depreciation has also been deducted from Grant against Asset Account on liability side.

(m) that new properties acquired or constructed have been entered in the register with proper description;

(n) that conveyance deeds of properties acquired by purchase or free gift have been registered;

(o) that the prescribed procedure has been observed in the sale/ transfer of properties;

(p) that properties have been rented or leased out with the sanction of the competent authority and note to that effect has been kept in the register; and

(q) that all properties rented out are entered in the Demand Collection and Balance Register and the rent agreed upon has been duly recovered.

2.5.11 Investments

Investments for the period of one year or more are termed as long-term investments and investments for less than a year are termed as short term investment.

Audit Checks

(a) that the register has been maintained in Form, F&A 42 of MPMAM. (b) that investment documents have been physically verified by the competent authority

as laid down in para 8.1 of Chapter 3 of MPMAM and certificate to that effect has been recorded in the register under his dated signature.

(c) that the cost of investment includes cost incurred in acquiring it and incidental expenses incurred for its acquisition eg brokerage.

(d) that all long-term investments have been taken in the books of accounts at their cost.

(e) that short-term investments have been taken at their cost or market value (if quoted) whichever is lower.

(f) that accrued interest on investments has been accounted for. (g) that dividend on investments has been accounted for on actual basis.


(h) that profit / loss, if any, arising on disposal of investment (net of selling expenses such as commission, brokerage, etc) has been accounted for in the accounts of year of its disposal.

(i) that income on investments made from Special Fund has been credited to special fund whenever accrued. Profit / Loss, if any, arising on disposal of such investments (net of selling expenses such as commission, brokerage, etc) has been credited / debited to Special Fund Account.

2.5.12 Current Assets, Loans and Advances

Current assets include loans and advances, sundry debtors, deposits receivable, stock in hand, prepaid expenses, cash and bank balances.

(a) Stock in Hand

Audit Checks

(i) that the inventory register has been maintained in prescribed form F&A 43 of MPMAM.

(ii) that 100% stock in hand has been physically verified and necessary adjustment of shortages / excesses, if any found, has been made.

(iii) that the stock as at the close of the year has been valued at cost following the valuation method First in First out (FIFO).

Note:- Consumables such as stationary, fuel, etc are treated as expenditure and charged as revenue expenditure at the time of purchase hence the same are not to be included.

(b) Sundry Debtors and Deposits Receivable

Audit Checks

(i) that provision for doubtful debts has been made as laid down in para 2.6 of Chapter 4 of Madhya Pradesh Municipal Accounts Manual.

Service / Activity < 2 years

2 to 3 years

3 to 4 years

4 to 5 years

> 5 years

Property and related taxes Nil 25% 50% 75% 100% Water, sewerage, solid waste management fee and charges

Nil 25% 50% 75% 100%

Lease, rentals etc. 25% 25% 50% 75% 100% All other accrued revenue 25% 50% 100% 100% 100% Closed, sick industries, establishment etc.

100% ---- ---- ---- ----

(ii) that age-wise analysis of all receivables on account of taxes, rental and charges has been made at the year end and shown in notes forming part of the annual financial statements.

(iii) that confirmation of balances has been obtained from the sundry debtors and for the deposits receivable.

(c) Prepaid Expenses

The expenses relating to next financial year but paid during the current financial year have been correctly classified as prepaid expenses. Prepaid expenses generally include premium of insurance policies, annual maintenance contracts etc.

(d) Cash and Bank Balances

Cash Balance at the end of financial year (31st March) shall be checked with Cash Book. It should be seen to ensure that the cash balance has been physically verified by the nominated officer other than the cashier at least at the close of each month and necessary certificate recorded on cash book alongwith denomination wise details of the cash balance.

- The bank balance shall be verified with the Bank Book(s). Schedule showing name of bank, bank account, balance as per bank book and balance as per bank statement has been annexed with the balance sheet. In case of difference in balances shown in Bank Book(s) and Bank Statement(s) Bank Reconciliation Statement has been prepared to reconcile the same. Arrears / delay in bank reconciliation should be highlighted as there may be possibilities of misappropriation and frauds.


- The liability has been created for the uncashed cheques, which were more than six months old, after obtaining confirmation from the concerned bank.

- Audit should also see that the cash including bank balance is not less than five percent of the recurring annual income of ULB.

(e) Loans and Advances

Loans and advances include advances to staff / contractors and suppliers, material cost recoverable from contractors etc.

It should be seen that proper recoveries / adjustment of loans and advances has been made. In case of non-recovery / adjustment of any loan and advance provision for write off has been made and exhibited in the accounts.

2.5.13 Receipts and Payments Account

The Receipts and Payments Account depicts the sources of funds received and the applications of funds during the accounting period.

Audit Checks

that receipts and payments account has been prepared in the format prescribed in MPMAM.

that the receipts and payments in the account have been taken on cash basis only.

that non-cash items viz depreciation, miscellaneous expenditure written off, profit / loss on disposal of fixed assets / investments have not been included.

General

2.5.14 Significant Accounting Policies

During course of audit it may be ensured that “Significant Accounting Policies” of the ULB indicating items, if any, accounted for on cash basis, fixed assets and inventory valuation etc have been appended to annual financial statements.

The accounting principles adopted by the ULB in respect of accounting for its transactions and preparation of Financial Statements have been followed consistently. In case of deviation in any accounting principle, the particulars of such deviation have been disclosed with the reasons and its financial effect.

2.5.15 Notes to Accounts

The Notes to accounts shall indicate exemptions from statutory enactments, treatment of contingent liabilities etc.

Audit Checks

That contingent liabilities represent a claim against the ULB which are contingent on the happening of uncertain event in the future and financial implications of which may or may not be ascertainable. Contingent liabilities include :-

(i) Capital contracts remaining to be executed. (ii) Claims included in suits filed against ULB. (iii) Claims against the ULB not acknowledged as debts, and (iv) Other money for which the ULB is contingently liable.

2.5.16 Minus Balances

Minus balances, if any, appearing in the annual financial statements require careful probe in audit. They sometimes foretell serious irregularities. Reasons for each minus balance should be examined.

2.5.17 Cross Checking of Accounts with Schedules

That all the schedules referred to in the accounts have been correctly drawn up and figures shown therein tally with the accounts figures, as the schedules form part of the accounts certified by audit.

2.5.18 Summary

• the “Income” and “Expenditure” in Income and Expenditure Account constitute both revenue received and receivable and amounts paid and payable respectively;

• incurrence of expenditure on repairs and maintenance during the period of the financial year but not actually paid during the year was treated as liability (payable) and disclosed as such in the Balance Sheet;

• the collections made on behalf of the State Government credited to proper account head;


• any subsequent collection or recovery of “Receivables for Property & Other Taxes” which were already written off, recognized as “Prior Period Income”;

• the demands raised with retrospective effect treated as Prior Period Income to the extent it pertained to earlier years;

• write-off of cess adjusted against the provisions made and to that extent ‘recoverable’ reduced;

• revenue in respect of Water Charges, Sewerage Charges, Disposal Charges etc. recognized in the period in which they became due, ie. , when the bills were raised;

• revenue in respect of connection charges for water supply recognized on actual receipt; • the computation of cost of fixed assets included cost incurred/money spent in acquiring or

installing or constructing fixed asset, interest on borrowings attributable to acquisition or construction of fixed assets up to the date of commissioning of the assets and other incidental charges incurred up to that date;

• the additional expenditure incurred for improvement of the fixed asset capitalized and included in the cost of the asset;

• expenditure for repairs and maintenance of the asset having benefit for less than a year has been charged as revenue expenditure;

• assets under erection/installation on existing projects (including advances for capital works and project store) shown as “Works-in-Progress”;

• the amount of forfeited earnest money deposit and security deposit or the right for claiming refund of deposit having expired was recognized as income;

• deposit received from the Government or any other institution for deposit works treated as a liability till such time the projects for which money was received and the cost incurred against it reduced from the liability upon completion of the works;

• expenditure in respect of store (material, equipment, etc.) procured recognized on accrual basis;

• the stock lying at the end of financial year valued at cost in accordance with the FIFO (First in-First out) method;

• revenue in respect of disposal of material has been recognized as actual receipt; • the ULB has followed prescribed codification structure for classification of income and

expenditure under different heads; o repair works to previously abandoned buildings, which were required for bringing

them into use, were classified as original works; o where a portion of an existing structure was dismantled and replaced and if the cost

of such replacement represented a genuine increase in the permanent value of the property as an asset, the work was classified as original work;

o where the Engineering Department issued any permission for road digging or any other activity for private purpose, and the charges actually incurred for repair of the damaged road or any other structure adjusted from the deposit received from the person seeking permission;

o specified percentage of the value of the deposit works was provided to the ULB as service charges.

o revenues (service charges) in respect of deposit works were accrued along with the expenditure of deposit works;

o the opening balance sheet depicts all the assets comprehensively with valuation.

2.5.19 Reporting on Financial Statement vis-a-vis, Audit C ertificate:

Reporting methods, parameters, formats, and the certificate on account are discussed in chapter 2 of section 5 of this Manual.

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SECTION – 3 SUPPLEMENTARY INSTRUCTIONS

CHAPTER – 1 AUDIT OF TENDERS AND CONTRACTS


The responsibility for the conclusion of contracts for works to be done and supplies to be made and for enforcing them rests with the Executive. However, scrutiny of these contracts or agreements entered into by authorities on behalf of the ULB constitutes one of the important functions of audit. The objective of such a scrutiny is to see whether the contracts or agreements have led to loss or wastage of public money and also to ensure that the rules and regulations provide reasonable security against malpractices.

3.1.2 General Principles Governing Audit of Contracts

The Central Government under General Financial Rules (GFR), which have been adopted by all the Departments, has laid down the following fundamental principles for the guidance of authorities authorised to enter into contracts or agreements :-

(i) The terms of a contract must be precise and definite, and there must be no room therein for ambiguity or misconstruction.

(ii) Standard forms of contracts should be adopted wherever possible, the terms being subjected to adequate prior scrutiny.

(iii) As far as possible, legal and financial advice should be taken in the drafting of contracts before they are finally entered into.

(iv) No contract involving any uncertain or indefinite liability or any condition of an unusual character should be entered into without the prior consent of the competent financial authority.

(v) Similarly, terms of a contract once entered into should not be materially varied without the prior consent of the competent financial authority.

(vi) Contracts should invariably be placed only after inviting open tenders and the lowest tender accepted. In cases where it is not considered practicable to invite open tenders or to accept the lowest tender, the reasons for the deviations should be recorded.

(vii) In selecting the tender to be accepted, the financial status of the tendering individuals and firms must be taken into consideration, in addition to all other relevant factors.

(viii) Even in cases where a formal written contract is not entered into, no order for supplies should be placed without at least a written agreement in regard to price.

(ix) Provision must be made in contracts for safeguarding ULB property entrusted to contractors.

(x) When a contract is likely to endure for a period of more than five years, it should include, wherever feasible, a provision for its unconditional revocation or cancellation at any time after the expiry of six months notice to that effect.

Though these guiding principles are primarily in the nature of financial rules and applicable in Government Departments yet they are nevertheless of relevance from the audit perspective as well an equally applicable other public organisations.

Deviations from contracts require authority not inferior to that required for the conclusion of the original contract. Audit should also see that any payments outside the strict terms of the contract or in excess of the contracted rates are not made without approval of the competent financial authority.

Cases in which there is evidence that an officer or agent of ULB has an undue common interest with the other contracting party it should be brought to the notice of the competent higher authority for such action as it may deem necessary.

Standing contracts should be reviewed occasionally and if audit has reason to believe that the rates accepted in those contracts are considerable higher than the rates prevailing at the time of review, such variations should be brought to the notice of the Mayor-in-Council.


3.1.3 Source Documents:-

The following are the main source documents to be checked in the audit of contracts and agreements:-

(i) Contract files maintained by the ULB. (ii) Accounts and payment vouchers. (iii) Administrative approvals and technical sanctions of the competent authority forming

the basis of the contracts. (iv) Bills for supply of store. (v) Copies of contracts and agreements (vi) Any other documents that would facilitate effective audit.

3.1.4 Powers and Functions of the ULB authorities for Ten ders and Contracts .

The financial powers to various authorities have been vested in Section 5 of Madhya Pradesh Municipalities (the Conduct of Business of the Mayor-in-Council / President-in-Council and the Powers and Functions of Authorities Rules 1998.

The financial powers vested in the various authorities of ULB presently are as under:-

S.No Authority Population Three lakh or more Less than three lakh

(1) (2) (3) (4) 1 Commissioner Upto rupees ten lakh. Upto rupees two lakh. 2 Mayor Exceeding rupees ten lakh but

not exceeding rupees twenty five lakh.

Exceeding rupees two lakh but not exceeding rupees ten lakh.

3 Mayor-in-Council Exceeding rupees twenty five lakh but not exceeding rupees one crore.

Exceeding rupees ten lakh but not exceeding rupees twenty five lakh,

4 Council Exceeding rupees one crore. Exceeding rupees twenty five lakh.

Provided that in case of externally aided projects or deposit works, the State Government may, by order, authorise the Commissioner or the Mayor-in-Council to exercise such enhanced financial powers, as it may deem fit. These powers are also subject to revision from time to time.

3.1.5 These financial powers shall be exercised in the following conditions:-

(i) There should be allocation of funds in the sanctioned budget and the amount available in the relevant budget head for the work concerned.

(ii) The services of some qualified consultant may be taken for assistance in the technical and other matters subject to the qualification and procedure specified by the State Government in this behalf.

(iii) Such works which are of the policy nature or relevant to the whole city, irrespective of the amount of expenses likely to be incurred thereon, the prior approval of the Council shall have to be obtained.

(iv) In respect of the proposal of construction work in any ward, the recommendation / concurrence of the concerned ward Councillor / Mayor / Commissioner / Local Member of Legislative Assembly / Local Member of Parliament, shall be necessary.

(v) The works which are sanctioned by the Commissioner, Mayor, Mayor-in-Council within the limit of their powers and if the amount of expenses on the work so sanctioned exceeds ten times of their original powers (For example when the Commissioner has sanctioned the works upto rupees ten lakh) then this information be given immediately to his senior authority. Similarly the same procedure shall be followed by the Mayor and Mayor-in-Council.

(vi) In case of the exercise of financial powers by the Mayor-in-Council, information in all relevant cases shall be submitted in the next meeting of the Parishad.

3.1.6 Scrutiny of tenders, comparative statement and con tract agreements should ensure that:-

(i) the officers concerned have made an intelligent assessment of their requirement regarding the purchases to be effected and also decided the specifications of each article, put to tender and that the terms in the tender notice were clear regarding (i) last date of receiving tenders; (ii) period for which supplies are required; (iii) form of


earnest money and security deposits; (iv) time for supply of articles by the suppliers; (v) stipulated date of completion of supply; and (vi) provision to safeguard ULB property if entrusted to the supplier;

(ii) at least three quotations have been called for if the amount of expenditure involved exceeds rupees one thousand and does not exceed rupees ten thousand.

(iii) the wide publicity through Madhyam is given for calling tenders and due period of notice allowed consistent with the magnitude of the contract as short notice of tender prevents adequate number of competitors; Tenders have been invited by giving at least seven days time if the value of any article or work is exceeding ten thousand rupees.

(iv) tender documents include the following; (a) tender notice; (b) complete specifications of the work to be done and of material to be used; (c) schedule of quantities of various descriptions of work and/or a schedule of

probable items; (d) set of conditions of contract to be complied with as embodied in the

prescribed form in which the contract was to be finally executed. (v) tenders have been received from the registered contractors on prescribed form

issued to them by the ULB on payment of the prescribed fee in sealed covers alongwith earnest money deposit;

(vi) the tenders received and the tendered rates are entered in the ‘Register of Tenders’ by the authorised officer opening the tenders and the tenderers, in whose presence the tenders are opened, have also signed it;

(vii) the officer opening tenders has attested all overwritings, corrections, errors etc in the tender in his own hand writing.

(viii) the authorised officer shall testify in his own hand that tender is opened by him and also the rate tendered therein ;

(ix) the rates quoted by the tenderers have not been overwritten or changed without attestation by the tenderer and have been correctly transcribed in the comparative statement;

(x) the lowest tender has been determined by working out the cost of all items of works / supplies on the basis of estimated quantity of work to be done or supplies to be obtained and not merely by visual comparison of the tendered rates without reference to the cost of work or supplies involved;

(xi) in selecting the tender to be accepted the financial status of the individuals and firms tendering has been taken into consideration in addition to all other relevant factors;

Note:- Acceptance of tender without verifying financial and technical capacity of contractor or supplier is likely to involve risk of non-performance and complications consequent to it .

(xii) the comparative statements have been duly checked and approved by the tender committee;

(xiii) from all available details the audit should satisfy itself that the tenders were invited in a most open manner and process subsequent to it are not vitiated in any manner;

(xiv) tenders are accepted by competent authority on the recommendations of tender committee and that the terms once entered into are not varied without special and proper sanction; If the sanctioning authority does not agree to the recommendations of the tender committee then he, by recording in writing the reasons thereof in detail, has to obtain the orders of the authority senior to him. In case of Council such orders shall be obtained from the State Government.

(xv) the rate sanctioned by sanctioning authority is not more than the prevailing market rate; and that the rate so sanctioned, as per tender / quotation called, has been limited to the concerned work and not used for any other work;

(xvi) where a formal written contract has not been made the orders for supplies or for execution of works are not given without atleast a written understanding as to the price or rate at which payment is to be made; and

(xvii) earnest money deposit was refunded to the unsuccessful tenderers.


3.1.7 Execution of Contracts:-

(i) The contract has been executed either on standard form or on special form prepared in consultation with the legal cell of the ULB and the terms are precise and definite and there is no room for ambiguity or misconstruction therein;

(ii) Any payment out side the terms of the contract or in excess of contract rate has not been made without proper sanction of the competent financial authority;

(iii) All the contract agreements are entered in the ‘Register of Contract Agreements’ to maintain a complete record of all the contract agreements executed during the year;

(iv) No contract involving uncertain or indefinite liability or any condition of an unusual character is entered into without the previous consent of competent financial authority;

(v) Every contract for the execution of work or supply of material or goods which involve an expenditure exceeding ten thousand rupees shall be in writing and shall be sealed with the common seal of the ULB;

(vi) At least thirty percent of total purchases of various articles should be made from the businessmen / dealers / sellers / institutions belonging to scheduled castes / scheduled tribes. The purchases of various articles have been made in accordance with the procedure laid down in the Madhya Pradesh Store Purchase Rules.

(vii) The Commissioner shall require sufficient security for the performance of any contract. Provided that the amount of such security shall not be less than five per cent of the estimated cost of work or the estimated value of the material or the goods; and

(viii) In case of delay in completion of work / supply action as per terms and conditions of contract has been taken for the delay.

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CHAPTER – 2 EFFICIENCY CUM PERFORMANCE OR VALUE FOR MONEY

AUDIT

Intent and Scope

3.2.1 Regularity audit and propriety audit, which are generally applied to individual transactions, alone are not adequate for an assessment of the implementation and result, of a plan, project, programme or scheme, or the functioning of an organisation in terms of its goals and objectives. Such an assessment can be made only on the basis of a comprehensive review of the projects, programmes, schemes, organisations, etc. in terms of their goals and objectives aimed at ascertaining the extent to which the expected results have been achieved from the use of available resources of money, men and material. This audit is known as Efficiency-cum-Performance Audit (ECPA) or Value for Money (VFM) Audit. ECPA is a technique of audit adopted to assess and evaluate the economy, efficiency and effectiveness of development schemes, projects or organisations and hence this branch of audit is also known as Economy, Efficiency and Effectiveness Audit or the Three Es Audit. Economy means operation at the lowest possible cost, while efficiency is the maximization of outputs from a given input. Effectiveness deals with achieving the programmed objectives and goals and ensuring that intended benefits arise in real terms. This approach is more appropriate for a non-profit organisation like ULB where the profit oriented measures cannot be made applicable.

3.2.2 A review of the working of a project / scheme / organisation with a view to assessing and evaluating the achievements should cover both financial and socio-economic aspects. The financial aspects to be seen are whether (a) the agency maintains an effective control over its income, expenditure, assets and obligations; (b) the agency is responsible for its resources, obligations and operations; and (c) its reports include specific true and useful data. The socio-economic aspects to be seen are how far the time-specific goals / targets set have been achieved and the intended benefits to the community / area have accrued.

3.2.3 ECPA is directed towards an examination of the system and procedures for the planning and implementation of projects, schemes, programmes, activities, etc. and an evaluation of their performance and achievements. The audit should envisage a comprehensive review of the project / scheme / programme / activity to ascertain:

(i) the extent to which the physical and financial targets and the intended impact have been achieved;

(ii) how far the socio-economic objectives have' been realised; (iii) whether the operations are being conducted economically; (iv) whether the scheme / programme was implemented with due regard to economy

and instances of overpayment, loss, extravagance, avoidable excess or infructuous expenditure attributable to improper planning, delays in execution, overstaffing, overcapitalisation, adoption of unsound policies, etc. were avoided; and

(v) whether the utilisation of resources was in accordance with the projected outlays and, if not, the reasons for deviations.

The total size of the sample will vary in different reviews depending upon the objectives, the basis of the targeted coverage etc.

3.2.4 Aspects to be covered and source documents

Some of the aspects to be looked into in the course of ECPA or VFM Audit are as follows:

(i) Adequacy of investigations, surveys and feasibility studies. (ii) Schedule of implementation.

(iii) System and procedures in force for implementation, progress, procurement of plant and machinery, special store, other supplies, etc.

(iv) Correlation of physical and financial achievements with envisaged targets. (v) Arrangements for material management and inventory control. (vi) Outcome of mid-term appraisals. (vii) Impact of changes in scope, if any. (viii) Procedures or norms adopted for identification of eligible beneficiaries in the case of

schemes meant to benefit certain specified sections of the population, such as families below the poverty line, tribals, scheduled castes, unemployed youth, women


and children, etc. (ix) Adherence to programme schedules and Time and Cost Overruns, if any. (x) Realisation of projected / anticipated revenues m the case of projects / schemes

intended to generate revenue.

These are, however, only illustrative and not exhaustive.

Some of the documents or records that would need to be examined for the purpose of comprehensive review are project or feasibility reports; survey or investigation reports; Plan and Budget documents; guidelines formed for the project / scheme; administrative and technical clearances; reports of periodical inspections undertaken by personnel at various levels; reports of evaluation by ULB and external agencies; periodical or mid-term appraisal reports; records of field-level implementing agencies, revenue records etc.

3.2.5 Approach for Review

It will not be practicable to prescribe a uniform pre-determined approach or guidelines for comprehensive review because schemes vastly differ in their concept, objectives, scope and content, methodologies, etc. Information available for analysis will also be diverse in nature. Audit methodology should include review of system and structures, examination of files, interviews with officials, analysis on ULB databases, etc.

Active cooperation of the ULB and its proper appreciation of the purpose of review by Audit are essential for them to be meaningful. Therefore, it should be mandatory for pre-review discussions or an entry conference to be held between the Audit and the Head of ULB. These discussions could also be utilised for ensuring that all assistance would be forthcoming from the ULB. A similar meeting or exit conference should also be arranged with the Heads of ULB on completion of the review to discuss its findings and to obtain further clarifications, if any, from the ULB.

3.2.6 Criteria Based Audit

As the first criterion, it is necessary to see whether the goals and results were defined in concrete terms and whether reliable methodology and data were used for determining how the goals would be achieved. It is a common fact that the more general the goals, the weaker are the control functions since vague or uninformative goals cannot be assessed, achieved or audited.

3.2.7 Planning for Review

Various phases of scheme review can be broadly categorised as follows:

(i) Preliminary study of the selected project / scheme. (ii) Development of Audit Plan. (iii) Substantive testing and adoption of detailed audit procedures together evidence. (iv) Drafting of the Review Report and recommendations. (v) Approval of Review.

3.2.8 Preliminary Studies

Preliminary study of the selected scheme is an essential part of the review. The objective is to obtain a more comprehensive insight into the broad picture that was available at the time of initial selection to locate areas and aspects that would require in-depth examination. Budget, progress reports, administrative reports, reports of periodical appraisal by the Concerned officers and nominated external agencies, etc. would provide the necessary background material about the scheme, its aims and objectives, financial targets and actual expenditure, arrangements for implementation, etc.

While conducting a review of a project / scheme, it is essential to understand nature of the project right from the stage of its conception. During the preliminary study it should be seen whether.

(i) adequate surveys were undertaken before launching the project/scheme; (ii) proper feasibility reports were prepared; (iii) a detailed project report is available and there are any deviations therefrom; (iv) the specifications and performance of various items of equipment are properly

matched so as to avoid large idle capacities; (v) proper system and procedures for inventory control and material management are in

place; and (vi) the functioning and performance of a completed/scheme are as envisaged.


Besides, the preliminary study should also be aimed at ascertaining (i) the system and procedures prescribed for conclusion of contracts; and (ii) operational problems, if any, and the steps taken to overcome or eliminate them.

3.2.9 Formulation of Audit Plan

An Audit Plan should be prepared indicating scope / coverage of audit, objectives of audit, and the time frame for completion. This will also include the formulation of a detailed audit programme. Necessary formats and questionnaires should be devised for collection of important data and information relating to various aspects of the scheme.

3.2.10 System Approach to Review

The following aspects will need the special attention of Audit:

(i) Extent to which the objectives of the project / scheme have been clearly defined and are in conformity with the policies and decisions of ULB.

(ii) Whether the schemes / programmes have been formulated in accordance with these objectives and arc being implemented based on specific and well-defined procedures and whether appropriate structures and systems are in place to enforce accountability.

(iii) Whether sound management information and monitoring system arc available for' collection of reliable data and evaluation of implementation and progress and the extent to which the data is effectively utilised to bring about improvements or remedy deficiencies with utmost expedition.

(iv) Adequacy and relevance of the internal control mechanisms for effective control over various areas of implementation and prevention of leakages, losses, avoidable and wasteful expenditure etc.

(v) Availability of specified performance indicators. If these are not in existence, the procedures followed or yardsticks/norms adopted to assess the performance of the project/scheme and their validity.

This approach, which has a substantial element of system audit, will provide necessary ideas and guidance for further studies and probe in the field units. The formats and questionnaires prepared for collection of detailed information from base level sections of ULB should be reviewed on the basis of the studies conducted and modified, if necessary.

3.2.11 Field Studies/Investigations

The next stage is carrying out studies and collection of information from field units. The examination and audit scrutiny of selected samples of transactions should be thorough and complete. In order to derive reasonable audit findings, it is necessary that the sample size determined for detailed check in audit is adequate and is fairly representative of the whole.

3.2.12 Some of the other broad guidelines for field studies/investigations are as follows:

(i) It should be verified whether sound system and procedures exist in all disciplines of management control and monitoring and whether these are being followed both in letter and spirit at all levels including the operational level. Weaknesses and lapses, if any, should be identified.

(ii) Where the performance prima facie appears to be less than efficient, the reasons therefor should be ascertained and examined in detail in consultation with the ULB authorities.

(iii) Reasons for delay in execution of project should be analysed and bottlenecks, if any, identified.

(iv) It should be seen whether evaluation methodologies like PERT (Programme Evaluation and Review Technique). guidelines for holding inventories, yardsticks in respect of inputs and outputs, delegation of powers, etc. are available and effectively put to use.

(v) In order to assess whether the returns anticipated are actually accruing, the benefits realised should be evaluated by comparing the actual cost-benefit ratio with the projections made at the sanctioning stage.

(vi) The extent to which the social objectives have been realised should be assessed.

3.2.13 Overall Macro Assessment

A review is not a narration of instances of aberrations / shortcomings in the execution of the programme but is an ‘appraisal’ intended for expressing an ‘opinion’ on the quality of internal controls and information system, achievement of objectives, quality of execution and


expenditure and realisation of value for money. A specific pattern of shortcomings noticed in the course of this appraisal should lead to the audit opinion.

3.2.14 Defining the Sample

Sample in terms of numerical and financial parameters should be defined in as much detail as possible with the appropriate sample annexed to the review.

3.2.15 Overlapping Programmes

Special efforts will be necessary to examine the usefulness of programmes that overlap and to determine whether the same individuals or target groups are stated to have derived the benefits form more than one propgramme implemented within the same area, either by the same agency or by different agencies.

3.2.16 Financial Management

Apart from the adequacy of resources, the examination of documents in the executing agencies as well as department concerned of ULB should cover the following aspects:

(i) Budgetary assumptions and their reliability (ii) Timely release of the budgeted grants to the executing agencies is of vital

importance. Instances of belated release of grants leading to their not being utilised and resulting in an adverse impact on the implementation of the project / scheme, as well as of unnecessary releases even when the pace of implementation is slow and progress inadequate should be specifically commented upon.

(iii) Arrangements for receipt and scrutiny of periodical reports on utilisation of budget grant.

(iv) Irregular treatment of advances and deposits as expenditure and consequential false reporting of financial achievements.

(v) Investment of surplus grants and unspent balances, interest earned / forgone, and utilisation of interest, etc.

(vi) Quality of maintenance of basic records, such as cash book, ledger, bank book and the integrity and reliability of financial reports.

(vii) Extent to which the maintenance of accounts facilitates audit and inspection trails distinctly in respect of each scheme executed or administered by the same agencies without the accounts of different schemes being mixed up so as to create confusion.

(viii) Extent to which the State Government adhered to the approved financial arrangements by the timely release of its pro rata contributions.

(ix) Financial plans and detailed project reports (DPRs) prepared by ULB before undertaking the scheme for execution.

3.2.17 Relationship of Financial and Physical Performance

A relationship between physical and financial performance should be established and commented upon. The unit cost of implementing the scheme should be arrived at and analysed in absolute terms.

3.2.18 Misuse of Grants

While commenting on aspects like misuse of grants a distinction should be made between bonafide negligence or omissions and blatant and deliberate misuse of grants in utter disregard or the principles of propriety. In all such cases, accountability of those who approved such unauthorised expenditure should be established and appropriate recommendation for action against them included in the review. The grant received for specific scheme has been actually utilized by the ULB for which it was received;

Procurement Procedures

3.2.19 Procurement of material, equipment, consumables, etc. in substantial quantities is an important component of many schemes. The systems and procedures in force for procurement and purchases should be examined in detail from the point of view of their adequacy and appropriate comments proposed. Records relating to procurement and purchases, comparative bids, actual receipt of store and equipment and their end use should be examined in depth.

Accountability Procedures

3.2.20 In almost all schemes, accountability procedures and levels ultimately responsible for planning, sanction, execution and overall results (performance) at different stages are not defined at all or only inadequately defined. In the result, most of the programme managers at


the grass-root and middle levels function without being accountable for their performance and for achieving the stated objectives. Absence of accountability levels and procedures and deficiencies should be commented upon in the Review. As far as possible, appropriate recommendations should also be included for establishing or strengthening accountability procedures.

3.2.21 Manpower Resources

Human resources / manpower should constitute a distinct theme in all reviews. Shortages of core personnel essential for programme implementation / management should be commented upon bringing out clearly the implications. Excessive deployment of staff thereby augmenting overheads on implementation too could be a good theme for comment.

3.2.22 Vigilance and Grievance Redressal

Vigilance is a system to ensure output delivery and to prevent misuse. The review personnel should identify the features of the system available and test its efficacy, sample check the extent of adherence and offer specific opinions based on their examinations.

3.2.23 Drafting the Review

Drafting of the Review is the final stage of the review process. The data collected or obtained from the ULB units should be consolidated and collated for interpretation and detailed analysis. The review Report should be drafted after careful analysis of the results of the study.

3.2.24 Style of Drafting

The third person active voice should be adopted in the Review as far as possible unless the use of passive voice is inescapable at some places. The drafting should be simple, precise and crisp. All opinions and comments of Audit included in the Review should be supported by substantive evidence.

Every statement and comment included in the Review should be specific and vagueness should be eschewed.

3.2.25 Use of Statistical Data

The body of the Review should not normally be cluttered with excessive statistical data or too many tables. It will be desirable to organise the detailed data in appropriate tables to be annexed to the Review and to extract form these tables only the more important information / data forming the basis of the audit observations and present these in an appropriate abstract form in the body of the Review.

3.2.26 Use of Charts, Diagrams, Photographs, etc

If considered appropriate and necessary to emphasize or enhance the appeal of any important audit finding, relevant and suitable charts, diagrams, photographs, etc. could be included in the Review. Due care should be taken to get photographs authenticated by the ULB.

3.2.27 Accountability-Centred Observations and Opinions

All reporting shall be accountability-centred only. There can be no audit point unless the system or the person is faulted and the reporting is specific and positive. It should be borne in mind that individuals are always responsible for the implementation / execution of schemes, programmes, etc., and it is, therefore, incumbent on the auditor to pinpoint the extent of their accountability after issuing the accountability-centred half margin memos containing the audit observations.

3.2.28 Recommendations / Suggestions by Audit

Any observation or opinion that is not strengthened by appropriate recommendations would render a Review incomplete to a reader in general and to the Mayor-in-Council and Municipal Accounts Committee in particular. The Review should, therefore, contain well-considered and well-articulated suggestions to address the shortcomings disclosed as a result of audit. Utmost care should, however, be taken in presenting the suggestions, which should be done with due regard to the requirements of rules and orders, operational constraints and the prevailing milieu. Suggestions proposed to be incorporated in the Review should be discussed with sufficiently high level functionaries and their acceptance obtained as far as possible.


3.2.29 Suggested Layout

The following layout with such modifications as may be necessary in respect of individual review based on it scope and content or special features could be adopted in respect of audit review of ULB schemes and programmes:

(i) Introduction – Brief description of the project / scheme / programme and its objectives details of the inputs or action plan identified in the project / scheme document to achieve the stated objectives.

(ii) Scope of Audit – Extent of coverage, size of sample, etc. (iii) Organisational arrangements. (iv) Highlights. (v) Allocation of financial resources and flow of grants. (vi) Physical and financial targets. (vii) Utilisation of financial assistance / resources – Critical analysis of the expenditure

actually incurred on the project / scheme with reference to allocations / targets, including irregularities in expenditure, instances of diversion or misuse of grants.

(viii) Output analysis – Critical analysis of the goals, achievements and shortfalls in respect of each component / sub-component of the project / scheme, including deficiencies in implementation.

(ix) Utilisation of material / equipment. (x) Creation of assets and their utilisation. (xi) Manpower / human resources and their utilisation. (xii) Impact assessment – Realisation of socio- economic objectives – effectiveness of the

project / scheme. (xiii) Arrangements for monitoring and evaluation.

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CHAPTER - 3 AUDIT OF BORROWINGS, LOANS, ADVANCES AND

INVESTMENTS

3.3.1 Audit Objective and Scope

The primary objective of audit of borrowings of the ULB, loans, advances and amortisation thereof, sinking fund etc is to ensure that;

(i) the transactions are, within such limits as prescribed in this regard; (ii) the transactions are correctly reflected in the detailed accounts; (iii) borrowings are being serviced as per the terms agreed upon and there is periodic

confirmation of balances;

3.3.2 Audit of Borrowings

The borrowing powers of the ULB shall be limited to the provisions contained in section 104 of the Act. The borrowings under the Act shall not at any time exceed, together with the balances of all the outstanding loans and debts due by the ULB on the whole, double the annual value of the land and buildings of the ULB.

Loan has been raised by ULB from any financial institution only with the prior sanction of the State Government and the necessary particulars, viz. the rate of interest to be paid for such loan and the terms and conditions of repayment approved by the State Government; ULB has observed the required financial discipline in the matter of debt servicing, vis-à-vis, creating a sinking fund as per norms prescribed by the State Government;

The duties of Audit in relation to borrowings is to see that:-

(i) the proceeds of loans are properly brought to account and they are expended only on objects for which the loans were originally raised or to which borrowed moneys may properly be applied in accordance with sound principles of public finance.

(ii) no portion of the loan raised for the “Construction of works” was utilized for the payment of salaries or allowances to any officer or employee of the ULB who was not exclusively employed for the construction of the work for which the loan was raised;

(iii) there was no case where the time for repayment of any loan exceeded 60 years or the time for repayment of any loan raised for the purpose of discharging any previous loan extended beyond the unexpired portion of the period for which such previous loan was sanctioned;

(iv) interest on borrowings directly attributable to acquisition or construction of fixed assets up to the date of commissioning of the assets capitalized and thereafter it has been charged to the Income and Expenditure Account of current period;

(v) the amount received as loan deposited in the Designated Loan Bank Account; (vi) Loan Register showing the details of each loan and terms of sanction has been

maintained in the prescribed form F&A 44 of MPMAM. The corresponding credits of loan should be traced in bank book.

3.3.3 Audit should also see whether adequate arrangements are made by the ULB for amortisation of borrowing particularly in cases where borrowed moneys are utilised on objects or works which cannot be regarded as productive and should bring also to notice instances in which amortisation is ignored or it is prima facie inadequate.

3.3.4 The prima facie adequacy of the amortisation arrangements should be examined by Audit in accordance with the general principles set out below:-

(i) Amortisation arrangements for loans for unproductive purposes may be related to some extent to the period of maturity of the loan, and also to the chances of growth of the particular type of un-productive debt. It is, however, sound and more prudent to relate the arrangements rather to the object of the borrowing than to the currency of the actual loan. The period of amortisation ought to be comparatively short where the expenditure on the unproductive purpose should more properly be met from Municipal Fund and where the assets constructed from the loan are comparatively short lived, or where the total of the borrowings for the unproductive purpose is likely to increase rapidly. Where a material asset is produced the amortisation period should not exceed the life of the asset.


(ii) The arrangement for the amortisation of loans for productive purposes must again depend on the particular circumstances of each case. Where the net earning propensity of an asset substantially exceeds the interest on the debt, it may not be necessary to suggest amortisation. It should be, however, recognised that it is sound and prudent financial policy to make amortisation arrangements even in case of a most productive debt. Where depreciation or renewal reserves are constituted for the replacement of assets constructed from loan fund amortisation is often omitted altogether or its rate scaled down. Normally the rate of amortisation should be related to the life of the revenue producing asset for the construction of which the debt was incurred.

(iii) The conditions of the repayment scheme are scrupulously observed; the annual debits against Municipal Fund under the scheme are calculated strictly in accordance with the approved programme; the appropriations for reduction or avoidance of borrowings are applied to the objects for which the money has been set aside; and that repayment proceeds are at the rate and on the lines prescribed.

(iv) The scheme of liquidation prescribed, as the basis of the Sinking Fund, is financially sound and consistent with laid down principles;

(v) The fund contains the amount which should have been accumulated if the prescribed scheme of the Sinking Fund had been observed in respect both of the amount to be credited to the fund and of the interest which is anticipated ;

(vi) The investments of the Sinking Fund are sound and are valued at not more than their market price ; and

(vii) Defects and deficiency in the sinking fund, any unsound investment, or unusual depreciation in the market price of investment, if seen, should be brought prominently to the notice of the ULB.

3.3.5 Repayment of Loans :-

Every loan raised by the ULB has been repaid within agreed time frame and by such of the following methods, as may be, approved namely-

(a) by payment from a sinking fund established to repay the loan, or (b) by equal payments of principal and interest, or (c) by equal payments of principal, or (d) from any sum borrowed, or (e) partly from the sinking fund in respect of the loan and partly from money borrowed for

the purpose. 3.3.5A Powers of Corporation to consolidate loans:

Where ULB has invited tenders for a new loan to be called “Corporation Consolidated Loan” and also invited holders of municipal debenture to exchange their debenture for scrip of such loan. In such cases Audit should see that:

(i) The terms of every such consolidated loan, and the rates at which exchange into a consolidated loan has been permitted, have been decided with prior approval of the Government.

(ii) The period for the extinction of any such consolidated loan has not, without the sanction of the Government, been extended beyond the farthest date within which any of the loans to be consolidated would otherwise be repayable.

(iii) The ULB has established a sinking fund for the repayment of each of such consolidated loan.

3.3.6 Audit should verify accuracy of the loan statement prepared at the end of each year by the ULB showing:-

(a) the amount and date of borrowing of loans raised by the ULB which are outstanding and the annual loan charges ;

(b) in the case of every loan for which a sinking fund has been established the accumulation in the sinking fund at the close of the year, showing separately the amount paid to the credit of the fund in the year;

(c) the loans repaid during the year and in the case of loans repaid in instalments or by annual drawings, the amounts repaid during the year and the balance due at the close of the year;

(d) the particulars of securities in which the sinking fund have been invested or which have been reserved for the investment of these funds.


3.3.7 The Central and State Governments are empowered to give guarantees in respect of loans raised by ULBs within such limits as may be fixed from time to time. Such guarantees constitute liability of ULB and it is an essential duty of Audit to see that regular payment of guarantee fee has been made by ULB.

It should also be seen that the commitment charges have not been paid due to delays in utilisation of loan by the ULB.

3.3.8 Sinking Funds

In auditing the transactions connected with the Sinking Funds regularly constituted for the redemption of loans raised by the ULB Audit has to satisfy itself that credits to these funds are in accordance with the undertakings given by ULB and set forth in the prospectus of the loans and that the payments are eventually utilised for the purpose for which the funds themselves were created.

3.3.9 Establishment and maintenance of sinking funds

Whenever the repayment of a loan from sinking fund has been sanctioned, whether ULB has established such fund and have paid into it, on such dates as may have been approved, such sum as will, with accumulation of compound interest, be sufficient after payment of all expenses to pay off the loan within time line approved.

The ULB has established a separate Sinking Fund in respect of each loan there was no case of application of the money at the credit of the concerned Sinking Fund for any purpose other than the purpose of repayment of loan;and due credit to such fund provided;

Whether further payment into such funds has been discontinued with the permission of the Government if it is found that the sum standing to the credit of the sinking fund established for the repayment of a loan was of such amount that if allowed to accumulate at compound interest it would be sufficient to repay the loan within the agreed time.

3.3.10 Application of Sinking fund:-

It is to be ensured that until any loan is wholly repaid, the ULB has not utilised the sinking fund established in respect of that loan to any purpose other than the repayment of loan.

3.3.11 Examination of sinking funds: -

(a) All sinking funds established under the Act shall be subject to annual examination by the audit. The Audit shall satisfy itself that the provisions for application of sinking fund are being complied with and that the cash and the current value of the securities belonging thereto are actually equal to the amount which should have been at the credit of such funds had investments been regularly made and had the rate of interest as originally estimated been obtained therefrom.

(b) The ULB shall forthwith pay into sinking fund any sum by which the audit may certify the fund to be deficient, unless the Government by general or special order sanction a gradual readjustment.

(c) If the cash and the value of the securities at the credit of any sinking fund are in excess of the amount which should have been at its credit the audit shall certify the amount of such excess sum and the ULB may thereupon transfer the excess sum to the Municipal Fund.

3.3.12 Investment of sinking fund: -

Audit should see that:-

(a) all money paid into a sinking fund is invested by the ULB without any delay in: - (a) Government securities, or (b) Securities guaranteed by Government

and held by the ULB for the purpose of repayment of loan. (b) all dividends and other sums received, in respect of any such investment, have been

paid into the appropriate sinking fund and invested in the prescribed manner. (c) money standing to the credit of two or more sinking funds has been invested in a

common fund. (d) when any part of a sinking fund has been invested in municipal debentures or is

applied for payment of any part of a loan before the period fixed for repayment, the interest which would otherwise have been payable on such part of the loan has been paid into the sinking fund and invested.


The expenses incurred while issuing debentures or bonds (Issue Expenses) have been deferred and amortised in equal instalments over a period of five years or the tenure of the loan whichever earlier; The amount of issue expenses outstanding during the year have been written off and charged to the Income and Expenditure Account as expenses of the year in case of premature redemption of debentures and bonds; The particulars of the debenture holder have been recorded in the Register of Debentures;

(e) investments made in respect of Sinking Fund entered in a Investment Register (Form F&A 42) alongwith the details of specific securities, accrual of interest and maturity;

(f) all dividends and other sums received in respect of any such investment appropriated to the appropriate Sinking Fund and invested forthwith;

(g) the amount of interest earned on investments, profit/loss on disposal of investments updated in the register;

(h) the authorised officer carried out physical verification of investment documents and compared it with the Sinking Fund Investment Account;

(i) the adequate funds have been transferred from the main Bank Account to Sinking Fund Bank Account if the present value of the sinking fund investment was not in accordance with the value of the fund as per sanction of the State Government;

(j) an annual statement showing the necessary particulars of investments made during the year including, inter alia, the aggregate amount of application from the investment for the purpose of repayment was laid in meeting of the Parishad;

3.3.13 Audit of Loans and Advances:

Loans and Advances fall under two categories (a) interest bearing and (b) interest free. In case of advances sanctioned and to be recovered from employees the following points should be seen by audit :-

(a) that the advance has been sanctioned as per rules and drawn in the same financial year in which it was sanctioned.

(b) that interest, if any, recoverable on the advance, has been calculated on the balance amount of advance on the last day of the month.

(c) that the register of advances to employees has been maintained in the prescribed form F&A 20 of MPMAM.

(d) that the entries of advance sanctioned and recovery thereof in the register have been attested by the officer-in-charge.

(e) that recovery of the amount advanced has been done / are being done as per terms and conditions of advance.

(f) that the register has been maintained employee wise for each type of advance. Loans and advances to employees generally include festival advance, grain advance, medical advance, tour advance, transfer travelling advance, cycle advance etc.

(g) that temporary advance sanctioned from the general provident fund has been noted in the register and recovery thereof has been made regularly.

(h) that recoveries / deduction shown in the last pay certificate of the employee has been recorded in the register and the same have been recovered and remitted to the concerned authorities.

(i) that the employee has shown the balance of previous advance, if any, in his application for fresh advance.

(j) that temporary advance, if any, given to the employee against the passed vouchers for making payment, has also been recorded in the register for watching adjustment.

3.3.14 Permanent Advance :-

Audit should see that the register of permanent advance to officers of ULB has been maintained in the prescribed form F&A 21 of MPMAM. The officer concerned is regularly submitting the account for expenses incurred from permanent advance. The officer has not incurred the expenditure in excess of the advance which constitutes a serious irregularity. The amount of permanent advance is not in excess of requirement. The advance has been finally settled at the close of each financial year.


3.3.15 Municipal Fund


(a) there is no case of misclassification in credit to the Fund; (b) there is no case of irregularity / misclassification in appropriation from the Fund; (c) there is no case of utilization of any amount from the Fund without proper

appropriation; (d) written requisition from the State Government is forthcoming in case of temporary

payments from the Fund for works urgently required in the public interest and the cost thereof recovered from the State Government and credited to the Fund;

(f) details of investment of surplus money, if any, made in specific securities with the prior approval of the State Government have been recorded in the Investment Register (Form F&A 42). Details of accrual of interest and maturity of investments have also been entered therin.

3.3.16 Special Fund

(a) a separate Special Fund Account has been maintained if ULB constituted special fund for any purpose;

(b) the amount of interest received from the investment of surplus fund from specific grant has been credited to the Special Fund concerned;

3.3.17 Audit of Investment of Surplus Municipal Fund / Spe cial Fund

It should be seen in audit that the investments of Municipal Fund are in the instruments authorised by the statutory provisions and are completely secured. When there is no governing statutory provision proper authority for the investment should be demanded. The Audit should promptly take up with the Commissioner any of investments which it considers to be unauthorized, irregular or unsound. Any ascertained losses connected with investments or unusual depreciation in the market price of any investment should also be reported to Government in a suitable manner with such comments as the Audit may think fit.

3.3.18 Powers of ULB to invest in its own debentures : -

(a) For investing any portion of the Municipal Fund, including the sinking funds, the ULB has reserved and set apart for issue at par to and in the name of ULB any portion of the debentures to be issued on account of any loan, provided that the intention to reserve and set apart such debentures have been notified as a condition of the issue of the loan.

(b) The purchase by or the transfer, assignment or endorsement to the ULB, of any debenture issued by the ULB has not operated to extinguish or cancel any such debenture, but the same is valid and negotiable in the same manner and to the same extent as if held by, or transferred, assigned or endorsed to any other person.

It should be seen by audit that the details of each investment have been kept in the register in prescribed form F&A 42 of MPMAM and that the securities have been properly recorded and safe guarded.

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CHAPTER – 4 AUDIT OF PROVIDENT FUND AND OTHER RETIREMENT BENEFI TS

3.4.1 Audit of General Provident Fund Accounts

General Provident Fund subscription can be received only from such employees as are either required or permitted by the rules of the Fund to subscribe to it. Having satisfied itself on this score Audit must watch that subscriptions and other dues recoverable under the rules of fund are duly and regularly recovered from the employee concerned. Finally Audit must verify that the accounts of the fund are correct both in total and in the detailed accounts of the subscribers.

The General Provident Fund accounts of employees maintained by ULB should be audited alongwith audit of the establishment.

3.4.2 During audit of these accounts it should be seen that:-

(i) every employee, for whom it is compulsory to subscribe to the General Provident Fund, has joined the fund;

(ii) any broken period in the month in which employee is appointed or promoted or dies has been neglected; the first subscription has been deducted from the pay for the first complete calendar month;

(iii) the monthly subscription is not less than the limit fixed by ULB from time to time subject to a minimum of 6% of basic pay and that it is rounded to the nearest multiple of a rupee;

(iv) subscription during leave without pay and allowance has not been recovered; (v) the subscription payable in respect of a month, spent partly on duty and partly on

leave or partly on leave on average pay and partly on other leave, is not exceeding the amount which the subscriber was subscribing prior to proceeding on leave. Further the subscription during suspension and foreign service should be verified with reference to the rules. It should also be seen that contribution has been regularly received from the foreign employer, whenever necessary, and not allowed to fall in arrears;

(vi) the account of general provident fund of each employee has been properly maintained; total of each account has been checked; and the closing balance at the close of each year has been correctly carried forward in the next year;

(vii) the account has been closed at the close of each financial year and copy of account is supplied to each subscriber for acceptance of balance in his account;

(viii) no part of the provident fund money has been utilised even temporarily for purposes other than either sanctioned advance or a final withdrawal;

(ix) the unclaimed balances, if any, have been credited to Municipal Fund; (x) subscriptions have been properly recovered and correctly posted in the ledger

account of each subscriber; (xi) temporary advances and part / final withdrawals have been sanctioned as per rules.

Utilisation certificate has been obtained from the subscriber where required; (xii) interest of each year has been calculated and the amount of interest has been posted

in the account of each subscriber by debit to Municipal Fund; (xiii) the interest has been calculated at the time of final payment upto the preceding

month of the sanction of final payment; (xiv) the difference, if any, between the interest earned from investment of general

provident fund amount and the interest payable to the subscriber has been contributed by the ULB by debit to Municipal Fund;

(xv) deductions on account of subscription as shown in pay bills have been checked with the postings in the individual accounts in the ledger;

(xvi) the amount booked in the account agrees with the totals of the account of each subscriber and the closing balance at the end of the year agrees with the balance shown in the account of ULB;

(xvii) if withdrawals have been made for financing insurance policies, it should be ensured that the policies are alive, and amount drawn has actually been paid as subscription of those policies;


(xviii) the entries of the amount of subscription, refund of advances, temporary advance and part final withdrawals have been initialed by the authorised officer;

(xix) each employee has been allotted account number; (xx) the nomination from the subscriber has been received, entered in the ledger and kept

in office duly countersigned. If the subscriber has a family, he has not nominated a member other than that of his family.

3.4.3 Fund for Repayment of General Provident Fund

Fund has been created for the repayment of general provident fund subscriptions of the employees alongwith the interest at the prescribed rate on the death, retirement, termination or dismissal etc. from service. Separate bank account has been opened for the Fund and separate bank book has been maintained.

3.4.4 It should be seen by audit that :-

(a) all the interest on investments have been realised on the due date and credited to the provident fund account;

(b) surplus balances in the fund account have been promptly and judiciously invested as required under the rules in the better interest-earning investments;

(c) the subscription recovered from the employees for the month after deducting the amount of temporary advance / part final payment etc has been deposited in the account of the fund;

(d) investment register has been properly maintained and securities have been properly safeguarded;

(e) balance as shown by the bank in its statement has been reconciled with the balance shown in bank book.

3.4.5 Audit of Contributory Provident Fund

The employees, who are availing of the facility of contributory provident fund, have not been allowed the benefit of the pension. Ledger account of such employees has been opened and the subscriptions deducted from him have been posted therein. It should also be seen that employer’s contribution alongwith interest at the approved rate has also been credited in the account of employee by debit to “Municipal Fund’.

3.4.6 Audit of Family Benefit Fund (FBF)

The Family Benefit Fund Scheme is applicable only to employees, who were in employment prior to the introduction of the Employees Group Insurance Scheme and have specifically opted for the retention of this scheme. The following points should specially be seen by audit:-

(a) Monthly subscription is deducted from the pay of employee at the rate fixed by the State Government;

(b) Pass Book for each employee has been maintained and subscription recovered from the employee has been correctly posted therein;

(c) The total subscription deducted from the employees alongwith the employee-wise details has been informed to the Commissioner Urban Administration and Development Department (UADD);

(d) The amount of subscription has been retained by the ULB and it has been adjusted by UADD at the time of release of grant to the ULB from Madhya Pradesh Vikas Nidhi Niyam 2001;

(e) The amount payable to employee on retirement has been correctly worked out and recommended to the Commissioner UADD for payment to the employee;

(f) A proper nomination has been obtained from every employee who is member of the “Scheme”;

(g) The nominations received are countersigned by officer authorised and pasted in the service book and an entry has been made therein, that the nomination has been duly received.

Audit of Pension Cases

3.4.7 Audit Objective and Scope

The objective of audit of pensions are to verify that :-

(i) the qualifying conditions governing the grant of pension is fulfilled and (ii) the amount of pension sanctioned and drawn is correct.

The terms ‘Pension’ used in this chapter includes ‘Gratuity’ if any, payable under the rules.


3.4.8 Following points should be seen by audit in pension cases :-

(a) Anticipatory pension has been sanctioned to the retired person as per rules and being paid every month;

(b) Anticipatory gratuity has been sanctioned as per rules; (c) The amount of anticipatory pension / gratuity, if any, paid to the employee shall be

adjusted while making final payment of pension / gratuity; (d) Length of qualifying service has been correctly calculated; (e) Gratuity & pension has been sanctioned in accordance with the rules or orders in

force; (f) Last pay certificate and no dues certificate have been received before processing the

pension case; (g) The qualifying conditions governing the grant of a pension have been fulfilled and that

the amount of pension sanctioned and drawn is correct; (h) The amount of pension drawn is not greater than the amount sanctioned; (i) The voucher is duly supported by the prescribed life certificate, if the pensioner does

not appear in person to receive payment; (j) The prescribed certificates regarding non-employment. marriage, etc. have been

furnished in evidence of the continued title to pension; (k) The rules regarding periodical identification of pensioners have been duly observed

by disbursing officer; (l) Consolidated bill of the pensioners has been prepared at the end of each month and

sent to the bank alongwith the cheque for crediting the amount of pension in the account of each pensioner;

(m) In case of death before preparation of the bill the amount of pension has been calculated upto the date of death of the pensioner. If death occurs after issue of cheque for bill amount, the pensioner has been paid by the bank upto the date of death only and the balance amount has been refunded to ULB by the bank by cheque.

3.4.9 Pension Fund Pension fund has been created and a separate bank account is opened for it in which contribution of the ULB towards pension is deposited. The investment of this fund has also been done in the best interest of ULB. All the pensioners have opened their individual account in the same bank in which pension fund account has been opened by ULB and they have not been provided cheque facility. The pensioner has been authorised to withdraw the amount of his pension from the bank in person only. Bank Book separately maintained for Pension Fund account should be checked with the amount of pension contribution credited according to the rates prescribed. The monthly balance should be reconciled with the bank statement and the Investment Register. It should also be seen that the surplus balance has been promptly invested in accordance with the Pension Fund Rules of the ULB. Investment Register should be scrutinised alongwith the safe-custody of securities, etc. and it should be seen that the interest is collected on due dates.

3.4.10 Other Retirement Benefits

Ex-gratia Payment :-

Ex-gratia Payment Rs. 25000/- or six months basic pay, whichever is less, has been paid to the family members of the employee in case of death while in service. It has been paid in cash only when payment made on the date of death of the employee.

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CHAPTER – 5 AUDIT OF IMPORTANT ACCOUNTS RECORDS

The significant account record which should attract Audit attention are discussed hereunder:-

3.5.1 Cash Book

Following points in regard to maintenance of cash book and receipt of cash shall be carefully examined by Audit. Any deficiency in following the procedure prescribed by MPMAM shall be brought out before the management:-

(i) Cash Book has been maintained in prescribed form F&A 1 for recording cash transactions as laid down in para 2.1.1 of MPMAM by ULB Treasury;

(ii) The arrangements for the drawal of cash from bank or realisation from other sources and for custody, payment and accounting of cash, are in conformity with the prescribed rules;

(iii) Drawals from the bank, remittances into the bank have been verified from the bank book as well as bank statement and difference, if any, has been analysed;

(iv) Opening balance has been checked from the closing balance of previous month; (v) All transactions have been entered strictly in chronological order; (vi) The officer-in-charge has recorded on the cash book, over his dated signatures,

certificate to the effect that he has verified the closing balance by actual cash count at periodical intervals; and has also prepared an analysis of the cash balance;

(vii) The permanent advances to staff is not in excess of requirement; (viii) No expenditure has been incurred in excess of the permanent advance by spending

from the receipts. It constitutes a serious irregularity; (ix) There is no tendency to keep unduly large cash balances in hand and sums are also

not drawn from bank far in advance of requirement; (x) If money is temporarily advanced to subordinates for expenditure, either from the

permanent advance or out of drawals from bank there should be a proper record of the payment of the advances and the receipt of accounts of expenditure incurred there from. It should be seen that such advances are made for authorised purposes only, that the amounts were not held outside the chest in this manner any longer than was absolutely necessary and that the receipt of accounts of advances and the incorporation of expenditure in the cash book was strictly watched by the officer in charge of the cash book;

(xi) Adequate arrangements exist for the safe custody of cash. The accounts of any other fund have been maintained in a set of books separate from the Municipal Fund and that money of Municipal Fund has not been mixed up with, and kept separate from the money of other fund;

(xii) There are no erasures, overwritings or interpolations in the entries of cash book; (xiii) Each entry in the cash book is attested by the officer in charge of the cash book; (xiv) The officer in charge of the cash book has verified the total of the cash book or have

it done by some responsible officer other than the writer of the cash book in order to maintain its arithmetical accuracy;

(xv) The undisbursed amount as shown in the cash book tally with the balance in the register of undisbursed pay and allowances;

(xvi) The dates of withdrawal of undisbursed pay and allowances have been recorded and no undisbursed amount is in hand for more than three months;

(xvii) There is no evidence of removal of or tampering with the pages of the Cash Book and that its pages are machine numbered, that the certificate of count of pages contained in a cash book is recorded under the signatures of the officer-in-charge on the fly leaf before bringing the same into use;

(xviii) It should be seen that required security has been obtained from persons handling cash and store unless otherwise exempted by ULB;

(xix) The cash book has been closed and balanced at the end of each working day; (xx) The cash book has been maintained by each unit, section or department of ULB

handling cash in any manner and all cash collection deposited into the bank have been recorded in the cash book;


3.5.2 Bank Book


(i) it has been maintained in prescribed Form F&A 2 of MPMAM; (ii) separate bank book has been maintained in respect of each bank account and for

each type of fund received for specific purposes; (iii) designated bank account has been operated for depositing collections pertaining to

Property and Other Taxes, Water Supply, Cess, Public Works, Special Funds etc; (iv) all collections by cheque and deposits of cash in bank have been recorded on the

receipt side and all payments by cheque and cash withdrawals on the payment side of the bank book;

(v) the cheque book supplied by the bank has been kept under the personal custody of the authorised officer?

(vi) all the payments above the specified amount have been made by cheques only; (vii) the fact of cancellation has been noted in red ink under the initials of the drawer of the

cheque upon the counterfoil and also across the endorsement which was enfaced upon the voucher;

(viii) cheque Book Control Register in Form F&A 27 has been maintained showing the details of receipts of cheque book from the banks, issue of cheque book to the authorised officer of the ULB, number of cheque cancelled and return of counterfoils from the officer.

(ix) it has been closed every day and signed by the cashier and the authorised officer; (x) the bank account opened for specific purpose has been closed on the completion of

work etc; (xi) the balance in each bank book at the end of the month has been reconciled with the

balance shown by the bank in its statement and the difference, if any, has been analysed;

(xii) a register in the form prescribed by ULB has been maintained showing the name of bank, account number and purpose for opening the account.

3.5.3 Contra / Bank Transfer Voucher (Form F&A 8)


Contra / Bank Transfer Voucher has been prepared in prescribed Form F&A 8 of MPMAM by the account section for recording transactions involving deposit of cash into the bank, withdrawal of cash from bank or transfer of amount from one bank to another.

In case of self cheque

(a) Audit should see in accounts section that :-

(i) it has been posted in the ledger of the Bank concerned. (ii) bills duly passed for payment against self cheque have been entered in the bank

book and sent to treasury for payment. (iii) if the amount of passed bills happen to be more than the amount of self cheque,

another self cheque for the difference amount has been issued. (iv) vouchers after payment have been received at the close of day from treasury and

undisbursed amount, if any, entered in the undisbursed register. (v) acknowledgement of the payee has been obtained on the original voucher and note

of payment recorded in undisbursed register.

(b) Audit should see in treasury account that :-

(i) amount of self cheque received from bank and payment made against passed bills received from account section have been entered in the cash book.

(ii) undisbursed amount has been paid on the basis of separate passed bills received from account section.

(iii) undisbursed amount as shown in cash book of treasury has been reconciled with the undisbursed amount shown in the register of account section.

(iv) undisbursed amount after three months has been remitted into bank by credit to the account head concerned. In case of March, it has been remitted into Bank on 31st March.


3.5.4 Payment Advice (Form F&A 16)


(a) payment advice has been prepared in prescribed Form F&A 16 of MPMAM by the section or department concerned.

(b) it contains the sanction for payments to contractor/supplier. (c) it has been filled in by the authorised officer from details of the work order, sanction

order, and from the bill submitted by the contractor/ supplier. (d) it has been taken as the basis for recognising the amount payable and to pass journal

entries to account accrual of liability – payable.

3.5.5 Payment Voucher (Form F&A 17)


(a) payment voucher has been prepared in prescribed Form F&A 17 of MPMAM to record the accounting of the payments released to the contractor/supplier.

(b) the voucher has been prepared on the basis of the payment advice (Form F&A 16). (c) the receiver's signature and date, authenticating the fact of delivery of cash/cheque to

the contractor/supplier has been obtained on the voucher.

3.5.6 Cheque Issued Register (Form F&A 18)


(a) cheque issued register has been maintained in the prescribed Form F&A 18 of MPMAM.

(b) all details concerning cheque issued by the ULB for payment of amounts payable for works, goods and services have been recorded.

(c) all details regarding encashment of each cheque have been filled in from the statement received from the bank.

3.5.7 Bank Reconciliation


(a) bank statement has been collected from the bank by the zone/treasury of ULB at the end of each week and reconciled with the cash remittance and cheques / drafts deposited.

(b) the dates for collection of cheques and drafts as shown in bank statement have been noted in the register of cheques and drafts.

(c) dishonoured cheques have been entered in the cheques dishonoured register and returned to the ward / section / department for realization in cash alongwith the surcharge, if any, for the delay in payment and the penalty for dishonoured cheque. The amount of discount, if any, allowed has also been recovered.

(d) there is no undue delay by the bank in the collection of cheques / drafts. (e) there is no other discrepancy in the bank statement except cheques / drafts under

collection. (f) the bank has not recovered any collection charges. (g) there is no difference in the amount of cash remitted and credited by bank. (h) the amounts, if any, credited by bank have been taken as receipts by ULB in bank

book; (i) there is no difference in the amount of cheque issued by ULB and amount debited by

bank; (j) cheques outstanding for more that six months have been cancelled after obtaining

certificate of non payment from bank.

3.5.8 Journal Voucher (Form F&A 9)


(a) journal voucher has been prepared in prescribed Form F&A 9 of MPMAM. (b) it has also been prepared for recording entries not related to cash/bank transactions

e.g transactions relating to adjustments / rectification entries, correction of accounting heads, depreciation etc.

(c) it has been prepared to record entries for recognising demand for income, recognising amounts payable etc.


(d) the concerned officer has authenticated the journal entry and the same has been posted to the respective accounting head in the ledger.

(e) all the Journal vouchers have been fully supported by the relevant documents like sanction orders, bills, invoices, etc. necessitating passing of the Journal entry.

(f) journal in the form prescribed by ULB has been maintained to keep a consolidated record of all the journal vouchers.

3.5.9 Ledger (Form F&A -10)


(a) Ledger has been maintained in prescribed Form F&A 10 of MPMAM by accounts section.

(b) it contains all the accounts as specified in the Chart of Accounts and operated. (c) each entry in the Cash Book (Form F&A 1), Bank Book (Form F&A 2), and the

Journal Voucher (Form F&A 9) has been posted in the Ledger (except transactions relating to deposit into or withdrawal of cash from bank or transfer of amount from one bank to another bank account).

(d) the debit and credit amounts of each account head shown on the ‘Payment’ side and ‘Receipt’ side of the Cash Book and Bank Book have been posted under the 'debit' and 'credit' column in the ledger.

(e) in case of the Journal Voucher the accounts debited and credited have been correctly posted in the ledger under the debit and credit column respectively.

(f) the Ledger has provided a listing of all the transactions in respect of each account head during an accounting period.

(g) each accounting head has been balanced at the end of each month showing the balance for the month and balance to end of the month.

(h) the balance of each account head in the ledger has been correctly carried forward in the trial balance.

(i) cross reference of posting of each entry of cash book/bank book/journal in the ledger has been done by recording ledger folio in cash book/bank book/journal and cash book/bank book//journal folio in the ledger.

3.5.10 Audit of Establishment Pay Bill

The Audit of pay, leave salary and other allowances admissible to the various classes of employees is mainly conducted with reference to the rules and regulations made by ULB governing their conditions of service. These rules and regulations are referred to in this manual as “Service Rules”.


(i) the pay bill of establishment is within the sanctioned human resource compliment; (ii) the pay bill is supported with primary records containing the authority for the events

necessitating the regulation of pay and allowances such as increment certificates sanctioning the increments, declaring him fit to cross the efficiency bar, orders of promotion or reversion and consequential fixation of pay, sanctions to leave and leave salary, orders of suspension and subsistence allowance granted, different type of allowances admissible and specific orders of ULB in regard to grant of special pay or compensatory allowance;

Apart from comparing the pay and allowances drawn by each employee in the pay bill with the corresponding entries in the pay column of the service book and checking the acquittance rolls of employees who have been paid in cash to ensure that the pay and allowances drawn have been disbursed and acquittance obtained properly and accurately; The above check should be integrated with the check of service books and where service books are not made available they should be checked independently with reference to the initial and primary records mentioned above.

(iii) fixation of pay on promotion or reversion has been done as per rules; (iv) the rules and regulations have been followed for sanction of overtime allowance

claims, children's education allowance claims, reimbursement of tuition fees etc; (v) the money drawn on the bill is fully accounted for by the acquittances of the payees

and undisbursed amount of the bill, if any, has either been refunded/adjusted by short drawal or stands included in the cash balance;

(vi) a note of the arrear bill has been made in the bills for the period to which the claim


pertains over the dated initials of the drawer of the arrear bill in order to avoid the risk of arrears being claimed over again;

(vii) the certificate of disbursement to the actual payee is duly recorded by the disbursing officer under his dated signatures on the acquittance rolls or the receipted bills showing clearly the item number and the amount paid on different dates;

(viii) medical certificate in the prescribed form has been attached to the first pay bill of the employee concerned drawn after new appointment;

(ix) the bill is prepared according to the sanctioned scale, that the substantive pay, and the increase thereto of an officiating employee are distinctly shown, where necessary, that arrear pay is drawn on a separate bill, that the name of any person on leave, suspension or deputation, as well as the name of the officiating person is shown in the bill;

(x) no pay for an employee beyond the date of attaining the age of superannuation or on the expiry of a term of extension of service sanctioned by competent authority has been drawn;

(xi) no drawal has been done for an employee, other than a person newly appointed in ULB, unless it is supported by last-pay certificate in such form as may be prescribed by the ULB;

(xii) all the statutory deductions viz income tax, professional tax etc. have been made in the pay bill and the amount so deducted has been promptly remitted to the concerned authorities;

(xiii) the recovery of loans and advances has been made from the employee as per rules and the entries of deduction have been made in the register of advances to employees maintained in prescribed form F&A 20 of MPMAM. The deductions also shown in the last pay certificate of employee has been noted in this register for watching recovery.

Service Books and Leave Accounts

3.5.11 (A) Service Books

Service book is the miniature record of the entire service of an employee and has to serve as regulating factor of his entitlements. It is, therefore, essential that adequate attention should be paid to it during audit and review of service books.

In audit of service books it should be seen that :-

(a) all preliminary entries regarding name and surname, religion, caste/tribe, residence and postal address, father’s name and surname and last address, date of birth, personal mark of identity etc. have been duly filled in under attestation of the authorized officer;

(b) specimen signature of the employee has been taken after every five years and attestation has been done;

(c) entries of all part final withdrawals from general provident fund have been made; (d) all the events during service period such as entry in service, pay fixation, increment,

promotions, demotions, suspension etc. are entered and attested by authorised officer;

(e) all nominations for death-cum-retirement gratuity., employees group insurance scheme, pension, family benefit fund, general provident fund, etc. have been obtained and a copy has been kept in the service book. This point should be specifically seen as non availability of nominations can cause hardship to the family of the employee;

(f) service book in prescribed form only has been maintained properly for each employee on regular establishment and kept uptodate.

(g) the entries in the front page have been re-attested every five years; (h) the date of first entry into service and the orders of confirmation have been recorded; (i) the annual verification of service is properly recorded by the authorised officer in the

service books of the employees concerned; and (j) Service books and leave accounts of those employees who are due to retire during

next 5 years should be checked in detail.


(B) Leave Account

3.5.12 While checking leave account it should be seen that :-

(i) it has been maintained in the prescribed form; properly posted and closed after the incumbent returned to duty from leave and every entry has been attested;

(ii) leave sanctioned has been correctly posted in the leave account and the entry of the leave sanction order has been attested;

(iii) leave account has been kept upto date as per rules and entries of leave availed have been made;

(iv) leave at credit has been correctly calculated in accordance with the rules and the leave account has been revised with reference to orders regarding completion of probation, confirmation etc;

(v) certificate to the effect, that the period of leave shall be counted as service for increment under the rules has been be recorded.

(C) Encashment of Earned Leave

3.5.13 Surrender and encashment of earned leave shall be permissible to employee as per the provisions applicable in the ULB :-

(i) that surrender and encashment of earned leave has been sanctioned by the competent authority;

(ii) that surrender and encashment of leave has been sanctioned for 15 days or leave at his credit whichever is less for each completed year of service upto 09.03.87 and from 10.03.87 for 7 days for each completed year of service;

(iii) that the period of service in excess of completed year upto 09.03.87 has not been rounded off as the same shall be added in the service period after 09.03.87;

(iv) that the period of leave surrendered is debited in the respective leave account, the sanctioning order is noted in the service book and a certificate to this effect is recorded by the officer in the pay bill in which the leave salary is drawn;

(v) that encashment of earned leave on retirement has been limited to 240 days or leave at his credit whichever is less;

(vi) that the leave salary has been calculated reckoning a month of 31 days and not 30 days;

(vii) that general provident fund subscription at the usual rate has been deducted from the leave salary paid for the surrendered leave if it is for 30 days and at prorata basis if it is for a lesser period;

(viii) that house rent allowance, project allowance and non-practicing allowance has not been paid alongwith the leave salary for the surrendered earned leave. However, other allowances like city compensatory allowances are payable to the employees;

(ix) that this concession is admissible to the employee on deputation to other ULB or State Government or any other Non-Government body or institution or has been sent on training in India or abroad;

(x) that the concession is not admissible to employees on leave preparatory to retirement or refused leave or during extension of service or to the re-employed persons.

3.5.14 Compensatory Allowances and Honoraria

In auditing sanctions to the grant of any compensatory allowances, fees or honoraria to employees it should be kept in view that; unless in any case it is otherwise distinctly provided, the whole time of an employee is at the disposal of the ULB which pays him, and he may be employed in any manner required by proper authority, without claim for any additional remuneration;

Audit of Travelling Allowance (T.A) Bills

3.5.15 Introductory

Travelling allowance is paid to the employee to cover actual travelling expenses incurred by him in travelling in the interest of ULB. It is a basic principle that the allowance is not to be a source of profit. No allowance is granted to meet the expenses of the family of the employee, if accompanying him, when travelling on duty.

A journey for which travelling allowance is claimed may be performed by different modes of conveyance such as Air, Railway or Road, according to entitlement of performing journey in a particular class or means of conveyance.


3.5.16 As all the checks prescribed cannot be exercised by Audit independently the duty of scrutiny of travelling allowance bills is shared between Controlling Officer and Audit. It is an important function of Audit to also see that the scrutiny entrusted to controlling officer under the rules of the ULB is exercised by him properly.

3.5.17 Duties of Controlling Officer vis-a-vis T.A. Claims :-

Duties of Controlling Officer for T.A bills is :-

(a) to scrutinise the necessity, frequency and duration of journey and halt for which travelling allowance is claimed. Also to disallow the whole or any part of the travelling allowance claimed for any journey or halt if he considers that the journey was unnecessary or unduly protracted or that halt was of excessive duration;

(b) to scrutinise carefully the necessity for a road journey by motor car between places connected by rail;

(c) to see that all necessary receipts and certificates are attached; (d) to scrutinise the bonafides of claim made for transport of members of the employees

family accompanying him on transfer; (e) To observe any subsidiary rule, which a competent authority may make for his

guidance.

3.5.18 Forfeiture of T.A. Claim:

The right of an employee to transfer and tour travelling allowance including daily allowance is forfeited or deemed to have been relinquished if the claim is not preferred within one year form the date on which it became due. This applies to the claims of conveyance allowance also.

3.5.19 General Principles of Audit :-

(i) No revision of claim of travelling allowance is permitted;

(ii) An employee’s claim of travelling allowance should be regulated by the rules in force at the time journey was undertaken.

Audit should further ensure that :- (i) journey was actually performed duly supported by ticket numbers or certificate in lieu

thereof; (ii) journey was necessary and authorised by general or special order. This is done on

the basis of countersignature on T.A. bills; (iii) no bill has been submitted for it before; (iv) amount drawn is correct with reference to Travelling Allowance Rules applicable.

To ensure this the following should be checked :-

(a) The gradation is correct as per pay admissible and entitlements are calculated on its basis;

(b) No T.A. is drawn for journey within the radius of 8 kms; (c) Headquarter allowance is not drawn for journey by one’s own motor car, motor cycle

etc; (d) Certificate about non-use of ULB vehicle for journey to and from railway station,

airport or bus stand is recorded, and where no such certificate is recorded head quarter allowance is not claimed at rate more that one-quarter of the admissible rates of D.A;

(e) The number of total D.A. is first calculated on the basis of the total absence from headquarters. From this, Daily Allowance. at special rate according to the place of halt is calculated. For rest of the period, the D.A. will be payable at ordinary rate which includes journey period also;

(f) Certificate about non-availability of the facility of free boarding and lodging is recorded, otherwise D.A. for halt including special halt allowance would be payable at one-fourth of the applicable rate. If only boarding or lodging is allowed free to such an employee, he may draw D.A. at the half of the admissible rate;

(g) If employee departs from an outstation on the same day on which he arrived at it and vice versa, no special halt allowance is admissible. It is admissible at the rate applicable to the place where night halt is made;

(h) No special halt allowance is given where the place of halt is not more than 32 kms. away from Headquarters. Moreover, for absence from Headquarter for twenty four


hours or less beginning and ending in different calendar days, no special halt allowance is admissible;

(i) The time of arrival and departure, in the Hotels, has been indicated in the Hotel Receipt;

(j) Certificate to the effect "paid Rs. ……………… as bus fare on………………(date)" recorded by the employee concerned on the bus ticket ;

(k) The time of departure of train/bus, has been indicated in the T.A. Bill for onward / inward journeys;

(l) Bus tickets have been enclosed with the T.A. claim as proof of the fact that the journey was actually undertaken by semi-Delux or Delux bus;

(m) Registered taxi number has been quoted if full taxi (four wheeled auto fitted with milometer) engaged and higher rate of mileage has been charged;

3.5.20 Transfer Travelling Allownace Bill

(i) Transfer T.A. not to be allowed unless transfer is in public interest. Mutual transfer at one’s own request is not treated as transfer in public interest;

(ii) Transportation charges of family and luggage are not allowed unless this was done within one month before and one year after the date of transfer. The date of transfer means the date of taking over charge at the new place;

(iii) If the luggage and family transported to the new place from a place other than the old place, the transportation charges should be limited to that admissible from the old to the new place;

(iv) Parents, sisters and minor brothers are not to be included in the term family unless they are wholly dependent and residing with the employee concerned. Similarly more than one wife and earning children should be ignored for purposes of transfer T.A.;

(v) Truck number should be quoted in the case of transfer of luggage by truck; (vi) Transportation charges for conveyance not to be allowed unless the conveyance is

required at the new place for efficient performance of duties of the employee concerned;

(vii) T.A. claim is preferred within one year of the date on which it became due.

3.5.21 Medical Benefit


(i) application for medical reimbursement has been submitted in the form prescribed by ULB to the countersigning authority within six months from the date on which expenditure incurred alongwith essentiality certificate duly signed by the Authorised Medical Attendant (AMA) and the receipts and cash memos in respect of all payments made on account of treatment, room rent etc. duly countersigned by him. Where medicines have been prescribed by the AMA are outside the priced vocabulary of the Medical Stores Depot, the essentiality certificate has been, or in addition, countersigned by the Chief Medical and Health Officer in case where he is not himself the AMA for it. In case of treatment by the Medical Officer retained by the ULB such countersignature shall not be required;

(ii) all bills for medical expenses have been countersigned by the countersigning authority empowered by the ULB;

(iii) reimbursement of claim for prenatal and post-natal treatment to female employee or the family members of the employee has been done only upto three children and not beyond it;

(iv) the expenditure incurred on purchase of medicines has been reimbursed which are incorporated in the Madhya Pradesh Civil Services (Medical Attendance) Rules, 1958 on the signature of the Authorized Medical Attendant including Vaidya, Hakim or Homeopathic or Biochemic Doctor in charge of a hospital and medicines out of list on the counter-signature of the Principal/ Divisional Officer, Ayurveda / Superintendent of the dispensary shall be deemed to be Authorised Medical Attendant;

Note: If ULB is running its own dispensary, the reimbursement to the employee has been made only when the claim has been countersigned by Doctor-in-Charge dispensary of the ULB.

(v) employee-wise register for medical reimbursement has been maintained by the ULB in the prescribed form :-

(vi) the husband or wife of an employee of ULB employed in different organization and facility of medical reimbursement available in both the organizations, has given a


declaration indicating that where his/her wife/husband is employed and wherefrom he/she, including their dependent children, will be claiming medical reimbursement;

(vii) approval of the Director Medical Education of the State Government and the ULB has been taken for treatment outside the State and claim is limited to the rates and the procedure for it approved by the State Government;

(viii) payment for tests and investigations in the hospitals recognized by the State Government for the purpose has been made as per terms and subject to the rates approved by the State Government for which facilities are not available in public hospitals.

3.5.22 Register of Settlement of bills


(i) the bills (invoices) of the contractors / suppliers are entered in the register in prescribed form F&A 25 and bills for services in form F&A 26;

(ii) details of approval of the competent authority and payment made against the bills have been made in the register;

(iii) the bills have been approved and paid within the reasonable time and reasons for unnecessary and unusual delay in approval of payment, if any, have been recorded;

(iv) the assets / goods received and accepted on or before 31st March, where bills are received after that date, have been accounted for either based on the value as stated in the purchase order where the bill not received (upto the cut off date) or the value as stated in the bills;

(v) all bills outstanding in the previous year’s register have been duly carried forward and the register has been written up completely and up-to-date.

3.5.23 Refund bills

The bills for refund of taxes should be scrutinised by audit with reference to rules and sanction of the Standing or other Committees. It should also be seen that all refunds have been noted on the duplicate or counterfoil of original receipts and against entries in the Register of Demand Collection Balance to prevent duplicate claim of refund.

3.5.24 Audit of Log Books of Vehicles / Machines :-

(i) A separate log book in the prescribed form is to be maintained for each vehicle / machine;

(ii) Full details of all journeys / works undertaken arc recorded, covering places visited enroute and the kilometer reading;

(iii) Purpose of journeys / works is always recorded in detail under the signatures of the officials using the vehicle / machine and vague descriptions such as "official duty" etc. are avoided;

(iv) The vehicle / machine is used only for bonafide public purposes and not for any private purposes without payment and orders of competent authority;

(v) In the case of authorised private use the charges recoverable at the prescribed rates recovered in advance and credited to Municipal Fund; Details of the amount recovered is to be recorded in logbook;

(vi) All issues or purchases of petrol, diesel oil, mobile oil and other lubricants and consumable stores such as acids, distilled water etc., have been recorded in the log hook;

(vii) Log books have been closed at month end and average kilometers per litre of petrol or diesel oil worked out at prescribed intervals and in case of unduly low yield reasons leading thereto be investigated;

(viii) Full details of repairs to the vehicle / machine replacement of parts and spares have been recorded in the log book;

(ix) The repairs and replacements have been done by Central Workshop in accordance with the orders of ULB in this behalf;

(x) Details of equipments, tools with the driver have been recorded in the log book; (xi) Details regarding the identity of the engine, tyres and battery etc. fitted on the vehicle

/ machine have been recorded in the log book; (xii) The replacement of parts, for which life has been prescribed i.e., engine, battery,

tyres etc. have been made only after completion of the required kilometers; (xiii) The vehicle / machine is periodically tested and inspected by the prescribed

authorities;


(xiv) Account of the condemned and replaced parts and accessories is maintained and their disposal done to the best advantage of the ULB;

(xv) History sheet of each vehicle / machine is maintained; (xvi) Entries in log books of fire fighters, ambulance, hearse (Shanti Vahan), solid waste,

gowardhan project, encroachment cell, J.C.B machines, hydraulic machines, tracker trolleys etc. have been attested by the authorized officer of the concern department. Hire charges have been recovered and receipt number, date, and amount has been noted in the log book;

(xvii) Entries in the log book of fire fighters have been supported with entries in the call register. Hire charges have been recovered in advance in case of ambulance, hearse, hydraulic machines, tracker trolleys etc.;

(xviii) Entries in log book of water tankers have been attested by Hydrant in-charge. In case of private supply details of recovery for water charges have been recorded.

Note.:- Log books are required to be preserved for a period of five years reckoned from the date of the last entry in it or one year after its examination by Audit, whichever is earlier, provided, however, that no log book due for destruction after the stipulated period, should be destroyed until the settlement of all audit objections relating any entry therein.

3.5.25 Workshop Accounts

The audit of workshop accounts includes not only the usual scrutiny of the admissibility of the payments and the correctness of the accounts, but also an examination of any cost account, where maintained, in order to test whether they are soundly compiled and made to tally with the expenditure accounts. Appreciable discrepancies between the aggregate of the expenditure charged to various jobs and the actual expenditure in the account should be investigated.

3.5.26 It is a duty of Audit to verify that

(a) store received in the workshop are properly brought to account and that the issue of store against indents is properly controlled.

(b) In the case of manufacturing operations, the financial result of the year and the cost of manufacture in the workshop has been compared with the price of similar articles in market.

(c) the pro forma accounts of workshop form an accurate and complete record of all the financial transactions directly or indirectly affecting workshop.

(d) insurance premium and registration fee has not been paid for condemned vehicles; (e) fixed assets register has been maintained for the tools and plants of the workshop.

3.5.27 Repairs and Maintenance of Vehicle / machine / equi pments


(a) requisition for repair of vehicle / machine has been received from the concerned officer-in-charge;

(b) estimate has been prepared on the basis of report of mechanic and sanctioned by competent authority;

(c) register of settlement of supplier bills (Form F&A 25) to record the details of bills submitted by the supplier and details of payment thereof has been maintained;

(d) inventory register (Form F&A 43) has been maintained to keep record of the parts received and issued to mechanic;

(e) stock register for scrap of old parts etc has been maintained and sold after approval of competent authority;

(f) register of repairs has been maintained vehicle / machine wise to keep watch over expenditure on repairs of each vehicle / machine;

(g) entry for the repair has also been made in the log book / history sheet of the concerned vehicle / machine;

3.5.28 Assets / Works-in-Progress received by ULB from Oth er Organizations

Audit should see that the assets / work-in-progress received by ULB from other organizations have been properly accounted for in accordance with the provisions of para 5.2(K) Madhya Pradesh Municipal Accounts Manual.


3.5.29 Register of Court Cases :-

(a) The suits filed should be checked at the time of perusal of proceedings

and with reference to the bills of legal charges and the entries in the register of court cases;

(b) It should be seen that undisposed suits of previous years are kept in view by means of an index of all pending suits;

(c) The expenses incurred from the fund in connection with suits should be traced into the register.

3.5.30 Deposits Receivable

Audit should ensure that the subsidiary register in the proper form has been maintained to keep record of the amounts deposited by ULB as security for :-

(i) telephone connections; (ii) electric connections for offices, street lights, parks, filtration plants etc; (iii) advertisements and publicity with Madhyam; (iv) any other purpose.

3.5.31 Audit should also see that refund of deposit has been claimed when the connection is discontinued or the deposit is no more required. In case of deposit with Madhyam, it should be ensured that it is adjusted against the bills for advertisement and publicity.

- - - - - - -


CHAPTER – 6 OTHER MISCELLANEOUS AREAS OF AUDIT CONCERN

3.6.1 Compensation and Grants Receivable from State Gover nment

Besides taxes and other revenue proceeds of the ULB it receives funds from the State Government on following counts :-

(i) The amount of entry tax to be paid from time to time by the State Government from consolidated fund of the State to compensate the loss caused as a result of abolition of octroi. The amount to be so released to the ULB shall be ten percent more than the last year or the actual net income whichever is less treating the year 2000-01 as base year;

(ii) The grants to be received from the State Government on the recommendations of the State Finance Commission for the improvement of basic services;

(iii) The grant to be given by the State Government for other specific purposes; (iv) Funds received from any other source.

Audit in these spheres should see that :-

(i) compensation to octroi has been received as admissible and credited to Municipal Fund;

(ii) stamp duty and other compensations receivable from State Govt. have been received and credited to Municipal Fund;

(iii) the amount for development works, if any, sanctioned by the State Government has been received;

(iv) the repayment of debt, if any made by the State Government, on behalf of ULB from the fund has been properly accounted for in the accounts of ULB;

(v) there was no case of utilization of the grant for any purpose other than the purpose for which the same was sanctioned;

(vi) separate accounts for Capital and Revenue grants has been kept; (vii) “Statement of Expenditure” submitted to the sponsoring agency at the prescribed

intervals for grant received as a reimbursement of expenditure. There was no case of non-receipt of the amount of reimbursement due to non-submission or delay in submission of statement of expenditure;

(viii) ULB has opened a Designated Bank Account where the specific grant requires to maintain separate books of accounts;

(ix) the grants received State Government were based on the formula recommended by the State Finance Commission (SFC);

(x) the amount of interest received from the investment of surplus fund from specific grant has been credited to the specific grant concerned;

(xi) grants received were deposited in the respective designated grant bank account and the same were accounted for in the following manner:- (a) the details of the grant sanction order were recorded in the grant register; (b) separate bank book in prescribed form was maintained in respect of all

grants; (c) the details of the receipt of the grant was updated in the grant register; (d) advance made to a contractor/supplier in respect of project/scheme against a

specific grant was paid from the designated grant bank account and not from the main bank account;

(e) the details of expenditure were recorded in the grant register under the respective specific grant;

(f) proper accounts kept in respect of grants received from Central and State Government; for general purposes or specific projects/schemes;

(xii) the bank reconciliation was carried out on a monthly basis or such other shorter time interval as the ULB decided.

(xiii) utilization of unspent balance of government grant for expenditure in subsequent year has not been done without prior sanction of the State Government;


3.6.2 Grant-in-aid from Government for Specific Purpose : -

(a) The responsibility of watching the progress of expenditure and fulfillment of conditions of the grant-in-aid primarily rests with the Government authorities sanctioning the grants. The ULB is equally responsible to see that the grant has been utilized for the purpose it was made available;

(b) The audit of the expenditure incurred from such grant-in-aid would largely depend on whether the grant is conditional or unconditional. Where no conditions are attached to a grant, Audit would be mostly concerned with the normal expenditure parameters. Where conditions are attached to the utilisation of the grant, they usually take the shape of specification of the particular objects on or the time limit within which the money must be spent, unless it is otherwise ruled by Government. Every grant for a specified object is subject to the following conditions namely :- (i) that the grant will be spent upon the object within a reasonable time, if no

time limit has been fixed by the sanctioning authority; (ii) that any portion of the amount which is not ultimately required for expenditure

upon that object will be surrendered to Government, before the expiry of the financial year in which it is sanctioned, unless there is specific provision to the contrary to it.

3.6.3 Budget

Audit should ensure that :-

(a) the prescribed dates for preparation of (a) estimated receipts and expenditure; (b) draft annual budget estimate; (c) placement of the same to the Mayor; and (d) sanction of budget estimate by the Parishad have been adhered to;

(b) estimated receipts and expenditure of the following year has been prepared by the different departmental heads in consultation with the respective Zone Samities;

(c) deficit has not been provided in the sanctioned budget; (d) the budget heads have been broadly divided into three categories of accounts, viz.

(a) Revenue Account; (b) Capital Account; and (c) Debt, Deposit Account; (e) the unspent balance of development grant and loan as well as unspent balance of

capital receipt from own sources at the close of financial year was shown as the opening balance of Capital Account of the following year;

(f) the ledger balance for Advances, Deposits and Material Accounts at the close of financial year was shown as the opening balance of Debt, Deposit Account of the following year;

(g) the items of receipts/expenditure of revenue, capital and extra-ordinary nature have been correctly booked under Revenue, Capital and Debt, Deposit Accounts respectively;

(h) receipts on account of Development Grants, Loans made available by the State Government as well as Development Authorities and Development Loans from LIC, HUDCO and Banks constituted capital receipt;

(i) receipts like sale proceeds of land, property and any other fixed asset, realization on account of investment have been shown as capital receipts;

(j) capital expenditure, if any, met out of own revenue income of that year transferred to Capital Account from the Revenue Account and the same duly reflected under the appropriate budget head;

(k) the details of outstanding liabilities, if any, have been shown in the budget; (l) the rates at which various taxes, surcharges, cesses and fees would be levied during

the proposed year have been specified in the budget estimates; (m) the amount of money to be raised as loan during the year has been specified in the

budget estimate.

3.6.4 Appropriation Register


(a) the Appropriation Register has been kept in the prescribed form; (b) the expenditure has been posted monthly from the Register of Works or other

appropriate registers; (c) there was no case of appropriation of funds, even temporarily, without prior approval

of the Parishad to an object other than that for which it was intended;


(d) separate pages or sets of pages have been set apart for endowment and fund;

Printing Press, Stationery and Valuable Forms

3.6.5 Printing Press

The following checks shall be exercised by audit :-

(a) estimates are to be checked with the estimate register; (b) the estimate register is to be linked with the register of press orders; (c) the dispatch register, material warrant register, out-turn register and the press

material stock register; (d) paper received for printing of forms has been properly accounted for and

consumption thereof has been shown on the basis of forms printed; (e) all forms printed for use of ULB have been duly accounted for in the respective forms

register. (f) inventory register has been maintained for the receipts, issues and balance of the

consumable articles; (g) scrap has been sold under the orders of competent authority; (h) physical verification of consumables and non-consumable has been done at the

close of each financial year and shortages, if any, have been recovered or written off under the orders of competent authority;

(i) log book of printing machines has been maintained.

Stationery and Valuable Forms

List of Important valuable forms is given in Appendix – II.


(a) stationery article-wise inventory register has been maintained for the receipts, issues and balance;

(b) issues have been supported with the indents duly signed by authorized officer; (c) inventory register for valuable forms has been kept separately and the record of its

issue has been maintained ward / section / department-wise; (d) reconciliation of valuable forms issued and received by the ward / section /

department has been done; (e) physical verification has been done at the close of financial year and shortages, if

any, have been recovered or written off under orders of competent authority.

3.6.6 Bye-laws, Rules, Regulations and date of effect

It should be seen by audit that bye-laws, rules and regulations required to be framed by ULB have been framed and approved by the competent authority; that the levy of taxes and fees is in conformity with Rules and Bye-laws; that the operation of any of them has not been suspended or the scale of fees prescribed there in has not been varied except after modifying the provision with the competent sanction in accordance with the terms of the Act. Any defects in the system of assessment and collection or in supervision thereof that might lead to fraud or malpractices should be prominently brought to the notice in the Audit Report. It should, in particular be seen that the Bye-laws and Rules are not inconsistent with the Act and no sources of revenue are over-looked. In the absence of any definite date of application the bye-laws have effect from the date of publication in the Government Gazette.

List of Important Sections of Madhya Pradesh Municipal Corporation Act, 1956, Rules framed by State Government and Bye-Laws to be made by the ULB relating to accounts and audit is given in Appendix – III.

Indira Gandhi National Oldage Pension Scheme / Cons olidated Oldage and Social Security Pension / National Family Benefit Scheme


(a) designated bank account has been opened for the fund received for the scheme from Zila Panchayat;

(b) separate bank book and all requisite account records have been maintained; (c) bank reconciliation has been done at the close of each month; (d) the pension has been sanctioned after following the prescribed procedure and also as

per rules; (e) pensioner-wise record has been maintained;


(f) pension payment has been stopped after death of pensioner and his account closed; (g) amount transferred to designated banks for the payment of pension to pensioners

has been reconciled and undisbursed amount, if any, has been accounted for; (h) lump sum amount sanctioned and paid under National Family Benefit Scheme to the

members of deceased family was as per rules; (i) life certificate has been obtained from the pensioners at regular intervals; (j) reports in the prescribed form for the utilization of fund have been furnished to Zila

Panchayat; (k) compliance of the objections included in the audit report of auditors of Zila Panchayat

has been done;

3.6.8 Grant-in-Aid by ULB


(a) the organization / samiti has applied for the sanction of grant-in-aid with full justification therefor;

(b) the organisation / samiti has submitted the receipts and payment account as well as utilization certificate of the grant-in-aid, if any, previously released;

(c) grant-in-aid has been sanctioned by the Parishad; (d) acknowledgment of the organization / samiti has been obtained before releasing the

amount of grant-in-aid; (e) register has been maintained to ascertain that utilization certificate as well as

Receipts and Payment Account has been received from the organization / samiti for the grant-in-aid released by ULB within the specified time;

(f) grant-in-aid has been recovered from the organisation / samiti who could not submit utilization certificate with receipts and payment account.

3.6.9 High Speed Diesel (HSD) Tank and Lubricants


(a) inventory register in the prescribed form has been maintained to keep account showing the daily receipt, issues and balance of HSD;

(b) issues of HSD are against indent duly countersigned by the authorized officer; (c) account for issues has been maintained vehicle / machine wise and the total issues

for the day have been shown in the inventory register; (d) quota register has been maintained vehicle / machine wise to restrict the issue of

HSD within the limit fixed by the competent authority; (e) separate inventory register has been maintained for the receipts & issues of

lubricants. Its issue has been controlled in the same way as for HSD; (f) shift wise handing over and taking over balance of HSD and lubricants has been

done; (g) physical verification of HSD and lubricants has been done at regular intervals; (h) shortage / excess found during physical verification / change of shift has been

suitably dealt with.

Library, Reading Room, Advertisement / Publicity

3.6.10 Library


(a) inventory register has been maintained and all the books / magazines purchased have been entered therein;

(b) register of settlement of supplier bills has been maintained to record details of all bills submitted by the suppliers and details of payment.

(c) subject / author / alphabetical-wise catalogue of books / magazines has been maintained;

(d) register of members has been maintained showing the details of receipt of membership fee and security deposit. The membership has been renewed at the end of each year;

(e) register for issue and return of books has been maintained; (f) the value of books issued to the member is not more than the amount of security

deposit received from him;


(g) card for each book has been maintained. Membership card of the member has been retained alongwith card of the book when the book has been issued;

(h) action has been taken against the members and employees of ULB who have failed to return the books. In case of employees the cost of books has been recovered from their dues;

(i) fine has been recovered from the members if there is delay in return of the books; (j) physical verification of books has been done at regular intervals and action has been

taken to write off / recover shortage, if any.

3.6.11 Reading Room


(a) attendance and account register in the prescribed form has been maintained in reading room for each newspaper;

(b) register of settlement of suppliers bills has been maintained for keeping the record of bills received from Newspaper Agency and details of payment;

(c) bill of newspaper agency has been verified before payment from the attendance and account register;

(d) disposal of old newspaper has been done under orders of competent authority and sale proceeds credited to Municipal Fund.

3.6.12 Advertisement / Publicity


(a) register for meetings and functions has been maintained for verification of the bills for entertainment etc.;

(b) register as prescribed by ULB has been maintained to keep record of all the advertisements / photos released to print media for publicity and their subsequent payment;

(c) the advertisements / photos have been released to print media through “Madhyam” a Government Agency;

(d) account of amount, if any, deposited with Madhyam has been maintained. (e) the payment has been made at the rates approved by State Government;

3.6.13 Horticulture Department


(a) material / articles-wise inventory register has been maintained showing the receipts, issues and balance in the store;

(b) issues of material / articles are against indents duly countersigned by the authorized officer;

(c) employee-wise register has been maintained for the tools and plants which are to be subsequently returned or written off;

(d) account showing consumption of material has been maintained by each employee to whom material issued from the store;

(e) nursery has been maintained showing the germination of seeds, plants sold or consumed in the parks of ULB and the percentage of survival.

3.6.14 Shiksha Karmi Establishment

Funds for personal entitlements of shiksha karmi are received from the Education Department of the State Government. Separated Bank Account and Bank Book is required to be maintenance for it. The Audit in these cases should exercise the same control as being exercised in respect of other establishments.

3.6.15 Important Finance and Accounting Forms

List of Important Finance and Accounting Forms prescribed in Madhya Pradesh Municipal Accounts Manual relating to Audit is given in Appendix - IV

3.6.16 Register for Destruction of Records

Audit should see that register for destruction of records has been maintained by the ULB and account records, if any, have been destroyed after the expiry of preservation period under the orders of competent authority.

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CHAPTER – 7 INTERNAL AUDIT

3.7.1 Introduction

Internal Audit is a timely aid to the management with a view to ensuring rectification of all the irregularities before regular Audit. The work of Internal Audit should be entrusted to well trained inhouse team or should be outsourced to a reputed concern which have expertise in the field of Internal Audit. The team authorized to undertake the internal audit is to exercise the necessary checks. The reports on such check should be placed before the Municipal Accounts Committee and Director of Local Fund Audit.

Checks to be exercised by Internal Audit

3.7.2 The auditor should see that appropriate internal controls were adhered to and the reports of internal audit has covered the following aspects:-

� any material impropriety or irregularity detected; � any deficiency or loss caused by the gross negligence or mis-conduct; � all the expenditure incurred was authorised by appropriate provisions in the sanctioned

budget, whether made originally or subsequently; � all sums due to and received have been promptly brought to account; � all transactions (income, expenditure, assets and liabilities) were correctly classified; � all books, ledgers, registers etc. have been maintained in the prescribed form and closed

at the end of each financial year; � the amounts received as specific grants have been utilised for the purposes as stated in

the sanction; � the special funds, created as per the provisions of relevant statutes have been utilised for

the purposes for which created; � bank reconciliation has been done at the end of each month/financial year and difference

reconciled; � cash balance has been physically verified by the Officer-in-Charge monthly and signed in

token of checking; � heavy cash balance has not been kept in cash chest; � the entries in the cash book / bank book have been tallied with vouchers by the Officer-in-

Charge, and a certificate to that effect recorded by the Officer-in-Charge; � receipts from receipt books and also cash and bank payment vouchers entered in the

cash book / bank book; � posting of all payments and receipts from cash book / bank book to ledgers has been

done in proper and correct head of account; � temporary advances to the staff did not remain unadjusted for more than a month from

the date of payment of such advance. The advance has been utilised for the specific purpose for which the advance was sanctioned;

� written certificates in confirmation of the balances shown as debit/credit at the close of the year have been obtained from the debtors /creditors;

� proper records showing full particulars, including quantitative details and situation of fixed assets have been maintained;

� the parties, to whom the loans or advances in the nature of loan was given by the ULB, were repaying the principal amount as stipulated and were also regular in payment of the interest. In case of default reasonable steps have been taken for recovery of the principal as well as interest;

� an adequate internal control, procedure for the purchase of store, including components, plant and machinery, equipment and other assets exist;

� purchase committee reports are being drawn up as per rules and cost control exercise done in each case by the Purchase Committee;

� all purchases have been made as per the Store Purchase Rules. Supply orders have been placed for all the purchases;

� all the purchases have been made from authorised dealers. All the bills and cash memos are on proper form and are not obtained on letter heads and plain papers, and a register for purchases has been maintained;


� articles purchased properly recorded in the concerned register. Such articles, if any, issued to an individual should be shown (with cost) in his name in his ledger account, and whenever he is transferred/retired he should be asked to deposit back these articles. If he fails to return, the amount should be recovered;

� bill register has been maintained in Account Section in the prescribed form, and every bill received from supplier has been entered therein before processing for payment. Bills have been processed on the first come first out basis, and not on pick and choose basis;

� advances against suppliers have been adjusted and loss of interest by way of blocking heavy amounts with suppliers has been avoided;

� store ledgers are posted and balanced upto date; � the valuation of store has been done in accordance with the accounting principles laid

down in the Madhya Pradesh Municipal Accounts Manual; � physical verification of store and assets has been conducted at the end of each financial

year; � record of loose tools and plants (Phawra, Gaiti, Tagari, etc.) has been kept properly; � all deductions made from salaries of employees/payments to contractors have been

remitted to the appropriate authorities promptly, and registers maintained for such recoveries and remittances;

� measurement book / muster roll register has been maintained, for the receipts as well as issues;

� consumption statement of material has been received with the muster roll; � log books of vehicles, machines, equipments etc. have been signed by Officer-in-Charge

and hire charges recovered wherever necessary.

- - - - - - -


CHAPTER – 8 INFORMATION TECHNOLOGY (IT) AUDIT

Recommendations of the Eleventh and Twelfth Finance Commission (EFC & TFC)

3.8.1 A portion of the Local Body Grants (LBG) under EFC (para 2.2 of the EFC guidelines) was provided for maintenance of accounts and for development of data base on the finances of the municipalities at the district, state and central government levels and to be made easily accessible by computerization. The data should be collected and compiled in standard formats prescribed by the C&AG.

3.8.2 TFC (para 2.3 of the recommendations) felt it to be imperative that high priority need to be assigned to creation of database and maintenance of accounts.

3.8.3 TFC observed [para 3.1 (xv)] that most States did not have credible information on the finances of their local bodies. Hence, local bodies would continue to need funding support for building database and maintenance of accounts.

3.8.4 States should assess the requirement of each local body in this regard and earmark funds accordingly out of the total allocation recommended.

Jawaharlal Nehru National Urban Renewal Mission (J NNURM)

3.8.5 JNNURM is a Central Government Scheme jointly sponsored by the Ministry of Urban Employment and Poverty Alleviation and the Ministry of Urban Development for effecting potential reforms and development of the municipalities and corporations of 63 selected towns and cities in India.

3.8.6 The expected goal of JNNURM, among other things, included introduction of e-governance applications in core functions of ULBs resulting in reduced cost and time of service delivery processes.

Audit of ULB Transactions

3.8.7 Indeed, it is true that the computer technology is advancing. The ULBs are increasingly depending on computerised information system to carry out their operations and to process, maintain and report essential information.

3.8.8 As a consequence, the reliability of computerised data and of the system that process this data is a major concern to audit.

3.8.9 IT auditors have to evaluate the reliability of computer generated data, supporting financial statements and analyse specific programmes and their outcome. In addition, IT auditors have to examine the adequacy of controls in information system and related operations to ensure system effectiveness.

3.8.10 In accordance with the EFC guidelines (Para 6.4) the CAG shall be responsible for exercising control and supervision over the proper maintenance of accounts and their audit for all the ULBs.

3.8.11 State Government is required to send a request under section 20 (1) of the CAG’s Duties, Powers and Conditions of service (DPC) Act 1971 for this purpose.

3.8.12 Objective of IT Audit

The focus areas would be the following:-

Attestation and certification of financial statements

(i) Assurance that every entity using IT for accounting is subjected to IT Audit to provide assurance that data entry, processing and outputs are reliable.

(ii) Assurance that whenever data pertaining to financial results of an entity is processed by IT, its reliability is assessed.

(iii) Identification and assessment of reliability of all such IT applications that provide data for incorporation in the financial statements.

3.8.13 Performance Audit of IT System:-

(i) System designs (ii) Procurement (iii) Achievement of intended objectives (iv) Management of the System.


Audit methodology, i.e. types of audit testing

3.8.14 Auditors carry out two types of testing to gain audit assurance:

Preliminary evaluation and compliance testing:- Preliminary evaluation and compliance testing are carried out to determine what reliance can be placed on the auditee’s internal controls. The auditor has to see:

- how the IT function is organized; - use of computer hardware and software; - application processed by the computer and their relative significance to the organisation;

and, - methods and procedures laid down for implementation of new applications or revision to

existing applications.

3.8.15 In course of preliminary evaluation, the auditor should ascertain the level of control awareness in the auditee organisation and existence of control standards.

3.8.16 The preliminary evaluation should inter-alia identify potential key controls and any serious control weakness. For each control objective the auditor should state whether or not the objective has been achieved, and if not, he should assess the significance and risks involved due to control deficiencies.

3.8.17 Substantive Testing:- After completing the preliminary IT system and compliance testing substantive testing is used by the auditor to substantiate or confirm the figures in the financial statements. This type of testing may include:-

- the confirmation of account balances;

- analytical review, ie. predicting the account balances from external factors;

- the testing of individual transactions against each of the audit assertions, for example, selecting a payment and checking it for completeness, occurrence, measurement, disclosure etc.

3.8.18 Audit Techniques

IT audit techniques refer to the use of computers, including software, as a tool to independently test computer data of audit interest as discussed below:

(a) Computer Assisted Auditing Techniques (CAAT)

(i) collecting and processing a set of test data with the help of CAAT that reflects all the variants of data and errors which can arise in an application system at different times;

(ii) CAAT include use of soft wares like IDEA, ACL, ACCESS, SQL; (iii) CAAT tools can be used to:

(a) extract information from auditee databases, (b) total, summarise, sort, compare and select from large volumes of data in

accordance with specified criteria, (c) tabulate, check and perform calculations on the data; (d) perform sampling, statistical processing and analysis, etc.

(b) Computer Audit Techniques

• simulating the auditees’ application programmes using audit software to verify the results of processing;

• reviewing programme listings periodically to see that there are no unauthorized alterations to the programs;

• extracting samples of data from the auditee database/files, using sampling techniques, for post analysis and review. The nature of data and type of analysis required determine what technique is to be employed. The auditor should give the sample size and design;

• verification of ledger balances and control totals independently; • recalculation of critical computerised calculations to check mathematical correctness; • range checks to verify the working of computer based controls and testing for

exception conditions; • testing the validity of data which have gone into the master file;


• detection of data abuse/frauds; and • substantive testing with large volumes of data which is difficult, if not impossible, in a

manual audit process.

The particular computer audit technique employed depends on:-

• the type of application system under review;

• the extent of testing required; • the availability of resources in terms of computer facilities, and the level of EDP skills

among the audit staff; and • volume of data and availability of printer information.

3.8.19 Control Objectives for Information and Related Tech nology (COBIT)

• it is a model for control of the IT environment; • it supports IT governance; • it is a generally applicable and accepted standard for good IT security and control

practices; • it is internationally accepted as a good practice for control over information, IT, and

related risks; and • it helps in understanding, assessing and managing the risks together with the benefits

associated with IT.

3.8.20 Internet – The Internet is being increasingly important as a research, planning, communication and reporting tool. Auditors should be sufficiently familiar with the Internet to be able to use it to facilitate the conduct of performance audits and to understand the implications for performance auditing.

3.8.21 Performance auditing in IT environment

Auditors should not only be aware of the uses of IT, they should also develop strategies and techniques for providing assurance to stakeholders about value for money from the use of IT, security of the system, existence of proper process controls, and the completeness and accuracy of the outputs.

3.8.22 Audit Points Relating, IT Environment

An auditor should see :-

• if there is a comprehensive strategic plan; • if it accurately reflects business needs; • if management effectively controls strategy; • whether a published standard methodology is being used for designing and

developing system? • whether there is a common understanding by all parties-users, system analysts,

management and auditors-of the basic structure of both manual and computer processing activities, as well as of the concepts and needs for control and of the applicable control techniques?

• whether the system development work was preceded by a feasibility study to determine the most appropriate solutions to standard problems?

• whether there is adequate cross referencing between the following stages: (i) content and format of preliminary studies, (ii) feasibility studies, (iii) system specifications, (iv) program coding

• whether project management techniques, are applied in system development work-that is to say, are there project decision milestones, time and cost estimates so that progress could be monitored against estimates?

• whether programming standards using modular structured methodology are being adhered to in coding?

• whether existing in house or external available application packages were considered before deciding upon new in-house application development?

• Whether manuals are maintained and kept up-to-date specifying the control procedures and whether they are enforced in practice through a ‘test check’?


• Whether system documentation is sufficiently comprehensive? • Whether a back-up copy of the documentation is held? • Whether all prime input, including changes to standing data is appropriately

authorized?

• For on-line system, whether the ability to enter data from a terminal is adequately restricted and controlled?

• Whether there is a method to prevent and detect duplicate processing of a source document?

• Whether all input has been submitted? • Whether there are procedures for ensuring correction and resubmission of rejected

data? • Whether the transaction processing is accurate, complete, valid, unique (ie. no

duplicates), and the computer processes are auditable? • Whether the computer outputs are produced and distributed on time? • Whether the same are reconciled with input control parameters? • Whether the same are physically controlled at all items, depending on the

confidentiality of the document? • Whether the errors and exceptions pertaining to the same are properly investigated

and acted upon?

- - - - - - -


CHAPTER - 9 SOCIAL AUDIT

Basic Concept

3.9.1 In accordance with the provisions of section 130-A of the Madhya Pradesh Municipal Corporation Act 1956, ULB shall arrange for social audit in such manner as prescribed by the State Government

3.9.2 The Right to Information (RTI) came into force in India, the world’s largest democracy, on October 12, 2005. The Act empowers the people to demand information on all public activities from the government. Through social audit people can make use of the RTI to obtain the actual status of the works undertaken by the Government Departments or a Local Public Body. Thereby they can watch the manner in which the tax payers money is spent. The Social Audit is, therefore, an important means to hold the public authorities accountable.

3.9.3 Social Audit unlike the formal institutional audit mechanism, seeks to achieve the twin objectives of transparency and accountability. It has the potential of developing into an important instrument for enhancing the effective delivery of public services and programmes by the urban local bodies. It may thus be termed as People’s Audit’ in consideration of the fact that under this mechanism, the people as a collective entity are afforded an opportunity of analyzing and assessing not only the issues pertaining to financial matters but also several other aspects such as, inter alia, the following:

o Identification of collective and individual needs of the local community; o Selection of schemes and their location; o Selection of the potential beneficiaries, particularly those belonging to disadvantaged

groups; and o The manner in which the developmental and welfare programmes/schemes are being

implemented, vis-a-vis their declared objectives.

3.9.4 Proper social audit is feasible if council of the ULB has free and ready access to all relevant, demystified and comprehensible information and documents regarding the activities that they are empowered to audit.

3.9.5 A silent wave of revolution in the form of RTI campaign is sweeping across the country. The Supreme Court has observed that RTI is a part of right to speech and expression, a fundamental right under Article 19(1) of the Constitution.

3.9.6 Salient Features of Right to Information (RTI) Act, 2005

The RTI Act, 2005 received the assent of the President on the 15th June, 2005 and was published in the Gazette of India dated, June 21, 2005. The salient features of the statute to are discussed below:

• The act provides the right to the citizens to secure access to information under the control of public authorities in order to promote transparency and accountability;

• Information means any material in any form including records, documents, memos, e-mails, opinions, advices, press releases, circulars, orders, log books, contracts, reports, papers, samples, models, data material, held in any electronic form and information relating to any private body which can be accessed by a public authority;

• RTI means the right to information accessible under this act which is held by or under the control of any ULB and includes the right to o inspect work, documents, records; o take notes, extracts or certified copies of documents or records; o take certified samples of material; o obtain information in the form of diskettes, floppies, tapes, video cassettes or

in any other electronic mode or through printouts where such information is stored in a computer or in any other device;

• Every ULB shall maintain all its records duly catalogued and indexed and publish the same;

• Every ULB shall designate a Public Information Officer; • A person desiring to obtain any information shall make a request in writing or through

electronic means in English or Hindi; • The designated Public Information Officer shall provide the information on payment of

prescribed fee or reject the request within thirty days of the receipt of request;


• If a request is rejected the Public Information officer shall communicate the reasons for such rejection to the person making the request;

• The act expressly gives details of issues which are exempt from disclosure of information and the ULB shall have no obligation to give any citizen any information of such issues. Some instances are given below:- o a Information, disclosure of which would prejudicially affect the sovereignty

and integrity of India, the security, strategic, scientific or economic interests of the State, relation with foreign State or lead to incitement of an offence;

o Information which has been expressly forbidden to be published by any court of law or tribunal or the disclosure of which may constitute contempt of court;

o provided that the information which cannot be denied to the Parliament or a State Legislature cannot be denied to any person.

3.9.7 The Role of Public Hearings or Jansunwai

The findings of a social audit may be presented and discussed in the public meetings in a ward or area in the presence of the entire community and stakeholders. Such public meetings are titled public hearings or jansunwais. The reports on works as per the official records are read out to the people in the meeting and the people publicly testify the veracity of such reports. Thus the proceedings take shape in a completely transparent manner. Hence, social audit and jansunwais are a big relief towards real participatory democracy. The origin of such social audit and jansunwais can be traced from an agitation for minimum wages by the Majdoor Kisan Shakti Sangathan (MKSS) or the Organisation for Empowerment of Workers and Peasants in the rural Rajasthan in the late 1980, although it took full shape after 1994.

3.9.8 Jansunwai, vis-a-vis, Social Audit-some points to p onder

However, RTI initiatives are stymied, inter-alia, by the inadequacy of civil society institutions to play a role; lack of popular awareness and interest; the failure to sustain activism beyond the campaign period; the poor state of record-keeping and lack of equipment such as photocopier machines for copying documents. Although NGOs are playing a crucial role in the process, social audits, like many other community initiatives, need more champions and motivators and dedicated volunteers to sustain participatory functioning.

3.9.9 There is also a need for more inter face between social audit and statutory audit in order to facilitate transparency at the level of the urban local bodies. The Auditor should be aware of social audits that have been carried out, review the responsiveness of the urban local bodies to applications for information that may have been submitted by individuals/ organisations and accordingly make a comment on the operationalisation of the people’s Right to Information.

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SECTION – 4 WORKS AUDIT

CHAPTER - 1 WORKS EXPENDITURE AUDIT (ENGINEERING DEPARTMENT)

4.1.1 Introduction

The main objectives of works audit i.e Engineering Works are to see that:

(i) all sums received / paid have been credited / debited to the proper heads of account; (ii) all charges are covered by sanctions and allotments; (iii) all vouchers and accounts are properly prepared, arithmetically correct and are

correctly classified; (iv) claims admitted for payment are valid according to the rates sanctioned by the

competent authority.

4.1.2 Source document

The following are the source documents :-

(i) Administrative approval (ii) Estimates – technical sanction (iii) Computed tenders (iv) Measurement book, voucher (v) Works register

The processes and checks to be exercised in this part of the activities are discussed in the succeeding paragraphs.

4.1.3 Administrative Approval

Before commencement of a work and incurring expenditure there on from Municipal Fund it is necessary that administrative sanction, generally known as administrative approval is obtained from the competent authority. The audit is also to see that the amount of administrative approval does not exceed without proper authority for it. A register in the form prescribed by ULB is maintained to have a consolidated record of administrative approvals accorded and also the status of various works sanctioned.

4.1.4 Estimates - Technical sanction

A proper detailed estimate has been prepared for the work for sanction of the competent authority. Sanction so accorded by the competent authority is known as the “Technical sanction to the Estimate’. Work is not to commence without technical sanction. The works taken up for execution without proper detailed estimate are taken up in case of emergency only and regularised subsequently by obtaining appropriate sanctions. The amount of technical sanction is not to exceed the amount of administrative approval. The rates in the estimate are not to be in excess of the market rate or schedule of rates applicable to the ULB.

The approval of the authority competent to accord a technical sanction has been obtained for material structural alterations in the technical estimate in the course of construction even if no additional expenditure is involved as a result of change.

Every work costing more than the specified amount has been sanctioned by the Parishad and covered by the current budget grant. Approval of the State Government obtained in respect of work etc. estimated to cost more than the limit specified, if any.

Revised administrative approval and revised technical sanction shall also become due if the cost of the original estimate exceeded by more than 10% of the total amount or there were considerable alterations in the original estimate. Reasons for excess over sanctioned estimate would need investigation and audit comment if any irregularity is perpetrated in the course of construction. Audit should also see that register for sanctioned estimates has been maintained in the form prescribed by the ULB.


4.1.5 Audit of Vouchers

It should be seen by audit that:-

(a) the vouchers are in the form prescribed by ULB and in original and the payment are duly receipted by the payees ;

(b) the vouchers are numbered with reference to their numbers in bank book / journal ;

(c) the details work up to the totals and the totals are given in words as well as in figures and arithmetically correct ;

(d) the vouchers bear a pay order of the authorised officer ;

(e) the vouchers are stamped “paid” after payment;

(f) erasures and alternations, if any, in the total are attested by the authorised officer;

(g) unless otherwise provided in the rules revenue stamp has been affixed to all vouchers and punched ;

(h) entry for cheque issue to the contractor has been made in cheque issue Register (Form F&A 18).

Note: (1) The term 'voucher' should be taken to include 'sub voucher' for purpose of audit.

(2) Cash memoranda issued by tradesmen for sales against cash payment should not be regarded as sub-vouchers unless they contain an acknowledgement of the receipt of money from the purchaser as named therein for the price of the articles sold.

(i) the expenditure is duly sanctioned and has been incurred by an authority competent to incur it and is covered by the budget grant ;

(j) the expenditure does not involve any breach of Standard of Financial Propriety; (k) payment has been made to the proper person and it has been so acknowledged

and recorded that a second claim against ULB on that account is impossible; (l) the head of account, to which the charges are debitable or to which the

deductions or other credits shown in the voucher are creditable, are clearly stated in the space provided for the purpose;

(m) if a voucher has been paid by transfer it has been stamped as having been so paid, showing the head to which the amount is to be debited and credited;

(n) full name of the work as given in the estimate, the name of the component / part (or sub-head) of it, if separate accounts are kept for the several components, and the charges (if any) which are of the nature of recoverable payment and the names of the contractors or other from whom they are recoverable are clearly indicated; and

4.1.6 Special points as detailed below should also be seen in conducting audit of vouchers.

(i) Register of Settlement of Contractor Bills (Form F&A 25) has been maintained and all the bills have been entered therein;

(ii) the bill has been prepared on the basis of actual measurements and the pages of the MB in which the detailed measurements were recorded, were quoted in the bill;

(iii) the bill has been signed by the officer in charge of the work and the contractor in token of its correctness;

(iv) the bill has been checked by the accountant with the MB, estimate, agreement, previous bill (in case of running bill), as well as its arithmetical calculations. The quantities in the bill have also been compared with those recorded in the MB;

(v) all up-to-date and other figures brought forward from the earlier running account bill, are correct with reference to the last bill;

(vi) in the case of payments appearing in a bill for removing material from a work or cutting trees from the compound of building etc. there is a note on the voucher indicating the saleable value of the material in question, with a note of the probable date on which the sale proceeds are likely to be credited to ULB;

(vii) the voucher in support of charges for dismantling old work or for its renewal bears a note of the serviceable material received from dismantled work and of the method by which it is proposed to be disposed of ;

(viii) in the case of additional payment for an item of work for which a consolidated rate had been agreed upon, which prima facie required some explanation, an enquiry should be made in audit to make sure that the charge was valid and that no financial irregularity was involved in its payment;


(ix) the nature of the charge is one which may rightly be made against ULB and against the work or service to which it is debited;

(x) the outlay is fully detailed and that quantities are always given for work done and material supplied ;

(xi) the payee in case of final payment has added, in their own handwriting words to the effect, that the payment is in full settlement of all claims;

(xii) there has been no abnormal delay in the payment of the bill and that the quantity as shown in the previous running bill is not reduced in a subsequent or final bill;

(xiii) the measurements have been taken or checked by the Assistant Engineer and if this has not been done a note is made referring to the previous measurements recorded or checked by the Assistant Engineer;

(xiv) there are no unauthorised deviations from the approved rates of payment; (xv) in respect of charges for new supplies of tools and plants, and other articles, for

which payments have been made, have been brought on to the relevant numerical account;

(xvi) payment of compensation for land acquired under the Land Acquisition Act is supported by the award statements and entries in the register of land maintained by the Revenue Department of ULB;

(xvii) payment was made against bill raised after deducting the security deposit, income tax, and other deductions/recovery including advance, if any;

(xviii) the taxes and labour welfare cess deducted at source from the contractor’s bill, etc. were remitted to the authorities concerned in accordance with the provisions of the relevant acts;

(xix) the work completion certificate issued by competent authority was annexed to the final bill;

(xx) all the dues, including liquidated damages/penalties, were recovered from the contractor before making the final payment and no amount was due from the contractor, which might be otherwise adjusted before payment;

(xxi) the rates paid for work done or supplies made are in accordance with the contract. If they are not covered by contract, the rates paid have been sanctioned by the competent authority in accordance with the provisions of contract agreement;

(xxii) a certificate prescribed by the Government as given below is appended to each claim for commercial tax; "Certified that the goods, for which commercial tax has been charged, have not been exempted under the State Commercial Act or Rules made thereunder and the charges on account of tax on these goods are correct under the provisions of that act, or the rules made thereunder and that in the case of supplies against regular contracts, the relevant contract includes a specific provision that tax is payable by ULB";

(xxiii) the change in the scope of contract by extra items or extra quantity of work does not involve wide and disproportionate variation with the original estimated value of the contract which warranted fresh tender independently;

(xxiv) when "through rates" for finished works are allowed to contractors, the value of material, carriage etc., and incidental charges have not been charged to ULB but recovered from contractors;

(xxv) no financial aid has been given to the contractor beyond that agreed upon in the contract or permissible under the rules;

(xxvi) that where contractors have been allowed labour rates only and work is carried out by daily labour, arrangements exist for exercising detailed control over transactions relating to material and for verifying unused material;

(xxvii) that all advances recoverable have been duly realized and credited to the proper head of account, and also to the appropriate personal account of the contractor in the register of advances to contractor (Form F&A 19) of MPMAM;

(xxviii) that financial rules regulating the payment of advances to contractors and issue of material to them have been observed. In case of final bill, the date of completion of the work has been checked with that stipulated in the contract; in case of delay in completion either extension of time has been granted or penal action under the provisions of contract agreement has been taken;


(xxix) that the value of material or store for which secured advance has been disbursed, the value of such material / store used in the work has been recovered from the contractors in accordance with the rules;

(xxx) that works expenditure is checked with reference to the estimate in order to ensure that the charges have been incurred only in pursuance of the objects intended in the estimate. In the case of works expenditure which is recorded by sub-heads (e.g expenditure on brick work), the Audit is responsible for checking the expenditure on each sub-head with the estimated quantity or work to be done, the sanctioned rate and the total sanctioned cost so that he may bring to notice all deviations from the sanctioned estimate;

(xxxi) that the authorized gross expenditure on a work has not exceeded without the orders of the competent authority. Recoveries of expenditure are also not utilized towards such additional expenditure, savings on account of abandonment of parts of a work, as evidenced by the quantities of the work executed or otherwise, are not utilized towards an unauthorized object;

(xxxii) the expenditure incurred on construction of works was debited to Works-in-Progress Account and on completion it has been charged on to the concerned asset account and entered by the revenue department in the concerned fixed asset register;

(xxxiii) accounts section has passed necessary accounting entries to account for the difference between the store issue rate and the recovery rate for material issued to contractors; and

(xxxiv) on completion of an original work, reconciliation was carried out by the accounts section in respect of the expenditure as shown in the Register of Works maintained by the Engineering Department and the work-in-progress account maintained by the accounts section.

4.1.7 Muster Rolls

It should be seen by Audit that :-

(i) register of muster rolls in the form prescribed by ULB has been maintained showing the details of receipt from the Central Store; details of issue viz (a) date of issue; (b) name of subordinate; (c) name of work; (d) number of labour and period for which to be engaged ; and (e) details of payment viz voucher number, date and amount paid;

(ii) the muster rolls received from central store are machine numbered ; (iii) the receipt of muster rolls in the register has been periodically verified from the issue

register of central store ; (iv) the name of subordinate, number of labour to be engaged, period for which to be

engaged and name of work has been recorded on the muster roll under the signatures of authorised officer before its issue ;

(v) the attendance has been taken daily and the recorded attendance has been checked by some responsible officer;

(vi) the muster roll is an original record and has not been copied from some other register or record;

(vii) the disbursements have not been entrusted as a rule to officials of low standing and the payment to labour has been made promptly in the presence of competent authority;

(viii) the officer making the payment is not the same as that controlling the labour; (ix) the record of the progress of the work done by labour has been kept in measurement

book as well as and endorsed on the muster roll; (x) all thumb impressions of illiterate payees have been duly attested; (xi) the certificate of disbursement has been duly signed and dated by a responsible

officer. (xii) the value of work done by labour at schedule of rates is not less than the amount paid

to labour. If it is so, the reasons for it are investigated and responsibility for short progress fixed.

(xiii) the details of material, if any, issued for the execution of work have been shown in the muster roll as well as in the inventory register maintained by the subordinate. The consumption of material shown in muster roll is not in excess of theoretical requirement;

(xiv) the details of material, if any, received during the execution of work have been shown in the muster roll as well as in the inventory register maintained by the subordinate;


(xv) unpaid wages, if any, have been shown in the muster roll as well as in the register of unpaid wages; and

(xvi) payment of wages, not claimed within three months, has not been made without the written orders of the authorised officer.

4.1.8 Measurement Books

It should be seen by audit that :-

(i) a register in the form prescribed by ULB has been kept for keeping the record of receipt from central store; date of issue, name of subordinate and name of work for which issued and date of return after completion of work for record;

(ii) the measurement books received have been periodically verified from the issues from central store;

(iii) the books have been maintained in accordance with the instructions printed on the fly-leaf of the book; the book should bear serial number; and its pages machine numbered;

(iv) there was no case of erasing or effacing of entries in the MB and the measurements have been recorded in ink;

(v) the arrangements in force for taking measurements; for checking measurements by some officer superior to the official who had originally taken measurements; and the results of check measurements are not such as to indicate laxity of control;

(vi) measurements have been recorded in chronological order; (vii) the pages containing detailed measurements are scored by a diagonal line in red ink

after payment of the bill and the abstract of measurements bear a reference to the number and date of voucher payment;

(viii) a few record of measurements be selected at random to check arithmetical accuracy; (ix) all previous payments made on a particular work are deducted from the final bill; (x) the number and the date of payment voucher was noted on the abstract of

measurements in the MB; (xi) blank pages or portions or pages left blank have invariably been crossed and

cancelled over the signature of the holder of the book to avoid the possibility of fraudulent entries at some later date ;

(xii) in the case of cancelled measurements, the cancellation is supported by the dated initials of the officer ordering the cancellation and also full reasons for the same; and

(xiii) as far as possible a separate measurement book is maintained for each work.

4.1.9 Loss caused by careless or dishonest accounting of works expenditure

Losses are often caused by careless or dishonest accounting of expenditure relating to works. Although audit has limited scope to detect a well planned fraud however care must be taken to ensure that there are no cases of the nature indicated below:

(i) omission to claim money due from a contractor or to afford credit in the accounts in anticipation of realisation;

(ii) exorbitant or inflated rates in estimates of works; (iii) the contract rate is both for labour and material and full rates allowed to contractors

but the material is supplied by the ULB and is charged to the work; (iv) the rate for a certain kind of work e.g., brick work is fixed on the assumption that the

required material will be available at a certain rate; full rate to the contractor allowed even when the ULB supplied the material at a lower rate;

(v) issue of material to the contractor more than actually required for the work; (vi) incorrect measurements for a work, or measurements paid twice for the same work;

The above list is just explanatory and not exhaustive. A careful and thorough check may reveal many other type of inconsistencies.

C. Register of Works

4.1.10 Register of Works has been maintained for watching the progress of expenditure against the sanctioned estimate / budget grant in respect of every original work or repair work showing the details of expenditure incurred in comparison with the estimate and the arrears due on accounts for which part payments were made. The register is closed at the end of each month and progressive expenditure worked out to control it against the provision.


The accounts of work should also to be closed expeditiously after completion of work so that charges not chargeable to work are not debited to it.

4.1.11 Deposits of Contractor

Audit checks :-

(i) No amount recovered from contractor which should have been credited as a revenue receipt or in reduction of expenditure of ULB should be credited as deposit.

(ii) Repayments of deposit are supported by proper vouchers as evidence to the amount repaid and each repayment should be against the original receipt either individually or against the total credit in a particular account in order to see that repayments do not exceed the amounts originally received and credited to deposit account.

(iii) Refund of deposit is under the orders of competent authority and note of refund has been recorded against the original entry so that a second claim against ULB on the same account is not possible.

(iv) Balances in deposit accounts are correctly carried over from year to year. The balance at the close of the year in each account should be acknowledged as correct by the contractor / supplier concerned wherever necessary and practicable

(v) Any deposits remaining unclaimed for such period as may be prescribed by ULB in this behalf are duly credited to lapsed deposits in the accounts of ULB.

Account of amounts deducted by ULB on account of security deposit / earnest money deposit / retention money is to be maintained in prescribed form F&A 22, 23 & 24 respectively of MPMAM. Proper record of interest bearing securities, fixed deposit receipts, bank guarantees etc. received by ULB from the Contractors / Suppliers / consultants etc. should be kept in a separate register of interest bearing securities and bank guarantees in the form prescribed by ULB and the same may be returned after fulfillment of contractual obligations and obtaining proper acknowledgement against it.

4.1.12 Deposit Register

It should be seen in audit that :-

(i) adjustment of debits is to the extent of the corresponding credits and there is no minus balance;

(ii) if any of the deposit has been converted into any form of interest bearing security, it should be seen that the certificate prescribed for the purpose has been recorded correctly;

(iii) it should be verified that lapsed deposits have been duly credited to ULB in accordance with the provisions;

(iv) various debits and credits should be checked to ensure their agreement with the corresponding entries in the vouchers and the counterfoil of receipts;

(v) it should be verified that necessary details in support of deposits for work to be done are available;

(vi) all opening balances against individual items should be checked with their closing balances of the earlier year;

(vii) work-wise and contractor wise account has been maintained in the register for the deposit received and expenditure incurred; and

(viii) refund of deposit has been made under the orders of competent authority and a note of refund has been recorded against the original entry so that second claim on the same account is not possible.

4.1.13 Deposit Works

Deposit works are the works undertaken by ULB on behalf of other agencies and financed by the funds made available for the purpose in advance by the concerned agency.

4.1.14 While auditing the deposit works receipt of fund as deposit should be verified with the entries shown in bank book. It should also be seen that:-

(i) the progressive expenditure does not exceed either the amount of the estimate or that of the cumulative deposit and, if the progressive expenditure exceeds the cumulative deposit for a work, the excess (i.e expenditure incurred in excess) is covered by the specific orders of the Commissioner in this regard and action for recovery thereof has been initiated ;


(ii) account for deposits received for deposit works from local bodies, institutions etc. has been maintained separately to keep watch over the expenditure and to restrict it within the amount of deposit received. Similarly account for amount received from MLA / MP Fund is maintained work-wise;

(iii) the ULB has taken action to refund the unexpended balance of deposit or to effect recovery of the amount spent in excess of the sums deposited, as the case may be;

(iv) the progress of expenditure on a deposit work is communicated periodically to the institution etc. depositing fund for it.

4.1.15 Register of Interest Bearing Securities & Bank Guar antees

A register in the form prescribed by ULB has been maintained for the interest bearing securities / bank guarantees received from the contractors / suppliers as per terms and conditions of contract agreement. It may also be received from the contractors / suppliers by conversion of earnest money deposit / security deposit / retention money, if permissible under the agreement.

It should be seen in audit:-

(i) that all the interest bearing securities / bank guarantees received from contractors / suppliers are in accordance with the terms and conditions of contract agreement;

(ii) that the securities / guarantees have been renewed before the expiry of validity; (iii) that the securities / guarantees have been returned strictly as per the terms and

conditions of contract agreement and under the orders of the competent authority; and

(iv) that they have been kept in safe custody of the authorised officer and are reviewed periodically.

4.1.16 Advances to Contractors / Suppliers

ULB may occasionally have to make advances to contractors / suppliers. These advances are permissible only if contract agreement has provision for it. Audit may require that the reasons, for making such advances as well as the conditions on which it is made, are stated in full in the orders sanctioning the advance. These advances may be with interest or without interest as may be the terms of the contract. Audit should see that the conditions of repayment of a loan or advance are complied with by the contractor / supplier and should exercise a close watch over repayment of principal and realisation of interest, if any. In reviewing the outstanding loans and advances special attention should be directed to ir-regularities in repayment, acknowledgment of balances and unrealisable and doubtful debts.

Register of advances to contractors is to be maintained in prescribed form F&A 19 of MPMAM.

4.1.17 Following points may be further seen in the audit:-

(i) Whether all the formalities which were required to be observed before the grant of advance e.g. hypothecation of machinery, bank guarantee for mobilization advance, execution of indenture for secured advance etc., have actually been complied and important documents have been kept in the safe custody;

(ii) The register prescribed in MPMAM for the grant and watching the recovery of advance for the various purposes has been maintained and it is adequate to serve the purpose for which it is intended;

(iii) The pace of recovery and the amount recovered are in accordance with the provisions of the contract agreement;

(iv) Audit should ensure that the dues pending for recovery from the contractors are recovered timely and no unauthorised financial aid in any shape is extended to them.

4.1.18 Audit of Schemes / Projects

Besides the scrutiny of individual transactions with a view to detect cases of improper extravagant, wasteful or uneconomical expenditure an important function of audit is to examine how far the agency or authority, whose transactions are under audit, is adequately discharging its financial responsibilities in regard to the implementation of various schemes undertaken by it and the extent they are able to fulfil the objectives which they were expected to attain.


It is, necessary that every scheme / project is taken for audit scrutiny with a view to see whether the scheme is being executed efficiently, its operations are conducted economically and it has been able to achieve physical and financial targets set out for it within the prescribed time frame. The objective of the audit in these cases shall be the same as discussed in chapter 2 of section 3 of this Manual.

4.1.19 Register of Approved Contractors / Suppliers

The audit should see that a register in the form prescribed by ULB is maintained for the sale of application form in the prescribed format for the registration of contractors. The cost of form at the rate approved by ULB has been recovered from the applicant; receipt issued; and the amount credited in Municipal Treasury.

Audit should see that the contractors registered by ULB have been entered in the register in the form prescribed by ULB and registration fee has been recovered and credited in Municipal Treasury. The tender forms have been issued only to the registered contractors in the prescribed category.

4.1.20 Schedule of Rates

Schedule of Rates for each kind of works executed by the ULB has been prepared and updated from time to time on the basis of market rates.

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SECTION - 5 RESULT OF AUDIT

CHAPTER – 1 RAISING AND PURSUANCE OF OBJECTIONS

5.1.1 Introduction

Effectiveness of audit depends on its rights and duty to report the results of its scrutiny to the proper authority so that appropriate remedial action may be taken, where necessary, to rectify the irregularity, impropriety and failure and to prevent its recurrence. The authority may be the Municipal Commissioner, Mayor-in-Council or the Parishad, and the State Government as the last resort.

5.1.2 Treatment of Objections

Treatment of the result of audit demands the highest quality of understanding, balanced judgment and keen sense of proportion. It is to enable the auditor to adequately deal with the results of his audit that he has been accorded a high degree of independence and prestige. An auditor must develop instinct for assessing the irregularity as well as adequacy of the system. His primary functions are to secure the substantial correctness of accounts, the regularity and propriety of individual financial transaction, and also to examine the adequacy of the system and procedures. On completion of audit of accounts and transactions and on noticing infractions of rules and orders, he must decide whether to insist on the regularization of or rectification of irregularities or errors in individual cases and improvement in system or whether to be satisfied with their prevention and recurrence in future.

5.1.3 In exercising the discretion the auditor should take into consideration the following general principles.

(i) It is an important responsibility of Audit to ensure that various financial rules and orders satisfy the provisions of the law and are free from audit objection and are properly being applied.

(ii) While it is imperative that financial rules and orders must be observed mere rigid and literal enforcement of such rules and orders may degenerate into wholly unintelligent audit.

(iii) As a general rule, undue insistence on minor errors and technical irregularities should be avoided and more time and attention be devoted to the investigation of really important and substantial irregularities with the objective not only of securing rectification of irregularity but also of ensuring regularity and propriety in similar cases in future.

(iv) Notice may, however, be taken of the cumulative effect of numerous petty errors or irregularities as being indicative of carelessness and inefficiency in the maintenance of accounts or in financial administration generally.

(v) All observations and objections must be conveyed in courteous and impersonal terms and must be clear and intelligible. They should also be based on undisputed facts and should incorporate in brief the views held and clarifications furnished by executive officers. Any kind of insinuation and innuendos are entirely avoidable.

(vi) Every statement or criticism of an irregularity in the Audit Report should be precise, accurate, fair, moderately worded and dispassionate.

(vii) Objections and observations in relation to an account or transaction subjected to audit should be communicated to the disbursing officer and, where necessary, to the Controlling Officer at the earliest opportunity.

(viii) Reports of individual cases of serious irregularity should be addressed, in the first instance, to the controlling authority concerned or to such other authority as may be specified in the rules and copies of it may be sent simultaneously to a higher authority.

(ix) It is important that complete details of objections should be registered in the prescribed records maintained in the office before communicating the objections to the authorities concerned.


(x) If a particular irregularity or case of fraud is considered serious enough to merit the attention of investigating authorities / agencies, it ought to find mention in the Audit Report.

(xi) Minor objections, which are not much of consequence to the finances of the ULB or to the interest of tax payers should be treated as settled if they are set right immediately.

5.1.4 Reports on Defalcation and Losses

In the event of a defalcation, fraud or loss, having been detected the Auditors should obtain all such further information as he may require and carefully examine the case to ascertain whether the defalcation or loss was rendered possible by any infirmity in the rules or whether it was due to neglect of rules or lack of supervision on the part of authorities concerned. In similar instances action as contained in Rule 20 of the Madhya Pradesh Sthaniya Nidhi Sampariksha Niyam, 1974 should be taken.

5.1.5 Pursuance of Audit Observation

Queries or observations by Audit in relation to accounts or transactions should be promptly taken into consideration by the disbursing officer or authority to whom it may be addressed and returned with the required documents and / or explanation to the Auditor concerned within such period as may be specified by him. The irregularities rectified to the satisfaction of Audit will not ordinarily be pursued further. It is, therefore, to the advantage of the disbursing and other departmental officers to expedite disposal of audit queries.

5.1.6 The responsibilities for the settlement of objections and other points raised in audit primarily devolves upon disbursing officers, heads of offices and controlling authorities. The Audit shall keep the controlling authorities fully acquainted with not only individual instances of serious disregard of financial rules and discipline but also with the progress of the clearance of objections. The procedure in this regard should be determined in consultation with the Finance Department of the State Government.

5.1.7 Prompt and vigorous pursuance of objections and timely reporting of serious irregularities to the Municipal Commissioner, Mayor-in-Council, and to Municipal Council is essential to ensure that the ULB is performing as best as possible in the framework.

5.1.8 In order to make an impact on the management and to prevent accumulation of unsettled audit objections a consistant trail of pursuance at appropriate levels including the Municipal Council, in case of significant and important objections, has to be maintained. A steady record of such objections should be kept centrally and these may be properly chased to ensure timely remedial action and avert their recurrence.

5.1.9 The adjustment / settlement of each individual objection should be watched through the prescribed records until it is finally settled or withdrawn as the case may be.

5.1.10 Format of Audit Inspection Report is given in Appendix V.

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CHAPTER – 2 AUDIT REPORT

5.2.1 Mandate

Sub-section (3) under section 130 of the Madhya Pradesh Municipal Corporation Act, 1956 reads that as soon as may be, after the commencement of each financial year, the audit shall deliver to the Mayor-in-Council a report upon the whole of the municipal accounts for the previous financial year.

5.2.2 The Commissioner shall cause the said report to be printed and forward a copy thereof to each councillor alongwith printed copy of the Administrative Report and Statement of Accounts for that year.

The Municipal Authorities are to remedy the defects appearing in the report and report the compliance of the report to the Government. If the Municipal Authority fails to comply, within period specified by the Government, the provisions of section 418 of the Act aforesaid may have to be taken resort to.

5.2.3 The Municipal Accounts Committee constituted under section 131 A of the Madhya Pradesh Municipal Corporation Act, 1956 shall also consider the Report of the Auditor and submit it to the Parishad alongwith its views on it.

5.2.4 With the introduction of Accrual Based Double Entry Accounting System (DEAS) a separate Audit Report on accounts has also become necessary as discussed in chapter 5 of section 2 of this Manual.

5.2.5 Scope and Content of Audit Report

Generally, the Report of ULB should draw attention to the following :-

(i) Observations relating to efficiency of budgeting and control over expenditure. (ii) Public debt. (iii) Results of audit of all expenditure from Municipal Fund. The Report is also to

comment on the adequacy or otherwise of the rules and regulations in force for the conduct of financial transactions and ensuring their regularity and propriety.

(iv) Observations arising from comprehensive review of various programmes and schemes undertaken by the ULB.

(v) Important cases of losses and write off of dues and wasteful expenditure. (vi) any other matter of interest from the efficiency, financial or accounting points of view

which the Director Local Fund Audit consider necessary to bring to the notice of Mayor-in-Council, Parishad and the State Government.

5.2.6 The Report is supposed to contain only the significant and important audit observations involving considerable expenditure. The report will also indicate the extent to which Government rules and orders are adhered to by the ULB and also suggest the directions in which the rules and orders can, with advantage, be amplified or modified. Similarly the Report on Revenue Receipts will highlight the lapses on the part of the assessing officers in complying with the rules and orders issued thereunder. The report is an important instrument to ensure accountability of the Executives to the Government, Corporation and Mayor-in-Council.

5.2.7 The revenue receipt part of the Report is to consist of the following :

(i) Relevant statistical information and reviews of functioning of the revenue collecting sections of the ULBs: A preliminary paragraph should review briefly the total revenue receipts of the ULB during the year to which the report pertain as compared to the receipts in the preceding one or two years to indicate the trend of assessment and realisation of revenue under various categories.

(ii) Variations between budget grants and actuals. Reasons for substantial variations should be brought out clearly in the Audit Report. Decline in collections attributable to evasion or avoidance of tax, non-pursuance of claims, reduction in claims without adequate justifications or authority, double or fraudulent refunds, reliefs, exemptions and concessions allowed or extraneous considerations etc. may be commented upon in dealing with variations provided these have had a significant impact on revenue.

(iii) Assessment in arrears : Statistics of the number of assessments due to be completed during the year, those completed and those yet to be finalised at the end of the year with corresponding figures for the preceding year, are to be incorporated.


(iv) Arrears of revenue : Yearwise break up of the arrears, should be presented indicating yearwise pendency. A few cases of substantial arrears should be examined and interesting features, if any, noticed should be brought out.

(v) Other interesting asides could be frauds and evasions, write off and remissions of revenue, cost of collection and other specific observations.

5.2.8 Drafting Report and its Submission

In drafting the Report, it is necessary that a detached, impersonal, dispassionate and objective attitude is maintained. The expression should be free from bias or prejudices.

5.2.9 The report should be preceded by an overview so that one may have an insight of the contents in brief. It should be drafted well, lucid, accurate and brief without compromising the essential details.

Format of General layout of the Audit Report is given in Appendix – VI.

5.2.10 Accuracy, brevity, clarity and purposeful focus should be the hallmarks of the Report. Only significant audit findings should get place in it. Complex sentences, verbosity and matter not so relevant are to be avoided.

5.2.11 If a table is included in a review or paragraph it should be followed by a clear analysis of the information contained therein.

5.2.12 In dealing with cases of irregular, excessive or wasteful expenditure and losses, their extent should be, as far as possible, quantified.

5.2.13 Audit paragraphs included in Report should clearly bring out defects in systems and procedure that led to the irregularity and the remedial action, if any, adopted. Important points that can form the subject matter of comments in audit report are given in Appendix VII.

5.2.14 Care should be taken to avoid asperity in comments. The use of words such as “fraud” or “embezzlement”, that denotes criminal act itself, should be avoided until conclusively established. It would generally be sufficient to use ordinary words like “loss”, in such cases.

5.2.15 The emphasis should be on quality rather than on quantity and on analysis rather than on mere narration. The thrust of the point objected to should come out clearly.

5.2.16 Report on Annual Account Statements

Report on Annual Account Statements, which have become essential alongwith certification of accounts after introduction of the Accrual Based Double Entry Accounts System (DEAS), may be designated as Separate Audit Report.

5.2.17 The Separate Audit Report will include mainly comments relating to the correctness of the accounts and the conclusions which can be drawn from them; other comments on irregularities affecting the accounts can also be included, but these should be related to matters the facts of which are beyond dispute and in regard to which there is not likely to be any difference of opinion between Audit and the ULB management.

5.2.18 These reports are expected to contain observations as following :-

(i) All points that vitiate the certification of accounts as representing a true and fair, picture of the working and state of affair of the ULB.

(ii) Utilisation of assistance given by Government the observations would cover instances of under utilizations, diversion of assistance to purposes not covered by the sanction, excess release or belated receipt of grants and assistance etc.

(iii) Non fulfillment of the intended objectives of the scheme of assistance. (iv) Cases of avoidable or infructuous expenditure, excess delays and irregularities in

execution of works and schemes etc. (v) Omissions to initiate remedial action on persistent irregularities. (vi) Absence of internal controls and checks, non-maintenance of basic records, delay in

recovery of dues and advances. (vii) Inaccuracies in accounts and classification. (viii) Major audit comments pertaining to financial irregularities, losses, failure of

objectives, cost and time over runs etc. noticed in the course of audit.

These are, however, not to be considered as exhaustive.


5.2.19 Any important issues on which audit consider it necessary to express an opinion on conclusion critical in nature and in particular issues in respect of which a difference of opinion is likely, between the Audit and Management, should be reserved for inclusion in the conventional Audit Report.

5.2.20 Basic Elements of the Separate Audit Report

The separate Audit Report should interalia include the following basic elements and should ordinarily have the following layout:

(a) Title (b) addressee (c) opening or introductory paragraph.

(i) identification of financial statements audited. (ii) a statement of the responsibility of the entity’s management and the

obligations of the Auditor.. (d) scope paragraph (i) reference to the relevant standards or practices.

(ii) a description of the work the auditor performed. (e) expression of opinion on the financial statements on its various segments etc.

wherever required. (f) date of the report, auditors signature etc.

The report should include a statement by the auditor that the audit provides a reasonable basis for opinion.

The Auditor’s report should clearly state the Auditors opinion as to whether financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the financial reporting framework and, where appropriate, whether the financial statements comply with statutory requirements. Wherever reservations they should be brought out clearly and reported through annexures.

5.2.21 Besides above the SAR may have additional or supplementary information as may be mandated in this regard.

5.2.22 Format of Audit Certificate is given in Appendix - VIII .

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CHAPTER – 3 Audit Fee its Determination and Payment

5.3.1 In exercise of the powers delegated under sub section 3 of Section 4 of Madhya Pradesh Local Fund Audit Act 1973 the Madhya Pradesh Govt., Finance Department under its notification No. F.1(A)1/87/Corp-3/Four dated 27th September 1989 has notified revised Audit Fee rates. These rates are applicable with effect from 1st April 1989.

For Current Audit of the Local Authority

(i) upto Rs. 5.00 lakh of income 2 percent of the income (ii) Next 45.00 lakh of the income 1½ percent of the income (iii) on income above Rs. 45.00 lakh 1 percent of the income

Note – For audit fee following receipts shall not reckoned as income –

(1) Sale proceeds of Govt. Securities and Withdrawals from Bank. (2) Sinking Fund Realisation. (3) Fund received for Deposit Works and paid to State Public Works / Public Health

Engineering Department. (4) Sums received for disbursement to other Local Bodies and / or institutions acting as

agency only. (5) Withdrawals from Public Utility Fund under section 105 (3) of the Municipal

Corporation Act. (6) Earnest Money received for tenders not approved. (7) Income from Adjustments. (8) Recovery of Advances. (9) Refund of sums. (10) Income from cattle pond (Goverdhan Project) which has been credited to the State

Govt. account. However, income on this account, which has been retained by ULB shall be liable to payment of the Audit Fee.

(11) Income from Ferry Ghat, which has been credited to State Govt. accounts. However, income on this account, which has been retained by ULB shall be liable to payment of the Audit Fee.

5.3.2 Fee for Special Audit

For Special Audit the fee payable shall be at three times of the normal rate of the fee.

5.3.3 Revision in the Audit Fee

The State Govt. shall be competent to revise the Audit Fee under sub section 3 of Section 4 of Madhya Pradesh Local Fund Audit Act 1973 (No. 43 of the year 1973).

5.3.4 Payment of Audit Fee

The Local Authority shall be liable to pay the Audit Fee payable under sub section 3 of the Section 4 of the Madhya Pradesh Local Fund Audit Act 1973, to the Director Local Fund Audit.

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SECTION – 6 CHAPTER - 1

TRAINING ON AUDIT OF URBAN LOCAL BODIES (ULBs)

Training Objective

6.1.1 A training module to induct the concerned personnel of the ULB to new and upgraded accounting and auditing system is as Appendix IX. It may be of help in devising a proper curriculum for training and shaping the right perception to suite the new environs.

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APPENDIX - I (Referred to in Para 1.1.10 of Chapter 1 of Section 1)

Excerpts from Auditing Standards for Audit of Urban Local Bodies finalized by the C&A.G. in the year 2002

CONTENTS

CHAPTER- I ………………………………………………………………………………………. 1

BASIC POSTULATES …………………………………………………………………………… 1

1.

2.

3.

4.

5.

INTRODUCTION ………………………………………………………………………….

AUDIT OBJECTIVES ……………………………………………………………………..

SCOPE OF AUDIT ………………………………………………………………………..

AUDITING STANDARDS ………………………………………………………………..

BASIC POSTULATES …………………………………………………………………….

1

1

2

2

3

CHAPTER-II ……………………………………………………………………………………... 6

GENERAL STANDARDS ………………………………………………………………………. 6

1. INTRODUCTORY ………………………………………………………………………... 6

2. INDEPENDENCE ………………………………………………………………………… 7

3. COMPETENCE …………………………………………………………………………… 9

4. DUE CARE ………………………………………………………………………………... 10

5. QUALITY ASSURANCE REVIEW …………………………………………………….... 11

6. OTHER GENERAL STANDARDS FOR AUDITING INSTITUTIONS ……………….. 11

7. SCOPE IMPAIRMENTS …………………………………………………………………. 14

CHAPTER-III …………………………………………………………………………………… 15

FIELD STANDARDS ……………………………………………………………………………. 15

1. OVERALL FRAMEWORK OR CRITERlA ……………………………………………... 15

2. APPLICABILITY …………………………………………………………………………. 17

3. PLANNING ……………………………………………………………………………….. 18

4. SUPERVISION AND REVIEW ………………………………………………………….. 18

5. STUDY AND EVALUATION OF INTERNAL CONTROL ……………………………. 20

6. COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS …………………. 20

7. AUDIT EVIDENCE ………………………………………………………………………. 23

8. ANALYSIS OF FINANCIAL STATEMENTS …………………………………………... 24

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CHAPTER-IV …………………………………………………………………………………….. 26

REPORTING STANDARDS …………………………………………………………………….. 26

1. INTRODUCTORY ………………………………………………………………………… 26

2. AUDIT INSPECTION REPORT …………………………………………………………. 26

3. FOLLOW UP OF AUDIT INSPECTION REPORTS ………………………………… 29

4. REPORT DISTRIBUTION ……………………………………………………………….. 30

5. REPORTING ON COMPLIANCE WITH LAWS AND REGULATIONS AND ON INTERNAL CONTROL ………………………………………………………………

30

6. VALUE FOR MONEY AUDIT …………………………………………………………… 30

7. NON-COMPLIANCE AND ABUSE ……………………………………………………… 30

8. INTERNAL CONTROLS …………………………………………………………………. 31

9. AUDIT OF FINANCIAL STATEMENTS ………………………………………………... 32

10. FRAUD, ILLEGAL ACTS AND OTHER NON-COMPLIANCE ………………………. 33

11. DEFICIENCIES IN INTERNAL CONTROL …………………………………………….. 34

12. THE FORM AND CONTENT OF AUDIT OPINION AND REPORT ………………… 35

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CHAPTER- I

BASIC POSTULATES

1. INTRODUCTION

1.1 The audit of the Urban Local Bodies (ULBs) includes audit of:

(i) Receipts and Expenditure from various sources (ii) Classification (iii) Income and Expenditure Account, Balance Sheet and other subsidiary accounts. (iv) Utilization of Grants & Loans given by Governments for specific purposes. (v) Store and stock accounts.

1.2 The Audit Institutions (AI) entrusted with responsibility of audit of Local Bodies, derive their duties and powers mainly from Article 243-Z of the Constitution of India, which expect the States to make provision by legislation for maintenance of accounts by the Urban Local Bodies and their audit. ‘Various States’ have passed necessary legislation for maintenance of accounts and audit of local bodies. The audit mandate thus originates in a legislative statute by State Governments. In most of the States the Director Local Fund Audit or similar authority is vested with the authority for audit of accounts of the municipalities. As per the recommendations of the XIth Finance Commission and the Guidelines for Utilization of Local Bodies grants issued by Ministry of Finance, Govt. of India, the Comptroller and Auditor General (C&AG) of India is responsible for exercising control and supervision over the proper maintenance of accounts and their audit.

Thus the Director Local Fund Audit or any similar statutory authority under the State Acts would be the primary auditor for ULBs, while the C & AG would conduct a test check by way of technical control and supervision over the primary auditor.

2. AUDIT OBJECTIVES

2.1 The broad aim of audit is to safeguard the financial interests of the Urban Local Bodies by sound and economic financial management practices and to promote public accountability.

2.2 The executives of the Urban Local Bodies are primarily responsible for enforcing economy and efficiency in the expenditure of public money. It is, however, the duty of Audit to bring to light wastefulness, failures, system weaknesses, deficiencies and circumstances leading to infructous expenditure. The Audit assists the ULBs in the exercise of financial control.

3. SCOPE OF AUDIT

3.1 The term "audit" includes both financial audit and performance audit. In pursuance of legislative responsibility, the prescribed audit authority would decide the nature, scope, extent, quantum of audit, the form and content of audit reports including certification of accounts in respect of audit to be conducted by such authority or on its behalf.

4. AUDITING STANDARDS

4.1 Auditing Standards prescribe the norms, which the Auditors are expected to follow in the conduct of audit. They provide minimum guidance to the Auditor that helps determine the extent of auditing steps and procedures that should be applied in the audit and constitute the criteria or yardstick against which the quality of audit results are evaluated. The Auditor must exercise due care and concern in complying with the auditing standards.

4.2 The auditing standards of the Supreme Audit Institution of India (SAI) have been suitably adapted with due consideration of the relevant statutes and rules for the auditing standards for the Urban Local Bodies.

4.3 The auditing standards can be broadly considered under three headings:

(a) General Standards (b) Field Standards (c) Reporting Standards

4.4 The general standards define the basic professional needs of the Auditor, and are concerned with his relationship to the audited body. The Field standards regulate the audit examination, the steps or action that the Audit Institution and the Auditor have to follow in conducting or managing audit work. What the Auditor has to say at the end of the audit is governed by reporting standards.

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5. BASIC POSTULATES

5.1 The basic postulates for auditing standards are basic assumptions, consistent premises, logical principles and requirements, which help in developing auditing standards and serve the Auditors in forming their opinion and reports, particularly where no specific standards apply.

5.2 The Audit Institutions should establish a policy by which the standards are followed by these institutions for conduct of various types of audit work to ensure the high quality of work.

5.3 The Audit Institution should comply with the relevant auditing standards in all matters that are deemed material.

5.4 In general terms, a matter may be judged material if knowledge of it would be likely to influence the users of the Auditor’s report.

5.5 Materiality is often considered in terms of value but the inherent nature of an item or a group of items may also render a matter material, as for example, mandatory disclosure requirements of statutes regardless of the amounts involved.

5.6 In addition to materiality by value and by nature, a matter may be material because of the context in which it occurs, for example, considering an item relating to:

(i) The overall view given to the financial information; (ii) The total of which it forms a part; (iii) The corresponding amount in previous years;

(iv) Associated terms.

5.7 The Audit Institution applies its own judgment to the diverse situations that arise in the course of auditing.

5.8 It would be impracticable to establish a code of rules, sufficiently elaborate, to cater to all situations and circumstances which an auditor might encounter. In the observance of auditing standards, therefore, the auditor in discharge of his responsibility, must exercise his judgment in determining the auditing procedures necessary in the circumstances, to afford a reasonable basis for his opinion and the content of his report, audit of issues and areas of audit, and the nature, timing and extent of audit tests and procedures.

5.9 The Urban Local Bodies shall develop adequate information control, evaluation and reporting system to facilitate the accountability process and shall be responsible for correctness and sufficiency of the form and content of the financial reports and other information. As per the para 6.5 of the Guidelines for utilization of grants for local bodies, issued by Ministry of Finance, Govt. of India, in June 2001, the format for preparation of budgets and for keeping of accounts for Local Bodies shall be as prescribed by the C & A G of India.

5.10 It is the responsibility of audited entity to develop adequate internal control systems to protect its resources. It is also its obligation to ensure that adequate controls are in place and functioning to ensure that applicable laws and regulations are complied with and that probity and propriety is observed in decision making. However, this does not relieve the auditor from submitting proposals and recommendations to the audited entity where controls are found to be inadequate or missing.

5.11 Auditor often expresses an opinion on the performance of auditee based on comparison of the information given in the financial statements over a period of time. Consistency in following the accounting standards will facilitate expression of a fair opinion.

5.12 Auditor has a right to inspect accounts of the Urban Local Bodies; he can access any books, papers and other documents which are relevant to the transactions to be sent to him and he can put such questions to the persons in charge of the office or make such observations and call for such information as he may require for the preparation of any prescribed account or report.

5.13 Information about an audited entity acquired in the course of the auditor's work shall not be used for purposes outside the scope of audit and formation of an opinion or in reporting not in accordance with the auditor's responsibility. It is essential that audit maintains confidentiality regarding audit matters and the information arising from audit task.

5.14 The expanding audit role of the auditors will require them to improve and develop new techniques and methodologies to assess whether reasonable and valid performance measures are used by the audited entity. The Auditors should avail themselves of techniques and methodologies of other disciplines.

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5.15 Audit Institution performs its role by carrying out audits of the accountable entities and reporting the results. To fulfill this role, it needs to maintain its independence and objectivity. The application of appropriate general auditing standards assist the Audit Institution in satisfying these requirements.

5.16 Audit Institution shall advise the appropriate authorities for the promulgation of acceptable accounting standards for financial reporting and disclosures relevant to their needs. The audited entities should develop specific and measurable objectives and performance targets.

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CHAPTER – II

GENERAL STANDARDS

1. INTRODUCTORY

1.1 The general auditing standards define the basic professional needs of the auditor and the need for the auditor to be aware of his responsibilities and develop necessary skills and tasks, so that the audit assignment is performed efficiently and economically. The general standards describe the qualifications of the auditor and the Audit Institutions (Director Local Fund Audit, Examiner Local Fund, Accountant General or any other statutory audit authority) so that may carry out the tasks related to the field and the reporting standards in a competent and effective manner.

1.2 The general auditing standards include standards, which apply both to the Auditors and to the Audit Institutions, and standards, which are meant for Audit Institutions. The standards common to Auditors and Audit Institutions are:

(a) The Auditor and the Audit Institutions must be independent. (b) The Auditor and the Audit Institutions must possess the required competence. (c) The Auditor and the Audit Institutions must exercise due care and concern in

complying with these auditing standards. This embraces due care in planning, specifying, gathering and evaluating evidence, and in reporting findings, conclusions and recommendations.

1.3 The general auditing standards for the Audit Institutions are that they should adopt policies and procedures to:

(a) Recruit personnel with suitable qualifications. (b) Develop and train employees to enable them to perform their tasks effectively, and to

define the basis for the advancement of Auditors and other staff. (c) Prepare manuals and other written guidance notes and instructions concerning the

conduct of audits. (d) Support the skills and experience available within the Audit Institutions and identify

the skills which are absent; and have proper planning and supervision to achieve its goals at the required level of due care and concern.

(e) Review the efficiency and effectiveness of internal standards and procedures.

2. INDEPENDENCE

2.1 In all matters relating to audit work, the Auditor and the AI must be free from personal or external impairments to independence, must be institutionally independent and shall maintain an independent attitude and appearance.

2.2 The need for independence and objectivity in audit is vital. An adequate degree of independence is essential to the conduct of audit and to the credibility of its results.

2.3 It is important that the AI maintains its independence from and external influence including political in order to preserve an impartial approach to its audit responsibilities. This implies that the AI not be responsive nor give the appearance of being responsive to the wishes of particular political interest.

2.4 Adequate independence requires that AI not be subject to direction by the legislature in the programming, planning and conduct of audits. The AI need freedom to set priorities and program its work in accordance with its mandate and adopt methodologies appropriate to the audits to be undertaken.

2.5 It is important for the independence of the AI that there be no power of direction by executive in relation to the performance of its mandate. The AI is not obliged to carry out, modify or refrain from carrying out, an audit or suppress or modify audit findings, conclusions and recommendations.

2.6 Maintenance of independence does not preclude requests to the AI proposing matters for audit. But if it is to enjoy adequate independence, the AI must be able to decline any such request. It is fundamental to the concept of independence of AI that decisions as to the audit tasks comprising the programme should rest finally with the AI.

2.7 Any imposition of restrictions by the executive, which would constrain the exercise of mandate by the AI would be an appropriate matter for reporting to the appropriate authority.

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2.8 The audit mandate provides for full and free access by the AI to all premises and records relevant to audited entities and their operations and provides adequate powers to it to obtain relevant information from persons or entities possessing it.

2.9 By legal provision and accepted convention, the executive permits access by the AI to sensitive information, which is necessary and relevant to the discharge of its responsibilities.

2.10 In order that the AI not only exercises its functions independently of the executive but also be seen to do so, it is important that its mandate and its independent status be understood in the community. The AI should, as appropriate opportunities arise, undertake an educational role in that regard.

2.11 The AI’s functional independence need not preclude arrangements with executive entities in regard to the AI’s administration in matters such as industrial relations, personnel management, property management, or common purchasing of equipment and stores, though executive entities should not be in a position to take decisions that would jeopardize the AI’s independence in discharging its mandate.

2.12 The AI must remain independent from audited entities. The Audit should, however, seek to create among audited entities an understanding of its role and functions, with a view to maintaining amicable relationships with them. Good relationship can help the Audit to obtain information freely and frankly and to conduct discussions in an atmosphere of mutual respect and understanding. In this spirit, the AI while retaining its independence, can agree to be associated with reforms which are planned by the administration in areas such as public accounts or financial legislations or agree to be consulted about the preparation of draft laws or rules affecting its competence or its authority. In these cases it is not, however, a matter of the AI interfering in administrative management but a matter of co-operating with certain administrative services by giving them technical assistance or by putting AI’s financial management experience at their disposition.

2.13 In contrast to private sector audit, where the Auditor’s agreed task is specified in an management letter, the audited entity is not in a client relationship with the AI. The AI has to discharge its mandate freely and impartially, taking management views into consideration in forming audit opinions, conclusions and recommendations, but owing no responsibility to the management of the audited entity for the scope or nature of the audits undertaken.

2.14 The AI should not participate in the management or operations of an audited entity. Audit personnel should not become members of management committees and, if audit advice is to be given it should be conveyed as audit advice or recommendation and acknowledged clearly as such.

2.15 Any AI personnel having close affiliations with the management of an audited entity, such as social, kinship or other relationship conducive to a lessening of objectivity should not be assigned to audit that entity.

2.16 Personnel of the AI should not become involved in any decision making or approval process, which is considered the auditee's management responsibility.

2.17 The AI may cooperate with academic institutions and enter formal relationships with professional bodies, provided the relationships do not inhibit his independence and objectivity, in order to avail of the advice of experienced members of the profession at large.

3. COMPETENCE

3.1 The Auditor and the AI must possess the required competence.

3.2 The following paragraphs explain competence as an auditing standard:

3.2.1 The mandate of AI generally imposes a duty of forming and reporting audit opinions, conclusions and recommendations.

3.2.2 Discussions within the Audit promote the objectivity and authority of opinions and decisions.

3.2.3 Since the duties and responsibilities thus borne by the AI are crucial to the concept of public accountability, the AI must apply to its audits, methodologies and practices of the highest quality. It is incumbent upon it to formulate procedures to secure effective exercise of its responsibilities for audit reports.

3.2.4 The Audit needs to command the range of skills and experience necessary for effective discharge of the audit mandate. Whatever the nature of the audits to be undertaken under that mandate, persons whose education and experience is commensurate with the nature, scope and complexities of the audit task should carry out the audit work. The Audit should equip itself with the full range of up-to-date audit methodologies.

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3.2.5 Since the nature of audit mandate is wide and discretionary and leaves the AI discretion in the frequency of audits to be carried out and the nature of reports to be provided, a high standard of management is expected within the Audit.

4. DUE CARE

4.1 The general standards for the Auditor and the AI include due professional care in conducting audit, specifying, gathering and evaluating evidence and in reporting findings, conclusions and recommendations.

4.2 The following paragraphs explain due care as an auditing standard:

4.2.1 The Audit Institution must be, and be seen to be, objective in its audit. It should be fair in its evaluations and in its reporting the outcome of audits.

4.2.2 Performance and exercise of technical skill should be of a quality appropriate to the complexities of a particular audit. Auditors need to be alert to detect control weaknesses, inadequacies in record keeping, errors and unusual transactions or results which could be indicative of fraud, improper or unlawful expenditure, unauthorized operations, waste, inefficiency or lack of probity.

4.2.3 Where an authorized or recognized entity sets standards or guidelines for accounting and reporting, the audit may use such guidelines in the course of its examination.

4.2.4 Should the AI, in the performance of its functions, need to seek advice from external specialists, the standards for exercise of due care in such arrangements have a bearing also on the maintenance of quality of performance. Obtaining advice from an external expert does not relieve the Audit of responsibility for the opinions formed or conclusions reached on the audit task.

4.2.5 When the audit uses the work of another auditor(s), it must apply adequate procedures to provide assurance that the other auditor(s) has (have) exercised due care and complied with relevant auditing standards, and may review the work of the other auditor(s) to satisfy itself as to the quality of that work.

4.2.6 Information about an audited entity acquired in the course of Auditor’s work must not be used for purposes outside the scope of an audit and the formation of an opinion or in reporting in accordance with the Auditor's responsibilities. It is essential that the Audit maintains confidentiality regarding audit matters and information arising from its audit task. However, the Audit should report offences against the law to proper prosecuting authorities.

5. QUALITY ASSURANCE REVIEW

5.1 AI should have an appropriate quality assurance system in place.

5.2 The following paragraphs explain quality assurance reviews as an auditing standard:

5.2.1 Because of the importance of ensuring a high standard of work by the Audit, it should pay particular attention to quality assurance programs in order to improve audit performance and results. The benefits to be derived from such programs make it essential for appropriate resources to be available for this purpose. It is important that the use of these resources be matched against the benefits to be obtained.

5.2.2 AI should institute its own internal audit function to assist the Audit to achieve effective management of its own operations and sustain quality of its performance.

5.2.3 The quality of the work done by the Audit can be enhanced by strengthening internal review and by the independent appraisal of its work.

5.2.4 AI should establish systems and procedures to confirm that internal quality assurance process operates satisfactorily, ensure the quality of the reports and secure improvements and avoid repetition of weaknesses.

5.2.5 In-built systems of detailed directions, guidance and supervision of audit, careful and critical examination of audit conclusions, written down manuals and job specific audit guidelines/plans, internal control and inspection systems and procedures secure a high degree of quality assurance and credibility of audit conclusions.

6. OTHER GENERAL STANDARDS FOR AUDITING INSTITUTIONS (AI)

6.1 The AI should adopt policies and procedures to recruit personnel with suitable qualifications.

6.2 The personnel of the AI should possess suitable academic qualifications and be equipped with appropriate training and experience. The AI should establish, and regularly review, minimum educational requirements for the appointment of Auditors.

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6.3 The AI should adopt policies and procedures to develop and train its employees to enable them to perform their task effectively and to define the basis for the advancement of Auditors and other staff.

6.4 The following paragraphs explain training and development as an auditing standard:

6.4.1 The AI should take adequate steps to provide for continuing professional development of its personnel, including, as appropriate, provision of in-house training and encouragement of attendance at external courses.

6.4.2 The AI should identify professional development needs of its personnel.

6.4.3 The AI should establish and regularly review criteria, including educational requirements, for the advancement of Auditors and other staff of the AI.

6.4.4 The AI should also establish and maintain policies and procedures for the professional development of audit staff regarding the audit techniques and methodologies applicable to the audits of Panchayats including Urban Local Bodies.

6.4.5 AI personnel should have a good understanding of the institutional environment, including such aspects as the role of the legislature, the legal and institutional arrangements governing the operations of the Panchayati Raj Institutions and the Urban Local Bodies. Likewise, trained audit staff must possess an adequate knowledge of the auditing standard, policies, procedures and practices.

6.4.6 Audit of financial systems, accounting records and financial statements requires training in accounting and related disciplines as well as a knowledge of applicable legislation and executive orders affecting the accountability of the audited entity. Further, the conduct of performance audits may require, in addition to the above, training in such areas as administration, management, economics and the social sciences.

6.4.7 The AI should encourage its personnel to become members of a professional body relevant to their work and to participate in the body's activities.

6.5 The AI should adopt policies and procedures to prepare manuals and other written guidance and instructions concerning the conduct of audits.

6.6 The following paragraphs explains written guidance as an auditing standard:

6.6.1 Communication to staff of the AI by means of circulars containing guidance, and the maintenance of an up-to-date audit manuals setting out the AIs policies, standards, practices and procedures, is important in maintaining the quality of audits.

6.6.2 The manuals, instructions and procedures of the audited entity should also be consulted by the staff of the AI.

6.7 The AI should adopt policies and procedures to support the skills and experience available with it and identify those skills which are absent; provide a good distribution of skills to auditing tasks and a sufficient number of persons for the audit; and have proper planning and supervision to achieve. its goals at the required level of due care and concern.

6.8 The following paragraphs explain the use of skills as an auditing standard:

6.8:1 Resources required to undertake each audit need to be assessed so that suitably skilled staff may be assigned to the work and a control placed on staff resources to be applied to the audit.

6.8.2 The extent to which academic attainments should be related specifically to the audit task varies with the type of auditing undertaken. It is not necessary that each Auditor possesses competence in all aspects of the audit mandate. However, policies and procedures governing the assignment of personnel to audit tasks should aim at deploying personnel who have the auditing skills required by the nature of the audit task so that the team involved on a particular audit collectively possesses the necessary skills and expertise.

6.8.3 It should be open to the AI to acquire specialized skills from external sources if the successful carrying ,out of an audit so requires in order that the audit findings, conclusions and recommendations are perceptive and soundly based and reflect an adequate understanding of the subject area of the audit. It is for the AI to judge, in the particular circumstances, to what extent its requirements are best met by in-house expertise as against employment of outside experts.

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6.8.4 Policies and procedures governing supervision of audits are important factors in the performance of the AI role at an appropriate level of competence. The AI should ensure that audits are planned arid supervised by Auditors who are competent, knowledgeable in the AI's standards and methodologies, and equipped with an understanding of the specialties and peculiarities of the environment.

6.8.5 Where the AI mandate includes the audit of financial statements the audit teams deployed should be equipped to undertake a co-ordinated evaluation of the institutional accounting systems as well as the co-ordination arrangements and control mechanisms. Audit teams will require knowledge of the relevant institutional accounting and control systems and an adequate expertise in the auditing techniques applied by the AI.

6.8.6 Unless the AI is equipped to undertake, within a reasonable time-frame, all relevant audits, including performance audits covering the whole of every audited entity's operations, criteria are needed for determining the range of audit activities which, within the audit period or cycle, will give the maximum practicable assurance regarding performance of public accountability obligations by each audited entity.

6.8.7 In determining the allocation of its resources among different audit activities, the AI must give priority to any audit tasks, which must, by law, be completed within a specified time frame. Careful attention must be given to strategic planning so as to identify an appropriate order of priority for discretionary audits to be undertaken.

6.8.8 Assignment of priorities compatible with maintaining the quality of performance across the mandate involves exercise of the AI's judgment in the light of available information. Maintenance of a portfolio of data pertaining to the structure, functions and operations of the Urban Local Bodies will assist the AI in identifying areas of materiality and vulnerability and areas holding potential for improvements in administration.

7. SCOPE IMPAIRMENTS

7.1 When factors external to the Auditor and AI restrict the audit or interfere with Auditor’s ability to form objective opinions and conclusions, the Auditor should attempt to remove the limitation, failing that, report the limitation to the appropriate authority.

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Chapter-III

FIELD STANDARDS

1. OVERALL FRAMEWORK OR CRITERIA

1.1 The field standards establish the criteria or overall framework for the purposeful, systematic and balanced steps or actions that the auditor has to follow in conducting or managing audit work. These steps and actions represent the rules of investigation that the Auditor, as a seeker of audit evidence, implements to achieve a specific result.

1.2 The field standards establish the framework of conducting and managing audit work. They are related to the general auditing standards, which set out the basic requirements for undertaking the tasks covered by the field standards. They are also related to the reporting standards, which cover the communication aspect of auditing, as the results from carrying out the field standards constitute the main source for the contents of the opinion or report.

2. APPLICABILITY

The field standards applicable to all types of audit are:

(a) The Auditor should plan the audit in a manner, which ensures that an audit of high quality is carried out in an economic, efficient and effective way and in a timely manner.

(b) The work of the audit staff at each level and audit phase should be properly supervised during the audit; and a senior member of the audit staff should review documented work.

(c) The Auditor, in determining the extent and scope of the audit, should study and valuate the reliability of internal control.

(d) In conducting regularity (financial) audits, a test should be made of compliance with applicable laws and regulations. The Auditor should design audit steps and procedures to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the results of regularity audits. The Auditor also should be aware of the possibility of illegal acts that could have an indirect and material effect on the financial statements or results of regularity audits.

In conducting audit covering non-expendable assets, an assessment should be made of compliance with the applicable rules and procedures for acquisition, recording, physical verification and disposal of non-expendable assets.

In conducting performance audits, an assessment should be made of compliance with applicable laws and regulations when necessary to satisfy the audit objectives. The Auditor should design the audit to provide reasonable assurance of detecting illegal acts that could significantly affect audit objectives.

The regularity audit is an essential aspect of auditing of local bodies. The Audit Institution (AI) is to make sure, by all the means put at its disposal, that the auditee's budget and accounts are complete and valid. This will provide users of the audit report with assurance about the size and development of the financial obligations of the auditee. To achieve this objective the AI will examine the accounts and financial statements of the auditee with a view to assuring that all operations have been correctly undertaken, completed, passed, paid and registered.

In conducting audit of revenue receipts such as taxes, duties and other levies, the Auditor should satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment and collection of revenue and are being duly observed.

The Auditor's alertness to fraud is most important factor in detecting fraud during routine audits. Auditor should be alert to situations or transactions that could be indicative of fraud, abuse and illegal acts and if evidence exists that an irregularity, illegal act, fraud or error may have occurred, which could have a material effect on the audit should cause the Auditor to extend procedures to confirm or dispel such suspicions.

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(e) Competent, relevant and reasonable evidence should be obtained to support the Auditor's judgment and conclusions regarding the body, program, activity or function under audit.

(f) In regularity (financial) audit and in other types of audit when applicable, Auditors should analyze the financial statements to establish whether prescribed accounting procedure for financial reporting and disclosure are complied with. Analysis of financial statements should be performed to such a degree that a rational basis is obtained to express an opinion on financial statements.

3. PLANNING

3.1 The field standards include:

The Auditor should plan the audit in a manner, which ensures that an audit of high quality is carried out in an economic, efficient and effective way and in a timely manner.

3.2 The following paragraphs explain planning as an auditing standard:

3.2.1 In planning an audit of Urban Local Bodies, the Auditor should:

(a) Identify important aspects of the environment in which the audited entity operates;

(b) Develop an understanding of the accountability relationships; (c) Consider the form, content and users of audit opinions, conclusions or reports; (d) Specify the audit objectives and the tests necessary to meet them; (e) Identify key management systems and controls and carry out a preliminary

assessment to identify both their strengths and weaknesses; (f) Determine the materiality of matters to be considered; (g) Review the internal audit of the audited entity and its work program; (h) Assess the extent of reliance that might be placed on other auditors, for

example, internal audit; (i) Determine the most efficient and effective audit approach; (j) Provide for a review to determine whether appropriate action has been taken

on previously reported audit findings and recommendations; and (k) Provide for appropriate documentation of the audit plan and for the proposed

fieldwork.

3.2.2 The following planning steps are normally included in an audit:

(a) Collect information about the audited entity and its organization in order to assess risk and to determine materiality;

(b) Define the objective, scope and methodology of the audit. Objectives are what the audit is intended to accomplish. Scope of audit is the boundary of audit and should be directly linked to the objectives. Methodology comprises the work involved in gathering and analyzing data to achieve the objectives. Auditors should design the methodology to provide sufficient, competent and relevant evidence to achieve the objectives.

(c) Undertake preliminary analysis to determine the approach to be adopted and the nature and extent of enquiries to be made later;

(d) Highlight special problems foreseen when planning the audit; (e) Prepare a budget and a schedule for the audit; (f) Identity staff requirements and a team for the audit: and (g) Familiarize the audited entity about the scope, objectives and the assessment

criteria of the audit and discuss with them as necessary.

3.2.3 The audit plan may be revised during the audit when necessary.

3.2.4 Auditor should design the audit to provide reasonable assurance of detecting material misstatements resulting from non-compliance with provisions of contracts or grant agreements that have a direct and material effect on the determination of financial statement amounts. If specific information comes to the Auditor’s attention that provides evidence concerning the existence of possible non-compliance that could have a material indirect effect on the financial statements, Auditors should apply audit procedures specifically directed to ascertaining whether that noncompliance has occurred.

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4. SUPERVISION AND REVIEW

4.1 The field standards include:

The work of the audit staff at each level and audit phase should be properly supervised during the audit, and a senior member of the audit staff should review documented work.

4.2 The following paragraphs explain supervision and review as an auditing standard:

4.2.1 Supervision is essential to ensure the fulfillment of audit objectives and the maintenance of the quality of the audit work. Proper supervision and control is therefore, necessary in all cases, regardless of the competence of individual Auditors.

4.2.2 Supervision should be directed both to the substance and to the method of auditing. It involves ensuring that:

(a) The members of the audit team have a clear and consistent understanding of the audit plan;

(b) The audit is conducted in conformity with the auditing standards and practices and in accordance with the professional judgment of the Auditor;

(c) The audit plan and action steps specified in that plan are followed unless a variation is authorized;

(d) Working papers contain evidence adequately supporting all conclusions, recommendations and opinions;

(e) The Auditor achieves the stated audit objectives; and (f) The audit report includes the audit conclusions, recommendations and opinions,

as appropriate.

4.2.3 All audit work should be reviewed by a senior member of the audit staff before the audit opinions or reports are finalized. It should be carried out as each part of the audit progresses. Review brings more than one level of experience and judgment to the audit task and should ensure that:

(a) All evaluations and conclusions are soundly based and are supported by competent, relevant and reasonable audit evidence as the foundation for the final audit opinion or report;

(b) All errors, deficiencies and unusual matters have been properly identified, documented and either satisfactorily resolved or brought to the attention of a more senior officer(s) of the AI;

(c) Changes and improvements necessary to the conduct of future audits are identified, recorded and taken into account in later audit plans and in staff development activities.

4.2.4 This standard emphasizes the importance of involvement of each higher level of supervision and does not in any way absolve the lower levels of audit staff carrying out field investigations from any negligence in carrying out assigned duties.

5. STUDY AND EVALUATION OF INTERNAL CONTROL

5.1 The Auditor, in determining the extent and scope of the audit, should study and evaluate the reliability of internal control.

5.2 The following paragraphs explain internal control as an auditing standard:

5.2.1 The study and evaluation of internal control should be carried out according to the type of audit undertaken. In the case of regularity (financial) audit, study and evaluation are made mainly on controls that assist in safeguarding assets and resources, and assure the accuracy and completeness of accounting records. In the case of regularity (compliance) audit, study and evaluation are made mainly on controls that assist management in complying with laws and regulations. In case of performance audit, the study and evaluation shall be made of the internal control systems applicable to the audited body, programme, activity or function under audit.

5.2.2 The extent of the study and evaluation of internal control depends on the objectives of the audit and on the degree of reliance intended.

5.2.3 Where accounting or other information systems are computerized, the Auditor should determine whether internal controls are operating effectively to provide reliability of and security over the data being processed.

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6. COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS

6.1 In conducting regularity (financial) audits, a test should be made of compliance with applicable laws and regulations. The Auditor should design audit steps and procedures to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the results of regularity audits. The Auditor also should be aware of the possibility of illegal acts that could have an indirect and material effect on the financial statements or results of regularity audits.

6.2 In conducting audit covering non-expendable assets the Auditor should see that the internal procedure adequately secures correct accounted of non-expendable assets, verification of their physical existence and obsolescence and disposal.

6.3 In conducting performance audits, an assessment should be made of compliance with applicable laws and regulations when necessary to satisfy the audit objectives. The Auditor should design the audit to provide reasonable assurance of detecting illegal acts that could significantly affect audit objectives.

6.4 Efficiency-cum-performance audit is directed to the examination of the systems, procedures, planning, implementation, field performance and monitoring of programmes, schemes and activities. It brings out among other things, weaknesses and deficiencies as also lapses to individual transactions for appropriate action.

6.5 Economy and efficiency determine whether the audited institution is managing and utilizing its resources economically and efficiently, the cases of inefficiency or uneconomical practices and whether the institution complies with laws and regulations concerning matters of economy and efficiency.

6.6 Programme results determine whether the desired results or benefits established by the authorizing body are being achieved and whether the institution has considered alternatives that might yield desired results at a lower cost.

6.7 The regularity audit is an essential aspect of the Urban Local Bodies (ULBs) auditing. One important objective that this type of audit assigns to the AI is to make sure, by all the means put at its disposal, that the auditee's budget and accounts are accurate, complete and valid. This will provide users of the Auditor's report with assurance about the size and development of the financial obligation of the audited body. To achieve this objective, the AI will examine the accounts and financial statements with a view to assuring that all operations have been correctly undertaken, completed, passed, paid and registered.

6.8 In verifying compliance with the applicable tax laws, audit of receipts is regulated mainly with reference to the statutory provisions as judicially interpreted. Interpretation of law is a judicial function; the Auditor does not review a judicial decision. Audit may, however, point out cases where there is an apparent lacuna or loophole in law and make suggestions for their amendments.

6.9 The Auditor should see that the internal procedure adequately secures correct and regular accounting of demands, collections and refunds, that no amounts due are left outstanding on its books without sufficient reason and that the claims are pursued with due diligence and are not abandoned or reduced except with adequate justification and with proper authority.

6.10 Auditor's alertness to fraud is important in detecting fraud during routine audit. The Auditor should be alert to situations or transactions that could be indicative of fraud, abuse and illegal acts and if such evidence exists, Auditor should extend audit steps and procedures to identify the effect on the entity's operations and programmes.

Some fraud may be impossible to detect even by the best Auditors. Skillfully prepared false documents, collusion to circumvent separation of duties, and unrecorded transactions are not usually discovered through accepted audit methods.

An audit made in accordance with the standards will not guarantee the discovery of all fraud, abuse or illegal acts that might have been committed. Nor does the subsequent discovery of fraud, abuse or illegal acts committed during the period covered under audit necessarily means that the Auditor's performance was inadequate. However, if the audit was conducted in accordance with the prescribed auditing standards, the Auditors have fulfilled their professional responsibility.

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Where there are reasonable grounds for suspicion, the Auditors must go beyond the mechanical performance of auditing procedures and extant audit steps and procedures to track down improprieties.

6.11 The following paragraphs explain compliance as an auditing standard:

6.11.1 Reviewing compliance with laws and regulation is especially important when auditing programs of the ULBs because decision-makers need to know if the laws and regulation are being followed, whether they are having the desired results, and, if not, what revisions are necessary. Additionally the Urban Local Bodies programs, services, activities, and functions are created by laws and are subject to more specific rules and regulations.

6.11.2 Those planning the audit need to be knowledgeable of the compliance requirements that apply to the entity being audited. Because the laws and regulation that may apply to a specific audit are often numerous, Auditors need to exercise professional judgment in determining those laws and regulations that might have a significant impact on the audit objectives.

6.11.3 The Auditor also should be alert to situations or transactions that could be indicative of illegal acts that may indirectly impact the results of the audit. When audit steps and procedures indicate that illegal acts have or may have occurred, the Auditor needs to determine the extent to which these acts affect the audit results.

6.11.4 In conducting audits in accordance with this standard, the Auditors should choose and perform audit steps and procedures that, in their professional judgment, are appropriate in the circumstances. These audit steps and procedures should be designed to obtain sufficient, competent, and relevant evidence that will provide a reasonable basis for their judgment and conclusions.

6.11.5 Generally, management is responsible for establishing an effective system of internal controls to ensure compliance with laws and regulations. In designing steps and procedures to test or assess compliance, Auditors should evaluate the entity's internal controls and assess the risk that the control structure might not prevent or detect non-compliance.

6.11.6 Without affecting the independence of the Al the Auditors should exercise due professional care and caution in extending audit steps and procedures relative to illegal acts so as not to interfere with potential future investigations or legal proceedings. Due care would include consulting appropriate legal counsel and the applicable law enforcement organization to determine the audit steps and procedures to be followed.

7. AUDIT EVIDENCE

7.1 Sufficient, competent, relevant and reliable evidence should be obtained to support the Auditor's judgment and conclusions regarding the body, program, activity or function under audit.

7.2 The following paragraphs explain audit evidence as an auditing standard:

7.2.1 The audit findings, conclusions and recommendations must be based on evidence. Since Auditors seldom have the opportunity of considering all information about the audited entity, it is crucial that the data collection and sampling techniques are carefully chosen. When computer-based system data are an important part of the audit and the data reliability is crucial to accomplishing the audit objective, Auditors need to satisfy themselves that the data are reliable and relevant.

7.2.2 Auditors should have a sound understanding of techniques and procedures such as inspection, observation, enquiry and confirmation, to collect audit evidence. The AI should ensure that the techniques employed are sufficient to reasonably detect all quantitatively material errors and irregularities.

7.2.3 In choosing approaches and procedures, consideration should be given to the quality of evidence; i.e. the evidence should be sufficient, competent, relevant, reliable and as direct as possible so as to reduce the need for inferences to be made.

7.2.4 Auditors should adequately document the audit evidence in working papers, including the basis and extent of the planning, work performed and the findings of the audit. Working papers should contain sufficient information to enable an experienced auditor having no previous connection with the audit to ascertain from them the evidence that supports the Auditor's significant findings and conclusions.

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7.2.5 Adequate documentation is important for several reasons. It will:

(a) Confirm and support the Auditor's opinions and reports; (b) Increase the efficiency and effectiveness of the audit;

(c) Serve as a source of information for preparing reports or answering any enquiries from the audited entity or from any other party;

(d) Serve as evidence of the Auditor's compliance with auditing standards; (e) Facilitate planning and supervision; (f) Help the Auditor's professional development;

(g) Help to ensure that delegated work has been satisfactorily performed; and (h) Provide evidence of work done for future reference.

7.2.6 The Auditor should bear in mind that the content and arrangement of the working papers reflect the degree of the Auditor's proficiency, experience and knowledge. Working papers should be sufficiently complete and detailed to enable an experienced Auditor having no previous connection with the audit subsequently to ascertain from them what work was performed to support the conclusions.

8. ANALYSIS OF FINANCIAL STATEMENTS

8.1 In regularity (financial) audit and in other types of audit when applicable, Auditors should analyze the financial statements to establish whether prescribed accounting procedures for financial reporting and disc10sure are complied with. Analysis of financial statements should be performed to such a degree that a rational basis is obtained to express an opinion on financial statements.

8.2 The following paragraphs explain analysis of financial statements as an auditing standard:

8.2.1 Financial statement analysis aims at ascertaining the existence of the expected relationship within and between the various elements of the financial statements, identifying any unexpected relationships and any unusual trends.

8.2.2 The auditor should, therefore, thoroughly analyze the financial statements and ascertain whether:

(a) Financial statements are prepared in accordance with prescribed accounting procedures;

(b) Financial statements are presented with due consideration to the circumstances of the audited entity;

(c) Sufficient disclosures are presented about various elements of financial statements; and

(d) The various elements of financial statements are properly evaluated, measured and presented.

(e) The auditors should take into account that some entities may use cash basis accounting, whereas others may use accrual or modified accrual basis of accounting.

8.2.3 The methods and techniques of financial analysis depend to a large degree on the nature, scope and objective of the audit and on the knowledge and judgment of the Auditor.

8.2.4 Where the AI is required to report on the execution of budgetary laws, the audit should include:

(a) For revenue accounts, ascertaining whether forecasts are those of the initial budget, whether the audit of taxes, rates and duties recorded, and imputed receipts, can be carried out by comparison with the budget of the audited entity;

(b) For expenditure accounts, verifying credits to assist budgets, adjustment laws and, for carryovers, the previous year's financial statements.

8.2.5 Where the AI is required to report on systems of tax administration or systems for realizing non-tax receipts, along with a systems study and analysis of realization of revenues/receipts, detection of individual errors in both assessment and collection is essential to highlight audit assertions regarding the system defects and comment on their efficiency to ensure compliance.

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Chapter - IV

REPORTING STANDARDS 1. INTRODUCTORY

1.1 The culmination of the audit process is the reporting which summarizes the evidence gathered during the conduct of audit and communicates the audit opinion and other findings. It is essential for the Auditor to prepare report in such a way so that audit observations are easy for readers to understand. Timeliness of the report is the essence as delay may make the report irrelevant and corrective action may not be practicable. Discussions are held with the audited institutions and the Auditor considers their responses. Significant audit findings are detailed in the annual audit reports. The reporting standards set down the framework for reporting the results of audit concisely, objectively with accuracy, and clarity and for appropriate, conclusive and preventive follow up action.

2. AUDIT INSPECTION REPORT

2.1 On the completion of each audit assignment, the Auditor should prepare a written report setting out the audit observations and conclusions in an appropriate form; its content should be easy to understand and free from vagueness or ambiguity supported by sufficient, relevant and reliable audit evidence and be independent, objective, fair, complete, accurate, constructive and concise.

2.2 The Auditor should issue the reports without undue delay for use by management and other interested users. The audit report may be presented on other media that are retrievable by other interested users and the audit institutions. Retrievable audit reports include those, which are in electronic formats and may be released on the Internet once it is public document. Any report is not a public document till it is presented to the appropriate authority in the manner prescribed as per the provisions of the relevant legislative statute.

2.3 With regard to audit of financial statements, the Auditor should prepare a report expressing opinion on the fair presentation of the financial position of the audited entity in the financial statements. Certificate shall state expressly:

� the financial statements to which it relates;

� that the audit has been carried out in accordance with the relevant statutory authority and with auditing standards;

� an opinion about the accounts which the Auditor has formed as a result of the audit.

Form and content of this report and the nature of opinion are discussed in succeeding paragraphs.

2.4 With regard to fraudulent practice or serious financial irregularities detected during audit or examined by audit, a written report should be prepared. This report should indicate the specific scope of audit, the findings, total amount involved, modus operandi of the fraud or the irregularity, accountability for the .same and recommendations for improvement of internal control system, fraud prevention and detection measures to safeguard against recurrence of fraud/serious financial irregularity. Where the right to information about the affairs of the State and the public bodies is available, it may require release of the reports publicly after it has been presented before the house of the elected body. However, premature disclosure of suspects and the details of the fraud in an audit report can seriously jeopardize criminal prosecution, it is therefore, important that the report is first made to the management confidentially and legal counsel obtained concerning its release to public.

2.5 With regard to performance or value for money audits, the report should include a description of the scope and coverage of audit, objective of audit, area of audit, main findings in respect of the efficiency, economy and effectiveness (including impact) aspects of the area (subject matter) which was audited and recommendation suggesting the improvements that are needed.

2.6 With regard to regularity audits, the Auditor should prepare a written report which may either be a part of the report on the financial statements or the value for money audit or a separate report on the tests of compliance of applicable laws and regulations the report should contain a statement on the results of the tests to indicate the nature of assurance Le positive or negative obtained from the tests.

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2.7 Reporting standards constitute the framework for the audit organization and the Auditor to report the results of audit of regularity or performance audit or expressing his opinion on a set of financial statements.

2.8 These standards are to assist and not to supercede the prudent judgment of the Auditor in making audit observations, conclusions and report.

2.9 The expression “Reporting” embraces both the Auditor's opinion on a set of financial statements and the Auditor's report on regularity, performance or value for money audit and also the reports prepared on periodical inspection of the records of an auditee.

2.10 The audit inspection report should be complete. This requires that the report contains all pertinent information needed to satisfy the audit objectives and to promote an adequate and correct understanding of the matter reported. It also means including appropriate background information.

2.10.1 In most cases, a single example of a deficiency is not sufficient to support a broad conclusion or a related recommendation. All that it supports is that a deviation, an error or a weakness existed. However, except as necessary, detailed supporting data need not be included in the report.

2.11 Accuracy requires that the evidence presented is true and the conclusions are correctly portrayed. The conclusions should flow from the evidence. The need for accuracy is based on the need to assure the users that what is reported is credible and reliable.

2.11.1 The report should include only information, findings and conclusions that are supported by competent and relevant evidence in the Auditor's working papers. Reported evidence should demonstrate the correctness and reasonableness of the matters reported.

2.11.2 Correct portrayal means describing accurately the audit scope and methodology and presenting findings and conclusions in a manner consistent with the scope of audit work.

2.12 Objectivity requires that the presentation throughout the report be balanced in content and tone. The audit report should be fair and impartial and not misleading and should place the audit results in proper perspective. This means presenting audit results impartially and guarding against the tendency to exaggerate or over-emphasize deficient performance. In describing shortcomings in performance, the Auditors should present the explanation of the audited entity and stray instances of deviation should not be used to reach broad conclusions.

2.12.1 The tone of reports should encourage decision-makers to act on the Auditor's findings and recommendations. Although findings should be presented clearly and forthrightly, the Auditors should keep in mind that one of their objectives is to persuade and this can best be done by avoiding language that generate defensiveness and opposition.

2.13 Being convincing requires that the audit results are presented persuasively and the conclusions and recommendations followed logically from the facts presented. The information presented should be sufficient to convince the readers to recognize the validity of the findings and reasonableness of audit conclusions. A convincing report can help focus the attention of management on matters that need attention and help stimulate correction.

2.14 Clarity requires that the report be easy to read and understand. Use of straightforward, non-technical language is essential. If technical terms and unfamiliar abbreviations are used, they should be clearly defined. Both logical organization of the material and precision in stating the facts and in drawing conclusions significantly contribute to clarity and understanding. Appropriate visual aids (such as photographs, charts, graphs and maps etc.) should be used to clarify and summarize complex material.

2.15 Being concise requires that the report is not longer than necessary to convey the audit opinion and conclusions. Too much detail detracts from the report and conceals the audit opinion and conclusions and confuses the readers. Complete and concise reports are likely to receive greater attention.

2.16 Being constructive requires that the report also includes well thought out suggestions, in broad terms, for improvements, rather than how to achieve them. In presenting the suggestions due regard should be paid to the requirements of rules and orders, field constraints and the prevailing milieu. The suggestions should be discussed with sufficiently high level functionaries of the entities and as far as possible, their acceptance obtained before these are incorporated in the report.

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2.17 Timeliness requires that the audit report should be made available promptly to be of utmost use to all users, particularly to the audited institution or body and/or the authorities who have to take requisite action.

3. FOLLOW UP OF AUDIT INSPECTION REPORTS

3.1 Adequate, prompt and proper follow up action by the entity on and in the light of audit conclusions projected will enhance the effectiveness of audit and promote public accountability.

3.2 Systems and procedures should be in place and implemented for securing appropriate conclusions and preventive follow up action on audit reports. In subsequent audits and otherwise, the Auditors should examine and report whether satisfactory action was taken on the audit reports.

4. REPORT DISTRIBUTION

4.1 Written audit reports are submitted by the Audit to the appropriate officials of the institution or the body audited. Copies are sent to other officials who may be responsible for taking action on audit observations and conclusions. Some State Governments having enacted the "Right to Information Act" to provide citizens the right to information about the affairs of the State and the public bodies, it may require, unless restricted by any other law or regulations, release of the reports publicly Le. made available for public inspection after it has been presented to the house of the local body. However, the report is not a public document till it is presented as per provisions of the legislative statute.

5. REPORTING ON COMPLIANCE WITH LAWS AND REGULATIO NS AND ON INTERNAL CONTROL

5.1 This standard is discussed under two sections, viz. (a) Value for Money/Performance audit; and (b) Audit of financial statements

6. VALUE FOR MONEY AUDIT

6.1 Auditors should report all significant instances of non-compliance and all significant instances of abuse that were found during or in connection with the audit. In some circumstances, Auditors should report illegal acts promptly to the audited entity without waiting for the full report to be prepared after the audit.

7. NON-COMPLIANCE AND ABUSE

7.1 When Auditors conclude, based on evidence obtained, that significant non-compliance or abuse either has occurred or is likely to have occurred, they should report relevant information. The term "non-compliance" comprises illegal acts (violations of laws and regulation) and violations of provisions of contracts or grant agreements. Abuse occurs when the conduct of an Urban Local Body programme, activity or function falls far short of societal expectations for prudent behaviour.

7.2 Whether a particular act is, in fact, illegal may have to await final determination by a court of law. Thus, when Auditors disclose matters that have led them to conclude that an illegal act is likely to have occurred, they should take care not to imply that they have made a determination of illegality.

7.3 In reporting significant instances of non-compliance, Auditors should place their findings in perspective. To give the reader a basis for judging the prevalence and consequences of non-compliance, the instances of noncompliance should be related to the universe or the number of cases examined and be quantified in terms of money value, if appropriate.

7.4 When Auditors detect non-significant instances of non-compliance they should communicate them to the auditee, preferably in writing. If the Auditors have communicated such instances of non-compliance to the top management, they should refer to such communication in the audit report. Auditors should document in their working papers all communications to the auditee about non-compliance.

7.5 Where audit reveals sufficient grounds to infer corruption/illegal acts/irregularity, which are serious enough to merit attention of the investigative authorities, auditors may report such cases directly to the concerned Secretary of the government department in the auditee Government after approval by the Finance Secretary, with a request for concurrence and approval, to refer the matter to specified office for investigation and action (for example Lokayukta etc.)

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7.6 The auditee may also be required by law or regulation to report certain illegal acts to specified internal or external parties (for example an investigating agency or Lokayukta etc.). If Auditors have communicated such illegal acts to the auditee, and it fails to report them, then the Auditors should include such matters in their report.

8. INTERNAL CONTROLS

8.1 Auditors should report the scope of their work on management controls and any significant weaknesses found during the audit.

8.2 Reporting on management controls will vary depending on the significance of any weaknesses found and the relationship of those weaknesses to the audit objectives.

8.3 In audits where the sole objective is to audit the management controls, weaknesses found of significance to warrant reporting would be considered deficiencies and be so identified in the audit report. The management controls that were assessed should be identified to the extent necessary to clearly present the objectives, scope and methodology of the audit. In a performance audit, Auditors may identify significant weaknesses in management controls as a cause of deficient performance. In reporting this type of findings, the control weaknesses would be described as the "cause".

9. AUDIT OF FINANCIAL STATEMENTS

9.1 Reporting Standards determine what the Auditors are obliged to cover in the certificate given to the accounts. As the certificate is the means by which the Auditor's conclusions are conveyed to the users of accounts, the wording of the report is important. The certificate should state:

• the financial statements to which it relates; • that the audit has been carried out in accordance with the relevant statutory authority

and with auditing standards; and • the opinion about the accounts which the Auditors have formed as a result of audit.

9.2 The report on the financial statements should either (1) describe the scope of the Auditors' testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests or (2) refer to the separate report(s) containing that information. In presenting the results of those tests, Auditors should report fraud, illegal acts, other material non-compliance, and reportable conditions in internal control over financial reporting. In some circumstances, Auditors should report fraud and illegal acts promptly to the specified authority in the audited entity as per the instructions/ orders on the subject.

9.3 These responsibilities are in addition to and do not modify Auditors' responsibilities to (i) address the effect, fraud or illegal acts may have on the report on the financial statements, and (ii) determine that the appropriate authority are adequately informed about fraud, illegal acts and reportable conditions.

9.4 When Auditors report separately (including separate reports bound in the same document) on compliance with laws and regulations - and internal control over financial reporting, the report on the financial statements should state that they are issuing those additional reports. The report on the financial statements should also state that in considering the results of the audit, these reports should be read along with the Auditor's report on the financial statements.

9.5 Auditors should report the scope of their testing of compliance with laws and regulations and of internal control over financial reporting, including whetl1er or not the tests they performed provided sufficient evidence to support an opinion on compliance or internal control over financial reporting and whether the Auditors are providing such opinions.

10. FRAUD, ILLEGAL ACTS AND OTHER NON· COMPLIANCE

10.1 When Auditors conclude based on evidence obtained, that fraud or an illegal act either has occurred or is likely to have occurred they should report relevant information. Auditors' need not report information about fraud or on illegal act that is clearly inconsequential. Auditors should also report other non-compliance (for example a violation of a contract provision) that is material to the financial statements.

10.2 Whether a particular act is, in fact, illegal may have to await final determination by a court of law.

21

10.3 Thus when Auditors disclose matters that have led them to conclude that an illegal act is likely to have occurred, they should take care not to imply that they have made a determination of illegality.

10.4 In reporting material fraud, illegal acts, or other non-compliance, the Auditors should place their findings in proper perspective. To give the reader a basis for judging the prevalence and consequences of these conditions, the instances identified ~hould be related to the universe or the number of cases examined and be quantified in terms of money value, if appropriate. In presenting material fraud, illegal acts or other non-compliance, Auditors should ensure that standard for objectives, scope and methodology, audit results and presentation standards, as appropriate, are observed. Auditors may provide less extensive disclosure of fraud and illegal acts that are not material in either a quantitative or qualitative sense.

10.5 When Auditors detect fraud, illegal acts, or other non-compliance that are not of material nature, they should communicate those findings to the auditee, preferably in writing and should refer to such communications in their report on compliance. Auditors should document in their working papers all communications to the auditee about fraud, illegal acts, and other non-compliance.

10.6 Management is responsible for taking timely and appropriate steps to remedy fraud or illegal acts that Auditors report to it. When fraud or an illegal act involves assistance received directly or indirectly from government or any other agency (for example, State Government Grants), the Auditors may have a duty to report it directly (to the government/any other agency) if management fails to take remedial steps.

10.7 Auditors should obtain sufficient, competent and relevant evidence (for example, by confirmation with outside parties) to corroborate assertions by management that it has reported fraud or illegal acts.

11. DEFICIENCIES IN INTERNAL CONTROL

11.1 Auditors should report deficiencies in internal control that tltey consider to be reportable conditions. The following are examples of matters that may be reportable conditions:

• absence of appropriate segregation of duties consistent with appropriate control objectives;

• absence of appropriate reviews and approvals of transactions, accounting entries or systems output;

• inadequate provisions for the safeguarding of assets; • evidence of failure to safeguard assets from loss, damage or misappropriation; • evidence that a system fails to provide complete and accurate out put consistent with

the auditee’s control objectives because of the misapplication of control procedures; • evidence of intentional override of internal control by those in authority to the

detriment of the overall objectives of the system; • evidence of failure to perform tasks that are part of internal control, such as

reconciliation not prepared or not timely prepared; • absence of a sufficient level of control consciousness within the institution; • significant deficiencies in the design or operation of internal control that could result

in violations of laws and regulations having a direct and material effect on the financial statements; and

• failure to follow up and correct previously identified deficiencies in internal control.

11.2 Audit follow-up standard requires Auditors to report whether satisfactory action was taken or not, on the audit reports.

11.3 In reporting reportable conditions, Auditors should identify those that are individually or cumulatively material weaknesses. Auditors should ensure that standard for objectives, scope, methodology, audit results and report presentation standards, as appropriate are followed in their reports on audit of financial statements.

11.4 When Auditors detect deficiencies in internal control that are not of material nature, they should communicate those deficiencies to the auditee, preferably in writing. If the Auditors have communicated other deficiencies in internal control to the top management, they should refer to such communication when they report on internal control. All communications to the auditee about deficiencies in internal control should be documented in the working papers.

22

12. THE FORM AND CONTENT OF AUDIT OPINION AND REPO RT

12.1 The form and content of all audit opinions and reports are founded on the following general principles:

(a) Title - The opinion or report should be preceded by a suitable title or heading, helping the reader to distinguish it from statements and information issued by others.

(b) Signature and Date - The opinion or report should be properly signed. The inclusion of a date informs the reader that consideration has been given to the effect of events or transactions about which the Auditor became aware up to that date (which in the case of regularity (financial) audits, may be beyond the period of the financial statements).

(c) Objectives and scope - The opinion or report should include reference to the objectives and scope of the audit. This information establishes the purpose and boundaries of the audit.

(d) Completeness - Opinions should be appended to and published with the financial statements to which they relate, but performance reports may be free standing. The Auditor's opinions and reports should be presented as prepared by the Auditor. In exercising its independence audit authority may acquire information from time to time, which in the national interest cannot be freely disclosed. This can affect the completeness of the audit report. In this situation the Auditor should consider the need to make a report, possibly including confidential or sensitive material in a separate, unpublished report.

(e) Addressee - The opinion or report should identify those to whom it is addressed, as required by the circumstances of the audit engagement and local regulations or practice. This is unnecessary where formal procedures exist for its delivery.

(f) Identification of subject matter - The opinion or report should identify the financial statements in the case of regularity (financial) audits or area in the case of performance audits to which it relates. This includes information such as the name of the audited entity, the date and period covered by the financial statements and the subject matter that has been audited.

(g) Legal basis - Audit opinions and reports should identify and mention the legislation or other authority providing for the audit.

(h) Compliance with standards - Audit opinions and reports should indicate the auditing standards or practices followed in conducting the audit, thus providing the reader with an assurance that the audit has been carried out in accordance with generally accepted procedures.

(i) Timeliness - The audit opinion or report should be available promptly to be of greatest use to readers and users, particularly those who have to take necessary action.

12.2 An audit opinion is normally in a standard format, relating to the financial statements as a whole, thus avoiding the need to state at length what lies behind it but conveying by its nature a general understanding among readers as to its meaning. The nature of these words will be influenced by the legal framework for the audit, but the content of the opinion will need to indicate unambiguously whether it is unqualified or qualified and, if the latter, whether it is qualified in certain respects or is adverse or a disclaimer of opinion.

12.3 An unqualified opinion is given when the Auditor is satisfied in all material respects that:

(a) The financial statements have been prepared using acceptable accounting bases and policies, which have been consistently applied;

(b) The statements comply with statutory requirements and relevant regulations; (c) The view presented by the financial statements is consistent with the Auditor's

knowledge of the audited entity; and (d) There is adequate disclosure of all material matters relevant to the financial

statements.

12.4 Emphasis of matter - In certain circumstances the Auditor may consider that the reader will not obtain a proper understanding of the financial statements unless attention is drawn to unusual or important matters. As a general principle, the Auditor issuing an unqualified opinion does not make reference to specific aspects of the financial statements in the opinion in case this should be misconstrued as being a

23

qualification. In order to avoid giving that impression, references that are meant as "emphasis of matter" are contained in a separate paragraph from the opinion. However, the Auditor should not make use of an emphasis of matter to rectify a lack of appropriate disclosure in the financial statements, nor as an alternative to, or a substitute for, qualifying the opinion.

12.5 An Auditor may not be able to express an unqualified opinion when any of the following circumstances exist and, in the Auditor's judgment, their effect is or may be material to the financial statements:

(a) There has been limitation on the scope of the audit; (b) The auditor considers that the financial statements are incomplete or

misleading or there is an unjustified departure from prescribed accounting procedures; and

(c) There is uncertainty affecting the financial statements.

12.6 Qualified Opinion - Where the Auditor disagrees with or is uncertain about one or more particular items in the financial statements that are material but not fundamental to understanding of the statements, a qualified opinion should be given. The wording of the opinion normally indicates a satisfactory outcome to the audit, subject to a clear and concise statement of the matters of disagreement or uncertainty giving rise to the qualified opinion. It helps the users of the statements if the Auditor quantifies the financial effect of the uncertainty or disagreement although this is not always practicable or relevant.

12.7 Adverse Opinion - Where the Auditor is unable to form an opinion on the financial statements taken as a whole due to disagreement which is so fundamental that it undermines the position presented to the extent that an opinion which is qualified in certain respects would not be adequate, an adverse opinion is given. The wording of such an opinion makes clear that the financial statements are not fairly stated, specifying dearly and concisely all the matters of disagreement. Again, it is helpful if the financial effect on the financial statements is quantified where relevant and practicable.

12.8 Disclaimer of Opinion - Where the Auditor is unable to arrive at an opinion regarding the financial statements taken as a whole due to an uncertainty or scope restriction that is so fundamental that an opinion, which is qualified in certain respects! would not be adequate, a disclaimer is given. The wording of such a disclaimer makes it clear that an opinion cannot be given, mentioning clearly and concisely all matters of uncertainty.

12.9. It is customary to provide a detailed report amplifying the opinion in circumstances in which it has been unable to give an unqualified opinion.

12:10 In addition, regularity audits often require that reports are made where weaknesses exist in systems of financial control or accounting (as distinct from performance audit aspects). This may occur not only where weaknesses affect the audited entity's own procedures but also where they relate to its control over the activities of others. The Auditor should also report on significant irregularities, whether perceived or potential, on inconsistency of application of regulation or on fraud and corrupt practices.

12.11 In reporting on irregularities or instances of non-compliance with laws or regulations, the Auditors should be careful to place their findings in the proper perspective. The extent of non-compliance can be related to the number of cases examined or quantified monetarily.

12.12 Reports on irregularities may be prepared irrespective of a qualification of the Auditor's opinion. By their nature they tend to contain significant criticisms, but in order to be constructive they should also address future remedial action by incorporating statements by the audited entity or by the Auditor, including conclusions or recommendations.

12.13 In contrast to regularity audit, which is subject to fairly specific requirements and expectations, performance audit is wide-ranging in nature and is more open to judgment and interpretation; coverage is also more selective and may be carried out over a cycle of several years, rather than in one financial period; and it does not normally relate to particular financial or other statements. As a consequence performance audit reports are varied and contain more discussion and reasoned argument. The report should present factual data accurately and fairly, include only information, findings, and conclusions that are adequately supported by sufficient

24

evidence in the Auditor's working papers to demonstrate or prove the basis for the matters reported and their correctness and reasonableness.

12.14 The performance audit report should state clearly the scope and objectives of the audit. Reports may include criticism (for example where, in the public interest or on grounds of public accountability, matters of serious waste, extravagance or inefficiency are drawn to attention) or may make no significant criticism but give independent information, advice or assurance as to whether and to what extent economy, efficiency and effectiveness are being or have been achieved.

12.15 The Auditor is not normally expected to provide an overall opinion on the achievement of 3-Es of economy, efficiency and effectiveness by an audited entity in the same, way as the opinion on financial statements. However, an expression of overall opinion on 3-Es may sometimes be necessary in case of performance audit. Where the nature of the audit allows this to be done in relation to specific areas of an entity's activities, the Auditor should provide a report, which describes the circumstances and arrives at a specific conclusion rather than a standardized statement. Where the audit is confined to consideration of whether sufficient controls exist to secure economy, efficiency or effectiveness, the Auditor may provide a more general opinion.

12.16 Auditors should recognize that their judgment is being applied to actions resulting from past management decisions. Care should, therefore, be exercised in making such judgments, and the report should indicate the nature and extent of information reasonably available (or which ought to have been available) to the' audited entity at the time the decisions were taken. By stating clearly the scope, objectives and findings of the audit, the report demonstrates to the reader that the Auditor is being fair. Fairness also implies the presentation of weakness or critical findings in such a way as to encourage correction, and to improve systems and guidance within the audited entity. Accordingly the facts are generally agreed with the audited entity in order to ensure that they are complete, accurate and fairly presented in the audit report. There may also be a need to include the audited entity's views pertinent to the matters raised during audit either verbatim or in summary, especially where an Auditor presents his own views or recommendations.

12.17 Thee reports should place primary emphasis on improvements rather than on criticism of the past. Critical comments should be presented in a balanced perspective, considering any unusual difficulties or circumstances by the operating officials concerned. The Auditor's conclusions and recommendations are an important aspect of the audit and, where appropriate, are written as a guide for action. Generally these recommendations suggest what improvements are needed rather than how to achieve them, though circumstances sometimes arise which warrant a specific recommendations, for example to correct a defect in the law in order to bring about an administrative improvement.

12.18 In formulating and following up recommendations, the Auditor should maintain objectivity and independence and thus focus on whether identified weaknesses are corrected rather than on whether specific recommendations are adopted.

12.19 In formulating the audit opinion or report, the Auditor should have regard to the materiality of the matter in the context of the financial statements audit or regularity audit as the case may be or the nature of the audited entity or activity being audited where performance audit is being conducted.

12.20 For regularity (financial) audits, if the Auditor concludes that, judged against the criteria most appropriate in the circumstances, the matter does not materially affect the view given by the financial statements the opinion should not be qualified. Where the Auditor decides that a matter is material the opinion should be qualified, having determined the type of qualification.

12.21 In the case of performance audits that judgment will be more subjective as the report does not relate so directly to financial or other statements. Consequently the Auditor may find that materiality by nature or by context is a more important consideration than materiality by amount.

12.22 In the case of performance audits, the report shall include pertinent views of officers of the audited entity, those looking after the function, programme or activity audited concerning the Auditor's findings, conclusions and recommendations.

25

APPENDIX – II (Referred to in Para 3.6.5 of Chapter 6 of Section 3)

List of Important Valuable Forms

ØØØØ---- jlhn @QkeZ dk ukejlhn @QkeZ dk ukejlhn @QkeZ dk ukejlhn @QkeZ dk uke ØØØØ---- jlhn @ QkeZ dk ukejlhn @ QkeZ dk ukejlhn @ QkeZ dk ukejlhn @ QkeZ dk uke

okMZ @ tksu okMZ @ tksu okMZ @ tksu okMZ @ tksu i'kq fpfdRlk foHkkx i'kq fpfdRlk foHkkx i'kq fpfdRlk foHkkx i'kq fpfdRlk foHkkx

1 pkyku cqd 1 i'kq foØ; izek.k & i=

2 tujy jlhn cqd 2 i'kq foØ; jlhn cqd

3 lEifÙk dj jlhn cqd 3 dqRrks ds yk;lsal gsrq vkosnu

4 tynj jlhn cqd 4 dqRrks ds yk;lsal izek.k & i=

5 thou ckfVdk QkmUVsu dh jlhn cqd xkso/kZu ;kstuk xkso/kZu ;kstuk xkso/kZu ;kstuk xkso/kZu ;kstuk

6 ekfld rg cktkjh cqd 1 eos'kh nkf[kyk ikl cqd

7 rg cktkjh 1 :i;s 2 eos'kh fjgkbZ ikl cqd

8 rg cktkjh 2 :i;s yk;lsal yk;lsal yk;lsal yk;lsal

9 rg cktkjh 5 :i;s 1 [kk| inkFkZ gsrq yk;lsal vkosnu

10 isM+ ikfdZax nks ifg;k 2] :i;s 2 [kk| inkFkZ dh yk;lsal cqd

11 isM+ ikfdZax pkj ifg;k 5] :i;s 3 v[kk| inkFkZ dk yk;lsal vkosnu

12 uohu jk’ku dkMZ 4 v[kk| inkFkZ dh yk;lsal cqd

13 MqIyhdsV jk’ku dkMZ 5 uohu ?k.̀kk&izn O;kikj gsrq vkosnu

;kaf=dh foHkkx ;kaf=dh foHkkx ;kaf=dh foHkkx ;kaf=dh foHkkx 6 ?k`.kk&izn O;kikj dh yk;lsal cqd

1 eLVj jksy 7 iqjkuk yk;lsal uohuhdj.k QkeZ

2 ,e- ch- & 100 ist 8 ykftx gkml dh yk;lsal cqd

3 ,e- ch-& 50 ist m|ku foHkkx m|ku foHkkx m|ku foHkkx m|ku foHkkx

4 ,e- ch- & 25 ist 1 xkMZu dh jlhn cqd

5 ,e- ch- & 10 ist fofo/k fofo/k fofo/k fofo/k

6 Vs.Mj QkeZ & A 1 N.O.C. pDdh dusD’ku

7 Vs.Mj QkeZ & B 2 foKkiu gsrq vkosnu

8 Vs.Mj QkeZ & C 3 Vªd dulS’ku ikl

9 Vs.Mj QkeZ & F 4 isM+ks dks dkVus gsrq vkosnu i=

10 Bsdsnkjh gsrq iaft;u QkeZ Vksy VSDl Vksy VSDl Vksy VSDl Vksy VSDl

dV~Vh ?kj dV~Vh ?kj dV~Vh ?kj dV~Vh ?kj 1 Vksy VSDl dh jlhn cqd 50@&

1 jlhn cqd & oksnk HkSal 2 Vksy VSDl dh jlhn cqd 100@&

2 jlhn cqd & cdjk & cdjh 3 Vksy VSDl dh jlhn cqd 2200@&

Hkou vuqKk 'kk[kk Hkou vuqKk 'kk[kk Hkou vuqKk 'kk[kk Hkou vuqKk 'kk[kk

1 Hkou vuqKk QkeZ

2 i;Zo{k.k QkeZ

3 fcfYMax ijeh’ku lfVZfQdsV cqd

4 Lo% foÙkh; vkokl QkeZ

5 voS/k Hkouksa dks oS/k djus dk QkeZ

6 dkyksuh fodkl jftLVªs’ku vkosnu QkeZ

7 dkyksuh dh vuqKk QkeZ

okVj odZl okVj odZl okVj odZl okVj odZl

1 uy dusD’ku vkosnu

2 voS/k uyks dks oS/k djus dk vkosnu

26

27

APPENDIX – III (Referred to in Para 3.6.6 of Chapter 6 of Section 3)

List of Important Sections of Madhya Pradesh Munici pal Corporation Act, 1956, Rules and Bye-Laws Relating to Accounts and Audit

THE CONSTITUTION (SEVENTY FOURTH AMENDMENT) ACT 1992 Section 243 - X - Power to impose taxes by, and Funds of the Municipalities 243 – I & 243 -Y - Finance Commission 243 - Z - Audit Of Accounts of Municipalities

Madhya Pradesh Municipal Corporation Act 1956

S. No.

Subject Matter Section

1. Transfer of Liabilities 3

2. Power to acquire and hold movable and Immovable property

8

3. Non-payment of corporation dues by councillors and office bearers of the corporation (Non-Payment of Tax Rules)

26

----

4. Powers and special functions of commissioner 55, 69 (3) (4) & 383

5. Appointment and Conditions of service of corporation officers & employees (Service Rules 2000)

58

6. Employees not to be interested in any contract with corporation 59

7. Penalties, Extra Ordinary Pension, Re-employment, Vacation of Premises, Essential Services of Staff

60 – 64

8. Sanction of Expenditure 72

9. Contracts 73

10. Record of Immovable Property 83

11. Custody and destruction of record 83 A

12. Municipal Fund 86 – 93

13. Budget Estimate 94 – 101

14. Loans 102 – 124

15. Audit & Accounts (Accounts Committee Rules 2001)

125 – 131 A

16. Taxation (Govt. Orders dt. 24-06-1998)

132 – 134

17. Property Tax (Annual letting value of Buildings / Lands Rules) Govt. orders Dated. 30.07.1998 & 19.06.1998

135-172

18. Infrastructure Development Fund 163 A

19. Bills for Taxes 173-174

20. Power to remit fee 176

21. Fees & Costs Chargeable 182

22. Receipts to be given for all payments 186

23. Writing off Irrecoverable Taxes 187

24. Recovery of toll & cess on imports 188

25. Supply of water – cutting thereof 221-222 & 225

28

S. No.


26. Power to fix scale of charges for Water (Govt. Orders Dated 05.05.97)

240

27. Building Control 293-294

28. Compounding offences of construction of buildings without permission 308A-B

29. Powers of fire brigade and to make regulations 352-353

30. Licences & Permissions 366

31. Recovery of expenses 377-381 387-391

32. Punishment of Offences 434-440

Rules & Notifications

1. Minimum Cash Balance (Rules – 1974)

2. Additional Stamp Duty Rules

3. Remuneration & Allowances of Councillors Rules 1995

4. Recruitment and Conditions of Service of Shiksha Karmi Rules 1998

5. Registration of Colonisers (Terms & Conditions) Rules 1998

6. Assessment and Collection of Terminal Tax

7. Municipal Accounts Committee Rules 2001

8. Employment & Conditions of Contract Shikshak Rules 2005

9. M.P. Nagar Vikas Nidhi Niyam 2001

9. vpy laifÙk dk varj.k fu;e

Bye Laws to be made by ULB

S. No.


1. Authority on which money may be paid from Municipal Fund and the Management of Provided Funds

427(1) (c)

2. Preparation of estimates of Income & Expenditure 427(1) (e)

3. Manner in which accounts are to be kept - Powers of Auditors 427(1) (f)

4. By whom contracts may be executed security, estimate, acceptance of tender kind of works etc

427-1-H (a to e)

5. Person by whom payment may be made out of fund 427-1-I

6. Preparation of Budget estimates 427-1-L

7. Toll & Cess on imports – Mode of collection & assessment etc. 427-1-M (1)

8. Time & Mode of collection of taxes 427-1-M (2)

9. Assessment, Collection of Taxes 427-1-M (3) (a to d)

10. Registration of Births & Deaths 427(26)

11. Licensing of Theaters 427(27)

12. Construction of Buildings 427(28)

13. Charges for services 427(36)

14. Register of improvement charges 427(37)

15 Licences & Notices 427(41)

16. Penalties for Breach of Bye Laws 428

17. Permission to Borrow Money 433 (2) (a)

29

APPENDIX – IV (Referred to in Para 3.6.15 of Chapter 6 of Section 3)

List of Important Account Forms of MPMAM Relating t o Audit

S. No. Form No. Subject & Para No.

1 1 Cash Book (Para 2.1.1)

2 2 Bank Book (Para 2.1.2)

3 3 Daily Collection Details (Para 3.1.1)

4 4 Ward Wise Collection Summary (3.1.2)

5 5 Zone Wise Collection Summary (3.1.3)

6 6 Acknowledgment of Cash/Cheque Receive (Para 3.1.4) (Receipt Book)

7 7 Receipt Voucher (Para 3.1.5)

8 8 Contra / Bank Transfer Voucher (Para 3.1.6) (Deposit of Cash into Bank/ withdrawal of Cash from Bank / transfer from one bank to another)

9 9 Journal Voucher (Para 3.1.7)

10 10 Ledger (Para 2.1.3)

11 11 Cheques Received Register (Para 4.1.1)

12 12 Cheques Dishonoured Register (Para 4.1.2)

13 13 Notice of Demand (Para 3.1.8)

14 14 Self Assessment Property Tax Form (Para 3.1.9)

15 15 Demand Collection Balance Register (Para 4.1.3)

16 16 Payment Advice (Para 3.1.10) (Basis for recognising the amount payable and to pass journal entries to account accrual of liability - payable)

17 17 Payment Voucher (Para 3.1.11)

18 18 Cheques Issued Register (Para 4.1.4)

19 19 Register of Advances to Contractors (Para 4.1.5)

20 20 Register of Advances to Employees (Para 4.1.6)

21 21 Register of Permantent Advances to officers (For Official Purpose)

22 22 Register of Security Deposits (Para 4.1.7)

23 23 Register of Earnest Money Deposits (EMD) (Para 4.1.8)

24 24 Register of Retention Money (Para 4.1.9)

25 25 Register of Settlement of Contractor / Supplier Bills (Para 4.1.10)

26 26 Register of Settlement of Service Bills (Para 4.1.11)

27 27 Cheque Book Control Register (Para 4.1.12)

28 28 Land Register (Para 4.1.13)

29 29 Building Register (Para 4.1.14)

30 30 Statues and Heritage Assets Register (Para 4.1.15)

31 31 Roads and Streets Register (Para 4.1.16)

32 32 Bridges, Flyover, Subway & Causeway Register (Para 4.1.17)

30

33 33 Drains (Including Underground Drains) Register (Para 4.1.18)

34 34 Public Lighting System Register (Para 4.1.19)

35 35 Ponds and Lakes Register (Para 4.1.20)

36 36 Plant and Machinery Register (Para 4.1.21)

37 37 Vehicle Register (Para 4.1.22)

38 38 Office Equipment Register (Para 4.1.23)

39 39 Furniture and Fixtures Register Para 4.1.24)

40 40 Computers and Peripheral Register (Para 4.1.25)

41 41 Software Register (Para 4.1.26)

42 42 Investment Register (Para 4.1.27)

43 43 Inventory Register

44 44 Loan Register (Para 4.1.28)

31

APPENDIX – V (Referred to in Para 5.1.10 of Chapter 1 of Section 5)

AUDIT INSPECTION REPORT ON THE ACCOUNTS OF ____________ (ULB)

FOR THE PERIOD FROM________ TO ________

1. Introduction

The __________ (Name of ULB) was established in ____________ under ____________ Act, _________. The audit of the accounts of the ULB covering the period from _________ to _______ was conducted by Shri ______________ during __________ to ___________ Shri _________________ supervised the audit from ______________ to ______________.

2. Administration

The present body of the ULB has taken charge on ______. The incumbency in the key administrative and executive positions was as under:

Shri ______________, Mayor From _______ to ________

Shri ______________, Commissioner From _______ to ________

3. Review of outstanding audit paras of Inspection Reports (IR)

S. No. Period of IR Para No. Brief of the para Present Position

4. Status as on 31 st March ………………

4.1 Population ________________ (Census __________) 4.2 Area _________________

4.3 Area of parks and gardens ____________________ 4.4 Street Lighting _________

4.5 Water Supply

(a) Treated water :

(i) Capacity created per day __________

(ii) Actual supply per day _________

(b) Deep tube well:

(i) Estimated coverage per tube well ____

(ii) Number of tube well installed ______

(iii) Number of tube well defunct ______________

(iv) Date from which defunct _______________

(v) Number of arsenic affected tube well ______

(vi) Remedial action taken_________________

4.6 Drainage ______________

4.7 Sewerage _______

(Instructions: Where data / information is not available write not available supported by reasons furnished by the ULB).

32

5. Finance

5.1. Budgetary provisions and expenditure for the last three years

Year 200 --0 200 --0 200 --0 Total (Instructions: To be supported by annual financial statements indicating heads of account and signed by authority)

Final/Revised Budget

Actual expenditure(gross)

Savings(+) Excess(-)

(Instructions: Comments may be offered on the basis of preparation, rationality, excess / substantial savings under different heads of account, inadequate / nil appropriation, expenditure on new service, etc. with detail figures).

5.2. (a) Volume of transactions

Opening balance Receipts Total Net expenditure Closing balance

5.2(b) Bank reconciliation

(Instructions: Simply write “Reconciled and balances tallied” if reconciliation done satisfactorily. Report the difference in balances where they differ. In case, no reconciliation was done, mention in the IR).

5.3 Revenue Receipts for the last three years

Year 200 -- 0 200 -- 0 200 -- 0

(a) Own source

Budget estimates

Actual Budget estimates

Actual Budget estimates

Actual

Property tax

Water charge

Others

(b) Administrative grant

(c) Schemes

(d) Loan

State

Central

Others

(Instructions: Analysis of unrealistic estimates and non-implementation of schemes/projects due to inability in arranging estimated fund may be brought out in the IR).

5.4 Position of revenue realisation

Demand Realisation Closing Balance

Arrear Current demand

Total Arrear Current demand

Total Arrear Current demand

Total

Property tax

Water charge

Others

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5.5 Debt Service / loan position as on 31 st March ……………….

Opening Balance Addition Repayment Outstanding

Principal Interest Principal Interest Principal In terest Principal Interest

State

Central

Others

6. Comments on Accounts (Balance Sheet)

6.1. Comments on Accounts (Balance Sheet)

(Instructions: If Balance Sheet has not been prepared, make comments specifying the position of arrears of accounts with reference to provisions of relevant Act and reasons for delay. Where Balance Sheet / Balance Sheets of previous year(s) is / are furnished, please comment separately for each year. The copy of the balance sheet is to be appended to the IR).

7. Position of ongoing works

S.No Name of

work

Purpose (with

coverage)

Estimated cost

Date of commencement

Scheduled date of

completion

Expenditure incurred as on 31.03.0

Reasons for delay

Part II A

All Audit objections/irregularities having monetary value of Rs. 10 lakh and above

Part II B

All Audit objections/irregularities having monetary value less than Rs. 10 lakh.

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APPENDIX – VI (Referred to in Para 5.2.9 of Chapter 2 of Section 5)

GENERAL LAY OUT OF THE AUDIT REPORT Overview – Brief highlights of the important observ ations

Chapter I – General

Comments on the financial position of ULB in general terms will be included in this chapter. These comments should be preceded by a summary of the accounts of the ULB emerging from the Annual Financial Statements under the following headings.

I- Statement of financial position as at the end of the financial year. II- Abstract of Receipts and Disbursements for the year.

The audit comments will include brief paragraphs on ULB’s investments, if any, and guarantees.

Chapter II – Budgeting and Control over Expenditure

This chapter will deal with important comments arising as a result of study of budget and achievement their against. Wherever possible, comments on physical progress of projects / schemes / programmes in relation to the targets and actual expenditure may be included. Any other points establishing linkages between the budget and accounts in terms of policies and their effect may also be commented upon.

Chapter III – Civil Department

Irregularities and other points pertaining to expenditure incurred by various civil segments other than that on works, will be included in this chapter. The arrangement of activities in the chapter and of paragraphs under those activities may be decided keeping in view the importance of the individual paragraph and reviews.

Chapter IV – Works Expenditure

This Chapter will deal with observations arising out of the audit of woks expenditure.

Chapter V – Store and Stock Accounts

This chapter will contain a synopsis of important Store Account and also include points noticed in the course of audit of store and stock transactions. The audit emphasis should inter alia be on an assessment of the efficiency and effectiveness of purchase functions, systems followed in the ULB and arrangements for inventory control and management as a whole.

Chapter VI - Revenue Receipts

Results of audit of revenue receipts will be incorporated in this chapter.

Chapter VII - Outstanding objections and Inspectio n Reports

A review of the shortcomings in the system and procedures for prompt action on audit objections, etc, may be included in this chapter.

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APPENDIX – VII (Referred to in Para 5.2.13 of Chapter 2 of Section 5)

COMMENTS ON IMPORTANT POINTS IN AUDIT REPORT

Important points that can form the subject matter o f comments in Audit Report

1. Budgeting and Control over expenditure :

(a) Matters affecting the completeness or accuracy of the accounts. (b) Expenditure on services not duly authorised in the budget. (c) Expenditure not in accordance with the intentions of the ULB or the Government. (d) Expenditure on any object disapproved by the ULB or requiring its specific approval,

but incurred in its absence. (e) Any important item of expenditure incurred without necessary sanction or contrary to

a valid condition or restriction imposed by the ULB. (f) Expenditure incurred in excess of provision.

2. Revenues

(a) Actual realisation from the levy of additional or fresh taxes and duties in comparision to the forecasts in the budget.

(b) Disproportionate increase in recent years in the cost of collection of taxes. (c) Arrears and other irregularities in realisation of revenues. (d) Delays in notification of detailed rules for levy and collection of taxes and duties. (e) Efficacy of internal audit machinery and systems in the major revenue earning

segment and review of the results of internal audit. (f) Trends of realisation of extraordinary receipts and special features, if any. (g) Cases of remission of revenue and abandonment of claims. (h) Large claims that have been outstanding for prolonged periods.

3. Expenditure

(a) Expenditure not in conformity with the authority that governs it. (b) Irregularities connected with contracts. (c) Major items of extraordinary or apparently unnecessary expenditure such as :

(i) ex-gratia payments ; (ii) compensation paid for damages sustained ; (iii) payments in excess of amounts admissible under a statute, contract or rules ; (iv) payments necessitated by failure to enforce contractual terms ; and (v) irrecoverable advance payments made on account of services not rendered

ultimately. (d) Any uneconomical or apparently wasteful expenditure attributable to :

(i) execution of works without adequate investigation of their utility or feasibility ; (ii) execution of works by agencies not possessing the ability or facilities for

proper execution. (iii) physical achievements of schemes and projects not being commensurate

with the expenditure incurred ; and (iv) any other causes, and

(e) important cases or losses, write – off, nugatory or improper expenditure.

4. Debt. and Reserve Fund Transactions

(a) Debt position of the ULBs – A consolidated statement of debt may be presented and salient features such as the magnitude of debts, expenditure on debt servicing, amortisation arrangements, arrears in repayment, etc. may be highlighted.

(b) State of loan records.

36

(c) Acceptance and verifications of balances. (d) Deviations in utilisation of loan proceeds and from the stated objectives in support of

the borrowings and manner of application of borrowed funds not in conformity with sound and prudent principles of pubic finance.

(e) Review of Reserve Funds – Extent to which the objectives of the funds are fulfilled.

5. Grants – in – Aid

(a) irregularities connected with administration and utilisation of grants–in–aid. (b) overpayments and irregular payments.

6. General

This is not an exhaustive list of likely comments. The Auditors are to stretch their capacities to cover every possible area of the activities of the ULB and draw inferences as may be emerging in the course of audit.

37

APPENDIX - VIII (Referred to in Para 5.2.22 of Chapter 2 of Section 5)

AUDIT CERTIFICATE

I have examined the Receipt and Payments Accounts and the Income and Expenditure Account for the year ending 31st March, ________ and the Balance Sheet as on 31st march, ________ of the ________________ ____________. I have obtained all the information and explanations other than those mentioned in the Report, and taken in view of the accounting policies of the ____________ _________ as acknowledged by the State Government. Subject to the comments in the appended Report, I certify, as a result of audit, that in my opinion these Accounts and Balance Sheet exhibit a true and fair view of the state of affairs of the _______________ ________________ according to the best of information and explanations given to me and as shown in the books of the organisation

Place : ___________ (Sd/-)

Dated : ___________ Seal and Designation of the

Auditing Agency

38

APPENDIX - IX (Referred to in Para 6.1.1 of Chapter 1 of Section 6)

Training Module on Audit of Urban Local Bodies (ULB s)

Sessions at a glance

Day 1

Session Time Topic

1 10.30 hrs. to 11.45 hrs.

Historical perspective of ULB: Evolution of Municipal Corporations in India; Enactment of constitutional provisions.

2 12.00 hrs. to 13.15 hrs.

Constitution and Organisation of ULBs and Powers and Functions of ULBs.

3 14.15 hrs. to 15.30 hrs.

Audit of Municipal Fund, Special Fund, Grants and audit points.

4 15.45 hrs. to 17.00 hrs.

Audit of Loans borrowed by ULBs; its accounting system; sinking fund, and audit points. Audit exercises for session 2,3 and 4.

Day 2

Session Time Topic

5 10.30 hrs. to 11.45 hrs.

Budget of ULBs and audit points.

6 12.00 hrs. to 13.15 hrs.

Audit of Taxation, Fees and Cess; their accounting system and audit points.

6 14.15 hrs. to 15.30 hrs.

Continued

6 15.45 hrs. to 17.00 hrs.

Continued Audit exercises for session 5 and 6.

Day 3

Session Time Topic

7 10.30 hrs. to 11.45 hrs.

Accounting system of ULBs; understanding accrual system of accounting; accounting principles; codification structure in ULB accounting system;

7 12.00 hrs. to 13.15 hrs.

Continued

7 14.15 hrs. to 15.30 hrs.

Public Works and its accounting system; Store and its accounting system; Health and Sanitation and its accounting system.

7 15.45 hrs. to 17.00 hrs.

Reconciliation procedure; financial statements. Audit exercise

39

Day 4

Session Time Topic

8 10.30 hrs. to 11.45 hrs.

Familiarisation with schemes

9 12.00 hrs. to 13.15 hrs.

Information Technology Audit in ULBs

10 14.15 hrs. to 15.30 hrs.

Internal Control.

11 15.45 hrs. to 17.00 hrs.

Duties and Powers of Auditor, Auditing Standards.

Day 5

Session Time Topic

12 10.30 hrs. to 11.45 hrs.

Environment Management and Social Audit.

13 12.00 hrs. to 13.15 hrs.

Important Observations raised in Audit Reports of Different States

14 14.15 hrs. to 15.30 hrs.

Evaluation test and submission of feed back form.

15 15.45 hrs. to 17.00 hrs.

Valediction.