Friday 21 January 2011
KERALA COOPERATIVE AUDIT MANUEL VOLUME I PART I CHAPTER V
VOUCHING OF PAYMENTS
1.General :- (Propriety of expenditure etc.)
(i) After vouching the receipts side of the Day book, the auditor has to take up checking of entries in the payment side. It is his duty to ensure that every payment made is genuine,coretect, proper and duty authorised and also supported by a valid documentary evidence viz. a voucher. Documentary evidence for payment will generally consist of acknowledgment of the payee, receiving the amount, Cash bills, etc. In vouching a payment a payment item in the day book, the auditor has first to examine the relative voucher. The name of payee, date, amount and other particulars in the voucher should be compared with the corresponding entries in the Day book. The object of scrutinising the date is mainly to guard against the production of vouchers of previous months/years in support of fraudulent payments. The receipts from payees in their printed receipt forms and those bearing their rubber stamps are better evidences than an invoice or document merely receipted in ink or typewritten.
In addition to the regular voucher containing acknowledgment of the payee, the auditor has to examine other documentary evidences also such as minutes correspondence files and records of transactions etc. Therefore, before commending vouching, the auditor has to get himself familiarised with the nature of supporting evidence that would be available to him and the types of documents that will have to be examined in connection with the payment.
(ii) Points to be noted while checking payments :- (a) The voucher should have been addressed to the society itself and not in the personal name of the Secretary, Managing Director, Chairman, or other Officers.
The nature and purpose of the transaction to which the payment relates, should be one which the society is normally expected to carry on as per in bye laws.
(b) The vouchers should be properly authenticated by the authorised officers of the society.
(c) Where payment has been made to an officer representing an institution the voucher should bear the rubber stamp of the institution.
(d) Where payment has been made to a person other than the payee, a valid letter of authority from payee should be obtained and filed.
(e) All payments in excess of Rs. 20 should have been duly stamped.
(f) The vouchers should have been properly checked as regards arithmetical accuracy of the amount and propriety of the payment by a responsible officer of the society.
(g) All thump impressions should have been properly described and attested.
(h) All vouchers should be cancelled by the Auditor when he checks and passes entries in his audit. This is to prevent their production once again in support of a subsquent fraudulent or fictitious payment. Either a rubber stamp bearing his name should be used for the purpose or the voucher should be initialed by the auditor in a prominent place, preferably in the middle.
It is necessary that all payments should have been regularly sanctioned by the committee or an officer properly authorised to do so. When the Managing Director, Manager or Secretary is authorised to sanction payments or incur expenditure, it should be seen that these officers do not exceed their authority. Resolution of the managing committee or the general body will have to be seen in the case of payments which are beyond the powers of the officer concerned. All extraordinary expenses which are incidental to the business of the concern or connected with any of its activities should have been sanctioned by the general body. Even in such cases their legality and propriety will have to be further examined. Again, purchases of immovable properties and investments of funds outside-the business of the society which the Board or Committee is not competent to sanction, should have been sanctioned by the general body.
So also where the Secretary or the office bearer who is authorised to incur the expenditure upto a specified limit, all expenditures incurred by him and all disbursements made by him should be placed before the committee periodically for its approval.
2. What is Capital and Revenue Expenditure :- Capital expenditure means money spent on acquiring fixed assets or expenditure which tends to extend or improve the existing assets so as to enhance the revenue earning capacity of the business.
Revenue expenditure means expenditure incurred for carrying on the business and in maintaining the capital assets in a state of efficiency.
The correct allocation of expenditure between capital and revenue calls for the careful examination of the auditor; as it will affect the profit and loss account and Balance Sheet. Wages paid in the ordinary course of business, represents revenue expenditure. But when wages are paid for erection of building etc. they will be of capital nature.
Similarly, legal fees paid is normally a revenue expenditure but when it is paid for conveyance of the title deeds or in connection with acquisition of property it will come under capital expenditure.
When a new construction/additional work is taken up, the expenditure incurred is first debited to the advance account and then transferred to the capital head.
Improper treatment of expenditure between capital and revenue will have far reaching results on the accounts. If a capital expenditure is debited to the profit and loss account, that item will not come in the asset side of the balance sheet thus creating a secret reserve and reducing the profit or increasing the loss to that extent.
The distinction between Capital and Revenue Expenditure most vitally affects the fundamentals of accounting. It is highly essential, that proper adjustment of these items must receive close and careful attention at the time of preparation of final accounts. As such in constructing the final accounts all revenue items would have to be included in the Revenue Account i.e. Profit and Loss account and all items of capital Expenditure will form part of the Balance Sheet. It follows that the distinction would need to be most rigidly observed, in as much as, any incorrect adjustment of allocation in this behalf would falsify the final results as disclosed by both the P & L account and the balance sheet.
All expenditure for acquisition of permanent assets and which is intended for continuous use in the business of the society earning revenue is Capital expenditure. Again any expenditure which tends to extend for improve the existing assets so as to enhance their revenue earning capacity by increasing production or reducing cost of production may rightly be treated as Capital Expenditure.
All expense under Establishment and other expenses incurred in connection with the business of the society come under the heading of Revenue Expenditure. Further all expenses under repairs, replacements, renewals of existing assets, which do not in any way add to their earning capacity but simply serve to maintain the original equipment in an efficient working order are chargeable to revenue. Thus, office salaries, rent, taxes, insurance, advertising and the expenses incidental to the carrying on of a business as also amounts expended on repairs to assets forming part of permanent equipment would be treated as items of Revenue Expenditure.
It is important to note that where as all items of Capital Expenditure will be included in the Balance Sheet, all Revenue items will find their place in the Revenue account, i.e., the profit and loss account.
(b) Deferred Revenue Expenditure :- When heavy expenditure of a revenue nature, such as exceptional repairs, expenses on removal of business, or abnormal advertising, is incurred, it is customary and legitimate not to charge the whole of such expenditure to the Revenue Account of the year in which it is incurred, but to spread it equitably over the number of years during which the benefit of such expenditure is likely to be felt. A proportion of such expenses is then written off in the profit and loss account each year and the balance not written off will appear on the assets side of the Balance Sheet under the heading of “Deferred Revenue Expenditure”. The whole underlying idea is to see that each year’s profit and loss account is charged only with expense that can fairly be attributed to that year. The following pre-operative expenses are to be treated ad Deferred Revenue Expenditure.
(ii) Rent, rates and taxes.
(iii) Trading expenses.
(iv) Legal charges.
(v) Postages, telegrams, telephone etc.
(vi) Printing, stationery and advertisements.
(vii) Miscellaneous expenses.
3. Vouching of Capital and Revenue expenditure - Apportionment :- The apportionment of expenditure between capital and revenue is of vital importance, as a wrong allocation, will directly affect the amount of profit or loss and the correctness of the balance sheet. Where the expenditure is incurred for capital items, the expenditure on that account can be vouched during the course of examination of the cash book, or purchase register. All capital expenditure incurred should be properly authorised. The resolution of the committee Board authorising the purchase should be seen. In the case of farming societies, the expenditure incurred for developing land, construction of bunds and providing irrigation facilities, should be debited to deferred revenue expenditure. In housing societies the expenditure incurred for the development of land including construction of roads, drainage, provision for electricity and water should be capitalised. Expenditure incurred by newly organised societies, upto the date of commencement of trading may be allowed to be capitalised. In the case of processing and manufacturing societies, the entire expenditure incurred including financial charges up to the date of commencement of manufacturing activities may be capitalised.
4. Lands and buildings - Construction of building :- In the case of erection of a new building the title deeds of the land on which the building is constructed the agreement of the contractor, and the certificate from a qualified engineer must be verified. Where buildings are purchased the agreement of the sale of properties/building, conveyance and title deeds and other records should be verified. On the other hand, if the building purchased is in the course of construction, the buildings account, running bills and receipt and certificates of the architects or qualified engineers, should be verified.
5. Plant and Machinery :- Where plant, machinery, furniture etc. have been newly acquired, invoice and receipts will be verified. Enquiry should be made to ascertain whether there is proper authorisation for the expenses. It should be seen that the expenses incurred in connection with the repairs, and maintenance are not added to the asset. However, the cost of direct expenses which are incurred in connection with the acquisition, like cartage, or cost of erection can be capitalised.
6. Investments :- Payments for the purchase of shares, securities etc. should be vouched with the broker’s bought note, share certificates, bonds etc. The auditor should also verify whether the investments have been made in accordance with the provisions of the Act, Rules and Byelaws.
7. Loans to members :- The auditor should verify the loan applications, security, if any, offered, sanction of the loan, bond executed, acknowledgment etc. If the loan is advanced against mortgage he should examine the mortgage deed, title deed and legal opinion.
8. Salaries and commissions :- The payment of salaries can be vouched with reference to the appointment file, acquittance roll, and with the order sanctioning the increments or allowances, if any. The auditor should also verify whether the incumbent in each post possesses the required qualifications and satisfies other conditions stipulated the service conditions of employees. Total salary paid during a month should be compared with the account paid in the remaining months. Reasons for any abnormal increase or decrease in the total amount disbursed as salary should be duly enquired into and satisfactory explanations obtained.
9. Travelling expenses :- Rules should be framed regulating payment of travelling allowance, Daily allowance etc., to the employees and office bears of the society. The expenses incurred for payment of travelling allowances, are not usually passed with vouchers alone. The person incurring the same should have preferred the claim in accordance with the prescribed rates and within the limit fixed in the Rules. The auditor can pass the voucher if it is in accordance with the Rules.
10. Postage :- The cost of revenue stamps purchased is not included in postage charges. Postages are small amounts, but they provide ample scope for misappropriation, if no efficient internal check on the same exists. The entries in the postage book should be examined with the despatch register. The amounts drawn from the petty cashier by the despatch clerk should be verified and the balance on hand counted. The auditor should also ensure that some one responsible checks the postage account daily. For payment on postage under paid, not paid envelopes etc., the envelope/cover/wrapper on which the dues is marked should be seen. Similarly for V.P.P. charges the original wrapper on which the amount is mentioned, should be see. For payment of registration charges of articles sent by registered post, the Post Office issues separate receipts.
11. Management expenses :- Rule 48 of the Rules authorises Registrar to fix the maximum rates of travelling allowances and daily allowances or sitting fees payable to the member, and committee members for attending the general body or committee meetings. Accordingly Registrar has fixed the T.A.,D. A. etc. payable to the Directors of different categories of societies. Since fees to the committee members are payable for attending meetings, it is necessary that an attendance register is maintained in the society marking their attendance the meeting and duly authenticated by the President/Chairman. Payment made to the Directors should be checked with reference to the Attendance Register also.
12. Conveyance charge :- When vehicles owned by the society are used by the Committee members or members of staff, no conveyance charges need by paid to them.
13. Maintenance charges of vehicles :- All Co-operative Societies which possess trucks, motor cars or jeeps, should maintain log book and trip sheet for each vehicle in the prescribed form in order to record details of each operation. The societies must have also framed necessary sub-rules, for the operation of the vehicles. The Rules should provide for the recovery of charges for private use of the vehicle. For each journey, duty slips should be issued to the driver. The person who had travelled in the vehicle should sign either in the Log book or in the duty slip.
Separate accounts are to be maintained for each vehicle for recording the expenses over its maintenance and repairs. The auditor should verify whether the expenses are reasonable and whether the society has limited the expenses within the budget allotment. He should also see whether monthly statements of expenditure incurred over the maintenance of the vehicles are prepared and submitted to the committee for approval. A register of unserviceable parts like tyres, tubes, spare parts etc., should also be maintained.
14. Expenses over maintenance of guest houses :- Every society/bank which possesses guest rooms should frame necessary sub-rules and obtain approval of Registrar of Co-operative Societies for letting there out. A registrar showing the name and address of the occupant, date and time of arrival and departure, charges, if any, recovered from them etc, should be maintained. The auditor should verify and ensure that the rates as prescribed in the sub rules are recovered from the occupants of the guest room, when let out. He should also see whether the expenses incurred over the maintenance of guest rooms is reasonable and limited to the budget allotment.
15. Payment of honorarium :- Payment of honorarium or remuneration to the members of the committee is governed by Rule 49 of the Rules under the Act. There should be provision in the byelaws permitting the payment and also scale of payment. Honorarium or remuneration can be given to the members of the committee based on the extend of business done by such members to the society or on the value of services rendered by them to the society. The extent of such remuneration is to be fixed by the general body, by specific resolution, and got approved by the Registrar.
16. Donations:- The auditor should see that provisions under section 56 (2) (d) are scrupulously followed in giving donations. Ordinarily donations are to be made only for purposes defined in the Charitable Endowments at 1890. If payments are made for purposes other than those provided in the Charitable Endowment Act, it should be made only from the Common Good Fund/Charity Fund created for the purpose. If such a fund is not maintained by the Society, donation should be debited to suspense or sundry debtors account in the first instance and then shown as recoverable. This can be written off against common good fund/charity fund when such a fund is created out of net profit in accordance with the byelaws.
17. Electricity and water charges :- Payments on account of electricity and water charges are to be checked with reference to the monthly bills issued by the competent authority. The receipted bills themselves would serve as vouchers, for payment made on this account, as no other receipts are generally issued. When expenses are incurred for delayed payment, the auditor should enquire about the reasons for penalty etc. and decide according to merits.
18. Telephone charges :- Registrar of trunk calls noting private calls also has to be maintained in respect of each phone. The expenses incurred should be checked with the monthly or quarterly bills issued by the Posts and Telegraphs Department. The bills of trunk calls can be checked with the ‘Trunk Call Register’. Charges for private calls should be realised from the parties making the calls.
19. Printing charges :- When printing of forms, bills etc. is to be executed on a large scale, the auditor should see that, in placing orders for printing, the society has observed the normal cannons of financial propriety, such as inviting of quotations and accepting of the lowest one etc. If on any reason the lowest tender/quotation is not accepted, the reason for the same has to be recorded. Payment for printing should be made only for the completed item of work and on delivery of printing materials. Payment on this account can be checked with reference to the bills received from the printing press. An inward register should be maintained for the receipt of items from the press. The stock register of forms or bills can be prepared with the help of the inward register. Issues and consumption of stationery article should have been properly controlled. The accounts of stationery and printed materials should have been maintained and checked by a responsible officer at frequent intervals.
20. Payment of Insurance Premium :- A register of insurance policies, showing the particulars of assets insured, risk covered, policy number, period, date of expiry, premium paid, claims preferred etc. should be maintained. The payment made can be checked with the receipt issued by the insurance company acknowledging the payment. The amount of premium paid has also to be gathered from the concerned Insurance Policy or the cover note.
21. Advertisement charges :- Newspaper cutting of the advertisement and the bill received from the press should have been attached to the voucher. The date or dates on which the advertisement has appeared in the paper and as mentioned in the bill, should be checked with the press copy received.
22. Vouching of Petty Cash book :- In large undertakings, for recording small payments of Sundry nature, a petty cash book is usually maintained. A round sum, sufficient to cover the estimated petty expenses for a definite period, should be handed over to the Cashier. Petty cash should be kept on the imprest system. Only payments upto a specified limit should be made from the petty cash. The petty cash book along with the vouchers should be produced to the officers concerned to issue cheques for reimbursement. He should sign the petty cash book in token of having checked and approved the payments made. The auditor should check the receipt of money by the petty cashier with the cash book.
For payments made from the petty cash, proper vouchers should be maintained. The vouchers should be arranged and serially numbered. These vouchers should be duly cancelled at the time of re-imbursement of petty cash. In cases of petty expenditure, (like tea, cigarette, etc.) for which it is difficult to obtain proper voucher, a slip signed by any responsible officer of the institution may be accepted.
The auditor should test check the castings and postings and entries relating to the cheques drawn into the petty cash book. He should see that the petty cash book is signed by the petty cashier. Occasionally and without notice, he should count the cash in hand. Surprise checks will be useful to bring to light any misuse of petty cash.
23. Vouching of Bank Account :- The receipts from Bank and the payments into it have to be vouched with reference to the Pass Book. Payments into the Bank should be vouched with the counterfoils of the paying-in-slips. Payments made by certain customers direct into the society’s account in the Bank, can be checked with the advices received from the Bank. Payments out of the Bank can be vouched with the counterfoils of cheques issued. Payments of Bank charges, commission, interest etc. can be checked either by means of entries in the pass book or by the intimations received.
The auditor should not simply satisfy himself with the balance as disclosed by the Pass book, since it is likely that dummy pass books might be produced to him for checking. Therefore he should obtain direct form the bank a confirmation certificate of the balance shown in the books of the Bank as on the closing date of the period.
24. Payment of advances :- Members of the staff and office bearers of the society are given advances for various purposes, such as for purchases, and also for meeting their expenses in connection with official work. Very often advance payments have to be made for services rendered, for works to be executed, for supplies to be made etc. Payment of reasonable amount of advances for genuine purposes and in the normal course of business of the society is to be admitted in audit. The vouchers in support of advance payments should be descriptive of the purpose for which advance is made. As far as possible all advance payments should be adjusted with in a reasonable time. When advances are taken for making purchases or for meeting the expenses in connection with the travel, such advances are to be adjusted immediately after return to the headquarters. Advances given without authority or for unjustifiable purposes should be objected in audit. Such objected items should be shown in audit as recoverable from the persons responsible.
The auditor should prepare a list of all long outstanding advances on the date of audit and should enquire into the reasons for failure to recover the amounts.
25. Refund of shares :- While checking refund of shares, the auditor should ensure whether the refund has been made in accordance with the provisions under the Act, Rules and the byelaws of the society. When refund of shares is made the society has to get book the share certificate issued to the member and the same attached to the voucher after cancellation. In the case of refund of shares consequent on the resignation of membership, the resolution of the committee accepting resignation and allowing refund of shares should be verified. The auditor should also check the entries in the share ledger. In the case of refund of shares and consequent cessation of membership, the fact should be recorded in the share ledger with the dated initials of the auditor.
26. Refund of deposits :- (i) Fixed Deposits :- Before refund of the Fixed deposit, the fixed deposit receipt issued while accepting the deposit should be called back and got discharged. In cases where no separate receipts are issued for fixed deposits, the original receipt issued for the deposit should be called back and a separate voucher obtained for the refund of the deposit, with interest. The original receipt obtained bank should be cancelled and attached along with the voucher.
(ii) Savings deposits :- Even though there is provision in the byelaws of agricultural Credit societies, to accept savings deposits, only a few societies have been mobilising deposits. For payment of saving deposits withdrawal form should be supplied to the depositors and their signatures obtained thereon, in the presence of independent witnesses.
27. Payment of interest on deposits and loans :- Interest paid on deposits should be checked with the particulars furnished in the deposit ledger/voucher. Usually the deposit receipts contain provision for recording payment of interest on deposits. If provision is not made on the deposit receipt itself for acknowledging interest, separate vouchers should be obtained from the depositor, indicating full particulars of deposit, interest secured, period in respect of which interest is paid etc. Interest on Savings Bank Accounts is usually credited to the account of the depositor and added to the principal. Therefore, for payment of interest in respect of Savings Bank Accounts, separate vouchers are not necessary.
With regard to the payment of interest on other borrowings such as Bank loans, cash credit etc. The bank will debit the interest to the account of the society, either half yearly on 31st December and on 30th June or yearly. The Bank usually sends advice slips to the society when interest is debited to the account. For checking payment of interest the auditor can make use of these advice slips and Bank Pass Books.
28. Payment out of profit :- (i) Dividend :- The auditor has first to verify whether general body has authorised the Payment of dividend. Dividend has to be paid in accordance with the provisions in the byelaws of the society. If dividend warrants are not issued, separate vouchers should be obtained from the members indicating the number of shares held, the period for which shares are held, and the rate of dividend. The dividend register can also be checked to ensure the correctness of calculations.
(ii) Bonus :- Buns payable should be checked with the entries in the bonus paid register. If bonus warrants are not issued, separate vouchers specifying details of bounds paid should be maintained. As regards payment of bonus or rebate on purchases from or sales made through the society, a register showing particulars of the purchases made from the society or sales made through it and the rate at which bonus or rebate is paid or amount earned etc. should be maintained. In the case of bonus payable to the staff members of the society, the auditor has to verify whether payment has been made in accordance with the provisions of the Act, Rules and Byelaws and the instructions of the Reserve Bank of India.
(iii) Common good fund :- Contributions from common good fund are made only for purposes mentioned-in the charitable Endowment Act such as Medical relief, sanitation, Co-operative propaganda, maintenance of library education and relief to poor.
29. Refund of Suspense accounts :- Amounts credited to suspense account or Sunday Creditor’s account are to be repaid only on getting proper vouchers indicating the particulars of the original advance. While refunding the amount, the original receipt, if any, issued at the time of receipt of the amount, should be called back and attached to the voucher duly cancelled. If the party signs on the back of the original receipt as having discharged the claim, separate voucher may not be insisted on.
30. Repayment of Bank loans cash credit and overdrafts :- Repayment of Bank loan can be checked with the paying-in-slip issued by the bank. These slips usually indicate separately the amounts paid under principal and interest. In cases where Bank loans are adjusted from the balance standing to the credit of the society under current account, payments can be checked, through the entries in the pass book and the advice slips of adjustments.
Cash credit and overdrafts are generally operated by means of cheques. Repayment of cash credit/overdraft and other advances received from the Bank are checked with counterfoils of paying-in-slips and the entries in the pass book or by means of the statements, if any, issued by the Bank.
31. Contingencies :- Payment of rent, rates and taxes.-Payment of land revenue, rent, taxes and other fees to Government and local authorities has to be checked on the receipts issued by the concerned authorities. In the case of lands held on lease, the payment rent has to be checked with the lease deed and the receipt issued by the land lord. It should also be seen that all the terms and conditions of the lease deed are properly complied with. Where payments are made into the Treasury, the receipted chalan can be checked. Hiring of premises and approval of rent or compensation should have been sanctioned by the committee. Deposits and advances paid towards rent or compensation should have also been sanctioned by the committee. The audit should also see the terms and conditions of repayment of those advances.
32. Miscellaneous :- General charges, office expenses, affiliation fees, provident fund etc.-Every expenditure should be covered by sanction of the general body. The expenditure incurred under each item should be within the budget allotment. In the case of amounts payable at regular intervals the scales have to be fixed by the managing committee. In the case of other expenditure, it should be incidental to the business of the society. The scales may very in accordance with the business of the society, and the importance of the occasion.
The expenditure over publicity, advertisement etc. should have relation to the expected increase in the volume of business also.
33. Expenses to be objected in audit :- The auditors should object the following expenditure despite the fact it is covered by sanction to the committee or any other authority.
(i) Expenses which are not incidental in the ordinary course of business.
Eg. Personal expenses of directors, officers and employees of the society.
(ii) Abnormal expenditure over publicity, propaganda, advertisement etc.
(iii) Expenses which could have been avoided in the ordinary course of business.
(iv) Expenses which are considered heavy and disproportionate, considering the size of the institution and importance of the occasion.
(v) Fraudulent, false or fictitious expenses.
The auditor should prepare a list of all objected expenses and attach them with the audit certificate/note with his definite observations and reasons therefore. If required, the auditor may discuss the matter with the committee of the society and suggestions made to recover the amount involved from the person responsible. If no action is taken by the management the auditor should specify the same in the audit report.
34. Checking of journal :- All those entries which cannot be passed through any other book of prime entry are passed through the journal., While vouching, entries in the journal or in the cash book, the auditor should not pass an entry in the journal until he is quite satisfied of the correctness and validity of the transaction. The following transactions are usually passed through the journal.
(i) Opening entries.
(ii) Transfers from one account to another.
(iii) Adjusting entries, such as making provision for bad and doubtful debts; outstandings, prepaid expenses, depreciation, rectification of errors and interest on capital.
(iv) Entries relating to depreciation, writing off of losses, preliminary expenses, deferred revenue expenses.
(v) Appropriation of profits.
(vi) Entries relating to issue and allotment of shares.
(vii) Forfeiture of shares.
(viii) Allocation of expenses between capital and revenue and amongst the various departments of business.
(ix) Entries relating to consignments, dishonour of bills etc.
(x) Closing entries i.e. transfer from the nominal accounts to the profit and loss account.
When transfer entries are passed through the cash book itself, both the debit and credit entries should be seen simultaneously. In order to distinguish the contra entries from other entries, such contra entries should be marked with the special tick. Since contra entries also create monetary obligations, they are as important as cash transactions. Therefore, the auditor should give due attention while checking these contra entries.
35. Repayment of loans to Government :- Repayments of Government loans are to be vouched with reference to the receipted chalan issued from the Treasury. The auditor has to ensure whether the principal and interest have been remitted to the correct. Head of account by means of separate chalans. While vouching the payment, the auditor should satisfy himself that the chalan produced bear the place, number and seal of the Treasury, amount remitted, head of account, purpose and date of remittance etc. and authenticated by the Treasury Officer or other Competent authority.
36. Expenses out of :- (i) General Funds :- Without the previous sanction of the registrar, societies shall not incur any expenditure which is not directly connected with the business or management of the society. So the auditor should see that any expenditure not being directly connected with the routine business or management of the society should have the sanction of the general body and or of the Registrar. If it lacks sanction of the competent authority it should be kept under objection in audit.
There may be other miscellaneous expenses like, payment of advances, execution fees, remuneration to clerical staff etc. In all these cases, the auditor, apart from verifying the vouchers should decide each case accounting to the circumstances and satisfy himself of the genuineness of the expenditure.
(ii) Reserve Fund :- A Reserve Fund may be defined as a sum set aside out of divisible profits and retained in order to provide for unexpected or unknown future losses or to strengthen the financial position of the concerns.
37. Auditor’s duty in regard to the audit of Reserve Funds :- (i) He should check that the amount set apart from the net profit is in accordance with the rate prescribed in the Kerala Co-operative Societies Act/Rules/Byelaws and the appropriation is authentic.
(ii) He should check that the amount set apart to the Reserve Fund and Agricultural Credit Stabilisation Fund together forms not less than 40 percent of the net profit, in respect of societies that are to maintain the later fund.
(iii) He should check that appropriation of net profit to the Fund has been properly transacted in the books of accounts.
(iv) He should check that the Reserve Fund has been properly invested and that any amount utilized in business or invested otherwise, has necessary sanction of the competent authority.
(v) In the case of societies, which have not distributed its profit in respect of a particular year, by the close of the subsequent year, or till the date of finalising the audit of the subsequent year, the auditor may set apart the required minimum amount to the Reserve Fund from the net profit after making necessary entries in the Books of Accounts of the societies concerned and in such cases the amount of undistributed profit in the balance sheet should be shown in the balance sheet with the following details.
Profit for the year :
Less amount set apart to Reserve
Fund and Education Fund, Agricultural
Credit Stabilisation Fund
(vi) He should also check the regularity of any set off Reserve Fund of towards payment of any debt or outstanding demand with reference to section 38 of the Kerala Co-operative Societies Act and rule 61 of the Rules thereunder.
(vii) In respect of Reserve Fund allowed to be utilised by the society on the basis of sanction of Registrar, the auditor should verify as to whether that portion of Reserve Fund withdrawn or allowed to be utilised has been utilised for the purpose for which it is allowed.