KERALA COOPERATIVE AUDIT MANUEL VOLUME I PART I CHAPTERS I&II

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PART I

CHAPTER I

GENERAL

1. Introduction :- The last two decades witnessed a rapid growth and vast expansion in the activities of Co-operatives in the State. There was a steep rise in the number of co-operatives of different types as well as marked diversification in their activities and substantial rise in their business operations.

The State Government was always patronising Co-operatives with liberal financial assistance like share capital, loans, subsidies, guarantees etc. In due course, the State acquired heavy financial interest in the working of Co-operatives. Therefore, the Auditors of the Department have to shoulder added responsibilities for safeguarding the interest of the State also. They have also to ensure that Government funds are properly utilised by the Co-operatives. All these necessitated that the Auditors should equip themselves with the required knowledge so that they can perform their duties with due skill and diligence.

Over a period of years, the techniques of accounting have also under-gone through changes and developed considerably. Therefore, the Auditors have to assist and guide the societies to maintain systematic accounts and also in introducing latest techniques, practices and procedures in accounting. This, required that the Auditors should have a through knowledge of the latest developments in Accountancy and Book-keeping.

Of late, with the emergence of a variety of Co-operative institutions like Sugar Factories, Spinning Mills, banks, housing societies, dispensaries, group hospitals, autorickshaw societies etc. the Auditors have to audit complicated transactions. This required practical and authoritative guidance on many important points. Thus, the need for a comprehensive handbook giving practical and useful guidelines in the day-to-day performance of the Auditors’ duties, was keenly felt. This Manual is an attempt towards that end. This manual will be of considerable assistance in the task of equipping those engaged in Audit and management of Co-operative institutions with a knowledge of co-operative auditing.

2. Objectives of the Manual :- The objectives of the Manual are:-

(i) To serve as a ready hand book of practical guidance to the Auditors of Co-operative Societies and to those who are responsible for maintenance of accounts.

(ii) To serve as a certified hand book of Department instructions relating to co-operative accounts and audit, and

(iii) To help to improve the quality of audit work and to maintain a high standard of audit.

3. Scope of the Manual :- In this manual, an attempt has been made to bring out the general principles and practices of audit and the procedure to be followed during the course of audit with special reference to the various Departmental Circulars and instructions issued by the Registrar from time to time. The procedure to be adopted in auditing the accounts of different types of co-operative societies, is also mentioned in the Manual. Besides explaining the general procedure of work, such as verification of cash, verification and valuation of assets and liabilities, examination of business transaction etc. the methods to be followed in assessing the operational efficiency, financial soundness and co-operative character of different types of co-operatives are also dealt with. Necessary instructions are also incorporated to ensure uniformity in drafting the audit reports, preparation and submission of special reports summary of defects filling in the schedules and other accompaniments to the audit note, preparation of audit programme, charging of depreciation, creation of reserves, Audit Classification etc. Wherever possible legal decisions relating to audit are also quoted. Every effort has been made to make the manual exhaustive wherever possible.

4. Audit - Definition :- The word “audit” is derived from the Latin word “Audire” which means “to hear”. In the middle ages whenever the owner of a business suspected fraud he appointed certain persons to check up the accounts. The details of the transactions were narrated to a third party who, by hearing, tested the correctness of accounting. The evolution of the principles of double-entry book-keeping which was first published in 1494 in Italy, gave a filling to the growth of the science of auditing.

Spicer and Pegler have defined audit as ‘such an examination of the books, accounts and vouchers of a business as shall enable the auditor to satisfy himself whether or not, the balance sheet is properly drawn up, so as to exhibit a true and correct view of the state of affairs of the business, according to the best of his information and explanation given to him and as shown by the books, and if not in what respect it is untrue or incorrect”.

Audit in its general sense is an intelligent and critical examination of accounts of a business and verification of correctness of accounts with relevant documents for the purpose of ascertaining the financial position of the business at the end of a particular period, by an independent agency. Audit is not a mere verification of records maintained, but involves also an  exhaustive verification of supporting vouchers and documents to ensure that the entries in the books themselves have been correctly made so as to form a true record of the transactions. The concept of audit has come to mean “such a close and careful examination of the account books, documents and other records of a business or other organization as shall enable the Auditor to satisfy himself whether or not the Balance Sheet and the profit and loss account have been properly drawn up, so as to exhibit a true and fair view of its financial operations”. An audit may therefore be described as a of its financial operations”. An audit may therefore be described as a “critical examination by an auditor, of the documentary and other evidence from which the profit and loss account and the balance sheet of an organisation have been drawn up, in order to enable him to report that they present a true and fair view of the summarised transactions for the period under review and of the financial position of the organisation as at the end of the period.

Section 63(2) of the Kerala Co-operative Societies Act 21 of 1969, lays down that ‘audit shall include an examination of overdue debts, if any, the verification of the cash balance and securities, and a valuation of the assets and liabilities of the Society”.

5. Main objects of audit :- The main objects of audit are :

(i) To detect clerical errors and errors of principle.

(ii) To detect fraud, if any exists and.

(iii) To prevent fraud and errors.

(iv) To ascertain a true and correct state of affairs of the institution/organisation.

1. Detection of errors :- Errors are generally innocent. But sometimes errors which might appear at first sight innocent, are ultimately found to be due to fraudulent manipulation.

Errors can be classified into the following groups:

(a) Errors of omission :- This arises when a particular transaction is omitted from entry either wholly or partly in the books. Eg:

(i) The rent for last month of the year and not shown as due.

(ii) An item of credit purchase omitted to be entered in the purchases day book.

(b) Errors of commissions :- An error of commission arises as a result of incorrectly recording a transaction either wholly or partly. In the case of whole omission, the Trail Balance will not be affected. In case it is partially and incorrectly, recorded, the result will be that the Trial Balance will be affected to that extent. Ex:-

(i) Credit sales for Rs. 400 wrongly entered in the sales day book as Rs. 450.

(ii) Rs. 250 received on A’s account wrongly posted in debit side of A’s account.

(c) Compensating error :- This type of error is one which is compensated by another error or errors. The result is that such an error is not disclosed by the Trial Balance. Ex:-While A’s account was to be debited with Rs. 100, it was actually debited with Rs. 10 and at the same time, B’s account which was to be debited with Rs. 10 was actually debited with Rs. 100.

(d) Errors of principles :- Such errors arise when entries are  not passed according to the fundamental principles of accounting. Errors of principle will affect the accounts considerably.

The following are a few examples.

(i) Ignoring outstanding liabilities.

(ii) Incorrect allocation of expenditure.

(iii) Wrong treatment or calculation of accrued assets.

(iv) Valuation of assets against the principles of book keeping.

(e) Errors of duplication :- Such a type of error arises when an entry in a book of original entry is made twice and posted twice.

The examination of accounts by an outside agency will no doubt create a moral check and will also facilitate early detection of frauds or errors. Fraud may take place, either in the form of misappropriation of cash or goods, or falsification of accounts, unaccompanied by misappropriation. While the former can be detected by a careful checking of accounts, the detection of the latter is not easy. As regards detection of errors, it is needless to point out that both from the point of view of the management and the employees themselves, this is a great advantage. The arithmetical  accuracy of the accounts can be tested by drawing up the Receipts and Disbursements statement or Trial Balance.

(2) Location of differences or errors :- The following methods are adopted to locate an error if the trial balance does not agree:

(i) Check the totals of the trial balance.

(ii) Compare the names of the accounts in the ledger with the names of the accounts given in the trail balance. It is possible that the balance of some accounts might not have been transferred to the trial balance.

(iii) Total the lists of debtors and creditors and compare them with the Trial Balance.

(iv) If books are maintained in the self balancing system, examine whether the totals of different accounts agree with the totals of these accounts and the balance of accounts, as recorded in the trial balance.

(v) Examine whether any debit balance has been put on the credit side and vice versa.

In spite of the above methods, if the error cannot be located, it may be due to the following causes:

(i) An error of say Re. 1 or Rs.10 or Rs. 100 etc. ie. a round sum may be due to wrong totalling. If the difference is in Rupees or Paise it may be due to wrong postings or extracting a wrong balance.

(ii) An error which is divisible by ‘9’ may be due to misplacement of figures ie. 32 for 23, 52 for 25 etc.

6. Advantages of audit :- Apart from the detection of errors fraud, a regular audit would help to keep the books of accounts of a business concern up-to-date. The fact that audit is being done at regular intervals will act as a moral check and prevent fraud and errors to a certain extent. It also helps to provide an independent opinion to the members’ general body about the management of their committee and the institution. Audited accounts are usually relied up on for the purpose of assessing the income tax and sales tax and also for disbursement  of Government assistance. An efficient audit is a safe guard to the creditors whose investments enable the institutions to conduct its business. The audit helps to ascertain the correct and true state of affairs of the business, which consequently enables the institution to secure necessary finance on the certificate of the audited balance sheet.

7. Different types of audit :- The different types of audit now in vogue are the following.-

(i) (a) Concurrent or continuous audit

A concurrent or continuous audit is one where the auditor visits the institution daily/regularly or periodically and “completes the examination of accounts up-to-date. It other words the audit is concurrent with the period of maintenance of accounts. This kind of audit is adopted by Societies having large volume of business and which have huge daily transactions. To conduct concurrent audit, individual societies or groups of societies can get the services of Department Auditors at their cost on request.

(b) Advantages of concurrent or continuous Audit

(1) Mistakes and frauds can be discovered easily and quickly and rectified them and there during the course of audit itself.

(2) As the auditor visits the society daily/regularly or periodically, he will be in touch with the business which helps him to gain technical knowledge of business. He will also be in a position to view critically the accounts.

(3) The final audit of accounts of the institution can be completed as soon as the year ends and certified. Balance Sheet made available.

(4) The daily or regular or periodical visits by the Auditor will create a moral effect on the staff to maintain the accounts up-to-date.

(ii) Interim audit

Interim audit is one performed between two final audits. It helps the auditor to get the  final audit done easier and quicker. Interim audit report has to be submitted with copy of receipts and disbursement statements for the period with the summary of defects if any.

(iii) Final audit

Final audit is the statutory annual audit. It is taken up at the close of the financial or trading period when all the accounts are balanced and a trading and profit and loss accounts and Balance Sheet prepared. The valuation and verification of assets are also done by the Auditor. Final audit of societies is generally taken up from 1st July every year. “Year shall ordinarily mean the period commencing on the first day of July of any year and ending with 30th of June of the succeeding year. With the previous permission of Registrar any registered society or class of societies may change its year to any other date. For example: the accounting year of School/College Co-operative Stores is from 1st January to 31st December’.

Societies are expected to prepare the balance sheet and profit and loss accounts every year and keep them ready for audit. These statements are to be checked by the Auditor with reference to the audited figures arrived at by them. Latter on, the auditor forwards his certified Balance Sheet and his report in the prescribed from to the issuing authority, viz. the Deputy Registrar, Assistant Registrar, as the case may be. The Deputy Registrar/Assistant Registrar will scrutinise the audit report, make necessary modifications if any, require and issue certificate to the society concerned together with a copy of the Auditor’s report and summary of defects, if any, on the working of the Society.

(iv) Test Audit

Test audit is one special to the Co-operative field. The Deputy Registrars/Assistant Registrars are expected to test audit a few Societies to ascertain whether the auditor has done the audit correctly or not. This is called “Test Audit”.

This involves a re-audit of the accounts of the Society, the audit of which is tested. At least one Society audited by each Auditor should be selected for test audit. If such test audit reveals serious defects the work of the Auditor concerned should be checked up by test auditing an additional Society audited by him.

While selecting societies for test audit, care should be taken to select those with sufficient transaction. The effectiveness of test audit to a certain extent depends up on the careful selection of Societies. In the case of Societies with heavy transactions, it is enough if one month’s transactions are test audited. Wherever possible, test audit should be done in the presence of the Auditors concerned. The audit certificate of the Society selected for test audit should not be issued before it is test audited. The auditors should not be informed of the societies which the Deputy Registrar/Assistant Registrar, would be test auditing. Test audit is to be conducted side by side with the final audit.

8. Approach to Audit :- (i) Co-operative Auditor :- Audit normally means an examination of accounts of an institution with a view to testify their accuracy. Co-operative audit is a statutory obligation of the Registrar of Co-operative Societies. The accounts of a Co-operative Society are to be audited annually. Co-operative audit is more comprehensive than any other kind of audit and includes an examination of overdue debts, if any, the verification of cash balance and securities and a valuation of the assets and liabilities of the society. Unlike any other kind of audit, the Co-operative Auditor has to go beyond the books and records and make personal enquiries in order to investigate the actual state of affairs of a particular issue, if he deems fit.

(ii) Audit by the Accountant General :- Accountant General’s audit is mainly audit of expenditure. It aims at safeguarding the financial interest of the tax payer and also the assist the State legislature in exercising financial control and discipline over the Executive. Audit by the Accountant General may be described as an audit against provision of funds, regularity (ie. against Rules and orders) scrutiny of Rules and orders, sanction of expenditure, propriety etc.

(iii) Inspection by the Finance Department :- The examination of accounts by the Finance. Department is in the nature of an inspection and not an audit. They examine whether the controlling officers, maintain proper accounts in respect of all financial transactions and submit the prescribed returns to the Government and the Accountant General. Proper collection of revenues and loans and advances are also watched through the inspection. They also ensure whether the loans and subsidies sanctioned by Government to various schemes are properly utilised. However it is not an annual obligation.

(iv) Audit by the Local Fund Audit Department :- Like Co-operative Audit, Local Fund Audit is a statutory one. They audit the accounts of institutions which are maintained wholly or partly from Government Grants. Local Fund audit examines the financial position of the Local bodies and bring to notice wastefulness in administration and infructuous expenditure. As in Co-operative Audit, the Local Fund Auditor is not bound to make independent enquiries from private individuals or members of the general public. In other words, this audit should strictly confine itself to calling upon the Executive to furnish any necessary information as may be required by the audit. Like the Co-operative Auditor, the Local Fund Auditor is also bound to verify the cash balance in hand of the institution at the time of audit and to record a certificate of verification.  

(v) Chartered Accountants :- (a) As per Section 63 of the Kerala Co-operative Societies Act, it is the statutory duty of the Registrar to Audit or cause to be audited by  a person authorised by him by general or special order in writing in this behalf the accounts of every co-operative society at least once in each year.

(b) Co-operative audit is basically different from commercial Audit; which is done by Chartered Accountants appointed by share holders. The audit of a Co-operative Society is to be done and its affairs viewed specially bearing mind the Co-operative Principles and guidance to be given to the institution for improvement. The Chartered Accountants need not necessarily view its affairs and accounts with this out look.

(c) Co-operative audit involves Administrative audit also. As chartered Accountants are not in touch with Administrative matters and problems of Co-operative Institutions, they may not be able to do justice in auditing these institutions. Moreover, in the case of Chartered Accountants, no effective control or supervision can be exercised by the Department over them since they are outside the Department.

CHAPTER II

CO-OPERATIVE AUDIT

 1. Definition :- (i) Co-operative audit is a close examination of financial transactions, maintenance of Books of Accounts, documents and other records of a business and includes an inquiry into the affairs of the society in order to ascertain the correctness of accountants and the extent to which its activities were useful in promoting the economic welfare of its members in accordance with co-operative principles.

(ii) Co-operative audit is a more comprehensive enquiry than a mere financial audit. It is also an administrative audit.

(iii) In the words of the Maclegan Committee “The terms of the Act expressly require that the audit shall include an examination of overdue debts and a valuation of assets and liabilities. By this latter we understand not merely the preparation of balance sheets of societies, but also a sufficient cheek, in accordance with such rules as the Registrar may lay down, of the list of material assets of the members. The audit, in our opinion, extends some what beyond the bare requirements of the Act, and should embrace an enquiry into all the circumstances which determine the general position of the society. It would, for instance, be the duty of the Auditor to notice any instances in which the Act, rules or bylaws have been infringed, to verify the cash balance and certify the correctness of the accounts to ascertain that loans are made fairly for proper periods and objects and on adequate security, to examine repayments in order to check book adjustments and improper extensions and generally to see that the society is working on sound lines and that the committee, the officers and the ordinary members, understand their duties and responsibilities”.

(iv) The above views of the Maclegan committee highlight the scope and duties of a Co-operative Auditor. The Co-operative Auditor cannot confine himself to the books of accounts, but should go beyond the books and make enquiries about the working and general affairs of the society. Co-operative Audit may also be described as a critical examination by an auditor, of the documentary and other evidence from which the profit and loss account and the balance sheet of a Co-operative Society/Bank have been drawn up, in order to enable him to report that they present a true, correct and fair view of the summarised transactions for the period under audit and of the financial position of the society as at the end of the co-operative year.

2. Statutory provision :- As per section 63 of the Kerala Co-operative Societies Act 21 of 1969, audit of Co-operative Societies, has become the statutory responsibility of the Registrar. Subsection (1) of section 63 lays down that “the Registrar shall audit or cause to be audited by a person authorised by him by general or special order in writing in this behalf, the accounts of every society at least once in each year”.

3. Audit at head quarters or at branches of society:- The Auditors should conduct the audit at the headquarters or branches of the society and should not remove the books or records from there.

4. Arrangement and set up for audit :- For the efficient and timely audit of Co-operative Societies there is a separate set of staff who are not concerned with the administration of societies in the department. The audit of societies other than those under the control of the Registrar of Co-operative Societies (viz. Industrial. Fisheries, Dairy etc.) is also attended to by the above audit staff in the Co-operative Department.

The following is the present set up of the audit wing in the State:-

Registrar

Additional Registrar (Audit)

Head Office                                                                District

D.R.(A) (1) 4(Sr. Auditor)                          D.R.(A) one for each Dist.

J.R./D.R./A.R./C.As.

in major Co-operative institutions         A.R.(Audit) One for each taluk

Unit Auditors (both Jr. & Sr.)       Concurrent Auditors (both Jr. & Sr.)

Additional Registrar (Audit) at the Head Office is in overall control of the audit staff and exercises all powers of the Registrar, as far as audit is concerned. Under him, there are Deputy Registrars (Audit) one for each District. At taluk level there are Assistant Registrars (Audit) - on for each taluk (except in Tellicherry Taluk where there are 2 Assistant Registrars (Audit). These Assistant Registrars, who are controlled by the respective Deputy Registrar (Audit) closely supervise and guide the work of the unit/concurrent Auditors (other than Assistant Registrar/concurrent Auditors) working in the respective taluks. In almost all major Co-operative Institutions, Deputy Registrar/Assistant Registrars of Co-operative Societies are working as concurrent Auditors. Unit Auditors, concurrent/Group Auditors in other institutions, are of the cadre of Senior Inspector/Junior Inspector of Co-operative Societies.

5. Co-ordination between the concerned Administrative Department and Audit Wing of the Co-operative Department :- Close Co-ordination between the concerned Administrative Department and Audit Wing of the Co-operative Department assumes importance in the control of expeditiously conducting the audit and rectifying defects pointed out in audit. Every Co-operative Society shall prepare for each co-operative year in such form as may be specified by the Registrar, a statement of receipt and disbursement, for the year, a profit and loss account, a balance sheet and such other statements as may be specified by the Registrar”. The administrative wing, during the course of supervision and inspection can give directions and guidance to the societies in the proper upkeep of accounts maintenance of records, books and registers in connection with the business of the society. It can also give suitable directions to the societies for the strict adherence of the provisions of the Act, Rules and the bylaws in its day to day transactions. On proper guidance the society can prepare and keep ready the audit statements and can also obtain confirmation statements of balances in respect of its assets and liabilities in advances for the purpose of audit. This will facilitate easy and expeditious audit of accounts.

Defects disclosed in audit will be brought to the notice of the society, as well as to the administrative wing in the form of “Summary of defects”. The administrative wing can persuade the society to rectify the defects and to avoid recurrence in future. Thus, close liaison between the concerned administrative departments and audit wing of the Co-operative Department will help in a long way to improving the working of the societies and for the timely completion of their audit.

6. Difference between the audit of Co-operative Societies and of Joint Stock Companies :- (i) Section 63 of the Kerala Co-operative Societies Act 1969, lays down that the Registrar shall audit or cause to be audited by a person authorised by him by general or special order in writing in this behalf, the accounts of every society at least once in each year. The audit of a joint stock company is conducted as per section 224 to 234 of the Indian Companies Act 1956. Thus the Co-operative audit is State Controlled, while audit of a joint stock company is an annual obligation left to the company itself.

(ii) The appointment of auditor of a Co-operative Society is made by the Registrar while in a joint stock company it is made by its share holders. The auditor of a Co-operative Societies is primarily and directly responsible to the Registrar while the auditor of a joint stock company is responsible to the shareholders. As observed by Maclagan Committee “it is through audit alone that an effective control can be exercised over the movement and it is clear that it was never intended that the audit should be merely an arithmetical one and that the Registrar’s activities outside audit should be confined to the inspections and enquiries. The auditing staff from whatever source they may be paid, are in our opinion responsible to the Registrar and must be mainly controlled by him. Their reports are primarily intended for his information”. It is thus clear that where as in a Co-operative Society the auditor carries out the audit on behalf of the Registrar and submits his reports to him, the auditor of a joint stock company, is appointed by the share holders and makes his report to them.

(iii) A joint stock company being an association of capitalists is mainly a profit seeking concern. The important result of audit they normally except is the disclosure of the net profit available for distribution as dividend. But in a Co-operative Society, the primary objective is to find out how far the society has been carrying on its business on sound co-operative lines and aiming at the material and normal improvement of its members. The mere fact of declaration of dividend in a Co-operative Society is not the criterion of its successful working.

(iv) Usually in a joint stock company the statement of accounts are prepared by the company themselves, whereas in a Co-operative Society the auditor may have to prepare all the statement of accounts, which will be signed by him. Even though the societies are bound to file the annual accounts in such form as may be specified, by the Registrar, such statements are made use of for compiling the state statistics. Such statements are subjected to scrutiny by the Auditor, during audit of accounts of the society.

(v) In a Co-operative Society, interest accrued and fallen overdue and interest accrued after an item of interest has fallen overdue is excluded for arriving at the net profits whereas in a joint stock company, both there items are included in calculating the net profits.

(vi) As per section 63 of the Kerala Co-operative Societies Act, the Co-operative Auditor is expected to examine the overdue debts, if any, and also to value the assets and liabilities. But in a joint stock company, the auditors simply check the valuation made by the management. Thus Co-operative Audit entails a more comprehensive enquiry than is usually made in the case of joint stock companies.

7. Scope and special features of Co-operative Audit :- The auditor of a Co-operative Society has not only to conduct his audit according to the normally accepted principles, but has also to follow the instructions issued by the Registrar from time to time.

The special feature of audit of a Cooperative Society is to safeguard the interests of its members and the creditors including Government in their finance. The duties of a Co-operative Auditor are much more extensive than those of the Auditor of a joint stock company who has merely to certify the correctness of the Balance sheet and profit and loss account.

(i) Examination of overdue debts :- Examination of overdue debts involves a careful assessment of chances of their recovery and their classification into good, bad and doubtful. The auditor has also to examine in detail whether the society has taken effective and prompt action for recovering the overdues.

(ii) Valuation of assets and liabilities :- One of the important duties of the auditor is to verify the assets and liabilities appearing in the balance sheet. Verification of assets is process by which the auditor substantiates the accuracy of the figure at the right hand side of the Balance Sheet. After ascertaining the assets in the books of accounts of the society, the auditor has to see that all those assets correctly valued and included in the Balance Sheet. The duty of an auditor with regard to the verification of assets as disclosed in the Balance sheet will be complete only when he satisfies that those assets are in the possession and enjoyment of the institution on the date of the Balance Sheet. The auditor has also to see that such assets are free from any charge or mortgage. The verification of assets should be done also by physical verifying the documents of titles, such as negotiable instruments, share certificates, securities, debentures etc., etc.

The accuracy of the Balance Sheet and the profit and loss account depends upon the correct valuation of assets and liabilities. The valuation of an asset has to be made taking also into consideration the original cost, the probable working life of the asset and the chance of the asset becoming obsolete. The duty of the Auditor here is to see that the basis of valuation and calculation is correct and provision made for all contingencies.

With regard to the valuation of liabilities the auditor has to see that all known liabilities are brought into account and, where the amounts are not certain, the estimates made have been reasonable. The Auditor has also to see that the provisions made are adequate.

(iii) Adherence to Co-operative Principles :- In conducting business operations the Co-operative are expected to observe certain well defined principles. A Co-operative Society is an association of members who have joined together not to earn profits on their investments but to secure resources and services required by them. The important result expected in audit is to ascertain how far the society has achieved the objects for which it has been organised and how far it has succeeded in improving the material and moral well being of its members.

(iv) Personal verification of members’ accounts and Examination of their pass books :- Personal verification of members’ accounts is a safe guard to prevent manipulation of accounts by dishonest employees and office bearers, of societies. In order to ascertain whether the books of accounts of the society show the correct position, the auditor has not only to compare the entries in the books with the receipts, vouchers and other documents, but also to make enquiry by calling for explanation and personal verification of the accounts of a god number of members selected at random. In the case of rural and agricultural credit societies, the auditor has to examine the entries made in their pass books, with reference to the books of accounts of the society and has to confirm the balance in their presence.

Section 63 of the Kerala Co-operative Societies Act 1969, gives the auditor ample powers to summon members to furnish such information relating to the transaction with the society.

(v) Assessment of damages due to negligence :- If any deficiency or loss has occurred to the society due to negligence, want of proper care, misfeasance or misconduct on the part of the employees or members of the committee, or of the society, the auditor, after careful examination of the relevant records, has to assess such deficiency or loss. He is thus vested with the responsibility of safeguarding the interests of the members and creditors of the society.

(vi) Certification of bad debts :- Rules 62 of the Kerala Co-operative Societies Rules, lays down that such of the dues to the society including loans and advances and interest thereon which are found irrecoverable can be written off only after they are certified as such by the auditor appointed under Section 63 of the Kerala Co-operative Societies Act 1969.

(vii) Awarding of audit classification to the society :- On completion of the statutory audit, the authority competent under Section 63 of the Act has to award an audit classification to the society, in accordance with the instructions issued by the Registrar from time to time.

An elaborate has been laid down in the method of classifying primary credit societies and noncredit societies. The societies are classified under A, B, C and D classes. Classification is made depending upon their general performance for which marks are awarded in each item. For details of classification refer to chapter No. II of part IV.

8. Auditor’s duties and responsibilities :- Section 63 (2) of the K.C.S. Act 1969, lays down that the audit shall include an examination of overdue debts, if any, the verification of cash balance and securities, and a valuation of the assets and liabilities of the society.

Therefore the auditor should:

(i) Verify the cash balance on the date of his visit and record the result of verification with his signature, date and designation. If on verification, the cash balance agrees with the book balance the result of verification may be recorded in the following form:-

“Cash balance of Rs..................................................(in words ........................................) was verified by me and found to agree with the book balance on / at the close/opening etc. of ....................................................... .......................................”

The auditor should study the bylaws of the society and ascertain as to whether the cash balance is actually kept by the person authorised to do so under the byelaws. He may also verify the manner in which it is kept. To ensure that the cash balance has been correctly noted in the cash book and that no bogus payments are entered therein, the auditor before verifying the cash balance should vouch the cash book upto date. In bigger institution, if it is not possible to conduct the mechanical checking up to date, the auditor may vouch the transaction of a day or two prior to the date of verification. If the cash balance is not forthcoming readily, he should take action as mentioned in para No. 9.

(ii) Verify whether all the books and registers prescribed in the Kerala Co-operative Societies Rules made under the Act and as prescribed by the Registrar from time to time are maintained properly and kept up-to-date;

(iii) Verify the genuineness and adequacy of all personal security, mortgage and other bounds and ascertain as to whether any of them is time barred;

(iv) Ascertain whether the personal sureties are good for their under-takings and whether the mortgage securities are sufficient;

(v) Submit a detailed report on all overdue debts, and state whether he considers them good, bad or doubtful. He should also state in detail the steps taken by the committee to realise them;

(vi) Verify the outside liabilities with Central Bank’s statements of outstanding balances, and other creditors like depositors, Government and other agencies and reconcile difference, if any;

(vii) State whether any of the byelaws has been infringed or instructions of Registrar violated;

(viii) Examine whether the expenditure incurred by the societies under establishment and contingencies is within the budget allotment and whether such expenditure is reasonable;

(ix) State whether all the defects brought to light in previous audit have been fully rectified;

(x) Enquire into the details of corrections overwritings etc. in receipts, vouchers, records and registers to ensure that there is no fraud in the transactions concerned;

(xi) State whether in his opinion and to the best of his information and according to the explanation given to him, the Balance Sheet and profit and loss account exhibit a true and fair picture of the affairs of the society; and

(xii) State in the audit memorandum, whether he has obtained all the information which to his knowledge are necessary for the purpose of audit.

The Auditor has also to examine many other things before arriving at the correct balance sheet and profit and loss account. For eg., in the case of;-

(1) Credit societies and banks, the Auditor has to see that the loans are given for proper objects and periods and on adequate security as per conditions for Co-operative finance. He has also to examine the repayments in order to ascertain book adjustments, improper renewals etc. and also to verify whether timely action has been taken in the recovery of dues and overdues.

(2) Marketing Societies.-In the case of marketing societies, the auditor has to see whether the society has undertaken pooling, grading, sale of produce of members etc.

(3) Farming Societies.-In the case of farming societies, the Auditor has to see that the lands have been pooled and cultivated jointly.’

(4) With regard to other societies the auditor has to see that the business is conducted properly in accordance with the Co-operative principles and propriety observed in respect of financial aspects.

9. Power :- The powers given to the auditor under subsection (3) and (4) of section 63 of the Kerala Co-operative Societies Act 1969 are the following.-

“The Registrar or the person authorised by him under subsection (i) shall at the reasonable times have access to all the books accounts, documents, papers, securities, cash and other properties belonging to, or in the custody of the society and may summon any person in possession of, or responsible for the custody of any such books, accounts, documents, papers, securities, cash or other properties, to produce the same at any place at the headquarters of the society or any branch thereof”.

“Every person who is, or has at any time been, an Officer or employee of the society, and every member and past member of the society shall furnish such information in regard to the transactions and working of the society as the Registrar or the person authorised by him may require”.

When the records or cash balance of a society is not forthcoming when requested for verbally by the Auditor, he can issue summons under the provisions of section 63 of the K.C.S. Act for immediate production of books and cash and serve it on the person responsible to produce the same. In the event of failure of the Officer/officer bearer to comply with the terms of the summons, the matter should be reported immediately to the Deputy Registrar with evidence of the Service of summons. An offence under section 63 is punishable under section 94 of the Act. As soon as a case of such offence is reported to the Deputy Registrar, he should take appropriate action to prosecute the delinquents concerned.

No auditing can be efficient where the auditor is not able to critically analyse the accounts so as to reveal the total picture of the institution. Mere  checking of figures, however carefully done, does not and never can constitute audit. The auditor must not only be familiar with the routine work of Co-operative Accounts, but must thoroughly understand the principle and purpose of the accounts that is involved by the figures from which they are built up. He must also have knowledge of and sympathy with the objects and aims of the society.

The auditor acts as a representative of the members and, as such, is entitled not only to examine the books, vouchers and accounts for the purpose, but also to make inquiries and to receive satisfactory explanation upon all points connected with the business which seem to be material to his duty.

The status and dignity of the auditor will grow in proportion to his fitness to fill the position and to perform adequately his duties and responsibilities. The auditor should use his position, and power by advice given to the committee and if necessary, to the general body with a view to have a sound business policy being adopted. He should be courageous as well as courteous, considerate as well as strong in character and cautions in judgement as well as tenacious in exposing wrong doing.

10. Liability of Auditor :- (i) Criminal liability :- Under section 628 of the Indian Companies Act, an auditor can be held criminally liable if he certifies a balance sheet, profit and loss account or any other statement, knowledge it to be false. There is no such provision in the Kerala Co-operative Societies Act. The Auditor of a Co-operative Society can be held criminally liable only if his acts constitute an offence under the Indian Penal Code. He can be hauled up before a Criminal Court, if he has certified a balance sheet or statement knowledge it to be false.

(ii) Civil Liability :- There have been several instances in which the auditor has been sued for damages. The following are a few of such instances:-

(1) An auditor certifying the profit and loss account and the balance sheet, does not merely guarantee the arithmetical accuracy of the statements, but also expresses his opinion that the statements reveal a true and fair view of the financial position of the business concern and its earnings.

(2) In the case of London Oil Storage Co., Ltd., 1904, it was held that an auditor was liable for damages if he failed to verify the existence of assets shown in the balance sheet.

(3) In the London and General Bank Case 1895, it was held that “an auditor is guilty of misfeasance if he knows that the balance sheet fails to disclose the true state of affairs and does not report the fact to the share holders. The Departmental auditors appointed to audit the accounts of Co-operative Societies are Government servants responsible to the Registrar and are not officers of the societies, as has been held about the Auditors of commercial concerns.

(4) In regard to stock in trade it has been held in Kinnton Cotton Mills Case 1896, that it is no part of the Auditor’s duty to take stock or as a valuer, he has to be satisfied not only about the arrangements made for stock taking, but also about the correctness of the valuation by testing a few of the stock sheets.

(5) In Irish Woollen Co., Ltd, 1904, it has been held that the Auditor has to see that all liabilities incurred, particularly in respect of purchases made and expense incurred, are duly brought into account and are not under stated.