Tuesday 18 January 2011

KERALA COOPERATIVE AUDIT MANUEL VOLUME I PART I CHAPTER III-IV

AUDIT COMMENCEMENT

I. Preparation for audit and framing of audit programme
1. Intimation of audit :- Every auditor, except attached to the institution itself for continuous audit, is likely to have in his charge a number of societies for audit. In order to complete the audit work of all societies efficiently and in time the auditor should have a monthly programme fixing up priorities and get the programme approved by the Assistant Registrar/Deputy Registrar. Then the probable date on which he would commence his work may be intimated to the concerned societies well in advance, say, at least a fortnight back. The intention in giving prior notice it to enable the society to bring up its accounts upto date and also to prepare the required statements and schedules for audit well in advance, if not already done. Previous intimation would also help the society to obtain confirmation of balances of outstandings.
Since the auditor has to certify that he has obtained all the information and explanation required by him for his audit, statements and schedules containing particulars of the operations and the financial position of the society will have to be obtained and thoroughly checked by him, before completion of his audit and thereafter they will form part of his office record.
When audit of a society is to be taken up urgently due to any extra-ordinary circumstances and as per special directions from competent authority, the auditor can modify his programme and take up the audit of that society without prior notice. Likewise, where from any sources he comes to know about the existence of any fraud or misappropriation or other serious irregularity in any society under his charge, he should with the approval of his controlling officer, visit the society and commence surprise checking of the accounts with special reference to the suspected fraud, misappropriation or serious irregularity. He has also to conduct surprise checking of cash, stocks, securities etc. of the society.
In case of societies, whose continuous and concurrent audit is being conducted no previous intimation would be necessary as the visit of the auditor are frequent.
2. Procedure to deal with complaints :- Sometimes, the Auditors may receive complaints, alleging mismanagement or serious irregularly etc. in the working of a society in his charge. In such cases, the auditor has to go through the complaint letter and see whether the allegations are of a serious nature warranting immediate action. He should acknowledge receipt of the reference and inform the complainant that the points mentioned therein have been  taken note of and that they would be examined during the course of next visit to the society. If the complaint is of a serious nature warranting immediate action by the administrative wing, it should be forwarded to the Deputy Registrar, with his observations.
3. Preparation of Statements of accounts and information required for audit :- Every Co-operative Society shall prepare for each (Co-operative) year the following statements and schedules in the prescribed form and keep them ready as soon as intimation of audit is received.
(1) List of account books and registers maintained by the society.
(2) List of files relating to audit including Rectification report on the previous audit/inspection memo of the Department, Financing bank, other agency etc.
(3) Statement showing the consolidated receipts and disbursements for the year.
(4) Trading and profit and loss accounts for the audit year.
(5) Balance sheet as at the close of the year (In case of audit for a specified period a tentative balance sheet on the date upto which the audit is to be carried out).
(6) Bank reconciliation and confirmation statements as on the last day of the year. (The confirmations of bank balances should, as far as possible, be obtained directly from the Banks by the Auditor himself. The society may also be asked to request the banks to furnish the confirmation certificates direct to the auditor).
(7) List of members of the Managing-Committee/Executive Committee, Sub Committee etc. salaried officers and other members of the staff of the society.
(8) List of overdue debts in the form prescribed by Reserve Bank of India classifying them as good, doubtful or bad and details of action taken for their recovery.
(9) Schedules of all types of personal ledger balances such as:-
(a) Shares and subscriptions.
(b) Deposits of all types such as Current, Savings, Fixed, Call, Recurring, cumulative etc.
(c) Loans, cash credits, overdrafts and all other types of advances. Separate statement indicating the loans and advances due from committee members including office bearers.
(d) List of sundry debtors and creditors, suspense payable or receivable, income received in advance, income accrued but not received, prepaid expense, deferred expenses, preliminary expenses to be written off, provisions made for outstanding liabilities etc.
(e) List of unpaid interest on all types of deposits, unclaimed dividend on shares and purchases and bonus payable (year-wise lists should be prepared.
(f) Inventories of stock on hand including stores, spare parts, raw materials, semifinished and finished goods in the case of processing and industrial societies.
(g) List of dead stock articles, furniture and office equipments, machinery, tools, implements etc. showing their purchase price, depreciation charged year after year and written down value.
(h) Lists of shares, bonds, securities, other investments etc., including receipts for fixed deposits held by the society giving their face value, Book value and Market value supported by market quotations as on the date of preparation.
(i) Particulars of immovable property held by the society, agricultural land, plots, buildings, godowns etc.
(j) Lists supporting balance sheet figures which are not mentioned above.
(k) Any other statement or schedules as may be required by the auditor for audit purpose.
4. Fraduction of records and statements for audit and procedure to be adopted in the event of non-production of records on demand :- As per subsection (3) of Section 63 of the Kerala Co-operative Societies Act, 1969, summons can be issued by the Assistant Registrar (Audit) /Auditors of Co-operative Societies for production of records for audit. They can issue summons to all societies including those societies under the administrative control of other Departments such as Industries, Dairy, Fisheries etc.
The form of summons may be as follows:-
“Whereas you were called upon to make available the accounts and Registrars required for audit for the year/s ............................... as per this office letter No............ dated........................ and whereas you have failed to make available the records on the dates specified therein, you are hereby called upon to show cause in writing within fifteen days from the date of receipt of this notice as to why further steps should not be taken, including liquidation. If you fail to send you written objections on the date specified above, or it your objection is found unsatisfactory, appropriate action according to the provisions of the Kerala Co-operative Societies Act, 1969 (Act 21 of 1969) will be taken.”

Place :                                                                         Assistant Registrar of
Date :                                                             Co-operative Societies (Audit)
If the society or the person responsible does not produce the records within the time-limit specified in the summon issued, the Assistant Registrar of Co-operative Societies (Audit) will send an intimation through the Deputy Registrar (Audit) concerned to this effect to :
(a) The Joint Registrar of Co-operative Societies in respect of societies under the administrative control of the Co-operative Department.
(b) The Director of Industries and Commerce/District Industries Officer, in respect of Industrial Societies.
(c) The Director of Coir Development, in respect of Coir Societies.
(d) The Secretary, Khadi and Village Industries Board, in respect of Khadi
and Village Industries Societies.
(e) The Director of Fisheries, in respect of Fisheries Societies; and
(f) The Director of Dairy Development, in respect of Milk Societies.
For instances where audit is held up for want of records, see Registrar of Co-operative Societies’ Circular No. 56/74 dated 21.11.1974 (ADL2-16551/74).
1. Records/in court or under Police custody
2. Records destroyed.
3. Records not written up.
4. Non co-operation of the Management in production of records.
5. Defunct nature of the institution.
6. Records with the Ex-committee
7. Non-availability of the custodian of records.
8. Records lost or missing.
9. Whereabouts of the society and records, not known.
10. Societies unstarted.
5. Additional information to be obtained in respect of some special types of Societies :- Examination of overdue debts being one of the important responsibilities of the Auditor, he has to get full details of all overdues and the action taken for their recovery. Depending upon the nature of business operations of the societies, the Auditor will have to obtain additional statements and information. For example, in the case of a Credit Society details required for classifying all overdue debt into good, doubtful and bad will have to be obtained. In the case of urban banks etc., information regarding their loan policy, collateral security for advances, maintenance of fluid resources etc., is to be obtained. Detailed information regarding arbitration cases filed by the society and suits filed in Civil Courts and its recover etc., will have to be obtained by the Auditor. Since the Auditor has to certify that he has obtained all the information and explanations required for his audit, statements, schedules and information on all items mentioned above will have to be obtained by the auditor before the completion of his audit and those records will be kept in his office.
6. Account books and records to be maintained by Co-operative Societies :- Rule 29 of the Kerala Co-operative Societies Rules lays down that every Co-operative Society shall keep the following account books:-
(i) Minutes book for recording proceedings of committee and of the General Body of members.
(ii) Share application register.
(iii) Admission register.
(iv) Nomination register.
(v) Day book and cash book.
(vi) Receipt book and voucher files.
(vii) General ledger and Personal ledger.
(viii) Ledgers of borrowings showing deposits, loans and other borrowings.
(ix) Registrar of monthly receipts and disbursements.
(x) Registrar of dividend.
(xi) Suspense account register.
(xii) Registrar of audit objection and Rectification Register.
(xiii) Property Registrar.
(xiv) Suspense Registrar.
(xv) Such other accounts and books, as are specified by Government from time to time by special or general order for any society or class of societies.
(b) In the case of societies issuing, loans, the following account books are also to be maintained.
(i) Loan application register.
(ii) Loan ledger showing the loans issued to members.
(iii) Liability Registrar indicating the indebtedness of each member.
(iv) Registrar of immovable property of defaulted members.
(v) Registrar of closed loans.
(vi) Registrar showing progress of applications for arbitration and execution.
(vii) Registrar of declaration made under section 36.
(viii) Registrar of lands cultivated by members.
(ix) Credit limit statement
(x) Decreed Loan Registrar
(xi) Registrar of liquidated societies.
(xii) Demand, collection and balance Register.
Societies which have undertaken trading or manufacturing activities, such as Consumer Societies, Marketing and Processing Societies. Handloom and Industrial Societies etc. are required to maintain purchase and Sales journals and stock Registers. Where the number of securities held by a society are many and varied, an “Investment Registrar” will have to be maintained. Processing and Industrial Societies will also have to maintain separate cost accounts, which will have to be reconciled with financial accounts. If the Society has undertaken distribution of Controlled Commodities, also, additional books and Registrar as prescribed by the Civil Suppliers or other concerned Departments are also required to be maintained.
The auditor will also see that, besides the statutory books prescribed, societies having different objects/activities maintain other types of books required according to the nature of their business. If any society is not maintaining any of the special account books or registers required due to ignorance, the auditor should guide the office bearers in writing up such books or registers.
7. Powers of Registrar to direct accounts and other books to be written up :- procedure to be followed when accounts are incomplete.-When any society has failed to maintain proper and complete accounts as specified under Rule 29 of K.C.S. Rules, the auditor should report the matter to the competent authority through his immediate superior.
The officer competent will then issue an order under Rule 30 directing the society and its office bearers to bring the accounts up-to-date and to furnish necessary statements and information required by the Auditor. If, after a reasonable, time, the directions are not complied with, orders will be passed invoking Rule 30. In such cases Registrar is competent to authorise any person to writ up the accounts at the expense of the society through a person/persons authorised by him. The cost will be determined taking into account the time involved and the emoluments of the officers deputed to attend to the work (Rule 30).
8. Period for which the account books are to be maintained by the societies :- Rule 31 of the Kerala Co-operative Societies Rules, specifies the period for which the societies are to keep their records after they are audited by the Department.
9. Auditor not to pass entries in audit without proper understanding :- In the course of audit, the auditor has to get him sell satisfied of the genuineness of the transactions recorded in the books of accounts of the society. Before commencement of audit of the accounts, the auditor should be acquainted with the nature of business transactions undertaken by the society and the various aspects connected with it. It may not also be possible that the auditor is fully familiar with the type of business conducted by the society. He may also be not knowing the technical aspects of the transactions of different types of societies in his charge. Therefore, it is necessary that he should supplement his knowledge by obtaining additional information about the nature of transactions. For thus, he should not hesitate to elicit information for the technical details on items about which he has no sufficient experience. An honest admission of ignorance of technical matters will always win more respect than an assumption of knowledge which he is not in fact possessed of. An auditor is not, therefore, expected to pass on entry unless he understands the full implications of the transactions recorded in the books of accounts of the society.
10. Internal Check :- Internal check is a system under which the accounting methods and details of an establishment are so laid out that the accounts and procedure are not under the absolute and independent control any one person, but on the contrary, of the work of one employee is complementary to that of another. In other words, it is a system of arrangement of accounts to facilities distribution of work in such a manner that the work of one person is automatically checked/rechecked by another. The system of internal check facilitates speedy detection of omission, frauds, errors etc.
11. Internal Audit :- Internal audit means audit of accounts of the institution by the employees of the very same institution (audit wing of the institution deputed for the work). The work is done by a separate section of the staff, who may or may not be qualified auditors. This is a type of continuous audit by the staff. In institutions where internal audit wing if functioning efficiently and independently, the auditor can depend on their checking to a certain extent. The existence of internal audit wing will minimise chances for committing frauds and errors.
12. Difference between internal audit and statutory audit :- (1) On accounting matters, both internal audit and statutory audit operate in the same field. Each of them aims at ascertaining whether internal check and accounting systems are good and serve the purpose.
(2) The internal auditor/auditors is/are being appointed by the Board of management/general body of the society, where as the appointment of statutory auditor is according to the statute.
(3) The internal auditor check the accounts to ensure whether the accounting system is perfect and it discloses material facts. On the other hand, the statutory Auditor has also to satisfy himself that the final accounts exhibit a true and fair view of the state of affairs of the business transactions of the society and the position of its assets and liabilities as on a given date (30th June).
(4) The internal auditor is primarily responsible to the Board of Management/General body and thus he has only a less independent status when compared to the same enjoyed by a statutory auditor.
(5) Both of them have more or less the same field of work and, therefore co-ordination between them may result in achieving best results.
13. Internal Control :- By internal control it is meant “the system established by the management in order to carry on the business of the society in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of the records. Internal control thus includes both internal check and internal audit-If, there is an internal audit department”.
The basic principles of internal control are explained below:-
(i) All remittances received should be immediately acknowledged. Official receipts from the printed receipt book should be issued to the parties by the person authorised under the bye-laws. In cases where official receipts are not necessary, viz, for with-drawal from bank, encashment of cash certificate, etc., the correct recording of the transactions should be ensured.
(ii) All payments should have been properly authorised and the vouchers should bear the signature of the payee and the details required.
(iii) The byelaws of each society should contain provision regarding the maximum amount of cash that can be retained and the designations of the officers responsible for its custody. The closing balance of cash on hand should be mentioned in words and in figures.
(iv) The-Day Book and other subsidiary ledgers should be written up-to-date.
(v) Monthly statements of accounts viz, a statement of receipt and disbursement, a provisional trading and profit and loss account etc., should be prepared and placed before the managing committee meetings for approval.
(vi) The duties and responsibilities of paid employees and matters to be attended to by the committee members should be clearly defined. Necessary subsidiary byelaws in this regard should also be got framed and got approved by the competent authority.
(vii) Cash, stocks, fixed assets, furniture and fittings, machineries, tools, equipments, vehicles, raw materials, stores, finished goods and other properties etc. of the society should be adequately insured in time.
14. Reconciliation of Bank accounts :- Bank reconciliation statements have to be prepared at regular intervals by the Cashier or the officer who receives the cash. During the course of audit, the auditors should compare the debits and credits shown in the Bank statements/pass books with the entries in the book and counterfoils of the pay-in-slips/cheques issued. Contra items either in the cash book or in the pass book should also be enquired into in detail. Items pending reconciliation at the end of each period should be traced out and reconciled in the following period. Any abnormal variation in the dates should also be specially taken note of.
15. Test of percentage checking :- During the course of audit, the auditor has to trace a transaction through various stages from the origin to its conclusion, examining at each stage the vouchers, records and authorities relating to it. Where the business transaction is of a voluminous nature this sort of detailed checking may not be possible. In such cases the auditors have to make a careful evaluation of the system of internal control in operation. If their appraisal proves satisfactory, they may, in appropriate eases, rely on a test or percentage checking of records/transactions. It is needless to point out that selection of the period for test/percentage checking  should be made carefully and the examination of the transactions of that period should be Sufficiently detailed. But where frauds and serious irregularities are suspected or noticed, a more exhaustive checking/verification should be carried out.
16. Preparation of programme of audit :- Audit, to be methodical and efficient, it is necessary that it should be carried on regularly according to a definite programme. Audit programme is a scheme setting out in detail the different phases of work to be done in the course of audit within a fixed time. The programme, to be effective, has to be based on a standard model, which would contain all the necessary items. It will not only record the exact nature of work to be performed by the Auditor and his staff, but will also have columns for the initials of the persons performing each part as and when they complete it. Audit programme will give the auditor a clear idea as to what has been done and how he has carried out his work and, how he has to finish the remaining work logically and efficiently. It will also guard against any possible omission and ensure thorough and systematic checking.  
17. Revision of audit programme :- The programme of audit has to be drawn up after careful examination of the nature of transaction of the society, so that all important items should receive due attention. The programme thus drawn up enables the auditor to carry on his work in a methodical and planned way. It is however not a rigid programme. It may have to be revised often during the progress of audit and according to the volume of work in each society.
18. Maintenance of working sheets :- Working sheets properly drawn up and with details of work done in respect of every society, might prove to be of great value to the auditor later on. Therefore the auditor should maintain the working sheets. The working sheets may contain the following particulars.
(i) Various questions raised during the course of audit.
(ii) All important errors/omissions that are detected.
(iii) Explanations and information received for the queries raised.
(iv) Details of all missing vouchers, receipts, invoices etc.
(v) Points which need discussion with the office bearers of the society.
From the working sheets maintained by the auditor the progress and stage of audit can be easily ascertained.
19. Use of ticks or check marks :- While carrying out checking for the mechanical audit, the Auditor has to make “ticks” or “check marks” for every entry in an account book/register/record examined by him and also initial or cancel vouchers. Cancellation of voucher can be done by putting the initial of the auditor on the face of the voucher. It is desirable that there should be some distinctive in the ticks or check marks used by the Auditors, indicating the different processes and procedures of audit. The following are a few examples or check marks used by auditors.

(i)  Posting
On the right hand side of the figure close to the last digit.
(ii) Casting of totalling
On the left hand side of the figure checked.
(iii) Carry forward
Same as above with an additional posting tick across the tick line.
(iv) Calling over or comparing
At the bottom of the figure
(v) Vouching
On the left side of the figure
(vi) Bank pass book or statements
The posting tick on the right hand side of unticked items ie., items appearing in                                                                             reconciliation would have the letter “R” placed on the  right hand side.         R
(vii) Contra or transfers
On the right handside             C
These ticks or check marks should be distinctive and be indicative of the particular process or procedure carried out or the test applied for. Particular care should be taken to see that the significance of these ticks is not known to the staff of the society whose accounts are being audited.
20. Use of coloured inks or pencils for audit :- For marking of the ticks or check marks the auditors are required to use coloured inks or pencils where checking of accounts is carried out through clerks or assistants of the auditors, they should be required to use inks or pencils of a different colour than is used by the auditor. The staff of the society should be requested not to make use of these coloured inks or pencils for their internal checking.
21. Entries in pencils to be inked before checking :- Quite often the auditors come across entries/totals recorded in pencil. As there are more chances for altering the figures written in pencil, the auditors are warned against accepting entries in pencil. They have to instruct the accountant or the officer in charge of writing the accounts to ink out the figures and authenticate them and see that it is done before checking is commenced.
22. Accounts to be got written before commencement of audit :- As far as possible, the auditor should commence the checking of account books only after they have been written up completely or the period of audit. Each stage of work should be completed in one sitting if possible. While checking Day Book with vouchers for a month or other specific period, the entire vouchers relating to the period should be checked and notes made about the missing vouchers and irregular payments. Similar is the procedure with regard to the checking of loan bonds, postings, etc. The suggestions are of special importance to the Auditors who work as continuous or concurrent auditors.
II Preliminaries to be gone through by the Auditors
In commencing the actual work of audit, the Auditor should not plunge into his work straight away. As Co-operative Audit includes administrative audit also it can be done usefully and effectively only if the Auditor is well prepared before commencement of the work.
1. He should be through with the provisions of the Co-operative Societies Act and Rules.
2. He should be well conversant with the directions issued by the Registrar of Co-operative Societies from time to time.
3. He has to examine the byelaws of the society with special reference to the value of shares, restrictions on holding of shares by a member, the credit limit of the society and of the individual members, the person or persons authorised to receive and pay money, rate of interest etc. It has also to be examined whether the bylaws framed and registered are in consonance with the provisions of Kerala Co-operative Societies Act and the Rules.
4. He should also obtain a list of the books and registers maintained by the society and study the relationship of each book or register to another.
5. He will examine whether the society has maintained all the books and registers prescribed under the Kerala Co-operative Societies Rules
6. The auditor should see that the person who writes/verifies the books/records etc., invariably attest the same in token of the correctness of entries.
7. He has also to ascertain the nature of the duties and responsibilities of each member of the staff and find out whether those have been defined in an office order or by a detailed resolution of the Board of Directors.
8. The Auditor should also examine the opening balance sheet and previous years audit report together with the summary of defects, if any, to understand the nature and working of the institution.
He can then chalk out a programme of work and do the work in a methodical way. To facilitate correct compilation of audit report it is always desirable that the auditor maintains a complete and permanent record of work done viz. “working sheets” during the audit of each society. This will be more helpful for purpose of reference later, if necessary.
In the case of large sized societies where concurrent audit is done, the audit programme is to be chalked out in such a manner to complete the audit as prescribed. If there are more than one society in the group, the programme should be such as the auditor could visit all the societies simultaneously.
III. Various stages of practical work
The practical work of an auditor can be divided into three main parts.
(i) Mechanical audit (ii) Administrative Audit. (iii) Preparation of final statement and the Audit report.
(i) Mechanical Audit
Mechanical audit aims at ensuring the accuracy of accounts recorded in the books of the society. It consists of vouching receipts and payments in the Day Book with special reference to the receipts and vouchers. The Day Book is checked also to assess the correctness of the daily balancing. As the Day book is the book of original entry in a Co-operative Society and forms the basis of all other books and accounts, the auditor should begin his work with the Day book. After the entries in the Day Book are checked, completely with the receipts and vouchers, the auditor should verify them with the entries in subsidiary corresponding ledgers (viz admission register, deposit register, loan ledger etc.) so as to ascertain whether all the receipts and payments found in the Day Book have been duly entered in the respective ledgers. This kind of checking may bring to light errors of omission or commission in the ledger or in the Day Book.
Finally, the entries in the general ledger should be checked direct from the Day book. When all the ledgers have been checked with the day books, a list of outstandings under various heads viz., share capital, loan, borrowings, deposits, advances, suspense etc. should be drawn up from the concerned ledgers. He should then examine whether the totals arrived at by him agree with those balances in the general ledger etc.
(a) Cash Book :- Cash book is usually maintained in Apex, Central, major and large sized societies. Only cash transactions are noted in the cash book. But in the Day book all transactions (cash and adjustment) are entered.
(b) Day book and Checking of receipts :-
The items in the receipt side of the day book should be checked at first with the Counterfoils of receipts. The auditor should verify whether the receipts are authenticated and all the items of receipts have been properly brought into account then and there
To prevent possible misappropriation of amounts received by the society under loans etc., it should be verified whether the signatures of the borrowers depositors or of their agents paying money on their behalf are obtained in the counterfoils of receipts/chalans. In case of doubt, the auditor should call for the originals of receipts issued and compare them with the counterfoils kept in the society and also take note of the result of such verification in the audit report. In cases where the persons remitting the money are illiterate their certified thumb impression (L.T.) should be obtained on the counterfoils of the receipts/chalans. For receiving moneys societies should use only printed and machine numbered receipt books. There should not be any missing number of counterfoil left blank or incomplete. In such cases explanations are to be obtained and verified with the evidences available. In the case of cancelled receipts the originals should remain tact or attached with the counterfoil. As far as possible separate receipts may be issued for two accounts paid together. After verification, if the auditor is satisfied, a tick should be given against the corresponding entry in the Day Book, and the counterfoil cancelled with the auditor’s initials with date. The dates of  the counterfoils should be scrupulously compared with the date of corresponding entry in the Day Book and checked whether there is delays in crediting the amount.
There may be withdrawals from financing banks, post office savings account, deposit accounts etc. or adjustment entries not supported by counterfoil of receipts. In the case of withdrawals from bank, post office savings account etc, the certified counterfoils in the cheque book should be checked. For adjusting entries, the existences of proper vouchers for the corresponding payments will suffice.
(c) Day Book and verification of disbursements :- The vouchers should relate to the transactions of the society, and specify the number, amount, date, purpose and nature of payment to whom and by whom paid etc. They should be filed in the order of the entries in the day book. Acceptance of signature or thumb impression or mark of the payee in the Day Book itself is not allowable. Separate and complete vouchers should be obtained and posted in the voucher file book. Petty payments may be passed, if found reasonable, and supported by the certificate of the disbursing officer even if no proper voucher is available.
Separate receipts from payees for sums sent by money order are not necessary. If the remittance is made at the request of the party, the postal receipt showing commission paid, acknowledgment of the party for the net sum and his written requisition are enough for the auditor. But if the amount is sent without the request of the party, then copy of the notice of the society asking the party to receive the amount within a specified period with the intimation that in case of failure, the amount will be sent by Money Order at his cost, together with his postal acknowledgment are enough. If the postal acknowledgment is found to be defective/doubtful the society should address the postal authorities and ascertain whether the recipient of he money order had been duly authorised to receive it. A perusal of the postmaster’s reply will enable the auditor to decide passing or objecting of the expenditure.
Vouchers furnished by the members of a Co-operative Society and those coming under the business of the Co-operative Society, are exempted from stamp duty. Those vouchers exceeding Rs. 20 and representing any kind of payment to non-members should bear revenue stamp. Vouchers for disbursement of pay and allowances (including T.A) and acquittance of employees are also not exempted from stamp duty. For payment of advances like salary advance, T.A. advance, bonus advance, onam advance etc. exceeding Rs. 20 also requires stamp A cash memo (cash bill) exceeding Rs. 20 does not require a stamp (or stamped receipt) as it is not a receipt within the definition of the stamp Act. A cash memo or cash bill without any proper indication of the number and name of the society should not be taken as a valid voucher. In such a case stamped receipt in proper form should be insisted. The vouchers checked should be cancelled as in the case of counterfoils of receipt books, with the initials of the auditor with date. The object of initials is (1) in respect of a counterfoil to see that all items received are accounted and brought into the cash book and (2) in respect of a voucher to disfigure it so that it cannot be used again in support of another entry.
(d) Besides collecting information by means of personal enquiries whenever necessary, the auditor should also obtain particulars from available records such as receipt book, Day Book, Loan, Ledger, Borrowing Ledgers etc. duly examined.
1. Receipt Books :- The auditor should see whether there are any folios missing or any receipts without his initials or any counterfoils left blank. In case of doubt regarding any miscredit, he should call for some of the receipts and pass books from the members and compare, them with the entries in the concerned books of the society.
2. Day Book :- The Day Book should be written in the chronological order as the transactions took place. It should be closed on all days having transactions and the closing cash balance recorded both in words and figures. It should be signed by the Secretary and any other person authorised under the byelaws. In the case of retention of heavy cash balances, the Auditor should obtain the explanation of the officers concerned and examine whether they are satisfactory. Reloaning from out of the collection from members or repayments to Central Bank from fresh loans obtained therefrom, should not be done in any circumstances. No transactions suggestive of book adjustments, should also be resorted to at any cost.
3. Loan Ledger :- The auditor should verify whether any of the item is not initialled by him. If any such case is detected he should examine them in detail and take note of . He should also ascertain whether prompt and effective action has been taken to realise the overdues. He has also to examine whether there  are any time barred loans against which no action is taken.
4. Ledger of Borrowings :- When societies remit their dues the Central, Bank through transmitting agencies, differences may occur in the dates between entries in the books and those in the receipts. The auditor should scrutinise each and reconcile the difference. In the case of fixed deposits etc. the Auditor should see wether the are repaid or refunded on maturity. The maximum borrowing power fixed in the bye-laws, may be compared with the actual borrowings.
5. Admission Register :- The Auditor will verify whether the dates of admission and withdrawal are correctly entered and the signatures of the members obtained in the appropriate column at the time of admission withdrawal. Arrears of share capital should also be taken note of it shall also be seen whether there is proper sanction of committee for admission of members, allotment of additional shares of refund of shares. Collection of entrance fees should also be noted. It has to be ensured that provisions of byelaws and Act and Rules are observed in collection, transfer and refund of shares.
6. Minute Book :- The auditor should see whether periodical meetings are held as per provisions in the Bye-laws and resolutions are properly recorded in  the Minute Book and duly attested by the Directors. He should also verify the relevant resolutions with his dated initials.
7. Property statement :- In a society with unlimited liability, the Auditor should arrange for the assembly of as many members as possible and read out to them the assets and liabilities together with their net assets, so as to verify the correctness of the particulars noted. He should also make independent enquiries, satisfy himself and also compare the maximum credit limit of the society with the net assets.
8. Register of investment :- The auditor should see that all investments such as share in other institutions K.S.D. loans, cash certificates  etc. made by the society are entered in this register and interest there on is worked out and collected periodically. The auditor should check the investments with reference to the share certificates/bonds/other documents relating to such investments.
9. General Ledger :- The auditor should see that every entry/total of each head, in the day book is posted into the general ledger under proper head of accounts. Omissions, commission and wrong postings in the general ledger should be rectified then and there. The casting of each  head of account in the day book and in the general ledger should be checked before striking the daily monthly balance in the general ledger.
10. Inspection report :- The auditor should verify some of the inspection reports and see whether the supervision was adequate, efficient and effective. He should, as far as possible, try to get the errors and commissions duly rectified during his stay in the society. Defects that could not be rectified them and there should be reported to the Deputy Registrar (Audit).
(ii) Administrative Audit
This is the special feature of Co-operative audit. The duty of the Co-operative Auditor is not merely to find out the errors and omissions and/or commission, but also the ensure the accuracy of the maintenance of accounts and also to arrange for the rectification of defects pointed out in the earlier audit certificates and inspection reports. He is also expected to go beyond the books and records and also to gather as much detailed information as  is required to understand fully the implication of the transactions of the society. For this purpose, the auditor can collect information by personal enquiries, wherever necessary, and obtain  particulars from available records in order to expose any fraud or misappropriation. The Co-operative Auditor should as far as possible, endeavour to see that the errors of commission and omission are rectified before the audit of that society is finalised. Such of the defects, which are serious and cannot be rectified on the spot should be reported to the competent authority together with his suggestions for further action and improvement.
Recent thinking on management principles has brought about a change in the concept of audit and widened its objectives. Emphasis of audit is now being shifted to the examination of administrative polices and its effects on the financial morality of transactions, the efficiency with which the schemes have been implemented and the level of performance achieved by the institution as a whole. Thus the conventional form of audit has been changed to a more dynamic system with a view to enabling the auditor to lay emphasis on certain important and essential aspects viz., (i) Propriety audit, (ii) Management audit, (iii) Efficiency audit, (iv) Performance audit and (v) cost audit.
They are briefly explained as follows:-
(a) Propriety audit :- The auditor should examine the various transactions involving expenditure, with the aim of ascertaining their economics, necessity and reasonableness. All improper and irregular decisions and expenditure thereon resulting in the waste of public funds and loss of stores should be brought to light.
(b) Management audit :- The auditor should see whether the management has followed sound lines of business policy or there has been any lapse on their part. In case of lapses are noticed it should be examined in details whether the management has dwindled the business or made the society to run into loss. Management decisions which have resulted in loss to the society should be specifically reported. The policies and decisions adopted by the management should be in conformity with the rules and regulations. The various aspects of planning, control and co-ordination should be examined by the auditor with reference to the results. The auditor should suggest better forms and methods if the existing methods are found inadequate or ineffective. The interest that the management takes in its development, fixing up individual liabilities and responsibilities of staff and watching their adherence, streamlining the administration etc. have to be examined in detail.
(c) Efficiency Audit :- The auditor should examine the results of various schemes implemented with reference to its plan and economics of expenditure with reference to the results achieved, the rate and scale of expenditure in conformity with the plan and estimate already prepared etc., The auditor may work out rations of each item vis-a-vis the budgeted or targeted figure or figures of the previous years by purchase, sales; trade profit, net profit etc. of the audit year can be compared with those of the previous year by taking the latter as the base year and working out the percentage of ration.
(d) Performance audit :- The auditor has to probe into the various aspects of the transactions and investigate the performance of the society to high light on the resultant progress or failure in the business. The efficiency, achieved or lost under different business ratios will provide the basis for performance audit.
(e) Cost audit :- (i) Cost Accountancy is defined as the application of costing and cost accounting principles, method and technique to the science, art and practice of cost accounting and the ascertainment of profitability. It includes the presentation of information derived therefrom for the purpose or managerial decision making.
The main objects of cost accounting are (1) cost control (2) ascertainment of profitability (of each activity) (3) assistance to management in its task of making decisions.
The aims are achieved by a purposeful analysis and classification of data and through compilation of reports which enable the management to locate causes of wastage and losses and to decide upon the proper course of action.
(ii) Cost audit aims at perfecting the cost accounts maintained by societies besides examining whether the policy laid down by the management has been or has not been followed strictly. It is the detailed checking of costing system technique and accounts to verify their correctness in order to ensure the adherence of the objectives of “cost accountancy”.
(iii) Preparation of final Statements
After completion of the mechanical and administrative audit the preparation of the consolidated statement of receipts and disbursements should be taken up from the general ledger. If general ledger is not maintained the statement should be drawn up directly from the day Book and subsidiary ledger. While checking the general ledger and preparing receipts and disbursement statement from the day book the auditor should be very careful in grouping the various items under, appropriate heads. Negligence in doing so may affect the profit of the society seriously. From the receipts and disbursements statement the auditor should prepare. Trading Account and profit and loss account and balance sheet. Thereafter the audit memorandum is to be prepared in the prescribed from and submitted to the competent authority for further action.
IV Reconciliation of Bank Accounts
(1) Bank Reconciliation statements should be prepared regularly by the office who receives cash bank statements or the pass book. During the course of audit; the auditor should  compare the debits and credits shown in the bank statements (or the pass book) with the entries in the cash book day book, the counterfoils of the paying in-slips and the cheques issued. Contra items either in the cash book or the pass book should be enquired and satisfactory explanations obtained. The items in the Reconciliation at the end of the period should be traced through the following period.
2. Verification of Schedules :- Since the auditor has to certify that he has obtained all the information and explanation required for his audit all statements and schedules and other information will have to be obtained and checked by him before completion of his auditor. They will form part of the records of his office.
The Auditor has to obtain the statements such as “Sundry Debtors” “Advances outstanding etc. and got agreed with the figures appearing in the balance sheet. Schedules of different types of advances outstanding at the close of the year should be obtained and checked  with the personal ledgers and other records and the total agreed with the amount shown against the items in the balance sheet. Differences if any should be given special attention the details should be ascertained and reconciled.
While checking ledger balances with the schedules, notes should be prepared showing the period during which the debtor other debit balance has been outstanding whether it has been subsequently recovered and, if not, why it has been allowed to remain outstanding and whether any action has been taken for its recovery. Any other information which will enable the auditor as to whether the debt appears to be good and recoverable should also be collected. A list of all accounts, which are overdue, should be prepared and checked by him.
During the course of verification of schedules with the ledger balances, if the auditor suspects the correctness of any account he should send the debtor a statement of his account as per society’s records and request him to communicate the discrepancies, if any. Where pass books are issued to members and other constituents who have dealings with the society, the same may be called for and returned with a request to confirm in the outstanding balances in their accounts.
V Management Accounts
 Management accounting helps the Management to control the activities of the institution and to employ its available resources with a view to attaining its objections and to achieve better results in the given circumstances.
The accounts of Co-operative Institution also are to be maintained in such a way that they should readily exhibit the financial results of the business transactions. The system of accounting should also be conducive for attainment of its objectives. On the basis of working results, the Management should be able to think in terms of corrective measures and development activities such as cost reduction, accelerating rotation of money, maximising profits, extending more services etc. For planning the future programmes of the institution and forecasting results, the Management require classified, processed and detailed data with comparative figures. For this, and also to examine reasons for failure, if any, the Management should have a good accounting system. In short the accounts should, inter alia, guide the Management to take timely and proper decisions and to function effectively. Through the accounts, the Management should also be able to assess the strength or weakness of the institution in a realistic way. A good system of management accounting will enable the Management to analyse the financial and working results, overall performance etc. of the institution within a short time.
The auditor should ascertain whether the system of accounting followed by the society meet with the above requirements. If not, he should guide the institution properly and ensure that a good system of accounting on the above lines is followed by the institution.
CHAPTER IV
VOUCHING OF RECEIPTS
1. (a) What is vouching :- A voucher may be described as a documentary evidence in support of an entry in the books of accounts. It may be a receipt, a counterfoil of receipt book, an agreement, an invoice, a paying-in-slip, bills bought note, sold note, wages book, statement of accounts, minutes of meeting etc.
Vouching may be described as an examination of every transaction of a business with relevant, valid, documentary and other evidences with a view to find out whether it is genuine and bona fide. Vouching is the very essence of auditing and the whole success of an audit depends upon the intelligence and thoroughness with which this part of audit work is carried out. It aims at ascertaining whether a transaction is in order, has been properly authorised and is correctly recorded in the books. It traces an entry to its source and explores its implications and circumstances. It has however to be understood that vouching does not mean merely comparing the receipts and vouchers with the cash book/day book.
A careful comparison of the entries in the cash book, and other books of prime entry with the supporting documents would ensure:-
As regards receipt :- (i) that all moneys due to or receivable have been duly brought into account and there has been no impropriety or irregularity in the realisation of money due to the business.
(ii) All moneys received by the business have been properly accounted for and credited to the proper accounts.
As regards payments :- (i) that all payments made and liability incurred are regular, properly authorised and payable out of the funds of the concern. All payments have to be shown under correct head of accounts, distinguishing between revenue and capital expenditure and in particular the expenditure incurred and liabilities contracted were necessary and incidental to the business of the society.
(ii) No fraudulent or unauthorised payments have been debited which reduce the cash balance of the society, and
(iii) The daily closing balances have been correctly extracted and carried forward.
While examining the vouchers, the following points should be borne in mind:
(1) All the vouchers should be consecutively numbered and file in the order of occurrence.
(2) Particular care should be given to see that the date of voucher correspond to the date noted in cash book, the name of the party from whom it is received, the party to whom it is addressed and the amount.
(3) All vouchers should be cancelled as passed by the Auditor with all documents attached to it by putting his initials with date preferably in the middle of the voucher by a special tick. This is done in order to prevent the production of the same voucher again in support of a subsequent fraudulent of fictitious payment.
(4) Every voucher should be passed by a responsible officer of the society. This may be done preferably on the original voucher itself if original vouchers are not available this may be done in the voucher obtained in the voucher form of the institution. This will ensure the genuineness of the vouchers produced for audit.
(5) The auditor should ensure that vouchers over Rs. 20 are properly stamped.
(6) He should see whether the amount in figures and in words agree.
(7) Lastly, the auditor should list out all the missing vouchers and explanation for the same obtained from the responsible officer.
To sum up, the auditor should endeavour to satisfy himself the three fold requisites of vouching, namely:-
(a) Proper sanction by a competent authority.
(b) Validity of the documentary evidence and
(c) Bona fide or genuineness of the transaction.
(b) Internal check with regard to cash :- In institutions having large cash transactions, the auditor should see whether there is any proper and efficient system of internal check. No hard and fast rule can be laid down on this, The set up of the system depends on the availability of sufficient number of staff and the volume and frequency of cash transactions. The best system is one which provides no loop-holes to suppress receipt of cash or to create fictitious payments.
The following is the general outline:-
(i) Cashier should not have any control over any ledgers of original entry, except cash book.
(ii) The unused receipt books should be under the custody of a responsible officer, other than the person authorised to sign the receipt. Stock register for the receipt book should be maintained. Fresh book should be issued only when the receipt book in use has been completely exhausted.
When different books are simultaneously in use for different classes of receipts, the receipt should be of different colours or sizes so as to distinguish them easily.
(iii) Daily Tappals should be opened by a responsible officer and all cheques, postal orders etc. should be crossed ‘Account payee’ only.
(iv) All receipts should be banked daily.
(v) Receipts prepared by cashier should be countersigned by another responsible person.
(vi) Cash book balance should be reconciled with pass book at regular intervals.
(vii) An efficient system of internal check should be maintained as regards cash sales.
(viii) Monthly statement of accounts of customers must be under the control of some responsible officer; other than the cashier.
(ix) Inward invoices should be verified with the corresponding orders.
(x) Cheques issued must be crossed preferably “Account Payee”.
(xi) Receipts received from parties to whom moneys are paid should be examined by a responsible person.
2. Vouching of cash transactions - Control over cash :- In order to avoid misappropriation of funds, there should be an efficient and scientific system of internal check as regards receipt, disbursement and remittance of cash, and for the safe custody of cash balance. Where a cashier is appointed the responsibility of receiving and disbursing of cash, remittances to and from bank, preparing of cheques, etc. should be entrusted to him. The ‘Day book’ or the ‘Main Cash Book’ should be written by the Accountant and not by the Cashier. The cashier may maintain a rough cash book or cash diary and the cash summary book.
3. Vouching of receipts - Internal control over receipts :- Vouching of receipts is always difficult than vouching payments, since in a majority cases, no direct evidence as regards regularity and correctness of the amount received, would be available.
To ensure proper control over receipts, the following arrangements are necessary. All incoming tap, also should be opened by the Manager or other responsible officer. Cheques, drafts, postal orders, etc. should be specially crossed to the Bank Account and entered in a separate register along with other remittances in currency notes and coins received under insured covers or by money orders before being passed on to the Cashier. At the close of the day entries in this books should be compared with the entries in the Cash Dairy or Rough Cash book maintained by the Cashier.
(i) All remittances made should be acknowledged. Printed receipt books with duplicate, serially numbered receipts to facilitate retention of the Carbon copy, should be used for acknowledging remittances received, cashier in cash or by cheque. Counterfoil receipt books are not to be recommended. Since the outer receipts and the counterfoil are to be written up separately and it is likely that unscrupulous employees might write different amounts in them. The practice of acknowledging on the invoices, bills or statements issued to the members should be discouraged. The employees should be strictly forbidden from acknowledging remittances or in the ledger accounts of the society kept by the customer or in the copy of the invoice or bill sent to him. Notice should be given to all members and customers showing that no receipt would be valid unless issued from the printed receipt book of the society and countersigned by the authorised person. All the receipts in the receipt book should have been prenumbered and the accuracy of serial numbers examined before a new receipt book is brought into use. In the case of banks, paying-in-slips in the signature of remitter is recommended.
(ii) Spoiled and cancelled receipts should be pinned to the carbon copy as evidence of what has taken place. Cancellation should be made under initial of the officers authorised to sign the receipts. While checking receipts it should be seen that serial numbers run consecutively and that no receipts are missing.
(iii) Where remittances are received, the signature of the remitter must invariably be insisted upon.
(iv) In the case of withdrawals from Bank, pass book entries or counter -foil of cheques have to be verified before obtaining confirmation certificate from the bank.
(v) Material alterations in the receipt should be initialled by the persons authorised to sign the receipts.
4. Method of checking receipts :- The receipt side of the Day Book should be vouched with reference to the duplicate of the receipt book, paying-in-slips etc. and see that the following particulars correspond.
1. Date of the receipt.
2. Name of the person paying in the amount and on whose behalf remittance is made.
3. Amount received (should have been mentioned both in words and figures).
4. Mode of remittance. (in the case of the receipt by cheque the name of the bank should be specified. In the case of Money Order, Postal order, insured post etc. the mode and purpose of remittance should be specified.)
5. Head to which the amount is credited.
Carbon copies of the receipt issued to the remitter retained in the receipt book only provides for indirect evidence. But there are different types of documents to be examined for verifying such receipts.
5. Shares and entrance fees :- Printed receipts are issued for amounts received towards shares and entrance fees paid by members and prospective members. Since the share amount and entrance fees are to be paid along with the application for membership and the admission takes place only after approval, of the committee, the amounts received would therefore be credited to a share suspense account till admission is granted by the committee. After admission the amount under suspense shall be adjusted towards share and entrance fee. The member will be issued a share certificate bearing distinctive number. His name will also be entered in the admission register. Counterfoils of share certificates issued will be made available for audit, and the auditor has to check the details contained therein with the entries in the share ledger, (admission register) and the member’s register. In cases where additional shares are to be allotted on the specific resolution of the Managing Committee the auditor has to verify the minutes of the committee meting also.
6. Recovery of shares by instalment :- Except in the case of some types of societies such as spinning mills, sugar mills etc. where the value of a share has been fixed high, the full value of the share is recovered in a lump. As such, except in a few cases mentioned above, there is no system of making calls towards balance share money due from subscribers (members). In the case of employees credit societies, monthly subscriptions at rates specified in the byelaws are collected from members along with other dues to the society. In such cases share is allotted to them when the full amount of share is collected In consumer stores, rebate or purchase bonus payable to non-member customers is also credited to their accounts and when the full amount of a share is collected, they are enrolled as members and the undisbursed bonus payable to them is credited to their share account.
7. Share capital of newly registered societies :- For the registration of a new Co-operative Society the promoters of the proposed society are required to collect initial share deposit from its prospective members under the head share suspense. This amount has to be deposited in the nearest branch of the District/Central Co-operative Bank, or in any other Bank approved by the Registrar. The account so opened shall be in the name of the proposed society and operated jointly by the Chief promoter and one or two other promoters duly authorised. No amount is normally allowed to be withdrawn from this account until the society is registered and the account transferred in the name of the registered society with the approval of the Department. If the society is not registered, the registering authority can issue orders permitting withdrawal of the amount and refund to the promoters of the proposed society. The newly registered society at its first General Body meeting should resolve and intimate the Bank and Registrar regarding the registration of the society and also request to transfer the amount in the name of the society. In the first General Body Meeting the promoters will be credited to their respective share accounts and entrance fee account and the share suspense account debited as per contra.
8. Audit of accounts of societies prior to their formal starting :- The promoters of the proposed society are required to maintain proper accounts in respect of moneys received and payments made by them prior to the registration of the society. If the transactions prior to the registration merely relate to collection of share capital and incurring of normal expenditure for getting the registration, viz expenses over printing of bylaws, postage, conveyance charges etc., they are generally entered in the cash book of the society to be checked by the auditor. If the promoters have already started business before registration of the society and considerable period elapsed, the auditor should get a statement of receipts and disbursements made by the promoters on behalf of the society and the transactions checked in detail. If the auditor finds any difficulty in checking these accounts, he may seek instructions of his higher officers for auditing the accounts by himself or by certified auditor. In other cases, the receipt and disbursement statement prepared by the promoters and duly signed by the Chief promoter is to be passed in the first General Body. The receipts and disbursements in respect of the pre-started period may be incorporated in the Receipt and Disbursement statement of post-started period and the miscellaneous expenses (initial express) charged to the loss account. However, if the society is to implement a major scheme incurring huge amounts under pre-operation expenses such expenses may be capitalised with the sanction of the Registrar and to be written off within a specified period.
9. Admission of members :- While checking the applications for membership, the auditor should examine the qualifications of the prospective members prescribed under the Co-operative Societies Act, Rules, bylaws and the circular instructions issued by the Registrar from time to time; for example:-
(i) In the case of a farming society members should execute an agreement authorising the society to borrow funds on the security of the lands pooled by them.
(ii) In taxi driver’s Co-operative Societies and Auto Rickshaw Driver’s Co-operative Societies, the members should have valid driving licenses.
(iii) In a society formed for the promotion of the economic interest of its members through a specified activity, or in a society formed exclusively for the benefit of persons engaged in any particular industry, no person other one who is likely to be benefited directly by such action or an actual worker in the industry, as the case may be, shall be admitted in excess of the limit that may be specified in the byelaws or in any case in excess of 10 percent of the total number of members in the society.
(iv) In the case of admission in two credit or housing societies, necessary precaution has been made with regard to the prohibition of dual membership.
(v) Undertakings to be furnished by members of salary earners societies, authorising their employers to deduct from their salaries, or wages, dues of the society as communicated by the society.
(vi) Declarations furnished by members of housing societies regarding building plots, houses, or tenements already owned by  them should be verified. Compliance of the provisions of the bylaws regarding purchase of shares in proportion to acerage under specified crops held, loans borrowed etc. will also have to be verified. The auditor should also check whether the society has maintained a share application register as contemplated in Rule 29 (2) (b) of the Kerala Co-operative Societies Rules.
10. Checking of admission register :- The entries in the admission register have to be checked with the application for membership, resolutions of the committee day book relating to receipt of share capital, entrance fees etc. In case of refusal of membership, the date of committee resolution and reason for refusal should be ascertained and see that they are recorded in the ‘remarks column’ of the share application register. As regards resignation of membership or transfer of shares, relevant resolutions of the committee accepting the resignation or approving refund or transfer of the shares held should be verified and satisfied. It should be ensured whether the provisions of the Act. Rules and  the byelaws have been complied with in the refund/transfer. It should also be seen that the resigning member has repaid all his outstanding to the society in the capacity of principal debtor or surety. If the auditor is satisfied after checking he should put his dated initials in the column specified in the register in taken of having verified the entries.
11. Receipt of Government assistance, Share capital, loans and subsidy :- 
(a) Receipt of share capital :- Government contribute either directly or indirectly to the share capital of certain types of societies. Only those societies which satisfy the terms and conditions laid down by Government in this regard would be eligible for the contribution. Therefore while vouching the receipt of share capital contribution, the auditors should study the terms and conditions specified in the sanction order for the grant of assistance. The pattern of assistance differs from type to type. As Government is entitled to receive dividend on the shares held by them like any other share holder, the auditor has to verify whether the society has issued necessary share certificate in favour of Government.
(b) Receipt of loan and subsidy :- As regards receipt of Government loan and subsidy, the auditor should verify the order sanctioning the loan or subsidy. He should also see whether the terms and conditions subject to which the loan/subsidy has been sanctioned are duly complied with. During the course of audit, the auditor should ascertain the proper utilisation of the loan/subsidy by the society ad indicate in his report cases of non-compliance of conditions, if any.
Loans are sanctioned to the village credit societies, Rural banks and marketing societies for construction of godowns. In such cases, the auditor should verify the original sanction order and also the intimation if drawals together with the receipt. He should also see whether the proceeds of the bills is immediately deposited in the district/central Co-operative Bank and utilised the amount properly as specified in the sanction order.
Joint Registrar, Deputy Registrars and other Officers sanctioning loans and subsidies have directions to forward to the auditor concerned a copy of the order sanctioning loan and/or subsidy. When loans and subsidies are sanctioned by other departments of Government (Industries Department, Fisheries, Harijan Welfare, Dairy Development etc. or by the Central Government or other authorities (NCDC) etc.} the Joint Registrar or the Deputy Registrar to whom a copy of the order has been received has to communicate the same to the auditor concerned to enable him to note compliance of the conditions of the  loan or subsidy. Even if he was not supplied with copies of such orders he should ascertain the terms and conditions from the copy of the order received by the society and point out non-compliance, of the conditions, if any noticed by him.
Institutions which are receiving assistance like grants, subsidy etc. should maintain registers in the form prescribed. The societies are also required to furnish an undertaking to the sanctioning authority not to misutilise such assets or not to dispose of or mortgage the assets without the prior concurrence of Government/authority. The Auditor should also verify    as to the proper maintenance of the prescribed registers and also see whether the conditions laid down are adhered to by the institution.
(c) Accounting of Subsidies granted by Government :- Managerial subsidies received towards the cost Secretary or other management expenses may be taken to Profit and Loss account except in cases where specific instructions are given for its treatment. Where any conditions have been laid down or special instructions have been issued by the Registrar for the utilisation of Government assistance, it should be seen that these conditions or instructions are complied with.
All the societies receiving grants-in-aid are required to furnish an undertaking agreeing to abide by the conditions attached to the grant-in-aid. Such societies are also required to maintain a register, in the proforma, prescribed and also not to dispose of, encumber, or utilise them for other purposes without prior concurrence of Government.
In case of all societies, which receive loan or subsidy under special schemes, orders sanctioning the loan or subsidy will contain specific instructions as regards treatment in accounts of subsidies granted to them. The  conditions specified in the sanction orders should be carefully studied by the Auditor and their compliance watched. Subsidies granted by Government towards capital cost of a scheme, should invariably be taken to capital Reserve.
(d) Small Farmers’ Development Agency :- S.F.D.A. give subsidy for various approved schemes to the identified beneficiaries (viz. potentially viable Small Farmers, Marginal Farmers and Agricultural Labourers). The schemes are financed through Co-operative Societies/Banks and Commercial Banks. Advance subsidies are given by crossed cheques to be adjusted within a period of 3 months. They are not paid direct to the borrowers/beneficiaries, but given to the financing institutions, for adjustment to the loan accounts of the borrowers in order to reduce the interest burden on the credit extended to them. The Auditor should, therefore, verify whether the subsidies sanctioned for any programme are correctly and properly accounted and promptly adjusted in full to the loan principal of the beneficiary.
The Agency also gives Risk Fund to Co-operative Societies at the rate of 4% on medium term loans issued to S.F.D.A. beneficiaries each year. Similarly Risk Fund is given at the rate of 4% on the additional quantum of short term loans issued to S.F.D.A. beneficiaries each year. The District Co-operative Banks are paid Risk Fund at the rate of 2% on short term and Medium term loans issued  to primary Co-operative Societies. Risk Fund is also paid to the Primary Co-operative Land Mortgage Banks at the rate of 2% on the long term loans issued to S.F.D.A. beneficiaries.
As per Rules governing the assistance the amounts of such contribution to Risk Fund shall be credited to the Bad Debt Reserve of the Society/Bank. The Risk Fund sanctioned is allowed to be treated as part of the Societies Bank’s owned Funds to be utilised in their normal business.
Since the Agency is making all payments by way of crossed cheques only, the pass books with the District/Central Co-operative Bank/other Banks have to be verified by the Auditor. They should also go through the approved schemes of S.F.D.A. before audit ensure that the conditions stipulated in the rules are strictly complied with.
12. Receipt from financing agencies :- While vouching the receipt of loans from financing agencies, like the District/Central Co-operative Banks etc. the loan application, loan sanction order, disbursement statement etc. should be verified. The auditor should also verify whether there is proper resolution of the Board of Directors for applying for the loan and whether the society has borrowed funds in excess of the limits prescribed under the byelaws. Duplicate copies of the loan bond or agreement and promissory note, should also be examined.
13. Repayment of loans by members :- For acknowledging repayment of loan made by members, printed receipts from the official receipt book are generally issued. Entries in the cash book/day book should be verified with the duplicate or counterfoils of receipts in which the respective remitters have put their signatures. Where pass books are issued to the borrowers, a few of the pass books at random should be called for and checked with the account in the ledger.
The auditor should be careful to locate instances of book adjustment. In order to get themselves eligible to receive fresh loans from the District Central Co-operative Banks, certain societies indulge in the undesirable practice of book adjustment with a view to show a reduced percentage of overdues. This sort of clearing of overdue loans simply by book adjustment, if allowed to continue will ultimately, result in the debts becoming bad.
14. Cash Sales :- This item of receipt provides great scope for misappropriation of money, unless there is a definite system of internal check. Cash memos showing particulars of goods sold, such as quantity, rate etc., and amounts received, should be checked with the daily sales register. (The procedure for checking cash sales has been discussed under “Vouching of trading transactions”).
15. Receipt from debtors :- As regards receipt of cash from debtors, one of the important precautions to be taken is to see that the cashier has no control over the preparation or of despatching of the monthly statements to them. Particular attention should be paid with regard to the payment of discount. The method of granting discount should be enquired into and any deviation from the normal rate should be noted and pursued farther. Wherever possible, the auditor should get confirmation from debtors, preferably a statement of accounts may be obtained and the balances get confirmed.
16. Sale proceeds of Government Securities and other Investments :- Since purchase and sale of Government securities and other investments are made through brokers of bank, the amount received on account of their sale should be vouched with the brokers sold note. The auditor should also see that necessary adjustments are made for interest included in the sale proceeds and income-tax deducted therefrom. The auditor will verify the resolution of committee/Board  for the sale of the assets. The auditor may also verify the sale rate with reference to the market value quoted in the relevant Share Market reports from the State Bank of India.
17. Capital receipts :-
(a) Sale of immovable property and other fixed assets :- In order to vouch the receipt on account of sale of immovable property the auditor has to satisfy whether proper sanction of the Registrar has been obtained for the sale. If the property  is sold on public auction, the auctioner’s report will be available in order to ascertain the sale proceeds. On the other hand, if it  is sold on private negotiation, the agreement for the sale, the sale deed and other correspondence should be verified.
In the case of sale of fixed assets, the auditor’s duty extends to the verification of connected records and calling for detailed information in order to ascertain whether the amount of sale proceeds was reasonable.
(i) Sale of fixed assets should be authorised by the Committee and General Body and sanction from Department should be obtained. Where fixed assets are sold, the value of such assets shown in the books of accounts should be removed from the balance sheet. In the case where a register of fixed assets is maintained, the accumulated depreciation pertaining to the items disposed of should be ascertained and written off against the original value of the items and the remaining net book value, if any, charged against the proceeds of the sale. If the sale proceeds are in excess of the net book value of the assets shown in the balance sheet, the surplus should not be taken to the profit and loss account, but should be credited to a “special capital reserve” or similar other fund. Any deficit remaining after adjusting the sale proceeds against the net book value should be written off against the profit and loss accounts. The profit or loss incurred on disposal of the fixed assets should be clearly disclosed in the accounts. When fixed assets are disposed off, it is the duty of the auditor to see by a reference to the sale agreement and other correspondence that the prices realised, are reasonable. This should be particularly seen when fixed assets are sold to parties who occupy positions in the society. For eg. When a vehicle/plot/building is sold to a relative or friend of a Director or an employee of the society and the price realised is below the market rate, further investigation is called for.
(b) Sale of movable properties :- The auditor has to examine whether the sale of movable property has been authorised by the committee and that sufficient publicity has been given for the sale. He should also verify the auctioner’s report if it was sold on public auction and the agreement for sale and sale deed etc. if sold on private negotiation. The net value of the asset is to be arrived at by deducting the ‘depreciation reserve’ charged already then the surplus or deficit remaining after adjusting the sale proceeds should be ascertained. If the sale proceeds are in excess of the  net book value arrived at as above, or as shown in the Balance Sheet, the surplus should not be taken to the profit and loss account., but should be credited to the “Capital Reserve” or similar other funds. Deficit, if any, remaining after adjusting the sale proceeds against the net book value should be written off charging the loss account. Profit or loss found on disposal of the assets should be clearly disclosed in the accounts.
18. Miscellaneous receipts :-
(i) Interest and dividend :- Interest received on account of deposits with banks will be vouched with the corresponding entries in the pass book. In the case of fixed deposits and other investments the rates of interest can be ascertained from the deposit receipts and thus interest can be checked by calculating interest on the deposits or securities. Interest can be checked by calculating interest on the deposits or securities. Interest and dividend on investment and shares should be checked with the counterfoils of the dividend warrants. When register of investments have been properly maintained the auditor can make use of this register for checking the receipts. In the case of interest on securities the concerned bonds themselves should be inspected.
Occasional receipts such as sale of scraps, unused stores and spare parts, unused materials, waste papers etc. and also receipts from insurance companies and railways in respect of claims should be vouched from the receipts issued correspondence, minutes and relevant documents.
(ii) Rent receivable :- The lease deeds and agreements should be examined to ascertain the amount of rent and the due dated. If the Society Bank has maintained a Rent Roll, the rent received as shown there in should be checked with the Day Book. He should also see whether all arrears have been accounted for properly and action taken for recovering them in time. Where properties or tenements are shown as assets, enquiries should be made as to why and how long they are vacant. Housing Societies, Co-operative Industrial estates and other societies which hold large properties should maintain “Property Registrar, Demand Register, Rent Registrar etc. and the Auditor should verify the same and ascertain whether all the particulars showing the lands acquired by the society are there.
(iii) Hire charges of vehicle and machines :- Societies which own vehicles should maintain log book and trip sheet in respect of each vehicles. In the case of machinery and other costly equipments, proper accounts should be maintained with regard to the hiring out of the machinery or equipments. When these are hired out to the members of the society, necessary applications should be obtained from the hirers regarding the nature of service required, period for which they are hired out etc. Hire charges due to the Society will be verified, with reference to the log book, trip sheet and other records. For hire charges received printed receipts should be issued. The auditor can check the amount received with reference to the counterfoils of the receipts and other records mentioned above. The rates of hire charges should be fixed by the Committee. Hire register is to be maintained by the society. When the number of such vehicles or machinery is large, daily reports should be obtained from the officers in charge. The auditor will see whether the performance of the vehicle has been periodically tested by some approved workshop and the rate of fuel consumption of each vehicle got certified.
(iv) Bills receivable :- Bills receivable Register has to be verified with the Day book and Pass book. The auditor has to examine in detail, the bills matured but amount not received. It should be particularly examined whether all bills that have become due are accounted for.
(v) Commission :- Commission received will be checked with the commission accounts of the parties from whom it is received. In order to ascertain the rate of commission, the agreements have to be verified.
(vi) Interest received on loans and advances :- Interest received on loans and advance to members will be checked from the counterfoils of the printed receipts issued to them. Calculation of interest will have to be checked while checking the postings into the loan ledger.
(vii) Sale of forms, news papers and periodicals :- Usually these items can be charged to Establishment and Contingencies under stationery and printing. But some times these items may be purchased/printed for more than a year to achieve economy, in some other cases, there will be purchase/printing for re-sale also. In such circumstances the expenditure should be capitalised and shown as other assets in the Balance Sheet. The value of stock issued should be charged to loss account every year and the sale proceeds should be taken under Miscellaneous Receipt.
The following points also should be borne in mind in accounting the above:-
(1) The stock should not be included under Trading A/c.
(2) As the purchase/printing/sales etc and re-sale to members are not done to make any profit, no separate trading account need be prepared for the same.
The above instruction will not apply to societies whose object includes purchase and sale of stationery articles (like consumer Stores) printing societies etc. In their cases these purchases will come under trading account except those required for their own purposes.
(viii) Suspense Assets and Liabilities :- “Suspense Account” is an account to which items of receipts or payments are temporarily posted pending ascertainment of specified heads of account, When a loan is disbursed to a member the payment can straight away be classified to “Loan account” in the Day Book. But when money is paid in advance to a clerk for purchase of some articles for the society, the amount so paid cannot straight away be debited to “Purchase Account” or “Materials Account” as it will not be supported by any cash bill or invoice. In such cases the payment or entrustment of the money to the clerk can only be treated as an advance to be recouped when the articles are actually purchased and cash bill/invoice are produced. Such payment in advance will be booked under “Suspense Asset Account”. It is an “asset account” because like any other advance these amounts are “due to”  the society.
Similar when a prospective member remits money towards share capital before he is actually admitted to membership, that amount cannot straight away be credited to ‘share capital Account’ till he is admitted by the Board as per rules. In these case the receipt of money will be treated as an item of advance and booked under “Suspense Liability Account”. When he is actually admitted as a member, the amount is refunded to him by “book adjustment” (transfer entry) and credited to his share capital account.
From the above it will be seen that “suspense Assets-Account” and “Suspense Liability Account” will have both, a receipt and a payment entry when the transactions are completed.
Separate subsidiary ledgers have to be maintained  for both those accounts in which separate folios are provided for each person for his transactions with the society. These ledgers have to be balanced at least once in every month and the total balances tallied with that arrived at in the general Ledger, under the respective heads. So also at the close of the year, a list of all outstanding items under these heads should be prepared and the balances got agreed with the General ledger balances. The auditor should close all accounts recording the total receipts, payments and balances in each account at the end of the year. The balances under each item should be confirmed at the end of the year and if any difference is noted that should be reconciled.
While checking the accounts under ‘suspense assets’ the auditor should ensure the following, that:-
( a) the payment is supported by a proper voucher and is for a genuine purpose and made by a competent authority.
(b) the payment is correctly recorded and posted in the suspense assets ledger and in the account and folio of the concerned person.
(c) the balance struck in the suspense asset ledger whenever a transaction takes place is correct.
(d) the amount was utilised for the purpose for which it was taken and accounts settled immediately after the amount was utilised.
(e) when the advance is recovered by “adjustment”, care should be taken to see that corresponding, (contra) payment entry is also made by “book adjustment” and ‘not by cash’ as such a wrong entry will have the effect of reducing the cash balance which will tend to falsification of accounts and eventual defalcations.
The following are some of the points to be borne in mind by the auditor while checking the accounts under ‘suspense liability Account”.
(i) The receipt of the amount was genuine and properly accounted in the books of the Society.
(ii) Each item of receipt from different persons is recorded in separate folios in the Suspense Liability register and the balance correctly struck.
(iii) There are no over payments or false payments and that vouchers are obtained from the same persons in whose name the amount was received.
(iv) The original receipt given to the party should be got surrendered and kept with the voucher for refund of the amount.
(v) When refunds are recorded by “adjustment” care should be taken to see that there is corresponding receipt entry by taken to see that there is corresponding receipt entry by “adjustment” to the correct account.
Apart from these, it is a common practice to exhibit all objected payments and sometimes receipts also, in suspense accounts. When a payment is objected by the auditor, that amount is rounded off in the General ledger and deducted from the payment side, the total of the account concerned, and transferred to “suspense asset account” in the General ledger at the same time recording the transactions as an item of objected payment in the suspense assets ledger. In such case the account and folios to which the amount was deducted and transferred and vice  versa should be noted in the General Ledger.
19. Deposits :-
(i) Fixed Deposit :- The auditor has to verify the byelaws and to examine whether the receipt issued for this kind of deposit is in conformity with the bylaws. For fixed and call deposits, printed receipts from the counterfoil receipt books specifying the terms and conditions of deposits such as rate of interest, period, due date etc. are to be issued to depositors. Counterfoils of receipts should be checked with the entries in the Day Book and the fixed deposit register.
(ii) Recurring deposits :- Here a fixed amount of Re.1 or multiple thereof is paid every month for a fixed period, say 12, 24, 48 months etc. to the society. The paying-in-slips or chalans would be available for checking the amounts received. The auditor may also call for a few pass books and verify them. Daily/weekly/monthly deposits will also come under this head.
(iii) Saving deposits :- A member or a non-member can open a savings deposits account subject to the conditions prescribed under the bylaws or sub rules. Interest is usually paid on the lowest balance on any date in each month. The paying-in-slips, or chalans, which are filled in by the remitters, would be available for checking the amounts credited to their respective accounts. The auditor should call for a few pass books of depositors and compare them with ledger accounts.
(iv) Current deposits :- Pay-in-slips or chalans which are prepared by the remitters, for remitting the amounts have to be checked with the deposit register. The auditor may also verify a few balance Confirmation Certificates from the depositors obtained by the society. Otherwise, he may call for the Confirmation statements of balances from a few account holders.
20. Others :- Occasional receipts and receipts which are not specified above should be vouched from the receipts issued, correspondences,  minutes and other documents available in the society.

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