1. Graduate Report: 2012-2013
Urban Governance and Management (CE-638)
Dr. Krupesh A. Chauhan
Asst. Prof. Chetan R Patel
Post Graduate Section in Urban Planning
Civil Engineering Department,
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2. Municipal Audit
3. Why municipalities have an audit?
3.1.Objectives of Audit
3.2. Administration’s responsibilities
4.1. Responsibilities of Auditors
5. Audit Techniques
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Audit is an evaluation of a person, organization, system, process, enterprise, project
or product. Audit” is an instrument of financial control. In its relation to commercial
transactions, it provide independent assurance that financial information is reliable
This graduate report is an attempt to give a brief view on Municipal audit, its concept,
objective and techniques used for audit.
2. Municipal Audit
In the year 2001, Government of India (GoI), based on the recommendations of the
Eleventh Finance Commission, issued guidelines to the Comptroller and Auditor General of
India (CAG), to prescribe formats of Budget and Accounts for Panchyat Raj Institutions and
Urban Local Bodies (ULBs) amenable to computerization. In September, 2003, the GoI
suggested to the CAG to develop National Municipal Accounts Manual (NMAM). In
December, 2004, the NMAM developed by CAG was made available to State Governments
across the country for development of State-specific Budget and Accounts Manuals to be
used by the ULBs.
A municipality can be defined as a unit of local self government in an urban area. By
the term ‘local self –government in an urban area, is ordinarily understood the administration
of a locality-a village, a town, activity or any other area smaller than a state-by a body
representing the local inhabitants, possessing fairly large autonomy, raising at least a part of
its revenue through local taxation and spending its income on services which are regarded as
local and, therefore, distinct from state and central services.
These bodies derived their revenue from a numbers of sources-taxes on property,
taxes on trade, taxes on persons, fees an licences, non-taxes resource such as rent of land,
houses, income from commercial undertaking, government grants etc.
Property taxes and octroi are the major sources of the municipal authorities; other
municipal taxes are profession tax, non- mechanised vehicle tax, taxes on advertisement,
taxes on animal and boats, tolls, show-tax, etc. local bodies may receive different types of
grants from the state administration as well.
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3. Why municipalities have an audit?
Legislators, other Government officials, and the public want to know whether:
i. Government resources are managed properly and used in compliance with laws and
ii. Government programmes are achieving their objectives and desired outcomes.
iii. Government services are being provided efficiently, economically, and effectively
Financial audits play a vital role in helping to preserve the integrity of public finance and
maintain citizens’ confidence in their elected leaders. Transparency and accountability in
government is essential to show that public functions are being carried out efficiently,
ethically and equitably.
3.1. Objectives of Audit
The external control of municipal expenditure is exercised by the state governments
through the appointment of auditors to examine municipal accounts. The municipal
corporations of Delhi, Bombay and a few others have powers to appoint their own auditors
for regular external audit.
The important objectives of audit are:
a. reporting on the fairness of the content and presentation of financial statements;
b. reporting upon the strength and weaknesses of systems of financial control;
c. reporting upon whether value is being fully received on money spent; and
d. Detection and prevention of error, fraud and misuse of resources.
3.2.Responsibilities of Administration
Each administrative has some responsibilities, that have to be taken care of, which will
help the auditor during municipal Audit procedure:
i. All records and books of account should be completed, posted, balanced and made
available for examination by the auditor.
ii. Supporting data should be grouped and matched to provide for easy examination.
iii. Payroll records should be completed for the fiscal period and required forms should be
completed and filed with the appropriate government ministry or agency.
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iv. A general ledger trial balance should be completed to determine whether adjusting
entries are required.
v. Adjustments should be journalized and posted so that a working trial balance can be
completed prior to the audit
It would be imminent on the part of the auditor to understand financial administration
of local bodies before embarking upon the audit.
Some of the aspects are as under:
a. Budgetary Procedure
This is geared to sub serve the twin consideration of financial accountability
and control of expenditure. The main objective is to ensure that funds are raised and
moneys are spent by the executive departments in accordance with the rules and
regulation and within the limits of sanction and authorization by the legislation or
b. Expenditure Control
The system of financial control obtaining in the state and central government
level is conditioned by the fact that there is a clear demarcation between the
legislature and executive. The integration of legislation and executive powers in the
municipal council makes it difficult for its executive to function as its inquisitorial
body as well. Moreover the separation of executive powers and function in municipal
government cannot accommodate the existence committee. This leaves the system of
external audit by state government as the only instrument of controlling municipal
c. Accounting System
Municipal accounting and budget format have been criticised as neither simple
nor comprehensible, sometime providing inadequate information and at other times
surfeit of information. Both these situation are not conductive to a proper system of
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4.1.Responsibilities of Auditor
The auditor is to ensure that the prescribed standards of accounting are observed and that the
transactions are entered under proper heads. The responsibilities of auditor are as follows:
i. Auditors should act in a way that will serve the public interest, honour the public trust,
and uphold their professionalism.
ii. Auditors need to make decisions that are consistent with the public interest in the
programme or activity under audit.
iii. Auditors need to perform all professional responsibilities with a highest degree of
iv. Auditors need to be professional, objective, fact-based, non-partisan, and non-ideological
in their relationship with audited organisations and users of the auditors’ reports.
v. Auditors are also responsible for being independent in fact and appearance when
vi. Auditors should be objective and free of conflicts of interest in discharging their
5. Audit Techniques
The auditor obtains evidence in performing compliance and substantive procedures by
one or more of the following methods:
iii. Inquiry and confirmation
v. Analytical Review
vi. Flowcharting; and
Inspection consists of examining records or documents. It provides evidence of
varying degrees of reliability depending on their nature and source and the effectiveness of
internal control over their processing.
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Four major categories of documentary audit evidence, which provide different degrees of
reliability to the auditor, are:
a) Documentary evidence created by third parties and held by the auditor;
b) Documentary audit evidence created and held by third parties;
c) Documentary audit evidence created by third parties and held by the organisation
d) Documentary audit evidence created and held by the organisation.
Observation consists of looking at a process or procedure being performed by others, for
example, the observation by the auditor of the counting of inventories by the organization’s
personnel or the performance of control procedures that leave no audit trail.
a) It provides a greater understanding of the business through audit involvement with
b) Information collected reflects actual behaviour and current events and not past events
c) Potentially time consuming and difficult to record data and observe large numbers of
people or activities.
d) Random observation may not provide an adequate evaluation of the process due to
fluctuations in volume or activity.
5.3. Inquiry and confirmation
Inquiry: involves seeking information from knowledgeable persons inside or outside the
organisation. Inquiry involves seeking information from knowledgeable persons inside or
outside the organisation
Confirmation is the name given to a specific form of inquiry that is particularly widely used.
It involves obtaining written confirmation from a third party in relation to an account balance
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in which the third party has an interest. For example, the auditor normally requests
confirmation of receivables by direct confirmation with debtors
Confirmations are best used where there is a knowledgeable party, independent of the
organisation and where alternative reliable evidence is not readily available
Computation consists of checking the arithmetical accuracy or reasonableness of
source documents and accounting records or of performing independent calculations. The
main advantage is it may provide the most efficient method to evaluate the outcome of a
certain process The disadvantage is it may be complex and time consuming and may require
assistance of outside experts, particularly where a valuation is being assessed - for example,
the internal auditor’s assessment of accuracy of iron ore stock-pile inventory recording
5.5. Analytical Review
Analytical review procedures may be defined as substantive tests of financial
information made by a study of comparisons and relationship among data i.e. analytical
review involves a comparison of detail balances or statistical data on a period-to-period basis
in an effort to substantiate reasonableness without systematic examination of the transactions
comprising the account balances.
Analytical procedures are used for the following purposes:
i. To assist the auditor in planning the nature, timing and extent of other auditing
ii. As a substantive test to obtain evidential matter about particular assertions related to
balances or classes of transactions As an overall review of the financial information in
the final review stage of the audit
iii. In some cases, analytical review procedure can be more effective or efficient than
tests of details in reducing detection risk for specific financial statement assertions.
Analytical procedures include comparison of financial information with:
i. Comparable information for a prior period or periods
ii. Anticipated results, such as budgets or forecasts; and
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iii. Similar organisation information, such as comparison of the ratio of Establishment
iv. Expenses to Total Income with the averages of other organisations of comparable size
Analytical procedures also include study of relationship:
i. Among elements of financial information that would be expected to confirm to a
predictable pattern based on the organisation’s experience
ii. Between financial information and relevant non-financial information
Analytic review is based on the assumption that comparability of period-to-period
balances and ratios shows them to be free from significant error. A well performed analytic
review not only benefits the examination by providing an understanding of the ULB’s
operations, but also highlights matters of interest and potential problem situations
A flowchart is a method for documenting and understanding the flow of a system and for
identifying its control points. This technique can be resorted to for evaluation of the internal
control system. It is a pictorial description of how transactions flow through a system. They
visually communicate the procedures, controls and the sequence in which they occur.
The advantages of using a flowchart to document a system are as follows:
i. Flowcharts are easier and less time consuming to understand than a narrative
ii. Flowcharts make it easier to represent flow of transactions using standardized
iii. It gives a bird’s eye view of the system
iv. Flowcharts are easier to update
There are three rules of flowcharting as it relates to auditing:
i. Prepare or update a flowchart for each audit, where practicable.
ii. Identify control points.
iii. Prepare a narrative on control points.
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Interview can also be described by other synonyms such as audience, conference,
consultation, dialogue, meeting, talk, examine, interrogate, question etc. Interviewing is a
process for gathering information which is a fundamental part of audit work.
Various types of interview are
a) Initial contact: This sets entire tone and tenor of the audit programme. The auditee
perceives the audit as a positive and constructive tool or avoidable inconvenience.
The terms of reference for the audit are discussed and a clear mutual understanding is
b) Fact finding: This is backbone of the audit work and a fine balance is required to be
maintained between getting the facts and disturbing the auditee’s work to avoid
conflict. Negotiation skills, tact, and diplomatic approach are to be adopted.
c) General survey: A general assessment of the overall domain environment to
understand work culture and to define high areas of risk that may require interaction
with senior officials. An effort shall be made to sell the audit as a service.
d) Wrap up meeting: This wrap up meeting involves explaining the audit findings to
the senior officials in order to avoid surprises to them in the final audit report. It is a
special negotiation process wherein the auditor is able to retain main audit paras but
tones down certain other paras wherein the senior officers are able to bring in new
perspective to initial audit findings. Personality factors may create sometimes a
barrier to the effectiveness of audit closure process and finalization of report.
e) Staff appraisal: This appraisal process is intended to appreciate staff attitudes, skills,
and motivational needs.
f) Fraud: Statutory implications shall be borne in mind as interviews in connection
with investigations are covered under various Acts, such as Criminal Procedure Code,
Evidence Act, Anti-Corruption Act and disclosure requirements stipulated in Rights
to Information Act.
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Transparency and accountability in government is essential to show that public
functions are being carried out efficiently, ethically, and equitably. Financial audits play a
vital role in helping to preserve the integrity of public finance and maintain citizens’
confidence in their elected leaders. The audits of the accounts of ULBs have generally been
unsatisfactory to a large extent and it is an acknowledged fact that these audits have virtually
ceased to have practical effect in ensuring the integrity of ULBs.
Government, auditors and inspectors need appropriate information to monitor
progress and assess performance. For better value for money, better financial management
and improved financial reporting, there is an urgent need to deliver high-quality, risk-based
audit in synchronization with the trends in urban sector reforms. This includes the use of
resources assessment with a specific judgment on how well ULBs achieve value for money.
Promote world-class financial management and reporting by local authorities and provide
practical guidance to assist them in achieving those high standards.
1. “Andhra Pradesh Municipal Audit Manual (February 2008), Department of
Municipal Administration and Urban Development, Government of Andhra Pradesh.
2. “Audit Manual for Metropolitan, Municipal and District Assemblies”, issued by The
Internal Audit Agency/Ministry o f Local Government and Rural Development.
3. “National Municipal Accounts Manual” (November 2004,) issued by Government of
India Ministry of Urban Development.