An Introduction to Indian Government Accounts and Audit, Second Edition 1940

National Archives Library
vrmrw^nr
Government of India
N ew Delhi
II
ca// A/o. . y ' S ^ t S y —
10,000 NAL/12

INDIAN
AN
INTRODUCTION
TO
GOVERNMENT ACCOUNTS
AND AUDIT
SECOND EDITION
Jaaued under the Authority of the Auditor General of India.
P u b l i s h e d b y M a n a g e h oh P u b u c a i i o n S j D k io ii
JP b in te d b y M a k a c e b , G o v ju u w b n c o f I n d i a P b b s s , C iiC D iT A
1940

List of Agents in India from whom
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Kristoawami & Co., TepB»kulam P. O., Trichlnopoly
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PREFACE.
The issue of this revised edition of “ An Introduction
to Indian Government Accounts and Audit ” has been
rendered necessary by the constitutional changes introduced
by the Government of India Act, 1935, and the consequent
changes in the sphere of Finance, Accounts and Audit.
The revision is contemporaneous with, and is alp made
necessary by, the issue of new Account and Audit Codes
by the Auditor General of India in pursuance of the pro
visions of the Act and the Government of India (Audit and
Accounts) Order, 1936.
2. No substantial change in plan has been made in this
edition. A slight re-arrangement has been made in
Parts III, IV and V in order that the subjects of study
may be developed more logically. The contents of three
separate chapters in the previous edition have with
necessary or suitable modifications been incorporated in
the relevant chapters in the present edition, while one of
the chapters in the previous edition has been split up into
two separate chapters. Two new chapters have been
included in the present edition,—one, on the subject of
audit of Debt and Remittance transactions, in Part III,
and the other, on the financial, accounting and audit
arrangements in respect of the transactions of the Crown
Representative, as a separate Part at the end.
3. The opportunity has been taken to eliminate all
pwrely historical matter relating to the development of
accounts, audit and financial administration, only so much
of the development of an idea or system being retained as
is necessary for an explanation of the present position.
4. The Preface to the first edition has been reproduced
in original and is appended. The instruction in the last
paragraph of that Preface continues to apply.
N e w D e l h i ; ) E . BURDON,
The 9th A'pril 1940. ) Andttor General of India.

PREFACE TO THE FIRST EDITION.
The present Manual combines, for the first time, the
“ Introduction to Indian Government Audit ” with the
“ Introduction to Indian Government Accounts It is
based in the main on the two earlier volumes which bore
these titles, the former of which was prepared by Sir
Frederic Gauntlett, K.C.I.E., K.B.E., I.C S. (late
Auditor General in India), while the latter was originally
drafted by Mr. L. E. Pritchard, (late Accountant General),
and subsequently revised by Sir Frederic Gauntlett.
Much of the material in the present Manual is taken
direct from the second editions of the earlier volumes, with
such modifications and omissions as are necessitated by the
changes which have taken place since they were published.
At the same time the opportunity has been taken
thoroughly to re-arrange the matter in such a way as to
facilitate a consecutive study of the subject. Moreover,
a considerable amount of new matter has been incorporated,
the more important portions of which deal with the consti
tutional position of Audit, and incidentally of Accotints,
under the reformed constitution given to India in 1919.
This Manual has been compiled at a time when further
changes of far-reaching importance are expected. To
postpone its issue until the changes are effected would
probably have involved a delay of several years; while
there is a certain advantage in making available at the
present stage a summary of the position as it now stands
in order to make it easier for Probationers,—and it is
hoped for others also,—to grasp the significance of the
impending changes as they take place.
This “ Introduction ” carries no authority beyond that
of the Statutory Rules, Codes, etc., which it attempts to
summarise. It may not, therefore, be quoted as carrying
any authority in itself. It must be remembered that a
summary of detailed Eules can only give a general
conspectus of their effect;and it is incumbent upon readers
to study the originals, to which this volume is intended! to
serve as a guide.
E. BURDON.
Auditor General irt'India.
July 1st, 19S0.

TABLE OF CONTENTS.
PART I.
A PRELIMINARY SURVEY OF ACCOUNTS AND AUDIT
SYSTEMS.
CHAPTER 1.
The Purpose of Accounts and Audit.
Subject matter .
Accounts and Transactions
Accounting
Keeping of Accounts
Audit . . . .
Auditor . . . .
Fundamental Principles
CHAFTEB 2.
F a b A.
1
2
3
4
5
7
9
Government System of Accounts and Audit and Commercial
System.
A.— A c c o u n t s .
Difference between Government and Commercial Functions
Principles and Methods of Commercial Accounting
Principles of Government Accounting .
Purpose of Government and of Commercial Accounts
Commercial Undertakings conducted by Government
Methods of Government Accounting
B.— ^
A
udit.
Principles of A u d i t .........................................................................................
Purpose and Procedure of Commercial A u d i t .............................................
Difference between a Government and a Commercial Firm necessitating
differences in Audit P r o c e d u r e ..............................................................
Government Audit as compared with Commercial Audit
CHAPTER 3.
The Position and Functions of the Auditor General of India.
Position of the Auditor General . . . . . . . .
Duties and Powers of the Auditor General in regard to Accounts .
Duties and Powers of the Auditor General in regard to Audit .
Duties of the Auditor General in regard to the Accounts of the Crown
R e p r e s e n ta tiv e ........................................................................•
Duties of the Auditor General in r^ ard to the Accounts of the Federal
Railway A u t h o r i t y ...............................................................' •
10
11
14
16
17
18
19
20
32
26
32
35
40
45
46

T i l l TABLE OF CONTENTS.
CELAPTER 3— covM.
Other Statutory Duties of the Auditor General . .
Arrangemente in regard to the Accounts and Audit of Government
transactions in the United Kingdom . . . . . .
Relations between the Auditor General of India and the Auditor of
Indian Home A c c o u n t s ........................................................................
P a r a .
4 f
48
50
CHAPTER 4.
Theory of Independence of Audit— Combination of Functions
in relation to Accounts and Andit.
Auditor’s Independence of the Accounting Authorities . . . . 51
Auditor’s Independence of the E x e c u t i v e ............................................. 52
Separation of Accounts from A u d i t ...................................................... 53
Possible Changes relating to the Keeping and Audit of Pronncial
A c c o u n t s ................................................................................................... 54
CHAPTER 3.
Distribntion of Responsibility for the Keeping and Andit ot
Accounts in India.
A .— Gkneral.
Distribution of Accounting and Audit D u t i e s .................................... 55
B.— ^DisTRiBtriiox OF A udit Work.
Main Branches of the Indian Audit D e p a r tm e n t....................................56
Channels of Control by the Auditor G e n e r a l.................................... 57
Civil Audit Offices .................................................. . . . . 58
Railway Audit O f f i c e s ................................................................................. 59
Posts and Telegraphs Audit O ffic e s ...............................................................60
Defence Services Audit O ffic e s ........................................................................ 61
Audit of Government Commercial U n d e r ta l-in g o .................................... 62
C.— D i s t r i b u t i o n o f A c c o u n t in g D u t i e s .
Transactions of the Civil, Public Works and ForestDepartments . 63
Transactions of the Railway D e p a r t m e n t ...........................................64
Transactions of the Posts and Telegraphs Department . . . . 65
Transactions of the Defence S e r v ic e .s .................................................. 86
Commercial A c c o u n t s ................................................................................. 37

TABLE OF CONTENTS. IX
PART n.
THE INDIAN FINANCIAL STRUCTURE AND THE INmAL
ACCOUNTS.
CHAPTER 6.
General Straetnre of the Financial Adminiitiation in India.
Paka.
Structure of A d m in istra tio n ....................................................................68
Finances of Provincial GrOTernments . . . . . . 71
Treasuries ..............................................................................................72
Treasury T lu le s ..................................................................................... 73
Accounts with the B a n k .............................................................................75
Transactions with other Governments . . . . . . . 76
Initial Accounts . . . . . . . . . . . 77
C la s s ific a t io n ............................................................................................. 30
C o m p i l a t i o n ..............................................................................................81
Audit ......................................................................................................87
Provision of F u n d s .....................................................................................88
E s tim a te s ...................................................................................................... 89
Ways and Means ..... ................................................................................ 91
R e s o u r c e ...................................................................................................... 92
Functions of variousAuthorities . . . . . . . . 93
Comparison with theEnglish s y s t e m ..................................................... 94
CHAPTER 7.
Cnirenc7 and Resonice Arrangements.
Introductory ..................................................................................... . 9 5
Currency ...................................................................................................... 96
R e s o u r c e ......................................................................................................102
Funds in I n d ia ..............................................................................................104
Funds in E n g l a n d ..................................................................................... 107
CHAPTER 8.
The Working of a Treasory.
I n t r o d u c t o r y ..............................................................................................108
P e r s o n n e l...................................................
Building . . . . . . .
Opening of the Treasury .
R e c e i p t s ...................................................
P a y m e n ts ...................................................
Treasurer’s and Accountant’s Books
Incorporation of Snb-treasury Accounts .
Daily C l o s i n g ...........................................
Receipt, issne and safe custody of Treasure
109
112
113
114
115
117
118
119

T A B I^ OF CONTENTS.
CHAPTER 8--contd.
Monthly Balance
Monthly Accounts
Daily and Monthly Agreement
Transactions at the Bank
•Check at the Treasury
Classification in the Treasury Accounts
Treasury Inspection . . . .
P a e a .
121
122
127
129
133
135
136
C H A P T E R 9.
Procedure of Seitartments whose Initial Accounts are compiled,
in whole or in part, departmentally instead of at the
Treasury.
A.—GENERAL.
Heceipts credited in lump, and Payments made by cheques . 138
Organisation
Payments
Receipts
B.—PUBLIC WORKS DEPARTMENT.
(o ) C o n s t i t u t i o n or t h e D e p a b tm e n t.
(6 ) R e l a t io n s w it h t h e T b e a s u b t .
(c) P b b p a b a tio n o f I n i t i a l A c c o u n ts .
Divisional and Sub-divisional Offices . . . .
(i ) Sub-divisional Accounts.
F u n d s ..............................................................
Account R e c o r d s ...............................................
Cash Book..............................................................
Muster R o l l ......................................................
Measurement B o o k ...............................................
Works A b stract...................................................
Stores Accounts . . . . . .
Monthly Sub-divisional Accounts
(it) Divisional Accounts.
Account R e c o r d s ...............................................
Contractors’ Ledger .......................................
Register of W o rk s...............................................
Transfer Entry B o o k .......................................
Revenue Accounts . . . . .
Monthly Divisional Accounts .
140
141
144
146
146
148
149
150
151
152
153
164
156
158
169
160
161
162

TABLE OF CONTENTS. ^
CHAPTEB ft—eoflW
.
C — D E FE N CE D EPARTM ENT.
(o) R e l a t io n s -
w ith t h e T r b a s u b t .
P a b a .
■
Cash Collections and F u n d s .....................................................................
(b) P r e p a r a tio n o f In ttiaI/ A c o o d n tb .
O r g a n i s a t i o n ...............................................................................................
D.— RAILW AY DEPARTM ENT.
I.— R a ilw a y s — O pen L itie s .
(a) Itelations with the Treasury.
Cash Collections and F u n d s .....................................................................1^0
(b) Preparation of Initial Accounts.
G e n e r a l ........................................................................................................
R e c e i p t s ........................................................................................................
P a y m e n t s ........................................................................................................1^5
II.— ^RaH/Wats u n d e r C o n s tb d o tio n .
O r g a n i s a t i o n ...............................................................................................
E.— POSTS AND TELEGRAPH S DEPARTM ENT.
I.— P o s t a l S e c tio n .
(a) Belations ivith the Treasury.
Cash Collections and F u n d s .................................................... • 179
Organisation and Account Records ........................................................... 180
Treasurer’s Cash B o o k ............................................................................. 181
..............................................................................182
..............................................................................183
.............................................................................. 184
..............................................................................185
....................................... 186
Head Office Summary
Head Office Cash Book
Monthly Cash Account
Otlier Returns .
Railway Mail Service
H . — T e l e g r a p h S e c t io n .
(a) Belations with the Treasury.
Cash Collections and F u n d s ................................................... 187
Account R e c o r d s ...................................................................................... 188
Stores T ran sa ctio n s..............................................................................* • 19®
Works A c c o u n t s ...................................................................................... 191

X II
t a b l e o f c o n t e n t s .
CHAPTER 9-co«oW .
F . — F O R E S T D E P A R T M E N T .
(a ) R e l a t i o n s w i t h t i t e T r e a s u r t .
C ash C o llec tio n s a n d F u n d s
(6 ) P h e p a r a t io n * o f I n it ia l A c c o u n t s .
O rg a n is a tio n
A c c o n n t R e c o rd s
G e n e ra l A rra n g e m e n t s
G .— O T H E R D E P A R T M E N T S .
CHAPTER 10.
The Original Records. The Basis of Accounts and Audit.
A c c u ra c y
V o u c h e rs . . .
R e c e ip ts a n d C e rtific a te s . . . . .
Im p o s s ib ility o f V e rific a tio n b y A u d it Office
P a r t p la y e d b y C o u n te rs ig n in g a n d C o n tro llin g O fficers !
D e te c tio n o f fr a u d
R e c o rd s su b m itte d to th e A c c o u n t Office
CHAPTER 11.
Classifleation of Receipts and Expenditure in Government
Accounts.
G e n e ra l R u le s o f C lassific atio n
O lassific atio u o f C a p it a l E x p e n d it u r e
P u r p o s e o f d e t a ile d C la ssific a tio n
M a in P r in c ip le o f C lassific atio n . . . ’
R e s p o n s ib ility f o r C la ssific a tio n
P a r a .
192
19S
19-5
199-
3(30
201
204
206
207
211
21-3
21r
221
222
223
224

T A B U OF CONTENTS. X U l
PART IIL
THE MAIN PRINCIPLES AND THE MAIN PROCESSES OF
AUDIT.
CHAPTER 12.
PanctionE and Spirit of Andit.
P ara.
Functions of Audit ....................................................................225
Spirit of A u d i t ..............................................................................................229
Procedure for Audit S c r u tin y .................................................................... 232
Audit to assist G o v e r n m e n t.................................................................... 235
CHAPTER 13.
Andit ol Beceipts.
Scope ol Roceipt A u d i t .................................. ..........................................236
Hegulations for the conduct of Receipt A u d i t ................................. 239
•Classes of Receipts subjected to A u d i t .................................................. 241
Functions of Receipt Audit ...... ........................................................... 242
-Check against Demands . . . . . . . . . . 24.3
•Check of Credit in the Acoounfc . . . . . . . 248
CHAPTER 14.
Andit oi Expenditure.
Essential Conditions governing E xp en d itu re...........................................M'J
Duty of A u d i t ..............................................................................................251
CHAPTER 15.
Andit of Sanctions.
Nature of Sanction Audit . . . . . . . . . 257
Communication of Sanctions to A u d i t ...................................................
Audit of Sanctions of the Secretaiy of State and of the CtentraJ and
Provincial Governments . . . . . . . . . 260
Audit of Auditor General’s S a n c tio n s ................................................... 261
<5ertain guiding Principles governing Sanction Audit . . . .
Audit of Sanctions to the grant of additions to pay and other special
concessions and a l l o w a n c e s ........................................................... 263
Record of Sanctions ..................................................................................... 264
Provisions governing Sanctions to expenditure on Public Services . 266
Authorities competent to sanction e x p e n d it u r e .................................. 267
CHAPTER 16.
Andit against Provision of Funds. '
I n t r o d u c t o r y ..............................................................................................268
Annual Financial S ta t e m e n t ................................................... - 269
Schedule of Authorised E x p e n d i t u r e ................................................... 270

x Iy t a b l e o r CONTENTS.
CHAPTER I'^—coM.
Supplementary Schedule of Authorised Expenditure
Sub-heads of Grants and Appropriations
Allotments and Re-appropriations
Nature of Audit against Provision of Funds
Appropriation A u d i t ...................................
Watch of Progress of Expenditure .
Responsibility for Appropriation Audit .
CHAPTER 17.
Audit against Rules and Orders (Audit against Regularity).
General . . . . . . .
Objects of A u d i t ....................................................................
Scrutiny of Rules and O r d e r s ...................................................
Interpretation of Statute, Rules and Orders . . . .
P a e a .
273
274
27fi
277
280
286
287
288
291
292
295
CHAPTER 18.
Audit of Debt and Remittance Transactions.
Nature of A u d i t ............................................................................. ggg
B o r r o w i n g s ............................................................
Contingent L i a b i l i t i e s ............................................................
Investments . . . . . . . . gog
Service and Provident F u n d s ...................................................
Reserves and ReserveF u n d s ..................................................... 30^
^
D e p o s i t s .....................................................................................
Loans and Advances byG o v e r n m e n t .................................... 31q
Suspense A c c o u n t s ............................................................................. gjg
R e m i t t a n c e s .................................................................... 3^5
CHAPTER 19.
Audit of Stores and Stock.
Linidtation of Responsibility for Audit of Stores and Stock . . .3 1 6
Regulations for Audit of Stores and S t o c k .................................. '
Stores A c c o u n t s ........................................................... gj^g
Functions of A u d i t ...............................................................................’ ' gj^g
CHAPTER 20.
Resulbi ol Audit. Audit Reports. /
Value of A u d i t .................................................................... 32^
Detailed Reports on A u d i t .................................. 39^
Collective Reports on A u d i t ...................................................
Object of the Report on the Appropriation Accounts . . ! ! 33()
Object of the Report on the Finance Accounts ■
. . . " 331
Submissicu of the R e p o r t s .................................... ' 339
Functions of the Public AccountsCommittees of the Central aud
Provincial L e g is la t u r e s ................................................... 333
Assistance rendered through the Reports . . . . " 335
Review of F in a n c e ..................................................... ' ggg

TABLE OF CONTENTS. X V
CHAPTER 20-cotUd.
P a b a .
Disposal of the R e p o r t s ............................................................................
Importance of the E x p o r t s ....................................................................338
Reports on the Accounts of the Crown Representative . . . . 3.39
CHAFTEB 21.
Relations between the Audit Department and the Finance
Departments of the Central and Provincial Governments.
Co-operation between Audit and the Finance Department of Govern
ment ..................................................................................................... 3*“^
C o n c o r d a t s .............................................................................................
Duties of the Finance Department and corresponding Functions of
the Audit D e p a r t m e n t ....................................................................342;

TABLE OF CONTENTS. XVU
PART IV.
t h e m a c h in er y a n d sp e c ia l p r o c e s s e s o f a u d it a n d
ACCOUNTING.
CHAPTEB 22.
Office Ammgements and Fiocedoie.
I n t r o d u c t o r y ............................................................
Arrangements in the Civil Audit Offices .
Arrangement in the Posts and Telegraphs Audit Offices
Arrangement in other Audit Offices
Inspections . . . . . . . .
Audit and Account Procedure .
CHAPTER 23.
P a b a .
349
350
357
358
359
360
The Acts, Codes and Begnlations, etc., used in Aa^it Oflicei.
G e n e r a l ..............................................................................................................
Acts of P a r lia m e n t.................................................................... 362
Orders in C o u n c i l ......................................................................................366
Secretary of State’s Rules and Directions .................................. 369
Acts of Central and Provincial L eg isla tu res...........................................372
Rules of the Governor General and Governors of Provinces . . . 374
Subsidiary or Procedure R u l e s ..................................................... . . 378
Account C o d e .............................................................................................. 379
A u d it C ode an d M a n u a l ....................................................................................... 384
Auditor General’s Manual of Standing Orders . . . . ' . 388
Local Manuals of Accountants Greneral................................................... 389
M is ce lla n e o u s ............................................................ 391
CHAPTER 24.
Remoneration of G^azetted OoTeniment Servants and 0!
Establishments.
A.— Grn'khai,.
P a y B i l l .................................................................................................................... 394
B.— R emuneration of Gazetted Goveenkeot Sbbvajtts.
Pay Bills of Gazetted Government S e r v a n ts ...........................................395
Audit of Pay Bills of Gazetted Government Servants . . . . 397
Increments on Time-scales of P a y ........................................... ....... 399
Scale R e g i s t e r ............................................................................. ........ 401
Sterling Overseas P a y ............................................................................ 402
Passage A c c o u n t s ......................................................................................403
Leave A c c o u n t ....................................................................................... . 404
History of S e r v ic e s ......................................................................................406
IV-10-7 2

X V lll TABLE OF CONTENTS.
CHARTER 24—contd.
C .— R e m d n e b a t io n o f E s t a b l is h m e n t s .
Pay Bills of E s t a b li s h m e n t .............................................
Audit of Pay Bills of Establishment . . . .
Audit of Pay Bills of Establishments on Time-seales of Pay
D.— Service R ui*
e s .
General . . . .
L i e n ....................................
P a y ....................................
Pay on a Tinie-scale .
Compensatory Allowances .
Fee& and Honoraria
Leave Rules
Leave Salary
Average Pay
Drawing of Leave Salary
Leave Accoimt . ,
Grant of Leave not due .
Extraordinary Leave
E.— AxiOGATiON OF Leave Salaries among differen t
6 oehnments.
Rules of In c id e n c e ................................................................................
CHAPTER 25.
Travelling Allowance.
Rules applicable to different Classes of Government Servants .
Rules framed by the Governor General for Journeys on Tour
Classification of Government Servants . . . . . .
Daily A l l o w a n c e ................................................................................
M i l e a g e ..................................................................................................
Rail and Steamer F a r e s .......................................................................
Rates for Journeys by A i r ..............................................................
Rates when Government supplies means of locomotion .
Permanent Travelling A llo w a n c e .....................................................
Conveyance A l l o w a n c e .......................................................................
Bill forms .........................................................................................
Audit ..................................................................................................
C H A m s 26.
Fenaons.
I n t r o d u c t o r y ................................................................................
Preliminarj Verification of S e r v ic e ............................................
Anticipatory Pensions . . . . . . . .
Authority for Disbursement of P e n s io n ....................................
Method of Pension Payment and Identification of Pensioner
Audit of ‘ Pension P a y m e n t * .....................................................
P a r a .
406
407
409
413
416
419
120
423
424
428
430
431
432
434
435
436
437
438
440
441
442
443
443
446
447
449
450
451
452
455
459
460
461
465
466

TABLE OF CONTENTS. XIX
CHAPTER 26— con^J.
P aha.
Allocation of Pensions among different Governments . . . . 467
(Commutation of Pensions . . . . . . . . 468
CHAPTER 27.
Contingent Ezpenditnie.
Introductory .................................................................................................469
Classification of CJontingent C h a r g e s .....................................................470
Permanent A d v a n c e ...............................................................................473
Responsibilities of Drawing O f f i c e r s .................................................... 474
Duties of Controlling A u th o r itie s ............................................................. 475
Audit ......................................................................................................... 476
(Contract C o n tin g e n c ie s ...............................................................................480
■Scale-regulated C o n tin gen cies......................................................................481
•Special C o n t i n g e n c i e s ............................................................................... 482
Countersigned C o n tin g e n c ie s ...................................................................... 483
Fully-vouched C o n tin g e n c ie s ...................................................................... 484
Kclative responsibilities of Controlling and Audit Authorities . . 485
CHAPTER 28.
Gnnts-in-aid.
I n t r o d u c t o r y ....................................................................................... 486
Audit ......................................................................................................... 487
CHAPTER 29.
Allocation of Ezpenditnre between Ca^tal and Revenue.
I n t r o d u c t o r y ....................................................................................... 492
Basic idea of Capital and R e v e n u e ............................................ 493
Distinction between Capital and Revenue Expenditure. . . . 494
Expenditure of a Capital n a t u r e .................................................... 495
Expenditure debitable to Revenue A c c o u n t ................................... 496
Difficulty in laying down hard and fast R u le s ...................................497
Rules for R a ilw a y s ...............................................................................498
System in Posts and Telegraphs D e p a rtm e n t................................... 500
Rules for Irrigation Works, etc.................................................. 501
Sources from which Capital and Revenue Expenditure is met . . 502
Provincial Governments’ Powers of B o r r o w in g ...........................-503
Duties of Audit ................................................................................505
CHAPTER 30.
Woiki Accounts.
A.— OtNKRAl.
I n t r o d u c t o r y ........................................................................................ 506
Need for Preparation of Estimates before Sanction. . . . 507
Basic Rules applicable to Works executed by the Public Worfce
D e p a r t m e n t ................................................................................509
Supplementary and Revised Eetimates . . . . . . .511
2 a

XX TABLE OF COMTBHTS.
CHAPTER Z
a
—c
o
rO
d
.
P aba .
Im portance o f accurate M e a a n ir e m e n t...............................................................516-
C ontracts .............................................................................................................................513
B .— W o rks ExrENDirtTHE.
A u d it ........................................................................................................ 521
D ivisional A ccountant and hisF u n c t i o n s .......................................................522
A u d it in th e A u d it O f f ic e ..............................................................................................530
Local I n s p e c t i o n ........................................................................................................ S
S
T
O.— WoBKS R e o d p ts.
A u d it .................................................... .....................................................53S-
D .— General PKrNoiPLES in begabd to labge Construction
P eo iects.
Accounting P r i n c i p l e s ................................................................................... . 541
Special Tools and P l a n t ..............................................................................................544
Interest c h a r g e s ........................................................................................................ 546-
A u d it ............................................................................................................................. 647"
CH AFTEB 31.
Stores and Stock Accounts.
A .— General.
Introductory . . , .................................................................................... 550* *
B .— P ublic W o r k s S to res. A
■
i*
i
A dm inistration and C o n t r o l ................................................................................... 554-
M aintenance of S t o c k .................................................................................... 556
Accounts m aintained b y th e E xecu tive . .................................................... 557 j f
H alf-Y early R egister of S t o c k ......................................................................... 560
P ricin g of A r t i c l e s ........................................................................................................ 561 S
Stock V e r i f i c a t i o n ........................................................................................................ 562 ^
Accounts of Tools and P la n t and Road M e t a l .......................................... 563
A u d it .............................................................................................................................56o
C .— Stobbs akd Stock A ccoxtnts of R a ilw a ys.
A dm inistration and C o n t r o l ................................................................................... 5 6 r
S upply of S t o r e s ........................................................................................................5
6
9
Purchases in I n d i a ........................................................................................................ 5
7
0 '4
M a n u f a c t u r e .................................................................................................................. 571
E nglish Purchases ........................................................................................................ 572- '■
Funds fo r Purchases . . . .................................................... 573
Issue of S t o r e s .................................................................................................................. 574
N um erical A ccount in the S tore Depot— C ard Ledgers . . . . 5
7
5
D aily R eturn s to th e Accounts O f f i c e .................................................... . 576
Perm anent W ay Inspectors’ I m p r e s t s .............................................................. 577 -
D istrict S u b - d e p o t s ........................................................................................................57^ :
D istrict M aterial A c c o u n t .................................................... . . 5
7
9 v3

TABLE OF CONTSNTS. XXI
CHAPTER 31—cojrfdL
•Unserviceable S t o r e s ....................................................
JJuties of the Accounts Ofiice . .
Pricing of A r t i c l e s .............................................................
Priced T^edgers......................................................................
Reconciliation between Card Ledgers and Priced Ledgers
-Stock V e r if ic a t io n ............................................
A udit ...................................
D .— S t o r k s a n d S t o c k A c c o u n t s oj- t h e E n g in e b r in g a n d W i b e -
iiE ss B k a n c h e s o f t h e P o s t s a n d T e l e g b a p h s D e f a b t h b k t .
Administration and C o n t r o l .....................................................
Accounts in Executive O ffic e s .....................................................
Pricing of Articles .......................................................................
fitores and Stock with the Divisional Engineers .
^Tnserviceable Stores ..............................................................
Duties of the Accounts O f f ic e .....................................................
Stock V e r if ic a t io n ......................................................................
Audit ...................................
E.— I n d ia n S i o e e s D e p a b tm b n t.
Activities of the Indian Stores Department .
Ohief Auditor, Indian Stores Department
Settlement of A c c o u n t s ............................................
Audit ............................................
CHAPTER 38.
Posts and Telegraphs Accounts and Audit.
P a e a .
581
582
584
585
'586
588
589
591
593
595
697
600
601
605
607
609
616
6ir
618
A .— G p n e b a l .
Expenditure
Audit
B .— TELEGBAPn B hanch.
0 .— ^Postal B b an cb .
Postal Life Insurance Policies
Money Order Transactions
Savings B an k Transactions
Government Securities
Cash Certificate Transactions
■Customs Duty realised by Post Offices
D.— ^Accounts.
General . . . .
Commercial System .
Capital Account
Telephone Development Fund
619
R e c e i p t s ......................................................................................................... .......
625
IRevenue B e c e i p t s ...................................................................................................g26
627
628
633
641
642
645
646
647
648
649

X X ll TABLE OP CONTENTS.
CHAFTEB Zi—
contd.
P a e a .
I n t e r e s t ............................................................................... 630
Records of A s s e t s ........................................................................................ 651
Renewals Reserve F u n d ................................................................................652
Revenue A c c o u n t ........................................................................................ 653
Adjustment of Interest Charges . . . . . . . 654
Profit and Loss A c c o u n t ................................................................................665
CHAPTER 33.
Accoontiiig for and Audit of Railway Receipts and Ezpenditoie.
A.— G E N E R A L ORGANISATION.
Railways— Ownership and Management .
Railway F i n a n c e ....................................
Separation of Accounts from Audit
Statutory A u d i t ....................................,
Financial and Audit Control .
656
65r
653-
661
667
B.— ACCOUNTING AX D IN TE R N A L CH E CK .
I.— G e n e r a l.
Main D iv is io n s ................................................................................................. 66S
-
II.— E x p e n d it u b b o n C o n s t r t t c t io n o f N e w R a i l w a y s .
Provision of Funds for Capital Expenditure .
Programme of Capital Expenditure
Check against Construction Estimate
Check against Budget Provision . . . .
Distribution of Funds between England and India
Control over Capital Expenditure . . . .
Check over Expenditure in a Construction Division
III.— E x p e n d it t jb e o n O p en L i n e s
Sanction and Provision of Funds . . . .
Payments and A c c o u n t i n g ....................................
Workshop E x p e n d it u r e .............................................
IV .— ^ R ailw ay R e c e ip t s .
Sources of R e v e n u e ......................................................
Accounting for R e v e n u e .............................................
Coaching T r a f f i c .....................................................
Goods Traffic . .............................................
Local and Other T r a f f i c .............................................
Traffic Book . ......................................................
Travelling Inspectors of Accounts . . . . .
C.— S T B U C T LU E O F R AILW A Y A C C O l NTS.
Main Headings of Railway A c c o u n t s ...................................
Account of Net Gain or Loss on the working of .State Railways
669
670
672
674
675
678
680
681
684
688^
699^
702
7oa
709
710’
711
712
7l »
7l t

t a b l e o f c o n t e n t s . x x n r
CHAPTER 33—contd.
P ar a,
Account of Contribution to General Revenues, and of Amounts accruing
to Railway Reserve F u n d .................................................................... 715
Capital A c c o u n t .....................................................................................
Revenue Account . . ....................................................
Account of Interest Charges ........................................................... 720
Depreciation Reserve Fund A c c o u n t ................................................... "21
Reserve Fund A c c o u n t ............................................................................. 722
Account of Miscellaneous R e c e ip ts ............................................................724
Account of Miscellaneous E x p e n d itu r e ................................................... 725
D.— RELATIONS BETW EEN GOVERNMENT AND COM
PAN IES WORKING STATE RAILW AYS.
Original C o n tr a c t s ......................................................................................726
Existing C o n tr a c t s ..................................................................................... 727
Control over the Operations ofC o m p a n ie s............................................. 728
E.— RELATIONS BETW EEN GOVERNMENT AND PRIVATE
COMPANIES.
Branch Line C o m p a n ie s............................................................................. 736
F.— FED ERAL RAll-W AY AUTHORITY.
Advance A r r a n g e m e n ts............................................................................. 737
CHAPTER 34.
Audit of Defence Services Acconnts.
Nature of Audit .........................................................................................738
Central Audit and Local A u d i t ............................................................740
CHAPTER 35.
Commercial Accoonting and Auditing as applied to Crovernment
Concerns.
I n t r o d u c t o r y .............................................................................................. 744
Initiation of Commercial A c c o u n ts ............................................................ 746
General Principles of A c c o u n t in g ............................................................ 748
Relation between Commercial and General Accounts . . . . 758
A u d i t .............................................................................. • 759
CHAPTER 36.
Inspections and Local Audit.
A.— G e n e r a l.
Objects of Inspections and Local A u d i t ................................................... 764
B.— I n s p e c t io n s .
Necessity for In s p e c tio n ............................................................................. 765
Inspection of T re a su rie s.....................................................................' • 768
Inspection of Public Works D iv is io n s ................................................... 771
Inspection of Posts and Telegraphs Offices, etc........................................7/4

X X IV TA BLE OF CONTENTS.
CHAPTEiB 36—conid,
C . — ^Lo o a l A u d i t .
F a s a .
N e c e ssity f o r L o c a l A u d i t ....................................................................................777
G e n e r a l A rra n g e m e n ts fo r L o c a l A u d i t ....................................................^ 779
A u d i t o f P re s s A c c o u n t s .................................................... .......... 781
Audit of Customs A c co u n ts...................................................................... 784

TABLE OF CONTENTS. XXV
PART V.
THE ACCOUNTING PROCESSESLEADING UP TO THE
FINANCE ACCOUNTS ANDTHE COMBINED HNANCE AND
REVENUE ACCOUNTS.
CHAFTEB 37.
Compilation of Acconnti.
P a b a .
Initial C o m p ila tio n .........................................................................................787
Main Processes of Compilation inAccount O f f ic e ......................................789
Subsidiary Accounting P r o c e s s e s .............................................................. 794
CHAPTER 88.
Technical Accoontt.
• G e n e r a l ...........................................................................................................797
J o u r n a l ...........................................................................................................800
X e d g e r ...........................................................................................................803
Verification of B a la n c e s ................................................................................ 809
CHAPTER 39.
The Finance Accounts and the Combined Finance'and]BeTeniie
Acconnts of the Central and Provincial OoTemmenti.
Finance Accounts ..................................................................................... 811
Clombined Finance and Revenue Accounts . . . . . 816

TABLE OF CONTENTS. X X V ll
PART VL
ARRANGEMENTS IN RESPECT OF THE TRANSACTIONS OF
THE CROWN REPRESENTATIVE.
CHAPTER 40.
Financial, Accounting and Audit Arrangements.
P a r a .
I n t r o d u c t o r y .................................................................................................
Financial A rra n g e m e n ts............................................................................... 821
A c c o u n t s ............................................................................... ........ 822-
A u d it .......................................................................................................................826

A n Introduction to Indian Government
Accounts and Audit.
P A R T I.
A Preliminary Survey of Accounts and Audit
Systems.
C H A P T E R 1.
The Purpose of Aooounts and Audit.
1. Subject matter.—The object of this book is to give a broad
idea of the activities of the “ Indian Audit Department ” , the
term meaning the officers and establishments, being in India and
subordinate to the Auditor General of India, that are emploved
upon the audit or upon the keeping and audit of the accounts of
the Central Government and of the Provinces. Before discussing
the principles of that particular branch of accounts and audit with
which this department deals, it is desirable to have a clear concep
tion of the phrase “ keeping and audit of the accounts
2. Accounts and Transactions.—The word “ accounts ” , in the-
financial sense, has been defined as statements of facts relating to
money, or things having money value. The facts that are incor
porated in accounting records are described as “ transactions ” .
3. Accounting.—A mere chronological register of pecuniary
transactions (commonly called a Cash Account) is soon found to be
insufficient. From such a register a man cannot tell, without
going through every item, how he stands in relation to his various
customers, and whether his business is profitable or not. It
becomes necessary that his transactions should also be classified
under various heads, as for example the names of various customers
dealt with, or of various articles dealt in; and that the results of
transactions under these heads should be arranged in such a form
as to show clearly not merely the significance of each separate
transaction but also the combined effect of any desired series of
transactions. The process through which these ends are effected is
called “ accounting
4. Keeping of Accounts.—Keeping of the accounts involves
compilation. To compile is to compose and arrange materials
collected from other records. As will be explained later, the initial
accounts of Government transactions in India are prepared'by the
• See page 1 of Book-keeping by Hamilton and Ball—

5] THE PUEPOSE OF ACCOrNTS AXD AUDIT. [C h a P. 1.
authorities through whom the transactions occur, those authorities
being unconnected w ith the Indian A u dit Departm ent. So far as
accounts are concerned, the duty o f the Indian A u dit Department
is to compile, under different heads prescribed for Government
-account, those in itial accoimts which under the rides are required
to be rendered to it for com pilation, and to arrange the results of
transactions under those heads in such a form as to bring out the
combined result of a ll the transactions w hich occur during a given
period. I t has also to com pile the Combined Finance and Revenue
Accounts of the Central and Provincial Governments in India,
w hich embody a sum m ary of the accounts com piled both by the
Departm ent itself and by other agencies and include the results of
ih e whole of the Governm ent transactions arising both in India and
the United Kingdom .
5 . A u d it.— The functions of A u d it are essentially diiferent from
those of Accounts. O f the m eaning of the v/ord “ raidit ” , an
excellent explanation can be given by quoting the follow ing
portions of a translation of S ir W alter H enley’s “ Tretyce off
Husbandry ” , a work w hich dates back to the thirteenth century.*
“ B u y and sell in season through the inspection of a true man
■
or two who can witness the business, for often it happens that those
who render accounts increase the purchases and dim inish the sales.
H ave an inspection of account, or cause it to be made b y some one
in whom you can trust, once a year, and (have a) final account at
ih e end of the year. I f there is any (money), let it be raised and
taken from the hands of the servants . . . . I f
arrears appear in the final account, let them be speedily raised
Look into your affairs often, and cause
-them to be reviewed, for those who serve you w ill thereby avoid
the more to do wrong and w ill take pains to do better. In the first
place he who renders accounts ought to swear that he w ill render a
law ful account and fa ith fu lly account for what he has received of
the goods of his lord, and that he w ill put nothing in this roll save
w hat he has to his knowledge spent law fu lly, and to his lord’s
profit . . . . A nd then, if he has rendered account
before, see how it com pares; and if he is foTind in arrears of money,
corn, or stock, put the whole in stated money valuation, and charge
it at the commencement of his roll . . . A t the end of
“the year, when a ll the accoimts shall have been rendered of the
lands, the issues, and a ll expenses of the manor, take to yourself
a ll the rolls, and b y one or two of the most intim ate and faithful
men you have, make very careful comparison with the rolls of the
accounts rendered, and of the rolls of the estim ate of com and stx>ck,
and according as they agree you shall see the industry or negligence
o f vour servants and bailiffs.
2
* Dicksee’s “ Treatise on Auditing ” for this quotation.

C h a p . 1 .] t h e p u e p o s e o f a c c o v n t s a x d a u d i t . [6-8
“ The lord of the mauor ought to command and ordain that the
accounts be heard every year, nut in one place but on all the
manors, for so can one quicklj' know everything and understand
the profit and loss . . . . The auditor.^ ought to be
faithful and prudent, knowing their business, and all the points
and articles of the account in rents, oiitlays and returns of stock.
And the accounts ought to be heard at each manor to know the profit
and loss, and then can the auditors take inquest of the doings which
are doubtful, and hear the plaints of each plaintiff and make the
fines. The steward ought to be joined with the auditors, not as
head or companion of the account, but as subordinate, for he must
answer to the auditors on the account for his doings just as another.
It is not necessary so to speak to the auditors about making audits,
for they ought to be so prudent, and so faithful, and so knowing
in their business, that they have no need of others’ teaching about
things connected with the accounts.”
6. Special attention is invited to the clause which says that the
lord of the manor ought to command that the accoimts be heard
every year. This shows that the word “ auditor ” is derived from
the Latin “ auditor ” , the ancient practice being that the parties
whose accounts were audited should attend before the auditor and
vouch them orally. The practice was perhaps necessary- in bygone
days when few people could read or write. It is possible even that
the auditor himself could not read but heard the accounts read out
by the clerks. The men responsible for the accounts voiiched for
the accuracy of the entries, and the auditor being specially chosen
for his prudence, faithfulness and knowledge of the business, was
able to satisfy the lord of the manor that the accounts rendered
accurately portrayed the exact state of affairs.
7. A vditor.— “ Audit ” is therefore an instrument of financial
control. In its relation to commercial transactions, it acts as a
safeguard on behalf of the proprietor (whether an individual or a
group of persons) against extravagance, carelessness or fraud on
the part of the proprietor’s agents or servants in the realisation
and utilisation of his money or other assets, and it ensures on the
proprietor’s behalf that the accounts maintained truly represent
facts, and that expenditure has been incurred with due regularity
and propriety. The agency employed for this purpose is called an
auditor ” .
8. It is essential that a sim ilar watch should be maintained
over the financial transactions of a Government, and th.-it the
agency employed for the purpose should be indeoendeiit of the
agents or servants of Government Avho are entiusted with the reali
sation and utilisation of public money or other assets. The task is
entTusted in India to tlw; Indian Audit Department. So far as its
audit duties are concerned, the position of the Indian Audit Pepart-
ment in relation to Government transactions in India is exactly the
=same as that of an “ auditor It must ensure that tljp accounts
3

t h e p t t k p o s e o f a c c o u n t s a n d a u d i t . [ C h a p . 1 .
maintained truly represent facts, that the rules and orders framed
by competent authority in regard to financial matters have been
obeyed, and that the expenditure has been incurred with due
regularity and propriety; and it must bring to the notice of com'
petent authority any irregularity or impropriety in connection
therewith.
9 . Fundamental Prindjtles.—Before leaving this introduction
to the subject, attention may be drawn to the way iu which the
principles enunciated 700 years ago in the extract' quoted in para
graph 5 still apply, as will be shown in this Compilation. PromptJ
payment of money into the treasury, the strict following up of
arrears, the necessity for accounts accurately portraying the facts,
the value of checking the accounts and of conducting local inspec
tions, periodical stock verification and the check of stock with the-
accounts, were fundamental principles then as they are to-day.
Principles which have held good for so long a period must contain)
the essence of importance.

5
C h a p . 2 .] g o v e e n m e n t s y s t e m o f a c c o u n t s a n d [ 10-13
AUDIT AND COilMEECIAL SYSTEM .
CHAPTER 2.
Govenunent System of Accounts and Audit and Commensial System.
A.—Accou>"rs.
■ between Government and Covtmercial Func-
The principles of Commercial and Government Accounting:
difter m certain essential points. The difference is due to the fact
tbat, while the mam function of a commercial concern ia to trade,
that IS to take part in the production, manufacture or interchanffe
of goods or commodities between different groups or individuals
and tbereby to make profit, that of a Government is to govern a
country and in connection thorewitL to administer the several
departments of its activities in the best way possible.
11. Principles and Methods of Covimercial Accounting._A
non-Goyernment commercial concern deals primarily with the
utilisation of Capital for the purpose of making a profit; and it is-
interested to see at intepals how it stands in relation to its debtors
and creditors, whether it is gaining or losing, what are the sources
of its gain or loss, and whether it is solvent or insolvent.
12. In order to obtain ready answers to these questions' the
concern has to keep a system of detailed accounts. In respect of
each person dealt with, each class of asset held, each article dealt
in, and each department of its activities, it maintains a separate
account 9o that the result of the transactions in each case mhy be
ascertained. It then becomes necessary for it to collect the results
of all these accounts in one place in order to record the assets and
liabilities under different heads and finally to prepare the Manufac
turing, Trading and Profit and Loss Accounts, and a Balance Sheet,
which shall show what is the gain or loss of the concern as a whole
and whether it is solvent or insolvent.
13. It is the generally accepted practice in the commercial
world to maintain account books by the Double Entry system,
which is based on the fact that in every transaction or financial
change two parties or accounts are involved, one giving and the
other receiving. Under that system every transaction, therefore,
requires two entries in the books, one against the party or account
giving and the other against the party or account receiving.
Further, if the concern is a manufacturing one, it has also to
maintain sets of books for (a) costing and (b) stores accoimting, in
order to ascertain as .regards (a) the cost of production of each
article so that its selling price may be fixed according^Iy, and as
regards (b) that there is an efi&cient system of stores control.
iv-10-7 3
-

14-17] GOVEENMENT SYSTEM OF ACCOUNTS AUD [ChAF. 2.
AUDIT AND COMMEHCIAL SYSTEM .
14. P n n cifles of Government Accounting.— The activities of a
good Croyerninent in auy eoimtrv are deterinined by the needs of
tlie country. The niain branches of its activities being known, it
IS a matter for decision -what expenditure w ill be necessary during
any year in carrying out these activities. A fter a decision has
been reached on these points it becomes necessary to determine
now to raise sufficient money to meet that expenditure.
accounts of the transactions of the
Central and Provm cial Governments in In dia is determined firstly
by the adm m istrative classification of the activities and secondly
. . L n S r classifiration of the nature of the transactions. The
accounting is tlierefore more elaborate than that followed in
accounts. B ut (leaving out of consideration for the
present the accounting fo r expenditure m et from Loans, and certain
su bsidia^ and technical accounts, which w ill be considered in Parts
and V of this Com pilation) the im mediate objective of Govern
ment accounting is not to ascertain the gain or loss on the transac-
tions of the Government as a whole in carrying out its activities.
Ib e method of budgeting and accounting '.inder the Service heads
18 not designed to bring out the relation in which Government
stands to Its m aterial assets in use, or its liabilities due to be
discharged at more or less distant dates. The accountinf? methods
adopted for commercial concerns, and the preparation of Manu-
tacturing. Trading^ and Profit and Loss Accounts, and a Balance
Sheet, in the commercial sense, are therefore unsuitable and
unnecessary. In its Budget for a year. Government is interested
to fo rec^ t w ith the greatest possible accuracy what is expected to
be received or paid during the year, and whether the former
together w ith the balance of the past year is sufficient to cover the
latter. Sim ilarly, lu the compiled accounts for that year, it is
concerned to see to what extent the forecast has been justified by
the facts, and whether it has a surplus or deficit balance as a result
of the year's transactions. On the basis of tlie budget and the
accounts Government determines (a) whether it w ill be justified in
curtailing or expanding its activities and {h) whether it can and
should increase or decrease taxation accordingly.
16. Purpose of Government and of Commercial Accounts.—
Government accounts are therefore desigrned to enable Government
to determine how little money it need take out of the pockets of the
tax-payers in order to m aintain its necessary activities at the
proper standard of efficiency, w hile non-Government commercial
accounts are designed to show how much monev the concern can
put into the pockets of the proprietors consistently with the m ain
tenance of a profit-earning standard in the concern.
17. Commercial Undertakings conducted ly Government.— The
operations of some departments of Government, however, sometimes

C h a p . 2 .] g o v e h x m e n t s y s t e m o f a c c o u n t s a n d [18-20
AUDIT AND COMMEHCIAL SYSTEM.
of a commercial or a gM«^i-comiiiereial
^ aracter, e.g an industrial factory or a store. Even though these
may be maintained almost entirely for the benefit of the depart-
ment, it is still necessary that the financial results of the under
takings should be expressed in the normal commercial form so that
the cost of the service or undertaking may be accurately known.
This implies the maintenance of suitable Capital, M anufacturing,
Trading and Profit and Loss Accounts, and as the Government
system oi accounts, being on a purely cash basis, is unsuitable for
such commercial accounts, these are' usually kept on a ®ro jorma
basis oxitside the general accounts of Government. The actual
transactions entering these fro forma accounts except those adjusted
^ basis find a place prim arily in the regular accounts
•and the conimereial accounts are additional as well as separate.
18. Methods of Government Accounting.—The mass of the
(rovernment accounts is kept by Single EntrV. There is, however,
a portion of the accounts which is kept on the Double Entry system,
the main pui-pose of which is to bring out by a more scientific
method the balances of accounts in regard to which Government
acts as a banker or remitter, or borrower or lender. Such balances
are, of course, worked out in the subsidiary accounts of the single
«ntry compilations as well, but their accuracy can be guaranteed
only by a periodical verification with the balances brought out in
the double entry accounts.
B .---A tD IT .
19. Principles of A udit— stated in paragraph 8, audit
' S r i l l I . indepen,lent of the authority
charged ^ ith the duty of carrying on the business and of keeping
accounts of the transactions which pass through his hands. This
principle is strictly observed in commercial audit, although when
auditing small concerns the auditor often finds the accounts so
*adly prepared as to render it necessary for him to build up a very
arge portion of the fabric of the accounts from the initial records
Ih is work IS, however, incidental to and not an essential part of
hie duties as an auditor.
■ and Procedure of Commercial Audit.— In commer
cial audit at the present day the main object is to present before
the proprietor or proprietors of the btisiness an accurate statement
of the position of affairs together w ith a profit and loss account
sJiowing how this position has been reached. In the case of
Companies the duty of an auditor is m ainly in the interest of the
^lareholders, who are practically sleeping partners in the business.
The directors are the active partners; and the auditor on i>ehalf
of the sleeping partners— the shareholders— has to examine the
accounts and the balance sheet prepared by the directops and to
jeport to the shareholders whether in his opinion those accounts ar©
3 a

21*22] GOVfiENMENT SYSTEU OF ACCOUNTS AND | C h A P . 2,-
a u d i t a n d c o m m e r c ia l s y s t e m .
8
correct, and fully and fairlj disclose the position of affairs, or in.
what respects they fail to do so.
21. On pages 40-43 of Dicksee’s “ Auditing’- (Fifteenth.
Edition) will be found a set of instructions to commercial auditors.
The procedure of commercial audit as there detailed may be-
Summarised briefly thus.—
The jirst step is to ascertain the authorities competent to-
sanction expenditure, to receive or pay money, or to incur liabili--
ties, on behalf of the firm.
Iho second is to understand the system of accounts followed.
The third is to check as far as possible the accuracy of the*
original record, namely, the cash book.
Ihe fourth is to see that all transactions are in accordance with
the minutes of the meetings of the Board of Directors or the orders-
of competent authorities.
The fifth is to investigate unusual items.
The sixth is to check the compilation of the accounts from the-
original records and to suggest corrections in the classification of
transactions.
The seventh is to review the procedure of stock-taking and of
pricing the goods on hand.
The eighth is to check or prepare the financial results, that is-
the Manufacturing, Trading and Profit and Loss Accounts, and the-
lialance Sheet, which will indicate accurately the progressive-
position of affairs. This necessitates also the investigation of-
depreciation of property (buildings, machinery, furniture, etc.),
the soundness of investments, debts due to the firm, and the correct-
allocation of expenditure to Capital Account.
28. Difference between a Government and a Commercial Firm
necessitating differences in Audit Procedure.—Unlike commercial-
audit. The audit of the transactions of the Grovemments in India-
w entrusted entirely to Government officials; and this difference has
influenced largely the system of audit adopted. As will be-
explained in Chapter 13, the cheek of receipts is in most cases left
to the departments responsible for the collection of revenue.
Similarly, the check of stores and stock is, as will be explained-
in Chapters 19 and 31, almost entirely left to the departments in
whose custody they are. The audit of expenditure in India is,
however, performed mainly by the Indian Audit Department which
is independent of the spending departments. This department is,
as has. already been stated, also responsible for the keeping of the
major portion of the accounts which it audits. The whole of the-
work of auditing the expenditure is not, however, conducted by^
this independent department, but, as explained in paragraiph 34,-

part of the work incidental to audit is also performed by the
.^pending department*.
2 3 . India is so vast a country and Government activities are so
various that it is impossible for independent A udit Officers, working
(as they do) almost entirely at headquarters, to be as closely in
touch with the facts to which the accounts refer as the officers of
the department in which the reveuue is realised and the exy<enditure
is incurred.
2 4 . Thus, the Audit Officer has no personal knowledge of the
quantity or quality of the work done by a contractor, of the quantity
or quality of goods supplied by a supplier, of the number of coolies
■employed each day on a work, or of the agreement between the
stores accounts and th« stock of stores. The payments are in many
cases made at treasuries the officers in charge of which are not
members of the Indian A adit Departm ent; while iu others the bills
are either presented to, or are prepared by, disbursing officers of
■other departments. Thus the prelim inary examination of bills
which are paid at treasuries or by disbursing officers of other
■departments is prim arily left to Treasury Officers, or to officers of
those other departments. The exact nature of tlie work done by
these agencies w ill be discussed Jater when we attempt to deal with
the details. For the present it if= sufficient to remember that under
the Government system of audit the executive officers of the
spending departments, as well a« officers in charge of treasuries,
take an important share in the scrutiny of expenditure.
25. Another point of difference between commercial and
Government audit is that, whereas the former is more often than
not periodical, the latter is almost entirely continuous. This is
■
due to the greater volume of work to be done and to the fact that
a large part of it is concerned with personal claim s which have to
"be finally adjusted with the utmost promptitude.
2 6 . Government A udit as compaTed with Commercial A u d it.—
I t is obvious that these differences in conditions must alter in detail
the system of a u d it; and it is interesting to compare w ith the main
factors of commercial audit, set out in paragraph 21 above, the
m ain objects of Government audit, which, as set out in the A udit
Code, are to ensure—
(a) that there is provision of funds for the expenditure duly
authorised by competent authority;
[h) that the expenditure is in accordance with a sanction
properly accorded and is incurred by an officer com
petent to incur it;
‘■
c) that payment has, as a fact, been made and has been made
io the proper person, and that it ha§ been bo
9
•Ch a p . 2 .] g o v e b n m e n t s y s t e m o f a c c o c n t s a n d [ 2 3 - 2 6
AUDIT AND COMUEHCIAL SYSTEM .

1 0
2 6 ] g o v e r n m e x t s y s t e m o f a c c o u n t s a x d [ C h a p . 2.
a u d i t a n d c o m m e r c ia l s y s t e m .
acknowledged and recorded that a second claim against
Lrovernment on the same account ia im possible;
(d) that the charge is correctly classified, and th at (as in the
^ r accounts) if a charge
debitable to the personal account of a contractor,
em ployee or other individual, or is recoverable from him
under any rule or order, it is recorded as such in a
prescribed account;
(e) that in the case of audit of receipts, (i) sums due are
regularly recovered and checked ao-ainst demand and
(ii) sums received are duly brought to credit in the
accounts ;
(/) that in the case of audit of stores and stock,, where a priced
account is m aintained, stores are priced w ith reasonable
accuracy, and that the rates in itially fixed are reviewed
irom tim e to tim e, correlated w ith m arket rates and
revised when necessary;
iff) that the articles are counted periodically an d otherwise
examined for verification of the accuracy of the quantity
balances in the books and that the total of the valued
account tallies w ith the outstanding amount in the
general accounts and th at the num erical balance of stock
m aterials is reconcilable w ith the total of value balances
in the accounts at the rates applicable to the various
classes of stores; and
(h) that expenditure conform s to the follow ing general
principles w hich have for long been recognised as*
standards of financial propriety, nam ely,—
(1) that the expendi<ure is not primd facie more than the
occasion demands, and th at every Government servant
exercises the same vigilance in respect of expenditure
incurred from public moneys as a person of ordinary
prudence w ould exercise in respect of expenditure of
uis own m oney,
(2) that no authority exercises its powers of sanctioning
expenditure to psss an order w hich w ill be directly
or iudirectly to its own advantage,
(3) that public moneys are not utilised for the benefit of a
particular person or section of the com m unity
unless—
(i) the amount of expenditure involved is insignificant,
or
(ii) a claim for the am ount could be enforced ia a court
of law , or

(iii) the expenditure is in pursuance oi a recognised
policy or custom,
and (4) that tlie amount oi allowances sucli as travelling
allowances, granted to meet expenditure ot a parti
cular type is so regulated that the allowani;es are not
on the whole sources of profit to the recipients.
27- This comparison is made in detail below.—
(a) The first and fourth ste/js of commercial audit,—to
ascertain the authorities covi'petent to sanction expendi
ture or to receive or pay money, etc., and to see that
the transactions are in accordance with the minutes or
orders.
These correspond with clauses (o) and (6) of paragraph 2tJ.
In Government accounts the minutes and orders are represented
by the Government of India Act, 1935 and the Orders in Council
issued thereunder, and the rules, directions and orders of a financial
character issued by the Secretary of State, the Central Government,
the Provincial Governments and other authorities. The volume of
such orders is immense, and this portion of audit is so important
quantitatively and qualitatively that it tends to overshadow all
the other branches.
(b) Second step of commercial audit,—understanding the
system of account followed.
It is unnecessary to put this forward as a main object of
Government audit, because in India the form in which the
initial accounts should be kept and that in which the accounts
should be rendered to the Audit Department are largely determined
by the agency which audits them and, after a certain point, also
compiles the •major portion of them. The system of accounts
followed is described in the Account Code and in the relevant
Departmental Codes and Manuals.
(c) Third step of commercial audit,— chech of the accuracy of
the original record.
Clause fc) of paragraph 26 may be held to correspond with this.
But, as stated in paragraphs 23 and 24, the check of the accuracy of
the original records is left to a great extent to the executive
officers of the spending departments, and this check is supplemented
by a test audit at regular intervals by officers of the Indian Audit
Department.
(d) Fifth step of commercial audit,— investigation of unusual
items.
This corresponds with clause (h) of paragraph 26.
(e) Sixth step of commercial audit,— check of the compilatinn
of accounts and of the classification of transadtions.
11
C h a p . 2.] g o v e k ?<
'm e n t s y s t e m oi a c c o u n t s a x d [27
A U D IT A X U t O illlE K C lA L S Y S T E J l.

12
GOVEHEMENT STfSTKU OF At'COBNTS AND [ C h A P . 2.
AUDIT AXD COMMEHCIAL SYSTEM .
Checking of tlie compilation of accounts is not specifically
mentioned in the list of objects of Government audit. As stated in
clause (6) of this paragraph, the greater number of the accounts
^ ^ certain point, built up by the auditing agency itself
and tie preliminary- accounts are checked by the Audit office as
’explained in clause (c). The compilation made in the Audit office
is test-checked within the department; and in the cases where
accounting is separate from audit and the compilation of accounts
is lett to the administrative departments, every process of
compilation leadmg up to the final account is test-checked fcy the
Indian Audit Department.
In Government audit the classification is thoroughly checked
f , Audit Department where that department is
Tespdifsible for the keeping of accounts, and is test-checked where
the keeping of accounts is left to the administrative department.
{ i) Seventh ste-p o f commercial audit,— check of the accuracy
o j the accounts of stores or goods.
This corresponds with clauses {,f) and {g) of paragraph 26.
(g) E ig h th step o f commercial audit,— the preparation of the
' M anufacturing, Trading and Pro-fit and Loss Accounts,
and the Balance Sheet, necessitating the in'vestigation of
d,epreciation o f property, the soundness o f investments,
debts due to the firm, and the correct allocation
o f expenditure to Capital Account.
In the ordinary accounts of Government there is nothing to
compare with these accounts which form the summary of the
nancial transactions of a commercial firm during a certain period.
Iheir place m ay be said to be taken by the annual Budget State
ments and by the annual Finance Accounts of the Central and
Frovincial Governments. However, in the case of Government
undertaking of a g-wosz-commercial character, the financial results
are ascertained and reviewed outside the regular accounts through
pro forma accounts which are prepared separately for the purpose,
has’ ^ forma accounts are prepared on a strictly commercial
In the regular Government accounts the correct allocation of
capital heads of account is checked by
The Audit Department.
work on Auditing states that the objects
of audit may be said to be threefold—
' 1) detection of fraud,
^2) detection of technical errors,
f3) (^tection of errors of principle.

2.] GOVEENMEJiT S1STEM OF ACCOrNTS AND [ 29-30
AUDIT AND COMMEECIAJL SYSTEM.
13
H ere again due altowance has to be made for the differences in
conditions between Government and a com mercial firm, and the
differences between the agencies w hich prepare and audit the
.accounts in the two eases. Thus in Governm ent audit there is
little scope for detection of errors of principle (that is, in the
system of accounts adopted) as the responsibility for determ ining
or advising as to the form in w hich accounts should be kept
devolves upon the A uditor General of India. The other two objeots
are, however, sufficiently provided for under the Government
system as explained below.
2 9 . A s regards the detection of fraud, it m ust be remembered
that, as explained in paragraph 2 4 , part of the work in connection
with the scrutiny of expenditure, is entrusted, for the sake of
-convenience and economy, to the officers of the spending depart
ments. A fraud in respect of expenditure would in some cases
indicate a paym ent to w hich the payee is not lega lly entitled, or
in others a paym ent made in respect of a claim wliich is not in
jaccordance w ith the facts. F n d er the existing arrangem ents the
certification as to the in itial facts is left to the executive officers,
and the A u d it D epartm ent verifies a certain percentage of them at
ilocal inspections. Most of the frauds are thus checked or detected
in the course of the scrutiny by the executive officers. The A u dit
^Officers also render valuable assistance in indicating directly or
indirectly to the executive officers defects or irregularities w hich
require their attention. This subject w ill be discussed in detail
in Chapter 10, and it w ill suffice to state here that the checks
prescribed for executive officers, supplemented b y occasional local
;Hudit and continuous central audit, sufficiently provide for the
detection of fraud in the Government system of audit. A s to the
detection of technical errors, the bulk of the work of the A u d it
offices used to fa ll under this category; and it was one of the chief
■complaints against the A u dit Departm ent that this had been their
m ain work.
3 0 . It is apparent th at this was not altogether a fair criticism
inasm uch as it overlooks the follow ing facts; —
(a) the officers of the Departm ent have m oulded and still
m ould the form of the accounts and thus prevent errors
of principle;
(b) wherever they have started work in a fresh field, as in
Local Fund audit, their pioneer work has been very
va lu ab le;
(c) their indirect work in the prevention and detection of
fraud is im portant; and
(d) the enormous num ber of objections raised is due t o ^
(i) the extreme elaboration o f the rules to be applied in
audit.

(ii) the mistakes made in the preparation of bills,
(iii) lack of intelligence or undue rigidity on the part of the
auditor.
Critics ought not to forget, as they sometimes do, that the
ofl&cers of the Department are not responsible for cause (ii), while
the ultimate responsibility for cause (i) rests with Government even
though they may have sought the advice of officers of the Indian
Audit Department in framing the rules. As regards cause fiii)^
it is important that officers of the Department should rectify it in
so far as they are empowered to do so; but the “ rigidity’ ’ of
which complaint is still made is often due to the rigid character of
statutory rules which admit of no relaxation otherwise than hv a
revision of the rules themselves.
31. The Constitutional Reforms of 1919, which invested Audit
with a higher responsibility and a greater power of initiative,
enabled Audit Officers to devote more attention to the broad
principles of orthodox finance and to the manner in which the
various executive officers undertake their more important financial
responsibilities. The provisions of the Government of India Act,
1935, and the Government of India (Audit and Accounts) Order,
1936, have in no way affected the responsibility of Audit in thia
matter.
14
3 1 ] g o v e r >':m e .v t s y s t e m o f a c c o u n t s a n d [ C h a p . 2 .
A U D IT AND CO M M ERCIAL S Y S T E M .

15
C h a p . 3 .] t h e i >
o s i t i o . a x d f u n c t io n s o f t h k [32-34
AUDITOR GEJfERAL OF INDIA.
CHAPTER 3.
The Position and Functions of the Auditor General of India.
32. Position of the Auditor General.— The office of the Auditor
General was for the first time recognised statutorily with the intro
duction ol the Constitutional Eeforma of 1919, and in audit matters
he was made bj- statiite independent of the Government of India,
lie was also recognised as the administrative head of the Indian
Audit Department, subject to control in some respects by the
Government of India, and was given extensive powers in regard to
Government accounting. Even before the advent of the 1919 Con
stitution, the Auditor General was independent of the Government'
of India in audit m atters; and, although the Governor General had
the right of appointing him and removing him from office, in both
cases the approval of the Secretary of State in Council had to be
obtained. This position was, however, secured by executive orders
issued by the Secretary of State, whereas under the Eeforms of
1919 there was a statutory recognition of the special features and
prerogative of his office by a formal provision in the Government
of India Act itself.
33. Under the provisions of the Government of India Act,.
1935, hereinafter referred to as “ the A ct ” , the independence of
audit in relation to the authorities whose transactions are audited'
is fully secured. Section 166 of the Act provides that the Auditor
General of India shall be appointed by His Majesty and shall only
be removed from office in like manner and on the like grounds as-
a Judge of the Federal Court. Under sub-section (2) of this Section
the conditions of service of the Auditor General have been pres
cribed by the Government of India (Audit and Accounts) Order,.
1936, hereinafter referred to as “ the Audit and Accounts Order ” ,
made by His M ajesty in Council. This Order also deals with the
duties and powers of the Auditor General in relation to the accoimta
of the Central and Provincial Governments, but according to sub
section (3) of Section 166 of the Act, these duties and powers are
subject to variation or extension by an Act of the Central Legis
lature.
3 4 . The Audit and Accounts Order is, however, silent on the
subject of the administrative and financial powers of the Auditor
General of India. These matters have been settled bv arrange
ments under the other provisions of the Act. The Auditor General
of India continues to be the administrative head of the Indian
Audit Department and subject to the provisions of paragraph 19"
of the Audit and Accounts Order his statutory responsibilities in

35] THE POSITION AND FUNCTIONS OF THE [C h A P . 3 .
AUDITOB GENERAL OF INDIA.
relation to the transactions of the Central and Provincial Govern
ments in India are discharged by officers of that department. The
Auditor General derives his administrative as well as his financial
powers by delegation from the Central Government. These powers
are detailed in the compilation known as the “ Auditor General’s
.Manual of Standing Orders ” . The powers delegated to the
Auditor General are very large so that an ample degree of
administrative independence should serve to guarantee his
audit independence- In the final event, however, the powers
of the Auditor General to impose standards of accounting and of
audit are conditioned by the limitations on his powers of sanc
tioning expenditure and obtaining funds.
35. Duties and Powers of the Avditor General in regard to
Accounts.—The duties and powers of the Auditor General in
.relation to accounts of the Central and Provincial Governments are
laid down in Section 168 of the Act, in paragraphs 11, 12 and 15
to 17 of the Audit and Accounts Order and in the Initial and
Subsidiary Accounts Rules issued by the Governor General in pur-
rsuance of paragraph 11 (3) of the latter Order. Section 168 of the
Act empowers the Auditor General with the approval of the
■Governor General to prescribe the form in which the accounts of
ihe Central Government are to be kept and with the like approval
to give any directions with regard to the methods or principles in
accordance with which any accounts of Provinces are to be kept.
This provision is designed to secure the maximum degree of
uniformity in accounting amidst the immense volume and variety
.of financial transactions of different Governments in India. Sub-
paragraph (1) of paragraph 11 of the Audit and Accounts Order
imakes the Auditor General statutorily responsible for the keeping
of the accounts of the Central Government and of each Province,/
other than the accounts relating to the Defence and Railway
Departments and accounts relating to transactions in the IJnited
Kingdom. This sub-paragraph, however, as it reads makes the
Auditor General responsible for keeping all accounts of the Central
Government and of the Provinces down to the initial accounts
kept in treasuries and departmental offices. In order to remove
ihis difficulty sub-paragraph (3) of paragraph 11 of the Order
provides that the Governor General, exercising his individual
judgment, may, after consultation with the Auditor General make
provision by rules for relieving the Auditor General from respon
sibility for keeping accounts of any particular class or character. ^
The Governor General has accordingly made the Initial and
Subsidiary Accounts Rules under which the Auditor General is
relieved of the responsibility for keeping initial accounts kept in
treasnries and departmental offices including accounts of stores and
-stock, trading, manufacturing and profit and loss accounts that may
be required to be kept in any particular office or department.
:16

17'
C h a p . 3 .] t h k i*o s i t i o k a .v u f u n c t i o n s o f X H t [ 3 6 - 3 8
AUDITOK GENEKAL OF INDIA.
It IS , however, necessary that the Auditor Greueral in order to
discharge adequately his responsibility for the keeping ot the
main accounts of a Government should have authority to
determine the form of compiled accounts rendered to offices
under his control as well as the form of initial accounts and records
from which these accounts are compiled. Necessary provision has
therefore been made in the Initial and Subsidiaiy Accounts Bulea .
mentioned above to the effect that the relieving of the Auditor
General from the responsibility for keeping initial accounts in
treasuries and departmental offices shall not impair his authority to
prescribe the form in which accounts are to be rendered to his
offices and the forms in which initial records on which such
accounts are based are to be kept. It has, however, been held
that the Auditor General also derives this power to prescribe the
form of the initial and subsidiary accounts direct from Section 168
of the Act. The Auditor General has thus two alternative methods ■
by which he can prescribe the form of initial and subsidiary
accoxmts and of the accounts rendered to his offices, that is, either
under Section 168 of the Act with the approval of the Governor
Geneml or tmder the Initial and Subsidiary Accounts Rules on his
sole authority.
36. Under sub-paragraph (5) of paragraph 11 of the Audit and
Accounts Order, a decision on a question of classification rests in the
last resort with the Governor General or with the Governor of a Pro
vince, as the case may be, exercising his individual judgment. Be
fore reaching a decision on a question of classification, the Governor
General or a Governor is required to consult the Auditor General,
but the latter is bound to give e£Eect to the decision, though in
his auditorial capacity he has every right to criticise it.
37. Under sub-paragraph (4) of paragraph 11 of the Audit and-
Accounts Order, the Auditor General has to prepare in each year
comprehensive accounts of receipts and expenditure of each Govern
ment, classifying the transactions under respective heads, and to
submit them to the Governments concerned. These accounts are
designated the Finance Accounts. Besides these accounts, the
Auditor General has also to submit annually to each Government
in respect of accounts kept by him. Appropriation Accounts, that
is, accounts relating expenditure brought into account during a
financial year to the several items specified in the schedules of
authorised expenditure authenticated under Section 35 or 80 of the
Act. The form of these accounts is determined by the Auditor
General in consultation with the Government concerned.
38. Under paragraph 12 of the Audit and Accounts Order, the
Auditor General has to prepare annually in such form as he with
the concurrence of the Governor General may determine and to
submit to the Governor General a General Financial Statement
incorporating a summary of the accounts of the Central Government

39 -4 0 ] THE POSITION AND FUNCTIONS OF THE [C h A P . 3.
AUDITOR GENEEAL OF INDIA.
18
and of all tlie Provinces for the preceding financial year and parti
culars of their balances and outstanding liabilities and containing
^ch other information regarding their financial position as the
Governor General may direct to be included in the Statement.
This General Financial Statement is known as the Combined
Finance and Revenue Accounts of the Central and Provincial
tjovernments in India.
3 9 . Tinder the provisions of paragraph 15 of the Audit and
Accounts Order, it is tlie duty of tlie Auditor General, so far as
The accounts for the keeping of which he is responsible enable him
so to do, to give to the Central Government and to the Government
01 every Province such information as they may from time to time
Tequire and such assistance in the preparation of their annual
inancial ^atements as they may reasonably ask for. Paragraph
17 of the Order empowers the Auditor General to inspect any oflS.ce
flf accounts in India which is under the control of the Central
-Government or of a Province, including treasuries and such offices
-responsible for the keeping of initial or subsidiary accounts as
•submit ^counts to him. Such a provision is necessarv in order to
ensure the correctness and accuracy of the initial and subsidiary
accounts kept in treasuries and departmental offices.
1 Powers of the Auditor General in regard to
y Paragraph 13 of the Audit and Accounts Order contains
tHe timdamental provisions relating to audit, and runs as follows :—
13. (1) It shall be the duty of the Auditor General—
to audit all expenditure from the revenues of the
Federation and of the Provinces and to ascertain
whether moneys shown in the accounts as having been
disbursed were legally available for and applicable to
the service or purpose to which they have been applied
or charged^ and whether the expenditure conforms to
the authority which governs it;
(ii) to audit all tran^ctions of the Federation and of the
Ijovinces relating to debt, deposits, sinking funds,
advances, suspense accounts and remittance business;
(iii) to audit all trading, manufacturing and profit and loss
accounts and balance sheets kept by order of the
Governor General or of the Governor of a Province in
any department of the Federation or of the Province;
and in each case to report on the expenditure, transactions or
accounts so audited by him.
(2) The_Auditor General may with the approval of, and shall
if so retired by, the Governor General or the Governor
of any Province audil and report on_
(i) the receipts of any department of the Federation or,
as the case may be, of the Province;

An Introduction to Indian Government Accounts and Audit, Second Edition 1940

An Introduction to Indian Government Accounts and Audit, Second Edition 1940

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An Introduction to Indian Government Accounts and Audit, Second Edition 1940