Municipal Audit ugm


Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Municipal Audit ugm

  1. 1. Graduate Report: 2012-2013 Urban Governance and Management (CE-638) Municipal Audit Submitted By Malvika Jiashal (P12UP004) Faculty Adviser Dr. Krupesh A. Chauhan Asst. Prof. Chetan R Patel Post Graduate Section in Urban Planning Civil Engineering Department,
  2. 2. Graduate Report: 2012-2013 Contents 1. Introduction 2. Municipal Audit 3. Why municipalities have an audit? 3.1.Objectives of Audit 3.2. Administration’s responsibilities 4. Auditors 4.1. Responsibilities of Auditors 5. Audit Techniques 6. Summary References
  3. 3. Graduate Report: 2012-2013 1. Introduction Audit is an evaluation of a person, organization, system, process, enterprise, project or product. Audit” is an instrument of financial control. In its relation to commercial transactions, it provide independent assurance that financial information is reliable This graduate report is an attempt to give a brief view on Municipal audit, its concept, objective and techniques used for audit. 2. Municipal Audit In the year 2001, Government of India (GoI), based on the recommendations of the Eleventh Finance Commission, issued guidelines to the Comptroller and Auditor General of India (CAG), to prescribe formats of Budget and Accounts for Panchyat Raj Institutions and Urban Local Bodies (ULBs) amenable to computerization. In September, 2003, the GoI suggested to the CAG to develop National Municipal Accounts Manual (NMAM). In December, 2004, the NMAM developed by CAG was made available to State Governments across the country for development of State-specific Budget and Accounts Manuals to be used by the ULBs. A municipality can be defined as a unit of local self government in an urban area. By the term ‘local self –government in an urban area, is ordinarily understood the administration of a locality-a village, a town, activity or any other area smaller than a state-by a body representing the local inhabitants, possessing fairly large autonomy, raising at least a part of its revenue through local taxation and spending its income on services which are regarded as local and, therefore, distinct from state and central services. These bodies derived their revenue from a numbers of sources-taxes on property, taxes on trade, taxes on persons, fees an licences, non-taxes resource such as rent of land, houses, income from commercial undertaking, government grants etc. Property taxes and octroi are the major sources of the municipal authorities; other municipal taxes are profession tax, non- mechanised vehicle tax, taxes on advertisement, taxes on animal and boats, tolls, show-tax, etc. local bodies may receive different types of grants from the state administration as well.
  4. 4. Graduate Report: 2012-2013 3. Why municipalities have an audit? Legislators, other Government officials, and the public want to know whether: i. Government resources are managed properly and used in compliance with laws and regulations. ii. Government programmes are achieving their objectives and desired outcomes. iii. Government services are being provided efficiently, economically, and effectively Financial audits play a vital role in helping to preserve the integrity of public finance and maintain citizens’ confidence in their elected leaders. Transparency and accountability in government is essential to show that public functions are being carried out efficiently, ethically and equitably. 3.1. Objectives of Audit The external control of municipal expenditure is exercised by the state governments through the appointment of auditors to examine municipal accounts. The municipal corporations of Delhi, Bombay and a few others have powers to appoint their own auditors for regular external audit. The important objectives of audit are: a. reporting on the fairness of the content and presentation of financial statements; b. reporting upon the strength and weaknesses of systems of financial control; c. reporting upon whether value is being fully received on money spent; and d. Detection and prevention of error, fraud and misuse of resources. 3.2.Responsibilities of Administration Each administrative has some responsibilities, that have to be taken care of, which will help the auditor during municipal Audit procedure: i. All records and books of account should be completed, posted, balanced and made available for examination by the auditor. ii. Supporting data should be grouped and matched to provide for easy examination. iii. Payroll records should be completed for the fiscal period and required forms should be completed and filed with the appropriate government ministry or agency.
  5. 5. Graduate Report: 2012-2013 iv. A general ledger trial balance should be completed to determine whether adjusting entries are required. v. Adjustments should be journalized and posted so that a working trial balance can be completed prior to the audit 4. Auditors It would be imminent on the part of the auditor to understand financial administration of local bodies before embarking upon the audit. Some of the aspects are as under: a. Budgetary Procedure This is geared to sub serve the twin consideration of financial accountability and control of expenditure. The main objective is to ensure that funds are raised and moneys are spent by the executive departments in accordance with the rules and regulation and within the limits of sanction and authorization by the legislation or council. b. Expenditure Control The system of financial control obtaining in the state and central government level is conditioned by the fact that there is a clear demarcation between the legislature and executive. The integration of legislation and executive powers in the municipal council makes it difficult for its executive to function as its inquisitorial body as well. Moreover the separation of executive powers and function in municipal government cannot accommodate the existence committee. This leaves the system of external audit by state government as the only instrument of controlling municipal expenditure. c. Accounting System Municipal accounting and budget format have been criticised as neither simple nor comprehensible, sometime providing inadequate information and at other times surfeit of information. Both these situation are not conductive to a proper system of management information.
  6. 6. Graduate Report: 2012-2013 4.1.Responsibilities of Auditor The auditor is to ensure that the prescribed standards of accounting are observed and that the transactions are entered under proper heads. The responsibilities of auditor are as follows: i. Auditors should act in a way that will serve the public interest, honour the public trust, and uphold their professionalism. ii. Auditors need to make decisions that are consistent with the public interest in the programme or activity under audit. iii. Auditors need to perform all professional responsibilities with a highest degree of integrity. iv. Auditors need to be professional, objective, fact-based, non-partisan, and non-ideological in their relationship with audited organisations and users of the auditors’ reports. v. Auditors are also responsible for being independent in fact and appearance when providing services. vi. Auditors should be objective and free of conflicts of interest in discharging their professional responsibilities 5. Audit Techniques The auditor obtains evidence in performing compliance and substantive procedures by one or more of the following methods: i. Inspection ii. Observation iii. Inquiry and confirmation iv. Computation v. Analytical Review vi. Flowcharting; and vii. Interviewing 5.1. Inspection Inspection consists of examining records or documents. It provides evidence of varying degrees of reliability depending on their nature and source and the effectiveness of internal control over their processing.
  7. 7. Graduate Report: 2012-2013 Four major categories of documentary audit evidence, which provide different degrees of reliability to the auditor, are: a) Documentary evidence created by third parties and held by the auditor; b) Documentary audit evidence created and held by third parties; c) Documentary audit evidence created by third parties and held by the organisation d) Documentary audit evidence created and held by the organisation. 5.2. Observation Observation consists of looking at a process or procedure being performed by others, for example, the observation by the auditor of the counting of inventories by the organization’s personnel or the performance of control procedures that leave no audit trail. Advantages a) It provides a greater understanding of the business through audit involvement with operational personnel. b) Information collected reflects actual behaviour and current events and not past events Disadvantages c) Potentially time consuming and difficult to record data and observe large numbers of people or activities. d) Random observation may not provide an adequate evaluation of the process due to fluctuations in volume or activity. 5.3. Inquiry and confirmation Inquiry: involves seeking information from knowledgeable persons inside or outside the organisation. Inquiry involves seeking information from knowledgeable persons inside or outside the organisation Confirmation is the name given to a specific form of inquiry that is particularly widely used. It involves obtaining written confirmation from a third party in relation to an account balance
  8. 8. Graduate Report: 2012-2013 in which the third party has an interest. For example, the auditor normally requests confirmation of receivables by direct confirmation with debtors Confirmations are best used where there is a knowledgeable party, independent of the organisation and where alternative reliable evidence is not readily available 5.4. Computation Computation consists of checking the arithmetical accuracy or reasonableness of source documents and accounting records or of performing independent calculations. The main advantage is it may provide the most efficient method to evaluate the outcome of a certain process The disadvantage is it may be complex and time consuming and may require assistance of outside experts, particularly where a valuation is being assessed - for example, the internal auditor’s assessment of accuracy of iron ore stock-pile inventory recording processes. 5.5. Analytical Review Analytical review procedures may be defined as substantive tests of financial information made by a study of comparisons and relationship among data i.e. analytical review involves a comparison of detail balances or statistical data on a period-to-period basis in an effort to substantiate reasonableness without systematic examination of the transactions comprising the account balances. Analytical procedures are used for the following purposes: i. To assist the auditor in planning the nature, timing and extent of other auditing procedure. ii. As a substantive test to obtain evidential matter about particular assertions related to balances or classes of transactions As an overall review of the financial information in the final review stage of the audit iii. In some cases, analytical review procedure can be more effective or efficient than tests of details in reducing detection risk for specific financial statement assertions. Analytical procedures include comparison of financial information with: i. Comparable information for a prior period or periods ii. Anticipated results, such as budgets or forecasts; and
  9. 9. Graduate Report: 2012-2013 iii. Similar organisation information, such as comparison of the ratio of Establishment iv. Expenses to Total Income with the averages of other organisations of comparable size Analytical procedures also include study of relationship: i. Among elements of financial information that would be expected to confirm to a predictable pattern based on the organisation’s experience ii. Between financial information and relevant non-financial information Analytic review is based on the assumption that comparability of period-to-period balances and ratios shows them to be free from significant error. A well performed analytic review not only benefits the examination by providing an understanding of the ULB’s operations, but also highlights matters of interest and potential problem situations 5.6. Flowcharting A flowchart is a method for documenting and understanding the flow of a system and for identifying its control points. This technique can be resorted to for evaluation of the internal control system. It is a pictorial description of how transactions flow through a system. They visually communicate the procedures, controls and the sequence in which they occur. The advantages of using a flowchart to document a system are as follows: i. Flowcharts are easier and less time consuming to understand than a narrative ii. Flowcharts make it easier to represent flow of transactions using standardized symbols iii. It gives a bird’s eye view of the system iv. Flowcharts are easier to update There are three rules of flowcharting as it relates to auditing: i. Prepare or update a flowchart for each audit, where practicable. ii. Identify control points. iii. Prepare a narrative on control points.
  10. 10. Graduate Report: 2012-2013 5.7. Interviewing Interview can also be described by other synonyms such as audience, conference, consultation, dialogue, meeting, talk, examine, interrogate, question etc. Interviewing is a process for gathering information which is a fundamental part of audit work. Various types of interview are a) Initial contact: This sets entire tone and tenor of the audit programme. The auditee perceives the audit as a positive and constructive tool or avoidable inconvenience. The terms of reference for the audit are discussed and a clear mutual understanding is established. b) Fact finding: This is backbone of the audit work and a fine balance is required to be maintained between getting the facts and disturbing the auditee’s work to avoid conflict. Negotiation skills, tact, and diplomatic approach are to be adopted. c) General survey: A general assessment of the overall domain environment to understand work culture and to define high areas of risk that may require interaction with senior officials. An effort shall be made to sell the audit as a service. d) Wrap up meeting: This wrap up meeting involves explaining the audit findings to the senior officials in order to avoid surprises to them in the final audit report. It is a special negotiation process wherein the auditor is able to retain main audit paras but tones down certain other paras wherein the senior officers are able to bring in new perspective to initial audit findings. Personality factors may create sometimes a barrier to the effectiveness of audit closure process and finalization of report. e) Staff appraisal: This appraisal process is intended to appreciate staff attitudes, skills, and motivational needs. f) Fraud: Statutory implications shall be borne in mind as interviews in connection with investigations are covered under various Acts, such as Criminal Procedure Code, Evidence Act, Anti-Corruption Act and disclosure requirements stipulated in Rights to Information Act.
  11. 11. Graduate Report: 2012-2013 6. Summary Transparency and accountability in government is essential to show that public functions are being carried out efficiently, ethically, and equitably. Financial audits play a vital role in helping to preserve the integrity of public finance and maintain citizens’ confidence in their elected leaders. The audits of the accounts of ULBs have generally been unsatisfactory to a large extent and it is an acknowledged fact that these audits have virtually ceased to have practical effect in ensuring the integrity of ULBs. Government, auditors and inspectors need appropriate information to monitor progress and assess performance. For better value for money, better financial management and improved financial reporting, there is an urgent need to deliver high-quality, risk-based audit in synchronization with the trends in urban sector reforms. This includes the use of resources assessment with a specific judgment on how well ULBs achieve value for money. Promote world-class financial management and reporting by local authorities and provide practical guidance to assist them in achieving those high standards. References 1. “Andhra Pradesh Municipal Audit Manual (February 2008), Department of Municipal Administration and Urban Development, Government of Andhra Pradesh. 2. “Audit Manual for Metropolitan, Municipal and District Assemblies”, issued by The Internal Audit Agency/Ministry o f Local Government and Rural Development. 3. “National Municipal Accounts Manual” (November 2004,) issued by Government of India Ministry of Urban Development.