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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,

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Page 1: Municipal Audit

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,

Page 2: Municipal Audit

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

Page 3: Municipal Audit

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.

Page 4: Municipal Audit

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.

Page 5: Municipal Audit

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.

Page 6: Municipal Audit

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.

Page 7: Municipal Audit

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

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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

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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.

Page 10: Municipal Audit

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.

Page 11: Municipal Audit

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.