UNIT 21 ACCOUNTING SYSTEM IN INDIA

Structure
Objectives
Introduction
Accounting : Definition and Importance
Principles and Methods of Government Accounting
Separation of Accounts from Audit
Departmentalisation of Accounts
Revised Accounting Structure
Management Accounting in Government
Let Us Sum Up
Key Words
References
Answers to Check Your Progress Exercises

21 .O OBJECTIVES
After studying this unit, you should be able to :
explain the differences between Commercial and Government Accounting
discuss the advantages and disadvantages of the separation of accounts from Audit
and its present position in Government
explain the main features of Departmentalisation of Accounts
describe the essentials of the Revised Accounting Structure; and
analyse the concept of Management Accounting and its limitations in Government.

21.1 INTRODUCTION
Accounting, whether in a commercial organisation or in Government, is a tool of
management, In a manufacturing organisation, it provides information to
management about the cost of manufacturing a product, the cost of performing a
job, the cost of sales and the profit earned or loss incurred etc. Similarly, in a
commercial organisation, it provides information about the profit or loss and also
the increase or decrease in the assets and liabilities of the organisation. It also
provides data for proper budgetary control. In the case of government, accounting
helps the various levels of management, in the preparation of plans and exercise of
, proper financial control. By providing data about the expenditure incurred on
various activities, it helps budget planners to determine in advance, the taxes to be \

I
levied and also the areas, where the cut in expenditure is possible. Again, it helps the
management in proper monitoring and implementation of plans, schemes. Thus,
I
accounting is an useful'aid to management in performing its various managerial
I
functions effectively.
i In this unit, the difference between commercial accounting and government
i accounting has been explained. The recent reforms in government accounting viz.,
I Departmentalisation of Accounts, Revised Accounting Structure, Management
i
Accounting have also been explained.

I ..
! .
ACCOUNTING : DEFINITION AND
i 21.2
IMPORTANCE
.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 incorporated in
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Aeeountn md ~ u d i t In the early stages of civilisation, the number of transactions to be recorded was so
small that each businessman was able to record and check for himself/ herself all the
transactions. But with the growth of trade, it became difficult for him/ her to know
from the records, how she/ he stood in relation to his/ her customers and whether
her/ his business was profitable or not. This gave rise to the maintenance of accounts
on a doubleentry basis, which was helpful in the preparation of profit and loss
account and balance sheet of the business. The process through which these ends are
effected is called "accounting."
Accounting is a discipline which records, classifies and summarises data and presents
it in a convenient form to various levels of management in an organisation for
decision-making purposes. It helps managers to prepare their budget plans
realistically so that the expenditure could be watched against the budget allocation,
and corrective action could be taken, wherever necessary. It also helps outsiders i.e.
shareholders/ government, to know the working of the business firm, by presenting
data about its activities, profit or loss and its assets and liabilities.
In government, accounting provides information for the preparation of annual
budgets. It helps budget planners to determine, in advance, the taxes to be levied for
meeting the committed expenditure, or to reduce the expenditure, wherever possible.
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It provides information to managers about the expenditure involved annually, on
pay, allowances, materials etc. and also the expenditure incurred on Plan Schemes. It
also provides information regarding expenditure incurred on functions, programmes,
activities, for the speedy development of performance budgeting in all departments of
government. It further helps in exercising proper financial control and observance of
rules and regulations by the various authorities. Its main purpose is to provide timely
information to various levels of management, for taking proper decisions in respect
of their areas of operations and for monitoring the performance of activities against
their physical targets and also the expenditure against the budget, so as to enable the
government to take corrective action, wherever considered necessary.

21.3 PRINCIPLES A N D METHODS OF

GOVERNMENT ACCOUNTING .
The principles of commercial and government accounting differ in certain essential -
points. The main function of a commercial concern is to produce goods and sell
them to earn a profit. On the other hand, the main function of government, is not to
make profit but to govern the country and administer the various functions in the
best way possible in the interests of the society at large.

A commercial concern deals primarily with the utilisation of capital for the purpose
of making a profit. It is interested in seeing at intervals, 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. 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, and each
department of its activities, it maintains a separate accourit, so that the result of the
transactions in each case may be ascertained. By preparing the manufacturing,
trading and profit and loss accounts and balance sheet, the concern is able to know
the profit earned or loss incurred during the year.
It is a generally accepted practice in the commercial world to m9intain account
books on the double entry system. The double entry system is based on the fact that
in every transaction, two parties or accounts are involved-one giving and the other
receiving. Under that system, every transaction requires two entries in the books, one
against the party or account giving and the other against the party or account which
is receiving.

The activities of a government, on the other hand, are determined by the needs of
the country. If the activities to be carried out, during the coming years, are known, it
becomes easier to determine the funds required to carry out those activities.
Government accounts are, therefore, designed to enable the government to
 determine, how much money it needs to collect from the tax-payers in order to Accounting System in lndr
maintain its activities.

The classification of transactions in government accounts is determined firstly by the

administrative classification of the activities and secondly by the classification of the
nature of the transactions. The government accounting is, therefore, quite elaborate
and is kept on a single entry basis.

21.4 SEPARATION OF ACCOUNTS FROM AUDIT

i) Introduction
Accounting and auditing are interrelated but have independent functions. For reasons
mainly of economy, these have been traditionally combined under one authority.
From time to'time, however, attempts have been made to separate accounting from
auditing as in the case of railways, defence, food, rehabilitation and supply. In 1971,
the Comptroller and Auditor General's (Duties, Powers and Conditions of Service)
Act was passed, which visualised the need for separating accounts from audit.
Section 10 of the Act empowered the President, after consultatiorl with the CAG. to
relieve the Comptroller and Auditor General from the responsibility of compiling the
accounts of any department of the Union Government. A scheme for the separation
of accounts from audit was approved by the Government of India in June 1975. An
ordinance was issued by the President, which was followed by passing an Act, which
amended the Comptroller and Auditor General's (DPC) Act 1971, thereby relieving
him from the responsibility of compiling accounts of Ministries1 Departments of
Government of India. He, however, still performs the accounts and audit functions
in each state.

ii) Advantages of Combined Audit and Accounts

Continuance of combined audit and accounts under one functionary has been
justified on the following considerations:
a) Accounting and audit functions are interrelated. The preaudit of claims before
admission for payment, the examination of contract documents, etc. with
reference to the financial principles and rules is essentially an audit process.
Therefore, the combination of the two functions is not wrong.
b) An accounts organisation, independent of the administration, is a must to
ensure that the internal accounting organisation is not coerced by the
administration to admit questionable claims, overlooking irregular practices.
.c) Under the existing practice, certain accounting responsibilities have been
imposed on the Comptroller and Auditor General. Consequently, arrangements
will have to be made by him for the consolidation of departmental accounts
and the compilation of Finance Accounts of the Central and State
Governments as a whole. The co-ordinating role will imply that the uniformity
in accounting principles and processes in the units has to be maintained.
d) The Constitution has provided for a single Comptroller and Auditor General,
unlike other Federal Constitutions. Hence, it would be better to keep accounts
and audit with the Comptroller and Auditor General.
i

iii) Dis\qdvantages of Combined Audit and Accounts

The basic disadvantages of the combined system are as follows :
a) It violates the fundamental spirit behind the provisions of the Constitution and
of the CAG Act of 1971, which expects that the duties of Comptroller and
Auditor General should essentially be auditorial.
b) Combination of audit functions with payment and account functions brings the
Comptroller and Auditor General under the indirect control of the Finance
Minister. Questions tabled in the Houses of Parliament pertaining to his
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Accounts and Audlt c) Federal structure has been prescribed by the Constitution with autonomy to the
states. With the state accounts handled by a functionary directly under the
President, entrusting accounting duties to the' Comptroller and Auditor General
would lead to the loss of the accounting autonomy of the states.
d) The combined accounts and audit dffices function with less speed in the
performance of their accounting duties, i.e. in the timely payments of dues,
such as salary, pension, provident fund, gratuity etc.
The disadvantages listed out above are not so great as to justify opposition to the
separation for all times to come. The mere fact that separate accounts organisations -
of Defence, Railways, Lok Sabhal Rajya Sabha Secretariat and the separated
Ministeries of Works, Housing and Supply etc. are functioning with efficiency, it dispel
- the fears enumerated. In fact, the disadvantages arising out of combined accounts
and audit organisations are more than the advantages accruing out of it.

iv) Advantages of Separation or Departmentalisation of Accounts

Departmentalisation of accounts has many advantagp. It establishes a definite
accountability on the decision-making departments for the expenditure incurred by
them, out of the approved budget. He, who spends, should account for the
expenditure. But an executive without administrative control over its accounting
machinery, will hardly be able to discharge effectively its financial and accounting
responsibility.
Departmentalisation of accounts enables the audit department to confine its
attention to audit matters in greater depth. The activity of higher audit (i.e.
Efficiency-cum-Peformance Audit) may g e y r r e d , when audit is involved with
i
routine accounting duties. Moreover, accounting duties bring the Audit Department
partially under the control of the executive, whose accounts it compiles.

v) Separation of Accounts
Realising the increasing need for separation of accounts from audit, the Government
of India decided to departmentalise the accounts of the Central1 Ministries1
Departments, which had been with the Comptroller and Auditor General of India.
All Ministries of the Government of India including the Posts and Telegraphs
Department were brought under the Scheme of departmentalisation of accounts
between 1st &I to 31st December, 1976.
>

he scheme of Departmentalisation of accounts introduced from 1st April. 1976. is

in character and method different from the earlier attempts made in this regard. The
main objective behind this scheme was that in view of the manifold increase in
Government expenditure and the need to implement effectively the developmental
plans, management accounting should be properly developed as an integral part of
each Ministry1 Department It was realised that to achieve this objective, the
externality of the accounting system should be eliminated and there should be a
vertical functional integration, coupled with horizontal administrative integration at
each level of management. Accordingly, the Departmentalisation df accounts
involved not only relieving the Comptroller and Accountant General of the
- responsibility of compilation of accounts but also taking over most of the payment
and reciept functions from the Treasuries.

The broad features of the Scheme of Departmentalisation are detailed below:

i) Each Ministry functions administratively under a Secretary, who is assisted by 1
an Additional Secretary, a Joint Secretary, and Under Secretaries supported by I

subordinate officers. Apart from the Headquarters set up, evely Ministry
P . .. . - . - -. -- - -.
 ii) The Comptroller and Auditor General was relieved of the responsibility of Accounting system in India '
compiling and keeping the accounts of transactions relating to the Departments
of the Ministries. Payment functions discharged by the treasuries were also
taken over by the Departments. According to the practice, prior to
departmentalisation of cc unts, the main Ministry and the subordinate offices
3 I?
used to draw funds by means of presenting bills in treasuries. The treasuries
used to render accounts to the respective Accountant Generals, who compiled
the monthly accounts. Each Accountant General rendered a monthly account
of Central Gover ment transactions to the Accountant General, Central
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Revenues in Delhi! for consolidation and preparation of civil accounts.
iii) The Secretary of each Ministry is designated as the Chief Accounting Authority
responsible for all transactions of the Ministry and its Departments. This
responsibility is discharged through the Integrated Financial Advisor (IFA) of
the Ministry. The Secretary has the over-all responsibility for the functioning of
the accounting and payment set-up and is responsible for certification of
monthly accounts.
I iv) The Integrated Financial Advisor performs the following duties, on behalf of
the Chief Accounting Authority. He/She will be responsible for:
a) The preparation of the budget of the Ministry and its Departments in
coordination with the Heads of Departments concerned and distribution
of the budget allotment among the various wings/ departments of the
Ministry. Control of expenditure will also form a part of his/ her
responsibility.
b) Arranging payments to autonomous bodies, corporations, authorities, and
also grants-in-aid, loans etc.
'c) Arrangements for making payments through the Pay and Accounts offices
of pay and allowances, office contingencies and miscellaneous payments.
d) Consolidation of the accounts of the Ministry as a whole, in accordance
with the instructions issued by the Central Government.
e) Preparation of Appropriation Accounts for the grants controlled by the
Ministry.
f) Organising a sound system of internal check to ensure accuracy in
accounting and efficiency of operation as part of management.
g) Introduction of an efficient system of Management accounting best suited
to the functional requirements of the Ministry and its Departments.
v) The payments relating to the Ministries/Departments which are now made by
the Bank and non-Bank treasuries, Accountant General and State Pay and
&counts Officers, will be made by the Departmental Pay and Accounts
Offices.
'\

In brief, departmentalisation of accounts was done mainly with a view to enable the
Ministries to exercise direct control over their expenditure and to introduce a
management accounting system, so as to provide relevant information to various
levels of.management for taking proper decisions.
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Check Your Progress 1

Note : i) Use the space given below for your answers.
ii) Check your answers with those given at the end of the unit.
1) Explain the advantages of the separation of accounts from audit.
Accounts md Audit

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2) Explain the disadvantages of the separ-&n of accounts from audit.

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3) Explain the salient features of departmentalisation of accounts.

21.6 REVISED ACCOUNTING STRUCTURE

The accounting system introduced by the British in the early years of this century
remained more or less unchanged till April 1974.

The classification in the accounting system introduced by the British, was mainly to
facilitate financial and legal accountability of the Executive t o the Legislature and
within the Executive. of the spending agencies t o the sanctioning authorities. Again.
the classification had close relationship to the department in which the expenditure
occurred than to the p d o s e s for which thermoney was spent. The basic concern
was the item on which money was spent rather than the purposes served by it. This
system served well so long as the functions of the Government were limited. But with
a change in the role of Government, i.e. undertaking developmental programmes for
the socio-economic development of the country under the successive Five Year Plans,
need was felt for bringing in necessary reforms in the system of accounts, so as t o
meet the challenges of development administration.

The Administrative Reforms Commission set up by the Government in 1966, to

bring about reforms in administration examined the existing system of accounts and
recommended in their Report o n " Firiume, Acc.ounts and Audit", some changes in
the system. This was done mainly in the context of introduction of performance
budgeting in India. The Commission recommended that the structure of major heads
of accounts should be recast to reflect broad functions and major programmes of
Government. Also, the programmes, activities and projects of the varlous
departments and organisations should be clearly identified and the minor heads
connected with these programmes suitably recast, so as to reflect these activities. T h e
Commission also suggested that the heads df development adopted for Plan purposes
should be reviewed with a view t o establish a direct correlation between these heads
and the general accounting heads. The Commission also recommended that the
Government should constitute a team composed of representativei of the
Comptroller and Auditor General, the Planning Commission, the Ministry of
Finance, and the Administrative Ministry concerned which should be assigned the
task of drawing up a programme for the implementation of the commission's
recommendations.

The Government of India accepted the suggestions of the Commission. I t appointed

a team of officers composed of the Deputy Comptroller and Auditor General, the
Joint Secretary (Budget) of the Ministry of Finance, and a representative of the
Planning Commission, to undertake a review of the Heads of acounts and the Heads
of dewelo~menta d o ~ t e dfor Plan DurDoses. The team submitted two reDorts on the
 reforms in the structure of demand-for grants. In p a r n o r the report, it suggested Accountlng System in India
that a Ministry/ Department in charge of a number of distinct services may present a
separate demand for each of the major activities.

In part I1 of the Demands, details of expenditure upto the level of major and minor
heads of account may be included.

In part 11i of the Demands, further details may be given about the provisions made
in part 11 for minor heads and for activities/schemes/organisationsunder minor
, ,
heads.
-.A

The team submitted the second report in November 1972. It proposed a five tier
classification structure.

The team mentioned that the new classification would facilitate a link between
budget outlays and functions, programmes-and activities. It would also ensure
itemised control of expenditure. Also, the classification would facilitate introduction
of performance budgeting.

The Government of India accepted the recommendations of the team on reforms in

the structure of Budget and Accounts.

A revised accounting.structure was introduced by :he Government of India from

April, 1974. Under this scheme, a five-tier classification has been adopted, namely
Sectoral Major Head, Minor Head, Sub-Head and Detailed Heads of account.
Sectoral classification has grouped the functions of government into three sectors,
namely, General Services, Social and Community Services and Economic Services.
General Services Sector includes services indispensable to the existence of an
organised state, such as Police. Defence, External Affairs, Fire protection etc. This
sector includes Organs of State (Parliament), Head of State, Judiciary, Fiscal and
Administrative Services and Defence Services.

Social and Community services sector covers programmes and activities relating to
provision of basic social services to consumers, such as Education, Medical Relief,
Housing, Social security and Welfare and Services required for community living
such as Public Health. Urban Development, Broadcasting etc. Economic Services
Sector includes programmes and acthities in the fields of Production. Distribution,
Trade, Regulation ctc.
,-
In the new scheme of accounts, a Major Head is assigned to each function, and a
Minor Head is allottcd to each Programme. Under each Minor Head, there would
be sub-heads assigned to activities/schemes/ organisations covered by the
progra*me. Major and Minor Heads classification is common to Union, States and
Union territories Govclmments. Under the new scheme, the object classification has
been retained and placed as the last tier. I t is meant to provide item-wise control
over expenditure and to ensure financial control.

The revised accounting structure in terms of programmes, activities, and projects

establishes adequate links between Budget and Account HeadQi.e. Major Head.
Minor Head and Sub-Head) and the Plan Heads of developmeqr. It helps in
obtaining information of the progressive expenditure incurred inflplan programmes
/?
and projects. I t also helps in the speedy implementation of performance budgeting.
Further. i t also helps in monitoring and analysis of expenditure on
progl-am'mes~activities,'projects to perform the management functions effectively.

21.7 MANAGEMENT ACCOUNTING IN

GOVERNMENT
According to Amerlcan Accounting Association "Management Accounting is the
application of appropriate techniques and concepts in processing historical and
projected economic data of an entity to assist management in establishing plans for
ieasonable economic objectives and in mqking of rational decisions with a view
toward those objectives." Management accounting involves collection and
presentation of all such information which can be of help to management in the
Accounts and Audit
* P
preparation of budget plans for the organisation. It helps in proper monitoring and
evaluation of performance of the activities,'as compared to the budget plan in terms
of financial expenditure and the corresponding physical accomplishments. Its
purpose is to provide timely information to various levels of managements to
facilitate decision-making, for efficient and economical achievement of their tasks.

Management accounting encompasses financial accounting, cost accounting and all

aspects of financial management. It involves not only colltction of information from
financial records but also from cost records. In a system of management accounting,
information has to be collected from various sources inside and outside the
organisation and presented to management for taking decisions.

A good management accounting system should provide timely accounting

information to various levels of management, for a continuous review of the progress.
of expenditure as related to the budgeted funds and the planned tasks. It should also
facilitate the working of the scheme of performance budgeting.

Management accounting varies from organisation to organisation depending on its

objectives, organisational structure, and the information requirements at various
levels etc. In Government, it is difficult to prescribe a standard system of
management accounting, applicable to all departments of Government, as the
functions of each department vary from one another. It is necessary, therefore, to
evolve a management accounting system suited to the department, keeping in view its
objectives, organisational structure, information requirements etc. Again;
management accounting system, once introduced, should be reviewed periodically to
cope with the changing requirements of that particular department.

An Advisory Committee had been appointed, in 1976, by the Government of India

under the Chairmanship of the F i ~ a n c eMinister, to consider and recommend
management accountancy concept1 to suit the requirements of different
Ministries/ Departments. The Committee was also required to make
recommendations regarding management information system necessary to be
developed for the purpose. Very little progress has, however, been in this dir~ction
due to various constraints.

The constraints in developing a system of management accounting in government

have to be recognised. Government accounting, is c(one on a cash basis (not double
entry basis) which makes it difficult to know the entire cost assignable to an activity.
Again, the present structure of financial accounting is not conducive to serve the
purposes of management accounting. The existing classification of accounts does not
allocate cost to a 'cost-centre' or responsibility centre so as to evaluate actual cost
against standard cost. Although the new classification structure developed for
performance budgeting in terms of functions, programmes, activities had helped in
monitoring expenditure on a programme or activity, the classification still needs to
be linked with cost-centres or responsibility-centres for speedy development of
management accounting in Government.

It may be concluded that the. recent financial reforms introduced in the Government
of India, namely, revised accounting structure, departmentalisation of accounts,
performance budgeting, Integrated Financial Advisor Scheme etc. are all intended to
facilitate the early introduction of management accounting in government. The
reforms already started should be carried forward, so that the management
accounting system developed in a Ministry/ Department, could provide timely
information to various levels at management for speedy decision-making,
--
' Check Your Progress 2
Note : i) Use the space given below for your answers.
ii) Check your answers with those given at the end of the unit.
1) Why was the accounting system introduced by the British revised?
 Accounting Syrtem In Indh

2) Explain the concept of Management Accounting. \

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21.8 LET U S SUM CTP

Thus, in this unit, the developments in the area of Government accounting right from
the beginning of this century to the present, have been explained. The importance of
management acco~intingand its limitations in Government, has also been explained.

21.9 KEY WORDS

Cost Accounting: Analysis of accounting and other information to determine the
cost of each activity/ product/job.
I
Capital ~ x ~ e h d i t u r Payments
e: in respect of which, services will be available for
many years to come e.g. machines.
Financial Accounting : Art of recording, classifying and summarising transactions,
which are of a financial nature.
Revenue Expenditure : Payment in respect of which services have already been obtained
e.g. wages, salaries, rent etc.

21.10 REFERENCES -
Chandrasekharan R.K., 1990. The Comptroller and Auditor General of India
(Vol. I ) , Ashish Publishing House : New Delhi.
RamachandrantK.S., 191 1. Wutc-17ingover a Watch Dog, Ashish Publishing House:
New Delhi.

21.11 ANSWERS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
I) Your answer should include the following points:
Advantages
Accounting and audit functions are interrelated
An Accounting organisation, independent of the administration, is necessary to
prevent irregular practices ih administration.
There is a need to maintain uniformitv in accounts.
2) Your answer should include the following points:
Disadvantages
The Combined system of audit and Accounts violates tile fundamental spirit
behind the provisions of the Constitution and of the CAG (DPC's) Act 1971.
It brings the Comptroller and Auditor General, under the indirect control of the
Finance Ministry.
It does not help in speedy performance of accounting duties.
Departmentalisation of accounts was done in all Ministries of Government in
1976.

3) Your answer should include the following points

The c o m p t r d l e r and Auditor General was relieved of the responsibility of
compiIing the accounts of the Ministries1 Departments.
Each Ministry functions administratively under a Secretary, who is
designated a s the Chief Accounting Authority. He/ She is responsible for the
accounting transactions of his/ her Ministry/ Department.
The Integrated. Financial Advisor assists the Secretary of the
MinistrylDepartment in the performance of his/ her accounting duties, by
preparing the Budget of the Ministry and watching the expenditure from
time to time.
The scheme helps in speedy introduction of Management Accounting in
Government.

Check Your Progress 2

I) Your answer should include the following points:
Change in the role of the government.
Extension of the government functions. *

2) Your answer should include the following points :

Management accounting encompasses Financial Accounting, Cost
Accounting and all aspects of Financial Management.
Government accounting is done on a cash-basis.
Classification in Government accounts is not in terms of Cost Centres or
Responsibility Centres, which are essential for allocation of expenses and
providing timely information to management.
 UNIT 22 AUDITING SYSTEM IN INDIA

Structure
Objectives
Introduction
Auditing: Definition and Importance
Evolution of Auditing in India
Statutory and Internal Audit
Types of Audit
Independence of Audit
Results of Audit-Audit Reports and their Follow-up with Administration
Let Us S u m Up
Key Words
References
Answers t o Check Your Progress Exercises

22.0 OBJECTIVES
After studying this unit, you should be able to: ..
explain the meaning and importance of audit
describe the differences between Internal and Statutory audit
analyse the features of Regularity audit and Performance audit
understand the utility of audit reports and their impact on administration.

22.1 INTRODUCTION
Audit deals with papers and figures. I t is in the nature of a post-mortem
examination of accounting and financial transactions of a firm or a company or a
department of Government.

An auditor has a vital role to play in modern economy. With the growth of joint-
stock companies with limited liability, there is divorce between owners (share-
holders) and managers (Board of Directors). This has made it important that there
should be an independent auditor to check the correctness of the financial
transactions of a limited liability company on behalf of the shareholders, as a means
of managerial accountability to thc owners. Likewise, on the basis of audited
accounls, certified by a n auditor. the tax authorities can be reasonably certain that
the profit or loss, disclosed by a n assessee, is reasonably true and correct, instead of
* undertaking a check of accounts of the assessees.

In the case of governmental activities, audit acts a s a 'watchdog' oE the nation's

financial interests. The administrative structure of the State is so vast and its
operations so complex that it is impossible for an ordinary tax payer to know that
the money contributed by him/ her t o the running of the state is being misused.
Audit helps to highlight losses, waste and under-utilisation of capacity, due to
improper decisions at the appropriate levels. Above all, ParliamentIState
Legislatures vote supplies but they have no means t o know that the moneys' have
been spent for the purposes for which they were voted and also not in excess thereof.
It is for the proper exercise of these important aspects of control that Parliament
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Accounts md Audit
In this unit, you will study the meaning a n d impo;tance of audit and the evolutio@,,
of auditing in India. You will know the various types of audit conducted by the
Comptroller and Auditor General for effecting economy and efficiency in
. administration. This unit will also explain the importance of audit reports and their
examination by the Public Accounts Committee of the Lok Sabha.
4

22.2 AUDITING : DEFINITION A N D IMPORTANCE

The world Audit is derived from the Latin word Audire t o hear. Originally, the
accounting parties were required to attend before the auditor, who heard the
accounts. I n the early stages of civilisation, the methods of accounts were so crude
and the number of transactions t o be recorded so few that each individual was able
t o check for himself/ herself all his/ her transactions. But soon with the establishment
of empires, a system was established t o record account transactions and audit them.
The person whose duty, it was to check such accounts came to be known a s the
Auditor.

An audit is a n examination of accounting records undertaken with a view to

establishing, yhether o r not they correctly and completely reflect the transactions t o
which they purport to relate. Its purpose is t o see that expenditure has been incurred
with the sanctions of the competent authority and applied for the purpose for which
it was sanctioned. It should be duly supported by vouchers, a s a safeguard against
fraud and misappropriation.

Audit is a n instrument of financial control. In its relation t o commercial

transactions, it acts a$ a safeguard, on behalf of the proprietor, against extravagance,
carelessness o r fraud o n the part of the proprietor's employees in the realisation and
utilisation of his/ her moeny or other assets. It ensures on proprietor's behalf, that the
accounts maintained truly, represent facts and that expenditure has been incurred
with due regularity and propriety. ( ,

The financial transactions of a government need to be similarly 'watched. The agency

employed for the purpose should be independent from the employees of
Government, who are entrusted with the realisation and utilisation of public money
or other assets, This task is entrusted, in India, t o the Indian Audit and Accounts
Department. S o far a s its audit duties are concerned, the position of the Indian
Audit and Accounts Department in relation to government transactions, is to a large
extent. similar t o that of a n auditor. In this context, Parliament1 Legislatures may be
regarded i s the shareholders of the Government concern and the Executive
Government as its directors. The object of this concern is. however. not profit-
making.
Audit is one of the four pillars of democracy viz.. (i) Parliament (ii) Judiciary
(iii) Press and (iv)'Audit. Firstly, Parliament is the most important organ of democracy.
It is composed of people's representatives, elected on the basis of adult franchise.
The members belonging to the majority party in Parliament form the Government.
!
All laws necessary for the running of the Government have to be passed by the
~ a r ~ ~ d m eAgain,
nt. it votes taxes which provide government the resources, necessary
for running the administrative machinery and also votes funds for meeting the
expenses. Secondly, judiciary and the press are the other two pillars which are
necessary for administration of justice and functioning of a healthy democracy.
Lastly, a F i t is a vital instrument of ensuring effective supremacy of Parliament over
the executive. Parliamentary control consists not only in voting suppliers and
approving the imposition of taxes but also in ensuring that actually the funds have
been applied to the purpose for which these werc voted.

Audit is a valuable aid t o administration. 1nBH countries, audit is not just tolerated
as a necessary evil but is looked upon a s a valued ally, which brings t o notice
procedural and technical irregularities and lapses on the part of individuals, whether
they may be errors of judgment, negligence or acts and intents of dishonesty. The -1
complementary roles of audit and administration are now accepted a s a fact, being
essential for toning up the machinery of government-In the ultimate ana!ysis, audit'
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 2 2 3 EVOLUTION OF AUDITING IN INDIA

I
1
i
The evolution of auditing in India, as well as in other countries, has been a gradual
process. It has been closely related to the activities undertaken by the government,
the internal control and management systems available in government departments.

; In the pre-war era, the main functions of government were collection of revenue,
maintenance of law and order, defence and execution of public works of certain
kinds. Few governments undertook commercial activities. In such a situation, the
functioh of audit was largely one of regularity and compliance audit. The principal
components of audit in the re-war era were (a) audit against budget provisions
(b) audit against sanctions (c) audit of accounts and appropriations (d) expenditure
aud'it and (e) propriety audit. Audit against budget provisions and against sanctions
I constituted what was known as complhnce.or regularity audit [See Section 22.5 (i)].
The highest form of audit within the traditional framework. was considered to be
propriety audit. A transaction. which was otherwise in order and in conformity with
I
rules and regulations, could still be objected to on the ground that it breached broad\
concepts of financial ethics.

In the post-war era, the welfare state had to undertake several socioeconomic,
commercial and industrial programmes to speed up development and improve the
quality of life of the people. Correspondingly. audit had to shift its emphasis so that
it was io a position to report to Parliament. whether or not these
programmesiactivities had achieved their objectives. New areas of audit had to be
covered and new techniques had to be developed. With increasing activity.
government departments and agencies had to build up their own systems of internal
control.

The transition from the traditional type of audit to the audit of economy, efficiency
and effectiveness of activities (the three E's audit) was achieled. through an
intermediate stage of value for money audit. which covered the economy and
efficiency aspects. Broadly. it can be said that economy audit is aimed at ensuring
that the activities are undertaken and completed at the lowest possible cost.
Efficiency audit is concerned with ascertaining that an activity is completed
according to a pre-determined output to input ratio and according to a pre-
determined time table. In the audit of effectiveness of programmes, it is necessary to
determine whether the objectives for which the-programmes were undertaken, have
been achieved and whether the programmes had the intended effect on the social and
economic life of the people. Thus, broadly, it can be stated, that in the earlier stage.
. traditional audit was concerned with economy. at the intermediate stage. it Was
concesned with economy and efficiency and that today it is concerned with economy,
efficiency and effectiveness.
As already mentioned. the evolution of government auditing in India has been a
gradual process. coinciding with the changes in the functions of government. Until
1950. government audit was mairJy expenditure oriented. Appropriarion audit;
regularity audit, sanction audit, propriety audit etc. were conducted by the Indian
Audit and Accounts Department, in so far as they related to individual transactions
of government. The techniques and procedures prescribed for conducting audit, by
and large. fulfilled the task of transaction audit of government expenditure.

The concept and practice of audit of expenditure has undergone radical changes in
the post-independent era (after 1950). Following the development of parliamentary
democracy and introduction of successive Five Year Plans for national
development-social, economic and industrial-massive investments have been made
by the government at the centre and in the states. .When the pattern of government
( ex&dituredimension underwent a radical and rapid transformation in the wake of
successive national plans, it was felt that the scrutiny of individual transactions was.
inadequate, as it tended to mistake the tree for the woods. It became. therefore,
essential for audit to ascertain whether the various developmeilt programmes and
welfare activities were being properly executed and their operations conducted
economically, whether they were producing the results expected of them. Hence she
concept of efficiency audit was introduced to meet the changing requirements in the
--r---- -P r . ..--
A
:
Accounts iunl Audit Introduction of performance budgeting and functional classification in government
accounting gave a new dimension to efficiency-cum-performance audit. Since 1962,
when the technique of efficiency-cum-performance audit was develcped, it has been
applied to the transactions connected with the development programmes. The
introduction of comprehensive appraisal of the public sector undertakings and
evolution of the mechanism of Audit Boards with built-in external expertise, saw yet
another extension of the technique of efficiency-~um~performance audit. In addition,
audit also covered new areas i.e. audit of tax receipts, audit of scientific departments
etc.

With the shift in approaches in audit, changes have been introduced in the content
and presentation of audit reports. Thus, the evolution of auditing in India has been a
gradual process, matching with the changes in the functions of government.

22.4 STATUTORY AND INTERNAL AUDIT

Statutory Audit
Statutory audit refers to the audit conducted by the Comptroller and Auditor
General, through the agency of the Indian Audit'and Accounts Department. As per
the Constitution as well as by the CAG CDPC) Act, 1971, it is the function of the
Comptroller and Auditor General to (i) audit all expenditure from the Consolidated
Fund of India of the Union, of each State and of each Union Territory, having a
Legislative Assembly and to ascertain whether the money shown in the accounts a s
having been disbursed were legally available and applicable to the service or purpose
to which they have been applied of charged and whether the expenditure conforms
to the authority who governs it and (ii) to audit all transactions of the Union and of
the states relating to the contingency functs and public accounts. The Comptroller
and Auditor General has been given, under the Constitution, access to the accounts
of expenditure incurred against appropriations granted by Parliament. The CAG is
empowered to inspect any office connected with the t r a n s a c t i v to which his/ her
authority extends.

Statutory audit has a three-fold purpose. First, it is an accountancy audit to check

the accuracy of arithmetical calculations and to see that all payments are sttpported
by receipted vouchers. In its essence, it is no different from the limited audit of
private auditors. Its objects are (i) detection of fraud (ii) the detection of technical
errors and (iii) the detection of errors of principles. It is usually a continuous audit.
but of a small percentage of transactions.
Secondly, it is a n appropriation audit to check the classification of expenditure, in
order to make sure that the items have been charged to the proper heads of accounts
and further that the apprcpriation for these heads have not been exceeded.
Thirdly it is an administrative audU or audit of sanctions to check that expenditure
has been incurred according to the rules and regulations or where not so covered, it
has been sanctioned by the competent authority.
Statutory audit, can assure the Parliament, that appropriations have been utilised in
accordance with the rules and regulations and within limits specified. I t can vouch
for the accuracy of ac,tounts and detect misapplication of funds, frauds, and
defalcations. I

Internal Audit
lnternaiaudit, on the other hand, is internal to the organisation. Internal audit is
conducted by an agency or departmeyt created by the management of the
organisation. It is an integral part of the organisation and functions directly under
the Chief Executive. It is in the nature of an internal service to the Executive for
smooth and efficient functioning and for reviewing and improving its performance.

The common objectives of an internal audit. inter-alia are to ( i ) check the adequacy,
soundness and applicability of the systems of internal controls (Accounting, financial
and other operating controls); (ii) prevent and detect frauds (iii) check on the
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 performance-cum-efficiency audit of an operation1 programme1 activity of an entity as AudltIIIg SW&I IIIl n d ~
a whole, or its parts designed to different levels for any of the objective, set by the
management.

Internal audit, in any organisation, does not possess the same kind of independence
as is available to the external audit, conducted by the Indian Audit and Accounts
Department. There is, however, no conflict between internal and external or
statutory audit. Where internal audit is adequate, the extent of statutory audit is
limited to test checking of internal audit work.

Check Your Progress 1

Note: i) Use the space given below for your answers.
ii) Check your answers with those given at the end of the unit.
1) Explain the meaning and importance of audit in a democracy.

2) Explain the difference between Statutory audit and Internal audit.

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22.5 TYPES OF AUDIT

The broad aim of audit is to safeguard the financial interests of the tax payer and to
assist the Parliament1 Statel Union territory legislatures in exercising financial control

I
over the executive. It is the function of the Comptroller and Auditor General to
ensure that the various authorities set up by or under the Constitution, act in regard
to all financial matters, in accordance with the Constitution and the laws of
Parliament and appropriate legislatures and rules and orders issued thereunder. In
order to discharge the auditorial duties entrusted by the Constitution to him/ her, the
Comptroller and Auditor General (CAG) conducts various types of audit viz.,
Financial audit, Regularity audit, Receipts audit, Commercial audit, Audit of stores
and stock, Petformance audit etc. In the performance of this stupenqous task, the
CAG is assisted by the accounting authorities in various ministries and by the
Principal Accounts Officers functioning in various states. Some of the features of
Financial audit, Regularity audit, Receipts aadit, Performance audit are explained in

i the following paragrahps.

Financial Audit
Financial audit is the audit conducted by the Indian Audit and Accounts
Department to see whether the administrative action of the executive is not only in
conformity with prescribed law, financial rules and procedures, but it is also proper
and does not result in any extravagance. Finaircia1 audit does not concern itself with
the audit of administrative organisations and procedures and is different from
administrative audit. It is the duty or the function of the executive government to
frame rules. regulations and orders. which are to be observed bv its subordinate
Accounts and Audit in waste. extravagance o r !mproper expenditure. it is certainly the duty o l audit to
call specific attention to matters of that kind and to bring the lacts to the notice of
Parliament. For instance, in a canal project construction. audit would not concern
itself with the administrative set-up for the actual construction of the canal and
whether it should pass through a particular part of the country or not. These are
matters of administration a n d no scrutiny of these processes will be done by the
audit. But if it is found that the alignments had been drawn up on insufficient data.
necessitating a subsequent change involving additional expenditure o r that the
financial results were less than what had been anticipated, then it is the duty of audit
to examine the circumstances which resulted in the wrong alignments resulting in
loss o r avoidable expenditure to the tax payer. Audit interferes only when
administrative action has serious financial implications and is not in comformity with
prescribed law, financial rules and procedures. Financial audit also includes audit
against propriety o r broad principles of orthodox finance. Thus, financial audit
safeguards the interests of tax-payer by bringing to the notice of Parliament, wastage
in government expenditure.

Regularity Audit
Regularity audit consists mainly In checking that the payments have been duly
authorised and are supported by proper vouchers in the prescribed form. Its main
purpose has been t o ensure conformity with the relevant administrative, financial
budgetary and accounting rules and regulations provided for in the Constitution or
the laws made by Parliament.

The objectives of a u d ~ against

t regularity as specified in the Audit code, inter-alia,
are to ensure:
I *\
i) that there is provision of funds for the expenditure, duiy authorised by
competent authority;
ii) that the expenditure is in accordance with a sanction properly accorded and is
incurred by an officer competent t o incur it; , I

iii) that the claims are made in accordance with the rules and in proper form;
iv) that all prescribed preliminaries t o expenditure a r e observed, such a s proper
estimateq framed and approved by competent authority for works
e x p e n d i t h e , a health certificate obtained, where necessary, before S t
' .e
disbursement of pay to a government servant;
V) that the expenditure sanctioned for a limited period is not admitted in audit
beyond that period without further sanction;
vi) that the rules regulating the method of payment have been duly observed by
the disbursing officer;
vii) that payment has been made to the person and. that it has been acknowledged
a n d recorded 50 t second claim against government o n the same account,
is not possible; a n
viii) that the payments have been correctly brought into account in the original
documents.

Audit against provision of funds, aims at determining that the expenditure incurred
'
has been o n the purpose for which the grant and appropriation had been provided
a n d that the amount of such expenditure does not exceed the appropriation made.
Audit, in relation t o audit'of expenditure, is t o ensure that each item of expenditure
is covered by a sanction of the competent authority. Audit against rules a n d orders is
a n important aspect of regularity audit. It ensures that the expenditure conforms t o
the relevant provisions of the Constitution and of the laws and rules made
thereunder. Audit of expenditure against regularity is a quasi-judicial type of work,
performed by the audit authorities. It involves interpretation of the Constitution, ,
rules and orders.

Receipts Audit
Receipts audit involves the audit of income-tax and custom and excise receipts at
A 1 - . ., .
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 level. From the late fifties, receipts audit has been conducted by the Indian Audit Auditing System in I?din
and Accounts Department,

In receipts audit, the function of audit department is to ensdre that adequate

regulations and procedures have been framed and are being observed by the revenue
department, to secure an effective check on assessment, collection and proper
allocation of revenue. Since the assessments in a revenue department are of a quasi-
judicial nature, audit should ensure that the discretion used has been exercised in a
judicious manner.

Performance Audit
Financial audit and Regularity audit generally involve scrutiny of individual
transactions. They do not focus on the evaluation of a scheme or a programme to
which these transactions relate. Therefore, both types of audits have been found
inadequate for an evaluation of the performance of an organisation in terms of its
goals or objectives.
Ever since the Government launched Five-Year Plans, investment on a large scale
has been made on developmental activities for acceleration of socio-economic
development of the country. In many cases, the investments did not give the
expected returns. Therefore, public has a right to know whether the results achieved
had been commensurate with the resources invested. The public concern has found
expression in the introduction of performance budgeting in government.
The change in the thinking of government, In recent tunes, about the need to relate
expenditure to corresponding physical accomplishments made it also t o think about
the functions of audit. It has been accepted that Regularity audit/Propriety audit is
essential for parliamentary control of expenditure. However, in view of the
increasing developmental expenditure, under the successive Five Year Plans, a%dit
should examine the achievements of specific programmes, activities and projects in
terms of their goals or objectives. It has been felt that audit should bring out those
cases where utilisation of resources has been sub-optimal. This has resulted in a
serious thought being given to the need for performance audit which is also called
efficiency unit.

Performance audit seeks to find out whether the resources have been utilised
efficiently by deploying them in an optimum manner. It highlights the extent to
which resources are put to productive uses. It also highlights as to what extent
quantified benefits could be expected from such deployment of resources.

Although the technique of performance audit is sound and useful, there are many
problems in conducting such an audit. Firstly, performance evaluation of an activity
can be made only in the light of the objectives, which is expected to achieve.
Objectives spell out the results desired from an activity. Whereas inputs are easy to
measure for an activity, tremendous effort is required to quantify and measure the
resulting output, particularly when this output has a social context.

Secondly, according to the concept of Net Welfare, the utilisation of resources

has to be optimised not only at the point where they are deployed but also at other
points, where the effects of such investments are carried. In other words, investment
decisions need to be justified by the application of the technique of social cost-
. .*
benefit analysis.
Thirdly, the objectives of investment are often a combination of financial and non-
financial factors. There may be situations, when these objectives of public investment
which are otherwise considered socially desirable, are found incompatible with
.immediate financial objectives. For instance, a public undertaking engaged in the
hoduction of fertilisers, may have to sell its output a t a low price fixed by the
government to support agricultural programmes. If the undertaking does not get
adequate subsidy from government, its financial results may present a discouraging
picture. The undertaking may have served a long-range national objective of
achieving self-sufficiency in food production. But in the process, its profits get
reduced considerably or it may incur losses. In situations, where the objectives act
against financial performance of a public undertaking, it would not be proper to
Fourthly, performance audit presupposes a good information system. A good
information system is necessary, to furnish information about what has been actually
achieved and at what cost, as against what was planned to be accomplished at a
particular cost.

Lastly, effectiveness of performance audit would depend onthow best the yardsticks
of performance have been evolved. The technique of performance audit can be
applied successfully in cases, where normslstandards are available for application. It
is easier to apply in manufacturing organisations, than in the case of governmental
organisat ions.
In India, the concept of performance audit is of recent origin. Its scope is unlimited.
T o conduct performance audit of public undertakings, Audit Boards have been set
up. These Boards have been functioning, under the Comptroller and Auditor
General, since April, 1969.

The utility of Performance audit can hardly be over-emphasised. It, however,

requires expertise in identifying quantifiable objectives in government. It also
necessitates framing of precise yardsticks against which the use of resources can be
evaluated. In view of these problems, the scope of performance audit in government
,appears to be at present limited.

22.6 INDEPENDENCE OF AUDIT

In India, independence of the audit has been ensured by the Constitution in many
ways. Firstly, the Constitution had made audit of the accounts of the Union and of
the States a Union subject, by virtue of Entry 76 in the Union List under Article 246
of the Constitution. There is, thus, a common auditor of both the Union
Government as well as the States and this is a unique feature of the Indian
Constitution.

Secondly, the Constitution provides that the Parliament shall have exclusive power to
make laws on the subject of audit of the accounts of the Union and of the States. At
the same time, the Constitution has not made the Comptroller and Auditor General
of India a n officer of Parliament or of the House of the People. In practice also, the
States do not regard him as a n officer of the Union but a functionary created by the
Constitution for purposes of both the States and the Union Government.
Thus, the Comptroller and Auditor General of India occupies a unique place. He
certifies the share of the States of the taxes collected by the Union and the
amoults so certified are accepted by the State Governments without demur. He
certifies the expenditure incurred by the States on public expenditure programmes
initiated and financed by the Union and the Union Government accepts the figures
without question. The Comptroller and Auditor General of India, thus plays a
fiduciary role in the sensitive Union-State relations.
Thirdly, the Constitution guarantees the independence of the Comptroller and
Auditor General of India by prescribing that he shall be appointed by the President
of India by warrant, under his hand and seal, and cannot be removed from office
except on the ground of proved misbehaviour or incapacity.
Fourthly, while Parliament will be competent to make laws to determine his salary
and other conditions of service, they cannot be varied to his disadvantage, after his
appointment.
Fifthly, on retirement, resignation or removal, the Comptroller and Auditor General
is prohibited from holding any further office either under the Government of India
or under the Government of any State. %

Sixthly, the salary and allowances of the Comptroller and Auditor General, the
pension etc., payable to retired Auditors General and the administrative expenses of
Comptroller and Auditor General's personal office, shall be charged on the
-
Consolidated
.. Fund of India. That is, they will not be subjected to the vote of
 Lastly, the Constitution furtliir provides that thd conditions of service of persons Auditing System in Jndin
serving in the Indian-Audit and Accounts General shall be determined by the
President after consultation with him. The Constitution, thus, provides adequate
safeguards to the Comptroller and Auditor General to enable him/ her perform
his'/ her constitutional functions, without any fear from the Executive. (These issues
are dealj-with in detail in assessing the role of Comptroller and Auditor General in
Unit 23.)
An independent judiciary and an independent audit are two of the more important
elements of democracy. On them, devolves in varying degrees, the responsibility of
protecting democracy from authoritarian trends and executive excesses. Our
Constitution has taken, therefore, reasonable care to safeguard their independence.

22.7 RESULTS OF AUDIT-AUDIT REPORTS AND

THEIR FOLLOW UP WITH ADMINISTRATION
Audit conducted by the Indian Audit and Accounts Department is in the nature of
ex-post facto examination. In some cases, certain classes of payments are made after
the claims have been audited and passed by audit. But these payments comprise a
negligible percentage of the total expenditure of government. Since audit is
conducted after the events have occurred, it cannot prevent an overpayment or non-
observance of the financial rules and regulations. Also, it cannot stop the executive
authorities from the commission of any irregularity or impropriety during the course
of t'ransactions. But the effectiveness of audit depends upon its right to report the
results of audit to the proper authorities, which may be a departmental authority, the
Government itself, or Parliament through the Public AccoOnts Committee. These
bodies can then take appropriate action to rectify the irregularity or impropriety.

The results of audit are required to be reported by the Audit Officer to the
administrative authorities concerned at the earliest opportunity. These authorities
then become responsible for the settlement of objections raised by audit authorities.
It is also the responsibility of the administrative authorities to effect recovery of any
amount disbursed wrongly. The Audit officers keep pursuing the objections raised by
them till these are settled to their satisfaction by the administration. Finally, after
completion of a year's accounts, the results of audit are reported to the concerned
Government and their legislatures through the instrument of Audit Reports.

Though Audit Reports appear post mortem, they serve many purposes:
They are a n aid to administration/management to ensure that irregularities are
not repeated in future.
They help the planning process in not conceiving faulty schemes.
They give the right signals for mid-course corrections in on-going schemes.
They also serve the basis for taking appropriate disciplinary action by the
administrative authorities concerned against the persons who have caused loss to
, the exchequer by their acts of omission and commission to act as a deterrent.

Audit Reports should, however, be largely current and should be able to bring out
the failures, drawbacks or the deficiencies as quickly as possible, so that prompt
. remedial measures can be taken by the administration.

I
The Constitution has prescribed the procedure to be followed by the Comptroller
and Auditor General for presentation pf the audit reports. The reports of the CAG
in regard to the Union Government accounts shall be submitted t o the president and
the State Government accounts, shall be submitted to Governor of the State. At
present, the Comptroller and Auditor General submits three reports viz., i) Audit
Report on the Appropriation Accounts, ii) Audit Report on the Finance Accounts
and iii) Audit Report on the commercial and public sector enterprises and revenue
receipts on Union and state governments.
The responsibility of the Comptroller and Auditor General ceases with the
submission of the audit reports to the President/Governor who causes them to be
laid before the ParliamentlState legislatures respectively. In actual practice, the audit
renorts of various novernments are received hv the Ministrv nf Finance on hehalf of
 - - - -

the President. The Finance Minister lays them on the table of each House of
Parliament. Regarding Audit Reports of states, similar procedure is followed
generally.

The authority of Parliament and state legislature to grant supplies to be effective,

will require that Parliament and legislature should assure itself thdt the money is
spent by the executive on purposes for which it was granted. And that the
expenditure incurred does not exceed the amount sanctioned by them.
The details of these are contained in the accounts and audit reports presented by the
Comptroller and Auditor General for both Union and State governments. It is
impossible for parliament and legislatures to examine in detail. the accounts and
audit reports thereon which are technical and voluminous documents. The Houses
are unable to spare the time that a proper examination requires. Parliament (Lok
Sabha) and state legislatures have, therefore, set up a Committee known as the
Committee on Public Accounts and have entrusted t~ it the detailed examination of
accounts (appropriation and Finance) and audit reports thereon.
An important function of the Public Accounts Committee is to ascertain that the
money granted by Parliament has been spent by the government within the scope of
the demand. This implies that the money recorded as spent against the grant, must
not be more than the amount granted and the grant should be spent on purposes,
which are set out in detailed demand. The functions of the committee extend,
however, beyond the formality of expenditure to its wisdom, faithfulness and
economy. When any case of proven negligence, resulting in loss or extravagance, is
brought to the notice of the committee, it calls upon the Ministry/Department
concerned to explain what action, it has taken to prevent a recurrence. In such cases,
it might record its opinion in the form of disapproval or pass strictures against the
extravagance or lack of proper control by the Ministry/ Department concerned. The
Committee is, however, not concerned with questions of policy in the broad sense.
The efficient functioning of the Public Accounts Committtee depends largely on the
assistance given to it by the Comptroller and Auditor General and other officers.
Apart from providing the basic material, audit assists the Committee in many ways.
It provides notes to the members of the Committee which explain the significance of
an irregularity or impropriety commented upon in the Audit report. Also, the
auditors brief the members orally so that they can seek clarification and additional
information in the course of oral examination of departmental witnesses. They also
assist the committees in drafting reports, after considering the oral and documentary
evidence. They also help the Committee in keeping a watch over implementation of
those recommendations, which have been accepted by Government.
The Public Accounts Committee of ParliamentIState submits its report embodying
the findings on the audit reports of the Comptroller and Auditor General to
Ministry/Department for implementation. The ministries are required to inform the
Committee of the action taken by them on these recommendations within a period of
six months from the date of the presentation of the Report. The Committee's
recommendations are generally accepted by the Government. In cases, where the
recommendations of the Committee are not acceptable to the Government, the
reasons for Government's disagreement are placed before the Committee.
check Your Progress 2
Note : i) Use the space given below for your answers.
ii) Check your answers with those given at the end of.the unit.
1) Distinguish between Regularity Audit and Receipts Audit.
 --. . - -.... -

2) Explain the meaning and scope of Performance Audit in India. Auditing System ~ Indla

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3) Discuss the importance of Audit Reports and their utility to administration.

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('
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Audit is an examination of accounting records, undertaken with a view to

establishing whether they correctly and completely reflect the transactions to which
they purport to relate. Its purpose is to see that expenditure has been incurred with
the sanction of the competent authority, applied for the purpose for which it was
sanctioned, and is duly supported by vouchers, as a safeguard against fraud and
misappropriation. Audit is one of the four pillars of democracy. It is a vital
instrument of ensuring effective supremacy of Parliament over the Executive. It is
also a valuable ally to administration.

The evolution of auditing in India has been a gradual process, coinciding with the
growth in the functions of Government. Initially, auditing was primarily expenditure
oriented. Gradually, audit of receipts was taken up. With the growth of public
enterprises, commercial audit came into being. Recently, audit has gone into the
evaluation of the performance of organisations, activities, projects etc.
The Comptroller and Auditor General of India is responsible for conducting audit of
the accounts of the Union, states and union territories with legislature. He/ She
conducts regularity audit, receipts audit, commercial audit, performance audit etc.
The Constitution has provided adequate safeguards to protect the independence of
the Comptroller and Auditor General from the Executive. He/ She will be appointed
by the President but can be removed only by the Parliament. His/ Her tenure,
conditions of service cannot be varied to his/ her disadvantage, after his/ her
appointment. He/ She cannot accept employment after retirement or dismissal, either
under the Union Government or under the state government. His/ Her salary,
allowances and pension as well as his/ her establishment will be charged upon the
Consolidated Fund of India and not voted.
Audit Report is the final destination of audit. The Comptroller and Auditor General
submits three reports i.e. Audit report on appropriation accounts, auditreport on
finance accounts, and audit report on the commercial and public sector enterprises
and revenue receipts on Union and State Governments, to the President/Governor of
ry with legisla\turs, who causes them to be
e legislatures resp'ectively. The Audit reports
ommittee. Besides providing the material, the
s the committee, by preparing memos-on
. /'

ommittee to conduct oral e,xamination and also

ittee. In fact, the Comptroller and Auditor
d guide of the committee. The Public Accounts
stry on the basis of the findings made in . .
t h w~nrnrnenA~tinnr
~ n f thp r n r n r n i t t ~ ~
--- - - - ---- --

Accounts and Au& are accepted By the Government. In case some recommendations are not acceptable
to Government, the Committee examines the same and submits Adion-taken Report
to the Parliament.

To sum up, audit is not an inquisition and its mission is not one of fault-finding. Its
purpose is to bring to the notice of the administration lacunae in the rules and
regulations, irregularities and lapses and to suggest wherever possible, ways and
means for the execution of plans and projects with greater expedition, efficiency and
economy.

22.9 KEY WORDS

Audit Reports: Comments on the regularity and propriety of expenditure as deemed

necessary and proper on the results of audit investigation.
Corporation Audit: Audit of the accounts of corporation either by or under law
made by Parliament.

22.10 REFERENCES

Chanda, Asok, 1958. Indian Administration. George Allen Unwin Ltd.: London.
Chanda, Asok, 1960. Aspects of Audir Control, Asia Publishing House: om bay.
Handa, K.L., 1979. Programme and Performance Budgeting, Uppal Publishing
House: New Delhi.
Krishan Y., 1990. Audit in India's Democracy, Clarion Books: New Delhi.
Mookerjee Sameer C., 1989. Role of Comptroller and Auditor General in Indian
Democracy, Ashish Publishing House: New Delhi.
Ramayyar M.S., 1967. Indian Audir and Accounts Department, The Indian Institute
of Public Administration: New Delhi.

22.11 ANSWERS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1) Your answer should include the following points
Audit is an examination of accounting records with a view to establishing
whether they correctly and completely reflect the transaction to which they
purport to relate.
Audit is an instrument of financial control.
.Audit is an aid to administration.
Audit is one of the four pillars of democracy. It watches the interests of.tax-
payer and also helps Parliament to exercise control over the Executive.
2) Your answer should include the following points :
I
Statutory audit is an audit conducted by the CAG of the transaktions of
the Government of the Union and of each state and Union territory with
legislature.
St;(tutdry audit serves a three-fold purpose. It is an accountancy audit,
appropriation audit as well as admidistrative audit.
Internal audit is conducted by an agency within the organisation and%
integral to management.
Internal audit concerns itself with the examination of accounting, financial
and other operations within the organisation.
There is no conflict between internal and external audit.
 --- -..
- --
Check Your Progress 2 Auditing System in !ndia
1) Your answer should include the following points :
Regularity audit consists in checking that payments have been duly
authorised and supported by proper vouchers. It ensures conformity with the
relevant rules and regulations provided in the Constitution or the laws made
by Parliament.
Receipts audit involves t'he audit of income-tax and customs receipts.
P.urpose of receipts audit is to ensure that adequate regulations and
procedures have been framed and are being observed by the revenue
departments to secure an effective check on assessment and collection of
revenue.
2) Your answer should include the following points:
Regularity audit involves the audit of individual transaction. It is not an
evaluation of performance of an organisation, in terms of its goals or
objectives. .
The change in thinking of Government to link expenditure to
accomplishments led audit also to examine the performance of an
organisation in terms of its goals or objectives. This is done by the
performance audit.
There are difficulties in the application of Performance audit viz., difficulties
in determination of objectives at micro-level, difficulties in assessing
performance in the case of public undertakings, where there are financial as
well as non-financial objectives, difficulties in evolving norms/standards for
Governmental activities etc.
3). Your answer should include the following points :
Results of audit find expression in Audit Reports.
Audit Reports are examined by the Public Accounts Committee and the
CAG assists the Committee. The CAG is the friend, philosopher and guide
of the Committee.
The Public Accounts Committee forwards Report to Government for
implementation of its recommendations. Where there is disagreement with
the recommendations of the Committee, the Government should forward its
views to the Committee within a period of six months which will, after
examination, submit an Action-taken Reportto the House.
- -

UNIT 23 ROLE OF THE COMPTROLLER

AND AUDITOR GENERAL
WAG)
Structure
23.0 Objectives
23.1 Introduction
23.2 Origin and Constitutional Position of CAG
23.3 Duties and Powers of the CAG in Regard t o Accounts and Audit
23.4 Other Duties of CAG
23.5 Role of C A G : An Appraisal
23.6 Let Us Sum Up
23.7 Key Words
23.8 References
23.9 Answers t o Check Your Progress Exercises

23.0 OBJECTIVES
After studying this unit, you should be able to:
understand the origin and constitutional position of CAG;
describe the duties of CAG in respect of Accounts and Audit; and
analyse the role of CAG in Indian Democracy.

23.1 INTRODUCTION
Exercise of financial control is one of the principal responsibilities of the legislature.
Parliamentary financial control on government spending is implemented in two
stages: primarily at the time of policy making and subsequently by controlling the
implementation of the policy. Budget or the Annual Financial Statement showing the
estimated receipts and expenditure of the Government for the ensuing financial year
is presented and discussed in the Parliament or Legislature. The initial parliamentary
financial control is exercised through the AnnuaI Budget Estimates of the
Government for the ensuing financial year, which is presented to the House for
approval.

The second stage of control o\er the implementation of poIicies is exercised by

examining that the funds voted by the Parliament1 Legislhture have been utilised f o r
the purpose and in the manner in which the ParliamentlLegislature had desired. The
control is exercised through the Financial Committees in Parliament and States
Legislatures. During the second stage, the Comptroller and Auditor General of India
(CAG) comes t o the aid cjf Parliament and State Legislatures. Audit is the principal
instrument to ensure the financial accountability of the Executive to the Legislature
of the Union and State. The Comptroller and Auditor Genera1 in India, has been,
made responsible by the Constitution. to conduct the audit of the transactions of the
Union and the States and Union Territories with Legislature.
In this unit, you will study the origin of the office of Comptroller and Auditor
General (CAG), the constitutional position and also the powers and duties of the
CAG in relation t o accounts and audit. This unit will also make an appraisal of the
role nf C A G in Indian demnrrarv
 Rok of the Comptrolkr
23.2 ORIGIN AND CONSTITUTIONAL POSITION md Auditor Cenad (CAC)
OF CAG
i) Origin
Finance, Accounts and Audit are as old as history itself. History bqars out that a
good accounts and audit organisation existed in ancient India. Kautilya in his
famous Arthasastra gives an elaborate account of the accounting system that existed
in the Mauryan period. According to the Arthasastra, "In the Mauryan policy, the
final authority, in the matter of Finance, was the King; one of whose daily duties
was to attend to the accounts of receipts and expenditure. Each Minister was
responsible for the finance of his department and each department had its own
accountant, treasurer and others. The Collector General was the head of the Finance
Department. Below him was the special commissioner (Pradeshtara), who was a kind
of Government Auditor checking District and Village group account, in addition to
being in charge of collecting certain kinds of revenue. The accounting and financial,
year closed on the last day of Ashadha".

Similarly, Gupta rulers introduced more elaborate and orderly system of accounts
and audit during their rule. According to Ramachandra Dikshitar "The accounts
were maintained, as during the days of their predecessors, the Mauryas, and were
submitted periodically for audit and approval. This is made clear to us by th'e term
PATYUPARIKA. This may be translated broadly as corresponding to the modern
Accountant General. The Accountant General who presided over the accounts
department was responsible to the Council of Minister for his acts. I t is evident that
there was an elaborate Department of Accounts in the Gupta time." Likewise, the
medieval rulers, viz. Sultans and Moghuls, laid proper stress on collection of revenue
and conduct of audit. The Moghuls vested greater authority in their financial chief.
by naming him as the Vnrir or Dewan.

Although the ancient and medie\,al administrations estahlishcd a coherent account

and audit organisations, it \vent illlo decay, during the period of later Moghuls.
Subsequently, it was the British. \\ho introduced a proper system of accounting and
auditing. This system is hcing l'ollo\ved. by and large. in oui country toda!..

In 1858. when the East lndia Company's administration was taken o\vr by the
Crown, a comptementary post ol Accountant-General at the India office was created
\
to prepare the accounts of the expenditure incurred in England. Simultaneously, an
independent Auditor was appointed by the Crown for the audit of these accounts.
This arrangement was, however, shortlived. In 1860, both accounting and auditing
f u n a o n s were amalga.mated and placed in charge of the Accountant-General to the
Government of India. who was designated as 'Auditor General'.

The statutory recognition of the Auditor General came, however, only in 1919, with
the introduction of Constitutional Reforms. He was made independent of the
Government af lndia and was appointed by the Secretary of State and held office as
the administrative head of the Indian Audit Department. during his Majesty's
pleasure. The Government of lndia Act 1935 gave further recognition to the
importance and status of this office. Thereafter, his appointment was made by His
Britannic Majesty and the conditions of his service were also determined by His
Majesty-in-Council. His duties and powers were prescribed by rules made under the
order of His Majesty-in-Council. His salary, allowances. and pension were made
chargeable on the revenues of the Federation. He could be removed from office only
in the same manner and on the same grounds, as a Judge of the Federal Court.

With the incorporation of the Government of lndia Act 1935 in the Independence -
Act 1947, the authority of the Auditor-General was further enhanced and the auditor
of the Indian accounts in United Kingdom was placed under his administrative
control. With the subsequent integration of the princely states in the federal structure
of the Indian Union, his audit responsibility was extended to the whole of India.

The Constitution Act, 1950, redesignated the Auditor General as Comptroller and
rr r.. ..... C.. -
Auditor General and made him, alongwith the Judges of the Supreme Court, an
.._.. 1 . . ...... " . . . P
 - -

financial administration of India, whether in the States o r the Union, should come
under the coordinating authority of a single officer of Constitution, the Comptroller
and Auditor General.

ii) Constitutional Position of CAG

The Constitution has installed the Comptroller and Auditor General (CAG) as a
high independent statutory authority. The CAG is the one dignitary, who sees on
behalf of the Legislatures that the expenses voted by them are not exceeded or varied
and that the money expended was legally available for and applicable t o the
purposes t o which it has been applied. Nothing can fetter the CAG's discretio o r I,
judgement in any manner on matters which helshe may bring t o the notice of the
Legislatures in the discharge of his/ her duties. The oath of office under the
Constitution requires him/her to uphold the Constitution and the laws and to
discharge the duties without fear or favour, affection o r ill-will.

For the purpose of securing the highest standards of financial integrity of the
administration and watching the interest of the tax-payer and also for purposes of
Legislative control, the Constitution safeguards the independence and freedom of the
Comptroller and Auditor General in the following ways. / , \

1) Article 148 of the Constitution lays down that the Comptroller and Auditor
General of lndia would be appointed by the President by warrant under his
hand and seal. The CAG will hold office for a period of six years o r till he
attains the age of 65, whichever is earlier. And he can be removed from office
only in the same manner and on the same grounds as a Judge of the Supreme
Court i.e. by impeachment in Parliament.
2) T o further ensure that the Comptroller and Auditor General cannot be
influenced by the Executive, the Constitution provides, as per Article 148(3) that
the salary and other conditions of service of the Comptroller and Auditor
General are such as determined by law and cannot be varied to his
disadvantages, after his appointment.
3) The Comptroller and Auditor General is debarred by Article 148(4) from
holding any office either under the Government of India o r the State
Governments, after he retires from the office of the Comptroller and Auditor
General.
4) Furthermore, as per Article 148(6) all salaries, allowances and pensions payable
to o r in respect of persons servihg in t p t office, shall be charged upon the
Consolidated Fund of India.
5) The Comptroller and Auditor General is the Administrative Head of the Indian
Audit and Accounts Department. His administrative power will be governed by
rules made by the ?resident, in consultation with the former.

Thus, the Constituti n/assures to the Comptroller and Auditor General.

?
constitutional indepdnpence and has also placed him beyond fear o r favour of the
'

i .
Executive, whose tda sactions he is expected t o audit.

23.3 DUTIES AND POWERS OF THE CAG IN

REGARD TO ACCOUNTS AND AUDIT
i) Accounting Duties ,i
The duties and powers of ;he Comptroller and Auditor ~ e n e r a have l been prescribed
by the Comptroller and Auditor General's (Duties, Powers and Conditions Service)
Act 1971 as required by Article 149 of the Constitution of India. nder the Act, it is
the responsibility of the Comptroller and Auditor General to a 4 1 1 expenditure
and receipts of the Government of India, the State ~ o v e r n m e n f and
s of the Union
Territories. H e is also empowered to audit the expenditure and receipts of bodies or
authorities substantially financed from Union o r State r e v e n u e s h t h e form of grants
or Inam
As per Section 10 of the CAG (DPC) Act 1971, it is the responsibility of the Role of the Comptroller
Comptroller and Auditor General to compile the accounts of the Union and of each and Auditor General (CAG)
State, and prepare the Finance Accounts. Again, it is the duty of the Comptroller
and Auditor General to prepare, from the accounts, Appropriate Accounts, showing
under the respective heads, the annual receipts and disbursements for the purpose of .
the Union, of each State and of each Union Territory having a Legislative Assembly.
These accounts (i.e. Finance Accounts and Appropriation Accounts) are to be
submitted to the President or Governor of a State or Administrator of the Union
Territory, as the case may be.

He also provides the necessary information to the Union and States in the
preparation of their Budgets (i.e. knnual Financial Statement).

The functions of the Comptroller and Auditor General, in brief, in so far as accounts
are concerned, are mainly:
1) the prescription of forms in which accounts are to be kept in the Union and of
the States;
2) preparation and submission of Finance Accounts and Appropriation Accounts
to the President/Governor/Administrator of Union Territory as the case may be,
and
33 providing information to UnionlState Governments for preparation of their
annual budgets.

ii) Auditing Duties

The real duty of the Comptroller and Auditor General is that of an auditor. The
primary audit function is to verify the accuracy and completeness of accounts; to
secure that all financial transactions viz., receipts and payments are properly
recorded in the accounts, correctly classified and that all expenditure and
disbursements are authorised and vouched and that all sums due, are recorded
regularly in accordance with the demands and brought into account. He/ She acts as
a watchdog to see that the various authorities under the Constitution function in
regard to financial matters, in accordance with the Constitution and the laws of
Parliament and appropriate Legislatures and Rules and Orders issued thereunder.

As per the CAG (DPC's) Act, 1971 the auditorial functions of the Comptroller and
Auditor General are as follows :
a) to audit all receipts into and expenditure from the Consolidated Fund of India
and of each State and of each Union territory, having a Legislative Assembly
and to ascertain whether the money shown in the accounts as having been
disbursed were legally available for and applicable to the service or purpose for
which they have been applied.
b) to audit all transactions of the Union and of the States relating to Contingency
Funds, and Public Accounts.
c) to audit all trading, manufacturing, profit and loss accounts and balance sheets
and other subsidiary accounts kept in any department of the Union or of a
State; and in each case to report on the expenditure, transactions or accou?ts so
audited by him.
d) to audit receipts and expenditure of bodies or authorities substantially financed
from Union or State revenues.
e) to audit the accounts of Government, Companies and Corporaions established
by or under the Law of Parliament, or in accordance with the provisions of
respective Legislations.
f) to audit account of bodies or authorities by request.

In connection with the discharge of the auditorial duties,, the Comptroller and
Auditor General can inspect any office of accounts under the control of the Union or
a State, including treasuries and offices responsible for keeping initial or subsidiary
accounts. In short, the Comptroller and Auditor General is responsible for the audit
of the accounts of the Union and of the States and of bodies substantially financed '
f r n m ITninn n r C t a t e reveniiec Flirther h e l c h ~aiiditc t h e arrniintc n f r n m n a n i p c nnrl
 corporations and of autonomous autpor/ities, whose audit has been entrusted by law
to him/her public interest. In the per/fo#mance of the duties, he/she is assisted by the
1
Indian Audit and Accounts Dep rtment. .
1

23.4 OTHER DUTIES OF T A ~

, Besides the duties and functions relating to the auditing and reporting upon the
accounts of the Union, of the States and of the Union territories with Legislature,
the Comptroller and Auditor General may be entrusted with duties and functions in
relation to thegccounts of any other authority or body, as may be prescribed by or
under any law made by Parliament. The Comptroller and Auditor General's
additional duty a t present, is to undertake audit of companies, the Comptroller and
Government companies. In the case of Government companies, the Comptroller and
Auditor General may comment upon or supplement the report of the professional
auditors. Also, his/her duty involves rendering assistance to the Public Accounts
Committee in its functions.

Check Your Progress 1

Note : i) Use the slate given below for your answers.
ii) Check youqanswers with those given at the end of the unit.
1) Explain the histodal development of Audit in India and the constitutional
position of the Comptroller and Auditor General.

2).< Describe the Accounting and Auditing duties of the Comptroller and Auditor
General. ,

23.5 ROLE OF CAG: AN APPRAISAL

The Constitution of India assigns an independent and.important position t o the
Comptroller and Auditor General to perform the duties without fear or favour. It
has provided adequate safeguards for his/ her independence from the Executive. The
office of the Comptroller and Auditor General of India is created by the
Constitution itself. I t has perpetual existence like other Constitutional organs of the
State viz., the Supreme Court, the High Courts and the Election Commission. The
Comptroller and Auditor General is an officer of the Constitution and not an officer
of Parliament, even though he/she exclusively serves Parliament and State
Legislatures. Thus, the Comptroller and Auditor General occupies a unique place in
Indian democracy.

i) Appointment, Tenure and Removal of CAG

The Constitution guarantees the independence of the C~mptrollerand Auditor 4
General by prescribing that he/she shall be appointed by the President of India by
warrant, under his hand and seal and shall not be removed from office except on the
ground of proved misbehaviour or incapacity. In a democratic set-up, independence
in adequate measure is an indispensable necessity for this constitutional functionary
 to perform his/her duties undeterred. A.K. Chanda, a former Comptroller and Role of the Comptroller
~ u d o General,
r has argued in favour of autonomy to "maintain the dignity, and Audltor General (CAC)
independence, detachment of outlook and fearlessness necessary for a fair, impartial
and dispassionate assessment of the actions of the Executive in the financial field".
As in the case of a Judge of the Supreme Court, the Comptroller and Auditor
General can be removed from office only on two grounds-proved misbehaviour or
incapacity. The address must be presented by both houses in the same session, and
special majority is obligatory in each house for the passing of the resolution. The
procedure for presentation of the address, investigation, and proof of the
mihbehaviour and incapacity is to be decided by Parliamentary legislation. Thus, the
removal procedure appears to be ji very difficult procedure and service as an effective
safeguard against executive interference.

ii) ~ e r m of
s Appointment
The Constitution guarantees his/her salary and other conditions of service, which
.
cannot be varied to his/ her disadvantage after his/ her appointment. Also, the salary,
and allowances of the Comptroller and Auditor General, shall be charged on the
Consolidated Fund of India. Interference with the Comptroller and Auditor
General's function is likely, if the salary and terms of conditions of service are left to
the discretion of the Executive. Again, even in the event of Parliamentary displeasure
with a Comptroller and Auditor General, his/ her salary, pension or age of retirement
will not remain within the competence of Parliament to change, if it so wishes to
penalise him/ her. On his/ her retirement, resignation or removal, the Comptroller
and Auditor General is prohibited from holding any office under the Government of
India or under the Government of the State. The purpose is to keep the incumbents
immune from allurement of receiving favours from executive, which in turn might
influence his/ her actions or decisions in office, prior to retirement. Indirectly, this
provision strengthens the hands of the incumbents in making fearless assessment of
executive actions. In actual practice, the spirit of this provision does not appear to
have been strictly followed. The Constitution has provided that salaries, allowances
and administrative expenses of the Comptroller and Auditor General be charged
upon the Consolidated Fund of India. Unlike the other expenses of the Government,
his/her expenses will not be votable in the budget. Hence, his/her action and official
conduct is intended to be excluded from the scope of Parliamentary discussion and
vote. The Constitution has thus accorded a very strong protection against
Parliamentary interference with the working of the Comptroller and Auditor
General's organisation.

iii) Duties and Powers

Parliament has prescribed the duties and powers of the Comptroller and Auditor
General by enacting the Comptroller and Auditor General's (Duties, Powers and
Conditions of Service) Act 1971. With the separation of accounts from audit in
I certain departments of Union Government, the Comptroller and Auditor General
had ceased to be responsible for maintaining the accounts of Food, Rehabilitation,
1 Supply Departments, Lok Sabha and Rajya Sabha Secretariats, since separate
I accounts offices were in existence for them. In 1976, the Government of India took
on accounting functions under its own administrative Ministry/ Department with the
result that separation of accounts from aylit in Central Government became
complete. But the responsibility for preparing annual accounts separately for each of
the State Governments and Union territories havirig Legislative Assemblies and to
submit them to the Governor or Administrator respectively remains with the
Comptroller and Auditor General. The combination of auditing functions in one
authority, though justified on grounds of economy, is contrary to the pdnciples of
independence of Audit. It amounts to making the Comptroller and Auditor General
'4
partly responsible to the Executive and Legislature. He/She becomes answerablefa,
Parliament and Legislature for his/ her accounting duties, which is an executive
responsibility. Moreover, the accounting.authority will hesitate in publishing in its
Audit Reports, major instances of accounting irregularity arising out of the accounts
compiled by itself. T o that extent, auditing functions would suffer.
The Constitution prescribes that the Comptroller and Auditor General is the
authority to prescribe the forms in which the accounts of the Union and of the
States shall be kept. The purpose of having a centralised system of accounts is
primarily to ensure uniformity and economy. Moreover,the technical expertise of
Accounta and Audit Comptroller and Auditor General in accounting matters of the Union and States is
to be taken advantage of by the Government in the preparation and presentation of
Annual Budget. So, the provision has its own advantgges. It entrusts the
Comptroller and Auditor General with a very important responsibility.

iv) Audit Reports

The Constitution has prescribed the procedure to be followed by the Comptroller
and Auditor General for presentation of his/ her reports. His/ her reports, in regard
to the Union Government accounts, shall be submitted to the President. And the
accounts of the State Government shall be submitted to the Governor of the State.
His/ Her responsibility thereafter ceases. But it becomes obligatory for the
President/ Governor to cause them to be laid before the House of Parliament/ State
Legislature respectively. He/ She submits three Reports viz., Audit Report pp- '
Finance Accounts, Audit Report on the Appropriation Accounts, and ~ u d Report t
on the Commercial and Public Sector Enterprises and Revenue Receipts on'U&n
and State Governments respectively. The Constitution does not prescribe any form
or guidelines for the contents of the Audit Report of the Comptroller and Audit
General. It has thus been left with the Comptroller and Auditor General, the
complete freedom and discretion to decide the form, the materials and the contents
of the reports.

v) Limitations
Inspite of the various safeguards provided by the Constitution to maintain the
independence of Comptroller and Auditor General from the Executive and
Parliament, his/ her independence appears to be limited by four factors viz.,
(a) restraint of the Executive on his/ her budgetary autonomy (b) block of control over
staff (c) indirect accountability to the Finance Ministry of the Union and the Finance
Department of the State Government for handling accounting duties (d) absence of
direct access to Parliament (unlike the Attorney General) in defence of his/ her
official conduct, if and when questioned on the floors of Parliament.
To conclude, notwithstanding these limitations, the Comptroller and Auditor
General plays a unique role in rndian democracy, by upholding the Constitution and
the laws in the field of financial administration. He/She is neither an officer of
Parliament nor a functionary of Government. He/ She is one of the most important
officers of the Constitution and his/ her functions are as important as that of
Judiciary.

Lheck Your Progress 2

Note : i) Use the space given below for your answers.
ii) Check your answers with those given at the end of the unit.
1) Evaluate the role of the Comptroller and Auditor General in Indian Democracy.

23.6 LET US S U M UP

As already mentioned, the Comptroller and Auditor General of India ensures the
supremacy of the Parliament over the Executive in financial matters. He/She is an
officer of the Constitution and not a n officer of the Parliament. The independence of
the CAG is guaranteed by the Constitution in many ways to enable him/ her to
 -

perform his/ her functions without any inteference from the Executive. His/ Her Role of the Comptroller
and Auditor General (CAG)
primary duty is to uphold'the Constitution and the laws in the field of financial
administration.

23.7 KEY WORDS

Compilation of Accounts: T o compile is to compose and arrange materials collected
from other records. The initial accounts of Government transactions in India are
prepared by the authorities through whom the transactions occur; these authorities
being unconnected with the Indian Audit and Accounts Department.

Stores and Stock: The term "stores" applies generally t o all articles and materials
purchased or otherwise acquired for the use of Government. The term "stock" refers
to plant, machinery, furniture, equipment etc.

23.8 REFERENCES
Chanda, Asok; 1968. Indian Administration, G. Allen and Unwin: London.
Chanda, Asok; 1960. Aspects of Audit Control, Asia Publishing House: New Delhi.
Chandrasekhar R.K., 1990. The Comptroller and Auditor General of India, Ashish
Publishing House : New Delhi.
Ramayyar A.S., 1967. Indian Audit and Accounts Department, The Indian Institute
of Public Administration : New Delhi.
Sameer C. Mookejee, 1989. Role of the.Comptroller and Auditor General in Indian
Democracy. Ashish Publishing House: New Delhi.

- -

23.9 ANSWERS TO CHECK YOUR PROGRESS

EXERCISES

Check Your Progress 1

1) Your answer should include the following points :
Accounting system in the ancient and medieval period.
Amalgamation of Independent Accounting system in 1857 by Lord Canning.
In 1860, auditing and accounting functions were amalgamated and placed in
charge of an Accountant-General.
Statutory recognition to the Auditor General in 1919.
Government of India Act of 1935 gave further recognitlion to the impo ance
and status of the office of CAG. 7
Constitution Act, 1950 redesignated the Auditor-General as Controller and
Auditor General and made him an officer of the Constitution.
Comptroller and Auditor General is an independent statutory authority.
The CAG is appointed by the President and can be removed only by the
Parliament.
The CAG's tenure is fixed for six years o r age of sixty five, whichever is
earlier.
The CAG's salary, allowances and pension are charged a n d n o t voted.
The CAG' is debarred from accepting employment either under the Union
Government or State Government, after demitting the office, of CAG.
2) Your answer should include the following points:
Thn PAc nracrrihac thn fnrmc in rvhir-h thn o~~nnnntc
n f thn 1Tn;nn nnrl nf thn
 The C A G prepares the Appropriation and Finance Accounts and submits
them to the President and Governor in respect of the Union and of the States
respectively.
The CAG renders assistance to the Union/ States in the preparation of their
budgets.
The CAG audits the accounts, expenditure and receipt of the Union/ States.
The CAG audits the bodies substantially financed from UnionlStates
resources.

Check Your Progress 2

1) Your answer shoud include the following points:
Independence of the Comptroller and Auditor General is assured by the
Constitution in many ways viz., Appointment, Removal, Fixed tenure, salary
and terms and conditions of service.
Limitations in regard t o control over staff, budget and direct access t o
Parliament.
The CAG upholds the Constitution and the laws in the field of Financial
Administration.