UTTARAKHAND FINANCIAL ATTEST AUDIT MANUAL-2021 VOLUME-I

UTTARAKHAND FINANCIAL ATTEST

AUDIT MANUAL-2021 VOLUME-I
Finance Department
Government of Uttarakhand
2021

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Contents
Preface .....................................................................................................................................................................6

Notification ...............................................................................................................................................................8

Abbreviations ........................................................................................................................................................ 40

Glossary ................................................................................................................................................................ 42

Structure of the Manual......................................................................................................................................... 45

Chapter 1: About the Manual ................................................................................................................................ 47

1.1 Purpose ............................................................................................................................................................ 47

1.2 Applicability of this Manual and It’s Users ..................................................................................................... 47
1.3 An overview of the Institutional Arrangement of Audit in the State ............................................................... 48
1.3.1 Finance Department ............................................................................................................................... 48
1.3.2 Directorate of Audit ............................................................................................................................... 49
1.3.3 Audit Cell .............................................................................................................................................. 52
1.4 Audit Mandate and Applicable Acts, Rules and Regulations .......................................................................... 53
1.5 Update of Financial Attest Audit Manuals ...................................................................................................... 53
Chapter 2: Background of Urban Local Bodies and Rural Local Bodies ................................................................ 54

2.1 Background of ULBs and RLBs ...................................................................................................................... 54

2.2 Organization Structure of Urban Local Bodies ............................................................................................... 55
2.3Organisation Structure of Rural Local Bodies.................................................................................................. 56
Chapter 3: Basic Principles and Concepts in Auditing ........................................................................................... 58

3.1 Types of Public Sector Audit........................................................................................................................... 58

3.2Purpose and Objective of the Financial Attest Audit ....................................................................................... 59
3.3 Auditing Standards and Applicability ............................................................................................................. 61
3.4 Code of Ethics and Independence.................................................................................................................... 62
3.4.1 Code of Ethics .............................................................................................................................................. 62
3.4.2 Confidentiality of Audit Information............................................................................................................ 63
3.4.3 Independence and Objectivity ...................................................................................................................... 64
3.4.4 Professional Judgment and Skepticism ........................................................................................................ 65
3.5 Audit Materiality ............................................................................................................................................. 66
3.5.1 Planning Materiality ..................................................................................................................................... 68
3.5.2 Performance Materiality ............................................................................................................................... 70
3.6 Risk Model and Materiality ............................................................................................................................. 73
3.7 Audit Sampling ................................................................................................................................................ 75
3.8 Audit Evidence ................................................................................................................................................ 81
3.8.1 Types of Audit Evidence .............................................................................................................................. 82
3.8.2 Nature of Audit Evidence ............................................................................................................................. 82
3.8.3 Techniques for Collection of Audit Evidence .............................................................................................. 83
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Chapter 4: Audit Life Cycle and Online Audit Management System ...................................................................... 86

4.1 Audit Planning and Preparation ....................................................................................................................... 86

4.2 Audit Execution ............................................................................................................................................... 87
4.3 Audit Reporting ............................................................................................................................................... 87
4.4 Audit Monitoring, Follow Up and Compliance ............................................................................................... 88
4.5 Quality Assurance Framework ........................................................................................................................ 88
4.6 Overview of Online Audit Management System (OAMS) ............................................................................. 88
4.7 Computer Assisted Audit Techniques (CAATs) ............................................................................................. 89
Chapter 5: Audit Planning and Preparation .......................................................................................................... 91

5.1 Prepare Overall Annual Audit Plan ................................................................................................................. 92

5.2 Allocate Audit Team ..................................................................................................................................... 100
5.3 Allocate Man-Days to each Audit Unit ......................................................................................................... 101
5.4 Prepare Annual and Quarterly Audit Calendar .............................................................................................. 102
5.5 Intimate Audit Plan to Audit Units and Audit Teams ................................................................................... 103
5.6 Prepare Audit Planning for Individual Audit................................................................................................. 104
5.6.1 Understand the Audit Unit and Its Environment ........................................................................................ 107
5.6.2 Understand the Financial Reporting Framework (FRF) ............................................................................. 122
5.6.3 Setting of Planning and Performance Materiality....................................................................................... 138
5.6.4 Selection of Significant and Non-Significant Account Areas .................................................................... 138
5.6.5 Designing of Audit Procedures................................................................................................................... 161
5.6.6 Preparation of Audit Planning Memorandum............................................................................................. 166
Chapter 6: Audit Execution ................................................................................................................................. 168

6.1 Important Points Need to be Remembered during Audit Execution ............................................................. 168
6.2 Field Work ..................................................................................................................................................... 169
6.2.1 Entry Conference Meeting .......................................................................................................................... 170
6.2.2 Revision in Audit Planning Memorandum ................................................................................................. 171
6.2.3 Work Distribution Among the Audit Team Members ................................................................................ 171
6.2.4 Selection of Transaction to be Audited ...................................................................................................... 172
6.2.5 Audit Assertions ......................................................................................................................................... 174
6.2.6 Issuance of Half Margin Memo .................................................................................................................. 177
6.2.7 Exit Conference Meeting ............................................................................................................................ 179
6.2.8Written Representation Letter from the Auditee ......................................................................................... 180
6.3 Documentation of Field Work ....................................................................................................................... 180
6.3.1 Timely Preparation of Audit Documentation ............................................................................................. 182
6.3.2 Documentation of the Audit Procedures Performed and Audit Evidence Obtained .................................. 182
6.3.3 Departure from a Relevant Requirement .................................................................................................... 183
6.3.4 Audit Working Papers ................................................................................................................................ 183
6.3.5 General Content of Working Papers ........................................................................................................... 183
6.3.6 Review of Working Papers ......................................................................................................................... 185

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6.3.7 Ownership and Custody of Working Papers .............................................................................................. 187

Chapter 7: Audit Reporting ................................................................................................................................. 188

7.1 Conversion of Half Margin Memo (HMM) into Audit Para ......................................................................... 190
7.2 Preparation of Financial Attest Audit Report ................................................................................................ 191
7.2.1 Types of Financial Attest Audit Report ...................................................................................................... 191
7.2.2Evaluation of Material Misstatements and Selection of Basis for Opinion ................................................. 193
7.2.3 Form and Content of Independent Auditor’s Report .................................................................................. 195
7.2.4 Detailed Audit............................................................................................................................................. 206
7.2.5 Management Letter ..................................................................................................................................... 207
7.3 Review, Approval, and Issuance of Financial Attest Audit Report .............................................................. 208
7.3.1 Audit Team Members ................................................................................................................................. 208
7.3.2 Audit Team Leader ..................................................................................................................................... 209
7.3.3 Supervising Officer..................................................................................................................................... 209
7.3.4 Final Review and Approval and Issuance of Financial Attest Audit Report .............................................. 210
Chapter 8: Audit Monitoring, Follow Up and Compliance ................................................................................... 211

8.1 Introduction ................................................................................................................................................... 211

8.2 Audit Monitoring Process .............................................................................................................................. 213
8.2.1 Supervising Officer..................................................................................................................................... 213
8.2.2 Monitoring by Director, Audit .................................................................................................................... 215
8.3 Audit Follow Up Process ............................................................................................................................... 216
8.4 Audit Review Compliance Committees ........................................................................................................ 217
8.4.1 Departmental Audit Review Committee ................................................................................................... 217
8.4.2 State Level Audit Review Committee ....................................................................................................... 218
8.5Annual Consolidated Audit Report to be Placed before the State Assembly ................................................. 219
Chapter 9: Quality Assurance Framework .......................................................................................................... 221

9.1 Quality Assurance and Improvement Program (QAIP) ................................................................................. 221

9.2 Quality Review Supervising Officer ............................................................................................................. 222
Chapter 10: Using the Work of Other Auditor/ Internal Auditor and Experts ..................................................... 225

10.1 Using the Work of Internal Auditor............................................................................................................. 225

10.2 Using the Work of the Comptroller & Auditor General of India ................................................................ 226
10.3 Using the Work of Other Experts ................................................................................................................ 227
Chapter 11: Appointment of Chartered Accountant Firms .................................................................................. 228

11.1 Legal Mandate ............................................................................................................................................. 228

11.2 Roles and Responsibilities of the External Agency (CA Firm) ................................................................... 228
11.2.1 General Points........................................................................................................................................... 228
11.2.2 Standards .................................................................................................................................................. 229
11.2.3 Audit Reporting and Documents .............................................................................................................. 229

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Figures
FIGURE 1: INSTITUTIONAL ARRANGEMENT FOR AUDIT IN THE STATE ..................................................................48
FIGURE 2: ORGANIZATION STRUCTURE OF ULBS .................................................................................................56
FIGURE 3: ORGANIZATION STRUCTURE OF RLBS .................................................................................................57
FIGURE 4: BASIC PRINCIPLES AND CONCEPTS IN AUDITING .................................................................................58
FIGURE 5: OVERVIEW OF MATERIALITY................................................................................................................68
FIGURE 6: AUDIT LIFE CYCLE ...............................................................................................................................86
FIGURE 7: OVERVIEW OF OAMS ...........................................................................................................................88
FIGURE 8: STEPS INVOLVED IN AUDIT PREPARATION AND PLANNING .................................................................91
FIGURE 9: STEPS INCLUDED IN ANNUAL AUDIT PLANNING ..................................................................................93
FIGURE 10: STEPS IN AUDIT PLANNING AT THE UNIT LEVEL ..............................................................................105
FIGURE 11: PROCESS OF AUDIT REPORTING........................................................................................................190
FIGURE 12: PROCESS FOR DECIDING ON TYPE OF OPINION ..................................................................................195
FIGURE 13: REVIEW, APPROVAL, AND ISSUE OF FINANCIAL ATTEST AUDIT REPORT ........................................208
FIGURE 14: PROCESS OF REVIEW, APPROVAL & ISSUANCE OF REPORTS ............................................................231

Tables
TABLE 1: STRUCTURE OF THE MANUAL ................................................................................................................46
TABLE 2: OVERVIEW OF ULBS ..............................................................................................................................56
TABLE 3: LIST OF ISSAI STANDARDS APPLIED IN CONDUCTING FINANCIAL ATTEST AUDIT ...............................62
TABLE 4: MATERIALITY LEVEL BASED ON RISK CATEGORY ................................................................................67
TABLE 5: EXAMPLE OF PLANNING MATERIALITY .................................................................................................69
TABLE 6: EXAMPLE OF PLANNING MATERIALITY .................................................................................................69
TABLE 7: EXAMPLE OF PERFORMANCE MATERIALITY..........................................................................................71
TABLE 8: EXAMPLE OF PERFORMANCE MATERIALITY..........................................................................................71
TABLE 9: PARAMETERS FOR RISK PROFILING OF AUDITABLE UNITS UNDER ULBS & RLBS ..............................94
TABLE 10: ILLUSTRATIVE PARAMETERS FOR RISK PROFILING OF AUDITABLE UNITS WITH RANGES, SCORES AND
WEIGHTAGE..........................................................................................................................................99
TABLE 11: ILLUSTRATIVE MATRIX FOR SELECTION OF UNITS TO BE AUDITED BASED ON RISK PROFILING .......100
TABLE 12: ILLUSTRATIVE MATRIX FOR ALLOCATION OF MAN-DAYS FOR FINANCIAL ATTEST AUDIT .............102
TABLE 13: AUDIT PLANNING FOR INDIVIDUAL UNIT ...........................................................................................106
TABLE 14: ILLUSTRATIVE CHECKLIST FOR UNDERSTANDING AUDIT UNIT AND ITS ENVIRONMENT....................108
TABLE 15: KEY ACCOUNTING HEADS USED IN THE FINANCIAL STATEMENTS OF ULBS......................................118
TABLE 16: REFERENCE DOCUMENTS AND FEATURES FOR UNDERSTANDING ACCOUNTING PROCESS FOR ULB & RLB
...........................................................................................................................................................121
TABLE 17: ILLUSTRATIVE CHECKLIST FOR UNDERSTANDING THE COMPUTER/IT INVOLVEMENT ......................122
TABLE 18: OVERVIEW OF FINANCIAL REPORTING FRAMEWORK FOR ULBS ......................................................124
TABLE 19: COMPONENTS OF FINANCIAL STATEMENTS OF ULBS .......................................................................126
TABLE 20: OVERVIEW OF FINANCIAL REPORTING FRAMEWORK FOR RLBS ......................................................129
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TABLE 21: OVERVIEW OF SIMPLIFIED FORMATS OF ACCOUNTS FOR RLBS .......................................................131

TABLE 22: IDENTIFY MATERIAL RISK OF MATERIAL MISSTATEMENT ...............................................................135
TABLE 23: RISK OF CONTROL ACTIVITY .............................................................................................................136
TABLE 24: RISK ANALYSIS ..................................................................................................................................137
TABLE 25: CLASSIFICATION OF TRANSACTIONS FOR ULBS ................................................................................152
TABLE 26: CLASSIFICATION OF TRANSACTIONS FOR RLBS ................................................................................160
TABLE 27: CLASSIFICATION OF SIGNIFICANT ACCOUNTS/HEADS ......................................................................160
TABLE 28: EXAMPLE OF TEST OF INTERNAL CONTROL.......................................................................................162
TABLE 29: ILLUSTRATIVE METHODS USED FOR EVALUATING CONTROL............................................................163
TABLE 30: TEST OF DETAILS ................................................................................................................................164
TABLE 31: SUBSTANTIVE PROCEDURES ...............................................................................................................164
TABLE 32: MATRIX FOR APPROACH TO BE ADOPTED FOR TESTING OF CONTROLS .............................................165
TABLE 33: MATRIX FOR SUBSTANTIVE PROCEDURE ...........................................................................................166
TABLE 34: PRINCIPAL OF ASSERTION FOR BALANCE SHEET ITEMS ....................................................................175
TABLE 35: PRINCIPAL OF ASSERTION FOR RECEIPTS AND PAYMENTS OR INCOME AND EXPENDITURE ACCOUNT176
TABLE 36: ILLUSTRATIVE CHECKLIST FOR REVIEW OF WORKING PAPER ...........................................................186
TABLE 37: ILLUSTRATIVE TIMELINE RELATED TO AUDIT REPORTING ................................................................190
TABLE 38: CATEGORIZATION OF AUDIT PARA ....................................................................................................191
TABLE 39: TYPES OF FINANCIAL ATTEST AUDIT REPORT ..................................................................................192
TABLE 40: ILLUSTRATIVE MATRIX FOR EVALUATION TO FORM AN OPINION .....................................................194
TABLE 41: DESIGNATION OF THE AUTHORITY TO WHOM THE REPORT TO BE ADDRESSED .................................197
TABLE 42: EFFECT OF PERVASIVENESS ON OPINION ...........................................................................................199
TABLE 43: MATRIX FOR SIGNATURE OF THE INDEPENDENT AUDITOR’S REPORT...............................................205
TABLE 44: TIMELINES FOR SUBMISSION OF COMPLIANCE TO AUDIT REPORT......................................................212
TABLE 45: TIMELINE FOR FOLLOW-UP.................................................................................................................216
TABLE 46: CONSTITUTION OF DEPARTMENTAL AUDIT REVIEW COMMITTEE. IN CASE OF GPS THE DPRO WILL BE
THE MEMBER FOR POINT 5.................................................................................................................218
TABLE 47: CONSTITUTION OF STATE LEVEL REVIEW COMMITTEE ....................................................................219
TABLE 48: ILLUSTRATIVE CHECKLIST FOR QUALITY REVIEW OF AUDIT REPORT ...............................................224
TABLE 49: MATRIX FOR SIGNATURE OF AUDIT REPORTS ....................................................................................232

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Preface

The Government of Uttarakhand (GoUK) has passed separate legislation, namely ‘The Uttarakhand Audit
Act, 2012’ which provides provisions and regulations for audit of all Government Departments, Public
Corporations, Government Companies, Institutions, Statutory Authorities, Panchayati Raj Institutions,
Urban Local Bodies and Government Committees in the State.

Financial Attest Audit’ of Urban Local Bodies and Rural Local Bodies is entrusted under the Technical
Guidance and Support (TGS) of C&AG of India by the Government of Uttarakhand. The objective of
conducting a Financial Attest Audit is to express an opinion on Financial Statements of the ULBs & RLBs.

Financial Attest Audit (Certification Audit) was introduced by the Government of Uttarakhand in 2018.
With this Manual, the concepts of Audit Risk, Audit Sampling, Materiality, Issuance of Financial Attest
Audit Reports are being reinforced and the prime focus is on making the audit procedures uniform. This
manual has been prepared by following International Standards of Supreme Audit Institutions (ISSAI) as
prescribed by International Organisation of Supreme Audit Institutions (INTOSAI) to the extent applicable
in the context of the State of Uttarakhand.

The content of this manual has been divided into two volumes. The first volume covers the complete audit
life cycle. It has eleven Chapters which deal with an introduction, brief organisation structure of ULBs and
RLBs, functioning of the Finance Department, Directorate of Audit, audit planning, audit execution
methodology, audit reporting, monitoring, issuance of Financial Attest Audit Report to ULBs and RLBs,
follow up and quality assurance framework etc. The second volume covers standardised Forms and Formats
and audit checklists to be used in conducting Financial Attest Audits of ULBs and RLBs in the State.

This manual exhibits the principles, policies and procedures that govern the Financial Attest Audit practice
for Urban Local Bodies and Rural Local Bodies in the State of Uttarakhand. The manual provides a standard
set of guidelines and a code of ethics for conducting Financial Attest Audit including management of related
audit functions such as planning, execution, reporting, documentation, and quality assurance. This manual

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would assist audit team in discharging their roles and responsibilities in conducting the Financial Attest
Audit and providing expression of opinion on the Financial Statements of ULBs and RLBs.

The Manual is expected to be followed by all auditors in conducting Financial Attest Audit which will lead
to the standardized and uniform application of the audit procedures to bring efficiencies in the process.

I am grateful for the support given by Hon’ble Chief Minister & Finance Minister Shri Pushkar Singh
Dhami. I would like to place on record the excellent guidance provided by the Chief Secretary Shri S. S.
Sandhu-IAS, MS Manisha Panwar (Additional Secretary Finance) and would like to express my sincere
thanks to Ms. Sowjanya-IAS (Former Secretary, Finance, and project Director), Shri S Murugesan-IAS (
Former Director Audit), Shri Surendra Narayan Pande-IAS (Director, Audit), Dr. V Shanmugam-IAS
(Former Director, Audit), Dr. Ahmed Iqbal-IAS (Deputy Project Director), Shri J. C. Joshi (Director
CTRFA), Shri Khajan Chandra Pandey (Joint Secretary Finance Audit Cell), Shri Vipin Bihari Lal (Deputy
Director Audit), Shri Sobhan Singh Nagnyal (Deputy Director, Audit), Shri Ramesh Mishra (Senior Audit
Officer, Directorate of Audit), Shri Rajat Mehra (Audit Officer, Audit Cell), consultants and all other
Officers of the Directorate of Audit who contributed extensively in the development of this manual. The
comments and suggestions provided by the World Bank Team have been pivotal in improving the quality
and practicality of this Manual.

Finally, this Manual, being the first of its kind for the State. I would be appreciative of suggestions to bring
about further improvements if any, and also to bring to our notice any error, inaccuracy, or omission to be
incorporated in the next edition.
Amit Singh Negi
Date: 06 December 2021 Secretary, Finance and Project Director
Place: Dehradun Government of Uttarakhand

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Notification

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Abbreviations
List of abbreviations used in this Financial Attest Audit Manual is provided below.
Abbreviation Full Form
AR Audit Risk
ARC Audit Review Committee
CAAT Computer Assisted Audit Techniques
C&AG Comptroller & Auditor General of India
CFC Central Finance Commission
COTABD Class of Transactions, Account Balances and Disclosures
CR Control Risk
DoA Directorate of Audit
DR Detection Risk
FC Finance Commission
FRF Financial Reporting Framework
GAAP Generally Accepted Accounting Principles
GoUK Government of Uttarakhand
GP Gram Panchayat
HMM Half Margin Memo
HO Head Office
HoA Head of the Auditee
IAASB International Auditing and Assurance Standards Board
IFAC International Federation of Accountants
IFMS Integrated Financial Management System
INTOSAI International Organization of Supreme Audit Institutions
IR Inherent Risk
ISA International Standard on Auditing
ISSAI International Standard for Supreme Audit Institution
KP Kshettara Panchayat
OAMS Online Audit Management System

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PRIs Panchayati Raj Institution also known as Rural local Bodies

PSC Professional Standard Committee
RBA Risk Based Audit
RLBs Rural Local Bodies
SAIs Supreme Audit Institutions
UC Utilisation Certificate
ULBs Urban Local Bodies
UMAM Uttarakhand Municipal Accounting Manual, 2021
ZP Zilla Panchayat

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Glossary

The definitions of the various terms used in this Manual are given below:
1. Act refers to The Uttarakhand Audit Act, 2012.
2. Accounting policies are the specific principles and procedures implemented by an organisation that
are used to prepare its Financial Statements. These include any accounting methods, measurement
systems, and procedures for presenting and disclosures.
3. Administrative Department means concerned Administrative Department of Government of
Uttarakhand.
4. Audit includes Financial Attest Audit i.e., audit of the Financial Statements of Urban Local Bodies
and Rural Local Bodies in the state of Uttarakhand.
5. Auditee means the auditable units of Urban and Rural Local Bodies whose audit is conducted.
6. Auditor means and includes Director and all other officers appointed under Section 3 of The
Uttarakhand Audit Act, 2012 for their assistance including the person appointed through
outsourcing from any eligible Firm, Company or Institution and Society,
7. Audit Cell: Audit Cell setup at the Secretariat under the Finance Department, Government of
Uttarakhand.
8. Audit Team means the team of audit personnel assigned by the Directorate of Audit to conduct the
Financial Attest Audit of Urban and Rural Local Bodies.
9. Audit Plan is a process of deciding in advance what is to be done, who is to do it, how it is to be
done and when it is to be done by the team of audit in order to have efficient and effective completion
of Financial Attest Audit work.
10. Audit Programme is a detailed action plan of the audit work that includes necessary audit checks
and procedures to be performed by the auditor during the conduct of Financial Attest Audit of ULBs
and RLBs.
11. Audit Sampling is the use of an audit procedure on selection of the items within an account balance
or class of transactions.
12. Half Margin Memo is a memo or letter issued by the auditor during the course of the audit to elicit
information from the auditee on any other matter considered necessary to form an audit opinion.
13. Chief Secretary means Chief Secretary to the Government of Uttarakhand.

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14. Competent Authority means the authority that has been authorized to perform the function or
provide approval as per the Act, rules, procedures, Government Order, Transaction of Business
Rules.
15. Computer Assisted Audit Techniques (CAAT) refers to software tools used by the auditor for
data analysis to enhance the audit practices.
16. Director means the Director, Audit (with Local Funds Audit, Panchayat Audit) appointed under
Section 3 of the Uttarakhand Audit Act, 2012 and inter alia includes such officer on whom powers
of the Director are conferred upon under sub-section (4) of section 3.
17. Drawing and Disbursing Officer (DDO) refers to a Departmental officer, entrusted with the
responsibility of drawing and disbursing funds of the Government. Administrative
Departments/Heads of the Departments declare Gazetted Officers under their Administrative
Control as Drawing and Disbursing Officer in respect of specific establishments.
18. Financial Year means the period beginning on April 1st and ending on March 31st
19. Financial Statements are reports prepared by an organisation’s management to present the
financial performance and position at a point of time in accordance with the applicable financial
reporting framework. A general-purpose set of Financial Statements usually includes a balance
sheet, income statements (income & expenditure, receipt & payment account, statement of cash
flows, notes to account or any other relevant statements or documents of financial data prepared
from accounting records.
20. Financial Reporting Framework is defined as set of criteria used to determine measurement,
recognition, presentation, and disclosure of all material items appearing in the Financial Statements
and would be UMAM 2021 for Urban Local Bodies (ULBs) and Simplified Format of Accounts for
Rural Local Bodies (RLBs) as applicable from time to time.
21. Head of the Office means the senior-most gazetted officer of the office.
22. Head of Department means an authority declared so by the State Government.
23. International Standards of Supreme Audit Institutions (ISSAI) are the framework of
professional standards issued by the International Organisation of Supreme Audit Institutions
(INTOSAI) for public sector audits.
24. International Organization of Supreme Audit Institutions (INTOSAI) is a worldwide affiliation
of governmental entities. INTOSAI operates as an umbrella organization for the external
government audit community. It is a non-governmental organization with special consultative status
with the Economic and Social Council (ECOSOC) of the United Nations.
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25. Internal Control refers to the procedures or policies adopted by the management to safeguard
assets, promote accountability, increase efficiency, and prevent fraudulent behaviour.
26. Local Bodies are institutions of the local self-governance, which look after the administration of an
area or small community such as villages, towns, or cities. Local bodies constituted for local
planning, development and administration in the rural areas are referred as Rural Local Bodies
(Panchayats) and the local bodies, which are constituted for local planning, development and
administration in the urban areas are referred as Urban Local Bodies (Municipalities).
27. Online Audit Management System (OAMS) is a web application developed by the National
Informatics Centre for Directorate of Audit, Government of Uttarakhand. It has distinct audit and
compliance modules to digitalize the entire audit life cycle starting from audit planning, execution,
reporting, follow-up, compliance, and monitoring.
28. Panchayati Raj Institution (PRI)is a system of rural local self-government in India. Local Self-
Government is the management of local affairs by such local bodies who have been elected by the
local people.
29. State Government means Government of Uttarakhand.
30. UMAM means Uttarakhand Municipal Accounting Manual 2021 issued by GoUK, and as amended
from time to time.
31. Any other terms which is not been defined either in the Uttarakhand Audit Act, 2012 or in this
audit manual will be referred from its source document.

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Structure of the Manual

The Financial Attest Audit Manual has been divided into two volumes. The first volume covers and
introduction to the manual, basic concepts relating to Financial Attest Audit and Financial Statements
including the entire audit life cycle of Financial Attest Audit. While the second volume covers standardised
Forms, Formats, and audit checklists to be used in conducting Financial Attest Audit of ULBs and RLBs
in the State.

Volume-I
Heading of Chapter Content of the Chapter
Chapter 1: About the Manual Includes an Overview of the Manual, Applicability of the
Manual, user of the Manual including function and Roles of
the Finance Department, DoA and Audit Cell and audit
mandates.
Chapter 2: Background of Urban Contains an overview about Urban Local Bodies and Rural
Local Bodies and Rural Local Bodies Local Bodies in the State including a brief about the
Organisation Structure.
Chapter 3: Basic Principles and Comprises types of Public Sector Audit, Purpose and
Concept in Auditing Objective of Financial Attest Audit, Applicability of the
Auditing Standards, Code of Ethics and Independence for the
audit staffs, Audit Materiality, Risk Model, Audit Sampling
and Audit Evidence.
Chapter 4: Audit Life Cycle Explains the complete Audit Lifecycle e.g. Audit Planning and
Preparation, Audit Execution, Audit reporting, Audit Follow
Up, Audit Monitoring and Quality Assurance and Introduction
to OAMS and CAAT.
Chapter 5: Audit Planning and Consist of steps to be followed for Annual Audit Planning,
Preparation Audit Preparation for Individual Audit including Financial
Reporting Framework of ULBs and RLBs.

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Chapter 6: Audit Execution Includes steps that are to be followed in Execution of Financial
Attest Audit including Documentation and Audit Working
Papers.
Chapter 7: Audit Reporting and Includes steps to be followed for Preparation of Financial
Documentation Attest Audit Report including Review and Approval Process
Chapter 8: Audit Monitoring, Includes steps to be followed for Audit Monitoring, Follow Up
Follow-Up, and Compliance and Compliance of Audit Paras.
Chapter 9: Quality Assurance Includes steps to be followed for Quality Assurance
Improvement Program (QAIP) in conducting Financial Attest
Audit.
Chapter 10: Using the Work of Other Includes situations where work of Other Auditor/ Internal
Auditors/Internal Auditors and Auditor and Expert can be used.
Experts
Chapter 11: Appointment of Include the Roles and Responsibilities of a Chartered
Chartered Accountant Firms Accountant Firms for conducting Financial Attest Audit
Volume-II
Chapter 12: Forms, Format and Includes various Forms, Formats and Detailed Audit Checklist
Audit Checklist to be used while conducting Financial Attest Audit.
Table 1: Structure of the Manual

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Chapter 1: About the Manual

1.1 Purpose

1. This manual will guide users to conduct Financial Attest Audit and covers the entire audit life cycle by
providing clarity on how to issue a Financial Attest Audit Report for ULBs and RLBs. This Manual
is a compilation of policies, procedures and guidelines that governs the Financial Attest Audit practice
and process of ULBs and RLBs in the state of Uttarakhand. The said Manual is expected to be followed
by all the audit parties involved in conducting the Financial Attest Audit which will lead to the
standardized application of the audit procedures to bring efficiencies and uniformity in the audit
process.

2. The manual has been designed to meet the following important objectives:
 To serve as a guide for the auditors of the Directorate of Audit.
 To assist the auditors in performing their roles and responsibilities during the conduct of
Financial Attest Audit of Financial Statements efficiently.
 To provide guidelines for the auditors in applying audit techniques.
 To exercise professional judgment in framing the expression of opinion and issuing Auditors
Report on the Financial Statements of ULBs and RLBs.
1.2 Applicability of this Manual and It’s Users

3. This manual is applicable for conducting the Financial Attest Audit of the following entities:
a. Urban Local Bodies (Nagar Nigam, Nagar Palika Parishad and Nagar Panchayat)
b. Rural Local Bodies (Zilla Panchayat, Kshettara Panchayat and Gram Panchayat)

4. The users of this manual will be the staff and the Officials of Finance Department, Directorate of Audit,
Audit Cell and any CA firms or Societies appointed by the Directorate of Audit for carrying out the
Financial Attest Audit of ULBs and RLBs in pursuance of the provisions of the Uttarakhand Audit Act,
2012.

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1.3 An overview of the Institutional Arrangement of Audit in the State

5. The Preamble of Uttarakhand Audit Act, 2012, states about the regulation of audit of all government
machineries, public corporation, government companies, institutions, statutory authorities, Panchayati
raj institutions, municipalities, urban local bodies, governmental committees in the State. Further, sub-
section (1) of section 3 of the Uttarakhand Audit Act, 2012 states “ an organisational structure shall be
constituted for performing the Audit work.” An overview of the institutional arrangement of audits in
the State is provided below.

Figure 1: Institutional arrangement for audit in the State

1.3.1 Finance Department

6. The Finance Department means Finance Department of Government of Uttarakhand. The Finance
Department’s mission is to uphold and promote public accountability, optimum utilisation of public
funds and resources, transparency and accountability of Government and maintain financial discipline
in the State. The Finance Department to meet the aforesaid goals and for smooth implementation of

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all the provisions of the Uttarakhand Audit Act,2012 is entrusted with the following roles and
responsibilities:
a. Update of Financial Attest Audit manual on a periodical basis.
b. Adoption of new auditing standards issued by INTOSAI.
c. Issue Government orders and Notifications as may be necessary for conducting Financial Attest
Audit smoothly from time to time.
d. Review progress of the Financial Attest Audit work submitted by Director, Audit through
‘Quarterly Progress and Performance Report’.
e. Review status of compliance and follow up of Financial Attest Audit report submitted by the
Director, Audit on a quarterly basis.
f. Issue of guidelines and government order for the outsourcing of Financial Attest Audit work as
per Section 3(6) of Uttarakhand Audit Act, 2012.
g. Review of serious audit paras to be placed before the State Level Audit Committee.
h. Review and finalise “Annual Consolidated Audit Report’ to be placed before the State Legislature.
i. Coordinate from time to time with office of the AG (Audit), Uttarakhand for Technical and
Guidance Support for Local Fund Audit.
j. Notify the audit fee to be charged from the ULBs and RLBs for conducting Financial Attest Audit
under Section 4 (4) of the Uttarakhand Act, 2012.

1.3.2 Directorate of Audit

7. The Directorate of Audit is constituted under Section 3 of the Uttarakhand Audit Act, 2012 to perform
audit functions across the State.

8. The Directorate of audit is headed by the Director, Audit and day-to-day audit functions are handled
by the officers of the Directorate of Audit. The power, duties and responsibility of the Director, Audit
and other officials of the Directorate of Audit is provided below.

1.3.2.1 Director, Audit

9. The power, duties and responsibility of the Director, Audit for carrying out the Financial Attest Audit
has been provided below.

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a. Issue functional directions, and guidance to the officials of the department for conducting the
Financial Attest Audit function.
b. Approve annual and quarterly audit plan prepared by the officers authorised by the Director,
Audit for conducting Financial Attest Audit.
c. Review risk profiling parameters for prioritisation of which audit unit to be audited first.
d. Review and decide Audit Materiality threshold for conducting Financial Attest Audit based on
the past audit experience.
e. Ensure compliance with all the procedures outlined in this Financial Attest Audit Manual
including code of ethics and auditing standards.
f. Recommend to the concerned Administrative Department and Head of Department of the auditee
to take disciplinary action against the person who willfully neglects or refuses to provide any
requisition of records under Section 7 of the Uttarakhand Audit Act, 2012 as per the applicable
service rules.
g. Implement complete audit process starting from preparation of Financial Attest Audit plan,
allocation of audit team for execution of Financial Attest Audit and timely issuance of Financial
Attest Audit Report to the auditee.
h. Review, Sign and issue of Financial Attest Audit report to the auditee submitted by the officers
authorised by Director, Audit.
i. Follow-up, monitoring and compliance of audit paras reported in the Financial Attest Audit
Report forward the same to Finance Department on a quarterly basis.
j. Prepare and submit key audit paras related to irregularities like misappropriation of Government
money, defalcation, and fraud etc. to the Finance Department and concerned Administrative
Department to be placed before State Level Audit Committee.
k. Prepare and Submit Annual Consolidated Audit Report to the Finance Department to be laid
before State Legislature.
l. Prepare and plan the Quality Assurance Improvement Program (QAIP) of the audit team.

1
1.3.2.2 Supervising Officer

1
Not below the rank of Deputy Director, Audit and in case of Gram Panchayat not below the rank of Assistant Director.

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2
10. Director, Audit in order to supervise, monitoring and review of Financial Attest Audit work carried
by the audit team, may authorise any officials for this purpose. The officer so authorised by the
Director; Audit hereinafter shall be referred “Supervising Officer”. The key functions of the
Supervising Officer are as under:
a. Supervise and guide the audit team by the visiting auditee.
b. Ensure smooth execution of annual and quarterly audit plan.
c. Review whether the audit team has obtained sufficient and appropriate audit evidence to
provide expression of opinion on the financial statements of the auditee.
d. Review, approve and put forward Financial Attest Audit Report to the appropriate authority as
provided in clause 7.2.3.9 for review and sign on the Financial Attest Audit Report.
e. Sign and submit annual independence as per clause 3.4.1 “Code of Ethics” under Chapter 3.
f. In case of any fraud, embezzlement or misappropriation where the audit team has proposed any
further inspection or verification, exercise the following steps:
• Analyse and evaluate audit evidence obtained by the audit team by applying professional
Skepticism.
• Intimate to Directorate, Audit and conduct the field visit if evaluation of documents and
audit evidence indicates such misappropriation etc.
• Initiate joint inspection with the auditee (except where auditee is involved) to substantiate
the misappropriate etc.
• Upload all the working papers on OAMS jointly signed by the audit team, auditee and all
other officers who were present during inspection/ verification immediately after
completion of the inspection.
• Provide direction to the audit team to perform additional audit procedure.
g. Prepare and submit “Quarterly Progress and Performance Report” to Director, Audit.

1.3.2.3 Audit Teams

11. Audit team comprises two to three members, including the team leader. The key roles and
responsibilities of the audit team are as under:

2
To work as Supervising Officer.

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a. Perform duties as specified under Section 6 (4) of the Uttarakhand Audit Act, 2012.
b. Sign and submit annual independence as per clause 3.4.1 “Code of Ethics” under Chapter 3.
c. Conduct Financial Attest Audit of ULBs and RLBs with the use of OAMS or any other audit
management software as per the direction issued by the Finance Department.
d. Conduct Financial Attest Audit in accordance with the guidelines provided in this audit manual
and any Government Order, Notification etc. issued by the Finance Department from time to
time for carrying out the Financial Attest Audit of the ULBs/ RLBs.
e. Issue Half Margin Memo to the auditee for the record, reply, explanation through OAMS or any
other audit management software in use as per the direction issued by the Finance Department.
f. Inform to supervising officer regarding non-compliance of audit requisition by the auditee.
g. Conversion of Half Margin Memo into audit para and prepare the Financial Attest Audit Report
in accordance with the guidelines specified in this audit manual.
h. Upload all working papers and evidence on OMAS or any other audit management software in
use as per the direction issued by the Finance Department.
i. Obtain and upload a Written Management Representation letter from the auditee.
j. Inspect stores/ inventory of completed works/ ongoing works with the help of an expert if,
required by issuing HMM one day advance and upload all working papers on OAMS jointly
signed by the audit team, auditee and all other officers who were present during the inspection/
verification immediately on completion of such inspection and verification.
k. Report to the Supervising Officer in case of any fraud ,embezzlement or misappropriation is
found during the course of Financial Attest Audit and perform additional audit procedures as per
the direction of the Supervising Officer.

1.3.3 Audit Cell

12. Audit Cell is set up at Secretariat under the Finance Department, Government of Uttarakhand.
11. Audit Cell is comprised officers as decided by the State Government from time to time. Audit Cell, as
per the directions of Additional Chief Secretary/ Principal, Secretary/Secretary, Finance will assist in
carrying out the duties and responsibilities as mentioned in clause 1.3.1 above.

12. The Audit Cell will carry out any such other functions as directed by Additional Chief Secretary/
Principal, Secretary/Secretary, Finance.
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1.4 Audit Mandate and Applicable Acts, Rules and Regulations

13. As per Article 243(J) and 243(Z) of the Constitution, the State Legislature may, by law, make
provisions with respect to maintenance of accounts by Local Bodies, i.e. Panchayats and Municipalities
and auditing of such accounts. Therefore, the Government of Uttarakhand (GoUK) has promulgated a
separate legislation, namely the ‘Uttarakhand Audit Act. 2012’, governing inter alia the audits of
Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs) in the State. The Act provides for
constitution of an organization structure for conducting audit functions in State by the State
Government.

a. Audit of Accounts of Panchayats-Article 243J. The Legislature of a State may, by law, make
provisions with respect to the maintenance of accounts by the Panchayats and the auditing of such
accounts.
b. Audit of Accounts of Municipalities-Article 243Z. The Legislature of a State may, by law, make
provisions with respect to the maintenance of accounts by the Municipalities and the auditing of such
accounts.

14. The guidelines provided in this manual are governed by various Acts, Rules and Regulations issued by
Government of Uttarakhand from time to time. The list applicable Acts, Rules and Regulations is
provided below:
1. Uttarakhand Audit Act, 2012
2. Uttar Pradesh Nagar Nigam Act 1959 (as in force and as amended in Uttarakhand)
3. Uttar Pradesh Nagar Palika Act 1916 (as in force and as amended in Uttarakhand)
4. The Uttarakhand Municipal Accounting Manual (UMAM) 2021 (as amended from time to time)
5. The UP Panchayati Raj Act, 2016 (as in force and as amended in 2019)
6. Advertisement Rules, 2015
7. Simplified format for Accounts of PRIs, 2009

1.5 Update of Financial Attest Audit Manuals

The Financial Attest Audit Manual shall be updated by the Finance Department at least once in every three
years.
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Chapter 2: Background of Urban Local Bodies and Rural Local Bodies

2.1 Background of ULBs and RLBs

15. The 73rdand 74thConstitutional amendment (1992) gave Constitutional status to the Panchayati Raj
Institutions (PRIs) (hereinafter referred to as “RLBs”) and the Urban Local Bodies (hereinafter referred
to as “ULBs”) by changing the structure of governance permanently and by giving
Panchayats/Municipal Bodies a distinct developmental orientation. These amendments were inserted
in Part IX (Article 243 to 243O) and Part IX-A (Article 243 P to 243 ZG) of the Constitution, which
relate to the Panchayats and Municipalities respectively.

16. The system envisaged a uniform structure, regular elections, adequate flow of funds through Finance
Commissions (FCs), etc. for the Panchayats/Municipalities so as to ensure a more participative
governance structure in the country. The Amendment contained provisions for devolution of powers
and responsibilities to the Panchayats/Municipalities for the preparation of economic development
plans, for dispensation of social justice, as well as for implementation of plans and programmes related
3
to 29 subjects listed in the schedule XI of the Constitution to Panchayats and 18 subjects in Schedule
4
XII of the Constitution to Municipalities . These changes intend to convey:

3
Following are the items as per Eleventh Schedule of the Constitution of India to Panchayats : 1.Agriculture including agricultural
expansion,2. Land improvement, implementation of land reforms, land consolidation and soil conservation, Animal Husbandry, Dairying and
poultry,4. Fisheries Industry, 5. Minor irrigation, water management and watershed development, 6. Social forestry and farm forestry, 7. Small
scale industries in which food processing industry is involved, 8.Minor forest produce, 9. Safe water for drinking, 10. Khadi, village and
cottage industries, 11. Rural housing, 12. Fuel and fodder, 13. Rural electrification, including distribution of electricity, 14. Road, culverts,
bridges, ferries, waterways and other means of communication, 15. Education including primary and secondary schools, 16. Non-conventional
sources of energy, 17. Technical training and vocational education, 18. Adult and non-formal education, 19. Public distribution system,
20. Maintenance of community assets, 21. Welfare of the weaker sections of the in particular of the schedule caste and schedule tribes,
22. Social welfare, including welfare of the handicapped and mentally retarded, 23. Family welfare, 24. Women and child development, 25.
Markets and Fairs, 26. Health and sanitation including hospitals, primary health centres and dispensaries, 27. Cultural activities, 28. Libraries,
29. Poverty Alleviation Programmes
4
Following are the items as per Twelfth Schedule of the Constitution to Municipalities: Urban 1. Planning including town planning, 2.
Regulation of land use and construction of buildings. 3. Planning for economic and social development. 4. Roads and bridges. 5. Water supply
for domestic, industrial and commercial purposes. 6. Public health, sanitation conservancy and solid waste management, 7. Fire services. 8.
Urban forestry, protection of the environment and promotion of ecological aspects. 9. Safeguarding the interests of weaker sections of society,
including the handicapped and mentally retarded. 10. Slum improvement and upgradation, 11. Urban poverty alleviation. 12. Provision of
urban amenities and facilities such as parks, gardens, playgrounds,13. Promotion of cultural, educational and aesthetic aspects,14. Burials and

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 PRIs and ULBs became institutions of self-governance.

 There would be institutions of planning for economic growth of their respective jurisdictional
territories.
 These institutions would be the main agents for implementing State and Central schemes.

2.2 Organization Structure of Urban Local Bodies

17. Based on the population/ income from own sources of revenue, Urban Local Bodies in Uttarakhand
are divided into various categories in Nagar Nigam, Nagar Palika Parishad and Nagar Panchayat. The
categories as per State’s Gazette Notification No. 756/IV(1)/2015-01(32)/2014 dated June 12, 2015
are provided below table:
Type of Nagar Nigam Nagar Palika Parishad Nagar Panchayat
ULBS
Governing Uttar Pradesh Nagar Nigam Uttar Pradesh Nagar Palika Act 1916 (as in force and as
Acts Act 1959 (as in force and as amended in Uttarakhand)
amended in Uttarakhand)
Category 1 Nagar Nigam with Nagar Palika Parishad whose Nagar Panchayat
population more than 5 lakh own revenue is more than or whose population is
equal to Rs.1 crore and Nagar more than 10,000
Palika with District headquarter
whose own revenue is more than
or equal to Rs.50 lakhs
Category 2 Nagar Nigam with Nagar Palika Parishad whose Nagar Panchayat
population between 2 to 5 own revenue is more than or whose population is
lakhs equal to Rs. 50 lakhs and all rest less than 10,000
district Nagar Palika or Nagar
Palika whose population is more
than 50,000

burial grounds, cremations, cremation grounds and electric crematoriums, 15. Cattle ponds; prevention of cruelty to animals, 16. Vital statistics
including registration of births and deaths, 17. Public amenities including street lighting, parking lots, bus stops and public conveniences, 18.
Regulation of slaughterhouses and tanneries.

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Type of Nagar Nigam Nagar Palika Parishad Nagar Panchayat

ULBS
Category 3 Nagar Nigam with Other Nagar Palika Parishad -
population less than 2 lakh
Table 2: Overview of ULBs

2.3Organisation Structure of Rural Local Bodies

Figure 2: Organization Structure of ULBs

18. The Uttarakhand Panchayat Raj Act, 2016 envisaged following three tier panchayats of elected bodies
for local self- government i.e. (1) Gram Panchayat (2) Kshettara Panchayat and (3) Zilla Panchayat

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Figure 3: Organization Structure of RLBs

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Chapter 3: Basic Principles and Concepts in Auditing

19. This Chapter covers the following key areas:

Types of Public Sector Audit: Financial, Complaince & Performance Audit

Purpose and Objective of Financial Attest Audit

Auditing Standards and Applicability

Codes of Ethics and Independence

Audit Materiality

Risk Model and Materiality

Audit Sampling

Audit Evidence

Figure 4: Basic Principles and Concepts in Auditing

3.1 Types of Public Sector Audit

Para 22 of the ISSAI 100, Fundamental Principles of Public-Sector Auditing categorize audits into
three types namely:
A. Financial Audit focuses on determining whether the Financial Statements are properly prepared and
presented in accordance with the applicable financial reporting and regulatory framework. This is
accomplished by obtaining sufficient and appropriate audit evidence to enable the auditor to express an
opinion as to whether the Financial Statements are free from material misstatement whether due to fraud
or error.

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B. Compliance Audit focuses on whether the activities of an audit entity, its financial transactions and
information materially comply with the applicable laws, rules &regulations and various orders
&instructions issued by the competent authority from time to time.
C. Performance Audit focuses on the extent to which an activity and programme or an organisation
operates economically, efficiently, and effectively and whether there is a scope for improvement. The
objective of the performance audit is to evaluate actual performance against a pre-defined set of outputs,
outcomes, and criteria along with providing key recommendations for improvement.
3.2Purpose and Objective of the Financial Attest Audit

The International Standards of Supreme Audit Institutions(ISSAI) 200 explains the overall objective
of an auditor in conducting an audit of Financial Statements which is:
➢ To obtain reasonable assurance whether the Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling an auditor to express an opinion on
whether the Financial Statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
➢ To report on the Financial Statements, and communicate as required by the ISSAIs, in accordance
with the auditor’s findings.

20. The primary objective of Financial Attest Audit is to provide an ‘expression of opinion’ on the “true
and fair view” of the Financial Statements. The purpose of Financial Attest Audit is to ascertain
whether financial statements prepared by the ULBs and RLBs are free from material misstatements
and depicts a true and fair view of the state of the affairs and their financial position. The Financial
Attest Audit enhances the degree of confidence of intended users on the audited Financial Statements.
This is achieved by providing ‘expression of opinion ‘by the auditor on whether the Financial
Statements are prepared, in all material respects, in accordance with the applicable financial reporting
framework and the Financial Statements so prepared give ‘true and fair view’ of the state of affairs
and financial position of the respective ULBs and RLBs. Therefore, while conducting Financial Attest
Audit, the auditors shall consider the following:
 Whether books of accounts and the Financial Statements are in compliance with the applicable
laws, rules, regulations, and accounting principles prescribed by the appropriate authorities.
 Completeness of the books of accounts and financial records maintained by ULBs and RLBs and
the Financial Statements.
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 Whether accounting transactions and account balances are appropriately reflected in the
Financial Statements.
 Reporting of receipts and payments along with their cross verification and reconciliation with the
accounts &other records.
 Adequacy of disclosures including appropriate and necessary explanations for any transaction or
amount which is prima facie unusual.

21. During the Financial Attest Audit, the auditor will analyse the Financial Statements, in order to
ascertain whether these statements are prepared in accordance with the prescribed manual, guidelines,
accounting standards and procedures and whether sufficient disclosures are made about the various
elements reported in the Financial Statements.

22. Accordingly, the overall objective of the Financial Attest Audit are:
a. To obtain reasonable assurance about whether the Financial Statements as a whole are free
from material misstatements, due to fraud or error.
b. Thereby enabling the auditor to express an opinion through a report on whether the Financial
Statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework; and
c. To communicate the result of the Financial Attest Audit to the management of the auditee unit.

23. The Concept of Reasonable Assurance and not the Absolute Assurance: The audit opinion
provided by the auditor would always be a ‘reasonable assurance’, that the Financial Statements are
free from material misstatements caused either due to errors, mistakes, or other irregularities. The
framework for audit reporting issued by ISSAI suggests expression of a ‘reasonable assurance’ and
not ‘absolute assurance’ as absolute assurance is rarely attainable due to the following inherent
limitations in the work carried out by an auditor:
 Inherent limitations of internal controls in an entity do not guarantee the completeness or
accuracy of accounting records.
 The audit evidence collected by the auditors is mostly persuasive and not conclusive.
 A lot of professional judgment is used in gathering and evaluating the audit evidence; and
 The use of test checking/selective testing.

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24. Therefore, it is important for the auditors to follow the concept of “Materiality” which is relevant for
the Financial Attest Audit. Refer to Section3.5 of Chapter 3 “Basic Principles and Concept in
Auditing” for Audit Materiality.

3.3 Auditing Standards and Applicability

25. The Auditing Standards provide a framework for the auditing steps and procedures. The Auditing
Standards establish the norms which are applicable to all public audit engagements, irrespective of
their form or context. The standards incorporate prerequisites for the functioning of Public Audit
Institutions, determine the procedures to be applied in audit and constitute the criteria or benchmark
against which the quality of audit results is evaluated.

26. This Financial Attest Audit Manual has been prepared based on the principles of International
Standards of Supreme Audit Institutions (ISSAIs) issued by International Organization of Supreme
Audit Institutions (INTOSAI) to the extent it is made applicable to the State of Uttarakhand. The
Finance Department as well as the Directorate of Audit is required to follow these Auditing Standards
for conducting Financial Attest Audit of ULBs and RLBs in the State. The INTOSAI has endorsed
the International Standards on Auditing developed by International Auditing and Assurance
Standards (IAASB) of International Federation of Accountants (IFAC).

27. The overview of these standards used for general application in the conduct of Financial Attest Audit
of Urban Local Bodies and Rural Local Bodies are as under.

Number Name of ISSAIs

ISSAI-20 Principles of Transparency and Accountability
ISSAI-130 Code of Ethics
ISSAI-40 Quality Controls
ISSAI-100 Fundamental Principles of Public Sector Auditing
ISSAI-200 Fundamental Principles of Financial Auditing
ISSAI-2220 Quality Control for an Audit of Financial Statements

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ISSAI-2230 Documentation of the Audit Procedures Performed and Audit

Evidence Obtained
ISSAI-2300 Planning of an Audit of Financial Statements
ISSAI-2320 Materiality in Planning and Performing and Audit
ISSAI-2330 Auditors Response to Assessed Risks
ISSAI-2450 Evaluation of Misstatement Identified during the Audit
ISSAI-2530 Audit Sampling
ISSAI-2500 Audit Evidence
ISSAI-2700 Forming an Opinion and Reporting on Financial Statements
ISSAI-2701 Communication of Key Audit Matters in the Independent Auditor’s
Report
ISSAI-2705 Modifications to the Opinion in the Independent Auditors Report
ISSAI-2706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditors Report
ISSAI-2720 Auditors Responsibilities Relating to Other Information in
Documents Containing Audited Financial Statements
Table 3: List of ISSAI standards applied in conducting Financial Attest Audit

Refer to Section12.1.1. of Chapter 12 “Forms, Formats and Audit Check List, Volume II” for List of
Relevant ISSAI Standards.
3.4 Code of Ethics and Independence

3.4.1 Code of Ethics

28. A Code of Ethics: The code of ethics is designed to prevent internal conflicts of interest and
corruption and ensure the transparency and legality of their operations, as well as actively promoting
ethical behaviour throughout the organisation. The ethical requirements cover the obligation of the
auditors and other staff working in the Directorate of Audit or any other external staff ( CA Firm,
Society etc. ) working on behalf of the Directorate of Audit.

INTOSAI Code of Ethics (ISSAI 130) is based on five fundamental values:

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a. Integrity: to act honestly, reliably, in good faith and in the public interest,
b. Independence and Objectivity: to be free from circumstances or influences that compromise,
or may be compromising, professional judgment, and to act in an impartial and unbiased manner,
c. Competence: to acquire and maintain knowledge and skills appropriate for the role, and to act in
accordance with applicable standards, and with due care,
d. Professional Behaviour: to comply with applicable laws, regulations and conventions, and to
avoid any conduct that may discredit the DoA.
e. Confidentiality and Transparency: to appropriately protect information, balancing this with the
need for transparency and accountability.

29. Based on the above fundamental principles, the following standards of code of conduct have been set
forth for the official of DoA and external staff (CA Firms & Societies etc.) working on behalf of the
DoA.
 The officials and officers should exercise honesty, objectivity, and diligence in the performance
of their duties and responsibilities. They shall be mindful of their obligation to maintain the
highest standards of competence, morality, and dignity in the execution of their roles and
responsibilities. They should not engage in any acts or activities which may cause disrespect to
the profession of the audit.
 To refrain from doing any activity which conflicts with the interest of the audit department or
which would prejudice their ability to carry out their duties and responsibilities objectively.
 The officials and officers shall continuously strive for improvement in their skill and in the
effectiveness and quality of their services.
 The officials and officers shall not accept any gift from an employee, supplier, or business
associate of the audit unit, which would impair or be presumed to impair their professional
judgment.
 The officials and officers shall be careful while using the information acquired during the conduct
of their duties. Further, they shall not use confidential information for any personal gain nor in any
manner, which would be contrary to law or detrimental to the welfare of the audit unit.

3.4.2 Confidentiality of Audit Information

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30. The auditors are required to respect the confidentiality of information acquired from the various audited
units. The auditors shall not disclose any official information without obtaining the necessary
authorization or using it for personal benefits. Information collected during an audit shall only be used
for the purpose for which it was collected and shall not be disclosed, other than for audit purposes.
Disclosure of any official information can only be done with prior approval from the competent
authority from DoA. Additionally, the auditors as well as the authorized official, must ensure the
confidentiality of all files gathered from the auditee whether it is in the office of the Directorate of
Audit or on the location of the auditee.

31. It is necessary that all audit findings and conclusions shall be kept confidential until they have been
completely substantiated, processed through an authorized clearance procedure, and approved for
release by the competent authorities. Improper or premature external disclosure of audit findings can
harm the audited entity and may cause embarrassment to the DoA. The principle of confidentiality also
dictates that all those working in the DoA must be cautious in discussing official information with
friends, relatives, and colleagues outside the DoA.

3.4.3 Independence and Objectivity

As per International Standards of Supreme Audit Institutions(ISSAI) 200 ‘Fundamental

Principles for Financial Audit’
“Auditors conducting audits in accordance with the ISSAIs are subject to comply with ethical
requirement set out in ISSAI 130 which ensure that the auditor will maintain objectivity and
independence throughout the conduct of the audit. It sets out the overall objectives of an audit and
explains the nature and scope of an audit designed to enable the auditor to meet those objectives.

32. The GoUK has passed separate legislation, ‘Uttarakhand Audit Act, 2012’ that provide powers to
conduct the audit of Local bodies.

33. Independence from the audited entity is indispensable for the audit team. This implies that the audit
team should behave in a way that increases or in no way diminish their independence. The auditor

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should strive not only to be independent of the audited entity but also be objective in dealing with the
issues and topics under review.

34. It is essential that auditors are independent and impartial, not only in fact but also in appearance.
Independence of mind and appearance is necessary to enable the auditor to express conclusion without
bias, conflict of interest or undue influence of others.

35. Independence in fact is a situation where individuals are able to perform activities without being
affected by relationships that can influence and compromise professional judgment, allowing them to
act with integrity and exercise objectivity and professional Skepticism

36. Independence in appearance is the absence of circumstances that would cause a reasonable and
informed third party, having knowledge of relevant information, to reasonably doubt the integrity,
objectivity or professional skepticism of the auditor(s), or conclude that the information has been
compromised.

37. Objectivity is the mental attitude where individuals are able to act in unbiased manner, presenting or
assessing things on the basis of facts rather than own feelings and interests, without subordinating
judgment to others.

38. It is the duty of the DoA to ensure that necessary policies and procedures have been put in place to
safeguard independence, objectivity, and impartiality. To this end, prior to the commencement of an
auditing assignment, all members of the audit team including the Supervising Officer should give
individual undertaking to this effect. Similarly, all individuals/ firms working for or on behalf of the
DoA in carrying out the Financial Attest Audit should also give an undertaking to this effect.

3.4.4 Professional Judgment and Skepticism

39. Professional skepticism means maintaining professional distance, significant alertness and questioning
attitude while assessing the sufficiency and appropriateness of audit evidence obtained throughout the
audit. It also entails remaining open-minded and receptive to all views and arguments. Professional
judgment implies the application of collective knowledge, skills, and experience to the audit process.
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40. The audit team should maintain appropriate professional behaviour by applying professional
skepticism and professional judgment throughout the audit. The audit team’s attitude should be
characterised by professional skepticism and professional judgment, which are to be applied while
taking decisions about the appropriate course of action or while forming an opinion.

Refer to Section12.1.2. of Chapter 12 “Forms, Formats and Audit Check List, Volume II” for
Declaration Regarding Adherence to the Code of Ethics.

3.5 Audit Materiality

ISSAI 2320 ‘Materiality "Information is material, if its misstatement (i.e. omission or erroneous
statements) could influence the economic decision of users taken on the basis of the Financial Statements.
Materiality depends on the size of the item or error judged in the circumstances of its omission or
misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic which information must have if it is to be useful."
Auditors should apply the concept of materiality in an appropriate manner when planning and performing
the audit.The concept of materiality is to be applied appropriately throughout the audit, especially when:
▪ Identifying the components to be audited (overall audit planning)
▪ Determining the nature, time and extent of audit procedure (detailed planning); and
▪ Evaluating the effect of material misstatements (for reporting)

41. Materiality is an important concept in Financial Attest Audit. A matter can be judged material if
knowledge of it would likely to influence the decisions of the intended users. Determining materiality
is a matter of professional judgment and depends on the auditor’s interpretation of the users’ needs.
The auditors should consider materiality throughout the audit process. The auditor should apply the
concept of materiality, both in quantitative (by amount) and when relevant in qualitative (by nature)
terms, when planning and performing the Financial Attest Audit and evaluating the findings and
reporting the results.

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42. When planning for the audit, the auditor should decide an overall level of materiality (known as
planning materiality) for the Financial Statements as a whole, taking into account the level of
misstatements, which could influence the decision of the users.

43. The auditor should then reduce that level of materiality when establishing the audit work to be
undertaken, in order to reduce to an acceptable level, the risk that the aggregate of undetected and
uncorrected misstatements do not exceed overall materiality. This lower materiality level (known as
performance materiality) should be used to determine the nature, timing and extent of audit
procedures to be performed and to assess the results of those procedures.

44. Risk and materiality have inverse relationship, higher the risk lower will be the materiality level and
vice-verse.
Risk
Materiality

45. Therefore, planning materiality should be determined separately for Urban Local Bodies and Rural
Local Bodies (i.e. for Zilla Panchayat, Kshettara Panchayat and Gram Panchayat) based on the risk
associated to the respective audit entity as per the below matrix and this materiality level should be
adjusted based on field experience in future years.

Planning Low Risk Medium Risk High Risk

Materiality ULBs KPs and ULBs and KPs and ULBs KPs and
and GPs ZPs GPs and GPs
ZPs ZPs
Gross Expenditure 2% 5% 1.5 % 3% 0.5% 2%
Table 4: Materiality Level based on Risk Category

46. An overview of the materiality has been provided in the below table:

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Figure 5: Overview of Materiality

3.5.1 Planning Materiality

A. Materiality for Financial Statements as a Whole:

47. When establishing the overall audit strategy, the auditor is required to determine the materiality to be
applied for the Financial Statements as a whole during the Financial Attest Audit. However, there may
be items (e.g. class of transactions, account balances or disclosures) where misstatements are less
significant in amount, but this could reasonably be expected to influence the economic or non-
economic decision of the Financial Statements users. So, if the auditor concludes that such possibility
exists, then the auditor should calculate materiality for those particular classess of transactions, account
balances or disclosures separately instead of calculating the materiality for the Financial Statements as
a whole.
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48. In determining the materiality for Financial statements as a whole, an appropriate benchmark may be
used e.g. total receipts or, total expenditure. Determining a percentage to be applied to a chosen
benchmark involves the exercise of professional judgment. The following example illustrates the
calculation of materiality for Financial Statements, based on the possible approach.

Benchmark Amount (Rs.) % Used Materiality (Rs.)

Total Expenditures 10,00,00,000 2% 20,00,000
Reason for using 2 %:
Reason for using the benchmark
Table 5: Example of Planning Materiality

Note: % used here is just an example. In future, the DoA based on its professional judgment and past
experience will determine the benchmark to be used for calculating Planning Materiality for each financial
year. The recommended normal sensitivity range for planning material is from 0.5% to2%.

49. From the above table misstatements higher than Rs.20,00,000 (i.e. more than 2% of the total
expenditures) will be considered as material misstatements for the Financial Statements as a whole.

B. Materiality for particular Class of Transactions, Account Balances and Disclosures

(COTABD):

50. Auditor has an option to set separate planning materiality for a particular class of transactions, account
balances and disclosures if in the auditor’s judgment, circumstances, risk assessment and the particular
issue demands so, the same principle would apply to calculate materiality for particular COTABD.
Here, misstatements of lesser amounts than materiality for the Financial Statements as a whole could
reasonably be expected to influence the economic decision of the users in the case of COTABD.

Benchmark Amount (Rs.) % Used Materiality (Rs. )

Travel Expenses 1,00,00,000 0.5% 50,000
Procurement Expenses 5,00,00,000 2.0% 10,00,000
Reason for using given 2 %:
Reason for using the benchmark
Table 6: Example of Planning Materiality

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Note: % used in the above table is just an example. In future, the DoA based on their professional judgment
and past experience will determine the benchmark to be used for calculating each of the COTABD. In the
above example benchmark for travel expenses and procurement expenses have been considered 0.5% and
2% respectively.

51. From the above table, misstatements higher than Rs. 50,000 for travel and Rs. 10,00,000 for
procurement will be considered material misstatement in the Financial Statements.

52. When comparing travel expenses and procurement expenses with overall materiality for the Financial
Statements as a whole, these expenditures might not be material, but this could still influence the
decision of the users of the Financial Statements because of their nature. In other words, some of the
items of the Financial Statements can be critical in nature e.g. payment of honorarium to the elected
members and related party transactions which require the calculation of separate materiality at the
individual transaction level.
3.5.2 Performance Materiality

As per para 11 of ISSAI 2320 “Materiality in Planning and Performing an Audit” issued by
INTOSAI, the performance materiality means “The auditor shall determine performance materiality
for purposes of assessing the risks of material misstatement and determining the nature, timing and extent
of further audit procedures to be performed”

53. The determination of performance materiality is not a simple mechanical calculation but involves the
exercise of professional judgments. It is affected by the auditor’s understanding of audit entity updated
during the performance of the risk assessment procedures and the nature and extent of misstatements
identified in previous audits and thereby the auditor’s expectations in relation to misstatements in the
current period. The auditor needs to determine the performance materiality level for the purposes of
assessing the risks of material misstatement and determining the nature, timing and extent of further
audit procedures to be performed. In formulating an audit opinion, the auditor should inter-alia give
due regard to the materiality of the matter keeping in view the nature, timing and extent of the issues
that may be considered material even if the monetary value is not significant for example.
 Fraud, intentional unlawful acts or non-compliance.

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 Incorrect or incomplete information to the executive, the auditor or to the legislature

(concealment).
 Intentional disregard to the executive, authoritative bodies or auditors, and

54. The performance materiality is fixed lower than the planning materiality determine for Financial
Statements as a whole. For example, considering the previous example performance materiality has
been calculated as under.

Planning materiality % Used Performance Materiality (Rs.)

20,00,000 75% 15,00,000
Table 7: Example of Performance Materiality

Note: The recommended normal sensitivity range for performance materiality is 60% to 80% of the
planning materiality. The auditors generally use 75% of planning materiality as performance materiality.
The limit of performance materiality as calculated above is used to classify head of account balances into
significant accounts and non-significant accounts. Accordingly, the head of the account whose closing
balance is more than Rs. 15,00,000 will be considered as a significant account and the head of the account
whose closing balance is equal to or below Rs. 15,00,000 will be considered as a non-significant account.

55. The same principle is applied while determining the performance materiality for a particular COTABD.
This is calculated only if the separate planning materiality is determined for the particular COTABD.

COTABD Planning Materiality % Used Performance

Materiality (Rs.)
Travel 50,000 75% 37,500
Procurement 10,00,000 75% 7,50,000
Reason for using given %:
Table 8: Example of Performance Materiality

Note: The recommended normal sensitivity range for performance materiality is 60% to 80% of the
planning materiality. The auditors generally use 75% of planning materiality as performance materiality.

56. Both the planning materiality and performance materiality will be calculated and decided at DoA
level for each financial year separately based on their professional judgments and experience

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gathered from the previous years’ Financial Attest Audit report which shall be approved by the
Director, Audit along with the annual audit plan.

57. Concept of Threshold: The concept of threshold is the dividing line between material and immaterial
information. In order to establish an appropriate level of audit threshold the auditor normally considers
the amount and type of misstatement reported in the Financial Statements. The audit threshold may be
stated as a specific percentage of financial items as a whole. The concept of threshold is used by the
auditor to determine what is required to be reported and what is not required to be reported when
framing an opinion on the Financial Statements.

Illustration on selection of Materiality:

If the audit team is planning for audit of XYZ “Gram Panchayat” and selected that “Gross
Expenditure” incurred as the base to determine the Planning Materiality (details of gross expenditure
may be taken either from the cash book file maintained in hard copy or from data uploaded on
the -Gram Swaraj or other accounting software used by the ULBs or RLBs duly integrated with
OAMS).
Say, Gross Expenditure of Gram Panchayat is = Rs. 10,00,00,000
STEP 1: Calculate Planning Materiality @ 0.5% of the gross expenditure
Hence, the Planning Materiality would be = Rs. 5,00,000 (0.50% of Rs, 10,00,00,000)
STEP 2: Performance Materiality has been set at 50% of the Planning Materiality
Performance Materiality= Rs. 2,50,000 (i.e.50% of Planning Material)
Step 3:Audit Difference Threshold: Rs. 25,000 (i.e. 5% of the planning materiality). The
Misstatements identified below this threshold shall be deemed unimportant. Therefore, all uncorrected
misstatements over this amount need to be reported. And other uncorrected misstatements which are
relating to reclassification or disclosures and corrected misstatements will be communicated to the
extent it requires the attention of the management or users of the Financial Statements.
STEP 4:If the total value of uncorrected errors goes beyond Rs. 5,00,000 in aggregate or individually
excluding audit difference threshold, then auditor need to provide a qualified opinion or adverse type
of opinion by stating the fact about the material misstatements involved in the Financial Statements.
And for uncorrected errors related to disclosures etc. together with corrected misstatement shall be
reported only if it requires the attention of the users of the Financial Statements only.

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STEP 5:The account balances below Rs. 2,50,000 would be audited by selecting 4 to 5 transactions
randomly in order to ensure the completeness of checking.

3.6 Risk Model and Materiality

58. Audit risk is defined as ‘the risk that the auditor expresses an inappropriate audit opinion when the
Financial Statements are materially misstated. Therefore, an audit team must keep the Audit Risk very
low, otherwise, the key objective of the Financial Attest Audit would not be achieved. Audit risk cannot
be eliminated even if 100% verification is carried out which is practically not feasible.

59. Materiality and Audit Risk has an inverse relation with each other, if the materiality level gets lower
then audit risk is higher and vice versa. The level of audit risk that an auditor can accept is very crucial
and subjective. Normally a level of 95% assurance is considered appropriate which means the audit
risk would be 5%. Audit risk is contributed by inherent risk, control risk and detection risk. Generally,
the auditor does not have control over inherent risk and control risk. Therefore, the auditor assesses
inherent risk and control risk for the possible impact on Financial Attest Audit and manage the
detection risk to bring the audit risk to an acceptable level.

60. According to the risk model, the Audit Risk (AR) has three components inherent risk, control risk and
detection risk. Thus, the Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk
(DR)

61. Inherent Risk (IR) is the risk that is inherent in any operation and which arises due to the complex
nature of operations. Inherent risk is one of the factors along with control risk, that an auditor can only
assess the risk of material misstatements associated with a Financial Statements. The following are
some of the illustrative factors used for assessing Inherent Risk.
 Nature of Transaction: Cash in hand is by nature riskier and more prone to theft than a large
inventory or any other assets of the entity.
 History of Error: Error reported for a particular type of transaction or group of transactions in
the previous three financial years.

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 The Complexity of Transaction: Particular type of transaction or class of transactions in which

errors are more likely to occur considering the governing conditions and complex nature of
calculations.
 The Volume of Transaction: High volume transactions considering the size and nature of the
entity.
 Non-Production/ Non-Preparation of Records for Audit: History of the audit reveals the non-
production/non-preparation of records for audit by the auditee.

62. Control Risk (CR) is the risk of material misstatements associated in account balances or class of
transactions that could occur and go undetected by the entity’s internal control system. In this case, the
auditor could only assess whether the controls are designed appropriately and implemented by the
entity.

63. Detection Risk (DR) is the risk that an auditor’s audit procedures will not detect a misstatement,
existing in an account balance or class of transactions that could be material, individually or when
aggregated. The auditor can manipulate the detection risk by altering the nature, extent and timing of
the audit.

64. Accordingly, the risk which audit procedures fail to detect (i.e. Detection Error- DE) is therefore,
influenced by the amount of Inherent Risk (IR) and Control Risk (CR).

65. The following illustration gives an understanding of how detection risk and confidence levels can be
calculated:

The audit risk model can be expressed as AR = IR X CR X DR

Assume that auditor takes 5% audit risk and auditee’s control environment presents as under:
-The auditor’s judgment caps the IR 60% due to the complexity of the operations. In other words, only
40% assurance is possible in the prevailing circumstances.
-And auditor’s, past experience of the internal control system of the entity shows that 40% assurance can
be taken due to these in-built controls, which means control risk would be 60%.

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-Then, the Detection Risk would be = 0.05/ (0.6*0.6) = 14% which means the prevailing environment
only gives 86% confidence level to the auditors. Therefore, the auditor’s test procedures and sample sizes
will have to be planned accordingly.
From the above example, if the auditor’s assessment of inherent and control risk is high, the detection
risk is set at a lower level to keep the audit risk at an acceptable level. Lower detection risk may be
achieved by increasing the sample size for testing. In other words, if the auditor wants to decrease the
detection risk then sample size for testing has to be increased. Conversely, where the auditor believes the
inherent and control risk of an engagement to be low, detection risk is allowed to be set at a relatively
higher level.
The Extent and nature of audit procedures are determined by the level of detection risk required to bring
audit risk to an acceptable level. The auditor cannot control the inherent and control risk. They can
however balance these risks by determining the suitable detection risk to keep the overall risk in check.
Detection risk directly influences the audit strategy e.g. if the auditor requires a low detection risk to
counter high control risk, the auditor may rely on control testing and conduct extensive substantive
procedures to form a valid opinion.

3.7 Audit Sampling

As per ISSAI 2530 “Audit Sampling” applies when the auditor has decided to use audit sampling in
performing audit procedures. It deals with the auditor’s use of statistical and non-statistical sampling
when designing and selecting the audit sample, performing tests of controls and tests of details, and
evaluating the results from the sample. The following terms have the meanings attributed below:
(a) Audit sampling – The application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in order to
provide the auditor with a reasonable basis on which to draw conclusions about the entire
population.
(b) Population – The entire set of data from which a sample is selected and about which the auditor
wishes to draw conclusions. This individual item in population are known as sampling units.
(c) Sampling risk – The risk that the auditor’s conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure.
(d) Statistical sampling – An approach to sampling that has the following characteristics:

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 Random selection of the sample items; and

 The use of probability theory to evaluate sample results, including measurement of sampling
risk.
 A sampling approach that does not have characteristics (i) and (ii) is considered non-
statistical sampling

66. After determination of the audit materiality the next step is to apply the concept of audit sampling
within the account balances or class of transactions (determined as per materiality). It enables the
auditor to obtain and evaluate the audit evidence about some characteristics of the selected items to
form or assist in framing, a conclusion about the audit population from which sample size is drawn.
The determination of sample may be made using either non-statistical method or statistical method
which is as under.

A. Non-Statistical is a method in which an auditor uses professional judgment to select the sample
items and to evaluate results from the sample. In exercising professional judgment, the auditors
use their knowledge, skill and experience to diligently perform the gathering of evidence in good
faith and with integrity. The exercise of professional judgment allows auditors to obtain reasonable
assurance that any material misstatements or significant inaccuracies in data are likely to be
detected. In this technique, the auditors use either directed sample selection or block sample
selection or haphazard sample selection. The following are the statistical sampling techniques
for the selection of transactions to be audited.
i. Directed Sampling: Selecting items from the population using some pre-specified criteria
(i.e. selecting accounts receivable for confirmation based on amount outstanding).
ii. Block Sample Selection: Selecting items from the population in contiguous groups (blocks)
within the population. Block selection cannot ordinarily be used in audit sampling because
most populations are structured such that items in a sequence can be expected to have similar
characteristics to each other, but different characteristics from items elsewhere in the
population. Although in some circumstances it may be an appropriate audit procedure to
examine a block of items, it would rarely be an appropriate sample selection technique when
the auditor intends to draw valid inferences about the entire population based on the sample.

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iii. Haphazard Sample Selection: Selecting items from the population without considering
known characteristics of the items in the population (i.e. any conscious bias in the selection
of population items).

B. Statistical Sampling is a method for randomly selecting a sample size i.e. in such a way that each
population item has a known probability of being included in the sample (based on laws of
probability). In this technique, the auditors use either random sampling or systematic sampling or
stratified sampling or more complex probability-based sampling methods. The following are the
statistical sampling technique for the selection of transactions to be audited.

i. Random Sampling: Under random sampling, every sample unit of the population has an
equal chance of being selected. To conduct this type of sampling, one can use tools like
random number generators or other techniques that are based entirely on chance. For
example, an auditor wants to select 30% vouchers out of total of 100 vouchers for checking.
Vouchers are numbered from 1 to 100 and the auditor randomly select 30 numbers from 1
to 100 and checks the corresponding voucher. This is the most commonly used sampling
technique. In random sampling, the auditors can use either random number tables or can use
MS Excel to generate numbers for a given population. Under this method, all items in the
population have an equal chance of being selected. Following are the steps involved in
random sampling:
a. Determine the Population: The population (i.e. list of transactions) is the entire set of
data from which the auditor wishes to obtain a sample for audit to reach a conclusion.
The auditor will need to determine that the population from which the sample is drawn
is complete, to meet the Financial Attest Audit objective. It could be list of schemes
implemented by the auditee or transactions incurred under various processes i.e.
Revenue, Establishment Cost, Procurement etc.
b. Ensure Completeness of Data: In this step, the auditor needs to ensure the inclusion
of all the schemes implemented or transactions incurred during the period under audit
in the population, on which sampling procedure has to be performed.
c. Drawing the Sample: After a list of populations has been constructed, various random
sampling options are available. Some common ones include selecting any two months

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of the year, selecting transactions on the basis of narration, selecting transactions of high
value, and selecting transaction of unusual nature.

Systematic Sampling: In systemic selection the number of sampling units in the population
are divided by the sample size to give a sampling interval, for example 50, and having
determined a starting point within the first 50, each 50thsampling unit is selected thereafter.
Although the starting point may be determined haphazardly, the sample is more likely to be
truly random if it is determined by use of computerized random number generator or random
number tables. When using systematic sampling, the auditor would need to determine that
sampling units within the population are not structured in such a way that the sampling
interval corresponds with a particular pattern in the population.

ii. Stratified Sampling: Stratified sampling involves dividing the population into
subpopulations that may differ in important ways. It allows to draw more precise conclusions
by ensuring that every subgroup is properly represented in the sample. Under this technique,
populations is divided into subgroups (called strata) based on the relevant characteristic such
as months, types, or nature of transaction etc. Based on the overall proportions of the
population, one can determine the sample to be selected from each subgroup. After
determining the sample to be selected from each subgroup, we can use random or systematic
sampling to select samples from each subgroup. The Following are the steps involved in
stratified sampling.
a. Creation of Strata: When performing sample selection (i.e. selection of transactions to
be reviewed), the population is often stratified by monetary value. This allows greater
audit effort to be directed to the larger value items, as these items may contain the
greatest potential misstatement in terms of an overstatement. Similarly, a population
may be stratified according to a particular characteristic that indicates a higher risk of
misstatement, for example, when testing the allowance for doubtful accounts in the
valuation of accounts receivable, balances may be stratified by age.
b. Evaluation of the result of each Strata: The results of audit procedures applied to a
sample of items within a stratum can only be projected to the items that make up that
strata. To draw a conclusion on the entire population, the auditor will need to consider
the risk of material misstatements in relation to whatever other strata make up the entire
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population. For example, 20% of the items in a population may make up 90% of the
value of an account balance. The auditor may decide to examine a sample of these items.
The auditor evaluates the results of this sample and reaches to a conclusion on the 90%
of the value and separately for the remaining 10% (on which a further sample or other
means of gathering audit evidence will be used, or which may be considered
immaterial).
c. Combined evaluation of all the Strata to form a conclusion: If a class of transactions
or account balance has been divided into strata, the misstatement is projected for each
stratum separately. Projected misstatement for each stratum is then combined when
considering the possible effect of misstatement on the total class of transactions or
account balances.

iii. Cluster sampling: Cluster sampling also involves dividing the population into subgroups,
but each subgroup should have similar characteristics to the whole sample. Thereafter,
instead of sampling individual items from each subgroup, we can randomly select the entire
subgroups.

67. Although, each method has its own advantages and disadvantages for smooth conduct of Financial
Attest Audit a Random Sampling Technique would be used for extracting the sample transactions to
be audited.

Let’s understand with an example

If the auditor selected audit of XYZ Nagar Nigam and there are 1,000 transactions that occurred during
the period under audit. Now, in this case, if audit team has decided not to check 100% of transactions,
then the audit team should use a random sampling technique for extracting sample transactions to be
audited. The following are the steps involved in extracting the sample for verification:
Step-1 Determine the Population: The audit team primarily extracts data from external applications
linked with the OAMS such as e-GramSwaraj, to decide the population size on which audit sampling will
be performed. There might be an instance wherein a certain specific area, the audit team do not wish to
apply sampling (e.g. audit team may decide to check expenses incurred on salary due to increment 100%,
in such case expenses incurred on salary should be excluded from the overall population).

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Step-2 Ensure Completeness of Data: The audit team will perform validation check to ensure about the
inclusion of entire sets of data on which sampling is to perform sampling. (for example: in case auditee
has taken transactions incurred on procurement from cash book, then the audit team needs to validate the
list of transactions of procurement with procurement register, to ensure whether all the transactions
incurred during the period under audit have been included in the list or not.
Step 3-Drawing Sample: In this step the audit team will extract the number of items to be audited by
considering the following parameters:
➢ Selection of transactions randomly by selecting any two months of the year,
➢ Selection of High value transactions (for example: for selection of transactions under
procurement/ revenue or any other auditing area based on the tolerable limit determined under the
performance materiality (for example Rs. 2,50,000) for selection of transactions. In such case all
account balances whose balance is more than 2,50,000 will form part of the sample population.
➢ Selection of transaction incurred with an inadequate description of expenditure/receipt,
➢ Selection of transactions incurred with a fixed amount every month (for example: Housekeeping
expenses, Rent expenses etc.)
➢ Selection of transaction where any information is missing (such as, name of the party, date etc.)
➢ Selection of transaction based on nature of expenditure (for example: under office expenditure,
select minimum transactions from recurring expenditure such as, electricity and water charges as
these expenses are a necessity of the auditee. On the other hand, select more transactions from
non-recurring expenditure i.e. expenses on purchase of office equipment/ material, expenses on
major repair and maintenance etc.

68. Following are the key points that need to be considered while selecting sample size for Financial Attest
Audit by the audit team.
a. Unusual nature of transactions should be included in the sample (for example, in a procurement
process where generally transactions are ranging between 1 lakh to 5 lakhs but if the auditor finds
that there are transactions of very small amount e.g. Rs. 1000/ Rs.5000, these transactions are
classified as transactions of unusual nature).
b. Transactions of the fixed amount incurred monthly during the entire year should also be enquired
further
c. The sample transactions selected should be representative of the population.

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d. The sample size may be increased post discussion with the HoA, if the audit team finds material
errors, irregularity, or discrepancies during the course of audit.
e. In determining sample size, the audit team presume that there are no errors in the population.
3.8 Audit Evidence

The International Standard on Supreme Audit Institutions (ISSAI) 2500, “Audit Evidence”
explains what constitutes audit evidence in an audit of Financial Statements and deals with the auditor’s
responsibility to design and perform audit procedures to obtain sufficient &appropriate audit evidence to
be able to draw reasonable conclusions to form the auditor’s opinion. This ISSAI is applicable to all the
audit evidence obtained during the course of the audit.
For purposes of the ISSAIs:
➢ Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of the
audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement
and also by the quality of such audit evidence.
➢ Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which the auditor’s opinion
is based.

69. Audit eevidence refers to the data or information used by the auditor to arrive at the audit findings and
conclusions on which the auditor’s opinion is based. Audit evidence includes both information
contained in the accounting records underlying the Financial Statements and other information. The
auditors should obtain sufficient and appropriate audit evidence by performing the compliance and
substantive audit procedures to assist them in drawing a reasonable conclusion based on which they
could provide their opinion on the Financial Statements.
a. Compliance Procedures (also known the test of controls) are designed to test transactions to
obtain reasonable evidence that the internal controls are effective. Refer clause no. 5.6.5 for
further detail.
b. Substantive procedures (also known the test of details) are designed to obtain evidence as to
the completeness, accuracy and validity of the data produced by the Accounting System.
Substantive procedures could be (i) test of details of transactions and balances and (ii) analysis
of ratios and trends. Refer clause no. 5.6.5 for further detail.

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3.8.1 Types of Audit Evidence

70. The audit evidence can be broadly classified based on the source from which it originates, i.e. either
external or internal evidence.
a. Internal Evidence: Internal evidence relates to information that the auditors collect from the
auditee, while performing their audit steps. It is important for the auditors to properly cross-verify
the authenticity and accuracy of evidence when it is collected from the auditee, as such
information has a higher risk of being misrepresented.
b. External Evidence: External evidence relates to information that the auditors collect from
outside of the audit unit, while performing their audit steps. Such evidence could be in the form
of financial information like invoices from the vendor against goods and material supply, bank
balance confirmation etc.
3.8.2 Nature of Audit Evidence

71. The Auditing Standards require that the auditor should obtain competent, relevant and reasonable
evidence to support his judgments and conclusions.
a. Competent evidence: Competent evidence is information that is quantitatively sufficient and
appropriate to achieve the auditing results and is qualitatively impartial such as to inspire
confidence and reliability.
b. Sufficient evidence: Sufficient audit evidence will be obtained if the extent of tests (both
compliance and substantive tests, as may be relevant) are adequate. Although sufficient evidence-
primarily means obtaining of reasonable evidence to reach to the conclusion. This should not be
too little where a conclusion could not be drawn or too much which involve wastage of time and
effort. The question that how much audit evidence is sufficient is a matter of the auditor’s
professional judgments, guided by the generally accepted auditing principles.
c. Reliable evidence: Reliable audit evidence is evidence that is impartial. The reliability of audit
evidence is dependent upon its nature, source and the method used to obtain it. Sometimes,
alternative forms of evidence, sources and methods are available. The following guidelines may
be noted regarding their reliability and the audit team should seek to ensure that the most reliable
sources and methods are employed within the time and cost constraints imposed upon the audit.
• Documentary evidence is more reliable than oral evidence.
• Evidence, of which the auditor has direct personal knowledge, is the most reliable evidence.

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• Independent evidence obtained from external sources is more reliable than internal evidence
(obtained from the audited entity) if that evidence is truly independent and complete.
• Visual evidence is highly reliable for confirming the existence of assets, but not their
ownership or value.
• Evidence drawn solely through examining relationships between figures in the account
(analytical review) is less reliable evidence.
• Oral evidence must be considered as the least reliable. Whenever feasible, auditors should
attempt to obtain documentary confirmation of oral evidence (e.g. agreed written records of
interviews or meetings).
• The reliability of information generated within the auditee entity is a function of the reliability
of internal control systems within the entity.
• Photocopies are less reliable than the originals. The source of photocopies should be identified
by noting the source and, as far as possible, the photocopies should be certified.
d. Relevant evidence: Relevant audit evidence is information that is pertinent to the audit objectives.
The auditor's purpose in obtaining substantive evidence is to frame and express an opinion on the
Financial Statements. Evidence is relevant only if it can be used for this purpose. The general audit
objectives are designed to ensure that the auditor obtains evidence to support all aspects of the
opinion he/she is required to give on Financial Statements. To be relevant, the audit evidence must
relate to the general audit objectives (also called assertions).
e. Reasonable evidence: Reasonable audit evidence is information which is economical i.e.the cost
of gathering such evidence commensurate with the result that the auditor is trying to achieve.
Generally, audit evidence is persuasive rather than conclusive and, for this reason, the auditor
should seek evidence from different sources or of different nature to support the same audit
objective.
3.8.3 Techniques for Collection of Audit Evidence

72. One of the most critical factors of any audit activity is to collect audit evidence in respect of the
function/process/ account that is being audited. Given below are some techniques to facilitate the
collection of information during audits:
a) Interviewing: Interviewing is an effective way of collecting information in respect of possible
important and control deficient areas in the function being audited. The following points need to
be kept in mind with respect to interviewing:

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• Fix a prior appointment: Considering that the auditor shall be meeting with a senior officer
of the respective auditee, he/she should fix up an appointment prior to the meeting date and
ensure that the officer is able to spare the requisite time for the interview.
• Adopt a top-down approach: For the assessment of the control environment, it is necessary
that the auditors adopt a top-down approach, meeting with the functional head and going
down to the officers engaged in the function under audit at the respective location. This
approach leads to better acceptability and wider coverage.
• Keep the questions simple: The auditors should ask general questions, which are open-
ended in nature like the following:
• What are some of the key concerns you have in respect of your function?
• What are the main objectives of the respective ULB and RLB?
• What are the main bottlenecks to these objectives?
• What are some improvements that can be made in the ULB’s/RLB’s functioning?
The above questions encourage the auditee to speak about his function and provide information to
the auditor. (It makes the auditee open and speak to the auditor).
b) Comparative Analysis: This involves comparing of data, sometimes from various sources, to
identify unusual situations or deviation e.g. comparing total collection as per demand and
collection register with the cash book and income reported in the Financial Statements.
c) Analytical review: This involves comparing results such as income, expenses etc., for the same
entity from period to period. This can be used in evaluating changes in results that are dependent
or affected by other factors. For example, if the number of employees has increased from the last
period, the payroll costs should also go up in addition to the normal increase due to pay raise,
inflation, etc. or if the number of taxpayers increases in comparison to the previous year then the
total collection and demand should also be increased.
d) Visual observations: A tour of the facilities of the entity audited may disclose material
weaknesses in the operations. Visual observations also include scanning records and reports for
unusual items.
e) Photographs: Photographs are taken to capture something which the audit team has already
observed. The photos should be conveying and clear. While taking photographs, the auditor shall
inform in writing to auditee that they will be taking photos (need not specify time, date). Photos
should be authenticated by the auditee as far as possible to avoid dispute. Date, time, place to be
recorded on photos.
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f) Physical verification: The audit team should always, in presence of representatives of the auditee,
physically verify the closing balance of cash, items of inventory and fixed assets on a sample basis
and the finding of which should be documented and signed by both the parties.
g) Other types of collecting evidence
• Copy of an external but authoritative record
• Print out of an electronic database/web page
• Extract from an authentic report/book
• Result of a survey conducted by audit/ another agency.
• Analysis of data

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Chapter 4: Audit Life Cycle and Online Audit Management System

73. The components of the Audit Life Cycle for Financial Attest Audit of ULB’s & RLB’s are audit
planning, audit execution, audit reporting, audit follow-up, audit monitoring& quality assurance. The
activities under various stages of the audit life cycle i.e. from audit planning to audit follow and
monitoring shall be conducted through Online Audit Management System (OAMS). The OAMS is a
web application being developed by the
National Informatics Centre (NIC) for the
Directorate of Audit, Government of
Uttarakhand. A brief description of each of the
above audit phases is given below and detailed Financial
Attest Audit
steps involved in each of the above phases has Lifecycle

been elaborated further in subsequent chapters

of this Manual. Refer from Chapter 5 to
chapter 9 for details. The adjacent figures
illustrate the important components of the
Figure 6: Audit Life Cycle
Financial Attest Audit lifecycle.

4.1 Audit Planning and Preparation

74. Planning is an important step to ensure that the engagement is performed in an efficient and effective
manner and that audit risk has been reduced to an acceptable level. The Directorate of Audit shall
establish an overall audit planning that sets the scope, timing and direction of the audit and guides for
the development of the audit plan. The activities involved under this phase are listed below.
 Prepare Overall Annual Audit Plan.
 Allocate Audit Team.
 Allocate Man-days to each Audit Unit.
 Prepare Annual and Quarterly Audit Calendar.
 Intimate Audit Plan to Audit Units and Audit Teams.
 Prepare Audit plan for Individual Audit.

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4.2 Audit Execution

75. Under this stage quarterly audit plans will be executed, and observations are noted through the
systematic application of the audit procedures. This stage also involves the on-field review of the audit
work done to ensure that the conclusions or observations reached are based on facts and necessary
documents have been collected and documented to validate these observations. It also explains the
nature of evidence to be gathered during the execution of the Financial Attest Audit. The activities
involved under this phase are:
 Conduct Fieldwork.
 Organize entry conference meeting with auditee in order to develop coordination between the audit
team and the auditee and finalisation of the audit program.
 Revise Audit planning memorandum as required.
 Distribute work among the team members.
 Perform audit testing based on the audit sampling and materiality.
 Perform controls testing procedures.
 Perform substantive audit procedures and analytical procedures.
 Derive conclusions by evaluating audit findings and evidence.
 Issue half margin memo.
 Exit conference meeting.
 Review and document working papers on OAMS.
4.3 Audit Reporting

76. This phase covers the conversion of half margin memo to audit para based on the reply submitted by
the auditee or in the absence of no reply submitted by the auditee against the half margin memo and
then consequently preparation &submission of Auditors Report. The activities covered under this
phase are as under:
 Conversion of half margin memo to audit para based on the reply submitted by the auditee or in
case of no reply submitted by the auditee.
 Preparation of Financial Attest Audit Report which includes the auditor’s opinion on the Financial
Statements and Detailed Audit Report in the selected cases as mentioned in clause no. 7.2.1.
 Issuance of Audit Report to auditee after review and approval.
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4.4 Audit Monitoring, Follow Up and Compliance

77. It includes audit monitoring and receiving first compliance, sending reminders for not receiving
responses in time, procedure for non-compliance, steps to improve compliances of the Financial Attest
Audit Report by the Auditee.
4.5 Quality Assurance Framework

78. This chapter includes the responsibility of the Supervising Officer to review and submit the
“Quarterly Progress and Performance Report” to DoA in order to prepare the annual training
calendar. This chapter will also include the minimum number of hours of training is required to be
completed by each member of the audit team.

4.6 Overview of Online Audit Management System (OAMS)

79. The Online Audit Management System (OAMS) is a web-based application being developed by the
National Informatics Centre (NIC) for the Directorate of Audit, Government of Uttarakhand. The
objective of OAMS is to systematize the entire audit life cycle starting from audit planning, execution,
reporting, follow-up, compliance, and monitoring through e-management. The current and proposed
function of the OAMS is given below.
Audit Planning

Yes Capture Annual Creating Audit Quaterly Audit Submission of Audit prepration,
Prepare Annual Approval by Intimation of
Audit Program Party & Mapping Schedule Information risk assessment &
Audit Program SF Audit to Auditee
on OAMS to Audit Unit Prepared Sheet by Unit preparation of PM
Reimnder
from director

Yes Yes
Audit Execution

Revenue Drop
Information HMM
Filling of work HMM Team
Exit
Transaction Leader Issue of
Entry Update
distribution selected for Approval HMM Meeting Resolved
Meeting of PM Audit
form
Observation
Convert
HMM
No to Para
Expenditure No
Audit Reporting

Update/Consolidate Paras for preparation Issue of Report with Expression of Opinion to Auditee, Head of
Approved
of Draft FAA report by TL and submission by DD/AO Concerned RLB & ULB
to DD or authorized officer

No
Audit Monitoring

Yes
Complied
& Follow-up

Complaince of Audit Submission of Submission of Annual

Follow up on Satisfactory State Level Audit
observation Complaince data to Response Consolidated Report to
Complaince by DARC review committee
by Auditee DoA Legilative Assembly
Compilation & Reporting
Cordination with Auditee and Head of Concerned RLB/ULB of Non Complied para by
by DoA for complaince No DoA

SF: Secretary Finance TL: Team Leader

PM: Planning Memorandum FAA: Financial Attest Audit
HMM: Half Margin Memo AO: Authorized officer
Current Through
Offline/Proposed DD: Dy Director
OAMS DARC: Departmental Audit Review Committee
DoA: Directorate of Audit

Figure 7: Overview of OAMS

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4.7 Computer Assisted Audit Techniques (CAATs)

80. Computer assisted audit techniques (CAATs) is an IT based audit tool that assists the auditors in
identifying high-risk audit areas and high-risk transactions where population and sample sizes are very
large. CAATs is a generic term used to collectively describe various software-based techniques and
tools viz. IDEA, NT-Auditor, MS-Access etc. used for the analysis of electronic data. The use of
CAATs enhances the efficiency and effectiveness of audit planning and audit execution process as it
enables the auditor to interrogate the entire population of digital data, choose audit samples more
scientifically and perform a wide variety of analyses.

81. Auditors use CAATs for performing various types of data analysis which have been described below:

a. Generation of Control totals and reconciliation of data – Using data analysis software the control
totals of the population can be recalculated and compared with account balances and summarised
figures in the trial balance. Any discrepancy can be investigated further and reconciled. This
procedure additionally provides assurance regarding the completeness and integrity of the data
obtained from the auditee’s computer systems.
b. Duplicate check – Duplicate check assist in identifying gaps in sequences like cheque / EFT
numbers and identify transactions beating duplicate fields
c. Summarisation – Summarising the transactions for different data fields is used to generate sub-
totals which is a useful tool for identifying important sub-classes of transactions for risk assessment
purposes. Summarisation is an important tool for audit as it can be used to segregate the entire
population of financial transactions into various classes and account balances.
d. Interrogation – Using the Equation Editor and the functions, the auditor can build simple to
complex criteria to interrogate the entire population of transactions like payments, journal entries,
user logs etc. in order to identify possible unusual and irregular transactions and misstatements.
e. Stratification – Stratification of the population value helps to identify the distribution of the
monetary value across the various strata. It is an important tool for determining audit strategy for
testing and for the selection of high value items for 100% testing
f. Matching and joining databases – Joining and matching databases enables the auditors to find
exceptional items and compare account balances across different accounting periods. Joining files
is also useful for combining master files and transaction files.
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g. Sampling–Sampling enables the auditor to extract a representative selection of transactions from

the file for audit testing. The various types of sampling supported by CAATs include Systematic,
Random, Stratified, Monetary Unit, Attribute

Note: This section will be further updated post completion of pilot audit and types of CAAT tools selected
by DoA.

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Chapter 5: Audit Planning and Preparation

82. In order to improve the quality of Financial Attest Audit, detailed and well-defined audit planning is
essential. In this stage, each audit unit is planned in a manner to ensure that audits are carried out in an
efficient and timely manner. The planning establishes and documents the overall audit approach, audit
objectives, scope and audit program covering all the audit procedures to be performed.
The ISSAI 2300 “Planning of an Audit of Financial Statements” deals with the auditor’s responsibility
to plan an audit of Financial Statements. Planning an audit involves establishing the overall audit strategy
for the engagement and developing an audit plan. An adequate audit planning benefits in several ways:
➢ Helping the auditor to properly organize and manage the audit engagement so that it is performed in
an effective and efficient manner.
➢ Assisting in the selection of audit team members with appropriate levels of capabilities and
competencies to respond to anticipated risks, and the proper assignment of work to them.
➢ Helping the auditor to devote appropriate attention to important areas of the audit based on the risk
assessment.
➢ Helping the auditor identify and resolve potential problems on a timely basis.
➢ Facilitating the direction and supervision of audit team members and review of their work.

83. Audit planning is the responsibility of the Director of Audit. Following are the key activities to be
undertaken for the preparation of an effective audit plan.

Step 1 • Prepare Overall Annual Audit Plan

Step-2 • Audit Team formation

Step 3 • Allocate Man-days to each Audit Unit

Step 4 • Prepare Annual and Quarterly Audit Calendar

Step 5 • Intimate Audit Plan to Audit Units and Audit Teams

Step 6 • Prepare Audit Plan for Individual Audit

Figure 8: Steps involved in Audit Preparation and Planning

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5.1 Prepare Overall Annual Audit Plan

84. The Financial Attest Audit of all auditable units of ULBs and RLBs will be done annually irrespective
of their size and nature. The Directorate of Audit will establish an overall planning strategy that sets
out the scope, timing, and direction for Financial Attest Audit which would guide for the development
of the annual audit plan. Therefore, updating of audit universe of ULBs and RLBs on yearly basis is
essential in order to prioritize which audit unit to be undertaken for audit on a priority basis, considering
the various factors like regulatory requirements, timelines, and available audit team with the DoA.
Therefore, it is become essential to prepare an overall annual audit plan and then divide this into a
quarterly audit plan for smooth execution of the annual audit plan. This shall be done by following the
steps listed below:
a. The DoA shall prepare the annual audit plan in the first quarter of each audit year on the basis of
Financial Statements prepared and submitted by the ULBs and RLBs before 31 May of the year
while the audit execution will be carried out from the second quarter onward. For the remaining
audit units which have not submitted their Financial Statements within the cut-off date, the annual
plan, as well as quarterly audit plan, will be updated latest by 31 December of the year. The annual
audit plan will include the following details:
 Details of the ULBs and RLBs to be audited (entire universe).
 Audit resources available for Financial Attest Audit for the year.
 Number of man-days allocated for Financial Attest Audit to each ULB/ RLB.
 Total number of resources required for Financial Attest Audit of ULBs/RLBs including the
backlog audit carried forward from the previous period if any.
b. The annual audit plan shall be reviewed and approved by the Director, Audit
c. The approved annual audit plan shall be divided into quarterly audit plans for ease of
implementation, follow up and monitoring.
85. Conducting Financial Attest Audit of all ULBs and RLBs simultaneously may not be possible due to
a large number of auditable units especially in the case of Gram Panchayat. Therefore, it becomes
essential to adopt a mechanism, based on certain predefined parameters called Risk-Based approach
for selection of audit unit which needs to be audited first and auditable units which need to be audited
at a later stage. This risk-based approach would help DoA in selecting high-risk audit units for auditing

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on a priority basis while the medium risk and low risk audit units may be audited at a later stage. This
exercise will be done annually for all ULBs and RLBs separately in order to identify the auditable units
that need to be audited on a priority basis based on the risk profiling done for all auditable units. For
categorization of all auditable units into high, medium, and low, the following steps shall be
undertaken:

Step 1: Select the parameters based on which risk profiling of audit units is to be done

Step 2: Plotting of data against each of the selected parameters

Step 3: Scoring of auditable units based on the plotted data

Step 4: Assigning of weights against each of the assigned score and calculation of weighted
scores for each of the audit unit

Step 5: Calculation of Overall Score

Step 6: Classification auditable units as High, Medium and Low based on the overall score
and prioritization audit units to be audited

Figure 9: Steps included in Annual Audit Planning

Note: The above steps will be done annually at DoA level, considering the Financial Statements prepared
and submitted by the audit unit.

Step 1: Select the parameters based on which risk profiling of audit units is to be done

86. The risk profiling of all auditable unit of ULBs and RLBs shall be done based on the following financial
and non-financial parameters separately.

Parameters Types Name of Parameters Description of Parameters

Financial Parameters Total expenditure (revenue Total expenditure (revenue and capital)
and capital) incurred by the auditee for the Financial Year to
be audited

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Financial Parameters Total Revenue Total Revenue recorded for the Financial Year
to be audited
Financial Parameters Values of paras pending for Total value of pending paras for compliance at
compliance end of the immediately preceding Financial
Year
Non-Financial Number of paras pending Total Number of paras pending for compliance
Parameters for compliance at end of the immediately preceding Financial
Year
Non-Financial Financial Statements Mandatory parameter for selection of audit units
Parameters prepared and submitted to by DoA.
DoA for audit
Non-Financial Number of embezzlement Number of embezzlement paras pending for
Parameters paras pending for settlement at end of the immediately preceding
settlement Financial Year
Table 9: Parameters for Risk Profiling of Auditable Units under ULBs & RLBs

Note: The above parameters are indicative, the DoA may add/delete/modify any of the above parameters
based on the available information and the circumstances of the case in the field.

OAMS Functionality: All the above-mentioned parameters will be made available on OAMS for
selection of audit units to be audited from the total number of available auditable units automatically.
The DoA will have the option to add new parameters and/or delete any of the parameters based on their
professional judgments and past experience.

Step 2: Plotting of data against each of the selected parameters

87. The next important step would be to plot the data for each of these parameters against each of the
auditable unit of ULBs/ RLBs. The data with respect to these parameters will have to be fed on OAMS
for the first time to create master data. Some data against these parameters is already available in
OAMS while some of the data needs to be fed manually from external sources e.g. from e-Gram Swaraj
or any other accounting and reporting software adopted by the ULBs and RLBs.

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Step 3: Scoring of audit units based on the plotted data

88. In this step suitable benchmark value for each of the above-mentioned parameters will be assigned.
The score will be assigned on a scale of 10 for each of these parameters.
OAMS Functionality: Once all the range of values and the respective score are decided and updated
into OAMS master data, the system will automatically calculate the scores against each of these
parameters based on the data plotted for each audit unit.

Step 4: Assigning of weights against each of the assigned score and calculation of weighted scores for
each of the audit unit

89. After assigning the score for each of the selected parameters, the next step would be to assign
appropriate weights against each of the parameters. The assigning of weight will be an administrative
decision and shall be reviewed/revised once in every three years at DoA Level and approved by the
Director, Audit based on the experience gathered from previous year’s Financial Attest Audit. Once the
weight to individual parameters and scores against each of the parameters have been updated in OAMS,
the weighted score for each of the audit units will be calculated by OAMS automatically without any
human intervention.
OAMS Functionality: For the first time these data needs to be updated into the OAMS database and
then the OAMS will automatically calculate the weighted scores without any human intervention.

Step 5: Calculation of Overall Score

90. The overall score for each of the audit unit will be calculated by using the following formula.
SU1 = (P1× W1) + (P2× W2) + ……. + (Pn× Wn)
(W1 +W2 +……. Wn)
Where:
SU1 is Score for selection of auditable unit of the ULB/RLB
Pn is score for variable under respective parameters
Wn is the weight of the respective parameter

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OAMS Functionality: The OAMS will automatically add all the weighted scores of each of the parameters
and then reflect the overall score for each audit unit to be audited.

Step 6: Classification of audit Unit as High, Medium, and Low based on the overall score and
prioritization of audit units to be audited

91. Based on the overall score for each of the audit units, an appropriate range may be taken to classify the
audit unit as High, Medium, and Low. For example, if the overall score is 7 and above the audit unit
will be classified as ‘High’ and if the score is in a range of 4 to 7 then it will be classified as ‘Medium’
and for the units where the overall score is equal to or below 4 then it will be classified as ‘Low’.

92. Accordingly, the auditable units classified as ‘High’ should be planned for audit in second quarter of
the audit year and the auditable units which have been classified as ‘Medium’ and ‘Low’ should be
planned for audit from the third quarter onward based on the available audit team with the DoA.

93. The above process has been summarized as under.

Categorisation of Auditable Units for Planning of Financial Attest Audit

Frequency of Annually
this Activity
Responsibility Directorate of Audit
Activities to be The Directorate of Audit will categorise the auditable units for ULBs and RLBs
taken separately based on the following steps:
Step 1: Risk Profiling, of the auditable units (will be done separately for ULBs
and RLBs) based on the following Financial and Non-Financial Parameters

S. No. Parameter Description of Scoring

Name Parameters Variable Range Score Weig
htage
Financial Parameters:
1 0-5% 3 20%
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Total Total Total 5-10% 6

Expenditur Expenditures in Expenditures >10% 10
es in case case of ULBs or or Total
of ULBs or Total payments Payments of
Total in case of RLBs auditable unit
Payments of the financial divided by
in case of year to be Total
RLBs (both audited. e.g. If Expenditures
revenue Financial Attest in case of
and capital Audit is to be ULBs/Total
expenditur done for FY Payments in
e) 2020-2021 then case of RLBs
Total as the case may
Expenditures/T be(%)
otal Payments
of FY 2020-21
needs to be
considered
2 Total Total Revenue Total Revenue <0% 0
Revenue in in case of ULBs or Gross 0-5% 3
case of or Gross Receipt of the 5-10% 20%
6
ULBs or Receipts in case auditable units
Gross of RLBs of the divided by
Receipts in financial year to Total Revenue
case of be audited. or Gross
RLBs Receipts as the
case may
be(%)
3 Values of Values of paras Value of paras 0 0
paras pending for pending for 0-2L 3

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pending for compliance of compliance for >2L- 6

compliance Financial Attest the respective 10L 20%
Audit at end of auditable unit >10L 10
the immediately
preceding
financial year
Non-Financial Parameters:
4 Number of Total Number No. of paras <0% 3 20%
paras of paras pending for 0-5% 6
pending for pending of compliance as 5-10% 10
compliance Financial Attest % of total no.
Audit for of audit paras
compliance at of all the
end of the ULBs/RLBs at
immediately the state level
preceding
financial year
5 Financial Financial Financial No 0
Statements Statements Statements Yes 10 10%
prepared and prepared and
submitted to submitted by
DoA for the auditee
Financial Attest
Audit
Number of Number of No. of <0% 3
embezzlem embezzlement embezzlement 0-5% 6 10%
ent paras paras pending paras pending 5-10% 10
pending for for settlement at for
settlement end of the compliance as
immediately % of total no.
of

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preceding embezzlement
financial year audit paras of
all
ULBs/RLBs at
the state level
Table 10: Illustrative Parameters for Risk profiling of Auditable units with ranges, scores and weightage

Note:
a. Above parameters has been kept as dynamic
b. In case there is any embezzlement, fraud or misappropriation of funds reported in
any of the auditable unit in the immediately preceding financial year then such
auditable unit will be classified as high-risk audit unit irrespective of the score
calculated above.
c. If the relevant information with respect to the parameters no. 1 & 2, is not
available then the ULBs/RLBs having higher expenditures or Payments and
higher revenue or gross receipts will be given higher weightage.
Step 2: Calculate scores for each of the auditable unit based on the above
parameters:
SU1 = (P1× W1) + (P2× W2) + ……. + (Pn× Wn)
(W1 +W2 +……. Wn)
Where:
SU1 is Score for selection of auditable unit of the ULB/RLB
Pnis score for variable under respective parameters
Wn is the weight of the respective parameter
Step 3: Prioritisation of auditable Units to be audited
Based on the final score calculated in step-2 above, the auditable units within ULBs
and RLBs shall be selected for audit as per:
Particular Category Auditing Criteria
Auditable unit with score more High To be prioritise for audit in
than 7 second quarter of the audit
year

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Auditable unit with score more Medium To be planned for audit from
than 4 but less than or equal to 7 third quarter onward of the
Auditable Unit with score up to 4 Low audit year.
Table 11: Illustrative Matrix for selection of units to be audited based on Risk Profiling

Note 1: The above process would help DoA to prioritise auditable units which need
to be undertaken for Financial Attest Audit on priority basis.
Note 2: The above risk profiling is required to be carried out at Gram Panchayat Level
due to involvement of large numbers of auditable units and low volume of transactions.
Therefore, in case of GP, prioritisation of auditable unit will be done by DoA based
on their professional judgment and past audit experience.

5.2 Allocate Audit Team

94. Allocation of the audit team to each of the audit units will be done at the level of DoA. The selection of
the right audit team is one of the important factors for achieving the objectives of Financial Attest Audit.
The audit team includes 2-3 members, depending on the size and nature of the audit unit led by a team
leader. While allocating the audit team, the preference should be given to the background of the team
members, their past experience, and skillsets. This would improve the effectiveness of the Financial
Attest Audit. The following key considerations must be kept in mind while allocating the audit team
for Financial Attest Audit.
 The team leader and other members should have prior work experience for conducting financial
attest audits.
 As far as possible, the nearest audit unit is assigned to each of the audit teams in order to save time
and cost.
 Further, each audit team member is responsible to comply with ethical requirements including
independence as set out in this Financial Attest Audit manual.

OAMS Functionality: This logic will be built up in OAMS to automatically map the audit team for
Financial Attest Audit. Any change in the structure of the audit team must be approved by the Directorate
of Audit.

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5.3 Allocate Man-Days to each Audit Unit

95. Once the audit team is mapped with the audit unit, the next step is to allocate the number of man-days
required to carry out the Financial Attest Audit. The number of man-days required to carrying out
Financial Attest Audit would be based on the type of audit units(such as Nagar Nigam, Nagar Palika,
Nagar Panchayat, Zilla Panchayat, Kshettara Panchayat, and Gram Panchayat) and their risk rating as
high, medium, and low. The framework for allocation of the number of man-days to each of the audit
units to carry out Financial Attest Audit has been provided below.
S. Tasks Nagar Nagar Nagar Zilla Kshettara Gram
No. Nigam Palika Panchayat Panchayat Panchayat Panchayat**
Parishad
1. Based on the 1 1 1 1 1 1*
information
received through
information sheet
and data extracted
from e-GramSwaraj
or other software
integrated with
OAMS. The audit
team will carry out
data analysis,
prepare the list of
required
information and
finalise the audit
program before
visiting to audit
unit.

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2. Audit execution at 4 3 3 4 1
the field i.e.
verification of
transactions and
collection of
evidence,
assessment of
internal control
environment,
1
issuing of half
margin memo, entry
and exit meeting
and conversion of
half margin memo
into the audit paras
3. Issuance of 2 1 1 1 1
Auditors Report
Total 7 5 4 6 3 1+1
Table 12: Illustrative Matrix for allocation of Man-days for Financial Attest Audit

*40 Gram Panchayat can be planned in a single day.

** In case of gram panchayat, only one audit personal would be allocated.
Note: The above framework for allocation of man-days is indicative which can be modified based on the
requirement, risk rating and past experience gathered from the Financial Attest Audit of ULBs/ RLBs by
the Director, Audit or any officer authorised by the Director, Audit.
OAMS Functionality: The number of days for each type of audit unit as per their risk rating will be pre-
fed into OAMS and then OAMS will automatically allocate the number of man days to each auditable
unit based on its risk rating.

5.4 Prepare Annual and Quarterly Audit Calendar

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96. The DoA has the responsibility to prepare an annual audit calendar covering the following details:
 Name of the audit unit selected for audit.
 Quarter in which actual audit will be performed.
 Details of concerned Supervising Officer to supervise the audit team assigned for conducting
Financial Attest Audit.
 Details of the audit team member assigned to carry out Financial Attest Audit including the name
of the team leader.
 The number of audit teams required for carrying out the Financial Attest Audit.
 The financial year for which Financial Attest Audit is to be conducted.
 Man-days to be allotted for carrying out the Financial Attest Audit.

97. The annual audit plan will be prepared in the first quarter of the audit year. The approved annual audit
plan shall be uploaded on the website of the Directorate of Audit, and on the OAMS. Based on the
annual audit plan, a quarterly audit plan will be prepared by the DoA. Any amendment/change in the
approved annual audit plan as well as in the quarterly audit plan can be done with the prior approval
from Director, Audit.
OAMS Functionality: The OAMS will prepare the annual audit calendar automatically based on the
previous information filled which can be reviewed and modified by the concerned officials of DoA.
5.5 Intimate Audit Plan to Audit Units and Audit Teams

98. Once the annual audit plan and quarterly audit plan is finalized. The quarterly audit plan shall be
communicated to each of the audit units, their HoA, and to the audit team via auto generated emails
from OAMS at least 30 days before the start of the quarter. This will enable to audit unit to arrange
necessary records and in identifying the concerned personnel who is responsible for the smooth conduct
of the Financial Attest Audit. Along with the intimation, Information Sheet will also be sent to the audit
unit which needs to be filled and uploaded by the audit unit on OAMS at least 14 days before the start
of the Financial Attest Audit. Refer to Section12.1.3 of Chapter 12 “Forms, Formats and Audit Check
List, Volume II” for Format of “Information Sheet and Intimation Letter”

99. As soon as the Information Sheet is duly filled and approved by the HoA, the OAMS will send an
intimation automatically to the concerned audit team via email. In case of non-submission of

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Information Sheet by the auditee within the stipulated time, the OAMS will send reminders to the
auditee and to HoA of the concerned ULBs/ RLBs for action. Disciplinary action can also be initiated
U/s 7 of the Uttarakhand Audit Act, 2012 against the concerned officer for non-submission of
Information Sheet intentionally after sending the final reminder.

OAMS Functionality: the approved annual and quarterly audit plans will be uploaded on OAMS. The
audit plan will include all the information such as the name of the audit units selected for audit, financial
year to be audited, name of the audit team members and a number of working days allotted for completion
of the Financial Attest Audit. As soon as approved quarterly audit plan is uploaded on OAMS, , an
intimation shall be sent to the auditee by the OAMS through email. Along with the intimation sheet and
information sheet shall also be sent to the auditee which needs to be filled up and uploaded by the auditee
on OAMS with the approval of the HoA at least 14 days before the start of the audit. Once the information
sheet is approved by the HoA the same shall be intimated automatically to the concerned audit team
through SMS/ email by OAMS. The Auditor can also view his schedule on OAMS and can plan their
visit accordingly. If the auditee doesn’t send the initiation letter in time the OAMS shall send reminders
automatically.

5.6 Prepare Audit Planning for Individual Audit

100. Upon receipt of the Information Sheet from the auditee, the DoA with the help of a group of auditors
shall prepare the individual audit plan. It is the responsibility of DoA to take necessary steps and
prepare an audit execution plan for each of the audit units scheduled for the Financial Attest Audit for
the relevant quarter. The findings noted during the individual audit planning will be communicated to
the concerned audit team members before they proceed for a field visit. Following activities will be
undertaken while preparing an individual audit plan.

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3. Setting of
1. Understand the 2. Understand the
Planning and
Entity and its Financial Reporting
Performance
Environment Framework
Materiality

6. Preparation of 4. Selection of
5. Designing of Significant and Non
Audit Planning
Audit Procedures Significant Account
Memorandum

Figure 10: Steps in Audit Planning at the Unit Level

S. No. Steps to be Undertaken Remarks

I. Understand the audit unit and its This activity will be undertaken at DoA separately
Environment. This include the following. for Nagar Nigam, Nagar Palika Parishad, Nagar
a. Understand the Legal and Regulatory Panchayat, Zilla Panchayat, Kshettara Panchayat
Framework and Gram Panchayat by DoA along with group of
b. Understand the Significant Areas auditors identified for this purpose. The findings of
c. Understand the extent of Computer this activity will be communicated to the concerned
Involvement audit team for their consideration. Refer clause no.
5.6.1 below.
II. Understanding Financial Reporting This activity will be undertaken at DoA level
Framework separately for Nagar Nigam, Nagar Palika
Parishad, Nagar Panchayat, Zilla Panchayat,
Kshettara Panchayat and Gram Panchayat by DoA
along with group of auditors identified for this
purpose. The findings of this activity will be
communicated to the concerned audit team for their
consideration. Refer clause no. 5.6.2 below.
III. Setting of Planning and Performance This activity will be done at DoA level separately
Materiality for Nagar Nigam, Nagar Palika Parishad, Nagar
Panchayat, Zilla Panchayat, Kshettara Panchayat
and Gram Panchayat by DoA along with group of
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S. No. Steps to be Undertaken Remarks

auditors identified for this purpose. The findings of
this activity will be communicated to the concerned
audit team for their consideration. Refer clause no.
5.6.3 below.
IV. Selection of Significant and Non- This activity will be undertaken at DoA level
Significant Account separately for Nagar Nigam, Nagar Palika
Parishad, Nagar Panchayat, Zilla Panchayat,
Kshettara Panchayat and Gram Panchayat by DoA
along with group of auditors identified for this
purpose. The findings of this activity will be
communicated to the concerned audit team
members for their consideration. Refer clause no.
5.6.4 below.
V. Designing of Audit Procedures This activity will be undertaken at DoA level
separately for Nagar Nigam, Nagar Palika
Parishad, Nagar Panchayat, Zilla Panchayat,
Kshettara Panchayat and Gram Panchayat by DoA
along with group of auditors identified for this
purpose. The findings of this activity will be
communicated to the concerned audit team for their
consideration. Refer clause no. 5.6.5below.
VI. Preparation of Audit Planning This activity will be undertaken at DoA level
Memorandum separately for Nagar Nigam, Nagar Palika
Parishad, Nagar Panchayat, Zilla Panchayat,
Kshettara Panchayat and Gram Panchayat by DoA
along with group of auditors. The findings of this
activity will be communicated to the concerned
audit team for their consideration. Refer clause no.
5.6.6 below.
Table 13: Audit Planning for individual unit

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101. The above steps have been described in detail below:

5.6.1 Understand the Audit Unit and Its Environment

102. A detailed understanding of the audit unit and its environment is essential for conducting a Financial
Attest Audit efficiently and effectively. An understating about the auditee would help in designing an
efficient and effective audit approach with the focus on significant areas that may have an impact on
the Financial Statements. Each member of the audit team should have knowledge about the audit unit
and its operations before the start of the Financial Attest Audit. The understanding about the auditee
and its environment would help in:
a) Identifying entity’s risks relevant to financial reporting objectives.
b) Estimating the significance of the risks.
c) Assessing the likelihood of their occurrence; and
d) Deciding about actions to address those risks.

103. The entity’s risk assessment process forms the basis as to how the management determines and
manages the risk. If this process is appropriate to the circumstances, including the nature, size, and
complexity of the entity, it would help in identifying risks of material misstatements whether due to
fraud or error. Appropriateness of risk assessment processes is a matter of professional judgment.
This will be done by reviewing the following areas/ documents of the audit unit.

S. N0. Checkpoint Response

1. Brief background of audit unit, organisation structure and activities undertaken Yes / No
by the audit unit
2. The accounting policies, books of accounts required to be maintained and Yes / No
actually maintained
3. The Accounting treatment for revenues, expenditure, grant received, assets and Yes / No
liabilities created.
4. Charts of accounts, any new heads of account introduced by audit unit since the Yes / No
last audit
5. Source of funding of audit unit Yes / No

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S. N0. Checkpoint Response

6. Main contacts for audit at the audit unit Yes / No
7. Relationship with other audit units / government organizations Yes / No
8. Change that has taken place in previous or is planned to be taken place (like re- Yes / No
organization of a unit/ wing)
9. List of the recipients of services/schemes Yes / No
10. Key members of the audit unit and what are their responsibilities Yes / No
11. Previous years' audit reports and Financial Statements; Yes / No
12. Past audit experience and observations on previous years’ accounts (including Yes / No
transaction audit observations if any);
13. Important points from discussion with management of ULB’s and RLB’s and Yes / No
internal audit personnel;
14. Key focus areas as per act, policy and procedural manuals, internal audit reports, Yes / No
budgets, revised budget and minutes of management meetings; interim
accounts, if any;
15. Key points from Annual Administrative Report of ULB and RLB Yes / No
16. Any other document relevant to the audit. Yes / No
17. Whether any items require exercising of judgment or estimation. Yes / No
18. Whether any new scheme/ services are implemented by audit unit since last Yes / No
audit.
19. Whether account balances, classes of transaction and disclosure expected in the Yes / No
Financial Statements are done appropriately or not
Table 14: Illustrative checklist for understanding audit unit and its environment

OAMS Functionality: Audit team should use the documents uploaded by audit unit on OAMS together
with intimation letter, to gain an understanding about the auditee and its operations.

A. Understand the Legal and Regulatory Framework

104. It is the responsibility of the management to ensure that entity’s operations are conducted in
accordance with the provisions of the applicable laws and regulations. Any breach related to laws and
regulations could have an impact on the Financial Statements including the determination and
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disclosure of material amounts in the Financial Statements. Therefore, the audit team needs to have
an understanding of the legal and regulatory framework of the auditee to be audited. This may include
the following information.
 Any changes in the reporting framework or formats of accounts since the last audit.
 Guidelines/ amendments issued by the regulatory authority for preparation and presentation of
Financial Statements and reporting structure.
 Identify the legislative interest and public interest in the entity and its Financial Statements, in
particular the level of assembly questions, complaints from the public directly or to the public
representatives, and scrutiny of Financial Statements by government and/or legislature.
 Primary and Secondary Legislation (like any Governing Legislation, Financial Rules,
Notification) and any changes since last year audit.
 Any instructions issued by Finance Department or Controlling Department or any changes since
the last year’s audit.

B. Understand the Significant Audit Areas

105. The audit team should analyse and understand the significant audit areas of the Financial Statements.
The significant audit areas are the classes of assets, liabilities, income, and expenditure which have
similar underlying characteristics and transactions stream. The Audit team should obtain an
understanding of the accounting processes, its accounting systems, and the management information
systems. The audit team also needs to understand the nature and accounting treatment for different
types of transactions like Revenue (Tax Revenue, Non-Tax Revenue), Procurement, Establishment
and Revenue expenditure, Grants in Aid, Capital & Revenue Receipts, Fixed Assets / Capital
Expenditure, stores and stock management, Loans and Advances, Investments, schemes, accounting
estimates etc. are happening in the books of accounts.

The definition of significant areas is a matter of professional judgment. However, the following are the
guiding factor for the determination of significant audit areas.
 The significant transaction types or items.
 The accounting and financial reporting process.
 An assessment of the risk and tendency to error for a different type of transactions.
 The control systems followed and in operation in the entity; and

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 The control systems operated for accounting.

106. Understanding significant audit areas would help to carrying out a risk assessment and designing of
audit plan. Below is an example of significant audit areas with respect to the ULBs and RLBs.

A. Significant Audit Areas with respect to Urban Local Bodies

a. Planning and Budgeting: A budgeting process as the toll that supports the allocation of resources
for different operation plans prepared for achieving the strategic goals of the ULBs. Every ULB is
required to prepare an annual budget which should be based on its annual work plan to achieve its
objectives. These include estimation and forecasting, keeping in view the resource required for
implementing the plan. Thus, the annual work plan and the budget should be aligned with the
strategic objectives of the ULBs.

b. Procurement: Procurement is the process of acquisition by way of purchase, lease, license or

otherwise of works, goods, and services, including awarding of Public Private-Partnership projects
by procuring entity whether directly or through an agency with which a contract for procurement
services is entered.
c. Establishment or Human Resource: The establishment is a key function in the ULBs. Following
key tasks are undertaken in the establishment unit.
 Maintenance of service book of employees (includes fixation of pay due to increase in pay
or annual increment etc.), personal files and leave files of the employees,
 Appointments, Transfers, Deployments, contracting of services etc.
 Salary and wage processing,
 Keeping and maintaining records related to Performance evaluation of the staff etc.
d. Accounting (including Cash and Bank): Accounting is the process of recording, analysing,
classifying, summarizing, communicating, and interpreting financial information in aggregate and
in detail reflecting transactions and other economic events involving the receipt, spending, transfer,
usability and disposition of assets and liabilities. The purposes of accounting are:
 To record the financial transactions in a timely, efficient, and reliable manner (e.g. to make
payments, settle liabilities, collect sums due, buy and sell assets etc.) in accordance with
the applicable financial reporting framework.
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 To keep systematic, easily accessible accounting and documentary records as evidence of

past transactions and current financial status, so that detailed transactions can be identified
and tracked, and all aggregates can be conveniently broken down into their constituent
parts.
 To provide periodic Financial Statements and results, containing appropriately classified
financial information, as a basis for (a) accountability and (b) decision-making.
 To maintain financial records suitable for budgetary control, internal control, and the needs
of auditors.
 To provide means for effective management of government assets, liabilities, expenditures,
and revenues.
5
e. The key accounting heads used in the Financial statements of ULBs as per UMAM 2021 has been
provided below in the table:

S. Item Description
No
1. Income & Expenditure
1.1 Income
a) Tax Revenue Fund raised through the various taxes is referred to as tax
revenue such as property tax, water supply and drainage tax,
elementary education tax, scavenging tax, or any other taxes as
applicable from time to time. Tax revenue including surcharge
shall be recognized in the period in which they become due and
demands are ascertainable.
b) Assigned Revenues & Assigned revenues are a share in the revenues of the state
Compensation government, to compensate for certain losses in revenue and
arrangement of resources of the ULBs. The share in revenues is
determined based on the recommendations of the State Finance
Commissions and devolution of funds to ULBs agreed by the
state. Assigned revenues passed on by the Central/

5
Refer UMAM for accounting policies and details on each area of transaction.

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S. Item Description
No
State/Government Agencies to the ULB shall be accounted for
during the year only upon actual receipt. At the year-end these
shall be accrued only if a sanction order is received and the
amount is ascertained and should be disclosed separately in the
notes to accounts.
c) Rental Income from Income accrued and collected by ULBs on account of municipal
Municipal Properties properties rent out/leased out. Revenues in respect of rents from
municipal properties shall be accrued based on the terms of each
agreement.
d) Fees & User Charges It includes various user charges, Licence Fee, building
permission fee, registration fee, development charge,
advertisement fee, etc. The rates shall be charged as per the
relevant bye-laws.
e) Sale & Hire Charges This includes income from sale of products, forms &
publications, stores & scrap etc. and hire charges for vehicles
and equipment.
f) Revenue Grants, Revenue Grant is generally utilised for meeting recurring
Contributions & Subsidies expenditure, the benefits of which usually expire within the
accounting year in which it is incurred. Revenue Grants are
usually in the nature of a subsidy. Untied (General) Revenue
Grants, which are of a revenue nature, shall be recognised as
income on actual receipt. Whereas, a specified revenue grant
shall be accounted as a liability on receipt and will be treated as
income once the specific condition has been fulfilled.
g) Income from Investments Interest/dividend earned on investments made from Municipal
funds, Special Funds and Grants shall be deposited in the
respective Fund bank account. Interest/dividend received on
investments of Special Fund or Grants represents accretion to
the Special Fund or Grant and cannot be utilised for any purpose

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S. Item Description
No
other than for which the Special Fund has been created or Grant
has been received.
h) Interest Earned This includes interest accrued and collected through balances in
bank accounts, interest on loans and advances to employees,
interest on loans to others and other interest.
i) Other Income It includes incomes such as deposits forfeited, lapsed deposits
insurance claim recovery, profit on disposal of fixed assets,
recovery from employees, Unclaimed Refund/Liabilities,
Excess Provisions written back, Miscellaneous Income etc.
Other income, in respect of which demand is ascertainable and
can be raised in the regular course of operations of the ULB,
shall be recognized in the period in which they become due, i.e.,
when the bills are raised.
Other Incomes, which are of uncertain nature or for which the
amount is not ascertainable or where demand is not raised in
regular course of operations of the ULB, shall be recognized on
actual receipt.
1.2 Expenditure
a) Establishment Expenses Establishment expenses include expenses towards salaries and
wages, bonus, pensions etc. and shall be recognized on accrual
basis at the end of each month. Contribution towards
contributory pension fund shall be accounted as and when the
salary expenditure is accrued.
b) Administrative Expenses Include expenses such as rent, rates and taxes, office
maintenance, communication expenses, books & periodicals
printing and stationery, traveling & conveyance, insurance audit
fees etc.
c) Operations & Maintenance Includes expenses towards power & fuel, bulk purchases
consumption of stores, hire charges, repair & maintenance

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S. Item Description
No
d) Interest & Finance Expenses Borrowing costs should be recognized as an expense in the
period in which they are incurred, except to the extent that they
are capitalized.
e) Programme Expenses Expenses towards election expenses own programs, share in
programs of others.
f) Revenue Grants, Includes grants, contributions and subsidies given by the ULBs
Contributions & subsidies
g) Provisions &Write off A provision is the amount of an expense that an entity elects to
recognize, before it has precise information about the exact
amount of the expense. For example, an ULB routinely records
provisions for bad debts on an estimated basis. Normally such
provisions are recognised at the end of financial year.
This also includes various revenue and assets written off.
h) Miscellaneous Expenses This includes expenses such as loss on disposal of assets, loss
on disposal of investments and other miscellaneous expense
i) Depreciation A measure of the wearing out, consumption or other loss of
value of a depreciable asset arising from use, effluxion of time
or obsolescence through technology and market changes. It is
allocated to charge a fair proportion in each Accounting Period
during the useful life of the asset. It includes the amortisation of
assets whose useful life is predetermined and the depletion of
wasting assets. The method adopted for depreciation of assets is
a straight-line method of depreciation, except for leasehold
lands, which are amortized over its leased life. Depreciation
method adopted is same for assets acquired on finance lease.
2. Balance Sheet
2.1 Liabilities
a) Corporation Fund/ Municipal The municipal or general fund is the general operating fund of
Fund a ULB. It is used to account for all financial resources except

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S. Item Description
No
those related to any special or trust funds. The fund is named as
“Corporation Fund” in case of Nagar Nigam, and “Municipal
Fund” in case of Nagar Palika Parishad and Nagar Panchayat.
b) Earmarked Funds Funds representing Special Funds to be utilised for specific
purposes
c) Reserves includes funds towards capital contribution, capital reserve
borrowing redemption reserve, statutory reserve, general
reserve, revaluation reserve etc.
d) Grants, Contributions for Includes capital grants and revenue grants for specific purposes
specific purposes which shall be accounted for in accordance with the condition
attached to it.
e) Secured Loan Represents secured loans availed by ULBs from the State
Government or others such as banks, international agencies etc.
The details of the security shall be provided in the notes to the
accounts. Rate of Interest and the original amount of loan and
outstanding can be provided for every loan category separately
f) Unsecured Loan Represents unsecured loans availed by ULBs from the State
Government or others such as banks, international agencies etc.
Rate of Interest and the original amount of loan and outstanding
can be provided for every loan category separately
g) Current Liabilities and Current liabilities are short-term financial obligations that are
Provisions: due within one year or within a normal operating cycle. Current
• Deposits received Liability includes creditors, loans, deposits and bank overdrafts
• Deposit works which are due for payment in a relatively short period, normally

• Other liabilities (Sundry not more than twelve months.

Creditors)
• Provisions
2.2 Assets

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S. Item Description
No
a) Fixed Assets including Gross Fixed Assets represent those assets of the ULBs, which are
Block, Net Block, Capital meant for use over useful life of assets or further in an extended
Work in Progress period. These are the assets held for providing services and are
not held for resale in the normal course of operations of the
ULBs. A tangible asset held for long term use in producing or
providing goods and services, and which is not held for sale in
the normal course of operations of the ULB is called a fixed
asset.
The fixed assets are shown net of depreciation known as Net
Block (Net Block = Gross Block – Accumulated Depreciation)
b) Investments (General Fund includes investment towards central government securities state
and Other Funds) government securities, debentures and bonds, preference shares,
equity shares, units of mutual funds, other investments etc. from
general funds or other funds
c) Stock / Inventories Stores items (Inventories) are assets (a) In the form of materials
or supplies to be consumed in the production process; (b) In the
form of materials or supplies to be consumed or distributed in
the rendering of the services, (c) Held for sale or distribution in
the ordinary course of operations; or (d) In the process of
production for sale or distribution. Inventories in the local
bodies may include (a) Consumable stores; (b) Maintenance
materials; (c) Spare parts for plant and equipment, other than
those dealt with in standards on Property, Plant and Equipment;
(d) Work-in-progress, including educational/training course
materials; and (e) Property held for sale. The cost of inventories
should comprise all costs of purchase, costs of conversion, and
other costs incurred in bringing the inventories to their present
location and condition. Accordingly, it will include various
expenses like carriage cost, material testing charge, etc.

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S. Item Description
No
d) Sundry Debtors The person from whom amounts are due for goods sold or
(Receivables) services rendered or in respect of contractual obligations. Also
termed as Debtor, Trade Debtor, and Sundry Debtor. The words
'Receivables' and 'Debtors' are used interchangeably. In ULBs
debtors would normally include dues recoverable on account of
property tax, water tax, rents, lease, user fees etc. All the dues
which are pending for recovery at year end should be analysed
and recoverability of the same should be obtained from the
ULB.
e) Prepaid expenses Any expenditure for which the payment has been made in the
current period, but the benefit and/or service is likely to arise in
a future period shall be treated as a prepaid expense in the year
of spending (to the extent does not pertain to the current year
proportionately). Carried forward prepaid expenses shall be
treated as current asset in the year of incurring the expenditure
to the extent related to a future period and will be treated as
revenue expenditure in the period/s in which its benefit arises
and/or services are received in future.
f) Cash and Bank Balances Cash management and banking (Treasury) arrangements are
one of the most fundamental systems operated in the ULB/RLB
and therefore it is the most important asset. The ability to pay
wages, pay suppliers and met expenditures on time depends on
the availability of cash. Further, cash is always treated as most
risky asset which is highly vulnerable to theft, fraud and
corruption, as it can be hard to trace and is easy to spend. It is
therefore of fundamental importance for ULB/ RLB to have
good systems for collecting, managing and disbursing cash and
bank balances in order to ensure that all cash income is

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S. Item Description
No
collected, recorded adequately and promptly banked; and that
suitable banking (Treasury) services are obtained.
g) Loans, advances, and This includes loans and advances given to employees, employee
deposits provident fund loans, loans to others, advance to suppliers and
contractors, advance to others, deposit with external agencies
etc.
h) Other Assets Other assets include deposits works, other assets control
account, miscellaneous expenditure written off.
Table 15: key accounting heads used in the Financial statements of ULBs

B. Significant areas with respect to Rural Local Bodies

I. Planning and Budgeting: A budgeting process is a tool that support the allocation of resources
for different operational plans prepared for achieving the strategic goals of the RLBs. Every RLB
is required to prepare an annual budget which should be based on its annual work plan to achieve
its objectives. These include estimations and forecasting, keeping in view the resources required
for implementing the plan. Thus, the annual work plan and the budget should be aligned with the
strategic objectives of the RLB.
II. Accounting (including Cash and Bank): Accounting is the process of recording, analysing,
classifying, summarizing, communicating, and interpreting financial information in aggregate and
in detail reflecting transactions and other economic events involving the receipt, spending,
transfer, usability, and disposition of assets and liabilities. The purpose of accounting is:
a. To record the financial transactions in a timely, efficient and reliable manner (e.g. to make
payments, settle liabilities, collect sums due, buy and sell assets etc.) in accordance with the
applicable financial reporting framework.
b. To keep systematic, easily accessible accounting and documentary records as evidence of past
transactions and current financial status, so that detailed transactions can be identified and
tracked, , and all aggregates can be conveniently broken down into their constituent parts.
c. To provide periodic Financial Statements and results, containing appropriately classified
financial information, as a basis for (a) accountability and (b) decision-making.

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d. To maintain financial records suitable for budgetary control, internal control, and the needs of
the auditor.
e. To provide means for effective management of government assets, liabilities, expenditures,
and revenues.
III. Cash and Bank: Cash management and banking (Treasury) arrangements are one of the most
fundamental systems operated in the RLBs and therefore it is the most important asset. The ability
to pay wages, pay suppliers and meet expenditure on time depends on the availability of cash.
Further, cash is always treated as risky asset which is highly vulnerable to theft, fraud, and
corruption, as it can be hard to trace and is easy to spend. It is therefore of fundamental importance
for RLBs to have good systems for collecting, managing, and disbursing cash and bank balances
in order to ensure that all cash income is collected, recorded adequately and promptly banked; and
that suitable banking (Treasury) services are obtained.
IV. Establishment(Human Resource): The establishment branch is a key branch in the government
organisation. The establishment branch typically deals with matters related to Human Resources;
Broadly, an Establishment branch performs the following tasks:
a. Maintenance of service book of employees (includes fixation of pay due to increase in pay or
annual increment etc.), personal files and leave files of the employees.
b. Matters related to Appointments, Transfers, Deployments, contracting of services etc.
c. Masters related to salary and wage processing.
d. Ensuring proper records are maintained related to Performance evaluation of the staff etc.
V. Procurement: Procurement is the process of acquisition by way of purchase, lease, license or
otherwise of works, goods, and services, including the award of Public-Private Partnership projects
by procuring entity whether directly or through an agency with which a contract for procurement
services is entered.
VI. Revenue (Tax revenue/Non-Tax revenue): Government revenue is subdivided into two broad
categories which are Tax revenue and Non-Tax revenue.
a. Tax Revenue: A fund raised through the various taxes is referred to as tax revenue such as
license fee etc.
b. Non-Tax Revenue: Public income received through the administration, commercial
enterprises, user charges, gifts, Interest receipts and grants are the source of non-tax revenues
of the RLBs

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VII. Grants in Aid: Grants are assistance by Government (state or central) in cash or kind to an
enterprise for past or future compliance with certain conditions. They exclude those forms of
government assistance which cannot reasonably have a value placed upon them and transactions
with government that cannot be distinguished from the normal trading transactions of the
enterprise.
VIII. Schemes: The RLB undertakes schemes entrusted by the state government or central government
in different sectors to capture new developments and commitments. The State Government is
continuously striving for creating a policy environment that nurtures the private enterprise to
invest in different schemes implemented by the State Government.
IX. Stores and Stock Management: Stores and stocks management process includes aspects such as
controlling and overseeing ordering inventory, storage of inventory, and the issue of inventory. It
is all about having the right inventory at the right quantity, in the right place, at the right time, and
at the right cost.

C. Concept of Accrual Basis of Accounting and Cash Basis of Accounting

a. While analysing the Financial Statements, the audit team needs to understand the basics of accounting
followed by the audit unit in preparation and presentation of the Financial Statements. If the accounts
are prepared on an accrual basis, the underlying characteristics of assets and liabilities would be
different from those prepared on a cash basis. Under cash basis accounting, the revenues and expenses
are recorded only if they are actually received or paid irrespective of the accounting period to which
they belong.
b. While under the accrual basis of accounting, the occurrence of claims and obligations in respect of
incomes or expenditures, assets or liabilities based on happening of any event, the passage of time,
rendering of services, fulfilment (partially or fully) of contracts, diminution in value of assets, etc.
are recorded even though actual receipts or payments of money may not have taken place during that
period. Thus, the transactions with respect to outstanding expenses, prepaid expenses, income
receivable and the income received in advance are shown separately in the books of accounts.
c. Government of Uttarakhand has decided to implement Accrual Based Double Entry Accounting
System (ABDEAS) in all the Urban Local Bodies (ULBs) in the State. Following are the reference
materials with which auditors must be familiarised before the start of the field visit for conducting
Financial Attest Audit:
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Type Reference Material Features

Urban Local Bodies Uttarakhand Municipal The main features of the UMAM are as
Accounting Manual 2021(as under:
amended from time to time)  Accrual based accounting.
 New charts of Accounts.
 Significant Accounting Policies.
 Format of the books of accounts like
cash book, demand and collection
register, PLA etc.
 Standard format for preparation and
presentation of the Financial
Statements including notes to
accounts.
 Accounting estimates.

Rural Local Bodies Simplified, Formats of Account The main features of the Simplified,
for RLBs (Guidelines for Formats of Account for PRIs are as
preparation of Receipts and under:
Payments Accounts)  The accounts are prepared on a cash
basis.
 Daily transaction shall be recorded in
cash book.
 Everyday cash book shall be closed
 At the end of the month bank
reconciliation, treasury reconciliation
should be done and difference
between cash and bank and treasury
balance should be rectified etc.

Table 16: Reference documents and Features for understanding accounting process for ULB & RLB

C. Understand Extent of Computer Involvement

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107. The computer-based systems often form an integral part of the financial control and reporting systems
used by all sizes of audit units. In cases where a detailed review of the IT systems is required, trained
IT audit personnel within the audit team should be involved especially in the cases where the audit
unit has developed a new IT system. For conducting the IT system audit, the principle laid down in
the Information Technology Audit Manual will be referred. The following questionnaire would
help to assess the requirement for an Information Technology audit.

S. No Checkpoint Response
1. Were the following areas related to IT environment reviewed before start of the
Financial Attest Audit
1.1 IT tools/ software used for accounting and recording of transactions Yes / No
1.2 Level of coverage of accounting of transaction within the audit unit/department Yes / No
through IT tools/software
1.3 Input Controls surrounding the entry of data/journal entry through software Yes / No
(Maker, Checker, Approver ), processing controls and output controls
1.4 Disaster recovery plan like back up of the data Yes / No
1.5 Availability of IT user manual Yes / No
1.6 Documentation of IT responsibilities to various users (Maker or Approver) Yes / No
1.7 Existence of any legislation that impacts the need of IT control Yes / No
1.8 Steps undertaken by the audit unit to ensure compliance with the regulatory Yes / No
requirements
1.9 Availability of required tangible and intangible infrastructure at the audit unit. Yes / No
1.10 Polices/matrix related to IT security and password policy Yes / No
1.11 Availability of trained professional on IT tools/software. Yes / No
1.12 Provision of required training and capacity building activities Yes / No
Table 17: Illustrative checklist for understanding the Computer/IT involvement

5.6.2 Understand the Financial Reporting Framework (FRF)

108. A financial reporting framework refers to the set of criteria to determine the measurement,
recognition, presentation, and disclosure of all material items appearing in the Financial Statements
of the audit unit. An acceptable financial reporting framework is a precondition for the Financial
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Attest Audit. The auditor should understand and evaluate the relevant financial reporting framework
which the audit unit will use to prepare and present its Financial Statements. This evaluation would
enable the auditor to conclude whether the financial reporting framework adopted by ULBs and RLBs
is as per the applicable rules, acts, guidelines, manual and in understating with the accounting
methodologies adopted by ULBs and RLBs including the format of the Financial Statements.

5.6.2.1 Financial Reporting Framework of ULBs

109. The ULBs is required to prepare their books of accounts in accordance with Accrual Based Double
Entry Accounting System (ABDES) and present their Financial Statements based on the principles
specified in the updated Uttarakhand Municipal Accounting Manual (UMAM),2021 (as amended
from time to time). The updated UMAM has also defined sets of rules for the measurement,
recognition, preparation, presentation, and disclosure of all material items appearing in the Financial
Statements.

110. The following table provides key concepts related to the Financial Reporting Framework used by the
ULBs for the preparation and presentation of the Financial Statements:

S No Particular Remarks
1. Applicable Accounting Rules/ Policies/ Uttarakhand Municipal Accounting Manual
Manual (UMAM) 2021 (as amended from time to time).
2. Applicability Nagar Nigam, Nagar Palika Parishad and Nagar
Panchayat.
3. Method of Accounting to be followed Accrual Based Double Entry Accounting System.
4. Period for which Financial Statements to Each financial year starting from 1st April and
be prepared ending on March 31st or as directed by the
Government of Uttarakhand.
5. Components of Financial Statements The Financial Statements comprised of:
 Balance sheet.
 Income and Expenditure Account.
 Cash Flow Statement.

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 Notes to Accounts (including Significant

Accounting Policies and Disclosures).
The above components have been briefly explained
at table 20 below.
6. Mode of preparation Presently, ULBs are maintaining books of accounts
in manual form, or in some cases using standalone
accounting software. In future, these could be
maintained in a centralised accounting software
application as approved by the Director, Urban
Development.
7. Signing of the Financial Statements The Financial Statements shall be signed by the
authorized representative of ULB as per the below
matrix:
➢ Nagar Nigam: Commissioner.
➢ Nagar Palika: Executive Officer and CAO or Sr.
AO.
➢ Nagar Panchayat: Executive Officer and CAO
and Sr. AO.
Table 18: Overview of Financial Reporting Framework for ULBs

111. The above-mentioned Financial Statements would be prepared on the basis of the final trial balance
generated by the accounting system. The purpose of preparing a Trial Balance is to determine the
equality of posted debits and credits, and to generate a basic summary of accounts and to facilitate in
preparation of Financial Statements. Each component of the Financial Statements have been
explained below:

Components of Financial Brief Explanations

Statements
Balance sheet Each ULB prepares a Balance Sheet at the end of each accounting
period which reflects the financial position of assets and liabilities of
the ULB as on that particular date. It presents the assets, liabilities,
and reserves of the ULB at the end of the reporting period. The

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Components of Financial Brief Explanations

Statements
details of material items are given in separate schedules attached to
the Balance Sheet.
[refer para 27.5 of the UMAM for details]
Income and Expenditure Each ULB prepares an Income and Expenditure Statement for every
Account accounting period. The Income and Expenditure Statement reflects
the results of the working of the ULB for that period. It shows
incomes earned and expenditures incurred by ULB during the
accounting period with and excess of income over expenditure or
vice-versa for that period. Since, Financial Statements are prepared
on accrual basis, the Income and Expenditure Statement includes all
the income earned during that period whether actually received or not
and all the expenditure incurred during that period whether actually
paid or not. The details of material items are given in separate
schedules attached to the Income & Expenditure Account.
[refer para 27.4 of the UMAM for details]
Cash Flow Statements A Cash Flow Statement is prepared in order to have information
about the cash flows of the ULB. It is useful in providing users of
Financial Statements with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the ULB to utilize
those cash flows. A Cash Flow Statement, when used in conjunction
with the other Financial Statements, provides information that
enables users to evaluate the changes in assets and liabilities of an
ULB, its financial status, and the actual performance in terms of cash
inflows and outflows. The cash flow statement prepared for an ULB
includes the cash flow generated/utilized from operating, investing
and financing activities
[refer para 27.6 of the UMAM for details]
The Notes to Accounts comprised of Statement of Significant
Accounting Principles, Statement on Contingent Liabilities, and

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Components of Financial Brief Explanations

Statements
Notes to Accounts (including other necessary disclosures related to items mentioned in the above
significant accounting policies Financial Statements of the ULB. The Statement of Significant
and disclosures) Accounting Policies list down the details of accounting principles
followed by the ULB in respect of accounting of the transactions and
in the preparation & presentation of the Financial Statements. The
notes to accounts also include the explanations on the figures shown
in the above-mentioned Financial Statements, wherever necessary,
and also includes disclosure of any material fact that has a bearing on
the Financial Statements.
[refer para 27.8 and all respective paragraphs of the UMAM for
details]
Table 19: Components of Financial statements of ULBs

5.6.2.2 Salient Features of Accounting Framework Specified in UMAM for ULBs

112. The accounting framework specified in UMAM for ULBs are as under:
I. Basis of Accounting: The accounts are prepared on accrual basis.
II. Accounting Period: A period of 12 months starting from 1 April and ending on 31 March of the
next year.
III. Historical Cost: The transactions are recorded in the books of accounts with the respective
amounts involved. For example, if an asset is purchased, it is entered in the accounting records
at the price paid to acquire the same and that price is considered to be the base for all future
accounting.
IV. Going Concern: The underlying assumption is that, the ULB will remain in existence for the
foreseeable future.
V. Revenue Recognition: Income in respect of which demands are raised by the ULB are accounted
on an accrual basis as and when they become due. For other income where there is no specific
demand raised, it will be treated on a cash basis. The accounting policies will determine how and
when the revenue will be recognised in the books of account. For example, the property tax is

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accrued at the date prescribed in the ULB’s byelaws, while the rental income is accrued as and
when it becomes due as per the terms of the rental agreement.
VI. Recognition of Expenditure: Expenditure is recognised as they are incurred, for example:
• Establishment expenses are recognized on accrual basis at the end of each month.
Contribution towards contributory pension fund is accounted for as and when the salary
expenditure is accrued.
• Leave encashment, pension (including commuted pension) and gratuity, are reckoned only
upon passing of bills for payment.
• Interest on long term loans has been accounted on annual basis as per the terms of the loan
agreement
• Expenditure on works is accounted on approval of running bills after certification of the
work.
VII. Fixed Assets and Depreciation: Fixed assets are accounted for as under:
• Fixed assets are shown at cost less accumulated depreciation.
• Capital works in progress are transferred to the respective fixed asset accounts as and when
the works are completed.
• Depreciation is charged on fixed assets on Straight Line method at the rates prescribed in the
accounting policy of UMAM..
• Fixed assets costing below Rs. 5,000 are charged to expense.
• Interest on borrowings specifically related to fixed assets is capitalised under the respective
head
VIII. Grants: The accounting for grant will be done in the following manner:
• Specific grants towards revenue expenditure received prior to the incurring of expenditure
are treated as liability till the actual date of incurring of actual expenditure
• Grants received and receivable towards specific revenue expenditure is recognised as income
in the accounting period in which the corresponding revenue expenditure is charged to
Income and Expenditure Account.
• Specific Grants received towards capital expenditure is treated as a liability till such time
that the fixed asset is constructed or acquired. And upon utilisation the same is treated as
capital contribution
• Capital Grants received by the Municipality as a nodal agency or implementing agency for
intended purpose and which does not result in creation of assets with ownership rights for
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the Corporation, are netted against the grant upon utilization. Only the unutilized portion of
such grants, are carried over in the balance sheet as a liability
IX. Investment: Investments are carried at cost. Any permanent reduction in the carrying value of
the investments are provided for.
X. Stores and Spares: Stores and spares are valued at cost based on weighted average method
XI. Disclosures Requirement: To be followed as per UMAM.
XII. PFMS and IFMS: The line ministries/ department utilise this platform to track the fund
provided to implementing agencies and State Government. PFMS is also used for Direct Benefit
Transfer (DBT) payments under notified schemes of the Government of India. Additionally,
Certain expenses are paid through PFMS and IFMS and these expenses need to be consolidated
at the time of preparation of final accounts and special focus to be provided at the time of audit.
XIII. Chart of Accounts: The Chart of Accounts has to be followed as per UMAM.
XIV. Annual Closing: To be followed as per UMAM.
XV. Budget: To be followed as per UMAM.

5.6.2.3 Financial Reporting Framework of RLBs

113. The Technical Committee on Budget and Accounting Standards in the meeting held on 29 January
2009 have approved Simplified Formats of Accounts for PRIs. The following table provides the
key concepts related to the Financial Reporting Framework for RLBs in State of Uttarakhand.
S. No. Particular Remarks
1. Applicable Accounting Rules/ Policies/ Simplified, Formats of Account for PRIs as
Manual approved by Technical Committee on Budget and
Accounting Standards of the Comptroller & Auditor
General of India in 2009.
2. Applicability Zilla Panchayat, Kshettara Panchayat and Gram
Panchayat
3. Method of Accounting to be Followed Cash Basis of Accounting
4. Period for which Financial Statements Each financial year ending on March 31stor as directed
to be prepared by the Government of Uttarakhand
5. Components of Financial Statements The Financial Statements would comprise of:

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S. No. Particular Remarks

 Format I – Annual Receipts and Payments
Account
The above Simplified Formats of Accounts for RLBs
have been briefly explained below.
6. Other Formats as Per Simplified, Apart from the above format, the following 7 formats
Formats of Account for RLBs are also to be prepared by the RLBs; however, this
would not form part of the Financial Statements
but could be considered as subsidiary reports and used
for audit.
 Format II – Consolidated Abstract Register.
 FormatIII–Monthly Reconciliation
Statements.
 Format IV – Register of Receivable and
Payments.
 Format V – Register of Immovable Assets.
 Format VI – Register of Movable Assets.
 Format VII – Inventory Stock Register.
 Format VIII – Register of Demand Collection
and Balance.
The above Simplified Formats of Accounts for RLBs
have been briefly explained below.
7. Mode of preparation To be prepared by RLBs through e-GramSwaraj
application
8. Signing of the Financial Statements The Financial Statements shall be signed by the
appropriate authority as per the below matrix:
➢ Zilla Panchayat: Mukhiya Karyadhikari.
➢ Kshettara Panchayat: Block Development
Officer.
➢ Gram Panchayat: Panchayat Secretary.
Table 20: Overview of Financial Reporting Framework for RLBs

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114. The description of Simplified Formats of Accounts for RLBs which have been prescribed to be
maintained by the RLBs are given below:

Format Name of the Format Description

No
I. Annual Receipts and  Provides a summary of receipts and payments for the selected
Payments Account period under various heads of receipts (Tax and non-tax) and
payments
 Includes both revenue and capital receipts and payments
 Prepared for each month and is consolidated for the year
 To be prepared from the cash book/register of the RLBs. At the
end of each month the totals of Receipts and Payments (up to
object head level) are posted to the Monthly Receipts and
Payments Account.
II. Consolidated Abstract  Provides a two-dimensional month wise and head wise
Register comparison of planned and non-planned payments.
 The Receipts and Payments account is prepared on the basis of
figures in the Consolidated Abstract.
 Prepared for each month and is consolidated for the year

III. Monthly Reconciliation  Provides reconciliation of bank and cash balances with the
Statements monthly receipts and payments
 Prepared on Monthly Basis

IV. Register of Receivable  Provides head of account wise statement of receivables and
and Payments payables at the end of a year
 Maintenance of this format would help in the subsequent switch
over to the modified accrual system of accounting.
V. Register of Immovable  Provides details of the immovable’s assets of the RLBs for a
Assets particular period with details of the cost of acquisitions, details
of the transactions etc.
 Maintenance of this format would help in the subsequent switch
over to the modified accrual system of accounting.

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Format Name of the Format Description

No
VI. Register of Movable  Provides details of the movable assets of the RLBs for a
Assets particular period with details of the cost of acquisitions, details
of the transactions, details of disposal, if any, etc.
 Maintenance of this format would help in the subsequent switch
over to the modified accrual system of accounting.
VII. Inventory Stock Register  Provides details of the balance of different types of inventory
for a month/year maintained at ULBs with entries related to
purchase and issue or sale
 Maintenance of this format would help in the subsequent switch
over to the modified accrual system of accounting.
VIII. Register of Demand  Provides details of the demands, collection, arrears, and write-
Collection and Balance offs of tax revenue for a month/year
 Maintenance of this format would help in the subsequent switch
over to the modified accrual system of accounting.
Table 21: Overview of Simplified Formats of Accounts for RLBs

5.6.2.4 Salient Features of Account Code Specified in Simplified Format of Accounts

115. The Simplified Format of Accounts for RLBs, has classified the accounts code into Major Code,
Minor Code and Object Code. The first four-digit classification in the simplified system is ‘Major
Head’ represents a function enumerated in the 11th schedule of the Constitution. The second three-
digit classification represents the ‘Programme/Unit’ of expenditure and the third tier two digits
represent ‘Object Head’ which represents the items of expenditure. Two-digit standard object code
has been recommended for most commonly used items of expenditure. Also, the RLBs may open
separate Object Head as per requirement under each Minor Head. Additionally, for better planning,
monitoring and decision making, the central scheme has been given distinct two-digit sub heads.
Similarly, the state considering the number of schemes and diversity may use two digits Alpha-
numeric sub heads for state schemes.

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5.6.2.5 Salient Features of Accounting Framework Specified in Simplified Format of Accounts for
RLBS

116. The following accounting framework has been specified by the Simplified Format of Account for
RLBs:
I. Basis of Accounting: The accounts are prepared on a cash basis i.e. a transaction is only recorded
when cash is received or paid.
II. Accounting Period: A period of 12 months normally starting from 1 April and ending on 31
March of the next year.
III. Recording of Transactions: Daily transactions shall be recorded in Cash Book. The receipts
shall be recorded on the receipts side and payments on the payments side. Every day the cash
book shall be closed, and the Closing Balance worked out would then form the Opening Balance
for the next day. Classification/head of account for each transaction shall be clearly mentioned.
Every day the details of transactions as recorded in the cash book should be transferred to either
Register of Receipts if the transaction receipts or to Register of Payments if it is payment under
the respective heads of account.
IV. Month-end closing of Accounts and Reconciliation: At the end of the month the bank
reconciliation and treasury reconciliation should be completed, and it should be ensured that all
differences between cash book and bank and treasury balances are rectified. If any differences
are noticed, the corrections should be made, then and there in the Register of Receipts and
Register of Payments. At the end of the month totals in Register of Receipts and Register of
Payments can be struck. This would give the total expenditure under each head of account for
the month. Where RLBs and Bank/Treasury are computerized, online reconciliation with
Bank/Treasury may be followed.
a. At the end of each month the totals of Receipts and Payments (up to object head level) are
to be posted to the Monthly Receipts and Payments Account.
b. The monthly figure is added to the previous month’s progressive total and the figures up
to the end of the current month can be worked out in the Consolidated Abstract.
V. Annual Closing: At the end of the year the progressive figure to the end of March can be worked
out in the Annual Receipts and Payments Account.
a. After the closing of March Accounts, Reconciliation of Receipts and Expenditure figures
with the Departments (online, where the facility is available) should be carried out to detect
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any misclassification and to clear the unclassified transaction booked in the Suspense
accounts and all transactions appearing as Transfer entries. The final progressive figure
under each head is worked up to the end of March which completes the accounting process
for that year. The Receipts and Payments account is prepared on the basis of figures in the
Consolidated Abstract.
VI. Budget: The Budget of RLBs for the year may be prepared by adopting the classification
prescribed in the Receipts and Payments Account/ List of Codes for functions, programs and
activities prescribed.
VII. Annual Financial Statements: The annual Financial Statements of RLB would include
Format I – Annual Receipts and Payments Account
VIII. Other Registers to be maintained: Register of Receivable and Payable, Register of Movable,
and Immovable property, Register of Inventory, Register of Demand, Collection and Balance
form and integral part of the annual accounts. Maintenance of these registers would help in the
subsequent switch over to the modified accrual system of accounting.

5.6.2.5 Salient Features of e-GramSwaraj Portal (i.e. Accounting and Reporting Software for RLBs)

117. In order to strengthen e-Governance in RLBs across the country, the Ministry of Panchayati Raj
(MoPR) has launched e-GramSwaraj, a user-friendly web-based portal. The e-GramSwaraj is one of
the applications developed as part of Panchayat Enterprise Suite (PES) under e-panchayat mission
mode project of the Ministry of Panchayati Raj (MoPR). The e-GramSwaraj portal is a step to make
RLBs digital and provides a single interface on which the development works will be listed for each
RLB. The portal ensures real time monitoring and accountability. The portal provides RLB wise
records of work from planning to implementation under the development plan. The main features for
the e-GramSwaraj portal are as under:
a. Profile: Maintain the basis profile of the panchayat such as election details, elected
members and committees etc.
b. Planning: Facilitates for creation of plan activities separately e.g. creation of plan activity
as per Gram Panchayat Development Plan. In order to avoid duplicity of work GIS based
activity/ work planning will be done.

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c. Progress Reporting: Record the physical and financial progress of approved activities.
Capture stage wise physical progress for each asset in the activity and capture stage wise
photographs along with geo-coordinates of the assets (i.e. through Geotagging).
d. Finance and Accounting: Facilities the work-based accounting and monitoring of funds
on real time basis through PFMS (real time payment on R-E-A-T module).
e. Assets Directory (Geo Tagging of Assets): Maintain assets details (immovable and
movable assets).

118. The following reports can be generated from e-GramSwaraj:

a. Annual Receipts and Payments Account.
b. Consolidated Abstract Register.
c. Monthly Reconciliation Statements.

119. The following are the features of e-GramSwaraj :

a. The three-tier accounting classification consisting of Major Heads, Minor Heads and Object
Heads are captured by the software. In addition, as defined by CAG in the revised classification,
wherever Central/State scheme activities are to be captured as per the Scheme guidelines, the
software provides for accounting the scheme as a Sub-head under the respective Minor Head.
b. At the time of entering the data of the receipts and expenditure figures into the system, the user
selects the appropriate account heads from the three-tier classification. Once the receipts and
expenditure entries are captured in the system, the software automatically generates the reports
in the revised formats prescribed by the CAG. Since the format allows the user to book
expenditure explicitly under the sub-head provided for the scheme, scheme-wise expenditure
generates automatically.
c. In order to extend flexibility to states which want to retain their own existing classification
relating to the schemes, the software allows mapping of the state-specific classification to the
revised classification proposed by CAG. This enables the panchayats in the states to carry on
with their ongoing accounting classification while at the same time enabling the Government of
India to view the accounting details of the RLBs as per the classification prescribed by the CAG.
d. In view of the high security needs of the accounting system, the software provides a strong
authentication mechanism and also maintains detailed audit logs of all the transactions carried
out through the software.
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120. After obtaining a complete understanding of the entity, its environment and financial reporting
framework as explained in point 5.6.1 & 5.6.2 above, the next step is to identify the processes
involved in the audit unit. This includes routine and non-routine processes undergone by classes of
transactions, account balances and disclosures presented in the Financial Statements in order to
identify the risk of material misstatements. The identification of risk of material misstatements in the
Financial Statements involves professional judgments e.g. while processing payment to the supplier
the following could go wrong.

Payment Process Risk What could go wrong

Processing final payment for Inflated rate in the final invoice Overstatement of
purchase of computer equipment (over and above the quoted rate) Expenditures
Table 22: Identify Material Risk of Material Misstatement

121. Misstatements in the Financial Statements can arise either from fraud or error. The distinction
between fraud and error; is that fraud is caused intentionally while an error is unintentional. Although,
the primary responsibility for the prevention and detection of fraud lies in the management of the
audit unit through implementing and operating an adequate accounting and internal control system.

122. Identifying and assessing the risks of material misstatements provide a basis for designing and
performing further audit procedures at two levels:
a. at the Financial Statements level:
➢ to determine whether the risk of material misstatements relate pervasively to the Financial
Statements as a whole and is not specific to a class of transactions or account balances. This
situation may arise where management override of internal controls process.
➢ deficient control environment.
➢ concern about the integrity of the management and doubt on the availability of sufficient and
appropriate audit evidence.

b. at the assertion level:

➢ to determine the risk of material misstatements on classes of transactions, account balances,

and disclosures (COTABD) and its impact on the preparation and presentation of the
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Financial Statements. At the same time the auditor needs to assess the control risk which
will have an impact on the audit plan to test the operative effectiveness of internal control.
For example.
Risk Control Activity
Travel claim of an employee being paid An independent check should be performed of standard
at incorrect rates. data (e.g. government approved travel claim rates) to
travel claim processed by an employee.
Table 23: Risk of Control Activity

123. In the following situation the possibility for risks of material misstatement is greater. Therefore, a due
consideration should be taken while preparing the audit plan.
S. No. Questions Analysis
1. Greater management intervention to specify the accounting treatment
2. Greater manual intervention for data collection and processing of data
e.g.new systems, systems requiring a significant level of manual
intervention.
3. Complex calculations or accounting principles e.g.this may occur either
due to a misunderstanding or a misinterpretation of the regulation or
through simple error in application.
4. Non-routine transactions, which may make it difficult to implement
effective controls
5. Significant judgmental matters that require the development of
accounting estimates e.g. any estimates rarely be conclusive and require
involvement of judgment which may be subjective therefore carrying high
risk
6. Significant related-party transactions, e.g. unusual related party
transaction may carry higher risk
7. Transactions that are outside the normal course of entity’s activity or
appear to be unusual e.g. Transactions not in the normal course of
business and/or exceptional transactions may carry higher risk.

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8. Recent significant developments (e.g. accounting reforms, political or

economic instability, new contract arrangements of significant amount,
etc.) that require specific attention to the risk
Table 24: Risk Analysis

The following information may be useful for conducting Risks Assessment:

 Past audit experiences, audit observations of the previous audits and pending audit paras yet to
comply.
 Financial problems are being faced by the entity.
 Any new activities were undertaken during the period under audit.
 Effectiveness of internal controls and management’s response to any weaknesses in internal
controls.
 The complexity of accounting principles and calculations, any judgment involved.
 The complexity of operations and underlying regulations/ regulatory environment.
 Susceptibility of assets to material fraud/misappropriation.
 Competencies of Staffs especially accounting personal and frequencies of changes in last three
years and reason for such changes.
 The track record in the production of records of the audited unit or non- preparation of records.
 Any complaints about the audit unit.
 Any newspaper/other media information about the audit unit in the last year.
 Nature and complexity of accounting process and use of IT in accounting; a mix of IT and
manual controls in place; accounting policies and changes to accounting policies.
 Other Risk Indicators like Expenditure trends, Persistent and unexplained excess drawls,
Unadjusted account bills, Transfers to Personal Ledger Accounts etc.
 Expenditure trend in last three years.
 Persistent and unexplained budget problems and excess spending.
 Transfers to Personal Ledger Accounts.
 Unadjusted bills.
 Large purchase

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5.6.3 Setting of Planning and Performance Materiality

.
124. After understanding audit units and their environment and financial reporting framework, next step
is to set the planning materiality and performance materiality as described in Section 3.5 under
chapter-3 “Basic Principles and Concepts of Auditing”.

a. Planning Materiality

125. Planning materiality has an impact while framing an opinion on the Financial Statements at the
reporting stage. The main aim to determine the planning materiality is to ensure that any misstatement
below this materiality level will not affect the presentation of the Financial Statements and it will not
affect the financial decision of the users made on the basis of the audited Financial Statements. As
the materiality is determined by using professional judgment and prior experience. Therefore, it
becomes essential to DoA to document the basis of the factors on which planning materiality has been
considered for that particular year. Refer to point 3.5.1 “Planning Materiality” under Chapter -3
“Basic Principles and Concepts of Auditing”.

b. Performance Materiality

126. The auditor should determine performance materiality for the purposes of assessing the risks of
material misstatements and in determining the nature, timing, and extent of further audit procedures.
Application of Performance Materiality at the account or balance level is used to determine:
 The account areas that are significant,
 Sample sizes for the transaction to be audited
 The starting point for identifying key items, testing scopes and thresholds
 The starting point for establishing variance threshold when performing substantive analytical
procedures. Refer to point 3.5.2 “Performance Materiality” under Chapter-3 “Basic Principles
and Concepts of Auditing”.

5.6.4 Selection of Significant and Non-Significant Account Areas

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127. Significant accounts areas are those account areas that significantly impact the Financial Statements
of the audit unit for which the auditor must obtain sufficient, relevant and reliable audit evidence. If
the audit team focuses on account areas that do not have a significant impact on the Financial
Statements (i.e. non-significant accounts) it would result in over auditing and inefficient utilisation
of audit resources. However, for account areas that are non-significant, audit team should
perform analytical procedures. Therefore, identification of significant account areas and non-
significant account areas is essential part of the audit planning to ensure that the Financial Attest
Audit is effective and efficient.

128. Identification of non-significant account areas is usually dependent upon analysing audit areas into
their smaller constituent parts. This analysis is done on the basis of materiality by value, materiality
by nature and materiality by context as explained in clause no. 3.5 under Chapter 3. For
identification of significant and non- significant account areas the auditor should use object code/trial
balance as the base documents. The auditor should be careful to consider the aggregate value of all
non-significant audit areas in relation to materiality. In all cases it is essential that the audit file
contains lead schedules that clearly demonstrate that the amounts being audited are in agreement with
the Financial Statements.

129. The audit team should ensure the following.

 All account areas have been assessed into significant and non-significant account areas to the
Financial Statements.
 This analysis should be done based upon materiality by value.
 The results of auditor understanding on entity’s control environment should also be consider for
this assessment.

130. After classification of accounting areas into significant account and non-significant accounts, the next
step is to classify the risk associated with each of the significant accounting area as high risk, medium
risk and low risk as explained below. The decisions about nature, extent and direction of audit tests
depend upon an assessment of the risk of material error or irregularity occurring (inherent risk); and
the risk that the entity’s controls cannot detect the irregularities in a timely manner (control risk).
Refer Clause No. 3.6 “Risk Model and Materiality” under Chapter-3 “Basic Principles and
Concepts of Auditing”.
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131. Based on risk assessment, the auditor should design audit procedures so as to have a reasonable
expectation of detecting and evaluating material misstatements and irregularities arising due to fraud
or error. Once all the inherent risk of misstatements has been identified, it is important to review them
and focus on those that will have the greatest impact on the accounts and on the Financial Statements.

132. The steps for classification of significant accounting areas as high, medium, and low have been
summarised below:
Step-1: Take the Object Code/Trial Balance of ULB and Receipts and Payments Account of RLB.
Step-2: Determine the performance materiality as explained in clause no. 3.5.2 under Chapter-3.
Step-3:Identify the significant account areas, this is the account or group of accounts whose closing
balance is more than the performance materiality.
Step-4: Identify the non-significant account areas, this is the account or group of accounts whose
closing balance is equal to or less than the performance materiality.
Step-5:Classification of each identified significant account as mentioned in step-3 above would be
done into high, medium, and low based on the guidance provided in para no. 131 below.

133. The guidance for classification of significant account areas as High, Medium, and Low risk is
provided below. This classification would be done separately for each significant account head based
on their respective nature i.e. revenue, expenditure, assets, or liability.

A. For Urban Local Bodies

S. Significant High Risk Medium Risk Low Risk

No. Transactions
1. Revenue
1.1 Own Source Demand collection and DCB register updated DCB maintained in the
Revenue-Tax balance (DCB) register but not maintained in the prescribed format and
(like property not maintained/ prescribed Format as all demand and receipts
tax) provided or delayed as specified in UMAM till last FY has been
updated.

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
per the previous year’s 2021(as amended from
audit report. time to time)
Debtors’ balance as per Paras relating to errors
DCB and as per in preparation of
accounts department demand collection and
remain un-reconciled. balance register like
overwriting, strike off,
etc. found in the
previous year’s audit
report
Where current year’s Where current year’s Where current year’s
Own Sources Revenue Own Sources revenue Own Sources revenue
Tax for selected head is Tax for selected head is Tax for selected head is
more than 15% of the more than 5% but not not more than 5% of the
Total Revenue of ULB. more than 15% of the total Revenue of ULB.
Total Revenue of ULB.
If more than 50% of If 20% to 50% of If less than 20% of
revenue is collected in revenue is collected in revenue is collected in
cash cash cash
Where there is Where there is a Where there is a
significant variation in variation in the selected variation in the selected
the selected tax revenue tax revenue head by tax revenue head up to
head by more than 30% more than 10% but not 10% in the current year
in the current year as more than 30% in the as compared to
compared to previous current year as previous year.
year. compared to previous
year.
Subsidiary register Subsidiary register Subsidiary register
(receipt books, (receipt books, (receipt books,

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
collection files etc.) collection files etc.) collection files etc.) are
were not maintained or updated but not maintained and updated
delayed as per previous maintained in the as per prescribed
year’s audit report prescribed formats as formats as specified in
specified in UMAM 2021
UMAM2021
1.2. Own Source Demand and collection Demand and collection Demand and Collection
Revenue- Non- register not maintained/ register not maintained register maintained as
Tax (like rent, provided or delayed as in prescribed formats as per format and all
interest, licensee per the previous year’s specified in UMAM demand and receipts till
fee etc.) audit report. 2021 last FY has been
Debtors’ balance as per Paras relating to errors updated.
DCB and as per in preparation of
accounts department demand collection and
remain un-reconciled. balance register like
overwriting, strike off,
etc. found in the
previous year’s audit
report
Where current year’s Where current year’s Where current year’s
Own Sources Non-Tax Own Sources Non-Tax Own Sources revenue
revenue for selected revenue for selected Non-Tax for selected
head is more than 15% head is more than 5% head is not more than
of the Total Revenue of but not more than 15% 5% of the total Revenue
ULB. of the Total Revenue of of ULB.
ULB.
If more than 50% of If 20% to 50% of If less than 20% of
revenue is collected in revenue is collected in revenue is collected in
cash cash cash

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
Where there is Where there is a Where there is a
significant variation in variation in the selected variation in the selected
the selected non- non-tax revenue head by non-tax revenue head
revenue head by more more than 10% but not up to 10% in the current
than 30% in the current more than 30% in the year as compared to
year as compared to current year as previous year.
previous year. compared to previous
year.
Subsidiary register Subsidiary register Subsidiary register
(receipt books, (receipt books, (receipt books,
collection files etc.) collection files etc.) collection files etc.) are
were not maintained or updated not maintained maintained and updated
delayed as per previous in the prescribed Form in the prescribed Forms
year’s audit report and Format. and Format.
1.3 Assigned Variation in Assigned Variation in Assigned Variation in Assigned
Revenue Revenue receipts is Revenue receipts is Revenue receipts is up
more than 30% in more than 10% but less to 10% in current year
current year as than 30% in current year as compared to
compared to previous as compared to previous previous year.
year. year.
Assigned Revenue Irregularities noted in There was no
mentioned in the accounting of Assigned irregularity noted in
Government Order Revenue as per accounting of Assigned
(G.O) is not accounted previous year audit Revenue as per
in the books of accounts. report. previousyear audit
report.
1.4 Grant in Aid Grant Register as Grant Register Grant register
prescribed under rules is maintained but not in the maintained as per
not maintained as per prescribed Format as per Format and all demand

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
Previous Year audit Previous Year audit and receipts till last
report. report. financial year has been
Paras relating to errors updated.
in preparation of Grant
Register like
overwriting, strike off,
etc. found in previous
year audit report.
Grant receipt for the Grant receipt for the Grant receipt for the
selected head is more selected head is more selected head is up to
than 15% of the total than 5% but less than 5%of the total revenue
revenue of the current 15% of the total revenue of the current year.
year. of the current year.
Variation of more than Variation of more than Variation of up to 10%
30% in selected grant 10% but less than 30% in selected grant receipt
receipts in current year in selected grant receipts in current year as
as compared to previous in current year as compared to previous
year. compared to previous year.
year.
Subsidiary register Subsidiary register Subsidiary register
(receipts books, expense (receipt books, expenses (receipt books,
register, utilization register, utilization expenses register,
certificate etc.) not certificate etc.) updated Utilization Certificate
maintained or delayed as but not maintained in the etc.) are maintained and
per previous years audit prescribed Forms and updated in the
report. Format. prescribed Forms and
Format.
2. Expenditure

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
2.1 Establishment Variation in Variation in Variation in
Expenditure establishment establishment establishment
(like salary, TA, expenditure by more expenditure by more expenditure up to 10%
MA, service than 30% in current year than 10% but not more in current year as
book, etc) as compared to previous than 30% in current year compared to the
year. as compared to the previous year.
previous year.
If Establishment Establishment Establishment
expenditure is more than expenditure is 5% to expenditure is up to 5%
15% of the total 15% of the total of the total expenditure
expenditure of current expenditure of current of current year.
year. year.
Subsidiary registers Subsidiary register (Pay Subsidiary register (Pay
(Pay posting register, posting register, TA and posting register, TA and
TA and MA register MA register etc.) not MA register etc.)
etc.) not maintained or maintained in the maintained and updated
delayed as per previous prescribed formats or as per prescribed
year audit report. Paras relating to errors Format.
in preparation of records
like overwriting, strike
off, etc. found in
previous year audit
report.
2.2 Work, Contract Procurement procurement procurement
and expenditure is more than expenditure is 5% to expenditure is up to 5%
Procurement 15% of total expenditure 15% of total expenditure of total expenditure
Expenditure during current the year. during current the year. during current the year.
Variation in works/ Variation in the Variation in works/
procurement procurement procurement

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
expenditure by more expenditure by more expenditure up to 10%
than 30% as compared than 10% but not more as compared to the
to the previous year than 30% as compared previous year
expenditure. to the previous year expenditure.
expenditure.
Measurement Book and Measurement Book and Measurement Book and
Subsidiary registers Subsidiary register Subsidiary register
(works files, contractor (works files, UCs, (works files, UCs
register, advances supporting documents supporting documents
register, deductions etc.) not maintained in etc.) maintained and
register, UCs, the prescribed formats updated as per
supporting documents or Paras relating to prescribed format.
etc.) not maintained or errors in preparation of
delayed as per previous records like overwriting,
year audit report. strike off, etc. found in
previous year audit
report.
2.3 Office Variation in office Variation in the office Variation in office
Expenditure expenditure by more expenditure by more expenditure up to 10%
(like printing and than 30% as compared than 10% but not more as compared to the
stationary, repair to the previous year than 30% as compared previous year
and expenditure. to the previous year expenditure.
maintenance, expenditure.
etc.) Office expenditure is Office expenditure is Office expenditure is up
more than 15% of the between 5% to 15% of to 5% of the total
total expenditure of the total expenditure of expenditure of current
current year current year year
Related records/ Related records/ Related records/
registers not maintained registers not maintained/ registers maintained

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
or delayed as per provided as per Previous and updated as per
Previous Year audit Year audit report per prescribed forms and
report. prescribed forms and format.
formats or
Paras relating to errors
in preparation of records
like overwriting, strike
off, etc. found in
Previous Year audit
report.
2.4 Other Variation in other Variation in the other Variation in other
Expenditure expenditure by more expenditure by more expenditure up to 10%
(like electricity, than 30% as compared than 10% but not more as compared to the
water, telephone to the previous year than 30% as compared previous year
expenses, etc) expenditure. to the previous year expenditure.
expenditure.
Other expenditure is Other expenditure is Other expenditure is up
more than 15% of the between 5% to 15% of to 5% of the total
total expenditure of the total expenditure of expenditure of current
current year. current year. year.
Related records/ Related records/ Related records/
registers not maintained registers not maintained/ register maintained and
or delayed as per provided as per previous updated as per
previous year audit year’s audit report in the prescribed Forms and
report. prescribed Forms Format.
&Format or Paras
relating to errors in
preparation of records
like overwriting, strike

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
off, etc. found in
previous year audit
report.
3. Assets
3.1 Capital Significant addition Significant addition Addition (up to 10%) in
Expenditures (more than 30%) in (10% to 30%) in current current year as
current year as year as compared to compared to previous
compared to previous previous year. year.
year.
Deletion is more than Deletion is 10% to 30% Deletion is 5% to 10%
30% of the total of the total expenditure of the total expenditure
expenditure of current of current year. of current year.
year.
Related records/ Related records/ Related records/
registers not maintained registers not maintained/ register maintained and
or delayed as per provided as per Previous updated as per
previous year audit Year audit report per prescribed forms and
report. prescribed Forms and format.
Format. Paras relating to
errors in preparation of
records like overwriting,
strike off, etc. found in
previous year audit
report
There was irregularity There was irregularity of There was no
under serious audit paras under non- serious audit irregularity noted as per
noted as per previous paras noted as per previous year audit
year audit report. previous year audit report.
report.

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
3.2 Other Assets Variation in assets by Variation in assets Variation in Assets up
(Other than more than 30% in between 10% to 30% in to 5% in current year as
Fixed Assets) current year as current year as compared to previous
compared to previous compared to previous year.
year. year.
Related records/ Related records/ Related records/
registers not maintained registers not maintained/ register maintained and
or delayed as per provided as per Previous updated as per
previous year audit Year audit report per prescribed Forms and
report. prescribed Forms and Format.
Format.
Paras relating to errors
in preparation of records
like overwriting, strike
off, etc. found in
previous year audit
report
There was irregularity There was irregularity of There was no
under serious audit paras under non- serious audit irregularity noted as per
noted as per previous paras noted as per previous year audit
year audit report. previous year audit report
report.
3.3 Investment Variation in value of Variation in value of Variation in value of
investment by more than investment between Investment up to 5% in
30% in current year as 10% to 30% in current current year as
compared to previous year as compared to compared to previous
year. previous year year
Variation in income Variation in income Variation in income
from investment by from investment from Investment up to

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
more than 30% in between 10% to 30% in 5% in current year as
current year as current year as compared to previous
compared to previous compared to previous year
year. year
Specific fund was Irregularity in making Investment was made in
invested without investment were accordance with
obtaining approval from reported in the Previous guidelines specified in
the Finance Department. Year audit report. i.e. the UMAM
investment was not
made in accordance with
guidelines specified in
the UMAM
Related records/ Related records/ register Related records/
registers not maintained maintained. However, register maintained and
or delayed as per Paras relating to errors updated in the
Previous Year audit in preparation of records prescribed Forms and
report. like overwriting, strike Format.
off, etc. found in
previous year audit
report
There was irregularity There was irregularity There was no
under serious audit paras under non- serious audit irregularity noted as per
noted as per paras noted as per previousyear audit
previousyear audit previousyear audit report.
report. report.
4. Liabilities
4.1 Other liabilities Variation in liability by Variation in Liability Variation in Liability
more than 30% in between 10% to 30% in up to 5% in current year
current year as current year as

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
compared to previous compared to previous as compared to
year. year previous year
Related records/ Related records/ Related records/
registers not maintained registers not maintained/ register maintained and
or delayed as per provided as per Previous updated as per
previous year audit Year audit report per prescribed Forms and
report. prescribed Forms and Format.
Format. Paras relating to
errors in preparation of
records like overwriting,
strike off, etc. found in
previous year audit
report.
There was irregularity There was irregularity of There was no
under serious audit paras under non- serious audit irregularity noted as per
noted as per previous paras noted as per previous year audit
year audit report. previous year audit report.
report.
4.2 Capital Grant Grant Register Grant Register Grant register
prescribed under rules is maintained but not in the maintained in the
not maintained as per prescribed Forms and prescribed Forms and
previous year audit Format as per previous Format were
report. year audit report. maintained.
Paras relating to errors
in preparation of Grant
Register like
overwriting, strike off,
etc. found in previous
year audit report.

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
Segregation of Segregation of Segregation of
combined grant into combined grant into combined grant into
capital and revenue is capital and revenue is capital and revenue is
not done not properly done as per UMAM
Variation of more than Variation of more than Variation of up to 10%
30% in selected grant 10% but less than 30% in selected grant receipt
receipts in current year in selected grant receipts in current year as
as compared to previous in current year as compared to previous
year. compared to previous year.
year.
Subsidiary register Subsidiary register Subsidiary register
(receipts books, expense (receipt books, expenses (receipt books,
register, utilization register, Utilization expenses register,
certificate etc. not certificate etc.) updated Utilization Certificate
maintained or delayed as but not maintained in the etc.) are maintained and
per previous years audit prescribed Forms and updated in the
report. Format. prescribed Forms and
Format.
Table 25: Classification of Transactions for ULBs

Note 1: The above classification of transactions ae not applicable for the Inherent Risk type of transaction
e.g. cash and bank balance.
Note 2: The above classification of the transaction is based on professional judgments and are dynamic in
nature.
Note 3: If any fraud, embezzlement were noticed with respect to any transaction or class of transaction in
the previous year’s audit then it will be classified under high risk category without applying the above
guidelines.
Note 4: Current Year means the financial year for the which the Financial Attest audit of the Financial
Statements is being carried out whereas Previous Year means the immediately preceding financial year to
Current Year

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B. For Rural Local Bodies

S. Significant High Risk Medium Risk Low Risk

No. Transactions
1. Receipts
1. Receipts
1.1 Own Source Demand collection and DCB register updated DCB maintained as per
Receipts-Tax balance (DCB) register but not maintained in the format and all demand
(like property not maintained/ prescribed Forms and and receipts till last FY
tax) provided or delayed as Format. Paras relating has been updated.
per the previous year’s to errors in preparation
audit report. of demand collection
Debtors’ balance as per and balance register like
DCB and as per overwriting, strike off,
accounts department etc. found in the
remain un-reconciled. previous year audit
report.
Where current year’s Where current year’s Where current year’s
Own Sources Receipts Own Sources receipts Own Sources receipts
Tax for selected head is Tax for selected head is Tax for selected head is
more than 15% of the more than 5% but not not more than 5% of the
Total receipts of RLB. more than 15% of the total Receipts of RLB.
Total receipts of RLB.
If more than 50% of If 20% to 50% of If less than 20% of
receipts is collected in receipts is collected in receipts is collected in
cash. cash. cash.
Where there is Where there is a Where there is a
significant variation in variation in the tax variation in the tax
the tax receipts by more receipts by more than receipts up to 10% in
than 30% in the current 10% but not more than the current year as

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
year as compared to 30% in the current year compared to previous
previous year. as compared to previous year.
year.
Subsidiary register Subsidiary register Subsidiary register
(receipt books, (receipt books, (receipt books,
collection files etc.) collection files etc.) collection files etc.) are
were not maintained or updated but not maintained and updated
delayed as per previous maintained in the as per prescribed Forms
year’s audit report prescribed Forms and and Formats.
Format.
1.2. Own Source Demand and collection Demand and collection Demand and Collection
Receipts- Non- register not maintained/ register not maintained register maintained in
Tax (like rent, provided or delayed as in prescribed Forms and the prescribed Forms
interest, licensee per the previous year’s Format. and Format and all
fee etc) audit report. Paras relating to errors demand and receipts till
Debtors’ balance as per in preparation of last FY has been
DCB and as per demand collection and updated.
accounts department balance register like
remain un-reconciled. overwriting, strike off,
etc. found in the
previous year’s audit
report
Where current year’s Where current year’s Where current year’s
Own Sources Non-Tax Own Sources Non-Tax Own Sources receipts
receipts for selected receipts for selected Non-Tax for selected
head is more than 15% head is more than 5% head is not more than
of the Total Receipts of but not more than 15% 5% of the total Receipts
RLB. of the Total Receipts of of RLB.
RLB.

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
If more than 50% of If 20% to 50% of If less than 20% of
receipts is collected in receipts is collected in receipts is collected in
cash cash cash
Where there is variation Where there is a Where there is a
in the selected non- variation in the selected variation in the selected
receipts head by more non-tax receipts head by non-tax receipts head
than 30% in the current more than 10% but not up to 10% in the current
year as compared to more than 30% in the year as compared to
previous year. current year as previous year.
compared to previous
year.
Subsidiary register Subsidiary register Subsidiary register
(receipt books, (receipt books, (receipt books,
collection files etc.) collection files etc.) collection files etc.) are
were not maintained or updated not maintained maintained and updated
delayed as per previous in the prescribed Forms in the prescribed Forms
year’s audit report and Format.. and Format. .
1.3 Assigned Variation in Assigned Variation in Assigned Variation in Assigned
Revenue Revenue receipts is Revenue receipts is Revenue receipts is up
more than 30% in more than 10% but less to 10% in current year
current year as than 30% in current year as compared to previous
compared to previous as compared to previous year.
year. year.
Assigned Revenue Irregularities noted in There was no
mentioned in the accounting of Assigned irregularity noted in
Government Order Revenue as per accounting of Assigned
(G.O) is not accounted. Previous Year audit Revenue as per
report. Previous Year audit
report

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
1.4 Grant in Aid Grant Register as Grant Register Grant register
prescribed under rules is maintained but not in maintained in the
not maintained as per accordance in the prescribed Forms and
Previous Year audit prescribedForms and Format and all demand
report. Format as per Previous and receipts till last FY
Year audit report. has been updated.
Paras relating to errors
in preparation of Grant
Register like
overwriting, strike off,
etc. found in Previous
Year audit report.
Grant receipt for the Grant receipt for the Grant receipt for the
selected head is more selected head is more selected head is up to
than 15% of the total than 5% but less than 5%of the total receipts
receipts of the Current 15% of the total receipts of the Current Year.
Year. of the Current Year.
Variation of more than Variation of more than Variation of up to 10%
30% in selected grant 10% but less than 30% in selected grant receipt
receipts in current year in selected grant receipts in current year as
as compared to previous in current year as compared to previous
year. compared to Previous year.
Year.
Subsidiary register Subsidiary register Subsidiary register
(receipts books, expense (receipt books, expenses (receipt books,
register, utilisation register, Utilisation expenses register,
certificate etc. not certificate etc.) updated Utilisation Certificate
maintained or delayed as but not maintained in the etc.) are maintained and
updated in the

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
per previous years audit prescribed forms and prescribed forms and
report. formats formats
2. Payments
2.1 Payments under Variation in selected Variation selected Variation selected
Grant–in –Aid, payment head by more payment head by more payment head up to
Capital Outlay than 30% in current year than 10% but not more 10% in current year as
or Other as compared to previous than 30% in current year compared to the
Payments year. as compared to the previous year
previous year
If payments for the payments for the payments for the
selected head is more selected head is 5% to selected head is up to
than 15% of the total 15% of the total 5% of the total
Payments of Current Payments of current Payments of current
Year Year year.
Subsidiary registers not Subsidiary registers not Subsidiary registers
maintained or delayedas maintained in the maintained and updated
per previous year audit prescribed formats or as per prescribed format
report. Paras relating to errors
in preparation of records
like overwriting, strike
off, etc. found in
Previous Year audit
report.
2.2 Work, Contract Procurement procurement procurement
and expenditure is more than expenditure is 5% to expenditure is up to 5%
Procurement 15% of total expenditure 15% of total expenditure of total expenditure
Expenditure during current the year. during current the year. during current the year.
Variation in works/ Variation in the Variation in works/
procurement procurement procurement

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
expenditure by more expenditure by more expenditure up to 10%
than 30% as compared than 10% but not more as compared to the
to the previous year than 30% as compared previous year
expenditure to the previous year expenditure
expenditure
Measurement Book and Measurement Book and Measurement Book and
Subsidiary registers Subsidiary register Subsidiary register
(works files, contractor (works files, UCs, (works files, UCs
register, advances supporting documents supporting documents
register, deductions etc.) not maintained in etc.) maintained and
register, UCs, the prescribed formats updated as per
supporting documents or prescribed format
etc.) not maintained or Paras relating to errors
delayedas per previous in preparation of records
year audit report. like overwriting, strike
off, etc. found in
Previous Year audit
report.
2.3 Office Variation in office Variation in the office Variation in office
Expenditure expenditure by more expenditure by more expenditure up to 10%
(like printing and than 30% as compared than 10% but not more as compared to the
stationary, repair to the previous year than 30% as compared previous year
and maintenance, expenditure to the previous year expenditure
etc.) expenditure
Office expenditure is Office expenditure is Office expenditure is up
more than 15% of the between 5% to 15% of to 5% of the total
total expenditure of the total expenditure of expenditure of current
current year current year year

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
Related records/ Related records/
registers not maintained registers not maintained/ Related records/
or delayed as per provided as per Previous registers maintained
Previous Year audit Year audit report per and updated as per
report. prescribed forms and prescribed forms and
formats or format.
Paras relating to errors
in preparation of records
like overwriting, strike
off, etc. found in
Previous Year audit
report.
2.5 Investment Variation in value of Variation in value of Variation in value of
investment by more than investment between Investment up to 5% in
30% in current year as 10% to 30% in current current year as
compared to previous year as compared to compared to previous
year. previous year year
Variation in income Variation in income Variation in income
from investment by from investment from Investment up to
more than 30% in between 10% to 30% in 5% in current year as
current year as current year as compared to previous
compared to previous compared to previous year
year. year
Specific fund was Irregularity regarding Investment was made in
invested without investment were accordance with
obtaining approval from reported in the Previous guidelines specified in
the Finance Department. Year’s audit report. the Act and Rules
Related records/ Related records/ register Related records/
registers not maintained maintained. However, register maintained and

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S. Significant High Risk Medium Risk Low Risk

No. Transactions
or delayed as per Paras relating to errors updated in the
Previous Year audit in preparation of records prescribed forms and
report. like overwriting, strike format.
off, etc. found in
Previous Year audit
report
There was irregularity There was irregularity There was no
under serious audit paras under non- serious audit irregularity noted as per
noted as per Previous paras noted as per Previous Year audit
Year audit report. Previous Year audit report
report.
Table 26: Classification of Transactions for RLBs

Note: As per the above table, assessment of a significant account/head is done on multiple parameters and
therefore there is a need to develop a uniform mechanism to classify a significant account/head based on
the responses on all the parameters for such a significant account/head. This would include the following
steps:
a) Scoring each of the individual parameters for a significant account/head based on the respective
response i.e. for High Risk - 10 Point, Medium Risk- 5 Points, Low Risk– 3 Points
b) Calculating the overall score of the significant account/head by calculating a simple average or
weighted average scores on the individual parameters. The decision regarding selection of simple
average or weighted average methodology shall be done by DoA.
c) Classifying a significant account/head as High, Medium or Low as below table:
Particular Category Auditing Criteria
Score upto3 Low 25%
Score between 3 to 7 Medium 40%
Score more than7 High 50-60%
Table 27: Classification of Significant Accounts/Heads

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OAMS Functionality: After classification of accounts code as High Risk, Medium Risk and Low Risk,
the next step is to select the transactions to be audited. (refer clause no.6.2.4 for selection of transaction
to be audited). OAMS will have a unique feature to select the transaction to be audited based on certain
predefined parameters. DoA need to select the different parameters for each of the specific accounting
areas in OAMS and the OAMS will automatically throw a listing of sample transactions to be audited
for each of the audit unit.
5.6.5 Designing of Audit Procedures

134. After understanding the audit unit and its environment and upon identifying significant and non-
significant account areas, the auditor should evaluate the effectiveness of internal controls designed
by the audit unit. The responsibility to design internal control lies in the management of the audit
unit. Internal control is considered adequately designed and operative when it can prevent or detect
the risk of material misstatements and errors. If controls are not appropriately designed and effective
the auditor should report its ineffectiveness to the management along with the recommendations if
any. An understanding of internal control designed would assist the auditor in identifying types of
potential misstatements and factors that affect the risks of material misstatements, in designing the
nature, timing and extent of “further audit procedures” as defined in ISSAI 2330. The audit
procedures as provided in ISSAI 2330 are as under:

135. Test of Control (i.e. Test of Internal Control): This is designed to evaluate the operating
effectiveness of controls in preventing or detecting and correcting material misstatements at the
assertion level. These tests are necessary when the risk assessment includes an expectation of the
operating effectiveness of controls, requiring the testing of those controls to support the risk
assessment; and where substantive procedures alone do not provide sufficient appropriate audit
evidence, enquiring tests of controls to obtain audit evidence about their operating effectiveness.

136. The audit team performs audit procedures to evaluate the effectiveness of the internal control system.
The Audit team should make a list of internal controls which are in operation then perform tests of
control to assess the existence and adequacy of internal controls. However, the Auditor may not be
required to test all the internal controls. The audit team may select some sample controls based on the
results of the risk assessment and professional judgment. Internal control assessment will help to the
audit team to know the following:
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 Reliability of records and registers maintained by the audit unit.

 Whether the internal controls are sufficient and being followed.
 What are the areas where controls are weak and where it is unnecessarily excessive.
 The extent and the depth of the examination that needs to be carried out in the different areas of
accounting, for example.
Risk Control Activity Test of Control Financial statements
Procedures Assertion
Travel claim of An independent check Inspect the travel claim Accuracy (checking if
an employee should be performed of of an employee for rates of travel claim
being paid at standing data (e.g. evidence of were applied
incorrect rates. government approved independent check correctly).
travel claim rates) to travel being performed
claim processed by an
employee
Table 28: Example of Test of Internal Control

137. The method commonly applied by the audit team to confirm whether the controls are operating
effectively and consistently have been detailed in table below:
Inspection of Records Inspection consists of examining records or documents whether it is
internal, external or in paper form or electronic form
Physical verification of Inspection of tangible assets consists of physical examination of the assets.
tangible assets Inspection of tangible assets may provide reliable audit evidence with
respect to their existence, but does not assure about the entity’s rights and
obligations or the valuation of the asset
Observation Observation consists of looking at a process or procedure being performed
by others e.g. include observation of the counting of inventories by the
entity’s personnel and observation of the performance of control activities
Inquiry Inquiry consists of seeking information, both financial and nonfinancial,
from knowledgeable persons in the entity or outside the entity.
External Confirmation External confirmation directly from a third party such as the confirmation
of bank balance as at the end of financial year from the bank.

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Inspection of Records Inspection consists of examining records or documents whether it is

internal, external or in paper form or electronic form
Recalculation Recalculation includes checking the mathematical accuracy of documents
or records
Analytical Procedures Analytical procedures consist of evaluations of financial information made
by a study of reasonable relationships among both financial and non-
financial data
Process Flow on internal Process flow charts will help the audit team in identification of weakness
in internal control
Table 29: Illustrative Methods used for Evaluating control

138. Substantive Procedures: This is a detailed test that needs to be designed and performed on the class
of transactions, account balances or disclosures, irrespective of whether internal control exist or not.
The substantive procedures comprise of:
i. Test of Details: To be used for a particular class of transactions, account balances and disclosures
e.g. reconcile general ledger expense, account totals to purchase journal, reconcile quantities on
purchase invoice to goods received. In other words, test of details includes tracing of figures relevant
to supporting documents to determine the validity of transactions, proper classification, and
completeness. For example.

Risk Control Activity Test of Control Substantive Financial

Procedures Audit statements
Procedures Assertion
Travel claim An independent check Inspect the travel Obtain printout Accuracy
of an should be performed of claim of an of standing (checking if
employee standing data (e.g. employee for data (e.g. Govt. rates of
being paid at government approved evidence of approved travel claim
incorrect travel claim rates) to independent check travel claim were applied
rates. travel claim processed by being performed rates) and correctly).
an employee compare with
the rates being
applied in

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Risk Control Activity Test of Control Substantive Financial

Procedures Audit statements
Procedures Assertion
travel claim of
an employee
Table 30: Test of details

ii. Substantive Analytical Procedures: To be used for ratio analysis, calculating the percentage
increase in revenue, and comparing to forecast and to the prior year (trend analysis); performing a
calculation to test the reasonableness of interest received for instance, the average bank balance
against average interest rate for the year. In other words, the substantive analytical procedure
includes financial information in the Financial Statements with other reliable information or with
the auditor’s expectation, to determine that the reported information is accurate. The unexpected
variations or differences identified by performing analytical procedures may lead to further review
and investigation.

Financial Statements Account Balance Substantial Analytical Procedures

Assertion
Accuracy Payroll Cost • Define the acceptable tolerance for the
difference between the independent
expectation for current financial year e.g.
employee basis salary expenses and actual
employee basic salary recognised in the
previous financial year in the Financial
Statements.
• Determine the actual basic salary recognised in
the current financial year in the Financial
Statements
• Calculate the difference between the
independent expectation and actual outcome
• Explain a difference that exceeds the acceptable
tolerance
Table 31: Substantive procedures

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139. Decision Regarding Appropriate Audit Approach to be Adopted: It is important to note that even
if the assessed levels of inherent risk and control risk is sufficiently low, this cannot eliminate for the
auditor not to perform some substantive audit procedures for significant account balances and a class
of transactions. The audit team should discuss and evaluate the most appropriate audit approach for
different account balances/ transaction streams. Following are the important point for consideration.
 Whether internal controls are existing.
 Whether the controls can be relied upon.
 Whether there is a need to perform other substantive audit procedures.

Instances Approach to be Performed

For each audit assertion to the Financial The audit team should either
statements, where specific risk factors  Rely on the mitigating control and perform a minimum
are identified level of substantive audit procedure or
 Perform focussed substantive procedure.

For each audit assertion to the Financial The audit team should either
statements, where no specific risk factors  Confirm the reliability of the relevant accounting systems
are identified and controls and perform a minimum level of substantive
audit procedure or;
 Perform focussed substantive procedure.
Table 32: Matrix for Approach to be adopted for testing of controls

140. Level of Substantive Procedure to be Performed: The substantive procedures can be performed at
one of three levels, depending on the amount of assurance required. In decreasing order of assurance,
they are:
 Focused
 Standard
 Minimum.

141. In general, the lower the level of assurance required, the lesser will be the extent of audit procedures.
Type of Substantive Circumstances in which Audit procedures generally included
procedure performed

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Focussed Performed if the audit team Substantive procedure:

substantive identifies a risk that could lead to  Testing high value and significant
procedure a potential material misstatement transactions
and where no reliance can be  Sample testing of representative
placed on mitigating control to transactions
address the risk  Confirmation from third parties
 Reliance on internal audit work

Standard Performed if the audit team Substantive procedure: -

substantive identifies a risk that could lead to  Comparative type procedures
procedure a potential material misstatement  Other substantive procedures
and where no reliance can be
placed on controls
Minimum Performed if the audit team plans Substantive procedure: -
Substantive to take assurance from mitigating  Comparative type procedures
procedure controls (where there is risk of  Other substantive procedures
material misstatement) and from
other controls (where there is no
risk of material misstatement)
Table 33: Matrix for Substantive procedure

5.6.6 Preparation of Audit Planning Memorandum

142. The overall audit plan should be summarised in an audit planning memorandum containing a
summary of the scope of the audit and planned audit approach. The audit planning memorandum
should present an analysis of the main audit areas and a summary of the key planning decisions during
the preparation phase.

143. The audit planning memorandum provides a basis for regular monitoring progress of the Financial
Attest Audit. It helps audit team members to understand what is required from them. It facilitates
redistribution of audit work in the event of changes in the composition of the audit team.

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144. While the contents of an audit planning memorandum depend on the specific circumstances attending
for a particular type of audit. The audit planning memorandum should include:
 A brief description of the audit unit, its function and financial reporting framework. .
 Basic details about the audit (such as, name of audit unit, audit period and start date and tentative
completion date).
 Scope of Financial Attest Audit along with planning and performance materiality.
 The list of significant and non-significant accounting areas.
 Sources of funding, financial targets, and a brief assessment of the auditee’s financial situation.
 Details of key peroneal of the auditee (such as, name, designation, contact number and email id).
 Details of audit team members (such as, name, designation, contact number and email id).
OAMS Functionality: At the end of the preparation phase, an Individual Audit Planning Memorandum
shall be prepared in the OAMS which will include scope of audit, nature and timing of audit procedure
and the overall strategy for the audit execution.

145. After determining the audit approach and preparation of the audit planning memorandum, detailed
audit programs explaining the procedures to be followed by the audit team to implement the chosen
audit approach should be prepared and included in the audit planning memorandum. The previous
experience with the audit unit must be considered while preparing the audit planning memorandum
and audit program. Refer to Section12.1.4of Chapter12 ”Forms, Formats and Audit checklist” –
Volume II for Format of Audit Planning Memorandum.

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Chapter 6: Audit Execution

146. In this stage, quarterly audit plans are executed, and observations are noted through a systematic
application of the audit procedures. The prime focus under this stage is to ensure the completion of
the audit program in accordance with the designed audit execution strategy. This stage also involves,
on-field review of the audit work done, to ensure that conclusions drawn, or observations made are
based on the facts. And the relevant documents have been collected to validate the observations.

6.1 Important Points Need to be Remembered during Audit Execution

147. Period: Check whether the date of vouchers falls within the accounting period or not.
148. Authorization: The vouchers/transactions are duly and properly authorized by the appropriate
authority.
149. Ownership: The transactions incurred belongs to the audit unit and took place during the period
under audit, e.g. check whether the voucher solely belongs to the audit unit, followed by a unique
voucher number or not.
150. Accurate Records: The transaction is recorded in the proper account e.g. check whether the
transactions are recorded in the correct register, forms or not.
151. Occurrence: All transactions which have occurred during the period of audit have been recorded e.g.
check whether transactions entered in the books of accounts are occurred during the period under
audit or not.
152. Supporting: The vouchers that is being examined need to be properly supported with all and relevant
documents.
153. Rechecking of calculations: It involves checking on a sample basis the computations as well as
ledger postings to test arithmetical accuracy.
154. Physical Examination: Test check the tangible asset such as fixed assets, stock, cash, etc.
155. Requisition for Data: The requisition for data, information or documents should be made in writing
through OAMS to the officer in-charge to the audit unit.
156. Accounting Estimates: Accounting estimates are approximations of the amount of an item in
Financial Statements in the absence of a precise means of measurement. The accounting estimates

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are usually associated with the preparation of accounts on an accrual basis. They may also be found
in cash accounts e.g. when it is required to disclose estimates of contingent liabilities.

157. The audit team can adopt one or more of the following approaches for checking of accounting
estimates:
 Review and test the processes used by the audit unit to develop the estimate.
 Use an independent estimate for comparison with that prepared by audit unit.
 Review subsequent events.
158. Following steps are involved for the review and testing of the processes used by the audit unit with
respect to the accounting estimates.
 Evaluation of the data and consideration of the assumptions on which the estimate is based.
 Testing of the calculations involved in the estimate.
 Comparison, wherever possible, of estimates made for prior periods with actual results of those
periods; and
 Consideration of audit unit’s review and approval procedures.
159. Review of Subsequent Events: The audit team should consider the effect of subsequent events on
the Financial Statements between the period end and the date of the audit report. For this purpose,
subsequent events are those relevant events (favourable or unfavourable) that occur and those facts
which are discovered after the close of the period covered by the Financial Statements under audit
and before the date of signing of Financial Attest Audit. The audit team should perform audit
procedures to obtain assurance that all material subsequent events up to the date of the Financial
Attest Audit have been identified and that appropriate adjustments or disclosures have been made in
the Financial Statements. These procedures are performed during the field visits and updated to the
date of signing of the audit report. Some of these procedures are:
 Make enquiries to the audit unit to ascertain their procedures for identifying subsequent events.
 Review of minutes of various committees meeting of audit units including board meeting if any.
 Reviewing the latest available financial information, e.g. post period accounts, budgets and
management information.
 Obtaining written representations letter from auditee.
6.2 Field Work

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160. While conducting Financial Attest Audit, auditors are required to visit the office of the audit unit.
Fieldwork involves verification of accounts, relevant records and compliance with the act, rules and
various orders issued from time to time. However, the responsibility of the audit team is not only
limited to verification of accounts and performing audit procedures but also to giving
recommendations to improve the financial management system of the audit unit. Following are the
steps involved in fieldwork.
6.2.1 Entry Conference Meeting

161. The purpose of the entry conference meeting is to establish effective communications between the
audit team and the audit unit at the beginning itself. The entry conference meeting will be held after
the completion of the individual audit plan prepared in the planning phase and before the
commencement of actual audit work at the field. The entry conference meeting will be held among
the audit team members, audit unit’s head and key officials of the audit unit. During the entry
conference meeting the audit coordinator to be identified. The entry conference meeting will facilitate
to build a good relationship between the audit team and official of the audit unit. Following are the
main points that need to be discussed in the entry conference meeting.
a. Objectives and Scope of Work: There should be clear communication about the objective and
scope of the audit. Auditors shall emphasize that the purpose of the audit is to assist management
by providing analysis, appraisals, recommendations, and information in respect of their activities.
b. Seeking Inputs and Co-operation from Auditee: Discuss and seek inputs on problem areas
where the auditor can be of assistance to the audit unit. Careful consideration must be given to
any suggestions and requests. Inquire about working hours, access to records, available work
area for participating auditors, the audit unit’s work deadline and any other information which
would help to schedule audit activities with minimal interruption to the audit unit’s routine
activities.
c. Audit Progress: Establish a clear understanding with the audit unit and regularly update them
regarding audit progress and findings. Determine the frequency of progress updates at the audit
level to be updated.
d. Audit Findings: Discuss how the audit findings will be handled, e.g. resolution of minor
findings, the discussion of all findings on a concurrent basis to enable the audit unit to take timely
and corrective action and other actions relating to closing meeting etc. and also discuss the status
of prior audit findings.

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e. Debriefing and Reporting: The audit team shall discuss the procedures for verifying and
reporting the audit findings with the audit unit. Immediately after the entry conference meeting,
the audit team shall submit an additional list of records required for the execution of the audit
and enhance their understanding of the operation of the audit unit based on the entry conference
meeting.
f. One the member of audit team should be assigned to fill up all the details of the entry conference
meeting on OAMS under the entry conference tab and need to be duly approved by both parties.
Wherever practicable the entry conference meeting must be attended by the person responsible
for preparation of the Financial Statements with respect to the Urban Local Bodies and Rural
Local Bodies and official responsible for the execution of programs. Refer to Section 12.1.5 of
Chapter 12 “Forms, Formats and Audit checklist” – Volume II for format of Minutes of Entry
Conference Meeting
OAMS Functionality: In OAMS, under the entry conference tab, the audit team will fill all the necessary
details relating to audit units like name of the HoA of concerned ULBs and RLBs, period of audit, last
audit time and period, audit start date, audit end date, audit month, auditee name, mobile number of
concerned officials etc.

6.2.2 Revision in Audit Planning Memorandum

162. Based on the Entry Conference Meeting in case any new/revised information comes out then the audit
planning memorandum prepared by the audit team at the audit planning stage shall be reviewed and
updated for effective conducting of Financial Attest Audit.

OAMS Functionality: After the entry conference meeting, the audit team needs to update the Audit
Planning Memorandum based on the discussion if any relevant information comes out which may affect
the execution strategy.

6.2.3 Work Distribution Among the Audit Team Members

163. The audit team leader should divide the audit work among the team members and according to the
work distribution the team members should proceed with the audit. For example, one team member
may take up verifying cash book, treasury bill registers and reconciliation with treasury and the bank;

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another might start checking the establishment expenditure and the audit team leader should take up
the more significant items along with supervision of other team members work. Each member of the
audit team needs to maintain an updated record of the work performed each day in the prescribed
formation OAMS.
OAMS Functionality: Post the entry conference meeting and based on the review of the information
sheet, a work distribution form is required to be filled by the team leader into OAMS specifying the
details of work allocated among the audit team members together with the completion timeline.
6.2.4 Selection of Transaction to be Audited

164. After risk classification of significant areas as high, medium, and low and post distribution of work
among the team members by the team leader. The audit team will start the audit by going through the
audit checklist which provides a comprehensive list of questions to be reviewed in each area of an
audit. The audit team could use it as a guidance document during the audit and frame their questions
for the audit. In this step, the audit team will carry out the review of transactions incurred during the
period under audit which involves an examination of transactions along with their supporting
documents to examine the audit assertions. The transaction audit will ensure, whether the transactions
incurred by the audit unit are authorised by the competent authority, incurred during the relevant
period, and ownership of transactions lies with the audit unit. The audit shall be conducted based on
the detailed audit checklist specified under the chapter. Refer to Section12.2of Chapter 12” Forms,
Formats and Audit checklist” – Volume II for Audit Checklist for ULBs & RLBs

165. Following are the steps to be followed by the audit team for selection of transactions to be audited.
Step 1: Extraction of Transactions Report

166. The audit team will first extract the total expenditures report of the audit unit from the software
integrated with OAMS e.g. e-GrmaSwaraj or other accounting and reporting software used by the
ULBs or RLBs.

167. The following is an indicative list of documents/books of accounts required to be extracted for
selection of transactions to be audited:
 Cash book- consist of day wise receipts and payments.
 Receipts and Payments Account/Budget and Expenditure statement (as applicable);
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 Procurement Register.
 Asset Register.
 List of ongoing schemes (central as well as state-sponsored).
 Types of own source of revenue and monthly collection details.
 Monthly payroll sheet.
 Bank statements (if any).
 Any other books/ register maintained by auditee.

Step 2: Extent of Audit

168. Based on the classification of significant accounting transactions as high, medium, and low as
mentioned in point no.5.6.5.1‘Risk Assessment’ under Chapter- 5“Audit Planning and
Preparation”, the audit team will select the transactions to be audited based on the random sampling.
 For High-Risk Significant Account Balance and for Inherent Risk Items: 50% to
60%value shall be selected for audit
 For Medium Risk Significant Account Balance: 40% value shall be selected for audit
 For Low-Risk Significant Account Balance: 25% value shall be selected for audit

169. The above extent of checking is indicative which the auditors may increase based on their professional
judgments and findings during the course of the audit. However, with respect to the non-significant
account balances, the auditors are required to verify at least 2-3 transactions from each of the account
balances so that completeness of verification can be ensured.

170. To select the transactions to be audited, the guidance provided in clause no. 3.7 “Audit Sampling”
under Chapter 3.”Basic Principles and Concepts in Auditing” will be followed. Based on the
selected sample the audit team will verify the transactions, incurred during the period which involves
an examination of transactions along with their supporting documents and will examine the audit
assertions. This verification would ensure that transactions incurred by the audit unit are authorised
by the competent authority, incurred during the relevant period, and ownership of transactions lies
with the audit unit. The verification of transactions will be carried out based on the audit checklists
provided in chapter 12.2. of Volume-II. Refer to Section12.2of Chapter 12 ”Forms, Formats and
Audit checklist” – Volume II for Audit Checklist for ULBs & RLBs.
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171. The audit team will carry out the audit of sampled transactions which involves an examination of
supporting documents and occurrence of transactions. The auditor has to ensure that transactions are
recorded in time after proper verification and under the appropriate budget head and all transactions
should be approved by the competent authority. For expressing an opinion on the Financial
Statements being audited, the auditor shall collect sufficient and appropriate evidence. Further, all the
evidence collected must be relevant to the general audit objectives called audit assertions.
6.2.5 Audit Assertions

172. In order to substantiate the audit findings, audit team should obtain audit evidence, and the same must
relate to the general audit objectives ‘called audit assertions.
Assertions can be defined as “Representations by management, explicit or otherwise, that are embodied
in the Financial Statements, as used by the auditor to consider the different types of potential
misstatements that may occur.” Assertions are positive statements about the "state of being." For
example, an assertion may be that all receipts were accounted for, or that all the investments shown in
accounts were really owned by the entity. These general audit objectives (assertions) are designed to
ensure that the auditor obtains evidence to support all aspects of the opinion required to be expressed on
Financial Statements.

173. Assertions are used by the auditors to form a basis for:

 Considering the different types of potential misstatements that may occur.
 Assessing the risk of material misstatement.
 Designing further audit procedures that are responsive to the assessed risks.

174. The assertions are classified in two parts

A) Assertions for items related to assets and liabilities

175. There are five general objectives (assertions) for items related to assets and liabilities explained
below:

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Assertions Explanations
Completeness Completeness means that all assets and liabilities have been recorded in the accounts
and nothing was omitted. This objective directly tests for potential understatement
of assets and liabilities. For example, if the Financial Statements omit some
investment or liabilities, the ‘completeness’ objective is not satisfied.
Existence Existence means that all recorded assets and liabilities exist. This objective directly
tests for the potential overstatement of assets and liabilities. For example, if the
accounts show some amount as cash balance, which does not exist, the ‘existence’
objective is not satisfied
Valuation Valuation means that the values given to the assets and liabilities are accurate and
have been arrived at in accordance with the established accounting policies or on an
acceptable and consistent basis. This goes beyond mere arithmetical accuracy and
requires conformity with accounting policies and standards and their consistent
application
Ownership Ownership means that the assets are owned by the entity, the liabilities are of the
entity and both arise solely from regular activities. The balance sheet represents an
accumulation of the entity’s rights and obligations. ‘Ownership’ assertion requires
that the assets and liabilities reported actually represent those rights and obligations.
For example, if an item is shown in the accounts as an amount receivable, the entity
should have the legal right to sue and collect the amount.
Disclosure Disclosure’ means that the assets and liabilities have been properly disclosed in
accordance with the applicable reporting framework. This implies that the assets and
liabilities were booked to the proper account head and the disclosures made in the
notes and footnotes to the accounts are appropriate and adequate. For instance, if
obligations under guarantees given by the entity are not shown in the accounts, the
requirement of ‘disclosure’ is not satisfied.
Table 34: Principal of Assertion for Balance sheet items

B) Assertions for items related to Income and Expenditure account

176. There are five general objectives (assertions) for items related to Income and Expenditure account,
explained below:

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Assertions Explanations
Completeness Completeness’ means that all transactions relevant to the year of account have
been recorded. This implies that no transaction has been overlooked. This
assertion directly tests for potential understatement of figures in accounts. To
take an example, if the accounts are prepared for the financial year 2018-19 and
an item of expenditure that take place during 2018-19 is omitted from accounts,
the ‘completeness’ objective is not fulfilled
Occurrence Occurrence’ means that all recorded transactions occurred and were relevant to
the year of account. For instance, if an item of receipt was booked in the
accounts for the financial year 2018-19, to satisfy the ‘occurrence ‘objective,
the item should properly relate to only 2018-19 and not to any other financial
year. This assertion directly tests for the potential overstatement of figures in
the accounts.
Measurement Measurement’ means that the recorded transactions have been correctly valued,
properly calculated, or measured in accordance with established accounting
policies, on an acceptable and consistent basis. This involves much more than
clerical accuracy as it requires the auditor to check the conformity with
established accounting policies and standards and the consistency in the
measurement
Disclosure Disclosure’ means that the recorded transactions have been properly classified
and disclosed where appropriate. This implies that the receipts and expenditures
were booked to the proper account head and the disclosures in the notes and
footnotes to the accounts are appropriate and adequate.
Regularity Regularity’ is a unique requirement for government accounts This requires that
the recorded transactions are in accordance with the primary and secondary
legislation and other specific authorities required by them. For example
payment may be correctly recorded and properly disclosed in the right year of
account at the right value, but the payment would be irregular if it did not accord
with the requirement of the governing legislation or regulations.
Table 35: Principal of Assertion for Receipts and payments or Income and expenditure account

Example 1

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One of the audit concerns is whether the transactions were properly disclosed. If some item of revenue
expenditure is misclassified as capital expenditure, it can be said that the disclosure is not proper. The
auditor has to be satisfied with the classification of transactions.
Example 2
One of the concerns of the auditor is whether any items have been omitted from the account. The auditor
must obtain evidence to the effect that all transactions relevant to the year of account have been recorded.
This relates to the completeness objective. The auditor has to design audit tests to ensure that the
completeness objective is met.
Example 3
Payment may be correctly recorded and properly disclosed in the relevant year of account at the right
value, but the payment would be irregular if it did not accord with the requirement of the governing
legislation or regulations.

OAMS Functionality: The audit team will carry out test of transactions for selected transactions
extracted from OAMS. For this purpose, the audit team will use the audit checklist of provided in the
OAMS.

6.2.6 Issuance of Half Margin Memo

177. While conducting Financial Attest Audit, the audit team might come across various issues/findings
for which a clarification from the audit unit is required by issuing a Half Margin Memo to be created
through OAMS and sent to the audit unit for replies

178. Half margin memo shall be prepared by the audit team member during the audit for (i) seeking
clarification from the audit unit regarding any findings or (ii) requirement of any additional
information or documents.

179. Thus, the Half Margin Memo is classified as under:

 Information Memo: This is used to obtain additional information or documents from the audit
unit.
 Observation Memo: is used where the preliminary audit indicates that a draft para can be made.

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 Information Cum Observation Memo: HMM created by team members shall be reviewed and
approved by the team leader before sharing it to the audit unit. HMM shall be approved or rejected
by the team leader only once.

180. HMM created by the team leader shall be sent directly to the audit unit. However, the HMM created
by the team members needs to be approved by the team leader before sharing with the audit unit for
reply. There could be the following scenarios for the HMM created by the team member:

181. If HMM is approved by the Audit Team Leader: The approved Half Margin Memo shall be sent
to the audit unit for seeking a response. The timeline for providing a response against Half Margin
Memo is three working days starting from the date of issuance of the Half Margin Memo. The auditor
is required to evaluate the response provided by the audit unit for each of the Half Margin Memo and
needs to take necessary actions accordingly. Following are the two outcomes of Half Margin Memo:
• Resolved Half Margin Memos: In case the audit the unit provides a response, which is satisfactory
as per the auditor, then Half Margin Memo is considered to be resolved.
• Un-resolved Half Margin Memos-
o In case the audit unit fails to provide a response within the stipulated time, then Half Margin
Memo is considered to be un-resolved and shall be converted into audit para.
o In case audit the unit provides a response, which is not satisfactory as per the auditor, then
HMM is considered to be un-resolved and shall be converted into audit para.

182. If HMM is not approved by the Audit Team Leader: The unapproved HMM shall be returned to
the audit team member along with the comments (reason for rejection) for necessary corrections. The
team member post rectification is required to resubmit this to the team leader for his/her approval.

183. The Team leader will review all unresolved HM /uncorrected misstatements before converting the
same into the audit para.

OAMS Functionality: Half Margin Memo (HMM) created on OAMS by the team members will be
approved by the team leader. Once it is approved by the team leader, an automatic intimation will be sent
to the coordinator of the audit unit through SMS/email for the reply.

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HMM once created and submitted to the audit unit, cannot be edited. The audit team can add sub-HMM
for any additional point or for addressing the reply received from the audit unit. However, all the HMM
must be either closed as resolved or converted into draft paras in the OAMS. Information HMM has to
be closed and any discrepancy or limitation faced shall be mentioned in the audit report.
 The audit unit has to respond to the HMM within three working days. Along with the reply, the
audit unit has also to upload all the documents on OAMS as a supporting document which helps
in resolving of HMM.
 Based on the response of the audit unit, the audit team either drops the HMM or covert the same
into the draft para. However, in case of a non-reply or unsatisfactory reply, the HMM must be
converted into audit para.

6.2.7 Exit Conference Meeting

184. Once the audit team completes the audit and compiles all its findings noted during the audit execution
stage, the audit team shall interact with the audit unit for discussion on the conclusion drawn on the
audit findings. The audit team leader together with other team members shall be responsible for the
scheduling of Exit Conference Meeting with HoA along with the concerned official of the auditee
prior to the last date of fieldwork in order to provide an opportunity to the auditee to provide
clarification on unresolved Half Margin Memo. The purpose of the exit conference meeting is:
 To Inform the HoA about the audit findings (discuss the unresolved half margin memo issued
during the audit period / uncorrected misstatement, which have been included in the half margin
memo) and reporting process,
 To obtain management response on the half margin memo and recommendation made along with
the reason thereof,
 To provide reasons for acceptance or rejection of responses received on the half margin memo,
 To provide adequate guidance about corrective actions to be taken against each half margin
memo and also provide guidance about their rights and available remedies,
 To Suggest for improvement in accounting and financial management and general performance
of the audit unit, If any

185. One of the audit team members will be assigned to document all the discussion of Exit Conference
Meeting in OAMS. The minutes of exit conference meeting will be digitally signed by the team leader
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and by HoA. Refer to Section 12.1.6of Chapter 12 “Forms, Formats and Audit Checklist” -Volume
II for Format of Minutes of Exit Conference Meeting.
OAMS Functionality: Under the exit conference meeting tab in the OAMS, all the discussions of exit
conference meeting will be documented. The exit conference meeting template also includes major
queries raised and discussed during the exit conference meeting.
6.2.8Written Representation Letter from the Auditee

ISSAI 2580 requires the auditor to perform certain audit procedures on management representations
by the end of the audit. The auditor should ensure that the date of written representations is as close as
possible to, but not after, the date of the auditor’s report. The auditor cannot express an opinion on the
presentation of the financial statements on a date before the date of written representations, because
those representation are audit evidence.

186. The ISSAI 2580 deal with “Written Representation”. The audit team shall obtain written
representations from the auditee (shall be issued by HoA) on material matters of the Financial
Statements. A written representation is a statement by management provided to the auditor to confirm
certain matters or to support other audit evidence. Therefore, the auditor should obtain a written
representation from the HoA acknowledging the responsibility of the management on certain material
matters and transactions. The Management representations are usually sought for the following
reasons:
 Where Knowledge of the facts pertaining to a matter is confined to management alone.
 To acknowledge management's responsibility for the regularity of expenditure.
 To acknowledge management's responsibility for the preparation of the Financial Statements.
Refer to Section 12.1.7of Chapter 12 “Forms, Format and Audit Checklist” Volume II for
Format of Written Representation letter.
6.3 Documentation of Field Work

Documentation is an integral part of the auditor’s responsibilities. As per ISSAI 2230 “Documentation
of the Audit Procedures Performed and Audit Evidence Obtained “deals with the auditor’s
responsibility to prepare audit documentation for an audit of Financial Statements.

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The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having
no previous connection with the financial attest audit, to understand:
(a) The nature, timing and extent of the audit procedures performed to comply with the ISAs and
applicable legal and regulatory requirements.
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon, and significant
professional judgments made in reaching those conclusions.

187. The audit working papers are documents that record the audit procedures undertaken, the conclusions
drawn and the impact on the audit opinion. They should record the reasoning on all significant matters
where the members of the audit team have exercised their professional judgment. The audit working
papers help the individual audit team members to ensure that they have completed all the work in
accordance with the work plan and they have collected the evidence to back their conclusion drawn
from them.

188. All correspondence with the audit unit should be retained, together with minutes of meetings (MoM)
wherever applicable. The acid test for good documentation is that an experienced auditor with no
previous connection with the Financial Attest Audit should be able, without difficulty, to ascertain
the evidence gathered and understand & support the conclusions reached.

189. In addition to the above, audit documentation also serves a number of additional purposes, including
the following:
 Assisting the engagement team to plan, perform and review the audit engagements.
 Assisting members of the engagement team responsible for supervision to direct and supervise
the audit work, and to discharge their review responsibilities in accordance with ISSAI 2220
‘Quality Control for an Audit of Financial Statements.
 Enabling the engagement team to be accountable for the work performed
 Retaining a record of matters of continuing significance for future audits.
 Enabling for the conduct of quality control reviews and inspections in accordance with
professional requirements.
 Enabling the conduct of external inspections in accordance with applicable legal, regulatory or
other requirements.
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 Ensuring that all errors or control weaknesses have been investigated and discussed with the
management of the audit unit, as necessary.
 Any matters that are unresolved or that have been informed in writing to the audit unit.
OAMS Functionality: All the forms, formats, checklists and annexures used by audit team in audit life
cycle process shall be uploaded/updated on OAMS and audit team need to be updated the same through
the use of OAMS and take out the print for approval from auditee if, required.
6.3.1 Timely Preparation of Audit Documentation

190. The audit team shall prepare audit documentation on a timely basis i.e. before issuance of the auditor’s
report.
6.3.2 Documentation of the Audit Procedures Performed and Audit Evidence Obtained

191. Theauditor shall prepare audit documentation, which is sufficient to enable an experienced auditor,
having no previous connection with Financial Attest Audit, to understand:
 The nature, timing and extent of the audit procedures performed to comply with the ISSAIs and
applicable legal and regulatory requirements.
 The results of the audit procedures performed, and the audit evidence obtained; and
 Significant matters arose during the audit, the conclusions reached thereon, and significant
professional judgments were made in reaching those conclusions.

192. In documenting the nature, timing and extent of audit procedures performed; the auditor shall record:
 The identifying characteristics of the specific items or matters tested.
 Name of the team members who performed the audit work and the date of completion of such
work.
 Name of the team member who reviewed the audit work performed and the date and extent of such
review.

193. The auditor shall document discussions of significant matters with audit unit/ senior officials, and
others, including the nature of the significant matters, discussed including the details of time and
participants with whom the discussions took place.

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194. If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding
a significant matter, the auditor shall document how the auditor addressed the inconsistency.
6.3.3 Departure from a Relevant Requirement

195. If, in exceptional circumstances, the auditor’s judgment is necessary to depart from a relevant
requirement from ISSAI, the auditor shall document how the alternative audit procedures were
performed to achieve the aim of that requirement, and the reasons for the departure.

196. Sufficient documentary evidence to support audit conclusions and confirms that the audit was carried
out in accordance with the relevant act, rules & regulations, and standards. “Adequate documentation
is important for several reasons” so that it can:
 Confirm and support the auditors' report.
 Increase the efficiency and effectiveness of the audit.
 Facilitate planning and supervision and provide evidence of work done for future reference.
 Serve as a source of information for preparing reports or answering any inquiry from the audited
entity or from any other authority.
 Serve as evidence of the auditor's compliance with relevant rules, guidelines, and auditing
standards.
6.3.4 Audit Working Papers

197. Maintaining sufficient and relevant working papers is the responsibility of the audit team. The
working papers file should contain all tests conducted, samples were drawn, documentary evidence
supporting the audit findings and conclusions. The term “audit working paper” in this context applies
to both hard copy audit working papers and to files stored in computer-readable form.
OAMS Functionality: All the relevant working papers will be uploaded on OAMS before the
finalization of the Independent Audit Report.

6.3.5 General Content of Working Papers

198. A standard method of filing working papers/documents is essential. The filing method should
recognise that documents may be categorised in two categories:
 Those relevant to the audit of ULBs/ RLBs generally.
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 Those relevant only to the audit of ULBs/ RLBs for a particular year.

199. The documents to which the auditor needs to refer each year should be placed in Permanent File.
This file should contain current information about the organisation itself, such as:
 Information concerning with legal and organisation structure of the auditee:
 Governing Acts and Rules.
 Extracts or copies of important documents such as the agreement and minutes of the meeting.
 Notes regarding significant accounting policies.
 Short description of the activities carried on by the auditee.
 Details of the standing committees and key personnel along with their designation and contact
information.
 Descriptions of accounting systems, internal control environment.
 Any other relevant documents.

200. The documents relevant to the audit of a particular year should be placed in a manner which brings
together related working papers in a series of folders (or in separate sections within the folders).

201. The audit file should contain a list of working papers referred / prepared during the course of audit
and generally include the following:
 The names of audit personnel who carried out Financial Attest Audit work.
 The dates when the audit work was carried out by the respective audit personnel.
 The sources of the information/evidence obtained.
 Audit Plan/Programme.
 Audit Schedule and allocation sheet among the team members.
 Planning Memorandum.
 A record of nature, timing and extent of audit procedures performed and the result of such
procedure.
 Previous Internal audit reports.
 Physical verification reports of cash/stock and store etc.
 Data relating to budget provision and actual expenditure for the period of audits.
 Minutes of opening and closing meeting conducted.
 Summary review Memorandum.
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 Written representation letter.

 Conclusion reached by the auditors including how exception and unusual matters if any, disclosed
by the audit procedure were resolved and treated.
 Copies of communication with other auditors, expert and third parties if any.
 A note of the study and evaluation of the accounting system and related internal control. This could
be in the form of narratives description, questionnaire, flowcharts, or combination thereof; and
 Analysis of transaction and account balances.

202. It is important to note that any judgments made, and each audit conclusion reached, on account areas
and balances should be recorded clearly. Lead schedules covering each account area should
summarise the audit work carried out and the results of the audit. Each the lead schedule should
provide cross-referencing between the figures in the Financial Statements and the audit done to
confirm or verify them.

203. In order to standardize the working paper’s headings following key characteristics should be
followed:
 It should provide details of Urban Local Bodies/ Rural Local Bodies being audited and the audit
period covered.
 Cross-referencing within work papers should be complete and accurate. Work papers should be
cross-referenced to the Audit Findings and Audit Plan.
 The system of indexing audit work papers should be simple. A capital letter (A-Z) should be used
to identify each segment of the audit, and Arabic numerals (I, II, III etc.) should be used to identify
schedules within the segments.
 The auditor should make full use of the working papers developed in the prior audit. Flow charts,
system descriptions, and other data may still be valid. Those papers that remain useful should be
made as a part of the current working papers.
6.3.6 Review of Working Papers

204. A timely review of working papers is an important part of quality control. The audit team leader is
required to maintain adequate working papers of the work. These working papers would be reviewed
by Audit Team Leader and by the Supervising officer. While discharging their review responsibilities
in accordance with ISSAI 2220 ‘Quality Control for an Audit of Financial statements’ they should
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look whether the working papers are correct and contain reliable and adequate evidence to the support
the audit findings.An illustrative checklist for review of working papers is provided in below table:
S. No Checkpoint Response
1. Check that the working papers are appropriately indexed, labelled, and dated Yes / No
2. Check whether each of the audit observation is supported with proper evidence Yes / No
which is documented adequately
3. Check that adequate referencing and cross-referencing of the working papers with Yes / No
the relevant audit observations is made to make it more meaningful and useful for
stakeholder
4. Check that all the documents/ working papers are legible Yes / No
5. Check the mode of collection to comment on authenticity and reliability of the Yes / No
documents
6. Check whether the Audit File (either in hard copy or on OAMS) includes: Yes / No
7. Organizational Chart Yes / No
8. Description of Schemes, programs, systems, procedures and business plans Yes / No
9. Corrective action plans Yes / No
10. Legal and regulatory issues impacting the organization Yes / No
11. Risk assessment Yes / No
12. Copies of the Draft and Final Audit Report Yes / No
13. Significant findings and issues identified during the audit and how they were Yes / No
resolved
14. Audit planning documentation Yes / No
15. Work Distribution sheet Yes / No
16. Administration/correspondence documents Yes / No
17. Follow-up of previous audit reports Yes / No
18. Updated audit programmes/ planning memorandum Yes / No
19. Supporting documentation for the audit conclusions Yes / No
20. Minutes of entry and exit meeting Yes / No
21. Any other document/evidence collected during audit Yes / No
Table 36: Illustrative checklist for review of Working paper

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6.3.7 Ownership and Custody of Working Papers

205. The ownership of the audit working papers rests with the administrative section of the Directorate of
Audit and not with the individual auditor. Upon completion of the Financial Attest Audit and issuance
of the Financial Attest Audit Report, it would be the responsibility of the team leader to update the
audit files and upload the same on OAMS and archive the file of working papers so that they can be
retrieved as and when needed. The original working papers shall be submitted by the audit team leader
to the administrative section of DoA for necessary recording and safekeeping. These working papers
shall be kept for a minimum period of 8 years unless other law requires for longer periods to satisfy
any legal requirements of records retention.

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Chapter 7: Audit Reporting

206. Audit Report would be the final deliverable of the Financial Attest Audit. Hence, the audit team
should take utmost care in drafting the Audit Report. The Audit report would be prepared based on
the evaluation and conclusions drawn from the audit evidence obtained during the audit execution
phase.
International Standard of Supreme Audit Institutions (ISSAI) standard 2700, “Forming an
Opinion and Reporting on Financial Statements,” deals with the auditor’s responsibility to form an
opinion on the Financial Statements. It also deals with the form and content of the auditor’s report issued
as a result of an audit of Financial Statements.
The auditor shall evaluate whether, in view of the requirements of the applicable financial reporting
framework:
(a) The Financial Statements appropriately disclose the significant accounting policies selected and
applied.
(b) The accounting policies selected and applied are consistent with the applicable financial reporting
framework and are appropriate.
(c) The accounting estimates made by management are reasonable.
(d) The information presented in the Financial Statements is relevant, reliable, comparable. and
understandable. In making this evaluation, the auditor shall consider whether.
 The information that should have been included has been included, and whether such information
is appropriately classified, aggregated or disaggregated, and characterized.
 The overall presentation of the Financial Statements has not been undermined by including
information that is not relevant or that obscures a proper understanding of the matters disclosed.
(e) The Financial Statements provide adequate disclosures to enable the intended users to understand
the effect of material transactions and events on the information conveyed in the Financial
Statements; and
(f) The terminology used in the Financial Statements, including the title of each Financial statements,
is appropriate.”
International Standard of Supreme Audit Institutions (ISSAI) standard 2701 “Communicating
Key Matters in the Independent’s Auditor Report” Deal with how the key matters will be
communicated by the Independent Auditor.

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International Standard of Supreme Audit Institutions (ISSAI) standard 2705, “Modification to the
Audit Opinions in the Independent Auditor’s Report” and International Standard of Supreme
Audit Institutions (ISSAI) standard 2706, “Emphasis of Matter, “Deal with how the form and content
of the auditor’s report are affected when the auditor expresses a modified opinion or includes an Emphasis
of Matter paragraph or other Matter paragraph in the auditor’s report.
International Standard of Supreme Audit Institutions (ISSAI) standard 2706, “Emphasis of Matter
Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report”, provides the
requirements for an auditor who, having formed an opinion on the financial statements, has determined
that it is necessary to draw users’ attention, by way of clear additional communication in the auditor’s
report, to:

 A matter, although appropriately presented or disclosed in the financial statements, that is of such
importance that it is fundamental to users’ understanding of the financial statements; or
 As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s
responsibilities, or the auditor’s report
.

207. This phase would start after the exit conference meeting is recorded in OAMS. Below are the
timelines involved for the preparation and circulation of the audit report.
Activities Timelines Responsibility Reference
Exit Conference Meeting On or before the last date of Team Leader Refer Clause
field work No.6.2.7
Conversion of HMM into Within 3 working days from Team Leader Refer Clause
Audit Para the date of exit conference along with Team No.7.1
meeting Member
Preparation of Financial Within 15 days from the date Team Leader Refer Clause
Attest Audit Report of exit conference meeting No.7.3.2
Review of Financial Attest Within 30 days from the date Supervising Refer Clause
Audit Report of exit conference meeting Officer. No.7.3.3&7.3..4
Final Review, Approval and Within 45 days from the date Director, Audit or Refer Clause
Issuance of Financial Attest of exit conference meeting Officer Authorised No.7.3.4
Audit Report to the Auditee by the Director,
Audit

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Table 37: Illustrative Timeline related to Audit reporting

208. The process for preparation and submission of the Auditors Report in OAMS has been summarised
below.

Figure 11: Process of Audit Reporting

7.1 Conversion of Half Margin Memo (HMM) into Audit Para

209. Based on the response submitted by the audit unit, the audit team would either drop the HMM or
convert the same into audit para. However, the unresolved HMM due to non-submission of the reply
within the stipulated period of time or due to the unsatisfactory reply will mandatorily be converted
into audit para within 3 working days from the date of the exit conference meeting.

210. The HMM converted into audit para by the audit team member shall be sent to the audit team leader
for review and approval. The audit team leader can either approve or reject or return the audit para
created by the team member along with comments for appropriate action by the team member. The
team leader can reject or return any audit para created by the team member for their necessary action
only once. The team member after making necessary rectification shall resubmit the same to the team
leader for approval.
OAMS Functionality: Creation of audit para from HMM shall be done through the functionality
provided in OAMS. All the Half Margin Memo (HMM) must either be closed as resolved or converted
into audit paras in OAMS. There can be following two types of situations:
- Where reply submitted by the auditee against the half margin memo (HMM) is satisfactory then the
HMM shall be dropped or considered as closed and resolved.
-Where reply submitted by the auditee against the HMM is unsatisfactory in the opinion of the auditor or
the auditee has not submitted any reply within the stipulated period of time then the Half Margin Memo
(HMM) mandatorily be converted into Audit Para.

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7.1.1 Categorization of Audit Para

211. For ease of tracking, reporting and recommendations on the audit paras, the audit paras noted during
current audit period shall be classified under the following two categories.
Serious Those audit paras which have a significant impact or are considered material when
Audit Paras expressing an opinion on the Financial Statements will be categorised under this
category and will be suitably disclosed in the Detailed Audit Report/ Management
Letter.
Other Audit All other audit paras which have not been classified as serious audit paras will be
Paras categorised as Other Audit Paras and will be suitably disclosed in the Management
Letter.
Table 38: Categorization of Audit Para

OAMS Functionality: The categorization of audit paras shall be done through OAMS. The category of
audit paras shall be pre-fed in the OAMS for the first time and thereafter it shall be updated on periodical
basis by the DoA. The auditor needs to select the appropriate category of audit para while converting the
HMM into audit para.
7.2 Preparation of Financial Attest Audit Report

7.2.1 Types of Financial Attest Audit Report

212. Following reports will be issued under Financial Attest Audit.

S. Type of Report Responsibility of Remarks
No Preparation
1. Independent Team Leader To provide an audit opinion on the Financial Statements.
Auditors’ Report Refer Clause No. 7.2.3 for Form and Content of the
Independent Auditors’ Report. This report will be issued
for all ULBs and RLBs where Financial Attest Audit is
undertaken.
2. Detailed Audit Team Leader A detailed audit will be done in limited cases and will
Report for cover only a few audit entities every year. A detailed audit
may be conducted when:

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S. Type of Report Responsibility of Remarks

No Preparation
Selected ULBs • Audit findings from Financial Attest Audit are
and RLBs significant/material/pervasive and there is a need
to apply detailed audit procedures to identify the
cause and effect of these findings (there are
significant qualifications/audit report is adverse or
disclaimer);
• Instances of fraud or serious irregularities have
been noticed during audit.
• Special request from HoA to Director, Audit or
Finance Department to conduct a detailed audit
for specific units.
• At the discretion of the Director, Audit (e.g. the
DoA at its discretion may select a sample of
ULBs/ RLBs to be undertaken for detailed audit
every year).
• The report will be issued to the Head of the
Auditee. Refer clause no. 7.2.4. for details
3. Management Team Leader The Management Letter is normally issued along with the
Letter Financial Attest Audit report at the discretion of the
Auditor. The Management Letter shall include an
Executive Summary and shall be addressed to the Head
of the Auditee. Refer clause no. 7.2.5 for details.
4. Annual DoA will prepare There will be an Annual Consolidated Report will be
Consolidated and submit to which shall be laid before the State Assembly. Refer
Report for State Finance clause no. 8.5 for details.
Assembly Department as per
point 1.3.1.
Table 39: Types of Financial Attest Audit Report

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7.2.2Evaluation of Material Misstatements and Selection of Basis for Opinion

213. The auditor should evaluate the audit evidence with a view to obtaining audit findings. When
evaluating the audit evidence and assessing the materiality of findings the auditor should take both
quantitative and qualitative factors into consideration.

214. Misstatement is the difference between what has been reported and what was supposed to be reported.
The auditor shall accumulate misstatements identified during the audit, other than those that are
clearly trivial (unimportant).

215. The auditor should determine whether misstatements are material, individually or in aggregate. The
evaluation of misstatements is done against the materiality and tolerable error limit that the auditor
has set using professional judgment. The misstatement should include the identified misstatements
and the projected misstatements based on the sample results.
(a) The size and nature of the misstatements, both in relation to particular classes of transactions,
account balances or disclosure and on the Financial Statements as a whole and the particular
circumstances of their occurrence; and
(b) The effect of misstatements related to prior periods on the relevant classes of transactions,
account balances or disclosures, and on the Financial Statements as a whole.

216. The auditor shall also evaluate a misstatement affected by the auditor’s responsibilities established
by law, regulation or other authority to report specific matters e.g. fraud. Further, issues like public
interest, accountability, probity and ensuring effective legislative oversight may affect the assessment
of whether an item is a material by virtue of its nature. This is particularly for the items that relate to
compliance with laws, regulations or other authorities.

217. Broadly two types of audit opinion will be given by the Independent Auditors.
(a) Unmodified opinion.
(b) Modified Opinions (Qualified, Disclaimer and Averse).

218. Below table will help to Independent Auditor to carry out an evaluation in order to form an opinion
on the Financial Statements.

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S. No. Indicators Evaluation Criteria Response

Yes No
1 Audit Evidence Sufficient, Appropriate √ X
2 Uncorrected material misstatements Materiality X √
3 Significant accounting policies Disclosed Adequately √ X
4 Accounting policies Consistent with financial √ X
reporting framework
Appropriate √ X
5 Accounting estimates Reasonable √ X
6 Information Presented in the Financial Relevant √ X
Statements Reliable √ X
Comparable √ X
Understandable √ X
7 Financial Statements Disclosures Adequate √ X
8 Measurement Reasonable √ X
9 Recognition Complete √ X
10 Maintenance of books of records Complete √ X
11 Adequate internal controls Adequate √ X
Table 40: Illustrative Matrix for evaluation to form an Opinion

219. From the above table if the auditor gathers a negative response on one or more indicators, the auditor
shall evaluate the pervasiveness and materiality of the same on the Financial Statements which in turn
would enable them to form the basis of opinion.

220. Thus, while determining the type of auditor’s opinion, the auditors’ professional judgment plays a
crucial role in determining the pervasiveness of the effects or possible effects of the matter that may
give rise to a modification of the auditor’s opinion on the Financial Statements. Thus, if the auditor
concludes that:
a. The result of finding is not material and Financial Statements gives a true and fair view in all
material respect then the auditor will choose the Unqualified type of Opinion.

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b. The result of finding is material but not pervasive of the Financial Statements then the auditor will
choose the Qualified type of Opinion.
c. The result of finding is material and pervasive of the Financial Statements then the auditor will
choose the Adverse type of Opinion.
d. The result of finding is material and pervasive of the Financial Statements and the auditor is unable
to obtain sufficient and appropriate audit evidence then the auditor will choose the Disclaimer of
Opinion.

221. The below figure provides an illustrative process for selecting the different kind of modified opinion
in various situations.

Figure 12: Process for deciding on type of Opinion

7.2.3 Form and Content of Independent Auditor’s Report

222. Independent Auditor’s Report, would include the following headings:

a. Title of the report
b. Addressee
c. Auditors’ Opinion

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d. Basis for Opinion

e. The Emphasis of Matter (to be reported wherever applicable)
f. Responsibilities of Management of (insert name of the ULBs/ RLBs) for the Financial Statements
g. Auditors’ Responsibilities for the Audited Financial Statements
h. Report on Legal, Regulatory and Other Requirements (to be reported wherever applicable)
i. Name, Address and Signature of Auditors along with the date
j. Appendix to the Independent Auditors Report (to be reported wherever applicable)

223. The detailed format of Independent Auditors’ Report is as under:

7.2.3.1 Title

224. The Independent Auditors Report shall have title that clearly indicates that it is an “Independent
Auditor’s Report”. The “Independent Auditor’s Report” affirms that the auditor has met all the
ethical requirements, including that of independence and therefore, distinguishes the independent
auditor’s report from reports issued by others.

7.2.3.2 Addressee

225. The auditor’s report shall be addressed as appropriate, based on the circumstances of the engagement,
law, regulations, or the terms of the engagement. The auditor’s report is normally addressed to those
for whom the report is prepared, or to those charged with governance of the entity whose Financial
Statements are being audited.
Independent Audit Report Relate To Addressed to
Gram Panchayat Panchayat Secretary
Kshettara Panchayat Block Development Officer
Zilla Panchayat Apar Mukhya Adhikari (AMA)
Nagar Panchayat Executive Officer
Nagar Palika Executive Officer
Nagar Nigam Municipal Commissioner
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Table 41: Designation of the Authority to whom the report to be addressed

7.2.3.3Auditors Opinion

226. The Financial Attest Audit is an independent assessment of the Financial Statements prepared by the
ULBs and RLBs, wherein the auditor expresses an opinion providing reasonable assurance regarding
whether, in all material respects, the Financial Statements are prepared as per the applicable financial
reporting framework or not. In this section, the opinion shall be provided by the auditor based on the
audit of the Financial Statements.

227. The Independent Auditor’s Report shall include a section called ‘Opinion’. Before framing an
opinion on the Financial Statements, the auditor should consider the following conditions:
 Whether Financial Statements are prepared in all material respects, in accordance with the
applicable Financial Reporting Framework. Refer clause no. 5.6.2.“Financial Reporting
Framework” under Chapter-5 “Audit Planning and Preparation”.
 Whether the Financial Statements as a whole are free from material misstatements whether due to
fraud and error. This conclusion should be based on the following:
o Whether appropriate audit evidence has been obtained as required by ISSAI 2330 “Auditors
Response to Assessed Risk” and
o Whether uncorrected misstatements are material individually, or in aggregate, in accordance
with ISSAI 2450 “Evaluation of Misstatement Identified during the Audit.
 Consideration of the qualitative aspects of accounting practices.

A. Unmodified Opinion

228. The auditor gives an unmodified opinion when the auditor concludes that Financial Statements are
prepared in all material aspects, in accordance with the applicable Financial Reporting Framework.
However, the wording of the opinion paragraph of the auditor’s report will depend on the type of
reporting framework used by the entity in preparing the Financial Statements, i.e. either the fair
presentation framework or the compliance framework. In Uttarakhand, the Financial Statements of
ULBs are prepared in accordance with the provisions specified in Uttarakhand Municipal
Accounting Manual (UMAM)2021 and Financial Statements of RLBs are prepared in accordance

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with Simplified Format of Accounts for PRIS, 2009.The above Financial Reporting Framework
follows the accounting policy which provide emphasis on providing Fair presentation of Financial
Statements (i.e. Financial Statements give true and fair view). Therefore, the Financial Reporting
Framework used by the ULBs and RLBs are Fair Presentation Framework. Accordingly, the
unmodified opinion of the auditor shall include the following phrase:
“In our opinion, the accompanying Financial Statements give a true and fair view, in all material
respects, of the financial position of the [name to the entity] as at March 31, 20XX in accordance with
[the applicable Financial Reporting Framework].”The format of unmodified opinion for ULB and
RLB is provided in Volume-II of this manual. Refer to Section 12.1.8.1 and Section 12.1.11.1 of
Chapter 12 “Forms, Format and Audit Checklist” Volume II for Format of Format Independent
Audit Report in case of Unmodified opinion.

229. Basis of Opinion:The auditor gives the unmodified opinion on the Financial Statements when the
auditor concludes that:
 Financial Statements are prepared in accordance with the applicable financial reporting framework
in all material aspects and free from any material errors, irregularities or misstatements.
 Accounting policies are followed consistently.
 Total value of errors or irregularity or deficiencies is less than or equal to the threshold limit
decided in audit materiality step.
 There is adequate disclosure of all information relevant for a proper understanding of the Financial
Statements and it gives a true and fair view in conformity with the applicable financial reporting
framework

B. Modified Opinion

230. The auditor gives the modified opinion on the Financial Statements when the auditor concludes that:
 Based on the audit evidence obtained, the Financial Statements as a whole are not free from material
misstatement e.g. disagreement with the accounting policies used by the ULB/ RLB or accounting
transactions made in the books of accounts; or
 Unable to obtain sufficient &appropriate audit evidence to conclude that the Financial Statements
as a whole are not free from material misstatement e.g. lack of access to certain areas of accounting
transactions/documents or failure by the management to produce documents. The format of
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modified opinion for ULB and RLB is provided in Volume-II of this manual. Refer to Section
12.1.8.2 to 12.1.8.4 and Section 12.1.11.2 to 12.1.11.4 of Chapter 12 “Forms, Format and Audit
Checklist” Volume II for Format Independent Auditor’s Report in case of Modified Opinion.

231. The extent of modification in the auditor’s opinion shall depend on the circumstances and pervasive
effects of the matter, or its possible effects on the Financial Statements. Therefore, while determining
the type of modified opinion, auditors’ professional judgment plays a crucial role in determining the
pervasive effects or possible effects of the matter on the Financial Statements.

232. Pervasive Effects on the Financial Statements: Pervasive effects are those that are not confined to
specific elements, accounts or items in the Financial Statements. These misstatements represent the
substantial part of the Financial Statements. Auditor’s opinion is based on their judgment about the
pervasive effects or possible effects of a matter on the Financial Statements, is provided in the below
table.
Nature of Matter Giving Rise to Material but not Material and Pervasive
Modification Pervasive
Financial Statements are materially Qualified Opinion Adverse Opinion
misstated
Inability to obtain sufficient Qualified Opinion Disclaimer of Opinion
appropriate audit evidence (not due
to the auditor)
Table 42: Effect of pervasiveness on Opinion

I. Qualified Opinion

233. Where the auditor is uncertain or disagrees with one or more particular items of the Financial
Statements that are material but not fundamental to understanding of the accounts, a qualified opinion
should be given. A qualified opinion is expressed when the auditor concludes that there are material
errors or irregularity, or deficiency appears in the Financial Statements of the audit unit or the audit
team is unable to obtain adequate evidence against error or irregularity or deficiency noted during the
audit. Accordingly, the qualified opinion of the auditor shall include the following phrase:

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“In our opinion, except for the effects of the matter(s) described in the basis for Qualified Opinion, the
accompanying Financial Statements give a true and fair view, in all material respects, of the financial
position of the [name to the entity] as at March 31, 20XXX in accordance with [the applicable
Financial Reporting Framework].”Refer to Section 12.1.8.2 and Section 12.1.11.2 of Chapter 12
“Forms, Format and Audit Checklist” Volume II for Format of Format Independent Auditor’s
Report in case of Qualified Opinion.

234. Basis of opinion: Audit team shall select the qualified audit opinion where any of the following
situations arise:
 The audit team have obtained sufficient and appropriate audit evidence and concludes that errors
or irregularity or deficiency, individually or in aggregate are material i.e. total value of errors or
irregularity or deficiencies is greater than the threshold limit decided in the audit materiality step;
or
 The audit team is unable to obtain sufficient and appropriate audit evidence against the error or
irregularity of deficiency noted during the audit.

235. In both the above situation, if the auditor concludes, based on their professional judgment that the
above deficiencies or limitation is material, but not pervasive, qualified opinion shall be given.

II. Adverse Opinion

236. Where an auditor is unable to form an opinion on the Financial Statements taken as a whole due to
disagreement which is so fundamental that it undermines the position presented to the extent that an
opinion that is qualified in certain respects would not be adequate then an adverse opinion shall be
given. The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both
material and pervasive to the Financial Statements. An adverse opinion is expressed when the audit
team found any fraud, embezzlement, defalcation of cash which are pervasive to the Financial
Statements and audit team concludes that qualification of the report is not adequate to disclose the
misleading or incomplete nature of the Financial Statements. Accordingly, the adverse opinion of the
auditor shall include the following phrase:

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“In our opinion, because of the significance of the matter(s) described in the basis for Adverse Opinion,
the accompanying Financial Statements do not give a true and fair view, of […………………]in
accordance with [the applicable Financial Reporting Framework].”Refer to Section 12.1.8.3 and
Section 12.1.11.3 of Chapter 12 “Forms, Format and Audit Checklist” Volume II for Format of
Format Independent Auditor’s Report in case of Adverse Opinion.

237. Basis of opinion: The audit team shall select the adverse audit opinion where any of the following
situations arise and the auditor concludes, based on their professional judgment that the deficiencies
or limitation is material and pervasive to the financial statement then qualified opinion shall be given.
 After having obtained sufficient audit evidence, the audit team found cases of fraud,
embezzlement, or defalcation of cash which affect validity and truthfulness of the accounts/
Financial Statements which are materially and pervasive to the Financial Statements.
 The audit team observes that the audit unit has not maintained accounts (i.e. books of accounts/
records/ registers/ documents and information etc.) in accordance with forms and formats as
prescribed under rules and regulations which governed such audit unit and the effect of which is
material and pervasive to the financial statement.

III. Disclaimer of Opinion

238. The auditor disclaims an opinion only when he concludes that, for the items or accounts, they could
not obtain sufficient and appropriate audit evidence to provide the basis for an opinion on the
Financial Statements and the effect of which could be so material and pervasive to the financial
statements. However, if the effects of the items or accounts are immaterial or material, but not
pervasive, the auditor issues a qualified opinion. In other words, a disclaimer type of opinion is
expressed in a situation where the audit team has not been able to obtain sufficient and appropriate
audit evidence and accordingly is unable to express an opinion on the Financial Statements. Such an
opinion may be issued in case of non-maintenance of records or non-production of records etc.
Accordingly, the Disclaimer of Opinion of the auditor shall include the following phrase:

“We do not express an opinion, on the accompanying Financial Statements. Because of the significance
of the matters described in the Basis for Disclaimer of Opinion section, we have not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion on the Financial
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Statements”. Refer to Section 12.1.8.4 and Section 12.1.11.4 of Chapter 12 “Forms, Format and
Audit Checklist” Volume II for Format of Disclaimer of Format Independent Auditor’s Report in
case of Opinion.

239. Basis of opinion: Audit team shall select the disclaimer of opinion where any of the following
situations arise and the auditor concludes that they could not obtain sufficient and appropriate audit
evidence to provide basis for opinion on the Financial Statements and the effect of which could be so
material and pervasive on the financial statements then disclaimer of opinion shall be given.
 The audit team member observed that the audit unit has not maintained appropriate accounts (i.e.
books of accounts/ records/ registers/ documents and information etc.) as prescribed in the rules
and regulations which govern the audit unit or audit unit refuses to produce books of accounts for
audit.
 There has been limitation on the scope of audit.

7.2.3.4 Basis for Opinion

240. This section shall provide a description of the matters due to which the auditors provide unmodified
or modified opinion. This section also includes a para on the auditing standards and code of ethics
followed by the auditors. The basis for framing an opinion has been explained at clause no. 7.2.2
above. The wording to be used for the basis of opinion has been provided in the Format of
Independent Auditors Report. Refer to Section 12.1.8 and Section 12.1.11 of Chapter 12 “Forms,
Format and Audit Checklist” Volume II for Format of Independent Auditor’s Report.

241. The heading of this section shall be based on the type of opinion provided by the auditor such as
“Basis for Unqualified Opinion”, “Basis of Qualified Opinion”, “Basis of Adverse Opinion” and
“Basis of Disclaimer Opinion”.

7.2.3.5 Emphasis of Matter Paragraph (only if applicable)

242. The Emphasis of Matter paragraph which is included immediately after the Opinion paragraph does
not affect the audit opinion. An ‘Emphasis of Matter’ paragraph reflected in the auditor’s report

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emphasize a matter already presented or disclosed in the Financial Statements. However, the
purpose of this paragraph is to draw the attention of the user to those matters that, in the auditor’s
judgment, are fundamental to the user’s understanding of the Financial Statements. The wording for
Emphasis of Matter has been provided below:
“We draw attention to note X to the Financial Statements, which describes the uncertainty regarding
the future outcome of an outstanding litigation against XXXX. However, we have not qualified our
opinion in respect of this matter.”Refer to Section 12.1.8 and Section 12.1.11 of Chapter 12 “Forms,
Format and Audit Checklist” Volume II for Format of Independent Auditor’s Report.

7.2.3.6 Responsibilities of Management of(name of the ULB/ RLB) for the Financial Statements

243. This section of the auditor’s report describes the responsibilities of those in the entity that is
responsible for the preparation of the Financial Statements. The auditor’s report shall include a section
with the heading “Responsibilities of Management for the Financial Statements.” The auditor’s
report shall use the term that is appropriate in the context of the legal framework applicable to the
entity and need not refer specifically to “management”. In some entities, the appropriate reference
may be to those charged with governance.

244. The auditor’s report shall describe management’s responsibility for the preparation of the Financial
Statements. The description shall include an explanation that management is responsible for the
preparation of the Financial Statements in accordance with the applicable financial reporting
framework, and for such internal control as it determines necessary to enable the preparation of
Financial Statements that are free from material misstatement, whether due to fraud or error. Refer to
Section 12.1.8 and Section 12.1.11 of Chapter 12 “Forms, Format and Audit Checklist” Volume
II for Format of Independent Auditor’s Report.

7.2.3.7 Auditors Responsibilities for the Audit of the Financial Statements

245. The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for the
Audit of Financial Statements”.

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246. This section state the auditor’s responsibility to express an opinion on the Financial Statements based
on the audit. This section of the auditor’s report shall:
I. State that the objectives of the Financial Attest Audit are to:
a. obtain reasonable assurance about whether the Financial Statements as a whole are free from
material misstatements, whether due to fraud or error; and
b. issue an Independent Auditor’s Report that includes auditor’s opinion.
II. State that the reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance to the applicable auditing standards will always detect a material
misstatement when it exits; and
III. State that the misstatement can arise from fraud or error, and either.
a. They are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of the users taken on the basis of these
Financial Statements; or
b. Define or describe materiality in accordance with the applicable financial reporting
framework.

7.2.3.8 Report on Legal, Regulatory and Other Requirements (to be reported wherever applicable)

247. In case of ULBs there is an additional requirement for the auditors to report on specific matters as
provided in Chapter 12. This additional reporting necessitates enhanced due diligence and is designed
to bring in greater transparency in the state of affairs of the ULBs for the benefit of the users of the
Financial Statements. Section 12.1.8.5 of Chapter 12 “Forms, Format and Audit Checklist”
Volume II for Report on Legal, Regulatory and Other Requirements.

248. In addition to the above, any other matter which is notified by the State Government needs to be
reported as an annexure to the auditors’ report. Such additional reporting will be applicable from the
year as desired by the State Government.

7.2.3.9 Name Address and Signature of Auditor

249. The Independent Auditors’ Report shall be signed either digitally through digital signature or in hard
copy as per the below matrix:
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Independent Preparation First Level Review Final Review,

Audit Report &Submission of Audit Approval and
Relate To Report Signature*
Gram Team Leader Officer Authorized by the Deputy Director,
Panchayat Director, Audit not below the Audit
rank of Assistant Director, Audit
Kshettara Team Leader Officer Authorized by the Joint Director, Audit
Panchayat Director, Audit not below the
rank of Deputy Director, Audit
Zilla Panchayat Team Leader Officer Authorized by the Director, Audit
Director, Audit not below the
rank of Deputy Director, Audit
Nagar Team Leader Officer) Authorized by the Joint Director, Audit
Panchayat Director, Audit not below the
rank of Deputy Director, Audit
Nagar Palika Team Leader Officer Authorized by the Additional Director,
Director, Audit not below the Audit
rank of Deputy Director, Audit
Nagar Nigam Team Leader Officer Authorized by the Director, Audit
Director, Audit not below the
rank of Deputy Director, Audit
Table 43: Matrix for signature of the Independent Auditor’s Report.

*All the above posts are under the DoA. In case where any of the above posts is vacant, the auditors’ report
shall be signed by an officer authorized by the Director, Audit. Further, in case of fraud, adverse type of
opinion and disclaimer type of opinion, the auditors’ report will mandatorily be sent to Director, Audit for
his/her review and approval before signed by the appropriate authority.

250. The auditor’s report shall be dated not earlier than the date on which the auditor has obtained sufficient
appropriate audit evidence to form an opinion on the Financial Statements

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7.2.3.10 Appendix to Independent Auditor’s Report

251. The appendix to the Independent Auditor’s report shall include details regarding the responsibilities
and functions of the auditors while carrying out the Financial Attest Audit. This section includes
detailing of the auditor responsibilities which has been summarized in the clause no. 7.2.3.7 above.
Refer to Section 12.1.8and Section 12.1.11 of Chapter 12 “Forms, Format and Audit Checklist”
Volume II for Format of Independent Auditor’s Report.
7.2.4 Detailed Audit

252. The detailed audit will be done in limited cases and will cover only a few audit entities every year. the
detailed audit will be initiated either on the direction of the Finance Department or Director, Audit. the
detailed audit may be conducted in the following cases:
a. Where audit findings from Financial Attest Audit are significant/material/pervasive and there is
a need to apply detailed audit procedures to identify the cause and effect of these findings (i.e.
for qualified, adverse and disclaimer type of opinion).
b. Instances of fraud or serious irregularities are noticed during Financial Attest Audit.
c. Special request from HoA to conduct a detailed audit for specific units.
d. Sample units selected for detailed audit every year at the discretion of the Director, Audit.

253. A detailed audit will be conducted with respect to the ULBs and RLBs except for Gram Panchayat.
However, if a Gram Panchayat falls under any category mentioned in para 252(a), (b) and (c) above,
the detailed audit will be conducted with the approval of the Finance Department.

254. Detailed audit report will be issued to the management of the audit unit and shall include the following
information. For conducting the detailed audit procedures specified in “Audit of ULBs and RLBs
Manual” shall be referred.

255. The content of the detailed audit report has been provided below.
a. General Information
b. Audit Observation, Conclusion and Recommendations
c. Compliance of Previous Audit Observations

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Refer to Section 12.1.9 and Section 12.1.12 of Chapter 12 “Forms, Format and Audit Checklist”
Volume II for Format of Detailed Audit Report.

7.2.4.1 General Information

256. This would provide brief information about the auditee and the auditor.
 Audit Unit’s Profile: provides basic details about the audit unit such as name of the auditee, address
& contact details of the auditee, name of the HoA, name of the senior account person and DDO.
 Auditor’s Profile: provides basic details about the team leader and team members such as name
and contact details (email and phone no.) of the audit team member.
 Audit Profile: provides basic details such as audit period, the start date of audit, the end date of
audit allocated man days and actual man days etc.

7.2.4.3 Audit Observations, Conclusion, and Recommendations

257. This section would include the details of observations along with their categorization as mentioned
in clause no. 7.1.1 above. This section shall cover all major irregularities noticed during the course
of the Financial Attest Audit, its impact (quantitative or qualitative), the response received from audit
units on the observations etc. This section shall become the base for audit follow- ups and compliance.
The auditor shall also provide recommendations, if any, for each observation in this section. Further,
the observation mentioned in this section may also form the basis for auditors to provide their opinion.

7.2.4.4 Compliance to Previous Years’ Audit Observations

258. In this section, the auditors shall provide the status of compliance/ action taken by the auditee with
respect to the audit observations reported in the previous year’s Financial Attest Audit report.
7.2.5 Management Letter

259. The outcome of the Financial Attest Audit is not only to express an opinion on the Financial
Statements but also to add value in improving the financial management and controls. The
Management Letter shall be issued along with the Financial Attest Audit report at the discretion of
the Auditor and shall be conveyed to the Head of the Auditee.
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260. The content of the Management Letter is provided below.

a) Executive summary
b) Good practice: highlighting the good practices observed during the Financial Attest Audit report.
c) Key, analysis, issues and recommendation.
d) Details of Audit Observation

Refer to Section 12.1.10 and Section 12.1.13 of Chapter 12 “Forms, Format and Audit Checklist”
Volume II for Format of Management Letter.

7.3 Review, Approval, and Issuance of Financial Attest Audit Report

261. The process flow for submission, review, approval, and issuance of Financial Attest Audit Report to
the individual auditee is explained below:

• Convert the HMM created by them into audit para and submit same
Audit Team Member
to the team leader for review and approval

• Review the audit paras converted by the team member and

consolidate all the audit paras at one place for preparation of the
Audit Team Leader Financial Attest Audit report. Thereafter, the Financial Attest Audit
report will be submitted to Supervising Officer for review and
approval.

• Review and approve the Financial Attest Audit report submitted by

the team leader and then it will be submitted to the appropriate
Supervising Officer
authority for final review, approval and signature as per matrix
provided in clause no. 7.2.3.9.

Review, Approval and • Once the Financial Attest Audit report is reviewed, approved and
Issuance of Audit signed by the appropriate authority as per the matrix provided in
Report clause no.7.2.3.9, it will be issued to the Auditee.
Figure 13: Review, Approval, and Issue of Financial Attest Audit Report

7.3.1 Audit Team Members

262. Audit team members shall convert HMM created by them into audit para and submit same to the
team leader for review and approval.

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7.3.2 Audit Team Leader

263. The team leader shall review the audit para submitted by the team member before consolidating all
the audit para at one place for the preparation audit report. While reviewing the audit para of team
members team leader can either drop, edit or delete the audit para on merit or advise them for making
necessary changes. However, such rejection or approval to audit para by the team leader can be done
only once.

264. Post consolidation of all audit paras at one place, the team leader shall prepare Financial Attest Audit
report in the prescribed format provided in OAMS within 15 days from the date of exit conference
meeting. The team leader before finalising the Financial Attest Audit report including opinion on the
Financial Statements will consult with the team members. Once the Financial Attest Audit report is
finalised by the team leader it will be submitted to the Supervising Officer for review and approval.

7.3.3 Supervising Officer

265. The Supervising Officer shall review the Financial Attest Audit report submitted by the audit team
leader.
266. The Supervising Officer shall either approve or return the Financial Attest Audit report to the team
leader for correction, if any with respect to improvement in languages, reference to Acts, Rules,
Regulations, or notification.

267. The Supervising Officer can return the Financial Attest Audit report to the team leader for correction
or modification only once.

268. The Supervising Officer shall take all necessary efforts to review and approve the Financial Attest
Audit report within 30 days from the date of the exit conference meeting. As soon as the Financial
Attest Audit Report is approved by the Supervising Officer in OAMS it will be submitted to the
appropriate authority for final review, approval, and signature as per the matrix provided in clause
no. 7.2.3.9 above.

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269. The Financial Attest Audit report prepared by the CA Firms shall also be reviewed by the Supervising
Officer by following the same procedure and then it shall be finally reviewed, approved, and signed
by the appropriate authority. Refer to Section11.2 to 11.2.3 of Chapter 11 “Appointment of
Chartered Accountant Firms” for Provisions Related Work of CA Firms.

7.3.4 Final Review and Approval and Issuance of Financial Attest Audit Report

270. The Supervising Officer on being satisfied with the quality of the Financial Attest Audit report
submitted by the team leader shall approve the same in OAMS and then it will be submitted to the
appropriate authority for their review, approval and signature as provided in clause no. 7.2.3.9 above.

271. In case the appropriate authority has any comments/ suggestions which need to be addressed, the
same shall be communicated to the audit team leader through the Supervising officer for necessary
correction.

272. On receipts of the comments and suggestions, the team leader shall carry out the necessary correction
as suggested and then resubmit the Financial Attest Audit Report by following the same procedures
as provided above.

273. However, in case of fraud, adverse or disclaimer type of opinion, the Financial Attest Audit Report
shall be sent to the Director, Auditor for review and approval before it is signed by the appropriate
authority provided in clause no. 7.2.3.9 above and in case of Gram Panchayat only for disclaimer
type of opinion, it will be sent to Additional Director, Audit or Joint Director, Audit for review and
approval.

274. The Financial Attest Audit report review, approval, signed by the appropriate authority and issuance
to the auditee to be completed within 45 days from the date of exit conference meeting.

OAMS Functionality: The Financial Attest Audit report would be prepared by the team leader on the
functionality provided in OAMS and then it will be sent to the appropriate authority for review, approval,
and signature. The signature on the Financial Attest Audit Report will be done digitally.

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Chapter 8: Audit Monitoring, Follow Up and Compliance

275. This chapter describes the steps that are to be followed for Audit Monitoring, Follow Up and
Compliance. It would be the responsibility of the auditee to comply with the audit paras reported in
the Financial Attest Audit Report and to take appropriate steps to implement the recommendations
provided in the Financial Attest Audit report in time bound manner.

276. The objective of this chapter is to ensure that observations and recommendations provided in the
Financial Attest Audit report should be complied with by the auditee in time bound manner. So that
similar types of observations could be avoided in the future. This chapter has been divided into the
following sections:
8.1 Introduction
8.2 Audit Monitoring Process
8.3 Audit Follow up Process
8.4 Audit Review Compliance Committees
8.5 Guidelines for Accelerating the Follow up Procedure

8.1 Introduction

277. The audit monitoring and compliance process will be done at two levels:

a. The Officers Authorised by the Director, Audit: The officers authorised by the Director, Audit
would be responsible to monitor the progress of audit execution work and review about the quality
of the Financial Attest Audit Report prepared and submitted by the team leader. The officers
authorised by the Director, Audit would also be responsible for follow up and compliance of audit
paras reported in the last year’s Financial Attest Audit Report and would submit the “Quarterly
Progress and Performance Report” to the Director, Audit about the progress of Financial Attest
Audit work, comments on the quality of work done by the audit team and status on compliance of
audit paras reported in previous years Financial Attest Audit Report.

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b. Director, Audit: After issuance of the Financial Attest Audit Report to the auditee, Director, Audit
is entrusted to monitor the compliance of audit paras reported in the Financial Attest Audit Report.
The Director, Audit in every six months shall prepare the compliance report of the audit paras and
submit the same to Finance Department which will be presented to State Level Committee for
review and suggestion of the Committee.

278. The important timelines for compliance with the audit paras reported in the Financial Attest Audit
report are as under:
Particular Report to Responsibility Timelines Reference
Submission of action DoA Audit Unit Within 1 month form the Refer Clause
plan taken or proposed date of receipt of FAA No.8.2
be taken against each of Report
the audit para
Submission of DoA Audit Unit Within 3 months from the Refer Clause
Compliance Report date of receipt of FAA No.8.2
report or within such
extended time as
permitted by the Director,
Audit.
Quarterly Progress and DoA and FD Officers Within 15 days from the Refer Clause
Performance Report as per clause Authorised by close of each quarter No.8.2.1
no. 1.3.1 & the Director,
1.3.2.1 Audit
provided
above
Status Compliance State Level DoA Once in every six Months Refer Clause
Report Audit No.8.2.2
Review
Committee
Table 44: Timelines for submission of compliance to audit report

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8.2 Audit Monitoring Process

279. On receipt of the Financial Attest Audit Report under Section 8 of the Uttarakhand Audit Act, 2012,
the auditee shall take immediate action and submit replies to Supervising Officer within one month
against each point raised therein, showing the action taken or proposed to be taken thereon.

280. The Financial Attest Audit report along with the comments of the auditee shall also be placed before
the Departmental Audit Review Committee for review on the adequacy of the response.

281. The Departmental Audit Review Committee shall be constituted for review on the adequacy of the
compliance done by the audit units. It shall be the responsibility of the auditee to ensure that the audit
observations and irregularities reported in Financial Attest Audit report are addressed within three
months from the date of the receipt of the Financial Attest Audit Report.

282. The Director UDD/Director PRI shall be responsible for periodically follow up on the status of
compliance of the audit findings. Refer clause no. 8.4.1 about the Departmental Audit Review
Committee.

283. The DoA will institute processes for monitoring and follow up with the auditee for compliance of
outstanding audit paras reported in the Financial Attest Audit Report. On a periodic basis the DoA
will verify whether the auditee has taken necessary steps to comply with audit paras and implemented
the recommendation made in the Financial Attest Audit Report or not. On a Quarterly basis the DoA
shall update to Finance Department on the status of compliance carried out by the auditee.

284. The Audit Cell within 15 days from the date of the receipts of status of compliance report would apprise
to Secretary, Finance on the compliance carried out by the auditee along with the details of serious
paras pending for compliance at each audit unit.

8.2.1 Supervising Officer

285. The Supervising Officer will be responsible for timely and efficient execution of quarterly/annual
audit plans. The Supervising Officer shall prepare and submit a “Quarterly Progress and

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Performance Report” to the Director, Audit on the progress of the Financial Attest Audit work
carried out by the audit team within 15 days from the close of each quarter. The Supervising Authority
shall also responsible to oversee whether work allocated to the respective audit team is expected to
complete within the stipulated timelines or not and the team has sufficient audit allocation.

286. Apart from the above, Supervising Officer would also be responsible for quality review of the
Financial Attest Audit Report prepared and submitted by the audit team and monitor the compliance
of the previous year’s audit paras reported in the Financial Attest Audit Report. The content of the
‘Quarterly Progress and Performance Report’ will be as under:

a. Part A: The summary of the Quarterly Progress and Performance Report will include the status
of audit execution up to the reporting period, plan for the ongoing quarter, remaining annual audit
plan, and any other challenges and issues along with suggestions on staffing issues, backlog, etc.
This report should also include the comments on the audit findings noted for Quality Assurance
Improvement Program (QAIP).
b. Part B: Status of Audit Plan up to the reporting period includes:
 List of audit units where audit is yet to begin.
 List of audit units that are in the execution stage.
 List of audit units where Finance Attest Audit is completed but issuance of the Finance Attest
Audit Report is pending.
 List of audit units to whom Finance Attest Audit Report has been issued.
 List of Audit Team with number of audits allotted and status (yet to begin, in the execution
stage, completed but the issue of Finance Attest Audit Report is pending, and Financial Attest
Audit Report issued)
 Details of deviation in planned audit activities with the actual together with the reasons for
such deviation (if any) and suggestions.
 Suggestion relating to Quality Assurance Improvement Program (QAIP) for the audit team.
 Comments on the status of compliances carried out by the audit unit with respect to audit paras
reported in the previous year’s Financial Attest Audit Report.
c. Part C: Plan for the Ongoing Quarter and remaining Annual Audit Plan.
 The number of audit units planned.

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 Details of planned audit team deployment.

d. Part D: The Quarterly Progress and Performance report may also include such other specific items
as per the guidelines issued by Director, Audit and Finance Department. Refer to Section12.1.14
of Chapter 12 “Forms, Format and Audit Check List” for Format of Quarterly Progress and
Performance Report.

OAMS Functionality: OAMS will provide MIS for the Quarterly Progress and Performance Report for
monitoring the status of audit executed, in progress and yet to start. Once the system stabilizes, the DoA
may mandate at least monthly updating of the data so that the report is available with improved frequency.
The dashboard of OAMS provides information relating to total number of audit units scheduled, number
of audit units pending for audit, number of audit units where audit is in progress and number of audit
units completed for the month.
8.2.2 Monitoring by Director, Audit

287. The auditee on receipts of the Financial Attest Audit report shall submit action taken or proposed to
be taken against each audit paras to Director, Audit within one month.

288. The Director, Audit is vested with the responsibility to monitor for compliance with the audit paras
and for implementation of the recommendations reported in the Financial Attest Audit report. In the
Financial Attest Audit Report, there may be audit paras that are of serious nature and require immediate
action by the auditee. Therefore, the Director, Audit or any person authorised by Director, Audit is
responsible to carry out the following activities on regular basis:
a. Whether auditee has submitted action taken report or proposed action to be taken against each of
the audit paras/recommendations reported in the Financial Attest Audit report within one month
from the date of receipt of such report. Consolidate the status of compliance carried out against
each audit paras /recommendations provided in the Financial Attest Audit Report as per the action
plan submitted by the auditee.
b. Put up the status of the compliance report before the State Level Audit review committee for its
review and suggestions.
c. Consolidate the decision of the State Level Committee and communicate the directions to the
auditee and to their Administrative Department for action.

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8.3 Audit Follow Up Process

289. Follow up is a process that evaluates the adequacy, effectiveness and timeliness of actions taken by
concerned officials of the auditee on the observations and recommendations reported in the Financial
Attest Audit Report. The Director, Audit shall determine the nature, timing, and extent of follow up
process based on the following factors:
 Significance (or materiality) of the reported observations or recommendations.
 Degree of effort and cost needed to correct the reported observations or recommendations.
 The impact that may result in case the corrective action is not implemented.
 The complexity of the corrective action.
 The time period required to resolve the observation or act upon the recommendation.

290. The audit unit shall send the compliance detail against each of the audit paras to the Director, Audit
within one month from the date of receipt of Financial Attest /Detailed Audit report through OAMS.

291. Timeline for follow-up procedure for the audit paras is provided below:
Action Timelines Responsibility
1st reminder for seeking On completion of one month from the date of Through OAMS by
compliance issue of Financial Attest /Detailed Audit Report DoA to ULBs/
RLBs and in case of
GPs DPRO
2nd reminder for seeking Within 30 working days from the date of first Through OAMS by
compliance letter of reminder DoA to ULBs/
RLBs and in case of
GPs DPRO
3rd reminder: Official letter to Within 30 working days from the date of second Through OAMS by
the Administrative letter of reminder DoA to ULBs/
Department of the Auditee i.e. RLBs and in case of
Director UDD and Director GPs DPRO
Panchayati Raj
Table 45: Timeline for follow-up

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292. The status of compliance would be monitored through OAMS. The OAMS will provide the dashboard
on a real time basis about the audit paras pending for compliance and the audit paras which have
already been compiled by the auditee.

293. The Director, Audit based on the above report will compile common and recurring nature of
observations and discuss the same for resolution with the Director UDD or Director Panchayati Raj
or with their designated representatives. Such observations will be considered and dealt with at the
central level between the Finance Department and Director, Audit before escalating it at the State
Level Audit Review Committee. Such observation can be of the systemic issues, deficiency in some
direction or rule or absence of guidelines. Refer clause no 12.1.15of “ Forms, Format and Audit
Checklist” Volume-II for Format of Follow up Report and Detailed Follow up report on Action
Taken by the Management/ Auditee.

OAMS Functionality: The Quarterly Progress and Performance Report and Follow up Register shall be
prepared and maintained through OAMS. The template for Quarterly Progress and Performance Report
would be integrated in the OAMS. The integration of the above formats on the OAMS would be done in
such a manner that it would ensure auto-populating of maximum data which is already available in the
database. Further, the follow-up process including sending of reminders shall also be carried out through
OAMS to the extent possible.

8.4 Audit Review Compliance Committees

294. There shall be two Audit Review Compliance Committees for observations/recommendations
reported in Financial Attest /Detailed Audit Report as provided below:
a. Departmental Audit Review Committee
b. State Level Audit Review Committee

8.4.1 Departmental Audit Review Committee

295. There will be Departmental Audit Review Committee at ULB/ RLB level which shall be
responsible for compliance of observations/recommendations reported in the Financial Attest Audit

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Report. The committee on a quarterly basis shall review the compliance done by the audit unit and
shall send its report to the Director, Audit for consideration.

296. The Composition of the Departmental Audit Review Committee will be as under (Separately for
Directorate Urban Development and Panchayati Raj):

1 Head of ULB/ RLB (Director of Urban Development/ Director of Panchayati Chairman

Raj)
2 Representative of Directorate of Audit as nominated by Director of Audit Member
3 Finance Controller/Finance Officer of the Directorate of Urban Development/ Member
Directorate of Panchayati Raj
4 Representative nominated by the Head of ULB/ RLB (Director of Urban Member
Development/ Director of Panchayati Raj) Secretary
5 Respective Auditee ( Member
Table 46: Constitution of Departmental Audit Review Committee. In case of GPs the DPRO will be the member for point 5

297. The functions, roles and responsibility of Departmental Audit Review Committee is as under:
• The Committee meeting shall be scheduled once in a every quarter
• Review of the audit compliance report submitted by various audit units with respect to the serious
and non-serious observations made in the Financial Attest /Detailed Audit Report and issue
direction and guidelines to the audit unit for compliance.
• Recommend to respective administrative department to carry out a departmental inquiry to find
out the responsible person in case clear misuse or misappropriation of funds were observed and
ensure the recovery of public money based on the departmental inquiry and evidence.
• To act upon the directions of State Level Audit Review Committee.

8.4.2 State Level Audit Review Committee

298. There shall be a State Level Committee for review of the compliance of the finding reported in the
Financial Attest Audit report.

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299. The Composition of the State Audit Review Committee will be as under:

1 Chief Secretary, GoUK Chairman

2 Secretary Finance of GoUK Member Secretary
3 Secretary UDD Member
4 Secretary Panchayati Raj Member
5 Director UDD Member
6 Director Panchayati Raj Member
7 Director, Audit Uttarakhand Member
8 Joint Secretary Audit Cell Member
9 Finance Controller ULB and Panchayat Raj Member
Table 47: Constitution of State Level Review Committee

300. The functions, roles and responsibilities of the State Level Audit Review Committee is as under:
• Committee meeting shall be scheduled once in every six months.
• Review of minutes and recommendations of the Departmental Audit Review Committee.
• Review the common and recurring observations of systemic nature to be dealt with at the State
Level.
• Advice concerned administrative department for disciplinary proceedings regarding serious paras
identified in the Financial Attest Audit report.
• Review and provide suggestions to the Finance Department and Director, Audit for preparation of
Annual Consolidated Audit Report to be placed before the State Assembly.

OAMS Functionality: The Compliance report and the actions taken report shall be submitted by audit
unit and Departmental Audit Review Committee respectively through OAMS. Minutes of the Committee
proceedings shall also be uploaded on OAMS.

8.5Annual Consolidated Audit Report to be Placed before the State Assembly

301. This report will be a consolidated report based on various audit reports issued during the year and
will provide a synopsis of systemic and other issues which will help the Assembly to understand the

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status of accounts and audit of ULBs and RLBs. The Annual Consolidated Audit report of ULBs and
RLBs shall be laid before the State Assembly as per Section 8(3) of the Uttarakhand Audit Act 2012
within a period of 12 months from the end of each financial year. The Annual Consolidated Report
shall be prepared by the Director, Audit and shall be submitted to the Finance Department which shall
be laid before the State Legislature by Principal Secretary/ Secretary, Finance.

Refer Clause No. 12.1.16 under Chapter 12: “Forms, Format and Audit Check List” - Volume II for
Format of Annual Consolidated Report to be Placed before State Assembly

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Chapter 9: Quality Assurance Framework

The International Standards of Supreme Audit Institutions (ISSAI) standard 20, Principle 3 states,
“SAIs should implement an appropriate system of quality assurance over their audit activities and
reporting and subject such system to periodic independent assessment.” Additionally,ISSAI-200 on
INTOSAI Auditing Standards-General Standards paragraph 1.27 states the SAI should establish
systems and procedures to:
(a) confirm that integral quality assurance processes have operated satisfactorily.
(b) ensure the quality of the audit report; and
(c) secure improvements and avoid repetition of weaknesses
As per the International Standards of Supreme Audit Institutions (ISSAI) standard 2220 “Quality
Control for an Audit of Financial Statements”, An effective system of quality control must include a
monitoring process designed to provide the firm with reasonable assurance that its policies and
procedures relating to the system of quality control are relevant, adequate, and operating effectively.

9.1 Quality Assurance and Improvement Program (QAIP)

302. The Quality Assurance and Improvement Program (QAIP) is “an ongoing and periodic assessment
of the entire spectrum of audit work performed by the audit team. These ongoing and periodic
assessments comprised of rigorous and comprehensive supervision; testing the quality of the
Financial Attest Audit report issued by the audit parties are in compliance with the regulatory
requirements and standards set out in this Financial Attest Audit manual.

303. The quality assurance and improvement program within the department will consist of the following.
a. Execution of Financial Attest Audit in accordance with the mandate and in compliance with the
regulations, manuals, instructions, and guidelines of the Finance Department.
b. Standards for independence, competence, due care, field standards relating to planning, supervision
and review, evidence, reporting, and follow-up.
c. Organization of audit work with clearly defined responsibilities for staff, audit officers and
Supervisory Officer.

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d. Qualification and competency of the staff members, continuing skill development, training and
quality assurance review programs.
e. Internal quality control system including the guidance on technical and administrative aspects of
quality control.
f. The Quality Assurance and Improvement Program (QAIP) would be done by the officer authorised
by Director, Audit.
9.2 Quality Review Supervising Officer

304. The Supervising Officer would be responsible for quality review of all the Financial Attest Audit
reports prepared by the audit team. The weakness noted in audit reports would be reported in its
‘Quarterly Progress and Performance Report’ as mentioned in clause no. 8.2.1 under chapter
8.

305. The Director, Audit, based on the recommendation received in ‘Quarterly Progress and
Performance Report’ would prepare the annual training calendar in accordance with procedures laid
down in the Training Need Assessment (TNA) Report.

306. A requisite number of training would be conducted every year to train the audit staff. Additionally,
each audit team is required to complete requisite number of hours of training in every year as
mandated by the Finance Department.

307. The Director, Audit may formulate Quality Review Audit Committee for review of the Financial
Attest Audit report in order to improve the quality of the Financial Attest Audit function.

308. An illustrative checklist for quality review of the Financial Attest Audit report is provided below in
the table:
Sr No Checkpoint Response
1. Details of entry meeting and exit meeting are documented on OAMS on real Yes / No
time basis
2. Verification of items selected for audit has been done Yes / No
3. Documentation of items verified on the basis of professional judgment. Yes / No
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Sr No Checkpoint Response
4. Sufficient and appropriate audit evidence has been obtained
5. Documentation of working papers as per prescribed in this manual has been Yes / No
done
6. The structure of the report is as per the template provided in this Manual (refer Yes / No
chapter12)
7. The audit opinion has been arrived in accordance with the guidelines provided Yes / No
in this Manual. (refer chapter 12)
8. If any scope limitation was observed whether that has been clearly brought Yes / No
out in the Financial Attest Audit report
9. The Financial Attest Audit report was issued in time so as to facilitate Yes / No
initiation for appropriate remedial action
10. The Financial Attest Audit report was reviewed and approved by competent Yes / No
authority as per the process outlined in this audit manual before issuing it to
the auditee.

11. Detailed audit report has been issued, wherever applicable (Refer Chapter 7) Yes / No
12. The Financial Attest Audit report was signed by authority designated for this Yes / No
purpose
13. The Financial Attest Audit Report has been addressed to the correct authority Yes / No
14. The explanation for basis of opinion has been clearly provided in the auditors’ Yes / No
report
15. Significant audit observations that require immediate action been highlighted Yes / No
16. The report contains the date of audit, period of audit and date of issue of Yes / No
Financial Attest Audit Report
17. Overall, in the opinion of the reviewer, the Financial Attest Audit report is Yes / No
meeting the following:
a. Accurate
b. Objective
c. Clear
d. Concise
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Sr No Checkpoint Response
e. Complete

Table 48: Illustrative checklist for quality review of Audit Report

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Chapter 10: Using the Work of Other Auditor/ Internal Auditor and
Experts

309. There can be areas where it is both effective and efficient to use the work of others as a source of
audit evidence. Responsibility to provide audit opinion and the determination of audit procedures to
support the audit opinion would continue to be vested on the auditor. Hence, before placing reliance
on such audit evidence, it is necessary to ensure that it is adequate for audit purposes and is consistent
with other sources of evidence. Following are examples where the work of others can be used by the
auditor.
 Documentation of systems internal auditor and testing carried out by the internal auditors.
 An audit conducted by the Comptroller & Auditor General of India.
 Work done by any other expert.

10.1 Using the Work of Internal Auditor

310. Internal auditor is considered to be part of an organisation's overall internal control system. This
function may be provided in house by staff in full time employment or by a third party (for example
an audit firm).

311. It is the responsibility of the auditee to establish appropriate internal audit arrangements in the
organisation. The auditor should carry out a general assessment of the effectiveness of the internal
audit function to assess if reliance can be placed on the work of the internal auditor. This assessment
should be done in accordance with the size and complexity of the auditee unit.

312. In the planning phase of the audit, the activities of the audited entity’s internal audit function should
be considered, and a sufficient understanding has been obtained to develop an effective audit plan.
The internal audit may provide audit evidence on:
 The overall financial control environment.
 The operation of the systems of internal control, including those established to ensure regularity
and propriety and the achievement of those objectives.
 Specific account balances, which were subject to investigation.

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313. While assessing the internal audit function following points should be considered:
a. The status of the internal audit function:
 was the internal audit conducted in accordance with a well-defined term of
reference?
 Does it report to senior management?
 Can it directly approach Director Urban Development or Director Panchayati
Raj or equivalent level of management or Audit Committee if any?
 Did management regularly respond to the internal audit findings?
 Effectiveness of management’s response to the recommendations of internal
audit?
 Is it empowered to carry out a full range of assignments, or are there some significant
restrictions on the scope of its work?
b. The resources available to the internal audit function – whether there are sufficient staff of suitable
calibre to manage and carryout the function?
c. The coverage of internal audit work – whether it includes all major areas of operations of the
auditee
d. Quality of internal audit work and its documentation – whether the internal audit work is properly
planned, supervised, reviewed and documented?

314. It is common practice to use a questionnaire while assessing the internal audit function. Where the
internal audit function is assessed to be of sufficient, it is necessary to evaluate such work to reach a
conclusion on its adequacy. Such evaluation should be done on the basis of:
 the proficiency of the internal audit staff who have carried out the work and of their supervisors/
managers.
 the level of internal audit management reviewed the work carried out by the internal auditor; and
 the adequacy of the evidence to support the conclusions reached.

315. Depending on the results of the audit procedure, the audit team may decide to carry out some limited
testing or reperformance of the internal auditors ‘work.

10.2 Using the Work of the Comptroller & Auditor General of India

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316. The Financial Statements of the ULBs/ RLBs are subject to audit of Comptroller & Auditor General
of India (CA&G). Therefore, while conducting the Financial Attest Audit, the auditors may refer the
findings reported by the CA&G as an evidence while framing an opinion on the Financial Statements.

10.3 Using the Work of Other Experts

317. Prior to the identification and assessment of the risk of material misstatements, the auditor need to
consider the matters that require the involvement of experts because the auditors are experts in
accounting and auditing matters, but they are not reasonably expected to be experts in any other fields
also.
318. If the preparation of an entity’s financial statements is required input from an expert, then the
competence of the expert and appropriateness of the work carried out are important considerations
when assessing the risk of material misstatement.
319. However, in certain situations, auditors do need to employ their own expert in order to decrease the
risk that material misstatement will not be detected. Such expertise may be required in relation to
such matters e.g. valuation of land and building, plant and machinery, jewellery, intangible assets
(such as patents and trademarks etc.)
320. In both the above situations, if any information to be used as evidence that has been prepared using
the work of expert, the auditor should ensure with the following:
• Evaluate the competence, capabilities and objectivity of that expert
• Obtain an understanding of the work of an expert
• Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion
321. If the experts do not fulfil with the above attributes, the risk of error or inaccuracy in the work carried
out is increased and therefore, the auditors need to review their further auditor procedure in order to
minimise the risk of material misstatements.

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Chapter 11: Appointment of Chartered Accountant Firms

322. This chapter explains the provisions for engaging the Chartered Accountants Firms for carrying out
the Financial Attest Audit of ULBs and RLBs. This chapter elucidates the legal mandate and roles
and responsibilities of Chartered Accountant firms while performing the Audit of ULBs and RLBs.

11.1 Legal Mandate

323. As per Section 3(6) of the Uttarakhand Audit Act,2012, the State Government may permit to conduct
audit through outsourcing from any eligible Firm, Company or Institution, Society.

324. Considering the nature of work, the external agencies to be considered for Financial Attest Audit shall
be Chartered Accountant Firms registered with ICAI and empanelled with CAG for not less three
years.

11.2 Roles and Responsibilities of the External Agency (CA Firm)

11.2.1 General Points

325. The External Agencies engaged to conduct the Financial Attest Audit would be governed under the
points given below:
a. strictly work in accordance with the provisions of Uttarakhand Audit Act, 2012 and guidelines
mentioned in the Financial Attest Audit Manual.
b. strictly comply with the clauses of confidentiality, data protection and intellectual property rights
which shall be included in their contract
c. complete the audit work in accordance the plan given to them.
d. provide the progress of work to the concerned Supervising Officer on regular basis.
e. It must not involve in audit follow up work with the auditee

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f. should not directly or indirectly have any association with the auditee for a period for which audit
is to be carried on and undertaken or undertake no accounting activity for one year after
conducting the Financial Attest Audit.
g. ensure that no changes in the proposed audit team would be entertained except in the exceptional
circumstances and with written permission of DoA
h. would attend all the training programs scheduled for external agencies by DoA from time to time
i. provide support to quality review committee in carrying out quality control of audit work carried
out by them
j. strictly adhere to guidelines and notifications issued by DoA and Finance Department from time
to time.
k. follow the audit process and methodology elaborated in this audit manual for conducting the
Financial Attest audit with respect to the execution of audit, reporting, incorporating the
responses provided by the Supervising Officer.
l. continuously comply with the terms and conditions mentioned in their respective Contract
m. carry out the Financial Attest Audit function through OAMS and e-GramSwaraj or other
accounting and reporting software used by the UlBs and RLBs only for which they would be
provided separate user ID and password
11.2.2 Standards

326. The external agency would conduct the Financial Attest Audit in compliance with this Financial
Attest Manual in all respects including conduct of audit and submission of their report through
OAMS or any other audit management software as mandated by the Finance Department
327. The external agency would follow the code of ethics and independence as described in this audit
manual along with separate undertaking to follow code of ethics of ICAI.

11.2.3 Audit Reporting and Documents

328. The CA firm shall be provided the assignment through an engagement letter with the scope of audit
and reporting requirement.
329. The CA firm shall carry out the audit as per the terms of engagement provided by the DOA. They
would be carrying out this audit on behalf of DOA and shall be reporting to the DOA.

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330. The external agency would submit the Financial Attest Audit Report to the Supervising Officer for
review and approval.
331. The Financial Attest Audit Report will be reviewed Supervising Officer, and any
corrections/suggestions in it will be carried out by the respective CA firm.
332. After that Financial Attest Audit Report shall be finally reviewed by the respective officials
mentioned in clause no. 7.3.3. and 7.3.4 under Chapter 7. The process flow for submission, review,
approval and issuance of Financial Attest Audit Report for individual audit is explained below:

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The final audit report would be signed by the officials of DoA as outlined below.

• Convert the HMM created by them into audit para and submit same
Audit Team Member
to the team leader for review and approval

• Review the audit paras converted by the team member and

consolidate all the audit paras at one place for preparation of
Audit Team Leader Financial Attest Audit report. Thereafter, the Financial Attest Audit
report will be submitted to the Supervising Officer ority for review
and approval.

• Review and approve the Financial Attest Audit report submitted by

the team leader and then it will be submitted to the appropriate
Supervising Officer
authority for final review, approval and signature as per the matrix
provided in clasue no. 7.2.3.9.

Review, Approval and • Once the Financial Attest Audit report is reviewed, approved and
Issuance of Audit signed by the appropriate authority as per the matrix provided in
Report clasue no. 7.2.3.9, it will be issued to the Auditee.
Figure 14: Process of Review, Approval & Issuance of reports

Independent Preparation First Level Review Final Review,

Audit Report &Submission of Audit Approval and
Relate To Report Signature*
Gram Team Leader Officer Authorized by the Deputy Director,
Panchayat Director, Audit not below the Audit
rank of Assistant Director, Audit
Kshettara Team Leader Officer Authorized by the Joint Director, Audit
Panchayat Director, Audit not below the
rank of Deputy Director, Audit
Zilla Panchayat Team Leader Officer Authorized by the Director, Audit
Director, Audit not below the
rank of Deputy Director, Audit
Nagar Team Leader Officer) Authorized by the Joint Director, Audit
Panchayat Director, Audit not below the
rank of Deputy Director, Audit

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Nagar Palika Team Leader Officer Authorized by the Additional Director,

Director, Audit not below the Audit
rank of Deputy Director, Audit
Nagar Nigam Team Leader Officer Authorized by the Director, Audit
Director, Audit not below the
rank of Deputy Director, Audit
Table 49: Matrix for signature of audit reports

333. The external agency would upload all the working papers, documents and audit evidence collected
during the audit on OAMS or any other audit management software as mandated by the Finance
Department.

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