Cooperative Audit Overview

Origins and Evolution of Audit

• Originated to ensure proper accounting of money or property.
• Early system was limited to cash transactions and public accounts.
• The Auditor, derived from Latin 'Audire' meaning to hear, was responsible for checking these
accounts.

Modern Audit Objectives

• Aims to verify the financial position of an undertaking.
• Examines accounting records to ensure they accurately reflect transactions.
• Examines Balance Sheet, Profit and Loss Accounts, and related books of accounts and vouchers.
• Acts as a financial control instrument, safeguarding the proprietor against extravagance,
carelessness, or fraud.
• Ensures correct account maintenance and financial regularity and propriety.

Audit's Main Objectives

• To find out if accounts of a particular concern exhibit a true and fair view of the financial State of
affairs.
• Detects errors, fraud, etc. to ensure financial discipline.
• Assesses the achievement of cooperative objectives and the moral and material well-being of its
members.
• Adheres to provisions of the Cooperative Societies Act & Rules and other relevant Acts and Bye-
laws.

STATUTORY AUDIT OF CO-OPERATIVE SOCIETIES

• Cooperative societies are established under the Cooperative Act 1912, amended by various State
Governments.
• In Kerala, accounts are maintained under the 'The Kerala State Cooperative Act of 1969'.
• Audits of these institutions are compulsory and conducted by the Cooperative Department of the
state.
• Cooperative societies are classified as A, B, C, D, and E based on management efficiency.
• The auditor awards the classification after examining all aspects.
• The Registrar or authorized person audits every society's accounts at least once a year.
• Audits include examination of overdue debts, verification of cash balance and securities, and
valuation of assets and liabilities.
• The audit period is extended back to the last date of the previous audit and up to the last date of
the cooperative year preceding the audit.
• The results of the audit are communicated to the society within six months.

Audit Memorandum Preparation and Submission

• Auditor must prepare and submit a prescribed audit memo referencing examined accounts,
balance sheet, and final accounts.
• The memo should include details of transactions contrary to act, rules, and byelaws, unpaid
amounts, material irregularities in expenditure or recovery, bad or doubtful debts, audit
classification statement, and any other specified matter.
• The audit results and societal defects should be brought to the society's notice under Sec.64, with a
direction to rectify the defects within specified time.

Cooperative Audit Functions:

• Ensures proper management of society's affairs on sound business principles.
• Provides detailed checks of numerous transactions throughout the year.
• Assists creditors in assessing the financial soundness and creditworthiness of societies.
• Ensures efficiency and integrity of employees in managing affairs.
• Provides a systematic and thorough check of accounts of employees.
• Ensures the safety of funds for non-members depositing with Cooperative Banks.

Co-operative Audit: Salient Features and Scope

• Co-operative audit differs from joint stock company audit due to its focus on service rather than
profit.
• Maclagan Committee suggests Co-operative Audit extends beyond Act requirements, examining
all circumstances determining the society's position.
• Mirdha Committee suggests Co-operative Audit should scrutinize the extent of benefit accruing to
weaker members.
• Co-operative Audit should go beyond books of accounts, examining the society's working and
general functioning.
• The audit should be conducted in the context of Co-operative Principles, providing guidance for
improvement.
• Co-operative Audit is not just a financial audit but also includes Administrative Audit.

MAIN FEATURES OF CO-OPERATIVE AUDIT

The main features of Co-operative Audit relate to the following:-
1) Adherence to Co-operative Principles
2) Observance of provisions of Act, Rules and byelaws.
3) Valuation of assets and Liabilities and Verification of Cash Balance and Securities.
4) Verification of balances of Depositors and Creditors.
5) Examination of overdue debts and classification of bad debts.
6) Personal verification of members and examination of their pass books.
7) Discussion of draft audit report with Managing Committee.
8) Audit classification of society; and
9) Examination of the working and other prescribed particulars of the society.

Co-operative Audit Features

• Examination of Overdue Debts: A detailed analysis of overdue debts to determine recovery

chances and classify them as good or bad. Comparison of overdue debts to working capital, loans,
and advances with the last year to determine trend and recovery measures.
• Adherence to Co-operative Principles: Assessment of the extent to which the society's objectives
have been fulfilled, including benefits to members, cost savings, and avoidance of wastage of funds.
• Observance of the Act and Rules: Infringement of the KCS Act and Rules and the bye-laws of the
society should be pointed out in audit, with financial implications assessed.
• Personal Verification of Member’s Loan and Examination of Pass Books: This is necessary to
ensure books of accounts are free from manipulation, especially in Rural and Agricultural Societies
with illiterate members.
• Audit Classification of Society: The auditor's classification indicates the overall performance of
the society.
• Discussion of the Draft Audit Report with Managing Committee: The draft audit report should be
discussed with the management before finalizing the report.

OBJECTS OF CO-OPERATIVE AUDIT

1. Verification of the accuracy of the books of accounts and ascertaining correctness of
accounts.
 2. Detection of clerical errors and errors of principles and prevention of such errors.
3. Detection and prevention of frauds.
4. Examination of the affairs of the society in order to ascertain whether they have been carried
on in accordance with the provisions of the Co-operative Law and the Principles of Co-
operation and on sound business principles.
5. (a) Assessment of the extent to which the conditions of the members, particularly their
economic conditions, have improved by the operations of the society. (b) Certification of
actual profit realized or loss incurred.

Co-operative Audit

• Co-operative audit is statutory in nature and conducted by the government.

• The state is a major partner in most cooperative undertakings and recognizes the agency of Co-
operatives as an economic growth instrument.
• Regular audits of Co-operative Society accounts are vital for the success of the Co-operative
movement.
• Mismanagement of funds in Co-operative societies can occur if transactions are not properly
checked and promptly followed up on.
• Control exercised through audit serves a valuable purpose in weeding out unscrupulous elements
from the Co-operative movement.
• The Director of Co-operative Audit is entrusted with the audit of Co-operative Societies, ensuring
proper management of public organizations.

Advantages of Audits
• Detects fraud and keeps business books up-to-date.
• Acts as a moral check, preventing fraud and errors.
• Provides independent opinion to the members' general body about committee and institution
management.
• Used for assessing income and sales tax, and disbursement of government assistance.
• Safeguards creditors' investments enabling business operations.
• Ascertains the correct business state, enabling necessary finance secured on audited balance sheet
certificate.

DUTIES RESPONSIBILITIES AND POWERS OF COOPERATIVE AUDITOR

• Examination of overdue debts: The auditor must thoroughly examine all overdue debts to estimate
bad and doubtful debts.
• Verification of cash balance & securities: The auditor must verify the actual exchangeable value
of assets and liabilities.
• Examination of all transactions: The auditor assesses losses sustained by a society due to
negligence misconduct by office bearers or officers.
• Examination of the statement of accounts prepared by the committee: The auditor may go beyond
books and accounts to supplement information.
• Reviewing recovery of current and overdue loans: The auditor must ensure no unauthorized
renewals have occurred.
• Certification of accounts: The auditor must submit an audit memorandum to the Registrar.
• Audit duration: The audit should extend back to the last date covered by the previous audit and up
to the last date of the cooperative year preceding the audit.
Powers of an Auditor in Cooperative Societies

• Auditor has the authority to audit any cooperative institution by general or special order.
• They can examine over dues, debts, cash balance, securities, assets and liabilities, and all
transactions.
• They have free access to all books, accounts, cash, and other properties of the society.
• Officers, employees, members, and past members must provide necessary information about the
society's transactions and working.
• Auditors have the right to receive all notices and communications related to the annual general
meeting of the society.
• If authorized, auditors can summon and enforce attendance of any person to give evidence or
produce any document.
• Failure to furnish information/documents is punishable.
• Auditors appointed under this Act are public servants under the Indian Penal Code 1860.

LIABILITIES OF AN AUDITOR

• Perform duties based on books of accounts, papers, and information as per Act. Rules & Byelaws.
• Certify profit & loss accounts and balance sheets produced by Cooperative Institution
management.
• Ascertain actual financial position of business.
• Hold liable for negligence in cash counting, verification of Government and other securities, asset
evaluation, and detection of frauds during audit period.

Auditor's Responsibilities and Procedures

• Auditor is personally liable for work done by assistants or subordinates.

• Auditor is equally responsible for negligence by assistants or subordinate staff.

Audit Planning

• Audits are conducted with specific objectives in mind.

• Steps include confirming appointment, completion date, and notification to society.
• Audit program is created and records are prepared.
• Society's accounting system is examined.
• List of books maintained by society is obtained.
• Internal check system is checked.
• Officers of society are consulted about their duties and powers.
• Account books are written up before auditing.
• Auditor's report, audited Profit & Loss Account, and balance sheet are reviewed.
• Bye-laws and rules of the society are carefully reviewed.

AUDIT NOTE BOOK

An audit note book is a written record of queries made, replies furnished there against,
correspondence entered into, observations made at the time of checking etc. Some of the salient
points required to be noted down in an Audit Note Book are indicated below:-

1. List of books of account maintained.

2. Names & designation of the members of the Committee and the Officials.
3. Points requiring further explanations and clarifications.
4. Particulars of missing vouchers, the duplicates of which have to be obtained.
5. Errors and frauds, if any discovered.
6. Totals or balances of books account, Bank reconciliation statement.
7. Dates of commencement and completion of audit.
8. Provisions in the Rules & Bye-law of the society effecting the accounts and audit.
9. Points which have to be incorporated in the audit report etc.
Audit Programs
• Audit programs are lists of audit procedures for audit staff to obtain appropriate evidence.
• These procedures are determined after understanding the accounting system and determining the
audit strategy.
• The audit program reflects the auditor's understanding of the system, incorporating compliance
and substantive tests.
• It is a crucial part of the auditor's working papers and records significant audit evidence.
• It provides a guide for arranging and distributing work and checking against potential omissions.
• Auditors should consider common and special points during the preparation of the audit program.

Audit Program includes

• Examining societal regulations affecting account systems.

• Vouching cash received as share capital, including non-member subscriptions.
• Vouching receipts from deposits and government grants.
• Checking loans borrowed from banks.
• Thoroughly vouching payments and interest receipts.
• Scrutinizing cashbook and verifying cash in hand.
• Verifying investments and stock.
• Ensuring creation of Reserve Fund as per rules.
• Examining dividend payments to members.
• Certifying Profit & Loss Accounts and Balance Sheet.
• Drafting a report.

WORKING PAPERS
Working papers are those papers which contain essential facts about the accounts so that the
auditors may not have again to go over the accounts. These form a part of the audit report. This
shall contain:-
i. Audit programme duly completed, showing the nature of work, the extent of checking and
the initials of the person undertaking the work.
ii. Working trial balance.
iii. Schedules of the debtors and creditors, fixed assets, investments etc.
iv. Correspondence made by the Auditor, if any.
v. Abstracts from minute books.
vi. Particulars of investments.
vii. Particulars of depreciation, stock.
viii. Details of queries made during the audit and the replies furnished.
ix. Particulars of overdue debts and action taken for their recovery etc.

• Filling in and signing the Audit Programme.

• Checking audit notes, queries, draft accounts.
• Filing statements, schedules, working papers in the Audit file.

Purpose of Audit Programs

• Providing instructions to the audit team.

• Assisting with audit planning and performance.
• Controlling and recording audit work execution.
• Recording audit procedures, objectives, timing, sample size, and criteria selection basis.
• Supporting auditor opinion with audit evidence.
Types of Audit Programs
• Standardized audit programs: Pre-prepared objectives and tests for audits. Consistency reduces
risks of omitted procedures.
• Tailored audit programs: Programs tailored to specific engagement circumstances. Procedures
should match the entity's actual system. References can be made to specific procedures/documents.

ISA 230 AUDIT DOCUMENTATION

The auditor should document matters which are important in providing evidence to support the
audit opinion and evidence that the audit was carried out in accordance with ISA.

WORKING PAPERS
Working papers are documents prepared or obtained by auditors for their audit performance, often
stored on paper, film, or electronic media. They can also be used in court, particularly in cases of
negligent audit.

TYPES OF WORKING PAPERS

Working papers are usually filed in 2 separate files:
PERMANENT AUDIT FILE (used more than one financial year and file is built only one)
It comprises matters of continuing importance affecting the audit such as:
1. Copy of Articles of Association.
2. Copy of Memorandum of Association
3. Information concerning the legal and organizational structure of the entity.
4. Extracts or copies of important legal documents, agreements and minutes.
5. Accounting & Internal Control Systems.
6. Letter of Engagement
7. Bankers
8. Legal adviser

CURRENT AUDIT FILE (Pertain to a particular financial year)

It relates specifically to the audit of a particular set of accounts:
1. Evidence of the planning process.
2. Evidence of the auditor’s understanding of the accounting and internal control systems.
3. Analyses of transactions and balances.
4. A record of the nature, timing and extent of audit procedures performed and the results of
such procedures.
5. An indication as to who performed by assistants was supervised and reviewed.
6. Details of procedures applied regarding components whose financial statements are audited
by another auditor.
7. Letters of representation received from the entity.

WORKING PAPERS
Purpose and Importance:
• Assist in audit planning and performance.
• Assist in supervision and review of audit work.
• Record audit evidence to support auditors' opinions.

Importance of Working Papers:

• Quality control in audits.
• Assurance of proper completion of audit work.
• Evidence of effective audit execution.
• 3Es: increase audit efficiency and effectiveness.
• Support auditor conclusion: contain detailed, up-to-date facts.
• Retaining record for future audits.
Review of Working Papers:
• Hot review: Review by experienced staff during audit.
• Post audit review: Review by audit manager and partner.
• Second partner review: applicable for large, complex audits.
• Cold review: team review by experienced staff to ensure audit compliance with firm standard
procedures.

Audit Working Paper contents

• Client's name.
• Audit period.
• Subject matter.
• File reference.
• Staff member's signature and prepared date.
• Client staff's receipt date and audit team member's initials.
• Staff member's review date and prepared date.

SOME CHARACTERISTICS OF A GOOD WORKING PAPER

1. State a clear audit objective.
2. State the name of client, subject matter, year/period end.
3. State the full extent of the test or audit objective.
4. Reference of linked documents.
5. How sample size were determined.
6. Clearly and objectively state the results of the test.
7. The conclusions reached should be consistent with result of the test.
8. Main reference.
9. Signed and dated by preparer.
10. Signed and date by reviewer.
11. Standards review by reviewed.

Audit Report Maintenance and Procedure

Maintenance of Audit Files:

• Collect all important information into a file containing documents, working papers, schedules, and
audit notes.
• Keep current important papers like asset schedules, ledger balance, inventory schedules, bank
reconciliation, balance certificate, etc. in a 'current file'.
• Maintain Audit Note Books and Working Papers.

Rectification:
• Correct minor defects and irregularities during audit to avoid recurrence.
• Settle audit objections on the spot, rather than taking exhaustive notes.
• Gather additional particulars or explanations during audit as they arise.
• Note all objectionable items and serious irregularities.

AUDIT MEMORANDUM
The Auditor is required to submit an audit memorandum to the society the accounts of which he has
audited and also to the Register. The form of the Audit Memo has been specified in the Act or
Rules. All information furnished should be correct and should always agree with the information
contained in the final accounts, lists of overdue, schedules and other statements accompanying the
audit memo.

SCHEDULES TO CONTAIN IN THE AUDIT

MEMORANDUM
i) all transactions, which appear to be contrary to the provision of the Act, the rules and
bye- laws of the society.
ii) all sums which ought to have been but not been brought into account.
iii) any material impropriety or irregularity in the expenditure or in the realisation of
moneys due to the society.
iv) any money or property belonging to the society which appears to the auditor to be bad or
doubtful debts; and
v) any other matter specified by the Register in this behalf.

The Auditor must mention all cases of breaches of the Act, rules, and bye-laws in his report.
• The Auditor must provide full particulars of all sums that should have been but not brought into
account.
• The Auditor must also examine minutes agreements, other records, and personal inquiries to
ascertain if any amounts received or receivable by society have not been brought into account.
• The Auditor must report all cases of improper or irregular payments and irregularities in the
realization of moneys due to the society.

Auditor's Report

• The Auditor's Report should contain general observations of the society's affairs, accounts audited,
irregularities, and suggestions for improvement.
• The report should be divided into two parts: Part I, which deals with financial stability, loan
policy, recoveries, business conduct, internal control deficiencies, and infringement of Act, Rules,
bye-laws, and circular instructions.
• Part II deals with account irregularities and the Auditor's suggestions.
• The report should be divided into several paragraphs, each with a clear-cut heading.
• The report should cover all important aspects of the society's working, including unaddressed
points in the last audit memo, review of progress, deficiencies in internal control arrangements,
management-loan policy, financial position, financial position, working capital, and non-observance
of business rules.
• The report should also include correctness of the Balance Sheet and profit and loss account,
disagreements of bank balances, and differences in personal ledger balances.
• The summary of the audit memo should be read out in the general meeting, with a brief resume of
important points for the Annual General Meeting.

Drafting Part-II of Audit Report

• Auditor's duty: Discuss audit objections with Office Bearers and identify irregularities promptly.
• Part-II should be divided into separate paragraphs, grouped under headings:
- List of missing vouchers and loan bonds.
- List of vouchers with missing payee acknowledgement.
- List of defective vouchers and loan bonds.
- List of payments not supported by documents or sub-vouchers.
- List of payments not properly authorized.
- List of items where delegated authority has been exceeded.
- List of remittances without official receipts.
- Mistakes in interest calculations.
- Other irregularities to be specified.
- Suggestions for improvement of the accounting system.

Audit Classification in Societies

• Auditor must classify societies based on instructions from the Registrar.

• Classification should be careful and intelligent, avoiding low orders that may deter office bearers.
• Classification should not exceed the eligibility of the society.
• Two tests are used: financial stability and administrative efficiency.
• Registrar's conference in 1976 laid down standards for audit classification, which were modified
to suit local conditions.
• The Rural credit Survey Committee emphasized the need for uniform standards across all types of
Co-operatives.
• The Agricultural Credit Department of Reserve Bank and the Advisory Committee on Agricultural
Credit have developed standards for audit classification.

Broad principles of classification: - The following general standards have been laid down for
classifying agricultural credit societies and Rural Banks:-

(1) Capital structure :- The progress made in strengthening the capital structure, own funds etc.
and in tapping more deposits when compared with the previous years.
(2) Credit and Financial stability, economic viability etc.
(3) Management efficiency, maintenance of accounts etc.
(4) Undertaking of subsidiary activities.
(5) General working.
(a) Credit Societies
(b) Non-credit societies
(c) Co-operative Central Banks

Credit Societies Classification

Class A:
• Society requires no official or non-official staff, except for annual audits.
• Overdues of loans with members should not exceed 10% of total outstanding.
• Society maintains its own staff and is profitable.

Class B:
• Overdues should not exceed 25%.
• Accounts may not be faultless.
• General co-operative vitality must be high.
• Management should be interested in remedying defects.

Class C:
• Society not falling under A, B, and D classes.
• Overdues should not exceed 40%.
• Financial position should be sound.

Class D:
• Overdues exceeding 40% and moribund.
• Society must receive loans on any terms from financing institutions.
• If in 'D' Class for 2 or 3 years, it must be liquidated.
Non-Credit Societies Audit Classification

Types of Non-Credit Societies

• There are various types of non-credit societies, but no separate standards for each type are
provided.
• Audit classification of consumer and industrial societies is discussed.

Consumer Societies
• The main objective of a consumer society is to distribute consumer goods to its members.
• The auditor verifies member loyalty by assessing if members are purchasing all their requirements
from the society.
• Factors considered include efficient and economic management, working capital adequacy,
employee supervision, gross and net income, purchase policy, fund rotation, customer service, and
maintenance of registers and records.

Classification of Consumer Societies

• High-standard societies can be classified under 'A' if no serious defects are noticed.
• Class B societies can be classified under 'B' if they make steady profits, have a owned capital of at
least 50% of the working capital, and have over 40% of members purchasing their requirements.
• Societies incurring losses due to bad management or lack of business volume can be classified
under 'C'.
• Societies not falling under these classes will be classified under 'D'.

Industrial Societies

• Industrial Societies are producers' societies, requiring adequate arrangements for raw material
purchase and agency-based sales of finished products.
• Quality checks of finished goods must be robust.
• Compulsory savings for producer members must be implemented.
• The use of substantial government financial assistance must be verified by the auditor.
• The society's accounts must be maintained promptly and correctly.
• Staff training and qualifications are crucial.
• Loans should be used properly.
• Overdues should not exceed 10% of outstandings.
• Society classifications include 'A', 'B', 'C', and 'D'.
• Auditor must award suitable marks and submit the name to the Deputy Registrar/Assistant
Registrar.
• The Deputy Registrar/Assistant Registrar must also check the reasons behind the audit marks
before approving the audit certificate.

Co-operative Central Banks

• The Reserve Bank of India provides financial assistance to agricultural credit Societies through
the Kerala State Co-operative Bank.
• District/Central Co-operative Banks must meet certain standards to qualify for assistance under
Section 17 of the Reserve Bank of India Act.
• Central Co-operative Banks falling under A and B classes are eligible for assistance on the
security of two signatories.
• Audit classification norms for District/Central Co-operative Banks are as follows:

• 'A' Class Central Banks:

- Arrears under principal should not exceed 20% of demand and under interest should not exceed
5%.
- Total bad debts and 50% of doubtful debts should not exceed the Bank's Bad debts Reserve.
- Short-term liabilities should not exceed short-term investments exclusive of overdues.
- The Bank should maintain the required standard of fluid resources throughout the year.
- At least 50% of loans issued during the year should be for short-term purposes.
- Not more than 35% of the Societies indebted to the Bank should be defaulters.
• The Bank should have worked at profit.
• The management of the staff should be efficient and qualified.

Audit Classification and Submission of Special Reports

Audit Classification Process

• Auditor prepares a statement detailing the marks allotted under each head and sub head to
determine the audit class.
• If a system of awarding marks is prescribed, the auditor uses discretion to determine the extent of
fulfillment of conditions/criteria and award marks.
• Societies with 60% and above and working on profit are classified under 'A'.
• Society with overdues to demand under principal exceeding 20% or 25% are classified as 'B'.
• Service societies should allot suitable marks for non-credit activities out of the marks assigned for
general working.
• New Societies are not classified for the first two years and are shown as "unclassified."

Submission of Special Reports

• Defects noticed by the auditor are listed in a classified and consolidated form on separate sheets.
• If a defect is of very serious nature and requires special attention, a separate special report is
submitted immediately.
• Special reports should be submitted to the Deputy Registrar of Co-operative Societies (Audit) or
the concerned superior officer.
• The auditor must ensure that circumstances exist that warrant the submission of a special report
and that the auditor has conducted a thorough investigation into the matter.

ASSESSMENT AND LEVY OF AUDIT FEES

Procedure for levy of audit fees - Statutory provision :- of Co-operative Societies is the statutory
responsibility vested on the Registrar. In order to carry out this responsibility effectively, the
Registrar has to maintain sufficient number of staff, indifferent categories, the cost of which is met
from out of Public revenue. Every Co-operative Society whose accounts are audited by the
Department, is required to pay to the Government audit fees according to the scale fixed under the
provisions of the Co- operative Societies Act and Rules. The audit fees payable by a Society is
calculated soon after the audit is over, and the amount payable is to be specified in the audit
certificate. The basis of levy of audit fee is different for different types of societies.

Rule 65 of Kerala Co-operative Societies Rules 1969: Audit Fee Payment

• Co-operative societies must pay an audit fee within one month of receiving the annual audit
certificate.
• Fees are calculated on the working capital, total sales, or gross income.
• Credit Societies: Fees are on working capital.
• Primary Land Mortgage Banks, House Mortgage Banks, Housing Societies: Fees are on the
aggregate of loans issued and recovered.
• Societies with credit and non-credit activities: Fees are on working capital or sale proceeds of
goods.
• Societies dealing in goods: Fees are on sale proceeds.
• Coir Co-operative Societies: Fees are on proceeds of Coir sold as owner and commission realized
on goods sold as agents.
• Transport Societies: Fees are on hire charges collected and sale proceeds of articles.
• Other Societies: Fees are on gross income.
Audit Fees in Kerala Societies

• Audit fees are calculated at 30 Paise for every 100 Rupees on working capital, sales, or gross
income up to Rs. 5 lakhs.
• The next 100 rupees are charged at 20 Paise.
• The maximum audit fees a society can pay is Rs. 3000.
• Exemptions include:
- All Co-operative Societies with majority Harijans.
- All farming societies.
- All social welfare societies.
- Societies audited at their own expense by the Co-operative Department.
- Weavers’, coir, housing, or primary societies formed for Fishermen.
- Society for the first year of audit.
- Credit societies with working capital not exceeding Rs. 2,000 and sales or gross income not
exceeding Rs. 10,000.
• Audit fees are remitted into the Government Treasuries.