Audit of Public Sector Undertakings – CA Final Audit Question Bank

Audit of Public Sector Undertakings – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Audit of Public Sector Undertakings – CA Final Audit Question Bank

Basics of Audit of PSU

Question 1.
Write short note on: Organisation subject to CAG Audit.
Answer:
Organisation Subject to CAG Audit:

• All the Union and State Government departments and offices including the Indian Railways, Posts and Telecommunications.
• Public commercial enterprises controlled by the Union and State governments, i.e. government companies and corporations.
• Non-commercial autonomous bodies and authorities owned or controlled by the Union or the States.
• Authorities and bodies substantially financed from Union or State revenues.

Question 2.
Write short note on: Public accounts Committee
Answer:
Public Accounts Committee:
Audit Reports and Annual Accounts of entities subject to CAG audit will be referred to specialized committees constituted by Parliament and the State legislatures, i.e. Public Accounts Committee and Committee on Public Undertakings. Public Accounts Committee performs the following functions:

1. Examine that the moneys (shown in the accounts) were disbursed for the purpose to which they were applied.
2. Examine that the expenditure was authorised.
3. Examine that re-appropriation has been made in accordance with the provisions made (i.e. distribution of funds).
4. Examine the statement of accounts of autonomous and semi-autonomous bodies, the audit of which is conducted by the CAG either under the directions of the President or by a Statute of Parliament.

Question 3.
The Comptroller & Auditor General of India plays a key role in the functioning of the financial committees of Parliament and the State Legislatures. He has come to be recognised as a ‘friend, philosopher and guide’ of the Committees. In view of above, you are required to list down role of CAG. [MTP-Oct. 18]
Answer:
C & AG Role in functioning of financial committees of Parliament and State Legislature:

1. Reports of CAG form the basis of Committees’ working, i.e. committees examine the issues raised by C & AG Reports.
2. Committees requires the assistance of C & AG for scrutinising the notes which the Ministries submit to the Committees in so far as to check the correctness of submissions to the Committees and facts and figures in their draft reports.
3. Reports of the Financial Committees are being submitted to the Parliament/State Legislature with their observations and recommendations. The CAG assists various committees in suggesting the recommendations.

Question 4.
Write short note on: Objectives and Scope of Audit of PSU
Answer:
Objectives of Audit of PSU:

• Objectives of Audit of PSU, in broader context, covers two main elements:

(a) Fiscal Accountability: It includes audit of provision of funds, sanctions, compliances and propriety.
(b) Managerial accountability: It includes audit of efficiency, economy and effectiveness.

• Another equally important objective of audit of PSU is to help the government and the enterprise management to improve their efficiency and effectiveness.
• This is achieved by bringing out financial and operational deficiencies, inadequacies or ineffectiveness of systems, shortfalls in performance etc. and by analyzing the causes of shortfall from acceptable standards of performance.

Scope of Audit of PSU:
The C&AG’s [Duties, Power and Conditions of Services] Act, 1971 specifies the entities that come under audit purview of C&AG at the Union and State level, however, the scope and extent of audit is determined by the C&AG itself.
Scope and extent of audit of PSU extends to

1. Financial audit,
2. Compliance Audit,
3. Comprehensive audit,
4. Propriety Audit and
5. Performance audit.

Question 5.
Write short note on: Elements of PSU Audit.
Answer:
Elements of PSU Audit:
There are three elements of PSU Audit. These are:

(a) Parties Involved:

• The auditor: In public sector auditing the role of auditor is fulfilled by Supreme Audit Institution, India and by its personnel delegated with the task of conducting audits.
• The responsible party: Generally, auditable entities and TCWG of the auditable entities would be the responsible parties.
• Intended users: The intended user is primarily the Parliament or the Legislature which represents the citizens by determining the priorities of public finance, purpose and content of public spending and income.

(b) Subject Matter, Criteria and Subject Matter Information

• Subject matter refers to the information, condition or activity that is measured or evaluated against certain criteria.
• The criteria are the benchmarks used to evaluate the subject matter.
• Subject matter information refers to the outcome of evaluating or measuring the subject matter against the criteria.

(c) Types of Engagement: There are two types of engagement: Attestation Engagements and Direct
Reporting Engagements.

• In attestation engagements, the responsible party measures the subject matter against the criteria and presents the subject matter information, on which the auditor then gathers sufficient and appropriate audit evidence to provide a reasonable basis for expressing a conclusion.
• In direct reporting engagements, it is the auditor who measures or evaluates the subject matter against the criteria.

Question 6.
Briefly describe the various principles associated with audit of Public Sector enterprises.
Answer:
Principles associated with audit of PSU:
(a) General Principles

• Ethics & Independence
• Professional Judgment, due care and skepticism
• Quality Control
• Audit Team Management & Skill
• Audit Risk
• Materiality
• Documentation
• Communication

(b) Principles associated with Audit:

(i) Planning an Audit

1. Auditors shall obtain an understanding of the nature of the entity/programme to be audited.
2. Auditors shall conduct a risk assessment or problem analysis and revise this as necessary in response to the audit findings.
3. Auditors shall identify and assess the risks of fraud relevant to the audit objectives.
4. Auditors shall plan their work to ensure that the audit is conducted in an effective and efficient manner.

(ii) Conducting an Audit

1. Auditors shall perform audit procedures that provide sufficient and appropriate audit evidence to support the audit report
2. Auditors shall evaluate the audit evidence and draw conclusions

(iii) Reporting & Follow-up

1. Auditors shall prepare a report based on the conclusions reached.
2. Follow up on reported matter as relevant.

Audit of Government Companies 

Question 7.
Write short notes on the Role of C & AG in the Audit of a Government Company.
Answer:
Role of C&AG in the Audit of a Government company:
Role of C&AG is prescribed under sub-sections (5), (6) and (7) of section 143 of the Companies Act, 2013. –

(a) Directions to Auditor – Sec. 143(5): In the case of a Government company, the CAG shall appoint the auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited.
(b) Supplementary Audit – Sec. 143(6): The CAG shall within 60 days from the date of receipt of the audit report have a right to,

conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the CAG may direct, and

Comment upon or supplement such audit report:
(c) Test Audit- Sec. 143(7): The CAG may, in case of government company, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the CAG (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.

Question 8.
Write short note on: Supplementary Audit u/s 143(6) of Companies Act, 2013. [Nov. 12 (4 Marks)]
Answer:
Supplementary Audit u/s 143(6) of Companies Act, 2013:
The CAG shall within 60 days from the date of receipt of the audit report have a right to,

(i) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished To any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the CAG may direct; and

(ii) Comment upon or supplement such audit report:
Provided that any comments given by the CAG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements u/s 136(1) i.e. every member of the company, to every trustee for the debenture holders, and to all other entitled persons and also be placed before the AGM of the company at the same time and in the same manner as the audit report.

Question 9.
Comptroller & Auditor General of India were conducting supplementary audit U/s 143(6) of the Companies Act, 2013 made certain comments on the reported foreign exchange loss in the accounts of a Public-sector company. The Board of Directors failed to reply to the comments of C & AG in their report. Comment. [Nov. 11 (4 Marks)]
Answer:
Reply of Board of Directors on the comments of C & AG:

Section 134(3)(f) of the Companies Act, 2013 imposes a duty on the Board of Directors of a company to give the fullest information and explanations in the Directors’ Report regarding every reservation, qualification or adverse remarks contained in the auditors’ report.

The Board’s remarks on the auditors’ report are to be given as an addendum to the report and are to form part of the main body of the report as per Section 134(3).

However there exists no mandatory requirement for the Board of Directors of a government company to give their reply on the reservations made by C&AG. Hence the Board of Directors of the Company is not bound to give information or explanation in respect of C&AG comments.
Conclusion: The Board of Directors has not contravened any of the provisions of the Companies Act.

Question 10.
What are the relevant sections of the Companies Act, 2013 and steps involved in audit of Government Companies? [Nov. 16 (4 Marks)]
or
“The C&AG may direct the appointed auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India.” What are the relevant sections of the Companies Act, 2013 and steps involved in auditor of Government Companies? [MTP-Aug. 18, MTP-March 19, Nov. 19-New Syllabus (5 Marks)]
or
Ceta Ltd. is a company in which 58% of the paid up share capital is held by Rajasthan Government. The company is engaged in the business of providing consultancy services in relation to construction projects. The audit of the financial statements of Ceta Ltd. for the financial year ended 31 March 2020 got completed with lot of intervention of Comptroller & Auditor General of India, wherein C&AG was giving directions to the auditors on the manner in which audit should be conducted in respect of certain areas.

Further, it also received comments from C&AG on the audit report of the auditors. Ceta Ltd. is seeking advice to go against C&AG so that they can avoid unnecessary interference of C&AG. You are required to advise Ceta Ltd. with respect to role of C&AG in the audit of a Government company. [MTP-May 20]
Answer:
Relevant Sections of Companies Act, 2013:

• Sec. 139(5) – Appointment of Auditor other than First Auditor.
• Sec. 139 (7)- Appointment of First Auditor.
• Sec. 143(5) – Duties of Auditor of Government Companies.
• Sec. 143(6) – Powers of CAG to order Supplementary Audit.
• Sec. 143(7) – Powers of CAG to order Test Audit.

Steps involved in Audit of Government Companies:

(i) Directions by CAG – Sec. 143 (5): In the case of a Government company, the CAG shall appoint the auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited.

The auditor so appointed shall submit a copy of the audit report to the CAG which, among other things, include the following:

1. directions, if any, issued by the CAG,
2. the action taken thereon and
3. its impact on the accounts and financial statement of the company.

(ii) Supplementary Audit – Sec. 143(6): Sec. 143(6) of Companies Act, 2013 provides that the CAG shall within 60 days from the date of receipt of the audit report have a right to,

(a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the CAG may direct; and

(b) Comment upon or supplement such audit report:
Provided that any comments given by the CAG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements u/s 136(1) i.e. every member of the company, to every trustee for the debenture holders, and to all other entitled persons and also be placed before the AGM of the company at the same time and in the same manner as the audit report.

(iii) Test Audit – Sec. 143 (7): The CAG may, in case of Government Company and Government owned or controlled companies, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the CAG (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.

Question 11.
On receipt of statutory audit report on 30-3-2020 of M/s Sunlight Ltd., a government company, C&AG on 25-5-2020 appointed M/s Veeru & Associates to conduct supplementary audit u/s 143(6) (a) of the Companies Act, 2013. They submitted their report to C&AG as per their scope of work. The Company held its AGM on 01-09-2020 but directors did not think it necessary to discuss supplementary auditor’s report and comment of the C&AG. Is the approach of the directors of Sunlight Ltd. correct? Guide the company with the provisions related to supplementary audit. [May 19 – New Syllabus (5 Marks)]
Answer:
Supplementary Audit u/s 143(6) of Companies Act, 2013:
Sec. 143(6) of Companies Act, 2013 provides that the C&AG shall within 60 days from the date of receipt of the audit report have a right to,

(i) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the C&AG may direct; and

(ii) Comment upon or supplement such audit report:
Provided that any comments given by the C&AG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements u/s 136(1)

i. e. every member of the company, to every trustee for the debenture holders, and to all other entitled persons and also be placed before the AGM of the company at the same time and in the same manner as the audit report.

In the instant case, directors think that it is not necessary to discuss supplementary auditor’s report and comment of the C&AG.
Conclusion: Based on the requirements of proviso to Sec. 143(6), management thinking does not seem to be proper.

Types of Audit Conducted by CAG and Comprehensive Audit

Question 12.
Write short notes on: Various Types of Audit conducted by CAG.
Answer:
Types of Audits conducted by CAG

1. Financial Audit: Financial audit is conducted to express an audit opinion on a set of financial statements.
2. Compliance Audit: Compliance audit is carried out to determine whether specified compliance requirements are met or not.
3. Comprehensive Audit: Comprehensive Audit involves assessing overall efficiency and effectiveness of Public Enterprises. This is done by reference to certain pre-determined standards, objectives and criteria.
4. Propriety audit: Propriety Audit stands for verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct.
5. Performance Audit: Performance audit is an objective and systematic examination of evidence for the purpose of providing an independent assessment of the performance of a government organization, program, activity, or function in order to provide information to improve public accountability and facilitate decision-making by parties with responsibility to oversee or initiate corrective action.

Question 13.
For facility of consideration, the reports of the Comptroller and Auditor General on the public sector undertakings of the Central Government are presented to the Parliament in several parts. Briefly describe those parts.
or
Write short note on: Contents of Audit report given by comptroller & Auditor – General of India. [Nov. 17 (4 Marks)]
or
The reports of the Comptroller and Auditor General of India on the audit of PSUs are presented to the Parliament and to various state legislatures to facilitate a proper consideration. Enumerate the contents of Audit Report presented by C&AG. [May 19 – Old Syllabus (5 Marks)]
Answer:
Audit Report of CAG:
Reports of the CAG on the PSUs of C.G. are presented to the Parliament in following parts:
(a) Introduction containing a general review of the working results of Government companies, deemed Government companies and corporations.
(b) Results of comprehensive appraisals of selected undertakings conducted by the Audit Board.
(c) Resume of the company auditor’s reports submitted by them under the directions issued by the CAG and that of comments on the accounts of the Government companies.
(d) Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.

ICAI Examiner Comments”

Majority of the examinees instead of explaining the contents of Report presented by C & AG on the public sector undertakings required in the question, wrongly discussed the Contents of General audit report like title, opening paragraph, responsibility of auditors etc., besides 1 wrongly explaining supplementary audit and Test audit.

Question 14.
The areas covered in comprehensive audit vary from enterprise to enterprise depending on the nature of the enterprise, its objectives and operations. You are required to list down some of the broad areas to be examined in comprehensive audit. [MTP-April 18]
or
XYZ&Co., a CA. firm was appointed by C&AG to conduct comprehensive audit of ABC Public undertaking. C&AG advised to cover areas such as investment decisions, project formulation, organisational effectiveness, capacity utilisation, management of equipment, plant and machinery, production performance, use of materials, productivity of labour, idle capacity, costs and prices, materials management, sales and credit control, budgetary and internal control systems, etc. Discuss stating the issues examined in comprehensive audit. [RTP-May 20]
or
The Comptroller and Auditor General assists the legislature in reviewing the performance of public undertakings. He conducts an efficiency-cum-performance audit other than the field which has already been covered either by the internal audit of the individual concerns or by the professional auditors. He locates the area of weakness and extravagance for managements’ information. Explain stating clearly the issues examined in comprehensive audit. [MTP-Oct. 19]
or
Sun Light Limited is a public sector undertaking engaged in production of electricity from solar power. It had commissioned a new project near Goa with a new technology for a cost of Rs. 5,750 crore. The project had seen delay in commencement and cost overrun. State the matters that a Comprehensive Audit by C&AG may cover in reporting on the performance and efficiency of this project. [Nov. 18-New Syllabus (4 Marks), MTP-Oct. 20]
or
Write a short note on the following: Areas covered in Comprehensive Audit. [RTP-May 19]
Answer:
Comprehensive Audit:
Meaning: Comprehensive Audit involves assessing overall efficiency and effectiveness of Public Enterprises. This is done by reference to certain pre-determined standards, objectives and criteria.

The starting point of a comprehensive audit is the preparation of an audit programme based on the study of decisions relating to the setting up of the enterprise, its objectives, the areas of operation, organisation, financial and operational details, capital and operational budgets and other relevant available papers.

Areas to be covered in Comprehensive Audit:
The areas covered in comprehensive audit will vary from enterprise to enterprise depending on the nature of the enterprise, its objectives and operations. Some of the broad areas are listed below:

1. Comparison of overall capital cost of the project with the approved planned costs.
2. Production or operational outputs vis-a-vis under-utilisation of the installed capacity.
3. Soundness of systems of project formulation and implementation.
4. Achievement of Planned rate of return.
5. Adequacies of Cost control measures.
6. Existence and performance of Research and development programmes.
7. Existence of adequate system of repairs and maintenance.
8. Effective and economical procedures
9. Inefficiency or insufficiency of Project planning.
10. Undue waste, unproductive time for men and machines, wasteful utilisation or even non-utilisation of resources

Propriety Audit

Question 15.
Write short note on: General Principles relating to Propriety Aspect. [Nov. 08, May 11 (4 Marks) |
or
What are the principles involved regarding”Propriety audit” in the caseofPublicScctor Undertaking?
or
Write a short note on – Propriety Audit.
Answer:
General Principles of propriety Aspect:
Propriety Audit stands for verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct.

Instead of too much dependence on documents, vouchers and evidence, it shifts the emphasis to the substance of the transactions and looks into the appropriateness thereof on a consideration of financial prudence, public interest and prevention of wasteful expenditure. Audit against propriety seeks to ensure that expenditure conforms to these principles which have been stated as follows:

1. Expenditure is not prima facie more than the occasion demands and that every official exercise the same degree of vigilance in respect of expenditure as a person of ordinary prudence would exercise in respect of his own money.
2. The authority exercises its power of sanctioning expenditure to pass an order which will not directly or indirectly accrue to its own advantage.
3. Funds are not utilised for the benefit of a particular person or group of persons.
4. Apart from the agreed remuneration or reward, no other avenue is kept open to indirectly benefit the management personnel, employees and others.

Question 16.
Briefly describe the problems associated with the Propriety Audit.
Answer:
Problems associated with the Propriety Audit:

The expression “propriety” is a moral term and can be understood by reference to the concept of morality accepted by the society at a given time.

Propriety audit has an inherent element of subjectivity because it is very difficult to establish standards of public interest, commonly accepted customs, standards for conduct which are not firm basis for audit evaluation.

The element of subjectivity has caused proper discharge of duty very delicate and demands discretion, but wisdom of taking commercial decisions under dynamic environment (the economic, social and political) must be evaluated with reference to the circumstances in which these were taken and therefore, the auditor in his field must reconstruct such circumstances.

The judgment of the auditor must be objective as otherwise it would dampen the initiative of management and others in taking commercial decisions and propriety audit would prove itself to be counterproductive.

To take care of this situation, the C&AG has developed the norms of propriety for expenditure of public funds in our country. By laying down the standards of propriety for Government expenditure the C&AG has really tried to tackle in a practical way the complex problem of subjectivity inherent in a situation calling for propriety consideration.

Question 17.
Write a short note on – Areas of propriety audit under Section 143(1) of the Companies Act, 2013. [Nov. 12 (4 Marks), RTP-Nov. 19]
Or
Tee & Co., a firm of chartered accountants had been appointed by C&AG to conduct statutory audit of M/s Rare Airlines Limited, a Public-Sector Company. They would like to check certain mandatory propriety points sector company. They would like to check certain mandatory propriety points as required u/s 143(1) of the Companies Act, 2013. List the areas of check to meet these requirements. (May 18 – New Syllabus (4 Marks), MTP-April 19)
Answer:
Areas of propriety u/s 143(1) of Companies Act, 2013:
Section 143(1) of the Companies Act, 2013 requires the auditor to make an enquiry into certain specific areas. In some of the areas, the auditor has to examine the same from propriety angle as to:

(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

Performance Audit:

Question 18.
Write short note on: Performance Audit .
or
“A performance audit is an objective and systematic examination of evidence for the purpose of providing an independent assessment of the performance of a government organization, program, activity, or function in order to provide information to improve public accountability and facilitate decision-making by parties with responsibility to oversee or initiate corrective action.” Briefly discuss the issues addressed by Performance Audits conducted in accordance with the guidelines issued by C&AG. [RTP-Nov. 18, May 20]
or
Write short note on: Issues addressed in Performance Audit of PSUs. (Nov. 18-Old Syllabus (4 Marks)]
Answer:
Performance Audit:
Meaning: A performance audit is an objective and systematic examination of evidence for the purpose of providing an independent assessment of the performance of a government organization, program, activity, or function in order to provide information to improve public accountability and facilitate decision-making by parties with responsibility to oversee or initiate corrective action.

Elements of Performance Audit: Performance audits include evaluation of economy, efficiency and effectiveness.

1. Economy: Economy stands for minimising the cost of resources used for an activity, having regard to appropriate quantity, quality and at the best price. Evaluating economy implies forming an opinion whether resources have been used economically and acquired in due time, in appropriate quantity and quality at the best price.

2. Efficiency Audit: Efficiency is the measurement of input-output. It is said to be achieved when the output is maximised at the minimum of inputs, or input is minimised for any given quantity and quality of output. Examining efficiency embraces aspects such as whether:
(a) procurement practices followed are sound;
(b) resources are properly protected, maintained and efficiently used;
(c) efficient operating procedures are used; and
(d) the objectives of public sector programmes are met cost-effectively.

3. Effectiveness: Effectiveness is the measurement of the extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity. Examining effectiveness will cover the following:
(a) determine the extent to which a program achieves a desired level of results;
(b) assess the effectiveness of the program and/or of individual program components;
(c) determine whether management has considered alternatives for carrying out the program that might yield desired results more effectively or at a lower cost;
(d) assess the adequacy of the management control system for measuring, monitoring and reporting a programme’s effectiveness;
(e) ensure compliance with laws and regulations applicable to the program.

Question 19.
In carrying out efficiency audit of a Public-Sector Undertaking (PSU), what important aspects are required to be looked into, to assess the efficiency? [May 18 – Old Syllabus (4 Marks)]
Answer:
Aspects to be looked into to assess the efficiency of a PSU:
Efficiency is the measurement of input-output. It is said to be achieved when the output is maximised at the minimum of inputs, or input is minimised for any given quantity and quality of output. Examining efficiency embraces aspects such as whether:
(a) procurement practices followed are sound;
(b) resources are properly protected, maintained and efficiently used;
(c) efficient operating procedures are used; and
(d) the objectives of public sector programmes are met cost-effectively.

Question 20.
ABG & Co., a Chartered Accountant firm has been appointed by C&AG for performance audit of a Sugar Industry. What factors should be considered by ABG & Co., while planning a performance audit of Sugar Industry? [May 14 [6 Marks)]
Or
Kalmani & Co. Chartered Accountants have been appointed by C&AG for performance audit of a sugar industry. What factors should be considered by Kalinam & Co., while planning a performance audit of a sugar industry? [May 1.6 (4 Marks)]
Answer:
Factors to be considered while planning performance audit:

1. Significance and the needs of potential users of the audit report.
2. Obtaining an understanding of the program to be audited.
3. Legal and regulatory requirements.
4. Management controls.
5. Identifying the criteria needed to evaluate matters subject to audit.
6. Identify significant findings and recommendations from previous audits that could affect the current audit objectives.
7. Potential sources of data that could be used as audit evidence and consider the validity and reliability of these data.
8. Consider whether the work of other auditors and experts may be used to satisfy some of the auditors’ objectives.
9. Providing sufficient staff and other resources to do the audit.
10. Preparing a written audit plan.

“ICAI Examiner Comments”
Most of the Candidates failed to highlight important factors while planning the performance audit, instead treated this to be covered as internal audit of sugar industry and discussed only general points.

Question 21.
You have been appointed by C&AG for performance audit of a PSU. What are the steps to be followed by you while planning the performance audit.
Answer:
Steps for planning a performance audit:

1. Understanding the entity/programme: Auditors should obtain an understanding of the programme to be audited to help assess, among other matters, the significance of possible audit objectives and the feasibility of achieving them.

2. Defining Audit Objective: These are the basic audit questions that performance auditors seek answers to. These are usually expressed in terms of questions about performance i.e., achievement of economy, efficiency and effectiveness of an entity, programme or activity under audit.

3. Scope of Audit: Defining scope focuses the extent, timing and nature of the audit. Answers to the following four questions help in defining the audit scope: WHAT, WHO, WHERE, WHICH PERIOD.

4. Determining the audit Criteria: Criteria are the standards used to determine whether a program meets or exceeds expectations. In selecting criteria, auditors have a responsibility to use criteria that are reasonable, attainable, and relevant to the matters being audited.

5. Deciding Audit Approach: Performance auditing generally follows one of three approaches in examining the performance of the audited entity files).

6. Developing audit Questions: Audit team should prepare a list of questions to which they would seek answers. There could be many ways to develop and frame audit questions. The performance auditors should frame a comprehensive and detailed list of questions.

7. Assess audit team skills and requirement of outside expertise: The performance auditor must possess the range of skills and experience necessary for effective discharge of audit mandate. The Audit team needs to decide at the planning stage on which aspect expertise is required.

8. Audit design Matrix: Audit Design matrix is a rigorous, structured and highly focused approach to designing a performance audit study, based around the audit objectives, associated sub objectives and lower level detailed questions.

9. Establish the timetable and resources: It is important to determine the timetable and the resources needed. Selection of appropriate audit team is the most important component in planning an audit. Considerations for selection of a particular team should be recorded in the planning documents along with the proposed timelines for various activities to be undertaken as part of the audit process.

10. Intimation of Audit: Audited entities must be informed about the intention of taking up the planned performance audit with scope and extent of audit well before the commencement of Audit.