Financial Daily from THE HINDU group of publications
Monday, Mar 28, 2005
How does an auditor vouch and verify patents
M. V. Kali Prasad
How will you vouch and/or verify the following: a) personal expenses of directors met by the company; b) preliminary expenses; and c) advances given to suppliers.
a) Personal expenses of directors met by the company acquire a lot of significance since Section 227 (1A) as well as CARO require the auditor to comment whether any expenses of a personal nature are charged to revenue unless they are payable by way of a contractual obligation.
b) Preliminary expenses are those incurred in connection with incorporation of a company. They consist of stamp duties, registration fees, legal costs, consultant's fees, expenses of printing of memorandum and articles, and so on.
In this context, the following should be checked:
Minutes of the first board meeting where the preliminary expenses are taken on record and the period over which they are to be written off.
c) Advances given to suppliers: It is a common business practice to pay advances to suppliers of both capital goods as well as revenue items. The auditor should, therefore, examine the following:
The salient features are: a) budgetary procedures; and b) expenditure control.
Budgetary procedure: This serves a dual purpose, of financial accountability and control of expenditure. It ensures that collection and expenditure of various departments is in accordance with the limits, rules and as authorised by the legislature.
The budget exercise determines changes in levels of taxation and allocation of expenditure to various departments. There is no specific budget format and the head of accounts, which vary from one municipality, cantonment board or corporation to the other.
These budgets do not differentiate between revenue and capital items. Most of the capital transactions are covered by the head "extraordinary items". Separate funds are established for different activities such as irrigation, roads, and so on. Separate budgets are made for specific functions of the municipality, such as education, water supply, health and sanitation, and so on.
Expenditure control: In any Government there is a clear demarcation between legislature and executive. The local bodies do not provide for an independent finance officer. Legislative and executive powers are integrated in the local body, thereby making the entire system complicated. There is no provision for management information systems.
Thus, financial administration in local bodies is complicated, confusing and incomprehensive.
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