INTERNALCHECK AND STATUTORY AUDIT

INTERNAL CHECK –PRE AND POST CHECK
1.1 INTERNAL CHECK
The check exercised By the Accounts office on the financial transactions of the Railways on half of Railway Administration is called internal check. This is called so to distinguish it from the audit conducted by the chief auditor of the railways receipts and expenditure on behalf of the controller and Auditor General of India. In fact the audit conducted by the Chief auditor should be rightly called “external audit” and the internal check carried out by the financial Adviser and his officers, on behalf of the Railway administration should be called “Internal audit” in modern parlance.

1. 1.1 The Scope and methods of internal check or internal audit have been brought out in detail in Chapter VIII of Accounts Code Volume I.

The Salient features of internal audit are as under.
(a) Check of Sanctions and orders,
(b) Check of delegation of financial authority,
(c) Check of all Establishment bills
(d) Pre-check and Post-check of expenditure
(e) Scrutiny of receipt - this includes inspection of original records at the stations as well as post audit of returns from the stations in the Traffic Accounts office;
(f) Internal check of debt and remittance transactions,
(g) Maintenance of Provident Fund Accounts,
(h) Check of pension payments,
(i) Prior check of all contractors bills etc., before passing the same for payment inspection of stations and other executive officers for checking the original records.

1.2 The Internal check is conducted with reference to -
(a) rules and orders issued by the President Railway Board, General Managers of Railways and various authorities,
(b) the instructions contained in the Codes and instruction issued from lime to time by the Railway Board,
(c) The recognized standards of financial propriety,

1. 3 While scrutinizing receipt. It should be seen
(i) That the amount due to the Railway for services rendered, supplies made, arc correctly and promptly assessed recovered as soon as they fall due,
(ii) that all receipt arc properly brought into account,
(iii» that all receipts are correctly classified, and if they represent an amount due to more than one railway, that they are correctly apportioned among the railways,

1.4 All claims against the railway are scrutinized with a view to see
(a) that the expenditure has been sanctioned by competent authority and that the expenditure is incurred by .an officer competent to incur it,
(b) that all prescribed preliminaries to expenditure are observed before disbursement of pay, etc.
(c) that it is covered by the grant at the disposal of the officer incurring it,
(d) that the expenditure does not contravene any rules and orders in force,
(e) that the expenditure does not involve a breach of the Standards of financial Propriety
(f) that the expenditure sanctioned for a limited period is not admitted beyond that period without further sanction,
(g) that in the case of recurring charges, which are, payable on the fulfillment of certain condition a certificate is forthcoming from the drawing office to the effect that necessary conditions have been fulfilled,
(h) that the charge is correctly classified,
As exceptions to this general rule the following payments may be; made before such check: - \
a} Payments from imprest
(h) Payment from station earnings when permitted under rules.
(e) Commission deducted by auctioneers from sale proceeds,
(d) Payment of certain classes of pay bills, muster sheets and labour pay sheets of open line staff specially permitted to be made by F.A. & C.A, 0.

1.5 INTERNAL CHECK OF SANCTIONS AND ORDERS
The Accounts Officer -should examine every rule. order or sanction whether issued by the president, the Railway Board, or any sub-ordinate authority in order to see
(a) that the authority framing the rule or according the sanction is competent to do so,
(b) that the sanction is definite.
(c) that the rule or order or sanction does not contravene any general or special orders of any higher authority and
(d) that the sanctions to expenditure of definite amounts, [he same arc always expressed both in words and figures.

1.6 TREATMENT OF ERRONEOUS PAYMENTS
When erroneous payments have been passed for considerable time. owing either to a wrong interpretation of financial rules or due lo oversight, the following procedure should he observed:
f) Wrong interpretation:
The new interpretation should be given effect from the date, which the competent authority may decide. If no date is specially fixed, the correct interpretation -should be given effect to from the date it is stated by the competent authority
Oversight
Payment made less than 12 months ago, should be recovered. Every overpayment of money to a railway servant is and must be regarded as a debt to public and all possible action should be taken for speedy recovery

1.7 POST CHECK OF PAID VOUCHERS
All bills, whether under the pre-check or the post check system in which payment has been made should be checked to see -
(a) that the acknowledgements of payments have been obtained (in English or Hindi).
(b) that the names of payees mentioned in the bills tally with the signatures obtained,
(c) that the payment has been witnessed, whereso required, by the official named in the bill and the acknowledgement is unqualified,
(d) that where a person other than payee himself has received the amount, the payment has been made under proper authority.
(c) that vouchers are stamped,
(f) that each voucher has been cancelled efficiently and promptly,

1.8 INTERNAL AUDIT AND INTERNAL CHECK :
Though Internal Check is part of Internal Audit as far as Railways are concerned yet there is a distinct difference between the two.
''International Audit is an independent appraisal function within an Organization for the review of activities as a service to all levels of Management. It is a review of the operations and accounts some-times continuously undertaken within a business by specially assigned staff".

The objectives of Internal Audit are
i) a Service to Management;
ii) ensures reliability and integrity of Accounts System.
iii) ensures compliances with rules and regulations;
Facilitate preventions and detection of frauds.
Internal Check is a part of the overall internal control system. The internal check is the check exercised on the day-to-day transactions which operate continuously as part of the routine system whereby the work of one person if proved independently of another.

SYSTEM OF INTERNAL AUDIT IN INDIAN RAILWAYS:
Internal Audit functions are performed in the form of Inspections of activity centres and offices by different agencies from Zonal and Divisional Railway offices:-
i) Inspection of Executive offices by Accounts Officers and Staffs as provided in Chapter-XVII of the Accounts Code Part-1,
ii) Inspection of stations by TIAs as per Chapter - XXXIII of Accounts Code - Part-II
Accounts Stores Verification of Stores as per Chapter-XXXIII of Stores Code
iv) Inspection of Subordinate Accounts offices by FA & CAO and his officers.
v) Inspection of Zonal Railway's Account Offices by the Board's Inspection Party,
All these Inspections are in the nature of Systems Audit ad Transaction Audit.
Further reading: Please refer Chapter-XVII of Accounts Code Part-1 to know more about the objectives of Inspections of executive offices and the records that are to be inspected.

STATUTORY AUDIT
2.1 Railways are part of the Government of India and not a corporation under any statute or Indian Companies Act. There is, therefore, no statutory audit of the type under Indian Companies Act. Statutory Audit is conducted by CAG which is much more comprehensive than company auditors and the audit report on performance is submitted lo the Par/lament by CAG, Public accountability is, therefore, maximum.

2.2 FUNCTIONS
The Comptroller and Audit General of India is the final audit authority in India and he is responsible for the audit of the accounts of the Indian Railways hut has no responsibility for the compilation of such accounts. The form in which account of the Indian Railway should he kept and changes in accounts classification affecting the recording of The expenditure in the Finance and Revenue Accounts are, however, subject to his approval (113-!).

2.3 OBJECT OF STATUTORY AUDIT (116 AI and 911 of Finance Code)
The Statutory audit has three fold purposes viz.
it is an accountancy audit - to check the accuracy and to see that all payments are supported by receipted vouchers,
it is an appropriate audit - to check to ensure that expenditure, receipts have been properly classified, and voted appropriations have not been exceeded
iii) it is also an administrative audit to check that expenditure has been incurred according to prescribed rules and regulations.
The main object of audit is to ensure -
a) that the system of accounts used by the internal check authority is correct,
b) that the method of check applied at every stage of the accounts is sufficient,
c) that the accounts are maintained and the checks applied with due accuracy and
d) that the arrangements exist in the accounts office to ensure attention to the financial interest of the railways on the part of all concerned.
2.4 RESPONSlBILITY
The responsibility of statutory audit is briefly as follows :-
a) it extends in respect of expenditure transactions lo all expenditure incurred in India.
(i) in respect of receipts, it includes receipt of Indian railways including receipts relating to accounts of manufacture,
c) it includes stores and stock accounts to do the extent prescribed by the Comptroller and Auditor General of India.
2.5 Audit is always conducted ex-post facto i.e. after the event-
Audit cannot prevent an overpayment through negligence or non-observance of rules and regulations. It is the duty of Audit to report results to the proper authority so that appropriate action is taken to rectify the irregularity wherever possible and atleast prevent its recurrence

COMMUNICATION FROM AUDIT -DRAFT PARAS AND AUDIT REPORTS (Chapter IX of Finance Code)
Ordinarily the results of statutory audit are communicated through -
a) Specific reports of the more important and serious irregularities discovered in the course of audit, of Accounts and departmental offices and station records,
b) Audit notes detailing minor irregularities discovered in the course of audit of accounts office records,
c) Inspection reports showing the results of audit of the initial records of executives offices (Para 916 of Financial Code).

An inspection report will consist of two parts, namely Part I dealing with the more important matters and Part II dealing with the rest, containing minor routine matters. Audit notes will also similarly consist of two parts. The final disposal of part II of audit notes and inspection reports rests with the Accounts officers and no formal reply to the Director of Audit is necessary. Replies to part I of inspection reports and audit notes and specific reports should be sent by the executive offices concerned to the accounts officer. In scrutinizing them, the Accounts officer should call for further information, if necessary, and consult the head of the division or department concerned, where desirable before giving a reply to the Director of Audit (918 and 919 of Financial Code). All audit objections and notes should be promptly attended to by the Accounts officer.

All important eases coming to the notice of Audit during inspections or regular audit which in the opinion of the Director of Audit merits inclusion in the Audit Report are brought to the notice of the Railway Administration through special letters, notes of objection etc., to the Heads of Departments/FA&CAOs by the Director of Audit. Since these special letters, factual statements form the basis of the material for the Audit Report, the Railway administration should deal with them at a sufficiently high level and bring out their point of view in a convincing manner before they proceed to prepare a draft paragraph for incorporation in the Audit report.

11.3 Draft paras
If it is decided by the Director of Audit that the statement of facts are required to be converted into a Draft Para for the Audit report, the draft Para prepared will be sent by the Director of Audit to the Personal address of the GM simultaneously sending advance copies of the draft Para with connected correspondence to the FA&CAO. HOD concerned, the additional Deputy, C&AG (Rlys) and the Director (Finance) Railway Board to facilitate prompt action and detailed examination. The railway administration is required to give a final reply lo the Director of Audit, after consultations with the Railway Board, within a period of eight weeks from the receipt of the draft Para. To allow some time for further enquiries and examination by the Railway Board, it will be necessary for the railway to forward the draft Para alone with a report from the Railway administration personally to the Director (Finance) Railway Board, as quickly as possible as but not later than five weeks of the receipt of the draft Para. The reply will be sent over the personal signature of the GM duly vetted by the FA&CAO.

Any modifications, which the Railway administration may desire to suggest, or any comments, which they wish Director of Audit to consider before giving their final reply should, as far as possible, be settled by personal discussions so that the final reply of the administration is sent within the overall time limit of 8 weeks. After the railway, administration has replied finally, any further enquiries by the Board or the Director of Audit will have to be dealt with based on highest priority,

11.4 Audit report of CAG
If the Audit is convinced of Railway administration replies that there are no irregularities, the draft paras will be dropped- If the audit considers the cases as irregular the draft paras will be included in the report of the CAG and the report is presented to the Parliament where it is taken up for consideration by the Public Accounts Committee. The Committee obtains personal evidence of senior officers of the Railway Board. The recommendations made by the Committee are considered by the Railway Board and notes on action taken by the Board are submitted to the Committee.

The Audit Report Covers Comments arising from audit of the Accounts of Railways and Appropriation Accounts on Railway Grants. Other points arising from the test audit of financial transactions of Railways are also included,

The Audit Report generally highlights :-
Financial Results of the year,
Leakage and Seepage of Railway Earnings,
Avoidable expenditure
Underutilization of assets:
Cost over runs due to Time overruns in the execution of projects
Inventory Control,

11.1 RECTIFICATION OF MISTAKES IN ACCOUNTS DISCLOSED BY AUDIT
(Para 922 of Finance Code)
if any mistake or inaccuracy is disclosed by Audit or detected in internal check, the following procedure should he adopted :
1) The mistakes should be rectified through the account of the month in hand if the accounts of the year have not been finally closed. (Any nature or mistakes)
2) Mistakes and misclassification noticed after, closing March Accounts but before the preparation _of Capital and Revenue and Finance Accounts should be rectified - The corrections should be intimated to the Railway Board by the first week of August either through a revised account or through corrections to accounts already submitted.
3) The following rules are lo he followed if the mistakes are noticed after the submission of Capital and Revenue and Finance Accounts :-
(a) If the item belongs to one revenue or service head but is wrongly classified under another - No correction need be made. A suitable note against the original entry is sufficient
The mistakes must, however, be corrected if the error affects (i) the revenue or expenditure of another Railway or a branch line company or another Government Department (ii) Capital Head (iii) Debt or remittance head.
(b) Capital - If the corrections affect capital major heads the same should be effected as without financial adjustment i.e. by altering the progressive figure of capital outlay.
(c)Debt or Remittance head : If the error affects a debt or remittance head the following procedure should be followed ;-
(i) Item taken to one debt or remittance head instead of another (either debit or credit) the correction should be made by transferring it from one to the other
(ii) Item credited or debited to a debt or remittance head instead of revenue or service head - same procedure as mentioned at (i) above,
(iii) Item credited or debited to a revenue head instead of to a debt or remittance head - correction should be made by minus crediting or minus debiting the revenue head and crediting or debiting the proper head,
4, If the rectification of mistake would lead to an excess over grant or grants voted by Parliament or to a considerable change in the dividend payable in General Revenue, the orders of Financial Commissioner (Railways) must be obtained.