Unit 3: Cooperative Audit

Cooperative Audit 

A Cooperative Audit is a systematic examination of the accounts, activities, and management of a cooperative society.
It is done not only to check accuracy of financial records, but also to ensure that the cooperative is working according to:

• Cooperative principles
• Cooperative Societies Act
• Rules & bylaws
• Government instructions
• Members’ interests

It is more than a financial audit because it checks both financial health and democratic functioning.

Objectives of Cooperative Audit

1. Checking Accuracy

• Verify correctness of accounts, cash book, ledger, vouchers, receipts.

2. Detecting Errors and Fraud

• Identify misappropriation, misuse of funds, or irregularities.

3. Ensuring Legal Compliance

Check compliance with:

• Cooperative Societies Act
• State cooperative rules
• Bylaws
• Government schemes

4. Assessing Financial Position

• Evaluate profitability, liquidity, and solvency of the society.

5. Protecting Members’ Interests

• Ensure transparency and fairness in management decisions.

6. Checking Cooperative Principles

• Ensure democratic control, open membership, proper elections, etc.

7. Suggesting Improvements

• Provide recommendations for efficient working and future growth.

Scope of Cooperative Audit

The scope is wider compared to normal commercial audits.

It covers:

1. Financial Audit

• Checking accounts
• Verification of assets and liabilities
• Loan transactions
• Investments
• Reserves & surpluses

2. Operational Audit

• Checking business activities
• Evaluating performance of manager/board
• Reviewing internal controls

3. Statutory Compliance Audit

• Checking if returns, statements, and registers are submitted on time.

4. Management & Governance Audit

• Checking election procedures
• Board meetings, AGM minutes
• Working as per bylaws

5. Social Audit

• Studying member participation, training, community benefit programs.

Advantages of Cooperative Audit

1. Ensures Transparency

• Builds trust among members.

2. Detects Fraud Early

• Reduces chances of corruption.

3. Improves Financial Discipline

• Encourages proper maintenance of accounts.

4. Helps Management Improve

• Practical suggestions for better functioning.

5. Required for Government Assistance

• Loans, subsidies, grants often require audited accounts.

6. Builds Credibility

• Useful for borrowing and external evaluations.

Internal Check vs Internal Audit

Feature	Internal Check	Internal Audit
Meaning	Continuous checking of day-to-day work	Independent appraisal of activities
Performed by	Staff within the department	Internal auditor (independent)
Purpose	Prevent errors and fraud	Detect errors, evaluate processes
Nature	Part of routine work	Periodic activity
Scope	Limited to accounting processes	Wider—includes efficiency, control, compliance

Audit, Inspection, and Supervision (Differences)

Activity	Meaning	Purpose
Audit	Detailed examination of accounts & operations	Detect errors/fraud, ensure compliance
Inspection	Surprise or short check of records or branches	Ensure day-to-day compliance
Supervision	Continuous oversight by registrar or officials	Guidance and monitoring of management

Audit of Cooperative Societies vs Audit of Joint Stock Companies

Basis	Cooperative Societies	Joint Stock Companies
Authority	Done by Registrar of Cooperative Societies	Appointed by shareholders
Scope	Wider—includes management & member welfare	Primarily financial
Purpose	Social + economic goals	Profit maximization
Audit Fee	Fixed by government	Decided by company
Legal Requirement	Annual audit mandatory by Coop Dept.	Mandatory under Companies Act
Focus	Compliance with bylaws	Accounting standards & company law

Administrative Setup for Cooperative Audit

Cooperative audit is handled by the State Government through the Registrar of Cooperative Societies (RCS).

Administrative Structure

1. Registrar of Cooperative Societies (RCS)

   • Head of cooperative audit in the state

   • Sets policies, rules, audit standards

2. Additional/Deputy Registrar

   • Supervises audit at divisional level

3. District Cooperative Auditors / Audit Officers

   • Conduct audit for societies within districts

4. Certified Cooperative Auditors (CCA)

   • Empanelled professionals allowed to audit cooperatives

5. Department of Cooperative Audit

   • Separate wing for audit work in many states

Functions of Cooperative Audit Administration

• Allotting auditors
• Monitoring audit quality
• Training auditors
• Issuing audit classification (A, B, C, D)
• Taking action on audit objections
• Approving audit reports

Appointment of Auditor in Cooperative Societies

Who Appoints the Auditor?

The appointment depends on the Cooperative Societies Act of each state, but generally:

1. Registrar of Cooperative Societies (RCS) - Appoints auditors for most cooperative societies.
2. Annual General Meeting (AGM) - May approve/confirm the auditor (in some states).
3. Government / Financing Bank - May recommend auditors for societies receiving grants or loans.
4. Panel System - Only auditors from the government-approved panel of cooperative auditors can audit.

Eligibility

• Must be a Certified Auditor registered under the Cooperative Department.
• Chartered Accountants may audit specific cooperatives (e.g., apex bodies).

Rights of a Cooperative Auditor

A cooperative auditor has several statutory rights:

1. Right to Access Records - Can inspect all books of accounts, vouchers, agreements, minutes, registers.
2. Right to Ask for Information - Can question the Executive Committee, Manager, Accountant, Cashier.
3. Right to Verify Assets & Liabilities - Right to physically verify cash, stock, fixed assets, investments.
4. Right to Attend Meetings - Can attend AGM or board meetings where audit-related matters are discussed.
5. Right to Report Irregularities - Can report fraud, mismanagement, or misuse of funds to the Registrar.
6. Right to Remuneration - Legally entitled to audit fee fixed by government or society.

Duties and Responsibilities of a Cooperative Auditor

1. Examine Financial Records

• Cashbook, ledger, journal, trial balance, vouchers.

2. Verify Loans

• Check loan applications, security, approval, recovery, overdue amounts.

3. Check Compliance

Ensure society follows:

• Bylaws
• Cooperative Act
• Government rules
• Registrar’s orders

4. Ensure Proper Maintenance of Registers

Examples:

• Share register
• Members’ register
• Minutes book
• Stock and asset registers

5. Evaluate Internal Controls

• Checking internal checks, authorization, and division of work.

6. Physical Verification

• Stock, cash, assets, investments.

7. Report Mismanagement

• Fraud, corruption, illegal decisions, conflict of interest.

8. Prepare Audit Report

• Classification (A, B, C, D)
• Suggestions for improvement
• Highlight financial health

Types of Audit in Cooperative Societies

1. Statutory Audit - Mandatory annual audit by government-approved auditor.
2. Internal Audit  - Conducted periodically by the society to improve internal controls.
3. Concurrent Audit - Real-time audit, mostly in banks (checking day-to-day transactions).
4. Special Audit - Ordered when fraud or misappropriation is suspected.
5. Re-Audit - Conducted when initial audit is defective or incomplete.
6. Cost Audit- Checking cost records (rare in cooperatives).
7. Performance / Management Audit - Evaluates efficiency, productivity, decision-making.
8. System Audit - Examines computerized systems, CBS, MIS, software controls.

Mechanical Audit vs Administrative Audit

Basis	Mechanical Audit	Administrative Audit
Focus	Mathematical accuracy	Governance & management
Checks	Posting, totaling, balancing	Bylaws, decisions, elections
Purpose	Ensure accuracy of accounts	Evaluate correctness of administration
Nature	Technical	Managerial
Example	Checking cashbook totals	Checking if AGM was conducted on time

Mechanical Audit Includes:

• Checking arithmetical accuracy
• Vouchers
• Balance verification
• Ledger posting

Administrative Audit Includes:

• Management decisions
• Policy implementation
• Member participation
• Compliance with bylaws

Preparation for Audit

Before starting an audit, the auditor should check:

1. Appointment Letter

• Receive official authority from Registrar / society.

2. Previous Audit Report

• Understand earlier objections, comments, pending issues.

3. Basic Documents

• Bylaws
• Minutes book
• Share register
• Loan documents

4. Financial Records

• Cashbook
• Ledgers
• Vouchers
• Trial balance
• Bank statements

5. Physical Verification Plan

• Stock, assets, cash, inventories.

6. Audit Team Preparation

• Allocate responsibilities if working with junior auditors.

Framing of an Audit Programme

An Audit Programme is a written plan detailing:

1. What to Audit

• Cash, loans, shares, deposits, assets.

2. How to Audit

• Methods, sampling, verification.

3. When to Audit

• Timelines and sequence.

4. Who Will Do Each Task

• Allocation within the audit team.

Example of a Cooperative Audit Programme

A. Preliminary Work

• Study bylaws, last audit report, AGM minutes.

B. Verification of Records

1. Cashbook & Bank Reconciliation

2. Share Capital Records

3. Loan Registers

   • Issue, recovery, overdue

4. Deposits & Investments

5. Income & Expenditure Accounts

6. Assets (stock, furniture, building, equipment)

C. Compliance Checks

• Bylaws, statutory registers, returns to Registrar.

D. Management & Governance Review

• Elections
• Meetings
• Decision-making

E. Reporting

• Audit classification (A/B/C/D)
• Recommendations
• Final audit memo