Unit 4: Audit Certificate and Classification

Cooperative Audit: Audit Certificate and Classification

Commencement of Audit Programme

Before starting an audit, the auditor frames an audit programme and then begins the audit process:

Steps in Commencement:

Receive Appointment & Authority - Appointment letter from Registrar / Cooperative Department.
Study Previous Audit Reports - Understand earlier objections, pending issues, discrepancies.
Collect Basic Documents - Bylaws, minutes, financial statements, registers.
Plan Audit Work - Allocate duties to audit team.
Notify the Society - Inform management about audit commencement.

Purpose: Ensures systematic, transparent, and efficient audit.

Routine Checking

Routine checking is ongoing verification of accounts and transactions during the audit:

Examine cashbook, bank book, ledgers.
Ensure correct posting, totaling, and balancing.
Compare voucher details with ledger entries.
Verify deposits, loans, share capital, and investments.
Identify errors, omissions, or irregularities early.

Routine checking reduces the chance of fraud and ensures accuracy before final verification.

Vouching of Cash Transactions

Vouching is the process of checking each financial transaction with proper supporting documents (vouchers).

Key Points:

Cash receipts: Verify all receipts with counterfoils, deposit slips, receipt books.
Cash payments: Verify with payment vouchers, sanction notes, bills, receipts.
Loan transactions: Ensure loan disbursement & recovery is recorded with vouchers.
Deposit receipts: Check against ledger and actual cash.

Objective: Ensure authenticity, accuracy, and legality of all cash transactions.

Meaning of Verification

Verification means examining and confirming the existence and value of assets and liabilities.
It goes beyond checking arithmetic accuracy.

Assets: Cash, stock, land, buildings, machinery, investments, loan balances.
Liabilities: Deposits, loans, payables, reserves.

Verification ensures the society’s balance sheet reflects true financial position.

Mode of Valuation of Various Assets and Liabilities

A. Cash

Value = Face value (actual money held in cash/bank).

B. Loans & Advances

Value = Principal outstanding + accrued interest.
Consider NPAs: Reduce value for doubtful loans.

C. Investments

Valued at cost or market value, whichever is lower (conservative approach).

D. Fixed Assets (Building, Plant, Machinery)

Value = Historical cost – depreciation.
Include installation, freight, and taxes.

E. Stock / Inventory

Value = Cost or market value, whichever is lower (LIFO/FIFO methods).

F. Liabilities

Value = Amount payable (deposits, loans, payables, outstanding expenses).

G. Reserves & Funds

Valued according to society rules and statutory requirements.

Depreciation

Depreciation is the reduction in value of fixed assets over time due to:

Wear & tear
Obsolescence
Passage of time

Methods of Depreciation:

Straight-Line Method (SLM)

Equal depreciation every year.


Depreciation = (Cost of Asset – Salvage Value) / Useful Life

Written Down Value Method (WDV)
- Depreciation on reducing balance of asset value each year.
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Depreciation = Rate % × Book Value at Beginning of Year
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Purpose in Cooperative Audit

Shows true value of assets in balance sheet.
Helps calculate profit/loss accurately.
Ensures compliance with accounting standards.

Audit Certificate and Classification

A. Audit Certificate

A formal statement issued by the auditor after audit.

Confirms:

Accounts are correct and complete
Financial statements reflect true position
Books maintained as per rules
Compliance with Cooperative Act and bylaws

Components of Audit Certificate:

Name of society
Period audited
Scope of audit
Observation on accounts
Classification of society
Signature of auditor and date

B. Classification of Cooperatives (Based on Audit)

Cooperative societies are graded according to financial health and compliance:

Grade	Meaning
A	Satisfactory – accounts clean, well-managed
B	Fair – minor discrepancies, needs improvement
C	Unsatisfactory – irregularities, needs corrective action
D	Poor – serious mismanagement/fraud, may need intervention

Classification helps Registrar take corrective actions and decide grant/subsidy eligibility.

Summary Table

Step	Key Activity
1. Commencement	Planning, gathering documents, notifying society
2. Routine Checking	Examine cashbook, ledger, vouchers regularly
3. Vouching	Check each cash/payment/receipt with supporting docs
4. Verification	Confirm existence/value of assets & liabilities
5. Valuation	Assets: cost – depreciation; Loans: principal + interest; Liabilities: payable
6. Depreciation	Reduce asset value over time (SLM/WDV)
7. Audit Certificate	Issue formal certificate confirming accounts & compliance
8. Classification	Grade society as A, B, C, or D based on audit report

Reserve

A reserve is a portion of profits or surplus set aside by a cooperative society to:

Strengthen financial position
Meet future contingencies
Expand business
Comply with legal requirements

According to ICA/Cooperative Practice:

“A reserve is an appropriation of net profits retained in the business and not distributed as dividend, to provide for future requirements and safeguard the society’s financial stability.”

Various Types of Reserves

Type	Purpose / Features
General Reserve	Created from profits to meet unforeseen losses or expansion needs
Specific Reserve	For specific purposes like bad debts, building fund, equipment replacement
Capital Reserve	Not distributable; created from capital profits (e.g., sale of asset above book value)
Contingency Reserve	To cover unexpected events like natural disasters or fraud
Legal / Statutory Reserve	Mandated by Cooperative Societies Act or Registrar rules

Reserves improve solvency, credibility, and financial health of the cooperative.

Audit of Final Accounts

Final accounts include:

Profit & Loss Account (P&L)
Balance Sheet

A. Profit and Loss Account

Shows income and expenditure for the financial year.

Auditor checks:

Proper posting of revenues and expenses
Correct interest on loans, deposits, and subsidies
Treatment of reserves and surplus
Correct allocation of dividend / patronage bonus

B. Balance Sheet

Shows financial position as on the last date of the year.

Auditor verifies:

Assets: Cash, loans, stock, investments, fixed assets
Liabilities: Deposits, loans, outstanding expenses
Capital & Reserves: Share capital, general reserve, contingency reserve

Reconciliation of Bank Accounts

Bank Reconciliation Statement (BRS) ensures cash book and bank passbook balances match.

Steps:

Check opening balances in cash book vs. bank passbook.
Identify outstanding cheques.
Identify deposits in transit.
Adjust for bank charges, interest credited, dishonoured cheques.
Calculate correct closing balance.

Auditor verifies BRS to ensure accuracy and completeness of cash transactions.

Audit Report

An audit report is a formal statement submitted by the auditor summarizing findings of the audit.

Contents of Audit Report

Name of society & period audited
Scope of audit
Financial position: assets, liabilities, reserves
Profit & Loss review
Compliance with bylaws & legal requirements
Classification of society (A/B/C/D)
Recommendations / objections
Signature & date of auditor

Audit Certificate

A certificate issued by auditor confirming:

Accounts are properly maintained
Financial statements reflect true and fair view
Compliance with law & bylaws
Classification of society

Serves as official proof for government, NABARD, banks, and members.

Audit Classification

Based on audit findings, societies are classified as:

Grade	Meaning
A	Satisfactory – proper accounts, compliance, no major objection
B	Fair – minor irregularities, can improve
C	Unsatisfactory – serious irregularities, corrective action needed
D	Poor – mismanagement, non-compliance, may face penalties or intervention

Classification helps Registrar in subsidy, loan, or managerial decisions.

Assessment and Levy of Audit Fees

Assessment of Fees

Based on size of society, turnover, loans, members, and complexity of accounts.
Prescribed by State Cooperative Department.

Levy of Audit Fees

Auditor is paid from society funds.
Fees may be fixed annually or based on audit report type (statutory/special).
Fees should not compromise independence of auditor.

Proper fees ensure qualified auditors are available and audit quality is maintained.

Summary Flow – Cooperative Audit

Audit Process Flowchart:

Appointment of Auditor → 2. Commencement of Audit Programme → 3. Routine Checking & Vouching → 4. Verification of Assets & Liabilities → 5. Depreciation & Valuation → 6. Audit of Final Accounts (P&L, Balance Sheet) → 7. Bank Reconciliation → 8. Audit Report & Audit Certificate → 9. Classification (A/B/C/D) → 10. Levy of Audit Fees