Basics of Internal Audit in D.A.D.

Reading Material

Local Audit
This Reading Material has 3 Chapters:
1. Local Audit Mandate and Setup

2. Local Audit Programme (LAP)

3. Scheduling and Linking

National Academy of Defence

Financial Management &
Regional Training Centre

Golibar Maidan
Pune
PIN 411 001

Phone: 020 - 26454510/26444318

Fax: 020-26443983
3
Email: mail.nadfm@nic.in
 Basics of Internal Audit in Defence Accounts Department

CHAPTER 1
Local Audit Mandate and Setup

LOCAL AUDIT SET UP

As you all are aware that Local Audit is the Lowest level where Internal Audit is conducted. Local
Audit of Store Accounts of Units and Formations is carried out locally by Local Audit Officers (LAOs)
and their staff acting under the orders of the PCDA/CDA. It is organized under two categories – (i)
Audit by the Local Audit Staff, (ii) Review of local audit by an Indian Defence Accounts Service
Officer
SET UP

Duties and Responsibilities of LAO

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 Basics of Internal Audit in Defence Accounts Department

The final responsibility for the efficient conduct of Local Auditrests always with L.A.O.In addition to the spe-
cific duties, the L.A.O. is expected to conduct an intelligent reviewof the audit work of his staff and to apply
surprise test checks periodically. The L.A.O. will in all cases investigate the reasons for the non-linking of
vouchers selected for test linking by the Local Audit staff. He must ensure that the non-linking of vouchers is
not due to a defect in the accounting system of the unit
He will examine the draft objectionstatements and see that they are correct and properly worded and will
verify by test check that the corrections made in the accounts as a result of the objections raised have been
properly carried out. He will take up all outstanding objections and points of a controversial nature which
have been held over for his scrutiny and orders, and precede with their settlement in personal consultation
with the Officer Commanding the unit or other officers concerned, where necessary
Local audit officers will also examine all orders and sanctions affecting their work, issued by the Government
of India and authorities subordinate to them, C.G.D.As letters and Principal Controller's/ Controller's office
orders, etc., in order to ensure that they are correctly applied in audit. For this purpose, they will hold
monthly conferences with their A.A.O. and other staff members readily available at their headquarters sta-
tions. All important and doubtful points arising in the course of local audit will be discussed at these confer-
ences. The results of the conferences will be recorded in a review register. All doubtful points connected with
the interpretation or applicability of rules, instructions, etc., will be referred to the Principal Controller/
Controller for orders.
Apart from the primary role of Auditing the store accounts of Units/formations, LAO is also responsible for
rendering financial advice and scheduling (forwarding) the concerned vouchers generated under his audit
jurisdiction to the consignee LAOs

GENERAL PRINCIPLES OF LOCAL AUDIT:

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 Basics of Internal Audit in Defence Accounts Department

As can be seen from the above chart/picture, the Local Audit activities can be broadly divided into
three parts- Pre Audit Activities, Actual Audit and Post Audit Activities. Activities mentioned at Sl No. 1 to 4
denotes Pre Audit Activities, Sl No. 5 denotes Actual Audit and Sl No. 6 to 8 denotes Post Audit Activities

TOUR PROGRAMME / LOCAL AUDIT PLAN (LAP) FINALISATION

At present Local Audit of the Units/Formations are being carried out half yearly (except NCC Units for which
the audit is being done annually) i,e. April to September and October to March. Before the commencement
of Local Audit, LAO/ALAO sends the Tour Programme indicating dates of audit, mandays to be utilized etc to
Main Office for approval. On receipt of the approved tour programme, LAO/ALAO can only start the audit.
The details of LAP will be discussed under the category ‘LAP- Preparation and approval’.

INTIMATION FOR LOCAL AUDIT:

On receipt of the approved Tour Programme from the Main office, LAO/ALAO has to intimate the concerned
Unit/Formation regarding the dates of audit at least 7-15 days prior to commencement of Audit so that they
can keep their records up to date and show the documents to the audit party on demand

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ENTRY CONFERENCE
Internal Audit commences with an entry conference, by meeting the key personnel of the auditee organiza-
tion including the head of the office. The scope and flow of activities of the audit are communicated so that
the auditee makes necessary arrangements for effective conduct of audit. The plan and methodology of the
audit may be discussed for better communication and required support from the auditee. The entry confer-
ence sets the tone for effective audit by establishing effective communication lines with the auditee unit. It
also helps the internal auditor to validate the information he has gathered during the planning stage and as-
sess the attitude and perception of the key personnel towards control. The minutes of the Entry Conference
should be recorded

AUDITABLE DOCUMENTS
For every Unit/Formation there is a standard list of auditable documents. Any additions and/or deletions to
this list has to be with the approval of the Main office. For that LAO/ALAO has to send the revised list of Au-
ditable documents for the prior approval of the Main Office

APPLICATION OF AUDIT
Basically the local audit revolves around three activities- Casting, Linking and Pairing

The details will be discussed under the category ‘Scheduling and Linking of Vouchers’

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PRELIMINARY AUDIT OBSERVATION(PS)

During the course of Audit, if the audit party finds any irregularity and the Unit authority is unable to give
satisfactory answer and/or fails to produce the required documents to audit, then audit party issues a Prelim-
inary Slip / Preliminary observation to the concerned Unit/formation under the signature of LAO/ALAO. The
PS are numbered serially starting from 1 for a particular Half year Audit

UNIT RESPONSE AND CONFIRMANTION

The PS has to be replied within 48 hours. If the reply furnished by the Unit/Formation is satisfactory, then the
PS will be dropped. In some cases audit party can call for additional information/document, if required.

EXIT CONFERENCE
Request for exit conference should be made through a formal letter to the management enclosing the draft
internal audit report, giving sufficient time to auditee and his team to study it and prepare themselves for the
meeting. The purpose of exit conference is to give the department an opportunity to place additional facts,
it’s views etc on the audit findings. Essentially, it is an opportunity for the internal auditor to seek confirma-
tions. If the exit conference takes place in the right spirit, the audit report becomes an agreed document be-
tween the auditees and the internal audit. Minutes of the exit conference should be recorded and a copy
may be given to the auditee for their information

AUDIT PROGRESS REGISTER

LAO maintains one Register called Audit Progress Register (APR), where all the outstanding objections will be
entered/noted down with full details of nature of irregularity, Unit etc and it will be reviewed/updated peri-
odically. Once satisfactory reply is received from the Unit/Formation, the objection will be settled and a note
in this regard will be kept in the APR. A quarterly/Half yearly report to Main office is also rendered regarding
objections remaining outstanding with oldest date of outstanding objection

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EXTENT OF LOCAL AUDIT PRESCRIBED

Sl Nature of Work Scope

No.
1 Credit verification of ‘E’ copies, LP Vouch-
ers and CP Vouchers
2 External and Internal issue audit.
16 ½ % for E copies, 100% audit above Rs. 20000/- for
LP vouchers and 100% audit above Rs. 50000/- for
C.P. Vrs.
16 ½% audit (i.e.) one month detailed audit in every six

3 Audit of Ration Accounts 33 1/3% detailed audit (i.e.) 2 months in every 6

months. For the remaining months the checking to be
(IAFZ 3033)
restricted to ensuring that the ration drawn is as per
the average strength of the unit.
4 Ration Return 100% casting verification & 33 1/3% detailed audit.
(IAFS 1519)
5 Payment Issue Ration / POL 33 1/3% audit in respect of: -
1) Cash memos to Payment Register
2) Casting of Payment Register
3) Payment Register to Ration Return.

100% audit in respect of:-

6 Audit of Clothing
7 M.T. and P.O.L. Audit
8 Service Books and Railway Warrants.
9 Cash Accounts (Public / Imprest cash book
audit by LAOs).
10 Issue audit in OD / COD etc.
1) Cash remittances into Public Fund Account.
2) Watching of remittances through MRO and their
acknowledges from CDA.
16 ½% detailed audit. (1 month)
16 ½% detailed audit. (1 month)
Existing System / Procedure will continue
Existing System / Procedure will continue
10% instead of present 33 1/3%
(Note: - After computerization this will be reviewed)

Note: Any variation in % between the scope mentioned here and that of the Office Manual, the % mentioned
in Office Manual will prevail

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CHAPTER 2
Local Audit Programme (LAP)

PREPARATION AND APPROVAL

Preparation and approval of the Local Audit Plan (LAP) is the first and foremost activity in the Local
Audit Cycle. As we are aware that the periodicity of Local Audit is Half Yearly viz April to September
and October to March (except for NCC units which is audited Annually).
A half yearly programme of local audit for each station or group in his area will be drawn up by the
LAO. The programme will provide for the completion within that half year of the audit due to be
carried out in the period. The LAP will be submitted to the PCDA/CDA for approval by the 20th of
the fifth month of the preceding half year. For example, for the period of Audit October 2017 to
March 2018, the LAP should be forwarded to PCDA/CDA office by 20thAug 2017. The standard time
in man-days as approved and notified by the CGDA from time to time for each class of Unit repre-
sents the average period required for the local audit of the accounts of that Unit, and should be ad-
hered to by the LAO in making out the programme. Similarly, a separate programme for the review
of store accounts and inspection of cash accounts of units by the LAOs will be prepared and sub-
mitted to the PCDA/CDA.
Let us summarize the above in the table below:

Local Audit Plan (LAP)

Prepared By : LAOs
Submitted to : PCDA/CDA for approval
Due date : 20thof the fifth month of the preceding half year
What it contains : A detail of Man-days authorised and man-days proposed for audit
Purpose : Systematic completion of audit in a timely manner
Format : Annexure ‘A’

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 Basics of Internal Audit in Defence Accounts Department

Office of the Local Audit Officer

Summary of LAP
Number of working days available during the Half Year

Month No. of Saturday /Sunday /Closed Net Working Days

Holiday

10/17 08 23
11/17 06 24
12/17 08 23
01/18 06 25
02/18 05 23
03/18 06 25
TOTAL 143 days

Number of staff posted as on date : 10

Mandays available during the Half Year (10 X 143) : 1430
Man days required for Audit (As per authorisation) : 1380
Mandays required for Misc. Work (1/6th) : 230
Man days erequired for scheduling (Vrs/350) :

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CHAPTER 3
Scheduling and Linking

SCHEDULING AND LINKING OF VOUCHERS

As you all know the dictionary meaning of Scheduling is making arrangement or arranging the documents/
vouchers in a particular manner. Scheduling may be broadly divided into two types – Scheduling In and
Scheduling Out. Before knowing about Scheduling Inand Scheduling Outof Vouchers, let us first discuss about
the method of preparation of vouchers and their distribution

Case – I: Stores transferred from one Supply or Store Depot to another Depot or Consuming Unit
When stores are transferred from one depot to another depot or to a unit, the issue voucher (I.A.EZ.-2096 or
its equivalent) is generally prepared in five copies. These are referred to as the "A" copy, "B" copy, "C" copy,
"D" copy, and the "E" copy (except ordnance depot where they are referred to as No. l, 2, 3, 4 and 5 copy).
The method of disposal by the issuing depot is as under
i. The "A" copy is the issuing depot's office copy.
ii. The "B" and “C” copies are sent to the Consignee by the Depot. The Consignee returns the “B” copy duly
receipted and retains the “C” copy with him
iii. The "D" and "E" copies are sent by the Consignor (Depot) to his L.A.O. LAO pairs the two, retains the "D"
copy and passes on the "E" Copy to the Consignee's L.A.O.

The above can be understood from the following diagram

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 Basics of Internal Audit in Defence Accounts Department

Case – II: Stores transferred from one Consuming Unit to another or Supply or Supply / Store Depot
When the stores are transferred from one Consuming Unit to another Consuming Unit or Supply/Store De-
pot, the issue voucher will be prepared in 4 copies. The “D” copy of the voucher being left out. The local Au-
dit staff will link the issue transactions in the Consignor’s ledger etc into the “A” copies of vouchers.

Case – III: Local Purchase Vouchers

In the case of stores purchased locally, the vouchers will be sent by the disbursing P.C.D.A./C.D.A. to the
L.A.O. / A.L.A.O. by the 10thof the month following that to which the paid vouchers relate, duly accompanied
by a sub-list for each unit or formation showing therein the serial number and date of the vouchers and a top
list.
With this background knowledge of flow of vouchers, let us discuss what is Scheduling.
SCHEDULING IN:
The vouchers received from other LAOs (Consignor LAOs) / Local purchase vouchers/CP Vouchers received
from PCsDA/CsDA comprises Scheduling In vouchers. Receipt audit is carried out with reference to these
vouchers.
Duty/Responsibility of Auditor/Scheduling Clerk:
1. After receipt verify correctness of vouchers received.
2. Acknowledge the vouchers.
3. Enter in Schedule (IN) Register.
4. Reschedule the vouchers, which do not pertain to his jurisdiction.
5. Sort out the vouchers Unit wise.
6. Prepare reconciliation statement at the end of the month.
7. Hand over the concerned vouchers to the Audit Party for conducting receipt audit
Duty/Responsibility of AAO:
1. Ensure immediate acknowledgement of vouchers received.
2. Rescheduling has been done correctly as per the distribution list
3. Reconciliation has been done correctly and there is no discrepancy.
4. CP vouchers/LP vouchers are correctly batched for carrying out 100% verification where the value is
above Rs 20000/- (This value changes as and when amendments received).

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 Basics of Internal Audit in Defence Accounts Department

Duty/Responsibility of LAO:
1. Ensure reviewing of Scheduling (IN) Register.
2. Give selection order for conducting receipt audit.

SCHEDULING OUT
Vouchers-“E” copies received/collected from the units are recorded in a Register for outward scheduling-
“Outward Scheduling Register”. The register shows the receipt of voucher-distribution of vouchers and its
reconciliation. The vouchers are scheduled out by the consignor LAOs to the consignee LAOs for CREDIT VERI-
FICATION
Duty/Responsibility of Auditor/Scheduling Clerk
1. Receipt of “E” Copies from units and copies collected by audit staff under Top List.
2. Verify to see that the voucher bears RV No. and is ‘paired’ and initiated by the auditor.
3. Enter the No. & date of forwarding of memo under which the vouchers are received along with details of
no. of vouchers in the respective column of the Register.
4. Sort out the vouchers unit wise/LAO wise as per the distribution list.
5. Prepare memo with LAO wise Top List and dispatch the vouchers.
6. Enter the details of distribution of vouchers LAO wise in the Register.
7. Watch for acknowledgement from LAO and note in the respective column of the Register when received
8. Purse the wanting acknowledgement cases.

Duty/Responsibility of AAO
1. Ensure voucher are received, entered in the register, scheduled out LAO wise as per distribution of units
and dispatched
2. Test checks few vouchers to ensure that ‘Paired’ endorsement with dated initial of auditor is available in
the voucher.
3. Check the reconciliation register for its correctness and initial and submit to LAO.

Duty/Responsibility of LAO
1 Ensure receipt, noting, proper accounting, LAO wise distribution and dispatch.
2 Check the Register and initial
3 LAO's personal linking vrs are selected, paired, initialed and dispatched to the consignee LAO for personal
linking and acknowledgement received and recorded

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In simple language to summerise

As can be seen from the above diagram Consignor LAO receives both “D” and “E” copy of the vouchers from
Consignor Depot/Unit. After that Consignor LAO has to forward the “E” copy to Consignee LAO for their cred-
it verification. This forwarding of “E” copy to the Consignee LAOs after segregation is known as Scheduling
Out. Similarly, when these vouchers will be received in office of the Consignee LAOs, the task of segregating
them unit wise/ category wise will be treated as Scheduling In. In lay Men’s language, receipt of vouchers and
it’s segregation is known as Scheduling In and forwarding of vouchers to concerned LAOs after segregation is
known as Scheduling Out
On receipt of the “E” copies from the Consignor’s LAO, the dealing/scheduling clerk will prepare a distribu-
tion statement. A sample is shown below for reference

Distribution statement of inward "E" copies of voucher received from ...........................................

to...............................

Inward top lists from Page Number Sub-lists of units Number of

of file vouchers
of
vouchers
L.A.O., Ranchi 15 49 President's Body Guard, New Del- 28
hi
L.A.O., Lucknow 16 32 A.H.Q. Signal Regiment, New 15

L.A.O., Ambala 17 15 Supply Platoon, New Delhi 38

,L.A.O., Mumbai 18 24 MilitaryHospital, DelhiCanton- 17

L.A.O.,Mhow 19 16 A. O. C. Officer's Shop, Delhi 54

L.A.O.,Meerut 20 25 Security Troops, New Delhi 9
161 161

Initialled with date......................................................

(Scheduling Clerk)
Initialled with date......................................................
(A.L.A. O.)

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LINKING OF VOUCHERS
"Linking” means bringing together an entry in a ledger, etc., and supporting voucher, to ensure that the entry
in the ledger, etc., is strictly in accordance with the voucher, or vice versa.
The linking of receipt and purchase vouchers into the store ledgers, stock and due sheets, returns etc., of the
consignees, is one of the most important functions of the local audit staff. TheL.A.O. will watch that there has
been no undue delay in the linking of such vouchers into the consignee's ledgers, etc.Linking of vouchers with
the ledger and vice versa is carried out to ensure that the items received are correctly brought on charge in
the ledger and the items issued are correctly struck off from the ledger.
There are two basic principles of Linking of Vouchers – one for linking of Issue vouchers and the second is for
linking of Receipt vouchers

Linking of Issue Vouchers

Linking of issues i.e. items charged off from the Consignor’s Ledger in the Issue Vouchers/Expense Vouchers/
Transfer Vouchers etc. The Issue vouchers will be linked from LEDGER to the VOUCHERS i,e. The base entry
becomes the entry in the LEDGER. The number of items issued will be checked from LEDGER to the Issue
Voucher. For example, as per the LEDGER entry, let us say 10 nos. of an item “X” is issued to Unit “A”. Then
while linking the issue vouchers, LAO staff will verify whether the same 10 nos. of item “X” is mentioned in
the issue voucher. Linking of issue vouchers also involves one month detailed audit to see that all the items in
the vouchers are linked and ticked with reference to the ledger entry.Where consumable items are charged
off on expense voucher see that a certificate is endorsed on the voucher that the items are issued for the
Govt. bonafide purposes and signed by the officer

Linking of Receipt Vouchers

RECEIPT VERIFICATION in the consignee ledger is carried out with reference to :
(A) ‘E’copies received from consignor LAO
(B) Inspection Note/RV in respect of Central Purchase Items.
(C) CRV/abstract in respect of Local Purchase Item.

The receipt vouchers will be linked from VOUCHERS to the Ledger and not vice-versa i,e. the base entry be-
comes the entry in the VOUCHER. It is to be checked whether the number of items shown in the VOUCHER
have been taken on charge / reflected in the ledger or not.

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 Basics of Internal Audit in Defence Accounts Department

Duty/Responsibility of Auditor:
1. Auditor collects vouchers for audit from the ‘Scheduling In’ Task Holder for the respective period /
respective Unit.
2. Obtain selection order from LAO on the top sheet of the voucher bundle, which are page numbered.
3. Ensure 1/6th of the total ‘E’copies is selected for receipt check.
4. Ensure thatSpecial Linking VouchersLP/CP Vouchers are not mixed with other vouchers but are bundled
separately.
5. Verify the credit in the ledger, item wise and ensure that the quantity is correctly taken and totaling is
correct.
6. Make an endorsement in the voucher “Paired and Credit Verified” with Receipt Voucher No & Date.

Duty/Responsibility of AAO:

1. Ensure auditor has taken selection order correctly and has checked the vouchers as per the selection or-
ders.
2. Test check 1/6th of the vouchers checked by the Auditor
3. Scrutinize the voucher bundle and Test Check some vouchers of Costly items, which are not selected by
LAO
4. Make Test Check (TC) endorsement wherein receipt checking is done

Duty/Responsibility of LAO
1. Ensure different methods of selection and not done in a routine manner.
2. Ensure Auditor has verified credit all the selected vouchers and AAO Test Checked the required quantum
of vouchers.
3. Test Check 1/16th of the vouchers checked by Auditor/AAO
4. Credit verifies 100% the vouchers received for personal linking.
5. Make necessary TC endorsement on the voucher/ledger page where receipt check is done.
6. In case large numbers of vouchers are not produced/items not taken on charge and are objected, include
the same in MFAI (Major Financial & Accounting Irregularities).

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Basics of Internal Audit in D.A.D.
Reading Material

National Academy of Defence

Financial Management &
Regional Training Centre

Golibar Maidan
Pune
PIN 411 001

3 Phone: 020 - 26454510/26444318

Fax: 020-26443983
Email: mail.nadfm@nic.in