Special audits: educational institutions, insurance companies and co-operative societies

1. Audit of an educational institution

Schools and colleges are usually run by a trust or a society registered under the State law (in Karnataka, the Karnataka Societies Registration Act 1960) or by a section 8 company. Audit is required by the governing law, by the conditions of government grants and affiliation, and by the income-tax law for exemption of charitable institutions.

Preliminary steps: read the trust deed, bye-laws or memorandum, the letter of appointment, minutes of the governing body, the conditions of recognition and affiliation and of government grants; note the rules on fees, scholarships and staff salaries; study the internal check over fee collection.

Income

• Fees: vouch fee receipts with counterfoils of pre-numbered receipt books or the fee software; check the total fees due with the students’ register (strength in each class × prescribed rate), allowing for concessions, free studentships and scholarships approved by the head of the institution; see that arrears are followed up and fines for late payment are accounted.
• Government grants: vouch with the sanction order and bank statement; check that the conditions of the grant are complied with and that utilisation certificates are correct; capital grants are not credited to revenue.
• Donations and endowments: vouch with receipts and the donors’ correspondence; earmarked donations are credited to the specified fund and used only for that purpose.
• Other income: hostel fees, rent from hall or canteen, interest on investments, examination fees; check each with registers and agreements.

Expenditure

• Salaries: check with the sanctioned posts and pay scales, appointment orders, attendance and the acquittance roll; check statutory deductions and their deposit.
• Scholarships and prizes: check with the sanctioning resolution and students’ acknowledgements.
• Purchases of laboratory equipment, library books, furniture: vouch with invoices and the Board or committee approval; distinguish capital from revenue.
• Hostel and mess expenses: vouch and compare with hostel receipts.

Assets and liabilities: verify buildings and land with title deeds; inspect the library and laboratory stock registers and the physical verification reports; verify investments of endowment funds; confirm caution money deposits from students (a liability, refundable); check the fund accounts (building fund, prize fund) and that the income of each fund is credited to it.

Report to the governing body and, where grants are received, in the form the grant-giving authority requires.

2. Audit of an insurance company

Legal framework. An insurer in India must be a company registered with IRDAI. Its accounts are prepared under section 11 of the Insurance Act 1938 in the forms prescribed by IRDAI regulations: for a life insurer, a revenue account (policyholders’ account), a profit and loss account (shareholders’ account) and a balance sheet; for a general insurer, a separate revenue account for each class of business (fire, marine, miscellaneous). The audit is governed by the Companies Act 2013 read with the Insurance Act and IRDAI’s regulations and directions; CARO 2020 does not apply to insurance companies.

Steps

1. Premium: vouch with proposal forms, policy registers, cover notes and the premium register; check rates with the tariff or filed product terms. Section 64VB of the Insurance Act provides that no risk shall be assumed unless the premium is received in advance; check compliance. Premium received in advance for the next year is carried forward as a liability.
2. Claims: vouch with the claim intimation, the policy, the surveyor’s or investigator’s report, the approval of the competent authority and the discharge voucher of the claimant; for life claims, the death certificate or maturity; check that claims outstanding at the year end (including those incurred but not reported) are provided for on an actuarial or reasonable basis.
3. Commission to agents and intermediaries: check with the agency register and the limits prescribed under the Act and regulations; see that no commission is paid to unlicensed persons.
4. Reinsurance: check premiums ceded, commission received and recoveries on claims with the reinsurance treaties and the statements of reinsurers.
5. Reserves: for general insurance, see that the reserve for unexpired risks is created as required; for life insurance, see that the actuarial valuation of policy liabilities by the appointed actuary is incorporated.
6. Investments: verify with custodian and demat statements; check that the investment pattern complies with section 27 of the Insurance Act and IRDAI regulations, and that valuation follows the regulations.
7. Solvency margin: check the computation of the required solvency margin under section 64VA.
8. Expenses of management: check they are within the limits fixed by the Act and regulations.
9. Branch audit and consolidation of branch returns; IT controls over the policy administration system.

3. Audit of a co-operative society

Legal framework. Co-operative societies within a State are governed by the State Act (in Karnataka, the Karnataka Co-operative Societies Act 1959 and its rules); multi-State societies by the Multi-State Co-operative Societies Act 2002. The Constitution (Ninety-seventh Amendment) Act 2011 inserted Part IXB, of which Article 243ZM requires the accounts to be audited within six months of the close of the financial year by an auditor or audit firm qualified under the law and drawn from a panel approved by the State Government or an authority. In Union of India v. Rajendra N. Shah, 2021 INSC 340, the Supreme Court held that Part IXB, having been passed without ratification by half the State Legislatures, could not operate on co-operative societies within a State, and survives only for multi-State co-operative societies. For a Karnataka society, the audit provisions of the State Act therefore govern.

Special features

• The auditor is appointed under the State Act (often from the panel of the department or of chartered accountants), not by the members alone.
• The audit covers not only the accounts but compliance with the Act, the rules and the bye-laws of the society.
• Loans and overdues: examine the loan applications, sureties and the limits in the bye-laws; prepare a list of overdue loans and classify them; check provisions for bad and doubtful debts.
• Check the distribution of profit: transfer to the reserve fund and other statutory funds, the limit on dividend and contribution to the co-operative education fund as the Act requires.
• Verify the share capital with the members’ register; see that no member holds more than the permitted share.
• Examine transactions with members of the committee for conflict of interest.
• Prepare an audit memorandum in the prescribed form, often with an audit classification (grading) of the society, pointing out defects, irregularities and misappropriation, which the society must rectify and report on.

How this is examined

“Explain the audit procedure of an educational institution” (2019, 2022, April 2023, October 2023; January 2026 Q.4, 16 marks): section 1 under the headings of preliminary steps, income, expenditure, assets and report. “Explain the audit procedure of an insurance company” or “steps to be taken by the auditor” (April 2021, November 2021, April 2023, August 2024, June 2025): section 2. “Audit of co-operative societies” (April 2021, 2022): section 3, with Article 243ZM and the State Act.