Overview of Audit of Public Sector Undertakings: formula sheet

Key formulas

Government company (section 2(45), Companies Act, 2013)

Paid-up share capital held by Central Govt and/or State Govt(s) ≥ 51%, or a subsidiary of such a company

The holding can be by the Central Government, by one or more State Governments, or by both together. A subsidiary of a government company is also a government company.

Three forms of PSU

PSU = Government company | Statutory corporation | Departmental undertaking

Learn them in this order: Companies Act body, special Act body, part of a Government department.

Legal status test

Government company and statutory corporation = separate legal entity; departmental undertaking = no separate legal entity

A departmental undertaking is part of the Government. It has no corporate personality of its own.

Source of existence

Government company: Companies Act | Statutory corporation: its own special Act | Departmental undertaking: executive decision of the Government

Use this line to separate the three forms in any comparison question.

Constitutional basis

Article 148 = office, appointment, removal, oath, salary and service conditions (148(3)), staff service conditions (148(5)), expenses of office (148(6)); Article 149 = duties and powers as Parliament provides; Article 150 = form of accounts; Article 151 = reports

Learn what each article covers. Say that reports go to the President or Governor, who place them before the legislature.

Independence safeguards

Appointment by President + removal like a Supreme Court judge + salary and service conditions fixed by Parliament's law and not varied to his disadvantage (Art 148(3)) + expenses charged on the Consolidated Fund (Art 148(6)) + not eligible for further office under the Union or a State after ceasing to hold office (Art 148(4))

Use these five points to answer any question on his independence. Service conditions are set by Parliament, not by the executive or a State.

Source of audit mandate

Constitution (Arts. 148-151) + CAG's (DPC) Act, 1971 + Companies Act, 2013 for government companies

Always name all three sources when the question mentions government companies.

Key provisions of the 1971 Act

s.13 = Consolidated Fund, Contingency Fund and Public Account receipts and expenditure; s.14 = bodies substantially financed; s.15 = grants and loans for specific purposes; s.16 = receipts; s.17 = stores and stock; s.18 = powers of access to records

Match the section to the entity or duty in the question, then apply it to the facts.

Government company audit chain

CAG appoints statutory auditor (s.139(5) within 180 days from the start of the financial year; first auditor within 60 days of registration, s.139(7)) → auditor reports → CAG supplementary or test audit and comments

The CAG's comments upon, or supplement to, the audit report are sent to the company and placed before the annual general meeting along with the auditor's report (section 143(6)(b)).

Reporting line

Union accounts: CAG → President → Parliament; State accounts: CAG → Governor → State Legislature

The CAG reports to the legislature, not to the management of the audited body.

Government company (Section 2(45))

Government holding ≥ 51% of paid-up share capital (Central, State, or both together); subsidiary of a government company is also a government company

The test is not less than 51%; a holding of exactly 50% does not qualify. Holdings of Central and State Governments can be added together.

Subsequent auditor (Section 139(5))

Appointed by the CAG within 180 days from the commencement of the financial year; holds office till the conclusion of the AGM

Applies to government companies and other companies owned or controlled by Central or State Governments. Members do not appoint.

First auditor of a government company (Section 139(7))

CAG within 60 days from the date of registration → if CAG fails, Board within the next 30 days → if Board fails, members at an EGM within 60 days

The Board and members act only as fallbacks. The CAG has the first right.

CAG directions (Section 143(5))

CAG directs the manner of audit → auditor complies and reports on the directions → copy of audit report goes to the CAG

The auditor reports on these directions in the report on other legal and regulatory requirements.

Supplementary audit and comments (Section 143(6))

Within 60 days from receipt of the audit report, the CAG may conduct a supplementary audit and comment upon or supplement the audit report

The Act gives the CAG this right within 60 days from receipt of the audit report. The company sends the comments to every person entitled to the financial statements and places them before the AGM at the same time and in the same manner as the audit report. The Act does not state a consequence for comments made after the 60 days, so do not invent one.

Test audit (Section 143(7))

CAG may, if he considers it necessary, order a test audit of the company's accounts by order

Section 19A of the CAG's (Duties, Powers and Conditions of Service) Act, 1971 applies to the report of such test audit.

Economy

Economy = acquiring inputs of appropriate quality at the lowest reasonable cost

Focus on inputs and cost. Example: purchases without competitive bids, excess stock bought, or idle capacity created.

Efficiency

Efficiency = output ÷ input (compared with a norm or benchmark)

Focus on the link between resources used and output. Look at wastage, idle time, low capacity use and high cost per unit.

Effectiveness

Effectiveness = actual results achieved ÷ intended objectives

Focus on outcomes. A project can be efficient but not effective if it does not serve the objective.

Propriety test

Propriety = legality + public interest + prudence + financial discipline

A transaction can pass the legality test and still fail propriety. This is a framework to remember, not a statutory formula.

Audit route rule

Constituting Act of the corporation decides the auditor

Two broad patterns: (1) CAG as sole auditor; (2) chartered accountants appointed by Government in consultation with the CAG, with CAG supplementary or test audit as provided.

Reporting rule

Central corporation → Parliament; State corporation → State Legislature

The audit report and accounts are laid before the legislature as the Act provides.

COPU test

Affairs run on sound business principles and prudent commercial practices?

COPU does not go into day-to-day administration, major Government policy, or matters handled by a special statutory machinery.

PAC vs COPU

PAC → government accounts and CAG reports on them; COPU → public undertakings and CAG reports on them

A standard comparison point in descriptive answers. Background only: COPU's size and membership are set by Lok Sabha rules, so do not rely on member numbers in an answer.

Quick revision

• PSU types: government company, statutory corporation, departmental undertaking.
• A government company is one in which at least 51% of the paid-up share capital is held by the Central Government and/or one or more State Governments (Section 2(45)). A company that is a subsidiary of a government company is deemed to be a government company (Section 2(45)).
• The CAG's office is constitutional and independent of the executive.
• For a government company, the CAG, not the Government or the shareholders, appoints the statutory auditor, who must be a chartered accountant. The appointment is made within 180 days of the start of the financial year (Section 139(5)).
• The CAG can give directions to the appointed auditor on how to conduct the audit (Section 143(5)).
• Within 60 days of receiving the audit report, the CAG may conduct a supplementary audit and may comment upon or supplement the report (Section 143(6)). These are not alternatives to each other.
• Financial audit checks accuracy and compliance of accounts.
• Propriety audit asks whether spending was sound, prudent and in public interest.
• Performance audit checks economy, efficiency and effectiveness.
• Statutory corporations are audited as their own Act provides.
• Always name the entity type before stating the audit route.
• Write answers as provision, facts, conclusion.

Common mistakes

• Saying a company with exactly 50% Government holding is a government company. Fix: The test is at least 51% of paid-up share capital. Holding of 50% does not meet it, unless it is a subsidiary of a government company.
• Forgetting that a subsidiary of a government company is also a government company. Fix: Always state both limbs: the 51% holding and the subsidiary rule.
• Saying the CAG is appointed by the Parliament or the Prime Minister. Fix: Write: appointed by the President by warrant under his hand and seal.
• Treating the CAG as the statutory auditor of every government company. Fix: Write that the CAG appoints the statutory auditor, who audits; the CAG then conducts a supplementary or test audit and comments.
• Saying the members appoint the auditor of a government company at the AGM. Fix: For government companies, the CAG appoints under Section 139(5). Members or the Board come in only as fallbacks for the first auditor under Section 139(7).
• Treating a company with exactly 50% government holding as a government company. Fix: The threshold is not less than 51% of paid-up capital. Add Central and State holdings before testing.
• Treating propriety audit as the same as a legality or compliance check. Fix: Say that propriety goes beyond legality. It tests wisdom, prudence and public interest in decisions that may be perfectly legal.
• Mixing up economy and efficiency. Fix: Economy is about the cost of inputs bought. Efficiency is about how well inputs are turned into output. Use input cost versus output per input as your anchor.
• Saying the CAG is the sole auditor of every statutory corporation. Fix: Write that the audit arrangement depends on the constituting Act. Give both patterns.
• Saying the CAG has no role when chartered accountants are the auditors. Fix: Add that the CAG is consulted on the appointment and may have supplementary or test audit and report comments as the law provides.

Exam tips

• Learn the section 2(45) test word for word: at least 51% of paid-up share capital, Central and/or State Governments, and the subsidiary limb.
• In case MCQs, add up the Central and State holdings before deciding. Splitting the holding across governments is a common trap.
• For comparison questions, use the same headings for every form: creation, legal status, capital, management and audit.
• Keep this topic's answer short and link to the audit topics for detail. Marks come from correct classification first.
• Mention objectives such as social welfare and balanced regional development when the question says 'features and objectives'.
• For 'powers and duties' questions, give the three sources: Constitution, the 1971 Act and the Companies Act, 2013 for government companies.
• In independence answers, give at least four distinct safeguards. Examiners reward a complete list tied to reasons.
• In comparison questions, set out appointer, reporting line, scope and purpose side by side in plain sentences.