Advanced Auditing, Assurance and Professional Ethics · Specialised Areas

Audit of Public Sector Undertakings and CAG Audit

Updated 5 October 2026

PSU audit covers government companies and statutory corporations. For a government company, the CAG appoints the auditor under s.139 and directs the audit under s.143(5). The auditor sends a copy of the report to the CAG, who has 60 days from receipt to conduct a supplementary audit and to comment upon or supplement the report under s.143(6). Test audit is a separate power under s.143(7).

Understand Audit of Public Sector Undertakings and CAG Audit

A Public Sector Undertaking (PSU) is an entity owned or controlled by the Central or State Government. Common forms are government companies, statutory corporations and departmentally run undertakings. Public money is involved, so the audit must give assurance beyond a true and fair view.

A government company is a company in which at least 51% of the paid-up share capital is held by the Central Government, one or more State Governments, or both. A subsidiary of such a company is also a government company. It is still a company, so the Companies Act, 2013 applies, with the special audit rules for government companies.

The Comptroller and Auditor General of India (CAG) is a constitutional authority, independent of the executive. Under section 139(5) of the Companies Act, 2013, the CAG appoints the statutory auditor of a government company within 180 days from the start of the financial year. The auditor must be a chartered accountant. The first auditor is also appointed by the CAG, under section 139(7), within 60 days from the date of registration of the company. If the CAG does not appoint within that time, the Board appoints the first auditor within the next 30 days. Section 143(5) is not the appointment section. Under section 143(5), the CAG directs the auditor on the manner of audit. The auditor reports on the action taken on these directions and its impact on accounts and financial statements. The auditor also submits a copy of the audit report to the CAG.

Under section 143(6), the CAG has a further role after the report is received. Under s.143(6)(a), within 60 days from the date of receipt of the audit report, the CAG has the right to do two things: conduct a supplementary audit, and comment upon or supplement the audit report. The 60-day period governs both. Under s.143(6)(b), the CAG's comments are forwarded to the company, which places them before the annual general meeting along with the auditor's report.

Test audit is a separate power under section 143(7). The CAG may, by order, cause a test audit of the accounts of a class of companies specified in the order. No 60-day period is attached to it.

Performance audit looks at whether the entity achieved its objectives economically, efficiently and effectively. It goes beyond the accounts. A related idea is propriety audit, which asks whether spending was wise and in the public interest, not just legal. Findings are reported to the legislature through CAG reports.

Key rules to remember

Government company: Government holding ≥ 51% of paid-up share capital (Central/State Governments, singly or together), or a subsidiary of such a company; Test the holding first. Below 51% means it is not a government company.
Appointment of auditor: Auditor of a government company = appointed by the CAG: s.139(5) within 180 days from the start of the financial year; first auditor under s.139(7) within 60 days from the date of registration (if the CAG does not appoint, the Board appoints within the next 30 days); Not by the members or the board in the normal case. Do not cite s.143(5) for appointment. It deals with directions and the copy of the report to the CAG.
CAG powers: s.143(5): directions on manner of audit + copy of audit report to the CAG; s.143(6)(a), within 60 days of receiving the audit report: supplementary audit and comment upon or supplement the audit report; s.143(6)(b): CAG's comments forwarded to the company and placed before the AGM along with the auditor's report; s.143(7): test audit of a class of companies by order of the CAG; The 60-day limit is in s.143(6)(a). It counts from receipt of the report and covers both the supplementary audit and the comments. Section 143(6)(b) deals with what happens to the comments. Test audit is a separate power under s.143(7) and has no 60-day period.
Performance audit scope: Economy + Efficiency + Effectiveness (the 3 Es); Use these three tests to judge how resources were used.
Propriety vs regularity: Regularity = legal and per rules; Propriety = wise, prudent, in public interest; A transaction can be regular yet improper.

How to solve Audit of Public Sector Undertakings and CAG Audit questions

Use this approach for any PSU or CAG audit question, whether a theory answer or a short case.

1Identify the entity type: government company, subsidiary of one, statutory corporation or other body.
2If it is a company, check the 51% government holding test, including subsidiaries.
3Name the governing framework: Companies Act for government companies, the parent statute for corporations.
4State who appoints the auditor and who gives directions. For a government company, the answer is the CAG.
5Pick the audit type the facts point to: statutory, supplementary, test, propriety or performance audit.
6Apply the facts: link each fact in the case to the specific power or duty.
7Conclude clearly: say what the auditor must do, such as report on directions or submit a copy of the audit report to the CAG.
8Keep the answer in provision, facts and conclusion form.

Quickest way: Who, What, Report: a 3-line approach

When to use it: Use it for short MCQs and for the opening of any written answer when you have little time.

Who: check the 51% test and name the CAG as the appointing authority under s.139(5).
What: state the CAG's powers: directions under s.143(5), supplementary audit and comments on or supplement to the report under s.143(6)(a), and test audit of a class of companies under s.143(7).
Report: state the flow. The auditor submits a copy of the audit report to the CAG. The CAG has 60 days from receipt to conduct a supplementary audit and to comment upon or supplement the report under s.143(6)(a). Under s.143(6)(b), the comments are forwarded to the company, which places them before the AGM along with the auditor's report. Test audit under s.143(7) is separate and has no 60-day period.

Common mistakes in Audit of Public Sector Undertakings and CAG Audit

Saying the members appoint the auditor of a government company at the AGM.
This is the rule for ordinary companies, and students carry it over.
Fix: For a government company, always write that the CAG appoints the auditor under s.139(5).
Citing s.143(5) as the section under which the CAG appoints the auditor.
Students link the CAG with s.143(5) and use it for every CAG power.
Fix: Cite s.139(5) for appointment within 180 days from the start of the financial year, and s.139(7) for the first auditor, appointed within 60 days from the date of registration (the Board appoints within the next 30 days if the CAG does not). Use s.143(5) only for directions and the copy of the report to the CAG.
Treating any company with some government shareholding as a government company.
Students skip the holding test.
Fix: Check for at least 51% of paid-up capital, held by the Central or State Governments or both, or that it is a subsidiary of such a company.
Confusing supplementary audit with a second statutory audit.
Both follow the same accounts.
Fix: Supplementary audit is done by or for the CAG after the statutory auditor reports, within 60 days of the CAG receiving the report. The CAG's right to comment upon or supplement the report sits in the same s.143(6)(a) and the same 60 days. Section 143(6)(b) covers forwarding the comments to the company and placing them before the AGM.
Describing performance audit as a check of arithmetic and compliance.
Students think all audits are about accounts.
Fix: Define it through the 3 Es: economy, efficiency and effectiveness of resource use.
Mixing up propriety audit and regularity audit.
Both test transactions.
Fix: Regularity asks if it followed law and rules. Propriety asks if it was prudent and in the public interest.
Leaving out the auditor's duty to report on directions and to submit a copy of the report to the CAG.
Students focus on the CAG's powers, not the auditor's duties.
Fix: Add that, under s.143(5), the auditor reports on action taken on the directions and on their impact on accounts and financial statements, and submits a copy of the audit report to the CAG.

Worked examples

Example 1

The Government of a State holds 40% of the paid-up capital of Greenfield Power Ltd. The Central Government holds a further 15%. The members want to appoint their own auditor at the AGM. Advise on the position.

Show the solution

Provision: a government company has at least 51% of paid-up capital held by the Central Government, State Governments, or both together. The holding can be combined.
Facts: State holds 40% and Centre holds 15%, so the total is 40% + 15% = 55%.
Test: 55% is above 51%, so Greenfield Power Ltd is a government company.
Consequence: under s.139(5), the auditor of a government company is appointed by the CAG, not by the members at the AGM.
Conclusion: the members cannot appoint the auditor. The CAG will appoint a chartered accountant.

Answer: Greenfield Power Ltd is a government company because combined government holding is 55%, which is at least 51%. The CAG appoints the auditor, so the members cannot do so at the AGM.

Example 2

The statutory auditor of a government company has issued the audit report and submitted a copy to the CAG. Thirty days after the CAG received it, CAG staff ask to carry out a supplementary audit of the accounts. The CAG also intends to comment on the report. The management objects that the audit is already complete. How do you respond?

Show the solution

Provision: under s.143(5), the auditor submits a copy of the audit report to the CAG.
Provision: under s.143(6)(a), within 60 days from the date of receipt of the audit report, the CAG has the right to conduct a supplementary audit and to comment upon or supplement the audit report.
Facts: the report was submitted, and 30 days of the 60-day period have passed. The CAG wants to carry out a supplementary audit and to comment on the report.
Application: 60 days − 30 days = 30 days remain. The request for a supplementary audit falls within the window, so it is within the CAG's power under s.143(6)(a). Completion of the statutory audit does not block it.
Application: the CAG's comments on or supplement to the report are also covered by s.143(6)(a), so they must be given within the same 60 days from receipt of the report. Under s.143(6)(b), they are forwarded to the company, which places them before the AGM along with the auditor's report.
Conclusion: the management's objection is not valid and it should co-operate with the CAG.

Answer: The objection fails. The CAG received the report 30 days ago and has 60 days from receipt, so 30 days remain. Within that period the CAG may conduct a supplementary audit and comment upon or supplement the report under s.143(6)(a). Under s.143(6)(b), the comments are forwarded to the company, which places them before the AGM with the auditor's report, so the management should co-operate.

Exam tips

Start every government company answer with the 51% test and the CAG's role in appointment under s.139(5). It earns early marks.
Learn the CAG's powers with their sections: directions under s.143(5), supplementary audit and comments under s.143(6)(a), placing the comments before the AGM under s.143(6)(b), and test audit under s.143(7). Attach the 60 days from receipt of the report to s.143(6)(a), covering both the supplementary audit and the comments, and not to test audit.
For performance audit, define it with the 3 Es and give one example, such as checking whether a project met its output targets on time and at planned cost.
In case MCQs, look for who is doing the appointing. If it is the members for a government company, that option is wrong.
Write answers in provision, facts and conclusion form, even for short 4-mark questions.

Practice questions from Specialised Areas

Audit of Public Sector Undertakings and CAG Audit: frequently asked questions

Who appoints the auditor of a government company?

The CAG appoints the auditor under s.139(5), within 180 days from the start of the financial year. The first auditor is appointed by the CAG under s.139(7) within 60 days from the date of registration; if the CAG does not appoint in that time, the Board appoints within the next 30 days. The auditor must be a chartered accountant. The members do not appoint the auditor at the AGM. Under s.143(5), the CAG also gives directions on how the audit is to be conducted.

What is supplementary audit by the CAG?

The auditor submits a copy of the audit report to the CAG. Within 60 days from receipt of the report, the CAG may conduct a supplementary audit and comment upon or supplement the report under s.143(6)(a). Under s.143(6)(b), these comments are forwarded to the company, which places them before the AGM along with the auditor's report. Test audit of a class of companies is a separate power under s.143(7), with no 60-day period.

What is performance audit?

Performance audit examines whether an entity used resources with economy, efficiency and effectiveness. It looks at results and value for money, not only at the accounts. Findings are reported through CAG reports.

How is propriety audit different from regular audit?

Regular audit checks that transactions follow law and rules. Propriety audit asks whether the spending was prudent and in the public interest. A transaction may be legal and still fail propriety.