Audit of a Co-operative Housing Society and FAQ's

What is a cooperative society audit?

The Co-operative Housing society is no doubt an autonomous and self-reliant endeavor. However, once every year, it is subject to the scrutiny of an outside agency to have its financial statements audited. For this purpose, it hires the services of financial experts per government laws. Annual account audit of a co-operative housing society is mandated by the Constitution of India. The model bye-laws state that it is the responsibility of the Managing Committee to do an Accounts Audit within a period of six months from the closure of the financial year and before the Notice of Annual General Body Meeting.

Procedure to conduct an audit of cooperative society?

The first step is to appoint a Statutory Auditor from the panel of Auditors approved by the State Government or an experienced Chartered Accountant who holds a Certificate in Cooperative Audit issued by a recognized authority. However, the chosen Auditor is not allowed to be retained for more than two consecutive years. The selection of the Auditor is to be done by the Managing Committee at a General Body Meeting. At the same time, a society may select an Internal Auditor from within the society/committee (if they find it necessary).

The Auditor has to be financially compensated by the society, thus his fees have to be paid by the statutory scale of compensation decided by the Registrar with respect to the type of society.

The Secretary of the society is required to furnish all the necessary documents included but not limited to, ledgers, cashbooks, register of members, a record of shares/debentures, minutes book of the society’s meetings, receipts and payments of income and expenditure, financial statements, profit-loss balance sheets, and any other documents needed by the internal as well as Statutory Auditor.

Housing society audit checklist

The Auditors checks for audit of housing society are as follows:

  • Irregularities, misstatements in the accounts of the society
  • Specifics of any anomalies, misappropriation of funds, embezzlement, or fraud found in the
  • account statements of the society.
  • Studying the financial transactions such as loan, investment, borrowings, lending of the funds by the society and examine the interest paid and received along with the related agreements
  • Physically inspecting the assets of the society
  • Ensuring the society’s financial dealings are in accordance with the Co-operative Society Act

The Auditor takes stock of the amount defected, investigates how anomalies were caused and prescribes ways to fix the problem. He also highlights the impact of account irregularities (if any) and their impact on the overall financial statement. The audit is presented to the society and forwarded to the Registrar, who then submits it to the State Government every year.

What happens after the society accounts audit is completed?

After receiving the Audit Reports from the internal and external auditors, the Secretary is required to prepare draft audit rectification reports which include comments, objections, suggestions, corrections, clarifications on the Accounts Audit report and present the rectification report to the Managing Committee for approval in the next general body meeting. The audit rectification has to be completed within three months from the date the Accounts Audit was handed over. The same audit rectification report is submitted to the Registrar and to the members of the society at the Annual General Body Meeting.

If the Managing Committee of the society fails to submit the audit rectification report to the Registrar, it is considered a constitutional offence and is subject to punitive measures. The Registrar maintains a detailed list of all registered co-operative housing societies district-wise and has a record of all societies that have not conducted their Accounts Audit. The Registrar is also responsible for coordinating between the Auditor and the societies to ensure the entire procedure is finished on time.

Why should you conduct an accounts audit with due diligence?

As a responsible member of the Managing Committee, you are required to maintain immaculate financial accounts of the society’s income and expenses. The Secretary is responsible for keeping a record of all receipts, bills and expense accounts for the entire year and store them in a secure place for the Accounts Audit.

If any malfeasance, deliberate or unintentional, is found by the Auditor, it affects the financial framework of the entire society and could cause a serious impact on the members’ financial well-being. Not getting your Accounts Audit done efficiently as per the mandated procedure makes your society non-compliant in the eyes of the government, leading to further action, which could be easily avoided with a timely Accounts Audit.

To aid residents of the co-operative society, who are in most cases laymen coming together to create community living and may not be experts in finance and accounting laws, the government has laid down above mentioned directives which are necessary for every society to follow earnestly.

Now that you have a general idea about how Accounts Audits are performed, let’s take a deep dive in the technical and operational details of a housing society’s Accounts Audits.

What are the provisions (exact verbiage) for audit as per Section 17 of the Co-operative Society Act, 1912?

Audit.—(1) The Registrar shall audit or cause to be audited by some person authorised by him by general or special order in writing in this behalf the accounts of every registered society once at least in every year. 

(2) The audit under sub-section (1) shall include an examination of overdue debts, if any, and a valuation of the assets and liabilities of the society. 

(3) The Registrar, the Collector or any person authorised by general or special order in writing in this behalf by the Registrar shall at all times have access to all the books, accounts, papers and securities of a society, and every officer of the society shall furnish such information in regard to the transactions and working of the society as the person making such inspection may be required.

What are the qualifications of an auditor? 

The Auditor can be a government-certified Chartered Accountant (within the meaning of the Chartered Accountant Act-1949).

Apart from that, 

  • A professional who has earned a government Diploma in Co-operative Accounts or in Cooperation and Accountancy
  • Any auditor who has previously served as an auditor in the government’s Cooperative Departments.

Appointment of the auditor

The Registrar of Cooperative Societies appoints the Auditor who conducts the audit and submits a report to the Registrar and the society. 

Society has to bear the expenses of the Audit and pay as per the mandated rates determined by the government. (Appointment procedure described in detail above). 

The housing society upon selection of the Auditor from the government panel should send an official request in writing to him, requesting his eligibility, availability, and Panel No. The Auditor in question is expected to accept or deny officially along with his Panel No. 

Rights of an auditor

As per Section 17 of the Cooperative Societies Act, 

The Registrar, the Collector or any person authorised by general or special order in writing in this behalf by the Registrar shall at all times have access to all the books, accounts, papers and securities of a society, and every officer of the society shall furnish such information in regard to the transactions and working of the society as the person making such inspection may require.”

On a more general note, a housing society should make sure the Auditor is provided with clean, comfortable and quiet surroundings to operate from within the premises and should be given the necessary help while performing physical audits of assets. 

Duties of an auditor

He should have in-depth understanding and knowledge of society bye-laws and the Cooperative Society Act 1912. He should:

  • Check membership registers to ascertain the number of shares held by each member.
  • Know the power of society’s officers with respect to who’s in charge of advancing, borrowing loans and investment (one or more appointees). 
  • With respect to loans, the auditor should check loan agreements (whether the society is the borrower or the lender), interest due with the loan repayment cycle, actual interest received and repaid amount received and tally it up. 
  • Check if loans given to members are according to the legal compliance and rules passed within the society in writing and that loans given to non members are done after receiving permission from the Registrar. 
  • Any Cooperative Bank loans received are within the limit
  • Be well versed in physical inspection of society’s assets with different inspection techniques required as per society.
  • He should also check the following:
  • Profit and Loss statements
  • Balance sheets
  • Income and expense statements, income tax return filing, with applicable GST and other cuts applicable as per the Income Tax Act and Cooperative Societies Act audit cash book, bank book, receipts and payments of financial transactions throughout the year.

In legal terms, according to the government directives, 

An auditor has to inquire ,

(a) Whether The loans and advances made by the co-operative society are properly secured and are not prejudicial to the interest of the co-operative society or its members.

(b) Whether The transactions of the co-operative society are not prejudicial to the interest of the co-operative society.

(c) Whether personal expenses have been charged to revenue account.

(d) Whether the position as stated in the account books and the balance sheet of the co-operative society is correct, regular and not misleading. And

(e) Whether any special issue referred for enquiry by Reserve bank or National Bank duly enquired into and reported to the concerned. 

Bookkeeping and financial record keeping

According to section 43 (h), the State Government is liable to make rules to, “prescribe the accounts and books to be kept by a society and provide for the audit of such accounts and the charges, if any, to be made for such audit, and for the periodical publication of a balance-sheet showing the assets and liabilities of a society”,

Generally, the following are inspected:

  • List of bank accounts
  • General Ledgers
  • Trial Balance
  • Stock and Asset Register
  • Shares and Debentures Register, Loan Registers
  • Minutes of Meetings books
  • Property Registers
  • Audit objections and records
  • Payroll reports
  • Vendor payments
  • Copies of legal documents

The main features of a co-operative society audit

According to the government,

  • Adherence to Co-operative Principles 
  • Observance of provisions of Act, Rules and bye-laws
  • Valuation of assets and Liabilities and Verification of Cash Balance and Securities. 
  • Verification of balances of Depositors and Creditors. 
  • Examination of overdue debts and classification of bad debts. 
  • Personal verification of members and examination of their pass books. 
  • Discussion of draft audit report with Managing Committee. 
  • Audit classification of society; 
  • Examination of the working and other prescribed particulars of the society.

Special features of cooperative society audits

1. Overdue debts

The examination of overdue debts has to be carried out and categorised going back from six months to five years as well as those overdue above five years, classify them in categories and include them in it in his final report.

Auditors should assess the bad debt situation of the society and check the relevant provisions to see if they’re applicable in their situation. 

2. Overdue interest

Any overdue interest should be excluded while calculating the profits of the society.

3. Asset & liability valuation

While the main intention of the Auditor is to confirm that assets and liabilities are appearing in the balance sheet exhibiting their proper and correct value. However, valuation models can be applied as per the general accounting rules and no special mention in the law that states otherwise. 

Top 15 FAQ for society audit, reports, and format

1. What does the Auditor check regarding Co-operative Principles and the intended compliance?

The Auditor is liable to check if society follows the primary principles of Co-operative Societies of democratic control and voluntary responsibility. Even though it may not be profitable, the Auditor can discern whether it’s in alignment with the true purpose of its inception. 

2. What is the rule regarding certification of bad debts?

Rules applicable in various States mandate that no bad debts can be written off unless the Auditor certifies them as bad debts. If not, the MC can proceed as they fit. 

3. When is Member Register (apart from checking other mandated details) and Passbook Verification done?

Necessary for exercising extra caution in rural areas or where most residents are illiterate or senior citizens. 

4. What’s an Audit Classification of the Society?

The Auditor is required to classify the class of the society (A,B, C,D,E as per the marks given on different criteria fixed by the district/state Registrar). If any dispute is found by the society in the classification, they can raise a complaint at the Registrar’s Office. 

5. What happens when the Auditor finds a red flag?

If any malfeasance, anomaly, or special case of cases of non-compliance, the Auditor should make a report and present it to the Registrar, who should then take the necessary action. 

6. What are the auditor fees?

Varies from districts to states, however, here’s a sample from the government of Maharashtra rates :-

Within the Corporation area and cantonment areas, Rs.36/- per member

Municipal Towns – Rs.24 per member

Village/Panchayat level – Rs.12 per member

7. What are the different types of Cooperative Audits? 

(a) Concurrent Audit: 

Under concurrent audit, audit is concurrent with the period of maintenance of accounts and the auditor engaged on audit continuously throughout the year. This type of audit is generally adopted in big institutions, State Level and Apex Bodies, District Co-operatives Central Banks, Central Stores, Sugar Mills, Spinning Mills etc., having large volume of business and huge daily transactions. Concurrent audit is conducted by Departmental Auditors and the cost thereof is borne by the societies concerned. Auditors conducting concurrent audit have to furnish Concurrent Audit Report to the Societies concerned periodically in the manner prescribed by the Director of Co-operative Audit so as to facilitate the management to rectify the defects well before the issue of final audit report. 

(b) Interim Audit: 

Interim Audit is conducted before Final Audit. It facilitates early completion of Final Audit. It also helps the staff to rectify the irregularities mentioned in the interim audit report. It ensure prompt action on the part of the management for rectification of errors pointed out in the interim audit report. Interim Audit Report has to be submitted for the period concerned with the summary of defects, if any. 

(c) Test Audit 

Test Audit is conducted with a view to testing the correctness of Final Audit done by an Auditor. All the societies are not test audited during the year. Only a certain percentage is taken up for test audit. The objective of Test Audit is to check the efficiency of audit staff, to find out the mistakes committed by them and to ensure correct and efficient audit. Test audit is conducted by the superior officers in the presence of the Auditor who has conducted a test Audit. Test Audit is conducted in order to ascertain whether the auditor has done the audit correctly or not. While selecting societies for test audit care should be taken to select only those with considerable transactions. In the case of societies with heavy transactions it is sufficient if one month’s transactions are test-audited. The effectiveness of Test Audit depends, to a good extent, on careful selection of societies If test audit of a society discloses serious defects, the work of the concerned auditor should be examined in-depth by test auditing more societies audited by such auditors.

d) Final audit: 

Final Audit is the statutory annual audit. It is taken up after the end of the financial or trading period, after the accounts are closed and are prepared. It includes a complete examination of all books of accounts, verification of cash and bank balances and securities, verification of assets and liabilities and examination of overdue debts. Final Audit brings to light the extent to which the society has been able to improve the economic conditions of its members. Apart from assessing the financial position of the society, final audit should aim at finding out the extent to which the society has been able to achieve its specified goals. 

The audit report should indicate, inter alia, the details of assets and liabilities, over dues, bad and doubtful debts, confirmations received from creditors and debtors and details of the suspense account. A defects sheet enumerating the various defects relating to contravention of the Act, Rules and Bye-laws, misappropriation, un-authorized payments etc., should accompany the audit report. The auditor should also furnish a certificate in the prescribed form indicating the state of accounts and affairs of the society.

 8. Is there a discussion post-audit?

The Managing Committee can discuss the report after the Auditor hands it over. Any mistakes and irregularities can be discussed and the report can only be finalised once the MC approves of it. 

9. What is the investment rule according to the Bye-laws?

A housing society must have its own bye-laws signed and sealed by the Registrar responsible for approving any amendments. A society can only:

  • Invest or deposit in a government bank /co-operative bank in securities, bonds, or other forms of investment as specified in Section 20 of the Indian Trust Act. 
  • In the shares of any other registered society – Any other bank approved by the Registrar for specific purpose or exception and any other financial institutions mentioned in State-specific Cooperative Societies rules. 

10. What are the Audit dates?

Book of accounts should be handed over within 15 days from the finalisation to the auditor i.e. 1st June. 

The audit shall be completed within 4 months from the end of the financial year i.s. by 31st July. [S.81 and Rule 69]

11. What are the forms?

Form 1 and Form 27/28. Part I of the Auditor’s Report contains the general remarks on the society’s functioning (including the reports aforementioned) and part II points out the errors and irregularities. 

12. What are the Restrictions on Cooperative Societies with respect to financial transactions?

Restrictions on shareholding – the total authorised capital gets divided in individual shares at Rs50 each. According to Section 5 in the Co-operative Societies Act, 1912

Restrictions on interest of member of society with limited liability and a share capital.—Where the liability of the members of a society is limited by shares, no member other than a registered society shall—

(a) hold more than such portion of the share capital of the society, subject to a maximum of one-fifth, as may be prescribed by the rules; or

(b) have or claim any interest in the shares of the society exceeding one thousand rupees.

Restrictions on Transfer of Share – a member cannot transfer his shares a) unless he has held them for a year, and b) the transfer is made to the society or one of its members. 

13. What are the restrictions on loans?

-a registered society shall not make a loan to any person other than a member: Provided that, with the general or special sanction of the Registrar, a registered society may make loans to another registered society.

Save with the sanction of the Registrar, a society with unlimited liability shall not lend money on the security of movable property.

By general or special order, the [State Government] may prohibit or restrict the lending of money on mortgage of immovable property by any registered society or class of registered societies.

14. What are the limitations on borrowings by society with limited liability?

Usually, Cooperative Societies Acts state that “Twenty times the paid-up share capital plus accumulated reserves and profits provided the repayment of principal and interest is secured by mortgage or pledge of tangible assets and securities.”

15. What are the restrictions on borrowings? 

As per the Cooperative Society Act, Section 30, ” A registered society shall receive deposits and loans from persons who are not members only to such extent and under such conditions as may be prescribed by the rules orby-laws.”

16. What should the housing society do with its profits?

What are the provisions for Reserve Fund, Contribution to Charitable Funds and Distribution of Profit?

According to Section 33, 

  • At least one-fourth (25%) should be invested in a Reserve Fund once the society becomes profitable.
  • After that, 10% can be donated to a charitable cause. 
  • The rest can be distributed as profit, dividend can be shared among members but it should not exceed 6.25%. 

Note: In the case of a society with unlimited liability no distribution of profits shall be made without the general or special order of the State Government.

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