Chapter 14 Solutions: Internal Control and Auditing

Answers to the Chapter 14 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, five marks’ worth of explained points, tables or working for 5 marks, and an introduction, explained points and a conclusion for 8 marks.

Group A: Very Short Answer Questions (1 Mark Each)

1. What is Internal Control?

Internal Control is the system of organizational plans, procedures, division of duties, internal checks and budgetary controls set up by the management or Head of Office within an organization to run daily operations smoothly, safeguard assets, prevent errors and fraud, and ensure compliance with laws and policies.

2. From which Latin word is the term ‘Audit’ derived and what does it mean?

The term ‘Audit’ is derived from the Latin word “Audire”, which means “to hear”.

3. Who conducts the Internal Audit and Final Audit of Federal Government offices in Nepal?

The Internal Audit of Federal Government offices is conducted by the District Treasury Comptroller Office (DTCO) under the FCGO during the fiscal year, and the Final Audit is conducted by the Office of the Auditor General (OAG) after the fiscal year ends.

4. What is Beruju (Audit Irregularity)?

Beruju is any financial transaction pointed out by the auditor during an audit as carried out contrary to prevailing laws, without the required supporting documents or accounts, in an irregular or unreasonable manner, or as an advance left unsettled (Section 2(t) of the Financial Procedures and Fiscal Accountability Act, 2076).

Group B & C: Short and Long Answer Questions (5 & 8 Marks)

1. What is Auditing? Explain any four objectives/advantages of Auditing. (5 Marks)

Meaning: The word Audit is derived from the Latin word “Audire”, meaning “to hear”. Auditing is the independent, systematic and critical examination of the books of accounts, vouchers, supporting documents, store records and financial statements of an organization by a qualified and authorized auditor, to verify their regularity, economy, efficiency, effectiveness and propriety and to express an official audit opinion or report. In Nepal, public sector audit is governed by the Audit Act, 2075 under the Office of the Auditor General (OAG), while corporate audit follows the Nepal Standards on Auditing (NSAs) regulated by ICAN.

Four objectives/advantages of Auditing:

1. Verifying the accuracy and reliability of accounts: The auditor checks that every entry is supported by valid bills, receipts, vouchers and approvals, and that the books and financial statements give a true and fair picture of income, expenditure, assets and liabilities. Audited accounts can therefore be trusted by management, owners, the government and the public.
2. Detecting and preventing errors and fraud: Auditing brings to light clerical errors, omissions, overpayments, embezzlement and misuse of assets, so that they can be corrected or the money recovered. Because employees know that their work will be examined, auditing also acts as a moral check that discourages errors and fraud in the first place.
3. Ensuring compliance with laws, rules and the budget: The auditor examines whether transactions follow the prevailing laws (such as the Public Procurement Act and tax laws), financial rules and approved budget limits. In government offices, transactions that break these rules are reported as Beruju, which must then be recovered, regularized or settled.
4. Judging economy, efficiency and effectiveness: Beyond checking figures, the auditor assesses whether resources were obtained at a reasonable cost, used without waste and actually achieved the intended results. Its suggestions help management and the government get better value for money in the future.

Auditing also promotes accountability, since the OAG’s Annual Report reaches the Federal Parliament and its Public Accounts Committee, and audited statements are more readily accepted by banks, tax authorities and investors.

2. Differentiate between Internal Audit and Final (External) Audit in five points. (5 Marks)

Every government office in Nepal goes through two stages of audit: Internal Audit during the fiscal year and Final / External Audit after the fiscal year ends. They differ as follows:

3. What is Beruju? Explain the three main classifications of Beruju in Nepal’s government accounting system and how Beruju can be minimized. (8 Marks)

According to Section 2(t) of the Financial Procedures and Fiscal Accountability Act, 2076, Beruju (Audit Irregularity) is any financial transaction pointed out by the auditor during an audit as carried out contrary to prevailing laws, without the required supporting documents or accounts, in an irregular or unreasonable manner, or as an advance remaining unsettled. When the Office of the Auditor General conducts the Final Audit, it classifies all the Beruju it finds into three official categories. Beruju is a sign of weak financial discipline, so every office should both settle it and prevent it.

Three classifications of Beruju:

1. Recoverable Beruju: This covers overpayment, embezzlement, revenue leakage, or payment made without the actual delivery of goods or completion of work. Here public money has actually been lost, so the exact amount must be recovered in cash from the concerned official or contractor and deposited into the Consolidated Fund (Revenue Code 15111). For example, if a contractor has been paid for work that was never done, that amount is recovered from the contractor.
2. Beruju to be Regularized / Adjusted: Here the work was genuinely performed and no money was misappropriated, but procedural formalities, bills, receipts or approvals were incomplete. It has four sub-types:
   • Unreasonable / Improper: a procedural rule was bypassed, so the expenditure needs regularization by the superior authority or Parliament.
   • Unsupported by Documents: a bill, receipt or Dakhila report is missing, and the Beruju is cleared by submitting the missing proof.
   • Responsibility Not Taken: a balance was not carried forward into the next year’s books.
   • Reimbursement Not Taken: foreign aid or grant money was spent, but the reimbursement has not yet been claimed.
3. Unsettled Advance Beruju: Advances given to employees, contractors or institutions, or opened as Letters of Credit (LC), that have not been cleared within the legal deadline by the end of the fiscal year become Beruju. They are settled when the advance holder submits the bills for the work done or returns the unspent amount.

How Beruju can be minimized:

1. Strong internal control system: Every office should prepare and follow the Internal Control Guideline required under the Financial Procedures and Fiscal Accountability Act, 2076. Duties should be separated, so that the person who purchases goods, the storekeeper who verifies the Dakhila and the accountant who makes the payment are different people, and no one person can complete a whole transaction alone.
2. Following laws, rules and budget limits: All purchases and payments should strictly follow the Public Procurement Act, tax laws and financial rules, and no expenditure should exceed the approved budget head. Computerized systems such as CGAS and TSA help here by blocking payment orders that exceed the approved budget.
3. Complete supporting documents and up-to-date records: No voucher should be passed without valid bills, receipts, Dakhila reports and approvals, and all records should be kept in the prescribed AGF forms. Balances should be carried forward properly into the next year’s books, and reimbursements from donors should be claimed on time.
4. Timely clearance of advances: The accounts section should keep track of every advance and see that employees, contractors and institutions clear it with bills, or return the unspent amount, within the legal deadline and before the fiscal year closes.
5. Acting promptly on audit findings and fixing responsibility: Errors pointed out in the DTCO’s internal audit should be corrected before the Final Audit. When the preliminary audit report arrives, the Accounting Officer and Head of Office must recover the amounts, submit missing documents or clear advances within 35 days. Officials who cause Beruju should be held responsible, and accounting staff should be trained regularly in financial rules.

Conclusion: Beruju shows where public money has been spent against the law, without proper documents or through unsettled advances. The OAG classifies it as recoverable, to be regularized, or unsettled advance, and its reports are reviewed by the Public Accounts Committee of Parliament. A strong internal control system, strict compliance, complete documentation, timely clearance of advances and prompt action on audit findings can keep Beruju to a minimum and strengthen public trust in government accounts.