Accounting and Financial Reporting

Role of audit in promoting transparency, accountability and integrity — 5 marks

1. Transparency. Audit provides an independent, evidence-based examination of financial statements, transactions and compliance. By reporting findings to the Public Accounts Committee, the Office of the Auditor General and the public, it places government income, expenditure and decisions in the public domain. Citizens and oversight bodies can then see how public resources are raised and used, which reduces secrecy and information asymmetry between the government and the people.

2. Accountability. Audit fixes responsibility for the use of public funds. It verifies whether expenditure was authorised by the legislature, made for the sanctioned purpose, and within the budget. Irregularities, misuse, over-payment and unauthorised spending are pointed out with the responsible official and amount, which enables recovery, departmental action and parliamentary follow-up. In this way audit makes executives answerable for their stewardship of public money.

3. Integrity. Regular and surprise audits act as a deterrent against fraud, corruption, nepotism and misappropriation. The fear of detection and punishment discourages dishonest behaviour, while audit recommendations strengthen internal control, segregation of duties and record-keeping. This builds an ethical work culture and protects the honesty of public servants.

4. Supporting good governance. Audit reports supply reliable information for planning, budgeting and policy correction. Performance and value-for-money audits assess economy, efficiency and effectiveness, so that resources are not merely spent but spent well. Follow-up of audit observations closes the loop between detection and correction.

5. Limitations and conditions. Audit is only a means, not an end. Its effectiveness depends on the independence of the audit institution, timely submission of reports, strong follow-up and enforcement, and an active legislature and vigilant citizenry. Without these, audit findings remain merely on paper.

Conclusion. Audit thus works as the watchdog of public finance: it exposes facts (transparency), assigns responsibility (accountability) and discourages dishonesty (integrity), thereby strengthening public trust in governance.

Errors that do not affect the agreement of the trial balance are those that leave total debits equal to total credits. They are:

1. Error of complete omission — a transaction is left out of the books altogether, so neither a debit nor a credit is recorded.
2. Error of commission — the correct amount is posted on the correct side but to a wrong account of the same nature (e.g. a sale to Ram credited to Shyam's account).
3. Error of principle — a transaction is recorded against the wrong class of account (e.g. purchase of furniture debited to Purchases, or capital expenditure treated as revenue expenditure).
4. Error of original entry — a wrong amount is entered in the journal or subsidiary book, and the same wrong amount is posted to both accounts.
5. Compensating errors — errors of equal amount on the debit and credit sides cancel each other (e.g. Rs 500 under-cast in one account and Rs 500 over-cast in another).
6. Duplication — a transaction is recorded twice, with equal debit and credit each time.

The trial balance proves only arithmetical accuracy of the ledger, not the absence of errors.

Insurance accounting is the branch of accounting that records, classifies and reports the transactions peculiar to insurance companies: premium income, claims, commission, management expenses, technical reserves (such as the reserve for unexpired risks and outstanding claims) and investment income. Its purpose is to find the true underwriting result, profit or loss and financial position of the insurer. In Nepal it is regulated by the Insurance Act, the Nepal Insurance Authority (formerly Beema Samiti) directives and NFRS.

Kind of accounting used. Insurance companies follow the double-entry system on the accrual (mercantile) basis, supported by a fund-based, class-wise statutory format:

1. Accrual basis — premium is recognised as earned over the period of cover, and claims are recognised when they arise, including claims outstanding and incurred but not reported (IBNR).
2. Separate funds and classes — life business (Life Insurance Fund) is kept apart from non-life business, which is further divided by class (fire, marine, motor, miscellaneous).
3. Technical reserves — the unexpired portion of premium is carried forward as a reserve, and provision is made for outstanding claims.
4. Statutory accounts — a Revenue Account for each fund or class, then a Profit and Loss Account and Balance Sheet, prepared in the formats prescribed by the regulator.
5. Actuarial valuation — life insurers value policy liabilities actuarially and transfer the surplus to the shareholders and policyholders.