Government Accounting System and Auditing
Accounting and Accounting System
Accounting refers to the records, ledgers, books, and related documents maintained in accordance with prevailing laws to accurately reflect transactions. The accounting system, on the other hand, encompasses the entire process of identifying, measuring, analyzing, classifying, recording, and reporting transactions.
American Accounting Standard (1966): "Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of accounts."
Process: Communication → Transactions → Recording → Classification → Summarization → Interpretation & Evaluation
Double Entry System
The double entry system records both aspects of a financial transaction (debit and credit), ensuring that the total debit equals the total credit. It was introduced by Luca Pacioli in Italy through his book Summa de Arithmetica in 1494.
Example: When purchasing a vehicle, the vehicle account is debited (asset increases), and the cash account is credited (cash decreases).
Features:
- Records dual effects of transactions.
- Scientific and accurate.
- Provides complete transaction details.
- Facilitates error detection via trial balance.
Advantages:
- Complete transaction records.
- Reveals accurate business results and financial position.
- Ensures arithmetic accuracy.
- Facilitates comparison and reduces errors.
- Relevant and reliable.
Government Accounting System
The system of recording government revenue, expenditure, and other transactions is called the government accounting system. In Nepal, it is based on the double entry system since March 1962.
Features:
- Public transparency.
- Broad scope.
- Aligned with government economic policies.
- Dual effect recording.
- Specialized and standardized forms.
- Basis for financial decisions.
- Management of various funds.
Importance:
- Budget control.
- Ensures financial accountability.
- Provides data for economic policy formulation.
- Evaluates cost-effectiveness and program achievements.
- Controls expenditure and cash flow.
Principles:
- Legality
- Public Fund
- Budget Control
- Fiscal Year
- Historical Cost
- Simplicity
- Uniformity
- Neutrality
- Double Entry
- Cash and Accrual Basis
- Financial Accountability
- Clarity
Current Accounting Systems in Nepal
- Appropriation Ledger: Since 1961/62.
- Inventory Ledger: Since 1963/64.
- Revenue Ledger: Since 1974/75 (double entry since 2006/07).
- Deposit Ledger: Since 1988/89.
- Project Ledger: Since 1995/96.
Central and Operational Level Accounting
Central Level Accounting: Records maintained for reporting to central authorities, used for financial control, coordination, monitoring, and unified budget tracking.
Operational Level Accounting: Records maintained at the operational level for direct transactions (expenditure, revenue, deposits). These are practical records, while central-level records support policy-making and coordination.
Functions of Operational Level Accounting:
- Direct expenditure.
- Recording transactions.
- Reporting.
- Budget preparation.
- Providing data for central accounting.
Types of Ledgers
Appropriation Ledger: Tracks budget allocation, expenditure, and reporting based on approved budgets.
Inventory Ledger: Records details of inventory (goods received, used, and their condition).
Revenue Ledger: Manages collection and reporting of tax and non-tax revenue deposited in the Consolidated Fund.
Deposit Ledger: Tracks deposits for contracts, tax assessments, or court orders, including related records and reports.
Project Ledger: Records income, expenditure, and balances of projects (often foreign-aided) since 1995/96, including loan accounts, special accounts, and donor reimbursement details.
Objectives and Benefits of Government Accounting
- Ensures public accountability.
- Promotes financial discipline and transparency.
- Ensures efficient use of public resources.
- Protects government cash and inventory.
- Provides financial data for decision-making.
- Supports internal control and monitoring.
- Maintains uniformity in accounting.
Key Accounting Forms
Goshwara Voucher: The primary record for financial transactions, detailing each transaction separately. It is divided into four sections:
- First Section: Office name, voucher number, date.
- Second Section: Reference number, transaction details, ledger page number, account number, debit/credit amounts.
- Third Section: Receipt number, check number.
- Fourth Section: Submitter and approver details.
Debit Rules: Debit when assets increase, liabilities/income decrease, expenses are incurred, or cash/bank balance increases.
Credit Rules: Credit when assets/expenses decrease, or liabilities/income increase.
Types of Goshwara Vouchers:
- Simple Voucher: For general income/expense (e.g., Debit: Furniture Budget ₹10,000, Credit: Cash/Bank ₹10,000).
- Advance Voucher: For advances paid before receiving goods/services.
- Miscellaneous Voucher: For transactions like transfers, loans, corrections, etc.
Year-End (Saltamami) and Task-End (Kamtamami) Vouchers:
- Saltamami: Closes annual transactions.
- Kamtamami: Closes transactions for specific tasks.
Bank Cash Book: Records cash and bank transactions, ensuring accuracy and preventing fraud. Includes accounts for cash, bank, budget, advances, and miscellaneous.
Budget Ledger: Tracks allocated budget, releases, and expenditure, prepared monthly.
Principles of Accounting System
- Periodic Principle
- Dual Effect
- Monetary Measurement
- Cost Principle
- Matching Concept
- Consistency
- Going Concern
- Business Entity
- Accrual Accounting
- Realization
Conventions: Conservatism, full disclosure, uniformity, relevance.
Ways to Improve Nepal’s Government Accounting
- Adopt accrual-based accounting.
- Reduce payment centers and implement a Treasury Single Account (TSA).
- Ensure double entry for all ledgers, including inventory.
- Apply matching concept for revenue collection.
- Enhance staff training and IT-based networking.
- Formulate clear accounting policies.
Treasury Single Account (TSA)
The TSA system assigns district treasury offices to manage the Consolidated Fund, revenue, and budget expenditure. It replaces over 12,000 accounts with one per district, implemented in 38 districts as of 2025, with plans for nationwide adoption.
Purpose:
- Simplify daily revenue/expenditure tracking.
- Maximize fund utilization.
- Ensure transparent expenditure through post-audit.
- Reduce operational costs.
- Streamline cash flow management.
Auditing
Definition: Auditing is the independent, objective examination of an organization’s financial records and transactions.
Concept: Derived from the Latin word "Audire" (to hear), auditing involves verifying financial records. It dates back to Vedic times and was formalized in the 18th century.
History in Nepal:
- 1768: Kumari Chowk established by Prithvi Narayan Shah.
- 1846: Kumari Chowk formalized by Jung Bahadur.
- 1873: Separate ledger and verification office.
- 1947: Chief Auditor’s Office.
- 1959: Office of the Auditor General established.
- 1963: First audit report issued.
Importance:
- Ensures public accountability.
- Promotes transparency and prevents fraud.
- Protects government assets.
- Verifies financial statements.
- Evaluates performance and recovers losses.
Principles:
- Independence and Objectivity
- Due Diligence
- Confidentiality
- Evidence Collection
- Legal Basis
Types of Auditing
- Pre-Audit: Before final transactions.
- Internal Audit: Conducted by internal mechanisms.
- Final Audit: Conducted by the Auditor General post-fiscal year.
- Compliance Audit: Ensures regulatory adherence.
- Social Audit: Evaluates social impact.
- Equity-Based Audit: Focuses on fairness.
Internal Audit: Conducted within the organization, ongoing, and managed by the District Treasury Controller Office (DTCO) or internal audit units.
Legal Basis in Nepal:
- Interim Constitution 2007
- Audit Act 1991
- Financial Procedures Act 1998 and Rules 2007
- Public Procurement Act 2007 and Rules 2007
- Local Self-Governance Act 1999
Internal Audit Features and Importance
Features:
- Internal control mechanism.
- Corrective and ongoing.
- Facilitates final audit.
Importance:
- Ensures financial accountability.
- Resolves issues and controls fraud.
- Guides management and supports final audits.
Challenges:
- Lack of recognition as a valuable tool.
- Insufficient resources and trained staff.
- Weak coordination with the Auditor General.
Solutions:
- Enhance networking and IT use.
- Restructure and train staff.
- Link audit findings to performance evaluations.
Final Audit
Conducted by the Auditor General, it examines transactions for a fiscal year or period, ensuring no further audits are needed. Governed by the Interim Constitution 2007, it covers courts, police, military, and government offices.
Scope (Audit Act 1991): Regularity, economy, effectiveness, efficiency, propriety.
INTOSAI Additions: Equity, environmental impact.
Importance: Promotes transparency, accountability, and good governance.
Challenges:
- Limited resources and skilled staff.
- Poor implementation of recommendations.
- Increasing irregularities.
Solutions:
- Improve internal audits.
- Link findings to career development.
- Establish recovery offices for outstanding dues.
- Adopt ICT-based auditing.
Relationship and Differences Between Internal and Final Audit
Relationship:
- Internal audits provide data for final audits.
- Final audit reports guide internal audits.
- Internal audits ensure regularity, aiding final audits.
Differences:
| Basis | Internal Audit | Final Audit |
|---|---|---|
| Agency | Internal unit | External body (Auditor General) |
| Reporting | Within organization | To the President |
| Scope | Regularity | Regularity, efficiency, effectiveness, propriety |
| Responsibility | Managerial | Public financial accountability |
| Period | Ongoing | Post-fiscal year |
| Authority | By law | By constitution |
Public and Gender Auditing
Public Auditing: Covers government offices, public institutions, and local bodies, with the Auditor General as the final auditor.
Gender Auditing: Examines women’s participation, access, and benefits in government and development activities.
Performance Auditing (INTOSAI): Evaluates whether resources are used economically, efficiently, and effectively.
Compliance Audit: Re-examines irregularities, conducted by the Auditor General, clearance committees, or independent bodies.
