INTRODUCING COOPERATIVE AUDITING

1.0 INTRODUCTION

Cooperatives today, play a prominent role in different economies, and although cooperation is a voluntary movement of the public at large, there has been considerable state participation in the development of cooperative movement in many countries. Mahatma Gandhi had envisaged that the cooperative movement is a tool for eradication of poverty when he said that:

1. cooperation is a gateway to economic freedom. 
2. Cooperative audit focuses on cooperative societies. In this unit, therefore, we shall consider the following: 
3. what cooperative means; 
4. types of cooperative governances and cooperatives; 
5. features of cooperative audit; 
6. objects of cooperative audit; 
7. need for cooperative audit; 
8. duties of a cooperative auditor. 

OBJECTIVES

At the end of this unit, you should be able to:

1. explain the concept of cooperative 
2. explain the types of cooperative governances and cooperatives 
3. highlight the features and objects of cooperative audit 
4. assess the need for cooperative audit 
5. identify the duties of a cooperative auditor. 

3.0 MAIN CONTENT

3.1 The Concept of Cooperative

The international cooperative alliance’s statement on the cooperative identity defines a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically- controlled enterprise”. It is a business organisation owned and operated by a group of individuals for their mutual benefit. A cooperative may also be defined as “a business owned and controlled equally by the people who use its services or who work at it”.
A cooperative can be seen as a legal entity owned and democratically- controlled equally by its members. Members have a close association with the enterprise as producers or consumers of its products or services, or as its employees.

3.1.1 Types of Cooperative Governances

These are as follows.

(a) Retailers’ Cooperative

This is an organisation which employs economies of scale on behalf of its members to get discounts from manufacturers and to pull marketing.

(b) Workers’ Cooperative 

This is a cooperative that is owned and democratically-controlled by its “worker-owners”. There are no outside owners in “pure” workers’ cooperative; only the workers own shares of the business.

(c) Consumers’ Cooperative

A consumers’ cooperative is a business owned by its customers. Employees can also generally become members.

3.1.2 Types of Cooperatives

Cooperative types include the followings.

1. Housing cooperative :A housing cooperative is a legal mechanism for ownership of housing where residents either own shares reflecting their equity in the cooperative’s real estate, or have membership and occupancy rights in a not-for-profit cooperative, and they underwrite their housing through paying subscription or rent. 
2. Building cooperative :Members of the building cooperative pool resources to build houses, normally using a high proportion of their labour. When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved. 
3. Agricultural cooperative :Agricultural cooperatives are widespread in rural areas. They provide inputs into the agricultural process. Agricultural cooperatives are the most rational and convenient form of organising small and medium farmers. They are key components of strategy of development of rural and underdeveloped regions. 

SELF-ASSESSMENT EXERCISE 1

1. Name and discuss three types of cooperatives. 

3.2 Cooperative Audit

This will be discussed under the following.

3.2.1 Salient Features of Cooperative Audit

The audit of a cooperative society is different from that of a limited liability company (company) because the objects of a cooperative society are quite different from those of a company. While the main object of a company is to earn profits, that of a cooperative society is to service to its members. Service rather than profit is the motto of a cooperative society.

Regarding the nature, extent and scope of cooperative audit, a cooperative auditor should not confine his enquiry to the books of accounts, but should go beyond the books and make enquiries into the working and general functioning of the (cooperative) society. His enquiry should embrace all circumstances which determine the general position of the society and should aim at seeing that the society is working on sound lines. Thus, cooperative audit is not merely a financial audit, it involves administrative audit also.

3.2.2 Main Features of Cooperative Audit

The main features of cooperative audit relate to the following.

1.  Adherence to cooperative principles; 
2. Observance of provisions of acts, rules and bylaws; 
3. Valuation of assets and liabilities and verification of cash balance and securities; 
4.  Verification of balances of depositors and creditors;
5.  Examination of overdue debts and classification of bad debts; 
6.  Personal verification of members and examination of their passbooks; 
7. Discussion of draft audit report with the managing committee; (h) Audit classification of society; 
8.  Examination of the working and other prescribed particulars of the society. Apart from the general processes of auditing like posting, vouching, verification of assets and liabilities and so on, the special features of cooperative audit are briefly mentioned below.

(i) Examination of overdue debts

Overdue debts affect the working of a credit society seriously. They affect the working capital position of the society. As such, it is necessary to make a detailed analysis of the overdue debts with a view to ascertaining the chances of their recovery and classifying them as good or bad. It is also necessary to compare the percentage of overdue debts to working capital and loans and advances with that of the previous year and ascertain whether the trend is decreasing or increasing, whether adequate action is being taken for recovery, and whether necessary provision is being made for doubtful debts.

(ii) Adherence to cooperative principles

It has to be ascertained in general whether, and, to what extent, the objects for which the society was set up have been fulfilled. The assessment need not be in terms of returns made but in terms of benefits given to members. The benefits could be in terms of sales made at lower prices to members, economy achieved in operations, avoidance of wastage of funds, avoidance of middlemen in purchases and so on. (iii) Personal verification of members and examination of their passbooks
This is necessary in cooperative societies in order to ensure that books of accounts are free from manipulations, since in many rural and agricultural societies, a considerable number of members could be illiterate and as such, personal verification provides a safeguard against any manipulation.

3.2.3 Need for Cooperative Audit

Cooperative audit serves the following purposes.

1.  Members of the society are to be satisfied that the affairs of the society are managed properly and are on sound business principles. This is rendered possible by the cooperative auditor undertaking a detailed check of the voluminous transactions taking place during the entire year and making a report of his findings as a result of this check, to the members. 
2.  A large number of societies borrow funds from outside. The creditors would be keen to satisfy themselves of the financial soundness and creditworthiness of the society. For this purpose, they would depend upon the cooperative auditor’s report. 
3.  A large number of persons are employed by cooperatives for managing their affairs. In order to ensure that there is proper check on efficiency and integrity of employees, the management would require a systematic and thorough check of their accounts. This purpose is served by cooperative audit. 
4.  Non-members of the cooperatives, who deposit their funds with the cooperative, would like to satisfy themselves that their funds are safe with the society. This is made possible by the auditor’s report on the working of the society. 

3.2.4 Objects of Cooperative Audit

At this point, let us summarise the objects of cooperative audit as follows.

1. Verification of the accuracy of the books of accounts and ascertaining correctness of accounts; 
2.  Detection of clerical errors and errors of principles, and prevention of such errors; 
3.  Detection and prevention of frauds; 
4. Examination of the affairs of the society in order to ascertain whether they have been carried on in accordance with the provisions of the cooperative law and the principles of cooperation, and on sound business principles; 
5.  Assessment of the extent to which the conditions of the members, particularly their economic conditions, have improved by the operations of the society;
6. Certification of the actual returns made or loss incurred. 

3.2.5 Main Aspects of Cooperative Audit

In several countries (including the Asian countries), there are two main aspects.

1. Cooperative audit is an audit conducted under the statute, and therefore, it is statutory in character; 
2. It is undertaken by government itself, and it is therefore, state- controlled audit. 

You should note the experience in the Kingdom of Bangkok.

The Cooperative Auditing Department (CAD) is the only institution to audit the cooperatives and farmer groups. In an attempt to perform the duty efficiently, the CAD has set a vision to develop and promote transparency in cooperatives, move forward with information technology and introduce accounting to Thai farmers.
The CAD plays a significant role to strengthen the financial and accounting conditions of cooperatives and farmer groups and for the well-being of Thai farmers, the CAD has enhanced their accounting knowledge.

Thus, CAD’s interim and annual auditing aims at:

1. checking the correctness of book-keeping and observe whether the internal control is as efficient as possible, and helps the cooperatives in updating and completing the accounts; 
2.  giving a true and fair view of the financial condition of cooperatives and farmer associations. 

Due to the increasing number of cooperatives, especially agricultural cooperatives, CAD has private auditors to relieve the auditing workload. However, the auditing procedure must be standardised.

3.2.6 Duties of a Cooperative Auditor

From the foregoing, we can highlight the duties and responsibilities of a cooperative auditor to include the following.

1.  To verify the cash balance and securities, examine the overdue debts, if any, value assets and liabilities of the society, verify balances at the credit of the depositors and creditors and the amount due by the society’s debtors; 
2. To satisfy himself that the cooperative society has kept all account books and registers in connection with the business of the society properly and up-to-date; 
3. Verify whether necessary statutory provisions have been strictly observed; 
4.  Verify whether the business of the society has been concluded according to the cooperative principles and sound business practices; 
5.  Conduct personal verification of members’ accounts and examination of their passbooks with a view to preventing manipulation of accounts by dishonest employees and office bearers; 
6. Certify the financial statements – balance sheet, etc. 

SELF-ASSESSMENT EXERCISE 2

1.  What is the need for cooperative audit? 
2. What is the difference between cooperative audit and other business organisations’ audit? 

4.0 CONCLUSION

In this unit, you have learnt that cooperative audit is not merely a financial audit, it involves administrative audit also. Countries establish Cooperative Audit Departments (CAD) to: 

1. audit the accounts of cooperatives; 
2. assist/advise on book-keeping; 
3. offer advisory services generally; 
4. strengthen accounting and internal control system. 
5. CAD may engage private auditors to assist in reducing the workload. 

ANSWER TO SELF -ASSESSMENT EXERCISE 3

Three types of Cooperatives are as follows.

(a) Housing Cooperative

A housing cooperative is a legal mechanism for ownership of housing where residents either own shares reflecting their equity in the cooperative’s real estate, or have membership and occupancy rights in a not-for-profit cooperative, and they underwrite their housing through paying subscription or rent.

(b) Building Cooperative

Members of the building cooperative pool their resources to build housing, normally using a high proportion of their labour. When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved.

6.0 TUTOR-MARKED ASSIGNMENT

1. Explain the concept of cooperative. 
2. Assess the duties and responsibilities of a cooperative auditor.