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📚 Learn/ / AUDIT - Audit of Different Type of Entities
Microlesson · 5-min read

Audit of Co-operative Societies

# Audit of Co-operative Societies

## Statutory Framework

Audit Obligation:

The Registrar shall audit (or cause to be audited) the accounts of every registered society at least once every year.

## Qualifications of Auditors

Apart from a Chartered Accountant, some State Co-operative Acts also permit:

  • Persons holding Government diploma in co-operative accounts
  • Person who has served as auditor in the co-operative department of Government

## Appointment of Auditor

  • Auditor appointed by the Registrar
  • Auditor conducts audit on behalf of Registrar
  • Submits report to Registrar AND society
  • Audit fees paid by society as per statutory scale of fees prescribed by Registrar (varies by category of society audited)

## Restrictions on Society

### 1. Restriction on Shareholdings

Where liability of member is limited, no member (other than a registered society) can hold:

  • More than 20% of total shares, OR
  • Shares of value exceeding Rs 1,000

(State Acts may provide different limits)

### 2. Restriction on Loans

  • Society shall not make loan to any person other than member
  • Exception: With special sanction of Registrar, may lend to another registered society
  • State Government may put further restrictions

### 3. Restriction on Borrowings

Society may accept loans and deposits from non-members subject to restrictions and limits of society's bye-laws.

### 4. Investment of Funds

Society may invest its funds in:

  • Central or State Co-operative Bank
  • Securities specified u/s 20 of Indian Trusts Act, 1882
  • Shares, securities, bonds or debentures of other society with limited liability
  • Co-operative bank (other than Central/State co-op bank) approved by Registrar
  • Other moneys permitted by CG or SG

## Appropriation of Profits

### Reserve Fund

  • Prescribed percentage of profits must be transferred to Reserve Fund BEFORE distribution as dividends/bonus to members

### Contribution to Charitable Purposes

  • With approval of Registrar, society may contribute up to 10% of net profits remaining after compulsory transfer to reserve fund
  • For any charitable purpose

### Investment of Reserve Fund

May be utilised:

  • In business of society as working capital, OR
  • Invested as per provisions of the Act, OR
  • For public purposes to promote object of society

## Books of Account

For large co-operatives, separate subsidiary books/registers maintained; daily summary totals transferred to main Cash Book. Examples:

  • Daily cash sales summary register
  • Register of collections from debtors
  • Register of recovery of loans from salaries
  • Loan disbursement register for credit society
  • Other columnar subsidiaries

## Contribution to Education Fund

  • It is a CHARGE on profits (NOT an appropriation)
  • Note: Some State Acts treat Dividend Equalisation Reserve and Share Capital Redemption Fund transfers as charges - but per GAAP, these are appropriations (not charges)
  • Auditor should point out where statutory provisions contradict GAAP

## Special Features of Co-operative Audit

### 1. Examination of Overdue Debts

Overdue debts must be classified by period:

  • 6 months to 5 years
  • More than 5 years

Auditor must report these classifications.

### 2. Overdue Interest

  • Overdue interest should be EXCLUDED from interest outstanding/accrued due while calculating profit
  • (Prudence - do not recognise income that is doubtful)

### 3. Audit Classification of Society

  • After judging performance, auditor awards a class to society based on Registrar's criteria
  • If management not satisfied with audit class, appeal to Registrar
  • Registrar may direct review of audit classification

### 4. Discussion of Draft Audit Report with Managing Committee

  • On conclusion of audit, auditor should request Secretary to convene managing committee meeting to discuss draft audit report
  • Audit report should NEVER be finalised without discussion
  • Minor irregularities may get settled and rectified through discussion

## Special Report to Registrar

During audit, if auditor notices serious irregularities, he may report to Registrar (who may take necessary action). Cases warranting special report:

  • Personal profiteering by managing committee members detrimental to society's interest
  • Detection of fraud relating to expenses, purchases, property of society
  • Specific examples of mismanagement - decisions against co-operative principles

Worked example

### Example 1

Example - Shareholding Restriction:

A Co-operative Society has 100 members and total share capital of Rs 1,00,000 (10,000 shares of Rs 10 each).

  • Member X (individual) wants to subscribe to 2,500 shares (Rs 25,000)
  • This = 25% of total shares
  • NOT PERMITTED - exceeds 20% limit
  • Also exceeds Rs 1,000 value limit
  • Maximum allowed: lower of 20% (2,000 shares) OR Rs 1,000 worth (100 shares)

→ Member can hold only 100 shares (Rs 1,000)

### Example 2

Example - Overdue Debt Classification:

Credit Co-operative Society has overdue debts as on 31st March 2026:

DebtorAmountOverdue From
ARs 50,000Oct 2025 (5 months)
BRs 30,000June 2024 (1 year 9 months)
CRs 1,00,000Jan 2020 (6 years)

Auditor classification:

  • A: Not overdue beyond 6 months → not reportable category
  • B: 6 months to 5 years → Rs 30,000
  • C: More than 5 years → Rs 1,00,000

Also, overdue interest on B and C should be excluded from profit calculation.

### Example 3

Example - Profit Appropriation:

Society has net profit Rs 10,00,000 for FY 2025-26. Reserve Fund prescribed: 25%.

Step 1 - Compulsory transfer to Reserve Fund: 25% × 10,00,000 = Rs 2,50,000

Step 2 - Net profit after Reserve Fund = Rs 7,50,000

Step 3 - Max permissible contribution to charity (10% of Rs 7,50,000) = Rs 75,000 (requires Registrar approval)

Step 4 - Balance Rs 6,75,000 available for dividend/bonus to members (subject to society rules)

⚠️ Common exam mistakes

  • Including overdue interest in profit calculation - violates prudence principle for co-operative societies
  • Finalising audit report without discussing with Managing Committee first - process violation
  • Not classifying overdue debts by period (6 months-5 years vs more than 5 years)
  • Allowing dividend distribution without first transferring prescribed percentage to Reserve Fund
  • Treating Education Fund contribution as appropriation instead of charge (state law treats it as charge)
  • Society making loans to non-members without special Registrar sanction
  • Allowing individual member to hold more than 20% shares or Rs 1,000 value (whichever lower)
  • Society contributing more than 10% of post-reserve profits to charity
Bare-Act text Section 17 - Audit · Co-operative Societies Act, 1912 (and corresponding State Co-operative Societies Acts) · click to expand
(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, the verification of the cash balance and securities, and a valuation of the assets and liabilities of the society.
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