India operates under a federal system of government. There are three levels, the Union (Central) Government, the State (Regional) Government and the Local Governments.

National Level

India is governed by a Union (Central) Government located in New Delhi. The central government consists of three branches: the Executive (headed by the President of India); the Legislature (bicameral and consists of the Rajya Sabha (Council of States) and the Lok Sabha (House of the People); and the Judiciary.

State/Regional Level

India is divided into 28 states (Regions) and 8 Union territories (UTs). Each state has its own government, with Executive, Legislative, and Judicial powers similar to the Central Government. States have a significant degree of autonomy and are responsible for a wide range of issues including education, healthcare, agriculture, and law enforcement. Union territories, on the other hand, are directly governed by the Central Government, although some have their own Legislatures and Councils with varying degrees of power.

Local Level

At the local level, the States/Regions are divided into Districts, each of which is administered by a District Collector or Deputy Commissioner. Districts are further subdivided into sub-districts or tehsils, which have both villages (Rural) and urban areas.

Local self-government bodies exist at two levels: rural (also known as Panchayati Raj Institutions, comprising of Village Panchayats, Block Panchayats and District Panchayats) and urban (also known as Urban Local Bodies, comprising of Town Panchayats, Municipalities and Municipal Corporations). These Institutions are elected bodies responsible for local administration in rural areas and Urban areas respectively.

SAI India conducts Financial, compliance and Performance Audits of the National and Regional Governments under provisions of the Constitution, the Comptroller and Auditor General’s (CAG) Duties Powers and Conditions of Service Act, 1971 and the CAG’s Regulations on Audit and Accounts (Amendments) 2020.

The Financial audit of the Local Governments, both at Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs), is primarily carried out by Regional Audit Institutions – Local Fund Auditors, which are departments under the State/Regional Governments.  The composition and structure of the Local Fund Auditors vary from state to state. Their mandate and reporting requirements are determined by legislations passed by State/Regional Legislatures.

Many states have specific rules and regulations governing the audit of local bodies, which are framed under the authority of the respective Municipal Acts or Panchayati Raj Acts. These rules typically outline the procedures and standards to be followed by auditors.

The Local Fund Auditors prepare their Annual Audit Plan independently. However, they are assisted by SAI India in the planning and reporting as a part of Technical Guidance and Support arrangement. The Local Fund Auditors conduct financial and compliance audits.

Additionally, SAI India conducts performance audits and compliance audits of selected activities of Local Governments.

SAI’s Mandate in Auditing Local Governments

SAI India audits the Local Governments under Comptroller and Auditor General’s (CAG) Duties Powers and Conditions of Service Act, 1971 and the CAG’s Regulations on Audit and Accounts (Amendments) 2020. The Comptroller and Auditor General may undertake the audit of Panchayati Raj institutions and Urban Local Bodies if such bodies are financed by grants or loans from the Consolidated Fund of India or of any State or Union Territory having a Legislative Assembly and are auditable under the provisions of Section 19 or Section 20 of this Act.

SAI India conducts compliance and performance audits of PRIs and ULBs. In some of the states, the financial audit of Local Bodies is also entrusted to SAI India. Normally financial audit, performance audit and compliance audit are not combined in one inspection.

SAI India is guided by the local audit standards/guidelines/instructions:

• Auditing Standards for Panchayati Raj Institutions and Urban Local Bodies
• Manual of Instructions for audit of Panchayati Raj Institutions
• Guidelines for Financial Audit of Panchayati Raj Institutions.

SAI India continuously reviews and develops professional pronouncements on this matter. Currently, new Guidelines on Local Governments Audit is under preparation.

SAI India has audit offices in all States which is headed by an Accountant General/Principal Accountant General. These offices conduct the audit of PRIs and ULBs in that State.

Interaction between SAIs and RAIs and Local Auditors

SAI India is also the primary auditor for Regional Governments.  In respect of the Local Fund Auditors, SAI India provides Technical Guidance and Support (TGS), establishes Audit Standards and Guidelines, provides regular training and capacity-building programs to enhance the knowledge, skills and competences of auditors involved in the local audits.

Сooperation between the Comptroller and Auditor General and the Local Fund Auditor under Technical Guidance and Support arrangement may include the following activities:

• The Local Fund Auditor prepares an Annual Plan for audit of Panchayati Raj Institutions and Urban Local Bodies and forward it to the Accountant General (Auditor) of the State for advice.
• The audit of Panchayati Raj Institutions and Urban Local Bodies is performed by the Local Fund Auditor in line with guidelines prescribed by the Comptroller and Auditor General.
• Copies of draft Audit reports are sent by the Local Fund Auditor to the Comptroller and Auditor General for review (to obtain comments regarding the organization of the audit and the quality of the reporting).
• The Comptroller and Auditor General conducts test-check of some of Panchayati Raj Institutions and Urban Local Bodies in order to provide technical guidance. The report of the test- check would be sent to Local Fund Auditor to correct the identified deficiencies.
• All serious violation of financial rules and fraud noticed by Local Fund Auditor will be intimated to the Comptroller and Auditor General.
• The Local Fund Auditor shall develop, in consultation with the Comptroller and Auditor General, a system of internal control.
• The Comptroller and Auditor General undertakes training of the Local Fund audit staff.