AUDITING

1
PART 4

• AUDITING
• IN
• PUBLIC SECTOR ORGANISATIONS

2
Framework of Accountability

• ACCOUNTABILITY

Accounting
Budgeting
Auditing
(Source Rauf, et al, 2003)
3
Introduction

• Auditing (Auditing Practice Board)
• as well as financial statements, audit and
  related service engagements may involve other
  financial information, or non-financial
  information, such as
• - the adequacy of internal control system
• - compliance with statutory, regulatory and
  contractual requirements
• - economy, efficiency and effectiveness in the
  use of resources (value for money auditing)
  and
• - environmental practices

4
Introduction

• However the extent of public sector audit usually
  goes beyond statutory audit (attestation of
  financial audit) that includes
• Financial and Regulatory Audit
• Financial Audit ensures that systems of
  accounting and financial control are efficient
  and operating properly and financial txn are
  properly accounted
• Regulatory Audit (Compliance Audit) - review of
  the operations to ensure compliance with
  applicable policies, plans, procedures, laws, etc
• Economy and Efficiency Audit
• To highlight any wasteful, extravagant or u
  unrewarding expenditure
• Effectiveness Audit
• An assessment whether programs or projects meet
  the established policy or goals
• Asset Management Audit
• review the safeguarding of assets and verify the
  existence of such assets
• Also include review of cash management, stock
  control, etc

5
Functions of Auditing

• Assist the management in the discharge of its
  duties
• Report to the public on the effectiveness of the
  activities of government managers
• Report to other levels of government on the use
  of funds provided and
• Report on the results of operation and financial
  position of the government.

6
Types of Auditors

• Internal Government Auditor
• IA report to the management of the organization
• Primary role to ensure that good IC system is
  in place and to improve operations
• External Government Auditor
• Two types
• independent auditor within a government unit eg
  auditing the govt agencies programs, functions or
  activities
• independent auditor from another level of
  government eg environmental auditor
  investigating the spending of environmental
  allocations
• Private Sector Auditors
• hired by government to assess and report on some
  aspects of the programs
• Also hired to assess and give opinion on their
  the Financial Statements

7
Auditing Standards

• Standards for the Professional Practice of
  Internal Auditing
• Independence of internal auditing dept from the
  activities audited and objectivity of internal
  auditors
• Proficiency of internal auditors and the
  professional care they should exercise
• Scope of internal audit work
• Performance of the internal auditing assignments
• Management of the internal auditing department

8
Auditing Standards

• Government Auditing Standards
• The purposes
• Scope of audit is sufficiently broad to ensure
  accountability
• Audit is conducted by personnel who have
  necessary skill
• Independence of auditor is maintained
• Applicable standards are followed
• The audit organization has an appropriate
  internal control
• The audit organization undergoes an external
  quality control review

9
Audit Process

• A typical audit process in public sector
  organization would include the following six
  stages
• Opening Conference
• Matters discussed
• - Scope of audit
• - Specific areas required to be examined
• - procedures of audit
• - establishment of appropriate communication
  channel
• - improprieties that have occurred since the
  last audit
• - reporting procedures for reporting
  preliminary, draft, and final reports, and the
  need for responses from management

10
Audit Process

• Preliminary Audit Survey
• Audit team conducts a survey of the
  organisational and programme information to
  develop a complete understanding of the org. and
  its internal control system
• Fieldwork Phase
• Main audit work (on-site audit work) and
  expected to consume the largest amount of time

11
Audit Process

• Preliminary Audit Findings
• - Initially discuss any finding with agency
  managers before reporting in the draft report to
  agency officials
• - Responses by agency management should be
  provided and factual differences should be
  resolved before the audit team leaves

12
Audit Process

• Closing Conference
• To discuss with the agency managers on the
  managements response on the preliminary audit
  findings and how auditors will incorporate them
  in the draft report
• This is also the last avenue for managers to
  communicate with the audit team
• Draft and Final Reports
• Draft Report sent to agency management for
  formal response, which will be included in the
  final draft report
• Final Report written in a fair and objective
  manner and conveying the true sense of what has
  occurred in the entity

13
Internal Audit

• Auditing Practices Comm. (1990)
• An independent appraisal function established by
  the management of an organisation for the review
  of the internal control system a s a service to
  the organisation. It objectively examines,
  evaluates and reports on the adequacy of internal
  control as a contribution to the proper,
  economic, efficient and effectiveness use of
  resources

14
Internal Audit

• independent appraisal function
• Without fear and unwarranted repercussion
• Unrestricted access to highest level of
  management
• Freedom to report to all senior management
• Objectivity
• Independent mental attitude exercise judgement,
  express opinions and present recommendations with
  impartiality
• Conclusions and analysis are not influenced by
  feelings or personal opinion

15
Internal Audit

• examines, evaluates and reports on the adequacy
  of internal control
• The focus of the audit - to objectives IC
  system
• Ensure adherence to management policies and
  directives
• Safeguard assets
• Secure relevance, reliability and integrity of
  information as well as completeness and accuracy
  of records
• Ensure compliance with statutory requirements

16
Other Characteristics of IA

• Professional skepticism
• - an attitude of doubt of evidence presented
  until fully satisfied by its validity
• - exercise due professional care
• Innovative ability
• - eg the use of the latest technology
• Minimising confrontation
• - emphatic communication with understanding the
  environment and the people

17
Performance Auditing (PA)

• The objectives
• The emphasis on the value for money (VFM)
  auditing is to ensure resources are properly
  deployed and managed.
• As an an audit function (an independent audit
  review) to secure economy, efficiency and and
  effectiveness in the use of resources.
• To provide a substitute for a competitive market
  and relates to the concept of 3Es

18
Economy Efficiency Audit

• Economy
• acquiring appropriate resources for minimum cost
• (a measure of input to achieve certain
  objectives)
• Efficiency
• ensuring that maximum output is obtained from
  the resources or a minimum resources used to
  achieve the given level of output
• (the optimum with economy and effectiveness)
• Procedures
• Similar to other types of audit
• Planning
• Reviewing accounting and internal control systems
• Obtaining audit evidence
• Review financial statements
• Producing reports

19
Economy Efficiency Audit

• Two issues
• Measurement of output sometimes involve value
  judgment (subjectivity) efficiency become
  matters of opinion emphasis more on verifying
  the output measures
• Measurable (physical units)
• E.g. refuse disposal unit or refuse disposal
  service
• Implicit and not measurable
• E.g. efficiency of a service dept (Accounting
  department)
• The need of financial information implicit
• The state of internal control system
• emphasis on the existence, compliance and meeting
  the objectives of IC as the responsibility of the
  management is to establish proper IC
• E.g. appointment procedures
• Review would likely include
• Authority to advertise appointments
• Means of advertising internal circulation or
  external
• Who draw up the short listings
• Who is responsible to interview?
• Who ultimately appoint

20
Effectiveness Audit

• Effectiveness
• the output achieves the desired output or rather
  about achieving objectives (ultimate output of
  service or the impact on the customer
• The practice of this audit is still limited
  simply because the objectives of certain programs
  or policy are very often not clearly stated.
• In performing the audit function, the following
  questions are crucial (PW, 1990)
• Is there any clear identification or ranking of
  goals?
• Can progress towards goals be objectively
  assessed?
• Is the target service level (how activities
  contribute to goal) clearly known?

21
Effectiveness Audit

• However, impact or outcome could be possibly
  evaluated using the followings
• Proxy measures of output
• Evaluation by customers
• Evaluating the process rather then the output
• Question
• Is it worth conducting effectiveness audit?