THE PUBLIC SECTOR AUDIT PROCESS
How to engage with relevant audit
reports and what the audit opinions
mean?
Presentation to Select Committee on
Finance
Imran Vanker
Business Executive: Gauteng
3 June 2005
AGENDA
• Oversight process
• The audit process
• Types of audits
• Reporting
• Provincial General Report
OVERSIGHT ROLE IN CONTEXT
Drafting P hase
Legislative P hase
Implementatio n P hase
Audit and Oversight P hase
Med ium Term Strategic Framewo rk
Med ium Term Macro & Fiscal Framework
Med ium Term Exp end iture
Framework
Tabling
Parliamentary
Amend ments
Annual F iscal F ramework
Revenue Proposals
Med ium Term Bud get
Polic y Statement
Tabling
Tax Bill
Tax Act
Consolidated Annual
Financial Statements
Parliamentary
Amend ments
Divis io n of Revenue
Tabling
Tabling
Division of Revenue
Bill
Budget R eview
Estimates of
Natio nal Exp end iture
Departmental Strategic
Plans
Spend ing P roposals
Tabling
Tabling
Departmental Strategic
Plans
Appropriation Bill
Parliamentary
Amend ments
Parliamentary
Amend ments
In-year revis io n
and ad justments
Tabling
Adj. Appro’tion Bill
Division of
Revenue Act
Progress Reports on
Cond itio nal Grants
Quarterly P erformanc e
Reports
Appropriation
Act
Mo nthly & Q uarterly
Financ ial R eports
Adjustment
Appro’tion Act
Departments’
Annual Reports
Departments’ Annual
Financial Statements
Aud itor-G eneral’s
Report
AUDIT PROCESS
•
An audit can be defined as an official
examination of accounts or as a
searching examination
AUDIT PROCESS continued…
• Objective
of
audit
of
financial
statements is to express an opinion as
to whether statements are a fair
presentation
• Process is underpinned by professional
requirements
throughout,
i.e.
independence, objectivity, confidentiality
and professional behaviour.
TYPES OF AUDITS
•
•
•
•
•
Comprehensive (Regularity) auditing
Performance auditing
Forensic auditing
Sustainable development auditing
Integrated auditing
TYPES OF AUDITS continued…
Comprehensive Audit
• Comprises both financial auditing and the
consideration and testing of compliance with laws
and regulations
• Output of an comprehensive audit is the expression
of an opinion of the financial statements of an entity
TYPES OF AUDITS continued…
Performance Audit
Focuses on evaluating measures implemented by
management to ensure economic procurement of
goods and services and efficient and effective
application of the same
Forensic Audit
An independent process to prevent or detect
economic crime in the public sector
TYPES OF AUDITS continued…
Sustainable Development Audit
Uses existing auditing disciplines but focuses on the
social and environmental aspects of business
processes
Integrated Audit
Independent process whereby the principles of
preceding audit disciplines are co-ordinated and
incorporated into one process
AUDIT PROCESS
AUDIT PROCESS
PreEngagement
Activities
Audit Planning
Execution
Reporting
AUDIT PROCESS
Pre-Engagement
Activities
Audit Planning
Execution
Reporting
• PRE-ENGAGEMENT ACTIVITIES
– Consider changes in circumstances of
previously audited entities
– Consider circumstances of new
engagements (identify risks)
– Determine skills and competency
requirements
– Establish terms of engagement and
communicate to management
AUDIT PROCESS
Pre-Engagement
Activities
Audit Planning
Execution
Reporting
• AUDIT PLANNING
–
–
–
–
–
–
–
Obtain knowledge of the business
Obtain understanding of systems and processes
Assess financial risks facing the entity
Evaluate work of internal audit
Evaluate financial management
Formulate audit approach
Communicate audit plan to management
AUDIT PROCESS
Pre-Engagement
Activities
Audit Planning
Execution
Reporting
• EXECUTION OF THE AUDIT
– Testing of controls
– Detailed test of transactions and balances
– Continual communication
– Letter to management to highlight key audit
findings
– Final audit steering committee meeting to
clarify findings
AUDIT PROCESS
Pre-Engagement
Activities
Audit Planning
Execution
Reporting
AUDIT REPORT AS OVERSIGHT TOOL
• Audit assignment, nature and scope
paragraph
– common in all reports
• Qualification paragraph
– findings on which qualified opinion is based
– Two types of reports
• unqualified
• modified
AUDIT REPORT AS OVERSIGHT TOOL
continued…
Unmodified
“clean” report
No further
audit comment
AUDIT REPORT AS OVERSIGHT TOOL
continued…
Modified reports
Matters that do not affect the
auditor’s opinion
Additional
reporting
requirements
To highlight a
matter
AUDIT REPORT AS OVERSIGHT TOOL
continued…
Modified reports
Matters that do affect the auditor’s opinion
Limitation of
scope
Effect is so material
and pervasive
and/or fundamental
that auditor is
unable to express
an opinion
Disclaimer of
opinion
Disagreement with
management
Effect is not so
material and
pervasive and/or
fundamental as to
require disclaimer of
opinion
Qualified
opinion
Effect is not so
material and
pervasive and/or
fundamental as to
require adverse
opinion
Qualified
opinion
Effect is so material
and pervasive
and/or fundamental
that auditor
concludes that a
qualified opinion is
inadequate
Adverse
opinion
AUDIT REPORT AS OVERSIGHT TOOL
continued…
• Emphasis of matter paragraph
– Matters affecting financial
• Going concern
• Fraud or suspected fraud
– Matters not affecting financials
•
•
•
•
•
Unauthorised expenditure
Irregularities and losses
Weaknesses in internal control
Financial management
DORA
AUDIT REPORT AS OVERSIGHT TOOL
continued…
• Qualification and emphasis of matter
paragraphs important to PAC
• Questions on:
– Reasons for shortcomings
– Whether poor controls gave rise to
losses/irregularities
– Steps taken to regularise
– Financial misconduct
– Departmental investigations
PROVINCIAL GENERAL REPORT HIGHLIGHTS
This report is divided into three key areas:
• Section 1: Analysis of Provincial Departments
• Section 2: Analysis of financial information
and audit findings
• Section 3: Specialised audit services
PROVINCIAL GENERAL REPORT
HIGHLIGHTS continued…
Section 1 – Analysis of provincial departments
• Votes of provincial departments were not
standardised;
• Consequently comparisons between provinces
for benchmarking purposes were difficult to
perform; and
• The number of unqualified audit opinions
decreased from 51% to 37% for all three sectors
PROVINCIAL GENERAL REPORT
HIGHLIGHTS continued…
Section 2 – Analysis of financial information
and audit findings
• Asset management is not being effectively
addressed;
• Personnel expenditure representing 47% of total
expenditure is another key area identified during
the audits;
• Internal audit/audit committees
PROVINCIAL GENERAL REPORT
HIGHLIGHTS continued…
Section 2 – Analysis of financial information
and audit findings continued…
• Transfer payments; and
• Unauthorised, irregular and fruitless and wasteful
expenditure reported on amounted to 3,5%
(R5,833 billion) of the total expenditure of R167,4
billion.
PROVINCIAL GENERAL REPORT
HIGHLIGHTS continued…
Section 3 – Specialised audit services 03-04
• Special investigations
• Performance audits
• Performance information review
- Highlights fundamental
deficiencies. This includes poor
linkage to budget commitments,
lack of measurable objectives
and lack of explanation of
deviations from planned targets
and outputs.
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Thank you
for your attention and participation