Implementing the Siyanqoba Strategy

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PRESENTATION TO SCOPA
THE AUDIT PROCESS
By the Auditor-General Mr Shauket Fakie 21 August
2002
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WHAT IS AN AUDIT?

• The dictionary defines an audit as an
• Official examination of accounts a searching
  examination.
• An audit can properly be described as the
  independent assessment of public sector financial
  statements. The Auditor-General must then
  express an opinion on the fairness or accuracy of
  these statements as well as the extent of
  compliance with rules, laws and regulations.

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TYPES OF GOVERNMENTALAUDITING

• Comprehensive Auditing
• Environmental Auditing
• Forensic Auditing
• Integrated Auditing

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AUDITING CONCEPTS
COMPREHENSIVE AUDITING
REGULARITY AUDITING Financial Compliance
PERFORMANCE AUDITING Economy Efficiency Effectiven
ess
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DEFINITION OF FINANCIAL AUDITING

• The objective of a financial audit is to enable
  the auditor to express an opinion on the fair
  presentation in the financial statements of an
  entity's financial position on a certain date,
  and on the results of its operations and related
  cash flows for the period ended on that date.

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DEFINITION OF COMPLIANCE AUDITING

• The objective of the act defining this as a
  specific focus area is to enable the auditor to
  report on an entitys compliance with relevant
  laws, rules and regulations.
• Auditor-General Act, No.12 of 1995

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COMPLIANCE AUDIT

• Audit and report the compliance with laws and
  regulations which have a direct financial impact
• Although a separate opinion is not expressed the
  scope of compliance work remained unchanged
• AG report on the fair presentation of the AFS
• Prevent possible public confusion

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DEFINITION OF PERFORMANCE AUDITING

• An independent auditing process to evaluate the
  measures instituted by management to ensure that
  allocated resources are procured economically and
  utilised efficiently and effectively and, if
  necessary, to report thereon.

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DEFINITION OF FORENSIC AUDITING

• The role of forensic auditing is to facilitate
  the prevention, detection and investigation of
  fraud and corruption in the public sector.
• Forensic audit improves the quality and coverage
  of governmental auditing by taking cases of
  alleged fraud and corruption to a more advanced
  stage of readiness for the investigative
  agencies.

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DEFINITION OF INTEGRATED AUDITING

• An integrated audit is an independent audit
  process whereby the principles of the above audit
  disciplines are coordinated and incorporated into
  one process.

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AUDITING STANDARDS

• Regularity audit is conducted in accordance with
  South African Auditing Standards (issued on
  behalf of the Public Accountants and Auditors
  Board (PAAB)).
• Other audits i.e compliance and performance
  audits are conducted in accordance with INTOSAI
  auditing standards.
• The audit provides a high, but not absolute
  assurance to the users of the quality of the
  information contained in the AFS.
• Audits conducted by/on behalf of the Office are
  subject to quality control processes - internally
  and externally (PAAB). This provides additional
  assurance that the correct opinion is expressed.

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REGULARITY AUDITING

• STEPS OF THE AUDIT PROCESS-
• The audit process can be divided broadly into
  four categories
• Pre-engagement activities
• Planning
• Performance of audit strategy (execution)
• Conclusion and reporting.

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AUDIT RISK

• Audit risk is the risk that the auditor gives an
  inappropriate audit opinion when the financial
  statements are materially misstated. There are 3
  components
• Control risk
• Detection risk
• Inherent risk

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MATERIALITY

• Information is material if its omission or
  misstatement could influence the decisions of
  users i.e Portfolio Committees, SCOPA and the
  Department.
• Differs from auditee to auditee
• Is influenced by risks identified
• High audit risk low materiality and vice versa
• Is used to determine reporting items in the audit
  report
• Is used to determine the audit opinion to be
  expressed

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REGULARITY AUDITPROCESS

• Assess engagement risk
• Determine skill and competency requirements of
  engagement team
• Establish terms of engagement
• Information gathering
• Assessment of inherent risk
• Determine reliance on internal control system
• Determine planned level of substantive testing
• Determine audit strategy

Pre-engagement
Planning
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REGULARITY AUDITPROCESS (continued)

• Test of controls
• Substantive testing
• Final analytical review
• Obtain management representation letter
• Audit conclusion
• Perform subsequent events review
• Reporting

Execution
Reporting
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REPORTING

• Informal queries
• Formal Management Letter
• Audit Report

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EMPHASIS OF MATTER

• Purpose and effect
• Highlight/bring to attention a specific problem
  or matter already included in the AFS.
• Elaborate information already included in the
  AFS.
• Not material and has no impact on the audit
  opinion.
• Consists of 2 categories namely
• Matters affecting the AFS
• Going concern problem
• Other significant uncertainly which may impact on
  the AFS.

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EMPHASIS OF MATTER - Continued

• Matters not affecting the AFS
• Irregularities, material losses, unauthorised
  expenditure, matters in public interest, lack of
  internal control etc.
• Non-compliance with laws and regulations
• Financial management or other audit flavours
• Results of other audits

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PFMA REQUIREMENTS

• PUBLIC FINANCE MANAGEMENT ACT, NO. 1 OF 1999
• 40(1)The accounting officer for a department -
• must prepare financial statements for each
  financial year in accordance with generally
  recognized accounting practice
• must submit those financial statements within two
  months after the financial year to-
• (i) the Auditor-General for auditing
• 40(2)The Auditor-General must audit the financial
  statements referred to in subsection (1) and
  submit an audit report on those statement to the
  accounting officer within two months of receipt
  of the statements.

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PFMA REQUIREMENTS(continued)

• MEASURES TO COMPLY WITH PFMA REPORTING
  REQUIREMENTS
• TIMING OF AUDIT PROCESS
• INTERIM AUDITS
• PLANNING PHASE
• TESTING OF CONTROLS
• SUBSTANTIVE TESTING (LIMITED TO PERIODS
  AVAILABLE)
• FINAL AUDIT (ROLL-FORWARD)
• CONTRACTING OUT OF AUDITS TO PRIVATE FIRMS
• CONTRACTING IN OF PRIVATE FIRM STAFF MEMBERS

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REGULARITY AUDIT CYCLE
Pre-engagement activities
Next financial year
Follow-up
Resolution
Planning
Regularity Audit cycle
Public Accounts Committee
Execution
Management Letter Preparation
Report to Legislature
Report to department
Discussion of draft management letter
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AUDIT STEERING COMMITTEES (ASC)

• Discuss the nature and scope of the audit
• Identify contact persons (auditor and the
  auditee).
• Giving the auditee the opportunity to provide
  inputs.
• Presenting the budget for the audit time and
  costs to the auditee.
• Discuss the management letter and audit report
  and deal with queries.
• Discuss and clear up of all deficiencies or
  irregularities revealed during the audit.
• Problems encountered during the audits, e.g.
  availability of records, should receive
  attention.

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AUDIT COMMITTEES (AC)

• Review and endorse IA charter
• Review significant transactions not normally part
  of the entitys business
• Review annual financial statements
• Strengthen the independence and objectivity of
  the external auditor
• Improved communication and increased contact,
  understanding and confidence between management
  of the auditee and the auditor
• Follow up on recommendations made by the EA
• Review the audit plan (Not approve)
• Identify other possible risk areas

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INTERNAL AUDIT

• Reliance on Internal Audit (IA) depends on
• Organisational Status (Independent)
• Scope of IAs work
• Technical Competencies
• Due professional care
• External auditor (EA)
• IAs objectives are different than the EAs
• Obtain understanding of internal audit activities
• Assess activities and reports
• Effective IA could reduce EAs work
• If reliance is placed the EA test the work
  performed by IA
• Benefits of effective IA can exceed the cost

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PERFORMANCE AUDITING

• ECONOMY
• EFFICIENCY
• EFFECTIVENESS

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ECONOMY

• REFERS TO THE ACQUISITION OF RESOURCES IN THE
  RIGHT QUANTITY, OF THE RIGHT QUALITY, AT THE
  RIGHT TIME AND PLACE, AT THE LOWEST POSSIBLE
  COST.

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EFFICIENCY

• REFERS TO THE RELATIONSHIP BETWEEN INPUTS AND
  OUTPUTS.
• TWO POSSIBILITIES
• - Maximisation of outputs with given inputs.
• - Minimisation of inputs for given outputs.

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EFFECTIVENESS

• REFERS TO THE EXTENT TO WHICH
• SET OBJECTIVES ARE ACHIEVED.

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MANDATE TO CONDUCT PERFORMANCE AUDITS

• S3(3) Auditor-General Act
• The Auditor-General may at his/her discretion
  determine the nature and extent of the audits to
  be carried out and request the details and
  statements of account which he or she considers
  necessary.
• S3(4)
• The Auditor-General shall reasonably satisfy
  himself or herself that -
• S3(4)(d)
• Satisfactory management measures have been taken
  to ensure that resources are procured
  economically and utilised efficiently and
  effectively.

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SOME INDICATORS TO DETERMINE NEED FOR PERFORMANCE
AUDIT

• Where performance is low and costs are high.
• Where fraud or other irregularities have taken
  place.
• Where Parliament or the public have a special
  interest.
• Where results of previous audits have indicated
  deficiencies.

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PROCESS OF DISCLOSURE

• Section 4(2) of Auditor-General Act, 1995
• The Auditor-General shall, not less than 7 days
  before the date on which he submits a report to
  Parliament or a provincial legislature, transmit
  a copy thereof to-
• (a) each Minister
• (b) the MEC of a province who is entrusted with
  the financial matters of such province
• (c) the chairperson of the council or board of
  a statutory body and
• (d) the accounting officer, concerned.

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AUDIT REPORTS 2001/02

• Vote Reports
• Total vote reports 33
• Finalised and handed over 26 79
• Not finalised 7 21
• General Reports
• General Report I September 2002
• General Report II October 2002

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AUDIT REPORTS 2001/02 (continued)

• Special Reports (Performance)
• Public Reports 2
• Consultants
• Learner Support Administration
• Anticipated additional reports 2/3
• Miscellaneous Accounts (Public Entities)
• Available September 2002 30
• Available October 2002 14