THE PUBLIC SECTOR AUDIT PROCESS How to engage

THE PUBLIC SECTOR AUDIT PROCESS How to engage with relevant audit reports and what the audit opinions mean? Portfolio Committee on Do. D Briefing 19 October 2005 RP Mosaka/ C Botes Parliamentary Service Unit Office of the Auditor-General

INDEX • Definition • Types of audits • The audit process • Reporting

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 attesting whether the controls are in place or not, and if in place, whether they are: a) Being implemented (compliance), or b) Effective, i. e. whether they are working or not

TYPES OF AUDITS • Comprehensive (Regularity/Financial) 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 – VFM audits 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 Pre. Engagement 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 Disagreement with management Limitation of scope Effect is so material and pervasive and/or fundamental that auditor is unable to express an opinion Disclaimer of opinion 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 statements • 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 both PACs and PCs – to ensure that the accountability and oversight loop is complete • For Example - Questions on: – Reasons for shortcomings – Whether poor controls gave rise to losses/irregularities – Steps taken to regularise – Financial misconduct – Departmental investigations – Whether subsequent budgets (and therefore strategic plans) address shortcomings raised/observed before