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PRESENTATION TO SCOPA

THE AUDIT

PROCESSBy the Auditor-GeneralMr Shauket Fakie21 August 2002

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WHAT IS AN AUDIT?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 GOVERNMENTALAUDITINGTYPES OF GOVERNMENTALAUDITING

Comprehensive Auditing

Environmental Auditing

Forensic Auditing

Integrated Auditing

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AUDITING CONCEPTSAUDITING CONCEPTS

COMPREHENSIVE AUDITING

REGULARITYAUDITING

FinancialCompliance

PERFORMANCEAUDITING

EconomyEfficiency

Effectiveness

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DEFINITION OF FINANCIAL AUDITINGDEFINITION 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 AUDITINGDEFINITION OF COMPLIANCE AUDITING

The objective of the act defining this The objective of the act defining this as a specific focus area is to enable as a specific focus area is to enable the auditor to report on an entity’s the auditor to report on an entity’s compliancecompliance with relevant with relevant laws, ruleslaws, rules and and regulationsregulations..

• Auditor-General Act, No.12 of 1995

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COMPLIANCE AUDITCOMPLIANCE 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 AUDITINGDEFINITION OF PERFORMANCE AUDITING

An An independentindependent auditingauditing process to process to evaluate the evaluate the measuresmeasures instituted instituted by by managementmanagement to ensure that to ensure that allocated resources are procured allocated resources are procured economicallyeconomically and utilised and utilised efficientlyefficiently and and effectivelyeffectively and, if necessary, and, if necessary, to to reportreport thereon. thereon.

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DEFINITION OF FORENSIC AUDITINGDEFINITION 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 AUDITINGDEFINITION 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 STANDARDSAUDITING STANDARDS

Regularity audit is conducted in accordance with South African Auditing Standards (issued on behalf of the Public Accountant’s and Auditor’s 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 AUDITINGREGULARITY 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 RISKAUDIT 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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MATERIALITYMATERIALITY

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 AUDITPROCESSREGULARITY 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)REGULARITY AUDITPROCESS (continued) Test of controls Substantive testing Final analytical review

Obtain management representation letter

Audit conclusion Perform subsequent events review Reporting

Reporting

Execution

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REPORTINGREPORTING

Informal queries

Formal Management Letter

Audit Report

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EMPHASIS OF MATTEREMPHASIS OF MATTERPurpose 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:

1 Matters affecting the AFS Going concern problem Other significant uncertainly which may impact on

the AFS.

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EMPHASIS OF MATTER - ContinuedEMPHASIS OF MATTER - Continued

2 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 REQUIREMENTSPFMA REQUIREMENTSPUBLIC FINANCE MANAGEMENT ACT, NO. 1 OF

199940(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)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 CYCLEREGULARITY AUDIT CYCLE

Regularity Audit cycle

Resolution

Follow-up

Execution

Planning

Public AccountsCommittee

Discussion of draftmanagement letter

Pre-engagement activities

Report toLegislature

Report to department

Next financial

year

Management Letter Preparation

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AUDIT STEERING COMMITTEES (ASC)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)AUDIT COMMITTEES (AC)

Review and endorse IA charter Review significant transactions not normally part of the

entity’s 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 AUDITINTERNAL AUDIT

Reliance on Internal Audit (IA) depends on Organisational Status (Independent) Scope of IA’s work Technical Competencies Due professional care

External auditor (EA) IA’s objectives are different than the EA’s Obtain understanding of internal audit activities Assess activities and reports Effective IA could reduce EA’s 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 AUDITINGPERFORMANCE AUDITING

ECONOMY

EFFICIENCY

EFFECTIVENESS

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ECONOMYECONOMY

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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EFFICIENCYEFFICIENCY

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 EFFECTIVENESS

REFERS TO THE EXTENT TO WHICH

SET OBJECTIVES ARE ACHIEVED.

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MANDATE TO CONDUCT PERFORMANCE AUDITSMANDATE TO CONDUCT PERFORMANCE AUDITS

S3(3) Auditor-General ActThe 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

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 DISCLOSUREPROCESS 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

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)

AUDIT REPORTS 2001/02 (continued)

Special Reports (Performance) Public Reports 2

Consultants

Learner Support Administration Anticipated additional reports2/3

Miscellaneous Accounts (Public Entities)

Available September 2002 30 Available October 2002 14