NEWSLETTER ● Special Issue December 2003 ● page 1

Introduction

In this issue of the Audit Newsletter, we cover the two workshops which have taken place since the last issue of the newsletter published in September 2005. On September 28-30 2005, the Hungarian Supreme Audit Office hosted the workshop on the Audit of EU Structural and Cohesion Funds. SIGMA would like to thank Dr Arpad Kovacs, President, for kindly hosting the workshop, and Janos Revesz, Zsofia Hangyal and the rest of the international team for putting together such an excellent workshop. This was followed by the worskhop on the Audit of Public Sector Financial Statements generously hosted by the National Audit Office of Malta from 26-28 October 2005. Our special thanks on this occasion go to Mr Joseph Galea, Auditor General of the Maltese NAO, and to Mr. Brian Vella and his team for ensuring that the workshop ran so efficiently and effectively. Sigma would also like thank Mr Hubert Weber, President of the European Count of Auditors, and Chris Kok, Director of External Relations, for their continued and much appreciated support for the workshops. The information and recommendations arising from the workshops are made available to as many of our SAI colleagues as possible. SIGMA will make all documents from workshops available on the SIGMA closed EDG, to be found on the SIGMA audit Web site www.oecd.org/gov/sigma as well as the Web sites of the hosting SAIs. In addition, a new CD Rom has been produced to accompany this newsletter containing information and reports from all the previous workshops to date. All SAI Presidents, Liaison Officers and past participants of workshops will receive a copy. Finally, let us take this opportunity to wish all our readers a happy Christmas and prosperous 2006.

All the best from Sigma

(left) Dr Arpad Kovacs, President, Hungarian State Audit Office (right) Mr Gejza Halasz, Member for Hungary at the ECA

Mr Joseph Galea, Auditor General, Maltese National Audit Office

This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union, and do not necessarily reflect the views of the OECD and its Member countries or of the beneficiary countries participating in the SIGMA Programme.

Issue no. 12

AUDIT NEWSLETTER ● November 2005 For the Working Groups of the Presidents of the Supreme Audit Institutions of European Union

New Member States and Candidate Countries, Albania, fYROM & the European Court of Auditors Produced by SIGMA and the European Court of Auditors

SIGMA Support for Improvement in Governance and Management

A joint initiative of the OECD and the European Un ion, principally financed by the EU

European Court of Auditors

AUDIT NEWSLETTER ● November 2005 ● page 2

Conclusions from the Budapest Workshop on Auditing EU Structural and Cohesion Funds

Although the European Union (EU) is one of the richest parts of the world, there are striking internal disparities of income and opportunity between its regions. The entry of 10 new Member States in May 2004, whose incomes are well below the EU average, has widened these gaps. The purpose of the Structural and Cohesion Funds is to contribute to the overall harmonious development of the EU. The funds aim to strengthen economic and social cohesion in the EU by reducing disparities between the levels of development in the various regions. Their pre-accession equivalents have a similar purpose in respect of candidate countries, as well as preparing those countries for handling Structural and Cohesion Fund monies when they become Member States. The European Commission’s latest proposals for the regional and cohesion policy instruments for the new programming period from 2007 to 2013 envisage spending of some €336 billion, which would exceed one third of the total EU budget.

(Left to right); A. Kovacs (President, Hungary SAO), G. Halasz (Member, ECA), N. Treen (Sigma), C. Maynard (ex-ECA), R. Wilms and N. Aimi (EC DG Regio)

The workshop - who and why?

Representatives of the SAIs from the new Member States (MS) and Candidate Countries, along with Albania and FYROM, met in Hungary for three days to discuss and exchange experiences on the subject of auditing EU Structural and Cohesion funds. Given the nature of the topic and the variety of countries with regard to their experiences of auditing such funds, the subject was going to be of interest in different ways for the participants:

• New MS who were starting to implement the Structural and Cohesion Funds. • New MS with varying experience of their pre-accession equivalents. • Candidate Countries with and without experience of pre-accession instruments. • Other countries with little or no experience of auditing such funds but who could expect to be involved in this area in the

future. Given the differing backgrounds of the participants in terms of experience in auditing EU Funds, a special emphasis was placed on discussing good practices when first building up a capacity and capability for the audit of such funds, whether in the context of a Candidate Country or a new Member State. The presentations, from the European Commission (DG Regio) and the ECA, and old and new MS, were intended to facilitate an exchange of knowledge and practical experiences of current practices and standards for such audits. And, despite the differences in backgrounds, a large number of common points emerged during discussions.

Significant management and control weaknesses There was a general consensus that implementation in the new Member States or Candidate Countries of the Structural and Cohesion Funds (or their pre-accession equivalents) under the regulations currently in force faces a number of important potential management and control weaknesses.

Some of the workshop participants

These include notably:

• Generally poor understanding of what were perceived to be too complex regulations (at both EU and national level),

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compounded by poor or lacking written procedures. • Often incomplete or uncoordinated information systems. • Lack of an adequate audit trail. • Insufficient checks, particularly on the concrete progress of projects on the ground. • Interlinked human resource problems, including high workload, low motivation, high turnover, lack of experience and

inadequate training. • Inadequate communication between the many bodies involved.

Such weaknesses, according to the experience of both the Commission and the ECA in the “old” Member States, have led to significant cases of ineligible expenditure, failure to respect procurement rules, etc. In some cases these have led to significant amounts of EU funds being repaid by Member States to the EU budget. Many corrective measures were proposed, of which the most common were:

• Establishing good written procedures and guidance, particularly on the detection and treatment of irregularities; • Better training of staff on the applicable regulations and procedures. • Taking specific measures to motivate staff, and manage and supervise their work. • Increasing the level of on the spot checks on the reality of project implementation. • Better analysis of errors and analysis of why existing costly extensive checks are not working. • Improving communication between the bodies involved.

(on left) G. Cipriani (Director, ECA) and J. Topka (Czech Rep) during a group exercise

(on left) Z. Hangyal (Hungary) and E. Bright (Sigma)

Structural problems There was a general perception that the Structural and Cohesion Funds suffered from excessive bureaucracy and complexity, sometimes at EU level and sometimes at national level, to the extent that the take-up of such funds at national or regional level can be inhibited. There was a need for simplification. Some of the most important problems indicated were:

• Too many funds with apparently overlapping objectives, each with its own set of complex rules. • Too many bodies involved, at both EU and national levels, together with a lack of clarity concerning their respective roles. • A tendency to focus on eligibility of expenditure (with complex rules) rather than achieving objectives. • The lack of a properly integrated control system based on COSO principles.

The way forward

The Commission’s proposals of July 2004 for somewhat simplified and more integrated regional and cohesion policy instruments were touched on in the context of the ECA’s opinion on those proposals (http://www.eca.eu.int/audit_reports/opinions/docs/2005/05_02en.pdf )

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These proposals, which would give more responsibility to Member States for the management of Structural Funds and would largely substitute national eligibility rules for detailed EU rules at an operational level, were generally welcomed. However, views were expressed that the proposals were not radical enough in terms of simplification, and doubts were expressed about the adequacy of the accountability towards the EU. Views differed considerably on the level of supervision which the Commission, the EU institution with final responsibility for the implementation of the EU budget, needed to exert over the actions of the Member States. However, there was considerable support for a properly integrated control system of the kind advocated by the ECA in its “single audit” opinion. ( http://www.eca.eu.int/audit_reports/opinions/docs/2004/04_02en.pdf ) Some of the ideas put forward with a view to achieving further simplification included:

• A single Structural Fund, focussed on the primary objective of reducing the disparities between the levels of development of the various EU regions.

• Fixing of specific objectives for each country and/or region, consistent with the financial resources and administrative capacity available.

• Fewer bodies to be involved in management and control at both EU (one DG only) and national levels, and communication and coordination to be improved between those that are involved.

• Clear division of roles between Member States and the Commission, with the latter doing whatever is necessary to ensure high-level monitoring and evaluation accountability towards the EU.

• Fewer, simpler rules to be applied to the use of EU fund. • The principle of “single audit” to be applied wherever possible.

Some proposals went as far as advocating the replacement of specially defined EU programmes and projects by specified EU-supported spending targets within national budgets, linked to the monitored achievement of defined measurable objectives throughout the programming period concerned.

(standing) G. Paterson of ECA (clockwise sitting) A. Zoldreti (Hungary), M. Naumoski (fYROM), J. Polak (Czech Republic)

Challenges faced by SAIs It is clear that, from a practical point of view, many SAIs face problems in carrying out audits of expenditure supported by the EU Structural and Cohesion Funds or their pre-accession equivalents. It involves dealing with a new subject area and having to become familiar with detailed and often complicated legislation. A lack of resources within the SAI often further complicates the task. Nevertheless, it is precisely in the situation where a country is learning to avail of new sources of funding in the manner most beneficial to its people that the SAI can play a significant role in exerting a positive influence.

Developing the capability of SAIs to audit Structural and Cohesion Funds

It was generally recognised that auditors would benefit from further training specific to the audit of EU funds, but also that

sharing information between SAIs facing similar problems is a simple yet effective aid to auditors. Bringing together people on the same subject, even with different needs, and allowing auditors to learn more about what was happening in other countries (as was done in this workshop), highlighted the value and importance of cooperation. It was recognised that experience in auditing pre-accession instruments is good preparation for the audit of Structural and Cohesion Funds by a Member State SAI. In addition to SAIs exchanging information (such as reports, manuals, checklists, etc.), and building upon individual contacts created during this workshop, it was specifically proposed that an Internet forum/discussion point should be set up for exchanging information between SAIs on how to deal with practical problems arising from audits related to EU Structural and Cohesion Funds. New Member State SAIs who were not already members of the Contact Committee’s Working Group on Structural Funds, which is

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currently carrying out a parallel audit on “The processes in place for identifying, reporting and following up on irregularities”, are invited to make contact with the Working Group (chaired by the German SAI) if they wish to participate as observers in its meetings. SAIs could do more to harmonise audit standards between themselves, and promote the idea of greater reliance by the EU institution on the work of audit bodies in the Member States, including themselves (in accordance with international standards on this subject (IFAC ISA 600)

What SAIs can do to contribute to optimising the use of EU Structural and Cohesion Funds SAIs in new Member States are in a prime position to promote the good use of EU Structural and Cohesion Funds at a time when their use is at an early stage. It seems that the SAIs in these countries are keen to do audits in this field, and can profit from the experience of those countries among the “old” Member States, such as the Netherlands, who have an established tradition of doing so. Traditional audits of the regularity of the expenditure concerned will be an important contribution in detecting cases of ineligible expenditure etc. However, other types of audits can be more productive in encouraging early improvement in weak practices and procedures which could help to avoid problems arising in the first place. The main options would be the following:

• Preventive audits of the preparation for, and/or the early implementation of, Structural and Cohesion Funds, such as have been carried out, for instance, by the Polish SAI. Such audits tend to focus on the adequacy of the systems set up and of the administrative resources provided for the implementation of the funds.

• Performance audits focussing on the effectiveness of EU Structural and Cohesion Funds expenditure in achieving objectives which are capable of contributing to the overall purpose of the funds, namely reducing disparities in development between regions. Such audits can legitimately raise questions concerning the appropriateness and efficiency of the instruments chosen by the EU. SAIs should not hesitate to advocate radical solutions where they consider them appropriate, and communicate such ideas to their national representatives in EU legislative bodies. However, performance audits may well require specialist expertise which SAIs do not have, and the setting up of the audit requires in particular the defining of objectives and indicators for measuring the effectiveness of the programmes concerned.

Conclusions

SAIs may best contribute to better management and effectiveness of EU funds by auditing them. It is the important job of external auditors, in this field as in others, to determine whether managers are not just making sure that money has been spent, but also that the money has been spent properly and effectively. For auditors facing the subject for the first time, such a task can seem especially daunting. The EU regulations governing this field, and the “sharing” of management between the European Commission and the Member States, are complicated matters for most people. The ECA, with its long experience of auditing EU funds, has highlighted potential problems arising from the Commission’s latest proposals to modify the Structural Funds regime. As SAIs become more familiar with the subject and gain more experience of the implementation of these funds on the ground in Member States, they will surely produce audit results which can be put to good use in the interests of national and EU taxpayers alike. Improved communication and greater co-operation between SAIs and the EU institutions, and between each other, can contribute to this objective. Ways and means of achieving this, whilst maintaining ‘independence’ in a practical way, should be developed. Nick Treen1, SIGMA, Workshop co-Chair Colin Maynard, ex-ECA, Workshop co-Chair George Paterson, ECA Janos Revesz & Zsofia Hangyal, HSAO

1 www.oecd.org/gov/sigma Support for Improvement in Governance and Management. A joint initiative of the OECD and the European Union, principally financed by the EU.

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LIST OF PARTICIPANTS AT BUDAPEST WORKSHOP

Hysen MUCEKU Albania Dirk IPENBURG*# Netherlands Zlatina PETROVA Albania Lech WITECKI* Poland Mariana KATSAROVA Bulgaria Piotr SZPAKOWSKI* ** Poland Akis HJIIOSSIF** Cyprus Marilena DEMIAN** Romania Josef POLAK** Czech Republic Ioana IONESCU Romania Jan TOPKA** Czech Republic Olga FAJROVA Slovak Republic Kaido VETEVOOG** Estonia Iveta FABEROVA** Slovak Republic Krista UUNA** Estonia Andreja JERINA** Slovenia Mito NAUMOSKI fYROM Mehmet BOZKURT Turkey Bransilav GULEV** fYROM Robert WILMS*# EC Bernd ELLERMANN*# Germany Nicola AIMI*# EC Attila ZOLDRETI* Hungary Gejza HALASZ ECA Eva TUKACS Hungary Gabriele CIPRIANI*# ECA Zsofia HANGYAL Hungary Richard HARDY*# ECA Janos REVESZ Hungary George PATERSON# ECA Zane BARBALE Latvia Colin MAYNARD## Formerly ECA Inese STRAZDINA Latvia Nick TREEN## SIGMA Laimute VIRBICKIENE Lithuania Esther BRIGHT SIGMA Tanya MERCIECA Malta

*Main presenters ** Group exercise presenters

#Facilitators ##co-Chairs

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Conclusions from the Malta Workshop on Audit of Public Sector Financial Statements

It is a basic right of the public and taxpayers to have accurate and reliable financial statements reflecting the complete operations and financial situation of government and other public sector bodies (including information on all revenues, assets and liabilities as well as expenditure). These are essential for the purposes of good governance, public accountability and transparency, as well as constituting a sound basis for economic decisions. The opinion resulting from an SAI’s audit of the financial statements serves as an essential assurance to all stakeholders that the financial statements concerned are in fact reliable, that is that they are complete and accurate in all material respects. In the public sector there is also an expectation that the audit of such financial statements should also aim at giving assurance about the regularity of the revenue and expenditure operations underlying the financial statements. Such assurances can only be given if the audit work, which supports such opinions, is of a sufficiently high standard and quality, and achieving this requires a professional approach. The purpose of the workshop was to identify the key issues of concern to SAIs in attaining and maintaining such high standards for the audit of their governments’ financial statements. Representatives of the SAIs from the New Member States (NMS) and Candidate Countries, along with Albania and fYROM participated at a workshop hosted by the Maltese NAO to discuss and exchange experiences on the subject of auditing public sector financial statements. Given the fact that most of the countries concerned had some experience of auditing financial statements, even if the precise nature of their mandates could differ somewhat, the subject was going to be of wide interest for the participants. The presentations, from the ECA from old and NMS, were intended to facilitate an exchange of knowledge and practical experiences of current practices and standards for such audits. And, despite the differences in backgrounds, a large number of common points emerged during discussions. At the end of each of the following headings specific recommendations are indicated (in italics) which can help SAIs to ensure that the audits of financial statements, which they carry out, result in soundly based opinions which provide the assurance stakeholders require.

INTOSAI and IFAC standards on financial audit and compliance audit

International auditing standards will help public sector auditors to achieve good practice in the audit work they carry out, although care should be taken to ensure that such standards are adapted to the particular circumstances of the audit body concerned. Such standards are not a straightjacket, and each SAI needs to derive specific methods, guidance and manuals which set out how it will meet the standards. The INTOSAI auditing standards, specifically designed for the public sector, are useful but rather general in nature. The IFAC International Standards on Auditing (ISAs)2, more detailed and practical in nature and essentially designed for use in the private sector, are widely applicable to the public sector audit of financial statements, and the public sector perspectives incorporated in them are useful, However, there is a need for a full set of detailed guidelines specifically designed to help SAIs apply ISAs while implementing the INTOSAI standards. Workshop participants noted the usefulness of the EU Implementing Guidelines for INTOSAI Standards, but also noted that these had not been recently updated. INTOSAI has recognised the need for further guidance and its Professional Standards Committee has set up a structure to issue a comprehensive set of public sector-oriented guidance covering all areas relevant for SAIs. There are six sub-committees, two of them dealing separately with financial (statements) audit and compliance (with laws and regulations) audit, chaired by Sweden and Norway respectively. These sub-committees have formed working groups to make proposals for INTOSAI “practice notes”. In the case of financial audit, the content of the practice notes will be based on IFAC ISAs, co-ordination being done through an INTOSAI “reference panel” consisting of SAI 2 Issued by its International Auditing and Assurance Standards Board (IASSB) www.ifac.org

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representatives, which also has an input into the IFAC standard setting process (which is relatively slow). It is intended that INTOSAI guidelines on compliance audit, a subject which is not adequately covered by the ISAs, will be adopted in 2007.

The SAIs involved in INTOSAI standard-setting come from a relatively limited number of countries (mainly Anglo-American and Northern European). However, a few of the SAIs participating in the workshop are involved in the INTOSAI Professional Standards Committees’ working groups. The SAIs of the NMS and Candidate Countries show considerable awareness of the content of IFAC’s ISA standards and apply many of them. Some consider them directly applicable, and others have national standards based on the IFAC standards. Their importance is underlined by the fact that most of the countries participating in the workshop had access to translations of the ISA standards. All the ISA standards were considered by the workshop participants to be relevant to their audit work to a greater or lesser extent, and those that were considered to be most applicable and useful by participants were those covering: • “Objectives and general principles governing an

audit of financial statements (ISA 200); and “Consideration of laws and regulations in an audit of financial statements” (ISA 250).

(left to right); E. de Bruyne (ECA), M. Kraff (ECA), C. Maynard (Ex-ECA); J. Galea (Auditor General, Maltese NAO); N. Treen (Sigma), P. Borg (Assistant Auditor General, Maltese NAO), J. Grech, C. Pace, S. Ciantar and M. Zammit (Malta)

• “Planning an audit of financial statements” (ISA 300); “Understanding the entity and its environment and assessing the risks of material misstatement” (ISA 315); and “Audit materiality” (ISA 320).

• “Audit evidence” (ISA 500); and “Audit sampling and other means of testing” (ISA 530). • “Using the work of another auditor” (ISA 600); and “Considering the work of internal audit” (ISA 610). • “The auditor’s report on financial statements” (ISAs 700 & 700R). Recommendations • SAIs should apply, or continue to apply, to their audit work the international standards which are appropriate

for the public sector and to their specific national circumstances. The application of such standards is particularly valuable in achieving a consistently high quality of audit in SAIs with a collegial structure.

• SAIs should be more proactive in supporting the development of ISAs and INTOSAI guidance, and apply to be

nominated to INTOSAI reference panels or working groups deliberating on audit standards, so that they can exert influence on the content of such standards.

The importance of the SAI’s opinion resulting from its audit of financial statements

SAIs’ opinions provide the assurance needed by stakeholders that the financial statements concerned “give a true and fair view in accordance with the applicable financial reporting framework and, where appropriate, that they comply with statutory requirements” (to use the wording of the ISAs on the auditor’s reporting on financial statements). The expression “present fairly, in all material respects” is considered equivalent to “true and fair view” and other wording is sometimes used, such as in the case of the ECA which is required to give its opinion on the “reliability” of the EU accounts. Whatever the precise wording the purpose of an opinion is to state whether the financial statements are free from material misstatement, that is to say complete and accurate in all material respects. Only then can the financial statements provide accountability and constitute a reliable basis for economic decisions.

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Opinions providing such positive assurance constitute modern best practice. Opinions have very limited value if they provide only negative assurance, which means that conclusions relate only to the elements the auditor has actually

Workshop speakers (left to right), P. Borg (Malta), M. Kraff (ECA), I. Metsalu (Estonia); A. Bratanic (Slovenia); A. Anderson (Audit Scotland); E. de Bruyne (ECA)

examined, and not to the financial statements as a whole. The importance and usefulness of this kind of audit is highlighted by the ECA’s experience for ten years of issuing a qualified opinion on the EU accounts and an adverse opinion on the legality and regularity of the underlying transactions. SAIs also have a duty to underline the importance of their government producing good quality financial statements and adopting good accounting practice. This can be aided by the application of IFAC’s International Public Sector Accounting Standards (IPSAS) to government financial statements, which few of the governments of the countries attending the workshop yet do.

The SAI’s opinion, particularly as is often the case when it also covers compliance with applicable regulations, can also: • Provide assurance that the national budget has been properly spent as intended. • Help to prevent future irregularities. • Help to improve financial management by identifying problem areas and system weaknesses. Recommendations

• SAIs should produce opinions which aim at providing positive assurance concerning the truth and fairness of

their government’s financial statements as a whole. • SAIs should use their influence to promote the use of good accounting standards for public sector financial

statements. They should ensure that they are consulted by bodies setting national standards for government/public sector accounting.

• SAIs should do their reporting on the results of their audit of financial statements in a way which can contribute

to an improvement in public sector management and the avoidance of problems in future.

The incorporation of the audit of compliance with laws and regulations into the audit of financial statements It is generally considered that the audit of public sector financial statements should include an audit of the legality and regularity of the transactions underlying the financial statements concerned (compliance audit). Integrating the audit of compliance with laws and regulations into the audit work aimed at verifying the financial statements is a good idea because it is efficient to examine the same transactions and documents for both purposes. This can be done to a large extent even when, because tolerance of error is usually lower, materiality levels for the audit of compliance with laws and regulations tend to be lower than for financial statements audit. In such cases a single sample of transactions could be tested for both financial statement and compliance objectives, and audit testing may be extended for the specific purposes of the audit of compliance with laws and regulations. Particular problems faced when carrying out an audit of compliance with laws and regulations, in addition to the materiality question mentioned above, are: • The extensiveness of the regulations that have to be considered (which in some countries can include rules at a

lower level than national legislation).

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A. Anderson and N. Treen with participants( from left to right), T. Jeszenkovits (Hungary); R. Rudokiene (Lithuania); D. Victor (Romania) D. Tabunova (Latvia) and I. Metsalu (Estonia)

• The lack as yet of international standards and guidelines specifically dealing with the audit of compliance with laws and regulations.

• Occasional difficulties in obtaining sufficient

relevant evidence. • The need for risk assessments to specifically target

the risks of irregularity occurring, and provide a basis for decisions on whether further testing is required specifically for the audit of compliance with laws and regulations.

IFAC’s Study 3 on “Auditing for compliance with authorities – a public sector perspective” is an interesting supplement to the rather concise public sector perspective included in ISA 250 on “Consideration of laws and regulations in an audit of financial statements”.

Recommendations

• It is perfectly feasible for SAIs to integrate their audit of compliance laws and regulations with their audit of

financial statements, while taking into account the possible need for a different risk assessment and materiality limit.

• A specific audit assertion for legality/regularity should be developed by SAIs in the context of the audit of public

sector financial statements to specifically cover the audit of compliance with laws and regulations.

Planning the audit of financial statements Proper planning of financial statements audits is essential if the audits are to avoid problems during the implementation and reporting phases. Some well-established SAIs devote as much as 20% of the total time spent on an audit on the planning phase, which includes considerable work on gaining knowledge of the corporate structure, systems and procedures of the entity being audited. This knowledge supports the risk assessment work which is the basis for the decisions on the nature and volume of the audit procedures planned to be carried out, in particular how much reliance can be placed on systems of internal control (which must be evaluated and tested). This knowledge also provides the basis for decisions to rely on the work of other auditors, such as internal auditors, provided that the objectives and quality of their work are assessed to be in line with those of the SAI carrying out the external audit. If this is the case, there should be considerable scope for such reliance. Public sector auditors may also consider sub-contracting part of their work to private sector auditors, in cases where the terms of reference are unambiguous and supervision by the SAI can be ensured. The Audit Scotland practice of preparing a “Priorities and Risk Framework” for each entity being audited is an interesting idea for other SAIs. Its purpose is not only to document the main priorities and risks facing an entity to give auditors a focus for both financial and performance audits, but also to explain to auditees key issues about their control framework and the auditor’s objectives. This helps to promote a cooperative attitude on the part of the auditee and helps it develop its own effective risk management processes. Recommendations • SAIs should devote time to planning financial statements audits sufficient for gaining all the knowledge of the

entity required to assess the risks involved, and to decide on the combination of audit procedures and volume of work required to fully meet the objectives of such audits.

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• The materiality concept should be applied to the planning of audits of public sector financial statements. • SAIs should take every opportunity to rely on the work of other auditors, particularly internal audit, wherever the

requirements of the relevant ISA standards can be met.

E. de Bruyne with working group participants( from left to right), J. Grech (Malta); A. Bratanic (Slovenia); H. Bilgin (Turkey); M. Wiatrova (Czech Rep); L. Witecki (Poland)

M. Kraff with working group participants (from left to right); S. Ciantar (Malta); Z. Hangyal (Hungary); M. Pieri (Cyprus); A. Niedzielski (Poland); M. Kysucka (Slovakia)

The consequences of the transition from cash-based accounting to accruals accounting

Many SAIs (almost two thirds of the SAIs participating in the workshop and including the ECA) face a situation whereby the government financial statements subject to their audit are in the process of being changed from cash-based accounting to accruals accounting within the next few years. This poses problems not only for the government accounting services, which have to draw up appropriate new standards and procedures, but also for the SAIs which will face new and more complex accounting systems and procedures and financial statements. This implies a need for increased personnel resources. Recommendations

• SAIs could usefully exchange experiences on the problems they face in dealing with significant changes to the

financial statements they have to audit, and to the accounting systems which produce them (cash-based to accruals).

• SAIs should use their influence to promote the use of good accounting standards, (firmly based on those

developed internationally – IFAC IPSAS3) for public sector financial statements. They should ensure that they are consulted by bodies setting national standards for government/public sector accounting.

• SAIs should plan for the extra resources they will need to both familiarise themselves with new accounting

systems and procedures and financial statements and also to audit them. Special attention needs to be given to the running of the new system before it becomes the official accounting system, to the verification of opening balances which have to be developed for the first year of official operation, to reporting progress to Parliament and to carrying out special audits where significant problems arise.

Deciding on the content of an opinion on financial statements

This is a difficult and complex task, made easier if good planning ensures that major risks are identified in advance and that sufficient audit work is performed to provide a sound basis for a reliable opinion. From this point of view some of the classic audit assertions can be difficult to verify. Making sure that some elements of the 3 IFAC International Public Sector Accounting Standards

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financial statements, such as revenue, are complete is particularly difficult. There can also be problems in verifying that liabilities are complete and that valuations are reasonable for both assets and liabilities. An opinion on financial statements must always cover compliance with laws and regulations to the extent necessary to ensure discovery of a potentially material effect on the truth and fairness of the financial statements, or their compliance with statutory requirements. Where an opinion on compliance with laws and regularities is specifically required, it is usually presented separately from the opinion on the financial statements, although often they are presented in the same document. The two opinions can show different results (for instance, one qualified and one unqualified), which does not mean that they are conflicting, given that each opinion is on a different subject. Providing an unqualified opinion is risky unless the basis is sound, as material problems may come to light at a later time. Should this happen the auditor should have put himself in a position to prove that the problems concerned cannot have a material effect on the truth and fairness of the financial statements, and/or that he has applied all relevant standards to carrying out his audit work and evaluating the results. Providing a qualified or adverse opinion or a disclaimer of opinion needs to be explained and justified, which means clearly describing the reasons in terms of nature and value. There can be problems in getting auditees to accept negative opinions, and in getting stakeholders, the press and the public to understand their true significance. Where expectations are unreasonable it is up to the auditor to make this clear. Opinions on compliance with laws and regulations are usually particularly sensitive to public reaction, and it is therefore not unusual for auditors to report irregularities which may not be material in value terms, but are by context or nature. In the end, when forming his opinion, the auditor has to rely on his own professional judgment, backed up by the knowledge that he has applied sound standards in the execution of his audit work, and that he and his staff have the required professional skill. While it may be hypothetically possible for two auditors to arrive at a different opinion in the same set of circumstances, professional standards and skills should ensure that this would be a very rare occurrence.

Recommendations

• SAIs need to devote particular attention to ensuring that the opinions they issue are based on high quality audit work and sound professional judgment.

• SAIs should use the ISA guidance (ISAs 700, 700R and 701 in particular) when

drawing up their opinions on financial statements. Where national requirements differ from the international standards SAIs should use their influence to promote harmonisation.

Conclusions

Carrying out effective audits which can support sound opinions on financial statements is not easy, and the public sector has its own particular complications, difficulties and exposure. From a practical point of view, many SAIs face problems in carrying out audits of financial statements, particularly where a specific audit of compliance with laws and regulations may be needed to achieve the highest standards in audit quality.

E. Bright with Malta NAO workshop organisers (left to right); M. Debattista, S. Borg, B. Vella, J. Cilia, L. Costa

A lack of resources within the SAI often further complicates the task, and this is exacerbated when new challenges are faced, such as changing the basis for government accounts from cash to accruals. SAIs need to be confident in their skills and use their professional judgment, while benefiting from the comprehensive international standards which exist on the subject of the audit of financial statements. The more they can exploit opportunities for cooperation with their colleagues in other countries (as was done in this workshop) the easier that will be. Working together to harmonise and improve audit methods and practices is surely a very good thing. The high professional level of staff in SAIs means that, whatever their status, they have the potential to promote and implement whatever changes may be needed to achieve the highest standards in audit quality. Nick Treen, SIGMA, Workshop co-Chair Colin Maynard, ex-ECA, Workshop co-Chair George Paterson, ECA Brian Vella, MNAO

AUDIT NEWSLETTER ● November 2005 ● page 13

LIST OF PARTICIPANTS AT MALTA WORKSHOP

Klodiana BLLACI Albania Charles PACE Malta Osman ALUSHI Albania Marlene ZAMMIT Malta Maria PIERI** Cyprus Waldmar DLUGOLECKI** Poland Martina WIATROVA Czech Republic Adam NIEDZIELSKI** Poland Pavel SKOPAL** Czech Republic Lech WITECKI Poland Rolf ELM-LARSEN* Denmark Dumitru ALAMIIE Romania Kaido VETEVOOG** Estonia Dan VICTOR Romania Ines METSALU Estonia Svetlana MURESAN Romania Tonis SAAR# Estonia Maria KYSUCKA Slovak Republic Maskim ACEVSKI fYROM Anica BRATANIC* Slovenia Ivan IGNJATOV** fYROM Husamettin BILGIN** Turkey Tamas JESZENKOVITS Hungary Andrew ANDERSON*# United Kingdom Zsofia HANGYAL Hungary Erik de BRUYNE*# ECA Lelde DIMANTE** Latvia Manfred KRAFF*# ECA Dzintra TABUNOVA** Latvia George PATERSON ECA Regina RUDOKIENE Lithuania Colin MAYNARD## Formerly ECA Paul BORG*# Malta Nick TREEN## SIGMA Simon CIANTAR Malta Esther BRIGHT SIGMA James GRECH** Malta

*Main presenters ** Group exercise presenters

#Facilitators ##Co-chairs

AUDIT NEWSLETTER ● November 2005 ● page 14

Sigma PIFC and SAI Peer Assistance Updates PIFC

A Sigma peer assistance report for State Internal Audit at the Ministry of Finance in Latvia is nearing its completion. PIFC peer assistance is planned to take place in Estonia and Cyprus. On-going Sigma PIFC peer assistance is taking place in Lithuania, Hungary and Slovakia until the end of 2006

SAI The final presentation of the second peer review for the Riiginkontroll (Estonia SAI) was carried out in September 2005. A second Sigma peer assistance in Latvia to support the development of a new strategic plan for 2005-2008 and evaluate

performance (since the first peer review in 1999) was finalised early 2005. A second Sigma peer assistance review at the National Audit Office in Lithuania started in October 2005. A short Sigma follow-up peer review in the Slovak Republic was finished in January 2005. A draft project fiche for a

twinning light was prepared and an audit activity has been agreed between the Slovakian and Hungarian SAIs. A second peer review of the Romanian Court of Audit started in October 2005. A peer review of the Bulgarian National Audit Office started in November 2005. The final presentation of the Bosnia-Herzegovoina SAI was carried out in October 2005.

Forthcoming NMS and CC Audit Manuals and Methods Workshops

Following the decision by the Heads of the Candidate Countries at their 2004 meeting in Riga to continue the workshops in the area of audit manuals, it is planned to organise two more workshops in 2006. The first will be held in Lithuania from 15-17 March, on the subject of implementing the EU Audit Quality Guidelines. The last workshop of the year, and of the current series of workshops, is scheduled to be held in Estonia from 6-8 September. Being the last workshop, this one will focus on sharing experiences in good practices in the development of audit manuals and methods that have occurred during the period the working group has been in existence, from 2000 to the present. For further information on the workshop programmes please contact Nick Treen or George Paterson

Agenda of Events for 2005-2006 Year Month Day Event Place 2005 November 10-11 54th Meeting of the INTOSAI Governing Board Vienna 15 Publication of the ECA Annual Report 2004 Luxembourg December 5-6 Meeting of the EU Contact Committee of EU SAIs Stockholm 2006 March 15-17 Working Group on Audit Manuals and methods – SIGMA/ECA

workshop on Implementing the EU Audit Quality Guidelines and Quality Assurance

Vilnius

May 15-16 Meeting of the Liaison Officers of EU SAIs Budapest June 29-30 14th Meeting of the Eurosai Training Committee Luxembourg September 6-8 Working Group on Audit Manuals and Methods – SIGMA/ECA

workshop on Developing Audit Manuals and Methods Tallinn

ECA Reports in 2005

The European Court of Auditors published its Annual Report year 2004 on 15 November 2005. The report in full, the summary version and press release as well as President Weber’s speech to the European Parliament Budgetary

Control Committee, can be found at 2004 Annual Report, Summary Report and Press Release:

http://www.eca.eu.int/audit_reports/annual_reports/annual_reports_index_en.htm Presentation to the Budgetary Control Committee

http://www.eca.eu.int/press/speeches/docs/2005/eca0514en.pdf Special Reports were also published by the ECA during 2005. These can be found at:

http://www.eca.eu.int/audit_reports/special_reports/special_reports_index_en.htm

Contributions for the next issue of the newsletter are most welcome and should be sent to:

Nick Treen or Esther Brightwww.oecd.org/gov/sigma