how to engage with relevant audit reports and what the audit opinions mean? presentation to select...

How to engage with relevant audit reports and what the audit opinions

mean?

Presentation to Select Committee on Finance

Imran VankerBusiness Executive: Gauteng3 June 2005

THE PUBLIC SECTOR AUDIT PROCESS

AGENDA

• Oversight process

• The audit process

• Types of audits

• Reporting

• Provincial General Report

Medium Term Strategic Framework

Medium Term Macro & Fiscal Framework

Drafting Phase Legislative Phase Implementation Phase Audit and Oversight Phase

Medium Term Expenditure Framework

Annual Fiscal Framework

Division of Revenue Tabling

Tabling Departmental Strategic

Plans

Tabling

Division of Revenue Bill

Spending Proposals Tabling

Medium Term Budget Policy Statement

Budget Review

Parliamentary Amendments

Appropriation Bill

Estimates of National Expenditure

Departmental Strategic Plans


Appropriation Act

Division of Revenue Act

Revenue Proposals Tabling Tax Bill Tax Act


Tabling Progress Reports on Conditional Grants

Quarterly Performance Reports

Monthly & Quarterly Financial Reports

Departments’ Annual Financial Statements

Consolidated Annual Financial Statements

Departments’ Annual Reports

Auditor-General’s Report

Adj . Appro’tion Bill Adjustment Appro’tion Act

Parliamentary Amendments In-year revision

and adjustments Tabling

OVERSIGHT ROLE IN CONTEXT

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


Performance AuditFocuses on evaluating measures implemented by management to ensure economic procurement of goods and services and efficient and effective application of the same

Forensic AuditAn independent process to prevent or detect economic crime in the public sector


Sustainable Development AuditUses existing auditing disciplines but focuses on the social and environmental aspects of business processes

Integrated AuditIndependent process whereby the principles of preceding audit disciplines are co-ordinated and incorporated into one process

AUDIT PROCESS

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 PROCESS

• 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



• 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



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 PROCESS



AUDIT REPORT AS OVERSIGHT TOOL continued…

Unmodified

“clean” report

No furtheraudit comment


Modified reports

Matters that do not affect the auditor’s opinion

Additional reporting

requirements

To highlight a

matter


Modified reports

Matters that do affect the auditor’s opinion

Effect is so material and pervasive

and/or fundamental that auditor is

unable to express an opinion

Effect is not somaterial and

pervasive and/or fundamental as to

require disclaimer of opinion

Effect is not so material and

pervasive and/or fundamental as to require adverse

opinion

Effect is so material and pervasive

and/or fundamental that auditor

concludes that a qualified opinion is

inadequate

Qualified opinion

Adverse opinion

Disagreement with management

Disclaimer of opinion

Qualified opinion

Limitation of scope


• 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


• 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

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

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


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


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.


Section 3 – Specialised audit services 03-04

• Special investigations Page 3• Performance audits Page 19• Performance information review Page 25

- 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.

for your attention and participation

Thank you

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