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PRESENTATION TO SCOPA

PRESENTATION TO SCOPA. THE AUDIT PROCESS. By the Auditor-General Mr Shauket Fakie 21 August 2002. WHAT IS AN AUDIT?. The dictionary defines an audit as an: ‘Official examination of accounts; a searching examination.’

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PRESENTATION TO SCOPA

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  1. PRESENTATION TO SCOPA THE AUDIT PROCESS By the Auditor-General Mr Shauket Fakie 21 August 2002 1

  2. 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. 2

  3. TYPES OF GOVERNMENTALAUDITING • Comprehensive Auditing • Environmental Auditing • Forensic Auditing • Integrated Auditing 3

  4. AUDITING CONCEPTS COMPREHENSIVE AUDITING REGULARITY AUDITING Financial Compliance PERFORMANCE AUDITING Economy Efficiency Effectiveness 4

  5. 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. 5

  6. 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 entity’s compliance with relevant laws, rules and regulations. • Auditor-General Act, No.12 of 1995 6

  7. 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 7

  8. DEFINITION OF PERFORMANCE AUDITING • An independentauditing 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. 8

  9. 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. 9

  10. DEFINITION OF INTEGRATED AUDITING • An integrated audit is an independentaudit process whereby the principles of the above audit disciplines are coordinated and incorporated into one process. 10

  11. AUDITING 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. 11

  12. 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. 12

  13. 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 13

  14. 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 14

  15. 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 15

  16. REGULARITY AUDITPROCESS (continued) • Test of controls • Substantive testing • Final analytical review • Obtain management representation letter • Audit conclusion • Perform subsequent events review • Reporting Execution Reporting 16

  17. REPORTING • Informal queries • Formal Management Letter • Audit Report 17

  18. 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. 18

  19. 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 19

  20. 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 twomonthsafter 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 anaudit report on those statement to the accounting officer within two months of receipt of the statements. 20

  21. 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 21

  22. ü 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 22

  23. 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. 23

  24. 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 24

  25. INTERNAL 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 25

  26. PERFORMANCE AUDITING • ECONOMY • EFFICIENCY • EFFECTIVENESS 26

  27. 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. 27

  28. EFFICIENCY • REFERS TO THE RELATIONSHIP BETWEEN INPUTS AND OUTPUTS. • TWO POSSIBILITIES: - Maximisation of outputs with given inputs. - Minimisation of inputs for given outputs. 28

  29. EFFECTIVENESS REFERS TO THE EXTENT TO WHICH SET OBJECTIVES ARE ACHIEVED. 29

  30. 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. 30

  31. 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. 31

  32. 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. 32

  33. 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 33

  34. 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 34

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