AUDIT PROCEDURES by Rashid Saleh ras

1. “Capacity Building and Training on Procurement” Training the trainers workshop 19th to 21st September, 2005 AUDIT PROCEDURES by Rashid Saleh ras

2. Retrospection Audit Procedures • The Audit of Expenditures on Procurement has traditionally been carried out in accordance with the Provisions of the General Financial Rules as contained in Chapter 8 – under STORES which covered all articles and materials purchased or otherwise acquired for the use of Government and also included articles of dead stock of the nature of plant, machinery, instruments, furniture, equipment, fixtures etc.

3. Prior to the separation of the Auditing and the Accounting Function the Audit Manual, the Audit Code and a comprehensive manual called the Outside Audit Department Manual (OAD Manual) provided elaborate guidelines to field auditors • The Central Public Works Accounts Code and other Departmental Codes and Manuals still guide field auditors through their works audit drill

4. Retrospection - Audit Procedures • The GFRs have historically been applied and are still being applied wherever departmental rules on procurement are either not available or are insufficient. • It is given in Chapter 1 of the GFRs under Introductory at para1, that the departmental authorities should follow these rules, supplemented by the special rules and Instructions, if any, contained in their departmental regulations and other special orders applicable to them.

5. Chapter 2: General Systems of Financial Management and Control- IV - Contracts: General Principles – Rules 18 and 19 • Rule 18. No contracts may be entered into by any authority which has not been empowered to do so by or under the orders of the President. • The various classes of contracts and assurances of property authorized by the President in exercise of powers conferred by Article 99 of the Constitution to be executed by different authorities are specified in Appendix 1. • Subsidiary orders of Government as to the limitation upon the powers of these authorities, the conditions under which such powers should be exercised and the general procedure prescribed with regard to such contracts, such as calling for and acceptance of tenders, etc., are laid down in the appropriate departmental regulations.

6. Rule 19. The following general principles have been laid down for the guidance of authorities which have to enter into contracts or agreements involving expenditure from Public funds:- • The terms of a contract must be precise and definite and there must be no room for ambiguity or misconstruction therein. • As far as possible, legal and financial advice should be taken in the drafting of contracts and before they are finally entered into. • Standards forms of contracts should be adopted wherever possible, the terms to be subject to adequate prior scrutiny. • The terms of the contract once entered into should not be materially varied without the previous consent of the authority competent to enter into the contract as so varied. No payments to contractors by way of compensation, or otherwise, outside the strict terms of the contract or in excess of the contract rates may be authorized without the previous approval of the Ministry of Finance.

7. No contact involving an uncertain or indefinite liability or any condition of an unusual character should be entered into without the previous consent of the Ministry of Finance. • Whenever practicable and advantageous, contracts should be placed only after tenders have been openly invited and, in cases where the lowest tender is not accepted, reasons should be recorded. • In selecting the tender to be accepted, the financial status of the individuals and firms tendering must be taken into consideration in addition to all other relevant factors.

8. An Environment with a Strong Internal Control & Monitoring framework alone can help Prevent - Rule 2(f) of the Public Procurement Rules • It states that “corrupt and fraudulent practices” includes the offering, giving, receiving, or soliciting of any thing of value to influence the action of a public official or the supplier or contractor in the procurement process or in contract execution to the detriment of the procuring agencies; or misrepresentation of facts in order to influence a procurement process.

9. or the execution of a contract, collusive practices among bidders (prior to or after bid submission) designed to establish bid prices at artificial, non-competitive levels and to deprive the procuring agencies of the benefits of free and open competition and any request for, or solicitation of anything of value by any public official in the course of the exercise of his duty;

10. Rule 4 of the Public Procurement Rules, 2004 states that : Principles of Procurements • Procuring agencies, while engaging in procurements, shall ensure that the procurements are conducted in a fair and transparent manner, the object of procurement brings value for money to the agency and the procurement process is efficient and economical.

11. Audit Procedures Introduction to Audit Guidelines • Guiding Principles The guiding principles that should be observed when conducting any audit under the authority of the Auditor-General’s Ordinance 2001 are documented in DAGP’s Financial Audit Manual (first published in 2005 under the Project for Improving Financial Reporting and Auditing (PIFRA)).

12. PRE-AUDIT CHECKSApplied by the Accountant General • Scrutiny of AT (Approved / Accepted Tender). • by verifying the Rates. • Date and place of delivery. • Consignee and the name of the contract. • Terms and conditions of the contract. • Availability of funds. • The head of account to be debited. • Verification of signature & seal of purchasing / indenting officer by the A.G Office i.e S.V.O (Signature Verifying Officer) on every page of the form. • Verifying the Bill issuance form issued by department to the contractor with the serial number allotted and serial number of A.T mentioned by the indenting officer.

13. Check the receipt of verification memo with the Inspection Note / Certificate by the industries department or the committee constituted for this purpose. • Check and verify the deduction of Income Tax / GST / Service charges / Fines on late supply of materials. • The Bill / Claim is cleared subject to confirmation of receipt of items in good condition duly certified and verified through delivery challan. • All the details are recorded in the Supply Audit Registered of A.G Office.

14. The Financial Audit Manual (FAM), and the Audit Guidelines • FAM Provides modern Auditing Standards, Concepts, Techniques, and Quality Assurance arrangements. It covers the entire audit cycle. • The FAM is supported by a standard audit working paper kit and a set of tailored audit guidelines applicable to all areas of audit. There is a specific guideline for the audit of procurement.

15. Introduction to Audit Guidelines • Auditors’ Responsibility • Every auditor engaged in a DAGP audit is required to be familiar with the audit theory, practice standards, and techniques described in the DAGP Financial Audit Manual, including the documentation standards.

16. Introduction to Audit Guidelines • Practical Tools • In addition to the Financial Audit Manual, PIFRA also provides the auditor with practical tools for conducting the audit. One of these tools is a set of Standard Audit Working Papers. These working papers are a generalized set of forms and schedules designed to help each audit team perform the audit in compliance with the principles set out in the Financial Audit Manual. This Guideline has been prepared to assist each audit team to apply the Standard Audit Working Papers to the audit of Procurement activities.

17. The auditor is required to be familiar with the laws, regulations and procedures pertaining to contracting and procurement. Obtain copies of contracting policies and procedures manuals, circulars, etc. In particular, the auditor should refer to the “Public Procurement Rules, 2004” (provided as an Appendix ). • Focus of the Procurement Audit • There are three questions that the auditor should ask: • What should be examined? • At what stage should the auditor examine the procurement process? • Which parties to the procurement process should be approached?

18. The Guidelines for the audit of Procurement Scope • Contracting and procurement activities apply to the acquisition of a whole range of resources, including: • Infrastructure, buildings and major equipment[1]; • Vehicles, furniture, tools, small equipment and parts; • Small items such as stationary and pencils and consumables; • Materials and equipment for maintenance purposes; • Maintenance services for facilities and equipment; • Hardware and software for computer systems; • Consulting services; and • Other contracted out services. • [1] These are generally managed as projects (see the Audit Program Guide for the Audit of Expenditures – Project Costs and Performance in Appendix B) - but they often have a substantial contracting and procurement component.

19. The Guidelines for the audit of Procurement • The best input to this decision is experience but the following provides some guidance. The decision should be based on answers to the following questions: • Is the amount of procurement within the organization of high materiality? • Is it anticipated that the controls over the procurement process are weak (assessment of this is usually based on past audit work, internal audit reports, management interviews or an initial assessment of internal controls)? • Is there a lot of sole sourcing (i.e. many contracts are let without going through a competitive bid process) – and especially, does this applies to large procurements?

20. The Guidelines for the audit of Procurement • Are there many examples of poor performance (projects over budget or delayed, contracts not let, multiple contract amendments, goods or services not meeting requirements)? • Any suspicion of misallocation of funds (such as identifying possible duplicate payments, unable to locate items bought, finding new equipment is not being used, critical newspaper articles)? • The more “yes” to these questions the more important it is for the auditor to examine the procurement process and activities. Even a single “yes” may be considered sufficient to conduct an audit.

21. The Guidelines for the audit of ProcurementIdentification of Major Procurement Activities • Almost every audit office within the DAGP will need to conduct audit work relating to Procurement within its area of audit responsibility. • For audits specifically focused on Procurement, the first consideration is determining the types of procurement, the amount of procurement, and the particular risks associated with procurement carried out by the audit entity. The design of the audit approach and determination of audit scope to fulfill the audit objective relating to Procurement will be the responsibility of the Audit Manager.

22. The Guidelines for the audit of ProcurementDetermining the Audit Objective and Audit Scope • The auditor needs to obtain a clear picture of the procurement activity of the audit entity. The scope of the audit could include the government as a whole; a department of government; or simply the procurement activity for a single project. • The audit objective may focus on one aspect of procurement such as the extent of competitive procurement and the proper justification for sole sourcing of products or services; or it may cover all aspects of the procurement cycle. The selection of areas of Procurement may also focus on particular types of procurement, such as acquisition of: • Computers (and the controls over the acquisition of computers); or • Vehicles (and what specific standards exist governing the type and/or cost of vehicle and the criteria for acquiring replacement vehicles); etc.

23. Compliance Audit against the Public Procurement Rules, 2004 • In conducting an audit of the entity’s compliance with these Rules, the auditor should address each of the following requirements which are specified in the Public Procurement Rules: • # 8: procurement planning: all proposed procurement is to be planned in detail as to requirements, available resources, timing, and, anticipated benefits. • #9: no splitting or regrouping is allowed to circumvent the intent of the rules. • #10: specifications should allow the widest possible competition and not create unnecessary barriers to potential vendors. • #11: proper approval mechanism: to ensure clear authorization, proper delegation of powers, prior approval from competent authorities.

24. #13: sufficient response time should be given. • #14: exceptions (proprietary or national security concerns). • #15, 16: process for pre-qualifying suppliers. • #17, 18, 19: basis for disqualifying or blacklisting offending vendors. • #20, 21: open competitive bidding. • #22-27: rules relating to submitting bids. • #28-35: opening, evaluating and rejecting bids. • #36: alternatives for open competitive bidding (one envelope containing both technical and financial proposal / two envelope bid with technical opened first, then financial of technically accepted bids opened publicly / two stage biding procedure).

25. #37: guidance on which procedure to use. • #38-41: acceptance of bids and award of contracts. • #42: alternative methods of procurement (conditions and procedures for alternative methods). • #43: prompt payment. • #44: coming into force of a procurement contract. • #45: closing of the contract. • #46, 47: maintenance of records and freedom of information. • #48, 49: redressal of grievances and settlement of disputes. • #50: unauthorized breach of rules constitutes a mis-procurement