Académique Documents
Professionnel Documents
Culture Documents
STANDARDS AND
IMPLEMENTATION Guide I&II
-----------------------------------------------------
July 2013
CONTENT
SECTION
ONE
Page
DEFINITIONS
INTRODUCTION
CHAPTER ONE
CHAPTER TWO
CHAPTER THREE
13
CHAPTER FOUR
59
CHAPTER FIVE
69
CHAPTER SIX
77
80
INTRODUCTION
81
CHAPTER ONE
82
CHAPTER TWO
84
CHAPTER THREE
91
CHAPTER FOUR
103
CHAPTER FIVE
109
GLOSARY
110
REFERENCE
114
SECTION THREE
SECTION FOUR
115
Appendices
APPENDICES (1 -26)
136
SECTION
ONE
Page
DEFINITIONS
INTRODUCTION
CHAPTER ONE
Concepts
2-4
CHAPTER TWO
5 - 12
13 58
CHAPTER FOUR
Main Investigation
..
59 - 68
CHAPTER FIVE
Reporting
69 - 76
CHAPTER SIX
77 - 79
SECTION TWO
Auditing
Standards
Page
DEFINITIONS
80
INTRODUCTION
81
CHAPTER ONE
Back Ground
82 -83
CHAPTER TWO
General Standards .
84 - 90
CHAPTER THREE
91 102
CHAPTER FOUR
Reporting Standards .
103 - 108
CHAPTER FIVE
Follow-up
109
Glossary
..
110
Reference
..
114
INTRODUCTION
1. The role of the Internal Audit traditionally has been limited to expressing
Recommendations on financial statements and related issues of legality, regularity and
fraud. This involves assessments of whether transactions were properly controlled,
whether care was taken in the collection and custody of revenues, whether
expenditures were properly incurred and generally, whether the executives intentions
were being met.
2. However, this approach does not provide information on waste, inefficiency or
ineffectiveness. Increased public expenditure, the need for more rational and
informed decision making in the use of resources and the growing demand for public
accountability of those who manage public resources necessitated a new and
expanded scope auditperformance audit.
3. Today, performance audit has become one of the major tasks in most developed and in
some developing countries. According to Financial administration proclamation
648/2001 (E.C) article No 7 sub article 1 (a) Internal audits in Ethiopia are already
Page | 1provided with mandates to undertake performance audit in the public bodies.
Traditional financial and compliance audits will continue to play an essential part; it is
anticipated, however, that there will be a gradual and planned growth of performance
audit work.
4. The Ethiopian Performance Auditing Standards (EPAS) and guides accompany this
manual. The manual and the guide are intended to assist performance auditors to
carry out performance audit projects successfully and to bring about work of
acceptable and uniform quality in all internal audits. Therefore, all internal audits are
advised to plan, execute and report performance audits in accordance with the
suggested procedures of the manual, standards and guide.
5. The manual is divided into 6 chapters.
Chapter 1: Concepts
Chapter 2: Purpose and Scope of Performance Audit
Chapter 3: Performance Audit Planning
Chapter 4: Main Investigation Stage
Chapter 5: Reporting
Chapter 6: Closure and Follow-Up.
CHAPTER 1: CONCEPTS
1.1 The purpose of this chapter is to introduce some concepts and terminology used in
performance audit, to give the definition of performance audit, economy, efficiency and
effectiveness and to explain how the performance of an organization, entity, activity,
ministry, program or scheme can be measured. It also explains the interrelationship
between the basic concepts.
1.6
Efficient:-
Effective -
Examples of the economy, efficiency and effectiveness issues of specific programs and
schemes can be found in this manual. Further elaboration of the concepts of economy,
efficiency and effective in relation to performance audit is provided below:
Economy
1.7
Economy is usually thought of as the obtaining of the appropriate quality and quantity
of goods and services at the appropriate times and at the best (minimum) prices. Lack
of economy could occur, for example, when there is overstaffing or when overqualified
staff or overpriced facilities are used or excessive costs, or poor quality of goods and
services bought. (For further technical elaboration refer to technical appendix 1)
Efficiency
1.8 Efficiency is making sure that the maximum level of output is gained from the resources
devoted to each activity, or alternatively, that only the minimum level of resources are
devoted to achieving a given level of output.
1.9 So it is concerned with the production process of an organization i.e. The relationship
between the quantity of inputs expended and the amount of outputs obtained. An
efficient organization is one that optimized this relationship, either:
Minimizing the inputs used to obtain a desired level of output; or
Maximizing the outputs produced from a set level of inputs.
Effectiveness
1.10 Effectiveness is defined as:
The extent to which an organization achieves its objectives. An effective
organization will maximize this whilst minimizing the cost of doing so; and
The relationship between its actual impact and its intended impact. An effective
organization will maximize the extent it secures its intended impacts, at a least
cost, encourage beneficial side effects and discourage unwanted side effects.
1.11 The purpose of such an evaluation is to determine whether the desired results or benefits
are being achieved, whether the objectives established by the legislature or other
authorizing bodies are being met, and whether the agency has considered alternatives
3
which might yield desired results at a lower cost. In other words it attempts to
measure a public sector organizations true bottom line performance, that is, whether
or not the organization or program is achieving its objectives. This issue is arguably
the most important element of performance today, finding increasing application in
the public sector.
1.12 Recent developments in performance audit have moved from economy and efficiency,
often easier to examine and measure to effectiveness. This third E is closest to
policy issue and it is a thin line between needing to know what constitutes a policy
and criticizing it. Auditors are concerned with the choice and impacts of operation of
policy instruments, not question the merits of policy objectives.
1.14
1.15
From the definitions of the 3Es given in the above paragraph, economy relates to
inputs; efficiency is the relationship between inputs and outputs; and effectiveness is
the relationship between outputs and impacts. In business enterprise both the inputs
and outputs are measurable in terms of money, and the efficiency with which the
business is conducted is reflected in a resultant profit or loss equation. The latter is not
necessarily the case with most governmental activities.
One has, however, to be cognizant that governmental activities also have a purpose.
Governments usually spend some amounts of money on numerous activities relating
to matters of public policy or the common good. Such expenditures are expected to
yield results in the form of benefits to the country, community, or to particular groups
of people. The goals, the benefits, or other outcomes that are expected to be achieved
represent the value to be obtained from the envisaged expenditures, while the money
spent represents the expenditures incurred in the process. In short, the basic question
in regard to government expenditure is - Is the government getting adequate values
for the money it spends on various programs, projects and activities? That indeed is
the essence of performance auditing.
In performance auditing, we try to measure inputs in terms of the economy exercised
in the expenditure of money, outputs in terms of efficiency, and effectiveness value of
the results obtained, and the relevant activities by which inputs are converted into
outputs in terms of the degree of efficiency with which they are carried out.
Economy, efficiency and effectiveness are all related to one another by way of inputs,
activities, outputs, and outcomes/impacts, measured in terms of money spent, work
done and value obtained.
To do this,
2.6 Audit may cover all or part of both of these topics. It may be sufficient for the
auditor to assess performance to date to point up success or the need for remedial
action by management. In other circumstances the auditor may wish additionally to
identify good and bad practice in the management of the scheme and suggest
recommendations for the future.
2.7 In performance audit, the auditor must first gain a clear understanding of the
objectives of the organization, scheme or program to be audited and of the strategies
used to achieve those objectives and then examine the systems and practices that
management uses to control operations. It permits the auditor to identify those
particular systems and practices that are key to the organizations success and it is on
these systems and practices that the auditor concentrates.
2.8 The performance auditor must tailor the audit engagement by selecting those several
available methodologies and techniques that are appropriate to the nature of the
audited programs, activities, the interests of the auditee, and the relationship between
data availability and the audit resources. This selection is the key to the success of
the performance audit.
2.9 If a performance audit to be successful:
11. Work is to be adequately planned;
12. Assistants are to be properly supervised;
13. Relevant, reliable and sufficient evidence is to be obtained to afford a reasonable
basis for the auditors opinions, judgments, conclusions and recommendations.
6
2.10
The extent to which we can assess performance under each of economy,
efficiency and effectiveness can vary considerably. It is often easier to identify and
value inputs than outputs and outputs are generally easier to measure than impacts.
The objectives of the audited scheme may relate to social or economic aspects of a
program or an activity making it difficult both to assess changes and to distinguish
the effect of the program from other influences. Securing the intended impacts may
also be long term and involve matters of quality as well as quantity.
2.11
In the short term, in such instances, the examination may have to be confined
to whether intended outputs have been achieved rather than intended impacts.
However, it must be recognized that this is not a measurement of effectiveness.
Nevertheless good management and performance under all the three headings economy, efficiency and effectiveness - are the foundation of value for money and
the concern of performance auditing.
2.12
Performance auditing is a dynamic activity aiming at recommending timely
corrections, therefore, more skill and experience is required of an auditor when
conducting the audit.
2.15 Performance audits are necessary for a more complete picture of what is taking
place inside the organizations. Financial audits alone do not give this completeness,
which is desirable for effective control and accountability of any organization.
2.16 The scope of financial audit is usually limited to financial statements at a
particular time and matters related to them. The audit work is based on
generally accepted auditing standards which provide the auditors with specific
guidance for audit planning, fieldwork and reporting. In contrast, government
auditing standards applicable to performance audits provide only general
guidelines for conducting the audits; and the scope of performance audits varies
considerably depending on audit objectives. Unfortunately, some officials
contracting for a performance audit may not have clearly defined audit
objectives, placing the auditor at greater risk of not meeting user expectations.
The auditor should discuss audit objectives and evaluative criteria with officials
of the entity to be audited and get their agreement; if agreement cannot be
reached, the views of the entity should be recorded.
Public Accountability
2.20 In a modern democratic government, elected representatives rarely manage
expenditure or income themselves. They entrust this to executive government
officials.
Whilst elected representatives should set the objectives for
government, it is the responsibility of the officials to ensure that those
objectives are achieved economically, efficiently and effectively and that
resources are used with due regard for value for money.
2.21 This split between elected representatives and management means that the
council of ministers requires adequate independent information and advice to
hold officials accountable for their actions. In the first instance it is for officials
to provide sufficient relevant and reliable information. The Internal audit has
the responsibility, through performance audit reports, for:
Executive
To provide assurance that official information is adequate and reflects the true
performance of the auditee;
To supplement official information where it believes it to be inadequate.
The Auditee
To give advice, as to what could lead to improvements for the audited body;
To encourage audited entities to improve the quality of their reporting to the
executive.
Ways of achieving these objectives entails:
Assessing whether the auditee has established sound system and adequate control
for ensuring its performance;
Assessing whether the auditee has adequate systems and procedures for detecting
non compliance irregularity and illegal acts.
Examining the practice of these systems/controls;
Examining evidence of poor VFM, seeking the causes and establishing potential
improvements;
Identifying appropriate cost effective ways of improving financial management
and control to persuade auditees cost effective solutions;
9
Ensuring that there is a cycle of coverage based on materiality, risk and key areas
and issues;
Ensuring credibility by presenting reports on major examinations which are fair,
balanced, accurate and up to date.
public body ensures that appropriate advice and assistance are available to the
audit teams. Audit teams should consult with internal audit committee, subject
matter specialists, and other support groups, as appropriate, on critical decisions
made during the audit, and also hold an informal brainstorming internal
methodology meeting during the planning process to obtain advice and
guidance before finalizing the audit plan.
2.25 Following is an outline of the key responsibilities of the consulting committee.
Audit advisory committees should be established in each public body.
Members of committee, from both inside and outside the public body, should be
selected on the basis of their skills, insights, relevant knowledge and experience.
Outside advisors are recognized as leaders in their fields of expertise.
2.26 The committee is designed to primarily provide a forum where the audit team
can seek advice on the objectives of the audit, the general approach, and the
significant matters and issues that are to be reported. The team also presents
information to the committee at the critical decision points of the audit and
normally meets two to four times during the course of an audit. The audit team
consults with committee members on the following aspects of the audit:
48. The preliminary broad audit issues which were identified during the overview
stage, background and rationale for the audit, initial lines of inquiry, and the
relevance of the planned audit to the offices mandate;
49. The scope, general approach and evaluative criteria, and emerging issues during
the feasibility stage;
50. Expected findings, recommendations, conclusions and reporting strategy; and
51. The report chapter to assure that it addresses the right message, is fair, significant
and clearly presented during the reporting stage.
2.27 The role of the committee is to:
52. Advise on planned coverage, matters of potential significance and audit approach
in the early stages of the audit;
53. Provide expert counsel on the significance of issues;
54. Review the avenues for quantification being pursued and whether they will be
achieved;
55. Provide independent review, challenge and council at the critical control points of
the audit; and
56. Advise on whether the report message is right and the issues are significant, and
on the tone, fairness accuracy and reasonableness of the presentation.
The audit department/division could also use individual members of the committee
with expert knowledge as special advisors to the audit team.
2.29 At the initial stage the objectives could focus on ensuring establishment of
sound accounting standards and procedures and see to it that money is spent
only for authorized purposes. The subsequent practice for the committees to
spend more time upon the elimination of waste and extravagance, the
encouragement of sound practices in estimating, contracting and financial
administration, and finally the need to ensure the quality of service to the public
and obtain good value for money.
2.30 Such committees may not have an executive power and can only submit
recommendations. Their value comes not from simply criticizing things that
things are wrong but by making fair recommendations, firmly based on actual
cases, which may be applied with good effect over a wide field. Their terms of
reference could be defined in broad terms Including the right to examine
accounts, to send for persons, papers and records, and to report. In practice the
significant work of the committees will arise from its examination of the
Internal audit report.
2.31 The effectiveness of the committees largely depends on having sound audit
reports, from the Internal Auditors, as a starting point with the specific issues to
be resolved clearly indicated. In turn the auditors effectiveness gains
significantly from the support and standing of the committees. The effort of the
internal audit may be seriously undermined when auditees fail to give adequate,
prompt consideration and response to audit queries; this is an area where the
Internal Audit should get to strong management support to secure corrective
actions.
2.32 Where the committees suffer from having only limited staffing support, the
problem can be relieved by way of direct assistance from the internal audit.
In particular the committees should be briefed as to the effective lines of inquiry
and questions which elicit the information required for any possible committees
reports. The committees make the greatest impact by taking evidence from the
head of the body under scrutiny as such body has the ultimate responsibility for
financial management.
12
3.6 During this stage the auditor makes a preliminary assessment of those areas that warrant
audit attention, and determines a tentative audit strategy for addressing them.
3.7 An in-depth understanding of an audit entity may be developed and maintained over a
lengthy period of involvement with the entity, both through financial audit and past
VFM activities, or it may have to be acquired before the auditor is in a position to plan
and carry out a specific audit.
3.8 Careful selection and targeting of performance audit assignments is particularly important
in view of the complexity of the public sector and the relative resource constraints for
carrying out the work. Unless worthwhile assignments are selected, and confirmed by
the feasibility study, time spent in detailed main investigations will be wasted with little
being achieved. The overview is therefore a crucial stage in the performance audit
process.
13
3.9 Information gathering during the overview can be extensive but should not become an
end in itself. The auditor needs to strike a balance between collecting sufficient
information to have confidence in his/her recommendations to proceed to a feasibility
study, thereby committing the audit office to further use of scarce resources, without
trespassing into the feasibility study itself. Further explanation for the aims and
objectives of the overview is given in Guide 2 appendix 3.
Methodology
3.10 The overview consists of a top down approach to information gathering and analysis.
Starting with the most strategic and summarized information, we need to collect only
sufficient evidence in each potential audit area as to:
65. Differentiate the main activities of the auditee to allow us to form a broad strategy
for our audit;
66. Identify possible audit areas and issues for the main feasibility study;
67. Evaluate each of these audit areas and issues against the risk criteria mentioned
earlier.
The objective of the overview is not to find out everything to know about the audited
entity. Information gathering should, therefore, be selective and targeted.
Inputs: for studies of the control of resources and for wider economy studies; and
The principal financial management control systems: for studies of the adequacy
and quality of the management controls over economy, efficiency and effectiveness.
3.20 Analysis should not be limited to the current financial year. To understand the entity
fully the auditor needs to appreciate organizational trends. Analysis of movements in
the financial statements year on year and of its budgets should also be undertaken to
show:
Major changes in expenditure or income by policy objective or instrument;
Significant variations in inputs;
Un-budgeted income or expenditure;
Explanations of the above.
3.21 At the end of the initial information gathering and analysis the auditor should present a
report to the relevant principal auditor showing the results of the crosscuts and
recommendations of the different levels of priority for materiality. The principal
auditor should decide on the basis of this information which areas to investigate further
(that is, against the remaining criteria) and to what depth.
3.30 Information requirements to assess audit ability will depend on the nature of the
proposed audit assignment and the necessary methodology. What information we will
require during the main investigation, how we will analyze it, and the audit resources
required can only be determined once the issues and methodology have been defined.
But, as noted above, the auditor must confirm during the overview that a main
investigation is possible and should remain to be proved in the feasibility stage.
3.31 At a minimum the auditor should check, for both departmental and possible external
information required during the main investigation:
91. Its availability, that is, does it exist and if not what can we do to fill gaps?
92. Its location, that is, how easy will it be to collect?
93. Its quality, that is, can we rely upon it?
The auditor should also ensure that any necessary external assistance would be
available when required.
Selecting areas for audit
3.32 The main purpose of the overview is to identify potential performance audit
investigations. During the overview process vast amounts of information are
collected about the audited body. To be able to make recommendations about what
would or would not make good studies and the priorities between studies the auditor
needs some form of basis for evaluating the information that has been collected.
3.33 Selecting potential areas for audit should be based on some or all of the following
criteria:
3.34
3.35
Materiality;
Risks to VFM;
Public accountability;
Possible impact;
Legislative or public interest;
Risks to the audit offices;
Departmental issues;
Suitability;
Audit ability;
Timeliness;
Previous audit works;
Other major work planned or in progress;
Developments likely to affect assessment.
The above information should be analyzed against each risk criterion. The primary
requirements are:
To identify and evaluate all information having a significant impact on our view of the
auditee;
To develop a consistent approach to the allocation of priorities across all topics within
the audit field; and
To delineate, within each potential audit area, the 2 - 4 key study areas for the
feasibility study.
To complete the risk assessment forms the auditor should:
107.
Assign a priority to the topic as a whole;
108.
Suggest when the audit should take place within the overall programme;
18
109.
Give a priority rating (low, medium, high) against each risk criterion and
briefly explain the reasoning for these.
A worked example is given in Guide 2 appendix 10.
3.36 Even if the auditor uses selective approach to gather information, for the overview, he
can generate a large amount of data. To summarize results the auditor should produce
a short report as in Guide 2 appendix 9 for each of the main topics identified in the
crosscuts. Risk assessment form should be produced for each low, medium or high
priority areas, whether or not an assignment is being proposed. It is important to
ensure completeness.
Materiality (Significance)
3.37 In performance audit a matter is deemed material if its disclosure is likely to be of
interest to, or influence, the report user. Materiality is one of the main criteria
considered at the overview and strategic planning stages and latter in the reporting
process. It assists in the selection of areas for examination, in the determination of
priorities and in deciding what needs to be included in reports.
3.38 Deciding whether or not an audit issue or finding is material always involves the use of
professional judgment. There are three main factors which influence materiality
decisions-the amount, the nature of a matter and the context in which it occurs.
However, the measure of whether an item is material may not be determined solely in
terms of any single factor. Thus it may not be the value of the activity which is the
over-riding determinant of what is material, but its very nature, or the context in
which it occurs.
3.39
3.40
3.41
3.42
Materiality by Amount
Materiality by amount involves a consideration of whether the financial value is such
as to make it of interest to report users i.e. Influence them. This may be in terms of its
absolute amount (what is considered a significant sum of money) and/or its relative
value (e.g., compared to the auditees programs, total resources, assets etc.). It does
not necessarily relate to a given years expenditure and is more likely to be considered
in relation to the continuing program of activity.
Materiality by amount covers all financial factors in the organization expenditure and
income, assets and liabilities. Items should be considered in gross, rather than in net
terms so as not to hide underlying trends or significant areas of activity. We should
also include any public expenditure that is not the direct responsibility of the audited
entity but over which it has a major influence. In the case of country like Ethiopia,
receiving extensive but finite foreign aid, it is also appropriate to include the aid
expenditure that falls within the audited entity s remit.
Analysis of materiality should not be limited to the present financial year but should
include expenditure and income over the recent past and proposals for the future.
Any major changes or significant trends are important as they give further context to
our assessment and may help us evaluate the potential for inherent risk. Information
on materiality can normally be obtained from the organizations budgets, corporate
plans and financial statements.
The auditors interest in materiality is in both the absolute size of the audit item and its
size relative to other audit areas. Its relative materiality will be one factor in deciding
the priority of each individual item within the whole audit field.
19
Example
OFAGs Social Services Division, in the 1983 E.C. financial year, had an audit field of
approximately 982 million Birr, with the following expenditure spread for organizations:
1 - ~ 493 million Birr;
2 - ~ 156 million Birr;
2 - between 20 and 30 million Birr;
1 - between 10 and 20 million Birr;
2 - above 3 million Birr;
Range of smaller institutions totaling another ~ 100 million Birr.
Given this spread of expenditure, it might be reasonable to allocate priorities as follows:
If the division has sufficient resources to conduct 2 performance audits a year, and leaving
all other criteria aside, the office might decide to conduct performance audits as follows:
One study of a high priority entity every 18 months, giving an audit cycle of 4
years;
One study of a medium priority entity every 2 years, giving an audit cycle of 10
years;
Studies of low priority items as audit resources, and other criteria, dictate.
The only caveat to this is to consider a study of the quality of financial control systems in
low priority entities. This would be a high priority item as together they spend
approximately 100 million Birr a year - the cut-off point for high priority entities.
Materiality by Nature
3.43 The consideration of materiality by nature relates to whether the intrinsic
characteristics of an activity are likely to interest or influence report users. Apart
from of its financial value, a matter may be significant, for example, because: it is
new (e.g., a new spending program, initiative or tax); it is novel or unusual; it
involves substantial diseconomy, inefficiency or ineffectiveness; or it is of particular
legislative or public interest.
Materiality by Context
3.44 Materiality by context relates to matters which are not necessarily material in their
own right, but because of their significance, they need to be drawn to attention. The
auditor must be sure that the related matter is relevant and of sufficient importance
while, at the same time, be satisfied that because of the context in which it occurs it
warrants inclusion on the grounds of fairness or completeness.
the program with economy, efficiency, cost effectiveness or taking into account the
environment implications.
3.46 A risk to VFM is the risk that economy, efficiency and effectiveness are not being or
may not be achieved. Risk defined as the probability that an event or action may
adversely affect the organization, such as exposure to financial loss, loss of reputation
or failure to deliver the program with economy, efficiency, cost effectiveness or taking
in to account the environmental implications. Risk assessment is the process that is
crucial to the development of effective audit work schedules. The risk assessment
process includes identification of auditable activities, identification of relevant risk
factors, and an assessment of their relative significance. A risk assessment requires
the auditor to ask the following types of questions.
122.
What can go wrong?
123.
What is the probability of it going wrong?
124.
What are the consequences?
125.
Can the risk be mitigated or controlled?
3.47 There are two main types of risk to VFM, inherent risk, which stems from the nature
of the activity, and identified (control) risk, which may result from a perceived
weakness or specific evidence. The distinction between the two types of risk is often
not clear-cut. Categorizing risk in this way is merely intended as an aid to the
evaluation process.
Inherent risk
3.48 Certain types of operation, by their very nature, have an inherent risk to the
achievement of VFM. Factors outside the control of the audited body (if only
temporarily) may render a matter prone to poor VFM. This would include such
aspects as:
126.
The set up of new services;
127.
Legislative change;
128.
Major contingencies;
129.
Introduction of significant new policies;
130.
Unusual transactions, that is, those outside the normal course of business of
the entity;
131.
Unusual financial arrangements;
132.
The effects of the general economic and political conditions on operations,
financing or investment activities;
133.
Exposure to interest or exchange rate fluctuations;
134.
Complex programs;
135.
New technology; and
136.
Intangible objectives/outputs.
practices, and as a result of the experience of audit offices staff. Such climates may
consist of:
a) Operational climate: political, social, environmental or economic issues can
influence the way in which operations are conducted, as can legislative or
other pressures. These may lead to activities being expanded or curtailed,
resulting in controls being circumvented, or other risks to VFM. Whilst, these
factors may be outside the control of the audited entity they are not inherent.
Evaluating the operation climate however can ensure that associated risks are
taken into account.
b) Management practice: the quality of management can also provide a good
indicator of the possibility of risk to VFM. The auditor should be looking for
three key elements which help to secure, control and monitor the achievement
of the 3Es. These are:
i)
The establishment of clear organizational and operational objectives;
ii)
Sound control over activities and procedures to make the most economic,
efficient and effective use of resources;
iii)
Appropriate monitoring and information systems to ensure that
management can quickly become aware of diseconomy, inefficiency and
ineffectiveness and take necessary action.
The absences of these elements can pinpoint the risk of poor vfm.
Degree of Risk
3.50 Once the inherent and identified risks have been assessed the auditor will need to make
some assessment as to how likely and how serious he/she believes them to be. This
should enable the risks to be given an approximate order or ranking, generally in
terms of high, medium and low.
3.51 It is not, however, possible to provide exact guidance on the level of risk. The auditor
must use his/her judgment to decide, but the following questions might help:
137.
Is there evidence that poor VFM has actually occurred in the past? If so, to
what extent?
138.
How adequate is the evidence in showing the likelihood of poor VFM having
occurred in the past?
139.
How adequate is the evidence in showing the likelihood of poor VFM
occurring in the future?
Steps taken in risk assessment
3.52 The following steps should be considered in evaluating risks to VFM:
140.
Identify areas of operations and activities susceptible to poor VFM;
141.
Identify specific risks;
142.
Establish VFM control and management information systems;
143.
Assess degree of risk (likelihood, frequency, significance,
consequences, short/long-term etc.);
144.
Produce an order of ranking.
extent,
3.53 To assess whether an organization is achieving value for money the auditor must first
establish criteria of what constitutes economic, efficient and effective use of resources
for the entity or scheme in question (that is, what price it should pay for inputs, what
level of outputs it should be getting and what impact it should be having). By
22
3.54
3.55
3.56
3.57
3.58
3.59
comparing actual achievement with these ideal criteria the auditor can identify
areas where there is waste or poor performance.
Most people do this as a matter of course each time they make a purchase. For
example, when buying food we have a view of how much we want, what quality we
are expecting and what price we are prepared to pay. If the goods do not live up to
the standards we set then we see them as a poor purchase, that is, bad value for
money.
In assessing risk to value for money the auditor takes this process one step further. In
addition to seeing whether there has been waste s/he assesses the environment and
management controls to see whether they create a risk to the economic, efficient and
effective use of resources. By comparing the actual financial management
environment and control systems with those that a secure and well-managed
organization would have in place, the auditor can assess the risk that the entity will
not secure good value for money. A detailed discussion of the nature and use of risk
evaluating criteria is available in Guide 2 appendix 4.
Auditors should also pay special attention to the indications of non-compliance with
laws and regulations, irregular and illegal acts with in each audit area.
It would be impossible to include here all the possible evaluative criteria the offices
might use. However there are a number of available sources in OFAG library.
The overview should not be limited to looking only at those parts of an organization
with direct control over the use of resources. Poor value for money can also be
experienced in any area of an organization whose actions or regulations affect the use
of resources by others. For example, the Ministry of Transport may spend only a
limited amount on accident prevention on roads. But its regulations on such matters
as the wearing of seat belts and its effectiveness as a test for drivers may have a
major, albeit indirect, effect on money spent in the Ministry of Health on the
treatment of accident victims.
This criterion also incorporates the objective of identifying well performing
government organizations. This is the inverse of high risk and the analysis that
identifies poor performing or managed organizations will also allow the auditor to
pick out the well performing entities.
Public Accountability
3.60 This influences the auditors assessment of the audit field and selection of assignments
in two ways:
145.
The executive should be given the opportunity to hold public bodies account
for major areas of government expenditure. This is discussed more fully in
Chapter 2.
146.
The Internal Audit corporate objectives include improving accountability by
strengthening audited entities reporting to executive .
3.61 In the first of these, we are interested in organizations or schemes which are so
important that it is reasonable that they are examined as a priority issue, irrespective
of any other criteria. This will often come down to a question of size and the auditor
will use materiality as the criteria for selection. However, there may be occasions
where an organization is important because of its political context; this is discussed
below under legislature or public interest.
3.62 The second is concerned with the quality of organizations external reporting process.
As noted in Chapter 2 it is the responsibility of the organization to report accurately
23
and fairly on its use of resources and performance achieved. In selecting performance
audit assignments, the auditor should assess whether there is proper external reporting
and, where appropriate, identify the need for improvements. Evaluative criteria for
this area are detailed in Guide 2 appendix 4.
Possible Impact
3.63 The Internal Audit objectives for performance audit are heavily geared to having a
beneficial impact. Its principal purpose is to enhance the quality of reporting.
Equally, those concerned with value for money seek to encourage improvements
through recommendations which are necessary and cost-effective or by learning
lessons from well performing organizations. Cost-effectiveness analysis tries to show
how a given level of benefit can be achieved at the minimum cost, or to show how the
maximum benefit can be achieved at some given level of cost. The audit offices,
then, are not interested in being negative, critical agencies but wish to have a positive
impact through their work.
3.64 Identifying the scope for beneficial impact goes hand in hand with analyzing value
for money and public accountability. These criteria may identify instances where
the auditees performance or systems are weak. To assess the potential impact of an
audit assignment the auditor should then ask a further question as to what can be done
about it - what improvements should be made within the audited entity.
3.65 To answer this question the auditor should go back to the comparison between the
action of a good organization and those of the audited entity. As noted above, this
defines the problem areas within the auditee. But it also points to what the auditee
should do to improve. The evaluative criteria - our views of what a good organization
would be doing - are the required changes.
3.66 Identifying potential improvements is only the first step. The auditor should also
consider whether they are:
147.
Feasible;
148.
Cost-effective.
We should not expect the audited entity to be perfect. Perfection can be exorbitantly
expensive. It may not even be possible. The auditor should make a realistic
assessment of the true worth of any possible recommendations.
Executives Interest
3.67 Performance audit is not an end in itself. The public body expend valuable resources
on it to serve the interests of its main clients: the executive and, through them, the
public and the media. The auditor needs, therefore, to have a view of whether the
audit assignments he/she proposes are in areas of the executive or public interests or
whether the subject will prove to be of interest if the Internal Audit provide adequate
information. Though the auditor should be politically neutral he/she needs to have an
appreciation of the political environment.
3.68 The executive interest is also important because it will have a direct effect on the
impact of the public body work. If the Internal Audit recommendations are opposed
by the public body and the audit report does not generate much interest by the
executive, it may be difficult to secure improvements in value for money or public
accountability.
Departmental Issues
3.71 The audited entity affects selection of assignments in two ways:
149.
They may commission the study themselves: this is a positive advantage to
any assignment as the auditee is then more likely to accept the conclusions and
recommendations. The auditor must, however, ensure that other criteria are met
before recommending a study. She/he needs to be satisfied that there is a real risk
to value for money worth investigating and that the Internal Audits are capable of
conducting a quality audit;
150.
They may strenuously oppose a particular study: experience shows that
this can lead to considerable delays and may affect the quality of the final output.
This should not, of itself, stop the engagement from proceeding but the auditor
should consider the implications for the audit office work (likely delays, cost in
resources, future working relationships) and report accordingly to the audit offices
senior management.
Suitability
3.72 The auditor should only recommend potential assignments which are suitable for the
target audience. This revolves around two issues:
151.
Whether the subject is so highly contentious politically that the Internal Audit
report will end up being argued over rather than acted upon. Auditors should avoid
audits which involve criticism of the governments political objectives or which
will inevitably to be used for this purpose by external audiences;
152.
Whether the subject is so technical in nature, that the Internal Audit cannot
present a report which meets the audiences needs.
It is unlikely that the Internal Audit can achieve any of its corporate objectives if either
of these situations prevails.
3.73 The suitability of a subject depends upon how the likely content of the final Internal
Audit report can be presented. Being politically contentious or highly technical does
not, in itself, rule out an audit. If a subject can be presented in a factual, clear fashion,
without provoking political value judgments, it can still make a good study regardless
of its apparent sensitivity. To assess suitability, auditors must consider the final
presentation of the report, even at this early stage.
Audit ability
3.74 The auditor should only recommend assignments that the Internal Audit has the ability
to investigate. If the auditor recommends a study at the overview stage she/he is
committing the public body to expending scarce resources on a feasibility study.
Further, if it is found at the feasibility stage that the study is not viable, the audit will
have nothing to show for a considerable effort.
3.75 By the end of the overview stage the auditor should have a clear idea of a few more
important, potential audit areas to be investigated for value for money, public
accountability and performance audit improvements. The auditor should assess the
auditability of the identified potential study issues.
3.76 Audit ability depends upon:
25
153.
The nature of the issues: very broad, effectiveness issues are generally more
difficult to examine than narrower economy issues. For example, if an audited
entity has failed to measure its achievement of social objectives and the auditor
decides this is an issue to look at he/she needs to think carefully about whether
his/her office has the ability to measure performance in this area;
154.
The methodology required: the methodology will determine the necessary
evidence, analysis and staff skills. The auditor should assess whether the audit
office can cater for all of these before recommending a study.
155.
The availability of evidence: evidence must be sufficient, relevant and
reliable. At the overview stage the auditor should make an initial assessment of
what will be needed, what is available in the audited body or elsewhere, and of its
quality. The auditor should then consider:
How easy it will be to collect the evidence: it may only be available at various
locations far away from the audited entity. This could have significant
implications for costs and delivery of the study;
Any gaps in the available information and the implications of poor quality of
information: if the gaps and the poor quality of information are significant the
audit office will have to fill them itself. The auditor needs to be sure that this is
possible and to have some view of the likely cost;
The Internal Audit available skills: auditors cannot attempt to be experts in every
field. The Internal Audits may need to employ specialist consultants. Equally, the
audit team may not have within it the necessary analytical skills and will have to
think about bidding for staff from elsewhere in its office;
Overall resource requirements: evidence may be available, and the office may
have all the necessary skills, but the audit may be prohibitively expensive to
conduct. The auditor should make an initial assessment of likely resource
requirements and estimate the projected delivery date of the final report. This
should be weighed against the potential impacts to see if the audit is cost effective.
Timeliness
3.77 The internal auditor should have to consider whether or not:
158.
This is the right time for the Internal Audit to investigate this area;
159.
The audited entity needs more time to implement major such as:
i) recommendations resulting from internal/external reviews; or
ii)
Changes resulting from new legislation.
Documentation
3.84 At the end of the overview the auditor should produce a summary working paper
folder containing:
160.
A synopsis of the cross cuts covering the whole audit area. This can follow
the format of table 1 of appendix 22 in Guide 2 with one diagram for each type of
cross-cut e.g., by objective, inputs, financial management control system;
161.
All risk assessment forms;
162.
A short discussion of the performance audit strategy for the area, showing, at a
minimum the cycle of coverage of high, medium, and if appropriate, low priority
items;
163.
A timetable for the proposed audit areas covering the following 5 years.
164.
Separate working paper folders containing all relevant and necessary
supporting evidence.
3.85 Each risk assessment form should be fully supported by working papers and evidence.
This should be kept on separate working papers folders. Detailed evidence should not
be placed on the summary folder. The summary folder will then be both concise and
sufficient to go forward from the Internal Audit head, with a covering memo to the
head of public body Documentation of working papers and working paper folders are
discussed in Guide 2 Appendices 20 and 21.
3.86 Risk assessment forms on the summary folder should be referenced to the relevant
working papers and working paper folders containing the background information
and evidence for the auditors judgments. Referencing should be sufficient to allow
management to easily refer to the relevant data.
27
3.90
3.92 The over-riding principle to which we should always work in our relations with
auditees, at all stages of performance audit, is that of no surprises. As we want to
be kept informed of any significant developments in the audited entity, so we should
ensure that we keep all relevant staff within the audited entity informed of what we
are doing. Co-operation cannot be one-sided.
3.93 The first stage of developing good relations is to inform the head of public body of our
intention to carry out an overview through opening conference. This should normally
be undertaken by the internal audit head or senior auditor directing the work and
should cover:
3.94 In setting up the overview we should also take the opportunity of inviting top
management to give us a statement of the auditees policy objectives and inform us
of:
178.
Any major concerns regarding its performance or that of its subsidiary bodies;
179.
Any constraints affecting value for money;
180.
Significant future developments within the auditee;
181.
Any hindrances to the successful completion of the overview, e.g., the
availability of key staff. Before commencing, we should make every effort to
resolve these.
3.95 The head and key staff within the finance branch should also be fully briefed. As
noted above, the finance branch is an important source of information. Because of the
internal audit financial audit the finance branch will be aware of the internal audit ,
but may not have come across performance audit before.
3.96 The auditor must also liaise properly with all other staff within the public body whom
he/she wishes to interview. These staff is more likely to be unaware of the internal
audit, its role and purpose and are unlikely to have encountered performance audit
29
previously. As a result they may, at first, appear hostile but this can normally be
overcome by careful explanation and discussion.
3.97 The auditor should ensure that the finance branch and other departmental staff of the
audited entity are informed, as appropriate, about:
182.
The role and purpose of the Internal Audit;
183.
The objectives of performance audit;
184.
What an overview is and why we are carrying it out;
185.
Briefly, the methodology of an overview;
186.
What information is required from them and why;
187.
Our staffing and timetable;
188.
The liaison arrangements established with head of the public body, liaison
officer should be close to the top management and have the authority to speak
on behalf of the audited entity.
189.
What we will do with our results, including the fact that the Internal
Audit will discuss results with the auditee at the end of the overview.
3.98
Precise methods of familiarizing staff will depend upon the liaison arrangements. In
some cases the audited entity will take responsibility, in others it will be left to the
Internal Audit head. (Whichever is the case, the auditor must check that auditees
auditee staff is fully and accurately briefed at an early stage.)
3.99 If there are any major changes in our staffing or timetable, or in the access we require
to people and papers, the internal auditor head should consult with the head of the
public body the earliest opportunity. Even where there are no changes, it would be
courteous to keep the auditee abreast of the progress of the overview. Internal audit
we wish to be informed of any developments within the audited entity which are
likely to affect the conduct or outcome of the overview.
3.100 In large, more complex organizations it is good practice to agree key facts as the
overview progresses. This gives added confidence to findings and might include:
Policy objectives, if these have not been formally communicated by the
auditees top management;
Financial information;
Existence and usage within the auditee of the major information systems;
The structure and key components of the financial management systems,
including strengths and weaknesses;
Completeness of listings of all major departmental reviews of the auditee,
internal audit or consultancy reports.
The auditor may find it useful to produce a fact sheet of the key information and
seek verification and agreement from the auditee.
3.101 On completion of the overview the principal or senior auditor should discuss the
results with auditee top management. This is partly a matter of maintaining the
principle of no surprises by keeping the auditee informed, but their comments on
our conclusions would be valuable at this point. They may be able to add a gloss to
some of the audit findings (e.g., by placing some risks to value for money into
context) and may be able to correct any errors that may have crept into our work (that
is, acting as a form of quality control on the overview).
3.102 These discussions should only cover the findings and broad conclusions of the
overview and should not commit the internal audit to a definite program of studies for
the future. Final decisions on the internal audit future work plan lies with the head of
30
the internal audit and other management who will not have had an opportunity to
consider the overview at this point.
Management
3.103 The overview is difficult to plan and control. It does not lend itself to detailed early
planning because both:
195.
The results of early rounds of information gathering and analysis and
196.
The large number of audit judgments involved (e.g., on the levels of
materiality)
Affect the direction of later elements of the work. At the outset there will be
considerable uncertainty about which areas to concentrate audit resources on. This
will only become apparent as the overview progresses. Indeed, one of the reasons for
the overview, and later feasibility and main investigation planning stages, is to reduce
uncertainty about the scope, content and outcome of the (more costly) main
investigation by targeting audit areas with a high probability of success.
3.104 These difficulties can be reduced by breaking the overview down into self-contained
tasks. This gives management scope to monitor and review progress and intervene as
and when necessary at key decision points. The main tasks are:
197.
Initial job specification: before any information gathering starts management
must carefully design the job, defining the scope, overall objectives, time and cost
budgets, and overall resource requirements;
198.
Initial information gathering and cross cuts;
199.
Detailed information gathering and risk assessment: this can be broken
down by subject and allocated to a number of staff;
200.
Report preparation.
3.105 Although the work should be broken down into manageable tasks, it is good practice to
keep continuity of staff throughout. Understanding of the audited entity and
judgment of the risks and priority of each individual area in the context of the whole
organization depends upon the steady accumulation of knowledge and understanding
by those involved. This will not be facilitated by chopping and changing staff.
3.106 Each task should be separately planned in its own:
201.
Objectives;
202.
Methodology, data sources and analytical requirements;
203.
Time and cost budgets;
204.
Milestones; and
205.
Expected outputs and documentation requirements, including deadlines.
Staff should be left in no doubt of what is required of them, how, by when and with
what results.
3.107 Milestones are those points in a task when management needs to evaluate progress to
date and consider options for future direction. They are decision points, and may
require some element of re-planning of tasks or the overview as a whole. Identifying
milestones has a number of advantages:
206.
They highlight when management input is essential;
207.
They emphasize the importance of key outputs without which management
cannot make informed decisions;
208.
They delineate between those decisions which management needs to make and
those that can be left to more junior audit staff. This in turn points up to staff
which unplanned results should be brought to managements attention.
31
3.108 Once the audit begins management must maintain a high degree of involvement.
Adequate control relies upon:
209.
Monitoring progress and reviewing outcomes and outputs: management
should retain sufficiently close contact with the progress, outcomes and outputs of
the various tasks as to be confident that objectives for quality, time and cost are
being achieved; and
210.
Acting at each key decision point: management must maintain the direction
of the study by making well-informed, prompt and appropriate decisions as
necessary.
3.109 Control also depends upon adequate communication within the internal audit and with
management. Good planning and the specification of key outputs and milestones will
help. Communications will also be aided by the use of regular internal audit
meetings. These should include all staff, including management. Their success
depends upon:
211.
Relevance: the purpose of team meetings is to review progress and consider
the future direction of the overview. They should not become a forum for general
discussion. The head of the internal audit should chair all meetings;
212.
Preparation: each staff should take responsibility for their own work and be
able to review progress accurately and completely, highlighting the significant
findings and areas where decisions need to be made;
213.
Free flow of information: good quality decision-making depends upon all
relevant information being considered. This requires everyone being prepared to
listen as well as contribute;
214.
Completeness of decision making: decisions should cover what needs to be
done, for what purpose, by whom, the deadline and, if appropriate, the
methodology;
215.
Accurate minute taking: minutes are records of discussion but, more
importantly, of decisions made. They are working documents from which all
should be able to see clearly what is required of them.
Marking
3.110 The information and analysis from overview work needs to be kept up to date so that
changes in circumstances can be taken into account when planning the audit strategy
e.g., changing legislation, rapid growth in income or expenditure.
3.111 Marking is the process of keeping the overview up-to-date. It involves maintaining a
selective watch of information and developments in the audited body with the
objectives of:
216.
Identifying and evaluating any major changes in the audit field;
217.
Revising the audit strategy and priority of audit areas as the changes dictate.
3.112 The two main elements of marking are:
218.
Maintaining a broad overview of departmental plans and activities e.g. Annual
reports and estimates. The aim is to identify the principal developments which
might affect decisions taken as a result of overview;
219.
Keeping a particular watch in those areas identified from the overview as
warranting special attention (examination of progress reports, management
information, statistics etc.).
32
3.113 To be fully effective marking must be capable of highlighting both new risks to VFM
and changes in the importance of previously identified risks.
3.114 Changes in the audited entity are likely to take place. These changes may include:
revising policy objectives, instituting new policy instruments, changing the allocation
of resources, getting involved in new activities etc. Equally, as performance audit
takes effect we would expect to see auditees with in the entity developing their
management systems, reducing risk to value for money, improving public
accountability and making better performance information available. All changes,
whether for the better or worse, must be incorporated into audit planning. This may
open up new areas for audit and change the priority given to existing ones.
3.115 Although we need to keep our audit planning up to date, we do not want to go through
the entire process of an overview each year. They are large-scale exercises which
consume considerable resources. We need to take a selective approach to our review,
homing in on any major changes in the audited entity and evaluating their
significance. Where the auditee continues as before largely unchanged the overview
analysis can stand unchallenged.
Methodology
3.116 Marking includes the following activities:
220.
Selection of key departmental data sources to monitor;
221.
Review of data sources to identify significant developments in the audit field
since the previous overview or marking round;
222.
Evaluation of developments against the risk criteria discussed in Overview;
223.
Revision of the audit strategy and audit proposals, as necessary;
224.
Documentation and reporting of results.
Marking incorporates only those techniques that are used during an overview, but on a
more limited and targeted scale.
3.119 As with the overview, the first step is to analyze the financial data using crosscuts.
Marking cross-cuts have two purposes:
227.
To see whether the overview analysis of the audit area is still valid, that is,
whether there have been significant changes in the materiality of the various
elements of the area;
228.
To identify any significant trends in expenditure, income, or use of resources.
3.120 Marking should also include a brief review of organizational:
229.
Policy objectives;
230.
Activities;
231.
Financial management structures.
The internal auditor should also monitor the auditees future plans through such
sources as corporate plans, resource bids etc.
3.121 The internal auditor should stay informed on the auditees achievement of value for
money. Sources for this will normally be identified during the overview and,
typically, will include:
232.
Internal or external reporting of performance (e.g. Annual reports);
233.
Internal audit reports;
234.
Consultancy or other management reports.
3.122 All information should be evaluated against the risk criteria discussed in Overview and
the results compared to that of the overview or previous years marking. In each case
the auditor should look for any significant developments since the previous year and
assess the implications for the audit strategy and potential assignments.
Documentation
3.123 Documentation should reflect the principal activities of marking. It should:
235.
Record the results of cross-cuts of financial data;
236.
Identify further data sources;
237.
Record the results of the monitoring of each data source, confirming, as
necessary, that the audit strategy or proposed assignments remain unaffected or
highlighting any major changes required;
238.
Summarize proposed revisions in each individual future audit assignments and
the strategy as a whole.
3.124 Typically documentation would produce three sets of working paper folders:
239.
Cross-cuts;
240.
One for each data source (e.g., internal audit reports, annual reports etc.) With
a brief covering note of findings and implications;
241.
A summary folder containing any revised or additional risk assessment forms
and revised audit strategy, as necessary.
3.125 As with the overview, it is essential that all working papers and working paper folders
are referenced properly. Documentation of working papers, including referencing, is
discussed in Guide 2 appendix 6.
3.126 Adequate contact should also be made with:
Management
3.130 Marking must be closely managed. Decisions need to be made at the outset on:
249.
The depth or intensity of marking;
250.
Which data sources to review;
251.
Whether marking should be once a year event or on a continuous basis;
252.
Who should do the work staffing;
253.
Time budgets and delivery dates.
ensure that all proposals are valid. The basis, scope and targeting of each
recommendation should therefore be reviewed in some depth during marking.
257.
The complexity and size of the auditee: if the audit entity is large, with
multiple objectives and a wide variety of functions marking could develop into a
major audit activity. But the purpose is not auditing, hence effort will therefore
need to be concentrated on monitoring of priority areas.
Data Sources
3.133 The management should recognize that the more data sources that they require to be
marked the more audit resources they will consume.
Organization
3.134 Management has a choice as to whether part or all of marking should be conducted as
a once a year exercise or spread throughout the year. This will normally come down
to a question of the availability of resources. In practice it is probably best to parcel
the job up into discrete tasks (e.g., by data source) which can be given to staff as and
when they become available. If this is the case then there should be a marking
coordinator to monitor progress and to draw the findings together at the end of the
year.
Staffing
3.135 Decisions on staffing revolve around getting the best mix of skills to do the job.
Marking benefits from combining:
258.
Performance audit skills: especially a knowledge and understanding of risk
criteria;
259.
Knowledge of the overview: the auditor needs to appreciate the results of the
overview to put marking findings in context;
260.
Up to date knowledge of the audited entity: being familiar with what is
going on in different fields of the audited entity on a day to day basis can add
insight to and reduce the time spent on marking. Such knowledge is most often
found in those responsible for the financial audit.
The internal audit head therefore need to balance the various skills and abilities of their
staff.
263.
Identifying within these performance audit strategies possibilities and
priorities for forwarding programs of investigations;
264.
Providing a basis for allocating resources to departments.
3.138 Every year in June/July Internal Audit should produce a performance audit strategic
and annual performance plan. This is an internal decision making document for
discussion and agreement between Internal Audit and the head of public body on:
265.
The internal audit strategy for the coming 5 years;
266.
Specific performance audits for the following 24 months;
267.
Consequential staffing needs and other resources.
3.139 Top managements approval of the plan, revised as necessary, provides the Internal
Audit with a number of outputs:
268.
It constitutes approval by top management to take specific audits forward to
the feasibility stage;
269.
Taken together the strategies within the plans constitute the Internal Audit
proposed strategy for achieving the performance audit objectives;
270.
The approved audit plan for the program of performance audit that the Internal
Audit expects to produce over the next 2 years;
271.
Taken together the plans define the Internal Audit performance audit staffing
and other resource requirements for the next 2 years.
A brief description of the scope of the audit field and the internal audit proposed
strategy for performance auditing;
A brief description of the proposed program of audit assignments;
A short commentary on performance against the previous years plan, including an
explanation of any problems encountered;
A statement of the necessary staff and other resource requirements for the proposed
performance audit assignments;
A statement of staff availability within the internal audit;
37
A detailed staff bid to meet the gap between staff requirements and availability
plus a bid for other external resource requirements not available within the internal
audit.
3.142 The head of the public body requires concise planning document which will:
284.
Provide sufficient information;
285.
Identify performance audit delivery;
286.
Offer options;
287.
Provide a satisfactory basis for decisions making.
To meet these requirements internal audits should prepare a short plan which has the
following case materials:
Part I:
coverage summary
Part II:
work proposal
Part III: overhead targets
Part IV: resources
Part V:
appendices
Within appendices:
A spreadsheet of the priority under each risk criteria of each proposed performance
audit assignments in the field, also showing proposal for timing (pro- forma in
Guide 2 appendix 10;
Up to a 3-page proposal for each recommended audit assignment. Requirements
for proposals are in Guide 2 appendix 12;
A departmental income and expenditure account for staffing showing staff
availability and main usage and highlighting free capacity available for
performance audit in Guide 2 appendix 13;
A statement on the need for consultants or other outside resources (Guide 2
appendix 14);
A work plan covering the next 2 years, by month, showing the time spent on each
stage of each audit assignment.
3.143 Plans should be prepared from:
293.
The information and analysis of the overview and marking;
294.
An assessment of resource requirements;
295.
Monitoring and analysis of present staff usage.
296.
In normal situations the plan can be rolled forward each year: where no major
revision of the audit strategy is needed the plan will vary little from one year to the
next, merely requiring the addition of a new 5th year of audit plan.
3.144 Responsibility for proposing strategy and for implementing the program of audit
assignments rests with internal audit head. Once discussed and agreed by the head of
public body the plans constitute accountability documents which the head of
Internal audit is answerable for delivering. To avoid problems at the feasibility,
planning and main investigation stages internal auditors must satisfy themselves that
their plans are viable.
Selecting an Audit
38
3.145 After the process of moving from general information about an organization to the
point where the exact sequence and timing of studies is worked out, it is possible to
select a study from number of options.
3.146 The following are suggested criteria for selecting a study from a number of options.
Thus a good performance audit study is that which:
297.
Tackles important and topical issues and areas of strategic importance to
government policies and programs;
298.
Gets to the heart of the matters examined;
299.
Is well arranged and evidenced to provide Internal Audit impact; and added
value
300.
Takes constructive approach which is relevant to the auditee management in
the real world;
301.
Is valuable and credible to knowledgeable users;
302.
Is understandable to people who know about the subject.
Hence, divisions should bear these factors in mind when preparing their strategic
plans.
Feasibility Stage
3.149 The purpose of a feasibility study is to produce a worthwhile and viable proposal for
the main investigation. The objectives of a feasibility study are:
To define the audit objectives, for the main investigation, the issues, scope,
evaluative criteria, likely conclusions and expected recommendations;
To design an audit methodology capable of delivering the main investigation
objectives;
To assess the ability of the internal audit to execute the methodology successfully;
To estimate realistic time and cost budgets and produce a work plan for the main
investigation.
3.150 The feasibility study is a major element of the performance audit process. It is central
to the effectiveness and efficient execution of the main investigation. Unless due care
is taken and effort is exerted during the feasibility stage it may prove difficult,
excessively costly or, in extreme case, impossible to produce a satisfactory
performance audit report.
39
3.151 On completion of the feasibility stage the internal auditor should report results to the
head of internal audit. The report should cover the objectives of the main
investigation, its feasibility and expected cost (full requirements are detailed below).
It is then for top management to decide whether a study should proceed.
3.152 The feasibility study may lead to decision that a main investigation is not justified at
this stage: The following could be some of the reasons for not carrying out the
proposed performance audit:
Unavailability of data;
Cost of carrying out the audit may be more than the benefits expected from the
audit;
Financial audit results have covered most of the ground;
The internal controls and performance of management are satisfactory;
The objectives of the auditee are being met satisfactorily;
The audit is not expected to lead to significant findings and recommendations.
Sequential Steps
3.153 The steps involved in the feasibility study are shown in diagram 3.1. These are likely
to be iterative, with refinement coming through a number of cycles.
40
Reconsider
feasibility of
study or redefine
objectives,
issues and scope
2. Establish evaluative
criteria
3. Identify likely conclusions
or
Redefine
methodology
4.
Identify expected
recommendations
5.
Delineate methodology
6.
Assess information
requirements
7.
Examine availability,
quality and access to
information
8.
9.
Examine availability of
resources
Information
not available
Resources
not available
Achievement
unlikely
12.
41
Impact limited
or little
contribution
42
1. Issue
1.
2. Evaluative
Criteria
3. Likely
conclusion
4. Expected
recommendation
M (negative)
N (positive)
P (positive)
Q (negative)
R (positive)
Z
Note: negative likely conclusions are where there are indications of poor value for
money, and/or inadequate public accountability. In each case there are corresponding
recommendations to improve performance. Thus steps 1-4 give a number of layers of
objectives from broad issues to specific likely conclusions and expected
recommendations.
All conclusions, both positive and negative, should be reported.
43
attention to any impact. This may have a considerable effect on the investigations
conclusions and recommendations. Guide 2 Appendix 16 should accompany the
feasibility stage report to senior management.
45
3.177The work plan involves scheduling work and resources to give the most efficient
execution of the methodology within the desired time frame. The plan should show,
by week:
The timing of the various tasks: these should be arranged in their logical
sequence taking into account the interdependence between them. For example,
review of the sample of cases can only take place after the work has been
completed to draw up the specification of need on which the review is based;
Required inputs from Internal audit and external source: the necessary input,
by post level, should be scheduled over the lifetime of the investigation. There
will normally be opportunities to trade off levels of staffing with delivery dates.
For example, one less auditor could be used (on the review of the sample cases
and survey of grant recipients) but at the cost of a later overall completion of the
main investigation. Due regard must be given, however, to the necessary
sequencing of tasks;
Key dates: start and completion of planning stage, start of main study, delivery of
draft report to the management, report to auditee body.
3.178 The time budget should show the total man-day input required for each grade within
the audit team, plus Internal audit specialist assistance and external resources. The
cost budget should show the total expected cost of each of these. These allow the head
of internal audit to compare the value of the outputs from the proposed study with the
cost of undertaking it. An example of a time and cost budget is in Guide 2 appendix
17.
Step 11 and 12: Likely achievement of study objectives and impact of the
study and contribution to the Internal audit performance audit objectives
3.179 Prior to producing the feasibility stage report to the internal audit head, the senior
auditors should review all the stages to date to assess whether:
The study procedures from steps 1-4 can be achieved using the methodology
defined and with the assessed information and resource availability;
The study will be worthwhile and is likely to have a significant impact; and
It will contribute materially to the achievement of the Internal Audit performance
audit objectives.
If this is the case, the team is in a position to report to the management. If not, there
will be no justification for proceeding with the main investigation, and the team should
either reconsider the feasibility of the study or redefine either the audit issues and
scope or methodology, as necessary, and then reperform all subsequent steps.
Documentation
3.181 The supporting document of the report should be organized as working paper folders
as suggested in Guide 2 appendix 6.
proposed main investigation with the audited department and should seek the head of
the auditee entity.
Comments and/or concerns about the scope and issues;
Acceptance of internal auditor evaluative criteria and methodology as a fair and
reasonable foundation for an investigation. The internal auditors should discuss
the criteria with management before adopting them. Sometimes, the management
would dispute the criteria laid down by the internal auditors. In such a situation
the matter is resolved by discussion. But if the auditee management is adamant on
some particular criteria about which the auditor feels sure they (auditors) should
report the matter to Ministry of Finance and Economic Development.
3.184 Adequate contact should also be made with other department heads from whom
information will be required during the course of the feasibility stage. In each case
they should be informed of:
The role and purpose of the feasibility stage and, if necessary, of the subsequent
main investigation;
Briefly, the methodology;
What information is required from them and why;
Our staffing and timetable;
What we will do with our results.
If they are new to either the Internal audit or performance auditing they should also be
informed of:
The role and purpose of the Internal audit.
The objectives of performance audit.
3.185 As with the previous performance audit stages, precise methods of familiarizing
auditees staff will depend upon the arrangements agreed with the auditee management.
In some cases the auditee will take responsibility, in others it will be left to the Internal
audit. Whichever is the case, the auditor must check that auditees staffs are fully and
accurately briefed at an early stage.
3.186 In most cases it will be good practice to discuss the outcome of the feasibility stage
with auditees officials. However, care should be taken to avoid introducing any
concept of likely conclusions or expected recommendations into the discussion.
Auditees may feel that these indicate that the Internal audit is prejudging the main
investigation and entering into it with bias. Discussions should therefore be limited to
issues, scope, evaluative criteria, methodology, timing, information availability and
audit resourceing. Responsibility for this agreement lies with the internal audit head in
charge.
Internal audit Planning and Control
3.187 The internal audit head should plan and control each main task of the feasibility stage.
This allows the head to monitor and review progress and intervene at key decision
points. The main tasks are:
Initial job specification: before any work starts on the steps in diagram 3.1,
management must carefully design the job, defining the scope, overall objectives,
time and cost budgets, and resource requirements, including specialist staffing
skills;
Early agreement with Head of public body: normally undertaken by the head of
internal audit.
48
Staffing
3.191 As with every other audit task, decisions on staffing revolve around getting the best
mix of skills to the job. The feasibility stage will benefit from combining:
Performance audit skills, especially a knowledge and understanding of the conduct
of main investigations;
Up to date knowledge of the relevant section of the auditee: this will aid
agreement and step 7 of the approach. Such knowledge is most often found in
those responsible for the financial audit;
An appreciation and understanding of the subject matter of the audit, including
relevant management principles: to draw up issues and evaluative criteria and to
identify likely conclusions the team will need expertise in the area being audited,
be it housing, human resources etc.;
Any necessary specialist skills in audit methodology: this may be include statistics,
surveying of client groups etc.
49
Information to be collected
3.203 During performance audit studies there is a tendency to collect too much information.
Often because of our limited knowledge of the subjects being examined, it is difficult
to ensure that only sufficient, relevant and reliable evidence is collected. The frame
work suggested above of the audit issues being systematically broken down into a
hierarchy of audit tasks leading to a series of audit tests can help focus attention on
what is the minimum evidence needed to prove the expected conclusions. In this way
the scope for collecting irrelevant data might be reduced. The framework also
provides a useful reference point for the team members during the audit because it
confirms that the work being done is supporting the issues.
Sources of Information
3.204 During the feasibility study the Internal Audit will have considered the evidence the
public body:
Is known to hold and which will be collected;
Should hold but may not and therefore needs to be generated;
Does not hold but which is necessary for the report.
Each of the different sources of information will have implications for the audit
e.g., time if a survey is to be used;
Cost where local audits are needed.
These will need to be discussed and the most appropriate source used given the
resources available.
plans contain some form of test programs. They are a useful method of collecting
data. They can provide audit team with clear instructions of the work to be done and
provide the internal audit head with a means of monitoring progress. However they
can become long and unwise to use.
Allocation of Priorities
3.206 Two of the common problems on audit studies are overrunning on budgets and a
failure to meet target dates. These may occur because there is insufficient time
available to complete the planned work. In this situation a decision may need to be
taken on whether to reduce the fieldwork and meet the budget/target date or complete
the fieldwork and overrun the budget and miss the deadline. To help this process the
fieldwork could be prioritized to allow flexibility in the scheduling of the work.
Analysis Plan
3.207 Plans are decision documents. They need to show not only what will be done but why.
An analysis plan might form part of the necessary explanation. It could state how the
data collected would be analyzed to provide the evidence to support the likely
conclusions and expected recommendations.
3.208 Analytical techniques might be used in audit studies. Certain of them require data to
be sampled and collected in a specific way. Failure to do so may prevent the technique
being used. An analysis plan therefore helps avoid such occasions arising.
Presentation of Evidence
3.209The structure of the plan outlined so far has been based on the audit issues alone. There
may be occasions though when additional information is required for say the purposes
of comparison, illustration of events etc. It is easy to overlook these and if the
information is not collected during the fieldwork the opportunity to make the
comparison or the illustration may be lost. Consideration of the structure and content
of the final report should form part of the planning process.
Budget
3.210The provisional budget (staff and time) for the main investigation, broken down by
grade, will have been propose in the feasibility study report. Although based on an
outline of the main investigation it can at best only be an estimate. It should therefore
be reassessed in light of the detailed planning.
3.211Unrealistic budgeting can be as much a problem on audits as the failure to control data
collection. It is important therefore that the plan focus on what is reasonable and
realistic and not what is desirable.
3.212Seeking senior managements approval before the fieldwork commences enables them
to see what the team are aiming to achieve and how. It gives them the opportunity to
introduce their own ideas at an early stage and guide the direction of the audit study.
3.213During the main investigation, management and the team will need resource budgets to:
Plan inputs into the audit;
Assess progress of work against the resources used.
Budgets will normally be required for each significant element of work as well as for
the audit as a whole. Experience suggests that it is advisable to desegregate totals into
segments of work that can be monitored and controlled easily during the main
investigation.
3.214 Whilst the exact structure of the budgets for the various tasks will vary from study to
study, they should include:
53
Full details of internal audit staff resource requirements, by grades, skills and
experience needed, including:
Planning and controlling the task during the main investigation;
Executing the work as specified in each audit program;
Documentation and
Management
Budgets should identify internal audit specialist assistance separately.
Any consultant or outside assistance. This should include the Internal audit input
into the consultancy (e.g., for agreement with the consultant, production of
information, assessment of results etc.) As well as the consultants own time.
Guidance and examples of both time and cost budgets for the main investigation
are in Guide 2 appendix 21.
3.215 The budget for the audit as a whole will consist mainly of the aggregation of the
individual task budgets. However, additional allowance should be made for the
following, where not included in individual tasks:
Staff familiarization with the audit;
Progress monitoring and review, e.g. Team meetings;
Internal audit senior management involvement;
Administration of the audit.
3.216 What is the most appropriate level of planning? This depends upon many factors.
Insufficient planning can result in a poor quality report and a disillusioned team, whilst
too much planning is wasteful and unnecessarily restrictive. It is also sometimes seen
as preventing the use of initiative. Factors which influence the amount of time spend
on planning and the details of the plan are:
The experience of staff who will be working on the audit;
The staffs knowledge of the audited entity;
Whether the audit team worked on the feasibility study;
Size of the audit team;
Audit approach e.g. Whether the audit involved collecting the same data from
many locations;
Need to complete the audit quickly.
Audit Programs
3.217These should give full details of the audit tests and other work necessary to achieve the
main investigation objectives. Programs should cover all aspects of the audit from the
start of the main investigation up to preparation of the draft report. They should be
produced in sufficient detail to:
Ensure that all involved in the audit comprehend the objectives and methodology
of the investigation and of each task;
Allow staff to participate effectively in the main investigation and to recognize
what is required of them and by when;
Provide management with the means to monitor the investigations progress.
There will normally be one audit program for each main task or sub-task.
3.218 Audit programs should always be written with the abilities, competence and
experience of the team in mind. Programs are not an end in themselves. They are
working documents which all must be able to use and are intended to help management
54
and the team to move from the approved audit objectives/issues to the written report
efficiently and effectively.
3.219 Each audit program should:
State the objective(s) of the task (or sub-task);
Show how the task relates to the audit objectives/issues and fits into the audit as a
whole;
Identify the evaluative
criteria, likely conclusions and/or expected
recommendations to which the work relates and the means of interpreting findings.
All three of the above encourage staff understanding of their work and encourage
positive communication within the audit team;
Specify all work necessary to implement the audit methodology, including:
Audit tests;
The nature of evidence required;
Indicate sample sizes or other indications of quantity of evidence:
Location of evidence;
Method of collection;
Means of analysis;
Management;
Expected outputs;
Identify key milestones, including delivery dates for outputs and the points within
the audit when decisions need to be made to advance the work;
Contain cross-referencing of each audit program to the relevant feasibility study
working paper folders. List contacts made in the auditee and elsewhere during the
feasibility stage together with references to all relevant evidence. This gives staff
new to the investigation a good starting point for their work;
Make sure that the structure of the audited entity is considered when packaging the
work. Minimize the burden on departmental staff to that consistent with an
efficiently run investigation;
Identifying the inter-relationship between different elements of the work. This is
necessary to plan the timing of staff input on a logical basis;
Establish priorities for the work. At the start of the investigation the team may have
only a limited idea of the time it will take to carry out each test. If a task has to be
dropped subsequently this should be done on a consistent and considered basis;
Make recommendations for the presentation of findings and documentation of
working papers. This will aid the collation of results and preparation of the draft
report. Guidance on documentation is contained in Guide 2 appendix 6.
Timetables
3.220 Each audit will normally have two timetables:
Work based: showing the timing and sequencing of tasks and other work;
Staff based: showing the involvement of all Internal Audit staff and consultants.
During the main investigation, management will use these to plan input and monitor
progress.
3.221Timetables should be based on the estimated elapsed time for each task and reflect the
sequencing of tasks identified in the audit programs. They should show the timing,
from start of the main investigation to preparation of the draft report, of:
All elements of the work;
The input of resources;
55
Methodology - review
3.228 On completion of the planning package the internal auditor and management should
review the planning package to ensure that it:
Achieves the audit objectives/issues;
Does not differ significantly, in terms of expected use of resources and delivery
dates for outputs, from the budgets previously approved by internal audit senior
management at the feasibility stage.
3.229 In the normal course of events, the planning stage should lead to broadly the same
conclusion as the feasibility stage. However, there may be occasions when this more
detailed planning casts doubt on the feasibility of the investigation, the Internal Audit
ability to draw the conclusions expected or on the cost or delivery dates of the study.
In such cases, the senior auditor charge should inform Internal Audit head and make
recommendations about the continued viability of the audit. No work should start on
the main investigation until the head have given his approval.
57
Documentation
3.230 Documentation during the planning stage consists primarily in the production of the
various elements of the planning package audit programs, budgets, timetables, plan
of agreement and consultants terms of reference.
Management
3.234 The planning stage does not require extensive management. It can be limited to
allocation of tasks amongst the audit team (audit programs, timetables, etc.) And
monitoring of progress. Detailed planning and control of each task will not normally be
necessary.
3.235Although there is no need for detailed management of the planning stage itself, Internal
Audit head must be heavily involved in review of the outputs of the planning process.
They must ensure that they are in full agreement with the output of the planning stage
as the basis for conducting the main investigation. Work should not start on the main
investigation until management have given their formal approval to all aspects of the
planning package.
58
Methodology
4.4 During the planning stage the internal auditor will have produced a planning package for
the main investigation. This should contain all that the internal auditor and
management require to carry out a successful investigation - audit programs, budgets,
timetables, a plan for agreement with the audited entity and use of consultant (see
Guide 2 Appendix 19). In the simplest cases, therefore, all the team needs to do is to
implement the package, including:
474.
Limited initial planning and set-up of the main investigation;
475.
Execution of audit programs;
476.
Evidence collection;
477.
Monitoring of progress;
478.
Control and
479.
Documentation
More often, however, as the audit team obtains information not available at the
feasibility and planning stages, the main investigation will also require some element
of re-planning, re-scheduling of resources, or even re-definition of the direction and
priorities of the examination.
Agree with the audited entity to ensure that all auditees are fully aware of the main
investigation.
Evidence Collection
4.8 Evidence is the specific information, obtained during the main investigation through such
activities as, analysis of records and other data, interview, survey, case studies and
observations. Such evidence, to support performance audit reports, must be relevant,
reliable and sufficient to draw reasonable conclusions. In the process of the
investigation, therefore, evidence collection should be directed towards examining
questions of economy, efficiency and effectiveness on the issues under review.
4.9 Before starting evidence collection, it is good practice for the internal auditor to stop and
think about the type and qualities of the evidence. Unnecessary time wastage and cost
should not be sustained in collecting irrelevant and unreliable evidence. Consequently,
in collecting evidences, the internal auditor should seek to collect relevant example of
perceived weaknesses. In addition to this, each individual involved in evidence
collection needs to consider:
483.
What sort of evidence should be collected;
484.
Will this form of evidence be the most useful;
485.
How will it support or refute the initial conclusions on the issues under
investigation;
486.
How can this evidence be translated into facts for the internal audit report.
It is only after such considerations and assurances, on the relevance and usefulness of
the evidence, collection should proceed.
4.10 There are four categories (types) of evidence, PHYSICAL, TESTIMONIAL,
DOCUMENTARY and ANALYTICAL, each of which has different qualities of
which the auditor should be aware. Detailed guidance on the types of evidence and
some of the techniques used to obtain evidence are given in Guide 2 appendix 18.
4.11 Collection of evidence by itself is not sufficient. The findings observed should be
evaluated against the criteria set. When the internal auditor identify a deviation from a
detailed criterion, they should gather and analyze additional evidence to support
conclusion at the level of the component and the entity as a whole. Generally, each
auditor needs to:
487.
Determine the frequency of the deviation, to assess whether the deficiency is
an isolated instance or represents a systemic or general weakness;
60
488.
Identify the fundamental cause of the deficiency. This is important in
appreciating the significance of the findings and in developing a basis for
recommending remedial action;
489.
Assess and quantify the effect or potential effect of the problem, where
practical. Quantifying the effect of a problem helps to determine its significance.
490.
Consider the relative significance of the findings in relation to the audit issues
and in relation to the audited entity.
491.
Develop one or more examples or cases for inclusion in the report to clearly
illustrate the nature of the problem. Examples help the report user to understand
the So what of procedural or control deficiencies;
492.
Determine if the audited entitys management deficiency and if corrective
action is underway. This may help the auditor to decide the reporting strategy and
to ensure fairness in the report. A matter that has been identified by the audited
entitys management and is being corrected and/or disclosed to MOFED may be
less significant for reporting purposes than a previously unknown, unresolved
problem;
493.
Identify best practices that can be emulated or transferred to other entities.
Monitoring of Progress
4.12 Adequate monitoring, together with effective control are probably the most important
factors in determining the success of the investigation. They are the process through
which management ensure, as far as possible, that actual achievements conform to
planned achievements within agreed deadlines and budgets. If we do not monitor and
control the investigation properly we are unlikely to deliver a satisfactory end product
on time and to cost.
4.13 It is not possible to monitor the progress of every aspect of an investigation - they are
too large and cover too many variables. Management should focus, therefore, on the
studys key performance areas:
494.
Achievement of the audit objectives/issues: Management should monitor
developments which may affect the achievement of the audit objective/issues.
Checks should involve questions such as:
Are there developments, or new information, which may affect the audit issues,
methodology and plans for collecting evidence?
Are we collecting the evidence we planned to collect?
Are there findings we had not expected?
Does the evidence collected or findings require us to change the direction or
priorities of the investigation or individual tasks?
How can the evidence be used in the final report?
Quality of the audit: Internal audit should monitor and review the quality of work
to ensure that the internal audit investigation is defensible. Questions to ask
include:
Is the team carrying out the audit in a professional manner and in compliance
with the Internal Audit performance audit operational objectives, the
Performance Audit Manual, procedures and in accordance with standards.
In the light of evidence collected, do the evaluative criteria and methodology of
the investigation remain appropriate to the audit issues?
Is the evidence collected relevant and reliable?
61
4.14 Effective monitoring depends upon good communication between the team and internal
audit. This needs to go beyond the traditional process of management review of
completed tasks and working papers which, whilst a necessary element of quality
assurance, will rarely be sufficient for effective monitoring. Monitoring of the
progress, achievement of study objectives and the quality of the audit can be enhanced
by the use of:
498.
Main investigation summary reports; and/or
499.
Fact sheets;
500.
Team meetings;
501.
Limited interim review of working papers;
62
502.
Fact Sheets
4.18 Fact sheets are statements that show the evidence collected during the investigation
corroborated by the agreement of the audited entity. During the main investigation
process, it is good practice to provide the audited entity with the fact sheets of
evidence for them to agree, before drafting of the final report. Such an exercise
provides the opportunity for evidences to be presented and for any misconception to be
removed. To make the auditee aware of the evidence collected the audit team needs to
provide the facts at regular intervals, say at the end of every month or audit issues
(without repeating what previously presented). This condition minimizes the time
delay in clearing the final reports with the audited entity through removing
misunderstanding and any information gap that might arise.
4.19 Care should be taken not to include in the fact sheets any opinion, because it could
lead to dispute and delay the progress of the investigation. Only factual data such as
outputs not produced, number of cases etc. Should be included being free of any
opinion. Auditee together with the audit team could choose the format of the fact
sheets. However, for clarity and simplicity, it is advisable to use two column format,
one for facts (the evidences collected) and the other for comment by the audited entity
confirming the fact or not (with their reasons). Always fact sheets should be provided
and confirmed by responsible head of auditee. An example is shown in Guide 2
appendix 20.
4.20 The use of fact sheet to internal audit is that they indicate the progress of the main
investigation together with the reaction of the audited entity on the evidence collected
to date. From the fact sheets any matters in dispute could be observed early to further
extend the audit work for completeness and for supporting the conclusions to be
63
reached. It also facilitates the reviewing process of the investigation by internal audit
leading them to concentrate on key issues disputed.
Team Meetings
4.21 The objective of team meetings is to:
506.
Assess progress to date, including the achievement of objectives and the
quality of the investigation; and
507.
Identify the best way forward, any changes in plans and necessary corrective
action.
When team meetings are held regularly, fact sheets and main investigation summary
sheets should be prepared and circulated to each members in advance.
4.22 Meetings should be conducted in a professional manner. Agendas should be circulated
in advance and staff should come prepared and able to report on the progress of their
tasks and to answer questions. Discussion should be properly controlled and directed
to the agenda. Internal audit must create a climate in which each member of staff feels
able to contribute openly. Meetings should be properly minuted with a record of:
508.
The main points made on progress to date;
509.
All decisions on future action;
510.
Specific allocation of responsibility for that action to those present.
Meetings should normally include all staff involved in the audit, regardless of grade.
Each member of staff will have information which may contribute to an informed
picture of progress and results and the exclusion of staff will leave internal audit with
less than a complete view.
monitoring forms are useful in this process; guidance on their use and an example is in
Guide 2 appendix 21 and 22.
Control
4.25 The value of monitoring is lost unless internal audit takes appropriate action to control
the investigation. This involves:
515.
Deciding whether changes and new instructions (audit programs, budgets,
timetables etc.) Are needed to achieve the audits objectives;
516.
Identifying the changes and communicating these decisions to members of the
audit team;
517.
Inputting the changes and instructions into the planning package and hence
into the control mechanism for later stages of the audit.
Control should be exercised over the achievement of objectives, the quality of the
audit, use of resources and the cost and delivery of the audit. Internal audit should use
the checklist in paragraph 4.13 to assess what changes are needed.
4.26 Significant changes should be communicated to auditee senior management for
consideration and approval. The audit is the responsibility of the relevant team auditor
but internal audit head should be consulted where team consider that there will be:
518.
An alteration of audit issues or major changes in the possible impact of the
audit;
519.
Slippage in the internal audit report date;
520.
More than a reasonable percentage increase in budgeted staff costs;
521.
Any increase in expenditure on external consultancies.
Documentation
4.27 Main investigations tend to generate a considerable amount of evidence and working
papers. It is important, therefore, to document the audit well to ensure that:
522.
All evidence, analysis, decisions and agreement with the audited entity are
properly recorded
523.
All evidence and analysis are given due weight within the audit and Internal
Audit report. (Unless they are properly documented they may be forgotten or
overlooked)
524.
Evidence and analysis can be easily and quickly located to support the Internal
Audit report in discussing the report with the audited entity. Auditors should be
able to produce all necessary evidence to justify their conclusions and
recommendations;
525.
Internal audit is able to review work with ease.
4.28 General guidance on documentation is contained in Guide 2 appendix 6. Additional
important points to consider during the main investigation are the need to:
526.
Develop a logical overall structure to the documentation of the study:
Keep administrative and evidential documentation on separate working paper
folders;
Organize administrative working paper folders around the relevant activity, e.g.,
audit programs, timetables, monitoring of budgets, auditees agreement etc.;
Organize evidential working paper folders by task, audit program, location of
evidence (or a combination of these) as the needs of the audit dictate, but
65
ensure that the structure is coherent and remains consistent throughout the
study;
Keep all drafts of the report on a separate folder and date reference all revisions
such that internal audit head and staff can easily identify the current version;
Ensure that evidential working paper folders contain all necessary documentation.
These include:
The relevant audit programs;
All relevant evidence and analysis;
A clear and concise summary analyzing the significance of the evidence
including a record of, and justification for, the auditors conclusions and
recommendations;
A full record of all managerial review points, with examiner responses;
An index of contents.
Ensure that all evidence obtained from the audited department is fully referenced
to its source (e.g., departmental file), notes the date of origin and originator (with
grade), and shows any subsequent departmental action, where appropriate;
Record all planning and monitoring activities and decisions (e.g., audit programs,
main investigation summary reports, fact sheets, minutes of team meetings) for
future reference and ensure that they are circulated to all interested parties;
Record all agreement with the audited department - this may be required at a future
date to clarify facts or resolve problems;
Reference every fact, conclusion or recommendation in the draft report to the
relevant working paper folder and individual working paper. This has two
advantages: it allows management to locate supporting evidence and assess its
strength quickly and easily; it also provides a check for the audit team that they are
able to justify all that they have written;
Reference all drafts of the internal audit report sent to the audited entity to the
relevant departmental source (file, report, interview etc.) From which information
was obtained. Care should be taken, however, not to infringe the confidentiality of
interviews with individual members of the auditees staff, where this is relevant.
540.
Ensure that there are adequate arrangements for discussion and clearance of
the draft internal audit report with the audited entity and that they are kept
informed as to when we will require input from them.
Management
4.31 The internal audit responsible for achieving the audit objectives on time and to cost.
This depends upon adequate:
541.
Planning: development of a main investigation planning package and initial
set-up of the audit is in paragraph 4.5 above;
542.
Monitoring, including good communications between staff and management:
this is discussed in paragraphs 4.12 - 4.23 above; and
543.
Control, including taking of corrective actions, where necessary: see
paragraphs 4.25 and 4.26 above.
4.32 In addition to the items discussed in above, internal audit should consider the need to:
544.
Allocate tasks amongst the audit staff to get the best possible match between
the requirements of the work and the skills, experience and capabilities of team
members;
545.
Make good use of consultants and ensure that:
There is a clear understanding from the outset about the scope of the
consultants work, timetable and deadlines;
There are adequate arrangements for agreement with consultants, including
timing of interim reports and meetings at key stages;
Any problems are identified and resolved at an early stage;
There is adequate communication between the Internal audit and the consultants
such that all evidence is properly considered;
The work of consultants is monitored, controlled and reviewed promptly and
properly. Consultants should conduct their work in a professional manner, free
of error and bias, allowing the internal audit to use it in the report with
confidence. The management should ensure that this is so, working on the
principle that, though conducted by persons outside the public body, the work
of consultants remains the responsibility of the auditee. Guidance on the
management and use of consultants is contained in Guide 2 appendix 19;
Gain assurance about the quality of the completed audit. Paragraphs 4.12 - 4.26
above emphasized the need for adequate monitoring and control of the progress of
the audit. The use of main investigation summary sheets, fact sheets and team
meetings, with some limited interim review of working papers where necessary,
was recommended. However, this does not remove the need for management to
review completed tasks in detail. Before proceeding to drafting of the report
internal audit must assure them selves that every aspect of the main investigation
accords with Internal audit professional standards. This can only be achieved by a
detailed review of working papers. Normally the senior auditor should examine all
papers; the Internal audit head should conduct a test check of the more important
or sensitive areas;
Learn lessons for the future from the experience of the present main investigation.
Each investigation will provide lessons both for performance audit in general (e.g.,
regarding the completeness of Internal audit procedures, the value and conduct of
particular audit techniques etc.) And for working with the audited entity (e.g., their
attitude to effectiveness audits, the general awareness of their staff about the audit.
67
It is important that we learn from these lessons if the Internal audit ability to
conduct performance audit efficiently and effectively is to improve, these lessons
must be recognized and propagated within the public body.
68
CHAPTER 5: REPORTING
5.1 Reports are the principal means by which an Internal Audit meets its primary performance audit
objective of providing its executive with independent information, advice and assurance on
the use of resources by the audited entity. Reports are also springboards for action; they
should not just expose weaknesses and criticize, but acknowledge auditees achievements and
attempt to show the way forward. They should not be written to be read as dialogue between
the Internal Audit and the auditee. They should get their essential messages across clearly
and simply to an audience who almost certainly do not know, do not need to know and do not
wish to know the details and complexities which may surround the subjects being examined.
Consequently, to satisfy these conditions attempts must be made:
552.
To keep them as brief as possible;
553.
To give them clear report structure;
554.
To use simple, direct and unambiguous language;
555.
To select the minimum information needed for a sufficient understanding of
the main issues and important findings, conclusions and recommendation; and
556.
To use hard evidence and telling examples to reinforce the messages in the
reports.
5.2 This chapter, therefore, presents the structure, methodology, findings, conclusions and
recommendations of the performance audit end product the performance audit report.
5.5 These objectives must be kept clearly in mind throughout the drafting process and reports
should be tailored accordingly. Reporting is the final main stage in Audit approach to
realize its organizational performance audit objectives. It is the principal means by
which the Internal Audit informs its users of its findings, conclusions and
recommendations. It is, therefore, the main means of communication by which the
Internal Audit tries achieve its objectives.
70
Structure I
Structure II
Findings
Findings on A
Findings on B
Conclusions
Conclusions on A
Conclusions on B
Findings on B
Conclusions on B
Recommendations on B
Recommendations
Recommendations on A
Recommendations on B
The two structures both have advantages. Structure I make it possible to get a good overview
of all findings, conclusions and recommendations. Structure II on the other hand provides a
more comprehensive analysis of the different audit issues.
Methodology
5.9
5.13 A useful aid to producing the outline is the latest version of the main investigation
summary sheets, (see Chapter 4, paragraphs 4.15 and 4.17 ). If the summary sheets
have been produced properly during the main investigation they will detail the up to
date position on the audits:
Findings, conclusions and recommendations; and,
Material evidence against each audit issue.
These will contain, therefore, the main items for inclusion in the outline.
5.14 Although the summary sheets should include all the more important facts, etc., it is
good practice to allow all staff who have had a significant part to play in the audit to
have the opportunity to participate in preparing the outline. This gives added
assurance that the outline is complete and also ensures that a balanced interpretation is
given to the evidence. Staff can place evidence in its proper context something
which a bare reading of the summary sheets may not be able to do.
5.15 Once approved, by management, the outline report should be passed to the auditte
entity as the basis for discussing views on the main matters to be raised in the final
report. Such discussions must in no way be allowed to become a clearance exercise, or
the occasion for extensive and time-consuming arguments. The auditte will have every
opportunity to comment widely at the full draft report stage, so discussion at the
outline report stage should be confined to reviewing the main issues and should avoid
questions of details. The aim is to identify and, if necessary, take account of any
fundamental differences of view on main facts and conclusions and major obstacles
72
likely to arise at the formal clearing stage. More detailed guidance is given in Guide 2
appendix 24.
evidence. The team may also find it useful to cross-reference the report - its findings,
conclusions and recommendations, supporting evidence, tables and charts etc. - back
to the relevant main investigation working papers to check that it is possible to justify
everything in it. Check list is provided in Guide 2 appendix 23.
Ascertain what action the audited entity intends to take on the reports conclusions
and recommendations.
5.23 At such report clearance stage all material differences observed should be identified.
Where the audited entity does express reservation, on the facts and conclusions
drawn, these should be considered and discussed in a fair way. Any subsequent
redrafting of the report should continue to reflect the aims of having an agreed report
which clearly sets out the facts, evidences and conclusions. Where differences of
opinion can not satisfactory be resolved the report should bring this out. And both the
auditees reservations and proposed course of action should be noted in the report
together with comment from the Internal Audit.
5.24 The current procedure followed after discussion with the auditee (clearance on the
reports) is for the Internal Audit to request a formal response from auditee when
sending them the report. On receipt of the response the Internal Audit head will ask
the audit team for their comments. The Internal Audit should consider whether the
response is:
Complete, that is, whether it addresses all the major conclusions and
recommendations made in the report;
Relevant - whether the audited entity has responded to the actual issues raised in
the report;
Sufficient - whether the audited entitys proposed course of action will solve the
problems identified in the report in their entirety and whether it will lead to the
speedy and full implementation of the recommendations;
Fair - whether the audited entitys reservations or disagreements with the report are
justified.
Where the response significantly fails one or more of these tests the Internal Audit
head will consider writing back to the auditee. Any subsequent response should be
subjected to the same examination.
5.25 The Internal Audit head should also consider the nature of any major reservations or
disagreements the auditee may have. These can be divided into:
Disagreements on the completeness, relevance or sufficiency of the auditees
response;
Disagreement on facts or technical interpretation of the evidence.
The distinction affects the way in which the Internal Audit handles the disagreement.
On the former, if reported clearly and fairly, we can expect the MOFED to be able to
weigh the merits of the Internal Audit and auditees positions. They can, therefore, be
included in the Annual Report to the council of ministers In contrast; disagreements
on facts or technical interpretation will normally be beyond the MOFED competence
to judge. They should, as far as possible, be resolved before proceeding to drafting of
the final report to the executive.
(d) Report to the Executives
5.26 The report to the executive differs from that to the audited entity only in:
Format (see paragraph 5.11 above);
Including the substance of the audited entitys formal response, and the audit
offices comments on the response.
75
In all other respects the general structure and content of the report should follow the
outline report.
5.27 The executive, unlike the audited entity, will have no specialist knowledge of the
subject matter. MOFED must bear this in mind in producing the first draft. The report
should be written to allow the executive a ready understanding of the main issues, the
internal audit approach, findings, conclusions and recommendations. As noted above,
the report must avoid placing the executive in a position where it is required to make
technical judgments which are outside its competence.
Documentation
5.28 The main elements of documentation in the reporting stage are the various drafts of
internal audit report. There will be few, if any, additional working papers generated and,
consequently, only limited need to apply. See Guide 2 Appendix 6.
5.29 It is essential, however, to maintain the standard of documentation through to the final
supported Report. Audit teams should:
Keep a separate working paper folder containing all main drafts of the reports
together with all correspondence with the audited entity;
Maintain a clear trail from the first draft of both reports, through the various
revisions, to the final versions. Keep copies of all drafts of each section of the
reports and date all pages of all revisions of the drafts;
Cross refer all main drafts of the reports back to the evidence. Internal audit drafts
should be referenced to the internal audit working papers and any drafts sent to the
auditee referenced to the auditees own files.
76
This chapter describes the objectives and procedure for closure of the investigation,
review of the audited entities response to the Internal Audit report and measuring the
impact of the Audit report.
6.2
At the end of the investigation, after submission of the Internal Audit report the head of
internal audit should produce a resume to the public body management on the
achievement the manner in which the audit has been conducted, problems, if any,
faced and important lessons learned from the investigation. The objectives of the
procedure are:
595.
To give management the opportunity to sign off the study, thereby formally
closing it;
596.
To ensure that the Internal Audit as a whole is able to learn lessons from the
conduct of the audit which will assist its development of performance audit.
6.3
6.4
6.6
At a suitable interval after submission of the Internal Audit report, normally about two
years, the audit department should review the audited entitys response to the Reports
conclusions and recommendations. The objectives of this exercise are:
603.
To ensure that the auditee has acted adequately and is seeking to improve
public accountability and/or value for money;
604.
To evaluate the benefits that has resulted from the audit report.
The team should report their findings to the internal audit head, with appropriate
recommendations for further action by the public body.
Review should consist of an examination of the auditees actions on each conclusion
and recommendation and, where possible and appropriate, an evaluation of the savings
that have accrued. The audit team may find it useful to list each main point in the
report and ask the auditee for a formal statement of their response and actions. Even
77
6.7
where a formal statement is not forthcoming, the team should always agree the facts
with auditees, especially where producing financial estimates of savings.
The review should also include an evaluation of the adequacy of the audited entitys
response to the internal audit conclusions and recommendations. Where the review
suggests that the response has not been adequate, internal audit team should seek an
explanation from the audited entity. If this is not satisfactory, the internal audit should
consider possible further action by auditee:
A formal letter from the Internal audit to the head of the auditee, again seeking
explanations and asking for appropriate action to be taken;
A briefing to MOFED explaining the facts of the case;
A further audit investigation and report at a later date.
The course to follow will depend upon the significance of the relevant conclusions and
recommendations and upon the audited entitys reasons for their lack of response.
However, if the performance audit work is to have a beneficial impact, audited entities
must act properly and speedily.
B)
Evaluating impacts
In evaluating commitments and the subsequent achievements, there should be
evidence that the work of the internal audit or the executive influenced the
proposed action to a significant extent; that action has actually been taken and that
benefits can be reasonably attributed to the action. It is not possible to be specific
and prescriptive over the definition of significant impact. This is because most
performance audit impacts will relate to individual internal audit or executives
recommendations and responses of the audited entities. Benefits, derived from the
action taken as the result of the study may be measurable or not. Hence auditors
should identify these benefits as measurable and non measurable to facilitate their
evaluation. If measurable, it should enable them to report the extent of the impact
of the audit in the clearest terms. These might include reduction in expenditure,
increases in income, improved efficiency in service delivery and greater outputs
from the same level of expenditure. However, in some cases it will not be possible
to estimate financial benefits accurately. In such cases best estimates of the likely
savings within a range of potential savings is advisable. On the other hand, nonmeasurable impacts are those arising from actions which improve government
operations or provide better service to the public but for which there is no
quantifiable and discernible financial benefit. Examples of these are reducing
waiting times for operations, simplifying procedures for tax collection or
improving advice and guidance to claimant etc. By identifying these measurable
and non-measurable impacts, auditors should assess and evaluate the results of the
audited entities commitments and achievements. These need to be recorded and
updated regularly in the working paper folder opened to monitor and track impacts.
C) Reporting
As the impact of internal audit may come under close it is important that
assessments are consistent. Benefits achieved as a result of the work of internal
audit should always be internally validated. Wherever possible they should be
agreed with the audited entities or MOFED. If there is a disagreement clearly
articulated about the benefits achieved the head of the public body should be
advised on what basis the benefit has been assessed and, if applicable, the audited
bodies reservations clearly articulated.
6.11 The audit process should not come to an end once and for all. For all audits
undertaken, there should follow a cycle starting from the overview to the follow up
stage and again marking. Internal audit should ensure that the outcome of an
investigation and any necessary follow up is clearly brought out to be included in all
marking and monitoring arrangements.
79
80
INTRODUCTION
The standards contained in this document, referred to as Ethiopian Audit Standards are
intended for use by auditors conducting performance audits of government entities, programs,
activities, and services. The standards provide benchmarks for ensuring that auditors achieve
a professional level of quality, integrity, objectivity, and independence in planning,
conducting and reporting their audits. The standards together with the performance audit
manual and supporting materials provide guidance for the auditor in determining the auditing
steps and procedures that should be applied in the internal audit.
The document comprises four chapters:
Chapter 1: Provides essential background. It defines the concept of the 3Es of performance
audit and the basic principles considered in developing the standards.
Chapter 2: Presents the 3Es key general standards: independence of internal audit
competence of the audit; the exercise of due professional care in conducting and reporting the
audit; and the presence of quality assurance required in carrying the audit.
Chapter 3: Presents the fieldwork standards that highlight the need for planning,
supervising, documenting, study and evaluation of internal controls, examining auditees
compliance with laws and regulation and obtaining relevant, reliable and sufficient audit
evidence during the planning and the execution stages of the audit.
Chapter 4: Deals with the reporting standards which discuss the requirements that should
be fulfilled by the auditors and the internal audit with respect to the form, timeliness, content,
presentation and distribution features of the audit report.
Chapter 5: Deals with follow-up standards that highlight the need to follow-up on action
taken by the audited body on previous recommendations.
81
CHAPTER 1
BACKGROUND
1.1 The role of the public auditor traditionally has been limited to expressing opinions on
financial statements and related issues of legality, regularity and fraud. This involves
assessments of whether transactions were properly controlled, whether care was taken
in the collection and custody of revenues, whether expenditures were properly incurred
and generally, whether executives intentions were being met.
1.2 Starting in the 1960s with increasing public expenditures, the need arose for more rational
and informed decision-making in the use of resources and a growing demand for public
accountability of those who manage public resources.
1.3 Traditional financial and compliance, although essential, could not provide the
information needed on waste, inefficiency or ineffectiveness. This necessitated the need
for a new type of audit with an expanded scope. This new type of audit came to be
known as performance audit or value-for-money audit.
1.4 Performance auditing was first introduced in the Supreme Audit Institutions (SAIs) of
some western countries in the 1970s. Today, it has become one of the major tasks of
SAIs in most developed and in some developing countries. In Ethiopia, the Office of
the Federal Auditor General (OFAG) commenced performance audit in 1992. Some
Regional Audit Offices (RAOs) has recently introduced it. Although, traditional
financial and compliance audits will continue to play an essential role, it is anticipated,
however, that there will be a gradual and planned growth of performance audit work in
all offices in due course.
1.5 More recently, about 20 years ago, greater awareness and understanding of environmental
issues led governments to rethink their roles and responsibilities as environmental
stewards. Over this period, there has also been increasing concern that organizations
should be held accountable for their actions that affect the environment.
1.6 In line with this, audit offices began to examine and assess the performance of
government organizations, programs, activities in relation to compliance with
applicable environmental laws, regulations, policies, etc. They also started to include
environment as the 4th E in a normal performance audit or made environment the
primary focus in the audit (audit of air quality, water quality, for example), in order to
provide the legislature with independent information, to improve environmental
protection processes and encourage best practices for sustainable development.
1.7 Performance audit is an objective and systematic examination of the financial and
operational performance of a government organization, programme, activity or function
carried out to provide the council of ministers with independent information, improve
public accountability and encourages best practice. It is also to help audited bodies
improve their performance in achieving value for money (VFM).
82
83
CHAPTER 2
GENERAL STANDARDS
2.1
INDEPENDENCE
In all matters related to their audit work, the Internal audits and their individual auditors must have
independence from the management of the public body.
2.2
2.3
Internal audits must be objective in their audit of entities. They should use sound
judgment in determining the scope, audit objectives, selecting the methodology and
procedures for the audit.
2.4
The auditor and Internal audits must be, and must be seen to be, independent and
objective in carrying out audits. They should be fair in their evaluations and in reporting
on the outcome of audits.
2.5
The audit offices are expected to work closely with the legislature, including with any
committees empowered by the legislature to consider audit office reports.
2.6
The Internal audits may give members of the executive council briefings on audit
reports, but it is important that the Internal audit maintain their independence from
political influence, in order to preserve an impartial approach to their audit
responsibilities.
2.7
Independence requires that they not otherwise be subject to direction by the council in
the programming, planning and conduct of audits. The Internal audit should have the
freedom to set priorities and programme their work in accordance with their mandates
and adopt methodologies appropriate to the audits to be undertaken and to decide
whether studies should be extended or curtailed or even aborted. However, this does
not imply that the internal audit should not accept audit assignments requested by their
respective executive. The Internal audit may take into consideration their respective
executive request for audits while planning their regular audit tasks. But the Internal
audit should be free to decide on the manner in which they conduct the requested audit.
84
2.8
The Internal audit should be able to form their own conclusions and recommendations
based on the audit findings, and report the findings impartially to their respective head
of the public bodies heads and ministry of finance and economic development.
2.9
The Internal audit should have budget and staffing freedom to discharge their
responsibilities in a reasonable manner.
2.10 The Internal audit should not be obliged by the management to carry out, modify or
refrain from carrying out an audit or suppress or modify findings, conclusions and
recommendations.
2.11 The Internal audit should be ready to advise the management in such matters as
accounting standards, policies and regulations avoiding any explicit or implied
commitment that would impair the independent exercise of their audit mandates.
2.12 The Internal audit should have adequate power to access, at all reasonable times,
premises, records, relevant documents and any other information that is necessary to the
fulfillment of their duties and responsibilities. They should also have the right to obtain
relevant information, by way of enquiry or other means, from persons or entities
possessing it..
2.13 The Internal audit has to discharge their mandates freely and impartially, taking the
audited entities' management views into consideration in forming audit conclusions,
judgments and recommendations.
2.14 The internal audit may co-operate with academic institutions and establish formal
relationships with professional bodies, provided the co-operation and the relationships
do not inhibit their independence and objectivity, in order to make use of the advice of
experienced members of the profession at large.
2.15 The Internal audit has a duty to ensure that the results of the audits are communicated
accurately, without bias and in a manner that allow the appropriate user to understand
fully and act appropriately.
2.16 Individual auditors must perform their audit in an ethical manner without any financial
influences that might compromise their independence. They should also be sufficiently
removed from political pressures to ensure that they can audit and report their findings
and conclusions objectively with out fear of political repercussion.
2.17 Auditors should protect their independence and avoid any possible conflict of interest
by refusing gifts or gratuities which could influence or be perceived as influencing their
independence and integrity. Auditors should not use their official position for private
purposes and should avoid relationships which involve the risk of corruption or which
may raise doubts about their objectivity and independence.
85
2.18 Auditors should not become members of management committees of their entity and; if
advice is to be given, it should be conveyed as audit advice or recommendation and
acknowledged clearly as such.
2.19 Auditors who have and/or had had close affiliation with the management such as social,
kinship or other relationships that lessens objectivity, should not take that assignment to
audit that. Similarly, auditors who have official, professional, personal or financial
relationship with the audittee that might cause an auditor to limit the extent of the
inquiry, to limit disclosure, or to weaken or slant audit findings in any way should not
be assigned in that area.
2.20 Auditors who face personal impairments indicated above should clearly decline to
perform the audit and are responsible for notifying the appropriate officials. The
Internal audit is also responsible for having policies and procedures in place to help
determine if auditors have any personal impairment.
COMPETENCE (1200)
The audit team must collectively possess the required competence.
2.21 The Internal audit must apply methodologies and practices of the highest quality to their
audit in order to provide the required professional service to the public sector entities.
Accordingly, audit tasks should be carried out by auditors whose education and
experience is commensurate with complexities of the audit tasks.
2.22 Internal Auditors have a duty to conduct themselves in a professional manner at all
times and to apply high professional standards in carrying out their work to enable them
to perform their duties competently and with impartiality.
2.23 Internal Auditors should not undertake audit assignments that they are not competent to
carry out unless competent advice and assistance are obtained which enable them to
conduct the audit satisfactorily.
2.24 Each Internal audit needs to command the range of skills and experience necessary for
effective discharge of the audit mandate. Thus, the internal audit should equip
themselves with the full range of up-to-date audit methodologies including systemsbased techniques to audit automated information systems.
2.25 The Internal audit should adopt policies and procedures to recruit personnel with
suitable qualifications for performance audit such as accounting, statistics, law,
engineering, architect, automated data processing, public administration, economics or
other related social sciences.
2.26 Newly recruited auditors should attend an induction course on performance auditing
methodology, auditing standards as well as government policies and procedures.
2.27 Internal audit personnel should possess suitable academic qualifications and be
equipped with appropriate training and experience. The audit offices should establish,
and regularly review, minimum educational requirements for the appointment of
auditors.
86
2.28 The Internal audit should adapt policies and procedures to develop and train employees
to enable them to perform their task effectively and to define the basis for the
advancement of auditors and other staff.
2.29 The Internal audit should have well-established training programmes to ensure that their
staff maintain professional proficiency through continuing education and training. In his
regard, auditors have a continuous obligation to update and improve the skills required
for the discharge of their professional responsibilities.
2.30 The internal audit should adopt policies and procedures to support the skills and
experience available within the offices and identify those skills which are absent;
provide a good distribution of skills to auditing tasks and a sufficient number of persons
for the audit; and have proper planning and supervision to achieve their goals at the
required level of due care and concern.
2.31 The Internal audit should encourage their personnel to become members of professional
bodies relevant to their work and to participate in the bodies' activities.
2.32 The audit offices should ensure that audits are planned and supervised by auditors who
are competent, equipped with knowledge of the offices' standards and methodologies,
and have an understanding of the specialties and peculiarities of the environment.
2.33 The audit offices may acquire external experts as consultants if the successful carrying
out of an audit so requires in order that the audit findings, conclusions and
recommendations are perceptive and soundly based and reflect and an adequate
understanding of the focus area of the performance audit.
DUE CARE (1220)
The Internal audits and their auditors must exercise due care and concern in
complying with the performance auditing standards. This embraces due care in
planning, executing and reporting the performance audit assignments.
2.34 The Internal audit must be objective in their audit of public bodies. They should use
sound judgment in determining the scope, audit objectives, selecting the methodology
and procedures for the audit. They should also apply the same sound judgments in
conducting and supervising the audit, in evaluating and reporting the audit results.
2.35 Technical skill should be of a quality appropriate to the complexities of a particular
audit assignment. Auditors need to be alert for situations, weak management control
systems, inadequacies in record keeping, errors and unusual results which could be
indicative of fraud, improper or unlawful expenditure, unauthorized operations, waste
or inefficiency or lack of probity. Even in seemingly normal circumstances, auditors
should maintain an attitude of professional skepticism and should make a critical
assessment, with questioning mind of, audit evidences, representations of management
and be alert for evidence that contradicts or brings into question the reliability of
documents or representations of management.
87
2.36 The Internal audit must exercise due care when employing external experts as consultants
to assure themselves of the consultants' competency and aptitude for the particular tasks
involved.
2.37 Should the Internal audit need to seek external expert advice to carry out certain
performance audit projects, the standards for exercise of due care in such arrangements
have a bearing also on the maintenance of quality of performance. Obtaining and using
external consultants' service in carrying out performance audit projects does not relieve
the Internal audit of responsibility for the opinions formed or conclusions reached on
the performance audit task.
2.38 When the Internal audit use the work of another auditor(s), they must apply adequate
procedures to provide assurance that the other auditor(s) has exercised due care and
complied with relevant auditing standards, and may review the work of the other
auditor(s) to satisfy themselves as to the quality of that work.
2.39 The internal audit is required to maintain confidentiality regarding audit matters and
information arising from their audit task. However, they must be entitled to report
offences against the law to proper prosecuting authorities.
2.40 Auditors must respect the confidentiality of information acquired during the course of
their audit work, and should not disclose or use any such information unless there is a
legal or professional right or duty to disclose such information.
2.41 Auditors should not use information received in the performance of their duties as a
means of securing personal benefit for themselves or for others. Neither should they
divulge information which would provide unfair or unreasonable advantage to other
individuals or organizations, nor should they use such information as a means for
harming others.
2.42 Auditors should conduct themselves in a manner which promotes co-operation and
good relations between auditors and within the profession. The support of the
profession by its members and their co-operation with one another are essential
elements of professional character. The public confidence and respect which an auditor
enjoys is largely the result of the cumulative accomplishments of all auditors, past and
present. It is therefore in the interest of auditors, as well as that of the general public,
that the auditor deals with fellow auditors in a fair and balanced way.
88
To ensure consistently high standards of work, internal audit should pay particular
attention to quality assurance programmes in order to maintain and improve audit
performance and results.
2.44
Confirm whether the performance auditing standards were applied in the various
stages of the audit;
Ensure whether adequate performance audit procedures are followed in conducting
the audit;
Confirm whether integral quality assurance processes have operated satisfactorily;
and
Secure improvements and avoid repetition of weaknesses.
2.45
The Internal audit head has the overall responsibility for ensuring the quality of the
audit. However, in carrying out the audit engagement, the audit head delegate portion of
the work pertaining to planning, execution or supervision to other members of the audit
team.
2.46
Audit staff who have line responsibility for ensuring the quality of performance audits
should supervise and review audit activities and the audit report by using the auditing
standards.
2.47
The Internal audit should establish their own quality assurance arrangements in
relation to planning, conduct and reporting of an audit. A sample of audits may be
reviewed in depth by suitably qualified personnel not involved in those audits, in
consultation with the relevant line management regarding the outcome of the internal
quality assurance arrangements and periodic reporting to top management.
2.48
It is appropriate for Internal audit to institute their own internal audit function with a
wide charter to assist the public body achieve effective management of its own
operations and sustain the quality of its performance.
2.49
Internal audit conducting audits in accordance with these standards should have an
external quality review at least once every five years external body. The external
quality review should determine whether the Internal audit have quality assurance
systems in place and are operating effectively to provide reasonable assurance that
established policies and procedures and applicable auditing standards are being
followed.
89
2.50
An external quality review under this standard should meet the following
requirements: Reviewers should be qualified and have current knowledge of the type of
work to be reviewed and the applicable auditing standard
a)
Reviewers should be independent of the audit office being
reviewed, its staff and its auditees whose audits are selected for review
b)
Reviewers should use sound professional judgment in conducting
and reporting the results of the external quality review
c) The review should include a review of the audit reports, working papers, and other
necessary documents (such as correspondence and continuing education
documentation) as well as interviews with the reviewed audit office's professional
staff, and
d) A written report should be prepared communicating the results of the external
quality review.
WRITTEN GUIDANCE
The Internal audit adopt policies and procedures to prepare manuals and other
written guidance and instructions concerning the conduct of the performance audits.
2.51 The Internal audit should communicate to their staff by means of circulars containing
guidance, and the maintenance of an up-to-date audit manual setting out their polices,
standards and practices so as to maintain the quality of audits.
2.52 The Internal audit should attempt to update their performance audit manuals with latest
methodologies and practices on a pre determined regular period.
2.53 The Internal audit should revise and update their manual and guidance in the light of
new Internal audit standards and as well as the Financial regulations and guides.
90
CHAPTER 3
FIELDWORK STANDARDS
(2000-2300)
3.1 This chapter prescribes standards for fieldwork (planning and conducting the audit) for
performance audits.
3.2
3.3
Audit of the economy with which the entity has utilized resources in the pursuit of its
objectives in accordance with sound administrative principles and practices, and
management policies;
Audit of the efficiency of utilization of human, financial and other resources, including
examination of information systems, performance measures and monitoring
arrangements, and procedures followed by audited entities for remedying identified
deficiencies;
Audit of the entity's effectiveness in achieving its predetermined objectives, and audit of
the actual impact of activities compared with the intended impact; and
Audit of the environmental effects of government activities.
The purpose of fieldwork standards is to establish the criteria or overall framework for
the purposeful, systematic and balanced steps or actions that the auditor has to follow.
These steps and actions represent the rules of research that the auditor, as a seeker of
audit evidence, implement to achieve a specific result.
PLANNING
The auditor should plan the audit in a manner which ensures that an audit of high
quality is carried out in an economic, efficient and effective way and in a timely
manner.
3.4
l) Obtain the agreement of the audit entity regarding scope, objectives and
assessment criteria of the audit and note any disagreements, if necessary;
m) Prepare a written audit plan with the necessary supporting documents.
3.5
3.6
3.7
3.8
Audit objectives
(2210)
Audit objectives must be carefully considered and clearly stated. They identify the
audit subjects and performance aspects to be examined (for example the 4Es) as well
as the potential finding and reporting elements that the auditor expects to develop.
3.9
Audit objectives are normally expressed in terms of what questions the audit is
expected to answer about the performance of an activity, such as results achieved, or
the economy and efficiency of resource utilization.
3.10 An audit objective is a precise statement of what the audit intends to accomplish. They
must be defined in a way that will allow the audit team at the end of the audit to
92
conclude against each of the objectives. The audit objectives should, therefore, be
defined as precisely as possible in order to avoid unnecessary and expensive audit work.
3.11 The audit objectives provide a clear direction to the audit process and drive the rest of
the planning process. Often the main audit objective can broken down to a number of
sub audit objectives.
3.12 Audit Scope
(2220)
Scope is the framework, boundary, limit or subject of the audit. Scoping the audit
involves narrowing the audit to a relatively few matters of significance that pertain to
the audit objective and are critical to achieving the intended result of the audit subject.
It describes the parts or functions of the entity that are the subject of the audit as well as
the time period covered by the audit. The purpose of defining the scope is to set an
optimal balance between the spread and depth of the audit.
3.13 The public body is engaged in a number of activities in a wide variety of areas and it is
not possible for the internal audit to audit all performance activity at the same time.
There are three underlying principles in establishing the scope of the audit:
Relevance to the mandate: Auditors should determine whether the issues selected for
audit are within the mandate of the Internal audit have a priority within their mandate
and are of interest to parliamentarians.
Matters of significance: Identifying matters of significance for audit involves
answering the following types of questions:
Does the subject have an important impact on results?
Is it an area of high risk?
Does it involve material amounts?
Is it an issue of visibility or of current concern? Is it of interest to council
and the public?
Will it result in improved performance, accountability or value for money?
Auditability: Auditability relates to the ability of the audit team to carry out the audit
in accordance with standards. The team may decide not to carry out the audit
because it may not have or cannot acquire the required expertise, suitable criteria
are not available, or the area is undergoing significant change, etc.
3.14
3.15
3.16
Audit criteria Audits must have suitable criteria that focus the audit and provide a
basis for developing observations. Criteria are reasonable and attainable standards of
93
Criteria should be developed for each line of enquiry. They should be:
3.18
Primary sources of criteria are the controls, standards, measures, results, commitments
and targets adopted by the entity itself or imposed by legislative bodies. The auditor
should review these criteria to assess their relevance to the audit to ensure they are
reasonable and complete. The sources of the criteria determine the amount of effort
needed to assure the suitability of the criteria. Where the entity's own measures are
found to be suitable, they can be adopted as audit criteria.
3.19
Where the entity does not have well-established standards for measuring or judging
performance consistent with the audit objectives, acceptable criteria may be obtained
from the law, regulations, standards developed by professional bodies, performance
data of similar organizations, and through other analytical methods.
3.20
3.21
When the audit team believes that the criteria set are reasonable, they should discuss
them with the auditee senior officials to obtain their comments. If there is
disagreement and this cannot be resolved, the audit team should consult senior staff
and/or the advisory committee before proceeding with the audit.
94
3.22
If there is disagreement with auditee management about the audit criteria, then this is
to be disclosed in the chapter with an explanation of why the audit team believes
management is responsible for the subject matter and/or why the team used the
criteria despite managements objection.
3.23
3.24
The auditor should obtain reasonable assurance about the experts competence and be
satisfied that the experts work is appropriate for audit purposes.
3.25
3.26 The audit team should consult with entity management and, among things, introduce the
members of the audit team to auditee management, review the scope, objectives,
criteria, audit plan and audit time table, provide a short summary of the methods and
procedures to be used to conduct the audit, establish official communication link
between the audit team and the auditee
3.27 The Internal audit may acquire external and internal experts throughout the audit as
consultants and adviser if the successful carrying out of an audit so requires in order
that the audit findings, conclusions and recommendations are perceptive and soundly
based and reflected.
3.28
There may be many players involved in the area of environmental protection and
their activities might be complex and require a wide range of skills, expertise,
experience and judgment to do the audit effectively.
3.29
The audit team should use the services of an advisory committee. Members of the
advisory committee could be both from inside and outside the audit office and should
be selected on the basis of their skills, insight, relevant knowledge (e.g. Subject matter
specialist) and experience.
3.30
The audit team should meet with the advisory committee at the critical decision
points of the audit.
3.31
The audit team should also consult with internal staff to benefit from their advice,
experience and knowledge of the subject matter.
(2230)
95
Supervision is an essential process that requires that the audit team leader and other
supervisors should ensure that:
The audit is carried out in accordance with the performance auditing standards and
practices of the Internal audit;
Audit team members have a clear and consistent understanding of the audit plan and
fully understand the audit objectives(s);
The audit plan and action steps specified in that plan are followed unless a variation
is authorized;
The necessary audit work is only carried out and budgets and timetables are met;
Appropriate advice and on-the-job training based on the level of experience of the
team members is provided;
Working papers contain evidence adequately supporting all conclusions and
recommendations;
The audit team achieves the stated audit objectives; and
96
3.37 The specific needs of environmental auditing may require additional procedures to be
carried out. For the assurance required it may also be advisable to make use of a
specialist in the audit office to carry out a review of the planning and fieldwork from an
environmental perspective.
3.38 Senior member of the audit staff should review all audit work before the audit reports
are finalized and it should be carried out as each part of the audit progresses.
3.39 Supervisors must ensure that the audit is carried out in accordance with environmental
auditing standards and practices of the audit offices.
3.40 All audit work should be reviewed by a senior member of the audit staff before the
audit reports are finalized. It should be carried out as each part of the audit progresses.
Review should ensure that:
All evaluations and conclusions are soundly based and are supported by sufficient,
relevant and reliable evidence as the foundation for the final audit report.
All errors, deficiencies and unusual matters have been properly identified,
documented and either satisfactorily resolved or brought to the attention of a more
senior members of the audit staff;
Changes and improvements necessary to the conduct of future audits are identified,
recorded and taken into account in later audit plans and in staff development
activities.
Tailor each audit objective to questions about specific features of the programme to
be audited,
Identify laws and regulations that have a sensible relation to specific parts of the
programme in the audit objective questions, and
Asses whether violation of those laws and regulations could considerably affect the
auditors' answers to the questions included in the audit objective. If they could,
they are likely to be important to the audit objectives.
3.45
Auditors conducting audits in accordance with this standard should choose and apply
Audit steps and procedures that, in their professional judgment, are appropriate to the
Circumstances. These audit steps and procedures should be designed to obtain
sufficient, Relevant and reliable evidence that will provide a reasonable basis for their
judgments And conclusions.
3.46
In designing tests of compliance with important laws and regulations, auditors should
assess the risk that illegal acts could occur. The auditors assessment of risk should
consider inter alia, whether the entity's management has effective control for
deterring and detecting illegal acts. If auditors conclude that the controls are effective
they can Reduce the extent of their tests of compliance.
3.47
3.48
3.49
An audit made in accordance with this standard provides reasonable assurance that its
objectives have been achieved. It does not, however, guarantee the discovery of every
illegal act or contingent liabilities resulting from them. Nor does the subsequent
discovery of illegal act committed during the audit period necessarily mean that
auditors' performance was inadequate provided the audit was conducted in accordance
with this Standard.
3.50
For certain audit assignments, auditors may depend on the work of legal consultants
to determine those laws and regulations that are important to the audit objectives,
designing tests of compliance with laws and regulations and evaluating the results of
those tests. Auditors may also rely on the work of legal experts when audit objectives
presuppose testing compliance with provisions of contracts or grant agreements.
98
3.51
Because the laws and regulations that may apply to a specific audit are often
numerous, the auditors should exercise professional judgment in determining those
laws and regulations that might have a significant impact on the audit objectives.
3.52
If indications are found that unlawful acts have or may have been committed, the
auditor must determine to what extent such acts affect his/her conclusions and the
further progress of the audit.
(2120)
Auditors should obtain an understanding and assess and evaluate management controls
that are relevant to the audit. When controls are significant to audit objectives, auditors
should obtain sufficient evidence to support their judgment about such controls.
3.53
3.54 The extent of the study and evaluation of internal control depends on the objectives of
the audit and on the degree of reliance intended.
3.55 Auditors should assess and evaluate the auditee's internal control system designed for
economic, efficient and effective operation of the audited entity, for ensuring adherence
to management policies, and for producing timely and reliable financial and
management information.
3.56 Auditors should focus on understanding the following internal controls in determining
their significance to the audit objectives. These include policies and procedures that
management has implemented to reasonably ensure that:
A program meets its objective;
Valid and reliable data are obtained, maintained, and fairly disclosed in reports;
Resources are safeguarded against waste, loss and misuse;
Resource use is consistent with laws and regulations.
3.57
(a) Which of the controls within the system are key controls, i.e. Controls that should, if
operating effectively:
Ensure compliance with laws and regulations,
Ensure that there are no major failures in the economy, efficiency or
effectiveness of the activities being audited.
99
(b) The overall quality of the system of controls relevant to the audit and thus the degree of
reliance that the auditor can place upon it, assuming that subsequent tests of control
provide evidence that it has operated effectively on a day-to-day basis.
3.58
Auditors should determine whether internal controls are functioning properly to ensure
The integrity, reliability and completeness of the data.
3.59
Internal Auditors should assess the work of internal auditors to ensure that
management controls are functioning properly and to prevent duplication of effort.
3.60
3.61
The auditor should study and evaluate the internal control measures instituted by
management for environmental matters and determine the extent of reliance that can be
placed on them. The extent of the study depends on the objectives of the audit and the
degree of reliance intended.
3.62
Auditors should assess the work of internal auditors on whether management controls
with respect to environmental management systems are functioning properly and, if this
work meets their own standards, use it in order to prevent duplication of effort.
EVIDENCE
Relevant, reliable and sufficient evidence should be obtained to support the
auditors' findings and conclusions regarding the organization, programme, activity
or function under audit.
3.63
3.64
Since auditors seldom have the opportunity of considering all information about the
audited entity, it is crucial that the data collection and sampling techniques are
carefully chosen. In particular, when computer based system data are an important
part of the audit, and the data reliability is crucial to accomplishing the audit
objective, auditors should satisfy themselves that data are reliable and relevant.
100
3.65
3.66
The audit offices should ensure that the techniques and procedures employed are
sufficient to reasonably assess the performance of the auditee. Auditors should
evaluate the alternative audit approaches and judge which of these will achieve the
desired results most economically to ensure that sufficient, relevant and reliable
evidence is obtained to achieve the audit objectives at the least possible cost.
However, auditors should give consideration in selecting audit approaches and
procedures to the quality of evidence.
3.69
Audit evidence should be of such quality and quantity that competent auditors
working independently of each other will reach similar audit findings/conclusions
from evaluating the same audit evidence against the same audit criteria.
3.70
3.71
3.72
Indications of weakness in the environmental management system and/or nonconformity to the environmental management system should be recorded.
3.73
Indirect audit evidence based on confirmations from outside sources is more reliable
than evidence obtained from the audited entity itself.
3.74
The auditor's own checks are more reliable than audit evidence based on external
confirmations and inquiries.
101
3.75
Documentation
Auditors should maintain adequate working papers showing
the basis and extent of the planning, work performed, evidence collected, findings
and conclusions reached and provide the basic on which the audit report can be
prepared.
3.76
3.77 Working papers should be sufficiently complete and detailed to enable an experienced
auditor having no previous connection with the audit to subsequently ascertain from
them what work was performed to support the conclusions.
3.78 Well-organized and complete working papers are of critical importance when
reviewing findings with management, briefing the head of the public body answering
subsequent queries from the outside, and planning future assignments.
3.79
3.80
Internal audit should adopt reasonable procedures for safe custody of working papers
and draft and final reports pertaining to the audit and should be retain them for a
sufficiently long period to meet the needs of its practice and to satisfy any pertinent
legal requirements of records retention.
3.81
Audit observations The comparison of the evidence against criteria will result in
the identification of observations. The observations are the basis for forming overall
conclusions against audit objectives.
102
3.82 Conclusions
Audits must have necessary and sufficient observations to support
conclusions made against each objective. The auditor should assess the significance of
the observations in relation to the audit objectives. At the extreme ends of the
performance spectrum-fully satisfactory performance or highly unsatisfactory
performance concluding against the overall objective may not pose a problem. In the
majority of cases, however, the auditor will have to use judgment in reaching
conclusions.
3.83 Recommendations
Where deficiencies in performance have been identified the
auditor needs to develop-recommendations to guide corrective action. Normally the
recommendations should be stated in broad terms of what needs to be done, with the
specifics of how it can be done being left to entity management. When developing
recommendations, the auditor should take management views into account, consider
the cost and feasibility of implementing the proposed action, and understand the effects
on results, both positive and negative, if the recommendations are adopted. As
appropriate, a legal opinion should be sought in cases involving sensitive or
confidential information.
103
104
CHAPTER 4
REPORTING STANDARDS (2400)
4.1 This chapter prescribes standards of reporting for performance audits. They cover the
need for written audit reports and their timeliness and content.
At the end of each audit, auditors should prepare a written audit report that clearly
communicates the results of the audit.
4.2 The reputation and credibility of the audit depend to a great extent on the quality of the
reports it produces. The reports are what council of ministers see of the work of the
public Body. Consequently, they have to meet the highest standards for content and
presentation.
4.3 Written reports communicate the results of audits to council of ministers and others;
Reduce the chance of misunderstanding about results reported; and facilitate follow-up
to determine whether appropriate corrective actions have been taken. The need to
maintain public accountability for government programmes demands that written audit
reports be Produced.
FORM
4.4 The report should be preceded by a suitable title to help the reader to distinguish it from
statements and information issued by others.
4.5 The report should be signed by the head of the public body concern or Minister of
Finance and Economic Development.
4.6 The report should bear the date to inform the reader that consideration has been given to
the effect of events about which the auditor becomes aware up to that date. After the
reports have been issued, auditors have no obligation to perform procedures or make
enquires or investigation regarding the issues covered by the audit report.
4.7 However, when, after the reports have been issued to the auditees and other users, but
before they have been laid before the council, auditors become aware of subsequent
events which, had they occurred and been known of at the date of their report, might
have covered them to issue a different report, they should discuss the matter with the
auditee, and should consider the implications for their report, taking additional action
as Appropriate.
CONTENT
Each performance audit should be complete, accurate, objective, convincing and as clear
and concise as the subject permits.
4.8 The content of the report should be easy to understand and free from vagueness or
ambiguity, include only information which is relevant and supported by sufficient and
105
logically flow from the evidence and need to state clearly the actions to be taken. The
recommendations should be constructive and should be directed at resolving the cause
of identified problems. They should also be specific, action oriented, practical and
feasible, addressed to parties that have the authority to act.
4.20 Material non-compliance
Auditors should report all material non-compliance with
laws and regulations and illegal acts that were found during the audit. These findings
should be supported by adequate evidence.
4.21 Management controls The internal controls that were assessed should be identified to
the extent necessary to clearly present the objectives, scope, and methodology of the
audit. When auditors discover significant weaknesses in management control as the
cause of deficient performance, the findings should be described in the report as the
"cause". In audits where the sole objective is to audit the internal controls, the
weaknesses found during the audit that would be significant to the users should be
identified and included in the report to head of the public body and MOFED and all
control weakness should be included in the report as deficiencies
4.22 Management views (2600)
Auditors should report the views of responsible officials of the auditee on the audit
findings, conclusions and recommendations as well as corrections planned. Auditors
should request that the responsible officials' views on significant findings, conclusions
and recommendations be submitted in writing.
4.23 The auditees' view should be evaluated objectively and recognized, as appropriate, in
the report. Auditee's promise or plan for corrective action should be noted but should
not be Accepted as justification for dropping a significant finding or related
recommendation.
4.24
When the auditees comments state that the audit findings, conclusions or
recommendations are inaccurate or misleading and those comments are not, in the
auditors' opinion, valid, the auditors should state their reasons for disagreeing with the
comments in a fair and objective manner. On the other hand auditors should adjust their
reports as necessary if they find the auditees comments are valid.
4.25 If the auditee fails to give comments to the Internal audit and MOFED at the right time
or does not volunteer any comment on the audit results, the MOFED should indicate the
auditee's failure or reluctance in the report.
4.26 Accomplishments Auditors should report noteworthy accomplishments, particularly
when management improvements in one area may be applicable elsewhere. Reporting
accomplishments along with the deficiencies provides a more fair presentation of the
situation by providing appropriate balance to the report. In addition, inclusion of such
accomplishments may lead to improved performance by other government
organizations that read the report.
4.27 Need for further work If, during the audit, auditors identify significant issues, other
than fraud and illegal acts, that warrant further work, but the issues are not directly
107
related to the audit objectives or the auditors do not have the time or resources to
expand the audit to pursue them, they should refer the issues to the head of the public
body Who are responsible for planning future audit work. When appropriate, auditors
should also disclose the issues in the report and the reasons the issues need further
study.
4.28 Non-disclosure of information If certain information is prohibited from general is
closure by federal, state laws or regulations, auditors should report the nature of the
information omitted and the requirement that makes the omission necessary. Additional
circumstances associated with public safety and security concerns could also justify the
exclusion of certain information in the report. For example, detailed information
related to computer security for a particular program may be excluded from publicly
available reports because of the potential damage that could be caused by the misuse of
this information. In such circumstances, auditors may issue a limited official use report
containing such information and distribute the report only to those parties responsible
for acting on the auditors' recommendations.
4.29 Auditors need to weigh the need to reveal all significant facts known to them which, if
not revealed, could either distort the results or conceal improper or unlawful practice
against any requirements or other circumstances that may necessitate the omission of
certain information. However, if the internal audit has acquired information in the course of an
audit, which in the national interest cannot be freely disclosed in the audit report, it should
consider making a separate, unpublished report including confidential or sensitive material.
Besides, complete means that the report should provide adequate information about the
extent and significance of audit findings, including the frequency of occurrence of the
findings with respect to the number of cases or transactions examined and the
relationship of findings to the auditee's operations. Hence, sufficient detailed
supporting data should be included to make convincing presentation.
4.33 Accuracy requires that the evidence presented be true and that findings be correctly
portrayed. Accordingly, the report should contain only information, findings and
conclusion that are supported by relevant, reliable and sufficient evidence in the
auditors working papers. It also means describing the audit scope and methodology
and presenting findings and conclusions in a manner consistent with the audit scope. If
the auditors come across data that are relevant and significant to the audit findings and
conclusions but are unable to examine them, they should indicate in the report the
data's limitations and their decision not to make unwarranted conclusions or
recommendations based on the data.
4.34 Clarity requires that the report should be easy to read and understand. as far as
possible reports should be written in a simple language. If there is a need to use
technical terms, abbreviations and acronyms, they should be clearly defined. Auditors
may consider using a summary within the report to capture the report user's attention
and highlight the overall message. If a summary is used, it generally should focus on
the specific answers to the questions in the audit objectives, summarize the audits most
significant findings and the report's principal conclusions, and prepare users to
anticipate the major recommendations.
The report should also contain suitable titles
and captions to make the message easier to understand. Visual aids such as pictures,
charts, graphs and maps should be used whenever possible to clarify and summarize
complex material.
4.35 Conciseness requires that the report be no longer than necessary to convey and support
message. Auditors should avoid writing too much details or unnecessary repetition.
Although room exists for considerable judgment in determining the content of reports,
those that are fact-based, but still concise, are likely to achieve greater results.
REPORT DISTRIBUTION (2440)
Audit reports should be submitted to the head of public body, and to Ministry of
Finance and Economic Development.
4.36 The report should be submitted to the auditee, officials designated by law or regulation
to receive such reports, those responsible for acting on the findings and
recommendations, those who have legal oversight authority, those who have provided
assistance to the audited entity, including external funding organizations, of necessary.
4.37 Unless restricted by law or regulations, copies should be made available for public
inspection.
4.38 If the subject of the audit involves material that is classified for security purpose or is
not releasable to particular parties or the public for other valid reasons, the internal audit
should limit the report distribution.
109
CHAPTER 5
FOLLOW-UP (2500)
5.1 This chapter prescribes the standard for follow-up of recommendations made in previous
audit reports and/or the recommendations made by council of ministers.
5.3 Responsibility for planning and carrying out the follow-up rests with the appropriate
internal audit head.
5.4 Effective follow-up arrangements need to be in place to ensure that the audited body has
properly considered any matters identified during the current or pervious audits and
where appropriate, has implemented agreed actions.
5.5 Elements of follow-up include:
A timely review of the action taken by the management of the audited body on the
recommendations made by MOFED/Council of ministers.
An evaluation of the adequacy of the action in achieving performance
improvements
An assessment of any problems that may have arisen in relation to implementation
As assessment of the impacts of the examination
Consideration of the need or scope for further audit work in the same or a related
area.
110
in
implementing
recommendations
by
GLOSSARY
Audit Evidence
Information that forms the foundation which supports the auditor's or audit
office's findings, conclusions or report.
Relevant most up-to-date available and have a logical relationship to what
is being examined.
Reliable most accurate, obtainable, valid and complete.
Sufficient would lead a reasonable person to the same conclusion as you.
Audit Issues
The focus of the main investigations. They are the basic questions the
investigation will consider.
Audit Mandate
The auditing responsibilities, powers, discretions and duties conferred on
an audit office under the constitution or other lawful authority of a country.
Audit Objective
A precise statement of what the audit intends to accomplish and/or the
question the audit will answer.
Audit Scope
The framework or limits and subjects of the audit.
Auditing Standards They are the criteria or yardsticks against which the quality of the audit
result is evaluated. They provide minimum guidance for the auditor that
helps determine the extent of audit steps and procedures that should be
applied to fulfill the audit objective.
Due Care
The appropriate element of care and skill which a trained auditor would be
expected to apply having regard to the complexity of the audit task,
including careful attention to planning, gathering and evaluating evidence
and forming conclusions and making recommendations.
Economy
Minimizing the cost of resources used for an activity having regard to the
appropriate quality and timing.
Effectiveness
The extent to which objectives/intended impacts are achieved.
The relationship between the output, in terms of goods, services, or other
Efficiency
results, and the resources used to produce them.
Criteria
Condition
Effect
Cause
When the auditors' objectives include explaining why the poor (or good)
performance determined in the audit happened, the reasons for that
performance are referred to as "cause". Identifying the cause of problems
can assist auditors in making constructive recommendations for
corrections. Because problems can result from a number of plausible
factors, the recommendations can be more persuasive if auditors can
clearly demonstrate and explain with evidence and reasoning the link
between the problems and the factor or factors they identified as the cause.
When the auditors' objectives include estimating the programme's effect on
changes in physical, social, or economic conditions, they seek evidence of
the extent to which the programme itself is the "cause" of those changes.
A Code of Ethics
Executive
Field Standards
Findings,
Findings are the specific evidence gathered by the auditor to satisfy the
Conclusions
and audit objectives (audit issues); conclusions are statements deduced by the
Recommendations auditor from those findings; recommendations are courses of action
suggested by the auditor relating to the audit objectives.
General Standards The qualifications and competence, the necessary independence and
objectivity, and the exercise of due care, which shall be required of the
auditor to carry out the tasks related to the field and reporting standards in
a competent, efficient and effective manner.
The freedom of the Internal audit to act in accordance with their audit
mandate without external direction or interference of any kind.
Control The whole system of financial and other controls, including the
organizational structure, methods, procedures and internal audit,
established by management within its corporate goals, to assist in
conducting the business of the audited entity in a regular, economic,
efficient and effective manner; ensuring adherence to management
policies; Compliance with rules and regulations; safeguarding assets and
resources; securing the accuracy and completeness of accounting records;
and producing timely and reliable financial and management information.
Independence
Internal
Systems
112
International
An international and independent body which aims at promoting the
Organization
of exchange of ideas and experience between Supreme Audit Institutions in
Supreme
Audit the sphere of public financial control.
Institutions
(INTOSAI)
Legislature
Materiality/Signific
ance
Planning
Postulates
Program
Pubic
Accountability
Reporting
Standards
Supervision
113
REFERENCES
1. Auditing Standards, International Organization of Supreme Audit Institutions, Auditing
Standards Committee, June 1992.
2. Audit and Accounting Guide, Guide on Performance Audit in the Pubic Sector, The South
African Institute of Chartered Accountants, July 1999.
3. Code of Ethics and Auditing Standards, INTOSAI, Seoul. 2001.
4. European Implementing Guidelines for the INTOSAI Auditing Standards, No 41, 1998.
5. Government Auditing Standards, General Accounting Office, July 1999.
6. Performance Audit Manual, Office of the Federal Auditor General, Addis Ababa,
Oct. 1996.
114
7. Value-for-Money Audit Manual, Office of the Auditor General of Canada, Last Version
Oct. 2001.
8. Value for Money Workshop Binder, CTI/IDI, NAO, August 1993.
9. Government Auditing Standards Exposure Draft, General Accounting Office, 2002.
10. Value for Money Handbook, National Audit Office, Spring 1997.
11. Government Auditing Standards, General Comptroller of the Republic of Peru, Printed
from Internet.
115
e)
When appraising the value of information received during interview we should take
account of the interviewee's apparent knowledge of the subject, his position in the
hierarchy and whether the information is consistent with any other obtained from
elsewhere. The fact that an individual is a senior officer does not ensure the reliability of
the information provided. The individual may be new or lack the detailed first-hand
knowledge which a subordinate may have.
CONDUCT OF INTERVIEWS
h) The interviewer should control the discussion to keep it directed towards
obtaining the required information and to avoid protracted debate. There are
three important rules to try to adhere to:
a)
obtain if possible all the information required in one interview;
b)
at the end of the interview briefly summarize the main points with the
interviewee with a view to confirming understanding and clarifying any
misunderstanding;
c)
do not extend the interview beyond a reasonable period of time, which should
closely approximate to the time initially agreed.
i)
CONFIRMATION BY INTERVIEWEE
l) Where possible notes of meetings should be agreed by the interviewee.
Alternatively, some form of written confirmation of significant facts obtained
orally should be requested from interviewees. Written confirmation is
particularly important if other corroborating evidence is unavailable.
m) If an interviewee refuses to confirm the significant oral information either in
writing or orally we should note our working papers accordingly and state
where available the interviewee's reasons. In such cases we need to consider
the effect of this unwillingness on the use of the data in our reports. Also the
person may not be independent and will likely have a corporate position to
present.
117
Unless properly organized and conducted, interviews will not give us the required
audit evidence. Therefore, we should organize and conduct interview by considering
factors that affect their effectiveness. A number of conditions that affect the
interviewee to respond positively to our questions should be considered and resolved.
For example, the interviewee:
may be relatively uninformed about the audit office, the purpose of performance
audit and the particular assignment we have;
may be personally responsible for some aspect of the area we are examining; or not
independent because of the corporate position he/she holds;
may not see us positively, as few people see auditors in a wholly positive light;
may have their own agendas and concerns which they bring to the interview;
may not have a detailed understanding of the language or concept of performance
audit;
may only be prepared to allow as a limited amount of time.
2.
All these create problems. They can make the interviewee defensive and not easy to
communicate with. Such factors lead to misunderstandings about the nature and
purpose of our questions. The interviewee may also see us as having some
undisclosed motive and view us with suspicion. The set-up of the interview and the
way that we pose our questions is therefore of the utmost importance.
3.
How we set-up an interview-our introduction of the audit office, our work and
ourselves will influence how the interviewee perceives us and consequently the
information that she/he is prepared to impart. If we are unclear and appear secretive
the interviewee will be left in confusion and may view us with mistrust. On the other
hand if we are open and explicit we can expect a better reception.
4.
It is normally better to start from the assumption that the interviewee has no
knowledge about the audit office, the assignment or ourselves (unless the contrary is
true). In this regard, we should provide information on:
the role of the audit office;
the purpose of the performance audit;
the scope and issues of the assignment and our concerns in the area;
why we wish to discuss with the particular interviewee;
what we want to discuss about;
who will be coming to interview her/him;
how we intend to use the information we obtain;
what the audit office does with the results of its investigations.
5.
the use of technical expressions: for example, the words economy, efficiency and
effectiveness have particular meanings to us which the interviewee can not be
expected to share;
Abbreviations or acronyms.
It is often useful to develop a standard form of wording to include in all written approaches to
interviewees. If the initial contact is by telephone we can follow it up with a short
written explanation.
6.
We should try to ensure that the information conveyed in advance of the interview as
this is more likely to put the interviewee at ease. If it is left to the start of the interview
you may face someone who already feels defensive and is reluctant to discuss issues
openly with you. It is also good practice, at the start of the interview, to reinforce the
interviewees understanding by going over the information again possibly putting in
different ways than the former. Further, before starting the questions, give the
interviewees an opportunity to clarify any aspect that they are still not clear about.
7.
At times, auditors should not provide the interview terms of reference in advance if
they believe that advance warning could allow the interviewee time to firm up a lie, or
give them time to develop a common story so that auditors do not detect
inconsistencies.
8.
9.
Finally our questioning technique will play a major part in our effectiveness as an
interviewer. The different types of questions that could be used in an interview are:
i.
Closed questions: used to obtain specific answers usually very short and
frequently only yes or no. However, closed questions can allow the
interviewee to be uninformative;
ii.
The direct question: usually begins with WHO, WHERE, WHY WHEN
OR HOW and is designed to elicit specific information;
iii.
The follow up or probing questions: this can be used to probe weaknesses
or problem areas or just to obtain more details or explore the subject in greater
depth.
119
e.g. How often are the reports analyzed? What action is taken as a result of the analysis?
iv.
The open question: is very important and it invites the
interviewee to talk freely and to offer information openly without appearing to be
interrogated. The open question also allows the interviewee to express personal
opinion or communicate problem. Very often it tells the interviewee what is
actually happening rather than what should happen. It also offers the opportunity
for the interviewer to follow up on significant points.
E.g. Could you tell me about the maintenance of the motor vehicles?
However, care must be taken to control any unnecessary digression and maintain control of the
interview.
v.
11.
All the above types of questions are not relevant for interviews. Mostly open
questions that require the interviews to give his views in broad terms are advisable. In
general questions should:
be non judgmental and neutral in style;
not lead the interviewee towards an answer;
be appropriate to the grade and function of the interviewee;
not be asked in multiple forms. Ask them one at a time allowing the interviewee to
give a full answer before asking the next;
be phrased to avoid yes/no answers;
be written clearly and in plain language. Again, avoid the use of jargons technical
wording and abbreviations.
In conclusion, to get the most out of the interview, we should:
prioritize the questions; this is particularly important when meeting senior officials
who are likely to give us only a limited amount of time.
lay out our interview sheets, so that there is plenty of space to note down the
answers;
for important formal interviews, take at least two audit office staff one to be
responsible for asking questions, the other to record the answers;
keep the number of audit office staff at each interview to the minimum; the more
staff you take, the more intimidating it will be for the interviewee;
produce a record of the discussion as soon as the interview is completed.
120
3. SURVEY
INTRODUCTION
1.
Surveys are one of the audit techniques used in
collecting audit evidences for performance audit. They can give new insight in areas
under examination and provide the auditor with a sharper view of organizational
performance. However, surveys will only be successful if we use the appropriate type
of survey, design the questions well and analyze the results carefully. This requires a
firm understanding of the procedures involved in carrying out a survey and the quality
of evidence that can be collected. The purpose of this guide is to provide a range of
ideas and advice on how to perform a survey and how to use the evidence collected.
USE OF SURVEYS
2.
Surveys are a very versatile technique for collecting
information because they can provide evidence for many different purposes. They can
be used:
a)
during the performance audit planning stages to
identify key (audit) issues and views on the main factors affecting performance.
The planning stage includes both the overview, marking and feasibility; where key
issues are to be delineated. For example, at the overview stage questions can be
used to investigate the public's attitude to the health service in the health care
institutions. From the result issues to be investigated in depth can be identified.
b)
as part of the full investigation:
To provide substantive evidence on aspects of the audited entity's performance
in qualitative and quantitative terms. Evidence can be obtained from within the
audited body (for example, in the study of immunization program health
professionals participating in the program were surveyed for their attitude to the
program) or from outside the audited entity's (for example, factors affecting
mothers to participate in immunization program were identified from eligible
women). The evidence can be facts and figures or it might be the views and
opinion of the recipient of the audited entity's services.
To provide comparisons with bodies providing similar services in Ethiopia or
Foreign Countries. This can be particularly useful during investigating standard
managerial operations where the executive would expect the internal audit to
explore as to what happens the public body, private sector or overseas.
TYPES OF SURVEY
3.
The most widely used types of surveys are:
self completion questionnaires (postal questionnaires);
unstructured interviews (group discussion); and
structured interviews (telephone surveys and face to face surveys).
121
8.
122
9.
b)
c)
d)
e)
f)
g)
h)
11.
12.
13.
from a list;
multiple choice questions ask the respondents to rate their answers according to
15.
16.
17.
As the time the survey takes is too long, the benefits will
be lost. A balance has to be struck between what you need for the study and what
responses can or will provide. First think about the recipients; it is important to
maintain their interest. If the survey takes too much time their interest will be lost or
they may refuse to take part. Second, think about the practicality of handling all the
responses.
19.
To check that your survey will ask the right people the
right question in the right way and that the respondents are willing and able to give
you the information, you need to pretest your work. Pretesting is carried out during
the initial development of the survey instrument, and involves finding out from the
respondent if you have asked:
20.
21.
22.
taking into account the normal work loads of the respondent; and
following up non-responses, usually using reminding letter.
25.
26.
27.
28.
Why was the survey needed? What did it enable you to do?
type of the survey;
Was it a postal, a telephone or an opinion survey?
Did it involve any group discussions or in depth interviews?
who conducted the survey;
Was it the audit office, consultants or jointly?
who was surveyed;
LOC like to know who has provided us with evidence.
the number of respondents surveyed and how they are selected;
the response rate;
Executives are interested in the response rate, so it is advisable to state in the report. You
should also state the validity of the survey result for small response rate.
the survey result.
Consider publishing the result of the survey. The executive may be interested in the
raw data: the questions asked and the response given. They could be incorporated in
an appendix or published separately.
29.
4. SAMPLING
1.
2.
3.
128
(c)
determine the type of sample to be used (sample, stratified, cluster, two stages
etc.);
establish that a record exists of all possible items in the population to be
sampled, that is, the sampling frame;
determine the sample size;
select the sample from the frame in an unbiased (e.g. random) way;
analyze the results of tests made on the sample selected;
use the result to support or illustrate the argument of the report.
Auditors could use these procedures in their audit process to draw conclusions for the
whole population. Further guides may be provided in details separately at the need
arises.
129
3.
KEY CONSIDERATIONS
4.
130
5.
TEXT
6.
Data can be presented solely within the narrative when the
points being made can be emphasized by commenting on a few results. More
commonly, data within the text will be used to complement an adjoining table or chart
and to highlight the most important points. An example of data presented in narrative
form is provided below:
The NAO Corporate Plan for the next five years expects total staffing levels
to remain fairly constant with planned staff years totaling 945 in 1989/90
and 939 in 1993/94. The plan expects the resources used for VFM Audit to
rise from 214 to 256 staff years over the five-year period.
Note that only a handful of key figures has been included in the text. Although the
data have not been rounded in this example, rounding should always be considered as
too many digits may confuse the reader. The choice will depend on whether there is a
greater need for accuracy than for simplicity.
7.
When more figures than this have to be provided or a more
complete picture is required then a table or chart will have to be included.
TAB LE S
8.
Data should be presented in tabular form when large amounts
of information or a number of figures need to be shown with reasonable accuracy.
Important points to remember when constructing a table within a report are:
Arrange the data in columns and rows in a logical order. There will often be a
natural order such as date, alphabetical, hierarchical, or geographical order. Where
there is no obvious natural order. arrange in order of size, with the largest numbers
at the top. The figures that are most likely to be compared should be in columns
131
rather than rows since it is easier to determine trends and analyses (requiring
additions and subtractions) by working up and down the page rather than across.
In Table 1 the natural order followed is the date order and the table is arranged so that
trends over the years are shown down the page.
Table 1 NAO Planned staff years by activity Plan 1987/88 to 1991/92
Planned Staff Years
Direct Output
Support Activities
Year
VFM
Fin Audit
Audit
Indirect
Central
1987/88
245
176
300
187
1988/89
240
199
315
187
1989/90
233
214
322
186
1990/91
230
231
319
176
1991/92
236
242
314
168
Average
235
212
314
181
Source: Summary of the NAO Corporate Plan
Total
908
941
955
956
950
948
Textual comment:
"Staff resources are planned to decrease for certification audit and central activities
and to increase for VFM audit during the next five years."
Round the data wherever precision is not required. This makes the information
easier to absorb and presents a clearer picture. Figures can normally be reduced to
about two effective digits and still provide sufficient accuracy. (An effective digit
is a digit that varies from one number to another. For example, the numbers 7,846,
7,264 and 7,114 reduced to two effective digits would be shown as 7,850, 7,260
and 7,110).
Line graphs.
Remember:
Keep the diagram clear and simple so it is easy to understand.
Use two or three charts if there are several features to highlight. This may be more
effective than a single diagram.
Always accompany the chart with a brief written summary to draw the reader's
attention to its main message.
Pie Charts
10.
Bar Charts
12.
to compare groups
to show the breakdown of a group
to show changes over time for one or several variables.
The chart can be drawn either vertically or horizontally. The
forms of bar chart most commonly used are:
simple bar charts (figure 2)
component bar charts (Figure 3)
group (or multiple) bar charts (Figure 4)
(Textual comments have been omitted.)
13.
Figure 2
NAO staffing by grade
Plan for 1989/90
Senior auditors
Staff Years
300
200
100
Managers
Senior managers
Directorate
External staff
0
1
Staff Grade
Figure 3
100
millions
80
60
40
20
0
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87
Surplus funds
Years
Total Expenditure
134
Figure 4
Local and regional bids & allocations
1986-87 to 1988-89
millions
200
150
100
50
0
1986-87
1987-88
Local bids
Regional bids
1988-89
Allocations
135
Line Graphs
15.
The line graph is the most appropriate method of illustrating
changes over time for one or more variables.
Figure 5
350
300
250
Fin Audit
200
VFM Audit
Indirect
150
Central
100
50
0
1987/88
1988/89
1989/90
1990/91
1991/92
Average
DESIGN FACTORS
17.
This section contains a summary of advice governing the
design of displays of data. Although some of the advice may appear trivial it can have
a significant impact on the visual clarity of the displays.
Advice for tables:
1. Include a clear concise title.
2. Display the time period and geographical area covered by the table.
3. Acknowledge the source of the data.
4. Use footnotes to explain any unavoidable inconsistencies, anomalies or
changes in definition.
5. Space columns out evenly. This will help to balance the table. Row and
column headings should not influence spacing.
136
6. Use ruled lines sparingly - they prevent the eye moving easily between data
points. Never use lines between columns of data within the main body of a
table.
7. Avoid the excessive use of capital letters.
8. Maintain consistency in the use of different fonts.
9. Number all tables sequentially.
10. Maintain the same order for displaying headings if the same categories are to
be covered in two or more tables. This will make comparisons easier.
137
This part of the guide gives examples of economy, efficiency and effectiveness. It is
for illustration only and does not provide an exhaustive picture of the area or even the
subjects used.
Example 1: Eradication of disease.
Objectives
The objective of the program is the complete eradication of the preventable disease X
amongst young people throughout the whole country within a 20-year time period;
Activities:
A program of inoculations for the 0-16 year old age group throughout the country
accompanied by education to show parents the effects of the illness and to encourage
them to bring forward their children for inoculation;
Inputs
Vaccines, doctors, hypodermics, vehicles for transport, petrol, foreign currency (for
vaccines, petrol, vehicles etc.), training of staff, education literature;
Outputs
Staff trained, parents contacted, village groups addressed, inoculations given, villages
inoculation visits;
Impacts
Direct program impacts: fall in level of illness from specified disease both amongst
those inoculated and more widely in the population;
Wider objective impacts: contact with doctors and health visitors during inoculation
program may lead to rural population gaining a generally better level of health care.
Economy
Calculation of economy should incorporate both the price paid to suppliers and all
other costs that are directly attributable to inputs.
Effective cost is the total cost incurred by the organization in acquiring inputs and
bringing them to the point of production usage. Factors to be considered are:
gross purchase
discount
extra purchase price cost, e.g. tax,
supplier transport costs
own transport, maintenance cost to make use of inputs,
the cost of sub-standard items
Purchase Price
138
The price paid to suppliers for inputs is central for economy: an economic organization
will obtain the desired quantity and quality of inputs for the lowest total price after
allowing for all available discounts. The organization may also consider any later scrap
value of inputs to minimize the total net cost of inputs (T1) in:
T1 = ((p-d)n) - s
where
n is the number of items purchased;
p is the basic supply price paid per unit of input;
d is the discount per item given on "n" items;
s is the total scrap value of "n" units.
Overheads
Purchasing, transporting, storing and maintaining inputs also generate costs which an
economic organization should consider within its decision-making. Thus, for example, an
organization may pay less to its suppliers, through bulk discounts if it purchases all its
inputs in one large order. This may also allow savings on transportation. But the high
stock levels may necessitate larger, and more expensive, storage facilities over a longer
period than a number of smaller orders. Including overheads, an economic organization
will aim to minimize T2 in:
T2 = ((p-d)+a)n - s
where:
"a" is the per unit overhead cost of purchasing, transporting, holding and maintaining n
units of input.
Quality
The economic performance of an organization will also be affected by the financial
consequences of the quality of the inputs it purchases. Quality can affect total input costs
through:
the true supply price of usable inputs: unless an organization obtains credit from
its supplier for sub-standard inputs the purchase contract with the lowest face
value may not be the most economic. If a large number of components fail quality
tests, the effective supply price of "quality" inputs may prove to be relatively high.
In this situation, ignoring overhead costs, an economic organization would aim to
minimize the effective total supply price of usable inputs (T3):
T3 = N(P-D) + M(P-D) - S
where:
N is the quantity of usable (or "quality") input acquired;
M is the quantity of sub-standard input;
P is the basic supply price paid per unit of N+M input;
D is the discount given per unit on N+M items;
[(P-D) being the net, or actual, price paid per unit];
S is the total scrap value realizable on N+M items.
direct addition of costs: poor quality inputs may be cheaper to buy but add to total
costs through the need to carry out remedial work on sub-standard items or the
addition of further inputs to compensate for poor quality. Identifying which
139
the level of overheads: if an organization is unable to identify and weed out substandard inputs at the point of purchase it will incur higher expenditure on its
overheads (e.g. transportation or storage), increasing the total cost of purchasing
"quality" inputs. In this situation it may prove more economic to pay a higher unit
price to a supplier if this guarantees a lower level of sub-standard items and,
consequently, a lower total cost for quality items. Again, to be economic an
organization should minimize T5:
T5 = ((P-D)+A)N + M((P-D)+R) + B + I - S
where:
A is the overhead cost, per unit, of purchasing, transporting, holding and maintaining N units
of quality input;
B is the addition to total overhead costs of purchasing, transporting, holding and maintaining M
units of sub-standard input.
From the above equation T1 and T2 incurred by the organization are not considering
quality problem of economy but T3, T4 and T5 are with quality problems. T2 includes all
the overhead cost and T5 A & B are overhead cost by sub-standard product.
Economy questions are like:
Whether price paid for doctors, hypodermics was justified and corresponded to
normal or recognized prices;
Whether, given specified needs and quality, every effort was made to use un-branded
drugs, which are normally very much cheaper, rather than branded drugs for the
inoculations;
Whether bulk purchase discounts were achieved for purchase of vehicles;
Efficiency
An operation could be said to have increased its efficiency in the sense that either fewer
input were used to produce a given amount of output, or a given level of inputs resulted in
increased output. Inefficiency would be revealed by identifying the performance of work
with no useful purpose or the accumulation of an excess of (or unnecessary) material and
supplies.
Efficiency can be expressed as being to either:
Minimize
I1,
I2,...,Im
in
fn(I1,I2,...Im;O1,O2,...Op)
subject
to
O1=q1,
O2=q2, .....,Op=qp;
or
Maximize O1, O2,.....,Op fn(I1,I2,...Im;O1,O2,...Op) in subject to I1<Q1,
I2<Q2,.....,Im<Qm.
where:
fn is the "production function" relating outputs to inputs;
I1,...,Im are the quantity of inputs 1 to m;
O1,...,Op are the quantity of outputs 1 to p.
An efficient organization is then one that has the best possible production function, fn.
Efficiency covers the performance of all the activities of an organization. If we are
examining the efficiency of a hospital, for example, we could look at everything from the
performance of cleaning staff, through the operation of the pharmacy, to the utilization of
operating theaters. We could also have looked at the use made of bricks, labor, cement,
transport etc. in first building the hospital.
In each case we are evaluating how well the organization turns inputs (bricks, cleaning
staff, drugs, operating theaters, doctors etc.) into outputs ( the hospital, clean corridors,
filled prescriptions, operations). In some cases the outputs of one activity are the inputs
of another. For example, an operating theater may be an output of the hospital building
program but the key input for theater utilization. Thus we can trace a whole range of
efficiency issues through an organization from its prime inputs to its final outputs.
Efficiency questions are like:
141
Whether appropriate vehicles were used for the type of terrain covered (e.g. if all
travel is on good quality roads there will be less justification for use of expensive
4WD vehicles)
Whether the use of staff matches the needs of the work (e.g. it would be inefficient to
use of doctors for inoculations, as opposed to nurses or health visitors could also be
overly expensive);
Whether the visits to villages have been planned to maximize the level of contact with
the target population for the level of inputs;
(e.g. planning to contact major population centers, education through pre-natal or
post-natal clinics, inoculation through post-natal clinics, if appropriate)
Whether it could have been integrated with other existing health programs to achieve
the same output but at greatly reduced inputs;
Effectiveness
The effectiveness of an organization is not just a question of whether it has achieved its
objectives or obtained its intended impacts - these might have occurred without any
intervention or expenditure by the organization. If that were the case then government
expenditure was entirely wasteful. Effectiveness is concerned with the extra benefits
which have accrued through the organizations or scheme's intervention in the field.
To examine or assess how effective an organization is we need to evaluate its impacts .
The impacts of a scheme or program can be viewed under the following four categories:
additionality: the extra intended impacts that have occurred solely as a result of
the intervention of the organization;
deadweight: those intended impacts that already existed or would have occurred
without any intervention from the organization. Government expenditure on
deadweight is completely ineffective as the impacts would have accrued without
it. For example, if a government is trying to increase production of an item, (e.g.
coffee) subsidies for that element of production that already takes place is
unnecessary. Government should only be subsidizing additional production;
displacement: those intended impacts that are additional but occur because activity
has been relocated from one place to another, or because activity on the subsidized
scheme has displaced activity on other desired objectives, merely to take
advantage of government support. For example, if government wished to see an
increase in employment and provided subsidies for industry in Addis some firms
might move investment planned for other parts of the country to the capital to take
advantage of government funding. Equally, in countries where the exchange rate is
kept at an artificially high level through government control of foreign currency,
black market entrepreneurial activity on acquiring foreign exchange so as to
import "luxury" goods is displaced from more (socially) useful activities;
Side effects: the unintended impacts of government intervention. They may be
desirable or unwanted. For example, subsidies for increased agricultural
production may lead farmers to exploit land to an extent that soil erosion becomes
a serious long-term problem.
In assessing the effectiveness of an organization we should be looking to see that it
maximizes its additionality. Funding of other impacts - deadweight, displacement and
side effects - is wasteful as it does not add to the direct achievement of the scheme's
objectives. However, it should be recognized that deadweight, by itself, is also beneficial
providing the government avoids paying for it: deadweight impacts contribute to the
142
achievement of the objective. They are distinguished from additionality solely because
they would have happened without government intervention. With few exceptions,
government should maximize additionality without discouraging deadweight.
Effectiveness is arguably the most important element of performance. Goods and
services may be provided economically or efficiently but if they do not achieve their
intended objective the resource used will largely be wasted. For this reason the auditor
will often find that effectiveness is the first area to be considered when looking at the
opportunities to conduct an investigation. However, assessing effectiveness can be
extremely difficult. Identifying and measuring impacts may pose considerable problems.
Assessing whether they are additional, deadweight etc. may be impossible. Auditors must,
therefore, only enter into effectiveness audits if they are satisfied that they have the skills
and techniques necessary to produce defensible and accurate results.
Effectiveness audit is often seen as the most important aspect of examining auditees
performance. It creates major problems for the auditor because:
it is difficult to measure and identify
the impacts may only be apparent in the long term
establishing cause and effect may not be possible
it leads us into the political area.
Effectiveness questions are like:
Whether a government-funded program is needed amongst certain segments of the
population (some people may have intended to pay for the inoculations themselves government funding is deadweight);
Whether the program leads to long-term eradication of the disease (note: the
program's objective is disease eradication, not the giving of inoculations);
Whether the program creates or solves other health care problems (side effects health visitors may be able to identify and treat other diseases at an early stage; on the
negative side there may be examples associated with use of non-sterile needles or
direct side effects of vaccines, e.g. whooping cough or the use of drugs in less
developed countries that have been banned elsewhere because of their known
problems).
Economy
Efficiency
Effectiveness
6.
7.
143
8.
3. EXAMPLES
Area
OBJECTIVES
INPUTS
ACTIVITIES
OUTPUTS
IMPACTS
New roads
Effect on other roads and rail schemes
144
1.
This appendix defines aims, objectives and policy instruments, how they inter-relate
and looks at areas of audit interest.
2. Aims can be defined as " the purposes for which an organization or program exists".
Objectives are said to "stem from Aims and to represent specific planned achievements".
Objectives are usually set at several levels, from high-level strategic objectives to
individual objectives for particular activities.
3.
Aims and objectives therefore form a hierarchy, with Aims at the highest and most
general level, and objectives beneath in several tiers, of increasing specificity as one
goes down. Aims are directions, while objectives are destinations. According to these
definitions an Aim does not provide the basis of an assessment of achievement, because
if you said you'd go north, then an enormously wide range of outcomes would be
consistent with that intention - a range so wide as to make meaningful assessment
impossible. The distinction is worthwhile because the difference is significant: audit
assessment of effectiveness cannot get going if we have only aims and no objectives.
4. We can exemplify these ideas with the case of commercial company. Its aim would be
something like "to maximize earnings per share". Subsidiary to that it might have
objectives for net profit after interest and taxation, market share, growth, etc. Then there
might be a lower level of more specific objectives, e.g. for gross profit, borrowings, loan
charges, taxation.
5.
Government departments and other public bodies will not usually have such clearly
enunciable aims and objectives as profit-oriented trading companies. One thing we have
to be careful of is that departments sometimes call their aims "objectives". It doesn't
matter what these things are called as long as we keep a clear view of the
direction/destination distinction. We should also distinguish between policy objectives,
which are stated in terms of impacts, and program objectives, which are stated in terms
of outputs.
Secondly we can look at the process of policy formulation, and consider whether policy
objectives were set on the basis of adequate analysis and sufficient and up-to-date
information.
8. Thirdly we can look at the relations between the objectives. This means checking that
there are logically sound relations between objectives at different levels of the hierarchy145
the crucial area will probably be the relation between policy objectives and program
objectives. We should also look for possible conflicts between the policy objectives of
the audited body and those of other public sector bodies if unresolved they may create a
risk to VFM.
Policy instruments - definition
9. The terms "policy instrument" and " program" are both used to denote the means adopted
by departments to pursue their objectives. Policy instruments are the activities of the
department, whether it be making grants, providing services, or procuring goods and
services. The term "instrument" signals the fact that what the department does should be
regarded as a means to an end rather than an end in itself.
10. In the past things tended to get done "because they've always been done like that", or
because of unacknowledged pressure from some constituency or interest. This is not
satisfactory. Departments should have clearly enunciated policy objectives. Once they
have objectives, they can ask themselves how their policy instruments relate to them: are
the current instruments really the best means of securing the prevailing objectives?
Policy instruments - audit interest
11. There is a list of points to consider in the 'Policy Instruments' section of the Effectiveness
audit Aide Memoire in Guide I. The following paragraphs provide some expansion and
discussion of the more important points.
12. Clear link between policy instruments and policy objectives: If the relation between
instruments and objectives has been got right, the objective(s) will be a complete
justification of a policy instrument. Sometimes the choice and design of policy
instruments is influenced by wider policy considerations: a less cost-effective
administrative arrangement may be chosen because of the desire to reduce the numbers
of civil servants, or a more expensive good procured because the cheaper alternative is
an import and there are foreign currency considerations & services. The important thing
is that any such extra purposes, which do not form part of the primary rationale for the
policy instrument, should be "in the open"; they should be stated as secondary objectives
and some indication given of how they interact with the main objectives (i.e. which
objectives get priority in which circumstances). The means chosen to pursue a policy
objective may themselves be chosen for political reasons, and if this is clear to the
legislature the AG would not normally comment on the instruments chosen (although he
might still wish to draw attention to the extent to which policy was being achieved or to
any financial consequences of which Parliament would not otherwise be aware).
13. Alternative instruments should be evaluated and costed: To be sure that it has chosen
the best means the department should examine all the possibilities. There ought to be a
thorough and systematic review of precedents, parallels, and evidence from pilot studies,
specially commissioned research, surveys, & services. The department needs to have a
proper understanding of the environment within which the instrument will operate,
especially the related activities of other public sector bodies. It is common to find that
thorough analysis of this kind has not been done. As well as bringing this to attention
when it occurs, we can consider the scope for supplementing the information available to
the department with other information in the public domain, advice or research solicited
from third parties such as academics, and survey data.
146
14. Policy instruments should have evaluation criteria and assessment and monitoring
mechanisms built in at the outset as part of the design of the instrument: In other
words departments should not start to operate instruments before they have said what the
operational criteria of success are to be; hostages to fortune must be given.
147
148
Aims
The aims of the overview are to;
I) obtain a good understanding of the audited entity, its policies and objectives, its main activities and principal
resources;
II) identify the potential risk to achieving VFM;
III) suggest areas or subjects for individual in-depth investigations;
IV) highlight areas for continuing audit attention.
2.
Objectives
The objective of the overview is to assemble and evaluate relevant information in order to
provide an understanding of the audited entity, its main activities and principal resources, it
should identify the main VFM risks and possible investigations and also provide sufficient
information to support the preparation of a divisional plan. It should not extend to the
collection or examination of detailed audit evidence. The overall approach should be to
collect the minimum amount of information needed to meet the objective.
3.
Scope
The scope of the overview covers a number of main areas each of which can be supported by
a variety of information. These include:
a) Background
Financial information: budgets,
estimates, accounts, significant
holdings of assets.
Organizational structure: divisional
(branch and regional) local office
network.
b) Objectives
c) Constraints
d) Resources
e) Activities
I) Other information
The approach to information collection should be top-down starting at the high general
level and working down to as much detail as is required to meet the overview objective.
4.
Planning
The organizations audited by the audit offices may be large and complex. Efficient and
effective overview of such organization requires careful planning. An audited entity can be
covered by a single overview, or by a number of overviews covering different parts of the
organization, they may be carried out in one year or spread over several years; and they can
be undertaken as a single annual exercise or as a series of ad-hoc exercises.
The number and scope of overview depends on the audited entity's organizational
complexity and the prior knowledge of the audit field. If the entity is very complex it will
usually require more than one overview. Timing depends on the scale of the overviews and
the availability of resources.
Organizational complexity depends on the scale, nature and inter-relationship of the audited
entity's objectives, activities, structure and resources-factors which in themselves tend to
suggest the best approach to tackling an overview. Organizational complexity can be
assessed by considering the following questions.
Objectives
Activities
objectives?
Structure
151
Concepts
3.
Evaluative criteria can be either:
principles, i.e. the absolute considerations which determine whether an activity is
conducted properly or whether value for money is achieved (e.g. that the audit entity
should report its performance to the council; or that job creation should be cost-effective);
standards, i.e. the level of performance of the activity or of the resultant impact. Standards
often take the form of norms or targets, may cover quantity and quality, and may be
absolute or relative, (e.g. that the audited entity should produce a report to the council on
its performance at least annually; or that the cost per job should not exceed X birr).
4.
We can also set evaluative criteria as questions. This has one major advantage. Where we
find that the answer is not wholly in the positive, we know that we have significant findings
(provided that we ensure that the evaluative criteria are significant). Further, the evaluative
criteria themselves provide us with the recommendation. So, if we find that the answer to
the evaluative criteria.
Note:
5. The minimum requirement for an efficient study is a set of evaluative principles. Alone these
may be sufficient for more limited studies of structure or process as they will allow the
auditor to identify areas where there is a risk to value for money and to suggest
improvements.
6.
Standards give the auditor the added dimension of being able to measure the extent of the
auditee's performance of the principle established for structure or process or its impact on
value for money. By setting a numerical benchmark of expected performance the auditor may
be able to value the financial and/or non-financial consequences of the auditee's actions.
Equally, it may be possible to assess the value of any audit recommendations.
7.
The broad content of evaluative criteria also varies according to the nature of the
overview/marking topics or audit issues we are looking at. Audit issues fall into 3 broad
categories:
questions of structure : the overall legal, organizational, resource and management
framework;
question of process: such management and technical activities as planning, production,
control etc.;
questions of achievement of value for money: the level to which an activity is economic,
efficient or effective.
A detailed analysis which can help the auditor to identify audit issues is given in this
Guide on page 25 to 26.
8. The criteria we use will therefore fall somewhere within the following matrix:
STRUCTURE
PROCESS
VFM
ACHIEVEMENT
9.
PRINCIPLE
e.g. there should be clear
lines of accountability
for all expenditure
STANDARD
e.g. the audited entity
should produce annual
reports to Council
Any particular audit may need evaluative criteria for a number of the cells of the matrix,
depending upon the exact scope of the audit. Criteria should give complete coverage of all
the audit issues, i.e. we should construct an umbrella of criteria from which definition of the
audit methodology, information gathering and analysis of audit findings can proceed. Thus
for an audit looking at the management and performance of a scheme, criteria will probably
be needed for both principles and standards of process and VFM achievement. Within each
cell a number of criteria may be needed.
153
In the main investigation, criteria will be determined by the objectives and depth of the
investigation. In a broad based audit it may be appropriate to define only high-level
principles for each aspect of the auditee's control framework. For narrower, more sharply
focused studies, more detailed principles and standards might be necessary.
13. Some criteria are applicable to all fields of management. For example we can establish criteria,
that the audited entity should:
have clear measurable objectives and a general plan for accomplishing them;
have targets by which to assess whether objectives are being met;
have well defined responsibilities for the use of resources;
have staff and organize in an economic and efficient manner to accomplish objectives and
the plan;
use resources to deliver programs efficiently and with adequate control;
have information which is timely and accurate and enable the achievement of the targets
and the objectives to be monitored;
report the results of its key activities (staff, council, share holders, public, customers).
14.
The above criteria are broad statements which are equivalent to fundamental (study) issues
and can be used for establishing the scope of investigation. But they exclude what can be
useful for conducting the investigation detailed criteria for specific function or activity. For
example, it can be established for the training function that the organization should:
identify staff training needs;
analyze training needs and develop training plans;
design courses to reflect the needs identified; control the implementation of staff training
courses;
monitor and evaluate staff training needs.
154
These criteria would provide the benchmarks for an examination of the training function.
But it is possible to sub divide these still further so that for instance. the audited entity
should identify staff training needs.
individual and group training needs should be identified in terms of potential
improvement to present and future job performance.
line managers should have the primary responsibility for identifying training needs.
15.
The level of detail will depend on examiners judgment. The question to ask is what is useful
for conducting the audit. Criteria can be set at three levels:
at the first level, are the broad statements of principle which will apply in any situation;
at the second level, is the methodology for a function or activity;
at the third level, are detailed standards and procedures of a specific or technical nature.
This is the difficult -think tank - stage. It is possible to identify criteria which apply to each
type of function or activity e.g. manpower, training, grants in aid etc. The examiner could
then apply the appropriate set of criteria to the investigation. While this is a useful starting
point, in practice the criteria have to be tailored to each audited entity's circumstances. The
reasons for this are:
Structure The audited entity is organized hierarchically or by team etc. It is
centralized/decentralized. It is governed by a board, committees, chief
executive or combination of the above. Sensitivity has to be shown to
the audited entity's historical development e.g. universities. None of
the structures are good or bad. It depends on which suits the audited
entity's functions/activities.
Central Controls -
An agency may have more power to act on its own behalf than a
government entity. Thus an agency may have flexibility e.g. on staff,
use of funds. But such arrangements will be set out in the framework
document with the sponsoring organizations. Government entity in
turn need to ensure that they comply with treasury requirements in
their own operations.
Legislature
Size
16.
Risk -
Time -
If service standards require a quick response e.g. policies, fire then the
systems should be geared to providing that response.
When you believe you have reasonable set of criteria discuss them with the auditee
department. Their comments could influence your decision on which criteria to use for the
investigation.
When setting criteria:
the criteria should be measurable wherever possible;
155
17.
In many cases there may be some guidance on evaluative criteria. Possible source of
information include:
generally accepted management practices; (good practice)
objectives of the entity or project;
previous audit offices investigations of the same subject;
academic pronouncement of the profession;
publications of other national audit offices;
government rules and regulations;
standards establish by the audited or/and its supervisory authority of the auditee;
professional bodies or trade associations, here or abroad;
the Ethiopian management institute;
the internet
international bodies;
comparison of the audited entity with similar organizations both in Ethiopia and abroad.
The assistance of consultants may also prove valuable.
18. If using existing criteria the auditor should ensure that it:
is relevant to the issues and the audit entity's under examination;
provides adequate coverage of all the key value for money considerations;
is pitched at the right level;
is up to date.
19. Establishing a standard against which to evaluate the auditee's performance will generally be
more difficult than reaching agreement that the auditee's should follow certain principles of
good management or best practice. Often we will find that the audited entity has not set itself
standards of performance and that no generally accepted ones exist. Where no standards
exist, comparisons may prove useful. There are a number of different comparisons which we
can employ:
comparisons over time;
between geographical areas;
between individuals where they are doing like work;
156
20. Though informative, comparisons may not allow us, in all cases, to draw definitive conclusions
as to whether value for money is being achieved. However, even in such situations, they may
provide sufficient evidence to query "outlyers", i.e. those occurrences which lie furthest from
the norm of performance for their comparators. For example, if in examining public sector
contributions to private sector housing schemes we find that in 75% of cases the contribution
ranged between Birr 5,000 and Birr 10,000 we might query both cases where the
contribution was less than Birr 1,000 (on the grounds that the private sector scheme would
have gone ahead without public sector contributions) and where it was in excess of Birr
20,000 (on the grounds that the public sector contribution was excessive in comparison to
the resulting benefits). In both instances the cases should be reviewed in detail to provide
sufficient evidence to support our initial conclusions.
21. One word of caution is necessary. In certain circumstances the auditor may not be best placed
to specify generally acceptable criteria. In effectiveness audit both principles and standards
derive from the policy objectives and will need to be set or agreed by the policy makers. But
even in these cases the auditor has two further constructive avenues to investigate:
where the auditee have omitted to set criteria themselves, this may be a relevant finding
for report;
comparisons can be made to similar schemes both in Ethiopia and abroad.
Conclusions
22. To draw conclusions in performance audits we decide what is good and bad practice by the
auditee - we intuitively set our own evaluative criteria. If considered systematically, agreed
within the team, and discussed with the auditee, criteria can form the cornerstone of an
efficient study. By setting out the criteria upfront we can ensure our work focuses on the key
issues for value for money.
157
Fundamental issues are the basic VFM questions the investigation should consider if it is to
reach sound conclusions on performance and use of resources in program, project or other
area or activity to be examined. To produce penetrating investigations and decisive reports
within a reasonable timescale the number of fundamental issues to be pursued should
normally be to 2-4. These should not be allowed to mushroom as the investigation proceeds.
2.
As a starting point to identify such issues, the auditor may consider the following list of 11
basic questions. This list is not intended to be prescriptive nor it is to be taken as a complete
summary of all possible fundamental issues.
Authority?
Need?
Alternatives?
Method?
Standard?
Timeliness?
Controls?
Cost?
Recovery?
Achievement?
Implications?
158
APPENDIX 6: DOCUMENTATION
Working paper should be maintained to provide a record of the work carried out, the findings and
conclusions reached and provide the basis on which the performance report can be prepared. They
should be prepared in sufficient detail, but at the most economical level, to enable an experienced
auditor with no previous connection with the audit to establish what work was performed to
support the findings and conclusions.
Working papers should be prepared and filed in working paper folders (WPF) as the audit
proceeds. Care should be taken to include only that material which is directly relevant and auditors
should guard against the tendency to copy too many unnecessary documents. It will be helpful at
the referencing, review and reporting stages, if the auditor summarizes the evidence collected to
show the detailed audit objectives of the examination to evaluate its relevance, reliability and
sufficiency, and to draw conclusions and make recommendations based on the evidence. Auditors
should therefore, implement the following guidelines:
1. Working papers should show:
the evidence collected
the procedure used to obtain it
the source of the evidence
the staff who carried out the work
the date of the work
the issue, supposition and detailed audit objective to which the evidence relates.
2.
Working papers should be clear, concise and legible. Material should be restricted to matters
which are relevant to the audit and should not contain excessive detail. They should be
suitably referenced and cross references and orderly placed for ease of location and
reference.
3.
All working papers should be filed on working papers folders (WPFs). The material held in
WPFs for individual investigation should consist of:
a) planning and administrative material (e.g. copies of feasibility review reports, notes of
progress meetings).
b) Correspondence with the audited entity and notes of discussions with the auditee
officials;
c) copies of evidence, records, analysis and other papers in support of the findings and
conclusions;
d) materials and papers accumulated in report preparation including drafts and summaries
of main issues.
5) avoid extraneous or unnecessary enclosures (if necessary only the appropriate parts of a
document should be enclosed);
6) documents should normally be filed in chronological order, alternatively, sub-division
may be used for separate aspects;
7) documents should show the file number from which they were copied, the date (or if not
known the approximate date) of origin, and if possible the grade of the originator;
8) if the enclosure is a draft, efforts should be made to confirm that a final version was
made, (especially if the document is a submission to Ministers etc.), and a note made of
the outcome;
9) Where an enclosure on WPF refers to another document of significance which is also
on file, its file and enclosure number should be referred to in the margin;
10) important or relevant sentences and paragraphs in the enclosure should be side lined
or otherwise highlighted;
Reporting material
5.
During the course of report preparation it is likely that a number of drafts will be prepared
within the internal audit. This has a tendency to distance the drafts from the evidence and as
a result it is essential that:
all draft reports should show the date of origin on each page;
all drafts should be kept and filed in chronological order;
draft reports should be referenced to supporting evidence showing WPF reference
and enclosure number;
the final draft report to be sent to the audited entity should be referenced back to
the auditee's source from which the evidence was obtained.
This provides a good discipline to ensure that we have adequate support for the report and
allows us to respond quickly to any challenges from the auditee.
160
3. The example below is about the fictional Department of Assorted Issues. It is assumed that all
the necessary information has been collected. The remainder of this part of the guide
demonstrates how that information can be analyzed.
4. A good starting point is often the financial statements of the organization. These can indicate
where resources are being used, and for what purpose. The auditee's annual accounts give
the following information:
Table 1: Expenditure of the Department of Assorted Issues, 19XX EC.
Item
Housing
Transport - roads
Transport - rail
Ancient monuments
Museums and other collections
National Parks
Departmental Administration
Total expenditure of department
(Source: fictitious)
This gives us only a very high level view of the department. All we can say at this stage is
that housing and the two types of transport are the most material areas.
161
5. Looking further into the available financial information we find that the expenditure on
housing can be broken down, by policy instruments, as follows:
Table 2: Abstract from the Department of Assorted Issues' budget showing expenditure on
housing by policy instrument (also showing spending authority)
Policy instrument
New build - private (ministry)
New build - public (municipalities)
Slum clearance (municipalities)
Renovation - public (municipalities)
Nomad sites (zones)
Hostels for urban homeless (municipalities)
Rehabilitation of housing for displaced homeless persons (zones)
Diplomatic housing [net trading account loss] (Ministry)
Total housing expenditure
(source: fictitious)
Birr
(in Millions)
37
60
33
16
6
21
75
2
250
Table 2 gives us a better appreciation of the priority to be attributed to each housing area:
the rehabilitation expenditure and public sector new build account for over 50% of
housing expenditure between them, and should be reviewed in more detail later in the
overview;
nomad sites and diplomatic housing appear to be relatively unimportant;
we need to be careful, however, as the item for diplomatic housing is a loss made on a
trading activity whose annual turnover is 144 million birr. In gross terms it is the largest
item, and the existence of a loss suggests poor value for money. There is strong evidence
to suggest that it is an area worthy of further investigation.
6.
In table 2 we have analyzed expenditure by broad policy instrument only. In practice this is
often how we will find financial information presented. Using this data we could also
attempt an analysis by the policy objectives to which each of those instruments relate. By
interviewing the auditee's top management we obtain information on their policy objectives
which allows us to prepare figure 1. There are a number of interesting features about this:
the department has 3 broad housing objectives: improving rural and urban housing and
providing adequate housing for the diplomatic community;
improvement/extension of urban housing is the single biggest third tier item;
what appeared to be a relatively small item - nomad sites - becomes of medium size
when the element from the rehabilitation policy instrument expenditure item is included.
7.
We can also re-present table 2 to show the relative importance of the various spending
authorities:
162
Spending Authority
Municipality
Zones
Ministry
130
81
39
250
(source: fictitious)
Birr
(in millions)
Building contracts
Administrative staff
Other directly employed labour
Plant and equipment
Road vehicles
Light vehicles
Major transport
Land purchase
Cash compensation to farmers
Railway rolling stock
Computers
Administrative inputs
Interest payments
Total expenditure of the auditee
(Source: fictitious)
308
40
25
51 *
18 *
27 *
9
12
177
6*
16 *
137
826
There are 3 items over Birr 100 million which will have a major effect on whether the
organization is economical. In each case we would expect the department to have adequate
controls. In addition the items marked "*" will be purchased from main suppliers. There
should be a proper procurement system covering all such purchases. Together these items
account for Birr 118 million.
163
Administrative inputs
16
Renovation - public
16
Cash compensation to farmers
12
Land purchase
9
Computers
6
Nomad sites
6
This list is too large to be able to conduct a full overview on each item. Full analysis of risk
to value for money, public accountability etc. for each expenditure item would take a
considerable time. Further, in the normal course of events, the list would be supplemented by
further tables covering expenditure by activity and full breakdowns of the railway's, ancient
monuments' etc. expenditure by policy instrument and policy objective. We need to set
priorities for our future overview work.
10. Setting priorities is a matter for audit judgment and will vary with available resources. The
more staff we have the greater the number of high and medium priority items we can
investigate in depth in the rest of the overview. Below is one possible set of priorities:
high priority: > birr 100 million (8 items)
medium priority: > 40 million but < 100 million (9 items)
low priority: > 10 million but < 40 million (9 items)
de minimus: < 10 million (3 items)
11. By setting these priorities we are saying that we are unlikely to examine low priority items and
will conduct no further work on de minimus items, unless evidence comes to light to change
this decision. The financial cross cuts have given us 17 items which, on the materiality
164
criteria, are worth investigating further. Cross cuts have also indicated that for one item,
diplomatic housing, there is a clear concern about value for money.
12. We should not limit cross cuts solely to the financial information. Organizations can undertake
regulatory or administrative activity which, though not having a significant direct bearing on
their own use of resources, can affect the income, expenditure or value for money of others
in the public sector. We need our map of the organisation to cover both its own use of
resources and the influences it has on the rest of the public sector.
13. In addition to the financial cross cuts, we need an organizational chart of the department with a
full statement of the policy objectives of each area. Much of this will correspond to the
analysis above, as it will be a restatement of the financial data from an organizational
viewpoint. But there may be areas where the income or expenditure is minimal but where
the objectives are important for the wider public sector.
14. An example above might be National Parks. Its expenditure is medium priority as it affects the
department of Assorted Issues, but its regulatory and administrative activities are likely, at
the minimum, to affect the activities and expenditure of the Department of Agriculture as
well. We might find that the latter carries costs of a further 50 - 100 million birr because of
the actions of the DAI. If we were to analyze each department entirely on its own
expenditure alone, each item would be only medium priority. Together, under the over-riding
policy objective, the total expenditure is high priority.
15. A further example might be in an area that appears in none of the tables above - road accident
prevention. In our fictional example the DAI has responsibility for road accident prevention
and a policy objective to minimize the cost to the economy of accidents. But it makes no
direct expenditure on this objective. All such expenditure is borne by other departments, by
municipalities or zones. The others together spend 20 million birr a year on such things as
road improvements, traffic lights, round about etc.. But two other factors are important:
the direct cost to the department of health of treating accident victims is approximately
90 million birr a year;
the effect on the economy as a whole runs into many 100s of millions of birr a year.
In this case the DAI has an administrative/regulatory activity with a major policy objective
having significant public sector and national cost implications. It would be wrong,
therefore, to ignore it. If we limit cross cuts to direct departmental financial data alone we
would not pick this up.
16. The success of cross cuts depends on good information about the objectives, activities, finances
and management systems of the organization. It is dependent, therefore, on having a good
working relationship with the audited department and adequate access to papers etc.
Information requirements will vary with the organization but in general they should include:
the top management information systems;
a statement of all policy objectives and instruments;
the organizational chart. Sometimes the telephone directory, if up to date and organized
by section, makes a good alternative;
all relevant financial data;
an understanding of the financial management control systems.
Cross cuts, and priorities, should be reported to the Head of internal audit.
165
High priority
High expenditure
High risk to VFM e.g.:
higher inherent risk
poor control environment
poor strategic or budgetary planning
no performance review performed
history of poor VFM
166
Low priority
High priority
The listing is not intended to complete. Nor does the existence of one or more of the higher risk
indicators necessarily mean that there is a deficiency or irregularity relevant to the specific
objectives of an audit. The presence of such indicators should, however, heighten our awareness of
the possibility of increased risks in any work we undertake.
167
Produced by
Reviewed by
Date
COMMENT
Background
Materiality
Risk to value
for money
Public
accountability
Possible impact
Executives/
public interest
Risk to internal audit
Departmental
issues
Suitability
Auditability
Other major work
planned/in progress
Developments likely
to affect assessment
Conclusions and
overall priority
168
PRIORITY
(High/medium/low)
the private sector element is administered directly by the DAI who are responsible for
attracting and approving applications, monitoring work in progress and paying grant against
invoices. DAI employ quantity surveyors to assess whether invoices are reasonable; the QSs
spot check approximately 20% of all works. A strict control is kept on the which sites the QSs
visit through the use of random number tables;
there is no limit placed on the amount which private individuals may apply for, though house
building firms are not eligible. The median 10% of grants was found to be in the range 40,000
- 60,000 birr, but with an upper 10% in the range 190,000 - 250,000 birr. What limited work
has been done on those receiving grant suggests that they tend to be professionally qualified
in private practice or business men, with an average annual income of approximately 60,000
birr. Most grants were for areas within Addis such as bole road or old airport and to people
wishing to expand or move to a larger house. 800 new private sector houses were funded in
19XX;
municipalities must apply each year for a grant allocation detailing the projects and likely
expenditure under each. They may include an estimate for "reasonable" overheads. The
department reviews the municipalities' intended recipients of housing and the areas proposed
to ensure that they accord with the scheme's objectives. The DAI then pays quarterly against
totaled invoices and does a random spot check of municipalities to ensure that they are not
claiming in advance of need. The DAI does not collate information on the total number of
units built each year;
the department are concerned about the scheme, especially the municipality element. They feel
that it is being used an area where municipalities "dump" overheads and the department feel
unable to challenge overhead costs on the limited information that they collect. However they
are unlikely to be able to start a major review within the next 2 years. There are no other major
reviews known of and there is no evidence of either legislature or press interest in the scheme.
This is due in part to the absence of any form of external reporting by the department;
169
a brief review of some completed schemes by the audit team showed that whilst a majority
were completed and maintained to a good standard, and all the private housing appeared to be
in excellent condition, a significant minority of municipality housing appeared to suffering
from both structural and upkeep problems. There were also suggestions that major services,
such as water and sewage, were not adequate in some cases. DAI has no minimum regulations
for the quality of new build;
170
Produced by:
Priority:
Medium
Reviewed by:
Timing:
This year
Date: 29/10/19XX
CRITERIA
Background
Materiality
Risk to value
for money
COMMENT
Objective is to build new houses in areas of
greatest homelessness and overcrowding.
Assistance given to municipalities and private
sector. Individual grants are not limited in size.
Total expenditure of Birr 97m.
Grants to private sector: B 37m.
Public sector exp.: B 60m.
1. Municipality overheads charged to grant
scheme run at >30% of total public sector
exp..
2. Private sector exp. not going to people/areas in
greatest need
3. Inadequate control over quality of new build some schemes rapidly degenerated.
PRIORITY
(High/medium/low)
Medium
High
171
High
High
Low
High
CRITERIA
Departmental
issues
Suitability
COMMENT
PRIORITY
(High/medium/low)
Medium
High
Auditability
172
Medium
High
Medium
Medium
AUDITEE:
REVISED BY
PRODUCED BY
DATE
STUDY ITEM
Housing
New Build
Improvement of urban
Materiality Risk
to
VFM
Public
account'y
Medium High
High
Impacts Executive
interest
High
Low
Risk to Departme
Internal ntal issues
Audit
High
housing
Improvement of rural
housing
Displaced persons housing
etc.
Inputs
Building contracts
Interest payments
Major purchases etc.
Fin. Management
Municipalities
Zones
173
Medium
Suit'y
High
Audit'y
Other Developments
work
Medium High
Medium
OVERALL
PRIORITY
TIMING
Medium
1984-85
APPENDIX
12:
REQUIREMENTS
FOR
PRODUCING
(1) Background;
(2) Main policy objectives and instruments in the field to be covered (see note 1);
(3) Concerns regarding value for money and public accountability;
(4) Proposed scope of assignment (including materiality), and the audit issues to be covered;
(5) Legislature and public interest;
(6) Assurance of auditee's acceptance of proposal, or details of their objections and how the
division propose to handle these;
(7) Details of proposed methodology, including sources of evidence (note 2)
(8) Expected impacts of the study (note 3);
(9) Resource needs in terms of man-days for each of the 3 main assignment stages the feasibility,
the main investigation planning and main investigation. (consultancy and other external expert
costs should be separately identified);
(10) timing of feasibility, main investigation planning and main investigation starts and
completions with expected date for draft report.
Notes :
l. Policy Objectives/Instruments
Senior management require all study proposals to quote directly the audited entity's policy
objectives and instruments in the area covered by the investigation. Study proposals should
identify the source or authority for the policy objectives and instruments (e.g. relevant
legislation, departmental statement government report). Where no specific policy objectives
and instruments have been articulated, this should be clearly stated in the study proposal.
2. Methodology
Precise information is needed on how the study is to be carried out establishment of criteria
against which performance would be measured i.e. how economy, efficiency and effectiveness
issues would be examined; sources of evidence; techniques of data collection and analysis; and
types of consultants and their precise contribution.
3. Impacts
Each audit outline should include a paragraph assessing the potential impact or benefits of an
audit study, which should be an important factor in deciding between studies or selecting issues
from with in a study area. Likely impacts or benefits include quantifiable savings, or
unquantifiable improvements such as changes in systems that strengthen accountability;
improved control over assets; improvements in the quantity of outputs and services provided.
174
RESOURCE REQUIREMENTS
REVISED BY
DATE
Plan for
1984-85
(staff months)
Plan for
1985-86
(staff months)
REVISED BY
DATE
1984-85
Staff
months
1985-86
Cost
birr
Overview
Marking
Feasibility stage
1.
2.
3.
Main investigation planning
1.
2.
3.
Main Investigations
1.
2.
3.
TOTAL
176
Staff
months
Cost
birr
PRODUCED BY
REVISED BY
DATE
This format illustrates how the audit methodology should be derived from the need to examine the issues
evaluative criteria, likely conclusions and expected recommendations. The example is based on the fictional
new build housing program introduced in this guide page 42 - 44.
ISSUES
EVALUATIVE CRITERIA
LIKELY CONCLUSIONS
Objectives clearly stated. Only
general statement of need.
EXPECTED
RECOMMENDATIONS
Gov't should develop precise
statement of need and target client
group.
METHODOLOGY
Review of departmental files and interview with
head of central policy unit (CPU) and Head of
housing policy.
As above.
As above. OAG to
produce specification.
Departmental regulations
contain criteria for selection
of applicants but these are
only fair representation of
those in need.
That grant should only go to those in That grant has not been limited As above.
need (as defined by eligibility
to those in need and significant
criteria)
number and value not satisfying
eligibility
criteria
177
178
REVISED BY
DATE
This format illustrates the process of identifying information requirements from the methodology, evaluating the information availability and
analysing the effect that any gaps in the information may have on the likely conclusions and expected recommendations.
LIKELY CONCLUSIONS
EXPECTED
METHODOLOGY
INFORMATION
RECOMMENDATIONS
REQUIREMENTS
INFORMATION
AVAILABILITY
COMMENT
No significant problems
As above.
No significant problems
(1) as 1 above;
(2) departmentally agreed
specification of need;
179
Date ___________
TIME
WORK
DAYS
COST
A. DIVISION COSTS
Internal Audit Department
Senior auditor II
Senior auditor I
Team leader
Auditor
Assistant auditor
TOTAL DIVISIONAL COST
(B) Other AO staff
AO statistician
TOTAL AO STAFF COST
(C) Subsistence costs
TOTAL AO INTERNAL COSTS
(D) External costs
Consultancy
Other external costs
TOTAL EXTERNAL COSTS
TOTAL COST
Prepared by ____________________
Revised by ____________________
Approved by ___________________
Sig.__________________
Sig.__________________
Sig.__________________
180
Date________
Date________
Date________
RELIABLE:
The evidence collected should be the most accurate and obtainable through
the use of reasonable audit methods. In considering the reliability of
evidence the auditor should carefully consider whether there is any reason
to doubt its validity or completeness. This is important where different
types of evidence suggest inconsistency. So if there is doubt we should
seek to obtain additional evidence but alternatively may qualify our
conclusions accordingly.
SUFFICIENT:
Categories Of Evidence:
1. There is no international agreement about the categorization of evidence.
The
classifications of evidence vary from literature to literature. In this guide evidence is
categorized as documentary analytical, physical and testimonial.
DOCUMENTARY: documentary evidence consists of file papers, management reports,
operating manuals, staff instructions etc.. Documentary evidence often
provides the most reliable type of evidence although it can be timeconsuming to gather and the auditor must guard against misinterpretation.
It is important as corroboration for oral evidence. Documentary evidence
need not be internally produced by the audited entity. Evidence obtained
181
PHYSICAL:
TESTIMONIAL:
182
File Examination
5. The prime source of documentary evidence is the examination of the auditee organizations
files and papers. The information collected from the file examination can be summarized
and recorded in the auditors own words on working paper folders (WPFs). ). (Format
attached as annex 1 in this Guide can be used during file examinations.) Important
documents and those conveying significant or potentially controversial matters should be
photocopied and originating file recorded on the copy.
6. It is important for the auditor to realize that all relevant papers may not be contained on
files which are registered. There may be other relevant files which the auditor is not aware.
It is, therefore, essential to seek assurance on the completeness of the evidence obtained.
External Papers
7. Paper originating from outside the audited entity may also provide a valuable source of
documentary evidence. Examples include government papers, published economic analysis
and reports from other public and private bodies, papers from international offices and other
audit office. Foreign sources and comparisons can be drawn upon as well as those available
nationally.
Specialist Assistance
8. Specialist in the subject of the investigation (if necessary) can enhance the scope and
penetration of the examination. Such service should be properly planned, obtained and
monitored to get relevant, reliable and sufficient evidence that meets the expected standard
of quality. Possible sources include consultancy firms, academics, professional bodies,
research organizations and selected individuals. Detailed guidance is given in this Guide on
(App 19).
Market Research
9. Market research involves commissioning a survey by a specialist firm or carrying out the
survey using own staff. It can provide useful evidence on the results achieved by
programmes or projects, in particular where the intended impact is directed on identifiable
groups. Survey can be costly. It requires special care in the choice of question, structuring
the question and sample selection. Contacting and collecting views from outside users of
the organizations service on those affected by the activities of the organization could be
used to smaller groups. For example, use can be made of the informal views and comments
of the external groups such as trade associations and other interested parties.
Analysis
10. A collection of raw data may not by itself give meaningful information. Further analysis
should be done. Such analysis may involve taking evidence already gathered and reperforming it to produce fresh evidence. Evidences collected using the above techniques
can sometimes be analyzed to produce further evidence. Using statistical operational
research, computer modeling etc. techniques.
183
ANNEX 1
NAME OF THE AUDIT OFFICE:
FILE EXAMINATION SHEET
INDEX NO.______________
AUDITEE ___________________
Issue
(Sub Issue)
Evaluative
criteria
Produced by______________________
Reviewed by _____________________
Date ____________________
Date of the
evidence collected
Evidence
collected
184
Finding/Conclusions
Source
file Ref.
Remark
1. Introduction
This part of the guide provides advise on the selection and use of consultants in performance
audits. Consultancy is expensive. This puts a premium on cost-effectiveness and on the audit
office managing the use of consultants effectively from the selection process to the final review
of their output.
To get the best results:
Identify tasks, opportunities and new approaches where consultants' experience and
expertise could benefit the work.
Select the right consultants for the job.
Bring them in early.
Set firm objectives, clear terms of reference and tight budgets.
Integrate the consultants' contribution with the work of the rest of the team.
Supervise and manage the work through to a successful conclusion.
Learn lessons for the future.
185
186
5. Short-Listing Candidates
Having decided on the type of consultancy required, the next step is to identify possible
candidates. Make an initial selection from such sources as:
Consultants who have previously carried out successful assignments for the audit office;
Inquiries amongst known experts in the field;
Professional bodies and similar organizations, including private organizations;
Industrial Project Service;
Standard reference sources;
Suggestions by the audited entity;
Once possible consultants have been identified further informal inquiries - for example by
telephone - should enable a short-list to be drawn up of those available to undertake the
assignment and interested in quoting for the work.
These initial discussions are valuable in providing an opportunity for an early assessment of the
capabilities of potential bidders. But avoid building up a special or preferential relationship
with any individual or consultancy firm competing for the work or otherwise giving them an
advantage in securing the assignment. Competitive tenders should be the normal rule.
6. Financial Control
Likely costs have to be considered at all stages of the work. It is the Head of internal Audit job
to ensure that sufficient funds are available for the assignment; that costs and commitments are
monitored against approved budgets; and that costs are contained and penalties avoided.
But remember that costs aren't everything. Generally you get what you pay for, and the quality,
speed and timeliness of the work are also crucial factors. Keeping costs under tight control is
essential; but it would be foolish to jeopardize the usefulness of the work, and perhaps hinder
the investigation as a whole, by taking concern for costs too far.
To ensure sound financial control:
Draw up a specification of the objectives, scope and timing of the assignment;
Prepare a provisional estimate of fees and expenses as soon as possible, and certainly
before going out to tender;
Confirm availability of funds and provisional budget approval;
Review the scope of the work and/or budget in light of tenders submitted and confirm
revised approval as necessary;
Monitor costs against budget as work proceeds and agree prices in advance for any extra
work to be carried out;
Revise work plans to keep within approved budget, or obtain revised approval as
necessary for essential extras.
7. Seeking Bids
Bids should normally be obtained by competitive tender from 3-5 firms. Single tender action
may be appropriate where the assignment extends an existing contract won in competition, or
where there is clearly only one source of assistance. Exceptionally this may also be necessary
where time is very short.
Tenderers should be provided with a background brief which covers such matters as the
responsibilities and work of the audit office. The brief should also outline the audited entity's
responsibilities, main functions, and organization; and it should set out the background to and
main aims and objectives of the examination. This gives the tenderers a clearer idea of the job
and helps them tailor their proposals to the audit office's needs.
Negotiations and discussions with the potential consultants are the responsibility of the line
division concerned, taking care to avoid any premature commitments. Discussions with
187
tenderers should normally take place in the audit office on a straightforward "business" basis.
Entertainment of, or by, competing consultants should be avoided.
Main matters to be covered:
Provide tenderers with a background brief;
Set out clear terms of reference for the work;
Explain to tenderers how their work will interact with the rest of the team;
Make it clear that the audit office's work requires a high standard of evidence and
rigorous analysis
Encourage tenderers to discuss the requirements and seek further information and
explanations;
Invite their ideas on alternative ways of carrying out the work;
Decide main criteria for assessing proposals and bids.
8. Assessing Proposals
Decide in advance the criteria to be used to evaluate the individual proposals received from
consultants. A first sift of the bids may then eliminate those which are clearly not suitable on
content, quality or cost grounds. But do not hesitate to go back to the consultants if any issues
have not been adequately covered, or there is uncertainty over coverage, pricing or other
matters.
Main points to be covered in assessing individual proposals:
Are the consultants experienced in the field under examination? Are they well versed in
public sector concepts?
Can they demonstrate achievements and results in relevant areas? Have they a good track
record? (Inquiries into their previous work should stop well short of expecting them to
breach client confidentiality);
Do their proposals conform to the terms of reference? Do they demonstrate a sound grasp
of the aims and objectives of the office and of the particular examination?
Have they analyzed the task requirements carefully and thoroughly? Are their approach
and methodology sound?
Are the individuals who will personally undertake the work capable, experienced and of
high quality?
Is there a clear commitment of partner and senior management back up?
Will additional resources be available as necessary to help?
overcome any problems?
Is there an obvious willingness to meet the office's particular requirements? Do they fully
recognize the need to fit in with the rest of the team?
Are they committed to the timing of the work and meeting the agreed deadlines and
delivery dates?
Do they recognize the importance of clear control and reporting arrangements?
Are the costs firm and clearly set out? Does the bid provide an appropriate analysis of
time and charge-out rates? Are expenses and other costs clearly identified? Are there any
"hidden extras"?
9. Choosing the Winner
Further analysis and inquiries on the remaining proposals will normally produce a clear-cut
decision as to which consultant should be awarded the contract. The administration division of
the audit office will then deal with the contractual arrangements, liaising as necessary with the
line division. The tenderers not selected will also be informed and, if they wish, given a brief
explanation as to why their proposal was not successful.
188
In some cases it may be difficult to accept a consultant on cost grounds, even though they are
clearly the best equipped to carry out the assignment. In this situation, the consultants
concerned should be approached to discuss ways in which the fee might be reduced, perhaps by
modifying or re-scheduling the work. But remember that such discussions need careful
handling to avoid undermining the original tendering procedures.
Having evaluated the individual proposals:
Compare the strengths and weaknesses of the competing bids;
Check any differences in the bases of fees and the comparability of prices quoted;
Eliminate any proposal clearly not suitable;
Draw up a list of matters requiring clarification on remaining bids;
Arrange meetings to discuss any doubts or clarifications with those who are to do the
work. Assess their overall attitudes, capabilities, suitability, and commitment;
Watch for independence, objectivity, freedom from political bias, drive enthusiasm and
constructive ideas;
Decide which proposal represents best value for money, on content, quality and cost;
Review terms of reference with the provisionally selected consultant and amend as
necessary as basis for formal contract;
Supply the administration division with documented evaluation of competing bids and
recommend consultant to be selected.
10. Working Relationships
Good working relationships are essential to get the best out of consultancies. All aspects of an
examination must remain under the office's control; but remember that the consultants are an
important part of the team and will provide better value for money by being given every
opportunity to deploy their experience and abilities.
Generally there should be a clear recognition that throughout the assignment the consultants are
representatives of the office; and they will be treated as such and should act accordingly. High
standards are expected on both professional and personal conduct.
Working effectively with the consultants means the principal auditor should:
Set up the necessary liaison arrangements, including timing of interim reports and
meetings at key stages;
Make sure from the outset that there is a clear understanding about the scope of the
consultants' work, timetable, and deadlines;
Encourage two-way traffic and an effective working relationship between the consultants
and the rest of the team;
Establish arrangements for identifying and dealing with any emerging problems;
Ensure that any variations to the work, and extra costs, are cleared and approved in
advance, and the contract amended accordingly;
Review and discuss the consultants' reports promptly, linking their findings with work of
the rest of the team and ensuring feedback.
11. Reviewing Findings
Work done by consultants in effect becomes the audit office's work. We cannot hide behind
their reputation or expertise. So their findings and conclusions need to be independently
reviewed to ensure that they meet the required standards.
In specialist fields this may not always be easy; but it cannot be avoided if the final audit Office
report is to be presented to the head of audited entity.
When reviewing the consultant's work:
Satisfy yourself that the coverage has been properly carried out and is based on sound,
documented evidence;
189
Ensure that the findings and conclusions in the consultant's report are accurate, fair and
balanced;
Watch that recommendations are practical and cost-effective;
Check the consistency of their work, findings and recommendations with those of the rest
of the audit team;
Pay special attention to those aspects which have caused, or are likely to cause, particular
difficulties with the audited entity;
Discuss and resolve potential difficulties with the consultants, and seek their advice on
how their work can best be used.
Think hard about the best ways of dealing with the consultants' findings when deciding on the
content and presentation of the final report to be published by the audit office. Whichever
course is adopted, it should be made clear that the audit office stands by the end product. We
cannot distance ourselves from the consultants' findings.
In some cases consultants may wish the results of some or all of their work to be published
separately, or used for other purposes. This requires our approval and cases should be
considered on their merits in consultation with the head of audited entity.
Consultants findings may be used in the following ways:
No written report by consultants, but findings discussed and incorporated as necessary in
final published report;
Consultants submit written report to the audit office, but this is wholly subsumed within
the final report;
Consultants' findings are included in whole or in part in final report, and are identified
accordingly;
Consultants' report, or summary, is included as separate chapter or annex in final report;
Consultants' report is published separately by the audit office, as complementary to the
main report.
190
DATE
AUDITORS
FACTS
COMMENTS
(by the Auditee)
Example:
I. Scheduled and actual project implementation time:
Phases
Schedule/plan
Actual
I
January 1978
March 1978
II
January 1983
April 1984
III
April 1, 1988
October 1988
II)
True
COMMENTS
(by the Auditee)
Outputs
I)
The pathology laboratory was strengthened with the assistance of
the International expert.
Dr.W.B.O.Robert
II)
True.
III)
True.
Post
Date
191
APPENDIX
21:
TIME
AND
COST
BUDGETING
AND
MONITORING
1.INTRODUCTION
1.1. This part of the guide outlines techniques for budgeting and monitoring of the time and
cost of the main investigation.
1.2. Time can be defined as the hours that each grade of staff will spend on each of the
operations in the main investigation. Its importance is that staff input is normally the
principal resource we use to execute investigations. Time must, therefore, be controlled
effectively if studies are to be kept on track and delivered to budget.
1.3. Cost is the full monetary value of the resources used in carrying out the investigation. It
will include the value of the staff hours, any consultant fees and ancillary costs (e.g. travel
and subsistence payments). Cost is important to management, firstly, because it helps us
assess whether we are using the various grades of staff efficiently (principal auditors cost
considerably more per hour to employ than assistant auditors) and because it allows us to
monitor staff time, consultant costs and ancillary expenditure using the same base of
measurement - money.
2. Planning Stage
2.1. As explained in Chapter 3, the first step in planning the main investigation is to split the
audit down into discrete, manageable tasks and sub-tasks - hereafter called operations.
The example in annex 1 illustrates this process. Note that it incorporates all operations
requiring staff input during the study, including all necessary planning and control, liaison
(both with the audited entity, outside bodies and any consultants), communication within
the team, documentation and review tasks, as well as the general execution of audit
programmes. If budgets are to be accurate, and monitoring to be effective, the inclusion of
all such operations is essential.
2.2.
2.3. Estimating is largely a matter of experience but certain rules should be followed:
ensure that you have allowed for the time of all staff who you will need to employ on the
audit. In table 1, the audit offices statisticians time has been included, as well as the
main audit team;
recognize that the different grades of audit office's staff should have different roles and
responsibilities within the audit. For example, junior staff should not be made
responsible for liaison with the audit entity's top management. Equally, using head of
internal Auditors to extract files for examination is inefficient;
be realistic about estimates. If in doubt, it is always better to err on the side of
conservatism than optimism. Estimators have a tendency to be overly optimistic, underestimating the time that operations will take; to counter this management should look
critically at all estimates. If budgets are too optimistic they will prove of little value to
management during the main investigation;
avoid spurious accuracy.
There are a variety of estimating procedures which
management can use, but they are all open to some degree of error round up estimates
(following the principle of conservatism), as appropriate. For example, management may
192
estimate that it will take an average of 3.5 hours of auditor time to examine each of 35
cases, giving a total time of 122.5 hours. This should be rounded up - say to 130 hours;
allow for contingencies. It is rare for a study not to produce some unexpected and
unplanned event. Though these may lead to savings in time, they have a tendency to
cause extra use of resources. In table 1, a 10% contingency allowance has been built
in for each grade of staff;
recognize that there will be a learning time for all staff on the study. This can be built
into each operation or into the contingency allowance.
193
Task description
Planning
30
80
30
10
10
160
Departmental objectives
Review of CPU files
Review of housing files
Interview of CPU
Interview of housing
Documentation of task 2
0
0
0
0
0
0
0
0
0
0
10
10
5
5
4
30
30
5
5
10
5
10
0
0
0
0
0
0
0
0
45
50
10
10
14
5
5
5
10
20
5
10
0
0
0
0
0
40
20
60
70
0
0
0
2
5
20
3
5
100
10
25
230
0
60
50
10
5
0
25
100
400
5
5
0
0
5
10
0
0
10
10
1
1
20
10
5
5
0
5
15
15
10
20
0
0
50
60
21
21
7 Analysis of review
7.1 Input to computer
7.2 Analysis of sample and survey
0
5
0
5
5
10
10
70
70
10
5
100
90
200
8 Reporting
8.1 outline
8.2 Draft Report
2
5
3
10
10
50
0
0
0
0
0
0
15
65
0
5
5
40
3
5
15
150
10
5
10
20
5
13
5
0
5
5
0
0
2
2
0
0
25
35
35
210
10 Contingency
10
35
30
60
25
15
175
TOTAL
122
368
374
628
285
169
1946
2
2.1
2.2
2.3
2.4
2.5
3 Specification of need
3.1 AO draw up specification
3.2 Liaison with dep't re spec.
4
Review of scheme
performance
- sample of 100 cases
5.1 Definition of sample
5.2 Sample extraction
5.3 Sample review
6
6.1
6.2
6.3
6.4
9
9.1
9.2
9.3
9.4
Review of scheme
performance
- survey of applicants
Selection of surveyees
Preparation of survey
Distribution of survey
Reminder to surveyees
Administration
Summary sheets
Team meetings
Liaison with depts
Management review of WPFs
194
2.4. Cost budget: because staff time is the principal resource used in performance audit the cost
budget is heavily based on the time budget. The input of each grade should be multiplied
by the appropriate hourly cost for that grade to come to the total cost of staff input. To this
should be added any extra costs for consultants and ancillary expenditure. Thus total
budgeted cost equals:
(estimated principal auditor hours x the per hour cost of a principal auditor) +
(estimated senior auditor II hours x the per hour cost of a senior auditor II)+
+.............+
(estimated assistant auditor hours x the per hour cost of an assistant auditor) +
Consultant costs +
Ancillary costs
An example of a cost budget is at table 2. Note that the budget is cast at the task, rather
than operation level. This will normally be sufficient both for budgeting and control
purposes.
3. Main investigation stage
3.1. During the main investigation management must ensure that resources are used efficiently
and effectively if the study is to be delivered according to timetables and to cost.
Management needs to monitor the use of resources accurately and promptly, if they are to
control the study. This should cover both time and cost.
3.2. Time monitoring: as explained above, because staff input is the principal resources used,
the monitoring of staff time is an essential part of the management process.
Monitoring of time consists of:
tracking of time spent to date on each operation;
identifying the extent to which the operation is complete the operation;
estimating the further time needed to complete the operation;
computing the total time that each operation will have taken from start to completion;
comparing to budgets to identify significant variations.
3.3. An example of a time monitoring form is at table 3. This has not been subdivided by
grade, though in the normal course of events it should be. (Through not always required
for control of staff time, management will need information on the hours spent by each
grade on each operation in order to monitor costs accurately). Any additional operations,
over and above those originally budgeted, which are needed to complete the study
satisfactorily, should be included (operation no 11 in the example). Management should
identify and consider the reasons for all major variations (e.g. operations 3 & 5 in table 3),
taking appropriate corrective action as necessary.
195
Task description
STAFF HOURS
Planning
Departmental objectives
Specification of need
Review of deptal instructions
Review of scheme performance
- sample of 100 cases
Review of scheme performance
- survey of applicants
Analysis of review
Reporting
REVIEWED BY
APPROVED BY
DATE
Principal Senior
Team Auditor Assist't
Auditor Auditor II Leader
Auditor
AO
Stats
TOTAL
TASK
HOURS
TOTAL
TASK
COST
(BIRR)
931
472
321
268
1900
0
593
0
941
800
8.7
4.3
3.6
2.5
30
0
10
0
0
80
0
15
5
27
30
34
25
5
108
10
80
10
60
265
10
15
0
0
110
0
0
0
0
15
160
129
60
70
525
10
15
22
40
35
30
152
5
7
5
13
15
60
80
0
80
0
105
0
290
80
9
9.1
9.2
9.3
9.4
Administration
Summary sheets
Team meetings
Liaison with depts
Management review of WPFs
0
5
5
40
3
5
15
150
10
5
10
20
5
13
5
0
5
5
0
0
2
2
0
0
25
35
35
210
10
Contingency
10
35
30
60
25
15
175
122
1001
368
2130
374
1350
628
2261
285
713
169
507
1946
0
98
160
195
1334
0
750
8761
Consultant costs
Ancillary cost
- travel and subsistence
Nil
TOTAL
STUDY
COSTS
3.4. Cost monitoring: monitoring of cost involves evaluating the monetary value of staff input
adding any further consultant or ancillary costs incurred. Again, management should:
track expenditure to date on each cost generating task (staff time, consultant costs and
ancillary expenditure);
estimate the further cost needed to complete the task, adding the cost of any extra
tasks, over and above those originally budgeted, which are needed to complete the
study satisfactorily;
compute the estimated total cost of each task from start of the study to completion;
compare to budgets to identify significant variations and explain any significant
variations.
3.5. Though the largest aspect of controlling study costs is by monitoring and controlling staff
input, cost monitoring important in:
identifying the effect of varying the grade of staff used to undertake operations;
controlling consultancy and ancillary costs; and
assessing the overall cost of the study.
196
150
8911
4. Conclusion
4.1. Effective monitoring, and consequently adequate control, requires sufficient reliable
information. Above all else management needs to know the level of staff input into each
operation. In the absence of a formal time recording system within the audit office,
management may find it useful to require staff to record the time they spend on each
operation in the study each week. A pro-forma for time recording on studies is at annex. 2
197
AUDITEE
PRODUCED BY
Task
No.
Task
description
APPROVED BY
DATE
Budgeted
hours
Actual
to date
(hrs)
Over/
Percent Estimate
(under) complete
to
budget
complete
(hrs)
(hrs)
Estimated
Total on
Complete
(hrs)
Estimated
over/(under)
budget on
completion
COMMENT
Planning
160
90
-70
65
80
170
10
2
2.1
2.2
2.3
2.4
2.5
Departmental objectives
Review of CPU files
Review of housing files
Interview of CPU
Interview of housing
Documentation of task 2
45
50
10
10
14
49
57
5
4
11
4
7
-5
-6
-3
100
100
100
100
100
0
0
0
0
0
49
57
5
4
11
4
7
-5
-6
-3
3
3.1
3.2
Specification of need
AO draw up specification
Liaison with dep't re spec.
40
20
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
-40
-20
70
32
-38
80
37
-33
25
100
400
30
103
80
5
3
-320
100
100
40
0
0
120
30
103
200
5
3
-200
6.1
6.2
6.3
6.4
50
60
21
21
45
72
0
0
-5
12
-21
-21
100
100
0
0
0
0
21
21
45
72
21
21
-5
12
0
0
7
7.1
7.2
Analysis of review
Input to computer
Analysis of sample and survey
90
200
0
0
-90
-200
45
120
45
120
-45
-80
8
8.1
8.2
Reporting
Outline Report
Draft Report
15
65
15
65
0
0
100
100
0
0
0
0
0
0
9
9.1
9.2
9.3
9.4
Administration
Summary sheets
Team meetings
Liaison with depts.
Management review of WPFs
25
35
35
210
12
15
33
37
-13
-20
-2
-173
20
20
40
170
32
35
73
207
7
0
38
-3
10.
Contingency
175
-170
N/A
40
45
-130
11
11.1
11.2
Additional tasks
Survey of Zones and regions
Visit to Zones/regions to
review and collect data
N/A
N/A
120
120
120
N/A
N/A
120
120
120
}
} see summary sheet
} on 1 st criteria
N/A
N/A
30
30
30
1866
680
-1126
972
1652
-214
5.1
5.2
5.3
11.3
198
} Reduced scope
} - see summary sheet
}
} Reduced scope
} - see summary sheet
This annex, based on the study of housing in which presented in this Guide App.17, illustrates the
process of dividing a study into discrete and manageable tasks and subtasks as a first stage in
estimating time and cost budgets. Note that it incorporates all operations that require staff input
including planning (task 1) and administration (task 9).
Methodology
(from page 43)
Task
No.
1
Task
description
Planning -
2
2.1
2.2
2.3
2.4
2.5
Departmental objectives
Review of CPU files
Review of housing files
Interview of CPU
Interview of housing
Documentation of task 2
3
3.1
3.2
Review of deptal
-instructions -
Review of performance
- sample of 100 cases
Definition of sample
Sample extraction
Sample review
5.1
5.2
5.3
6
6.1
6.2
6.3
6.4
Review of performance
- survey of applicants
Selection of surveyees
Preparation of survey
Distribution of survey
Reminder to surveyees
7
7.1
7.2
Analysis of review
Input to computer
Analysis of sample and
199
Methodology
(from page 43)
Task
No.
Task
description
survey
9
9.1
9.2
9.3
9.4
Administration
Summary sheets
Team meetings
Liaison with depts
Management review of
WPFs
200
1.1 It is the responsibility of line department management to plan, monitor and control the
progress of main investigations so that they are delivered on time. The following part of this
Guide describes how to:
plan the timing of all activities of the main investigation;
identify and estimate the necessary delivery dates of all major activities; and
monitor the success of the study in meeting agreed deadlines.
The
appendix
includes
illustrations of the procedures and techniques for producing study timetables and outlines how
milestones can be used in monitoring the progress of studies.
2. Planning activities and timetabling
2.1. Earlier in the time and cost budget section describes how the first step in producing time
and cost budgets is to split the study into discrete manageable operations. "Operations" are
defined as any task or sub-task requiring staff or consultant input. In the same way, to produce
realistic and helpful target dates and timetables, we must first split the study down into all its
various activities. In this context, an "activity" is anything that takes up a significant amount
of elapsed time during the study.
201
Task/Operation
description (from
this guide page
Planning
Activity
No.
1.1
1.2
1.3
1.4.1
1.4.2
Departmental
objectives
2.1 Review of CPU files
Activity description
Allocation of tasks to
study
staff
Recasting of timetables
Initial team meeting
Set-up of initial meeting
with
audited department
Initial meeting with
depart't
Estimated
elapsed time
Sequencing of
activities
Total
Staff
hours
this
guide
page
1 day
At start
3 days
1 day
after 1.1
after 1.2
14
7
2 weeks
1 day
At start
after 1.2 and 1.4.1
3
3
1 week
After task 1
6 days
2 days
36
6
Arrange access to
housing files
Review housing files
Evaluate file evidence
1 week
after 2.1.2
after 2.1.2, before
2.3/2.4
After task 1
after 2.2.2
after 2.2.2, before
2.3/2.4
After 2.1/2.2
after 2.3.1
After 2.1/2.2
after 2.4.1
42
6
2.1.1
2.1.2
2.1.3
2.2.1
2.2.2
2.2.3
2.3.1
2.3.2
2.4.1
2.4.2
2.5
7 days
2 days
2 weeks
1 day
2 weeks
1 day
3 days
3
3
3
3
14
Assumptions:
1. Task 1 must be complete before any other tasks begin
2. The study must be planned before the initial meeting with the department
3. Both CPU and housing files must be reviewed and evaluated
before the heads of CPU and housing are interviewed
2.4. Identifying the correct sequence of activities is important if we are to plan the work in a
logical order. For example, we cannot hold a meeting with the audited entity before we
arrange it. Equally, we cannot write the minutes of the meeting before the meeting takes
place. Sequencing also assists management to plan resource requirements efficiently (see
paragraph 2.8 below)
202
2.5 With the study broken down into activities, with estimates of elapsed time and with properly
identified sequences of activities it is relatively straightforward to produce a study timetable.
Management need to plot out the order and the elapsed time of each activity to produce a
logical flow of work. As mentioned in Chapter 3, timetables of activities and of staff
involvement in the study are required. Table 21/2 shows the activity timetable for table 21/1.
2.6. In producing timetables management should consider the following:
it is often helpful to start specifying activities from the operations identified for time
budgeting . Activities can be viewed as the collection of actions that need to be
completed to undertake operations successfully. This is illustrated in table 1 where
activities have been grouped under the relevant operations;
activities should include all necessary :
study planning, monitoring, review and control activities;
management involvement, including that of principal auditors and audit office
senior management;
there should be realistic provision for unexpected delays;
elapsed time is best estimated at the level of days or weeks. Timetables should not be
plotted at the level of hours: this implies a level of accuracy that we cannot achieve;
if staff input is used as the basis for estimating elapsed time, management should accept
that staff are unlikely to work 100% of each day. 7 hours work is likely to take 1 days
elapsed time;
think carefully about all the activities that must be completed before a new one starts.
For example, in table 1, both 1.4.1 and 1.2 must be finished before 1.4.2 takes place;
timetabling of staff input should reflect the grades that need to complete the activities;
base initial timetabling, at the start of a study, on a combination of:
detailed planning of all activities in earlier tasks; and
broad estimates of the elapsed time for later tasks (not going down to the level of
activities).
The precise timing, and possibly the content, of later tasks will depend on the outcomes of
earlier ones: early detailed planning of later tasks is therefore likely to be highly speculative,
and have very limited value;
estimate the best trade-off between the elapsed time of the study and the number of staff
involved. There is a balance to be drawn. Too many staff adds to learning time and
increases the risk of poor communication or inconsistent approaches; too few staff can
make skills matching difficult and lead to long studies with attendant risks of tunnel
vision and poor motivation;
try to eliminate or minimize any downtime. "Downtime" is when staff have little or no
work to do whilst waiting to start a new activity. This arises because preceding
activities, requiring little staff involvement, are not completed. In table 1, staff cannot
start activities 2.3.2 and 2.4.2 (holding meetings with the Heads of CPU and Housing)
until 2.3.1 and 2.4.1 are completed, creating a two-week period when staff will have
nothing to do.
2.7.
203
Activity
description
1.1
Allocation of tasks to
study staff
Recasting of timetables
1.2
Estimated
elapsed 1
time
1 day
Week
4
3 days
XX
X
1.3
1.4.1
1.4.2
2.1.1
2.1.2
2.1.3
2.2.1
2.2.2
2.2.3
2.3.1
2.3.2
2.4.1
2.4.2
2.5
1 day
2 weeks X------------>
1 day
X
X--->
XXXXXX
XX
X--->
XXXXXX
XX
X-------->
X
X-------->
X
XX
X
204
2.9.Though network analysis can be useful, it should not be used slavishly. It is an aid to
management not a necessary requirement for all performance audits. It will be most helpful
where the sequencing of events is complicated and difficult to appreciate fully without some
form of pictorial representation. However, whether management use network analysis or not,
they must think carefully about the logical execution of activities before producing timetables.
3. Monitoring progress: milestones
3.1. Planning activities and staff input is only part of management's responsibility. They must
also monitor and control progress so that the study is delivered on time. Timetables are an
essential part of this process as they show exactly where the audit should be at any point in
time. Management can compare progress with planned achievements and estimate the likely
impact on deadlines, taking corrective action as necessary.
3.2. Milestones: Management may also find it useful to monitor progress against milestones.
In this context milestones are intermediate points, throughout the study, which act as
benchmarks of progress. They are descriptions of conditions or states that the investigation
must occupy at various points in its progress in order for it to achieve its deadlines. Each
milestone has three parameters which assist management to monitor and control the study:
a statement of expected output or achievement (i.e. of quality) at the milestone;
a planned cost, in either monetary terms or staff input, for reaching the milestone (from
the time and cost budgets);
a date by which we expect to achieve the milestone (from the timetable)
3.3. The choice of milestones is dependent on the study and the requirements of management
to maintain adequate control. Looking at table 1 and figure 1, for example, the first milestone
(M1) might be the holding of the initial meeting with the audited department. This is a crucial
event - without it no progress can be made on the study. Further milestones could include:
205
M2: completion of activities 2.1.3 and 2.2.3, evaluation of CPU and housing files: until
review and evaluation is complete the audit team will not have the information to
conduct well researched interviews with the Heads of CPU and Housing;
M3: completion of activity 2.5, documentation of task 2. This signifies the formal
completion of all activities in tasks 1 and 2.
3.4. If management judge that they need a greater degree of control they can add additional
intermediate milestones. It is essential, however, that:
there are sufficient milestones to maintain adequate control over the whole course of the
study;
milestones include all significant events during the study. Excluding any important
event increases the risk that the study will wander off course;
management must define fully the state or condition that each milestone represents. For
example, by milestone M2 we expect to have collected and evaluated all the available
documentary evidence on the department's aims and objectives. This should be
sufficient to guide our interviews with the Heads of CPU and Housing. By milestone
M3 we should have a full and up-to-date statement, both documented and oral, of the
aims and objectives. We should have sufficient confidence in the relevance, reliability
and completeness of the information we have collected to seek the department's
agreement to it as the definitive statement on their aims and objectives.
3.5. Having identified the necessary milestones, and defined the "quality" aspect of each,
management should compute the planned delivery date and expected cost for each milestone.
Assuming that we are going to employ two examiners on the investigation, we plan to achieve
the milestones M1-M3 by the following dates and at the following cost:
Milestone
Expected
"cost"
(from table 1)
M0 + 2 weeks, 1 day
M0 + 3 weeks, 10 days
M0 + 5 weeks, 14 days
33 hours
127 hours
153 hours
206
we tend to use them naturally to monitor progress, setting ourselves targets against which to
judge how well we are proceeding. Establishing a formal milestone system ensures
consistency, logic and completeness;
assessing progress against regular milestones may be less time-consuming than constant
reference to timetables and budgets. Management can monitor progress with a relatively
light touch whilst allowing staff freedom to manage their own areas of work;
milestones provide recognizable targets for all in the study to achieve - if all work towards
these milestones there is a better chance that the study as a whole will be delivered on time
and to cost;
milestones allow management to draw all three main objectives of the study together quality, cost and time (delivery dates) - giving an integrated process of targets, monitoring
and control.
4. Conclusion
4.2. Management should, however, recognize that achieving agreed deadlines is only one
aspect of conducting an effective examination. If the study sacrifices quality (relevant,
reliable and sufficient evidence and analysis) to achieve deadlines the examination will be of
little or no value. Management must integrate monitoring and control of all the study's
objectives - quality and cost (including staff input) as well as deadlines.
207
Date ____________________
Description
Yes
Feasibility Study
Was the feasibility study undertaken in
accordance with the performance audit Manual,
Guides and standards?
208
No
Comment &
Initial
Item
No.
6
Description
Yes
10.
11
12
13
14
15
16
209
No
Comment &
Initial
Item
No.
17
Description
Yes
18
19
21
Documentation
Was the documentation adequate and complete
to support the audit conclusions?
Have the main investigation summary reports,
fact sheets, minutes etc. prepared been factually
sound, supported by relevant, reliable and
sufficient audit evidence?
22
23
24
20
25
26
Techniques
Were any special analytical or other techniques
applied (e.g. statistical, mathematical, computer
analysis)?
How did this assist the progress of the study?
Were performance measures developed?
Were they produced in conjunction with the
audited entity?
27
28
210
No
Comment &
Initial
Item
No.
29
30
Description
Yes
31
32
33
34
35
36
37
38
39
211
No Comment
& Initial
212
any possible option to narrow or widen the scope of the approved investigation should be
put forward in the memo (minute) at this stage if thought to be desirable.
Generally speaking, the outline report will provide senior management with first opportunity to
check on the detailed progress of the whole investigation and it should therefore be submitted
at an early enough stage for any possible changes of emphasis or direction to be
accommodated.
213
text not only in appendices. This can save a lot of explanation and provided they are simple
and well laid out, can often convey more in a short space than stretches of narratives.
Appendices
6. More detailed information which is essential to an informed reading of the report should
wherever possible be provided in appendices. The rules of relevance simplicity and brevity
apply equally to appendices as to the main report. They are not a vehicle for including
descriptions of detailed systems or procedures operated within the audited body in areas
covered by the investigation.
Glossary
7. Abbreviations in report should be kept to a minimum. Where five or more abbreviations (or
specialized terms) are necessary to be used in the report then all abbreviations and terms
included should be listed at the beginning part of the report.
215
2.
Planned Impacts are those identified at the formulative stages of performance audit. They are
impacts that could be identified and anticipated during the feasibility study, as being the likely
impacts of the study objectives. In the feasibility stage, if the expected impacts of the selected
audit issues are limited or the contributions of the study are not considerable, we need either to
redefine the issues or reconsider the feasibility of the study. This is because the audit office
should not commit its resources on studies which have no beneficial benefits. In addition
adequate identification of planned impacts could also facilitate monitoring and follow up of
the study results. In financial audit, similarly, it may also be possible to identify a planned
impact before a management letter is sent.
3.
Departmental commitments arise from the auditees promises to take action in response to the
internal audit or executive conclusions and recommendations. The commitment can be made
in the audited entities responses to the conclusions and recommendations made in the Internal
audit or executive reports or other outputs such as management letters, and sometimes in the
course of the study. Here, commitments are defined as the projected effects of auditee's
actions for the year for which initial delivery is promised by the auditee. It can be later than
the year in which the commitment is made. If the time assumed for implementation of
commitment is short, it would also be appropriate to take two calendar years.
4.
Departmental achievements are the internal audit best assessment of the audited entities
progress against commitments. Such achievements should be validated where possible by
agreement with the audited entities, in particular where measurable savings are involved, or
should be supported by reliable evidences. Achievements will be recorded by internal audit on
the basis of what has actually been delivered in the three years period against commitments to
deliver in that period.
217