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AuditMAnuAl

forthe

AuditoftheAccountsAnd

operAtions

of

MetropolitAn,MunicipAl

and

districtAsseMblies(MMdAs)

pArt1

tAbleofcontents

description

pageno.

FORWARD

9

ACKNOWLEDGEMENT

10

CHAPTER1

INTRODUCTION

Background

11

Thepurposeofthemanual

12

AuditMandate

13

Conceptualframework

13

FinancialAuditing

13

Typesofaudits

14

Scopeofaudit

14

Reasonableassurance

15

Responsibilityforthefinancialstatements

16

PerformanceAuditing

16-19

CHAPTER2

CODEOFETHICS

Introduction

20

Codeofethicsstatements

21

Concept,backgroundandobjectiveofcodeofethics

21

Integrity

22

Independence

22

PoliticalNeutrality

23

ConflictsofInterest

23

Confidentialityorprofessionalsecrecy

24

Professionalcompetenceandduecare

24

description

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CHAPTER3

STRUCTUREOFMETROPOLITAN,MUNICIPALANDDISTRICT

ASSEMBLIES(MMDAs)

Introduction

26

Establishment/CreationofDistrictAssemblies

26

StructureoftheLocalGovernmentSystem

27

FunctionsoftheAssemblies

28

Sub-DistrictPolitical/AdministrativeStructures

29

Sub-Metropolitan/DistrictCouncils

29

UrbanCouncils

30

ZonalCouncils

30

Town/AreaCouncils

30

UnitCommittees

30

RegionalCo-ordinatingCouncils(RCCs)

31

COMMITTEESOFDISTRICTASSEMBLIES

ExecutiveCommittee

31

Sub-CommitteesofExecutiveCommittee

32

OthermainCommittees

34

FINANCINGTHELOCALGOVERNMENTSYSTEM

BudgetingandRating

35-44

LocallyGeneratedRevenue

44-45

CentralGovernmentTransfers

45-47

SpecialisedFunding

47

CHAPTER4

AUDITPLANNING

Introduction

47

Planning

47

ObjectiveofAuditPlanning

47

PlanningtheAuditWork

47

TheOverallAuditPlan

48

description

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TheAuditProgramme

49

ChangestotheOverallAuditPlanandAuditProgramme

50

CHAPTER5

SYSTEMDOCUMENTATION

Introduction

51

Characteristics

51

Sourcesofinformationandverification

52

UpdatingtheDocumentation

53

CHAPTER6

MATERIALITY,RISKANDSIGNIFICANCE

Introduction

54

Materiality

54

Auditrisk

56

Significance

61

CHAPTER7

EVALUATIONOFINTERNALCONROLSANDTESTSOFCONTROL

Introduction

63

InternalControl

63

EvaluationofInternalControl

64

RelationshipswiththeManagementoftheAuditedMMDA

65

TypesofInternalControls

65

CarryingoutanEvaluationofInternalControls

67

Carryingouttestsofcontrol

68

EvaluatingtheResultsofTestsControl

69

JoinTestsofControlandSubstantiveTesting

70

CHAPTER8

SUBSTANTIVEAUDITTESTS

Introduction

71

AnalyticalProcedures

72

NatureandPurposeofAnalyticalProcedures

72

description

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Analyticalproceduresassubstantiveprocedures

73

Extentofrelianceonanalyticalprocedures

74

InvestigatingUnusualItems

75

Vouching

76

AssetVerification

76

LiabilityVerification

77

CHAPTER9

AUDITEVIDENCE

Introduction

78

Sufficientappropriateauditevidence

78

Proceduresforobtainingauditevidence

80

Inspection

80

Observation

81

InquiryandConfirmation

81

Computation

81

AnalyticalProcedures

81

CHAPTER10

VALIDATIONOFFINANCIALSTATEMENTS

Introduction

82

CashBasisofAccounting

82

BooksofAccounts

82

PurposeofFinancialStatements

83

ResponsibilityforFinancialStatements

83

ComponentsofFinancialStatements

83

FinancialYear

84

MonthlyAccountsandStatements

84

AnnualAccountsandStatements

85

description

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CHAPTER11

AUDITINGINCOMPUTERISEDENVIRONMENT

Introduction

88

Financialauditobjectives

89

Reportingweaknesses

89

Organizationandsecurityofcomputerinformationandfacilities

89

OrganizationalControls

90

SeparationofDuties

90

ProgrammeChange

91

SecurityofInformationandComputerfacilities

91

Computerfacilityaccess

91

SecurityofComputerprogrammesandfiles

92

Recovery

93

Environmentcontrols

93

CHAPTER12

AUDITREPORTING

Introduction

94

ReportingtoManagement

94

ReportingtoParliament

95

MANAGEMENTLETTER

Introduction

95

Content

95

Preparation

96

ReviewandApproval

97

Follow-up

98

THEAUDITOR’SREPORTONFINANCIALSTATEMENTS

ConsiderationofIdentifiedMisstatements

99-105

Typesofauditopinions

105

description

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CHAPTER13

DOCUMENTATION/AUDITWORKINGPAPERS

Introduction

119

Purpose,FormandContent

119

Documentationoffinancialaudit

121

OrganizationandcontentofFinancialAuditFiles

122

DocumentationofPerformanceAudit

124

OwnershipandSecurity

124

Contentsofpermanentfiles

125

CHAPTER14

QUALITYCONTROL

Introduction

127

Carryingoutqualitycontrolprocedures

127

Qualitycontrolthroughouttheaudit

127

bibloGrAphY

133

AcronYMs

134

foreWord

Metropolitan, Municipal and District Assemblies are the core institutions

establishedunderthe1992Constitutiontogiveeffecttothedecentralizedsystem

ofgovernmentmandatedbythesameConstitution.

TheAssembliesandtheirsub-structures(sub-metro,zonal,urban,townandarea councils)haveawiderangeofresponsibilitiestowardsthepublicintheprovision ofessentialservices.Assembliesalsohaveauthoritytoraiserevenuefromthepublic intheformofrates,fees,lands,licences,tradingservicesandmiscellaneoussources. In addition to such internally generated funds, Central Government makes substantialtransfersofmoniestoAssembliesfromtheConsolidatedFundinthe

formoftheDistrictAssembliesCommonFund(Act455of1993).

ThesepublicmonieshavetobeproperlyaccountedforbytheAssembliesand

usedforthepurposesforwhichtheywerecollected.TheAssembliesalsohave

toensurethatvalueformoneyhasbeenderivedintheuseofsuchpublicfunds.

TheroleoftheGhanaAuditServicebecomescriticalinthisregard.

Article 187(2) of the 1992 Constitution, therefore mandates the Auditor – GeneraltoaudittheaccountsoftheAssemblies,amongotherinstitutions.

ToensurethattheAuditor–General’smandateisfullyandeffectivelycarried

out,thestaffoftheserviceneedstoadoptaholisticandprofessionalapproach

totheirauditofMMDAs.

Inthisconnection,theGovernmentofGhanaandDANIDAundertheLocal

ServiceDeliveryandGovernanceProgramme(LSDGP)haveprovidedfinancial

supporttotheGhanaAuditServicetowardsthedevelopmentoftheAuditManual

whichwouldenablethestaffoftheServicetoapproachtheirauditofMMDAs

inamoreprofessionalandholisticmanner.

Themanualisintwoparts.PartIprovidestheoreticalbackgroundtofinancial

andperformanceauditwhilePartIIprovidesthestaffwiththeauditprogrammes

forfieldauditsofMMDAs.

AcKnoWledGeMent

The consultants wish to express their profound thanks to the following institutionsandindividualsfortheirinvaluableassistanceofferedtheminthe developmentofthisManual:

MembersoftheSteeringCommitteeoftheGhanaAuditService

AccraMetropolitanAssembly

TemaMetropolitanAssembly

NewJuabenMunicipalAssembly

GaWestMunicipalAssembly

Mr.E.B.Lamptey,aretiredDeputyAuditor-General

NanaAgyekumDwamenaofManagementServicesDivision,OHCS

chApter1

1.0introduction

1.1Background

Ghana’scommitmenttodecentralisationisembodiedinthe1992Constitution

andinvariouslegislativeinstrumentssuchastheLocalGovernmentAct,1993

(Act462),theDistrictAssembliesCommonFundAct,1993(Act455)and

theLocalGovernmentServiceAct,2000(Act656)andhasbeenpursuedby

successivegovernments. Thegoalsofthedecentralisationprogrammeare:

(i)

Strengtheningandexpandinglocaldemocracy;

(ii)

Promotinglocal,socialandeconomicdevelopment;and

(iii)

Reducingpovertyandincreasingthechoicesofthepeople.

Inlinewiththeabove,variousstructuresandsystemshavebeenputinplace toensurethatMetropolitan,MunicipalandDistrictAssemblies(MMDAs) plan,initiate,coordinate,manageandexecutepoliciesinrespectofallmatters affecting the people within their area. Further, each Local Government Organisationisexpectedtopromotesoundfinancialsystemtoenableitutilise the increasing volume of funds being transferred through the District AssembliesCommonFund(DACF),DistrictDevelopmentFacility(DDF) and other sources to fully deliver the services which are central to the developmentofthearea.Additionally,developmentprojectsinthedistricts areexpectedtobefundedundertheDDF,whichisaperformancebasedgrant fromdonors.TheFunctionalOrganisationalAssessmentTool(FOAT)will providethebasisformeasuringtheperformanceofAssembliesandtheir suitabilitytoaccessthefacility.TheAuditServiceisalsorequired,aspartof themeasuringprocess,toauditandreportonoperationalandmanagement issuesinitsroutineaudit.

Further,throughtheimplementationoftheDDFandFOAT,triggersand indicators would be provided to enhance the Assemblies’ finances and promoteaccountability.

In furtherance of the above, it has become imperative that systems for accountabilityofLocalGovernmentOrganisationsshouldbeclarifiedand strengthened.Theprincipleofpublicaccountabilityrequiresthoseincharge ofgovernmentactivitiestoberesponsiblefortheirdecisions,actionsand inactions.Incorporatingoperationalmanagementissuesinourroutineaudits, willenhancepublicaccountabilitybyprovidingParliamentarians,themedia, citizensanddonorswithindependentassessmentoftherunningandoutcome ofAssemblies’activities.

The role of the GhanaAudit Service, therefore, becomes critical in this enterprise.Consequently,theGovernmentofGhanaandDanishInternational DevelopmentAgency (DANIDA) under the Local Service Delivery and GovernanceProgramme(LSDGP)providedsupporttoenabletheGhana AuditServicetodevelopthismanual.

Themanualcoversabroadrangeoffinancialandperformanceauditareas.

ThesearePlanning,Budgeting,CashManagement,Procurement,Contract

Management,PayrollSystem,DistrictAssembliesCommonFundandother

RelatedFunds,AuditinginComputerisedEnvironmentandValidationof

AnnualFinancialStatements.

1.1.1Purposeofthemanual:

Thepurposesofthemanualare:

i. Document expectations of theAudit Service as it relates to the conductofauditsattheAssemblies,

ii. IntegratebothFinancialAuditandPerformanceAuditapproaches intheauditofMMDAs;

iii. Standardiseapproachesfortheconductoftheaudits;

iv. Provide a framework for capacity building of staff of theAudit Service;

v. Serveasabasisfortheassessmentofthelevelofaccountabilityat theAssembliesbystakeholders;

vi. Enhancestakeholderconfidenceintheauditreportsproduced;and

vii. EvaluatethegovernancesystembyexamininghowMMDAs function.

1.1.2AuditMandate

Article187(2)ofthe1992ConstitutionandSection11oftheAuditService

Act,2000(Act584)mandatestheAuditor-Generaltoaudittheaccountsof

allpublicoffices,includingLocalGovernmentAdministration.Section11

(2)oftheAct,furtherempowerstheAuditor-Generaltohaveaccesstoall

books, records, returns and other documents, including documents in computerisedandelectronicformrelatingtoorrelevanttothoseaccounts.In

addition,Section14(2)(e)oftheAuditServiceActrequirestheAuditor-

General to draw attention to General Corporate performance, indicating achievementagainstsettargetsandobjectivesandwhetherthefinancesof thebodyhavebeenconductedwithdueregardtoeconomy,efficiencyand effectivenesshavingregardtotheresourcesused.

ThisenablestheAuditor-Generaltoincorporateoperationalandmanagement

issuesinhisauditengagementsintheMMDAs.

Alsosection121oftheLocalGovernmentAct,1993(Act462)empowers

theAuditor-GeneraltoaudittheaccountsofMMDAs.

1.2.0conceptuAlfrAMeWorK

1.2.1FinancialAuditing

Financialauditingistheexpressionofanopinionbytheauditorastowhether or not the financial statements are prepared, in all material respects, in accordancewithanidentified/applicablefinancialreportingframeworkand /orstatutoryrequirementsaswellastherequirementsoftheInternational

StandardsonAuditing(ISA200.2)

Theauditor’sopinion:

(i)

enhancesthecredibilityofthefinancialstatements;

(ii)

doesnotguaranteethefutureviabilityoftheMMDA;

(iii)

does not guarantee the efficiency or effectiveness with which managementhasconductedtheaffairsoftheAssemblies;and

(iv)

doesnotguaranteethattheMMDAisfreeoffraud.

1.2.2Typesofaudits

The most common types of SupremeAudit Institutions (SAI) audits are regularityandperformanceaudits.

Regularityauditembraces:

(a)

attestation of financial accountability of MMDAs and involves examinationandevaluationoffinancialreportsandexpressionof opinionsonfinancialstatements;

(b)

attestation of financial accountability of the government administrationasawhole;

(c)

auditoffinancialsystemsandtransactions,includinganevaluation ofcompliancewithstatutesandregulations;

(d)

auditofinternalcontrolsandinternalauditfunctions;

(e)

auditoftheprobityandproprietyofadministrativedecisionstaken withintheauditedMMDA;and

(f)

reportingonanyothermattersarisingfromorrelatingtotheaudit thattheSAIconsidersnecessarytodisclose.

1.2.3Scopeofaudit

Theterm“scopeofaudit”referstotheauditproceduresdeemednecessaryin the circumstances to achieve the objective of the audit. The procedures required to determine the scope of an audit in accordance with auditing standards should be determined by the auditor, taking into account the requirementsofauditingfinancialstatements,laws,regulationsand,where appropriate,thetermsoftheauditengagementandreportingrequirements.

Ontheotherhand,financialauditassesseswhetheraccountsaretrueandfair.

Consequently,itfocusesontheaccountingandmanagementinformation system. Some of the specific objectives financial auditors evaluate are whether:

(i)

Adequateandeffectivesystemofinternalcontrolsaremaintainedto ensure the security, transparency and accountability in the managementofprojectfunds;

(ii)

Projectfundsaremanagedandutilisedincompliancewithapplicable lawsofGhanawithdueregardtoeconomyandefficiency;

(iii)

Procurementofgoods,worksandserviceshavebeencarriedoutin

accordancewiththePublicProcurementActinatransparentand

competitivemanner;

(iv)

FinancialStatementshavebeenpreparedaccuratelyandontimely

basisandcirculatedtostakeholders;and

(v)

Projectsareinitiatedandbudgetssubmittedinaccordancewiththe

MemorandumofunderstandingwithDevelopmentPartners.

However,evenwheretherearenosuchadditionalobjectives,theremaybe generalpublicexpectationswithregardtopublicsectorauditors’reporting onnon-compliancewithauthoritiesorreportingonineffectivenessofinternal control.Therefore,publicsectorauditorskeepsuchexpectationinmindand arealerttoareasthatmaygiverisetoriskofnon-compliancewithauthorities or risk relating to ineffectiveness of internal control when planning and

performingtheaudit(ISSAI131p3).

In determining the audit procedures to be used in conducting audit in accordancewithISA,theauditorshouldcomplywithallrelevantstandards

ofISA(ISA200.14).Consequently,theauditmayonlyclaimcompliancewith

ISA in the audit report when all the relevant ISA standards have been

compliedwith(ISA200.14).

1.2.4Reasonableassurance(ISA200.17-21)

Accordingtotheauditingstandardsanauditisdesignedtoprovidereasonable

assurancethatthefinancialstatementstakenasawholearefreefrommaterial

misstatements.Reasonableassuranceisnottotalassuranceduetoinherent

limitationstoanauditaslistedbelow.Itmeansthattheauditevidenceprovided

bytheauditorleadstotheconclusionthattherearenomaterialmisstatementsin

thefinancialstatementsasawhole.Reasonableassurancerelatestothewhole

auditprocess. Thereareinherentlimitationsinanauditthataffecttheauditor’sabilitytodetect material misstatements. These limitations result from factors such as the following;

(a)

Onlyasampleoftransactionsorbalanceswillbeselectedfortheaudit;

(b)

Theinherentlimitationsofanyaccountingandinternalcontrolsystem.

Forexample,thepossibilityofcollusion,and (c) Thefactthatmostauditevidenceispersuasiveratherthanconclusive.

Inmanyinstances,theauditorwillrelyonprofessionaljudgment,inparticular, whendecidingonthenature,timingandextentofauditproceduresordrawing conclusionsbasedontheauditevidencegathered.Forexample,theauditorneeds to decide on the reasonableness of the estimates made by management in preparingthefinancialstatements.

1.2.5Responsibilityforthefinancialstatements(ISA200.33–55)

Whiletheauditorisresponsibleforformingandexpressinganopiniononthe

financialstatements,theresponsibilityforpreparingandpresentingthefinancial

statementsisthatofthemanagementoftheMMDA.Theauditofthefinancial

statementsdoesnotrelievemanagementofitsresponsibilities.

1.2.6Performanceauditing

The International Organisation of Supreme Audit Institutions (INTOSAI) adoptedtheLimaDeclarationofGuidelinesonAuditingPreceptsinOctober

1997.TheGuidelinesplacedValue–For–Money(VFM)auditsandfinancial

auditsonthesamefooting.TheGuidelinesaffirmedthesignificanceofthe traditionaltaskofSAIs,thatis,toauditthelegalityandregularityoffinancial managementandofaccounting. Inadditiontothistypeofaudit,however,it acknowledgedanotherequallyimportanttypeofaudit(performanceaudit), whichseekstoexaminetheeconomy,efficiencyandeffectivenessofpublic administration.

Afullscopeauditofthepublicsectorwillthereforecovernotonlyfinancial operations, but also the full range of government activities including organisationalandadministrativesystems.

Inpursuanceofthedeclaration,theAuditServiceAct,2000(Act584)gavethe

mandate for performance auditing to be carried out by Audit Service to complementitstraditionalfinancialaudits.TraininginPerformanceauditing

wasaccordinglyintroducedintheAuditServicein2001aspartofcapacity

buildingprojectfundedbytheEuropeanUnion.

PerformanceauditisdefinedbytheINTOSAIAuditingStandardsasanaudit thatseekstoevaluatetheeconomy,efficiencyandeffectivenesswithwhich a government organisation, a Ministry, a Programme or MMDAuses its resourcesincarryingoutitsresponsibilities.

Thegeneralobjectiveofcarryingoutaperformanceauditistoassesswhether the programmes and activities are economical, efficient and effective. It thereforefocusesontheorganisation’sprogrammesandactivitiesandresults andoutcomes.Someofthespecificobjectivesitseekstoevaluatearewhether:

(i)

projectsidentifiedbytheDistrictAssemblyforfundingunderthe programmehavebeenincludedintheMediumTermDevelopment PlanandapprovedintheDistrict’sbudget

(ii)

monitoringofperformancehavebeencarriedoutbydistrictand regional monitoring and evaluation teams and report issued appropriatelydealtwith

(iii)

projectsarecompletedwithinthespecifiedperiodaccordingtowork

plansandinvolvingthefullparticipationofcommunitiesandsub-

structures,and

(iv)

theimpactoftheprojectsintermsoftheirobjectivesareevaluated,

monitoredandreportedintermsoftheirrelevanceandeffectiveness.

FlowingfromthedefinitionarethebasicconceptsinPerformanceAudit,

commonlyreferredtoasthe3Es,whicharedefinedasfollows:

(a)

Economy:minimisingthecostofresourcesusedforanactivity,

havingregardtoappropriatequality.

(b)

Efficiency:therelationshipbetweeninputsintermsofgoodsand

servicesandotherresults,andtheresourcesusedtoproducethem;

and

(c)

Effectiveness:theextenttowhichobjectivesareachievedandthe

relationshipbetweentheintendedimpactandtheactualimpactof

anactivity.

Thereisalsoa4thE,whichlooksatenvironmentalimpactofgovernment’s

policiesandactivitiesinthecommunity.

The3Esareinterrelatedinthemanagementprocessandtheirinterrelationship

isshowninthemanagementprocessillustratedinFigure1.

Figure1:Managementprocess

Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)
Figure1: Managementprocess TheBasicPerformanceAuditQuestionsare:. (a)

TheBasicPerformanceAuditQuestionsare:.

(a)

Arethingsbeingdoneintherightway?

(b)

Aretherightthingsbeingdone?

Thefirstquestionisintendedtofindoutwhethertheactivitiescarriedoutare consideredthemostappropriateandalsoconformtorulesandregulations. Thesecondquestionreferstoeffectivenessorimpactonsocietyandwhether theintendedobjectivesareachieved.

AtypicalVFMauditmaybelookingatoneormoreofthe3Es.Foreachof

them,theauditorattemptstoaskthefollowingbasicquestionstofacilitate

itsassessmentandthus,enablehimdrawthenecessaryconclusions.

Economy:isaresourceacquisitionconceptandtheauditofeconomywill

provideanswerstoquestionssuchas:

(i)

dothemeanschosenortheequipmentobtained(inputs)represent themosteconomicaluseofpublicfunds?

(ii)

have the human, material or financial resources been used economically?

(iii)

are management activities performed in accordance with sound administrativeprinciplesandgoodmanagementpolicies?

Efficiency:isresourcesutilisationconcept.Duringanauditofefficiency,the

auditorwouldwanttoknowwhether:

(a)

resourcesacquiredhavebeenputtooptimalorsatisfactoryuse;and

(b)

whetherthesameorsimilarresultsintermsofqualityandturnaround

timecouldhavebeenachievedwithfewerresources.

Effectiveness:isessentiallyagoalattainmentconceptwhichisconcerned

withrelationshipbetweengoalsorobjectives,outputsandimpacts.Anaudit

ofeffectivenesstriestofindoutwhetherthestipulatedaimsarebeingmetby

themeansemployed,theoutputsproducedandtheimpactsobserved.

Environment:the4 th Edealswiththeenvironment.Duringtheaudit,the auditorwouldseektodeterminetheimpactoftheGovernmentPoliciesand programmesonthecommunity.

chApter2

2.0codeofethics

2.1InternationalFederationofAccountants(IFAC)Codeofethicsstatements

andINTOSAIcode ofEthicsforAuditorsinthePublicSector.

TheCodeofEthicsforProfessionalAccountants,developedbyIFACandthe INTOSAIcodeofethicsestablishesethicalrequirementsforprofessional accountants. Aconceptualframeworkforallprofessionalaccountantswas providedtoensurecompliancewiththesixcorefundamentalprinciplesof professionalethics. Inaddition,inthepublicsectortheremaybeapplicable

nationalethicalrequirementsauditorsneedtoconsider.(ISSAI1200P13)

Theauditorshouldcomplywithethicalrequirementsrelatingtoallaudit

engagements(ISA200.14)(ISSAI1220EP6).Theserequirementsrelateto

thefollowingfundamentalprinciples:

(i)

Integrity:honesty;

(ii)

Independence: the auditor should not have personal or financial dealingswhichmightcauseaconflictofloyaltyorinterest;

(iii)

Conflict of interest: auditors should avoid all relationships with managersandstaffoftheauditedMMDAandotherpartieswhich mayinfluence,compromiseorthreatentheabilityofauditorstoact andbeseentobeactingindependently;

(iv)

Confidentiality:auditorsshouldnotdiscloseinformationobtained intheauditingprocesstothirdparties;

(v)

Professionalcompetenceandduecare:auditorsmustnotundertake worktheyarenotcompetenttoperform;and

(vi)

Political neutrality: It is important to maintain both actual and perceivedpoliticalneutralityoftheSAI.Thereforeitisimportant thatauditorsmaintaintheirindependencefrompoliticalinfluencein ordertodischargetheirauditresponsibilitiesinanimpartialway.If auditorsarepermittedtoparticipateinpoliticalactivitiestheyhave tobeawarethattheseactivitiesmayleadtoprofessionalconflicts.

2.2Codeofethicsstatements

The code gives guidance to how auditors should behave in specific circumstances. ItdealswithprofessionalattitudesofmembersofAFROSAI–E.

2.3Concept,backgroundandobjectiveofcodeofethics

Acodeofethicsisacomprehensivestatementofthevaluesandprinciples thatshouldguidethedailyworkofauditors. Theindependence,powersand responsibilitiesofthepublicsectorauditorplacehighethicaldemandsonthe SAIandthestafftheyemployorengageforauditwork. Acodeofethicsfor auditorsinthepublicsectorshouldconsidertheethicalrequirementsofcivil servantsingeneralandtheparticularrequirementofauditors,includingthe latter’sprofessionalobligations.

Theconductofauditorsshouldbebeyondreproachatalltimesandinall circumstances. Anydeficiencyintheirprofessionalconductoranyimproper

conductintheirpersonallifeplacestheintegrityofauditors,theSAIthatthey represent,andthequalityandvalidityoftheirauditworkinanunfavourable light,andmayraisedoubtsaboutthereliabilityandcompetenceoftheSAI itself. Theadoptionandapplicationofacodeofethicsforauditorsinthe publicsectorpromotestrustandconfidenceintheauditorsandtheirwork. Acodeofethicsrecognisesthattheobjectivesoftheprofessionaretowork tothehigheststandardsofprofessionalism,toattainthehighestlevelsof performanceandgenerallytomeetthepublicinterestrequirements. These objectivesrequirefourbasicneedstobemet:

(a)

Credibility:Inthewholeofsocietythereisaneed forcredibilityin informationandinformationsystems;

(b)

Professionalism:Thereisaneedforindividualswhocanbeclearly identified by clients, employers and other interested parties as professionalpersonsintheaccountancyfield;

(c)

QualityofServices:Thereisaneedforassurancethatallservices obtainedfromaprofessionalaccountantarecarriedouttothehighest standardsofperformance;and

(d)

Confidence:Usersoftheservicesofprofessionalaccountantsshould beabletofeelconfidentthatthereexistsaframeworkofprofessional ethicswhichgovernstheprovisionofthoseservices.

2.4Integrity

Integrityisthecorevalueofacodeofethics. Auditorshaveadutytoadhere tohighstandardsofbehaviour(e.g.honestyandcandidness)inthecourseof theirworkandintheirrelationshipswiththestaffofauditedentities. Inorder to sustain public confidence, the conduct of auditors should be above suspicionandreproach.

2.5Independence

IndependencefromtheauditedMMDAandotheroutsideinterestgroupsis indispensableforauditors. Auditorsshouldalsobeobjectiveandimpartial indealingwiththeissuesandtopicsunderreview. Independencemaybe impaired, for example, by external pressure or influence on auditors; prejudicesheldbyauditorsaboutindividuals,auditedMMDA,projectsor programmes;recent/previousemploymentwiththeauditedMMDA;or personalorfinancialdealingswhichmightcauseaconflictofloyaltyor interest. Auditorshaveanobligationtorefrainfrombeinginvolvedinall mattersinwhichtheyhavevestedinterest.

Thereisaneedforobjectivityandimpartialityinallworkconductedby auditors,particularlyintheirreports,whichshouldbeaccurateandobjective. Conclusionsinopinionsandreportsshouldthereforebebasedexclusivelyon evidence obtained and assembled in accordance with the SAI’s auditing standards. Auditorsshouldmakeuseofinformationbroughtforwardbythe auditedMMDAandotherparties. Thisinformationistobetakenintoaccount intheopinionsexpressedbytheauditorsinanimpartialway. Theauditor shouldalsogatherinformationabouttheviewsoftheauditedMMDAand otherparties. However,theauditor’sownconclusionsshouldnotbeaffected bysuchviews.

Foreachaudit,theAuditor–Generalorthepersonwhoisdelegatedwiththe signing of the report should form a conclusion on compliance with independencerequirementsthatapplytotheauditengagement. Thisentails thefollowing:

(a) ObtainingrelevantinformationfromtheSAItoidentifyandevaluate circumstancesandrelationshipsthatcreatethreatstoindependence;

(b)

Evaluating the information on identified breaches, if any, of the MMDAs’ policies, procedures and programmes to determine whethertheycreateathreattoindependencefortheaudit;

(c)

Takingappropriateactiontoeliminatesuchthreatsorreducethem toanacceptablelevelbyapplyingsafeguards. TheAuditorshould promptlyreporttotheMMDAanyfailuretoresolvethematterfor appropriateaction;and

(d)

Documenting conclusions on independence and any relevant discussionswiththeMMDAsthatsupporttheseconclusions.

2.6PoliticalNeutrality

Itisimportanttomaintainboththeactualandperceivedpoliticalneutrality

oftheSAI.Thereforeitisimportantthatauditorsmaintaintheirindependence

frompoliticalinfluenceinordertodischargetheirauditresponsibilitiesinan

impartialway.Ifauditorsarepermittedtoparticipateinpoliticalactivities

theyhavetobeawarethattheseactivitiesmayleadtoprofessionalconflicts.

2.7ConflictsofInterest

Whenauditorsarepermittedtoprovideadviceorservicesotherthanauditto

MMDA,careshouldbetakenthattheseservicesdonotincludemanagement

responsibilitiesorpowers,whichmustremainsolelywiththemanagement

oftheMMDA.

Auditorsshouldprotecttheirindependenceandavoidanypossibleconflict of interest by refusing gifts or gratuities, which could influence or be perceivedasinfluencingtheirindependenceandintegrity.

AuditorsshouldavoidallrelationshipswithmanagersandstaffoftheMMDA

andotherpartieswhichmayinfluence,compromiseorthreatentheabilityof

auditorstoactandbeseentobeactingindependently.

Auditorsshouldnotusetheirofficialpositionforprivatepurposesandshould

avoidrelationshipswhichinvolvetheriskofcorruptionorwhichmayraise

doubtsabouttheirobjectivityandindependence.

Auditorsshouldnotuseinformationreceivedintheperformanceoftheir dutiesasameansofsecuringpersonalbenefitforthemselvesorforothers. Auditors should not divulge information that would provide unfair or unreasonableadvantagetootherindividualsororganizations,norshouldthey usesuchinformationasameansforharmingothers.

Itisimportanttomaintainboththeactualandperceivedpoliticalneutrality of the SAI. Therefore, it is important that auditors maintain their independence from political influence in order to discharge their audit responsibilitiesinanimpartialway. Thisisrelevantforauditorssincethey work closely with the legislative authorities, the executive or other governmententitiesempoweredbylawtoconsidertheauditor’sreports.

Itisimportantthatwhereauditorsundertakeorconsiderundertakingpolitical activitiestheybearinmindtheimpactthatsuchinvolvementmighthave– orbeseentohave–ontheirabilitytodischargetheirprofessionalduties impartially. Ifauditorsarepermittedtoparticipateinpoliticalactivitiesthey havetobeawarethattheseactivitiesmayleadtoprofessionalconflicts.

2.8Confidentialityorprofessionalsecrecy

Auditorsshouldnotdiscloseinformationobtainedintheauditingprocessto

thirdparties,eitherorallyorinwriting,exceptforthepurposesofmeeting

theSAIsstatutoryorotheridentifiedresponsibilitiesaspartoftheauditor

normalproceduresorinaccordancewithrelevantlaws.

2.9Professionalcompetenceandduecare

Auditorshaveadutytoconductthemselvesinaprofessionalmanneratall

timesandtoapplyhighprofessionalstandardsincarryingouttheirworkin

ordertoenablethemtoperformtheirdutiescompetentlyandwithimpartiality.

Auditorsmustnotundertakeworktheyarenotcompetenttoperform.

Auditors should know and follow applicable auditing, accounting and financial management standards, policies, procedures and practices. Likewise, they should have a good understanding of the constitutional, principlesandstandardsgoverningtheoperationsoftheMMDAs.

Auditorsshouldexercisedueprofessionalcareinconductingandsupervising

theauditandinpreparingtherelatedreports.

Auditorsshouldusemethodsandpracticesofthehighestpossiblequalityin theiraudits. Inconductingtheauditandissuingreports,auditorshaveaduty toadheretobasicpostulatesandgenerallyacceptedauditingstandards.

Auditors have a continuous obligation to update and improve the skills requiredformeetingtheirprofessionalresponsibilities.

Thelegislativeand/orexecutiveauthority,thegeneralpublicandtheMMDAs

areentitledtoexpecttheSAI’sconductandapproachtobeabovesuspicion

andreproachandworthyofrespectandtrust.

Auditorsshouldconductthemselvesinamannerthatpromotesco-operation andgoodrelationsamongauditorsandwithintheprofession.Thesupportof theprofessionbyitsmembersandtheirco-operationwithoneanotherare essential elements of professional character. The public confidence and respect that an auditor enjoys are largely the result of the cumulative accomplishmentsofallauditors,pastandpresent. Itisthereforeintheinterest ofauditorsaswellasthegeneralpublicthattheauditordealswithfellow auditorsinafairandbalancedway.

Thelegislativeand/orexecutiveauthority,thegeneralpublicandtheMMDAs

shouldbefullyassuredofthefairnessandimpartialityoftheSAIswork.

Inallpartsofsocietythereisaneedforcredibility. Itisthereforeessential thatthereportsandopinionsoftheSAIareconsideredtobethoroughly accurateandreliablebyknowledgeablethirdparties.

All work performed by the SAI must stand the test of legislative and/or executivescrutiny,publicjudgementsonproprietyandexaminationagainst theCodeofEthics.

chApter3

3.0structureofMetropolitAn,MunicipAlAnddistrict

AsseMblies(MMdAs)

3.1Introduction

ThemodalitiesforLocalGovernmentadministrationinthegovernancesystem ofGhana,includingtheestablishment,composition,structure,power,functions, roles and responsibilities of District Assemblies are covered by various provisionsontheAssemblieswhicharescatteredacrossvariouslawsofthe country.Aclearunderstandingofthelinkagesinthelegislativeframeworkand the relationship between the District Assemblies and other parties in the administrationoftheAssembliesisthereforeveryessentialinmonitoringand reportingoncomplianceandweaknessesintheregulatoryregime.

District Assemblies are the core institutions established under the 1992 Constitution to give effect to the decentralized system of government

mandatedbythe1992Constitution,thesupremelawofGhana.AnAssembly

bydefinitionismadeupofMetropolitan,MunicipalandDistrictAssembly.

EachAssemblyisacorporatebody.CollectivelytheAssembliesareknown

asMMDAs.

Inpursuanceofconstitutionalprovisions,specificActsofParliamentshave

beenenactedtodealexclusivelywithLocalGovernment.Theseare:

(i)

TheLocalGovernmentsAct,1993(Act462)

(ii)

DistrictAssembliesCommonFundAct,1993(Act455)

(iii)

LocalGovernmentServiceAct,2003(Act656)

3.1.1Establishment/CreationofDistrictAssemblies

According to Article 241 of the Constitution, the district in existence

immediatelybeforethecomingintoforceofthe1992Constitutionwere

deemedashavingbeenestablished.ThisArticlealsoempowersParliament to enact laws for the redrawing of the boundaries of districts or for reconstitutingthedistricts.TheConstitutionfurthermandatestheElectoral CommissionertodemarcatetheboundariesforLocalGovernmentelections.

UndertheLocalGovernmentAct1993,(Act462)thePresidenthasthepower

todeclarebyexecutiveinstrumentanyareawithinGhanatobeaDistrictand assignanametoit.Again,thePresidenthasthemandatetodirecttheElectoral Commission,whichconstitutionallyisnotsubjecttothedirectionorcontrol byanypersonorauthorityintheperformanceofitsfunctions,tosubmit recommendationstothePresident,takingintoaccounttherequirementof

section1(4)oftheAct.

Further,theElectoralCommissionisrequiredbysection2oftheActtoreview

attherequestofthePresidentareaofauthorityofUnitCommittees,Town/ Area, Zonal, Urban and Sub Metropolitan District Councils, District, MunicipalandMetropolitanAssembliesandtosubmitareport,including recommendationstothePresident.

Undersection3oftheLocalGovernmentAct1993,theMinisterresponsible

for Local Government has also been charged to establish by Legislative Instrument an Assembly for each District, Municipality and Metropolis specifying among other things the jurisdiction, functions, powers and responsibilitiesofeachAssembly.EachAssemblywhichconstitutesthehighest

politicalauthorityintheDistrictaccordingtoArticle241(3)oftheConstitution

operatesunderitsownenactmentasacorporateinstitutionwithperpetual successionandacommonsealandmaysueandbesuedinitsownname,as

stipulatedbysection4ofthisAct.

3.1.2StructureoftheLocalGovernmentSystem

TheLocalGovernmentsystemisafour-tierMetropolitanandthree-tier

Municipal/DistrictAssembly’sstructureasshownonthenextpage.

DistrictAssembliesinGhanaareeitherMetropolitan,MunicipalorDistrict
DistrictAssembliesinGhanaareeitherMetropolitan,MunicipalorDistrict

andare:-

(a)

createdasthepivotofadministrativeanddevelopmentaldecision-

makinginthedistrictandthereforethebasicunitofgovernment

administration:

(b)

assignedwithdeliberative,legislativeaswellasexecutive

functionsunderlaw;

(c)

establishedasamonolithicstructuretowhichisassignedthe

responsibilityofthetotalityofgovernmenttobringabout

integrationofpolitical,administrativeanddevelopmentsupport

neededtoachieveamoreequitableallocationofpower,wealthand

geographicallydisperseddevelopmentinGhana;and

(d)

constitutedastheplanningauthorityforthedistrict.

3.1.3FunctionsoftheAssemblies

Thesearedeliberative,legislativeandexecutiveSection6(3)ofPNDCL207

liststhemasfollows-

(i)

beresponsiblefortheoveralldevelopmentofthedistrictandshall

ensurethepreparationandsubmissiontotheCentralGovernment

forapprovalthedevelopmentplanandbudgetforthedistrict;

(ii)

formulateprogrammesandstrategiesfortheeffectivemobilization

andutilizationofhuman,physical,financialandotherresourcesin

thedistricts;

(iii)

promoteandsupportproductiveactivityandsocialdevelopmentin thedistrictandremoveanyobstaclestoinitiativeanddevelopment;

(iv)

initiateprogrammesforthedevelopmentofbasicinfrastructureand providemunicipalworksservicesinthedistrict;

(v)

beresponsibleforthedevelopment,improvementandmanagement ofhumansettlementsandtheenvironmentinthedistrict;

(vi)

inco-operationwithappropriatenationalandlocalsecurityagencies beresponsibleforthemaintenanceofsecurityandpublicsafetyin thedistrict;

(vii)

ensurereadyaccesstothecourtsandpublictribunalsinthedistrict forthepromotion ofjustice;

(viii)initiate,sponsororcarryoutsuchstudiesasmaybenecessaryfor

thedischargeofanyofthefunctionsconferredbythislaworany

otherenactment;and

(ix) performsuchotherfunctionsasmaybereferredtoitbytheCentral

Government.

3.1.4Sub-DistrictPolitical/AdministrativeStructures

Thesebeingsubordinatebodiesofthedistrictassemblies,performfunctions

assignedtothembytheinstrumentssettinguptheassembliesordelegatedto

thembytheassemblies.TheyareconstitutedbytheSub-MetropolitanDistrict

Councils,Urban/Town/Zonal/AreaCouncils,andUnitCommittees

3.1.5Sub-MetropolitanDistrictCouncils

ThesestructuresareimmediatelybelowtheMetropolitanAssembliesandare

establishedbylaw.BelowareexamplesofSub-MetropolitanDistrictCouncils

undertheirrespectiveMetropolitanAssemblies.

AccrA MetropolitAn AsseMblY

KuMAsiMetropolitAn

AsseMblY

seKondi-tAKorAdi

MetropolitAnAsseMblY

Ablekuma

Asokwa

Sekondi

AshieduKeteke

Bantama

Takoradi

Ayawaso

Manhyia

Kojokrom

Okaikwei

Subin

Fijai

Kpeshie

OsuClottey

This arrangement has been dictated by the complex and peculiar socio- economic, urbanization and management problems which confront the MetropolitanAssemblies.

3.1.6UrbanCouncils

UrbanCouncilsarepeculiartosettlementsofDistrictAssemblies.Theyare created for settlements with population above 15,000 and which are cosmopolitan in character, with urbanization and management problems, thoughnotofthescaleassociatedwiththemetropolises.

3.1.7ZonalCouncils

Thezonalcouncilsareinthe“one-town”municipalassembliesforwhichthe establishment of town/area councils will raise problems of parallel administrative structures. Such Councils are based on the National Commission for Civic Education criteria of commonality of interest,

populationof3,000andidentifiablestreets,landmarks,etc.

3.1.8Town/AreaCouncils

ThesearefoundintheMetropolitanandDistrictAssemblies.IntheDistrict Assemblies,towncouncilsareestablishedforsettlementswithpopulation

between5,000and15,000andareacouncilsforanumberofsettlements/

villageswhicharegroupedtogetherbutwhoseindividualsettlementshave

populationoflessthan5,000.Theycoverareaswithpredominantlyrural

populationandinsomecasescanbeidentifiedwithspheresofinfluenceofa particulartraditionalauthority.Theyareessentiallyrallyingpointsoflocal enthusiasminsupportofthedevelopmentobjectivesoftheDistrictAssembly. TownCouncilsintheMetropolitanAssembliesaremarkedlydifferentinsize,

sometimesexceeding50,000.

3.1.9UnitCommittees

Unit Committees form the base structure of the new Local Government system.Aunitisnormallyasettlementoragroupsettlementwithapopulation

ofbetween500and1,000intheruralareas,andahigherpopulation(1,500)

fortheurbanareas.UnitCommitteesbeinginclosetouchwiththepeople,

havetheimportantrolestoplayineducation,organisationofcommunal

labour,revenueraisingandensuringenvironmentalcleanliness,registration

ofbirthsanddeaths,implementationandmonitoringofself-helpprojects.

3.1.10RegionalCo-ordinatingCouncils(RCCs)

Regional Co-ordinating Councils are established as part of the new

arrangementsforLocalGovernmentinGhana.Thereareten(10)Regional

Co-ordinatingCouncils,consistingofaRegionalMinister(chairman),Deputy

RegionalMinister(ex-officiomember),allDistrictChiefExecutivesandall

PresidingMembersofDistrictAssembliesinaregion.TheRegionalCo-

ordinatingCouncilispurelyanadministrativeandco-ordinatingratherthan

apoliticalandpolicymakingbody.ItsfunctionsasoutlinedintheLocal

GovernmentLawareto:

(i)

co-ordinateandformulatetheintegratedplansandprogrammesof thedistrictassembliesintheregionandharmonisetheseplansand programmeswithnationaldevelopmentpoliciesandprioritiesfor approvalbytheCentralGovernment;

(ii)

monitortheimplementationofprogrammesandprojectswithinthe Region and evaluate the performance of such programmes and projects;

(iii)

planattheregionallevelandintegratealldepartmentalprogrammes intheRegion;

(iv)

allocatetotheDistrictsintheregionasappropriatepublicfunds, underestimatesapprovedbytheCentralGovernment.

(v)

reviewandco-ordinatepublicservicesgenerallyintheregion;and

(vi)

performsuchotherfunctionsasmaybeassignedtoitbytheCentral Government

3.2 coMMitteesofdistrictAsseMblies IntheperformanceofitsfunctionstheDistrictAssemblyworksthroughthe executivecommitteeanditssubsidiarycommittees.

3.2.1ExecutiveCommittee

TheexecutivefunctionsoftheAssemblyareperformedbytheExecutive Committee, which is presided over by the District Chief Executive, and consistsofnotmorethanone-thirdofthetotalnumberofmembersofthe

Assembly,excludingthePresidingMember.Thefunctionsperformedbythe

ExecutiveCommitteeare;-

(i)

co-ordinate plans and programmes of the Sub-Committees and submit these as comprehensive plans of action to the District Assembly;

(ii)

implementresolutionsoftheDistrictAssembly;

(iii)

overseetheday-to-dayadministrationofthedistrictincollaboration withtheofficeoftheDistrictChiefExecutive;

(iv)

recommend,inthecaseofnon-decentralisedagenciesintheDistrict, totheappropriateGovernmentMinistry/Department/Agencythe appointmentandreplacementonstatedgroundsofofficerswithin theareaofauthorityoftheAssembly.

(v)

adoptmeasurestodeveloptheactivitiesandexecuteapprovedplans oftheunits,areasandtownsandsub-metropolitandistrictswithin theareaofauthorityoftheDistrictAssembly;

(vi)

when necessary appoint or dissolve ad-hoc committees of the ExecutiveCommittee.

3.2.2Sub-CommitteesofExecutiveCommittee

Thesub-committeesoftheexecutivecommitteeandtheirfuntionsareas

follows:

3.2.2a DevelopmentPlanningSub-Committee

(i)

takeacomprehensivelookatthedistrict;

(ii)

identifytheeconomicresources/potentialsofthedistrict;

(iii)

developaninformationbaseontheresources;

(iv)

identifyopportunitiesandconstraintsfortheexploitationof theseresources;

(v)

prepareanexploitationandphasingplanandstrategy;

(vi)

consultwithotherSub-Committeesfortheimplicationsthe proposed district plan may have on other Sub-Committees plans;and

(vii)

submittheplanstotheExecutiveCommitteeforharmonisation withotherSub-Committees’plans.

3.2.2b SocialServicesSub-Committee TheSub-Committeesoftheexecutivecommitteeandtheirfunctionsare asfollows:

(i)

takeacomprehensiveandlongtermlookatareasofsocial developmentinthedistrict,inparticulareducation,health, socialwelfare,sports,culture,etc;

(ii)

develop the information base on these areas of social development;

(iii)

identifythestrengthsandweaknessesinthesocialservices areas;

(iv)

prepareasocialdevelopmentplan(long,mediumandshort term),forthedistrict;

(v)

examinetheimplicationsofthesocialdevelopmentplanon othersub-sectorsofthedistricteconomy;and

(vi)

submit the plans to the Executive Committee for harmonisation.

3.2.2c WorksSub-Committee Thefunctionalareasofthetechnicalinfrastructuresub-committeeinclude

roads,electricity,sanitation,water,etc.Withinthegeneralframeworkof

theLocalGovernmentlawandthespecificfunctionsinthelegislative

instrumentsthatestablishedthevariousassemblies.Thissub-committee;-

(i)

takesacomprehensivelookattheinfrastructureneedsand problemsofthedistrict;

(ii)

developsaninformationbaseoneachoftheseprogramme/ functionalareas;

(iii)

maps out, initiates and phases out programmes for their developmentand/orprovision;

(iv)

examinestheimplicationsofsuchactionsfortheothersub- committeeproposalsand

(v)

submits the programmes to the Executive Committee for harmonisationandaction.

3.2.2d FinanceandAdministrationSub-Committee

Thissub-committee:-

(i)

examinesthegeneralfinancialpositionoftheAssembly;

(ii)

examinestherevenuemobilisationandexpendituretrendsof theAssembly;

(iii)

mapsoutstrategiestoimproverevenuemobilisationinthe present,andsetstargetsforthefuture;

(iv)

submits financial plans to the Executive Committee for harmonizationwithotherSub-Committees’plans;and

(v)

identifiesstrategiestoensurejudiciousutilisationofavailable resources.

3.2.2e JusticeandSecuritySub-Committee

There is no doubt that intra-district and inter-district conflicts abound. Besides,thereareissuesthatpertaintotheenforcementofbye-lawsofthe

Assembly.TheJusticeandSecuritySub-Committee:-

(i)

examinestheseandotherrelatedconflictareas;

(ii)

recommendstotheExecutiveCommitteewaysandmeansto resolvedisputes;and

(iii)

ensuresreadyaccesstothecourtsandforthepromotionof justice in the District, e.g. making sure that premises are availableforusebycommunitytribunals,thatpolicelogistics areadequate,etc.

3.2.3OthermainCommitteesare:-

(i)

PublicRelationsandComplaintCommittee(Section27ofAct462);

(ii)

RateAssessmentCommittee(Section103ofAct462);and

(iii)

AuditReportImplementationCommittee(Section30ofAct584).

3.2.3aAuditReportImplementationCommittee(ARIC)

AttheMetropolitan,MunicipalandDistrictAssemblylevels,theARICis

madeupoffivemembersasfollows:

(i)

ThePresidingMemberorarepresentativeofthePresidingMember

fromamongmembersoftheAssembly(Chair)

(ii)

AmemberfromtheFinanceandAdministrationSub-Committeeof

theAssembly

(iii)

TheMMDAChiefExecutive

(iv)

MMDACoordinatingDirector

(v)

Oneexternalrepresentativewithaminimumoffouryearsexperience

inaccountingorauditingnominatedbytheInternalAuditAgency.

3.3finAncinGthelocAlGoVernMentsYsteM

The means available to Local Governments to translate power and competence at their disposal into a development phenomenon, i.e. the resourceswithwhichtoperformthetransferredfunctions,formsthesubject matterofLocalGovernmentfinancing.

ThefinancialprovisionsfortheLocalGovernmentsystemarecontainedin

section76,86and94oftheLocalGovernmentAct1993,andArticles245

and 252 of the 1992 Constitution. Revenues from those sources may be

classifiedas;-

(i)

BudgetingandRating

(ii)

Locallygeneratedrevenues(traditional);and

(iii)

CentralGovernmenttransfers.

3.3.1BudgetingandRating

Thebudgetprocessandtheinformationpresentedinthebudgetdocumentation arecentraltofiscaltransparency.Almostwithoutexception,theannualbudget istheAssembly’smaininstrumentforsettingdevelopmentagenda.Itisthe occasiononwhichtheAssemblypresentsitsexpenditureproposals,andthe meansbywhichitwillfinancethem,withinthecontextofexplicitstatements ofitspolicyintentions.Alongsidetheformalsetofline-itemallocationsof spendingorganizedbyadministrativeunit,whichformsthecoreofinformation needed by the GeneralAssembly to scrutinize and approve spending, the Assemblyusesthebudgettodetailitsproposalsforrevenuecollectionand borrowing,placedinahistoricalframework,andexplainshowtheseproposals willhelpachieveitsmediumtermdevelopmentplan.

Informationprovidedatthetimeoftheannualbudgetshouldcoverallfiscal

activities,irrespectiveoftheinstitutionalarrangementunderwhichtheytake

place. Information should also be readily available on how budgets are prepared and executed, including the role of such documents as budget circulars.Thetypeofinformationrequiredforfiscaltransparency—including functionalandeconomicpresentations.Principlesandpracticesrelatingto opennessofthebudgetprocessconcernbudgetpreparation,documentation, andpresentation,aswellasproceduresforbudgetexecution,fiscalreporting andauditing.

3.3.1.1BudgetPreparationProcess

Budgetpreparationshouldfollowanestablishedtimetableandbeguidedby

welldefinedmacroeconomicandfiscalpolicyobjectives.

Budgetpreparationincludesgoodpracticesrelatingto(1)budgetcalendar;

(2)medium-termframework;(3)newmeasures;(4)fiscalsustainabilityand

fiscalrisks;and(5)coordinationofextrabudgetaryactivities.

Basicrequirementsunderthisprinciplearetoensurethat:

a. realisticbudgetproposalsarepresentedtotheGeneralAssembly accordingtoaprescribedtimetable;

b. thelikelycostsandeffectsofnewexpenditureandrevenuemeasures areclearlyexplained;and

c. a consistent multiyear fiscal framework is provided, based on realisticeconomicassumptions.

3.3.1.1aBudgetcalendar

Abudgetcalendarshouldbespecifiedandadheredto.Adequatetime

shouldbeallowedforthedraftbudgettobeconsideredbytheGeneral

Assembly.

Animportantfeatureofatransparentbudgetpreparationprocessisthe availability of a reliable and publicly available calendar, along with associatedprocedures,towhichtheexecutivesandothersub-structure

officialsrigorouslyadheres.Thishelpsensurefairandfullaccesstothe

budgetprocess.Suchprovisionsdonot,however,requiretheexecutiveto

deny itself space for careful deliberation and decision making before

making available the full details of its budget proposals for General Assemblyandpublicconsideration.Thisisparticularlyimportantfortax policy changes. But there should be predictability about when the executive’sproposals—ineitherconsultative,draft,orfinalform—willbe madepublic.Normallythedraftbudgetitselfshouldbemadepublicwhen theexecutivesubmitsitsbudgetforGeneralAssemblyapproval.

Medium-termframeworks Itisessentialthattheannualbudgetbepreparedandpresentedwithin a comprehensive and consistent quantitative medium-term macroeconomicframework.Initssimplestform,thisisoftentermeda medium-termfiscaloutlook,whichgenerallyincludesunconstrained estimates of the effect of current policies over the medium term. Extendingthisapproachtoproduceamedium-termfiscalframework (MTFF)requiresagreementalsoonacomprehensivestatementoffiscal policyobjectivesagainstwhichfiscalperformancecanbeassessed.In particular,fiscaltargetsshouldbespecifiedthatareconsistentwith macroeconomicstabilityandfiscalsustainability,andtheseshouldbe embedded within realistic and internally consistent medium-term macroeconomicprojections.Inthiscontext,thereshouldbeastrong interfacebetweenthegovernment’snationalplanningordevelopment framework(e.g.,PovertyReductionStrategyPaper(PRSP))andthe medium-termbudget.

Broadereconomicimplications PovertyandSocialImpactAnalysis(PSIA)referstotheanalysisof the distributional impact of policies and policy reforms on the welfareofdifferentgroups,withaspecificemphasisonthepoorand vulnerable.Similaranalysiscanbeappliedtoothereffects(suchas theenvironment)andtargetotherpartsofthepopulation.Various approachesareavailable,fromthemostsimpletomorecomplex econometrictechniques.Goodpracticewouldrequirethatbudget documentationincludeatleastasimpleanalysisofthedifferential impactofnewpoliciesandmeasures.

3.3.1.1bFiscalsustainabilityandfiscalrisks

The budget documentation should include an assessment of fiscal sustainability.Themainassumptionsabouteconomicdevelopmentsand policiesshouldberealisticandclearlyspecified,andsensitivityanalysis shouldbepresented.

Budgetprogramsandperformanceobjectives TransparencyandaccountabilityinAssemblyrequirethatbudget presentations and accounts contain clear statements of the Assembly’sobjectivesaswellasalistingoftheitemsonwhich moneyisspent(asintraditionalline-itembudgeting).Resultsof previous policies should also be evaluated against their stated objectives.Modernbudgetingtriestoidentifyasfaraspossiblethe objectives of Assembly activities and to measure outputs and outcomesinrelationtotheseobjectives.Animportantelementof earlyeffortsinthisdirectionistheclassificationofexpenditureinto “programmme,” “subprogrammme,” and “activity” categories, definedwithincreasingspecificityatthemoredetailedlevelsin relationtoaclearlystatedsetofobjectives.

3.3.1.1cPerformance-basedBudgeting(newmeasures)

Performance-basedbudgetingreferstoproceduresormechanismsintended

tostrengthenlinksbetweenthefundsprovidedtopublicsectorentitiesand

outputsthroughtheuseofformalperformanceinformationinresource allocationdecisionmaking.Performance-basedbudgetingencompassesa wide range of different budgeting reforms that differ in the way they measureperformanceandlinkresultstofunding.Parallelobjectivesof performance budgeting cover improvements in both allocative and managerial efficiency of public expenditure, with the former perhaps predominantindevelopingcountries,andthelatterinearlyreformers.One underlyingthemeofthesereformsistopermitgreatermanagerialfreedom solongastheycanproducethedesiredoutputsoroutcomes.Various modelsforperformancebudgetingincludethefollowing:

1.

Programbudgeting(basedonPlanning,Programming,and

Budgetingfirstimplementedinthe1960s)—whichallocates

funds according to programs rather than line items so that commonobjectivesareconsideredandfundedtogether.

2. Marginalanalysis(mostwell-knownexampleisZero-Base Budgeting which decomposes programs into incremental stages(calleddecisionpackages),eachofwhichisranked accordingtoprioritysothatavailablefundingisassignedto thehighestpriorities.

3. Systemsthatattempttolinkthelevelofbudgetfundingto performancetargets—forexample,byprovidingadditional funding conditional upon agencies agreeing to tougher outcomeand/oroutputtargets.

4. Formulafundingbasedonexpectedresultsand/orcostsfor deliveringthoseresults.

5. Budgetaryperformanceincentivesthatlinkpastperformance tofutureagencyfundingasamotivatorforperformance.

6. The purchaser-provider model in which agencies are paid “prices”fortheresults(usuallyoutputs)thattheydeliver.This modelrepresentsacombinationofcost-basedformulafunding andbudgetaryperformanceincentives.

3.3.1.1dExtrabudgetaryfunds

Extrabudgetaryfundscanunderminetransparencybytakingexpenditure

decisionsoutsidethebudgetprocess,distortingresourceallocationfrom

the path envisaged in announced policies. Recognizing that many Assemblieshavesometypeofextrabudgetaryactivity,itisimportantto maketheirroleincarryingoutAssemblypoliciestransparentandsubjected tothesameaccountabilityrequirementsasotherbudgetedexpenditures. Fiscaltransparencyrequirementsareoutlinedbelow:

1. Extrabudgetaryactivitiesshouldbeidentifiedintheannual budgetoranannextothebudget,alongwithastatementofthe purposeorpolicyrationale.

2. Fiscalactivitiesfinancedthroughextrabudgetaryfundsshould be integrated into the budget process, even if they remain outsidebudgetallocations,tomaintainunifiedcontroloffiscal policy and avoid problems in expenditure coordination. In

general,resourcesforextrabudgetaryfundsshouldbeallocated through the budget, and expenditures should be subject to GeneralAssemblyapproval,eveniftheyremainoutsidethe annualappropriationsprocess.

3. Therulesandoperationsofanextrabudgetaryfundshouldbe transparentandfreefrompoliticalinterference.Thisrequires regulardisclosureandreportingoftheprinciplesgoverning thefund.

4. Extrabudgetaryfundsshouldbesubjecttoauditandshould publishfinancialstatementscoveringallinflowsandoutflows and,ifrelevant,theallocationandreturnonassets.

5. Transparency requires

extrabudgetaryactivitybeincludedinbudgetdocumentation and(ii)reportingonextrabudgetaryactivitiesfollowthesame basis as budget reporting (on a gross basis; distinguishing revenue, expenditure, and financing; with expenditure classified by economic, functional, and administrative category).

that

(i)

detailed reports

of

3.3.1.2ProceduresforExecution,Monitoring,andReporting

Basicrequirementsunderthisprinciplearetoensurethat

i) revenues, commitments, payments, and arrears can be tracked effectively;and

ii) auditedfinalaccountsandauditreportsarepresentedtotheGeneral Assemblyandpublishedwithinayear.

3.3.1.2aAccounting

The accounting system should provide a reliable basis for tracking revenues,commitments,payments,arrears,liabilities,andassets. i) Assessmentofarrears In addition to being an indicator of serious flaws in fiscal management, a failure to identify arrears—on the payments or receiptsside—canbeamajorimpedimenttofiscaltransparency.To theextentthatarrearsareunreported,thefiscalpositioniswrongly statedonanaccrualsbasis.Effectivegovernmentaccountingsystems

shouldprovideenoughinformationtoassesstheextentofpayment

ortaxarrears.

Fiscal transparency requires that cash accounting reports be supplementedbyaccounts-basedreportsofbillsdueforpaymentto assessarrears. Dataonarrearswouldnotbegeneratedasamatter of course from a simple cash accounting system, but should be providedinsupplementaryreports.Therefore,allAssembliesshould move toward an accounting standard that facilitates end-period reportsonaccountsdueforpaymentaswellasreportsonacash basis—whatever basis of accounting is used. An accrual or a modifiedaccrualsystemwouldachievethisobjective,andmaybe appropriate.

Ontherevenueside,Assembliesmustalsoaccountfortaxesand otherrevenuethathavenotbeenreceivedontime.Forexample,the stockoftaxarrearscanbesubstantial,butitisdifficulttoknowhow muchofthestockisactuallycollectiblebecausemanyAssemblies donotwriteoffbaddebts.Aswiththeexpenditureside,itisessential that the finance and accounting systems recognize and record payments due, and that, to the extent possible, they report the monthlyandannualflowsofunpaidtaxes,penalties,andinterest

ii)StagesofPaymentandPaymentArrears

Apaymentarrearoccurswhenabillorotherobligationisduefor

paymentbutisnotpaidonorbeforetheduedate.Toassessarrears,

itisnecessarytoidentifybothwhenabillisdueforpaymentand

whetherornotactualpaymenthasoccurred.Inatypicalpayment

process,allaccountingsystemsobservefourbasicstages:

1. commitment: a prospective expenditure resulting from placementofanorder,signingofacontract,orotheragreement fortheprovisionofgoodsorservices; 2. verification:confirmationbytheauthorizedreceivingagent thatanorderedgoodorservicehasbeenreceivedand,thereby, thataliabilityandduedateofpaymentarerecognized;

3.

paymentissue:issuanceofachequeorpaymentordertothe supplierofagoodorserviceortomeetatransferobligation fallendue;and

4. cash payment: payment of cash or transfer of funds to a supplier or recipient’s account after presentation and processingofacheckorpaymentorder.

iii)Auditedaccounts Auditedfinalaccountsandauditreports,includingreconciliation with the approved budget, should be presented to the General Assemblyandpublishedwithinayear.

Theyear-endreportallowstheAssemblytodemonstratekeyresults achievedandtooutlineacomprehensiveoverviewoftheAssembly’s financialassetsandliabilities,andcontingentliabilities.Itshould explainanydeviationfromcompliancewiththelevelofrevenueand expendituresauthorizedbytheGeneralAssemblyinthebudget.It should, if possible, also include performance information that demonstrateshowtheoriginallyarticulatedtargetshaveachieved actualresults.Ideally,theyear-endreportshouldprovideexplicit reconciliationstopreviousbudgetdocuments.

3.3.1.2bAidinkind

Arelatedandverycommonweaknessinaccountingsystemsofmany

Assembliesisthatnoncashaidisrarelyfullyrecorded.Thismeansthat

theAssembly’saccountsdonotrevealthetruelevelofresourcesusednor

theirallocationbysector,organization,orregion.Anequallyimportant failingisthatassetstherebycreatedoracquiredarenotrecordedinaway that helps to identify long-term operations, capital depreciation, and maintenanceneeds.ThetransferofsuchassetstotheAssemblywhen donorfinancingiscompletedcanthenleadtounexpectedpressuresonthe budget.Therearealsoproblemswiththetimelyrecordingandvaluation

ofsuchassistance,andsomemeasuresshouldbetakentoincludeaid-in-

kindtransactionstoimprovetransparency.Cashsystemsaregenerally

unsatisfactoryasameansoftrackingsuchtransactions,andafullaccrual

system would be needed to deal with nonfinancial assets in a fully integrated way. It is proposed that all Assemblies maintain at least memorandum-levelrecordsofsignificantreceiptsofaidinkind,showing forecast receipts in the budget and audited receipts with the annual accounts.DonotalsoforgettomaintainAssetsandDonationsregisters

3.3.1.2cSupplementarybudgets

Supplementaryrevenueandexpenditureproposalsduringthefiscalyear

shouldbepresentedtotheGeneralAssemblyinamannerconsistentwith

theoriginalbudgetpresentation.

Theexistenceofabudgetlawdoesnotguaranteethatitsprovisionswill

beobservedinpractice.Thereareseveralareasofbudgetlawthatare

commonlyabused,andtheyneedspecialattentioniffiscaltransparency

istobefullyachieved.Theseincludetheexcessiveuseofsupplementary

budgets,abuseofcontingencyfunds,andaccumulationofpaymentarrears.

Allthesepracticestendtoreducetransparency,intermsofbothaggregate

controlandstrategicprioritysetting.

3.3.2LocallyGeneratedRevenue

LocallygeneratedrevenuegenerallyreferredtoasIGF,isderivedfromseven

mainsources.Theseare;

(i)

Rates;

(ii)

Lands;

(iii)

FeesandFines;

(iv)

Licences;

(v)

Rent;

(vi)

Investments;and

(vii)

Miscellaneous.

Rates

Includedunderthisrevenueare;-

(i)

basicrate(polltax);

(ii)

propertyrate(bylandedpropertyowners);and

(iii) specialrate.

SpecialratesareimposedbytheAssemblythroughfee-fixingresolutionsto

raisefundsforspecificprojects.Suchratesareareaandprojectspecific.

Propertyrateisleviedonlandedpropertiesintheareaofauthorityofthe

Assembly.Commercialandparastatalorganisationsarerequiredtopayrates

ontheirpropertiesinthedistricts.

FeesandFines

InaccordancewiththeLocalGovernmentAct,1993(Act462)andwithinthe

guidelinessetbytheCentralGovernment,DistrictAssemblieslevyfeesona rangeofitemsandcommercialactivities.Itlistssomeoftheareasforfees collected as cattle pounds, slaughter houses, market dues, market stalls, marketstores,tradingkiosks,buildingpermitfees,birthsanddeaths,marriage

anddivorceandcourtfines.UnderL.I.1530of1992,allcrops,withthe

exceptionofcocoa,coffeeandcottonarealsoleviable.

Licences

Licencesareissuedforahostofitemsandactivities.Theyincludedogs

licence,hawkers’licence,extensionofhours,hotelsandrestaurants,beerand

winesellers,petroleuminstallations,lorryparksoverseers,self-employed

artisansetc.

TradingServices

DistrictAssembliesundertaketradingactivitiessuchascementsalesand

hiringoutofchairsandcanopies.

Lands(StoolLandsandProperties)

Revenuefrommineralsandlandroyaltiesintheminingareasareimportant

sourcesofrevenue.

3.3.3CentralGovernmentTransfers

Thesearerevenueswhicharetransferredfromcentralgovernmentsourcesto

theDistrictAssemblies.Themajoronesare;-

(i)

DistrictAssembliesCommonFund

(ii)

Salaries(EstablishedPost)

(iii)

CededRevenue

(iv)

OtherDonorSupportTransfers

CededRevenue Cededrevenueisderivedfromrevenuesourceswhichhithertoweretapped bythecentralgovernmentthroughtheInternalRevenueService,butwhich central government has ‘ceded’to the DistrictAssemblies, in pursuit of decentralization.

ThesesourcesaslistedinthesixthscheduleoftheLocalGovernmentAct,

1993are;-

(i)

EntertainmentsdutyundertheEntertainmentsDutyAct,1962(Act

150).

(ii)

CasinorevenueundertheCasinoRevenueTaxDecree,1973(NRCD

200)

(iii)

BettingtaxunderBettingTaxAct,1965(Act268)

(iv)

GamblingtaxundertheGamblingMachinesDecree,1973(NRCD

1974)

IncomeTax(registrationoftrade,business,professionorvocation)Law,1986

(PNDCL156)

Inaccordancewithsection57(4)oftheLocalGovernmentLawof1988,

whichstates‘theMinisterinconsultationwiththeMinisterresponsiblefor

nationalrevenue,mayfromtimetotimebylegislativeinstrumentamendthe

provisionsofthesixthscheduletothislaw’,twonewsourceshavebeenadded

totherevenuesourcesthatmakeupthecededrevenue.Theseare;-

(a)

Dailytransporttaxundertheincometax(amendment)law;and

(b)

Advertisementtaxundertheadvertisementtaxdecree,1976(SMCD50)

ThecededrevenueiscentrallycollectedbytheInternalRevenueServiceand

thetotalcededrevenuecollectedforayearistransferredtotheMinistryof

LocalGovernmentandRuralDevelopmentwhichsharesitamongtheDistrict

AssembliesusingaformulaapprovedannuallybyParliament.

DistrictAssembliesCommonFund

Article252oftheConstitutionoftheFourthRepublicofGhanaprovides

fortheestablishmentofDistrictAssembliesCommonFund,whichshall;-

(i)

beallocatedannuallybyParliamentnotlessthanfive(5)percentof

thetotalrevenueofGhanaandpayableinquarterlyinstalmentsfor development;

(ii)

bedistributedamongDistrictAssembliesonthebasisofaformula tobeapprovedbyParliament;and

(iii)

be administered by a District Assemblies Common Fund Administrator.

Act455whichestablishestheDistrictAssembliesCommonFunddefinesthe

‘totalrevenuesofGhana’forthispurposetomean‘allrevenuecollectedby

oraccruingtotheCentralGovernmentotherthanforeignloans,grants,non

taxrevenueandrevenuesalreadycollectedbyorforDistrictAssembliesunder

anyenactmentinforce’.

TheobjectoftheCommonFundistomakeavailabletothedistrictassemblies

additionalresourcesfordevelopment.

Section 9 of Act 455 states “the Minister responsible for Finance in consultationwiththeMinister(responsibleforLocalGovernmentandRural Development),shalldeterminethecategoryofexpenditureoftheapproved developmentbudgetoftheDistrictAssembliesthatmustineachyearbemet outofamountsreceivedbytheAssemblyfromtheFund.

3.3.4SpecialisedFunding

Theseincludethefollowing;-

(a)

Timberroyalties;and

(b)

Mineralsdevelopmentfund.

chApter4

4.0AuditplAnninG

4.1Introduction

Itisofgreatimportancethatanauditisplannedinadvancetoensurethat:

a) Theintendedmeansofachievingtheauditobjectivesisestablished.

b) Theauditiscontrolledanddirected

c) Attentionisfocusedoncriticalandhighriskareas.

d) Theworkiscompletedeconomicallyandtotimescalerequirements.

4.2Planning

Thismeansdevelopingageneralstrategyandadetailedapproachforthe

expectednature,timingandextentoftheaudit.Theauditorplanstoperform

theauditinanefficient,effectiveandtimelymanner.

4.2.1ObjectiveofAuditPlanning

i. To set out the way in which legal obligations and other audit prioritieswillbeachieved;

ii. Toidentifythescope,objectivesandanticipatedoutputsofaudit;

iii. Toidentifyhowauditevidencenecessarytoachievetheobjectives willbeobtainedandanalysed;

iv. To identify the resources that would be needed and actually employedonauditsandestablishcostandtimebudget;and

v. Toallowmanagementtosuperviseandcontrolindividualaudits.

4.2.2PlanningtheAuditWork

Adequateplanningoftheauditworkensuresthat:

i. appropriateattentionisdevotedtoimportantareasoftheaudit;

ii. potentialproblemsareidentified;and

iii. theworkiscompletedexpeditiously.

planning also assists in proper assignment of work to assistants and in coordinationofworkdonebyotherauditorsandexperts.

TheextentofplanningwillvaryaccordingtothesizeoftheMMDA,the

complexityoftheauditandtheauditor’sexperiencewiththeMMDAand

knowledgeofthebusiness.

Obtainingknowledgeofthebusinessisanimportantpartofplanningthe

work.Theauditor’sknowledgeofthebusinessassistsintheidentificationof

event,transactionsandpracticeswhichmayhaveamaterialeffectonthe

financialstatements.

Theauditormaywishtodiscusselementoftheoverallauditplanandcertain

auditprocedureswiththeMMDAauditcommittee,managementandstaffto

improvetheeffectivenessandefficiencyoftheauditandalsoco-ordinatethe

auditprocedureswithworkoftheMMDApersonnel.Theoverallauditplan

andtheauditprogramme,however,remaintheauditor’sresponsibility.

4.2.3TheOverallAuditPlan

Theauditorshoulddevelopanddocumentanoverallauditplandescribing

theexpectedscopeandconductoftheaudit.

Whiletherecordoftheoverallauditplanwillneedtobesufficientlydetailed

toguidethedevelopmentoftheauditprogamme,itspreciseformandcontent

willvarydependingonthesizeoftheMMDA,thecomplexityoftheaudit

andthespecificmethodologyandtechnologyusedbytheauditor.

Matterstobeconsideredbytheauditorindevelopingtheoverallauditplan

includes:-

(a)KnowledgeoftheBusiness

(i)

General economic factors and social / environmental conditions

affectingtheMMDA’sbusiness;

(ii)

ImportantcharacteristicsoftheMMDA,itsbusiness,itsfinancial

performanceanditsreportingrequirements,includingchangessince

thedateoftheprioraudit;and

(iii)

Thegenerallevelofcompetenceofmanagement.

(b)UnderstandingtheAccountingandInternalControlSystem

(i)

TheaccountingpoliciesadoptedbytheMMDAandchangesinthose

policies;

(ii)

Theeffectofnewaccountingorauditingpronouncements;and

(iii)

Theauditor’scumulativeknowledgeoftheaccountingandinternal

controlsystemandtherelativeemphasisexpectedtobeplacedon

testofcontrolandsubstantiveprocedures.

(c)RiskandMateriality

(i)

The expected assessments of inherent and control risks and the identificationofsignificantauditareas;

(ii)

Thesettingofmaterialitylevelsforauditpurposes;

(iii)

Thepossibilityofmaterialmisstatements,includingtheexperience ofpastperiods,orfraud;and

(iv)

The identification of complex accounting areas, including those involvingaccountingestimates.

4.2.4TheAuditProgramme

Theauditorshoulddevelopanddocumentanauditprogrammesettingoutthe

nature,timingandextentofplannedauditproceduresrequiredtoimplement

theoverallauditplan.

Theauditprogrammeservesasasetofinstructionstoassistantsinvolvedin

theauditandasameanstocontrolandrecordtheproperexecutionofthe

work.Theauditprogrammemayalsocontaintheauditobjectivesforeach

areaandatimebudgetinwhichhoursarebudgetedfor,forthevariousaudits

areasorprocedures.

Inpreparingtheauditprogramme,theauditorwouldconsiderthespecific

assessmentsofinherentandcontrolriskandrequiredlevelofassurancetobe

providedbysubstantiveprocedures.Theauditorwouldalsoconsiderthe

timingoftestofcontrolsandsubstantiveprocedures,thecoordinationofany

assistanceexpectedfromtheMMDA,theavailabilityofassistantsandthe

involvementoftheotherauditorsorexperts.

4.2.5ChangestotheOverallAuditPlanandAuditProgramme

Theoverallauditplanandauditprogrammeshouldberevisedasnecessary

duringthecourseoftheaudit.

Planningiscontinuousthroughouttheauditbecauseofchangesincondition

orunexpectedresultsofauditprocedures.Thereasonsforsignificantchanges

wouldberecorded.

chApter5

5.0sYsteMdocuMentAtion

5.1Introduction

InordertoassisttheauditortounderstandtheMMDAfinancialsystemand identify the control processes for transactions, the system should be documentedinalogical,orderlymanner.Thedocumentationwouldthenserve as a basis for the evaluation of the systems and the assessment of their controls.

Thesystemdocumentationformspartofthepermanentauditfile.Itisusually

completedorreviewedandupdatedaspartoftheplanningandfamiliarization

phaseoftheaudit.

Thepurposeofthissectionistodescribedocumentationcharacteristicsand

thestagesinvolvedindocumentingasystem.

5.2Characteristics

Tobeeffective,thesystemdocumentationshould:

- beclearandaccurateandavoidunnecessarydetail;

- progress logically from the start of the procedure, and indicate the sequenceoftheprocedure;

- be adequately cross-referenced to related documentation; (i.e. interaction with another process or common function, e.g. cash payments);

- indicatethesection/unitresponsiblefortheprocedure;and

- indicatetheoutputofeachprocess.

System descriptions may be documented using narrative notes, block diagramsorflowcharts.Thedescriptionshouldcover:

- themainprocessingprocedure;

- majorcontrolprocedures;

- type,valueandvolumeoftransactionsprocessed;and

- interfacesbetweenmanualandcomputersystem.

Theauditorwilloftenneedtodescribethesystematdifferentlevelsofdetail. Initially,anoverviewofthesystemshouldbeproducedwhichallowsthe auditor to see the total flow of transaction to secure a reasonable understandingofthesystem.Thiswillidentifytheoverallcontrolprocedures andanyareaswhichrequiremoredetaileddescription.

More detailed documentation may be required to indicate the individual controlsapplied,theflowofdocumentthroughaparticularpartofthesystem, andthesection/unitresponsible.Thiswillusuallyincludetheauthority limits,themethodbywhichthecontrolsareevidencedandthefrequencyof operatione.g.weekly.However,thelevelofdetailsshouldbecompatiblewith theimportanceoftheprocessbeingdocumented.Laboriousdocumentation ofunnecessarydetailsshouldbeavoided.

Theabovecanbeaccomplishedbytheuseofflowcharts.Flowchartingisa

methodofgraphicallyrepresentingtheflowofdatawithinasystemwherea

verydetaileddescriptionisrequired.

5.3Sourcesofinformationandverification

Informationfordocumentingthesystemcanbeobtainedbyobservingthe system,discussionwiththekeypersonnel,reviewingproceduralmanuals, and studying organizational charts or other charts prepared by the organization.Fulluseshouldbemadeofexistingdocumentation,including anysystemdescriptionpreparedbyinternalaudit.However,thesemayneed tobemodifiedtosuitexternalauditrequirements.

Aspartofthedocumentationandverificationofasystem’sdescription,the

auditorshouldtraceanumberofeachmajortypeoftransactionthroughthe

system.These“walk-throughchecks”helptoconfirmthatthesystemappears

tooperateinthemannerrecorded.Thesechecksareparticularlyrelevant

whereuseismadeoftheorganization’sorinternalaudit’ssystemdescriptions.

The“walk-throughcheck”shouldspecificallynotewhetherthecontrolson whichreliancemaybeplacedareoperatingasrecorded.Thecheckdoesnot, however, provide any significant assurance on the effective operation of

internalcontrols.Detailsofthewalk-throughchecksshouldberetainedwith

thesystemdocumentationtoassistthemanagementreview.

From documenting a system the auditor may identify serious control weaknesses,whichshouldbenoted.However,thesystemdocumentation processalonecannotbereliedupontoevaluatefinancialcontrols.Therefore, once the accuracy of the documentation has been confirmed, the auditor shouldcompleteafullevaluationofthesystem.

5.4UpdatingtheDocumentation

Thesystemdocumentationshouldformpartofthepermanentfilesothatthe informationcanbeusedforsubsequentaudits.Foreachyear,theauditor should ensure that the description accurately describes the system in operation.This is usually accomplished from examining revisions to the proceduralmanuals,discussionswiththeresponsiblestaffandbyconducting walk-throughtest.Also,managementletterpointsshouldbefollowedup whichmighthaveresultedinchangestothesystem.Anyidentifiedchanges shouldbeincluded(andindicated)onneworrevisedsystemdocumentation.

The impact of any changes will need to be evaluated and the system evaluationquestionnairesrevisedasappropriate.Likewise,whencompliance testingasystem,theauditorshouldrevisethesystemdocumentationifitdoes notaccuratelycharttheprocessesinoperation.

chApter6

6.0MAteriAlitY,risKAndsiGnificAnce

6.1Introduction

BestAuditingPracticesrequirethatindevisingtheauditprogramme,the auditorshouldtakeintoconsiderationnotonlythenatureandscaleofthe MMDAsexpenditurebutalsothescale,effectivenessandreliabilityofthe accounting and administrative procedures, as well as the financial and administrativeinternalcontrolsandchecks. Systemsofinternalcontroland check,includinginternalaudit,shouldbereviewedandevaluatedinorderto determine:

(a)

Thedegreeofreliancethatcanbeplaceduponthem;and

(b)

Theextentoftestingthatneedstobeperformedbytheauditor.

Thedegreeofriskofmis-statement,amongotherthings,affectstheauditor’s

judgementastowhatissufficientappropriateevidence.

Thepurposeofthischapteristoamplifythecommonauditingstandards

outlinedaboveandtodefineanddescribetheconceptsofmateriality,riskand

significance,theinterrelationshipandtheapplicationoftheseconceptswhen

planningandconductinganauditandevaluatingtheresultsofprocedures.

6.2Materiality

Materialityreferstothemagnitudeornatureofamis-statement(includingan

omission)offinancialinformationeitherindividuallyorintheaggregatethat,

inthelightofsurroundingcircumstances,makesitprobablethatjudgement

ofareasonablepersonrelyingontheinformationwouldhavebeeninfluenced

oradecisionaffected,asaresultofthemis-statement.

Anauditorplansandconductstheaudittohaveareasonableexpectationof detectingmis-statementswhich,individuallyorinaggregate,arematerialin relation to the financial information on which he/she is reporting. The assessment of what is material is a matter of the auditor’s professional judgement. Although the auditor generally plans the audit to detect

quantitatively material mis-statements, he/she assesses both the amount (quantity)andnature(quality)ofanymis-statementsdetected. Indealing withpotentialmis-statements,theauditorconsidersmaterialityatbothan overalllevelandinrelationtoindividualaccountbalancesanddisclosures.

Materialitymayalsobeinfluencedbyotherconsiderationssuchaslegaland regulatoryrequirementsandconsiderationsrelatingtoindividualfinancial statement;accountbalancesandrelationships. Thisprocessmayresultin differentlevelsofmateriality,dependingontheareasbeingaudited.

Theauditorreviewsbothamountandnatureofmis-statementwhichcometo his/herattention.Becausethenatureofamis-statementmaygiverisetoother concernstheauditorshouldbealertfordetectederrorsorrelativelysmall amountsthatcouldhaveamaterialeffectonthefinancialinformation. For example,anillegalpaymentofanotherwiseimmaterialamountcouldbe considered material if there is a reasonable possibility of it leading to a materialcontingentliability,amateriallossofassetsoramateriallossof revenue.Anotherexampleofaqualitativemis-statementwouldbeinadequate orimproperdescriptionofanaccountingpolicywhichcouldbematerialifit is likely that a user of the financial information would be misled by the description.

Materialityshouldbeconsideredbytheauditorwhen:

(i)

Determiningthenature,timingandextentofauditprocedures;

(ii)

Evaluating the effect of mis- statement on the measures and classificationofaccounts;and

(iii)

Determiningtheappropriatenessofthepresentationandrelevant disclosureinthefinancialinformation.

6.2.1Settinganappropriatematerialguideline

Theauditor’schoiceofaguidelinewillgenerallybebasedonthesizeand natureoftheorganizationandthesensitivityofthefinancialstatements;that is,thedegreeofimportanceheexpectsthereadertoattachtoaccuracyinthe financial statements.Amateriality guideline is generally calculated as a percentageofanasset,liability,revenue,expenditure,oragroupingofthese.

Preliminarymaterialguidelinesshouldbeestablishedduringtheplanning

phaseoftheaudit.Theyshouldbebasedonthebestpossibleestimatetothe

finalresults.Theguidelinesmayhavetobeadjustedduringtheexecution

phaseifcircumstanceschange.Attheendoftheaudit,itisnecessarytore-

evaluatethematerialitydecisionstoensurethattheyarestillappropriatein

thecontextofthefinancialstatements.

62.2Relationshiptoextentoftesting

Attheendofanaudit,thesupervisorshouldbeinapositiontobeableto state whether he or she is confident that the auditors have detected any materialerrorthatmayexistintheaccountsexamined.Thetestconducted mustbeextensiveenoughtodrawthisconclusion.Thematerialityguideline willdeterminetheprecisiontowhichtheauditorwishestoaudit.Ingeneral, themoreprecisetheauditorwantstobethemoretestinghewillhavetodo. Thehigherthematerialitylimit,thelesstestingtheauditorwillhavetodoto besatisfiedthaterrorsinthefinancialstatementsdonotexceedthislimit. Thelevelofmaterialitycombinedwithadesiredconfidenceandadefinition oferrorwillbeusedtodeterminetherequiredextentoftesting

6.3Auditrisk

Auditriskistheriskthatanauditormaygiveaninappropriateopiniononthe

financialinformationthatismateriallymis-stated.

6.3.1Auditriskatthefinancialstatementslevel

Auditriskisconsideredatthefinancialstatementslevelduringtheaudit planningprocess.Atthistime,theauditorshouldundertakeanoverallaudit risk assessment based on his/ her knowledge of the MMDA’s activities, management, controls, environment and operations. Such an assessment providesthepreliminaryinformationaboutthegeneralapproachtotheaudit, theauditor’sstaffingneedsandtheframeworkwithinwhichmaterialityand auditriskassessmentcanbemadeattheindividualaccountbalancesorclass oftransactionslevel.Aspartofthisoverallriskassessmenttheauditorshould consider whether there is potential for pervasive problems, for example, liquidityorgoingconcernproblems.

6.3.2Auditriskattheaccountbalancesandclassoftransactionlevel

The majority of audit procedures are directed to, and carried out at, the accountbalanceandclassoftransactionslevel.Accordingly,auditriskshould beconsideredbytheauditoratthisleveltakingintoaccounttheresultsofthe overallauditriskassessmentmadeatthefinancialassessmentlevel.

6.3.3Assessmentofauditrisk

Theparagraphsthatfollowprovideguidancedirectedtotheassessmentof

audit risk at both the overall and the account balances and the class of transactionslevel.Thethreecomponentsofauditriskare:

(i)

Inherentrisk(riskthatmaterialerrorswilloccur);

(ii)

Controlrisk(riskthattheMMDA’ssystemofinternalcontrolwill notpreventorcorrectsucherrors) and

(iii)

Detectionrisk(riskthatanyremainingmaterialerrorswillnotbe detectedbytheauditor).

6.3.3(a)Inherentrisk

Inherentriskisasusceptibilityofanaccountbalanceorclassoftransactions tomis-statementthatcouldbematerial,individuallyorwhenaggregatedwith mis-statementsinotherorclasses,assumingthattherewerenorelatedinternal controls.ItisafunctionoftheMMDAsoperationsanditsenvironmentand thenatureofaccountbalancesorclassoftransactions.Forexample,accounts involvingadegreeofmanagementjudgement,orthataredifficulttocompute, suchasacomplexaccountingestimateorthatinvolveahighlydesirableand movable assets, such as computer equipments, or that are particularly susceptibletochangesthatcouldaffecttheirvalue,willinvolvemoreinherent riskthanotheraccounts.

6.3.3(b)Controlrisk

Controlriskistheriskthatmis-statementthatcouldoccurinanaccount

balancesorclassoftransactionsandthatcouldbematerial,individually

orwhenaggregatedwithmis-statementsinotherbalancesorclasseswill

notbepreventedordetectedonatimelybasisbythesystemofinternal

control.Therewillalwaysbesomecontrolriskbecauseoftheintrinsic

limitationsofanysystemsofinternalcontrol.Toassesscontrolrisk,the

auditorsshouldconsidertheadequacyofcontroldesign,aswellastest

adherencetocontrolprocedures.Intheabsenceofsuchanassessment,the

auditorshouldassumethatcontrolriskishigh.

6.3.3(c)Detectionrisk

Detectionriskistheriskthatanauditor’sprocedureswillnotdetectamis-

statementthatexistinanaccountareasorclassoftransactionsthatcould bematerial,individuallyorwhenaggregatedwithmis-statementsinother balances or classes. The level of detection risk relates directly to the auditorsprocedures. Somedetectionriskwouldalwaysbepresentevenif

anauditorweretoexamine100percentoftheaccountbalancesorclass

oftransactions.Forexample,theauditormayselectaninappropriateaudit

procedureormisinterprettheauditresults.

6.3.4Interrelationshipofcomponentsofauditrisk

Inherent and control risk differ from detection risk in that they exist independentlyofanauditoffinancialinformation.Inherentandcontrolrisk arefunctionsoftheMMDA’sactivitiesanditsenvironmentandthenatureof theaccountbalancesorclassesoftransactions,regardlessofwhetheranaudit isconducted.Eventhoughinherentandcontrolriskcannotbecontrolledby the auditor, the auditor can assess them and design his/her substantive procedurestoproduceanacceptablelevelofdetectionrisk,therebyreducing auditrisktoanacceptablylowlevel.

6.3.5Applicationofmaterialityandauditriskprinciples

Theamountoferrorwhichtheauditordefinesasbeingmaterial,andtherisk thathe/sheiswillingtoacceptthathis/hertestswillnotdetectmaterialerrors whichexist,arefactorswhichcombinetodeterminetheextentoftesting he/sheconsidersnecessary.Forexample,ifafterestablishinghis/herplanfor specific audit procedures, the auditor subsequently determines that the

acceptable materiality level is lower, audit risk is increased.The auditor compensatesforthisbyreducingdetectionriskby:

(a)

Increasingtheextentofauditprocedures;

(b)

Selectingamoreeffectiveauditprocedure;or

(c)

Performingcertainauditproceduresclosertothebalancesheetdate.

6.3.6Materialityandauditriskinplanning

Whenplanningtheaudit,theauditorshouldconsiderwhatwouldmakethe financial information materially mis-stated. The auditor’s preliminary judgementofmaterialityshouldberelatedtospecificaccountbalancesand classesoftransactions,suchasreceivablesandinventory.Thishelpstheauditor decidesuchquestionsastowhatitemsinthebalanceorclasstoexamineand whethertousesamplingoranalyticalreviewtechniques.Thisdetermination enables the auditor to select audit procedures that, when the results are aggregated, can be expected to support his/her opinion on the financial statementsatanacceptablelowlevelofauditrisk.

Theauditshouldbeplannedsothatauditriskiskeptatanacceptablelowlevel. Aftertheauditorhasassessedtheinherentandcontrolrisks,he/sheshould considerthelevelofdetectionriskthathe/sheispreparedtoacceptand,based uponhis/herjudgement,selectappropriatesubstantiveauditprocedures.Ifthe auditordoesnotperformanysubstantiveprocedures,detectionrisk,thatis,the riskthattheauditorwillfailtodetectamis-statement,willbehigh.Theauditor reducesdetectionriskbyperformingsubstantiveprocedures-themoreextensive theproceduresperformed,thelowerthedetectionrisk.Thenatureandtiming of substantive procedures will also affect detection risk. For example, confirmationwiththirdpartieswillleadtolowerdetectionriskthanreliance oninternaldata,relatingtoyear-endbalances.

6.3.7Materialityandauditriskinevaluatingauditevidence

Theauditor’sassessmentofmaterialitymaybedifferentatthetimeofplanning

theauditthanatthetimeofevaluatingtheresultofhis/herauditprocedures.

Thiscouldemanatefromachangeincircumstancesortoachangeinhis/her

knowledgeasaresultofhis/heraudit.Forexample,ifanauditorplanstheaudit

priortotheendofthefinancialstatementsperiod,he/shewillanticipatethe

resultsofoperationsandthefinancialposition.

If actual results of operation and financial position are different, his/her assessmentofmaterialitymayalsochange.Additionally,theauditormay,in planninghis/herwork,intentionallysetthematerialitylevelatalowerlevel thanhe/sheintendstousetoevaluatetheresultsoftheaudit.Thisisusually

donetoreducethelikelihoodofundiscoverederrorsandtoprovidetheauditor

withamarginofsafetywhenevaluatingtheimpactoferrorsdiscoveredduring

theauditinrelationtotheacceptableleveloferror.

Theauditor’sassessmentofauditriskmaychangeduringthecourseofanaudit.

Forexample,inplanningtheaudit,theauditormaybelievethatthereisalow

inherentandcontrolriskbasedonanassessmentoftheprobabilityoferrors

occurringandonareviewandtestingofthesystemofinternalcontrol.After

performingauditprocedures,however,theauditormayconcludethattheearlier

assessmentwastoolow.Inthiscase,additionalauditprocedureswillneedto

becarriedoutinordertoreducethelevelofdetectionriskandachieveaudit

riskattheleveloriginallyplanned.

Ifaggregateuncorrectedmis-statementthattheauditorhasidentified,either specificallyorbyprojectionoferrors,approachesthematerialitylevel,he/she shouldconsiderwhetheritislikelythatundetectedmis-statement,whentaken withidentifiedmis-statements,couldcausethematerialitythresholdtobe exceeded. Thus, as identified uncorrected mis-statements approach the materialitylevel,theauditorshouldconsiderreducingthisriskbyperforming additional audit procedures or by requesting that management correct the identifiedmis-statements.

Managementmaydecidetoadjustthefinancialstatementsforsome,orall,of themis-statementstheauditorbringstoitsattention.Inevaluatingwhetherthe financialstatementsgiveatrueandfairview(or“arepresentedfairly”),the auditorshouldtakeintoaccounttheaggregateofalluncorrectedmis-statements, includingthoseinvolvingestimates.Theaggregationofmis-statementsshould include the auditor’s best estimate of total mis-statements in the account balancesorclassesoftransactionsexamined,notjustthemis-statementsthat he/shehasidentified.Iftheaggregateuncorrectedmis-statementsexceedthe finalassessmentofmaterialityforthefinancialinformation,accountbalances orclassesoftransactions,theauditorshould,afterperformingadditionalwork ifneeded,requestmanagementtocorrectthematerialmis-statementand,if managementrefuses,issueaqualifiedoradverseopinion.

6.4Significance

Significance,likemateriality,isaconceptthatdealswithamatterthatis likelytoinfluencethejudgmentsordecisionsofareaderofafinancialreport. Whilematerialityisusedinthecontextoffinancialstatements,significance applies to the range of activities audited, including financial and other controls and procedures examined by the auditor. It is important that managementlettersandreportstoParliamentaddresssignificantmatters only.

Significanceisusuallyjudgedbyeffect.Effects,eitheractualorpotential, canfrequentlybestatedinquantitativeterms,suchascedis,time,unitsof production, or number of transactions. Sometimes effects, such as low morale,areintangiblebutneverthelesssignificant.Regardlessoftheterms .used,thereportmustincludesufficientinformationtoconvincethereader thatthematterwarrantsattention.

6.4.1Factorsaffectingsignificance:

Factorstheauditorshouldconsiderinselectingauditobjectivesandreporting

onmattersofsignificanceare:

(a)

sensitivity,knownorprobablefinancialormanagementissuesof concerntoParliament;

(b)

areasofriskorparticularongoingconcernidentifiedinprevious audits;

(c)

questionsofethics,fraudorotherirregularity,andnon-compliance withfinancialregulationsandrules;

(d)

known,suspectedorpotentialareasofuneconomicalandinefficient operations;

(e)

uncertaintygoverningtheMMDAsknowledgeoftheeffectiveness ofitsprogrammesanddeficienciesin theMMDAsproceduresto evaluateeffectiveness;

(f)

natureandrelativesizeofaprogrammeoractivityanditsimportance andimpact,currently,cumulativelyorpotentially;

(g)

significanceofneworexpandedprogrammesoractivities;

(h)

programmemanagementcharacteristics,suchasunusualrestrictions orfreedomsincarryingoutfunctions;and

(i) natureandimportanceofthephysicalresourcesinvolved.

Judgements concerning matters of significance are made continually throughouttheaudit.Asthesejudgementsoccur,attentionshouldbegiven notonlytotheimpactofknownorpotentialconditionsintheMMDAbut alsotopossibleusersofthereport.

chApter7

7.0eVAluAtionofinternAlconrolAndtestsof

control

7.1Introduction

‘Theauditor,indeterminingtheextentandscopeoftheaudit,shouldstudy

andevaluatethereliabilityofinternalcontrols.’

7.2InternalControl

Internal control is established by, and it is the responsibility of the managementofMMDA.Internalcontrolisdefinedasallthepoliciesand proceduresconceivedandputinplacebyMMDAsmanagementtoensure:

(i)

theeconomical,efficientandeffectiveachievementoftheMMDAs objectives;

(ii)

the adherence to external rules(laws, regulations, etc) and to managementpolicies;

(iii)

thesafeguardingofassetsandinformation;

(iv)

thepreventionanddetectionoffraudanderror;and

(v)

the quality of accounting records and the timely production of reliablefinancialandmanagementinformation.

The concept of internal control extends beyond strictly accounting and financialconsiderationsandincludestwoelements:

(a)

thecontrolenvironment:whichmeanstheoverallattitude,awareness andactionofseniorandlinemanagementregardinginternalcontrol anditsimportancewithintheMMDA.

(b)

internalcontrolprocedures:theproceduresinadditiontothecontrol environment put in place by the MMDAs management which contributetotheachievementsoftheMMDAsobjectives.

Thecontrolenvironment(whichwouldalsobedescribedasthe‘control

culture’withintheMMDA)hasaninfluenceupontheeffectivenessofspecific

systemsofinternalcontrolprocedures.Forexample,acontrolenvironment

inwhichthemanagementshowsitsinterestincontrolrelatedactivitiesand functions can reinforce specific systems of internal control procedures. However,astrongcontrolenvironmentisnotsufficientinitselftoensurethat thesystemsofinternalcontrolproceduresareeffective.Theauditorcanassess thequalityofcontrolenvironmentofanMMDAortheprogrammesand projectsbyevaluatingtheindicatorscorrespondingtobestorganizationaland managementpractice.

Theseproceduresmayincludethepreparationandmanagementreviewof

reconciliations,theestablishmentofproceduresandresponsibilitiessuchthat

keydutiesareseparated,limitingphysicalaccessandaccountingrecordsto

authorizedpersonsonly,etc.Itisfortheauditortodetermine,inthecontext

ofeachindividualaudittask,thoseinternalcontrolprocedureswithinthe

overallsystemputinplacebymanagementthatarerelevanttotheaudit

objectives.

Whenanauditorevaluatesthecontrolenvironment,he/sheisseekingtoassess management’s awareness of the significance of internal control and management’scommitmenttoensuringthatactivitiesareproperlycontrolled. On the other hand, when evaluating control procedures, the auditor is assessing whether the necessary procedures are in place and operating effectively,continuouslyandconsistentlythroughoutthereportingperiod.

7.3EvaluationofInternalControl

Theauditorshould,asaminimum,undertakeapreliminaryevaluationofthe

internalcontrolsrelevanttotheaudit.Thisevaluationshouldbesufficientto

allowtheauditorto:

(a)

makeaninitialassessmentoftheinherentandcontrolriskassociated withtheactivityunderexamination

(b)

assess whether the controls appear, at this early stage, to be sufficientlyeffective.Inthesecircumstances,furtherin-depthtesting ofthecontrolsmustbecarriedoutand,iftheresultsaresatisfactory, reliancecanbeplaceduponthesystem.Thisallowstheauditorto reducetheamountofsubstantivetesting.

Theauditormustthencarryoutanin-depthevaluationoftherelevantinternal

controls.Theobjectiveofthisevaluationistodetermine:

a. whichofthecontrolswithinthesystemarekeycontrols-i.e.controlsthat

should,ifoperatingeffectively:

(i)

preventordetectmaterialmisstatements,orsafeguardtheMMDAs

assets(reliabilityoftheaccounts)

(ii)

ensurecompliancewithlawsandregulations(legalityandregularity

oftheunderlyingtransactions)or;

(iii)

ensurethattherearenomajorfailuresintheeconomy,efficiency,or

effectivenessoftheactivitiesbeingaudited;

b. theoverallqualityofthesystemofcontrolsrelevanttotheaudit,andthus

thedegreeofreliancethattheauditorcanplaceuponitifsubsequenttests

ofcontrolprovideevidencethatithasoperatedeffectivelyonaday-to-day

basis.

Itisimportanttonotethat,atthisstage,theauditorisreachingajudgment

astothepotentialeffectivenessofthecontrolsystemthat,accordingtothe

policydecisionsandinstructionsoftheMMDA’smanagement,shouldbe

inplace.Beforeactuallyplacingrelianceuponthissystemitisnecessaryto

evaluateitseffectivenessinpracticei.e.carriesouttestsofcontrol.

7.4RelationshipswiththemanagementoftheauditedMMDA

ItisusuallyanormalpracticetoinformthemanagementoftheMMDAofany weaknessesidentifiedintheirsystemsofinternalcontrol.Thetimingandformof thiscommunicationwilldependuponthenatureandseriousnessoftheweaknesses discovered, the channels of communication that are available, and the legal frameworkoftheaudit.Itisanormalpracticefortheauditortorecordinthe workingpapersanysuchcommunications,sothattheymightbereferredtoata laterdateifnecessary.

7.5Typesofinternalcontrols

Thefollowingisadescriptionofsomeofthetypesofcontrolswhichtheauditor

mayfindintheMMDAsandonsomeoracombinationofsomeof,whichhemay

seektoplacesomedegreesofreliance.

(i)

Organizational MMDAs should have a plan of their organization, defining and allocatingresponsibilitiesandidentifyinglinesofreportingforall aspects of the MMDAs operations, including the controls. The delegationofauthorityandresponsibilityshouldbeclearlyspecified.

(ii)

Segregationofduties One of the prime means of control is the separation of those responsibilities or duties which would, if combined, enable one individualtorecordandprocessacompletetransaction.Segregation ofdutiesreducestheriskofintentionalmanipulationorerrorand increases the element of checking. Functions which should be separated,includeauthorization,execution,custody,recordingand incaseofacomputer-basedaccounting,systemdevelopmentand dailyoperations.Internalauditandfinancialcontrol(asapplicable) shouldbeindependentofday-to-daymanagementofactivities.

(iii)

Physical Theseareconcernedmainlywiththecustodyofassetsandinvolve proceduresandsecuritymeasuresdesignedtoensurethataccessto assetsislimitedtoauthorizedpersonnel.Thisincludesbothdirect accessandindirectaccessviadocumentation.Thesecontrolsassume importance in the case of valuable, portable, exchangeable or desirableassets.

(iv)

Authorizationandapproval All implementing decisions and transactions should require authorizationorapprovalbyanappropriateresponsibleperson.The limitsfortheseauthorizationsshouldbespecified.Thisisaspecial caseunderorganizationaltypeofinternalcontrol.

(v)

Arithmeticalandaccounting

Thesearecontrolswithintherecordingfunctionswhichcheckthat

thetransactionstoberecordedandprocessedhavebeenauthorized,

thattheyareallincludedandthattheyareallcorrectlyrecordedand

accurately processed. Such controls include checking the arithmeticalaccuracyoftherecords,themaintenanceandchecking oftotals,reconciliations,controlaccountsandtrialbalances,and accountingfordocumentsandresources.

(vi)

Personnel Thereshouldbeprocedurestoensurethatpersonnelhavecapabilities commensurate with their responsibilities. Inevitably, the proper functioningofanysystemdependsonthecompetenceandintegrity ofthoseoperatingit.Thequalifications,selectionandtrainingas wellastheinnatepersonalcharacteristicsofthepersonnelinvolved areimportantfeaturestobeconsideredinsettingupanycontrol system.

(vii)

Supervision

Anysystemofinternalcontrolshouldincludethesupervisionby

responsibleofficialsofday-to-daytransactionsandtherecording

thereof.

(viii)Management

Thesearethecontrolsexercisedbymanagementoutsidetheday-to-

day routine of the system. They include the overall supervisory controls exercised by management, the review of management accountsandcomparisonthereofwithbudgets,theinternalaudit functionandspecialreviewprocedures.

7.6Carryingoutanevaluationofinternalcontrol

Thefollowingstepsshouldbefollowedincarryingoutanevaluationofa

system,whetherthisevaluationispreliminaryorin-depth:

(a)

identifytherisksrelevanttotheauditobjectivesagainstwhichan

effectivecontrolsystemshouldprovideprotection.

(b)

examineproceduremanuals,instructionstostaff,andbyinterview,

etcidentifythecontrolsthathavebeenputinplacetoguardagainst

theidentifiedrisk.Itisnecessarytoidentifywhichofthesecontrols

arethekeyones.

(c)