(Audit) Expectation Management CHU Annual Conference, Zagreb, Dec 12th 2014 Harry Jansen Senior Audit Manager Dutch Central Audit Service

Introduction (1) Harry Jansen 59 y.o. 38 years Ministry of Finance in various capacities CPA, IIA, MSc QICA Director of audit support department (development and implementation of new policies and procedures) RTA in Estonia and Croatia at the Audit Authority Current position Senior Audit Manager at the Dutch Central Audit Service PL Twinning Light Montenegro

Dutch Context Almost 17 million people Major cities: Amsterdam, Rotterdam, The Hague and Utrecht. Monarchy (Royal Family) Government of Labour and Liberals Decentralization within the state: Central Government: 11 ministries Provinces: 12 provinces Municipalities: Approx. 420 municipalities

Dutch structure (1) Parliament Court of Audit Ministry of Finance Minister Audit Committee (top management) Financial and Economic Affairs Department (internal controller) Policy Directorates Court of Audit (external auditor) Ministry of Finance (DG Budget) Internal Audit Department

CENTRAL AUDIT SERVICE Dutch structure (2) 5 separate audit services & 1 department for audit policy July 2007 decision to merge August 2008 the start of the Central Audit Service January 2009 more audit services joined April 2009 end 1st transition phase End 2015: all departments join in the central audit service

Managing Audit expectations is Complicated   Moving on …. Managing Audit expectations is Complicated  

Today’s topic

Internal Audit (1) 1. An independent, objective assurance and consulting activity, designed to add value and improve an organization’s operations. Why? (Managerial) accountability Product (Internal) audit provides reasonable assurance on the (financial) statements and the overall performance and reliability of the system.

Internal Audit? (2) 2. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes

Expectation gap !! (1) Just one (of many) possible examples: An unqualified opinion stating that there are no material mis statements in the annual accounts of the organisation is issued by the internal audit unit of an organisation. Users conclusion: everything is 100% OK ! Reality: materiality level applied: 2% errors detected during audit : 1,75% So still nema problema  ….unqualified opinion justified

BUT: Expectation gap !! (2) The Organisation’s budget is 1.000.000.000 And thus the absolute (detected) error amount: 17.500.000 Ooops……this changes everything 

The risk of non detected errors The risk of (non detected) Fraud Expectation gap !! (3) And then there is………. The risk of non detected errors and The risk of (non detected) Fraud Quality of personnel and of audit-execution Non independent position Restrictions in access to data Time restrictions Budget limits

Non detection / focus

Operational Performance Expectation gap !! (4) So it’s all about Content in a Context and the Users Perception Governance Operational Performance €

Perception

Different viewpoints Scope Integrity risks Governance risks Policy risks Legislative risks Cultural risks Financial risks Political risks ICT risks Operational risks Scope Economic risks Audit department Users Organisation

Making it Simpler Audit Expectation Gap Reasonability Gap Performance Gap What can reasonably be expected within the given limits Professional responsibilities vs execution within the given limits (non detection)

And complicated again…. disecting the elements On the one hand (IA): Accountability Reasonable level of assurance Materiality (true and fair view) Relative but also absolute Scope Effectiveness of operations And on the other hand: Objective and subjective expectations (perception) on internal (and external) audit Context and (lack of) knowledge Expected confidence and trust and (not today’s topic) quality of execution

So what to do…? (1)… …Not my problem

So what to do…? (2) Up to date audit charter internal audit role purpose authority responsibility inter relationships promote the chapter througout the organisation Clear visibility to demonstrate IA’s level of performance and professionality it’s added value it’s applied risk (management) approach And ……adopt the inherent consulting and advisory role / function

So what to do…? (3) Address the general (subjective) perception of accountant and auditor (what’s the difference?) policeman watchdog Always follow the Code of Ethics (example behaviour) Be professionals and demonstrate it Issue clear and unambiguous auditors opinions and…………………………..

So what to do…? (4) Be transparant……. and

So what to do…? (5) Communicate in a clear and simple way with all users and stakeholders inside and outside the organisations

Dutch changes New text for auditors opinion in preparation and discussion: Including the materiality level (in % and amount??) Describing the main focus points of the audit. Possibly introduced already for this years opinion but for sure introduced for next years opinion (obligatory).

If time is left a short movie on communication

Hvala Harry L. Jansen h.l.jansen@minfin.nl

KEEP CALM AND CARRY ON AUDITING