2. 1 PRESENTATION TO SCOPA THE AUDIT PROCESS By the Auditor-General Mr Shauket Fakie 21 August 2002

3. 2 WHAT IS AN AUDIT? The dictionary defines an audit as an: ‘Official examination of accounts; a searching examination.’ An audit can properly be described as the independent assessment of public sector financial statements. The Auditor-General must then express an opinion on the fairness or accuracy of these statements as well as the extent of compliance with rules, laws and regulations.

4. 3 TYPES OF GOVERNMENTAL AUDITING Comprehensive Auditing Environmental Auditing Forensic Auditing Integrated Auditing

5. 4 AUDITING CONCEPTS COMPREHENSIVE AUDITING REGULARITY AUDITING Financial Compliance PERFORMANCE AUDITING Economy Efficiency Effectiveness

6. 5 DEFINITION OF FINANCIAL AUDITING The objective of a financial audit is to enable the auditor to express an opinion on the fair presentation in the financial statements of an entity's financial position on a certain date, and on the results of its operations and related cash flows for the period ended on that date.

7. 6 DEFINITION OF COMPLIANCE AUDITING The objective of the act defining this as a specific focus area is to enable the auditor to report on an entity’s compliance with relevant laws, rules and regulations. The objective of the act defining this as a specific focus area is to enable the auditor to report on an entity’s compliance with relevant laws, rules and regulations. Auditor-General Act, No.12 of 1995

8. 7 COMPLIANCE AUDIT Audit and report the compliance with laws and regulations which have a direct financial impact Although a separate opinion is not expressed the scope of compliance work remained unchanged AG report on the fair presentation of the AFS Prevent possible public confusion

9. 8 DEFINITION OF PERFORMANCE AUDITING An independent auditing process to evaluate the measures instituted by management to ensure that allocated resources are procured economically and utilised efficiently and effectively and, if necessary, to report thereon. An independent auditing process to evaluate the measures instituted by management to ensure that allocated resources are procured economically and utilised efficiently and effectively and, if necessary, to report thereon.

10. 9 DEFINITION OF FORENSIC AUDITING The role of forensic auditing is to facilitate the prevention, detection and investigation of fraud and corruption in the public sector. Forensic audit improves the quality and coverage of governmental auditing by taking cases of alleged fraud and corruption to a more advanced stage of readiness for the investigative agencies.

11. 10 DEFINITION OF INTEGRATED AUDITING An integrated audit is an independent audit process whereby the principles of the above audit disciplines are coordinated and incorporated into one process.

12. 11 AUDITING STANDARDS Regularity audit is conducted in accordance with South African Auditing Standards (issued on behalf of the Public Accountant’s and Auditor’s Board (PAAB)). Other audits i.e compliance and performance audits are conducted in accordance with INTOSAI auditing standards. The audit provides a high, but not absolute assurance to the users of the quality of the information contained in the AFS. Audits conducted by/on behalf of the Office are subject to quality control processes - internally and externally (PAAB). This provides additional assurance that the correct opinion is expressed.

13. 12 REGULARITY AUDITING STEPS OF THE AUDIT PROCESS- The audit process can be divided broadly into four categories: — Pre-engagement activities — Planning — Performance of audit strategy (execution) — Conclusion and reporting.

14. 13 AUDIT RISK Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. There are 3 components: –Control risk –Detection risk –Inherent risk

15. 14 MATERIALITY Information is material if its omission or misstatement could influence the decisions of users i.e Portfolio Committees, SCOPA and the Department. –Differs from auditee to auditee –Is influenced by risks identified –High audit risk = low materiality and vice versa –Is used to determine reporting items in the audit report –Is used to determine the audit opinion to be expressed

16. 15 REGULARITY AUDIT PROCESS Assess engagement risk Determine skill and competency requirements of engagement team Establish terms of engagement Information gathering Assessment of inherent risk Determine reliance on internal control system Determine planned level of substantive testing Determine audit strategy Pre- engagement Planning

17. 16 REGULARITY AUDIT PROCESS (continued) Test of controls Substantive testing Final analytical review Obtain management representation letter Audit conclusion Perform subsequent events review Reporting Reporting Execution

18. 17 REPORTING  Informal queries  Formal Management Letter  Audit Report

19. 18 EMPHASIS OF MATTER Purpose and effect Highlight/bring to attention a specific problem or matter already included in the AFS. Elaborate information already included in the AFS. Not material and has no impact on the audit opinion. Consists of 2 categories namely: 1 Matters affecting the AFS Going concern problem Other significant uncertainly which may impact on the AFS.

20. 19 EMPHASIS OF MATTER - Continued 2 Matters not affecting the AFS Irregularities, material losses, unauthorised expenditure, matters in public interest, lack of internal control etc. Non-compliance with laws and regulations Financial management or other audit flavours Results of other audits

21. 20 PFMA REQUIREMENTS PUBLIC FINANCE MANAGEMENT ACT, NO. 1 OF 1999 40(1)The accounting officer for a department… - must prepare financial statements for each financial year in accordance with generally recognized accounting practice; must submit those financial statements within two months after the financial year to- (i) the Auditor-General for auditing 40(2)The Auditor-General must audit the financial statements referred to in subsection (1) and submit an audit report on those statement to the accounting officer within two months of receipt of the statements.

22. 21 PFMA REQUIREMENTS (continued) MEASURES TO COMPLY WITH PFMA REPORTING REQUIREMENTS TIMING OF AUDIT PROCESS –INTERIM AUDITS PLANNING PHASE TESTING OF CONTROLS SUBSTANTIVE TESTING (LIMITED TO PERIODS AVAILABLE) –FINAL AUDIT (ROLL-FORWARD) CONTRACTING OUT OF AUDITS TO PRIVATE FIRMS CONTRACTING IN OF PRIVATE FIRM STAFF MEMBERS

23. 22 REGULARITY AUDIT CYCLE Regularity Audit cycle Resolution Follow-up Execution Planning Public Accounts Committee Discussion of draft management letter Pre-engagement activities Report to Legislature Report to department Next financial year Management Letter Preparation

24. 23 AUDIT STEERING COMMITTEES (ASC) Discuss the nature and scope of the audit Identify contact persons (auditor and the auditee). Giving the auditee the opportunity to provide inputs. Presenting the budget for the audit time and costs to the auditee. Discuss the management letter and audit report and deal with queries. Discuss and clear up of all deficiencies or irregularities revealed during the audit. Problems encountered during the audits, e.g. availability of records, should receive attention.

25. 24 AUDIT COMMITTEES (AC) Review and endorse IA charter Review significant transactions not normally part of the entity’s business Review annual financial statements Strengthen the independence and objectivity of the external auditor Improved communication and increased contact, understanding and confidence between management of the auditee and the auditor Follow up on recommendations made by the EA Review the audit plan (Not approve) Identify other possible risk areas

26. 25 INTERNAL AUDIT Reliance on Internal Audit (IA) depends on Organisational Status (Independent) Scope of IA’s work Technical Competencies Due professional care External auditor (EA) IA’s objectives are different than the EA’s Obtain understanding of internal audit activities Assess activities and reports Effective IA could reduce EA’s work If reliance is placed the EA test the work performed by IA Benefits of effective IA can exceed the cost

27. 26 PERFORMANCE AUDITING n ECONOMY n EFFICIENCY n EFFECTIVENESS

28. 27 ECONOMY REFERS TO THE ACQUISITION OF RESOURCES IN THE RIGHT QUANTITY, OF THE RIGHT QUALITY, AT THE RIGHT TIME AND PLACE, AT THE LOWEST POSSIBLE COST.

29. 28 EFFICIENCY REFERS TO THE RELATIONSHIP BETWEEN INPUTS AND OUTPUTS. TWO POSSIBILITIES: -Maximisation of outputs with given inputs. -Minimisation of inputs for given outputs.

30. 29 EFFECTIVENESS REFERS TO THE EXTENT TO WHICH SET OBJECTIVES ARE ACHIEVED.

31. 30 MANDATE TO CONDUCT PERFORMANCE AUDITS S3(3) Auditor-General Act The Auditor-General may at his/her discretion determine the nature and extent of the audits to be carried out and request the details and statements of account which he or she considers necessary. S3(4) The Auditor-General shall reasonably satisfy himself or herself that :- –S3(4)(d) Satisfactory management measures have been taken to ensure that resources are procured economically and utilised efficiently and effectively.

32. 31 SOME INDICATORS TO DETERMINE NEED FOR PERFORMANCE AUDIT Where performance is low and costs are high. Where fraud or other irregularities have taken place. Where Parliament or the public have a special interest. Where results of previous audits have indicated deficiencies.

33. 32 PROCESS OF DISCLOSURE Section 4(2) of Auditor-General Act, 1995 The Auditor-General shall, not less than 7 days before the date on which he submits a report to Parliament or a provincial legislature, transmit a copy thereof to- (a)each Minister; (b)the MEC of a province who is entrusted with the financial matters of such province; (c)the chairperson of the council or board of a statutory body; and (d)the accounting officer, concerned.

34. 33 AUDIT REPORTS 2001/02 Vote Reports  Total vote reports33  Finalised and handed over2679%  Not finalised721% General Reports  General Report ISeptember 2002  General Report IIOctober 2002

35. 34 AUDIT REPORTS 2001/02 (continued) Special Reports (Performance)  Public Reports2 Consultants Learner Support Administration  Anticipated additional reports2/3 Miscellaneous Accounts (Public Entities)  Available September 2002 30  Available October 2002 14