Page 1 Portfolio Committee on Public Service and Administration Presentation by the Auditor-General 18 November 2009

2 Reputation promise/mission The Auditor-General has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. This is our reputation promise.

Page 3 PART 1 An overview of the auditing process and standards

4 The benefits of external auditing by the AGSA The benefits of external auditing are to: add credibility to the information provided, assist in the strengthening of oversight, accountability and governance in the public sector, assist in giving momentum to the process of transformation of financial management in the public sector, and provide insights to facilitate foresight of decision-makers, thus, making a difference in the lives of citizens.

5 Different types of audits – mandatory audits of the AGSA Regularity audit Financial audit (to provide comfort that financial information is fairly reflected and to enable proper oversight of financial management) Required in terms of sections 4 and 20 of the Public Audit Act Opinion on the fair presentation of information in the financial statements Reflections on internal control

6 Different types of audits – mandatory audits of the AGSA (cont.) Regularity audit Good governance practices (internal audit, audit committees, legislative compliance, etc.) Value for money through specific focus areas (transversal audits and sector auditing) Includes a component of compliance auditing

7 Different types of audits – mandatory audits of the AGSA (cont.) Audit of performance information To provide comfort that performance information is fairly reflected and to enable good oversight of service delivery Required in terms of sections 4 and 20 of the Public Audit Act Conclusion on the report of an entity that deals with how well they have done against their predetermined performance objectives

8 Different types of audits – discretionary audits of the AGSA Performance auditing (including environmental auditing) –Permitted in terms of sections 4 and 20 of the Public Audit Act –Economic, efficient and effective utilisation of scarce resources –Considers the effects of policy implementation, but does not evaluate policy

9 Different types of audits – discretionary audits of the AGSA (cont.) Investigations –Permitted in terms of section 5 of the Public Audit Act –Factual findings relating to financial misconduct, maladministration and impropriety –Based on allegations or matters of public interest

10 Different types of audits – discretionary audits of the AGSA (cont.) Special audits –Permitted in terms of section 5 of the Public Audit Act –Agreed-upon procedures (required reviews relating to, for example, donor funding, certificates to ensure legislative compliance, etc. )

11 Audit process (engagement activities and planning) A: Engagement activities Before any audit work is performed, we: Determine skills and competence requirements of the audit team (right people for the job) Establish terms of engagement (responsibilities of management and auditor) B: Planning We assess risk at two levels: 1.Overall at financial statement level (looking at the entity in total) 2.Detailed at account/transaction level (looking at individual amounts )

12 Audit process (engagement activities and planning) (cont.) Things that we look at are: Understanding the entity and its environment Understanding accounting information and internal control systems Assessing risk (focus areas) Determining materiality amounts (which would impact on users’ decisions) Developing the audit strategy –How, when and how many items to audit in order to reduce the risk of an inappropriate audit opinion

13 Audit process (execution) C: Execution (fieldwork) We design audit procedures to address the risk identified in planning We perform test checks (do not test all transactions/accounts 100%) –Sufficient (“enough evidence”) –Appropriate (“right type of evidence”) How do we get evidence? –People –Paper –Place

14 Audit process (evaluate, conclude and report) D: Evaluating, concluding and reporting We review all evidence obtained during the audit process We report on identified potential exceptions: –Qualitative (non-financial information) –Quantitative (rand value) Management report: –Our audit findings are communicated to management via a management report –Management gives responses to findings in writing –Report includes financial and governance issues –This is not a public document, but be assured that all material findings will flow through to the audit report

15 Audit process (evaluate, conclude and report) (cont.) Audit report –Audit report is a “reflection” of significant findings in the management report –This is a public document; a report is only public after tabling in Parliament or a provincial legislature, as follows: Mandatory audits – as part of the annual report of the auditee, tabled by the auditee Discretionary audits – as separate reports, tabled by the AGSA

16 Audit communication Objective: to clarify audit expectations, ensure a smooth process and prevent surprises in the audit report This can take the form of: Leadership visibility Engagement letters Letters requesting evidence or clarifying audit findings Structured meeting agendas Audit steering committees Report discussion meetings Therefore much effort is placed on ensuring that the audit reports are beyond reproach

17 Reports on financial statements AUDITOR’S REPORT Report on FINANCIAL STATEMENTS Opinion on financial information Emphasis of matter (highlights certain disclosures, NOT a qualification) OTHER MATTERS Root causes/reflection on internal control Governance matters OTHER REPORTING RESPONSIBILITIES Auditing of performance information Reference to OTHER REPORTS Performance audits, special audits, investigations APPRECIATION

Page 18 PART 2 Consolidated audit outcomes PFMA

Audit outcomes – Departments, entities and legislatures * As at 05 October 2009, 5 of the 32 not reported on were finalised (one department and 4 entities)

Audit outcomes – Departments and legislatures : Comparison between and

21 Areas Qualified in Annual Financial Statements

22 Warning Signals

23 Non-compliance with PFMA / Treasury Regulations – National and provincial departments

24 Audit of Performance Information (AOPI) General ■ Phase-in approach by the AGSA since together with National Treasury ■ Stakeholder engagements to clarify approach and essence of AOPI has taken place and will continue throughout ■ will be a further opportunity to get ready for the AOPI opinion Audit Results - Areas requiring improvement Audit findings National Departments Provincial Departments Legislature Non-compliance with regulatory requirements42%57%30% Usefulness of reported performance information42%38%40% Reported performance information not reliable39%52%20%

Page 25 PART 3 Key focus areas for achieving clean audits

26 THE KEY FOCUS AREAS TO MOVE TOWARDS CLEAN AUDIT OPINIONS Quality of financial statements –Ability to produce financial statements and quality management information throughout the period –Utilisation by leadership of credible financial information to proactively address emerging concerns Strong governance arrangements –Effective internal audit functions and audit committees –Review of internal controls, risks and financial information throughout the period –Monitor action plans compiled to address previous audit deficiencies and the effect of implementing them Effective oversight by the leadership –Administrative leadership should establish proper tone at the top and act timeously on “red flags” –Executive Authority must act decisively on obstacles hampering implementation of corrective action plans and on red flags brought to their attention by auditors and those charged with governance –Improve coordination and collaboration between PACs and Portfolio committees

27 Questions