External Audit Core PFM Training Program Sanjay Vani Lead Financial Management Specialist

External Audit Overview Supreme Audit Institution Different Models Public Sector Audit Standards Different Types of Audit Key Attributes of a Sound SAI Assessing Capacity of SAIs Building Capacity in SAIs

Supreme Audit Institution Main purpose of an external audit agency responsible for audit of government operations and accounts is: to examine and report on accounts relating to the use of public funds. Some SAIs also carry out performance audits – examinations of the economy, efficiency and effectiveness with which public funds have been used. Some SAIs carry out additional work which develops out of these two strands. While the SAIs share common purposes, precise definitions of their roles can differ, and the design of the institutions need to be tailored to the level of development, culture and administrative practices of the countries concerned.

Different SAI Models Several different public external audit models exist around the world. In many countries, their existence and role are defined in the Constitution, and/or they have their own primary law. In some countries, however, the legal basis of the SAI is defined in the public finance law.

Westminster Model a National Audit Office (NAO) with a single head - often called the Auditor General; all rights, powers and responsibilities vested in the Auditor General personally, rather than in the NAO as an institution; strong safeguards to ensure the independence of the Auditor General;

Westminster Model a strong focus on financial audit and on the value for money audits; an active PAC of the parliament which works closely with the NAO; and a mechanism, whether formal or by convention, whereby the Government is required to respond to PAC reports and state the actions it is taking to implement recommendations.

Judicial or Napoleonic Model Ministry of Finance officials, based in line ministries and other bodies, act as public accountants - responsible for the proper expenditure of funds and annual financial statements; the SAI is a court and its Members are judges who can impose penalties or corrections on audited officials; the Court normally selects a Member to act as its president on a first among equals basis. However, all members have independent judicial status and the authority to rule on the cases in front of them; professional staff in the SAI tend to have legal rather than accounting or auditing backgrounds;

Judicial or Napoleonic Model the main focus of the audit work is to verify the legality of the transactions which have taken place the SAI audits the annual financial statements prepared by public accountants and presents a report on the State Account to Parliament; the SAI judges the legality of the public accountant’s actions and can either: ‘discharge’ – the public accountant from further liability if it is satisfied that the transactions are legal; or impose a penalty where illegal transactions are found to have occurred; there is often no Public Accounts Committee in the national Parliament as the detailed task of holding officials to account is carried out by the Court; and there is limited follow up of the Court’s reports by Parliament.

Board or Collegiate Model The basic structure similar to the Westminster model; Governing board consisting of members of the college and headed by a President; depending on the size of the office, there may be a series of colleges or sub-committees each having the power to decide on the audit matters within their area of responsibility. There is usually also some sort of appeals committee to review contested decisions of individual colleges;

Board or Collegiate Model members normally have considerable freedom in determining their working methodologies and there may be a variety of audit approaches between different colleges within the same institution; members of the college are normally appointed for a fixed term of office by a vote of Parliament, with their period in office often being limited to a maximum of two terms.

Public Sector Audit Standards International Standards of Supreme Audit Institutions (ISSAI) Level 1: The Lima Declaration Level 2: The INTOSAI Code of Ethics. Level 3: The INTOSAI Auditing Standards which contain the basic assumptions and principles for carrying out the audit work. Level 4: INTOSAI Implementation Guidelines which contain more specific guidance material on different subjects.

Public Sector Audit Standards Level 4 ISSAIs guidelines are based on the International Standards on Auditing (ISA) Provide public sector perspective for the ISAs. For example, ISSAI 1220 Quality Control for Audits of Historical Financial Information mirrors ISA 220

Public Sector Audit Standards Some SAIs have developed their own audit standards. For example, the US GAO has developed Government Audit Standards, also known as the Yellow Book. Some SAIs have adopted ISAs. For example, UK’s NAO, Australian NAO, Canadian OAG have basically adopted ISAs.

Different Types of Audit Compliance Audit refers to audit of organization’s/department’s compliance with laws, rules, and procedures to ensure the legality of expenditures and actions. Financial Audits verify whether the final accounts of the department/agency truly and fairly reflect their financial situation with a view to provide an opinion on the financial statements. Performance Audit is generally interpreted as referring to audit of economy, efficiency, and effectiveness of operations/programs.

Key Attributes of a Sound SAI Framework Sound legal basis for the existence of the SAI – a provision in the constitution of the country or a separate law establishing the SAI is essential for effective functioning of the SAI. Functional and organizational independence including financial independence. A sufficiently broad mandate to audit public funds – both revenues and expenditures. The existence of an effective follow-up mechanism on SAI recommendations

Assessing Capacity of SAIs Assessment of fiduciary risks in the use of SAIs to audit Bank-financed projects is covered in the Guidance Note on the Assessing Fiduciary Risks in the Use of Country FM Systems GAP Analysis tool to assess the state of public sector auditing standards vis-à-vis internationally accepted standards. SAI Capability Model developed by AFROSAI-E in cooperation with the Swedish National Audit Office PEFA has a specific indicator (PI 26) to assess the scope, nature and follow up of external audit

Capacity Building in SAIs Aligned with other ongoing activities in building wider PFM capacity in the country. Based on strategic plans of SAIs. Better coordination amongst the donors.