1. How to engage with relevant audit reports and what the audit opinions mean? Presentation to Select Committee on Finance Imran Vanker Business Executive: Gauteng 3 June 2005 THE PUBLIC SECTOR AUDIT PROCESS

2. AGENDA Oversight process The audit process Types of audits Reporting Provincial General Report

3. OVERSIGHT ROLE IN CONTEXT

4. AUDIT PROCESS An audit can be defined as an official examination of accounts or as a searching examination

5. AUDIT PROCESS continued… Objective of audit of financial statements is to express an opinion as to whether statements are a fair presentation Process is underpinned by professional requirements throughout, i.e. independence, objectivity, confidentiality and professional behaviour.

6. TYPES OF AUDITS Comprehensive (Regularity) auditing Performance auditing Forensic auditing Sustainable development auditing Integrated auditing

7. TYPES OF AUDITS continued… Comprehensive Audit Comprises both financial auditing and the consideration and testing of compliance with laws and regulations Output of an comprehensive audit is the expression of an opinion of the financial statements of an entity

8. TYPES OF AUDITS continued… Performance Audit Focuses on evaluating measures implemented by management to ensure economic procurement of goods and services and efficient and effective application of the same Forensic Audit An independent process to prevent or detect economic crime in the public sector

9. TYPES OF AUDITS continued… Sustainable Development Audit Uses existing auditing disciplines but focuses on the social and environmental aspects of business processes Integrated Audit Independent process whereby the principles of preceding audit disciplines are co-ordinated and incorporated into one process

10. AUDIT PROCESS Pre- Engagement Activities Audit PlanningExecutionReporting

11. PRE-ENGAGEMENT ACTIVITIES –Consider changes in circumstances of previously audited entities –Consider circumstances of new engagements (identify risks) –Determine skills and competency requirements –Establish terms of engagement and communicate to management AUDIT PROCESS Pre-Engagement Activities Audit PlanningExecutionReporting

12. AUDIT PROCESS AUDIT PLANNING –Obtain knowledge of the business –Obtain understanding of systems and processes –Assess financial risks facing the entity –Evaluate work of internal audit –Evaluate financial management –Formulate audit approach –Communicate audit plan to management Pre-Engagement Activities Audit PlanningExecutionReporting

13. EXECUTION OF THE AUDIT –Testing of controls –Detailed test of transactions and balances –Continual communication –Letter to management to highlight key audit findings –Final audit steering committee meeting to clarify findings AUDIT PROCESS Pre-Engagement Activities Audit PlanningExecutionReporting

14. AUDIT REPORT AS OVERSIGHT TOOL Audit assignment, nature and scope paragraph –common in all reports Qualification paragraph –findings on which qualified opinion is based –Two types of reports unqualified modified AUDIT PROCESS Pre-Engagement Activities Audit PlanningExecutionReporting

15. AUDIT REPORT AS OVERSIGHT TOOL continued… Unmodified “clean” report No further audit comment

16. AUDIT REPORT AS OVERSIGHT TOOL continued… Modified reports Matters that do not affect the auditor’s opinion Additional reporting requirements To highlight a matter

17. AUDIT REPORT AS OVERSIGHT TOOL continued… Modified reports Matters that do affect the auditor’s opinion Effect is so material and pervasive and/or fundamental that auditor is unable to express an opinion Effect is not so material and pervasive and/or fundamental as to require disclaimer of opinion Effect is not so material and pervasive and/or fundamental as to require adverse opinion Effect is so material and pervasive and/or fundamental that auditor concludes that a qualified opinion is inadequate Qualified opinion Adverse opinion Disagreement with management Disclaimer of opinion Qualified opinion Limitation of scope

18. AUDIT REPORT AS OVERSIGHT TOOL continued… Emphasis of matter paragraph –Matters affecting financial Going concern Fraud or suspected fraud –Matters not affecting financials Unauthorised expenditure Irregularities and losses Weaknesses in internal control Financial management DORA

19. AUDIT REPORT AS OVERSIGHT TOOL continued… Qualification and emphasis of matter paragraphs important to PAC Questions on: – Reasons for shortcomings – Whether poor controls gave rise to losses/irregularities – Steps taken to regularise – Financial misconduct – Departmental investigations

20. This report is divided into three key areas: Section 1: Analysis of Provincial Departments Section 2: Analysis of financial information and audit findings Section 3: Specialised audit services PROVINCIAL GENERAL REPORT HIGHLIGHTS

21. PROVINCIAL GENERAL REPORT HIGHLIGHTS continued… Section 1 – Analysis of provincial departments Votes of provincial departments were not standardised; Consequently comparisons between provinces for benchmarking purposes were difficult to perform; and The number of unqualified audit opinions decreased from 51% to 37% for all three sectors

22. PROVINCIAL GENERAL REPORT HIGHLIGHTS continued… Section 2 – Analysis of financial information and audit findings Asset management is not being effectively addressed; Personnel expenditure representing 47% of total expenditure is another key area identified during the audits; Internal audit/audit committees

23. PROVINCIAL GENERAL REPORT HIGHLIGHTS continued… Section 2 – Analysis of financial information and audit findings continued… Transfer payments; and Unauthorised, irregular and fruitless and wasteful expenditure reported on amounted to 3,5% (R5,833 billion) of the total expenditure of R167,4 billion.

24. PROVINCIAL GENERAL REPORT HIGHLIGHTS continued… Section 3 – Specialised audit services 03-04 Special investigationsPage 3 Performance auditsPage 19 Performance information reviewPage 25 - Highlights fundamental deficiencies. This includes poor linkage to budget commitments, lack of measurable objectives and lack of explanation of deviations from planned targets and outputs.

25. for your attention and participation Thank you