CHAPTER ONE

SPECIALIZED AUDITS AND THE

ENVIRONMENT OF PUBLIC SECTOR
AUDITING.
 AUDIT
Audit is an independent
examination of financial
statements to express an
opinion whether financial
statements presents true and
fair view in all material
aspects.
There are two types of external audit:
1. Statutory audit 2. Non statutory Audit.
Statutory Audit: It is mandatory
by law
Non Statutory Audit: It is not
mandatory by law.
Advantages of Non Statutory Audit.
1. Sleeping partners will be more confident
about company’s performance 2. The accounts of
the companies will be more acceptable to the
taxation authorities.
3. Employees will be more confident about their
future/career.
Disadvantages of Non-statutory Audit.
1. It may be too costly
2. Employees may get demotivated.
3. Their might be collusion between auditors and
management
4. Human error can be made.
 PUBLIC SECTOR AUDITING
The environment of public-sector audit
Objectives of Public Sector Audit
Principles of PSA
Types of public-sector audit
Elements of Public sector audit
Engagement
Confidence and assurance in PSA
Forms of providing assurance
Levels of assurance
1.1. WHAT IS PUBLIC-SECTOR AUDITING?
Public-sector auditing is a systematic process
of objectively obtaining and evaluating
evidence to determine whether actual
conditions conform to established criteria.
It provides legislative and oversight bodies
and the general general public with
information information about independent
and objective assessments concerning the
stewardship and performance of government
policies, programs or operations
An independent examination of books of accounts, other
documents, stores, assets etc. relating to receipts and
expenditure of the Government, statutory public
authorities and public enterprises to ensure that:
Rules and orders framed by competent authority in
regard to financial matter have bee followed;
Expenditure has been incurred with due regularity
and good manner.
Assets have been properly utilized and safeguarded;
Public resources have been used economically,
efficiently and effectively; and
The accounts truly represent the true and fair view
 Public sector auditing enhances the
confidence of intended users by
providing information after
independent and objective
assessments on deviations from
accepted standards or principles of
good governance
 1.2THE ENVIRONMENT OF PUBLIC-SECTOR AUDIT
❑It is that in which governments and other public-sector entities
exercise responsibility for the use of resources derived from taxation
and other sources in the delivery of services to citizens and other
recipients.
These entities are accountable for their management and
performance, and for the use of resources, both to those that provide
the re-sources and to those, including citizens performance, and for
the use of resources, both to those that provide the re-sources and to
those, including citizens, who depend on the services delivered using
those resources.
Public-sector auditing helps to create suitable conditions and
reinforce the expectation that public-sector entities and public
servants will perform their functions effectively, efficiently, ethically
and in accordance with the applicable laws and regulations
1.3.OBJECTIVES OF PUBLIC SECTOR AUDIT
❑All public-sector audits start from objectives,
which may differ depending on the type of
audit being conducted.
However, all public-sector auditing
contributes to good governance by:
Providing the intended users with
independent, objective and reliable
information, conclusions or opinions based on
sufficient and appropriate evidence relating
to public entities
❑Enhancing accountability and transparency,
❑Encouraging continuous improvement and sustained
confidence in the appropriate use of public funds
and assets and the performance of public
administration;
❑Reinforcing the effectiveness of those bodies within
the co institutional arrangement arrangement that
exercise general monitoring and corrective functions
over government, and those responsible for the
management of publicly-funded activities;
❑Creating incentives for change by providing
knowledge, comprehensive analysis and well-
founded recommendations for improvement
 1.4 PRINCIPLES OF PUBLIC SECTOR AUDITING
❑General Principles
• Ethics and independence
• Professional judgment, due care and skepticism
• Quality control
• Audit team management and skills
• Audit risk:
• Materiality Documentation:
• Communication:
Principles related to the audit process
• Related to audit planning
• Related to audit performance
• Related to evaluating evidence and reporting
PRINCIPLES OF PUBLIC-SECTOR AUDITING
1. Ethics and independence: Auditors should
comply with relevant ethical requirements and
be independent
2.Professional judgment, due care and
skepticism: Auditors should maintain an
appropriate professional behavior by applying
professional skepticism, professional judgment
and due care throughout the audit.
3. Quality control :Auditors should perform the
audit in accordance with professional standards
on quality control
4.Audit team management and skills: The
individuals in the audit team should collectively
possess the knowledge, skills and expertise
necessary to successfully complete the audit.
5. Audit risk: Auditors should manage the risks
of providing an inappropriate report in the
circumstances of the audit
6. Materiality : Auditors should consider
materiality throughout the audit process. A
matter may be judged material if knowledge
of it would be likely to influence the decisions
of intended users.
7. Documentation: Auditors should prepare
audit documentation in sufficient detail to
provide a clear understanding of work
performed, evidence obtained and
conclusions reached.
8. Communication: Auditors should establish
effective communication throughout the audit
process .The auditor may also have a
responsibility to communicate matters related
to the audit with other stakeholders such as
the legislature and oversight bodies
 PRINCIPLES RELATED TO THE AUDIT PROCESS
Activities related to planning the audit
Auditors should ensure that the terms of the
audit have been clearly established
Auditors should obtain an understanding of
the nature of the entity/program
entity/program to be audited.
Auditors should conduct risk assessment
procedures or problem analysis and revise this
in response to audit findings as necessary
Auditors should identify and assess the risks
of fraud relevant to the audit objectives
❑Auditors should plan an audit to ensure that
the audit is conducted in an effective and
efficient manner.
Planning the individual audit includes
strategic and operational aspects
Strategically, audit planning should define
the scope, objectives and the approach to be
applied in the audit.
Operationally, planning the audit includes
setting the, timing and direction of the audit
and defines the nature, timing and extent of the
audit procedures to be performed
ACTIVITIES RELATED TO PERFORMING THE AUDIT
❑Auditors should perform audit
procedures that provide sufficient and
appropriate audit evidence to support
the audit report
Evidence should be sufficient (quantity)
to persuade a knowledgeable person
that the findings are reasonable, and
appropriate (quality) i.e. it is relevant,
valid and reliable.
ACTIVITIES RELATED TO EVALUATING AUDIT EVIDENCE,
CONCLUDING AND REPORTING
❑Auditors should evaluate the
audit evidence and draw
conclusions.
❑Auditors should prepare a
report based on the conclusions
drawn
 1.5 TYPES OF PUBLIC-SECTOR AUDIT
The main types of public-sector
audit are defined as follows:
1. Financial Audit
2. Performance Audit
3. Compliance Audit
4. Forensic Audit
5. Combined Audits
 1. FINANCIAL AUDIT
❑Financial audit focuses on determining
whether an entity’s financial information is
presented in accordance with the applicable
financial reporting and regulatory framework.
This is accomplished by obtaining sufficient
and appropriate audit evidence to enable the
auditor to express an opinion as to whether
the financial information is free from material
misstatement due to fraud or error.
 2 . PERFORMANCE AUDIT
❑Performance audit focuses on whether
interventions, programs and institutions are
performing in accordance with the principles
of economy, efficiency and effectiveness.
Performance is examined against suitable
criteria, and the causes of deviations
From those criteria or other problems are
analyzed. The aim is to answer key audit
questions and to provide recommendations for
improvement.
❖To evaluate management measures in order
to ascertain achievement of the 3 E’s9
objective)
❖Mainly programs, projects, systems or
activities; specific attention is directed
management measures associated( focus)
❖Usually more subjective but often based on
best/better practices which represent “good
management". Varies from audit to audit(Audit
criteria).
❖Symptom – based( Methodology).
❑Acquire resources of the right quality, in
the right quantity, at the right time and
place at the lowest possible cost
(Economy);
Achieve the optimal relationship
between output of services or other results
and the resources used to produce them
(Efficiency); and
Achieve policy objectives, operational
goals and other intended effects
(Effectiveness)
 CHALLENGES OF PA
1.Outputs and outcomes are hard to identify
and measure especially in the short term
2.National plans may not be linked to
strategic plans for Ministries, regions and
Spending Agencies. Consequently, outputs and
outcomes outcomes are hard to identify
identify and measure
3.Budgetary constraints in the sense that
programs and activities may not be fully
implemented due to either inadequate or lack
of funding
 3. COMPLIANCE AUDIT
Compliance audit focuses on whether a particular
subject matter is in compliance with authorities
identified as criteria.
Compliance auditing is performed by assessing
whether activities, financial transactions and
information are, in all material respects, in
compliance with the authorities which govern the
audited entity.
These authorities may include rules, laws and
regulations, budgetary resolutions, policy,
established codes, agreed terms or the general
principles governing sound public-sector financial
management and the conduct of public officials
4. FORENSIC AUDIT
According to ACCA (2008), forensic
accounting/auditing is regarded as a
comprehensive understanding of fraud
investigation and mainly used to study many
different types of fraud. It is useful to
categorize these types of fraud into three
groups to provide an overview of the wide
range of investigations that could be carried
out. The three categories of frauds are
corruption, asset misappropriation and
financial statement fraud.
 ASSURANCE ENGAGEMENT
An assurance engagement is one which a practiontier
expresses a conclusion design to the enhance the degree of
the confidence of the intended users other than the
responsible party about the subject matter information.
Following are the elements of Assurance engagement:
Intended user
Responsible party
Expert
Subject matter
Criteria
Evidence
Intended User: The one who is the user of subject
matter (Financial Statements) for whom expert
performs assurance engagement.
Responsible party: The one who is responsible about
the subject matter(Financial statements).
Expert: The one who will perform the review and
provides the opinion on subject matter.
Subject Matter: The Report on which on
expert/practioner gives his opinion.
Criteria: The basis on which expert will give his/her
opinion of financial statements.
Evidence: While performing the assurance
engagement expert will gather the evidence To
provide his/her opinion.
 TYPES OF ASSURANCE ENGAGEMENT
There are various types of Assurance
Engagement:
Positive Assurance
Review engagement/Negative assurance
Agreed upon procedures
Compilation engagement
Positive Assurance: Audit engagement is
positive assurance where auditor does provide
reasonable assurance on the financial
statements.
Review Engagement: Review engagement is
also known as negative assurance because
procedures in review engagement is less
detailed. Review engagement mostly perform
at mid Year or at the end of audit. In review
engagement auditor express his opinion in this
way: “ Nothing has come to our attention which
cause us to belief that this financial Statement
does not presents true and fair view.
Agreed upon procedures: The audit of
particular component of financial
statement such as receivables, inventory
and not whole financial statements is
agreed upon procedures. In this process
auditor will not provide any sort of
Assurance.
Compilation Engagement: The Services
given to client other audit services such as
Accountancy services, taxation services,
advisory services are known as compilation
engagement. Here Also auditor will not
provide any assurance.
 STATUTORY AUDIT AND REGULATION
Objective: The objective of statutory audit to express
an opinion whether financial statements presents true
and fair view in all material aspects. The audit report
should also insure that :
Adequate Accounting records have been kept.
The accounts agree with accounting records and
returns.
Details of directors has been properly enclosed.
All information details and explanations received
which auditor thinks are necessary for the purpose of the
audit.
Loans and other transactions in favour of directors
has been Properly disclosed in the financial statements.
 ASSURANCE ENGAGEMENTS
❖Historical Financial statements(
audit of Financial statements and
Review of Financial statements).
❖Other assurance services( that do
not involve historical financial
statements Eg. Report on forecasted
financial statements)
 NON-ASSURANCE SERVICES
❖Compilation services
prepare financial statements and present them to a
client or third party without providing any CPA
assurance about those statements

❖Agreed up on procedures
❖ emphasize the specific audit procedures performed and
the findings of those completed procedures
❖Examinations
❖Reviews
1.6 .ELEMENTS OF PUBLIC-SECTOR AUDITING

Three parties
The subject matter
The criteria, and
The subject matter information
 WHAT IS ASSURANCE?
An assurance engagement is:
'An engagement in which a practitioner
obtains sufficient appropriate evidence in
order to express a conclusion designed to
enhance the degree of confidence of the
intended users other than the responsible
party about the outcome of the evaluation
or measurement of a subject matter
against criteria.’
 Giving assurance means
offering an opinion about
specific information so the
users of that information are
able to make confident
decisions knowing that the risk
of the information being
'incorrect' is reduced.
ELEMENTS OF AN ASSURANCE ENGAGEMENT
There are five elements of an assurance engagement:
(1) Three party involvement Practitioner – the reviewer of the subject
matter who provides the assurance. Intended users – the people using
the subject matter to make economic decisions. Responsible party –
the party responsible for preparing the subject matter.
(2) Appropriate subject matter The information subject to
examination by the practitioner.
(3) Suitable criteria The criteria against which the subject matter is
evaluated, i.e. standards, guidance, laws and regulations.
(4) Sufficient appropriate evidence Sufficient appropriate evidence
is needed to provide a basis for the opinion/conclusion.
(5) Written assurance report in an appropriate form The output of
the assurance engagement expressing a conclusion/opinion about the
subject matter.
[International Framework for Assurance Engagements, 20]
 1. THREE PARTIES
Public-sector audit involve at least
three separate parties:
❖Auditor
❖ Responsible party and
❖ Intended users.
The relationship between the parties
should be viewed within the context of the
specific arrangements /objective for each
type of audit.
 The auditor-In public-sector auditing the
auditor persons to whom the task of conducting
the audits is delegated.
The responsible party-The responsible
parties responsible unit for the subject matter
information, for managing the subject matter
or for addressing recommendations.It may be
individuals or organizations.
Intended users-The individuals, organizations
or classes thereof for whom the auditor
prepares the audit report. The intended users
may be legislative or oversight bodies, those
charged with governance or the general public
 2. SUBJECT MATTER
Subject matter refers to the information,
condition or activity that is measured or
evaluated against certain criteria.
It can take many forms and have different
characteristics depending on the audit
objective.
An appropriate subject matter is identifiable and
capable of consistent evaluation or measurement
against the criteria, such that it can be subjected to
procedures for gathering sufficient and appropriate
audit evidence to support the audit opinion or
conclusion.
 3. THE CRITERIA
The criteria are the benchmarks used to
evaluate the subject matter.
Each audit should have criteria suitable to
the circum-stances of that audit.
In determining the suitability of criteria the
auditor considers their relevance and
understandability for the intended users, as
well as their completeness, reliability and
objectivity (neutrality, general acceptance and
comparability with the criteria used in similar
audits)
The criteria used may depend on a range of
factors, including the objectives and the type
of audit.
Criteria can be specific or more general,
and may be drawn from various various
sources, sources, including laws, regulations,
standards, sound principles and best
practices.
They should be made available to the
intended users to enable them to understand
how the subject matter has been evaluated or
measure
 4. SUBJECT MATTER INFORMATION
Subject matter information
refers to the outcome of evaluating
or measuring the subject matter
against the criteria.
It can take many forms and have
different characteristics depending
on the audit objective and audit
scope