Audit

in
the Public Sector
 Learning Objectives

At the end of this session you will be able to:

Define two types of Public Money
Enlist THREE Functions of Public Financial Management
Enlist at least Three Functions of Audit
Enlist Three stages in the Audit Cycle
Describe the structure of audit in public sector

24-Jul-19 Audit in Public Sector 2

 Discussion Points

1 Concept of Public Financial

Management (PFM)

2 Public Money

3
Public Financial Management Spiral

4 Role of Audit in the PFM

5 System of Audit in the Public Sector

24-Jul-19 Audit in Public Sector 3

 Concept of Public Financial
Management System

Why Public Sector?

(Requirement of State)
Provision of State Services (Public)
How to cater for the public services (Means)
Resources.
Man,
Money-Financial resources are fundamental,
and
Machines (equipment)
Bottom line: Financial Resources are the most
important ingredient in all public operations.

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 Public Financial Management
System

The system responsible for control, prioritization,

efficiency and accountability of the management of
public resources
As such, a sound system of PFM is essential to prevent
misuse of public resources

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 Government Funds

Consolidated Fund Public Account

All moneys received by

the Government, all
All other moneys, other
loans raised by the
than the Consolidated
Government, all money
Fund, received by the
received by the
Government in repayment Government

of loans

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 Consolidated Fund- Inflow
Revenue Receipts

Tax Receipts

Non-Tax Receipts

Capital Receipts

Raising of Loans

Receipt from repayment of loans

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 Consolidated Fund- Inflow and Outflow

Straight Transfers (NHP, Royalty on Oil and Gas)

Divisible Pool

Federal Share

Provincial Share
Share

Grants

Subventions

(Regulated through NFC)

 Public Financial Management
(PFM) System

Certification of Policy Formulation

Accounts and Preparation and
Preparation of Audit Execution of Budget
Report

Entities
in PFM

Authorization of
Budget and Review of
Payment and
Audit Reports
Compilation of
Accounts

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 Executive Departments,
Ministry of Finance,
Cabinet AGPR, AG, CGA etc
Preparation
of Budget
Policy
Auditor General
Setting
National/Provincial
Assembly

Authorization
Review of
of Budget
Budget
Budget Cycle
National /Provincial
Assembly
Reporting
& Execution
Monitoring of Budget

Executive Departments,
DAO, AG/AGPR,
Ministry of Finance, FDs
CGA
AGPR, AG, CGA etc
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 Budget Statements

Annual Budget Statement

Supplementary Budget Statement

Excess Budget Statement

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 Roles and Responsibilities
Authorities/Organizations

Cabinet

Policy Formulation

Approval of Budget before submission to Assembly

National /Provincial Assembly

Authorization of Budget

Review of Audit Report/Annual Accounts

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 ................Continued

Executive Departments including MoF/FD

Preparation of Budget

Execution of Budget

Collection of Receipts
Tax Receipts-FBR, Excise and Taxation Departments

Non-Tax Receipts- All Executive Departments

Incurrence of Expenditure-All Executive Departments

Preparation of Accounts (SAEs)

24-Jul-19 Audit in Public Sector 13

 ................Continued

DAO/AG/CGA
Payment
Accounting
Monthly Accounts-Monthly Civil Accounts

Annual Accounts
Appropriation Accounts

Finance Accounts
 ................Continued

SBP/NBP
Cash business of the Government
Accounts with SBP
Accounts with NBP
Auditor General of Pakistan
Certification of Accounts
Audit of Expenditure and Receipts

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 Main Functions of PFM

Budgeting

Accounting

Auditing

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 Theory of Auditing

Assumptions for the Theory of Auditing

There is a need for audit
A relationship of accountability between two or more parties
(Principal-Agent Relationship)-’Imposed Audit’
a need by some party to establish the reliability and credibility
of information for which they are responsible and which will
be used by another part (for example, partnerships)-
’voluntary audit’
public interest in the proper and adequate performance of
some party for instance academic audit- ‘public interest audit’

17
 Theory of Auditing......Contd.

Assumptions......
The subject matter is too remote, too complex or too
important to accept without an audit
Remoteness-physical displacement
Complexity of matter-special expertise like environment audit
Significance-economic, political etc (like audit of divisible
pool)

18
 Theory of Auditing......Contd.

Assumptions......
An audit must be conducted with independence and
without constraints either over conduct or in reporting
findings of audit
The subject matter of an audit can be verified by
collection of evidence-objective system based
approach

19
 Theory of Auditing......Contd.

Assumptions......
Standards of accountability, performance, etc., can
be set and actual performance can be measured
against these standards-International Standards of
Auditing
The purpose of the audit is sufficiently clear that its
results can be communicated
An audit produces an economic or social benefitted

20
 Principles of Auditing

Accountability:
Auditors act in the interests of primary stakeholders,
while having regard to the wider public interest
Integrity:
Auditors act with integrity, fulfilling their
responsibilities with honesty, fairness and truthfulness
Objectivity and independence:
Auditors are objective. They express opinions
independently of the entity and its directors

21
 Principles of Auditing........

Competence:
Auditors act with professional skill, derived from their
qualification, training and practical experience
Rigour:
Auditors approach their work with thoroughness and
with an attitude of professional scepticism
Judgment:
Auditors apply professional judgment, taking account
of materiality in the context of the matters on which
they are reporting
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 Principles of Auditing.........

Clear communication:
Auditors’ reports contain clear expressions of opinion and
set out information necessary for a proper understanding
of that opinion
Association:
Auditors allow their reports to be included in documents
containing other information only if they consider that the
additional information is not in conflict with the matters
covered by their report and they have no cause to believe
it to be misleading
Providing Value
Auditors add to the reliability and quality of financial
reporting

23
 What is Audit?

Audit is a systematic process of objectively obtaining and

evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of
correspondence between those assertions and
established criteria and communicating the results to
interested users.

24
 Types of Audit

Internal Audit-by Organization itself

External Audit
By Government Auditors-the Auditor General of Pakistan
(AGP)
Certification Audit
Regularity Audit/Compliance Audit
Performance Audit/Value for Money Audit
By Chartered Accountants-for companies and government
commercial enterprises(in addition to the External Audit by
the AGP).

25
 Certification Audit

Objectives
Completeness
Relevance
Validity
Disclosure
etc

26
 Accountability Cycle

Preparation of Budget by Departments-after due

scrutiny
Scrutiny by Finance Department/Division
Scrutiny and Approval by Cabinet
Authorization by National/Provincial Assembly
Execution by Departments-through Drawing and
Disbursing Officers (DDOs)

27
 Accountability Cycle……..Contd.

Monitoring and Evaluation-Monthly Expenditure

Statements, Reconciliation with Accounts Offices/Banks,
Revised Estimates etc
Reporting by Controller general of Accounts
Audit by the AGP
Review by Public Accounts Committee

28
 Budget/Accountability Cycle
National/
Provincial
Govt/
Budget Assembly
Cabinet Policy Authorization
Making

Budget
Audit Prepa-
and Budget Cycle ration
Review

Budget Executives/
Auditor Execution MoF/FDs/
Reporting/ EDOs (F&P),
General of
Pakistan/ Monitoring DAOs/AGs/
PAC CGA
DAOs/
AGs/CGA
 Review by the AGP

Financial Audit
Certification Audit
Regularity/Compliance Audit
Performance Audit
New Areas-Energy Audit, Environment Audit, Public
Private Partnerships Audit etc

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 Certification Audit

Objectives
Process;
System Based/Risk Based Approach
Assessment of the Internal Control System
Existence of Internal Controls
Compliance of Internal Controls
Substantive Audit: Sample based
Reporting of Results

31
 Certification Audit

Reporting
Audit Opinion:
Unqualified
Qualified
Adverse
Disclaimer
Management Letter

32
 Regularity/Compliance Audit

Compliance to Rules and Regulations

Conducted on the basis of sample
Samples based on evaluation of the internal control
system
Results reported in the form of audit observations

33
 Reforms in
Public Financial Management

Modernization of Accounting System

New Accounting Model
New Chart of Accounts
Integrated Financial Management System
Use of IT
SAP R/3
New Audit Methodology
System Based Auditing
Evaluation of Internal Controls

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 External Audit
Legal Arrangements

1973 Constitution
Articles 168-171
Audit and Accounts Order, 1973
Ordinances 2001
Auditor General Ordinance 2001

CGA Ordinance 2001

24-Jul-19 Audit in Public Sector 35

 …………..Continued

18th Amendment
Term of Auditor General’s Office
Audit of all authorities and bodies established by the
Federal and Provincial Govts.
Submission of Audit Reports to both Houses of the
Parliament

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 Audit Organization
in the Public Sector
Auditor
General of
Pakistan

Additional Additional
Auditor Auditor
General 1 General 2

Deputy Deputy
Auditors Auditors
General General

Directors Directors
General General
 Audit Organization
in the Public Sector
Federal Government
DG Audit (Federal Govt.)
DG Audit Railways
DG Audit WAPDA
DG Commercial Audit
etc
Provincial / District Govt.
DG Audit (Provincial Govt.)
DG Audit (District Govt.)
 Audit Cycle (Spiral)
Audit of Accounts
Identifying Discrepancies
Discussion of the Visiting team with the Management
Resolution
Conversion into report
Routine
Serious-Proposed Draft Paras
 Reporting of Regularity Audit

• Development of Audit observations by the visiting

audit/inspection team
• Compilation of Audit Inspection report issued to head of
the office/controlling office
• Conversion of serious irregularities into Proposed Draft
Paras (PDPs)
• Discussion of PDP in the Departmental Accounts
Committee-chaired by the Principle Accounting Officer
(PAO)
Resolved
Converted into Draft Paras
Printed in Audit Report
Discussed in the PAC
40
 …………………….Continued

• Preparation of Draft Audit Paras

• Approval by the Auditor General of Pakistan
• Compilation of the Annual Audit Reports
• Submission of the Audit report to the President/Governor
or the District Nazim
• Placing the Audit report before the National/Provincial
Assemblies and Zila Council
• Discussion of the Audit Reports in the Central or
Provincial PACs/Zila Accounts Committee

41
 Thank You

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