TOPIC11

INTERNAL AUDIT AND EXTERNAL

AUDIT

Topic11- Audit in PS (ZA/SEPT/14) 1

INTRODUCTION

 Audit functions as an essential mechanism in

facilitating and assuring the level of public
accountability and effective governance of public
sector organisations
 PS auditing was primary concerned with legality,
reliability and integrity of government expenditures
 Key focus relates to proper utilisation of financial
resources in accordance with relevant laws and
regulations as well as appropriate accounting &
reporting system
Meaning of ‘Audit’
‘”Audit serves as an accountability relationship. It is independent, objective
assessment of the fairness of management’s systems and practices,
against criteria, reported to a governing body or others with similar
responsibilities”
Canadian Comprehensive Audit Foundation (1994, p.11)

 Audit in general refers to the professional service of which auditor seeks to

provide a reasonable level of assurance through the issuance of opinion,
thus enhances the credibility of a subject matter
 Auditing involves evaluation and verification processes performed by a
competent and qualified individual.
 Primary aim- to provide a reasonable level of assurance that the information
in the reports, statements and other supporting documents audited are free
from material errors thus enhance the credibility of the subject matter
Meaning of ‘Audit’
 Auditing process should be conducted in accordance with the
adopted standards – to assure audit quality and auditor’s opinion or
other judgement relating to the degree of correpondence with
established criteria
The growing of ‘audit’ is consistent with the increasing needs and
pressures for effective and efficient performance and outcomes that
satisfy the mission and objectives of programmes and activities of
PS
 Term “ True and Fair View” from Section 174 of Companies Act 1965
 To boost up level of confidence of accounting information users
through auditors’ opinions on F.S
Purpose of Audit
 The concept and establishment of audit is inherent in public financial
administration as the management of public funds represents a trust
 Aim-To reveal deviations from accepted standards & principles of
legality & value for money, early enough to take corrective action, to
make those responsible to accept responsibility, get compensation
or to prevent or make such breaches more difficult.
 Main reason -To enable auditor to express opinion whether F.S are
prepared based on financial reporting framework (no absolute
assurance)
 International Standard on Auditing 120 , Framework of International
Standards on Auditing (paragraphs 11 and 13) (page 261)

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Purpose of Public Sector
Auditing
 To determine embezzlement from estimation
planned
 To declare any wrongdoings based on
principles, orders, rules & regulations
 To declare factors that lead to failure for
effectiveness, efficiency & economical
utilizations of government resources

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Roles and Responsibilities (Institute of
Internal Auditors, 2006)

Overnight role
 Evaluate whether government organisations are operating effectively and efficiently
(including government spending)
 Verify government organisations’ financial and programme performance
 Verify government organisations adhere to relevant rules and regulation
 Monitor the effectiveness of government organisations’ internal control system
Insight role
 Examine and understand programmes and practices
 Identify loopholes and problems
 Provide feedbacks on current policies and practices
 Recommend improvements
Foresight role
 Inform risks and future challenges
 Identify opportunities
 Offer future strategies towards effective and efficient management and practices
Key Elements of an Effective
Public Sector Audit Activity
 In Malaysia, the public sector auditing extends to all
levels of government organisations, which comprise
of the key elements which is federal, state & local
government

 PS audit has the key role towards safeguarding

public money, ensuring proper accountability,
upholding proper standards of conduct in public
services and helping public services achieve the
value of money
 Key Elements of an Effective Public Sector Audit
Activity (IIA, 2006) – pg 262
Regulatory Framework for
Public Sector Auditing
 The governing body- National Audit
Department (NAD)
 NAD used Auditing Standard as the core
reference in governing and conducting
various types of auditing.
 Audit mandates are Federal Constitution 1957
& Audit Act 1957
 Others professional standards: MIA, INTOSAI
& ASOSAI
Regulatory Framework for
Public Sector Auditing
Examples widely accepted professional audit standards:
 International Standards for the Professional practice of Internal
Auditing issued by IIA
 Generally Accepted Government Auditing Standards issued by
US Government Accountability Office (GAO)
 Governmental Internal Audit Standards, UK
 International Standard on Auditing issued by the International
Auditing and Assurance Standards Board (IAASB) of the IFAC
 Guidelines on the Internal Auditing issued by the East and
Southern African Association of Accountant General (ESAAG)
Categories of Audit

 Represent an integral part of the government financial

management.
 Act as instrument in improving the overall performance
of the government sector
 Two categories: internal audit and external audit
 Internal audit – power & responsibility under Head of
individual government organisation and reported made
to the Head of the Organisation
 External audit – function performed by NAD , power
authority & responsibility of AG under Art 106 &107 of
FC, and to be reported to Parliament
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Internal Audit
 Internal audit facilitate public sector organisations to achieve
accountability and integrity
 It is an auditing carried out by sub-unit of the organizations.
 Internal Audit Dept- comprise of qualifies auditors who are named
internal auditors.
 Internal audit focus on adherence to management operation, internal
control systems, proper record keeping and fraud detection
 In PS – carried out by appointed staff of the organisation to
independently and objectively review and evaluate organisation
activities to maintain or improve the efficiency and effectiveness of
internal control and governance
 In Malaysia, internal audit will help organisation to ensure public
accountability, governance, integrity, transparency and quality service
delivery
 The establishment Internal Audit Unit – TC No.2 1979
 Scope of work Internal Audit Unit – TC No.9 2004 – pg 264

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External Audit
 A periodic audit conducted by an independent (external)
auditors
 Function- include verifying accounting records, ensuring
the compliance with proper and relevant guidelines and
principles and determining whether the statements from
the accounts have been prepared fairly
 It is an examination carried out by Auditor General
Department to examine the financial statements,
programmes and activities of government agencies
 There are three types of audit carried out namely
financial audit, compliance audit and performance audit.

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Types of Audit

1. Financial Audit (post – audit/ attestation audit)

 To determine whether F.S shows true & fair view of
financial position
 To identify whether government entity has complied
with legal & regulatory requirements
 Involves gathering and evaluating evidence for financial
report
 Carried out annually according to Art 106 FC, S 6& 9 of
Audit Act 1957

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Types of Audit

1. Financial Audit (post – audit/ attestation audit)

 Includes the practice in determining whether
i. financial information is presented in accordance with
established reporting framework
ii. Specific financial regulations heve been adhered
iii. The internal control structure relating to financial
reporting and other related financial matters has been
designed and implemented accordingly

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Types of Audit

2. Compliance Audit (pre-audit)

 Sec 6 (e) Audited Act 1957
 Involves inspection & evaluation on activities of
Ministries / Department/ Agencies
 Involves gathering & evaluating evidence to
determine whether specific financial/ operating
activities of organization conform to rules &
regulations
 To compare internal procedures with actual
practice

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Types of Audit

3. Performance Audit – (cost vs benefit)

 INTOSAI defines as “ an independent assessment or
examination of the extend to which an activity,
programmes or public institution operates efficiently
and effectively, with due regard to economy”
 Involves studies & evaluation of specified programs or
activities of Ministries/ government dept / agencies
 To determine whether objectives of the programmes
are achieved & whether the implementation of the
programmes was carried out in most economical,
efficient, effective manner
 Covers full range of government activities including
financial, organisational and administrative system

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Summary of Types of Audits
Types Nature of Est. criteria Nature of AR
Assertions
Financial Entity’s financial Identified fin. Opinion on
data Reporting fairness/ ‘true &
framework fairness of fin.
Info.
Compliance Implicit claim on Mgt’s policies, Summary of
data adhere to laws, findings /
relevant policies regulations/ assurance
laws & reg. other 3rd party regarding degree
reqt of compliance
Performance Performance / Obj set, e.g. by Eco, effi, effec
Operational data mgt or by observed;
enabling recommend for
legislation improvement

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Government Audit Framework

Government Agencies Auditor General Department

•Events •Audit Process

•Activities •Audit Standards
•Transactions
Public Accounts Committee

FINANCIAL STATEMENTS •Comments

•Suggestion
AUDIT REPORT

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National Audit Department
 AG was established in 1906-aim to strengthen the government’s financial
management system
 Legal provision for discharge of the audit functions were only made in 1957
when FC was drafted
 Mission – carrying out “ audit in a professional and independent manner and
to produce balanced report to the parliament and state legislatures towards
enhancing good governance in the public sector”
 Federal sector – responsible for audit in Federal Ministries & Departments ,
statutory bodies & GLc
 State sector – responsible for audit of all State government including
Statutory Bodies, Local Authorities, Religious Council
 Entrusted to ensure existence of accountability in administration and
management of public fund through audit in government agencies
 Headed by auditor general (AG)
 Staff of NAD are also M’sian civil servants but delegated with powers of AG
as provided under FC and Audit Act 1957
Objectives of NAD

 To prepare quality and timely audit report to

the Parliament and state legislatures
 To carry out audit activities and prepare
reports in an independent and balanced
manner
 To fulfill the needs and expectations of
stakeholders and auditiees
 To manage audit activities efficiently and
effectively
 To be model employer
Auditor General
 AG’s power have been strengthened and his responsibilities are
broadened with the force of the Audit (Amendment) Act 1978 &
1983
 AG must be an officer of the general public service of the Federation
or otherwise provided in FC & under this law. (Sec 3 Audit Act 1957)
 AG appointed by YDA, with advise of PM and consultation of the
Conference of Rulers. Also eligible for reappointment but not for
any other appointment (Art 105 FC)
 AG may at any time resigned but shall not be removed from the
office except as decided by Federal Court
 AG remuneration provided by Parliament and charge on
Consolidated Fund (Art 98 of FC)
 The remuneration is being explained in the First & Second Schedule
(Sec 4 Audit Act 1957)
 Terms & condition of service of AG determine by Federal Law
 Responsibilities & Duties of
 AG
Responsibilities:
a) AG has the powers and duties to audit and report on
accounts of Federal and States (Art106 of FC)
b) Primary responsibility – to audit and certify the
appropriation and other accounts of government; to report
the results of audit to YDA, States’ Rulers who will cause it
to be laid in Parliament/ State Legislature;
c) to enhance standard of public accountability by reporting
and assuring the Parliament and States’ Legislatures that
Public Accounts are reported accurately and timely and
resources have been managed properly.

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Responsibilities & Duties
of AG
Duties- Sec 5(1) Audit Act stated that AG
shall in such manner as he may deem fit, to
examine, inquire and audit:
 The accounts of the Federation and the States
 The accounts of any separate fund….
 The accounts of any public authority or body…
 The accounts of any other body including a company registered
under the Companies’ Act….
 The accounts of any other public authority if the MOF so required
the AG
 AG is mandatory to conduct the financial audit to certify the FS of
the Federation, States and other public authorities & public bodies
as provided by law
 AG is empowered to conduct the performance audit (amendment
of Audit Act 1983)
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Nature & Scope of Work (Sec 6
Audit Act 1957)
Include ascertaining and ensuring whether:
 all reasonable precautions have been taken to safeguard the
collection and custody of public moneys or other moneys
 payments were made in accordance with proper authority
properly charged and supported by sufficient vouchers or
proof of payments
 due care have been taken into account to ensure proper use,
control, maintenance and disposal of all public stores
 all accounts and other records have been and are properly and
faithfully maintained
 moneys have been applied to the appropriate activities…….
 the provision of the FC, FPA and any other written law have
been complied with.

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 Powers of AG (Sec 7 of Audit Act 1957)
 May obtain any explanation & information required by him in
order to carry out proper audit
 May, without payment of any fee, cause search to be made in
and extracts to be taken from any book, document or
document in any public office
 Is entitled to have unimpeded access to all records, vouchers,
documents, cash, stamps, securities, stores and other
properties subject to his audit
 May call any person under oath or affirmation to furnish any
explanation or information which he may require….(Sec 7 (4)
 Empowered to delegate his powers and may authorize any
person he deem competent to conduct an audit on behalf &
under his direction (Sec 7 (2)and (3)
 Has the power to obtain the advice of a law office upon any
legal matters
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Secrecy (Sec 8 (3))

 It is the responsibility of AG to maintain the

secrecy of the information, which has been
obtained.
 Neither the AG or any other person shall
divulge or communicate except in the course
of duty to another person performing duties
under this act

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Audit Report (AR)

 Auditor’s report on the financial statement of a

government entity is similar to an auditor’s
report for the audit of corporate financial
statements.
 Auditors issue reports that express their
conclusion regarding how the audited activities
or events have complied with the applicable
predetermined standards.
 The reports are often referred to as the auditor’s
‘opinion’
 Audit Report (AR)
 Sec 9 (1) Audit Act 1957 support the provision required by
Sec 16 of the FPA 1957 – all accounts of government have to
be prepared, and transmitted to AG for examination, audit
and preparation of audit report
 AR for Federal Government will be submitted to YDA and
laid before Parliament, on the advice of PM and after
consultation with Conference of ruler (Art107 of FC)
 AR of State government, public authorities will be submitted
to State Rulers and laid before State Legislative Assembly
 AG also at any time may submit report to YDA and State
rulers upon urgent matters

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 Audit Report (AR)
 Should FS of any agencies is not received 7 months after close of
financial year, AG may submit report to Parliament /State Legislative
Assembly
 Should serious irregularities occurred, AG will bring this matter to the
notice of Treasury’s Secretary General or State Financial Authority. Sec 9
(4) Audit Act 1957
 AG can make recommendations or comments upon matters on public
accounts/ monies / stores
 AG can also submit certificate from observation of fund such as zakat,
fitrah and baitulmal. Sec 9 (6) Audit Act 1957
 AG may present certificate and observe Accounts of those authorities on
any matter in his opinion requires immediate attention. Sec 9 (7) Audit
Act 1957

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Types of report produced by AG

 Public account statements and financial

management of federal government ministries /
department
 Activities of federal government/ department and
federal government management companies
 Financial statements and financial management of
state department / agencies
 Activities and special research of state department /
agencies
 Financial management of Federal Statutory bodies
 Public Accounts Committee
(PAC)
 Parliamentary watchdog for public monies
 Appointed by House of Representative at beginning of each
session
 Established both at Parliamentary level and State level
 Comprise of 6-12 members drawn from Parliament
 PAC assist the House of Representative in inquiring into financial
matters of the government. It also highlight the main areas which
may require notice of the entire House in the House of
Representative to debate and act
 The committee is empowered by:
1. Standing Order 77(5) of the Standing Ordinance
2. Section 10 of the House of Parliament Ordinance 1951

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Power & Responsibility PAC –
by Standing Order
 The accounts of the federation and the
appropriation of the sum granted by the Parliament
to meet public expenditure
 Such accounts of the public authorities and other
bodies administering public fund as may laid before
the parliament
 Report of the AG laid before the Parliament in
accordance with Art 107 of the FC
 Such other matters as the committee may think fit
or which may be referred to the committee by the
Parliament
 Public Accounts Committee
 Main objectives – to ensure proper accountability
 PAC will examine Auditors’ report on whether expenditures
exceeded authorized limit and whether appropriations are not
spent according to rules and regulations
 Will also examine whether individual programmed have achieve
its objective and whether value of money being obtained
 Function;
i. Ensure money spent in accordance to purpose and programmes
as in approved
ii. To monitor that public officials spend money in most effective and
efficient manner
iii. To maintain high standards of accountability

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Key Challenges in Malaysian Public
Sector Auditing & The Related
Recommendations
 Transitional Period: Moving Towards OBB
and Accrual Accounting
 Increase use of ICT
 The Expanding Demands for the New Types
of Audits
 Inadequate Number and Relative
Competence of Audit Personnel
 Audit & IT
 Be aware of IS security risks, controls and standards & to
maintain their skills in order to undertake effective audit
 Support & encourage worthwhile changes
 Understand the objectives & practical implication of the
improved IS
 Auditor need training and development
 Need to be familiar with relevant information security
regulations & be able to recognise & understand the system
 Strong evaluation control to interpret audit findings
 Remain independent towards the implementation and
operation of the systems they audit
 Embrace changes by adopting audit approaches, which fits
into the new information system

Topic7- Audit in PS (ZA/Jan/08) 36