PRINCIPLES OF AUDITING

TOPIC SIX
PUBLIC SECTOR AUDIT

6.1. The concepts of Public sector Audit.

A public sector audit involves auditing a public entity’s financial statements and other information
(such as non-financial performance information) that the entity is required to have audited. There are
different requirements for different types of public entities. Audits also look at compliance with statutory
obligations, where those obligations have a material (big enough to matter) effect on the financial
statements.
The public-sector audit environment 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 resources 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.
In general, public-sector auditing can be described as a systematic process of objectively
obtaining and evaluating evidence to determine whether information or actual conditions conform to
established criteria. Public sector auditing is essential in that it provides legislative and oversight bodies,
those charged with governance and the general public with information and independent and objective
assessments concerning the stewardship and performance of government policies, programmes or
operations.

For the International Federation of Accountants (IFAC) “Auditing is a verification or examination

of the documents of accountability executed by an auditor with the objective of providing him the ability
to express an opinion of those documents in such a way as to provide them with greater credibility”

The International Organization of Supreme Audit Institutions (INTOSAI), who develops auditing
requirements for the public sector, defines “auditing” as an examination of operations, activities and
systems of a specific entity, to verify that they are executed or function in conformity with certain
objectives, budgets, rules and requirements”.

As can be seen from the above definition of INTOSAI, the scope of the audit in the public sector
should go beyond giving assurance on the accounts, to include examination of aspects of corporate
governance and the use of resources, commonly described as 'value for money'.

Public sector audit comprises two principal elements: the financial element of the audit ('financial
audit') and the performance element of the audit ('performance audit').

Financial audit covers the audit of the accounts and the underlying financial systems and
processes, whether public money was spent for the purposes for which it was intended and the financial
aspects of corporate governance, such as internal control and risk management. Essentially, it provides
assurance that public money has been safeguarded and accounted for properly.

Performance audit is concerned with the value for money of services, functions, programmes or
specific projects, and the systems and processes put in place by the body to manage its activity and use
of resources and to prepare and publish performance information.

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6.1.1 The Principles of Public Sector Audit

The Public Audit Forum believes that there are three fundamental principles which underpin
public sector audit:

• the independence of public sector auditors from the organisations being audited.

• the wide scope of public audit, that is covering the audit of financial statements, regularity
(or legality), propriety (or probity) and value for money.

• the ability of public auditors to make the results of their audits available to the public,
and to democratically elected representatives.

1. Independence
Public audit must be independent of the organizations being audited so that the auditors cannot
be improperly influenced by those whose work they audit and so that they can carry out their role freely.
Whether in the private or public sectors, confidence in auditing rests to a great degree on the
independence and objectivity of the auditor. The methods of appointment of the auditors of public services
should ensure that the appointed auditor is, and is seen to be, independent of the audited body and can
report without fear or favour.
The independence of the national audit agencies from the bodies being audited is guaranteed
by statute.

2. The wide scope of public audit

Public audit not only involves providing an opinion on the financial statements prepared by public
bodies, but also covers such issues as regularity, propriety and value for money

3. External reporting
For public audit to be effective, appropriate reporting arrangements are required. Public auditors
report the results of their audits to the representatives of the public responsible for funding the activities
concerned or directly to the public themselves where it is in the public interest to do so.
This completes the cycle of accountability.

Responsibility for maintaining records and preparation of financial statements

In all organizations, whether in the public or private sector, the responsibility for the accurate
recording of transactions and the preparation of financial statements, in accordance with appropriate
accounting policies, rests with the management of the entity. Such responsibilities include putting in place
and maintaining accounting records and internal controls, preventing fraud and error, and safeguarding
assets.

The auditor must carry out such examination of the financial statements and records and control
systems as is necessary to form their opinion.

6.1.2.Public Sector Auditing – Part of Effective Governance

In a system of representative democracy, the institutions of government and the officials exist to
serve the interests of the public. In such a constitutional system, the Parliament is the public’s

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representative forum and it derives its ultimate legitimacy from the public on whose behalf it has been
elected and acts. Parliament has the responsibility to promote the goals of openness, accountability and
integrity.

The public sector auditor is normally referred to as the Office of the Auditor-General. It provides
a critical link between the public sector on the one hand, and the parliament and the community on the
other. It alone subjects the practical conduct and operations of the public sector as a whole to regular,
independent investigation and review.

Its role is to assist Parliament to scrutinise the effectiveness, efficiency, and accountability of the public
entities that are accountable to it. It is, therefore, important for Parliament to ensure that the audit scope
covers the whole of government, all public sector agencies including state-owned enterprises,
companies, and joint ventures in which the government has a controlling interest.

The cornerstone of effective governmental audit services is auditor independence from executive
government.

Similarities between Public and Private Sector Auditing

There are many similarities. Auditors in both sectors adhere to the same high ethical principles,
use the same basic methods and apply the same independent auditing standards. All have robust quality
assurance processes in place and subject themselves to quality-control peer reviews.

Differences between Public and Private Sector Auditing

i. Company auditors are appointed by the shareholders, whereas in the public sector the
appointment of the auditor is done by Auditor General (CAG) who has been legislated by
Parliament making the Auditor General the auditor of all government entities and most
statutory bodies.

ii. Materiality. An auditor in the private sector is given guidance by the professional auditing
standards in determining what constitutes “materiality”. The private sector auditor, within the
professional standards, can ignore certain financial variations in the published accounts.
However, the public sector auditor in similar circumstances has to report on the basis that
the disclosure is in the public interest. An example is when payments have been made
without authority, irrespective of the amount involved.

iii. Legality and compliance issues, whereby the auditor is required to provide assurance that
the transactions recorded in the financial statements are in accordance with the relevant
authority, legislation and regulations. Legality and regularity has always been a primary focus
of the public sector auditor. Failure to report to Parliament of abuse of the processes of
government by executive government can facilitate a culture of corruption within government.
iv. Private sector audit has a much narrower scope, essentially being limited to a true and fair
opinion on the company’s financial statements, whereas, in the public sector it must cover
not only the audit of financial statements, but also aspects of corporate governance and
arrangements to secure value for money

v. Auditing Methods, In the public sector, prior to 1970, the normal auditing function of
expressing an opinion had been carried out after a comprehensive examination of the
financial transactions. This approach had the effect of placing relatively more emphasis on

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 the transactions and less on the system from which the transactions were derived. It required
more human resources. With the increase in complexities of government activities, coupled
with the growth and expansion of advanced computer systems, the introduction of a more
efficient and economical manner of conducting audits became necessary. This resulted in
the adoption of ‘system based’ auditing.
System-based auditing consisted mainly of two segments:
a) study and evaluation of the system of internal control for the period subject to the audit; and
b) actual verification of assets, liabilities, revenues, and expenses which, together with the
assurance provided by the system of internal controls, provide sufficient evidence to support the
expression of an opinion on the financial statements.
In the early 1990s, a risk-based approach was adopted for financial audits. This methodology which
provides a rigorous audit planning process enabling auditors to more directly and effectively assess the
risk components of each audit has led to greater efficiency in the conduct of financial audits and a
corresponding increase in the level of audit assurance.

vi. Audit Standards Financial audits in the public sector are carried out in accordance with the
International Standards of SAIs (ISSAIs) developed by INTOSAI. ISSAIs include the
International Standards on Auditing (ISAs) issued by the International Auditing and
Assurance Standards Board (IAASB) and Practice Notes (PN). The PNs provide a clear
statement on applicability of the ISA to the audits of public sector entities as well as
supplementary guidance to public sector auditors on the ISAs. There is a separate PN for
each ISA.

vii. Audit reports of the public sector, the outputs from both sets of external auditors are similar
in many respects. Both provide an audit plan, give an opinion on the accounts and provide
audit management letters. Nonetheless, there are some aspects unique to the public sector
and these are enshrined in statute. These include considering reporting in the public interest
where there is a matter that may need to be brought to the attention of the public. Also, the
relevance of audit reports for the public sector is different from the audit reports of the private
sector, due in part to the following facts:
• The range of users of the financial information of the public sector is much “wider”.
• General governments should render account to all citizens.

6.1.3 Emergence of Performance Auditing

By the end of the 1970s, there was increasing recognition worldwide that the accountability of
public service managers must extend further than compliance with the laws and regulation governing the
use of public funds. It was becoming obvious that whilst the system-based audit methodology provided a
rigorous examination of financial systems, it did not produce information that enabled audit to report to
the parliament on whether the organization’s resources were being managed so as to give the community
value for its money.

Hence this led to the development in the public sector of what today is generally referred to as
Performance Auditing. Performance Auditing is oriented towards examining economy, efficiency, and
effectiveness of public administration. It covers not only specific financial operations, but also the full
range of government activity including both organizational and administrative systems. Performance
auditing requires a different audit methodology to financial auditing.

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 Performance auditing has thus become the new and modern challenge for Public Sector
Auditing. These steps regarding more effective accountability and audit reporting would definitely bring
enormous benefits to the community at large.

6.2 The National Audit Office of Tanzania.

The National Audit Office of Tanzania (NAOT) is the Supreme Audit Institution of the United Republic of
Tanzania headed by the Controller and Auditor General (CAG). Its mandate is enshrined under Article
143 of the Constitution of the United Republic of Tanzania.
On 3 November 2019, The late President of the United Republic of Tanzania, Dr. John Pombe Magufuli,
appointed Mr. Charles Edward Kichere as the new Controller and Auditor General (CAG) of the National
Audit of Tanzania (NAOT). For more details on this office read its history
(https://www.nao.go.tz/about/category/history)

Functions of CAG
I. He audits all transactions of the Central and State Governments related to debts, deposits, funds, etc.

II. He audits the accounts of any other authority when requested by the President or Governor. For
example, local bodies.

III. He advises the President with regard to the prescription of the form as to how the records of Centre
and State shall be kept.

IV. He submits his report relating to the Centre to the President, who then places it before both houses
of Parliament.

V. He submits three audit reports to the President:

a. Audit report on appropriation accounts.
b. Audit report on financial accounts.
c. Audit report on public undertakings.

6.3 The Services offered by the NAOT office.

The following are the audit services offered by this office

A. Performance Audit
Section 28 of the Public Audit Act No. 11 of 2008 provides mandate to the Controller and Auditor General
to carry-out Performance or Value-for-Money Audit for the purposes of establishing the economy,
efficiency and effectiveness of any expenditure or use of public resources by Ministries, Departments and
Agencies (MDAs), Local Government Authorities (LGAs) and Public Authorities and other Bodies.

According to the Performance Audit Principles as stated in ISSAI 300, performance auditing is defined
as an independent, objective and reliable examination of whether government undertakings, systems,
operations, programmes, activities or organisations are operating in accordance with the principles of
economy, efficiency and effectiveness and whether there is room for improvement.

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Economy, efficiency and effectiveness (known as 3Es) form the theoretical platform for the perspectives
and types of problems that are addressed in performance auditing. International Organization of Supreme
Audit Institutions describes the concepts as follows:

Economy: The principle of economy means minimising the costs of resources. The resources used
should be available in due time, in and appropriate quantity and quality and at the best price

Efficiency: The principle of efficiency means getting the most from available resources. It is concerned
with the relationship between resources employed and outputs delivered in terms of quantity, quality and
timing

Effectiveness: The principle of effectiveness concerns meeting the objectives set and achieving the
intended results

There are three types of audit reports that are produced by NAO. These are

• Individual Performance Audit Reports;

• General Performance Reports; and
• Follow-up Reports

B. Forensic Audit
Is an audit aiming at the prevention and detection of irregularities, such as fraud, embezzlement and
corruption through application of auditing skills to situations that have legal consequences/for use in a
court of law.

C. Special Audit
Is a tightly-defined audit that only looks at a specific area of an organization's activities.

D. Financial Audit
In Tanzania, entities prepare financial statements in accordance with financial reporting frameworks
stipulated in various legislations including the Public Finance Act, the Local Government Finances Act
and the Companies Act. These legislations require Public Sector Entities to prepare and submit the
financial statements to CAG within a period of three months from the last date of the financial year (i.e.
not later that 30th September of every year).

CAG evaluates and expresses an independent audit opinion as to whether the financial statements are
presented fairly in all material respects in accordance with the applicable financial reporting framework.
In conducting the audits, CAG is guided by the International Standards of Supreme Audit Institutions
(ISSAIs) issued by INTOSAI.

E. Compliance Audit
This audit focus on assessing compliance with the legal and regulatory requirements of the laws,
regulations, established codes or norms, and agreed-upon terms that a public sector entity is expected
to comply with in the execution of its roles and responsibilities. In compliance audit, CAG identifies subject
matters that the audit will address, for example the entity’s compliance with Public procurements laws
and regulations, adherence to environmental laws or compliance with staff’s codes of conduct.

Audit reports issued by CAG on regularity audit

The results of regularity audit are communicated through various reports as explained below:

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Management letters which communicates audit findings and recommendations to the management of the
audited entities;
Audit reports on financial statements which communicates the ‘Audit Opinions’ on the audited financial
statements of the audited entities; and
Annual General Audit Reports which consolidate key audit findings from management letters of different
audited entities and general recommendations addressed to the Government as a whole.

F. Information System Audit

Information Systems Audit also is the process of deriving assurance on whether the development,
implementation, support and maintenance of information systems meets business goals, safeguards
information assets and maintains data integrity. The GAG examines the implementation of IT systems
and IT controls to ensure that the systems meet the government entities’ business needs without
compromising security, privacy, cost, integrity of data, availability of data and other critical business
elements.

Audit reports issued by CAG on Information Systems Audit

The results of Information Systems Audit are communicated through various reports as explained below:

Management letters which communicates audit findings and recommendations to the management of the
audited entities;
Annual General Audit Reports which consolidate key audit findings from management letters of different
audited entities and general recommendations addressing to the Government as a whole.