Audit Management and Audit Observation Settlement Procedure

Shish Haider Chowdhury Finance Controller (Army), Log Area Dhaka Cantonment, Dhaka LATC, 25 April 2012

Definition of Audit
The word 'audit' comes from the Latin audire meaning to hear.
An auditor is defined in Chamber dictionary as: a hearer: one who audits accounts. The auditors were deputed to hear suspected cases of irregularities, corruption, fraud and other serious offences in medieval times.

DEFINITION OF AUDIT
Audit is 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 with a view to ensure that rules and orders framed by competent authority in regard to financial matters have been followed; that expenditure has been incurred with due regularity and propriety; that assets have been properly utilized and safeguarded; that public resources have been used economically, efficiently and effectively; and that the accounts truly represent the fact/ true and fair view.

INTERNAL AUDIT AND EXTERNAL AUDIT COMPANY PERSPECTIVE

Basic point Appointment Internal Audit Internal auditor is appointed by the company management External Audit External auditor is appointed by the shareholders of the company at the AGM He is an independent individual The external auditor must be a Chartered Accountant His duty is compliance of statutory requirements Expression of an independent opinion on financial statements

Status Qualification Responsibility Basic job

He is a paid employee of the company No compulsory qualification is required for the internal auditor Internal auditor serves the needs of the management Review of operations and internal control for developing improvements and ensuring compliance of policies and procedures Determined by the management

Scope of work

Determined the companies act 1994

Internal Audit
Internal audit is an unit of the government entity does the auditing job of the expenditure. It is concurrent in nature. The internal audit reports directly to head of the office/department.

External Audit

External Audit
External audit is an independent act by the Comptroller and Auditor General on the accounts of the Government bodies. The C&AG is empowered by the constitution and answerable to the people through parliament.

Principles of Auditing
Seven principles as extracted from INTOSAI All institutions financed with or supported by public money should be subject to audit by supreme audit institutions, to promote better governance, transparency and accountability; The external auditor is fully independent in the conduct of the audit; The external auditor has sufficient authority to carry out the audit in a manner that meets best practice in the audit of public money

Principles of Auditing (Contd.)

The external auditor has adequate resources to carry out the audit; The external auditor has the right and obligation to report on the results of the audit; The external auditor meets relevant professional and ethical standards; and The external auditor is appointed in an open, fair and transparent manner.

Types of Audit
Attest or Financial auditing Regularity or Compliance auditing, and Performance or Value for Money auditing.

Financial Audit
Verifies the accuracy and fairness of financial statements presented; An independent examination and evaluation to provide reliable and objective information to the parliament.

Compliance Audit
A regularity or compliance audit is an examination of the management of expenditures and receipts, and financial systems and transactions of the audited entity to determine whether the entity has complied with specific applicable laws, rules, regulations, procedures, etc.

Performance Audit

Performance Audit
Performance audit is an objective and systematic examination of an entitys programme, activity, function, or management systems and procedures to provide an assessment of whether the entity in pursuit of predetermined goals has achieved economy, efficiency, and effectiveness in the utilization of its resources.

Audit Work and Mandate

The Audit work of the government expenditure is conducted by the Comptroller and Auditor General of Bangladesh; Article 127-132 of the Constitution of Bangladesh gives the mandate to the C&AG

Process of Audit
Audit Plan

Prepare Audit Reports with two volumes: audit observations. annexure

Audit Program

Provide training & briefing to audit team

Send to Ministry for their comments.

Auditing Supervision & Inspection Local Audit Report

Audit Management Process

P A R L I A M E N T
Legislative function Monitoring function (Finance Act, Appropriation Act).(Public Accounts Committee) Legal framework. Concerned Offices & authorities. Existing laws, rules, regulation and orders.

Ministry of Finance

Revenue Earning Agencies (NBR, Ministries, Sector Corporation). Spending Agencies (Ministries, Departments, Sector Corporation etc).

Reporting & Monitoring frame work. President Audit Report

O
Information

C A Analysis

G
Audit observation

Basics of Audit
Compliance with Public Procurement Act Compliance with GFR, TR, Delegation of Financial Power, fund release order etc. Special Regulations applicable for the Entity. Ensure Parliamentary requirements. Various circulars of NBR. Audit Code and Audit Standards. Adherence to DPP/TPP in terms of project management (for projects).

End Product of Audit

Report Audit Inspection Report by audit teams Auditor Generals Report to Parliament

Audit Inspection Report

Auditors report (Certified Management letter

Financial Statement)

Section 1: General information about project

Audit scope Financial operation and control Equipment management Monitoring Evaluation & Reporting Adequacy of management structure

Section 2: Audit observations

Part-A: Advance Para including SFI Part-B: Ordinary/Normal Para Overall Audit Results

Section 3: Follow up action

Developing Audit Observation

Significant deficiencies, weakness and problems caused by non- compliance with standards, regulations, authority and nonadherence to norms of economy and efficiency impairing the purpose of the project raises issues that are addressed in audit observations.

Why Audit Observation Arises

Misstatement in FS: Understated, Overstated, Accounting Standards

Lack of project documentation in transactions.

Non compliance of: Rules, regulations, agreements and other orders issued by GoB and DPs. Non-compliance with loan covenants. Lack of transparency in procurement.

Lack of Internal control:

Cash management Asset management

Continued
Poor Monitoring
Delay in preparation & submission of records Incomplete information from field offices Non reconciliation of accounting records

Long outstanding advances

Progress monitoring.

Lack of skills
Lack of adequate and skill manpower

Common Audit Observations

Non maintenance and submission of auditable documents Observation related to GOB fund Non adjustment and irregular advance Discrepancy between FS of PHQ & FO Unauthorized expenditure Misuse of money Non realization of Tax/VAT Poor maintenance of assets Excess payment Absence of reconciliation

How to minimize audit observations?

Personal involvement of Head/PD on financial management; Consultation of previous audit observation; Steps for non-repetition of previous audit queries; Introduction of Internal Control; Maintenance of the updated rules and regulations; Reconciliation and co-ordination between the transaction of field offices & PHQ;

How to minimize audit observations?

Proper and updated record keeping; Maintenance of proper accounting books; Avoidance of expenditure in the non project areas; Proper monitoring of physical and financial activities and transactions; Immediate response to the audit query; and Arrangement of bi and tripartite audit meeting

Procedure of Settlement
There are several ways to settle audit observations:
Spot
Exit

reply
reply

meeting meeting meeting

Broadsheet Bi-lateral

Tri-partite PAC

meeting

Spot Reply
Audit observations are raised during audit. The Auditee can furnish reply and evidence at that time. If the reply is satisfactory the audit observation is settled in the spot

Audit Exit Meeting

It is a tri-partite meeting usually held at FAPAD immediately after completion of audit. Discussion held on Draft AIR among DP representatives, concerned ministry, project personnel and FAPAD representatives. After discussion and presentation of evidence observations may be dropped

Broadsheet Reply

Bi-lateral/Tri-partite meeting

Continued..
Broadsheet (BS) reply:

After issuance of the AIR, the auditee sends written reply on audit observation to FAPAD. The reply of partA observation comes through concerned ministry and the reply of Part-B comes directly to FAPAD. Audit observations are dropped after analyzing the BS reply. This type of meeting is usually held by the request of the auditee to discuss and settle audit observations.

Bi-lateral/Tri-partite meeting:

PAC meeting
Audit observations included in the C&AGs audit report are discussed in the PAC of the Parliament. The C&AGs Audit Report is prepared with the unsettled SFI observations

Preparation of C&AGs Report

SFIs are issued to the concerned Secretary giving 30 days time for reply;
Reminder issued giving additional 2 weeks time; D.O letter issued to the Secretary by the Director General giving 4 weeks time; and 2 weeks time for preparation of draft audit report.