CIA3010

Public Sector Accounting

Week 13: Public Sector Auditing

Outline
■ Functions of audit
■ Regulatory framework for public sector auditing
■ Institutional framework
– The National Audit Department
– The Public Accounts Committee
■ Internal audit vs external audit
■ Value for money audit
■ Key challenges
Functions of Audit
■ Audit and Accountability
– To realise governmental accountability, the citizens, their
elected representatives and programme managers need
information to assess the integrity, performance, and
stewardship of the government activities. Thus, unless legal
restrictions or ethical considerations prevent it, audit reports
should be available to the public and to other levels of
government that have supplied resources.
– Accountability framework involves budgeting, accounting and
auditing.
– Audit – to examine and ensure existence of accountability by
providing independent judgement.
■ Public sector audit goes beyond the private sector by virtue of
statutory or other prescribed duties and obligations  ‘expanded
scope audit’ or ‘comprehensive auditing’
– Traditionally, audit involves evaluation and verification of
financial systems and records.
Development in Public Sector Audit in
Malaysia
■ Less emphasis on financial and regulatory audits and more on
value for money.
■ Towards performance auditing.
■ Auditors report on financial statements and make
recommendations about how performance could be improved.
■ Before 1968 – financial and regulatory audit
■ 1968 - 1977 – with emphasis on evaluation audit on selected
projects or programmes
■ Amendment of Audit Act in 1978 – include performance
auditing
Regulatory Framework
■ Federal Constitution
– Article 105 Auditor General
– Article 106 Powers and Duties of Auditor General
– Article 107 Reports of Auditor General
■ Audit Act 1957
– Section 3 Terms and conditions of service of AG
– Section 4 Remuneration
– Section 5 Duties of AG
– Section 6 Nature of Audit
– Section 7 Powers of the AG
– Section 8 Secrecy
– Section 9 Audit Reports
■ Auditor General’s Circulars
Institutional Framework
National Audit Department
■ Article 106 Federal Constitution, Section 5 Audit Act
■ Ensuring the existence of accountability in the administration and
management of public funds through the audit of accounts and
activities of the Federal Governments, State Government, Statutory
Bodies, Local Authorities, Islamic Religious Council and Miscellaneous
Funds.
■ Headed by the Auditor-General, whose appointment is by statute.
■ Provides the resources required by the Auditor-General in carrying out
the audit mandate. The staff of the NAD are members of the Malaysian
Civil Service and they are delegated with the powers of the Auditor-
General provided under the Federal Constitution and Audit Act 1957 for
the implementation of the audit.
■ Reports its findings pertaining to the audits of accounts and
evaluation of government programmes and activities to the Yang di
Pertuan Agong, state Sultans or the Yang diPertua Negeri who shall
cause the report to be laid before the Parliament or State Legislatures.
■ Once tabled in the respective legislatures, the report will finally be
deliberated by the Public Accounts Committee, a standing committee of
Parliament or State Legislatures
 Auditor General
■ APPOINTMENT (Article 105 of the Federal Constitution).  
– The Auditor-General is appointed by the Yang di Pertuan Agong on the
advice of the Prime Minister and after consultation with the Conference of
Rulers    
■ INDEPENDENCE (Article 105 and Audit Act)
– The Auditor-General serves the legislature and is granted unimpeded
right to audit and report directly to the Legislature. This enables him
to carry out his statutory duties according to the requirements of the law
and without interference, fear or favour.
– Adequate safeguards have been provided in the Federal Constitution
and the Audit Act to ensure his independence. The Auditor-General is
granted adequate powers to obtain any explanation and access to all
records and documents including those classified documents to enable
him to carry out his duties.  
– states that the Auditor -General is not subjected to the jurisdiction of
the Public Services Commission. The office of the Auditor-General
though part of administrative setup, is independent from the executive
branch of the Government.
– The Auditor-General's independence is further guaranteed by the
provision in the Constitution for the appointment, remuneration and
security of tenure of the office.  The staff of the Audit Department in
discharging the audit on behalf of the Auditor-General is protected by the
statutory powers provided to the Auditor-General by legislation.  
Powers of Auditor General
■ POWERS (Section 7 Audit Act)
– empowers the Auditor-General to obtain explanation and
information required by him in order to carry out a proper audit and is
entitled to have unimpeded access to all records, vouchers,
documents, cash, stamps, securities, stores and other properties
subject to his audit. He may call upon any person under oath to
furnish any explanation or information which he may require, and any
person called upon is legally bound to furnish information or
explanation required in his examination.  The Auditor-General also has
the power to obtain advice from a law officer upon any legal matter.  
– The Auditor-General is empowered to delegate his powers and may
authorise any person he deems competent to conduct an audit on his
behalf and under his direction, including competent person from
outside the government to assist him in carrying out the audit work.  
■ SECRECY (Section 8 Audit Act)
– With a wide scope of powers, it is the responsibility of the Auditor-
General to maintain the secrecy of the information which have been
obtained.
– Section 8(3) of the Audit Act expresses that neither the Auditor-
General nor any other persons while carrying out his duties is
permitted to divulge such information to any other person, except to
those who are performing duties under the Act. 
 Public Accounts Committee
Authority and Structure Relationship and resources

Power, Roles and Practices

Internal Audit vs External Audit
Internal Audit External Audit

• Independent appraisal function • Independent examination of; and

established by management of an expression of an opinion on:
organisation for the review of the internal • the financial statements and other
control system as a service to the financial information;
organisation. • non-financial information
• Objectively examines, evaluates and • the adequacy of internal control
reports on the adequacy of internal system;
control as a contribution to the proper, • compliance with statutory, regulatory
economic, efficient and effective use of or contractual requirements;
resources. • economy, efficiency and effectiveness
• Ensure adherence to policies and in the use of resources (‘value-for-
directives money’) and
• environmental practices
• Safeguard assets
• Secure the relevance, reliability
and integrity of information
• Ensure compliance with statutory
requirements
• Treasury Circular No 2/1979
Implementation of internal audit in
Federal Government Agencies
• Treasury Instructions 308 - 311
• Internal audit scope covers financial and
management
 Audit Process in Malaysia
Government National Audit
Agencies Department

· Events
· Audit Process
· Activities
· Audit Standards
· Transactions
FINANCIAL Public Accounts
STATEMENTS Committee

· Revision
· Suggestion
AUDIT REPORT
 Nature and Scope of Audit
Section 6 Audit Act
The Auditor General shall in his audit make such examination as he may deem
necessary to ascertain:
a) whether all reasonable precautions have been taken to safeguard the
collection and custody of public moneys or other moneys subject to his
audit;
b) whether issues and payments of moneys subject to his audit were made in
accordance with proper authority and payments were properly chargeable
and are supported by sufficient vouchers or proof of payment;
ba) whether due care has been taken to account for and to ensure proper use,
control, maintenance and disposal of all public stores or other stores
subject to his audit;
c) whether all accounts and other records have been and are properly and
faithfully maintained;
d) whether in his opinion moneys have been applied to the purposes for
which they were appropriated or authorized and the activities related to such
purposes were carried out or managed in an efficient manner with due
regard for economy and the avoidance of waste or extravagance; and
e) whether the provisions of the Federal Constitution and of the Financial
Procedure Act 1957, and any other written law relating to moneys or stores
subject to his audit have been in all respects complied with.
Types of Audit
■ Financial audit
– Assertion on entity’s financial report data
– Criteria: Financial reporting framework
– Report: Opinion on the fairness or true and fair view of financial information
■ Compliance audit
– Implicit claim that data adhere to relevant policies, laws and regulations
– Criteria: Management’s policies, laws, regulations or other third-party
requirements
– Report: Summary of findings or assurance regarding degree(s) of compliance
■ Performance audit
– Performance or operational data
– Criteria: Objective set, for example, by management or enabling legislation
– Report: economy, efficiency and effectiveness observed; recommendations for
improvement.
■ Audit is conducted in 2 phases:
– Interim audit – to test effectiveness of internal controls, performance audit on
periodic basis
– Final audit – to ensure existence, completeness, ownership, obligation,
occurrences, validity, accuracy, presentation, disclosure and regularity
Performance Audit
■ Value-for-money audit = management audit = operational audit
■ VFM objective is for resources (man, money, materials, machine) being
managed with economy, efficiency and effectiveness (3E)
■ An objective examination of the financial and operational performance of
agency, program, activity or function.
■ Towards identifying opportunities for greater economy, efficiency and
effectiveness with which programmes are carried out
• Controversies surrounding its introduction – subjective assessment; auditor’s
competency etc.
• Economy and efficiency determine whether organisation is managing and
utilising its resources economically and efficiently in order to achieve programme
objectives, cause and effect if inefficiencies and uneconomical practices
• Effectiveness determines whether desired results or benefits established by
legislature, management or other authority are being achieved, whether
organisation has considered alternatives that might yield desired results at lower
cost
• Impact determines effect of implementation of programmes on the conditions
that give rise to them and whether management has established systems and
procedures to ensure achievement of value for money
 Financial Audit vs Performance Audit
Characteristic Financial Audit Performance Audit
Purpose To express opinion on the To appraise economy, efficiency,
financial statements and to and fulfilment of objectives; to
assess financial stewardship identify problem areas and
opportunities for improvement
Scope Fiscal records An organisation, a programme,
(financial/economics) project, activity of function
Orientation To the financial state of To the operational state of
affairs from a retrospective affairs: past, present and future
viewpoint
Yardstick GAAP Operations management
principles and objectives
Precision Absolute Relative

Frequency At least annually Regular with indefinite timing

Deals with Primarily physical and All operations including finance

financial assets
Components of Audit Report
1. Analysis on the statement of accounts
– quality of statements, analysis of accounts,
2. Financial management
– overall performance, sources and uses of funds
– financial management of selected departments and ministries
3. Implementation of activities at selected ministries and departments
4. Statutory bodies
– financial statements and implementation of activities
5. Status of previous year’s audit findings
6. General
– financial statements tabled to the Parliament
– meetings of the PAC
– contributions of NAD towards improving performance,
financial management and implementation of activities.
Accountability Index Ratings
 Beginning 2007, the National Audit Department implemented
the Audit Rating System based on Accountability Index (AI).
 The objective of AI is to assess the extent of financial
management of Ministries, Departments, Statutory Bodies,
Local Authorities and Islamic Religious Councils in adhering to
the government financial laws and regulations.
 The financial management assessment encompasses the
following elements:
i. Statement Organisational Management Control
ii. Budgetary Control
iii. Receipts Control
iv. Expenditure Control
v. Management of Trust Funds, Trust Accounts and Deposits
vi. Management of Assets and Inventories
vii. Management of Investments
viii. Management of Loans
ix. Financial
 Auditor General’s Dashboard
Key Challenges
■ Transitional period: moving towards OBB and accrual
accounting
– Require auditors to enhance knowledge and expertise
■ Increase use of ICT
– Intense development of e-government
– New accounting system
■ Expanding demands for new type of audits
– VFM audit, environmental audit, social audit
■ Inadequate number and relative competence of audit personnel
– Shortage of staff, level of competency
 Principal – Agent Relationship

Public Sector Accounting Governance and Accountability in the Malaysian Context All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2019 7–20
 Issues in the relationship between
the principal and agents

Public Sector Accounting Governance and Accountability in the Malaysian Context All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2019 7–21
 Principal – Agent Relationship

 In addressing the issues highlighted, there is a need for

public sector auditors to remain grounded in the core governance
process, while at the same time expanding the focus of the public
sector auditing to include the governance mechanisms which
encompass effective management control systems and efficient
programme deliverables. 
 The governance process encompasses the following aspects:
 Independence from the parties being audited and an objective
perspective towards the subject under audit 
 Use of organized processes to collect and analyse relevant and
suitable evidence 
 Comparison to criteria for formulating conclusions
 Use of generally accepted professional audit standards.

Public Sector Accounting Governance and Accountability in the Malaysian Context All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2019 7–22
Discussion Questions
1. Compare and contrast between external audit and internal audit
in the public sector.
2. ‘The scope of public sector audit extends beyond that of private
sector audit in a number of ways’. Discuss this statement.
3. Find the latest available Audit Report published on the website
of the National Audit Department. Identify one issue raised by
the Auditor General. Discuss this issue in class. You can use
either Audit Report for Federal Government or any of the State
governments.
4. Identify international organisations related to audit in the public
sector and briefly describe their functions.