* Director General (Training), Department of the Auditor General of Pakistan
The main objective of this paper is to discuss the management practices relating to certification audit in Pakistan. Traditionally, the Department of the Auditor General of Pakistan has been responsible for the maintenance of accounts and audit of public revenue and expenditure. But in the 1960s, the Department started transferring the accounting work to executive departments. The pace of this work has been slow and the Audit Department still maintains accounts of a large number of departments of the government. The dual role of the Auditor General has significantly influenced the scope and procedures of certification work. For example, upto 1988, when auditing and accounting functions were segregated within the Audit Department, the concept of audit certificate was quite rudimentary. The certification by the Accountant General of the accounts of the government, though countersigned by the Auditor General was in essence his certificate in the capacity of an accountant. From 1988, the situation has significantly changed. The accounting and auditing functions have been segregated upto the level of Deputy Auditor General. For each accounts office, there is a corresponding audit office. This has highlighted the need for an audit certificate by the Auditor General as auditor of the State. This has also necessitated revision and review of auditing procedures - a question to which we shall revert at the end of the paper. Suffice it to say that at present the Auditor General's department is passing through a transition. It is facing a number of challenges which have imposed upon it the compulsion of re-thinking on its entire role and function. The management practices discussed here are, similarly, in a fluid state and far from settled. But a process has been started and it would usher the department into its new role in the foreseeable future.
The paper discusses planning, supervision and reliance on internal audit as main issues. It also throws some light on the two related issues : reliance on outside auditors and reporting on fraud. The last part of the paper discusses our future plans.
We shall discuss three important questions at this place :
Resource Allocation : The Auditor General's department has been following a mechanical concept of audit planning as per its Audit Code and Manual. These source documents prescribed a certain percentage of vouchers and statements to be checked by each audit office every month. But gradually the department got uneasy about these instructions on the following grounds:
These ideas agitated the minds of the departments' elite but until recently there was no formal open debate. The Annual Audit and Accounts Conference 1985 discussed the whole issue of audit planning threadbare. For the first time, perhaps, there was an open discussion and a frank confession about the failure of the existing planning mechanism to achieve the audit objectives. The Conference was a landmark in the thinking process which recommended that all audit offices should start preparing audit plans from July 1986. It set in train an organic process of audit planning which took into account the living reality. Since time was short for the preparation of a revised Audit Manual, general guidelines were given to all field offices for preparing audit plans. Salient features of these guidelines were as follows:
Another landmark in the process of audit planning is the Annual Audit Conference held in October 1991 under the leadership of the present Auditor General. The Conference took stock of the practices set in motion by the 1985 Conference. It was decided that:
Selection of Auditees: In the certificate of state accounts the SAIs all over the world face a peculiar problem which the private firms of auditors do not. This problem relates to the selection of entitees to be audited in a year. The problem arises because their number is often so large that all of them cannot be covered in a year within the given resources. At the same time the state auditors have to certify the accounts as well.
In Pakistan, after 1988, this question has been addressed at two levels. Firstly, the Auditor General has to certify that the accounts were presented properly. For this purpose his auditors must not exclude any accounts from their scrutiny. In other words, all account offices must be audited. This is ensured by attaching a nucleus of auditors to all accounts offices and they audit the accounts on a monthly basis. Then at the central level, the consolidated accounts are audited by a central group, usually known as Book Section auditors. While auditing the monthly accounts, the auditors do rely on a sample of transactions, vouchers and other statements. But no month is excluded nor any office is left unaudited. These procedures take care of the Auditor General's certificate about proper presentation of accounts.
Secondly, the Auditor General's certificate also covers regularity and propriety in the executive financial operations. This is a vast area and can be attended to by deputing audit teams to the various entities where they examine the initial documents. This work has to be done by sampling the audit entities. The general principle is that entities with large budgets are audited every year. Relatively smaller organisations are audited once in two-to-three years. The selection ensures that all entities come under audit scrutiny once in each audit cycle. The selected audit entities are also not audited one hundred percent as regards their transactions. Usually 8% to 16% of their transactions are test-checked for compliance with rules and regulations.
The audit certificate for a year relies on the audit of the selected entities so far as regularity and propriety aspects are concerned. No work relating to this aspect is treated in arrear once the accounts are certified as properly presented.
The annual plans of the field offices contain a detailed list of those entities which are to be audited in a year.
Audit Programme: Another issue of audit planning is audit programme for each audit assignment. The Auditor General's department has not issued any model audit programme. Various departmental audit manuals contain checklists for audit of different organisations. The general practice is that an audit team receives oral instructions from the Director of Audit before commencing an audit, about special areas to be explored. These instructions tend to make up the. deficiencies in the instructions of the Audit Manual which have become outdated by now. The oral instructions usually relate the audit effort to the real life situation. Since the auditors have been carrying out audit for a long time, the practice of writing audit programme for each assignment is not in vogue. However, the Audit Manual does specify the duties of each member of the team, extent of audit, periodicity of audit and audit procedures to be applied.
The October 1991 Audit Conference reiterated the need for developing check-lists for audits of various organisations by the field offices. The Deputy Auditor General (Government Audit) is closely monitoring the development of these check-lists. Once completed, they will fulfil the need for written audit programmes to some extent.
The Audit Manual provides for the supervision of audit at different levels. The auditors are required to keep a diary of the work done by them on all days. The Audit Superintendent and Audit Officer review specified percentages of the work done by the auditors. The review provides for the examination of auditor's work papers as well. Besides this immediate supervision, the Deputy Directors of Audit are obliged to spend specified number of days for the supervision of audit teams. During the supervision the Deputy Directors are also required to do a certain percentage of audit themselves. Besides, they review the progress of the audit team and allow any extension of time needed for completing the audit assignment.
The third level of supervision comes at the Audit Headquarters where the Director General of Audit examines the work done by the field auditors. At this level, the audit reports are reviewed for consistency, significance, and validity.
The last level of supervision is at the office of the Auditor General where important findings of audit reports are reviewed by the Deputy Auditor General of Government Audit before submission to the Auditor General.
The supervision at all levels is guided by the good sense of the supervisor. There are no "supervision tools" prescribed by the Audit Manual. As a result, sometimes the department feels that weak audit reports happen to filter through to the top despite all the levels of scrutiny. The department lacks in the control instruments which may standardise the supervisors' work in all field offices.
The internal audit function in the government of Pakistan is not fully developed. Some executive departments have established internal audit organisations. But they are often not independent of the Chief Accounts Officer. Their audit procedures are hackneyed. Their reports do not get the top support. The scope and coverage of audit is often not comprehensive. For these reasons the state auditors do not adjust the scope of their audit in the light of the work done by the internal auditors. However, the extent of audit prescribed in the Audit Manual takes care of the fact that most of the expenditure is pre-audited. Although pre-audit is an accounting function, the checks exercised at this stage are almost the same which would be exercised at the post-audit stage. Therefore, the Audit Manual has prescribed significantly lower percentage of audit for post audit in certain cases.
In Pakistan, the Auditor General's Department does not contract out its work to outside auditors. However, in case of public enterprises registered under Companies Act, the audit is carried out by firms of Chartered Accountants before they are inspected by the state auditors. The state auditors do not certify their accounts but audit the initial accounts for regularity and propriety.
The state auditors are required to report any fraud detected or suspected by them to the Director General of Audit immediately. At this stage, the scope of audit is expanded to carry out detailed investigation. If there is evidence to show that some criminal offence has been committed, the matter is reported to the police and other law enforcing agencies. The case is registered against the suspected culprits for judicial probe besides departmental inquiry.
So far as corruption is concerned there are detailed rules and norms of behaviour for government servants. But the process of corruption is so invisible that it hardly leaves any documentary evidence. Despite the knowledge of the fact that there is widespread corruption in government departments state audit has not played any effective role to forestall it. The cases of corruption which come to light (by the 'negligence' of the culprit, of course) are hardly ever taken serious note of. It is partly because of the reason that gradually the society has become more tolerant towards corruption. In the final analysis, the responsibility is shifted to small fries. The big fish remain immune. This has a demoralising effect on auditors as well. They feel that in a society where accountability is so week, it is pointless to smell for corruption.
The Department is at present passing through a transition. The old procedures have been partly discarded and new ones have yet to evolve. In this situation of flux, a lot of ad-hoc practices are going on. However, the department has started research on new auditing procedures. It has adopted the Public Audit Manual published by the NAO as a model and started developing a new Audit Manual. Despite the availability of the model the real task of adapting to System Based Auditing is an uphill task. We have completed first drafts of two Audit Manuals, one each for civil departments and Pakistan Railways. The manuals provide detailed procedures for audit planning, supervision and reliance on internal audit. They prescribe fresh documentation and work-paper formats. It is hoped that these manuals will help achieve audit objectives within given resources, taking into account the new reality and facilitate our transition into 21 st century.