Governmental auditing literature would be out of fashion today if it makes no reference to such terms as Management Audit, Efficiency Audit and Performance Evaluation. The National Audit institutions both in the developed and the developing world are caught up in the rush for modernisation. This development may be the result of a genuine desire to perform more useful audits or the result of a frustration arising from the routine and mechanical tasks associated with the 'regularity audit'. While this development may be considered progressive, it may tend to devalue, (if it has not already devalued) the important functions performed by auditors as 'regularity auditors', resulting in a serious under-mining of the basic financial controls of the State. Audit institutions in developing countries have to keep this aspect of the problem in view in their efforts to arrive at the 'comprehensive audit'. An attempt is made in this article to give some ideas with regard to the strategy, National audit institutions particularly in developing countries could adopt in expanding the scope of audit.
The rigidity in thinking associated with the regularity audit appears to be one of the major obstacles to be overcome in the progress towards comprehensive auditing. Another problem is the lack of an adequate response from the administration towards this type of audit. Therefore, the following necessary conditions should exist for successful comprehensive auditing:
(a) Objective: In the regularity audit the auditor reports factual situations expecting the management to take appropriate action. The regularity audit reports can be indirectly very useful to management, but it cannot be stated that the regularity auditor is motivated by a desire to improve management. Any benefit to the management is through the 'shock treatment' given through revelations made by the auditor. This 'take it or leave it' attitude may not be very helpful in the solving of management problems.
On the other hand, in a management oriented audit, the auditor's main objective should be to produce a report containing information directly useful to the management. The auditor gives an independent analysis of and if possible some suggestions to solve problems faced by the administration. An appreciation of this positive approach is necessary in a comprehensive audit.
(b) Economic Basis: The regularity auditor is concerned with documents and monetary figures and hardly appreciates the economic entity which lies behind the documents and the figures.
In comprehensive auditing, the auditor has to be conscious of the economic entity or the operation which lies behind the accounts, the books, records and the files. Thus, comprehensive audit training has to be based on economics and its relationship with accounting.
(c) Accountability: The auditor engaged in comprehensive auditing should have a wider appreciation of the meaning of 'accountability'. This wider aspect of accountability includes not only an accountability for compliance with laws and rules but also an accountability for efficiency and effectiveness in the utilisation of limited economic resources.
(d) Response from the Administration: Comprehensive auditing itself would not be effective unless there is an adequate response to and appreciation of such audits by the administration. Therefore, it would be desirable if the Government creates an institutional system to cooperate with the audit with a view to derive the benefits from comprehensive auditing. From this point of view the establishment of an independent controllership system within the administration on a parallel with the Auditor General is desirable. The responsibility of the controller should cover not only the preparation of accounts but the full information system needed for effective decision making within the Governmental Sector. The findings of comprehensive audits could then become effective through the co-operation of the Auditor General and the controller who would become responsible for implementation of the agreed findings.
The above conditions require of the audit an attitude of co-operation with the administration. This co-operation, should not however be at the expense of the independence of the audit. The two objectives of co-operation and independence need not necessarily be irreconcilable if the audit personnel have the required vision and maturity.
Regularity Audit
The regularity audit is one element of the comprehensive audit. An economic entity cannot produce results unless it is organised and managed and the management obviously has to be by people. This management cannot generate the confidence of those whom they serve whether they be shareholders, consumers or the society unless it works within a set of laws and rules imposed by the State or by the organisation itself. The purpose of these rules is to ensure the orderly management ensuring fairness as well as efficiency. Management, however, technically efficient it may be, cannot hope to survive in the long run if it abuses its powers and privileges.
The regularity audit which is primarily concerned with the management's compliance with laws, rules and regulations is the only reliable means of exposure of possible abuses and malpractices. The discipline imposed by a regularity audit on the management in this respect is an essential criterion for successful management. Therefore, the regularity audit itself makes a fundamental contribution to good management and its devaluation could have serious consequences. This is particularly so because the National audit institution is, perhaps, the only institution which attends to this task, whereas there may be a multiplicity of management auditing or management consultancy institutions.
Financial Audit
The financial audit is related to financial statements and is aimed at commenting on whether the results of management decisions are fairly stated in the financial statements based on certain rules and principles followed in accounting. It is not concerned with the wisdom of management actions. Nevertheless, the system of accounting is an essential part of the information system of any organisation and the disciplines followed in accounting make the information models prepared by accountants more reliable bases for management purposes. Thus, accounts or financial statements are means to an end and in the development towards management or efficiency auditing the auditor has really to use the 'accounts to audit' rather than 'audit the accounts'. The auditing of accounts forms part of financial audit.
Financial auditing is not confined purely to monetary accounting but is getting increasingly integrated with quantitative accounting. An analysis of financial, physical and statistical information is an essential process in the diagnosis of efficiencies and inefficiencies in an organisation. Therefore, the financial audit is a starting point in the management and operational audit.
The following basic characteristics of the comprehensive audit approach should be recognised:
1. Scope: The scope of comprehensive audit covers the entire field of management involving decision making at the planning level, implementation level and the review level.
From the point of view of economic resources, the comprehensive audit deals with economy, efficiency and effectiveness in the utilisation of resources, in addition to the legal aspects.
2. Method: The method of the comprehensive audit has the following stages:
The above approach requires of the auditor a critical attitude as well as a willingness to consider impartially all points of view relating to the problem under study. Another point to be noted is that whereas in a regularity audit, the auditor is primarily concerned with reporting basic findings, in the comprehensive audit the auditor has to evaluate his own findings. Very often in the regularity audit, the auditor makes important discoveries. It is not an exaggeration to say that the distinction between the 'regularity audit' and the 'wider comprehensive audit' lies in this evaluation requiring analysis and deduction.
It is useful to classify techniques under two categories, namely:
The following techniques could be used for the collection of information:
Analysis and evaluation techniques vary from simple comparison techniques to sophisticated techniques requiring a knowledge of higher mathematics. Flow-charting, Statistical Sampling and decision making techniques such as 'break-even analysis' and Discounted Cash Flow techniques will also be useful in auditing.
However, the value of simple 'comparison' and 'observation' techniques should not be underrated. Auditors should give priority to the application of simpler techniques in preference to more advanced techniques.
A weakness of regularity auditors is their lack of interest in the collection of relevant information with regard to a particular issue. They tend to be satisfied purely with a fact of non-compliance with the law or the rule. A 'researching' and inquisitive type of mind is required in comprehensive auditing.
Audit institutions in developing countries may not achieve much success in comprehensive auditing if they wait for the elusive day when they will have adequate skills. A more pragmatic approach would be to have a plan of priorities taking into account the existing limitation of resources and the more urgent problems the administration faces in its management. In this regard, priority may be given to the following areas of comprehensive auditing:
(a) Control Systems: Many well conceived projects do not achieve their objective due to ill-designed and ineffective operation of control systems. The traditional Government auditor has at least a general knowledge of governmental systems and this knowledge is the primary requirement for a systems audit. Therefore, it is felt that the Government auditor could without much difficulty succeed in the systems auditing area in a limited time. The techniques of systems analysis could be gradually introduced into the work. This type of auditing will have a very effective impact on the administration resulting in savings of money and time as well and prevention of frauds and abuses. The traditional regularity audit reports, no doubt, identify weaknesses in control systems but do not very often go beyond that identification. What is needed is the next step of evaluation of the auditor's findings on a systematic and logical basis;
(b) Information Systems: Decision making throughout the cycle of management involving planning, implementation and review is based on information. The reliability and relevance of the information as well as the reliability and relevance of the methods adopted in the evaluation of such information are essential for proper management decisions. Therefore, a critical examination of the design and operation of the information systems and the evaluations of such information for various decision purposes is an area of comprehensive auditing which the experienced auditor can easily get into. It is found in practice that many decisions made by the administration are incorrect mainly because either the raw data is totally unreliable and/or because the techniques adopted in evaluating the information are not relevant to the particular decision. It is also found in practice that the arguments in support of a particular course of action are inconsistent and totally irrelevant to the proposed action. Experienced Government auditors, if they are given a basic understanding of economics and its relationship, to accounting and the limitations of the accounting processes could give sound evaluations for decision making purposes based on the information already available with the administration. Such unbiased and logical independent points of view could save the administration from many embarrassing situations;
(c) Projects funded by foreign aid: An area where the traditional auditors could easily apply comprehensive auditing is that dealing with projects funded by foreign aid, the reason being that usually these projects are well documented in the form of feasibility studies, project reports, budgets, etc. Very often what is needed in comprehensive audit is to follow the feasibility and project reports and budgets already prepared for the project by independent consultants. Projects funded by World Bank Agencies are particularly amenable to this type of audit and the Lending Agencies themselves encourage and appreciate such audits.
It is also felt that in early stages of comprehensive auditing the auditor may achieve better satisfaction in carrying out diagnostic audits identifying areas of inefficiencies, ineffectivenesses and diseconomies in the management of governmental programmes without getting involved in indepth studies which are time consuming. Also diagnostic audits can cover a wide area and can be more useful to the administration rather than indepth studies which have to be restricted to a few projects. It is also found in practice that very often detailed audit reports which may look attractive and comprehensive may nevertheless not attract much attention from the administration which is generally busy and may not have the time to read and digest such detailed reports. Very practical results could, however, be derived from short diagnostic studies.
In the progress towards comprehensive auditing emphasis should be laid on the following aspects in the education and training programmes:
The Sri Lanka Audit Department has taken the following steps in expanding the scope of the traditional audit." Although these attempts have not been fully successful yet it can be stated that in spite of the pressure of the financial audit some progress has been made in the preparation of audit reports which contain useful information for purposes of management:
(a) Public Enterprises: Standardised auditing procedures, and reporting formats have been introduced. The auditing procedures involve the collection of comprehensive information with regard to accounting, financial and operational aspects of each public enterprise on a continuing basis. This information is expected to be critically analysed and reviewed for the preparation of the report which consists basically of two parts, viz:
This report is a diagnostic report drawing attention to problem areas. It is significant to point out that this type of review is done annually for each of the 150 or more public enterprises.
The information available in the Audit Department can be utilised to carry out indepth evaluation of any corporation over a prolonged period of time, say a 5 year period;
(b) As regards project studies the Department set up as early as in 1972 a special unit to carry out evaluations of selected projects. Under this scheme about 10 projects were studied in detail. However, this unit could not be continued in view of the pressure of the financial audit.
Subsequently, this Unit concept was given up and instead each Superintendent of Audit who is responsible for financial audit as well was assigned one or two subjects for study (systems studies as well as economic studies). This procedure is now continuing and a number of Superintendents of Audit have been able to produce reports of good quality. Two or three detailed studies have also been carried out in respect of investment decisions. One study dealt with the proposal to set up a hydro cracker for the Refinery and the other dealt with a decision to invest in gas turbines to overcome the power shortage. These studies were mainly based on a critical review of feasibility studies, project reports, tender procedures and the evaluation of tenders received. Systems as well as economic and financial aspects were dealt with in these reports. Other reports under this scheme have dealt with operations of farms, factories, construction projects, etc. A fairly detailed study was also made of the Government's programme on teacher training;
(c) One of the areas in which comprehensive auditing is required and is being appreciated is that dealing with operation of projects financed by World Bank Agencies and other lending agencies. These are mainly infrastructure projects dealing with Integrated Rural Development, irrigation, water supply, etc. Since the lending agencies themselves require a performance evaluation there is a good response to these reports by lending agencies which give much encouragement to this type of audit. Also the availability of well designed feasibility and project reports itself makes comprehensive auditing easier in this area;
(d) The Department has made a formal distinction between the two aspects of auditing namely, financial audits and non-financial audits and has issued two basic circulars governing reporting procedures under these two divisions. Well designed reporting formats are a means of giving instructions to the audit staff.
The main benefit arising from these attempts has been the success in inducing audit staff to think in terms of projects utilising limited economic resources and the need to optimise the use of such resources through better decision making as well as design and operation of better management systems. Not much emphasis is being laid in these attempts on the use of sophisticated techniques and the findings are very often based on simple analysis and comparisons. The next stage would be to give more intensive training in the techniques.