The State audit is as old as organised governments and has a fairly long pedigree even in developing countries. The concept, contents, scope, and the effectiveness of State audit have developed in tune with the political, social and economic development of the countries, the evolution of suitable Executive administration to cope with the changing requirements of Governments in response to national goals and objectives and the extent of control exercised by the national legislatures to ensure accountability of the Executive in respect of public revenues and expenditure. The theory and practice of Government audit have been developed and designed to respond to the changes and developments in Governments, particularly the Executive and Legislative wings, and the constitutional, legal and statutory stipulations of the country. Government audit has not only adapted the basic essentials of auditing, as known and practiced in the profession, to suit the requirements of Governmental transactions but has also added new concepts, techniques and procedures to the Audit profession. According to the U.N. Hand Book on Government auditing in developing countries "Government auditing is the objective, systematic, professional and independent examination of financial, administrative and other operations of a public entity, made subsequently to their execution for the purpose of evaluating and verifying them, presenting a report containing explanatory comments on Audit findings together with conclusions and recommendations for future actions by the responsible officials and in the case of examination of financial statements, expressing the appropriate professional opinion regarding the fairness of the presentation". In actual practice, Government audit varies from country to country depending on the national requirements developed over a time.
Initially, Government audit was confined to regularity, compliance, appropriation and propriety audit with reference to the general financial and accounting rules, regulations and legislative enactments of the Government. Later on, when the functions of State enlarged to encompass Socio-economic development
involving massive outlays of Government expenditure and increased turnover of revenue to finance it, the scope of audit was expanded to cover efficiency, economy and effectiveness audit which enlarged the domain of audit to new frontiers of value for money audit. Consequently, Government audit underwent a sea change-in regard to its role, coverage and results-and in the performance of the functional role it provided information to (i) the Executive as to how the multitude of authorities under it have performed the functions entrusted to them and spent the resources entrusted to it, particularly in regard to execution of projects/programmes, etc., and (ii) to the legislature the means to ensure accountability of the Executive in regard to the goals set and resources allocated to achieve them over a time.
The concept of public accountability has expanded to encompass (a) Fiscal accountability-which includes fiscal integrity, full disclosure and compliance with applicable laws and regulations; (b) Managerial accountability-which is concerned with efficiency and economy in the case of public funds, property, personnel, and other resources; and (c) Programme accountability-which is concerned with whatever Government programmes and activities are achieving vis-a-vis the objectives established for them with due regard to both costs and results/With enlargement of accountability, the role and functions of SAI and the means to accomplish them underwent basic changes.
The fundamental principles governing audit of expenditure and revenue and the general rules for conducting audit have been evolved over a time by the Supreme Audit Institutions. The SAIs have not only adapted the basic principles of Auditing to suit the audit of transactions of Government but have also developed them with reference to the laws, rules, regulations, procedures and systems evolved by Government. This has enhanced the utility and effectiveness of Government audit to the multitude of authorities in the Executive hierarchy, the wherewithal to control expenditure activities and performance but has also provided the means to help legislature to perform its assigned roles for ensuring accountability of the Executive.
The Supreme Audit Institutions (SAIs) have generally been built into the constitutional arrangements for governance of the countries, independently of the Executive branch of the Government to assist the national legislatures in the fulfilment of their avowed objective of exercising control over and ensure accountability in respect of public revenues and expenditure. Independence of audit, which is the basis for impartial and objective investigations of the activities of authorities, is generally recognised and specifically provided for by suitable legislative provision in most of the developing countries.
Four types of SAIs could generally be distinguished, based on the location of the Supreme Audit Institution in relation to the Legislative and Executive branches of Government-
Regardless of the location of the SAI in the realms of Legislative and Executive branches of the Government, independence in function is secured in different ways, such as among others, regulation by constitutional provisions, special audit acts, or laws on SAI, guaranteed length of the tenure of the head of SAI and un-removability during tenure of office. The SAI lays down the rules and regulations for conducting audit, the scope and extent of audit for different classes of transactions, the nature and scope of the information to be obtained by applying the prescribed techniques, the modus operandi for processing them within the audit organisation and with the executive and the Code of Conduct and behavior expected of the auditor in the exercise of the professional functions entrusted or delegated to him. It determines how the controls and investigations are to be undertaken within the legal mandate regulating its functions. It also determines how often they will be done and what categories of revenue or expenditure are to be audited in what manner from time to time.
The functions entrusted to SAIs cover the entire gamut of Government transactions-receipts, expenditure, commercial and trading activities undertaken by Government, the State owned enterprises including public utilities and other autonomous bodies/corporations, etc. In the case of departmental concerns, public utilities, autonomous bodies/corporations, etc., certification of accounts is also involved. In the case of Corporations or Companies owned by Government where statutory audit exists, Government audit is super-imposed both for certification of accounts under the statute and review of performance. Naturally, the performance of such complex and varied functions call for prescribing general principles for conducting audit of different types and rules for Code of Conduct for observance by the large body of auditors under SAI.
While the constitutional provisions and statutory enactments have provided for the SAI, its role, status, and relationship with Executive and Legislature, the scope, content and extent of audit have changed to suit the increasing activities of Government and the changing pattern of Government receipt and expenditure-dimensions and mix and the degree of control exercised by the Legislature over the executive on plans, programmes and utilisation of resources. The SAIs are no longer confined to operating on conventional areas of audit-regularity, compliance, appropriations and propriety-but are moving into new areas of efficiency-cum-performance audit with reference to national plans, programmes and projects involving large financial outlays extending beyond a financial year. The concepts of efficiency, economy, and effectiveness of audit have widened and deepened the scope and extent of audit in most of the countries. They are naturally defined and practiced according to the national requirements of each country but they all aspire to reach the new frontier of value for money audit, as developed and sophisticated in the advanced countries. New additions by way of system audit, Manpower Planning and Control Audit and audit of Management Information System, including computerised data, have also been added for evaluating performance. The transformation in the scope and coverage of audit has brought in specialisation in audit, particularly in the sphere of audit of receipts, expenditure, commercial and trading activities, state enterprises, including public utilities, etc. The SAIs have developed standards for conducting audit of different classes of transactions under various types of audit required to be undertaken by them. They are explained briefly in the succeeding para.
The basic standard set for audit of expenditure is to ensure
The detailed rules and procedures for conducting audit against provision of funds with reference to the Constitutional and statutory requirements of each country have been laid down by the SAIs. The Regularity Audit is conducted to see that the expenditure conforms to the relevant provisions of the Constitution, of the Laws and Rules made thereunder and is in accordance with the financial rules, regulations and orders issued by a competent authority under original or delegated powers. The work is of a quasi-judicial character and involves interpretation of the basic statutes, enactments, rules and orders and the connected case law thereto. Audit brings to the notice of the appropriate authority in Government any expenditure which is not covered by the terms of the statutes Act or rule or regulations, as the case may be. Observance of rules and regulations in letter and spirit is ensured. The financial rules and orders affecting expenditure and other
transactions are themselves scrutinised to see that they are intravires and the transactions covered by them can be audited effectively. Consistency with the basic statutes, responsiveness to the essential requirements of audit and accounts, conformity to the general or particular orders issued by any higher authority, and legality of the rule making authority are seen in audit. The sanction for expenditure is audited from the angle of competency, regularity and propriety. Improper expenditure and waste of public money or stores, even though the accounts themselves may be in order or no prima facie irregularity is noticeable, audit against propriety, which "extends beyond the formality of the expenditure to its wisdom, faithfulness and economy" is carried out. Not mere adherence to observance of sundry rules or orders of competent authority but general conformity to the broad principles of orthodox finance by the sanctioning and spending authorities are seen during such audit. Whether the commonly recognised standards of financial propriety-the quantity, quality, morality, and ethics of expenditure- are observed by the sanctioning/spending/disbursing
authorities are seen in audit. Transactions relating to Debt, Deposits and Advances, which comprise receipts and payments in respect of which Government becomes liable to repay the moneys received or has a claim to recover amounts paid together with repayment of the former and recoveries of the latter are audited more or less in the same manner subject to such changes as are found necessary due to changes in nature of the transactions involved. Application of these principles or standards of audit of expenditure to individual transactions with a view to detect cases of improper, extravagance, wasteful or uneconomical expenditure is a common feature of all SAIs.
(ii) The Three Es Audit
The scope of audit has been extended to cover efficiency, economy and effectiveness audit or performance audit, or full scope audit while the definition of these terms vary from country to country, the SAIs have developed standards for audit to meet the national requirements and technical needs of the work.
In Efficiency Audit, whether the various schemes/projects are executed and their operations conducted economically and are yielding the results expected of them are inquired into. It refers to the relationship between goods and services produced and resources used to produce them; examination aimed at to find out the extent to which operations are carried out in an economical and efficient manner. In Economy Audit, whether Government have acquired the financial, human and physical resources in an economical manner, whether the sanctioning and spending authorities have observed economy, etc. are examined. In Effectiveness Audit, appraisal of the performance of programmes, schemes, projects with reference to the overall objectives achieved at as well as efficiency of the means adopted for the attainment of the objectives are looked into. The efficiency-cum-performance audit, wherever used, is an objective examination of the financial and operational performance of an organisation, programme authority or function and is oriented towards identifying opportunities for greater economy, efficiency, and effectiveness. The procedure for conducting performance audit is laid down. by different countries, which inter alia, cover identification of topic, preliminary study, planning and execution of audit, and reporting. While trend towards a comprehensive approach for conducting the performance or full scope audit is visible, the coverage and depth of evaluation vary according to the statutory limitations, and the organisational constraints of SAIs.
(iii) Audit of Stores and Stock
The audit of the accounts of Stores and Stock has been developed as a part of expenditure audit with reference to the duties and responsibilities entrusted to SAIs. Audit is conducted to ascertain that the regulations governing purchase, receipt and issue, custody, condemnation, sale and stock-taking of stores are well devised and properly carried into effect and to bring to the notice of Government any deficiencies in quantities of stores held or any grave defects in the system of control. The audit of purchase of stores is conducted in the same manner as audit of expenditure, namely, that these are properly sanctioned or made economically and in accordance with the rules for purchase laid down by the competent authority, particularly in regard to bidding and determination of fair and equitable/reasonable prices, that the rates paid agree with those shown in the contract or agreement made for the supply of stores, that the certificates of quality and quantity are furnished by the inspecting and receiving units, etc. Cases of uneconomical purchases of stores or losses attributable to the defective or inferior nature of stores are commented upon in audit. Accounts of receipts, issues and balances are checked regarding accuracy and correctness and reasonableness of balances in stock with reference to prescribed norms for levels of consumption of stock holding and excess or idle stocks are commented upon and periodical verification of stock by independent authority checked to ensure their existence as per books of accounts. Where priced accounts are maintained, Audit sees that the stores are priced with reasonable accuracy, are reviewed from time to time, and are corrected with market rates and revised where necessary and the value account tally with the physical accounts and adjustment of profits or losses due to revaluation, stock-taking or other causes are carried out:
(iv) Audit of Commercial Accounts
The public enterprises which normally maintain commercial accounts fall under three categories namely-
The audit of departmental concerns is undertaken in the same manner as any department of Government where commercial accounts are kept, audit is enlarged to cover audit of such accounts and their certification. Depending on the nature and type of the statute governing the Bodies or Corporations, audit is conducted and accounts are certified. These include large public utilities in many countries. Both financial and accounts audit are conducted by SAI and where compilation of accounts is vested with the SAI functions, norms and standards of work usually followed by the professional auditors as adopted mutatis mutandis by the SAI. Government companies have their own auditors under the statutes, who are appointed by Government in consultation with the SAI. In addition, a supplementary audit by the SAI is provided. The SAI conducts a supplementary test audit of the accounts. In addition, financial audit and appraisal of performance is conducted by the SAI periodically. The SAIs audit expenditure to issue direction to the company auditors for reporting on specific aspects of their audit work which are reviewed and condensed in SAI's reports to the Government/Legislatures. Certain SAIs have adopted the mechanism of Audit Board-comprising representatives of SAI and nominees of Government including functional specialists for processing reviews or appraisals on performance. While the extent, quantum and nature of audit checks depend on the role, duties and functions entrusted to SAIs in each country, the general standards, principles, techniques and procedures for audit adopted by the SAI are a mixture of Government audit and commercial audit as known and practised by professional auditors. The concepts of autonomy and accountability of the institutions/bodies/ corporations/companies have influenced the nature and scope of audit by SAIs in applying the conventional audit and modern three Es audit.
Where the SAIs are required to certify the accounts, the common standard of check of primary accounts, initial books of accounts, verification of ledgers, registers and other books of accounts, check of trial balance, manufacturing trading, profit and loss accounts and balance sheet and connected schedules thereto are conducted by commercially qualified and experienced auditors and suitable certificates in regard to true and fair nature of accounts are given by appropriate authorities. These apply to certification of pro forma accounts as prescribed to various autonomous bodies governed by separate statutes.
(v) Audit of Receipts
The audit of receipts is neither all pervasive or as old as audit of expenditure and has come to stay in some of the countries and the principles, techniques and procedures for audit have been perfected by some SAIs. These provide for checking (i) whether all revenues or other debts due to Government have been correctly assessed, realised and credited to Government account by the designated authorities, (ii) that adequate regulations and procedures have been framed by the department/agency concerned to secure an effective check on assessment, collection and proper allocation of cases, (iii) whether such regulations and procedures are actually being carried out, (iv) whether adequate checks are imposed to ensure the prompt detection and investigation of irregularities, double refunds, fraudulant or forged refund vouchers or other loss of revenue through fraud or willful omission or negligence to levy or collect taxes or to issue refunds, (v) review of systems and procedures to see that the internal procedure adequately secure correct and regular accounting of demands collection and refunds and pursuance of dues up to final settlement and for suggesting improvements. The basic principle of audit of receipts is that it is more important to look at the general than on the particular, though individual cases of assessment, demand, collection, refund, etc. are important within the area of test check. A review of the judicial decisions taken by tax authorities is done to judge the effectiveness of the assessment procedure.
In sum, the standards set for the expanded scope of Government audit cover the following:
The extent and quantum of audit required to be done under each category of audit with reference to the mandate given to the SAI are determined by the SAIs. These are neither negotiable nor questionable and any judgement based on such audit is not generally open to question by the auditee. The SAI's responsibility is limited to the area of audit conducted in accordance with the standard laid down by it. The prescribed extent and quantum of audit are structured in accordance with the design of test check, random sampling, general review, indepth study of specified areas, etc. as may be warranted by the nature of transactions, its importance in the scheme of activities of a department and the totality of its transactions, the frequency of check and total plan
of audit to be executed during a period. Institutional mechanism provides for primary check by the auditor, test check by the Supervisor and control and direction by the group leader. Planning, executing and reporting of work is directed and monitored at middle and top levels of the audit hierarchy. There are built-in arrangements within the SAI to ensure that the work assigned to each employee is carried out as prescribed by appropriate authorities. The audit is conducted both centrally where accounts and original vouchers are kept and locally where the drawing and disbursing functions are performed under delegated functions, depending on the organisational and institutional arrangements obtained in Government.
Audit depends for its effectiv; value in its right and duty to report results to the proper authority so that appropriate action may be taken to rectify the irregularity or impropriety where possible or to prevent a recurrence of it. This authority may be a departmental authority, Government itself or in the last resort, the legislature through its financial committee consisting of members of legislature depending on the constitutional set-up in each country and the status and importance assigned to the SAI in the Constitutional arrangements of a Government. The audit reports are tailored to the needs of administration at various levels in Government with a view to not only ensuring regularisation of irregular transactions but also avoidance of wastage in expenditure and leakage in revenue. The contents and style of reporting vary from level to level in the hierarchy of Government and the Audit Report of the SAI to the top Executive* in Government and to the Legislature summarises the sum and substance of the audit findings during a period. By and large, the scope of audit, the important findings in audit, the qualifications of accounts checked and certified, and the general assessment of the state of accounts etc., are contained in the initial report, which are also discussed with the authorities of the auditee entity before issuing to the authority in charge of the entity audited, its controlling authority and to Government, if there are special points meriting report.
The common reporting standards are
Nationally authorised standards by some SAIs cover the following additional standards:
The Reports contain comments on individual transactions and performance reviews on selected topics. The standards of reporting adopted for including comments in the Reports by an SAI are given below:
The standards of reports on the three Es' Audit vary from country to country but are generally different from those adopted for drafting comments on individual transactions. The final report, cover the following:
In some countries, the performance reports do not embody auditor's recommendations or solutions of the problems uncovered by audit, which are left to be suggested by the legislative committee, who examine audit reports in the performance of the statutory functions under the constitution of the country concerned. Individual reports are issued, where the nature and scope of audit performance is large and the findings are too many, which cannot be included in the conventional audit reports. Reports are distributed to the auditee, the principal audit recipient and other legal recipient and other relevant organisations.
The Report content of an SAI is given below.
The Report will compress the various micro and macro aspects as also the various components of the programme as seen in audit. While the replies of Government/Department, wherever received, are incorporated, no suggestions of the solution of the problems unearthed in audit are attempted, which are left to the Executive/Legislature.
While applying the technique of test check or frequency it is ensured generally that the coverage, both in depth and spread, is adequate and representative enough to base audit opinions or form a judgement on entity's activities. Audit of public enterprises, where certification of accounts or issue of audit comments within a stipulated time is involved, annual audit-both financial and accounts-is conducted according to a calendar fixed in advance to facilitate the performance of statutory obligations vested in SAI. In the case of the three Es' audit, the extent, quantum and coverage is expanded to facilitate a comprehensive appraisal of the entity concerned and the Audit Report is not linked to the finalisation of accounts or their placement before the share holders in the General Body Meeting.
The standards for conducting prescribed test check or audit study in depth are laid down by the SAIs. Items of check and areas of work assigned to the auditor depending on their qualification, experience and status- comparable to the levels in administrative hierarchy-are laid down. The procedure for audit documentation and processing of audit work is to ensure on the one hand that the auditor/supervisor have done the work expected of them with diligence and professional care and involved the entity management before finalising the results having adequate proof in their working sheets, files and reports and on the other hand to convince the auditee of the equity, fairness and accuracy of the audit findings. The planning of audit, execution, finalisation of Audit Reports, their pursuance up to finality are built into the systems and procedures prescribed by the SAIs.
Linked to the standards of audit work is the qualifications, training, expertise and skills of the auditor employed by SAIs for carrying out the assigned tasks. As Government auditing or accounting are not prescribed courses for graduation or post-graduation in all the universities in most of the countries, it has become obligatory and necessary on the part of SAIs to recruit, train and initiate necessary personnel for audit work at all levels-primary, supervisory, middle and top management levels-in audit. At the primary levels, recruitment and induction of graduates is made either by the SAI or independent recruiting agency, who are trained on accounting and auditing either in internal training institutions or in professional institutions and on completion of training, they are required to qualify in prescribed examinations for various levels. The syllabus and content of examinations are so designed to test the
knowledge, expertise and skills acquired by the examinees in the diverse needs of Government Auditing as prescribed by the SAI. They are allowed to move up to the positions of supervisors and first level managers. Further specialisation and diversification of training and expertise are provided for upgrading their professional and managerial skills. The supervisors are mostly promoted from the ranks of primary auditor after completing stipulated period of service and qualifying in departmental examinations prescribed for diverse specialities of receipts and expenditure audit. The managers are promoted from them. Direct recruitment of officers for holding managerial posts above the first level is made through open competitive exams and are specially trained and developed in a staff college and in the field offices. The SAIs face many problems in developing technical expertise in staff on account of environmental factors like low incentive to attract and retain employees with desired qualifications and skills, inadequate training facilities, fast mobility of qualified and experienced personnel and resources constraints.
Among the most important developments in Government auditing in this century have been the recognition of the concept of internal control and induction of internal auditing by professional auditor as a part of the management control system in Government. Internal Control covers all aspects of an entity's activities-financial, accounting and operations and are intended to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to prescribed managerial policies. The principal areas of internal control are (i) internal check, (ii) internal accounting control, and (iii) internal administrative control. The main objectives are to ensure regularity, compliance, provision of funds, economic, efficient and effective operations, appropriate classification of transactions, correct accounting, substantiation, evaluation and adequacy or otherwise of physical safeguard. Internal management control with varying degrees of functional jurisdiction, demarcation of duties and responsibilities, autonomy and independence in functioning-planning of audit, execution of auditing, reporting and pursuance of results-are in existence in the developing countries. The internal audit functions mostly as an integral part of the administration or management and carries out objective, independent, systematic and professional examination of financial, administrative and other operations expost facto and reports results to the appropriate authority within the organisation/department for taking remedial action. Internal audit is thus a control of controls. It is in the nature of an internal service to the Executive for smooth and efficient functioning and for reviewing and improving its performance. Wherever set-up, the common
objective of internal audit system, expressed or implied, cover the following:
While the scope of internal auditing vary from country to country depending on the development of administrative and managerial systems and procedures, it is recognised that the Government or designated management-
It is, however, left to internal auditor to-
In some of the developing countries, following essentials for an efficient and effective Internal Audit are recognised:
The SAI is naturally concerned with the quality of the internal control system, particularly internal audit, prevailing in Government or Public enterprise. The quantum of internal audit and its spread also help the SAI to determine the quantum and extent of its own audit. Where the internal auditing is adequate, the extent of audit is limited to appropriate test check of internal audit work. Such tests are performed by examining or reviewing source of the same operations, transactions or balances that were examined by the internal auditor or by examining similar ones but not those actually examined. The results of the external auditor's test are compared to with the internal auditor's work to form conclusions regarding its acceptability or adequacy by SAI. The competence and objectivity of the internal auditor's qualifications, professional care, quantum and extent of work, independence, objectivity and effectiveness, is also seen to restrict or add to the scope of audit work of SAI. The plans, programmes, working sheets, reports, follow-up, etc. for internal auditor and their disposals by management are accessible to SAI to enable it to make a fair evaluation of its work and performance. By proper co-ordination and mutual cooperation, duplication of audit or overlapping of functions can be eliminated.
As part of their audit function, Supreme Audit Institutions examine the internal control systems and procedures of government entities, both at the macro and micro level. While conducting transactions audit at the unit level, it is seen in Government audit as to whether the internal controls prescribed for the activity or transactions have been adhered to and non-compliance or non-observance are brought out for regularisation by competent authority. The internal control systems and procedure are subjected to detail review periodically for pointing out their reliability, efficacy, effectiveness and adequacy to meet the changing requirements of administration.
The size of the entity, its activities, organisational structure and its complexities determine the approach of
The Supreme Audit Institution also study the organisational structure of the entity to assess that
The entity's financial and operational procedures are tested by SAI to conclude that
Besides, the work of employees in the financial and operational departments are also reviewed in audit to assess that these are discharged satisfactorily. Great reliance is placed by SAI on the data and information generated by the internal control systems for conducting efficiency-cum-performance audit. The adequacy or otherwise of the internal audit systems is commented upon in SAI for strengthening it.