1. Audit of Public Enterprises presents a challenge to the Supreme Audit Institution, in many ways. On one hand their compact structure, clear-cut orientation towards profit and commercial nature of activities make them more susceptible to audit evaluation. On the other hand their social objectives and their actions in working as instruments of State policy make it difficult to evaluate their performance within the frame work of recognized parameters. The auditor is therefore required to bring to his work all the skills and resources at his command in order to discharge his duties effectively.
2. For effective audit of public enterprises, a harmonious blending of various elements of management and the professional auditing are necessary. The aim of this paper is to discuss those aspects of audit management which require professional inputs, with a view to present a framework for audit management of public enterprises.
3. The Supreme Audit Institutions undertake the audit of public enterprises either for the certification of accounts or for the Value for Money audit which aims at the evaluation of economy, efficiency and effectiveness of transactions. Many SAIs also undertake comprehensive appraisals of the enterprises with a view to ascertain whether the public investment in the entire enterprise as a whole has yielded the desired results and that the management in all areas has been efficient and effective.
4. The first step in the process of audit management will therefore be to decide clearly the objective for which the audit is being undertaken. Once the objective is clearly decided, all the re sources will have to be directed only for the achievement of this objective. For this purpose, a detailed audit plan will have to be prepared.
5. The main objective of audit planning is to ensure that our audits are carried out effectively and efficiently. In a broader context, audit planning also ensures that the best use is made of SATs resources. It directs audit effort to important areas of audit, identifies potential problems promptly and generally promotes better control and coordination for timely completion of audit effort.
6. Audit planning process can be broadly divided in the following stages:
7. The purpose of audit planning is to make the best use of the scarce resources available and achieve the maxi mum effectiveness. To achieve this selection should be done carefully. The extent and nature of investment, public purpose involved, topicality of subject, controversies raised in press, public or Parliament, mismanagement, waste and inefficient use of public resources should be some of the guiding factors in selection of organisation/project or transactions. Here also the audit objective is important. For a regularity audit, we should select an enterprise where accounting irregularities or manipulation of accounts are suspected; for a comprehensive appraisal, we would select an enterprise with an important public purpose which has been in operation for a reasonable length of time. For economy and efficiency audits, contract transactions of large amounts may be suit able, but for effectiveness, self-contained schemes, expansion programmes or projects may be ideal.
8. After the selection of an organisation or project, before we move to the next stage, a detailed study of the nature of business transacted by the organisation is quite essential for a meaningful planning. In particular, such a study will be of great help in identification of critical areas. The systems followed by the organisation and the internal controls established should also form a part of such a study. This will enable us to form a judgement regarding the extent of check required for compliance and substantive testing in various areas.
9. The identification of critical areas can be done only after a detailed study of the working of organisation. Here again the audit objective is the frame of reference. If we are taking up a the certification audit of accounts, the analytical review bringing out changes in various items of expenditure or performance ratios with reference to the previous year will be very important. The areas where substantial or unexpected variation is noticed should be taken up for examination. Similarly, changes in accounting policies, computation of depreciation, valuation of closing stock and disclosures in the Notes forming part of Accounts will need close examination.
10. An audit for economy, efficiency and effectiveness will need different analysis. Here we may study the minutes and agenda notes of the meetings of the Board of Directors to pick up important transactions, prepare a list of contracts to select high value items, relate the purchase orders with stock levels, surplus store items, take up schemes and projects just completed and so on. In any case a close study of working of the entire enterprise is essential for conducting this exercise.
11. Performance appraisal would demand an analysis on a much wider scale. Here the statistics in respect of each of the spheres of activity will have to be projected for the period of last four to five years with a view to establish a trend. Production, capacity utilisation, consumption of raw materials, marketing, man-management, project execution, research and development and inventory management are some of the areas. Wherever it is noticed that there is a declining trend or abrupt changes, those areas should be earmarked for indepth examination. In addition to this, the identification of objectives of the organisation is very important. It will have to be examined whether these objectives have been achieved or not. If yes, then to what extent and if not, the reasons for such a failure will have to be examined. It may be remembered that in this type of appraisal, all the activities of the organisation come under our scrutiny and the cost and effectiveness in every area has to be examined.
12. Having identified the critical areas for examination, the next step is to decide the nature and extent of audit checks to be applied. We have already seen the importance of the detailed study of the organisation. Such a study should reveal to us the areas of strength and weakness. The soundness or otherwise of internal control systems should be verified by examination of working of such controls. These tests are compliance tests. For other areas, we shall require independent examination of documents, verification or recomputation of data. These are called substantive tests. The extent of such tests will depend upon the degree of reliability which we wish to achieve, in order to form an opinion and report upon it. This will vary in each case depending on many circumstances, but it should be decided as a part of planning.
13. Now if we have planned the areas for examination as well as the extent of audit checks, it should not be difficult to fix a suitable time-frame. Timeliness is the essence of effectiveness for many audit findings. It is also seen that in the absence of such a time-frame there is a tendency on the part of audit staff to go on and on in the hope of finding some thing. This results in a wasteful effort. The time-frame should however be realistic and can be reviewed with the progress of audit.
14. If we have fixed the areas of scrutiny, extent of audit checks and the time- frame, it should be possible for us to determine the manpower required to accomplish this task. The decision regarding man power is not only the numbers but also the qualifications and experience of persons to be included in the group, the extent of supervision and stages at which it will be provided. If there is an enterprise in the aviation sector or the oil sector, you may like to select the persons who have had some exposure to the working of that industry. If you intend to take up an appraisal, it may be wise to provide for supervision in various spells to ensure that it proceeds on the right track.
15. In addition to the five stages of planning mentioned in para 6 above, the audit for three Es and the performance appraisals have one more step in planning. In these cases the audit planning should include the assessment for knowledge inputs. Depending upon the nature of transaction/enterprise selected for audit, knowledge will have to be developed in its areas of working. To take an example, if the audit of an oil company or an oil refinery is being planned, it may be essential for the audit staff to know about the various chemical processes, basic parameters to determine the process efficiency and the various products and their application. If special mechanism is being applied for product pricing, as in India, then it will also require a thorough study. In some cases, the study of literature brought out by the enterprise may be enough; but in many cases special efforts like training, study of relevant standards of professional bodies, technical literature etc. will be necessary to develop the essential knowledge inputs. This should be done as a part of the planning process.
16. The audit planning will thus present a clear picture of what we are going to attempt in a given time with the given manpower. Rather than shooting in the dark or depending upon rumours or information provided by disgruntled elements in the organisation, we attempt to make a purposeful study of the critical areas for examination so that we know where we are going. The next stage is now to subject the management process to audit.
17. We have so far seen the determination of audit objectives and the process of planning. It may so happen that in the course of execution of the audit plan, we may be required to conduct independent audits of several departments, offices or projects or a combination of all of them, either located at the same place or at different places. In that case these smaller audits will also have to be planned and executed. In each of these audits the objectives and plan must be firmly linked up to the overall objective and plan. Time should be allocated for each audit within the overall time-frame and resources will be allocated according to the nature of examination and quantum of work involved, within the overall plan. These individual audits should also be carried out efficiency and effectively so that they contribute to the final outcome. The systems and procedures through which this effectiveness is achieved may be termed as essentials of Micro-Audit Management.
18. Conducting audit basically consists of four stages:
19. Preliminary observations arise as a result of examination of critical areas earmarked during planning. These are in the nature of first impressions and are issued to obtain views of Management or to seek clarification with a view to understand the transactions. The observations should be politely worded and focus on areas where clarifications are required. We should have an open mind at this stage and wording of observations should not indicate an air of finality.
20. All aspects of transactions should be covered and every information not available from the records should be asked for, raising all relevant points carefully. Preliminary observation Notes are the basic documents of audit evidence on the basis of which the final Audit Reports are developed. If any point is missed at this stage, the entire process will have to be repeated, resulting in additional requirement of time and manpower.
21. Equally important is the consideration of replies to these observations. Management often feel that Auditors have made up their mind well in advance and the replies have little effect on them. This should not be allowed to happen. Genuine difficulties, technicalities, compulsion of the circumstances and other reasons when advanced by the Management deserve proper consideration. If we feel that these reasons are genuine, the observations should either be dropped or modified. However, if the Management does not show any interest in giving replies, we are entitled to go ahead after a reasonable time without waiting further for an indefinite period. The replies or statements furnished by the Management in the course of audit should be properly got authenticated and kept on record forming part of the evidence.
22. Those of the observations where satisfactory replies, explanations or clarifications have not been given by the Management are included in the Inspection Report. This report is thus the first formal expression of Audit views in respect of the area covered by audit. It includes the facts of cases in brief, replies by Management, contradictions and tentative conclusions reached in Audit on the basis of available information. Inspection reports are forwarded to corporate Management for their comments. Following points need special attention in this stage of management:
23. After the Inspection Report is prepared, the draft report should invariably be discussed with the Management. The discussion should be held at the highest possible level available on the spot. Even in discussion we should have open mind and in case the Management comes forward with fresh and convincing evidence to justify their action, there should be no hesitation in making necessary changes in the report. It should always be kept in mind that such open discussions are the real testing ground for strength of audit points. Once it is known that the Management has no plausible explanation, we can confidently go ahead for reporting that point. At the same time we will not continue to harp on a weak point. The fact that the report was discussed with the Management should be recorded.
24. Inspection Reports are raw materials from which ultimately several points of audit importance are developed for final reporting. If these reports are of good quality, the ultimate Audit Reports are bound to be superior.
25. Depending upon the size of organisation and the objective of audit the duration can be long or short. Particularly for the long duration audits, reap-preciation and feed-back are very crucial. In case after commencement of audit, it is found that things are different from what we anticipated, corrective action is called for. For this purpose midterm meeting should be planned and the progress of audit should be reviewed. This can be done after the audit of certain phase, either project or department of the enterprise is over. If necessary there can be gaps between various spell of audit so that absorption from one spell can be fruitfully utilized for the subsequent spells. The audit plan may also be modified and additional time and manpower should be allocated.
26. In addition to the mid-term review regular monitoring system should be there to keep the work of audit teams under constant review. There should be regular communication with them and their points of doubts, difficulties etc. should be attended to. For all major audit programmes there should also be a debriefing session at the end of audit. The problems faced by the audit team, defects in planning, difficulties faced in in-depth auditing and other problems should be discussed so that the experience gained by one team can be utilized by the other.
27. Performance appraisals cover a much wider area and also attempt to measure efficiency in various areas of management. This approach throws up certain vital issues which can be summed up as below:
28. It is quite necessary that at the stage of audit planning a total view of the enterprise, its importance and contribution to economy and circumstances leading to various investment decisions should be kept in view. For this purpose it will be necessary to study the following documents at planning stage:
29. A study of the above documents will present a total view of objectives and activities of the enterprise, which should be used in preparing plans for performance appraisal. In the absence of such a study, it will not be possible to locate the areas of weakness and conduct their indepth examination. It is also possible that without such a total view an unbalanced picture of the enterprise may be presented.
30. Determination of the parameters of efficiency is very crucial in the performance appraisal or for that matter for any efficiency audit. Basically the efficiency has to be measured in terms of achievement of end-results of the activities undertaken. This achievement has to be viewed in terms of input of resources, and the parameters for efficiency have to be developed. Let us take an example. If we are auditing a large marketing organisation, the end-results of its activity is sale of products. We find that total sales have gone up substantially during the last three years. Then the major controllable input is man power. This has also increased. If we find a ratio of sales per employee, this will give an indication of organisational efficiency. On the other hand for a production organisation, unit cost of production is the obvious parameter.
31. In most cases it should be possible for Audit to adopt the same parameters of efficiency as are used by the Management to monitor their working. For this purpose the management information reports should be studied closely. In addition, the targets for achievements should be compared with actual achievements and process of determination of targets should also be examined. In a way the efficiency audit is a mirror reflection of the management monitoring for efficiency. However, where the management does not have such system or suitable criteria, it will have to be developed by Audit after a close study of the working of the enterprise.
32. The next important point is regarding examination of technical areas. In a performance appraisal, such examination becomes necessary. There is a general impression that such examination cannot be carried out unless there are technically trained personnel working with Audit. This is not quite true. The intention in undertaking such an examination is not to discuss technical merits or demerits of a decision per se. The audit objective is merely to ascertain that in taking such a decision due regard has been shown to the efficiency and economy of expenditure. This has to be ascertained from the records and available evidence. Following suggestions may be useful in this regard:
33. The culmination of the entire audit effort is the final Audit Report which is presented to the appropriate authority as prescribed by law. The report brings out lucidly the observations of Audit on various aspects of activities which have been examined. The audit planning process should always bear in mind the final requirement of preparation of report. It should be kept in view that:
34. The process of audit management discussed above clearly points to a different style of leadership for successful and efficient management of an audit organisation. The leadership has to be participative and knowledge-oriented. Theory 'Y' of man-management propounded by Douglas McGregor is aptly suited to an audit organisation. The normal bureaucratic functioning will hardly yield any desired results. Openness and constant two way communication with staff is the most essential element of such a system.
35. Nature of job of an auditor is often unrewarding, irksome and unpleasant. In these circumstances if he does not receive adequate recognition even from his own superiors, there remains no motivation to work. The emphasis therefore should be on enhancing the job satisfaction and investing the employees with a sense of importance and participation.
36. Communication is the life-line of such an organisation. Not only with the employees but also with the auditee organisations the channels of communication should always be open. This will, on the one hand ensure that the employees work on the right track and efficiency is maximised, on the other hand contact with Management will ensure that relevant papers are available and that the facts presented are objective.
37. In view of the acute shortage of trained manpower and rising costs of Governmental operations, it is imperative that the best use is made of avail able resources. An effective audit management therefore can contribute a lot to ensure greater accountability.