Audit Manual Part 1

Audit MAnuAl for the Audit of the Accounts And operAtions of MetropolitAn, MunicipAl and district AsseMblies (MMdAs)
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Audit MAnuAl for the Audit of the Accounts And operAtions of MetropolitAn, MunicipAl And district AsseMblies (MMdAs)
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description FORWARD ACKNOWLEDGEMENT CHAPTER 1 INTRODUCTION Background The purpose of the manual Audit Mandate Conceptual framework Financial Auditing Types of audits Scope of audit Reasonable assurance Responsibility for the financial statements Performance Auditing CHAPTER 2 CODE OF ETHICS Introduction Code of ethics statements Concept, background and objective of code of ethics Integrity Independence Political Neutrality Conflicts of Interest Confidentiality or professional secrecy Professional competence and due care page no. 9 10
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CHAPTER 3
STRUCTURE OF METROPOLITAN, MUNICIPAL AND DISTRICT ASSEMBLIES (MMDAs) Introduction Establishment / Creation of District Assemblies Structure of the Local Government System Functions of the Assemblies Sub-District Political / Administrative Structures Sub-Metropolitan / District Councils Urban Councils Zonal Councils Town / Area Councils Unit Committees Regional Co-ordinating Councils (RCCs) COMMITTEES OF DISTRICT ASSEMBLIES Executive Committee Sub-Committees of Executive Committee Other main Committees FINANCING THE LOCAL GOVERNMENT SYSTEM Budgeting and Rating Locally Generated Revenue Central Government Transfers Specialised Funding CHAPTER 4 AUDIT PLANNING Introduction Planning Objective of Audit Planning Planning the Audit Work The Overall Audit Plan
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description The Audit Programme Changes to the Overall Audit Plan and Audit Programme CHAPTER 5 SYSTEM DOCUMENTATION Introduction Characteristics Sources of information and verification Updating the Documentation CHAPTER 6 MATERIALITY, RISK AND SIGNIFICANCE Introduction Materiality Audit risk Significance CHAPTER 7 EVALUATION OF INTERNAL CONROLS AND TESTS OF CONTROL Introduction Internal Control Evaluation of Internal Control Relationships with the Management of the Audited MMDA Types of Internal Controls Carrying out an Evaluation of Internal Controls Carrying out tests of control Evaluating the Results of Tests Control Join Tests of Control and Substantive Testing CHAPTER 8 SUBSTANTIVE AUDIT TESTS Introduction Analytical Procedures Nature and Purpose of Analytical Procedures
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description Analytical procedures as substantive procedures Extent of reliance on analytical procedures Investigating Unusual Items Vouching Asset Verification Liability Verification
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CHAPTER 9 AUDIT EVIDENCE Introduction Sufficient appropriate audit evidence Procedures for obtaining audit evidence Inspection Observation Inquiry and Confirmation Computation Analytical Procedures CHAPTER 10 VALIDATION OF FINANCIAL STATEMENTS Introduction Cash Basis of Accounting Books of Accounts Purpose of Financial Statements Responsibility for Financial Statements Components of Financial Statements Financial Year Monthly Accounts and Statements Annual Accounts and Statements
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description CHAPTER 11 AUDITING IN COMPUTERISED ENVIRONMENT Introduction Financial audit objectives Reporting weaknesses Organization and security of computer information and facilities Organizational Controls Separation of Duties Programme Change Security of Information and Computer facilities Computer facility access Security of Computer programmes and files Recovery Environment controls CHAPTER 12 AUDIT REPORTING Introduction Reporting to Management Reporting to Parliament MANAGEMENT LETTER Introduction Content Preparation Review and Approval Follow-up THE AUDITORS REPORT ON FINANCIAL STATEMENTS Consideration of Identified Misstatements Types of audit opinions
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description CHAPTER 13 DOCUMENTATION / AUDIT WORKING PAPERS Introduction Purpose, Form and Content Documentation of financial audit Organization and content of Financial Audit Files Documentation of Performance Audit Ownership and Security Contents of permanent files CHAPTER 14 QUALITY CONTROL Introduction Carrying out quality control procedures Quality control throughout the audit bibloGrAphY AcronYMs
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Audit Manual for the Audit of the Accounts and operations of Metropolitan, Municipal and district Assemblies (MMdAs)
foreWord
Metropolitan, Municipal and District Assemblies are the core institutions established under the 1992 Constitution to give effect to the decentralized system of government mandated by the same Constitution. The Assemblies and their sub-structures (sub-metro, zonal, urban, town and area councils) have a wide range of responsibilities towards the public in the provision of essential services. Assemblies also have authority to raise revenue from the public in the form of rates, fees, lands, licences, trading services and miscellaneous sources. In addition to such internally generated funds, Central Government makes substantial transfers of monies to Assemblies from the Consolidated Fund in the form of the District Assemblies Common Fund (Act 455 of 1993). These public monies have to be properly accounted for by the Assemblies and used for the purposes for which they were collected. The Assemblies also have to ensure that value for money has been derived in the use of such public funds. The role of the Ghana Audit Service becomes critical in this regard. Article 187(2) of the 1992 Constitution, therefore mandates the Auditor General to audit the accounts of the Assemblies, among other institutions. To ensure that the Auditor Generals mandate is fully and effectively carried out, the staff of the service needs to adopt a holistic and professional approach to their audit of MMDAs. In this connection, the Government of Ghana and DANIDA under the Local Service Delivery and Governance Programme (LSDGP) have provided financial support to the Ghana Audit Service towards the development of the Audit Manual which would enable the staff of the Service to approach their audit of MMDAs in a more professional and holistic manner. The manual is in two parts. Part I provides theoretical background to financial and performance audit while Part II provides the staff with the audit programmes for field audits of MMDAs.
AcKnoWledGeMent
The consultants wish to express their profound thanks to the following institutions and individuals for their invaluable assistance offered them in the development of this Manual: Members of the Steering Committee of the Ghana Audit Service Accra Metropolitan Assembly Tema Metropolitan Assembly New Juaben Municipal Assembly Ga West Municipal Assembly Mr. E. B. Lamptey, a retired Deputy Auditor-General Nana Agyekum Dwamena of Management Services Division, OHCS
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1.0 introduction 1.1 Background Ghanas commitment to decentralisation is embodied in the 1992 Constitution and in various legislative instruments such as the Local Government Act, 1993 (Act 462), the District Assemblies Common Fund Act, 1993 (Act 455) and the Local Government Service Act, 2000 (Act 656) and has been pursued by successive governments. The goals of the decentralisation programme are: (i) Strengthening and expanding local democracy; (ii) Promoting local, social and economic development; and (iii) Reducing poverty and increasing the choices of the people. In line with the above, various structures and systems have been put in place to ensure that Metropolitan, Municipal and District Assemblies (MMDAs) plan, initiate, coordinate, manage and execute policies in respect of all matters affecting the people within their area. Further, each Local Government Organisation is expected to promote sound financial system to enable it utilise the increasing volume of funds being transferred through the District Assemblies Common Fund (DACF), District Development Facility (DDF) and other sources to fully deliver the services which are central to the development of the area. Additionally, development projects in the districts are expected to be funded under the DDF, which is a performance based grant from donors. The Functional Organisational Assessment Tool (FOAT) will provide the basis for measuring the performance of Assemblies and their suitability to access the facility. The Audit Service is also required, as part of the measuring process, to audit and report on operational and management issues in its routine audit. Further, through the implementation of the DDF and FOAT, triggers and indicators would be provided to enhance the Assemblies finances and promote accountability.
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In furtherance of the above, it has become imperative that systems for accountability of Local Government Organisations should be clarified and strengthened. The principle of public accountability requires those in charge of government activities to be responsible for their decisions, actions and inactions. Incorporating operational management issues in our routine audits, will enhance public accountability by providing Parliamentarians, the media, citizens and donors with independent assessment of the running and outcome of Assemblies activities. The role of the Ghana Audit Service, therefore, becomes critical in this enterprise. Consequently, the Government of Ghana and Danish International Development Agency (DANIDA) under the Local Service Delivery and Governance Programme (LSDGP) provided support to enable the Ghana Audit Service to develop this manual. The manual covers a broad range of financial and performance audit areas. These are Planning, Budgeting, Cash Management, Procurement, Contract Management, Payroll System, District Assemblies Common Fund and other Related Funds, Auditing in Computerised Environment and Validation of Annual Financial Statements. 1.1.1 Purpose of the manual: The purposes of the manual are: i. Document expectations of the Audit Service as it relates to the conduct of audits at the Assemblies, ii. Integrate both Financial Audit and Performance Audit approaches in the audit of MMDAs; iii. Standardise approaches for the conduct of the audits; iv. Provide a framework for capacity building of staff of the Audit Service; v. Serve as a basis for the assessment of the level of accountability at the Assemblies by stakeholders; vi. Enhance stakeholder confidence in the audit reports produced; and vii. Evaluate the governance system by examining how MMDAs function.
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1.1.2 Audit Mandate Article 187 (2) of the 1992 Constitution and Section 11 of the Audit Service Act, 2000 (Act 584) mandates the Auditor-General to audit the accounts of all public offices, including Local Government Administration. Section 11 (2) of the Act, further empowers the Auditor-General to have access to all books, records, returns and other documents, including documents in computerised and electronic form relating to or relevant to those accounts. In addition, Section 14(2) (e) of the Audit Service Act requires the Auditor General to draw attention to General Corporate performance, indicating achievement against set targets and objectives and whether the finances of the body have been conducted with due regard to economy, efficiency and effectiveness having regard to the resources used. This enables the Auditor-General to incorporate operational and management issues in his audit engagements in the MMDAs. Also section 121 of the Local Government Act, 1993 (Act 462) empowers the Auditor-General to audit the accounts of MMDAs.
1.2.0 conceptuAl frAMeWorK 1.2.1 Financial Auditing Financial auditing is the expression of an opinion by the auditor as to whether or not the financial statements are prepared, in all material respects, in accordance with an identified / applicable financial reporting framework and / or statutory requirements as well as the requirements of the International Standards on Auditing (ISA 200.2) The auditors opinion: (i) enhances the credibility of the financial statements; (ii) does not guarantee the future viability of the MMDA; (iii) does not guarantee the efficiency or effectiveness with which management has conducted the affairs of the Assemblies; and (iv) does not guarantee that the MMDA is free of fraud.
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1.2.2 Types of audits The most common types of Supreme Audit Institutions (SAI) audits are regularity and performance audits. Regularity audit embraces: (a) attestation of financial accountability of MMDAs and involves examination and evaluation of financial reports and expression of opinions on financial statements; (b) attestation of financial accountability of the government administration as a whole; (c) audit of financial systems and transactions, including an evaluation of compliance with statutes and regulations; (d) audit of internal controls and internal audit functions; (e) audit of the probity and propriety of administrative decisions taken within the audited MMDA; and (f) reporting on any other matters arising from or relating to the audit that the SAI considers necessary to disclose. 1.2.3 Scope of audit The term scope of audit refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. The procedures required to determine the scope of an audit in accordance with auditing standards should be determined by the auditor, taking into account the requirements of auditing financial statements, laws, regulations and, where appropriate, the terms of the audit engagement and reporting requirements. On the other hand, financial audit assesses whether accounts are true and fair. Consequently, it focuses on the accounting and management information system. Some of the specific objectives financial auditors evaluate are whether: (i) Adequate and effective system of internal controls are maintained to ensure the security, transparency and accountability in the management of project funds; (ii) Project funds are managed and utilised in compliance with applicable laws of Ghana with due regard to economy and efficiency;
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(iii) Procurement of goods, works and services have been carried out in accordance with the Public Procurement Act in a transparent and competitive manner; (iv) Financial Statements have been prepared accurately and on timely basis and circulated to stakeholders; and (v) Projects are initiated and budgets submitted in accordance with the Memorandum of understanding with Development Partners. However, even where there are no such additional objectives, there may be general public expectations with regard to public sector auditors reporting on non-compliance with authorities or reporting on ineffectiveness of internal control. Therefore, public sector auditors keep such expectation in mind and are alert to areas that may give rise to risk of non-compliance with authorities or risk relating to ineffectiveness of internal control when planning and performing the audit (ISSAI 131 p3). In determining the audit procedures to be used in conducting audit in accordance with ISA, the auditor should comply with all relevant standards of ISA (ISA 200.14). Consequently, the audit may only claim compliance with ISA in the audit report when all the relevant ISA standards have been complied with (ISA 200.14). 1.2.4 Reasonable assurance (ISA 200.17-21) According to the auditing standards an audit is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatements. Reasonable assurance is not total assurance due to inherent limitations to an audit as listed below. It means that the audit evidence provided by the auditor leads to the conclusion that there are no material misstatements in the financial statements as a whole. Reasonable assurance relates to the whole audit process. There are inherent limitations in an audit that affect the auditors ability to detect material misstatements. These limitations result from factors such as the following; (a) Only a sample of transactions or balances will be selected for the audit; (b) The inherent limitations of any accounting and internal control system.
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(c)
For example, the possibility of collusion, and The fact that most audit evidence is persuasive rather than conclusive.
In many instances, the auditor will rely on professional judgment, in particular, when deciding on the nature, timing and extent of audit procedures or drawing conclusions based on the audit evidence gathered. For example, the auditor needs to decide on the reasonableness of the estimates made by management in preparing the financial statements. 1.2.5 Responsibility for the financial statements (ISA 200.3355) While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for preparing and presenting the financial statements is that of the management of the MMDA. The audit of the financial statements does not relieve management of its responsibilities. 1.2.6 Performance auditing The International Organisation of Supreme Audit Institutions (INTOSAI) adopted the Lima Declaration of Guidelines on Auditing Precepts in October 1997. The Guidelines placed ValueForMoney (VFM) audits and financial audits on the same footing. The Guidelines affirmed the significance of the traditional task of SAIs, that is, to audit the legality and regularity of financial management and of accounting. In addition to this type of audit, however, it acknowledged another equally important type of audit (performance audit), which seeks to examine the economy, efficiency and effectiveness of public administration. A full scope audit of the public sector will therefore cover not only financial operations, but also the full range of government activities including organisational and administrative systems. In pursuance of the declaration, the Audit Service Act, 2000 (Act 584) gave the mandate for performance auditing to be carried out by Audit Service to complement its traditional financial audits. Training in Performance auditing was accordingly introduced in the Audit Service in 2001 as part of capacity building project funded by the European Union.
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Performance audit is defined by the INTOSAI Auditing Standards as an audit that seeks to evaluate the economy, efficiency and effectiveness with which a government organisation, a Ministry, a Programme or MMDA uses its resources in carrying out its responsibilities. The general objective of carrying out a performance audit is to assess whether the programmes and activities are economical, efficient and effective. It therefore focuses on the organisations programmes and activities and results and outcomes. Some of the specific objectives it seeks to evaluate are whether: (i) projects identified by the District Assembly for funding under the programme have been included in the Medium Term Development Plan and approved in the Districts budget (ii) monitoring of performance have been carried out by district and regional monitoring and evaluation teams and report issued appropriately dealt with (iii) projects are completed within the specified period according to work plans and involving the full participation of communities and substructures, and (iv) the impact of the projects in terms of their objectives are evaluated, monitored and reported in terms of their relevance and effectiveness. Flowing from the definition are the basic concepts in Performance Audit, commonly referred to as the 3 Es, which are defined as follows: (a) Economy: minimising the cost of resources used for an activity, having regard to appropriate quality. (b) Efficiency: the relationship between inputs in terms of goods and services and other results, and the resources used to produce them; and (c) Effectiveness: the extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity. There is also a 4th E, which looks at environmental impact of governments policies and activities in the community.
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The 3Es are interrelated in the management process and their interrelationship is shown in the management process illustrated in Figure 1. Figure 1: Management process
The Basic Performance Audit Questions are:. (a) Are things being done in the right way? (b) Are the right things being done? The first question is intended to find out whether the activities carried out are considered the most appropriate and also conform to rules and regulations. The second question refers to effectiveness or impact on society and whether the intended objectives are achieved. A typical VFM audit may be looking at one or more of the 3Es. For each of them, the auditor attempts to ask the following basic questions to facilitate its assessment and thus, enable him draw the necessary conclusions.
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Economy: is a resource acquisition concept and the audit of economy will provide answers to questions such as: (i) do the means chosen or the equipment obtained (inputs) represent the most economical use of public funds? (ii) have the human, material or financial resources been used economically? (iii) are management activities performed in accordance with sound administrative principles and good management policies? Efficiency: is resources utilisation concept. During an audit of efficiency, the auditor would want to know whether: (a) resources acquired have been put to optimal or satisfactory use; and (b) whether the same or similar results in terms of quality and turnaround time could have been achieved with fewer resources. Effectiveness: is essentially a goal attainment concept which is concerned with relationship between goals or objectives, outputs and impacts. An audit of effectiveness tries to find out whether the stipulated aims are being met by the means employed, the outputs produced and the impacts observed. Environment: the 4th E deals with the environment. During the audit, the auditor would seek to determine the impact of the Government Policies and programmes on the community.
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2.0 code of ethics 2.1 International Federation of Accountants (IFAC) Code of ethics statements and INTOSAI code of Ethics for Auditors in the Public Sector. The Code of Ethics for Professional Accountants, developed by IFAC and the INTOSAI code of ethics establishes ethical requirements for professional accountants. A conceptual framework for all professional accountants was provided to ensure compliance with the six core fundamental principles of professional ethics. In addition, in the public sector there may be applicable national ethical requirements auditors need to consider. (ISSAI 1200 P13) The auditor should comply with ethical requirements relating to all audit engagements (ISA 200.14) (ISSAI 1220E P6). These requirements relate to the following fundamental principles: (i) Integrity: honesty; (ii) Independence: the auditor should not have personal or financial dealings which might cause a conflict of loyalty or interest; (iii) Conflict of interest: auditors should avoid all relationships with managers and staff of the audited MMDA and other parties which may influence, compromise or threaten the ability of auditors to act and be seen to be acting independently; (iv) Confidentiality: auditors should not disclose information obtained in the auditing process to third parties; (v) Professional competence and due care: auditors must not undertake work they are not competent to perform; and (vi) Political neutrality: It is important to maintain both actual and perceived political neutrality of the SAI. Therefore it is important that auditors maintain their independence from political influence in order to discharge their audit responsibilities in an impartial way. If auditors are permitted to participate in political activities they have to be aware that these activities may lead to professional conflicts.
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2.2 Code of ethics statements The code gives guidance to how auditors should behave in specific circumstances. It deals with professional attitudes of members of AFROSAI E. 2.3 Concept, background and objective of code of ethics A code of ethics is a comprehensive statement of the values and principles that should guide the daily work of auditors. The independence, powers and responsibilities of the public sector auditor place high ethical demands on the SAI and the staff they employ or engage for audit work. A code of ethics for auditors in the public sector should consider the ethical requirements of civil servants in general and the particular requirement of auditors, including the latters professional obligations. The conduct of auditors should be beyond reproach at all times and in all circumstances. Any deficiency in their professional conduct or any improper conduct in their personal life places the integrity of auditors, the SAI that they represent, and the quality and validity of their audit work in an unfavourable light, and may raise doubts about the reliability and competence of the SAI itself. The adoption and application of a code of ethics for auditors in the public sector promotes trust and confidence in the auditors and their work. A code of ethics recognises that the objectives of the profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirements. These objectives require four basic needs to be met: (a) Credibility: In the whole of society there is a need for credibility in information and information systems; (b) Professionalism: There is a need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field; (c) Quality of Services: There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance; and (d) Confidence: Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services.
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2.4 Integrity Integrity is the core value of a code of ethics. Auditors have a duty to adhere to high standards of behaviour (e.g. honesty and candidness) in the course of their work and in their relationships with the staff of audited entities. In order to sustain public confidence, the conduct of auditors should be above suspicion and reproach. 2.5 Independence Independence from the audited MMDA and other outside interest groups is indispensable for auditors. Auditors should also be objective and impartial in dealing with the issues and topics under review. Independence may be impaired, for example, by external pressure or influence on auditors; prejudices held by auditors about individuals, audited MMDA, projects or programmes; recent / previous employment with the audited MMDA; or personal or financial dealings which might cause a conflict of loyalty or interest. Auditors have an obligation to refrain from being involved in all matters in which they have vested interest. There is a need for objectivity and impartiality in all work conducted by auditors, particularly in their reports, which should be accurate and objective. Conclusions in opinions and reports should therefore be based exclusively on evidence obtained and assembled in accordance with the SAIs auditing standards. Auditors should make use of information brought forward by the audited MMDA and other parties. This information is to be taken into account in the opinions expressed by the auditors in an impartial way. The auditor should also gather information about the views of the audited MMDA and other parties. However, the auditors own conclusions should not be affected by such views. For each audit, the Auditor General or the person who is delegated with the signing of the report should form a conclusion on compliance with independence requirements that apply to the audit engagement. This entails the following: (a) Obtaining relevant information from the SAI to identify and evaluate circumstances and relationships that create threats to independence;
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(b)
(c)
(d)
Evaluating the information on identified breaches, if any, of the MMDAs policies, procedures and programmes to determine whether they create a threat to independence for the audit; Taking appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards. The Auditor should promptly report to the MMDA any failure to resolve the matter for appropriate action; and Documenting conclusions on independence and any relevant discussions with the MMDAs that support these conclusions.
2.6 Political Neutrality It is important to maintain both the actual and perceived political neutrality of the SAI. Therefore it is important that auditors maintain their independence from political influence in order to discharge their audit responsibilities in an impartial way. If auditors are permitted to participate in political activities they have to be aware that these activities may lead to professional conflicts. 2.7 Conflicts of Interest When auditors are permitted to provide advice or services other than audit to MMDA, care should be taken that these services do not include management responsibilities or powers, which must remain solely with the management of the MMDA. Auditors should protect their independence and avoid any possible conflict of interest by refusing gifts or gratuities, which could influence or be perceived as influencing their independence and integrity. Auditors should avoid all relationships with managers and staff of the MMDA and other parties which may influence, compromise or threaten the ability of auditors to act and be seen to be acting independently. Auditors should not use their official position for private purposes and should avoid relationships which involve the risk of corruption or which may raise doubts about their objectivity and independence.
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Auditors should not use information received in the performance of their duties as a means of securing personal benefit for themselves or for others. Auditors should not divulge information that would provide unfair or unreasonable advantage to other individuals or organizations, nor should they use such information as a means for harming others. It is important to maintain both the actual and perceived political neutrality of the SAI. Therefore, it is important that auditors maintain their independence from political influence in order to discharge their audit responsibilities in an impartial way. This is relevant for auditors since they work closely with the legislative authorities, the executive or other government entities empowered by law to consider the auditors reports. It is important that where auditors undertake or consider undertaking political activities they bear in mind the impact that such involvement might have or be seen to have on their ability to discharge their professional duties impartially. If auditors are permitted to participate in political activities they have to be aware that these activities may lead to professional conflicts. 2.8 Confidentiality or professional secrecy Auditors should not disclose information obtained in the auditing process to third parties, either orally or in writing, except for the purposes of meeting the SAIs statutory or other identified responsibilities as part of the auditor normal procedures or in accordance with relevant laws. 2.9 Professional competence and due care Auditors have a duty to conduct themselves in a professional manner at all times and to apply high professional standards in carrying out their work in order to enable them to perform their duties competently and with impartiality. Auditors must not undertake work they are not competent to perform. Auditors should know and follow applicable auditing, accounting and financial management standards, policies, procedures and practices. Likewise, they should have a good understanding of the constitutional, principles and standards governing the operations of the MMDAs.
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Auditors should exercise due professional care in conducting and supervising the audit and in preparing the related reports. Auditors should use methods and practices of the highest possible quality in their audits. In conducting the audit and issuing reports, auditors have a duty to adhere to basic postulates and generally accepted auditing standards. Auditors have a continuous obligation to update and improve the skills required for meeting their professional responsibilities. The legislative and/or executive authority, the general public and the MMDAs are entitled to expect the SAIs conduct and approach to be above suspicion and reproach and worthy of respect and trust. Auditors should conduct themselves in a manner that promotes co-operation and good relations among auditors and within the profession. The support of the profession by its members and their co-operation with one another are essential elements of professional character. The public confidence and respect that an auditor enjoys are largely the result of the cumulative accomplishments of all auditors, past and present. It is therefore in the interest of auditors as well as the general public that the auditor deals with fellow auditors in a fair and balanced way. The legislative and/or executive authority, the general public and the MMDAs should be fully assured of the fairness and impartiality of the SAIs work. In all parts of society there is a need for credibility. It is therefore essential that the reports and opinions of the SAI are considered to be thoroughly accurate and reliable by knowledgeable third parties. All work performed by the SAI must stand the test of legislative and/or executive scrutiny, public judgements on propriety and examination against the Code of Ethics.
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3.0 structure of MetropolitAn, MunicipAl And district AsseMblies (MMdAs) 3.1 Introduction The modalities for Local Government administration in the governance system of Ghana, including the establishment, composition, structure, power, functions, roles and responsibilities of District Assemblies are covered by various provisions on the Assemblies which are scattered across various laws of the country. A clear understanding of the linkages in the legislative framework and the relationship between the District Assemblies and other parties in the administration of the Assemblies is therefore very essential in monitoring and reporting on compliance and weaknesses in the regulatory regime. District Assemblies are the core institutions established under the 1992 Constitution to give effect to the decentralized system of government mandated by the 1992 Constitution, the supreme law of Ghana. An Assembly by definition is made up of Metropolitan, Municipal and District Assembly. Each Assembly is a corporate body. Collectively the Assemblies are known as MMDAs. In pursuance of constitutional provisions, specific Acts of Parliaments have been enacted to deal exclusively with Local Government. These are: (i) The Local Governments Act,1993(Act 462) (ii) District Assemblies Common Fund Act,1993(Act 455) (iii) Local Government Service Act,2003(Act 656) 3.1.1 Establishment / Creation of District Assemblies According to Article 241 of the Constitution, the district in existence immediately before the coming into force of the 1992 Constitution were deemed as having been established. This Article also empowers Parliament to enact laws for the redrawing of the boundaries of districts or for reconstituting the districts. The Constitution further mandates the Electoral Commissioner to demarcate the boundaries for Local Government elections.
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Under the Local Government Act 1993, (Act 462) the President has the power to declare by executive instrument any area within Ghana to be a District and assign a name to it. Again, the President has the mandate to direct the Electoral Commission, which constitutionally is not subject to the direction or control by any person or authority in the performance of its functions, to submit recommendations to the President, taking into account the requirement of section 1(4) of the Act. Further, the Electoral Commission is required by section 2 of the Act to review at the request of the President area of authority of Unit Committees, Town / Area, Zonal, Urban and Sub Metropolitan District Councils, District, Municipal and Metropolitan Assemblies and to submit a report, including recommendations to the President. Under section 3 of the Local Government Act 1993, the Minister responsible for Local Government has also been charged to establish by Legislative Instrument an Assembly for each District, Municipality and Metropolis specifying among other things the jurisdiction, functions, powers and responsibilities of each Assembly. Each Assembly which constitutes the highest political authority in the District according to Article 241(3) of the Constitution operates under its own enactment as a corporate institution with perpetual succession and a common seal and may sue and be sued in its own name, as stipulated by section 4 of this Act. 3.1.2 Structure of the Local Government System The Local Government system is a four-tier Metropolitan and three-tier Municipal / District Assemblys structure as shown on the next page.
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District Assemblies in Ghana are either Metropolitan, Municipal or District and are:(a) created as the pivot of administrative and developmental decisionmaking in the district and therefore the basic unit of government administration: (b) assigned with deliberative, legislative as well as executive functions under law; (c) established as a monolithic structure to which is assigned the responsibility of the totality of government to bring about integration of political, administrative and development support needed to achieve a more equitable allocation of power, wealth and geographically dispersed development in Ghana; and (d) constituted as the planning authority for the district. 3.1.3 Functions of the Assemblies These are deliberative, legislative and executive Section 6(3) of PNDCL 207 lists them as follows(i) be responsible for the overall development of the district and shall ensure the preparation and submission to the Central Government for approval the development plan and budget for the district; (ii) formulate programmes and strategies for the effective mobilization and utilization of human, physical, financial and other resources in the districts;
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(iii) promote and support productive activity and social development in the district and remove any obstacles to initiative and development; (iv) initiate programmes for the development of basic infrastructure and provide municipal works services in the district; (v) be responsible for the development, improvement and management of human settlements and the environment in the district; (vi) in co-operation with appropriate national and local security agencies be responsible for the maintenance of security and public safety in the district; (vii) ensure ready access to the courts and public tribunals in the district for the promotion of justice; (viii) initiate, sponsor or carry out such studies as may be necessary for the discharge of any of the functions conferred by this law or any other enactment; and (ix) perform such other functions as may be referred to it by the Central Government. 3.1.4 Sub-District Political / Administrative Structures These being subordinate bodies of the district assemblies, perform functions assigned to them by the instruments setting up the assemblies or delegated to them by the assemblies. They are constituted by the Sub-Metropolitan District Councils, Urban / Town / Zonal / Area Councils, and Unit Committees 3.1.5 Sub-Metropolitan District Councils These structures are immediately below the Metropolitan Assemblies and are established by law. Below are examples of Sub-Metropolitan District Councils under their respective Metropolitan Assemblies.
AccrA MetropolitAn AsseMblY KuMAsi MetropolitAn AsseMblY seKondi - tAKorAdi MetropolitAn AsseMblY
Ablekuma Ashiedu Keteke Ayawaso Okaikwei Kpeshie Osu Clottey
Asokwa Bantama Manhyia Subin
Sekondi Takoradi Kojokrom Fijai
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This arrangement has been dictated by the complex and peculiar socioeconomic, urbanization and management problems which confront the Metropolitan Assemblies. 3.1.6 Urban Councils Urban Councils are peculiar to settlements of District Assemblies. They are created for settlements with population above 15,000 and which are cosmopolitan in character, with urbanization and management problems, though not of the scale associated with the metropolises. 3.1.7 Zonal Councils The zonal councils are in the one-town municipal assemblies for which the establishment of town/area councils will raise problems of parallel administrative structures. Such Councils are based on the National Commission for Civic Education criteria of commonality of interest, population of 3,000 and identifiable streets, land marks, etc. 3.1.8 Town / Area Councils These are found in the Metropolitan and District Assemblies. In the District Assemblies, town councils are established for settlements with population between 5,000 and 15,000 and area councils for a number of settlements / villages which are grouped together but whose individual settlements have population of less than 5,000. They cover areas with predominantly rural population and in some cases can be identified with spheres of influence of a particular traditional authority. They are essentially rallying points of local enthusiasm in support of the development objectives of the District Assembly. Town Councils in the Metropolitan Assemblies are markedly different in size, sometimes exceeding 50,000. 3.1.9 Unit Committees Unit Committees form the base structure of the new Local Government system. A unit is normally a settlement or a group settlement with a population of between 500 and 1,000 in the rural areas, and a higher population (1,500) for the urban areas. Unit Committees being in close touch with the people, have the important roles to play in education, organisation of communal
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labour, revenue raising and ensuring environmental cleanliness, registration of births and deaths, implementation and monitoring of self-help projects. 3.1.10 Regional Co-ordinating Councils (RCCs) Regional Co-ordinating Councils are established as part of the new arrangements for Local Government in Ghana. There are ten (10) Regional Co-ordinating Councils, consisting of a Regional Minister (chairman), Deputy Regional Minister (ex-officio member), all District Chief Executives and all Presiding Members of District Assemblies in a region. The Regional Coordinating Council is purely an administrative and co-ordinating rather than a political and policy making body. Its functions as outlined in the Local Government Law are to: (i) co-ordinate and formulate the integrated plans and programmes of the district assemblies in the region and harmonise these plans and programmes with national development policies and priorities for approval by the Central Government; (ii) monitor the implementation of programmes and projects within the Region and evaluate the performance of such programmes and projects; (iii) plan at the regional level and integrate all departmental programmes in the Region; (iv) allocate to the Districts in the region as appropriate public funds, under estimates approved by the Central Government. (v) review and co-ordinate public services generally in the region; and (vi) perform such other functions as may be assigned to it by the Central Government 3.2 coMMittees of district AsseMblies In the performance of its functions the District Assembly works through the executive committee and its subsidiary committees. 3.2.1 Executive Committee The executive functions of the Assembly are performed by the Executive Committee, which is presided over by the District Chief Executive, and consists of not more than one-third of the total number of members of the
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Assembly, excluding the Presiding Member. The functions performed by the Executive Committee are;(i) co-ordinate plans and programmes of the Sub-Committees and submit these as comprehensive plans of action to the District Assembly; (ii) implement resolutions of the District Assembly; (iii) oversee the day-to-day administration of the district in collaboration with the office of the District Chief Executive; (iv) recommend, in the case of non-decentralised agencies in the District, to the appropriate Government Ministry / Department / Agency the appointment and replacement on stated grounds of officers within the area of authority of the Assembly. (v) adopt measures to develop the activities and execute approved plans of the units, areas and towns and sub-metropolitan districts within the area of authority of the District Assembly; (vi) when necessary appoint or dissolve ad-hoc committees of the Executive Committee. 3.2.2 Sub-Committees of Executive Committee The sub-committees of the executive committee and their funtions are as follows: 3.2.2a Development Planning Sub-Committee (i) take a comprehensive look at the district; (ii) identify the economic resources/potentials of the district; (iii) develop an information base on the resources; (iv) identify opportunities and constraints for the exploitation of these resources; (v) prepare an exploitation and phasing plan and strategy; (vi) consult with other Sub-Committees for the implications the proposed district plan may have on other Sub-Committees plans; and (vii) submit the plans to the Executive Committee for harmonisation with other Sub-Committees plans.
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3.2.2b Social Services Sub-Committee The Sub-Committees of the executive committee and their functions are as follows: (i) take a comprehensive and long term look at areas of social development in the district, in particular education, health, social welfare, sports, culture, etc; (ii) develop the information base on these areas of social development; (iii) identify the strengths and weaknesses in the social services areas; (iv) prepare a social development plan (long, medium and short term), for the district; (v) examine the implications of the social development plan on other sub-sectors of the district economy; and (vi) submit the plans to the Executive Committee for harmonisation. 3.2.2c Works Sub-Committee The functional areas of the technical infrastructure sub-committee include roads, electricity, sanitation, water, etc. Within the general framework of the Local Government law and the specific functions in the legislative instruments that established the various assemblies. This sub-committee;(i) takes a comprehensive look at the infrastructure needs and problems of the district; (ii) develops an information base on each of these programme / functional areas; (iii) maps out, initiates and phases out programmes for their development and/or provision; (iv) examines the implications of such actions for the other subcommittee proposals and (v) submits the programmes to the Executive Committee for harmonisation and action.
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3.2.2d Finance and Administration Sub-Committee This sub-committee:(i) examines the general financial position of the Assembly; (ii) examines the revenue mobilisation and expenditure trends of the Assembly; (iii) maps out strategies to improve revenue mobilisation in the present, and sets targets for the future; (iv) submits financial plans to the Executive Committee for harmonization with other Sub-Committees plans; and (v) identifies strategies to ensure judicious utilisation of available resources. 3.2.2e Justice and Security Sub-Committee There is no doubt that intra-district and inter-district conflicts abound. Besides, there are issues that pertain to the enforcement of bye-laws of the Assembly. The Justice and Security Sub-Committee:(i) examines these and other related conflict areas; (ii) recommends to the Executive Committee ways and means to resolve disputes; and (iii) ensures ready access to the courts and for the promotion of justice in the District, e.g. making sure that premises are available for use by community tribunals, that police logistics are adequate, etc. 3.2.3 Other main Committees are:(i) Public Relations and Complaint Committee (Section 27 of Act 462); (ii) Rate Assessment Committee (Section 103 of Act 462); and (iii) Audit Report Implementation Committee (Section 30 of Act 584). 3.2.3a Audit Report Implementation Committee (ARIC) At the Metropolitan, Municipal and District Assembly levels, the ARIC is made up of five members as follows: (i) The Presiding Member or a representative of the Presiding Member from among members of the Assembly (Chair) (ii) A member from the Finance and Administration Sub-Committee of
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the Assembly (iii) The MMDA Chief Executive (iv) MMDA Coordinating Director (v) One external representative with a minimum of four years experience in accounting or auditing nominated by the Internal Audit Agency. 3.3 finAncinG the locAl GoVernMent sYsteM The means available to Local Governments to translate power and competence at their disposal into a development phenomenon, i.e. the resources with which to perform the transferred functions, forms the subject matter of Local Government financing. The financial provisions for the Local Government system are contained in section 76, 86 and 94 of the Local Government Act 1993, and Articles 245 and 252 of the 1992 Constitution. Revenues from those sources may be classified as;(i) Budgeting and Rating (ii) Locally generated revenues(traditional); and (iii) Central Government transfers. 3.3.1 Budgeting and Rating The budget process and the information presented in the budget documentation are central to fiscal transparency. Almost without exception, the annual budget is the Assemblys main instrument for setting development agenda. It is the occasion on which the Assembly presents its expenditure proposals, and the means by which it will finance them, within the context of explicit statements of its policy intentions. Alongside the formal set of line-item allocations of spending organized by administrative unit, which forms the core of information needed by the General Assembly to scrutinize and approve spending, the Assembly uses the budget to detail its proposals for revenue collection and borrowing, placed in a historical framework, and explains how these proposals will help achieve its medium term development plan. Information provided at the time of the annual budget should cover all fiscal activities, irrespective of the institutional arrangement under which they take
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place. Information should also be readily available on how budgets are prepared and executed, including the role of such documents as budget circulars. The type of information required for fiscal transparencyincluding functional and economic presentations. Principles and practices relating to openness of the budget process concern budget preparation, documentation, and presentation, as well as procedures for budget execution, fiscal reporting and auditing. 3.3.1.1 Budget Preparation Process Budget preparation should follow an established timetable and be guided by well defined macroeconomic and fiscal policy objectives. Budget preparation includes good practices relating to (1) budget calendar; (2) medium-term framework; (3) new measures; (4) fiscal sustainability and fiscal risks; and (5) coordination of extrabudgetary activities. Basic requirements under this principle are to ensure that: a. realistic budget proposals are presented to the General Assembly according to a prescribed timetable; b. the likely costs and effects of new expenditure and revenue measures are clearly explained; and c. a consistent multiyear fiscal framework is provided, based on realistic economic assumptions. 3.3.1.1a Budget calendar A budget calendar should be specified and adhered to. Adequate time should be allowed for the draft budget to be considered by the General Assembly. An important feature of a transparent budget preparation process is the availability of a reliable and publicly available calendar, along with associated procedures, to which the executives and other sub-structure officials rigorously adheres. This helps ensure fair and full access to the budget process. Such provisions do not, however, require the executive to deny itself space for careful deliberation and decision making before
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making available the full details of its budget proposals for General Assembly and public consideration. This is particularly important for tax policy changes. But there should be predictability about when the executives proposalsin either consultative, draft, or final formwill be made public. Normally the draft budget itself should be made public when the executive submits its budget for General Assembly approval. Medium-term frameworks It is essential that the annual budget be prepared and presented within a comprehensive and consistent quantitative medium-term macroeconomic framework. In its simplest form, this is often termed a medium-term fiscal outlook, which generally includes unconstrained estimates of the effect of current policies over the medium term. Extending this approach to produce a medium-term fiscal framework (MTFF) requires agreement also on a comprehensive statement of fiscal policy objectives against which fiscal performance can be assessed. In particular, fiscal targets should be specified that are consistent with macroeconomic stability and fiscal sustainability, and these should be embedded within realistic and internally consistent medium-term macroeconomic projections. In this context, there should be a strong interface between the governments national planning or development framework (e.g., Poverty Reduction Strategy Paper (PRSP)) and the medium-term budget. Broader economic implications Poverty and Social Impact Analysis (PSIA) refers to the analysis of the distributional impact of policies and policy reforms on the welfare of different groups, with a specific emphasis on the poor and vulnerable. Similar analysis can be applied to other effects (such as the environment) and target other parts of the population. Various approaches are available, from the most simple to more complex econometric techniques. Good practice would require that budget documentation include at least a simple analysis of the differential impact of new policies and measures.
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3.3.1.1b Fiscal sustainability and fiscal risks The budget documentation should include an assessment of fiscal sustainability. The main assumptions about economic developments and policies should be realistic and clearly specified, and sensitivity analysis should be presented. Budget programs and performance objectives Transparency and accountability in Assembly require that budget presentations and accounts contain clear statements of the Assemblys objectives as well as a listing of the items on which money is spent (as in traditional line-item budgeting). Results of previous policies should also be evaluated against their stated objectives. Modern budgeting tries to identify as far as possible the objectives of Assembly activities and to measure outputs and outcomes in relation to these objectives. An important element of early efforts in this direction is the classification of expenditure into programmme, subprogrammme, and activity categories, defined with increasing specificity at the more detailed levels in relation to a clearly stated set of objectives. 3.3.1.1c Performance-based Budgeting (new measures) Performance-based budgeting refers to procedures or mechanisms intended to strengthen links between the funds provided to public sector entities and outputs through the use of formal performance information in resource allocation decision making. Performance-based budgeting encompasses a wide range of different budgeting reforms that differ in the way they measure performance and link results to funding. Parallel objectives of performance budgeting cover improvements in both allocative and managerial efficiency of public expenditure, with the former perhaps predominant in developing countries, and the latter in early reformers. One underlying theme of these reforms is to permit greater managerial freedom so long as they can produce the desired outputs or outcomes. Various models for performance budgeting include the following: 1. Program budgeting (based on Planning, Programming, and Budgeting first implemented in the 1960s)which allocates
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2.
3.
4. 5. 6.
funds according to programs rather than line items so that common objectives are considered and funded together. Marginal analysis (most well-known example is Zero-Base Budgeting which decomposes programs into incremental stages (called decision packages), each of which is ranked according to priority so that available funding is assigned to the highest priorities. Systems that attempt to link the level of budget funding to performance targetsfor example, by providing additional funding conditional upon agencies agreeing to tougher outcome and/or output targets. Formula funding based on expected results and/or costs for delivering those results. Budgetary performance incentives that link past performance to future agency funding as a motivator for performance. The purchaser-provider model in which agencies are paid prices for the results (usually outputs) that they deliver. This model represents a combination of cost-based formula funding and budgetary performance incentives.
3.3.1.1d Extrabudgetary funds Extrabudgetary funds can undermine transparency by taking expenditure decisions outside the budget process, distorting resource allocation from the path envisaged in announced policies. Recognizing that many Assemblies have some type of extrabudgetary activity, it is important to make their role in carrying out Assembly policies transparent and subjected to the same accountability requirements as other budgeted expenditures. Fiscal transparency requirements are outlined below: 1. Extrabudgetary activities should be identified in the annual budget or an annex to the budget, along with a statement of the purpose or policy rationale. 2. Fiscal activities financed through extrabudgetary funds should be integrated into the budget process, even if they remain outside budget allocations, to maintain unified control of fiscal policy and avoid problems in expenditure coordination. In
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3.
4.
5.
general, resources for extrabudgetary funds should be allocated through the budget, and expenditures should be subject to General Assembly approval, even if they remain outside the annual appropriations process. The rules and operations of an extrabudgetary fund should be transparent and free from political interference. This requires regular disclosure and reporting of the principles governing the fund. Extrabudgetary funds should be subject to audit and should publish financial statements covering all inflows and outflows and, if relevant, the allocation and return on assets. Transparency requires that (i) detailed reports of extrabudgetary activity be included in budget documentation and (ii) reporting on extrabudgetary activities follow the same basis as budget reporting (on a gross basis; distinguishing revenue, expenditure, and financing; with expenditure classified by economic, functional, and administrative category).
3.3.1.2 Procedures for Execution, Monitoring, and Reporting Basic requirements under this principle are to ensure that i) revenues, commitments, payments, and arrears can be tracked effectively; and ii) audited final accounts and audit reports are presented to the General Assembly and published within a year. 3.3.1.2a Accounting The accounting system should provide a reliable basis for tracking revenues, commitments, payments, arrears, liabilities, and assets. i) Assessment of arrears In addition to being an indicator of serious flaws in fiscal management, a failure to identify arrearson the payments or receipts sidecan be a major impediment to fiscal transparency. To the extent that arrears are unreported, the fiscal position is wrongly stated on an accruals basis. Effective government accounting systems
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should provide enough information to assess the extent of payment or tax arrears. Fiscal transparency requires that cash accounting reports be supplemented by accounts-based reports of bills due for payment to assess arrears. Data on arrears would not be generated as a matter of course from a simple cash accounting system, but should be provided in supplementary reports. Therefore, all Assemblies should move toward an accounting standard that facilitates end-period reports on accounts due for payment as well as reports on a cash basiswhatever basis of accounting is used. An accrual or a modified accrual system would achieve this objective, and may be appropriate. On the revenue side, Assemblies must also account for taxes and other revenue that have not been received on time. For example, the stock of tax arrears can be substantial, but it is difficult to know how much of the stock is actually collectible because many Assemblies do not write off bad debts. As with the expenditure side, it is essential that the finance and accounting systems recognize and record payments due, and that, to the extent possible, they report the monthly and annual flows of unpaid taxes, penalties, and interest ii) Stages of Payment and Payment Arrears A payment arrear occurs when a bill or other obligation is due for payment but is not paid on or before the due date. To assess arrears, it is necessary to identify both when a bill is due for payment and whether or not actual payment has occurred. In a typical payment process, all accounting systems observe four basic stages: 1. commitment: a prospective expenditure resulting from placement of an order, signing of a contract, or other agreement for the provision of goods or services; 2. verification: confirmation by the authorized receiving agent that an ordered good or service has been received and, thereby, that a liability and due date of payment are recognized;
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3. payment issue: issuance of a cheque or payment order to the supplier of a good or service or to meet a transfer obligation fallen due; and 4. cash payment: payment of cash or transfer of funds to a supplier or recipients account after presentation and processing of a check or payment order. iii)Audited accounts Audited final accounts and audit reports, including reconciliation with the approved budget, should be presented to the General Assembly and published within a year. The year-end report allows the Assembly to demonstrate key results achieved and to outline a comprehensive overview of the Assemblys financial assets and liabilities, and contingent liabilities. It should explain any deviation from compliance with the level of revenue and expenditures authorized by the General Assembly in the budget. It should, if possible, also include performance information that demonstrates how the originally articulated targets have achieved actual results. Ideally, the year-end report should provide explicit reconciliations to previous budget documents. 3.3.1.2b Aid in kind A related and very common weakness in accounting systems of many Assemblies is that noncash aid is rarely fully recorded. This means that the Assemblys accounts do not reveal the true level of resources used nor their allocation by sector, organization, or region. An equally important failing is that assets thereby created or acquired are not recorded in a way that helps to identify long-term operations, capital depreciation, and maintenance needs. The transfer of such assets to the Assembly when donor financing is completed can then lead to unexpected pressures on the budget. There are also problems with the timely recording and valuation of such assistance, and some measures should be taken to include aid-inkind transactions to improve transparency. Cash systems are generally unsatisfactory as a means of tracking such transactions, and a full accrual
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system would be needed to deal with nonfinancial assets in a fully integrated way. It is proposed that all Assemblies maintain at least memorandum-level records of significant receipts of aid in kind, showing forecast receipts in the budget and audited receipts with the annual accounts. Do not also forget to maintain Assets and Donations registers 3.3.1.2c Supplementary budgets Supplementary revenue and expenditure proposals during the fiscal year should be presented to the General Assembly in a manner consistent with the original budget presentation. The existence of a budget law does not guarantee that its provisions will be observed in practice. There are several areas of budget law that are commonly abused, and they need special attention if fiscal transparency is to be fully achieved. These include the excessive use of supplementary budgets, abuse of contingency funds, and accumulation of payment arrears. All these practices tend to reduce transparency, in terms of both aggregate control and strategic priority setting. 3.3.2 Locally Generated Revenue Locally generated revenue generally referred to as IGF, is derived from seven main sources. These are; (i) Rates; (ii) Lands; (iii) Fees and Fines; (iv) Licences; (v) Rent; (vi) Investments; and (vii) Miscellaneous. Rates Included under this revenue are;(i) basic rate (poll tax); (ii) property rate (by landed property owners); and
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(iii) special rate. Special rates are imposed by the Assembly through fee-fixing resolutions to raise funds for specific projects. Such rates are area and project specific. Property rate is levied on landed properties in the area of authority of the Assembly. Commercial and parastatal organisations are required to pay rates on their properties in the districts. Fees and Fines In accordance with the Local Government Act, 1993 (Act 462) and within the guidelines set by the Central Government, District Assemblies levy fees on a range of items and commercial activities. It lists some of the areas for fees collected as cattle pounds, slaughter houses, market dues, market stalls, market stores, trading kiosks, building permit fees, births and deaths, marriage and divorce and court fines. Under L.I. 1530 of 1992, all crops, with the exception of cocoa, coffee and cotton are also leviable. Licences Licences are issued for a host of items and activities. They include dogs licence, hawkers licence, extension of hours, hotels and restaurants, beer and wine sellers, petroleum installations, lorry parks overseers, self-employed artisans etc. Trading Services District Assemblies undertake trading activities such as cement sales and hiring out of chairs and canopies. Lands (Stool Lands and Properties) Revenue from minerals and land royalties in the mining areas are important sources of revenue. 3.3.3 Central Government Transfers These are revenues which are transferred from central government sources to the District Assemblies. The major ones are;44
(i) (ii) (iii) (iv)
District Assemblies Common Fund Salaries (Established Post) Ceded Revenue Other Donor Support Transfers
Ceded Revenue Ceded revenue is derived from revenue sources which hitherto were tapped by the central government through the Internal Revenue Service, but which central government has ceded to the District Assemblies, in pursuit of decentralization. These sources as listed in the sixth schedule of the Local Government Act, 1993 are;(i) Entertainments duty under the Entertainments Duty Act, 1962 (Act 150). (ii) Casino revenue under the Casino Revenue Tax Decree, 1973 (NRCD 200) (iii) Betting tax under Betting Tax Act, 1965 (Act 268) (iv) Gambling tax under the Gambling Machines Decree, 1973 (NRCD 1974) Income Tax (registration of trade, business, profession or vocation) Law, 1986 (PNDCL 156) In accordance with section 57(4) of the Local Government Law of 1988, which states the Minister in consultation with the Minister responsible for national revenue, may from time to time by legislative instrument amend the provisions of the sixth schedule to this law, two new sources have been added to the revenue sources that make up the ceded revenue. These are;(a) Daily transport tax under the income tax (amendment) law; and (b) Advertisement tax under the advertisement tax decree, 1976 (SMCD 50) The ceded revenue is centrally collected by the Internal Revenue Service and the total ceded revenue collected for a year is transferred to the Ministry of Local Government and Rural Development which shares it among the District Assemblies using a formula approved annually by Parliament.
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District Assemblies Common Fund Article 252 of the Constitution of the Fourth Republic of Ghana provides for the establishment of District Assemblies Common Fund, which shall;(i) be allocated annually by Parliament not less than five (5) per cent of the total revenue of Ghana and payable in quarterly instalments for development; (ii) be distributed among District Assemblies on the basis of a formula to be approved by Parliament; and (iii) be administered by a District Assemblies Common Fund Administrator. Act 455 which establishes the District Assemblies Common Fund defines the total revenues of Ghana for this purpose to mean all revenue collected by or accruing to the Central Government other than foreign loans, grants, non tax revenue and revenues already collected by or for District Assemblies under any enactment in force. The object of the Common Fund is to make available to the district assemblies additional resources for development. Section 9 of Act 455 states the Minister responsible for Finance in consultation with the Minister (responsible for Local Government and Rural Development), shall determine the category of expenditure of the approved development budget of the District Assemblies that must in each year be met out of amounts received by the Assembly from the Fund. 3.3.4 Specialised Funding These include the following;(a) Timber royalties; and (b) Minerals development fund.
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4.0 Audit plAnninG 4.1 Introduction It is of great importance that an audit is planned in advance to ensure that: a) The intended means of achieving the audit objectives is established. b) The audit is controlled and directed c) Attention is focused on critical and high risk areas. d) The work is completed economically and to time scale requirements. 4.2 Planning This means developing a general strategy and a detailed approach for the expected nature, timing and extent of the audit. The auditor plans to perform the audit in an efficient, effective and timely manner. 4.2.1 Objective of Audit Planning i. ii. iii. iv. v. To set out the way in which legal obligations and other audit priorities will be achieved; To identify the scope, objectives and anticipated outputs of audit; To identify how audit evidence necessary to achieve the objectives will be obtained and analysed; To identify the resources that would be needed and actually employed on audits and establish cost and time budget; and To allow management to supervise and control individual audits.
4.2.2 Planning the Audit Work Adequate planning of the audit work ensures that: i. appropriate attention is devoted to important areas of the audit; ii. potential problems are identified; and iii. the work is completed expeditiously. planning also assists in proper assignment of work to assistants and in coordination of work done by other auditors and experts.
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The extent of planning will vary according to the size of the MMDA, the complexity of the audit and the auditors experience with the MMDA and knowledge of the business. Obtaining knowledge of the business is an important part of planning the work. The auditors knowledge of the business assists in the identification of event, transactions and practices which may have a material effect on the financial statements. The auditor may wish to discuss element of the overall audit plan and certain audit procedures with the MMDA audit committee, management and staff to improve the effectiveness and efficiency of the audit and also co-ordinate the audit procedures with work of the MMDA personnel. The overall audit plan and the audit programme, however, remain the auditors responsibility. 4.2.3 The Overall Audit Plan The auditor should develop and document an overall audit plan describing the expected scope and conduct of the audit. While the record of the overall audit plan will need to be sufficiently detailed to guide the development of the audit progamme, its precise form and content will vary depending on the size of the MMDA, the complexity of the audit and the specific methodology and technology used by the auditor. Matters to be considered by the auditor in developing the overall audit plan includes:(a) Knowledge of the Business (i) General economic factors and social / environmental conditions affecting the MMDAs business; (ii) Important characteristics of the MMDA, its business, its financial performance and its reporting requirements, including changes since the date of the prior audit; and (iii) The general level of competence of management.
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(b) Understanding the Accounting and Internal Control System (i) The accounting policies adopted by the MMDA and changes in those policies; (ii) The effect of new accounting or auditing pronouncements; and (iii) The auditors cumulative knowledge of the accounting and internal control system and the relative emphasis expected to be placed on test of control and substantive procedures. (c) Risk and Materiality (i) The expected assessments of inherent and control risks and the identification of significant audit areas; (ii) The setting of materiality levels for audit purposes; (iii) The possibility of material misstatements, including the experience of past periods, or fraud; and (iv) The identification of complex accounting areas, including those involving accounting estimates. 4.2.4 The Audit Programme The auditor should develop and document an audit programme setting out the nature, timing and extent of planned audit procedures required to implement the overall audit plan. The audit programme serves as a set of instructions to assistants involved in the audit and as a means to control and record the proper execution of the work. The audit programme may also contain the audit objectives for each area and a time budget in which hours are budgeted for, for the various audits areas or procedures. In preparing the audit programme, the auditor would consider the specific assessments of inherent and control risk and required level of assurance to be provided by substantive procedures. The auditor would also consider the timing of test of controls and substantive procedures, the coordination of any assistance expected from the MMDA, the availability of assistants and the involvement of the other auditors or experts.
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4.2.5 Changes to the Overall Audit Plan and Audit Programme The overall audit plan and audit programme should be revised as necessary during the course of the audit. Planning is continuous throughout the audit because of changes in condition or unexpected results of audit procedures. The reasons for significant changes would be recorded.
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5.0 sYsteM docuMentAtion 5.1 Introduction In order to assist the auditor to understand the MMDA financial system and identify the control processes for transactions, the system should be documented in a logical, orderly manner. The documentation would then serve as a basis for the evaluation of the systems and the assessment of their controls. The system documentation forms part of the permanent audit file. It is usually completed or reviewed and updated as part of the planning and familiarization phase of the audit. The purpose of this section is to describe documentation characteristics and the stages involved in documenting a system. 5.2 Characteristics To be effective, the system documentation should: - be clear and accurate and avoid unnecessary detail; - progress logically from the start of the procedure, and indicate the sequence of the procedure; - be adequately cross-referenced to related documentation; (i.e. interaction with another process or common function, e.g. cash payments); - indicate the section / unit responsible for the procedure; and - indicate the output of each process. System descriptions may be documented using narrative notes, block diagrams or flowcharts. The description should cover: - the main processing procedure; - major control procedures; - type, value and volume of transactions processed; and - interfaces between manual and computer system.
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The auditor will often need to describe the system at different levels of detail. Initially, an overview of the system should be produced which allows the auditor to see the total flow of transaction to secure a reasonable understanding of the system. This will identify the overall control procedures and any areas which require more detailed description. More detailed documentation may be required to indicate the individual controls applied, the flow of document through a particular part of the system, and the section / unit responsible. This will usually include the authority limits, the method by which the controls are evidenced and the frequency of operation e.g. weekly. However, the level of details should be compatible with the importance of the process being documented. Laborious documentation of unnecessary details should be avoided. The above can be accomplished by the use of flowcharts. Flowcharting is a method of graphically representing the flow of data within a system where a very detailed description is required. 5.3 Sources of information and verification Information for documenting the system can be obtained by observing the system, discussion with the key personnel, reviewing procedural manuals, and studying organizational charts or other charts prepared by the organization. Full use should be made of existing documentation, including any system description prepared by internal audit. However, these may need to be modified to suit external audit requirements. As part of the documentation and verification of a systems description, the auditor should trace a number of each major type of transaction through the system. These walk-through checks help to confirm that the system appears to operate in the manner recorded. These checks are particularly relevant where use is made of the organizations or internal audits system descriptions. The walk-through check should specifically note whether the controls on which reliance may be placed are operating as recorded. The check does not, however, provide any significant assurance on the effective operation of
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internal controls. Details of the walk-through checks should be retained with the system documentation to assist the management review. From documenting a system the auditor may identify serious control weaknesses, which should be noted. However, the system documentation process alone cannot be relied upon to evaluate financial controls. Therefore, once the accuracy of the documentation has been confirmed, the auditor should complete a full evaluation of the system. 5.4 Updating the Documentation The system documentation should form part of the permanent file so that the information can be used for subsequent audits. For each year, the auditor should ensure that the description accurately describes the system in operation. This is usually accomplished from examining revisions to the procedural manuals, discussions with the responsible staff and by conducting walk-through test. Also, management letter points should be followed up which might have resulted in changes to the system. Any identified changes should be included (and indicated) on new or revised system documentation. The impact of any changes will need to be evaluated and the system evaluation questionnaires revised as appropriate. Likewise, when compliance testing a system, the auditor should revise the system documentation if it does not accurately chart the processes in operation.
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chApter 6
6.0 MAteriAlitY, risK And siGnificAnce 6.1 Introduction Best Auditing Practices require that in devising the audit programme, the auditor should take into consideration not only the nature and scale of the MMDAs expenditure but also the scale, effectiveness and reliability of the accounting and administrative procedures, as well as the financial and administrative internal controls and checks. Systems of internal control and check, including internal audit, should be reviewed and evaluated in order to determine: (a) The degree of reliance that can be placed upon them; and (b) The extent of testing that needs to be performed by the auditor. The degree of risk of mis-statement, among other things, affects the auditors judgement as to what is sufficient appropriate evidence. The purpose of this chapter is to amplify the common auditing standards outlined above and to define and describe the concepts of materiality, risk and significance, the interrelationship and the application of these concepts when planning and conducting an audit and evaluating the results of procedures. 6.2 Materiality Materiality refers to the magnitude or nature of a mis-statement (including an omission) of financial information either individually or in the aggregate that, in the light of surrounding circumstances, makes it probable that judgement of a reasonable person relying on the information would have been influenced or a decision affected, as a result of the mis-statement. An auditor plans and conducts the audit to have a reasonable expectation of detecting mis-statements which, individually or in aggregate, are material in relation to the financial information on which he/she is reporting. The assessment of what is material is a matter of the auditors professional judgement. Although the auditor generally plans the audit to detect
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quantitatively material mis-statements, he/she assesses both the amount (quantity) and nature (quality) of any mis-statements detected. In dealing with potential mis-statements, the auditor considers materiality at both an overall level and in relation to individual account balances and disclosures. Materiality may also be influenced by other considerations such as legal and regulatory requirements and considerations relating to individual financial statement; account balances and relationships. This process may result in different levels of materiality, depending on the areas being audited. The auditor reviews both amount and nature of mis-statement which come to his/her attention. Because the nature of a mis-statement may give rise to other concerns the auditor should be alert for detected errors or relatively small amounts that could have a material effect on the financial information. For example, an illegal payment of an otherwise immaterial amount could be considered material if there is a reasonable possibility of it leading to a material contingent liability, a material loss of assets or a material loss of revenue. Another example of a qualitative mis-statement would be inadequate or improper description of an accounting policy which could be material if it is likely that a user of the financial information would be misled by the description. Materiality should be considered by the auditor when: (i) Determining the nature, timing and extent of audit procedures; (ii) Evaluating the effect of misstatement on the measures and classification of accounts; and (iii) Determining the appropriateness of the presentation and relevant disclosure in the financial information. 6.2.1 Setting an appropriate material guideline The auditors choice of a guideline will generally be based on the size and nature of the organization and the sensitivity of the financial statements; that is, the degree of importance he expects the reader to attach to accuracy in the financial statements. A materiality guideline is generally calculated as a percentage of an asset, liability, revenue, expenditure, or a grouping of these.
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Preliminary material guidelines should be established during the planning phase of the audit. They should be based on the best possible estimate to the final results. The guidelines may have to be adjusted during the execution phase if circumstances change. At the end of the audit, it is necessary to reevaluate the materiality decisions to ensure that they are still appropriate in the context of the financial statements. 62.2 Relationship to extent of testing At the end of an audit, the supervisor should be in a position to be able to state whether he or she is confident that the auditors have detected any material error that may exist in the accounts examined. The test conducted must be extensive enough to draw this conclusion. The materiality guideline will determine the precision to which the auditor wishes to audit. In general, the more precise the auditor wants to be the more testing he will have to do. The higher the materiality limit, the less testing the auditor will have to do to be satisfied that errors in the financial statements do not exceed this limit. The level of materiality combined with a desired confidence and a definition of error will be used to determine the required extent of testing 6.3 Audit risk Audit risk is the risk that an auditor may give an inappropriate opinion on the financial information that is materially mis-stated. 6.3.1 Audit risk at the financial statements level Audit risk is considered at the financial statements level during the audit planning process. At this time, the auditor should undertake an overall audit risk assessment based on his/ her knowledge of the MMDAs activities, management, controls, environment and operations. Such an assessment provides the preliminary information about the general approach to the audit, the auditors staffing needs and the framework within which materiality and audit risk assessment can be made at the individual account balances or class of transactions level. As part of this overall risk assessment the auditor should consider whether there is potential for pervasive problems, for example, liquidity or going concern problems.
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6.3.2 Audit risk at the account balances and class of transaction level The majority of audit procedures are directed to, and carried out at, the account balance and class of transactions level. Accordingly, audit risk should be considered by the auditor at this level taking into account the results of the overall audit risk assessment made at the financial assessment level. 6.3.3 Assessment of audit risk The paragraphs that follow provide guidance directed to the assessment of audit risk at both the overall and the account balances and the class of transactions level. The three components of audit risk are: (i) Inherent risk (risk that material errors will occur); (ii) Control risk (risk that the MMDAs system of internal control will not prevent or correct such errors) and (iii) Detection risk (risk that any remaining material errors will not be detected by the auditor). 6.3.3(a) Inherent risk Inherent risk is a susceptibility of an account balance or class of transactions to mis-statement that could be material, individually or when aggregated with mis-statements in other or classes, assuming that there were no related internal controls. It is a function of the MMDAs operations and its environment and the nature of account balances or class of transactions. For example, accounts involving a degree of management judgement, or that are difficult to compute, such as a complex accounting estimate or that involve a highly desirable and movable assets, such as computer equipments, or that are particularly susceptible to changes that could affect their value, will involve more inherent risk than other accounts. 6.3.3(b) Control risk Control risk is the risk that mis-statement that could occur in an account balances or class of transactions and that could be material, individually or when aggregated with mis-statements in other balances or classes will not be prevented or detected on a timely basis by the system of internal control. There will always be some control risk because of the intrinsic limitations of any systems of internal control. To assess control risk, the
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auditors should consider the adequacy of control design, as well as test adherence to control procedures. In the absence of such an assessment, the auditor should assume that control risk is high. 6.3.3(c) Detection risk Detection risk is the risk that an auditors procedures will not detect a misstatement that exist in an account areas or class of transactions that could be material, individually or when aggregated with mis-statements in other balances or classes. The level of detection risk relates directly to the auditors procedures. Some detection risk would always be present even if an auditor were to examine 100 per cent of the account balances or class of transactions. For example, the auditor may select an inappropriate audit procedure or misinterpret the audit results. 6.3.4 Interrelationship of components of audit risk Inherent and control risk differ from detection risk in that they exist independently of an audit of financial information. Inherent and control risk are functions of the MMDAs activities and its environment and the nature of the account balances or classes of transactions, regardless of whether an audit is conducted. Even though inherent and control risk cannot be controlled by the auditor, the auditor can assess them and design his/her substantive procedures to produce an acceptable level of detection risk, thereby reducing audit risk to an acceptably low level. 6.3.5 Application of materiality and audit risk principles The amount of error which the auditor defines as being material, and the risk that he/she is willing to accept that his/her tests will not detect material errors which exist, are factors which combine to determine the extent of testing he/she considers necessary. For example, if after establishing his/her plan for specific audit procedures, the auditor subsequently determines that the acceptable materiality level is lower, audit risk is increased. The auditor compensates for this by reducing detection risk by: (a) Increasing the extent of audit procedures; (b) Selecting a more effective audit procedure; or (c) Performing certain audit procedures closer to the balance sheet date.
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6.3.6 Materiality and audit risk in planning When planning the audit, the auditor should consider what would make the financial information materially mis-stated. The auditors preliminary judgement of materiality should be related to specific account balances and classes of transactions, such as receivables and inventory. This helps the auditor decide such questions as to what items in the balance or class to examine and whether to use sampling or analytical review techniques. This determination enables the auditor to select audit procedures that, when the results are aggregated, can be expected to support his/her opinion on the financial statements at an acceptable low level of audit risk. The audit should be planned so that audit risk is kept at an acceptable low level. After the auditor has assessed the inherent and control risks, he/she should consider the level of detection risk that he/she is prepared to accept and, based upon his/her judgement, select appropriate substantive audit procedures. If the auditor does not perform any substantive procedures, detection risk, that is, the risk that the auditor will fail to detect a mis-statement, will be high. The auditor reduces detection risk by performing substantive procedures- the more extensive the procedures performed, the lower the detection risk. The nature and timing of substantive procedures will also affect detection risk. For example, confirmation with third parties will lead to lower detection risk than reliance on internal data, relating to year-end balances. 6.3.7 Materiality and audit risk in evaluating audit evidence The auditors assessment of materiality may be different at the time of planning the audit than at the time of evaluating the result of his/her audit procedures. This could emanate from a change in circumstances or to a change in his/her knowledge as a result of his/her audit. For example, if an auditor plans the audit prior to the end of the financial statements period, he/she will anticipate the results of operations and the financial position. If actual results of operation and financial position are different, his/her assessment of materiality may also change. Additionally, the auditor may, in planning his/her work, intentionally set the materiality level at a lower level than he/she intends to use to evaluate the results of the audit. This is usually
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done to reduce the likelihood of undiscovered errors and to provide the auditor with a margin of safety when evaluating the impact of errors discovered during the audit in relation to the acceptable level of error. The auditors assessment of audit risk may change during the course of an audit. For example, in planning the audit, the auditor may believe that there is a low inherent and control risk based on an assessment of the probability of errors occurring and on a review and testing of the system of internal control. After performing audit procedures, however, the auditor may conclude that the earlier assessment was too low. In this case, additional audit procedures will need to be carried out in order to reduce the level of detection risk and achieve audit risk at the level originally planned. If aggregate uncorrected mis-statement that the auditor has identified, either specifically or by projection of errors, approaches the materiality level, he/she should consider whether it is likely that undetected mis-statement, when taken with identified mis-statements, could cause the materiality threshold to be exceeded. Thus, as identified uncorrected mis-statements approach the materiality level, the auditor should consider reducing this risk by performing additional audit procedures or by requesting that management correct the identified mis-statements. Management may decide to adjust the financial statements for some, or all, of the mis-statements the auditor brings to its attention. In evaluating whether the financial statements give a true and fair view (or are presented fairly), the auditor should take into account the aggregate of all uncorrected mis-statements, including those involving estimates. The aggregation of mis-statements should include the auditors best estimate of total mis-statements in the account balances or classes of transactions examined, not just the mis-statements that he/she has identified. If the aggregate uncorrected mis-statements exceed the final assessment of materiality for the financial information, account balances or classes of transactions, the auditor should , after performing additional work if needed, request management to correct the material mis-statement and, if management refuses, issue a qualified or adverse opinion.
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6.4 Significance Significance, like materiality, is a concept that deals with a matter that is likely to influence the judgments or decisions of a reader of a financial report. While materiality is used in the context of financial statements, significance applies to the range of activities audited, including financial and other controls and procedures examined by the auditor. It is important that management letters and reports to Parliament address significant matters only. Significance is usually judged by effect. Effects, either actual or potential, can frequently be stated in quantitative terms, such as cedis, time, units of production, or number of transactions. Sometimes effects, such as low morale, are intangible but nevertheless significant. Regardless of the terms .used, the report must include sufficient information to convince the reader that the matter warrants attention. 6.4.1 Factors affecting significance: Factors the auditor should consider in selecting audit objectives and reporting on matters of significance are: (a) sensitivity, known or probable financial or management issues of concern to Parliament; (b) areas of risk or particular ongoing concern identified in previous audits; (c) questions of ethics, fraud or other irregularity, and non-compliance with financial regulations and rules; (d) known, suspected or potential areas of uneconomical and inefficient operations; (e) uncertainty governing the MMDAs knowledge of the effectiveness of its programmes and deficiencies in the MMDAs procedures to evaluate effectiveness; (f) nature and relative size of a programme or activity and its importance and impact, currently, cumulatively or potentially; (g) significance of new or expanded programmes or activities; (h) programme management characteristics, such as unusual restrictions or freedoms in carrying out functions; and
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(i)
nature and importance of the physical resources involved.
Judgements concerning matters of significance are made continually throughout the audit. As these judgements occur, attention should be given not only to the impact of known or potential conditions in the MMDA but also to possible users of the report.
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chApter 7
7.0 eVAluAtion of internAl conrol And tests of control 7.1 Introduction The auditor, in determining the extent and scope of the audit, should study and evaluate the reliability of internal controls. 7.2 Internal Control Internal control is established by, and it is the responsibility of the management of MMDA. Internal control is defined as all the policies and procedures conceived and put in place by MMDAs management to ensure: (i) the economical, efficient and effective achievement of the MMDAs objectives; (ii) the adherence to external rules(laws, regulations, etc) and to management policies; (iii) the safeguarding of assets and information; (iv) the prevention and detection of fraud and error; and (v) the quality of accounting records and the timely production of reliable financial and management information. The concept of internal control extends beyond strictly accounting and financial considerations and includes two elements: (a) the control environment: which means the overall attitude, awareness and action of senior and line management regarding internal control and its importance within the MMDA. (b) internal control procedures: the procedures in addition to the control environment put in place by the MMDAs management which contribute to the achievements of the MMDAs objectives. The control environment (which would also be described as the control culture within the MMDA) has an influence upon the effectiveness of specific systems of internal control procedures. For example, a control environment
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in which the management shows its interest in control related activities and functions can reinforce specific systems of internal control procedures. However, a strong control environment is not sufficient in itself to ensure that the systems of internal control procedures are effective. The auditor can assess the quality of control environment of an MMDA or the programmes and projects by evaluating the indicators corresponding to best organizational and management practice. These procedures may include the preparation and management review of reconciliations, the establishment of procedures and responsibilities such that key duties are separated, limiting physical access and accounting records to authorized persons only, etc. It is for the auditor to determine, in the context of each individual audit task, those internal control procedures within the overall system put in place by management that are relevant to the audit objectives. When an auditor evaluates the control environment, he/she is seeking to assess managements awareness of the significance of internal control and managements commitment to ensuring that activities are properly controlled. On the other hand, when evaluating control procedures, the auditor is assessing whether the necessary procedures are in place and operating effectively, continuously and consistently throughout the reporting period. 7.3 Evaluation of Internal Control The auditor should, as a minimum, undertake a preliminary evaluation of the internal controls relevant to the audit. This evaluation should be sufficient to allow the auditor to: (a) make an initial assessment of the inherent and control risk associated with the activity under examination (b) assess whether the controls appear, at this early stage, to be sufficiently effective. In these circumstances, further in-depth testing of the controls must be carried out and, if the results are satisfactory, reliance can be placed upon the system. This allows the auditor to reduce the amount of substantive testing.
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The auditor must then carry out an in-depth evaluation of the relevant internal controls. The objective of this evaluation is to determine: a. which of the controls within the system are key controls- i.e. controls that should, if operating effectively: (i) prevent or detect material misstatements, or safeguard the MMDAs assets(reliability of the accounts) (ii) ensure compliance with laws and regulations (legality and regularity of the underlying transactions) or; (iii) ensure that there are no major failures in the economy, efficiency, or effectiveness of the activities being audited; b. the overall quality of the system of controls relevant to the audit, and thus the degree of reliance that the auditor can place upon it if subsequent tests of control provide evidence that it has operated effectively on a day-to-day basis. It is important to note that, at this stage, the auditor is reaching a judgment as to the potential effectiveness of the control system that, according to the policy decisions and instructions of the MMDAs management, should be in place. Before actually placing reliance upon this system it is necessary to evaluate its effectiveness in practice i.e. carries out tests of control. 7.4 Relationships with the management of the audited MMDA It is usually a normal practice to inform the management of the MMDA of any weaknesses identified in their systems of internal control. The timing and form of this communication will depend upon the nature and seriousness of the weaknesses discovered, the channels of communication that are available, and the legal framework of the audit. It is a normal practice for the auditor to record in the working papers any such communications, so that they might be referred to at a later date if necessary. 7.5 Types of internal controls The following is a description of some of the types of controls which the auditor may find in the MMDAs and on some or a combination of some of, which he may seek to place some degrees of reliance.
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(i)
Organizational MMDAs should have a plan of their organization, defining and allocating responsibilities and identifying lines of reporting for all aspects of the MMDAs operations, including the controls. The delegation of authority and responsibility should be clearly specified. Segregation of duties One of the prime means of control is the separation of those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction. Segregation of duties reduces the risk of intentional manipulation or error and increases the element of checking. Functions which should be separated, include authorization, execution, custody, recording and in case of a computer-based accounting, system development and daily operations. Internal audit and financial control (as applicable) should be independent of day-to-day management of activities.
(ii)
(iii) Physical These are concerned mainly with the custody of assets and involve procedures and security measures designed to ensure that access to assets is limited to authorized personnel. This includes both direct access and indirect access via documentation. These controls assume importance in the case of valuable, portable, exchangeable or desirable assets. (iv) Authorization and approval All implementing decisions and transactions should require authorization or approval by an appropriate responsible person. The limits for these authorizations should be specified. This is a special case under organizational type of internal control. (v) Arithmetical and accounting These are controls within the recording functions which check that the transactions to be recorded and processed have been authorized, that they are all included and that they are all correctly recorded and
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accurately processed. Such controls include checking the arithmetical accuracy of the records, the maintenance and checking of totals, reconciliations, control accounts and trial balances, and accounting for documents and resources. (vi) Personnel There should be procedures to ensure that personnel have capabilities commensurate with their responsibilities. Inevitably, the proper functioning of any system depends on the competence and integrity of those operating it. The qualifications, selection and training as well as the innate personal characteristics of the personnel involved are important features to be considered in setting up any control system. (vii) Supervision Any system of internal control should include the supervision by responsible officials of day-to-day transactions and the recording thereof. (viii) Management These are the controls exercised by management outside the day-today routine of the system. They include the overall supervisory controls exercised by management, the review of management accounts and comparison thereof with budgets, the internal audit function and special review procedures. 7.6 Carrying out an evaluation of internal control The following steps should be followed in carrying out an evaluation of a system, whether this evaluation is preliminary or in-depth: (a) identify the risks relevant to the audit objectives against which an effective control system should provide protection. (b) examine procedure manuals, instructions to staff, and by interview, etc identify the controls that have been put in place to guard against the identified risk. It is necessary to identify which of these controls are the key ones.
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(c) (d)
(e)
document the result of this examination(flow diagrams, written descriptions etc); check his understanding of the system by following a small number of transactions through the system(walk-through test or transaction review); and on the basis of the controls that have been identified, evaluate their likely effectiveness in respect to the risks inherent in the activities concerned e.g. by using internal control questionnaires (ICQs).
The auditor must complete the in-dept evaluation by establishing the degree of reliance that might be placed upon the system if it is later found to be operating efficiently in practice. As a general rule, the system will be judged as: (a) excellent if all risk are adequately addressed by controls which are likely to operate effectively; (b) good if all risk are adequately addressed by controls which are likely to operate effectively with only minor exceptions (c) fair if risk are addressed to some extent by controls which may fail occasionally (d) poor- not all risks are addressed by controls and/or there are likely to be frequent control failures. 7.7 Carrying out tests of control It is not sufficient just to carry out the in-depth evaluation of the internal controls. The auditor must also establish whether the controls have actually operated effectively and consistently throughout the period under audit: it is necessary to make tests of control. Typically, the key controls that have been identified should be tested by examining a sample of transactions or operations that have been subjected to those controls. As the auditor is seeking to assess the practical effectiveness of the controls, the sample selection method and the nature of the tests performed should ensure that: (a) evidence is obtained of the consistent operation of the control over time (N.B. periods of absence of key staff, etc); and
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(b)
evidence is obtained of the consistent operation of the control upon all types of transaction processed through the system(NB: high volume, low value transactions, unusual transactions, transactions being re-processed following earlier rejection by the system etc)
It is for the auditor to judge how many transactions should be examined to obtain sufficient evidence as to the satisfactory operation of a control. The following points need to be considered in making this judgment: (a) the significance of the control within the overall system; (b) the extent to which the auditor wishes to place reliance upon the satisfactory operations of the controls and the length of time concerned; (c) the range and nature of the transactions being processed through the system; and (d) the fact that most tests of control provide evidence not that the control has operated but that it has not failed (negative evidence). Whilst most tests of control give negative evidence the auditor also needs to be alert to possibilities of obtaining positive evidence of the effective operation of controls. This can be done by seeking examples where controls have detected errors or exceptions. The timing of tests of control poses particular problems. The auditor must seek evidence of the effective operation of controls throughout the period in which he wishes to rely upon them. This must be taken into consideration in designing and carrying out the compliance tests. 7.8 Evaluating the results of tests control When tests of control are completed, the auditor must reach a final judgment as to the extent of reliance he can place upon the system of controls, and thus upon the amount of substantive testing that it will be necessary to undertake to obtain the overall level of assurance required.
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The level of assurance that can be taken will depend firstly upon the auditors initial evaluation of the system. The results of tests of control provide the auditor with additional evidence regarding the operation of the system, which allows him to confirm or re-evaluate his original judgment. 7.9 Join tests of control and substantive testing There is no objection in principle to the auditor carrying out simultaneous tests of control and substantive testing on a particular sample. Whilst recognizing that this might be an efficient use of audit resources, care must also be taken to document the results properly in such circumstances.
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chApter 8
8.0. substAntiVe Audit tests 8.1 Introduction Substantive audit tests are tests of transactions and balances and other procedures such as analytical review, which seek to provide audit evidence as to the completeness, accuracy and validity of the information contained in the accounting records or in the financial statements. From the definition, we may deduce that all audit work comes within the compass of substantive testing. However, it is usually used to mean all tests other than compliance tests. A substantive test is any test which seeks direct evidence of the correct treatment of a transaction, a balance, an asset, a liability, or any item in the books or the accounts. Analytical review is also seen as a separate type of test. Some examples (i) Of a transaction the sale of a piece of plant will require the auditor to examine the invoice, the authorization, the entry in the plant register and other books, the accounting treatment and some evidence that the price obtained was reasonable. (ii) Of a balance direct confirmation of the balance in deposit account obtained from the bank. (iii) Analytical review evidence of the correctness of cut off by examining the gross profit ratio (iv) Completeness of information obtaining confirmation from a clients legal adviser that all potential payments from current litigation had been considered. (v) Accuracy of information obtaining from each director a confirmation that an accurate statement of remuneration and expenses had been obtained. (vi) Validity of information validity is based on evidence that can be supported. For example, a provision for future warranty claims may be extremely difficult to estimate in precise monetary terms. If such
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a provision is made in the accounts, the auditor would need to apply substantive tests to determine its validity, i.e. that it was supported by adequate evidence. 8.2 Analytical procedures. The auditor should apply analytical procedures at the planning and overall review stages of the audit. Analytical procedures may also be applied at other stages. Analytical procedures means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviations from predicted amounts. 8.3 Nature and purpose of analytical procedures Analytical procedures include the consideration of comparisons of the MMDAs financial information with the following: (a) comparable information for prior periods. (b) anticipated results of the MMDA, such as budgets or forecasts. Analytical procedures also include consideration of relationships (i) among elements of financial information that would be expected to conform to a predictable pattern based on the MMDAs experience, such as gross margin percentages. (ii) between financial information and relevant non-financial information, such as payroll cost to number of employees. Various methods may be used in performing the above procedures. These range from simple comparisons to complex analyses using advanced statistical techniques. Analytical procedures may be applied to consolidated financial statement, financial statements of component (such as subsidiaries, divisions or segments) and individual elements of financial information. The auditors choice of procedures, methods and level of application is a matter of professional judgment. Analytical procedures are used for the following purposes:
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(i)
to assist the auditor in planning the nature, timing and extent of other audit procedures; (ii) as substantive procedures when their use can be more effective or efficient than tests of details in reducing detection risk for specific financial statements assertions; and (iii) as an overall review of the financial statements in the final review stage of the audit.
8.4 Analytical procedures as substantive procedures The auditors reliance on substantive procedures to reduce detection risk relating to specific financial statements assertions may be derived from tests of details, from analytical procedures, or from a combination of both. The decision about which procedures to use to achieve a particular audit objective is based on the auditors judgment about the expected effectiveness and efficiency of the available procedures in reducing detection risk for specific financial statements assertions. The auditor will ordinarily inquire of management as to the availability and reliability of information needed to apply analytical procedures and the results of any of such procedure performed by the MMDA. It may be efficient to use analytical data prepared by the MMDA, provided the auditor is satisfied that such data is properly prepared. When intending to perform analytical procedures as substantive procedures, the auditor will need to consider a number of factors such as the: (i) objectives of the analytical procedures and the extent to which their results can be relied upon (ii) nature of the MMDA and the degree to which information can be disaggregated; for example, analytical procedures may be more effective when applied to financial information on individual sections of an operation or to financial statements of components of a diversified MMDA, than when applied to the financial statements of the MMDA as a whole. (iii) availability of information, both financial, such as budgets or forecasts, and non-financial, such as the number of units produced
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or sold. (iv) reliability of the information available, for example, whether budgets are prepared with sufficient care. (v) relevance of the information available, for example, whether budgets have been established as results to be expected rather than as goals to be achieved (vi) sources of the information available, for example, sources independent of the MMDA are ordinarily more reliable than internal sources. (vii) knowledge gained during previous audits, together with the auditors understanding of the effectiveness of the accounting and internal control systems and the types of problems that in prior periods have given rise to accounting adjustments. 8.5 Extent of reliance on analytical procedures The application of analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. The presence of these relationships provides audit evidence as to the completeness, accuracy and validity of the data produced by the accounting system. However, reliance on the results of analytical procedures will depend on the auditors assessments of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists. The extent of reliance that the auditor places on the results of analytical procedures depends on the following factors: (i) materiality of the items involved, for example, when inventory balances are material, the auditor does not rely only on analytical procedures in forming conclusion. However, the auditor may rely solely on analytical procedures for certain income and expense items when they are not individually material; (ii) other audit procedures directed towards the same audit objectives, for example, other procedures performed by the auditor in reviewing the collectibles of accounts receivable, such as the review of subsequent cash receipt, might conform or dispel questions raised
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from the application of analytical procedures to an aging of customers accounts; (iii) accuracy with which the expected results of analytical procedures can be predicted, for example, the auditor will ordinarily expect greater consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses, such as research or advertising; and (iv) assessments of inherent and control risk, for example, if internal control over sales order processing is weak and therefore control risk is high, more reliance on test of details of transactions and balances than on analytical procedures in drawing conclusions on receivables may be required. The auditor will need to consider testing the controls, if any, over the preparation of information used in applying analytical procedures. When such controls are effective the auditor will have greater confidence in the reliability of the information and therefore in the results of analytical procedures. The controls over non-financial information can often be tested in conjunction with test of accounting related controls. 8.6 Investigating unusual items When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanation and appropriate corroborative evidence. The investigation of unusual fluctuations and relationships ordinarily begins with enquiries of management, followed by; (i) corroboration of managements responses, for example, by comparing them with the auditors knowledge of business and other evidence obtained during the cause of audit; and (ii) consideration of the need to apply other audit procedures based on the results of such enquiries, if management is unable to provide an explanation or if the explanation is not considered adequate
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8.7 Vouching Vouching may be defined as the examination, by the auditor, of all documentary evidence which is available to support the authenticity of transactions entered in the MMDAs records In vouching the auditor will: (i) ensure that all transactions are accounted for accurately and properly; (ii) carry out tests to ensure that expenditures are recorded with budgetary provisions, and that the appropriate regulations and directives have been observed; (iii) test the calculations and extensions of the amount; (iv) ensure that the date of the transaction are within the reference period; (v) ensure that the transactions are authorized and approved by appropriate officials and that authority limits are not exceeded; (vi) carry out an examination of commitment and payment to verify entitlements and of receipts to ascertain that all income/revenue have been received and properly brought to account; (vii) carry out a verification of securities and monies recorded in the MMDAs books as being on deposits by certificates received directly from the depositories and by appropriate reconciliations; (viii) test to ascertain that all assets and liabilities are properly recorded; (ix) carry out an examination of inventories and stores accounts and a check that holdings have been verified by physical inspection and counts; and (x) check the financial statements against organizations main accounts supplemented by test of the later with subsidiary books of records and vouchers, contracts, purchase orders and other original documents. 8.8 Asset verification The auditor has a duty to verify all the assets appearing on the balance sheets and also a duty to verify whether there are no other assets which ought to appear on the balance sheet. The following aspects of each asset must be verified;
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(a) (b) (c) (d) (e) (f)
cost authorization value existence beneficial ownership presentation in the accounts
When verifying assets at a balance sheet date it is possible to divide the assets into two classes: I. those acquired during the year under review; and II. those held at the date of the previous balance sheet. For type I assets, it will be necessary to vouch their acquisition. This is why the terms cost and authorizations have been included. For type II assets, the acquisition would have been dealt with in the previous year. The presentation will of course need to be consistent with the presentation adopted in previous years. Both type I & II assets should be verified from the Assets Register. 8.9 Liability verification The auditors duty i fourfold viz: (a) to verify the existence of liabilities shown in the balance sheet. (b) to verify the correctness of the amount of such liabilities. (c) to verify the appropriateness of the description given in the accounts and the adequacy of disclosure. (d) to verify that all existing liabilities are actually included in the accounts or disclosed.
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9.0 Audit eVidence 9.1 Introduction The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. The audit evidence is obtained from an appropriate mix of test of control and substantive procedures. In some circumstances, evidence may be obtained entirely from substantive procedures. Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence will comprise source documents and accounting records underlying the financial statements and corroborating information from other sources. Test of control means tests performed by the auditor to obtain audit evidence about the suitability of design and effective operation of the accounting and internal control systems. Substantive procedures means tests performed by the auditor to obtain audit evidence to detect material misstatements in the financial statements, and are of two types: (a) tests of details of transactions and balances; and (b) analytical procedures 9.2 Sufficient appropriate audit evidence Sufficiency and appropriateness are interrelated and apply to audit evidence obtained from both tests of control and substantive procedures. Sufficiency is the measure of the quantity of audit evidence; appropriateness is the measure of the quality of audit evidence and its relevance to a particular assertion and its reliability. Ordinarily, the auditor finds it necessary to rely on audit evidence that is persuasive rather than conclusive and will often seek audit evidence from different sources or of a different nature to support the same assertion.
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In forming the audit opinion, the auditor does not ordinarily examine all of the information available because conclusions can be reached about an account balance, class of transactions or control by way of using judgmental or statistical sampling procedures. The auditors judgment as to what is sufficient appropriate audit evidence is influenced by such factors as the: (i) Auditors assessment of the nature and level of inherent risk at both the financial statements level and the account balance or class of transactions level; (ii) Nature of the accounting and internal control systems and the assessment of control risk; (iii) Materiality of the item being examined; (iv) Experience gained during previous audit; (v) Results of audit procedures, including fraud or error which may have been found; (vi) Source and reliability of information available. When obtaining audit evidence from tests of control, the auditor should consider the sufficiency and appropriateness of the audit evidence to support the assessed level of control risk. The aspects of the accounting and internal control systems about which the auditor would obtain audit evidence are:(a) Design:- the accounting and internal control systems are suitably designed to prevent and / or detect and correct material misstatements; and (b) Operation:- the system exist and have operated effectively throughout the relevant period. When obtaining audit evidence from substantive procedures, the auditor should consider the sufficiency and appropriateness of audit evidence from such procedures together with any evidence from tests of control to support financial statements assertions.
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Financial statements assertions are assertions by management, explicit or otherwise, that are embodied in the financial statements. They can be categorized as follows: (a) existence:- an asset or liability exist at a given date; (b) right and obligation:- an asset or a liability pertains to the MMDA at a given date; (c) occurrence:- a transaction or event took place which pertains to the MMDA during the period; (d) completeness:- there are no unrecorded assets, liabilities, transactions or event, or undisclosed items; (e) valuation:- an asset or liability is recorded at an appropriate carrying value; (f) measurement:- a transaction or event is recorded at the proper amount and revenue or expense is allocated to the proper period; and (g) presentation and disclosure:- an item is disclosed, classified and described in accordance with the applicable financial reporting framework. 9.3 Procedures for obtaining audit evidence The auditor obtains audit evidence by one or more of the following procedures: a) inspection b) observation c) inquiry and confirmation d) computation e) analytical procedures The timing of such procedures will be dependent, in part, upon the period of time during which the audit evidence sought is made available 9.4 Inspection Inspection consists of examining records, documents or tangible assets. Inspection of records and documents provides audit evidence of varying degrees of reliability depending on their nature and source and the effectiveness of internal controls over their processing. Three major categories
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of documentary audit evidence, which provide different degree of reliability to the auditor, are: (a) documentary audit evidence created and held by third parties (b) documentary audit evidence created by third parties and held by the MMDA; and (c) documentary audit evidence created and held by the MMDA. (d) Inspection of tangible assets provides reliable audit evidence with respect to their existence but not necessarily to their ownership or value. 9.5 Observation Observation consist of looking at a process or procedure being performed by others, for example, the observation by the auditor of the counting of inventories by the MMDAs personnel or the performance of control procedures that leave no audit trail. 9.6 Inquiry and confirmation Inquiry consists of seeking information of knowledgeable persons inside or outside the MMDA. Inquires may range from formal written inquiries addressed to third parties to informal oral inquiries addressed to persons inside the MMDA. Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence. Confirmation consists of the response to an inquiry to corroborate information contained in the accounting records. For example, the auditor ordinarily seeks confirmation of receivables by communication with debtors. 9.7 Computation Computation consists of checking the arithmetical accuracy of source document and accounting records or of performing independent calculations 9.8 Analytical procedures Analytical procedures consist of the analysis of significant ratios and trends, including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviations from predicted amounts.
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10.0 VAlidAtion of finAnciAl stAteMents 10.1 Introduction Validation means looking for sufficient evidence to satisfy oneself as auditor that the accounts are presented fairly in all material respect. It is concerned with the verification of accounting data and with determining the accuracy and reliability of accounting statements and reports. 10.2 Cash basis of accounting The cash basis of accounting recognises transactions and events only when cash (including cash equivalent) is received or paid by the MMDA. Financial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purpose for which the cash was used and the cash balances at the reporting date. The measurement focus in the financial statements is balances of cash and changes therein. Notes to the financial statements may provide additional information about liabilities, such as payables and borrowings, and some non-cash assets, such as receivables, investments and property, plant and equipment. 10.3 Books of accounts Under Section 90 of the Local Government Act, 1993 (Act 462) and Regulation 32(8) of LI 1589, Assemblies and its Sub-District Structures shall keep proper books of Accounts. The following main books of accounts shall be kept at all Assembly Finance Office: (a) treasury cash book (D.A Form 5) (b) treasury Ledger (D.A Form 6) Each entry made in the cash book apart from contra entries for transactions between cash and bank, shall have a corresponding entry in the Ledger, a debit to cash in the Cash Book being competed by a credit to the relevant Ledger Account and a credit to cash by a debit to the appropriate Ledger Account.
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All books of accounts shall be written entirely in ink. 10.4 Purpose of financial statements Financial statements are a structured financial representation of the transactions undertaken by MMDAs. The object of general purpose financial statements is to provide information about the financial position, performance and cash flows of an MMDA that is useful to wide range of users in making economic decisions. Financial statements also show the results of managements stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about the MMDAs: (a) Revenue & Expenditure; (b) Balance Sheet; (i) Financial Assets (ii) Financial Liabilities; (iii) Accumulated Surplus / Deficit (c) Cash Flow (d) Notes and Significant Accounting Policies. This information, along with other information in the notes to financial statements, assists users in predicting the MMDAs future cash flows and in particular, the timing and certainty of the generation of cash and cash equivalents. 10.5 Responsibility for financial statements Heads of MMDAs are responsible for the preparation and presentation of their financial statements in accordance with. Sec 41 (1) of FAA, 2003 (Act 654) 10.6 Components of financial statements Section 41(1) of the FAA, 2003(Act 654) requires that within a period of three months, or such other period as Parliament may by resolution appoint, after the end of each financial year, the head of each MMDA should prepare and transmit to the Auditor-General, the Minister of Local Government and Rural Development and the Controller and Accountant-General in respect of the financial years accounts of the MMDA the following: (i) A balance sheet showing the assets and liabilities of the MMDA as at the end of the year;
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(ii) A statement of revenue and expenditure for the year; (iii) A cash flow statement of the MMDA for the year; and (iv) Notes that form part of the accounts which should include particulars of the extent to which the performance criteria specified in the estimate in relation to the provision of the MMDAs output were satisfied. Subsection 2 of section 41 states that the accounts submitted under this section should (a) be prepared in accordance with generally accepted accounting principles and in accordance with any instructions issued by the Controller and Accountant-General in consultation with the AuditorGeneral; and (b) state the basis of accounting used in their preparation and identity any significant departures and the reasons for the departure. 10.7 Financial year The financial year of MMDAs shall extend from the first day of January until the 31st of December in each year. (Section 43of FAA, 2003 (Act 654). 10.8 Monthly accounts and statements A Trial Balance shall be prepared and signed by the Finance Officer at the end of each month and whenever the Finance Officer hands over his duties to another officer. The Trial Balance is a list of debit and credit balances extracted from the Ledger and Cash Book and its purpose is to prove the arithmetical accuracy of the accounts. Total credits must equal total debits. A Revenue and Expenditure Statement which set out the accumulated surplus of Revenue over Expenditure or Accumulated Deficit of Expenditure over Revenue, as the case may be bought forward at the beginning of the financial year, the actual revenue and Expenditure by Heads from the beginning of the financial year to date and the resultant Accumulated Surplus of Revenue over Expenditure or the Accumulated Deficit of Expenditure over Revenue shall be prepared by the Finance Officer monthly from the Trial Balance and signed.
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A Balance Sheet shall be prepared by the Finance officer monthly from the Trail Balance and signed. The Accumulated Surplus or Deficit thereof shall agree with the Accumulated Surplus or Deficit of the Revenue and Expenditure Statement. The monthly Trail Balance, Revenue and Expenditure Statements and Balance Sheet shall be submitted at regular monthly intervals for the information of the Finance and Administration Sub-Committee and copies shall be sent to the Minister responsible for Local Government and Rural Development, Regional Minister, District Chief Executive, Presiding Member, the Controller and Accountant General, and the Auditor General, so as to reach them within fifteen days of the end of the month to which they relate. Failure to balance the Trail Balance must be due to posting, casting or balancing errors and in this event immediate steps shall be taken with a view to rectifying the position. Should this in turn fail the Finance & Administration Sub-Committee shall be informed without delay. 10.9 Annual accounts and statements The Annual Accounts and Statements that are to be prepared, submitted for audit and published in accordance with Section 90 of the Local Government Act, 1993 shall comprise the following:(i) The Revenue and Expenditure Statement for the financial year signed and dated by the Finance Officer and the Co-ordinating Director. (ii) The Balance Sheet at 31st December signed and dated by the Finance Office and the Coordinating Director. (iii) A comparative Statement of Revenue and Expenditure, which details the years actual Revenue and Expenditure by Head, Sub-head and items in relation to Estimates and all additional or Reduced Provision approved. (iv) An Analysis of Advance Account outstanding at 31st December. (v) An Analysis of Deposit outstanding at 31st December. (vi) A Statement of unredeemed Loans (vii) The Profit and Loss Accounts of any trading concerns under the Control of the Assembly.
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(viii) A Statement showing the receipt, disbursement and unspent balance in respect of all grants and loans for specific purposes. (ix) An analysis of claims against Assembly funds for goods and services supplied remaining unpaid at 31st December. (x) A Statement of total arrears of Rates uncollected at 31st December and subdivided in accordance with the sub-heads of Head I of the Revenue Estimates. (xi) Notes mentioning: significant accounting policies, basis of accounting, classification of accounts, development expenditure and foreign currency transactions. Six copies of the statements mentioned above shall be sent to the local representative of the Auditor General so as to reach him not later than 31st March following the close of the financial year to which they relate. One copy of each audited statement shall subsequently be sent to the Minister responsible for Local Government and Rural Development, Regional Minister, District Chief Executive, Presiding Member, the Controller and Accountant General, and the Auditor General, together with his report on the accounts of the Assembly.
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11.0 AuditinG in coMputerised enVironMent 11.1 Introduction Computers form an integral part of most financial and information system of MMDAs. Auditors, therefore, have to evaluate computer systems as part of their work on the MMDAs financial accounts to obtain assurance that proper controls are exercised over financial, accounting and other transactions. Also, computer technology and support represent a very significant investment of funds and resources, and the auditor is required, to appraise the procedures for the safeguarding of the MMDAs assets. This will include the safeguard of both the computer equipment and the information within the computer systems against damage, unauthorized access, theft, and loss. The auditor also has a discretionary power to make observations with respect to the efficiency of the financial procedures as well as the administration and management of the MMDAs. The auditors may, therefore, be concerned that computer resources are planned, used and managed economically, efficiently and effectively. The audit of computer facilities is, therefore, concerned with three main areas: (a) the organization and security of computer information and facilities; (b) computer application controls; and (c) the management of computer resources Each of these areas are examined below, outlining particular control aspects the auditor may be required to evaluate. The first two areas mainly relate to the financial audit opinion with the latter two areas relating more to valuefor-money or performance audit considerations. There is, however, some overlap between the two areas. The knowledge required to complete the reviews outlined in this chapter should be within the ability of an auditor with some computer experience. However, some aspects of computer audit require specialist knowledge of computer operations and programming (e.g. the assessment of a computers
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system or the examination of specific programmes), and for these the employment of a computer specialist should be considered. The computer specialist must be capable of applying basic audit principles to computer systems and be competent in his/her knowledge of evolving computer technology. The specialist should also work as a member of the audit team. 11.2 Financial audit objectives Where computers are used to process transactions or provide source information, the auditor will need to identify and assess the relevant controls to determine the degree of reliance that can be placed upon them. This will form an integral part of the systems evaluation which embraces both the computer and noncomputer elements. It will include the controls built into a computer system itself together with a review of the administrative and organizational controls throughout the computer environment. The auditors evaluation should also identify the procedures for safeguarding computer assets and information. 11.3 Reporting weaknesses The auditor may become aware of weaknesses in internal controls during the evaluation of the computer systems. Material weaknesses should be reported to management, on a timely basis. In addition, the auditor may become aware of defects relating to safeguarding data and continuity of processing. Management should also be informed of these aspects. All such weaknesses are usually reported in writing and it is important to state that the audit is not designed to determine the adequacy of all the internal controls required for management purposes. 11.4 Organization and security of computer information and facilities This section examines the controls which are not specific to individual computer applications but which should provide a secure environment in which to develop, maintain and operate computer systems. The extent of the controls will depend mainly on the size of the computer installation. The auditor may need to adopt the principles for particularly small or large installations.
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It is usually appropriate to review these installation controls before the specific application controls as they help the auditor to familiarise himself / herself with the computer environment. Also, installation control weaknesses could override the controls for a particular application.
11.5 ORGANIZATIONAL CONTROLS 11.5.1 Separation of duties A key organizational control is the separation of functions within the computer department and between the computer department and the user sections. Within the computer department, it should be clearly defined which members of staff are responsible for system design and programming, computer operations (data preparation, file storage / librarian and computer operating), and system support. These functions are largely incompatible so the auditor should establish there is appropriate segregation in order to reduce risks associated with application controls. For example, system programming staff should not be involved in operating the live system and computer mainframe operators should not be involved in initiating transactions. The organization of the function may be set out in an overall policy or strategy statement. In addition, there may be job descriptions which define the roles and authority of computer staff, although the auditor would have to verify that these are used in practice in order to place reliance on them. The degree of control which can be achieved will depend, to some extent, on the size of the computer installation. Where sections operate and programme their own microcomputers, there is unlikely to be scope for adequate separation of duties and for a small computer department it may be uneconomic and impractical to assign functions to separate staff. In these conditions, there is an increased risk of inaccurate processing and the increased possibility that staff could circumvent control procedures. The auditor in these circumstances should consider increasing the relevant substantive tests or see whether there are counterbalancing controls such as increased management supervision.
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11.5.2 Programme change Controls should exist to prevent unauthorized amendments to the live programmes. Also the auditor will need to evaluate the controls that ensure that all authorized programme change are properly tested and implemented. The development staff should be segregated from the other computer functions. In addition, it is essential that the development is conducted away from live programmes so that real transactions are not processed through the programmes until they have been properly tested and approved. Access to the development areas should also be restricted which could be through designated terminals, use of passwords or physical access through the use of locks. This aspect is considered further in the management of computer resources section below. 11.5.3 Security of information and computer facilities The auditor should evaluate whether there are controls to ensure that assets are adequately safeguarded. This will include the safeguard of both the computer equipment and the information within the computer against damage, unauthorized access, theft, and loss. Also, where data files are lost or equipment fails, there should be established procedures to ensure that data can be removed and the major systems can continue. 11.5.4 Computer facility access The access to computer facilities should be adequately restricted and controlled. This could be done through restricting physical access by the use of locks and identification devices. This is not only applicable to the computer section but also to the use of microcomputers. The auditor should ensure that the physical restrictions are actually operating e.g. those sections are not kept unlocked and that only authorized staffs have the means of entrance. There should be a list of staff who have authorized access to key facilities. Similarly, computer files should also be securely stored and adequately labelled for identification purposes and to ensure that correct versions are used for processing.
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11.5.5 Security of computer programmes and files Access to computer programmes and files is usually controlled through the use of passwords. The auditor may need to examine that the appropriate access rights to sensitive data are assigned by individual passwords or sets of passwords. Users should usually be restricted to the minimum access of applications consistent with their task in the MMDA. There should also be controls to ensure passwords are reviewed when staff change section and deleted when staff leave. Passwords should be changed on a regular basis and users need to be aware that their passwords should be kept secure. There also need to be controls to ensure that passwords are not displayed by the terminal or made available to unauthorized users. A log of computer usage should be produced in large computer systems to monitor information processing and access. Also the system should record user activity so that individuals can be made accountable for their actions. The logs should be examined by management and used to detect control failures or security breaches. A further control to prevent data loss and corruption is to ensure that jobs to be processed in batch systems are properly authorized and scheduled. Also, operating procedures should be adequately documented and staff trained in those procedures. Controls also should be established to ensure that all software brought into the MMDA is recorded and authorized so as to avoid data being corrupted, viruses being introduced into the system, and faults occurring due to incompatibility. In addition, there should be procedures to check all storage devices brought into the MMDA and programmes introduced to ensure that no computer viruses are present. The software within the MMDA should also be checked on an established basis to protect them against computer viruses. 11.5.6 Recovery There is a risk that data file and programmes could be lost through theft, corruption during processing or from physical damage. It is essential,
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therefore, that secondary copies of key programmes and files are available so that the MMDA can maintain its financial and information systems. The auditor should, therefore, establish that procedures exist to provide sufficient backup copies of files and programmes. These procedures apply to both mainframes and microcomputers. In event of file loss, the recovery arrangements should be adequately documented and tested at regular intervals. Records should be maintained so that any update of data table (master file) and data dictionaries (standing data) made since the last backup was taken can be incorporated into the backup copy. It is also common practice to store key programmes and files at a different site to protect them against local disasters like fires and floods. In the event of prolonged major equipment failure, there should be controls to ensure that the critical processing can continue. This could be done through the use of a remote site in which case security of the site and the facilities should be considered. The procedures should be formally set out and adequately documented. These procedures should also cover data preparation, if appropriate. 11.5.7 Environment controls The location of computer equipment should be considered to minimize the risk of damage from electrical faults, extreme temperatures, and water. The auditor should see that there has been adequate consideration of the environmental requirements of the computer systems and that the potential damage from fires and floods are minimized.
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12.0 Audit reportinG 12.1 Introduction Reporting is the final phase in the audit process. It includes reporting on the result of audits to senior management as well as reporting to Parliament or other appropriate governing body. 12.1.1 Reporting to Management Reporting by letter to management is the first step of the reporting phase. The purpose of this letter is to draw senior managements attention to audit findings, conclusions, opinions and recommendations in a formal report. In writing the management letter, the auditor should pay particular attention to: (i) Choosing appropriate words and tone; (ii) Providing sufficient description of the particular aspect of the management system examined; (iii) Stating audit results in a manner that is concise, clear, complete, accurate, constructive, fair, objective and factual; and (iv) Determining the extent of information which should be included in the report with respect to the causes and effects of deficiencies noted. Since seeking managements response is such an important aspect of a constructive audit approach, adequate time and thought should be given to this step of the reporting phase. Any implications arising from managements response should be given appropriate consideration. The policies and procedures adopted by the audit team with respect to the content, preparation, approval and issue of management letters and their subsequent follow-up are described in the Audit Manual.
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12.1.2 Reporting to Parliament The Audit Reports Committee is responsible for drafting the Auditor Generals report to Parliament. These reports which contain a summary of the significant matters to be brought to the attention of Parliament are compiled from matters in management letters to the Assemlies during the period under review.
12.2 MAnAGeMent letters 12.2.1 Introduction Every audit assignment, whether interim or final audit, should culminate in a written report to management on the results of the audit. These reports are called management letters which are confidential between management and the AuditorGeneral and should be marked as such. As a result, copies of these letters are not provided by the AuditorGeneral to an individual, body or organizations outside the MMDA. The purpose of this section is to set forth the policies and procedures adopted by the AuditorGeneral with respect to the content, preparation, approval and issue of management letters and their subsequent follow-up. 12.2.2 Content There is no standard format for management letters. There are, however, a number of components which all letters should contain: Introduction A brief introductory paragraph which identifies the MMDA and / or activity being audited and the time period covered. Audit objectives and scope of examination One or two paragraphs that briefly describe the main aim of the audit and the areas of examination and review. Summary of Observations and Overall Results To aid senior management in identifying the system weaknesses and corrective action required, a summary of major observations and
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conclusions should be presented before the detailed audit observations and recommendations. Audit Observations and recommendations The main body of the letter and contains in order of importance details of audit findings, recommendations for corrective action and managements reaction and the extent of corrective action taken on observations made in prior reports / management letters. Acknowledgements A brief paragraph acknowledging the co-operation given by management and staff of the audited organization. For each audit observation, there should be a paragraph(s) which describes in a concise manner the nature of the problem and its possible effect on the operations and /or the financial statements. There should then follow a paragraph containing the recommendation(s) for corrective action and another paragraph describing or quoting managements reaction to the recommendation(s). Management letters should be written in a clear and precise manner. Recommendations should be written in a clear language indicating the of management responsible for taking corrective action. Minor issues should be discussed verbally so that management letters can focus on truly significant matters. 12.2.3 Preparation Upon completion of the audit, it is the responsibility of the leader of the audit assignment to draft a management letter for submission to the Director of Audit. It is also the officers responsibility to ensure that the contents of the letter have been discussed fully with the personnel involved and that their comments have been incorporated in the letter. Management letters form the basis of the AuditorGenerals report to Parliament. To comply with the relevant Laws and to afford management ample opportunity to respond to audit observations before they are finalized,
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the following approach should be used: (a) If the leader of the audit team sees the need to bring to the attention of the management any audit observations which merits its comments, a written note should be prepared containing details of the observation. A written reply should be requested from management; (b) At the conclusion of the audit, a draft management letter will be prepared by the leader of the audit team to be reviewed and discussed with management and amended as appropriate; and (c) The letter should be sent to the responsible Director of Audit, along with working papers supporting the audit observations. In most instances and at the discretion of the Director, it is desirable to leave a copy of this draft with the management so that follow-up action can be implemented as quickly as possible. When this is done, the letter should be clearly marked Draft for Discussion Purposes Only, and management should be made aware that it is subject to review by the supervisor and final revision and approval by the Director of Audit. It is essential that all audit observations be adequately supported in the working papers. As a minimum, they should include: (i) A detailed narrative of findings, including copies of supporting documentation, when appropriate; (ii) Details of discussion with management, including the date, the names and title of persons interviewed; (iii) A record of the significance of the weaknesses and, where possible, an evaluation of the monetary effects; and (iv) Response of management and the details and date of any corrective action taken by the MMDA on identified weaknesses. 12.2.4 Review and Approval Directors of Audit are responsible for reviewing and modifying draft management letters for issue and distribution. Management letters are issued under the signature of the Director of Audit on
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behalf of the AuditGeneral who has prime responsibility for the audit assignment. The Director concerned should discuss with management the level of authority to which management letters should be addressed. The aim should be to obtain not only timely replies but to assure prompt and efficient action by management on the recommendations contained therein. Management letter should be addressed to the Presiding Member of MMDA. Copies, however, of management letters should be sent to the Chief Executives of the MMDA and the Auditor General. Also copies of the letters should be provided to Internal Audit and Audit Report Implementation Committee. 12.2.5 Follow-up Parliament, from time to time requests the AuditorGeneral to report to it on any recommendations that have not been implemented by the MMDAs. Thus, it is essential that audit procedures for subsequent audit include a review of the extent and follow-up of corrective action taken on earlier recommendations. Where such matters are significant, the management letter should include a separate section on the status of implementation of the recommendations.
12.3 the Auditors report on finAnciAl stAteMents Financial statements in government are usually prepared in line with a financial reporting framework set out by legislation. Commonly, legislation refers to the International Public Sector Accounting Standards (IPSAS). Financial statements with disclosure notes including a statement of accounting policies and other explanations are subject to audit. The objectives of the auditor are to: (a) form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and (b) express clearly the opinion through a written report that explains the basis of the opinion (ISA 700.6;8;9;10). To form an opinion the auditor should perform relevant procedures to provide reasonable assurance that the financial statements are free of material
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misstatements and that all requirements of the applicable financial reporting framework have been correctly applied. The auditor should follow the approach prescribed in this manual and conclude on the required aspects. (ISA 700.11;12) In addition, when the reporting framework allows entities to deviate from the requirements of the reporting framework in order to achieve fair presentation the auditor should also evaluate whether these deviations were adequate for that purpose. 12.3.1 Consideration of Identified Misstatements 12.3.1a Evaluating the effect of misstatement In forming an opinion on the financial statements, auditors need to conclude whether the financial statements as a whole are free from material misstatement. (ISA 450.1) A misstatement is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework or legislation. Misstatements can arise from error or fraud. Auditors need to consider whether financial statements give a true and fair view and giving consideration to laws and regulations as required. (ISA 450.4) In doing that the auditor should assess the effect of identified misstatements on the audit and the effect of aggregated uncorrected misstatements in forming an opinion. In addition to this, in the public sector, misstatements include instances of non compliance with legislation which also needs to be assessed. (ISA 450.2) At this point auditors should also: (i) consider whether the nature and occurrence of misstatement
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indicate that the initial risk of material misstatement identified on a financial statements level is still appropriate. (ISA 450.5;6) (ii) re-calculate final materiality and determine whether it will differ from preliminary materiality. If yes, the impact of any changes to materiality and risk on the audit approach need to be considered. (ISA 450.10) (iii) aggregate audit findings and evaluate whether the accumulated misstatements approach materiality. The auditor should consider: (a) the size and nature of the misstatements, considering quantitative and qualitative materiality factors. (b) the effect of uncorrected misstatements related to prior periods (ISA 450.11) (iv) Consider whether adequate and sufficient audit evidence was collected during the audit or whether the audit procedures should be extended to identify the extent of certain problems. Public sector auditors may also accumulate instances of noncompliance with authorities. Noncompliance with authorities or control deviations in public sector can be qualitatively material and all such instances or deviations are normally accumulated and evaluated (ISSAI 1450 P6). The auditor should keep in mind that in certain instances there is also a possibility of misstatements of relatively small amounts that, cumulatively, could have a material effect on the financial statements. For example, an error in a month end procedure could be an indication of a potential material misstatement if that error is repeated each month. If, at the auditors request, management has examined a class of transactions, account balance or disclosure and corrected misstatements that were detected, the auditor shall perform
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additional audit procedures to determine whether misstatements remain. This requirement does not apply to instances of noncompliance with authorities or control deviations. Even if a transaction is correctly shown in the financial statements, if the transaction was unlawful or the control was not followed, by its nature it represents an instance of non-compliance with authorities or a control deviation or deficiency (ISSAI 1450 P7) (ISA 450.7) Audit objectives may include compliance with laws and regulations and effectiveness of internal control depending on the audit mandate. The following definitions apply to types of misstatements identified: (a) Control deviation the entitys failure to follow or implement a significant control procedure for a transaction; (b) Control deficiency (control weakness) a condition in which the design or operation of a control does not allow management or employees to timely prevent or detect material misstatements; and (c) Instance of non-compliance with authorities failure to adhere to law or regulation, including budgetary authority, for a transaction (ISSAI 1450 P5) 12.3.1b Communicating to management and the correction of misstatements All audit findings should be communicated to the appropriate level of management on a timely basis. The auditor should request management to adjust the financial statements. Even when management does adjust the misstatement identified the underlying control weakness may still be included in the audit report. (ISA 450.8) If management refuses to adjust the financial statements containing material misstatements the auditor should consider reasons for the refusal by management and evaluate whether the matter will cause the audit report to have a modification. (ISA 450.9)
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Auditor should obtain written representation that management considers the effects of uncorrected misstatements on the financial statements to be immaterial and on compliance with authority and effectiveness of internal control. When auditors find instances of non-compliance with authorities or control deficiencies, management may modify such representations accordingly (ISSAI 1450 P8) (ISA 450.14) Many auditors communicate all identified instances of noncompliance with laws and regulations. Some public sector audit organizations can, according to the audit mandate, order the entity to correct any instance of non-compliance with laws and regulations. In such cases, public sector auditors determine whether their independence will be impaired (ISSAI 1450 P9). When required by audit mandate the auditors should separately evaluate financial statements misstatements, instances of noncompliance with laws and regulations and control deviations (ISSAI 1450 P10). If the auditor concludes that, or is unable to conclude whether, the financial statements as a whole are materially misstated, the auditor should consider the effect thereof on the opinion in the auditors report. When auditors have additional reporting responsibilities, each reporting responsibility may be evaluated separately. For example, if auditors are required to report instances of non-compliance with laws and regulations, their evaluation whether the entity has complied with laws and regulations may be separate from their evaluation whether the financial statements as a whole are free from material misstatement. However, misstatements and instances of non-compliance with laws and regulations can also be interrelated, potentially increasing the risks of material misstatements and vice versa. For example, misstatements may represent instances of noncompliance with authorities (ISSAI 1450 P14).
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For control deviations, auditors determine whether they represent control deficiencies. In this evaluation, auditors evaluate compensating controls to determine whether the control objective has been met (ISSAI 1450 P11). 12.3.1c Communication with those charged with governance and other parties The auditor should communicate with those charged with governance: (i) Uncorrected misstatements and the effect that they, individually or in aggregate, may have on the opinion in the auditors report, unless prohibited by law or regulation. (ii) The effect of uncorrected misstatements related to prior periods influencing the current financial statements. (ISA 450.12;13) (iii) Instances of non-compliance with authorities and control deficiencies (iv) Any matters that may lead to modification of audit opinion, any emphasis of matter and other matter to be included in the audit report and the proposed wording of these paragraphs. (ISA 701.28;9) (ISSAI 1706E P7) Auditors may be expected to communicate all misstatements, even those that have been corrected by the entity, and all control deficiencies, and instances of non-compliance with authorities. This maybe the case since the auditee may constitute a limited part of the wider public sector control structure. Therefore, control deficiencies may have implications from a broader perspective. Public sector auditors determination of who to communicate with about instances of non-compliance with authorities and control deficiencies is based on professional judgment and effected by factors such as: (i) The practice in the public sector environment (ii) The nature and number of occurrences (iii) Whether similar occurrences are likely to exist in the entity
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or in other entities for which those charged with governance have responsibility When communicating with those charged with governance, auditors use ways of reporting relevant in their jurisdiction. Auditors may also be called upon to testify before the legislature on the results of the financial statements audit. Auditors may also communicate misstatements, instances of non-compliance with authorities and control deficiencies to additional parties such as government officials (ISSAI 1450 P12; P13) (ISSAI 1700E P13). In addition, when a reporting deadline given by legislation is not met by auditors, this fact should be reported to those charged with governance or legislature as applicable. (ISSAI 1700E P13) 12.3.1d Documentation and evidencing Auditors should document:(i) all misstatements and whether they have been corrected (ii) identified control deviations and whether they represent control deficiencies. (iii) control deficiencies that do not arise from control deviations. (iv) identified instances of non-compliance with authorities. (v) conclusions as to whether uncorrected misstatement, noncompliance with laws and regulations and control deficiencies are material and the basis for those conclusions (ISSAI 1450 P15) (ISA 450.15). 12.3.2 Types of audit opinions 12.3.2(a) Unqualified opinion An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (ISA 700.16).
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When expressing an unqualified opinion, the opinion paragraph of the auditors report should state the auditors opinion that the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording should be used). Auditors should draw users attention to a matter or matters presented or disclosed in or outside the financial statements that are important for users understanding of the financial statements or the auditors report. These matters will be included in an emphasis of matter or an other matter paragraph respectively. The users of the financial statements in the public sectors are legislators, representing citizens who are the ultimate users. (ISSAI 1700E P3) (ISA 706.1) In the public sector, laws and regulations, the audit mandate or common practice may lead public sector auditors to report findings in the auditors report according to the ISAs. Additional findings, disclosures, conclusions, recommendations and management responses may be reported in a separate report. (ISSAI 1700E P5) emphasis of Matter paragraph refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors judgment, is of such importance that it is fundamental to users understanding of the financial statements. (ISA 706.5) Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are: (i) An uncertainty relating to the future outcome of exceptional litigation or regulatory action. (ii) Early application (where permitted) of a new accounting standard (for example, a new International Financial Reporting Standard) that has a pervasive
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effect on the financial statements in advance of its effective date. (iii) A major catastrophe that has had, or continues to have, a significant effect on the entitys financial position. Bringing attention to the following aspects are properly disclosed in the financial statements: (a) Non-compliance with legislation (if no separate opinion is required) (ISSAI 1706E P4); (b) Legislative actions on programmes or the budget; (c) Contradictive laws, regulations or directives with a significant effect on the entity; (d) Fraud, abuse or losses; (e) Significant transactions; (f) Significant internal control weaknesses; (g) Questionable business practices; (h) Transactions entered into without due regard for economy; (i) Prior period restatements; (j) Lack of fiscal sustainability; (k) Environmental Issues; (l) Corporate social responsibility issues; and (l) Propriety issues (proper behavior by public officials) (ISSAI 1706E P3) other Matter paragraph refers to a matter other than those presented or disclosed in the financial statements that, in the auditors judgment, are relevant to users understanding of the audit, the auditors responsibilities or the auditors report. When the aspects listed in the previous paragraph are not disclosed properly. (ISA 706.5) (ISSAI 1706E P5) Other matter paragraphs normally include control weaknesses, noncompliance with laws and regulations which do not constitute a qualification.
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12.3.2(b) Modified reports The auditor should appropriately modify the opinion in the auditors report when the auditor: (i) Concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or (ii) Is unable to obtain sufficient appropriate audit evidence. (ISA 700.4;6;17) (iii) Determines that the auditee did not comply with responsibilities prescribed by the financial reporting framework to: (a) Achieve fair presentation of financial information. (b) Fulfil all requirements of the financial reporting framework. (ISA 700.18;19) (iv) Any additional audit requirements, such as non-compliance with legislation or internal control weakness which in the opinion of the auditor has a material or pervasive effect on the financial statements. (ISSAI 1700E P4 P5 P6) Pervasive is a term used to describe the effects on the financial statements of misstatements or possible effects if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditors judgment: (i) Are not confined to specific elements, accounts or items of the financial statements; (ii) Represent or could represent a substantial proportion of the financial statements; or (iii) Fundamental to users understanding of the financial statements. (ISA 700.5) Pervasiveness of the finding will determine the kind of modified audit opinion which will be issued.
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The auditor should select the most appropriate modified opinion from the 3 options described below: (i) A qualified opinion should be expressed when the auditor having obtained sufficient appropriate audit evidence concludes that there are material misstatements in the financial statements or if the auditor cannot obtain adequate evidence on aspects of the audit. Qualified opinion is issued when the misstatement or limitation on scope is not as material and pervasive as to require an adverse opinion or a disclaimer of opinion. It is expressed as being except for the effects of the matter to which the qualification relates. (ISA 700.7); (ii) An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements; and (ISA 700.8) (iii) A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements. A disclaimer opinion may also be issued considering the potential cumulative effect of uncertainties even when all audit evidence is received. (ISA 700.9;10). (ISSAI 1700E P10) The decision on which type of modified opinion is appropriate depends upon: (a) the nature of the audit finding (quantitative materiality), (b) the extent of misstatement of the financial statements (quantitative materiality) and (c) the pervasiveness or the possible effects of the matter on the financial statements. (ISA 705.2) Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should
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be included in the report and, unless impracticable, a quantification of the possible effect(s) on the financial statements (ISA 705.16;17). 12.3.3 Limitation on scope imposed by management If management imposes a limitation of scope on the audit which will affect the audit opinion the auditor should: (i) Request management to remove the limitation. (ii) If limitation persists the auditor will communicate this to those charged with governance and determine whether alternative procedures can be performed to obtain evidence. (iii) If no alternative procedures are possible and withdrawal from the audit is not normally applicable in public sector the audit should issue a disclaimer of opinion. (iv) In certain instances reporting to legislature may also be applicable or required. (ISA 705.11;12;13;14) (ISSAI 1700E P7) In certain instances the auditors may find that the scope limitation is imposed by parties other than management, such as those charged with governance or legislation. (ISSAI 1700E P9) It is the responsibility of the auditor to express an opinion on one or more specific elements, accounts or items of a financial statement. The auditor cannot issue unqualified opinion when there is an adverse opinion or disclaimer already issued on the financial statements as a whole. To include such an unqualified opinion in the same report in these circumstances would contradict the auditors adverse opinion or disclaimer of opinion on the financial statements as a whole. (ISA 705.15) 12.3.4 Supplementary information presented with audited financial statements The auditor should be satisfied that any supplementary information presented together with the financial statements that is not covered by the auditors opinion is clearly differentiated from the audited financial statements. If the auditor concludes that the entitys presentation of any unaudited
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supplementary information does not differentiate it sufficiently from the audited financial statements, the auditor should explain in the auditors report that that information has not been audited (ISA 700.46). Supplementary information that is not required by the applicable financial reporting framework but is nevertheless an integral part of the financial statements because it cannot be clearly differentiated from the audited financial statements due to its nature and how it is presented shall be covered by the auditors opinion. (ISA 700.47) 12.3.5 Contents of the auditors report 12.3.5a Reporting in accordance with ISAs The auditors report should only state that the audit has been conducted in accordance with the International Standards on Auditing (all standards of ISA has been fully complied with). When the auditor prepares the auditors report using the layout or wording specified by the law, regulation or auditing standards of the specific jurisdiction or country, the auditors report should refer to the audit being conducted in accordance with both International Standards on Auditing and the auditing standards of the specific jurisdiction or country only if the auditors report includes, at a minimum, each of the following elements: (a) A title clearly indicating that it is the report of an independent auditor; (ISA 700.21) (b) An addressee, as required by the circumstances of the engagement. If laws and regulations do not refer to the addressee the auditors can address the report to those charged with governance(ISA 700.22) (ISSAI 1700E P11) (c) An introductory paragraph that includes the following: (i) Identify the entity audited; (ii) State that the financial statements have been audited; (iii) Identify the title of each statement that comprises the financial statements including additional reports
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(d)
(e)
where applicable (such as budget and actual comparison, performance information etc); (ISSAI 1700E P14) (iv) Refer to the summary of significant accounting policies and other explanatory information; and (v) Specify the date or period covered by each financial statement comprising the financial statements; (ISA 700.23) A description of managements responsibility for the preparation and fair presentation of the financial statements titled Managements responsibility for the Financial Statements. Responsibilities of management should include: (i) Preparation of the audited Financial Statements in line with the financial reporting framework; (ii) Instituting necessary internal controls to ensure the preparation of financial statements free of misstatements; and (iii) Achieving fair presentation where applicable (ISA 700.24;25;26;28) A description of the auditors responsibility titled Auditors responsibility that includes the responsibility to: (i) Express an opinion on the financial statements base on the audit, (ii) Perform the audit in line with the International Standards on Auditing. Include specific reference to the requirement to comply with ethical requirements (IFAC and INTOSAI Code of Ethics) and the explanation of reasonable assurance that is provided by the auditor that the financial statements are free from material misstatement. (ISSAI 1700E P8) (iii) The auditors report should describe an audit by stating that: An audit involves performing procedures to obtain audit evidence about the amounts and
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(f)
disclosures in the financial statements; The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. In circumstances where the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor shall omit the phrase that the auditors consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements; and Any other reporting responsibilities of the auditor maybe applicable. (ISA700.28;29;30;31;32;33) (ISSAI 1700E P7) The auditors report should state that the auditor believes that the audit evidence he has obtained is sufficient and appropriate to provide a basis for the auditors (modified Qualified / Adverse where appropriate) opinion. Consequently, when a disclaimer of opinion is issued it needs to be stated that evidence could not be obtained. (ISA 705.26;27)
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12.3.6 Basis for Qualified / Adverse / Disclaimer Opinion Description of the matter giving rise to the modification and a quantification of the amount of misstatement when practicable should also be included in the paragraph. The description may refer to, for example, a narrative disclosure and explanation given on how this disclosure is misstated. It may also refer to an aspect which was omitted. All the matters which would in itself warrant a qualification should be included under this heading. For example, if a disclaimer of opinion is issued based on the lack of audit evidence the auditor would describe the scope limitation and also include paragraphs under the same heading with explanations for other material misstatements found during the audit. (ISA705.16;17;18;19;20;21). (a) An opinion paragraph is titled opinion The title of this paragraph should clearly state the kind of modified opinion issued when applicable ie. Qualified Opinion, Adverse Opinion, Disclaimer of Opinion. (ISA 705.22) The paragraph should make reference to the applicable financial reporting framework used in preparing the financial statements ; An expression of opinion on the financial statements. For unqualified audit opinion the paragraph will state that: The financial statements present fairly, in all material respects, in accordance with [name the applicable financial reporting framework]; or The financial statements give a true and fair view in accordance with [name the applicable financial reporting framework]; or Financial statements are prepared: in all material respects, in accordance with [name the applicable financial reporting framework]. (ISA 700.34;35;36;37) For qualified audit opinion the paragraph will quote: except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph (ISA 705.23) For adverse opinion state that: The financial statements do not present fairly - or the financial statements have not been
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(b) (c)
(d)
prepared - in all material respects, in line with applicable financial framework. (ISA 705.24) For disclaimer of opinion state that because of the significance of the matter described in the Basis for Opinion paragraph the auditor has not been able to obtain sufficient appropriate audit evidence to provide basis for an audit opinion. (ISA 705.25) Other reporting responsibilities the auditor may have should be included here. For example, the auditor maybe required to report on the legal or regulatory requirements, or on performance information disclosed. (ISA 700.38;39) emphasis of matters paragraphs with clear indication that the audit opinion is not qualified as a result of this paragraph. other matters paragraphs - Standards, laws or generally accepted practice in a jurisdiction may require or permit the auditor to elaborate on matters that provide further explanation of the auditors responsibilities in the audit of the financial statements or of the auditors report thereon. Such matters may be addressed in a separate paragraph following the auditors opinion; other reporting responsibilities Matters reported relating to reporting responsibilities other than reporting on the financial statements. The auditors signature; (ISA 700.40); The date of the auditors report; (ISA 700.41); and The auditors address (ISA 700.42);
12.3.7 Reporting in accordance with a layout prescribed by law If law or regulation requires auditors to use a specific layout or wording of the auditors report, the auditors report should refer to International Standards on Auditing only if the auditors report includes, at a minimum, each of the following elements: (i) A title; (ii) An addressee, as required by the circumstances of the engagement; (iii) An introductory paragraph that identifies the financial statements (iv) A description of the responsibility of management for the preparation of the financial statements;
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(v)
(vi)
(vii) (viii) (ix)
A description of the auditors responsibility to express an opinion on the financial statements and the scope of the audit, that includes: A reference to International Standards on Auditing and the law or regulation; and A description of an audit in accordance with those standards; An opinion paragraph containing an expression of opinion on the financial statements and a reference to the applicable financial reporting framework used to prepare the financial statements (including identifying the jurisdiction of origin of the financial reporting framework that is not International Financial Reporting Standards or International Public Sector Accounting Standards; The auditors signature; The date of the auditors report; and The auditors address. (ISA 700.43) (ISSAI 1700E P9)
12.3.8 Understandability of reports When the auditor is required by law to conduct an audit in accordance with the auditing standards of a specific jurisdiction (the national auditing standards), but additionally also complied with the ISAs, the auditors report may refer to the ISAs in additional to the national auditing, if: (i) There is no conflict between the requirements in the national auditing standards and those in ISAs that would lead the auditor to form a different opinion, or not to include an Emphasis of Matter paragraph that, in the particular circumstances, is required by ISAs; and (ii) The auditors report should include the minimum layout requirements as stated above. The auditors report should identify the applicable national auditing standards. (ISA 700.43) The audit report should be easy to read and understand. Clarity and understandability may be enhanced by: (i) Use of non-technical language. All technical terms, unfamiliar abbreviations and acronyms should be clearly defined when used; (ii) Logical organization of material; (iii) Accuracy and precision in stating facts and in drawing conclusions; (iv) Effective use of titles and captions and topic sentences; and
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(v)
Use of visual aids (such as pictures, charts, graphs, and maps) to clarify and summarize complex material.
The audit report should be no longer than necessary to convey and support the message. Needless repetition should be avoided. 12.3.9 Comparative information disclosed in the financial statements There are two different broad approaches to the auditors reporting responsibilities in respect of comparative information: corresponding figures and comparative financial statements. The approach to be adopted is often specified by law or regulation but may also be specified in the terms of engagement. (ISA 710.2) Comparative information is the amounts and disclosures included in the financial statements in respect of one or more prior periods. Corresponding figures refer to comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements. (ISA 710.6) The essential audit reporting differences between the approaches are: (a) For corresponding figures, the auditors opinion on the financial statements refers to the current period only; whereas (b) For comparative financial statements, the auditors opinion refers to each period for which financial statements are presented. (ISA 710.3) The auditor should obtain sufficient appropriate audit evidence and report about whether the comparative information included in the financial statements has been presented, in all material respects, in accordance with the requirements for comparative information in the applicable financial reporting framework (ISA 710.5). If the auditor identifies a possible material misstatement in the comparative information during the current audit, the auditor should perform additional audit procedures to determine whether a material misstatement exists. If the
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auditor had audited the prior periods financial statements, the requirements of events after balance sheet date should be followed. If the prior period financial statements are corrected, the auditor shall determine that the comparative information agrees with the amended financial statements. (ISA 710.8) 12.3.10 Reporting on corresponding figures When corresponding figures are presented, the auditors opinion should not specifically refer to the corresponding figures, since the audit opinion is on the current period financial statements as a whole, including those figures (ISA 710.10). When the auditors report on the prior period, as previously issued, included a qualified opinion, disclaimer of opinion, or adverse opinion and the matter which gave rise to the modification is resolved and properly dealt with in the financial statements, the current report should not refer to the previous modification. However, if the matter is unresolved it needs to be considered in light of the current years financial statements. If it is material to the current period, the auditor should modifying the current years report accordingly. The Basis for Modification paragraph in the auditors report should either: (a) Refer to both the current periods figures and the corresponding figures in the description of the matter giving rise to the modification when the effects or possible effects of the matter on the current periods figures are material; or (b) In other cases, explain that the audit opinion has been modified because of the effects or possible effects of the unresolved matter on the comparability of the current periods figures and the corresponding figures. (ISA 710.11). The auditor may identify a material misstatement affecting the previous years financial statements where an unmodified audit opinion was issued. In such circumstances, the auditor should consider whether the corresponding figures have been restated or not. If the corresponding figures have not been properly restated and/or appropriate disclosures have not been made, the auditor should
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request management to revise the corresponding figures or if management refuses to do so, appropriately modify the report (ISA 710.12). If the financial statements of the prior period were audited by another auditor the auditor should (if not prohibited by law) refer to the predecessor auditors report on the corresponding figures stating in an Other Matter paragraph the type of opinion expressed by the predecessor auditor and the date of the report and the reasons for a modified audit opinion. This scenario is not applicable to contracted out audits, or audits which are moved from one responsible auditor to another within the SAI. (ISA 710.13) (ISSAI 1710E P4) If the prior period financial statements were not audited, the auditor should state in an Other Matter paragraph in the auditors report that the corresponding figures are unaudited. The auditor then should obtain sufficient appropriate audit evidence that the opening balances do not contain misstatements that materially affect the current periods financial statements. (ISA 710.14) 12.3.11 Reporting on Comparative Financial Statements When the comparatives are presented as comparative financial statements, the auditors opinion should refer to each period for which financial statements are presented and on which an audit opinion is expressed. (ISA 710.15) When reporting on the prior period financial statements in connection with the current years audit, if the opinion on such prior period financial statements is different from the opinion previously expressed, the auditor should disclose the substantive reasons for the different opinion in an emphasis of matter paragraph. (ISA 710.16) If the financial statements of the prior period were audited by another auditor, in addition to expressing an opinion on the current periods financial statements, the auditor shall state in an Other Matter paragraph that the prior period was audited by another auditor, the type of report issued by the predecessor auditor and if the report was modified, the reasons thereof and the date of that report (ISA 710.17).
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If material misstatements were found affecting prior period financial statements audited by another auditor, the auditor should discuss the matter with management and those charged with governance. After having obtained managements authorization, the auditor should contact the predecessor auditor and propose that the prior period financial statements be restated. If the previous auditor agrees to reissue the auditors report on the restated financial statements and the auditor agrees with the report the auditor will only report on the current years financial statements. In some cases the auditors are required to include an Emphasis of Matter or Other Matter paragraph in the audit report relating to the restatement of information. (ISA 710.18)(ISSAI 1710E P5) When the prior period financial statements are not audited, the incoming auditor should state in the auditors report that the corresponding figures or comparative financial statements are unaudited as applicable. (ISA 710.19)
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chApter 13
13.0 docuMentAtion / Audit WorKinG pApers 13.1 Introduction Best Professional Practices require that working papers should be prepared by an auditor in the course of the audit which should include reference to the procedures followed, tests performed, information obtained and conclusion reached. This section provides guidelines on the purpose, form and content of these working papers, as well as procedures for their security, retention and storage. 13.2 Purpose, Form and Content Good documentation is essential for the following reasons. (a) to provide the principal support for all audit conclusions, recommendations and opinions; (b) to encourage and demonstrate a methodical and professional approach to the audit; (c) to provide a record of work carried out, attesting to professional standards achieved; (d) to allow work to be formally reviewed at any stage of the audit; and (e) to record problems and conclusions for future reference. The test of good documentation is that it should enable an experienced auditor with no previous connection with the audit to ascertain without difficulty the evidence gathered and to understand the conclusions reached. The documentation should therefore be sufficient, relevant and reliable. To achieve this, working papers should be: (i) complete and accurate, showing the nature and extent of the audit work done and providing proper support for findings, conclusions and recommendations; (ii) concise and clear without requiring supplementary oral explanation (especially for working papers prepared away from stations). (iii) pertinent and should contain only information which is relevant,
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important and useful with respect to the objectives established for the examination; and (iv) legible, neat and orderly. Working papers should record (a) All relevant and material facts and sources of the information obtained; (b) The nature, timing and extent of audit procedures performed and the name of the auditor who performed them; and (c) The audit conclusions and the basis for arriving at those conclusions. The extent of documentation is a matter of professional judgement since it is neither necessary nor practical for the auditor to document in his / her working papers every observation, consideration or conclusion made. However, all significant matters which require the exercise of judgement should be included in the working papers. Schedules and information which are not of direct relevance to the audit should not be put in the working papers. Auditors should avoid the copying of material such as invoices, inventory records and account listings, which are readily available within the organization. To improve audit efficiency, the auditor usually plans to use schedules, analyses and other working papers prepared by the client, as part of their process of producing and validating the accounts. The auditor will need to ensure that these papers are available at the correct time and in a usable format so that any requirements should be communicated to the client at an early stage in the audit. The auditor should also satisfy himself / herself that these working papers have been properly prepared. Working papers should be designed, organized and filed to meet the auditors need and the individual circumstances for each audit. The use of standardized working papers (e.g. check list, specimen letter, and standard filing of working papers) may improve efficiency with which they are prepared and reviewed.
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They facilitate the delegation of work while providing a means to control its quality. 13.3 Documentation of financial audit Working papers should (i) Support the audit conclusions, recommendations and opinions by providing sufficient and relevant evidence of the work done by documenting: (a) The planning of the audit (b) The evaluation of systems of financial management and control; (c) The tests of accounting records and other supporting evidence; (d) The examinations of the financial statements; and (e) The matters contained in management letters to the MMDA and ultimately in the report of the AuditorGeneral to parliament. In essence, all points raised in management letters should be readily substantiated and located in the working papers; (ii) Aid in ensuring that high audit standards are maintained by providing; (a) Staff members with information on accounting systems and previous audits to enable them to familiarize themselves with the MMDA and the audit environment; (b) An orderly presentation which shows that adequate attention was given to each audit area and that all significant items were examined; and (c) A reference point for any subsequent clarification; (iii) Facilitate review of the audit work by enabling the supervising Director / AAGS to satisfy themselves that a proper audit was performed; (iv) Encourage audit staff to adopt a disciplined approach to their work and provide a basis for assessing the development of staff; and (a) Provide for future reference evidence of work done and conclusions reached for third parties and successive auditors.
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13.4 Organization and content of Financial Audit Files There are two main categories of working paper files: (a) Permanent files; and (b) Current audit files. 13.4.1 Permanent Files The permanent files should contain information of continuing or permanent relevance to the MMDA and successive audits. These are distinct from the current audit files which contains information relating primarily to the audit of a future examination and should be carried forward in a permanent file to eliminate duplication of continuing pertinent information. To ensure that the file does not become a bulky accumulation of obsolete and useless information, the contents of the permanent file should be reviewed and updated on a continuous basis and all superseded material and expired documents removed. It is the responsibility of the officer in charge of the audit to prepare and arrange such files. For each MMDA there should be permanent files which provide information on: (a) the background to the department or organization; (b) systems documentation for key financial systems and their evaluation; (c) reports on internal controls; and (d) master copies of audit programmes. 13.4.2 Current Audit Files The material normally placed in these files consists of information relevant to the current assignments. For most MMDAs, current audit files should consist of: (a) Planning and control files; (b) Interim audit files; and (c) Financial statements files. A suitable file structure should be adopted to suit the particular requirement of the audit. At the end of the audit, the auditor should remove from the current files any items of continuing interest and place them in the permanent files.
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13.4.3 Planning and Control Files The planning and control file(s) should contain the approved scope of the audit, planning check lists, basis of selection of the audit areas and the rationale for the audit approach. It should also cover any significant events and changes within the MMDA which impact on the audit. Administration arrangements such as staff assignments, operating budgets and time tables for work completion, receipt of accounting schedules and review should also be included. These files may also be used to record correspondence with the MMDA. Some of the planning information will already be included in the permanent files and should not be duplicated in the planning and control files. Instead, summary notes and extracts of key information should be included in the planning and control files to enable the plan to be efficiently reviewed. 13.4.4 Interim Files The interim files should correspond to functional segments or account area under review and should contain the summary evaluation, audit programs, and working papers, including any flow charts and completed questionnaires, supporting the audit tests performed for the particular segment audited. 13.4.5 Financial Statements Files The financial statements files should document the conclusions reached on the audit to support the audit report and audit opinion. They will therefore contain the year-end statement with lead schedules, and analyses of each account included in the financial statements, and analyses all significant matters arising from the audit. It is often appropriate to separate the documents on the audit certificate and report from the work performed on the final account schedules. The work on the final account should include detailed analyses of all the material items in the financial statements. The working papers should also allow for the orderly presentation of the beginning or trial balance figures, all adjustments and the final balances. The final balance must be cross referenced to the lead schedules, trial balance and the financial statements.
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The files should also contain a review of the financial statements. This includes variance analyses of the current years figures comparing them to previous year-end figures and budget figures to determine whether significant changes have occurred and document any relevant explanations. 13.5 Documentation of Performance Audit Working papers used to document performance audits should show: (i) The evidence collected (ii) The audit objective and issue to which the evidence relates; (iii) The procedures used to obtain that evidence; (iv) The source of the evidence; (v) The staff who carried out the work; and (vi) The date of the work. Appropriate audit files should be established for performance audits and the documentation should consist of: (a) Planning and administration material including notes of progress meeting; (b) Correspondence with the MMDA and notes of discussions with officials; (c) Copies of evidence, records, analyses and other papers in support of the findings and conclusions; (d) Papers relating to the report preparation including summaries of the main issues. Where performance audit of a particular topic is conducted on a recurring basis permanent file, similar to those for financial audit, may be created. 13.6 Ownership and Security All audit working papers are the property of the AuditorGeneral. This applies whether the auditor or the MMDA prepared the papers. Staff members must respect the confidential nature of the information contained in the working papers and must not disclose any such information to other parties, either persons within the MMDA or others, except in
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connection with the proper discharges of the auditors duties. The auditor may, at his/her discretion, make portions of or extracts from his/her working papers available to the management. They should not, however, be a substitute for the Assemblies accounting records. Staff members should ensure that there is no access to working papers by unauthorized persons. Care should be exercised in the handling and safeguarding of working papers at all times. Similar care should be applied to the audited MMDAs records, and steps should be taken to ensure that all borrowed material is returned to the MMDA when the audit is completed. When not in use, working papers are retained in the AuditorGenerals offices. The working papers should be retained for a period of time appropriate to the legal and other circumstances. Suitable safeguards should be applied to the destruction of classified and confidential material. 13.7 Contents of permanent files An example of the organization and content of permanent files is shown below: 13.7.1 Background Information File (i) Extracts of governing statues, resolutions, and executive policies (e.g. decisions of the Assembly); (ii) Discussions and agreements on form of account including appropriate directions; (iii) Organizational data including charts, lists of operational locations, descriptions of key positions, delegations of authority, approved staffing tables, etc. (iv) Operational data concerning the Assemblys programs and trend information for variance analyses; (v) Consideration of developments or charges likely to affect the audit; (vi) Copy of the latest accounts, latest management letters and their replies, and audit report
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13.7.2
Financial Rules and Regulations Files (i) Financial Administration Act and Financial Administration Regulations; (ii) Local Government Act, 1993 (Act 462); (iii) Administrative, technical and financial instructions; (iv) District Assembly Common Fund Act, 1993 (Act 455); (v) Current statement of the accounting policies. (vi) Local Government Service Act, 2003 (Act 656) Account Area/ Thrust Area/ Audit Segment Files (i) System description and documentation; (ii) Evaluation of system controls; (iii) Organization relating to the accounts area; (iv) Policies, procedures and instructions relating to the account area; and (v) Internal or consultant reports relating to the account area. Audit Programme File Copies of reviewed and approved compliance and substantive test programmes
13.7.3
13.7.4
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chApter 14
14.0 QuAlitY control 14.1 Introduction Quality control procedure should be performed by the audit team for every individual audit engagement (ISA 220.2). These procedures are performed by members of the audit team, on different levels including the Auditor-General or the person who is delegated to sign off the audit report. They are designed to ensure that the persons take responsibility for the overall quality of the assignment. 14.2 Carrying out quality control procedures The overall quality control questionnaire contains series of procedures which are developed to monitor the compliance with the auditing standards throughout the audit. These procedures should be carried out by the audit team member of different levels. The purpose of the quality control is to ensure that the principles of the Regularity Audit has been followed during the audit and that sufficient, appropriate audit evidence has been obtained to support the audit opinion, including the documentation and justification of significant professional judgments. Quality control offers benefits for the SAI in the following ways: (i) It enables the identification and sharing of good practices with members of staff: (ii) It discovers weaknesses in the audit process and assists the SAI to identify its training and development strategy; and (iii) It promotes consistency between audits and consequently reporting, enabling benchmarking between reports. 14.3 Quality control throughout the audit The review process can be divided into the following levels: (a) First level lowest level of review, e.g. team leader;
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(b) (c)
Second level reviews may be done by the District Auditor / Regional Auditor; and Third level review by the Headquarters Quality Control Team.
All three levels of review should consider the following fundamental issues when reviewing an audit file: (i) All required working papers and procedural steps have been adequately completed, signed by preparer and reviewer, dated and cross-referenced. When a working paper of procedural steps is omitted adequate reasons are supplied; (ii) The audited financial statements (and other relevant audited information) have been identified and clearly linked to the audit; (iii) Knowledge of business obtained is adequate to inform the auditors decision relating to the audit approach; (iv) Conclusions were adequately drawn and supported by appropriate and sufficient audit evidence; (v) Significant deviations from the overall audit plan and any changes in the scope of the audit have been documented; (vi) Adequate level of audit coverage has been obtained for material areas; (vii) All significant professional judgments made have been documented and are supported by appropriate audit evidence; (viii) The audit was conducted in accordance with the relevant audit approach, guidelines and other directives; (ix) All significant audit matters have been resolved or have been appropriately reported to management in the management letter as well as in the audit report; (x) The work performed and results obtained have been adequately documented; (xi) Based on the underlying audit work and findings the correct audit opinion has been expressed; and (xii) Reported findings are supported by adequate and sufficient audit evidence.
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The working papers should be reviewed as far as possible immediately after each segment of the work has been completed. Timely review provides better control over the quality of work and the time consumed in its performance. Normally the reviewer will be on a higher level than the preparer. 14.3.1 First Level (Team Leader) Depending on the size of the audit the team leader will conduct the first level of review. In the case of larger audits there may be more than one first-level reviewer. In such cases the reviewers should focus on the sections that have been allocated to them. First level review should be performed on an ongoing basis. For example, each time a working paper is finalized by the preparer it should be reviewed. All working papers, conclusions drawn, professional judgments made and the related audit evidence on the audit file should be reviewed. This includes the review of the following: (i) Adequate and sufficient completion of working papers including clear and understandable language and spelling; (ii) Consistency of documented information and decisions made between different working papers; (iii) Significant decisions made and audit evidence supporting decisions and findings; (iv) The planning of the audit, balancing audit risk, tests of control and substantive tests performed, evaluating the sample sizes, conclusions, management letter issues, audit findings (exceptions), audit report issues, etc; and (v) Inspecting the audit procedures performed and ensuring that all the assertions are addressed. 14.3.2 Second Level (District / Regional Auditors) The second level of review is almost as detailed as the first, but some reliance can be placed on the review work already performed. The experience and seniority of the first reviewer will influence the reliance placed on the first review conducted. The second reviewer, District / Regional Auditor, will still concentrate on detailed work but to a lesser extent. Focus will be placed on documentation
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of key working papers, including as a minimum: (i) Engagement letters; (ii) Overall audit plan, including significant risk areas and audit approach; (iii) Management letter, confirming that there is adequate audit evidence supporting the findings; (iv) Audit differences, schedule of overs-and unders; and (v) Audit report with supporting audit evidence for the findings. The second reviewer will also review the work performed by the first reviewer. 14.3.3 Third Level (headquarters Quality control team.) The third level review should be performed by the person who is responsible for signing off the audit report (ISA 220. 6). In certain instances the review will be performed by more than one person. For example, when the first level review is performed by the team leader and the second level review is performed by the District / Regional Auditor, senior manager the third level review may be performed by the business executive (AAG) who may not be responsible for signing off the report. In this case the person signing off the report will perform another third level review. The person performing a third level review should be, as far as possible, involved in major decisions relating to the audit. The overall audit strategy should be approved by the third level reviewer before any of the fieldwork is conducted. If this is not possible the third-level reviewer should at least be consulted to obtain his or her inputs regarding the audit plan and scope. This is to ensure that the correct audit approach is followed and that the person who is responsible for signing the report is aware of the aspects covered in the audit plan. At the third level the review should be focused on the following aspects: (i) Work performed by the second-level reviewer; (ii) Appropriate and sufficient audit evidence exists to support the audit findings (ISA 220.26);
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(iii) Exceptions raised, Management letter and Draft audit report; (iv) Comparing the work performed with the overall audit strategy to ensure that all risk areas have been addressed and deviation from the strategy have been documented with reasons; (v) All supporting working papers, including overall audit summary memorandum, schedule of overs and unders, events subsequent to balance sheet date, etc; and (vi) Financial statements, related disclosure and the trial balance to ensure that the audit sufficiently covered all significant balances and risk areas. The scope of the third-level reviewer should be increased if he or she identifies other possible risk areas or if there is any indication that the audit file does not meet the required technical standards. Besides the quality control described here there should also be an independent review of selected audits by a quality assurance review team, and perhaps involve a peer review of all sample of completed audits each year. These quality assurance reviews are prescribed by the policies of the SAI and performed centrally.
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bibloGrAphY
1. AFROSAI E Auditing Manual 2. Audit Service Act, 2000 (Act 584) 3. Auditing (An Instructional Manual for Accounting Students) 4. District Assemblies Common Fund Act, 1993 (Act, 455) 5. Financial Administration Act, 2003 (Act, 654) 6. Financial Administration Regulation, 2004 (LI 1802) 7. Financial Memoranda for Metropolitan, Municipal and District Assemblies (2004). 8. Ghana Audit Service Performance Audit Guidelines 9. International Standards on Auditing (IFAC) 10. International Public Sector Accounting Pronouncements (IFAC) 11. INTOSAI Accounting Standards 12. Local Government Act, 2003 (Act, 462) 13. Procurement Manual issued by Public Procurement Agency 14. Public Sector Auditing by Pendlebury 15. United Nations Board of Auditors Auditing Manual 16. 1992 Constitution of the Republic of Ghana
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AcronYMs
AAG AFROSAI ARIC DACF DANIDA DDF DFO FAA FOAT INTOSAI ISA ISSAI LSDGP MFO MMDA OHCS RCC
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Assistant Auditor General Organisation of African Supreme Audit Institutions Audit Report Implementation Committee District Assembly Common Fund Danish International Development Agency District Development Facility District Finance Officer Financial Administration Act Functional Organisational Assessment Tool International Organisation of Supreme Audit Institutions International Standards on Auditing International Standards of Supreme Audit Institutions Local Service Delivery and Governance Programme Metropolitan / Municipal Finance Office Metropolitan, Municipal and District Assemblies Office of the Head of Civil Service Regional Co-ordinating Council
SAI VFM
Supreme Audit Institution Value for Money
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Audit MAnuAl for the Audit of the Accounts And operAtions of MetropolitAn, MunicipAl and district AsseMblies (MMdAs)

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Ablekuma Ashiedu Keteke Ayawaso Okaikwei Kpeshie Osu Clottey

Asokwa Bantama Manhyia Subin

Sekondi Takoradi Kojokrom Fijai

(i) (ii) (iii) (iv)

nature and importance of the physical resources involved.

(a) (b) (c) (d) (e) (f)

cost authorization value existence beneficial ownership presentation in the accounts

(vii) (viii) (ix)

Supreme Audit Institution Value for Money

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