ROLE OF THE PUBLIC SECTOR AUDITOR

The legislative mandate for the Auditor-General to audit the accounts of public sector agencies is provided by the Public Finance and Audit Act 1987 (the Act).

The Act imposes a statutory obligation on the Auditor-General to conduct the audits of 206 agencies and statutory funds (this does not include 35 entities that are within the control of the South Australian Asset Management Corporation and which, in accordance with section 33 of the Act, are audited by the Auditor-General).

TYPES OF AUDITS AND REVIEWS CONDUCTED

The Act provides a mandate for the Auditor-General to conduct three different types of audit. These are:

• financial and compliance audits - subsection 31(1);

• efficiency and economy audits - subsection 31(2);

• examinations of publicly funded bodies - section 32.

FINANCIAL AND COMPLIANCE AUDITS

Subsection 31(1) of the Act imposes a statutory obligation on the Auditor-General to audit the accounts of the Treasurer and also of each public authority (as defined in the Act).

Such audits are known as 'financial compliance' audits. As that term indicates, the main thrust of those audits is directed towards the matter of accountability for funds and resources provided and administered by agencies and provides a high level of assurance that all legal obligations and requirements have been met.

The Act does not prescribe the methods to be used in conducting financial and compliance audits. This department continually seeks to meet the highest level of professional excellence. The methodology practised follows that stipulated in the Auditing Standards and Statements of Auditing Practice issued by the Australian Accounting Research Foundation on behalf of the two major accounting bodies in Australia.

The particular methodology adopted by this department is known as 'Risk Based Auditing'. This methodology places a heavy emphasis on the planning of audits.

The first stage of audit planning requires that all auditable areas of the auditee organisation are identified and the audit risk associated with each of those auditable areas is identified and documented.

The second stage requires that sufficient audit coverage and testing is planned in order to ensure that those audit risks identified in the first stage are reduced to an acceptable level. All audit plans are reviewed and approved by a Director of Audits.

Transactions and/or records required for audit testing are generally selected using statistical sampling methods and many are extracted from auditee files using special audit software routines. Similarly many of the audit tests to which those transactions and/or records are subjected are applied by using specialised audit software which runs on the powerful notebook personal computers issued to each staff member.

Details of the audit work done and the results are recorded electronically using an audit software package acquired from an international firm of chartered accountants.

Findings resulting from the audit are discussed with appropriate auditee staff and subsequently forwarded in writing by means of a management letter to the appropriate level of auditee management. Auditee management are requested to reply to the issues raised by Audit. The time period for a reply to be made is usually four weeks.

At the conclusion of each audit, a series of quality control reviews are undertaken by senior audit officers to ensure that:

• sufficient work was done on which to form an opinion on the agency's financial statement;

• the work done was in accordance with that planned or good reasons exist (and are documented) for any material deviations;

• the work done was of an acceptable professional standard;

• the results have been conveyed accurately and in a timely manner to auditee management;

• a written response has been received;

• the opinion expressed on the financial statements is reflected by the results of the audit.

In accordance with professional standards the Auditor-General issues an opinion on each auditee's financial statements through a document known as an 'Independent Audit Report'. The Independent Audit Report in most cases is not qualified. However, where the results of an audit are not satisfactory or where the accounting treatment of certain transactions does not comply with applicable professional accounting standards the Independent Audit Report may be qualified, or in extreme cases no opinion may be expressed. The inability to express an opinion would signal the fact that there were issues associated with an agency audit that warranted the attention of the Government and the Parliament. In accordance with professional requirements full reasons are provided in those cases where the Independent Audit Report is qualified or where no opinion is given.

INTERNAL CONTROL

As stated above, the Auditor-General has a professional responsibility to form and express an opinion on the financial statements of those agencies which he is required by law to audit.

The responsibility to prepare those financial statements and to present them for audit rests with the senior management of each agency. That level of management also has a responsibility to maintain accounting systems which will provide a high level of assurance over the accuracy of the financial records maintained and the safeguarding of the agency's assets. An essential element to enable that high level of assurance to be given is the implementation and maintenance of a sound system of internal control.

Within the South Australian public sector, that responsibility is embodied in the Treasurer's Instructions which are issued under the provisions of the Act. Treasurer's Instructions specifically require Chief Executive Officers to:

• maintain records, accounts and financial management information systems which will ensure that efficient, effective and economic management and control is exercised over his/her agency's operations;

• establish a sound system of internal control over the financial operations of his/her agency.

Accountability for the responsibility of Chief Executive Officers concerning internal control is to be found in section 36 of the Act. That section requires the Auditor-General to report to the Parliament whether, in his opinion, the controls exercised by the Treasurer and public authorities in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities is sufficient to provide reasonable assurance that the financial transactions of the Treasurer and public authorities have been conducted properly and in accordance with law. Specific opinions in respect to the Treasurer and individual public authorities were included in the 1995-96 Auditor-General's Report to Parliament.

It follows therefore that the audits of public sector agencies which are conducted by the Auditor-General must place emphasis on the identification, evaluation and testing of agencies' systems of internal control.

That legislative requirement for the Auditor-General to express an opinion on the effectiveness of the systems of internal control provides another dimension to the audit of public sector agencies and illustrates one of the more significant differences between auditing in the public sector and auditing in the private sector.

EFFICIENCY AND ECONOMY AUDITS

Subsection 31(2) of the Act authorises the Auditor-General to examine the efficiency and economy with which a public authority (as defined in the Act) uses its resources.

Such audits are also known as 'value for money (or performance) audits'. As could be expected this type of audit can be diverse in respect of the types of issues reviewed, may be large and complex, and may encompass more than one organisation, or alternatively could be relatively small and cover only one section or part of an organisation.

The methodology and approach adopted will, of course, vary from one subject matter to another. The overall methodology to be followed however, will encompass the following stages:

• Planning

• Fact Gathering

• Quality Control

• Forming Provisional Conclusions

• Natural Justice/Procedural Fairness

• Processes Reporting.

The Act provides the Auditor-General with flexibility regarding reporting the results of efficiency and economy audits to Parliament. They may be included in the Annual Report produced in accordance with the requirements of subsection 36(1) of the Act or they may be the subject of a special report produced in accordance with section 37 of the Act.

It has been the policy of this department to include comment on efficiency and economy audits finalised during the year in the Auditor-General's Annual Report to Parliament produced in accordance with subsection 36(1) of the Act.

This department does not maintain a separate dedicated team to conduct efficiency and economy audits. They are conducted by field audit staff supplemented where necessary by external consultants.