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Audit Manual Chapter 2&3 2-1

1 ROLE OF THE AUDITOR-GENERAL

1.1 Parliamentary Control and Public Accountability

1.1.1 Accountability of elected officials ??? and the public servantsthat implement their policies is a cornerstone of democraticgovernment. In Pakistan, the government is formed of electedrepresentatives of the people, and is required by theConstitution to seek a fresh mandate every five years.

1.1.2 To ensure the administrative machinery of the governmentperforms its functions in accordance with the aspirations of thepeople, the National Assembly (lower house of the Parliament)and the four Provincial Assemblies constitute StandingCommittees on Public Accounts (PACs). The PACs are

mandated to oversee the implementation of governmentpolicies and programmes.

1.1.3 The Government departments and agencies are heldaccountable for any major departure from the approved budgetand for significant violations of rules and regulations. The Auditor-General of Pakistan reviews the financial statementssubmitted by each Government department and agency andreports findings to the President and Provincial Governors whosubmit them to the National and Provincial Assembliesrespectively. The legislatures assign these reports to the

PACs for detailed scrutiny. Each PAC holds hearings at whichsecretaries of the ministry, divisions and departments submittheir responses to the Auditor-Generals observations. Basedon this testimony, each PAC then makes its recommendationsto the National Assembly. This process ensures thatdepartments and agencies are accountable to government forimplementation of policies in accordance with regulations.

Is it an efficient process??

If no, Why?

What could be done to make it efficient?

1.2 Introduction to Auditing

1.2.1 Auditing is the process by which the Auditor-General ofPakistan (or such officer of the department as may beauthorised in this regard by general or special order) evaluatesthe financial statements that have been submitted for audit bythe ministries, departments and agencies, against the

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Audit Manual Chapter 2&32-2

governments accounting and financial administration policiesto enable him to prepare a report or state an opinion on thefinancial statements.

1.2.2 Section 3.4 of DAGPs Auditing Standards requires that a

financial audit will include a test of compliance with applicablelaws and regulations.

Types of Audits:

1) Attesting accuracy and reliability of numbers:

2) Attesting compliance with policy, regulations, rules, etc.

1.2.3 To ensure that an audit has value, it should be conducted inaccordance with generally accepted auditing standards(GAAS). These standards have developed over manygenerations of auditors around the world to provide the basis

for ensuring complete, accurate, honest and transparentreporting of financial operations.

1.3 Legislative Basis

1.3.1 The authority under which the Auditor-General of Pakistanconducts audits is given by Article 169 of the Constitution ofthe Islamic Republic of Pakistan. In addition, Articles 168 to171 also relate to the work of the Auditor-General.

1.3.2 Until 1 July 2001, most of DAGPs audit work was performed

under Articles 168 to 171 of the Constitution, and the Pakistan(Audit and Accounts) Order, 1973.

1.3.3 Effective 1 July 2001, the Pakistan (Audit and Accounts) Order,1973 was replaced by the following two ordinances:

a) Auditor-Generals (Functions, Powers and Terms andConditions of Service) Ordinance, 2001 (Auditor-GeneralOrdinance); and

b) Controller General of Accounts (Appointment, Functions andPowers) Ordinance, 2001 (Controller General Ordinance).

1.3.4 Among other things, these ordinances elaborate on thefunctions, powers and responsibilities of the Auditor-General ofPakistan in line with the provisions of Article 169 of theConstitution.

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1.3.5 Section 7 of the Auditor-Generals (Functions, Powers andTerms and Conditions of Service) Ordinance, 2001 (Auditor-General Ordinance) states that The Auditor-General shall, onthe basis of such audit as he may consider appropriate andnecessary, certify the accounts of the Federation, of each

Province and of each district. A financial attestation auditleads to the certifications called for in Section 7 of the Auditor-General Ordinance.

1.3.6 In addition, Section 8 of the Auditor-General Ordinancemandates an audit of expenditures of the Federation and ofeach province and Section 12 of the Auditor-GeneralOrdinance mandates an audit of the receipts of the FederalGovernment and of each Province and each district.

1.4 Vision, Mission and Values

1.4.1 DAGP has developed a set of guiding principles for theexercise of its mandate. These principles the Vision, Missionand Values - are as follows:

1.4.2 The Vision of DAGP is to add value to public resources.

What does value addition mean?

How is it possible through Audit?

1.4.3 The Mission of DAGP is to develop our auditing andaccounting capabilities to establish ourselves as a credibleprofessional institution that promotes good governance andpublic accountability.

1.4.4 The Values held by DAGP are:

a) Accountability. DAGP holds itself accountable for theachievement of its vision, mission, and these stated values.

b) Professionalism. DAGP conducts all of its activities in an open,transparent, disciplined and highly ethical manner that isworthy of professional respect and trust.

c) Integrity. DAGP takes an objective, fair, honest and balancedapproach to all of its activities.

d) Excellence. DAGP strives for excellence in all of its activities.

e) Reliability. DAGP produces high quality products that aretimely, accurate, useful, clear and candid.

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f) Cooperative and constructive spirit. DAGP works withparliamentarians and with its audit entities, staff, suppliers,consultants and other parties with whom it deals in aprofessional, cooperative and constructive manner.

g) Innovative spirit. DAGP constantly looks for ways to improve itsaudit practices, operations and other activities.

h) Making a difference. DAGP constantly looks for ways toimprove the operations of the entities that it audits.

i) Risk managers. DAGP managers and staff are encouraged toaccept challenges, and to take and manage the risks requiredfor DAGP to achieve its vision, mission and stated values.

j) Open communications. DAGP maintains open and timelycommunications with parliamentarians and with its audit

entities, staff, suppliers, consultants and other parties withwhom it deals.

k) A respectful workplace. DAGP provides a workplace in which adiverse workforce can strive for excellence and professionalcompetence, and where individuals can realise their full careerpotential.

VISION:

A model supreme audit institution adding value to nationalresources.

MISSION:

Serving the nation by promoting accountability, transparency andgood governance in the management and use of public resources.

CORE VALUES:

INTEGRITY: Our Way of LifeWe ensure integrity by:

y Conforming to ethical standards andcode of conduct

y Compliance of professional standardsin our work

y Honesty and Objectivity in carrying out

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our work

QUALITY: Our Way of Doing Business

We achieve quality by:

Producing Relevant, Timely and Reliable

ReportsMeeting audit objectives in a Cost Effectivemanner

Applying Quality principles and Qualitystandards in audit planning, execution andreporting processes.

Providing quality support for efficientimplementation of Government policies

PARTNERSHIP:Our Way of Interaction

We promote better relationship with stakeholdersby:

Aligning our goals with the Government'sreform agenda

Understanding our clients

Improving communication with stakeholders

Working as partners, help clients achieve theirobjectives economically, efficiently andeffectively.

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Chapter #3

2 THE JOB OF THE AUDITOR

Introduction

The auditor is a professional with a special role to play in ensuring theintegrity of the operations of the Government of Pakistan andsafeguarding its assets.

As such the auditor must fulfill certain expectations with respect toperformance of duties and ethical conduct.

The auditor is employed pursuant to a set of formal conditions andshould expect appropriate protection in the fulfillment of his or herresponsibilities. These issues are outlined below.

Expectations

Auditors work in teams. Audit teams perform their work inaccordance with DAGPs Auditing Standards, which are described indetail in Chapter 4. The audit teams should fulfil a number of generalexpectations in performing their duties:

a) At least one auditor within the audit team should be fullyconversant with the rules and regulations concerning theaccounts to be audited.

b) The audit team should subject the audit entity to a complete

and thorough check according to the audit programme withinthe constraints of the time available. Any failure to completethe prescribed audit programme must be reported clearly andfully to the Audit Manager.

c) Each auditor is expected to use professional judgment incarrying out all aspects of an audit programme.

d) Although it is not the responsibility of the auditor to detectfraud, every auditor is expected to take appropriate actionwherever a situation of fraud is suspected.

Code of Ethics

Concept, Background and Purpose of the Code of Ethics

The Auditor General of Pakistan (AGP) has deemed it essential toestablish a Code of Ethics for auditors in the public sector.

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a) This Code of Ethics is a comprehensive statement of thevalues and principles which should guide the daily work ofauditors. The independence, powers and responsibilities of thepublic sector auditor place high ethical demands on theDepartment of the Auditor General of Pakistan and the staff

deployed on audit work. This code of ethics for auditors in thepublic sector outlines the ethical precepts of civil servants ingeneral and the particular requirement of auditors, includingthe latters professional obligations.

b) With the Lima Declaration of Guidelines on Auditing Preceptsas its foundation, this Code of Ethics should be seen as anecessary complement, reinforcing the Auditing Standardsissued by the Auditor General of Pakistan in June 2002 in linewith INTOSAI Code of Ethics and Auditing Standards.

c) The Code Ethics is directed at the individual auditor, theAuditor-General of Pakistan, executive officers and allindividuals working for or on behalf of the AGP who areinvolved in audit work.

d) It is the responsibility of the AGP to ensure that all its auditorsacquaint themselves with the values and principles containedin this Code of Ethics and act accordingly.

e) The conduct of auditors should be beyond reproach at all times

and in all circumstances. Any deficiency in their professionalconduct or any improper conduct in their personal life placesthe integrity of auditors, The Department of AGP that theyrepresent, and the quality and validity of their audit work, in anunfavourable light, and may raise doubts about the reliabilityand competence of the Department of the AGP itself. Thiscode of ethics for auditors should promote trust and confidencein the auditors and their work.

f) It is of fundamental importance that the Department of the AGPis looked upon with trust, confidence and credibility. The

auditor promotes this by adopting and applying the ethicalrequirements of the concepts embodied in the key wordsIntegrity, Independence and Objectivity, Confidentiality andCompetence.

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Trust, Confidence and Credibility

The legislative and/or executive authority,

the general public and the audited entities

are entitled to expect the conduct and

approach of the officers and the staff of

the Department of the AGP to be above

suspicion and reproach and worthy of

respect and trust.

a) Auditors should conduct themselves in a manner which

promotes co-operation and good relations among themselvesand within the profession. The support of the profession by itsmembers and their co-operation with one another are essentialelements of professional character. The public confidence andrespect that an auditor enjoys is largely the result of thecumulative accomplishments of all auditors, past and present.It is therefore in the interest of auditors, and the public, forauditors to conduct themselves in a fair and balanced way.

b) The legislative and/or executive authority, the general publicand the audited entities should be fully assured of the fairnessand impartiality of all the work the Department of the AGP.

c) In all parts of society there is a need for credibility. It istherefore essential that the reports and opinions of theDepartment of the AGP are considered to be thoroughlyaccurate and reliable by knowledgeable third parties.

d) All work performed by the Department of the AGP must standthe test of legislative and executive scrutiny, public judgmentson propriety, and examination against this Code of Ethics.

2. Integrity

a) Integrity is the core value of this Code of Ethics. Auditors havea duty to adhere to high standards of behaviour (e.g. honestyand candidness) in the course of their work and in theirrelationships with the staff of audited entities. In order tosustain public confidence, the conduct of auditors should beabove suspicion and reproach.

Auditors have aduty to adhere tohigh standards ofbehaviour and to beabove suspicion andreproach

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b) Integrity, including financial, moral, and intellectual integrity,can be measured in terms of what is right and just. Integrityrequires auditors to observe both the form and the spirit ofauditing and ethical standards. Integrity also requires auditors

to observe the principles of independence and objectivity,maintain irreproachable standards professional conduct, makedecisions with the public interest in mind, and apply absolutehonesty in carrying out their work and in handling theresources of the Department of the AGP.

3. Independence, Objectivity and

Impartiality

a) Independence from the audited entity and other outsideinterest groups is indispensable for auditors. This implies that

auditors should behave in a way that increases, or in no waydiminishes, their independence.

b) Auditors should strive not only to be independent of auditedentities and other interested groups, but also to be objective indealing with the issues and topics under review.

c) It is essential that auditors are independent and impartial, notonly in fact but also in appearance.

d) In all matters relating to the audit work, the independence ofauditors should not be impaired by personal or externalinfluence. Independence may be impaired, for example, byexternal pressure or influence on auditors; prejudices held byauditors about individuals, audited entities, projects orprogrammes; recent previous employment with the auditedentity; or personal or financial dealings which might causeconflicts of loyalties or of interests. Auditors have an obligationto refrain from becoming involved in all matters in which theyhave a vested interest.

e) There is need for objectivity and impartiality in all workconducted by auditors, particularly in their reports, which

should be accurate and objective. Conclusions in opinions andreports should, therefore, be based exclusively on evidenceobtained and assembled in accordance with the auditingstandards of the Department of the AGP.

f) Auditors should make use of information brought forward bythe audited entity and other parties. This information is to betaken into account in the opinions expressed by the auditors in

Auditors should beindependent and

objective.

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an impartial way. The auditor should also gather informationabout the views of the audited entity and other parties.However, the auditors own conclusions should not be affectedby such views.

4. Political neutrality

a) It is important to maintain both the actual and perceivedpolitical neutrality of the Department of the AGP. Therefore, itis important that auditors maintain their independence frompolitical influence in order to discharge their auditresponsibilities in an impartial way. This is relevant for auditorssince Department of the AGP works closely with the legislativeauthorities, which is empowered by law to consider the reportsof the AGP.

5. Conflicts of Interest

a) When auditors are permitted to provide advice or servicesother than audit to an audited entity, care should be taken thatthese services do not lead to a conflict of interest. In particular,auditors should ensure that such advice or services do notinclude management responsibilities or powers, which mustremain firmly with the management of the audited entity.

b) Auditors should protect their independence and avoid anypossible conflict of interest by refusing gifts or gratuities thatcould influence or be perceived as influencing theirindependence and integrity. Government servants, ConductRules, 1964 shall also apply in this regard.

c) Auditors should avoid all relationships with managers and staffin the audited entity and other parties that may influence,compromise or threaten the ability of auditors to act and beseen to be acting independently.

d) Auditors should not use their official position for private

purposes and should avoid relationships that involve the risk ofcorruption or may raise doubts about their objectivity andindependence.

e) Auditors should not use information received in theperformance of their duties as a means of securing personalbenefit for themselves or for others. Neither should theydivulge information that would provide unfair or unreasonable

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advantage to other individuals or organisations, nor shouldthey use such information as means for harming others.

Professional Secrecy

a) Auditors should not disclose information obtained in theauditing process to third parties, either orally or in writing,except for the purposes of meeting the statutory or otheridentified responsibilities of the Department of the AGP as partof its normal procedures or in accordance with relevant laws.

Competence

a) Auditors have a duty to conduct themselves in a professional

manner at all times and to apply high professional standards incarrying out their work to enable them to perform their dutiescompetently and with impartiality.

b) Auditors must not undertake work they are not competent toperform.

c) Auditors should know and follow applicable auditing,accounting, and financial management standards, policies,procedures and practices. Likewise, they must possess a goodunderstanding of the constitutional, legal and institutionalprinciples and standards governing the operations of theaudited entity.

Professional Development

Auditors should exercise due professional care in conducting andsupervising the audit and in preparing related reports.

a) Auditors should use methods and practices of the highestpossible quality in their audits. In the conduct of the audit andthe issue of reports, auditors have a duty to adhere to basicprinciples and generally accepted auditing standards.

b) The Department of the AGP has a continuous obligation toupdate and improve the skills of officers and staff in thedischarge of their professional responsibilities.

Auditors should notdisclose informationobtained in theauditing process.

Auditors should

know auditing,accounting, and

financialmanagementstandards, policies,

procedures andpractices.

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2.1 Protection of the Auditor

2.1.1 Auditors must have the freedom to carry out audits in aconscientious and thorough manner. There is an onus on theauditor to carry out the audits in a fair, objective and courteous

manner (and comply with the Code of Ethics presented in theSection above). In turn, the auditor expects to receivecooperation and courtesy from those being audited.

2.1.2 Any serious attempts to hinder or impede the conduct of theaudit should be brought to the attention of the Audit Manager. Any concern of possible intimidation or threat to the auditormust be taken seriously both by the auditor and themanagement of DAGP. A formal process should be followedwherever the auditor, or the conduct of the audit, is threatened,or a risk of impedance is perceived. This process involves thefollowing steps:

a) Whenever the auditor senses any problems in the conduct ofthe audit, he/she should ensure that all meetings are held withat least two auditors present and that notes of these meetingsare clearly documented;

b) The auditor should inform his/her supervisor or Audit Managerin writing of any serious incidents or concerns with specificdetails of what transpired;

c) A course of action is proposed by the Audit Manager, ifnecessary, in consultation with senior management withinDAGP;

d) Depending on the seriousness of the situation, and the natureof the problem, one or more of the following courses of actionshould be implemented:

- The Audit Manager raises the issue with the PrincipalAccounting Officer, or equivalent;

- A letter, signed by the Auditor-General or Deputy Auditor-General, is submitted to the Principal Accounting Officer, orequivalent, and/or sent to the Controller General;

- The composition of the audit team is changed;- If necessary, after consultation with the Auditor-General, seek

a legal opinion or other course of action; and- Whenever an individual auditor is not satisfied with the action

taken, they have the right to report their concern to theAssistant Auditor-General, Personnel, a Deputy Auditor-General or the Auditor-General.

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