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fam Chapter 1421092005

fam Chapter 1421092005

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financial audit manual
financial audit manual

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Published by: Humayoun Ahmad Farooqi on May 17, 2010
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06/08/2013

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14.AUDIT FOLLOW UP
14.1Introduction
14.1.1Follow up is an integral part of the audit function. The auditor’s objective isnot fulfilled unless any errors or deficiencies identified during the audithave been corrected or at least addressed. Both DAGP and the appropriatePublic Accounts Committee (PAC) should ensure that entity officials takeaction to correct all errors found and deal with all recommendations made.14.1.2Entity officials themselves are responsible for ensuring that their financialstatements are as complete and accurate as possible, and that their internalcontrol structures are operating as efficiently and effectively as possible.They should be encouraged to view the auditor as an ally in this endeavour,and should actively work with the auditor to address any concerns.14.1.3To achieve these objectives, there should be a formal follow up of everyfinancial audit. All observations, conclusions and recommendations should be followed up and reported until they are satisfactorily dealt with, or untilcircumstances have rendered them no longer relevant.14.1.4The follow-up phase involves returning to the entity at a later date todetermine if entity officials have:a)Corrected errors identified during the audit; and b)Implemented recommendations made by the auditors.14.1.5The errors identified during the financial audit could include:a)Monetary errors or related compliance with authority violations that led to areservation in the auditor’s opinion (a qualified, adverse or disclaimer of opinion); and b)Other monetary errors and compliance with authority violations.14.1.6Recommendations made by the auditor can relate to:a)Reservations being expressed in the audit report; b)Contentious matters on which DAGP decided not to express a reservation;c)Comments on the form and content of the financial statements;d)Comments on the accounting policies used to prepare the financialstatements;e)Compliance with authority violations;f)Internal control weaknesses; andg)Performance (value-for-money) matters.14.1.7This Chapter discusses:a)the timing of the follow up of the correction of errors and implementationof recommendations;
Audit Manual – Chapter 14
14-1
Ensure that entity officialstake action tocorrect all errorsfound and dealwith allrecommendations that aremade.There should bea follow up of every financialaudit.
 
 b)the two basic levels of assurance that the auditor can plan to achieve duringthe performance of the follow up;c)the follow up process which first deals with the correction of errors andthen with the implementation of recommendations;d)reporting the results of the follow up; and,e)when the auditor should perform additional follow ups of matters whichentity officials have not resolved.
14.2Timing of the Follow Up
Correction of Errors
14.2.1The auditor should encourage entity officials to investigate and correct allmonetary errors that have been detected. This should include investigatingand correcting the known errors, investigating the accuracy of the auditor’smost likely error, and making a correction for the determined amount.14.2.2If the most likely error was material, entity officials should normally have performed their investigation at the time of the audit. However, they maynot have corrected the error.14.2.3If the error, material or otherwise, was not investigated and corrected at thetime of the audit, the auditor should try to ensure that entity officials perform their work before the completion of the following year’s audit.There are two reasons for this:
a)
As discussed in Chapter 9, errors that affect closing balances in one year will affect the opening balances for the following year. To obtain the mostaccurate estimate of the most likely error in the opening balances for thefollowing year, it would be best if the investigation was performed beforethe completion of the following year’s audit. b)The same type of error may recur in the following year. Investigating thecause of the error found in the first year might help the auditor to arrive at amore accurate estimate of the most likely error in the following year.
Implementation of Recommendations
14.2.4There is no simple rule as to when the follow up of the implementation of arecommendation should be conducted. The timing of the follow up willdepend on:a)The seriousness of the matters raised; b)A realistic time period for entity officials to implement therecommendation;c)The time period reflected in the entity’s action plan and agreed to by DAGPand the PAC; andd)How the follow up fits into DAGP’s overall strategic plan.
Audit Manual – Chapter 14
14-2
Encourageentity toinvestigate and correct allmonetary errors.
 
14.2.5With respect to (a), very serious deficiencies that can be corrected quicklyshould be followed up within a short timeframe. In contrast, the follow upof minor deficiencies can often be postponed until the next regularlyscheduled visit.14.2.6For larger entities, the next regularly scheduled visit for a financial auditwill most likely be the following year. For smaller entities it is possible thata visit will not be required in the following year. The auditor shouldconsider whether the matter is important enough to warrant a special visit tothe entity to follow up the matter.14.2.7With respect to (b), the timing of the follow up will depend on the timerequired for entity officials to implement the necessary changes. If therecommendation calls for staffing changes, these may take several monthsto be fully implemented. Major changes to computer systems can takeseveral years to be fully implemented.14.2.8With respect to (c), in cases where implementation may take a protractedamount of time, the auditor should request the officials to produce an action plan, indicating when and how the corrective actions are going to be taken.In some cases, the PAC may request the officials to table this action planwith the Committee.14.2.9For matters that will require an extensive period of time, such as those thatrequire changes to computer systems, the auditor should also request entityofficials to establish interim milestones, and to make interim reportsoutlining their progress against each milestone.14.2.10With respect to (d), the follow up must not be ignored or delayed beyond anappropriate time period. To do so would indicate to the entity that theauditor did not really consider the implementation of the recommendationto be important.14.2.11The schedule for conducting follow up audits should be contained in eachdirectorate’s strategic audit plan.
14.3Determining the Desired Level of Assurance
Correction of Errors
14.3.1There are two basic levels of assurance that the auditor can plan to achieve – an audit level of assurance and a review level of assurance. To achievethe audit level of assurance, the auditor would need to conduct an audit of the error investigation performed by the entity to ensure that:a)The work performed was sufficient and appropriate, and done correctly; b)The entity’s estimate of the error was calculated correctly; andc)The correcting entry was properly recorded.
Audit Manual – Chapter 14
14-3

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