Overview of Government External Auditing

As we know, auditing is one of the most crucial part of government accounting, at which
auditor is expected to provide independent reasonable assurance of government’s performance,
both on financial performance and efficiency. However, in practice, auditors actually cannot
have completely independent view since the role of auditing itself is not exactly adversarial, but
rather towards cooperation with auditee. Thus, compromission of auditors’ independent role will
occur, including in government auditing. Despite exceptional role of auditing in public sector
accounting which demand for an independent view of public money, compromission in auditors’
independent view still exist because government cannot fully hand over their sovereignty to
auditors when doing auditing which has limited auditors’ level of independence.
Unlike auditing in for-profit organizations which expects essence of independence
towards the auditee, government auditing provides another essence of independence, which is
independence of legislature. The reason for this additional essence is that legislature is included
in political position which does not reflect independent view, but rather towards specific
dominating political party. Even if legislature is dominated by opposition political party, auditor
still cannot be considered as independent from the viewpoint of others. As we know, in
sovereign government, the auditee is the executive of government systems. Thus, auditors
themselves must be separated from executive so that they can be independent, which called
comptroller and auditor general in UK and supreme audit institutions in US. The same things go
to lower-level government despite they do not have their own legislatures.
Continuous demand of independent auditing in government has eventually brought to
the concept of external auditing. External auditors’ main sense of being independent is that they
are not employed by the auditee but rather by higher-level government or government agency.
Despite being independent to some extent, however, it is still questionable for external auditors
their independence for some reason. The first is that, although external auditors are separated
from the constitution, it is undeniable that they still exist as part of the government. Moreover, it
is also questionable for auditors as citizen to be independent of their own government. Since
continuous tension between the demand of independence and the fact of inevitable
compromission towards external government auditors’ role has brought so much consideration,
the needs of foundations architecture in government auditing independence that require support
from public is required. Compromises made include several points of government auditing
concept such as, being part of government but not generally adversarial, paid for and by
government, utilizing government management premises, equipment and supplies, judged by
the same values as government and subject to the same difficulties in balancing inputs, outputs
and outcomes when judging performance.
Similar to for-profit auditing, government auditing is also presented in written form being
tie to international auditing standards for its standards of writing and minimum reporting
requirements. However, the planning, programming and conducting will be back again to the
responsibility of the auditor. There are also several challenges striking sovereign government in
auditing. One of the challenges is regarding budget as reducing budget is an obvious recourse
for those who want to curtail audit activity and auditor will recourse to legislature and public in
order to protect themselves in terms of auditing budget. Another challenge is regarding degree
of access in sensitive information at which auditors are not permitted to access sensitive
information that involves security at sovereign level. Thus, despite demanding for
independence, auditing standards also required auditors to be in good relations with auditee
with no responsibility towards auditee and no audit participation in management nor personal
involvement by any of auditors in the auditee. The same concepts also go to lower-level
government auditing at which auditing independence will be greater when auditors are
appointed by government agency. In general, external audits of government is categorized as
financial and regularity audits and performance audits.

Financial and Regularity Audits

Not having much different with for-profits organization auditing, financial and regularity
audits for government commonly deals with annual financial statement audit in which its method
and products are quite purely technical. The final product of financial statement audit is auditors’
opinion on whether or not the general-purpose financial statements fairly present what they are
supposed to present and conform to the law related to financial statements. During the
implementation, auditors rely on two different sets of accounting information, bookkeeping
records of transactions, reconciled to bank statements which forms financial information and
opinions that included annual aggregation, measurement and valuation of revenues, expenses,
assets, liabilities and cash flows. Under accrual basis of accounting, auditors’ opinion will rely on
combination between the two sets of information.
Besides financial statement audit, there is also another focus of financial and regularity
audits, which is propriety and probity of transactions. It involves investigating on how proper the
transactions are including spending and collection of income, safeguarding of assets and
appropriateness of liabilities as well as accuracy and completeness of records judging from
public money context. With that being said, auditors are actually providing reasonable
assurance for the transactions to be free of error and not fraudulent nor wasteful and
extravagant. In addition to government auditing in propriety and probity, audits of government
also have responsibility to check whether transactions conformed to the budget or not since it is
public money according to law. In practice, it is impossible for auditor to provide opinion on
accrual based financial statements without giving opinion on going concern status of
government which may be overlap with other type of audits, performance audits.
Another service offered by government external auditors besides their core
responsibilities mentioned above is to provide attestation. Attestation is service given by auditor
that have lower level of assurance than auditing. Activities includes in attestation: review of
financial statements, compilation of financial statements, certifying grant claims for higher-level
governments, reporting only on internal control and compliance with laws and regulations and
reporting on budgets. These activities may be ad hoc, relate only to parts of financial
statements, reporting entities or government.

Performance Audits
Performance audits usually deal with output and outcomes. In other words, it is closely
related to economy, efficiency and effectiveness of government. Despite requirement of
continuous audit, it is also quite impossible to carry annual performance audit on all aspects of
government. Thus, auditors will evaluate as to what aspects to audit that usually including
particular aspect of government that give rise to controversy. Moreover, performance audit
usually does not possess standard form in its audit report with auditee being given at least the
opportunity to comment on a report before it is published.
Unlike financial and regularity audits that have been largely reduced to technical
financial matters, performance audits sometimes can be politically sensitive. This is because
performance audits must cover both financial matters in terms of cost in economic meaning and
non-financial outputs and outcomes which may eventually end up in questioning government
policies in their way of providing independent view for government performance in economy,
efficiency and effectiveness of policies and their implementation.
One of the challenges in performance audits is that the role of performance audit itself
may be eventually end up in questioning government policies which is politically unacceptable.
Thus, performance auditors are limited to provide opinion regarding governments’ control
systems that explicitly include the determination, implementation and monitoring of policies and
not the formation of policies itself. Moreover, regardless of the main concept in auditors’
independence that require them to be accurate, based on evidence, reliable and objective,
performance audit in its implementation will often involve political opinion and thus reducing the
possibility of objectivity in it. However, several approaches also have been taken in response to
this challenge, which is to focus on the narrower, measurable and more technical matters. For
example, procurement practices, overstaffing, corruption and also accounting system that
involves relevant costs and timeliness of reporting. Auditors can also supplement themselves
with interdisciplinary professionals for wider questions for further understanding of performance.
Despite absence of absolute success measurement, performance auditors can also use
previous period performance and comparable organizational units as benchmark for their
measurement. Thus, the more homogeneous organizations available to be compared, the more
useful the report is.

Internal Control
As we know, the role of internal control is crucial when it comes to auditing since auditor
will rely on degree of strength in internal control in determining number of audit test to be
conducted. Although there may be information that comes from external parties, still internal
control plays an important part in achieving organization’s objective. Few preventive controls in
internal control include authorization procedures, segregation of duties, control over financial
resources and records, systematic verifications of financial balances, systematic financial
reconciliations and financial reporting. External auditors are not the only ones with explicit
responsibilities for internal control system. Internal auditors also provide a view that is
independent of top management with a direct reporting line to those in charge of governance.
It is inevitable to say that there is no complete perfection in internal control design. Thus,
auditors must not completely rely on internal control in their decision making. Moreover, there is
also tension between more control and better services of organizations since control is
necessary for organizations to exist, but it is not sufficient to determine the necessary amount of
control is actually needed. For example, is the travel and hospitality expenses of public
servants, and their salaries tend to be a strict control compared to for-profit organizations. Thus,
it can be said that internal control is designed not to provide absolute assurance but rather
towards reasonable assurance regarding government’s system by making risk-based
assessments which they do not actually check for every details.

Materiality
Materiality in government’s records of transactions is required to extract relevant and
reliable meaning from the complex detail. Thus, auditors are required to have professional
judgement in determining materiality of reports. However, during the early stages of auditing
process, materiality was actually undefinable. However, during the second half of twentieth
century, quantitative measures of materiality are set. Typical quantitative measures of
materiality are naturally drawn from fundamental aggregates in financial statements including
revenues, expenses, assets, liabilities and cash flows. These quantitative measures are used in
two ways, the first is that they must be used with the companion of nuance at which the use of
certain quantitative measurement may be wrong if it is used in wrong way. Second is that they
are accompanied by qualification in which it deals with public money, there are sensitivities not
necessarily reflected in monetary amounts. Despite being crucial towards government auditing,
the guidance of materiality is small relative to its importance. Most of it relates to general
purpose of financial reporting. Thus, materiality is even by the standards of most government
accounting and auditing issues, an esoteric matter. In other words, it is left to accountant and
auditor to qualitatively be judged by those external users in retrospect practically.

Budget Auditing
As we know, budgeting is one of the most important part in rational planning, execution
and monitoring cycle of government. It is expected that budgeting in government can be publicly
transparent. There are few reasons for this action: the first is that the interest of politicians and
the public in this cycle are overwhelmingly weighted towards budget. The second is that the
annual cycle of incremental budgets can easily proceed from original budget to original budget,
even with a revised budget, unanchored by any explicit comparison with actual results. Thus,
budgeting audit can never provide the same assurance as an audit of financial statements of
actuals since financial statement audit depend on verifiable records of transactions which
budget auditing do not share. Budget auditing will deal with evaluating internal control over
budgets, evaluating assumptions of the budget, evaluating compliance with rules and guidelines
and issuing a report.