Module 1 - Unit ONE: Introduction to Financial Management Home | Help | Exit

KENYA SCHOOL OF GOVERNMENT

SENIOR MANAGEMENT COURSE

PUBLIC SECTOR AUDIT

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Session Outline
1. Session Objectives
2. Introduction
3. Types of Audit
4. Approaches to Audit
5. Functions of Internal Audit
6. Independence of Internal Audit
7. Internal Control System
8. Functions of External Audit
9. Types of External Audit Opinions
10. Conclusion

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Session Objectives
By the end of this unit, you should be able to:

Explain the rationale for Public

Sector Audit

Describe the components of

Internal Control System

Differentiate between internal

and external Audits

Discuss the functions of Internal and

External Audits

Evaluate the role of management in

Auditing

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Introduction

• Audit is a cornerstone of good public sector

governance.
• By providing unbiased, objective
assessments, auditors help public sector
organizations achieve accountability and
integrity, improve operations, and instill
confidence among citizens and stakeholders.
• It provides those charged with governance
and the general public with independent and
objective assessments concerning the
stewardship and performance of government
policies, programmes and operations

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Rationale for Audit

• Public sector audit roles:
(a) Oversight - addresses whether public sector entities
are doing what they are supposed to do and serves
to deter public corruption, fraud and waste.
(b) Insight - assists decision-makers by providing an
independent assessment of public sector programs,
policies, operations, and results.
(c) Foresight - identifies trends and emerging
challenges.
Auditors use tools such as financial audits, performance
audits, system audits and advisory services to fulfill each of
these roles.

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Types of Audit
1. Annual Financial Audit- Focuses on determining whether an
entity’s financial information is presented in accordance with the
applicable financial reporting and regulatory framework.

2. Forensic Audit-This is undertaken to establish fraud, corruption

or other financial improprieties, and is undertaken for use as
evidence in a court of law.

3. Performance Audit- It involves the assessment of government

operations, programs or project’ use of public resources in line
with the 4 E’s: Efficiency, Economy, Equity and Effectiveness. Its
aim is to evaluate, whether the citizens have gotten value for
money in the completed project

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Types of Audit Cont.

4. Information Technology / System Audit- It reviews the
computerized elements of an accounting information system.
The audit assesses the following: Confidentiality, Integrity,
Availability of Systems and Non-repudiation

5. Periodic Audit- Its conducted upon client request or

auditor’s initiative with an aim of preventing and deterring
fraud and corrupt practices, as well as establishing the
effectiveness of risk management, control and governance
processes within state organs and public entities.

6. Procurement Audit- It examines the public procurement and

asset disposal process of a state organ or a public entity with
a view to confirm as to whether procurements were done
lawfully and in an effective way.

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Approaches to Public Sector Audit

Approaches to Public Sector Audit can

be categorized into two:
✓Internal Audit
✓External Audit

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Internal Audit
• Internal Audit is a legal requirement for public sector
entities
• PFMA 2012 defines Internal Audit as:
• Independent, objective assurance and consulting
activity designed to;
• add value
• improve an organization’s operations
• assists an organizations accomplish objectives
through evaluation and improvement of the
effectiveness of risk management, control, and
governance processes

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Mandate of internal auditors

(PFMA Regulations, 2015 sec 160)

• review and evaluate activities and processes including;

• budgetary performance
• financial management
• transparency and accountability mechanisms
• processes
• give reasonable assurance through the audit committee
on the state of risk management, control and governance
• review the effectiveness of financial and non-financial
performance management systems

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Independence of the internal auditor

(PFMA Regulations, 2015 sec 162)

• Head of Internal Audit Unit has;

➢ operational independence through the reporting
structure by reporting;
i. administratively to the Accounting
Officer
ii. functionally to the Audit Committee
➢ unrestricted, direct and prompt access to;
i. all records
ii. all officials or personnel holding any
contractual status
iii. all the premises and properties of the
entity

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Independence of the internal auditor cont.

• The Internal Auditor shall;
✓respect the confidential nature of information
✓use such information with discretion
✓be free from influence by any element in the
organization in matters of;
– audit selection - scope
– procedures - frequency
– timing - report content

• The Internal Auditor shall not have direct operational

responsibility or authority over any of the activities they
review

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Auditors Role is Supportive

The internal auditor’s role supports the governance
responsibilities of;-
• Oversight,
• Insight, and
• Foresight.
• Detection
• Deterrence
• Through Internal Control Systems (ICS)

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What is Internal Control Systems (ICS)

• ICS is a process designed by management to provide
reasonable assurance about the achievement of the entity’s
objectives with regard to;-

➢the reliability of financial and non financial information,

➢effectiveness and efficiency of operations

➢and compliance with applicable laws and regulations.

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Components of Internal Control System (ICS)

✓Control Environment.
✓Entity's Risk Assessment Process.
✓Control Activities
✓Information System including the related
Business Process relevant to Financial Reporting
& Communication (ERPs).
✓Monitoring of Controls.

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Control Environment

– A sound control environment is created by top management

by setting the ‘tone’ through :
1. Organisation structure and methods of assigning
authority and responsibilities
2. Management philosophy and operating style
3. Human resources policies and procedures
4. Communication style
5. Management attitude to control – e.g. segregation of
duties
6. Leading by example
7. Focus on integrity
8. Commitment to investigating discrepancies
9. Diligence in designing systems, etc.

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Types of Internal Controls Activities

❑ Preventive Controls
❑ Detective Controls
❑ Corrective Controls
❑ Directive Controls

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Preventive Controls
• Attempt to deter or prevent undesirable events from
occurring.
• They are proactive controls that prevent a loss.
• Examples include
➢Segregation of duty
➢Proper authorizations
➢Adequate documentation
➢Physical control over assets

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Detective Controls
• They alert people after or before the unwanted event.
• They are effective when detection occurs before the material
harm.
• They provide evidence that a loss has occurred but do not
prevent the loss from occurring
• Examples Include:
➢Review and analyses
➢Variance analyses
➢Reconciliations
➢Physical inventories
➢Audits

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Corrective Controls
• They correct the negative effects of the unwanted event.
• They are designed to fix problems once they are found by
the detective controls. They are designed to:
✓Find the cause of the problem
✓Correct the result of the problem
✓Modify the system to keep the problem from not
happening again.
✓Minimize the impact of a threat
✓Remedy problems discovered by detective controls
• Examples Include: Deployment, Litigations, Surcharge
Action, Sacking, Training

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Directive Controls
• They cause or encourage the occurrence of a desirable
event.
• Examples Include;
➢Policy and Procedures Manuals
➢Employee training
➢Job descriptions

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Monitoring of Controls

❖Regular Review of Records and Reconciliations

❖Regular Review of Summary Reports
❖Regular Management Briefings- scheduled or
unscheduled meetings
❖Regular and Random Physical Inspections of offices,
works, stores

• Reviews sets the ‘tone’ for the needed work discipline,

and an attitude of accuracy, completeness and timeliness
among managers & staff

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External Audit
• It is an independent verification of an entity’s financial statements
as well as non-financial information, undertaken to ascertain
fairness and accuracy of all financial transactions carried out by
the said entity.

• This task is undertaken by an independent expert (Auditor

General), who then expresses an opinion on the subject matter
(financial statements verified) through an audit report

• Article 229 of the Constitution; establishes the Office of the

Auditor-General (OAG) with the overall mandate to audit all
entities funded from public funds and confirm whether or not
public money has been applied lawfully and effectively.

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Functions of External Auditor/ Auditor General

(Public Audit Act 2015 sec 7)

✓ give assurance on the effectiveness of internal controls, risk

management and overall governance at national and county
government;
✓undertake audit activities in state organs and public entities to
confirm whether or not public money has been applied lawfully
and in an effective way;
✓satisfy himself or herself that all public money has been used and
applied to the purposes intended and that the expenditure
conforms to the authority for such expenditure;
✓ issue an audit report in accordance with Article 229 of the
Constitution;

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External Audit Timelines

• Article 229 (4) of the Constitution specifies that within six (6)
months after the end of each financial year, the Auditor General
shall audit and report in respect to that financial year on the
accounts of national and county governments and all other public
offices including accounts of political parties funded from public
funds.
• The OAG is mandated to carry out accountability of resources
through:
i. Certification of Accounts
ii. Continuous Audit Presence
iii. Service Delivery to all Kenyans
• Section 32 of the Public Audit Act (2015) requires the Auditor
General to publicize the audit report within 14 days after
submission to Parliament. This includes having the reports on the
OAG’s website.

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Types of External Audit Report / Opinions

1. Unqualified Opinion
➢It means that the financial statements are clean and give a true
and fair view of the financial position of a public entity.
➢It’s a good/clean report

2. Qualified Opinion
➢It means that the financial statements are, by and large, fairly
presented.
➢However, there are specific discrepancies which could include:
an incorrect accounting policy, unrecoverable debts, misstated
inventories, or a discrepancy not recurring in the financial
statements.

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Types of External Audit Report / Opinions

3. Adverse Opinion
➢ It means that the financial misstatements, individually or in
aggregate, are both material and pervasive to the financial
statements.
➢Therefore, the report is bad.

4. Disclaimer of Opinion
➢ This means that the Auditor General was unable to obtain
sufficient audit evidence upon which to base an opinion.
➢ Thus, the available financial statement could not be relied
upon to warrant an opinion.
➢This is the worst form of opinion the Auditor General can issue.

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Conclusion

• External, internal auditors and management are

partners in ensuring accountability of public
resources

• Accountable governance of public entities will

enhance service delivery and instills public
confidence in government.

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References
1. Constitution 2010
2. Public Finance Management Act, 2012
3. PFMA Regulations, 2015(National Government
& County Government)
4. Public Audit Act, 2015
5. International Auditing Standards (IAS)

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The End

Thank You

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