Chapter 15

Audit and assurance services in the public sector

Learning objectives
15.1 Describe the responsibilities of the different levels of government in Australia and explain the
concept of accountability.
15.2 Outline the different bases of accounting used in the public sector.
15.3 Explain public sector audit requirements.
15.4 Explain the nature of performance engagements.
15.5 Explain the nature of regularity audits.

Major chapter sections

System of government and accountability
Government accounting
Public sector audit requirements
Performance engagements
Regularity audits

Lecture plan
This chapter provides a background to government in Australia and discusses the nature of
government accounting and government auditing.

You should outline the learning objectives for this chapter, and also walk students through how this
chapter outlines other assurance services provided by the assurance provider.

[Use slides 15-1 to 15-3]

LO 15.1: System of government and accountability

Slide 15-4 outlines the three tiers of government that exist in federal systems such as Australia. The
extent of description offered for each tier by the instructor will be determined by students’ knowledge
of the Australian system of government. The next three slides on accountability describe the
importance of accountability under the Westminster system of government and outline the cycle of
accountability.

[Use slides 15-4 to 15-7]

LO 15.2: Government accounting

Students’ knowledge of government accounting might vary and should be determined before the
lecture. This slide outlines the applicability of Australian accounting standards and the use of accrual
accounting for reporting entities.

If it is thought that students have insufficient knowledge of government accounting, reading from an
introductory accounting text could be set here.

[Use slide 15-8]

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LO 15.3: Public sector audit requirements
This section outlines the structure of the public sector, the audit mandate, reporting duties and
independence.

[Use slides 15-9 to 15-15]

LO 15.4: Performance engagements

The importance and necessity of performance engagements in the public sector should be raised. It
should be noted that ASAE 3500 was reissued in October 2017, effective for periods beginning on or
after 1 January 2018. (It should also be pointed out that most of the new assurance services offered or
being considered are a form of performance engagement.) The slides outline the concepts of
economy, efficiency and effectiveness and the relationship between these concepts. The stages of a
performance engagement are also diagrammatically outlined (Figure 15.4).

[Use slides 15-16 to 15-24]

LO 15.5: Regularity audits

These slides outline what is involved in a regularity audit; and a component of regularity audits, the
compliance engagement. Reporting on internal control in the public sector and the important issue of
probity are also covered.

[Use slides 15-25 to 15-29]

Summary
We provide a summary slide of the main learning takeaways in this chapter.

[Use slide 15-30]

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 SOLUTIONS

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REVIEW QUESTIONS

15.1 The three tiers of government in Australia are:

 the Commonwealth, which is responsible for matters of national importance such as defence

 the states and territories, which are responsible for social services such as education

 local governments, which are responsible for civic services, such as garbage disposal.

15.2 Accountability commences with Parliament allocating resources to government agencies or

departments, approving the terms and the use to which these resources can be put, and specifying the
expected outcomes of the programs. These agencies or departments then report back to Parliament on
the use of the allocated resources, and the results achieved. The auditor-general then provides
assurance to Parliament that public resources have been used appropriately.

15.3 Since 1996, the Australian accounting standards have required government departments that are
reporting entities to prepare general-purpose financial reports using accrual accounting, as follows.

 AASB 1049.9–10 requires that, unless otherwise specified in that standard, whole-of-
government financial reports and general government sector financial reports must adopt the
same accounting policies and be prepared in a manner consistent with the other applicable
Australian accounting standards.

 AASB 1050 Administered Items sets out disclosure requirements for administered items in
the general-purpose financial reports of government departments.

 AASB 1051 Land Under Roads sets out requirements for all government entities’ general-
purpose financial reports regarding land situated under roads.

 AASB 1052 Disaggregated Disclosures sets out the requirements applicable to the general-
purpose financial reports of local governments and government departments.

15.4 The first step in determining which standard will apply is the correct classification of the agency into
either a for-profit or a not-for-profit entity. The Australian accounting standards contain many
provisions that are specific to not-for-profit entities, so the status of an entity is critical to its selection
of accounting policies.

15.5 The auditing of Commonwealth government departments and statutory authorities and instrumentalities
is primarily the responsibility of the Commonwealth Auditor-General. The Commonwealth Auditor-
General also acts as auditor for government corporations by arrangement with the responsible minister.
Each state and territory has an auditor-general with similar duties. The auditor-general’s
comprehensive audit mandate encompasses performance engagements and regularity auditing, which
include both financial report audits and compliance engagements.

15.6 The Australian accounting bodies have endorsed Australian auditing standards as applying to members
working in the public sector, to the extent that they are not inconsistent with or unnecessary to the audit
mandate of the public sector engagement.

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 The Commonwealth Auditor-General is required by the Auditor-General Act 1997 to publish audit
standards covering audits in the Commonwealth public sector. In setting these standards, the
Commonwealth Auditor-General has adopted the auditing standards issued by the Australian Auditing
and Assurance Standards Board (AUASB). Similar situations apply for each state and territory auditor-
general. Therefore, auditors in the public sector are required to follow Australian auditing standards.

15.7 The Commonwealth Auditor-General is appointed by the Governor-General following the approval of
the Joint Committee of Public Accounts and Audit (JCPAA) for a period of 10 years. The responsible
minister makes a recommendation for appointment to the JCPAA after consultation with the finance
minister, a nominee of the leader of the opposition in the House of Representatives, the chair of the
JCPAA and the chair of the Audit Committee of the Parliament (if established). This consultative
process and the appointment by the Governor-General help to ensure the Auditor-General’s
independence.

A similar process is followed for the appointment of state and territory auditors-general.

The Commonwealth Auditor-General can only be removed if both Houses of Parliament in the same
session request that the Governor-General effect their removal, or if the Auditor-General becomes
bankrupt.

15.8 Public sector auditors provide an important link in the accountability chain between the public sector,
Parliament and the community. Public sector auditors subject the conduct and operations of the public
sector as a whole to regular independent investigation and review. Therefore, it is critical that public
sector auditors are, and are seen to be, independent.

The independence of the Commonwealth Auditor-General is maintained by the provisions applying to

the appointment of the Auditor-General by the Governor-General or Governor for a period of five to 10
years depending on the jurisdiction. The appointment takes place after a consultative process.

Further, the independence of the position is protected by the requirement that the Auditor-General can
only be removed by a request from both Houses of Parliament in the same session or if the Auditor-
General becomes bankrupt.

Also, the Auditor-General is designated as an officer of the Parliament and cannot be directed in
relation to his or her function.

15.9 ASAE 3500.7 indicates that the objective of a performance engagement is to evaluate the performance
of an activity, with respect to economy, efficiency and/or effectiveness against the identified criteria.

Therefore, a performance engagement differs from a financial report audit in the following respects:

 The purpose of a financial report audit is to express an opinion on whether the report fairly
presents the entity’s financial position, results of operations and cash flows in conformity with
accounting standards, whereas the purpose of a performance engagement is to assess the
management and operational performance of an entity in using financial and other resources.

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  The criteria for judging the representations in a financial report are codified in authoritative
accounting pronouncements, whereas the criteria used in performance engagements are the
‘specified objectives’ unique to the program or activity being reviewed. The assurance practitioner
may also be involved in the detailed development of these ‘specified objectives’.

Often a performance engagement requires knowledge and skills outside the fields of accounting and
auditing. In these cases, an expert in the relevant field has to be included in the assurance team.

Like financial report auditing, where management prepares a financial report and the auditor adds
credibility through an independent opinion, performance engagements expect management to be
responsible for ensuring economy and efficiency in the use of resources, with the auditor providing a
report on the extent to which predetermined goals have been achieved economically and efficiently.

15.10 ASAE 3500.16 defines economy as the minimisation of the costs of resources, within the operational
requirements of timeliness and availability of required quantity or quality.

Examples of economy audits involve determining whether the entity has:

 followed sound procurement practices

 acquired the appropriate type, quality and amount of resources at the right time and for the
lowest cost.

An example of improved economy is a reduction in costs through bulk buying or better contracting.

15.11 Audit criteria for performance engagements may be obtained from previous years’ audit files or from
other performance engagements undertaken. Alternatively, they might be developed from enabling
legislation; entity operating and procedure manuals; central agency policies, standards, directives or
guidelines; ANAO publications; or private sector auditor publications.

15.12 Regularity audits consist of financial report audits and compliance engagements. Therefore, regularity
audits involve, to varying degrees:

 examination of financial systems and transactions, including evaluation of compliance with

applicable statutes, regulations and administrative requirements

 review of internal control and internal audit arrangements

 examination of the probity and propriety of decisions taken with respect to all aspects from
or relating to the auditor-general’s activities that the auditor-general considers should be brought to
attention.

15.13 There are two views of materiality for compliance engagements. One view is that all instances of non-
compliance are material to the accountability process and should be reported. An alternative view is
that materiality applies to compliance auditing in a manner similar to the way in which it applies to
financial report audits and will therefore be based on professional judgment, taking into account
quantitative and qualitative considerations.

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15.14 Probity is about the standards of conduct in public sector entities and applies to all members of the
public service. Public sector auditors need to be aware of acceptable standards of conduct, which may
be documented in legislation, an agency’s code of conduct, personnel handbooks and central agency
policies. The risk of a lack of probity needs to be considered at the planning stage.

DISCUSSION PROBLEMS AND CASE STUDIES

15.15 (Easy)

The management of public sector entities is entrusted with public resources on a stewardship basis.
They discharge their accountability role by preparing reports to show the results of their administration
of public funds and use of resources. Public sector auditors assist in the accountability process by
providing assurance of the credibility of management’s financial reports, ensuring compliance with
regulations and making assessments of management’s performance. This involves both regularity
audits and performance engagements.

15.16 (Easy)

The Corporations Act 2001 will apply to public sector entities that use companies as part of their legal
structure. For other entities, the Commonwealth Parliament has passed a number of Acts that provide a
legislative framework for the performance, propriety and accountability of Commonwealth entities.
These are as follows.

 The Financial Management and Accountability Act 1997 provides for the proper use and
management of public money, public property and other Commonwealth resources.

 The Commonwealth Authorities and Companies Act 1997 provides regulations for certain
aspects of the financial affairs of Commonwealth authorities, and stipulates rules for reporting and
accountability. It also contains reporting requirements for Commonwealth companies in addition
to the requirements of the Corporations Act 2001.

 The Auditor-General Act 1997 provides for the appointment of the Commonwealth Auditor-
General and sets out the functions of the office.

The Australian accounting standards require government departments that are reporting entities to
prepare general-purpose financial reports using accrual accounting.

AASB 1049.9–10 requires that, unless otherwise specified in that standard, whole-of-government
financial reports and general government sector financial reports must adopt the same accounting
policies and be prepared in a manner consistent with the other applicable Australian accounting
standards. Therefore, with a few significant exceptions, AASB 1049 requires the definition,
recognition, measurement, classification, consolidation, presentation and disclosure requirements
specified in other applicable Australian accounting standards to be adopted in both whole-of-
government financial reports and general government sector financial reports.

In addition, further requirements specific to the public sector are set out in:

 AASB 1050 Administered Items

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  AASB 1051 Land Under Roads
 AASB 1052 Disaggregated Disclosures.
15.17 The benefits of accrual accounting in the public sector include:

 enhancing and extending public and parliamentary accountability by disclosing the full cost of
services provided by the public sector and the resources used to provide those services

 assisting decision making by promoting a management culture focused on the effective and
efficient deployment of resources and the achievement of outputs, and not just the inputs
consumed in delivering services

 improving performance monitoring

 enabling intergenerational comparisons by allowing judgments as to whether the current

generation has added to or reduced the net worth of the state for future generations

 assisting understanding of public sector assets and liabilities.

15.18 (Easy)

Public sector auditors carry out their duties in accordance with an audit mandate, which specifies the
type of assurance engagement to be conducted, the entity or activity to be audited and the powers and
responsibilities of the auditor. Audit mandates in the public sector are usually specified in legislation.

15.19 (Medium)

(a) ASA 210.11 (ISA 210.11) states that if the law or regulation prescribes the terms of the audit
engagement in sufficient detail, the auditor need not record the terms of the audit in a written
agreement. However, they must record the fact that such a law or regulation applies, and that
management acknowledges and understands its responsibilities. This means that management must
sign the acceptance of the terms of the audit engagement.

(b) As the auditor is compelled to accept the audit by law, the restrictions outlined in ASA 210.8 (ISA
210.8) regarding not accepting the audit do not apply. The Australian auditing standards do not
override law or regulation in such matters. As per ASA 210.20 (ISA 210.20), where management
will not acknowledge its responsibilities or agree to provide the written representations, the auditor
will be unable to obtain sufficient appropriate audit evidence. In cases where the auditor is required
to accept the audit engagement, the auditor may need to explain to management the importance of
these matters and their implications for the auditor’s report.

15.20 (Easy)

ASAE 3500.16 defines efficiency as the minimisation of inputs employed to deliver the intended
outputs in terms of quality, quantity and timing.

It is essentially a resource use concept. Examples of efficiency audits involve determining whether the
entity has:

 prevented idleness and overstaffing

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  prevented duplication of effort by employees.

An example of improved efficiency is using less coal for the same amount of electricity.

ASAE 3500.16 defines effectiveness as the extent to which the intended objectives at a program or
entity level are achieved. It focuses on the results or outcomes of resource use and organisational
operations. Therefore, effectiveness is ends oriented rather than means oriented. Examples of
effectiveness engagements are:

 an engagement to determine whether an entity has achieved its objective

 an analysis of the relevance of the entity’s activities to its objectives.

An example of improved effectiveness is a reduction in the incidence of disease through a preventive

health program.

15.21 (Easy)

Audit Performance assertions to be Explanation

criterion tested

1. Efficiency If the Department has clear grant program guidelines

and criteria, the Department will optimise the output
from the pool of grant program funding.

2. Effectiveness If the grant program aligns to the core business of the

Department, the grant program will contribute to the
achievement of the Department’s objectives.

3. Efficiency If the Department follows grant program guidelines and

criteria in assessing grant proposals, the Department
will select those grant proposals that optimise the
output from the pool of grant program funding.

4. Effectiveness If the distribution of grants is significantly skewed

based on political and regional characteristics, there is a
risk that the overall objectives of the Department (to
benefit all of South Australia) will not be achieved.

5. Effectiveness If the Department ensures grant funding is used for the

intended purpose, the Department will maximise the
achievement of the program’s objectives.

6. Effectiveness If the Department evaluates the grant program, the

Department will ensure the program continues to
contribute to achievement of the Department’s
objectives.

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15.22 (Medium)

Economy refers to the cost of resources, thus a review of financial information to determine if budget
had been met would usually fall within this category.

Efficiency refers to the use of resources. That is, it attempts to determine the amount of resources
consumed in providing output. The financial information could be used to monitor efficiency if costs
and use were compared to the output produced by the Department. However, meeting budget by itself
does not necessarily mean that the Department has been efficient, depending on how the budget was
set.

Effectiveness refers to the achievement of the objectives of the Department. Unless the key objective
of the Department is to meet budget, review of financial information is unlikely to assist with
monitoring effectiveness. Objectives of departments, such as the Department of Transport, are
usually specified in non-financial terms, such as improvements in infrastructure, increased
satisfaction with services and so on. Often, owing to fiscal constraints placed on departments,
department managers can lose sight of the objective of the Department and focus solely on costs.
Such a procedure is not consistent with monitoring effectiveness.

15.23 (Medium)

(a) The Auditor-General’s audit is assessing the effectiveness assertion. Government entered into the
arrangement to secure a high-quality, well-maintained facility and the engagement will assess how
well the Queensland Government is managing the handover to ensure the terminal is in a satisfactory
condition (i.e. meets the objective of being well maintained).

(b) The two sources to which the Auditor-General can refer are:

 the Queensland Government’s ‘PFP Guidelines’

 the UK Highway Department’s ‘Maintenance Risk Reduction Terms’.

(c) The project deed between Australian Air and the Queensland Government did not contain terms
specifying that a detailed inspection take place five years before the handover date, as per the UK
Highway Department’s ‘Maintenance Risk Reduction Terms’. This provides the evidence that the
relevant assessment criteria will not be met for this aspect of the project and so the handover will not
be well managed.

(d) Based on (c) above, the Auditor-General should include a modified conclusion in the report.

15.24 (Medium)

Criteria (a) Suitability (b) Performance assertion addressed

1. Cannot be used, as ‘operating as Effectiveness—satisfactory operation

expected’ may be subject to addresses the objectives
different interpretations; thus,

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 understandability is compromised

2. Cannot be used, as ‘good’ may Effectiveness—good decision relates to

lead to bias; thus, neutrality is whether objectives are being met
compromised

3. Can be used, as it is reliable, Economy—the aim of a tendering process

neutral, understandable, relevant is to obtain appropriate quality and
and complete quantity of resources at the appropriate
times and at the lowest cost

4. Can be used, as it is reliable, Effectiveness—reviews will ensure

neutral, understandable, relevant objectives continue to be fulfilled
and complete

5. Cannot be used, as ‘recycling’ Efficiency—making use of waste is part

does not appear to be part of the of optimising inputs and outputs
catering objectives; thus,
relevance is compromised

6. Cannot be used, as ‘taste better’ Effectiveness—improving the taste was

may be hard to consistently one of the objectives
measure; thus, reliability is
compromised

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15.25 (Medium)

(a) A performance engagement could assist Peter Tan by:

 establishing in written form exactly what procedures are currently used

 providing industry and/or best-practice data with which to compare RDP’s performance

 objectively reporting on performance without any of the inherent biases that would exist in an
internally generated report

 establishing performance criteria

 commenting on the economy, efficiency and effectiveness of current processes and

recommending improvements

 performing a cost/benefit analysis on alternative solutions, and recommending a solution to best

meet the client’s needs.

(b) Key information includes:

 how materiality is to be applied to the engagement (this might be established in conjunction with
the client once the terms of the engagement are known)

 what information is available to help establish appropriate criteria for the audit (in order to
establish where the purchasing process is ‘flawed’ it will be necessary to establish some kind of
benchmarks to use for comparison)

 the evidence that is likely to be available; for example, whether current procedures are
documented, and how easy it will be to obtain accurate information about the purchasing process
from the client’s staff

 what time period the engagement will cover; for example, whether the client wants procedures
observed over a number of months or whether they just want a snapshot.

(c) ASAE 3500.16 defines criteria for a performance engagement as the benchmarks used to measure or
evaluate the underlying subject matter, which in a performance engagement is the activity.

Suitable criteria generally are discussed at ASAE 3000.24 (ISAE 3000.24); suitable criteria have the
characteristics of relevance, completeness, reliability, neutrality and understandability.

To arrive at suitable criteria, the assurance practitioner could:

 obtain information from industry associations (both here and overseas)

 obtain relevant data from bodies such as the Australian Bureau of Statistics and the National
Food Authority

 research any relevant TAFE college courses to see how ordering and stock management is taught
to people studying in related industries

 obtain any publicly available information from competitors and suppliers

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  draw on their own experience, if they have performed a similar audit for another client.

15.26 (Medium)

(b) The key assertion is effectiveness. Effectiveness means the achievement of objectives or other
intended effects of activities at a program or entity level. The audit assesses whether the
amalgamation realised intended benefits, that is, achieved the objective of amalgamation.

(c) The Auditor-General has already identified that a number of actions need to take place for an
amalgamation to be successful, as follows:

 Objectives and benefits of amalgamation are clearly defined.

 Plans and budgets are clearly defined.

 Staff members who are accountable for a successful amalgamation are identified.

(d) Adverse. The ERA has undertaken none of the actions that defined a well-planned amalgamation.
This is significant, and suggests that an opinion more severe than a qualified opinion should be
issued.

15.27 (Easy)

(a) The specified criterion was whether management has implemented good internal controls over cash
management procedures. It is not a suitable criterion.

(b) The criterion is not suitable because:

 it is not complete—there is not sufficient information for the assurance practitioner to form a
view (e.g. there is no time period covered by the criterion)

 it is not understandable or reliable—the adjective ‘good’ is vague and undefined and therefore
the criterion could be subject to significantly different interpretations. This does not allow for
reasonably consistent evaluation of the subject matter.

15.28 (Easy)

The Auditor-General will check compliance with the Medical Equipment Procurement Guidelines, as
it is a requirement of the funding arrangement that the entity comply with these requirements.

15.29 (Medium)

(a) Two procedures that could be used to detect non-compliance with section 232 of Firstland’s Mental
Health Act 1994 are as follows.

 Sight that there is a separate bank (or building society or credit union) account established for
the:

o Patients’ Trust Fund

o Patients’ Amenities Account

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 o interest account.

 Sight approval for the accounts by the treasurer.

(b) Two procedures that could be used to detect non-compliance with section 233 of Firstland’s Mental
Health Act 1994 are as follows.

 Select a number of receipts for a patient from the receipt book, and ensure that the amounts
shown were banked to the Patients’ Trust Fund bank account and entered into the record of that
patient’s account.

 Select a number of withdrawals from a patient’s account and trace them back to supporting
documentation, to ensure that the amount drawn was used for the benefit, use or enjoyment of
that patient.

15.30 (Medium)

(a) In accordance with ASAE 3100.15, compliance engagements may provide either reasonable or
limited assurance.

(b)

Legislative Procedure
section

Section 28 Sight copy of advertisement appearing in major newspaper and on the New State
Government’s recruitment website

Section 32 Sight documents prepared by the selection committee that demonstrate that each
application received was assessed against the set merit-based criteria

Section 37 Sight the department head’s approval and confirm that the approved applicant was from
the pool of applicants considered by the selection committee

Section 43 Where the department head did not appoint the selection committee’s recommended
applicant, sight the written report provided by the department head to the selection
committee, ensuring that:

 the written report was sent prior to the department head’s approval under section 37

 the written report details the reasons for not appointing the selection committee’s
recommended applicant.

Also ensure that the department head received acknowledgment of the written report
from all selection committee members prior to the department head’s approval under
section 37

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