Exam focus
This syllabus area is only relevant to students sitting the International variant of the syllabus. The concepts covered in this are very similar to the concepts covered in the on social and environmental .
1 Public sector audit requirements
Public sector audit requirements
Public sector organisations are subject to greater regulation and requirements than profit making organisations due to the fact that they are funded by taxpayer money.
There are 2 types of audit that must be performed for public sector organisations:
- Financial statement audit
- Performance audit.
2 Performance audit
Performance audits aim to provide management with assurance and advice regarding the effective functioning of its operational activities.
A performance audit uses auditing skills (planning & risk assessment, gathering sufficient appropriate , ) and applying them to activities of the organisation that an external auditor of the financial statements wouldn’t normally consider.
Performance audits may include
- Performance information
- Value for money – economy, efficiency and effectiveness of operations
- Operational audits.
3 Performance information
Performance information is information published by public sector bodies regarding their objectives and the achievement of those objectives.
This information should have the same qualitative characteristics of general purpose financial reports such as relevance, completeness, reliability, neutrality, understandability, timeliness, validity and accuracy.
The external auditor may have a responsibility to report on this information to the users of such information.
Performance measures for public sector bodies
Hospital Performance Measures
Reduce number of medical errors
Reduce number of cases of MRSA (a bacterium responsible for causing infections particularly prevalent in hospitals)
Reduce waiting times for operations
Improve satisfaction with hospital food Decrease mortality rates.
Local Council Performance Indicators
% of streets that have unacceptable levels of litter on them to be 7% or less
% residents satisfied with the local environment to be 79% or above
At least 200 dwellings improved by the actions of the council
To have no more than 45 households living in temporary accommodation
At least 57% of bids for external finance/grant applications to be approved.
Police Performance Measures
Reduce number of priority crimes e.g. burglary, theft of cars by 18%
Increase serious violence detection rates by 68%
Reduce number of anti-social behaviour incidents by 40% Reduce reoffending rates by 50%
Increase public satisfaction to 80%.
Performance measures such as these are important to various stakeholder groups for example:
The government who want to see that the money they provide to the relevant departments is being used effectively.
The users of the services to assess how well their police force/hospital/council is performing in comparison with others.
Potential users of the services e.g. where there is a choice of hospital to use, the patient may look at this information to decide which hospital at which to have their treatment.
4 Planning an audit of performance information
At the planning stage the auditor will:
Obtain an understanding of the information to be reported on including how it is collected, aggregated, processes, systems and controls.
Make enquiries with management and staff to obtain an understanding of the data and how it is processed and reported.
Establish materiality (see below).
Examine the processes, systems and controls in place to collect, aggregate and report the performance information.
Materiality for non-financial information
Materiality for non-financial information is just as important as for financial information. For example if the entity is that a target has been met when it hasn’t this will affect the penalties faced.
For performance information such as mortality rates for a hospital, the indicator is highly sensitive and therefore material.
Setting materiality for non-financial information is more difficult to apply as compared with financial information and there is a risk that different assurance providers would reach different conclusions. As a result, this will undermine the credibility of the report.
One way of overcoming this issue is to disclose the materiality level used in the assurance report. Where performance measures apply across a variety of public bodies, a consistent approach should be adopted.
5 Procedures
Procedures to gather will be the same as for a normal audit:
Inspection of the supporting documentation for the information.
Enquiry of management and other personnel within the organisation.
Perform analytical procedures on the information such as comparison with prior year or other organisations of a similar size.
Obtain written representation from management regarding the accuracy and completeness of the information.
Recalculation of amounts included in the performance information.
Audit procedures
Following on from the illustration above, below are some procedures that could be performed to obtain over the hospital performance measures.
Hospital performance
measure
Procedures
Reduce number of medical errors
Enquire of hospital management what the definition of a medical error is.
Inspect Department of Health
publication to confirm management’s
understanding of the definition.
Inspect hospital records and board
minutes to confirm the number of
medical errors.
Reduce number of cases of MRSA and C-Diff
Inspect hospital records of the number of cases of MRSA/C-Diff.
Compare with prior years and re-
calculate the % change.
Improve satisfaction with hospital food
Review patient feedback questionnaires regarding hospital food.
Recalculate the average score
generated from the feedback and
compare with prior years.
Decrease mortality rates
Inspect hospital records of the number of deaths.
Review board minutes for of
any unrecorded deaths.
Compare with prior year and re-
calculate the % change.
Reports on performance information may be in the form of reasonable assurance or limited assurance.
A reasonable assurance report would express the conclusion positively e.g. ‘In our opinion the number of deaths reported by the hospital is fairly stated’.
A limited assurance report would express the conclusion negatively
e.g. ‘Nothing has come to our attention that causes us to believe that the number of deaths reported by the hospital is not fairly stated.
The assurance report will contain the usual elements of an assurance report:
Title
Addressee
Introductory paragraph identifying the subject matter – the performance information being reported on
Scope including the applicable standards and guidance followed e.g. ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial Statements
Respective responsibilities of management and the assurance provider Inherent limitations of the report
Summary of the work performed
Conclusion based on the work performed Signature of the assurance provider
Date.
7 Usefulness, measurability and reliability
Usefulness
Performance information is now more commonplace with the introduction of government targets, league tables and measures for public sector organisations to demonstrate accountability to the taxpayer.
This information is reported to the relevant regulatory authority but may also be published on the organisation’s website and included in their annual report.
Users of the information are able to assess the performance of government departments or to help make choices such as which hospital to choose for treatment.
Measurability
Some measures may be subjective in terms of definition and as a result may be easily manipulated by management in order to ensure they are being seen to achieve the target.
This may lead the way for some organisations to include measures which are not relevant to their main strategic aims but which have been included to make it appear as though the organisation has achieved something.
There is a risk that organisations are deliberately vague when composing performance measures so that they can claim to have met their target.
For these reasons, measurement of the target may be difficult and therefore difficult for the auditor to prove or disprove.
Whilst there are national performance measures in place which all organisations of a particular type will need to report, each organisation can also determine their own performance objectives they wish to measure. This inconsistency means comparisons cannot be drawn between different entities and may cause confusion for users of the performance information who see that different criteria are being used to assess the same information.
Reliability
It is important that detailed criteria are developed to avoid different entities and assurance providers interpreting them differently. These criteria should be referred to in the assurance report, either via a link to the website detailing the criteria or as an appendix to the report.
Quality assurance processes within the public sector compare the assurance provider’s work and results to ensure that a level of consistency exists between the different firms and give comfort to users that the conclusions drawn would be the same irrespective of which assurance firm performed the work.
These pre-determined standards and quality assurance processes should improve reliability of the performance information.
Test your understanding 1
Suggest 3 performance measures for a government treasury department and list the audit procedures that an auditor of the performance information could perform to obtain to support the figures
reported. (6 marks)
Test your understanding 2
Explain the difference between a performance audit and an audit of
performance information. (2 marks)
| Test your understanding 1 | |||
| Performance measures | Audit procedures | ||
| Gross domestic product | Review department reports for GDP and | ||
| (GDP) per head of | population. | ||
| population | |||
| Recalculate the GDP per head of | |||
| population to verify the figure reported. | |||
| Employment rate | Review department reports for the | ||
| number of people in employment and | |||
| calculate this as a % of the working | |||
| population. | |||
| Public sector net debt as a | Review the department report for the | ||
| % of GDP | level of debt and calculate this as a % of | ||
| GDP. | |||
| These are procedures assuming a limited assurance engagement. If a | |||
| reasonable assurance engagement was being performed, tests of | |||
| controls could be performed to evaluate the systems and processes used | |||
| to collect the information. | |||
| Test your understanding 2 | |||
| Performance audit | |||
A performance audit is an audit of the operational activities of an organisation, typically with a view of assessing value for money.
Value for money is concerned with the 3 Es – economy, efficiency and effectiveness.
Economy – obtaining the lowest cost for the required level of quality. Efficiency – achieving the maximum output for the minimum input.
Effectiveness – achieving the objectives set.
In the context of a public sector organisation, value for money is concerned with stewardship of the public pound i.e. not wasting taxpayer money.
Performance information audit
Public sector organisations have targets set by the government which must be reported to assess the organisation’s performance. This is referred to as ‘performance information’.
An audit of the performance information will be concerned with obtaining that the results reported by the organisation against such targets are:
Accurate – data is recorded correctly.
Valid – data has been produced in compliance with relevant requirements.
Reliable – data has been collected using a stable process in a consistent manner over a period of time.
Complete – all relevant information has been included.
