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9 September 2014

5 th Parliament capacity building Portfolio Committee on Home Affairs Presented by: Naveen Mooloo. 9 September 2014. Reputation promise/mission. The Auditor-General of South Africa has a constitutional mandate and,

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9 September 2014

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  1. 5th Parliament capacity building Portfolio Committee on Home AffairsPresented by: Naveen Mooloo 9 September 2014

  2. Reputation promise/mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

  3. Objective of presentation To provide members of parliament with the necessary information/guidance on the role of the AGSA to enable them to effectively execute their oversight function

  4. Index Combined assurance Complimentary support mandate 2. Audit mandate and process Legislative requirements Regularity audit process AGSA audits Audit of Predetermined Objectives How to interpret and Audit Report Audit report structure Financial audit opinions Good administration 5. Briefing process

  5. Oversight

  6. Oversight model OVERSIGHT: Parliament, provincial legislature or municipal council • Identify desired impacts Assess and adjust Specify performance indicators Monitor Set targets and take corrective and allocate action resources Policy development Strategic Planning INSTITUTION National department Provincial department Municipality Public entity Municipal entity Operational planning and budgeting End-year reporting Implementation and in-year reporting

  7. Oversight legislation National Section 55(2) of the Constitution: the National Assembly must provide for mechanisms to ensure that all executive organs of state are accountable to them Legislatures Appoint Committees to Oversee on behalf of Parliament Provincial Section 114(2) of the Constitution: the Provincial Legislature must provide for mechanisms to ensure that all executive organs of state are accountable to them PC’s– overseeing the overall performance and functioning of departments Committees PAC’s– scrutiny of the financial statements of organs of State and reports of the AGSA

  8. Oversight and Accountability Model - concept Oversight Definition:Oversight entails the informal and formal, watchful, strategic and structured scrutiny exercised by legislatures in respect of the implementation of laws, the application of the budget, and the strict observance of statutes and the Constitution. In addition, and most importantly, it entails overseeing the effective management of government departments by individual members of Cabinet in pursuit of improved service delivery for the achievement of a better quality of life for all citizens. 1. 2. OVERSIGHT FUNCTIONS 3. 4.

  9. Oversight and Accountability Model - concept Accountability Definition:Accountability is the hallmark of modern democratic governance. Democracy remains clichéd if those in power cannot be held accountable in public for their acts or omissions, for their decisions, their expenditure or policies. Accountability refers to institutionalised practices of giving account of how assigned responsibilities are carried out. Accountability functions To enhance the integrity of public governance in order to safeguard government against corruption, nepotism, abuse of power and other forms of inappropriate behaviour. As an institutional arrangement, to effect democratic control. To improve performance, which will foster institutional learning and service delivery. In regard to transparency, responsiveness and answerability, to assure public confidence in government and bridge the gap between the governed and the government and ensure public confidence in government. To enable the public to judge the performance of the government by the government giving account in public.

  10. Oversight component - Portfolio committee mandate Role of Portfolio Committees (Rule 201)

  11. Support oversight – complimentary mandate Management assurance First level of assurance Oversight assurance Second level of assurance Independent assurance Third level of assurance Senior management Senior management Accounting officers/ authority Accounting officers/ authority Executive authority Coordinating / Monitoring institutions Internal audit Audit committee Oversight (portfolio committees / councils) Public accounts committee National Assembly Required assurance levels Required assurance levels Required assurance levels Extensive Extensive Extensive Extensive Extensive Extensive Extensive Extensive Extensive • Management’s assurance role • Senior management– take immediate action to address specific recommendations and adhere to financial management and internal control systems • Accounting officers/ authority– hold officials accountable on implementation of internal controls and report progress quarterly and annually • Executive authority– monitor the progress of performance and enforce accountability and consequences • Oversight’s assurance role • National Treasury/ DPSA– monitor compliance with laws and regulations and enforce appropriate action • Internal audit– follow up on management’s actions to address specific recommendations and conduct own audits on the key focus areas in the internal control environment and report on quarterly progress • Audit committee– monitor risks andthe implementation of commitments on corrective action made by management as well as quarterly progress on the action plans • Role of independent assurance • Oversight (portfolio committees)– review and monitor quarterly progress on the implementation of action plans to address deficiencies • Public accounts committee– exercise specific oversight on a regular basis on any report which it may deem necessary • National Assembly – provide independent oversight on the reliability, accuracy and credibility of National and provincial government

  12. Support oversight – complimentary mandate Figure 2 below illustrates the oversight cycle on an annual basis: The oversight cycle requires Parliament to take a long-term view of oversight in order to ensure effective oversight of sustainable delivery. The parliamentary oversight cycle provides a means through which Parliament can monitor government delivery in terms of long-term commitments, rather than focusing exclusively on annual commitments, annual planning and performance assessments. The cycle thus provides for continuity in Parliament’s oversight activities from year to year.

  13. Audit mandate and process

  14. Audit - Legislative requirements Available on Treasury website www.treasury.gov.za/legislation/pfma/circulars Also refer to AG Directive General Notice 263 of 2014 issued 2 April 2014

  15. Regularity Audit - process What is an audit in the public sector? The public sector auditor assesses the stewardship of public funds, implementation of government policies and compliance with key legislation in objective manner. The scope of the annual audit performed for each auditee is prescribed in the Public Audit Act and the general notice issued in terms thereof. It includes the following: - Providing assurance that the financial statements are free from misstatements that will affect the users of the financial statements - Reporting on the usefulness and reliability of the information in the annual performance report - Reporting on material non-compliance with key legislation - Identifying the key internal control deficiencies that should be addressed to achieve a clean audit Performance audits may also be performed to determine whether resources have been procured economically and are used effectively and efficiently. What does an audit not do? Due to the test nature and other inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some, even material, misstatements in reported information may not be detected, and the completeness and the accuracy of the information reported are not guaranteed. Due to the focus on specific areas in key legislation, the audit does not provide assurance that all applicable legislation has been complied with. Although possible fraud may be identified during the audit, this is not the main purpose of the audit. The audit does not provide assurance that service delivery has been achieved, only that the annual performance report is useful and reliable.

  16. AGSA Audits (service types & value add) Regularity Audit Audit reports The AGSA fulfils its mandate by conducting a variety of audits, such as regularity audits (financial and compliance) and the audit of reporting against predetermined objectives. We also identity root causes that drive the audit outcomes. These are then communicated to the General Conference, through the Executive Board, and the various oversight bodies, i.e. Oversight Advisory Committee, Internal Oversight Service, and Oversight bodies of international standing Financial Statement Audit Information Systems Audit The audit of financial statementsThe financial statements submitted for auditing must be free from material misstatements. Misstatements refer to incorrect or omitted information in the financial statements. Examples include the incorrect or incomplete classification of transactions, or incorrect values placed on assets, liabilities or financial obligations and commitments. The objective of an audit of financial statements is to express an audit opinion on whether the financial statements fairly present the financial position of auditees at financial year-end and the results of their operations for that financial year. • Audit of computer systems used by the public sector: - PFMA • Basic Accounting System (BAS) • PERSAL (HR management • Logis (asset management) • MFMA • System used by municipality (each different) • Focus on: • IT Governance • User access management • Security management • IT service continuity (Disaster recovery and Business continuity plans) Performed annually ISAs (International Standards of Auditing) and ISSAIs Information systems auditing standards/Guidelines

  17. AGSA Audits (service types and value add) VS Value add processes Value add processes are usually performed after inspecting the financial records of an auditee following a directive for the audit to be performed before the usual annual audit. The government may order a special audit conducted on an auditee if there is evidence that its financial affairs are not being run in accordance with proper accounting practices. Performance Audit Investigations Performance Audits – (independent auditing process to evaluate the measures instituted by management to ensure that resources have been procured economically and are used efficiently and effectively) Investigations assist and support the regulatory audit teams with the identification of fraud risks in the audit environment. The investigations team perform the following procedures: Assist with fraud risk assessments Special forensic engagements Fraud research and training, and Peer quality assurance support. Performance Audits Focus on performance while spending– the three Es •Economy •Efficiency •Effectiveness Regularity Audits Focus on finances •Financial statements •Financial management •Compliance with laws and regulations Performed when: problems are identified/requested International Standards of Supreme Audit Institutions (ISSA) 3000 and ISSAI 3001 Standards & Guidelines: Investigations

  18. AGSA Audits (service types and value add) Performance Auditing: Looking at the 3Es BEST RESOURCE BASED ON NEED BEST RESULTS USING WHAT WE HAVE GOAL REACHED = VALUE FOR MONEY SERVICE DELIVERY +

  19. AGSA Audits (service types and value add) Performance Auditing: Looking at the 3Es • Ask: what do I need, what quality do I need, when do I need it, where do I need it, how much of it do I need and where can I get all my needs met at the lowest price? • Examples of findings: • Needs assessments were not always done • Competitive bidding processes were not always followed • Contracts were open-ended in terms of cost and time • Ask: was the work done with the minimum of effort? • Examples of findings: • Projects were extended because of a lack of project management and monitoring • Payments were made in excess of the amounts approved • The document archiving system was not adequately maintained • Ask: Did we do what we set out to do? • Examples of findings: • Project objectives were not achieved, and deliverables only partially completed • Skills transfer was not always effective • Projects were not analysed to determine whether objectives were met and to determine the benefits received

  20. AGSA Audits (service types and value add) Value add processes Investigations • The Investigation Business Unit assists the regularity audit teams as follows: • Fraud risk assessments • Assist and support the regularity audit teams with the identification of fraud risks in the audit environment as required by ISA 240. • 2. Special forensic engagements • Review amongst others, the following complex audit areas to identify non-compliance with prescripts and risk of fraud and irregularities: • Supply chain management • Human resource management • Information Technology controls • Submitted financial statements • Perform investigations in exceptional cases. • 3. Fraud research and training • Perform pro-active data analysis on government payment systems, to identify fraud risks. • Provide fraud risk awareness training. • 4. Peer quality assurance support • Assist the regularity audit teams with peer reviews on procedures performed to mitigate risks identified during risk assessment process.

  21. Audit of Predetermined Objectives

  22. Regularity Audit - process THE ANNUAL AUDIT PROCESS What do auditors do? Why they do it? Risk assessment Agree terms of engagement Terms of engagement are communicated & agreed to ensure a clear understanding of responsibilities of the parties, the objectives of the audit, access to information and the reports to be provided. Plan the audit An understanding of the auditee is obtained for risk assessment purposes & an audit plan is prepared. Perform risk assessment procedures A risk assessment is performed to determine the number and type of procedures to perform. Risk response Procedures are performed to obtain evidence that the financial statements & annual performance report do not contain material misstatements and that key legislation has been complied with. Design and Perform procedures to address identified risk The report is only provided to the management of the auditee and the executive authority at the end of the audit. It details the findings from procedures performed, identifies the root causes of these findings and makes recommendations for improvement. Reporting Prepare Management Report (Not published) Prepare Audit Report (Published) The report is published in the auditees’s annual report. It informs those responsible for oversight, the public and others of material misstatements in the financial statements, material findings on the usefulness and reliability of the performance report, material non-compliance with key legislation in specific focus areas, and the deficiencies in internal control that were identified during the audit.

  23. Key concepts for Predetermined Objectives A good performance indicator ito the FMPPI chapter 3.2 should be:

  24. Key concepts for predetermined objectives continued A useful set of criteria for selecting performance targets is the "SMART" criteria ito the FMPPI chapter 3.3;

  25. How to interpret an Audit report

  26. Audit opinions four (4) Financial audit opinions financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable financial reporting framework. Regularity Audit - report Unqualifiedwith findings on compliance and PDO Qualified departures from financial reporting framework, or limitation on scope which is not so material and pervasive (unqualified opinion cannot be expressed ) Disclaimer limitation on scope is so material and pervasive the auditor has NOT been able to obtain sufficient appropriate audit evidence to form an opinion (unable to express opinion) disagreement with management regarding departures from the financial reporting framework,is so material and pervasive to AFS (qualification of the report is not adequate to disclose the misleading or incomplete nature of the AFS) Adverse

  27. Regularity Audit - report Additional Matter paragraph included in audit report: >20% of targets are not achieved

  28. Regularity Audit – Best practices Best practices on how to achieve a good administration? • Matters reported by external and internal auditors should receive timeous management attention, internal controls should address the following key areas: • Leadership • Establish a culture of honesty, ethical business practices and good governance • Exercise oversight responsibility • Ensure effective human resource practices • Implement appropriate policies and procedures • Approve and monitor the implementation of action plans to address internal control deficiencies • Approve an appropriate information technology governance framework • Financial and performance management • Ensure proper record keeping of all transactions • Maintain effective controls over daily and monthly processing and reconciling of transactions • Produce regular, accurate and complete financial and performance (service delivery) reports • Review and monitor compliance with applicable legislation • Design and implement formal controls to mitigate information technology risks • Governance • Ensure that risks are periodically identified, assessed and effectively mitigated • Maintain an adequately resourced and functioning internal audit unit • Maintain an audit committee that performs its legislated duties and promote accountability and service delivery

  29. Briefing process by the AGSA

  30. Briefing process • Reliable, accurate and complete Annual Reports by entities • AGSA review of annual reports critical in ensuring complete, reliable and accurate reporting - Oversight committees must obtain an understanding of the entity - The Annual Report of the entity must be studied prior to the briefing and hearing • - AGSA briefing of Root causes of audit outcomes • - Root causes are linked to the Key Focus Areas • Analysis and understanding of the Root causes of the audit outcomes by oversight • AGSA make recommendations to oversight in addressing the deficiencies reported • Oversight committees issues their findings and must make recommendations which address the deficiencies identified by way of resolutions • Recommendations must have milestones and conform to the “SMART” principles • Send reports to executives for implementation. • Entities must compile an action plan to address the deficiencies • Action plans must have deliverable milestones and also conform to the “SMART” principles • Progress on implementation of action plan and measures to improve the audit outcomes must be reported to oversight for monitoring. Reporting by departments and entities Understanding Mandate of entities by Oversight Actual Briefing process Recommend-ations by oversight committees Action plans by entities and progress monitoring EFFECTIVE BRIEFING PROCESS

  31. Annual Report including Audit Report & Performance Report State of the Nation Address/Budget speeches AGSA Briefing Notes TOOLS • Estimates of National Expenditure Accounting officer and audit committee ’s Reports Briefing process

  32. Acts applicable

  33. How to interpret an Audit report - Example Report

  34. DHA audit outcomes to 2012/13

  35. Audit opinion history

  36. Thank You

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