A financial audit is a comprehensive audit of the economic and financial condition of an organization as well as verification of the reliability of information in its financial statements. External and performance audit are the two types most commonly encountered in the public sector as they allow careful assessment of the allocation of funds provided by the government. However, there are certain distinctive features of the two types of audits that make one or the other type preferable under different circumstances. This paper looks upon the challenges of performance and external audit in public sphere and discusses how the two types contribute to the compliance of public organizations with the aims outlined in the Bill of Rights.
The objective of the audit is to analyze the profitability and efficiency of the company’s core, financial and investment activities as well as its compliance with the Bill of Rights and other governmental acts. To accomplish this task, detailed study, analysis, and evaluation of the information provided in the financial statements of the organization, analysis of financial and economic activities are necessary (Hay & Cordery, 2021). The best confirmation of the reliability of the company is the conclusion of an independent auditor on the reliability of financial and accounting statements. In addition, an audit report is necessary to confirm the image and business reputation of the company when concluding contracts with governmental agencies or receiving governmental grants for certain work. Auditing activities are carried out in accordance with International Standards on Auditing (ISA), which are mandatory for audit organizations, auditors, self-regulatory organization of auditors and its employees.
The external audit of public sector organizations focuses on determining the compliance of the submitted financial information with the requirements of financial reporting standards and regulatory legal acts. The purpose of the audit of financial statements in public sector is to increase the degree of trust of prospective users. At the same time, the auditor must obtain reasonable assurance that the financial statements as a whole do not contain misstatements due to fraud or error, which further allows expressing an informed opinion and presenting the audit results. The results of external audit reflect the performance of organizations within public sector and serve as a basis for determining whether the financial resources received from the government have been used in accordance with the outlined aims and goals (Hay & Cordery, 2021). The major drawback of external audit is that it is always performed after the money has been allocated thus allowing space for corruption and fraud. Moreover, external audit is focused only on assessment and provides no recommendations for organizations to improve their results.
In the Lima Declaration of the Guiding Principles of Control, adopted by the IX Congress of the International Organization of Supreme Audit Institutions (INTOSAI), it is emphasized that there is also another type of control, which is aimed at checking how efficiently and economically public funds are spent (Cordery & Hay, 2020). Such control includes not only specific aspects of management, but also all management activities, including organizational and administrative systems. This type of audit is called performance audit.
Performance audit is usually associated with government agencies at all levels, since most government agencies receive federal funding. The goal is to evaluate the validity of the declared programs in order to determine the effectiveness of resource allocation in the light of the aims outlined in the Bills of Rights. Moreover, performance audit aims to identify whether actions, programs and institutions comply with the principles of competence and whether there are additional opportunities for their improvement (Muda et al., 2018). At the same time, ‘competence’ is often interpreted as a set of three indicators that include ‘economy’, ‘efficiency’ and ‘effectiveness’.
Economy reflects the cost side of the activity of an economic entity. In particular, management decisions are considered economical, if the necessary resources are obtained and used with minimal costs. Thus, economy is seen as an opportunity of reducing resource costs while maintaining proper quality (Sharkansky, 2019). Efficiency is understood as the ratio of the results obtained and the amount of costs to achieve them (Sharkansky, 2018). Effectiveness, in its turn, is the correspondence of costs and results to certain goals, the achievement of which is mandated by the legislative initiatives or specific state programs.
Thus, performance audit allows more flexibility than the external one, since, first of all, it assesses not only adherence of the organizations to the law and declared aims, but also evaluates efficiency and effectiveness of resource usage and allocation. Secondly, performance audit goes beyond purely evaluating functions providing recommendations as to the best ways of fulfilling governmental tasks in terms of costs and the results achieved (Parker et al., 2021). Finally, performance audit is often made in the process of the program’s implementation and not after it which allows scope for making changes before the program is finished thus enhancing its effectiveness.
Nowadays, the requirements for the quality of audit services are rising worldwide. In South Africa, measures are undertaken to implement international auditing standards, standards of professional ethics, increasing requirements for training and the role of quality control. The trend of improvement is irreversible as the profession of auditor becomes more and more demanded in the society. Audit in the public sector is one of the most important types of audit since it deals with control of money distribution and adherence to legislative initiatives. Having two types of control in this sphere – external and performance – makes the process of auditing in this sphere more transparent and allows to get reliable results.
Reference List
Cordery, C. J., & Hay, D. C. (2020). Public sector audit. Routledge. Web.
Cordery, C. J & Hay, D. C. (2021). Evidence about the value of financial statement audit in the public sector. Public Money & Management, 41(4), 304-314.
Muda, I., Erlina, I. Y., & AA, N. (2018). Performance audit and balanced scorecard perspective. International Journal of Civil Engineering and Technology, 9(5), 1321-1333. Web.
Parker, L. D., Schmitz, J., & Jacobs, K. (2021). Auditor and auditee engagement with public sector performance audit: An institutional logics perspective. Financial Accountability & Management, 37(2), 142-162.
Sharkansky, I. (2018). Audit. In Defining Public Administration. Routledge, pp. 375-381. Web.