The principles of "Good Public Auditing Practice"

New Guideline from Rigsrevisionen

Rigsrevisionen has produced and published a guideline specifying the requirements and conditions of the principles of “good public auditing practice”. Rigsrevisionen has published the guideline in order to establish a set of standards for the professional services which auditors have to meet when they audit an area covered by these principles.

These principles have been made because the audit of public accounts is carried out by Rigsrevisionen, municipal auditors and private auditors, and the audit is part of the state accounts. There is a great need for common principles particularly within the area of public subsidy. Such subsidies are a very large part of the Danish state accounts. Subsidies, in particular for social security, pensions, and unemployment relief, are much higher than the amount used for the state’s current and investment expenditure.

Common framework of reference

Very often, audits of local accounts are carried out by local private auditors or municipal auditing bodies. Therefore it is important that all parties, the ministries, agencies, citizens and auditors, apply the same principles of “good public auditing practice”. The auditing task includes financial and performance audit in accordance with good public auditing practice. When drawing up the principles, Rigsrevisionen has, in addition to Danish legislation, taken its point of departure from INTOSAI’s auditing standards and from the “European guidelines for using INTOSAI auditing standards”. The European guidelines have been worked out among the Supreme Audit Institutions in the European Union and the European Court of Auditors. The principles of good public auditing practice were thoroughly discussed with Rigsrevisionen's professional partners of co-operation, the national auditor associations and the municipal auditors.

The principles of “good public auditing practice” set out both the requirements and the conditions which form the basis for the conducting of the audit, and for the content of the audit, of the state accounts, public agencies, and accounts of agencies where the state has given subsidies or guarantees. In accordance with the Act of the Auditor General, Rigsrevisionen audits the state accounts and accounts of agencies where the state has an interest similar to that of an owner. Accounts of agencies that are partially financed by the state by means of subsidies, guarantees or loans are audited by private or municipal auditors. However, Rigsrevisionen can carry out a review of the accounts and of the audit that has taken place. The legal status of the audited units is of great importance in relation to how the principles of good public auditing practice are to be employed. The auditor must always ensure that the accounts are correct, in other words that the accounts have no significant errors or deficiencies, and that the actions taken are in accordance with appropriations and laws. This legal-critical audit is primarily of importance when carrying out public auditing.

Distribution of responsibility between management and auditor

It is a significant requirement for good public auditing practice that the responsibility between the management and the auditor is well defined. The point of departure is that the management is responsible for and in charge of preparing the accounts, but it is the auditor’s responsibility to make an assessment of how the management of an agency has managed this task.

It is the responsibility of the management that goals, strategies and plans of action are available, and that performance follow-up is carried out. The management must ensure that sound financial considerations have been taken into account. It is the responsibility of the management to establish appropriate administrative systems, and an appropriate internal control system. Management includes performance, activity, resources and financial management. In other words, an administration should be organised to include the necessary financial management, accounting systems and internal controls, in order that accurate and reliable accounts may be presented, documenting that the funds have been applied in accordance with the requirements, and that the results that were sought have been achieved. The management must also report by way of accounts, reports and so forth.

Taking this into consideration, it is the auditor’s responsibility to plan and carry out an audit, and to review and assess whether the management has complied with the aforementioned obligations to ensure a reliable and financially sound account. The task of the auditor is hereafter to plan, carry out the audit, and to report accordingly.

The audit is divided into financial audit and performance audit.

Financial Audit

When carrying out a financial audit the auditor verifies the accuracy of the accounts (in other words, that the accounts have no significant errors and deficiencies) and verifies whether the actions taken are in accordance with appropriations and laws.

The goal of a financial audit is to obtain reasonable assurance of the quality of the individual organisation’s accounts and of the internal control system. The auditor must plan the audit in order to ensure a balance between quality and an economic way of carrying out the audit. The design of the auditor’s strategy will depend on an assessment of the risk of significant errors or deficiencies in the accounts. If the auditor has previously established that the system’s internal controls are working satisfactorily, and if the auditor is convinced that no material changes have been implemented in the system compared to earlier years, then the auditor does not have to test the system every year. All material systems and internal controls should be reviewed and tested within a reasonable fixed number of years. The goals, scope, and expected results of the audit are established in the audit plan.

Systems audit is applied as the aggregated audit principle, though combined in varying degrees with substantive audit in accordance with the auditor’s assessment of materiality and risk. “Good public auditing practice” also includes conditions for the documentation of audit proof and of quality management.

Performance audit

The aim of performance audit is:

• to assess whether sound financial considerations have been taken into account;
• to assess the validity and reliability of indicators on efficiency and effectiveness in the reports of the agencies;
• to assess whether the organisation does enough to identify areas of improvement; and
• to assess whether sound public financial management has been applied.

When making performance audit examinations the following may be examined:

a. the extent to which the agency has actually been economic, efficient and effective;

b. whether the agencies’ systems ensure that sound financial considerations have been taken into account when administering the funds.

Performance audit work will include an examination of whether the agency has established an appropriate steering system which contributes to making the agency economic, efficient, and effective. This kind of examination will often be a financial management examination. Under item a the auditor will examine the actual efficiency and effectiveness, whereas under item b the auditor will examine the steering systems.

In relation to the steering systems, goals, strategies and actual performance targets have to be established, supplying information on whether the goals of the organisation are achieved using the planned amount of resources, and the reliability of information systems including among other a time registration system. Furthermore, a reporting system must also be established conveying to the public, the appropriation authority and the subsidy donor, what has been achieved and with what efficiency and effectiveness.

It is important that this kind of information is well balanced so that it focuses primarily on economy, efficiency and effectiveness, as well as on quality and service.

Performance audit may be carried out as an integrated part of financial audit, or concurrently with the financial audit of the annual accounts, or it may be organised as a separate examination of a public expenditure programme.

When making examinations of public expenditure programmes, an analysis will be made of an audit area without any necessary connection with the annual accounts. A preliminary study is made, resulting in a presentation which includes an analysis of financial, judicial and management related matters. The auditor shall, in accordance with the principles of good public auditing practice, make a written report. The report must set out its purpose, methodology, basis of assessment, and results of the examination. The conclusions and any recommendations must be supported by evidence and documented. In the principles of good public auditing practice a lot of emphasis is placed on the viewpoints of the audited agency - any comments from the audited agency are faithfully incorporated in the report and the reporting should clearly present the questions and problems which the decision makers should act on.

The Guideline’s effect on the audit of subsidies

After completing the principles of good public auditing practice, Rigsrevisionen has worked out recommendations for the standard audit instructions for all ministries. This was carried out in co-operation with the national professional audit bodies. The instructions are based on the principles of good public auditing practice. When auditing subsidies an additional factor is included, namely the organisation providing the subsidy (the donor of subsidies). The donor of subsidies is responsible for the goals and results of the subsidy scheme, and for ensuring that the intended legislative effect is obtained. Therefore the donor is responsible for making operational, legislatively established goals and for outlining the basic criteria of success for the whole area of subsidy.

For the individual subsidy, the donor must establish tangible performance goals and conditions for the reporting by the beneficiary of the subsidy on performance targets. The management is responsible for administering the tasks and for presenting the accounts. The standard audit instruction’s point of departure is therefore that the auditor may base his work on the information which has been produced by the subsidy beneficiary on request of the subsidy donor. In this way, the subsidy donor may best and most economically obtain confirmation that the long-term effects of a subsidy scheme have been achieved.

As mentioned, the European guidelines for using INTOSAI’s auditing standards have been a source of inspiration when drawing up the principles of good public auditing practice. The principles may thus be viewed as an example of the fact that the European guidelines and the auditing standards of INTOSAI are made operational and useful in relation to both state audit and the audit of individual accounts of agencies, subsidy beneficiaries and so on.