Public Audit Forum - What public sector bodies can expect from their by rtu18834

VIEWS: 21 PAGES: 39

									        Public Audit Forum




  What Public Sector Bodies
can expect from their Auditors

            MARCH 2000
                         THE PUBLIC AUDIT FORUM


Public sector audit has a key part to play in safeguarding public money,
ensuring proper accountability, upholding proper standards of conduct
in public services and helping public services achieve value for money.


The Public Audit Forum was established in 1998 by the four national audit
agencies, that is the National Audit Office (NAO), the Northern Ireland Audit
Office (NIAO), the Audit Commission for Local Authorities and the National
Health Service in England and Wales, and the Accounts Commission for
Scotland. It brings together the audit agencies on a purely advisory basis to
provide a focus for developmental thinking about public audit. It has a remit to
build on the existing co-operation between the national audit agencies to
enhance the efficiency and effectiveness of public audit, to provide a strategic
focus on issues cutting across their work and to help develop common
standards for public audit.


A key element in the Forum is a consultative forum which draws on the
experience and expertise of public auditors, the bodies they audit, the auditing
profession and the wider community. The membership is set out overleaf.


The Public Audit Forum has published the following reports to date:

u      The Principles of Public Audit – a statement by the Public Audit Forum
       (October 1998)

u      The Service which Auditees can Expect from Public Auditors – a
       consultation document (October 1998)

u      Implications for Audit of the Modernising Government Agenda – a
       paper by the Public Audit Forum (April 1999)

u      What public sector bodies can expect from their auditors - a
       consultation paper (June 1999)


This report, past publications and other information about the Public Audit
Forum, are available on its web site at www.public-audit-forum.gov.uk.


The Secretary is David Corner, who can be contacted on 0171 798 7529 at
the National Audit Office, 157-197 Buckingham Palace Road, London SW1W
9SP.
   MEMBERSHIP OF THE CONSULTATIVE FORUM OF THE
               PUBLIC AUDIT FORUM
                                  Robert Le Marechal
                           Deputy Comptroller and Auditor General
                              National Audit Office (Chairman)

                                        Bryan Avery
                                        Cabinet Office

                                      John Ballard
                  Department of the Environment, Transport and the Regions

                                       Tony Bingham
                                   PricewaterhouseCoopers

                                      Robert Black
                              Accounts Commission for Scotland

                                     Dr Peter Collings
                                      Scottish Executive

                                      John Dowdall
                                 Northern Ireland Audit Office

                                        Martin Evans
The Audit Commission for Local Authorities and the National Health Service in England and Wales

                             Paul Flatters (until October 1999)
                                  Consumers Association

                                      Carole Hudson
                                Local Government Association

                                       Lew Hughes
                                   Auditing Practices Board

                                        Gilbert Lloyd
                                            KPMG

                                    Caroline Mawhood
                                     National Audit Office

                                   Andrew McCormick
                                   Northern Ireland Office

                                      Jamie Mortimer
                                        HM Treasury

                                       David Parker
                                     Department of Health

                                        David Prince
                                         District Audit

                                      David Richards
                                 National Assembly for Wales

                                       Peter Shaw
                          Department for Education and Employment

                                         Vernon Sore
                    Chartered Institute of Public Finance and Accountancy

                                      Eugene Sullivan
                                     RSM Robson Rhodes

                              Albert Tait (until January 2000)
                            Convention of Scottish Local Authorities

                                    Stephen Thornton
                                     NHS Confederation

                                       David Corner
                               National Audit Office (Secretary)
.   Foreword

    In October 1998, the Public Audit Forum endorsed a statement setting out the fundamental
    principles which we believe underpin public audit in the United Kingdom (Annex A). In doing so we
    recognised that public auditors are accountable for their performance and duty bound to
    undertake their work in a professional, objective and cost-effective manner and with due regard to
    the needs of the public sector bodies they audit.


    At this time, we set out our intention to produce a further paper on the service that public sector
    bodies can expect from their auditors and issued a short consultation paper setting out the terms
    of reference for this work and inviting comments. The consultative forum considered the comments
    it received and prepared a further full consultation paper and published it in June 1999.


    This final paper has been prepared by the consultative forum, which examined the important issues
    involved and took into account the responses to consultation. The paper focuses on the essentials
    of the service provided by auditors in the public sector. Issues covered include: achieving mutual
    understanding in the planning process; relying on and working with others; reporting in an
    appropriate, fair and timely manner; adding value; and observing professional ethics.


    This paper is aimed at all those involved in public sector audit: senior management, board
    members, audit committees and their equivalents, and external and internal auditors. The term
    public sector auditor used in this paper should be taken to mean all auditors of public sector
    bodies. It applies not only to the national audit agencies but also to supplier firms.


    This paper is not a formal standard but sets out the broad levels of service audited bodies can
    expect when they have met their own corresponding obligations. These expectations should not
    change considerably for the foreseeable future. Therefore, this document is not subject to a system
    of formal regular update but the Public Audit Forum will keep it under review.


    We consider that this paper should be of particular interest both to the management of bodies
    across the public sector and to all those who undertake audits in the public sector. We are
    therefore pleased to endorse this paper.




     Sir John Bourn Comptroller and Auditor General, National Audit Office, 157-197 Buckingham Palace Road LONDON SW1W 9SP
     Andrew Foster Controller of Audit, The Audit Commission for Local Authorities and the National Health Service in
     England and Wales, 1 Vincent Square, LONDON SW1P 2PN
     Bob Black Controller of Audit Accounts Commission for Scotland 18 George Street EDINBURGH EH2 2QJ
     John Dowdall Comptroller and Auditor General Northern Ireland Audit Office106 University Street BELFAST BT7 1UE




                                                                                                                             1
.        Executive Summary

         Introduction

    1.   Public sector audit plays an essential role in maintaining confidence in the stewardship of public
         funds and in those to whom the responsibility of stewardship is entrusted. Public sector auditors
         are of course themselves accountable for their performance and are duty bound to undertake their
         work in a professional, objective and cost-effective manner and with due regard to the needs of
         the organisations they audit. Their primary audiences are those (such as Parliament, local
         electorates and taxpayers) on whose behalf they carry out their statutory and other functions.
         However, as well as addressing these audiences, it is in everyone’s interest that public auditors
         work with the grain of what public bodies are seeking to achieve and that they seek to add value.


    2.   This paper discusses the service that public sector bodies can expect from their auditors under the
         headings: achieving mutual understanding in the planning process; making use of the work of
         others; reporting in an appropriate, fair and timely manner; adding value; and observing
         professional ethics.


         Achieving mutual understanding in the planning process

    3.   Public sector bodies and their auditors need to understand thoroughly each others’ roles, and
         work together to facilitate effective audit arrangements. Public sector auditors should plan their
         work considerately; and bodies subject to audit should comply fully with the requirements of public
         accountability and be open in their dealings with the auditor. These considerations apply to all
         types of audit: the audit of financial statements, examining and reporting on the risks to financial
         systems, regularity, propriety and value for money.


    4.   Public sector auditors should:

         u    plan each audit on a thorough understanding of the audited business, and the environment
              in which it operates, as it relates to the audit assignment;

         u    be open with the public sector bodies that they audit about their overall audit approach and
              how this will be applied in the context of each organisation;

         u    fully consider the needs of the public sector bodies they audit in respect of the timing of the
              audit and jointly agree a reasonable timetable for submission of good quality accounts and
              completion of the audit;

         u    seek to minimise changes in key audit personnel from one year to the next in order to allow
              audit staff to develop a sound business understanding and deliver the full potential benefit of
              their accumulated knowledge and experience;




    2
     u    ensure their work is cost-effective by focusing on areas where they assess that the risks of
          error, fraud or other irregularity are greatest and by adopting audit approaches designed to
          ensure that they gather sufficient, appropriate evidence to support their audit opinion in the
          most cost-effective and timely manner, having regard to the impact of audit on the audited
          body;

     u    be accessible throughout the year to the public sector bodies that they audit.


5.   This approach will work best when public bodies are fully open with auditors with their
     management information and plans, and where they facilitate the collection of evidence by
     auditors and co-operation with their own internal, or appointed, auditors. It is the responsibility of
     public sector bodies to maintain proper accounting records, prepare financial statements to
     reasonable timetables agreed with their auditors, safeguard assets, ensure the compliance of
     transactions with statutory and other authorities, take reasonable steps to prevent and detect fraud
     and other irregularities, and manage their affairs economically, efficiently and effectively.


     Making use of the work of others

6.   It is common for the audit of some public bodies, for example government departments, to need
     to draw on evidence from other bodies in the public, private or voluntary sectors which have
     received public grants or which undertake functions on behalf of the body being audited. It would
     be neither cost-effective nor fair and reasonable for all the bodies in the spending chain, from the
     funding to the delivery of services, to be constantly subjected to several layers of audit, each
     addressing its own reporting requirements. In such circumstances, efficiency requires that public
     auditors seek to maximise, both in their audit of financial statements and their value for money
     work, the use they make of the work of others such as internal auditors, regulators and external
     auditors of related bodies. The work carried out under various quality schemes can also be
     relevant. In using the work of others, public auditors must nevertheless ensure that what they do
     continues to be consistent with the duties placed on them by professional auditing standards. As
     discussed in the Auditing Practices Board’s guidance in Practice Note 10, sometimes public
     auditors of central government will require direct access to entities funded by the bodies they are
     auditing so as to perform audit procedures.


7.   Public sector auditors should:

     u    wherever they judge it possible, work closely with internal auditors;

     u    seek to use the work of the auditors of related entities, such as subsidiaries, joint ventures or
          other public bodies, where financial information about these other entities is included in the
          financial statements of public sector bodies which they audit, wherever possible and to the
          extent that the scope of the work of these auditors is sufficient for their purposes;

     u    explore ways to work together across the audit range, from financial audit to value for money
          examinations;




                                                                                                              3
     u    make use of the work of regulatory and inspection bodies, wherever it is consistent with
          professional auditing standards to do so; and

     u    seek to work closely with the European Court of Auditors to minimise the audit burden on UK
          public sector bodies so far as this is consistent with the differing statutory regimes that govern
          the work of the national audit agencies.


8.   Public sector auditors will be able to make the most extensive use of the work of internal auditors
     where there is mutual understanding of the important and different role of internal auditors and
     the specific ways in which their work can be of value to external audit, and a willingness to adjust
     work programmes where appropriate and feasible. Public sector management has an important
     role to play in promoting effective co-operation of this nature. Similarly, government departments
     have an important role to play in encouraging the regulators and inspectors for which they are
     responsible to co-ordinate their activities with the work of public auditors.


     Reporting in an appropriate, fair and timely manner

9.   For public audit to have the most beneficial impact, it is essential that public auditors report the
     results of their work promptly – whether this is financial audit or value for money work – not just to
     elected and appointed representatives but also to the management of the bodies subject to audit.
     Reports to audited bodies provide further opportunities for auditors to add value and thereby
     directly help to improve management and control within public sector bodies. It is important that
     public bodies and auditors set realistic timetables for the discussion and finalisation of reports, and
     that they keep to these timetables.


10. Public sector auditors should:

     u    seek to ensure that, from the first draft, reports intended for publication are objective,
          balanced in content and tone, reliable, clear, persuasive and timely;

     u    report in a timely manner to the appropriate audience and provide feedback to audited
          bodies throughout the audit process; and

     u    show public sector bodies drafts of reports about them intended for publication, and give
          them the opportunity to agree the facts set out and comment on the opinions reached.


     Adding Value

11. The primary value of the audit of financial statements arises from the assurance provided to the
     taxpayer, Parliament and other representatives as the result of an objective and rigorous review.
     Financial audit also directly provides value by monitoring and improving financial management.
     Auditors will, however, often provide additional value when they note opportunities for
     cost-effective improvements arising from their




4
      examinations and draw these to the attention of management. And the execution of value for
      money studies is likely to present greater scope for adding value. Public auditors should:

      u    seek, wherever possible, to promote better management and decision-taking, and thus a
           more effective use of taxpayers’ resources, for example, through highlighting and
           disseminating good practice and providing technical assistance, and help promote effective
           corporate governance arrangements in public sector bodies.


      Observing professional ethics

12. Professional auditors are required by Statement of Auditing Standards 100 to observe the ethical
      guidance of the particular professional bodies to which they belong1. In addition there are ethical
      considerations specific to the public sector. All public sector bodies are required to observe high
      standards of probity in the management of their affairs. These include the seven principles of
      public life identified by the Committee on Standards in Public Life: selflessness, integrity, objectivity,
      accountability, openness, honesty and leadership. The national audit agencies seek to maintain
      the highest standards of corporate governance within their organisations and therefore to apply
      appropriate ethical standards to the conduct of their audits. They have drawn on professional and
      public sector principles in preparing their own codes of conduct and will take into account any
      further developments in this area.


13. Public sector auditors should:

      u    not become financially or personally involved with the public sector bodies they audit and not
           accept gifts or anything other than modest hospitality from them;

      u    not allow personal or political considerations to cloud their judgement;

      u    not share in the decisions of the public sector bodies they audit, other than in reaching
           agreement over the conduct of the audit;

      u    avoid taking over the duties of management of the public sector bodies they audit in relation
           to maintaining accounting records, preparing accounts, safeguarding assets, providing
           internal audit services or preventing fraud and corruption. They should not act as
           management consultants, but should provide advice to management;

      u    avoid any campaigning on behalf of the bodies they audit, other than to uphold examples of
           good practice for the benefit of others;

      u    use teams possessing appropriate skills and experience in the work they undertake and for
           the type of assignment undertaken;




  1    It should be noted that the Auditing Practices Board only intended such Statements to cover auditors in the context of the audit
       of financial statements.




                                                                                                                                      5
    u     work with care, thoroughness and expedition, assessing critically the information and
          explanations they obtain in the course of their audits and other examinations and seeking
          additional evidence that they consider necessary;

    u     have in place arrangements to control and review the quality of their work;

    u     behave with consideration towards those they meet in the course of conducting their work;

    u     have defined processes and procedures for dealing with complaints and seek to resolve
          difficulties quickly, carefully and fairly;

    u     not disclose, beyond requirements to report in the public interest, information obtained in the
          course of their work, except where required to in pursuance of their statutory responsibilities
          or by agreement with audited bodies; and

    u     give individuals or third parties an opportunity to comment on points of fact and presentation
          before reports which make substantive references to them are finalised, so far as is
          practicable.


14. In the context of these commitments, it is worth noting that auditors’ ability to work efficiently and
    effectively, and to present results in a timely fashion, depends heavily on the co-operation of those
    they are auditing. Public sector bodies that find that their auditors are falling short of these
    commitments in any significant respect should raise the matter with their auditors. The four
    national audit agencies each have their own procedures for dealing with these matters.




6
.        What public sector bodies can expect from
         their auditors

         A Consultation Paper Issued by the Public Audit Forum

         Introduction

    1.   Public sector audit plays an essential role in maintaining confidence in the stewardship of public
         funds and in those to whom the responsibility of stewardship is entrusted. The primary audiences for
         public auditors are those (such as Parliament, local electorates, taxpayers) on whose behalf they carry
         out their statutory and other functions. However, as well as addressing these audiences, public sector
         auditors recognise that they are accountable for their own performance and are duty bound to
         undertake their work in a professional, objective and cost-effective manner and with due regard to
         the needs of the bodies they audit. While the audit of public bodies is undertaken by many different
         bodies, including the national audit agencies and private sector auditors whom they or others
         appoint, this accountability applies regardless of whom is the auditor.


    2.   A high quality audit (see Figure 1) can best be provided when audited bodies and auditors each
         fulfil their respective responsibilities and actively seek to work together. The service which public
         sector bodies can expect from their auditors must therefore be set in the context of these
         responsibilities:

         u    public bodies are accountable to Parliament, local electorates and the public for the
              stewardship of public funds under their control. To this end they are responsible for
              maintaining proper accounting records, preparing financial statements to reasonable
              timetables agreed with their auditors, safeguarding assets, ensuring the compliance of
              transactions with statutory and other authorities, taking reasonable steps to prevent and
              detect fraud and other irregularities, and managing their affairs economically, efficiently and
              effectively; and

         u    public auditors are responsible for forming an independent and objective view on the
              financial statements prepared by audited bodies, including, where applicable, the
              compliance of the underlying transactions with statutory and other authorities, and on the
              arrangements made by the audited body for securing propriety and value for money.




                                                                                                                 7
    Figure 1: Essential characteristics of high quality audit


    A good quality audit will be:
    u independent and objective;

    u timely;

    u well-reasoned and soundly based.


    The process of a high quality audit:
    u does not lead to excessive disruption of the audited body’s business;

    u draws management’s attention to areas for improving stewardship and performance that are detected in the course of the work;

    u is subject to effective quality control.




3.      This paper describes in broad generic terms the scope and nature of the service that public sector
        bodies can expect from their auditors. It is not intended to establish any new requirements for
        public sector auditors or to be read as a performance standard. In the audit of the financial
        statements of a public sector body, public sector auditors comply with the Auditing Standards
        established by the Auditing Practices Board, which are set out in Statements of Auditing Standards
        (SASs). In other types of audit assignment they undertake at public sector bodies, public sector
        auditors apply the concepts enshrined in SASs where appropriate. However, SASs are intended for
        financial statement audit and so do not provide a comprehensive framework for these other
        assignments. Public sector auditors also carry out their work in accordance with any relevant
        statutory codes of public sector audit.


4.      Public sector audit has direct financial consequences on the public purse. It is therefore in
        everyone’s interest for public sector audit to be cost-effective, both by avoiding excessive
        compliance costs and, where practicable, by helping the public sector body. However, a
        cost-effective audit must also result in sound and reliable conclusions. Public sector auditors
        therefore recognise cost considerations and the desire to add value cannot be allowed to impair
        the rigour and independence of the audit.


5.      The paper covers the need for public sector auditors to:

        u       achieve mutual understanding in the planning process;

        u       ·make use of the work of others;

        u       report their work in an appropriate, fair, timely manner;

        u       add value;

        u       observe professional ethics.




8
         Achieving mutual understanding in the planning process

6.       Public sector bodies and their auditors need to understand thoroughly each others’ roles, and
         work together to facilitate effective audit arrangements. Public sector auditors should plan their
         work, considerately and with a regard to its efficiency and value for the client, and bodies subject
         to audit should comply fully with the requirements of public accountability and be open in their
         dealings with the auditor. These considerations apply to all types of audit: the audit of financial
         statements, examining and reporting on the risks to financial systems, regularity, propriety and
         value for money.


7.       Statement of Auditing Standards 200.1 recognises the importance of planning and requires
         auditors to plan their audit work so as to perform the audit in an effective manner2. Public sector
         auditors should plan each audit on a thorough understanding of the audited business, and the
         environment in which it operates, as it relates to the audit assignment. Such understanding allows
         auditors to plan audits which are cost effective, use appropriate qualified and trained staff,
         minimise the disruption to the audited bodies’ businesses, and maximise the opportunity to add
         value to the business of the audited body. This approach will work best when public sector bodies
         are fully open with auditors about their management information and plans, and where they
         facilitate the collection of evidence by auditors and co-operation with their own internal or
         appointed auditors.


8.       The following paragraphs cover the roles of auditors and public sector bodies in:

         u    planning audits considerately; and

         u    planning audits which are cost-effective and can add value.


         Planning audits considerately

9.       It is considerate and makes for an effective relationship if auditors are open with the public sector
         bodies that they audit about their overall audit approach. They should provide a high level audit
         plan to management, any audit committee (or equivalent) and internal audit. High level plans
         should normally include terms of reference for all work in non technical language so as to help
         management achieve a clear understanding of the remit of the work. Figure 2 outlines, as an
         example, the features and use of the high level plans set out in the Audit Commission’s Code of
         Audit Practice.




     2    It should be noted that the Auditing Practices Board only intended such Statements to cover auditors in the context of the audit
          of financial statements.




                                                                                                                                         9
 Figure 2: Example of the features and use of a high level plan – the Audit Commission’s Code
 of Audit (Section 29)


 The outcome of the planning process should be a documented overall audit for the year under review and prepared in liaison
 with the audited body. The plan should:

 a)    document the auditor’s preliminary assessment of the significant relevant operational and financial risks of the audited
       body;
 b)    document the auditor’s preliminary assessment of the adequacy of the controls and procedures which the audited body
       has set in place to minimise these risks;
 c)    show how the auditor plans to respond to the risks identified;
 d)    show what work the auditor plans to carry out to enable him or her to meet the requirements of the Code.




10. Good communications are important at all stages of the audit. They are not the sole responsibility
      of either party, but are a shared responsibility. The planning of the audit should:

      u    help public sector bodies understand the audit purpose and process;

      u    allow public sector bodies to identify matters of concern which they would like their auditors
           to consider in their audit;

      u    provide an opportunity for auditors to explain and discuss their assessment of audit risk with
           bodies and how the audit will take account of these factors;

      u    allow both parties to be clear about how the audit will be conducted and about their
           respective responsibilities, relating for example to the provision of information by the audited
           body by a certain date or the timetable for the conduct of audit work and delivery of the
           auditor’s feedback to management;

      u    identify and avoid potential problems that might arise during the audit, such as access to
           information or people, including third parties. In the case of the latter, this should facilitate
           timely access agreements;

      u    provide an opportunity for co-ordinating the work with the work of internal audit, and others.


11. During this process, the auditor can consider suggestions from the audited body regarding content
      and approach and these may help the auditor to add value. The auditor must, however, be
      mindful of the need to preserve a position of independence and objectivity. Figure 3 shows an
      example of how an auditor can use a protocol to communicate the audit approach.




10
 Figure 3: Example of a protocol that facilitates communication of the audit approach – the
 National Audit Office’s Financial Audit Client Liaison Schedule


 The National Audit Office agree an annual Financial Audit Client Liaison Schedule with each public sector body that they audit.
 The Liaison Schedule identifies in detail the documents and activities necessary to complete the audit. It allocates
 responsibilities for delivering them between the public sector body and the National Audit Office, and it specifies delivery
 dates. The benefits to public sector bodies include:

 u a sound basis on which to maintain clear understanding and good relations with the National Audit Office;

 u a firm framework for planning the delivery of annual accounts;

 u certainty about when auditors will visit; and

 u a clear set of target dates against which to review progress and to identify and address difficulties early.




12. There are, however, some limits to openness that must be retained to maintain the effectiveness of
     audit and hence protect the interest of the taxpayer. Audited bodies must accept that auditors
     cannot disclose some details of their audits, such as those that address the risk of fraud, and that
     auditors may only appropriately disclose some matters to an audited body’s audit committee.


13. Auditors should fully consider the needs of the public sector bodies they audit in respect of the
     timing of the audit and should jointly agree a reasonable timetable for submission of good quality
     accounts and completion of the audit. Auditors recognise that public sector bodies continue to
     perform their statutory and other functions while audits are taking place. Auditors should plan their
     work so as to minimise business disruption, subject to audited bodies meeting their own
     obligations in relation to audit. Auditors should also take account of external reporting timetables.
     When a joint timetable has been agreed, both the audited body and the auditors should view the
     key dates as deadlines.


14. Auditors of public sector bodies should seek to minimise changes in key audit personnel from one
     year to the next in order to allow audit staff to develop a sound business understanding and
     deliver the full potential benefit of their accumulated knowledge and experience. Auditors will need
     to strike a balance, however, between the benefits of continuity on the one hand and their own
     operating efficiency, the developmental needs of their staff and the importance of periodically
     bringing fresh perspectives to audits. In any case, auditors should ensure that their teams include
     adequately trained and skilled staff. Public sector bodies may wish to assist in the induction of new
     staff and auditors should make use of such assistance.


     Planning audits which are cost-effective and can add value

15. Auditors of public sector bodies should ensure their work is cost-effective by focusing on areas
     where they assess that the risks of error, fraud or other irregularity are greatest. In the case of value
     for money audit, they should ensure cost-effectiveness by focusing on areas where there may be
     substantial scope for improving value for money or a material risk that it is not being achieved.
     They should adopt audit approaches designed to ensure that they gather sufficient, appropriate



                                                                                                                              11
     evidence to support their audit opinion, findings or recommendations, in the most efficient and
     timely manner. Public sector bodies and their auditors share responsibility for working in a way that
     minimises disruption to normal business activity. This applies in audits of financial statements, and
     also in respect of other types of audit engagement, such as value for money audits. To this end,
     public sector auditors should plan to make use of the work of others in line with the consideration
     in paragraphs 19 to 35 of this paper.


16. The primary value of audit arises from the assurance provided to the taxpayer as the result of an
     objective and rigorous review. However, the process will often yield additional value to the audited
     body. Public sector auditors should plan the execution and reporting of their work in a way that
     enables any additional value to be passed on to the audited body, in line with the considerations
     in paragraphs 42 to 48 of this paper.


     Audit Committees (and their equivalents)

17. Audit committees are a relatively new phenomenon in the public sector. They and their equivalents
     have particular value in, among other things, helping achieve mutual understanding in the
     planning process. As noted in paragraph 12 above, some aspects of an audit plan, such as those
     relating to the detection of fraud, cannot be discussed with executive management and staff
     without compromising the integrity and value of the audit. They may, however, be discussed with
     an audit committee, and this in turn can secure management’s co-operation. Both HM Treasury
     (DAO GEN 11/99) and the NHS Executive have produced guidance on the use of audit
     committees. The Auditing Practices Board has produced a briefing paper Communication between
     external auditors and audit committees to assist development of working practices of both audit
     committees and auditors.


     Communication throughout the audit

18. Communication between public sector auditors and audited bodies and audit committees should
     not end with the planning process. Plans are likely to require at least occasional variation because
     of the needs of either the auditors or the audited body. Such variations should be discussed at as
     early a stage a possible so that both parties remain fully informed. Auditors should be accessible
     throughout the year to the public sector bodies that they audit, so that public sector bodies can
     seek advice and guidance from them.


     Making use of the work of others

19. It is common for the audit of some public bodies, for example government departments, to need
     to draw on evidence from other bodies in the public, private or voluntary sectors which have
     received public grants or which undertake functions on behalf of the body being audited. In such
     circumstances, efficiency requires that public sector auditors seek to maximise, both in their audit
     of financial statements and their value for money work, the use they make of the work of others




12
    such as internal auditors, regulators and external auditors of related bodies. In using the work of
    others, public sector auditors must nevertheless ensure that what they do continues to be consistent
    with the duties placed on them by professional auditing standards. And sometimes public sector
    auditors will require direct access to entities funded by the bodies they are auditing so as to
    perform audit procedures, in line with the Auditing Practices Board’s guidance in Practice Note 10.


20. It would be neither cost-effective nor fair and reasonable for all the bodies in the spending chain,
    from the funding to the delivery of services, to be constantly subjected to several layers of audit,
    each addressing its own reporting requirements. Public auditors should therefore seek to maximise
    the use they make of the work of others, both in the context of the audit of financial statements
    and value for money work. The work carried out under various quality schemes can also be
    relevant.


21. Annex B sets out the professional auditing standards that public sector auditors must follow when
    using the work of others. In essence, whatever the circumstances in which public auditors use the
    work of other auditors (whether internal auditors or other relevant external auditors) and experts,
    they nevertheless retain sole responsibility for the audit opinions, findings and recommendations
    that they give, and the determination of the audit procedures to support them. When using the
    work of others they therefore need to assure themselves of its adequacy for their purpose and that
    it is consistent with other sources of evidence, and the following paragraphs need to be read in
    this context. Public auditors’ good working relationships with other auditors will help ensure that
    the amount of work necessary to obtain such assurance will be minimised.


22. The advent of “joined up government” under the Modernising Government agenda will increase
    the need for co-operation. The Public Audit Forum published in April 1999 a paper, Implications
    for Audit of the Modernising Government Agenda.


    Internal Audit

23. Public sector auditors recognise that a close working relationship with internal audit can increase
    efficiency and reduce the demands on the bodies they audit. Auditors of public sector bodies
    should, wherever possible, work closely with internal auditors. The external auditor must assess the
    internal auditor’s work before placing reliance on it. Annex B provides further information on this.
    Guidance on the work of internal audit is promulgated by HM Treasury for central government, by
    CIPFA for local government and by the NHS Executive for the NHS, and can be used to assess the
    work of internal audit. External auditors will be able to make the most extensive use of the work of
    internal auditors where there is mutual understanding of the important and different role of internal
    auditors and of the specific ways in which their work can be of value to external audit, and a
    willingness to adjust work programmes where appropriate and feasible. Public sector management
    has an important role to play in promoting effective co-operation of this nature.




                                                                                                           13
24. Co-operation between external and internal auditors should be a two-way process. Internal audit
      should not become simply an agent of external audit. Working relationships should involve:

      u      periodic meetings to discuss matters of mutual interest;

      u      access to each other’s high level plans and systems notes and findings;

      u      mutual consultation on audit plans and visits, which gives sufficient advance notice; and

      u      common understanding on audit techniques, methods and terminology.


25. Figure 4 gives an example of how external and internal auditors in the public sector can work
      together. The managed audit approach promoted by the Audit Commission encourages the
      maximum possible reliance on internal audit provided their work is of an appropriate standard.


 Figure 4: External and internal auditors working together


 a) The Audit Commission’s managed audit approach
 The managed audit approach promoted by the Audit Commission is their approach to the financial audit in conditions where
 the audited body has sound financial systems, effective controls, good internal audit, and reliable accounts production
 processes. Where audited bodies improve their standards of control over financial systems and become more efficient, it
 allows the auditors appointed by the Commission to achieve efficiency savings too. This is done by working constructively with
 management, yet independently of them, to streamline the audit processes and eliminate any duplication or unnecessary audit
 effort. The benefits to the audited body include:

 u improvements through a better control environment and a more efficient and reliable procedure for producing the year end
     accounts;

 u a more focused and effective use of time for staff concerned with financial accounting;

 u a co-ordinated and efficient audit service, with no duplication of effort;

 u improved satisfaction with the audit service, arising from better joint planning and communication; and

 u the audit of the financial statements accomplished in fewer audit days, through a higher proportion of the audit being done
     by more senior audit staff.

 b) Managed audit in practice at a county council
 A firm of chartered accountants were appointed auditors to a county council. The council had a large internal audit department
 of 30 staff. Early planning meetings identified the potential for more effective use of the internal audit resources. Through
 regular planning liaison meetings, held in accordance with the principles of managed audit, the internal audit department
 developed:

 u a revised operational plan to include documentation and testing of all fundamental systems on an annual basis so providing
     management with assurance on the operation of such systems;

 u changes in working procedures to facilitate external audit reliance on their work so reducing the level of detailed systems
     and verification testing by the external auditor;

 u a protocol for effective working arrangements with external audit.



26. Guidance is available to auditors in the public sector on how co-operation can be put into
      practice. The Treasury and the National Audit Office have agreed a Good Practice Guide on
      Co-operation between Internal and External Auditors, and the Audit Commission have published a
      good practice guide on this subject (Figure 5).




14
 Figure 5: Guidance on co-operation between internal and external auditors


 u The Audit Commission’s booklet “It Takes Two” provides good practice guidance for co-operation between internal and
    external auditors. It describes the benefits of co-operation to managers, internal auditors and external auditors, and
    emphasises that managers need to be committed if it is to work. The guidance explains the areas where external auditors
    normally consider using the work of internal auditors, and how they retain overall responsibility for their work. It suggests
    procedures and provides checklists for promoting the success of co-operation and solving problems.


 u The Treasury/National Audit Office Guide identifies benefits of co-operation between internal and external auditors, such
    as increased scope for using each others’ work, better co-ordinated audit activity and reduced disruption for public sector
    bodies. It notes the conditions for building effective co-operation: the commitment of senior management in public sector
    bodies; consultation between internal and external auditors on their work plans and procedures; and ongoing
    communication and mutual confidence between internal and external auditors. And it gives examples of the wide range of
    opportunities for auditors to co-operate in practice, in particular on assurance about: the operation and effectiveness of
    internal controls; corporate governance statements; the prevention and detection of fraud; and developing systems.



     Working with other auditors

27. Some public bodies prepare financial statements that include financial information concerning the
     activities of related entities, such as subsidiaries, joint ventures or other public bodies. Public
     sector auditors will need sufficient and reliable evidence to form a view of such financial
     information and sometimes this will require direct inspection of the entity’s records. They should,
     wherever possible, seek to use the work of the auditors of any related entities where financial
     information about these other entities is included in the financial statements of public sector
     bodies which they audit. This can only be to the extent that the scope of the work of these auditors
     is sufficient for their purposes. For instance, the auditors may not necessarily audit the regularity or
     propriety of expenditure. Where there is chain of reliance, auditors should co-ordinate their work,
     as far as statutory and professional requirements permit, so that they operate to the same
     requirements. Where this is possible, one auditor should be able to rely directly on the audit
     opinion of another.


28. Figure 6 shows how in the National Audit Office’s audit of the NHS summarised accounts they
     use the work of the auditors of individual health bodies appointed by the Audit Commission.




                                                                                                                                15
 Figure 6: An example of the use made by public auditors of the work of other auditors

 Annual spending in the NHS is some £35 billion, funded by the Department of Health and accounted for through
 Appropriation Accounts on which the Comptroller and Auditor General is required to provide an opinion as to the proper
 presentation of the financial information and whether the monies were expended for the purposes intended. He is also
 statutorily required to provide an opinion and report annually on the summarised accounts of the NHS. To provide these
 assurances to Parliament the Comptroller and Auditor General needs to assure himself as to the proper use of funds by health
 authorities and NHS Trusts.

 As the underlying accounts are separately audited by the auditors appointed by the Audit Commission, the National Audit
 Office makes extensive use of their work in order to give an opinion on the summarised accounts and the Appropriation
 Accounts. The National Audit Office audit therefore concentrates on a review of opinions, reports and main findings of the
 appointed auditors, an assessment of the Audit Commission’s quality review of audits, an audit of the summarisation process
 carried out by the NHS Executive, and investigation and consideration of anomalies and key issues. The Comptroller and
 Auditor General also draws on the work of the appointed auditors on issues of regularity and propriety. A number of sessions
 of the Committee of Public Accounts have been based on the National Audit Office’s review of main findings of the appointed
 auditors and focusing on management issues in the NHS.



29. Auditors of public sector bodies should explore ways to work together on other forms of audit
     engagement, such as value for money audits, as there is scope for more of such joint working
     without compromising independence. Figure 7 shows some examples of how this has worked in
     practice.


 Figure 7: Examples of collaborative working

 The National Audit Office and the Audit Commission undertake joint studies, for example on Combating Housing Benefit
 Fraud, and have developed close working relations in relation to value for money audit in the health sector.

 The Northern Ireland Audit Office have contributed to studies carried out by the National Audit Office by examining related
 areas in Northern Ireland and draw on the work of the National Audit Office and the Audit Commission in their programme of
 value for money studies.

 The National Audit Office and the Accounts Commission have worked together in value for money audit in the Scottish health
 sector.


     Regulators Inspectors and other scrutiny organisations

30. In recent years, changes in the way public services are delivered have led to the development of
     regulators and inspectors. This trend continues with, for example, the recent establishment in the
     NHS of the Commission for Health Improvement. The auditor may be able to derive comfort from
     rigorous inspection. Making use of the work of such organisations is therefore of growing
     importance. In some circumstances, the auditor may also obtain relevant information from
     accreditation processes, such as the European Foundation for Quality Management Excellence
     Model®.


31. Inspection forms part of the management arrangements established by the Government for the
     delivery of public services. And inspectors are qualified and expected to comment on service
     standards and professional competence. Their objectives are different from those of external public




16
     audit, which are to provide independent assurance to the public and its representatives on the
     stewardship of public monies and performance of public bodies. The common interest of
     inspectors and auditors is largely confined to this latter area of performance.


32. Auditors of public sector bodies should make use of the work of regulators and inspectors,
     wherever it is consistent with professional auditing standards to do so. Auditors must use their
     judgement about using the work of regulators and inspectors as these are not specifically covered
     by Statements of Auditing Standards. This applies not only for their financial statements work but
     also for their work on regularity, propriety and value for money. Auditors must recognise the
     original purpose and limitations of inspectors’ work and must use it appropriately. Auditors should
     not attempt to direct the work of inspectors.


33. Where formal reliance on the work of regulators and inspectors may not be possible, public
     auditors should nevertheless seek to develop close working relationships with relevant regulators
     and inspectors. Such relationships could take the form of exchanging information, subject to
     statutory constraints, joint inspection arrangements, co-ordination of work programmes and the
     timing of visits to public sector bodies, and exchanging staff to facilitate closer understanding of
     the role and remits of each body. Auditors should, within the limits imposed by statutory
     requirements and professional standards, co-ordinate their work with regulators and inspectors so
     as to prevent public sector bodies receiving conflicting messages.


34. Government departments have an important role to play in encouraging the regulators and
     inspectors, for which they are responsible, to co-ordinate their activities with the work of public
     auditors and to make use of auditors’ reports. For their part, auditors should make relevant audit
     reports available to regulators and inspectors, except where legal constraints apply. Figure 8 sets
     out examples, drawn from the work of the national audit agencies, which illustrate the range of
     ways in which public auditors can make use of the work of regulators and inspectors.


 Figure 8: Examples of the ways in which public auditors can rely on the work of, and work
 with, regulators or inspectorates

 u The Comptroller and Auditor General’s reports on Swansea Institute of Higher Education (HC 222, Session 1996-97) and
    Glasgow Caledonian University (HC 680, Session 1997-98) included, and drew heavily on, reports prepared by the auditors
    employed by the respective funding councils.

 u The National Audit Office have worked together with the Further Education Funding Council for England and the
    Department for Education and Employment to develop good practice guides which will be of practical help to further
    education colleges.

 u The Audit Commission carry out joint inspection of local authority social services departments with the Social Services
    Inspectorate and of local education authorities with the Office for Standards in Education. And from April 2000, the
    Commission assumes statutory responsibility for the inspection of all local government services, not currently subject to
    inspection by a statutory inspectorate, including housing. There is a memorandum of understanding for co-operation
    between the Audit Commission, its appointed auditors and inspectors and other statutory inspectorates.

 u The Northern Ireland Audit Office, in their examination of the European Union Special Support Programme for Peace and
    Reconciliation, used the work of the Training and Employment Agency’s Financial Audit Support Team.




                                                                                                                                17
     European Court of Auditors

35. Many public bodies also receive funding from the European Community Budget. The European
     Court of Auditors (ECA) have rights of access to all recipients of European Community funds in
     both the public and private sectors across the European Union. Auditors should seek to work
     closely with the ECA to minimise the impact on UK public sector bodies so far as this is consistent
     with the differing statutory regimes and working methodologies that apply to the work of the
     national audit agencies. Such co-operation may, however, be constrained by differences between
     the access rights of the ECA and the national audit agencies. The European Commission inspect
     grant recipients directly, but the scope for public sector auditors to rely on their work is limited.


     Reporting in an appropriate, fair and timely manner

36. For public sector audit to have the most beneficial impact, it is essential that public sector auditors
     report the results of their work promptly – whether this is for financial audit or value for money
     work – not just to elected representatives but also to the management of the bodies subject to
     audit. Auditors of public sector bodies should seek to ensure that reports intended for publication
     are objective, balanced in content and tone, reliable, clear, persuasive and timely, from the first
     draft. To avoid wasted effort on both sides they should check the correctness of factual content with
     public sector bodies before reaching an opinion and conclusions. Reports to audited bodies,
     including presentations and less formal interactions, provide further opportunities for auditors to
     add value and thereby directly help to improve management and control within public sector
     bodies. It is important that public bodies and auditors set realistic timetables at the outset of the
     work for the discussion and finalisation of reports, and that they monitor their adherence to these
     timetables.


37. Auditors of public sector bodies should report in a timely manner to the appropriate audience and
     should provide feedback to audited bodies throughout the audit process. Reporting by public
     sector auditors can take many forms depending on the type of audit engagement and the subject
     matter and will vary from one public sector body to another. Reporting will not meet its objectives
     unless it provides the audited body with the opportunity to respond effectively to any matter raised.
     For the auditor, this means that matters identified during the course of an audit should be
     discussed with management and documented as they arise.


38. Timely reporting to the appropriate level within the audited organisation ensures that at the
     conclusion of an audit there are no surprises for either the public sector body or the auditor. Timely
     reporting also helps ensure that the audit is viewed as a positive experience, findings can be dealt
     with quickly, trust is established between the public body and the auditor, and the process adds
     value to the client. In return, public sector bodies should provide timely responses to
     recommendations. A balance needs to be struck between the time allowed for discussion of draft
     reports and the timeliness of the final report. Public sector bodies and auditors need to bear this in
     mind when settling reporting timetables.




18
39. Auditors should show public sector bodies drafts of reports about them intended for publication
     and give them opportunities and sufficient time to agree the facts contained within them and
     comment on the opinions reached. Public sector bodies need to respond to consultation in a
     timely manner if this is not to delay the reporting process. The external reporting of public audit
     results is important as such reporting completes the cycle of accountability.


40. Auditors should be willing to revise their opinions in the light of further evidence and explanation.
     Public sector bodies can therefore normally expect feedback from their auditors throughout the
     audit process. As a minimum, feedback should in the first instance be directed to the line manager
     within the client. At the completion of key stages of the audit, the client can generally expect the
     results to be reported to the director of finance or other relevant senior manager, while at the
     conclusion of the audit findings should normally be presented to the chief executive and audit
     committee or equivalent committees.


41. Audit committees and their equivalents have an important role in raising the profile of audit reports
     and securing constructive management responses. HM Treasury has provided guidance on the use
     of audit committees as set out in Figure 9.


 Figure 9: HM Treasury’s guidance on the use of audit committees in order to respond
 constructively to auditor’s reports

 DAO GEN 11/99 recommends that audit committees and internal audit are used to monitor and report on the
 implementation of agreed recommendations from the National Audit Office and the Public Accounts Committee. In particular,
 audit committees should monitor the implementation of action plans. The audit committees of agencies and non-departmental
 public bodies should provide their parent departments with annual reports that explain, where necessary, why agreed
 recommendations have not been implemented.

 (HM Treasury will add further guidance in due course.)



     Adding Value

42. While the primary value of the audit of financial statements is the assurance it provides to the
     taxpayer, Parliament and other representatives as the result of an objective and rigorous review,
     such audit also directly provides value by monitoring and improving financial management.
     Providing added value is secondary to these processes but they are not mutually exclusive.


43. Auditors will often provide additional value when they note opportunities for cost-effective
     improvements arising from their examinations and draw these to the attention of management.
     This may be through promoting better management and decision-taking, and thus a more effective
     use of taxpayers’ resources, and helping promote effective corporate governance in public sector
     bodies. They should also directly answer management’s questions that are relevant to financial
     reporting.




                                                                                                                        19
44. The scope for adding value through the execution of value for money audit studies is likely to be
      much greater. In identifying the criteria against which value for money is judged, the auditor has
      the opportunity of identifying more economic, efficient or effective ways of undertaking the audited
      bodies’ business.


45. Auditors recognise that they have the opportunity to add value to the work of public sector bodies
      as a result of their financial statements audits and value for money work. Opportunity for auditors
      to add value should stem from:

      u     a position of objectivity;

      u     a detailed understanding of individual organisations’ objectives and operations within a
            wider public sector context;

      u     access to detailed views of the operation of large numbers of public sector bodies, thus
            affording a unique and valuable perspective for comparisons.


46. Public sector auditors should therefore have clear communication strategies that may include:

      u     meetings with, and presentations to, management, for example, to review progress in
            implementing recommendations;

      u     summary publications;

      u     providing easy, and increasingly, electronic, access to good practice databases and reports;

      u     secondment of staff to audited bodies, for fixed periods or defined projects.


47. Figure 10 describes examples of ways in which auditors have added value to public sector bodies.


 Figure 10: Examples of ways in which auditors have added value to public sector bodies

 u The National Audit Office worked alongside the Treasury and others to develop accounting guidance for the Resource
     Accounting initiative in central government. As a member of the Financial Reporting Advisory Board to the Treasury, the
     National Audit Office helped to prepare a Resource Accounting Manual setting out detailed guidance for Departments on
     the accounting policies for Resource Accounting. The National Audit Office also provided practical advice and guidance to
     individual public sector bodies about their preparations for implementing Resource Accounting.

 u The National Audit Office distribute “NAO Focus” two or three times a year to public sector bodies. Its aim is to highlight
     ideas covered in National Audit Office value for money reports that might be of interest for those dealing with similar issues
     in other areas of the public sector. Its emphasis is on examples of good practice. NAO focus has covered matters such as
     achieving value in privatisations and Private Finance Initiative projects, managing conventionally procured construction,
     utilities regulation, pension fund management, and various types of asset disposal.


                                                                                                                     continued ...




20
 Figure 10: Examples of ways in which auditors have added value to public sector bodies
 continued

 u Many local authorities and police forces are keen to adopt good practices highlighted in Audit Commission national reports,
    before the local audit begins. Such an approach can lead to strong local ownership of the change agenda. Most local
    authority audits now follow such a pattern, called “study-implement-audit”. The key features of the methodology are: early
    benchmarking to provide a baseline of data against which an authority’s progress can be monitored; a diagnostic “snapshot”
    by the local auditor to ascertain the key local issues; the opportunity for audited bodies to draw up their own “agenda for
    action” to address the main issues in the light of local circumstances and priorities; management handbooks, and possibly
    workshops, to support audited bodies when implementing their own solutions; and follow-up review by the auditor to
    establish how well the audited body has progressed its own agenda for action. The effect, therefore, is to focus local audit
    effort on the audited body’s performance in formulating and implementing an agenda for actions rather than concentrating
    on the assessment of current performance.

 u A study by the Accounts Commission found wide variations in the proportions of council tax collected by local authorities
    that were significantly explained by differences in collection and debt recovery practices. Indicative targets were suggested
    for improvement and most councils were given local audit reports setting out actions plans to help implement changes. The
    Scottish Office and the Convention of Scottish Local Authorities subsequently prepared a consultation paper on how the
    framework of council tax collection might be strengthened, and the audit process will be used to monitor whether potential
    improvements are achieved.

 u The Accounts Commission organised a special audit of about 270 Direct Labour Organisations and Direct Service
    Organisations in response to a crisis of confidence following a number of financial deficits. The audit covered management
    arrangements, business planning and controls, roles of councillors and senior staff, monitoring and reporting arrangements,
    financial controls and financial performance. Many councils adopted the audit questionnaire as a diagnostic tool for assessing
    their own risk areas and weaknesses, and the audit process will be used to monitor whether councils strengthen the overall
    management arrangements in areas of identified weakness.



48. Public sector auditors should, where the opportunity arises, add value in a variety of ways,
     including:

     u     helping public sector bodies to recognise business risks and to respond to them effectively;

     u     helping public sector bodies to respond effectively to changes in the way public services are
           organised and delivered, including, identifying opportunities for worthwhile innovation;

     u     providing independent information on the extent to which Government departments and
           other public bodies achieve value for money in the management of their resources;

     u     collecting and analysing evidence that adds to all parties’ knowledge and understanding of
           an important topic;

     u     identifying the scope for financial savings through improvements in economy, efficiency and
           effectiveness;

     u     providing new insights into the way an audited body manages its resources, delivers its
           programmes, achieves its objectives and develops business opportunities, including how
           cost-effective improvements might be identified and achieved;

     u     collating and distilling information, for example, on good practice from across ranges of
           public bodies;

     u     appropriate recognition of improvements in performance;



                                                                                                                                21
       u     contributing to new accounting systems by making clear what the auditors’ requirements are;

       u     promoting good corporate governance by, for example, assessing whether there is an
             effective board.


       Observing professional ethics

49. Professional auditors are required by Statement of Auditing Standards 100 to observe the ethical
       guidance of the particular professional bodies to which they belong. While that guidance varies in
       detail between bodies, reflecting differences of emphasis in the type of work undertaken by
       members, the broad principles are consistent. The Auditor’s Code, developed and issued by the
       Auditing Practices Board, sets out some fundamental principles which the Board expect to guide
       the conduct of auditors and which underlie its Auditing Standards and the ethical standards of
       professional auditing bodies.


50. The accounting profession, both in the United Kingdom and internationally, is working on the
       development of ethical standards:

       u     In the UK, work is in hand to establish the Ethics Standards Board. This will be independent of
             the profession. It will operate under the aegis of the Foundation, itself a new body, which was
             set up to oversee a new framework for the regulation of the accountancy profession. The
             Board will build on existing ethical guidance, such as that developed by the Chartered
             Accountants Joint Ethics Committee, and develop the consistent application of ethical
             standards across professional practice, including the public sector.

       u     The Fédération des Experts Comptables Européens are developing a core set of ethical
             principles with the intention that they might be adopted throughout Europe, while the United
             States Independence Standards Board and the International Federation of Accountants are
             developing their existing conceptual frameworks of ethical standards. Bodies within the
             Consultative Committee of Accountancy Bodies already draw on the work of the International
             Federation of Accountants in preparing guidance for members.

       u     The International Organisation of Supreme Audit Institutions (INTOSAI), to which the
             National Audit Office belongs, has also agreed a “Code of Ethics for Auditors in the Public
             Sector” covering basic principles of common ground between national public sector auditors.

51. In addition to the above there are ethical considerations for the public sector, the national audit
       agencies seek to maintain the highest standards of corporate governance within their organisations
       and therefore to apply appropriate ethical standards to the conduct of their audits. All public sector
       bodies are required to observe high standards of probity in the management of their affairs, and the
       Committee on Standards in Public Life3 has identified seven principles of public life. These are
       selflessness, integrity, objectivity, accountability, openness, honesty and leadership.


   3     “Standards in Public Life” - First Report of the Committee on Standards in Public Life, Cm 2850-1, May 1995




                                                                                                                       23
52. The national audit agencies have drawn on professional and public sector principles in preparing
         their own codes of conduct and will take into account any further developments in this area. Figure
         11 describes the National Audit Office’s Code of Conduct applicable to all their work. The
         National Audit Office have also identified eight principles that encapsulate the fundamental
         qualities and characteristics that should mark and guide value for money work. These are
         accountability, integrity, objectivity and independence, adding value, competence, rigour,
         perseverance and clear communication (set out in detail in Annex C). More generally, all
         professional accountants have a public interest responsibility for the collective well-being of the
         community of people and institutions that they serve4.


 Figure 11: The National Audit Office’s Code of Conduct

 The National Audit Office have a Code of Conduct that all their staff, including temporary staff, must sign every year to affirm
 their compliance. The Code is based on the public service values of accountability, probity, objectivity and impartiality that
 underpin the work of the National Audit Office. It covers:

 u work conduct, particularly the principles of propriety, integrity, independence, objectivity, accuracy, fairness, balance,
     constructiveness and competence;

 u confidentiality, including the provisions of the Official Secrets Acts and the requirement not to disclose beyond proper
     reporting channels any information about audited bodies or the National Audit Office obtained through work;

 u political activities, with detailed rules about restrictions on involvement in national and local political activities;

 u conflicts of interest, covering restrictions on private occupations, payment for private work, shareholdings, relationships
     with suppliers and consultants, and acceptance of gifts and benefits; and

 u personal conduct, including the need to report arrests or convictions, to use and control public funds and assets properly,
     and to observe employment legislation such as that covering discrimination and harassment.


53. The remainder of this section concentrates on the expectations which public sector bodies in
         particular can have of their auditors as reflected in professional standards, the auditors’ ethical
         codes and good practice. It follows the categories in Statement of Auditing Standards 100.2 on
         “Objective and General Principles Governing an Audit of Financial Statements”, which requires
         auditors to comply with the ethical guidance issued by their relevant professional bodies in the
         conduct of any audit of financial statements. The ethical principles which govern auditors’
         professional responsibilities include:


         u     integrity and objectivity;

         u     professional competence and due care;

         u     professional behaviour; and

         u     confidentiality.




     4     International Federation of Accountants Code of Ethics for Professional Accountants




24
      Independence, Integrity and objectivity

54. All ethical guidance requires auditors to exhibit independence, integrity and objectivity. The
      International Federation of Accountants Code of Ethics for Professional Accountants is a valuable
      source of ethical guidance that applies to auditors whose institutes have adopted it. The Code
      states that accountants should be straightforward and honest in performing professional services
      and should be fair and not allow prejudice or bias, conflict of interest or influence of others to
      override objectivity. The independence of auditors is of paramount importance if the public and
      their representatives are to be able to rely on their reports and this is recognised in the Public Audit
      Forum publication, The Principles of Public Audit, which is reproduced at Annex A.


55. It follows from this that public sector auditors and bodies should recognise the importance of
      avoiding any perception that the auditor’s integrity, objectivity or independence are being
      infringed. Auditors should be constantly alert to factors that might give rise to a perception of
      conflict of interest and take steps to avoid them. Ethical codes should not be viewed as just
      catalogues of prohibitions. The auditor should apply appropriate safeguards to deal with threats to
      objectivity, as, for example identified by the Chartered Accountants Joint Ethics Committee
      framework. Although they should always be ready to give constructive advice, auditors of public
      sector bodies should:

      u    not become financially or personally involved with the public sector bodies they audit and not
           accept gifts or anything other than modest hospitality from them;

      u    not allow personal or political considerations to cloud their judgement;

      u    not share in the decisions of the public sector bodies they audit, other than where these relate
           to the conduct or outcome of the audit;

      u    avoid taking over the duties of management of the public sector bodies they audit in relation
           to maintaining accounting records, preparing accounts, installing IT systems, safeguarding
           assets, or providing internal audit services5. This should not, however, stop auditors from
           providing valuable advice to management along the lines referred to in paragraphs 42 to 48
           above;

      u    avoid any campaigning on behalf of the bodies they audit, other than to uphold examples of
           good practice for the benefit of others.




  5     In small Non-Departmental Public Bodies it may be reasonable to augment the external audit role by, for example,
       undertaking additional testing, in the absence of internal audit. (DTI)




                                                                                                                           25
56. Whilst public sector auditors will take into account the views of the elected representatives to
     whom they report, and those of the bodies they audit and other interested parties, they are
     responsible for their own judgements. They should base their conclusions and recommendations
     on sound evidence by reference to clear and objective criteria, all of which they should be ready to
     explain and justify. They must avoid political bias in the selection and conduct of matters to
     examine and in reporting. They should seek to ensure that their reports give balanced views of the
     matters being examined, paying due regard to the underlying reasons for the performance of
     public bodies and giving credit for good practice as well as pointing to any deficiencies and areas
     needing improvement. All these considerations underlie the Forum’s report, The Principles of Public
     Audit (Annex A).


     Professional competence and due care

57. Auditors of public sector bodies should use teams possessing appropriate skills and experience in
     the work they undertake, whether it is a financial audit, value for money examination or any other
     assignment. Audit staff should have attained professional competence through education, training,
     examination and work experience, and should maintain their competence through updating their
     knowledge and skills. They should also have sound knowledge of public sector financial and
     management procedures. Audit teams collectively should be experienced, familiar with the topics
     they examine, and competent to identify and apply the techniques which they consider appropriate
     to the assignment. Value for money audit teams in particular may need to include
     non-accountancy professionals in addition to accountants.


58. Auditors of public sector bodies should work with care, thoroughness and expedition, assessing
     critically the information and explanations they obtain in the course of their work and seeking
     additional evidence that they consider necessary for the purposes of their audits and other
     examinations. Auditors are responsible for deciding when they have obtained sufficient evidence to
     support their opinions and conclusions, and when they need to undertake more work before they
     can report with integrity, keeping public sector bodies fully informed of these decisions. Auditors’
     abilities to work efficiently and effectively, and to present results in a timely fashion when they are
     still relevant and useful, depend heavily on the co-operation of those they are auditing.


59. Auditors of public sector bodies should have in place arrangements to control and review the
     quality of their work. For the audit of financial statements, Statement of Auditing Standards 240
     requires auditors to implement quality control policies and procedures to ensure that all audits
     comply with Auditing Standards. The auditor’s quality review arrangements should operate at the
     organisational level and also specifically to individual audits. The Auditing Practices Board is
     reviewing this Statement of Auditing Standard and has published an exposure draft that broadens
     its scope so as to cover ethical and regulatory requirements, leadership, resources, acceptance
     and continuation of audit engagements, consultation and monitoring.




26
60. Public auditors’ practices keep pace with evolving best practice. The audit agencies of the Public
     Audit Forum have systems in place to ensure compliance with their own principles, improve the
     quality of reports, and secure best practice in the manner in which work is carried out. Their
     emphasis within their value for money and financial audit work is on getting it right first time, for
     example through effective training, correct skills mixes in audit teams, sound client knowledge,
     planning and risk identification, as well as reviews of work as, and after, it is carried out. Public
     sector auditors may also have regard to external benchmarks and the views of the public sector
     bodies that they audit. Figure 12 provides examples of how the Audit Commission control the
     quality of work undertaken by the auditors they appoint and how the National Audit Office subject
     their value for money work to external quality assessment in addition to seeking the views of the
     public sector bodies that are the subject of examinations.


 Figure 12: The Audit Commission’s quality control review and the National Audit Office’s value
 for money quality review process

 The Audit Commission’s quality control review uses teams of independent inspectors who visit audits on site to examine, over
 a five year cycle, the work of the auditors that they appoint against the Commission’s Code of Audit Practice, professional
 auditing standards and the Commission’s specific audit requirements. They also meet representatives of the audited body to
 find out what they think of their external auditors and how the service they provide could be improved. In addition, the Audit
 Commission carries out a wider survey of audited bodies’ chief executives and senior non-executives to obtain their views of
 the audit service provided. The Commission’s inspectors also review its appointed auditors’ quality assurance systems, and
 teams of Commission experts review a wide sample of management letters.

 The National Audit Office’s value for money quality review process has four complementary strands each of which feed into
 the continuing process of developing value for money techniques and preparing reports that address more closely the needs of
 different audiences:

 u an external multi-disciplinary panel (currently provided by the London School of Economics) reviews each value for money
    report and assesses it by reference to pre-determined criteria;

 u the Principal Finance Officers or other senior officials of the body which was the subject of the value for money examination
    are invited to complete a questionnaire on how the National Audit Office carried out and reported the examination;

 u the National Audit Office study team record their own assessments of the way the examination was carried out and the
    value for the report, identifying lessons which could benefit the conduct of future studies; and

 u these three assessments are examined by National Audit Office senior management, and lessons arising are taken on board
    as part of the value for money development programme.



     Professional behaviour

61. Auditors should behave with courtesy and consideration towards those they meet in the course of
     conducting their work. They have to be determined in carrying out their investigations and
     persistent in collecting and analysing the evidence they need to draw conclusions. But they will
     always be polite in the exercise of their duties and they will preserve open minds, considering
     carefully and objectively any alternative approaches or explanations that staff of public sector
     bodies suggest to them.




                                                                                                                             27
62. Public sector auditors should have defined processes and procedures for dealing with complaints
     and should seek to resolve difficulties quickly, carefully and fairly. Auditors can draw on comments
     from those they audit and use them to improve the quality of their service. Figure13 describes an
     example of the Audit Commission’s stepped complaints procedure.




28
 Figure 13: The Audit Commission’s complaints procedure

 The Audit Commission explain their complaints procedure in a leaflet. It sets out the Commission’s commitment to be polite,
 helpful and fair in response to complaints and to investigate them carefully and quickly. It describes what types of complaint can
 be considered and what other matters, such as decisions on whether to issue public reports, cannot be investigated. It identifies
 the appropriate person to contact for each type of valid complaint and it gives undertakings about the timing of replies and the
 steps taken if a complaint is upheld. Finally, the leaflet describes what progressive courses of action are available to
 complainants who are dissatisfied with the Commission’s initial response.


     Confidentiality

63. Although reports to audited bodies are valuable products of the audit process, the primary
     audiences for public sector auditors are the relevant elected representatives to whom they report.
     In the public sector, this usually involves making the results of audit available to democratically
     elected representatives and the public, and the legislation governing public audit makes provision
     for such reports. The scope of public sector audit, and therefore the extent of reporting, is
     particularly wide, covering financial statements, regularity (or legality), propriety (or probity) and
     value for money. It is the duty of public sector auditors to decide whether their findings justify
     issuing a report to elected representatives and/or the public, or whether a report to the
     management of the audited body will suffice. However, the Codes of Audit Practice of the Audit
     Commission and the Accounts Commission require auditors to report to elected members and
     board members in the form of an annual letter, or a final report, as a matter of course.


64. In deciding what to report and on the need for publication, auditors should have regard to the
     views of the public sector bodies they audit when these bodies consider that publication of
     sensitive information would be contrary to the public interest. Auditors should always consider
     carefully the grounds on which it is argued that the public interest might be damaged. If they are
     convinced that there are compelling arguments against publication, alternative arrangements
     should be in place to bring significant issues to the attention of the elected representatives to
     whom they report and ensure public sector bodies remain accountable.


65. Beyond these requirements, auditors of public sector bodies should not disclose information
     obtained in the course of their work except where they are required to do so in accordance with
     their statutory responsibilities or by agreement with audited bodies. Accordingly, auditors should
     exercise responsibility in their dealings with news media.


66. As set out above in paragraph 39 above, auditors should give the bodies they audit the
     opportunity to comment on points of fact and presentation in reports about them before they are
     finalised. This is important in ensuring that facts are presented correctly and may be required in the
     interests of natural justice. Auditors should, so far as is practicable, give individuals or third parties
     referred to in reports which are not themselves audited bodies an opportunity to comment as well.




                                                                                                                                29
.        Annex A

         The Principles of Public Audit
         A statement by the Public Audit Forum - October 1998

         The Importance of Public Audit

         The public expect that those responsible for handling public money are held fully accountable for
         the use of that money. The prime responsibility for ensuring that public money is handled with
         absolute integrity, and spent wisely, rests with Ministers, elected members, governing bodies,
         managers and officials. Public audit is an important link in that chain of accountability. It
         strengthens accountability, both upwards to the elected or appointed members who provide
         resources, and outwards to the consumers and beneficiaries, taxpayers and the wider community
         at large. As the Committee on Standards in Public Life recognised in their First Report:



                                Economy                    Efficiency               Effectiveness


                  £               Inputs                   Outputs                    Outcomes


         Source: Audit Commission


                  “regular audit is an important way of uncovering irregularities in financial matters – whether
                  they are due to outright fraud and corruption or result from laxity in following proper
                  procedures – and of establishing public confidence that public money is being properly
                  spent.”


         Public audit adds value not merely by analysing and reporting what has happened after the event
         but also by being forward looking, by identifying lessons to be learnt and by disseminating good
         practice. External public auditors thereby have a direct and positive influence on the way
         organisations and people in the public service discharge their responsibilities. With internal
         auditors working within public bodies, they help to promote better management and
         decision-taking, and thus a more effective use of taxpayers resources, and play an important role
         in the corporate governance arrangements of public bodies.

         The Principles of Public Audit

         The Public Audit Forum believe that there are three fundamental principles which underpin public
         audit:

         u    the independence of public sector auditors from the organisations being audited;



    30
u   the wide scope of public audit, that is covering the audit of financial statements, regularity (or
    legality), propriety (or probity) and value for money; and

u   the ability of public auditors to make the results of their audits available to the public, and to
    democratically elected representatives.




                                                                                                    31
     Independence

     Public audit must be independent of the organisations being audited so that the auditors cannot
     be improperly influenced by those whose work they audit and so that they can carry out their role
     freely. Whether in the private or public sectors, confidence in auditing rests to a great degree on
     the independence and objectivity of the auditor. The methods of appointment of the auditors of
     public services should ensure that the appointed auditor is, and is seen to be, independent of the
     audited body and can report without fear or favour. The financial relationship between auditors
     and auditees should be such that it does not compromise the independence of the auditor.


     Public auditors must have discretion in deciding upon the minimum amount of work necessary to
     meet their obligations and to follow up the implementation of their recommendations. They must
     also have access to information in the custody or under the control of the audited body necessary
     to undertake the audit.


     The independence of the national audit agencies from the bodies being audited is guaranteed by
     statute. They can ensure that there is independent audit by undertaking the audits themselves,
     appointing the auditors, or through a right of access to the audited bodies and their auditors. In
     any event the national audit agencies have complete discretion in the way they exercise their
     functions, whilst paying due regard to statutory requirements, Parliamentary and public
     expectations and professional standards (such as for competency, behaviour and due diligence).

     The wide scope of public audit

     Public audit not only involves providing an opinion on the financial statements (including
     statements of internal financial control where appropriate) prepared by public bodies, but also
     covers such issues as regularity, propriety and value for money. In doing so, it can contribute
     positively to the corporate governance arrangements of public bodies; that is, the high level
     management systems which enable public bodies to operate effectively with due regard to
     regularity, propriety and good value for money.

     Regularity

     Public audit must ensure that financial transactions comply, where appropriate, with: the legislation
     that authorises them; regulations issued by a body with the power to do so; Parliamentary
     authority; and Treasury authority.

     Propriety

     The concept of propriety is closely connected with public and Parliamentary expectations as to the
     way in which public business is conducted, for example in relation to standards of conduct and
     behaviour. Public audit helps ensure that public bodies meet their statutory and ethical duties to
     the public and other stakeholders in an open and even-handed manner.




32
Value for money

Those who use or pay for public services, either through taxation or charges, have a reasonable
expectation that public bodies make the best use of the resources at their disposal. Public audit
must therefore include examinations of the economy, efficiency and effectiveness (which can be
defined in the ways shown below) in the use of public resources, including the evaluation of
service quality and the measurement of performance.

u    Economy means minimising the cost of resources acquired or used, bearing in mind the
     quality

u    Efficiency covers the relationship between the output of goods or services and the resources
     used to produce them

u    Effectiveness covers the relationship between the intended and actual results of projects and
     programmes


Source: National Audit Office Annual Report

External reporting

For public audit to be effective, appropriate reporting arrangements are required. Public auditors
report the results of their audits to the representatives of the public responsible for funding the
activities concerned or directly to the public themselves where it is in the public interest to do so.
This completes the cycle of accountability.




                                                                                                         33
.        Annex B

         Auditing standards on considering the work of internal auditors, other
         external auditors and experts

         Statement of Auditing Standards SAS 500 – Considering the work of internal
         audit

         u    External auditors should consider the activities of internal audit and their effect, if any, on
              external audit procedures.

         u    The external auditors should obtain a sufficient understanding of internal audit activities to
              assist in planning the audit and developing an effective audit approach.

         u    During the course of their planning the external auditors should perform an assessment of the
              internal audit function if they consider that it may be possible and desirable to rely on certain
              internal audit work in specific audit areas for the purpose of the external audit of the financial
              statements.

         u    When the external auditors use specific internal audit work to reduce the extent of their audit
              procedures, they should evaluate that work to confirm its adequacy for their purposes.


         Statement of Auditing Standards SAS 510: The relationship between principal
         auditors and other auditors

         Principal auditors are those external auditors with responsibility for auditing the financial statements
         of an entity when those financial statements include financial information of one or more
         components audited by other auditors.


         Practice Note 10 gives guidance on the application of SAS 510 in the central government sector.
         Central government sector auditors are usually able to audit most assertions by reference to the
         audited entity alone, but to audit the regularity assertion, they may need to examine the application
         of grants paid to lower tier entities. Wherever possible, and in so far as it is consistent with the
         objective of giving an opinion on the financial statements based on independent audit evidence,
         the principal auditors, in the interests of efficiency and to reduce the overall burden of audit, seek
         to use the work of the auditors of the lower tier entity. This can only be possible with the
         co-operation of the auditors of the lower tier entity.

         u    When using the work of other auditors, principal auditors should determine how that work
              will affect their audit.

         u    Auditors should consider whether their own participation is sufficient to enable them to act as
              principal auditors.




    34
u   When planning to use the work of other auditors, principal auditors should consider the
    professional qualifications, experiences and resources of the other auditors in the context of
    the specific assignment.

u   Principal auditors should obtain sufficient appropriate audit evidence that the work of the
    other auditors is adequate for the principal auditors’ purposes.

u   The principal auditors should consider the significant findings of the other auditors.

u   Other auditors, knowing the extent to which the principal auditors intend to use their work,
    should co-operate with and assist the principal auditors.


Statement of Auditing Standard 520: Using the work of an expert

u   When using the work performed by an expert, auditors should obtain sufficient appropriate
    audit evidence that such work is adequate for the purposes of the audit.

u   When planning to use the work of an expert the auditors should assess the objectivity and
    professional qualifications, experiences and resources of the expert.

u   The auditors should obtain sufficient appropriate audit evidence that the expert’s scope of
    work is adequate for the purposes of their audit.

u   The auditors should assess the appropriateness of the expert’s work as audit evidence
    regarding the financial statement assertions being considered.




                                                                                                   35
.        Annex C

         The National Audit Office’s eight fundamental principles of value for
         money examinations

         Accountability

         Our main concern is accountability to Parliament and ultimately the taxpayer – so as to assure
         them that public funds and resources are used properly and to good effect. We do this by
         providing Parliament with independent information and advice about how economically and
         effectively the bodies we examine have used their resources and by highlighting instances where
         the proper conduct of public business may be at risk. We also help audited bodies provide better
         value for money.

         Integrity

         We should act with integrity, fulfilling our responsibilities with honesty, fairness and truthfulness. We
         should explain our reasons for collecting evidence; and our findings should be by reference to
         stated criteria consistently applied.

         Objectivity and Independence

         In carrying out value for money examinations, we should maintain independence from
         Government, political parties and other organisations. We should not show political or any other
         bias in our examinations or reports.

         Adding Value

         Value for money examinations should provide added value both to Parliament and to audited
         bodies. Added value includes:

         u    independent information on the extent to which Government departments and other public
              bodies achieve value for money in the management of their resources;

         u    evidence collection and analysis that adds to all parties’ knowledge and understanding of an
              important topic;

         u    identifying the scope for financial savings through improvements in economy, efficiency and
              effectiveness; and

         u    new insights into the way an audited body manages its resources, delivers its programmes
              and achieves its objectives, including how cost-effective improvements might be identified
              and achieved.




    36
Competence

Value for money examinations should be carried out by teams with appropriate competence in
terms of skills and experience. Collectively the team should be:

u    experienced in conducting vfm work;

u    familiar with the topic under examination and the nature of Government and Parliamentary
     procedures;

u    sufficiently competent and expert to identify and apply the appropriate techniques for
     collecting, analysing and interpreting evidence, or to arrange for this to be done; and

u    able to deliver work to cost, time, and quality requirements.


Rigour

We should approach our value for money examinations with thoroughness and assess critically the
information on which we base our findings and conclusions. The evidence supporting our value
for money examinations should be sufficient, relevant and reliable.

Perseverance

We should be polite but determined in carrying out value for money examinations. Although
always open minded, we should not be deflected from collecting and analysing the evidence
needed to produce worthwhile findings and conclusions.

Clear communication

Our reports should be objective, balanced in content and tone, reliable, clear and persuasive.




                                                                                                 37

								
To top