Chapter 2: Support to ParliamentFinancial
Audit
OBJECTIVE
2.1 The primary objective of the National
Audit Office's financial audit is to provide independent assurance,
information and advice to Parliament on the proper accounting
and use of public resources. In addition to reporting the results
of this work to Parliament, the Office also aims to assist audited
bodies to improve their financial management.
2.2 The National Audit Office's financial
audit contributes to these objectives in three ways:
by providing Parliament with reasonable
assurance that the financial statements are presented truly and
fairly, have been prepared in accordance with relevant accounting
and other requirements and are in accordance with the authorities
which govern them;
by identifying, assessing and examining
risks to propriety and financial control in central Government
bodies and reporting on significant weaknesses to Parliament;
and
by giving audited bodies constructive
advice that will help them improve their corporate governance,
financial management, control and reporting.
2.3 The National Audit Office conducts its
financial audit work in accordance with the Statements of Auditing
Standards issued by the Auditing Practices Board. In the central
Government sector these Auditing Standards are supplemented by
a Practice Note, prepared in close consultation with the National
Audit Office, designed to help ensure the consistent application
of Auditing Standards across the central Government sector.
THE AUDIT
FIELD
2.4 The National Audit Office examines and
certifies the accounts of Government departments and a wide range
of public corporations, agencies and other public bodies. In 2001-02
the National Audit Office audited expenditure and revenue, which
together totalled around £650 billion, and assets of much
greater value. In addition the National Audit Office enjoys access
rights to information held by a range of bodies helping to deliver
public services on behalf of the bodies it audits. These include:
Health Service bodies (almost 600);
Further Education institutions (over
400 colleges);
Higher Education institutions (over
130 universities and colleges of higher education); and
Several thousand other miscellaneous
bodies, including private contractors and grant recipients. For
example the Office is able to inspect the accounts of EDS in relation
to its contract with the Inland Revenue for the provision of IT
services.
The National Audit Office exercises these inspection
rights to provide assurance to Parliament on propriety and regularity
as well as providing advice to these bodies on accounting, corporate
governance and audit matters.
2.5 The current workload of accounts audited
varies widely in type, size and complexity. The Office is responsible
for the annual audit of some 550 financial accounts. These include
departmental resource accounts, Executive Agency accounts, National
Loans Fund accounts, as well as the accounts of funds and bodies
established by statute or Royal Charter such as the National Insurance
Fund and the Medical Research Council.
2.6 The portfolio of accounts audited changes
from year to year as new bodies are established by Parliament,
or in response to machinery of government changes. Over the Plan
period, the National Audit Office will be devoting more resources
to the successful implementation of whole of government accounts,
and will be taking over a number of audits of non-departmental
public bodies following the Government's acceptance of Lord Sharman's
Report "Holding to Account, The Review of Audit and Accountability
for Central Government".
CONTRACTING OUT
2.7 The Comptroller and Auditor General
contracts out some of his financial audit work to major accountancy
firms. The aims are to help the National Audit Office manage the
overall financial audit workload, which peaks after the 31 March
year end adopted by central Government, and to help the Office
benchmark costs and quality. Where work is subcontracted, it is
still subject to quality assurance checks by the Office before
the Comptroller and Auditor General provides his audit opinion
on the financial statements.
2.8 The proportion of subcontracted financial
audit work was around 13 per cent in 2001-02. Over the Plan period
, the Comptroller and Auditor General aims to extend the use of
contractors to meet the target of 25 per cent recommended in Lord
Sharman's report.
METHODOLOGY
2.9 Where the National Audit Office carries
out the financial audit, it plans and organises the work so that
the Comptroller and Auditor General can express an opinion on
the accounts in the most cost-effective manner. The Office keeps
its methodology under continual review and compares it with best
practice through involvement with the standard setting bodies
in the profession, contact with the leading accounting firms and,
as noted above, by subcontracting audits to the private sector.
2.10 The National Audit Office uses a number
of techniques to support its certification audit, including assessments
of the overall control environment, the review and testing of
accounting and IT systems, and methodologies such as predictive
analytical procedures and the direct testing of individual transactions.
Although not all techniques are used on every audit, each audit
requires some substantive procedures. Where individual transactions
are checked, samples of transactions are normally selected statistically
and weighted towards high value items.
2.11 In 1999 the National Audit Office introduced
changes to its audit approach to keep it at the forefront of financial
audit methodology, drawing on the latest thinking and developments
in risk based audit. The methodology starts from a top-down analysis
of business risk in each of the Office's audit clients. It then
considers these risks in the context of the body's financial statements,
identifies the management controls which address those risks and
tests their effectiveness. Detailed audit testing can then be
focused on those areas where reliance on controls would not provide
the necessary assurance.
2.12 The approach, known as "Audit
21", has led to more efficient audits which add more value
to clients. The Office, in conjunction with a private sector partner,
has also developed a new financial audit support software package
based on the Audit 21 approach. This package, known as "Team
21" was trialled on the audit of 2000-01 accounts and introduced
office-wide for the audit of 2001-02 accounts.
2.13 The financial audit work of the National
Audit Office is not restricted solely to the certification of
financial statements. A programme of periodic reviews of audited
bodies' activities is undertaken to identify areas where there
are potentially significant risks of irregularity, impropriety
or failures in financial control. Using the techniques employed
to support its certification audit, the Office obtains sufficient,
appropriate evidence to draw conclusions on the existence and
significance of the risks identified. The National Audit Office's
work also encompasses a review of each body's Statement on Internal
Control for compliance with requirements and investigation of
any information which is misleading or inconsistent with that
disclosed elsewhere in the financial statements.
2.14 The Comptroller and Auditor General
has a statutory responsibility to examine systems for the assessment,
collection and allocation of revenue, in addition to his financial
audit of the revenue accounts. This is a complex area of work
involving the evaluation of systemsincluding major IT systemsdesigned
by the revenue departments to manage the risks associated with
revenue identification and collection, which are somewhat different
from those associated with expenditure programmes.
2.15 The National Audit Office support Parliamentary
scrutiny of revenue by producing an annual report on the results
of this financial audit work. The most recent report drew attention
to the level of fraud from smuggling and evasion on Customs and
Excise duties, which suggested that there was more work to be
done to ensure that the department's controls are fully adequate
to secure an effective check on this revenue. Tax revenue is expected
to increase in value over the Plan period to match government
expenditure and the National Audit Office will need to continue
to devote significant resources to this important aspect of government
activity in support of Parliament's scrutiny of this area.
THE NATIONAL
AUDIT OFFICE'S
ROLE IN
THE DEVELOPMENT
OF PROFESSIONAL
THINKING
2.16 The National Audit Office actively
contributes to the development of new professional guidance. The
demands on the Office are increasing. Significant current projects
include:
assisting the Auditing Practices
Board to develop guidance on corporate governance for public sector
auditors;
contributing to the development of
British Standards for information systems management which will
have a beneficial impact on the reliability of IT operations in
both public and private sectors;
participating in an Accounting Standards
Board working group developing a public sector version of its
Statement of Principles for Financial Reporting;
membership of a Chartered Institute
of Public Finance and Accountancy working group on the implementation
of the new pensions accounting standard (FRS 17) in the public
sector; and
participating in an Institute of
Chartered Accountants in England and Wales' working group on developing
guidance for accountants reporting on grant claims in the public
sector.
2.17 The National Audit Office is also represented
on the following bodies, some of which deal with value for money
matters as well as financial audit:
Financial Reporting Council. The
Comptroller and Auditor General is an observer at the Council
and a member of the Financial Reporting Review Panel.
The Public Audit Forum. The
Comptroller and Auditor General, together with the heads of the
other national audit agencies, make up the Forum. Current projects
include the relationship between auditors and inspectors and obtaining
management value from accruals accounts.
Institute of Chartered Accountants
in England and Wales. A National Audit Office Director is
on the Financial Reporting Committee, and a member of staff serves
on its Council. A number of other members of staff contribute
to various working groups or committees.
Chartered Institute of Public
Finance and Accountancy. An Assistant Auditor General is a
member of the Council and is on the Technical Committee and another
chairs its Central Government Panel. Other members of staff participate
on its other professional panels and committees.
Association of Chartered Certified
Accountants. A member of staff is on the Public Sector Technical
Issues Committee.
Auditing Practices Board. An
Assistant Auditor General is a member of the Public Sector Committee.
Financial Reporting Advisory Board
to the Treasury. An Assistant Auditor General is a member
of the Board.
Accounting Standards Board's Public
Sector and "Not-for-Profit" Committee. A Director
is a member of the Committee.
KEY DEVELOPMENTS
IN THE
NATIONAL AUDIT
OFFICE'S
FINANCIAL AUDIT
WORK
Ensuring that Departments' resource accounts provide
proper Parliamentary accountability
2.18 The first stage in the introduction
of resource accounting has been achieved, with the completion
of three years of parallel running with appropriation accounts
(1998-99 dry run; 1999-2000 and 2000-01 fully published resource
accounts). The 2001-02 financial year is the first year of resource-based
Supply and the first year in which resource accounts will provide
accountability to Parliament in place of appropriation accounts.
Departments are now subject to resource-based, as well as cash
based, limits. The Office needs to provide assurance to Parliament
that results are being presented fully in accordance with accounting
standards. It also needs to be able to provide assurance that
the details of expenditure compared with the Estimates are being
fairly represented. This and the additional features of resource
accounts set out below make the audit work much more demanding.
Departmental assets and liabilities
are recognised on Resource Account balance sheets. Auditors need
to ensure that all assets and liabilities have been identified
and properly accounted for.
Resource Accounts provide Parliament
with much more information on operating costs and revenues. As
well as including analyses by type of expenditure and income,
transactions are analysed by objective and by programme. These
analyses, in separate financial statements, are supported by additional
detail in notes to the account.
Supplementary financial statements
are required for some departments: for example pension fund statements
for public sector pensions schemes need to be prepared and audited.
Agency accounts are consolidated
into their parent departments' Resource Accounts.
2.19 Departments continued to improve the
quality and timeliness of their resource accounts for 2000-01,
compared with those for 1999-2000. Nevertheless, nine out of the
52 accounts for 2000-01 received a qualified audit opinion, and
21 accounts were presented for audit after the statutory deadline
of 30 November. Much, therefore, remains to be done by some departments
to achieve unqualified accounts and timely rendition for audit.
The consequences for the Office's financial audit are that additional
assistance, examination and testing over and above what would
be required to express an opinion on soundly based accounts, continue
to be required to overcome the accountingand in some cases,
staffingdeficiencies.
"WHISTLEBLOWING"THE
PUBLIC INTEREST
DISCLOSURE ACT
1998
2.20 The Public Interest Disclosure Act
1998 came into force on 2 July 1999, and provides a right to redress
in the event of unfair dismissal or other sanction for individuals
("whistleblowers") who make disclosures relating to
malpractice in the workplace. The Act aims to encourage responsible
disclosures and encourages internal disclosures in the first instance.
However, where an individual reasonably believes they would be
victimised or there would be a cover up, the Act provides for
them to make protected disclosures externally to prescribed persons.
2.21 The Comptroller and Auditor General
is a prescribed person under the Public Interest Disclosure Act
1998 for receiving disclosures of matters in the public interest
from employees of any organisation. He is prescribed only for
disclosures that concern the proper conduct of public business,
fraud and corruption in relation to the provision of centrally-funded
public services. The Act does not require the Comptroller and
Auditor General to investigate allegations, but in view of his
audit and reporting duties, he follows up relevant allegations.
2.22 The National Audit Office has set up
a dedicated telephone line, publicised on its website, to receive
disclosures, and may also receive allegations in the course of
its work. As public awareness of the Act increases, so has the
number of allegations received by the Office, which are now running
in the order of 50 a year.
2.23 The disclosures to date have included
references to tendering procedures, the contractual status of
consultants, performance-related pay, the misuse of funds, and
overseas travel. In practice, the majority of allegations warrant
further investigation, although to date no instances of fraud
or mismanagement have been confirmed. This does not mean that
effort is wasted, however, since National Audit Office investigations
have led to a strengthening of controls at audited bodies.
CORPORATE GOVERNANCE
2.24 The adoption of the "Turnbull"
report on Internal Control by the central Government sector for
2001-02 accounts, and the Cabinet Office's Modernising Government
Agenda Action Plan have led to a greater awareness of the benefits
of sound risk management and internal control systems within central
Government bodies. The National Audit Office is contributing to
this process through sector wide initiatives under the auspices
of the Auditing Practices Board, the Public Audit Forum and a
joint Treasury/Cabinet Office working group on risk management.
It is also contributing through its audit work on internal controls
and management systems and the examination of bodies' Statements
on Internal Control. For example, many clients are strengthening
Audit Committees, in which the National Audit Office is playing
a major role.
INFORMATION TECHNOLOGY
2.25 The National Audit Office's clients
continue to make more use of IT to prepare their accounts and
to support electronic service delivery. From a financial audit
standpoint, the key requirements are that adequate controls are
built into departments' systems and that there is evidence that
the controls have operated effectively. The Office's commitment
to work with clients was reflected in its contribution to the
Public Audit Forum report on electronic service delivery, which
has helped to highlight the importance of shared standards and
certification schemes to ensure continuity of control. Over the
Plan period, the Office will continue to contribute to the maintenance
of existing standards and promote the development of new standards
where gaps are found.
2.26 The National Audit Office has made
extensive use of computer assisted audit techniques for a number
of years, and also uses the Internet and its own corporate intranet
to harvest and manage information. The Office is currently piloting
a mobile computing project, which enables staff to access this
and other information when they are away from the Office, thereby
improving efficiency. The Office aims to extend mobile computing
to all financial audit staff over the Plan period.
WHOLE OF
GOVERNMENT ACCOUNTS
2.27 The Treasury aim to produce an audited
set of whole of government accounts for the whole of the public
sector for 2005-06 with "dry-runs" for the two preceding
years. There is a phased approach with dry run accounts for central
government for 2001-02 and 2002-03 and fully audited and published
central Government accounts for 2003-04. The National Audit Office
has a key role to play in preparing for and eventually auditing
the central government and whole of government accounts. Work
is underway on the first dry run audit of the central Government
account, through direct contact with Departments, their agencies
and non-departmental public bodies, and through liaison with the
auditors of other bodies to be included within the account.
2.28 The National Audit Office is also continuing
with its substantial input into the range of complex accounting
issues that have to be addressed to enable a whole of government
account to be put together. These include the disclosure of tax
revenue on an accruals basis, for example to show amounts due
from taxpayers, rather than on a cash basis, accounting for social
security benefits, the accounting treatment of debt and reserves,
and the definitions of the bodies which will be included in the
account.
Efficiency improvements
2.29 Efficiency improvements in the way
the National Audit Office carries out financial audit will arise
from the application of the new computerised financial audit documentation
package (Team 21). The Office will need however, to continue to
invest appropriate levels of resources both into the computer
hardware necessary to support the IT and in the training of staff
using Team 21.
COSTS
2.30 The table below shows the average cost
of auditing accounts compared with the targets set. The Office
has successfully controlled its costs over time, keeping them
within or below targets and plans to continue to do so over the
Plan period.
1. Average costs of certifying accounts
|
| | 1998-99
| 1999-2000 | 2000-01
| 2001-02 |
|
Large, complex audits | Target
| 163-166 | 159-163
| 159-163 | 159-163
|
| Achieved |
155 | 149
| 156 | 154
|
Medium sized audits, of
average complexity
| Target | 36-38
| 36-38 | 36-38
| 36-38 |
| Achieved |
37 | 37
| 37 | 35
|
Small, non-complex audits | Target
| 4-7 | 4-7
| 4-7 | 4-7
|
| Achieved |
6 | 7
| 7 | 7
|
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Notes:
1.At 2002-03 prices in £000.
2.Examples of:Large, complex auditsNational Insurance Fund, Highways Agency
Medium-sized, average complexity auditsArts Council England, QEII Conference Centre
Small, non-complex auditsParole Board, Police Complaints Authority
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Quality and timeliness
2.31 The time taken from the end of a financial year
to the production of a certified account depends upon Government
accounting conventions; statutory dates for the signing of accounts;
and departments' ability to produce an accurate account for audit.
Notwithstanding a slight improvement in the timing of the presentation
of accounts in 1998-99, the overall trend since the mid-1990s
has been a decline in the number of accounts being presented for
audit on time. The standard of preparation of some accounts passed
to the Office for audit has also been poor. Departments have attributed
such difficulties to the need to concentrate on introducing resource
accounts, together with a lack of sufficiently qualified staff.
Inevitably this increases the amount of audit time that has to
be spent on such accounts. The ending of the requirement for appropriation
accounts from 2001-02 may help departments to submit their resource
accounts on a more timely basis in future years.
Impacts
2.32 The National Audit Office's certification audit
work is fundamental in securing high quality central Government
financial reporting and to assure Parliament that public resources
have been used in the way intended. Departments also benefit from
the knowledge that reliance can be placed on their financial statements.
The "deterrent effect" of audit should also not be underestimated:
rigorous independent scrutiny by the National Audit Office, reinforced
by the effect of the hearings of the Committee of Public Accounts,
is a major incentive for management to abide by the principles
of good corporate conduct, propriety and regularity.
2.33 There are also financial and other benefits arising
from certification work. The National Audit Office draws management's
attention to any scope for improvement in accounting and financial
control systems arising from the audit. If important issues arise,
or if the audit uncovers irregularities or improprieties, matters
can be reported to the Committee of Public Accounts in separate
Reports or Memoranda.
2.34 The National Audit Office analyses and measures
the impact of its work and records results in terms of the number
and type of significant changes it stimulates. In 2001 departments
made over 1,000 significant changes to their systems. Departments
also achieved savings in excess of £75 million in 2001 as
a result of the Office's financial audit work. For example:
The Maritime and Coastguard Agency undertook a review of
the charges it makes for the provision of statutory services to
ensure compliance with HM Treasury principles on full cost recovery,
and invited the National Audit Office to review its fees model
in respect of charges for ship surveys and seafarers' examinations
and certificates. The Agency implemented a number of improvements
recommended by the Office relating to long-term planning, the
reliability of information on the use of staff time, and monitoring
recovery rates.
The Highways Agency is empowered to enter into contracts
for road development where the primary beneficiary is a developer
but where there is also a public benefit, such as a road to a
new supermarket. The developer deposits the total cost of the
project in advance and the Agency's managing agents draw down
funds to pay contractors as the project proceeds. The National
Audit Office found a number of cases where the Agency had paid
out more money than developers had deposited. Some £10.5
million has so far been recovered.
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