Audit Commission

Audit Commission

 

Introduction

            Business organizations in both public and private sectors perform a variety of tasks and responsibilities that enable it to function in an effective manner. These tasks and responsibilities are distributed among teams, which are assigned to fulfill their duties in a specific organization. All designated tasks are equally important in a company, thus, making all employees and staff crucial to the operations of the organization. One of the crucial functions in both public and private organizations is the process of auditing.

            It has been reported that an audit is an evaluation of an organization, system, process, project or product, which involves the independent and fair assessment of the financial statements of the organization (2007). Knowledgeable, independent, and objective individual or group of individuals, known as auditors or accountants, makes a report based on the results of the audit. In addition, this function is performed to determine the reliability and validity of financial information, and to present an evaluation of a specific company or an internal control of a particular business system, for these systems must comply with the generally accepted standards laid down by national governing bodies for regulation (2007). Because of such importance, this paper seeks to analyze and evaluate the external auditing and its role in the public and private sectors.

 

1) What are the advantages of having a national body to appoint and oversee the work of external auditors in the public sector?

            External auditors are independent staffs that are assigned to evaluate financial statements or to perform other agreed upon evaluations, are employed for annual engagements and called upon from the external environment of the organization (2007). In addition, they are being relied on to present an unbiased and independent assessment on the financial statements and legal entities of an organization, such as the government or private sectors. Their role is to communicate their opinions if the financial statements of a company are free of material misstatements, including investigation of issues on regulation and taxation, which are based on the internal controls of the company ( 2007). In a public sector, the work of external auditors is equally important because they serve to alert or warn the organization regarding policies, issues and other inaccuracies in terms of their internal control or audit ( 2005). However, in overseeing the work of external auditors, a responsible national body must be assigned to do the tasks. Having a national body in the public sector involves a variety of advantages or benefits. These advantages, as pointed out by  (1993) include the following:

• Achieve mutual understanding in the planning process – This involves coming up with cost-effective process for the cost reduction of the organization.


• Advantage of the public sector in producing and supervising a report in an appropriate, fair, and timely manner


• Observing professional work ethics – This can exist between the national body and the external auditors to achieve mutual understanding and teamwork.


• Understanding their roles and working together to facilitate effective arrangements


• Practice effective communication – With the supervision of the national body, proper information regarding the organization will be effectively shared and dissipated to the external auditors for more reliable and credible data


• Reinforce and reinstate purpose and process of the audit


• Overseeing their work would allow the national body to recognize matters of concern, which they would like their external auditors to consider in the audit


• Through supervision of a national body, the external auditors can plan coordinating with the organization’s internal auditors when needed – This would produce more accurate and reliable data


• Overseeing and appointing the work of external auditors would prevent potential problems that may arise, such as access to information or people – In avoiding this, a smooth and credible external audit can be facilitated.

 

With such advantages, the external auditors will be able to produce an unbiased audit regarding the public sector’s entities, with the guidance and supervision of its national body. This not only enhances and develops the relationship and communication of both parties, but also contributes to the improvement of the coordination and teamwork being exhibited in the public sector.

 

2) What is the role of the auditor in respect of policy decisions made by audited bodies?

            Because auditors have the access to the financial data of organizations, they are governed by specific rules and policies in accordance to information and data disclosure. This is especially applicable to external auditors, who are considered as third parties; for these policies aim to prevent dissipating important data from getting into the wrong people (2006). In addition, because policymakers have always considered auditor changes to be important events, auditors are required to enable detailed and timely disclosures, and monitoring such disclosures, require the report by both the auditor and the client ( 2002). With such importance, the role of auditors on policy decision made by the organization must be given emphasis. This would reinforce the limitations of auditors and prevent irresponsible use of such valuable information.

            With respect to policy decisions, the primary role of auditors is maintaining a good and effective communication at all stages of the audit, specifically to become clear about the process and goals of the audit. Second, because of some limits to openness that should be retained to maintain effectiveness of audit, the auditors must protect the interest of the organization, by not disclosing some details of their audits, such as those that address the risk of fraud. Third, auditors must fully consider the needs of the audited bodies in relation to the timing of the audit. In relevance to this, the auditors should agree a sensible timetable for submission of good quality and complete accounts. In addition, with respect to policies of the organization, the auditors must plan their work effectively to minimize business interruption. Moreover, the auditors must reduce changes in key audit personnel from one year to the next in allowing audit staff to develop a sound business understanding with the organization it audits, and deliver the full potential benefit of their accumulated knowledge and experience (2000). With these roles, auditors will be able to maintain and sustain a good relationship with the organization, thus, upholding compliance to the policies and rules being implemented by the organization. From this compliance, the auditors will be able to prevent the irresponsible use of such important information. Emphasizing and reinforcing their roles will enable and ensure the organizations they serve that their disclosed information and data will be protected and secured, thus, ensuring a smooth relationship between both parties.

 

3) In what ways could value for money auditing be applied to the private sector?

            Value for money auditing is a recent expansion in the scope of auditing, and generally applies in the public sector, which expresses concern with regularity of spending and compliance with rules, laws, and regulations. It also referred to as performance auditing, comprehensive auditing, management auditing and efficiency auditing ( 2003). Its most important objective managing financial, human and physical resources, with due regard to economy, efficiency and effectiveness ( 2003). Despite its usefulness in the public sector, this form of auditing can also be useful and applicable in the private sector in accordance to the evaluation of its respective core values, including economy, efficiency and effectiveness. In addition, its relevance to the private sector can be applied in using the 4 Pillars Approach.

• Economy – This core value is defined as reducing the cost of resources that was used for an activity in relation to its appropriate quality, wherein relevant resources include physical, financial, human and information ( 2003). In value for money auditing, resources are given much importance because an organization must be able to obtain the right amount, quality and cost of resources, at the right place, and at the right time ( 2003). If this is very applicable and relevant in the public sector, then it is also equally applicable and relevant in the private sector for having the same resources. Private sectors must also give emphasis to economy to achieve cost reduction in their operations. With giving importance to economy, private sectors would be more efficient and effective in allocating their resources, thus, providing more for the different functions and teams within the organization. Moreover, this would enable the organization to give importance and care for the welfare of its employees, customers, stakeholders, and its community.


• Efficiency – This refers to the relationship of inputs and outputs, which is relevant to the use of resources, and measuring it presumes the existence of acceptable standards ( 2003). Efficiency standards in relation to value for money auditing will be useful in private sectors because auditors may gather data indicating the usefulness and utilization of resources in an organization. Although such findings may not affect the activities of the organization, the findings may help organizations in the private sector with solutions or answers in relation to implementing changes and projects in the company. Efficiency measures may help organizations in the private sector assess and evaluate its resources in relation to its employees, partners, market, products, distribution channels, and processes and operations.


• Effectiveness – This core value is defined as an ends oriented concept that measures the degree to which predetermined goals and objectives for a particular activity or program are achieved ( 2003). Effectiveness is related to achieving the goals and objectives of an organization, and thus, also relevant and applicable to the private sector. Like the government, the organizations in the private sector also have goals and objectives to pursue and target. Because effectiveness is related to goal achievement, this element can be discussed in relevance to resources and the other means to attain goals, including skills. Superior skills and resources, taken together, represent the ability of the organization to do more and better. Superior skills are the distinctive capabilities of people in the organization that distinguish them from people in organizations ( 2003). The use and interaction of the two factors enable an organization to achieve and attain its short-term and long-term objectives.

Lastly, the concept of value for money auditing is relevant to private sectors in line with the implementation of the 4 Pillar Approach. The 4 Pillar Approach involves 1) making the project objectives clear; 2) applying the proper processes; 3) selecting the best available deal; and 4) challenging or ensuring the deal makes sense (2006). In auditing, this approach is applicable to the value for money concept because like public organizations, the private sector needs the implementation of such approach in order to effectively and efficiently assess and evaluate their resources and their entities. With this approach, auditing will be more organized and systematic for it follows a framework and guide that will enable auditors gather information and data more effectively. In addition, with such an approach, auditors would ensure that their roles of preventing irresponsible use and misuse of important information would be achieved.

 

Conclusion

            Auditors play an important role in any organization, both in private and public sectors. This importance lies on the fact that auditors are able to protect and organize the relevant data in any organization. With this, their work and role must be given emphasis, including the approach that they can use to improve.     

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