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Efficiency Audit - Auditor-General's Office - Report of Independent Auditor, dated 5 March 1982


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The Parliament of the Commonwealth of Australia

REPORT OF THE INDEPENDENT AUDITOR

On an Efficiency Audit of the Auditor-General’s Office under the A u d it A c t 1901

Presented by Mr Speaker 10 March 1982 Ordered to be printed 25 March 1982

Parliamentary Paper No. 68/1982

Report of the Independent Auditor on an Efficiency Audit of the Auditor-General’s Office under the Audit Act 1901

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Report of the Independent Auditor On an Efficiency Audit of the Auditor-General’s Office under the Audit Act 1901

AUSTRALIAN GOVERNMENT PUBLISHING SERVICE CANBERRA 1982

Report of the Independent Auditor On an Efficiency Audit of the

Auditor-General’s Office under the Audit Act 1901

AUSTRALIAN GOVERNMENT PUBLISHING SERVICE CANBERRA 1982

© Commonwealth of Australia ISBN 0 644 01687 6

Printed by C. J. T hompson, Commonwealth Government Printer, Canberra

167 Macquarie Street, Sydney, N.S.W. 2000. 5 March 1982

Sirs In accordance with the provisions of Section 48 P of the Audit Act 1901,1 transmit to the Parliament a copy of my report signed on 5 March 1982 upon an efficiency audit of the Auditor-General’s Office.

Yours faithfully

EVAN DUFF CAMERON Independent Auditor Appointed under Section 48k of the Audit Act 1901.

Senator, the Honourable Harold W. Young The President of the Senate The Right Honourable Sir Billy Snedden The Speaker of the House of Representatives

Parliament House Canberra, 2600

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Contents

Page

SECTION 1 INTRODUCTION 1

1.1 Audit Arrangements ................................................. 1

1.2 Objectives ............................................................... 1

1.3 Approach and Scope ................................................. 1

1.4 Documentation and records reviewed ..................... 3

SECTION 2 AUDIT OBSERVATIONS AND RECOMMEN­ DATIONS 4

2.1 Overvie wo! Audit Observations ............................. 4

2.2 Audit Management and P l a n n i n g ............................. 5

2.3 O b serv atio n s............................................................... 5

2.4 R ecom m endations..................................................... 6

2.5 Audit and Work Paper S t a n d a r d s .............................

2.6 O b serv atio n s...............................................................

2.7 R ecom m endations...................................................... 8

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1. INTRODUCTION

1.1 Audit Arrangements The Audit Amendment Act 1979 amended the Audit Act 1901 to provide for the appointment of an independent auditor to carry out audits in relation to the Auditor- General’s Office. I was appointed independent auditor on 31 May 1979.

The functions of the independent auditor are set out in sub-section 48 K (1) of the Audit Act. One of those functions is “to carry out efficiency audits of the operations of the Auditor-General’s Office”. The manner in which efficiency audits are conducted, including frequency and scope is, subject to the provisions of the Act, at the discretion

of the independent auditor.

Early in 1981,1 met with the Auditor-General to discuss the feasibility of carrying out an efficiency audit of his Office. Subsequent to that discussion, I advised the Auditor-General that I would carry out an efficiency audit during 1981 and would limit its scope to the examination of certain key operating areas where it was felt the most

benefit could flow.

1.2 Objectives During 1980, the first three volumes of the proposed five volume General Audit Man­ ual (GAM) designed for the Auditor-General’s Office were issued.

In Chapter 3.2 of volume one of GAM the Auditor-General endorsed certain aims and objectives by which all audit efforts of his office might be guided. These are:

“ (a) to audit the various operations and undertakings of government so as to form opinions on government administration and report those opinions to the Par­ liament; and (b) to present independent and objective reports on the performance of depart­

ments and agencies directed towards stimulating improvements in public administration.” I advised the Auditor-General that I would carry out a review of his Office with the objective of forming an opinion on whether the manner in which it went about achiev­ ing the above aims and objectives was both economical and efficient.

1.3 Approach and Scope Chapter 1.3 of volume one of GAM states that:

“The five volumes as a set are intended to provide full documentation of the re­ quirements for auditing effectiveness in terms of the objectives of government, the policies of the Auditor-General, and acceptable managerial and professional criteria for the efficient performance of the audit function.” In carrying out my review, I have looked for adherence to the philosophy, policy, nature and design of audits performed by the Office expounded in GAM. However, I have recognised, in the course of the review, that the Manual has been available for only a relatively short period and many of the philosophies and policies represent major

changes in the previous methods by which the audit function of the Office was con­ ducted. My experience is that considerable effort is necessary to ensure that staff are properly educated in any new methodology. I am aware that the Office has invested sig­ nificant resources in the training of staff. I also have recognised that audit practices are

the subject of constant revision to adapt to changed circumstances and new techniques. Several areas of the manual were under review at the time of my audit.

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In addition, I have endeavoured to allow for the special role and function that the Auditor-General’s Office plays in the public sector. While it is basically involved in the auditing field, the Office in some areas is significantly different to a large auditing firm in the private sector. Some of those differences are:

• a private firm is obviously profit orientated, whereas the Office works within an approved predetermined expenditure budget • decisions to hire or retrench staff are readily put into practice in a private firm. The Office must work within the Public Service system and is subject to govern­

mental constraints on staff levels • most of the clients of the Office are substantially different from those encountered in the private sector, and • measurement of efficiency of job performance by staff is more difficult in the

Office because most of the productive effort is not recoverable by charges to clientele.

Nevertheless, allowing for the special influences on the Office because of the environment in which it operates, I believe the audit performance standards within the Office should not be significantly different from those of the private sector.

I advised the Auditor-General that the scope of my efficiency audit would be to review a representative sample of the audit work performed by the Office sufficient to enable me to express an opinion on whether the performance of the audit function was being carried out in an economical and efficient manner. In the course of my audit, I would have particular regard to whether:

• the auditing policies and procedures in use were in accordance with those set down in GAM and with generally accepted auditing standards • those policies and procedures were adequately applied • work paper documentation was in evidence to support audit opinions and the

work papers had been subjected to adequate review procedure, and • planning, supervision and administration of the limited staff resources were of an acceptable level.

In selecting a representative sample of the audit work performed by the Office, I had regard to the organisational structure of the Office and the diversity of clientele. I decided to select one audit assignment from each of the three field operational divisions, “A", “B” and “D ” which were both varied and possessed of differing gradations of com­ plexity, viz:

Assignment Division

Statutory Authority, Annual A u d i t .......................................................... A

Government Department, Field Surveys ................................................ B

Statements of the Minister for Finance (Basic Financial Audit) . . . . D

In the course of the audit, I visited central office in Canberra and the branch offices in Sydney and Melbourne. All branches were not scheduled for review on the assump­ tion that the procedures for controlling, administering and carrying out the audits should be similar to those followed at the branches selected.

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1.4 Documentation and Records Reviewed

I examined, in the course of the audit, documentation and records which were con­ sidered to be relevant. These included: • volumes one to three inclusive of GAM • audit management and planning records maintained at central office including the

strategic audit plans, tactical work programs, work and cost analysis, work analy­ sis report and records of actual performance against budget • records relating to timekeeping and cost control maintained at branch offices in­ cluding planning work papers, time records, assignment of staff, actual perform­

ance against budget and branch productivity • correspondence and similar types of files for control over client audit, liaison be­ tween central office and branch offices and effectiveness of communication procedures

• reports issued by branch offices to central office in respect of audit findings for evi­ dence of proper follow up and disposition of matters contained in such reports, and • all significant work papers relating to field work performed by branch offices as

follows: (i) Statutory Authority, Annual Audit Melbourne office audit work papers relating to the audit of the authority’s head office and Victoria branch for the year ended 30 June 1980 and the interim audit

for the year ended 30 June 1981, on a test basis (ii) Government Department, Field Surveys Sydney office audit work papers for two field surveys of the New South Wales branch of the Department completed around mid 1980 and early 1981 respectively

(iii) Statements o f the Minister for Finance (Basic Financial Audit) Canberra office and Sydney office audit work papers, relating to the audit of the Minister for Finance’s Statements for the year ended 30 June 1980 and the interim audit for the year ended 30 June 1981 on a test basis.

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2. AUDIT OBSERVATIONS AND RECOMMENDATIONS

2.1 Overview of Audit Observations

The objective of the audit was to enable me to form an opinion on whether the audit function was being carried out, so as to achieve the aims and objectives of the Office, in an economical and efficient manner.

In carrying out my audit, I reviewed a significant quantity of documentation and spent considerable time in discussion with the professional staff of the Office. Although the audit disclosed several instances where scope existed for improvement of systems and organisation controls to enhance the operating efficiency of the Office, I believe

that, overall, audit performance and management and planning of staff resources were of an adequate standard and in keeping with the policies and procedures laid down in GAM.

My audit findings on the areas covered during the course of the review and my rec­ ommendations for improvement were forwarded to the Auditor-General for comment. Discussions were held with the Auditor-General and his staff on the matters raised. I was pleased to find that the Office was aware of most of the deficiencies and the need for improvement and either had taken corrective action or planning was well advanced to institute new systems and controls. A memorandum containing my detailed audit ob­ servations on each of the assignments reviewed has been forwarded to the Auditor-General.

I have taken into account in arriving at my opinion, and was impressed by, the following:

• the high technical standard of GAM which was the culmination of considerable effort by the Office over an extended period prior to its issue in 1980. The Office has invested significant resources in the professional development of its staff to ensure that they fully comprehend the concepts, methodology and practice enun­ ciated in the Manual. Full benefits of its introduction are beginning to be felt by the Office

• the Office makes a significant commitment to the professional development of its staff particularly in the area of the audit of ADP systems. The latter training is essential because of the increasing complexity of ADP systems in the government sector

• the Office has invested substantial resources in the development of computer audit techniques and in the training of professional staff in their use. Specialised computer-assisted techniques such as ASDA and CASPA have been devised by the Office

• the Office puts considerable detail and effort into planning for the utilisation of available staffing resources so as to achieve its audit requirements. The three year cycle method of planning through the use of Strategic Audit Plans (SAP’s) and Tactical Work Programs (TWP’s), for the audit requirements of the Office is an intelligent approach to the apportionment of scarce resources. The approach is in line with current practice in the private sector. The planning task should be con­ siderably enhanced by the introduction of the new management (audit) infor­ mation system early in 1982, and

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• the high calibre and the enthusiasm for their work of many of the senior staff dealt with in the course of the audit was most impressive.

Taking into account all of the information obtained during the course of my audit, I have formed the opinion that generally the audit function was carried out in an econ­ omic and efficient manner during the period covered by my review.

The introduction of the planned improvements to the systems and controls will further enhance the operational efficiency of the Office and the ability to cope with its responsibilities.

I am aware that, because of constraints placed on staff levels, consideration is being given to extending the three year cycle to ensure adequate audit coverage of audit responsibilities. I am of the opinion that any extension may prove difficult to justify.

My audit findings and recommendations are summarised in the following paragraphs.

2.2 Audit Management and Planning “Audit management and planning includes control of human resources and physical fa­ cilities in a logistics sense and carries this further to a professionally viable concept of resources control. It implies a provision of audit services which comply with generally

accepted performance standards or norms for the audit function." (GAM chapter 2.2.2).

2.3 Observations 2.3.1 The Auditor-General plans, over a three year cycle, to cover all material aspects of audits assigned to or accepted by him. SAP’s, which are prepared each year, indicate the proposed audit coverage for the ensuing period of thirty six months. Resource ap­

portionment is based on planning information and considers the resource requirements for all mandatory audits and the balance of resources available to undertake non­ mandatory audits.

Comparisons of hours incurred by branches in carrying out assignments with the budgets prepared at central office through the SAP’s and TWP’s showed that on some of the Office’s audits there were significant overruns, particularly in 1980, indicating deficiencies in the budgeting process and the monitoring of staff performance. I was

advised that the 1980 SAP’s were the first prepared under the cycle approach required by GAM and because of the absence of historical trends, estimates of hours required for assignments in retrospect proved to be inadequate.

Overruns of time allocated for mandatory audits reduce the time available for non­ mandatory audits with the result that further time is incurred by senior personnel reviewing priorities as to which non-mandatory audits should be deferred.

Mainly because of the experience gained in 1980, the 1981 SAP’s were generally more accurate than those of the previous year. However, I did note that some projects planned to be carried out in 1980 but subsequently deferred were scheduled as being again deferred in the 1981 SAP’s.

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It is appreciated that there is a certain amount of flexibility regarding non­ mandatory audits. However, because of the limited resources of the Office any deferral from one year must have a compounding effect on ensuing years. As a result, the adher­ ence to the three year cycle approach of GAM may not be achieved.

2.3.2 At the time of the audit, the ADP produced time reports were inadequate to meet the needs of the office for the efficient management of staff resources. In particular:

• the Work and Cost Analysis (WACA) report was not available until the follow­ ing month and was therefore of limited use except as an historical record of accumulated hours of staff. As a result, principal auditors at central office were required to spend considerable time manually updating their knowledge of the status of jobs, and

• the Work Analysis report recorded actual hours incurred by sections. Budgeted hours were shown only in total and to compare them with actual hours, a manual addition was necessary.

2.3.3 The ratio of productive hours charged to client audits to available hours (ex­ cluding leave, public holidays, etc.) of staff employed at branch offices visited was gen­ erally around 70% during the period in which the audit assignments covered by our re­ view were carried out, ie, 1980 and early 1981. This ratio would be unacceptable in private practice, which generally looks for a recovery rate of at least 80% for the ma­ jority of field staff. I believe that there was inadequate monitoring of staff non­

productive hours during the period. We were informed that the time reporting (TS6) forms were reviewed at branch level by the Chief Auditor or his authorised officer to ensure that time charged to overheads is justifiable although the forms examined bore no evidence of review nor provided for signature of the reviewer.

I am aware that steps have been taken by the Office to increase productivity and I have been advised by the Auditor-General that a ratio of around 80% is now being achieved.

2.3.4 In discussions with the professional staff at branch offices, it became evident that there was some uncertainty as to the role of the Principal Auditor located at cen­ tral office and the responsibilities of persons located at the branches for the control and administration of audit assignments although the respective roles of the Chief Auditor and Principal Auditor had been redefined in February 1981.

2.4 Recommendations 2.4.1 Employees responsible for budgeting and monitoring staff performance and for monitoring the audit assignment progress need information of sufficient and timely nature to ensure that resources are efficiently managed.

The management information system in use at the time of the audit was inadequate to meet the current needs of the Office to carry out this function. However, I am aware that the Office has developed a new management (audit) information system which is scheduled for introduction early in 1982. This new system is designed to produce more timely and useful information for the management of staff resources and specifically will:

• provide management reports in a timely manner

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• provide information to assist all levels of management with planning, monitoring and reporting of Office performance • provide reports to assist with competing demands for resources • assist with manpower planning, and

• facilitate fee estimation, cost monitoring and billing.

2.4.2 Levels of staff productivity should be constantly reviewed to determine whether they can be improved. Recording of non-productive time should be closely monitored at branch level to ensure that it is kept to a minimum and justifiable.

The new management (audit) information system referred to earlier should greatly enhance the capability of supervisory staff to monitor the performance of professional staff to ensure the time not directly charged to clients is justified.

The manpower resources of the Office are limited and the efficient management of these resources is necessary to achieve its objectives in the most economical manner. Obviously, any reduction of unnecessary overruns of time spent on jobs and any in­ creases in productivity would be of significant benefit.

2.5 Audit and Work Paper Standards “All audits performed by officers under responsibilities and powers of the Auditor- General for the Commonwealth are to comply with Auditing Standards as set down in this Manual. Audits of financial statements of autonomous entities of government and

audits by arrangement of other entities, are also to comply with requirements of State­ ments of Accounting and Auditing Standards issued by the professional accounting bodies in Australia and with Auditing Standards of this Office as appropriate to oper­ ations in the public sector.” ( G A M chapter 1.5.1).

2.6 Observations Audit work and other files reviewed did not meet in all respects the auditing standards encompassed by the above extract from G A M. The files were generally deficient in the following areas.

2.6.1 Many of the audit working paper files lacked evidence of review by senior auditors of the work performed by audit staff of lesser experience although I was assured that reviews had been carried out.

Lack of evidence of review of working papers by more senior auditors of work per­ formed by audit staff of lesser experience could indicate inadequate supervision. As a result, undue reliance and responsibility could be placed on auditors with insufficient experience to assess accounting and departmental action package questionaires and the significance of key control points and to set audit steps in support of substantive testing.

2.6.2 Although I was informed that the Chief Auditor, or a person designated by him, reviews the audit working papers prior to the issuing of his report to central office on an assignment there was no evidence in the files as to the scope of the review or that it had been carried out.

2.6.3 The master action package in volume three of GAM provides guidelines for set­ ting and interpreting audit plans, conduct of audits, arrangement of working papers and exercise of quality control. After completing the evaluation guidelines and rationale

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statements, it is necessary to prepare procedural programs to test key controls for com­ pliance and substantive programs to investigate weaknesses and confirm balances prior to commencement of the field testing.

Generally, pre-prepared procedural and substantive audit programs were not used in the audit files reviewed. Programs on the files were usually hand written by the field auditors.

2.6.4 In addition to the above, work paper files were deficient in that there was a lack of: • adequate summaries to link together relevant key work papers and cross ref­ erences between various work papers of related interest thereby making the re­

view process more time consuming • written justification of sample sizes selected for substantive testing of revenue, payments, receipts, etc. at branches • initials of persons preparing work papers and the date of preparation, and • adequate explanation of symbols or legends used on work papers.

2.6.5 Although there was evidence of considerable activity by the office in reviewing internal audit activities, there was no explanatory memoranda on the files reviewed indicating to what extent consideration had been given to the effectiveness of the internal auditors’ work when setting the audit scope.

2.7 Recommendations 2.7.1 There should be a consistent program of review and supervision of all work done during the audit and upon completion to ensure minimum standards are maintained by all sections. Review should be carried out by the senior auditor during the duration of the audit and on completion of the overall job by the Chief Auditor or an Assistant Chief Auditor or a senior officer who is not involved in the client audit.

The latter review is important to enable the Chief Auditor to be confident that, prior to the issuing of his report, all necessary audit work has been completed and the working papers contain adequate evidential matter. I recognise that the Chief Auditor himself cannot, because of time limitations, be expected to carry out all of these re­ views. However, I believe that this review is necessary to ensure that the working papers adequately support the final opinion, that Office policies and procedures are being followed and that uniform standards are being maintained.

I am aware that the appointment of additional Assistant Chief Auditors to the branches was approved early in 1981 but the positions had not been filled at the time of my audit. These appointments should enable the standard of supervision over the work of senior auditors to be raised and ensure that professional staff are adhering to and ap­ plying properly Office standards and methodology.

Consideration should be given to the establishment of a program of regular quality control reviews to ensure that standards of audit work are uniform throughout the Office.

2.7.2 Pre-prepared detailed audit programs, based on the knowledge of the client’s ac­ counting system should be tailored to meet the particular circumstances of the client under audit having regard to the evaluation guidelines and rationale statements.

2.7.3 A comprehensive set of audit work papers should be arranged so as to enable a person reviewing the files to readily establish the work carried out in each area of audit.

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The papers should be indexed and cross referenced where they are related with legends explaining audit symbols used. They should record the names and/or initials of the auditors preparing the papers and the date they were prepared.

GENERAL I would like to express my appreciation to the Auditor-General and his staff for the as­ sistance and co-operation extended during the course of the audit.

Sydney, New South Wales. 5 March 1982

EVAN DUFF CAMERON Independent Auditor Appointed under Section 48K of the Audit Act 1901

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