Public Sector Auditing
A Discussion of Public Sector Auditing Standards and Current Issues
An Introduction to Public Sector Auditing
The public sector in Canada is comprised of all levels of government, government
organizations, including not-for-profits such as schools, universities, colleges and
hospitals, government business enterprises and government partnerships. Public entities,
like their private sector counterparts, use financial statements to report on the financial
position and the change in financial position of their reporting entities. “Financial
statements provide information that is critical to evaluating the financial condition of the
government, and they form the cornerstone of a government’s financial report. PS1000.08″
Financial reporting further serves as a means for a government and its reporting entities to
present an account of its use of public resources.
All levels of government within Canada publish financial statements. Canadian law
requires the disclosure of public sector financial reports to users of such information,
including the general public, investors, and the legislators who make the decision on where
public money is spent. Legislators and councilors are primary users of public sector
financial statements as they determine the distribution of public resources, and hold the
government accountable for its financial conduct. Other users may include analysts, other
governments, or any party interested in the current state of a country’s economic affairs.
Given the importance of the accountability relationship that exists between the government
and its financial statement users, a need arises for an unbiased, objective assessment of the
financial statements and the government’s management of public funds. The role of
government auditing and the public sector auditing bodies that administer such audits is
essential to the discussion of government accountability. As with private sector audits,
public sector auditing provides the unbiased and objective assessment of the financial
reporting results of public sector entities.
The Audit Role in the Public Sector
Role of Public Sector Governance in the Audit Function
In discussing the importance of the public sector audit function, it is necessary to first
discuss the role of governance in the public sector. The role of public sector governance
expresses the basis for key public sector performance measurement functions. Public
sector governance is comprised of procedures and policies that are used to direct an
organization`s activities and to provide reasonable assurance that objectives are met and
that operations are carried out in an ethical and accountable manner. With public sector
entities, this means ensuring the parties` credibility and confirming the proper behaviour of
officials of the entities to limit corruption.
Governments hold coercive (police, taxation, and regulatory) powers over citizens and
economics enterprises, and thus they must enact protections to ensure accountability in the
use of those powers and in the delivery of the expected services. Governance principles
that are critical to the public sector include:
Accountability: The notion that public sector entities and the individuals and parties within
them are responsible for their decisions and actions.
Transparency: The concept of openness in government and the disclosure of important
decision making information to stakeholders.
Honesty and Integrity: Government officials prescribe to such values to promote public
trust.
Equity: How fairly government officials exercise the power that has been given to them.
Oversight: Addresses if the government entity is doing what it is supposed to do and
detects and deters public corruption.
Insight: Provides an assessment of government programs, policies, operations and results.
Foresight: Discussed trends and emerging challenges.
As is the case in private sector accounting, auditors use several different tools other than
simply financial statement audits to reach these goals. These include financial audits,
performance audits, and investigation and advisory services though both the internal and
external audit functions. Further, there are several overarching goals of audit function in
the public sector. These generally include:
Helping government organizations achieve accountability and integrity.
Improving management and efficiency of operations.
Instilling confidence among its stakeholders, both the general public and other interested
parties.
Key Elements of a Public Sector Audit
Government audits must be configured in a way that achieves credibility, equity, and
evaluates the behaviour of governments to reduce the probability of corruption. In order to
achieve these objectives, public sector audits must meet the following criteria:
Government audits must be configured in a way that achieves credibility, equity, and
evaluates the behaviour of governments to reduce the probability of corruption. In order to
achieve these objectives, public sector audits must meet the following criteria:
Organizational independence: Audit activities must maintain independence from those it is
required to audit so that work can be conducted without undue influence and interference.
A formal mandate: The duties of the auditor should be to set out a legal document
describing the scope and purpose of the audit.
Unrestricted access to information pertinent to the audit: Auditors should be able to access
all information that is important in formatting an audit conclusion. Restrictions to access
would introduce a limitation of scope.
Sufficient funding: The cost of the audit must properly reflect the amount of audit work to
be performed.
Competent audit staff: Auditors must have the training and qualifications necessary to
perform an effective audit.
Follow a set of professional audit standards: Auditors should have a framework to compare
reporting results with. Auditors should ensure reporting entities conduct their work in
accordance with the recognized standards.
Types of Public Sector Audit
In the public sector is uncommon for an auditing practitioner to perform multiple
engagements in order to provide additional assurance given the different needs of users
compared to those in the private sector. There are several different forms of engagements
that practitioners can perform in order to provide assurance to the entity’s users. The first
and most common form of engagement is one of an external audit of the entity’s financial
statements. This form of audit is completed by either an external accounting firm or by the
Office of the Auditor General (OAG), as they are viewed as an independent party for all
government agencies and crown corporations. By examining the financial statements of
the entity, the auditor is able to gain assurance and provide their opinion on the entity’s
compliance with the applicable reporting standards for public sector entities, Public Sector
Accounting Standards (PSAS).
An additional form of engagement that can be completed to provide the users with
additional assurance of the public entity is a performance audit. This form of engagement
is most often completed by the OAG with assistance provided by the internal auditors
report on internal controls and overall performance of the entity. By examining the
performance of the entity in detail, the practitioner is able to properly determine the
effectiveness of the entity and their associated programs. Additionally, auditors are able to
evaluate how efficiently and economically the funds granted to the entity are being spent.
Furthermore, auditors may engage in a legislative and regulatory compliance audit, which
examines the entity’s ability to adhere to their mandate as well as any regulatory
responsibilities. Given the large amount of legislature and regulations a public sector entity
must comply with, practitioners will identify and focus on specific pieces of law that are
seen as vital parts to be in compliance with.
Finally, external auditors may also be acquired to perform additional audit engagements of
special nature in the case the entity does not have adequate experience to perform the
engagement on their own, as discussed above. Examples of some of the different types of
engagements external auditors may be obtained to perform include: IT and systems audit,
forensic audits, and specialized audits. There are numerous different forms of engagements
that an external party may specialize in that may be sought after by a public sector entity at
some point in time.
Public Sector vs. Private Sector Auditing
When looking at the needs of assurance, we can see some vast differences between the
needs of public sector and private sector companies. One of the more noticeable
differences between the two sectors is the goals and objectives that are held by members of
each sector. For public sector companies, the intention is not to generate wealth and profit,
as seen in the majority of private companies. Additionally, public sector firms are not
motivated to act in the best interest of their shareholders as they are non-existent, given
that most public sector companies are government run and do not provide the opportunity
to support shareholders. Alternatively, crown corporations and government agencies are
more focused on achieving various social and economic goals for all Canadian citizens,
such as providing health care. The various goals of each sector would otherwise be
impossible to obtain by their counterpart given the differences in how they determine
success.
Another major aspect that impacts the assurance needs of public sector companies that
varies from the private sector is the funding provided. While the private sector can be seen
as self-sufficient in regards to the fact that they are able to generate considerable revenues
on their own in order to cover their operating costs, public sector entities are not seen the
same way. Rather, these entities obtain their funding from the various levels of government
through the process of authorizing budgets and providing the necessary resources to cover
operations and meet their desired objectives. As a result, a high level of stewardship is
required by the management of all government agencies. It is necessary for the authorized
