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Financial auditing explained

Accountability and reporting by public sector agencies

The chief executive officer, or departmental secretary is responsible for the accountability and governance of their agency, or department. This responsibility is prescribed in legislation such as the Financial Management Act 1994, the Local Government Act 1989 and/or other specific enabling legislation. In most instances, audit committees have been established to assist in the meeting of these obligations.

Accountability and governance responsibilities encompass the maintenance of proper records of transactions and activities of the entity, the effective internal control structure and preparation of annual financial statements.

An effective internal control structure assists management in ensuring activities undertaken by the entity are authorised and controls operate as intended. Effective internal controls assist in:

the prevention or detection, and correction of irregularities when they occur

the safeguarding of assets from unauthorised use or disposal

ensuring the completeness and accuracy of financial records that validates the underlying information for the preparation of financial statements and supports timely financial reporting.

The primary responsibility for the prevention and detection of fraud and error lies with the entity’s management.

Why have financial audits?

An essential element of the accountability and governance process is the independent assurance provided by the Auditor-General that the information provided in a public agency’s annual financial statements is presented fairly, and is relevant and reliable.

Financial statement audits are conducted in accordance with the requirements of Australian auditing standards.

Financial audit resources

The Auditor-General is the auditor of all Victorian public sector agencies.

Financial audits may be undertaken by staff of the Auditor-General’s Financial Audit Group or by private sector contractors appointed under the provisions of the Audit Act 1994.

Private sector contractors (external audit service providers) are appointed following a process of contestability and are managed by the Office's Financial Audit Group.

The Auditor-General maintains a policy where a minimum of 35 per cent of financial statement audits within each key government sector are audited by the Office's Financial Audit Group. This ensures that effective knowledge of emerging issues within each sector is retained within the Office.

Financial audit process

The Auditor-General utilises a risk-based methodology for the conduct of financial audits. Under this methodology, the organisational risks and management controls within an entity are identified and assessed, with the most appropriate combination of compliance procedures (testing of controls) and substantive procedures (verification of specific financial transactions and balances) selected in order to conduct an effective and efficient audit.

The following diagram provides an overview of the key phases and activities undertaken in a risk-based financial audit.

Overview of the financial audit process

The strategic planning phase is a 2-part process, involving an assessment of the entity and of its processes:

At the entity level, the assessment involves obtaining an understanding of the operations of the client, including recent developments, the key risks facing the client and the client's risk mitigation strategies, and the entity’s governance and management control framework.

At the process level, detailed assessment of controls and processes pertaining to management, accounting and information technology systems are conducted.

The output from this process is an audit strategy memorandum, which addresses audit’s assessment of the entity and the proposed approach to the financial statement audit. This document is issued to the client (in most instances, the audit committee) at the commencement of the audit and includes an estimate of the cost of the audit.

The audit implementation phase is twofold, comprising the performance of tests at various stages of the audit:

The first stage is a detailed controls assessment, where tests are performed to confirm audit’s assessment of the internal controls identified in the planning stage. Irregularities noted from the tests are reported in an interim management letter to the entity.

The second stage is the conduct of final audit procedures, and encompass the conduct of substantive procedures, such as verification and analysis of financial statement balances, and an assessment of compliance with specific accounting standards and legislative requirements. Following the completion of these tests, a final management letter is issued to the entity reporting on the findings arising from this process.

The assessment of results phase culminates in the issue of:

an audit opinion on the financial statement of the entity. The audit opinion is presented alongside the entity’s published financial statements. A separate audit opinion is made available for inclusion with the financial statements that are placed on the entity’s website

a report to the minister responsible for the entity, of significant findings identified in the audit process.

Financial audit reporting

The Auditor-General provides assurance in the form of a report that contains an opinion as to whether the financial statement is prepared, in all material respects, in accordance with accounting standards, relevant statutory requirements and other mandatory professional reporting requirements.

If the auditor has any reservations about totals, accounting treatments or disclosures contained in the financial statement, the audit report would be modified to describe these reservations.

Various types of audit reports are issued by the Auditor-General. These can include reports on:

an entity’s financial statement

performance statements (currently for local government entities and water authorities)

acquittal statements (where required by specific legislation).

The audit report typically comprises a section outlining the scope of the audit and a section detailing the nature of the opinion issued.

The Audit Act 1994 enables the Auditor-General to delegate to his agent, the power to issue audit reports on financial statements of certain entities subject to the prescribed requirements in the Audit Act.

Report to parliament

The results of our financial statement audits are also reported to parliament each year in respect of the 30 June and other than 30 June financial statement balance dates.

Consistent with principles of natural justice, and the Audit Act, any article developed for inclusion in a report to parliament is provided to the chief executive officer or departmental secretary, at least 10 days before tabling, for consideration of its accuracy and fairness prior to tabling.