41429 Report No. : 39621-BT 41429 BHUTAN PUBLIC SECTOR ACCOUNTING AND AUDITING A Comparison to International Standards Country Report The Kingdom of Bhutan South Asia Region Financial Management Unit May, 2007 A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S ABBREVIATIONS AND ACRONYMS 41429 ACCA Association of Chartered Certified Accountants, United Kingdom AG Auditor General CAO Chief Accounting Officer CAPA Confederation of Asian and Pacific Accountants CFAA Country Financial Accountability Assessment CFO Chief Financial Officer CIPFA Chartered Institute of Public Finance and Accountancy, United Kingdom CPA Certified Practicing Accountant (Australia) GARR General Auditing Rules and Regulations IAASB International Auditing and Assurance Standards Board IAS International Accounting Standard IES International Education Standards for Professional Accountants IFAC International Federation of Accountants IFRS International Financial Reporting Standard INTOSAI International Organization of Supreme Audit Institutions IPSAS International Public Sector Accounting Standard IPSASB International Public Sector Accounting Standards Board ISA International Standard for Auditing PEFA Public Expenditure and Financial Accountability PFM Public Financial Management RAA Royal Audit Authority RGoB Royal Government of Bhutan RIM Royal Institute of Management SAI Supreme Audit Institution UNDP United Nations Development Programme C O U N T R Y R E P O R T PAGE 3 A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S ACKNOWLEDGMENTS 41429 This assessment of accounting and auditing standards and practices in the public sector was carried out in active collaboration with the Royal Government of Bhutan (RGoB) and various stakeholders, particularly the Royal Audit Authority; the Ministry of Finance; and the Royal University of Bhutan and its institutions, including the Royal Institute of Management. The review was conducted through a participatory process that involved these stakeholders whose responses to issues that were raised in the diagnostic questionnaires were especially useful, as were the reports and information from recent World Bank assessments of public financial management. A workshop was held in Thimphu on September 20, 2006 by the Government and the World Bank to review the results of the assessment and to decide on actions to be taken. The list of those actions has been included in this final report at Part IV. Theteamofadvisorsanddevelopmentpartnersalsocontributedgreatlytotheearlystagesoftheconcept note and framework development, as well as drafting of earlier reports for this study which ultimately is intended to cover the countries of the South Asia Region: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The World Bank's Task Team for the assessment is responsible for the content of this report. Irene Julitta Ponniah, Senior Financial Management Specialist, SARFM, World Bank provided substantial assistance to the team with drafting work. Peer reviewers included Ivonna Teresa Kratynski and Rajat Narula, Financial management Specialists in the World Bank. Task Team P K Subramanian, Lead Financial Management Specialist Manvinder Mamak, Senior Financial Management Ronald Points, Lead Consultant, Accounting Michael Jacobs, Lead Consultant, Auditing Advisors Simon Bradbury, Manager, Loans Department, World Bank David Goldsworthy, Operations Manager, International Technical CooperationProgram, UK, National Audit Office Noel Hepworth, Chartered Institute of Public Finance and Accountancy, London Abdul Mudabbir Khan, Fiscal Affairs Department, International Monetary Fund Ian Mackintosh, Chairman, UK Accounting Standards Board N.R. Rayulu, Additional Comptroller & Auditor General (International Relations), Office of the C O U N T R Y R E P O R T PAGE 5 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G CAG of India; Nominee of Asian Organization of Supreme Audit Institutions (ASOSAI) 41429 Paul Sutcliffe, Technical Director, International Public Sector Accounting Standards Board, International Federation of Accountants Development Partner Collaborators David Biggs, Financial Management Advisor, UK Department for International Development Kathleen Moktan, Asian Development Bank PAGE 6 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S CONTENTS 41429 Executive Summary 9 I. Introduction 15 II. Public Sector Accounting 17 A. Institutional Framework for Public Sector Accounting 17 1. Accounting Laws and Regulations 17 2. Education and Training 18 3. Code of Conduct 19 4. Public Sector Accountant Arrangements 19 B. Accounting Standards as Practiced 19 1. Setting Public Sector Accounting Standards 19 2 Presenting Financial Reports 20 III. Public Sector Auditing 21 A. Institutional Framework for Public Sector Auditing 21 1. Institutional Framework 21 2. Setting Auditing Standards 22 3. Code of Ethics 22 4. Accountability in the Supreme Audit Institution 23 5. Independence 23 6. Qualifications and Skills for the Auditors 23 7. Training 24 8. Audit Competence 24 9. Quality Assurance 24 B. Auditing Standards as Practiced 24 1. Audit Planning 25 2. Audit Supervision 25 3. Reviewing Internal Controls 25 4. Reviewing Compliance 26 5. Audit Evidence 26 6. Analyzing the Financial Statements 26 7. Preparing Audit Opinions 26 8. Reporting on Fraud 27 9. Reporting on Compliance 27 C O U N T R Y R E P O R T PAGE 7 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G IV. Action Plans 41429 28 Annex A. Methodology of the Assessment 32 Annex B. Accounting and Auditing Standards 34 International Public Sector Accounting Standards 35 International Education Standards 35 International Financial Reporting and International Accounting Standards 36 INTOSAI Code of Ethics and Auditing Standards 37 International Standards on Auditing 40 Annex C. Accounting Legislation 41 Annex D. Audit Legislation 43 Annex E. Benefits of Accrual Accounting 62 Supplementary Table of Standards and Gaps 65 PAGE 8 C O U N T R Y R E P O R T 41429 EXECUTIVE SUMMARY 1. This assessment of public sector accounting and auditing is generally meant to assist with the implementation of more effective public financial management (PFM) by means of better quality accounting and public audit processes. It is intended to provide greater stimulus for more cost-effective outcomes of government spending. The specific objectives are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common well-founded knowledge as to where local practices stand in accordance with the internationally developed standards of financial reporting and audit; (b) to assess the prevailing variances; (c) to chart paths to reduce the variances; and (d) to provide a continuing basis for measuring improvements. 2. Adoption of international standards for accounting forms the basis of competent financial reporting and transparency. The International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) has developed a core set of accrual-based International Public Sector Accounting Standards (IPSAS) and also a comprehensive IPSAS on the cash basis of accounting. These IPSAS establish an authoritative set of independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether or not the country should adopt a limited version of the standards, as the processes of developing the standards have already considered any acceptable options that can be incorporated into the text of the standards, but they do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application of IPSAS will support developments in public sector financial reporting directed at improving decision making, financial management, and accountability and it will be an integral element of reforms directed at promoting social and economic development. The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting.1 The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets, and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees). 3. Annex A explains the methodology used for the study. Annex B provides a summary of accounting and auditing standards referred to in this study. Annexes C and D provide country accounting and auditing legislation, respectively. Annex E includes a description of the benefits of accrual accounting. 1 Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, IFAC Public Sector Committee, December 2003. C O U N T R Y R E P O R T PAGE 9 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G The desired actions indicated by this assessment are summarized below. 41429 4. For reliability, the requirements for public sector accounting and reporting should be specified by law. The Financial Rules and Regulations 2001 are currently in place. A draft Public Finance Bill has been prepared for presentation to the incoming legislature. Passage of this legislation would provide a sound framework for PFM development. An Accounting Standards Board should be set up to give advice on the establishment of accounting standards for both the private and public sectors. This Board should include representatives from public and private enterprises, the Ministry of Finance, and the Royal Audit Authority (RAA). 5. There is a need to improve the reliability and consistency of reporting by using the format of the Cash Basis IPSAS. An implementation time table for adoption of Cash Basis IPSAS is needed. The Government's reporting does not at present comply with the formats of the Cash Basis IPSAS, Part 1, but the information is generally available to do so. Further examination will be needed to assess the steps to consolidate controlled entities. The IPSASB encourages governments to progress to the accrual basis of accounting and to harmonize national requirements with the IPSAS. A longer-term goal will be to move to accrual-based reporting, but in the early stages the optional information set out in IPSAS, Part 2, may be reported on a progressive basis. 6. There is a need to improve the current budget and accounting computer systems to provide a fully linked system that enables monthly and annual reporting at entity and national level. Program changes are underway to support electronic transfer of accounting reports on a monthly basis from all accounting offices. Scoping studies are being made of the communications links that are needed and will provide an estimation of the hardware, communication, and software requirements. There is a need for some reassessment of the system to establish how it will support the accounting and reporting requirements of the proposed Public Finance Act. This Act will require half- yearly and annual ministerial reports on the actual performance against that specified in the budget. To achieve better budget performance, the accounting system needs to provide managers with frequent information on progress against budgets at the portfolio level and below. 7. Increased attention needs to be given to reporting issues for public enterprises. The state-owned enterprises tend to apply unspecified accounting standards. The International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the IFAC should be adopted by the Royal Government of Bhutan (RGoB) and be specifically referred to in the financial statements as having been adopted. The relevant schedule of the Companies Act should be so amended. The proposed Accounting Standards Board would advise the Ministry of Finance and the Royal Audit Authority on the implementation of the ISA. 8. A Supplementary Table of Standards and Gaps at the end of this report provides a matrix detailing the current standards, the present position, and options for improvements, separately, for accounting and auditing. A summary of the accounting issues is shown in Table ES1, while Table ES2 covers those related to auditing. 9. Adoption of the international standards for auditing provides the basis for assuring competent financial reporting and transparency if supported by enforcement of a code of ethics. TheInternationalOrganizationofSupremeAuditInstitutions(INTOSAI)hasproducedaCodeof PAGE 10 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S TABLE ES1. SUMMARY OF ACCOUNTING STANDARDS ISSUES 41429 Standard Current status Activity required to adopt international standards 1. Does the Public Sector No. The proposed Public Finance Act provides for Accounting Law adopt the Chief Accounting Officer to set accounting IPSAS? standards. Once in place then IPSAS should be specified. 2. Does education and Broadly yes, but Training needs analyses need to be completed training of account ants enhancements are needed to and training courses and resources modified to accord with IES? provide sufficient capacity. meet the requirements. 3. Does the Code Broadly but not in PartAoftheIFACCodeofEthicsforProfessional of Ethics match the sufficiently specific terms for Accountants should be adopted suitably international standards? accountants. amended for Bhutan. 4. Is there a body to No. The proposed Public ItwouldbedesirabletoestablishaformalBoard prescribe public sector Finance Act provides for the or Committee to advise on the establishment accounting standards? Chief Accounting Officer to of accounting standards for both the private set accounting standards. and public sectors. 5. Are the financial No. The RGoB should adopt Part 1 of the Cash statements in accord Basis IPSAS for the Government's accounts. with the international Consolidation of controlled entities, such as standards? public enterprises, should be considered when feasible. 6. Is the statement No. of Cash Receipts and Payments in IPSAS form? The information for these requirements is available and a Cash Basis IPSAS statement 7. Are accounting No. should be included in the annual accounts. policies and explanatory notes required? 8. Are other disclosures No. in accord with IPSAS? 9. Does the government No. Implementationplanandtimetablesareneeded issue a consolidated for consolidation of controlled entities into the financial statement cash basis statements. which consolidates all controlled entities? Ethicsasastatementofvaluesandprinciplestoguidethedailyworkoftheauditors;andasetofAuditing Standards that contain the postulates and principles for carrying out the audit work. The INTOSAI proposes that auditors need a subsidiary level of guidance to provide practical assistance to supreme audit institutions (SAI) in implementing the auditing standards in their individual constituencies. This lower level of guidance is provided by the International Standards of Auditing (ISA) prepared by the C O U N T R Y R E P O R T PAGE 11 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G IFAC's International Auditing and Assurance Standards Board (IAASB). 41429 10. There is a need to adopt the practices set out in the IFAC-issued International Standards on Auditing in the new auditing manuals. The current auditing approach is based on the Auditing Standards of Bhutan, which are in line with the INTOSAI Auditing Standards. However, INTOSAI Auditing Standards are too general to support the development of adequate manuals. New laws and manuals are in development and should mandate the adoption of international auditing standards. The implementation of the Audit Act and the modern audit methodologies needs to rely on the IFAC-issued International Standards on Auditing for efficient audit processes. 11. Improvement of accounting and auditing skills would benefit from some external support to academic bodies. Improved compliance with international standards requires properly trained accounting and auditing staff. Recent reviews found that Royal Institute of Management (RIM) qualificationsneedtobeupgradedandsupportedwithfurtherin-servicetraininginthecorecompetencies needed for public sector accounting and reporting. Both accounting and auditing knowledge and skills need to be adequate for all audit staff. The Royal Institute of Management is developing its courses to support training of potential recruits and current staff for the Royal Audit Authority. Strengthening this training support through association with a foreign accounting institution would be helpful. TABLE ES2. SUMMARY OF AUDITING STANDARDS ISSUES Standard Current status Action to move toward international standards 1. Is the SAI statutory framework in Not until the new Audit Implementation of the new Audit accord with the needs of the INTOSAI Act was passed following Act will provide a sound framework. Auditing Standards? the conduct of the assessment. 2. Is there a body to prescribe public- RAA does this currently. There is a need for a Standards Board sector auditing standards? to assist. 3. Have INTOSAI and IFAC audit RAA has adopted the IFAC ISAs have not been adopted standards been adopted? INTOSAI Auditing and action should be taken to adopt Standards them. 4. Has a code of ethics equivalent to Yes. Enforcement will support the INTOSAI standards been adopted? transparency. 5. Is the accountability process in the Yes. SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI legal framework No. Implementation of the new Audit meet the INTOSAI standards for Act will provide a sound framework. independence and powers? 7. Does education and training of No. Training needs analyses of staff and auditors accord with INTOSAI and IES linkage with a foreign accountancy standards? institution to assist the Royal Audit Authoritywithcapacitydevelopment Should be instituted. PAGE 12 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Standard Current status Action to move toward 41429 international standards 8. Is the SAI equipped with the audit Broadly. New audit manuals are in process methods and technologies to meet of development and the technology INTOSAI Auditing Standards? needs will emerge from these. 9. Does the SAI have the quality Yes. assurance programs to meet international standards? 10. Do the processes for planning, No. New audit manuals being developed supervision, evaluation of internal should improve these processes. The control,assessmentofcompliancewith manuals should adopt guidance from laws and collection of audit evidence the relevant ISA. for the audits meet international standards? 11 Does the audit analyze the financial No. The RGoB needs to adopt IPSAS for statements to establish whether reporting. acceptable accounting standards for financial reporting and disclosure are complied with? 12 Does the auditor prepare an audit No The form of report needs to be opinion on the financial statements in adjusted to accord with ISA 700. a form that conforms to international standards? 13.Doestheconsiderationoffraudand Broadly yes. Further adoption of the relevant ISA error in an audit of financial statements will improve performance. accord with international standard? 14. Are the Auditor General's reports Yes. made public? 15. Is the process for taking action on Yes, in the absence of Parliamentary scrutiny is a crucial audit recommendations sufficiently an effective legislative component of the process of effective to meet international scrutiny. responding to audit scrutiny. standards? 12. A summary of the auditing issues is shown below, in Table ES2. 13. Improve public financial management through making managers of budget and accounting systems accountable for internal controls. Public financial management relies on a comprehensiveandtimelyaccountingandfinancialreportingsystem,whichissupportedbyacompetent audit function that assures that the system is working properly and that the information is reliable. The RAA report on the 2002-03 annual accounts (submitted January 4, 2005) proposed a position of a Chief Financial Officer (CFO) to head a separate Department of Public Accounts in the Ministry of Finance. This position has been separated from the budget function. The proposed Public Finance Act imposes substantial reporting requirements on portfolio ministers. A CFO for each portfolio would be needed to manage this. Accountable officers for the public finance system should maintain systems of internal C O U N T R Y R E P O R T PAGE 13 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G financial controls that manage risks, and prepare the accounts for signature. Specific identification of 41429 CFOs officers with overall responsibility will help ensure effective implementation. In addition, the budget monitoring system should be computerized and supported by timely accounting information. 14. The Royal Government of Bhutan should prepare a PFM indicators survey for monitoring progress in adopting and applying international standards. Use of the PFM performance measurement framework developed by the Public Expenditure and Financial Accountability (PEFA)2 program, suitably extended, would be a good basis to develop and measure progress in the full cycle of PFM reform that encompasses budget formulation, accounting and audit, legislative scrutiny, and remedial action 2The PEFA Program is a partnership among the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the Strategic Partnership with Africa, IMF, and the World Bank,. A Steering Committee, comprising members of these agencies, manages the Program. A secretariat is located at the World Bank in Washington, DC. PAGE 14 C O U N T R Y R E P O R T 41429 INTRODUCTION 1. The purport of this assessment of accounting and auditing in the public sector is to help in implementing a highly effective public financial management (PFM) through better quality accounting and public audit processes. It is envisaged to provide greater stimulus for more cost-effective outcomes of government spending. The specific objectives are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common well-founded knowledge as to where local practices stand in accordance with the internationally developed standards of financial reporting and audit; (b) to assess the prevailing variances; (c) to chalk out methods to reduce the variances; and (d) to provide a continuing basis for measuring improvements. 2. Information on national standards and practices for accounting, financial reporting, and auditing in the government budget sector and in the state-owned enterprise sector were collected through diagnosticquestionnairesthatwerecompletedinconjunctionwithcountryauthorities.Thediagnostic questionnaires incorporate the principles contained in the public sector accounting and auditing standards promulgated by the International Organization of Supreme Audit Institutions (INTOSAI) and International Federation of Accountants (IFAC). The responses in these questionnaires have been further explored through discussions by a World Bank team with country authorities. These discussions included examination of accounts and audit reports and working papers to explore the quality of the processes and the products. Annex A further explains the methodology used for the study. 3. The analysis in this report has been conducted in the light of the strong measures being taken in the Kingdom of Bhutan to reform the accounting and auditing processes. New laws on public finance and auditing are in an advanced stage of preparation or are before the legislature. Steps are already being taken in the Department of Budget, the Department of Finance, and the Royal Audit Authority (RAA) to modernize their practices and make better use of information technology and communications. 4. The World Bank and other donors have been involved in assisting the Royal Government of Bhutan intheseendeavors. AcoordinatedefforttopreparearoadmapforcomprehensivePFMupgradingisbeing developed between the donors and the Government. The Country Financial Accountability Assessment (CFAA) completed in February 2002, identified financial human resource development as one of the priority areas. The CFAA recommended that the Government develop an integrated plan to improve financial accountability including: C O U N T R Y R E P O R T PAGE 15 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Adopting international accounting standards in major public enterprises; 41429 Implementing professional leadership in accounting and financial management; Implementing a fully integrated, computerized government accounting system; Drafting new acts on public financial management and combating corruption; Strengthening the Royal Institute of Management (RIM); and Providing training for finance, accounting, and internal audit staff in line ministries and other government agencies, heads of administration and finance divisions, and other managers. 5. The Royal University of Bhutan and its institutions are increasing the attention given to training in accounting and establishing revised and upgraded curricula and courses. Assessment of training needs have been carried out to help in the creation of their medium-term development plans. 6. Annex B provides a summary of international accounting and auditing standards referred to, in this study. Annex C and D provide national accounting and auditing legislation, respectively. Annex E includes a description of the benefits of accrual accounting. The Supplementary Table of Standards and Gaps shows the present position for each component of the existing standards, and the options for improvements that would bring closer conformance with the international standards. PAGE 16 C O U N T R Y R E P O R T 41429 PUBLIC SECTOR ACCOUNTING A. Institutional Framework for Public Sector Accounting 7. The institutional framework should include adherence to IFAC-issued International Accounting Standards (IAS) and qualified accounting staff to provide the timely, relevant, and reliable financial information needed to support all fiscal and budget management, decision-making, and reporting processes. The diagnostic questionnaires that were used in this assessment have collected information on the current arrangements and the apparent gaps in accounting laws and regulations, education and training of public sector accountants, application of a code of conduct, and numbers and characteristics of public sector accountants. 1. Accounting Laws and Regulations 8. The accounting laws and regulations should be more prescriptive about the use of international accounting standards. A draft Public Finance Act is being circulated for comment. Passage of this Act will provide for a good PFM foundation. Bhutan's Financial Rules and Regulations 2001, specify the current accounting practices, internal control procedures, reporting requirements and timetables, and responsibilities for financial management in all agencies. The accounting system is focused on ensuring due control over and reporting against budget appropriations, and audited annual accounts are essentially a budget realization statement. The International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) of the IFAC are not adopted or complied with in preparing the annual accounts. However, in practical terms, the provisions of the Financial Rules and Regulations 2001 have facilitated a flexible reporting environment. Since much of the information seems available, there is scope for the Ministry of Finance to format annual financial statements using Cash Basis IPSAS, Part 1. This will be in line with the proposed Public Finance Act, which provides for the chief accounting officer to prescribe accounting standards. 9. Enacting the proposed Public Finance Act can provide a firm basis for more effective enforcement and clarify the financial accountabilities of responsible parties. Audit reports show some lack of financial discipline and a lack of proper training for finance personnel, which has led to practical problems in implementing Financial Rules and Regulations 2001. There is a need for a better framework of financial accountability through a modern financial reporting framework, as proposed in the Public Finance Act. Producing annual reports for each ministerial portfolio will provide a basis for holding senior managers accountable for their operations and use of budget funds. The Auditor General C O U N T R Y R E P O R T PAGE 17 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G will need to specify the actions that departments should take to correct any accounting effects that 41429 lead to audit findings. Currently the accounts are only available at year-end. The computer accounting system needs to be enhanced and connected to enable monthly reporting at entity level. Networking and other system improvements are needed. 10. As the relevant authority, the Auditor General should require public enterprises to report in accordance with international accounting standards. Public enterprises are not supported by a set of Bhutan Accounting Standards. It is up to the enterprise and its auditors to decide which set of accounting standards are used to report in accordance with generally accepted accounting principles. Public enterprises are required by the Bhutan Companies Act 2000 to provide an annual report, including a balance sheet and a profit and loss account. The Companies Act includes a schedule of the audit requirements that specifies reporting in accordance with generally accepted accounting principles. This schedule is subject to amendment by the Auditor General. 2. Education and Training 11. Accounting courses need to be upgraded. A training needs analysis conducted in 2004 by the Australian Society of Certified Practicing Accountants (CPA Australia) found a need for the Royal Institute of Management accounting courses to be modified to provide the basic accounting competencies required by the Confederation of Asian and Pacific Accountants (CAPA) standards. The RIM qualifications provide a basis for an effective National Finance Service but need to be upgraded and followed up with further in-service training in the core competencies needed for public sector accounting and reporting. 12. There is no regular system or mechanism to provide public sector accountants with continuing professional development and training. The use of a comprehensive graduated framework of professional accountancy qualifications is needed. The training needs analyses by CPA Australia found that the National Finance Service should review its functional and skills requirements as a professional accounting service. The Royal Public Service Commission has introduced a formalized position classifications system for the National Finance Service. The UK Association of Chartered Certified Accountants (ACCA) offers a worldwide Professional Scheme and Certified Accounting Technician Scheme, as does the public sector program of the Chartered Institute of Public Finance and Accountancy (CIPFA) in the United Kingdom. Cooperation with these or similar bodies and the Royal University of Bhutan could provide a cost-effective mechanism for providing a wide range of levels of accountancy training. 13. TheGovernmentshoulddevelopastrategytodevelopadequateaccountingandfinancial professionalism. The training needs analyses by CPA Australia proposed a professional accounting body in Bhutan to support the National Finance Service. The Royal Public Service Commission has decided to establish an Accounts and Finance Division in its new Position Classifications System, a step forward in creating a professional body of accountants in the National Finance Service. The Government should respond to the proposals put forward in the CPA Australia report on strategic pathways to developing adequate accounting and financial professionalism. 14. A training program that meets the IFAC International Education Standards (IES) for Professional Accountants is needed for public sector accountants and auditors. The PAGE 18 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S recommendations of the CPA Australia report should be assessed by the Auditor General and the 41429 Ministry of Finance with a view to establishing a Bhutan Institute of Accountants. The professional leadership capacity of the Royal Institute of Management and the National Finance Service should be strengthened in order to train and manage the professional development of public sector accounting staff. There are approximately 585 accounting staff in the Bhutan public sector. The Royal Institute of Management requires higher-level training for professional development and professional membership qualifications. The ACCA is a body that could provide substantial support to the Bhutan accounting profession. Plans to adopt the ACCA or the CIPFA public sector program for local conditions would provide the path for sustained, improved training. The plan would be to use the existing local training institutions within the Royal University of Bhutan to teach the appropriate curricula with the guidance of the international affiliate. 3. Code of Conduct 15. A public sector accounts code of ethics is needed. Public sector accountants must adhere to the Civil Service Code of Conduct and Ethics stipulated in the Bhutan Civil Service Rules 2002. But the Civil Service Code is less prescriptive than the standard code for professional accountants, thus a special code is needed. The new Audit Act includes a specific code of conduct for auditors. This should be mirrored in a similar code for accountants, which can be based on Part A of the IFAC Code of Ethics for Professional Accountants. The cultural support that a strongly directed Code of Ethics can create would be helpful in maintaining good public financial management. 4. Public Sector Accountant Arrangements 16. External and internal audits are not as effective as they should be in ensuring that systems of internal financial controls work well. For each public sector body that prepares annual accounts, there should be a professionally qualified Chief Financial Officer (CFO) to shoulder overall responsibility for maintaining systems of internal financial controls that manage risks, and for preparing the reports and accounts for signature by the chief executive officer. The audit results are not being sufficiently translated into remedial actions. For this work to be done properly, the CFO needs to be given specific responsibility. The RAA report on the 2002-03 annual accounts (submitted on January 4, 2005) proposed the creation of a post of CFO as head of a separate Department of Public Accounts in the Ministry of Finance; this has been separated from the budget function. The proposed Public Finance Act imposes substantial reporting requirements on portfolio ministers, and a CFO for each portfolio will be needed to manage this. B. Accounting Standards as Practiced 17. The diagnostic questionnaires have facilitated the collection of information on the current arrangements and the apparent gaps for setting public sector accounting standards, besides presenting financial reports. Out of this exercise came recommended activities that will help bring local standards into line with international standards. 1. Setting Public Sector Accounting Standards 18. More formalized arrangements are needed for setting accounting standards for the public and private sectors. The proposed Public Finance Act provides for annual audited financial C O U N T R Y R E P O R T PAGE 19 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G statements and for a Chief Accounting Officer (CAO) in the Ministry of Finance who shall prescribe 41429 accounting standards for use by all budgetary bodies. It would be desirable to establish a formal board to advise on the establishment of accounting standards for both the private and public sectors. This proposedAccountingStandardsBoardshouldincluderepresentativesfrompublicandprivateenterprises, the Ministry of Finance, and the Royal Audit Authority. The preference would be for this Board to adopt all IAS, IFRS, and IPSAS for the relevant bodies, but specify appropriate exemption periods for particular standards or clauses where difficulty in implementation is envisaged. Consultation and cooperation with other boards or committees in the Region on their practices could assist in this process in the initial and early stages. 2. Presenting Financial Reports 19. TheannualconsolidatedfinancialstatementsneedadjustmenttoaccordwithCashBasis IPSAS, Part 1. In his report on the 2002-3 financial statements, the Auditor General recommended that notes to the accounts should form an integral part of the financial statements and that the financial position should be presented in the form of a balance sheet and other accounts. The Royal Government of Bhutan should adopt Part 1 of the Cash Basis IPSAS for Government accounts. Consolidation of controlled entities such as public enterprises should be considered when feasible. Time tables are needed for consolidation of controlled entities into the cash basis statements as per 1.6.5 of the Cash Basis IPSAS (e.g. public enterprises), and for the longer-term transition path to the adoption of accrual- based IPSAS. 20. Increased attention should be given to reporting issues for public enterprises. State- owned enterprises tend to apply unspecified accounting standards of their own choosing. This does not give the consistency required for proper interpretation of accounts. It is important that a specific set of accounting standards be used for preparation of financial statements and for the audit of those statements. The use of `generally accepted accounting standards' does not provide any reference to the specific set of explanations and definitions that are available in formally issued accounting standards. These explanations are a useful reference point for readers and users of the accounts. The IAS and IFRS should be adopted by the Royal Government and be specifically referred to in the report on the financial statements as having been adopted. The relevant schedule of the Companies Act should be so amended. The proposed Accounting and Auditing Standards Board would advise the Ministry of Finance and the Royal Audit Authority on the implementation of the international standards. PAGE 20 C O U N T R Y R E P O R T 41429 PUBLIC SECTOR AUDITING A. Institutional Framework for Public Sector Auditing 21. Effective scrutiny by the legislature through comprehensive, competent external audit underpinned by international standards on auditing enables accountability for the implementation of fiscal and expenditure policies. The environment for an effective supreme audit institution (SAI) requires a comprehensive approach to public financial management. Supreme audit institutions are not stand- alone institutions; they are part of a PFM architecture that also includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the Supreme Audit Institution functions is integral to providing information for improving the overall PFM system, but the action must be within the executive branch under the watchful eyes of the legislature and the public. A strong demand for good public sector external auditing is necessary for the Supreme Audit Institution to have any impact. This requires willingness of the executive branch to accept and respond to external scrutiny over its management of funds, and to ensure that steps for reforms are taken. 22. The diagnostic questionnaires, in addition to providing information regarding the current arrangements, indicated the apparent gaps in the following areas: Institutional framework for the supreme audit institution, Process for setting auditing standards, Use of Code of Ethics or Codes of Conduct, Arrangements to ensure accountability in the supreme audit institution, Arrangements to ensure independence, Arrangements to ensure adequate skills and qualifications for the auditors, Arrangements for providing training, Arrangements to ensure auditor competence, and Arrangements for quality assurance. 1. Institutional Framework 23. A new National Audit Act has been passed in June, 2006. The appointment and powers of the Auditor General are specified in a new National Audit Act. An assessment of this Act in comparison C O U N T R Y R E P O R T PAGE 21 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G with the UNDP model law shows that the Audit Act is very comprehensive and will provide a good 41429 foundation for the proper implementation of the audit function. 24. Continuing monitoring of high-level PFM indicators should be conducted. Given the stronginterdependenciesamongtheelementsofthePFMsystem,coordinatedorintegrateddevelopment programs are important for successful implementation. Strengthening the RAA alone will not work well without also strengthening internal controls and the complementary legislative scrutiny processes. In this context, the use of indicators for measuring PFM performance provides a useful monitoring mechanism for the Royal Government of Bhutan; a preliminary assessment has already been conducted by the World Bank. 25. The new National Audit Act should be used to undertake all forms of audit. Forensic and performance audit are needed as part of a balanced audit program, and there will be a need for training and implementation assistance. The Anti-Corruption Commission has recently begun its work. 2. Setting Auditing Standards 26. The National Audit Act provides an enabling environment for the Royal Audit Authority to establish auditing standards. It does not specify the adoption of INTOSAI or IAASB standards. The INTOSAI Auditing Standards supported by the detailed IFAC/IAASB-issued International Standards on Auditing underpin a modern audit process. The International Audit and Assurance Standards Board is progressively rolling out international auditing standards. The INTOSAI is moving from maintaining its own auditing standards by seeking to support the IAASB's development of audit standards. This is being done particularly so that the IAASB audit standards appropriately reflect the interests of the international public- sector audit community. The current auditing approach is based on the Auditing Standards of Bhutan, which are in line with the INTOSAI Auditing Standards but do not incorporate the IFAC/IAASB International Standards on Auditing. 27. The IFAC/IAASB-issued International Standards on Auditing represent best international practices for the auditing profession, particularly in such areas of fundamental auditing practice as the following: audit evidence, documentation, audit materiality, fraud, audit errors, audit opinions, audit planning, control environment assessments, and supervising the work of audit staff. 3. Code of Ethics 28. Policies and procedures for protecting whistle blowers should be adopted. The Royal Audit Authority has adopted a specific Code of Ethics that is relevant to auditors. All auditors are PAGE 22 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S sworn in to uphold the RAA Code, which forms an integral part of the employment contract. The 41429 National Audit Act provides a strong ethical framework and provides that the Royal Audit Authority shall maintain the confidentiality of the source of any information received about potential offences, in good faith and trust, under the laws of the Kingdom. Additional elements should be considered to assist with implementation of these requirements as part of the execution of the National Audit Act and Public Finance Act. The INTOSAI Code of Ethics is considered an essential complement to the INTOSAI Auditing Standards, and should be adopted, applied, and communicated to all staff. 4. Accountability in the Supreme Audit Institution 29. TheRoyalAuditAuthorityneedstoreviewitsaccountabilityandreportingarrangements in the light of the new Laws. The Royal Audit Authority follows the Financial Rules and Regulations, the Bhutan Civil Service Rules and Regulations, the General Auditing Rules and Regulations, all of which provide the internal control framework for the Audit Office. The Royal Audit Authority prepares and issues an Annual Audit Report, which includes comprehensive information of its operations and performance during the year. There is need for a more comprehensive corporate plan covering the general developments needed by the Audit Office. 5. Independence 30. The National Audit Act provides more effective independence to the Auditor General. ThenewAuditActprovidesforafive-yearnon-renewabletermfortheAuditorGeneral;thistermisshort in comparison to international standards.3 Greater powers to the Auditor General as regards staffing are also provided in the Audit Act, but no specific powers over the budget are provided. The legislation does propose that if, in the opinion of the Auditor General, there was insufficient budget to conduct his/her responsibilities, it should be mentioned in the Annual Report. This is not fully satisfactory (a better formulation is outlined in section 13 of the UNDP model law). This provides for the Auditor General's budget proposal to be submitted to the Legislature by the Auditor General at the same time and in the same format as the Executive Branch submits its budget. 6. Qualifications and Skills for the Auditors 31. Somedevelopmentsintheaccountingandauditingeducationalandtrainingarrangements need further support. Atrainingneedsanalysis4indicatedthatthequalityofaccountingandauditing educational and training arrangements in the academic bodies is not fully satisfactory. The Audit Act provides for a separate cadre of officers and employees to be constituted with their terms and conditions of services prescribed in the rules to be framed under the Act. The rules are yet to be framed, but the principles are contained in the Act. When the requirements of the Position Classifications System (under which the skills needs are expected to be formalized) have been completed, a needs analysis for training individual officers would be useful. The Royal Institute of Management is developing its courses to support training of potential recruits for the Royal Audit Authority. Strengthening support through association with a foreign accounting institution would be helpful. 3A Model National Audit Office Act, Association of Chartered Certified Accountants, UK, 2004, Section 38 4Training Needs Analysis of the Financial and Accounting Capacity within the Public Sector and a Simultaneous Assessment of the Royal Institute of Management, CPA Australia, 2004. C O U N T R Y R E P O R T PAGE 23 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 7. Training 41429 32. Better training arrangements that meet international educational standards should be introduced for RAA staff. The Royal Audit Authority has a professional and international relations division responsible for arranging and providing training for staff. Though the Royal Audit Authority has plans and programs to provide in-house and external training in the future, it is severely constrained by the lack of financial resources to develop and implement the programs. There is a need for more extensive arrangements for professional training. The outreach programs of the ACCA and CIPFA could help bridge the gap, possibly with the help of the Royal Institute of Management or other in-country academic institution. 33. A skills analysis program based on international standards for competencies should be conducted for the Royal Audit Authority. The Royal Audit Authority does not itself have adequate facilities for training, research, and development. A proper need-based approach is required that will support the introduction of the audit methodologies under development. The Department of Finance and the Royal Institute of Management have conducted training needs analysis programs, and a similar exercise in the Royal Audit Authority would be appropriate. 8. Audit Competence 34. It is necessary to strengthen the technical and professional competence of the Royal Audit Authority and improve its operational capacity to produce and disseminate quality audit reports that meet international standards and serve the needs of the stakeholders. Systems,methodologies,andfacilitiesshouldbeupdatedandmodernizedtoenableefficientandeffective audits by the staff. Properly designed audit sampling techniques in the certification audit are difficult to use without computer support. Use of sampling techniques and computer-aided auditing techniques especially for the Budget and Accounting System, should be developed to increase the efficient use of audit resources. Currently the Supreme Audit Institution has no detailed financial audit manuals. Twelve manuals are planned for development. It will be necessary to review the adequacy of this work and provide supplementary development in due course. There is a need to develop specialized forensic audit and computerized audit capabilities. The audit orientation has to change from transaction to risk- based systems. 9. Quality Assurance 35. The new Audit Methodology Manuals need to continue to assure quality. The Royal Audit Authority does have a satisfactory quality control and quality assurance procedure in place for its audit work. It is significant to note that the new manuals are being prepared by RAA staff in consultation with external consultants providing guidance but not actually writing the manual so that ownership and local relevance of the material can be assured. B. Auditing Standards as Practiced 36. The diagnostic questionnaires have uncovered information about the current arrangements for the audit methodology and the apparent gaps in the country for: audit planning, PAGE 24 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S audit supervision, 41429 reviewing internal controls, reviewing compliance with laws, ensuring adequate audit evidence is collected, analyzing whether the financial statements accord with accounting standards, preparing audit opinions, reporting on fraud, and reporting on compliance. Out of this exercise came recommended activities that will help bring local standards in line with international standards. 1. Audit Planning 37. The new Audit Methodology Manuals should introduce more comprehensive planning requirements based on the specific objectives of the audits. A Peer Review in 2005 by the Supreme Audit Institution of India recommended that audit manuals be prepared. During June and July of 2005, teams were established to prepare audit guides in various areas of audit. The Royal Audit Authority should review the success of these development activities and develop further plans as needed to prepare appropriate audit manuals for the tasks that are established by the Audit Act. Capacity inadequacies prevent reliance on internal audits. Internal audit has been declining and the new Audit Act and the proposed Finance Act provide for a stronger internal audit function. This needs to be supported by a more formal approach to training and monitoring the activities of internal audit. 2. Audit Supervision 38. Amorecomprehensivelystructuredworkingpaperandsupervisorysystemisneededfor the audits that will be undertaken using the new audit manuals. The supervision arrangements in the Royal Audit Authority are reasonable but would benefit from increased leadership and knowledge skills for the areas covered by the new audit manuals. 3. Reviewing Internal Controls 39. NewAuditMethodologyManualsshouldincludeandsupportoverallauditproceduresto conduct reviews of internal controls. Auditstaffsdohaveagoodunderstandingoftheenvironment in which the audited institution operates. However, assessments of the internal control systems of the audited institutions are not carried out nor relied upon for RAA's audit work. This is essentially because internal control practices in government agencies are not fully functional. Improvements in internal control will be implemented if internal and external auditors make recommendations for improvements. The audit manuals should provide for the audit reports to make assessments of internal control adequacy and make recommendations for improvements. The Royal Audit Authority will be supported in this process of reviewing internal controls when the new Public Finance Act is in place. The Public Finance Act makes additional requirements for internal audit and internal controls. C O U N T R Y R E P O R T PAGE 25 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 4. Reviewing Compliance 41429 40. All audit reports should introduce recommendations, implementation of the recommendations should be monitored, and the process should be reported in the Annual Report. The Royal Audit Authority uses much of its resources for compliance type of audit work, and there are strong systems in place for dealing with instances of noncompliance. There needs to be some increase in the efforts made to test internal controls and to recommend improvement in internal controls to reduce the incidence of noncompliance. The proposed manual on certification audit will rectify these defects. 5. Audit Evidence 41. Theauditmethodologyandnecessarysupportingworkingpapersshouldbemorepreciselydefinedin the new Audit Methodology Manuals. Currently working papers deal mostly with individual compliance defects rather than systems of internal controls and accounting systems. The manual on certification audit that is to be prepared will rectify these defects, provided a policy decision is made by the Royal Audit Authority for audit reports to make recommendations on improvement of internal controls. 6. Analyzing the Financial Statements 42. The new Audit Certification Manual should improve the way the Royal Audit Authority analyzes the Royal Government's financial statements once the accounts are presented in IPSAS format. The Royal Audit Authority includes analysis of the annual financial statements in its report on these statements. 7. Preparing Audit Opinions 43. The requirements of ISA 700, The Auditor's Reports on Financial Statements, should be adopted in full. The most recent, available Auditor's Report (FY2002-03) has a two-part certificate and opinion. These provide most of the elements of an audit opinion that accords with ISA 700, but the presentation suffers from various substantial differences from the standard. In particular the opinion is expressed negatively--"The audit had not detected any material mis-statement." The defects in the format of the opinion have been corrected as per the requirements of ISA 200, Objective and General Principles Governing an Audit of Financial Statements, which are stated more positively: We plan and perform the audit to obtain reasonable assurance about whether the schedule is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the schedule. We believe that our audit provides a reasonable basis for our opinion. As matters stand now, the user of the statement is not certain as to whether the auditor has done enough testing to provide assurance about the financial figures in the statement and for which figures the auditors have some doubt. PAGE 26 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 8. Reporting on Fraud 41429 44. Much of the audit reporting relates to incorrect rather than fraudulent behavior, but it is not clear from the reports. This orientation comes from the compliance testing approach. Some training in the use of specific forensic audit methods would assist with the effectiveness of the reporting on whether deficiencies arise from fraud rather than error or oversight. An Anti-Corruption Commission has recently started work, and greater clarity in the reporting of possible fraudulent behavior by the Royal Audit Authority would be timely. The Royal Audit Authority operates a website with summaries of its reports, its audit plans, and other material. This provides a very effective means of contact with the public. 9. Reporting on Compliance 45. The effectiveness of the audit report should be enhanced by improving the system for checking and resolving clearance matters. The Royal Audit Authority prepares an Inspection Report, which is a mix of financial audit, compliance audit, and performance audit. All such reports are addressed to the ministers/chairmen concerned and are summarized in the RAA's Annual Report. The reports include identification of the persons who should be held accountable for defects for which adverse reports are entered against their name in the RAA Audit Information Management System. The Bhutan Civil Service Rules and Regulations require that every civil servant obtain an Audit Clearance Certificate prior to requesting processing of promotion, training, post-retirement benefit, further studies, and participation in conferences and seminars. The Royal Audit Authority issues an Audit Clearance Certificate only if the Audit Information Management System does not contain any adverse report against the applicant. This has encouraged personal and professional discipline in the discharge of fiduciary duties. The Royal Audit Authority has been experiencing manpower constraints in adequately staffing and maintaining the Audit Information Management System. Recent initiatives have been taken to reduce the workload. C O U N T R Y R E P O R T PAGE 27 41429 ACTION PLANS Accounting Standard Current status Action required to be taken to move Issues towards international standards STATUTORY FRAMEWORK FOR ACCOUNTING 1. Does the Public Sector The proposed Public Finance PFA expected to be presented in June Accounting Law adopt Act provides for the Chief 2007 to the National Assembly. The CAO IPSAS? Accounting Officer (CAO) to set shall prescribe the appropriate accounting accounting standards. Once this standards (preferably IPSAS) for Bhutan. To is in place then IPSAS should be follow up on further steps after passage of specified. the Act. EDUCATION AND TRAINING FOR ACCOUNTANT COMPETENCE 2. Does education and Education and training needs The Department of Public Accounts (DPA) to training of accountants' analysis to be completed come up with an Action Plan (by June 2007) conform to IFAC and courses and resources for assessing the education and training International Education to be modified to meet the needs for the National Accounting Service Standards? requirements. in consultation with the Royal Institute of Management. CODE OF ETHICS 3. Does the Code of EthicsPart A of the IFAC Code of EthicsThe National Accounts Service (NAS) is to match internationalfor Professional Accountants have a Code of Ethics for Accountants. The standards? should be adopted suitably World Bank will provide support to DPA to amended for Bhutan. draft the NAS Code of Ethics. The proposal is to be finalized jointly by June 30, 2007. SETTING ACCOUNTING STANDARDS 4. Is there a body to Itwouldbedesirabletoestablish The CAO will initiate the establishment of prescribe public-sectora formal Board or Committee to a Committee or Board for the government accounting standards? advise on the establishment of sector. For corporate sector, a ROSC (A&A) accounting standards for both willbecarriedoutbytheWorldBankFY07/08 the private and public- sectors. and the recommendations will be reviewed. PAGE 28 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Accounting Standard Current status Action required to be taken to move 41429 Issues towards international standards FINANCIAL REPORTING 5. Are the financial No. The RGoB should adopt This issue is linked to Point No.1. statements in accord with Part 1 of the Cash Basis the IPSAS standard? On designation of the CAO, the need for IPSAS for the Government's revision of Financial Manual and rules is to accounts. Consolidation of be examined to present the annual financial controlled entities, such as statements according to IPSAS. public enterprises, should be considered when feasible. The proposed action is to be reviewed in the light of progress on the proposed Finance Law and the CAO. 6. Is the statement of cash No. The information for these receipts and payments in requirements is available and IPSAS form? a Cash Basis IPSAS statement could be included in the annual accounts. 7. Are accounting policies and explanatory notes required? 8. Are other disclosures in accord with IPSAS? 9. Does the government Implementation plans and This is also linked to Point No.1. issue a consolidated time tables are needed for financial statement which The CAO is to draw a road map for possible consolidation of controlled consolidates all controlled consolidation in consultation with the entities into the cash basis entities? corporate sector. statements. The proposed action is to be reviewed in the light of progress on the new Finance Act and the CAO. Auditing Standard Current status Action required to be taken to move Issue towards international standards STATUTORY FRAMEWORK FOR AUDITING 1. Is the SAI statutory No. Implementation of the new The Audit Act of Bhutan 2006 was enacted on framework in accord with Audit Act will provide a sound June 30, 2006. the needs of the INTOSAI framework. Auditing Standards? C O U N T R Y R E P O R T PAGE 29 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G SETTING AUDITING STANDARDS 41429 2. Is there a body to There is a need for a Standards An advisory committee is to be established by prescribe public sector Board. the RAA for this purpose. The development auditing standards? of Auditing Standards to be applied by the Royal Audit Authority (RAA) should be the sole responsibility of the Auditor General of Bhutan. Article 45 of the Audit Act of Bhutan, 2006 empowers Auditor General to issue statements on the generally accepted auditing standardsandprinciplesandrelatedguidelines. This will also ensure the independence of the authority. 3. Have INTOSAI and IFAC ISAs have not yet been Use of ISAs will follow as soon as RAA needs IFAC audit standards been adopted and action should be to certify the accounts in accordance with adopted? taken to adopt them. RAA has IPSAS. Recommendations from the proposed adopted the INTOSAI Auditing ROSC (A&A) for the corporate sector will also Standards. be considered. 4. Has a code of ethics Yes. No action needed. equivalent to the INTOSAI standards been adopted? ENSURING INDEPENDENCE OF THE AUDITOR 5. Is the accountability Yes. No action needed process in the SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI legal No. Implementationofthenew The Audit Act was enacted on June 30, 2006. framework meet the Audit Act will provide a sound INTOSAI standards framework. The new National for independence and Audit Law should provide for powers? all of the eight core INTOSAI principles of independence. TRAINING AND AUDITOR COMPETENCE 7. Does education and No. Training needs analyses The RAA is to come up with a proposal (by training of auditors and linkage with a foreign June, 2007) for assessing the education and conform to INTOSAI and accountancy institution to training needs for its staff in consultation with IES standards? assist the RAA with capacity the Royal Institute of Management. development should be instituted. 8. Is the SAI equipped Broadly. New audit manuals The RAA is to prepare a proposal on the with the audit methods are in process of development requirements, particularly for IDEA software and technologies to meet and the technology needs will and training in time for the audit of the 2007 the INTOSAI Auditing emerge from these. AnnualFinancialStatementsandforsupportin Standards? conducting an IT Systems Audit of the BAS. PAGE 30 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S QUALITY ASSURANCE 41429 9. Does the SAI have Yes. A proposal is to be prepared by the RAA to the quality assurance meettheadditionalneedsforqualityassurance programs to meet the of its audit work. international standards? AUDIT PLANNING AND CONDUCT 10. Do the processes for No. New audit manuals which The RAA is to prepare a proposal for assistance planning, supervision, are being developed should in improving the quality of its audit work and evaluation of internal improve these processes. The for reviewing and implementing the manuals control, assessment of manuals should adopt guidance under preparation, and training trainers. compliance with laws the relevant ISA. and collection of audit evidence for the audits meet the international standards? AUDIT REPORTING 11. Does the audit analyze No. The RGoB needs to adopt IPSAS for reporting the financial statements its annual financial statements. to establish whether acceptable accounting standards for financial reporting and disclosure are complied with? 12. Does the auditor No. The form of report needs to be adjusted to prepare an audit opinion accord with the requirements of ISA 700 and onthefinancialstatements the audit testing needs to be sufficient to inaformthataccordswith provide the required audit evidence. Computer international standards? Aided Audit Techniques will be needed to assist in auditing the accounting records in the BAS. 13.Doestheconsideration Broadly Yes The RAA and the Anti-corruption Commission of fraud and error in to coordinate any proposals for assistance on an audit of financial improved responses. statements accord with international standards? RESPONSE TO AUDIT REPORTS 14. Is the process for Yes, in the absence of No further action required until a Legislative taking action on audit parliamentary legislative Scrutiny Committee is set up. The Bank r e c o m m e n d a t i o n s scrutiny. Parliamentaryscrutiny already is providing support to the National sufficiently effective is a crucial component of the Assembly. to meet international process of responding to audit standards? scrutiny C O U N T R Y R E P O R T PAGE 31 41429 Annex - A METHODOLOGY OF THE ASSESSMENT AspartofthegeneralsupportprograminSouthAsiaforassessmentandimprovementofpublic-sector accounting and auditing against international standards, the World Bank with the cooperation of member governments is conducting the Review of Public-Sector Accounting and Auditing Practices in member countries. The development of the PFM Performance Measurement Framework5 by the Public Expenditure and Financial Accountability (PEFA) Program6 has opened the way for a diagnostic tool to be developed that is referenced to the accounting and auditing standards of IFAC and INTOSAI, and other relevant international benchmarks. This exercise provides substantial insightintocountryperformanceinregardtotheexternalauditingandfinancialstatementreporting FM indicators. A set of 6 questionnaires is used to collect relevant information on country practices: The public sector accounting environment ­ collecting basic information about financial laws and standards-setting arrangements, educational requirements for accountants compared with IFAC International Education Standards, ethical requirements compared with the IFAC Code of Ethics for Professional Accountants. Public sector accounting practices for the general budget sector if using the cash basis of accounting ­ compared with the requirements of the Cash Basis International Public Sector Accounting Standards (IPSAS). Public sector accounting practices for the general budget sector if using the accrual basis of accounting ­ compared with the IPSAS requirements that govern accrual reporting for the public sector. Public sector auditing environment ­ compared with the provisions of the International 5The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. 6 The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, is managing the Program. A Secretariat has been set up and is located in the World Bank in Washington, DC. PAGE 32 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Organization of Supreme Audit Institutions (INTOSAI) Code of Ethics and the INTOSAI general 41429 standards. PublicsectorauditingpracticescomparedtotherequirementsoftheINTOSAIfieldstandards and reporting standards, and the IFAC International Standards on Auditing. Accounting and auditing practices for state-owned enterprises compared with the requirements of the International Financial Reporting Standards (IFRS) and International Standards on Auditing that govern commercial reporting. The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help as necessary of in-country experts retained by the Bank, are supplemented by a due diligence review conducted by members of a World Bank task team from the country. Various documents are examined as part of the review including relevant laws, codes of conduct, national accounting and auditing standards, accountant selection and promotion processes, training needs assessments, accountancy training course outlines, curricula and accreditation methods, sample accounts, and sample audit reports and working paper sets. Acountryreportontheassessmentispreparedforeachcountryandreviewedbyapanelofexpertadvisors before examination by the World Bank country team. The draft is then shared with the Government for response before finalization. C O U N T R Y R E P O R T PAGE 33 41429 Annex - B ACCOUNTING AND AUDITING STANDARDS This annex contains a summary of the frameworks that have been used for the public- sector accounting and auditing assessment The International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI) are cooperating in setting international standards for accounting and auditing. TheIASBisanindependent,privatelyfundedaccountingstandard-setterbasedinLondon,UK.TheBoard members come from nine countries and have a variety of functional backgrounds. In the public interest, IASB is committed to developing a set of high quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB co-operates with national accounting standard-setters to achieve convergence in accounting standards around the world. The IASB issued International Accounting Standards (IAS) from 1973 to 2000. Since 2000, they have issued International Financial Reporting Standards (IFRS). IFAC has its headquarters in New York, USA and comprises 163 member bodies, mainly the national professional accountancy bodies of most countries around the world. The IFAC Board established the International Public Sector Accounting Standards Board (IPSASB) to develop high quality accounting standards for use by public sector entities around the world in the preparation of general purpose financial statements. These are the International Public Sector Accounting Standards (IPSAS). The full text of Standards and Exposure Drafts currently on issue is available at http://www.ifac.org/publicsector. The first 20 IPSAS are based on IAS to the extent appropriate for the public sector. IFAC also has establishedtheInternationalAuditingandAssuranceStandardsBoard(IAASB)toprepareandpromulgate International Standards on Auditing (ISA) and is now working in cooperation with INTOSAI on preparing public sector guidance on the use of ISA. INTOSAI includes the Auditors General from almost all national government audit departments around the world and has its Secretariat in the Vienna offices of the Auditor General of Austria. Its Auditing Standards Committee, chaired by the Auditor General of Sweden, produces the INTOSAI Code of Ethics and Auditing Standards, a set of standards at a higher and more generic level than the IFAC-issued ISA. The Auditing Standards Committee is working with the IAASB to prepare practice notes explaining the application of each ISA in the public sector.7 7 Working Group on Financial Audit Guidelines, INTOSAI Auditing Standards Committee, Swedish National Audit Office, 2004. PAGE 34 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S The various standards are listed on the following pages. 41429 International Public Sector Accounting Standards IPSAS 1, Presentation of Financial Statements IPSAS 2, Cash Flow Statements IPSAS 3, Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS 4, The Effects of Changes in Foreign Exchange Rates IPSAS 5, Borrowing Costs IPSAS 6, Consolidated Financial Statements and Accounting for Controlled Entities IPSAS 7, Accounting for Investments in Associates IPSAS 8, Financial Reporting of Interests in Joint Ventures IPSAS 9, Revenue from Exchange Transactions IPSAS 10, Financial Reporting in Hyperinflationary Economies IPSAS 11, Construction Contracts IPSAS 12, Inventories IPSAS 13, Leases IPSAS 14, Events after the Reporting Date IPSAS 15, Financial Instruments: Disclosure and Presentation IPSAS 16, Investment Property IPSAS 17, Property, Plant and Equipment IPSAS 18, Segment Reporting IPSAS 19, Provisions, Contingent Liabilities and Assets IPSAS 20, Related Party Disclosures IPSAS 21, Impairment of Non-cash Generating Assets Cash Basis IPSAS, Financial Reporting under the Cash Basis of Accounting International Education Standards IES 1, Entry Requirements to a Program of Professional Accounting Education IES 2, Content of Professional Accounting Education Programs IES 3, Professional Skills IES 4, Professional Values Ethics and Attitudes IES 5, Practical Experience Requirements IES 6, Assessment of Professional Capabilities and Competence IES 7, Continuing Professional Development IES 8, Competence Requirements for Audit Professionals C O U N T R Y R E P O R T PAGE 35 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G International Financial Reporting and International Accounting Standards 41429 IFRS 1, First-time Adoption of International Financial Reporting Standards IFRS 2, Share-based Payment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Non-current Assets Held for Sale and Discontinued Operations IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, Cash Flow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 11, Construction Contracts IAS 12, Income Taxes IAS 14, Segment Reporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benefits IAS 20, Accounting for Government Grants and Disclosure of Government Assistance IAS 21, The Effects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, Related Party Disclosures IAS 26, Accounting and Reporting by Retirement Benefit Plans IAS 27, Consolidated and Separate Financial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 31, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation see also: See also Financial Instruments - Other Issues IAS 33, Earnings per Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurement see also: See also Financial Instruments ­ Other Issues PAGE 36 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S IAS 40, Investment Property 41429 IAS 41, Agriculture INTOSAI Code of Ethics and Auditing Standards Code of ethics Integrity. Auditors have a duty to adhere to high standards of behavior (e.g. honesty and candidness) in the course of their work and in their relationships with the staff of audited entities. Independence, objectivity and impartiality. The independence of auditors should not be impaired by personal or external interests. There is a need for objectivity and impartiality in the work and the reports, which should be accurate and objective. Conclusions in opinions and reports should be based exclusively on evidence obtained and assembled in accordance with the SAI auditing standards. Professional secrecy. Auditors should not disclose information obtained in the auditing process to third parties except for the purposes of meeting the SAI statutory responsibilities. Competence. Auditors must not undertake work for which they are not competent to perform. Basic postulates for the auditing standards (a) The SAI should consider compliance with the INTOSAI auditing standards in all matters that are deemed material. Certain standards may not be applicable to some of the work done by SAIs, including those organized as Courts of Account, nor to the non-audit work conducted by the SAI. The SAI should determine the applicable standards for such work to ensure that it is of consistently high quality. (b) TheSAIshouldapplyitsownjudgmenttothediversesituationsthatariseinthecourseofgovernment auditing. (c) With increased public consciousness, the demand for public accountability of persons or entities managing public resources has become increasingly evident so that there is a need for the accountability process to be in place and operating effectively. (d) Development of adequate information, control, evaluation and reporting systems within the government will facilitate the accountability process. Management is responsible for correctness and sufficiency of the form and content of the financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the government, and audited entities should develop specific and measurable objectives and performance targets. (f) Consistent application of acceptable accounting standards should result in the fair presentation of the financial position and the results of operations. (g) The existence of an adequate system of internal control minimizes the risk of errors and irregularities. It is the responsibility of the audited entity to develop adequate internal control systems to protect its resources. It is also the obligation of the audited entity to ensure that controls are in place and C O U N T R Y R E P O R T PAGE 37 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G functioning to help ensure that applicable statutes and regulations are complied with, and that 41429 probity and propriety are observed in decision making. The auditor should submit proposals and recommendations where controls are found to be inadequate or missing. (h) Legislative enactments would facilitate the cooperation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. (i) All audit activities should be within the SAI audit mandate.* (j) Legislative enactments would facilitate the cooperation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. (k) SAIs should work toward improving techniques for auditing the validity of performance measures. (l) SAIs should avoid conflict of interest between the auditor and the audited entity. * The full scope of government auditing includes regularity and performance audit. Regularity audit embraces: i. Attestation of financial accountability of accountable entities, involving examination and evaluation of financial records and expression of opinions on financial statements; ii. Attestation of financial accountability of the government administration as a whole; iii. Auditoffinancialsystemsandtransactionsincludinganevaluationofcompliancewithapplicable statutes and regulations; iv. Audit of internal control and internal audit functions; v. Audit of the probity and propriety of administrative decisions taken within the audited entity; and vi. Reporting of any other matters arising from or relating to the audit that the SAI considers should be disclosed. Performance audit entails the audit of economy, efficiency and effectiveness and embraces: vii. Audit of the economy of administrative activities in accordance with sound administrative principles and practices, and management policies; viii. Audit of the efficiency of utilization of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements, and procedures followed by audited entities for remedying identified deficiencies; and ix. Audit of the effectiveness of performance in relation to the achievement of the objectives of the audited entity, and audit of the actual impact of activities compared with the intended impact. PAGE 38 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S General auditing standards 41429 The auditor and the SAI must be independent. The auditor and the SAI must possess the required competence. The auditor and the SAI must exercise due care and concern in complying with the INTOSAI auditing standards. This embraces due care in planning, specifying, gathering and evaluating evidence, and in reporting findings, conclusions and recommendations. The SAI should adopt policies and procedures to recruit personnel with suitable qualifications. The SAI should adopt policies and procedures to develop and train SAI employees to enable them to perform their tasks effectively, and to define the basis for the advancement of auditors and other staff. The SAI should adopt policies and procedures to prepare manuals and other written guidance and instructions concerning the conduct of audits. The SAI should adopt policies and procedures to support the skills and experience available within the SAI and identify the skills which are absent; provide a good distribution of skills to auditing tasks and assign a sufficient number of persons for the audit; and have proper planning and supervision to achieve its goals at the required level of due care and concern. The SAI should adopt policies and procedures to review the efficiency and effectiveness of the SAI internal standards and procedures. Field standards (a) The auditor should plan the audit in a manner that ensures that an audit of high quality is carried out in an economic, efficient and effective way, and in a timely manner. (b) The work of the audit staff at each level and audit phase should be properly supervised during the audit; and documented work should be reviewed by a senior member of the audit staff. (c) Theauditor,indeterminingtheextentandscopeoftheaudit,shouldstudyandevaluatethereliability of internal control. (d) In conducting regularity (financial) audits, a test should be made of compliance with applicable laws and regulations. The auditor should design audit steps and procedures to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the results of regularity audits. The auditor also should be aware of the possibility of illegal acts that could have an indirect and material effect on the financial statements or results of regularity audits. Reporting standards (a) At the end of each audit the auditor should prepare a written opinion or report, as appropriate, setting out the findings in an appropriate form; its content should be easy to understand and free from vagueness or ambiguity, include only information which is supported by competent and relevant audit evidence, and be independent, objective, fair and constructive. (b) It is for the Auditor General to decide finally on the action to be taken in relation to fraudulent practices or serious irregularities discovered by the auditors. C O U N T R Y R E P O R T PAGE 39 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G International Standards on Auditing 41429 Framework: Audit Evidence: International Framework for Assurance 500 Audit Evidence Engagements 501 Audit Evidence - Additional Considerations General Principles and for Specific Items Responsibilities: 505 External Confirmations 200 Objective and General Principles Governing 510 Initial Engagements - Opening Balances an Audit of Financial Statements 520 Analytical Procedures 210 Terms of Audit Engagements 530 Audit Sampling and Other Means of Testing 220 Quality Control for Audits of Historical 540 Audit of Accounting Estimates Information 545 Auditing Fair Value Measurements and 230 Documentation Disclosures 550 Related Parties 230R Audit Documentation 560 Subsequent Events 240 The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements 570 Going Concern 580 Management Representations 240A Fraud and Error Using the Work of Others: 250 Consideration of Laws and Regulations in an Audit of Financial Statements 600 Using the Work of Another Auditor 260 Communications of Audit Matters with 610 Considering the Work of Internal Auditing Those Charged with Governance 620 Using the Work of an Expert Risk Assessment and Response to Audit Conclusions and Reporting: Assessed Risks: 700 The Auditor's Reports on Financial 300 Planning an Audit of Financial Statements Statements 315 Understanding the Entity and Its 700R The Independent Auditor's Report on a Environment and Assessing the Risks of Complete Set of General Purpose Financial Material Misstatement Statements 320 Audit Materiality 701 Modifications to the Independent Auditor's Report 330 The Auditor's Procedures in Response to Assessed Risks 710 Comparatives 402 Audit Considerations Relating to Entities 720 Other Information in Documents Using Service Organizations Containing Audited Financial Statements Specialized Areas: 800 The Auditor's Report on Special Purpose Audit Engagements PAGE 40 C O U N T R Y R E P O R T 41429 Annex - C ACCOUNTING LEGISLATION Extracts from the Financial Regulations: 1.1.2.3 Government accounting shall be maintained on cash basis. 1.3.6.1 The Government shall hold Government Consolidated Account at the RMA as the Principal account for the budgetary operations of the Government. The daily cash position of the budgetary operations of the Government shall be ascertained from this account. 5.1.1.1 An expenditure shall be recognised immediately upon making payment in cash or signing a cheque in case of a Disbursement Voucher and on authorization of a Journal Voucher subject to the following: a. In the case of payments made from Permanent or Temporary Advances, the expenditure shall be recognised when an account together with the relevant supporting documents are approved and authorized for adjustment. b. Direct disbursements from a loan account shall be recognised on the dates of such disbursements irrespective of the actual date of receipt of the goods or services in the project. c. Direct disbursements from grant accounts shall be recognised only after the receipt of goods or services in the project. 5.1.1.2 Fiscal Year of a payment shall be determined by the issue date of the cheque or the date of payment in cash. 5.1.2.1 Every unit incurring expenditure shall maintain proper books of accounts...... 11.1.1.1 The Department of Budget & Accounts shall prepare the Annual Financial Statements of the budgetary operations for each fiscal year within six months after the close of the fiscal year. 11.1.1.2 ThestatementsshallbeauditedandcertifiedbytheRoyalAuditAuthoritybeforesubmission to the Government. The audit shall be completed within four months after preparation of the statement C O U N T R Y R E P O R T PAGE 41 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 11.1.1.3 The total receipts and expenditures of the Government during a fiscal year shall be the basis 41429 for preparation of the Annual Financial Statements. 11.1.1.4 The Annual Financial Statements shall include the following statements and schedules: a. Consolidated receipts & payments statement (FAM ­ 11.1); b. Summary of original and revised budget estimates and variations with actual outcome (FAM ­ 11.2); c. Statement of outstanding loans (FAM ­ 11.3); d. Statement of equity portfolio of the Government (FAM ­ 11.4); e. Statement of operations on Refundable Deposit Account, Revolving and Trust Funds (FAM ­ 11.5); f. Government Consolidated Account Reconciliation Statement; g. Schedules giving details of Internal Revenue, Grant assistance, Borrowings, Loan recoveries and Other Receipts; h. SchedulesofBudgetaryExpenditurebyobject,byadministrativeagenciesat programme level compared with budget provisions and by function; i. Schedules of loan principals repaid and lending made; j. Any other information/report as may be decided by the Ministry of Finance. PAGE 42 C O U N T R Y R E P O R T 41429 Annex - D-1 AUDIT LEGISLATION Extracts from the Finance and Accounting Manual: 1.3.10.1 The Royal Audit Authority (RAA) shall operate a current account styled "Audit Recoveries Account" outside the Government Consolidated Fund Account for the deposit and management of audit recoveries remitted to it on its instance. 1.3.10.2 The amounts recovered at the instance of the RAA shall be remitted by the Heads of Offices within the prescribed dateline to the RAA. Such remittances shall be supported by a statement indicating the Audit report No. & date, relevant audit paragraph/memo number and date, name of the party, amount recovered and the balance amount recoverable, if any. In case, the amounts are directly received by the RAA from the party concerned, it shall provide all the above information to the Head of Finance Section of the relevant office among others. 1.3.10.3 The RAA shall remit the proceeds of the Audit Recoveries Account on a quarterly basis.... 10.1.2 Preservation period of financial records 10.1.2.1 The minimum preservation period shall be reckoned from the date of completion of audit by the Royal Audit Authority and settlement of audit observations pertaining to the contents of the records, if any. 11.1.1.1 The Department of Budget & Accounts shall prepare the Annual Financial Statements of the budgetary operations for each fiscal year within six months after the close of the fiscal year. 11.1.1.2 ThestatementsshallbeauditedandcertifiedbytheRoyalAuditAuthoritybeforesubmission to the Government. The audit shall be completed within four months after preparation of the statements. C O U N T R Y R E P O R T PAGE 43 41429 Annex - D-2 AUDIT ACT, 2006 TABLE OF CONTENTS Title Page Preamble 46 Chapter 1: Preliminary 47 Title, Commencement and Extent 47 Repeal 47 Chapter 2: Royal Audit Authority 47 Establishment 47 The Appointment of Auditor General 47 Eligibility and Qualifications of Auditor General 47 Oath or Affirmation 48 Terms and Conditions of Service 48 Resignation and Removal 48 Independence of the Authority 48 Chapter 3: Code of Professional Conduct 49 Compliance 49 Responsibility 49 Accountability 49 Confidentiality 49 Integrity 49 Selflessness 49 Transparency 49 Personal Conduct 50 Conflicts Of Interest 50 Violation 51 PAGE 44 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Chapter 4: Functions, Jurisdictions And Scope Of Auditing 41429 51 Functions Of The Royal Audit Authority 51 Audit Jurisdiction 51 Scope Of Audit 52 Chapter 5: Powers, Responsibilities And Right Of Access To Information 53 Powers Of The Authority 53 Responsibility Of The Authority 54 Powers Of The Auditor General 54 Responsibilities Of The Auditor General 54 Right Of Access To Information 55 Chapter 6: Auditing And Reporting Standards 55 Standards And Practices 55 Audit Report 56 Annual Audit Report (Aar) 57 Publication Of Reports 57 Admissible Period To Respond 57 Follow-up Of Audit Reports 58 Chapter 7: Testimony 58 Testimony, Opinion And Reports 58 Expert Opinion 58 Chapter 8: Accountability Of The Authority 58 Auditing The Authority And Peer Review 58 Protection Of Information, Sources And Persons 59 Chapter 9: Offences And Penalties 60 Offences 60 Prosecution 60 Penalties 60 Chapter 10: Miscellaneous 60 Immunity From Prosecution 60 Rule Making Power 60 Authoritative Text 61 Amendment 61 Definitions 61 C O U N T R Y R E P O R T PAGE 45 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G P R E A M B L E 41429 Whereas the Constitution provides the Royal Audit Authority of Bhutan as an independent Authority; and Whereas in keeping with His Majesty's vision to enhance accountability and proper utilization of public resources through effective auditing and reporting without fear, favour or prejudice, and to promote Good Governance; The National Assembly of Bhutan in its 85th Session held on 5th Day of the 5th Month of the Male Dog Year of the Bhutanese Calendar, corresponding to 30th June, 2006 hereby enacted the Audit Act of Bhutan as follows: PAGE 46 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S CHAPTER 1 : PRELIMINARY 41429 Title, Commencement and Extent 1. This Act shall: (a) Be called the AUDIT ACT OF BHUTAN, 2006; (b) Come into force on the Day of the Sixth Month of the Male Dog Year of the Bhutanese Calendar, corresponding to August 2, 2006; and (c) Extend to the whole of the Kingdom of Bhutan or otherwise within the jurisdiction of Bhutan. Repeal 2. This Act hereby repeals any provisions of any law, by-law, rules or regulation which is inconsistent with this Act CHAPTER 2 : ROYAL AUDIT AUTHORITY Establishment 3. ThereshallbeaRoyalAuditAuthoritytoauditandreportontheeconomy,efficiency,,andeffectiveness in the use of public resources. 4. The Authority shall be an independent and non-partisan institution headed by the Auditor General. The Appointment of Auditor General 5. The Auditor General of Bhutan shall be appointed by the Druk Gyalpo from a list of eminent persons recommended jointly by the Prime Minister, the Chief Justice of Bhutan, the Speaker, the Chairperson of the National Council and the Leader of the Opposition Party. Eligibility and qualifications of Auditor General 6. A person shall be eligible for appointment as the Auditor General if he is: (a) A natural born citizen of Bhutan; (b) Not married to a person who is not a citizen of Bhutan; (c) Not convicted of any criminal offence; (d) Not in arrears of taxes or other dues to the Government; (e) Not holding any office of profit in any public companies and corporations; C O U N T R Y R E P O R T PAGE 47 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G (f) A senior government official suitably qualified for the post; 41429 (g) Have no political affiliation; and (h) Have not been terminated from Public Service. Oath or Affirmation 7. The Auditor General shall, upon assuming office, take an Oath or Affirmation of office and secrecy as provided in the Third and Fourth Schedule of the Constitution respectively. 8. The Oath and Affirmation shall be taken before His Majesty the Druk Gyelpo or Chief Justice of the Bhutan as per the command of His Majesty the Druk Gyalpo. Terms and conditions of service 9. The term of office of the Auditor General shall be five years or until attaining the age of sixty-five years, whichever is earlier. 10. The Auditor General shall not be eligible for re-appointment. 11. The Auditor General shall receive such salary, allowances and other benefits as may be prescribed by law in parity with holders of other constitutional offices. Resignation and removal 12. The Auditor General may resign from office at any time in writing to the Druk Gyalpo. 13. The Auditor General can be removed only by impeachment. 14. The vacancy of the post of Auditor General shall be filled within a period of thirty days from the date of such vacancy. Independence of the Authority 15. The Authority shall enjoy full organizational and functional independence including programming, investigative and reporting. 16. The Authority shall have full authority to determine and administer its organizational structure, budgetary and personnel requirements. 17. The State shall make adequate financial provisions for the independent administration of the Authority. 18. The Authority's budget shall be approved by the Parliament as a part of the National Annual Budget. If the decision of the Parliament on National Budget is delayed, the Ministry of Finance shall provide the Authority with interim funds, which shall be at least equal to the previous year's budget. 19. Except for the Auditor General, the Authority shall prescribe the service conditions and personnel policies for its staff broadly in accordance with the Civil Service Act. PAGE 48 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S CHAPTER 3 : CODE OF PROFESSIONAL CONDUCT 41429 Compliance 20. The Auditor General shall ensure that his conduct is, in appearance and in fact, in compliance with this Code. 21. The Auditor General shall: (a) Have the moral integrity required to competently, efficiently and professionally carry out his tasks; and (b) Not only abide by the provisions of this Act but ensure that all auditors comply with the Good Code of Conduct, Ethics and Secrecy of the Authority. 22. The Auditor General, auditors and staff shall individually and collectively ensure that the integrity of the Authority is maintained. Responsibility 23. The Auditor General shall ensure that his conduct is consistent with the dignity, reputation and integrity of the Authority and the sovereignty and integrity of Bhutan. Accountability 24. The Auditor General shall have a duty to account and be held accountable for the policies, decisions and actions of the Authority. Confidentiality 25. The Auditor General shall maintain confidentiality in cases where the decisions, documents and deliberations should not be disclosed in the public interest. Integrity 26. The Auditor General shall not be influenced in any manner whatsoever by any individual or body of individuals in the discharge of his official duties. Selflessness 27. The Auditor General shall take decisions solely based on the public interest and not on any other factors. Transparency 28. The decisions and actions of the Auditor General shall be transparent and he shall give reasons for his decisions. C O U N T R Y R E P O R T PAGE 49 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Personal conduct 41429 29. The Auditor General having been entrusted with the sacred responsibility to serve the Tsawa-Sum, shall: (a) Refrain from indulging in habits and behaviour that infringe upon the performance of official duties or tarnish the image of the Auditor General, the Authority or the Country; (b) Not do or direct to be done, in abuse of his office or power, any act prejudicial to the rights of any other person knowing that such act is unlawful or contrary to any government policy; (c) Not maintain or operate a bank account in any country outside Bhutan; (d) Notprovideinformation,whichisdetrimentaltotheprestige,territorialintegrityandsovereignty of the Kingdom; and (e) The Auditor General shall not accept any gifts, presents or benefits. Conflicts of interest 30. The Auditor General shall ensure that no conflict of interest arises or appears to arise, between his public duties and his private interests, financial or otherwise. 31. AconflictofinterestmayexistwhentheAuditorGeneralisinfluencedorappearstobeinfluencedby private interests. Private interests include not only the Auditor General's financial or other interests but also the financial or other interests of the Auditor General's spouse or dependant. 32. The Auditor General shall: (a) Declare the assets and liabilities, including the assets and liabilities in the name of his spouse and dependants within 3 months after the appointment, annually thereafter and 3 months before leaving the office, to the Anti-Corruption Commission; (b) Not undertake any private trade or commercial activity or additional employment; (c) Not hold chairmanship or membership in a public or private company whether it carries remuneration or is honorary other than as may be required in his official capacity as the Auditor General; (d) Not act as consultant to any company, business or association or provide assistance to any such body, except as may be appropriate in his official capacity as the Auditor General; (e) Not be a member of, belong to, or take part in any society the membership of which is incompatible with the functions or dignity of his office; and (f) Not make any unauthorized commitment or promise that purports to bind the Government. 33. All auditors, including the Auditor General, shall declare any potential conflict of interest before undertaking any particular audit or other duties concerning a particular person or entity. 34. All auditors, including the Auditor General, shall maintain the highest degree of incorruptibility. PAGE 50 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 35. The Auditor General may exclude an official from an audit if he considers there is a reasonable cause 41429 to doubt the existence of a conflict of interest. Violation 36. Violation of this Code by the Auditor General shall be a ground for his impeachment for misbehaviour. 37. Violation of the Good Code of Conduct, Ethics and Secrecy of the Authority by the auditors shall be a ground for disciplinary action. CHAPTER 4 : FUNCTIONS, JURISDICTIONS AND SCOPE OF AUDITING Functions of the Royal Audit Authority 38. The functions of the Authority shall be to: (a) Carry out financial, propriety, compliance, special audits and any other form of audits that the Auditor General may consider significant and necessary; (b) Conduct Performance audit to ascertain and report on the economy, efficiency and effectiveness of the operations of agencies audited; (c) Conduct in depth audit of any aspects of the accounts, operations, systems and management practices of the agencies; (d) Conduct the audit of assessment, collection and accounting of revenues & taxes; (e) Conduct the audit of aid, grants and public debt of the Nation; (f) Certify the Consolidated Annual Financial Statements of the Royal Government; (g) Report its findings and recommendations to the relevant authorities; and (h) Follow-up on the compliances of the Audit Reports. Audit Jurisdiction 39. The Authority shall conduct without fear, favour or prejudice the audits of the following: (a) Government or any of its instrumentalities which include, Ministries, Departments, Divisions, Units, Dzongkhags, Gewogs, Thromdues, autonomous bodies, foreign-assisted or special projects of the Royal Government; C O U N T R Y R E P O R T PAGE 51 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G (b) Zhung Dratshang, Rabdeys and all related institutions; 41429 (c) Judiciary and Judicial Bodies; (d) Legislature and related institutions; (e) Constitutional bodies; (f) Defence and Security Services; (g) All corporations, Financial Institutions including the Central Bank and their subsidiaries established under the laws of the Kingdom in which the Government has an ownership interest; (h) All entities including non-governmental organizations, foundations, trusts, charities and civil societies fully or partly funded by the Government; whose loans are approved or guaranteed by the Government; and those receiving funds, grants and subsidies directly or through the Government and collections and contributions from people and fund raised through lottery. (i) Any entity or activity upon Command of the Druk Gyalpo. 40. Notwithstandingtheprovisionsofanylawsrelatingtotheaccountsandauditofanypublicauthority, the Parliament, if satisfied that the public interest so requires, shall direct that the accounts of such authority be audited by the Auditor General. Scope of Audit 41. The Authority shall audit the following matters to ascertain whether: (a) The amount appropriated have been expended for the specified programs and tasks within the approved budget limits; (b) The financial transactions comply with the existing laws and the evidence relating to items of income and expenditure are sufficient; (c) The accounts have been maintained in the prescribed forms and such accounts fairly represent the position of the transactions; (d) The program implementations are adequately monitored to avoid incidences of cost and time overruns; (e) Theinventoryofpublicpropertiesisaccurateandup-to-date,andcustody,control,management and physical safeguard measures instituted are adequate; (f) Physical assets and infrastructures reported actually exist and confirm to the required specifications and standards; (g) The available resources including human, financial and other assets are properly utilized; (h) Theaccountingandrelatedsystemofcontrols,financialorotherwiseincludingthearrangements for internal audit and internal control of cash, kind and other public property against any loss, damage and abuse are adequate; (i) The accounts of revenue, taxes, other incomes and deposits are accurate and the systems PAGE 52 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S relating to assessment, realization, recording and methods of reporting are adequate; 41429 (j) The debts, liabilities and specific purpose funds are recorded accurately and managed properly; (k) The ICT and other technological systems developed are appropriate and adequate controls and security measures are instituted to prevent unauthorized access to the system; and (l) The implementation of programs and activities are as planned and the intended objectives achieved. CHAPTER 5 : POWERS, RESPONSIBILITIES AND RIGHT OF ACCESS TO INFORMATION Powers of the Authority 42. The Authority may: (a) Develop rules, procedures and guidelines to carry out auditing economically, efficiently and effectively; (b) Determine the objectives, scope, frequency and findings of audits in accordance with the laws and Generally Accepted Auditing Practices; (c) Determine the audit findings to be included in the report in the light of observations made by the auditors and explanations, justifications and evidence furnished by the auditee agency; (d) Develop investigative auditing procedures designed to increase the likelihood of detection of fraud and corruption thereby reducing the incidence of their occurrences; (e) Adopt procedures for the issuance of audit clearance certificates; (f) Establish requirements that copies of audited financial statements, performance and other reports of agencies be delivered to it; (g) Represent the Kingdom in the fields of auditing in national, regional and international arena; and (h) Cooperate with international and regional accounting and auditing associations and bodies in the development and application of the generally accepted auditing standards, principles and practices in line with acceptable international standards and practices. 43. The Authority shall have the power to settle the audit observations in the light of justifications provided, compliance made, and improvement noted as may be appropriate. C O U N T R Y R E P O R T PAGE 53 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Responsibility of the Authority 41429 44. It shall be the duty of the Authority to: (a) Carry out its responsibilities by conducting proper and timely audits of public funds utilized by the ministries, departments, corporations and other organizations of the Government; (b) ReportonwhethertheconcernedagenciescomplieswiththewilloftheParliament,asexpressed through budgetary appropriations; and (c) Promote economy, efficiency and effectiveness of the use of public resources through its reports and recommendations. Powers of the Auditor General 45. The Auditor General shall have power to: (a) Enforce the provisions of this Act; (b) Issue statements on the generally accepted auditing standards and principles and related guidelines; (c) Appoint other persons, organizations or companies to perform any particular audits; (d) Station an auditor in any agency in order to carry out the functions of the Authority effectively. (e) Require every person employed in the Authority to comply with any security requirements; (f) Develop and implement training programmes which ensures that Audit staff remain competent to carryout their duties in accordance with the prevailing standards and practices; (g) Make financial commitments on behalf of the Authority, including contracting for professional services in accordance with the governing policies and procedures of the Government; (h) Enter into agreements with, and receive and manage funds from donors for capacity building of the office in accordance with the governing policies and procedures of the Government; and (i) Represent the Authority at home and abroad. 46. TheAuditorGeneralshallhavethepowertorequiretheagenciestoprovidetechnicalandprofessional support as may be necessary and warranted in proper discharge of audit function. 47. The Auditor General may delegate the exercise of any of his powers to other auditors but such delegation shall not remove him of the responsibility and accountability for acts by those individuals delegated with such powers. Responsibilities of the Auditor General 48. The Auditor General shall have the duty to: (a) Carry out his responsibilities with utmost loyalty and dedication to the Tsawa-Sum, unaffected byanyconsiderationforthoseinpositionsofpowerandinfluenceandshowingnodiscrimination whatsoever in the line of his work; PAGE 54 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S (b) InformtheAnti-corruptionCommissionorrelevantauthorityonanyactivityorpersonidentified 41429 in the course of an audit that may constitute as offences under this Act or other laws; (c) Perform such other duties, in relation to the accounts of bodies administering public funds, as may be prescribed by law. 49. TheAuditorGeneralshallbeheldaccountablefortheAuthority'snon-compliancewiththeprovisions of this Act and for any acts contrary to the objectives and functions of the Authority. Right of access to information 50. Subject to the provisions of other laws, the Authority shall have the right of access to the personnel records, information and premises of the entities being audited and parties involved. 51. TheAuthorityshallhaverightofaccesstotherecords,bankstatementsofagenciesaudited,suppliers, taxpayers and other third parties in accordance with the laws, if found relevant and material to the audit of an entity. 52. The Authority shall have powers to enforce or initiate enforcement action to secure access to needed records, which are not produced. 53. The Authority shall be provided with copies of any documents or materials, access to premises, office space and other facilities necessary for auditing. 54. The Auditor General or anyone authorized by him upon written notice may require anyone currently or previously involved in the activities under audit to: (a) Provide a written explanation of any related matter; or (b) Attend and give evidence, affirmation or otherwise, before the Auditor General or the designated person. 55. The Auditor General shall have power to obtain information from individuals who have been participants or beneficiaries, and those who may be providers of services. CHAPTER 6 : AUDITING AND REPORTING STANDARDS Standards and practices 56. The Authority shall establish auditing, reporting standards and practices that will meet the highest auditing and reporting standards. 57. The Authority shall publish standards and practices in an appropriate manner to make the proposal known to the public and invite comments before adopting such standards. C O U N T R Y R E P O R T PAGE 55 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 58. An auditee shall submit annual financial statements for their operations for audit in accordance with 41429 standards and requirements established by laws. 59. The Authority may rely on the audits performed by other organizations including internal auditors if it has reasonable assurance through such means as prior experience, tests or other indicators that the audits and the reports on those audits are accurate, reliable and meet its standards. 60. Audit methods shall be adapted to the progress of the sciences and techniques relating to sound financial management and reporting. 61. The Authority shall intimate an entity to be audited before starting the audit unless it is a special investigation audit. Audit Report 62. The report covering the financial operation of the agency shall contain the Authority's opinion on the financial statements indicating, whether the financial statements have been fairly presented in accordance with applicable laws and generally accepted accounting principles. 63. The report shall invite attention to the cases and indications of fraud, abuse or illegal acts. 64. The report shall also disclose appropriate supplementary explanation and information about the financial statements, monthly and annual accounts, as well as violations of legal or the regulatory requirements, including instances of non-compliance. 65. The Auditor General shall address an Audit Report to: (a) The concerned Minister and head of the audited entity requiring the follow-up action and copy endorsed to others where appropriate; (b) The Chief Justice of Bhutan for audits of the Courts; (c) The Speaker of the National Assembly for the audit of Legislative Offices; (d) The Chairman for the audit of the National Council; (e) The Minister of Finance for the audit of Defence and Security Services; (f) The Ministry of Finance for certification audits in respect of donor funded projects; and (g) The Chairpersons of the Board of Directors for the audits of the Corporations and Financial Institutions. 66. Confidential information may be covered in a separate report. Such information shall not be divulged or released prior to its authorized release, or revealed to other parties not concerned, without prior clearance and approval of the Auditor General or his duly designated representative. 67. The Authority shall submit copies of the Audit Report to the Druk Gyalpo, the Prime Minister and the Chairperson of the Royal Civil Service Commission or the Chairperson of the Anti-Corruption Commission, where offences are serious and require urgent attention. PAGE 56 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 68. The concerned agency shall immediately take action on audit observations and ensure that any fund 41429 or property misspent, misused or wasted is recovered without undue delay. Annual Audit Report (AAR) 69. The Auditor General shall submit the Annual Audit Report (AAR) during the fourth quarter of the fiscal year on the audits carried out during the previous fiscal year. 70. The Annual Audit Report shall contain the result of the audit of the Annual Financial Statements of the Government, the overall financial condition and recommendations to improve the economy, efficiency and effectiveness of the Government. The report shall assess whether the administration as a whole has been economical, efficient and effective in the utilization of the public fund. 71. The Annual Audit Report shall include: (a) The Audit Report on the operation of the Royal Audit Authority for the fiscal year; (b) Works performed by the Authority during the period defined; (c) Significant audit findings and recommendations for improvement of agencies audited; (d) Cases where the Authority did not receive acceptable responses or cooperation; (e) Cases where, in the Auditor General's opinion, the follow-up reports submitted by an entity are not adequate, or are not being carried out as recommended; (f) Future course of action in the interest of enhancing accountability and improving auditing operational capacity; and (g) Any other matter based on audit findings that the Auditor General, in his opinion, considers to be significant and of a nature that needs to be brought to the attention of His Majesty the Druk Gyalpo, the Parliament and the people of Bhutan. 72. The Auditor General shall submit the Annual Audit Report to the Druk Gyalpo, the Prime Minister and the Parliament. 73. The Auditor General shall endorse copies of the Annual Audit Report to the Lhengye Zhungtshog, concerned Head of the audited entity, the Chairperson of the Anti-Corruption Commission and the Chairperson of the Public Accounts Committee. Publication of Reports 74. The Auditor General shall publish its Annual Audit Report every fourth quarter of the fiscal year on the activities carried out during the previous fiscal year. Admissible period to respond 75. All audited entities must respond to the Audit Reports within the time frame as specified here under: C O U N T R Y R E P O R T PAGE 57 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G a) Response to initial audit observations - within one month of the issue of field audit 41429 memos b) Response to agency specific reports - withinthreemonthsoftheissueofthereports by the Authority c) Response to draft Annual Audit Report - within one month of the issue of the draft by the Authority Follow-up of Audit Reports 76. The Lhengye Zhungtshog, Ministries, and other concerned authorities shall be responsible to take timely follow-up actions on Audit Reports under this Act. 77. The Royal Audit Authority shall issue reminders on reports not being acted upon and if there be further non-compliance and non co-operation, a defaulting auditee must be questioned and required to submit explanation. CHAPTER 7 : TESTIMONY Testimony, opinion and reports 78. The Auditor General or an official authorized by him from the Authority shall be obligated to testify before the Parliament or the Judiciary. 79. The Auditor General shall review every five years the auditing system for maximizing and utilizing the use of public funds and optimizing the values for its intended purpose. 80. The Auditor General, or anyone designated to do so by him from the Authority may provide advice or information to a person or entity relating to the responsibilities of the Authority. Expert opinion 81. The Authority may provide the Parliament and the administration with their professional knowledge in the form of expert opinions, including comments on financial bills when requested. CHAPTER 8 : ACCOUNTABILITY OF THE AUTHORITY Auditing the Authority and Peer Review 82. The operations of the Authority shall be subject to the same standards and requirements established by this Act or other relevant Law. PAGE 58 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 83. The Parliament shall appoint independent auditors drawn from professional firms or bodies not 41429 within the audit jurisdiction of the Authority for auditing the annual accounts of Royal Audit Authority. 84. TheAuthorityshallprovideitsfinancialstatementsandoperationalinformationtoappointedauditor within 45 days after the end of a fiscal year. 85. The Auditor shall: (a) Submit a report on any matter related to the operations of the Authority without fear or favour or prejudice, to the Parliament; and (b) If required testify before the Parliament or entities of the Parliament on matters related to the operations of the Authority. 86. The Authority may undertake a peer review by a member of peer organizations or other professional bodies from time to time to ensure consistency and high standard of auditing. Protection of information, sources and persons 87. Auditors shall respect the security requirements applicable to the information that they receive and obtain. 88. The Authority shall maintain the confidentiality of the source of any information received about potential offences, in good faith and trust, under the laws of the Kingdom. 89. The Authority shall not provide information to any member of the public or any person or authority, if in its opinion, the information has: (a) To be held confidential under national laws and accepted legal practice; (b) Commercial and industrial confidentiality of national significance; and (c) National Security and larger public interest implications under laws of the Kingdom. 90. The Authority shall give the same level of confidentiality and protection as is required by laws of the Kingdom for any secret or sensitive material or evidence, written or otherwise, obtained by or made available to the Authority from an entity pursuant to this Act. 91. The Authority shall: (a) Provide for the safety of person whose assistance and cooperation had been significant and material for an audit in upholding the public interests; (b) Require the appropriate authorities to provide protection and ensure safety of person whose support to the Authority is significant and material for enhancement or safeguarding of the national interest; and (c) Require authorities to provide protection and ensure safety of auditors, where, in the opinion of the Auditor General, there is apparent risk and threat to their safety. C O U N T R Y R E P O R T PAGE 59 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G CHAPTER 9 : OFFENCES AND PENALTIES 41429 Offences 92. Any person who has committed an offence under this Act or who fails to comply with any provision of this Act shall be guilty of an offence. 93. A complainant or informer, who knowingly gives or causes to be given any false or misleading information relating to any offence committed by an entity or a person with malicious intent shall be guilty of an offence. Prosecution 94. No person shall be liable for an offence under this Act unless found guilty and Convicted by a court of law. 95. A person alleged of commission of an offence shall be prosecuted by the Office of the Attorney General in accordance with its Act and other relevant laws. Penalties 96. Any person who is found guilty of an offence shall on conviction be liable to punishment provided for such offence under the Penal Code of Bhutan or other relevant laws of the Country. 97. Every person convicted of an offence of corruption under this Act or any other law, for which no penalty is specifically provided under the Penal Code of Bhutan or any other law, shall be liable to a fine or to imprisonment, or both, as graded by the court. 98. Any disciplinary action against the auditors or other staff can be imposed only with the Service Rules framed under this Act. CHAPTER 10 : MISCELLANEOUS Immunity from prosecution 99. The Auditor General and its auditors shall enjoy immunity from prosecution for any lawful act arising from the due discharge of their duties under this Act. Rule making power 100. The Authority may make rules necessary to carry out its functions economically, efficiently and effectively in accordance with law. PAGE 60 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Authoritative Text 41429 101. The Dzongkha text shall be the authoritative text, if there exist any difference in meaning between the Dzongkha and the English text of this Act. Amendment 102. The amendment of this Act may be effected only by the Parliament. Definitions 103. For the purpose of this Act unless the context indicate otherwise, the words, phrases and acronym are defined as follows: (a) "Accounts" means the records, ledgers and books, maintained under existing laws showing particulars of transactions, and other documents substantiating such transactions. (b) "Act" means the Audit Act of the Kingdom of Bhutan. (c) "Audit" means formal inspection, investigation, examination or review of an individual's or organization's accounting records, operations, financial position, or compliance with applicable laws, rules, regulations and standards and ascertaining whether or not the intended objectives are achieved. (d) "Auditor General" means the Auditor General of Bhutan appointed under the Constitution and this Act. (e) "Authority" means the Royal Audit Authority of Bhutan established by the Constitution of the Kingdom with power to enforce this Act. (f) "Corruption" means as defined in the Anti Corruption Act. (g) "Government" means the Royal Government of Bhutan. (h) "Kingdom" means the Kingdom of Bhutan. (i) "Misbehavior" means any action or inaction in violation of the code of professional conduct mentioned in this Act. (j) "PeerReview"meansaperiodicoutsidereviewofanorganization'squalitycontrolsystemto maintainandimprovethequalityoftheservicesperformedbypeerorganizationscommitted to excellence and professionalism. (k) "Performance Audit" means the aspects of value-for-money (VFM), operational and management audits including an audit of the economy, efficiency and effectiveness with which the audited entity uses its resources in carrying out its responsibilities and any other review or examination of any aspect of the operations of an entity including audit of any performance report prepared by the management. C O U N T R Y R E P O R T PAGE 61 41429 Annex - E BENEFITS OF ACCRUAL ACCOUNTING Extract from Study No. 14 "Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities," IFAC Public-Sector Committee, December 2003. 1.18. The PSC has commented extensively on the benefits of accrual accounting for governments and individual public-sector entities in previous Studies (Studies 5, 6, 8, 9 10 and 11) and Occasional Papers (Papers 1, 3, 5, 6 and 7). In order to provide some context for readers who are not familiar with the Public-Sector Committee's other publications, this section contains a summary of the benefits of reporting on the accrual basis. 1.19 Theinformationcontainedinreportspreparedonanaccrualbasisisusefulbothforaccountability and decision-making. Financial reports prepared on an accrual basis allow users to: assess the accountability for all resources the entity controls and the deployment of those resources; assess the performance, financial position and cash flows of the entity; and make decisions about providing resources to, or doing business with, the entity. 1.20 At a more detailed level, reporting on an accrual basis: shows how a government financed its activities and met its cash requirements; allows users to evaluate a government's ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position of a government and changes in financial position; provides a government with the opportunity to demonstrate successful management of its resources; and is useful in evaluating a government's performance in terms of its service costs, efficiency and accomplishments. Financial Position 1.21 Accrual accounting provides information on an entity's overall financial position and current stock of assets and liabilities. Governments need this information to: PAGE 62 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S make decisions about the feasibility of financing the services they wish to provide; 41429 demonstrate accountability to the public for their management of assets and liabilities recognized in the financial statements; plan for future funding requirements of asset maintenance and replacement; plan for the repayment of, or satisfaction of, existing liabilities; and manage their cash position and financing requirements. 1.22 Accrual accounting requires organizations to maintain complete records of assets and liabilities. It facilitates better management of assets, including better maintenance, more appropriate replacement policies, identification and disposal of surplus assets, and better management of risks such as loss due to theft or damage. The identification of assets and the recognition of depreciation help managers to understand the impact of using fixed assets in the delivery of services, and encourage managers to consider alternative ways of managing costs and delivering services. 1.23 Accrual accounting provides a consistent framework for the identification of existing liabilities, and potential or contingent liabilities. The recognition of obligations meeting the definition of a liability and the criteria for recognition: compels governments to acknowledge and plan for the payment of all recognized liabilities, not just borrowings; provides information on the impact of existing liabilities on future resources; means that it is possible to allocate responsibility for the management of all liabilities; and provides necessary input for governments to assess whether they can continue to provide current services and the extent to which they can afford new programs and services. 1.24 Accrual accounting highlights the impact of financing decisions on net assets/equity and may lead governments to take a longer term view when making financing decisions than is generally possible when relying on cash or modified cash reports. Information on net assets/equity also means t hat governments may be held accountable for the financial impact of their decisions on both current and future net assets/equity. Changes in an entity's net assets/equity between two reporting dates reflect the increase or decrease in its wealth during the period, under the particular measurement principles adopted and disclosed in the financial statements. Under the accrual basis of accounting, the financial statements will include a Statement of Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assets/equity will be reported. Where this figure is positive it can be interpreted as the net resources that may be applied for the provision of goods or services in the future, and therefore the community's investment in the reporting entity. Where the figure is negative, it may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities. Net assets/equity can comprise some or all of the following components: contributed capital; C O U N T R Y R E P O R T PAGE 63 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G accumulated surpluses and deficits; and 41429 reserves (for example revaluation reserve; foreign currency translation reserve). Financial Performance 1.25 Accrual accounting provides information on revenues and expenses, including the impact of transactions where cash has not yet been received or paid. Accurate information on revenues is essential for assessing the impact of taxation and other revenues on the government's fiscal position, and in assessing the need for borrowing in the long term. Information on revenues helps both users and governments themselves to assess whether current revenues are sufficient to cover the costs of current programs and services. 1.26 Governments need information about expenses in order to assess their revenue requirements, the sustainability of existing programs, and the likely cost of proposed activities and services. Accrual accounting provides governments with information on the full costs of their activities so that they can: consider the cost consequences of particular policy objectives and the cost of alternative mechanisms for meeting these objectives; decide whether to fund the production of services within government sub-entities, or whether to purchase goods and services directly from non-government organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs. 1.27 Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management of activity and program costs. 1.28 Accrual accounting allows an individual entity to: record the total costs, including depreciation of physical assets and amortization of intangible assets, of carrying out specific activities; recognizeallemployee-relatedcostsandtocomparethecostofvarioustypesofemployment or remuneration options; assess the most efficient way of producing their goods and services and of managing the resources over which they have been delegated authority; determine the appropriateness of cost-recovery policies; and monitor actual costs against budgeted costs. Cash Flows 1.29 Accrualaccountingprovidescomprehensiveinformationoncurrentcashflowsandcertainprojected cash flows, including the cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparation of more accurate cash budgets. PAGE 64 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S SUPPLEMENTARY TABLE OF STANDARDS AND GAPS 41429 I. Public Sector Accounting 66 A. Assessment of the National Public Sector Accounting Environment 66 (1) The Accounting Law 66 (2) Education and Training of Public Sector Accountants 67 (3) Code of Ethics for Public Sector Accountants 69 (4) Public Sector Accountant Arrangements 69 B. Assessment of National Public Sector Accounting Standards 70 (1) Framework for the Preparation and Presentation of Financial Statements. 70 (2) Preparation and Presentation of Financial Statements on the Cash Basis. 71 C. Assessment of Accounting and Auditing in State-Owned Enterprises 72 II. Public Sector Auditing 72 A. Assessment of the Public Sector Auditing Environment 72 (1) Statutory Framework 72 (2) Setting Auditing Standards 73 (3) Code of Ethics 74 (4) Accountability in the SAI 74 (5) Independence provided by the Legislation 75 (6) Qualifications and Skills of the Auditor 78 (7) Training 78 (8) Audit Competence 79 (9) Quality Assurance 79 B. Assessment of Public Sector Auditing Standards and Practices 80 (1) Planning 80 (2) Supervision 81 (3) Internal Controls 82 (4) Compliance with Laws 83 (5) Evidence 85 (6) Analysis of Financial Statements 85 (7) Reporting on Financial Statements. 86 (8) Reporting on Fraud 87 (9) Reporting on Compliance 87 C O U N T R Y R E P O R T PAGE 65 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT I. Public Sector Accounting A. Assessment of the National Public Sector Accounting Environment Timely, relevant, and reliable financial information is required to support all fiscal and budget management, decision-making, and reporting processes. 1. The Accounting Law 1. For reliability, the Public sector accounting and Legislation approved by the requirements for public sector reporting is governed by the Financial ParliamentisdesirableandaPublic accounting and reporting Rules and Regulations of 2001 (FRR) Finance Bill has been drafted in should be specified by law, and is applicable to all agencies of preparation for presentation to cover all government-owned the Royal Government of Bhutan, the National Assembly. entities, specify the methods including departments, ministries, by which accounting and autonomousbodies,andDzongkhags auditing standards are to be (provinces). The FRR are embodied in set for the public sector, specify the following manuals: the reporting requirements, and lay down timetables for the Financial Management Manual publication of audited annual Budget Manual accounts. Revenue Manual Finance and Accounting Manual Procurement Manual Aid and Debt Management Manual Property Management Manual These documents specify the accounting practices, internal control procedures, reporting requirements andtimetables,andresponsibilitiesfor financial management in all agencies. 2. Compliance with The Royal Government follows a The annual financial statements International Public Sector double-entry book-keeping approach should be presented in the form Accounting Standards and maintains accounting records recommended by Cash Basis (IPSAS) for non-commercial on the cash basis. The accounting IPSAS. The FRR provisions have bodies and International system is focused on ensuring due facilitated a flexible reporting Accounting Standards (IAS) control over and reporting against environment and provided a and International Financial budget appropriations. IPSAS are not frameworkfortheimplementation Reporting Standards (IFRS) for adopted or complied with. of accounting practices that commercial bodies is needed for support a cash basis. As the consistent transparency. Public Enterprises are required by information is available, there the Bhutan Companies Act 2000 to is scope for the annual financial provide an annual report including a statements to be prepared in the balance sheet and a profit and loss Cash Basis IPSAS format. account. They are subject to audit by an accounting firm selected by the Currently the accounts are only relevant Board from a panel of firms available at year end and the PAGE 66 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT chosen by the Auditor General (AG). computer accounting system The Royal Audit Authority (RAA) needs to be enhanced and conducts a compliance audit. connected to enable monthly reporting at entity level. The Bhutan Companies Act includes Networking and other system a schedule of the audit requirements improvements are needed. thatspecifiesreportinginaccordance with generally accepted accounting Public enterprises are not principles. The audit requirements supported by a set of Bhutan's cover a range of types of audit and Accounting Standards. It is are not limited to certification of the up to the enterprise and its accounts. Thisscheduleissubjectto auditors to decide which set of amendment by the Auditor General. accounting standards to use. As the relevant authority, the Auditor General should vary the Companies Act Schedule to provide more certainty by requiring public enterprises to report in accordance with IAS. 2. Education and Training of Public Sector Accountants 3. Forreliability,thecurriculum Financial management staffs in the Strengthening of the RIM requirementsfortheaccounting public sector belong to the National courses is required to meet the qualifications of public sector Finance Service. To enter the increased skills needs of the accountants should accord National Finance Service, candidates National Finance Service as withinternationallyrecognized must have completed: (a) the one- more rigorous accounting and standards of accounting year Post-Graduate Certificate in reporting requirements are to be training as established in Financial Management at the Royal met. the IES for Professional Institute of Management (RIM) if Accountants. they are graduate entrants (usually The Royal Public Service B. Com); or (b) the two-year Commission has introduced a Diploma in Financial Management if Position Classifications System theyareaGradeXIIqualifiedentrant. under which the skills needs of Graduates from RIM might go on National Finance Service posts to work not just for the National will be formalized. The use of Finance Service but also for the a comprehensive graduated Royal Audit Authority, Revenue and framework of professional Customs, and the private sector. accountancy qualifications is needed. The UK Association of ATraining-NeedsAnalysisconducted Chartered Certified Accountants in 2004 by the Australian Society (ACCA) offers a worldwide of Certified Practicing Accountants ProfessionalSchemeandCertified (CPA Australia) found a need for the Accounting Technician Scheme, courses to be modified to provide asdoesthepublicsectorprogram the basic accounting competencies of the UK Chartered Institute of required by the Confederation of Public Finance and Accountancy Asian and Pacific Accountants (CIPFA). Cooperation of one of C O U N T R Y R E P O R T PAGE 67 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT (CAPA) standards; and for the these or similar bodies with the NationalFinanceServicetoreviewits Royal University of Bhutan could functional and skills requirements as provideacost-effectivemechanism a professional accounting service. for providing a wide range of levels of accountancy training. The creation of a professional body of accountants in the National FinanceServicehasbeenfacilitated by the Royal Public Service Commission decision to establish an Accounts and Finance Division in its new Position Classifications System. The Government needs to respond to the proposals put forward in the CPA Australia report on strategic pathways to developing adequate accounting and financial professionalism.8 4. For reliability, public There is no regular system or The recommendations of CPA sector accountants should mechanism to provide public sector Australiareportneedtobeassessed be provided with continuing accountants with continuing by the Auditor General and the professional training professional development and Ministry of Finance with a view requirementsthataccordwith training. The few international to establishing a Bhutan Institute internationally recognized training programs to which staffs of Accountants.9 Bhutan has standards of accounting are sent, ranging from three-year over 585 public-sector accounting training. CPA programs in Australia to ad-hoc staff. The National Finance Service short courses in India and Thailand, professional leadership capacity arenotroutinelymadeavailabletoall should be strengthened to enable public sector accountants, especially training and monitoring of the those not based in Thimpu. The CPA professional development of the Australia-conducted Training Needs public-sector accounting staff. This Analysis proposed a professional canbedoneviahigher-leveltraining accounting body in Bhutan to intheRoyalInstituteofManagement support the National Finance or the Royal University of Bhutan, Service. or by adopting the professional membership qualifications of the leading Chartered Accountant or CPA Institutions. The ACCA could provide substantial support to the accounting profession.10 8The Royal Government of Bhutan Finance and Accounting Strategic Pathways, Training Needs Analysis of the Financial and Accounting Capacity within the Public Sector and a Simultaneous Assessment of the Royal Institute of Management, Australia Society of Certified Public Accountants, 2004, pages 54-58. 9The Royal Government of Bhutan Finance and Accounting Strategic Pathways, Training Needs Analysis of the Financial and Accounting Capacity within the Public Sector and a Simultaneous Assessment of the Royal Institute of Management, Australia Society of Certified Public Accountants, 2004, page 56 and Appendix 7. 10The UK Association of Chartered Certified Accountants is active in the Region. PAGE 68 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT 3. Code of Ethics for Public Sector Accountants The INTOSAI Code of Ethics covers integrity; independence, objectivity, and impartiality; professional secrecy; and competence. The IFAC Code covers integrity, objectivity, independence, confidentiality, technical and professional standards, competence and due care, and ethical behavior. 5. For reliability, public sector Public sector accountants are part The new Audit Law includes accountants should be required of the Civil Service and have to a specific code of conduct for to adhere to the principles laid adhere to the Civil Service Code auditors. This should be mirrored down in a code of ethics that of Conduct and Ethics stipulated in a similar code for accountants, are at least in accord with the in the Bhutan Civil Service Rules which can be based on Part A of internationally recognized 2002. Bhutanese ethical values, the IFAC Code for Professional standards for professional i.e. personal and collective Accountants. 11 accountants.Thismaybebased discipline and a sense of national on IFAC or INTOSAI codes. pride and purpose, tend to guide the civil service in working toward protecting public resources. 4. Public Sector Accountant Arrangements 6. For timeliness, relevance, The Position Classification The RAA report on the 2002-03 and reliability, there should System has classified Finance annual accounts (submitted on be a professionally qualified and Audit Services as a major January 4, 2005) proposed the Chief Financial Officer (CFO) occupational group. The position creationofapostofchieffinancial function to be responsible for structure comprises Executives officer as head of a separate maintaining systems of internal (Bachelor or Masters), Specialist Department of Public Accounts financial controls that manage (Masters or Ph D), Professional in the Ministry of Finance. This risks, and for preparing regular and Management (Bachelors now has been separated from the financial accounts for each or Masters), supervisory and budget function. The Position government entity. support ( Diploma or Certificate) Classification System affords and Operational (Class 10). the opportunity to establish the The CFO should also be specificdutiesandresponsibilities responsible the following: Open and competitive selection; of the person holding this post. maintenance and job descriptions which define management of the chart responsibilities, knowledge, and of accounts, skills requirements; and equal ensurethemostappropriate opportunity promotion through a technological support for combinationof aminimumperiod financial management of service at the lower level (with practices, someopportunitiesforaccelerated manage training and promotion) are characteristics of education needs for thePositionClassificationSystem. financial management, At present, there is no concept report on key performance of a professionally qualified chief indicators, and financial officer to be responsible assist program managers for financial management, either 11Handbook of International Auditing, Assurance, and Ethics Pronouncements, International Federation of Accountants, 2005, pages 15-37. C O U N T R Y R E P O R T PAGE 69 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT to develop an effective at the entity level or at the national financial approach to level. the delivery of expected outcomes. At the entity/agency level, according to the FRR, the head of the department is responsible for the appropriated funds. Day-to- day financial management activities are carried out by the respective AdministrationandFinanceDivisions of ministries and departments, and by the Administration and Finance Sections of autonomous agencies and Dzongkhags. Accounts at the entity level and at the national level, the consolidated financial statements of the Government, are prepared by the Department of Budget. B. Assessment of National Public Sector Accounting Standards Financial reporting must be adequate to meet the accountability demands of stakeholders. 1. Framework for the Preparation and Presentation of Financial Statements 7. National accounting There are no national accounting The proposed Public Finance standards should accord standards in Bhutan nor have the Act provides for annual audited with international standards IPSAS been formally adopted. The financialstatementsandforachief to provide consistency. The Financial Rules and Regulations accounting officer in the Ministry responsibility for establishing prescribe the general accounting of Finance who shall prescribe the national accounting framework and principles for accounting standards for use by standards for the public sector preparing financial statements of all budgetary bodies. It would should be well-defined to the Government. be desirable to establish a formal provide reliability. board or committee to advise on the establishment of accounting standards for both the private and public sectors This should include representatives from publicandprivateenterprises,the MinistryofFinance,andtheRoyal Audit Authority. Consultation or cooperation with a similar board in the Region could be considered. Preferably the Board should adopt for the relevant bodies all IAS, IFRS, and IPSAS, but specify appropriate exemption PAGE 70 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT periods for particular standards or clauses where difficulty in implementation is envisaged. Consultation with other boards in the Region might assist in this process in the early stages. 2. Preparation and Presentation of Financial Statements on the Cash Basis 8. The Government should Though the IPSAS have not The Auditor General adopt a national accounting been formally adopted, the recommended in his report on and reporting framework based FRR accounting rules do allow the 2002-03 statements that on recognized international compliance with the key principles notes to the accounts should standards to provide authority. of the Cash Basis IPSAS: form an integral part of the financial statements; and that If the Cash Basis IPSAS is A statement of cash receipts the financial position should be adopted as a national standard, and cash payments (IPSAS presentedintheformofabalance reporting should comply 1.3.4); sheet and other accounts. with the standard to ensure Sub-classification of cash consistency. receipts and cash payments The Royal Government should into total cash receipts, total adopt Part 1 of the Cash Basis If the accrual basis IPSAS is cash payments, and opening IPSAS for the Government's adopted, disclosures made and closing cash balances accounts. Consolidation of with respect to the general (IPSAS 1.3.12); controlled entities, such as government sector shall Disclosure of third party public enterprises, should be include at least disclosure of settlements of government considered when feasible. the following: obligations (IPSAS 1.3.24); Assets by major class, Authorization for the issue of The further development and showing separately the financial statements (IPSAS linking of current computerized investment in other 1.4.5); budgetandaccountingsystemsis sectors, Disclosure of significant underwayforareliableaccounting Liabilities by major class, restrictions on the use of systemthatprovidestherequired Net assets/equity, available cash balances by the timely annual and monthly Total revaluation incre­ government (IPSAS 1.4.9); accounts. These accounts will ments and decrements Comparative numerical rely on computerization of all and other items of revenue financial information up to accounting offices and reliable and expense recognized one year (IPSAS 1.4.16); electronic communication. The directly in net assets/ A consolidated financial accounting software needs to equity, statement (IPSAS 1.6.5); and support the required chart of Revenue by major class, Foreign currency transactions accounts. The communications Expenses by major class, (IPSAS 1.7.2). and hardware needs have not Net surplus or deficit, yet been finalized, and a careful Cash flows from operating review of the proposals will be activities by major class, required. Cash flows from investing activities, and Cash flows from financing activities. (Oct 2005 IPSAS ED 28) C O U N T R Y R E P O R T PAGE 71 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT C. Assessment of Accounting and Auditing in State-Owned Enterprises Financial Statements should comply with IAS and IFRS 9. Financial statements should Financial statements are prepared It is important that a specific set include (a) balance sheet, generally in these forms but not of accounting standards be used (b) income statement, (c) specifically in accord with IAS or as the basis for preparation of statement of changes in equity IFRS. The audit reports refer to the financial statements and for or a statement of recognized the generally accepted accounting the audit of those statements. gains and losses, and (d) cash standards or principles and therefore Generally accepted accounting flow statement. [IAS 1.8] do not provide sufficient specific standards do not have the specific information for a user to know what setofexplanationsanddefinitions Financial statements should specific accounting principles have that are available in formally present fairly (or give a been used, except where they are issued accounting standards, and true and fair view) of the specified in the notes. are needed to be a useful reference financial position, financial point. The IAS and IFRS should be performance, and cash flows adopted and referred to in the of the entity. [IAS 1.13] financial statements as having been adopted. Financialstatementsshouldbe prepared on the accrual basis The relevant schedule of the of accounting. [IAS 1.27] Companies Act should be so amended. The proposed Financialstatementsshouldbe Accounting and Auditing prepared using the accounting Standards Board would advise policies established by the IAS the Ministry of Finance and the and IFRS. [IAS 1] Royal Audit Authority on the implementation of ISA. II. Public Sector Auditing A. Assessment of the Public Sector Auditing Environment Effective scrutiny by the legislature through comprehensive, competent, external audit enables accountability for the implementation of fiscal and expenditure policies. The environment for an effective supreme audit institution requires a comprehensive approach to public financial management (PFM). Supreme audit institutions are not stand-alone institutions; they are part of a PFM architecture that also includes budgeting, accounting, internal control, audit, and legislative oversight; and government response. Improving the way the supreme audit institution functions is integral to providing information for improving the overall PFM system, but the action must be within the executive branch under the watchful eyes of the legislature and the public. A strong demand for good public sector external auditing is necessary for the supreme audit institution to have any impact. This requires willingness of the executive branch to accept and respond to external scrutiny over its management of funds and to ensure that action is taken for reform. It also requires public presentation of the audit reports to ensure public support for effective action. 1. Statutory Framework 10. Statutory auditing The Royal Audit Authority is the An Audit Act is to be presented requirements should be government's external auditor. The to the coming session of the established by legislation. Royal Audit Authority is governed legislature for consideration. PAGE 72 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT by the 1970 royal edict and the (enacted since then in June 2006). 1989 General Auditing Rules and The model law is comprehensive Regulations (GARR). and will provide a good foundation for the proper implementation of the audit function. 11. The Supreme Audit As provided for by the Royal edict The functional independence of Institution should have and the GARR 1989, the Royal the Royal Audit Authority would authoritytoconductafullrange Audit Authority is mandated to be improved by the independence of audits for all government- carry out audits of government guarantees in the governance owned or -controlled entities organizations, government-owned section in the Audit Act and have including regularity, financial, and/or -controlled entities, foreign the access rights set down in the and performance audits. aidprojects,andnon-governmental Act. (INTOSAI Lima Declaration organizations. It has the functional Sections 18-19) independence to decide on the type and scope of audits to be carried out on each entity and, as such, performs financial, statutory, compliance, certification audits, and special reviews, as it may deem proper. In practice, however, due to manpower constraints, Royal Audit Authority allows state- owned enterprises to have their financial statements audited by a private audit firm selected from an approved list of auditors. Also some instances in the Audit Report for 2002-03 noted that certain records were not made available. 12. The legislation should There are no penalties specified in The new Audit Act contains a set out penalties in the event the GARR1989 for non-compliance satisfactoryoffencesandsanctions of non compliance with the with auditing requirements. section. auditing requirements, and these penalties should be applied appropriately. 2. Setting Auditing Standards 13. The government should The Royal Audit Authority has The Royal Audit Authority needs adopt the INTOSAI Auditing drafted and developed its own to review the success of these Standards and the IAASB Auditing Standards of Bhutan, development activities and International Standards on which are in line with the INTOSAI develop further plans as needed to Auditing for public sector Auditing Standards. A peer review prepare appropriate audit manuals entities.(ISA200.5andINTOSAI in 2005 by the SAI of India for the tasks that are established Auditing Standards1.0.14) recommended that audit manuals by the new Audit Act. be prepared. During the June- July 2006 period, teams have been established to prepare audit guides in 14 areas of audit. C O U N T R Y R E P O R T PAGE 73 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT 3. Code of Ethics 14. The INTOSAI Code of The Royal Audit Authority has its Policies and procedures for Ethics should be fully adopted own Code of Ethics. All auditors are protecting whistle blowers should by the SAI (IAASB ISA 200.4 sworn in by this Code. The RAA be adopted. and INTOSAI Code of Ethics 4), Code forms an integral part of the communicated to all staff, and employment contract of RAA staff. ThenewAuditActprovidesastrong applied. ethical framework and provides that the Royal Audit Authority shall maintain the confidentiality of the source of any information received about potential offences, in good faith and trust, under the laws of the Kingdom. 4. Accountability in the Supreme Audit Institution 15. There should be an TheAuditorGeneralhasmanagement accountability process in the meetings, and circular instructions Supreme Audit Institution. are issued to staff from time to time (INTOSAI Auditing Standards by the Auditor General. 1.0.20) 16. There should be clear The Royal Audit Authority follows responsibility in the SAI for: (a) the FRR, Bhutan Civil Service Rules advising on internal finance, and Regulations, and GARR 1989, all keeping proper financial records of which provide the internal control and accounts, and maintaining framework for the audit office. systems of internal control; and (b) for ensuring compliance with laws and regulations. 17. The SAI should prepare an The Royal Audit Authority prepares The Royal Audit Authority issues annual report on its operations and issues an Annual Audit Report, only one report a year, which and performance, which is which includes comprehensive includes the audit opinion on the separate from its reports on information of its operations and annualaccountsofthegovernment, its audits. It should provide performance during the year. This and the AG's comments on the an objective, balanced and report includes information (by work of the Audit Office, and understandable account of agency and amounts) on key audit the audit reports on the Audit activities and achievements, findings, wasteful expenditure, Office's inspection and compliance and details of financial position double payments, contract activities. This confluence of and performance. mismanagement, misappropriation different reporting would be more of funds, noncompliance with rules, user-friendly if the annual report performance lapses, and value for had separate volumes to cover the money. different aspects. The Audit Act requires an extensive Annual Audit Report that is separate from the other audit reports. It is important that the audit reports be presented in separate volumes throughout the PAGE 74 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT year as audits are completed. This procedure would simplify the reporting process and make it more timely, and lessen the burden on the Public Accounts Committee for examination of audit reports. 18. The SAI should prepare a The Royal Audit Authority prepares There is need for a more corporate plan or equivalent. an Annual Audit Plan, which details comprehensive corporate plan the audit program schedule for covering the general development auditee institutions. needed by the Audit Office. 19. The SAI should undergo The Royal Audit Authority in 2004 The new Audit Act requires peer review or independent had the SAI of India carry out a peer regular peer review. performance audit. review of its operations. 5. Independence provided by the Legislation Legislation should be adequate for the following core SAI principles of independence if the Supreme Audit Institution is to provide effective external scrutiny: Existence and de facto application of an appropriate and effective constitutional and legal framework, Independence of SAI Heads including security of tenure and legal immunity in the normal discharge of their duties, Sufficiently broad mandate and full discretion in the discharge of SAI functions, Unrestricted access to information; Obligation to report on their work, Freedom to decide on content and timing of their reports and to publish and disseminate them, Existence of effective follow-up mechanisms on SAI recommendations, Financial and managerial autonomy and the availability of appropriate human, material, and monetary resources. (Core Principles of SAI Independence, INTOSAI Sub-committee on SAI Independence, 2004) 20. The legislation should spell The Royal edict of 1970, resolutions Satisfactory arrangements are out in detail the extent of the of the National Assembly, GARR made in Part 5 of the new Audit SAI independence. (INTOSAI 1989 and FRR provide for the Act. Lima Declaration Section 5) independence of the Royal Audit Authority. The appointment of the The new legislation would assist The legislation should assure the Auditor General is made by the King in resolving the differences independence of the SAI Heads of Bhutan. between the current practice in and "Members" (in collegial Bhutan and that desired by the organizations) and that there international practice. is security of tenure and legal immunityinthenormaldischarge of their duties. (INTOSAI Lima Declaration Section 6) 21. The SAI constitutional/ Thelegalframeworkdoesnotprovide Greater powers regarding the statutory/legal frame work for the AG's administrative and recruitment of staff are provided C O U N T R Y R E P O R T PAGE 75 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT should ensure that it has financial independence to decide in the new Audit Act, but no available sufficient human, on matters such as recruiting staff , specific powers over the budget material, and monetary material, and monetary resources. are provided. However the new resources. (INTOSAI Lima legislation does propose that if Declaration Section 7) (in the opinion of the Auditor General) there was insufficient budget to conduct his/her responsibilities, it should be mentioned in the Annual Audit Report. This is not satisfactory. The UNDP model law (Section 13) provides for the AG's budget proposal to be submitted to the LegislaturebytheAuditorGeneral at the same time and in the same format as the Executive submits its budget. 22. A fixed term must be long Once appointed, the Auditor The new legislation provides enough to survive changes of General has tenure until reaching for a five year non-renewable governmentandavoidpressures retirement age (60 years). Although term and this is rather short by concerning re-appointment there is no provision de jure to international standards. impinging too early in the safeguard the Auditor General term of office of the SAI office from being summarily dismissed by holder. A single nonrenewable the King, in practice this has not appointment is preferable happened. to avoid those pressures. (INTOSAI Working Group on SAI Independence, 2004) 23. The legislation should The Auditor General does not The new Audit Act provides for ensure that the SAI Head is free have administrative independence this. to determine the organization to determine and implement of the audit office, including policies relating to matters of personnel and contract personnel recruitment, selection, management systems and remuneration, training, promotion, material acquisition/disposal discipline, and dismissal of RAA policies and procedures. The staff. SAIshouldbeabletodetermine personnel policies, including the selection, recruitment, training, remuneration, promotion, discipline, and dismissal of staff and contract personnel. (INTOSAI Lima Declaration Section 6) PAGE 76 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT 24. There should be The legal framework provides The new Audit Act provides or unrestricted access to for access to information. The this. information. (INTOSAI Lima Royal Audit Authority does have Declaration Section 10) unrestricted access to reports, records, and all other information deemed necessary for proper execution of its audits. 25. The legislation should give The legal framework does provide The new Audit Act provides theSAItherightandobligation Royal Audit Authority with the for more extensive reporting to report on their work. freedom to decide on the content as desired by the international (INTOSAI Lima Declaration of its reports (within a stipulated standard. With respect to Section 16) time frame). dissemination, the proposed The legislation should give the The Royal Audit Authority also Audit Act provides that: SAI the right and obligation prepares an Annual Audit Report 9.2 The Auditor General, or to report effectively on its summarizing the results of its anyone designated to do so by work, and the freedom to audit work for the year. The him/her, may provide advice or decide on the content and Annual Audit Report for 2004 informationtoapersonorentity timing of its reports and to was published in May 2005 on relating to the responsibilities publish and disseminate them the RAA website. of the Royal Audit Authority, expeditiously. (INTOSAI Lima if in the opinion of the Auditor Declaration Section 17) However,thereisnolegalprovision at present which explicitly allows General, it does not affect the Royal Audit Authority to publish integrity of the Authority and is and disseminate audit reports on in the interest of the Kingdom. its auditee institutions once those This is much more restrictive reports have been submitted to than desirable if the media the King. is to be well informed about the contents of the Auditor General's audit reports. A more positive approach in the ACCA model law is exemplified in the following (4) The Auditor-General or his/ her staff may provide comments and interviews to the press or other media on the subject of any published audit reports.'12 26. To the extent that findings An RAA division follows up on of the SAI findings are not audit observations and reports delivered as legally valid and on these matters in the following enforceable judgments, the year's audit report of the auditee Supreme Audit Institution institution. In addition, status of shall be empowered to outstanding matters (by auditee approach the authority which institutions) is reported on in 12A Model National Audit Office Act, The Association of Chartered Certified Accountants, UK, 2004 ­ Section 38 C O U N T R Y R E P O R T PAGE 77 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT is responsible for taking the the following year's RAA Annual necessary measures and require Audit Report. The identification and the accountable party to accept sanctionofpersonsheldaccountable responsibility.(LimaDeclaration for deficiencies provides a strong Section 11.2) framework for remedy of identified compliance deficiencies. 6. Qualifications and Skills of the Auditor The SAI needs qualified accountants to sign audit opinions.. Auditors must have adequate professional expertise and technical knowledge to carry out audits 27. The government's and The Royal University of Bhutan Not all officers have attended the SAI's accounting schools has a curriculum that covers all courses covering these matters syllabus should cover all areas areas recommended by the IFAC and additional in-house training recommended by International educational standards. may be needed. When the Federation of Accountants' requirements of the Position educational standards (IES). Classifications System under which the skills needs are to be formalized have been completed, a training needs analysis would be useful. 28. There should be adequate Recruitment matters are decided by The new Audit Act provides for professional criteria for the Royal Civil Service Commission, a separate cadre of officers and recruitment and promotion and Royal Audit Authority merely employees to be constituted, of auditors. (INTOSAI Lima appoints officers selected by them. with their terms and conditions Declaration Section 14 and Recruitment is at two levels: of services prescribed in the rules INTOSAI Auditing Standards tobeframedundertheAuditAct. 2.1.4) Diploma level ­ candidates The rules are yet to be framed but holding a Diploma in Financial the principles are contained in Management from RIM; and the Act. Degreelevel­candidatesholding a Post Graduate Certificate in Financial Management from RIM. 7. Training 29. The SAI should operate The Royal Audit Authority has There is a need for a more a continuing professional a professional and international extensive arrangement for development program for relations division responsible for professional training. The its professional personnel. arranging and providing training facilities of the ACCA and CIPFA (INTOSAI Lima Declaration for staff. Though the Royal Audit outreach programs would bridge Section 14 and INTOSAI Authority has plans and programs the gap, possibly with the help Auditing Standards 2.1.5- to provide in-house and external of the RIM or other in-country 2.1.12) training in the future, it is severely academic institution. constrained by lack of financial resources. PAGE 78 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT 8. Audit Competence 30. The SAI should equip itself The Royal Audit Authority has Properly designed audit sampling with the full range of up-to-date FRR, Bhutan Civil Service Rules and techniques in the certification audit methodologies, including Regulations, GARR, Procurement audit are difficult to use without systems-based techniques, Manual, INTOSAI & ASOSAI computersupport.Useofsampling analytical review methods, standards, and its own Bhutan techniques and computer-aided statistical sampling, and audit of Auditing Standards to equip itself auditing techniques, especially automated information systems. with a full range of comprehensive for the Budget and Accounting (INTOSAI Auditing Standards audit methodologies. These do System, should be developed to 2.2.37) not provide a sufficiently detailed increase the efficient use of audit methodology for certification audit. resources. TheSAIhasdevelopedaPerformance Audit Manual with the help of the The SAI has no detailed financial UNDP. audit manuals. Several manuals are in process of, or planned for, development. It will be necessary to review the adequacy of this work and provide supplementary development in due course. 9. Quality Assurance 31. The SAI should have the The Royal Audit Authority does quality assurance programs in have a satisfactory quality control placetoensureauditperformance and quality assurance procedure in and results. Written quality place for its audit work. control policies and procedures should be communicated to the audit personnel in a manner that provides reasonable assurance that the policies and procedures areunderstoodandimplemented. (ISA 220.7) Quality control procedures should cover: Direction. Assistants to whom work is delegated need appropriate direction. Supervision. During the audit (a)monitortheprogressofthe audit, (b) become informed of and address significant accounting and auditing issues, and (c) resolve any differences of professional judgment between person­ nel and consider the level of consultation that is appropriate. C O U N T R Y R E P O R T PAGE 79 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT Review. The work performed by each assistant needs to be reviewed by personnel of atleastequalcompetence. (ISA 220.8-220.17) B. Assessment of Public Sector Auditing Standards and Practices Results from the audits should hold the executive to account for its fiscal and expenditure policies and their implementation. 1. Planning 32. The planning process The Royal Audit Authority has a Internal audit has been declining should collect information dedicated team of staff assigned to recently and the proposed Audit about the audited entity and auditee institutions, thus, specialist Act and Finance Act is likely to its organization in order to knowledge about the environment, provide for a stronger internal identify important aspects accountability relationships, audit function. This needs of the environment in which outstanding issues from previous to be supported by a more the audited entity operates, audit findings, etc. are available. formal approach to training develop an understanding and monitoring the activities of of the accountability internal audit. relationships, determine whether appropriate action The audit manuals should correct has been taken on previously the deficiencies in planning reported audit findings and arrangements. recommendations, assess risk, and determine materiality. (IAASB ISA 300.6-300.9) The planning process should As audit scope is specified in the identify the scope of the audit, various rules and regulations of the andspecifytheauditobjectives government, this is not done during andthetestsnecessarytomeet the planning phase. them. (ISA 300.10-300.12) The planning process should This is not done. review the internal audit of the audited entity and its work program, identify key management systems and controls, and carry out a preliminary assessment to identify both their strengths andweaknesses,anddetermine the approach to be adopted in the audit. (ISA 300.9) PAGE 80 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT The planning process should This is not done. highlight special problems foreseen when planning the audit. (ISA 300.10) The planning process should The documentation produced during prepare a budget and a schedule the planning stage comprises lists of for the audit, and provide for agencies and the time schedule only. appropriate documentation of the audit plan and for the proposed fieldwork. (ISA 300.10) The planning process should Audit staff requirements are identify staff requirements and a predetermined as stated above. team for the audit. (ISA 300.11) The planning process should This is not done. familiarize the audited entity about the scope, objectives and the assessment criteria of the audit and discuss with them as necessary. (ISA 300.7) 2. Supervision 33. The process of supervision The supervision arrangements in should ensure that the members RoyalAuditAuthorityaresatisfactory of the audit team have a clear andcoveralloftheaspectsmentioned and consistent understanding here. of the audit plan. (INTOSAI Auditing Standards 3.2.3a) 34. The process of supervision should ensure that the audit is carried out in accordance with the auditing standards and practices of the SAI. (INTOSAI Auditing Standards 3.0.3b) 35. The process of supervision should ensure that the audit plan and action steps specified in that plan are followed unless a variation is authorized. (INTOSAI Auditing Standards 3.0.3c) C O U N T R Y R E P O R T PAGE 81 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT 36. The process of supervision should ensure that working papers contain evidence adequately supporting all conclusions, recommendations, and opinions. (INTOSAI Auditing Standards 3.0.3d) The process of supervision should ensure that the auditor achieves the stated audit objectives. (INTOSAI Auditing Standards 3.0.3e) Theprocessofsupervisionshould ensure that the audit report includes the audit conclusions, recommendations and opinions, as appropriate. (INTOSAI Auditing Standards 3.0.3f) 3. Internal Controls 37. The auditor should obtain Audit staffs do have a good Improvements in internal an understanding of the entity understanding of the environment control13 will be implemented and its environment, including in which the auditee institution if internal and external auditors its internal control, sufficient operates. However, assessments make recommendations about to identify and assess the risks of the internal control systems of improvements.Theauditmanuals of material misstatement of the the auditee institutions are not should provide for the audit financialstatementswhetherdue carried out nor relied upon for reports to make assessments of tofraudorerror,andsufficientto RAA's audit work. This is essentially internal control adequacy and design and perform further audit because internal control practices in make recommendations about procedures. (ISA 315.2) government agencies are not fully improvements. After obtaining an under­ functional. standing of the accounting and internal control procedures, the auditor should obtain a sufficient understanding of control activities to assess the risks of material misstatement at the assertion level and to design further audit procedures responsive to assessed risks. (ISA 315.90) The auditor should document in the audit working papers: (a) conclusions reached about 13Guidelines for Internal Control Standards for the Public Sector, INTOSAI, 2004, provides a useful framework document. PAGE 82 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT susceptibility to material misstatement due to error or fraud; (b) the understanding obtained of the entity's accounting and internal control procedures; and (b) the assessment of control risk. (ISA 315.122-123) The auditor should perform tests of control to obtain sufficient appropriate audit evidence that the controls were operating effectively at relevant times during the period under audit. (ISA 330.23) When the auditor cannot obtain sufficient appropriate audit evidence as to a material financial statement assertion, the auditor should express a qualified opinion or a disclaimer of opinion. (ISA 330.72) The auditor should make Through the Inspection Reports, The manual on certification management aware in writing, Royal Audit Authority makes the audit, which is to be prepared, as soon as practical and at an management aware of material will rectify these defects. appropriatelevelofresponsibility, weaknessesinthedesignoroperation of material weaknesses in the of the accounting and internal design or operation of the control procedures of agencies. accounting and internal control procedures, which have come to the auditor's attention. (ISA 315.12) 4. Compliance with Laws 38. The auditor should obtain This is done as part of compliance a general understanding of the audits. legal and regulatory framework applicable to the entity and the industry and how the entity is complyingwiththatframework. (ISA 250.15) The auditor should perform This is not done. testing and other procedures to help identify instances of C O U N T R Y R E P O R T PAGE 83 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT non-compliance with those laws and regulations where noncompliance should be considered when preparing financial statements. (ISA 250.18-250.19) Generally, management is Thisisnotdoneastheinternalcontrol responsible for establishing system of the agency is not relied an effective system of internal upon by the Royal Audit Authority. controls to ensure compliance with laws and regulations. In designingstepsandprocedures to test or assess compliance, the auditor should evaluate the entity's internal controls and assess the risk that the control structure might not prevent or detect non- compliance. These evaluations should be used to report to management on defects in the system of internal controls and the steps that should be taken to improve the system. (ISA 250.17) The auditor should obtain This is not done. written representations that management has disclosed to the auditor, all known actual or possible non-compliance with laws and regulations, whose effects should be considered when preparing financial statements. (ISA 250.23) The SAI should use regularity This is not done. audit to make sure that the State budget and accounts are complete and valid. The audit procedure may result, in the absence of irregularity, in the granting of a "discharge". If not other processes are needed to resolve irregularities. PAGE 84 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT 5. Evidence 39. When obtaining audit Royal Audit Authority does collect The manual on certification evidence from tests of control, appropriate and sufficient evidence audit, which is to be prepared, the auditor should consider the to be able to later defend the audit willrectifythesedefectsprovided sufficiency and appropriateness report it issues. that the Royal Audit Authority of the audit evidence to support recommends the improvement the assessed level of control risk. of internal controls through a (ISA 500.10) policy decision for audit reports. When obtaining audit evidence However, as mentioned above, tests from substantive procedures, of internal controls are not done. the auditor should consider the sufficiency and appropriateness of audit evidence from such procedures together with any evidence from tests of control to support financial statement assertions. (ISA 500.12) 40. When inventory is material Yes, inventory verification is carried to the financial statements, out, if deemed necessary. the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting. (ISA 500.5) When in substantial doubt as Yes. to a material financial statement assertion, the auditor should express a qualified opinion or a disclaimer of opinion. (ISA 500.18) 6. Analysis of Financial Statements 41. Inregularity(financial)audit, These are done. and in other types of audit when applicable, the auditor should analyze the financial statements to establish whether acceptable accounting standards for financialreportinganddisclosure are complied with. (INTOSAI Auditing Standards 3.6.1) Analysis of financial statements should be performed to such a C O U N T R Y R E P O R T PAGE 85 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT degree that a rational basis is obtained to express an opinion on the financial statements. The auditor should ascertain whether: (a) financial statements are prepared in accordance withacceptableaccounting standards; (b) financial statements are presented with due consideration to the circumstances of the audited entity; (c) sufficient disclosures are presented about various elements of financial statements; and (d) the various elements of financial statements are properly evaluated, measured and presented. (ISA 200.2-200.12) 7. Reporting on Financial Statements. 42. The auditor should provide This is done. The most recent report The defects in the format of the an opinion paragraph in the is for the financial year 2002-03. opinionshouldbecorrectedasper audit report. (ISA 700.4) The two part certificate and opinion the requirements of ISA 200. In provided by the Auditor General particulartheopinionisexpressed There should be a reference includes most of the elements of an negatively rather than positively: to the financial reporting audit opinion that accords with ISA "The audit had not detected any framework used to prepare the 700, but the presentation suffers material misstatement" ­ rather financial statements (including from various substantial differences than ­ identifying the country of from the standard. origin of the financial reporting "We plan and perform the audit frameworkwhentheframework to obtain reasonable assurance used is not International about whether the schedule is Accounting Standards). (ISA free of material misstatement. 700.12-15) An audit includes examining, on a test basis, evidence supporting The opinion paragraph should the amounts and disclosures containanexpressionofopinion in the schedule. An audit also on the financial statements includes assessing the accounting stating the auditor's opinion principles used and significant as to whether the financial estimates made by management, statements give a true and fair as well as evaluating the overall view (or are presented fairly) presentation of the schedule. We PAGE 86 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT in all material respects. (ISA believe that our audit provides a 700.17) reasonable basis for our opinion." Also, the certificate attaches a statement of the exceptions rather than including them in the certificate. 43. The SAI should provide a An Inspection Report is issued detailed report amplifying the detailing the weaknesses identified opinion in circumstances in in the financial control system which it has been unable to during the audit. give an unqualified opinion. Reports should be made where weaknesses exist in systems of financial control or accounting. (ISA 700.17) 8. Reporting on Fraud 44. The SAI should report This is done. The Royal Audit fraudulent practices or serious Authority reports the matter to irregularities discovered by the the head of the ministry/agency for auditors. (INTOSAI Auditing initiating disciplinary action. Standards 4.0.7) ISA 240 establishes standards The Royal Audit Authority has also and provides guidance on the developed and published a list of auditor's responsibility to fraud indicators on its website. In consider fraud and error in an addition, Royal Audit Authority has audit of financial statements. a fraud alert service on its website, The standard requires that ­ which the general public can use when planning and performing to anonymously inform the Royal audit procedures and evaluating Audit Authority of any fraudulent and reporting the results thereof practices which they have observed ­ the auditor considers the risk of material misstatements in the financial statements resulting from fraud or error. 9. Reporting on Compliance 45. With regard to regularity audits, the auditor prepare The Royal Audit Authority prepares The Royal Audit Authority has a written report, which may an Inspection Report, which is a been experiencing manpower either be a part of the report mix of financial audit, compliance constraints in recruiting adequate on the financial statements or audit and performance audit. All staff and maintaining the Audit a separate report, on the tests such reports are addressed to the Information Management System. of compliance with applicable ministers/ chairmen concerned. The actions to reduce the calls on the system by the Royal Public C O U N T R Y R E P O R T PAGE 87 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR 41429 IMPROVEMENT laws and regulations. (INTOSAI The Bhutan Civil Service Rules and Service Commission are likely to Auditing Standards 4.0.7) Regulations require that every civil reduce these concerns. servant obtains an Audit Clearance Certificate prior to requesting processing of promotion, training, post-retirement benefits, further studies, and participation in conferences and seminars. Royal Audit Authority issues the Audit Clearance Certificate only if the Audit Information Management System does not contain any adverse report against the applicant. This has encouraged personal and professional discipline in the discharge of fiduciary duties at the individual level. Recent initiatives have been taken for the Royal Public Service Commission to hold information on which individuals are included in the Audit Information Management System and request clearances only for these persons. PAGE 88 C O U N T R Y R E P O R T 41429