41426 Report No. : 39176-LK SRI LANKA PUBLIC SECTOR ACCOUNTING AND AUDITING A Comparison to International Standards Country Report Government of Sri Lanka 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 ADB Asian Development Bank AG Auditor General CAO Chief Accounting Officer CFO Chief Financial Officer CIPFA Chartered Institute of Public Finance and Accountancy, United Kingdom DFID Department for International Development DG Director General IAASB International Auditing and Assurance Standards Board ICASL Institute of Chartered Accountants of Sri Lanka IAS International Accounting Standard IES International Education Standards for Professional Accountants IFAC International Federation of Accountants IFRS International Financial Reporting Standard INGAF Institute of Government Accounts and Finance INTOSAI International Organization of Supreme Audit Institutions IPFDA Institute of Public Finance and Development Accountancy (Sri Lanka) IPSAS International Public Sector Accounting Standards (of IFAC) IPSASB International Public Sector Accounting Standards Board ISA International Standard for Auditing MOF Ministry of Finance MOF&P Ministry of Finance and Planning PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PSC Public Sector Committee SAI Supreme Audit Institution SLIDA Sri Lanka Institute of Development Administration SOE State-Owned Enterprise WB World Bank 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 This assessment of accounting and auditing standards and practices in the public sector review was carriedoutinactivecollaborationwiththeGovernmentofSriLankaandvariousstakeholders,particularly the Auditor General and his staff; and the Director General, Department of State Accounts, Ministry of Finance and Planning, and his staff. A workshop was held in Colombo on August 18, 2006 by the Government of Sri Lanka and the participating donors, to review the draft report and decide on the steps to be taken in this regard. In particular, the following individuals and their departments provided time and expertise to this assessment: Mr. S. C. Mayudunne, Auditor General (retired August 2006) Mr. W. D. Hemaratne, Acting Auditor General (August-October, 2006) Mr. P. A. Pematilaka, Director General, State Accounts, Ministry of Finance (Auditor General since October, 2006) Mr. V. Kanagasabapathy, Director General, Department of Public Enterprises, Ministry of Finance (retired October, 2006, Financial Management Advisor to the Ministry of Finance since October 2006) Mr. Ajith Rathnayake, Director General, Sri Lanka Accounting and Auditing Standards Monitoring Board Mr. W. M. Wijepala, Deputy Auditor General, Auditor General's Department. Mr. H. A.S. Samaweera, Deputy Auditor General, Auditor General's Department. Mr. D. Widanagamachi, Director, Accounting Services, State Accounts, Ministry of Finance (Acting Director General, State Accounts since October, 2006) Mr. P. Fernando, Director, Systems and Training, Ministry of Finance Mr. Tennekoon, Director, Sri Lanka Institute of Development Administration Mr. R. M.J.. Ratnayake, Audit Superintendent, Ceylon Petroleum Corporation Mr. W. P. C. Wickramaratne, Audit Superintendent, National Water Supply and Drainage Board Mr. P. B. Munasinghe, Director Establishment, Institute of Chartered Accountants of Sri Lanka Mr. S. Sockalingam, Technical Director, Institute of Chartered Accountants of Sri Lanka Mr. Danushka De Silva, Technical Manager, Institute of Chartered Accountants of Sri Lanka Mr. Regis Chapman, US Treasury Resident Budget Advisor Mr. Kandasamy, Advisor to Auditor General Mr. Ruwanchandra, Consultant, Sri Lanka Institute of Development Administration The review was conducted through a participatory process that involved these stakeholders. The provision of several responses to the diagnostic questionnaires by senior members of the Department of State Accounts and the Auditor General's Department was especially useful for the study. Two highly 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 experienced local consultants were heavily involved in the study: Uditha Palihakarra, with a strong commercial sector background, was formerly CEO of the SME Bank of Sri Lanka, and President of the Institute of Chartered Accountants of Sri Lanka; Dyananda Wijesekara, with a government background, is Director, Finance and Administration, Techno Management Consultants; he was earlier employed as a senior-level government accountant in Sri Lanka and in several other countries. The World Bank's Task Team for the assessment is responsible for the content of this report. Review comments were obtained from advisors and development partners and the country team. Task Team Mr. P K Subramanian (Lead Financial Management Specialist) Ms. Jiwanka Wickramasinghe (Financial Management Specialist) Mr. Ronald Points (Lead Consultant, Accounting) Mr. Michael Jacobs (Lead Consultant, Auditing) Advisors Mr. Simon Bradbury, Manager, Loan Department, World Bank Mr. David Goldsworthy, Operations Manager, International Technical Cooperation Program, UK National Audit Office Mr. Noel Hepworth, Chartered Institute of Public Finance and Accountancy, London Mr. Abdul Mudabbir Khan, Fiscal Affairs Department, International Monetary Fund Mr. Ian Mackintosh, Chairman, UK Accounting Standards Board Nominee of Asian Organization of Supreme Audit Institutions (ASOSAI) - Mr. N.R. Rayulu, Additional Comptroller & Auditor General (International Relations), Office of the CAG of India Mr. Paul Sutcliffe, Technical Director, International Public Sector Accounting Standards Board, International Federation of Accountants Development Partner Collaborators Mr. David Biggs, Financial Management Advisor, UK Department for International Development Ms. 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 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 22 2. Setting Auditing Standards 22 3. Code of Ethics 23 4. Accountability in the Supreme Audit Institution 23 5. Independence 23 6. Qualifications and Skills for the Auditors 24 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 26 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 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 46 Supplementary Table of Standards and Gaps 49 PAGE 8 C O U N T R Y R E P O R T 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) through better quality accounting and public audit processes in Sri Lanka. 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 strongly 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 those variances; and (d) to provide a continuing basis for measuring improvements 2. Adoption of international standards for accounting and auditing provides the basis for 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) besides a comprehensive IPSAS on the cash basis of accounting. IPSAS establish an authoritative set of independent international financial reporting standardsforgovernmentsandothersinpublicsectororganizations.Thestudyhastakentheinternational 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 in their text, but they do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application of IPSAS by national authorities 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 guidelines 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 andauditingstandardsreferredtointhisstudy.AnnexCandDprovideSriLankaaccountingandauditing legislation, respectively. Lastly, Annex E includes a description of the benefits of accrual accounting. The desired lines of action to be taken as indicated by this assessment are summarized below. 1Transition 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 4. TheplanstobuildonthecurrentreportingunderIPSASthroughapathtoimplementation of the accrual IPSAS should be supported. An implementation program for progressive adoption of accrual reporting is underway. The IPSASB encourages governments to progress to the accrual basis of accounting and to harmonize national requirements with the IPSAS and Sri Lanka is progressing very well on this path. 5. The Table of Standards and Gaps appended at the end of this report provides a matrix detailing the current standards, the present position, and options for improvements. A summary of these accounting issues is shown in Table ES1. TABLE ES1. SUMMARY OF ACCOUNTING STANDARDS ISSUES IN SRI LANKA Standard Current status Action to move towards the international standard 1. Has the Public Not formally. Since 2002, the Anewlawisnotrequiredatthistime. Financial Sector Accounting Law Finance Department has been Regulations will be appropriately amended adopted IPSAS? preparing annual accounts to adopt IPSAS. The Department of Public increasingly in accordance with Finance of the Ministry of Finance & Planning the Cash Basis IPSAS. In 2005, (MOF&P)istotaketheinitiativebyearly2007 additional disclosures were in consultation with all stakeholders. made as a first step towards presenting the account on an accrual basis. However there is no current prescription by law for the adoption of IPSAS. 2. Does education and Substantially, but not formally. A proposal for WB funding for collaboration training of accountants Government accountants are with CIPFA is in progress and is currently accord with IES? required to hold a university under consideration by the Ministry of degree in accounting or Finance (MOF). Implementation is likely equivalent. Further training is during 2007. also provided but not in strict accordance with the IES. Director General (DG) State Accounts is to arrange to prepare a proposal to explore changes to the efficiency bar examinations in service progression with a view to including knowledge of IPSAS. DG State Accounts will alsoconsideractionsfortheinclusionofIPSAS in the curriculum of universities and INGAF/ SLIDA to meet IES. Progress is expected during 2007. 3. Does the Code No. There is a Civil Service A specific code based on IFAC or the ICASL of Ethics match Code but this is not specific to for use by public sector accountants. A Public international standards? accounting. Sector Committee (PSC) could explore the possibilities during early 2007. 4. Is there a body to No. ICASL provides standards By mid 2007, DG State A/Cs to initiate prescribe public sector for commercial accounting. a proposal for setting up a Public Sector accounting standards? Committee to establish standards for the government sector. 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 Standard Current status Action to move towards the international standard 5. Are the financial Government accounts are DG State A/Cs is to take steps to arrange statements in accord substantially in accord with compliance with IPSAS for the core with international Cash Basis IPSAS. State-Owned Government and non-commercial SOEs standards? Enterprise (SOE) accounts during 2007. World Bank (WB) is to discuss follow IFRS but the accounts the support required with DG State A/Cs by are usually qualified by the mid 2007. auditors on serious grounds. 6. Is the statement Yes, except that third party The 2005 accounts showed statements of of Cash Receipts and payments are not shown financial performance, cash flows, financial Payments in IPSAS separately position, contingent liabilities, accounting form? policies and notes to the accounts. The transition path now underway will make the 7. Are accounting Yes. improvements that are needed. The World policies and explanatory Bank arranged a workshop on IPSAS on notes required? October 27, 2006. 8. Are other disclosures Yes. in accord with IPSAS? 9. Does the government No. Only the Central Further steps will be needed to include issue a consolidated Government Sector is covered. controlled entities and WB is to discuss the financial statement Public enterprises, SOE and support required with DG State A/Cs by mid which consolidates all statutory boards are not 2007. controlled entities? included in the accounts. 6. There is a need to adopt the IFAC-issued International Standards on Auditing (ISA) in addition to the INTOSAI Auditing Standards already adopted, and auditing manuals and procedures should meet these standards. Currently the INTOSAI Auditing Standards have not formally been adopted although there is a willingness to follow their prescriptions. New and amended lawsshouldmandatetheadoptionofinternationalstandards. Auditrecommendationsandobservations go unheeded in far too many instances. The implementation of the Cabinet Decisions on a National Audit Act and the implementation of the Institutional Development Plan for the Auditor General's Department should introduce modern audit methodologies and a modern audit organization. 7. TheTableofStandardsandGapsattheendofthisreportshowseachcomponentofthestandards,the present position, and the options for improvements that would bring Sri Lanka into closer conformance with international standards. A summary of these auditing issues is shown in Table ES2. TABLE ES2. SUMMARY OF ACCOUNTING STANDARDS ISSUES IN SRI LANKA Standard Current status Action to move towards international standards 1. Is the SAI statutory Partly.Thereisconstitutionalsupport, A draft audit act has been prepared framework in accord but there is no Audit Act that and is awaiting approval. A decision with the needs of the deals specifically with the Auditor is in prospect before the end of 2007. INTOSAI Auditing General's duties and functions, and Standards? provides adequate administrative andfinancialarrangementstoensure proper support for PFM 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 Standard Current status Action to move towards international standards 2. Is there a body to No The AG and the DG State A/Cs will prescribe public sector coordinate the proposal for setting up auditing standards? of a PSC with the ICASL to establish standards for the government sector by mid 2007. 3. Have INTOSAI and Yes, but there is no document that No action required until the Audit Act IFAC audit standards lists out the public sector audit is passed. been adopted? standards. 4. Has a code of ethics No. The Code of Conduct for Public The proposed IDP likely to be equivalent to the Sector Accountants is mainly based implemented during 2007 will adopt INTOSAI standards on the Establishment Code for a code of ethics equivalent to the been adopted? Public Servants. INTOSAI Code. 5. Is the accountability Yes. process in the SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI legal No. For example, greater The draft act addresses most of the framework meet the independence is needed in the areas eight core INTOSAI principles of INTOSAI standards of administration and resources. independence. for independence and powers? 7. Does education and Not sufficiently. Peer reviews of the A proposal for funding CIPFA training of auditors AG Department have shown several collaboration is under discussion accord with INTOSAI inadequacies. between MOF and the WB. The and IES standards? Institutional Development Plan (IDP) implementation will address skills analysis during 2007 and 2008. 8. Is the SAI equipped No. The current audit methods The Institutional Development with the audit methods are attuned to budget compliance Plan prepared by the UK and The and technologies to checking. Major changes to audit Netherlands SAIs will correct these meet the INTOSAI methods are needed to support deficiencies and implementation of Auditing Standards? certification audit. Greater the IDP is under discussion with the technology is needed. WB. Action is likely during 2007. 9. Does the SAI have No. the quality assurance programs to meet the international standards? 10. Does the process Partly. Audit planning is not to plan the audits sufficiently tailored to the audit meet international client. standards? 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 towards international standards 11. Does the process No. Working paper systems are to supervise the audits insufficient to support proper meet international supervision. standards? 12. Does the process to No. The orientation is to identify evaluate the reliability deficient transactions rather than of internal control verify the systems of control. meet international standards? 13. Does the process Yes. used in audits to assess compliance with laws meet international standards? 14. Does the audit No. Working paper systems are process used to obtain insufficient. evidence to support conclusions meet the international standards? 15. Does the audit Yes. analyze the financial statements to establish whether acceptable accounting standards for financial reporting and disclosure are complied with? 16. Does the auditor Yes. prepare an audit opinion on the financial statements in a form that conforms to international standards? 17. Does the Yes. consideration of fraud and error in an audit of financial statements conformtointernational standards? 18. Is the process for No. There is an inadequate system An appropriate system needs to be taking action on audit for response. set up. recommendations sufficiently effective to meet international standards? 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 8. Public Financial Management (PFM) should be improved through a more ambitious and comprehensive reform program. Rapid progress is being made toward adoption of accrual reporting along IPSAS lines. Public financial management relies on a comprehensive and timely accounting and financial reporting system that is supported by competent assurance from a professional audit function, stating that the system is working properly and that the information is reliable. Current enforcement of adequate compliance with Financial Regulations in the general budget sector and corporate governance in the public enterprise sector falls short of satisfactory standards. Use of the PFM performance measurement framework developed by the Public Expenditure and Financial Accountability (PEFA)2 program will be a good basis to develop and measure progress in the full cycle of PFM reform from budget formulation to legislative scrutiny and remedial action. 9. Improvement of accounting and auditing skills. Improved compliance with international standards requires properly trained staff. Basic accounting and auditing skills are good but post graduate skills are required that suit Sri Lankan conditions. The proposed improvement of accountancy training institutions through the adoption of the Diplomas and Certificates issued by the Chartered Institute of Public Finance and Accountancy in the United Kingdom should be used to strengthen public sector accounting and auditing skills. 10. The preparation of a PFM indicators survey that provides the basis for monitoring progress in adopting and applying international standards. Improvement of audit impact should be monitored through the progress of the institutional strengthening proposed for the Office of the Auditor General over the next few years. 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 in the World Bank in Washington, DC. PAGE 14 C O U N T R Y R E P O R T INTRODUCTION 1. The basic purport of this assessment of public sector accounting and auditing is to facilitate more efficientPublicFinancialManagement(PFM)throughbetterqualityaccountingandpublicauditprocesses in Sri Lanka. Moreover, a greater stimulus is expected to be created for more cost-effective outcomes of government spending. The main objectives of this effort are to: (a) provide Sri Lanka's accounting and audit authorities and other interested stakeholders, with a common strongly founded knowledge regarding the status of local practices in accordance with the internationally developed standards of financial reporting and audit; (b) assess the prevailing variances; (c) chart paths to reduce the variances; and (d) provide an ongoing 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 from diagnostic questionnaires that were completed in conjunction with country authorities. The diagnostic questionnaires incorporated the principles contained in the public sector accounting and auditing standards promulgated by International Organization of Supreme Audit Institutions (INTOSAI) and International Federation of Accountants (IFAC). The responses to these questionnaires have been further explored through discussions conducted by a World Bank team with the 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 a concurrent public sector fiscal reform program supported by the Asian Development Bank (ADB) and the World Bank. Detailed studies of accounting and auditing have been conducted by ADB (Diagnostic Study of Accounting and Auditing Practices in Sri Lanka, 2002) and the World Bank (Country Financial Accountability Assessment, 2004). In addition, the United Kingdom and The Netherlands Audit Offices collaborated in producing the 2003 Institutional Development Plan for the Auditor General's Department. 4. These studies have examined the system of maintenance of public accounts in Sri Lanka in great detail. They show that the Financial Regulations (1992), which are the main authority for public financial management in the general government sector, focus only on the input aspect of expenditure control. They are issued by the executive branch (not by the legislature) and do not have the force of law. The studies found that there is a significant and long-standing practice of non-compliance with the Financial Regulations, in form and in sprit. The result is that government financial statements presenting the 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 financial condition of the State (the State Accounts) have not been available on a timely basis and are not comprehensive. In addition, the numbers are not completely reliable because of reconciliation and other problems. Reliability of financial data and timeliness of financial reporting have improved considerably in the presentation of financial statements for 2005. More needs to be done to develop performance budgets. 5. The Government of Sri Lanka has been making progress in improving the current state of affairs. The Financial Regulations are being transformed into a set of nine guidelines (on planning, budgeting, foreignaid,revenuemanagement,governmentaccounting,procurement,fixedassetmanagement,stores management and internal auditing) as part of simplifying the procedures and systems shifting focus more on outputs. This study found that so far, only one guideline had been implemented. The State Accounts have been produced in accordance with the Cash Basis International Public Sector Accounting Standards (IPSAS) and are intended to make the transition to the accrual basis or reporting in accordance with IPSAS. A significant gap in the public financial accountability framework has been the lack of a mechanism for monitoring and reviewing outputs and outcomes of government expenditure. This requirement will become more stringent with accruals, and the process must be tightened. A proposed Public Finance Bill (incorporating references to the financial guidelines), which has been drafted, lays a firmer legal basis for improving performance and financial accountability. But, action on the same has been deferred. Public sector auditing has been improving with wider coverage of public sector bodies and reporting that is more focused on material issues and general areas of control that need improving. What does not appear to have been improving has been the response to these identified deficiencies. 6. Annex B provides a summary of accounting and auditing standards referred to in this study. Annex C and D provide accounting and auditing legislation, respectively. And Annex E includes a description of the benefits of accrual accounting. The Table of Standards and Gaps at the end of the report summarizes each component of the current accounting and auditing standards, the present position, and the options for improvements that would bring Sri Lanka into closer conformance with international standards. PAGE 16 C O U N T R Y R E P O R T PUBLIC SECTOR ACCOUNTING A. Institutional Framework 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.Thediagnosticquestionnairesthatwereusedinthisassessmenthavefacilitatedthecollection of information on the current arrangements and the apparent gaps in the present accounting laws and regulations of Sri Lanka; 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 are prescriptive about the maintenance and compilation of accounts, but make no mention of International Accounting Standards. Sri Lankangovernmentorganizationscanbecategorizedinto(a)ministries,departments,andconstitutional bodies,includingtheAuditorGeneral'sDepartment;(b)non-revenue-earningstatutorybodiesandpublic enterprises; and (c) revenue-earning statutory bodies and public enterprises. The Sri Lankan Accounting and Auditing Standards Act (No. 15) 1995 requires that the latter group reports in accordance with Sri Lanka Accounting Standards. Categories (a) and (b) are required to report in accordance with the Financial Regulations (1992) issued by the Public Finance Department of the Ministry of Finance. These groups need to prepare cash-based budgets and financial reports. The Financial Regulations do not prescribe accounting standards in this respect.3 The Government is considering introducing accrual budgeting and accounting as part of the Public Expenditure Management Reform Program. There is no current prescription by law for the adoption of IPSAS. Since 2002, the State Accounts Department has been preparing annual accounts according to the Cash Basis IPSAS, and the Auditor General has been certifying those accounts. Also, the formats for presenting financial statements for 2005 has been improved taking into account the good practice examples adopted by other countries. There is an intention to progressively move toward accrual accounting using IPSAS. 9. Enacting the proposed Public Finance Bill can provide a firm basis for more effective enforcement and clarify the financial accountabilities of responsible parties. There is a need 3Diagnostic Study of Accounting and Auditing Practices in Sri Lanka, ADB, 2002. 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 for a better framework of financial accountability through a modern financial reporting framework. Producing annual audited accounts for each government department will provide a basis for holding senior managers accountable for their operations and use of budget funds. The Auditor General will need to specify the steps that departments should take to correct any accounting effects that lead to audit qualifications to the annual accounts. (2) Education and Training 10. Government accountants are recruited on the basis of the results of a competitive examination for which a university degree in accounting or equivalent is required. This qualification provides a solid basis for an effective accounting service but needs to be followed up with further training in the core competencies needed for public sector accounting and reporting. 11. There is a need for constant upgrading of training for government accountants in the requirements of the Financial Regulations and in the standards for preparing financial statements. Continued training after induction tends to depend upon requests rather than through a planned continued skills maintenance program. Currently government accountants take a 30-week induction training course that provides PFM foundation, but does not provide exposure to or training in accounting standards. 12. Current training institutions provide a foundation for an international standard public sector accountancy qualification. The Institute of Public Finance and Development Accountancy (IPFDA) was inaugurated in 1980 as a professional organization for public sector accountants and auditors in Sri Lanka. The objective of IPFDA is to improve public sector financial management systems in the field of budgeting, accounting, reporting, and auditing through the professional development of its membership. The Institute of Government Accounts and Finance (INGAF) was established in 1999 with the sponsorship of the Asian Development Bank. An arm of the Ministry of Finance, INGAF trains public sector accounting personnel, for the purpose of improving the financial management skills of public sector accountants and to develop computerized integrated government accounting. 13. A training program that meets the International Education Standards (IES) for Professional Accountants is needed for the public sector accountants and auditors. Plans to adopt the public sector program of the Chartered Institute of Public Finance and Accountancy (CIPFA) in United Kingdom for Sri Lankan conditions would provide the path for sustained, improved training. The plan is to use existing Sri Lankan training institutions (IPFDA and INGAF) that would be merged, upgraded, and monitored to international standards. The newly merged institution would be in a position to affiliate with IFAC after 10 years. The teaching institution would use the present CIPFA international certificate and diploma scheme as a basis for Sri Lankan qualifications. The CIPFA learning materials take into account international audit and accounting standards as required for adoption by public sector organizations. The modules cover the following elements: Financial reporting, Accounting for decision making, Audit I and II, 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 Financial management, Law and taxation, Information systems management, and Management. (3) Code of Conduct 14. The Code of Ethics is embedded within the Establishment Code for Public Servants and is less prescriptive than the standard code for professional accountants. The general knowledge of the requirements of the Establishment Code is poor. A code of ethics is needed to improve financial compliance. The cultural support that a strongly directed Code of Ethics can create would be helpful in improving public financial management. 15. A specific code based on IFAC or the Institute of Chartered Accountants of Sri Lanka (ICASL) should be prepared and adopted for use by public sector accountants. These two professional accounting bodies have codes which suit their specific institutional needs. The public sector codes would need to be directed to the needs of the public sector. The IFAC-issued Code of Ethics for Professional Accountants provides a useful basis for the public sector code. The proposed CIPFA training program would cover the training of both accountants and auditors. The certificate and diploma scheme would initially be used, and then the full CIPFA professional qualification would be used, as adapted for Sri Lanka circumstances. With both qualifications, those who are accepted into CIPFA membership, whether as affiliates (for the diploma holders) or as qualified accountants (for those who complete requirements for the full professional qualification), would be required to abide by the CIPFA code of discipline and ethics. This is based on the IFAC Codes. (4) Public Sector Accountant Arrangements 16. For each public sector body that prepares annual accounts, there should be a professionallyqualifiedchieffinancialofficer(CFO)whoistoberesponsibleformaintaining systems of internal financial controls that manage risks, and for preparing the accounts for signature by the chief accounting officer (CAO). Audits are not currently effective in ensuring that systems of internal financial controls work well. The audit results are not being translated into effective remedial action. The CFO function needs to be upgraded in order to get this work done. B. Accounting Standards as Practiced 17. The diagnostic questionnaires have collected information on the current arrangements and the apparent gaps in Sri Lanka for setting public sector accounting standards, and for presenting financial reports. Out of this exercise came recommended activities that will help bring local standards in line with international standards. (1) Setting Public Sector Accounting Standards 18. More formalized arrangements are needed for setting accounting standards for the public sector. For commercial accounting, the ICASL is empowered by law to establish accounting 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 and auditing standards, and the relevant committees (such as the Public Sector Accounting Committee) usually adopt IFAC standards after a short period of time for consideration. With IFAC promulgating IPSAS, it would be appropriate to amend the Sri Lanka Accounting and Auditing Standards Law (1995) to add responsibility for public sector standards. The Financial Regulations set out the detailed rules for the cash-based system of accounts. These are currently intended to support the use of Cash Basis IPSAS. (2) Presenting Financial Reports 19. The accordance of the annual Sri Lanka consolidated financial statements with Cash Basis IPSAS, Part 1, is incomplete. 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 transition path to the adoption of accrual accounts based on IPSAS. 20. The enforcement procedures for the Financial Regulations are weak. Audits show substantial lack of compliance. The response to audit findings is inadequate. 21. Greatly increased attention needs to be given to corporate governance issues for state- owned enterprises (SOEs) where the Auditor General qualifies the annual accounts. The state-owned enterprises apply International Financial Reporting Standards (IFRS). They should also comply with governance requirements established by the Department of Public Enterprises and by the ICASL Code of Best Practice. However, in the year 2003, only 10 of the 178 SOE accounts received unqualified audit opinions. The Auditor General expressed a disclaimer on 29 public corporations and noted a lack of response to problems identified in earlier years. 22. Intheeventofcontinuedfailuresincorporategovernance,theactionstakenwithrespect to directors of public corporations need to be reviewed. There is a clear problem in corporate governance where serious audit objections that lead to disclaimers on accounts are uncorrected. Long- standing receivables were noted as a particular problem. Failure by directors who are not meeting their responsibilities to deal with such issues leads to increased tax-payer burdens. PAGE 20 C O U N T R Y R E P O R T PUBLIC SECTOR AUDITING A. Institutional Framework for Public Sector Auditing 23. Effective scrutiny by the legislature through comprehensive, competent external audit underpinned by International Standards on Auditing (ISA) 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 Sri Lanka Supreme Audit Institution functions is integral to providing information for improving the overall PFM system, but the action must take place 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 the relevant reform action is taken. It also requires public disclosure of the audit reports to ensure public support for effective action. 24. The diagnostic questionnaires collected information describing the current arrangements in Sri Lanka and 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, Arrangement for providing training, Arrangements to ensure a desired level of competence for the auditors, and Arrangements for quality assurance. 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 (1) Institutional Framework 25. The appointment and powers of the Auditor General should be specified in a new National Audit Act. The Constitution and relevant laws4 provide for the President to appoint the Auditor General with a mandate to audit all government bodies. In practice, commercial state-owned enterprises are audited by accounting firms and reviewed by the AG Department, but the provisions are not very specific about the type of audit report required. The Auditor General does not have the powers or the status to secure implementation of his recommendations, despite the severe problems in public financial management that are identified in his reports. 26. Negotiations with donors over the implementation of the institutional strengthening program should be completed. In October 2005, the Government of Sri Lanka approved the drafting of a National Audit Bill and an Institutional Development Plan to modernize the AG Department. The Ministry of Finance is being asked to liaise with donors for the necessary funding. Further discussions are needed to decide the best way to manage the process, including the possibilities for a sector-wide approach to the development. 27. A review of PFM high-level indicators should be conducted. Given the strong interdependencies among the elements of the PFM system, coordinated or integrated development programs would be important for successful implementation. Merely strengthening the AG Department will not work without the strengthening of internal controls and the legislative scrutiny processes. In this context, the use of indicators for measuring PFM performance would be very helpful. 28. The new National Audit Act should provide a broader base to undertake all forms of audit and an adequate offences clause to ensure cooperation. Forensic and performance audit are needed as part of a balanced audit program. (2) Setting Auditing Standards 29. The National Audit Act should specify arrangements to adopt INTOSAI and IAASB Auditing Standards. The INTOSAI Auditing Standards supported by the detailed IFAC-issued International Standards on Auditing underpin a modern audit process. The International Audit and Assurance Standards Board (IAASB) 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 auditing standards. This is being done especially so that the IAASB audit standards appropriatelyreflecttheinterestsoftheinternationalpublicsectorauditcommunity. TheAGDepartment's current auditing approach is based together with some public sector elaboration on the ICASL Auditing Standards; but no document sets out the public sector audit standards as such. Without a formal document, there is no authoritative and credible basis for enforcement of standards. 30. The IFAC-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, 4FinanceActNo.38of1971,Ch.252;MunicipalCouncilOrdinance,Ch.255;UrbanCouncilOrdinance,Ch.255;PradesiyaSabha Act, No. 15 of 1987 (local government); and Lanka Accounting and Auditing Standards Act 1995. 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 documentation, audit materiality, fraud, audit errors, audit opinions, audit planning, control environment assessments, and supervising the work of audit staff. (3) Code of Ethics 31. The AG Department should adopt a specific Code of Ethics that is relevant to auditors. Along with INTOSAI's Lima Declaration of Guidelines on Auditing Precepts,5 the INTOSAI Code of Ethics is considered an essential complement to the INTOSAI Auditing Standards. A Code of Ethics is considered as a statement of values and principles guiding the daily work of the auditors. The Sri Lanka Supreme Audit Institution has not adopted the IFAC-issued Code of Ethics for Professional Accountants or the INTOSAI Code of Ethics. (4) Accountability in the Supreme Audit Institution 32. The Institutional Development Plan should pay particular attention to achieving the 2003 peer review recommendations. A 2003 peer review by The Netherlands Supreme Audit Institution satisfied the requirement for competent assessment of the accountability of the Sri Lanka Supreme Audit Institution. Its recommendations need to be implemented to complete the accountability process. (5) Independence 33. The proposed National Audit Act is needed to provide effective independence to the Auditor General. Five of the eight core principles of SAI independence that were set out by INTOSAI are only partially, if at all, met by the current legislative and administrative framework. The five core principles are: The independence of the SAI Heads including security of tenure and legal immunity in the normal discharge of their duties; A sufficiently broad mandate and full discretion in the discharge of SAI functions; The freedom to decide on the content and timing of SAI reports and to publish and disseminate them; The existence of effective follow-up mechanisms on SAI recommendations; Financialandmanagerialautonomyandtheavailabilityofappropriatehuman,material,andmonetary resources. 5Lima Declaration of Guidelines on Auditing Precepts, October 1977, INTOSAI 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 (6) Qualifications and Skills for the Auditors 34. The quality of accounting and auditing educational and training arrangements in the government's schools is not fully satisfactory. It does not meet the needs of modern accounting and financial management. (7) Training 35. Abettertraininginstitutionthatmeetsinternationalstandardsshouldbeintroduced.The AG Department staff has good basic accounting qualifications. However, the Institutional Development Plan highlights a dearth of required auditing expertise. The proposed CIPFA training program would cover the training of both accountants in the certificate and diploma scheme initially and then move to the full CIPFA professional qualification as adapted for Sri Lanka circumstances. 36. A skills analysis program based on international standards for competencies should be conducted. The AG Department does not have basic facilities for training, research, and development. A proper need-based approach is required to be implemented to support the introduction of an audit methodology, and international accounting and auditing standards. The Institutional Development Plan needs to be used to strengthen the internal AG Department training facilities. (8) Audit Competence 37. Systems, methodologies, and facilities should be updated in accordance with the Institutional Development Plan to enable modern audit to be undertaken by the staff. There is a need to develop specialist forensic audit and computerized audit capabilities. The audit orientation has to change from transaction to risk-based systems audit. It is necessary to strengthen the technical and professional competence of the AG Department and improve its operational capacity to produce and disseminate quality audit reports that meet international standards and serve the needs of the stakeholders. The AG Department needs to improve training, and to build in-house capacity for financial performance, fraud, environmental and computerized audits. An audit management system is needed that is supported by an up-to-date software and hardware configuration. (9) Quality Assurance 38. To improve quality assurance, the new Audit Methodology Manual, which would be prepared in accordance with the methods described in the Institutional Development Plan, is needed. There is no quality assurance program currently in use. Audit supervision is expected to ensurequality.However,currentauditsarenottimely,manyfindingslackmateriality;theauditprograms, whichfocusoncomplianceandfinancial(attestation)audits,arenotatparwiththebestofinternational practices. Given the lack of acceptance within the AG Department of a previous manual prepared by consultants during the 1990s, it is crucial that the new manual be prepared by AG Department staff in consultation with experts and practitioners, with external consultants providing guidance, but not actually writing the manual. B. Auditing Standards as Practiced 39. The diagnostic questionnaires have been used to collect information about the current arrangements for the audit methodology and the apparent gaps in the country for: 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 planning audit supervision reviewing internal controls reviewing compliance with laws ensuring that 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 40. The new Audit Methodology Manual should introduce more comprehensive planning requirements based on the specific objectives of the audits. Audit planning is not sufficiently tailored to suit the needs of the audit client. Recent modifications have sought to specifically identify those areas of concentration, but this is still insufficient for meeting international standards of audit planning. Most of the audits are aimed at identifying regulatory breaches. The reports of these audits are of minimal assurance value to either the preparers or users of the financial reports, or wider stakeholders. Nor are they of much value to those responsible for managing systems of internal control. Results from audits should hold the executive accountable for its fiscal and expenditure policies and their implementation. (2) Audit Supervision 41. A more comprehensively structured working paper system is needed for the audit to attain the normal audit objectives regarding the validity of transactions. Current supervision is hampered by inadequate working paper systems and a poor audit methodology. (3) Reviewing Internal Controls 42. The overall audit procedures need to be changed and supported by the new Audit Methodology Manual. The general budget sector audits examine transactions in accordance with the rules established by the Financial Regulations. They therefore report on where controls have not been applied. They do not approach the audit from the perspective of material misstatement of an accounting figure, but rather the failure of a transaction to comply with the rules. The effect of this approach is that there is no pressure on the system to improve as all of the effort goes into argument about the transaction, not the system of control. The 2003 Auditor General Activity Report notes that past audit reports had been merely post-mortem examinations, often delayed from 5 to 15 years; and that by and large the issues were not significant. INTOSAI has issued a paper on internal control standards6 that provide a good international benchmark for assessing internal controls. 6Guidelines for Internal Control Standards for the Public Sector, Internal Control Standards Committee, International Organization of Supreme Audit Institutions. 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 43. Introduce recommendations to all audit reports, monitor the implementation of the recommendations, and report on the process in the Activity Report. The AG Department uses much of its resources for compliance type of audit work. An important issue is whether the audits are effective in dealing with instances of non-compliance. In some South Asian countries, the audit reports log large numbers of transactions for pursuit of recovery. These cases continue to be monitored until the matter is resolved, either by the Public Accounts Committee or the Auditor General. In local government matters, the Auditor General does have the power to disallow items of the accounts that are contrary to law and surcharge the responsible officer. The effectiveness of the Public Accounts Committee needs improvement. Also, it is necessary to implement stronger enforcement of surcharge processes. The 2003 Auditor General Activity Report states that recoveries of surcharges were small, with more than half the outstanding surcharges uncollected for more than 4 years. The same report recommends that for public corporations those responsible for irregularities should settle such losses. (5) Audit Evidence 44. The audit methodology and necessary supporting working papers should be more precisely defined in the new Audit Methodology Manual.Currentlyworkingpapersareorganized by report paragraphs rather than the audit plan. They cover the details of the preparation and approval of the text of the audit paragraphs. 45. The AG Department should, as per ISA 600 (8), examine on a sample basis some of the working papers of the `qualified auditors' employed to audit government bodies. Most certification audit work is done by accounting firms on behalf of the Auditor General, but these working papers are not reviewed by the AG Department. (6) Analyzing the Financial Statements 46. ArevisedauditmethodologywillimprovethewayinwhichtheAGDepartmentanalyzes financial statements. The AG Department uses a checklist for analyzing financial statements. (7) Preparing Audit Opinions 47. The requirements of ISA 700, The Auditor's Reports on Financial Statements, should be adoptedinfull.TheauditscopeandauditopinionparagraphsfortheConsolidatedFinancialStatements 2004 do not contain the degree of detail set by ISA 700 in paragraphs 12 to 15. This creates doubts about the auditing standards used for the work. It also makes uncertain whether the audit provides a reasonable basis for the opinion, and if the audit was planned and performed to obtain reasonable assurance that the financial statements are free of material misstatement. The scope statement notes the limitations of staff, other resources, and time available. This would normally be read by a user of the accounts as an indication that the audit opinion on the accounts is thereby qualified although this is not clearly stated in the opinion paragraph. (8) Reporting on Fraud 48. Use of forensic audit methods would reduce fraud. Much of the audit reporting seems to relate to fraudulent behavior. This orientation comes from the compliance testing approach. The use of 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 specific forensic audit methods would enhance the effectiveness of the reporting on whether deficiencies arise from fraud rather than error or oversight. (9) Reporting on Compliance 49. Improve the effectiveness of the audit report by stronger enforcement of corporate governance requirements through the audit committees. The study reveals a number of weaknesses in the success of the present reporting system (e.g., lack of depth, irrelevance, lack of brevity, etc.) Although the Auditor General submits a supplementary report with respect to statutory boards and corporations, no serious attempt seems to have been made by the boards of such institutions for improving controls and management of resources. In general, arrangements to improve corporate governance ought to apply to the whole public sector, including state-owned enterprises. C O U N T R Y R E P O R T PAGE 27 ACTION PLANS Standards Issue Current status Steps to be taken to move toward international standards ACCOUNTING 1. Has the Public Sector Not formally. The Finance Need for a financial management law Accounting Law adopted Department has since 2002 adopting IPSAS full accrual by a specified IPSAS? been preparing annual accounts date, and for the Department of State increasingly in accordance with Accounts to develop a transition path7 first the Cash Basis IPSAS. However through the requirements of the Cash Basis thereisnocurrentprescriptionby IPSASthentoaccrualIPSAS. Improvements law for the adoption of IPSAS. in technology will be needed to support the system. No act is required at this time. Financial Regulationscouldbeappropriatelyamended to adopt IPSAS. Dept. of Public Finance of the MOF&P to take the initiative by mid 2007 in consultation with all stakeholders. 2. Does the education and Substantially but not formally. The proposed improvement of accountancy training of accountants' Government accountants are training institutions should be used to accord with IES? required to hold a university strengthen public sector accounting and degree in accounting or its auditing skills. equivalent. Further training is also provided but not in strict AproposalforWBfundingforcollaboration accordance with the IES. with CIPFA is in progress and is under consideration by MOF. Implementation is likely during 2007. DG State A/Cs could prepare a proposal to explore possibilities of including IPSAS in efficiency bar exams for service progression and also inclusion of IPSAS in the curriculum of universities and INGAF/SLIDA to meet IES. Progress is expected during 2007. 7IFAC Public Sector Study 14 `Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities' provides transition guidance. 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 Standards Issue Current status Steps to be taken to move toward international standards 3. Does the Code of No. There is a Civil Service A specific code based on IFAC or the ICASL Ethics match international Code but this is not specific to should be prepared and adopted for use by standards? accounting. public sector accountants. A Public Sector Committee could explore the possibilities (see point 4 for setting up a PSC) during early 2007. 4.Isthereabodytoprescribe No. ICASL provides standards for The Ministry of Finance and the ICASL public sector accounting commercial accounting. should establish a public sector committee standards? to establish standards for the government sector. By mid 2007 DG State A/Cs to initiate a proposal for setting up a Public Sector Committee. 5. Are the financial Government accounts are Audit Committees in public sector entities statements in accord with substantially in accord with should assure better compliance. A more international standards? Cash Basis IPSAS. SOE accounts effective supervisory regime is needed for follow IFRS but the accounts are SOEs. usually qualified by the auditors on serious grounds. 6. Is the statement of Cash Substantially. Third party Receipts and Payments in payments are not shown IPSAS form? separately 7. Are accounting policies Yes. and explanatory notes The transition path should make the required? improvements that are needed. WB arranged a workshop on IPSAS on October 8. Are other disclosures in Substantially. 27, 2006. accord with IPSAS? 9. Does the government No.OnlytheCentralGovernment Further steps will be needed to include issue a consolidated Sector is covered. Public controlled entities. financial statement which enterprises, SOE and statutory consolidates all controlled boards are not included in the WB to discuss the support required with DG entities? accounts. State A/Cs by mid 2007. AUDITING 1. Is the SAI statutory Partly. There is constitutional A specific National Audit Act is required framework in accord with support, but there is no Audit that meets international standards.8 The the needs of the INTOSAI Act that deals specifically with new Act should provide a broader base Auditing Standards? the Auditor General and provides to undertake all forms of audit. The Audit adequate administrative and Act should contain an adequate offences financial arrangements to ensure clause. proper support for PFM A draft audit act has been prepared and is awaiting approval. A decision is in prospect by end 2007. 8 Guidance is provided by "A Model National Audit Office Act," The Association of Chartered Certified Accountants, United Kingdom, 2004. 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 Standards Issue Current status Steps to be taken to move toward international standards 2.Isthereabodytoprescribe No. The Auditor General and the ICASL should public sector auditing establish a public sector committee to standards? establish standards for the government sector. AG and the DG State A/Cs will coordinate the proposal for setting up of a PSC by mid 2007. 3. Have INTOSAI and Yes, but there is no document The National Audit Act should specify IFAC audit standards been that lists out the public sector arrangementstoadoptINTOSAIandIAASB adopted? audit standards. InternationalStandardsonAuditing.Action awaits the approval of the new Audit Act as above. 4. Has a code of ethics No. The Code of Conduct for A code of ethics equivalent to the INTOSAI equivalent to the INTOSAI Public Sector Accountants Code needs to be adopted. standards been adopted? is mainly based on the The proposed IDP implementation will Establishment Code for Public address the adoption of INTOSAI code with Servants. guidelines for compliance. Implementation is likely during 2007. 5. Is the accountability Yes. process in the SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI legal No. For example, greater ThenewNationalAuditLawshouldprovide frameworkmeettheINTOSAI independence is needed in the for all of the eight core INTOSAI principles standards for independence areas of administration and of independence. The draft act addresses and powers? resources. most of the principles. 7. Does the education and Not sufficiently. Peer reviews of Draft legislation has been prepared to training of auditors accord the AG Department have shown establish a Public Sector Professional with INTOSAI and IES inadequacies. Accountancy Institute which merges two standards? currentpublicsectortraininginstitutes.This institute should follow IES requirements. A skills analysis is required for the AG Department and a review of training and performance management systems. A proposal for funding CIPFA collaboration is under discussion between MOF and the WB. The IDP implementation will address skills analysis during 2007 and 2008. 8. Is the SAI equipped No. The current audit methods The AG Department needs to improve with the audit methods areattunedtobudgetcompliance training, building in-house capacity for and technologies to meet checking. Major changes to audit financial,performance,fraud,environmental the INTOSAI Auditing methods are needed to support and IT audits. An audit management Standards? certification audit. Greater system is needed for the AG Department. technology is needed. An Institutional Development Plan has been prepared but not yet implemented. Implementation of this plan will deal with this issue and the deficiencies outlined in the items following. 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 Standards Issue Current status Steps to be taken to move toward international standards 9. Does the SAI have the No. A quality assurance program should be quality assurance programs introduced. to meet international standards? 10. Does the process to plan Partly. Audit planning is not theauditsmeetinternational sufficiently tailored to the audit standards? client. 11. Does the process to No. Working paper systems are The Institutional Development Plan supervise the audits meet insufficient to support proper prepared by the UK and The Netherlands international standards? supervision. SAIs will correct these deficiencies, if 12. Does the process to No. The orientation is to identify implemented. evaluate the reliability deficienttransactionsratherthan of internal control meet verify the systems of control. international standards? 13. Does the process used in Yes. audits to assess compliance withlawsmeetinternational standards? 14. Does the audit process No. Working paper systems are The Institutional Development Plan used to obtain evidence to insufficient. prepared by the UK and The Netherlands support conclusions meet SAIs will correct these deficiencies, if international standards? implemented. 15. Does the audit analyze Yes. the financial statements to establishwhetheracceptable accounting standards for financial reporting and disclosure are complied with? 16. Does the auditor prepare Yes. an audit opinion on the financial statements in a form that conforms to the international standards? 17. Does the consideration Yes. of fraud and error in an audit of financial statements accordwiththeinternational standard? 18. Is the process for No. The system of response is Introduce a system of recommendations and taking action on audit inadequate. methodstomonitorthattherecommendations r e c o m m e n d a t i o n s are implemented, and report on the process sufficiently effective to meet in an annual AG Activity Report. international standards? C O U N T R Y R E P O R T PAGE 31 Annex - A METHODOLOGY OF THE ASSESSMENT As part of the general support program in South Asia for assessment and improvement of public 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 Framework9 by the Public Expenditure and Financial Accountability (PEFA) Program10 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 insight into country performance in regard to the external auditing and financial statement reporting 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 Organization of Supreme Audit Institutions (INTOSAI) Code of Ethics and the INTOSAI general standards. 9The 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 creating a common platform for dialogue. 10The 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 Public sector auditing practices compared with the requirements of the INTOSAI field standards 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 authorities in the country, with the help, wherever 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. A country report on the assessment is prepared for each country and reviewed by an expert panel of advisors 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 Annex - B ACCOUNTING AND AUDITING STANDARDS This contains a summary of the frameworks that have been used for the public sector accounting and auditing assessment These have been compiled by the International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI), which 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.11 11Working 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. 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 Standards and International Accounting Standards 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 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 39, Financial Instruments: Recognition and Measurement see also: See also Financial Instruments - other issues IAS 40, Investment Property 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 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 important/essential. 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 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 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 its resources. It is also the obligation of the audited entity to ensure that controls are in place and functioning to help ensure that applicable statutes and regulations are complied with, and that 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 co-operation 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 co-operation 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. Audit of financial systems and transactions including an evaluation of compliance with applicable 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 matter(s) arising from or relating to the audit that should be disclosed, according to the SAI. 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. General auditing standards 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 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 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; it must 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; the 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, it should 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 Framework: Audit Evidence: International Framework for Assurance 500 Audit Evidence Engagements 501 Audit Evidence -- Additional General Principles and Considerations for Specific Items Responsibilities: 505 External Confirmations 200 Objective and General Principles 510 Initial Engagements --Opening Balances Governing an Audit of Financial 520 Analytical Procedures Statements 530 Audit Sampling and Other Means of 210 Terms of Audit Engagements Testing 220 Quality Control for Audits of Historical 540 Audit of Accounting Estimates Information 545 Auditing Fair Value Measurements and 230 Documentation Disclosures 230R Audit Documentation 550 Related Parties 240 The Auditor's Responsibility to Consider 560 Subsequent Events Fraud in an Audit of Financial Statements 570 Going Concern 240A Fraud and Error 580 Management Representations 250 Consideration of Laws and Regulations in an Audit of Financial Statements Using the Work of Others: 260 Communications of Audit Matters with 600 Using the Work of Another Auditor Those Charged with Governance 610 Considering the Work of Internal Auditing Risk Assessment and Response to 620 Using the Work of an Expert Assessed Risks: Audit Conclusions and Reporting: 300 Planning an Audit of Financial Statements 700 The Auditor's Reports on Financial 315 Understanding the Entity and Its Statements Environment and Assessing the Risks of 700R The Independent Auditor's Report on a Material Misstatement Complete Set of General Purpose Financial 320 Audit Materiality Statements 330 The Auditor's Procedures in Response to 701 Modifications to the Independent Assessed Risks Auditor's Report 402 Audit Considerations Relating to Entities 710 Comparatives Using Service Organizations 720 Other Information in Documents 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 ANNEX C. SRI LANKAN ACCOUNTING LEGISLATION The Finance Act (1971) and the Financial Regulations (1992), issued by the Ministry of Finance, require that ministries, departments, and constitutional bodies, such as the Auditor General's Office; and non revenue-earning statutory bodies and public enterprises report in accordance to this legislation. They prepare cash-based budgets and financial reports. The Financial Regulations do not prescribe accounting standards in this respect. The Sri Lanka Accounting and Auditing Standards Act (No. 15) 1995 requires that revenue- earning statutory bodies and public enterprises report in accordance with Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, and be subject to monitoring for compliance by the Sri Lanka Accounting and Auditing Standards Monitoring Board. Financial Regulations Extracts: F.R. 150. Appropriation Accounts. Part 1, General Estimates. As soon as possible after the end of each financial year, accounting officers will arrange for Appropriation Accounts to be prepared for each programme of expenditure under their control: one for projects classified under recurrent expenditure, and one for projects classified under capital expenditure. The Appropriation Account will follow the general details of the Estimates and will indicate the financial provision in the Estimates (as altered subsequently by supplementary provision or virement, if any), the actual expenditure, and the saving or excess under each Programme/Project. It will also contain the accounting officer's explanations of the causes of any significant variations between total net provision and total expenditure under each object class, as well as notes of any unusual payments. As a matter of accounting convenience, expenditure sanctioned by Special Law should be included in the main body of the Appropriation Account, together with a suitable footnote. The accounting officer for the programme will sign the Account in that capacity and will then submit the Account to the Chief Accounting Officer who will verify that it has been properly prepared, and that adequate explanations have been given of variations between estimated and actual expenditure. The Chief Accounting Officer willthensigntheAccountandforwardittotheAuditorGeneralassoonaspossible.TheAuditorGeneral, after examination and certification, will forward the Account to the Director General, Department of State Accounts, Treasury for publication. F.R. 151. Revenue Accounts. As soon as possible after the end of each financial year, each revenue accounting officer will prepare annually for publication a classified statement of revenue for which he is 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 responsible. This statement will provide the details of the appropriate Heads, Sub-heads, Items, and Sub- items of Revenue, the description of such Revenue, the amount of Revenue earned during each of the three preceding financial years, the estimated Revenue of the year for which the statement is prepared, the actual amount of Revenue collected during that year, the excess or the shortfall of actual collections as compared with the estimated Revenue, and the reasons for the excess or shortfall. This Revenue Account will be signed by the person in the capacity as revenue accounting officer and forwarded to the Auditor General for examination and certification. The Auditor General, after examination and certification, will forward the Accounts to the Director General, Department of State Accounts, Treasury for publication. F.R. 152. Committee on Public Accounts. The Committee on Public Accounts of Parliament has been set up by the following Standing Order: (1) There shall be a designated Committee on Public Accounts consisting of twelve members nominated by the Committee of Selection. (2) It shall be the duty of the Committee on Public Accounts to examine the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure and such other accounts laid before Parliament as the Committee may think fit, along with the reports of the Auditor General thereon, and the reports of the Auditor General on local authorities. (3) The Public Accounts Committee shall, from time to time, report to Parliament on the accounts examined, the finances, financial procedures, performance, and management generally of any department and local authority, and on any matter arising therefrom. (4) The Public Accounts Committee may, when it considers necessary, appoint subcommittees of its own members to examine and report to the full Committee on all accounts and the finances and management of such departments and local authorities as the Committee may direct. (5) The Public Accounts Committee or any of its subcommittees shall, for the performance of its duties, have the power to summon before it and question any person and call for and examine any paper, book, record or other document and to have access to stores and property. Chief Accounting Officers and Accounting Officers must appear before the Public Accounts Committee, when required, and answer questions on all matters arising from the Accounts of the Auditor General Report. The Chief Accounting Officers and Accounting Officers, who sign the Appropriation Accounts, are the persons answerable for the accounts. Yet for reasons of administrative convenience, the Public Accounts Committee will usually examine in the first instance those officers holding the posts at the time the accounts were examined. A Chief Accounting Officer or Accounting Officer has the right, however, to consult the person who signed the Appropriation Account that is being discussed. F.R. 153. Treasury Minutes. After the receipt of the Report of the Public Accounts Committee, the Treasury will issue, under the hand of the Secretary to the Treasury, on the instructions of the Minister of Finance, the Minutes relating to the various matters dealt with in the Auditor General Report. It is the duty of all Chief Accounting Officers and Accounting Officers to study the Report and the Treasury Minutes thereon and be guided by them with regard to future financial operations. PAGE 42 C O U N T R Y R E P O R T ANNEX D. SRI LANKAN AUDIT LEGISLATION Extracts from Chapter XVIII of the Constitution of Sri Lanka Article 153. (1) There shall be an Auditor General who shall be appointed by the President and who shall hold office during good behaviour. (2) The salary of the Auditor General shall be determined by Parliament, shall be charged on the Consolidated Fund, and shall not be diminished during his term of office. (3) The office of the Auditor General shall become vacant: (a) upon death of the Auditor General; (b) upon resignation of Auditor General in writing addressed to the President; (c) upon the Auditor General attaining the age of sixty years; (d) upon removal of Auditor General by the President on account of ill health or physical or mental infirmity ; or (e) upon removal of the Auditor General by the President upon an address of Parliament. (4) Whenever the Auditor General is unable to discharge the functions of his office, the President may appoint a person to act in the place of the Auditor General. Article 154. (1) The Auditor General shall audit the accounts of all Departments of Government, the Offices of the Cabinet of Ministers, the Judicial Service Commission, the Public Service Commission, the Parliamentary Commissioner for Administration, the Secretary-General of Parliament and the CommissionerofElections,localauthorities,publiccorporations,andbusinessorotherundertakings vested in the Government under any written law. (2) Notwithstanding the provisions of paragraph (1) of this Article, the Minister in charge of any such public corporation or business or other undertaking may, with the concurrence of the Minister in charge of the subject of Finance, and in consultation with the Auditor General, appoint a qualified auditororauditorstoaudittheaccountsofsuchpubliccorporationorbusinessorotherundertaking. C O U N T R Y R E P O R T PAGE 43 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 WheresuchappointmenthasbeenmadebytheMinister,theAuditorGeneralmay,inwriting,inform such auditor or auditors that he proposes to utilize their services for the performance and discharge of the Auditor General's duties and functions in relation to such public corporation, business, or other undertaking; and thereupon such auditor or auditors shall act under the direction and control of the Auditor General. (3) The Auditor General shall also perform and discharge such duties and functions as may be prescribed by Parliament by law. (4)(a) The Auditor General may, for the purpose of the performance and discharge of his duties and functions, engage the services of a qualified auditor or auditors who shall act under his direction and control. (4)(b) If the Auditor General is of the opinion that it is necessary to obtain assistance in the examination of any technical, professional, or scientific problem relevant to the audit, the Auditor General may engage the services of: (i) a person not being an employee of the department, body or authority the accounts of which are being audited, or (ii) any technical or professional or scientific institution not being an institution which has any interest in the management of the affairs of such department, body or authority. and such person or institution shall act under direction and control of the Auditor General. (5)(a) The Auditor-General or any person authorized by him shall, in the performance and discharge of his duties and functions, be entitled: (i) to have access to all books, records, returns and other documents; (ii) to have access to stores and other property ; and (iii) tobefurnishedwithsuchinformationandexplanationsasmaybenecessaryfortheperformance of such duties and functions. (5)(b) Every qualified auditor appointed to audit the accounts of any public corporation, or business or other undertaking, or any person authorized by such auditor shall be entitled to like access, information, and explanations in relation to such public corporation, or business or other undertaking. (6) The Auditor General shall, within ten months after the close of each financial year, and as and when he deems it necessary, report to Parliament on the performance and discharge of his duties and functions under the Constitution. (7) Every qualified auditor appointed under the provisions of paragraph (2) of this Article shall submit his report to the Minister and also submit a copy thereof to the Auditor General. (8) In this Article, "qualified auditor" means: (a) an individual who, being a member of the Institute of Chartered Accountants of Sri Lanka, or of any other Institute established by law, possesses a certificate to practise as an Accountant issued by the Council of such Institute ; or 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 (b) a firm of accountants each of the resident partners of which, being a member of the Institute of Chartered Accountants of Sri Lanka or of any other Institute established by law, possesses a certificate to practise as an Accountant issued by the Council of such Institute. Extracts from the Financial Regulations: Financial Regulation 154. Duties and functions of the Auditor General. The relevant Sections of Article 154 of the Constitution set out the duties and functions of the Auditor General in so far as they relate to Government Departments... All Chief Accounting Officers and Accounting Officers should ensure that every assistance is given to the Auditor General, and Officers authorized by him in writing, for the performance of their duties and functions. Financial Regulation 155. Audit Queries. The duties of audit are not exclusively the function of the Auditor General. The Minister of Finance, to whom has been assigned the function of supervising the public administration of the Island on its financial side, has a right to authorize an additional audit by any other person or organization that he may choose. Nevertheless, the functions of the Auditor General are imposed on him by the Constitution; and it is the duty of Chief Accounting Officers and Accounting Officers that letters and queries addressed to them by the Auditor General, or any officer authorized by him,isdealtwithpromptlyandcompleteanswersgiven.Whenafinalreplycannotbegivenimmediately, an interim report should be made. The Accounting Officer should inspect the Audit Query Register, referred to in Financial Regulation 452(1) on first assuming office, and at regular intervals thereafter in order to ensure not only that audit queries are promptly investigated but also that steps have been taken to correct any shortcomings which they reveal. The Chief Accounting Officer will also personally inspect the Audit Query Register from time to time as part of his supervisory functions. It should be clearly noted that, notwithstanding the examination of the accounts by the Auditor General, the responsibility for their accuracy and correctness rests entirely with the Accounting Officers concerned. C O U N T R Y R E P O R T PAGE 45 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: make decisions about the feasibility of financing the services they wish to provide; 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 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 that 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; accumulated surpluses and deficits; and reserves (for example revaluation reserve; foreign currency translation reserve). 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 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 Accrual accounting provides comprehensive information on current cash flows and certain projected 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 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 SUPPLEMENTARY TABLE OF STANDARDS AND GAPS I. Public Sector Accounting 50 A. Assessment of the National Public Sector Accounting Environment 50 (1) The Accounting Law 50 (2) Education and Training of Public Sector Accountants 51 (3) Code of Ethics for Public Sector Accountants 52 (4) Public Sector Accountant Arrangements 53 B. Assessment of National Public Sector Accounting Standards 53 (1) Framework for the Preparation and Presentation of Financial Statements 53 (2) Preparation and Presentation of Financial Statements on the Cash Basis 54 C. Assessment of Accounting and Auditing in State-Owned Enterprises 55 II. Public Sector Auditing 56 A. Assessment of the Public Sector Auditing Environment 56 (1) Statutory Framework 56 (2) Setting Auditing Standards 59 (3) Code of Ethics 60 (4) Accountability in the SAI 61 (5) Independence provided by the Legislation 62 (6) Qualifications and Skills of the Auditor 67 (7) Training 68 (8) Audit Competence 68 (9) Quality Assurance 70 B. Assessment of Public Sector Auditing Standards and Practices 71 (1) Planning 71 (2) Supervision 73 (3) Internal Controls 74 (4) Compliance with Laws 75 (5) Evidence 76 (6) Analysis of Financial Statements 77 (7) Reporting on Financial Statements. 78 (8) Reporting on Fraud 79 (9) Reporting on Compliance 79 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 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT 1.Forreliabilitytherequirements Public sector accounting is based on Legislation for the public sector forpublicsectoraccountingand provisions in the following laws: financial management of each reporting should be specified public sector entity needs to be by law, cover all government- Constitution of Sri Lanka 1978 updated covering: owned entities, specify the FinancialRegulationsofSriLanka methods by which accounting 1992 custody of money and andauditingstandardsaretobe Finance Act No 38 of 1971 property set for the public sector, specify Financial Responsibility Act of the accounting framework the reporting requirements, and 1987 adoption of IPSAS lay down time tables for the Local Government Acts and financial management publication of audited annual Ordinances auditing of financial accounts. statements Current financial management laws adoption of auditing do not provide a sufficient basis for standards based on ISA and modern efficient and effective PFM. INTOSAI Auditing Standards Accurate and timely accounting compliance with general information is needed for orderly policies of the Government and reliable departmental budget imposition of penalties for implementation and efficient audit malpractices activities. For the general budget contents of annual reports sector, the Government has adapted contents of annual financial theFinancialRegulationstofollowthe statements. Cash Basis IPSAS, Part I, presenting a statement of cash receipts and cash Enact the proposed Public Finance payments in line with IPSAS Cash Act to provide a firmer basis for Standard 1.3.4. The enforcement more effective enforcement and procedures for these regulations are clarifythefinancialaccountabilities weak. There is a need for constant of responsible parties. upgrading of officer training in the requirements. The Sri Lanka Accounting and Auditing Standards Act 1995 adopted international accounting and auditing standards to improve financial disclosure for the commercial sector including public corporations involved in the sale of goods or the provision of services. It also established the Sri Lanka Accounting and Auditing Standards 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT Monitoring Board to monitor compliance. However arrangements for the general budget sector are not legislated and practices are therefore not supported by adequate direction. 2. Compliance with IPSAS for The Government has stated its A time table is needed for non-commercial bodies and intention to adopt the accrual-based consolidation of controlled IAS for commercial bodies IPSAS as the basis for government entities into the cash basis is needed for consistent budgeting and accounting. A statements as per 1.6.5 of the transparency. draft Public Finance Act is under Cash Basis IPSAS (e.g. public consideration. enterprises). Annual financial statements are published according to Cash Basis IPSAS, Part 1, for the general budget sector.Annualgovernmentaccounts are not published in a sufficiently timely way. They do not provide sufficient information about public sectorperformanceandpublicassets and liabilities either in aggregate or by entity. In 2002 ADB reported a decline in the standard of financial reporting by public corporations. (2) Education and Training of Public Sector Accountants 3.Forreliability,thecurriculum Government accountants are A training program in Sri Lanka requirementsfortheaccounting recruited on the basis of the results that meets the IES is needed for qualifications of public sector of a competitive examination, the public sector accountants accountants should accord consisting of six 3-hour papers on and auditors. Plans to have the withinternationallyrecognized financial management, for which a UK CIPFA adapt its public sector standards of accounting university degree in accounting or program for Sri Lanka conditions training as established in equivalent is required. provide the path for sustained the IES for Professional improvement using a Sri Lanka Accountants. A 2002 ADB report found that based training institution government accountants and monitored to international auditors do not have adequate standards. or appropriate professional qualifications. These should have specified academic qualifications, professional examinations, practical experience, and continuing professionaleducationrequirements. 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT Current INGAF and SLIDA courses do not provide training of the standards set by the IES. There is no specific training for public sector accountants except the Induction Training given at recruitment given in SLIDA. A scholarship scheme exists to release a few accountants for ICASL training. The use of foreign training is expensive and potentially wasteful as its curricula are not oriented towards the Sri Lankan environment. The ADB study found deficiencies in the accreditation methods of the Institute of Public Finance and Development Accountancy. 4. For reliability, public All government accountants hold INGAS and SLIDA offer good sector accountants should at least a university degree of facilities for continuing training in be provided with continuing equivalent and most of them hold accounting and related matters, professional training part qualifications of ICA, CIMA. A and occasional training needs requirementsthataccordwith continuing training and professional analyses should be conducted internationally recognized development program should be a to identify and fill the needs for standards of accounting professional requirement that has training. training. not yet been met. The intention for accountants to be required to pass two efficiency bar examinations for their promotions has not yet been implemented. (3) Code of Ethics for Public Sector Accountants The INTOSAI code covers integrity; independence, objectivity and impartiality; professional secrecy; and competence. 5. For reliability, public Thegeneralcivilserviceestablishment A specific code of ethics based on sector accountants should code applies to all. IFAC or the Sri Lanka Institute of be required to adhere to the Accountants should be prepared principles laid down in a code and adopted. of ethics that are at least in accordwiththeinternationally recognized standards for professional accountants. This may be based on IFAC or INTOSAI codes. 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT (4) Public Sector Accountant Arrangements 6. For timeliness, relevance, The secretary (CEO) for each CFOs should be professionally and reliability, there should be ministry is appointed as the qualified as departments move a professionally qualified CFO CAO accountable for all aspects toward preparing their own function to be responsible for of financial management of the annual financial statements for maintaining systems of internal ministry and departments under audit and report financial controls that manage theirpurview.TheCAOisrequired risks, and for preparing regular to follow the instructions given financial accounts for each by the head of the Treasury, who government entity. is the CAO for the Ministry of Finance. Grade 1 officers generally The CFO should also be perform as the CFOs. They are responsible the following: responsible for preparing annual financial statements. maintenance and management of the chart of accounts, to ensure the most appropriate technological support for financial management practices, manage training and education needs for financial management, report on key performance indicators, and assist program managers develop an effective financial approach to the delivery of expected outcomes. 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 For commercial accounting the WiththepromulgationbyIFACof standards should accord ICASL is empowered by law to IPSAS, it would be appropriate to with international standards establish accounting and auditing amend the Sri Lanka Accounting to provide consistency. The standards. IFAC-issued ISA and and Auditing Standards Law responsibility for establishing IAS are generally adopted after a 1995 to add responsibility for the national accounting short time lag. public sector standards. standards for the public sector should be well defined to IAS 29 and IFRS 1 have not A further longer-term time table provide reliability. been adopted because of lack of is needed for the transition path relevance for Sri Lanka. IAS 32, for provision of the additional 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT 39 and 41, and IFRS 2 -7 are being information encouraged by Part adopted as per a work schedule. 2 of the Cash Basis IPSAS, and of the further movement toward All auditing standards have been full accrual reporting based on adopted and modifications for 2004 IPSAS. will progressively be incorporated. TheIFACPSCtransitionguidance For government, the ICASL has and the IPSASB Exposure Draft no role. The Ministry of Finance is 28, Disclosure of Financial responsibleingeneralbutnospecific Information about the General consideration has been given to this Government Sector should be issue. considered. (2) Preparation and Presentation of Financial Statements on the Cash Basis 8. The Government should Government has adapted Financial have adopted a national Regulations that substantially accounting and reporting follows the Cash Basis IPSAS plus frameworkbasedonrecognized some accrual elements. international standards to provide authority. 9. If the Cash Basis IPSAS has The Cash Basis has been adopted been adopted as a national and the 2004 accounts are in standard, reporting should compliance with Part 1 apart from comply with the standard to consolidation of non-commercial ensure consistency. public enterprises, disclosure of thirdpartypayments,anddisclosure If the accrual basis is adopted, of restrictions on cash balances. disclosures made with respect The 2005 accounts have been to the general government substantially expanded to include sector shall include at least accrual elements, and Sri Lanka disclosure of the following: is embarked on a path to accrual reporting in accordance with IPSAS. Assets by major class, showing separately the In addition annual accounts are investment in other being prepared and audited for sectors, Ministries/Departments. Liabilities by major class, Net assets/equity, Total revaluation incre- ments and decrements andotheritemsofrevenue and expense recognized directly in net assets/ equity, Revenue by major class, Expenses by major class, Net surplus or deficit, 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT Cash flows from operating activities by major class, Cash flows from investing activities, and Cash flows from financing activities. (Oct 2005 IPSAS ED 28) C. Assessment of Accounting and Auditing in State-Owned Enterprises Financial Statements should comply with IAS and IFRS. 10.Financialstatementsshould SOEs apply IFRS. They should Greatly increased attention include (a) balance sheet, also comply with governance needs to be given to corporate (b) income statement, (c) requirements established by the governance issues for SOEs statement of changes in equity Department of Public Enterprises whentheAGqualifiestheannual or a statement of recognized and by the ICASL Code of Best accounts. gains and losses, and (d) cash Practice. This includes the Board flow statement [IAS 1.8] having responsibility to assess The actions taken with respect to the systems of internal control directors of public corporations Financial statements should maintained by management and in the event of continued failures present fairly (or give a true to operate an Audit Committee. A in corporate governance need to and fair view of) the financial report on the risk management and be reviewed. position,financialperformance, control framework is to be included and cash flows of the entity. in the Annual Report. [IAS 1.13] Only 10 of the 178 SOE accounts Financial statements should be for 2003 received unqualified prepared on the accrual basis audit opinions. The AG expressed of accounting [IAS 1.27] a disclaimer on 29 public corporations, and noted a lack of Financial statements should be response to problems identified prepared using the accounting in earlier years. There is a clear policies established by the problem in corporate governance International Accounting when serious audit objections that Standards. [IAS 1] lead to disclaimers on accounts are uncorrected. Long-standing receivables were noted as a particular problem. This leads to increased tax-payer burdens. 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 II. PUBLIC SECTOR AUDITING A. Assessment of the Public Sector Auditing Environment An effective scrutiny by the legislature through comprehensive, competent, external audit enables accountability for the implementation of fiscal and expenditure policies. TheenvironmentforaneffectiveSAIrequiresacomprehensivePFMapproach.SAIsarenotstand-aloneinstitutions; 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 SAI 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 SAI 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 suitable action is taken for reforms. It also requires public presentation of the audit reports to ensure public support for effective action. (1) Statutory Framework STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT 11. Statutory auditing Current relevant laws are: Enact dedicated audit legislation requirements should be Constitution of the Democratic that specifies the duties, powers, established by legislation. Socialist Republic of Sri Lanka, and responsibilities of the Finance Act No.38 of 1971 Ch. Auditor General and provides 252, safeguards for the AG's financial Municipal Council Ordinance and administrative independence Ch 255, from the executive branch. Urban Council Ordinance Ch 255, Complete negotiations with Pradesiya Sabha Act No. 15 of donors over the implementation 1987 (local government), of the institutional strengthening Lanka Accounting and Auditing program that the World Bank is Standards Act 1995. considering. This program would resource part of the activities as The Constitution and the laws envisaged in the modernization above provide for the AG to audit proposal. The Ministry of Finance all government bodies; although is asked to liaise with donors in practice Government Business for the necessary funding. Enterprises are audited by Further discussions are needed accounting firms and reviewed by for evolving the best way to the AG Department. However, the manage the process, including provisions are not too specific about the possibilities for a sectorwise the type of audit report required. approach to the development. The legislation does not give Conduct a review of PFM high- sufficient administrative authority level indicators. Given the strong to the AG to ensure that the AG interdependencies between the Department is adequately protected elements of the PFM system, from interference by the executive coordinated or integrated branch. programs of development are important for success. The There is no Audit Act that deals World Bank regularly conducts specificallywiththeAuditorGeneral. PFM indicator assessments for 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT The Government of Sri Lanka had its members, which provide an approved in October 2005 the overall framework for dealing with drafting of a National Audit Bill and the financial management risks an institutional development plan through reform of PFM. Sri Lanka expected to cost US$19.5 million has not yet been addressed. to modernize the AG Department. Until the legislation and the audit functions are brought up to the international standards, the AG operations will continue to be inadequate to support the PFM system. Complementary developments in the accounting, internal controls, and legislative scrutiny functions will also be needed for the PFM function to perform in an adequate manner. 12. The SAI should have As per Section 154 of the The new National Audit Act authoritytoconductafullrange Constitution of the Democratic should provide a broader base to of audits for all government- Socialist Republic of Sri Lanka, undertake all forms of audit. The owned or government- "The Auditor General shall audit World Bank has already given controlled entities, including the accounts of all departments of advice in respect of the content of regularity, financial, and Government, ..., local authorities, the proposed law. Further to this performance audits. (INTOSAI public corporations and business advice, it is recommended that Lima Declaration Sections 18- or other undertakings vested under the law should include an overall 19) any written law." objectives clause as follows: Various laws governing public (1) The objectives of the Office of bodies specify the matters to be the Auditor-General shall include examined by the audits. In some providing an opinion on whether cases the laws allow a limited or not: form of performance audit through (a) the public accounts provide examining whether there has a true and fair view of the been economy and efficiency in finances of the government the commitment of funds and and the individual public the utilization of funds. The AG's bodies to which they refer; reports contain frequent reference (b) the financial transactions of to uneconomic transactions and the government and public under-utilized assets. bodies comply with relevant legislation, and regulations issued by any relevant competent body; (c) the financial affairs of the government and public bodies have been managed with due regard to probity, and that their statutory and 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT ethical duties to Parliament and the public have been met in an open and even-handed manner; (d) the government, public bodies, and public money have been managed with due regard to value for money and that officers have made the best use of the resources for which they are responsible. (2) The Auditor-General will provide recommendations and advice to Parliament on significant issues which the Auditor-General has discovered in the course of his/her work. 13. The legislation should Under the Financial Regulations ThenewNationalAuditActshould list out penalties in the event Section 154, all Chief Accounting contain an adequate Offences of non-compliance with the and Accounting Officers should Clause along the following lines: auditing requirements. These ensure that every assistance is given penalties should be applied to the Auditor General and AG- (1)Anypersoncommitsanoffence, appropriately. authorized Officers (in writing), for without lawful justification or the performance of their duties and excuse, if he/she: functions. Provisions in the Finance ActandtheAuditingandAccounting (a) intentionally obstructs, Standards Act allow for penalties hinders or resists the Auditor- with respect to some bodies. There General have been some cases of action taken (b) intentionally refuses or fails but details are not available. to comply with any lawful requirement of the Auditor General (c) makes a statement or gives information to the Auditor General knowingly or recklessly to the fact that the statement or information is false or misleading; (d) willfully suppresses any information required by the Auditor General in the performance of his/her duties; or (e) representsdirectlyorindirectly that the person holds any authority under this act when 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT the person knowingly does not hold that authority. (2) For the purpose of subsection (a),"theAuditor-General"includes anymemberoftheAGstafforother auditor acting with AG authority. (3) Any member of the AG staff or other auditor acting with his/ her authority commits an offence if he/she: (a) demands or takes any bribe, gratuity, recompense, or reward for the neglect or non- performance of his/her duty; (b) willfully fails to report to the Auditor General any abuse or irregularity that comes to his/her notice in the course of his/her auditing duties; or (c) makes any report to the Auditor General that he/she knows to be false or has no reason to believe to be true. If the Auditor General has reason to believe that an offence has occurred,he/sheshallrequestthat theDirectorofPublicProsecutions take appropriate action to prosecute the offender(s). A person who is convicted of committinganoffenceasstatedin Section 51 is liable, on summary conviction, to a fine not to exceed ... and/or to imprisonment for a term not to exceed five years. An organization which commits such an offence is liable, on summary conviction, to an unlimited fine. (2) Setting Auditing Standards 14. The government should The AG Department's current The formal government adoption have adopted the INTOSAI auditing approach is based on of International Standards on Auditing Standards and the Auditing Standards set by the Auditing in the new National 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT the IAASB International ICASL together with public sector Audit Act would be a credible Standards for Auditing for elaboration on some of the ICASL solution, as per the following public sector entities. (ISA Auditing Standards. However there formulation:12 200.5 and INTOSAI Auditing is no document that lists out the Standards1.0.14) public sector audit standards. The Auditor General shall Without any formal document determine which auditing there is no authoritative and standards should be applied; and credible basis for financial reporting may establish auditing standards standards. andacodeofethicsspecifictothe audits performed by the Office of the Auditor General. In applying generally accepted governmental auditing standards: (a) The auditing standards and code of ethics published by the INTOSAI and the IAASB may be used for conducting audits of central government bodies. (b) The auditing standards and code of ethics published by the IFAC may be used for conducting audits of public enterprises. (c) Other recognized or required standards issued or accepted by funding or donor organizations may be used in conducting audits of their projects. (3) Code of Ethics 15.TheINTOSAICodeofEthics There is no specific Code of The AG Department should adopt should have been fully adopted Ethics applicable to Government a Code of Ethics. by the SAI, communicated to Accountants. The SAI has not all staff and applied. (IFAC ISA adopted the IFAC Code of Ethics or A register of the interests held 200.4 and INTOSAI Code of INTOSAI Code of Ethics for its staff. by senior audit staff should be in Ethics 4) The Code of Conduct for Public place. Sector Accountants is mainly based on the Establishment Code for Policies and procedures for Public Servants, developed by the protectingwhistleblowersshould Ministry of Public Administration. be adopted. The Code of Ethics issued by the ICASL applies only to its members. 12Adopted from clause 40 A Model National Audit Office Act, The Association of Chartered Certified Accountants, 2004 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT There is no program for training or dissemination of a Code of Ethics. To be effective, a developing SAI needs its own Code of Conduct that is communicated to all staff, whomustberequiredtosubscribe to its elements, with policies and procedures in place for protecting whistle blowers.13 (4) Accountability in the SAI 16. There should be an The AG Department has accountability process in management meetings. Circular the SAI. (INTOSAI Auditing instructions are issued to staff Standards 1.0.20) from time to time by the AG. 17. There should be clear The general requirements of the responsibility in the SAI for (a) public service financial rules are advising on internal finance, applied. keepingproperfinancialrecords and accounts, and maintaining systems of internal control; (b) for ensuring compliance with laws and regulations. 18. The SAI should prepare an The annual Activity Report of annual report on its operations the Auditor General tabled in the and performance that is Parliament includes performance separate from its reports on commentary, organizational its audits. It should provide details,andsummariesoftheaudit an objective, balanced and findings for the year, which are set understandable account of outindetailinover30otherreport activities and achievements, volumes. For example the 2003 anddetailsoffinancialposition report includes a self assessment and performance. of the current strengths and weaknesses of state audit. It also contains an assessment of the SAI against INTOSAI standards. 19. The SAI should prepare a A corporate plan is being corporate plan or equivalent. prepared. 20. The SAI should undergo Done. A 2003 Peer Review by the The Institutional Development peer review or independent Netherlands SAI noted the need Plan should pay particular performance audit. for: attention to achieving the Peer a National Audit Act, Review recommendations in practice. 13Adopted from SAI Maturity Model, UK National Audit Office, 2005 C O U N T R Y R E P O R T PAGE 61 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 IMPROVEMENT AG status as that of Supreme Court Judge, budget to go to Parliamentary Committee, give audit reports to the media, more autonomy, (5) Independence provided by the Legislation If the SAI is to provide effective external scrutiny, legislation should be adequate for the following core principles of SAI independence: (a) The existence and de facto application of an appropriate and effective constitutional and legal framework, (b) The independence of the SAI Heads including security of tenure and legal immunity in the normal discharge of their duties, (c) A sufficiently broad mandate and full discretion in the discharge of SAI functions. (d) Unrestricted access to information, (e) The obligation to report on their work, (f) The freedom to decide on the content and timing of their reports and to publish and disseminate them, (g) The existence of effective follow-up mechanisms on SAI recommendations, (h) Financial and managerial autonomy and the availability of appropriate human, material and monetary resources. (Core Principles of SAI Independence, INTOSAI Subcommittee on SAI Independence, 2004) 21. There should be an By the Sri Lanka Constitution, the Complete the drafting and appropriate and effective AG Department has coverage of all passage of the National Audit constitutional/statutory/legal government bodies and adequate Act. framework for the extent of powers to carry out its audits. The SAI independence and powers, gapisthatlegalprovisionsgoverning and an adequate de facto audit are contained in acts primarily application of the provisions written for other purposes. Effective of this framework. (INTOSAI application of powers can be better Auditing Standards 1.0.15 and ensured through an act written 2.2.2) directly for the SAI. 22. The legislation should spell The Constitution does not specify The National Audit Act should out in detail the extent of SAI this. Without clear independence contain clauses specifying AG independence. (INTOSAI Lima the AG is constrained in his/her independencealongthefollowing Declaration Section 5) activities. lines: (a) The Auditor General shall The legislation should assure act independently in the the independence of the SAI exercise and performance Heads and "Members" (in of his/her functions, duties, collegial organizations) and and powers. that there is security of tenure (b) The Auditor General shall and legal immunity in the be immune from legal normaldischargeoftheirduties. prosecution in the normal (INTOSAI Lima Declaration discharge of his/her duties Section 6) during the period of his/her 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT office or after he/she has left office. (c) Before undertaking his/ her duties, the Auditor General shall take an oath, administered by the Speaker of Parliament, pledging to perform honestly and impartially the duties of the office,abidebythelaws,and uphold the Constitution. The salary, superannuation, benefits, and other conditions of service for the Auditor General shall be the same as those for the Supreme Court Judge. 23. The SAI constitutional/ The legal framework does not do statutory/legal framework should this. There are financial and other ensure that it has available constraints in making available sufficient human, material, and sufficient resources. The recent monetary resources. (INTOSAI Country Financial Accountability Lima Declaration Section 7) Assessment found that "Like any other government department, the Auditor General's Department faces resource constraints." 24. A fixed term must be long The Constitution allows the Auditor Legislation should specify the enough to survive changes of General to serve in office during a grounds upon which removal government and avoid pressures sustained period of good behavior. might be considered and the concerning re-appointment Removal can take place upon an process by which any alleged which create obstructions in the address of Parliament. infringement might be judged. term of office of the SAI office bearer. A single non-renewable Non-renewable appointment of a Clausesalongthefollowinglines appointment is preferable professionally qualified accountant might be considered: to avoid those pressures. for a fixed term of 10 or more years is (INTOSAI Working Group on SAI preferred for reasons of competence (a) The Auditor General may be Independence, 2004) and independence. removed from office only by the provisions of this More specific removal provisions are section. needed to prevent potential political (b) The Auditor General may be pressures. removed from office only on the grounds of inability to discharge the functions of his/her office (whether arising from infirmity of body or mind or any other 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT cause whatsoever) or for misconduct. (c) The Auditor General shall be removed from office by the President if the question of removal from office has been referred to a Parliamentary tribunalappointedunderthis article and the tribunal has recommended to Parliament that the Auditor General ought to be removed from officeforinabilityasaforesaid or for misconduct and the Parliament has endorsed the recommendation. 25. The legislation should The Auditor General has statutory ensure that is there is a responsibilities to report to the sufficiently broad mandate Parliament on his/her audits, under including financial and thestatute,withaviewtoimproving performance audit, and allow public sector administration and full discretion in the discharge accountability. The legislation does of SAI functions. (INTOSAI not specifically state that the AG Lima Declaration Section 4) Department is free to publish and disseminate its reports once they havebeenformallytabledasrequired by law, but the AG Department could do so, if it thinks fit. 26 The legislation should There are financial and other Greater autonomy should be ensure that the SAI Head is free constraints in making available given to the AG. Suitable clauses to determine the organization sufficient resources. The AG are as follows: of the audit office, including Department is under the The Auditor General shall personnel and contract administrative control of other employ such persons as management systems and agencies and has no legal authority, are necessary for efficiently material acquisition/disposal for example, to transfer staff from and effectively executing policies and procedures. The one station to another, to take the AG functions, duties, SAI Head should be able to disciplinary action, or to suspend a and powers. Within the determine personnel policies, salary increment, framework of the budget including the selection, The AG budget in Sri Lanka is not approvedfortheOfficeofthe recruitment, training, subject to scrutiny or approval by Auditor General, the Auditor remuneration, promotion, a special legislative committee, nor General has the authority discipline, and dismissal of are there any safeguards against to assess staffing needs staff and contract personnel. executive control over this budget. and appoint, train, assign, (INTOSAI Lima Declaration Similar to the problems faced by pay, promote, reward, and Section 6) other government departments, dismiss staff members. the AG Department has budget Employees in the Office of 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 STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT cuts imposed on it by the General the Auditor General shall Treasury and often encounters delays be considered to be in an in obtaining the approved funds. In excepted service. They are these circumstances, the AG is in no not part of the public service position to meet SAI international nor are they subject to any standards. of the rules, regulations, or procedures promulgated by Public Service Commission. The Auditor General shall establishjobdescriptionswith clearlydefinedresponsibilities, qualifications, and performance expectations for all positions in the Audit Office. The staff of the Office of the Auditor General shall be managed to ensure that: (a) there is fair, open, and equal treatment of individuals applying for or being offered positions; (b) staff appointments and advancement decisions are made on the qualification and merit of all individuals eligible for consideration ;and (c) disciplinary, removal, or other adverse actions are done in accordance with clear, established and consistently applied criteria and processes. The staff shall be appointed at such remuneration and on such other terms and conditions as the Auditor General may decide. In so deciding,theAuditorGeneralshall consider the terms and conditions determined by the Public Services Commission. 27. There should be unrestricted The Constitution provides for this. access to information. (INTOSAI Lima Declaration Section 10) 28. The legislation should give The Constitution provides for this. the SAI the right and obligation 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 IMPROVEMENT toreportontheirwork.(INTOSAI Lima Declaration Section 16) The legislation should give the SAI the right and obligation to report effectively on its work, andthefreedomtodecideonthe content and timing of its reports and to publish and disseminate them expeditiously. (INTOSAI Lima Declaration Section 17) 29. To the extent the findings of The Constitution does not give the Improve the audit and reporting theSAIfindingsarenotdelivered AG Department powers to enforce methodologies of the AG as legally valid and enforceable findings, and the general standard of Department. judgments, the Supreme Audit response to audit findings is not at a Institution shall be empowered satisfactory level. The SAI does not Introduce practice management to approach the authority which have the status nor the resources or systems which include is responsible for taking the methods to gain compliance with its audit recommendation necessary measures and require recommendations. tracking systems through to the accountable party to accept implementation (e.g. ADM Plus responsibility. (Lima Declaration In the absence of much stronger as used by the Pakistan SAI). Section 11.2) remedial actions by government agencies on the findings of the audit, Amend the standing orders and the history of repetitive reports of the Parliamentary Powers and misdemeanors will continue and Privileges Act, which govern the PFM in Sri Lanka will not improve to rules of procedure of Parliament, a satisfactory level. to allow for greater public access to the hearings of the There should be a greater willingness Committee on Public Accounts by the executive branch to follow and Committee on Public up and implement the SAI findings Enterprises. (which might require departmental Audit Committees to set a Build awareness, information stronger performance management sharing, and research capacity approach). Also there needs to be ofthetwooversightcommittees a much stronger interaction between and the proposed new standing the SAI and the legislative oversight committee on the budget in the committees to follow up SAI reports legislature. more systematically, and cause system improvements for the overall PFM structures in Sri Lanka. This may require support from donors for strengthening the Committee processes. 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 IMPROVEMENT (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 30. The syllabus of the Thequalityofaccountingeducational Introduce a better training governmentandSAIaccounting and training arrangements in institution that meets the schools should cover all areas the government schools is not established international recommended by IFAC-issued satisfactory as it does not meet standards. IES. the needs of modern accounting and financial management. AG Draft legislation has been Department staff has good basic prepared to establish a Public accounting qualifications, but a Sector Professional Accountancy dearth of required auditing expertise Institute which merges two has been highlighted in the current public sector training Institutional Development Plan. institutes (Institute of Public Finance and Development Accountancy and the Institute of Government Accounts and Finance). The assistance of the UK CIPFA has been sought to support a relevant professional diploma. The new Institute is envisaged to secure membership of IFAC within a five- to ten-year period. Provide for adequate funding of the Institute. Theideaofcreatinganinstitution teaching at international levels is supported by proposed World Bank funding but further funding may be needed. Use the Institutional Development Plan to fill current short-term gaps in skills. The implementation of the IDP would strengthen the training programs in the shorter term. 31. There should be adequate Recruitment requires an accounting Introduce a greater element professional criteria for degree. Promotion is based on of merit into the promotion recruitment and promotion seniority. process along with tests for of auditors. (INTOSAI Lima competencies as levels for 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 IMPROVEMENT Declaration Section 14 and promotion. There has been INTOSAI Auditing Standards an intention to introduce 2.1.4) examinations to act as tests for promotion at two levels, but no action has been taken. (7) Training 32. The SAI should operate The AG Department does not have Conduct a skill analysis program a continuing professional basic facilities for training, research based on international standards development program for and development. A proper needs- for competencies. its professional personnel. based approach is required to (INTOSAI Lima Declaration support the introduction of an audit Use the IDP to strengthen the Section 14 and INTOSAI methodology, and international internal AG Department training Auditing Standards 2.1.5- accounting and auditing standards. facilities. 2.1.12) (8) Audit Competence 33. The SAI should equip itself Theauditmethodologyforthegeneral Implement the Institutional withthefullrangeofup-to-date budgetsectorisaimedatfindingnon- Development Plan. Systems, auditmethodologies,including compliant transactions, not attesting methodologies, and facilities need systems-based techniques, to the reliability of a specified system to be updated in accordance with analytical review methods, of internal control and reporting. the Institutional Development statistical sampling, and audit Plan to enable modern audits to of automated information The AG Department's basic audit be undertaken by the staff. systems. (INTOSAI Auditing approach is pivoted on compliance Standards 2.2.37) testing of a 3-month selection of Develop a specialist forensic audit transactions. There is no intention capability. to form an opinion about the validity of the annual expenditure as a whole. Develop a specialist IT audit The intention of the testing is to help capability. toidentifypossibleoractualinstances of noncompliance with those laws Change the audit orientation and regulations which provide a from transaction to risk-based legal framework within which the systems. The audit should not entity conducts its affairs. It is only aim to correct instances of incidental that this also can provide misuse of government funds; some confidence about the accuracy it should be aimed at reporting of the financial accounts, but this on the adequacy of the system can only be done if the transactions of control, then recommending are selected on a systematic sample action to correct the system. It is basis in accordance with the relevant the responsibility of the managers ISA. to correct instances of misuse of government funds. There is no concept of audit confidencethat is, the confidence Audits should be aimed at level that is implicit in the audit identifying the inadequate 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 IMPROVEMENT opinion and which underpins the behavior of managers in level and extent of audit testing applying the system of controls required in order to express that rather than the inadequate opinion. behaviors of individual officers in managing specific transactions. Withoutsubstantiallydifferentaudit Both approaches involve the methodologies and substantially examination of transactions more IT support, the SAI will not but the systems approach be able to take full advantage of looks more thoroughly at each its staff's knowledge of accounting transaction selected on the to conduct valid certification and basis of materiality in order to systems-based audits. form conclusions about the system including the role of the An audit methodology should managers in that system. clearly outline: Aim to equip all audit staff with audit confidence level (usually laptop computers to enable the 95% confidence); introduction of electronic work minimum requirements for papers. An electronic work paper an audit, including how audit package would: planning, audit work papers, and the audit summary is enable standardization of documented; all planning and reporting how audit materiality is documents and audit work determined and what is an papers, acceptable level of audit risk ensure work papers are andconfidence,alongwithhow reviewed properly and these factors are documented; consistently, how to develop an appropriate eliminate the need to create mix of audit work, in order to hard-copy files, adequately address the audit provide for nationwide risks identified. electronic storage and retrieval of audit files, The mix of audit work would enable planning and work include: papers to be rolled forward documentation of key from year to year, accounting and management enable the assimilation information systems; of sector-wise issues theidentificationofkeycontrols collection and reporting in and around those systems, where appropriate, and with audit walkthrough tests to support review action. verify the systems and controls in operation; evaluation of the information systems control environment; overall assessment of the control environment; combination of audit compliance and substantive 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 IMPROVEMENT testing (key item testing, analytical review, and sampling) procedures that are necessary in order to form a view on key account balances and transactions; how audit errors are recorded, summarized and evaluated against audit materiality. (9) Quality Assurance 34. The SAI should have the There is no quality assurance An Audit Manual prepared in quality assurance programs program. Audit supervision is accordance with the methods in place to ensure audit expected to ensure quality. Currently described in the IDP is needed. A performance and results. however, the audit is not timely, manual prepared by consultants Written quality control many findings lack materiality, during the 1990s lacked policies and procedures should and the audit programs, which acceptanceintheAGDepartment. be communicated to the focus on compliance and financial The new manual should be audit personnel in a manner (attestation) audits, are not on par prepared and written by the AG that provides reasonable with international best practices. staff, in full consultation with assurance that the policies and external consultants who will be procedures are understood and Therehasbeensomeimprovementin providing guidance and support implemented. (ISA 220.7) the recent past. A quality assurance only, and not actually writing the program would help to implement manual. an adequate standard across the board. There is no Audit Manual. Such a manual is needed to outline the single layer of supervisory review to be undertaken on audits, prescribe what has to be covered by this review, and set down the supporting quality assurance program. 35. Quality control procedures The AG Department does apply should cover: quality control through audit supervisors. Direction. Assistants with delegated work need appropriate direction. Supervision. the functions that must be covered during the audit include (a) monitoring progress of the audit, (b) becoming informedofandaddressing significant accounting and 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 IMPROVEMENT auditing issues, and (c) resolving any differences of professional judgment between personnel and considering the level of consultation that is appropriate. Review. The work performed by each assistant needs to be reviewed by personnel of at least equal competence. (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 36. The planning process Most of the AG audits are aimed The new Audit Methodology should collect information at identifying regulatory breaches. Manual should introduce about the audited entity and The reports of these audits are of more comprehensive planning its organization in order to minimal assurance value to either requirements based on the specific identify important aspects thepreparersorusersofthefinancial objectives of the audits. of the environment in which reports, or wider stakeholders. Nor the audited entity operates; are they of much value to those develop an understanding of responsible for managing systems of the accountability relationships; internal control. determine whether appropriate action has been taken on Planning involves stating a number The audit methodology and previouslyreportedauditfindings of person-days for various areas supporting working papers should and recommendations; assess of audit examination. There can be more precisely defined in a risk; and determine materiality. also be some examination by audit manual of procedures. (IFAC ISA 300.6-300.9) supervisors of annual reports and other entity data to identify some particular areas of testing. Only the full financial attest audits provide any assurance value and utility. The work in these audits in the AG Department largely revolves around examining the compilation of the financial reports and substantively testing in order to form a view on the existence assertion. 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 IMPROVEMENT 37.Theplanningprocessshould Audit planning is not sufficiently identify the scope of the audit tailored to the audit client ­ that is, and specify the audit objectives there is no documented formality and the tests necessary to meet in the following points of an them. (ISA 300.10-300.12) assessment of the auditee's: management control environment accounting and management information systems key controls issues and risks size and scale of business and financial statements and key account balances. 38. The planning process This is not done. should 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 and weaknesses, and determine the approach to be adopted in the audit. (ISA 300.9) 39.Theplanningprocessshould This is done. highlight special problems foreseen when planning the audit. (ISA 300.10) 40.Theplanningprocessshould Budgets and schedules are prepared prepareabudgetandaschedule at a broad level. for the audit, and provide for appropriate documentation of the audit plan and for the proposed field work. (ISA 300.10) 41.Theplanningprocessshould This is done. identify staff requirements and a team for the audit. (ISA 300.11) 42.Theplanningprocessshould The type of audit-compliance is well familiarize the audited entity known to the auditee, so this is not about the scope, objectives, done. and the assessment criteria of 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 IMPROVEMENT the audit and discuss with them as necessary. (ISA 300.7) (2) Supervision 43. The process of supervision This is done. should ensure that the members of the audit team have a clear and consistent understanding of the audit plan. (INTOSAI Auditing Standards 3.2.3a) 44. The process of supervision Working paper practices were poor. should ensure that the audit is No working papers were signed-off carried out in accordance with as evidence of review. Generally the the auditing standards and supervision handled the preparation practices of the SAI. (INTOSAI of report paragraphs Auditing Standards 3.0.3b) 45. The process of supervision This is done. 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) 46. The process of supervision Mostly the audit evidence is should ensure that working containedintheoriginalvouchersand papers contain evidence supporting papers in the department. adequately supporting all They are not copied, documented, conclusions, recommendations, filed, and referenced. Mostly files and opinions. (INTOSAI relate to the audit findings that are Auditing Standards 3.0.3d) carried forward through to reporting Some brief review of working papers The process of supervision indicated that even where there were should ensure that the auditor manuals of audit procedures, working achieves the stated audit paper rules were not followed. objectives. (INTOSAI Auditing Standards 3.0.3e) Without a more comprehensively structured working paper system, The process of supervision the audit cannot attain the following should ensure that the audit normal audit objectives regarding the report includes the audit validity of transactions: conclusions, recommendations and opinions, as appropriate. Existence (INTOSAI Auditing Standards Measurement 3.0.3f) Completeness Measurement 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 IMPROVEMENT The process of supervision Presentation and Disclosure should ensure that the audit Regularity report includes the audit conclusions, recommendations and opinions, as appropriate. (INTOSAI Auditing Standards 3.0.3f) (3) Internal Controls 47. The auditor should obtain The general budget sector audits Introduce an updated Audit an understanding of the entity examine transactions against the Methodology Manual. and its environment, including rules established by the Financial its internal control, sufficient Regulations. Their reports therefore to identify and assess the risks indicate where controls have not been of material misstatement of the applied. They do not approach the financialstatementswhetherdue audit from the perspective of material tofraudorerror,andsufficientto misstatement of an accounting figure design and perform further audit but rather the failure of a transaction procedures. (ISA 315.2) to comply with the rules. Afterobtaininganunderstanding The effect of this approach is that of the accounting and internal there is no pressure on the system to control systems, the auditor improve as all of the effort goes into should obtain a sufficient argument about the transaction, not understanding of control the system of control. The 2003 AG activities to assess the risks Activity Report notes that past audit of material misstatement at reports had been merely post mortem the assertion level and to examinations often delayed from 5 to design further audit procedures 15 years, and that by and large the responsive to assessed risks. issues were not significant. (ISA 315.90) The AG intended to move toward a The auditor should document performance-based audit approach. in the audit working papers: This has involved supervisors looking (a) conclusions reached about for more significant issues to specify susceptibility to material forexaminationoftheirauditplanning. misstatement due to error or This was apparent in the study but to fraud; (b) the understanding be effective, the overall methodology obtained of the entity's needs to change and be supported by accounting and internal control a manual of audit procedures. systems;and(b)theassessment of control risk. (ISA 315.122- 123) Theauditorshouldperformtests of controls to obtain sufficient appropriate audit evidence that the controls were operating 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 IMPROVEMENT 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 management aware in writing, as soon as practical and at an appropriatelevelofresponsibility, of material weaknesses in the design or operation of the accounting and internal control systems that have come to the auditor's attention. (ISA 315.12) (4) Compliance with Laws 48. The auditor should obtain The AG Department uses most of its Introduce a system of a general understanding of the resources for this type of audit. It is recommendationsandmethodsto legal and regulatory framework an important issue as to whether or monitorthattherecommendations applicable to the entity and the not the audits are effective in dealing are implemented. Report on industry and how the entity is with instances of non-compliance. the process in the AG Activity complying with that framework. In other countries in South Asia, for Report. (ISA 250.15) example Pakistan, the audit reports log large numbers of transactions Introduce a system to ensure The auditor should perform for pursuit of recovery and these that 172 (3) of the Pradesiya Act testing and other procedures continue to be monitored until the (and any similar provisions in to help identify instances of matter is resolved, either by the other laws) are met effectively. non-compliance with those Public Accounts Committee or the Report on the process in the AG's laws and regulations where Auditor General. Activity Report. non-compliance should be considered when preparing In the local government area, the AG financial statements. (ISA doeshavethepowertodisallowitems 250.18-250.19) of the accounts that are contrary to law and surcharge the responsible Generally, management is officer. There was no indication that responsible for establishing this is done effectively. The 2003AG an effective system of internal Activity Report states that recoveries controls to ensure compliance of surcharges were small, with more with laws and regulations. In than half the outstanding surcharges designing steps and procedures uncollected for more than four years. 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 IMPROVEMENT 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 noncompliance. 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 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 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. (5) Evidence 49. When obtaining audit The relevant ISAs on evidence The AG Department should, as per evidence from tests of control, were not generally relevant to the ISA 600 (8), examine on a sample the auditor should consider the methodologyoftheauditsconducted basis some of the working papers sufficiency and appropriateness by the AG Department. It is likely ofthe`qualifiedauditors'employed of the audit evidence to support that they were used by the private to audit government bodies. ISA theassessedlevelofcontrolrisk. sector accounting firms that audited 600 (8) states: (ISA 500.10) the annual accounts of the public corporations, but this review did not "The principal auditor should When obtaining audit evidence have access to these working papers perform procedures to obtain from substantive procedures, because the AG Department did not sufficient appropriate audit the auditor should consider the have access. evidence that the work of the other sufficiency and appropriateness auditorisadequatefortheprincipal of audit evidence from such auditor's purposes, in the context procedures together with any of the specific assignment." 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 IMPROVEMENT evidence from tests of control to support financial statement assertions. (ISA 500.12) 50. When inventory is material These activities were undertaken. to the financial statements, 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 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 51.Inregularity(financial)audit, These appear to have been done for and in other types of audit when the audit of financial statements. 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 degree that a rational basis is obtained to express an opinion on the financial statements. The auditor should ascertain whether: financial statements are prepared in accordance with acceptable accounting standards; financial statements are presented with due consideration to the circumstances of the audited entity; 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 IMPROVEMENT sufficient disclosures are presented about various elements of financial statements; and the various elements of financial statements are properly evaluated, measured, and presented. (ISA 200.2-200.12) (7) Reporting on Financial Statements. 52. The auditor should provide By and large these requirements are The requirements of ISA 700 an opinion paragraph in the met. However, the audit scope and should be adopted in full audit report. (ISA 700.4) audit opinion paragraphs for the when the audit methodology Consolidated Financial Statements allows. It is apparent that the There should be a reference 2004 do not contain the degree of audit methodology used is not to the financial reporting detail set by ISA 700 in paragraphs 12 sufficiently precise to draw the framework used to prepare the to 15. This leaves some uncertainties audit conclusions that are needed financial statements (including as to the auditing standards used to follow the requirements of ISA identifying the country of for the work, and whether the audit 700 for the audit report. In the origin of the financial reporting provides a reasonable basis for the meantime the wording of the framework when the framework opinion, and that the audit was report should be in accord with used is not International planned and performed to obtain ISA 700 as far as is possible and Accounting Standards). (ISA reasonable assurance about whether the limitations should be set out 700.12-15) the financial statements are free of in specific terms at the relevant material misstatement. The scope part of the report. The opinion paragraph should statement notes the limitations contain an expression of opinion of staff, other resources, and time It would be preferable for the on the financial statements available. This would normally be audit opinion to make explicit stating the auditor's opinion read by a user of the accounts as an reference to the Cash Basis as to whether the financial indication that the audit opinion on ISPAS, Part I, as required by that statements give a true and fair the accounts is thereby qualified by standard if the accounts have view (or are presented fairly) the limitations on the work that has been prepared in accordance with in all material respects. (ISA been done as per ISA 700.36-37. the standard. Any exceptions can 700.17) be mentioned. The reference to the reporting framework used to prepare the accounts is by way of the notes to the financial statements and these are somewhat unclear as to whether Cash Basis IPSAS, Part I, has been fully adopted. For the audits of government business entities,thesampleofauditsexamined showed that the audit reports are in conformance with ISA 700. 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 IMPROVEMENT 53. The SAI should provide a This is done. The study reveals a Improve the effectiveness of detailed report amplifying the number of weaknesses in the success the audit report by stronger opinion in circumstances in of the present reporting system, enforcement of corporate which it has been unable to e.g. lack of depth, irrelevance, lack governance requirements through give an unqualified opinion. of brevity, etc. Although the AG the audit committees. Reports should be made where submits a supplementary report weaknesses exist in systems of in respect of statutory boards and financial control or accounting. corporations, no serious attempt (ISA 700.17) seems to have taken by the boards of such institutions for improving controls and management of resources. (8) Reporting on Fraud 54. The SAI should report Much of the AG Department work fraudulent practices or serious relates to these issues, but most irregularities discovered by the findings are not characterized as auditors. (INTOSAI Auditing fraudulent. Mostly they are classified Standards 4.0.7) ISA 240 as contentious; uneconomic; establishes standards and noncompliant; or lacking authority, provides guidance on the records, or verification. The2004 auditor's responsibility to AG Activity Report summarizes a consider fraud and error in an few instances of local government audit of financial statements. transactions considered to be The standard requires that, fraudulent. when planning and performing audit procedures and evaluating andreportingtheresultsthereof, the auditor considers the risk of material misstatements in the financial statements resulting from fraud or error. (9) Reporting on Compliance 55. With regard to regularity This procedure is followed. audits, the auditors prepare a written report, which may either be a part of the report on the financial statements, or a separate report, on the tests of compliance with applicable laws and regulations. (INTOSAI Auditing Standards 4.0.7) C O U N T R Y R E P O R T PAGE 79