Ensuring accountability, building public confidence
Our insights enable public institutions to make a meaningful impact in the lives of ordinary South Africans, use resources wisely and make decisions with integrity. By focusing on impact, our audits help shape public institutions that truly serves its people. Our manifesto for high impact states:
- We are practitioners in public sector accountability, transparency and integrity.
- Audit is not all we are; audit is what we do to collect, analyse and translate data into information, and information into impactful insights.
- Our work generates impactful insights; our influence translates insight into action.
- Action stimulates and shifts our clients towards a culture of accountability.
Understanding audits
Audit 101
What is an audit? Think of an audit as a health check for an organisation's financial and performance records. It's an independent examination that ensures financial statements are accurate and that entities are achieving their objectives efficiently. For the AGSA, this means assessing whether government departments and public entities are managing public resources responsibly.
Auditing terms you should know: Navigating the world of audits introduces you to some specific terminology.
Here's a quick glossary:
Clean audit outcome:
Financial statements are free from material misstatements, and there's no significant non-compliance with legislation.
Financially unqualified audit opinion:
Financial statements are accurate, but there might be issues with performance reporting or compliance.
Qualified audit opinion:
Financial statements have specific inaccuracies, or there's insufficient evidence to confirm their accuracy.
Adverse audit opinion:
Financial statements contain significant misstatements affecting their overall reliability.
Disclaimer of audit opinion:
Auditors can't express an opinion due to limitations in the audit scope or unresolved issues.
Audit process
| What do auditors do? | Why do they do it? |
|---|---|
| Agree terms of engagement | Terms of engagement are communicated & agreed to ensure a clear understanding of responsibilities of the parties, the objectives of the audit, access to information and the reports to be provided. |
| Plan the audit | An understanding of the auditee is obtained for risk assessment purposes & an audit plan is prepared. |
| Perform risk assessment procedures | A risk assessment is performed to determine the number and type of procedures to perform. |
| What do auditors do? | Why do they do it? |
|---|---|
| Perform procedures in terms of risk assessment | Procedures are performed to obtain evidence that the financial statements & annual performance report do not contain material misstatements and that key legislation has been complied with. |
| What do auditors do? | Why do they do it? |
|---|---|
| Prepare management report (not published) | The report is only provided to the management of the auditee and the executive authority at the end of the audit. It details the findings from procedures performed, identifies the root causes of these findings and makes recommendations for improvement. |
| Prepare audit report (not published) | The report is published in the auditees’s annual report. It informs those responsible for oversight, the public and others of material misstatements in the financial statements, material findings on the usefulness and reliability of the performance report, material non-compliance with key legislation in specific focus areas, and the deficiencies in internal control that were identified during the audit. |
The public sector auditor assesses the stewardship of public funds, implementation of government policies and compliance with key legislation in objective manner.
The scope of the annual audit performed for each auditee is prescribed in the Public Audit Act and the general notice issued in terms thereof. It includes the following:
- Providing assurance that the financial statements are free from misstatements that will affect the users of the financial statements
- Reporting on the usefulness and reliability of the information in the annual performance report
- Reporting on material non-compliance with key legislation
- Identifying the key internal control deficiencies that should be addressed to achieve a clean audit
Performance audits may also be performed to determine whether resources have been procured economically and are used effectively and efficiently.
Due to the test nature and other inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some, even material, misstatements in reported information may not be detected, and the completeness and the accuracy of the information reported are not guaranteed. Due to the focus on specific areas in key legislation, the audit does not provide assurance that all applicable legislation has been complied with. Although possible fraud may be identified during the audit, this is not the main purpose of the audit. The audit does not provide assurance that service delivery has been achieved, only that the annual performance report is useful and reliable.
A clean audit is the highest level of assurance an institution can receive from the Auditor-General of South Africa. It indicates that an institution has demonstrated strong financial management, credible reporting and compliance with key legislation.
When an auditee receives a clean audit, it means the auditor-general issued a financially unqualified audit opinion with no findings. In practical terms, this means three important things were achieved during the audit process. First, the institution produced financial statements that are free from material misstatements, meaning there were no significant errors or omissions that could mislead users of the information. Second, the institution submitted performance reports that are reliable and useful, accurately showing what was planned and what was actually achieved. Third, the institution complied with the key laws and regulations that govern how public money and resources must be managed.
A clean audit shows that an institution has proper records, effective controls and disciplined management practices in place. These enable transparent reporting to oversight bodies, such as councils, legislatures and Parliament, as well as to the public. This transparency allows communities and decision-makers to assess how well an institution is performing and to take action where improvements are needed.
However, a clean audit does not automatically mean that service delivery is perfect. It does not guarantee that all community needs are met or that there are no service challenges. What it does mean is that the institution has a solid foundation for accountability and improvement, supported by accurate information and compliance with the rules.
Sustained clean audits are important because they reflect consistency in good governance. Over time, institutions that maintain clean audits are better positioned to plan effectively, manage resources responsibly and improve service delivery in ways that positively affect the lives of South Africans.
Matters reported by external and internal auditors should receive timeous management attention, internal controls should address the following key areas:
Leadership
- Establish a culture of honesty, ethical business practices and good governance
- Exercise oversight responsibility
- Ensure effective human resource practices
- Implement appropriate policies and procedures
- Approve and monitor the implementation of action plans to address internal control deficiencies
- Approve an appropriate information technology governance framework
Financial and performance management
- Ensure proper record keeping of all transactions
- Maintain effective controls over daily and monthly processing and reconciling of transactions
- Produce regular, accurate and complete financial and performance (service delivery) reports
- Review and monitor compliance with applicable legislation
- Design and implement formal controls to mitigate information technology risks
Governance
- Ensure that risks are periodically identified, assessed and effectively mitigated
- Maintain an adequately resourced and functioning internal audit unit
- Maintain an audit committee that performs its legislated duties and promote accountability and service delivery
What is a material irregularity?
When government uses public money and resources, it must do so responsibly and in line with the law. A material irregularity is a serious problem identified by the auditor-general during an audit that shows this is not happening.
In everyday terms, a material irregularity is not just a mistake or minor non-compliance. It is a matter that has caused, or could cause, real harm to the public, government institutions or service delivery.
The Public Audit Act defines a material irregularity as non-compliance with legislation, fraud, theft or a breach of duty that results in, or is likely to result in:
- a significant financial loss,
- the loss or misuse of important public resources, or
- serious harm to a public institution or the general public.
What does this mean in practice?
A material irregularity may happen when:
- public money is spent but no service or value is received,
- essential assets, such as equipment or infrastructure, are lost, damaged or left unused,
- decisions are made that put communities at risk or disrupt basic services,
- officials fail to act in the best interests of the institution they serve.
Not every issue found during an audit is a material irregularity. The auditor-general focuses on matters that are serious enough to affect service delivery, public trust or the ability of an institution to do its job.
Why are material irregularities important?
Material irregularities help shine a light on the most serious accountability failures in the public sector. When one is identified:
- the accounting officer or authority is formally notified,
- they are required to take action to stop the problem, fix it and prevent it from happening again,
- losses must be recovered where possible, and
- steps must be taken against those responsible.
If appropriate action is not taken, the auditor-general has powers under the Public Audit Act to take further steps.
By identifying and reporting on material irregularities, the auditor-general helps protect public resources, strengthen accountability and ensure that government works better for all South Africans.
Audit terminology
The three aspects we audit
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The financial statements submitted for auditing must be free from material misstatements. Misstatements refer to incorrect or omitted information in the financial statements. Examples include the incorrect or incomplete classification of transactions, or incorrect values placed on assets, liabilities or financial obligations and commitments.
The objective of an audit of financial statements is to express an audit opinion on whether the financial statements fairly present the financial position of auditees at financial year-end and the results of their operations for that financial year.
We can express one of the following audit opinions:
- Clean audit outcome:
The financial statements are free from material misstatements (in other words, a financially unqualified audit opinion) and there are no material findings on reporting on performance objectives or non-compliance with legislation. - Financially unqualified audit opinion:
The financial statements contain no material misstatements. Unless we express a clean audit outcome, findings have been raised on either reporting on predetermined objectives or non-compliance with legislation, or both these aspects. - Qualified audit opinion:
The financial statements contain material misstatements in specific amounts, or there is insufficient evidence for us to conclude that specific amounts included in the financial statements are not materially misstated. - Adverse audit opinion:
The financial statements contain material misstatements that are not confined to specific amounts, or the misstatements represent a substantial portion of the financial statements. - Disclaimer of audit opinion:
The auditee provided insufficient evidence in the form of documentation on which to base an audit opinion. The lack of sufficient evidence is not confined to specific amounts, or represents a substantial portion of the information contained in the financial statements.
Apart from auditing the financial statements, our other reporting responsibilities include auditing auditees’ reporting on their predetermined objectives and auditing auditees’ compliance with legislation.
Legislation requires auditees to report against their predetermined objectives and to submit such annual performance reports for auditing. The objective of our audit of predetermined objectives is to determine whether the reported performance against auditees’ predetermined objectives in the annual performance report is useful and reliable in all material respects, based on predetermined criteria. This means that the reported performance information must be valid, accurate and complete.
Since the 2005-06 financial year, we have been phasing in the auditing of predetermined objectives and explaining to leaders within all spheres of government the importance of lending credibility to published service delivery information through the auditing thereof. Since the 2009-10 financial year, we have included a separate audit conclusion, based on the results of the audit on predetermined objectives, in management reports. However, these conclusions have not yet been elevated to the level of the audit report.
Legislation sets out the activities that auditees are charged with in serving the citizens and stipulate any limits or restrictions on such activities, the overall objectives to be achieved, and how due process rights of individual citizens are to be protected. Auditees are subject to legislation such as the Municipal Finance Management Act and the Municipal Systems Act, of which the objectives are proper financial management and performance management, transparency, accountability, stewardship and good governance.
The Public Audit Act requires us to audit compliance with legislation applicable to financial matters, financial management and other related matters each year. Material instances of non-compliance are reported in the audit report. To enhance accountability, auditees must identify and fully disclose any unauthorised, irregular as well as fruitless and wasteful expenditure incurred. In most part, such expenditure is incurred as a result of non-compliance with legislation.
Civil society organisations
Mandate: The Auditor-General of South Africa (AGSA) is the supreme audit institution (SAI) of South Africa, established in 1911. The AGSA is the only institution that is mandated by the Constitution to audit and report on how the government is spending the South African taxpayers’ money.
Performance auditing
The functions of the Auditor-General are reflected in section 188 of the Constitution and further regulated in the Public Audit Act, 2004 (PAA). Section 188 of the Constitution, 1996 states that the Auditor-General must audit and report on the accounts, financial statements and financial management of all national and provincial state departments and administrations and all municipalities. The mandate for Performance Auditing in South Africa was established in the Exchequer and Audit Act 1975, two years prior to the establishment of the same practice in Canada. However, it was only during 1986 that the first performance audit was carried out in South Africa at the then Department of Education and Training. The mandate to carry out and report on performance audits was further strengthened by means of the Auditor-General Acts of 1989 and 1995.
An independent auditing process to evaluate the measures instituted by management to ensure that allocated resources are procured economically and utilised efficiently and effectively and, if necessary to report thereon.
Performance auditing encourages learning and change within the public sector by providing new information and drawing attention to various challenges. It contributes to improvement and reform in public administration, providing the government with recommendations based on independent analysis. Thus, it adds value to the traditional functions of supreme audit institutions.
Performance auditing plays an important role in keeping the legislative well informed about governmental actions and the outcome of its own decisions. It increases public transparency and accountability, providing objective and reliable information on how public service perform.