A ministry's accounts show that ₦2 billion was paid for a road that has not been built. A year later the Auditor-General's report to the National Assembly lists the payment as an unsupported expenditure. The same money, spent in a private company, would be of concern only to shareholders.
In government, the money is the public's, so the audit asks more questions: was the money spent for the purpose the law gave it, was the right procedure followed, and did the public get value?
This topic covers the principles of public sector audit, how it differs from private sector audit, who audits government in Nigeria, the three types of public sector audit and the special risks. A full study of public sector accounting follows in the separate Public Sector Accounting and Finance paper.
In 30 seconds
Same principles: an independent audit under the International Standards on Auditing is performed in the same way for a public body as for a company, but the entity changes the risk and the approach. Auditors: usually a supreme audit institution such as the Auditor-General, which may or may not follow the ISAs and may or may not be independent in the full sense of the ethical code.
Differences: accountability for public money, legality and regularity, value for money, reporting to the legislature, political context. Types: financial, compliance and performance audit.
Key terms in plain English
| Term | What it means |
|---|---|
| Supreme audit institution | The national body that audits government accounts |
| Auditor-General | The constitutional officer who audits public accounts |
| Compliance audit | An audit of legality and regularity of spending |
| Performance audit | An audit of value for money |
| IPSAS | International Public Sector Accounting Standards |
| Ghost worker | A name on the payroll of a person who does not work for the entity |
Syllabus check
This topic is in syllabus area A, introduction to assurance, legal and regulatory frameworks, and audit process (20% of marks). It covers:
- the peculiarities of public sector audit
- value for money and performance audit
- the audit of not-for-profit and public bodies
CAMA 2020 and the public sector
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 404(1) | Auditors of a company report to its members | State-owned companies are audited as companies, with the state as member |
| s. 403 | Disqualification of persons connected with the company from acting as auditor | Independence applies to state-owned companies too |
| s. 407(3) | Right of access to books, accounts and vouchers | Access is a condition of all audits |
The rules in more depth
The same principles, a different entity
The principles of an independent audit of a public sector entity under the International Standards on Auditing (ISAs) are the same as for any other audit. The main difference is the nature of the entity audited, which affects audit risk and the audit approach. Many countries set up quasi-autonomous non-governmental organisations, called QUANGOs, to audit public sector entities.
QUANGOs may or may not follow the ISAs. May or may not be independent in the full sense of the International Federation of Accountants or the Institute of Chartered Accountants of Nigeria code of ethics. Public sector accounting and audit is studied in more detail in the Public Sector Accounting and Finance paper.
Who audits the public sector in Nigeria
In Nigeria the Auditor-General for the Federation audits the public accounts of the Federation and of all offices, courts, authorities and agencies of the Federation, and reports to the National Assembly (sections 85 and 86 of the Constitution of the Federal Republic of Nigeria 1999). Each state has an Auditor-General for the state (sections 125 and 126), who reports to the House of Assembly.
The constitution is meant to protect the independence of these offices, so that the Auditor-General is not directed or controlled by any other authority in carrying out the audit. The legislature's Public Accounts Committee examines the reports and calls officials to answer.
Firms of chartered accountants may also be engaged to audit statutory corporations, or to help the Auditor-General, and when they do they follow the ISAs and the code of ethics.
Standards for public sector auditors
The International Organisation of Supreme Audit Institutions (INTOSAI) issues the International Standards of Supreme Audit Institutions (ISSAIs) for the audit of government bodies, and these are based on the ISAs. International Public Sector Accounting Standards (IPSAS) set the reporting framework for government financial statements.
Local rules also matter: Financial Regulations, the Fiscal Responsibility Act 2007 and the Public Procurement Act 2007 set the rules that public officers must follow and that the auditor tests.
How public sector audit differs from private sector audit
| Point | Private sector | Public sector |
|---|---|---|
| Objective of the entity | Profit for shareholders | Service to the public within a budget |
| To whom the audit is accountable | Shareholders | The legislature and, through it, the public |
| Auditor | A firm appointed by the shareholders | Usually a supreme audit institution or its agents, appointed under the constitution or statute |
| Scope | Financial statements: true and fair view | Financial statements, plus legality and regularity of spending and value for money |
| Main concern | Fair presentation | Accountability, probity, compliance with the budget and the law, and waste |
| Reporting | Report to members, management letter | Report to the legislature, often public, with named findings and recommendations |
| Environment | Market | Political, with budgets, appropriation laws and public scrutiny |
| Risks | Misstatement, fraud | Misuse of funds, corruption, bribery in procurement, ghost workers, unsupported payments, off-budget spending |
The three types of public sector audit
- Financial audit: an opinion on whether the financial statements of the entity are prepared in line with the framework, such as IPSAS, and are free of material misstatement.
- Compliance audit (regularity and legality): whether the money was spent for the purposes intended by the legislature, with proper authority, following the financial regulations, the appropriation law and the procurement rules.
- Performance audit (value for money): whether public money was used with economy, efficiency and effectiveness, as set out in the topic on operational and other internal audit assignments.
Special risks and procedures
- Budget and appropriation: compare actual spending with the approved budget and look for spending above or outside the appropriation.
- Procurement: test tendering, award, contract variations, payment against work done and certification of work.
- Payroll: check for ghost workers and unauthorised allowances against staff records.
- Revenue: test that revenue due to government was collected and paid into the right account, and not retained by agencies.
- Cash and bank: confirm balances and look for unreconciled accounts, since many government bodies hold many accounts.
- Fixed assets: existence and ownership of land, buildings and vehicles, which are often poorly recorded.
- Fraud and corruption: report suspected offences to the proper authorities and the legislature.
Independence and ethics in public sector audit
The independence of a public sector auditor depends on the constitution and the law: security of tenure, the right to decide what to audit, access to all records and freedom to report. Political pressure and a lack of funds are the main threats. The ethical principles are the same as for any accountant, and the public interest is central because the money belongs to the public.
A public sector auditor who finds evidence of crime reports it as the law requires.
Worked examples
Example 1: which audit? The auditor checks whether a ministry spent ₦500 million on the project named in the appropriation law, with proper approval.
- That is a compliance audit: regularity and legality.
- A financial audit would test the figures, and a performance audit would ask about value for money.
Example 2: ghost workers. The payroll of an agency has 1,200 names, but only 950 people were seen at a headcount.
- 250 may be ghost workers.
- The auditor matches payroll to personnel records, bank accounts and the headcount, and reports the findings.
Example 3: a firm in the public sector. A firm of chartered accountants is appointed to audit a state-owned company.
- It follows the ISAs and the ICAN code of ethics.
- It also considers the legal rules for the corporation and reports to the state as the law requires.
Example 4: independence. The Auditor-General is told by the head of government that a report should be softened.
- The constitution protects the Auditor-General from direction or control by any other authority.
- The report should go to the legislature as the evidence requires.
How to score full marks
- Say the principles are the same and the entity is different.
- Name the three types of audit and the extra scope.
- Link each risk to public money: procurement, payroll, revenue, assets.
- Mention reporting to the legislature and independence.
Common mistakes in the exam
- Saying public sector audit has no standards.
- Saying profit is the measure of public bodies.
- Leaving out legality and value for money.
- Ignoring the reporting line to the legislature.
Quick revision
- Same ISA principles; different entity and risk.
- Auditor-General reports to the legislature.
- Financial, compliance and performance audit.
- Risks: procurement, payroll, revenue, assets, off-budget spending.
Practice questions
Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.
Question 1. The Auditor-General for the Federation reports to the:
- National Assembly
- A private board
- The bank
- The press only
Show the answer
A. Under the Constitution.
Question 2. A performance audit tests:
- Value for money
- Only the accounts
- Only tax
- Only fees
Show the answer
A. Economy, efficiency and effectiveness.
Question 3. A compliance audit tests:
- Legality and regularity of spending
- Marketing
- Product quality
- Staff morale
Show the answer
A. Spending in line with the law and authority.
Question 4. The ISAs for public sector audits are:
- The same in principle
- Totally different
- Not allowed
- Used only for banks
Show the answer
A. The principles are the same.
Question 5. The standards issued by INTOSAI are called:
- ISSAIs
- ISAEs
- ISQMs
- IPSAS
Show the answer
A. International Standards of Supreme Audit Institutions.
Question 6. A major public sector risk is:
- Ghost workers
- Share dividends
- Rights issues
- Hedging
Show the answer
A. Payroll fraud.
Question 7. The main concern of public sector audit is:
- Accountability for public money
- Profit
- Share price
- Marketing
Show the answer
A. The money belongs to the public.
Question 8. Public sector accounts are commonly prepared under:
- IPSAS
- Only tax law
- Only CAMA
- No standards
Show the answer
A. International Public Sector Accounting Standards.
Question 9. A threat to a public sector auditor's independence is:
- Political pressure
- Higher fees
- A new building
- A holiday
Show the answer
A. Political pressure and lack of funds.
Question 10. The legislative committee that examines audit reports is the:
- Public Accounts Committee
- Sports Committee
- Fashion Committee
- Fees Committee
Show the answer
A. The Public Accounts Committee.
Question 11 (10 marks). Explain how the audit of a public sector entity differs from the audit of a private company. (8 marks)
Question 12 (10 marks). Describe the three types of public sector audit. (6 marks)
Question 13 (10 marks). Identify six risks that an auditor of a government agency should consider and a procedure for each. (6 marks)
Model answers
Show the model answer to Question 11
Objective: service v profit; accountable to legislature v shareholders; auditor is a supreme audit institution v appointed firm; scope includes legality, regularity and value for money; reporting to the legislature, often public; political environment; risks of misuse of funds and corruption. (1 each, to 8)
Show the model answer to Question 12
Financial audit: opinion on statements under IPSAS. (2) Compliance audit: legality and regularity of spending. (2) Performance audit: economy, efficiency and effectiveness. (2)
Show the model answer to Question 13
Budget overspending (compare with appropriation); procurement irregularities (test tendering); ghost workers (match payroll to records); revenue leakage (trace collection); unreconciled bank accounts (confirm and reconcile); fixed assets unrecorded (verify existence). (1 each)
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