Accounting: Public Sector Auditing
Judge Learned Hand, in discussing "degree of care" inconnection with the standard by which a prudent person is to beheld, said this: "The degree of care demanded of a person by anoccasion is the result of three factors: the likelihood that hisconduct will injure others, taken with the seriousness of theinjury if it happens, and balanced against the interest which hemust sacrifice to avoid the risk." Discuss how Judge Hand’sstatement might be applied to the responsibilities of management inestablishing an internal control system and to the role of aperformance auditor in assessing the control system. Please answerin own words. (See paragraphs below to get an idea) Note: Internalcontrol system is based on five components: control environment,risk assessment, control activities, information and communication,and monitoring.
The Control Environment
The control environment is the foundation for all the othercomponents of internal control. It provides the underlyingmanagerial discipline and structure for the other components tofunction effectively. It is the collective impact of the followingbroad underlying factors on the effectiveness of all other policiesand procedures developed to achieve the entity’s objectives: theintegrity and ethical values of the managers; the operating styleand attitude of the managers; the organizational structure andmethods of assigning authority and responsibility; the way in whichmanagers exercise control; the competence and reliability of thepeople in the organization; the influence of legislative bodies andaudit committees; and the influence of external entities, such ashigher level governments and credit-rating agencies.
In its Standards for Internal Control in the Federal Government,the Government Accountability Office says: “Policy makers andprogram managers are continually seeking ways to improveaccountability in achieving an entity’s mission. A key factor inimproving accountability in achieving an entity’s mission is toimplement an effective internal control system.” Internal controlstarts with the highest-ranking executive and extends through everymanagerial level. The governor, the mayor, the department heads,the division chiefs, and other managers create and sustain thecontrol environment in an organization. They set the tone regardingthe importance of internal controls. Managers who establish a goodcontrol environment send the message that internal controls are notonly an integral part of operations, but also that they apply toeveryone in the organization.
A performance auditor, therefore, should see whether goals andobjectives have been established, and whether they are in accordwith related laws and requirements set forth by higher levelfunding agencies.
As a performance auditor, you need to assess such factors as:whether the entity attempted to measure performance; whether theperformance indicators appeared to be appropriate to the entity;whether the reporting system provided accurate and timely results,and whether management responded effectively and in a timely mannerto the performance results.
As a performance auditor, you need to determine whether thepolicies, procedures and strategies adopted by management meetthese criteria. To do this, you need to review the laws,regulations and literature pertaining to the program you areauditing. You also need to see how management has assessed therisks and what procedures they have used to become aware of “bestpractices.”
As a performance auditor, you need to determine the nature ofthe quantitative and qualitative work standards established bymanagement. You also need to find out how the standards wereestablished, and whether they are revised to take advantage ofchanging technology and experience.
When you do a performance audit, you are a part of themonitoring process done through separate evaluations. When anauditor evaluates internal controls as part of attesting to anentity’s financial statements, that auditor is also part of themonitoring process.
Role of the performance auditor: Wheredoes the separate evaluation - the performance audit - fit intothis picture? The performance auditor will assess such matters as:(a) whether the unit supervisors are doing what they are supposedto do (that is, reviewing the completed check lists, making spotvisits, and sending out complaint reports in a timely manner); (b)whether managers get periodic reports showing numbers of completedinspections relative to plan and whether they act promptly in theevent of lagging inspection performance; and (c) whether there area sufficient number of supervisors to do the job.
Performance auditors also have a responsibility to report majorproblems promptly to the appropriate levels of management. Asdiscussed in Chapter 5, performance auditors need to establish aline of continuous communication with top management at the openingaudit conference. Formal procedures should also be established forreporting on actions taken by management to resolve the conditionsnoted in performance audit reports.
Auditors sometimes tend to over-emphasize the wrong controlcomponents under the premise that control activities (i.e.,policies and procedures) are the most critical elements of anorganization’s success. Policies and procedures are certainlyimportant. An effective performance auditor, however, ensures notonly that they exist, but also that they exist within theappropriate control environment and that they are followed by staffand not over-ridden by management.
