41432 The World Bank Government of Pakistan The World Bank Government of Pakistan ISBN No: 978-969-9150-00-5 South Asia Region Financial Management Unit May 2007 Report No. 39699-PK PAKISTAN PUBLIC SECTOR ACCOUNTING AND AUDITING A Comparison to International Standards Country Report THE WORLD BANK Government of Pakistan South Asia Region Financial Management Unit May 2007 A COMPARISON TO INTERNATIONAL STANDARDS ABBREVIATIONS AND ACRONYMS AATI Audit and Accounts Training Institute ADB Asian Development Bank ACCA Association of Chartered Certified Accountants, UK AGP Auditor General of Pakistan CGA Controller General of Accounts CFO Chief Financial Officer CFAO Chief Finance & Accounts Officer DAC Departmental Accounts Committee DAGP Department of the Auditor General FAPC Financial Audit Policy Committee FPSC Federal Public Service Commission FAM Financial Audit Manual IAASB International Auditing and Assurance Standards Board IAS International Accounting Standard ICAP Institute of Chartered Accountants of Pakistan IES International Education Standards for Professional Accountants IFAC International Federation of Accountants IFRS International Financial Reporting Standard INTOSAI International Organization of Supreme Audit Institutions IPSAS International Public Sector Accounting Standard IPSASB International Public Sector Accounting Standards Board ISA International Standard on Auditing NAM New Accounting Model PACT Program for Accountability and Transparency (UNDP) PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PIFRA Project for Improvement of Financial Reporting and Auditing PIPFA Pakistan Institute of Public Finance Accountants SAI Supreme Audit Institution SDAC Special Departmental Accounts Committee SOE State-Owned Enterprise UNDP United Nations Development Program COUNTRY REPORT PAGE iii A COMPARISON TO INTERNATIONAL STANDARDS ACKNOWLEDGMENTS This assessment of accounting and auditing standards and practices in the public sector is part of a review program in the South Asia Region. It has been carried out in active collaboration with the Government of Pakistan and various stakeholders, particularly the offices of the Auditor General and the Controller General of Accounts. Discussions were also held with senior officers of the Audit and Accounts Training Institute (AATI) and the Project for Improvement of Financial Reporting and Auditing (PIFRA). In particular, thefollowingindividualscontributedtheirvaluabletimeandexpertisetothisassessment: Mr.M.YounisKhan,AuditorGeneral Mr.IftikharAhmedKhan,ControllerGeneralofAccounts(retiredonJanuary27,2007) Mr.NaimatuallahAbid,ActingControllerGeneralofAccounts Mr.RashidAhmedSaleh,DeputyAuditorGeneral Mr.SikandarAzizEsker,DeputyAuditorGeneral Mr.ShaikhNaseerAhmad,DeputyAuditorGeneral,CommercialAudit Mr.MohsinKhan,DeputyAuditorGeneral Mr.ShabirAhmedDahar,DeputyControllerGeneralofAccounts Mr.MohammadIqbal,DirectorGeneral,Accounts Mr.MuhammadAyubKhanTareen,AccountantGeneralPakistanRevenues Mr.Jalal-udDin,DirectorGeneral Mr.ImranIqbal,DirectorGeneral,CivilAudit,Punjab Mr.JamilBhatti,DirectorGeneral,DistrictAudit,Punjab Mr.KhalidAliShah,DirectorGeneral,Training Mr.IftikharAhmad,DirectorGeneralDefenseAudit Mr.WaheedAhmadShad,DirectorGeneral,DroughtEmergencyReliefAssistanceAudit Mr.Baseer,DirectorGeneral,EarthquakeRehabilitationandReconstructionAuthorityAudit Mr.SharsharAhmadKhan,DirectorGeneralFederalAudit Mr.MuhammadJunaid,DirectorGeneralCommercialAudit,Lahore Mr.MushtaqAhmadMemon,DirectorGeneralCommercialAudit,Karachi Mr.ZiaAkhter,GeneralManager,ManagementInformationSystems Mr.AkmalMinallah,DirectorAudit,PIFRA Mr.MuhammadZaheer,Director,Accounts COUNTRY REPORT PAGE v A COMPARISON TO INTERNATIONAL STANDARDS Mr.AbdulBari,Director Dr.TalatImtiaz,Director,CommercialAudit Mr.Salah-udDin,Director,Administration,AATI Mr.YousafSatti,Director,DroughtEmergencyReliefAssistance,Audit Mr.HammadYounis,PIFRA Mr.Khan,PIFRA The review was conducted through a participatory process that involved the stakeholders listed above. The responses to the diagnostic questionnaires were especially useful, as were the reports, manuals, and information available from the PIFRA Project and recent World Bank assessments of public financial managementinPakistan. The World Bank Task Team was responsible for this report with general guidance from the advisors and the development partners who collaborated on this review program. The draft report developed after a consultative workshop in Islamabad on December 16, 2006 was provided to the Government for comment, andthecommentsmadehavebeenconsideredinthiscountryreport. TaskTeam P.K.Subramanian,LeadFinancialManagementSpecialist IsmailaB.Ceesay,SeniorFinancialManagementSpecialist/CountryFMCoordinator FurqanSaleem,FinancialManagementSpecialist RonaldPoints,LeadConsultant,Accounting MichaelJacobs,LeadConsultant,Auditing ReviewProgramAdvisors SimonBradbury,LoansDepartment,WorldBank DavidGoldsworthy,InternationalTechnicalCooperationProgram,UKNationalAuditOffice NoelHepworth,CharteredInstituteofPublicFinanceandAccountancy,London AbdulMudabbirKhan,FiscalAffairsDepartment,InternationalMonetaryFund IanMackintosh,Chairman,UKAccountingStandardsBoard Paul Sutcliffe, International Public Sector Accounting Standards Board, International Federation of Accountants DevelopmentPartnerCollaboratorsontheReviewProgram DavidBiggs,UKDepartmentforInternationalDevelopment KathleenMoktan,AsianDevelopmentBank PAGE vi COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS CONTENTS ExecutiveSummary..........................................................................................................ix 1. Introduction..................................................................................................................1 2.PublicSectorAccounting...............................................................................................3 A. InstitutionalFrameworkforPublicSectorAccounting...............................................................3 (1)AccountingLawsandRegulations ................................................................................................3 (2)EducationandTraining................................................................................................................4 (3)CodeofConduct.........................................................................................................................5 (4)PublicSectorAccountantArrangements.......................................................................................5 B. AccountingStandardsasPracticed ............................................................................................6 (1)SettingPublicSectorAccountingStandards ..................................................................................6 (2)PresentingFinancialReports........................................................................................................7 C.AssessmentofAccountingandAuditinginState-OwnedEnterprises.........................................9 3.PublicSectorAuditing .................................................................................................11 A. StatutoryFrameworkforPublicSectorAuditing .....................................................................11 (1)StatutoryFramework................................................................................................................12 (2)SettingAuditingStandards ........................................................................................................14 (3)CodeofEthics ..........................................................................................................................15 (4)EnsuringIndependence.............................................................................................................15 (5)AccountabilityintheSupremeAuditInstitution ..........................................................................18 (6)QualificationsandSkillsfortheAuditors.....................................................................................18 (7)Training ...................................................................................................................................18 (8)AuditorCompetence.................................................................................................................19 (9)QualityAssurance.....................................................................................................................19 B.AuditingStandardsasPracticed................................................................................................19 COUNTRY REPORT PAGE vii A COMPARISON TO INTERNATIONAL STANDARDS (1)AuditPlanning..........................................................................................................................20 (2)AuditSupervision......................................................................................................................21 (3)ReviewingInternalManagementControlProcedures...................................................................21 (4)AuditEvidence .........................................................................................................................21 (5)AnalyzingFinancialStatements.................................................................................................22 (6)ReportingonFinancialStatements.............................................................................................22 (7)ReportingonFraud ...................................................................................................................22 (8)ReportingonCompliance ..........................................................................................................23 4.ActionPlans..................................................................................................................24 AnnexA. MethodologyoftheAssessment......................................................................29 AnnexB. AccountingandAuditingStandards................................................................31 InternationalPublicSectorAccountingandEducationStandards.......................................................32 InternationalFinancialReportingStandardsandAccountingStandards .............................................32 INTOSAICodeofEthicsandAuditingStandards ...............................................................................34 InternationalStandardsonAuditing ................................................................................................38 AnnexC. PakistanAuditingandAccountingLegislation................................................39 AnnexD. BenefitsofAccrualAccounting.......................................................................42 SupplementalTableofStandardsandGaps.....................................................................46 I.PublicSectorAccounting..............................................................................................46 A.AssessmentoftheNationalPublicSectorAccountingEnvironment .........................................46 B.AssessmentofNationalPublicSectorAccountingStandards ....................................................49 C.AssessmentofAccountingandAuditinginState-OwnedEnterprises.......................................51 II.PublicSectorAuditing.................................................................................................53 A.AssessmentofthePublicSectorAuditingEnvironment............................................................53 B.AssessmentofPublicSectorAuditingStandardsandPractices..................................................66 PAGE viii COUNTRY REPORT EXECUTIVE SUMMARY 1. This assessment of public sector accounting and auditing is generally meant to help implement more effective public financial management (PFM) through better quality accounting and public audit processes in Pakistan and to provide greater stimulus for more cost-effective outcomes of government spending. More 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 against the internationally developed norms of financial reporting and auditing; (b) to assess the prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuing basisformeasuringimprovements. 2. Annex A explains the methodology used for the assessment. The desired actions indicated by this assessmentaresummarizedbelow. 3. Adopt International Public Sector Accounting Standards. The International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) issues International Public Sector Accounting Standards (IPSAS). Annex B gives a general description of IFAC and a listing of the IPSAS. At the present time, Pakistan does not comply with the IPSAS in preparing its annual accounts. The country's accounts do not provide a statement of cash receipts and payments which (a) recognizes all cash receipts, cash payments, and cash balances controlled by the entity; and (b) separately identifies payments made by third parties on behalf of the entity in accordance with paragraph 1.3.24 of this IPSAS. In addition, the country's accounts do not provide accounting policies and explanatory notes. A general program is underway for the adoption of accounts in a form specified in its New Accounting Model (NAM). Thisformofreportingwasdevelopedin1998andadoptedthethenproposedmodifiedcashbasisof accounting standard.1 The IPSASB has not approved this form of reporting as an official standard. It has established standards for accrual-based reporting and also the Cash Basis IPSAS together with guidance for transitiontoanaccrualbasisofaccounting. UndertheguidanceoftheAuditorGeneralofPakistan(AGP),the Controller General of Accounts (CGA) needs to restructure the present cash basis of financial reporting to conform fully to the Cash Basis IPSAS. While the IPSAS-2 reporting format has been designated by the AuditorGeneralasadditionalreportingrequirementsforthegovernment,itwouldbeappropriatetosetupa committee to review and steer the process to implement Cash Basis IPSAS on a continuous basis. With strengthened capacity effected by recruiting financial reporting specialists for the CGA administration, a 1 The modified cash basis of accounting helps in controlling not only cash but also commitments against budget, allowing the productionofastatementofreceiptsandpayments,astatementofassetsandliabilities,andacashflowstatement. COUNTRY REPORT PAGE ix A COMPARISON TO INTERNATIONAL STANDARDS transition to full Cash Basis IPSAS--while also adopting the Modified Cash Basis IPSAS as per the New Accounting Model (NAM) --can be smoothly accomplished, although the problem of consolidation of controlled entities would still persist. The Government noted in its response to the draft report that the requirements of the cash basis of accounting have been incorporated in the NAM Manual of Accounting Principles and its Procedures Manual and that the progressive implementation of the NAM will meet all the requirements. As a next step, a transitional path should be developed that presents the full accrual information to best serve the general financial statements as required under Section 7(b) of the CGA (Appointment, Functions and Powers) Ordinance 2001. Annex C includes the pertinent text of the Constitution and the AGP and CGA Ordinances. Benefits from adopting accrual reporting are set out in AnnexD. 4. A Supplementary Table of Standards and Gaps of this report provides a matrix detailing the current standards, the present position, and options for improvement. A summary of the accounting standards issues isshowninTableES1. Table ES1. Summary of Accounting Standards Issues in Pakistan Activity required to adopt Standard Current status international standards 1. Does the Public Sector Only partially. The notification of the A committee should be set up to review AccountingLawadoptIPSAS? adoption of the IPSAS-2 cash flow and steer the process to implement full reporting format as part of the overall cash basis of financial reporting on a reporting requirements of the continuous basis. The financial reporting government is a step in the right specialists should steer the process as key direction. members of the committee. Upon implementation of the Cash Basis IPSAS as additional reporting requirements of the government, the committee should gradually begin the transition to adopting accrual-based IPSAS. The PIFRA project is providing the necessary support for computerization of the accounts and capacitybuildingofthestaff. 2. Does the education and Partly. A comprehensive training I m p l e m e n t t h e t r a i n i n g a n d training of accountants strategy is directed toward the professionalization strategy, and include accordwithIES? professionalization of accounting staff IPSASinAATIsyllabi. throughIES-compliantqualifications. 3. Does the code of ethics Yes. The Auditor General has Thecodeofethicsshouldbemadeapartof m a t c h i n t e r n a t i o n a l adoptedtheINTOSAICodeofEthics. thestaffcontracts. standards? 4. Is there a body to prescribe Yes. The Constitution of Pakistan While IPSAS should be the core public sector accounting delineates the authority of the Auditor framework for financial reporting, with the standards? General of Pakistan to prescribe the PAGE x COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Activity required to adopt Standard Current status international standards form, principles, and methods of Modified Cash Basis under the NAM, accounts of the Federation and of the IAS/IFRS should be the approved standards Provinces with the approval of the foraccountingandfinancialreportingforall President. state-ownedenterprises. 5. Are financial statements To a limited extent. The Cash Basis There are 3 identified gaps: (1) Accounting presented in accord with the IPSAS for financial reporting is not yet policies and notes to the accounts are IPSAS? followed, nor is the accrual-based absent. (2) Third party transactions are not IPSAS. The CGA has the responsibility included. (3) Controlled entities' financial for preparing and maintaining the information is not consolidated. The accounts of the Federation, the functions of the chief financial officer and Provinces and district governments. internal auditing within each government TheCGAalsolaysdowntheprinciples entity should be strengthened to assist governing internal financial control withthereliabilityofthereporting. Duality but certain accounting offices still of control by provincial and national remain with the provincial governments over some offices under the governments. CGA authority needs to be resolved for coherent reporting and undiluted administration of the accounting and reportingfunction. 6. Is the statement of cash No. A basic statement of cash A statement of cash receipts and payments receipts and payments in receipts and payments is provided but as per the IPSAS Cash Basis can be IPSASform? thisinformationiscurrentlypresented prepared using existing information from in formats inconsistent with the the accounting records. This work IPSAS. requires some restructuring of the financial reportingformats. 7. Are accounting policies and No. Statements of accounting policies There is a need to state the accounting explanatorynotesrequired? are not provided in the budget or policies and the basis on which the accountsdocuments. accountsareprepared. 8. Are other disclosures in Partly. Financial statements are not It would be necessary to reduce the accordwithIPSAS? available within 6 months of the reporting lag, improve reconciliations, and reporting period; some items are not disclose further information (e.g., on the disclosed, and presentation does not treatmentofforeigncurrency). m e e t s o m e t r a n s p a r e n c y requirements. 9. Does the government No. A statement of cash receipt and payment issue a consolidated financial as per the Cash Basis IPSAS can be statement that consolidates prepared. Furtherstepswillbeneededto allcontrolledentities? consolidate the financial information of thecontrolledentities. COUNTRY REPORT PAGE xi A COMPARISON TO INTERNATIONAL STANDARDS 5. Implement the Financial Audit Manual that has been prepared using the IFAC-issued International Standards on Auditing (ISA), as well as of the International Organization of SupremeAuditInstitutions(INTOSAI).TheAuditorGeneralofPakistanhasapprovedthenewFinancial Audit Manual, which follows the modern risk-based certification audit approach. A program for implementation of this Manual is in preparation. The Auditor General has already formally adopted the INTOSAI Auditing Standards with minor modifications. The INTOSAI recognizes that its Auditing Standards are broad in nature and that the IFAC-issued International Standards on Auditing provide a further level of detail for public sector audit guidance. The INTOSAI is working with IFAC in the longer term to develop practice notes to assist with the implementation of each ISA in the public sector. Annex B lists the INTOSAI andIFACstandards. 6. Improve the jurisdiction, mandate, and functions of the Auditor General of Pakistan as envisaged in the Auditor General Ordinance 2001, and strengthen the reporting and disclosure processes of audit conclusions. Auditing practices need to be revised in line with the INTOSAI Auditing Standards, IFAC-issued International Standards on Auditing, and the new Financial Audit Manual. Reporting of audit results needs to be more timely and to be disseminated more publicly. The incentives for auditees to take action on audit findings would increase by facilitating easy access to, and greater dissemination of, audit reports. And this would be helped by more focused and effective report writing and report follow-up processes. 7. A Supplementary Table of Standards and Gaps of this report provides a matrix detailing the current standards, the present position, and options for improvement. A summary of auditing issues is shown in TableES2. Table ES2. Summary of Auditing Standard Issues Activity required to adopt Standard Current status international standards 1. Is the SAI statutory Partially. Some additional powers Some revisions in the Auditor General framework in accord with need to be established by legislation Ordinance2001arerequired. the needs of the INTOSAI assetoutbelow. AuditingStandards? 2. Is there a body to Yes. It has been construed from To improve on this, the Auditor General prescribe public sector various provisions of legislation, should coordinate with ICAP to form a auditingstandards? including Section 22 of the Auditor Public Sector Committee for review and General Ordinance 2001 that the adoptionofISA. Auditor General would be the standard-setting authority for public sector auditing. Thus, the Auditor General adopted INTOSAI Auditing Standards as recommended by a PAGE xii COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Activity required to adopt Standard Current status international standards committee of senior officers in the DAGP. 3. Have INTOSAI and IFAC Partly. The Auditor General has A Public Sector Committee should be audit standards been adopted INTOSAI Auditing used to adopt ISA and develop formal adopted? Standards. implementationnotesforguidance.2 4. Has a code of ethics Yes. equivalent to the INTOSAI Auditing Standards been adopted? 5. Is the accountability Yes. process in the SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI legal Largely. The Auditor General needs improved framework meet the legislation to exclude limitations on INTOSAI Auditing Standards jurisdiction, mandate, and function of this for independence and position; and improved offence clauses powers? together with enhancement in transparency and disclosure of audit conclusions. While not mandatory, the national audit legislation should match internationalmodels.3 7. Does the education and Partly. Staff needs more professional The AATI should continue to review its training of the auditors training. syllabus to cover all areas recommended accord with INTOSAI and bytheIFACeducationalstandards. IES? 8. Is the SAI equipped with Yes. But not implemented in full at Improved methodologies are being the audit methods and themoment. implemented.Thetechnologyrequiredto technologies to meet the support a management information I N T O S A I A u d i t i n g system for the Auditor General is missing. Standards? The requirements are being acquired through PIFRA. The implementation plan will review capacity for implementing the newFinancialAuditManual. 2Pakistan should nominate persons to the Reference Panel of the INTOSAI Working Group on Financial Audit Guidelines, which is a subcommitteeoftheINTOSAIAuditingStandardsCommittee. 3Guidance is provided by (1) a general prescription of a model law developed by the UNDP Program for Accountability and Transparency (PACT) and (2) the Model National Audit Office Act by The Association of Chartered Certified Accountants, UK, 2004. COUNTRY REPORT PAGE xiii A COMPARISON TO INTERNATIONAL STANDARDS Activity required to adopt Standard Current status international standards 9. Does the SAI have the Partly. Internal quality assurance and Improved working paper guidance and requisite quality assurance supervision provide review computerization combined with more p r o g r a m s t o m e e t arrangements among the field audit effective supervision and more internationalstandards? offices. independent quality review processes are needed. 10. Does the process to plan Partly. Improved methodologies are The audit process should be risk-based the audits meet international beingimplemented. allowing sufficient flexibility to the standards? auditors to articulate and apply appropriate audit procedures on methodically selected samples to arrive at representativeauditconclusions. 11. Does the process of Partly. Working paper systems and The revised working paper structure supervising the audits meet audit methodologies do not currently should be implemented together with the internationalstandards? enable effective supervision. new Financial Audit Manual for audit Improved methodologies are being supervision. implementedunderPIFRA. 12. Does the process of Partly. Improved methodologies are The methodology needs to be more risk- evaluating the reliability of beingimplemented. andsystems-based. internal control meet the internationalstandards? 13. Does the process used in Partly. Improved methodologies are The methodology needs to be risk- and audits to assess compliance beingimplemented. systems-based and may be integrated as with laws meet international planned with the annual certification standards? audit. 14. Does the audit process Partly. The evidence to support audit More rigorous plans for audit testing need used to obtain evidence to criticisms on individual transactions is to be developed as per the Financial Audit support conclusions meet for the most part better than that Manual. The evidence for more general internationalstandards? available to provide the more general audit assurance needs better audit assurance on the summary organization. figuresinthefinancialstatements. 15. Does the audit analyze Partly. The existing structure of the The full implementation of IPSAS would the financial statements to financial statements only provides improve the DAGP's ability to do e s t a b l i s h w h e t h e r limited scope for financial analysis meaningfulandreliablefinancialanalysis. acceptable accounting thatisusefulforcertificationaudit. standards for financial reporting and disclosure are compliedwith? PAGE xiv COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Activity required to adopt Standard Current status international standards 16.Doestheauditorprepare Not fully at this stage. The Auditor The CGA program to provide annual an audit opinion on the General signs an opinion on the accounts in the IPSAS format needs to be financial statements in a form accounts; but because the financial established reliably. The timetable and t h a t a c c o r d s w i t h statements are not prepared in program for the implementation of the internationalstandards? accordance with adequate standards, newly adopted Financial Audit Manual the wording of the audit opinion does needs to be specified to accord with the not contain all of the requirements of availability of auditable accounts. The ISA 700, The Auditor's Reports on Manual is aimed at forming an opinion on Financial Statements. The wording the truth and fairness of the financial does not clearly indicate the financial statements so that the Auditor General reporting framework used to can sign an opinion in accordance with ISA prepare the financial statements, nor 700. does it state the auditor's opinion as The audit methodology specifies how the to whether the financial statements audit work can be planned to meet the give a true and fair view (or are confidence level that is implicit in the audit presented fairly, in all material opinion, and identify the level and extent respects) in accordance with that of audit testing required in order to financialreportingframework. expressthatopinion. 17. Does the consideration Partly. Audits focus on examining The testing needs to be more statistically of fraud and error in an audit transactions for discrepancies and based. Forensic audit training is needed to of financial statements regulatory breaches. Much of the categorize the observation as either a accord with international reporting seems to relate to mistaken violation or a deliberate and standards? fraudulent behavior and suggesting intentionalacttotakeunduebenefit. recoveries without exposing the facts indetail. 18. Are the Auditor Apparently. But only after tabling in The audit legislation should formally General's reports made the Parliament and consideration by provideforreportstobemadepublic,and public? the Public Accounts Committee. publicly available when tabled in the The legislation does not specifically Parliament. requirepublication. 19. Is the process for taking Partly. Improved audit, Public Improved audit methodology and report a c t i o n o n a u d i t Accounts Committee, and writing on the one hand and reform of the r e c o m m e n d a t i o n s departmental administrative fundamental processes for scrutiny on the sufficiently effective to meet processes are needed for follow-up other,arerequiredtoreducethisbacklog. internationalstandards? of audit reports. There is an enormous backlog by the Public Accounts Committee in reviewing the audit observations. Effective review of the backlog is becoming increasinglyimpossible. COUNTRY REPORT PAGE xv A COMPARISON TO INTERNATIONAL STANDARDS 8. The Commercial Audit Wing of the Auditor General Pakistan should perform a stronger review role for the compliance with International Accounting Standards and International Financial Reporting Standards (IAS/IFRS) by the state-owned enterprises. Sincethefinancialstatementsofmanyof the state-owned enterprises (SOE) are not audited by the Auditor General of Pakistan, there are transparency issues relating to the use of public funds in these enterprises that may not be subjected to legislative scrutiny by the Public Accounts Committee. The reasons include, but are not limited to, the lack of capacity in the office of the Auditor General to coordinate and review the work of the external auditors of these enterprises. There is a need for specialized training in the use of international accounting and auditing standards, and in using the work of other auditors. Many of the state-owned enterprises are outside the IAS/IFRS and other financial reporting and enforcement regimes of the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan. Those state-owned enterprises registered by the Securities and Exchange Commission of Pakistan should be audited by professional accounting firms that are selected by, and report through the Auditor General. There is a need for the DAGP Commercial Audit Wing (after it is strengthened) to review all state-owned enterprises for IAS/IFRS compliance. In addition, the Corporate Finance Wing in the Ministry of Finance, whose responsibility is to do more general monitoring, will be strengthened under a proposed capacity-building project. This project, fundedbytheWorldBank,hasnotyetstarted. 9. Continue to improve public financial management through the reform program. Public financial management relies on a comprehensive and timely accounting and financial reporting system. This system should be supported by a professional audit function that assures competency and reliable information within the system. 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 performance. The Country Financial Accountability Assessment for Pakistan concluded that there are significant challenges remaining within the country's public financial management reform agenda to improve the effectiveness and productivity of public spending.4 Ongoing reforms and capacity-building measures will help to strengthen performance in the PFM arena. Accountability based on the formal adoption of international accounting and auditing standards is a timely step for the Government of Pakistan to take now. And the implementation of these standards needs to be supported by a more comprehensive PFM reform program to achieve substantial positive impact. The PIFRA II is covering most of the required reform elements. The Finance Division has issued in September 2006 a memorandum5 covering a new system of financial control and budgeting which includes inter alia the specific duties and responsibilities of Principal Accounting Officers, Chief Finance and AccountsOfficers,andFinancialAdvisers.Economyandregularityarethetwomainprinciplestobeobserved. 10. Improve accounting and auditing skills of the Pakistan Accounts and Audit Service. For bringing about improvements in compliance with international standards there is a need for properly trained staff. Current programs are providing strong support in this area. The success will depend on how well the strategies are implemented. 4 WorldBank,CountryFinancialAccountabilityAssessmentforPakistan,SouthAsiaRegion.December2003. 5 EstablishmentDivisionO.M.NoF.3(2)Exp.III/2006dated13/9/2006 PAGE xvi COUNTRY REPORT 1 INTRODUCTION 1. This assessment of public sector accounting and auditing is generally meant to help implement a more effective public financial management (PFM) through better quality accounting and public audit processes in Pakistan and to provide greater stimulus for more cost effective outcomes of government spending. More specific objectives are: (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common, sound knowledge as to where local practices stand in accordance with international standards of financial reporting and auditing; (b) to assess the prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuingbasisformeasuringimprovements. 2. As part of the general support program in South Asia for assessment and improvement of public sector accounting and auditing, the World Bank, with the cooperation of member governments, is conducting a Review of Public Sector Accounting and Auditing Practices in member countries. In conducting this assessment, a set of diagnostic questionnaires [developed to be consistent with the context of the PFM Performance Measurement Framework6 used by the Public Expenditure and Financial Accountability (PEFA) Program7], was used to gather substantial insight into country performance with regard to the external auditing and financial statement reporting PFM indicators. Annex A discusses the methodology used for conductingtheassessmentinthisreport. 3. The diagnostic questionnaire was used to gather information on national standards and practices for accounting, financial reporting, and auditing in the government budget sector and in the state-owned enterprise (SOE) sector. Conducted in cooperation with country authorities, the diagnostic questionnaires incorporate the principles contained in the public sector accounting and auditing standards promulgated by the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI). Annex B summarizes the international accounting and auditing frameworks that were used in this assessment. The responses to these questionnaires stimulated further discussions among the World Bank team and senior staff in the offices of the Auditor General of Pakistan (AGP) and Controller 6The 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 monitoringofPFMperformanceprogress,andacommonplatformfordialogue. 7 The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund, and the Strategic Partnership with Africa. A Steering Committee, comprisingmembersoftheseagencies,managestheProgram.ASecretariatislocatedattheWorldBankinWashington,DC. PAGE 1 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS General of Accounts (CGA). These discussions examined accounts and audit reports and working papers as a meanstojointlyexplorethequalityofprocessesandproducts. 4. ThemaintenancesystemforpublicaccountsinPakistanislongstanding. Since1997,theWorldBank Project for Improvement of Financial Reporting and Auditing (PIFRA) has supported the comprehensive reform efforts by the Government of Pakistan to streamline its accounting and auditing systems and procedures, while developing the institutional and individual capacities for better public financial management. The initial reforms included some separation of audit and accounts activities through promulgation of legislation relating to separate roles for the Auditor General and the Controller General of Accounts. They also included designing modern accounting and auditing processes and devising a comprehensive human resource management plan. The replacement of inefficient manual and outdated accountingprocessesinthegeneralgovernmentsectorbyfasterandupdatedcomputerizedprograms(using the accounting software package SAP R/3) is underway with a program to computerize all district accounting officesbytheendof2007.AnnexCincludesexcerptsfromPakistanauditingandaccountinglegislation. 5. The second phase of the PIFRA project, PIFRA II, will help the government to build capacity to improve the accuracy, comprehensiveness, reliability, and timeliness of intra-year and year-end government financial reports at federal and provincial levels.8 The PIFRA II will also initiate the process at district and sub district levels thereby strengthening the financial accountability cycle. The project would therefore directly support the commitment of the Government of Pakistan in improving public financial management, accountability, and transparency, and enhance the capacity of public sector managers to meaningfully use credible financial information for better and informed decision-making. It will facilitate public oversight of the use of public monies, and increase the national and international credibility of the national and provincial governments'financialstatementsandassuranceprocesses.9 6. The reform efforts need to include identification of the relevant international standards of accounting and auditing applicable to the public sector and help achieve compliance with those standards. Adoption of International Public Sector Accounting Standards (IPSAS) for accounting and financial reporting and the IFAC-issued International Standards on Auditing (ISA) in addition to the INTOSAI Auditing Standards areimportantstepsinimprovingthebasisforadequatepublicfinancialmanagement. 8 PIFRA II has 4 core components: (a) financial accounting and budgeting systems, (b) capacity building for the office of the Auditor GeneralofPakistan,(c)capacitybuildingfortheofficeoftheControllerGeneralofPakistan,and(d)projectmanagement. 9 ProjectAppraisalDocument,SecondImprovementtoFinancialReportingandAuditingProject,WorldBank,August5,2005. COUNTRY REPORT PAGE 2 2 PUBLIC SECTOR ACCOUNTING A. InstitutionalFrameworkforPublicSectorAccounting 7. The institutional framework for public sector accounting should include adherence to international accounting standards and use of qualified accounting staff to provide timely, relevant, and reliable financial information that is needed to support all fiscal and budget management, decision-making, and reporting processes. The diagnostic questionnaires, which were used in this assessment, have collected information on the current arrangements and the apparent gaps in Pakistan for accounting laws and regulations; education andtrainingofpublicsectoraccountants;applicationofacodeofconduct;andnumbersandcharacteristicsof publicsectoraccountants. (1)AccountingLawsandRegulations 8. The Constitution of Pakistan delineates the authority of the Auditor General of Pakistan for prescribing the form, principles, and methods of accounts of the Federation and of the Provinces with the approval of the President. Under these conferred powers, the Auditor General has endorsed the Accounts Codes (Volume I to IV) and a New Accounting Model (NAM) for implementation when practicable.10 The PIFRA project is computerizing the accounting functions to enable the New Accounting Model to be implemented. Accounting functions are the responsibility of the Controller General ofAccounts. 9. A committee should be setup to review and steer the process of implementation of IPSAS on a progressive basis. The committee should have oversight of the financial reporting specialists in steering the adoption of IPSAS towards the accrual basis of accounting.11 The NAM development in 1998 used the IFAC-issued Guidelines for Governmental Financial Reporting and best practice from other countries.12 There is now an opportunity to apply the IPSAS, that have been developed since 1998, in the 10The New Accounting Model is a set of 7 books: Accounting Principles Manual, Accounting Policies and Procedures Manual, Chart of Accounts, Accounting Guidelines, Accounting Procedures for Self-Accounting Entities, Book of Forms, and Financial Reporting Manual. 11Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, International Federation of AccountantsPublicSectorCommitteeStudy14,December2003. 12The New Accounting Model sets the national standards of accounting and financial reporting. Pricewaterhouse Coopers analyzed differences between IPSAS and the New Accounting Model in 2004. The New Accounting Model is being implemented using the cash basis of accounting and will gradually move towards the accrual basis. Formal adoption of IPSAS would enable the customizationoftheNAMfinancialreportingformatsincompliancewithrelevantIPSASrequirements. PAGE 3 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS New Accounting Model and review the accounting model during its implementation. The Auditor General of Pakistan and Controller General of Accounts have already been engaged in deliberations to move towards adopting IPSAS. The adoption of IPSAS II cash flow formats is a step in this direction.13 The NAM Financial Reporting Manual provides for such reporting, which generally complies with Cash Basis IPSAS.14 This reporting also includes the optional disclosure requirements that are required to accord with IPSAS, such as third party payments and receipts that need to be identified and shown in a separate column. State-owned enterprise results should be consolidated into the annual accounts. Annex D discusses the benefits of accrual basisofreporting. 10. The PIFRA project is supporting the implementation of the New Accounting Model. Institutional and individual capacities in both the public sector financial management agencies, as well as the executive/service delivery formations are being developed through implementation of a comprehensive capacity development program mainly sponsored by PIFRA. The PIFRA project is supporting the implementation of the New Accounting Model through the implementation of computer accounting hardwareandsoftwareapplicationtoalldistrictaccountsoffices. (2)EducationandTraining 11. The Audit and Accounts Training Institute (AATI) is a countrywide network providing professionaltraininginpublicfinancialmanagementtobothaccountingandexecutivearmsofthe government. The AATI conducts long-term courses that lead to the Pakistan Institute of Public Finance Accountants(PIPFA)certification.15 TheAATIalsoconductsshortcoursesforprofessionaldevelopment. 12. The AATI has included the use of IPSAS in its course work. Through the technical assistance provided under the PIFRA, AATI has revitalized its syllabi and learning methodologies. It is now geared to teach areas of practical application, including IPSAS. The AATI has developed a comprehensive annual trainingprogramandhassettargetsforthefirstyear. 13. Offering international education standards will help to develop more professional audit and accounting staff. The strategy is to offer learning opportunities to develop qualifications that are compliant with the IFAC International Education Standards (IES) and acceptable to other professional accountancy bodies. The AATI has been cooperating with professional accountancy bodies to seek 13Notification of financial reporting policy, dated June 29, 2005, adopts Cash Basis IPSAS with a trial implementation of the policy for FY2004-05andeffectivedateinFY2005-06. 14 The annual financial statements consists of the following: (a) statement of assets and liabilities, (b) statement of revenues and expenditures (by function and by object), (c) statement of cash flows, (d) notes to financial statements, (e) summary of appropriation accounts by grants and appropriation, (f) appropriation accounts by economic function and department/division (g) appropriationaccountsbygrant,and(h)analysisofrevenuebydivision/department. 15The PIPFA is a body of professional accountants and an associate member of the International Federation of Accountants. It is a joint initiative of the Auditor General of Pakistan, the Institute of Chartered Accountants of Pakistan , and the Institute of Cost and ManagementAccountantsofPakistan. COUNTRY REPORT PAGE 4 A COMPARISON TO INTERNATIONAL STANDARDS acceptance of AATI qualifications that would meet the qualifications for professional accreditation of other professional bodies -- the Association of Chartered Certified Accountants (ACCA), UK; Institute of Chartered Accountants of Pakistan (ICAP); and Institute of Cost and Management Accountants of Pakistan (ICAMP). 14. The selection and training of government accountants differs from one departmental cadre to another, and falls short in ensuring the qualifications essential for providing competent professional accounting service in the public sector. The bachelor of commerce/accounting is the minimumacademicrequirementsforanindividualseekingtoworkinthedepartmentalcadreofpublicsector accountants. However, the inter-departmental cadre civil servants do not require such qualifications; they are recruited as generalists through the Federal Public Service Commission. These inter-departmental officers are given nine-months of probationary training at the AATI and are encouraged to take further specialist training. Nevertheless, this approach continues to fail to provide for competent professional accountingservice,equivalenttothatprovidedbytheprivatesectorwithitsICAPrequirements. (3) Code of Conduct 15. A code of ethics should be included in staff contracts. The INTOSAI Code of Ethics has been adopted by the Auditor General of Pakistan and should be followed by staff doing audits and maintaining accounts.16 The same has been included in the AATI syllabus. As such, the code of ethics is part of the overall guidance provided by the head of an organization to each staff member. Non-compliance of the code could leadtoactionsinaccordancewithEfficiencyandDisciplineRulesoftheGovernmentofPakistan. Thecodeof ethics should be made a part of staff contracts upon acceptance of a job, or separately signed by the employeesasalegallyenforceabledocument. (4)PublicSectorAccountantArrangements 16. Duality of control over accounting staff should be resolved. With the exception of a few departmentalized accounts, the Government follows a regime of centralized accounting offices that keep accounts of all departments in their regional jurisdiction. Out of 10,000 staff posted in the accounts offices, 921 staff members are employed by the federal government. The remaining staff comes mainly from the treasury services under the provincial finance departments. These provincial offices serve under the technical supervision of the Accountant General who is responsible to the Comptroller of General Accounts; but treasury staff is answerable to the Secretary of Finance of the relevant province. This duality of control overtheaccountingstaffremainsaproblemofadministrationandauthorityandneedstoberesolved. 16Some adaptations and deletions were made by a committee constituted by the Auditor General of Pakistan in connection with issuing the INTOSAI Code of Ethics and Auditing Standards. Only one paragraph relating to political neutrality (paragraph 21) was deletedfromtheCodeofEthicsandminorchangesofnomenclatureweremade. PAGE 5 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS 17. Budget officers (chief financial officer) should be adequately qualified to maintain internal financial control. The budget officers should have the qualifications to undertake responsibility for maintaining systems of internal financial controls that manage risks, and for preparing regular financial management reports for the principal accounting officer.17 The principal accounting officer is generally supported by a budget officer from within that line agency. These agency staff members require substantial training to equip them with the necessary tools of financial management to effectively assist the principal accounting officers. New positions of Chief Finance and Accounts Officers (CFAO) have been introduced under the system of financial control and budgeting introduced in September 2006. The system specifies that the CFAO shall be a well-trained and experienced officer. It is important that the Establishment Division which is to arrange the postings of these officers, ensures that this requirement reflects the expertise needed forthefunction. 18. Internal audit units should be established as per staffing and operational planning developed under PIFRA. Under PIFRA, a comprehensive plan was developed to initiate the internal audit function in government agencies for which a center of excellence is envisaged within the office of the Comptroller of General Accounts. Chief audit officers have been posted in 15 federal ministries with responsibilities for internal audit, reconciliation of accounts, coordination with departmental and parliamentary Public Accounts Committees, and the financial propriety of expenditure and receipts. More funding should be arranged to enable an effective internal audit function as per the staffing and operational plansdevelopedunderPIFRA. B. AccountingStandardsasPracticed 19. The diagnostic questionnaires collected information on the current arrangements and the apparent gapsinPakistanforsettingpublicsectoraccountingstandards,andforpresentingfinancialreports. (1)SettingPublicSectorAccountingStandards 20. In the existing format of the finance and appropriation accounts, there are considerable departures from Cash Basis IPSAS. GraduallythebudgetsectorisbeingconvertedtotheNAMChartof Accounts. Conversion to the NAM reporting framework is dependent on the roll-out of the PIFRA accounting systems and the implementation of all the accounting functions. Pensions, general provident fund, and asset accounting are examples of functional modules yet to be implemented. Government accounts are presentedintheoldformatsofthefinanceandappropriationaccounts. 17Theprincipalaccountingofficerisusuallythesecretaryofaministryorheadofthelinedepartment. COUNTRY REPORT PAGE 6 A COMPARISON TO INTERNATIONAL STANDARDS (2)PresentingFinancialReports 21. Use of the cash basis of financial reporting provides a necessary scope to the implementation of the New Accounting Model. One particularly useful feature of the Cash Basis IPSAS format is the disclosure of third party payments in separate columns on the face of the statement of cash receipts and payments. These disclosures enable users to identify the total amount of payments made; the purposes for which they were made; and whether, for example, the payments were made from amounts allocated or appropriated from general revenue or from special purpose funds or other sources. A case in point within the government sector is the payment of the electricity utility, WAPDA, by the central government, which then deducts these payments at source from its transfers to provincial governments. Provincial governments in turn deduct at source from transfers to local governments. As provincial and local governments are not well-notified of these deductions (as would be required in meeting Cash Basis IPSAS), they become a source of confusion and inefficiency. The government entities are unaware of their power costs and hence less likely to seek ways to be more economical. Also, as bills are already "paid," there is less incentivefortheutilitytoensurethatitsrecordsreconcilewithcustomers'records. 22. Table1identifiesthecurrentpositionandstepsrequirediftheCashBasisIPSASweretobeadopted. Table 1. Required Steps for Adopting Cash Basis IPSAS Activity required to adopt Cash Basis Requirements Current deficiencies IPSAS Financial statements The Pakistan reporting structure A statement of cash receipt and payment presentedinIPSAS focuses on consolidated fund and as per the Cash Basis IPSAS can be public accounts and the Cash Basis prepared using existing information from IPSAS for financial statements is not the accounting records. Also, for each followed. entity (i.e., ministry and department), an additional statement in accord with Cash Basis IPSAS can be prepared. This may require some restructuring of the NAM computerizedreportingformats.18 Information required in All this information is available on the This work requires restructuring of the accordance with IPSAS in the government reporting system, but is reporting formats and rectification of statement of cash receipts in formats inconsistent with IPSAS. errors in recording and compiling the andpayments Some negative balances are accounts. Thirdpartypaymentswouldbe appearing in the finance accounts. shown separately in the Cash Basis IPSAS The cash balance appearing in the format. financial statements is not reconciled with the bank accounts and 18 It is understood that changes in the financial reporting formats would not be considered as a departure from the new structure of accountingpoliciesandpracticesasapprovedbytheAuditorGeneralwiththeconsentofthePresident. PAGE 7 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Activity required to adopt Standard Current status international standards receivables are appearing from bodiesthatnolongerexist. Accounting policies and Statements of accounting policy are There is a need to state the accounting explanatorynotes not provided in the budget or policies for various elements of the accountsdocuments. financial statements and the basis on whichtheaccountsareprepared. General considerations At present financial statements are It would be necessary to reduce the · period reporting not available within 6 months of the reporting lag; and to disclose further · of adequacy reporting period; cash balances that information. Legislation should enforce information about the areavailableforuseandcashbalances specific timelines for the publication of entity that are subject to external annual audited financial statements of the · of presentation restrictions and un-drawn borrowing government. comparative facilities are not disclosed, and presentation does not meet certain transparency requirements. Although the authorization date is mentioned on the accounts, it is not clear when these financial statements become accessible to the general publicormedia. Correction of errors The nature of errors in prior periods, Further training and better supervision of disclosed the amount of the correction, and the accounts officers would be needed to · oferror nature fact that comparative information has correctly classify expenditures and · ofcorrection amount been restated, or that it is disclosure of errors rectified prior to the · comparative impracticable to do so, is not reporting period and restatement of information restated disclosed. comparative information where practicable. Consolidated financial The government budget sector is a A statement of cash receipt and payment statements reporting entity, as well as an as per the Cash Basis IPSAS can be economicentity. prepared. Further steps will be needed to include controlled entities as per IPSAS andSection7(b)oftheCGAOrdinance. Treatment of foreign The government largely follows Need to comply with the disclosure currency cash receipts, IPSAS except for the disclosure aspects of the accounting and financial payments, and balances aspects in respect of accounting reportingtreatmentofforeigncurrency. treated in compliance with treatmentofforeigncurrency. IPSAS Effective date of IPSAS Part I The government has not formulated Need for the Auditor General to formally and transitional provision a migration path and timeline for adopt IPSAS and for the CGA to prepare compliance. achieving Cash Basis IPSAS, Part I, an implementation plan and timeline COUNTRY REPORT PAGE 8 A COMPARISON TO INTERNATIONAL STANDARDS Activity required to adopt Cash Basis Requirements Current deficiencies IPSAS compliance. setting out specific steps to be taken, including disclosure, if necessary, of application of the transitional provision (i.e., full compliance achieved within 3 years) for reporting periods beginning on a date within 3 years of first adoption of IPSAS. C.AssessmentofAccountingandAuditinginState-OwnedEnterprises 23. It should be mandated by law that the financial statements of the state owned enterprises be prepared in accordance with the IAS/IFRS. Many state-owned enterprises are registered under the Company Law. Under the Companies Ordinance 1984, it is obligatory for all listed companies to present their financial statements in accordance with IAS/IFRS.19 These companies are required under the Companies Ordinance to be audited by a chartered accountant. The Institute of Chartered Accountants in Pakistan has mandated the observance of International Standards on Auditing by its members. Upon receipt from the IFAC, exposure drafts of proposed International Standards on Auditing are sent to ICAP members for comments. These comments are returned for consideration by IFAC. When the final standard is issued, ICAP adopts the International Standard on Auditing without modification. For non-listed companies, the implementation and enforcement of IAS/IFRS is not finalized. Enforcement of International Standards on Auditing for the audit of non-listed companies is less stringent than that for the listed companies. State- owned enterprises, which are not incorporated under the Company Law, do not usually apply IAS/IFRS for accountingandfinancialreporting. Thefinancialstatementsaregenerallyauditedafteralonglagtime. 24. There are serious issues relating to the use of public funds in state-owned enterprises that are not subjected to legislative scrutiny by the Public Accounts Committee. A review of a sample of financialstatementsofstate-ownedenterprisesthatareauditedbyCharteredAccountantsindicatedthatthe audit reports generally contained either significant qualifications and/or emphasis of matter paragraphs modifying the audit opinion. The Auditor General of Pakistan while conducting the regularity or performance audit cannot utilize the qualifications given in the audit report on the financial statements. The Auditor General does not have access to the management letter given by the external auditors to the state- owned enterprises, nor do they have access to the financial audit working papers. Thus serious issues relating to the use of public funds are not subjected to legislative scrutiny by the Public Accounts Committee 19The Report of Observance of Standards and Codes ­ Accounting and Auditing in, Pakistan, 2005, provides the implementation statusofIASIFRSandrelatedissues. PAGE 9 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS through consideration of the Auditor General's reports. The preferable practice is for the Auditor General to beabletoreviewtheworkingpapersandreportsofthecontractedauditfirms.20 25. There is a need for specialized training in the utilizing of IAS/IFRS, ISA, and using the work ofotherauditors. TheresourcesforauditingpublicsectorenterprisesintheDAGPareinshortsupply;and DAGP staff generally is not adequately trained in accounting. The need for additional specialized training in the applications of IAS/IFRS and ISA and using the work of other auditors has been recognized as a need. Greater provision of this training could be provided perhaps through the AATI or outsourced to the private sectorinstitutions. 26. The Commercial Audit Wing of the Auditor General of Pakistan should perform a monitoring role for the compliance of IAS/IFRS by state-owned enterprises. Monitoring of state- owned enterprises needs improvement. There is currently no Public Sector Enterprises Monitoring Board as established in other countries. This role is performed by the Corporate Wing of the Ministry of Finance. Some proposals are in place for strengthening the Corporate Wing. There is little involvement of the Auditor General in the selection of the external auditors of these state-owned enterprises.21 The respective ministries/departments with which individual state-owned enterprises are attached exercise varying levels of monitoring on these bodies. Many of these state-owned enterprises are outside the enforcement mechanisms (of IAS/IFRS and other financial reporting) by the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan. Hence, there is a need for the Commercial Audit Wing of the Auditor General of Pakistan to be strengthened to perform a more comprehensive review role for the compliance of IAS/IFRSbystate-ownedenterprises. 20Section25,AModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,UK,2004. 21Although there is a requirement to get approval of the selected auditor's (CA) name, in many cases it is not observed. Even with compliance,inpracticemanagementfinalizestheselectionoftheauditfirm,apracticethatthrowsintoquestiontheindependence oftheseauditors. COUNTRY REPORT PAGE 10 3 PUBLIC SECTOR AUDITING A. StatutoryFrameworkforPublicSectorAuditing 27. Effectual scrutiny by the legislature to ensure effective implementation of fiscal and expenditure policies needs comprehensive and competent external audits that are underpinned by international standards on auditing.22 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 includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the supreme audit institution functions is integral to providing information for improving the overall PFM system. But the action must be withintheexecutivebranchyetunderthewatchfuleyesofthelegislatureandthepublic.Astrongdemandfor 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 reform action is taken. It also requires public presentation of the audit reports to ensure public support for effective action. All of these requirements are covered by the INTOSAI and IFAC auditing standards listed in Annex B. These should be adopted by the Auditor General of Pakistan. The Government noted in its response to the draft report that the statutory framework included considerations of the Constitution and that it was not appropriate to compare with the frameworks of other countries as the frameworks reflect the choices made by the people of each country. Recognizing this, the report does not make comparisons between country's Constitutions; rather it identifies how the Constitution for Pakistan or other elements of the legal statutory framework make provision for the auditing principles that are set out in INTOSAIguidance. 28. The diagnostic questionnaires have collected information describing current arrangements and the apparentgapsinthecountryinthefollowingareas: ·InstitutionalframeworkfortheSupremeAuditInstitution, ·Processforsettingauditingstandards, ·Useofcodeofethicsorconduct, ·ArrangementstoensureaccountabilityintheSupremeAuditInstitution, ·Arrangementstoensureindependence, 22Scope, quality, and follow-up of external audit is performance indicator No. 26 in the PFM Performance Measurement Framework supportedbytheWorldBankandotherdevelopmentagencies. PAGE 11 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS ·Arrangementstoensureadequateskillsandqualificationsfortheauditors, ·Arrangementsforprovidingtraining, ·Arrangementstoensureauditorcompetence, ·Arrangementsforqualityassurance. 29. Thoseareaswithsignificantscopeforimprovementarediscussedbelow. (1)StatutoryFramework 30. The Auditor General's Ordinance 2001 requires some improvements. The Auditor General is appointed under provisions stipulated in the Constitution of Pakistan 1973 (as amended). The Auditor General's (Functions, Powers and Terms and Conditions of Service) Ordinance 2001 details the mandate, role,andpowersoftheAuditorGeneralofPakistan.TheOrdinancerequiressomeimprovementstoremove jurisdictional limitations on the AGP mandate: (a) make an explicit mention of the proprietary, efficiency, effectiveness, and economy in the use of public funds; and (b) provide for necessary dissemination arrangementsfortheauditreports. 31. The Auditor General of Pakistan should have the authority to conduct a full range of audits for all government-owned or -controlled entities. The Auditor General has full authority for auditing all budget sector receipts and expenditures from all government accounts, including defense expenditures.23 The Auditor General has the authority to audit any body or authority established by the government, or which has received a loan or grant; however, there are some exclusion clauses allowed for, in the Constitution as well as in the Auditor General's Ordinance. Article 169(b) of the Constitution limits the powers and function of the Auditor General in relation to any authority or body established by the government depending on the provisions contained in the respective legislation establishing that authority body. Similarly, Sections 9 (explanation), 11 (proviso), 15, and 16 of the Ordinance impose certain conditions on the powers and function of the Auditor General in relation to the audit of public sector enterprises. These jurisdictional limitations are under review; potential revision of the Ordinance to remove the restrictive or exclusion clauses is underway by a committee of the Auditor General, Secretary Finance, and Secretary Law. ThePublicAccountsCommitteeoftheParliamentispursuingthisissue. 32. The Auditor General of Pakistan should have the authority to conduct a full range of audits, including regularity, financial, and performance audits. The Auditor General's (Functions, PowersandTermsandConditionsofService)Ordinance,2001specifiesthefollowingtypesofaudits: ·Section7,CertificationAudit(Accounts) ·Section8,RegularityAudit ·Section9,AuditofAuthoritieshavingloansorgrantsfrompublicmoney 23 Thereareminorexclusionsofpracticerelatingtoreceiptskeptaslocalfundsorsocallednon-publicfundsbysomeinstitutions. COUNTRY REPORT PAGE 12 A COMPARISON TO INTERNATIONAL STANDARDS ·Section12,AuditofReceipts ·Section8&9,ReceiptsandExpenditures(includesauthoritiesandbodiessubstantiallyfinancedby loansandgrants) ·Section10,Studyreports(whichmayincludeperformance,governance,debt-management,or environment) ·Section15,AuditofCompaniesandCorporationsestablishedunderthepublicsector. 33. There is no explicit mention of the proprietary, efficiency, effectiveness, and economy of use of public funds in the Auditor General's Ordinance, yet many of the senior staff categorized these as the main objectives of the AGP audit. The proposed review of the Ordinance to resolve jurisdictional issues should also look into providing for a specific mandate of the Auditor General in relation to proprietary, economy, efficiency, and effectiveness of utilization of public funds along the lines of the model legislation proposed by theUNDPortheACCA.24 34. The legislation should clearly set out penalties and their appropriate application in the event of noncompliance with auditing requirements. Section 14 of the Auditor General's Ordinance applies to any person or authority hindering the audit functions of the Auditor General with regard to inspectionofaccounts;thispersonorauthorityshallbesubjecttodisciplinaryactionunderrelevantEfficiency and Discipline Rules, as applicable to their actions. Section 14 does not mention who would initiate such an action. Either the Auditor General, Public Accounts Committee, Public Accounting Officer, or another body could potentially initiate the action. Consequently, the implementation of this section could be problematic. In case of any hindrance or problem, the Public Accounts Committee generally issues directives to the executives with regard to compliance of auditing requirements. This process is lengthy and subject to many delays thereby reducing the effectiveness of the provision. The Auditor General should have specific powers to initiate action against persons who refuse to provide auditable accounts and relevant records to the DAGP staff. 35. Necessarydisseminationarrangementsfortheauditreportsshouldbeclearlylaiddownin the legislation. The legislative scrutiny is not supported by public scrutiny due to un-disseminated audit reports and government financial statements. There is confusion as to when audit reports and government financial statements become public documents. Specific provisions in the Auditor General's Ordinance should make public the audit reports and other documents in line with the ACCA model legislation as follows:25 ·AllreportsissuedbytheAuditorGeneralshallbeconsideredpublicdocumentswhenthereportsare presentedtoParliament.Aspublicdocumentstheyshallbemadeavailabletothepublicforaminimal cost-recoveryfee. 24Section 21 of the Model Law developed by the UNDP Program for Accountability and Transparency (PACT); and Sections 32 and 55ofAModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,UK,2004. 25AModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,UK,2004,Section38. PAGE 13 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS ·TheAuditorGeneralmaymakehis/herreportspubliclyavailableinelectronicformatonthe Internet. ·TheAuditorGeneralshallprovidecopiesofhis/herpublishedreportstothegovernmentarchivist,all public and university libraries (in relevant locations); National Broadcasting Corporation; and the press. ·TheAuditorGeneralorhis/herstaffmayprovidecommentsandinterviewstothepressorother mediaonthesubjectofanypublishedauditreports. (2)SettingAuditingStandards 36. The IFAC-issued International Standards on Auditing should be formally adopted, preferably by way of mention in the Financial Audit Manual. There is an Audit Code which lays down the basic principles of auditing in line with the Constitutional provisions and the Auditor General's (Functions, Powers and Terms and Conditions of Service) Ordinance 2001. The Auditor General of Pakistan adopted the INTOSAI Auditing Standards in 2002 with minor adaptations. The INTOSAI Auditing Standards form the basis of the auditing methodology and process for the office of the Auditor General of Pakistan. This methodology and process is further explained in the Procedure for Certification Audit of Appropriation and Finance Accounts prepared by the Auditor General. The Auditor General has approved the new Financial Audit Manual which would gradually replace the current procedures.26 The INTOSAI recognizes that the INTOSAI Auditing Standards are broad in nature and that the IFAC-issued International Standards on Auditing provide another level of detail for public sector audit guidance. The INTOSAI is working with IFAC in the longer term to develop practice notes to assist with implementation of each ISA in the public sector. Therefore, explicitly prescribing the IFAC standards as the applicable auditing standards in addition to the INTOSAI Auditing Standards would ensure that the relevant developments in the auditing process are learnedandappliedonacontinuousbasis. 37. A committee should be set up to review and adopt the International Standards on Auditing on a continuous basis. It has been construed from various provisions of the legislation, including Section 22 of the Auditor General's Ordinance 2001, that the Auditor General would be the standard-setting authority for the public sector auditing. As an active member of INTOSAI, the Auditor General usually subscribes to the declarations of the international organization for implementation with regard to transferencetothelocalsetupandenvironment.Therefore,theINTOSAIAuditingStandardswereadopted. The adoption process consisted of a review of the INTOSAI Code of Ethics and Auditing Standards by a committee of senior officers assembled by the Auditor General. A similar committee should review and adopt the IFAC-issued International Standards on Auditing for effect on a continuous basis. It would be useful to include on this committee representation from the Institute of Chartered Accountants of Pakistan, which 26 Chapter 4 of Financial Audit Manual mentions that the INTOSAI Auditing Standards have been considered as the general framework for the auditing methodology and procedures. Although the new Financial Audit Manual does not mention specifically theInternationalStandardsonAuditing,theoverallapproachandmethodologyisconsistentwiththem. COUNTRY REPORT PAGE 14 A COMPARISON TO INTERNATIONAL STANDARDS is in the process of adopting ISA compliance by its members. The process of ISA adoption should start with input at the exposure draft stage and continue through to issuing practical guidance on local application of the International Standards on Auditing. Pakistan has nominated persons to the Reference Panel of the INTOSAI Working Group on Financial Audit Guidelines, which is a subcommittee of the INTOSAI Auditing Standards Committee. The Government can similarly nominate persons for an ISA-adoption committee under the jurisdictionoftheAuditorGeneral,asperhis/herauthorityundertheConstitution,(Section170). (3)CodeofEthics 38. Improved monitoring for adherence to the Code of Ethics is needed, as well as review by the Controller General of Accounts. The INTOSAI Code of Ethics, which was prepared for auditors, was adopted by the Auditor General of Pakistan in 2002 to be followed by the DAGP audit staff and the CGA staff responsible for maintenance of accounts. Some minor adaptations and deletions were made while issuing the INTOSAI Code of Ethics and Auditing Standards to make them compatible with the local setup and environment. There is a need for taking practical steps to ensure compliance with the Code of Ethics. These steps might include guidance from the procedural mechanisms included in the IFAC Code of Ethics for Professional Accountants and review of the INTOSAI Code by the Controller General of Accounts to comparetheICAPCodeforrelevanceforaccountants. (4)EnsuringIndependence 39. Notwithstanding the limitations identified earlier, the legislation provides a strong enabling environment where the Auditor General of Pakistan can perform its scrutiny functions with considerable independence. The Constitution guarantees the protection of service of the Auditor General of Pakistan. Similarly, the charged expenditures of the DAGP are not subject to Parliamentary vote, therefore protecting the DAGP budget. Section 19 of the Auditor General's Ordinance gives the Auditor General full powers to incur expenditures within the budgetary provisions. As the head of a civil service cadre, the Pakistan Audit and Accounts Service, the Auditor General has substantial control over personnel and over the Audit and Accounts Training Institute, a powerful internal training and professional development mechanism. The overall status of the Auditor General ensures the independence of the position and an effective organization within the DAGP by virtue of the Auditor General's constitutional mandate; protection of term in office; financial and human resource independence; exercise of authority over the type of, schedule, and duration of audit; powers to examine records; direct liaison with the parliamentarians in the Public Accounts Committee; and INTOSAI representation. However, the Auditor General does have some limitations regarding managing staffing. In order to create new posts, the Auditor General must negotiate with the Ministry of Finance/government, which in practice does not considerably infringe on the AGP independence. However, the recruitment of civil servants in the Pakistan Audit and Accounts Service is done throughtheFederalPublicServiceCommission,anarrangementthathassignificantexpertiseissues. 40. TheAGPtermofofficeissecure.TheAuditorGeneralofPakistanisappointedbythePresidentof PAGE 15 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Pakistan and his oath is administered by the Chief Justice of Pakistan. The AGP term of office is 5 years or until theattainmentof65yearsofagebytheincumbent,whicheverisearlier. TheAuditorGeneralissecureinthis position throughout the term and can carry out mandates without fear of retribution. Once appointed, the Auditor General can only be removed by reference of the Supreme Judicial Council and affirmed by majority vote in the Parliament (the same procedure for removing a Supreme Court judge). Therefore, even the appointing authority does not have the termination powers. Re-appointment is not allowed before two years after vacating the office, thereby limiting opportunities for re-appointment. The UNDP model legislation recommends a 12-year term, and the ACCA recommends appointment to retirement age of 65. The Government noted in its response to the draft report that it considered that the Constitutional guaranteessufficedandthatalongertermwasnotneeded. 41. TheAuditorGeneral'sOrdinancesetstheAGP'srighttoaccessinformationandobligation to report to the President. TheSection14oftheAuditorGeneral'sOrdinance2001indicatesthepowers of the Auditor General in connection with access to all offices having accounts and other related documents and some guidance on how to deal with any person hindering the audit functions. Article 171 stipulates that the Auditor General shall submit reports to the President who in turn delivers the same to the Parliament. TheParliamentsendsthesereportstothePublicAccountsCommitteefordetailedscrutiny. Therehasnever beenanamendmenttoanyauditreportsafterbeingsubmittedtothePresident. 42. BeforesubmissiontothePresident,thereisampleopportunityfortheexecutivetoresolvetheaudit observations through holding of (Special) or Departmental Accounts Committee meetings or simply by taking administrative action as recommended in the Audit Information Report. Nevertheless, the resolution ofissuesoftendoesnotoccur. 43. The audit reporting requirements need to be made more specific. Section 7 of the Auditor General's Ordinance 2001 relates to the certification audit. This section assigns responsibility to the Auditor General for certifying accounts on the basis of the AGP audit for each financial year and presenting corresponding notes, comments, or recommendations related to those accounts. The Ordinance does not specifythetimelineforsubmissionofthecertifiedannualaccounts. Similarly,theOrdinancedoesnotrequire the Auditor General to submit an annual report on his/her performance. Section 7 states the minimum audit requirements from the Auditor General as the certification of annual accounts. The Auditor General must plan to have available the resources needed to conduct the certified audit and know how much time can be allocatedtoothertypesofauditsinayearinadditiontothemandatorycertificationofaccounts. ThePIFRAis trying to achieve an integration of the certification and regularity audit by introducing more concurrent audit activities focusing on regularity and compliance as part of the certification audit. This would also lead to a timelycertificationoftheaccountsandmeaningfulandcompleterepresentationsenttothelegislature.27 27Thereisalackofconnectionbetweencertificationandregularityauditreporting. Thecertificationauditgivespartialcompliancein the form of "can be relied upon" subject to both qualifications contained therein, as well as the issues reported elsewhere in regularity audit reports. The certification audit reports are seldom discussed by the Public Accounts Committee thereby limiting thegeneraldissemination/availabilityanduseofthegovernmentfinancialstatementsbythestakeholders. COUNTRY REPORT PAGE 16 A COMPARISON TO INTERNATIONAL STANDARDS 44. Legislation should provide an environment in which the Auditor General is free to meet with the media on audit reports. In Pakistan, unlike in other countries, the audit report is never discussed with the media. The only point in time when the press gets formal acknowledgement of an audit report is when the Public Accounts Committee deliberates on the audit observations. The model legislation for Supreme Audit Institutions reads, "The Auditor General or his/her authorized staff may provide commentsandinterviewstothepressorothermediaonthesubjectofanypublishedauditreports."28 45. There are some issues which can hamper the independence of the audit staff on individual assignments. The separation of audit and accounts has resolved the independence issue to some extent. However the rotations of assignments, including deputations to other departments and back to audit offices, needtobereviewed. Similarly,thedependenceontheauditeeorganizationsforprovidinglogisticscanaffect the highest level of independence. It is preferable to adopt the IFAC Code of Ethics with regard to procedures for enhanced independence as required by rotation of assignments and nominal dependency for logisticsonsomeauditees. 46. ImprovedprocessesofthePublicAccountsCommitteeanddepartmentaladministrations are needed for following up audit reports.29 Despite many opportunities, resolution of audit observationsfrequentlydoesnotoccurbeforesubmissionofreportstothePresidentandsubsequentreview by the Public Accounts Committee. This suggests an apparent indifference by senior departmental managers. It is important that there be certainty that audit observations are dealt with seriously by the legislature and the central agencies, such as the Ministry of Finance. This lack of resolution at the audit stage has led to an enormous backlog by the Public Accounts Committee in hearing the audit observations. Improved audit methodology and report writing, and reformation of the fundamental processes for scrutiny need to be undertaken to reduce this backlog. Better protocols may be useful between the Auditor General and various departments to ensure that auditor access is made easy and disruption in departments is kept at a minimum. In addition, better protocols would help ensure that draft audit reports are reviewed quickly by the departments for accuracy and fairness and that the Auditor General and departments, as far as possible, reach an agreement on reports before they are made public. Similar protocols are needed between Parliament and the Auditor General covering, for example, how the audit reports will be handled. An audit- observation tracking system is being implemented under PIFRA II, which would improve the post-audit accountability system. However, the primary responsibility of follow-up of actions is with the Public Accounts Committee secretariat that is closely coordinated by the Auditor General for compliance with its part of directives/recommendations.30 The Auditor General does not have statutory power for imposing sanctionsdirectly. 28AModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,London,2004. 39Legislative scrutiny of external audit reports is performance indicator No. 28 in the PFM performance measurement framework supportedbytheBankandotherdevelopmentagencies. 30Although the Public Accounts Committee writes "directives" for its decisions, many stakeholders perceive in line with the decision ofNWFPHighCourtdeclaringtheseas"recommendations,"whicharesubjecttovoluntarycompliancebytheexecutive. PAGE 17 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS (5)AccountabilityintheSupremeAuditInstitution 47. The Office of the Auditor General of Pakistan should be accountable for its performance and report to the legislature. The Inspection, Regulation, Vigilance, and Monitoring of the Training Wing are independent branches of the Office of the Auditor General of Pakistan, which performs its functions under a Deputy Auditor General. This function is a kind of internal audit within the Office of the Auditor General that conducts inspections of all activities, including field audit offices. It is the intended good practice of the Office of the Auditor General to prepare an annual report each year, but other priorities interrupt meeting the schedule. The last annual report was published for 2002. The Corporate Audit Plan (2001- 2002) contained the vision and mission statement that was reinterpreted into the annual audit plan. An annual report for the year 2004 is still under preparation and a 3-year plan is in the process of being written. The Office of the Auditor General does not undergo peer review or an independent performance audit, nor does any independent external body audit its activities. However there are interconnected arrangements for audits within the field audit offices that provide peer review assurance within the organization. The Office of the Auditor General should undergo an accountability mechanism in line with that suggested under the proposed legislation for Supreme Audit Institutions involving review of the annual corporate plan and annual report by the Public Accounts Committee.31 The Office of the Auditor General should prepare and disseminate its annual corporate plan, as well as the annual performance report of its office in a timely manner. (6)QualificationsandSkillsfortheAuditors 48. The AATI should continue to review its syllabus in order to cover all areas recommended by IFAC-issued International Educational Standards (IES). In an effort to meet the AATI and higher academic and professional qualifications, an elaborate system of training of accounting and auditing staff at different hierarchical levels exists at local and foreign universities and professional training bodies. The Auditor General has developed a comprehensive training plan. The PIPFA qualification has become mandatory for audit officers. The syllabi of AATI probationers have been revamped. A substantial portion of funding in PIFRA II has been earmarked for auditing and accounting training. All these factors contribute to the enhancing of the qualifications and skills of the auditors. The AATI should ensure that all IES- recommendedareasarecoveredbyalltrainingprovidersandinalltrainingmaterial. (7)Training 49. Despite good training opportunities available for auditing staff, further upgrading is needed. The AATI annual training plan provides many opportunities for their continuing professional development. The training plan encompasses more than 50 different short courses or workshops. Civil servantsarerequiredtotake12workingdaysof mandatory training.32 Allocatingcertaintrainingdaysineach 31AModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,UK,2004,PartVIII. 32EstablishmentDivisionO.M.No1/6/2002.OP.II,dated5-4-2002. COUNTRY REPORT PAGE 18 A COMPARISON TO INTERNATIONAL STANDARDS annual audit plan is good practice for time budgeting. Rigorous capacity-building exercises are being identified, designed, and delivered as part of PIFRA II. There are currently too few auditors with ICAP qualifications in the Office of the Auditor General. These auditors must have adequate professional expertise andtechnicalknowledgetocarryoutthecertificationauditsandtorecommendthattheAuditorGeneralsign audit opinions. The current AATI arrangements are not yet adequate to meet international standards for auditing annual accounts and signing audit opinions. Further upgrading of AATI courses and of promotion criteriaforseniorauditstaffisneeded. (8)AuditorCompetence 50. ThenewFinancialAuditManualshouldbeimplemented. ThedevelopmentofanewFinancial Audit Manual for auditing the financial statements of federal and provincial governments was outsourced to foreign consultants under PIFRA. The consultants have developed the guidelines and the methodologies with the help of the Accounting Policy Wing, which would be responsible for future maintenance and updating of the Manual. In addition, the Office of the Auditor General through PIFRA procured an audit department management system with modules for audit planning and implementation, risk assessment, personnel management, and recommendation tracking.33 An action plan for implementation of the new Financial Audit Manual is needed for an effective FY2004-05 and FY2005-06 audit. The implementation of the new Financial AuditManualshouldbelinkedtothecapacity-buildingandcomputerizationactivities. (9)QualityAssurance 51. Audit documentation and report writing for quality assurance needs improvement. Supervision occurs at the field audit office level where the Director General personally certifies the quality of audit reports; there is further review at the Deputy Auditor General level for quality assurance. Finally there is a Quality Assurance Review Committee at the Office of the Auditor General of Pakistan, which reviews all audit reports before their release. This process needs to be supported by formal mechanisms and adequate working papers as per ISA 220, Quality Control for Audit Work. The new Financial Audit Manual (Chapters 5 to 15) describes in detail the procedures for direction, supervision, and review of audit work. The World Bank's project team was not able to review recent audit reports because they had not been made public. Therefore,scrutinyofthisimportantareaisincompleteandinadequateinthisassessment. B.AuditingStandardsasPracticed 52. The diagnostic questionnaires have collected information about the current arrangements for the auditmethodologyandtheapparentgapsinthecountryinthefollowingareas: 33The Audit Command Language software has been acquired for computer-assisted audit techniques and applied on some transactiondatainSAPR/3systemsinaccountingoffices. PAGE 19 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS ·auditplanning, ·auditsupervision, ·reviewinginternalcontrols, ·reviewingcompliancewithlaws, ·ensuringadequateauditevidenceiscollected, ·analyzingwhetherthefinancialstatementsaccordwithaccountingstandards, ·preparingauditopinions, ·reportingonfraud,and ·reportingoncompliance. Outofthisexercisecamerecommendedactivitiesthatwillhelpbringlocalstandardsinlinewithinternational standards. (1)AuditPlanning 53. The planning process should collect information about the audited entity. Certification audit procedures suggest that the audit staff prepare work flow, procedure diagrams, or systems outlines, and list the main accounting areas in order to be familiarized with the audited entity; however, this does not include risk assessment and determination of materiality levels, which are more or less pre-defined by the procedures. The procedures define the objectives of each of the six audit areas: establishment costs, contingencies,pensions,receipts,generalprovidentfunds,andaccountscompilation. Theobjectivesarenot refined in accordance with risks of understatement, overstatement, or misstatement that can be associated with any of the audit areas; and audit tests are not accordingly articulated. Internal audit function is evaluated as part of the regularity audit. However, since internal audit in government departments is in its infancy,34 the certificationauditdoesnotplacerelianceontheinternalaudit. 54. Engagement of chartered accountants, as part of the audit teams for conducting of certification audit, can build skills. The planning documents currently prepared do not identify specific risks. The new Financial Audit Manual should introduce more comprehensive planning requirements based on the specific objectives of the audits. Engagement of chartered accountants as part of the audit teams for conducting certification audit can be very helpful in skill development. The memorandum of understanding between the Auditor General of Pakistan and the Institute of Chartered Accountants of Pakistan may be utilized for procuring such services with ICAP quality assurance support. The Government's response to the draft report noted that in addition to these interactions the DAGP is partnering with the international bodies INTOSAI,ACCA,andIIA. 34AnInternalAuditPlanandInternalAuditManualweredevelopedunderPIFRAI,andchiefauditofficerspostedin15ministrieshave beengiventheexposuretraining. COUNTRY REPORT PAGE 20 A COMPARISON TO INTERNATIONAL STANDARDS (2)AuditSupervision 55. When implementing the new Financial Audit Manual, the supervisory staff--including the Director and the Deputy Director--should test and demonstrate the new audit methodologies in the presence of field audit teams. The current supervision process generally concentrates on reviewing thefindingsoftheauditteamanddocumentationoftheauditevidence,andreferencingandsequencingofthe audit working papers; less emphasis is placed on involvement in the field work and on the overall assurance levels achieved. The shift should be made toward the risk-based audit approach. In the risk-based audit approach, the auditor minimizes risk through applying judgment in the design and conduct of field testing in ordertoprovidetherequiredassurancethatthefinancialstatementsprovideatrueandfairview. (3)ReviewingInternalManagementControlProcedures 56. The new audit methodology and process should be rolled out immediately to improve environmental risk assessment, compliance testing, and sampling. The existing certification audit procedures are mechanical and do not provide the requisite flexibility to the auditor to exercise judgment and innovation in achieving a higher degree of assurance. The techniques used for compliance testing and sampling need improvement. For example, the results of compliance testing have limited impact on the samplesizeforthesubstantiveprocedures,andtheresultsofthecompliancetestingareseldomusedtotailor the selection of sample transactions based on an identified pattern of errors. Therefore, the new audit methodology should be rolled out as early as possible without waiting for the implementation of the New Accounting Model and computerization of the accounting systems. An audit methodology should answer the followingpoints: ·Whatistheauditconfidencelevel? ·Whataretherequirementsforauditplanning,auditworkpapers,andauditreporting? ·Howisauditmaterialitydetermined,andwhatisanacceptablelevelofauditriskandconfidence? ·Howisanappropriatemixofauditworkdevelopedtoaddresstheauditrisks? 57. The audit should be completed by a process that provides information on how audit errors are summarizedandevaluatedagainstauditmateriality. (4)AuditEvidence 58. The new Financial Audit Manual provides details of the audit programs and documentation guidelines. Audit evidence is crucial to an effective audit. Current practice produces audit evidence that is poorly documented, filed, and referenced. The Financial Audit Manual offers guidelines that wouldhelpimprovethecaptureanddocumentationoftheauditevidence.TheFinancialAuditManualshould beimplemented. PAGE 21 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS (5)AnalyzingFinancialStatements 59. The transaction-based financial statements provide some limited scope for financial analysis that is useful for the audit. The auditor's ability to perform and use the various analyses of financial statements is hampered when these lack meaningful and reliable information with respect to assets orliabilitiesbalances.However,analysisoftheratiosofoneexpenditureheadtoanotherhead,comparisonof variations of expenditures over time, and relationships among financial and non-financial information (e.g. numberofstafftopayroll)canprovideusefulindicatorsofpossibleerrors. (6)ReportingonFinancialStatements 60. There should be a reference to the financial reporting framework used when preparing financial statements (including identifying the country of origin of the framework when the IAS framework is not used). There is no specific reference to the reporting framework in any procedures in use in Pakistan. The only mention relates to the provisions of Section 5(a) of the Controller General of Account Ordinance 2001 when read with the Article 169 of the Constitution. The IPSAS should be identified as the relevant financial reporting framework in the audit certificate once the accounts are prepared in this form. 61. The audit certificate should completely comply with the specimen formats given in the FinancialAuditManualandproceduresbeingfollowed. Theopinionparagraphgivesanexpressionthat the financial statements "can be relied upon." This is not consistent with the specimen audit reports given in the Procedures for the Certification Audit, which requires stating that "the accounts are complete and accurateinallmaterialaspects." 62. The audit report should be a stand-alone document giving complete assurance on the financial statements and should not refer to other reports. The certification audit report makes mention of the other AGP reports covering aspects of financial governance or economical, efficient, and effective utilization of public resources, which are submitted separately to the President. These reports provide information relatingtoweaknessesinthesystemoffinancialcontroloraccounting,inadditiontothosementionedinaudit comments annexed to the audit certificate. The details of all such referenced AGP reports mentioned in the audit certificate on the financial statements should be reattached to the audit certificate for a complete analysis. (7)ReportingonFraud 63. Forensic audit training is needed. The Supreme Audit Institution does not focus on fraud in a sufficiently systematic way. Much of the reporting seems to relate to fraudulent behavior and to suggest recoveries without detailing the facts. The ISA 240, The Auditor's Responsibility to Consider Fraud and Error COUNTRY REPORT PAGE 22 A COMPARISON TO INTERNATIONAL STANDARDS in an Audit of Financial Statements, requires the auditor to obtain information that is used to identify the risks of material misstatement due to fraud; to evaluate the design of the entity's related controls, including relevant control activities; and to determine whether they have been implemented. The auditing standard also requires the auditor to inform the auditee's management and the Board, if there is one, of any fraud and failure in internal control that led to the fraud. The auditor's report should identify the action that the entity is taking about the fraud. The Auditor General on special request may cooperate with other government agencies,liketheNationalAccountabilityBureau,onspecificincidenceoffraud. (8)ReportingonCompliance 64. The audit should be understood as a tool for gradual improvement in the control systems and processes over time. Thegeneraltendencyisfortheaudittocoverandreportonallcomplianceissues confronting an organization instead of emphasizing the most critical issues. The audit report can add significant value if the auditors focus on more critical issues with impact on the organization and recommend waystoresolvethoseissues. PAGE 23 COUNTRY REPORT 4 ACTION PLANS Accounting Standards Action to be taken to move towards Current status Issue international standards 1. Has the Public Sector Partially. The notification of the NAM needs to be reviewed and Accounting Law adopted adoption of the IPSAS-2 cash flow streamlinedtoensurethatthepoliciesand IPSAS? reporting format as part of theoverall procedures contained therein are reporting requirements of the consistent with and have references to government is a step in the right IPSAS. direction. 2. Does the education and Partly. A comprehensive training As training programs are revised, the training of accountants strategy is directed toward the International Education Standards will be accordwithIES? professionalizationofaccountingstaff thebasisforfurtherrevisionsrequired. throughIES-compliantqualifications. 3. Does the ICAB Code of Yes. The Auditor General has This will be implemented through more Ethics match international adoptedINTOSAICodeofEthics. regulartraining. standards? 4. Is there a body to Yes. The Constitution of Pakistan The AGP considers that the Constitution prescribe public sector delineates the authority of the empowers the AGP to prescribe public accountingstandards? Auditor General of Pakistan to sector accounting standards, and that prescribe the form, principles, and currentlythisissufficient. methods of accounts of the Federation and of the Provinces with theapprovalofthePresident. 5. Are the financial Partly. The Cash Basis IPSAS for Work is in progress on both the cash flow statements in accord with financialreportingisnotyetfollowed, statementsandbudgettoactual theIPSASstandard? nor is the accrual-based IPSAS. The CGA has the responsibility for preparing and maintaining the accounts of the Federation, the Provinces and district governments. The CGA also lays down the principles governing internal financial control but certain accounting offices still remain with the provincial governments. COUNTRY REPORT PAGE 24 A COMPARISON TO INTERNATIONAL STANDARDS Accounting Standards Action to be taken to move towards Current status Issue international standards 6. Is the statement of cash No. A basic statement of cash receipts and payments in receipts and payments is provided IPSASform? but this information is currently presented in formats inconsistent withtheIPSAS. 7. Are accounting policies No. Statements of accounting and explanatory notes policies are not provided in the required? budgetoraccountsdocuments. 8. Are other disclosures in Partly. Financial statements are not accordwithIPSAS? available within 6 months of the reporting period; some items are not disclosed, and presentation does not m e e t s o m e t r a n s p a r e n c y requirements. 9. Does the government No. A Committee will be formed to study the issue a consolidated financial issue and make recommendations on the s t a t e m e n t w h i c h best way forward to achieving this. The consolidates all controlled July 2007 Workshop to be conducted by entities? the World Bank for the CGA establishmentwillfollow-uponthis. Auditing Standards Action to be taken to move towards Current status Issue international standards 1. Is the SAI statutory Partially. Some additional powers Some revisions in the Auditor General framework in accord with need to be established by legislation Ordinance 2001 are being considered in the needs of the INTOSAI assetoutbelow. respect of district audits. Adequate AuditingStandards? mandate and other issues as specified in point number 6 below also need to be examined. 2. Is there a body to Yes. It has been construed from The AGP considers that the law prescribe public sector various provisions of legislation, empowers the AGP to prescribe public auditingstandards? including Section 22 of the Auditor sector accounting standards, and that General Ordinance 2001 that the currentlythisissufficient. Auditor General would be the standard-setting authority for public sector auditing. Thus, the Auditor General adopted INTOSAI Auditing Standards as recommended by a committee of senior officers in the DAGP. PAGE 25 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Auditing Standards Action to be taken to move towards Current status Issue international standards 3. Have INTOSAI and IFAC Partly. The Auditor General has A decision has been made to adopt the audit standards been adopted INTOSAI Auditing ISAs as per the INTOSAI standard setting adopted? Standards. processes by which the ISAs will be incorporated into the International StandardsofSupremeAuditinstitutions. 4. Has a code of ethics Yes Current actions are considered to be equivalent to the INTOSAI sufficient. Auditing Standards been adopted? 5. Is the accountability Yes Current actions are considered to be process in the SAI in accord sufficient. with INTOSAI Auditing Standards? 6. Does the SAI legal Largely. Improved legislation excluding limits on framework meet the jurisdiction, mandate, and function, INTOSAI Auditing Standards providing improved offence and immunity for independence and clauses and requiring enhanced disclosure powers? ofauditconclusionsaretobeconsidered. 7. Does education and Partly. Staff needs more professional The AATI will continue to review its training of auditors accord training. syllabus to cover all areas recommended withINTOSAIandIES? bytheIFACeducationalstandards. 8. Is the SAI equipped with Yes. Though not fully implemented Improved methodologies are being the audit methods and atthemoment. implemented. Technology to support a technologies to meet the management information system for the I N T O S A I A u d i t i n g Auditor General is not in place at present. Standards? The requirements are being acquired through PIFRA. The implementation plan will review capacity for implementing the newFinancialAuditManual. 9. Does the SAI have the Partly. Internal quality assurance and Improved working paper guidance and quality assurance programs supervision provide review computerization combined with more to meet international arrangements among the field audit effective supervision and more standards? offices. independent quality review processes are being implemented as per the FAM. This will be supported through establishing a function of quality management in the DAGP. COUNTRY REPORT PAGE 26 A COMPARISON TO INTERNATIONAL STANDARDS Auditing Standards Action to be taken to move towards Current status Issue international standards 10. Does the process of Partly. Improved methodologies are The audit process as per the FAM will be planning the audits meet beingimplemented. risk-based allowing sufficient flexibility to internationalstandards? the auditors to articulate and apply appropriate audit procedures on methodically selected samples to arrive at representativeauditconclusions. 11. Does the process of Partly. Working paper systems and The revised working paper structure should supervising the audits meet audit methodologies do not currently be implemented together with the new internationalstandards? enable effective supervision. Improved FinancialAuditManualforauditsupervision. methodologies are being implemented underPIFRA. 12. Does the process to Partly. Improved methodologies are The methodology is to be more risk- and - evaluate the reliability of beingimplemented. systemsbasedaspertheFAM. internal control meet internationalstandards? 13. Does the process used in Partly. Improved methodologies are The methodology is to be risk- and -systems audits to assess compliance beingimplemented. based and PIFRA is to review whether the with laws meet international audit planning arrangements may be revised standards? so that some regularity audit aspects are integrated as per the FAM with the annual certification audit, and other aspects are carriedoutusingperformanceaudits. 14. Does the audit process Partly. The evidence to support audit More rigorous plans for audit testing are used to obtain evidence to criticisms on individual transactions is being implemented as per the Financial support conclusions meet generally better than that available to Audit Manual. The evidence for audit internationalstandards? provide the more general audit assurance is to be organized as per FAM assurance on the summary figures in requirements. thefinancialstatements. 15. Does the audit analyze the Partly. The existing structure of the The implementation of IPSAS for the annual financial statements to financial statements only provides accounts as per plans set out above will establish whether acceptable limited scope for financial analysis that improve the DAGP's ability to carry out accounting standards for isusefulforthecertificationaudit. meaningful and reliable financial analysis financial reporting and because the accounting policies and disclosurearecompliedwith? reporting will be in accordance with internationalnormsandstandards. 16. Does the auditor prepare Not fully at this stage. The Auditor The timetable and program for the an audit opinion on the General signs an opinion on the implementation of the newly adopted financial statements in a form accounts; but because the financial Financial Audit Manual is to be specified in that accords with international statements are not prepared in detail and broad timetables have been standards? accordance with adequate standards, established under the PIFRA project. The the wording of the audit opinion does FAM is aimed at forming an opinion on the not contain all of the requirements of truth and fairness of the financial statements PAGE 27 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Auditing Standards Action to be taken to move towards Current status Issue international standards ISA 700, The Auditor's Reports on so that the Auditor General can sign an Financial Statements. The wording opinion in accordance with ISA 700. The does not clearly indicate the financial FAM audit methodology specifies how the reporting framework used to prepare audit work can be planned to meet the the financial statements, nor does it confidence level that is implicit in the audit state the auditor's opinion as to opinion, and identify the level and extent of whether the financial statements give a audit testing required in order to express true and fair view (or are presented that opinion. The AGP intends to issue the fairly, in all material respects) in opinion for the 2005-06 federal accounts as accordance with that financial perISA700. reportingframework. 17. Does the consideration of Partly. Audits focus on examining The testing is to be more statistically based fraud and error in an audit of transactions for discrepancies and asperFAM.Forensicaudittrainingisneeded financial statements accord regulatory breaches. Much of the under PIFRA to improve the ability of the withinternationalstandards? reporting seems to relate to fraudulent audit staff to categorize the observation as behavior and suggesting recoveries either a mistaken violation or a deliberate withoutdiggingoutthefactsindetail. andintentionalacttotakeunduebenefit. 18. Are the Auditor General's Apparently. But only after tabling in the The audit legislation should formally provide reportsmadepublic? Parliament and consideration by the for reports to be made public, and publicly Public Accounts Committee. The available when tabled in the Parliament with legislation does not specifically require appropriate immunity arrangements for the publication. auditors. 19. Is the process for taking Partly. Improved audit, Public Improved audit methodology and report a c t i o n o n a u d i t A c c o u n t s C o m m i t t e e , a n d writing are in process so as to improve the recommendations sufficiently departmental administrative processes report contents. Changes to the processes effective to meet international are needed for follow-up of audit for departmental and parliamentary review standards? reports. There is an enormous backlog processes will improve timeliness in by the Public Accounts Committee in scrutinizing and reporting on audit reports, reviewing the audit observations. andseparatelyactivitiesarebeingplannedto Effective review of the backlog is reduce the backlog of unresolved audit becomingincreasinglyimpossible. objections. COUNTRY REPORT PAGE 28 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 Framework35 by the Public Expenditure and Financial Accountability (PEFA) Program36 has opened the way for a diagnostic tool to be developed that is referenced to the accounting and auditing standards of the International Federation of Accountants (IFAC) andtheInternationalOrganizationofSupremeAuditInstitutions(INTOSAI),andotherrelevantinternational benchmarks. This exercise provides substantial insight into country performance in regard to the external auditingandfinancialstatementreportingfinancialmanagementindicators. Asetof6questionnaireswereusedtocollectrelevantinformationoncountrypractices: 1. 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 withtheIFACCodeofEthicsforProfessionalAccountants. 2. 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 PublicSectorAccountingStandards(IPSAS). 3. Public sector accounting practices for the general budget sector if using the accrual basis of accounting - compared with the IPSAS requirements that govern accrual reportingforthepublicsector. 4. Public sector auditing environment compared with the provisions of the INTOSAI CodeofEthicsandtheINTOSAIgeneralstandards. 5. Public sector auditing practices compared to the requirements of the INTOSAI field standardsandreportingstandards,andtheIFACInternationalStandardsonAuditing. 35 The 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 monitoringofPFMperformanceprogress,andacommonplatformfordialogue. 36The PEFA Program is a partnership among the World Bank, the European Commission, the UK's 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, comprisingmembersoftheseagencies,managestheProgram.ASecretariatislocatedintheWorldBankinWashington,DC. PAGE 29 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS 6. Accounting and auditing practices for state-owned enterprises compared with the requirements of the International Financial Reporting Standards (IFRS) and International StandardsonAuditingthatgoverncommercialreporting. The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help of in-country experts retained by the World Bank, are supplemented by a due diligence review conducted by membersofaWorldBanktaskteam. 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, andsampleauditreportsandworkingpapersets. A country report on the assessment is prepared for each country and reviewedby 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. Discussions will also be held with the relevant stakeholders to devise an implementation plan to address the way forward with a view to minimize variances from international standards. COUNTRY REPORT PAGE 30 ANNEX - B ACCOUNTING AND AUDITING STANDARDS This annex contains a summary of the frameworks that have been used for the public sector accounting and auditingassessment The International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI) are cooperating in setting international standardsforaccountingandauditing. The IASB is an independent, privately funded accounting standard-setter based in London, UK. The Board 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 issuedInternationalFinancialReportingStandards(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 ExposureDraftscurrentlyonissueisavailableathttp://www.ifac.org/publicsector. Thefirst20IPSASarebased on IAS to the extent appropriate for the public sector. IFAC also has established the International Auditing and Assurance Standards Board (IAASB) to prepare and promulgate International Standards on Auditing (ISA) and is nowworkingincooperationwithINTOSAIonpreparingpublicsectorguidanceontheuseofISA. 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 ISAinthepublicsector.37 Thevariousstandardsarelistedonthefollowingpages. 37WorkingGrouponFinancialAuditGuidelines,INTOSAIAuditingStandardsCommittee,SwedishNationalAuditOffice,2004. PAGE 31 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS InternationalPublicSectorAccountingandEducationStandards InternationalPublicSectorAccountingStandards IPSAS1, PresentationofFinancialStatements IPSAS2, CashFlowStatements IPSAS3, NetSurplusorDeficitforthePeriod,FundamentalErrorsandChangesinAccountingPolicies IPSAS4, TheEffectsofChangesinForeignExchangeRates IPSAS5, BorrowingCosts IPSAS6, ConsolidatedFinancialStatementsandAccountingforControlledEntities IPSAS7, AccountingforInvestmentsinAssociates IPSAS8, FinancialReportingofInterestsinJointVentures IPSAS9, RevenuefromExchangeTransactions IPSAS10, FinancialReportinginHyperinflationaryEconomies IPSAS11, ConstructionContracts IPSAS12, Inventories IPSAS13, Leases IPSAS14, EventsAftertheReportingDate IPSAS15, FinancialInstruments:DisclosureandPresentation IPSAS16, InvestmentProperty IPSAS17, Property,PlantandEquipment IPSAS18, SegmentReporting IPSAS19, Provisions,ContingentLiabilitiesandAssets IPSAS20, RelatedPartyDisclosures IPSAS21, ImpairmentofNon-cashGeneratingAssets CashBasisIPSAS,FinancialReportingundertheCashBasisofAccounting InternationalEducationStandards IES1, EntryRequirementstoaProgramofProfessionalAccountingEducation IES2, ContentofProfessionalAccountingEducationPrograms IES3, ProfessionalSkills IES4, ProfessionalValues,EthicsandAttitudes IES5, PracticalExperienceRequirements IES6, AssessmentofProfessionalCapabilitiesandCompetence IES7, ContinuingProfessionalDevelopment IES8, CompetenceRequirementsforAuditProfessionals COUNTRY REPORT PAGE 32 A COMPARISON TO INTERNATIONAL STANDARDS InternationalFinancialReportingStandardsandAccountingStandards IFRS1, First-timeAdoptionofInternationalFinancialReportingStandards IFRS2, Share-basedPayment IFRS3, BusinessCombinations IFRS4, InsuranceContracts IFRS5, Non-currentAssetsHeldforSaleandDiscontinuedOperations IAS1, PresentationofFinancialStatements IAS2, Inventories IAS7, CashFlowStatements IAS8, AccountingPolicies,ChangesinAccountingEstimatesandErrors IAS10, EventsAftertheBalanceSheetDate IAS11, ConstructionContracts IAS12, IncomeTaxes IAS14, SegmentReporting IAS16, Property,PlantandEquipment IAS17, Leases IAS18, Revenue IAS19, EmployeeBenefits IAS20, AccountingforGovernmentGrantsandDisclosureofGovernmentAssistance IAS21, TheEffectsofChangesinForeignExchangeRates IAS23, BorrowingCosts IAS24, RelatedPartyDisclosures IAS26, AccountingandReportingbyRetirementBenefitPlans IAS27, ConsolidatedandSeparateFinancialStatements IAS28, InvestmentsinAssociates IAS29, FinancialReportinginHyperinflationaryEconomies IAS30, DisclosuresintheFinancialStatementsofBanksandSimilarFinancialInstitutions IAS31, InterestsinJointVentures IAS32, FinancialInstruments:DisclosureandPresentationseealso:SeealsoFinancialInstruments-otherissues IAS33, EarningsperShare IAS34, InterimFinancialReporting IAS36, ImpairmentofAssets IAS37, Provisions,ContingentLiabilitiesandContingentAssets IAS38, IntangibleAssets IAS39, Financial Instruments: Recognition and Measurement see also: See also Financial Instruments - other issues IAS40, InvestmentProperty IAS41, Agriculture PAGE 33 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS INTOSAICodeofEthicsandAuditingStandards CodeofEthics Integrity. Auditors have a duty to adhere to high standards of behavior (e.g. honesty and candidness) in the courseoftheirworkandintheirrelationshipswiththestaffofauditedentities. 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 evidenceobtainedandassembledinaccordancewiththeSAI'sauditingstandards. Professional secrecy. Auditors should not disclose information obtained in the auditing process to third partiesexceptforthepurposesofmeetingtheSAI'sstatutoryresponsibilities. Competence.Auditorsmustnotundertakeworkwhichtheyarenotcompetenttoperform. BasicPostulatesforAuditingStandards (a) The SAI should consider compliance with the INTOSAI auditing standards in all matters that are deemed material. Certain standards may not be applicable to some of the work done by SAIs, including those organized as Courts of Account, nor to the non-audit work conducted by the SAI. The SAI should determinetheapplicablestandardsforsuchworktoensurethatitisofconsistentlyhighquality. (b) The SAI should apply its own judgment to the diverse situations that arise in the course of government 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 processtobeinplaceandoperatingeffectively. (d) Development of adequate information, control, evaluation and reporting systems within the government will facilitate the accountability process. Management is responsible for the correctness and sufficiencyoftheformandcontentofthefinancialreportsandotherinformation. (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 specificandmeasurableobjectivesandperformancetargets. (f) Consistent application of acceptable accounting standards should result in the fair presentation of the financialpositionandtheresultsofoperations. COUNTRY REPORT PAGE 34 A COMPARISON TO INTERNATIONAL STANDARDS (g) The existence of an adequate system of internal control minimizes the risk of errors and irregularities. It is the responsibility of the audited entity to develop adequate internal control systems to protect its resources. It is also the obligation of the audited entity to ensure that controls are in place and 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 controlsarefoundtobeinadequateormissing. (h) Legislative enactments would facilitate the cooperation of audited entities in maintaining and providing accesstoallrelevantdatanecessaryforacomprehensiveassessmentoftheactivitiesunderaudit. (i) AllauditactivitiesshouldbewithintheSAI'sauditmandate.* (j) Legislative enactments would facilitate the co-operation of audited entities in maintaining and providing accesstoallrelevantdatanecessaryforacomprehensiveassessmentoftheactivitiesunderaudit. (k) SAIsshouldworktowardimprovingtechniquesforauditingthevalidityofperformancemeasures. (l) SAIsshouldavoidconflictofinterestbetweentheauditorandtheauditedentity. *Thefullscopeofgovernmentauditingincludesregularityandperformanceaudit. Regularityauditembraces: § offinancialaccountabilityofaccountableentities,involvingexaminationandevaluationof Attestation financialrecordsandexpressionofopinionsonfinancialstatements; § Attestationoffinancialaccountabilityofthegovernmentadministrationasawhole; §offinancialsystemsandtransactionsincludinganevaluationofcompliancewithapplicablestatutes Audit andregulations; § Auditofinternalcontrolandinternalauditfunctions; § Auditoftheprobityandproprietyofadministrativedecisionstakenwithintheauditedentity;and § ofanyothermattersarisingfromorrelatingtotheauditthattheSAIconsidersshouldbe Reporting disclosed. Performanceauditentails theauditofeconomy,efficiencyandeffectiveness,andembraces: §oftheeconomyofadministrativeactivitiesinaccordancewithsoundadministrativeprinciplesand Audit practices,andmanagementpolicies; PAGE 35 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS §oftheefficiencyofutilizationofhuman,financialandotherresources,includingexaminationof Audit informationsystems,performancemeasuresandmonitoringarrangements,andproceduresfollowedby auditedentitiesforremedyingidentifieddeficiencies;and §oftheeffectivenessofperformanceinrelationtotheachievementoftheobjectivesoftheaudited Audit entity,andauditoftheactualimpactofactivitiescomparedwiththeintendedimpact. GeneralAuditingStandards TheauditorandtheSAImustbeindependent. TheauditorandtheSAImustpossesstherequiredcompetence. The auditor and the SAI must exercise due care and concern in complying with the INTOSAI auditing standards. This embraces due care in planning, specifying, gathering and evaluating evidence, and in reporting findings,conclusionsandrecommendations. TheSAIshouldadoptpoliciesandprocedurestorecruitpersonnelwithsuitablequalifications. The SAI should adopt policies and procedures to develop and train SAI employees to enable them to perform theirtaskseffectively,andtodefinethebasisfortheadvancementofauditorsandotherstaff. The SAI should adopt policies and procedures to prepare manuals and other written guidance and instructionsconcerningtheconductofaudits. 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 sufficientnumberofpersonsfortheaudit;andhaveproperplanningandsupervisiontoachieveitsgoalsatthe requiredlevelofduecareandconcern. The SAI should adopt policies and procedures to review the efficiency and effectiveness of the SAI's internal standardsandprocedures. FieldStandards (a) The auditor should plan the audit in a manner that ensures that an audit of high quality is carried out in an economic,efficientandeffectiveway,andinatimelymanner. (b) The work of the audit staff at each level and audit phase should be properly supervised during the audit; anddocumentedworkshouldbereviewedbyaseniormemberoftheauditstaff. COUNTRY REPORT PAGE 36 A COMPARISON TO INTERNATIONAL STANDARDS (c) The auditor, in determining the extent and scope of the audit, should study and evaluate the reliability of internalcontrol. (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 regularityaudits. ReportingStandards (a) At the end of each audit the auditor should prepare a written opinion or report, as appropriate, setting out the findings in an appropriate form; its content should be easy to understand and free from vagueness or ambiguity, include only information which is supported by competent and relevant audit evidence, and beindependent,objective,fairandconstructive. (b) ItisfortheAuditorGeneraltodecidefinallyontheactiontobetakeninrelationtofraudulentpracticesor seriousirregularitiesdiscoveredbytheauditors. PAGE 37 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS International Standards on Auditing Introductory Matters Audit Evidence 100 Assurance Engagements 500 Audit Evidence 110 Glossary of Terms 501 Audit Evidence - Additional Considerations for 120 Framework of ISAs Specific Items 505 External Confirmations Responsibilities 510 Initial Engagements - Opening Balances 200 Objective and General Principles Governing an 520 Analytical Procedures Audit of Financial Statements 530 Audit Sampling 210 Terms of Audit Engagements 540 Audit of Accounting Estimates 220 Quality Control for Audit Work 550 Related Parties 230 Documentation 560 Subsequent Events 240 The Auditor's Responsibility to Consider Fraud 570 Going Concern and Error in an Audit of Financial Statements 580 Management Representations 240A Fraud and Error 250 Consideration of Laws and Regulations in an Using the Work of Others Audit of Financial Statements 600 Using the Work of Another Auditor 260 Communications of Audit Matters with Those 610 Considering the Work of Internal Auditing Charged with Governance 620 Using the Work of an Expert Planning Audit Conclusions and Reporting 300 Planning 700 The Auditor's Reports on Financial Statements 310 Knowledge of the Business 710 Comparatives 320 Audit Materiality 720 Other Information in Documents Containing Audited Financial Statements Internal Control 400 Risk Assessments and Internal Control Specialized Areas 401 Auditing in a Computer Information Systems 800 The Auditor's Report on Special Purpose Audit Environment Engagements 402 Audit Considerations Relating to Entities Using 810 The Examination of Prospective Financial Service Organizations Information Related Services 910 Engagements to Review Financial Statements 920 Engagements to Perform Agreed-Upon Procedures Regarding Financial Information 930 Engagements to Compile Financial Information COUNTRY REPORT PAGE 38 ANNEX - C PAKISTAN AUDITING AND ACCOUNTING LEGISLATION (A)TheConstitutionoftheIslamicRepublicofPakistan 169. TheAuditorGeneralshall,inrelationto- (a) theaccountsoftheFederationandoftheProvinces;and (b) the accounts of any authority or body established by the Federation or a Province, perform such functions and exercise such powers as may be determined by or under Act of Majlis-e-Shoora (Parliament)and,untilsodetermined,byorderofthePresident. 170. The accounts of the Federation and of the Provinces shall be kept in such form and in accordance withsuchprinciplesandmethodsastheAuditorGeneralmay,withtheapprovalofthePresident,prescribe. 171. The reports of the Auditor General relating to the accounts of the Federation shall be submitted to the President, who shall cause them to be laid before the National Assembly and the reports of the Auditor General relating to the accounts of a Province shall be submitted to the governor of the Province, who shall causethemtobelaidbeforetheProvincialAssembly. (B)AuditingLegislation Extracts from the Auditor General's (Functions, Powers and Terms and Conditions of Service) Ordinance,2001 Section 4. Term of Office ­ The Auditor General shall, unless he resigns earlier or is removed from office in accordancewiththeConstitution,holdofficeforafixedtermoffiveyearsfromthedateonwhichheassumes suchofficeorheattainstheageofsixty-years,whicheverisearlier... Section 7. Auditor General to certify accounts. ­ The Auditor General shall, on the basis of such audit as he may consider appropriate and necessary, certify the accounts, compiled and prepared by Controller General of Accounts or any other person .....and shall submit the certified accounts with such notes, commentsorrecommendationashemayconsidernecessarytothePresident.... Section8. ProvisionsrelatingtoAudit­TheAuditorGeneralshall­ (a) audit all expenditures from the Consolidated Fund ....to ascertain whether the moneys shown in the accounts as having been disbursed were legally available for and applicable to the service and purposetowhichtheyhavebeenapplied.... PAGE 39 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS (b) auditalltransactions.. (c) audit all trading, manufacturing, profit and loss accounts and balance sheets and other subsidiary accounts.... (d) audit,subjecttoprovisionsofthisOrdinance,theaccountsofanyauthorityorbodyestablished... Section 9. Audit of receipts and expenditure of holders of authorities substantially financed by loans andgrants..... Section14. PowersofAuditorGeneralinconnectionwithauditofaccounts. (1) TheAuditorGeneralshall.....haveauthority- (a) toinspectanyofficeofaccounts... (b) torequirethatanyaccounts,books,papers... (c) toenquireormakesuchobservations... (2) Theofficerinchargeofanyofficeordepartmentshallaffordallfacilities.... (3) Any person or authority hindering the audit functions or the Auditor General regarding inspection of accounts shall be subject to disciplinary action under relevant Efficiency and Discipline Rules, applicable to suchperson. Section22. Powertomakeregulations.... (C)AccountingLegislation Extracts from the Controller General of Accounts (Appointment, Functions and Powers) Ordinance, 2001 Section 4. Controller General of Accounts. ­ ThereshallbeaControllerGeneralofAccountswhoshallbe appointedbythePresidentfromamongsttheofficersoftheAccountsGroupandshallbeaPBS22officer. Section5. FunctionsoftheControllerGeneral.- ThefunctionsoftheControllerGeneralshallbe­ (a) to prepare and maintain the accounts of the Federation, the Provinces and district governments in such form and in accordance with such methods and principles as the Auditor General may, with the approvalofthePresident,prescribefromtimetotime; (b) toauthorizepaymentsandwithdrawalsfromtheConsolidatedFundandPublicAccounts... (c) to prepare and maintain accounts of such organizations and authorities established, set up or controlled by the Federation or Provinces as may be assigned to him by the President or, as the case maybe,theGovernorofaProvince; COUNTRY REPORT PAGE 40 A COMPARISON TO INTERNATIONAL STANDARDS (d) to lay down the principles governing the internal financial control for Government departments in consultationwiththeMinistryofFinance... (e) to render advice on accounting procedure for new scheme, programmes or activities undertaken by theGovernmentconcerned; (f) to submit accounts compiled by him... to the Auditor General .... within the time-frame prescribed bytheAuditorGeneral; (g) toprovide....information (h) developandmaintainasefficientsystemofpension,providentfundsandotherretirementbenefits... (i) to co-ordinate and ensure resolution of audit observation of the Audit Department with the concerneddepartments;and (j) to prescribe syllabus, standards and provide facilities for training of officers and staff under his administrativecontrol. Section6. CertainofficestoworkunderthecontroloftheControllerGeneral... Section 7. Reports. ­ From the accounts directly kept or maintained by him or by accounts officers subordinate to him, and from the accounts kept and maintained by other entities, including self-accounting entities,theControllerGeneralshall­ (a) prepare each year the appropriation and finance accounts....for submission to the Auditor General.... (b) prepare and submit to the Auditor General for each financial year a Consolidated and General Financialstatement.... (c) .... Section12. Powertomakeregulations. ... PAGE 41 COUNTRY REPORT ANNEX - D BENEFITS OF ACCRUAL ACCOUNTING Extract from Study No. 14 "Transition to the Accrual Basis of Accounting: Guidance for Governments andGovernmentEntities,"IFACPublicSectorCommittee,December2003. 1.18 The IFAC Public Service Committee 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 Service Committee's other publications, this section contains a summary of the benefitsofreportingontheaccrualbasis. 1.19 The information contained in reports prepared on an accrual basis is useful both for accountability anddecision-making.Financialreportspreparedonanaccrualbasisallowusersto: §assesstheaccountabilityforallresourcestheentitycontrolsandthedeploymentofthoseresources; §assesstheperformance,financialpositionandcashflowsoftheentity;and §makedecisionsaboutprovidingresourcesto,ordoingbusinesswith,theentity. 1.20Atamoredetailedlevel,reportingonanaccrualbasis: §showshowagovernmentfinanceditsactivitiesandmetitscashrequirements; §allowsuserstoevaluateagovernment'songoingabilitytofinanceitsactivitiesandtomeetits liabilitiesandcommitments; §showsthefinancialpositionofagovernmentandchangesinfinancialposition; §providesagovernmentwiththeopportunitytodemonstratesuccessfulmanagementofits resources;and §isusefulinevaluatingagovernment'sperformanceintermsofitsservicecosts,efficiencyand accomplishments. FinancialPosition 1.21 Accrual accounting provides information on an entity's overall financial position and current stock of assetsandliabilities.Governmentsneedthisinformationto: §makedecisionsaboutthefeasibilityoffinancingtheservicestheywishtoprovide; §demonstrateaccountabilitytothepublicfortheirmanagementofassetsandliabilitiesrecognizedin thefinancialstatements; §planforfuturefundingrequirementsofassetmaintenanceandreplacement; §planfortherepaymentof,orsatisfactionof,existingliabilities;and COUNTRY REPORT PAGE 42 A COMPARISON TO INTERNATIONAL STANDARDS §managetheircashpositionandfinancingrequirements. 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 ofmanagingcostsanddeliveringservices. 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 criteriaforrecognition: §compelsgovernmentstoacknowledgeandplanforthepaymentofallrecognizedliabilities,notjust borrowings; §providesinformationontheimpactofexistingliabilitiesonfutureresources; §meansthatitispossibletoallocateresponsibilityforthemanagementofallliabilities;and §providesnecessaryinputforgovernmentstoassesswhethertheycancontinuetoprovidecurrent servicesandtheextenttowhichtheycanaffordnewprogramsandservices. 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,aresidualfigurefornetassets/equitywillbereported.Wherethisfigureispositiveitcanbeinterpreted asthenetresourcesthatmaybeappliedfortheprovisionofgoodsorservicesinthefuture,andthereforethe 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/equitycancomprisesomeorallofthefollowingcomponents: §contributedcapital; §accumulatedsurplusesanddeficits;and §reserves(forexamplerevaluationreserve;foreigncurrencytranslationreserve). FinancialPerformance 1.25Accrualaccountingprovidesinformationonrevenuesandexpenses,includingtheimpactoftransactions where cash has not yet been received or paid. Accurate information on revenues is essential for assessing the PAGE 43 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS impact of taxation and other revenues on the government's fiscal position, and in assessing the need for borrowinginthelongterm.Informationonrevenueshelpsbothusersandgovernmentsthemselvestoassess whethercurrentrevenuesaresufficienttocoverthecostsofcurrentprogramsandservices. 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 providesgovernmentswithinformationonthefullcostsoftheiractivitiessothattheycan: §considerthecostconsequencesofparticularpolicyobjectivesandthecostofalternative mechanismsformeetingtheseobjectives; §decidewhethertofundtheproductionofserviceswithingovernmentsub-entities,orwhetherto purchasegoodsandservicesdirectlyfromnon-governmentorganizations; §decidewhetheruserfeesshouldcoverthecostsassociatedwithaservice;and §allocateresponsibilityformanagingparticularcosts. 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 beusedwithinsub-entitiesforthemanagementofactivityandprogramcosts. 1.28Accrualaccountingallowsanindividualentityto: §recordthetotalcosts,includingdepreciationofphysicalassetsandamortizationofintangibleassets, ofcarryingoutspecificactivities; §recognizeallemployee-relatedcostsandtocomparethecostofvarioustypesofemploymentor remunerationoptions; §assessthemostefficientwayofproducingtheirgoodsandservicesandofmanagingtheresources overwhichtheyhavebeendelegatedauthority; §determinetheappropriatenessofcost-recoverypolicies;and §monitoractualcostsagainstbudgetedcosts. CashFlows 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 managementandmayassistinthepreparationofmoreaccuratecashbudgets." COUNTRY REPORT PAGE 44 A COMPARISON TO INTERNATIONAL STANDARDS Supplemental Table of Standards and Gaps Standards Present Position Options for Improvement I. Public Sector Accounting A. Assessment of the National Public Sector Accounting Environment Timely, relevant, and reliable financial information is required to support all fiscal and budget management, decision-making, and reporting processes. (1) The Accounting Law 1. For reliability, the The Constitution of Pakistan delineates The public sector accounting is requirements for public the authority of the Auditor General of undergoing a comprehensive reform sector accounting and Pakistan (AGP) to prescribe the form, sponsored by the PIFRA project of the reporting should be specified principles, and methods of accounts of World Bank. There is a need to maintain by law, cover all government- the Federation and of the Provinces with theexistingmomentumofactivities. owned entities, specify the the approval of the President. Under methodsbywhichaccounting these conferred powers, the Auditor and auditing standards are to General endorsed the Accounts Codes be set for the public sector, (Volume I to IV) as the accounting specify the reporting conduct. Currently the New Accounting requirements and lay down Model (NAM)38 is being implemented timetables for the publication withtheuseofSAPR/3applications. ofauditedannualaccounts. The New Accounting Model covers the accounting guidance related to the budget sector (the federal, provincial and district governments), self-accounting entitiesanddevelopmentprojects. The accounts-maintenance and the audit functions have been separated through assigning the accounts maintenance to the Controller General of Accounts (CGA) through the CGA Ordinance, 2001. 2. Compliance with IPSAS Developing a new financial reporting and A committee should be set up to review for non-commercial bodies accounting model in 1999 sought and steer the process of implementation and IAS for commercial guidance from the provisions of the of IPSAS on a continuous basis. This may bodies is needed for financial procedures given in the involve adoption of the Cash Basis IPSAS consistenttransparency. Constitution of Pakistan, the generally to start with and then gradually adopt the accepted accounting standards as Accrual Basis IPSAS as per the guidance suggested in INTOSAI Accounting given in the IFAC Public Sector Standards; IFAC-issued Guidelines for Committee's Study No. 14 relating to 38 The New Accounting Model is a set of 7 books, including the Accounting Principles Manual, Accounting Policies and Procedures Manual, Chart of Accounts, Accounting Guidelines, Accounting Procedures for Self-Accounting Entities, Book of Forms and FinancialReportingManual. PAGE 45 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement Governmental Financial Reporting, best transition toward the accrual basis of practices followed in other countries, accounting. and essential aspects of the existing The institutional and individual capacities system. However, a specific direction to are lacking in both the public sector apply IPSAS is neither given in the CGA financial management agencies, as well as Ordinance nor in the New Accounting the executive/ service delivery Model. formations. These are being overcome There are serious deliberations in through implementation of a progress to move fully toward IPSAS. comprehensive capacity development The adoption of IPSAS-2 cash flow program mainly sponsored by the PIFRA. formats39 of cash flow statement as The PIFRA project is supporting the recommended in the Cash Basis IPSAS is implementation of NAM through the a positive step toward this objective. application software which is being The NAM Financial Reporting Manual gradually rolled out to various districts provides for such reports, which to a accounts offices and other sites. Initially large extent comply with the reporting the idea is to expand technology-driven requirements under the Cash Basis financial management throughout the IPSAS, including many optional country while keeping the functionality disclosure requirements. However, simple and using the cash basis of there are certain deficiencies like non- accounting. Early efforts have resulted in disclosure of payments/receipts by third more than 41 productive sites out of 127. parties on behalf of the reporting entity This is indicative of the fact that the PFM that need to be identified and resolved reforms have entered into an advanced before the implementation of NAM stage of implementation with envisioned reportingframeworkiscompleted. benefits. The ADB also assists in improving the accounting and financial management of externally financed development projects (and particularly the implementing agencies involved in the earthquake rehabilitation and reconstruction). Steadily the efforts would be redirected toward vertical development through expanded functionalities and integrated financial reporting. (2) Education and Training of Public Sector Accountants 3. For reliability, the The Audit and Accounts Training Institute While the AATI's long-run focus is on curriculum requirements for (AATI) is a countrywide network specialized training and continuing the accounting qualifications providing the essential training in public professional development, the strategy 39Notification of financial reporting policy dated June 29, 2005, which states that the adoption of the IPSAS-2 cash basis of financial reporting as part of the annual finance accounts reporting with effect from FY2005-06 and the trial run of implementation of the policyforFY2004-05. ThesamehasbeenconfirmedforimplementationbytheCGAofficeinJuly2005. COUNTRY REPORT PAGE 46 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement of public sector accountants financial management to both accounting to professionalize the staff in audit and s h o u l d a c c o r d w i t h and executive arms of the government. accounting agencies of Pakistan through internationally recognized The AATI conducts long-term courses IES-compliant professional qualifications standards of accounting for staff and probationers which lead to isappreciable. training as established in the PIPFA Certification40 and short term International Education courses for professional development. Standards for Professional In case of probationers, the Federal Accountants(IES). Public Service Commission (FPSC) conducts the independent examinations. In addition, there are many civil servants from the Pakistan Audit and Accounts Service who have earned masters or higher degrees from foreign or local universities. The AATI is seeking exemptions from other professional bodies [including the UK Association of Chartered Certified Accountants (ACCA), Institute of Chartered Accountants of Pakistan (ICAP), and Institute of Cost and Management Accountants of Pakistan (ICMAP)] on the basis of FPSC exams and/or Pakistan Institute of Public Finance Accountants (PIPFA) exams. Arrangements are also underway with identified reputable tuition providers for passing the remaining exam papers of these bodies as a measure to encourage audit and accounts staff to opt for these professionalqualifications. 4. For reliability, public AATI has revitalized its syllabi and sector accountants should be learning methodologies through the provided with continuing technical assistance provided under the p r o f e s s i o n a l t r a i n i n g PIFRA and is now geared toward requirements that accord teaching of practical application areas, w i t h i n t e r n a t i o n a l l y including the IPSAS. The AATI has recognized standards of developed a comprehensive annual accountingtraining. trainingprogramandisstrivingtoachieve settargetsforthefirstyear. To work in public sector accounting, a 40PIPFA, a professional body of accountants, is a joint initiative of the Auditor General of Pakistan, ICAP, and ICMAP. and an associate memberofIFAC. PAGE 47 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement candidate must meet the minimum academic requirements, a graduate with commerce/accounting background. The civil servants who are recruited through the Federal Public Service Commission are also given one-year probationary training in AATI and exams conducted by FPSC; successful completion earns them membershipinthePIPFA. TheGovernmentofPakistanprescribesa minimum mandatory 12 days per year for in-service training.41 For accounting and auditing staff, these requirements are beingmainlymetbytheAATI. (3) Code of Ethics for Public Sector Accountants The INTOSAI Code of Ethics covers integrity; independence, objectivity, and impartiality; professional secrecy; and competence. The IFAC Code covers integrity, objectivity, independence, confidentiality, technical and professional standards,competenceandduecare,andethicalbehavior. 5. For reliability, public INTOSAI Code of Ethics was adopted by As such, the code of ethics is part of the sector accountants should be theAuditorGeneralofPakistan42andisto overall guidance provided by the head of required to adhere to the be followed by the staff that do audits or the organization to the staff members, principles laid down in a code are responsible for maintenance of for which non-compliance may lead to of ethics that are at least in accounts. The same has been included in trial of action in accordance with a c c o r d w i t h t h e theAATIsyllabus. Efficiency and Discipline Rules of internationally recognized Government of Pakistan. However, the One paragraph (21) relating to political standards for professional code of ethics should be made a part of neutrality has been deleted, apart from accountants. This may be staff contracts or separately signed by minorchangesofnomenclaturethathave based on IFAC or INTOSAI employees as a legally enforceable been made generally to substitute 'SAI' codes. document. Since the INTOSAI Code was with 'the Auditor General of Pakistan.'. designed for auditors, the CGA should Para 21 is deleted since public servants in review the ICAP Code for use by CGA Pakistan are not allowed to participate in accountants. politicalactivities. (4) Public Sector Accountant Arrangements 6. For timeliness, relevance With the exception of a few departments The funding should be arranged to andreliability,thereshouldbe where the accounts have been establish the internal audit units as per a professionally qualified departmentalized, the country follows a staffing and operational plan developed Chief Financial Officer (CFO) regime of centralized accounting through under PIFRA to enable an effective function to be responsible to the accounts offices keeping accounts of internal audit function as a fourth pillar of 41EstablishmentDivisionO.M.No1/6/2002.OP.II,dated5-4-2002. 42 Some adaptations and deletions were made by a committee constituted for the purpose by the Auditor General of Pakistan while issuingtheCodeofEthicsandAuditingStandardsofINTOSAI. COUNTRY REPORT PAGE 48 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement the Principal Accounting all departments in their regional governance. Officer (PAO) for maintaining jurisdiction. The principal accounting The CFO functions and internal auditing systems of internal financial officer is generally supported by a budget within each government entity should be controls that manage risks, officerfromwithinthatlineagency.43 strengthened. and for preparing regular Out of about 10,000 staff posted in the financial accounts for each Duality of control in accounting offices accounts offices, 921 (173 gazetted) are governmententity. shouldberesolved. employed by the federal government. 7. The CFO should also be Remaining staff come mainly from the r e s p o n s i b l e f o r t h e treasury services under the provincial m a i n t e n a n c e a n d financedepartments. management of the chart of Under PIFRA, a comprehensive plan has accounts, to ensure the most been developed to initiate the internal appropriate technological auditfunctioningovernmentagenciesfor support for financial which a center of excellence is envisaged management practices, within the CGA office. As a starting point m a n a g e t r a i n i n g a n d chief audit officers have been posted in education needs for financial 15 federal ministries. Main initiating management, report on key responsibilities of the chief audit officer performance indicators, and are internal audit/control, reconciliation assist program managers to of accounts, coordination with regard to develop an effective financial Departmental/Public Accounts approach to the delivery of Committees, and financial propriety of expectedoutcomes, expenditure and receipts. The ADB through a technical assistance in relation to emergency assistance project would initiate an internal control unit for implementing agencies involved in the rehabilitation and reconstruction activities. The same internal control unit is planned to be strengthened over time to become a Center of Excellence in Internal Auditing for all federal governmentoffices. 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. 8. National accounting The Government has not explicitly Formal adoption of IPSAS would enable standards should accord with adoptedIPSAS. the customization of the NAM financial international standards to reporting formats in compliance with The Auditor General of Pakistan has the provideconsistency. relevant IPSAS (moving from the cash 43UsuallytheSecretaryofaMinistryorheadofthelinedepartmentistheprincipalaccountingofficer. PAGE 49 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement The responsibility for Constitutional mandate to prescribe the basis in the short term to accrual basis in establishing the national form, principles, and methods of thelongerterm). accounting standards for the accounts of the Federation and of the A statement of cash receipt and payment public sector should be well- Provinces with the approval of the as per the Cash Basis IPSAS can be definedtoprovidereliability. President. The Auditor General has a prepared using existing information from similar role for any authority or body theaccountingrecords. established by the Federation or the Province subject to provisions of the There is a need to state the accounting relevant legislation. The NAM sets the policies and the basis on which the national standards of accounting and accountsareprepared. financialreporting. The accounting firm, Pricewaterhouse Coopers, analyzed differences between the IPSAS and the New Accounting Model in 2004. Currently NAM is being implemented using the cash basis of accounting and would gradually move towardtheaccrualbasis. (2) Preparation and Presentation of Financial Statements on the Cash Basis. 9.Financial statements Earlier to the New Accounting Model, The existing Finance and Appropriation presented in the IPSAS the Combined Accounts Codes were Accounts incidentally provide partial standard applied; gradually the budget sector is information as required under Cash Basis being converted to the NAM Chart of IPSAS; however there are considerable Accounts, posing a challenge to departures to be resolved for full conversion to the NAM reporting compliance. Aggregation of all SOEs into framework. While a number of the accounts is likely to occur in the accounting sites have yet to be upgraded longerterm. to the SAP R/3 accounting system, other The presentation of the financial position sites which are productive lack some and annual operations of the government functional aspects relating to pensions, can be considerably improved. The general provident fund, fixed assets, etc. disclosure of required information as per This limits the ability of the Auditor IPSAS should be made integral to the General to prepare financial reports on government systems. There is a need to NAM formats. Therefore, for the time comply with the disclosure of the being, the government accounts are treatment of foreign currency. Errors in presented using the old formats of the the accounts affecting the accuracy of FinanceandAppropriationAccounts. financial information should be In the existing format of Finance and immediatelyreconciledandrectified. Appropriation Accounts, there are departures from the Cash Basis IPSAS. As a result, important information is not presentedanddisclosed.44 44There are negative balances appearing in the Finance and Appropriation Accounts, the cash balance appearing in the financial statements is not reconciled with the bank, and receivables appearing from bodies which no longer exist. The overall format of the Finance and AppropriationAccountsisnotuser-friendly. COUNTRY REPORT PAGE 50 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement Although the authorization date is mentioned on the accounts, it is not clear as to when these financial statements become accessible to the general public ormedia. C. Assessment of Accounting and Auditing in State-Owned Enterprises Financial Statements should comply with IAS and IFRS. 10. The financial statements Under the Companies Ordinance 1984, It should be mandated by law that the should include (a) balance it is obligatory for all listed companies to financial statements of SOEs should be sheet, (b) income statement, present their financial statements in prepared in accordance with the (c) statement of changes in accordance with IAS/IFRS.45 These IAS/IFRS. equity or a statement of companies are required to be audited by The Deputy Auditor General recognized gains and losses, a chartered accountant under the (Commercial) Audit is responsible for and (d) cash flow statement Companies Ordinance. ICAP issues auditing the public sector enterprises [IAS1.8] IFAC International Standards of Auditing which is an under resourced institution. (ISA) for mandatory use by its members. The financial statements There is a dire need for specialized Upon receipt of ISA from the IFAC, the should present fairly (or give a training in areas like IAS/IFRS, ISA, and exposure draft is sent to ICAP members true and fair view of) the usingtheworkofotherauditors. for comments. These comments are financial position, financial returned for consideration by IFAC. There is an opportunity for the performance and cash flows When the final standard is issued by Commercial Audit Wing of the DAGP oftheentity.[IAS1.13] IFAC/IAASB, ICAP adopts the standard. (after strengthening) to monitor SOE for The financial statements The ISAs are adopted in Pakistan without IAS/IFRScompliance. should be prepared on the anymodification. accrual basis of accounting [IAS1.27] For non-listed companies, the implementationand enforcementof IAS/ The financial statements IFRS is being finalized. The enforcement should be prepared using the paradigm of ISAs for the audit of non- a c c o u n t i n g p o l i c i e slisted companies is less stringent than e s t a b l i s h e d b y t h e thatforthelistedcompanies. Thereisno International Accounting Public Sector Enterprises Monitoring Standards.[IAS1] Board as established in other countries. Such an organization (a Board as well as an Experts Advisory Cell) did exist in Pakistan during the 1970s-90s, which was disbanded subsequently. There is a Corporate Finance Wing in Ministry of Finance, whose responsibility is to do such monitoring. It is weak and hence 45 The Report of Observance of Standards and Codes, Audit & Accounts for Pakistan, World Bank, 2005, provides the implementationstatusofIAS/IFRSandrelatedissues. PAGE 51 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement monitoring is poor. Under the capacity- building project it is to be strengthened, but the program is yet to start. Strengthening this Wing in MoF would be more sensible than re-introducing a Board. A review of a sample of SOE financial statements which are audited by chartered accountants indicate that the audit reports generally contained either significant qualifications or emphasis of matter paragraphs modifying the audit opinion. In addition, SOEs which are not incorporated under the Company Law, do not usually apply IAS/IFRS in accountingandfinancialreporting. For public sector enterprises whose financial statements are not audited by chartered accountants, IAS/IFRS are not generally followed, and financial statements are generally audited after a longdelay. There is little involvement of the DAGP in selection of the external auditors of these SOE.4 6 The DAGP while conducting regularity or performance audit does not have access to the qualifications in the audit report on the financial statements. The DAGP is neither provided with the management letter given by the external auditors to the SOE nor given access to financial audit working papers. Thus, serious issues relating to the use of public funds are not subjected to legislative scrutiny bythePublicAccountsCommittee. 46A requirement for getting approval of selected auditors (chartered accountants) is in many cases not observed. Even with compliance, in practice management finalizes the selection of the audit firm which also puts into question the independence of theseauditors. COUNTRY REPORT PAGE 52 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement II. Public Sector Auditing A. Assessment of the Public Sector Auditing Environment Effective scrutiny by the legislature through comprehensive, competent external audit enables accountability for the implementationoffiscalandexpenditurepolicies. The environment for an effective 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 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 action is taken for reform. It also requirespublicpresentationoftheauditreportstoensurepublicsupportforeffectiveaction. (1) Statutory Framework 11. Statutory auditing Legislation exists: The Constitution of requirements should be Pakistan, 1973 (as stands amended); and establishedbylegislation. theAuditorGeneral's(Functions,Powers and Terms and Conditions of Service) Ordinance,2001. There is an Audit Code which lays down the basic principles of auditing in lieu of the Constitutional provisions and the AuditorGeneralOrdinance2001. The Auditor General adopted INTOSAI Auditing Standards in 2002 with minor adaptations. These standards form the basis of the auditing methodology and process for the DAGP which is further explained in the Procedure for Certification Audit of Appropriation and Finance Accounts. Recently the Auditor General approved the new Financial Audit Manual which will gradually replace thecurrentprocedures. 12. The SAI should have the Yes, AGP has full authority for auditing all The proposed review of the Auditor authority to conduct a full budget sector receipts and expenditures General's Ordinance 2001 to resolve range of audits for all from all government accounts including jurisdictional issues may also look into government owned or thedefenseexpenditures.47 providing for a specific AGP mandate in controlled entities including relation to economy, efficiency, and The AGP has the authority to audit any 47Thereareminorexclusionsofpracticerelatingtoreceiptskeptaslocalfundsorsocallednon-publicfundsbysomeinstitutions. PAGE 53 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement regularity, financial, and entity or body established by the effectiveness of utilization of public funds p e r f o r m a n c e a u d i t s . government or which has received a loan alongthelinesofmodellegislation.48 (INTOSAI Lima Declaration or grant; however there are some All commercial SOEs, registered by the Sections18-19) exclusion clauses in the Constitution, as Securities and Exchange Commission of well as in the Auditor General's Pakistan,shouldbesubjecttoworld-class Ordinance2001. audits by qualified firms selected by and Article 169(b) of the Constitution limits reporting through the Auditor General. the powers and functions of the AGP in In this way the Auditor General need not relation to any authority or body do the audits directly, but can ensure established by the government propercoverageandreporting. depending on the provisions contained in therespectivelegislationestablishingthat authority/body. Similarly, Sections 9 (explanation), 11 (proviso), 15 and 16 of the Auditor General's Ordinance pose certain conditions on the AGP powers and function in relation to the audit of the publicsectorenterprises. These jurisdictional limitations are under review. A committee of the Auditor General, Finance Secretary, and Law Secretary are looking at potential revision of the Auditor General's Ordinance to remove the restrictive or exclusionary clauses. The Public Accounts Committee of the Parliament is pursuingthisissue. The Auditor General's Ordinance 2001 specifiesthefollowingtypesofaudits: · 7,Certificationaudit Section (accounts). · Section8,Regularityaudit. · 9,Auditofauthoritieshaving Section loansorgrantsfrompublicmoney. · Section12,Auditofreceipts. · 8&9,Receiptsand Section Expenditures (includes authorities and bodies substantially financed by loansandgrants). 48Model Law developed by the UNDP Program for Accountability and Transparency (PACT) and A Model National Audit Office Act, TheAssociationofCharteredCertifiedAccountants,UK,2004,Section32&Section55. COUNTRY REPORT PAGE 54 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement · 10,Studyreports; Section Performance, governance, debt management, or environment. audits are covered under this section. · 15,Auditofcompaniesand Section corporations established under the publicsector(PTCL,PPAF,etc). Note: Section 22 gives the Auditor General, the powers to make regulations with the prior approval of Federal Government for furthering the purpose oftheAuditorGeneral'sOrdinance. There is no explicit mention of the proprietary, efficiency, effectiveness, and economy in the Auditor General's Ordinance, yet many of the senior staff categorized this as the main objectives of theDAGP. 13. The legislation should set There is no liability suggested by the law Resolve vagueness in Section 14 of the out penalties in the event of against the Auditor General for not doing Auditor General's Ordinance 2001 noncompliance with the theannualaudit. regarding the enforcement of action auditing requirements, and (whether the executive or Public Section 14 of the Auditor General these penalties should be Accounts Committee must initiate Ordinance applies to any person or appliedappropriately. action). The Auditor General should authority hindering the audit functions of have specific powers to initiate action the Auditor General regarding inspection against persons who refuse to provide of accounts. This person shall be subject auditable accounts and relevant records to disciplinary action under relevant toDAGPstaff. Efficiency and Discipline Rules, as applicable. Section14 does not mention Specific provisions in the Auditor who would initiate such an action General's Ordinance 2001 should be (possibly the Auditor General, Public made for making the audit reports public Accounts Committee, Principal in line with the ACCA's model legislation Accounting Officer or any other body). asfollows:49 Therefore the implementation of this (1) All reports issued by the Auditor sectionmaybeproblematic. General shall be considered public In case of any hindrance or problem, documents when the reports are generally the Public Accounts presented to Parliament. As public Committee issues directions to the documents, they shall be made available executives to comply with the auditing to the public for a minimal cost-recovery requirements. This process is lengthy fee. 48AModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,UK,2004­Section38 PAGE 55 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement and subject to many delays thereby (2) The Auditor General may make reducing the effectiveness of the his/her reports publicly available in provision and rendering the Auditor electronicformatontheInternet. Generalwithoutrecourse. (3) The Auditor General shall provide In addition, the legislative scrutiny is not copies of his/her published reports to the supported by the public scrutiny due to government archivist, all public and non-dissemination of audit reports and university libraries in relevant locations, governmentfinancialstatements. the National Broadcasting Corporation, andthepress. (4) The Auditor General or his/her staff may provide comments and interviews to the press or other media on the subjectofanypublishedauditreports. (2) Setting Auditing Standards 14. The government should The Auditor General has adopted the The International Standards on Auditing have adopted the INTOSAI INTOSAI Auditing Standards with some should also be formally adopted, Auditing Standards and the minor adaptations. These standards preferablythroughlegislation. I A A S B I n t e r n a t i o n a l have been used as the basis of the Audit It has been construed from various Standards for Auditing for Manual, in which Chapter 4 clearly provisions of the legislation, including public sector entities. (ISA mentions that the INTOSAI Auditing Section 22 of the Auditor General's 200.5 and INTOSAI Auditing Standards are considered the general Ordinance 2001, that the Auditor Standards1.0.14) framework for the auditing methodology General would be the standard-setting and procedures. Although the Audit authority for the public sector auditing. Manual does not mention specifically The Auditor General, as an active International Standards on Auditing, the INTOSAI member, usually subscribes to overall approach and methodology is the declarations of the international consistentwiththethesestandards. organization for implementation as per INTOSAI recognizes that the INTOSAI the local setup and environment; Auditing Standards are broad in nature therefore the INTOSAI Auditing and that the IFAC ISAs provide a further Standards have been adopted with minor level of detail for public sector audit modifications. guidance. It is working with IFAC in the The adoption process consisted of an in- longer term to develop practice notes to depth review of the INTOSAI Code of assist with implementation in the public Ethics and Auditing Standards by a sector of each ISA. Therefore, committee of senior officers established prescribing the ISAs as the applicable by the Auditor General. There is a need auditing standards in addition to the for a similar committee to review and INTOSAI auditing standards in an explicit adopt the International Standards on manner would ensure that the relevant Auditing for use on a continuous basis. developments in the auditing process are The committee might also be learntandappliedonacontinuousbasis. represented by local professional bodies. The Institute of Chartered Accountants COUNTRY REPORT PAGE 56 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement of Pakistan is already running a process for ISA adoption. The adoption process might start with inputs given at the exposure draft stage and continue through to issuing practical guidance on local application of international standards. (3) Code of Ethics 15. The INTOSAI Code of The INTOSAI Code of Ethics was Improved monitoring for the code is Ethics should have been fully adopted by the Auditor General of needed. adopted by the SAI (IFAC ISA Pakistan in 2002. The Code must be 200.4 and INTOSAI Code of followed by all staff who are doing audits Ethics 4), communicated to or are responsible for maintenance of allstaffandapplied. accounts. Some minor adaptations and deletions were made while issuing the INTOSAI Code of Ethics and Auditing Standardstomakethemsuitablewiththe localsetupandenvironment. (4) Accountability in the SAI 16. There should be an Any DAGP staff, being government accountability process in the public servants, who are caught in SAI. (INTOSAI Auditing misconduct, would be subject to the Standards1.0.20) Efficiency and Discipline Rules of the Government of Pakistan. In such a case the inquiry officer exercises the powers ofaCivilCourttoestablishtheguilt. 17. There should be clear A Manual of Standing Orders of the responsibility in the SAI for (i) Auditor General regulates the internal advising on internal finance, procedures of the organization. The keeping proper financial Manual is being updated. In the existing records and accounts, and structure of the DAGP, the administrative maintaining systems of and functional issues are all delegated to internal control; and (ii) for the Additional Auditor General ensuring compliance with (Administration). lawsandregulations The Inspection, Regulation, Vigilance and Monitoring of Training Wing, an independent branch of the DAGP under a Deputy Auditor General, is a type of internal audit unit that conducts inspections of all activities, including in- fieldauditoffices. PAGE 57 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement 18. The SAI should prepare It is the intended good practice of the The Auditor General should prepare and an annual report on its DAGP to prepare an annual report each disseminate an annual corporate plan, as operations and performance year, but other priorities interrupt well as the annual performance report of that is separate from its meeting the schedule. The last annual theDAGPinatimelymanner. reports on its audits. It should report was published for 2002. A report provide an objective, fortheyear2004isunderpreparation. balanced and understandable account of activities and achievements, and details of financial position and performance. 19. The SAI should prepare a The Corporate Audit Plan (2001-2002) corporateplanorequivalent. contained the vision and mission translated into an annual audit plan. A 3- yearplanisunderprocess. 20. The SAI should undergo The DAGP does not undergo a peer The DAGP should undergo an peer review or independent review or independent performance accountability mechanism in sync with performanceaudit. audit; nor does any independent external that suggested under the ACCA- body audit its activities. However, there proposed legislation for SAIs, involving are interlocking arrangements for audits review by the Public Accounts within the field audit offices which Committee of annual corporate plans providepeerreviewassurancewithinthe andannualreports. organization. (5) Independence provided by the Legislation 21. LegislationneedstobeadequateforthefollowingcoreprinciplesofSAIindependenceiftheSAIistoprovideeffectiveexternal scrutiny: (1) Theexistenceandde-factoapplicationofanappropriateandeffectiveconstitutionalandlegalframework. (2) TheindependenceoftheSAIHeads,includingsecurityoftenureandlegalimmunityinthenormaldischargeoftheirduties. (3) AsufficientlybroadmandateandfulldiscretioninthedischargeofSAIfunctions. (4) Unrestrictedaccesstoinformation. (5) Theobligationtoreportontheirwork. (6) Thefreedomtodecideonthecontentandtimingoftheirreportsandtopublishanddisseminatethem. (7) Theexistenceofeffectivefollow-upmechanismsonSAIrecommendations. (8) Financialandmanagerialautonomyandtheavailabilityofappropriatehuman,materialandmonetaryresources. (CorePrinciplesofSAIIndependence,INTOSAISub-committeeonSAIIndependence,2004) 22. The legislation should The Constitution guarantees the Adopt IFAC Code of Ethics procedures spelloutindetailtheextentof protection of service of the Auditor f o r e n h a n c e d i n d e p e n d e n c e the SAI independence. General of Pakistan. Once appointed, requirements in the environment of (INTOSAI Lima Declaration the Auditor General can only be rotation of assignments and nominal Section5) removed by a Supreme Judicial Council dependency for logistics on some of the and a majority vote in the Parliament. auditees. 23. The legislation should Similarly, the expenditures of his office 48AModelNationalAuditOfficeAct,TheAssociationofCharteredCertifiedAccountants,UK,2004­Section38 COUNTRY REPORT PAGE 58 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement assure the independence of (being the charged expenditures) are not t h e S A I H e a d s a n d subject to vote in the Parliament and "Members" (in collegial therefore avoid any general cuts in the organizations) and that there grants. is security of tenure and legalSection 19 of the Auditor General's immunity in the normal Ordinance 2001 gives the Auditor discharge of their duties. General full power to incur expenditures (INTOSAI Lima Declaration within the budgetary provisions. Being Section6) the head of a civil service cadre (i.e., PakistanAuditandAccountsService),the Auditor General has independence in personnelmanagement. The separation of audit and accounts has to some extent resolved the independence issue. However, the rotations of assignments, including deputations to other departments and back to audit offices, need to be reviewed. The AGP independence as a whole and the DAGP's effectiveness at financial accountability is ensured by the overall stature of the Auditor General through its constitutional mandate; protection of term; financial and human resource independence; exercise of authority over type, schedule and duration of audit; powers to examine records; direct liaison with the parliamentarians in the Public Accounts Committee; INTOSAI representation,etc. However, the accountability process after the audit involving legislative scrutiny and implementation of PAC's recommendations/ directives by the executive is lengthy and needs considerable improvements. An audit observation tracking system is being implemented under PIFRA II which would improve the post-audit accountability system. Similarly, the audit reports and certified accounts are not made public immediately after being laid to the parliament; therefore public PAGE 59 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement scrutiny based on the audit findings cannotbeexercised. Theapplicationofa Code of Ethics, rotation of staff among the field offices, and continuous training ensures that the AGP personnel do not develop too close a relationship with the entities that they audit. In addition, the close audit supervision ensures that the field audit staff does not mingle with the clients. However, the dependence on the auditee organizations for the provision of logistics sometimes can affectthehighestlevelofindependence. 24. The SAI's constitutional/ The fact that the Auditor General is head Some limitations are evident. The audit statutory/legal framework of the Pakistan Audit and Accounts law should be more powerful in the areas should ensure that it has Service ensures independence in human of the AGP's budget and personnel available sufficient human, resource planning and development. powers. material and monetary The recruitment of civil servants is done resources. (INTOSAI Lima through the Federal Public Service DeclarationSection7) Commission. The annual budget is approved as a charged expenditure and can only be discussed in the Parliament but not subject to voting. The Auditor General has full powers for incurring expenditures out of the approved budget. The direct liaison with the Parliament also ensures that Auditor Generaljustifiestheexpenditure. 25. Afixedtermmustbelong The Auditor General is appointed by the The term is short by international enough to survive changes of President of Pakistan and his oath standards. government and avoid administered by the Chief Justice of pressures concerning re- Pakistan. The termination of AGP appointment impinging too services before expiry of the term early in the term of office of follows the same procedures as removal the SAI office holder. A single of a Supreme Court judge from office non-renewable appointment (i.e., through the Supreme Judicial is preferable to avoid those Council and endorsement by the p r e s s u r e s . ( I N T O S A I Parliament). Therefore, even the Working Group on SAI appointing authority does not have Independence,2004) terminationpowers. The AGP term is 5 years or the attainment of 65 years of age by the incumbent, whichever is earlier. During this term, the Auditor General can carry COUNTRY REPORT PAGE 60 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement out the mandate without fear of retribution. If terminated, re- appointment is not allowed before the expiry of two years after vacating office, thereby limiting any bargains for re- appointment. 26. The legislation should The AGP is empowered to investigate ensure that the Head of the the use of public monies or assets by a SAI is free to determine the recipient regardless of its legal nature at organization of the audit least for the first year (Section 9 of AGP office, including personnel Ordinance 2001). The continued use of and contract management these public funds may go beyond the systems and material scope of the Auditor General due to the acquisition/disposal policies jurisdictional issues relating to audit of and procedures. The SAI thepublicsectorenterprises. should be able to determine The fact that the Auditor General is head personnel policies, including of the Pakistan Audit and Accounts the selection, recruitment, Service ensures independence in human training, remuneration, resource planning and development. promotion, discipline, and The recruitment of civil servants is done dismissal of staff and contractthrough the Federal Public Service personnel. (INTOSAI Lima Commission. The AATI is an internal DeclarationSection6) system for initial training and continuing professional development of staff. For new posts creation, the Auditor General has to negotiate with the Ministry of Finance. 27. There should be The Section 14 of the AGP Ordinance unrestricted access to 2001 ensures that the Auditor General information. (INTOSAI Lima has access to all offices having accounts DeclarationSection10) and other related documents and indicates how to deal with any person hinderingtheauditfunctions. 28.The legislation should give Article 171 provides that the Auditor Section 7 narrates the minimum audit the SAI the right and General shall submit the reports to the requirements for the certification of obligation to report on their President who shall cause them to be laid annual accounts. The Auditor General work. (INTOSAI Lima before the Parliament. The Parliament has to plan keeping in view the resources DeclarationSection16) sends these reports to the Public in hand, how much time can be allocated Thelegislationshouldgivethe Accounts Committee for detailed to other types of audits in a year, in SAI the right and obligation toscrutiny. There has never been an addition to the mandatory certification of report effectively on its work,amendment in the audit reports after accounts. and the freedom to decide on beingsubmittedtothePresident. PIFRA is trying to achieve an integration the content and timing of its of the financial certification and regularity PAGE 61 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement reports and to publish and Section 7 relates to the Certification audit by introducing more concurrent d i s s e m i n a t e t h e m Audit which assigns responsibility to the audit activities focusing on regularity and expeditiously. (INTOSAI Auditor General to certify the accounts compliance as part of the certification LimaDeclarationSection17) on the basis of his audit for each financial audit. This would also lead to a timely year and present his notes, comments, or certification of the accounts and recommendations in relation with those meaningful and complete representation accounts. The law does not specify the senttothelegislature.51 timeline for submission of the certified annual accounts. Similarly, the law does not require the Auditor General to submit an annual report on its performance. There is ample time before submission to the President for the executive to resolve any audit observations through (Special)/ Departmental Accounts Committees or simply by administrative action as recommended in the Audit Information Report. The audit reports purportedly become public after these are discussed by the Public Accounts Committee; but the mechanism is unclear. This gap analysis report was refused access to any recent reports because they were not public. As the Public Accounts Committee is often not in session and discussions are held years after the event, this method of publication of audit reports substantially varies from international standards and is consideredunsatisfactory. The study team was unable to establish what audit reports were public. The law does not specify when the Auditor Generalisfreetopublishanddisseminate its reports to the public and what should be the mechanism of dissemination. The senior audit staff generally perceives it as thefunctionofthelegislature. 51There is a disconnect /lack of connection between certification and regularity audit reporting. The certification audit gives partial compliance in the form of 'can be relied upon' subject to both qualifications contained therein, as well as the issues reported separately in regularity audit reports. The certification audit reports are seldom discussed by the Public Accounts Committee therebylimitingthegeneraldissemination/availabilityanduseofthegovernmentfinancialstatementsbystakeholders. COUNTRY REPORT PAGE 62 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement 29. To the extent the findings This primary responsibility of follow-up There are many audit observations and of the Supreme Audit of actions is with Public Accounts findingsthathavenotreceivedaction. Institution's findings are not Committee secretariat which is closely delivered as legally valid and coordinated by the Auditor General for enforceable judgments, the compliance of its part of directives/ Supreme Audit Institution recommendations.52 The Auditor shall be empowered to General does not have any statutory approach the authority which powerforimposingsanctionsdirectly. is responsible for taking the An Assistant Auditor General (PAC) necessary measures and maintains the record of the follow up of require the accountable party audit observations and actionable points to accept responsibility. (Lima emanating from the PAC deliberation on DeclarationSection11.2) the audit reports. Lately, the ADM Plus software has been procured for recommendation tracking. Holding mock / pre-PAC preparation is noted for properlyaddressingtheobservationsand recommendations. (6) Qualifications and Skills of the Auditor The SAI needs qualified accountants to sign audit opinions. Auditors must have adequate professional expertise and technicalknowledgetocarryoutaudits. 30. The syllabi of the There is an elaborate system of training The AATI should continue to review its government's and SAI's the accounting and auditing staff at syllabus to cover all areas recommended accounting schools should different hierarchical levels through the by IFAC IES. There is a need to build the cover all areas recommended AATI, and higher academic and numberofstaffwithICAPqualifications. b y t h e I n t e r n a t i o n a l professional qualifications at local and Federation of Accountants' foreign universities and professional educationalstandards(IES) training bodies. The Auditor General has developed a comprehensive training plan with the help of foreign consultants. PIPFA courses have become mandatory for Audit Officers. Syllabi of AATI probationers have been revamped. The substantial portion for funding in PIFRA II isfortraininginauditingandaccounting. 31.Thereshouldbeadequate The academic criteria used for These arrangements are not adequate to professional criteria for recruitmentandpromotionofauditors: meet international standards for auditing recruitment and promotion For assistant audit officer ­ B-Com is the annual accounts and signing audit of auditors. (INTOSAI Lima minimumqualification. opinions. Further upgrading of the AATI 52Although the Public Accounts Committee writes the word 'directives' for its decisions but many stakeholders perceive in line with the decision of NWFP High Court declaring these as 'recommendations' which are subject to voluntary compliance by the executive. PAGE 63 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement Declaration Section 14 and Forauditofficer­PIPFA. courses and the promotion criteria for INTOSAI Auditing Standards For civil service ­ 9 months' professional seniorauditstaffisneeded. 2.1.4) course at AATI, leading to PIPFA qualification. FPSC conducts the final examination. (7) Training 32. The SAI should operate a The annual training plan of AATI provides PIFRA II reform process should be continuing professional many opportunities for the continuing continued in relation to the capacity- development program for its professional development of staff. The buildingofauditingstaff. professional personnel. plan encompasses more than 50 different (INTOSAI Lima Declaration short courses or workshops. There is Section 14 and INTOSAI also a requirement of mandatory training Auditing Standards 2.1.5- of 12 working days53 as applicable to civil 2.1.12) servants in BPS 17 & 18. There is also a mechanism of allocating certain training days in each annual audit plan for the sake of time-budgeting. Finally, rigorous capacity-building exercises are being identified,designed,anddeliveredaspart ofPIFRAII. (8) Audit Competence 33. The SAI should equip Audit manual development was Anactionplanforimplementationofnew itself with the full range of up- outsourced under PIFRA to foreign Financial Audit Manual should be to-date audit methodologies, consultants who developed the developed for auditing the financial including systems-based guidelines and methodologies with the statements of federal and provincial techniques, analytical review help of the Accounting Policy Wing which governments and implemented in sync methods, statistical sampling, would be responsible for future with the capacity-building and and audit of automated maintenance and updating of these computerizationactivities. information systems. manuals. (INTOSAI Auditing Standards The DAGP through PIFRA procured 2.2.37) audit department management system for audit planning and implementation. Audit planning, risk assessment, p e r s o n n e l m a n a g e m e n t , a n d recommendation tracking are various modules. Audit Command Language has been acquired for computer-aided audit techniques and applied on the transaction data in SAP R/3 systems in accountingoffices. 53EstablishmentDivisionO.M.No1/6/2002.OP.II,dated5-4-2002. COUNTRY REPORT PAGE 64 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement (9) Quality of the Audit 34. The SAI should have the There is quality supervision at the field The audit documentation and report quality assurance programs in audit office level where the Director writingskillsneedtobeimproved. place to ensure audit General personally certifies the quality of performance and results. auditreports. Thereisfurtherreviewfor Written quality control quality assurance at the Deputy Auditor policies and procedures General level. Finally the Quality should be communicated to Assurance Review Committee at the the audit personnel in a DAGP reviews all audit reports before manner that provides theirrelease. reasonable assurance that the The new Audit Manual (Chapter 5 to policies and procedures are Chapter 15) describes in detail the u n d e r s t o o d a n d procedures for direction, supervision, implemented.(ISA220.7) andreviewofauditwork. 35. Quality control proceduresshouldcover: · Assistantsto Direction: whom work is delegated needappropriatedirection. · covering Supervision: the following functions during the audit: (a) monitor the progress of the audit, (b) become informed of and address significant accounting and auditing issues, and (c) resolve any differences of professional judgment between personnel and consider the level of c o n s u l t a t i o n t h a t i s appropriate. · Thework Review: performed by each assistant needs to be reviewed by personnel of at least equal competence. (ISA 220.8- 220.17) PAGE 65 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement B.AssessmentofPublicSectorAuditingStandardsandPractices Results from the audits should hold the executive to account for fiscal and expenditure policies and their implementation. (1) Planning 36. The planning process The certification audit procedures The new audit methodology manual should collect information suggest that the audit staff should should introduce more comprehensive about the audited entity and prepare work flow, procedure diagram, planning requirements based on the its organization in order to or systems outline; and list the main specificobjectivesoftheaudits. identify important aspects of accounting areas in order to familiarize Engagement of chartered accountants as the environment in which the themselves with the audited entity. part of the audit teams for conducting of audited entity operates, However,thisdoesnotdelveintotherisk certification audit can be very helpful in develop an understanding of assessment and determination of skill development. The memorandum of t h e a c c o u n t a b i l i t y materiality levels which are more or less understanding between the Auditor relationships, determine pre-definedbytheprocedures. General and the ICAP may be used for whether appropriate action The procedures define the overall procuring such services with quality has been taken on previously objectives of the certification audit and assurancesupportfromtheICAP. reported audit findings and the objectives of each of the six audit recommendations, assess a r e a s : e s t a b l i s h m e n t c o s t s , r i s k , a n d d e t e r m i n e contingencies, pensions, receipts, materiality. (IFAC ISA 300.6- general provident funds, and accounts 300.9) compilation. However, the objectives The planning process should are not further refined in accordance identify the scope of the with the risk of understatement, audit, and specify the audit overstatement, or misstatement that can objectives and the tests be associated with any of the audit areas; necessary to meet them. (ISA and audit tests are not accordingly 300.10-300.12) tailored. The planning process should The internal audit function is evaluated as review the internal audit of part of the regularity audit. However, the audited entity and its since the internal audit in government work program, identify key departments is in its infancy,54 the management systems and certification audit does not put controls, and carry out a considerable reliance on the internal preliminary assessment to audit. identify both their strengths Planning documents formally prepared and weaknesses, and donotidentifythespecificrisks;however determine the approach to the consideration of complaints, be adopted in the audit. (ISA newspaper cuttings, and problems 300.9) experienced during previous audits, The planning process should together with the value judgment, use of 54Internal Audit Plan and Internal Audit Manual was developed under PIFRA I, and chief audit officers posted in 15 ministries have beengivenexposuretraining. COUNTRY REPORT PAGE 66 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement highlight special problems hindsight, and threshold for materiality foreseen when planning the are envisaged at the planning stage of audit.(ISA300.10) audit under the new Financial Audit Manual. The planning process should prepare a budget and a The audit plan, which allocates the schedule for the audit, and human resources available to various provide for appropriate auditassignments,ispreparedannually. documentation of the audit For the certification audit, the accounting plan and for the proposed entities, including the Accountant fieldwork.(ISA300.10) General and District Accounts Offices, The planning process should provide the majority of auditable identify staff requirements documents supporting the financial and a team for the audit. (ISA statements. Initial discussions with them 300.11) give the auditor the required understanding as to how the accounts The planning process should havebeencompiled. familiarize the audited entity about the scope, objectives and the assessment criteria of the audit and discuss with them as necessary. (ISA 300.7) (2) Supervision 37. The process of The Director Audit or Deputy Director Improved working paper guidance and supervision should ensure Audit initially briefs the audit team usually technology combined with more that the members of the audit comprising the audit officer and assistant effective supervision and independent team have a clear and audit officer before sending them to the qualityreviewprocessesareneeded. consistent understanding of auditee. Later the Director / Deputy the audit plan. (INTOSAI Director supervises the team on site, the AuditingStandards3.2.3a) frequency of which varies depending on a number of factors. The Deputy Director Audit is often part of the exit meeting with the auditee sharing the Audit InformationReport. 38. The process of The supervision process generally There is a need for more guidance on the supervision should ensure emphasizes the findings of the audit team audit testing to be undertaken and the that the audit is carried out in and documentation of the audit functions of supervision. Working papers accordance with the auditing evidence; however, lesser emphasis is needtobemorestructured. standards and practices of the placed on the overall assurance levels SAI. (INTOSAI Auditing achieved and referencing and sequencing Standards3.0.3b) oftheauditworkingpapers. PAGE 67 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement 39. The process of The audit team usually keeps the Deputy supervision should ensure Director or Director Audit informed of that the audit plan and action significantdevelopmentsinthefield. steps specified in that plan are followed unless a variation is authorized. (INTOSAI AuditingStandards3.0.3c) 40. The process of Only the tenable audit observations are There is obvious opportunity to use the supervision should ensure printed. The Quality Assurance results of regularity audit while planning that working papers contain Committee is an important forum where and conducting the certification audit and e v i d e n c e a d e q u a t e l y each audit observation is reviewed from also to conduct the regularity checks as supporting all conclusions, the auditee's standpoint and dropped if part of the compliance testing recommendations and foundweak. procedures during the certification audit. opinions. (INTOSAI Auditing Efforts are underway through PIFRA to The process of audit supervision takes Standards3.0.3d) integrate the certification audit (Section the audit findings through the 7) and the regularity audit (Section 8) into 41. The process of quantification of the most likely error (by one certification audit product through supervision should ensure extrapolation of the known errors) implementation of the Financial Audit that the auditor achieves the which may lead to a qualified audit Manual. stated audit objectives. certificateissuedbytheAuditorGeneral. (INTOSAI Auditing Standards The audit process should be risk-based The audit reports generally include the 3.0.3e) allowing sufficient flexibility to the audit conclusions, recommendations, auditors to articulate and apply 42. The process of and opinions; but these are divided into appropriate audit procedures on supervision should ensure both the regularity audit and certification intelligently selected samples and to that the audit report includes audit. The audit certificate on the arriveatcorrectauditconclusions. the audit conclusions, financial statements points to the recommendations and regularity audit reports, among other A stakeholders' workshop was held opinions, as appropriate. audit reports, as covering the significant where representatives of Public (INTOSAI Auditing Standards aspects of financial governance, or Accounts Committee and auditees were 3.0.3f) economical, efficient, and effective also present and deliberated generally on utilization of public resources. However, all issues relating to the audit process. To 43. The process of there is no formal linkage at the working take the process forward, there is need supervision should ensure level between the certification audit and for more focused workshops to identify that the audit report includes the regularity audits conducted by the the most critical issues and come up with the audit conclusions, AuditorGeneral. concrete recommendations for recommendations and resolution. opinions, as appropriate. As the highest forum of supervision, the (INTOSAI Auditing Standards Quality Assurance Committee, 3.0.3f) consisting of senior officers of DAGP, ensures that the audit report includes the audit conclusions, recommendations, andopinions,asdeemedappropriate. The Quality Assurance Committee emphasizes that only the tenable audit COUNTRY REPORT PAGE 68 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement observations are printed. Each audit observation is reviewed from the auditee or audience standpoint and dropped if foundweak. Thissometimesmayleadto removal of loosely drafted paragraphs without consultation with the audit staff having exact knowledge of the observation. The process--from communication of the Audit Information Report to creation of advance or draft paragraphs then resolution of these through DAC/ SDAC before submission of printed reports to the Public Accounts Committee-- provides ample opportunity for the executive/auditee to resolve the audit observations. Onthisbasis onlyproperly identified, documented, and unresolved audit observations are brought to the attention of the most senior SAI officers for reporting. However PAC assessments have shown substantial numbers of unjustified audit observations sotherearemajorflawsintheprocess. Risk assessment procedures for the certification audits, as well as identifying formations for regularity audit, does not take into account the results/findings of thepreviousaudits. The audit review process feeds-back into process improvement through the FAPC Wing, which keeps reminding the field audit offices about the qualitative changes in formats, evidence gathering, and the broad policy toward impact- orientedauditreports. (3) Internal Controls 44. The auditor should The certification audit procedures The new audit methodology and process obtain an understanding of presently in use prescribe the should be rolled out immediately to t h e e n t i t y a n d i t s compliance checklists for each audit area improve the process of environmental environment, including its based on the government systems/ risk assessment, compliance testing, and internal control, sufficient to procedures, but does not encourage sampling procedures; and the PAGE 69 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement identify and assess the risks of identification of a lower number of implementation of the Financial Audit material misstatement of the critical controls that impact the contents Manual should not be coupled with the financial statements whether of the financial statements leading to a implementation of New Accounting due to fraud or error, and flexible design of substantive procedures Model sufficient to design and and innovative selection of samples for perform further audit these. procedures.(ISA315.2) The compliance checklists for each audit A f t e r o b t a i n i n g a n area cover the assertions of existence understanding of the and operation of internal controls. Since accounting and internal the checklist is based on the prescribed control procedures, the g o v e r n m e n t p r o c e d u r e s t h e auditor should obtain a effectivenessassertionisassumed. sufficient understanding of The auditor assesses the control risk for control activities to assess the each identified control and thereby r i s k s o f m a t e r i a l identifies the risk of likely error in the misstatement at the assertion form of proportion of departures level and to design further ascertained. However the compliance audit procedures responsive procedures are not based on systematic to assessed risks. (ISA environmental assessment and 315.90) evaluation of the entity's accounting and Theauditorshoulddocument internal control systems. Instead the in the audit working papers: control tests are based on the predefined (a)conclusionsreachedabout checklists as part of the audit procedures susceptibility to material forsixkeyauditareas. misstatement due to error or The failure to obtain sufficient fraud; (b) the understanding appropriate audit evidence for any obtained of the entity's material financial statements assertion accounting and internal leads to qualifications in the auditor's control procedures; and (b) opinion. the assessment of control risk.(ISA315.122-123) At the conclusion of the fieldwork the audit team shares with the auditee an The auditor should perform Audit Information Report identifying all tests of controls to obtain observations for management sufficient appropriate audit comments. evidence that the controls were operating effectively at relevant times during the period under audit. (ISA 330.23) When the auditor cannot obtain sufficient appropriate auditevidenceastoamaterial financial statement assertion, COUNTRY REPORT PAGE 70 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement 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 appropriate level of responsibility, of material weaknesses in the design or operation of the accounting a n d i n t e r n a l c o n t r o l procedures, which have come to the auditor's attention.(ISA315.12) (4) Compliance with Laws 45. The auditor should In certification audit, compliance with Certification audit is required to provide o b t a i n a g e n e r a l the legal and regulatory framework is assurance to adequate levels of understanding of the legal and ensured to an extent only. Whereas materiality. Greater assurance from regulatory framework regularityaudit, duetoitswidescope and compliance (regularity) audit is not applicable to the entity and greater coverage, provides greater required. If the Auditor General wishes the industry and how the assurance in relation to compliance with to undertake audits aimed at ensuring entity is complying with that lawsandregulations. that expenditures are properly framework.(ISA250.15) controlled, then such audits should be The management designs the systems, designedonmodernprinciples. The auditor should perform and an auditor independently assesses testing and other procedures those systems and provides feedback to to help identify instances of the management. The auditor does not non-compliance with those obtain written representations as to laws and regulations where whether the management has disclosed non-compliance should be to him all known actual or possible considered when preparing noncompliance with laws and regulations financial statements. (ISA whose effects should be considered 250.18-250.19) whenpreparingfinancialstatements. Generally, management is There is no formal procedure for responsible for establishing granting discharge to an auditee after the an effective system of internal successful completion of a formation c o n t r o l s t o e n s u r e under his control. The auditee remains compliance with laws and accountable despite the fact that the regulations. In designing steps external audit obtained substantial and procedures to test or assurance regarding the state of affairs assess compliance, the and the financial statements. For auditor should evaluate the instance, the special audits can cover PAGE 71 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement entity's internal controls and more than one previous year while assess the risk that the tracing any future incident and thereby control structure might not probe into any specific matter well after prevent or detect non- theconclusionoftheannualaudit. c o m p l i a n c e . T h e s e 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 resolveirregularities. (5) Evidence 46. When obtaining audit The results of the compliance tests do The new Financial Audit Manual should evidence from tests of have an impact on the sample size for the be implemented immediately discarding control, the auditor should substantive procedures, however the thesemechanicalprocedures. consider the sufficiency and results of the compliance tests are not appropriateness of the audit used to tailor the selection of sample evidence to support the transactions based on identified pattern assessed level of control risk. oferrors. (ISA500.10) When obtaining audit COUNTRY REPORT PAGE 72 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement evidence from substantive procedures, the auditor s h o u l d c o n s i d e r t h e s u f f i c i e n c y a n d appropriateness of audit e v i d e n c e f r o m s u c h procedurestogetherwithany evidence from tests of control to support financial statement assertions. (ISA 500.12) 47. When inventory is The Auditor General's Ordinance 2001 material to the financial under Section 13 specifically entitles the statements, the auditor Auditor General to audit the accounts of should obtain sufficient stores and stock kept in any government appropriate audit evidence office, however the scheduling of the regarding its existence and certification audit does not allow for the condition by attendance at presence at the physical inventory physical inventory counting. counts. The regularity audit generally (ISA500.5) covers the physical inspection of assets and inventories procured if existing at the When in substantial doubt as timeoftheaudit. to a material financial statement assertion, the In accordance with the procedures for auditor should express a the certification audit Step 4 of the Final qualified opinion or a Accounts Examination, the Auditor disclaimer of opinion. (ISA General assesses the type of audit 500.18) certificate as unqualified, qualified, disclaimer, or adverse, depending on the n a t u r e a n d q u a n t u m o f t h e disagreement/uncertainty. (6) Analysis of Financial Statements 48. In regularity (financial) The Finance and Appropriation Accounts The certification audit should consider audit, and in other types of are prepared following the combined the appropriateness of the financial audit when applicable, the Accounts Codes. A policy decision has reporting and compliance with Cash auditor should analyze the been made to adopt the IPSAS ­ 2, cash Basis IPSAS and should report all material financial statements to flow statement standard with effect from departures in the audit report. The establish whether acceptable FY2005-06 and to test run this by adoption of Cash Basis IPSAS would accounting standards for FY2004-05. The accounting policies are improve the AGP's ability to do financial reporting and not disclosed in the Finance and meaningfulandreliablefinancialanalysis. disclosure are complied with. Appropriation Accounts. The conversion (INTOSAI Auditing Standards to the NAM financial reporting 3.6.1) Analysis of financial framework would take time. The PAGE 73 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement statements should be auditor's ability to perform and use the performed to such a degree various analysis of the financial that a rational basis is statements is hampered when the obtained to express an financial statements only reflect the opinion on the financial recording and disclosure of mere statements. The auditor transactions and lack the meaningful and shouldascertainwhether: reliable information in respect of assets orliabilitiesbalances. (a) financial statements are prepared in accordance with acceptable accounting standards; (b) financial statements are p r e s e n t e d w i t h d u e consideration to the circumstances of the audited entity; (c) sufficient disclosures are presented about various elements of financial statements;and (d) the various elements of financial statements are p r o p e r l y e v a l u a t e d , measuredandpresented. (ISA200.2-200.12) (7) Reporting on Financial Statements 49. The auditor should Thisexistsbutnotinaproperform. The IPSAS and New Accounting Model provide an opinion paragraph should be identified as the relevant There is no specific reference to the in the audit report. (ISA financial reporting framework in the reporting framework. The only mention 700.4) audit certificate. The audit certificate relates to the provisions of Section 5(a) of should completely comply with the There should be a reference the Controller General of Account specimen formats given in the audit to the financial reporting Ordinance 2001 read with the Article manual/proceduresbeingfollowed. framework used to prepare 169oftheConstitution. the financial statements The opinion paragraph gives an (including identifying the expression that the financial statements country of origin of the "can be relied upon." This is not f i n a n c i a l r e p o r t i n g consistent with the specimen audit framework when the reports given in the Procedures for the framework used is not Certification Audit, which requires International Accounting stating that "the accounts are complete Standards).(ISA700.12-15) COUNTRY REPORT PAGE 74 A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement The opinion paragraph andaccurateinallmaterialaspects." should contain an expression of opinion on the financial statements stating the auditor's opinion as to whether the financial statements give a true and fair view (or are presented fairly) in all material respects. (ISA 700.17) 50. The SAI should provide a The certification audit report does All the referenced AGP reports detailed report amplifying the mention the other AGP reports covering mentioned in the audit certificate on the opinion in circumstances in aspects of financial governance or financialstatementsshouldbereattached which it has been unable to economical, efficient, and effective totheauditcertificate. give an unqualified opinion. utilization of the public resources which Reports should be made are submitted separately to the where weaknesses exist in President. These reports provide systems of financial control or information relating to weaknesses in the accounting.(ISA700.17) system of financial control or accounting in addition to those mentioned in audit comments annexed to the audit certificate. (8) Reporting on Fraud 51. The SAI should report The Auditor General on specific request Forensic audit training is needed. The fraudulent practices or can provide information to the Supreme Audit Institution does not focus serious irregularities government agencies, including the on fraud in a sufficiently systematic way. discovered by the auditors. National Accountability Bureau and the ISA 240 requires the auditor to obtain (INTOSAI Auditing Standards legislature, about a specific incident of information that is used to identify the 4.0.7) ISA 240 establishes fraud. risks of material misstatement due to standards and provides fraud; and evaluate the design of the Audits focus on examining transactions guidance on the auditor's entity's related controls, including for discrepancies and regulatory responsibility to consider relevant control activities, and determine breaches, and much of the reporting fraud and error in an audit of whether they have been implemented. seems to relate to fraudulent behavior financial statements. The ISA 240 also requires the auditor to and suggesting recoveries without standard requires that ­ inform management of the auditee and diggingoutthefactsindetail. w h e n p l a n n i n g a n d the Board, if there is one, of any fraud and performing audit procedures the failure in internal control that led to and evaluating and reporting the fraud. The auditor's report should the results thereof ­ the identify the action that the entity is taking auditor consider the risk of aboutthefraud. material misstatements in the financial statements resulting fromfraudorerror. PAGE 75 COUNTRY REPORT A COMPARISON TO INTERNATIONAL STANDARDS Standards Present Position Options for Improvement (9) Reporting on Compliance 52. With regard to regularity ReportssubmittedtotheParliament: The general tendency is for the audit to audits, does the auditor cover and report on all issues confronting · AnnualRegularityAudit prepare a written report, an organization instead of emphasizing which may either be a part of· SpecialAuditReports issues as compliance type and other most the report on the financial critical issues. The audit report can add statements or a separate · PerformanceAuditReports significant value if the auditors focus on report, on the tests of · EnvironmentalAuditReports more critical issues with impact on the compliance with applicable organization laws and regulations? · GovernanceAuditReports (INTOSAI Auditing Standards · ProcurementAudit(Proposed) 4.0.7) · ThirdPartyValidations Foreign Aided Projects ­ Financial StatementsCertification. COUNTRY REPORT PAGE 76