1. Financial Audit
Financial audit refers to an independent examination of an organization’s financial reports and financial reporting processes to increase the value and credibility of financial statement prepared by the organisation.
The main purpose of a financial audit is:
• To express an opinion on whether the financial statements are prepared in all material respect, in accordance with a financial reporting framework;
• To obtain a reasonable assurance about whether the financial information is free from material misstatement due to either fraud or error, and
• To report on the financial statements, and communicate as required by the standards, in accordance with the auditor’s findings
1.1 Mandates to conduct Financial Audit
The Royal Audit Authority derives its mandate to conduct financial audits from Section 73 of the Audit Act of Bhutan 2018 which states that “Financial audit include expressing opinion as to whether the financial statements have been prepared in accordance with applicable financial reporting standards and regulatory framework, including but not limited to:
(1) The financial transactions comply with the existing laws and the evidence relating to items of income and expenditure are sufficient;
(2) The amount appropriated have been expended for the specified programs and tasks within the approved budget limits;
(3) The accounting and related system of controls, financial or otherwise including the arrangements for internal audit and internal control of cash, kind and other public property against any loss, damage and abuse are adequate; and
(4) The accounts of revenue, taxes, other incomes and deposits are accurate and the system relating to assessment, realization, recording and methods of reporting are adequate”
1.2 Scope of Financial Audits
RAA audits the financial statements of the government and its budgetary agencies, i.e. ministries, departments, divisions and other units and institutions depending on significance of the entity, risks involved and availability of audit resources. The financial statements of civil society organization, religious organisations and political parties are also subject to audit and altogether the RAA conducts approximately 640 financial audits every year.
During an audit, the following areas are reviewed when RAA conducts an audit:
• budget allocation and procedures
• expenditure incurred for each activity
• financial statements and schedules
• internal control procedures
• compliance with the budget and key budget provisions
1.3 Guidelines for Financial Audits
Financial audits are carried out based on RAA’s Financial Audit Manual 2019, which is based on ISSAIs of the International Organization of Supreme Audit Institutions (INTOSAI). The RAA embraces quality in its audit by means of risk analyses, audit plans, audit process management, evidence gathering, review at difference levels, and ensuring uniformity of practices.
2. Compliance audit
Compliance audit is a comprehensive review as to whether the provisions of the applicable laws, rules and regulations, orders and instruction issued by the competent authority are being complied with. In compliance audit, the auditor looks for material non-compliance or departure from established criteria, which could be based on laws and regulations, principles of sound financial management, or best practices.
ISSAI 4000 states, “Compliance audit deals with the degree to which the audited entity follows rules, laws and regulations, policies, established codes, or agreed upon terms and conditions, etc. Compliance auditing may cover a wide range of subject matters”
2.1 Mandates to conduct Compliance Audits
The Royal Audit Authority derives its mandate to conduct compliance audits from Section 74 of the Audit Act of Bhutan 2018 which state that “Compliance audit may cover a wide range of subject matter providing assurance to intended users about the outcome of the evaluation or measurement of a subject matter against suitable criteria through independent assessment whether:
(1) Applicable laws, rules, regulations, policies, directives, systems and practices are complied with and systems are instituted to identify them and monitor compliance thereof;
(2) The accounts have been maintained in the prescribed forms and such accounts fairly represent the position of the transactions;
(3) The program implementations are adequately monitored to avoid incidences of cost and time overruns;
(4) The inventory of public properties is accurate and upto-date, and custody, control, management and physical safeguard measures instituted are adequate;
(5) Physical assets and infrastructures reported actually exist and confirm to the required specifications and standard;
(6) The available resources including human, financial and other assets are properly utilized;
(7) The debts, liabilities and specific purpose funds are recorded accurately and managed properly; and
(8) The implementation of programs and activities areas planned and the intended objectives achieved planned and the intended objectives achieved”.
Compliance audit promotes transparency by providing reliable reports as to whether public funds and resources have been used in line with applicable authorities. It also promotes accountability by reporting non-compliance and violation of authorities to take corrective actions and hold public officials accountable for their activities.
2.2 Modalities to conduct Compliance Audits
The RAA conducts both theme and entity based compliance audits. While the responsibility to select topics for theme based audit rest with top management, the selection of entity based compliance audits is left to the wisdom of respective divisions and regional offices. Unlike the financial audits for which the audits are required by respective legislation, the frequency of compliance audits is solely driven by risk assessment of agencies and by the potentiality of adding values.
Themes assessed to be significant are selected for auditing according to whether they involve any breaches of regulations, inappropriateness of government activities or errors in compliance with the budget and, above all, according to their impact on decision-making processes.
2.3 Guidelines for Compliance audits
Compliance audits is based on RAA’s Compliance Audit Guidelines 2019 prepared based on ISSAIs of the International Organization of Supreme Audit Institutions (INTOSAI). RAA ensure quality by means of risk analysis, audit plans, audit process management, robust QA review mechanism, and uniformity of practices.
3. Performance Audit
It is an independent examination of a program, operation or management system and procedures to assess whether the entity is achieving economy, efficiency and effectiveness in the employment of resources. It plays an important role in keeping legislature well informed about governmental actions and the outcome of its own decisions. It aims to increase public transparency and accountability by providing objective and reliable information on how the public services perform.
“An independent examination of the efficiency and effectiveness of government undertakings, programs or organisations, with due regard to economy, and the aim of leading to improvements” (INTOSAI)
3.1. Mandate and selection of topics for Performance Audits
The Royal Audit Authority derives its mandate to conduct performance audits from Article 25(1) of the Constitution of the Kingdom of Bhutan and Section 68 of the Audit Act of Bhutan 2018 which states that “The RAA shall audit and report on the economy, efficiency and effectiveness in the use of public resources”. Section 69 of the Audit Act further provides that, amongst others to “carry out performance audit to examine and report on the economy, efficiency and effectiveness in public operations on selected schemes, themes or topics as may be considered necessary by the Authority”.
The criteria for topic selection of performance audits include but not limited to:
• Possible impact
• Legislative or public interest
• Risks to the SAI
• Previous audit work
• Other works planned or in progress
• High political sensitivity
The performance auditing began as early as 2000 and established a separate Performance and Thematic Audit Division in July 2007. The first Performance Audit Guideline was developed in 2005 and revised in 2011.
With the adoption of International Standards of Supreme Audit Institutions (ISSAIs) as authoritative auditing standards in January 2017 and the changing dynamics and practices in such audits, the guidelines underwent revision in 2019.
3.2 Guidelines for Performance Audits
Performance audits is based on RAA’s Performance Audit Guidelines 2019 prepared based on ISSAIs of the International Organization of Supreme Audit Institutions (INTOSAI). The RAA ensure quality by means of risk analysis, audit plans, audit process management, robust Quality Assurance review mechanism, and uniformity of practices.