Performance Auditing: What It Is, and Why It Is Important Presented by: Harriet Richardson, CPA, CIA, CGAP Audit Manager, City of Berkeley

Transcription

1 Performance Auditing: What It Is, and Why It Is Important Presented by: Harriet Richardson, CPA, CIA, CGAP Audit Manager, City of Berkeley ASMC Sacramento Mini PDI 24 January 2012

2 Session Objectives Provide an overview of government performance audits: What they are and how they are different from financial audits Why government agencies would want a performance audit Conducting performance audits: the audit process 2

3 What Are Performance Audits? Audits that provide findings or conclusions based on an evaluation of sufficient, appropriate evidence against criteria. - Government Auditing Standards, December 2011 Objective and systematic reviews and analysis of information and data Independent assessments of performance and operations Provide decision makers with timely, accurate, and unbiased information Provide accountability and transparency of government programs and operations 3

4 Types of Performance Audits Economy, Efficiency, and Effectiveness: Does the entity acquire and use its resources (e.g., personnel, property, and space) in the best manner possible to meet its mission, goals, and objectives? Internal Control: Does the entity have effective plans, policies, methods, and procedures to provide reasonable assurance of meeting its mission, goals, and objectives? Compliance: Does the entity comply with the provisions of laws, regulations, contracts, and grant agreements governing its operations? Prospective Analysis: What actions might the entity take based on assumptions about events that may occur in the future? 4

5 Performance vs. Financial Audits Performance Audits Focus on how money was spent, including what activities were performed and what results were achieved Provide conclusions about the operations of an entity to help management and those charged with oversight use the information to improve program performance, reduce costs, facilitate decision making, and contribute to public accountability Review a variety of organizational structures and processes, peer and best practices, and program results Financial Audits Focus on how expenditures were recorded Provide an opinion about whether an entity s financial statements are presented fairly in all material respects in conformity with an applicable financial reporting framework, such as Generally Accepted Accounting Standards Review transactions to identify material misstatements in financial reporting 5

6 Why Do We Need Performance Audits in Government? No profit motive Legacy systems and aging infrastructure Organizations often don t monitor/track their performance Complex rules and regulations Complex funding streams Complex organizational structures Planning is typically short-term rather than long-term Political process determines mission and resources Increasingly constrained resources alongside need for increased capacity Emerging threats 6

7 Government Entities That Can Benefit From a Performance Audit Federal agencies State agencies County agencies City agencies Townships Villages Transit agencies Boards and commissions Public libraries Universities School districts Other special districts (e.g., utility) Auditors can be allies, even while maintaining independence: Auditor s recommendations can support an agency s request for needed policy changes or additional resources Auditors can identify management improvement opportunities and strategies for addressing them Auditors can provide detailed analysis to for data-driven decision making 7

8 Common Performance Audit Questions Is the program accomplishing what it is supposed to and meeting its performance goals? Are there activities or services that can be reduced or eliminated? Are there gaps or overlaps in programs or services within the agency or among agencies? Is the program using proven practices to achieve its goals and objectives? Do the practices achieve the program s goals and objectives in the most efficient and economical manner? Do the laws and regulations governing the program make sense? Does the program provide services and apply the rules equitably among its clients? 8

9 Factors Considered in Selecting Audits Audit selection is based on risk: Strategic could prevent an organization from meeting its goals Financial could result in negative financial impact Regulatory could result in sanctions from a regulatory agency for noncompliance with laws and regulations Reputational could expose an organization to negative publicity or loss of credibility Operational could prevent an organization from operating in the most effective and efficient manner Third-Party unsuccessful performance or inappropriate activity by a third party could subject the organization s programs to any of the above risks All performance audits must consider fraud risk! 9

10 Conducting Performance Audits: Professional Standards Government auditors often use the professional standards and guidance issued by the Comptroller General of the United States ( Yellow Book ) because they provide a framework for conducting high-quality audits with: Competence Integrity Objectivity Independence 10

11 Audit Organization Responsibilities The audit organization maintains credibility by following the professional standards, which require it to ensure: The audit organization is organizationally independent and the auditors maintain an independent attitude and appearance throughout the audit Auditors use professional judgment in planning and performing the audits and in reporting the results Auditors are professionally competent and collectively have the necessary skills and knowledge to address the audit objectives Audit staff are properly supervised throughout the audit It maintains a quality control system to provide reasonable assurance that the organization and its staff comply with the professional standards and that the organization undergoes an external peer review at least once every three years 11

12 Conducting Performance Audits: The Audit Process PLANNING Entrance conference Audit survey: ~ Gain an understanding of the nature and profile of the program and user needs ~ Identify criteria ~ Identify potential sources of evidence ~ Identify risks and performance issues Develop scope and objectives Develop audit plan FIELD WORK Engagement letter Gather data Analyze data Validate evidence Develop audit findings and conclusions Document work REPORTING Prepare draft report Conduct quality control review Exit conference and technical review with audited entity Edit draft report Obtain agency response Finalize and distribute report Present report 12

13 Audit Planning The Survey Understand the nature and profile of the program: Mission, goals, products, and services, including the target client Provisions of laws, regulations, contracts and grant agreements Resources and financing Performance measures/indicators and reporting mechanisms Operations, processes, and management controls Understand user needs management and agency officials, elected officials, citizens, interest groups, and clients: Specific information needs and when Program interests and concerns Major program barriers and challenges Suggested program changes Knowledge of similar programs in other jurisdictions 13

14 Audit Planning The Survey (continued) Identify potential audit criteria (i.e., what should be ) must be relevant to the audit objectives and permit consistent assessment of the subject matter: Laws, regulations, contracts, and grant agreements Policies and procedures Other entities performance (benchmarks) Defined business practices Technical standards Expected performance (e.g., target performance goals) Expert opinions Identify potential sources of information that can be used as audit evidence must be sufficient and appropriate to address the audit objectives and adequately plan the audit: Information systems Manual records Staff knowledge Work of other auditors 14

15 Audit Planning The Survey (continued) Identify risks and performance issues: Weaknesses in one or more performance aspects High potential for something to go wrong that would prevent the program from achieving its mission and goals Lack of customer satisfaction Significant deviations from what is desired Real and ongoing barriers to achieving goals Performance issues or challenges identified in other reports Past issues with fraud, abuse, or unethical behavior Known opportunities for improvement based on knowledge of similar programs elsewhere Develop objectives and scope The question(s) to be answered and its boundaries Develop the field work program: Specific procedures auditors will perform to address the audit objectives, including the information to gather and analyze Timeline 15

16 Audit Field Work Obtain sufficient, appropriate evidence as a whole, must address the audit objectives and support the findings and conclusions Sufficiency = quantity of evidence must be enough to persuade a knowledgeable person that the findings are reasonable; stronger evidence may allow less to be used Appropriateness = quality of evidence pertains to the relevance, validity, and reliability of the evidence Analyze, interpret, and validate the evidence Evaluate the analysis and draw conclusions Develop findings and recommendations Document all work Review all work 16

17 Obtaining Information for the Audit Physical (most preferable) direct inspection: Walk-throughs, ride-alongs Photographs, maps, drawings, charts Physical samples Documentary already existing information: Prior audits, studies, and evaluations Annual, performance measurement and management reports Strategic plans Contracts, budgets, financial reports, and accounting records Spreadsheets and databases Testimonial (least reliable; should be verified by other evidence if possible): Interviews Inquiries Questionnaires and surveys Focus groups and public forums 17

18 Findings and Recommendations Findings must contain the following five elements, to the extent they address the audit objectives: Criteria what should be Provide the expectations for the program Condition what is Describes what the auditors found as a result of their work Cause why? Describes the reason the condition occurred; often related to weaknesses in procedures ( internal controls ) Effect so what? Describes the impact or cost of the gap between the criteria and the condition Recommendations how to make the condition equal the criteria 18

19 Audit Reporting Prepare draft report; include: Background on the program Scope, objectives, and description of audit methodology Findings and recommendations Conclusions logical and persuasive inferences about the program based on the auditor s findings Statement that audit was conducted in accordance with generally accepted government auditing standards Views of responsible officials Provide copy of draft report to agency, conduct exit conference to discuss report content, and provide agency opportunity to comment on the factual accuracy of the report ( technical review ) Update report based on technical review comments and obtain management s response Finalize and distribute report Present results, e.g., to legislative body, audit committee 19

20 Questions? For more information, contact: Harriet Richardson, CPA, CIA, CGAP City of Berkeley Auditor s Office hrichardson@cityofberkeley.info