TOPIC 13: AUDITING IN THE PUBLIC SECTOR
Introduction
Public sector auditing is a critical function that ensures accountability, transparency, and
proper use of public resources. It involves the systematic evaluation of financial and
operational activities of public sector entities, such as government ministries,
departments, agencies, and state-owned enterprises. The objective is to provide
assurance to stakeholders (e.g., parliament, taxpayers, and citizens) that public funds
are managed efficiently, effectively, and in compliance with laws and regulations. This
topic covers the objectives, scope, regulatory framework, and unique aspects of public
sector auditing, as well as the roles of key players such as the Auditor General, internal
auditors, and audit committees. The notes are designed to help CPA students
understand the principles and practices of auditing in the public sector context.
1. Objective and Scope of Public Sector Auditing
1.1 Definition of Public Sector Auditing
Public sector auditing is a systematic process of objectively obtaining and evaluating
evidence to determine whether information or actual conditions conform to established
criteria. It provides independent, objective, and reliable information to enhance
accountability and governance in public entities.
Illustration: The Kenya National Audit Office (KENAO) conducts audits on government
ministries to verify that public funds allocated for education are used for their intended
purpose, such as building schools or purchasing textbooks.
1.2 Objectives of Public Sector Auditing
The primary objectives of public sector auditing include:
• Accountability: Ensuring public entities are accountable for their management
and use of resources to funders (e.g., taxpayers) and beneficiaries (e.g.,
citizens).
• Transparency: Providing clear and reliable information on the use of public funds.
• Governance: Supporting good governance by promoting ethical behavior and
compliance with laws and regulations.
• Performance Improvement: Encouraging continuous improvement in public
administration through recommendations.
• Confidence Building: Enhancing public confidence in the management of public
resources.
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Illustration: An audit of a public hospital may assess whether funds allocated for
medical supplies were spent appropriately, ensuring accountability to citizens who rely
on the hospital’s services.
1.3 Scope of Public Sector Auditing
The scope of public sector auditing is broader than private sector auditing and includes:
• Financial Audits: Verifying the accuracy and completeness of financial
statements.
• Compliance Audits: Ensuring adherence to laws, regulations, and policies.
• Performance Audits: Evaluating the efficiency, effectiveness, and economy of
operations (the 3Es).
• Value-for-Money Audits: Assessing whether public resources deliver optimal
value.
• Comprehensive Audits: Combining financial, compliance, and performance
audits.
Illustration: A performance audit of a road construction project may evaluate whether
the project was completed on time, within budget, and met quality standards, ensuring
value for public funds.
2. Types of Public Sector Audits
2.1 Financial Audits
• Focus on the accuracy and reliability of financial statements.
• Ensure financial reports comply with accounting standards (e.g., International
Public Sector Accounting Standards - IPSAS).
• Verify that public funds are recorded and reported correctly.
Illustration: The Auditor General audits the financial statements of a county
government to confirm that revenue from local taxes and expenditures on public
services are accurately reported.
2.2 Compliance Audits
• Assess whether public entities comply with legal and regulatory frameworks.
• Focus on adherence to budgetary provisions, procurement laws, and other
regulations.
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Illustration: An audit of a public procurement process may check whether contracts
were awarded in accordance with the Public Procurement and Asset Disposal Act,
2015.2.3 Performance Audits
• Evaluate the efficiency, effectiveness, and economy of public sector operations.
• Focus on whether programs achieve their intended objectives and deliver value
for money.
Illustration: A performance audit of a public health campaign may assess whether the
campaign reduced disease prevalence as intended and whether funds were used
efficiently.
2.4 Value-for-Money (VfM) Audits
• Focus on the 3Es: Economy (cost minimization), Efficiency (optimal use of
resources), and Effectiveness (achieving objectives).
• Often used to evaluate large public projects or programs.
Illustration: A VfM audit of a water supply project may assess whether the project was
completed at the lowest reasonable cost, delivered water to the intended population,
and met quality standards.
2.5 Comprehensive Audits
• Combine elements of financial, compliance, and performance audits.
• Provide a holistic view of an entity’s operations.
Illustration: A comprehensive audit of a public university may review its financial
statements, compliance with education regulations, and the effectiveness of its
academic programs.
3. Establishment, Mandate, and Functions of Public Sector Auditors3.
1 Establishment
Public sector auditors are established under legal frameworks, such as:
• Constitution of Kenya (2010): Article 229 establishes the Office of the Auditor
General (OAG) as an independent office responsible for auditing public entities.
• Public Audit Act, 2015: Provides the legal framework for the OAG’s operations in
Kenya.
Illustration: The OAG in Kenya is mandated to audit all public entities, including
national and county governments, to ensure accountability.
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3.2 Mandate
The mandate of public sector auditors includes:
• Auditing financial statements of public entities.
• Assessing compliance with laws and regulations.
• Evaluating the performance of public programs and projects.
• Reporting findings to oversight bodies (e.g., Parliament, County Assemblies).
Illustration: The Auditor General submits audit reports to the National Assembly, which
uses the findings to hold government officials accountable.
3.3 Functions
Key functions of public sector auditors include:
• Conducting audits of public entities.
• Issuing audit reports with opinions (e.g., unqualified, qualified, adverse, or
disclaimer).
• Providing recommendations to improve operations.
• Collaborating with oversight bodies to ensure accountability.
Illustration: The Auditor General may recommend improvements in procurement
processes after identifying irregularities in a government ministry’s tendering process.
4. Parties to Public Sector Auditing
4.1 Auditor
• The Auditor General or an appointed audit firm conducts the audit.
• Must be independent, objective, and comply with International Standards on
Auditing (ISAs) and International Standards of Supreme Audit Institutions
(ISSAIs).
Illustration: The OAG appoints qualified auditors to review the financial records of a
state corporation.
4.2 Responsible Party
• The management of the public entity being audited (e.g., accounting officers,
CEOs, or directors).
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• Responsible for preparing financial statements and ensuring compliance.
Illustration: The Principal Secretary of a ministry is the responsible party for ensuring
accurate financial reporting.
4.3 Intended Users
• Stakeholders such as Parliament, County Assemblies, taxpayers, and citizens
who rely on audit reports to assess the performance of public entities.
Illustration: Citizens use audit reports to demand accountability from county
governments for the use of public funds.
5. Role of Internal Audit Function in Public Entities
5.1 Definition
Internal audit is an independent, objective assurance and consulting activity designed to
add value and improve an organization’s operations.5.2 Role of Internal Audit
• Risk Assessment: Identifying and evaluating risks that could affect the entity’s
objectives.
• Control Evaluation: Assessing the effectiveness of internal controls.
• Compliance Monitoring: Ensuring adherence to laws, regulations, and policies.
• Advisory Role: Providing recommendations to management for operational
improvements.
Illustration: The internal audit unit of a public hospital may review the inventory
management system to ensure medical supplies are not misappropriated.5.3
Relationship with External Auditors
• Internal auditors provide insights into the entity’s operations, which external
auditors (e.g., OAG) can rely on to plan their audits.
• External auditors assess the work of internal auditors to determine its reliability.
• Collaboration ensures efficient audits and avoids duplication of efforts.
Illustration: The OAG may review the internal audit report on a ministry’s payroll
system to focus its external audit on high-risk areas.
6. Regulatory Framework Governing Public Sector Auditing
6.1 National Frameworks
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• Constitution of Kenya (2010): Establishes the OAG and outlines its
independence and mandate.
• Public Audit Act, 2015: Governs the operations of the OAG, including reporting
requirements.
• Public Finance Management Act, 2012: Sets standards for financial management
in public entities.
6.2 International Standards
• International Standards on Auditing (ISAs): Provide guidelines for financial audits.
• International Standards of Supreme Audit Institutions (ISSAIs): Specific
standards for public sector auditing, covering financial, compliance, and
performance audits.
• International Public Sector Accounting Standards (IPSAS): Govern financial
reporting in the public sector.
Illustration: The OAG uses ISSAIs to guide its performance audit of a government-
funded irrigation project, ensuring compliance with international best practices.
7. Functions of the Audit Advisory Board and Executive Committee in the Auditor
General’s Office
7.1 Audit Advisory Board
• Role: Provides strategic guidance to the Auditor General on audit policies and
priorities.
• Functions:
• Advising on audit planning and resource allocation.
• Reviewing audit methodologies and standards.
• Ensuring the OAG’s independence and effectiveness.
Illustration: The Audit Advisory Board may recommend focusing audits on high-risk
sectors like health or infrastructure based on national priorities.
7.2 Executive Committee
• Role: Manages the day-to-day operations of the OAG.
• Functions:
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• Implementing audit plans and strategies.
• Overseeing audit teams and resource management.
• Ensuring timely submission of audit reports.
Illustration: The Executive Committee coordinates the deployment of audit teams to
county governments to meet constitutional deadlines for audit reporting.
8. Purposes of the Auditor’s Report and the Concept of True and Fair View
8.1 Purposes of the Auditor’s Report
• Express an Opinion: Provide an opinion on whether financial statements present
a true and fair view.
• Communicate Findings: Highlight material misstatements, non-compliance, or
inefficiencies.
• Enhance Accountability: Inform stakeholders about the entity’s financial and
operational performance.
Illustration: The Auditor General’s report on a county government may indicate whether
funds allocated for road maintenance were used appropriately.8.2 True and Fair View
• Refers to financial statements that are free from material misstatements and
fairly represent the entity’s financial position.
• Based on compliance with IPSAS and other relevant standards.
Illustration: An unqualified audit opinion indicates that a public entity’s financial
statements are true and fair, giving confidence to stakeholders.
9. Reasons for Qualifications of Audit Reports
9.1 Types of Qualifications
• Except For: Issued when misstatements are material but not pervasive.
• Adverse: Issued when misstatements are material and pervasive, and financial
statements do not present a true and fair view.
• Disclaimer: Issued when the auditor cannot obtain sufficient evidence to form an
opinion.
9.2 Reasons for Qualifications
• Limitation of Scope: Inability to access sufficient audit evidence (e.g., missing
records).
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• Inherent Uncertainties: Uncertainty about future events (e.g., pending litigation).
• Disagreements: Discrepancies between management and auditor on accounting
treatments.
Illustration: The Auditor General may issue a qualified opinion on a ministry’s financial
statements if records for a significant expenditure are missing, limiting the scope of the
audit.
10. Practical Application:
Case Study Scenario: The Auditor General is auditing the financial statements of a
county government for the financial year 2024/2025. The audit includes a review of a
KES 500 million road construction project. Audit Process:
• Planning: Identify high-risk areas, such as procurement and contractor payments.
• Fieldwork: Verify invoices, contracts, and project progress reports.
• Findings:
• Financial audit: Confirm whether funds were recorded accurately.
• Compliance audit: Check if procurement followed the Public Procurement
and Asset Disposal Act, 2015.
• Performance audit: Assess whether the road was completed on time and
met quality standards.
• Reporting: Issue an audit report with an opinion (e.g., unqualified if no issues are
found, or qualified if irregularities are identified).
Illustration: The audit reveals that KES 50 million was paid to a contractor without
supporting documentation. The Auditor General issues a qualified opinion due to a
limitation of scope and recommends improved record-keeping.
11. Key Take aways for Learners
• Public sector auditing ensures accountability and transparency in the use of
public resources.
• It involves financial, compliance, performance, and value-for-money audits, each
with distinct objectives.
• The Auditor General plays a central role, supported by internal auditors and
oversight bodies.
• Audit reports provide critical information to stakeholders and may include
qualifications if issues are identified.
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• Understanding the regulatory framework (e.g., Constitution, Public Audit Act,
ISSAIs) is essential for public sector auditing.
12. Self-Assessment Questions
• Explain the difference between financial, compliance, and performance audits in
the public sector.
• Describe the role of the Auditor General in promoting accountability in public
entities.
• What are the key functions of the internal audit unit in a public sector
organization?
• Why might an auditor issue a qualified opinion, and how does this impact
stakeholders?
• Discuss the importance of ISSAIs in public sector auditing.
References
• KASNEB CPA Syllabus, Auditing and Assurance (Intermediate Level).
• Public Audit Act, 2015 (Kenya).
• Constitution of Kenya, 2010.
• International Standards of Supreme Audit Institutions (ISSAIs).
• RCM Publishers, CPA Notes – Auditing and Assurance.
• Kasnebnotes.com, CPA Intermediate Level – Auditing and Assurance (New
Syllabus).
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