CHAPTER FOUR

COMPLIANCE AUDITING
4.1. Compliance Auditing

 Society has always been concerned about

compliance with laws and regulations by all
types of organizations.
 As a result, compliance auditing has
evolved to become an important part of the
work of both external and internal auditors.
 Compliance auditing involves:

 testing and
 Reporting, on whether an organization has

compliance with various laws, regulations,

and agreements.
Cont…

 Legislator and various regulators are

adopting compliance auditing
requirements for a variety of business,
governmental, and nonprofit
organization.

 OFAG (Office of Federal Auditor General)

in Ethiopia has developed general
guidance for different types of
engagement that involve attesting to
compliance with law and regulation.
4.2. Characteristics of Compliance Auditing

 Compliance auditing may cover a wide

range of subject matter and can be
performed to provide either reasonable or
limited assurance, using several types of
criteria, evidence gathering procedures or
reporting formats.
 Compliance audits may be attestation or
direct reporting engagements, or both at
once.
 The audit report may be either long- or
short-form.
Cont…
 Compliance auditing promotes
transparency by providing reliable reports
as to whether funds have been
administered, management exercised and
citizens’ rights to due process honored as
required by the applicable authorities.
 It promotes accountability by reporting
deviations from and violations of authorities,
so that corrective action may be taken and
those accountable may be held responsible
for their actions.
Cont…
 It promotes good governance both by
identifying weaknesses and deviations from
laws and regulations and by assessing
propriety where there are insufficient or
inadequate laws and regulations.
 Fraud and corruption are, by their very nature,
elements which counteract transparency,
accountability and good stewardship.
 Compliance auditing therefore promotes good
governance in the public sector by considering
the risk of fraud in relation to compliance.
4.3. Principles Of Compliance Auditing
 General principles
 Auditors should:
 plan and conduct the audit with professional
skepticism and exercise professional
judgment throughout the audit process.
 take responsibility for the overall quality of the
audit.
 have access to the necessary skills.
 Consider audit risk throughout the audit process.
 Consider materiality throughout the audit process.
 Prepare sufficient audit documentation.
 Maintain effective communication throughout the
audit process.
Principles related to the audit process: Auditors should:

 Design the audit scope and the audit process

as a whole to cover the entire audit.
 Identify the subject matter and suitable
criteria;
 understand the audited entity in the light of
the relevant authorities;
 understand the control environment and the
relevant internal controls and consider
whether they are likely to ensure compliance;
 Perform a risk assessment to identify risks of
non-compliance;
 Consider the risk of fraud;
Cont…
 develop an audit strategy and an audit
plan;
 gather sufficient appropriate audit
evidence to cover the audit scope;
 evaluate whether sufficient and
appropriate audit evidence has been
obtained and form relevant conclusions;
 prepare a report based on the principles

of completeness, objectivity, timeliness

and a contradictory process;
 follow up instances of non-compliance

when appropriate.
Compliance audit reports should include the following elements (although not necessarily in this order):

1 Title
2 Addressee
3 Scope of the audit, including the time period covered
4 Identification or description of the subject matter
5 Identified criteria
6 Identification of the auditing standards applied in
performing the work
7 A summary of the work performed
8 Findings
9 A conclusion/opinion
10 Replies from the audited entity (as appropriate)
11 Recommendations (as appropriate)
12 Report date
13 Signature
4.4. Audit in accordance with OFAG standards

 According to proclamation No 68/1997 article

4, the office endeavors the following
objectives:
o Strengthen an audit system required for
reliable information necessary for proper
management and administration of the plan
and budget of federal government;
o Ascertain that all receivable money and
property of the federal government are
collected, preserved and used, in accordance
with the laws and regulations of the federal
government, and report same to the council.
Cont…

o Undertake financial and performance audits of the

offices and organizations of the federal
government;
o make efforts, in co-operation with concerned
organizations, to promote and strengthen
accounting and auditing professions;
o give professional assistance and advice to regional
and federal civil servants and organizations
engaged in accounting and audit services;
o Draw up a standard of auditing by which the
accounts of the offices and organizations of the
federal government shall be examined and follow
up the implementation of it.
Scope of OFAG

 The scope and conduct of an audit by OFAG is

definitely wider and much demanding than that of
any other audit, however achievement of such
objectives must be modern auditing methods and
techniques designed to secure audit satisfaction with
minimum expenditure of audit time and effort.
 Till today OFAG audits have been essentially
“Financial audits” with special emphasis on
“regularity” and “compliance” aspects.
 Hence ,the scope of OFAG audits is to be gradually
extended to cover performance audit aspect as well,
i.e audit of 3E’s.
 An advisory committee on performance audit, that
will guide on such matters as formal strategy and
detail operational procedures are evolved.
4.5. Audit in accordance with MOF standards

 Objectives of auditing by inspection department

under Ministry of Finance (MOF) are as follows:
 To ensure that budget proclamation, under
Ministry of Finance are implemented;
 To ensure that the offices and undertakings are
working efficiently and effectively;
 To ensure each organizations handle
governmental property and use them
economically and efficiently;
 Approval of corruption, fraud, and errors of
government resources, to suggest legal action
to be taking and to propose ideas to strength
the accounting statement.
Cont…
 Scope of auditing by inspection department of
MOF are as follows:
 Ensure that existence and proper implementation
of laws governing taxes, financial administration
and fees that meet the economic and social
development needs of the society;
 Ensure and control that government revenue from
any source is properly collected and accounted;
 Control any governmental institution by ensuring
proper accounting system;
 Ensure financial policies are properly implemented;
 Authorize to real sale, deposit boxes, financial
documents.
 To sue any case of irregularities in the court of law.
Cont…
 The inspection department conducts its auditing
activities in 3 ways:
a) Audit of financial and other resources balance:
 This kind of audit that has been conducted annually in

all offices that operated under Federal and Regional

government.
 Unless this audit is completed the next budget won’t

be released.
 By conducting this audit they ensure that the
appropriated budget has been spent, on the
predetermined purposes and returned the
unexpended balance to MOF for various reasons.
 Budget appropriations for new budget years therefore

would be based on the balance of accounting closed

on Hamle (July) 1st by the inspection department.
Cont…

b) Data Audit
 This type of audit is quite time consuming due to

lack of skilled manpower and time constraint.

 It is conducted only under government directives.

 It is conducted to ensure all activities are done in

compliance with budget appropriations.

 This includes:

 financial auditing

 property auditing (fixed and fast moving items)

 compliance audit as per rules and regulation of

external auditing
c) Surprise audit:

 It is conducted suddenly offices those

are to be audited without informed.

 They go to an office (bureau) which they

consider sensitive and risky and perform
audit.

 This is not also performed every year,

because of lack of manpower and
shortage of time.
4.6. Auditing in accordance with GAAS
 Auditors have a responsibility to design all
audits to obtain reasonable assurance of
detecting material misstatements resulting
from violation of laws and regulations that have
direct and material effects on amounts in the
financial statements.
 Governmental organizations are subject to a
vastly of laws and regulations that affect their
financial statements than business enterprises.
 Once the auditors have an understanding of the
important laws and regulations, they assess the
risks that financial statement amounts might
be materially misstated by violations.
Cont…

 In making these assessments, the

auditors consider the controls designed
to prevent violations, such as:
o polices regarding acceptable operating

practices,
o codes of conduct, and

o assignment or responsibility for

complying with requirements.
 These risk assessments are then used

to design the nature, timing and extent

of the auditor’s substantive tests of
4.7. Audit in accordance with other laws and regulations

 Provides guidance for auditors when they are

engaged to either apply agreed upon procedures
or perform an examination on an organization’s
compliance with laws and regulations.
 The objective of compliances engagements is to
attest to management’s assertion about the
organization’s compliance with specific
requirements, or about the organizations internal
control over compliance with specific laws and
regulations.
 Management assertion about compliance must
be presented in writing and may also be
presented in a formal report.