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External auditors have an essential role in Mauritius. The primary role of external auditors is to express an independent opinion on whether an entity's financial statements are free of material misstatements. Much of the debate in the research focuses on the audit approach of the external auditors in Mauritius and do they do their work efficiently and effectively. Some people confuse auditors with people who detect fraud but auditors have nothing to do with fraud detection exclusively. Auditors just want to make sure that company's financial statements are true and fair representation of its actual position. If they come across any fraud related information, it is their responsibility to bring it to the management's attention and consider withdrawing from the engagement if management does not take appropriate actions. Normally, external auditors review the entity's information technology control procedures when assessing its overall internal controls. They must also investigate any material issues raised by inquiries from professional or regulatory authorities. The debate surrounding the role of external auditors focuses in particular on auditor independence. A survey by the magazine "Financial Director" shows that the fees derived from audit clients in terms of non-audit services are significant in comparison with fees generated through auditing. Accounting firms sometimes engage in a practice called "low balling" whereby they set audit fees at less than the market rate and make up for the deficit by providing non audit services. As a result, some audit firms have commercial interests to protect too. There is concern that the auditor's interests to protect shareholders of a company and his commercial interests do not conflict with each other. Thus the main factors elaborated in the study include the auditor's independence and also the Legal and Regulatory framework of Mauritius. Furthermore research has also been done on whether external auditors follow fundamental principles and adopt the professional ethics approach. These findings are essential in the external audit's world and it is crucial to their audit approach.
An external auditor is an audit professional who performs an audit on the financial statements of a company, government, individual, or any other legal entity or organization, and who is independent of the entity being audited. Users of these entities' financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent evaluation on such entities.
External Auditors are distinguished from internal auditors for two main reasons: (1) the internal auditor's primary responsibility is appraising an entity's risk management strategy and practices, management (including IT) controls frameworks and governance processes, and (2) they do not express an opinion on the entity's financial statements. Besides providing audit services, external auditors also provide different other kind of services. Most common of them are reviews of financial statements and compilation. In review auditors are generally required to tick and tie numbers to general ledger and make inquiries of management. In compilation auditors are required to take a look at financial statement to make sure they are free of obvious misstatements and errors.
The primary role of an External Auditor is to express an independent opinion on whether the financial statements provide a true and fair view. The financial statement must be prepared in all material respect, in accordance with the financial reporting framework and relevant regulations. The shareholder appoints the external auditor at the annual general meeting. The external auditor are therefore, primarily accountable to the shareholders to whom their reports are addressed. Moreover the auditor's opinion also lends credibility to the financial statements.
As the duties of external auditors and internal auditors overlap to a significant extent, the work of the internal auditors can be useful to the external auditors. At the outset, the external auditors assess the work of the internal auditor in order to determine the nature, timing and extent of his own audit procedures. Furthermore, the external auditor should be able to carry out his function with a total independence. The accounts to be audited are prepared by management. If auditors discover a material misstatement in the financial statements, management is requested to adjust the accounts accordingly. In the event management refuses to comply, external auditors can consider qualifying their report.
1.1 Research Objectives
The aim of this research project as stipulated is to assess the role of external auditors in Mauritius and to know more about their professional world. It seeks to explore to what extent the external auditors play their independent role, their duties, and approach and do they respect the legal and regulatory framework of Mauritius.
1.1 Research Objectives
2.0 LITERATURE REVIEW
2.1 Theoretical Review
2.2 Empirical Review
3.0 RESEARCH METHODOLOGY
3.1 Research Questions
3.2 Data Collection
3.2.1 Primary Data
3.2.2 Secondary Data
3.3 Proposed Medium
3.4 Questionnaire Design
3.5 Target Population
3.6 Expected Outcome and Data Analysis
4.0 TIME FRAME
2.0 LITERATURE REVIEW
2.1 Theoretical Review
2.12 Brief History of Government Auditing
The practice of Auditing in Mauritius can be traced to the early period of the British Rule when the Accounts of Mauritius were under the scrutiny of Imperial Audit. In 1871, because the Crown Agents Accounts had become so voluminous the Imperial Audit ceased their audit and handed them over to the Audit Office in Mauritius. Annual Audit reports were then addressed to the Director of Colonial Audit in England till 1967, when the Colony of Mauritius was given more autonomy for its day-to-day administration. The National Audit Office (NAO) emerged in its present form since 1968 when Mauritius became independent.
NAO has been in existence for 40 years now and has, to date, been fulfilling its mandate every year throughout all these years. Yet from the comments heard from various sources and the letters and correspondences received at the Office, both signed and anonymous, it transpires that many of our stakeholders are not aware of the mandate, role, duties and powers of the Director of Audit. What is surprising is the fact that many civil servants are ignorant as well. For some years now quite a number of them (and the number is growing), including high officials, are refusing to provide my Officers the information, records and other documents requested for audit purposes. Some of them provide the information with considerable delay, with some lame excuses for the delay. Cases also exist where it is only after the audit has been completed and the audit staff have left the site, that I am informed that the information are supposedly now available. The legal status of auditing in the Republic of Mauritius is explicitly written in the Constitution. Section 110 of the Constitution of the Republic of Mauritius provides that there shall be a Director of Audit, whose office shall be a public office.
2.13 About the Director of Audit who is the external auditor of the Government
Good public sector governance requires that the Government be held accountable to the stakeholders for the proper use and stewardship of public resources and that there are effective checks and balances for monitoring the Government's performance. The Director of Audit, as the external auditor of the Government, has a duty to report to the National Assembly on the financial propriety of the Government's accounts, as well as the economy, efficiency and effectiveness of its performance.
The same section of the Constitution provides that the public accounts of Mauritius and of all courts of law and all authorities and officers of the Government shall be audited and reported on by the Director of Audit.
Section 16 of the Finance and Audit Act, as amended, gives the Director of Audit the authority to carry out Performance Audit. Performance audit refers to an examination of a program, function, operation or the management systems and procedures of a governmental or non-profit entity to assess whether the entity is achieving economy, efficiency and effectiveness in the employment of available resources. The examination is objective and systematic, generally using structured and professionally adopted methodologies.(Emerald 1967).
Section 20 of the Finance and Audit Act requires the Director of Audit to send to the Minister to whom the responsibility for the subject of Finance is assigned, within eight months of the close of every fiscal year, a certificate of audit on the statements submitted by Accountant General under Section 19 of the Act and a report upon his examination and audit of all accounts relating to public money, stamps, securities, stores and other property of the Government, and the Minister shall as soon as possible thereafter lay those documents before the Assembly.
Duties and Responsibilities of the Director of Audit
Section 16 of the Finance and Audit Act requires the Director of Audit to satisfy himself that:
All reasonable precautions have been and are taken to safeguard the collection of public money;
All laws, directions or instructions relating to public money have been and are duly observed;
All money, appropriated or otherwise disbursed, is applied for the purpose for which Parliament intended to provide and that the expenditure conforms to the authority which governs it; and
Adequate directions or instructions exist for the guidance of public officers entrusted with duties and functions connected with finance or storekeeping and that such directions or instructions have been and are duly observed.
Powers of the Director of Audit
Section 110 of the Constitution of the Republic of Mauritius provides that:
In the exercise of his functions under this Constitution, the Director of Audit shall not be subject to the direction or control of any other person or authority.
The Director of Audit or any person authorized by him in that behalf shall have access to all books, records, reports and other documents relating to those accounts.
Section 17 of the Finance and Audit Act provides the Director of Audit with the following powers in the exercise of his duties:
To call upon any public officer for any explanations and information which he may require in order enabling him to discharge his duties.
With the concurrence of the head of any Ministry or Department, to authorise an officer of that Ministry or Department to conduct on his behalf any inquiry, examination or audit and such officer shall report thereon to the Director of Audit.
Without payment of any fee to cause searches to be made in, and extracts to be taken from any document in the custody of any public officer.
If it appears to him to be desirable, send a special report on any matter incidental to his powers and duties under this Act to the Speaker of the Assembly to be by him presented to the Assembly.
Where the Minister fails, within a reasonable time, to lay any report made under Section 20 before the Assembly, the Director of Audit shall send such report to the Speaker of the Assembly to be by him presented to the Assembly.
In the course of an audit, the director of audit is required to form opinions on the efficiency of works and services that come under his review and to report cases where, in his opinion, there has occurred material waste, extravagance or lack of proper economy. To discharge this responsibility, NAO's approach to audit involves the following:
Planning the audit to obtain relevant information in the most efficient manner, and to determine the audit procedures to be employed.
Evaluation and testing of the accounting and internal control systems.
Testing of control to ensure that procedures have been applied and that the relevant laws and regulations have been complied with. Included is the testing of the validity, completeness and accuracy of the accounts.
Reporting the audit findings based on the audit procedures performed together with appropriate recommendations.
2.14 Audit Independence
Comparison of Framework
The UK framework on auditor independence adopts an integrated based approach, which identifies threats and safeguards to objectivity. Subsequent frameworks issued by the EC and IFAC take a similar approach on threats and safeguards (Beattie et al, 2001), but, make more specific reference to the distinction between independence in fact and appearance. The United States also recognized the importance of developing a Conceptual Framework for Auditor Independence (CFAI). However, the approach differs from the UK, which is based on four principles set by the SEC (Beattie et al, 2001).
IFAC (2001) defines auditor independence in a similar way to CFAI. Similar definition of threats and safeguards are also furnished. The UK framework identified safeguards against threats to independence. Subsequently, it expands and classifies those safeguards into three broad categories:
those created by the profession;
safeguards within the client;
safeguards within the firm's own system and procedures (Myring et al, 2003).
IFAC elaborates more on the nature of those safeguards within the audit firm and within the audit client, particularly focusing on audit committees and corporate governance, whereas, the UK Framework makes little reference to this.
The EU Conceptual Framework equally examines many of the same issues as CFAI. Moreover, it contains aspects of independence not addressed in CFAI. For instance, the EU Framework includes a description of a network of individual associated with the auditor to which independence rules are applied as well. Additionally, it provides a more detailed overview of safeguards protecting auditors' independence than the CFAI does.
Threats to Independence
IFAC identifies five main threats to independence. These are described below:
Self interest threat - Occurs when a firm or members of audit team could benefit from a financial interest.
Self review threat - Occurs when any product or judgment of a previous assurance of a previous engagement or non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance engagement.
Advocacy threat - Occurs when a firm or member of the audit team becomes an advocate for or against an assurance client's position or opinion to the point that objectivity is impaired.
Familiarity threat - Occurs by virtue of a close relationship with an assurance client, its directors, officers, or employees, a firm or a member of the audit team becomes too sympathetic to the client's interest.
Intimidation threat - Occurs when a member of audit team may be deterred from acting objectively and exercising professional scepticism by threats from a directors, officers, or employees of a client.
Fundamental Principles and Professional Ethics
In order to help auditors to remain independent, the code of ethics set by IFAC, has established some fundamental principles. The principles are technically similar to the ACCA rules of professional conduct. Nevertheless, there are some areas of dissimilarities. The basic principles are as follows:
A professional accountant should be straightforward and honest in performing professional services.
A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity.
Professional competence and duty of care
A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill.
A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.
A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. He has a duty to carry out with skill and care, the instructions of the client or employer in so far as they are compatible with the requirements of integrity, objectivity and independence. In addition, they should conform to the technical and professional standards promulgated by:
IFAC (e.g. International Standards on Auditing)
International Accounting Standard Committee
The member's professional body or other regulatory body
2.15 Regulatory and Legal Framework
The Regulatory Structure
The current regulatory structure allows senior corporate management with the economic power to lure, fire and control the employment conditions for auditors, thus, disadvantaging auditor's ability to be truly independent (Goldman and Barlev, 1974). This regulatory structure advocated by the Anglo-American countries and later by the IFAC is a coalition of arms length government oversight of a self-regulated profession in a liberalised market for accounting and auditing services. Thus auditors enjoy a remunerative monopoly providing audits and marketing multiple management services provided that they behave within the guidelines of a prescribed self-regulatory code of ethical conduct.
Legal Framework in Mauritius
The accountancy profession in Mauritius is not sufficiently structured. A professional accountancy body needs to be established with legal backing whose role would include the functions recommended by the IFAC. Moreover, there is no national institution to regulate the activities of accountants and auditors. A Financial Reporting Council needs to be incorporated and be responsible for the functioning of a regulatory body. The latter will be responsible to enforce accounting and auditing standards and codes.
In Mauritius, auditors' exposure to litigation risk is not consequent. There is no legal requirement for auditors to have professional indemnity insurance. Yet, practicing auditors are required by their individual professional bodies abroad to have professional indemnity insurance. Moreover, there is no legal provision in the Company Act for auditors to hold a "practice certificate", as there is no monitoring and enforcement of this requirement. Without local surveillance, an auditor may still provide services even if he fails to complete practical training requirements or has a practice certificate revoked due to non-compliance with continuing professional education requirements.
Code of Ethics
The accountancy profession throughout the world operates in an environment with different cultures and regulatory environment. Therefore IFAC has considered it essential to establish an international code of ethics for professional accountants to be the basis on which ethical requirements should be founded for each country. The code is intended to serve as a model on which to base national ethical guidance. It sets standards of conduct for professional accountants and states the fundamental principles that should be observed.
2.16 Corporate Governance
Corporate Governance is primarily the responsibility of the governing body of an entity (Grant G, 2002). According to Lynn (1996) corporate governance is concerned with maintaining an appropriate accountability system. Management is accountable to the board of directors for its actions, while the board is accountable to the shareholders for their supervision of management.
One of the impacts of corporate governance on auditors has been the establishment of audit committee as an accountability mechanism. A well functioning audit committee can play a very vital role in ensuring that the auditor is independent of the company. It serves to strengthen the auditor's independence by providing a reference point, independent of executive management, to which audit scope problems, contentious issues and conflicts arising during the audit can be referred on a timely basis (Grant G, 2002). Furthermore, the governance structure of an entity can assist in monitoring and safeguarding the independence of its external auditors.
Importance of Audit Committee
The audit committee can enable non-executive directors to make an active independent contribution to the governance of the business and strengthen the position of the external and internal auditors. In addition, it can focus attention on policies and procedures to prevent fraud and unethical activities and act as the lead committee on compliance with corporate governance code (Des Pearson, 2000).
Abbott and Parker (2000), contend that independent and active audit committee members demand a higher level of audit quality, as independent directors have a greater investment in their reputation as financial monitors. Knapp (1987) found that independent audit committees generally support auditors over management in dispute. Similarly, DeZoort and Salterio (2001) found audit knowledge are more likely to back an auditor promoting a substance over form approach in a client dispute.
2.2 Empirical Review
The Government Audit Office's approach to audit the World Health Organisation
The Government Audit Office's (GAO) approach to audit World Health Organization (WHO) is designed to meet the primary objective of the audit, which is to express an opinion on the financial statements and to report to the World Health Assembly pursuant to regulation XIV of the Financial Regulations and the Additional Terms of Reference Governing the External Audit.
The audit process will include evaluation of controls, testing of key controls, testing of general and application computer controls, substantial review procedures and testing of details of transactions and balances. The nature and extent of substantive audit procedures will be determined by various factors including materiality, risks identified and on work performed by internal audit.
The purpose of strategic analysis will be to provide a framework within which to first understand WHO's objectives and strategies in the context of the environment in which it operates. A thorough knowledge of WHO's operations and business is essential in this regard. We will identify the Organization's perspectives on the fundamental business risks affecting the business strategies, as well as the related control environment and specific controls established by management. Thus the analysis of WHO's view of strategy, risk and control will give sufficient information to identify those business processes that are critical to its successful operation. It is on those key business processes that the GAO will focus the majority of its work.
For each significant organizational risk, the GAO determines whether WHO's control environment, including strategic, management and process controls, is adequate to mitigate those risks. To the extent that the risk exposure remains, the GAO will consider the audit implications of the organizational risk and determine whether additional audit evidence is required to support the opinion on the financial statements. Our efforts will concentrate on the risk areas, while providing adequate assurance on other material areas on which an audit opinion is expressed.
The main responsibility of the Unit, as stated in Regulation XII of the WHO Financial Regulations, is to provide an effective review, evaluation and monitoring of the adequacy and effectiveness of the Organization's overall systems for internal control. The work performed by internal audit will be evaluated and relied upon in the formulation of our audit procedures.
Whilst we shall focus on gathering audit evidence to test the effectiveness of the control system and to confirm the accuracy of the accounting records, the audit team will be alerted to weaknesses in the system and procedures that will eventually form the basis of recommendations. Findings from the audit will be thoroughly discussed with Management. Continuous feedback to management, whether verbally during the course of our audit and in writing through our management letter, forms an integral part of our audit process.
The timeliness of our reporting to Management on our findings will be an important feature. We will issue management letter immediately after the work is undertaken.
The GAO will perform the audit in full compliance with the WHO Financial Regulations and the terms of reference governing the audit of WHO.
For the audit of WHO, we will take into account the following standards:
The Common Auditing Standards and Auditing Guidelines issued by the panel of External Auditors of the United Nations and its Specialized Agencies;
The Auditing Standards of the International Organisation of Supreme Audit Institutions;
The Auditing Standards of the International Federation of Accountants; and
The International Accounting Standards.
The GAO has a broad range of audit specialities that are available to WHO. These include regulatory auditing, as well as computer and performance auditing.
As required by the additional terms of reference, we will ensure that the financial statements are in accord with the books and records of the organization and that the financial transactions reflected in the statements have been in accordance with the rules and regulations, the budgetary provisions and other directives.
Performance Audit (Value for money)
The aim of a performance audit is to evaluate the measures implemented by Management to ensure that resources are procured economically and utilized efficiently and effectively. We have developed specialist expertise in performance audit of several sectors including Agriculture, Health, Tourism as well as Environment.
Computer auditing plays an increasingly important role in the work of the audit office. The role of the computer auditors is to proactively assist our functional auditors in identifying and evaluating computer related risks and controls.
3.0 RESEARCH METHODOLOGY
This study analyses the role of external auditors in Mauritius. As such, a descriptive research has been carried out to meet the aim of this research. The objective of this study is therefore to identify whether the external auditors do their job professionally, what are their approaches and what are the resolutions to this research.
3.1 Research question
a) Assessing whether external auditors are independent and what are the threats to their independence?
b) What are the duties and responsibilities of external auditors in Mauritius?
c) What are the approaches of external auditors in Mauritius?
d) Do external auditors respect the regulatory and legal framework of Mauritius?
3.2 Data Collection
As in any research, collection of data is an important phase, so as to achieve the goal of this study. Consequently, for the purposes of this study, both primary and secondary data are fundamental.
3.2.1 Primary Data
These are data collected for a specific purpose. Primary data will be gathered through a survey. Moreover, primary data are more appropriate for a descriptive research.
3.2.2 Secondary Data
These are already existing data. Secondary data play an important role in any research methodology, as they provide a basis for the starting point. For the research this type of information will be collected from various sources such as journals, magazines, relevant websites, text book and reports from other institutions.
3.3 Proposed Medium
The medium that I will use to collect primary data will be a questionnaire. The choice to go on a questionnaire is based on the fact that it is the easiest means to collect large amount of information at relatively low cost and to meet the objective of the research as well. Questionnaire also has a high degree of precision.
3.4 Questionnaire Design
While designing the questionnaire the following steps will be stick on:
Determination of information required
Choice of questionnaire format
Choice of type of questions, their content, wording and order of questions
Revision and production of final questionnaire
3.5 Target Population
For the purpose of this study, the questionnaire will be targeted mainly to qualified auditors expected to meet high professional and ethical standards, to provide the necessary information on the role of external auditors.
3.6 Expected Outcome and Data Analysis
Before the data will be collected during the survey could be analyzed, it needs to be processed. Processing involves editing and coding the data.
Therefore after the data will be edited and coded, it will be analyzed using SPSS (Statistical Package for Social Science) software version 17.0. Given the explanatory and descriptive nature of the research, rigorous statistical analysis will be carried out. Data findings and objectives of the paper will be illustrated in simple descriptive diagrams such as Bar Charts, Pie Charts and histograms in order to get a better understanding of the results. Further analysis will be conducted using a series of means to calculate the average and also a series of cross tabulations to identify relation between variables.
4.0 TIME FRAME
The Gantt chart
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