Performance Audit

By
THE INVESTOPEDIA TEAM




Updated March 04, 2021

Reviewed by
ERIKA RASURE
Fact checked by
YARILET PEREZ

What Is a Performance Audit?

A performance audit is an independent assessment of an entity's operations
to determine if specific programs or functions are working as intended to
achieve stated goals. Performance audits are typically associated with
government agencies at all levels as most government bodies receive federal
funding.

KEY TAKEAWAYS

 A performance audit is an independent assessment of an entity's

operations, typically associated with government agencies.
 The goal is to evaluate the performance of stated programs to
determine their effectiveness and make changes if needed.
  The standards for the audits are laid out by the U.S. Government
Accountability Office (GAO)
 The scope of a performance audit varies, but usually includes an
assessment of effectiveness, efficiency, and compliance with legal
requirements.

Understanding Performance Audits

In government, a performance audit is designed to examine the efficiency
and effectiveness of a program, with the goal of implementing improvements.
According to Generally Accepted Government Auditing Standards (GAGAS),
the term "program" can include government entities, activities, organizations,
programs, and functions.1

The standards for the audits are laid out by the U.S. Government
Accountability Office (GAO) and the principal aim is to provide objective data
that may be used to reduce costs and make other improvements.2

The specific objectives of an audit can vary. They may include effectiveness,
economy, and efficiency of a program and compliance with legal
requirements. An audit's scope is wide and can seek to determine fraud and
wasteful processes that are a hindrance to the stated objectives of a
program.

Requirements for a Performance Audit

The standards for the performance audit are laid out by the GAO and cover
three areas: general, field, and reporting.

General Standards

General standards cover matters such as professional judgment, quality

control (QC), and competence of the auditor and the audit process. General
standards seek to ensure that the auditor is independent, capable, and
abides by internal QCs.

Field Standards

Field standards apply to planning, gathering material for evaluation, and

preparing quality documentation. This topic seeks to outline the objectives,
their purpose, and the manner in which they will be sought.
Reporting Standards

Reporting standards relate to the content of the report and the

communication of the findings. These touch on the format of the audit report
and lay out to whom the report must be disseminated and how.

Benefits of Performance Audits

Once a performance audit is completed, the findings are delivered to the
management of the specific organization or program. The goal is for them to
use the findings to implement any changes to improve processes that will
help them achieve the stated goals. Typically, a follow-up performance audit
is done to assess whether management has implemented any of the audit
findings and if there has been any improvement by doing so.

Performance audits serve a fundamental purpose of government

accountability. Through performance audits government entities are held to
objective standards of executing the responsibilities that they are legally
authorized and charged to carry out.

Higher-level appointed staff and elected officials review the results of audits
to oversee the proper, legal, and cost-effective operation of public services
and programs. Publication of the results allows the public to see if certain
programs are worth their tax dollars, and they can use the information to
make educated voting decisions.

Business Audits
Performance audits are also implemented in the business sector and follow
many of the same stated goals and procedures.

In the investment world, a performance audit may be conducted on an asset

manager by an outside accounting firm to verify that the performance figures
shown to the public represent actual results. The CFA Institute has established
performance guidelines, called Global Investment Performance
Standards (GIPS).3 Though voluntary, they help ensure full disclosure of
investment practices.

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Chapter- II General Standards in Government Auditing

Auditing Standards - 2nd Edition, 2002

CHAPTER II
GENERAL STANDARDS IN GOVERNMENT AUDITING
1. Introductory
1.1 This section deals with general standards in government auditing. The general auditing
standards describe the qualifications of the auditor and the auditing institution so that they
may carry out the tasks related to field and reporting standards in a competent and effective
manner.

1.2 The general auditing standards include standards, which apply both to the auditors and
to the audit institutions, and standards, which apply to audit institutions. The standards
common to auditors and audit institutions are:

 (a) The auditor and the audit institutions must be independent.

 (b) The auditor and the audit institutions must possess the required competence.
 (c) The auditor and the audit institutions must exercise due care and concern in complying
with these auditing standards. This embraces due care in planning, specifying, gathering
and evaluating evidence, and in reporting findings, conclusions and recommendations.
1.3 The general auditing standards for the audit institutions are that they should adopt
policies and procedures to

 (a) Recruit personnel with suitable qualifications.

 (b) Develop and train employees to enable them to perform their tasks effectively, and to
define the basis for the advancement of auditors and other staff.
 (c) Prepare manuals and other written guidance notes and instructions concerning the
conduct of audits.
 (d) Support the skills and experience available within the audit institutions, and identify the
skills which are absent; provide a good distribution of skills to auditing tasks and assign a
sufficient number of persons for the audit; and have proper planning and supervision to
achieve its goals at the required level of due care and concern.
 (e) Review the efficiency and effectiveness of internal standards and procedures.
2. Independence
2.1 The general standards for the auditor and the audit institutions include independence
from the legislature, independence from the executive, and independence from the audited
entity.
2.2 Whatever the form of government, the need for independence and objectivity in audit is
vital. An adequate degree of independence from both the legislature and the executive
branch of government are essential to the conduct of audit and to the credibility of its
results.

2.3 The legislature is one of the main users of audit services. It is from the Constitution that
SAI derives his mandate, and a frequent feature of the audit function is its reporting to the
legislature. The SAI works closely with the legislature, including with committees
empowered by the legislature to consider audit reports.

2.4 The SAI may give members of the legislature factual briefings on audit reports, but it is
important that the SAI maintains his independence from political influence, in order to
preserve an impartial approach to its audit responsibilities. This implies that the SAI not be
responsive, nor give the appearance of being responsive, to the wishes of particular political
interests.

2.5 While the SAI must observe the laws enacted by the legislature, adequate
independence requires that it not otherwise be subject to direction by the legislature in the
programming, planning and conduct of audits. The SAI needs freedom to set priorities and
program its work in accordance with his mandate and adopt methodologies appropriate to
the audits to be undertaken.

2.6 It is essential that the legislature provide the SAI with sufficient resources, for which the
SAI is accountable, as well as for the effective exercise of his mandate. While the
expenditure of SAI's office is charged to the Consolidated Fund, the expenditure on the
other offices of the Indian Audit and Accounts Department is subject to the vote of the
central legislature.

2.7 The executive branch of government and the SAI may have some common interests in
the promotion of public accountability. But the essential relationship with the executive is
that of an external auditor. As such the SAI's reports assist the executive by drawing
attention to deficiencies in administration and recommending improvements. Care should
be taken to avoid participation in the executive's functions of the kind that would militate
against the SAI's independence and objectivity in the discharge of his mandate.

2.8 It is important for the independence of the SAI that there be no power of direction by the
executive in relation to the SAI's performance of his mandate. The SAI is not be obliged to
carry out, modify or refrain from carrying out, an audit or suppress or modify audit findings,
conclusions and recommendations.

2.9 A degree of co-operation between the SAI and the executive is desirable in some areas.
The SAI should be ready to advise the executive in such matters as accounting standards
and policies and the form of financial statements. The SAI must ensure that in giving such
advice it avoids any explicit or implied commitment that would impair the independent
exercise of his audit mandate.
2.10 Maintenance of the SAI's independence does not preclude requests to the SAI by the
executive proposing matters for audit. But if it is to enjoy adequate independence, the SAI
must be able to decline any such request. It is fundamental to the concept of SAI
independence that decisions as to the audit tasks comprising the program should rest finally
with the SAI.

2.11 A sensitive area in relationships between the SAI and the executive concerns provision
of resources to the SAI. In varying degrees, reflecting constitutional and institutional
differences, arrangements for the SAI's resource provision may be related to the executive
branch of government's financial situation and general expenditure policies. As against that,
effective promotion of public accountability requires that the SAI be provided with sufficient
resources to enable it to discharge its responsibilities in a reasonable manner.

2.12 Any imposition of resource or other restrictions by the executive, which would constrain
the SAI's exercise of its mandate, would be an appropriate matter for report by the SAI to
the legislature.

2.13 The legal mandate provided in the Comptroller and Auditor General's (Duties, Powers
and Conditions of Service) Act, 1971 provides for full and free access for the CAG and his
auditors to all premises and records relevant to audited entities and their operations and
provides adequate powers to the CAG to obtain relevant information from persons or
entities possessing it.

2.14 By legal provision and accepted convention, the executive permits access by the SAI
to sensitive information, which is necessary and relevant to the discharge of the SAI's
responsibilities.

2.15 In order that the SAI not only exercise his functions independently of the executive but
also be seen to do so, it is important that his mandate and his independent status be well
understood in the community. The SAI should, as appropriate opportunities arise, undertake
an educational role in that regard.

2.16 The SAI's functional independence need not preclude arrangements with executive
entities in regard to the SAI's administration in matters such as industrial relations,
personnel management, property management or common purchasing of equipment and
stores, though executive entities should not be in a position to take decisions that would
jeopardise the SAI's independence in discharging his mandate.

2.17 The SAI must remain independent from audited entities. The audit department under
the SAI should, however, seek to create among audited entities an understanding of its role
and function, with a view to maintaining amicable relationships with them. Good
relationships can help the SAI to obtain information freely and frankly and to conduct
discussions in an atmosphere of mutual respect and understanding. In this spirit, the SAI,
while retaining his independence, can agree to be associated with reforms which are
planned by the Administration in areas such as public accounts or financial legislation or
agree to be consulted about the preparation of draft laws or rules affecting his competence
or his authority. In these cases it is not, however, a matter of the SAI interfering in
administrative management but a matter of co-operating with certain administrative services
by giving them technical assistance or by putting SAI's financial management experience at
their disposition.

2.18 In contrast to private sector audit, where the auditor's agreed task is specified in an
engagement letter, the audited entity is not in a client relationship with the SAI. The SAI has
to discharge his mandate freely and impartially, taking management views into
consideration in forming audit opinions, conclusions and recommendations, but owing no
responsibility to the management of the audited entity for the scope or nature of the audits
undertaken.

2.19 The SAI should not participate in the management or operations of an audited entity.
Audit personnel should not become members of management committees and, if audit
advice is to be given, it should be conveyed as audit advice or recommendation and
acknowledged clearly as such.

2.20 Any SAI personnel having close affiliations with the management of an audited entity,
such as social, kinship or other relationship conducive to a lessening of objectivity should
not be assigned to audit that entity.

2.21 Personnel of the SAI should not become involved in instructing personnel of an audited
entity as to their duties. In those instances where the SAI decides to establish a resident
office at the audited entity with the purpose of facilitating the ongoing review of its
operations, programs and activities, SAI personnel should not engage in any decision
making or approval process which is considered the auditee's management responsibility.

2.22 The SAI may co-operate with academic institutions and enter formal relationships with
professional bodies, provided the relationships do not inhibit its independence and
objectivity, in order to avail of the advice of experienced members of the profession at large.

3. Competence
3.1 The auditor and the SAI must possess the required competence.

3.2 The following paragraphs explain competence as an auditing standard:

3.2.1 The mandate of a SAI generally imposes a duty of forming and reporting audit
opinions, conclusions and recommendations.

3.2.2 Discussions within the Audit Department promote the objectivity and authority of
opinions and decisions.

3.2.3 Since the duties and responsibilities thus borne by the SAI are crucial to the concept
of public accountability, the SAI must apply to his audits, methodologies and practices of the
highest quality. It is incumbent upon it to formulate procedures to secure effective exercise
of its responsibilities for audit reports, unimpaired by less than full adherence by personnel
or external experts to its standards, planning procedures, methodologies and supervision.
3.2.4 The audit department needs to command the range of skills and experience
necessary for effective discharge of the audit mandate. Whatever the nature of the audits to
be undertaken under that mandate, persons whose education and experience is
commensurate with the nature, scope and complexities of the audit task should carry out
the audit work. The audit department should equip itself with the full range of up-to-date
audit methodologies, including systems-based techniques, analytical review methods,
statistical sampling, and audit of automated information systems.

3.2.5 Since the nature of audit mandate is wide and discretionary and leaves the SAI
discretion in the frequency of audits to be carried out and the nature of reports to be
provided, there is a high standard of management expected within the audit department.

4. Due Care
4.1 The general standards for the auditor and the SAI include due care in specifying,
gathering and evaluating evidence, and in reporting findings, conclusions and
recommendations.

4.2 The following paragraphs explain due care as an auditing standard:

4.2.1 The SAI must be, and be seen to be, objective in its audit of entities and public
enterprises. It should be fair in its evaluations and in its reporting the outcome of audits.

4.2.2 Performance and exercise of technical skill should be of a quality appropriate to the
complexities of a particular audit. Auditors need to be alert for situations, control
weaknesses, inadequacies in record keeping, errors and unusual transactions or results,
which could be indicative of fraud, improper, or unlawful expenditure unauthorised
operations, waste, inefficiency or lack of probity.

4.2.3 Where an authorised or recognised entity sets standards or guidelines for accounting
and reporting by public enterprises, the SAI may use such guidelines in the course of his
examination. The Accounting Standards and Standard Audit Practices issued by the
Institute of Chartered Accountants of India (ICAI) should be kept in view by SAI while
carrying out the audit of companies registered under the Companies Act 1956.

4.2.4 If the SAI employs external experts as consultants he must exercise due care to
assure him of the consultants' competence and aptitude for the particular tasks involved.
This standard applies also where outside auditors are engaged on contract with the SAI. In
addition care must be taken to ensure that audit contracts include adequate provision for
the SAI to determine the planning, the audit scope, the performing, and the reporting on the
audit.

4.2.5 Should the SAI, in the performance of his functions, need to seek advice from
specialists external to the SAI, the standards for exercise of due care in such arrangements
have a bearing also on the maintenance of quality of performance. Obtaining advice from
an external expert does not relieve the audit department of responsibility for the opinions
formed or conclusions reached on the audit task.
 4.2.6 When the audit department uses the work of another auditor(s), it must apply
adequate procedures to provide assurance that the other auditor(s) has exercised due care
and complied with relevant auditing standards, and may review the work of the other
auditor(s) to satisfy itself as to the quality of that work.

4.2.7 Information about an audited entity acquired in the course of the auditor's work must
not be used for purposes outside the scope of an audit and the formation of an opinion or in
reporting in accordance with the auditor's responsibilities. It is essential that the audit
department maintain confidentiality regarding audit matters and information arising from its
audit task. However, the SAI should report offences against the law to proper prosecuting
authorities.

5. Quality Assurance Review

5.1 SAI should have an appropriate quality assurance system in place.

5.2 The following paragraphs explain quality assurance reviews as an auditing standard:

5.2.1 Because of the importance of ensuring a high standard of work by the audit
department, it should pay particular attention to quality assurance programs in order to
improve audit performance and results. The benefits to be derived from such programs
make it essential for appropriate resources to be available for this purpose. It is important
that the use of these resources be matched against the benefits to be obtained.

5.2.2 The SAI should establish systems and procedures to:

 Confirm that internal quality assurance processes have operated satisfactorily;

 Ensure the quality of the audit report; and
 Secure improvements and avoid repetition of weaknesses.
5.2.3 As a further means of ensuring quality of performance, additional to the review of audit
activity by personnel having line responsibility for the audits concerned, it is desirable for the
audit departments to establish their own quality assurance arrangements. That is, planning,
conduct and reporting in relation to a sample of audits may be reviewed in depth by suitably
qualified SAI personnel not involved in those audits, in consultation with the relevant audit
line management regarding the outcome of the internal quality assurance arrangements
and periodic reporting to the SAI's top management.

5.2.4 It is appropriate for audit institutions to institute their own internal audit function with a
wide charter to assist the audit department to achieve effective management of its own
operations and sustain the quality of its performance.

5.2.5 The quality of the work done by the audit department can be enhanced by
strengthening internal review and by the independent appraisal of its work.

6. Other General Standards for Audit Institutions

6.1 The SAI should adopt policies and procedures to recruit personnel with suitable
qualifications and train them professionally.
6.1.1 SAI personnel should possess suitable qualifications and be equipped with
appropriate training and experience. The SAI should establish, and regularly review,
minimum training requirements for the appointment of auditors at each level within the
organisation.

6.2 The SAI should adopt policies and procedures to develop and train SAI employees to
enable them to perform their task effectively and to define the basis for the advancement of
auditors and other staff.

6.2.1 The following paragraphs explain training and development as an auditing standard:

6.2.2 The SAI should take adequate steps to provide for continuing professional
development of its personnel, including, as appropriate, provision of in-house training and
encouragement of attendance at external courses.

6.2.3 The SAI should identify professional development needs of its personnel.

6.2.4 The SAI should establish and regularly review criteria, including educational
requirements, for the advancement of auditors and other staff of the SAI.

6.2.5 The SAI should also establish and maintain policies and procedures for the
professional development of audit staff regarding the audit techniques and methodologies
applicable to the range of audits it undertakes.

6.2.6 SAI personnel should have a good understanding of the government environment,
including such aspects as the role of the legislature, the legal and institutional arrangements
governing the operations of the executive and the charters of public enterprises. Likewise,
trained audit staff must possess an adequate knowledge of the SAI's auditing standards,
policies, procedures and practices.

6.2.7 Audit of financial systems, accounting records and financial statements requires
training in accounting and related disciplines as well as a knowledge of applicable
legislation and executive orders affecting the accountability of the audited entity. Further,
the conduct of performance audits may require, in addition to the above, training in such
areas as administration, management, economics and the social sciences.

6.2.8 The SAI should encourage his personnel to become members of a professional body
relevant to their work and to participate in that body's activities.

6.3 The SAI should adopt policies and procedures to prepare manuals and other written
guidance and instructions concerning the conduct of audits.

6.3.1 The following paragraph explains written guidance as an auditing standard:

6.3.2 Communication to staff of the SAI by means of circulars containing guidance, and the
maintenance of an up-to-date audit manual setting out the SAI's policies, standards and
practices, is important in maintaining the quality of audits.
6.4 The SAI should adopt policies and procedures to support the skills and experience
available within the SAI and identify those skills which are absent; provide a good
distribution of skills to auditing tasks and a sufficient number of persons for the audit; and
have proper planning and supervision to achieve its goals at the required level of due care
and concern.

6.4.1 The following paragraphs explain the use of skills as an auditing standard:

6.4.2 Resources required for undertaking each audit need to be assessed so that suitably
skilled staff may be assigned to the work and a control placed on staff resources to be
applied to the audit.

6.4.3 The extent to which academic attainments should be related specifically to the audit
task varies with the type of auditing undertaken. It is not necessary that each auditor
possess competence in all aspects of the audit mandate. However, policies and procedures
governing the assignment of personnel to audit tasks should aim at deploying personnel
who have the auditing skills required by the nature of the audit task so that the team
involved on a particular audit collectively possesses the necessary skills and expertise.

6.4.4 It should be open to the SAI to acquire specialised skills from external sources if the
successful carrying out of an audit so requires in order that the audit findings, conclusions
and recommendations are perceptive and soundly based and reflect an adequate
understanding of the subject area of the audit. It is for the audit institution to judge, in its
particular circumstances, to what extent its requirements are best met by in-house expertise
as against employment of outside experts.

6.4.5 Policies and procedures governing supervision of audits are important factors in the
performance of the SAI's role at an appropriate level of competence. The SAI should ensure
that audits are planned and supervised by auditors who are competent, knowledgeable in
the SAI's standards and methodologies, and equipped with an understanding of the
specialties and peculiarities of the environment.

6.4.6 Where the SAI's mandate includes the audit of financial statements which cover the
executive branch of government as a whole, the audit teams deployed should be equipped
to undertake a coordinated evaluation of departmental accounting systems, as well as of
central agency co-ordination arrangements and control mechanisms. Teams will require
knowledge of the relevant governmental accounting and control systems, and an adequate
expertise in the auditing techniques applied by the SAI to this type of audit.

6.4.7 Unless the SAI is equipped to undertake, within a reasonable time-scale, all relevant
audits, including performance audits covering the whole of every audited entity's operations,
criteria are needed for determining the range of audit activities which, within the audit period
or cycle, will give the maximum practicable assurance regarding performance of public
accountability obligations by each audited entity.

6.4.8 In determining the allocation of its resources among different audit activities, the SAI
must give priority to any audit tasks, which must, by law, be completed within a specified
 time frame. Careful attention must be given to strategic planning so as to identify an
appropriate order of priority for discretionary audits to be undertaken.

6.4.9 Assignment of priorities compatible with maintaining the quality of performance across
the mandate involves exercise of the SAI's judgement in the light of available information.
Maintenance of a portfolio of data pertaining to the structure, functions and operations of
audited entities will assist/the SAI in identifying areas of materiality and vulnerability and
areas holding potential for improvements in administration.

6.4.10 Before each audit is undertaken designated personnel within the SAI should give
proper authorisation for its commencement. This authorisation should include a clear
statement of the objectives of the audit, its scope and focus, resources to be applied to the
audit in terms of skills and quantum, arrangements for reviews of progress at appropriate
points, and the dates by which fieldwork is to be completed and a report on the audit is to
be provided.

6.5 Standards with ethical significance:

These standards apply to individual auditors, head of the SAI, executive officers and all
individuals working for and on behalf of the SAI. The SAI has the responsibility to ensure
that all its auditors acquaint themselves with the values and principles contained in the
Conduct Rules for government servants in India and they act accordingly. The following
audit standards have ethical significance:

 The auditor and the SAI should be independent and should avoid conflicts of interest with
the audited entity on matters that may impair their independence materially.
 The auditor and the SAI must possess the required competence.
 The auditor must exercise due care and concern in complying with the auditing standards.
 The auditor should at all times maintain absolute integrity and devotion to duty.
 Auditors should not disclose information obtained in the auditing process to third parties,
either orally or in writing.

Chapter- II General Standards in Government Auditing

Auditing Standards - 2nd Edition, 2002

CHAPTER II
GENERAL STANDARDS IN GOVERNMENT AUDITING
1. Introductory
1.1 This section deals with general standards in government auditing. The general auditing
standards describe the qualifications of the auditor and the auditing institution so that they
may carry out the tasks related to field and reporting standards in a competent and effective
manner.
 1.2 The general auditing standards include standards, which apply both to the auditors and
to the audit institutions, and standards, which apply to audit institutions. The standards
common to auditors and audit institutions are:

 (a) The auditor and the audit institutions must be independent.

 (b) The auditor and the audit institutions must possess the required competence.
 (c) The auditor and the audit institutions must exercise due care and concern in complying
with these auditing standards. This embraces due care in planning, specifying, gathering
and evaluating evidence, and in reporting findings, conclusions and recommendations.
1.3 The general auditing standards for the audit institutions are that they should adopt
policies and procedures to

 (a) Recruit personnel with suitable qualifications.

 (b) Develop and train employees to enable them to perform their tasks effectively, and to
define the basis for the advancement of auditors and other staff.
 (c) Prepare manuals and other written guidance notes and instructions concerning the
conduct of audits.
 (d) Support the skills and experience available within the audit institutions, and identify the
skills which are absent; provide a good distribution of skills to auditing tasks and assign a
sufficient number of persons for the audit; and have proper planning and supervision to
achieve its goals at the required level of due care and concern.
 (e) Review the efficiency and effectiveness of internal standards and procedures.
2. Independence
2.1 The general standards for the auditor and the audit institutions include independence
from the legislature, independence from the executive, and independence from the audited
entity.

2.2 Whatever the form of government, the need for independence and objectivity in audit is
vital. An adequate degree of independence from both the legislature and the executive
branch of government are essential to the conduct of audit and to the credibility of its
results.

2.3 The legislature is one of the main users of audit services. It is from the Constitution that
SAI derives his mandate, and a frequent feature of the audit function is its reporting to the
legislature. The SAI works closely with the legislature, including with committees
empowered by the legislature to consider audit reports.

2.4 The SAI may give members of the legislature factual briefings on audit reports, but it is
important that the SAI maintains his independence from political influence, in order to
preserve an impartial approach to its audit responsibilities. This implies that the SAI not be
responsive, nor give the appearance of being responsive, to the wishes of particular political
interests.

2.5 While the SAI must observe the laws enacted by the legislature, adequate
independence requires that it not otherwise be subject to direction by the legislature in the
programming, planning and conduct of audits. The SAI needs freedom to set priorities and
program its work in accordance with his mandate and adopt methodologies appropriate to
the audits to be undertaken.

2.6 It is essential that the legislature provide the SAI with sufficient resources, for which the
SAI is accountable, as well as for the effective exercise of his mandate. While the
expenditure of SAI's office is charged to the Consolidated Fund, the expenditure on the
other offices of the Indian Audit and Accounts Department is subject to the vote of the
central legislature.

2.7 The executive branch of government and the SAI may have some common interests in
the promotion of public accountability. But the essential relationship with the executive is
that of an external auditor. As such the SAI's reports assist the executive by drawing
attention to deficiencies in administration and recommending improvements. Care should
be taken to avoid participation in the executive's functions of the kind that would militate
against the SAI's independence and objectivity in the discharge of his mandate.

2.8 It is important for the independence of the SAI that there be no power of direction by the
executive in relation to the SAI's performance of his mandate. The SAI is not be obliged to
carry out, modify or refrain from carrying out, an audit or suppress or modify audit findings,
conclusions and recommendations.

2.9 A degree of co-operation between the SAI and the executive is desirable in some areas.
The SAI should be ready to advise the executive in such matters as accounting standards
and policies and the form of financial statements. The SAI must ensure that in giving such
advice it avoids any explicit or implied commitment that would impair the independent
exercise of his audit mandate.

2.10 Maintenance of the SAI's independence does not preclude requests to the SAI by the
executive proposing matters for audit. But if it is to enjoy adequate independence, the SAI
must be able to decline any such request. It is fundamental to the concept of SAI
independence that decisions as to the audit tasks comprising the program should rest finally
with the SAI.

2.11 A sensitive area in relationships between the SAI and the executive concerns provision
of resources to the SAI. In varying degrees, reflecting constitutional and institutional
differences, arrangements for the SAI's resource provision may be related to the executive
branch of government's financial situation and general expenditure policies. As against that,
effective promotion of public accountability requires that the SAI be provided with sufficient
resources to enable it to discharge its responsibilities in a reasonable manner.

2.12 Any imposition of resource or other restrictions by the executive, which would constrain
the SAI's exercise of its mandate, would be an appropriate matter for report by the SAI to
the legislature.

2.13 The legal mandate provided in the Comptroller and Auditor General's (Duties, Powers
and Conditions of Service) Act, 1971 provides for full and free access for the CAG and his
auditors to all premises and records relevant to audited entities and their operations and
provides adequate powers to the CAG to obtain relevant information from persons or
entities possessing it.

2.14 By legal provision and accepted convention, the executive permits access by the SAI
to sensitive information, which is necessary and relevant to the discharge of the SAI's
responsibilities.

2.15 In order that the SAI not only exercise his functions independently of the executive but
also be seen to do so, it is important that his mandate and his independent status be well
understood in the community. The SAI should, as appropriate opportunities arise, undertake
an educational role in that regard.

2.16 The SAI's functional independence need not preclude arrangements with executive
entities in regard to the SAI's administration in matters such as industrial relations,
personnel management, property management or common purchasing of equipment and
stores, though executive entities should not be in a position to take decisions that would
jeopardise the SAI's independence in discharging his mandate.

2.17 The SAI must remain independent from audited entities. The audit department under
the SAI should, however, seek to create among audited entities an understanding of its role
and function, with a view to maintaining amicable relationships with them. Good
relationships can help the SAI to obtain information freely and frankly and to conduct
discussions in an atmosphere of mutual respect and understanding. In this spirit, the SAI,
while retaining his independence, can agree to be associated with reforms which are
planned by the Administration in areas such as public accounts or financial legislation or
agree to be consulted about the preparation of draft laws or rules affecting his competence
or his authority. In these cases it is not, however, a matter of the SAI interfering in
administrative management but a matter of co-operating with certain administrative services
by giving them technical assistance or by putting SAI's financial management experience at
their disposition.

2.18 In contrast to private sector audit, where the auditor's agreed task is specified in an
engagement letter, the audited entity is not in a client relationship with the SAI. The SAI has
to discharge his mandate freely and impartially, taking management views into
consideration in forming audit opinions, conclusions and recommendations, but owing no
responsibility to the management of the audited entity for the scope or nature of the audits
undertaken.

2.19 The SAI should not participate in the management or operations of an audited entity.
Audit personnel should not become members of management committees and, if audit
advice is to be given, it should be conveyed as audit advice or recommendation and
acknowledged clearly as such.

2.20 Any SAI personnel having close affiliations with the management of an audited entity,
such as social, kinship or other relationship conducive to a lessening of objectivity should
not be assigned to audit that entity.
2.21 Personnel of the SAI should not become involved in instructing personnel of an audited
entity as to their duties. In those instances where the SAI decides to establish a resident
office at the audited entity with the purpose of facilitating the ongoing review of its
operations, programs and activities, SAI personnel should not engage in any decision
making or approval process which is considered the auditee's management responsibility.

2.22 The SAI may co-operate with academic institutions and enter formal relationships with
professional bodies, provided the relationships do not inhibit its independence and
objectivity, in order to avail of the advice of experienced members of the profession at large.

3. Competence
3.1 The auditor and the SAI must possess the required competence.

3.2 The following paragraphs explain competence as an auditing standard:

3.2.1 The mandate of a SAI generally imposes a duty of forming and reporting audit
opinions, conclusions and recommendations.

3.2.2 Discussions within the Audit Department promote the objectivity and authority of
opinions and decisions.

3.2.3 Since the duties and responsibilities thus borne by the SAI are crucial to the concept
of public accountability, the SAI must apply to his audits, methodologies and practices of the
highest quality. It is incumbent upon it to formulate procedures to secure effective exercise
of its responsibilities for audit reports, unimpaired by less than full adherence by personnel
or external experts to its standards, planning procedures, methodologies and supervision.

3.2.4 The audit department needs to command the range of skills and experience
necessary for effective discharge of the audit mandate. Whatever the nature of the audits to
be undertaken under that mandate, persons whose education and experience is
commensurate with the nature, scope and complexities of the audit task should carry out
the audit work. The audit department should equip itself with the full range of up-to-date
audit methodologies, including systems-based techniques, analytical review methods,
statistical sampling, and audit of automated information systems.

3.2.5 Since the nature of audit mandate is wide and discretionary and leaves the SAI
discretion in the frequency of audits to be carried out and the nature of reports to be
provided, there is a high standard of management expected within the audit department.

4. Due Care
4.1 The general standards for the auditor and the SAI include due care in specifying,
gathering and evaluating evidence, and in reporting findings, conclusions and
recommendations.

4.2 The following paragraphs explain due care as an auditing standard:

4.2.1 The SAI must be, and be seen to be, objective in its audit of entities and public
enterprises. It should be fair in its evaluations and in its reporting the outcome of audits.

4.2.2 Performance and exercise of technical skill should be of a quality appropriate to the
complexities of a particular audit. Auditors need to be alert for situations, control
weaknesses, inadequacies in record keeping, errors and unusual transactions or results,
which could be indicative of fraud, improper, or unlawful expenditure unauthorised
operations, waste, inefficiency or lack of probity.

4.2.3 Where an authorised or recognised entity sets standards or guidelines for accounting
and reporting by public enterprises, the SAI may use such guidelines in the course of his
examination. The Accounting Standards and Standard Audit Practices issued by the
Institute of Chartered Accountants of India (ICAI) should be kept in view by SAI while
carrying out the audit of companies registered under the Companies Act 1956.

4.2.4 If the SAI employs external experts as consultants he must exercise due care to
assure him of the consultants' competence and aptitude for the particular tasks involved.
This standard applies also where outside auditors are engaged on contract with the SAI. In
addition care must be taken to ensure that audit contracts include adequate provision for
the SAI to determine the planning, the audit scope, the performing, and the reporting on the
audit.

4.2.5 Should the SAI, in the performance of his functions, need to seek advice from
specialists external to the SAI, the standards for exercise of due care in such arrangements
have a bearing also on the maintenance of quality of performance. Obtaining advice from
an external expert does not relieve the audit department of responsibility for the opinions
formed or conclusions reached on the audit task.

4.2.6 When the audit department uses the work of another auditor(s), it must apply
adequate procedures to provide assurance that the other auditor(s) has exercised due care
and complied with relevant auditing standards, and may review the work of the other
auditor(s) to satisfy itself as to the quality of that work.

4.2.7 Information about an audited entity acquired in the course of the auditor's work must
not be used for purposes outside the scope of an audit and the formation of an opinion or in
reporting in accordance with the auditor's responsibilities. It is essential that the audit
department maintain confidentiality regarding audit matters and information arising from its
audit task. However, the SAI should report offences against the law to proper prosecuting
authorities.

5. Quality Assurance Review

5.1 SAI should have an appropriate quality assurance system in place.

5.2 The following paragraphs explain quality assurance reviews as an auditing standard:

5.2.1 Because of the importance of ensuring a high standard of work by the audit
department, it should pay particular attention to quality assurance programs in order to
 improve audit performance and results. The benefits to be derived from such programs
make it essential for appropriate resources to be available for this purpose. It is important
that the use of these resources be matched against the benefits to be obtained.

5.2.2 The SAI should establish systems and procedures to:

 Confirm that internal quality assurance processes have operated satisfactorily;

 Ensure the quality of the audit report; and
 Secure improvements and avoid repetition of weaknesses.
5.2.3 As a further means of ensuring quality of performance, additional to the review of audit
activity by personnel having line responsibility for the audits concerned, it is desirable for the
audit departments to establish their own quality assurance arrangements. That is, planning,
conduct and reporting in relation to a sample of audits may be reviewed in depth by suitably
qualified SAI personnel not involved in those audits, in consultation with the relevant audit
line management regarding the outcome of the internal quality assurance arrangements
and periodic reporting to the SAI's top management.

5.2.4 It is appropriate for audit institutions to institute their own internal audit function with a
wide charter to assist the audit department to achieve effective management of its own
operations and sustain the quality of its performance.

5.2.5 The quality of the work done by the audit department can be enhanced by
strengthening internal review and by the independent appraisal of its work.

6. Other General Standards for Audit Institutions

6.1 The SAI should adopt policies and procedures to recruit personnel with suitable
qualifications and train them professionally.

6.1.1 SAI personnel should possess suitable qualifications and be equipped with
appropriate training and experience. The SAI should establish, and regularly review,
minimum training requirements for the appointment of auditors at each level within the
organisation.

6.2 The SAI should adopt policies and procedures to develop and train SAI employees to
enable them to perform their task effectively and to define the basis for the advancement of
auditors and other staff.

6.2.1 The following paragraphs explain training and development as an auditing standard:

6.2.2 The SAI should take adequate steps to provide for continuing professional
development of its personnel, including, as appropriate, provision of in-house training and
encouragement of attendance at external courses.

6.2.3 The SAI should identify professional development needs of its personnel.

6.2.4 The SAI should establish and regularly review criteria, including educational
requirements, for the advancement of auditors and other staff of the SAI.
6.2.5 The SAI should also establish and maintain policies and procedures for the
professional development of audit staff regarding the audit techniques and methodologies
applicable to the range of audits it undertakes.

6.2.6 SAI personnel should have a good understanding of the government environment,
including such aspects as the role of the legislature, the legal and institutional arrangements
governing the operations of the executive and the charters of public enterprises. Likewise,
trained audit staff must possess an adequate knowledge of the SAI's auditing standards,
policies, procedures and practices.

6.2.7 Audit of financial systems, accounting records and financial statements requires
training in accounting and related disciplines as well as a knowledge of applicable
legislation and executive orders affecting the accountability of the audited entity. Further,
the conduct of performance audits may require, in addition to the above, training in such
areas as administration, management, economics and the social sciences.

6.2.8 The SAI should encourage his personnel to become members of a professional body
relevant to their work and to participate in that body's activities.

6.3 The SAI should adopt policies and procedures to prepare manuals and other written
guidance and instructions concerning the conduct of audits.

6.3.1 The following paragraph explains written guidance as an auditing standard:

6.3.2 Communication to staff of the SAI by means of circulars containing guidance, and the
maintenance of an up-to-date audit manual setting out the SAI's policies, standards and
practices, is important in maintaining the quality of audits.

6.4 The SAI should adopt policies and procedures to support the skills and experience
available within the SAI and identify those skills which are absent; provide a good
distribution of skills to auditing tasks and a sufficient number of persons for the audit; and
have proper planning and supervision to achieve its goals at the required level of due care
and concern.

6.4.1 The following paragraphs explain the use of skills as an auditing standard:

6.4.2 Resources required for undertaking each audit need to be assessed so that suitably
skilled staff may be assigned to the work and a control placed on staff resources to be
applied to the audit.

6.4.3 The extent to which academic attainments should be related specifically to the audit
task varies with the type of auditing undertaken. It is not necessary that each auditor
possess competence in all aspects of the audit mandate. However, policies and procedures
governing the assignment of personnel to audit tasks should aim at deploying personnel
who have the auditing skills required by the nature of the audit task so that the team
involved on a particular audit collectively possesses the necessary skills and expertise.
6.4.4 It should be open to the SAI to acquire specialised skills from external sources if the
successful carrying out of an audit so requires in order that the audit findings, conclusions
and recommendations are perceptive and soundly based and reflect an adequate
understanding of the subject area of the audit. It is for the audit institution to judge, in its
particular circumstances, to what extent its requirements are best met by in-house expertise
as against employment of outside experts.

6.4.5 Policies and procedures governing supervision of audits are important factors in the
performance of the SAI's role at an appropriate level of competence. The SAI should ensure
that audits are planned and supervised by auditors who are competent, knowledgeable in
the SAI's standards and methodologies, and equipped with an understanding of the
specialties and peculiarities of the environment.

6.4.6 Where the SAI's mandate includes the audit of financial statements which cover the
executive branch of government as a whole, the audit teams deployed should be equipped
to undertake a coordinated evaluation of departmental accounting systems, as well as of
central agency co-ordination arrangements and control mechanisms. Teams will require
knowledge of the relevant governmental accounting and control systems, and an adequate
expertise in the auditing techniques applied by the SAI to this type of audit.

6.4.7 Unless the SAI is equipped to undertake, within a reasonable time-scale, all relevant
audits, including performance audits covering the whole of every audited entity's operations,
criteria are needed for determining the range of audit activities which, within the audit period
or cycle, will give the maximum practicable assurance regarding performance of public
accountability obligations by each audited entity.

6.4.8 In determining the allocation of its resources among different audit activities, the SAI
must give priority to any audit tasks, which must, by law, be completed within a specified
time frame. Careful attention must be given to strategic planning so as to identify an
appropriate order of priority for discretionary audits to be undertaken.

6.4.9 Assignment of priorities compatible with maintaining the quality of performance across
the mandate involves exercise of the SAI's judgement in the light of available information.
Maintenance of a portfolio of data pertaining to the structure, functions and operations of
audited entities will assist/the SAI in identifying areas of materiality and vulnerability and
areas holding potential for improvements in administration.

6.4.10 Before each audit is undertaken designated personnel within the SAI should give
proper authorisation for its commencement. This authorisation should include a clear
statement of the objectives of the audit, its scope and focus, resources to be applied to the
audit in terms of skills and quantum, arrangements for reviews of progress at appropriate
points, and the dates by which fieldwork is to be completed and a report on the audit is to
be provided.

6.5 Standards with ethical significance:

These standards apply to individual auditors, head of the SAI, executive officers and all
individuals working for and on behalf of the SAI. The SAI has the responsibility to ensure
 that all its auditors acquaint themselves with the values and principles contained in the
Conduct Rules for government servants in India and they act accordingly. The following
audit standards have ethical significance:

 The auditor and the SAI should be independent and should avoid conflicts of interest with
the audited entity on matters that may impair their independence materially.
 The auditor and the SAI must possess the required competence.
 The auditor must exercise due care and concern in complying with the auditing standards.
 The auditor should at all times maintain absolute integrity and devotion to duty.
 Auditors should not disclose information obtained in the auditing process to third parties,
either orally or in writing.

CHAPTER II

GENERAL STANDARDS IN GOVERNMENT AUDITING (Page-2/3)

2.15 In order that the SAI not only exercise his functions independently of the executive but
also be seen to do so, it is important that his mandate and his independent status be well
understood in the community. The SAI should, as appropriate opportunities arise, undertake an
educational role in that regard.

2.16 The SAI's functional independence need not preclude arrangements with executive entities
in regard to the SAI's administration in matters such as industrial relations, personnel
management, property management or common purchasing of equipment and stores, though
executive entities should not be in a position to take decisions that would jeopardise the SAI's
independence in discharging his mandate.

2.17 The SAI must remain independent from audited entities. The audit department under the
SAI should, however, seek to create among audited entities an understanding of its role and
function, with a view to maintaining amicable relationships with them. Good relationships can
help the SAI to obtain information freely and frankly and to conduct discussions in an
atmosphere of mutual respect and understanding. In this spirit, the SAI, while retaining his
independence, can agree to be associated with reforms which are planned by the Administration
in areas such as public accounts or financial legislation or agree to be consulted about the
preparation of draft laws or rules affecting his competence or his authority. In these cases it is
not, however, a matter of the SAI interfering in administrative management but a matter of co-
operating with certain administrative services by giving them technical assistance or by putting
SAI's financial management experience at their disposition.

2.18 In contrast to private sector audit, where the auditor's agreed task is specified in an
engagement letter, the audited entity is not in a client relationship with the SAI. The SAI has to
discharge his mandate freely and impartially, taking management views into consideration in
forming audit opinions, conclusions and recommendations, but owing no responsibility to the
management of the audited entity for the scope or nature of the audits undertaken.
2.19 The SAI should not participate in the management or operations of an audited entity.
Audit personnel should not become members of management committees and, if audit advice is
to be given, it should be conveyed as audit advice or recommendation and acknowledged clearly
as such.

2.20 Any SAI personnel having close affiliations with the management of an audited entity,
such as social, kinship or other relationship conducive to a lessening of objectivity should not be
assigned to audit that entity.

2.21 Personnel of the SAI should not become involved in instructing personnel of an audited
entity as to their duties. In those instances where the SAI decides to establish a resident office at
the audited entity with the purpose of facilitating the ongoing review of its operations, programs
and activities, SAI personnel should not engage in any decision making or approval process
which is considered the auditee's management responsibility.

2.22 The SAI may co-operate with academic institutions and enter formal relationships with
professional bodies, provided the relationships do not inhibit its independence and objectivity, in
order to avail of the advice of experienced members of the profession at large.

3. Competence

3.1 The auditor and the SAI must possess the required competence.

3.2 The following paragraphs explain competence as an auditing standard:

3.2.1 The mandate of a SAI generally imposes a duty of forming and reporting audit opinions,
conclusions and recommendations.

3.2.2 Discussions within the Audit Department promote the objectivity and authority of
opinions and decisions.

3.2.3 Since the duties and responsibilities thus borne by the SAI are crucial to the concept of
public accountability, the SAI must apply to his audits, methodologies and practices of the
highest quality. It is incumbent upon it to formulate procedures to secure effective exercise of its
responsibilities for audit reports, unimpaired by less than full adherence by personnel or external
experts to its standards, planning procedures, methodologies and supervision.

3.2.4 The audit department needs to command the range of skills and experience necessary for
effective discharge of the audit mandate. Whatever the nature of the audits to be undertaken
under that mandate, persons whose education and experience is commensurate with the nature,
scope and complexities of the audit task should carry out the audit work. The audit department
should equip itself with the full range of up-to-date audit methodologies, including systems-
based techniques, analytical review methods, statistical sampling, and audit of automated
information systems.
3.2.5 Since the nature of audit mandate is wide and discretionary and leaves the SAI discretion
in the frequency of audits to be carried out and the nature of reports to be provided, there is a
high standard of management expected within the audit department.

4. Due Care

4.1 The general standards for the auditor and the SAI include due care in specifying, gathering
and evaluating evidence, and in reporting findings, conclusions and recommendations.

4.2 The following paragraphs explain due care as an auditing standard:

4.2.1 The SAI must be, and be seen to be, objective in its audit of entities and public
enterprises. It should be fair in its evaluations and in its reporting the outcome of audits.

4.2.2 Performance and exercise of technical skill should be of a quality appropriate to the
complexities of a particular audit. Auditors need to be alert for situations, control weaknesses,
inadequacies in record keeping, errors and unusual transactions or results, which could be
indicative of fraud, improper, or unlawful expenditure unauthorised operations, waste,
inefficiency or lack of probity.

4.2.3 Where an authorised or recognised entity sets standards or guidelines for accounting and
reporting by public enterprises, the SAI may use such guidelines in the course of his
examination. The Accounting Standards and Standard Audit Practices issued by the Institute of
Chartered Accountants of India (ICAI) should be kept in view by SAI while carrying out the
audit of companies registered under the Companies Act 1956.

4.2.4 If the SAI employs external experts as consultants he must exercise due care to assure
him of the consultants' competence and aptitude for the particular tasks involved. This standard
applies also where outside auditors are engaged on contract with the SAI. In addition care must
be taken to ensure that audit contracts include adequate provision for the SAI to determine the
planning, the audit scope, the performing, and the reporting on the audit.

4.2.5 Should the SAI, in the performance of his functions, need to seek advice from specialists
external to the SAI, the standards for exercise of due care in such arrangements have a bearing
also on the maintenance of quality of performance. Obtaining advice from an external expert
does not relieve the audit department of responsibility for the opinions formed or conclusions
reached on the audit task.

4.2.6 When the audit department uses the work of another auditor(s), it must apply adequate
procedures to provide assurance that the other auditor(s) has exercised due care and complied
with relevant auditing standards, and may review the work of the other auditor(s) to satisfy itself
as to the quality of that work.
4.2.7 Information about an audited entity acquired in the course of the auditor's work must not
be used for purposes outside the scope of an audit and the formation of an opinion or in reporting
in accordance with the auditor's responsibilities. It is essential that the audit department maintain
confidentiality regarding audit matters and information arising from its audit task. However, the
SAI should report offenses against the law to proper prosecuting authorities.

ENERAL STANDARDS IN GOVERNMENT AUDITING (Page-3/3)

5. Quality Assurance Review

5.1 SAI should have an appropriate quality assurance system in place.

5.2 The following paragraphs explain quality assurance reviews as an auditing standard:

5.2.1 Because of the importance of ensuring a high standard of work by the audit department, it
should pay particular attention to quality assurance programs in order to improve audit
performance and results. The benefits to be derived from such programs make it essential for
appropriate resources to be available for this purpose. It is important that the use of these
resources be matched against the benefits to be obtained.

5.2.2 The SAI should establish systems and procedures to:

· Confirm that internal quality assurance processes have operated satisfactorily;

· Ensure the quality of the audit report; and

· Secure improvements and avoid repetition of weaknesses.

5.2.3 As a further means of ensuring quality of performance, additional to the review of audit
activity by personnel having line responsibility for the audits concerned, it is desirable for the
audit departments to establish their own quality assurance arrangements. That is, planning,
conduct and reporting in relation to a sample of audits may be reviewed in depth by suitably
qualified SAI personnel not involved in those audits, in consultation with the relevant audit line
management regarding the outcome of the internal quality assurance arrangements and periodic
reporting to the SAI's top management.

5.2.4 It is appropriate for audit institutions to institute their own internal audit function with a
wide charter to assist the audit department to achieve effective management of its own operations
and sustain the quality of its performance.

5.2.5 The quality of the work done by the audit department can be enhanced by strengthening
internal review and by the independent appraisal of its work.
6. Other General Standards for Audit Institutions

6.1 The SAI should adopt policies and procedures to recruit personnel with suitable
qualifications and train them professionally.

6.1.1 SAI personnel should possess suitable qualifications and be equipped with appropriate
training and experience. The SAI should establish, and regularly review, minimum training
requirements for the appointment of auditors at each level within the organisation.

6.2 The SAI should adopt policies and procedures to develop and train SAI employees to enable
them to perform their task effectively and to define the basis for the advancement of auditors and
other staff.

6.2.1 The following paragraphs explain training and development as an auditing standard:

6.2.2 The SAI should take adequate steps to provide for continuing professional development of
its personnel, including, as appropriate, provision of in-house training and encouragement of
attendance at external courses.

6.2.3 The SAI should identify professional development needs of its personnel.

6.2.4 The SAI should establish and regularly review criteria, including educational
requirements, for the advancement of auditors and other staff of the SAI.

6.2.5 The SAI should also establish and maintain policies and procedures for the professional
development of audit staff regarding the audit techniques and methodologies applicable to the
range of audits it undertakes.

6.2.6 SAI personnel should have a good understanding of the government environment,
including such aspects as the role of the legislature, the legal and institutional arrangements
governing the operations of the executive and the charters of public enterprises. Likewise,
trained audit staff must possess an adequate knowledge of the SAI's auditing standards, policies,
procedures and practices.

6.2.7 Audit of financial systems, accounting records and financial statements requires training
in accounting and related disciplines as well as a knowledge of applicable legislation and
executive orders affecting the accountability of the audited entity. Further, the conduct of
performance audits may require, in addition to the above, training in such areas as
administration, management, economics and the social sciences.

6.2.8 The SAI should encourage his personnel to become members of a professional body
relevant to their work and to participate in that body's activities.

6.3 The SAI should adopt policies and procedures to prepare manuals and other written
guidance and instructions concerning the conduct of audits.
6.3.1 The following paragraph explains written guidance as an auditing standard:

6.3.2 Communication to staff of the SAI by means of circulars containing guidance, and the
maintenance of an up-to-date audit manual setting out the SAI's policies, standards and practices,
is important in maintaining the quality of audits.

6.4 The SAI should adopt policies and procedures to support the skills and experience
available within the SAI and identify those skills which are absent; provide a good distribution of
skills to auditing tasks and a sufficient number of persons for the audit; and have proper planning
and supervision to achieve its goals at the required level of due care and concern.

6.4.1 The following paragraphs explain the use of skills as an auditing standard:

6.4.2 Resources required for undertaking each audit need to be assessed so that suitably skilled
staff may be assigned to the work and a control placed on staff resources to be applied to the
audit.

6.4.3 The extent to which academic attainments should be related specifically to the audit task
varies with the type of auditing undertaken. It is not necessary that each auditor possess
competence in all aspects of the audit mandate. However, policies and procedures governing the
assignment of personnel to audit tasks should aim at deploying personnel who have the auditing
skills required by the nature of the audit task so that the team involved on a particular audit
collectively possesses the necessary skills and expertise.

6.4.4 It should be open to the SAI to acquire specialised skills from external sources if the
successful carrying out of an audit so requires in order that the audit findings, conclusions and
recommendations are perceptive and soundly based and reflect an adequate understanding of the
subject area of the audit. It is for the audit institution to judge, in its particular circumstances, to
what extent its requirements are best met by in-house expertise as against employment of outside
experts.

6.4.5 Policies and procedures governing supervision of audits are important factors in the
performance of the SAI's role at an appropriate level of competence. The SAI should ensure that
audits are planned and supervised by auditors who are competent, knowledgeable in the SAI's
standards and methodologies, and equipped with an understanding of the specialties and
peculiarities of the environment.

6.4.6 Where the SAI's mandate includes the audit of financial statements which cover the
executive branch of government as a whole, the audit teams deployed should be equipped to
undertake a coordinated evaluation of departmental accounting systems, as well as of central
agency co-ordination arrangements and control mechanisms. Teams will require knowledge of
the relevant governmental accounting and control systems, and an adequate expertise in the
auditing techniques applied by the SAI to this type of audit.

6.4.7 Unless the SAI is equipped to undertake, within a reasonable time-scale, all relevant
audits, including performance audits covering the whole of every audited entity's operations,
criteria are needed for determining the range of audit activities which, within the audit period or
cycle, will give the maximum practicable assurance regarding performance of public
accountability obligations by each audited entity.

6.4.8 In determining the allocation of its resources among different audit activities, the SAI
must give priority to any audit tasks, which must, by law, be completed within a specified time
frame. Careful attention must be given to strategic planning so as to identify an appropriate order
of priority for discretionary audits to be undertaken.

6.4.9 Assignment of priorities compatible with maintaining the quality of performance across
the mandate involves exercise of the SAI's judgement in the light of available information.
Maintenance of a portfolio of data pertaining to the structure, functions and operations of audited
entities will assist/the SAI in identifying areas of materiality and vulnerability and areas holding
potential for improvements in administration.

6.4.10 Before each audit is undertaken designated personnel within the SAI should give proper
authorisation for its commencement. This authorisation should include a clear statement of the
objectives of the audit, its scope and focus, resources to be applied to the audit in terms of skills
and quantum, arrangements for reviews of progress at appropriate points, and the dates by which
fieldwork is to be completed and a report on the audit is to be provided.

6.5 Standards with ethical significance:

These standards apply to individual auditors, head of the SAI, executive officers and all
individuals working for and on behalf of the SAI. The SAI has the responsibility to ensure that
all its auditors acquaint themselves with the values and principles contained in the Conduct Rules
for government servants in India and they act accordingly. The following audit standards have
ethical significance:

o The auditor and the SAI should be independent and should avoid conflicts of interest with
the audited entity on matters that may impair their independence materially.

o The auditor and the SAI must possess the required competence.

o The auditor must exercise due care and concern in complying with the auditing standards.

o The auditor should at all times maintain absolute integrity and devotion to duty.

Auditors should not disclose information obtained in the auditing process to third parties, either
orally or in writing.

CHAPTER-III

FIELD STANDARDS IN GOVERNMENT AUDITING (Page-1/3)

1. The purpose of field standards is to establish the criteria or overall framework for the
purposeful, systematic and balanced steps or actions that the auditor has to follow. These steps
and actions represent the rules of investigation that the auditor, as a seeker of audit evidence,
implements to achieve a specific result.

2. The field standards establish the framework for conducting and managing audit work. They
are related to the general auditing standards, which set out the basic requirements for undertaking
the tasks covered by the field standards. They are also related to the reporting standards, which
cover the communication aspect of auditing, as the results from carrying out the field standards
constitute the main source for the contents of the opinion or report.

3. The field standards applicable to all types of audit are:

(a) The auditor should plan the audit in a manner, which ensures that an audit of high quality is
carried out in an economic, efficient and effective way and in a timely manner.

(b) The work of the audit staff at each level and audit phase should be properly supervised during
the audit; and a senior member of the audit staff should review documented work.

(c) The auditor, in determining the extent and scope of the audit, should study and evaluate the
reliability of internal control.

(d) In conducting regularity (financial) audits, a test should be made of compliance with
applicable laws and regulations. The auditor should design audit steps and procedures to provide
reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct
and material effect on the financial statement amounts or the results of regularity audits. The
auditor also should be aware of the possibility of illegal acts that could have an indirect and
material effect on the financial statements or results of regularity audits.

In conducting performance audits, an assessment should be made of compliance with applicable

laws and regulations when necessary to satisfy the audit objectives. The auditor should design
the audit to provide reasonable assurance of detecting illegal acts that could significantly affect
audit objectives. The auditor also should be alert to situations or transactions that could be
indicative of illegal acts that may have an indirect effect on the audit results.

Any indication that an irregularity, illegal act, fraud or error may have occurred which could
have a material effect on the audit should cause the auditor to extend procedures to confirm or
dispel such suspicions. The regularity audit is an essential aspect of government auditing. One
important objective, which this type of audit assigns to the SAI, is to make sure, by all the means
put at its disposal, that the State budget and accounts are complete and valid. This will provide
Parliament and other users of the audit report with assurance about the size and development of
the financial obligations of the State. To achieve this objective the SAI will examine the accounts
and financial statements of the administration with a view to assuring that all operations have
been correctly undertaken, completed, passed, paid and registered. The audit procedure normally
results, in the absence of irregularity, in the granting of a "discharge."

(e) Competent, relevant and reasonable evidence should be obtained to support the auditor's
judgement and conclusions regarding the Organisation, program, activity or function under audit.

(f) In regularity (financial) audit and in other types of audit when applicable, auditors should
analyse the financial statements to establish whether acceptable accounting standards for
financial reporting and disclosure are complied with. Analysis of financial statements should be
performed to such a degree that a rational basis is obtained to express an opinion on financial
statements.

4. Planning

4.1 The field standards include:

The auditor should plan the audit in a manner, which ensures that an audit of high quality is
carried out in an economic, efficient and effective way and in a timely manner.

4.2 The following paragraphs explain planning as an auditing standard.

4.2.1 The SAI should give priority to any audit tasks, which must be undertaken by law and
assess priorities for discretionary areas within the SAI's mandate.

4.2.2 In planning an audit of specific auditees, the auditor should:

(a) Identify important aspects of the environment in which the audited entity operates;

(b) Develop an understanding of the accountability relationships;

(c) Consider the form, content and users of audit opinions, conclusions or reports;

(d) Specify the audit objectives and the tests necessary to meet them;

(e) Identify key management systems and controls and carry out a preliminary assessment to
identify both their strengths and weaknesses;

(f) Determine the materiality of matters to be considered;

(g) Review the internal audit of the audited entity and its work program;

(h) Assess the extent of reliance that might be placed on other auditors, for example, internal
audit;
(i) Determine the most efficient and effective audit approach;

(j) Provide for a review to determine whether appropriate action has been taken on previously
reported audit findings and recommendations; and

(k) Provide for appropriate documentation of the audit plan and for the proposed fieldwork.

4.3 The following planning steps are normally included in an audit:

(a) Collect information about the audited entity and its Organisation in order to assess risk and to
determine materiality;

(b) Define the objective and scope of the audit;

(c) Undertake preliminary analysis to determine the approach to be adopted and the nature and
extent of enquiries to be made later;

(d) Highlight special problems foreseen when planning the audit;

(e) Prepare a budget and a schedule for the audit;

(f) Identify staff requirements and a team for the audit; and

(g) Familiarise the audited entity about the scope, objectives and the assessment criteria of the
audit and discuss with them as necessary.

4.4 The SAI may revise the plan during the audit when necessary.

4.5 Auditors should design the audit to provide reasonable assurance of detecting material
misstatements resulting from non-compliance with provisions of contracts or grant agreements
that have a direct and material effect on the determination of financial statement amounts. If
specific information comes to the auditor's attention that provides evidence concerning the
existence of possible noncompliance that could have a material indirect effect on the financial
statements, auditors should apply audit procedures specifically directed to ascertaining whether
that non-compliance has occurred.

CHAPTER-IV

REPORTING STANDARDS (Page-1/5)

Government auditors submit different kinds of reports to the Executive and the Legislature. The
audit reporting process begins with submission of an Inspection Report to the Head of any Office
or Department which has been audited with a request to submit replies and
clarifications/comments on the audit observations. Depending on the veracity and relevance of
replies/clarifications received and the materiality of the observations in the Inspection Reports,
these are further processed for reporting in the Audit Report submitted by the SAI for being
placed in the concerned Legislature. Besides this basic distinction, there are audit certificates of
financial statements or of statements of expenditure, which are issued to the management of a
company/corporation and departments dealing with them. The following standards apply equally
to all these reports with variations in the scope of these reports.

1.1 On the completion of each audit assignment, the Auditor should prepare a written report
setting out the audit observations and conclusions in an appropriate form; its content should be
easy to understand, free from ambiguity and supported by sufficient, competent and relevant
audit evidence and be independent, objective, fair, complete, accurate, constructive and concise.

1.2 The auditor should issue the reports in a timely manner for use by management,
legislature and other interested users.

1.3 The audit report may be presented on other media that are retrievable by other users and
the audit organisations. Retrievable audit reports include those, which are in electronic formats
and maybe released on the Internet.

1.4 With regard to audit of financial statements, the auditor should prepare a report
expressing opinion on the fair presentation of the financial position of the audited entity in the
financial statement. Form and content of this report and the nature of opinion is discussed in the
following paragraphs.

1.5 With regard to fraudulent practice or serious financial irregularities detected during audit
or examined by audit, a written report should be prepared. This report should indicate the scope
of audit, main findings, total amount involved, modus operandi of the fraud or the irregularity,
accountability for the same and recommendations for improvement of internal control system,
fraud prevention and detection measures to safeguard against recurrence of fraud/ serious
financial irregularity.

1.6 With regard to Performance or Value for Money Audits, the report should include a
description of the scope and coverage of audit, objective of audit, area of audit, main findings in
respect of the efficiency, economy and effectiveness (including impact) aspects of the area
(subject matter) which was audited and recommendations suggesting the improvements that are
needed.

1.7 With regard to regularity audits, the auditor should prepare a written report which may
either be a part of the report on the financial statements or the value for Money Audit or a
separate report on the tests of compliance of applicable laws and regulations. The report should
contain a statement on the results of the tests to indicate the nature of assurance i.e. positive or
negative obtained from the tests.
1.8 Reporting standards constitute the framework for the audit organisation and the Auditor
to report the results of audit of regularity or performance audit or expressing his opinion on a set
of financial statements.

1.9 These standards are to assist and not to supercede the prudent judgement of the Auditor
in making audit observations, conclusions and report.

1.10 The expression 'Reporting' embraces both the Auditor's opinion on a set of financial
statements and the Auditor's report on regularity, performance or value for money audit and also
the reports prepared on periodical inspection of the records of an audit entity.

1.11 The audit report should be complete. This requires that the report contains all
pertinent information needed to satisfy the audit objectives, and to promote an adequate and
correct understanding of the matter reported. It also means including appropriate background
information.

1.11.1 In most cases, a single example of a deficiency is not sufficient to support a broad
conclusion or a related recommendation. All that it supports is that a deviation, an error or a
weakness existed. However, except as necessary, detailed supporting data need not be included
in the report.

1.12 Accuracy requires that the evidence presented is true and the conclusions be correctly
portrayed. The conclusions should flow from the evidence. The need for accuracy is based on the
need to assure the users that what is reported is credible and reliable.

1.12.1 The report should include only information, findings and conclusions that are
supported by competent and relevant evidence in the auditor's working papers. Reported
evidence should demonstrate the correctness and reasonableness of the matters reported.

1.12.2 Correct portrayal means describing accurately the audit scope and methodology and
presenting findings and conclusions in a manner consistent with the scope of audit work.

1.13 Objectivity requires that the presentation throughout the report be balanced in content
and tone. The audit report should be fair and not be misleading and should place the audit results
in proper perspective. This means presenting the audit results impartially and guarding against
the tendency to exaggerate or over-emphasise deficient performance. In describing shortcomings
in performance, the Auditor should present the explanation of the audited entity and stray
instances of deviation should not be used to reach broad conclusions.

1.13.1 The tone of reports should encourage decision-makers to act on the auditor's findings
and recommendations. Although findings should be presented clearly and forthrightly, the
auditor should keep in mind that one of the objectives is to persuade and this can best be done by
avoiding language that generate defensiveness and opposition.

1.14 Being convincing requires that the audit results be presented persuasively and the
conclusions and recommendations followed logically from the facts presented. The information
presented should be sufficient to convince the readers to recognise the validity of the findings
and reasonableness of audit conclusions. A convincing report can help focus the attention of
management on matters that need attention and help stimulate correction.

1.15 Clarity requires that the report be easy to read and understand. Use of nontechnical
language is essential. Wherever technical terms and unfamiliar abbreviations are used, they
should be clearly defined. Both logical Organisation of the material and precision in stating the
facts and in drawing conclusions significantly contribute to clarity and understanding.
Appropriate visual aids (such as photographs, charts, graphs and maps etc.) should be used to
clarify and summarise complex material.

1.16 Being concise requires that the report is not longer than necessary to convey the audit
opinion and conclusions. Too much of details detracts from the report and conceals the audit
opinion and conclusions and confuses the readers. Complete and concise reports are likely to
receive greater attention.

Pages - 1 2 3 4 5

Difference between Rules Based Approach and

Principles Based Approach in Corporate
Governance
Difference between Rules-Based Approach and Principles-Based
Approach are explained in the below table,

Rules-Based Approach Principle-Based Ap

Legal Requirement Not a Legal Requi

Code of Corporate Governance is a set of legal requirements mentioned in
Code of Corporate Governance is a set of best pr
the Act.
Compliance or non-compliance Judgements are be
Compliance or non-compliance Judgements are being made by the court.
(shareholders
Practically it is difficult to set up rules that are suitable for every set of
This is the usual approach which most organiz
circumstances.
Non-compliance will result in heavy penalties in the form of fines. Non-compliance will result in an explanation
Rules Based Approach vs Principle Based Approach
In the rules-based approach, there will be legal requirements for
companies to follow the rules laid down. There will be legal
consequences if the board fails to follow the requirements
mentioned in the Act.
In the principles-based approach, the board can adhere to the best
practices laid out, while having some space for flexibility based on
different circumstances. Compliance or non-compliance
Judgements are being made by the owners of business in this
method. This is the usual approach which most organizations in the
world are practicing.