Many ways for internal, legislative audit to cooperate

December 11, 2006

In many Canadian jurisdictions, the Office of the Auditor General is viewed as a critical player in the accountability process. But Auditors Generals can't do it all. The Internal Audit Departments in the public sector also have a key role to play in the accountability process.

Bonnie Lysyk is the Deputy Auditor General and Chief Operating Officer of the Office of the Auditor General of Manitoba, and a champion of leading edge Internal Audit Services in the public sector. She encourages clear understanding and effective coordination of the internal and legislative audit functions.

In late October 2006, she presented her views on the relationship between the two functions twice in one week – once to the Government Internal Auditors Council of Canada at the council's annual meeting in Halifax, and once to a conference on Best Practices in Internal Audit for the Public Sector in Gatineau, Quebec. CCAF asked her to prepare this Update for CCAF members based on her presentations.

Bonnie Lysyk, MBA, CA•CIA
Deputy Auditor General and Chief Operating Officer
Manitoba Office of the Auditor General

MANY WAYS FOR INTERNAL, LEGISLATIVE AUDIT TO COOPERATE

Although there are similarities between internal audit and legislative audit there are some distinct differences. Table 1 provides a quick overview of the purposes, reporting relationships and focus of the two functions.

Table 1: Comparison - Internal Audit and Legislative Audit

	Internal Audit Function within Government	Legislative Audit
Primary Purpose	Serving Management - As per internal mandate.	Serving Legislative Assembly/Citizens Created under an Act of the Legislative Assembly.
Accountability & Reporting	Internal to Government Management Internal Audit Committee Potentially external publication	Legislative Assembly Public Accounts Committee
Jurisdiction	Government Departments Potentially Third-Party Service Providers	Entities within the Government Reporting Entity Recipients of Public Money
Selection of Audits	By Internal Audit/Approval by an Audit Committee or Equivalent	By Auditor General (except for audits assigned by statute)
Scope of Work	Assurance (not usually including financial statement audits) Consultancy/Advisory	Assurance (including financial statement audits)/VFM/ Compliance/Governance
Fee Based Services	Usually non fee-based services.	Some fee-based services offered.
Powers Under The Evidence Act	No powers to interview under The Evidence Act	May have powers to interview under The Evidence Act
Auditor of the Public Accounts	Not the external auditor for the Public Accounts	Act appointed auditor of the Public Accounts.
Operations Reporting	May not publish an annual Operations Report	Publishes an Annual Operations Report
Working Papers	May be accessible by client and the Office of the Auditor General	Not normally accessible under legislation

A fundamental difference is that Offices of the Auditor General are created and operate within an act of the legislature, serving members of the legislative assembly and the citizens of a jurisdiction, whereas internal audit is primarily focussed on serving management within the public sector.

Internal auditors are closer to the operations of government than legislative auditors can ever be. Because of their on-going, day-to-day working relationship, they tend to be more familiar with the people, the culture, and the operating environment in the entities they audit. They can identify problem areas in advance and offer credible advice on how to address them. On the other hand, internal auditors have to temper their comments to management with the knowledge that they have to continue to work together tomorrow and the following day.

There are also important differences in our scope of work. Internal audit provides assurance as well as consultancy services. Legislative audit's assurance work includes financial statement audits; we also conduct value-for-money, compliance and governance audits. Although legislative offices can offer advice, that advice takes the form of providing recommendations and not directly performing consultancy services.

The role of any individual legislative audit office will depend, of course, on its legislation and its operational decisions around how it fulfills its duties under the legislation. Its effectiveness can also be partly dependent on the effectiveness of the respective legislature's Public Accounts Committee. Auditor General's reports are referred to the Public Accounts Committee for discussion and review. CCAF's recent research on ways to strengthen the effectiveness of Public Accounts Committees is therefore of considerable interest to Auditor's General.

The list of similarities between the internal and legislative audit functions is a long one.

Best practises for both functions suggests that they should:

The public sector role of
private sector auditors

According to Bonnie Lysyk, private sector external auditors also play an important role in auditing the public sector. Auditor General offices across Canada place reliance on the financial statement attest work and opinions issued by many private sector auditors for public sector entities. Many public sector entities that are part of the Government Reporting Entity are consolidated into the Public Accounts issued by each jurisdiction. This reliance is needed in order for the Legislative Auditor to issue an audit opinion for the Public Accounts in each jurisdiction. Auditors General may also contract with private sector external auditors as “agent auditors”. They also provide additional services for organizations as per terms of engagement and in accordance with professional conduct rules.

In this context, it is worth noting that external auditors share the many similarities that legislative and internal auditors share, including the use of professional staff, auditing to standards, and a focus on risk. They too are partners in the public sector accountability process.

employ professional staff;
follow codes of ethics;
audit to standards;
undertake training and professional development;
recruit and retain capable staff;
establish and communicate clear vision and strategy;
demonstrate value;
understand client/stakeholder needs;
focus on risk;
audit internal controls;
educate management on risks and controls;
improve audit processes;
communicate results ot their work; and
continuously strive for improvement.

It is these types of similarities that provide common ground for cooperation and collaboration.

So the questions is , given these similarities and considering the differences previously noted, where are there opportunities for cooperation between the legislative and internal audit functions?

One large area of activity where we could coordinate our efforts is in the evaluation of government systems and controls. To be specific, we could coordinate our evaluations of:

the reliability and integrity of financial information;
system conversions;
systems established to ensure compliance with laws and regulations impacting the financial statements;
methods for safeguarding assets and verifying the existence of assets; and
internal controls affecting the financial statements.

Legislative and internal audit offices could also:

coordinate training courses;
meet to discuss matters of mutual interest;
exchange audit reports (once tabled by Legislative Audit Offices) and management letters;
attempt to use similar audit methods and terminology;
coordinate university hiring programs/student exchanges; and
communicate on special audits.

Legislative auditors could:

place reliance on internal audit for financial statement audit purposes;
conduct quality assurance reviews of the internal audit function; and
request information about known or suspected illegal acts, disagreement with management, and other matters that external auditors are required to communicate to boards/public accounts committee.

Internal auditors could:

provide legislative auditors and private sector external auditors with audit reports in order for the work of internal audit to factor into attest audit plans and approaches; and to
provide legislative auditors and private sector external auditors with management responses to internal audit reports and subsequent internal audit follow-up.

With the demands on both legislative and internal audit functions increasing, I think there is an excellent opportunity for both functions to take advantage of both our similarities and our differences to better meet our particular objectives and work toward improved transparency and accountability in the public sector.

In Manitoba, the Office of the Auditor General reviewed the province's internal audit function in the spring of 2006 and surveyed audit committees in the public sector. This work led to the development of publications of interest to the internal audit community – A Guide to Leading Edge Internal Auditing in the Public Sector; Internal Audit Services – A Self-Assessment Checklist; Enhancing Audit Committee Practices in the Public Sector; and Audit Committees: A Self-Assessment Checklist. Electronic copies of these reports are available on the website of the Office of the Auditor General of Manitoba: www.oag.mb.ca.

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