Assosai Guideline of Fraud and Corruption

8/9/2019 Assosai Guideline of Fraud and Corruption

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PREFACE

In its 31st meeting held in Manila in 24 October 2002, the Governing Board of ASOSAI established an ad hocor!ing Gro"# and a $ore Member %as! &orce to develo# regional g"idelines for dealing 'ith fra"d and

corr"#tion( hile the or!ing Gro"# com#rised nominees of the SAIs of Bangladesh, India, )a#an, *orea,

Mala+sia, e#al, -a!istan, -hili##ines, %hailand and %"r!e+, the SAIs of India, )a#an, -a!istan and -hili##ines'ere re#resented on the $ore Member %as! &orce(

%he 'or! for develo#ing the G"idelines 'as initiated b+ the SAI of )a#an b+ cond"cting a ."estionnaire/baseds"rve+ on e isting a##roaches and #ractices follo'ed b+ member SAIs( %he s"rve+ 'as cond"cted from

ecember 2002 to )an"ar+ 2003(

%he SAI of )a#an also develo#ed a Base oc"ment for the G"idelines ta!ing into consideration the res#onses tothe s"rve+ ."estionnaire and related #rofessional material( A or!ing raft of the G"idelines 'as develo#ed b+the or!ing Gro"# d"ring a t'o 'ee! or!sho# %he 'or!sho# 'as f"nded b+ )I$A held in %o!+o from 12thto 23rd Ma+ 2003( %he or!ing raft 'as refined into the &irst #os"re raft of the ASOSAI A"ditG"idelines on &ra"d and $orr"#tion b+ the $ore Member %as! &orce( %he &irst #os"re raft 'as sent to allthe Governing Board members for their comments in 23 )"l+ 2003(

%a!ing into consideration the comments of the Governing Board members on the &irst #os"re raft, the $oreMember %as! &orce #re#ared a Second #os"re raft, 'hich 'as sent to all the ASOSAI members as advanceinformation for the 5th ASOSAI Assembl+ in 5 October 2003( After that, f"rther efforts had been made b+ the$ore Member %as! &orce to refine the raft into the &inal raft of the ASOSAI G"idelines for ealing 'ith&ra"d and $orr"#tion(

%he &inal raft 'as disc"ssed and s"##orted b+ the %raining $ommittee on 15 October 2003, and a##roved atthe 32nd Governing Board meeting on 20 October 2003, and the 5th Assembl+ on 22 October 2003(

In the ASOSAI G"idelines for ealing 'ith &ra"d and $orr"#tion, 30 s#ecific a"dit g"idelines on fra"d andcorr"#tion are incl"ded( ach g"ideline refers to an a"diting #rinci#le 6 standard and g"idance #rescribed b+ theI %OSAI a"diting standards( %he g"idelines also incl"de a cha#ter dealing 'ith "nderstanding fra"d andcorr"#tion b+ a"ditors of the member SAIs(

%he ASOSAI G"idelines are e #ected to be "sed as the model for each SAI to develo# its o'n G"idelines(Accordingl+, each SAI ma+ modif+ the G"idelines a##licable to each co"ntr+( %he G"idelines 'ill be greatl+

beneficial to a"ditors of member SAIs 'hen the+ deal 'ith fra"d and corr"#tion cases(

Background

1(1 &ra"d and corr"#tion have increasingl+ become im#ortant concerns for co"ntries aro"nd the 'orld( %he roleof a"dit in addressing this concern has come "nder critical scr"tin+( %here is an increasing e #ectation that SAIssho"ld, thro"gh concerted action, #la+ an effective role in #romoting a c"lt"re that val"es honest+,res#onsibilit+, and acco"ntabilit+ in the e ercise of a"thorit+ and "tili7ation of national reso"rces(

1(2 %his e #ectation is embodied in the I %OSAI A"diting Standards in the follo'ing 'ords8

9A"ditors need to be alert for sit"ations, control 'ea!nesses, inade."acies in record !ee#ing, errors and"n"s"al transactions or res"lts, 'hich co"ld be indicative of fra"d, im#ro#er or "nla'f"l e #endit"re,"na"thorised o#erations, 'aste, inefficienc+ or lac! of #robit+( :-aragra#h 2(2(41, General Standards inGovernment A"diting;

1(3 %he r"g"a+ in 155? disc"ssed @the ole of SAIs in -reventing and etecting &ra"dand $orr"#tion as one of its themes signif+ing a gro'ing a'areness of the I %OSAI to a #roblem that affectsin var+ing degrees the individ"al member co"ntries and collectivel+ #oses a challenge for the a"diting

comm"nit+(


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1(4 %he >r"g"a+ I $OSAI agreed that corr"#tion in government res"lts in 'aste of reso"rces and red"ceseconomic gro'th and the ."alit+ of life, and it "ndermines the credibilit+ of state instit"tions and red"ces their effectiveness( A reali7ation 'as flagged that a strong correlation a##arentl+ e ists bet'een corr"#tion and the'ea!ening of state instit"tions( An "nderstanding emerged that corr"#tion often lin!s "# to the socioeconomicenvironment of the #o#"lation, li!e social inC"stice, #overt+, and violence, and that a co"ntr+Ds traditions,

#rinci#les, and val"es infl"ence the nat"re of corr"#tion( hile registering the gravit+ of the challenge #osed b+

corr"#tion, the I %OSAI comm"nit+ also observed that it is diffic"lt to detect man+ acts of corr"#tion and toestimate their financial im#act as the loss does not necessaril+ get re#orted in the financial statements

1(E %he >r"g"a+ I $OSAI ado#ted the follo'ing Accords8

SAIs agree that fra"d and corr"#tion are significant #roblems affecting all co"ntries in var+ing degrees and thatthe SAIs can and sho"ld endeavor to create an environment that is "nfavorable to fra"d and corr"#tion( As

#rovided in the Fima eclaration ado#ted b+ I %OSAI in 15 , SAIs agreed that the+ sho"ld be inde#endentand have ade."ate mandates that enable them to effectivel+ contrib"te to the fight against fra"d and corr"#tion(It 'as also agreed that, 'here #ossible, SAIs sho"ld8

1( see! an ade."ate level of financial and o#erative inde#endence and breadth of a"dit coverageH

2( ta!e a more active role in eval"ating the efficienc+ and effectiveness of financial and internal control s+stemsand aggressivel+ follo' "# on SAIs recommendationsH

3( foc"s a"dit strateg+ more on areas and o#erations #rone to fra"d and corr"#tion b+ develo#ing effective highris! indicators for fra"dH

4( establish an effective means for the #"blic dissemination of a"dit re#orts and relevant information incl"ding,establishing good relationshi# 'ith the mediaH

E( #rod"ce relevant a"dit re#orts that are "nderstandable and "ser/friendl+H

( consider a closer coo#eration and a##ro#riate e change of information 'ith other national and international bodies fighting corr"#tionH

( intensif+ the e change of e #eriences on fra"d and corr"#tion 'ith other SAIsH

?( enco"rage the establishment of a #ersonnel management #roced"res for the #"blic service that selects, retains,and motivates honest, com#etent em#lo+eesH

5( enco"rage the establishment of g"idance for financial disclos"re b+ #"blic servants and monitor com#lianceas #art of the ongoing a"dit #rocessH

10( "se the I %OSAI $ode of thics to #romote higher ethical standards and a code of ethics for the #"blic

serviceH

11( consider the establishment of a 'ell #"blici7ed means to receive and #rocess information from the #"blic on #erceived irreg"laritiesH and

12( contin"e 'or! regarding fra"d and corr"#tion thro"gh I %OSAIDs e isting committees and 'or!ing gro"#sHfor e am#le the A"diting Standards $ommittee 'ill consider these iss"es as #art of develo#ing im#lementationg"idance as #art of a broader standard frame'or!(@

1( In f"rtherance of the I %OSAI frame'or!, ASOSAI initiated in ecember 2001 a #roCect %he #roCect is being im#lemented 'ith Asian evelo#ment Ban! f"nding and s"##ort( for Strengthening the egional%raining $a#abilit+ 'hich foc"ses on the im#roving a"dit s!ills for fra"d detection( One of the maCor foc"sareas of the #roCect is the develo#ment of regional g"idelines on fra"d and corr"#tion, an initiative that receivedformal s#onsorshi# of the ASOSAI in the meeting of the Governing Board held in Manila in October 2002(


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a"ditable record ma+ be materiall+ misre#resented and the misre#resentation ma+ or ma+ not have ta!en #lace'ith the !no'ledge or involvement of the management( %his res#onsibilit+ of the A"ditor is the e tension of hisres#onsibilit+ to #rovide ass"rance abo"t the a"dited entit+ and its financial statements and his obligation toma!e the management :either in each entit+ individ"all+ or thro"gh re#orts to the legislat"re; a'are of an+'ea!nesses in the design or o#eration of the acco"nting and internal control s+stems 'hich are revie'ed b+ himin the discharge of his #rofessional d"ties( Altho"gh a"ditors are not #rimaril+ res#onsible for #reventing fra"d

and corr"#tion, a"dit can be a significant infl"ence in red"cing fra"d and corr"#tion( B+ cond"cting an a"dit thatis sensitive to the ris! of fra"d and corr"#tion, the a"ditors can ma!e a #roactive contrib"tion to #revent fra"dand corr"#tion(

Audit Mandate

1(13 hile the legislative frame'or! and mandate determine the #olicies and a"dit g"idance ado#ted b+ eachSAI, these G"idelines recommend that in its inter#retation of its #rimar+ a"dit mandate, an SAI sho"ld becogni7ant that #"blic #erce#tions abo"t fra"d and corr"#tion #ose a serio"s ris! to the credibilit+ of its findingsin individ"al a"dits and its national res#onsibilit+ and role( e#ending on their #ec"liar circ"mstances, the SAIssho"ld activel+ consider ado#ting a formal #olic+ or strateg+ for deterring fra"d and corr"#tion in theorgani7ations covered in their a"dit C"risdiction( %hese G"idelines are based on the a'areness that SAIs sho"ld

have an ade."ate level of mandate to deal 'ith cases of fra"d and corr"#tion in #lanning and cond"cting ana"dit and that this mandate is "s"all+ inherent in the a"dit mandate( Ko'ever, if an SAI feels constrained in itsinvestigation of s"s#ected fra"d or corr"#tion cases in the #erformance of its normal a"dit 'or!, it sho"ld see! reinforcement of its a"dit mandate( %his reinforcement co"ld be in the sha#e of a reg"larit+ #rovision s#ecif+ingthat the SAI 'o"ld be notified in all cases 'here fra"d or corr"#tion are s"s#ected or re#orted(

2(1 &ra"d and corr"#tion incl"des both those committed b+ the government em#lo+ees or management of ana"ditee :internal fra"d and corr"#tion;, and those #er#etrated against the a"ditee b+ o"tside individ"als or gro"#s :e ternal fra"d and corr"#tion;( Internal fra"d and corr"#tion ma+ res"lt in benefits being obtained either from the organi7ation :e(g(, theft of cash6assets, falsification of #a+roll data;, or from a third #art+ :e(g(, the theftof #atientsL #ro#ert+;( %he latter ma+ not res"lt in immediate loss to the a"ditee, b"t it ma+ res"lt in a liabilit+for restit"tion 'here #ositions of tr"st have been ab"sed( am#les of e ternal fra"d and corr"#tion incl"dema!ing fra"d"lent claims for government grants and benefits or s"##liers iss"ing false or d"#licate invoices(

2(2 hereas the loss to the a"ditee is "s"all+ fairl+ a##arent in cases of @fra"d as defined above, in the case of @corr"#tion the corr"#t government em#lo+ee ma+ benefit from the act, b"t there ma+ not be an+ loss to thea"ditee or effect on financial information( Both fra"d and corr"#tion are b+ definition 'itho"t #ro#er a"thorit+and involve breach of tr"st and therefore irreg"lar(

2(3 %here are man+ general and technical definitions of fra"d( In most co"ntries, fra"d and corr"#tion are legalconce#ts, altho"gh the+ are referred to in vario"s 'a+s( One of the factors disting"ishing fra"d from error is'hether the "nderl+ing ca"se is intentional or "nintentional, altho"gh intent is often diffic"lt to determine,

#artic"larl+ in matters involving the "se of C"dgment(

Definitions of Fraud

2(4 >G>A 155? vie'ed fra"d as a legal conce#t, 'hich involves acts of deceit, tric!er+,concealment, or breach of confidence that are "sed to gain some "nfair or dishonest advantageH an "nla'f"linteraction bet'een t'o entities, 'here one #art+ intentionall+ deceives the other thro"gh the means of falsere#resentation in order to gain illicit and "nC"st advantage(

2(E According to S-ASAI &ra"d G"ide, @fra"d is a generic term 'hich embraces all the means that h"maningen"it+ can devise, 'hich are resorted to b+ one individ"al, to get an advantage over another b+ falsere#resentations( %here is no finite r"le to define fra"d as it incl"des s"r#rise, tric!, c"nning and "nfair 'a+s b+'hich another is cheated(


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2( &ra"d, as it is commonl+ "nderstood toda+, means dishonest+ in the form of an intentional dece#tion or a'ilf"l misre#resentation of a material fact( F+ing, the 'ilf"l telling of an "ntr"th, and cheating, the gaining of an"nfair or "nC"st advantage over another, co"ld also be "sed to f"rther define the 'ord fra"d beca"se both thatand dishonest+ denote intention or 'illingness to deceive(

2( %he $anadian A"dit G"ide 21 on &ra"d A'areness refers to fra"d as an action 'here there is a loss of aval"able reso"rce res"lting from a false re#resentation made !no'ingl+, 'itho"t belief in its tr"th( S"ch actionsco"ld res"lt in charges being laid "nder vario"s a##licable $anadian la's(

2(? According to the ational A"dit Office of >*, fra"d involves the "se of dece#tion to obtain an "nC"st or illegal financial advantage as 'ell as intentional misstatements in, or omissions of amo"nts or disclos"res from,an entit+Ds acco"nting records or financial statements( It also incl"des theft, 'hether or not accom#anied b+misstatements of acco"nting records or financial statements(

2(5 %he &ra"d aminers Man"al vie's fra"d as an+ intentional or deliberate act to de#rive another of #ro#ert+or mone+ b+ g"ile, dece#tion or other "nfair means( Similarl+ International Standard of A"diting :240; alsotreats fra"d as an intentional act b+ one or more individ"als among management, those charged 'ithgovernance, em#lo+ees, or third #arties, involving the "se of dece#tion to obtain an "nC"st or illegal advantage(

2(10 ssentiall+, fra"d refers to intentional misre#resentation of financial information b+ one or more individ"alamong the management, em#lo+ees or third #arties( It involves the "se of dece#tion to obtain an illegal financialadvantage(

2(11 &ra"d ma+ involve8

• mani#"lation, falsification or alteration of records or doc"ments(

• misa##ro#riation6 misa##lication of assets(

• s"##ression or omission of the effects of transactions from records or doc"ments(

• recording of transaction 'itho"t s"bstances(

• misa##lication of acco"nting #olicies(

Elements of Fraud

2(12 %he basic elements of fra"d can be s"mmari7ed as follo's8

• %here m"st be at least t'o #arties to the fra"d, namel+ the #er#etrator and the #art+ 'ho 'as or co"ldhave been harmed b+ the fra"d, other'ise !no'n as the victimH

• A material omission or false re#resentation m"st be made !no'ingl+ b+ the #er#etratorH

• %here m"st be intent b+ the #er#etrator that the false re#resentation be acted "#on b+ the victimH

• %he victim m"st have the legal right to re#l+ on the re#resentationH


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• %here ma+ be an attem#t to camo"flageH and

• $orr"#tion involves breach of tr"st(

Factors that Influence Fraud and Corruption

2(20 It is "sef"l for a"ditors to "nderstand the motivational and organi7ational6environmental factors of fra"dand corr"#tion( %he #resence of these factors does not necessaril+ mean that fra"d and corr"#tion have occ"rred(

ather, a'areness of their #resence sho"ld increase the a"ditorDs sensitivit+ to that #ossibilit+( %he !e+ factorsgenerall+ associated 'ith fra"d and corr"#tion are as follo's8

Motivational Factors

2(21 Motivation and o##ort"nit+ are the elements that generall+ "nderlie the commission of fra"d andcorr"#tion( %hese co"ld ta!e the form of8

• conomic motivation / financial need or gain is the most common motivation for fra"d and corr"#tion(Often, #ersons convicted of fra"d and corr"#tion com#lain that the+ had "nbearable financial #roblemsfor 'hich there 'as no legitimate reco"rse(

• Greed P #ersons 'ith #o'er and a"thorit+ often commit fra"d and corr"#tion beca"se the+ aremotivated b+ greed(

• -restige or recognition P #ersons ma+ feel the+ deserve more #restige or more recognition( %hese #ersons are often motivated b+ Cealo"s+, revenge, anger, or #ride( %he+ often believe that the+ ares"#erior to others, that the+ are shre'd eno"gh to confo"nd and conf"se others and can commit fra"dand corr"#tion 'itho"t being discovered or detected(

• Moral S"#eriorit+ P #ersons ma+ also be motivated b+ a ca"se or val"es that the+ feel are morall+s"#erior to those of the victim, or the government in this case(

Organizational/Environmental Factors

2(22 %he organisational atmos#here and its #erce#tion #la+ a maCor ca"sative role in #er#etration of fra"d andcorr"#tion(

2(23 here management is #erceived as insensitive, insec"re, im#"lsive or too strict, illtreats em#lo+ees and C"dges #erformance either on short term res"lts or 'itho"t considering o#erational constraints, the

disgr"ntlement in the em#lo+ee is li!el+ to res"lt in instances of fra"d and corr"#tion(

2(24 S+stems and #roced"res ado#ted in organisations and organisational #olicies are #artic"larl+ im#ortant( Anorganisation in 'hich the cor#orate #olicies are "nclear, there is inade."ate internal control, e cessivereg"lations, red/ta#ism, inade."ate acco"ntabilit+ or histor+ of #rogramme ab"se is li!el+ to have moreinstances of fra"d and corr"#tion(

2(2E An "nderstanding of the organisational atmos#here 'ill enable an a"ditor to assess 'hether there is ahigher ris! of fra"d and corr"#tion in the entit+ and #lanning of the a"dit co"ld be s"itabl+ modified( -oor management str"ct"re and #olicies are indicated b+ a high t"rn over of em#lo+ees, absenteeism, #oor doc"mentation, lo' a'areness of reg"lator+ re."irements and lac! of trans#arenc+ in re'ard s+stems

2(2 It is im#ortant for the a"ditor to also "nderstand that ver+ often the #er#etrator of fra"d and corr"#tionrationalises his actions 'ith some !ind of C"stification( &or instance an em#lo+ee acc"sed of fra"d andcorr"#tion is li!el+ to rationalise his action b+ sa+ing or believing that his lo' #a+ C"stifies the action or since


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ever+bod+ is doing that he is also 'ell 'ithin his right to do itH 'hile a contractor co"ld C"stif+ his acts of fra"dand corr"#tion as a cost of doing b"siness or #roblems of sec"ring contract from a government entit+(

!pes of Fraud and Corruption

2(2 Some of the most t+#ical fra"d and corr"#tion are as follo's8

• Briber+ is the giving, receiving, offering or soliciting of an+ @thing of val"e in order to infl"ence a #erson in the #erformance of, or fail"re to #erform, his 6 her d"ties(

• &alse Statements and &alse $laims occ"r 'henever a #erson !no'ingl+ and 'illf"ll+ falsifies amaterial fact or ma!es a false or fictitio"s re#resentation or files a false or fictitio"s claim that res"lts ineconomic or financial loss to the #erson to 'hom the false re#resentation has been made(

• mbe77lement is the fra"d"lent conversion of #ersonal #ro#ert+ b+ a #erson in #ossession of that #ro#ert+ 'here the #ossession 'as obtained #"rs"ant to a tr"st relationshi#( am#les of means toconceal embe77lement are the "se of !iting or la##ing scheme(

o

*iting occ"rs 'hen a #erson 'ithdra's cash from a ban! on chec!s de#osited b+ a #erson for 'hich the cash has not +et been collected b+ the ban!( %o conceal the fra"d, the #ersoncontin"o"sl+ 'rites chec!s against non/e istent acco"nt balances :@!ites chec!s from ban! to

ban!;(

o Fa##ing occ"rs 'hen a #erson steals cash from #a+ment of acco"nts receivable, andcontin"o"sl+ "ses cash from other #a+ments of acco"nts receivables to conceal the initial theft:@la#s t'o consec"tive acco"nts;(

• $onflict of Interest occ"rs 'hen a #erson has an "ndisclosed economic or #ersonal interest in atransaction that adversel+ affects that #ersonLs em#lo+er(

• -hantom $ontractor is a non/e istent com#an+ 'hose invoice is s"bmitted for #a+ment b+ a #ersoninvolved in the #"rchase #rocess(

• -"rchases for -ersonal >se( A #erson ma+ #"rchase items intended for #ersonal "se or ma+ ma!ee cess #"rchases of items needed, some of 'hich are then diverted to #ersonal "se(

• S#lit -"rchases( $ontracts are s#lit into t'o or more segments to circ"mvent the #roc"rement a"thorit+limitations, and th"s to avoid com#etitive bidding( %his ma+ involve briber+ from the contractor to a

#erson of the other #art+(

• $oll"sive Bidding, -rice &i ing or Bid igging( Gro"#s of #ros#ective contractors for a contract forman agreement or arrangement, to eliminate or limit com#etition( %his agreement ma+ also involve

briber+(

• -rogress -a+ment &ra"d( %he contractor re."ests #rogress #a+ments based on falsified informations"bmitted to the other #art+(

• Over or "nder invoicing( Occ"rs 'hen there is deliberate misstatement of the invoice val"e ascom#ared 'ith goods or services received or s"##lied(

• tortion is the "se of a"thorit+ to sec"re "nla'f"l #ec"niar+ gain or advantage(

• e#otism and &avoritism "nla'f"l "se of #"blic office to favor relatives and friends(


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• Foss of even"e on acco"nt of ta or d"t+ evasion can incl"de different sit"ations 'here reven"e d"eto the government is not received or #aid(

• >nfair ecr"itment favoritism e ercised in the #rocess of recr"itment for "nla'f"l gain(

•

$om#"ter &ra"d is an+ fra"d"lent behavior connected 'ith com#"teri7ation b+ 'hich a #erson intendsto gain a dishonest advantage( &or instance, salami/slicing is a com#"ter fra"d 'here fractions of interest calc"lations are transferred to a #ersonal acco"nt(

Identification of "igh Ris# Areas

2(2? An "nderstanding of the a"dited entit+ sho"ld enable the a"ditor to identif+ #otential high/ris! areas ands"itabl+ modif+ a"dit #roced"res and techni."es( Some of the commonl+ #erceived high ris! areas are8

• contracts of service6#roc"rementH

• inventor+ managementH

• sanctions6clearancesH

• #rogram managementH

• reven"e recei#tH

• cash managementH

• general e #endit"reH and

• other areas 'ith #"blic interface(

SAIs 'o"ld have to, based on e #erience and #erce#tions, identif+ s"ch ris! areas 'hile #lanning a"dits(

Contract Fraud and Corruption

2(25 -roc"rement of goods and services is a maCor activit+ in the government sector and is traditionall+ #rone tofra"d and corr"#tion( >nderstanding fra"d and corr"#tion in contracts ma+ therefore be beneficial to the a"ditor(An ill"strative list of the forms fra"d and corr"#tion can ta!e in the area of contracts is given at A##endi 1 toenhance the A"ditorLs "nderstanding(

2(30 %he a"dit of $ontracts in most SAIs, therefore becomes an area of foc"s for the A"ditor 'ho has to be #artic"larl+ sensitive to the #ossibilit+ of &ra"d in this area( A##endi 2 lists o"t the 'arning signs that ana"ditor needs loo! o"t for( %hese 'o"ld alert him to the necessit+ of f"rther scr"tin+ or intensive e amination(%he si7e of the sam#le or the techni."es ado#ted co"ld also be s"itabl+ adC"sted(

Computer Fraud


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2(31 ith the increased "se of information technolog+ in the f"nction of entities and increased introd"ction of I% s+stems the a"ditors needs to "nderstand that the #er#etration of fra"d and corr"#tion and conse."entl+detection of s"ch instances become more com#licated(

2(32 $om#"ter fra"d co"ld involve the mani#"lation of a com#"ter or com#"ter data b+ 'hatever method inorder to dishonestl+ obtain mone+, #ro#ert+ or some other advantage of val"e or to ca"se loss

2(33 %he A"ditor has to be #artic"larl+ a'are of the a"dit trail, of the chec!s and balances of I% s+stems, of thelevels of control and needs to also have a fair idea of ho' #rocessing controls can be circ"mvented b+ the

#er#etrator of fra"d and ho' data can be accessed and mani#"lated( It is #artic"larl+ im#ortant for the a"ditor of the I% s+stem to assess in his a"dit the level of sec"rit+ controls b"ilt in and if these are in t"ne 'ith thesensitivit+ of data(

2(34 A"dit evidencing in an I% environment is often more com#le than traditional man"al a"dit( In an I%environment not onl+ it is necessar+ to "nderstand the techni."es of assessing s+stem and data so"ndness b"talso necessar+ to establish means of collecting evidence( %he standards of a"dit evidence collection have to beset b+ the SAIs in consonance 'ith the legal frame'or! and reg"lations in 'hich the a"dit is carried o"t(

2(3E Since this is an emerging field of a"dit and is also "ndergoing ra#id changes the SAIs ma+ consider the #ooling of information on the I% a"dits cond"cted and techni."es ado#ted(

BASIC PRINCIPL S

Auditing Principle

@A"diting -rinci#le here refers to Basic -rinci#les as given in the I %OSAI Standards(

3(1 %he SAI sho"ld consider com#liance 'ith the I %OSAI a"diting standards in all matters that are deemedmaterial( :#aragra#h 1(0( :a;;

IN!"SAI #uidance

@I %OSAI G"idance refers to the e #lanation of the Basic -rinci#les, General Standards, &ield Standards, ande#orting Standards given in the I %OSAI Standards(

In general terms, a matter ma+ be C"dged material if !no'ledge of it 'o"ld be li!el+ to infl"ence the "ser of thefinancial statements or the #erformance a"dit re#ort( :#aragra#h 1(0(5;

Materialit+ is often considered in terms of val"e b"t the inherent nat"re or characteristics of an item or gro"# of items ma+ also render a matter material/for e am#le, 'here the la' or reg"lation re."ires it to be disclosedse#aratel+ regardless of the amo"nt involved( :#aragra#h 1(0(10;

In addition to materialit+ b+ val"e and b+ nat"re, a matter ma+ be material beca"se of the conte t in 'hich itocc"rs( &or e am#le, considering an item in relation to8

:a; the overall vie' given to the financial informationH

:b; the total of 'hich it forms a #artH

:c; associated termsH

:d; the corres#onding amo"nt in #revio"s +ears( :#aragra#h 1(0(11;

AS"SAI #uideline $


11/26

@ASOSAI G"ideline is the s#ecific a"dit g"ideline on fra"d and corr"#tion as recommended b+ ASOSAI(

hile determining materialit+ levels for different a"dit areas the SAI ma+ ta!e into acco"nt adC"stments to thematerialit+ level that ma+ ma!e a"dit more res#onsive to ris! arising from fra"d and corr"#tion(

Auditing Principle3(2 %he SAI sho"ld a##l+ its o'n C"dgment to the diverse sit"ations that arise in the co"rse of governmenta"diting( :#aragra#h 1(0( :b;;

IN!"SAI #uidance

A"dit evidence #la+s an im#ortant #art in the a"ditorDs decision concerning the selection of iss"es and areas for a"dit and the nat"re, timing and e tent of a"dit tests and #roced"res( :#aragra#h 1(0(1 ;

AS"SAI #uideline %

SAIs sho"ld a##l+ its o'n C"dgement to determine the e tent of a"dit investigation to be "nderta!en in cases of s"s#ected fra"d and corr"#tion(

Auditing Principle

3(3 ith increased #"blic conscio"sness, the demand for #"blic acco"ntabilit+ of #ersons or entities managing #"blic reso"rces has become increasingl+ evident so that there is a need for the acco"ntabilit+ #rocess to be in #lace and o#erating effectivel+( :#aragra#h 1(0( :c;;

AS"SAI #uideline &

ith an increasing concern on fra"d and corr"#tion SAIs are e #ected to demonstrate that the a"dit addressesthese concerns( %he SAIs sho"ld activel+ consider ado#ting a formal #olic+ or strateg+ for deterring fra"d andcorr"#tion(

Auditing Principle

3(4 evelo#ment of ade."ate information, control, eval"ation and re#orting s+stems 'ithin the government 'illfacilitate the acco"ntabilit+ #rocess( Management is res#onsible for correctness and s"fficienc+ of the form andcontent of the financial re#orts and other information( :#aragra#h 1(0( :d;;

A##ro#riate a"thorities sho"ld ens"re the #rom"lgation of acce#table acco"nting standards for financialre#orting and disclos"re relevant to the needs of the government, and a"dited entities sho"ld develo# s#ecific

and meas"rable obCectives and #erformance targets( :#aragra#h 1(0( :e;;

$onsistent a##lication of acce#table acco"nting standards sho"ld res"lt in the fair #resentation of the financial #osition and the res"lts of o#erations( :#aragra#h 1(0( :f;;

IN!"SAI #uidance

%he correctness and s"fficienc+ of the financial re#orts and statements are the entit+Ds e #ression of the financial #osition and the res"lts of o#erations( It is also the entit+Ds obligation to design a #ractical s+stem 'hich 'ill #rovide relevant and reliable information( :#aragra#h 1(0(24;

%he SAIs sho"ld 'or! 'ith the acco"nting standards setting organisations to hel# ens"re that #ro#er acco"nting

standards are iss"ed for the government( :#aragra#h 1(0(2 ;


12/26

AS"SAI #uideline '

SAI sho"ld revie' 'hether a##licable acco"nting standards ens"re ade."ate recognition of assets and liabilitiesand disclos"re of tr"e financial #osition incl"sive of an+ losses res"lting from fra"d and corr"#tion( In case itobserves an+ deficienc+ in this regard it sho"ld 'or! 'ith the a"dited entit+ and the acco"nting standard setting

bod+ to remove the deficienc+(

AS"SAI #uideline (

%he res#onsibilit+ for ade."ate and timel+ disclos"re of an+ cases of fra"d and corr"#tion rest 'ith themanagement and the res#onsibilit+ of ens"ring reliabilit+ and res"lts of o#eration m"st incl"de concerns arisingfrom ris! of fra"d and corr"#tion( %hro"gh its a"dit the SAI m"st eval"ate and re#ort on the ade."ac+ andcom#etence 'ith 'hich the management has discharged this res#onsibilit+(

Auditing Principle

3(E %he e istence of an ade."ate s+stem of internal control minimises the ris! of errors and irreg"larities

:#aragra#h 1(0( :g;;(

IN!"SAI #uidance

It is the res#onsibilit+ of the a"dited entit+ to develo# ade."ate internal control s+stems to #rotect its reso"rces(It is not the a"ditorDs res#onsibilit+( It is also the obligation of the a"dited entit+ to ens"re that controls are in

#lace and f"nctioning to hel# ens"re that a##licable stat"tes and reg"lations are com#lied 'ith, and that #robit+and #ro#riet+ are observed in decision ma!ing( Ko'ever, this does not relieve the a"ditor from s"bmitting

#ro#osals and recommendations to the a"dited entit+ 'here controls are fo"nd to be inade."ate or missing(:#aragra#h 1(0(31;

AS"SAI #uideline )

SAIs sho"ld be alert to shortcomings in s+stems and controls that are li!el+ to #rovide an environmentcond"cive for fra"d and corr"#tion and sho"ld #roactivel+ re#ort to the management to im#rove the controlenvironment and minimi7e the ris! of fra"d and corr"#tion(

Auditing Principle

3( Fegislative enactments 'o"ld facilitate the co/o#eration of a"dited entities in maintaining and #rovidingaccess to all relevant data necessar+ for a com#rehensive assessment of the activities "nder a"dit :#aragra#h1(0( :h;;(

IN!"SAI #uidance %he SAI m"st have access to the so"rces of information and data as 'ell as access to officials and em#lo+ees of the a"dited entit+ in order to carr+ o"t #ro#erl+ its a"dit res#onsibilities( nactment of legislative re."irementsfor access b+ the a"ditor to s"ch information and #ersonnel 'ill hel# minimise f"t"re #roblems in this area(:#aragra#h 1(0(33;

AS"SAI #uideline *

Fegislative enactment can ens"re that all s"s#ected and detected cases of fra"d and corr"#tion are re#orted toa"dit b+ the management( If considered necessar+ SAI can reinforce their mandate to investigate cases of fra"dand corr"#tion b+ see!ing legislative enactments on these lines(

Auditing Principle


13/26

3( All a"dit activities sho"ld be 'ithin the SAIDs a"dit mandate( :#aragra#h 1(0( :i;;

IN!"SAI #uidance

%he f"ll sco#e of government a"diting incl"des reg"larit+ and #erformance a"dit( :#aragra#h 1(0(3?;

eg"larit+ a"dit embraces8

:a; attestation of financial acco"ntabilit+ of acco"ntable entities, involving e amination and eval"ation of financial records and e #ression of o#inions on financial statementsH

:b; attestation of financial acco"ntabilit+ of the government administration as a 'holeH

:c; a"dit of financial s+stems and transactions incl"ding an eval"ation of com#liance 'ith a##licable stat"tesand reg"lationsH

:d; a"dit of internal control and internal a"dit f"nctionsH

:e; a"dit of the #robit+ and #ro#riet+ of administrative decisions ta!en 'ithin the a"dited entit+H and

:f; re#orting of an+ other matters arising from or relating to the a"dit that the SAI considers sho"ld be disclosed(:#aragra#h 1(0(35;

-erformance a"dit is concerned 'ith the a"dit of econom+, efficienc+ and effectiveness and embraces8

:a; a"dit of the econom+ of administrative activities in accordance 'ith so"nd administrative #rinci#les and #ractices, and management #oliciesH

:b; a"dit of the efficienc+ of "tilisation of h"man, financial and other reso"rces, incl"ding e amination of

information s+stems, #erformance meas"res and monitoring arrangements, and #roced"res follo'ed b+ a"ditedentities for remed+ing identified deficienciesH and

:c; a"dit of the effectiveness of #erformance in relation to the achievement of the obCectives of the a"ditedentit+, and a"dit of the act"al im#act of activities com#ared 'ith the intended im#act( :#aragra#h 1(0(40;

AS"SAI #uideline +

ormall+ sensiti7ation of different t+#es of a"dits "nderta!en b+ SAIs to fra"d and corr"#tion can be bro"ghtabo"t "nder their e isting mandates( Ko'ever, 'here SAIs feel constrained, the+ can see! additional mandate(

Auditing Principle

3(? SAIs sho"ld 'or! to'ards im#roving techni."es for a"diting the validit+ of #erformance meas"res(:#aragra#h 1(0( :C;;

IN!"SAI #uidance

%he e #anding a"dit role of the a"ditors 'ill re."ire them to im#rove and develo# ne' techni."es andmethodologies to assess 'hether reasonable and valid #erformance meas"res are "sed b+ the a"dited entit+( %hea"ditors sho"ld avail themselves of techni."es and methodologies of other disci#lines( :-aragra#h 1(0(4 ;

AS"SAI #uideline ,


14/26

%he a"ditor sho"ld ma!e the management a'are that the absence or lac! of a##lication of reliable and valid #erformance meas"res and indicators co"ld increase the #ossibilit+ of occ"rrence of fra"d and corr"#tion(

# N RAL S!ANDARDS

#eneral Standard@General Standard here refers to General Standards as given in the I %OSAI Standards(

3(5 %he SAI sho"ld ado#t #olicies and #roced"res to recr"it #ersonnel 'ith s"itable ."alifications( :#aragra#h2(1(2 :a;;

%he SAI sho"ld ado#t #olicies and #roced"res to s"##ort the s!ills and e #erience available 'ithin the SAI andidentif+ the s!ills 'hich are absentH #rovide a good distrib"tion of s!ills to a"diting tas!s and assign a s"fficientn"mber of #ersons for the a"ditH and have #ro#er #lanning and s"#ervision to achieve its goals at the re."iredlevel of d"e care and concern( :#aragra#h 2(1(2 :d;;

IN!"SAI #uidance

It sho"ld be o#en to the SAI to ac."ire s#ecialised s!ills from e ternal so"rces if the s"ccessf"l carr+ing o"t of an a"dit so re."ires in order that the a"dit findings, concl"sions and recommendations are #erce#tive andso"ndl+ based and reflect an ade."ate "nderstanding of the s"bCect area of the a"dit( It is for the SAI to C"dge, inits #artic"lar circ"mstances, to 'hat e tent its re."irements are best met b+ in/ho"se e #ertise as againstem#lo+ment of o"tside e #erts( :#aragra#h 2(1(1?;

AS"SAI #uideline $-

%he SAI sho"ld have an ade."ate inventor+ of s!ills to deal 'ith cases of fra"d and corr"#tion( In the detailede amination of cases of fra"d and corr"#tion 'here an SAI feels the need to involve o"tside #rofessionale #ertise, s"ch #rofessional o#inion sho"ld onl+ serve to a"gment the a"dit concl"sion, the "ltimateres#onsibilit+ for the concl"sion remaining 'ith the SAI(

#eneral Standard

3(10 %he SAI sho"ld ado#t #olicies and #roced"res to develo# and train SAI em#lo+ees to enable them to #erform their tas!s effectivel+, and to define the basis for the advancement of a"ditors and other staff(:#aragra#h 2(1(2 :b;;

IN!"SAI #uidance

%he SAI sho"ld ta!e ade."ate ste#s to #rovide for contin"ing #rofessional develo#ment of its #ersonnel,incl"ding, as a##ro#riate, #rovision of in/ho"se training and enco"ragement of attendance at e ternal co"rses(:#aragra#h 2(1( ;

%he SAI sho"ld establish and reg"larl+ revie' criteria, incl"ding ed"cational re."irements, for the advancementof a"ditors and other staff of the SAI( :#aragra#h 2(1(?;

AS"SAI #uideline $$

In considering the #ortfolio of s!ills that the SAI sho"ld have to meet the re."irements of its a"dit mandate, theSAI sho"ld #a+ #artic"lar attention to training its a"ditors to deal 'ith concerns abo"t fra"d and corr"#tion,incl"ding e #erience gained from #ast fra"d and corr"#tion cases( %raining co"ld incl"de develo#ing forensic

a"diting s!ills #rovided that forensic investigation is covered b+ the mandate of the SAI(


15/26

SAIs co"ld consider sharing of information and !no'ledge of techni."es, #roced"res and s!ill develo#ment inorder to develo# e #ertise in this area(

#eneral Standard

3(11 %he SAI sho"ld ado#t #olicies and #roced"res to #re#are man"als and other 'ritten g"idance andinstr"ctions concerning the cond"ct of a"dits( :#aragra#h 2(1(2 :c;;

IN!"SAI #uidance

$omm"nication to staff of the SAI b+ means of circ"lars containing g"idance, and the maintenance of an "#/to/date a"dit man"al setting o"t the SAIDs #olicies, standards and #ractices, is im#ortant in maintaining the ."alit+of a"dits( :#aragra#h 2(1(14;

AS"SAI #uideline $%

SAI sho"ld consider revie'ing the man"als, #olicies and #ros#ect"s from the #ers#ective of cond"cting a"ditsthat are sensitive to fra"d and corr"#tion and dealing 'ith s"s#ected cases of the nat"re(

#eneral Standard

3(12 %he a"ditor and the SAI m"st be inde#endent( :#aragra#h 2(2(1 :a;;

SAIs sho"ld avoid conflict of interest bet'een the a"ditor and the entit+ "nder a"dit( :#aragra#h 2(2(1 :b;;

IN!"SAI #uidance

hile the SAI m"st observe the la's enacted b+ the legislat"re, ade."ate inde#endence re."ires that it not

other'ise be s"bCect to direction b+ the legislat"re in the #rogramming, #lanning and cond"ct of a"dits( %he SAIneeds freedom to set #riorities and #rogram its 'or! in accordance 'ith its mandate and ado#t methodologiesa##ro#riate to the a"dits to be "nderta!en( :#aragra#h 2(2(5;

%he legal mandate sho"ld #rovide for f"ll and free access b+ the SAI to all #remises and records relevant toa"dited entities and their o#erations and sho"ld #rovide ade."ate #o'ers for the SAI to obtain relevantinformation from #ersons or entities #ossessing it( :#aragra#h 2(2(15;

AS"SAI #uideline $&

%he SAIs need to demonstrate that the+ are inde#endent not onl+ in a legal sense b"t in a #ractical sense as 'ellso that the+ can #erform an effective role against fra"d and corr"#tion( emonstration of inde#endence in

#ractical a"dit 'or! incl"des avoidance of an+ #ossible conflict of interest sit"ation(

%he SAI sho"ld be in a #osition to carr+ o"t an inde#endent ris! assessment and #rioriti7e its a"dit #lanningaccordingl+(

here necessar+ the SAI sho"ld 'or! for legislation that 'o"ld allo' it access to all records and informationre."ired in the e amination of cases of fra"d and corr"#tion(

AS"SAI #uideline $'

itho"t com#romising on their inde#endence to #lan and cond"ct a"dit the SAIs sho"ld consider establishmentof means to receive and #rocess information from the #"blic on s"s#ected cases of fra"d and corr"#tion(

#eneral Standard


16/26

3(13 %he a"ditor and the SAI m"st e ercise d"e care and concern in com#l+ing 'ith the I %OSAI a"ditingstandards( %his embraces d"e care in s#ecif+ing, gathering and eval"ating evidence, and in re#orting findings,concl"sions and recommendations( :#aragra#h 2(2(1:d;;

IN!"SAI #uidance

%he SAI m"st be, and be seen to be, obCective in its a"dit of entities and #"blic enter#rises( It sho"ld be fair inits eval"ations and in its re#orting of the o"tcome of a"dits( :#aragra#h 2(2(40;

AS"SAI #uideline $(

Since com#lete evidence abo"t cases of fra"d and corr"#tion ma+ not be available to the SAI, d"e care sho"ld be e ercised in arriving at an a"dit concl"sion( In man+ circ"mstances additional tests ma+ have to be #erformed and additional evidence ac."ired than 'o"ld normall+ be considered a##ro#riate and necessar+ for arriving at an a"dit o#inion(

AS"SAI #uideline $)

In investigating and re#orting cases of fra"d and corr"#tion the SAIs sho"ld be a'are of the ris! that #er#etrators of fra"d and corr"#tion see! #rotection for their acts b+ acc"sing the a"ditors of libel and slander(%he SAIs co"ld consider 'or!ing to'ards changes in their legislation 'hich #rotects their a"ditors against s"challegations and li!el+ legal #roceedings(

FI LD S!ANDARDS

-lanning

&ield Standard

@&ield Standard here refers to &ield Standards as given in the I %OSAI Standards(

3(14 %he a"ditor sho"ld #lan the a"dit in a manner 'hich ens"res that an a"dit of high ."alit+ is carried o"t inan economic, efficient and effective 'a+ and in a timel+ manner( :#aragra#h 3(0(3 :a;;

IN!"SAI #uidance

In #lanning an a"dit, the a"ditor sho"ld8

:a; identif+ im#ortant as#ects of the environment in 'hich the a"dited entit+ o#eratesH

:b; develo# an "nderstanding of the acco"ntabilit+ relationshi#sH

:c; consider the form, content and "sers of a"dit o#inions, concl"sions or re#ortsH

:d; s#ecif+ the a"dit obCectives and the tests necessar+ to meet themH

:e; identif+ !e+ management s+stems and controls and carr+ o"t a #reliminar+ assessment to identif+ both their strengths and 'ea!nessesH

:f; determine the materialit+ of matters to be consideredH

:g; revie' the internal a"dit of the a"dited entit+ and its 'or! #rogramH

:h; assess the e tent of reliance that might be #laced on other a"ditors, for e am#le, internal a"ditH


17/26

:i; determine the most efficient and effective a"dit a##roachH

:C; #rovide for a revie' to determine 'hether a##ro#riate action has been ta!en on #revio"sl+ re#orted a"ditfindings and recommendationsH and

:!; #rovide for a##ro#riate doc"mentation of the a"dit #lan and for the #ro#osed field'or!( :#aragra#h 3(1(3;

%he follo'ing #lanning ste#s are normall+ incl"ded in an a"dit8

:a; collect information abo"t the a"dited entit+ and its organi7ation in order to assess ris! and to determinematerialit+H

:b; define the obCective and sco#e of the a"ditH

:c; "nderta!e #reliminar+ anal+sis to determine the a##roach to be ado#ted and the nat"re and e tent of en."iries to be made laterH

:d; highlight s#ecial #roblems foreseen 'hen #lanning the a"ditH

:e; #re#are a b"dget and a sched"le for the a"ditH

:f; identif+ staff re."irements and a team for the a"ditH and

:g; familiarise the a"dited entit+ abo"t the sco#e, obCectives and the assessment criteria of the a"dit and disc"ss'ith them as necessar+( :#aragra#h 3(1(4;

%he SAI ma+ revise the #lan d"ring the a"dit 'hen necessar+(

AS"SAI #uideline $*

hile #lanning his a"dit the a"ditor sho"ld assess the ris! that fra"d ma+ ca"se the financial statements tocontain material misstatement or record material irreg"lar transactions(

Q %he a"ditor ma+ !ee# in vie' that the ris! of fra"d and corr"#tion co"ld be higher in certain organi7ation li!ethose involved in #roc"rement of goods and services(

Q %he a"ditor ma+ !ee# in vie' that 'hen a fra"d is cond"cted there is a deliberate effort to conceal the factsand distract the a"ditor(

Q &or #lanning the a"dit the a"ditor sho"ld have a com#lete "nderstanding of the a"ditee incl"ding theenvironment in 'hich the entit+ o#erates the level of internal control and the #ast #erformance of the a"ditee

es#eciall+ #revio"s instances of fra"d and corr"#tion(

AS"SAI #uideline $+

Based on the ris! assessment the a"ditor sho"ld develo# the a"dit obCective and design a"dit #roced"res so as tohave reasonable e #ectation of detecting and eval"ating material misstatement and irreg"larities arising fromfra"d and corr"#tion( In case of high ris! a"dit the a"dit team sho"ld be selected !ee#ing in vie' there."irement of s"ch a"dit(

AS"SAI #uideline $,

%he SAI sho"ld !ee# in vie' the need for fle ibilit+ in terms of b"dget, time and e #ertise of the a"dit team #artic"larl+ 'hen fra"d and corr"#tion are s"s#ected or discovered in the co"rse of a"dit(


18/26

S"#ervision and evie'

Field Standard

3(1E %he 'or! of the a"dit staff at each level and a"dit #hase sho"ld be #ro#erl+ s"#ervised d"ring the a"ditH

and doc"mented 'or! sho"ld be revie'ed b+ a senior member of the a"dit staff( :#aragra#h 3(0(3 :b;;

IN!"SAI #uidance

All a"dit 'or! sho"ld be revie'ed b+ a senior member of the a"dit staff before the a"dit o#inions or re#orts arefinalised( It sho"ld be carried o"t as each #art of the a"dit #rogresses( evie' brings more than one level of e #erience and C"dgment to the a"dit tas! and sho"ld ens"re that8

:a; all eval"ations and concl"sions are so"ndl+ based and are s"##orted b+ com#etent, relevant and reasonablea"dit evidence as the fo"ndation for the final a"dit o#inion or re#ortH

:b; all errors, deficiencies and "n"s"al matters have been #ro#erl+ identified, doc"mented and either

satisfactoril+ resolved or bro"ght to the attention of a more senior SAI officer:s;H and

:c; changes and im#rovements necessar+ to the cond"ct of f"t"re a"dits are identified, recorded and ta!en intoacco"nt in later a"dit #lans and in staff develo#ment activities(:#aragra#h 3(2(4;

AS"SAI #uideline %-

&or ens"ring that all a"dits dealing 'ith act"al cases of fra"d and corr"#tion are ade."atel+ s"#ervised, the SAIsho"ld develo# #olicies, incl"ding a com#rehensive s"#ervision chec!list, regarding s"#ervision levels and

#roced"res for managing the investigation of fra"d and corr"#tion(

hen fra"d and corr"#tion are s"s#ected in the co"rse of a"dit the a"ditor sho"ld re#ort the matter to the

official of the SAI in accordance 'ith the SAILs #olic+ on s"#ervision levels(

St"d+ and val"ation of Internal control

Field Standard

3(1 %he a"ditor, in determining the e tent and sco#e of the a"dit, sho"ld st"d+ and eval"ate the reliabilit+ of internal control( :#aragra#h 3(0(3 :c;;

IN!"SAI #uidance

%he st"d+ and eval"ation of internal control sho"ld be carried o"t according to the t+#e of a"dit "nderta!en(:#aragra#h 3(3(2;

here acco"nting or other information s+stems are com#"teri7ed, the a"ditor sho"ld determine 'hether internalcontrols are f"nctioning #ro#erl+ to ens"re the integrit+, reliabilit+ and com#leteness of the data( :#aragra#h3(3(4;

AS"SAI #uideline %$

%he changes and im#rovements in the internal control s+stem made b+ management 'hen there have been #revio"s instances of fra"d and corr"#tion or in res#onse to changes in the a"ditee environment sho"ld be #artic"larl+ st"died and eval"ated d"ring a"dit(

AS"SAI #uideline %%


19/26

Increasing "se of I% s+stems b+ a"ditees re."ires that the a"ditor sho"ld have access to reliable and verifiables+stem/based a"dit trails to eval"ate the internal control( &or meeting this obCective legislation or e ec"tiveg"idance sho"ld ens"re that a"dit is vie'ed as a sta!eholder in the s+stem develo#ment(

$om#liance ith A##licable Fa's and eg"lations

Field Standard

3(1 In cond"cting reg"larit+ :financial; a"dits, a test sho"ld be made of com#liance 'ith a##licable la's andreg"lations( %he a"ditor sho"ld design a"dit ste#s and #roced"res to #rovide reasonable ass"rance of detectingerrors, irreg"larities, and illegal acts that co"ld have a direct and material effect on the financial statementamo"nts or the res"lts of reg"larit+ a"dits( %he a"ditor also sho"ld be a'are of the #ossibilit+ of illegal acts thatco"ld have an indirect and material effect on the financial statements or res"lts of reg"larit+ a"dits(

In cond"cting #erformance a"dits, an assessment sho"ld be made of com#liance 'ith a##licable la's andreg"lations 'hen necessar+ to satisf+ the a"dit obCectives( %he a"ditor sho"ld design the a"dit to #rovidereasonable ass"rance of detecting illegal acts that co"ld significantl+ affect a"dit obCectives( %he a"ditor alsosho"ld be alert to sit"ations or transactions that co"ld be indicative of illegal acts that ma+ have an indirecteffect on the a"dit res"lts(

An+ indication that an irreg"larit+, illegal act, fra"d or error ma+ have occ"rred 'hich co"ld have a materialeffect on the a"dit sho"ld ca"se the a"ditor to e tend #roced"res to confirm or dis#el s"ch s"s#icions(:#aragra#h 3(0(3 :d;;

IN!"SAI #uidance

%he a"ditor also sho"ld be alert to sit"ations or transactions that co"ld be indicative of illegal acts that ma+indirectl+ im#act the res"lts of the a"dit( hen a"dit ste#s and #roced"res indicate that illegal acts have or ma+have occ"rred, the a"ditor needs to determine the e tent to 'hich these acts affect the a"dit res"lts( :#aragra#h3(4(4;

itho"t affecting the SAIDs inde#endence, the a"ditors sho"ld e ercise d"e #rofessional care and ca"tion ine tending a"dit ste#s and #roced"res relative to illegal acts so as not to interfere 'ith #otential f"t"reinvestigations or legal #roceedings( "e care 'o"ld incl"de cons"lting a##ro#riate legal co"nsel and thea##licable la' enforcement organisations to determine the a"dit ste#s and #roced"res to be follo'ed( :#aragra#h3(4( ;

AS"SAI #uideline %&

henever a material instance of fail"re to com#l+ 'ith the a##licable la's and reg"lations is observed thea"ditor sho"ld 'itho"t a"tomaticall+ ass"ming the management and staff are dishonest investigate the controlfail"re 'ith an a##ro#riate degree of #rofessional s!e#ticism( Ke ma+ also e amine if the s"##orting evidencehas been tam#ered in an+ manner or an+ individ"al:s; co"ld have benefited from the material violation(

A"dit vidence

Field Standard

3(1? $om#etent, relevant and reasonable evidence sho"ld be obtained to s"##ort the a"ditorDs C"dgement andconcl"sions regarding the organisation, #rogram, activit+ or f"nction "nder a"dit( :#aragra#h 3(0(3 :e;;

IN!"SAI #uidance

A"ditors sho"ld have a so"nd "nderstanding of techni."es and #roced"res s"ch as ins#ection, observation,en."ir+ and confirmation, to collect a"dit evidence( %he SAI sho"ld ens"re that the techni."es em#lo+ed ares"fficient to reasonabl+ detect all ."antitativel+ material errors and irreg"larities( :#aragra#h 3(E(3;


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AS"SAI #uideline %'

hen a"ditors s"s#ect the #ossibilit+ of fra"d and corr"#tion, the+ sho"ld establish 'hether it has ta!en #laceand there has been res"ltant effect on the financial re#orting, es#eciall+ 'hether the certificate re."ires the."alification(

AS"SAI #uideline %(

hen a"ditors intend to re#ort on fra"d and corr"#tion, the+ sho"ld ens"re the reliabilit+ of a"dit evidence b+verif+ing it 'ith so"rce doc"ments incl"ding third #art+ evidence( A"ditors sho"ld caref"ll+ determine ho'm"ch evidence the+ sho"ld gather in s"##ort of a"dit concl"sions( A"ditors sho"ld also !ee# in vie' that theevidence gathered b+ them and the concl"sion dra'n b+ them co"ld become the basis of legal or disci#linar+

#roceedings( :Some of the so"rces of evidence and factors that ma+ be considered in searching for evidence arelisted in A##endi (;

AS"SAI #uideline %)

Since man+ records are #rod"ced b+ com#"ters in the "s"al and ordinar+ co"rse of 'or!, a"ditors sho"ld"nderstand ho' to collect and handle those records as a"dit evidence( $ollecting com#"ter evidence re."irescaref"l #lanning and e ec"tion( A"ditors sho"ld e amine 'hether a##ro#riate controls are in #lace in order toens"re the a"thenticit+ of com#"ter evidence(

Anal+sis of &inancial Statements

Field Standard

3(15 In reg"larit+ :financial; a"dit, and in other t+#es of a"dit 'hen a##licable, a"ditors sho"ld anal+se thefinancial statements to establish 'hether acce#table acco"nting standards for financial re#orting and disclos"reare com#lied 'ith( Anal+sis of financial statements sho"ld be #erformed to s"ch a degree that a rational basis is

obtained to e #ress an o#inion on financial statements( :#aragra#h 3(0(3 :f;;

IN!"SAI #uidance

&inancial statement anal+sis aims at ascertaining the e istence of the e #ected relationshi# 'ithin and bet'eenthe vario"s elements of the financial statements, identif+ing an+ "ne #ected relationshi#s and an+ "n"s"altrends( :#aragra#h 3( (2;

AS"SAI #uideline %*

A"ditors need to be alert to deviations from acce#table acco"nting standards incl"ding disclos"re re."irements #artic"larl+ 'hen there is s"s#icion of fra"d and corr"#tion(

R P"R!IN# S!ANDARDS

@ e#orting Standard here refers to e#orting Standards given in the I %OSAI Standards(

Reporting Standard

3(20 At the end of each a"dit the a"ditor sho"ld #re#are a 'ritten o#inion or re#ort, as a##ro#riate, setting o"tthe findings in an a##ro#riate formH its content sho"ld be eas+ to "nderstand and free from vag"eness or ambig"it+, incl"de onl+ information 'hich is s"##orted b+ com#etent and relevant a"dit evidence, and beinde#endent, obCective, fair and constr"ctive( :#aragra#h 4(0( :a;;


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It is for the SAI to 'hich the+ belong to decide finall+ on the action to be ta!en in relation to fra"d"lent #ractices or serio"s irreg"larities discovered b+ the a"ditors( :#aragra#h 4(0( :b;;

IN!"SAI #uidance

In form"lating and follo'ing "# recommendations, the a"ditor sho"ld maintain obCectivit+ and inde#endenceand th"s foc"s on 'hether identified 'ea!nesses are corrected rather than on 'hether s#ecific recommendationsare ado#ted( :#aragra#h 4(0(2 ;

AS"SAI #uideline %+

hen in the o#inion of the a"ditor the financial statements incl"de material fra"d"lent transactions, or s"chtransactions have not been ade."atel+ disclosed, or the a"dit cond"cted b+ the a"ditor leads him to theconcl"sion that instance:s; of fra"d and6or corr"#tion have ta!en #lace and 'hen the a"ditor has ade."ateevidence to s"##ort his concl"sion, he sho"ld ."alif+ the a"dit certificate and6or ens"re that his findings areade."atel+ incl"ded in his a"dit re#ort( Ko'ever, the term fra"d or corr"#tion ma+ not be "sed in a concl"sivesense "nless s"ch action is established in a co"rt of la'(

AS"SAI #uideline %,

%he re#ort ma+ contain a"ditorLs recommendations for the changes in the s+stem and #roced"res that co"ld #revent rec"rrence of s"ch instances(

AS"SAI #uideline &-

In follo'ing "# on re#orted cases of fra"d and corr"#tion the a"ditor sho"ld determine 'hether the necessar+action is being ta!en 'ith d"e regard to "rgenc+ that the sit"ation demands and become a'are of the changes inthe s+stems and #roced"res 'hich co"ld be validated thro"gh s"bse."ent a"dits(

!.pes of Fraud and Corruption in Contracts

%he follo'ing t+#es of fra"d and corr"#tion have been re#orted in contracting for goods andservices8

• Briber+ and *ic!bac!s / Mone+ or an+ other form of re'ard or favo"r is e changed bet'een a #"blicf"nctionar+ and a #rovider of goods and services in order to obtain some benefit e(g( acce#tance of s"bstandard goods or obtaining "na"thori7ed information(

• $hanges in Original $ontracts / $hanges are made in the original contract re."iring flo' of additionalf"nds from the government to the contractor, 'hich ma+ affect the basis on 'hich the contract 'asa'arded to the contractor in the first instance( %his ma+ also involve front/loading of contract in theho#e of increasing the #rice of the original contract thro"gh change orders or s"bse."ent modificationsto the contract(

• "#licate -a+ments / %he contractor claims and receives #a+ment for the same service or 'or! done or goods s"##lied "nder the same or different contracts(

• $oll"sive or $artel Bidding / $ontractors form cartels to fi artificiall+ high #rices for goods and

services s"##lied b+ them(


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•

• >n'arranted involvement of senior officials

•

Bidding and selection stage

• %he s#ecifications are not clearl+ defined

• A ver+ limited n"mber of offers is received

• oc"mentation indicates "n"s"al involvement of an official

• S"s#icion abo"t conflict of interest

• vidence of earl+ recei#t of information b+ some contractors

• e."est for #ro#osal is not #ro#erl+ advertised

• >n"s"al handling of the bidding #rocess

• val"ation criteria is not consistent for different offerors

• ce#tions to the tender deadlines

• $hanges in the bids made after their formal recei#t

• Fo'est res#onsive bidder is not selected

• $ontractor s"bmits "nrealistic bid indicating coll"sion or bid rotation

• >n"s"al 'ithdra'al of bids

• e/bid res"lts identical to original bids

• S"ccessf"l contractors "se com#etitors as s"b/contractors


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• )"stification for single so"rce #roc"rement is inade."ate

• $ontract #erformance and eval"ation stage

• $hanges in a contract res"lt in the large increase in the cost of goods and services

• $hanges made 'itho"t ade."ate e #lanations

• >n'arranted contract e tension

• $om#laints abo"t the ."alit+ of goods and services received

• Inade."ate ins#ections and ."alit+ ass"rance of goods and services received

• vidence of over charging and d"#licate billings

• "bio"s invoices

• Ins"fficient #re/a"dit of contractor #a+ments

• $ontracts re#eatedl+ a'arded to one contractor

• >nd"l+ high labor #a+ments

Audit vidence

In searching for the evidence of fra"d and corr"#tion the a"ditor m"st8

• Al'a+s search for the strongest #ossible evidenceH

• Investigate 'itho"t dela+, as evidence can be destro+ed, lost or forgottenH

• ot ignore small cl"es or leadsH

• Foo! for facts that confirm or ref"te s"s#icionsH

• $oncentrate on the 'ea!est #oint in the fra"d and corr"#tion(


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• Identif+ and s"mmari7e the evidence indicating that fra"d and corr"#tion ma+ have been committedH

• Identif+ the #ossible scenario of fra"d and6or corr"#tionH

• S"mmari7e and e #lain the acco"nting and control s+stems involved, the #a#er trail involved in the transaction, and the deviations from the s+stemsH

• #lain #atterns "sed in covering "# the fra"d and corr"#tionH

• Identif+ the #ossible e tent of the fra"d and corr"#tionH and

• $onsider the #ossibilit+ of coll"sion(

• So"rces of vidence

• oc"ments from the a"ditee8 "ring the co"rse of e amination of boo!s of acco"nts, a"ditorsinvestigate vario"s doc"ments that serve as evidence for the a"dit( %hese doc"ments ma+ be originalsor #hotoco#ies de#ending "#on their im#ortance(

• e#ort of Internal A"ditor8 %he internal a"ditor ma+ have identified instances of deviation from normal #roced"re(

• Intervie's8 A"ditors can obtain im#ortant information from vario"s government em#lo+ees( Since the+ma+ have noticed internal control fail"re made b+ managers and fra"d"lent activities #er#etrated b+other em#lo+ees, intervie's ma+ be "sef"l in detecting material misstatements ca"sed b+ fra"d andcorr"#tion(

• Ins#ection6 Observation8 A"ditors can notice #ossibilit+ of fra"d and corr"#tion thro"gh thee amination of ins#ection 6observation6#h+sical verification re#orts :e(g( forged doc"ment, inventor+not in e istence or inferior ."alit+;( here an+ a"ditor relies on #h+sical observation for an a"ditconcl"sion this 'o"ld needs to be s"##orted 'ith #ro#erl+ doc"mented evidence(

• R"estionnaires8 A"ditors ma+ gather im#ortant and hel#f"l information b+ "sing ."estionnaires(

• $onfirmation 'ith other related #arties8 A"ditors sometimes obtain information directl+ from other related #arties :e(g( ban! balance confirmation from the ban!, ebtorDs balance confirmation fromindivid"al debtors etc;( If the fig"res #rovided b+ these agencies do not tall+ 'ith the boo!s of acco"nt,the+ sho"ld chec! in detail to find o"t the reason for discre#anc+(

• es"lts of Anal+tical evie'8 A"ditors anal+7e both financial and non/financial information, 'hich

can indicate abnormal trends( In that case, a"ditors need to concentrate on #artic"lar areas(


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• #ert O#inion8 A"ditors ma+ see! e #ert o#inion abo"t a s"s#icio"s case( %he e #ertLs o#inion becomes evidence if a"ditors can rel+ on that o#inion in assessing fra"d and corr"#tion(

Assosai Guideline of Fraud and Corruption

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