4.1 Auditing in Nepal: Introduction, Objectives, Types, and Principles

Auditing in Nepal: Introduction, Objectives, Types, and Principles

Introduction to Auditing

Auditing is the independent, objective, and systematic examination of financial records and transactions of an organization, entity, or office to ensure accuracy, compliance, and transparency. The term "audit" originates from the Latin word Audire, meaning "to hear."

According to the Audit Act, 2075 BS (2018), auditing involves examining, evaluating, and analyzing an entity’s financial records and processes. In Nepal, auditing has historical roots dating back to King Prithvi Narayan Shah, who established the Kumari Chowk Adda to centrally audit state revenues and expenditures. The Legal Code, 2004 BS (1948) envisioned the Chief Audit Office, and the Interim Constitution, 2007 BS (1951) formalized the Auditor General as a constitutional body.

Today, under Part 22 of the Constitution of Nepal, the Auditor General operates as a constitutional entity responsible for auditing government transactions. Legal, policy, and institutional frameworks further enhance the reliability and structure of auditing in Nepal.

Example: A government ministry’s annual budget is audited to verify that funds allocated for road construction were used appropriately, identifying any discrepancies or misuse.

Objectives and Importance of Auditing

Auditing serves critical purposes in ensuring financial discipline and governance:

Identify weaknesses, fraud, or irregularities in financial transactions.
Promote public accountability and transparency.
Enhance economy, efficiency, and effectiveness in resource utilization.
Ensure a fair, balanced, and compliant financial administration.
Improve accounting systems and management practices.
Prevent loss or misuse of public assets and funds.
Ensure legal compliance and eliminate potential errors.
Provide an accurate depiction of financial status.
Contribute to establishing a society rooted in good governance.

Types of Auditing

Audits in Nepal are classified based on entity, timing, subject matter, and modern practices:

Based on Entity and Timing

Internal Audit: Conducted by an organization’s staff to ensure compliance and efficiency.
Final Audit: Performed by an independent body at the fiscal year’s end.

Based on Subject Matter

Performance Audit: Evaluates economy, efficiency, and effectiveness.
Management Audit: Assesses management processes and controls.
Regularity Audit: Ensures compliance with laws and regulations.
Tax Audit: Examines tax-related transactions.
Cash Audit: Verifies cash transactions and balances.
Cost Audit: Analyzes cost-effectiveness of operations.
Financial Audit: Reviews financial statements for accuracy.

Based on Modern Practices

Social Audit: Assesses social impact and accountability.
Environmental Audit: Evaluates environmental compliance and impact.
Gender Audit: Examines gender equity in resource allocation.
Information Technology Audit: Reviews IT systems and security.
Quality Audit: Ensures quality standards in operations.
Timeliness Audit: Assesses adherence to timelines.

Internal Audit

Internal auditing is conducted by an organization’s employees to ensure that transactions align with organizational goals, comply with regulations, stay within approved budgets, and maintain robust internal controls. The Financial Procedures and Fiscal Accountability Regulations, 2077 BS (2020) mandate internal audits to focus on regularity, economy, efficiency, and effectiveness.

Internal audits, performed monthly or quarterly by internal auditors or the Office of the Financial Comptroller General (FCGO), are not publicly disclosed. Their scope includes detecting arithmetic errors, ensuring compliance, and evaluating internal control systems.

Importance of Internal Audit

Promotes financial accountability.
Identifies and resolves issues early.
Ensures goal-oriented operations.
Detects errors and fraud.
Provides guidance and consultation.
Supports final audits.
Offers feedback to stakeholders.
Facilitates performance indicator evaluation.

Final Audit

Final auditing involves an independent, objective examination of an entity’s annual financial transactions at the fiscal year’s end, conducted by the Auditor General as per Nepal’s Constitution. The audit report is submitted to the President and presented to the Federal Parliament, ensuring public disclosure. The Auditor General is accountable to the Parliament.

Both internal and final audits aim to maintain financial discipline and promote good governance, ensuring systematic economic administration.

Importance of Final Audit

Enhances public accountability and transparency.
Promotes financial discipline.
Ensures effective use of public resources.
Fosters economy and efficiency.
Ensures legal compliance.
Builds public trust.
Strengthens the rule of law.
Improves financial management.
Provides a mechanism for corrective action.
Offers feedback and recommendations.

Measures to Enhance Auditing Effectiveness

Recommendations:

Provide regular training and capacity-building for auditors.
Adopt ICT-based monitoring and reporting systems.
Equip audit institutions with adequate resources.
Enhance auditor morale through incentives and security measures.
Gradually adopt international auditing standards.
Link audit reports to employee career development.
Strengthen internal audit processes.
Mandate internal auditors in all entities.
Integrate internal and final audits for coherence.
Enforce compliance with audit recommendations.
Assign internal auditors responsibility for developing internal control systems.
Decentralize the Auditor General’s office to provincial levels.

Performance Audit

According to the International Organization of Supreme Audit Institutions (INTOSAI), a performance audit evaluates whether an entity uses resources economically, efficiently, and effectively to fulfill its responsibilities. Initiated globally post-1970 and in Nepal since 2029 BS (1972), performance audits go beyond regularity to assess outcomes and explore future improvements.

Economy: Minimizing costs without compromising quality.
Efficiency: Achieving optimal results relative to costs.
Effectiveness: Meeting predetermined goals and objectives.

Example: A performance audit of a rural water supply project assesses whether funds were used efficiently to deliver clean water, meeting project goals within budget and timeline.

Fundamental Principles of Auditing

Auditing adheres to the following core principles:

Planning: Audits must follow a detailed, cost-effective plan.
Independence and Integrity: Auditors must be impartial, honest, and responsible.
Confidentiality: Sensitive information must be protected unless authorized for disclosure.
Professional Competence: Auditors must possess specialized knowledge and skills.
Due Care: Auditors must exercise caution due to the complex and sensitive nature of financial transactions.
Evidence and Documentation: Audit reports must be fact-based, with proper evidence collection and record-keeping.
Control: Auditors must evaluate internal control systems and accounting practices.
Reporting: Auditors must submit written reports with findings, recommendations, and improvement suggestions.
Legality and Validity: Audits must comply with prevailing laws and accounting standards.

For government audits, the Auditor General follows additional principles:

Regularity: Ensuring compliance with laws.
Economy: Minimizing costs with quality.
Efficiency: Assessing cost-result alignment.
Effectiveness: Evaluating goal achievement.
Propriety: Examining the appropriateness of expenditures, even if legally permissible.

Constitutional and Legal Framework

Nepal’s auditing system is governed by:

Constitution of Nepal
Audit Act, 2075 BS (2018)
Financial Procedures and Fiscal Accountability Act, 2076 BS (2019) and Regulations, 2077 BS (2020)
Public Procurement Act, 2063 BS (2007) and Regulations, 2064 BS (2008)
Specialized laws for organized institutions
Local Government Operation Act, 2074 BS (2017)
Audit standards, guidelines, and economic acts
Donor agency agreements
International standards and practices

Jurisdiction of the Auditor General

As per the Constitution, the Auditor General audits:

All federal, provincial, and local government offices for regularity, economy, efficiency, effectiveness, and propriety.
Entities with over 50% government ownership, with consultation for auditor appointments.
Other entities as specified by federal law.
Accounts maintained in prescribed formats.
Access to financial records at any time.

Key Provisions of the Audit Act, 2075 BS

The Act specifies:

Entities Audited: Government offices, fully government-owned entities, and entities designated by federal law.
Audit Scope: Selective or random audits of financial transactions, covering regularity, economy, efficiency, effectiveness, propriety, IT, performance, gender, forensic, and environmental aspects.
Grants and Transfers: Audits of all types of financial assistance across government tiers.
Audit Focus Areas:

Compliance with budget allocations and purposes.
Adherence to prescribed accounting formats and reporting timelines.
Accuracy of centralized financial statements.
Proper management of consolidated, contingency, and other government funds.
Timely budget disbursements.
Accuracy of financial statements.
Sufficiency of evidence for transactions.
Physical progress per financial reports.
Authorized expenditure approvals.
Timely liability settlements.
Effective resource and asset utilization.
Proper record-keeping of government assets.
Asset maintenance and protection.
Accurate accounting of loans, investments, interest, and dividends.
Legal provisions to prevent misuse of funds.
Effectiveness of internal control systems.
Quality of internal audits and report implementation.
Revenue collection, deposit, and leakage control.
Compliance with deposit-related laws.
Accounting of industrial and commercial services.
Appropriate organizational structure and task allocation.
Prevention of redundant or missed tasks.
Clear performance indicators and program achievements.
Alignment of plans, budgets, and programs with objectives.
Cost-effectiveness and program adherence to budgets.
Reliable record-keeping for targets, progress, and costs.
Effective monitoring and report implementation.
IT-based financial systems.
Effective use of revenue grants and royalties.
Timely reimbursements and irregularity settlements.

Challenges in Nepal’s Government Auditing

Internal Audit Challenges

Lack of specialized staff for accounting and auditing.
Weak effectiveness of internal audit processes.
Focus limited to regularity and arithmetic accuracy, despite regulations mandating economy, efficiency, and effectiveness.
Insufficient auditors relative to workload.
Lack of auditor skills and training opportunities.
Poor coordination with final audits, rendering irregularity findings redundant.
Limited transparency and fairness.
Lack of sensitivity among entity heads toward internal audits.
Insufficient stakeholder focus on effectiveness.
Lack of clear and adequate standards.

Final Audit Challenges

Lack of auditor integrity and commitment.
Limited contribution to good governance.
Failure to mainstream performance audits.
Overemphasis on regularity, neglecting efficiency, effectiveness, and propriety.
Insufficient auditor staffing.
Lack of transparency and stakeholder participation.
Questions over audit objectivity and fairness.
Inconsistent irregularity findings across audit teams.
Non-compliance with laws, standards, and codes of conduct.
Limited training and motivation for auditors.
Inadequate publicity and impact of audit reports.
Lack of stakeholder commitment to resolving irregularities.
Inability to meet donor expectations for quality.
Weak collaboration with stakeholders (e.g., entities, parliamentary committees).
Incomplete coverage of foreign aid under the Auditor General’s scope.
Lack of decentralization of the Auditor General’s office.

Independence and Competence of the Auditor General

The Lima Declaration emphasizes the need for Supreme Audit Institutions to have:

Constitutional autonomy
Operational autonomy
Financial autonomy
Administrative autonomy
Independent reporting systems

In Nepal, the Auditor General’s independence and competence are ensured through:

Establishment as the supreme audit authority.
Constitutional recognition under Part 22, defining roles and powers.
Exemption of remuneration and administrative expenses from parliamentary control.
Appointment through the Constitutional Council to avoid political influence.
Separate audit service for staff to ensure expertise and autonomy.
Authority to access and audit financial records at any time.
Submission of reports to the President or Provincial Governors.
Power to issue directives to government entities.

Audit Types and Focus Areas

The following table summarizes key audit types and their focus areas:

Audit Type	Focus Area	Objective
Internal Audit	Compliance, internal controls, regularity	Ensure operational efficiency and early issue detection
Final Audit	Annual financial transactions, compliance, public accountability	Promote transparency and governance
Performance Audit	Economy, efficiency, effectiveness	Optimize resource use and outcomes
Financial Audit	Accuracy of financial statements	Ensure reliable financial reporting
Environmental Audit	Environmental compliance and impact	Promote sustainable practices
IT Audit	IT systems and security	Ensure robust digital infrastructure

Conclusion

Nepal’s auditing system, anchored by the Auditor General and supported by robust legal frameworks, plays a vital role in ensuring financial discipline and good governance. By addressing challenges such as limited auditor capacity, lack of digitalization, and weak coordination, Nepal can align its auditing practices with international standards, enhancing transparency and public trust.

References

Constitution of Nepal
Audit Act, 2075 BS (2018)
Financial Procedures and Fiscal Accountability Act, 2076 BS (2019)
Public Procurement Act, 2063 BS (2007)
Local Government Operation Act, 2074 BS (2017)
INTOSAI Guidelines and Standards