Government and Corporate Sector Audit Standards in Nepal
Introduction to Audit Standards
Audit standards are the theoretical principles, procedural guidelines, and ethical practices that regulate and systematize auditing processes. According to the Nepal Chartered Accountants Act, 2053 BS (1997), audit standards refer to the norms, guidelines, and interpretations established or recommended by the Audit Standards Board to ensure reliability, quality, and professionalism in auditing.
These standards provide a unified framework for audit procedures, ethical conduct, and quality assessment, offering guidance even in cases of legal ambiguity. They are tailored for government and Corporate sectors as well as private entities, with international bodies like INTOSAI and ASOSAI, and national bodies like the Auditor General and Nepal Audit Standards Board, developing these standards.
In Nepal, the Auditor General establishes audit standards for the government and Corporate sectors, while the Nepal Audit Standards Board sets standards for the private sector.
Example: When auditing a government hospital’s procurement of medical supplies, auditors follow standards to verify compliance with financial regulations, ensuring transparency and cost-effectiveness.
Development of Audit Standards: International Context
The development of audit standards globally began with the Lima Declaration of Guidelines on Auditing Precepts, adopted in 1977 at the 9th Congress of the International Organization of Supreme Audit Institutions (INTOSAI) in Lima, Peru. In 1992, the 14th Congress in Washington, USA, categorized standards into four groups: Fundamental Standards, General Standards, Operational Standards, and Reporting Standards.
Subsequent INTOSAI congresses refined these standards, leading to the globally adopted International Standards of Supreme Audit Institutions (ISSAI). Nepal has developed its own government and corporate sector audit standards based on ISSAI.
Key Principles of the Lima Declaration
The Lima Declaration outlines the following foundational principles for audit institutions:
- Autonomy: Audit institutions must be independent.
- Freedom from Interference: Auditors must be free from external influence.
- Adequate Resources: Audit bodies must have sufficient resources.
- Access to Information: Auditors must have easy access to relevant data.
- Qualified Staff: Auditors must be competent, skilled, and honest.
- Systematic Reporting: Audits must produce structured reports.
- Specialist Services: Auditors should have access to expert services when needed.
Government and Corporate Sector
In Nepal, the term "government" refers to federal, provincial, and local governments, encompassing all public entities. The "Corporate sector" includes entities with over 50% ownership by the government or other corporate institutions, as defined by the Audit Act.
Audit standards for the government and corporate sectors are designed to ensure disciplined, reliable, and systematic auditing processes.
Government and corporate Sector Audit Standards in Nepal
The Nepal Government Audit Standards, 2077 BS (2020) outline standards for auditing government and corporate sectors, categorized as follows:
General Standards
- Independence and objectivity of audit institutions and auditors.
- Competence of audit staff.
- Due care in audit and reporting processes.
- Confidentiality of information.
- Quality control mechanisms.
- Professional judgment.
Planning Standards
- Preparation of annual audit plans.
- Study and analysis of the audited entity’s internal control systems.
- Development of specialized audit plans.
- Assessment and arrangement of specialist services.
Operational Standards
- Compliance with prevailing laws.
- Collection and documentation of evidence.
- Analysis of financial statements.
- Supervision and control of audit processes.
Reporting Standards
- Preparation and discussion of preliminary reports.
- Determination of audit opinions (unqualified, qualified, or adverse).
- Issuance of final reports.
- Ensuring clarity and significance in reports.
Contents of Audit Reports
Audit reports must include:
- Objectives and scope of the audit.
- Confirmation that the audit followed government audit standards.
- Details of preliminary findings and their impact (or lack thereof) on the audit opinion.
- Significant weaknesses in internal control systems.
- Instances of legal violations, misuse of authority, or fraud indicators.
- Identified problem areas and recommended actions.
- Perspectives of responsible officials on audit findings, conclusions, and suggestions.
- Notable successes in one area that could be applied elsewhere.
- Issues requiring further study or consideration.
- Details of any information withheld for confidentiality reasons.
Importance of Evidence Collection in Auditing
Evidence collection is critical for:
- Supporting the auditor’s opinions and reports.
- Enhancing audit efficiency and effectiveness.
- Demonstrating compliance with standards and laws.
- Ensuring objectivity and fairness.
- Supporting planning and supervision.
- Strengthening professional credibility.
- Ensuring satisfactory fulfillment of auditor responsibilities.
- Providing documented proof for future reference.
- Enhancing audit reliability and legitimacy.
Example: During an audit of a provincial education department, auditors collect invoices, contracts, and payment records to verify that funds for school supplies were used appropriately, ensuring evidence-based conclusions.
Barriers to Auditor Independence and Objectivity
Personal Barriers
- Family relationships with audited entities.
- Business, formal, personal, or financial ties.
- Prejudices or biased assumptions.
- Financial transactions or inducements.
- Bias when the same person handles accounting and auditing.
- Personal influence or favoritism.
External Barriers
- External interference or pressure.
- Time constraints.
- Interference in auditor appointments, promotions, or task assignments.
- Resource shortages.
- Limited authority or encroachment on auditor powers.
- Threats to auditors’ job security.
Challenges in Nepal’s Audit Standards Implementation
Despite established standards, several challenges persist:
- Incomplete and ineffective implementation of standards.
- Weak institutional autonomy (financial and administrative).
- Lack of consistency and integrity in applying standards and preparing reports.
- Non-specialized staff selection processes.
- Limited opportunities for staff capacity development.
- Lack of use of detailed job descriptions.
- Weak accountability for audit report findings.
- Inconsistent supervision and effectiveness in auditing.
- Failure to align staff behavior and practices with standards.
- Ineffective review and spot-checking of audit reports.
- Lack of urgency in implementing audit recommendations.
- Indifference from audited entities during field inspections.
- Inadequate legal action against officials withholding information.
- Limited public access to audit reports due to poor dissemination.
- Non-compliance with the auditors’ code of conduct.
- Low staff morale and motivation.
- Weak foundation for performance audits due to unclear targets and measurable standards in audited entities.
Recommendations for Improvement
Recommendations:
- Ensure full and effective implementation of audit standards.
- Provide adequate staffing and resources to the Auditor General’s office.
- Establish merit-based appointment systems for the Auditor General.
- Strengthen incentives and penalties to ensure consistent and honest use of standards.
- Introduce specialized staff selection processes.
- Create ample opportunities for staff capacity development.
- Enhance accountability for audit report findings.
- Improve supervision and effectiveness in auditing processes.
- Promote transparency and objectivity in audit reports for consistency.
- Align staff behavior and practices with audit standards.
- Strengthen review and spot-checking of audit reports.
- Promote urgency and accountability in implementing audit recommendations.
- Take strict legal action against officials who fail to cooperate during inspections or withhold information.
- Enhance public access to audit reports through effective dissemination.
- Enforce adherence to the auditors’ code of conduct.
Audit Standards Overview
The following table summarizes the key categories of Nepal’s government and corporate sector audit standards:
| Standard Category | Key Elements | Purpose |
|---|---|---|
| General Standards | Independence, competence, confidentiality, quality control | Ensure ethical and professional auditing |
| Planning Standards | Annual plans, internal control analysis, specialist services | Facilitate systematic audit preparation |
| Operational Standards | Legal compliance, evidence collection, supervision | Ensure effective audit execution |
| Reporting Standards | Preliminary reports, audit opinions, final reports | Provide clear and actionable findings |
Conclusion
Nepal’s government and corporate sector audit standards, rooted in international frameworks like ISSAI and the Lima Declaration, provide a robust foundation for ensuring transparency, accountability, and efficiency. Addressing challenges such as incomplete implementation, resource shortages, and lack of accountability will further strengthen the auditing system, aligning it with global best practices and enhancing public trust.
References
- Nepal Chartered Accountants Act, 2053 BS (1997)
- Nepal Government Audit Standards, 2077 BS (2020)
- Lima Declaration of Guidelines on Auditing Precepts (1977)
- International Standards of Supreme Audit Institutions (ISSAI)
- Audit Act, 2075 BS (2018)