Chapter 13.doc

DG Audit Federal Government

Audit Plan 2007 - 08Chapter 13: Defence Division

Chapter 13Defence DivisionAudit Period

Audit Year 2007-08

Auditable Expenditure

Grant No.

Particulars

Rupees

Current/ Non-Development Expenditure

21

Defence division

1,730,915,000

22

Meteorology

308,281,000

23

Survey of Pakistan

351,794,000

24

Federal Government Educational Institutional In Cantonment And Garisson

1,181,174,000

25

Defence services

250,984,241,000

254,556,405,000Development Expenditure

133

Defence Division

1,032,105,000

134

Federal Government Educational Institutions in Cantonments and Garrisons

23,060,000

1,055,165,000

Total

255,611,570,000

Audit Formations

Survey of Pakistan

Controlling & admin staff

MAP publication and drawing office

Survey of Pakistan- survey parties Islamabad

PAKSAT ROJECT

Knowhow development and capacity building in satellite engineering an technology

Human resource development for NSDP

Audit Team

S.No.

Name

Designation

Role

1.

Dr. Akmal Minallah

Director

Finalization of Audit report,

Holding DAC meetings

2.

Nazar Rauf Rathore

Dy. Director

Supervision of audit activities,

Planning of audit,

Review of audit findings,

Review of draft audit report

3.

Quratulain Hadi

Audit Expert

Technical support in planning, execution & reporting

4.

Shoukat Ali Bhutta

Audit Officer

Audit execution,

Preparation of AIRs & draft audit report

Update audit permanent file

5.

Hafiz Moin Ahmad

Assistant Audit Officer

Audit execution,

Prepare audit working papers

Time Schedule

From 22 October 2007 to 30 January 2008

(For details refer page 167)

I. AUDIT OBJECTIVE AND SCOPEThe main objectives of the audit of the Ministry of Defence are:

To attain reasonable assurance whether the financial statements are prepared in accordance with the identified financial reporting framework and the sum expanded has been applied in all material respect for the purposes authorized by the Parliament

To check the system of internal control and compliance with the respective authorities

To provide certification for the foreign aided projects

To perform performance audit of the major defence projects, so that efficiency, effectiveness and the impact of the project on the economy can be assessed.

The audit scope in an annual audit plan is a statement of what areas will be looked at, what work must be done and what will not be done and the methodology to be used to achieve the audit objectives(s).

The resources are allocated to perform the financial audit of the ministry which is corroborated by the regularity audit. The selection of the departments/projects for the regularity audit will depend on the following criteria, which include,

Materiality

Complexity of the project

Controversial issues

Government priority and etc

The following organizations of the Ministry of Defence are out of the preview of the federal audit;

Pakistan international airline corporation

Civil aviation authority

Further the functions of Defence services are not in the preview of the federal audit and separate director general of auditor general of Pakistan is appointed for the same.

The educational institutions are provided funds under Ministry of Defence which are then managed separately by those institutions and yet only transfers from the ministry are considered for audit purposes.

II. UNDERSTANDING THE ENTITY

Ministry of Defence is strategically run by elected representatives of the public and administratively controlled by the bureaucracy. Its mission is to enable the armed forces to defend the national sovereignty and territorial integrity of the Islamic Republic of Pakistan and protect its national interests and assets through military means and other Defence related capabilities.A. Status of Entity and its Core OperationsMinistry of Defence (MoD) comprises one Division, namely the Defence Division. The Defence Division is the Administrative Division and Secretariat of the Ministry of Defence responsible for the achievement of its Mission Statement. The departments covered under the ministry are;

Civil aviation authority

Airport security forces

Pakistan meteorological department

Pakistan international airline corporation

Survey of Pakistan

Civil aviation authority and Pakistan international airline corporation are out of the scope of the federal audit as operated by separate ordinances/acts.

The main role of the ministry is to,

a) To formulate, coordinate and execute the Defence Policy of Pakistan and other Defence related policies.

b) To provide-for and manage the national Defence needs through Defence Budgeting.c) To administer the Armed Forces of Pakistan.d) To promote and regulate Civil Aviation activities and related infrastructure in Pakistan, so as to be compatible with the contemporary global standards.e) To assist the Civil Administration in the maintenance of Public Order, combating the internal threats and battling the national disasters, calamities and emergencies, if required and asked for.f) To contribute towards the world peace and progress through the UN Peace Keeping and other operations.

B. SWOT Analysis

Strengths:

Full support from Federal Government

Support of people of Pakistan

Weaknesses:

Dependency on suppliers of strategic armed forces equipment.

Old aircraft/ machineries.

Opportunities:

Research and development in Defence equipment The present government is from arm forces thus could take serious actions to remove deficiencies International assignments of trained personal and forcesThreats: Withdrawal of support from supplier Curtailment of budget.

Obsoleteness of strategic equipment

Tense cross border relationsC. Intergovernmental Relationship

Functionally ministry consists of one main division along with various line departments/suboffices. The Ministry of Local Government and Rural Development is responsible for matters concerning federal functions pertaining to local government institutions and rural development programs. Various programs are initiated by the government under each division/department with a sharper focus on poor and unprivileged segments of the society.

D. Accounting System of the MinistryThe accounting of the selected entities of the Ministry of Defence rests with the AGPR counter, However, separate PLA accounts are opened for the projects where required.E. Organizational ChartThe organizational chart is annexed as Annexure A to the chapterIII. RISK ASSESSMENT A. General Risk Assessment Procedures

Our risk based approach during the audit would be to plan and document our risk assessment procedures performed so as to obtain an understanding of the entity and its environment. Our risk assessment procedures may include inquiries, observations and inspections, and analytical procedures. The major risk factors that would commonly be addressed to assess the risk of the entity are;

The adequacy of internal controls and the control consciousness environment is in place;

Participation by those charged with governance

Management approach to taking and managing business risks

Changes in operating environment

Corporate restructuring

Discussions with the management regarding any internal control weakness, frauds and irregularities identified earlier.

Are changes in the design of internal controls documented and review by a competent authority;

There is a clearly defined organization structure and the operating functions are performed independently so as to create segregation of duties;

The role and authority of the internal audit function (if any), and review of internal auditors assessment of the corrective actions taken, and to consider the impact on the nature, extent and timing of our audit tests and procedures;

The nature of transactions (for example, the number and Rupee volumes and the complexity involved);

Assessment of non-routine transactions and its adequacy of its documentation and approvals;

Understanding of the financial reporting process;

The age of the system or applications used;

The physical and logical security of information, equipment, and premises;

Susceptibility of assets to theft and misappropriation;

The adequacy of operating management oversight and monitoring;

Previous regulatory and audit results and managements responsiveness in addressing the issues raised;

Human resources, including the experience of management and staff, turnover, technical competence, managements succession plan, and the degree of delegation; and

Senior management oversight.The auditor must be able to identify high risk areas and the high risk areas may be identified from material weaknesses. Material weaknesses will be; Be evident at multiple agencies

Affect a significant portion of the governments total budget or other resources

Stem from a deficiency that should be monitored and addressed through individual agency actions as well as through Office of Management and Budget initiatives

Major non-compliance of applicable laws and regulations.

B. Inherent Risk Factors

1) Inherent risk factors associated with activities/programmes

Complexity of programs;

Complex, unusual or high value transactions;

Activities involving the handling of large amounts of cash or high value attractive goods - embezzlement or theft;

Activities of a nature traditionally considered to be particularly prone to fraud or corruption (e.g. public works and technical contracts, contracts for the delivery goods);

Urgent operations (e.g. emergency aid) and operations not fully subject to the usual controls;

Historical evidence of a high incidence of intentional irregularities;

Eligibility criteria inconsistent with objectives (too wide, too restrictive, not relevant);

Activities that are uninsurable and/or are subject to risks arising from political, financial, ecological (etc) instability;

2) Inherent risk factors associated with the operating structure

Management approach to taking, managing and mitigating business risk;

Geographically dispersed organization, or organization operating in areas where communications are difficult;

Unclear division of responsibilities within the Division/Department;

Activities or projects involving numerous partners (coordination problems, weaknesses in management and communications structures);

Particular points mentioned in internal and external audit reports, and in press reports etc.

3) Inherent risk factors associated with the beneficiaries

Operations where the conduct of beneficiaries is difficult to check, or where the ultimate beneficiaries may be different from the apparent recipient;

Beneficiaries highly dependant on public funds;

Activities which imply several levels of subcontracting, making the identification of eligible beneficiaries difficult;

Historical evidence of a high incidence of intentional irregularities;

Political or administrative pressure exerted by beneficiaries or participants in the activity;

Imposition of unwanted responsibilities upon organizations, administrations or beneficiaries;

4) Inherent risk factors associated with the economic or technical circumstances

Abnormal trends and ratios;

Results intangible or difficult to evaluate;

Activities that are starting up or coming to an end, or are subject to rapid technological change;

Unstable sources of supply and variable prices of inputs (raw materials, etc);

Over-dependence on one supplier (e.g. supplier of equipment has exclusive maintenance contract, is sole supplier of parts and materials, software, etc);5) Inherent risk factors associated with the audited entity

Lack of turnover of personnel and/or personnel not taking holidays in a sensitive department/area;

Activities with which the audited entity has no or limited experience;

Activities that are highly dependant upon a small number of key personnel;

Insufficient staff, or staff and management under-qualified, inexperienced or poorly motivated;

Peaks and troughs in work patterns and information flows;

Utilization of obsolete information technology systems;6) Inherent risk factors associated with the audited entitys management policies and practices

Badly defined or unrealistic objectives;

Strong pressure upon management to produce results, achieve objectives, meet unrealistic deadlines, achieve high rates of budgetary utilization at the year-end;

Short-term budgetary pressures (e.g. delay in undertaking necessary maintenance imposes greater costs later);

Management, supervision and control functions poorly suited to the activity;

Lack of management information system and/or cost accounting system;

Unclear division of responsibilities within and between the various departments;

C. Specific Audit Risks

Illegitimate payments

Compliance with clauses of grant agreements

Misuse and mismanagement of funds

Inadequate control over cash payments and bank payments

Violation of PPRA rules

Proper utilization of development budget

Risks involved in operating expenses:

Illegitimate payments

Improper classification of expenses in the heads of accounts

Improper mode of payment

Improper allocation of expenses

Risks involved in the purchase of physical assets:

Violation of PPRA rules

In adequate measurement

In complete records

In adequate utilization of resources

In adequate disclosureIV. AUDIT APPROACH

The audit approach would include a combination of financial audit and compliance audit. At the preliminary stage, the assessment of internal control system would be performed to identify the weaknesses that would lead to the assessment of audit risk. Materiality level is basically determined at 2 percent of the budgeted amount, but nature of expenditure is also considered. The departments, offices and projects are selected on the basis of

the high budget appropriation

grants subsidies and write offs involved

criticality of audit issues and

sensitivity of core operations

The selection of each DDO of each division for current expenditure and development expenditure is made on the basis of the level of materiality that is established by determining its nature and its amount. The DDOs selected have been mentioned individually and the areas to be focused upon are also mentioned.

The audit approach for efficient and effective would encompass around understanding of the financial reporting and internal control system, checking compliance with applicable laws and regulations and performing compliance testing (test of control) and substantive testing as appropriate. The audit procedures may include any of the following, but are not exhaustive of the all the procedures as some of the procedures may be identified at the time of execution of the audit.

Understanding the client internal control system and identifying internal control weaknesses and audit risks

Issues highlighted in the previous audit reports that are still unresolved

Compliance testing to ensure that applicable policies, rules and regulations and complied with.

Compliance with grant agreement.

Use of sampling to select items for compliance testing and substantive testing

Vouching payments on a test basis and check the payments for accuracy, completeness, valuation and ownership

Compliance of PC-1 document

Checking compliance with PPRA rules for the procurements made during the year.

Comparison of actual expenditure with budgeted expenditure

Prepare analytical procedures and Investigate where actual are more than budget appropriation.

Investigate transfer payments to sub-offices and there utilizations.

Understanding the client internal control system and identifying internal control weaknesses and audit risks

Compliance testing to ensure that applicable policies, rules and regulations and complied with.

Compliance with grant agreement.

Performance audit of ongoing and new PSDPs.

Performance audit procedures, if performance audit needs to be performed:

Identification of cost savings

Identification of services that can be reduced or eliminated Identification of programs or services that can be transferred to the private sector

Analysis of gaps or overlaps in programs or services and recommendations to correct gaps or overlaps

Feasibility of pooling information technology systems within the Department

Analysis of the roles and functions of the department, and recommendations to change or eliminate departmental roles or functions

Recommendations for statutory or regulatory changes that may be necessary for the department to properly carry out its functions

Analysis of departmental performance data and performance measures

Financial, economic and technical appraisal of projects

Identification of best practices.

The understanding of the accounting and internal control system will enable the auditor to 1) identify types of potential material misstatements, 2) considers factors that affect the risk of material misstatements, and 3) design appropriate audit procedures. Therefore, the auditor should obtain an understanding of the accounting and internal control system to identify and understand:

Major classes of transactions

How such transactions are initiated

Significant accounting records and supporting documents

Accounting and financial reporting process, from the initiation of significant transactions and other events to their inclusion in the financial statements.

The audit procedures would include a combination of compliance testing (tests of controls) and substantive procedures (test of detail). The objective of test of controls is to evaluate whether a control operates effectively, whereas the objective of tests of detail is to detect material misstatements.

The auditor is required to perform tests of control when the auditors risk assessment includes an expectation of the operating effectiveness of controls or when substantive procedure do not provide sufficient appropriate audit evidence. The auditor selects procedures to obtain sufficient appropriate evidence that the controls operated effectively throughout the period of reliance. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the risk of the auditors test of controls. In addition, as the rate of expected deviation from a control increases, the auditor increases the extent of testing of the control. The matters that may be considered in determining the extent of the auditors test of controls include the following:

The frequency of performance of control by the entity during the period.

The length of time during the audit period that the auditor is relying on the operating effectiveness of the control.

The relevance and reliability of the audit evidence to be obtained in supporting that the control prevents, or detects and correct, material misstatements at the assertion level.

The extent to which audit evidence is obtained from tests of other controls.

The extent to which the auditor plans to rely on the operating effectiveness of the control in the assessment of risk.

The expected deviation from the control.

The following are the types of controls to test:

Financial reporting controls (including certain safeguarding and budget controls) for each significant assertion in each significant cycle/accounting application,

Compliance controls for each significant provision of laws and regulations, including budget controls for each relevant budget restriction, and

Operations controls for each operations control (1) relied on in performing financial audit procedures or (2) selected for testing by the audit team. The auditor also should understand performance measures controls, but is not required to test them. However, the auditor may decide to test them

Substantive procedures are performed in order to detect material misstatements and include tests of detail of transactions, account balances, and disclosures and substantive analytical procedures. Substantive procedures are generally applicable to large volume of transactions that tend to be predictable over time, which includes a combination of tests of detail and analytical procedures. The auditor designs tests of details responsive to the assessed risks with the objective of obtaining sufficient appropriate audit evidence to achieve the planned level of assurance. In designing the tests of details, the extent of testing is ordinarily thought of in terms of the sample size, which is affected by the risk of material misstatement. However, the auditor may consider the use of selective sampling such as selecting large or unusual items from a population.

In addition to the above mentioned audit procedures, analytical procedures may also be performed that would include analysis significant ratios and trend, consideration of relationships among elements of financial information and considering the relationship between financial information and non-financial information. The auditor will need to consider the testing of controls, over preparation of information used in applying analytical procedures, accuracy and reliability of information available.

Audit approach to address the risks involved in operating expenses:

Illegitimate payments:

The risk could affect the management assertion regarding RIGHTS and OBLIGATIONS.

Document the system for the sanction of expenditure and identify any non compliance from general financial rules.

The expenses are compared against the budget allocations so that excess especially in the utilities and general which includes advertisement and miscellaneous can be critically analyzed.

Ensure that each payment is supported by the proper contract duly approved and authorized by the competent authority.

Ensure that the payments are made against the schedule of authorized expenditure, and the applicable laws and regulation.

Improper classification of the expenses in the heads of the account

The risk could effect the management assertion regarding CLASSIFICATION and PRESENTATION.

Review the details of expenditure, select the sample from each major classification and check the classification according to the new accounting model.

Improper mode of payment.

The risk could effect the management assertion regarding EXISTENCE and OCCURRENCE

Document the system recommended by the accounts manual and check the compliance in the departments/division.

Verify on sample basis the expenditures from the bank statement.

Obtain the list of expenditure paid in cash and obtain their justification.

Improper Allocation Of Expenses

The risk could effect the management assertion regarding VALUATION and EXISTENCE

Ensure with focus on advertisement expenses and miscellaneous whether the expenditure should be classified as capital expenditure or revenue expenditure as detailed in the audit code and IPSAS.

Approaches to address risks involved in purchase of assets:

Violation of PPRA

This risk will affect the assertion of compliance with regulation and inadequate disclosure of facts.

Document the system to call tenders and compare it with the bench mark provided in the PPRA rules.

Inquire non-compliances

In adequate valuation

This risk will affect the assertion of valuation

Check the useful life of the fixed asset and the depreciation rate applied with the market information for similar assets.

Document the criteria for the recognition of the cost and compare it with international standards.

Incomplete records

This risk could affect the assertion of EXISTENCE

Documents the system of recording the assets.

Document the internal control applied on recording the assets.

Check the items from records to ground and vice versa.

Inadequate utilization of resources

The risk will affect the assertion of Rights and Obligation.

Ensure that the assets are maintained properly

Ensure that assets are used for the purposes it is acquired.

Ensure that assets are in the name of the project/department.

Ensure that assets are insured or not.

Ensure that warranty services are acquired when required during the warranty period.

Inadequate disclosure

This will affect the assertion of classification and presentation and disclosure.

Select a sample and ensure that the items are properly disclosed in the correct account as per the classification of New accounting model.

Ensure that the assets are disclosed in accordance with financial reporting manual, and IPSAS.

Types of audits to be performed:

Financial audit

Compliance audit Performance audit (if required)System documentation:

Cash/bank payment and receipts system

Procurement of assets and other items

Payroll

Grant receipt and related expenditure

Transfers

Delegation of powersA system based integrated audit approach is considered so that regularity financial and compliance can be simultaneously performed. The two separate teams are allocated for the same. The audit evidence obtained on the compliance audit corroborates the evidence obtained on financial audit or identifies the critical area for audit. Performance audit, if any will be performed by the same team performing regularity audit.

Audit Approach for the non-development expenditure is discussed in the following paras with respect to separate DDOs.

The verification of employee related expenses will be performed by the financial audit team by applying CAAT.

V. BUDGET ALLOCATIONA.Current Expenditure

The total federal budget for current expenditure amounts to Rs. 2,390,990,000. Grant wise detail is as follows:

Grant No.ParticularsBudget allocation for current expenditure (Rs.)

21Defence division1,730,915,000

22Meteorology308,281,000

23Survey of Pakistan351,794,000

24Federal Government Educational Institutional in Cantonment & Garisson1,181,174,000

25Defence services250,984,241,000

Total254,556,405,000

Function wise and object wise classification of expenditure under each grant is as follows;

Grant No. 21: Defence division (Rs. 1,730,915,000)

Functional classification

Account Codes PARTICULARS Revised Estimates

2006-07

25Defence administration 513,492,000

32Police1,202,977,000

45Construction and transport14,446,000

TOTAL1,730,915,000

Object Classification


2006-07

A01Employee related expenses1,157,276,000

A03Operating expenses291,916,000

A04Employee retirement benefits500,000

A05Grants, subsidies, and write off 7,200,000

A06Transfers1,575,000

A09Physical assets130,220,000

A12Civil works5,916,000

A13Repairs and maintenance136,312,000

TOTAL1,730,915,000

Grant No. 22: Meteorology (Rs. 308,281,000)


Account

Codes PARTICULARS Revised Estimates

2006-07

41general economic , commercial and labour affairs 308,281,000

Object classification

Account Codes PARTICULARS Revised Estimates 2006-07

A01Employee related expenses 231,196,000


A04employee retirement benefits

A05Grants subsidies and written off loan

A06transfers35,000


A12Civil work2,223,000

A13Repairs and maintenance5,808,000

TOTAL308,281,000

Grant No. 23: Survey of Pakistan (Rs. 351,794,000)



2006-07

17research and development general public service 351,794,000



2006-07

A01Employee related expenses 268,953,000


A06Transfers270,000

A09physical assets 16,122,000

A13Repair and maintenance4,436,000

TOTAL351,794,000

Grant No. 24: Federal government educational institutions in cantonment (Rs. 1,181,174,000)



2006-07

91Pre-primary and primary education affairs and services144,122,000

92Secondary education affairs and services 734,384,000

93Territory education affairs and services 229,522,000

96Administration 73,146,000

1,181,174,000



2006-07

A01Employee related expenses1,100,818,000


A06Transfers20,000


A13Repair and maintenance2,451,000

TOTAL1,181,174,000

B.Development Expenditure

The total federal budget for Decelopment expenditure amounts to Rs. 1,055,165,000. Grant wise detail is as follows:

Grant No.ParticularsBudget allocation for current expenditure (Rs.)

133Defence division 1,032,105,000

134Federal Government Educational Institutions in Cantonments and Garrisons 23,060,000

Total1,055,165,000

Function wise and object wise classification of expenditure under each grant is as follows;

Grant No. 133: Defence Division (Rs. 1,032,105,000)

Account Codes Particulars Revised Estimates

2006-07

Pak Rupees

1. Functional Classification

025Defence Administration 75,047,000

032Police 49,559,000

041General Economic, Commercial and labour affairs 140,013,000

045Construction and Transport 767,486,000

1,032,105,000

2. Object Classification

A01Employees Related Expenses 6,313,000

A03Operating Expenses 842,411,000

A09Physical Assets 89,021,000

A12Civil Works 94,310,000

A13Repairs and Maintenance 50,000

1,032,105,000

Grant No. 134: Federal Government Educational Institutions in Cantonments and Garrisons (Rs.23,060,000)

Account Codes Particulars Revised Estimates

2006-07

Pak Rupees

1. Functional Classification

093Defence Administration 20,000,000

097Police 3,060,000

23,060,000

2. Object Classification

A03Operating Expenses 3,060,000

A09Physical assets 20,000,000

23,060,000

The non development expenditure considered for the purposes of the audit are;

DDO codeName of the projectBudgeted amount

For the yearCritical audit areaBudgeted amt. for critical audit area

ID2696PAKSAT PROJECT297,495,000Operating expense- general297,495,000

ID3231Knowhow development and capacity building in satellite engineering an technology85,089,000Operating expense- general85,089,000

ID 3239Human resource development for NSDP55,201,000operating expense- general 55,201,000

VI.ISSUES HIGHLIGHTED IN PREVIOUS YEARS Purchase at higher rates

Irregular / uneconomical expenditure

Irregular expenditure to clear liabilities of previous year

Unauthorized expenditure

Expenditure on purposes for which funds were not legally available

Unauthorized fixing of ceilings of imprest

Suspected misappropriation of government funds

Non-transfer of funds to Federal consolidated Fund

Fraudulent drawl of General Provident Fund advance by SOP employees

Non-reconciliation of expenditure on account of deposit works

Unauthorized deposits of receipts in commercial bank accounts

Audited statement of releases of funds not obtained

Wasteful expenditure

VII.TIME SCHEDULE

Planning10 days

Execution Fieldwork45 days

Reporting 4 days

Holding DAC Meeting28 days

Total87 days

ParticularsDurationStart DateFinish Date

87 days22-Oct-0730-Jan-08

Permanent File5 days22-Oct-0726-Oct-07

Planning File5 days27-Oct-071-Nov-07

Execution45 days2-Nov-0724-Dec-07

ASF Islamabad6 days2-Nov-078-Nov-07

Meteorological Department3 days9-Nov-0712-Nov-07

Survey of Pakistan10 days13-Nov-0723-Nov-07

PAKSAT Project10 days24-Nov-075-Dec-07

Knowhow development and capacity building in satellite engineering an technology10 days6-Dec-0717-Dec-07

Human resource development for NSDP6 days18-Dec-0724-Dec-07

Reporting4 days25-Dec-0728-Dec-07

Prepare AIR3 days25-Dec-0727-Dec-07

Send AIR to PAO1 day28-Dec-0728-Dec-07

DAC28 days29-Dec-0730-Jan-08

Hold DAC meeting21 days29-Dec-0722-Jan-08

Sign Minutes of meeting1 day23-Jan-0823-Jan-08

Complete Working Papers2 days24-Jan-0825-Jan-08

Scan WP Evidence2 days26-Jan-0828-Jan-08

Finalize Audit Report2 days29-Jan-0830-Jan-08

Annexure-A

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