Unit VII

GOVERNMENT AUDITING: CONCEPTS AND

ISSUES

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Learning Outcome:
At the end of this unit, the students should be able to:
 Define the nature of government auditing;
 Explain the different classifications of audit;
 Discuss the audit process;
 Understand the power and function of COA; and
 Identify and analyze the issues and problems in government auditing.

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State/government audit is an ancient and respected branch of state administration. In time, state
audit developed from the need for good government. It evolved from a simple device to prevent ruin in
public finances and chaos in public bookkeeping to an instrument for ensuring open, regular, efficient
and responsive government. State audit thus became closely intertwined with modern government and
public accountability.
In the public finance cycle, auditing comes in after planning, budgeting, implementing, controlling
and reporting phases. However, in some countries, audit is done immediately once the plan is
completed and goes through the culminating activity of government action. In spite of its immediacy in
action, auditing remains in the realm of post audit. As long as it focuses on evaluating management
activities, auditing is never categorized as pre-audit.

NATURE OF GOVERNMENT AUDITING

Definition
 State audit is mainly defined by constitution and law. In the Philippines, state audit is defined by
the “Government Auditing Code of the Philippines (Presidential Decree No.1445) as: “the
analytical and systematic examination and verification of financial transactions, operations,
accounts and reports of any government agency for the purpose of determining their accuracy,
integrity and authenticity and satisfying the requirements of law, rules and regulations and the
managerial norms.
 State audit relies on the provisions of law; its authority and limitations are prescribed by law and
it is conducted in accordance with law. The 1987 constitution and related laws set the scope,
powers, functions and jurisdiction of government auditing. All such laws pertaining to
government accounting and auditing, as well as modern principles of audit policy and practice
have been codified into the Code which took effect on August 7, 1978.
 Fundamental in auditing is its restriction to take the place of internal control system. It is
incumbent on management to institute adequate operational procedures and controls against
irregularities and improprieties and encourage adherence to adopted policies and other
requirements.

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 Auditing in Public Administration
 State audit (along with accounting) may be considered as the control and accountability
component of the fiscal administration cycle.
 As a control mechanism, auditing ensures the proper and legal utilization and
management of fiscal resources in accordance with sound financial management
principles, accounting and auditing standards, and applicable laws and regulations.
 As an accountability component, it seeks to ensure that public officials entrusted with
functions and resources are made responsible for the performance and results of
operations of their office.
 In the fiscal administration cycle, auditing also provides inputs to the next phase which is
planning. Audit reports contain vital information on the results of operations of agencies and
recommendations to improve their performance. For agency officials, these informations are
useful in formulating subsequent plans and targets.
 Auditing certainly can influence profoundly government operations and performance and its
development efforts. It remains for policymakers and the people to appreciate the potentials of
auditing as an active partner for national development.

Responsibility, Accountability and Liability over Government Funds and Property

(based on State Audit of the Philippines, P.D. No. 1445)

Responsibility over Government Funds and Property

1. Government resources shall be utilized efficiently and effectively in accordance with the law. The
head of a government agency is directly responsible in implementing this policy and is primarily
responsible for government resources entrusted to his agency. Those who are entrusted with the
possession of government resources are directly responsible to the head of the agency.
2. All those who are exercising authority over a government agency shall share fiscal responsibility.

Accountability over Government Funds and Property

1. A government officer entrusted with the possession of government resources is responsible for
the safekeeping therefore in accordance with the law. Every accountable officer shall be properly
bonded.
2. The transfer of government funds from one officer to another shall, except as allowed by law, be
made only after the authorization of the COA. The transfer shall be properly documented in an
invoice and receipt.

Liability over Government Funds and Property

1. The unlawful use of government resources shall be the personal liability of the employee found to
be directly responsible therefor.
2. Every accountable officer shall be liable for all losses resulting from the unlawful use or
negligence in the safekeeping of government resources.
3. No accountable officer shall be relieved from liability merely because he has acted under the
direction of a superior officer in unlawfully utilizing the government resources entrusted to him,
unless before the act, he has notified the superior officer, in writing, that the utilization is illegal.
The superior officer shall be primary liable while the accountable officer who fails to serve the
required notice shall be secondarily liable.
4. An accountable officer shall immediately notify the COA for any loss of government funds from
unforeseen events (force majeure) within 30 days. Failure to do so will not relieve the officer of
liability.

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TYPES OF AUDIT
The various types of state audit may be broadly classified as to:

A. As to Timing
1. Pre- audit reviews and examines the financial transactions such as disbursements or any
management decision involving money matters before their consummation of the financial
transaction or payments. It is an integral part of the accounting and payment process. In
instances where the risk of management errors and irregularities is high, pre-audit is adopted as
an auditing control measure in addition to the regular post-audit.
In this, the auditor reviews a transaction (a contract for janitorial services, for example) even
before such services are rendered. The auditor also gives his tentative approval for payment of
the services by the agency.
2. Post-audit is the examination of financial transactions that have been consummated or paid.
This is to determine among others their compliance with legal and regulatory requirements. It
traces the transactions on the books of accounts to ascertain the accuracy of the accounting
entries and may be expanded to embrace the audit of economy and efficiency as well ass
program results.
Under this, the auditor reviews and approves the transaction after the services have been
rendered and payment has been made.

In both cases, the review may consist of:

a. determining whether all relevant laws, rules and regulations have been observed in the
transaction;
b. physical inspection of supplies or equipment;
c. checking whether all necessary documents are submitted and properly accomplished;
d. determining whether the required authority or approval has been secured; and
e. checking mathematical accuracy.

B. As to Organizational Status of Auditor

Related to the lifting of pre-audit and installation of post-audit is the definition of the status of the
auditor.
1. Internal Audit
 mainly a management tool for control and evaluation of agency operations. It is sometimes
referred to as “management audit” and considered a part of the internal control system of an
agency.
 It is basically a continuing management task performed by management personnel. Its
objectives are to achieve regularity, efficiency, economy and effectiveness in agency
operations, especially in large organizations.
 The internal auditors are employees of the organization. They are the eyes and ears of
management and report directly to top officials.
 The internal auditor undertakes an analytical review of balances disclosed in the financial
statements to determine that the information contained in the statements is consistent
internally, with budget accounts, and with those of prior years.
 The audit activities of the internal auditor may be considered as a form of pre-audit, and
under the concept of fiscal responsibility is the primary function of agency management;
thus, internal audit becomes an indispensable tool for exercising such responsibility.

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  R. A 3456 (Internal Auditing Act of 1962) was enacted to provide for the creation of internal
audit services in all departments, bureaus and offices of the national government.
 R. A 4177, enacted in 1965, expanded the coverage of R.A 3456, to include all branches,
subdivisions and instrumentalities of the government and government-owned and controlled
corporations.

2. External Audit
 Performed by auditors external to or independent of the audited organization.
 In the Philippine state audit context, it is the audit performed by the COA auditors. In
commercial audit, it is conducted by independent CPA’s on private business organizations
primarily to express an opinion on the fairness, consistency and conformity of financial
statements to generally accepted accounting principles, for submission to management,
government regulatory agencies, stockholders and other interested parties.
 Under the Constitution, external audit by the COA cannot be replaced by internal audit (or
any private external audit). Only the COA auditor is authorized to conduct government audit.
 External audit as performed by the COA includes a comprehensive review of an agency’s
internal audit services. The COA’s concern over the quality of internal control systems is
based on the fact that the scope and thrusts of external audit is dependent on the adequacy
and effectiveness of internal audit services.

C. As to Audit Scope
1. Compliance Audit
 Compliance audit determines whether or not management’s performance conforms to the
regulatory, legal or statutory requirements.
 Compliance audit is an evaluation of the extent to which the agency has complied with
pertinent laws, policies and rules and regulations in the conduct of its operations. The
auditor tests the agency’s financial transactions and specific program, function or activity to
determine their legality or regularity.

2. Financial Audit
 Financial audit determines whether the financial statements of the auditee organization
present fairly the financial position and the results of financial operations in accordance with
generally accepted accounting principles and standards.
 In the government, financial audit is required by the Constitution. It is implied in the
Constitution provision requiring the COA to submit an annual report on the financial
condition and operation of the national government and its subdivisions, instrumentalities
and agencies, including government corporations. The auditor determines whether the
agency is maintaining effective control over revenues, expenditures, assets and liabilities,
whether financial statements are fairly presented and if financial reports contain accurate,
reliable and useful information.

3. Performance Audit
 Performance audit examines and diagnoses policies, organization and operation of a
government organization. It measures accomplishment with plan, results with standards, and
practice with policy. This objective looks into what is being done and how well it is being
done and matches it with the plans, policies and standards and most important, to
understand the reasons for positive variances or negative deviations from those plans,
policies and standards.

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  It is a constructive examination and evaluation of the financial and operational performance
of an organization, program, function or activity with the objective of identifying opportunities
for greater economy, efficiency and effectiveness in agency operations.
 It entails a broad review and diagnosis of agency policies, organizations and operations. It
includes comparison of plans with accomplishments, results with targets and standards,
practice with policy.
 As an evaluative process, performance audit emphasizes the identification of problems and
the formulation of appropriate solutions for their correction. The auditor recommends such
measures as to improve economy, efficiency and effectiveness.
 Performance audit is conducted on the basis of Section 4, Article IX-D of the Constitution
which requires that the COA shall “recommend measures necessary to improve their
efficiency and effectiveness”. Another statutory basis is found in the State Audit Code.

These three types of audit (financial, compliance and performance) overlap. Put together, the
three types of audit become a comprehensive unit. An audit may vary in scope. Compliance may be
required in every transaction so test of compliance to rules, regulations and laws follows. Financial audit
has legal deadlines but may be undertaken even more frequently as the need arises. Performance audit
at varying extent may be undertaken at longer periods apart from the time of the two other audit or as
directed by proper authority. Therefore, a government unit shall, at certain periods, have varying scope
audits unless a comprehensive audit is conducted.
A comprehensive audit includes the following elements:
a. Fiscal accountability involves fiscal integrity, full disclosure and compliance to applicable laws
and regulations.
b. Managerial accountability is concerned with efficiency and economy and the use of public
funds, property, manpower and other resources.
c. Programme accountability is concerned with whether government programs and activities
effectively achieved the objectives established with regard to costs and results.

THE AUDIT PROCESS

A. The Audit Cycle

The state audit cycle consists of seven phases:

Phase I. Preliminary Survey

The preliminary survey is conducted to acquire a working knowledge of the audited agency and
its legal, policy and administrative environment. The auditor gathers general background information on
the agency and its operations after which he defines the scope of his audit.

Phase II. Review of Legal and Policy Framework

In this phase, the information gathered from the preliminary survey are reviewed in order to
obtain a general knowledge of the legislation and policies applicable to agency objectives, policies,
programs and operating standards.
The auditor establishes the reason for the creation of the agency, its history, delegated
authorities, principal functions and responsibilities, any legal or policy restrictions imposed on its
operations, and the sources and methods of its finances.

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 In the course of his review, the auditor notes any failure on the part of the agency to exercise a
delegated authority which exceeds the limitations imposed on it. In any case, the auditor has to take into
account the spirit or intent of the law.

Phase III. Review and Evaluation of Internal Control System

In this phase, the auditor reviews the procedures and practices actually applied by the agency in
processing its transactions in order to establish:
a. The actual means and methods of carrying out operations;
b. Appropriateness and utility of various steps in the processes;
c. The results of operations or transactions relative to agency objectives, legal and policy
requirements and standards; and
d. The effectiveness of the internal control system and its various components.
At the end of the phase, the auditor is expected to have identified any problem areas which need
further examination in detail.

Phase IV. In-depth Examination of Problem Areas, Data-gathering, Analysis and Evaluation
In this phase, the auditor concentrates on audit findings on the problem areas in terms of:
a. Compliance with or adherence to legal and policy mandate, prescriptions and requirements;
b. Goals and objectives-achievement;
c. Operational efficiency, economy and effectiveness in the use of human, material and financial
resources; and
d. Propriety, accuracy, reliability and usefulness of financial records and reports, including the
effectiveness of control over the latter.
In-depth examination may involve reviewing agency reports, books, files, records and such other
relevant documents and analyzing, evaluating, verifying and confirming their content through inquiries,
inspection or observation.
The auditor develops the factual and documentary evidence to support his audit findings,
conclusions and recommendations. He analyzes the data gathered and determines the causes and
effects of the problems, and their significance to agency operations. He also determines whether the
agency needs to take corrective action and recommend the appropriate solutions.
In the financial aspect, the auditor formulates his findings, conclusions and recommendations
based on his evaluation of how well the agency’s financial statements conform to the accounting
standards against which they have been measured.
The result of this phase forms the basis for the preparation of the draft audit report.

Phase V. Preparation and Presentation of Draft Report

A draft audit report is prepared based on the findings and recommendations formulated in the
previous phase. The report is then presented to agency officials for their review and comments.
An “exit meeting” is held between the auditor and agency officials to discuss reactions to the
findings, conclusions and recommendations in the draft report. An open and frank discussion leads to
agreement on the nature and factual basis of the problems and the measures needed to deal with them.

Phase VI. Finalization of Audit Report

After the meeting, the auditor finalizes the audit report. In writing the final report, he has to
observe certain principles or standards of report writing. The scope of the audit should be stated clearly
and concisely in the report and any limitations should be explicitly mentioned.

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 Findings and conclusions should be adequately supported by factual documentary evidence. The
recommendations should be clearly identified and should be realistic. Previous audit recommendations
which have been unimplemented and the agency’s reason for such, should also be noted.

Phase VII. Follow-up on the Implementation of Audit Recommendations

Audit recommendations should be followed-up. There is always room for improvement in an
agency’s resources and management methods and systems. It is such improvements that will lead to a
full attainment of its objectives and goals or in other words the realization of the 3 E’s of agency
management – economy, efficiency and effectiveness.

B. General Objectives, Principles and Standards

General Objectives
There are many objectives of state audit and all these relate to the concept of public
accountability. Public accountability is central to government audit as it is anchored on the tenet that
public officials, as stewards of public office, must give a full and public accounting of the manner with
which they utilize the powers and expend the resources entrusted to them. State auditing thus occupies
a central role in its enforcement for it must verify, examine, evaluate, review and attest to such
stewardship.
Establishing accountability for compliance with applicable laws, policies, rules and regulations is
another objective of state audit. Through financial and compliance audits, state audit aims to determine
whether public officers have utilized their powers, authorities and funds in accordance with legal, policy
and reglementary requirements and limitations.

Specific Objectives
The specific objectives of state auditing also include the following, as enunciated in the Lima
Declaration of Guidelines on Auditing Precepts (Annex I):
a. Proper and effective use of public funds;
b. Development of sound financial management;
c. Orderly execution of administrative activities; and
d. Communication of information to public authorities and the public through publication of audit
reports.

Audit Principles and Standards

Audit principles and standards serve to guide the auditor in conducting his audit with integrity,
objectivity, independence and efficiency.
Audit standards deal with the quality with which the audit is performed based on the professional
and ethical qualifications of the auditor and his exercise of judgment in the course of audit. On the other
hand, audit procedures are the various methods used in obtaining evidence and the steps followed in
accomplishing the audit. Audit techniques are ways and methods of gathering evidence and
information; in a sense, a combination of procedures comprise an audit technique. Audit procedures
and techniques form part of an audit program which is a program of action specifying the audit
objectives, the scope or coverage and the audit procedures and techniques to be used.

THE COMMISSION ON AUDIT

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 The Commission on Audit (COA) is the Philippines' Supreme Audit Institution. The Philippine
Constitution declares its independence as a constitutional office, grants it powers to audit all accounts
pertaining to all government revenues and expenditures/uses of government resources and to prescribe
accounting and auditing rules, gives it exclusive authority to define the scope and techniques for its
audits, and prohibits the legislation of any law which would limit its audit coverage. In essence, the COA
is the official external auditor of the government.

Legal Framework of the COA

a. The 1987 Constitution of the Philippine (Part D, Article IX) mandates the keeping of government
accounts, the promulgation of accounting rules, the audit of financial reports, and the
submission of reports covering the Government’s financial operations and position.
b. The State Audit Code (Presidential Decree No. 1445) codifies all existing laws on government
auditing and outlines the organization of the COA. It specifies COA’s powers and
responsibilities which include prescribing accounting and auditing rules and regulations
whenever the reporting requirements of the Budget Commission pursuant to a budget law affect
accounting functions; regulating the requirement for, and the submission of accounting report;
etc.
c. The Administrative Code of 1987 embodies the major structural, functional and procedural
principles and rules of governance.
d. The 1977 Budget Reform Decree (Presidential Decree No. 1177) defines government as being
the national government, including the Executive, the Legislature, the Judiciary and the
Constitutional Commissions.
e. Delineating Primary and Joint Responsibilities of Government Wide Service Agencies and
Establishing the Mechanism Thereof (Presidential Decree No. 1376), specifying the primary
responsibilities of government wide service agencies with respect to the following activities:
Audits, Management Consultancy, Training, Debt Recovery, Accounting and Staffing.

Powers and Authority

The authority and powers of COA to audit are directed to the following entities:
 National Government
 Political subdivisions, agencies and instrumentalities
 Government-owned or controlled corporations, their subsidiaries, other self-governing
boards, commissions, or agencies of the government
 Non-governmental entities subsidized by the government
 Entities funded by donations through the government
 Entities required to pay levies or government share
 Entities for which the government has put up a counterpart fund or those partly funded by
the government
 At COA’s initiative, the audit confined only to funds or subsidies which come from or
through the government:
o non-government entities subsidized by the government
o those required to pay levies or government share
o those which have received counterpart funds from the government or partly funded
by donations through the government
o non-government entities, upon Presidential direction, whose loans are guaranteed
by the government, the audit to be confined only to the government’s contingent
liability.
COA’s Function

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 1. Auditorial – includes audit and examination through pre-audit and post-audit services, and
settlement of accounts or liabilities;
2. Rule-Making – exclusive authority to determine its scope of audit and examination and
formulate accounting and auditing rules and regulations;
3. Reportorial – submission of reports to heads of audited agencies, the President and
Congress, and such other reports as required by law;
4. Limited Accounting Function – keeping the general accounts of government by accounting
for transactions affecting the overall cumulative results of operation or the current surplus of
the national government;
5. Custodial – management and custody of the general accounts of government, custody of
funds from tax refunds and preservation of vouchers and other supporting papers pertaining to
the general accounts;
6. Quasi-Judicial – decision making on compromise claims, request for relief from
accountability and constructive distraint on property; initiation of criminal/malversation cases
with Sandiganbayan; issuance of opinion on queries;
7. Recommendatory – recommends measures to improve efficiency and effectiveness in
general government and agency operations;
8. Other Functions – deputization of private licensed professionals to assist government
auditors; participation in inventory of assets and properties; membership in policy study
bodies.

To enable it to effectively carry out these various functions, the COA is organized as a
constitutional commission, one of the very few audit bodies in the world so organized. As such, it may
be considered, together with other constitutional bodies, as comprising the “fourth branch” of
government.

Organization
 The Chairman and two Commissioners collectively comprise the Commission Proper (CP)
which is the highest policymaking body of the COA. The CP exercises its powers and authority
collegially, not individually by any or all of the members of the CP. It has the authority, among
other powers, to act on any appeal brought before it for final resolution. Its decision is
appealable only to the Supreme Court on certiorari. The Chairman is both the presiding officer
of the CP and the chief executive of the Commission. By legal definition, the Chairman and two
Commissioners compose the Commission on Audit.
o There shall be a Commission on Audit composed of a Chairman and two
Commissioners, who shall be natural-born citizens of the Philippines and, at the
time of their appointment, at least thirty-five years of age, certified public
accountants with not less than ten years of auditing experience, or members of the
Philippine Bar who have been engaged in the practice of law for at least ten years,
and must not have been candidates for any elective position in the elections
immediately preceding their appointment. At no time shall all Members of the
Commission belong to the same profession.
o The Chairman and the Commissioners shall be appointed by the President with the
consent of the Commission on Appointments for a term of seven years without
reappointment. Of those first appointed, the Chairman shall hold office for seven
years, one Commissioner for five years, and the other Commissioner for three
years, without reappointment. Appointment to any vacancy shall be only for the

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 unexpired portion of the term of the predecessor. In no case shall any Member be
appointed or designated in a temporary or acting capacity.
 Because the COA audits each and every government entity nationwide, it has a decentralized
organization. It has a resident auditing unit in almost every agency or office. The unit is headed
by a resident auditor who is assisted by assistant auditors, audit examiners and audit aides.
The COA resident auditor is possessed with full authority and powers needed by him to properly
perform his duties. His decision is however appealable to the provincial/city or regional director.
 Provincial and city auditors supervise the resident auditors in their respective areas. They are in
turn supervised by regional offices in each of the country’s administrative regions, which
function as “mini Commissions”. Headed by Directors, they supervise and control the
implementation of auditing rules and regulations in agencies within the region; review, analyze
and consolidate audit reports, and exercise authority on internal administrative, planning,
financial and legal matters within their respective areas of jurisdiction.
 The COA central offices in Quezon City supervise and control the regional offices. The
“operating offices” – Corporate Audit Offices I and II, Local Government Office and the National
Government Audit Offices I and II, formulate standards and plans for the implementation of
accounting and auditing rules and regulations in their respective sectors.
 The Accountancy Office prepares the annual financial report of the national government and
verifies appropriations of and controls funds released to national government agencies.
 The Special Audit Office (SAO) conducts special audits.

 The Technical Services Office develops auditing systems, renders consultancy services
pertaining to auditing, accounting and internal control systems and reviews infrastructure
contracts and projects.
 The support offices include the Legal Office; State Accounting and Audit Development Office;
Planning, Financial and Management Office and Administrative Office.

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ISSUES AND CONCERNS OF STATE AUDITING
The Proper Role of the COA
 In the Lima Declaration of Guidelines in Auditing Precepts, the role of the SAI is that of a
“corrective power”. There is also the popular belief that the COA is a financial policeman, the
guardian of public office or the watchdog of the treasury whose function is to stop any and all
misuse of public funds.
 Thus, there is the pervasive notion, even among the COA auditors, that COA audit alone can
effectively do the job. It is often the case that professionals strictly demarcate their mandates and
responsibilities from each other and to preserve their professional turf engage in “professional
rivalry” that only result to lack of coordination and cooperation. In a larger perspective, there is
within government itself the phenomenon of “institutional jealousy” among the control and
oversight bodies.
 Some would claim that this overarching role is impossible to realize and has become a major
reason for the ineffectiveness of the COA. It is argued that the auditor is only one of the
guardians of the people’s money; the others are the budget officer, the treasurer, the internal
auditor, the accountant, the controller. The members of the Congress, too, have an important role
in preventing abuse of the public purse.
 At the forefront is the agency head himself who bears the primary responsibility for the proper use
of the authority and the resources that go with it. It is a basic principle that “fiscal responsibility
rests directly with the chief or head of the government division, agency or instrumentality.
 The role of the COA is to determine whether such fiscal responsibility has been properly and
effectively discharged. The agency management has the prime duty to protect the financial
interest of the government. The agency head is expected to exercise the diligence of a good
father of family over the resources entrusted to his agency. The state auditor, for his part, should
leave management alone to discharge such responsibility. His concern is to establish system of
fiscal oversight and control and to see to it that these systems are working. This role thus brings
to fore the need for COA auditor himself to appreciate such role in the total financial management
system.
 There is the common perception that the primary purpose of the auditor is fault-finding. This also
beclouds the proper role of the COA. The COA’s role is to assist government achieve more
efficient and economical operations, and formulate and implement programs that will effectively
attain the avowed social and economic development goals of the country.
 The proper role of the COA as an institution should develop within the context of how auditing
could effectively contribute to the cause of good government and national development. There is
need for the COA to situate its role in the various concerns affecting not only fiscal management
but also the larger issues of national development.
 The COA is part of the public administrative system for governance and development
administration. It is recognized that within this system, its institutional development is strongly
influenced by political and socio-economic factors. COA is constantly subject to the vagaries of
national priorities and considerations that are beyond its control. At the same time, it is pressured
to keep pace with a fast-paced world of technological improvements and sophistication in the
functions and systems of government.
 State audit is constantly striving to remain relevant in times. In the Philippines, its role has
undergone a dramatic change in the last five decades. The challenge is for it to remain deeply
rooted in the cause of what is best for the people.

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The COA’s Independence
 One critical ingredient of COA’s effectiveness is its institutional independence. The COA can only
fulfill its mandate and functions if it is independent of the audited entity and is protected against
undue outside influences.
 The COA was converted by the 1973 Constitution from the then General Auditing Office (GAO)
into a constitutional commission. As such, it is treated as a body separate from the executive,
legislative and judicial branches of government. Its status and independence are guaranteed by
no less than the constitution. It is recognized, however, that its independence is not absolute.
Being part of the State, it could not be independent of all public authorities.
 The institutional independence of the COA is inseparably linked to the independence of its
members. Presently, the leadership of the COA is a Commission Proper composed of a
Chairman and two Commissioners. Such collegial composition is intended to minimize the
opportunities to succumb to strong outside pressures. It is envisioned that the powers and
authority of the Commission Proper are to be exercised collegially, not individually by any or all of
the members of the CP. The COA leadership is also protected from external pressures by the
constitutional provision that the Chairman and the Commissioners cannot be removed from office
except by impeachment.
 The COA likewise is imbued by the Constitution with the mandate and power to exercise
institutional independence. The 1987 Constitution has seen fit to reiterate the state policy giving
fiscal responsibility to agency management. Fiscal responsibility means that the COA does not
have the power or authority to withdraw, disburse or use funds and property pertaining to other
agencies or instrumentalities of government. What the Constitution mandates the COA is the
authority to audit, examine and settle accounts of agencies and offices. Such interpretation has
been upheld in jurisprudence.
 Another important ingredient to independence is fiscal autonomy. The COA is granted by the
1987 Constitution with fiscal autonomy. This includes the authority to augment any item in its
budget from agency savings without need of presidential approval, the automatic release of its
appropriations and the like. However, its budget goes through the same process of budget review
and approval by the executive and legislative offices as with the other agencies of the
government. This opens the COA to external pressures.
 A legal framework can only provide the minimum condition for institutional independence. It is
also important to recognize the political environment within which the COA operates. The COA is
subject to the interplay of political actors in the political system. On the other hand, a strong
commitment and support from the political actors to the cause of effective auditing invariably
encourages the audit institution to function with independence and effectiveness.
 The professional, moral and ethical qualities of the COA auditor must also be considered. It is at
the level of the individual auditor that the challenge of maintaining independence from the audited
agency is more daunting.

Performance Auditing
 Experiences in countries conducting performance audit point to the salutary effect of such audit
on how plans are formulated, how programs are executed, and how available fiscal resources are
budgeted and expanded.

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  Performance auditing became a mandate of the COA in 1973 by virtue of a provision in the 1973
Constitution requiring it to recommend in its audit reports “measures necessary to improve their
agencies efficiency and effectiveness”. The same provision was adopted in the 1987 Constitution.
 The COA started performance auditing in mid-seventies with the creation of a Performance Audit
Office. Performance audit was expanded and strengthened as part of comprehensive unit.

Constraints to the full practice of performance auditing

 Accountability for efficient, economical and effective operations or program accountability as it
is sometimes called is a relatively new field of auditing and is not usually incorporated in the
financial systems of agencies.
 Present accounting systems do not use cost accounting so that performance audit which
measures input-output relationships in terms of cost in its efficiency and economy tests cannot
be conducted. The lack of timely, adequate and comprehensive accounting data hinders the
development of criteria.
 Present budgeting system uses the line-item budgeting. Most agencies have vague and
generalized program objectives, plans and targets. This poses a formidable constraint since a
basic requirement of performance auditing is the clarity of the objectives and targets of plans
and programs.
 Agency plans and programs have no clear standards by which results could be evaluated. This
forced the COA to develop the standards by itself.
 There are conceptual problems in measurement. In resource allocation for instance, the auditor
cannot conclusively determine whether the public welfare is improved by spending more for
health or for education. The conduct of performance auditing requires an adequate financial
audit to include in its evaluation the assessment on the profitability, capital budgets and
expenditures particularly in the case of public enterprise.
 Performance audit also requires special qualifications of the auditor. Performance audit
necessitates multi-disciplinary academic preparation and experience in general fields such as
public administration, economics, law and so on. This is inevitable since performance audit on
government covers the whole gamut of government operations in diverse sectoral concerns.
The professional preparedness of the government auditor inevitably becomes an issue.
 The greatest resistance to performance auditing is attitudinal. To agency officials, performance
auditing necessarily subjects their policy and operational decisions to scrutiny and judgment.
Performance audit may also be an unwarranted encroachment on their management
prerogatives and discretion over agency affairs. On the part of the auditor, performance audit
may represent a loss of power and prestige, not to mention privileges. The auditor may not
easily abandon financial and compliance audits which have long been the source of control over
agency affairs.

Who Audits the Auditor?

 “Who will guard the guardians?” is a classic dilemma that the public is faced with, considering the
tremendousness of the power and authority vested in the COA.
 The COA itself is audited by a COA resident auditor, who is appointed by the COA Chairman.
The audit of the COA by its resident auditor, however, does not require approval by the
Chairman. He is given under the State Audit Code with all the authority and powers needed by
him to properly exercise his audit responsibilities. His relationship with the COA Chairman is just

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 like the relationship of any other resident auditor with the head of the agency under his audit
jurisdiction.
 In this way, the COA auditors are also audited and the COA Chairman and the Commissioners
are made accountable to the people, as the Constitution requires.

STUDENT ACTIVITY
(UNIT VII – Government Auditing: Concepts and Issues)

Name Student ID Number Date

Address CP Number Score

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Essay:
1. What is internal audit and explain why it is necessary.
2. Discuss the steps before an audit process.
3. What is the role of the Commission on Audit (COA) and its auditors in the scheme of
Governance?

Reaction Paper
COA has recently re-imposed pre-audit on selected transactions and agencies. Visit the
Accounting Office of your agency and interview personnel concerned on their personal views on the
pros and cons of pre-audit.

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References:

 Briones, Leonor M. (1996). Philippine Public Fiscal Administration. Fiscal Administration

Foundation, Inc.
 Catli, Roberto B. Public Fiscal Administration Module. Polytechnic University of the Philippines
(retrieved in https://scribd.com)
 Presidential Decree No. 1445 (Government Auditing Code of the Philippines) retrieved in
www.scribd.com.
 Commission on Audit. (1999). Looking Back, Moving Forward (The Story of the Commission on
Audit)
 Ursal, Sofronio B. (2008). Philippine Government Auditing. The Government Auditing Code as
Amended by Administrative Code of 1987 Philippine Constitution.
 https://www.coa.gov.ph
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Learning Material in Public Administration 6 | Public Fiscal Administration

Learning Material in Public Administration 6 | Public Fiscal Administration