This document discusses public sector auditing. It defines auditing as an independent examination of an organization's operations, processes, and products. The document outlines the objectives of auditing as expressing an opinion on whether financial statements accurately reflect an entity's affairs and results. It also distinguishes between external audits, conducted by outside auditors, and internal audits, performed within an organization. The document provides historical context on the origins of auditing and compares accounting and auditing. It describes the main objective of an audit is to express an opinion on whether financial statements provide a true and fair view, while subsidiary objectives include detecting fraud and advising on internal controls.

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7.0 TOPIC 7: PUBLIC SECTOR AUDITING
7.1 Session Objectives
The objective of this session is to explain the basic understanding of the term audit, roles of
External and Internal Audit Function (IAF) and its position in the public sector as per the legal
requirements, with emphasis in Tanzania. Specifically, at the end of the session participants
should be able to:
 Define the term audit and its types i.e. external and internal audit;
 Explain the legal basis for the establishment and need for the External and Internal
Auditing Function in an Organisation;
 List and explain the roles played by the External and Internal Auditing Function in
achieving organisation’s objectives;
 Explain the Internal Control Structure in the Public Sector;
 Explain the meaning of Value for Money (VFM) Audit and its importance in the public
sector.
7.2 Origin of Auditing
The word audit is derived from the Latin word “Audit” which means to hear. In the past the
businessmen used to go to a person who had a fair knowledge of accounting to get his opinion
about the correctness of the accounts on the basis of hearing on what was read before him. Any
questions raised were answered on the spot and after that the accountants were considered heard
or audited.
The role of the auditor also goes to hundreds of years. There are records from ancient Egypt and
Rome, showing that people were employed to review work done by tax collectors and estate
managers.
The origin of auditing is somewhat to observe (unknown). It is known however the system of
check and counter check existed from early times in connection with public accounts.
Before the 15th
C it is likely that the businessmen were not in favour of accounts be checked by
the others because of secrecy and they didn’t like to disclose their profits to others. Moreover the
businesses were so small that people didn’t feel a need to get the accounts audited by others.

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During the 15th
C when the growth of trade and commercial activities resulted in the evaluation of
the fairly complete system of accounts for merchantile transactions, the responsibility of the
auditors were considerably increased. Initially audits were performed mostly at request of
business owners who wished assurance that the book-keeping had been accurately handled and
that all cash was properly accounted for.
With declaration of partnerships audits also become useful in determining the amount of profits
to be distributed to the partners. However the audit of accounts didn’t become common until
19th
C when companies were distinct from the Internal Management.
The owners wanted to know whether these economic resources have been properly used for the
business. Also, whether the interests of owners have been protected.
7.3 What is Auditing
Auditing defined as an independent examination and systematic, structural evaluation of a
business organization, the operations therein and the products and processes within the business
system
In its original definition, auditing is an independent examination of the books of account and
vouchers of an entity with a view to enable the auditor to report whether the financial statements
show a true and fair view of the state of affairs of the entity and the financial results as shown by
the profit and loss account given a fair view to the best of information and explanations obtained
by the auditor.
According to A.W. Hauson “an audit is an examination of such records to establish their
reliability and the reliability of statements drawn from them”.
According to Lawrence R. Dicksel “An audit is an examination of accounting records undertaken
with a view to establishing whether they correctly and completely reflect the transactions to
which they relate. In some instances it may be necessarily to ascertain whether the transactions
themselves are supported by the authority”.
In the beginning people thought the objective of auditing was to detect errors and frauds which
have taken place within an organization. An auditor has to carry on his examination of book of
account. In order to do this he has to plan his work.
 He should know the various activities carried on by an organization.
 By whom those activities are carried on (Organization chart).
 What type of controls are there and these will enable him to make substantive tests after
which he/ she will start by random sampling of the activity.
In summary, auditing is a systematic process of objectively obtaining and evaluating evidence.
Evidence is evaluated regarding assertions about economic actions and events of an organisation.
This leads to ascertainment of the degree of correspondence against established criteria and
communicating the results to interested users. Thus the term Auditing means:

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From the above definition, auditing possesses the following key characteristics:
 Unbiased orientation toward the subject under audit.
 Use of systematic processes to collect and analyze information.
 Comparison to criteria for formulating conclusions. Examples of criteria include laws and
regulations; standards; goals/targets and benchmarks i.e. best practices.
 Use of widely accepted professional audit standards.
Through these key features, auditing derives its credibility of providing independent and
objective recommendations hence adding value to organisations regarding improvements on
controls, risk management systems and governance processes.
7.4 Types of Audit
There are two key types of audit viz- external and internal audit.
7.4.1 External Audit (EA). It is the type of audit which is conducted by an external audit body
i.e. external to the organisation. EA is generally an audit of financial statements normally
conducted at the end of the year i.e. on annual basis. It is the examination by an
independent third party of the financial statements of the organisation. It results in the
publication of an independent opinion on whether or not those financial statements are
relevant, accurate, complete, and fairly presented.
7.4.2 Internal Audit (IA). It is the type of audit which has its unit within the organisation. It is
conducted on regular basis within the organisation. IA is both an assurance and a
consulting activity designed to add value and improve organisation’s operations in the
areas of risk management, control, and governance processes. It results in the production of
periodic internal audit reports normally on quarterly basis.
7.4 Objectives Auditing
In the beginning, the objective of the audit was to ascertain whether the book-keeping had been
properly handled or not and that all the cash was properly accounted for. However, gradually
with the increase in the scope of auditing, the objectives of the auditing can be classified into two
categories:
(1) Main objective (express opinion or reporting)
(2) Subsidiary objective.
“Auditing” serves an accountability relationship. It is the independent, objective
assessment of the fairness of management’s representations on performance or the
assessment of management’s systems and practices, against criteria, reported to a
governing body or others with similar responsibilities.

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The main objective of an audit is an independent examination of the book of account and
underlying records of an entity and to “express opinion” based on reliable evidence on the
financial statements of the entity whether or not the financial statements give a true and fair view
of the state of affairs at the end of accounting period under review and to report on any material
inconsistencies between the directors reports and the financial statements.
Subsidiary objectives: the audit work is planned by the auditor in such a way in case there are
frauds or irregularities they are exposed.
During the cause of his examination, in case weaknesses are noticed in the system of internal
control, it is the duty of an auditor to advice the management on strengthening the internal
control system to make it effective. If the financial statements do not adhere to the Acceptable
Accounting Standards or there is inconsistencies in applying the accounting principles or bases
or policies all these should be exposed.
Note: The concept of true and fair view has been authoritatively defined as follows:
“… true and fair has become a term of art. It is generally understood to mean a
presentation of accounts drawn up according to accepted accounting principles using accurate
figures as far as possible and reasonable estimates otherwise, and arranging them so as to show
within the limits of current accounting practice as objective a picture as possible free from
willful bias, distortion, manipulation or concealment of material facts” (Lee).
In simple words, auditors should ensure that information is impartially presented and is clearly
understandable to achieve the statutory true and fair view.
Comparison of Accounting and Auditing
S/N ACCOUNTING AUDITING
1. Accounting is an art of recording, classifying,
summarizing, interpreting and reporting financial
information of a business to enable users of the
same perform informed judgments.
Auditing is an independent examination of
the books of account and vouchers of an
entity with a view to enable the auditor to
report whether the financial statement show a
true and fair view of the state of affairs of the
business entity
2. It is concerned with the maintenance of books of
account and preparation of financial statements.
It is an examination of completed records.
3. It is concerned with the preparation of financial
results and the financial position of the entity for the
accounting period.
It ascertains whether or not the financial
statements show a true and fair view of the
financial position and financial results for the
accounting period.
4. The accountant prepares the financial statements Auditor expresses opinion on financial
statements.

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7.5 Categories of Audit
Both internal and external audits involve examination/review process which may comprise of
three key forms or categories of audit namely:
 Financial Audit- the analysis of the economic activity of an entity as measured and reported
by accounting methods.
 Compliance Audit- the review of both financial and operating controls and transactions to
see how well they conform with established laws, regulations and standards.
 Operational Audit- the comprehensive review of unit activities, systems and controls within
the organisation to reach economic, efficiency, effectiveness or other objectives.
Each of these auditing forms may be performed by the external or internal auditors. The only difference
will be the emphasis regarding nature and objectives of these two types of audits.
7.6 The Importance of Auditing in Public Sector Organisations
Auditing is an important function to Public Sector Organisations (PSOs) as it supports the
governance roles of PSOs in respect of oversight, insight and foresight as explained below:
 Oversight –Auditing assists decision makers in exercising oversight by evaluating whether
PSOs are doing what they are supposed to do i.e. using resources for the intended
purposes/objectives, complying with laws and regulations, designing and implementing
effective internal control systems to minimize risks etc.
 Insight –Auditing provides insights to PSO management team with areas which need
improvements in their day to day managerial functions. Example, improvement in internal
control systems, governance processes etc.
 Foresight – Auditing helps PSOs to look forward by identifying trends and bringing
attention to emerging challenges before they become crises. Through risk –based audit
approaches, auditing identifies potential risks such as possible occurrence of frauds, thefts,
etc.
o By focusing on foresight, auditors play a key role in helping PSOs to understand,
initiate and implement risk management systems which provide assurance for
successful achievement of objectives.
Overall, through these roles, auditors protect core PSO’s values. They further help in ensuring
that PSO officials conduct their responsibilities or work transparently, fairly and honestly with
equity and probity.
.

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7.7 An Overview of External and Internal Audit
This section presents an overview of external and internal audit.
7.7.1 External Audit
External Audit is generally an audit of financial statements. It is the examination by an
independent third party of the financial statements of the organisation. It results in the
publication of an independent opinion on whether or not those financial statements are relevant,
accurate, complete, and fairly presented.
Hint
External audit emphasis is on the fairness of financial representation. It results on an
independent opinion regarding fairness of the financial statements.
External audit exists to add credibility to the financial transactions undertaken by the
organisation. It assures stakeholders that the financial statements fairly represent the
organisation's position and performance during a stated period. It is normally carried out on
annual basis by National Audit Office (NAO) and/or other professional registered auditing firms.
In the context of the public sector which represents a principal-agent relationship, auditing
provides an independent and objective assurance between the two. See also diagram 1 below:
Diagram 1: Principal-Agent Relationship and the Role of Auditing
Principal Owners and/or providers of resources i.e. in LGAs are the government and
taxpayers represented by the electorates (Councillors).
Agent Officials (LGA management team) entrusted to use resources on behalf of the
Principal. They must periodically account to the Principal on the use of resources.
Auditors Third party to the Principal-Agent relationship. They must provide assurance to the
AUDITORS:
 Independent
 Objective
PRINCIPAL
Accounting
of
Accomplishment
Resources
Authority
AGENT
T

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Principal on whether the Agent’s reports and other systems in place are correct,
accurate and/or reliable.
External auditors normally end their work by providing opinion (report) on the fairness of
financial statements of the organisation. The opinions provided by the auditor are mainly in two
forms:
(a) Unqualified Opinion
Here the external auditor is satisfied that the financial statements present “True and Fair View”
of the state of affairs of the organisation. That is, there was consistency in adhering to laid down
rules and regulations and insignificant material misstatement in the financial statements.
The typical opinion of an external auditor will be stated as follows:
In my opinion, the financial statements of the XYZ PSO have been prepared
based on the generally accepted accounting standards; and that they fairly reflect, in
all material respects, the results of its operations and cash-flows for the year ended
on 30th
June 20XX, and the financial position as at that date.
(b) Qualified Opinion
Qualified opinions are issued based on the degree of departure from prescribed rules, regulations,
generally accepted principles and material misstatements. They fall under the following
categories:
(1) Qualified Opinion with “Subject to” or “Except for”
Where the auditors have found some departure from prescribed rules, regulations, generally
accepted principles and material misstatements BUT the departure is not significant, they issue a
qualified opinion. i.e clerical mistakes which do not impact on making sound decisions based on
the financial statements.
The typical opinion of an external auditor will be stated as follows:
In my opinion, except for the following matters, the financial statements of
the XYZ PSO have been prepared based on the generally accepted accounting
standards; and that they fairly reflect, in all material respects, the results of its
operations and cash-flows for the year ended on 30th
June 20XX, and the financial
position as at that date.

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(2) Adverse Opinion
In this case, the departure from prescribed rules, regulations, generally accepted principles and
material misstatements is significant. Financial statements can not be relied upon for making
sound decisions. Examples include significant sums of missing payment vouchers, non- banking
of cash receipts, frauds and/ or misappropriation of funds etc.
The typical opinion of an external auditor will be stated as follows:
In my opinion, the financial statements of the XYZ PSO do not present fairly
the results of its operations and cash-flows for the year ended on 30th
June 20XX,
and the financial position as at that date.
(3) Disclaimer Opinion
In this case, the scope was limited- books of accounts were not provided for audit etc. Thus the
auditor can not form any opinion on the financial statements of the organisation.
The consequences of audit opinions
(i) Unqualified and qualified opinions- Stakeholders can rely and make decisions based on
the information contained in the organization’s financial statements.
(ii) Adverse and Disclaimer opinions- Stakeholders can not rely and make decisions based
on the information contained in the organization’s financial statements
Tips and Hints
S/N Tips and Hints on External Audit in Organisations O.K
1 External audit is generally an audit of financial statements of the
organisation by an independent third party
2 External audit adds credibility of the financial transactions undertaken by
the organisation
3 External audit work ends with a report/ opinion regarding the fairness of
financial statements of the organisation
4 The audit opinions issued by the external auditors are mainly in two
forms: clean or unqualified and qualified opinion
5 The audit opinions issued by the external auditors on financial statements
of the organisation have consequences on reliance by stakeholders
Exercise: Describe the types and effects of the main audit opinions issued by external
auditors on financial statements of an organisation.

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7.7.2 Internal Auditing
The definition of internal audit has changed many times. This is due to the need to adopt the
profession to the changes in the operating environment.
The Institute of Internal Auditors (IIA, 1999) provides for the working definition of internal
audit as follows:
“Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. It helps an organisation accomplish its objectives
by bringing a systematic, disciplined approach in evaluating and improving the effectiveness of
risk management, control, and governance processes.
This definition points out the following key issues on Internal Audit Function (IAF):
 It is an objective activity- i.e. it can be provided in-house or be outsourced.
 It is an assurance and consulting activity- i.e. encompasses audit and non-audit services
to management.
 Its scope is not just financial but it is concerned with key issues in control, risk
management, and governance. The auditing process can be illustrated using the flowchart
below:
The key steps of an auditing process involves establishing what the internal audit unit is going to
audit in a given year or longer period (planning); implementing the approved audit plan by
gathering evidences through field work (conducting) and lastly, accounting for the results
achieved through the implementation of the audit plan (reporting).
Hint
The existence of internal audit function in the organisation is a must. It
ensures that the organisation achieves its objectives. It brings comfort to the
management of the organisation. It ensures that internal controls in place are working.
Also, the regulations that are in place are being followed.
Differences between External and Internal Audit
The difference between external and internal audit is as summarized below:
S/N Internal Auditor External Auditor
1 An organization employee. An independent contractor.
2 Serves needs of the organization. Serves third parties who need reliable financial
information.
3 Reviews all operations and controls
in an organization for efficiency,
economy and effectiveness.
Reviews statements of financial position, financial
performance, changes in net asset/equity and cashflow
statements. Reviews operations and internal controls to
determine scope of examination and reliability of

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S/N Internal Auditor External Auditor
financial data.
4 Is directly concerned with the
prevention of fraud in any form or
extent in any activity audited.
Is incidentally concerned with the prevention and
detection of fraud in general. He is directly concerned
when financial statements may be materially affected.
5 Is independent of the activities
audited, but is ready to respond to
the needs and desires of all elements
of management.
Is independent of management and full council both in
fact and in mental attitude.
6 Reviews activities continually i.e.
on regular basis.
Reviews records supporting financial statements
usually once a year.
7 Internal Audit reports are for use
only by management.
External Audit reports are usually public documents
which are available to stakeholders.
8 Internal Audit reports provide
conclusion and recommendations.
External Audit reports express opinion and provide
recommendations
Hint
The external auditor puts more reliance on the organisation’s operations if
there is a strong and effective internal audit department.
7.8 Legal Basis and Need for both External and IAF in Public Sector in
Tanzania
7.8.1 Regulatory Environment of External Audit in Tanzania
The following are the key laws and standards that govern the regulatory environment of external
audit in Tanzania:
 The Constitution of the United Republic of Tanzania (1977) as revised from time to
time –Article 143 of the Constitution establishes and provides for the responsibilities of the
CAG as statutory auditor of public accounts i.e. MDAs, LGAs and other Parastatal
Organisations. Note: The National Audit Office (NAO) is the responsible organ for auditing
government departments and institutions in Tanzania (i.e MDAs and LGAs)
 The Public Audit Act (2008)- Sec 10 also establishes and provides for the responsibilities of
the CAG as statutory auditor of public accounts.
 The Public Procurement Act (2011) –Sec 48(3) which requires the external auditor of
every public body to state in his annual report whether procurement entities have complied

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with the procurement laws and regulations regarding procurement of goods, works or
services.
o As per ISSAI 1700, the audit opinion is included under “Report on other Legal and
Regulatory Requirements’
International Standards of Supreme Audit Institutions (ISSAIs) which provide professional
guidance in the conduct of audit processes and procedures. NB: ISSAIs Guidelines are freely
available from the Institution’s website
7.8.2 Regulatory Environment of Internal Audit in Tanzania
The regulatory environment of internal audit in Tanzania’s PSOs is governed by a number of
laws, regulations, circulars and standards as explained below:
(i) Local Government Finance Act No.9 of (1982) i.e. section 45 (1) of the Act requires
establishment and maintenance of an Internal Audit Function in LGAs.
(ii) Public Finance Act (2001) as revised in 2004 and amended in 2010 and its related
regulations i.e. Sections 37 and 38 relate to the establishment and responsibilities of the
Office of the Internal Auditor General in developing and managing internal audit function
in MDAs and LGAs.
(iii) The Public Procurement Act (2011)- Sec 48(2),”the head of internal audit of each
public body shall in his quarterly audit report include a report on whether this Act and
Regulations made under it has been complied with and the Accounting Officer upon
receiving such report shall submit a copy there of to PPRA”
(iv) Local Authority Financial Memorandum (2009). For instance, Order No 13 of the
LAFM states “...in accordance with section 48 of the Local Government Finance Act the
Council shall employ its own Internal Auditors who shall work closely with the HODs
and shall report directly to the accounting officer”.
(v) Internal auditing standards and guides set out in the International Professional Practice
Framework (IPPFs) issued by the IIA. NB: The Framework is available for sale from the
IIA website i.e. www.theiia.org.
(vi) Code of Ethics for Internal Auditors issued by the Internal Auditor General.
(vii) Circulars issued from time to time by the Permanent Secretary, Ministry of Finance
(MOF) as well as the Internal Auditor General (IAG);
(viii) Circulars issued from time to time by the Permanent Secretary, Prime Minister’s Office-
Regional Administration and Local Government (PMO-RALG).

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(ix) Other guidance:
- Guidance and instructions issued by the Finance Committee or Council Director
- Local Authority Strategic and Operation Plans
- Tanzania Auditing Standard No. 9 Guidance for Internal Auditors (i.e. director’s
report)
- Tanzania Statement of Recommended Accounting Practices No. 3 Governance in
Public Sector
Roles and Functions of Internal Auditors in MDAs and LGAs
The International Standards on Internal Auditing and regulations provide for the responsibilities
of the Internal Auditor (IA) in the public sector:
 Review and report on the controls over revenues, custody of receipts, and utilization of
financial resources;
 Assess the conformity with financial and operational policies and procedures;
 Review the reliability and integrity of financial and operating data;
 Review and report the system in place for the safeguard of assets and their existence;
 Review and report on operations and programmes of the organisation compared with
budgets;
 Review of all operations of the organization whether are performed with regard to value
for money;
 Review and report of actions by Heads of Departments (HoDs) on audit reports;
 Review and report on controls over computerised operations.
Exercise : What is the role of internal audit unit in the public sector organisation?---------
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7.9 Internal Control Structure in the Public Sector
7.9.1 Definition of Internal Control
Internal Control is the whole system of controls, financial and otherwise, established by the
organisation management to carry out the tasks of the organisation in an orderly manner,
safeguard its assets and secure as far as possible the accuracy and reliability of its records
[American Institute of Accountants, 1949 (now the AICPA)].
COSO defines internal control as “a process, effected by people, designed to provide
reasonable assurance regarding the achievement of objectives in the following categories:
effectiveness and efficiency of operations, reliability of financial reporting, and compliance
with applicable laws and regulations.”

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Examples are payment procedures, ledger account reconciliation, segregation of duties,
authorization and approvals, system access controls etc.
Key notable features from the definitions of internal control:
(a)Internal control is a process: Internal control systems are not set in stone. They are
constantly evolving and changing. Once implemented, internal controls require constant
monitoring and reengineering, as the entity’s external and internal environment change
and as former threats are mitigated and new risks arise
(b)People are crucial for strong internal controls: board of directors, management and
employees, responsible for ensuring effective application of internal controls in the
organisation. Management lies at the centre.
(c)Internal control systems only provide reasonable assurance: Controls do not completely
eliminate the potential for errors and irregularities. Thus, need for constant and regular
review and monitoring
(d)Internal control has four main objectives: Internal controls are essential to a well-
managed, well-functioning entity. Their purpose is to enable a particular entity to:
 Accomplish its mission and reach its objectives;
 Produce accurate, reliable data for decision-making;
 Comply with laid down laws, regulations, policies and procedures; and
 Safeguard its assets.
Thus in view of the above, it can be concluded that, internal audit is an important and
integral part of the internal control system of the organisation which provides assurance on
governance, risk management and internal control processes as set by the same.
7.9.2 Types of Internal Controls
There are generally two types of internal controls: preventive and detective controls.
Both types of controls are essential to an effective internal control system. From a quality
standpoint, preventive controls are essential because they are proactive and emphasize
quality. However, detective controls play a critical role by providing evidence that the
preventive controls are functioning as intended.
Preventive Controls are designed to discourage errors or irregularities from occurring.
They are proactive controls that help to ensure departmental objectives are being met.
Examples of preventive controls are:
 Segregation of Duties: Duties are segregated among different people to
reduce the risk of error or inappropriate action. Normally, responsibilities for
authorizing transactions (approval), recording transactions (accounting) and handling
the related asset (custody) are divided.

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 Approvals, Authorizations, and Verifications: Management authorizes employees to
perform certain activities and to execute certain transactions within limited
parameters. In addition, management specifies those activities or transactions that
need supervisory approval before they are performed or executed by employees. A
supervisor’s approval (manual or electronic) implies that he or she has verified and
validated that the activity or transaction conforms to established policies and
procedures.
 Security of Assets (Preventive and Detective): Access to equipment, inventories,
securities, cash and other assets is restricted; assets are periodically counted and
compared to amounts shown on control records.
Detective Controls are designed to find errors or irregularities after they have occurred.
Examples of detective controls are:
 Reviews of Performance: Management compares information about current
performance to budgets, forecasts, prior periods, or other benchmarks to measure the
extent to which goals and objectives are being achieved and to identify unexpected
results or unusual conditions that require follow-up.
 Reconciliations: An employee relates different sets of data to one another, identifies
and investigates differences, and takes corrective action, when necessary.
 Physical Inventories
 Audits- both external and internal
Review Questions
 Explain the concept of internal control
 What are the main objectives of internal controls?
 Who has the primary responsibility for ensuring effective internal controls in the
organisation?
 Describe the main types of internal controls
7.10 Value for Money (VFM) Auditing
7.10.1 Introduction and Definition of VFM Audit
 Recent major concern of audit on public sector organisations has been on their
accountability of public resources that have been entrusted to them. The broad question
being to what extent the public resources are spent to achieve the intended goals? This

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embraces not only financial and regularity audit but also the audit of performance or
value for money (VFM).
 A performance audit “is an objective and systematic examination of a public sector
organization's programme, activity, function or management systems and procedures to
provide an assessment of whether the entity, in the pursuit of predetermined goals, has
achieved economy, efficiency and effectiveness in the utilisation of its resources”.
 Accordingly, performance audit, involves an independent assessment of whether
economy, efficiency and effectiveness have been achieved by the organisations
concerned
 The three key elements of VFM can be defined in various ways, as follows:
Economy
Spending less – for inputs. Minimising the cost of resources used (staff, materials and
equipment) for an activity, having regard to quantity and quality. Example: Where
standard items such as school or hospital supplies of a given quality are purchased at the
best possible price.
Efficiency
Spending well – processes. Is concerned with the relationship between goods and
services produced (the outputs) and the resources used to produce them (the inputs).
Efficiency is improved when more outputs of a given quality are produced with the same
or fewer resource inputs, or when the same amount of output is produced with fewer
resources. Reduction in repairs and maintenance cost of equipment, for example,
vehicles, computers or photocopiers, is a measure of efficiency.
Effectiveness
Spending wisely – outputs/outcomes. Effectiveness is concerned with achieving
predetermined objectives (specific planned achievements) or goals and with the actual
impact (the output achieved) compared with the intended impact (the objectives).
Example: Where there has been an improvement in school examination results or where
sickness rates have fallen as a result of medical care.
7.10.2 Scope of Performance Audit
While financial audits and performance audits are two distinct types of audits, findings
from a financial audit may be incorporated in a performance audit. In broader terms,
VFM audit means attesting both financial and the non-financial information, including
the actual performance in order to come up with a meaningful assessment of the issues in
question to be considered, both quantitative and qualitative aspects.

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This implies that, performance audits are often complex undertakings, requiring
multidisciplinary analytical skills, expertise and experience.
7.10.3 Why Performance Audit
 To provide an independent assessment of an area of public sector activity and seek to
improve resource management and add value to an entity through recommendations on
improving operations and procedures – improvement aspect.
 To provide an independent assurance to parliament and the community that funds
appropriated for particular activities are spent wisely and in accordance with parliament's
expectations – control aspect.
 To reinforce the accountability of ministers and public sector managers for their
performance
 To recognise and advise the parliament of management initiatives and achievements
7.10.4 Areas of Performance Audit
 Performance reviews can be used to cover all types of management activities.
o They can cover all types of projects, activities and programmes.
o They can also be applied to particular sectors or they may be government-wide.
o They can be input-based (concerned with the cost of resources used in relation to
outputs);
o system-based (concerned with staffing, organisational structure or procedures in
an entity);
o or output based (concerned with effectiveness).
7.10 Summary
 External audit exists to add credibility to the financial transactions undertaken by the
organisations. It assures stakeholders that the financial statements fairly represent the
organisation's position and performance during a stated period.
 Internal Audit is an important activity in the organisation to ensure that the same achieves
its objectives. It covers issues beyond financial transactions to include other issues like
improving the effectiveness of risk management, control, and governance processes.

17. 17
 Both external and internal audits are governed by legal and regulations applicable to
public sector organizations (MDAs and LGAs).
 Value for Money (Performance) audit, involves an independent assessment of whether
economy, efficiency and effectiveness have been achieved by the organisations
concerned.
7.11 Questions for Understanding
a. “It has been argued that internal audit is an activity for ensuring that books of
account of the organisation are kept properly” Do you agree? Give reasons for
your answer.
b. What are the main legal and regulations that govern external and internal audit
function in public sector organizations in Tanzania and why do you think they
are important?
c. “The roles of external audit and internal audit in the organisation have many
similarities but some fundamental differences exist…”
You are required to list and explain on:
i. Similarities between external and internal audit
ii. Fundamental differences between external and internal audit
d. Why do we need internal controls in the organisation?
e. What is Value for Money Audit? Why is it important to conduct VFM Audit?