Agency 15: Audit
The Audit Agency is the fifteenth agency in the community and the third in the Regulatory Bureau. This bureau also contains Agency 13 (Intellectual Property) and Agency 14 (Legal). The Audit Agency works to strengthen the internal control of the community’s agencies and businesses, to develop and maintain audit regulations and standards, and to ensure compliance with bylaws and the law.
Background on auditing
Auditing refers to the examination and evaluation of a business’s health. There are three main fields of audit, each of which aims to establish how well a business is placed to meet its obligations. Financial audits examine books of accounts and establish whether any material misrepresentations could significantly alter what has been reported. Compliance audits establish whether a business is complying with all applicable laws, codes, and in the case of the community, bylaws and policies. Performance audits evaluate a business’s performance, and from the data available determine whether a business is performing well or not, and what can be done to bolster performance.
Auditing standards and guidelines are an important tool during audits, as they help in reaching objective and practical recommendations. The International Organization of Supreme Audit Institutions (INTOSAI), standards and guidelines are founded on “basic assumptions, consistent premises, legal principles, and requirements” that help in the formation of audit opinions and reports. Some auditing standards and guidelines are anchored in law, while others are specific to the type of audit, environmental factors, and other aspects.
Within the community, audit practice, whether automated or undertaken by contractors, will be guided by these standards. The Audit Agency provides a platform on which community audit standards are consistent with those backed by law or regulation. This platform also enables the agency’s system and auditors to quickly respond to any changes to standards and general audit practice.
How the Audit Agency works
Presidencies and boards
The Audit agency is served by an executive presidency. The presidency consists of four presidents serving and representing the four main demographics – married men (A), married women (B), single women (C), and single men (D). The executive presidency develops and adjusts the agency’s legal strategies and policies. It also monitors how different aspects of its operations work, including the automated system, operational presidencies, and contractors. It makes the necessary adjustments as needed.
The four executive presidents, together with their counterparts in the IP and Legal Affairs Agencies, form a bureau board. The bureau board is a useful check and balance mechanism for individual presidencies and agencies. The board assists new presidents learn the ropes once they have been selected, and additionally, provides a means through which presidents and agencies can cooperate on common interest goals.
Within the board, three presidents from the same demographic form a demographic presidency. There are four such presidencies, representing each of the four demographic groups. The demographic presidencies engage each other on matters that cut across the three agencies and need a demographic-centered approach. The specific arrangement of the different presidencies, and the board, can be tabulated as follows and shows that every president belongs to 2 presidencies and a board.
|Demographic presidency A||Demographic presidency B||Demographic presidency C||Demographic presidency D|
|Executive presidency, IP (13)||13A||13B||13C||13D|
|Executive presidency, Legal Affairs (14)||14A||14B||14C||14D|
|Executive presidency, Audit (15)||15A||15B||15C||15D|
As part of the Regulatory Bureau, the Audit Agency is served by a team of 12 operational presidencies. Each operational presidency serves 2 district buildings, where they interact with executive presidencies of the agencies that have their offices in those buildings, and district, village, and branch presidencies. Since each presidency consists of four presidents, there are 48 operational presidents. Each president also belongs to a demographic presidency and a board. The operational presidencies are organized as detailed in this table (split into two segments):
Operational presidents implement the strategic plans and policies that the executive presidency formulates. The presidents also interact with contractors and branch presidencies, offering them any facilitation necessary to serve participants better, collecting important information on the system’s functionality, and advising the executive presidency on how this system can be improved. They monitor the system to ensure it is meeting the participants’ expectations and needs.
Branch presidencies and boards
The captain serves the community at the branch level, helping a maximum of 10 limited partners of a specific demographic and their dependents to access services in the community. captains are a service extension of the Human Relations Agency, by the fact that this is the agency that recruits, inducts limited partners, and deals with participants’ personal issues. However, they help their limited partners with all issues that limited partners may encounter as they navigate various agencies’ systems. Besides arbitration, which is handled by public servants up to the village level, captains are the only interface that limited partners interact with besides the system.
The 10 limited partners who are served by a captain form a council of 10/ 11. The council meets at least quarterly and provides limited partners with a platform to interact and discuss common interest matters to their demographic within their branch.
A branch is made up of 4 such councils, which occupy the same apartment. A branch comprises around 40 limited partners and their dependents. The four captains who serve the branch make up a branch presidency.
10 branches form a village. Each of the branch presidencies that serves a branch also belongs to a branch board. Branch boards provide an additional check and balance for captains and branch presidencies. Branches are numbered based on the village’s hub, in the direction of the breezeway one-way traffic direction.
A branch’s number determines with whom its presidency will form a branch board. Branch presidencies 1, 2, and 3 form one branch board, as do 4, 5, and 6, and 7, 8, and 9.
Four villages make a district. The last branch presidency in each village in the community (branch presidency 10) combines with three others in their district or cluster of 3 districts to form additional branch boards. The last branch presidencies in villages 1, 2, and 3 in each district make a board. The last branch presidencies in village 4 of each of the 3 districts in a cluster also form a board.
This can be illustrated as follows:
Besides belonging to a branch presidency and a board, every captain belongs to a demographic presidency of 3. A demographic presidency is made up of 3 captains within a board, and who serve the same demographic. The demographic presidency mainly serves an advisory function, safeguarding issues common to the particular demographic, and helping in mentorship and support for incoming captains.
As discussed, it is envisaged that bar normal changes in audit practice and regulations, the system will be able to handle virtually every audit need that a participant may have. They may still be unable to navigate the system to meet these needs, at which point they will approach the branch presidency for help. Where they can, the branch presidency helps the participants and tries to train them to it themselves in the future. In instances where this is not possible, they direct the participant to the list of accredited contractors for the challenge they are facing. The contractor charges the participant in exchange for the services offered.
The Audit Agency works through an automated system with which it interacts with participants, community public servants, and contractors. The automated system provides a platform through which businesses and agencies can perform automated audits. If they have issues navigating the system, they can hire contractors for audits, and to train them on how to use the system.
A key part of the automated system is audit automation. Business records detailing transactions and operations are digitized in the community. Automated auditing utilizes cloud computing, artificial intelligence (AI), and machine learning to audit and secure this data. This approach to auditing offers a standardized approach that not only integrates other relevant information from other systems but also makes it easier for decision-makers to make informed decisions after digesting audit recommendations.
Audit automation as done in the community utilizes advanced data analytics that additionally buttresses the soundness of decisions made by entities, such as business associates, community agencies, and the businesses themselves since the information at their disposal is not only complete and accurate, but also free of any bias. In ordinally audit processes, auditors examine samples to make informed guesses about the health and correctness of data. With automation, however, it is possible to test entire data sets, making the information far superior in quality.
The system is intended to minimize the need for contractors working as auditors to assist participants and agencies. While businesses and agencies still have to pay to use the automated audit system, the costs and less than hiring an auditor, with additional savings in time and convenience. Minimizing costs as overhead will make the community more efficient as an economic unit. The system, therefore, aspires to tackle all audit issues that agencies and businesses have. Contractors and operational presidencies constantly monitor the system’s ability to handle current and anticipated audit issues. Where improvement can be had, they recommend adjustments to the executive presidency.
While the agency performs the bulk of its services through the automated system, it needs contractors to perform some day-to-day tasks, such as system maintenance, updates, and assistance to agencies and businesses in instances where the system is unable to help.
The Audit Agency accredits auditors, with its system containing details about their areas of expertise, ratings, academic credentials, professional experience, and any other detail that is relevant for decision-making once an entity decides to hire an auditor. The list is accessible to users, who select who they want to assist them and pay for the services offered. Auditors pay a subscription to appear on the list. The system facilitates self-regulation by auditors so that they can consistently operate at the highest levels of integrity and professionalism.
While auditors are important professionals, the automated system’s efficiency in handling audit issues can be measured by how many auditors there are, and the demand for their services. The more they are, the more likely it is that the automated system is not performing as well as it should be.
Each of the 24 agencies belongs to one of three columns. While columns do not have the level of interaction that boards do, there is nonetheless extensive collaboration between the agencies in a column. The Business Operations Agency (agency 3) collaborates with the Audit Agency on audit reports to determine the health of a business, and their ability to meet their factoring obligations. These points are used to determine whether a business qualifies for the factoring they apply for.
The Audit Agency works with the Commercial Bank Agency (agency 9) in the preparation of audits, as the bank provides extensive information on businesses’ financial activities. The Audit Agency also works with the QHSE Agency to help businesses comply with safety, workplace, and environmental regulations.
The Risk Management Agency is responsible for appraising risks and offering underwriting services to agencies and businesses. The Agency also relies on audit reports to determine businesses’ exposure to risk and prescribe ways that they could do to mitigate them.
Roles of the Audit Agency
- Checking the accuracy of financial reports
- Ensuring compliance with policies, regulations, bylaws, legislation, and audit standards
- Assess the adequacy of internal controls
Checking the accuracy of financial reports
The Audit Agency designs its automated system to apply professional skepticism in its analysis of financial reports. Professional skepticism enables the system to identify a set of conditions or events that could give rise to misrepresentation or misstatement of facts as indicated in financial statements. This means that as the auditor, the system does more than simply check whether the arithmetic is right and whether every item is where it ought to be. Instead, it watches out for red flags that could indicate trouble.
A common red flag is a situation whereby, without any logical explanation, revenues keep going down. An economic downtown or extraordinary events, such as a natural disaster could severely impact a business’s profitability. However, it could also indicate mismanagement, and possibly fraud. The system has extensive information to follow through with such a red flag and establish the facts. Another important measure is a comparison between a business’s financial position and that of other businesses.
In the community, where businesses do not own any assets, the balance sheet of businesses that have been operating for roughly the same amount of time, serve a similar market and have similar factoring trends will likely be in the same financial situation. When there is a wide variance, it is a sign that one of the businesses is not doing well. The agency can pick this up and investigate further using the other information at its disposal.
The Audit Agency’s automated system is embedded with the community’s bylaws, operating manuals, the law, regulations, and any other rules that a business or agency needs to operate within. Contractors who work as auditors have extensive training and exposure to these rules as well. When presented with an audit situation, the system applies these measures to establish whether day-to-day activities are compliant with the rules.
From time to time, the rules change. The agency will hire contractors who constantly monitor the environment to pick up any changes and have them included in the system. In instances where these changes are significant, such as changes in the tax code, the agency hires contractors who prepare training modules that businesses and community public servants are encouraged to study and ensure compliance.
While external regulators such as tax authorities have their mechanisms to ensure that any dues are paid as required by law, the Audit Agency regularly carries out automated exercises to ensure that all who have these obligations have reported them properly, and paid up.
Businesses and agencies have an obligation to formulate and implement internal controls which ensure that their operations are not exposed to unnecessary risks. The Audit Agency regularly tests these controls to ensure that they can hold up when faced with the challenges they are supposed to control or prevent. The agency constantly reviews ways through which these controls can be strengthened and shares the information with businesses and agencies as part of its audit function.
The implementation of audit recommendations, including measures to strengthen controls is undertaken by the businesses. Through its automated system, and where needed by operational presidencies and contractors, it closely monitors the process to ensure that its recommendations have been adhered to. It also retests them in the future to see whether any adjustments are required.
Presidencies’ offices, meetings, and quarterly conferences
The offices of the executive presidency that serves the Audit Agency are on the first floor of building 15’s western side. Across on the eastern side are the trustee and regulatory bureau operational presidencies that serve the agency. The two presidencies (trustee and regulatory bureau operational) alternate their offices. Trustees sit in their offices in building 15 on Tuesdays and Thursdays, while the operational presidencies use the offices on Mondays and Wednesdays, as shown in this timetable:
|Building 3/ Business Operations Agency||Building 15/ Audit Agency|
|Monday||Trustee presidency||Regulatory Bureau Operational presidency|
|Tuesday||Regulatory Bureau Operational presidency||Trustee presidency|
|Wednesday||Trustee presidency||Regulatory Bureau Operational presidency|
|Thursday||Regulatory Bureau Operational presidency||Trustee presidency|
The graphic below shows the first-floor layout, with offices for the executive presidency, trustees, and operational presidencies indicated.
Working hours and meetings
Community public servants, including the Audit Agency’s executive presidency and the Regulatory Bureau’s operational presidencies, work from Monday to Thursday, from 8:00 to 8:45 in the morning. This time is dedicated to meeting clients and normal operational duties as the office requires. On Thursday, the whole presidency (four presidents serving A, B, C, and D) meets for a 45-minute meeting from 9:00 to 9:45 in the morning.
On the last Friday of each quarter, between 9:00 AM and 12:00 PM, each demographic presidency meets. The three-member presidency discusses common bureau matters that are of interest to the demographic they serve. On Saturday, again between 9:00 AM and 12:00 PM, the whole board meets, where the presidents present their input from the previous day’s demographic presidency meeting, and prepare for the quarterly conference. The aim is to have a cohesive presentation during the quarterly conference but tailored to specific demographic interests.
Quarterly conferences are held on the last Sunday of each quarter, from 9:00 AM to 3:00 PM, with a lunch break in between. During quarterly conferences, each demographic presidency sits together in the same row.
Quarterly conferences are held in District Buildings 5 and 17. Each building has a lower and higher assembly court. The different demographic groups use the assembly courts as follows:
|5||Lower court||Married men (A)|
|5||Higher court||Married Women (B)|
|17||Lower court||Single women (C)|
|17||Higher court||Single men (D)|
Each of the four assembly courts has seats for 480 presidents representing the respective demographic. In the diagram below each of the 4 courts is illustrated. The ceiling of each court has an elliptical arch that enables executive presidents, who are the only ones who make a presentation during the conference, to speak without the need of amplifying their voice. The 480 seats are easily rotatable to enable presidents to face whoever is speaking.
Each of the four courts has an identical arrangement and number of seats. The exact arrangement of each court can therefore be illustrated using one court, in this case, building 5’s lower court that is used by married men (A).
Within an assembly court, the 480 presidents are arranged in terms of demographic presidencies of 3. The Regulatory Bureau’s demographic presidency for married men (13A, 14A, and 15A) sits as highlighted in the graphic below. The 12 Regulatory Bureau’s operational presidents for married men (A) are organized into 4 demographic presidencies: 1,2, 3/ 4, 5, 6/ 7, 8, 9/ 10, 11, 12.
Some additional notes/definitions from an earlier version of this page:
- Internal controls go beyond the reliability of financial reporting. They include ensuring that an entity’s operations are performed optimally and that the entity complies with financial and operational guidelines and laws (Fadzil, F. “Internal auditing practices, and internal control system.” Managerial Auditing Journal 20.8 (2000): 844-866. Electronic).
- External audit is an independent examination of an entity’s financial statements. While done by an external auditor, the Audit Agency set up automated mechanisms which will perform the role, with departmental agents handling those aspects which need personal attention, since the agency has a better grasp of community bylaws and accounting practices than a normal audit firm would offer. Both forms of auditing are critical to proper corporate governance (Rezaee, Z. Corporate Governance and Ethics. Danvers, MA: John Wiley and Sons, 2008).
- Audit algorithms are today used by auditors to randomly sample material entries in financial statements. Using pre-programmed criteria, the algorithms assess their correctness and completeness. Algorithms are therefore sensitive to particular needs of the auditor, and are able to tailor their reports based on industry and customer expectations/ needs (IBM. Audit Algorithm. 2019. 20 07 2019).
- Internal controls need to be continually reviewed to ensure they adequately respond to current and future threats. The Audit Agency works to strengthen the community’s controls, such that they do not need the Audit Agency to constantly run internal audit exercises and investigations unless there is a need to do so. This because of the Audit Agency’s automated audit system is able to highlight weaknesses, while the Audit Agency may not have sufficient resources for such an exercise anyway – working four hours a week (Cascarino, R. Corporate Fraud and Internal Control Workbook: A Framework for Prevention. Hoboken: John Wiley and Sons Inc., 2013).
- Computer-assisted audit techniques (CAATS) are increasingly popular in audit circles, especially when auditing large organizations. Such tools include trend analysis, parallel simulation, Benford’s Law, among others (Bourke, J. Computer Assisted Audit Techniques or CAATS. 25 01 2010. 01 06 2019).
- Non-financial reporting and internal controls are necessary to augment what financial reporting shows. Non-financial controls are meant to enhance integrity, and enable the community develop in a sustainable way (Manganiello, C. and R. Hofsetter. COSO for non-financial reporting: more transparency, more trust. 2019. 02 06 2019).
- Regulations and guidelines affecting financial reporting and industry best practice are constantly evolving. Some may be internal to the community, while professional and governmental authorities impose others. Compliance audits help organizations harmonize their practice with such guidelines, and draw up strategies to be better positioned to handle future changes more adequately. In the community, they will also enable the agency to identify and resolve weaknesses in compliance strategies and practices (Chorafas, D. IT Auditing and Sarbanes-Oxley Compliance: Key Strategies for Business Improvement. Boca Raton, FL: CRC Press, 2009).
- Financial risks are in many cases managed through strategies that reduce or eliminate the chance of their occurrence. This management is a function of internal audit. The Audit Agency will provide guidelines, informed by the community’s needs and industry best practice, to manage such risks (Ciunci, M. How Do Internal Audits Work? 26 04 2019. electronic. 19 05 2019).
- Weak internal controls usually lead to fraud. Organizational vulnerability to fraud must be constantly checked, since fraudsters and professional neglect will likely occur when there is a lapse in enforcement, rather than the absence of such controls at all (Marks, J. Combating Fraud Through Effective Internal Controls. Philadelphia: Baker Tilly, 2019. electronic).
- Investigative audits set out to discover the whole extent of suspected fraud or other forms of financial impropriety. The audit covers identifying the persons responsible, and their role, the damages incurred, and recommendations to strengthen controls, such that similar issues do not recur (Barley. Investigative Auditing. 2019. electronic. 19 05 2019).
- The IP audit process is essentially a legal process, necessitating the input of legal minds conversant with IP. The process can be general in scope, or can be targeted at a particular item for different reasons (McCann. IP Audits: What are they? Why are they important? What do they cost? 15 07 2018. electronic. 19 05 2019).
- The internal audit process also includes verifying the status of assets, fixed or not, and advising on future acquisition and utilization. The Audit Agency performs this role to advise the Leasing, and Housing and Equipment Management Agencies on how to better manage assets, and on more community – beneficial acquisition practices. Asset audit centers around asset availability, suitability for use and value (Hastings, N. Physical Asset Management: With an Introduction to ISO55000. New York: Springer, 2015. electronic).