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Understanding the audit process

This is part one of an analysis of the Audit of the Consolidated Fund of the Government of Bermuda for financial years 2010, 2011, 2012 by a former auditor.

This holiday season has arrived at the end of another year of a (hopefully) decreasing recessionary environment. While there is economic pickup, anecdotally, numerous cash-strapped Bermuda families are still challenged to celebrate Christmas. In spite of these financial obstacles, reader feedback from The Royal Gazette 14-week Bermuda financial review indicated that some Bermuda families were going to focus on setting up a budget for the New Year.

They are doing the right thing for their family, managing their financial resources to the best of their ability in an honest and transparent manner.

The Auditor General of Bermuda is focused on doing the right thing for our country by performing her mandate, the legislated job of independently auditing the financial statements of the Government of Bermuda to ascertain (with a degree of conviction or not) that the financial resources of our country are being managed in an honest and transparent manner.

In plain English, the auditor general, adhering to specific audit processes, conducts detailed significant third-part verification outside of, and completely independent of our internal finance structure of civil servants and ministerial oversight in charge of managing our country's financial resources. Namely, revenue flows inward, expenses incurred outward, the accumulation or sale of government assets, the increases and (unfortunately, far too few) decreases in Government debt and related items of all Government entities are subject to focused scrutiny for transparency, appropriateness, adherence to financial instructions, laws, and regulations and correct financial accountability.

The audit process utilises the skills of a team of qualified, intuitive, ethical accounting/audit professionals who are highly experienced in tracking fraud, investment, legal, tax, risk liabilities, capital asset management of related direct or indirectly related items and facts.

Auditing is also an exhausting laborious process of planning, interviewing/reviewing, verifying, inspecting, testing government financial information and correlating/verifying transactions activities with legitimate third parties as to the truthfulness (veracity) of the financial information provided by the government under audit.

The processes are heavily reliant upon the co-operation of the employees of the government (or entity) under audit, outside vendors, suppliers, consultants, financial institutions and so on. Inability to obtain satisfactory results whether through non-cooperation or non-existence of records or parties involved determines the final resultant opinion.

Audits are mandatory for publicly traded companies, governments, quangos, municipalities, provinces, states of the union, non-profits, investment funds, and any other body that is charged with managing public funds for citizens and residents, or operating an entity for profit where the company shares are traded on the open market.

The end result of an audit — on the opening page — is the statement of opinion issued by the auditor in audit language that really needs an interpreter to translate for the ordinary person. There are three opinions, from best to worst.

• The first or best so called “clean” or unqualified opinion is intended to provide reasonable, but not absolute assurance, that the financial statements present a fair and accurate picture of the company, in all material respects, and in accordance with (international) generally accepted accounting principles. This statement often creates confusion because we are accustomed to hearing about qualifications, qualified professionals — all indicating highest standards, yet the best, most satisfactory opinion is unqualified.

• The second opinion is a qualified opinion. The audit is qualified (not considered satisfactory) because it lists exceptions to the opinion that financial statements were presented fairly in all material respects. The limitations in scope and qualifications, such as matters of concern and special importance are clearly spelled out.

A qualified opinion on the audit for the Consolidated Fund was issued. It means that the auditor general was not able to find sufficient corroborating data, adherence to good accounting principles, inadequate records and processes, denial of right to inspect records of government expenditures, non-compliance with financial instructions and other regulations, lack of independent verification of financial transactions and additional criteria. She, therefore could not express an opinion, with reasonable assurance, that our finances for those years were managed responsibly and stated fairly in all material respects.

• The third adverse opinion is of course the worst. We called it the “going concern opinion” in that the findings, or lack of, financial verification is material and pervasive. The auditor simply expresses the opinion that the financial problems are serious and that the company's financial position is not fairly represented. Implied is that the company could close its doors.

Finally, there are two important criteria to keep in mind for part two.

1) An audit is only a statistical sample of financial records and statements. It is physically impossible to review and track every single entity transaction for a year.

2) The Government of Bermuda Consolidated Fund audit does not include a significant number of other organisations currently in the consolidated report. Yet, our Government is responsible for all liabilities incurred by these same groups.

What a bizarre situation. We, the taxpayers, ultimately have to pay if they fail, yet we know little about their annual financial operations.

Part two after the New Year, readers! You have enough on your plates and monitoring your holiday budget to be weighed down by any more financial numbers.

Merry Christmas. Do yourself a great favour and go to Oda Mallory's Facebook page for Christmas Remembrances Part 1 and Part 2. Oda had the popular Blondell Radio Show for a number of years in Bermuda. Delightful. https://www.facebook.com/oda.mallory/posts/10153354518657476

Martha Harris Myron CPA PFS JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, https://americansabroad.org/. Principal: The Pondstraddler* Life™ Consultancy providing financial planning, publications, presentations for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com

Under scrutiny: there are three types of audit, and each has its own peculiarities, but all are designed to track the oversight of finances, ensuring they are being managed in an open, transparent and responsible manner

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Published December 19, 2015 at 8:00 am (Updated December 19, 2015 at 12:17 am)

Understanding the audit process

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