Public Debt Committee
Guide for Conducting a Public Debt Audit -
The Use of Substantive Tests in Financial Audits
Public Debt Committee Chairman
Arturo González de Aragón, P.C.A.
Superior Auditor of Mexico
The official version of this publication will be made available in English, Spanish, French in the website of the Public Debt Committee of the International Organization of Supreme Audit Institutions (INTOSAI), http://www.intosaipdc.org.mx/.
Elements of Public Debt Management
Application of INTOSAI Auditing Standards to Public Debt Audits
Applications of Substantive Audit Procedures in Public Debt Audits
Substantive Audit Procedures for Derivatives
Table 1a: Characteristics of Public Debt Management Operations – Institutional Arrangements
Table 1b: Characteristics of Public Debt Management Operations – Features of
Primary and Secondary Markets
Table 1c: Characteristics of Public Debt Management Operations – Portfolio Management Arrangements and Benchmark Portfolios
Table 2: Information Systems Risks
Table 3: Steps in the Application of Analytical Procedures
Table 4: Audit Procedures Used in Public Debt Audits
Table 5: Substantive Audit Procedures Applied to Derivative Instruments
Under the terms of reference laid down by the Governing Board of INTOSAI in 1992, the Public Debt Committee (PDC) was given the task of publishing guidelines and other information for use by Supreme Audit Institutions (SAIs) to encourage the proper reporting and sound management of public debt. In its initial years the PDC discharged this responsibility primarily by publishing guides on the definition, disclosure and reporting of public debt, a guide to conduct audits of internal controls of public debt operations, and papers on government’s financial commitments, contingencies and fiscal risks.1
The PDC formed a partnership in 2002 with the INTOSAI Development Initiative (IDI) to develop Public Debt Auditing (PDA) capacity within INTOSAI members and provide trainers to build PDA capacity. This guide seeks to increase PDA capacity by providing a general framework that can be used to approach the audit of public debt and specific advice on how to conduct substantive procedures.2
This guide is based on documents discussed at PDC meetings which were prepared by UK National Audit Office and US Government Accountability Office. This guide incorporates feedback received by PDC members, public debt experts and auditors, and draws on INTOSAI Auditing Standards, the IMF-World Bank Guidelines for Public Debt Management, and previous guidance issued by the PDC.3
This guide is designed to be relevant and accessible to as wide an audience as possible. Information is presented in general terms to identify concepts and issues that auditors can consider when examining public debt. In this way the guide will facilitate the development of relevant and effective audit processes by SAIs, taking into account factors present within national environments. To ensure proper consideration of the requirements placed on auditors, the guide is organised around INTOSAI Field Standard Requirements. Each Field Standard is considered in turn to provide a structured approach to the complete audit process. Within this format the analysis concentrates on issues specific to public debt - this preserves the document’s focus and prevents undue commentary on issues that apply equally to all financial audits.
The document’s focus is maintained by making three key assumptions about the guide’s coverage and scope, namely, the guide addresses the audit of wholesale (not retail) public debt, the guide assumes the conduct of a financial audit with the aim of providing an opinion on a set of financial statements (i.e. this is not a performance audit guide), and the guide does not include the technicalities of statistical sampling procedures. While there will inevitably be read-across between the different aspects of PDA, there are specific considerations and issues relevant to both retail debt and performance audit that are outside the scope of this present document.
After the presentation of INTOSAI field audit standards, this guide discusses specific substantive procedures, presents analytical procedures and substantive procedures for derivatives.
1. ELEMENTS OF PUBLIC DEBT MANAGEMENT
This section of the guide provides the reader with a brief introduction to the subject of public debt management to facilitate a smooth introduction to the audit related sections that follow.4 The themes are presented by addressing the following key questions.
what is public debt management?
how do countries facilitate the management of public debt?
what instruments are used to raise public debt?
what accountability arrangements exist?
1.2 What is public debt management?
Public debt management is the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding at the desired risk and cost levels. It should encompass the main financial obligations over which central government exercises control. Public debt management is important for a number of reasons:
to ensure that the level and rate of growth of public debt is sustainable in a wide range of circumstances;
to lower government borrowing costs over the long term, thus reducing the impact of deficit financing and contributing to debt sustainability;
to avoid economic crises because of poorly structured debt;
the government debt portfolio is often the largest financial portfolio in the country and can have a far-reaching impact on financial stability – consequently, effective management is essential.