Financial Disclosure Audit: Best Practices and Impact in the Public Sector Segments Reporting
Author: Accountability State Authority of the Arab Republic of Egypt
Introduction
Financial statement disclosure is considered an important aspect of enhancing transparency and accountability, thus combating corruption. Financial audits conducted by Supreme Audit Institutions (SAIs) play an effective role in auditing these disclosures. In this article, we shall be tackling the disclosure audit of segments reports in the public sector, presenting a case study on these disclosures as an important aspect of enhancing transparency and accountability.
The International Public Sector Accounting Standard 18 (IPSAS 18) sets out the principles for reporting segments in the public sector, stating that disclosing segment information enhances the transparency of financial reporting and enables the entity to fulfill its accountability obligations (IPSAS 18,B), on an appropriate basis for performance evaluation and making decisions on resource allocations.
Risks inherent in presenting financial information by segment
IPSAS 18 adopts an approach to determine the level of detail required for segment reporting in the explanatory notes to the financial statements.
The Standard requires the identification of where the segments is a distinguishable activity or group of activities of an entity, for which it is appropriate to present financial information separately for the purposes of evaluating the entity’s past performance in achieving its objectives and making decisions on the future allocation of resources (IPSAS 18,9).
Under this standard, public sector entities must identify specific activities or groups of activities that should be reported separately as segments. This helps in (a) evaluating the entity’s performance, and if it has met its objectives in the past, and (b) making informed decisions about how to allocate resources. Entities are also encouraged to disclose additional information about these reportable segments, as determined by the Standard or necessary for accountability and decision-making. (IPSAS 18,13).
Factors to be considered when determining the segment financial information
Factors, to be considered when determining whether outputs (goods, services) are interrelated and should be grouped as segments for financial reporting purposes, include:
(a) The entity’s primary operating objectives, goods and services; activities related to achieving each of those objectives; whether resources are allocated and budgeted based on groupings of goods and services;
(b) The nature of goods or services provided or activities performed;
(c) The nature of the production process and/or the process or mechanism for providing and distributing services;
(d) The type of customer or consumer of goods or services;
(e) Whether this reflects the entity’s management method and how financial information is reported to Senior Management and the Board of Directors;
(f) If applicable, the regulatory environment’s nature (for example, management or statutory authority) or government sector (for example, the financial sector, public utilities or general government).
Case Study
The Case
Entity(X)- a public sector entity which applies IPSAS, has a number of subsidiaries and develops consolidated financial statements. At the consolidated financial statements level, it has a number of segments, discloses segments at the activity level and it is audited in accordance with International Standards on Auditing (ISA).
Disclosures
Below is the section on segment disclosures as of December 31, 2024 and December 31, 2023 for Entity(X), whose main activity consists of segments that include exchange revenues from land transportation, maritime transportation and other services as well as non-exchange revenues represented by grants it receives from the State.
Information about Segments
| Total (one thousand pounds) | Grants (one thousand pounds) | Other Services (one thousand pounds) | Maritime Transportation (one thousand pounds) | Land Transportation (one thousand pounds) | Description |
| 31-12-2024 | |||||
| 41 000 000 | 600 000 | 3 700 000 | 22 700 000 | 14 000 000 | Revenues |
| (10 100 000) | (1 100 000) | (6 000 000) | (3 000 000) | Wages | |
| (2 500 000) | (700 000) | (300 000) | (1 500 000) | Depreciation | |
| 13 700 000 | 600 000 | 800 000 | 7 200 000 | 5 100 000 | Surplus |
| 52 000 000 | 10 000 000 | 20 000 000 | 22 000 000 | Total Segment Assets | |
| 18 500 000 | 3 000 000 | 500 000 | 15 000 000 | Total Segment Liabilities | |
| 31-12-2023 | |||||
| 39 950 000 | 550 000 | 3 750 000 | 22 650 000 | 13 000 000 | Revenues |
| (9 520 000) | (920 000) | (5 800 000) | (2 800 000) | Wages | |
| (2 460 000) | (720 000) | (215 000) | (1 525 000) | Depreciation | |
| 13 480 000 | 550 000 | 830 000 | 7 300 000 | 4 800 000 | Surplus |
| 29 450 000 | 7 000 000 | 20 300 000 | 2 150 000 | Total Segment Assets | |
| 38 700 000 | 4 200 000 | 18 000 000 | 16 500 000 | Total Segment Liabilities |
Disclosure of revenues from Key Product Groups and Geographical Regions
| Total (one thousand pounds) | Grants (one thousand pounds) | Other Services (one thousand pounds) | Maritime Transportation (one thousand pounds) | Land Transportation (one thousand pounds) | Description |
| 31-12-2024 | |||||
| 14 150 000 | 350 000 | 2 300 000 | 11 500 000 | 10 000 000 | Area 1 |
| 3 600 000 | 200 000 | 1 200 000 | 10 700 000 | 2 500 000 | Area 2 |
| 3 250 000 | 50 000 | 200 000 | 500 000 | 1 500 000 | Area 3 |
| 21 000 000 | 600 000 | 3 700 000 | 22 700 000 | 14 000 000 | Total Revenues |
| 31-12-2023 | |||||
| 12 500 000 | 250 000 | 1 900 000 | 11 150 000 | 9 200 000 | Area 1 |
| 13 700 000 | 200 000 | 1 100 000 | 11 200 000 | 1 200 000 | Area 2 |
| 3 750 000 | 100 000 | 750 000 | 300 000 | 2 600 000 | Area 3 |
| 39 950 000 | 550 000 | 3 750 000 | 22 650 000 | 13 000 000 | Total Revenues |
Audit Work
Materiality
In accordance with the requirements of the International Standard on Auditing 320 (ISA 320), and in light of the ASA’s audit procedural guide, we set materiality at 1% of total assets and performance materiality at 80%.
Planning for Auditing Financial Statements
ASA planned the audit of the financial statements in accordance with the requirements of ISA 300. In identifying and evaluating the risks of material misstatement (in accordance with the requirements of ISA 315), we designed audit procedures in response to the evaluated risks (in accordance with the requirements of ISA 330). Based on our professional judgment, we determined the substantive procedures to be performed:
(a) Use of analytical procedures as substantive procedures
(b) Tests of details
We categorized the risks of material misstatement of financial information based on segments into:
- Determining the management of segments for which financial information should be disclosed
- Determining the degree of risk associated with the disclosed information
- Determining the audit procedures to be performed for auditing segment information
Audit Evidence
ASA used horizontal and vertical analysis of the financial statements related to the disclosed segments by comparing the entity’s financial information with:
- Comparative information for prior periods
- The entity’s planned results according to the approved budgets
We tested details of a sample of transactions related to the disclosed segments’ data and obtained related confirmations, which met our assurances of “completeness, occurrence, accuracy, classification”. We focused on transactions at the end of the financial period and the beginning of the following financial period as they are considered matters that increase the risks of material misstatement.
Key Audit Matters
ASA identified segment reporting as a key audit matter in accordance with the requirements of ISA 701, given its critical importance in providing information about the entity’s performance. It is also important as an area where the risk of material misstatement increases, particularly regarding management’s professional judgment in determining which segments to report.
Key audit matters are communicated in a separate section of the Independent Auditor’s Report in accordance with the requirements of ISA 701. This may include a description of the key audit matter, “Presentation of Financial Information about Segments”, which includes:
- The reason for considering segment financial information a key audit matter, through clarifying the importance of presenting such data in evaluating segment performance and its impact on transparency and accountability, by providing financial information to the entity’s supervisory bodies, enabling them to evaluate performance and hold management accountable.
- How to address the disclosure of financial information about segments through explaining the methodology used to verify the financial statements related to the disclosed segments and a brief overview of the procedures implemented.
Independent Auditor’s Report
ASA issued a long-form report on the audit of Entity (X) in accordance with the requirements of International Standards on Auditing and the entity’s regulatory requirements, in accordance with its financial regulations. The report included:
- An unmodified report on the financial statements for the fiscal year ending December 31, 2024, per ISA 700, with key audit matters presented separately as required by ISA 701.
- An executive summary of the observations from the financial and performance audits, communicated to management and governance bodies “the Program and Budget Committee”.
Conclusion:
Auditing segment reporting is a critical component of public sector financial audit, extending beyond mere compliance to enhance transparency and accountability. These audits empower stakeholders to assess fund allocation and spending efficiency, strengthen financial reporting credibility, and support sound financial governance by ensuring ethical and effective resource utilization.
