The Development of Quality Management System in Compliance

Audit of Construction Contract Agreement

Dhita Susriana, Yusuf Latief

Universitas Indonesia, Faculty of Engineering

Keywords: Audit, construction, compliance audit, quality management system.

Abstract: Construction projects funded by the government are usually audited by an independent auditor. Audit

functions to increase transparency, accountability, and to know the actual conditions of an entity as a basis

for making decisions and reducing the risk of errors in policy making for the entity being audited. One type

of audit is a compliance audit. The purpose of the compliance audit is to assess whether the principal matters

audited are compliant with the regulations. Compliance audit in the construction industry is to assess the

implementation of contract agreement between users and the providers, but the auditor is faced with the risk

of the possibility that the Auditor's findings, conclusions or recommendations are incorrect or incomplete, as

a result of factors such as insufficient or inappropriate evidence, or misleading information which will cause

a lawsuit. The method used is the study of literature and the Delphi method. This study aims to develop a

quality management system of compliance audit phases in order to achieve the expected quality objectives.

The results of this study indicate that the audit phases and quality objectives can be categorized into three

phases, namely planning, executing, and reporting.

1 INTRODUCTION

An auditor who performs audit duties is required to

be professional and careful in carrying out their duties

and authorities. The risks in the form of rebuttal in the

audit process up to a lawsuit after the issuance of

reports both civilly through the district court, as well

as state administration in the State administrative

court are still likely to occur as one manifestation of

stakeholder dissatisfaction with the results of the

audit. If the rebuttal or claim is proven, the impact

will be very detrimental and lead to a decrease in the

credibility of the audit institution in conducting an

audit.

Furthermore, the conflict of interest may occur

after the audit result issued through an audit report

made by the Supreme Audit Board. If there is

dissatisfaction with the audit results, which is stated

in the audit report, then the client can submit a

lawsuit. Some of the problems mentioned above are

caused by the lack of understanding of the audit

results between the auditor and the entity being

audited. This is because there is a risk of the

possibility that the auditor's findings, conclusions,

and/ or recommendations are incorrect or incomplete,

as a result of factors such as insufficient or

inappropriate evidence, inadequate audit procedures,

or deliberate negligence and misleading information

(Standar Pemeriksaan Keuangan Negara, 2017) and

the possibility of audit weaknesses at the planning

stage, executing stage or reporting stage.

According to Sarwoko and Agoes (2014) audit

quality is influenced by several things including

auditor independence and audit procedures designed

to detect fraud. To achieve good audit quality,

organizations also need to implement a Quality

Management System (QMS) to help improve the

results of their activities and to provide a solid basis

for sustainable development. Therefore this research

is needed for the purpose of developing quality

management system of compliance audit phases in

order to obtain the expected quality objectives.

2 LITERATURE REVIEW

ISO 9001: 2015 states that in a quality management

system, an organization must set its quality targets in

each process or stage needed. The organization must

720

Susriana, D. and Latief, Y.

The Development of Quality Management System in Compliance Audit of Construction Contract Agreement.

DOI: 10.5220/0008435807200725

In Proceedings of the 2nd International Conference on Inclusive Business in the Changing World (ICIB 2019), pages 720-725

ISBN: 978-989-758-408-4

determine the characteristics, roles, activities, and

work schedules of each of the resources needed, and

evaluate the results of the activities of these resources.

By building an organizational structure equipped with

resources and regulating procedures with the

principle of quality in carrying out an activity, it

means that an organization has implemented

management functions with a quality system.

2.1 Auditor Organization

Based on The Audit Board of the Republic of

Indonesia Regulation (Badan Pemeriksa Keuangan)

No. 1/2017, audits are processes of problem

identification, analysis and evaluation conducted

independently, objectively, and professionally based

on audit standards, to assess the correctness,

accuracy, credibility and reliability of information

regarding the management and responsibility of state

finances. The Pedoman Manajemen Pemeriksaan

(2015) contains the management of the audit process,

which starts from the planning phase, executing phase

up to reporting the results of the audit.

Audit planning is the beginning of the audit

process. Audit planning is needed so that audit

process can be carried out efficiently, effectively, and

in accordance with audit policies, audit activity plans,

and audit standards set by the Badan Pemeriksa

Keuangan (BPK). Audit executing is a realization of

audit planning. Meanwhile, audit reporting is the

process of preparing a report based on the results of

the analysis of the audit findings obtained during the

audit process.

At the planning phase, the Team Leader (KT) is

responsible for evaluating whether procedures

by the Team Member (AT). At the executing phase,

AT is in charge of implementing the audit program

and documenting it, the KT ensuring that all audit

procedures in the Audit Program have been carried

out, the Technical Controller (PT) is responsible

through the weekly report, reviewing that the audit

procedures that cannot be carried out have been

supported by adequate justification and analysis and

reviewing procedures. At the reporting phase, the

Quality Controller (PM) is responsible for reviewing

the proposed development of additional procedures.

2.2 Organizational Influence on

Quality

According to Priede (2012), companies can increase

their competitiveness through the implementation of

Quality management systems (QMS). The

implementation of QMS in managing organizational

strategies can help the organization to achieve its

goals and objectives. To maintain the quality system,

the organization needs to document the procedures,

the resources with their responsibilities and activities

that they must do in the organization. The document

must be accessible to all parties who need it and at

any time can be updated and the update can be

socialized easily and clearly (Zhao Z. et al., 2014).

Thus, quality management is a way to regulate and

involve all part of the organization in achieving

quality requirements, related to employee and

customer satisfaction. The implementation of QMS in

organizations defines the quality of services provided

by the organization, and it leads to customer trust.

2.3 Business Process of Audit

Dye & Stapenhurst (1998) on his journal, stated that

auditing is considered as one of the eight pillars of the

national integrity system, which can protect against

corruption (Jeppesen, 2017). Audit planning is

carried out by the auditor so that the audit activities

do not cost a lot, can collect sufficient evidence, and

also can avoid misunderstanding the contract of

cooperation with the client. Hall (2011) divides the

audit planning phase into three stages, namely (1)

reviewing the organizational structure and policies;

(2) reviewing general control of the organization

along with its control devices; and (3) testing of

control plans and substantive testing procedures. The

control testing phase has the following stages: (1)

implementation of the control test, (2) evaluating the

test results, and (3) determining the level of control.

The substantive testing phase has the following

stages: (1) the implementation of substantive testing,

(2) evaluating the results of the auditor's report, and

(3) making an audit report (Chou, 2015).

There are many parties who benefit from the

audit, not only in the private sector but also in the

public sector. Stakeholders such as fund lenders,

owners, employees, suppliers, or community groups

with particular interests benefit from audits of related

organizations (Hay & Cordery, 2018). Another thing

that needs to be considered in conducting audits is

collecting audit evidence. In conducting audits, audit

evidence is an important matter to note. In

International Standard Audit (ISA) stated that the

adequacy of audit evidence as a "measure of the

quantity of audit evidence." The ISA also states that

the suitability of audit evidence is "a measure of the

quality of audit evidence." The auditor can obtain

audit evidence and directly test the completeness and

The Development of Quality Management System in Compliance Audit of Construction Contract Agreement

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accuracy of the data while performing the main

inspection procedures that use the data.

2.4 Audits on Engineering

In the public sector and private sectors, both of them

conducted audits on the result of construction projects

that carried out by independent auditors. The purpose

is not only to assess the accuracy of financial

management activities on the project but also provide

benefits in assessing project performance and

comparing the project with best practices on other

similar projects for quality improvement. Morrill,

Cameron and Morril, Janet (2003) share some

external audit activities that are also used in internal

audits into four stages: planning of the audit; testing

of the internal control system; substantive testing and

analytical review.

Mashwama, N. et al. (2017) revealed that in order

to eliminate the poor quality of construction projects

in Swaziland, organizations could implement a

quality management system and determine the key of

success factors. In monitoring stage, success factors

that influence the reductions of cost of poor quality

are fulfilling health and safety requirements;

measurement of executed works; measurement of

wastage and reworks; testing of executed works

Measure Variation in planned and actual resource

utilization.

Nikulina, M.E. et al. (2017) developed audit

methods into 6 (six) main stages, are: planning;

collecting the audit evidence; make report and

auditor's conclusion (Bogdanova, N.A. et al., 2009);

arrange program of works; record all the field

inspections, laboratory results and the analysis; the

development of corrective actions and operability

analysis of data obtained. The type of operations

depends on the scope of activities (Nikulina, M.E. et

al., 2017).

Didkovskaya, O. et al. (2016) stated that

conducting a construction audit requires the

integration of technical experts, legal experts, and

financial experts to evaluate the optimization of

investment in a construction project. The construction

audit is needed to assess project investment and

project construction. Some actions taken in the

construction audit are analysis the initial document;

analysis project documents; assess conformity with

specifications; assess the supervision of construction

by the organization; analysis construction deadlines;

analysis the realization of the project budget; monitor

investment and expenditure, etc.

3 METHOD OF COMPLIANCE

AUDIT OF CONSTRUCTION

CONTRACT AGREEMENT

The methodology of this research is the study of

literature validated through the Delphi method.

Literature studies are used to reveal various theories

that are relevant to the problems being faced or

examined as reference material in the discussion of

the results of the study. Literature studies will be

conducted on several regulations, similar research

reports, audit journals, and guidance on auditing

infrastructures such as roads or other infrastructure.

Validity is carried out using the Delphi method to

several experts who participated in formulating the

BPK audit guidelines and to experts who involved

technically in infrastructure audit.

In a book entitled The Basics of IT Audit (2014)

is explained that one type of audit is a compliance

audit. Compliance audits consist of various series of

an audit conducted by external and internal auditors

in order to fulfill legal requirements or organizational

regulations, industry standards, licensing

requirements, contract commitments, or other formal

obligations. There are 3 (three) types of compliance

audits, namely legal compliance; compliance with

industry standards; and commercial standards.

Whereas according to the Standar Pemeriksaan

Keuangan Negara (2017), compliance audit is to

assess whether the subject matter being audited is

compliant with the provisions of the legislation. In

accordance with the Petunjuk Pelaksanaan

Kepatuhan (2018), compliance audit aims to provide

information to users of the results reports on the

compliance of the entity being audited in complying

with the provisions of the legislation, legislative

decisions, contracts, and established codes of ethics.

Compliance audit for the implementation of

contract agreement for the construction of State

Building refers to Presidential Regulation No. 16/

2018 concerning procurement of government. It has

been regulated in more detail regarding the executing

phases of the construction contract agreement, as

follows:

1. Letter of Appointment of Government

Goods/ Services Providers;

2. Signing of the Contract;

3. Provision of advances;

4. Payment of work performance;

5. Change of Contract;

6. Price adjustment;

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7. Termination of Contract or End of

Contract;

8. Termination of Contract;

9. Project handover; and

10. Handling the force condition.

4 RESULT AND DISCUSSION

Based on the discussions result with several experts

on each audit stages, a form of audit phases can be

obtained which can be carried out in the

Table 1: Audit Phase

No.

Audit Phase

Quality Objectives

Responsible (R),

Accountable (A), Consult (C)

and Informed (I)

Planning

a. Identify the users of

the audit report and

those responsible

All parties responsible for implementing the

Construction of State Building based on

contract agreement are clearly identified

b. Determination of the

main points,

objectives, and audit

scope

The main points, objectives and audit scope

for the implementation of contract

agreement for the construction of State

Building are clearly identified

c. Identification of

criteria;

There is a list of applicable criteria in

implementing the contract agreement for

the construction of State Building and

communicate it to the client

d. Understanding of the

entity and its

environment

The report of understanding results has

informed internal and external factors that

affect the entity

e. Understanding of

internal control

systems;

The report of understanding results of the

Internal Control System has informed the

level of effectiveness of the entity in an

effort to comply with the criteria

f. Determination of

materiality;

The report of materiality determination

results has considered issues of compliance,

public expectations, legislative oversight

needs, the need for transparency and the use

of large financing

g. Risk evaluation;

Risk assessment has informed each critical

area and mapping of the HR responsible for

handling it

h. Determination of

picking test;

Conclusions of the results of the picking

test represent the condition of the

population

i. Preparation of

strategies and audit

plans

The strategy and audit plan are documented

and updated during the audit process

Executing

a. Proof of acquisition

and exposures:

Acquisition of all document details

completed with minutes of request for

information and minutes of observations

from inspectors validated by authorized

users and service providers (refers to

implementation of contract agreement,

Presidential Regulation No. 16/ 2018)

A/C

b. Development of

audit findings

The audit findings contain all elements of

the findings, have substantive truths and

have been reviewed in phases

A/C

c. Obtaining response

to audit findings

Obtaining responses from authorized parties

(entities) over all audit findings submitted

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No.

Audit Phase

Quality Objectives

Responsible (R),

Accountable (A), Consult (C)

and Informed (I)

in an official written form equipped with

supporting documents adequately

Reporting

a. Make an audit report

Completion of the audit report should be on

time, complete, accurate, objective,

convincing, clear and concise

b. Follow-up on

Compliance Audit

Obtaining an action plan for the follow-up

of the entity and reporting the results of

follow-up monitoring

implementation of contract agreement for the

construction of State Building. In accordance with the

agreed audit phases, the quality objectives obtained

were also agreed upon by the experts as in table1.

This paper presents a review of the literature

regarding QMS to be implemented in a compliance

audit. First, the auditor organization shall determine

what will be done and who will be involved and being

responsible. Second, the organization shall establish

quality objectives at relevant processes needed for the

quality management system (ISO 9001). The audit

phase refers to the three basic verification phases are:

planning, collecting the audit evidence; integration all

the information and presentation the results

(Nikulina, M.E. et al., 2017) and in accordance with

the Petunjuk Pelaksanaan Kepatuhan (2018) that

divide the audit phases into three phases, are:

planning; executing; and reporting.

5 CONCLUSION

Each stage of the audit needs to set quality objectives

and roles of each party in the audit team. The quality

objectives were set by experts who are involved in

formulating audit policies or technically involved in

the audit. The purpose of developing a quality

management system in this audit process is to prove

to the client that the auditor's organization can

properly control all quality factors, and ensure the

suitability of the steps to meet the specified

requirements.

This study has limitations due to the focus of

research on compliance audits of construction

contract agreement on government procurement by

providers. Compliance audits assure the government

that a business is following the rules and regulations

of specific agreement and does not conflict with

higher regulations. Future research can develop the

research focus on the development of a quality

management system in audits of a construction

contract agreement that indicate fraud. Thus,

recommendations obtained from audit results can

help the organization to achieve its objectives by

taking preventive or anticipatory actions in

minimizing fraud in the project. Systematic audits of

risk management, control system, and management of

entities can produce recommendations to the

organization to increase its effectiveness.

ACKNOWLEDGEMENTS

The Authors would like to thank the Directorate for

Research and Public Services (DRPM) Universitas

Indonesia for all support.

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