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Risk Management for Auditing Public Debt

The International Organisation of Supreme Audit Institutions, cognisant of the complexity of sovereign debt issues, suggests that sufficient technical knowledge is essential in undertaking an audit. Quality public debt management audits require an understanding of the uncertain macroeconomy, market financing conditions, and government fiscal stance, and stochastic debt sustainability analysis models can provide the analytical engine. Using a model for optimal debt financing with sustainability risk constraints, the Audit Office of the Republic of Cyprus performs an audit of the country's Public Debt Management Office (PDMO). We discuss the use of the model to address two audit questions: (i) Is the government debt sustainable with high confidence, and (ii) is debt financing efficient and effective in securing the lowest cost with acceptable risks? We also examine climate change risks to sovereign debt, finding that they can be material. The Auditor General presented the findings at a special session of the Parliamentary Audit Committee in the presence of the Minister of Finance and they are expected to have a significant impact on the operations of the PDMO going forward.