A Strategy for Restructuring

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Keeping on Track Internal Control and Internal
Audit
Budget Execution Implementation for Public
Expenditure Financial Accountability
Course Washington, DC January 17, 2003
Presented by Richard Allen, PEFA Program
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Internal Control and Internal Audit
Control systems involve
Internal Control Audit
Identification of Risk
Development of of Internal Audit
Development of Internal Controls
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Risks
Going off the rail -- risks
Lack of timely and reliable financial and
resource management information
Misuse and waste of financial, human and
technical resources, including external aid
Fraud and error
Unsatisfactory accounting records
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Internal Control Internal Audit Professional
Standards
INTOSAI Guidelines for Internal Control
Standards
Standards for the Professional Practice of
Internal Auditing
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See INTOSAI at http//www.intosai.org/ and IIA
at http//www.theiia.org/
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Definition of Internal Control

• The reliability and integrity of information
• Compliance with policies, plans, procedures, laws
  and regulations
• The safeguarding of assets
• The economical and efficient use of resources
• The accomplishment of established objectives and
  goals of operations and programs

A process within an organization to provide
reasonable assurance regarding the following
primary objectives
Definition of Internal Control
Internal control is a management tool the
organization, policies and procedures used to
help ensure that government programs achieve
their intended results that the resources used
to deliver these programs are consistent with the
stated aims and objectives of the organizations
concerned that programs are protected from
waste, fraud and mismanagement and that reliable
and timely information is obtained, maintained,
reported and used for decision making. --
INTOSAI, Guidelines for Internal Control, June
1992
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Source The Institute of Internal Auditors
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Key Concepts of Internal Control
Internal control is
a process
affected by people. Its not merely policy
manuals and procedures, but people at every level
of the organization
can be expected to provide only reasonable
assurance, not absolute assurance to an entities
management stakeholders
geared to the achievement of objectives
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Source Committee of Sponsoring Organizations of
the Treadway Commission (COSO)
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Importance of Internal Control in Government
The average Ministry has a number of
responsibilities (committing funds, recruiting
staff, contracting for supplies and services,
approving actions, registering transactions and
events, deploying resources and controlling,
supervising and reporting on implementation of
policies).
If these responsibilities are fulfilled properly,
the result will be effective control over
resources, decisions and activities and the
achievement of ministry objectives.
Ministries
If not, abuses will proliferate and efficiency
decline.
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Two Principles of Internal Control
Governing bodies of public sector entities need
to ensure that a framework of control is
established and operates in practice and that a
statement on its effectiveness is included in the
entitys annual report.
Governing bodies of public bodies need to ensure
that effective systems of risk management are
established as part of the framework of internal
control.
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Source IFAC, Corporate Governance in the Public
Sector, 2000
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Three Approaches to Internal Control
B. Emphasis on responsibility for control being
decentralized to line ministries and other
government agencies (Anglo-Saxon, Scandinavian
tradition)
A. Emphasis on controls that are exercised by a
third party organization, at the center of
government, often an agency of the Ministry of
Finance or the MOF itself (Napoleonic tradition)
C. Mixed approaches (e.g., transition
countries)
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Control Procedures

• Clear instructions to staff and appropriate
  training on the objectives, policies and code of
  conduct of the ministry or agency
• An unambiguous definition of the responsibilities
  of staff
• Clear separation of function and duties between
  staff members in handling financial transactions
  or resources issues, e.g., contracts
• Development of an open culture to encourage
  staff at all levels to draw attention to
  non-compliance and irregularity
• Requirements that staff at all levels are aware
  of and apply all relevant instructions
• Support from effective internal audit procedures

Procedures
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Categories of Internal Control
Procurement Controls e.g., rules for advertising
and tendering major contracts
Physical e.g., security procedures intended to
control access to documents and records
Accounting Controls e.g., requirement for all
cash receipts to be deposited daily in a bank,
internal procedures to detect and report anomalies
Separation of Duties Both a control measure and
an indispensable element of many control systems
at least two officials should be involved in
any transaction to avoid risk of improper actions
Process Controls e.g., issuance of a purchase
order or the approval of a sizeable contract may
require documentation from the requesting
official, review by a purchasing clerk, and
approval by a supervisor
Management of Financial Other
Records Essential to establish audit trail
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Limitations of Internal Control
No system of internal control can provide an
absolute guarantee against the risk of wronging
or error. The proper goal of internal control is
to provide reasonable assurance that
improprieties will not occur, or if they do
occur, they will be revealed, reported and
appropriate action taken.
Wrongdoing by top managers
Collusion
Poor response to reported anomalies
Poor implementation
Design flaws
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Definition of Internal Audit
Internal Audit
Definition of Internal Audit Internal
auditing is an independent, objective, assurance
and consulting activity designed to add value and
improve an organizations operations. It helps an
organization accomplish its objectives by
bringing a systematic, disciplined approach to
evaluate and improve effectiveness of risk
management, control, and governance processes.
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Source The Institute of Internal Auditors
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Internal Audit Different Approaches

• In the Auditor-General tradition, internal audit
  is usually reflected in internal audit units of
  individual ministries or agencies, reporting
  directly to top management
• Such internal audit units may also exist in the
  Court of Accounts tradition
• Other variations US Inspector General of each
  agency reports to agency management and to the
  Congress
• The external auditor (SAI) may use the work of
  the internal auditor

• Many countries of the Court of Accounts tradition
  have a central (independent) internal control
  agency located within the Ministry of Finance
• In some cases these have an extensive pre-audit
  role
• Generally wide powers of inspection and review,
  and in many cases a prosecutorial role

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What does the Internal Auditor Look For?
Procurement
Systems Procedures
In the procurement field, has there been adequate
publicity for calls to tender, are there
satisfactory procedures for receiving and
evaluating tenders, is the justification for
contract awards in accordance with national
requirements?
How well do the systems and procedures of
internal control function?
Resource use
Objectives Achievement
Are the systems and procedures in place to ensure
that resources are used in accordance with the
relevant rules and regulations?
Have programs and actions achieved their intended
objectives?
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Independence of the Internal Auditor

• Not equivalent to the independence of the Auditor
  General or President of the Audit court. The
  internal auditor is responsible to the head of a
  ministry or agency and is part of the staff of
  that organization.
• Internal auditors are independent when they
  carry out their work freely and objectively.
  Independence permits internal auditors to render
  their impartial and unbiased judgments essential
  to the proper conducts of audits. It is achieved
  through organizational status and objectivity.
• Status and weight of internal auditor can be
  enhanced by having an audit committee chaired by
  the head of the ministry or agency.
• The internal auditor should not be involved in
  the internal control process which he is required
  to assess and judge.

Source The Institute of Internal Auditors
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Audit Trail

• An audit trail is necessary to keep under review
  the timely and adequate flow of funds and the
  procedures for efficient accounting and the
  reconciliation of expenditure reports with funds
  received or claimed. It is necessary to trace or
  check

To trace and evaluate the systems and procedures
through which approval for payment to the
contractor or beneficiary will be required to pass
To check the transfer of funds authorized by the
treasury to the line ministry or agency
To locate completed payment files with evidence
that payment has, or has not, been made in
accordance with rules and regulations
To trace the budget provision that authorized
payment
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Internal Audit Issues

• Who is in charge of internal auditing and what
  are their responsibilities?
• What is the desired relationship between external
  and internal auditors? What information should
  they share? Should they coordinate their work
  programs?
• How should the internal auditor fulfill his
  responsibilities to senior management? What are
  the limits on instructions that management may
  give to the auditor?
• Who should be the recipients of internal audit
  reports, other than senior management?
• What basic documents should the internal auditor
  produce, e.g., an annual audit plan, an annual
  audit report, etc.?
• Should the government follow the internal audit
  standards of the IIA or guidance from INTOSAI?

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QA Discussion