INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module 3.2 -Internal Control & Audit

Module map

• Internal Controls

• frameworks of internal control

• basic internal controls

• Internal Audit

• compliance & systems audit

• independence of internal audit

Module outline

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• Internal Controls

• frameworks of internal control

• basic internal controls

• Internal Audit

• compliance & systems audit

• independence of internal audit

Module outline

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Internal control is a process, effected by management, designed to provide assurances on:

• Effectiveness and efficiency of operations

• Reliability of financial reporting

• Compliance with laws and regulations

• Safeguarding against loss, misuse and damage

Internal Control - Definition

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• Can help prevent corruption at officer/internal level

• Can help reduce a culture of corruption

• Has limited ability to detect corruption at political level

• Is part of the armoury against corruption.

Internal Control – and Corruption

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• Internal control cannot by itself ensure the achievement of these the general objectives

• Human error

• Resource constraints

• Change

• Management attitude

Limitations

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• Internal Controls

• frameworks of internal control

• basic internal controls

• Internal Audit

• compliance & systems audit

• independence of internal audit

Module outline

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Internal control consists of five interrelated components:

• Control environment

• Risk assessment

• Control activities

• Information and communication

• Monitoring

Internal Controls

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COSO Pyramid

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• Sets the tone of an organisation, influencing the control consciousness of its staff

• Culture, staff morale, attitude to risk

• Organisational structure

• Personnel policies

Control Environment

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• Risk identification:

• Risk evaluation – likelihood and impact

• Assessment of the risk appetite of the organisation

• Development of responses

• Transfer, tolerate or treat

Risk Assessment

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• Internal Controls

• frameworks of internal control

• basic internal controls

• Internal Audit

• compliance & systems audit

• independence of internal audit

Module outline

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• Authorization and approval procedures

• Segregation of duties (authorizing, processing, recording, reviewing)

• Physical & virtual controls over resources and records

• Reconciliations – bank statement & cash book

• Supervision

Control Activities

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• Access controls - passwords

• Development controls

• Service continuity – backup - anti-virus

Control Activities - IT

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• Financial reports – monthly budget statements

• Key personnel receive and understand reports

Information & Communication

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1. Budgeting and accounting

2. Revenue

3. Expenditure controls

4. Payroll

5. Stock and fixed asset records

KEY INTERNAL CONTROLS

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• Financial regulations are up to date

• Budget agreed before the start of the year

• Aaccounts audited & published within one year of the year-end

• Suitable financial coding structure is maintained

1. Budgeting and accounting

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• Annual listing of tax, fees and charges

• All revenue receipted and promptly banked intact

• Income & receipts reconciled to bank statements

• Summary of all income received produced monthly

2. Revenue

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2. Revenue

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Annual listing of tax, fees and charges

All revenue receipted and promptly banked intact

Income & receipts reconciled to bank statements

Summary of all income received produced monthly

• Invoice or receipt retained for all expenditure 

• Segregation of duties

• Monthly bank reconciliations

• Approved list of suppliers

• Competitive tendering for capital contracts

3. Expenditure controls

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• Independent stock takes undertaken annually

• Fixed assets register maintained & checked annually

• Disposal of all public assets carefully controlled by public auctions

6. Stock & fixed asset records

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• Goal - assurance that public funds are being used for intended purpose & Value For Money (VFM)

Public Internal Financial Control

Financial Management & Control systems

Functionally independent internal audit

CentralHarmonization Unit (CHU) -developing methodologies and standards & monitoring

• Internal Controls

• frameworks of internal control

• basic internal controls

• Internal Audit

• compliance & systems audit

• independence of internal audit

Module outline

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• Inspection or compliance audit

• Operationally independent unit checking that internal controls are working properly and making recommendations for optimization of controls

INTERNAL AUDIT

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• General Financial Inspectorate

• reviews transactions, accounts and organizations

• compliance - financial laws & regulations

• corrective – analyze problems & recommend change

• reports to the Ministry of Finance

Inspection or compliance audit

• Easier to identify irregularities than poor internal control

Systems (risk based) audit

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• Internal audit’s scope should include the entity’s systems, procedures and locations

• Internal audit should audit internal control systems, risk management and corporate governance procedures

• Plan to cover the most significant (risky) systems each year

Systems (risk based) audit (2)

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• Practical steps to improve internal control

• Be specific

• Prioritisation of recommendations

• Follow-up

Recommendations

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• Internal Controls

• frameworks of internal control

• basic internal controls

• Internal Audit

• compliance & systems audit

• challenges of introducing systems audit

• independence of internal audit

Module outline

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• Report direct to the Permanent Secretary or Chief Executive

• Single department in Ministry of Finance, headed by a director

• Independent of the Accountant General

Independence of internal audit

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1. Strong internal controls are essential to reduce mistakes, waste, fraud & corruption

2. Compliance audits are required. 3. System audit is seen as a best practice,

but establishing strong systems/risk based internal audit takes time.

Key Messages

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