Presentation on theme: "Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 1 Module 1:Session 1:Overview of Internal Controls Internal."— Presentation transcript:
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 1 Module 1:Session 1:Overview of Internal Controls Internal Control is a management function whose role it is to restrict, limit, or regulate the performance of an activity. In the management of the affairs of Lower Local Governments, Internal controls refer to:- 1.The orderly conduct of designated tasks; 2.Safeguard of assets; 3.The keeping of accurate and reliable records. Accounting Controls ensure that:- Transactions are properly authorized; Access to assets and records are only with authority; All events/transactions are promptly and correctly; Recorded; The assets that appear in the records physically exist and their whereabouts are known at any given time.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 2 Module 1: Session 1: Characteristics of Internal Controls Administrative Controls ensure that:- Management instruction/ policies and directives are complied with; Activities are carried out in a manner that reduces waste and duplication of efforts. Characteristics of Internal Controls Honest, competent employees. Clear chain of command and levels of authority. Suitable documents and Forms. Segregation of duties. Independent verifications. Limitation of access to assets and accounting records.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 3 Module 1-Session 1: Procedures and Issues Internal Control Procedures Setting and agreeing the standards. Measuring performance. Getting feedback information. Taking corrective action. Important Issues The Local Government Act 1997. The LGFAR 1998. Tender Board regulations,. Agreements. Bye-laws. Charts of Accounts, etc. Performance measurement and feedback systems. Capacity to take timely corrective action.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 4 Module 1-session 1: Accounting Controls The Accounting controls Reconciliation;. verification of arithmetic accuracy. pre-numbering vouchers. Annual leave. Quality Control. Factors that may affect Internal Controls Staff collusion. Abuse of authority. Costs of control higher than expected benefits. Human error. Difficulty in covering non- routine transactions. Procedures often change.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 5 Module 1-Session 1: Limitations of Internal Controls Other influences on Internal Controls Standards, rules and norms are either not clear or incorrectly set. Lack of feedback information. Delayed corrective action. Resistance to change. Control action may be deferred due to high social and economic costs. Note: You cannot control what you are not in a position to measure. Management functions include planning, organizing, motivating and controlling the affairs of an organization
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 6 Module 1: Session 2: Evaluating Internal Controls Evaluation means the periodic assessment of the efficiency, effectiveness, impact, sustainability and relevance of the internal controls in the context of stated objectives. Steps 1.Internal controls must be written and communicated to staff. The assessment is to determine whether the controls have been applied. 2.Study the system to ascertain their application by; referring to procedural Handbooks,interviewing key personnel, observing practice and administering questionnaires
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 7 Module 1: Session 2- Steps in Evaluating Internal Controls Steps (ctd) 3.Record the Internal Control system through the use of narratives or flow charts. Narrative: Describe in words –The origin of the document/record; –Include any steps in its processing ; –Determine how the document is finally dealt with –Check the necessary authorizations and filing Use of Flow Charts These are symbolic (and often) diagrammatic representations of documents-their creation and flow within the LG. It follows sequentially from origin to final disposition., e.g. from issue of LPO to final settlement of the creditors’ account 4 Apply the Walk- Through Test; i.e. follow a selected document from its origin to disposition
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 8 Module 1: Session 2- Identification & Measurement of Controls The Walk- Through Test also enables you to understand the system better and to identify mistakes and incomplete parts of your description 5.Identify existing Internal Controls, and: Evaluate their adequacy when taken together in minimising the chance of error and irregularities Use- your description of the system; the internal control objectives, and elements of the internal control, e.g. segregation of duties, to arrive at a judgment on the adequacy of internal controls 6.Design audit tests (in the case of Auditors) and plan audit based on the judgment 7.Communicate weaknesses to management and Council
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 9 Module 1: Session 3: Revenue Collection Audit Reasons for auditing revenue: Verify total collection Assess compliance with LGA, LGFARs Determine revenue loss, if any Verify accounting records Verify banking Account for government grants The auditor must start by studying and evaluating the control systems for revenue and do the following:- 1.Audit for compliance with- Regulatory requirements-e.g. sharing of revenues between Gs Compliance with LGA, LGFARs Internal management guidelines
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 10 Module 1: Session 4-Substantive Revenue Audit 2.Carry out substantive audit: Test transactions to ascertain accuracy; Use tests in audit program; Review registers for unusual items; Trace registers to assessment forms; Compare billings to authorized rates; Reconcile revenue registers to cashbook; Confirm banking by reviewing bank statements; Verify categorization was properly made; Vouch receipts, test amount in words agree with amount in figures; Vouch release notes for grants to actual banked; Account for all receipt books; Confirm timely posting of revenue. 3.Carry out performance audit: Compare revenue collected to budgets population figures, collection in previous period, with other sub- counties, etc. Calculate some performance ratios
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 11 Module 1:Session 4- Tests for Revenue Arrears 4.Perform specific tests for revenue arrears Verify opening arrears Ascertain surcharge imposition and collection Verify schedule of revenue arrears 5.In the case of loans, perform the following tests Verify compliance with LGA and LGFARs Confirm authorization Confirm proper usage of funds –i.e for intended purpose Verify council compliance with loan terms Temporary borrowing should as well comply with LGA
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 12 Module 1: Session 4- Payment Controls Relevant Documents –Purchase Requisition –Local Purchase Order (LPO) –Goods Received Note (GRN) –Invoice –Payment Voucher –Voucher Register –Claims Forms –Payroll –Contacts/ Agreements –Delivery Note Controls are necessary in all the functions/ stages of the payment system including:- personnel, payroll processing, receiving goods, processing LPOs, and recording Ledgers
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 13 Module 1:Session 4-Recording Transactions Authorization Controls The HoD, CFO,CAO, Local Govt Tender Boards Goods/Services Received Controls Existence of LPO, GRN, Invoice, etc Cancel voucher and supporting documents after paying Verification of supporting documents by third, independent person Recording of payments & on-time controls Pre-number LPOs, voucher and GRN Internal verification of recording Post creditor ledger immediately goods/services are received; Daily posting of abstract Bank reconciliation
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 14 Module 1:Session 5-Fixed Assets Control Category of Fixed Assets Long- tern outlay. Other long- tern outlay. Suitable document: Fixed Assets Register Utilization: Proper authorization of use; Procedures to deter unauthorized, personal use; Scheduling. Acquisition: Authority and procedures for acquisition; The capital budget.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 15 Module 1: Session 5-Asset Acquisition and Use Asset acquisition Public tendering and value for money. Monitor capital expenditure. Recording: Internal verification of Assets Register and ledger; Confirmation of physical assets with records; Comparison of supplier invoice with records. Operation and Maintenance Keep, review and update maintenance file; Maintain log books; Authorize all jobs.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 16 Module 2: Session 1: Auditing and Audit Reports Internal Audit is an independent watch dog function that is conducted within a LG to check that public resources are properly managed and used. Functions of Internal Audit Reporting on effectiveness and adequacy of internal controls. Determining reliability of financial and operating information. Determining the extent to which management procedures are adequate to safeguard LG Assets. Determine the economy, efficiency, and effectiveness of LG activities, programmes, and service delivery.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 17 Module 2: Session 1- Internal Audit Functions Determining compliance with legal requirements- LGA & LGFARs. The Legal Requirements 91 LGA: District/City/Municipality/Town Council to have an Internal Audit Department. Chief S Internal Auditor to produce quarterly audit reports. Roles of Internal Auditors Post audit all financial transactions. Routine compliance auditing (regarding the law and financial regulations). Audit revenue collection. Ensure budgetary controls are followed.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 18 Module 2: Session 1-IA Roles; Auditor General Audit assets to ensure efficient use and proper custody. Review the adequacy of internal controls. Value- for- money audits. Audit sub-counties and divisions. On- the- spot cash checks. Special investigations. The Auditor General Expresses expert, independent opinion. Reliability of underlying records. Possibility of fraud, errors, and irregularities. Advise on internal controls. Compliance auditing. Certifies completed annual accounts of local governments. Other Relevant Organs The Inspector General of Government. PAC of the Local Government. MOLG Inspectors. MOFPED Inspectorate. Line Ministries. The Press.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 19 Module 5: Session 4: Value for Money Audits Value means the worth of something compared to the price paid for it. Users of a service are the best judges of its value VFM is important in Local Governments because success cannot be measured in terms of profits VALUE FOR MONEY ELEMENTS Outcomes or Objectives »EFFECTIVENESS Outputs (physical results »EFFICIENCY Activities »ECONOMY Inputs (resources)
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 20 Module 2: Session 2- Why Perform VFM ? VFM Audits are carried out by looking for instances of spending where too much money is spent on certain items, activities, or services than justified (economy); Whether too much resources have been used to achieve an output (Efficiency); Whether resources are spent for no objectives achieved (Effectiveness). Why perform VFM audits? To identify procedures more costly than justified; Detect work done but no objectives achieved; Identify duplication of efforts; Identify assets misuse and under utilization; Instances of over-staffing Where the cost of collecting revenue far exceeds amount collected Identify market improvements in outcome Recommend ways to improve VFM in LGs
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 21 Module 2:Session 2- Examples of VFM Considerations Examples: Inputs: Drugs, 10 health workers, transport funds, etc. Activity: Immunize children below five years against measles in a sub- county Economy: Cost of immunizing a child. Output: 3000 children immunized in 30 days Efficiency: 3000 = 30 children per 10 x 30 worker per day Objective: Improve service delivery by immunizing 95% of the children below five years against measles Outcome:Reduction in measles cases over the long term from 20% to 5% of the children below five years.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 22 Module 2: Session 2: Types of VFM Audits Types of VFM Selective investigations, e.g. in water activities Broad- based- all major activities Review of managerial operations Some audit tests include: Review of objectives of the service; Comparison of alternative costs/methods; Review of budgets; Calculation of revenue collection costs, compare with actual collections; Observation of activities; estimation of costs/efforts required; Asking service beneficiaries whether they are satisfied with the service/goods; Identify assets under- utilization, or misuse; Quantify outcomes and compare with budgets; Compare output with targets, national standards and budgets; Compare cost of item with market prices;
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 23 Module 6: Session 2:Writing Audit Reports Three types of Internal Audit Reports (1)Routine; (2) Quarterly; and (3) Special Investigations Good writing skills required for all. This requires more that just gook knowledge of auditing and Accounting. In addition:- The writer has to demonstrate skills in gathering facts, arranging them and presenting the conclusions correctly, comprehensively, and yet in simple language; Routine reports use previous reports as their starting point; Plan the structure, contents and recommendations of the report appropriately; Draft the contents during the actual audit when the details are still fresh.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 24 Module 2:Session 3: Characteristics of Good Reports Characteristics of Good reports Objectivity –Unbiased conclusions Clarity - the reader has little or no accounting knowledge Tone -sincere expressions supported by documented facts. Be courteous Title - explicit but brief Brevity – avoid excessive detail Accuracy Layout - list of contents Purpose Scope result (findings) may include management views - Opinion of Auditor - Recommendations - Acknowledgement of good - performance and corrective action - Appendices Confidentiality-If, print on face Materiality -give prominence to significant items Acknowledgement- of information from other sources Completeness Signature- by CIA, dated Timely- late reports are useless May include graphs, charts, tables, percentages as these are powerful in driving messages home
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 25 Module 2: Session 4: Audit Report Follow- up Audit reports have to be read and their recommendations implemented. In addition, Council and the administration should react to decisions taken. The CIA should follow –up to ensure reports are acted upon. This helps to avoid repeating the same recommendations again and again. Bodies to follow- up audit reports: 1.The LG Public Accounts Committee- examines reports on behalf of the council and may request councilors/officers to submit/explain a report and to act on it; 2.The Executive Committee receives quarterly IA reports from the LGPAC and reports to council; follows-up special investigations;
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 26 Module 2: session 4: Bodies That Follow-up Audits 3.The Council Discusses the LGPAC and CIA reports and gives directives to the Chief Administrative Officer/Town Clerk, or other officers. 4.The CAO/Technical Committee Implements recommendations of the LGPAC and Council should pay attention to routine internal audit reports and take necessary action. They may refer the reports to the Finance Committee for further action. 5.Parliament Discusses reports of the Auditor General and may direct certain corrective measures Parliament may use its committee on Local Governments.
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 27 Module 3: Session 1: Fraud in Local Governments Fraud is deception to make one obtain goods/services illegally, or present a false picture of the local government financial position. It includes embezzlement, forgery, falsification of documents, defalcation and corruption. Fraud is normally perpetrated by trusted council employees’. Two broad categories of fraud; –Manipulation of financial records/ accounts –Stealing council funds and other assets
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 28 Module 3: Session 1: Theft of Council Funds/Assets Some of the common methods include: Double payments; Fictitious employees; Use of wrong pay scales for employees; Forging supporting documents to steal cash; Teeming and lading; Carbon slipping; Wrong tax assessments; Printing own receipts; Forging signatures on cheques; Paying suppliers/contractors for no work done; Stealing stores; Intentional errors in book casting. In terms of amounts, payments to suppliers and contactors constitute the major avenue for stealing funds
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 29 Module 3: Session 2: Indicators for Fraud Indicators for fraud include: Extravagant lifestyles by employees; Inconsistencies in accounting documents; Unexplained filing procedures and messy document arrangements; Erasures and crossings in documents; Lack of proper segregation of duties; Excessive decision power to lower staff; Refusal to take leave; Unexplained delays in transactions recording. Note: all the above are circumstantial evidence of fraud Reasons for fraud: Low pay Greed Lifestyle Personal problems Job security Status Imminent changes in management Forthcoming appraisals Political factors
Section 14.0Financial Management: Internal Controls and Audit Course for Lower Local Governments 30 Mod 3:Session 3: Fraud Prevention and Detection Management and the Executive Committee should consider well in advance fraud prevention measures. Once cash, or any other assets are lost, it is not easy to get them back. Preventive mechanisms include:- Strong internal control systems- especially segregation of duties and authorization of transactions; Employee rotation within the council and mandatory annual leave for all employees; Creation of internal audit departments; Regular independent bank reconciliations; Regular assets and stores inspections; Use of carbonized receipts; Stringent deterrent penalties; Time accountability; Tests to detect cash frauds Count cash immediately and reconcile the cashbook; Cast and vouch the cashbook, scrutinize the CB against bank statements; Obtain bank confirmation directly; Compare payees with details in CB; Trace employees fro payroll to personnel records; Confirm debtors by circularization; Account for all vouchers; Note any irregular cash payments; Trace purchase invoices to CB, ensure no double payments; Circularize creditors.