Quality assessment of internal audit activities performed on a periodical basis Nikolina Bibić, Ministry of Finance, Central Harmonization Unit Republic of Croatia

Contents: 1.Introduction 1.1. Legal basis 1.2. Overview of established internal audit units in the public sector of the Republic of Croatia 2. Development of the quality assessment model  Model 1  Model 2  Model 3 3. Conclusion

1.1. Legal basis Public Internal Financial Control Law (2006) Rulebook on Internal audit of Budget Users (2008 and 2013) CHU Service for Methodology and Standards Service for Coordination of Training and Quality Control Service for International Activities

1.2. Overview of established internal audit units in the public sector of the Republic of Croatia BUDGET USERS TOTAL NUMBER OF ENTITIES WITH AN OBLIGATION FOR ESTABLISHIN G INTERNAL AUDIT UNIT NUMBER OF BUDGET USERS THAT HAVE ESTABLISHED THE INTERNAL AUDIT UNIT (as of ) % OF TOTAL NUMBER OF ENTITIES THAT HAVE ESTABLISHED THE INTERNAL AUDIT UNIT Central level ,56 Local level Total ,78

2. Development of the quality assessment model ModelYearDocument Title Methodological Guidelines for Conducting Periodic Quality Assessment of Internal Audit Activities Instruction for Conducting Periodic Quality Assessment of Internal Audit Activities (Version 1.0) Instruction for Conducting Periodic Quality Assessment of Internal Audit Activities (Version 2.0)

Model 1 Methodological Guidelines for Conducting Periodic Quality Assessment of Internal Audit Activities (2012) Organizatioanal position of the Internal Audit Unit Staff Methodology of work Periodic reporting Working papers

Model 2 Instruction for Conducting Periodic Quality Assessment of Internal Audit Activities (Version 2.0) Assessment areas 1. ESTABLISHMENT OF INTERNAL AUDIT 2. INTERNAL AUDITORS 3. CONTINUING PROFESSIONAL DEVELOPMENT 4. INTERNAL AUDIT MANAGEMENT 5. INTERNAL AUDIT PLANNING 6. WORKING PAPERS 7. CONDUCTING INTERNAL AUDIT 8. RECOMMENDATIONS MONITORING 9. REPORTING 10. QUALITY ASSURANCE AND IMPROVEMENT PROGRAM 11. IRREGULARITIES AND FRAUD

Quality assessment performed on the basis of Annual Plan Quality assessment performed by employees of the Central Harmonization Unit (team of two) Minister of Finance issues a decision on appointment Signing a Declaration of Confidentiality and Impartiality Checks take about 7-10 days (2-3 days of field work) Model 2

1.Survey for internal auditors 2.Anonymous survey 1.Interview with management 2.Anonymous survey for audited entities Checklists for all assessment areas (11) Percentage of compliance Assessment of compliance Description of assessment Opinion on compliance ≤50%0Non-compliant....non-compliances impair the ability to perform internal audits 51% - 75%1Partially compliant potential for significant improvements 76% – 99%2Substantially compliant potential for minor improvements 100 %3Fully compliantAll requirements are fulfilled INTERNAL AUDITORS HEAD OF INTERNAL AUDIT UNIT MANAGEMENT

Reporting process Content of the report Introduction Purpose and scope of the assessment Legal framework for conducting the assessment Persons who conducted the assessment Place and period in which the assessment is conducted Quality assessment methodology Assessment results (by areas of assessment) Findings, assessments, opinions, recommendations Conclusions Annexes Response of the head of internal audit unit to the draft report

Reporting process Draft Report on Conducted Assessment Response of the head of Internal Audit Unit Final Report on Conducted Assessment Within 15 working days after the assessment Within 7 working days after receipt of the draft report Within 5 working days after receipt of the response Head of Internal Audit Unit CHU Head of Institution Head of Internal Audit Unit

Assessment results

Model 2 – identified weaknesses Focus on assessment of compliance, not on quality All questions in the checklist are of equal importance Questions were repeated by areas (11) Technical questions – not related to quality assessment The report is too detailed The conclusion did not provide a general / overall assessment

3. Model Instruction for Conducting Periodic Quality Assessment of Internal Audit Activities (Version 2.0) Assessment areas 1. ESTABLISHMENT OF INTERNAL AUDIT 2. INTERNAL AUDITORS 3. INTERNAL AUDIT MANAGEMENT 4. STRATEGIC AND ANNUAL PLAN OF INTERNAL AUDIT 5. PLANNING OF INDIVIDUAL AUDITS 6. PERFORMANCE OF INDIVIDUAL AUDITS 7. REPORTING ON INDIVIDUAL AUDITS 8. QUALITY ASSURANCE AND IMPROVEMENT PROGRAM

1.Survey for internal auditors 2.Anonymous survey 1.Interview with management 2.Anonymous survey for audited entities Checklists for all assessment areas (8) Questions related to Level 1 Questions related to Level 2 Description of assessment Opinion Non-compliant....non-compliances impair the ability to perform internal audits Partially compliantpotential for significant improvements Substantially compliant potential for minor improvements Fully compliantAll requrements are fulflled INTERNAL AUDITORS HEAD OF INTERNAL AUDIT UNIT MANAGEMENT

Reporting process Content of the report Introduction Purpose and scope of assessment Methodology used for quality assessment Opinion about performed assessment (by areas of assessment) Findings, assessment, opinion, recommendations Conclusion Tabular presentation of proposed improvements (addressed to the head of budget user) Tabular presentation of examined areas and quality level (addressed to the head of internal audit unit) Comprehensive opinion (based on individual assessments by areas)

Model 3 The implementation of this quality assessment model will begin from march 2014 According to the Annual Plan, quality assessment of 31 Internal Audit Units / budget users shall be performed in 2014 Selection criteria: –Internal Audit Unit - established more than four years ago –Head of Internal Audit - appointed –The amount of budget funding –A user of EU funds

3. Conclusion Quality assessment has two parts: 1. compliance of the internal audit function and 2. functional efficiency assessment

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