INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 4.3: Internal Control & Audit

Internal Controls framework of internal control basic internal controls Internal Audit compliance & systems audit independence of internal audit Module outline 2

Internal Controls framework of internal control basic internal controls Internal Audit compliance & systems audit independence of internal audit Module outline 3

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 4

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 5

Internal control cannot by itself ensure the achievement of the general objectives Human error Resource constraints Change Management attitude Limitations 6

Internal Controls framework of internal control basic internal controls Internal Audit compliance & systems audit independence of internal audit Module outline 7

Internal control consists of five interrelated components: Control environment Risk assessment Control activities Information and communication Monitoring Internal Control Framework 8

9 COSO Framework COSO Cube (2013 Edition

Control Environment 10 1.Demonstrates commitment to integrity and ethical values 2.Exercises oversight responsibility 3.Establishes structure, authority and responsibility 4.Demonstrates commitment to competence 5.Enforces accountability

6.Specifies suitable objectives 7.suitable objectives 8.Identifies and analyzes risk 9.Assesses fraud risk 10.Identifies and suitable objectives 11.Identifies and analyzes risk 12.Assesses fraud risk 13.Identifies and analyzes significant change Risk Assessment 11 6.Specifies suitable objectives 7.Identifies and analyzes risk 8.Assesses fraud risk 9.Identifies and analyzes significant change

COSO (private sector) Internal Control — Integrated Framework (Revised 2013)" is translated into the Public Sector by the INTOSAI "Guidelines for Internal Control Standards for the Public Sector" (INTOSAI GOV 9100, revised 2004) the latter being the only basis for PEFA coverage of IC

Internal Controls framework of internal control basic internal controls Internal Audit compliance & systems audit independence of internal audit Module outline 13

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 14

Access controls - passwords Development controls Service continuity – backup - anti-virus Control Activities - IT 15

Financial reports – monthly budget statements Key personnel receive and understand reports Information & Communication 16

1.Budgeting and accounting 2.Revenue 3.Expenditure controls 4.Payroll 5.Stock and fixed asset records Key Internal Controls 17

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 18

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 19

2.Revenue 20 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 21

Effective control is achieved by segregation of three sets of data files: Personnel and payroll data is to be updated promptly & may be linked or one database Payroll see module funded posts - payroll personnel database

Independent stock verification undertaken annually Fixed assets register maintained & checked annually Disposal of all public assets carefully controlled by public auctions Stock & fixed asset records 23

Ensures Internal Controls remain relevant Ensures findings/recommendations are acted on Ongoing Monitoring Covers each of the IC components Separate Evaluations Monitoring

Internal Controls framework of internal control basic internal controls Internal Audit compliance & systems audit independence of internal audit Module outline 25

Operationally independent unit checking that internal controls are working properly and making recommendations for optimization of controls 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 26

Compliance with rules and regulations Easier to identify irregularities than poor internal control Systems Examines system of Internal controls, checks and balances Systems (risk based) audit 27

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) 28

Practical steps to improve internal control Be specific Prioritisation of recommendations Follow-up Recommendations 29

Internal Controls framework of internal control basic internal controls Internal Audit compliance & systems audit independence of internal audit Module outline 30

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 31

stronger emphasis on Internal Control Framework and control activities In the list of Indicators: A) control activities in payroll, procurement, revenues (covered in modules 3.1, 4.1 etc); B) NEW! Focus on Assets and Liability Management, PI-10 (fiscal risk management), PI-11 NEW indicator Public Investment management and PI -12 New Public Asset management, all include "monitoring” C) other specific additional indicators having changed are PI-24 (control non-salary expenditure, New: segregation of duties and, Compliance with control systems - reformulated) and PI-25 (internal audit – slight changes) PEFA 2015 UPDATE

Upgraded PFM Performance Report Executive summary 1.Introduction 2.Country background information 3.Assessment of PFM systems 4.Cross-cutting analysis 5.Government PFM Reform Process Annexes i. Performance indicator summary ii. Sources of information 33 s.2.5 Description of the internal control framework s.4.2 Effectiveness of the internal control framework

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 34