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Transcript of The World Bank Presented by: Richard Allen, PEFA Program Keeping on Track: Internal Control and...
The World Bank
Presented by:Richard Allen, PEFA Program
Keeping on Track:Keeping on Track:
Internal Control and Internal AuditInternal Control and Internal Audit
Budget Execution & Implementation forPublic Expenditure & Financial Accountability CourseWashington, DC: January 17, 2003
The World Bank
Control systems involve:
Internal Control and Internal Audit
2
Identification of Risk
Development of Internal Controls
Development of of Internal Audit
Internal Control & Audit
The World Bank
Risks
3
Misuse and waste of financial, human
and technical resources,
including external aid
Misuse and waste of financial, human
and technical resources,
including external aid
Fraud and errorFraud and errorUnsatisfactory
accounting records
Unsatisfactory accounting
records
Lack of timely and reliable financial
and resource management information
Lack of timely and reliable financial
and resource management information
Going off the rail -- risks
The World Bank
2
1
Internal Control & Internal Audit: Professional Standards
4See: INTOSAI at http://www.intosai.org/ and IIA at
http://www.theiia.org/
See: INTOSAI at http://www.intosai.org/ and IIA at
http://www.theiia.org/
Standards for the Professional Practice of Internal AuditingStandards for the Professional Practice of Internal Auditing
INTOSAI
Guidelines for Internal Control Standards
INTOSAI
Guidelines for Internal Control Standards
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A process within an organization to provide reasonable assurance regarding the following
primary objectives:
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
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
Source: The Institute of Internal Auditors
Source: The Institute of Internal Auditors
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
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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Key Concepts of Internal Control
Source: Committee of Sponsoring Organizations of the Treadway
Commission (COSO)
Source: Committee of Sponsoring Organizations of the Treadway
Commission (COSO)
Internal control is …
… a process… a process
… affected by people. It’s not merely policy manuals and
procedures, but people at every
level of the organization
… affected by people. It’s 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
… can be expected to provide only
reasonable assurance, not
absolute assurance to an
entities’ management & stakeholders
… geared to the achievement of
objectives
… geared to the achievement of
objectives
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The World Bank7
Importance of Internal Control in Government
Ministries
If these responsibilities are fulfilled properly, the result will be effective control over resources,
decisions and activities and the achievement of ministry objectives.
If these responsibilities are fulfilled properly, the result will be effective control over resources,
decisions and activities and the achievement of ministry objectives.
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).
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 not, abuses will proliferate and efficiency decline. If not, abuses will proliferate and efficiency decline.
The World Bank
Two Principles of Internal Control
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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 entity’s 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.
Source: IFAC, Corporate Governance in the Public Sector,
2000
Source: IFAC, Corporate Governance in the Public Sector,
2000
The World Bank9
Three Approaches to Internal Control
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)
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)
B. Emphasis on responsibility for control
being decentralized to line ministries and other
government agencies (Anglo-Saxon,
Scandinavian tradition)
B. Emphasis on responsibility for control
being decentralized to line ministries and other
government agencies (Anglo-Saxon,
Scandinavian tradition)
C. Mixed approaches (e.g., transition
countries)
C. Mixed approaches (e.g., transition
countries)
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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
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
Control Procedures
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Physical:e.g., security
procedures intended to control access to
documents and records
Physical:e.g., security
procedures intended to control access to
documents and records
Procurement Controls:
e.g., rules for advertising and tendering major
contracts
Procurement Controls:
e.g., rules for advertising and tendering major
contracts
Accounting Controls:e.g., requirement for
all cash receipts to be deposited daily in a
bank, internal procedures to detect and report anomalies
Accounting Controls:e.g., requirement for
all cash receipts to be deposited daily in a
bank, internal procedures to detect and report anomalies
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
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
Management of Financial & Other
Records:Essential to establish
audit trail
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
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
Categories of Internal Control
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Design flaws
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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.
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.
Poor implementation
Poor response to reported anomalies
Collusion
Wrongdoing by top managers
The World Bank
Definition of Internal Audit
Source: The Institute of Internal Auditors
Source: The Institute of Internal Auditors
Definition of Internal Audit:
“Internal auditing is an independent, objective, assurance and consulting activity designed to add value and improve an organization’s 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.”
Definition of Internal Audit:
“Internal auditing is an independent, objective, assurance and consulting activity designed to add value and improve an organization’s 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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Internal Audit
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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?
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Systems & Procedures
How well do the systems and procedures of internal control function?
Procurement
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?
Objectives’ Achievement
Have programs and actions achieved their intended objectives?
Are the systems and procedures in place to ensure that resources are used in accordance with the relevant rules and regulations?
Resource use
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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.
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.
16Source: The Institute of Internal
Auditors
Source: The Institute of Internal Auditors
The World Bank
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:
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:
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To trace the budget
provision that
authorized payment
To trace the budget
provision that
authorized payment
To check the transfer of
funds authorized by the treasury to
the line ministry or agency
To check the transfer of
funds authorized by the treasury to
the line ministry or agency
To trace and evaluate the systems and
procedures through which approval for
payment to the contractor or
beneficiary will be required to pass
To trace and evaluate the systems and
procedures through which approval for
payment to the contractor or
beneficiary will be required to pass
To locate completed
payment files with evidence that
payment has, or has not, been
made in accordance with
rules and regulations
To locate completed
payment files with evidence that
payment has, or has not, been
made in accordance with
rules and regulations
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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?
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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Q&A
&
Discussion