INTRODUCTION TO PUBLIC FINANCE
MANAGEMENT
Module 3.2 -Internal
Control & Audit
Module map
Module outline
• Internal Controls
• frameworks of internal control
• basic internal controls
• Internal Audit
• compliance & systems audit
• independence of internal audit
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Module outline
• Internal Controls
• frameworks of internal control
• basic internal controls
• Internal Audit
• compliance & systems audit
• independence of internal audit
4
Internal Control - Definition
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
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Internal Control – and Corruption
• 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.
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Limitations
• Internal control cannot by itself ensure the
achievement of these the general objectives
• Human error
• Resource constraints
• Change
• Management attitude
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Module outline
• Internal Controls
• frameworks of internal control
• basic internal controls
• Internal Audit
• compliance & systems audit
• independence of internal audit
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Internal Controls
Internal control consists of five interrelated
components:
• Control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring
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COSO
Pyramid
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Control Environment
• Sets the tone of an organisation, influencing
the control consciousness of its staff
• Culture, staff morale, attitude to risk
• Organisational structure
• Personnel policies
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Risk Assessment
• Risk identification:
• Risk evaluation – likelihood and impact
• Assessment of the risk appetite of the organisation
• Development of responses
• Transfer, tolerate or treat
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Module outline
• Internal Controls
• frameworks of internal control
• basic internal controls
• Internal Audit
• compliance & systems audit
• independence of internal audit
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Control Activities
• Authorization and approval procedures
• Segregation of duties (authorizing,
processing, recording, reviewing)
• Physical & virtual controls over
resources and records
• Reconciliations – bank statement
& cash book
• Supervision
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Control Activities - IT
• Access controls - passwords
• Development controls
• Service continuity – backup - anti-virus
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Information & Communication
• Financial reports – monthly budget
statements
• Key personnel receive and understand
reports
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KEY INTERNAL CONTROLS
1. Budgeting and accounting
2. Revenue
3. Expenditure controls
4. Payroll
5. Stock and fixed asset records
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1. Budgeting and accounting
• 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
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2. Revenue
• 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 19
2. Revenue
All revenue receipted
and promptly banked
intact
Annual
listing of
tax, fees
and
charges
Income &
receipts
Summary of reconciled to
all income bank statements
received
produced
monthly
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3. Expenditure controls
• Invoice or receipt retained for all expenditure
• Segregation of duties
• Monthly bank reconciliations
• Approved list of suppliers
• Competitive tendering for capital contracts
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6. Stock & fixed asset records
• Independent stock takes undertaken annually
• Fixed assets register maintained & checked
annually
• Disposal of all public assets carefully controlled
by public auctions
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Public Internal Financial Control
• Goal - assurance that public funds are being used
for intended purpose & Value For Money (VFM)
Central
Harmonization Unit Functionally Financial
(CHU) -developing independent Management
methodologies and internal
standards &
& Control
monitoring audit systems
Module outline
• Internal Controls
• frameworks of internal control
• basic internal controls
• Internal Audit
• compliance & systems audit
• independence of internal audit
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INTERNAL AUDIT
• Inspection or compliance audit
• Operationally independent unit checking that
internal controls are working properly and
making recommendations for optimization of
controls
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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
Systems (risk based) audit
• Easier to identify irregularities than poor internal
control
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Systems (risk based) audit (2)
• 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
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Recommendations
• Practical steps to improve internal control
• Be specific
• Prioritisation of recommendations
• Follow-up
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Module outline
• Internal Controls
• frameworks of internal control
• basic internal controls
• Internal Audit
• compliance & systems audit
• challenges of introducing systems audit
• independence of internal audit
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Independence of internal audit
• Report direct to the Permanent Secretary
or Chief Executive
• Single department in Ministry of Finance,
headed by a director
• Independent of the Accountant General
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Key Messages
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.
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