INTERNAL AUDIT. Smita Chaudhri Accountant General (C&RA) U.P.

Transcription

1 INTERNAL AUDIT Smita Chaudhri Accountant General (C&RA) U.P.

2 Audit types common terminologies Three categories of audit : CA audit External / Statutory ( also known as audit by CAG/AG) Internal audit.

3 Audit types common terminologies CA audit For companies / corporations / nigams Done by CA firms Appointed by the management to check if the accounts present a true and fair view For PSUs appointed by CAG If accounts have been prepared according to the accounting standards (AS) laid down by the ICAI. Annual accounts are audited by these auditors. Satyam case..

4 Audit types common terminologies External Audit obvious - it is by an agency external to the entity For governments it is by the SAI ( in India CAG) For international organizations UN, WHO etc by SAIs of member nations For PSUs CAG It is independent therefore - impartial Responsible to the legislature. Functions under authority of Act. Checks - whether expenditure made was economical, efficient, effective and as per rules and revenue collection optimized

5 Audit types common terminologies Internal audit a diagnostic aid of top management to enable pinpointing of problems, internal control weaknesses and to suggest system improvements a part of the executive function enjoying its own degree of autonomy accountable to the entity but should be independent of the activity it audits in order to achieve its objectives hence world over IA reports directly to the Board/Audit committee is under administrative control of CEO of firms / companies/ corporations in Government should report directly to the Secy /Pr Secy of the department in US operates under an Act

6 Similarities & Differences All check accuracy of financial data. EA & IA focus on expenditure control and revenue optimization, adherence to policies EA focus is to unearth frauds and errors, annual / periodical exercise IA focus - on prevention of frauds and errors, continuous stocktaking exercise CA audit focus correctness / accuracy of financial statements EA independent, impartial. Governed by DPC Act IA part of the entity, but should be independent of the part it audits hence report direct to CEO. Governed by rules of organization CA Audit appointed by management, responsible to code / standards set by ICAI / CAG/ GASAB

7 Definition - IA As defined by the Institute of Internal Auditors IA is : An Independent, objective assurance activity designed to add value & improve an organization s operations. It helps the organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of the management, control and governance processes.

8 chief role Role of Internal Audit to render effective financial advice through recurrent and sufficient sustained checks of the system of internal controls to help ensure an orderly and efficient conduct of business including adherence to policies, prevention of frauds and errors and ensure completeness of financial records. a tool of the management to ensure expenditure control and revenue optimization through system improvement

9 Role of Internal Audit management responsible for establishing policies /processes to help organization achieve specific objectives. IA evaluates whether the policies are designed properly and whether they are operating effectively identifies potential risk areas risks can be strategic, operational, financial, legal / regulatory

10 Role of Internal Audit role in corporate governance as one of the 4 pillars ( BOD, management, EA, IA) improving of internal control is with reference to: effectiveness and efficiency of operations. reliability of financial reporting compliance to laws & regulations

11 Is IA a new concept? for Government comparatively new especially in our country In UP started in 2000, WB was 1 st state - in 1998 for private sector old concept, initially stated as informal tool of owner / management after WW-II formal structure evolved, institute of Internal Auditors set up, standards developed especially strong in banking / financial institutions

12 Elements of IA Organizational independence - from management needed to enable unrestricted evaluation of activities and personnel Independence refers to reporting line who does IA ( IAO ) report to? status of IA- and the IAO - so as to actively fulfill responsibilities attitude to IA free from interference esp w.r.t scope, performing of the audit & communicating results right of communication directly to BOD/ head of the organization If even one of these is compromised the IA loses its relevance

13 Planning IA Prepare a plan Take management inputs while preparing plan so that it is clear that goals of IA & organization are on the same track Establish and communicate the scope of audit to management Develop understanding of the processes under review Identify key risks Identify control procedures developed to control each process Sample and test check to examine control processes through interview, examining documents Report which should have recommendations Follow up

14 IA Reports Elements of internal audit reports: ( the 5 Cs) Condition what was the problem identified Criteria what standard or policy could not be met Cause why did the problem occur Consequence what are the possible outcomes/ risks associated with the problem Corrective action - recommendation

15 Internal Audit in Government In the Private sector priorities are well defined profit maximization In Govt. policies & priorities based on public good, welfare schemes, etc. limited scope / no incentives for efficiency disincentive for proactive protecting of public interest wastage due to poor judgement in managing / allocating resources

16 Internal Audit in Government Audit reports highlighting these are generally felt as damaging to Govt in power and / or to bureaucrats in control position Therefore IA in Govt presents unique opportunities and a challenge to advocates of good governance The Challenge work through & with the system to achieve objectives, ensure public resources are effectively and efficiently used change mindset, promote independence, expand scope and develop a skill set which helps decision making

17 Drawbacks Internal Audit in Government while international standards ( like accounting standards ) are available - Governmental IA continues to focus on relatively minor issues viz; accuracy of accounts, pointing out irregularities and frauds, check if initial books of account are maintained it is like compliance audit, is accorded low priority, there are lack of resources and professional knowledge no specific mandate is given by the executive

18 Why IA in Govt? fiscal responsibility and accountability legislation has changed scenario in Govt coming of outcome budgeting will lead to shift in emphasis from outlays to outcomes disclosure statements will become a part of budget more transparency - RTI act, 24* 7 media, increased communication NEED OF THE HOUR accountability responsiveness IA - an aid to achieve this

19 IA Can IA aid effective governance? is control of all controls checks whether internal controls are working as they should offers scope for mid course correction preventive vigilance as it concurrent rather than post audit to be taken as constructive input encouraged to give +ve recommendation

20 YES Can IA aid effective governance? Why?? a mandate of IA is to identify potential risk areas risks can be strategic, operational, financial, legal / regulatory Govt manages huge resources hence larger exposure to risks

21 Can IA aid effective governance? Risks in Govt Financial like frauds, embezzlements Legal- not depositing EPF, non deduction of WCT, TDS Strategic & Operational biased beneficiary selection, inconsistencies in programme management with objectives failures to meet contractual obligations project delays time /cost overruns Environmental damage (recent Mumbai chlorine gas leak) Threat assessment and response 26/11

22 Risk assessment by IA citizens lose if public services are inefficient / inadequate if fail to meet public expectations reputation of department / Govt. suffers Identification of risks and mitigation will help better service delivery, better project management, improved allocation of resources, minimize waste

23 Can IA aid effective governance? in brief - IA can check whether Government policies as set out in rules & regulations are understood and properly implemented whether codes of conduct for Government employees followed or not whether levels of delegation of authority, responsibility and accountability and their demarcation / checks are clear presence or absence of - long and short term planning for setting up objectives cost benefit studies of major activities - whether the results are in conformity with the goals

24 Can IA aid effective governance? IA can check the reliability and integrity of financial and operating information the means utilized to safeguard and verify the existence of financial and physical assets. proper accounting and operating procedures to ensure reliability of accounting data and efficiency of operations review of operations to reduce possibility of fraud / collusion

25 conclusion world is dynamic, rapidly evolving with changes in technology, globalization, deregulation this causes rapid change in Govt. business changed relationship between Govt & citizens rising public expectations

26 hence - need for robust monitoring mechanisms to deliver quality services to citizens effective IA a major tool for ensuring delivery

27 Thank you