Internal Control Internal Audit External Audit by A N Chatterji

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Internal ControlInternal AuditExternal
Auditby A N Chatterji
An Overview of
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Internal Control

• An integral component of an organizations
• management that provides reasonable assurance
  that the following objectives are being achieved
• effectiveness and efficiency of operations,
• reliability of financial reporting, and
• compliance with applicable laws and
  regulations.

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The Five Standards for Internal Control

• Control Environment
• Risk Assessment
• Control Activities
• Information and Communications
• Monitoring

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Internal control

• a major part of managing an organization.
• Consists of plans, methods, and procedures used
  to meet missions, goals, and objectives and,
• supports performance-based management.

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Framework for establishing and maintaining
effective internal controls

• describe internal control roles and
  responsibilities for government managers and
  auditors,
• describe common internal control practices,
• provide a simple checklist to assess whether
  an organization has taken appropriate steps to
  ensure effective internal control, and
• provide a list of references for further
  information.

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Managers Internal ControlRoles and
Responsibilities

• Create a positive control environment by
• setting a positive ethical tone,
• providing guidance for proper behavior,
• removing temptations for unethical behavior,
• providing discipline when appropriate,
• preparing a written code of conduct for
• employees.
• Ensure that personnel have and maintain a
• level of competence to perform their duties.

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Managers Internal ControlRoles and
Responsibilities

• Clearly define key areas of authority and
  responsibility.
• Establish appropriate lines of reporting.
• Establish management control policies and
  procedures that are based on managements
  analysis of risk
• Use training, management communications, and
  day-to-day actions of managers at all levels to
  reinforce the importance of management control.
• Monitor the organizations control operations
  through annual assessments and reports to top
  management

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Internal Auditors Roles and Responsibilities

• Recommend ways to improve operations
• and strengthen controls.
• Follow up to ensure recommendations are
• fully and effectively implemented.
• Coordinate audit activities with external
  auditors.
• Implement an audit quality assurance system.

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Basis of Internal Control Practices

• Internal control practices should be designed to
  comply with internal control standards
• developed and promulgated by a central authority,
  
• usually designated by a legislative body.

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Common Internal Control Practices

• Transactions are promptly recorded to maintain
  their relevance and value to management in
  controlling operations and making decisions.
• Information processing is controlled, such as
  through edit checks of data entered.
• An organizations workforce is effectively
  trained and managed to achieve results.
• Key duties and responsibilities are divided among
  people to reduce the risk of error or fraud. That
  is, duties are segregated.

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Common Internal Control Practices

• Performance indicators are developed and
  monitored.
• Managers compare actual performance to planned or
  expected results and analyze differences.

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Common Internal Control Practices

• Physical control is established to secure and
  safeguard all vulnerable assets.
• Access to resources and records is limited to
  authorized individuals.
• Accountability for their custody and use is
  assigned and maintained.
• Transactions and other significant events are
  authorized and executed only by persons acting
  within the scope of their authority.
• Internal control and all transactions and other
  significant events are clearly documented and the
  documentation is readily available for
  examination.

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• Internal control structures are
• fundamental to
• control of an organization
• its purpose,
• operations,
• and resources.

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• Internal control is not one event, but a series
  of actions and activities that occur throughout
  an entitys operations on an ongoing basis.
• Internal control is an integral part of each
  system that management uses to regulate and
  guide its operations,not a separate system
  within an agency.
• Internal control is management control built into
  the entity to help managers run the entity and
  achieve their aims on an ongoing basis.

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Internal control helps ensure that the entity

• adheres to laws, regulations, and management
  directives
• promotes orderly, economical, efficient, and
  effective operations and
• achieves planned outcomes
• safeguards resources against fraud, waste,
  abuse, and mismanagement

• provides quality products and services
  consistent with the organizations mission and
• develops and maintains reliable financial and
  management information
• and fairly discloses that data through timely
  reporting.

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Internal Audit

• Auditors are a part of a governmental
  organizations internal control framework,
• they are not responsible for implementing
  specific internal control procedures in an
  audited organization.
• That is properly managements job.

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Internal Audit
Auditors may be part of the organization but it
is important and necessary that their
independence be maintained. Management should
support this by emphasizing the need for
independent and objective auditing. Management
should also identify areas for improving
performance quality and respond to information
developed through audits.
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Internal Auditors Roles and Responsibilities

• Maintain independence in fact and appearance.
• Ensure professional competence of audit staff.
• Advise management on areas at risk.
• Establish auditing strategic plans and goals.
• Perform audits of operations.
• Evaluate information technology systems.

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MANAGEMENT
INTERNALAUDIT
INTERNAL AUDIT IS PART OF MANAGEMENT

Periodically evaluate effectiveness of internal
control practices

• Work force is effectively trained and managed to
  achieve results. Performance indicators developed
  and monitored.
• Key duties and responsibilities are segregated
  to reduce risk of error or fraud.
• Compare actual performance to planned or expected
  results and analyze differences.
• Information processing is reliable and
  controlled.

INTERNALCONTROLS
ENTITY
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Parliamentary Financial Control
Parliament
Reports
Funds
ProgramOutputs
Accounts
GovernmentDepartments
AUDIT
AUDIT
Audit Office
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Comptroller Auditor General of India

• Appointed By The President
• As Provided For In The Constitution
• Heads The Indian Audit Accounts
  Department

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Objectives of external auditing

• Promote proper effective use of public funds
• Development of sound financial mgt.
• Promote proper execution of administrative
  activities
• Communication of information to Parliament
  general public

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Audit Mandate

• All Expenditures
• All Receipts(Tax Non Tax)
• Government Owned Commercial Enterprises
• Bodies Substantially Financed By Government

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Audit Operations

• Certification Of Accounts
• Regularity
• Propriety
• Performance

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Regularity Audit

• Budget Provisions
• Delegation Of Powers
• Observance Of Rules Procedures

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Propriety Audit

• Justification
• Adherence To Controls
• Legal Implications
• Safeguarding Of Govt. Interests

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Performance Audits

• Economy
• Efficiency
• Effectiveness

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Economy

• Minimising the cost of inputs used or required
• (consistent with quality)
• SPENDING LESS

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Performance Audit - Economy

• Audit of administrative activities in
  accordance with sound administrative
  principles and practices and management
  policies.

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Efficiency

• The relationship between the output from goods or
  services and the inputs to produce them
• SPENDINGWELL

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Performance Audit- Efficiency

• Audit of the efficiency of utilisation of human,
  financial, and other resources, including
  examination of information systems, performance
  measures and monitoring arrangements and
  procedures followed by audited entities for
  remedying identified deficiencies

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Effectiveness

• The relationship between the intended and actual
  results of public spending
• SPENDING WISELY

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Performance Audit - Effectiveness

• Audit of the effectiveness of performance in
  relation to the achievement of the objectives of
  the audited entity and audit of the actual impact
  of activities compared with the intended impact.

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Inputs to Outcomes(e.g. Afforestaion program)
PLANTATION
INPUTS
ACTIVITIES
OUTPUTS
LABOUR,FUNDS
PLANTING,PROTECTION
IMMEDIATEOUTCOMES
FORESTCOVER
REDUCEDSILTATION
REDUCED EROSION
INTERMEDIATEOUTCOMES
ULTIMATEOUTCOMES
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Office Of The CAG
Audits of Union Government
Audits of State Governments
Field Offices For Specific MinistriesPrincipal
Directors orDirectors General of Audit
Field Offices In Each StateAccountant
Generals or Principal Accountants General (Audit)
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Reporting

• For UnionGovernment
• ToPresident
• Reports Are Tabled In Union Parliament

• For
• StateGovernments
• To Governors Of States
• Reports Are Tabled In State Legislatures