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INTERNAL AUDIT Smita Chaudhri Accountant General (C&RA) U.P. Audit types common terminologies Three categories of audit : CA audit External / Statutory ( also ... – PowerPoint PPT presentation

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  • Smita Chaudhri
  • Accountant General (CRA) U.P.

Audit types common terminologies
  • Three categories of audit
  • CA audit
  • External / Statutory ( also known as audit by
  • Internal audit.

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..

Audit types common terminologies
  • External Audit
  • obvious - it is by an agency external to the
  • For governments it is by the SAI ( in India
  • 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

Audit types common terminologies
  • Internal audit
  • a diagnostic aid of top management
  • to enable pinpointing of problems , internal
    control weaknesses and to suggest system
  • 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

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

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

Role of Internal Audit
  • chief role
  • 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

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
  • identifies potential risk areas
  • risks can be strategic, operational, financial,
    legal / regulatory

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
  • effectiveness and efficiency of operations.
  • reliability of financial reporting
  • compliance to laws regulations

Is IA a new concept ?
  • for Government comparatively new especially in
    our country
  • In UP started in 2000,
  • WB was 1st 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

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

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
  • Develop understanding of the processes under
  • 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

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

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
  • wastage due to poor judgement in managing /
    allocating resources

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

Internal Audit in Government
  • Drawbacks
  • 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
  • there are lack of resources and professional
  • no specific mandate is given by the executive

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
  • more transparency - RTI act , 24 7 media ,
    increased communication
  • accountability
  • responsiveness
  • IA - an aid to achieve this

Can IA aid effective governance ?
  • IA
  • 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

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

Can IA aid effective governance ?
  • Risks in Govt
  • Financial like frauds, embezzlements
  • Legal- not depositing EPF, non deduction of WCT,
  • 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

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

Can IA aid effective governance ?
  • in brief - IA can check
  • whether Government policies as set out in rules
    regulations are understood and properly
  • 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

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

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

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

  • Thank you