Overarching role of Internal Audit IMFO AUDIT INDABA Venue: East London ICC, Auditorium Date: Friday, 23 May 2014 By: Nkuli Swana
Overview • What is Internal Audit • Statistics • Current state of Internal Auditing in South African municipalities • Benefits of having an Internal Audit function • Impact of not having an Internal Auditing function • Liaison with external auditors and Audit readiness • Conclusion
What is Internal Auditing 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 the effectiveness of risk management, control and governance processes.
Role of Internal Auditing • Governance • Governance processes deal with the procedures utilized by the representatives of the organization’s stakeholders to provide oversight of risk and control processes administered by management. • The monitoring of organizational risks and the assurance that controls adequately mitigate those risks both contribute directly to the achievement of organizational goals and the preservation of organizational value. • Internal controls • The role of IA in terms on internal controls is: • Assessing the scope and effectiveness of the systems established by management to identify, assess, manage and monitor the various risks arising from the organisation’s activities.
Role of Internal Auditing (continued) • Risk management • aims to create a disciplined, structured and controlled environment within which risks to the organization can be anticipated and maintained within predetermined, acceptable limits. • Liaison with external auditors and audit readiness: clean audit
Role of Internal Auditing (continued) • Performance audit • is the independent examination of a program, function, operation or government systems and procedures to assess whether the entity is achieving the set goals effectively and efficiently. • Oversight • Good governance provides the ability to prevent an oversight of risk and control processes formulated by management. • An oversight of the IA function may be prevented if the chairman of the audit committee allocates sufficient time and adequate resources.
Role of Internal Auditing (continued) • Compliance • Compliance is the act of conforming to the rules & regulations and policies that are put in place by the people in governance, e.g. the treasury regulations, PFMA, MFMA etc. • Fraud prevention: deterrents and prevention • IA intends to identify and reduce the conditions that allow corruption. The following are the ways to deter fraud, and other breaches of public trust: • Assessing controls for existing, or proposed functions • Assessing organisational audit-specific risks. • Reviewing proposed changes to existing laws, rules and implementation procedures. • Reviewing contracts for potential conflicts of interests.
Statistics • In South Africa we have 278 Municipalities, divided as follows: • 8 Metropolitan Municipalities • 44 District Municipalities • 226 Local Municipalities • Out of 278 municipalities only 17 received clean audits for the 2011/12 financial year • Overall best performing province was the Western Cape and Eastern Cape as the least performing for the 2011/12 financial year (AGSA consolidated General report 2011/2012)
Current state of Internal Audit in South African Municipalities
The utilisation of IA by Municipalities • Internal Audit in our municipalities is usually under resourced and may consequently fail to achieve set objectives. • Internal Audit may: Provide Assurance, Provide some assurance, Provide limited or no assurance • Out of all the municipalities in SA: • 22% provide assurance • 42% provide some assurance • 31% provide limited or no assurance • 5% have no established Internal Audit units (AGSA consolidated General report 2011/2012)
The utilisation of IA by Municipalities (AGSA consolidated General report 2011/2012)
Overall Audit Performance by Province (AGSA consolidated General report 2011/2012)
Contributing factor of Audit performance The discrepancies in the audit outcomes can be attributed to the employment process and competency levels in municipalities. The following diagram depicts the posts whereby competency levels are below par: (AGSA consolidated General report 2011/2012)
Benefits of having an Internal Audit function • Detect errors and frauds and provides suggestions to improve them which helps the management to take corrective action • Detects misuse of resources which helps reduce unnecessary expenditures • Tone up the morale and working efforts of all members of the organisation.
Benefits of having an Internal Audit function (continued) • Scrutinize accounting and financial data to screen facts from the heaps of figures and statistics. • Exercising effective control by measuring performance, evaluating results and recommending suggestions for remedial actions, internal audit may be instrumental for forcing events to conform to plans.
Liaison with external auditors and Audit readiness • IA should coordinate with the External Auditors (EA), which is very important as they have different strengths that may increase the effectiveness of audits. • This increases trust and efficiency as the EA may rely on the work performed by the IA to avoid duplication of efforts.
Liaison with external auditors and Audit readiness (continued) • IA takes charge on following up on Audit queries • IA is the link between management and EA • IA is responsible for providing AG with required information timeously
Ways of improving coordination between IA and EA • The IA can improve coordination by: • Take Initiative • Learn professional standards • Dispel myths • Increase communication • Instigate training
Conclusion • Establishment of IA unit • Outsource or co source where they lack expertise • Adequate and sufficiently skilled human resources must be available. • implementation of performance audit reviews