Local Government Internal Audit

1
Internal
Audit for Local
Government Units
2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

Citystate Asturias Hotel, Puerto Princesa City, Palawan
2
Principles and Concepts of

Internal Control (IC)

Outline of Presentation 3
 Definition of Internal Control (IC)

 IC in the Philippine Government
 General Objectives of IC
 The IC Framework
 Components of IC

What is Internal Control?
Internal control is an integral process that is effected by an entity’s
management and personnel and is designed to address risks and to
provide reasonable assurance that is in pursuit of the entity’s mission, the
general objectives are being achieved.
(INTOSAI, 2004)

4
What is Internal Control?
Internal control refers to the plan of organization and all the

coordinated methods and measures adopted within an
organization or agency to safeguard its assets, check the accuracy
and reliability of its accounting data, and encourage adherence to
prescribed managerial policies.
(Section 123 of Presidential Decree No. 1445, as amended)

5
IC in the Philippine Government
Administrative Order
Issuance of NGICS Issuance of LGIAM
No. 119
1989 2008 2016

1978 1990 2011
Presidential Decree
Memorandum 277 Issuance of PGIAM
1445

6
National Guidelines on
Internal Control Systems (NGICS)
An initiative taken by the national government to affirm its
commitment to the citizenry towards accountability, effective
operations, prudence in finances, and quality service. It unifies in
one document existing Philippine laws, rules and regulations on
internal controls to serve as a benchmark towards designing,
installing, implementing and monitoring internal controls in the
public service.

7
Philippine Government
Internal Audit Manual (PGIAM)
A complement to the NGICS, explains and clarifies the nature and
scope of internal audit in the Philippine public sector, including its
institutional arrangements, as well as its protocols and processes.
It aims to assist Departments, Agencies, and other
instrumentalities of the government in establishing and
developing internal audit to promote effective, efficient, ethical
and economical operations in government.

8
Local Government
Internal Audit Manual (LGIAM)
A complement to the NGICS, explains and clarifies the nature and scope
of internal audit in the Philippine public sector, including its institutional
arrangements, as well as its protocols and processes. It aims to assist
LGUs in establishing and developing internal audit to promote effective,
efficient, ethical and economical operations in government.

9
General Objectives of Internal Control
NGICS
 Safeguard assets
 Check accuracy and reliability of accounting data
 Ensure economical, efficient and effective operations
 Comply with laws and regulations; and
 Adhere to managerial policies

10
The Internal Control Framework

11
Components of Internal Control
 Control environment
 Risk assessment
 Control activities
 Information and communication
 Monitoring

12
Control Environment
Control environment is the general framework serving as basis for
the other four components of internal control. It is the scope and
coverage of an organization’s internal control system which impacts
on its structural and operational framework.

13
Risk Assessment
Risk assessment is the overall process of identifying, analyzing and
evaluating relevant risks to the achievement of the control
objectives and determining the appropriate response.

14
Control Activities
Control activities are the policies and procedures established to
address risks and achieve the agency’s mandate and objectives.
Control is a measure that is modifying a risk. Control includes any
process, policy, device, practice, or any other action which is
intended to modify risk.
Once implemented, control activities are integrated into the control

environment of the agency.

15
Information and Communication
Information and communication are vital in attaining the five
control objectives. They go hand in hand and cut across all other
internal control components. Information and communication
include the records system which will ensure the transfer of
required information to employees and top management, to the
public it serves, to other public service organizations, and to its
network of organizations and sectors that need the information.

16
Monitoring
Monitoring as a component of internal control is aimed at assessing
the quality of the internal control systems’ performance over time.

17
18
The Internal Audit

 Definition of Internal Audit (IA)

 Legal Bases
 Scope and Functions of IA Unit
 Internal vs. External Audit
 Key Benefits and Value of IA to LGUs
 Principles and Standards of IA
 Types of IA
What is Internal Audit? 20
 We all operate internal controls e.g. when we follow

management procedures for filing of documents;
 Internal audit is a means by which internal controls are

checked to determine whether they are well designed
and properly operated;

What is Internal Audit? 21
 It is not an adversarial function but a problem solving

partnership to help LGUs achieve their objectives.
 The internal audit function provides an objective source

detached from regular operating functions that can help
LGUs continually improve the design and operation of
internal controls.

Internal Audit 22
 Evaluation of management controls and operations

performance, and the determination of the degree of
compliance with:
 laws,
 regulations,
 managerial policies,
 accountability measures,
 ethical standards and
 contractual obligations.
Internal Audit 23
Appraisal of the plan Recommend courses

of organization and of action on matters
all the coordinated relating to operations
methods and and management
measures controls

Legal Bases of IA 24
No. Issuance Particulars

1 Presidential Decree No. 1 Abolished the IAS created under RA 3456, as
amended by RA 4177, and transferred the
function to the Management Division
2 Executive Order No. 292 or Created an IAS in the Department of Public
Administrative Code of 1987 Works and Highways, and included the
supervision of internal audit activities as one of
the functions of the Department of Finance’s
Central Financial Management Office
3 Administrative Order s(AOs) Provided authority for the creation of an IAS
278 and 70 and its functions, duties and activities
4 DBM Budget Circular 2004-4 Highlighted the policy guidelines in the
organization, staffing, positions and salary
grades of the IAS2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017
Legal Bases of IA 25
No. Issuance Particulars

5 DBM-CSC Joint Resolution Provided for the creation of an IAS/IAU with its
No. 1, s. 2006 functions in line with Executive Order No. 366
6 DBM Circular Letter (CL) No. Provided the guidelines in the organization of
2008-5 the IAS and clarified its functions, and the rank
and salary grade of the head of the IAS
7 DBM CL No. 2008-8 Provided that the IAS would be composed of a
Management Audit Division and an Operations
Audit Division, and specified the IAS/IAU’s
functions related to internal control
8 DBM LBC No. 110 Issuance of the LGIAM

Scope of Internal Audit 26
Involves all matters relating to operations and
management control:
 Appraisal of the adequacy of internal controls;

 Conduct of management audit; and
 Evaluation of the results of operations, focusing on
the effectiveness of controls of operating systems
and support services units/systems.

Functions of Internal Audit 27
CONDUCT management &

operations audit of LGU
functions, progs, projs, activities
& outputs & determine the
ADVISE the LCE on all degree of compliance with their
matters relating to mandate, policies, govt
management control & regulations, established
operations audit objectives, systems &
procedures/ processes &
contractual obligations

Functions of Internal Audit Service/Office/Unit 28
REVIEW and APPRAISE systems

and procedures, organizational ANALYZE and EVALUATE
structures, asset management management deficiencies and assist
practices, financial & management top management by recommending
records, reports and performance realistic courses of action
standards of the LGU
PERFORM such other related duties & responsibilities as may

be assigned or delegated by the LCE or as may be required by
law
Internal vs. External Audit 29
INTERNAL AUDIT EXTERNAL AUDIT

Function Advice LCE on matters Examine, audit and settle
relating to management accounts;
control and operations Conduct comprehensive
audit; audit and recommend
Review and appraise measures and courses of
systems and procedures; action;
Identify, analyze and Keep the general accounts
evaluate management of government
deficiencies and
recommend courses of
action
Internal vs. External Audit 30
INTERNAL AUDIT EXTERNAL AUDIT

Scope Systems and Processes All accounts, systems and
processes
Approach Controls-based Risk-based
Types of Audit Compliance Audit; Comprehensive audit
Management Audit; (financial and compliance
Operations Audit audits);
Performance Audits
(Value-for Money Audits);
Fraud Audit

31
Key Benefits of Internal Audit (IA) for LGUs
Oversight Foresight
 IA assists LCE by  IA by looking ahead can
evaluating whether play major role in
LGU is complying with Insight identifying risks facing
policies & laws; LGU and how to mitigate
 IA independent findings those risks & identify
on evaluating which opportunities.
policies, programs,
projects are working well
or not working as well
gives unique position to
identify better practices &
recommend ways to
improve service delivery;
and
32
Value of Internal Audit
Improve the Instill public Strengthen the

effectiveness of confidence in mechanism for
risk ensuring the
the LGU‘s
management, accountability of
controls and ability to LGUs to their
governance operate respective
processes. effectively. constituents

Principles and Standards of IA 33
 Conflict of Interest
The internal auditor should avoid conflict of

interest at all times, thereby maintaining
objectivity and impartiality and upholding public
interest.

 Objectivity and Impartiality
Objectivity and impartiality requires auditors not

to subordinate their judgment on audit matters to
that of others.

 Professional Competence
The internal auditor must maintain high standards

of competence and professional integrity
commensurate with his/her responsibilities and
mandated functions.

 Authority and Confidentiality
This requires that the internal auditor acquires

information in the course of the audit, with proper
and specific authority and should not use or
disclose any such information or appear to use the
same for personal advantage or for the advantage
of a third party.
 Code of Conducts and Ethics
As public servants, internal auditors are bound to

comply with the Code of Conduct and Ethical
Standards for Public Officials and Employees (RA
6713)

Types of Internal Audit 38
Compliance Audit
Evaluation of the degree of compliance with laws &
regulations, policies & procedures in the LGU

Compliance Audit 39
Components of Established
Internal Control Controls Criteria/ Output
System Standards
1) Control 1) The Philippine

Environment Constitution
2) Laws and their

IRR
2) Risk Assessment Design
3) Presidential
Issuances Compliance
with Laws,
3) Control Activities 4) Issuances of Regulations
Oversight and and Policies
Regulatory
4) Information and Bodies
Communication Implementation 5) Agency
Issuances
5) Monitoring 6) Contractual
Obligations
Source: LGIAM, page 40

Management Audit
Evaluation of the effectiveness of internal controls adapted in
the operating & support services units/systems to determine
whether they achieve the control objectives over a period of
time or as of a specific date

Management Audit 41
Components of
Control
Internal Control Controls Output
Objectives
System
1) Control 1) Safeguard Assets

Operating
Environment
System-Key
2) Check Accuracy &
processes
2) Risk Assessment Reliability of
Accounting Data
Control
3) Control Activities 3) Adherence to Effectiveness
Managerial Policies
4) Information and
Communication Support 4) Compliance w/ LRP
System-Key
processes 5) Ensure 4Es of
5) Monitoring
Operations
Source: LGIAM, page 41

Operations Audit
Evaluation of the outcome, output, process & input to
determine whether government operations, programs &
projects are effective, efficient, ethical & economical,
including compliance with laws & regulations, managerial
policies, accountability measures & contractual obligations

Operations Audit 43
“Doing things right” given the “Doing the right things”

available inputs and within achieving expected results and
a specified timeframe contribute to sectoral goals
Efficient Effective
Perform using the least Consistent with the

amount of inputs within a Code of Conduct and
specific timeframe Ethical Standards
Economical Ethical
Input Evaluation Process Evaluation Output Evaluation Outcome Evaluation
Quality Quality Quality Quality

Input Process Outputs Outcomes
Law, mandate, Implementation,

risk response, Products and Benefits and
program, organization,
staff, system,
’ resources performance and services impact or
and managerial policies compliance reviews change
Serving Citizens’ Satisfied Citizens’ Improved Quality

Citizens’ Needs Needs Needs of Life
Source: LGIAM, page

44
Organizing the Local

Government Internal Audit
Unit

 Organizational Structure of IA Unit

 Staffing the IAU
 Key Strategies for IA Function
 Key Attributes of the IA Function
 Roles and Responsibilities of Local Chief Executive,
Sanggunian and Head of IA
46
Organizational Structure
OLCE
IAS/U
ASSESSORS PLANNING ACCOUNTING TREASURY OTHERS

47
Organizational Chart for IAS/U

Staffing the IAS/U 48
LGU Organizational Structure and Head of the IAU
Provincial Government The IAS/U in a provincial government may be a Department to be headed
by a Provincial Government Department Head, SG-26.
City Government Special City The IAS/U in a special city may be a Department to be headed by a City
Government Department Head III, SG-27.
Highly Urbanized City The IAS/U in a highly urbanized city may be a department to be headed by a
City Government Department Head II, SG-26.
Component City The IAS/U in a component city may be a department to be headed by a City
Government Department Head I, SG-25.
Municipal Government The IAS/U in a municipal government within Metro Manila may be a
Within Metro Manila Department to be headed by a Municipal Government Department Head II,
SG-25.
Outside Metro Manila The IAS/U in a municipal government outside Metro Manila may be a
department to be headed by a Municipal Government Department Head I,
SG-24.
Options in setting up IAS/U for LGUs 49
which exceeded PS Cap
LGUs may resort to full time designation of
permanent employees of other units/departments
until such time that the PS Cap is no longer exceeded

Key Attributes for Sound IAS/U 50
 Independent & objective;  Continuous monitoring of internal

 Clear roles & responsibilities; audit effectiveness;
 Compliant with the PGIAM  Proactive auditing & advice;

professional standard of internal  Comprehensive & balanced audit
auditing; plans linked to LGU management of
 Sufficient resources & skills to carry risks; and
out audit work;  Presence of internal audit assessment
 Regular & timely communication of mechanism.
findings & recommendations;
 Systematic conduct of follow-ups on
audit recommendations;
Roles and Responsibilities 51
 Local Chief Executive

 Has the direct responsibility to install, implement, and monitor a sound system of
internal control
 Task the IAS/U to undertake the appraisal of the internal control within the LGU
 Disseminates managerial policies through the issuance of guidelines and
standards, to guide the personnel in the proper execution of their individual and
unit tasks that collectively contribute to the attainment of LGU goals

 Sanggunian
 Key role in establishing the IAS/U through the enactment of an ordinance
creating the IAS/U
 Providing funding support in accordance with the provisions set out in existing
Circulars
 Exercises operational responsibility over IAS/U in that the Head of the IA reports
his findings to the Sanggunian.

 Head of IA (HoIA)
 Accountable to the LCE and the Sanggunian, as the case may be, for the efficient
and effective operation of the internal audit function
 Has direct access to the LCE and meets regularly to provide the LCE the
opportunity to seek the comments of the HoIA on management control and
audit functions, quality of the audit effort and internal controls, and other areas
of control as appropriate
 Provide inputs to the LCE in the following areas:

 Head of IA (HoIA)
 a) Maintaining accountability for results, norms of conduct, and transparency
 b) Promoting self-assessment and adherence to professional and ethical
standards
 c) Ensuring that funds are properly utilized in order to attain objectives
 d) Enhancing management controls to ensure that control objectives are
achieved; and
 e) Ensuring that the 4E’s of operations are achieved

55
Strategic Internal Audit

Planning

 Strategic Internal Audit Planning

Definition
Importance

Strategic Internal Audit Planning 57
 This is the process of identifying the key audit

strategic direction of the IA Unit for a three-year
period.

Importance of Planning the Audit 58
 Understanding the control environment

and the organization;
 Outlining the scope and objectives of the
audit;
 Establishing the basis for budgeting
(time, cost, personnel);
 Identifying the evidence required to
develop the audit findings;
Importance of Planning the Audit 59
 Assisting in choosing/determining the

audit procedures (nature, extent and
timing); and
 Establishing the basis for coordinating
the staff.

60
Planning & Internal Audit Key Process
Types of Monitoring &
Strategic and Annual Planning Audit Process
Audit Evaluation
Baseline
Assessment Compliance Audit Audit Planning
Internal Control Strategic
System Plan
Audit Execution Performance

Control Management Audit Monitoring
Significance and
and
Materiality
Evaluation
Control Risk Audit Reporting
Annual Operations
Internal Work Plan Audit
Audit Risk Audit Follow-up

3 Levels of Audit Planning 61
Annual Work Audit Engagement

Strategic Planning
Planning Planning

Performance Monitoring and 62
Evaluation
 This is the periodical assessment of internal audit
performance and addressing opportunities for improvement
which can help maximize the efficiency and effectiveness of
the internal audit function.

Performance Monitoring by the 63
Head of IA Unit
Review of Progress Assessment Report

Review of Completion Assessment Report

Performance Evaluation by the LCE 64
Review of Internal Audit Report

Review of the IA Unit’s Performance Report

Oversight over IA Unit 65
COMMISSION DEPARTMENT
ON AUDIT OF BUDGET
AND
MANAGEMENT
Oversight Adequacy of IAU Efficiency and
as part of effectiveness of
internal control IAU as part of
system (ICS) ICS

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1

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

Principles and Concepts of

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 Definition of Internal Control (IC)

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

Internal control refers to the plan of organization and all the

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

1989 2008 2016

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

Once implemented, control activities are integrated into the control

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

The Internal Audit

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 Definition of Internal Audit (IA)

 We all operate internal controls e.g. when we follow

 Internal audit is a means by which internal controls are

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 It is not an adversarial function but a problem solving

 The internal audit function provides an objective source

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 Evaluation of management controls and operations

Appraisal of the plan Recommend courses

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

No. Issuance Particulars

No. Issuance Particulars

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 Appraisal of the adequacy of internal controls;

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

CONDUCT management &

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

REVIEW and APPRAISE systems

PERFORM such other related duties & responsibilities as may

INTERNAL AUDIT EXTERNAL AUDIT

INTERNAL AUDIT EXTERNAL AUDIT

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

Improve the Instill public Strengthen the

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

The internal auditor should avoid conflict of

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 Objectivity and Impartiality

Objectivity and impartiality requires auditors not

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

The internal auditor must maintain high standards

2017 3rd Quarterly Seminar & Meeting / October 4-7, 2017

 Authority and Confidentiality

This requires that the internal auditor acquires

 Code of Conducts and Ethics