Philippine Government Internal Audit Manual

1 I PREFACE Internal Audit , a component of the Internal control system, is a strategic function in ensuring good governance throughout the bureaucracy. This Manual is being issued to assist Departments, Government -Owned and/or -Controlled Corporations, State Universities and Colleges, Local Government Units and other agencies of Government in establishing, and thereafter strengthening, the Internal Audit function in their institutions. The Internal Auditor in the Philippine Government has the fundamental role of assisting the Department Secretary or the Governing Body/ Audit Committee of the Governing Board in promoting effective, efficient, ethical and economical operations by appraising the adequacy of Internal controls, consistent with the National Guidelines on Internal Control Systems (NGICS).

2 The findings on the appraisal of Internal controls are provided to said officials/bodies to institute corrective and preventive measures and achieve the agency objectives. The role of the Internal Auditor is not about fault-finding. Neither is it investigative nor punitive. As one of the accountability mechanisms in public service organizations, the Internal Auditor reviews the extent of compliance with laws and policies under the authority of the Department Secretary or the Governing Body/ Audit Committee. As a component of the performance management framework of Departments/ Agencies/ Government -Owned and/or -Controlled Corporations/ Government Financial Institutions, the Internal Auditor assesses the levels of performance against agreed measures, targets and objectives.

3 The Internal Audit function is separate from, but complementary to, the day-to-day monitoring of Internal controls and the conduct of continual management improvement, which are within the responsibility of operating units. The Philippine Government Internal Audit Manual (PGIAM) was developed to empower Internal Auditors in performing their roles. It is divided into two parts: Part I Guidelines outlines the basic concepts and principles of Internal Audit , and the policies and standards that will guide Government agencies in organizing, managing, and conducting an effective Internal Audit . Part II Practices contains user-friendly tools, techniques, and approaches in appraising the Internal control systems against strategic objectives, and in conducting management and operations audits.

4 To complement the PGIAM and facilitate the roll-out of the NGICS, Generic Manuals on Controls in the Human Resource Management System, Quality Management System, and Risk Management System will also be issued. An overview of these generic manuals is provided in Appendix A. The Department of Budget and Management, in conjunction with the Office of the President Internal Audit Office, the Commission on Audit , and the Reference Panel will regularly review these manuals to ensure that these remain updated, relevant and attuned to the developments in the bureaucracy and best practices abroad. ii TABLE OF CONTENTS .. i TABLE OF CONTENTS .. ii LIST OF BOXES .. vii LIST OF FIGURES .. vii LIST OF TABLES.

5 Vii LIST OF APPENDICES .. viii LIST OF ACRONYMS .. x PART I - GUIDELINES .. 1 INTRODUCTION .. 2 CHAPTER I - CONCEPTS AND PRINCIPLES OF Internal Audit .. 4 1. Definition of Internal Audit .. 5 2. Legal Bases for Internal Audit .. 5 3. Scope of Internal Audit .. 7 Scope .. 7 Functions of IAS/IAU .. 8 4. Types of Audits .. 9 Compliance Audit .. 9 Management Audit .. 9 Control Effectiveness .. 10 Management Review and Management Audit .. 11 Operations Audit .. 12 Workback Approach .. 13 The 4 Es of Operations Audit .. 20 5. Principles and Standards of Internal Audit .. 23 Conflict of Interest .. 23 Objectivity and Impartiality .. 23 Professional Competence.

6 24 Authority and Confidentiality .. 24 Code of Conduct and Ethics .. 25 Hierarchy of Applicable Internal Auditing Standards and Practice .. 25 IAS Functions vis- -vis Activities and Operations of Other Units .. 26 Internal Audit in Government not an Assurance and Consulting Activity .. 28 Consulting Activity is Non- Government Service .. 28 Consulting Activity is Non- Audit 28 Internal Audit in Government Not an Assurance Service .. 29 IAS/IAU Does Not Undertake Process or Systems Improvement .. 30 Internal Audit Studies, Services and Other Seminars by Private Persons or Firms .. 32 iii CHAPTER II - Internal CONTROL SYSTEM AND INSTITUTIONAL ARRANGEMENTS .. 33 1. Internal Control Framework.

7 34 Objectives of Internal Control .. 34 Components of Internal Control .. 35 Control Environment .. 35 Plan of 35 Coordinated Methods and Measures .. 36 Integral Process .. 36 Risk Assessment .. 37 Risk Identification .. 37 Risk Analysis .. 38 Risk Evaluation .. 38 Control Activities .. 41 Risk Response .. 41 Performance Review and Improvement of Operations, Processes and Activities .. 42 Compliance Review and Improvement of Operations, Processes and Activities .. 42 Information and 42 Information .. 43 Communication .. 44 Accountability for Transparency .. 45 Monitoring .. 46 Ongoing Monitoring .. 46 Separate Evaluation .. 47 Combination of Ongoing Monitoring and Separate Evaluation.

8 47 Distinction Between Monitoring, Performance Review and Compliance Review .. 49 2. Administrative Relationships .. 49 Supervision and Control .. 50 Administrative Supervision .. 50 Attachment .. 50 CHAPTER III - ORGANIZING THE Internal Audit .. 51 1. Establishment of Internal Audit Service/Unit .. 52 2. Reporting Lines .. 52 3. Roles and Responsibilities .. 52 4. Relationships with Principals and Key Stakeholders .. 53 Internal Audit Service/ Internal Audit Unit and the Department Secretary .. 54 Internal Audit Service/ Internal Audit Unit and the Governing Body .. 54 Internal Audit Service/ Internal Audit Unit and the Audit Committee in GOCCs/GFIs.

9 55 Internal Audit Service/ Internal Audit Unit and Management .. 55 Internal Audit Service/ Internal Audit Unit and the Commission on Audit .. 55 Internal Audit Service/ Internal Audit Unit and Oversight, Regulatory and Other External Bodies .. 56 Internal Audit Service/ Internal Audit Unit and Professional Bodies .. 56 iv 5. Organizational Structure .. 57 Management Audit Division .. 59 Operations Audit Division .. 60 6. Head of Internal Audit .. 62 Status .. 62 Qualifications .. 63 64 Skills .. 64 7. Staffing the Internal Audit Service/ Internal Audit Unit .. 65 Temporary Personnel Movements to Supplement Internal Audit Resources .. 66 .. 66 Secondment .. 66 Other Arrangements .. 67 8.

10 Internal Audit Budget .. 68 CHAPTER IV - PERFORMANCE MONITORING AND EVALUATION .. 69 1. Performance Evaluation .. 70 Measuring Internal Audit 70 Measurement 71 Internal Audit Annual Performance Report .. 72 PART II - PRACTICES .. 73 INTRODUCTION .. 74 CHAPTER I - STRATEGIC AND ANNUAL WORK PLANNING .. 76 1. Strategic Planning .. 77 Conduct Baseline Assessment of Internal Control System .. 78 Familiarization with the Organization s Operations .. 78 Flowchart/Narrative Notes and Walkthrough .. 92 Test of Controls .. 95 Interim Report .. 96 Defining Control Universe .. 97 Review of Oversight Bodies and International Development Partners .. 97 Preparation of the Baseline Assessment Report.