REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT …

1 C:\Users\Sheena Casuga'\Documents\+scasuga\+ICS\Updating of \Draft PGIAM\3rd Draft REVISED PGIAM_Body (As of May 2020) REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual 2020 REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (2020) i PREFACE INTERNAL AUDIT , a component of the INTERNAL control system, is a strategic function in ensuring good governance throughout the bureaucracy. INTERNAL auditors in the PHILIPPINE GOVERNMENT are mandated to carry out fundamental role of assisting their respective department secretaries/heads of agencies or the governing bodies/ AUDIT committees 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) that was issued through DBM Circular Letter (CL) No. 2008-8 dated 23 October 2008. The findings on the appraisal of the effectiveness and adequacy of INTERNAL controls are provided to said officials/bodies to institute corrective and preventive measures and achieve the agency objectives.

2 The role of the INTERNAL auditor is not about fault-finding, neither investigative, nor punitive. As one of the accountability mechanisms in public service organizations, the INTERNAL auditor reviews the degree of compliance of INTERNAL controls with laws and policies under the authority of the Department Secretary/Head of Agency or the Governing Board/ AUDIT Committee. As a component of the performance management framework of departments, agencies, GOVERNMENT -owned or -controlled corporations (GOCCs), GOVERNMENT financial institutions (GFIs), state universities and colleges (SUCs) and local GOVERNMENT units (LGUs), INTERNAL auditors assess the levels of performance against agreed measures, targets and objectives. 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.

3 The 2020 PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (PGIAM) is an updated version of the PGIAM developed in 2011 and issued under DBM Circular Letter No. 2011-05 dated 19 May 2011. This REVISED manual has been issued to clarify and address various emerging issues and concerns that are relevant in the effective and efficient conduct of INTERNAL AUDIT in the GOVERNMENT . Such issues and concerns were gathered from INTERNAL auditors during the series of INTERNAL AUDIT fora for departments and GOCCs that were conducted by the DBM in 2019, as well as the focus group discussions with departments concerned during the implementation in 2018 and 2019 of the DBM project under the Budget Reform Program entitled, Assessment of INTERNAL Control and INTERNAL AUDIT in National GOVERNMENT Agencies. REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (2020) ii Moreover, the manual has been REVISED to clarify and/or harmonize with pertinent laws, rules, regulations, guidelines and standards on the matter, including the Commission on AUDIT s INTERNAL AUDIT Standards for the PHILIPPINE Public Sector (IASPPS).

4 Similar to the first version of the PGIAM, it aims to assist departments, agencies, GOCCs, GFIs, SUCs, LGUs and other agencies of GOVERNMENT in establishing, and thereafter strengthening, the INTERNAL AUDIT function in their institutions. It is divided into two parts: Part I: Guidelines outlines the basic concepts and principles of INTERNAL AUDIT and the INTERNAL control system, as well as the policies and standards that will guide GOVERNMENT agencies in organizing, managing, and conducting an effective INTERNAL AUDIT ; and Part II: Practices contains the approaches, tools and techniques that could be used to facilitate the conduct of INTERNAL AUDIT activities by the IAS/IAU, to assist the agency head in undertaking a separate evaluation of the INTERNAL control system to determine if controls are well designed and properly implemented. In addition, more comprehensive and detailed workflow charts/diagrams of key INTERNAL AUDIT processes and generic templates on INTERNAL AUDIT reports, plans, and communications to serve as guide to INTERNAL auditors are included in the manual .

5 The Department of Budget and Management, in conjunction with the Office of the President Office of the Deputy Executive Secretary for INTERNAL AUDIT , will regularly review this manual to ensure that it remains updated, relevant and attuned to the developments in the bureaucracy. REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (2020) iii TABLE OF CONTENTS PREFACE .. i TABLE OF CONTENTS .. iii LIST OF BOXES .. viii LIST OF FIGURES .. viii LIST OF TABLES .. ix LIST OF APPENDICES .. ix LIST OF ACRONYMS .. x PART I. GUIDELINES .. 1 Introduction .. 2 Chapter 1 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 .. 9 4. Types of INTERNAL AUDIT .. 9 Compliance AUDIT .. 9 Compliance Review as Distinguished from Compliance AUDIT .. 10 Management AUDIT .. 10 Control Effectiveness.

6 11 Management Review as Distinguished from Management AUDIT .. 12 Operations AUDIT .. 13 Operations Review as Distinguished from Operations AUDIT .. 14 Work Back Approach .. 14 The 4Es (Effective, Efficient, Ethical and Economical) of Operations AUDIT .. 25 5. A Principles of INTERNAL Auditing .. 29 Objectivity and Impartiality, and Avoidance of Conflict of Interest .. 29 Professional Competence .. 30 Authority and Confidentiality .. 30 Evidence-Based Approach .. 31 Code of Conduct and Ethics .. 31 Hierarchy of Applicable INTERNAL Auditing Standards and Practice .. 33 i. INTERNAL AUDIT Service/Unit (IAS/IAU) Functions as Distinguished from the Operations and Processes of Other Units .. 33 Risk Management .. 35 Risk Assessment .. 40 Assurance Activity .. 41 Process or System Improvement .. 45 INTERNAL AUDIT as Distinguished from INTERNAL Quality AUDIT .

7 46 REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (2020) iv Chapter 2 INTERNAL CONTROL SYSTEM AND INSTITUTIONAL ARRANGEMENTS .. 48 1. Definition of INTERNAL Control .. 49 2. INTERNAL Control Framework .. 49 Components of INTERNAL Control .. 49 Control Environment .. 50 Plan of Organization .. 50 Coordinated Methods and Measures .. 51 Risk Assessment .. 52 Risk Assessment Process .. 53 Other Core Elements of Risk Management Process .. 55 Risk Assessment at the Organizational Level .. 55 Control Activities .. 59 Risk Response .. 60 Performance Review and Improvement of Operations and Processes .. 61 Compliance Review and Improvement of Operations and Processes .. 61 t Information and Communication .. 61 Information .. 62 Communication .. 62 Accountability for Transparency .. 64 t Monitoring and Evaluation.

8 65 Ongoing Monitoring .. 65 Separate Evaluation .. 66 Combination of Ongoing Monitoring and Separate Evaluation .. 66 Distinction Among Monitoring, Performance Review and Compliance Review .. 68 3. Roles and Responsibilities on INTERNAL Control .. 68 4. Administrative Relationships .. 70 Supervision and Control .. 71 Administrative Supervision .. 73 Attachment .. 74 Chapter 3 ORGANIZING THE INTERNAL AUDIT .. 75 1. Establishment of the IAS/IAU .. 76 Purpose, Authority and Functions of the IAS/IAU .. 76 2. Reporting Lines for the IAS/IAU .. 77 3. Roles and Responsibilities on INTERNAL AUDIT .. 78 Department Secretary (DS)/Head of Agency (HoA) or Governing Body (GB)/ AUDIT Committee (AuditCom) .. 78 IAS/IAU .. 79 Auditees .. 80 REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (2020) v 4. IAS/IAU Relationships with Principals and Key Stakeholders.

9 81 IAS/IAU and the DS/HoA .. 82 IAS/IAU and the GB/AuditCom .. 82 IAS/IAU and Executive Committee (ExeCom)/Management Committee (ManCom)/Top Management .. 83 IAS/IAU and the Department of Budget and Management (DBM) .. 83 IAS/IAU and the Commission on AUDIT (COA) .. 85 IAS/IAU and the Civil Service Commission (CSC) .. 87 IAS/IAU and Oversight, Regulatory and Other External Bodies .. 88 IAS/IAU and Professional Bodies .. 88 5. Organizational Structure of the IAS/IAU .. 89 Management AUDIT Division .. 92 Operations AUDIT Division .. 93 6. Head of the IAS/IAU .. 95 Status .. 95 Qualifications .. 96 Responsibilities .. 97 Skills .. 98 7. Staffing the IAS/IAU .. 98 Temporary Human Resource Movements to Supplement INTERNAL AUDIT Resources .. 99 Detail .. 100 Secondment .. 100 Other Arrangements .. 100 8. INTERNAL AUDIT Budget.

10 101 Chapter 4 PERFORMANCE MONITORING AND EVALUATION .. 102 1. Performance Monitoring and Evaluation .. 103 INTERNAL AUDIT Performance Measurement .. 103 Measurement Techniques .. 105 INTERNAL AUDIT Annual Performance Report .. 105 PART II. PRACTICES .. 107 Introduction .. 108 Chapter 1 STRATEGIC AND ANNUAL WORK PLANNING .. 111 1. Strategic Planning .. 112 Conduct of a Baseline Assessment of the INTERNAL Control System (BAICS) .. 113 Creation of a Planning Team for the Conduct of the BAICS .. 114 Familiarization with the Organization .. 114 Use of Flowcharts/Narrative Notes and Conduct of Walkthrough .. 124 Test of Controls .. 127 REVISED PHILIPPINE GOVERNMENT INTERNAL AUDIT manual (2020) vi Conduct of Inquiries and Interviews .. 128 Conduct of Interim Analysis and Preparation of Interim Report .. 129 Determination of the Control Universe.