Institute of Municipal Finance Officers & Related Professions PRESENTATION TITLE: BACK TO BASICS THROUGH INTERNAL AUDIT IMFO Audit & Risk Indaba 2015 20 – 22April 2015: Olive Convention Centre, Durban Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions BACKGROUND Legislative requirements Definition of Internal Auditing Compilation of the Strategic Internal Audit plans Oversight Committees Conclusion Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions LEGISLATIVE REQUIREMENTS AND REPORTING LINES Municipal Finance Management Act No 56 of 2003 SECTION 165 - Establishment and roles of Internal audit Activity SECTION 166 - Establishment and roles of the Audit Committees Internal audit should report functionally to the Audit Committee and administratively to the Accounting Officer. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions Definition of Internal Auditing Internal Auditing is: An independent, objective assurance and consulting activity designed to add value and improve the organisation’s operations. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions HOW DOES INTERNAL AUDIT ADD VALUE TO SERVICE DELIVERY WITHIN THE MUNICIPALITY Council and management have certain service delivery objectives Processes and projects are put in place in order to achieve these objectives Internal Audit provides independent assurance regarding risk management, governance and control activities that management has put in place to ensure that these processes/projects achieve their objectives, are functioning effectively and efficiently Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions Definition of Internal Auditing Assurance and consulting: Assurance assignments are appropriate when: For a significant risk there is a high reliance on controls and the residual risk is therefore mitigated to an acceptable level. Advisory assignments are appropriate when: The inherent risk has not been adequately addressed and the residual risk therefore remains outside the tolerable risk appetite. The actual approach will be to perform a combined assurance/advisory assignment.   Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions Internal Auditing Definition (cont..) Internal Auditing is: It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of Risk Management, Controls, and Governance Processes Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions INDEPENDENCE According to the Standards for the Professional Practice of Internal auditing ,internal auditors are independent when they can carry out their work freely and objectively. Independence permits internal auditors to render the impartial and unbiased judgments essential to the proper conduct of engagements. Independence is achieved through organisational status and objectivity. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions INDEPENDENCE (cont..) The internal audit function is authorised to: Have unrestricted access to all functions, records, property and personnel. Have full access to the audit committee Allocate resources, determine scopes of work, and apply the techniques required to accomplish audit objectives. Obtain the necessary assistance of personnel in the Municipality where they perform audits, as well as other specialised services from within or outside the municipality. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions INDEPENDENCE (cont..) The internal audit function is not authorised to: Perform any operational duties for the Municipality. Initiate or approve accounting transactions external to the internal auditing Activity/function. Direct the activities of any organisation employee not employed by the internal auditing activity, except to the extent that such employees have been appropriately assigned to auditing teams or to otherwise assist the internal auditors in carrying out investigations. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions WHAT INFORMS THE STRATEGIC INTERNAL AUDIT PLAN The strategic role of internal audit is emphasized when drafting the strategic three year rolling and one year operational audit plan. Certain critical success factors (key areas )should be focused on: Internal audit plan should be in line with the Municipal strategic objectives.(IDP) Strategic plans including operational plans should be Risk- based Proper matching of skill with available resources (The annual plan in terms of priority ranking (based on the risk assessment) of identified audit areas and the expertise and resources available to internal audit) Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions OTHER INPUTS TO THE ANNUAL INTERNAL AUDIT PLAN Management requests and Audit Committee inputs Legislative requirements (the MFMA and the Systems Act requires that certain areas have to be reviewed by Internal Audit on a yearly basis) Internal Audit Judgement Previous Internal and external audit reports Follow-up Internal Audit issues Follow-up AG issues Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions OTHER INPUTS TO THE ANNUAL INTERNAL AUDIT PLAN (cont..) AUDITOR GENERAL SOUTH AFRICA EMPHASIS AREAS/AREAS OF CONCERN:   Supply Chain Management; Quality of Annual Financial Statements; Reporting on pre determined objectives; IT Governance; and Human Resource Management Non compliance to laws and regulations Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions OTHER INPUTS TO THE ANNUAL INTERNAL AUDIT PLAN DASHBOARD REPORTING In addition to the above the AGSA introduced the dashboard reporting these are drivers of internal control when assessing Financial, Performance and Compliance management processes to achieve clean administration. Internal Auditors should align (reference)their annual internal plans to these key Control Checklist to continuously evaluate monitor internal controls and make appropriate recommendations.   Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions OTHER INPUTS TO THE ANNUAL INTERNAL AUDIT PLAN AGSA areas to assess controls around Financial, Performance and Compliance management Internal audit focus areas to assess Internal Controls Leardership -Effective leadership based on a culture of honesty, ethical business practices and good governance -Exercise oversight responsibility regarding financial and performance reporting and compliance and related internal controls -Implement effective HR management -Develop and monitor the implementation of action plans to address internal control deficiencies Risk Management - evaluate and assess significant organizational risks including IT & Fraud risks (fraud prevention plan) -Establishment of the Risk management units -Establishment of the Risk Management Committees Financial and Performance management -Implementation of proper record keeping -Preparation of regular, accurate and complete financial and performance reports. -Design and implement formal controls over IT systems Controls Internal audit evaluates if the controls, which management relies on to manage the risks down to acceptable levels, are appropriate and functioning as intended (i.e. are they effective yet efficient) and develop recommendations for enhancement or improvement.   Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions OTHER INPUTS TO THE ANNUAL INTERNAL AUDIT PLAN AGSA areas to assess controls around Financial, Performance and Compliance management Internal audit focus areas to assess Internal Controls Governance Appropriate risk management activities including IT & Fraud risks (fraud prevention plans) Ensure that there is an adequately resourced and functioning internal audit unit Audit committee promotes accountability and service delivery through evaluating and monitoring responses to risks Ensure that the audit committee promotes accountability and service delivery through evaluating and monitoring responses to risks and providing oversight over the effectiveness of the internal control environment including financial and performance reporting and compliance with laws and regulations The Internal audit function assists Council and Management in achieving goals of the municipality by evaluating the process through which: -goals and values are established and communicated. -the accomplishment of goals is monitored. -accountability is ensured and corporate values are preserved.   Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions CHARACTERISTICS OF AN EFFECTIVE AUDIT COMMITTEE Independence and competency of appointed members. Adequate training and resources. Frequency of meetings and special meetings. Evaluation of risk assessment, control systems, internal audit, external audit and management decisions. Unrestricted access to council, internal and external audit. Continual evaluation of the effectiveness of the Audit Committee by council. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions BENEFITS OF AN EEFECTIVE AUDIT COMMITTEE Improved communication channel between councillors, senior management, internal and external auditors Users of the municipality’s financial information are reassured about the credibility and objectivity of financial statements and standards of corporate governance. It strengthens the independence of the internal and external audit functions. It promotes improved effectiveness, efficiency and economy of operations. It promotes better financial management. It helps councillors and management fulfil their legal responsibilities. Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions CONCLUSION It is important for the following to be in place and operating effectively if we want to achieve clean administration: Internal Audit Units and Audit Committees Risk units and Risk Management Committees Audit Steering Committees MPAC ‘S Institute of Municipal Finance Officers & Related Professions

Institute of Municipal Finance Officers & Related Professions Thank You! Institute of Municipal Finance Officers & Related Professions