Workshop Internal Audit Manual Update 9 September, 2011 PAKISTAN - US ENERGY PROGRAM

Welcome Internal Audit Manual Update Introduction Current Manual Weaknesses Limited application Compliance with laws, regulations, organizational policies and procedures Internal controls over financial reporting Proposed internal audit manual framework Discussion Final Internal Audit Manual Framework Independent Auditor’s Comments in Letter to BODs Co-Sourcing Independent Auditor’s Annual Audit Report Agenda PAKISTAN - US ENERGY PROGRAM

The opinion letter of one external auditor in its letter to the DISCO BOD reminds the DISCO that “.. the Board’s responsibilities include..maintenance of adequate accounting records..internal controls,..the selection and application of accounting policies,..safeguarding of the assets of the Company and prevention and detection of frauds and irregularities..”. In a separate comment from another external auditor in its letter to the DISCO BOD it states “..Our review of internal audit function revealed that it is not as effective and independent as it should be, especially when compared to international standards..the department has no means to ensure the future compliance made and disciplinary actions taken by management to remove/settle the internal audit findings..we recommend that the BOD evaluate the internal audit function to strengthen this activity and independence..” Independent Auditor’s Comments PAKISTAN - US ENERGY PROGRAM

Co-sourcing is a partnership between the DISCO and an outside vendor, a professional audit service provider. An audit firm is chosen, which works with and often alongside—but doesn't replace—the existing internal audit staff based on specific skills needed to get the job done. When the project is finished the audit firm's job is over. Co-sourcing is different consulting because the DISCO’s personnel play an ongoing role in the project. In a typical consulting project, a consultant comes into a company, plans and performs a specific task and then presents a report, working independently most of the time. In a co-sourcing arrangement, the DISCO staff takes an active part in project planning and decision making and may participate in preparing the final report. Instead of relinquishing control over an activity DISCO managers involved in co-sourcing actively manage and work alongside the specially skilled outsiders. Co-Sourcing PAKISTAN - US ENERGY PROGRAM

Provide additional resources for an internal audit manual with an expanded scope. Introduce a higher level of expertise to the internal audit function. Establish a reliable and independent internal audit resource which can report directly to BOD Audit Committee. Provide training to DISCO internal audit staff. Co-Sourcing (cont’d) PAKISTAN - US ENERGY PROGRAM

Responsibility of management to establish and maintain a system of internal controls. Expand the scope of the annual audit. Report on compliance and internal controls over financial reporting. Independent Auditor’s Annual Audit Report PAKISTAN - US ENERGY PROGRAM