Financial Comptroller General Office
Assessment on Internal Audit Reform
Final Report
Consultant
Suvod Associates
Chartered Accountants
Shankhamul, New Baneshwor, Kathmandu-34
Falgun-2071
Table of Content
S.N
1.
2.
3.
4.
Contents
Chapter - 1
1.1. Background
1.2. Legal Provision
1.3. Term of Reference and objective of Consulting Service
Chapter - 2
2.1. Importance of study
2.2. Objective of Assessment
2.3. Assessment Methodology and Limitation
2.4. Scope of Assessment and Limitation
Chapter - 3
Situation Analysis
3.1. Size of Public Sector and Work Load
3.2. Recommendation of Various Studies
3.2.1.Report of AdministrativeReform commission,2070
3.2.2. Nepal portfolio performance review 2014
3.2.3. Auditor General’s Annual report 2070/2069 (2013 & 2014)
3.2.4. Country Financial Accountability Assessment 2002
3.2.5. Report of Public Accounts Committee on Public Account and Audit,2066
3.3. Analysis of Legal and Policy Arrangement
3.3.1. Provisions of Legislation
3.3.2. Independence
3.3.3.Scope of Internal Audit
3.4. Quality of Internal Audit
3.5. Internal audit organization and internal audit process
3.6. Internal Auditing Standards
3.6.1. Formulation and execution of Internal Auditing Standards
3.6.2. Code of Ethics and Internal Audit Service charter
3.7. Human Resource Management
3.7.1. Qualification and CapacityDevelopment
3.7.2. Approved Post of Human Resource
3.7.3. Lack of opportunity for capacity development of internal auditors staffs
3.8.Forms and Methods of Internal Audit financial transaction under Single Entry
Accounting System(STA)
3.9.Suitability of Computer Assisted Audit Techniques in Internal Audit
3.10. Effectiveness of Internal Audit
3.11. Internal Audit Management in Different Asian Countries
3.11.1. Internal Audit Practices
3.11.2.Cooperation and suggestion by Supreme Audit Organization
3.11.3. Situation of Manpower
3.11.4 .Audit of Information and technology
3.11.5 .Status of follow up and implementation of Suggestion
Chapter - 4
4.1. Quality of internal audit
4.2. Legal provision regarding internal audit & it’s scope
4.3. Independence of internal auditor
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4.4. Organization and human resource management
4.5. Organizational & functional model of internal audit
4.5.1. Single or In-house model
4.5.2. Co-sourced
4.5.3. Outsource with in-house management
4.5.4. Fully out sourced
4.6. Problem and Challenges Encountered by Internal Audit
Chapter - 5
5.
Suggestions for Improvements
5.1 Single or In-house Model for Internal Audit
5.1.1. More legal procedure
5.2. Organizational structure
5.2.1. Organizational Reforms
5.2.2. Proposed organizational structure and management
5.2.3. Proposed Structural of district based Offices
5.3. Internal Audit Standards & Review System
5.3.1. Internal Audit management & Internal Audit Standards
5.3.2. Monitoring of Internal Audit Report
5.3.3 Quality and Working Procedure of Internal Audit
5.4. Human Resource
5.4.1.Internal audit service / Group Formation
5.4.2. Capacity Development of Internal Audit
5.4.3. Review of existing approved Post and Proposed Manpower
5.5. Appropriateness of use of Information Technology auditing methods in Internal
Audit
5.6. Internalization of Good Practice
Chapter - 6
6.
7.
8.
9.
Conclusion
Chapter- 7
7.1. Suggestion for implementation Approach
7.1.1. Formation of Steering Committee
7.1.2. Formation of working Group
7.1.3. Coordination & Cooperation with Office of Auditor General
7.1.4. Co-operation with ICAN
7.1.5. Formulation of Strategic Plan
7.2. Strengthening of Internal Audit
Annexure
References
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Introduction
1.1 Background
In the past, the management of funds and accounts was carried out on adhoc basis during each
government system. Particularly, after the introduction of the budgeting system during the year
2008, Comptroller General Office was established in order for checking and record keeping the
budgeting system and the funds of the government. In course of the organizational development
of present organization, a committee was formed under the chairmanship of Accountant General
on 14thShrawan, 2031 with consultation of Ministry of finance, Office of the Auditor General
and Department of General Administration. As per the recommendation of the report prepared
by the Committee, the cabinet passed a decision on 16thBaisakh 2032 and established the FCGO.
Under the Financial Procedure Act, 2055 (1997), this office has entrusted with the responsibility
of operation and control of financial administration; issue directives for internal audit and
preparation of Nepal government’s Central level Income and Expenditure Accounts. According
to the Business Allocation Rules of the Government of Nepal, among the functions to be carried
out by the MOF, the tasks of administration and account control of government fund as well as
all the functions and duties that is stipulated by the prevailing Acts and laws should be carried
out by this office.
The functions of the FCGO are performed by its 4 Departments (Administration, Fund, Budget
implementation and Monitoring, Evaluation and Analysis. There are 14 different Sections under
these Departments. The DTCO office is located in all the 75 districts of the country.
1.2 Legal Provisions
In Nepal, internal audit was started after the execution of the new accounting system (F/Y
2018/19) conducting audit of the expenditure by concerned ministry and departments of their
subordinate offices. This system was transformed in 2029 by discontinuing the practice of
collecting the accounts of government office in the concerned Ministry/Department and gets
audited by deputing audit teams of Accountant General. Previously internal auditors were
accountable towards Departmental Head or Chief Accounting Officer because of which auditing
was considered as the main tool of internal control. In accordance with Government IncomeExpenditure Operation (Working Procedure) Rules, 2038, under the FCGO, the DTCOs were
established in 75 districts and these offices were entrusted with the function of conducting
internal audit of expenditure, revenue and deposit of government offices. The Financial
Procedure Act, 1997(2055) mandated FCGO to operate and maintaining accounts of
Consolidated Fund as well as carry out its internal audit. With this provision the structure of
internal audit results got legitimized.
As per the Rule 96 (1) of Financial Procedure Rules, 2007(2064), DTCOs are empowered to
conduct the internal audit of revenue, deposit, appropriation and expenditure of operating level
offices and public fund accounts established under the prevailing law which has extended the
scope of internal audit.
1.3 Terms of Reference and objectives of Consulting Service
As per the work order to consultant the main objectives of the assignment were to:
1. Identify the gaps of internal audit in order to develop the internal audit as a reliable tool for
monitoring with respect to sufficiency of internal control system of Government of Nepal.
2. Find out quality and coverage including other area and its working practices in internal audit.
3. Recommendations for institutional arrangements, organizational and operational modalities
for strengthening of internal audit.
4. Other objectives were as follows:
A. To identify potential internal audit structures and modalities of internal audit of financial
transactions in the context of introduction under Single Treasury Account (STA).
B. To reports on application of CAAT and IT audit in internal audit.
C. Assist in introducing internalization of good practice in the field of internal audit.
This assessment was conducting mainly focusing on the above TOR.
Chapter -2
Importance, Objectives, Methodology, Scope and Limitations of Assessment
2.1 Importance of study
So far as the strengthening of professional development is concerned no in depth study has been
conducted neither by the government nor by Development Partners (DPs). Internal audit is a tool
which supports in the risk minimization in relation to public financial management, improvement
in the internal control methods and administrative methods. It also helps in achieving the aim of
an organization and fulfillment of the responsibility of management. In the reports of study on
public expenditure management, instead of detailed recommendation about need of
improvements in internal audit system have recommended in brief. This fact is also proved from
description given for policy arrangement in Chapter 3 of this report. The main task of the internal
audit is to assess compliance with financial administration, to minimize the risks factors and
advice those charged with management to strengthen internal control system and aware them.
The effective execution of this task depends upon different factors, but the factors given below
are considered as the main basis which clarifies the role of the internal audit.
•
Ensure the independence of internal audit.
•
Communicate management appropriately and proactively
•
Implementation of recommendation.
The present context of government public financial management also shows the importance of
internal audit, proactive awareness and its contribution. However, the Chief Accountable officer
and Responsible Officer have not recognized these realities.
1. Performing the task of internal audit by considering the increasing size of budget, diversity of
program and their complexities.
2. Contribute in use of external source and compulsions of adherence with the conditions
imposed by Donor Agencies.
3. Support minimization of increased volume of irregularities and their nature pointed out by
external audit.
4. Support final audit to focus their endeavors on performance and risk based audit.
5. Create the situation of preparing the accurate Financial Statement in time.
6. Internal audit helps the management by pointing out weakness of the financial management
in time in order to take reformative measures.
With the increased volume of budget structure and complexities management of economy there
is increased interest in transparency and accountability in the use of public resources among the
stakeholders.
In this situation, management of internal audit and enhancement of
professionalism and capacity building of the auditors have become are indispensible. If such
arrangement could be managed then the capacity of the resources as well as the effectiveness of
its utilization will also insured. Similarly the internal audit can also contribute to management in
minimizing the risks associated with the use of public resources and mitigate the problems; it is
required for institutional restructuring and management of internal audit.
A study was conducted by FCGO in 2070 (2013) and prepared report for the structural
improvement of internal audit. But it was felt that the importance of the assessment may increase
if such assessment is conducted by a third party audit experts in line with international practices
and values that may be a basis for institutional development and make the audit more qualitative.
2.2 Objective of Assessment
The FCGO conducted a study on internal audit in 2070 by forming a Working Group. The
Working Group in its report has recommended to form a service group of internal audit by
separating the function of budget disbursement or integrate it in Departmental structure under
three different models. In this connection, this independent assessment was conducted carried out
for the purpose of identifying the positive and negative aspects of three models and suggest
alternatives of each model. As per the TOR mentioned in the paragraph 1.3 the consultant carried
out the assessment in focusing areas as mentioned below:
•
•
•
•
•
•
To find out the weaknesses in quality, scope, working methodology and practices of
internal audit,
To identify the gaps to develop the internal audit as a reliable tool of internal control
system,
To suggest organizational structure, management and operational modalities to strengthen
internal Audit,
To suggest potential system and methods of internal audit of financial transactions in the
context of Single Treasury Account system (TSA),
To recommend the application of CAAT and IT audit, and
To Internalize of good practice in internal audit domain.
2.3 Assessment Methodology and Limitation
In course of assessment, the following methods were used considering the TOR to the consultant
and applied the approach as stated in overview report.
2.3.1 Reviewed available documents and records,
2.3.2 Review extant Act, Rules and organizational structure including prevailing practice of internal
audit in the context of TSA system,
2.3.3 Information and statistics were collected through questionnaire from 20 government office from
three geographical regions including Kathmandu valley. In this process statistics were collected
from 11 offices in Kathmandu valley and 9 from outside the valley and were evaluated the
information. The questionnaire used during the assessment is given in the Schedule -2 of this
report.
2.3.4 Three DTCO located in valley and Account Officers of some government organization were
interviewed.
Due to the lack of time and cost involved only 20 offices were covered for field study. Adequate
information and statistics couldn’t be obtained from the offices that were visited. Discussion
couldn’t be held with some of the officers so the assessment was limited to the information
whatever obtained from the offices. During the assessment, statistics of 11 offices from valley
and 9 from outside valley were collected and assessed to complete the assessment. Information
and statistics collected through various methods was synthesized and evaluated based on the
strength and weaknesses including opportunities and challenges so as to determine the areas of
improvement and suggested work plan and recommendation in the report accordingly.
2.4 Scope of Assessment and Limitation
As per the agreement the this assessment covered the areas such as quality of internal audit, its
weakness, methods of internal audit along with possibilities of initiating IT audit in the context
of TSA system. This assessment also covered the available information for the period of
2067/68-2069/70 including 2070/71 was also covered in the scope of assessment. In the scope 6
DTCOs from valley and outside the valley and 14 other offices were also covered for assessment
purposes. The information was collected from various offices through questionnaires but some of
the offices did not provide the requested information due to which no assessment could be
conducted of those offices.
Chapter - 3
Situation Analysis
3.1 Size of Public Sector and Work Load
With the increased volume of budget the income and expenditure of Nepal has also been
subsequently increased in the same proportion. As a result, there is not only increase in volume
of work of PFM but also the complexities and risks associated with it are also increased.
Similarly the conditionality of foreign assistance to be complied with and eroding level of
internal control the work load of internal audit has also increased. With the manifold increase in
size of the budget the demand of the Parliament, oversight bodies, civil societies & media with
respect to transparency, accountability and effectiveness in service delivery in the use of public
resources has also increased. Due to this, there has been more pressure on public financial
management to confirm these aspects and ensure the stakeholders. In this context, skilled and
motivated staff, code of conduct, standard operational procedures (SOP) and arrangement of
training and resources is required to improve this situation. With such improvement, internal
audit could play significant role in timely communicating to those charged with management
regarding the weaknesses with respect to compliance with Acts & Rules, uses of the resources
through its report and uphold the fairness of financial administration and initiate reformative
measure in effective delivery of services proactively. However, considering the prevailing laws
and regulation; organization & management; working practices; manpower; and attitude of
management towards internal audit, the internal audit seems unable to contribute in the
aforementioned areas.
With the analyses of the information given table below and the recommendation given in the
Annual Reports of Auditor General; Country Financial Accountability Assessment and PEFA
Assessment conducted by Development Partners (DPs); and Working Groups formed by FCGO
have recommended various suggestions to strengthen internal audit. But no organizational and
professional improvements are visible as expected.
Fiscal year, Number of government entities & audited amount (amount in lakhs)
Particulars
2069/070
Number of Audited
Entities
Amount
of 3744
8,04,85,73
Number
Government
Entities
Number
of 92
Corporate
Bodies
Committees
805
and
other
2068/069
Number of Audited
entities
amount
3708
7,42,59,43
2067/068
Number of Audited
Entities
amount
3796
5,27,56,08
11,36,87,67
88
9717904
69
7,78,66
69,27,31
901
62,61,56
649
37,34,81
Organizations
District
Development
Committees
75
74,79,39
73
68,15,92
75
31,85,05
Source: Annual Reports of Auditor General
In the view of increased size of budget, number of offices, expectations of stakeholders, existing
organizational structure and management, manpower and available resource to internal audit it
seems difficult to perform audit principally and practically the assigned task.
3. 2 Recommendations of Various Studies
In order to improve the internal audit which is a major tool of internal control system of public
financial management, various Commissions and Working Groups were formed in time to time
and they recommended various policy prescription and suggestions in the past. The
recommendations made by various Commissions and Annual Reports of Auditor General with
regards to internal audit are given below.
3.2.1. Report of Administrative Reform Commission, 2070
Internal audit which is carried out by the DTCO, can be made effective by establishing the
departmental structure or by forming separate sub groups
The Ministry of finance should focus in capacity development of overall economy through strong fiscal
and financial management for sustainability and achieving broad and high economic growth. The
DTCOs should be given the task of Internal Revenue Department in those districts where the number of
tax payers is trivial.
3.2.2. Nepal Portfolio Performance Review, 2014
Internal Audit –A proposal has been proposed in internal audit reform in Nepal. A three steps
model is proposed by the FGCO delink same from budget release and internal audit separate
audit cadre or departmentalization of audit function. A action is taken by FCGO to delink those
people conducting internal audit who are engaged in budget release of the same office.
3.2.3.Auditor General’s Annual Report 2070 &2069 (2013&2014)
The Annual Reports of Auditor General 2069 and 2070 mentions that Rule 96 of Financial
Procedure Rules, 2064, empowers DTCOs to conduct internal audit of financial transactions of
all government offices, however the internal audit has not been effective due to the following
reasons.
•
•
•
•
•
Annual Report of Auditor General
2070 (2014 )
2069 (2013)
Inadequate manpower to conduct internal • The study conducted this year 56 DTCOs have
audit
adequate staff for conducting internal audit
Insufficient training opportunity available • Unrestricted access to information to internal audit
to the manpower who engage in audit
to conduct the work
The audits are carried out without Audit • Non-availability of Training opportunity to the
Plans and Programs
manpower who engage in internal audit
Audit is not conducted in accordance with • Audit files of district level offices are not
the Internal Audit Directives, 2068
maintained properly
Situation of checking arithmetical accuracy • The audit is carried out without preparing entity level
by final audit because the internal audit has
audit plans and programs
not pointed out the irregularities in • Audit is not conducted in accordance with the
majority of offices
Internal Audit Directives, 2068
• Lack of supervision of audit procedures applied
• Audit is not carried out on trimester basis
• It is noticed that mostly audit irregularities are not
pointed out by internal auditors whereas final audit
has pointed out irregularities
• Based on the above situation internal audit seems
not qualitative and reliable
In addition to the above the reports mention that fully owned Committees, established under
Committee Development Act, 2013, Projects and various autonomous bodies etc. hire service of
external experts to carry out internal audit. But such services are taken only after the close of the
fiscal year due to which the objective of the internal audit found unfulfilled.
In accordance with the Self Governance Act, 2055 there is permanent mechanism in the District
Development Committee in order to conduct internal audit of local bodies including DDCs itself
and district level offices of devolution program. But the internal audit those entities are being
done just for sake of audit due to non-application of fundamental audit procedure and lack of
trained manpower. Since there is no mechanism to conduct internal audit of Community Schools
a chunk of public fund remains out of the purview of internal audit and it has been difficult to
develop it as a management control tool.
Similarly these reports have given several suggestions with regard to internal control but the
internal audit has not been able to support in making internal control effective by checking the
regularity of financial transactions of the government entities. The final audit in its reports has
mentioned that it is forced to confine in checking the regularity aspects due to above reasons. So
it has suggested to take reformative measures such as organizational restructuring, adequate legal
provisions, enhancing capacity building, methodology development etc. to strengthen internal
audit.
3.2.4. Country Financial Accountability Assessment (CFAA), 2002
In course of CFAA assessment done by the World Bank in Asia and Africa during the period
2002-2005, it identified the areas of improvement in internal control and audit. The following are
the details mentioned in the CFAA Report, 2002 carried out by World Bank in Nepal.
•
Internal audit really assess internal control or recommend improvement. Normally it
examines whether or not prescribed legal provisions are being followed.
•
Internal audit is not effective as it might be due to large number of accounting and
payment centers relative and the limit of internal and role to transaction checking.
3.2.5 Report of Public Accounts Committee on Public Accounts and Audit, 2066
Several studies have been carried out in public accounts and audit in the past. In the report it is
mentioned that due to laxity in the implementation of suggestions, the expected improvement has
not been made in financial management of Government of Nepal.
Unless measures to develop the organizational capacity building of the bodies responsible for
oversight are not undertaken by initiating sustainable efforts so as to enhance the capacity and
skills of the manpower in such organizations it seems difficult to improve the public financial
management. In this connection, these assessment reports have identified several problems in the
PFM and recommended suggestions to make financial governance fast, updated and accountable.
In connection with implementation of recommendations, initiation for amendment in the legal
provisions needs to be taken by the concerned entities. But the Committee has not given detailed
implementation structure by obtaining the recommendation from responsible body along with
work plan. The Public Account Committee has recommended the following suggestion.
•
The internal audit should be delinked from the DTCO and create a separate Unit
under FCGO to perform the task.
•
To develop career development of Internal Audit
•
To develop Internal Audit Standards
•
To develop Internal Audit as a management information system
•
To make Internal Audit mandatory in public sector
•
To settle the audit irregularities pointed out by internal audit within 2 months by
related office or ministry and department
•
To settle the audit irregularities raised by the internal audit before the submitting
the books of accounts for external audit
In general, most of assessment reports have suggested undertaking the measures such as
organizational restructuring including capacity development, training, extension of scope of
work etc. in order to strengthen the internal audit.
3.3. Analysis of Legal and Policy Arrangement
Even after the more than 3 decades of inception of internal audit system in public financial
management, it has not been performed as per the spirit of the legislation. This situation has been
also proved from comments revealed from the different study reports and Annual Report of
Auditor General. In the view of the legal provision, internal audit management and its
implementation, organization and human resource management, monitoring etc. including
international practice relating to internal audit there is lot of room for improvement. The
substantial difference can be noticed if the current internal audit practice is compared with the
internal Auditing Standards of Institute of Internal Auditors. While categorizing different aspects
of international practices of internal audit and the current practice in the country, the following
weaknesses, strength, opportunity and threat can be seen.
3.3.1. Provision of Legislation
Financial Procedure Act, 2055; Financial Procedure Rules, 2064; the audit procedures prescribed
by FCGO; internal audit directives and Service Code of Conduct are the source of legal
provisions which are related to internal audit.
Strength
•
•
There is legal provision in the FPA, 2064 of getting internal audit conducted by the entities
DTCOs have been charged with the responsibility of conducting internal audit of the
revenue, deposit, income and expenditure of appropriation and the operational or other public
funds established in accordance with the prevailing law.
•
Conduct internal audit in accordance with the procedures prescribed by Internal Audit
Directives
•
Section 16,17 and 26 of FPA, 2055 have specified to take action or penalize based on the
audit finding of internal audit against the concerned person responsible for any act of loss or
damage sustained by the Government of Nepal.
Weaknesses:
•
The mandate of Internal Audit does not cover entire public sector like Municipalities, VDC,
Organizations established under Development Committee Act, 2013 etc. except District
Development Committee (devolution programs).
•
Internal audit is limited to the areas as specified in the Rule 96(2) of Financial Procedure
Rules, 2064,
The legislation does not specify the procedure or methods of internal audit.
•
•
Even after the implementation of TSA the Financial Procedure Act and Rules have not been
amended.
•
The legislation is silent about the access to information to internal audit.
•
In cases where the irregularities detected from the internal audit cannot be settled by
procuring evidence thereof prior to the final audit for any special reason, a written
explanation also setting out that mater shall be given to the final auditor. But the provision of
not to take action after final audit on irregularities raised by internal audit seems against the
spirit of the Act.
Opportunities and Challenges:
Checking of various requirements such as the compliance with the Procurement Act and Rules
thereon; budgetary procedures; amendments made every year in Finance Act; conditionality of
the projects implemented under external resources are some opportunities and challenged to
internal audit. The prevailing FPA and Rules thereon gives authority to internal audit to conduct
regularity and performance audit however, it is challenging to perform audit accordingly. The
legislation gives authority to conduct audit as mentioned above but if not implemented as per the
authority it cannot contribute to PFM.
3.3.2. Independence
External audit is kept independent from the management objectively so as to enable them in
selecting transaction,subject and have adequate access to information for conducting audit
independently and free of bias. Likewise for the effectiveness ofcompliance with basic elements
of internal audititrequires to be accorded organizational and functional independence from
management.
As IIA has defined IA in international Standards for the Professional Practice of Internal Audit
has defined internal audit as “Internal Auditing is an independent, objective assurance and
consulting activity designed to add value and improve an organization’s operations.it helps an
organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control and governance process”.
According to the above definition, internal auditors provide advice in the operation of
organization including objective and independent assurance which enhances value of the
transaction. Internal auditing supports in organization. Operational process evaluates
effectiveness of risk management and control in contributing for applying disciplined approaches
considering the existing organizational structure,audit practice etc. FCGO needs further
improvementsin conducting internal audit independently.
In the present context, the status of independence engaged by internal auditing is as follows:
•
•
•
•
•
Financial procedure Act, 2055 and Financial procedure Rules 2064, is silent regarding the
independence of internal auditing.
According to the Central level organizational Chart of FCGO and sub-ordinate office,
internal audit is kept as section.
Staff serving in DTCOs is engaged in dual responsibility of accountskeeping andinternal
auditing.
Due to the involvement of colleagues in accounting and internal auditing for a specific
period, the internal auditors might unable to perform their task unbiased manner to maintain
cordial relationship with each other.
Laws and Directives do not clearly specify whether internal audit report is to submit to chief
accounting officer or responsible person.
3.3.3. Scope of Internal Audit
According to Rule 96(2) of financial procedure policy, 2064, while performing the internal
auditing of income & expenditure of offices, DTCOs need to focus on the following matters:
•
•
•
•
•
whether the income and expenditure of Office and the accounting thereof are
maintained in consonance with the prescribed procedure or not,
whether the financial resources are used in an economical, efficient and effective
manner or not,
whether the goal as per the approved annual program has been achieved or not
whether the internal control system is effective or not,
Whether the financial statement give true and fair view of transaction or not
Other than above mentioned matters, internal audit need to consider the process mentioned by
FCGO in course of checking.
The Financial Procedure Act, 2055 and Financial Procedure Rules, 2064 has specified the scope
of work of DTCOs to conduct auditofthe revenue, deposit, income and expenditure of
appropriation and the operational or other public funds of office established in accordance with
the prevailing law.
Considering the above scope of it appears that checking of accounting and compliance with
process stipulated by Acts and Rules i.e. regularity/compliance audit needs to be conducted.
Also, in the context of utilization of financialresources,the aspects of economy, efficiency and
effectiveness is to be considered i.e. means performance audit is required to be carried out.
While analyzing above scope of work specified by the legislation following types of audit needs
to be under taken by internal audit.
 Regulatory Audit
• Performance Audit
• Financial Statement Audit
To a large extent Internal Audit is performing regularity /compliance audit of public entities
which come under the work scope butit has been conducted with the perspective of performance
audit. In case of Financial Statement audit it appears satisfactory. However, internal audit has not
been undertaken from the view of credibility of volume of transaction, completeness of
accounting of transaction of the central accounts, Consolidated Fund loan investment which
depicts overall position of financial transactions of the country
In the viewoflegal provisions, practically the entire public sector does not come within the scope
of internalaudit.Its main function is confined in budget release and it would have taken its nature
as a basis. Although within the scope of work of internal audit of local bodies which come under
Local Self Governance Act, 2055, Development Committee Act, 2013, Committees formed
under Special Act and administrative decision, community school as well as government
universities under District Education Office does not come under audit purview of Internal
Audit.
3.4.Quality of Internal Audit
In relation to internal audit management, Rule 96(2) of Financial Procedure Rules, 2064 specify
to conduct internal audit of income and expenditure and focus on five points. Considering the
provision of the legislation the internal audit is required to conduct the audit of regularity,
performance and completeness of financial statement. In addition to this, the internal audit
Directives has defined the terms such as objective of audit, methods, procedures, risk
assessment, check list, reporting, follow up etc. Legally, instead of specifying the rights and
duties of internal audit the CAO and Responsible Person have given duty and made them
responsible for accounting of transaction and get accounts audited from internal and external
auditors. Rule 45 of financial Procedure Rules, 2064 specify to see 19 points in order to assure
the reliability of income and expenditure, forexample whether accounts have been maintained in
prescribed format, financial transaction comply with prevailing laws, sufficient evidence of
income and expenditure is kept, records of government property is complete and updated as well
as appropriate use of property etc. The above mentioned points are similar to the 15 points stated
in Section 4 of Audit Act 2048. The Internal audit Directives 2068suggest on checking of
revenues and expenditure rather than focusing on overall audit management. The international
practices suggest about the audit management but in the absence of separate Internal Auditing
Standards it lacks proper management and its professionalism. In accordance with the
International Auditing Standards on Internal Audit the audit management includes the following
stages:
•
Preparation of Audit plan
•
Audit Execution and Evaluation
•
•
Communicating audit result
Follow up
The above stages suggested by internal auditing standards are followed while conducting the
audit. On the basis of internal auditing standard the aspect of the control environment of entity
being audited, risk assessment, selection of audit procedure, mobilization of skilled human
resources, etc. are followed in audit. Such internal audit only can provide substantial contribution
to PFM in the use of public resources. But the internal audit procedure adopted by DTCOs does
not meet the minimum standard of auditing. On this basis audit performed by DTCOs it is of low
quality. Other fundamental aspects affecting the quality of internal auditing is described in other
paragraphs.
3.5 Internal audit organization and internal audit process
Audit is established as a section under a Monitoring, Evaluation and Analysis
Department.Though the departmental head is assigned to officer of joint-secretary level officer,
the organizational structure shows that second class gazette officer is the head of audit section.
The officer level staff is transferred on the basis of civil service Act and transfer policy with the
period of two years.However assistant level staff of DTCOs is found to be serving in the same
office for more than the stipulated time.
The audit process adopted by DTCOs is depicted in the chart below:
Internal Audit Operating process
Internal Audit Plan
Entry Meeting
Conduct of Internal
Audit
Submission of Internal
Audit Report
•
•
•
•
Selection of audit staff
Issue Authority letter for audit
Discussion on main issues to be audited
Deadline
Internal Audit execution
• Meeting and discussion with organization head and
accounts head.
• Audit of books accounts
• Prepare working paper/notes on diary
• Discussion during internal audit
Submit internal audit report
• Prepare Draft Report
• Discussion between internal audit head and audit team
• Communication to Chief Treasury and Comptroller
• Issue internal audit report
Follow up
Reply and Follow up on
Internal Audit Report
• Response from the audited organization
• Request for Follow up (Re-verification)
• Communicate audited entity about audit results
• Observation reported in Internal Audit Report
becomes null once final audit is conducted
Although the internal audit is conducted by DTCOsby following the above process but it is not
documented except limited documents such as audit authorityletter documents related to follow
up audit only. No audit file is maintained regarding the audit process followed.
Generally junior level staffs are deputed to carry out the internal audit of offices. But, the report
is communicated to concerned offices by the officer level staffs. Records regarding the internal
audit activities applied are not kept properly. So, the information regarding which auditor has
performed the audit of particular office showing audit commencement and completion date, the
time for submission of report after the completion of audit is not supported by any documents.
When asked DTCOs regarding the frequency of internal audit conducted, two DTCOs replied
internal audit is done every 2 months whereas other 5 offices told on quarterly basis.
3.6 Internal Auditing Standards
According to international and national practices, separate internal and external auditing
standards are formulated and implemented so as to conduct audit work professionally, to
maintain quality and reliability. The main objective and use of internal audit standard can be
mentioned as follows:•
Establishing the fundamental principles of internal audit
•
Contribute to the operations and reform process of entity being audited
•
Establish basis for assessment made by internal audit and directs to formulating reform
plan
In various nations, there are separate laws, organizational and procedural arrangements are
madefor conducting internal audit of public sector.In our context, except the provisions related to
internal audit is specified in Financial Procedure Act and Rules thereon, the FCGO conducts
audit on the basis of Directives which was formulated for the first time in 2055 which has been
revised in 2063 and again in 2068.There is no national internal auditing standards in Nepal. In
the process of this assessment 6 DTCOs accepted absence of internal auditing standards.
3.6.1 Formulation and execution of Internal Auditing Standards
The Financial Procedure Act, 2055 and Financial Procedure Rules, 2064 have empowered FCGO
the right to perform internal audit. In the view of the legal provisions, to some extent the
compliance audit, performance audit and audit of completeness of accounting and financial
statement based on the values and practice of public sector audit (final audit). The internal audit
does not cover the entire public sector.The audit activities such as audit plan, execution,
reporting, monitoring, documentation, follow up, quality assurance, etc. are not seen in the
official records. The internal audit Directive does not mention the procedures of carrying out the
Internal audit of the areas such as appropriation,head wise expenditure, project assisted by
foreign resources,Operational Fund,accounts of inventory, revenue and deposit, etc. The
Directive suggests focusing on the points regarding checking of information mentioned in
Auditor General's Forms (OAG Forms) like checking of expenditure in line with budgeted head
and points to be considered whileconducting audit of revenue and records maintained etc. There
is neither any practice of keeping the records of internal audit activities nor maintain separate
audit file for it. In the situation, where there is no national internal auditing standards developed
in line with the values of international standards the audit so conducted by complying the process
of the provisions of legislation and as suggested by Internal Audit Directives including checking
of arithmetical correctness it is not sufficient to assure the quality of internal audit.
Since internal auditing is limited to the formal provision of legislation and not conducted as per
the generally accepted objectives of internal audit resulting no value addition through internal
audit.The management is of the view that internal audit is unable to play collaborative role in
providing quality report in time for initiating reform measures except legal backing. Due to these
reasons the external audit is limited to performing audit similar to the nature of internal audit due
to which it is unable to mobilize sufficient resource in high risk areas and in performance audit.
3.6.2 Code of Ethics and Internal Audit Service Charter
The Civil Service (administrative service) staffs are engaged in the task of internal audit work.
The staffs are transferred, promoted and action taken pursuant to the provisions mentioned in the
Civil service Act and Rules thereon. There are no extra provisions for Code of Conduct for the
staff engaged in task of special nature of accounting and internal audit as good
practice.Section19 of Prevention of Corruption Act, 2059 stipulates that whoever, either a public
servant or any other person authorized to carry out auditing in a government body or in a public
institution, prepares auditing report with mala fide intention having shown the facts not done or
happened in the transaction or having concealed the facts done or happened, shall be liable to a
punishment of imprisonmentdepending on the degree of the offence committed.
These provision are applied to public and private sector auditor hence it inspires to conduct
internal audit with due care and submit fact based report. But whether the audit is conducted by
complying COE and systematically is out of its scope. As per the international best practice there
is provision of Service Charter for internal auditors. Mainly the rights, duties, functions of the
internal audit, reporting requirements and the service provided are mentionedin the Service
Charter. Internal audit has been accorded less importance in the Service Charter published by
Good Governance Act, 2063 to the FCGO.
3.7 Human Resource Management
Capable manpower is required for smooth & efficient operation of any organization. In order to
achieve its organizational goal, and appropriate to its work nature the organization should
manage skilled, capable& knowledgeable human resource. For this, the organization should
develop job description for every level of staff and formulate HR plan so as to carry out capacity
development activities and ensure its implementation. The following are the related points:
3.7.1 Qualification and Capacity Development
From the entry to administration level in accounts department of gazette and non-gazette service,
the minimum Qualification required is knowledge on management, economics, statistics and
mathematics. If the applicants belong to other streams than management, then he/she should be
given long training recruitment. Recruitment training facilities are available only to officer level
employees not to assistant level employees. CPE for internal audit employee's annually level is a
must. Due to the many like obstacles change in technology, differed expert opinion, lack of
knowledge of international accounting practices internal audit is unable to provide expected
service. The minimum CPE required to the staff involved in internal audit is not assigned and
they hardly get morethan one training at one level. This has resulted in compromising in the
quality of internal audit. For e.g. employees of the OAG should receive 18 hours of training in a
year compulsorily, also as per the provision mentioned by Institute of Chartered Accountant of
Nepal (ICAN) ,its members in practice must complete a minimum of 20 credit hours for their
COP(Certificate of Practice) to be renewed. Internal auditors are not compelled to the above
provisions. To perform the internal audit as per legal provisions and to perform work as per
responsibility, internal auditor lack skill, knowledge and experience. This is all because of lack
of strong provisions regarding internal audit. This can be visualized by going through the internal
audit report. This is one of the main reasons that the entities being audited are negligible towards
internal audit report.
3.7.2Approved Post of human resource
According to the organizational structure of the FCGO, the existing number of employees in
various positions is 5027 .Among them 1037 are employees posted in DTCO, out of which 313
are assistant level staff
Position wise status is as follows:Position
First- class
Second-class
Third class
Assistants
Total
Gazetted
2
49
88
139
Non-gazetted
327
252
313
892
Total
1031
In reality the statistics of human resource engaged only for internal audit task is not available.
Some of the strengths as well as weaknesses of organization and human resource management
are as follows:-
Strengths
•
As per the Annual Report, 2068 of Auditor General ,there is sufficient human resource for
internal auditing
•
DTCO have presence and access of internal auditing in every district
•
Despite the absence of Internal Auditing Standards, there is availability of Internal Audit
Directives
Weaknesses
•
Majority of staff involved in internal auditing are of non-gazette position
•
No segregation of duties specifying the function of staff for internal audit and accounts
keeping
•
Due to the regular transfer of staff , they are unable to develop professionalism perform in
their roles respective areas
•
Lack of human resource planning for professional development.
According to the AG’s Annual Report, 2068, the sanctioned posts in terms of number of staff in
the DTCOs have available for carrying out internal audit.Availability of adequate staff in terms
of number as well as qualified, capable and opportunities for capacity development are also
important for quality audit. For this purpose the existing human resource management is needed
to be reviewed.From conducting such review strengths and weaknesses related to human
resource including duration, nature and level of training need are to be identified. In course of
assessment the DTCOs were asked the about the impediments for regular internal audit and all
six DTCOS are of the opinion that skilled human resource as main impediment.
In this
context of need assessment, the aspects related to internal audit such as objectives, legal
provision , code of conduct, reward system for motivating employees also need to be taken into
account seems to be .
3.7.3 Lack of opportunity for capacity development of internal auditors staffs
Human resource development plan is required for capacity development. The plan should
include capacity development, transfer, requirement of training of CPE credit hours for staffs etc.
For this purpose government training center as well as foreign training institute and appropriate
budget accordingly. The lack of skilled manpower results in less qualitative work. Theconditions
given below indicate the need for capacity development of staff who is involved in internal audit.
•
Even though the internal audit report does not mention new irregularities but the final audit
report has point out irregularities.
•
The internal audit report points out mainly the issues of non- compliance and recoverable
however it rarely points out about system, internal control and management of
office/project/program.
•
The mentioning about the reason for irregularities of irregularities for example amount of
irregularities brought forward from last year, settled and addition in amount during the
current year and it effects
•
The internal audit report does not give consolidated position
•
It does not examine economic efficiency and effectiveness of transactions.
3.8 Forms and Methods of Internal Audit financial transactions under Single
Entry Accounting System(STA)
The government has introduced modern fund management system in order to make financial and
expenditure management including cash management function simple transparent and
development financially. The main purpose of introducing STA on 15thMagh, 2065 as per the
decision of Government of Nepal was to make existing public fund management effective. All
the amounts collected in cash by the government can be transacted through banking channel so
as to reduce the cost of loan, maximize its use and make payments of expenditure on time.
Since STA is web based and it also helps government agencies to get info on revenue and
expenditure immediately and easily which facilitates to prepare financial statement. It helps in
effective monitoring and evaluation of budget on expenditure which can be taken as its positive
aspect of this system.
However,in the situation where the DTCOs are linked with the banks and interconnected with
web, it is the precondition to install a powerful communication capacity and server system for
accounting and reporting purposes. IT based accounting system have various risks for which
skilled ITpeople only can identify the measures to address such risks.Therefore, posts should be
approved posts to recruit IT staff with qualification and filled in the Accounting Service Group.
Presently all the post approved in DTCO has not been filled. In such situation payment is being
made simply on the request of district level officer by conducting normal checking or return for
justification. Since the internal audit of the transaction is to be conducted by this office and same
staff due to which there is the situation of conflict of interest.
Documentary Audit is suitable for single treasury accounting system since it is web based and all
the documents related to transaction are kept by the paying offices themselves. But Information
Technology Audit can be used in relation to single accounting system for the budget release
compilation of expenses, central account and reconcile the transactions with NRB or with other
banks, etc. initiation of formulating IT audit policy is required for the use of audit software in
future is appropriate in accounting and conduct internal audit based on CAAT.
Under the Single TreasuryAccounting DTCO are maintaining amount of budget disbursed to
various offices in computer system. This has facilitated to obtain information with respect to
budget disbursed.Under the STA system, DTCOs disburse budget and collate the payments made
by itself while conducting internal audit which appears to be conflict of interest, in this
connection a question was asked during this assessment about such conflict of interest but all of
them dispread this possibility saying check is issued on the request of entities .OAGN also agrees
this statement. From this, actual expenses incurred till date can be identified.
3.9 Suitability of Computer Assisted Audit Techniques in Internal Audit
It has been more than a decade since the introduction of maintaining information with regards
financial transactions which requires qualified on IT systemin the FCGO. At present FCGO and
DTCO are maintaining web based accounting of TSA.
CAAT is considered as one of the best audit tool for computer based accounting, auditor with
skills and competence as well as computer based information nature of hardware and software,
preparation of report, techniques of operation, system logic under EDP environment audit, the
overall objectives, scope and level is similar to general audit. But it is different in audit
process.Generally CAAT includes two ordinary techniques which are:
I.
Audit Software
II.
Test Data
Under this the auditor uses software to process the statistics of accounting system used by the
different organizations to be audited. Under this:
a. Package programmer – These are generalized computer programs designed to perform data
processing functions which include reading computer files, selecting information,
performing calculations, creating data files and printing reports in a format as specified by
the Auditor
b. Purpose-written programs- These are computer programs designed to perform audit tasks in
specific circumstances. These programs may be prepared by the auditors by the
organizations or by a n outside programmer engaged by the auditor.
c. Utility Programmer – These are used by the organizations to perform common data
processing functions such as sorting, creating and printing files. These programmers are
generally not designed for audit purposes and therefore, may not contain such features as
automated record count or control totals.
I.
Test Data
These techniques are used in conducting audit procedures by entering data (e.g. a sample of
transactions) into the computer system of the organization and comparing the results obtained
with pre- determined results
II.
Other Types of CAAT

Integrated Test Data Fancily

Tagging and Tracing (TT)

Mapping

Concurrent Processing

Parallel Simulation (Defining the application function, understanding the topic, executing
the simulated system and calculating the derivation from the original results)

Control Processing
At present, CAAT is not applied in public sector auditing. But since last few years, the OAGN
has started information and technology audit. International Organizations of Supreme Audit
Institution has pronounced a separate audit guide for IT audit. With the introduction of IT,FCGO
has also to take some initiatives to develop infrastructure for IT audit. From this FCGO can seek
support and suggestion from the OAGN.
3.10. Effectiveness of Internal Audit
In public financial management, budget is being allocated for carrying out development of
construction project program and for their execution. However anomalies such as under spending
of allocated budget, and rush in expenditure in last month of fiscal year rather than proportionate
spending in each trimester, trend ofvirement at the end of fiscal year, increased volume of
irregularities etc. are prevalent every year. In this context, there is room for internal audit to paly
vital role by highlighting anomalies such as to aware of management in time.So it is appropriate
to analyze the performance of internal audit compared to international and good practice in PFM.
Internal Auditors has conducted global research on effectiveness of internal auditor. A global
assessment based on the IA & Global Internal Audit Survey has identified nine elements.
• Organization independence
• A formal mandate
• Unrestricted Access
• Sufficient funding
• Competent leadership
• Objective staff
• Competent staff
• Stakeholders support
• Professional Audit standards
While comparing the effectiveness of internal audit performed by the DTCOs in relation to the
nine elements identified by the research carried out by IIA, the scenario emerges is given below:
3.10.1. Organizational independence
a) Characteristics
Organizational independence allows the audit activity to work and be perceived to conduct work
without inference by the entity under audit.
b. Present condition
Although the FCGO is a separate central level organization but internal audit is not independent
due to it is not in position in providing value added service.
c. Reason of weakness and Gaps


Internal audit has not beenrecognizedindependent legally and administratively.
Direct or indirect management interference
3.10.2. A formal mandate
a) Characteristics
The audit activity’s powers and entities should be established by public sector Constitution,
Charter or other basic documents. Among other topics, this document would address
procedures and requirement of reporting and the obligation of the audited entity to
collaborate with the auditor.
b) Present condition
Financial Procedure Act, 2055 and Financial Procedure Rules 2064 has to some extent
clarified the scope of work for internal audit. But internal audit has not been performed
effectively.
c) Reason of weakness and Gaps
Entire public sector entities (for ex: Local Government, Committee Board, Trust etc. do not
come under the jurisdiction of internal audit.
3.10.3. Unrestricted Access
a) Characteristics
Audit should be conducted with complete and unrestricted access to employees, property and
records as appropriate for performance of audit.
b) Present condition
The legislation does not clearly specify about the access to records and document however
the government bodies have been made responsible to provide records and documents for
internal audit purposes.
c) Reason of weakness and Gaps
Practically, it is felt that there is no access to related files of taxpayers.
3.10.4 Sufficient funding
a) Characteristics
The audit must have sufficient funding relating to the size of its audit responsibilities. This
important element should not be left under the control of organization being audited, because
the budget impacts the audit activity’s capacity to performing its responsibility.
b) Present condition
There is no provision for allocating separate budget for internal audit as per the scope of
work and size of the internal audit; there is no practice of conducting various kinds of audits
such as system audit, pay roll, revenue audit, procurement audit and management audit.
c) Reason of weakness and Gaps
•
Even though there is legal provision to conduct special audit but due to the lack of skilled
manpower neithersuch audit are conducted nor budget is not allocated
•
There is no practice to estimate the audit cost
•
There is no practice of preparing programs wise budget and budget is not demanded to
conduct audit.
3.10.5. Competent leadership
a) Characteristics
The leader should be knowledgeable of applicable standards, professionally qualified –
preferably certified and competent to oversee and manage an audit activity. Moreover the
CAE (Chief Audit Executive) should be an articulate public spokesperson for the audit
activity. .
b) Present condition
In FCGO, the internal audit Section is headed by Under Secretary levelofficer, but it is not
compulsory that suchofficer need not to have required qualification, ability and skill to
conduct internal audit. There is practice of deputing staff on the basis of approved post.
c) Reason of weakness and Gaps


Lack of tone from the top
A large numbers of assistant level staff compared to officer level.

No separate Cadre of internal audit has been established.
3.10.6. Objective Staff
a) Characteristics
Audit staff must have impartial attitudes and avoid any conflict of interest.
B. Present condition
There is no situation to conduct internal audit by engaging adequate trained staff provision
for training to staff to conduct internal audit in line with its objectives. There is situation of
conflict of interest and impartial attitudes.
C. Reason of weakness and Gaps

Staffs are assigned dual responsibility of accounts keeping and internal audit.


Lack of impartiality while conducting internal audit of accounts prepared by the
colleagues.
Job description isassigned based on the level of staff rather than work nature
3.10.7.Competent staff
a) Characteristics
The Audit activity needs a professional staff that collectively has the necessary qualification
and competencies to conduct the full range of Audits required by the mandate. Auditors
must comply with the minimum educational requirement established by their relevant
professional organizations and standards.
b) Present condition
There is a lack of individually and collectively capable and competent staff to conducting
audit and selecting audit activities based on its scope of work.
c) Reason of weakness and Gaps



Lack of selection of staffs to conduct the audit with desired academic qualification.
There is a less participation of staff in the national and international skill development
program.
Lack of policy regarding capacity development.
3.10.8. Stakeholders support
a) Characteristics
The legitimacy of Audit activity and its mission should be understood and supported by a
broad range of elected and appointed public sector officials as well as by the media
involved citizen.
b) Present condition
Lack of support and knowledge of the elected and appointed personincluding
topmanagement towards internal audit and recognize it as an important tool of public
financial management.
c) Reason of weakness and Gaps




Lack of focus towards risk control.
Lack of attitude to give importance towards observations pointed out by internal audit.
Taking internal audit observations as a criticism towards the management.
Non acceptance of negative comments made by internal audit.
3.10.9. Professional Audit Standards
a) Characteristics
Professional Audit Standards, such as the International Professional Practice Framework
(IPPF)promulgated by the IIA supports the implementation of previous elements and provide
a framework to promote quality audit work that is systematic, objective and based on
evidence. Audit activities should conduct their work in accordance with recognized
standards.
b) Present condition
•
•
•
•
Due to non-formulation of professional auditing standards, internal audit has not been
carried out in planned and qualitative manner.
Only internal audit directive have been issued
The Financial Procedure Act and rules there on only specify the points to be seen while
conducting internal audit.
Internal auditors are not given training in relation to professional audit standards.
c) Reason of weaknesses and Gaps
Professional auditing standard for internal audit and Code of Conduct for the internal auditor
have not been promulgated in line with international practice.
Considering the above elements the existing condition of the internal audit, additional objective
assessment is required so as to identify the ground situation. However, out of the above 9
elements,except a formal mandate and unrestricted access to records and information the
situation of other elements appears to be poor. Therefore, the internal audit performed in our
country is not in line with international values and beliefs.Additional analysis has been discussed
in different paragraph.
The ASOSAI has listed out following 5 elements of internal audit system in its Report on
Evaluation and Improvement of Internal Audit System and relation between the internal unit and
SAIs.
 Governance
 Organizational Structure
 Standards and Review system
 Human Resource
 Service and Role of internal auditing to financial management
In course of assessment while asking some of the offices about whether the internal audit has
contributed to financial management of which 10 have replied Yes whereas 3 have replied No.
Similarly in reply of question about how internal audit has contributed 6 offices have mentioned
that internal audit has supported in maintaining best working culture by highlighting the
errors/mistakes immediately and provide opportunity to rectify them; whereas 8 offices replied
that internal audit has contributed in timely in updating accounts for internal audit purposes
which has helped in enhancing competence level for submitting public accounts.
3.11 Internal Audit Management in Different Asian Countries
The Internal Audit is practiced in the public sector of almost all the Asian countries and
havecreated separate Internal Audit Unit in the ministry/departments. But internal audit is rarely
outsourced. Some of the facts regarding Internal Audit have been presented below:
3.11.1 Internal Audit Practices
•
Though audit manuals/guidelines have been pronounced by different countries but
standards of some countries are not in line with generally accepted standards.
•
In case of type of internal audit, most of the countries conduct compliance and financial
audit.
•
Lack of professional auditors is a major reason for the existing ineffectiveness of
internal audit.
Supreme Audit Institutions of various countries have accorded importance on the following
aspects while making assessment of internal audit functions:
•
Organizational structure of Internal Audit unit
•
Compliancy of Staff
•
Audit plan & execution
•
Quality of Audit Activity
•
Quality of Documentation
•
Quality of Audit Reports
•
Implementation of Audit Recommendation.
The above point is similar to listed as elements by Instituted of Internal Auditor.
3.11.2 Cooperation and suggestions by Supreme Audit Organizations
To improve the internal audit, various countries have given various suggestions covering the
areas of Internal Audit Legal Mandate, clarifying roles and responsibilities, better
communication, conducting formal training etc.
3.11.3 Situation of Manpower
The bodies charged with the responsibility of IA in various countries are facing shortage of staff
both in terms of number and quality of staff. In Malaysia National Audit Department is providing
different professional development trainings to internal audits. In case of qualification of internal
auditors in some countries the eligibility criteria for auditor is bachelor degree and certificate
related to audit is specified. In India, experienced auditors are given priority.
3.11.4 Audit of Information and technology
The use of computer has been increasing for supporting Internal Audit. Use of CAAT has been
implemented in most of the Asian countries for Audit of Information & Technology.
3.11.5 Status of follow up and implementation of Suggestion
In case of implementation of the suggestions of Internal Audit is not satisfactory. However, in
some countries suggestion have been accepted whereas there has been delay in their
implementation was fully found in some nations. In, some countries there is no practice of follow
up is done regarding implementation of suggestion.
On asking the DTCO regarding the situation of addressing the observation related offices, 3 of
the offices undermined the issues, 2 of them addressed 50% of the issues and only 1 office
addressed the issue. Similarly, since observation become null raised by the internal audit the final
audit, due to which pointed out by internal audit weren't taken seriously.
When similar enquiry was done to the OAG regarding the situation of addressing the internal
audit report and issues raised by it, it also replied that most of the offices neglected it.
Chapter - 4
4.1. Quality of Internal Audit
Regarding the quality of internal audit and issues details have been illustrated in situation the
analysis chapter and these have been also given in other paragraph depending on their relevance.
Despite the absence of standard in internal audit, the good international practice & final auditing
standard could be taken as reference. The quality of internal audit carried out by DTCOs under
FCGO as stipulated in Financial ProcedureAct, Internal Audit Directives, internal and Annual
Reports of OAG and other study reports discussed with some officers when taken into
consideration, following basis can be identified for quality of internal audit:
Basis for quality measurement
Position of internal audit
1. Legally ensure independency of
internal audit
•
Financial Procedure Act 2055 rules is
silent regarding independence of IA.
2. Moral requirement
•
Lack of Code of Ethics for internal audit
as absence of segregation of rules&
responsibility.
•
Same staff of account groups are
performing the responsibility of internal
audit & accounts keeping
•
Out of 600-700 staffs engaged in internal
audit most of them are(non-gazetted) staff
having different educational qualification,
least of them have attended training’s
transfer of staff in every 2 year interval as
per Civil Service Act are the reason for
the inconsistencies in performing internal
audit
3. Relation with entities to be audited.
4. Human Resource Management
5. Audit Execution
6. Supervision
•
There is no practice of preparing audit
plans although some DTCOs have
prepared time table for the entities to be
audited.
•
Non formulation of standards on internal
audit in line with international practice but
IA Directive relating to internal audit is in
place. These Directives mentions about
the points to be considered during
checking of different heads of revenue &
expenditure as well as Auditor General’s
Forms.
•
Internal audit is mainly focused on
compliance with law & regulation as
reflected from internal audit report
•
Situation of detection of several
inconsistencies by final audit which were
not found by internal audit.
•
Lack of monitoring whether finding of
internal audit were addressed or not.
•
No review system of quality control of
internal audit during & post of audit is not
done ,if done are also not properly
documented
•
NO action is taken against responsible
person regarding to non- clearance of
inconsistency detected by internal audit
•
There is no any practice of documentation
of various phases of audit activities such
as pre-planning, execution reporting and
follow up.
•
No documentation or audit file is
maintained starting of internal audit,
completion of internal audit, evidence of
irregularities matters audited
7. Documentation
However there is no basis to ensure the above mentioned working practice to confirm whether
quality or audit procedure applied is appropriate. This does not ensure the quality of internal
audit report &repetition of weakness in internal audit procedures.
4.2. Legal provision regarding internal audit &its Scope
There is provision regarding internal audit in Section 16 of Financial Procedural Act 2055
&Rules 95 & 96 of Financial Procedure Rules 2064. Section 16 of the Act specifiesthat internal
audit shall be conducted as specified by FCGO whereas Rule 96(1) to 96(8) Financial Procedure
Rules 2064has authorized to DTCOs to conduct. As per the provision of the Rules, internal audit
is to be carried out income, deposits and expenditure as well as other funds of office. As there is
no procedure & process specified for internal audit in the relevant Acts & Rules, nonformulationstandards on internal audit and no provision for risk assessment is prescribed in
Internal Audit Directives 2068, audit is to be carried out for entire transactions. Legislation is
silent regarding to risk assessment & sampling. The OAG in the view of the provision made in
Rule 96 of FPR it appear that FCGO is required to conduct compliance and performance audit
including checking of true and fairness of financial statement. Though there is a practice of
conducting compliance audited certification of financial statement but economy the audit reports
does not include the three documents of performance audit , efficiency &effectiveness of
transaction. Similarly the Law is silent regarding to objectives, independence and reporting of
internal audit. In practice, internal audit isconfirmed to compliance aspects and reports includes
cases of non-compliance rather than reporting suggestions for improvements.in course of
assessment opinion of six DTCOs was solicitedtheir opinion through questionnaire about the
legal arrangement of internal audit, all of them opined to amend the legal provision. OAGN also
is expressed their views for amendment in legislation both the sufficiency & insufficiency of
legal provision regarding to internal audit in an asked questionnaire to the people of the OAG.
4.3 Independence of internal auditor
The FCGO charged with the responsibility of internal audit as Departmental under the Ministry
of Finance which is headed by special class officer. There is no facilitation regarding reforms
initiative such as human resource management liaison ministry etc. of FCGO because of which
the quality of IA is not up to the mark. While deputing the joint FCG as leader and even FCG
does not come in the priority of first class officers of administrative service due to these reasons
there lack independence to IA legally and administratively.
In the structures of FCGO internal audit has been kept as a section & its business is also not
specified as per its objective & nature. Even if it is an independent but cannot function
independently being separate entity.
Following matters are to the considered to ensure the independence of internal audit as per
international standard on auditing & relevant best practice.so as to function legally and
administratively as independent body.
•
The responsibility of internal audit rests with the organization
•
The system of submitting the internal audit report to head of the organization
•
To ensure non- interferences on audit method and procedure
•
To follow standards to maintain consistency in audit work
•
To ensure unhindered access to information and records
•
To depute staff as per the specified procedures
•
To arrange Code of Conduct and Internal Audit Charter
•
To manage quality assurance system
Lack of independence affects the biasness and credibility of internal audit performed. In relation
to internal audit of public sector in Sri Lanka Financial Regulation has made provisions
regarding independence to internal Audit. In Sri Lanka the Regulation stipulates the accounting
head of department that is large in size and involved in development activity are required to
establish internal audit unit. The Regulation has specified the objectives of audit functions of
internal audit and its scope of work. The Regulation has stated that the internal auditor to submit
its report directly to organizational head and also to the AG.
The system of internal audit in public sector its management structure, scope of work and
reporting arrangement varies from countries to countries but they all have ensured the legal and
functional independence of internal audit. Different Auditing Standards has been issued by the
International Organization of Supreme Audit Institutions including Lima Declaration, 1977 on
independence and using work of internal audit. The significant provisions are described below:•
Lima Declaration 1977 internal audit services necessary are sub ordinate to the head to
the department within which they have been established. Nevertheless, they shall be
functionally and organizationally independent as far as possible within their
constitutional frame work.
•
Internal audit independence in public sector(INTOSAI GOV 9140)
•
Co-ordination and co-operation between SAIS and internal audit in the public
sector(INTOSAI GOV 9150)
•
Using the work of internal auditor (ISSAI 1610)
In these Declarations and auditing Standards, there is a detailed description about the
independence and obtaining the objectivity of internal audit and the using work of internal audit.
Internal audit is independent, organizationally and functionally based on the international
practice but the present performance doesn’t reflect the independence.
4.4 Organization and Human Resource Management
The organizational structure of FCGO is expanded at district level and one or more DTCOs are
performing in the districts based on the work load after the execution of TSA. Among its main
tasks, it is involved in budget execution, accounting and internal audit. As per the organizational
structure of FCGO there is a separate Internal Audit Section. Among the five thousand staff in
FCGO, there is one thousand staff performing in treasury administration of DTCO.TheDTCO
staffs are involved in the internal audit of district level offices. According to international and the
practice in other countries the Audit Committees are formed for monitoring and execution of
suggestions of audit (internal & external). However, we have no such Audit Committee even
though the OAGhas recommended establishingit.
To large extent, there is adequate human resource involved in internal audit however the most of
the audit is carried by junior level staff (non-gazetted) staff. There is no practice of monitoring
and supervision of internal audit quality controland job description is assigned to the posts rather
than on the basis nature of job.Similarly, there is lack of opportunity to develop qualification
required for internal audit, lack of proper appropriate documentation to conduct internal audit in
planned manner.
The transfer of staff generally takes place at the interval of 2 years which hinders to develop
professionalism in internal audit work. No discussion on internal audit report is held at
institutional and ministerial level.
4.5 Organizational & Functional Model of Internal Audit
The Financial Procedure Act, 2055 has made FCGO responsible for internal audit.Internal audit
is the main tool of internal control system of anorganization; therefore its organizational and
functional model differs from country to country. In some countries there is a separate internal
audit department under Supreme Audit Institution. Precisely in the Commonwealth countries
there is arrangement of Comptroller General.
Now, in case of model or structure of internal audit is concerned the following models have been
suggested for Public Sector (INTOSAI GOV9140) issued by International Organization of
Supreme Audit Institute (INTOSAI.).
• In-house: Employees within the organization who are not involved in any type of activities
of organization are mobilized for internal audit .The internal audit of Nepal government
falls in this category. Its management is done by one of the staff.
• Co-sourced: The organization’s employees along with external service provider are
involved in internal audit and it is managed by the organization's employee.
• Out-sourced with in-house management: The internal audit is done by the external service
provider however its management is done by the organization's employee.
• Fully outsourced: Internal audit is carried out by the external service provider and the
service provider manages the internal audit activity, however the project management is
done by the organization's employee.
The organizational structures, geographies, work nature, situation of internal control system, risk
control management and cost of internal audit etc. need to be considered while selecting the
internal audit model. Different countries have adopted different model for internal audit of public
sector. Whatever be the model of internal audit, it is important condition to ensure independence
required to be maintained legally and functionally. The strength and weaknesses of different
models relating to internal audit are as follows:
4.5.1 Single or In-house Model
As this model lies within the organization, one of the main challengesis to keep free from
biasness and availability of capable human resources. Its strength and weaknesses are as:
Strength
• Arranged through legal provision
Weaknesses
• To deal with the complexity which
•
•
•
•
•
•
•
•
•
Separate organizational structure
are encounteredby the large
human resource with specific qualification & skill
institution
in
administration
Mobilization of staff as per requirement
&carrying out activities.
Standards should and apply it
• Monotonous feeling arises due to
Comparatively this model is well managed &
involvement in internal audit for
professional due to large base of public sector
long period.
As it is separate service there are service condition • Threat of independence lies in
for promotional opportunities and career
caseoflack of divisional structure
development.
Consistency in reporting and solution can be
obtained with single decision through the process
of legislation
The use of single internal audit standard in audit
results uniformity of audit process report and ease
in implementation of standard due to application of
single set of IA standards.
Contributes to quality & capacity development
through collaboration with the OAG
4.5.2 Co-sourced
Although there is a separate structure of Internal Audit, a service of external service provider can
be taken in the form of maintaining coordination with them. In this model, departmental work
force and external service provider could be used jointly to carry out the internal audit. But it is
appropriate to make legal provision seek the services of external service provider. However,
under this model the management of internal audit should be donedepartmentally.Some of main
strength & weaknesses of this model are:•
•
•
•
Strength
Management of internal audit rests
Department
Can take service from external
service provider in accordance with
terms of reference
Transfer of professional skill by
service provider to Departmental
staff
Involvement of service provider
helps in developing internal audit
system and tools
•
•
•
•
•
•
Weaknesses
Risk of dependency on external service provider
Cost of internal audit t increase due to fees of
external service provider
Lack of knowledge about PFM and management
system to the external services provider
To orient the external service provider about PFM
and legal provisions of public sector audit and its
values
Risk of preparing work plan considering the
availability and timing of External service provider
Risk of dispute due to lack of clarity in Terms of
Reference in working jointly
4.5.3. Outsource with in-house Management
In this model the internal management is made responsible tocarry out internal audit activities
from external service provider. That means, internal management shall lead to mobilize external
service provider. The strength &weaknesses of this model are:
Strength
• The human resource for the internal audit
purpose can be deployed according to the
work plan, needs and requirements
• The management can initiate action or warn
for unsatisfactory performance against the
external service provider as provided by
contract
• Certainty in getting audit work performed by
capable, skilled and experienced human
resource of external service provider
Weaknesses
• Increased dependence on external human
resource
• Situation of capable and departmental
experienced manager might emerge
• Directive can be issued for mobilization of
human resource of external service provider
and for quality control
• Arrangement of internal structure or
Committee for management and
monitoring of external service provider
4.5.4. Fully out-sourced
As per this model, the task of internal audit is fully conducted by external service provider .It is
carried out as a Project. This model is slightly different with in-house management. The strength
and weaknesses of this model are:
Strength
• The sole responsibility of
internal audit lies with
external services provider
• Situation of work completion
on the basis of TOR and
stipulated time.
Weaknesses
Limited job description
Increase dependency on service provider
No contribution to organization’s capacity
Inadequate support to internal audit from entity being
audited
• Risk of encouraging external auditors to violate COE from
entity being audited
• Difficulties in organizational and procedural arrangement
with regards to regulating, monitoring and reporting of
external service provider
•
•
•
•
As the internal audit is a useful tool to enhance the public accountability,transparency and
alerting the public financial administration, which is pre-condition whatever, the model is
adopted. The geographical spread of entities to be audited, size of the budget, Financial
Procedure Act, Procurement Act, number of Projects, involvement of donors in development
activity, existing organizational structure of internal audit and availability of human resource etc.
have to be considered while adopting the model for internal audit. In the view of above and on
the matters described below including international practice, single or divisional model seems
appropriateto be adopted for internal audit.
•
For more than 3 decades,FCGO is conducting internal audit through is institutionalized
manner.
•
In Support in maintain consistency and facilitation process in conducting the internal
audit of more than 4500 public offices of the country is done by a single body.
•
Although maximum number of staffs are of assistant level, about 1000 staff are involved
in internal audit have experience in internal audit.
•
There is a room for bringing the various local bodies such as District Development
Committee, Village Development Committee, bodies established by Development
Committee Act, 2013, and other entities formed under Special Act and through
administrative decisions under the jurisdiction of internal audit.
•
It is certain that to expand the scope of internal audit under federal structure in upcoming
constitution.
Even if the services of external service provider is arranged to conduct the internal audit,it is
needed to formulate the activities such as the selection of service provider agencies, regulation
and develop operational guidelines for service providers. Due to engaging external service
provider, dependency on such service provider might increase. In addition to this, there might be
difference in approach of government auditors and external service providers. For this a small
structural and procedural arrangement is required.
Doing enquiries with different DTCOs regarding with model would be appropriate among the 4
practicedinternationally 6 of the DTCOs suggested that complete outsourcing would not be an
appropriate choice, where as the rest each 2 DTCOs evenly supported remaining modules. In
this regard, the OAG has suggested the In-house model as an appropriate choice for internal
audit.
4.6 Problem and Challenges Encountered by Internal Audit
The various studies have revealed that even after the clarity in legal and organizational
arrangement, internal audit performed is not qualitative. Internal Audit can provide important
contribution to public financial administration although it faces different external and internal
problems. This has been demonstrated through records as well as discussions and interviews with
some of the officers.Asomeof the major problems encountered by internal audit are as follows:
1. Quality and effectiveness of internal audit:
•
Lack of independence to internal auditors fails to perform independently
•
Lack of credibility due to dual responsibility of Accounting and internal auditing is
performed by same internal auditors
•
Lack of professionalism in audit management and its execution
•
Lack of Internal Audit Standards
2.Adequate Resources and Means:
•
Lack of skill and capacity development among auditors
•
Lack of training to auditors
•
Limited budget appropriation
3.Supports from Stakeholders:
•
Lack of importance provided to Internal Audit
•
Non-implementation of recommendation suggested by the internal audit report
•
Lack of positive attitude from audited entities towards internal auditors
In course of this assessment a question regarding the problems faced during conducting internal
audit was asked to some DTCOs, out of 3 of them replied that lack of independenceto the
internal auditor as the main reason whereas 12 offices opined as lack of capable manpower as the
main reason due to which internal audit has neither been effective nor contributed to
management.
There are the different problems faced by internal audit has been statedearlier, but the lack of
competent manpower and audit tools are the major problems. To resolve these issues initiation
has to be taken by FCGO to obtain support and cooperation of the OAG and the ICAN.
Similarly, the addressing of theseissues is essentialfor the effective management of internal audit.
when asked to the office of the audit general about the thoughts of organization being audited about the
internal audit office of audit general has answered that there is a culture to assume that the internal
auditor's are fulfilling their own responsibility.
we also asked about the erasing problems the internal audit system is facing from AG office, office of
Audit general answer that the problems in the system. Lack of competent human resource, lacking the
implementation are the problem which internal audit is still facing. According to the above, internal audit
is facing different problems among that competent human resource and required tools are the important
and challenging problems. In order to solve this problem, it is beneficial that the financial comptroller
office sought help and co-ordination from office of auditor general and institute of Nepal chartered
Accountants. Above problems needs to be addressed for the effective management of internal audit.
Chapter - 5
Suggestion for Improvement
Simply a single study or assessment may not be able to suggest solution for the organizational
strengthening and a separate study conducted based on the nature of work along with its sector
and such sector wise studies can identify the right solution.
In the view of situation analysis and result of this study relating to the public sector internal
audit, it is required to amend the extant Financial Procedural Act, 2055 by making provision of
independence to internal audit and expand its scope of work..
With the amendment in the legal provisions, FCGO need to be restructured including internal
audit and also approve the desired posts accordingly. Along based on the approved post filled a
separate HR Plan required to be formulated in order to develop capacity building and career
development of internal auditors is equally important. It is most important to develop Internal
Auditing Standards for maintain professional and standardization of internal audit and capacity
development of staff. Arranging these activities is time consuming and costly exercise. Similarly
some major issues are to be studied further by formulating strategic plan for reform and
implementation which seems to be appropriate option. The possible solution of the problems
identified by this assessment is recommended below.
5.1 Single or In-house Model for Internal Audit
As mentioned earlier in 4.5.1 single or In house model appears to be suitable for internal audit
although some legal, structural and functional infrastructure need to be dealt with. So, the
following activities are suggested.
5.1.1 Additional Legal Provisions
To improve the existing independence and neutrality in conducting internal audit it is desired
toamend the Financial Procedural Act and Rules thereon so as to extend the jurisdiction of
internal audit. This will support to increase scope of work and enhance the level of internal audit.
5.2 Organizational structure
5.2.1 Organizational Reforms
Organization and management survey is to be undertaken to decide whether the FCGO is to be
kept under the Ministry of Finance or create separate Department could be an option. Present
organizational structure also requires some changes so as to carry out internal audit
independently.
5.2.2 Proposed Organizational Structure and Management
As per the current organizational of FCGO,there exists Audit Section at central level and
Section/Unit at operational level of DTCO.In FCGO officer leads the Section. As mentioned in
paragraph 4.5with regard to internal audit, among the 4 models whichever model is adopted it is
appropriate to restructure and reorganized the present organizational structureand management of
FCGO. Every model has its own strength, weaknesses and challenges.
There is a situation to deal with organizational structure & managementof each and every model
in its own way. Likewise, once the model is adopted it seems appropriate to conduct organization
and management survey in detail. Therefore, an attempt has been made to mention the approach
regarding organization structure in this report. In the present context, it is appropriate to adopt inhouse model considering facts such as the number of entities to be audited, geographical spread,
size of the national budget, scope of work and its nature as stipulated by FPA, 2055 and Rules
2064 , available manpower, prevailing situation of poor internal control system of entities
,expectation of stakeholders etc.
For this purpose, the existing organizational structure and management of FCGO required to be
restructured as mentioned below for adopting in-house model. It is suggested to establish
following functional Department or Division within the structure of FCGO.





Economic and Administrative Sector Section/Wing
Social Sector Section/Wing
Methodology Development and System Section/Wing
Internal Governance Section/Wing
Central Accounts and Consolidated Fund Section/Wing
The scope of work, roles and work description of above Sections/Wing should be clearly
specified. Extension or merger of Sections can be undertaken based on the requirement.
5.2.3Proposed Structural of district based Offices:
Currently internal audit of district based offices are being performed by the DTCOs which is
required to be restructured by creating Section as below seems appropriate:Create two Sections at Central level with Sector wise Section for internal audit under the DTCO
appears to beappropriate.
• Internal Audit Section ( Financial & Administrative sector)
• Internal Audit Section (Social sector)
• Internal Audit Co-ordination Section ( Financial Statement / Project Account)
For the coordination of District offices, Section/ Branch with central Division /Section, an
internal audit Co-ordination Section would be appropriate. To maintain co-ordination with
central level Division and with all Section other department would be an appropriate to assign
the tasks of Internal Audit Co-ordination Section.
5.3 Internal Audit Standards & Review System
5.3.1 Internal Audit Management & Internal Auditing Standards
Irrespective of legal mandate to internal audit, internal auditing standards, Audit Directives and
tools are desired for management of internal audit and maintaining its quality. But presently, due
to non-formulation of internal audit standards as well as lack of necessary tools, additional
efforts are essential to maintain the reliability of internal audit. For instance, Internal Auditing
Standards have been issued and arebeing implemented in public sectors of United Kingdom. The
details have been mentioned under Annexure- 1.
5.3.2 Monitoring of Internal Audit Report
The Internal Auditing Standards specify about the monitoring of internal audit as well asits
quality control, but its procedures are specified in the Audit Directives managed through
administrative arrangement.Presently, Internal Audit Directives has mentioned the monitoring
process in brief but not in detail. Audited entities are to be made more responsible for settling the
audit observations raised in internal audit report and situation of monitoring results need to be
included in next year’s report. Therefore, their solution is necessary.
5.3.3 Quality and Working Procedure of Internal Audit
Auditing Standards is the main tool for maintaining quality and credibility of audit. The FCGO
has issued Directives for internal audit but has not yet formulated Auditing Standards for internal
audit of public sector. Furthermore, shortage of qualified manpower, lack of capacity
developmentactivities and Code of Ethics for Auditors are some issues to be dealt with so as to
carry out internal audit independently. No internal audit files are kept for audit performed. In this
situation it is difficult to assure that audit has been conducted in a professional, planned and
standardized manner.
In the context of private and public sector audit which is being conducted in accordance with the
Auditing Standards are alsoquestioned in time to time but internal audit conducted without
applying auditing standards and competent staff; it is difficult to measure the standard level of
internal audit conducted. So, whichever model is selected for internal audit, the following issues
must be addressed on time.
•
To formulate Internal Auditing Standards by forming a Working Group or work jointly
withthe OAG or ICAN
•
To prepare Code of Ethics for Internal Auditorsis essential.
•
To formulate or revise the Internal Audit Directive in line with Internal Auditing
Standards.
•
To develop HR Development Plan to activities for career development and capacity
building.
•
To take initiative for amendment in Civil Service Act and Rules thereon in order to create
an Internal Audit Group for the career development of staff.
To maintain the quality of internal audit issues other than those mentioned above are discussed in
other Chapter need to be considered.
5.4 Human Resource
5.4.1 Internal audit service / Group Formation
Currently there is a provision of separate Accounts Group for recruitment of staff, transfer and
promotion of staff underCivil Service (Administration).
In order to perform internal audit independently and impartially, there are two alternatives, either
forming a separate Account Service and internal audit service or forming an internal audit group
similar to AccountsGroup. The amendment in the Civil Service Act essential to create additional
posts of post of gazetted 1st level officers in accounts and internal audit service commensurate
with the size of total staff for the career development of staff. There is a provision of audit &
accounts service in India at central level.
5.4.2 Capacity Development of Internal Audit
One of the major problems of internal audit facing is that the negligible opportunity for capacity
development of the staffserving in this field of internal audit. Due to non-formulation of Internal
Auditing Standards internal audit has not been carriedout as per the audit values and principles.
Also there is no facility of internal training under the FCGO for the internal audit staff. The
Revenue Administration Training Center is conducting entry level training, in service training
and refreshment training for accounting staff for their capacity development .But such training
does not focused on internal audit within PFM. With some exceptions one or two batches of long
and short term trainings no other training have been conducted. Similarly adequate books and
study material is available related to internal audit.An understanding can be made between
OAGN and FCGO for the capacity development of internal auditors under staff exchange
program for a short period. Therefore it is necessary to address these problems.
5.4.3 Review of existing approved Post and Proposed Manpower
Presently out of one thousand staff involved in internal audit, a large number of staff covered by
non-gazette staff out of that also half of them are support staff. Therefore approved post required
to be reviewed so as to maintain the proportion of gazette 1st 2nd and 3rd class officers and
assistant level staff. This will not only help to improve the performance but also open the room
for career development of staff. Similarly the role and responsibility need to be specified in job
description of staff. This will solve the problem of dual responsibility of accounts keeping and
conducting internal audit by the some staff. This will also support specialization of staff. As per
the proposed structural approach the internal audit manpower to be mobilized as follows:
Particulars
Proposed number of staff and level
Gazetted 1
Gazetted 2nd
Gazetted 3rd Non-Gazetted
Class
Class
Class
1
1. FCGO (Central office)
5
10
15
Internal
Audit
Department/Division Chief
Section Chief
2.DTCO (district office)
Internal auditor Section Chief
Terai and large hilly district
20
40
60
Remaining hilly district
55
165
495
st



•
•
•
•
Terai hill and number of offices in regional headquarters, budget size, etc. should be considered
while determining numbers and grades of officer level staff and adjustment of posts in terms of
number for internal audit. But, while increasing the number of manpower officer level staff
should be added.
5.5 Appropriateness of use of Information Technology auditing methods in
Internal Audit
Despite being electronic recording of income & expenditure under single accounting system, the
supporting and basic documents are maintained manually in hardcopies. As a result, these don't
create any differences and problems in conducting regularity audit through internal audit of those
transactions. In the context of maintenance of accounts in IT system, the risk areas to be
considered in audit include maintenance connectivity, security, data backup, use of software
capacity, security control system completeness of information and its creditability, and
availability of staffs and training etc. required to be analyzed and tested.
As all offices are not integrated with information technology network, use of CAAT cannot be
applied since CAAT is complex task in which auditors needs to be initiate various steps.
There is a need for proper examination & study on fairness and completeness certification of
Financial Statements for which staff with adequate knowledge base on Information Technology
should be deputed for internal audit. Following arrangement can be made.
5.5.1 In case of non-availability of adequate and skilled staffs to conduct the system audit/IT audit
which have adopted IT based accounting system, service of external service provider can be
taken for conducting Compliance audit.
5.5.2There is need of co-ordination and cooperation from the OAG & Internal Audit for IT Audit or to
audit jointly which could result in skill development of both organizations.
5.5.3 As such there is no such vast difference between IT auditing & Financial Auditing in general but
auditors needIT knowledge. In addition to these following arrangement is needed for IT auditing.
•
Need for development of Guide, Directives and other Audit Tools. Initiation is required to
develop such Guides, Directives so as to support to conducting IT by internal auditors.
• It is appropriate to establish separate of Information Technology Section/Unitunder
organizational structure for internal audit. Such arrangement in organizational helps bringing
specialization of InternalAudit and open the avenues of career development of staff having
IT qualification.
5.6 Internalization of Good Practice
There is huge professional gap in the audit performed 3 decade since initiation of Internal Audit
of public sectors by the FCGO. The reason behind it isnon-availabilityof internal audit standards
and lack of capable and skill situation manpower is main reason behind this. In order to improve
the existing conditions there is need to make arrangement of seeking cooperation and advise
from Office of the Auditor General (OAG) & the Institute of Chartered Accountants of Nepal
(ICAN). Also in this connection it is appropriate to initiate obtaining technical and advisory
services from the external consulting service providers of development of internal audit.
Chapter -6
Conclusion:Legal provision have important role in public administration so, there is clear provisionin
Financial Procedure Act, 2055 and Financial Procedural Rules, 2064 about internal audit. As per
the FCGO's organizational, 75 DTCOs have been established across the country for Treasury
Management and Internal Audit.For the purpose of Treasury Management and carry out internal
audit more than 700 posts of different levelshave been approved. Under the FCGO,DTCO are
conducting internal audit of government entities since last three decades and have institutional
experience on it, the FCGO has issued Internal Audit Directive for proper management of
internal audit and enhance its standard. This directive has been updated in time to time.
The above mentioned facts are positive aspects in internal audit, but there is some weak aspects
also. Internal Audit has not been legally and administratively independent. In order to
carry/perform internal audit in other words internal audit is not free from management pressure
&un biasness. Moreover the internal auditors are also involved in accounting works which result
conflict of interest and situation of biasness while conducting internal audit.
Since the internal audit standards major audit tool for conducting internal audit but it has not
been formulated till date in line with the International Practices. As a result its difficult to assure
on reliability and quality of audit.
Due to limited opportunity of capacity development staff involved in Internal Audit, it has direct
impact over the quality of Internal Audit and lack of which audit has not been performed in
planning manner. Audit observation raised by internal auditor is also not given importance by
audited entity management. Because of these reasons internal audit has been unable to contribute
in maintaining sound financial administration.
Since last few years there has been big challenge to internal audit with the increase in size of
government budget, increased number of project and programs and compliance with conditions
to be abided by projects supported by Development Partners.
Similarly with the implementation of TSA, it has rapidly increased use of Information
Technology by FCGO; initiation of implementing accounting standard in public sector in line
with International Practice and use of CAAT has further created both opportunity and threat for
Internal Audit.
Therefore, by considering the above situations,existing organizational structure of internal audit
along with human resource management has to be restructured through legal & administrative
measures for strengthen it as mentioned in various Study Reports, reports of the Office of the
Auditor General. Otherwise it seems difficult to maintain professionalism in audit and legitimize
the financial activities in the name of internal audit.
Chapter -7
7.1 Suggestion for implementation Approach
In connection with strengthening of internal audit the areas of improvement identified by the
assessment for their implementation are given in work plan along with specific activities. But
further homework is required to implement the suggested activities. Thus it is appropriate to
follow the method mentioned below:
7.1.1 Formation of Steering Committee
It is appropriate to form a Steering Committee in FCGO to strengthen Internal Audit. Such
Committee must be represented by OAGN.
7.1.2. Formation of Working Group
One or more working group need to be formed for pre-planning and implementation of
suggestions. For instance form a Group to conducting organizationandmanagement surveyfor the
organizational restructuring of internal audit and a separate group for developing Internal Audit
Standards.
7.1.3. Coordination & Cooperation with Office of Auditor General
In connection of reinforcing and enhancing credibility of internal audit it seems useful to
coordinate with the Audit General Office.
7.1.4. Co-operation with ICAN
The internal auditors should co-ordinate with the ICAN which is established under Nepal
Chartered Accountants Act-2063 in seek support in the areas of formulation of internal Audit
Standards joint work for capacity development activities of internal auditors, for this it seems
appropriate to initiate formally for mutual agreement or understanding. .
7.1.5. Formulation of Strategic Plan
It is appropriate to formulate 3-5 years strategic standards plans for the strengthen of internal
auditors rather than performing activities on ad hoe basis Separate Strategic Plan committee can
be formed for initiating the task. The representatives from Auditor General Office, Ministry of
Finance, ICAN, Nepal Rastriya Bank, etcbe included in such Committee. The study report
prepared by FCGO for reform in internal audit has suggested work plan for 6 years. However
suggested activities can be carried out only by preparing Strategic Plan. The strategic plan could
be basis for arranging internal and external financial resources to FCGO which need to be taken
into consideration. In case of methods implementation of suggestions it may be effective to
initiate dialogue with internal and external stakeholders for obtaining their consent.
7.2
Strengthening of Internal Audit
Work – Plan
Key Milestone
1. Leadership
Activities
Initiate to form a Steering Committee
with specific TOR
Output
Steering Committee
2. Legal
Arrangement
Initiate to amend the Financial
Procedure Act to extend the scope of
work and provision of Independence
• Initiate to amend civil service
Act/Rules to create separate cadre
for internal auditors
FPA amended
3.Strategic
Planning
Form a task force to formulate
strategic plan for three years by
Covering all the above activities in
detail.
• Conduct organization and
management survey in line with
suggested In-house model
• Initiate to formulate Public Sector
Internal Auditing Standards in line
with international best practices ,
code of ethics for Internal Auditors
& Audit guide
• Sign MOU with Institute of
Chartered Accountants of Nepal to
formulate Internal Audit Standards
• Initiate dialogue with office of the
Auditor General seeking
cooperation in strengthen internal
audit.
• Develop strategy for capacity
building / training for Internal
Audit & training modules based on
standards & Audit Guide deliver
training modules. Conduct pilot
internal audit packages covering the
geographic spread at last in 10
places.
Strategic Plan
1st Year
O&M survey Report
TBD by
Steering
Committee
Starting from
1st year to 3rd
year on
ongoing basis
Delay is
decision
making
Lack of
budget,
administrative
support and
cooperation
from related
authorities
Explore the avenues for application of
CAAT in the entities maintaining
Accounts in EDP environment by
conducting a study.
Study report on
CAAT application
2nd year study
3rd year
Application
Use of EDP in
Government
Sector
Trained
manpower
4. Restructuring
the organization
and management
5. Capacity
building
Application of
CAAT
Internal Auditing
Standards, Audit
guide and code of
ethics
Time frame
Within the
month of 1st
year
1st and 2nd
year
MOU signed with
ICAN
Risk factors
Failure to
form
committee
Procedural
Delay or lack
of support
from MOF,
MOGA,
MOLJ ,
Parliament
Administrativ
e hassles
Dialogue held and
commitment from
OAGN for
cooperation
Training strategy &
training module
All Internal auditors
trained and Pilot
audit conducted.
ANNEXURE-1
Public Sector Internal Audit Standards UK
Attribute Standards
Purpose, Authority & Responsibility
Independence and Objectivity
Proficiency and Due Professional care
Quality Assurance and Improvement Program
Performance Standards
Managing Internal Audit Activity
Nature of work
Engagement Planning
Performing the Engagement
Monitoring Progress
Communicating Results
Acceptance of Risk
ANNEXURE-2
List of offices from which feedback were collected through Questioner.
S.No.
1
Name of the Office
Office Of The Auditor General
District
Kathmandu
2
Financial Comptroller General Office
Kathmandu
3
Financial Comptroller General Office
Bhaktapur
4
Financial Comptroller General Office
Lalitpur
5
Financial Comptroller General Office
Bara
6
Financial Comptroller General Office
Parsa
7
Financial Comptroller General Office
Kaski
8
District Education Office
Kaski
9
Division Road Office
Pokhara, Kaski
10
MalpotKaryalaya
Parsa
11
Division Road Office
Kathmandu
12
Directorate of Animal Health
Kathmandu
13
Department of Agriculture
Hariharbhawon, Lalitpur
14
Inland Revenue Office
Pokhara, Kaski
15
District Animal Service Office
Bhaktapur
16
District Animal Service Office
Kathmandu
17
Forest Office
Kaski
18
Forest Office
Parsa
19
Forest Office
Bara
20
Survey Office
Parsa
References
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Financial Procedure Act,2055
Financial Procedure Rules, 2064
Internal Audit Directives,2068
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•
INTOSAI, Lima Declaration Section 3 Internal Audit & External Audit, 1977.
INTOSAI, Cooperative & Coordination between SAIs & Internal Auditors in Public sector
INTOSAI Gov.9150
INTOSAI, guidance for good Governance, Internal Audit independence in the public sector
INTOSAI Internal Audit Independence in the public sector INTOSAI Gov. 9140
INTOSAI, Using the work of Internal Auditor ISSAI 1610
Related Web site
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