Professional Documents
Culture Documents
&'
Reorganized by Hong Ry, Senior
Auditor
Phnom Penh, Cambodia
Internal Audit for MFI -1- © Hong Ry, Senior Internal Auditor
OBJECTIVES:
INTERNAL AUDIT
9 Understand the various risks faced by
MFIs
9 Appreciate the role of a robust control
environment in mitigating risks
9 Describe various components of control
environment and distinguish between
them
9 Evaluate internal checks within their
organizations
Internal Audit for MFI -2- © Hong Ry, Senior Internal Auditor
OBJECTIVES: contd.
9 Understand the scope and role of internal
audits
9 Assess the existing organizational policies
9 Evaluate the management information
system of their organizations
9 Formulate internal audit plans
9 Conduct internal audits
9 Control fraud
9 Report the findings in a systematic manner
Internal Audit for MFI -3- © Hong Ry, Senior Internal Auditor
RISK MANAGEMENT
Internal Audit for MFI -4- © Hong Ry, Senior Internal Auditor
Operational
Credit, Fraud,
Inefficiency,
Security etc.
Financial
Institutional Management
External
Natural
Calamities
Internal Audit for MFI -5- © Hong Ry, Senior Internal Auditor
Risk Management:
A Systematic Approach
Identifying
Measuring
Mitigating
risks in an MFI
Internal Audit for MFI -6- © Hong Ry, Senior Internal Auditor
Risk Management
Internal Control
Internal Audit
External Audit
Internal Audit for MFI -7- © Hong Ry, Senior Internal Auditor
Risk Management Process Feedback Loop
1. Identify, assess
and prioritize risks
6. Revise
policies and
procedures
2. Develop
strategies to
measure risk
5. Test
effectiveness
and evaluate 3. Design
results policies and
procedures to
4. Implement mitigate risks
and assign responsibility
Internal Audit for MFI -8- © Hong Ry, Senior Internal Auditor
Assess and Prioritize the Risks
Quadrant 3- Quadrant 2-
Low Frequency High Frequency
(Probability), High (Probability), High
Impact: Fires, Natural Impact: Losses from
disasters, wire high risk business
transfer fraud, loans in one sector
computer crime.
Quadrant 4- Quadrant 1-
Low Frequency High Frequency
(Probability), Low (Probability), Low
Impact: Refunds of Impact: Typical
service charges loan losses; Petty
errors fraud
Internal Audit for MFI -9- © Hong Ry, Senior Internal Auditor
Develop Strategies to Manage the Risk
Internal Audit for MFI -10- © Hong Ry, Senior Internal Auditor
Assess and Prioritize the Risks
Internal Audit for MFI -11- © Hong Ry, Senior Internal Auditor
RISK MANAGEMENT AND THE NEED FOR BALANCE
Internal Audit for MFI -12- © Hong Ry, Senior Internal Auditor
Risk Trade Offs
Risk trade-offs occur when one type of risk is
substituted for another,
Examples of trade-offs:
• By outsourcing transfers to Western Union, MFI shifts
from operational risk to counterparty and reputation
risk and reduces operational risks
• By linking its clients to an insurance company, MFI
shifts the actuarial and operational risks and in turn
accepts counterparty and reputation risk
• By deciding to take security for its credit exposures,
MFI converts credit risk into operational as well as
market risk
• Trying to eliminate human error by computerization is
replacing one form of operational risk with another.
Internal Audit for MFI -13- © Hong Ry, Senior Internal Auditor
Internal Audit for MFI -14- © Hong Ry, Senior Internal Auditor
Internal Controls can be
•Preventive
•Detective
•Corrective
Internal Audit for MFI -15- © Hong Ry, Senior Internal Auditor
INTERNAL AUDIT
Internal Audit for MFI -16- © Hong Ry, Senior Internal Auditor
Risk Management
Internal Control
Internal Audit
External Audit
Internal Audit for MFI -17- © Hong Ry, Senior Internal Auditor
Internal Audit External Audit
Internal Audit for MFI -18- © Hong Ry, Senior Internal Auditor
INTERNAL AUDIT
is a systematic, objective appraisal of the diverse
operations and controls within an organization to
determine whether:
• Financial and operating information is accurate and
reliable
• Risks to the enterprise are identified and minimized
• External regulations and acceptable internal
policies
are followed
• Satisfactory operating criteria are met
• Resources are used efficiently and economically and
• The organizations objectives are effectively achieved
All for the purpose of assisting members of the organization
in the effective discharge of their responsibilities.
Internal Audit for MFI -19- © Hong Ry, Senior Internal Auditor
Internal Audit function
• Acts independently
• Reviews transactions in the field,
• compares actual procedures with
those documented,
• frequently reports to the board
through written reports and
presentations.
• reports on open items from previous
audits
Internal Audit for MFI -20- © Hong Ry, Senior Internal Auditor
INTERNAL CONTROL
Internal Audit for MFI -21- © Hong Ry, Senior Internal Auditor
The MFI
Organizational
Mission and
Structure
Values
PEOPLE
Internal Audit for MFI -22- © Hong Ry, Senior Internal Auditor
INTERNAL CONTROLS
“The system of internal control is the plan of
organization and all the methods and procedures
adopted by the management of an entity to assist in
achieving management’s objective of ensuring, as far
as practicable, the orderly and efficient conduct of its
business”.
It constitutes of:
• Organisation Structure
• Segregation of Duties
• Management
• Authorisation and Approval
• Arithmetical and Accounting
• Physical Security
• Personnel
• Policies and Procedures
Internal Audit for MFI -23- © Hong Ry, Senior Internal Auditor
MY MFI
Board of Directors
General Manager
Internal Auditor
Branch Manager Branch Manager
Accountant
Branch Auditor Credit Officer Savings Officer
Cashiers Bookkeepers
Branch Cashier
Internal Audit for MFI -24- © Hong Ry, Senior Internal Auditor
Approve ME
Do MYSELF
Record I
Internal Audit for MFI -25- © Hong Ry, Senior Internal Auditor
POLICIES AND PROCEDURES
Policies – indicate direction
Procedures – tell how to implement and
follow the policies
Internal Audit for MFI -26- © Hong Ry, Senior Internal Auditor
Characteristics of good controls
• Timeliness
• Economy
• Accountability
• Placement
• Flexibility
• Cause Identification
• Appropriateness
Internal Audit for MFI -27- © Hong Ry, Senior Internal Auditor
Limitations of Internal Control
• Judgment
• Breakdowns
• Management Override
• Collusion
• Costs
• People
Internal Audit for MFI -28- © Hong Ry, Senior Internal Auditor
INFORMATION SYSTEMS
Internal Audit for MFI -29- © Hong Ry, Senior Internal Auditor
INFORMATION
IS THE PILLAR
OF ANY MICROFINANCE
INSTITUTION
Internal Audit for MFI -30- © Hong Ry, Senior Internal Auditor
Unprocessed basic facts about the
Data activities of a business that give no
insight by themselves
Internal Audit for MFI -32- © Hong Ry, Senior Internal Auditor
Information System
The series of actions involved in:
capturing raw data from various sources,
processing the data into usable information,
storing the information and
disseminating information in the form
needed.”
Internal Audit for MFI -33- © Hong Ry, Senior Internal Auditor
Information System
Loan Officers
Accounting
Accounting
System
System
Tellers
Portfolio
Portfolio
Encoders Management
Management
System
System
Processes or
People Seeking Bookkeepers Deposit
Deposit Tracking
Tracking Decision
Information System
System or
Action
Managers
Customer
Customer
Information
Information
System
System
Clients
Human
Human Resource
Resource
Auditors System
System
Internal Audit for MFI -34- © Hong Ry, Senior Internal Auditor
IA5 – O6
Collection Sheet
Name of Branch : _______________ Month
Name of Field Staff: _____________
Center No
Loan Interest Savings Savings Loan Interest Savings Savings Loan Interest Savings Savings Loan Interest Savings Savings
collection collection collected withdrawn collection collection collected withdrawn collection collection collected withdrawn collection collection collected withdrawn
Group 1
Laxmi
Mahalakshmi
Parameswari
Meenakshi
Rajammal
Group Total
Group 2
Pushpavalli
Gandhimathi
Amsavalli
Shanthi
Mariammal
Group Total
Group 3
Rajeswari
Venkateswari
Velmani
Pushpavalli
Rajalakshmi
Group Total
Center Total
Internal Audit for MFI -35- © Hong Ry, Senior Internal Auditor
Collection Sheet
Name of Branch : _______________ Week Ending IA5 – O7
Name of Field Staff: _____________ Date:
Center No ____________________
Loan ID Loan Amount Date of Opening Balances During the week Closing balance
disbursement Principal Principal Interest Age of Principal Interest Current Current Principal Interest Principal Interest Fee Principal Principal Interest Age of Principal Interest
Outstanding Overdue Overdue overdue Prepayments Prepayments Principal Interest Demand Demand collected Collected collected Outstanding overdue overdue overdue Prepayments Prepayments
Due Due
Group 1 -
Laxmi
Mahalakshmi
Parameswari
Meenakshi
Rajammal
Group Total
Group 2
Pushpavalli
Gandhimathi
Amsavalli
Shanthi
Mariammal
Group Total
Group 3
Rajeswari
Venkateswari
Velmani
Pushpavalli
Rajalakshmi
Group Total
Center Total
Internal Audit for MFI -36- © Hong Ry, Senior Internal Auditor
Key aspects of good recording
Internal Audit for MFI -37- © Hong Ry, Senior Internal Auditor
Issues in report design
• Focus of contents
• Frequency of reporting
• Importance of timely information
• Importance of accurate and reliable
information
• Levels of reporting – appropriate level
of aggregation for user
• Identification of reports
• Usability
• Regularity of design improvements
Internal Audit for MFI -38- © Hong Ry, Senior Internal Auditor
Features of a Good MIS
• Reliability
• Timeliness
• User-friendliness
• Up-gradability
• Physical security
• Data back-up
• User-access rights
Internal Audit for MFI -39- © Hong Ry, Senior Internal Auditor
FEATURES OF A GOOD COMPUTERISED
INFORMATION SYSTEMS
AVAILABILITY
CONFIDENTIALITY
NON-
REPUDIABILITY INTEGRITY
AUTHENTICITY
Internal Audit for MFI -40- © Hong Ry, Senior Internal Auditor
KEY CONTROLS IN A COMPUTERISED ENVIRONMENT
MANAGEMENT
CONTROLS
APPLICATION
CONTROLS ORGANISATIONAL
CONTROLS
OPERATIONAL
CONTROLS
Internal Audit for MFI -41- © Hong Ry, Senior Internal Auditor
AUDIT PROCESS
Internal Audit for MFI -42- © Hong Ry, Senior Internal Auditor
The Audit Process
Inspectionof
Inspection ofdocuments
documentsand
andrecords
records
Physicalinspection
Physical inspection
Observation/s
Observation/s
Inquiry
Inquiry
Confirmation
Confirmation
Computation&&retracing
Computation retracing
Analyticalprocedures
Analytical procedures
Internal Audit for MFI -43- © Hong Ry, Senior Internal Auditor
Inspection of documents and records
Internal Audit for MFI -45- © Hong Ry, Senior Internal Auditor
Physical inspection
• Physical verification of cash & fixed assets
– Cash – reconciliation of cash book & bank statement
and corresponding cash amount
– Assets – verify their usage
• surprise element
• eliminates the scope of manipulation
Observation
• Witness a performance of processes on site
• Ascertain the compliance of procedures
• Useful step, if observations are recorded in descriptive
form
Inquiry
Information seeking from knowledgeable internal & external
source/s
May be oral OR written
Helps obtain understanding of the system through which the
economic information is generated
Internal Audit for MFI -46- © Hong Ry, Senior Internal Auditor
Key Analysis Areas
Authenticity
(genuineness of document)
Appropriateness
(legitimacy of the transaction record)
Authorisation
(necessary approvals present)
Classification
(properly classified in records)
Remember to cross check for dates, client name, signatures, cutting
& overwriting of amounts & identification and serial numbers
Internal Audit for MFI -47- © Hong Ry, Senior Internal Auditor
Confirmation
• Corroboration of records by obtaining client
information --- feedback system
• Reliable evidence
Internal Audit for MFI -48- © Hong Ry, Senior Internal Auditor
Computation and retracing
Internal Audit for MFI -49- © Hong Ry, Senior Internal Auditor
Analytical procedures
• Analysis of significant ratios and trends,
and investigation of reasons therein
Internal Audit for MFI -50- © Hong Ry, Senior Internal Auditor
Comparisons
Involves comparing financial
information with -
• Corresponding information for a prior
period
• Anticipated results such as budgets
and forecasts
• Similar information for other
MFIs/the mF sector
Internal Audit for MFI -51- © Hong Ry, Senior Internal Auditor
Study of relationships
Auditor studies relationships -
• Among elements of financial
information (such as PAR trends,
fluctuations in OER, OSS)
• Between financial information and
relevant non-financial information
(PAR & growth rate)
Internal Audit for MFI -52- © Hong Ry, Senior Internal Auditor
Bank reconciliation statement
Positive Negative
Internal Audit for MFI -53- © Hong Ry, Senior Internal Auditor
IA6-H9
Portfolio At Risk Collection Sheet of Micro Fund: Basic Information
Current week: 42
Internal Audit for MFI -54- © Hong Ry, Senior Internal Auditor
SAMPLING
Internal Audit for MFI -55- © Hong Ry, Senior Internal Auditor
Sampling Methods
•Stratified
Sampling
•Cluster Sampling
Internal Audit for MFI -56- © Hong Ry, Senior Internal Auditor
Simple Random Sampling
Each item in the population has an equal chance of
being included in the sample
Population
1 2 3 4 5 6 7 8 9 10 11 12 13
1 1 1 1 1 1 2 2 2 2 2 2 2
2 2 2 3 3 3 3 3 3 3 3 3 3
4 4 4 4 4 4 4 4 4 4 5 5 5
5 5 5 5 5 5 5 6 6 6 6 6 6
Sample
4 6 3 1 1
Internal Audit for MFI -57- © Hong Ry, Senior Internal Auditor
Systematic Sampling
Elements are selected from the population at a
uniform interval that is measured in time, order or
space
Population
1 2 3 4 5 6 7 8 9 1 1 1 1
1 1 1 1 1 1 2 2 2 2 2 2 2
2 2 2 3 3 3 3 3 3 3 3 3 3
4 4 4 4 4 4 4 4 4 4 5 5 5
5 5 5 5 5 5 5 6 6 6 6 6 6
Sample
2 1 2 3 4 5 6
Internal Audit for MFI -58- © Hong Ry, Senior Internal Auditor
Stratified Sampling
We first divide the population into relatively
homogeneous groups called strata. Then we select
items proportionately, from each stratum randomly
Population
I
1 2 3 4 5 6 7 8 9 1 1 1 1
1 1 1 1 1 1 2 2 2 2 2 2 2
II
2 2 2 3 3 3 3 3 3 3 3 3 3
III
IV
4 4 4 4 4 4 4 4 4 4 5 5 5
V 5 5 5 5 5 5 5 6 6 6 6 6 6
Sample
4 2 3 4 5
Internal Audit for MFI -59- © Hong Ry, Senior Internal Auditor
Cluster Sampling
We divide the population into groups, or clusters, and then select a
random sample of these clusters. We assume that these
individual clusters are representative of population as a whole
Population
I II III IV V VI VII VIII IX
1 2 3 4 5 6 7 8 9
1 1 1 1 1 1 1 1 1
1 2 2 2 2 2 2 2 2
2 2 3 3 3 3 3 3 3
3 3 3 4 4 4 4 4 4
Sample
4 1 2 3 4
Internal Audit for MFI -60- © Hong Ry, Senior Internal Auditor
Judgemental Sampling
Convenience Sampling
• Selection of units from the population is based
on easy availability and accessibility.
• Useful when it is expensive or impractical to use
statistical sampling methods
Internal Audit for MFI -61- © Hong Ry, Senior Internal Auditor
FRAUDS
Internal Audit for MFI -62- © Hong Ry, Senior Internal Auditor
WHAT IS FRAUD ?
“The risk of loss of earnings or capital as
a result of intentional deception by an
employee or client.”
Internal Audit for MFI -63- © Hong Ry, Senior Internal Auditor
WHAT ARE THE MOST COMMON
TYPES OF MFI FRAUD ?
w Fictitious loans
w Kickbacks
w Cash theft
Internal Audit for MFI -64- © Hong Ry, Senior Internal Auditor
FRAUD DETECTION SIGNALS
Ö Increase in delinquency
Ö Accounting irregularities
Ö Employee tips
Internal Audit for MFI -65- © Hong Ry, Senior Internal Auditor
REDUCING THE LIKELIHOOD OF FRAUD
CORE
4.Hire staff who share
VALUES
the core values
Internal Audit for MFI -66- © Hong Ry, Senior Internal Auditor
REDUCING THE LIKELIHOOD OF FRAUD
• Market Pricing
• Simplicity of operations
• Transparency
Internal Audit for MFI -67- © Hong Ry, Senior Internal Auditor
Preventing a fraud must be an element in
several phases of the lending process !!!
Loan Monitoring
Supervision
Internal Audit for MFI -68- © Hong Ry, Senior Internal Auditor
WHEN ARE MFIs MOST
VULNERABLE TO FRAUD?
Internal Audit for MFI -69- © Hong Ry, Senior Internal Auditor
What are the Key Challenges?
Internal Audit for MFI -71- © Hong Ry, Senior Internal Auditor
Internal Audit REPORT
WRITING
Internal Audit REPORT WRITING
General Standards of Report Writing is
5C’s
1. Complete
2. Clear
3. Concrete
4. Correct
5. Concise
Internal Audit for MFI -72- © Hong Ry, Senior Internal Auditor
Internal Audit REPORT
Format
Condition/ Finding Criteria Rate Implication Recommandation
Internal Audit for MFI -73- © Hong Ry, Senior Internal Auditor
Nothing is right unless it
is proved right!
THANKS
Internal Audit for MFI -74- © Hong Ry, Senior Internal Auditor
SOURCE DUCUMENT
Internal Audit for MFI -75- © Hong Ry, Senior Internal Auditor