Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Effective Financial
Management
Rwanda Civil Society Strengthening Project
November 2010
This training was based on InsideNGO.2009.Introduction to Financial
Management.
Auditing
Prepared by Emmanuel Gumisiriza FAM IREX Rwanda
1
AUDIT PLANING AND CONTOL
The International Auditing Standards (ISA) requires an auditor to do the following in order to carry out an audit efficiently.
To plan his work.
To control his work.
To record his work.
(a) AUDIT PLANNING
The audit plan is a detailed schedule of the activities to be conducted in an audit and specifying the resources needed.
Audit planning helps the auditor:
(a) Direct and control the audit work.
(b) Device a means of achieving audit objective.
(c) Complete the audit work in time for the Annual General Meeting. (d) Concentrate on key areas i.e. sensitive ones.
(e) To use audit staff optimally and complete work on time.
Planning procedures (Preliminary)
Before drawing up an audit plan the auditor should do the following preliminaries. (a) Review last years audit file especially the current audit file
(b) Identify changes in clients procedures and accounting system (c) Assess effect of the changes in legislation and accounting practices (d) Review interim management accounts and budgetary system
(e) Establish relevance of work done by the client internal audit department (f) Establish extent to which schedules are to be prepared by the client himself (g) Establish timing of the audit work
(h) Identify number of experienced staff required to carry out the audit (i) Assess briefing requirement of each audit clerk
Description of desired procedures of audit planning
1. Review previous years audit file (current file) and note (a) Difficult areas encountered
(b) Sample profit and loss account and balance sheet 2. Consult company’s senior staff and:
(a) Get an idea regarding current trading circumstances (b) Get an idea of significant changes in company personnel (c) Assess changes in location e.g. new branches
(d) Assess changes in accounting procedures 3. Review management interim accounts
4. Estimate audit time requirements by considering: (a) Division between interim and Final audit
Auditing
Prepared by Emmanuel Gumisiriza FAM IREX Rwanda
2 5. Determine the degree of cooperation expected from the internal audit department e.g.
stock counts, wage payments, verification of mobile assets, branch visits, cash counts, preparation of schedules.
6. Assess the availability of different levels of audit staff in terms of experience, ability and competence.
7. Brief audit staff in problematic areas e.g. areas managed by relatives.
8. Prepare an audit Memorandum-a summary of what is to be done by each member of the audit staff: This memorandum will contain:
(a) Each item in the financial statement, how, when, and by whom it will be verified. (b) Staff usage with time budgets.
(c) Timing requirement
Advantages of audit planning
1. Planning in advance solves the problem of client companies with similar year ends and timing requirements e.g. AGMs
2. Solves the problem of trained manpower by utilizing available staff optimally.
3. Delay in submitting information or documents by the client are accommodated in the plan.
4. Planning optimizes the effort in a two-part audit (Interim and Final) especially when the final audit is time critical.
5. Use of audit test requires careful planning to obtain good results in time. 6. Planning is essential for large companies where time is critical.
7. Planning assists to concentrate audit efforts on problem areas avoiding wastage of time.
8. Planning facilitates control.
Problems in audit planning
1. Client’s transactions are not evenly distributed throughout the financial period and may peak and drop haphazardly make it difficult to plan for.
2. Sudden changes in the business may make the plan absolute and necessitating changes.
3. Some client may make the plan unworkable by delaying information and documents leading to delays in Audit work.
4. Staff turnover of auditing staff e.g. illness, desertion that may disrupt the audit plan. 5. A good plan may be rendered useless by lack of qualified audit personnel.
6. Abrupt assignments to audit firms in form of receivership, liquidations and investigations that may disrupt the audit plan.
Ways of minimizing audit planning problems
1. Keeping close liaison with clients to avoid delays in submitting documents or information.
2. Concentrate more effort on interim audits and less on final audits.
3. To use long-range strategic plans anticipating the auditing needs of various clients. 4. Staffing requirements should be planned in advance and a small stand by staff kept
Auditing
Prepared by Emmanuel Gumisiriza FAM IREX Rwanda
3 5. Set up special department to take up sudden receivership, liquidation assignments. 6. Ability to engage part time audit staff often the need arises.
(
b) Audit controlTo achieve acceptable auditing standards audit control is important. Audit control can be achieved if:
a) Work is allocated to trained, proficient and experienced staff. b) Staffs understand their responsibilities through proper briefing. c) If proper recording is done of audit work
d) There is adequate review of audit work by a senior auditor.
Procedures to Ensure Proper Audit Control
a) Proper allocation of duties meeting experiences and competence. b) Proper briefing on what to do, how and when.
c) Audit staff briefed to report problem areas to the audit manager. d) Properly completed working papers that are comprehensive.
e) Management review of work done by junior audit staff and completed working papers and acknowledgement by the audit manager.
f) Use of audit completion lists e.g. on debtors, assets. Etc
g) Audit manager should consult partners for special opinions on issue that are not clear to time.
h) Constant reviews of audit work performed.
(C) AUDIT RECORDING
The auditor is supposed to record all-important items he comes across during the course of his audit work. This is important because when it comes to the final review he cannot check the accounts again. Recording is done in working papers.
Working papers:
Working papers are all records including information recorded, gathered form third parties, important documents collected during the course of an audit. Working papers provide evidence of work done.
Features of good working papers
1. Should be properly headed.
2. Should indicate period covered or when collected and recorded 3. Properly indexed for crosschecking.
4. Comprehensive enough.
5. Symbols used should be explained.
6. Kept safely to avoid misuse or destruction.
7. Preserved in the current file for at least 5 years and in the permanent file for at least 15years.
8. Periodically updated especially in the permanents file.
Auditing
Prepared by Emmanuel Gumisiriza FAM IREX Rwanda
4 10. Should be neatly arranged and kept in a suitable file or medium.
Advantages of collecting working papers
1. Used as a basis of planning the current audit.
2. Means of controlling the current years audit by reviewing them.
3. Enable the auditor to form an opinion on the true and fair view and whether the company has complied with statutory requirements.
4. Those collected in one part of an audit can be used in another part.
5. Audit working papers are used to assist in investigations on the company’s financial affairs.
6. Can be used as evidences of work done if the auditor is sued for negligence.
7. Are collected as evidence of work done by each audit clerk who can be questioned in case of omissions.
Gathering of audit working papers
1. Taking copies of client’s statements e.g. P & L account, Balance sheet, Trial balance etc.
2. Taking notes of areas of weak internal controls, material errors and frauds, areas of lack of cooperation, or explanation.
3. Filing up evidence from third parties e.g. Debtor and creditor circularisation, balances certificates, contingent liabilities, bills discounted, values certificates etc.
4. Auditors own judgement put on record and filed.
5. Important Company documents e.g. Memorandum and articles of association.
Storage of audit records
Working papers are kept in two files: 1. The current audit file.
2. The permanent audit file.
Current audit file
Contains information about the accounts being audited i.e. Information about the current year. The file is closed at the end of the current audit.
Contents of the current audit file
1. Copies of accounts and statement under audit fully authenticated by director’s signatures.
2. An index covering all working papers in the file.
3. Internal control questionnaires and answers and flow charts. 4. Audit programmes and tests and dates carried out.
5. Schedules of each item in the balance sheet and details eg. Value, ownership and existence and supporting documents
6. A schedule of each item in the profit and loss account.
7. A checklist concerning compliance with statutory disclosure, provisions for depreciation, bad debts, taxation etc.
Auditing
Prepared by Emmanuel Gumisiriza FAM IREX Rwanda
5 9. A schedule of important working ratios e.g. Gross profit, current ratio, stock turnover
ratio etc.
10. A record of minutes of meetings of shareholders directors etc.
11. Copy of management letter highlighting weaknesses in the internal control system and how rectifications have been done.
12. Letters of representation given by directors and written on the client’s letter head – the client’s confirmation of auditor’s opinions on matters such as stocks, contingent liabilities.
Permanent file
Contains information of continuing importance to the auditor i.e. can be used beyond a given financial period.
1. It contains only information of permanent importance 2. It should be updated after each audit.
3. It should be indexed.
Contents of the permanent
1. Index to the file
2. Statutory material governing the conduct of the accounts and audit e.g. accounting guidelines, audit guidelines.
3. Memorandum and articles of association, partnership deeds, constitutions (clubs and societies).
4. Address of company’s registered office and other premises
5. Copies of documents of continuing interest to the auditor e.g. Letters of engagements, minutes of the meeting that appointed the auditor, royalty agreements, debenture deeds, certificates, lease agreements, guarantees by or for the company etc. 6. Organizational chart.
7. List of books and records and names, positions, specimen signature and initials of responsible people keeping these books.
8. Outline history of the company e.g. Reserves, provisions, share capital, acquisitions. 9. Accounting matters of importance e.g. Company accounting policies e.g.
Depreciation policy, stocks stock valuation policy.
10. Note of interviews and correspondence and reference to previous letters of weakness. 11. Note of company’s position in the group e.g. holding, subsidiary or associate.
12. Clients internal audit and accounting instructions
13. A list of directors, their shareholding and service contract.
14. A list of the company’s advisors such as bankers, stockbrokers, lawyers and insurance brokers.
15. A list of the companies insurances. 16. Latter’s of representation
Contents which over-lap in the two files
1. Index to the file.
2. Records of minutes of shareholders and directors. 3. Letters of representation.
Auditing
Prepared by Emmanuel Gumisiriza FAM IREX Rwanda
6 5. Statements of accounts (balance sheet and profit and loss accounts).
Limitations of gathering working papers
1. Lack of cooperation, delays in submitting schedules, statements or documents. 2. Missing or misplaced documents not available for photocopying
3. Third party delays or bias if they collude with management
4. Working papers may be insufficient if collected by inexperienced staff.
5. The auditor may not understand the technical nature of a clients business leading to insufficient information.
6. It may be difficult to compile working papers collected by different people, hence making cross-referencing difficult.
7. Weak internal control systems may make it difficult to compile working papers e.g. lack of proper records, proper schedules.
8. Staff turnover that may interfere with the collection of working papers.
Advantages of working papers to the auditor
1. Facilitate the final review.
2. Review of the previous year working papers assist the auditor to concentrate on key areas.
3. Can be used in a court of law as evidence of work done if the auditor is sued for negligence.
4. Assist the auditor to detect errors and frauds in cases where figures are changed. 5. Are used on the basis of planning the current year’s auditor.
6. Working papers can be used to assist investigations that assist the auditor and the company.
7. Highlight the approach to an audit through the review of the informal control systems, flow charts, programmer and tests.
8. Highlight changes in accounting systems, accounting principles and policies. 9. Used as training materials to new audit staff.
10. Used as evidence of work done by each audit clerk and as such can be used for audit control.
11. Minimize the risk of duplicating the auditor’s effort. 12. Used as the basis of charging fees.
13. In case of disruption of the audit due to illness, the working papers will indicate how much as been accomplished and allows new staff to determine where to continue with the audit-ensuring smooth flow of the audit.
14. In cases of catastrophic losses e.g. Fire in the clients business the auditors working papers can be used in determining insurance claims.
The auditor’s lien (ownership of audit working papers)
As a contracted person, all working papers belong to the auditor and have lien over them until his fees are paid except for:
1. Returns from branches 2. Bank letters
3. Income tax returns 4. Letters of circularisation
Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Objectives:
Participants will be able to:
• Explain complex and varying purposes of financial
management
• Explain international accounting structures,
standards, policies and procedures to serve the
financial management needs of non-governmental
organizations
• Utilize this knowledge to review and analyze their
current accounting structures, standards, policies
and procedures for their comprehensiveness and
effectiveness
Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Overview of training:
• Introduction (40 minutes)
• Accounting standards (20 minutes)
• Break (15 minutes)
• Continue with Accounting standards (1.5 hours)
• Practical inform on accounting (1 hour)
• Break (lunch?) 30 minutes
• Budgeting (2 hours)
• Financial reports (1 hour)
• Break (15 minutes)
• Financial management policies (1 hour)
• Practical work (2 hours)
Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Introduction
Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Introduction
Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Introduction
What does financial management involve?
Planning, Organizing, Controlling
and
Monitoring
are the building blocks of the
management of the financial resources of
an organization
These activities need to be done on an
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Introduction: Role of managers
Financial managers should continually:
• Plan budgets,
• Implement the program and track expenses
and achievements and
• Review if spending and results are meeting
the original plan
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Introduction: Financial control
• Financial control refers to the systems and
procedures that make the financial
resources of an NGO properly handled.
Financial control is crucial.
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Introduction: Responsibility
• Who is responsible for financial
management?
– Legal liability
– Founding document: with named members
of governing body and its powers and
responsibilities
– CEO enforces the board’s policy, so they
must have system to monitor the results and
the NGO’s practices and finances
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Introduction: Wrap-up
• How do the theories of financial
management compare to your current
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Accounting standards
• Basics of financial management
• Accounting tools
• Design of system structure
• Finance manual & policies
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Accounting standards
Basics of Financial Management:
• Accounting = Record how funds have been
spent (to
Organize
and then
Monitor
)
• Financial
Planning
• Monitoring
• Internal
Control
s
*Back to the building blocks of financial
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Accounting standards
•
Financial accounting: is the realm of work
of tracking monetary transactions through
recording, classifying and summarizing
informational for various purposes.
•
Financial accounting should be:
– accurate,
– timely and
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Accounting standards
• Management accounting: is the realm of
work of analyzing the financial information
generated by the financial accounting in
order to make comparisons and informed
strategic decisions about the organization.
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Accounting standards
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Accounting standards: Accounting
tools
• What tools are your NGOs using now to
manage finances and planning?
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Rwanda MCC Threshold Program
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Accounting standards: Accounting
system design
• System design is an organizational aspect
of financial management.
• The accounting system organizes how
expenses are grouped or categorized and
tallied based on the needs of the NGO.
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Accounting standards: Accounting
system design
Accounting systems should be based on the
NGO’s:
• Size and structure
• Resources
• Reporting requirements
• Projects and activities
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Accounting standards: Designing
an accounting system
Cost structures:
• Restricted funding
• “Pots” of funding as various levels
• Direct and indirect costs
• Streamlining categories to feed into
overall financial picture of the
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Accounting standards: Designing
an accounting system
Chart of accounts
– Account name,
– Reference number
– Description of the type of expenses
that should be labeled under the
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Accounting standards: Designing
an accounting system
• Q&A
• Design or modify an accounting system for
your NGO
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Accounting standards: Financial
Manual and Policies
Finance manual and policies
• Suggested components to include
• A few simple policies
• Standardized financial cycles (basic
components to consider having)
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Accounting standards: Financial
manual and policies
A finance manual might include sections on:
•
Financial accounting routines
•
The Chart of accounts and cost center codes
•
Management accounting routines
•
The budget planning and management process
•
Delegated authority rules (i.e. who can do what)
•
Ordering and purchasing procedures
•
Bank and cash handling procedures
•
Management and control of fixed assets
•
Staff benefits and allowances
•
Annual audit arrangements
•
How to deal with fraud and other irregularities
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Accounting standards: Financial
manual and policies
• An NGO should have or create:
– Standard forms
– Organizational chart
– Job descriptions and clear levels of financial
authority
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Accounting standards: Financial
manual and policies
• Standard forms often include:
– A component requiring signatures of specific
job titles that must approve an expense
before it is authorized.
– Specifications of relevant documentation to
support the need and authenticity of the
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Practical information on accounting
• Brief overview of types of accounting
• Meeting the minimum standards
– Documents to keep
– Books to keep
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Practical information on
accounting: Types of accounting
•
Cash accounting: is a simple and effective
form of accounting
•
Payment are recorded in a bank/cash
book as they are made
•
Incoming transactions are likewise
recorded in the bank/cash book when
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Practical information on accounting
• Accrual accounting: this is a more complex
accounting system that records the dual
aspect of each transaction, that is the
receiving and giving of each transaction.
• Instead of recording transactions in a bank
or cash book, these are recorded in a
general ledger.
• Records are made as expenses occur and
income is recorded as it is earned
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Practical information on accounting:
Meeting the minimum standards
• Third party documents should be kept to support
every transaction taking place
• When labeling and filing, separate documentation
under “Paid” and “Received”
• Keep financial documentation consistent both to
help your organization stay organized and to avoid
having incomplete or inconsistent files, which may
look suspicious to auditors
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Practical information on
accounting: Balancing books
• Books should be balanced and verified
monthly
• Cash accounting: compare records with
bank statements and cash box
• Accrual accounting: (expenses + bills) must
equal (income + credit (money owed to the
organization))
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Budgeting
• Introduction
• Why budgeting is important
• Who needs budgets for what?
• Types of budgets
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Budgeting
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Budgeting: Who needs budgets for
what purposes
• Funders: to understand NGOs financial
requirements and to track accuracy of spending
• Accountants: to manage expenses
• Program managers: to track and monitor spending
and the rate of spending (or burn rate)
• Managers: to plan strategically
• Fundraisers: to show public goals and where funds
will be spent
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Budgeting: Type of budgets
• Planning budgets
• Cash flow forecasts
• Capital budgets
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Budgeting: How to
• Line-item based vertically and time based
horizontally
• Budget notes
• Budget must come from the narrative and
activities, rather than the other way around.
• Get accurate figures from people that know real
costs
• Be careful not to underestimate costs – you have
to do the work!
• Inform the donor if costs change during
implementation
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Financial reports
• Annual financial reports – what to include,
purposes served (internal and external)
• Ongoing (monthly and quarterly) financial
reporting
• Purpose of reporting
• Skills of a budget analyst
• Relationship with the donor
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Financial reports: Annual reports
• Usually produce about 6 weeks after the
end of the fiscal year
• Should show:
– where money has come in from,
– for what purposes,
– how money has been allocated
– what has been achieved by the organization
• Internal and external uses
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Financial reports: Ongoing reporting
• Financial reporting should also be done
quarterly and monthly
• Cash flow reports – to ensure that sufficient
funds are available for upcoming activities
and operational costs
• Budget monitoring reports – to compare
actual spending to budget allocations and to
analyze variances in spending
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Financial reports: Budget analysis
• Recognize issues
• Identify what information is relevant to
whom
• Present that information clearly and
succinctly to managers
• Find allowable and feasible solutions to
issues to present to managers
• Address issues effecting over spending or
under spending
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Financial reports: Donor relationship
• Donors will expect circumstances to change
• Be transparent and keep donors informed
• Changes may be able to be made:
• Under spending – increase activities or
request a no-cost extension
• Over spending – close early, reduce costs
or apply for a cost extension
• Still within overall budget with changes -
realignment
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Financial reports
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Financial management policies
• Manage fraud and internal risk
• The basics:
– Delegate authority,
– Separate duties,
– Reconciliation,
– Cash control,
– Physical control,
– Accountability reporting
– Audits
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Financial policies: Delegated authority
• Governing board and Chief Executive Officer
• Delegated authority document including:
– Placing and authorizing orders for goods and
services
– Signing checks
– Authorizing staff expenses
– Handling incoming cash and checks
– Access to the safe and petty cash
– Checking and authorizing accounting records
– Signing legal undertakings
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Financial policies: Delegating
authority
• Financial authority must be defined and
documented from most junior-levels up
• No one can authorize transactions for which
they will personally benefit
• Subordinates must not authorize payments
to managers
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Financial policies: Separate duties
• Different people should be responsible for
ordering goods, receiving goods, authorizing
the payment, keeping the accounting records
and reconciling the accounts.
• Establish procurement processes
• Upper management review
• Employees encouraged to report irregularities
• Irregularities should be swiftly and
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Financial management policies:
Reconciliation
• Reconciliation: the bank or cash book
should be reconciled monthly and the petty
cash weekly
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Financial management policies:
Physical controls
• Safes
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Financial management policies
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Internal audits
• Why
• What is reviewed
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Internal audits
Internal audits often include checks on the:
• Financial accounting systems and
procedures,
• Management accounting systems and
procedures
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Internal audits
Seven Principals of Financial Management
Consistency
The financial policies and systems of an NGO must be consistent over time. This promotes efficient operations and transparency, especially in financial reporting. Systems may of course be modified and improved, which may cause changes.
Inconsistent approaches to financial management may indicate that financial information is being manipulated.
Accountability
NGOs must explain how all resources (including equipment) are used and the result of their use. NGOs have an operational, moral and legal duty to explain their decisions and actions, and submit their financial reports for scrutiny.
Transparency
NGOs must follow the stipulations in their funding agreements regarding information to be provided to funders and stakeholders. Financial and programmatic reports should be thorough, accurate and timely.
Viability
To be financially viable, an organization's expenditure must be kept in balance with incoming funds. The governing body and managers should have a strategy regarding this and be able to show how the NGO will meet its financial obligations and carryout programmatic commitments.
Integrity
Individuals in the NGO must operate with honesty and integrity. Managers and Board members must lead by example, following policy and procedures and declaring any conflicts of interest. The integrity of financial records and reports is dependent on accuracy and completeness of financial records.
Stewardship
An organization must manage its financial resources to make sure that they are used for the purpose intended - this is known as financial stewardship. The governing board is ultimately responsible for financial stewardship and work with managers below them to plan, monitor and control finances.
Accounting standards,
The system for keeping financial records and documentation must observe
internationally accepted accounting standards and principles and be understandable to any accountant in the world.
Financial Management Tools
Planning: Strategic plans, business plan, activity plan, budgets, work plans, cash flow
forecast
Organizing: By laws, organizational charts, job responsibilities, chart of accounts
financial manual and budgets
Controlling: Budgets, delegated responsibility, defined levels of authority, systems to
reconcile spending, procurement procedures, internal and external audits
Monitoring: Evaluation reports, budget monitoring mechanisms, cash flow reports,
reconciling finances, bank statements,
Analysis of Accounting Systems Size and structure:
How many employees work exclusively or primarily on finances? 1. How many employees work partially on finances?
2. Does the current structure and system allow everyone access to information that needs it?
3. Does the current structure allow program managers to input information? 4. Is the current system overly bureaucratic?
5. Is the current system sufficiently organized /structured?
6. Do you feel that changes should be made to the accounting system to better fit the size or structure of the NGO?
Resources:
1. List resources:
2. List resource constraints:
Reporting requirements:
1. Does the current accounting system meet the reporting requirements? If not, why?
2. Are there multiple programs with multiple reporting cycles? If so, is this a problem for the current system?
3. Is varying information required by different programs? If so, how is this dealt with?
4. Can all programs use the same reporting preparation?
6. Are the accounting systems able to easily track that information?
7. Does the accounting system currently allow all programs’ financial information to be compiled to create an overall picture of the NGOs financial situation?
Projects and activities:
1. How many programs exist at the organization?
2. Do the programs have common categories of expenses? 3. What are some of the categories of spending?
Volume and type of financial transactions:
1. Does your NGO have accounts directly with vendors? 2. Are most payments made in cash?
3. Does your organization give grants or microloans to other parties? If so, are financial systems set up to manage this process well?
4. Does the current system track expenses by: cash and credit?
General:
1. Do all managers help code finances? If so, how and when is this be done?
2. What do you feel are your NGO’s weaknesses with the current financial system?
3. What steps need to be taken to improve your NGOs’ financial accounting and management accounting?
4. What levels/categories/classification of funding or information about the
transaction would be helpful to be tracked that is not currently being tracked or recorded?
Checklist of Standard Forms and Common Policies and Procedures
Does the NGO have the following standard forms: □ Bank reconciliation □ Cash Request □ Contract □ Expense report □ Invoice □ Payment voucher □ Purchase order
□ Travel expense report □ Vehicle log
□ Other…
Does policy exist for the following items: □ Financial accounting routines
□ The Chart of Accounts and cost center codes □ Management accounting routines
□ The budget planning and management process □ Delegated authority rules (i.e. who can do what) □ Ordering and purchasing procedures
□ Bank and cash handling procedures □ Management and control of fixed assets □ Staff benefits and allowances
□ Annual audit arrangements
□ How to deal with fraud and other irregularities □ Code of Conduct
□ Do any of the above mention, whose signature or what backup documentation is required?
Does the NGO have an: □ Organizational chart
Standard financial calendars for: □ Recording,
□ Reconciling,
□ Reporting expenses to date,
□ Forecasting budgets (once or twice annually) and □ Preparing for audits
Documents to Keep
□ Receipt or voucher for money received □ Receipt or voucher for money paid out □ Invoices - certified and stamped as paid
□ Paying-in vouchers for money paid into the bank □ Bank statements
□ Price quotes □ Contracts
The minimum requirements for accounting books are: □ Bank (or cash) book for each bank account
□ Petty cash book □ General/sub ledger □ Journal book □ Payroll ledger □ Assets register
Assessment of Accounting Practices
1. What aspects of your accounting systems are done well and correctly? Feel free to write a short assessment as well as consult the checklist below.
□ All transactions captured
□ All transactions are recorded in a consistent systematic manner
□ Accounts and transactions are reconciled monthly
□ At this time, the duality of each transaction is captured 100% of the time
□ Accounting documents are filed in an organized manner
□ Accounting documents are filed separated by “paid” and “received”
□ Books are kept for all the items they should be? 2. Is bookkeeping consistent?
3. How could your bookkeeping be improved?
Assessment of NGO’s Budgeting Techniques
What (if any) changes could be made to templates, to increase effectiveness of budgeting?
What (if any) changes could be made to templates, to increase efficiency of budgeting?
Are there aspects of the NGO’s business that are not being budgeted, which should be?
Financial Reports by Stakeholder
Stakeholder Need for Financial Reports
Project staff To know how much money and resources are
available for their projects and what has been spent so far.
Managers To keep an eye on how project funds are being
used, especially compared to the original plans. To help plan for the future.
Finance staff To make sure that there is enough money in
the bank to buy the things the NGO needs to run its programs.
Board of Trustees To keep an eye on how resources are being
used to achieve the NGO's objectives.
Donors To make sure that their grants are being used
as agreed and that the projects objectives are being fulfilled. To consider whether to
support an organization in the future. Government departments To make sure that the NGO pays any taxes
due and that it does not abuse its status as a 'not for profit’ organization.
Project beneficiaries To know what it costs to provide the services they are benefiting from and to decide if this is good value for their community.
The general public To know what the NGO raises and spends
during the year and how the money is used.
Assessment of Financial Reporting
1. Does the NGO currently do an annual financial report? 2. Does it include:
□ Where money has come in from, □ For what purposes,
□ How money has been allocated
□ What has been achieved by the organization
3. Does the financial report serve its internal and external needs? Please explain.
4. Does someone or a governing body analyze the financial trends and the health of the organization?
5. Are monthly or quarterly (please circle) financial reports done for: □ Cash flow
□ Budget monitoring
6. Do the financial managers and budget analyst have the ability and access to resources to do their jobs?
7. Do financial managers and budget analyst have the opportunity to present issues and potential solutions to managers?
8. Are financial reports given to donors honest and transparent?
10. Does the NGO deal with over or understanding or budget changes correctly?
11. What are your conclusions? What (if any) changes need to be made to financial reporting (internal or external reports).
Assessment of Financial Management Policies
Delegation of Authority:
NGO has:
□ Governing board and Chief Executive Officer with clear levels of responsibility and authority
□ A Delegated Authority Document exists that states who should do what in financial procedures (this document is approved by the governing board).
□ This document includes instructions regarding:
□ Placing and authorizing orders for goods and services □ Signing checks
□ Authorizing staff expenses
□ Handling incoming cash and checks □ Access to the safe and petty cash
□ Checking and authorizing accounting records □ Signing legal undertakings
Formal rules of authority:
□ Financial authority is defined and documented from most junior-levels up
□ There is a rule that states that no employee can authorize transactions for □ which they will personally benefit
□ There is a rule that states that subordinates cannot authorize payments to managers Comments:
Separating Duties:
□ Different people are responsible for ordering goods, receiving goods, authorizing the payment, keeping the accounting records and reconciling the accounts.
Procurement Processes are in place to:
□ Require multiply managers review and approval of purchases,
□ Set requirements for how purchases or made (i.e. large expenses should not be paid for through petty cash)
□ Determine after what amount competitive price quotes must be sought out Policies and procedures regarding separating of duties:
The NGOs has established that:
□ Checks must be signed by multiple people to avoid fraud
□ Upper management must review systems and double check accounting to ensure accounting is accurate.
□ Employees are encouraged to be report irregularities, abuse or fraud
□ Any irregularities must be investigated swiftly and professionally with a third person present
Comments:
Reconciliation:
Policies and procedures:
The NGOs has established that:
□ The bank or cash books are reconciled monthly □ The petty cash is reconciled weekly
□ Cash is accounted for (recorded) as it received (and before it is used) □ Receipts are always given for money received
□ Receipts are always obtained for money paid out □ Te surplus cash is to be kept in the bank – or in a safe
□ There are procedures for receiving cash (such as two people have to be present when a large sum of cash in withdrawn from the bank)
□ Access to petty cash is restricted to a few people □ Cash transactions are kept to a minimum
Comments:
Physical Controls:
□ The NGO has a safe
Policies and procedures to safeguard fixed assets: The NGOs has:
□ A list of valuable supplies and equipment and tracking number on the items
□ The list shows the original worth of the item and the date & places it was acquired. □ Expensive items are insured
□ The building and vehicles (etc.) are insured from theft, fire, flooding, etc.
Internal Audit & Plan of Action
Utilizing all that you have learned in this training, review and analyze your NGOs current accounting structures. Look over your notes and the handouts provided to assess the largest strengths and weaknesses of current systems and procedures. You should consult the: Financial Management Tools, Principals of Financial
Management, Checklist of Documents to Keep, Analysis of Accounting System (Structure), Standard Forms, Policies and Procedures, Assessment of Accounting Practices, Assessment of Budgeting, Assessment of Financial Reporting and finally the Assessment of Financial Management Policies.
Depending on the needs you see fit, prepare the following for your NGO:
1) Summary of strengths of current system and why these elements are necessary (brief)
2) Summary of weaknesses of current system and what risks, costs or other potential consequences are associated with not changing practices or systems.
3) For each weakness, present a solution for dealing with the issue.
4) Prioritize the urgency of changes to be addresses and write a justification for why you think certain weaknesses or solutions should be addresses first. This may include a logical order of steps that would need to be taken or policies that could easily be initiated and yield greater impacts, etc.
5) From the list of priorities, start drafting a Plan of Action that includes: a) when changes will be made, b) who needs to be involved in approving changes, c) how staff will be notified or trained.
6) If this assignment is not completed during the training, it should be sent back to IREX’s office when it is completed.
7) IREX management will follow-up on the progress of improvements to your NGO’s financial management and impacts the changes are having on the NGO’s operations and/or programming.
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
1
INTERNAL CONTROL SYSTEM
Internal Control, Internal Check and Internal Audit Definition
Internal control system is a system of controls, financial or otherwise (non-financial) instituted by the organisation to ensure that the business of the company is run in an orderly manner, and establishes safeguards on assets and promotes efficient and economical use of the company’s resources.
The types of controls instituted in a business can generally be divided into:
1. Financial controls: comprising controls over. a) Cash receipts
b) Cash payments
c) Financing operations – rising of finance.
d) Management of receivables and payables.(debtors and creditors) 2. Non – Financial / Administrative controls.
a) Controls over the company’s personnel.
b) Controls over the use of the company’s non-cash assets e.g. Fixed assets c) Controls over company’s policies.
d) Controls over the company’s procedures.
Objectives of the internal control system
1. To ensure that the company runs in an orderly manner. 3. To safeguard the company’s assets.
4. To ensure reliable records which are a source of information necessary for management decision making.
5. To ensure compliance with the laid down company policies. 6. To ensure that the company’s personnel are effectively utilised 7. To ensure compliance with the law e.g. Companies
Areas that fall under the scope of internal control system
These are:
1. Internal control 2. Internal check 3. Internal auditing
INTERNAL CONTROL SYSTEM
Internal Control Internal Check Internal Auditing
Whole system of controls:
1. Financial
2. Regulatory within the business Arrangements for: 1. Allocation of authority 2. Division & segregation of duties. 3. Supervisory control Internal Authorisation 1. Scrutiny and check to verify transaction in accounts. 2. Elimination of fraud and errors.
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
2 Features/ Characteristics of a Sound Internal Control
1. Plan of organisation; organisation chart
This is control over the company’s personnel. This defines: a) Duties and responsibilities.
b) Relationship between personnel.
It’s Importance
a) Avoids duplication of effort. b) Avoid conflicting duties. c) Facilitates delegation of duties. d) Harmonises operations.
2. Segregation of duties
Segregation of duties strengthens the internal control systems in that: a) Reduces risk of fraud, error and manipulation.
b) Increase efficiency due to specialisation. c) Facilitates supervision
Duties that must be segregated
a) Authorisation b) Recording c) Execution
d) Custody of assets
e) System development for computer operations
3. Physical controls
This is concerned with the custody and safety of the company’s assets. Access should be limited to a few individuals at any given time.
Examples of physical controls are:
a) Employment of watchmen/security guards. b) Alarm systems.
c) Strong electrified gates. d) Strong rooms and safes. e) Strong fences.
f) Security lights. g) Strong locks.
h) Mechanical checks e.g. cash registers i) Use of dogs.
j) Closed circuit TV’s
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
3
All transaction should be approved and authorised by a responsible person. The aim is to prevent fraud and streamline the flow of authority and avoid bureaucracy and conflicting authorities.
5. Arithmetic and accounting controls
This aims at assuring the accuracy of transactions. It also ensures proper recording of business transactions according to generally accepted accounting policies / principles.
6. Personnel
The company should employ qualified, experienced, competent and capable people. Supervisors must be vigilant in their duties to ensure proper implementation of company policies.
7. Supervision (lower level)
Supervisors must vigilant in their duties to ensure proper implementation of company policies. Supervision must be humane to boast subordinates morale.
8. Management supervision and review:
Management must check interim statements, budgetary controls, standard costing statements etc. Management must supervise the whole company.
9. Defined powers
These are powers at lower levels of the organisation e.g. record handling, handling of company assets etc. It must be clearly known and indicated who has these powers. For examples, the cashier should never have access to the company’s ledgers.
10. Responsibilities
Responsibilities should be clearly defined to boast efficiency and hold people accountable for what they do.
11. Routine and automatic checks;
This take the form of surprise checks e.g. for petty cash, stock counts, cash at hand etc.
12. Control of documents;
Involves control of sensitive documents e.g. Receipts, cheques, L.P.Os etc. They must be handled by responsible officers and should be pre-numbered. Must be kept securely.
13. Vacation and rotation of duties;
The company should give leave to especially accountants. This is armed at: a) Checking the efficiency in their absence.
b) Minimising errors and frauds. c) Boosting efficiency (having a rest)
14. Cost benefit analysis
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
4 Advantages of an Internal Control System in a Business
1. Minimise dances of errors and frauds e.g. through segregation of duties, surprise checks, close supervisors etc.
2. Safeguards the company’s assets through:
a) Limiting access by use of physical controls. b) Use of proper authorisation.
c) Routine checks.
d) Segregation of custody and recording of assets. e) Arithmetic and accounting controls
3. Boosts efficiency and smooth flow of operations by:
a) Supervisions of duties.
b) Competent and reliable personnel. c) Defined powers.
d) Managerial review and supervision.
4. Enables the company to achieve its goals through:
a) Budgetary controls. b) Constant supervision. c) Managerial reviews.
5. Management has relevant data for decision making through:
a) Qualified and competent staff. b) Routine and surprise checks. c) Use of machines.
d) Constant supervision.
6. Boasts control of work and avoids duplication of effort through: a) Delegation of duties
b) Defined powers c) Organisation charts
7. Facilitators efficient statutory audit’s as it acts as the basis on which the auditor will perform his work-reduces tests, amount of time and audit fees.
8. Motivates employees through routine checks, constant supervision etc. 9. Identifies inefficiently and out dated policies e.g. Through:
a) Managerial review.
b) Internal auditing functions. c) Segregation of duties.
10. Encourages specialisation through segregation of duties.
11. A strong internal control system allows the company to grow due to less frauds, errors and inefficiency.
Disadvantages of a strong internal control system
1. May cause apathy among the staff leading to lower morale due to bad supervision, poor delegation, and all leading to frustration.
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
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2. It is expansion to install and maintain e.g. an internal auditing function, informal check, physical controls etc.
3. May be very ambitions in approach e.g. setting unrealistic controls e.g. High budgets that cannot be achieved.
4. It may be rigidly designed and inflexible to changes in the environment. 5. Rigid segregation of duties may limit staff development.
6. A strong internal control system may lead to the auditor’s over-dependence on the system and thus relax his tests and leave errors and frauds undetected.
Remedy to the above disadvantages
1. Supervisory staff should be trained in human relations to:
a) Minimize supervision frustrations.
b) Make internal check a job description to employees during their engagement.
c) To employees access to management e.g. through meeting with staff.
d) Everyone should participate in budgeting in order to make realistic estimates. 2. The company can consult an auditor when designing an internal control system.
3. The company should use internal auditors who should bring lax management to the attention of the directors.
b. Use management auditors
4. Specialized personnel should be subject to other controls other than segregation of duties, which may increase their efficiency.
How the internal control system affects the auditor work (internal auditor)
1. If effective reduces the amounts of tests in an audit. 2. Reduces number of entries to be tested in each sample.
3. Minimizes chances of errors and frauds and minimizes the auditor’s liabilities to third parties.
4. Weak control necessitates a qualified report by the auditor and this will lead to negative consequences to the company.
5. An effective internal control system reduces the amount of audit evidence to gather in order to form an opinion.
6. A strong system reduces time needed for an audit and enables the auditor perform an efficient audit.
7. A strong system allows for efficient planning and drawing of programmes by concentrating on only weak areas.
8. Affects the timing of audit tests e.g. If it is weak certain tests will be undertaken early e.g. Debtors and creditors circularization.
9. Its strength or weakness will influence the number of audit staff required. 10. It will affect the audit fees charged.
11. It will affect quantity and quality of advice and forms a basis of the management letter.
Techniques used by auditors to assess strengths or weaknesses in the internal control system.
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
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A set of questions posed to the client by the auditor. A “yes” indicates strengths and a “NO” weakness
2. Flow charts
These are diagrammatic representations of accounting functions and procedures. A Gap in flow lines indicates weaknesses.
3. Third party confirmation
e.g. Debtors, creditors, bankers. Discrepancies may indicate a weak internal control
4. Compliance Tests
Tests on records and transactions of the business. Check the adequacy of the company’s recording.
5. Walk through test
Designed to assess in general the effectiveness of the internal control system.
6. Substantive tests:
These are tests on balances to see whether they are genuine. Done on balance sheet and income statement items.
7. Observation.
Done in such areas as stock taking, cash account, wage payment etc.
8. Companions
Using budget estimates that are compared with actual performance. Use of ratios, averages, comparing current statements with previous statement and schedules. Any deviation may indicate fraud
9. Verification of assets and liabilities
10. Vouching of entries
Vouching is the examination of vouchers to see whether they are: a) For the business
b) Properly authorized c) For the period under audit d) Properly recorded
11. Use of surprise checks e.g. On petty cash, cash at hand etc
Action to be taken in case of weak internal control system
a) Alert management immediately.
b) Compile a list of weakness in a management letter and suggest solutions
c) Change approach of the audit (i.e. from system) based to vouching based (audit in depth).
d) Increase sample size to be investigated or tested
Auditing
Prepared by
Emmanuel Gumisiriza FAM IREX Rwanda
7
f) Change the timing of the audit-do it earlier so as to have enough time. g) If weaknesses persists inform shareholders in the audit report
h) Record weaknesses in working papers and concentrate on these in subsequent audits. i) If the system is extremely weak, the auditor can produce an adverse report.
How the internal control system prevents frauds.
a) Plan and organisation:
Prevents conflicts in duties and duplication of efforts. Provides a clear line of responsibility and prevents frauds through internal checks.
b) Segregation of duties
The work of one person is checked by another person. Boosts accountability.
Boosts specialisation and thus efficiency and reduces chances of fraud. Segregating duties enables management to assess the performance of each employee. The internal auditor should be alert to any frauds or possibilities of fraud.
3. Physical controls
Devices such as locks gates prevent unauthorised access to the company’s assets Mechanised checks e.g. on franking machines, cash registrar, computers etc. Observation over company’s assets.
4. Authorisation and control
Vested on senior and responsible personnel
Segregation of authority. Approval given to different officers, one supplementing the authority of another person e.g. in signing of cheques.
5. Arithmetic and accounting controls
Minimise chances of errors and frauds.
6. Managerial Review:
Subordinate staff knows that their work will be subject to review by senior personnel and this knowledge discourages fraud.
7. Supervision
Both management supervision and lower level supervision will prevent fraud.
Circumstances which indicate weaknesses in the internal control system:
1. Where the informal control system is in the hands of one individual that is no segregation of duties.
2. When staff are reluctant to take up their annual leave.
3. Where officials of the company have conflicting business interest.
4. Where employees are allowed to purchase goods on discount using the company. 5. Employment of relatives.
6. Where business is ran by a small group of people without an oversight committee. 7. Where the integrity and competence of staff is questionable.
8. Where here is with complex corporate structure not justified by the size of the company.
