What is internal audit?
According to the definition in the IIA’s International Professional Practices Framework, internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations.
It helps an organisation to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.
How does internal audit benefit Parish and Town Councils?
There are nearly 10,000 Smaller Authorities (including parish and town councils) in England, two thirds of which are exempt from ‘External Audit’
Therefore the Internal Auditor – who is in fact external to the council – is the only independent person with a legal right to look at all of the systems and controls of the council.
The Internal Auditor checks that the Council has followed Proper Practices and thus that the figures they present on their AGAR can be relied on. The Internal Auditor is checking the systems and controls, not the accounts.
When a council approves the Annual Governance Statement and the Annual Statement of Accounts, the report of the internal auditor is proof that a competent independent person has reviewed the systems.
The purpose of the annual governance statement is for the authority to report publicly on its arrangements for ensuring that its business is conducted in accordance with the law, regulations and proper practices and that public money is safeguarded and properly accounted for.
By engaging an Internal Auditor who properly understands the legal framework and the Practitioners Guide, the council demonstrated to ratepayers that it is complying with the Accounts and Audit Regulations 2015.
Internal Auditors should provide a management report to council in addition to the AGAR form, to guide them towards improvements and better compliance. This should be published by the council along with a plan of improvement.
Why is internal audit important?
Internal audit provides an annual assurance to authorities and is designed to improve effectiveness and efficiency of the activities and operating procedures under the authority’s control.
Parish Council Internal Auditors do not need specific qualifications but they and the council appointing them need to ensure independence, competence and understanding of the tests to be carried out.
It is not the purpose of either internal or external audit to detect or prevent fraud.
Appointing an internal auditor: Essential Competencies
The Practitioners’ Guide includes detailed guidance for appointing an internal auditor. The key principles in appointing an internal auditor independence and competence. There is no requirement for a person providing the internal audit role to be professionally qualified, however essential competencies to be sought from any internal audit service should include:
- understanding book-keeping and accounting processes; where an authority’s turnover exceeds the £200,000 threshold, this must include accrual accounting and balance sheets
- understanding the role of internal audit in reviewing systems rather than undertaking detailed checks that are more appropriately the responsibility of management
- awareness of relevant principles and practice of financial and other risk management
- understanding proper practices in relation to governance and accounting requirements within the legal framework and powers of smaller authorities, as set out in the guidance
- awareness of the most recent model Standing Orders and model Financial Regulations as published by NALC and how they are adopted by authorities
- awareness of the relevance of VAT and PAYE/NIC rules as applied to the authority
- for larger authorities, a clear understanding of the risks and controls associated with ‘cut off’ procedures, particularly with respect to revenue-generating activities
Internal Auditor letter of Engagement
Every Internal Auditor should issue a letter of engagement, clarifying the work they will do, their fee and any other relevant terms.
An example of an engagement letter can be found below
What will the Internal Auditor look at ?
The internal auditor is looking at controls.
They will want to look at the minute book, policies, procedures, tenders, quotes, payroll, insurance, declarations of interest and anything else they request to ensure that the council is complying with the legislation.
An example of an IA checklist can be found below
JPAG – NALC PRACTITIONERS GUIDE
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