INTERNAL AUDIT IN MICROFINANCE - MICROCREDIT, NGO- MFIs INSTITITION

Internal Control Structure :

Internal control system should consists of five interrelated components : 1) Control environment 2) Risk assessment 3) Control activities 4) Information and communication and 5) Monitoring.

1)      Control Environment :

The control environment which means the overall attitude, awareness and actions of directors and management regarding the internal control system and its importance in the entity. The control environment has an effect on the effectiveness of the specific control procedure. A strong control involvement for example, one with tight budgetary controls and an effective internal audit function, can significantly complement specific control procedure. However a strong environment does not by itself ensure the effectiveness of the internal control system. Factors reflected in the control environment include-

§  The functions of the Board of directors and its committee.

§  Management philosophy and operating style. 

§  The entity’s organization structure and method of assigning authority and responsibilities.

§  Management control system including the internal audit function, personnel policies and procedures and segregation of duties. 

Control Procedure means those policies and procedures in addition to the control environment which management has established to achieve the entity’s specific objectives. Specific control procedures includes :

§  Reporting, reviewing and approving reconciliation.

§  Checking the arithmetical accuracy of the records.

§  Approving and controlling of documents.

§  Comparing internal data with external souses of information.

2)      Risk assessment:

Risk assessment is the identification and analysis of risk associated with the achievement of operations, financial reporting and compliance goal and objectives. The area where risk assessment is to be considered in financial statement level.

§  The integrity of the management.

§  Management experience and knowledge and changes in management during the period, for example inexperience of management may affect the preparation of the financial statements of the entity.

§  Unusual pressure of the management.

§    Financial statements likely to be capable to misstatement for example high degree of estimation. Internal control are executed in according with management’s general or specific authorization. Risk involves in case of internal controls system where tend to be directed at routine transactions rather than non-routine transactions.

3)      Control activities :

§  Sound design and use of renumbered documents and records.

§  Segregation of duties.

§  Proper authorization of transactions.

§  Adequate safeguards and security measures.

§  Independent checks on performance.

§  Proper valuation of recorded amounts.

§  Activities related to financial reporting.

§  General controls and financial control.

4)      Information and communication :

The communication to management of material weakness would ordinarily be is writing. In many case oral communication is appropriate.

§  Identify and capture information relevant to financial reporting.

§  Communicate relevant information in a suitable format.

5)      Monitoring :

§ Ongoing activities.

§ Separate evaluations.

Priority area of establishing internal control in Micro finance

In Micro finance sector following are the priorities area where internal control procedure may be followed.

a) Cash control : Just as cash is the beginning of  MFI operational cycle, it is usually the starting point for a MFI system of internal control. Cash is the one asset that is readily convertible into other type of asset; it is easily concealed and transported and it is highly desired. Moreover because of the large volume of cash transactions numerous errors may occur in executing and recording cash transaction. To safeguard cash and to assume the accuracy of the accounting records for cash, effective internal control over cash in imperative. Cash consists of coin, currency cheque, money in hand or deposit in a bank or similar depository. The general rule is that if the bank will accept it for deposit, it is cash.  

Internal control over cash receipts :

Cash receipts may result from a variety of sources, service cheque collection received, pass book sale etc. The internal control procedure as given below :

a)      Establishment of responsibility :

Only designated personnel authorized to handle cash receipts i.e cashier.

b)      Segregation of duties :

Different individuals receive cash, (Cashier and Assistant Cashier) record cash receipts and hold the cash.

c)      Documents procedure :

Cash Register tape, deposit slips etc.

d)     Physical, Mechanical and Electronic control :

-    Store cash in safe (Vault)

-    Limit to access in cashier area. 

-    Use cash registers /cash book.

e)      Independent Internal Verification :

-   Supervisors count cash receipts daily; Accountant compare total receipts with bank deposit daily.

-   Teeming and lading

Other control :

Bond personnel who handle cash; Revised all cash deposited into Bank.

Internal Control over disbursement :

Most MFI use a voucher system as part of their internal control over cash disbursement. A Voucher is a system is a extensive network of approves by authorized individuals acting independently to ensure that all disbursements by cheque are proper. 

Cash may be disbursed for a variety of reasons such as pay expenses and liabilities or purchase small assets. Generally internal control over cash disbursements is more effective. When payments are made by cheque, rather than by cash except for incidental amounts that we paid out of petty cash.

a)      Establishment of responsibility :

-   Only designated personnel authorized to sign cheque (ED & Manager).

b)      Segregation of duties :

-    Different individuals approved and make payment, Cheque signers do not record disbursement book.

c)      Documentation Procedure :

-    Use renumbered cheque and account for them in sequence.

-    Each cheque must have approved invoice/bill.

d)     Physical, Mechanical and Electronic Control :

-          Store blank cheques in safe with limited to access.

-          Print cheque amounts by machine in indelible ink.

e)      Independent Internal verification :

-          Compare cheque to invoice/bill.

-          Reconcile Bank statement monthly.

f)       Other Control :

-         Stamp invoice.

-         Paid seal.

g)      Purchase :

-          Initiation of purchase and consider maximum limit.

-          Quotation and tender.

-          Placing order.

-          Receipts of goods.

-          Invoice : Date, Description of goods, rate, extension and stamp.

-          Vouchers should be prenumbered.

-          Payment

-          Stock/ fixed assets register entry.

Method of Evaluation of Internal Control :

There are four methods of internal control.

Oral approach :

Oral discussion is held to identify strengths and weakness.

Memorandum Approach :

Full notes are taken during discussion governing evaluation of internal control. Analysis of weakness is undertaken and suggestions are offered through management letter for improvement

Internal Control Questionnaire (ICQ) :

An ICQ consists of question in respect of each element of business. Answer are obtained as ‘yes, no’ or ‘not applicable’. Remarks column is used for raising question and or identifying weakness of the existing internal controls with a view to removing these.

Flow Charts :

Flow charts of each business activity are reviewed and internal control are evaluated.

The internal audit process of Micro finance :

There are some checklists governing for looking approach to internal auditing are classified below :

1)        Evaluation of Internal Control : These short test of the adequacy of Accounting system from the following view points :

a)    Information is adequate and accurate.

b)    Resources of Micro finance are protected against losses resulting from :

i.        Theft

ii.      Embezzlement

iii.    Carelessness

c)    Control over all Phases of Operations.

2)        Review of Accounting Efficiency: This should cover the following aspects.

a)    Procedure are effective.

b)   Mechanical and electronic equipment is used.

c)    Space is fully utilized.’

d)   Personnel is adequate.

3)        Appraisal of performance of organization : Aspects to be covered include the following :

a)         Implementation of policy.

b)        Compliance with procedure.

c)         Review of individual performance.

d)        Checking up of plan on organization.

4)        Internal audit report : The benefit of internal auditor’s work are to be accomplished through the medium of reports and findings and recommendations. The report is prepared in the light of the following aspects :

a)        The report is carefully prepared and well written.

b)       The report is designed to catch and hold the attention of the POs to whom it is prepared.

c)        Conclusion and recommendation is clearly written.

d)       Rough findings report be discussed before POs level.

e)        Specific Improvement need to be properly highlighted.

f)        Follow up in needed to ensure action on the findings and recommendations.

Audit Checklist

List of the MIS and AIS formats to be checked and reviewed at the course of PKSF PO’s internal audit. PKSF internal Audit personnel should be given emphasize to the following formats and issues at the course of PO’s field and head office audit.

1.0              Vouchers (Dr. /Cr.- cash & bank  and Transfer/Journal)

2.0              Cash book

3.0              Verification of cash in hand

4.0              General ledger

 

Report review

5.0              Financial statement  prepared and submitted by the PO(FIS)

6.0              Progress report in different aspects

 

Registers review

7.0              Master roll for loan disbursement

8.0              Membership enrolment register

9.0              Fully repayment register

10.0          Recoverable/ realizable and daily realization/collection register

11.0          Savings (mandatory/flexible/& micro insurance) – withdrawal/return/adjustment registers

12.0          Group/samity based Subsidiary ledger- loan and savings

13.0          Registers for realizable amounts during govt. holiday and vacation

14.0          Daily collection Register(DCR)

15.0          Weekly and monthly MIS and AIS reports generated by the branch personnel

16.0          Fixed Asset Register- movable and immovable assets

17.0          Check and DD issue register

18.0          Stock register- printing and stationery goods

19.0          Loan and Advance register for officers and staffs

20.0          Daily attendance register

21.0          Movement Register

22.0          Back to office register( for visiting the groups by manager/ Monitoring )

23.0          Members passbook verification

24.0          Collection sheet verification

25.0          Loan application and Agreement verification

26.0          Savings withdrawal formats verification

27.0          Interests on different loan and savings product verification

28.0          Welfare funds- verification and  review

29.0          Loan loss provision (LLP) and Disaster management Fund (DMF)- verification and review

30.0          Others relevant issues- verification and review

31.0          Ratio analysis and verification of the analyzed and provided ratios by the PO accounts as well as PO management

BIBIOGRAPHY :

1. Bangladesh standard on Auditing (BSA) and Bangladesh auditing Practice Statements (BAPS).
2. Report of the National Commission on fraudulent Reporting, October 1987.
3. Auditing Principles & Procedures by Prof. Dr. Khawaja Amjad Saeed of Pakistan.
4. The Bangladesh Accountant Journal of the institute of Chartered Accountant of Bangladesh October – December 2007.