Lagos Audit Manual - Part One

7/30/2019 Lagos Audit Manual - Part One

1/83

Audit Manual

For the Office of the

Auditor General

for Local Governments

Lagos State


2/83

Lagos State Local Government Audit Manual Version 2.2 December 2012

Version 2.2 December 2012

Preface

This Audit Manual was first produced for the Office of The Auditor-General for Local

Governments in Lagos State in November 2005. It was subsequently fully revised in

December, 2012. The intention of the manual is three-fold. Firstly to ensure that audits are

performed in line with audit standards and best practices; secondly to ensure compliance with

the Model Financial Memoranda for Local Government and other statutory regulations as maybe revised from time to time; and thirdly to reflect the good practices which have been

developed in my office.

This Audit Manual is designed to enhance and standardise audit practice within the Office of

the Auditor-General for Local Governments by promoting the sharing of knowledge and good

practice. This should encourage standard uniform practice expected to facilitate peer review

and self-evaluation by the Audit team. This in turn will lead to improved performance which

would assure quality service delivery to Local Governments in Lagos State.


3/83


Foreword

The mandate of the Auditor-General for Local Governments, in broad terms, is to examinehow well theLocal Governments have managed their financial affairs and to report the results

of these examinations to the State House of Assembly through the Public Accounts

Committee (Local).

The Audit Manual sets out the principles and audit procedures which are to be followed by

every audit team member when auditing or undertaking audit related assignments in Local

Governments, Local Government Education Authorities and allied agencies or when called

upon to carry out investigations into matters that may have come before the State Assembly

or indeed the Office of the Auditor-General forLocal Governments (OAGLGs).

The manual sets out the high standards of professional serviceswhich theAGLG- expects of

his staff and reflects current International Standards on Auditing and I trust that the manual will

add value to the work undertaken by all audit teams. It is a reform strategy brought about by

the need to enhance service delivery and productivity of this office. As a symbol of "Public

Trust and Accountability", this manual will aid compliance with International Standards and

align us with the aspirationof Lagos State Government in achieving timeliness, adequacy and

effectiveness in financial reporting.

The Manual is expected to be a reference point for the continuous improvement of our audit

practice.As our knowledge of and experience with auditing continues to expand and evolve,

so will this Manual. The Manual has been prepared for use in guiding our audit programmeand tasks. We recognise that some changes to this document may be necessary in order to

ensure that the Manual is kept upto date and current. Therefore, this manual, in its entirety,

will be subject to review from time to time to in order to:

Keep up with new developments in audit practice,

Effect legislative changes as they affect the objectives of the Office of the Auditor

General for Local Governments from time to time and

Keep up with the challenges of our assignments.

Audit Teams should be proud of this Revised Audit manual and as such are expected to be in

full compliance with its contents on an ongoing basis. All new staff members are required to

read for retention, the contents of this Manual.

Comments or suggestions for improving the Manual are welcome and such should be

addressed to the Auditor-General for Local Governments, Lagos State.

I wish to express my profound gratitude to the Growth and Employment in States (GEMS3)

project, funded by the Department for International Development (DFID) of United Kingdomwho engaged Andy Wynne and F.O. Lasisi to work with my staff to review and revise the

Manual in line with INTOSAI international auditing standards and current good practices in my


4/83


office. My sincere appreciation also goes to the Lagos State Government that has provided us

with opportunities for capacity building enhancement of the performance of our duties. To the

members of staffof this office, I say a special thank you to all forthe support and dedication

with which everyone has undertaken theirtasks.

M. M. Hassan

Permanent Secretary/Auditor-General for Local Governments,

Block 2,

Old Secretariat,

Ikeja, Lagos State.

www.lagoslocalaudit.org

[email protected]

December, 2012
http://www.lagoslocalaudit.org/mailto:[email protected]://www.lagoslocalaudit.org/mailto:[email protected]


5/83


How to Use The Manual

This manual has been designed and presented in loose report format for ease of updating.

Whenever a review of the manual is undertaken, it will only be necessary to reprint the pages

of the manual that are affected by the exercise.

The page numbers at the bottom of the pages are for the purpose of filing updated pages or

pages affected by such update. With time it may become necessary to put gaps in the page

numbering. These are necessary in loose leaf reporting. Where such a gap occurs, there

should be a note under the page number preceding the gap on what the next page number

should be.

Updated Pages

Updates come in loose leaf and with them should come filing instructions explaining which

pages to remove and which new pages to insert. To keep your manual up to date, updates

should be filed as soon as possible after the receipt of the new pages. This may be done

collectively within an audit team. The filing instruction should carry date of the update to

provide a check on how current a manual is.

To misfile new pages of updates is to render yourmanual inadequate. Once the new pages

have been inserted, the filing instruction itself should be filed in the section marked "Last

Update Filing Instructions"

Pages being updated should carry the date of update next to the page number at the bottomof the page in small italics numbering.


6/83


List of Abbreviations Used in this Manual

AGLG Auditor-General forLocal Governments

APS Audit Planning Sheet

CAF Current Audit File

CPE Continuing Professional Educationee

CT Council Treasurer

EFCC Economic and Financial Crimes Commission.

ExCo Executive Committee

ICAN Institute ofChartered Accountants of Nigeriar

ICPC Independent Corrupt Practices Commission

INTOSAI International Organisation of Supreme Audit Institutions

ISA International Standards on Auditing

LGA Local GovernmentAuthority, which should be read to include Assigned

Agencies (Local Governmentn Education Authority and Pensions Board)

LGs Local Governments, which should be read to include Assigned Agencies (Local

Government Education Authority and Pensions Board)

OAGLG Office of the Auditor-General for Local Governments

PAC PublicAccounts Committee

PAF Permanent Audit File

SUBEB State Universal Basic Education Board

VFM Value for Money


7/83


OFFICE OF THE AUDITOR-GENERAL FOR

LOCAL GOVERNMENTS, LAGOS STATE

AUDIT MANUAL

Contents

Chapter 1: Introduction

Part One Regulatory Audit

Chapter 2: Audit Planning

Chapter 3: Evaluating and Testing Internal Controls

Chapter 4: Performing Audits

Chapter 5: Working Papers and Audit Evidence

Chapter 6: Audit Report and Materiality

Part Two Other Audit Methodologies (not included)

Chapter 7: Audit of Financial Statement

Chapter 8: Capital projects Inspection Exercise

Chapter 9: Staff Verification Validation Exercise

Chapter 10: Preventing, Detecting and Reporting Fraud and Illegal Acts

Chapter 11: Special Audit and Investigation

Chapter 12: Co-ordinating Audit Activities

Chapter 13: Professional Proficiency

Chapter 14: Standards and Guidelines for Auditing


8/83


CHAPTER 1

INTRODUCTION

1.1 Introduction

This manual is a revision and modernization of the first ever Local Government Audit Manualwhich was developed in 2005. The revision of the 1965 Audit Manual was necessitated by theneed to reflect changes in good practice in the execution of Local Government audits

This manual is prepared for the use of the staff of the Office of the Auditor General for LocalGovernments to explain the processes and procedures necessary to carry out auditing in anorderly and efficient manner. The purpose of the Manual is to offer practical guidance to LocalGovernment auditors. The manual is designed to meet the requirements of all Auditors in theOffice of the Auditor General for Local Governments.

Every audit needs to comply in various respects with the requirements of legislations,professional standards and best practice. This Manual sets out policies and practices thatshould be applied to meet these requirements. Although approach should always be tailoredto meet the individual circumstances of each audit, the framework will normally be the sameon every audit.

The manual will need to be continually updated to reflect changes is approach andrefinements to the audit methodologies adopted or to reflect changes in the regulatoryenvironment, for example, the format of the annual financial statements. In addition,additional sections may need to be added, for example, covering the work undertaken directly

for the Public Accounts Committee (Local) Public Accounts Committee (Local) of theState House of Assembly and formal risk management.

1.2 Knowledge of the ManualAll audit staff in the Office of the Auditor General for Local Governments are expected to havea reasonable knowledge of this manual and to follow the good practice it contains during theirwork. Audit staff have the responsibility to report areas where the manual needs to beupdated or is considered to be deficient.

1.3 Overview of the ManualThe main work of the Office of the Auditor General for Local Governments is to undertake

quarterly inspection audit visits to all of the 57 local governments and local councildevelopment areas (referred to generically in this manual as local governments) in LagosState. Chapters 2 to 6 cover this work from planning to reporting. This work is mainlyregulatory or compliance audit.

Part two of the manual covers other aspects of the work of the Office of the Auditor Generalfor Local Governments that are also important. These include, for example, financial audit(opinion on the financial statements), inspections of completed capital projects, staff andpensioner verification.

1.4 Overview of Quarterly Audit Inspections

This work follows five main stages which are each covered in a chapter of the manual:

Planning


9/83


Evaluating internal controls

Audit testing

Documentation of audit work

Audit reporting.

This process is also shown in the following diagram:

Key

A - Procedures are mostly analytical procedures

B - Procedures involve usage of basic substantive procedures

C - Procedures entail execution of comprehensive testing

D - Procedures entail detailed testing of audit evidence.

Planning is important to ensure all aspects of the work are completed and the work is


10/83


undertaken efficiently. It occurs at two levels:

planning the time and number of auditors to visit each local government

planning the allocation of audit tasks to each auditor with time budgets.

Evaluation of internal controls is an important first step for each inspection visit. Auditorsshould be able to gain some assurance from the quality of internal financial controls and mayassist the local government by making detailed recommendations on how these may befurther improved. If the internal controls are considered to be strong then only a sample ofpayment vouchers and other transactions may need to be checked.

Audit testing is a core part of this audit work. Tests need to be undertaken carefully toensure that all significant irregularities are identified and to assist with determining theappropriate audit opinion on the annual financial statements.

Documentation of audit work is necessary to ensure that the work can be properly

supervised and to ensure that adequate evidence is available to explain the results of ourwork to the Chair and Council Treasurer of the local government. It is also needed to ensurethat the Auditor General can report adequately to the Public Accounts Committee (Local) oneach local government.

Audit reporting is the output and the public face of our work. Improving public accountabilityis a core part of the work of the Office of the Auditor General for Local Governments and ourreports are available to be the public and so must be written carefully to ensure that all keystakeholders understand the work which has been undertaken and the results that we havefound. The most important stakeholder is the Public Accounts Committee (Local) of the LagosState House of Assembly.


11/83


Annex A

The INTOSAI basic principles are:

(a) The SAI should consider compliance with the INTOSAI auditing standards in all mattersthat are deemed material. Certain standards may not be applicable to some of the work doneby SAIs, including those organised as Courts of Account, nor to the non-audit work conductedby the SAI. The SAI should determine the applicable standards for such work to ensure that itis of consistently high quality.

(b) The SAI should apply its own judgement to the diverse situations that arise in the course ofgovernment auditing.

(c) With increased public consciousness, the demand for public accountability of persons orentities managing public resources has become increasingly evident so that there is a needfor the accountability process to be in place and operating effectively.

(d) Development of adequate information, control, evaluation and reporting systems within thegovernment will facilitate the accountability process. Management is responsible forcorrectness and sufficiency of the form and content of the financial reports and otherinformation.

(e) Appropriate authorities should ensure the promulgation of acceptable accountingstandards for financial reporting and disclosure relevant to the needs of the government, andaudited entities should develop specific and measurable objectives and performance targets.

(f) Consistent application of acceptable accounting standards should result in the fairpresentation of the financial position and the results of operations.

(g) The existence of an adequate system of internal control minimises the risk of errors andirregularities.

(h) Legislative enactments would facilitate the co-operation of audited entities in maintainingand providing access to all relevant data necessary for a comprehensive assessment of theactivities under audit.

(i) All audit activities should be within the SAI's audit mandate.

(j) SAIs should work towards improving techniques for auditing the validity of performancemeasures.


12/83


Chapter 2

Audit Planning

INTOSAI Auditing Standards state:

The auditor should plan the audit in a manner which ensures that an audit of high quality is carried

out in an economic, efficient and effective way and in a timely manner.

The following paragraphs explain planning as an auditing standard.

3.1.2 The SAI should give priority to any audit tasks which must be undertaken by law and assess

priorities for discretionary areas within the SAI's mandate.

3.1.3 In planning an audit, the auditor should:

(a) identify important aspects of the environment in which the audited entity operates;

(b) develop an understanding of the accountability relationships;

(c) consider the form, content and users of audit opinions, conclusions or reports;

(d) specify the audit objectives and the tests necessary to meet them;

(e) identify key management systems and controls and carry out a preliminary assessment to identifyboth their strengths and weaknesses;

(f) determine the materiality of matters to be considered;

(g) review the internal audit of the audited entity and its work program;

(h) assess the extent of reliance that might be placed on other auditors, for example, internal audit;

(i) determine the most efficient and effective audit approach;

(j) provide for a review to determine whether appropriate action has been taken on previously

reported audit findings and recommendations; and

(k) provide for appropriate documentation of the audit plan and for the proposed fieldwork.


13/83


2.1 Key Requirements

The key requirements of this chapter are:

Each audit inspection visit should be carefully planned and the size of the team and

length of the visit adjusted to reflect the audit risk of the particular local government

The Permanent and Current Files should be carefully maintained to document all keyaspects of the audit inspection and act as a guide for future audit visits

AnAudit Planning Sheet(see Annex A to this Chapter) should be develop as a guidefor the audit, provide a common purpose for the team and to form the basis ofallocating jobs/activities to team members (with time budgets)

Audit activities should be allocated with the aim of enriching the knowledge of all teammembers

The local government should be informed in adequate time of the date of the audit andthe names of the audit team members

The Zonal Coordinator should review and sign off the Audit Planning Sheet, theCurrent and Permanent Files.

2.2 Purpose of Audit Planning

Audit planning and the preparation of audit plans is important because it:

(a) Establishes the way in which we will achieve our objectives.

(b) Assists us to direct and control the work.(c) Helps to ensure that we devote sufficient attention to critical aspects of work.(d) Helps us to ensure that we complete our work efficiently and on time.

The overall audit planning process is a cascade of elements, as follows:

Annual Audit Plan||

Quarterly Team Work Allocations||

Operational Team Planning

2.2 Annual planning

An annual work plan is produced each year for the Office of the Auditor General for LocalGovernments. This includes a monthly plan with the planned activities for each Directorateand, in addition, quarterly plans for each directorate.

The main audit activities include:

quarterly visits to each of the 57 local governments

annual statutory report on the 57 local governments


14/83


reviews of the audits of the 20 Local Government Education Authorities and alliedagencies and production of annual report

annual staff/salary verification exercise (August) and monthly follow-up

capital projects inspection exercise (March)

pension audit on a continuous basis.

The Office of the Auditor General Local Governments annual work plan is printed and this is

made available to the Governor, Public Accounts Committee of the State House of

Assembly, State Ministry of Local Government & Chieftaincy Affairs, the Chairs of

the local governments and other stake holders on local government matters.

2.3 Quarterly Team Work AllocationsThe Director of Evaluation and Reporting writes to each local government with the dates of

commencement of the next quarterly audit at least a month before the plannedcommencement.

The Director of Evaluation and Reporting agrees the modality of audit for the next quarter anddetermines the audit teams and the local governments that they will visit in the next quarter.

Quarterly plans are produced and posted for the audit of the 57 local governments, indicatingthe Zonal Coordinators, the Team Leaders and Auditors and the local governments that theywill audit during the quarter.

Planning different sized local government

Local governments vary considerably in size with the largest being nearly three times the sizeof the smallest. In addition, to the risk assessment audit staff should be allocated to thedifferent local governments on the basis of their size and the level of competence of the teammembers.

The larger local governments may be audited with a team of four auditors rather than thenormal team of three auditors (including the Team Leader). Where the risk is high and so thelevel of audit work more demanding the length of the audit may also be extended to threeweeks rather the usual two. This is decided by the Director of Evaluation and Reporting.

It is usual to provide each audit team with one rural (usually smaller) and one urban (usuallylarger) local government to audit. Thus the team can spend more time on the larger council

and less time on the smaller local government.

Risk Model

To determine the level of resources or staff needed to undertake each quarterly auditinspection visit, it is necessary to undertake a review of the risks associated with each localgovernment and so the time needed to complete the audit. The type of information required toundertake this evaluation includes:

The size of the IGR (from Cash Flow, Statement 1)

Total Expenditure (Statement 5 Revenue & Expenditure).

The quality of internal financial control extent to which rules and regulations arefollowed in practice, bank reconciliations done on time? Staff vacancies? Quality of theCouncil Treasurer? see Chapter 3 of this manual for further guidance


15/83


The quality of the Internal Auditor

The audit opinion of the Auditor General Local Government in the last statutory auditreport (did the financial statements show a true and fair view.

Whether the local government is urban or rural.

The four factors can then be combined to provide an overall assessment of risk:

Risk factor High score 3 Medium score 2 Low score 1

Size of IGR (in Nmillions) More than 200 15 - 200 (2) Less than 15(1)

Volume of expenditure (in

Nmillions)

More than 750 300 - 750 (2) Less than 300(1)

Quality of internal financial

control

Poor internal control

(3)

Medium internal

control (2)

Good quality internal

control (1)

Quality of the internalauditor

Poor quality internalauditor (3)

Medium qualityinternal auditor (2)

Good quality internalauditor (1)

Previous audit opinion Financial statements

do notshow true and

fair view (3)

Financial statements

show true and fair view

(1)

Urban or rural local

government *

Highly urbanised local

government (1.5)

Medium (1) Highly rural local

governments (0.5)

*This criteria only scores half the scores of the others.

The scores for each factor are then added together to provide an overall risk score. Forexample:

Size of IGR = N150millions - Score 2

Volume of total expenditure = N8000millions - Score 3

Quality of internal financial control = poor - Score 1

Quality of the internal auditor = medium - Score 2

Quality ofPrevious audit opinion = qualified - Score 3



It is an urban local government = urban - Score 1.5

TOTAL SCORE - 14.5

The staff and time spent at each local government is then guided by the following:

High risk - score of 14 to 16.5 - three week visit and/or four auditor team


16/83


Medium risk score of 6 13 - two week audit visit (three auditor team)

Low risk score of 5 or below - one week audit visit (three auditor team)

Thus the example above with a total score of 14.5 would be considered high risk and sodeserve a three week inspection with four auditors (including the team leader).

As a result of a low overall assessment of risk, a reduction in substantive testing sample sizesmay be appropriate (see Chapter 4 Performing Audit Inspections). This will allow the auditto be completed in less time.

3.3 Operational Team Planning

Operational Team Planning involves planning for audit visits to individual local governments.This is undertaken by the relevant Zonal Coordinator and the Team Leader reviewing thePermanent Audit File and holding discussions with the Team Leader responsible for the localgovernment in the previous quarter.

The week before the quarterly inspection audits are due to start, the Zonal Coordinators writeto the local governments of their zone to introduce the next audit team and propose the timeof theAudit Entry Meeting.

The object ofOperational Team Planning is to identify issues which impact upon the approachto the audit inspection and which could influence the audit strategy and audit judgments. Theinitial review should normally involve consideration of the following:

Previous quarters audit report

Outstanding issues from the previous quarter

Correspondence/knowledge of events since the previous audit

The level of action taken by the local government on the findings from the previousquarter.

Each local government is visited for an audit inspection during each quarter. The audit teamsconsist of a Team Leader and two or three auditors. The audit teams are rotated so the TeamLeaders and other auditors visit a different local government in each quarter. In addition, theaudit teams are rotated so that the Team Leaders supervise different staff each quarter.

A permanent file is maintained for each local government with the financial statements and theannual audit reports and other vital documentation. A current file is developed for each auditvisit.

A meeting is held before each quarterly visit between the Team Leader for the previousquarter and the Team Leader who will lead the next visit. The Permanent File is reviewed andany outstanding issues are highlighted.

The end product of the planning process is theAudit Planning Sheet(see Annex A to thisChapter). This outlines the strategy for the audit assignment as a whole. The preparation oftheAudit Planning Sheetis be the responsibility of the Zonal Coordinator, supported by Team

Leaders.

The timing of audit planning and the extent of the planning required will vary, depending upon


17/83


the size and circumstances of the Local Government.

Identification of Auditable Activities

The core of the operational audit planning process is deciding what to audit from the manysystems and activities of the local governments. This requires good knowledge of the LocalGovernments business and a high level of professional judgment.

Auditable activities consist of those subjects, which are capable ofbeing defined andevaluated and may include:

Systems such as revenue, purchasing, payments etc

Cashbook, Departmental Expenditure Vote Account (DEVA)

Major contracts and projects

Financial Statements.

Auditors should be encouraged to use their judgment in the field to determine whether aparticulararea needs to be audited, considering any information that might come to theirknowledge during theiraudit visit. However, this should be discussed with the Team Leaderand perhaps the Zonal Coordinator.

For a typical local government the following systems and processes should be subject to auditverification during each quarterly inspection audit visit:

CASH & BANK ACCOUNT

Cash and bank accounts

Cash receipts treasury receipts, bank tellers, bank statements

Cash book payment vouchers, cheques, bank charges

CASH COLLECTION SYSTEM

Revenue receipts

Departmental Vote Revenue Account (DVRA)

Different revenue streams statutory allocations, state grants (including project funds),internally generated revenue, LASSA, Wharf fees and Land Use Charges

Controls over revenue receipt books

DIRECT BANKING SYSTEM

Bank tellers and bank statements


18/83


Revenue consultants - contracts

Revenue consultants payments

OTHER REVENUE

Revenue Committee

Property rentals

Areas of Revenue

EXPENDITURE AUDIT

Payment vouchers to cashbook and Departmental Vote Expenditure Account(DVEA)

Schedule of expenditure

Schedule of un-presented payment vouchers

EXAMINATION OF PAYMENT VOUCHERS

Regularity of payment vouchers

ADVANCES LEDGER

Prepare schedule of advances not deducted from salaries

DEPOSIT LEDGER

Prepare schedule of deposit balances, VAT, Withholding Tax etc

INVESTMENT LEDGER

Movements, interest, records

FINANCIAL STATEMENTS

Statement of assets and liabilities

Cash flow statement

Notes to the accounts

FOLLOW-UP

Follow-up of the level of action taken by the local government on the audit findings


19/83


from the previous quarter.

A more complete list of systems, activities and auditable objects may be found in theAudit

Guide in the Annex to Chapter 4.

Production of theAudit Planning Sheet

In preparation for the quarterly planning meeting between the Zonal Coordinator, Team

Leader and other team members, the Team Leader may develop a draftAudit Planning Sheet

(see Annex A to this Chapter). This details the work that will be undertaken at a specific local

government for a particular quarter. It forms the basis for the allocation of audit work to each

of the team members at the quarterly meeting.

This document sets out the details of each audit assignment, including the objectives and

notes of any issues forthe auditor to consider. The purpose oftheAudit Planning Sheetis to

ensure that the exact terms and details of the audit have been agreed and understood by all

members of the audit team. Management at the local government will be asked to provide

comments on the document so that any thoughts orconcerns can be built into the audit at this

stage of the planning process, thus ensuring that the mutual benefit of the complete audit

procedure will be maximised. The document must be agreed and authorised prior to

commencement ofthe audit work on site by the Zonal Coordinator/Team Leader, and must be

retained in the currentfile at the end of the audit.

Auditors should also consider undertaking the following background research where deemed

necessary. It should be clearly noted that this list is not exhaustive:

Reviewing LGA minutes;

The 'Financial Memoranda'

Any relevant legislation;

Any LGA policy documents

Other documentation considered relevant and appropriate to the audit e.g. code of conduct for

councillors and officers.

Therefore, the purpose of producing anAuditPlanning Sheetis to provide:

A well constructed plan encompassing the scope of an assignment to achieve theaudit objectives

A basis for assigning work to auditors

A record of work done

A comparison of work done with work planned


20/83


The basis for a review of the future Audit Team Workload

A means formanagement of the Office of the Auditor General LocalGovernments to supervise each audit adequately and review progress.

TheAuditPlanning Sheet(see Annex A to this Chapter) may require amendment in light of'on-the-job'experience as the audit progresses. If this is found to be necessary, this should be

confirmed with the Zonal Coordinator. Where anAuditPlanning Sheethas been fine-tuned

during the course of an audit, this must be fully and properly documented, and on completion

of the audit, a final version of theAuditPlanning Sheetmust be produced, authorised (by the

Zonal Coordinator) and retained in the Current File to inform future audits.


21/83


Annex A

AUDIT PLANNING SHEET

LOCAL

GOVERNMENT

PREPARED BY

TEAM LEADER

DATE REVIEWED BY

ZONAL

COORDINATOR

DATE

AUDIT AREA AUDITOR TIME

BUDGET

ACTUAL

TIME

SPENT

COMPLETI

ON

DATE

Cash book

COMMENTS

Vote Book

COMMENTS

COMMENTS

OFFICER SIGNED BY: DATE

Zonal Coordinator

Team Leader

Auditor 1

Auditor 2

Auditor 3

AUDIT PLANNING SHEET (Continued)

AUDIT AREA AUDITOR TIMEBUDGET

ACTUALTIME

COMPLETION


22/83


SPENT DATE


23/83


Chapter 3: Evaluating and Testing Internal

controls


3.3 Study and Evaluation of Internal Control

3.3.1 The field standards include:

The auditor, in determining the extent and scope of the audit, should study and evaluate the

reliability of internal control.

The following paragraphs explain internal control as an auditing standard.

3.3.2 The study and evaluation of internal control should be carried out according to the typeof audit undertaken. In the case of a regularity (financial) audit, study and evaluation are

made mainly on controls that assist in safeguarding assets and resources, and assure the

accuracy and completeness of accounting records. In the case of regularity (compliance)

audit, study and evaluation are made mainly on controls that assist management in complying

with laws and regulations. In the case of performance audit, they are made on controls that

assist in conducting the business of the audited entity in an economic, efficient and effective

manner, ensuring adherence to management policies, and producing timely and reliable

financial and management information.

3.3.3 The extent of the study and evaluation of internal control depends on the objectives of

the audit and on the degree of reliance intended.

3.3.4 Where accounting or other information systems are computerized, the auditor should

determine whether internal controls are functioning properly to ensure the integrity,

reliability and completeness of the data.



Key internal controls should be identified and tested

Key internal controls should be evaluated to decide whether we can rely on them andso avoid the need for 100% substantive testing

The results of testing key controls should be discussed with the Zonal Coordinator andthe strategy for sampling of transactions agreed and documented in the Current File.

3.2 Responsibility for Internal Control


24/83


It is the responsibility of the management of local governments to keep complete and accurate

operational and accounting records, which assist in:

Controlling departmental activities

Safeguarding assets

Preventing ordetecting errors, frauds or other irregularities

Preparing financial statements

Complying with legislation

Achieving the local governments objectives.

Management therefore needs to maintain internal controls designed to ensure the

completeness and accuracy of records and the validity and reliability of the entries they

contain.

The internal control procedures are documented in the Financial Memoranda for Local

Government(current edition 1998) and the Guidelines on Administrative Procedures for Local

Governments (2011).

Limitations on the Effectiveness of Internal Control

Any system ofinternal control is always subject to the possibility of errors. No internal financial

control structure, however elaborate, can guarantee efficient administration, completeness

and accuracy of records or be full-proof against fraud; especially when those holding positionsof authority or trust are involved.

For instance, in the following situations, internal control measures will prove to be ineffective:

segregation controls are avoided by collusion between officials

authorisation controls are abused by those who sign payment vouchers

management (for example, the Chair or Council Treasurer) over-ride key internalcontrols

selection and training may improve the competence and integrity of personnel operatingthe system, but these qualities may change due to pressures exerted from within oroutside their working environment

errors occur due to fatigue of staff, misinterpretation of regulations, carelessness ormisunderstandings.

The Auditor's Use of Internal Control

The auditor's objective in evaluating and testing controls is to determine the degree ofreliance


25/83


that may be placed on the accounting and other controls. If the auditor is reasonably assured

that the internal controls are effective, the extent of compliance and substantive tests may be

reduced and 100% vouching may not be necessary. However, due to thelimitations in any

system of internal control, it will always be necessary to perform some substantive testing.

3.3 Types of Internal Control

The following are some examples of types of internal control:

Organisational control- The organisation chart structure for LGAs is uniform. Iteffectively defines and allocates responsibilities, reporting lines, delegation ofresponsibilityand authority. To back this up, Local Governments also have in place a schedule ofAuthorised Signatories.

Segregation of duties - This is separation of duties orresponsibilities that would, ifcombined by one individual, enable that individual to record and process a complete

transaction. Segregation reduces the risk of manipulation or error and increases the degreeofchecking as the work of an officer checks oris complementary to that of another. As a rule,separate officers or sections should be responsible for the following tasks:

authorisation of local purchase orders or payment vouchers

receipt or custody of the goods or services

maintenance of the purchase ledger, cash book and other accounting records.

Physical controlSuch controls are primarily concerned with the custody ofassets andinvolve procedures and security measures designed to ensure that access to assets is limited

to authorised personnel.

SupervisionAny system of internal control must include supervision of the routinetransactions and operating procedures by responsible officers.

Authorisation and approvalAll transactions require authorisation orapproval by anappropriate, responsible officer.Authorisation limits have been established via the FinancialMemoranda for local Government (1998).

Arithmetic and accountingThese controls operate within the recording function tocheck that transactions to be recorded and processed have been authorised and are completeand accurate. These controls include checking arithmetical accuracy (recomputing/casting),

maintaining and checking reconciliation statements, document sequence and count checks.

PersonnelLagos State Government has put policies in place to ensure that a formalprocess has been established to assist and encourage personnel with Accounting andAuditfunctions to attain the necessary capabilities to fulfill the responsibilities of theirposts. It is afact that the properfunctioning of an operational and/or financial system depends on thecompetence and integrity of those operating it, and therefore qualifications, selection, trainingand the personal characteristics of officers involved are important features to be considered inestablishing any control mechanism.

Identification and Evaluation of Key Controls

A review of the accounting and internal control systems should be performed to identify the

keycontrols, which exist to prevent or detect material misstatements. .


26/83


Key controls are those controls, which are integral to the effective system as a means of

preventing ordetailing material misstatements. By identifying and testing the key controls, it is

not essential to test all the internal controls in a system. Controls will often relate to the

authorisation ofa transaction, or the evidence of review of a process.

A list of some of the key internal controls in local governments is included as Annex A to thisChapter.

As a result of identification and evaluation of key controls, the level of risk of each of the

systems/activities subject to audit testing should be assessed. Considerations, which

influence the level of risk will include, for example:

The control environment are key controls applied? Is internal audit well performed?

The nature and amount of the transactions and balances involved what is thequarterly level of revenue and expenditure?

The results ofthe previous audits an adverse audit opinion (not true and fair) willresult in high risk and 100% substantive testing.

The nature of any changes to the accounting and internal control systems since theywere previously tested.

Vacancies of key staff, for example, second signatory.

3.4 Tests of Control (compliance testing)

Tests ofcontrol are performed to obtain audit evidence that the key controls on which relianceis sought operate effectively. This means that the controls exist and have effectively operated

throughout the reporting period.

By testing the identified key controls it is not necessary to test all the controls present in the

system as these provide the controls, which are integral to the effective operation ofthe

system.

Tests of control may include:

Corroborative enquiries (third party confirmations) about, and observation of, internal

control functions

Inspection of documents supporting controls or events to gain audit evidence thatinternal controls have operated properly, for example verifying that a transaction hasbeen authorised ora reconciliation has been approved

Examination of evidence that management has carried out its own reviews, forexample minutes of Executive Committee meetings at which audit reports arereviewed and correctiveactions decided on

Re-performance of control procedures, for example reconciliation of bank accounts, toensure they were correctly performed by the responsible officer

When collecting evidence about the effective operation of internal controls, relevant

considerations are:


27/83


How they were applied?

Were consistency applied during the period?

Who applied them?

If a deviation is identified, specific enquiries must be made to identify whether the deviation

was isolated (these enquiries may include additional testing) and whether there were any

effective alternative sources of control during the period. Provided that the additional testing

confirms that the deviation was isolated or that a mitigating control proved effective, reliance

can still be placed on the effective operation of the control before and after the period of

deviation.

If errors or weaknesses are identified in the control system the risk of the specific audit area

should usually be revised as follows:

Original level of risk 1-3 errors 4 or more errors

Low Increase to medium risk Increase to high risk

Medium Increase to high risk Increase to high risk

The effect of these revisions may be to increase level of substantive testing by increasing the

sample sizes.

The output of testing the key internal controls will be an assessment of the audit risk for each

of the major systems which are subject to audit. In each case the system should be assessed

as being of high medium or low risk. This risk rating will act as a guide to the level oftransaction/substantive testing that is to be undertaken and may be documented in the form of

a table as follows:

System/activity Risk

assessment

Comments

Cash book High

Revenue and Expenditure Abstracts Low

Vote books Medium

Federal Government Grants Low

Continued

This risk rating should be documented in the Current File and be signed off by the Zonal

Coordinator.


28/83


3.5 Sample Sizes for Transaction Testing (substantive testing)

Transaction testing may be reduced where the key internal controls have been found to be

operating reliably over the period covered by the audit. In this case sample sizes for

substantive testing may be adjusted as follows:

Level of risk Sample size

High 100%

Medium 100% above say N100,000

and 50% below this level

Low 100% above say N100,000

and 25% below this level

Ajustification for the reduced level of substantive testing must be included within the planningmemorandum. In addition, care should be taken that contracts etc are not split into several

payments to ensure that transaction is subject to a reduce likelihood of being tested.


29/83


Annex A

LOCAL GOVERNMENT - KEY INTERNAL CONTROLS

Budgeting and accounting

1.1 A suitable, comprehensive budget (including revenue, capital and aid receipts) is

agreed by the Council and the Chair, before the start of the year, with figures showing the

previous year's expected expenditure.

1.2 Vote Registers (DVRA and DVEA) are properly maintained to ensure that all receipts

and payments are properly accounted for.

1.3 Monthly and quarterly financial statements are produced within one month of the end

of each month and submitted to the Office of the Auditor General for Local Governments.

1.4 A suitable, comprehensive Chart of Accounts and budget classification (developed by

the State Ministry of Economic Planning & Budget) is adopted by each local government.

1.5 Annual financial accounts are prepared in accordance with instructions issued by the

Office of the Accountant General of the Federation (FAAC 2005), they are audited within six

months of the year-end and show a true and fair view.

1.6 Sanctions for expenditure outside the official authorised budget or appropriations are

adequately enforced by the Treasurer, the Chair or the Council.

2 Revenue

2.1 An annual listing of authorised tax rates and other fees and charges should be publicly

available.

2.2 All cash revenue should be receipted and promptly banked intact.

2.3 Income records and receipts should be independently reconciled to the bank

statements on a regular basis and inconsistencies adequately investigated.

2.4 A monthly summary of all income received (with comparisons to previous year and thebudget) and 'arrears of revenue' return should be provided to the Council (or Revenue

Committee) and the Auditor-General for Local Government.

3 Expenditure controls

3.1 All payments are properly authorised and certified by the internal auditor

3.2 An official invoice or receipt should be retained for all expenditure.

3.3 There should be an approved list of suppliers and for the more frequent purchases anapproved price list.


30/83


3.4 Competitive tendering should be used for all significant orders. Depending on the size

of the order the following should be used:

obtaining three written quotations

formal tendering where suppliers have to submit sealed detailed bids for the work when

the goods or services are expected to cost N500,000 (half a million) or above approval is obtained from the State Governor for projects of over N35 million.

3.5 Proper segregation of duties should be maintained, the following three tasks should be

undertaken by separate staff and/or sections:

authorisation of local purchase orders or invoices for payment

receipt or custody of the goods or services

maintenance of the purchase ledger, cash book and other accounting records.

3.6 Formal bank reconciliations should be undertaken by staff who are not responsible for

maintaining the cash book at least once a month. The bank balances recorded on the bank

statements should be clearly balanced to the amounts recorded in the cash books. Any

differences should be investigated and cleared by senior officers.

4 Payroll

4.1 All posts and appointments should be authorised by the Local Government Service

Commission for officers on GL07 and above or the Human Resource Officer for lower grade

officers.

4.2 Changes between each periods payroll should be adequately explained and checked

by a nominated officer. This reconciliation and the payroll, should be formally authorised.

4.3 There should be careful liaison between the relevant line department, the Council

Treasurer and the relevant Local Government Service Commission. Records held by each of

these sections should be carefully reconciled at least annually to ensure that an agreed list of

employees is maintained.

5 Staff Advances

5.1 A listing of outstanding advances should be reviewed regularly (quarterly) by senior

staff in each department and the Council Treasurer. Any unusual, late or large items should

be investigated.

5.2 Last pay certificates should be prepared promptly and completely for all staff leaving.

Any outstanding advances should be deducted from the final pay.


31/83


6 Stock and fixed asset records

6.1 Independent stock takes should be undertaken at least once a year and, additionally,

whenever there is a change of stock keeper.

6.2 An appropriate Assets Register should be maintained of all fixed assets (land,

buildings, vehicles, IT equipment, furniture etc). There should be checks at least once a year

that all the assets are clearly accounted for and are held securely.

6.3 The disposal of all public assets is subject to the approval of the Local Government

Executive Committee and the Auditor General for Local Governments. Public auctions should

be held for all significant asset disposals.


32/83


Chapter 4

Performing Audit Inspections


3.2 Supervision and Review

3.2.1 The field standards include:

The work of the audit staff at each level and audit phase should be properly supervised

during the audit, and documented work should be reviewed by a senior member of the audit

staff

The following paragraphs explain supervision and review as an auditing standard.

3.2.2 Supervision is essential to ensure the fulfilment of audit objectives and the maintenance of the

quality of the audit work. Proper supervision and control is therefore necessary in all cases, regardless

of the competence of individual auditors.

3.2.3 Supervision should be directed both to the substance and to the method of auditing. It involves

ensuring that:

(a) the members of the audit team have a clear and consistent understanding of the audit plan;

(b) the audit is carried out in accordance with the auditing standards and practices of the SAI;

(c) the audit plan and action steps specified in that plan are followed unless a variation is authorised;

(d) working papers contain evidence adequately supporting all conclusions, recommendations and

opinions;

(e) the auditor achieves the stated audit objectives; and

(f) the audit report includes the audit conclusions, recommendations and opinions, as appropriate.

3.2.4 All audit work should be reviewed by a senior member of the audit staff before the audit

opinions or reports are finalised. It should be carried out as each part of the audit progresses. Reviewbrings more than one level of experience and judgment to the audit task and should ensure that:

(a) all evaluations and conclusions are soundly based and are supported by competent, relevant and

reasonable audit evidence as the foundation for the final audit opinion or report;

(b) all errors, deficiencies and unusual matters have been properly identified, documented and either

satisfactorily resolved or brought to the attention of a more senior SAI officer(s); and

(c) changes and improvements necessary to the conduct of future audits are identified, recorded and

taken into account in later audit plans and in staff development activities.


33/83




All audit work should be adequately planned and anAudit Planning Sheetcompleted

Letters of commencement and introduction should be sent on time

A suitable Entry Meeting should be held and minuted

Key internal financial controls should be documented, evaluated and tested

A suitable level of substantive testing should be undertaken in line with the audit guide

A suitable Exit Meeting should be held and minuted with the Team Leader and ZonalCoordinator in attendance

The Inspection Report should be reviewed by the Zonal Coordinator and signed off bythe Director of Evaluation & Reporting

Follow-up and post-audit review should be undertaken.

4.2 Preparation for an Audit

Planning is critical to the success of each audit assignment. The aim is to ensure that the

planned work will efficiently satisfy the audit objectives.Adequate time must be set-aside for

this stage, which identifies priorities, objectives, and allocates staff time to each activity.

The Team Leader will undertake the preparation for an audit including the development of

Audit Planning Sheet, with input from other team members and authorisation by the Zonal

Coordinator.

Research

It is essential for auditors at this stage to gain a good understanding of the local government

and its operations. Sources ofinformation will include, but not necessarily be limited to:

Audit report for the previous quarters inspection visit

The Permanent File, Current File and working papers (including the extraction offollow-up points from the previous quarter audit inspection)

Reference Library

Relevant legislation (see Appendix A)

Reports to Public Accounts Committee (Local) of the State House of Assembly

Financial and any other relevant regulations in addition to the FinancialMemorandaand the Guidelines on Administrative Procedures for Local Governments

Previous years financial statements and report of the Auditor General for LocalGovernments


34/83


Financial statements for the previous months/quarters for the current financial year

Organisation charts and contacts for key staff at the local government.

At the end of this stage, the auditor will be in a position to form a view about:

Systems boundaries orlimitations

Identification and assessment of risks

Identification of key personnel staffing structures and reporting lines.

4.3 Phases of Audit

Quarterly inspection audits will generally consist of eleven phases, with supervisory review

occurring at appropriate intervals:

Letter of Commencement sent by the Head of Evaluation & Reporting informing thelocal government of the audit (about a month before the start of the audit)

Letter of Introduction from the Zonal Co-ordinator or the Team Leader (about a weekbefore the start of the audit

Development ofAudit Planning Sheet

Entry meeting

Evaluation of internal controls

Substantive testing

Exist meeting

Report of the Inspection Audit

Response from the local government and appraisal of the response

Follow-up

Post-audit review.

4.4 Commencement Letter

Approximately a month before an audit is scheduled to begin, the commencement letter will

be sent by the Director of Evaluation and Reporting to the Chair of the LGA being audited and

copied to the members of management who may be affected by the audit. The letter will notify

them of the assignment and it will indicate that an entrance briefing will be conducted prior to

the audit. A point of contact and phone number of the audit office will be Included.

4.5 Letter of Introduction

A telephone call by the Zonal Coordinator (or introductory letter) should follow the planning.


35/83


This will schedule an entrance meeting to begin the exchange ofinformation that will be

needed during the audit.

4.6 Audit Entry Meeting

At the start of the audit visit an entry meeting is held by the Zonal Coordinator and Team

Leader with key officers and management staff of the local government including the

following:

Executive Chair

Council Manager

Council Treasurer

Heads of Department.

This agenda for this meeting should include:

introduction by the team leader

outstanding issues from the previous audit

information from the Office of the Auditor general for LocalGovernments

objectives of the exercise

significant developments at the local government

providing documents and records that will be needed for the audit (previously listed inthe Directors letter).

The entry meeting ensures that management of LGA endorses the audit and allows the

auditor to obtain critical information for the audit brief, as well as demonstrating common

courtesy.

The meeting will establish, among other things:

Audit and local management concerns

Client expectations in relation to the outcome

Any obvious local management and/or audit or operational issues arising at thisstage, which might impact on the work to be undertaken

Any known or perceived current and future pressures facing the audit.

It will confirm the auditor's understanding of systems boundaries and objectives and will

establish:

The best timing forthe audit for both the LGA and the Audit Team

The key contact(s) within the authority

The audit closure arrangements and interim/final reporting lines

During the entry meeting, the audit Zonal Coordinator/Team Leader should explain the audit

process, identify departmental heads' concerns and suggestions for objectives, and generally


36/83


open the channels of communication that are necessary fora successful engagement. The

other members of the audit team should also attend this meeting.

Formal minutes should be documented for the Entry Meeting and copies sent to all the

officials who attend.

4.7 Evaluation of Internal Controls

Auditors should identify and evaluate the key internal controls for each of the financial

systems which they review (see the checklist in Annex A to Chapter 3). The key internal

financial controls should then be tested to ensure that they are operating reliably over the

period subject to audit. Substantive testing may be reduced, with the use of audit sampling,

where the internal controls are operating reliably (see Chapter 3 for more details).

The reliance levels are interpreted below:

High control riskarises if controls are weak orif no reliance is to be placed upon the internal

system and no tests of control are to be performed. 100% substantive testing should be

introduced.

Medium controlriskmay be applied to an audit area where some internal control features

exist on which reliance can be placed although strong controls cannot be applied to all

aspects of the audit area. Reduced testing my be appropriate if agreed by the Team Leader

and Zonal Coordinator.

Low control riskis appropriate ifa strong and reliable internal control system appears to exist

and their reliability is confirmed by testing of the controls (for example, that proper bankreconciliations are undertaken each month and reviewed by the Council Treasurer). Audit

sampling of transactions (payment vouchers etc) should be agreed with the Team Leader and

Zonal Coordinator.

Control Recommendations

If the internal financial controls are not operating properly and reliably, specific

recommendations should be developed to introduce the required controls. These

recommendations should be reviewed by the Team Leader and Zonal Coordinator, reported at

the exit meeting and included in report of the inspection visit.

4.8 Substantive Testing

Substantive tests are performed to obtain sufficient and appropriate audit evidence that the

transactions and balances are accurate, authorised and regular. They are also necessary to

identify any possible errors, mistakes or irregularities.

Substantive tests include analytical review, observations and enquiry (e.g. the confirmation

that a staff list is accurate by tracing employees), re-computationsand inspections (e.g.

physical inspection ofitems in store).

Substantive tests of details are often the most appropriate way to test compliance with

relevant laws and regulations.


37/83


Level of Substantive Testing

The number ofsubstantive tests may be reduced where tests of control provide satisfactory

evidence as to the effectiveness of the internal financial control systems. However, a minimum

level of substantive tests should be performed for each material class of transactions and

balances.

Audit sampling is described in Chapter 3.

Audit Query

Audit queries may be raised by staff of the Office of the Auditor General for Local

Governments, but queries may also be raised by the internal auditor of a local government,

the Council Treasurer or the Council Manager. If they are over-ruled by the Chair of the local

government they should be referred to the Audit Alarm Committee (if it exists) and the Office

of the Auditor General for Local Governments.

Schedules 1 and 2 of the Guidelines on Administrative Procedure for Local Governments

(2011, pages 44-46) details the irregularities or offences which may result in an audit query

being issued, the time limit for a reply to the query and the sanctions which are to be applied.

If an audit query is needed to be raised during an audit, the Team Leader should discuss the

issue with the Zonal Coordinator. The Zonal Coordinator should review the relevant sections

of the file and initial and date them. The audit query is written and signed by the Team Leader

and sent to the Executive Chair with a copy to Council Treasurer or other head of department

who is responsible for the particular area.

The audit queries are reported during the Exit Meeting (see below) and copies are also sent

with the Audit Inspection Report and signed off by the Head of Evaluation and Reporting.

4.9 Exit Meeting

Auditors should keep management informed of how the audit is progressing and discuss

possible findings as these are identified throughout the audit. This practice helps ensure that

the results of an audit are accurate. It promotes a team approach by actively involving local

government management in developing solutions to issues identified by the auditors. Early

discussion of possible findings also allows local government management to begin to

introduce any corrective action that is needed.

At the end of the audit fieldwork, an Exist Meeting should be held with the senior management

of the local government. At this meeting the Team Leader or Zonal Coordinator will review the

work of the audit team and provide details of all audit queries and other audit findings. The

local government management may provide responses at this stage or after they have

received the formal written Audit Inspection Report and a written copy of any audit queries.

The following officials will attend the Exist Meeting:

Executive Chair

Council Manager

Council Treasurer


38/83


Heads of Department

Zonal Coordinator

Team Leader.

The other members of the audit team should also attend this meeting.

Formal minutes should be documented for the Exit Meeting and copies sent to all the officials

who attend.

4.10 Audit Inspection Report

After the fieldwork' for the quarterly inspection audit is complete, a written Audit Inspection

Report will be prepared and issued using the Office of the Auditor General for Local

Governments standard format. This report will include an overall opinion and provide details

about any significant issues, or findings, identified during the audit. Findings should be

presented by identifying the issue, describing the risks and the corrective action to be taken by

the local government.

The Audit Inspection Report should include detailed recommendations to improve internal

financial control, details of any irregularities identified and any audit queries raised should be

sent with the report. Any audit opinions or conclusions should be justified with clear evidence

from the audit testing.

The AGLG or the Director of Evaluation and Reporting signs routine reports for audits. These

will be issued to the Executive Chair, Council Treasurer and Council Manager (with the fourth

copy for the audit file). These officials are in a position to take corrective action or ensure thatany necessary changes are made by drawing the attention of other heads of department are

necessary.

A formal written response to the Audit Inspection Report should be received within two weeks

of the Exit Meeting.

Response from the local government and appraisal of the response

Procedures that should occur, as the audit is wrapped-up include:

Doing an overall review of the working papers to see that all procedures are complete,working papers are signed-off

Comparing the planned and actual completion dates and providing explanations forany material variances

Reviewing the result of the audit planning and lessons for future inspection visits

Submitting the working papers for filing.

Some of the above tasks may be combined with a post-audit review when the Director of

Evaluation and Reporting, the Zonal Coordinators and the Team Leaders will review the

results of the quarterly inspection audits to ensure that they were completed as required and

the necessary steps are taken for future audits.


39/83


4.11 Follow-Up

The Director of Evaluation and Reporting will follow-up to ascertain that appropriate action is

taken on reported audit issues and findings. Follow-up is a process by which auditors

determine the adequacy, effectivenessand timeliness of actions taken by local government

management on reported audit findings.

The Director of Evaluation will determine the nature, timing and extent of follow-up and

Reporting, to be completed usually within one year ofissuing the final report or shortly after

the last completion date formanagement's action plans has occurred.

Auditors will determine what corrective action was taken and ifit is achieving the desired

results.

4.12 Audit Control and Review

In orderto ensure consistency and compliance with professional standards and audit

procedures, it is essential that all audit work is effectively overseen at all stages of the

process. The audit files and reports should be reviewed and signed offby the Team Leader

Zonal Coordinatorat each stage and particularly before the Exit Meeting and again before the

audit report is issued.

This process is designed to ensure that:

All work undertaken complies with the requirements of this manual and professionalgood practice

Work programmes are completed unless deviations are bothjustified by thefindings ofthework undertaken and authorised by the Zonal Coordinator

Audit files are complete and properly structured

Appropriate audit techniques have been used

All working papers adequately support the findings, conclusions andrecommendations of the report to which they relate

The related audit report is complete, accurate, objective, clear, concise, constructive

and timely

The objectives of theaudit assignment are met within the allocated time budgets orappropriate time variations were authorised.

The Zonal Coordinator's overseeing of the audit must be evident from the working papers. The

audit management review process must be evidenced by the reviewer initialling and dating the

appropriate working papers. Issues raised during the review process should be adequately

recorded and cleared before final sign-off.


40/83


4.12 Post Audit Review

In April to June each year a post audit review is undertaken by the Director of Evaluation and

Reporting. This reviews the inspection visits of the four quarters of the previous years,

considers the quality of the work which was undertaken and documents any lessons to be

learnt for future years.


41/83


Annex A

AUDIT PROGRAMMES & CHECKLISTSThese audit programmes and checklists provide comprehensive guide

for carrying out routine examination of accounting books and records,procurement, verification of projects and financial statements inroutine field audit work.

SECTION I: MAIN BOOKS OF ACCOUNT

A - Cashbook

1. Main Activities Involved

The cashbook is the main analytical book where each money received or each

amount paid is recorded.

2. Control Objective

To ensure that the receipts and payments made by the local government are

correctly recorded as provided for by financial memoranda chapter 19.

3. Risks

The risk for inaccurate cashbook postings is that the actual receipts or

payments may be under or over stated thereby rendering the account balances

at the end of a reporting period unreliable.

4. Records Required at Audit

(a) cashbook

(b) payment vouchers

(c) receipt vouchers(d) bank reconciliation statements

(e) bank certificates

5. Estimated Time BudgetsTime Allocated Actual Time Spent Variance Explanation of the variance

6. Audit ProgrammeRef Audit Programme Tasks

1. Post all payment vouchers on the credit side of the cashbook.

Post all receipt vouchers on the debit side of the cashbook.

2. Record any unpresented payment or receipt voucher and consult the cashier for its whereabouts

3. Where deductions are made on payment or salary voucher and the payment is made by cash, the gross amount

must be entered as the payment in the cash column on the credit side and a treasury receipt must be made out

for the deduction which is then entered as a receipt in the cash column on the credit side of the cashbook.

4. Ensure that when a cheque is drawn to obtain cash from the bank, the amount of the cheque will be entered in

the bank column on the payment side of the cashbook and if the cash is received in the Treasury on the same

day, the identical amount shall be entered in the cash column on the receipt side if the cashbook. These two

entries should be marked as contra

5. At the beginning of each month, the cash in hand or at bank at the end of the previous month shall be brought

forward to the receipt side of the cashbook.


42/83


6. At the end of each month, the difference between the totals of the receipts columns and the totals of the payment

columns, is the amount of the cash in hand which figure shall be entered on the credit side of the cashbook, thus

bringing the two sides into agreement. Should, however, the bank payments total exceed the receipts total, the

balance is entered on the debit side of the cashbook and is the amount, by which the bank account is overdrawn.

7. At the end of each month, a bank reconciliation statement must be produced. The transaction according to the

bank statement must be checked against the entries in the Local Governments cashbook and the two recordsreconciled. The format for the preparation of bank reconciliation is attached at the end of this Guide.

8. Scrutinize bank paying-in-slip, ensure that they have been properly receipted by the bank and verify any

alterations made thereon.

9. Ensure that Treasury Receipts have been made out for and correspond with the details shown on paying-in-slips.

B Revenue & Expenditure Abstracts


The Daily and monthly abstracts of revenue and expenditure provide an

analysis of the financial transaction recorded in the cashbook and the

journal under the various heads and sub-heads of revenue and expenditure

and other accounts.


To ensure that the financial transactions of the Local Government are done

accurately, maintained and up-dated.

3. Risks

Prone to inaccurate data and financial statements.


(a) Abstracts of Revenue

(b) Abstracts of Expenditure(c) Payment vouchers


6. Audit ProgrammeRef Audit Programme Tasks

1. Post all receipts and payments vouchers into the daily abstracts of revenue and expenditure under thevarious sub-heads and accounts quoting the relevant voucher numbers.

For advances and deposits, ensure that the payment vouchers are posted to the relevant individual accounts

in the advances and deposits ledgers as detailed in FM 23.2 in addition to being entered in the abstracts.

2. At the end of every month, after all postings have been completed in the daily abstracts, post the monthly

totals for each sub-head in the monthly revenue abstracts or monthly expenditure abstracts.

3. The monthly abstracts totals of each sub-head should be posted against the Departmental Vote Revenue &

Expenditure Accounts.

4. Discuss any observation you might have with the appropriate Officials

C Vote Book


43/83



This audit programme covers the audit of Departmental Vote

Revenue/Expenditure Account books.


To ensure that all entries in the Vote Book reflect accurately the financialtransactions of the Department.

3. Risks

The key risk to the Department of poorly kept vote books is that all accounting

data will be tainted and unfit for use for the preparation of financial statements.

The underlying risks are:

(a) incorrect information is recorded in the vote book, including the vote, details

of approved estimates, re-allocation, supplementary provisions, imprests, etc.

(b) entries in the vote book are not complete or inaccurate, and as a result

commitments and payments may exceed the balance of available funds and

overspending may occur.

(c) the vote book is not promptly and properly reconciled each month with the

Finance Departments records.


The following records should be requested at the start of the audit:

(a) Vote Book;

(b) Approved Budget Estimates

(c) AISE/ Supplementary estimates;

(d) Payment Vouchers.


6. Audit Programme - Vote Book

For each department conduct the following checks:Ref Audit Programme Tasks

1. Use the Budget estimates book and appropriate supplementary allocation provisions to confirm that the Vote

Book pages correctly records the:

vote account details,

approved estimates,

supplementary provisions,

imprests and

departmental warrants if any

2. Confirm that a separate page has been opened for each expenditure item under the control of the department

under review.

3. Confirm that the entries are correct for both commitments and payments by checking the Vote Book entries

against payment vouchers

4. Confirm whether any of the votes are overspent.

5. Confirm that every entry in the Vote Book is properly initialled.


44/83


6. Confirm that the year to date balances have been calculated accurately by reproving the calculations.

7. Confirm that all Departmental Heads and Subheads have been correctly entered.

8. Confirm that the Vote Book has been properly and promptly reconciled each month with Daily & Monthly

Abstract Ledgers maintained at the Treasury. NB Care should be taken to ensure that the Vote Book is not

being written by merely copying the Finance Department statements.

SECTION II: REVENUES, RECEIPTING & BANKING

A - Federal Government Grants


The audit covers transfer by the Federal Government of funds to the Local

Government as Statutory Allocation.


To ensure that the Local Government accounts for all transfer and that itapplies and accounts for them in the correct manner.

3. Risks

The key risks to the Local Government of poor control over Federal

Government transfer are:

(a) the Inadequate recording and accounting of grants

(b) the late receipt of grants affecting the implementation of planned

programmes

(c) the incorrect use and application of grants to programmes.

4. Records Required at AuditThe following records should be requested at the start of the audit:

(a) Approved Estimates;

(b) Bank Statements;

(c) Revenue/transfer notifications from the Ministry ie Statutory Allocation

Tables.

(d) Daily & Monthly Abstracts of revenue;

(f) Cash Book


6. Audit Programme

Conduct the following checks:Ref Audit Programme Tasks

Receipting and Accounting

1. From the Estimates prepare a schedule of expected central government releases.

2. From the Statutory Allocation Table obtain details of amounts released and the dates of those transfers and

compare with 1 above

3. From the appropriate cash book confirm the correct recording of the receipt of funds.

4. From the bank statement confirm receipt of money.


45/83


5. From the accounting records confirm the recording of the correct amount

B - Local Revenue Collection

Locally Generated Revenues of a Local Government are derived from taxes, rates,

Licence & fees, commercial undertakings, rent on local government properties and

other miscellaneous revenues.


This audit covers the general collection of the above revenues, and should be

applied to all specific revenue collection and receipting locations.


To ensure that all revenue due to the Local Government is assessed and

collected; that all revenue is promptly and accurately recorded; and that all

revenue is promptly banked or handed over.3. Risks

The key risk to the Local Government of poor revenue collection is that under-

collection and/ or underbanking of revenue will mean insufficient funds to

provide the planned level of service delivery, and that inadequate safeguards

exist to prevent fraud, embezzlement and losses.

The underlying risks are:

(a) that there is incorrect accounting and recording of revenues collected,

resulting in the failure to record, or the under recording of revenue due to the

Local Government.(b) that there is the incorrect or incomplete application of cash receipting and

cashier procedures and controls as required by the Local Governments

Financial Memoranda.

(c) that cash collected, and therefore revenues of the Local Government are at

risk due to poor physical controls over cash and the poor application of controls

as required by the Financial Memoranda.

(d) that revenue received through direct payments to the bank account are not

adequately accounted for and so payees are not properly identified.


The following records should be requested at the start of the audit:

(a) Revenue Registers

(b) Revenue Collectors Cash Book;

(c) Main Cash Book;

(d) Daily Cash and Cheque Summaries

(e) Register of Paying-in books;

(f) Register of Receipt Books;

(g) Paying-in Books/ Slips

(h) Bank Statements and advices

(i) Cancelled Receipts;(j) Job Description of Cashier; and


46/83


(k) Organogram.

(l) Copies of demand notes

(m) Check stubs

(n) Executive Committee Minute Book

(o) Funds Management Committee Minute Book(p) Asset Register

(q) Contract Register

(r) DVEA and DVRA


6.Audit Programme - Revenue Collection, Receipting and Banking

Conduct the following checks to ensure that the system is being operated in

accordance with the Financial MemorandaRef Audit Programme Tasks

Preparation and Banking of Receipts

1. Ensure that the authentic signature of the Local Government issuing officer is evident on the cover of the

receipt book

2. Confirm that receipts are made out in indelible pencil or blue/ black ballpoint pen

3. For each receipt book, do a 100% validation/matching of receipts issued, to the amounts banked per bank

stamped deposit slip, and to the bank statement, ensuring all amounts receipted have been banked

4. Ensure that the funds have been banked promptly and intact into the correct Bank Account namely the

Revenue Collection Account

5. Ensure that all amounts per the bank stamped deposit slip are correctly recorded in the Revenue Collectors

Cash Book,.

6. Check that the revenue classification in the cas

Date post:	04-Apr-2018
Category:	Documents
Upload:	andy-wynne
View:	216 times
Download:	0 times

Lagos Audit Manual - Part One

Documents