PROVINCIAL INTERNAL AUDIT SERVICE OFFICE

LEGAL BASES FOR INTERNAL AUDIT

The establishment of the internal audit function is based on Philippine laws and statutes. The creation of the Internal Audit Service (IAS) was first mandated under Republic Act No. 3456 or the Internal Auditing Act of 1962, as amended by Republic Act No. 4177. With the reorganization of the Executive Branch of government under Presidential Decree No. 1, the IAS was abolished but its functions were merged with the Management Division of the Financial and Management Service (FMS) of Departments. The Administrative Code of 1987 re-established the IAS in the Department of Public Works and Highways. Subsequent administrative orders mandated government entities to strengthen their internal control systems and organize systems and procedures in coordination with the Department of Budget and Management (DBM). More recent administrative order and DBM issuances provided for the creation, functions, duties and activities of the IAS/IAU. PGIAM, LGIAM, ICSPPS, IASPPS

The chronological summary of issuances on the organization, staffing, functions and activities of internal audit is provided as follows.

Republic Act No. 3456 (Internal Auditing Act of 1962), as amended by RA No. 4177, created and organized an IAS/IAU in all government agencies to help management achieve an efficient and effective fiscal administration and to assist in the performance of agency affairs and functions. Presidential Decree No. 1 (Reorganizing the Executive Branch of the National Government), which was adopted on 1 September 1972 to effect the desired changes and reforms in the social, economic and political structure of the country, merged the IAS/IAU with the Management Division under the Financial and Management Service in Departments pursuant to Item 3, Article IV, Chapter I, Part V of the PD. Department of Justice Opinion No. 153 dated 27 September 1974, noted that the IAS/IAU was abolished by the Integrated Reorganization Plan under PD No. 1 and found no legal basis to allow the payment of salary differentials to seven Auditing Examiners II serving in said defunct IAS/IAU.

The chronological summary of issuances.

Executive Order No. 292 (Instituting the Administrative Code of 1987) dated 25 July 1987, created an IAS/IAU in the Department of Public Works and Highways under Sec. 4, Ch. 1, Title V, Book IV, and included the supervision of internal audit activities as one of the functions of the Department of Finance’s Central Financial Management Office under Ch. 3, Title II, Book IV. Section 1 of Administrative Order No. 119 dated 29 March 1989, mandated government entities to strengthen their internal control systems and organize systems and procedures in coordination with the DBM. Memorandum Order No. 277 dated 17 January 1990, Directing the Department of Budget and Management to promulgate the necessary rules, regulations and circulars for the strengthening of the internal control systems of government offices, agencies, government-owned or controlled corporations and local government units. Administrative Order No. 278 (Directing the Strengthening of the Internal Control Systems of Government Offices, Agencies, Government-Owned and/or Controlled Corporations, including Government Financial Institutions and Local Government Units, in their Operations) dated 28 April 1992, provided for the functions, duties and activities of the IAS/IAU. Administrative Order No. 70 (Strengthening of the Internal Control Systems of Government Offices, Agencies, Government-Owned and/or Controlled Corporations, Including Government Financial Institutions, State Universities and Colleges and Local Government Units) dated 14 April 2003, reiterated the authority for the creation of the IAS/IAU and its functions. DBM Budget Circular 2004-4 (Guidelines on the Organization and Staffing of Internal Auditing Units) dated 22 March 2004, provided for the policy guidelines in the organization, staffing, positions and salary grades of the IAS/IAU in Departments/Agencies/GOCCs/GFIs concerned. DBM – Civil Service Commission Joint Resolution No. 1 (Rationalization Programs, Organization and Staffing Standards and Guidelines) dated 12 May 2006, provided for the creation of the IAS/IAU with its functions in line with Executive Order No. 366. DOJ Opinion No. 007 dated 29 January 2007, in response to the query on whether or not RA No. 3456, as amended by RA No. 4177, is still the enabling law on the establishment of the internal audit function in government agencies, cited the evolution of the IAS/IAU from RA No. 3456, as amended by RA No. 4177, to PD No. 1, wherein the IAS/IAU was abolished but its functions were merged with the Management Division under the FMS. It also recognized DBM Budget Circular (BC) No. 2004-04 in setting the Guidelines on the Organization and Staffing of Internal Auditing Units. However, the DOJ opined that the query be coursed to the Office of the Government Corporate Counsel (OGCC) and/or the DBM. OGCC Opinion No. 099 dated 30 May 2007, stated that PD No. 1 recognized that the IAS/IAU had been abolished but its functions had been merged with the Management Division under the FMS, and DBM BC 2004-04. DBM Circular Letter No. 2008-05 (Guidelines in the Organization and Staffing of an Internal Audit Service/Unit and Management Division/ Unit in Departments/ Agencies/ GOCCs/GFIs Concerned) dated 14 April 2008, provides the guidelines in the organization of the IAS/IAU, clarifying its functions, and specifying the rank and salary grade of the head of the IAS/IAU. The Circular states that the head of the IAS/IAU shall directly report to the Department Secretary/Head of the Agency in the case of Departments and regular attached agencies, and to the Audit Committee3 of the Governing Board in the case of GOCCs/GFIs.

WHAT IS AN AUDIT?

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, internal auditing, and government auditing, but similar concepts also exist in project management, quality management, water management, and energy conservation. Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing the auditor perceives and recognizes the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgment which is communicated through his audit report.

DIFFERENCE BETWEEN INTERNAL AND EXTERNAL AUDIT

Internal audit is a function that, although operating independently from other departments and reports directly to the audit committee, resides within an organisation (i.e. they are company employees). It is responsible for performing audits (both financial and non-financial) within a wide range of areas within a business, as directed by the annual audit plan. Internal audit look at key risks facing the business and what is being done to manage those risks effectively, to help the organisation achieve its objectives. For example, they may look at risks to the company’s reputation such as the use of cheap labour in foreign countries, or strategic risks such as producing too many products in comparison to resources available etc. External audit is an independent body which resides outside of the organisation which it is auditing. They are focused on the financial accounts or risks associated with finance and are appointed by the company shareholders. The main responsibility of external audit is to perform the annual statutory audit of the financial accounts, providing an opinion on whether they are a true and fair reflection of the company’s financial position. As part of this, external auditors often examine and evaluate internal controls put in place to manage the risks which could affect the financial accounts, to determine if they are working as intended. Internal auditing is the evaluation of management controls and operations performance, and the determination of the degree of compliance with laws, regulations, managerial policies, accountability measures, ethical standards and contractual obligations. It involves the appraisal of the plan of organization and all the coordinated methods and measures, in order to recommend courses of action on matters relating to operations and management control. Internal audit, being a separate component of internal control, is instituted to determine whether internal controls are well designed and properly operated.