25 October 2012

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Audit Committees in Local
Government


FinPro Professional Development
Seminar


Linda MacRae

Local Solutions Pty Ltd


25 October 2012


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Contents


Legislative Framework

Audit


External and Internal

Internal Audit

Governance

Risks

Internal and External Auditor


Role

Management


Role

Audit
-

Outcomes

Questions for you to consider

Summary


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Legislative Framework

Local Government Act 1989 as amended
(LGA)


Local Government ( Finance and
Reporting) Regulations 2004


Long Service Leave Regulations


Australian Accounting Standards


Codes of ‘Best Practice’


Model Budget;
Model Annual Accounts; Internal Audit
Guidelines


Council’s Policies and Procedures


eg
Audit Committee Charter




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Local Government Act

Section 139:



A Council must establish an audit committee


An audit committee is an advisory
committee


Ministerial Guidelines :


Audit Committees


‘ A Guide to Good Practice
for Local Government’
(January 2011)


WHAT IS “GOOD PRACTICE” ?



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Audit
-

External

Victorian Auditor
-
General (VAGO) is the
External Auditor for all Victorian Councils


VAGO acts as the External Auditor or tenders
for Contractors (on a 3 or 4 year cycle) to
undertake individual Council’s external audit


The Contractor audits:



Annual Financial Statements



Performance Statement
-

to:



certify that the financial position is represented
fairly & that all mandatory professional reporting
requirements have been complied with.


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Audit


Internal

Focus on internal control procedures & processes


3 or 4 Year Internal Audit cycle


Most Council’s engage, through a tender process,
a contracted Internal Auditor


Independent Chairperson


2 or 3 independent representatives and 2 or 3
Councillors


Delegated charter from the Council


ensure
regular review


Considers Reports & Recommendation from the
Internal Auditor which are accompanied by
Management comments


Makes recommendations to the Council &
Management


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Internal Audit
-

Objective

The Australian National Audit Office
(NANO) defined objective of an audit
Committee is:





to provide independent

assurance to those charged

with governing an entity on the

entity’s risk, control and

compliance framework and its

external accountability

responsibilities’

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Internal Audit


Functions

Audit Committee Charter sets out:


Objective

Purpose

Roles

Responsibilities

Accountabilities

Reporting Framework

Committee Roles & Responsibilities

Evidence and Assurance
around:


Financial Reporting


Internal Control Processes


Risk Management


Business Continuity


Compliance


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‘Key Words’

Oversight / Oversee

Control

Integrity

Ethical

Monitor

Review

Evidence

Assurance

Mitigate

Liaise

Compliance

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Limits



An Audit Committee :


Does not have any delegated financial
responsibility

financial management
is a responsibility of Council


Has no management functions


must
maintain independence of
management


Can make recommendations to
Council


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Committee
-

Add Value

Offers independent advice


mix of skills


Professional expertise of competent and
independent persons


Focus on strategic risk management


Provides an efficient use of resources


Focus on internal controls; assurance &
accountability


Test and challenge management
assumptions

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Committee Work Plan

Meeting Cycle


generally 4 or 5 meetings per year


Annual Internal Audit Work Plan


Strategic Internal Audit Work Plan (generally 3 or 4 years)
-

sets direction; needs to be flexible and review annually


Link to the Audit Committee Charter
-

Standing Agenda Items
at each Meeting:


Risk Management


Operational and Strategic;


Status of Outstanding Internal Audit Recommendations (
Audit Register) ;


Monthly or Quarterly Finance Report


General and Rate Debtors Outstanding


Status of Internal Audit Work Plan


New Agenda Items at each Meeting:


Internal Audit Reports


Specific Management Reports


Annual assessment of Committee’s performance


Council’s responses to Reports from VAGO; Ombudsman;
DPCD; L G Inspectorate and relevant Legislation

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Governance

Good Governance Principles for an
Audit Committee :

Independence


clear responsibilities and
purpose

Full disclosure

Confidentiality

Integrity

Ethical standards

Skill Mix

Competence

Open and effective relationships

Reporting to Council

Compliance


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Disclosures to the Audit Committee

Disclosures at start of meeting of
Management by:

the CEO:





To the best of my knowledge, after due enquiry,


there
have been no major non compliance issues since the date
of my last report .



Based on my current information there
is no reason to believe that there may be a major non
compliance in the future




Disclosure of any fraud activity; major law suits.



Seek assurance re Annual Statements


eg


full
disclosure; valuations; contingent liabilities; cash
flow result


the Internal Auditor:


“Our work has not been impeded or obstructed in any way
since the last Meeting”.




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Reports to Council

Minutes to Council Meeting


Confidential


Recommend Council approve
annual financial statements


Annual Report by Chair of Audit
Committee

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Reports to Council
-

cont

Annual
:


Work achievements, Outstanding
matters, Recommendations


Assurance about Risk
management and Internal Control
environment


Evaluation of internal and external
audit


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Confidentiality

LGA
-

Confidential Information
-

Section 77



A person who is, or has been, a
Councillor or a member of a special
committee, must not release
information that the person knows,
or should reasonably know, is
confidential information.”

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Confidentiality

The Committee must be able to operate in an
open, frank and effective manner



It considers matters such as fraud control;
ethics, integrity and governance; risk
(including financial risk) identification and
mitigation


Sensitive issues reported on involving
practices and processes that can have staff
and other confidential implications


Internal and External Auditors often make
confidential presentations to the Committee
on a range of matters


The Committee can then advises Council on
addressing any matters arising from such
issues.

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Conflict of Interest


LGA
-
Conflict of Interest


Sec
77A to Sec 81


Audit Committee Members
required to comply





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Risks

Committee to consider
-


Operational:

Identify


discuss

eg

under resourced; ageing
workforce;


Strategic :

Identify


discuss


eg
-

environmental; financial
sustainability; ageing population; size of municipality


Are these risks incorporated in the Strategic Audit
Plan?


Ensure Council has considered such risks and is
endeavoring to implement controls to
manage/mitigate these

Internal Auditor
-

Role



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Understand Local Government
:



-

Environment


Legislation; Political;


Operational and Governance



-

Current Issues


Strategic and Operational



-

Processes and systems


Sufficiently resourced


skilled
staff


Relationships


build


Management; Committee
and External Auditors


Add Value


Continuous Improvement


Practical Recommendations that minimise or

mitigate
risk


Risk Rankings of Outcomes that reflect the real
risk to Council if not addressed

External Auditor
-

Role

Understand Local Government:




-

Environment


Legislation; Political;


Operational and Governance




-

Current Issues


Strategic and Operational




-

Processes and systems


Sufficiently resourced


skilled staff


Relationships


build


Management; Committee and
Internal Auditors


Add Value


Continuous Improvement


Recommendations that minimise or mitigate risk in
the Annual Report disclosures


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Management’s Role

Must have CEO and Executive Management Support and
ownership


VIP !

Audit Committee Member Selection
-


Include in Charter


cyclical replacement of External
members


Consider complimentary ‘skill mix’ of members


general; financial and risk

Induction


Councillors and External Members

Clear Meeting Agendas and Work Plan

Understand the ‘risk ranking’ and the implications

Process for ‘tracking’ status of outstanding
recommendations


‘interplan’; excel etc.

Keep Audit Committee Members informed on Industry
issues

Keep the Chair informed of Council Governance
breaches and any actual or potential fraud matters

Liaise with Internal and External Auditors regularly to
ensure healthy relationship

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Audit Outcomes

Council invests significant
resources in the External and I/A
Function

Must be able to demonstrate
outcomes


to Community;
Council; Management and Staff

Must ‘add value’ to Council


not
‘tick & flick’

Staff and Processes must benefit
from achievable; continuous
improvement recommendations



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Questions for you to consider?

Does your Council follow Audit Committee ‘Good
Practice’ ?

Does the Audit function at your Council have CEO and
Executive Management support ? Reports etc to
Executive Group for consideration

Does your Audit Committee comprise an appropriate
‘skill mix’ of Members ( including Councillors)?

Do you structure Audit Committee Agenda’s and Work
Plans timely and appropriately

Do you have mechanisms/ tools to track the status of
the implementation of I/A Recommendations

Does your Council get ‘good value’ from its External and
I/A Function by value adding and continuous
improvement recommendations ?

Do you understand the risk ranking used?

Does your Audit Committee undertake an evaluation?

Does your Council follow the principles of ‘good
governance’


including full disclosure; confidentiality;
conflict of interest etc ?




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In summary:



Internal and External Audit must add value
to Council by the independent contribution
of Auditors and Independent Audit
Committee members by obtaining evidence
and assurance to ensure that control
processes are in place to manage or
mitigate potential risks