Internal Audit Guideline-Draft1

Paulos Basazenew
Financial Management Specialist
Community-Led Accelerated WASH (COWASH)
INTERNAL AUDIT GUIDELINE
February 2018
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Contents
I. Introduction ............................................................................................................................. 2
II. AUDIT PLANNING .............................................................................................................. 3
2.1. OVERVIEW .................................................................................................................... 3
2.2. OBJECTIVES OF PLANNING ...................................................................................... 4
2.3. INTERNAL CONTROL SYSTEM ................................................................................. 4
2.4. AUDIT APPROACH ....................................................................................................... 7
2.5 ANALYTICAL PROCEDURES ...................................................................................... 7
2.6 AUDIT SAMPLING ......................................................................................................... 8
2.7. AUDIT PROGRAMME ................................................................................................ 10
III. AUDIT EXECUTION ........................................................................................................ 16
3.1 AUDIT CLASSIFICATION ........................................................................................... 16
3.2 AUDIT OF CASH AND BANK BALANCES (MFI BALANCES) .......................... 18
3.3. AUDIT OF RECEIPTS .......................................................................................... 21
3.4 AUDITS OF DEBTORS ................................................................................................ 23
3.5. AUDITS OF STOCKS ................................................................................................. 25
3.6. AUDIT OF FIXED ASSETS ....................................................................................... 28
3.7 AUDIT OF CREDITORS ............................................................................................... 31
3.8. AUDIT OF PURCHASES ............................................................................................. 33
3.9. AUDIT OF PAYROLL AND WAGES ...................................................................... 35
3.10. AUDIT OF PAYMENTS (EXPENDITURES) ..................................................... 40
3.11. OPENING BALANCES .............................................................................................. 44
3.12. FRAUD AND ERROR ................................................................................................ 44
IV. AUDIT OF BUDGET AND INVESTMENT COSTS ..................................................... 51
4.1. AUDIT OF BUDGET .................................................................................................... 51
4.2. AUDIT OF INVESTMENT COSTS ............................................................................. 52
V. AUDIT REPORT ................................................................................................................. 53
VI. FINANCIAL REPORTS THAT SHOULD BE ATTACHED TO THE INTERNA
AUDIT REPORT ...................................................................................................................... 56
APPENDICES ........................................................................................................................... 57
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Community-Led Accelerated WASH (COWASH)

Internal Audit Guideline
I. INTRODUCTION
The principal objective of any ordinary financial audit is to enable the auditor (whether
internal or external) to express an opinion on the truth and fairness of the financial position
and financial results as shown by the annual financial statements of an organization. Beyond
this, the internal auditor of any organization looks into the compliance of the actual
performance to a prescribed rules and regulations in the process of implementing the planned
activities. The internal audit can be done annually, semi-annually, quarterly or monthly based
upon the plan or on a need basis.
The secondary objectives of an audit are generally taken to be as follows:-
a) To detect errors and frauds  this is really a by-product of the examination of books,
accounts, vouchers and other records carried out by the internal auditor in pursuit of the
principal objective stated above; and
b) To prevent errors and frauds – this is a further by-product because of the deterrent effect
imposed on the staff of an organization by the possibility that errors and fraud might be
detected during the audit process.
The principal objective of this Guideline is, therefore, to provide broad guidelines on the
planning, operational and reporting procedures to be followed in carrying out audits of the
financial statements of Community-Led Accelerated WASH (COWASH) projects. The
Guideline ensures uniformity as between different regions in matters of audit planning, audit
execution and audit reporting and provides a framework of reference for all internal auditors of
COWASH in dealing with technical problems relevant to all stages of an audit from initiation
to completion.
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II. AUDIT PLANNING
2.1. OVERVIEW
Planning means laying out a course of action that we can follow that will take us to our desired
goal. It is a process of deciding what to do and how to do it before some action is required.
Audit planning, is therefore, a means of developing a general strategy and a detailed audit
procedure. More specifically it means determining the audit scope, timing, objectives, criteria
and methodology to be used and the resource required to ensure that the audit achieves the
predetermined level of assurance in an efficient manner. It is a vital area of the audit which is
primarily conducted at the beginning of the audit process. The plan developed will be revised
as necessary during the course of the audit. Good audit planning is of great importance in any
audit engagement. Without sound planning, there is a real danger that the internal auditor may
fail to obtain sufficient, appropriate and relevant audit evidence to support the contents of the
audit report and/or may perform the audit inefficiently or ineffectively.
Good audit planning should include the following basic elements:
✓Background information: Brief outline of the audited body's activities,

objectives and financial circumstances.
✓Significant events: Details of any events or changes which are likely to affect
the entity’s operations and the audit.
✓Audit/examination areas: Certification requirements describing the scope of

the audit for each area.
✓Audit programmes: Audit programmes are prepared to serve as a guide for

the audit.
✓Administrative arrangements and timetable: Any administrative

arrangements required to coordinate the work and the proposed timetable for
the audit to meet the agreed deadline.
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✓Staff allocation and responsibilities: This section enables appropriate

allocation of staff to the audit in terms of number, grades and experience. It
also shows the officers' responsible for supervision and review.
2.2. OBJECTIVES OF PLANNING
Since planning is the essential first step in any audit, it has several objectives:
❖to identify the scope, objectives and anticipated outputs of audits;
❖to ensure that sufficient, reliable and relevant evidence is gathered to support audit
opinion;
❖to determine the most efficient audit approach;
❖to ensure that resources are deployed most effectively;
❖to identify critical areas or aspects of audit at early stage;
❖to obtain senior audit management approval prior to audit;
❖to improve staff understanding of effort required.
2.3. INTERNAL CONTROL SYSTEM
As a first and essential pre-requisite for determining the audit strategy to be adopted, the
internal auditor should ascertain and evaluate the accounting and internal control systems of an
organization. To be able to properly evaluate systems of internal control, the internal auditor
must be able to visualize the types of internal control that should normally exist in the
circumstance of a given situation. For this, every internal auditor must be thoroughly familiar
with the general background of internal controls where he/she is working, their purposes and
significance from his/her point of view.
Definition
Internal control system is defined as all the policies and procedures conceived and put
in place by an entity's management to ensure:
✓economical acquisition of resources;
✓safeguarding of assets;
✓efficient use of resources;
✓reliability of accounting records;
✓effectiveness of operations;
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✓timely preparation of accurate financial and non-financial information;

✓prevention and detection of errors and irregularities; and
✓Compliance with statutory requirements and other directives.
Types of Internal Controls
The followings are a description of some of the types of controls which the internal auditor
may find in many organizations and on some or a combination of which he/she may seek to
place some degree of reliance.
1. Organizational Controls: Audited entities should have a plan of their organization,

defining and allocating responsibilities and identifying lines of reporting for all
aspects of the entity's operations, including the controls. The delegation of authority
and responsibility should be clearly specified. E.g., organization charts, job
descriptions, etc.
2. Segregation of Duties: One of the prime means of control is the separation of those
responsibilities or duties which would, if combined; enable one individual to record
and process a complete transaction. Segregation of duties reduces the risk of
intentional manipulation or error and increases the element of checking. Functions
which should be separated include those of authorization, execution, custody, and
recording.
3. Physical Controls: These are concerned mainly with the custody of assets and
involve procedures and security measures designed to ensure that access to assets is
limited to authorized personnel. This includes both direct access and indirect access
via documentation. These controls assume importance in the case of valuable,
portable, exchangeable or desirable assets.
4. Authorization and Approval: All implementing decisions and transactions should

require authorization or approval by an appropriate responsible person. The limits
for these authorizations should be specified. E.g. no expenditure commitment
without the signature of an authorized official, no payment without a duly certified
payment voucher, etc.
5. Arithmetical and Accounting Controls: These are the controls within the recording
function which check that the transactions to be recorded and processed have been
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authorized, that they are all included and that they are correctly recoded and
accurately processed. Such controls include checking the arithmetical accuracy of
the records, the maintenance and checking of totals, reconciliations, control accounts
and trial balances, and accounting for documents.
6. Personnel Control: There should be procedures to ensure that personnel have

capabilities commensurate with their responsibilities. Inevitably, the proper
functioning of any system depends on the competence and integrity of those
operating it. The qualifications, selection and training as well as the innate personal
characteristics of the personnel involved are important features to be considered in
setting up any control system.
7. Supervision: Any system of internal control should include the supervision by

responsible officials of day-to-day transactions and the recording thereof.
8. Management Controls: These are the controls exercised by management outside the
day-to-day routine of the system. They include the overall supervisory controls
exercised by management, the review of management accounts and comparison
thereof with budgets, and any other special review procedures.
Inherent Limitations of Internal Control

An internal control system can provide only reasonable assurance that the management's
objectives in establishing the system are achieved. This is due to the fact that any internal
control system has certain inherent limitations. These limitations arise due to the following
reasons.
a)Management itself may manipulate transactions or estimates.
b)Controls have to be cost-effective. Thus, some controls may not be instituted
merely because they are not cost-effective.
c)In any case, the potential of human error remains in any system of control.
d)No system can prevent fraud through collusion between two or more persons.
e)A member of the management may himself override the controls.
f)Controls may not keep pace with changes in condition.
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Tools in Assessing Internal Control

Normally the internal control questionnaire (ICQ) is used as a tool for reviewing and
assessing the internal controls. It is used by the internal auditor to assess the degree to
which the entity places emphasis in maintaining controls.
2.4. AUDIT APPROACH
Audit approach means the overall approach to be adopted in planning the execution of an audit
engagement. There are three basic approaches to audit:
a.Direct Substantive Testing (DST) - This involves seeking reasonable assurance as to the
accuracy and completeness of an account by examining sufficient transactions (say
100%) to provide direct evidence as to the validity of entries there in.
b.Systems Based Approach (SBA) - This involves seeking reasonable assurance as to the
accuracy and completeness of an account by:
i. Evaluating and testing the system of internal control involved in processing and
recording the transactions.
ii. When justified, placing reliance on these systems and carrying out an appropriately
reduced level of substantive testing.
c.Risk-Based Approaches (RBA) - In recent years there has been a shift away from the
system-based auditing towards risk-based auditing. Risk based auditing refers to the
development of auditing techniques which are responsive to risk factors in an audit. The
internal auditors apply judgment to determine what level of risk pertains to different
areas of offices system and devise appropriate audit tests. This approach should ensure
that the greatest audit effort is directed at the riskiest areas, so that the chance of
detecting errors is improved and time is not spent on unnecessary testing of 'safe' areas.
2.5 ANALYTICAL PROCEDURES
Analytical procedures mean the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts.
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Analytical Procedures in Planning the Audit
To carry out an effective audit we must have a detailed knowledge of the business. Structured
approaches to planning including the use of analytical procedures help to improve this
knowledge. We should apply analytical procedures at the planning stage to assist in
understanding the entity's business in identifying areas of potential audit risk and in planning
the nature, timing and extent of other audit procedures. Analytical procedures can be used on
all audits at the planning stage to:
•confirm and improve their understanding of the organization's activities;
•identify areas of potential audit risk;
•identify significant non-routine or unusual transactions and/or account balance;
•assist in planning the nature, timing and extent of substantive procedures.
2.6 AUDIT SAMPLING

Introduction
At the early developmental stage of auditing detailed examination of all items was common.
As organizations grew in size the detailed work did not require increasing to a level where
100% examination is neither necessary nor practicable, nor can it guarantee 100% accuracy
anyway.
Audit consists of obtaining evidence to form an opinion about an account. The evidence has to
be sufficient, relevant and reliable. Sufficient evidence is the quantity of evidence necessary to
provide the internal auditor with reasonable assurance that the account is not materially
misstated.
The internal auditor has the following options open to him when deciding how much testing of
a population to do. He will probably use a combination of all of these options while carrying
out his/her audit of the whole account. The options could be to examine all the transactions or
items in a population (100% testing). 100% testing of an entire account is normally
unnecessary and usually it would be impracticable anyway. However, in carrying out any test
as part of the overall audit, the internal auditor may sometimes decide that a particular portion
of the population requires 100% examination. For example, the internal auditor might test all
the items making-up a balance if the amounts were individually material or he might decide
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that 100% testing of a population was justified if there was a high risk of error in the
population.
Whenever the internal auditor tests less than 100% of the population, he has to select in some
way the transactions or items to be examined. Selective testing procedure falls into two
categories:
1. Those where the internal auditor selects certain items which in his judgment should be
examined. In this case, he should examine all transactions and items which individually
would have a significant effect on his opinion depending on the outcome. These are
called high value items. The internal auditor should set a high-value level equal to, or
below the materiality level but clearly not above it.
Examining high value items does not constitute audit sampling because the internal
auditor can reach a conclusion only on the high value items he has examined and not
on the whole population from which the items have been drawn. However, if the total
of the remaining is immaterial, he might feel justified in forming an opinion on an
account balance by examining only the high value components of that balance. He
may also select items which warrant particular attention based on his knowledge and
experience. They may be unusual items revealed by his scrutiny of the accounting
records and statements. They may be considered especially worthy of interest because
of their nature (for example, year-end adjustments). He may have identified a weak
area where transactions are prone to error. These items are called key items. How the
internal auditor goes about testing key items depends on their number and materiality.
He would examine them all if the items were few or material. Otherwise he might
examine the items which are most important in his judgment and a sample of the
remaining items.
2. Those where the internal auditor employs a sampling method with the aim of drawing a
conclusion about the whole population from the sample examined. In this regard the
internal auditor would want to divide (or stratify) a population into at least three
segments; high-value items, key items, and the rest. Key items could be those sensitive
transactions which need special attention. Having examined high value and key items
separately, he would then test the rest by sampling.
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Audit tests may be carried out using various techniques and the internal auditor may
apply such tests to an entire set of data (100% testing). Alternatively he may choose
to draw conclusions about the entire set of data (the population) by testing a
representative sample of items selected from it; this latter procedure is ‘audit
sampling’.
Sampling, as an element of the audit planning process is a continuation of gathering
information about the audited entity, setting materiality level, assessing risk,
performing analytical review and assessing audit area.
Types of Sampling
Sampling methods can be broadly categorized as statistical or non-statistical.
The main differences between statistical and non-statistical sampling are as follows:
•Statistical sampling is mathematically based on the probability of things happening.
Statistical sampling must use a method whereby selection of transactions or items for
examination is random, that is, there must be no bias present which influences the
selection;
•Non-statistical sampling simply means sampling which has no scientific basis. The
internal auditor still has to decide the sizes of the sample and to evaluate the sample
testing results but he does not have the benefits provided by statistical sampling for
measuring the sampling risk. The internal auditor can reach at reasonable conclusions
about the whole population when using non-statistical sampling; however, the internal
auditor cannot quantify and infers the sample result to the whole population in his report.
A non-statistical sampling plan (that is, a plan which is not fully based on statistical
theory) may nevertheless use some of the techniques associated with statistical sampling,
for example, random selection of the sample.
2.7. AUDIT PROGRAMME
Introduction
One end product of the preliminary planning process is a series of audit programmes on
different aspects of the audit. The audit plan is a base for the preparation of the audit
programme. An audit programme can be defined as a written plan containing details of
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auditing work to be performed. It specifies the procedures to be followed in meeting the audit
objectives.
Transactions performed by organizations should fulfill the following audit assertions:

Completeness - all transactions relevant to the year have been recorded.
Occurrence - the recorded transactions properly occurred and were relevant to
the budget year.
Measurement - the recorded transactions have been correctly valued, properly
calculated or measured in accordance with established
accounting policies, laws and regulations on an acceptable and
consistent basis.
Regularity - the recorded transactions are in accordance with appropriate
laws, regulations and other specific authorities.
Disclosure - the recorded transactions have been properly classified in to
appropriate budget headings.
Existence - all recorded assets and liabilities exist.
Valuation - the assets, inventories, and work-in-progress are recorded at cost
and depreciation, bad debts, etc. are recorded consistently with
due care according to a preset accounting principles.
Ownership - the assets are owned by the audited body, the liabilities are
properly those of the audited body and both arise solely from
regular activities.
Audit Evidence
The following classification of the types of audit evidence has been adopted for our purpose:
•Observation: It includes examination of physical assets, observation of actions of offices
and observation of records to ensure that bookkeeping and internal control procedures
have been carried out.
•Testimony from independent third parties which includes bank confirmation, debtors’
circularization.
•Externally prepared documents such as title deeds, leases etc.
•Internally prepared documents which include minutes, payment vouchers etc.
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•Testimony from Auditee Management which would be in the form of responses to

Internal Control Questionnaire (ICQ), letters of reasons.
•Concurrence of re-performance or re-computations by the internal auditor which refers to
verifying accuracy of calculations or performance of accounting routines.
Sources of Audit Evidence
There are four sources of audit evidence as described below:
Internal auditors' direct knowledge
This is the most reliable source of audit evidence and when available it should be preferred to
other sources. The internal auditor acquires direct knowledge through physical inspection,
observation and re-performance.
External evidence
External evidence originates from sources outside the organization being audited.
The evidence gathered from such source can either be:
➢ written testimonies or representations such as debtors’ circularization, bank
confirmations, etc.
➢ oral representations or statements made by third parties directly to the internal auditor
interviews, or documentary evidence that is obtained from within the body being
audited but it was externally prepared. Examples of such evidence include invoices
and bank statements. External evidence is less reliable than direct knowledge of the
internal auditor.
Internal evidence
Internal evidence is evidence obtained from within the office organization being audited. This
evidence may consist of documentary evidence such as payment vouchers, accounting records
and reports, oral or written representations of employees and management, etc. Internal
evidence is less reliable than external evidence and the internal auditor’s direct knowledge.
Quality of Audit Evidence

In order for the internal auditor to make sound judgments and conclusions about the fairness of
the accounting information presented by the organization under audit, sufficient, reliable and
relevant evidence must be gathered. Sufficiency, reliable and relevance are some of the
qualities of the evidence collected. One other determinant of persuasiveness also considered
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along with the above three qualities is timeliness. These determinants or qualities of evidence
are explained as follows:
Sufficiency of Evidence
This refers to the quality of evidence obtained. Sufficiency is one of the main qualities to be
determined when calculating a sample size. The determination of the sample size to select
involves not just how many items (vouchers) to select but also what items to select for
examination. The quantity of evidence to select will also depend, among other factors on the
internal auditor’s expectations of errors and the internal auditor’s assessment of the
effectiveness of the offices internal control structure.
Relevance of Evidence
Audit evidence must relate to general audit objectives for it to be relevant. Audit evidence
may be relevant to one objective but not to another. For example, if the internal auditor
obtains bank confirmation letters which satisfy the existence and/or measurement objectives,
the evidence so gathered would not be appropriate to satisfy the occurrence objective. In the
latter case, the evidence gathered through bank confirmation is not relevant to the occurrence
objective. However, audit evidence may satisfy more than one audit objective as in the former
case.
Reliability of Evidence
Reliability of evidence is the trust-worthiness of evidence. It depends on the following factors:
a) Independence of provider: Evidence obtained from within the organization being
audited is less reliable than that obtained from sources outside the organization.
b)Effectiveness of Internal Control Structure: When the internal controls of the
organization being audited are effective, the evidence gathered is more reliable than
when the controls are weak.
c) Internal auditor’s direct knowledge: Evidence gathered directly by the internal auditor
is more reliable than the information obtained indirectly.
d) Qualifications of individuals providing the information: Evidence is less reliable if the
individual providing the information is not qualified. For example, during an
examination of an inventory of diamonds and information obtained through an expert
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who is not trained to distinguish between diamonds and glass would not provide reliable
evidence of the value and existence of diamonds.
e) Degree of objectivity: Evidence that requires considerable judgment to determine
whether it is correct or not is as reliable as objective evidence. For example,
confirmation of bank balances or physical count of cash (objective evidence) is more
reliable than confirmation by the office’s lawyers of the likely outcome of outstanding
lawsuits against the office.
Timeliness of Audit Evidence
Refers to either when the evidence is collected or the period covered by the audit depending on
whether evidence is being gathered for the financial statements.
Techniques used to Gather Audit Evidence
Implementation of audit procedures refers to actual testing or gathering of audit evidence.
Several techniques or methods are used to gather the various types of audit evidence. The
following techniques are used in collecting audit evidence:
1. Cut-off
Ensuring that all aspects of transactions relating to a particular period are fully recorded
within that period e.g., that the cost of goods received and taken into stock before the
year-end is also included as purchases of that year itself, and the unpaid amount, if any,
is reflected as a liability in the balance sheet as well.
Application of cut-off procedures provides evidence that income and expenditures
(revenues and costs) have been matched and that all related items have been taken into
account in the particular year to which they all relate.
2. Observation
Looking at an operation or procedure being performed by others with the view to
determining the manner of its performance. Observation provides reliable evidence as to
the manner of performance at the time of observation but not necessarily at any other
time. For example observing inventory stock taking to assess whether employees are
following proper instructions.
3. Confirmation
Involves receipt of a written or oral response from an independent third party; for
example confirmations of bank balances.
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4. Enquiry
Seeking relevant information from knowledgeable persons inside or outside the
enterprise, whether formally or informally, orally or in writing. The degree of reliability
to be attached to evidence obtained in this manner should be dependent on the internal
auditor’s opinion of competence, experience, independence and/or integrity of the
respondent. Examples of this technique include internal control questionnaires asking
employees if certain procedures are being followed.
5. Re-performance of Accuracy
Involves checking the arithmetical accuracy of accounting records or re-performing
independent computations of the amounts making an account balance. Re-performance
provides evidence of the arithmetical accuracy in documents or account balances, but
not necessarily as to the completeness or authenticity.
6. Documentation or Vouching
Involves examining the evidence supporting a transaction or item or in other words
agreeing amounts of two or more different documents in order to determine its
authenticity and accuracy. For example, agreeing amounts on purchase orders to
supplier invoices and receiving reports.
7. Inspection
Physically examining or counting tangible assets, e.g., fixed assets, securities, cash, etc.
Inspection of tangible assets provides reliable evidence as to their existence, but not
necessarily as to their ownership or value.
8. Reconciliation
Identifying items which have caused a difference between two amounts (one of which is
usually an account balance) and inquiring into the individual items making up the
difference e.g., reconciliation of bank balance as per cash book with the balance as
shown in the relevant bank statement.
Reconciliations provide as to the apparent genuineness and/or accuracy of the relevant
account balances.
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III. AUDIT EXECUTION

3.1 AUDIT CLASSIFICATION
Audit may be classified into 'transaction' and 'validation' audits.

Transaction Audits
In order to have a clear understanding of transaction audits it is first important to define the
term transaction. Transaction involves an exchange of goods or services for money or money
worth. Thus, Revenue, Receipt, Purchases, Payroll and Payments (of all kinds) belong to the
category of transaction audit.
Transaction audit is normally carried out by means of vouching; which is the process of
examining the authority for, and the authenticity and accuracy of transactions as recorded in
books and accounts by reference to the source documents from which they originated.
Vouching is therefore the principal means of carrying out transaction audits. However, it must
be remembered that some degree of vouching may be required even in the course of validation
audits, e.g., in checking additions to, and disposals of assets during a given year.
Transaction Tests
1. Authority - Has transaction been properly authorized?
E.g., does budgetary authority exist? Has the commitment for the particular item of
expenditure concerned been approved by an authorized official?
2. Authenticity - was the transaction actually carried out?
E.g., with whom? Is it the transaction effected during the relevant budget period?
3. Accuracy - is the transaction recorded accurately in the books?
E.g., Are the quantities and prices, and the calculations, extensions and additions
correct? Have all appropriate deductions been made? Are the amounts correctly
recorded in the books?
4. Propriety - Check the reasonableness of the transaction in relation to the nature and
scope of the organization.
For example, in the case of purchases of goods the internal auditor should ask: Are
these goods normally consumed by the organization?
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Validation Audits
‘To validate’ is to support or corroborate on sound or authoritative basis. A validation (of
something) therefore, involves a corroboration, or supporting, or backing up, of events by clear
and concrete evidence. The term ‘validation audit’ is used more specifically to mean
validation or corroboration of account balance, that is, the balance appearing in given accounts
at a particular point in time reflecting the final position resulting from one or more transaction
in those accounts up to that point of time.
Thus, Stocks, Debtors and Creditors, Cash and Bank Balances, Fixed Assets, Long-term
Liabilities, are all account balances which fall within the preview of ‘validation audits’.
‘Verification’ is the process by which validation audit is performed through the establishment
of existence, ownership and valuation of assets, the correctness of liabilities, and the proper
disclosure of both assets and liabilities in the books and year-end financial statements.
Therefore, verification is the principal means of carrying out validation audits. However,
some degree of verification may be required even in the course of transaction audits.
Validation Tests
1. Existence - Did the asset or liability actually exist at the close of the financial year?
E.g., Do the building, plant, furniture stores etc., actually exist physically? Are the
liabilities shown on the balance sheet genuine and valid?
2. Ownership - Do the assets actually belong to the organization, and are the liabilities
shown actually owed to outsiders?
E.g., Has the title to the property concerned legally passed to the office before the
end of the financial year? Has any part of a liability been already paid before the
year-end?
3. Valuation – Have the amounts of the assets and liabilities been correctly stated?
E.g., Are all expenditures incurred on, say the construction buildings included in
the appropriate budgetary classification? Are the amounts correctly stated?
Is the amount shown as a liability the actual net amount still outstanding at
financial year-end?
4. Completeness - Have all assets and liabilities been fully recorded?
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E.g., Have any capital expenditure items been deliberately or inadvertently written
off as expenses during the year?
Have any liabilities been omitted or suppressed?
5. Disclosure - Have all assets and liabilities been properly disclosed, classified under
appropriate headings and sub-totaled where necessary?
E.g., Are they properly described in terms of budgetary classifications? Is the
method of valuation of stocks, or the existence of contingent liabilities disclosed
in notes to the accounts? Is the amount shown as a liability the actual net amount
still outstanding at financial year-end?
6.Completeness - Have all assets and liabilities been fully recorded?
E.g., Have any capital expenditure items been deliberately or inadvertently
written off as expenses during the year?
Have any liabilities been omitted or suppressed?
The use of Internal Control Questionnaires (ICQs)

The use of internal control questionnaires is to understand and document the internal control
systems. An internal control questionnaire lists various questions to which the internal auditor
seeks answers to evaluate internal controls. As stated earlier, the answers to these questions are
obtained by the internal auditor:
a) examination of relevant documents like procedures manuals;
b)observation of relevant processes operations; and/or
c) Discussions with staff and management of organizations.
d) Ascertainment and evaluation of the system of internal control actually in operation in
each organization is therefore a fundamental pre-requisite for both transaction tests and
validation tests.
It is necessary to emphasis that internal control questionnaire (ICQ) is the most common
method applied in evaluating the systems of internal control. An appendix of the relevant
internal control questionnaire is attached as a frame of reference.
3.2 AUDIT OF CASH AND BANK BALANCES (MFI BALANCES)
One term “Cash and Bank Balances” is taken to mean the balances of cash in hand and
the balances of cash at bank (balances of cash at Micro Finance Institution: MFI) held by
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COWASH at a given moment of time usually at periodic intervals such as at the end of
each month or year.
Bank Balances may include balances of a variety of different types of accounts held at
one or more of several banks, such as current accounts and saving accounts.
Cash and bank balances are the difference between receipts and payments at a given
point of time. The accuracy of the balance depends in part on the accuracy and validity
of the individual entries concerning receipts and payments of a given period.
Audit Objectives
The primary audit objectives of cash and bank balances are:
a) to check that all sums are received and subsequently accounted for and that cash and
bank balances are stated correctly in the final accounts.
b) to check that no payment are made which should not be made.
c) to check whether receipts and payments are promptly and accurately recorded.
d) to detect any misappropriation or manipulation of cash or bank balances.
e) to make a recommendation where necessary as to the formulation and application of
efficient cash control and management.
Internal Controls Over cash and Bank Balances

Since COWASH projects deals with bank transactions (accounts at MFI) we will focus
on the internal control of bank balances.
Controls over Banking, Cheque Payments and Bank Reconciliation
a)Opening and closing of bank accounts only with proper authority of the organizations
management.
b)Receipts should be banked intact daily.
c)Each day’s receipts should be recorded promptly in the cashbook.
d)Unused cheques should be held in a secure place.
e)The person who prepares cheques should have no responsibility over disbursement of
cash.
f)Cheques should be signed only when evidence of a properly approved transaction is
available. Such evidence may take the form of invoices, payroll, petty cash book etc.
g)This check should be evidenced by signing on the supporting documents.
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h)Cheque signatories should be restricted to the minimum practical number.

i) Two signatories at least should be required.
j) The signing of blank cheques and cheques in favor of the signatory should be
prohibited.
k)Cheques should be crossed before being signed.
l) Supporting documents should be stamped or cancelled as paid to prevent their reuse to
support further cheque payments.
m)Cheques should preferably be dispatched immediately. If not, they should be held in a
safe place.
n)Internal checking of all casts and balancing of the bankbook.
o)Monthly preparation of bank reconciliation statements, and examination and approval
of such statements by supervisory officials.
p)Investigation by higher officials of bank over drafts, the authority for them and
observance of overdraft limits.
Audit Procedures
Bank Balances
a)Obtain bank reconciliation statements prepared by the office and verify their accuracy;
b)Obtain a bank statement confirming the balance held at the year end;
c)Agree the cash book balance and the bank statement balance shown in the
reconciliation with the balances appearing in the cash book and the bank statement
respectively;
d)Check the balance in the last bank statement with the opening balance shown in the
bank statement;
e)Check whether outstanding cheques shown in the reconciliation actually appear in the
cash book prior to the year-end and trace these cheques to bank statements subsequent
to the year-end;
f)Investigate any significant reconciling items of an unusual nature;
g)Investigate any cheques outstanding for more than 6 months and consider whether they
should be restored to bank balances and the corresponding liability also restored;
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3.3. AUDIT OF RECEIPTS

This describes the approach to the audit of receipts to be applied in accordance with the
requirements of the governing legislation.
The term “Receipts” is taken to mean the receiving of money, in all its forms. Money in
this context is understood to mean not only cash, e.g., bank notes and coins, but also all
kinds of paper money. E.g., cheques, and bank drafts.
Receipts accounts are accounts drawn-up on a cash basis; they represent only the
transactions which occurred in the accounting period and do not incorporate prepayments
or accruals.
Generally, audit of receipts of cash, cheques, draft etc is a significant part of a financial
audit. This is because these receipts affect almost all accounts relating to income and a
number of asset and liability accounts. Moreover, this area is prone to defalcation and
other frauds. The internal auditor recognizes these factors in developing his/her
programme for audit of receipts.
Audit Objectives
The primary objective in the auditing of receipts is to attain reasonable assurance that all
monies that should have been received have in fact been received, properly recorded and
adequately safeguarded.
In carrying out an audit of receipts, the internal auditor aims at collecting sufficient
appropriate audit evidence to reasonably assure her/him about the following assertions:
1. Occurrence
a) The receipts recorded in the book of account represent amounts actually received
by the organization during the period under audit.
b) The receipts relate to the business of the respective office.
2. Completeness
The receipts that took place during the period under audit have been recorded in the
books of account.
3. Measurement
a) Receipts have been recorded at appropriate amount.
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b) Arithmetical accuracy has been maintained in recording the receipts in the books
of account.
4. Presentation and Disclosure
a) Receipts have been classified and disclosed under appropriate account heads in
the financial statements.
b) The disclosure of receipts in the financial statements is in accordance with
recognized accounting principles and relevant statutory requirements.
In designing his/her audit programme in respect of receipts, the internal auditor

has to ensure that he/she collects sufficient and appropriate audit evidence to
reasonably assure himself in respect of each of the above matters. This is
achieved by the internal auditor through the following two stages:
▪Studying the accounting system and internal control in relation to receipts and
evaluating them through compliance procedures;
▪Performing substantive procedure through:
a) tests of transactions are related to receipts,
b) performing analytical procedures, and
c) Examining the presentation and disclosure of receipts in the financial
statements.
In order to achieve this primary objective it is necessary to obtain reasonable satisfaction
that:
a) all receipts are recorded correctly and completely;

b) all monies received are adequately safeguarded, and deposited intact at bank
without delay; and
c) the accounting records reflect a reliable record of all the receipts.
Internal Control
Cash is the most liquid asset and therefore the most tempting for defalcation by an
organization’s employees. Its accuracy and completeness are also the most difficult for
an internal auditor to check, and therefore, very much depend on the adequacy and
efficacy of the office’s internal control systems.
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Audit procedures
Cash Receipts
a) Review all cash receipts for completeness of such collections;
b) Examine available evidence that the receipts are recorded using appropriate
ledgers by identifying both the receipts and disbursements;
c) Review reconciliation of subsidiary cash records with daily cash summaries;
3.4 AUDITS OF DEBTORS
Although debtors can be legal entities or persons who owe money to the organization,
and whose debts are expected to be realized in cash in the relatively short term, they
may be categorized into a few broad classes, depending on the nature of the debt that is
outstanding in each case, such as prepayments, staff debtors, deposits and advances.
Audit Objective
The primary audit objective in the validation of debtors in any organization is to gain,
assurance that the net total figure appearing as ‘debtors’ at the end of a financial year
gives a correct picture of the actual position as at that date.
In carrying out an audit of personal ledgers, the internal auditor aims at collecting
sufficient appropriate audit evidence to reasonably assure her/him regarding the
following assertions:
a) Existence:- the accounts recorded of debtors and creditors are actually outstanding as
at the date of balance sheet;
b) Rights and obligations: - Debtors represent rights of a given organization, that is,
amounts receivable by it. Similarly, creditors represent obligations of the enterprise,
that is, amounts payable by it;
c) Completeness:- the debtors and creditors as shown by the personal ledgers are
complete;
d) Valuation: - the debtors are valued properly as per the recognized accounting
principles. This implies that the carrying amount of debtors does not include those
debts which are uncollectible (that is, bad debts) and that there is an adequate
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provision against those debts whose recoverability is uncertain (that is, doubtful debt)
similarly, the creditors are stated at appropriate amounts.
e) Presentation and Disclosure: - Debtors and creditors are properly classified and
disclosed in the financial statements in accordance with recognized accounting
principles and relevant statutory requirements.
To achieve this primary objective it is necessary to ensure that the ledger accounts for
debtors have been fully and accurately recorded and that the resulting balances are
corrected.
Internal Control for Trade debtors
The internal auditor studies and evaluates the accounting system and internal controls
that should normally operate determining the nature, timing and extent of substantive
procedures to be carried out by her/him.
As with other types of transactions and account balances, so in the case of debtors too,
the prevailing system of internal control over debtors should be first ascertained before
actual auditing begins, usually by the use of internal control questionnaires (ICQs).
Audit Procedure
Some of the steps which the internal auditors take for the verification of debtors are
outlined below:
a) In the case of staff debtors, ensure that the following controls are properly
maintained and are functioning:
(i) Advances are given only after proper approval and are subject to
predetermined maximum limits;
(ii)New loans or advances are not granted before settlement of previous
ones;
(iii)Repayments are regularly deducted from the payrolls;
(iv)The full amount of any outstanding loans or advances is deducted
before an employee leaves or dismissed.
b) Check any suspense accounts carefully;

c) Vouch the genuineness of advance payments;
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d) Ensure that all prepayments are attributable either to services to be received in

the future or to periodic payments which relate to a period for doubtful debts
after the year-end;
3.5. AUDITS OF STOCKS
Stocks are often the largest single item in the balance sheet of a profit making
organization. Even in the government budget, the budget allocated for the purchase of
stocks for consumption purposes is substantial. In business enterprises the value
attributed to stock at the year-end could make a vast difference to the profit or loss of
the business as a whole. Thus, due care has to be exercised to ensure the safety and
proper use of stocks and their proper valuation at the end of each year.
Four important elements need to be considered when carrying out the audit of stocks, at
a given date, namely, their existence, ownership, valuation and disclosure. All these
aspects are covered in the numerous points enumerated under "Audit procedures"
(outlined under physical stock taking and accounting).
Stocks are taken to mean:

▪ Consumable materials, e.g., packing material, Spare parts, supplies etc.;
▪ Goods purchased for resale;
▪ Raw materials awaiting processing;
▪ Work in process, that is, incomplete products still under process;
▪ Finished products or produce awaiting sale;
▪ Goods in transit being the expenditure or irrevocable commitment incurred on
goods ordered but not received at the year-end.
Audit Objectives
The audit objectives in the matter of stocks may be enumerated as follows:
▪ To check that the stock quantities underlying the year-end balance are
reasonably stated;
▪ To check that the stock cut-off procedures has been performed satisfactorily;
▪ To ascertain that stock is appropriately valued at cost;
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▪ To ensure that appropriate net realizable values have been used in making any
required write-downs;
▪ To ascertain that slow-moving damaged or obsolete stock has been
appropriately identified and valued;
▪ To check whether the stock summaries are arithmetically accurate;
▪ To ensure that the basis of stock valuation is consistent with that of prior
periods.
Internal control over stocks
The essential features of a sound system of internal control of stocks may be classified
and enumerated as follows:
Stock - recording
a) Maintenance of a perpetual inventory system, e.g.; bin cards, stores ledger;
b) Segregation of duties as between storekeeper and accounts departments in the
maintenance of perpetual inventory records;
c) Use of all authenticated documentation, e.g., goods received notes, stores
requisitions (stores issue vouchers), for all entries in stores records;
d) Periodic reconciliation of book balance (in bin cards stores ledger) with
physical stock - checks;
e) Authorization procedures for write - offs of differences.
Storage and Security
a) Proper layout and arrangement of stores so as to minimize loss through
deterioration;
b) Also so as to provide ready accessibility to particular items of stock as and
when required;
c) Location of stored in reasonable proximity to incoming transport and to user
points;
d) Prohibition of access to stores by authorized persons;
e) Precautions against fire risks, and insurance coverage against losses by theft,
fire, etc.;
f) Proper authorization procedures for withdrawals of items from stores.
Physical Inventory - taking
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a) Arrangements for continuous stock taking where ever practicable; if not,

verification at least at the end of each year;
b) Planning and supervision of the whole process of inventory taking to be

placed in the hands of a sufficiently senior - level official;
c) Segregation of duties as between those in charge of the custody of stock and

those to be involved in the physical count;
d) Division of each stores into convenient sections for control purposes;
e) Procedures for the identification of slow-moving and obsolete stocks;
f) Procedures for investigation of major differences before physical count is

accepted as being correct;
g) Detailed procedures for the valuation of each item on every stock sheet and
for the extension, casing and summarization of all the stock sheet;
h) Cut-off procedures in regard to receipts and issues so as to ensure inclusion

of all goods bought but not yet received and the extension of all stock sold but
not yet delivered, stocks belonging to third parties, etc;
i) Issue of detailed stock taking instructions in writing, incorporating source of

the above points and clearly defining the duties and responsibilities of all
categories of staff, e.g., stock-counters, stock-writers, stock-taking supervisors,
etc., and setting out the methods to be adopted, e.g., to prevent double counting,
and to prevent the complete omission of store or part of a store.
Accounting
a) Procedures to ensure receipt by the Accounts Dept. of copies of all relevant
stores documents, e.g.; goods received notes, stores requisitions, stores transfer
notes, stores write-off authorization, etc.;
b) Recording of all such stock movements in the appropriate stores ledger

records;
c) Series control of the numerical sequence of all stores document copies and
follow up of missing numbers;
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d) Periodic reconciliation of stores ledger balances with physically verified

balance.
Audit Procedures
The audit procedures to be carried out are set out above, that is, under physical
stock taking and accounting.
3.6. AUDIT OF FIXED ASSETS
The term ‘Fixed Assets’ is taken to mean property owned by an organization where the
property concerned has a useful life of more than one year. Unlike merchandise, fixed
assets are not acquired for sale; rather, they are acquired to help produce goods for sale,
or to assist in other operational aspects of an organization. Examples of fixed assets
include land, buildings plant and machinery, office equipment, furniture, etc.
Unlike the audit of cash and bank balances, purchases, receipts, payments, etc., the audit
of Fixed Assets requires less audit work owing to:
(i) the relatively infrequent purchase of such assets; and
(ii) the relatively low risk of fraud or embezzlement.
However, the investment involved in their acquisition, e.g., construction works, plant and
machinery, etc., is often very substantial, sometimes running into millions of Birr.
Manipulation in this area, if it occurs, could also be substantial.
Audit Objectives
The audit objectives in the validation of fixed assets are to determine whether:
a) the cost or other method of valuation of fixed assets is appropriate and has been
consistently applied;
b) addition to fixed assets are valid;
c) all disposals of fixed assets have been appropriately recorded;
d) fixed assets that are recorded in the accounts do exist and are owned by the
bureau/office under audit;
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Internal Control over Fixed Assets

Some of the more important features of a sound system of internal control over fixed
assets are set out below:
Acquisition
a)Securing approval of funds in the overall budget and authorization of the specifics;
b)Tender or quotation procedures for selection of supplier(s);
c)Contract procedures (including retention money; penalty clauses, etc.) in the case
of construction works, installations and other large contracts;
d)Purchasing, receiving, storing and issuing procedures in the case of plant,

equipment, etc.,
e)Segregation of duties as between budgetary authorization, selection of supplier,

awarding of contract (if any), purchasing, receiving, storing and issuing to users.
Recording
a)Maintenance of a fixed assets register for the recordings of all details (e.g., date of
acquisition, supplier, cost, depreciation rates, if any, etc.) for each separate asset or
capital project;
b)Procedures to authorize and to record movements of fixed assets within the

organization;
c)Procedures to ensure the proper recording of all disposals of fixed assets.
Safeguarding
a)Security procedures, e.g., guard system, barricades, restricted areas, etc.;
b)Keeping deeds of contracts, leases and other valuable documents relating to fixed
assets in safe custody;
c)Insurance of high-valued assets against fire, theft, etc.;
d)Segregation of duties as between officials responsible for physical security, safe

custody of documents, insurances, etc.
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Physical Inventory-taking
a) Arrangement for periodic verification of fixed assets;
b) Reporting of losses, obsolescence, poor maintenance, etc. and follow-up action by
management.
Disposals
a) Proper authorization of all disposals, whether by sale or by scrapping;
b) Procedures for the notification of all disposals to the Accounts Department and to
the official in charge of the fixed assets register;
Accounting
1.Maintenance of control accounts in the general ledger for the costs of fixed assets
under each asset classification, such as land, buildings, machinery, office equipment,
etc.;
2.Separate control accounts for accumulated depreciation in respect of each asset
category, if any;
3.Proper recording in relevant asset category and depreciation, if any, accounts of all
asset additions and disposals;
4.Periodic reconciliation of control account balances with fixed asset register records.
Audit Procedures
The following are some of the audit procedures designed to establish the credibility of
the relevant accounting records:
Agree fixed asset account balances with supporting records
a)Agree opening balances of fixed asset accounts with prior-year working papers or
audited accounts;
b)Check the totals of all additions and disposals during the year to the entries in the
relevant asset accounts in the general ledger or any recording method;
Test fixed asset additions during the year

a)Prepare a schedule of major additions made during year for each class of fixed asset;
b)Verify the disbursement vouchers with supporting invoices, receiving reports and
purchase orders;
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c)Examine other supporting documentation, e.g., construction contracts, architects’

certificates, etc., also in the case of contracts awarded to outsiders;
d)Ascertain whether expenditure are approved by the appropriate authority, or a

designated official;
e)Compare the supporting data with the amounts listed in the schedule at (a) above.
Test fixed asset disposals during the year

a)Prepare a schedule of all disposal during the year;
b)Trace the costs of assets retired to the entries in the fixed assets register.
Establish existence of fixed assets at year-end
a)Inspect physically all major additions recorded during the year;
b)In a general way, get satisfaction in a “ get-acquainted” tour of the plant;
c)Visit and inspect major remotely located equipment;
d)In the case of certain types of fixed assets, e.g., computers, motor vehicles, etc obtain a
list of all items in existence at year-end, and agree differences in the purchases and
disposals during the year.
Determine ownership of Fixed Assets
a)Examine title deeds in the case of property, and title books, etc. in the case of motor
vehicles;
b)Examine readily accessible evidence, e.g., contracts, invoices, and paid cheques to
approve acquisition and ownership of specific items of property;
Examine insurance policies and see whether the assets concerned are insured in the name
of the office.
3.7 AUDIT OF CREDITORS
Creditors’ accounts represent amounts owed by an entity for a relatively short-term

period (usually within a maximum of one year from the balance sheet date). They too,
like debtors, may be categorized into a few broad classes depending on the nature of the
payment outstanding. Thus, we may, sub-divide creditors into the following classes:
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a)Trade creditors, that is, persons (suppliers) from whom goods have been bought on
credit in the normal course of business;
b)Taxes payable, that is, taxes already deducted from employees payrolls or charged
from customers at the time of sale of goods or services, as well as taxes levied on the
organization’s own profits of each year;
As in the case of trade debtors, trade creditors also often constitute a large element in the
accounts of commercial organizations, while taxes payable and the currently payable
proportion of long-term loans may be relevant to both commercial and governmental
entities.
Audit Objectives
The primary audit objective of trade creditors is to gain reasonable assurance that the
total figure of creditors at the end of a financial year represents a complete and accurate
statement of the position. To achieve this, it is necessary to ensure that the ledger
accounts for creditors have been fully and accurately recorded and that resulting balances
are correct.
Internal Control over Creditors Ledger

The creditors’ ledgers contain individual accounts of suppliers from whom materials or
goods have been purchased or services received. As in the case of other items, the
internal auditor carries out, the audit of creditors’ ledger in the following two stages:
a) The internal auditor first studies and evaluates the accounting system and internal
controls relating to creditors;
b) Based on the results of his/her evaluation of the accounting system and internal
controls, the internal auditor carries out substantive procedures.
Audit Procedures
In conducting the audit of creditors the following are some of the audit procedures that
may be applied:
a)Obtain from the organizations schedule of individual creditors balances, preferablly

aged;
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b)Select a sample of creditors’ ledger account and check the accuracy of the postings, the
castings and the balancing;
c)Check the balances of the schedule with individual ledger account balances or other
detailed records or supporting documentation;
d)Check the additions of the schedule and ensure that the total agrees with the balance of
the creditors control account in the general ledger or any controlling book of accounts.
e)In the case of taxes payable:
(i) check that taxes collected on behalf of the Revenue and Customs Authority
have been collected in accordance with the relevant legislation, and
(ii) ascertain that they have been settled in time after the year-end as per relevant
provision of financial regulations.
3.8. AUDIT OF PURCHASES

Purchasing is the function of buying machinery tools, general supplies, service, raw
materials, etc. both from local and foreign supplies required. The activities of
purchasing should be governed by the purchasing principles which states that "The
essentials of efficient purchasing are right quality, right quantity, right time, right price,
right source and delivery at the right place".
The work of purchasing is performed by the purchase section and in the broader sense;
their functions and responsibilities include the following:
1. Obtain the right quantity and quality of materials at the right time so that production/
activities are not hampered.
2. See that the purchase is made at the most competitive price.
3. See that the funds are utilized on purchase with the utmost discretion.
4. Cost reduction is another responsibility implied in the purchase function. This can be
achieved not only by competition buying and negotiation but also by techniques such
as standardization, value analysis, etc.
5. See that purchases are made only against authorized purchase requisitions and proper
sanction.
6. Deal with the suppliers regarding shortages, rejections, etc. reported by the stores.
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7. See that supplier's invoices are promptly paid by the Account Department.
Steps in purchasing procedure
The major steps involved in a normal purchasing procedure are as follows:

a) Requisitioning
Purchase request should come from appropriate section and be permitted only on
the authority of a purchase requisition duly signed and approved by authorized
officials.
b) Inviting quotations
Written quotation should be obtained from those suppliers which are included in
the supplier list. Bids/tenders must be publicly invited for major requirements;
c) Selecting the supplier
After scheduling all quotations, reputable supplier must be selected taking into
account all relevant factors, e.g. Price, quality, discount, delivery time, terms of
payment, reliability etc. (the cheapest is not necessarily the "best buy").
d) Ordering
A purchase order on the organization's standard form signed by a duly authorized
person should be sent to the selected supplier, with copies to all departments,
concerned, including in particular the Accounts Department.
e) Receiving
The goods should be checked against the packing list and the purchase order copy,
and receiving report prepared and sent to all parties concerned, the goods
themselves will be passed on to the storekeeper and/or the services should be
delivered to the appropriate section/department.
f) Follow-up
Follow-up action is required, especially in the case of large purchase contracts, so
as to ensure that all goods are received as ordered and at the same time to purchase
proper claims for short deliveries, damages, etc. if any.
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3.9. AUDIT OF PAYROLL AND WAGES

Salaries/payroll and wages constitute major items of expense in the case of most
organizations. As wages and salaries involve payments to a large number of persons and
the supporting evidence is generally internal, this area is susceptible to frauds and errors.
Audit of salaries and wages, therefore, assumes special importance.
In this regard, the purpose of this section is to describe the importance and general
objectives of the audit work pertaining to payroll and wage payments, to review certain
principles of internal control over payroll transactions and to outline the audit procedures
to be followed. The proper audits of payroll and wage payments are important because in
many government organizations and enterprises, salaries and wages are likely to be the
largest single expense. Moreover, as salaries and wages are usually paid in cash, they
present one of the prime opportunities for fraudulent action and misappropriation.
The common frauds on the payroll and wage payments include the inclusion of fictitious
name on the payroll, exaggeration of particular employees’ earnings by inflating base
pay or by including fictitious overtime, overstatement of the payroll totals so as to
misappropriate the excess cash drawn for wages, making of unauthorized deductions
from the payroll or the misappropriation amounts validly deducted and misappropriation
of unpaid wages.
Payroll and wage preparation procedures

The steps in preparing a payroll should normally be as follows:
a)The payroll section should receive prompt notifications on authorized forms or letter of
all changes in personnel and personnel records, e.g., name and dates of recruitment,
promotion and termination, applicable rates of pay and changes in salary or deductions;
b)Wage and payrolls must be prepared from approved time sheets or piece-work records;
c)Within the payroll preparation section duties should be divided amongst staff so that no
one member of the staff is responsible in any month for all aspects of the payroll in
respect of a particular department or group of employees;
d)Payrolls and wages should be checked in detail, as regard name, hours worked,
including overtime, rates of pay, calculations, gross pay, deductions and the overall
costs, by persons independent of those who originally prepared them;
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e)In the case of salary payrolls the total of current payrolls must be reconciled with
previous months’ payrolls by showing the specific changes;
f)Payrolls should be signed by the persons responsible for their preparation and checking
respectively, and should be finally approved for payment by a responsible official
independent of those involved in the payroll preparation or checking.
Audit objectives
The principal objectives of the audit of payroll and wage payments are to ascertain that:
a)Adequate internal controls are in operation to ensure the integrity of a payroll
preparation and recording and to prevent fraud and misappropriation of wages.
b)The office is paying only for employee services actually received.
c)All liabilities for salaries, wages and related expenses are properly recorded and
correctly calculated;
d)Statutory and others deductions have been properly computed and deducted from gross
earnings;
e)Unclaimed salaries and wages, if any, remaining at the end of a period are properly
accounted for and safeguarded against loss or misuse.
Internal Controls
The internal controls relating to wages and salaries can be divided into the following:
Personnel and employment records
This function involves engagement, retirement and dismissal of employees. It also
involves maintenance of personnel records including details of pay, deductions from
wages and salaries, specimen signatures, etc. The internal auditor examines the existence
and effective operation of the internal controls relating to personnel and employment
function.
This includes:
a)The personnel department must maintain independent records of hiring and firings,
individual rates and rate changes, agreed deductions, specimen signatures and all other
relevant records,
b)Such records should be kept separate from both the accounts department and the
payroll preparation section;
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c)Notices of engagement, transfer, dismissal, and changes in salaries, wages, overtime

and deductions should be reported on properly authorized forms to the staff involved in
the preparation of the payroll;
d)Entries in the personnel records should be authorized by someone not connected with
payroll preparation.
Computation of Salaries and Wages

a)A person having no other payroll duties should be responsible for the preparation of all
payroll records including necessary computation;
b)Computations for gross pay, deductions and net pay are based on properly authorized
time and rates of pay;
c)The computations should be checked by another member of the staff.
Payroll Deductions
a)Payroll deductions, other than statutory deductions, should only be made in accordance
with the employee’s written instructions or approvals maintained in his personnel
records;
b)Special columns should be provided for all compulsory deduction, e.g., income tax,
pension contributions, loan installment, etc,
c)All deductions should be credited to separate accounts ensuring control over the
accuracy of payments to third parties.
Payroll payments
a)payment of wages (in cash or by cheque) should be effected by employees who take no
part in the preparation of the payroll, who are not responsible for hiring or firing
employees and who do not approve time reports.
b)only the net amount of cash required for payment for the final net total of wages should
be drawn from the bank.
c)payment of wages should be made only against employees signature for receipt (letter
written from the office to the bank to transfer the net amount to their respective bank
account) or, where this is not possible, against adequate identification and authorization
where there are large numbers of employees, particularly laborer’s, the foremen or
supervisor concerned should be present to identify his employees,
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d)The wages of employees who are absent should be paid on his behalf to another person
only on production of written authority from the absentee.
e)Unclaimed wages should be separately recorded immediately after the conclusion of
payment, and paid out subsequently only on satisfactory proof of entitlement. Wages
unclaimed after a specified period should be returned and deposited to the bank.
Audit procedures
Audit procedures to be followed in testing payroll transactions may be considered as
follows:
Payroll preparation
a) Verify for a selection of employees regarding their employment and rates of pay
with the personnel records, ensuring that such records are duly authorized,
b) Check whether there is a system whereby any information having an effect on
payroll, that is, changes in personal or changes in pay, allowances, deductions, etc,
is intimated immediately to the persons responsible for time-keeping and
preparation of payroll.
c) Check whether there is a proper system of recording time/attendance where
employees are paid on the basis of number of hours/days worked. In other words,
trace hours used in payroll calculations to time records and work done to piece -
work records, verifying that such records are properly controlled and approved;
d) Test accuracy of gross pay calculations;
e) Test accuracy of amounts deducted from gross pay against authorizing documents;
f) Test accuracy of net pay calculations;
g) Check whether there is a system to ensure that the primary date for preparing
payroll, that is, the number of hours/days worked and/or the quantity/quality of
piece-work, are properly maintained;
h) Test that the payroll initialed by persons responsible for its preparation, checking
and authorization, that is, examine available evidence to insure that the checking
and approval of payrolls have been carried out in accordance with authorized
procedures;
i)Compare current payroll with previous months' payroll and examine any significant
variations as to their causes.
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Payroll payment
a) Check that wages and salaries credited to the respective bank accounts of the
employees by sending an advice to the bank;
b) Check that payment of wages and salaries shown in payroll, approved by a senior
official before the disbursement;
c) Test wages and salaries disbursed on fixed days and time;
d) Test wages and salaries of each section discussed in the presence of the section
head/other concerned.
e) Test wages and salaries disbursed only after proper identification of the worker and
signed accordingly;
f) Check the system of collection of wages/salary of a worker by another person,
check also for existence of proper authorization letters;
g) Check unclaimed wages and salaries how they are dealt with and check whether
proper record is maintained for unclaimed wages.
h) Test who authorizes the subsequent payment of unclaimed wages and whether the payment
is made through a separate voucher after proper identification of the payee;
i)In the case of workers at contract sites, test whether there are adequate controls on
primary records such as time cards, authorization of wage rates and identification of
workers;
j) Check the system of payment of wages to temporary, casual and contract workers,
that is check the existence of adequate controls to prevent fictitious payments.
Accounts Recording
a) Check payroll summary or journal voucher with payroll;
b) Check that personnel records maintained properly, that is, by looking into each
employee file the date of joining, scale and rate of pay, rate of increment, loan and
advance taken, deductions of income tax, repayment of loans etc.
c) Test the records also contain specimen signature of each employee and his current
and permanent addresses;
d) Check that whether there are well defined rules regarding incentive schemes,
holiday pay, bonus, etc;
e)Check postings to subsidiary and control ledger accounts;
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3.10. AUDIT OF PAYMENTS (EXPENDITURES)

When we say ‘payments’ or ‘expenditures’ we mean payments of money in cash or
money's worth say in cheque for securing a specific type of goods or services. The audit
of payments is the examination of payments - whether made in cash or by cheques as
medium of payment.
Payments in the normal course of business of any organization may be made for various
purposes, such as for purchases of goods and services, fixed assets, salaries and wages,
perdiem and travelling, printing and stationery, repair and maintenance, fuel and
lubricants, postage, telephone and other day-to-day expenses of minor nature. This
section, therefore, concentrate on the mechanics of the relevant payment procedure (that
is, depending on the particular mode of payment adopted), regardless of the purpose for
which a payment may be made. Basically, there are two modes of payment:
a)Payment in cash
Payment in cash is the giving of sum certain in money in the form of bank notes and
coins.
b)Payment by cheques
Payment by cheque is the discharge of an obligation by means of a written instrument
known as a cheque, a cheque being an instrument drawn on a banker, payable on
demand. Cheques are used to obviate the need for transferring large sums of money
in cash.
Payment Procedures
In order to appreciate fully the audit objectives, the internal control systems that should
normally operate, and the audit procedures that will be required to be followed, the usual
steps involved in a payment procedure are set out below according to the two main
methods of payments:
Cheque payments
a) Selection of invoices, or particular items in invoices for payment,
b) Preparation and approval of payment vouchers,
c) Preparation, recording and signing of cheques,
d) Mailing or delivery of cheques,
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e) Entry of cheques in cashbook,

f) Posting of payment to ledger account,
g) Periodical reconciliation of cheque payments with bank statement debits,
h) Follow-up of outstanding cheques.
Cash payments
a)Preparation and certification of payment voucher or petty cash voucher,
b)Payment of cash against voucher;
c)Entry of payments in petty cash book, if any, and extension into appropriate
analysis column(s),
d)Posting of analysis column entries (or, alternatively, of corresponding entries
in a summarized petty cash account) to appropriate Ledger accounts.
Audit Objectives
The primary objective in the auditing of payment, whether they are made by cheque or in
cash, is to obtain reasonable assurance that all payments have been dully authorized,
properly recorded and represent value received for the benefit of the organization.
In order to achieve this primary objective, it is necessary to obtain sufficient audit

satisfaction:
a)that proper authorization exist for the payment made;
b)that the payment was made to the right party;
c)that the payment was made for the purpose intended;
d)that the payment falls within the accounting period (fiscal year) under audit;
e)that all the proper supporting documents are attached to the payment voucher; and
f)finally, that the payment is correctly recorded in the books of the office.
Internal control over payments
In every organization, management normally establishes policies, issues regulations and
lay down procedures in order to avoid fraud, defalcation, misappropriation
embezzlement, errors, etc, in the process of effecting payments. Adequate and
satisfactory internal control systems are also necessary to safeguard the assets used for
payment, namely, cash and cheques, and to secure the completeness and accuracy of all
the relevant accounting records.
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Some of the major internal controls in this regard may be classified as follows.
1.Cash payments controls

a) all payments over specified limits should normally be made by cheques only,
and imprest system must be used for petty cash payment for the purpose of
adequate control;
b) proper segregation of duties among the personnel concerned must be made,
e.g., authorizing officers, paying officers (cashiers) and recording (accounting)
personnel;
c) payment vouchers and supporting documents should be approved by
authorized officials;
d) cash payment vouchers and supporting documents should be examined before
payment;
e) Cash safes or vaults for safe custody of cash, and cashiers should be placed in
areas restricted to others;
f) proper procedures for the accurate recording of all cash payments must be
maintained.
2.Cheque payments controls

a) procedures must be adequately maintained in the preparation of payment
vouchers, including attachment of all supporting documents and deduction of
all discounts, returns, etc. and all paid documents should be marked "PAID";
b) ensure the existence of procedures for the receiving, recording, custody and
issue of cheque books;
c) ensure the existence of rules and regulations governing the preparation of
cheques e.g. officials authorized to sign, use of crossings, blank cheques, loose
cheque leaves, etc;
d) lay down procedures relating to cancellation, revalidation and stoppage of
cheque and as to the issue of cheques in lieu;
e) establish methods to be used for transmission of cheques, e.g., by hand or by
direct transfer to the payee's bank account etc; and the manner of securing
acknowledgement of receipt;
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f) establish procedures for the arrangement, storing and custody of all paid
vouchers and supporting documents until audit and for a specified period
thereafter;
g) ensure proper recording of all payments in the cash and bank book, monthly
reconciliation with bank statements and follow-up of any un cleared items, all
duties being properly segregated amongst staff.
Audit procedures
The auditing of payments is perhaps one of the most difficult tasks in the audit work
as a whole because of the wide variety and multitude of transactions concerning
payments in any organization.
The following are some of the major points to which attention must be given;
1. Cash payments
a)examine the systems of filing of cash payment vouchers for sequential
numbering, and list, and inquire into , all missing numbers,
b)Select a sample of vouchers for test- checking and
i) see that they are properly authorized, also check against the specimen
signatures of the authorizing officials;
ii)ascertain that all calculations and supporting documents have been
checked and verified by supervising officials with their initials against
each stage of checking;
iii)verify the correctness of the arithmetical calculations, extensions and
casts;
iv)vouch all supporting documents and ensure that they are all stamped
"PAID";
v) in the case of petty cash payment, check that the authorized spending
limits have not been exceeded;
vi)check that all payment are properly entered in the accounting records
and posted to the appropriate ledger accounts.
2. Cheque payments
In addition to the above-mentioned checks to verify the correctness and validity
of payment by reference to supporting documents, the internal auditor should:
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a) examine cheque register and account for all the cheque books and inquire into
any messing serial numbers;
b) observe method of safekeeping of unused chequebooks and loose cheque
leaves, if any, and compare with the cheque register.
c) look for evidence that all cheques issued have been marked "A/c payee only";
d) get names, designations, specimen signatures, and initials of officials
authorized to sign cheques and ascertain the limits of their authority;
e) check that cheque signatories have initialed on the cheque stubs as well as on
the payment vouchers;
f) trace that all the recordings and postings have been properly made;
g) See that bank reconciliation have been prepared monthly and have been
checked and approved by a supervising official.
3.11. OPENING BALANCES
We should obtain sufficient and appropriate audit evidence that amounts derived from
the preceding periods financial statements are free from material misstatement and are
appropriately incorporated in financial statements for the current period.
Opening balances are those account balances which exist at the beginning of the period.
They are found in all financial statements prepared on an accrual or cash basis. They are
based on the closing balances of the preceding period and therefore reflect the
transactions of preceding year and accounting policies applied in those periods. We need
to obtain evidence that they do not contain any errors or misstatements which materially
affect the current period’s financial statements and that appropriate accounting policies
are consistently applied, or where changes have been made, they are properly accounted
for and disclosed.
3.12. FRAUD AND ERROR
Unintentional mistakes in financial statements, whether of a mathematical or clerical

nature and due to oversight or misinterpretation, are regarded as errors. Intentional
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distortion of financial statements for whatever purpose and misappropriation of assets

(whether or not involving distortion of financial statements) are referred to us
irregularities. Fraud is one form of irregularity involving the use of criminal deception to
obtain an unjust or illegal advantage.
1. “Fraud” involves the use of deception to obtain an unjust or illegal financial

advantage as well as intentional misstatements in, or omissions of amounts or
disclosures from, an entity’s accounting records or financial statements.
2. Corruption is defined as “the offering, giving, soliciting or acceptance of an

inducement or reward which may influence the action of any person.” That is, an
individual receives a bribe as a reward or incentive for action or inaction contrary
to the proper conduct of his or her duties, for the direct benefit of a third party. (see
Ethiopia’s Ethics & Anti-corruption Proclamation and its subsequent amendments).
3. Whereas the loss to the office is usually fairly apparent in cases of “fraud” as
defined above, in the case of “corruption” the corrupt employee may benefit from
the act, but there may not be any loss to the office or effect on the financial
statements.
4. Fraud includes both dishonest acts committed by employees or management of an

office (“internal fraud”) and dishonest acts perpetrated against the office by outside
individuals or groups (“external fraud”). Internal fraud may result in benefits being
obtained either from the audited entity (e.g., theft of cash/assets, falsification of
payroll data) or from a third party (e.g., the theft of patients’ property).
The latter may not result in immediate loss to the office, but it may result in a
liability for restitution where positions of trust have been abused. Examples of
external fraud include making fraudulent claims for state grants and benefits or
suppliers issuing false or duplicate invoices.
5. Both categories of fraud may have an impact upon the audit opinion. All fraud is
by definition without proper authority and therefore irregular and where material
fraud is discovered, we will qualify the regularity part of our audit opinion.
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6. Whether a fraud has been committed or not this can only be determined by a court
of law. We will often encounter circumstances where fraud is suspected but has
not been proven by a court. We approach such situations with a view to
establishing whether an irregularity has occurred and report accordingly.
Responsibilities of Management
The primary responsibility of safeguarding the audited entity's funds and assets rests
with management. It is thus management’s job to obtain reasonable assurance about
the prevention and detection of fraud and error by establishing an adequate system of
internal control, using such methods as controls on authorization and the segregation
of duties. The controls should be designed to ensure that:
a)the entity receives and enters in the accounting records the income or revenue to
which it is entitled promptly with immediate endorsement of cheques;
b)regulations governing contracts for works and for the supply of goods and services
are properly enforced, and that all expenditure is properly authorized;
c) all assets are properly recorded and provision is made for known or expected losses;
d)all liabilities are properly recorded and provision is made for known or expected
losses.
e)the accounting records provide a reliable basis for the preparation of financial
statements;
f) errors and irregularities in processing accounting information will become
apparent;
g)accounting instructions and financial regulations are available to all staff and are
kept up to date.
Responsibilities of the internal auditor
The internal auditor has a responsibility to detect all material errors and irregularities,
including material fraud, which could distort the results or state of affairs shown by the
financial statements.
Planning the Audit

The steps to be taken to plan the audit to provide a reasonable expectation of detecting
material irregularities are considered in the following paragraphs.
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When deciding what procedures to adopt for the purpose of detecting material
irregularities the internal auditor should exercise his judgment as to:
a) the types of fraud that are likely to occur, or which have occurred previously (e.g.,
misappropriation of cash where staff handle large amounts of cash);
b) the relative risk of their occurrence (e.g., high risk in small organizations where proper
segregation of duties is impossible); and
c) the relative effectiveness of different audit tests.
When exercising this judgment a number of factors should be considered;
a) the nature of the transactions conducted, or services provided by the entity and the
type of assets held (e.g., assets susceptible to misappropriation);
b) the significance of each area of the accounts in the context of overall materiality and
its general susceptibility to fraud or misstatement;
c) the adequacy of the control environment. This will normally be assessed when
deciding whether to place reliance in internal controls and to reduce the level of
substantive testing. Internal audit is an important element of internal control and where
present should act as a deterrent to irregularities.
The internal auditor’s assessment of effectiveness of the internal audit function and the
reaction management to their reports will therefore be important.
It is based on a thorough understanding of the office and its business and identification of
areas of particular risk of misstatement or irregularity. It is not possible to provide a
comprehensive list of those factors that may increase the risk of fraud but they are likely
to include:
a) For internal fraud:
-Previous experience or incidents which call into question the integrity or

competence of management. For example, domination by one individual or group,
high turnover of key staff, unnecessarily complex structures;
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-Weakness in the design and operation of internal control systems. For example,
excessive authority vested in a few individual, poor segregation of duties,
management override of controls;
-Weakness in the design and operation of internal control systems. For example,
excessive authority vested in a few individual, poor segregation of duties,
management override of controls;
-Unusual transactions. For example, transactions with related parties, payments

for services that appear excessive in relation to the service provided;
-Problems in obtaining sufficient appropriate audit evidence. For example,

inadequate records, evasive or delayed responses to audit enquiries,
uncooperative management attitude to the conduct of the audit;
-Situations where there are restrictions on our access to information because of its
sensitivity.
b) For external fraud:

i) where payment is made or revenue collected on the basis of self certification by
the claimant or payer;
ii) where other documentary evidence is not available to support a self certified
claim or receipt;
iii) where penalties available are low relative to the potential gain or the office is
known not to apply penalties in full.
Areas most vulnerable to fraud

The transaction areas where most frauds occur are in quantitative terms generally
considered to be receipts, payments, and stock, in that order. In value terms, payments
frauds are easily the largest. Concealment is highest in account areas where
manipulation of records is easiest and discovery least likely. For example, purchases,
sales, debtors, stock and year end transactions to move the deficiency on to a new
period.
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Common types of fraud

Examples of common types of fraud:
a) misuse of cheques forging the endorsement on cheques received, cheques

payable made out to fictitious persons;
b) theft of cash receipts and delaying banking of cash until cheques are
auditable to cover the shortfall (known as teeming and lading);
c) retention of cash from sales covered by alteration of stock records;
d) falsification of refunds;
e) collusion with contractors, payment for goods or services not received or

short delivered, evasion of tender procedure controls, invoices submitted for
goods delivered to private persons; specifications written around particular
suppliers or products; late telephone bids accepted; price increases
uncontested.
f) manipulation of procedures governing sales of surplus stock or scrap

(including improper down grading of normal stock for sale as scrap);
g) simple alterations to voucher or summaries to cover misappropriation (e.g.,

overstating cash requirements for cash payments such as wages).
Protection against fraud

Aspects to which management should be encouraged to give attention in order to
discharge its responsibilities for prevention of fraud should include:
a) sound working procedures with particular attention to danger spots, e.g., listing of
receipts and daily banking; comparison of invoices with goods received records and
purchase orders plus cancellation stamping of invoices authorized for payment; pre-
numbering of transaction documents.
b) segregation of duties to prevent one person having complete control over a single
transaction process, e.g., authorization should be divorced from payment; bank
statements and returned cheques sent to someone other than persons writing cheques;
bank reconciliation performed by someone unconnected with banking operations;
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segregation of responsibility for receipt of stores, stock recording, stock management

and stock checks;
c) surprise test checks in high risk areas or where proper segregation of duties is
impossible, e.g., of cash, of high value stock; cheque endorsements; formal entries;
outstanding loans; suspense accounts; dormant funds; inter-branch transactions; write
offs; stock counts;
d)confirmation procedures, e.g., circularization of offices for confirmation of balances

outstanding;
e)analytical review by senior staff to spot suspicious variations or trends, e.g., in

purchases of materials, maintenance expenses, stock consumption, production costs.
Indications of Irregularities or Error

Planning should always be sufficiently flexible to allow follow-up work to be carried out
when the internal auditor encounters circumstances which could be indicative of
irregularity. Examples of such circumstances might include:
a) missing vouchers or documents;

b) unsatisfactory explanations or which cannot be confirmed by documentary evidence;
c)unusual accounting entries or discrepancies within accounting records. (such as
control accounts not reconciling with supporting subsidiary records);
d) figures, trends or results which do not accord with expectations;
e)indications of unduly lavish life styles by employees or failure of a person in a key
position to take leave;
f) undue preference given to a particular contractor, or lowest tenders not being accepted;
g) high turnover of staff in key positions or understaffing of accounting and financial
functions.
Many substantive tests and procedures normally performed by the internal auditor can
assist in identifying irregularities, for example, debtors circularization, used primarily to
verify customer balances, may indicate irregularities such as the teeming and lading of
debtor accounts.
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IV. AUDIT OF BUDGET AND INVESTMENT COSTS

4.1. AUDIT OF BUDGET
Audit Objective:
To ascertain that budgets are formulated for a COWASH projects for a given financial year
according to the policies and procedures of the region and to ensure that budgets are used
efficiently and controlled effectively.
Audit Procedures:
• Examine the proclaimed budget for COWASH Projects;
• Investigate the budget control system, how budget are released to Woredas and specific
projects or WASHCOs, recording and controlling;
• Analyze the budget versus actual expenditures and look for any deviations;
• Examine how deviations are addressed;
• Examine what actions are taken whenever significant deviations are found;
• Check that monthly, quarterly and annual reports are properly prepared as per
established procedures by comparing with the budget.
Control
It is not enough to make plans and implement plan. The results of plans have to be
compared against stated objectives to assess the organization’s performance. Plan must
be continually reviewed because as environment change so plan and objective will need
revision.
Measure
Plan Operation actual result
Feed back
Control
Budget is a plan of action, relating to activities during a defined period of time, normally
expressed in financial terms. A process of preparing a budget is usually a part of the
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planning function within the organization. Plan may then be converted in to budget and
budget is usually a detailed expression of the plan which contains all the costs and
receipts that are associated with the execution of the plan.
Once budget exist it may be used as an instrument of business control. The results that
are achieved may be continuously compared with those planned so that the budget
variance and implementation of the investment projects are analyzed.
4.2. AUDIT OF INVESTMENT COSTS
Objective of the audit:

• To ascertain that the existence of adequate internal control for investment costs;
• To check appropriate and separate WASHCO file exists;
• To determine the effectiveness of the control over budgets for investment expenditures;
• To assess actual achievements and test the soundness of COWASH projects;
• To detect irregularities and inconveniencies.
The following data are auditing tools generally used by the internal auditor in reviewing
investment expenditure.
• The investment cost disbursement as per the project document.
• Budget as per the annual budget documents.
• Actual costs as per underlying records and schedules.
• Ongoing projects as per the project documents and agreements.
Audit procedures:
• Check the total investment costs disbursed to woreda MFI;
• Check the project costs disbursed to WASHCOs;
• Review the WASHCOs file so that to check the project documents as per the
COWASH requirements, supporting documents for the executed projects and check the
status of the project for ongoing projects;
• Ascertain that the proposed investment costs are within the approved budget;
• Check items in the budget documents to see whether they match (in name and amount)
with those appearing in the WASHCO documents;
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• Check whether WASHCOs projects specified by budget in a physical year are started
and carried out according to plan;
• Ascertain the adequacy of the cost control system by reviewing the WASHCOs file;
• Ascertain that actual costs have been posted in their respective ledger of each
WASHCO;
• Verify the correctness of those WASHCOs projects shown as in progress and examine
the status using the project supervison report prepared by CMP Supervisor or experts
of water office;
• Check whether completed WASHCOs are cleared and closed and any balance is
transferred to COWASH MFI account;
• Compare the budgets with the actual costs, analyses the differences if any.
V. AUDIT REPORT
Internal auditors' reports on the financial statements should contain a clear expression of
opinion, based on the review and assessment of the conclusions drawn from evidence obtained
in the course of the audit. The internal auditor should also prepare a written report, which may
either be a part of the report on the financial statements or a separate report, on the tests of
compliance with applicable laws and regulations.
Completeness
1.Being complete requires that the report contain all information needed to satisfy the audit
objectives, promote on adequate and correct understanding of the matters reported, and
meet the report content requirements. It also means including appropriate background
information.
2.Giving readers an adequate and correct understanding means providing perspective on

the extent and significance of reported findings, such as the frequency of occurrence
relative to the number of cases or transitions tested and the relationship of the findings to
the entity's operations.
3.In most cases, a single example of a deficiency is not sufficient to support a broad
conclusion or a related recommendation. All that it supports is that a deviation on error,
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or a weakness existed. However, except as necessary to make convincing presentations,

detailed supporting data need not be included.
Accuracy
1.Accuracy requires that the evidence presented be true and that findings be correctly
portrayed. The need for accuracy is based on the need to assure readers that what is
reported is credible and reliable. One inaccuracy in a report can cast doubt on the
validity of an entire report and can divert attention from the substance of the report.
Also, inaccurate reports can damage the credibility of the issuing audit organization
and reduce the effectiveness of its reports.
2.The report should include only information, findings, and conclusions that are
supported by competent and relevant evidence in the internal auditors' working papers.
If data are significant to the audit findings and conclusions, but are not audited, the
internal auditors should clearly indicate in their report the data's limitations and not
make unwarranted conclusions or recommendations based on those data.
3.Reported evidence should demonstrate the correctness and reasonableness of the

matters reported. Correct portrayal means describing accurately the audit scope and
methodology and presenting findings and conclusions in a manner consistent with the
scope of audit work.
Objectivity
1. Objectivity requires that the presentation of the entire report be balanced in content
and tone. A report's credibility is significantly enhanced when it presents evidence
in an unbiased manner so that readers can be persuaded by the facts.
2. The audit report should be fair and not misleading, and should place the audit results
in perspective. This means presenting the audit results impartially and guarding
against the tendency to exaggerate or overemphasize audit findings. In describing
shortcomings in performance, internal auditors should present the explanation of the
responsible officials including the consideration of any unusual difficulties or
circumstances they faced.
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3. The tone of reports should encourage decision-makers to act on the internal auditors'
findings and recommendations. Although findings should be presented clearly and
forth-rightly, the internal auditors should keep in mind that one of their objectives is
to persuade, and that this can best be done by avoiding language that generates
defensiveness and opposition. Although criticism of past performance is often
necessary, the report should emphasize needed improvements.
Convincing
Being convincing requires that the audit results be responsive to the audit objectives, the
findings be presented persuasively and the conclusions and recommendations follow
logically from the facts presented. The information presented should be sufficient to
convince the readers to recognize the validity of the findings, the reasonableness of the
conclusions, and the benefit of implementing the recommendations. Reports designed in
this way can help focus the attention of responsible officials on the matters that warrant
attention and can help stimulate correction.
Clarity
1.Clarity requires that the report be easy to read and understand. Reports should be
written in language as clear and simple as the subject permits.
2.Use of straightforward, non-technical language is essential for simplicity of

presentation. If technical terms and unfamiliar abbreviations and acronyms are used,
they should be clearly defined.
3.Logical organization of material, and accuracy and precision in stating facts and in
drawing conclusions, are essential to clarity and understanding. Effective use of titles
and captions and topic sentences make the report easier to read and understand.
Conciseness
Being concise requires that the report be no longer than necessary to convey and support
the message. Too much detail detracts from a report, may even conceal the real message,
and may confuse or discourage readers. Also, needless repetition should be avoided.
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However, if some reports are necessarily long, they should be accompanied y executive
summary.
Although room exists for considerable judgment in determining the content of reports,
those that are complete, but still concise, are likely to achieve greater results.
Timeliness
The audit opinion or report should be available promptly to be of greatest use to readers
and users, particularly those who have to take necessary action. Internal auditors should
appropriately issue the reports to make the information available for timely use by
management, legislative officials, and other interested parties.
To be of maximum use, the report must be timely. A carefully prepared report may be of
little of value to decision makers if it arrives too late. For appropriate and timely
issuance of the audit report, the audit organization has to set policies and procedures.
Therefore, internal auditors should plan for the appropriate issuance of the audit report
and conduct the audit with this goal in mind.
The internal auditors should consider interim reporting, during the audit, of significant
matters to appropriate officials. Such communication, which may be oral or written, is
not a substitute for a final report, but it does alert officials to matters needing immediate
attentions and permits them to correct them before the final report is completed.
VI. FINANCIAL REPORTS THAT SHOULD BE ATTACHED

TO THE INTERNA AUDIT REPORT
(Prepared by the respective auditees or offices under audit as per the Ethiopian
Government financial regulation):
❖ Revenue/Assistance/Loan Report;
❖ Recurrent Expenditure Report;
❖ Capital Expenditure Report;
❖ Transfer Report;
❖ Receivables Report;
❖ Payables Report; and
❖ Trial Balance.
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APPENDICES
Appendix I
AUDIT PROGRAM FOR BANK BALANCES AT MFI
Fiscal year/period under audit

Region and Wereda__________________________________________________________
Cross Performed ()

Description Ref. Not performed (X) Signature Date
1 Verify the correctness of all cheques found in the
cash safe, include checking the void ones.
2 Obtain the bank statement or copy of the ledger
from the office under audit or from the MFI for the
period under audit.
3 Obtain bank reconciliation and check the balance
with the record including outstanding items.
4 Compare previous year’s/period’s balances as
shown in bank book/ledgers with the monthly
statement of receipts and payment and ascertain
that such balance is correctly brought forward.
5 Check the current budget year’s/period’s receipts
and payments against the bank book/ledger and
also check the arithmetic accuracy.
6 Verify any adjustments, if any, regarding cash
balance at MFI.
7 Verify cash balance at MFI at the end of the
year/period against the bank reconciliation and
make sure that the balance is carried forward to the
next year/period.
Prepared by: Internal auditor: Name Sign.

Date
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Appendix II
INTERNAL CONTROL QUESTIONNAIRE

FOR RECEIPTS
Budget Year/period under Audit

Date
Ser. Description Yes/ N.A. Assessment

No. No
Segregation of function
1 Are cheques (if any) immediately deposited
in the bank?
2 Is cash collected (and/or deposited) proved
daily with the total of the receipts by
someone other than the cashier?
3 Are bank reconciliations and follow up an
outstanding items made by someone other
than the cashier?
4 Are cash positions subject to surprise
checks by accounts department
intermittently other than the cashier?
5 Are cashiers only assigned to the collection
of receipts and payments?
Receipts
6 Are prenumbered cash receipt voucher

used?
7 Are unused cash receipt vouchers
safeguarded and periodically checked?
Receivable Records
8 Is any receivables/advance collected timely

and follow up its collection case by case?
9 Is the write-off done after a decision made
by appropriate authority based upon a set of
procedures?
Cash Collections
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Ser. Description Yes/ N.A. Assessment

No. No
10 Are all cash receipts promptly turned over
to cashier and held until deposited?
11 Is a list made of all cheques received and
later checked against the bank deposit slip?
12 Is the bank deposit slip checked against the
posted ledger?
13 Is actual cash received (in the form of
checks or currency) through the cashier?
14 Is actual cash transferred to a MFI account
and evidenced by a bank/MFI advice?
15 Are total cash receipts deposited promptly
intact?
16 Does the office have appropriate
Government cash receipts vouchers?
17 Is the cash collected only by the cashier?
Accounting
18 Is the Accounts Department always notified

for any collections from debtors?
19 Is the the Accounts Department keeps
book/ledger for recording receipts?
20 Are void receipts recorded in the books, and
the original and second copies cancelled and
attached to the pad?
21 Are bank transfers listed and kept in record?
22 Do bank deposit slips reach Accounts
Department timely and properly?
23 Are supporting documents for receipts, bank
deposit slips and books of account kept
properly?
24 Are deposits recorded in the books by
checking against bank deposit slips?
Interviewed and Assessed by:

Internal auditor Name Sign
Date
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Appendix III
AUDIT PROGRAMME FOR RECEIPTS
Fiscal year/period under audit


Account Receivable
1 Check for evidence of collection from debtors

against general ledger control account.
2 Check that the write-off done after a decision
made by appropriate authority based upon a set
of procedures.
Cash Receipts
3 Reconcile some cash receipts against the bank

deposit slips and cross check with the bank
statements.
4 Review cash receipts for unusual items
5 Compare sample receipts and deposits to bank
statement for amounts and dates
6 Check that those receipt vouchers are
sequentially numbered.
7 Check that original and 2nd copies of void
receipts are attached to the receipts pad and
check that they are all cancelled.
8 Test that there are no cancelled or erased
receipts.
9 Test that issuance of receipts from stores is
according to magnitude of collections.
10 Check the approval and cashier’s signature for
receipt of the cash
11 Verify posting to books of accounts
12 Check that receipt is issued for all deposits in
the name of the office under audit and that is
recorded in the book or ledger.
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Recording of Receipts
13 Check that balance brought forward from

previous budget year is correctly recorded in
cash book and monthly statement of receipts
14 Check that receipts are recorded in the book or
ledger daily or the time it is received
15 Test accuracy of amounts monthly statement of
receipts or schedules by comparing it with cash
book and bank statements.
16 Include unrecorded receipts in the statement of
receipts or schedules and record it in its proper
ledger
17 Prepare monthly receipts schedule from cash
receipt vouchers.
Prepared by: Internal auditor: ____________________ Sign. ____________________

Date _________
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Paulos Basazenew
Appendix IV
FOR DEBTORS
Date
Yes/ N.A. Assessment

Description
No
Staff debtors
1 Does the office have defined policy with
regard to staff loans and advances with
specific limits to the amount of loans and
periods of repayment?
2 Do staff loans and advances require
specific approval by management?
3 Is the granting of new advances prohibited
while and existing advance remains
unsettled?
4 Are advance repayments automatically
deducted on the payrolls?
5 Are procedures adequate to ensure that the
amount of any outstanding advances is
recovered from the compensation due to
staff who resign or are dismissed?
6 Are procedures adequate to settle or
transfer the advance or obtain repayment,
from staff that is transferred to other
offices?
7 Are staff debtors balances periodically
reviewed for correctness by a senior
official not directly concerned with the
granting of advances or recording
repayments?
Interviewed and Assessed by: Internal auditor: _________________________Sign. _________

Date:__________
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Appendix V
AUDIT PROGRAMME FOR DEBTORS

Ser. Cross Performed ()

No. Description Ref. Not performed (X) Signature Date
Staff Debtors
1 Obtain schedule of balances, preferably aged,
and check casts and cross-casts.
2 Agree total with control account or ledger
balance.
3 Scrutinize control account or ledger and
verify validity of any closing adjustment
entries.
4 Test-check schedule of balances with
subsidiary ledger (if any) accounts and
scrutinize accounts for apparent correctness
and regularity of repayments.
5 Enquire into accounts in arrears or where
repayments not being regularly received.
Sundry Debtors
6 Check schedules of balances and agree with
control account balance.
7 Vouch outstanding insurance claims, if any,
with supporting documents and
correspondence with the insurance company
and ensure that follow up is adequate.
8 Review and vouch any advance payments,
say advance to artisans or contractors and
circularizes for confirmation as necessary.
Prepared by: Internal auditor : Name ____ Sign.

Date______________________
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Appendix VI
INTERNAL CONTROL QUESTIONNAIRE FOR STOCKS

Budget Year/period under audit _______________
Date
No. Key control questionnaire Yes/ N.A. Assessment

No
SEGREGATION OF FUNCTION
Is there separation of function
between:
1 Custody of stock and the keeping of
the stock records?
2 The physical verification of stocks
and the maintenance of stock records?
STOCK RECORDS
3 Are receipts of stock evidenced by
renumbered goods receiving reports
properly controlled for the integrity of
the numerical sequences?
4 Are issues of stocks made only
against properly approved stores
requisitions prepared by the relevant
department requiring the goods?
5 Are such issues made on
prenumbered stores issue vouchers
signed by the storekeeper for issue of
the goods and referenced to the stores
requisition from which they
originated?
6 Is adequate control exercised to
ensure the numerical sequence of
stores issue vouchers?
PHYSICAL CONTROL
7 Is there segregation of duties between
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No
persons responsible for the custody of
stock and the stock recording?
8 Are stocks protected by adequate
physical safeguards to prevent theft or
unauthorized removal of goods?
9 Is access to stocks restricted to
authorized personnel?
10 Are stocks subject to independent
physical verification?
a) On a continuous basis?
b) Periodic counts during the year?
c) At the financial year end only?
11 If physical stocktaking undertaken
only on a periodic basis or at the year
end, then:
a) Are written stocktaking

instructions issued to all counters?
b) Do such instructions
communicated to all the counters.
c) Are stocktaking sheets

prenumbered and adequate
control exercised to ensure that
all sheets are accounted for?
d) Is stock counting teams

adequately familiar with the
items they are counting or are
they accompanied by a superior
to identify items?
e) Are adequate cut-off procedures

in operation to ensure that there
are no movements of stock while
the counts are in progress and
that all stock issues and receipts
have been recorded?
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No
f) Are goods marked, as they are
counted to avoid the same items
being counted twice?
g) Does a supervisor check to

ensure that all items have been
marked and no stocks were left
uncounted?
h) Are differences above designated

tolerances between physical and
book stock subject to recount and
investigation?
i) Are all material differences

reported to management?
j) Are stock records checked with

the physical count sheets to
ensure that items are not omitted?
k) Are procedures for identifying

and reporting obsolete or
damaged items adequate?

Internal auditor: Name ____________________ Sign ______________________
Date
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Appendix VII
AUDIT PROGRAMME FOR STOCKS
Budget Year/period under Audit _______________
Ser. Cross Performed ()

No. Procedures Ref. Not performed (X) Signature Date
A. VALIDATION OF EXISTENCE
1 Where office has undertaken only
periodic stocktaking
a) If stocktaking attended by an internal

auditor then undertake audit
procedures as detailed in the "Attend
and observe Stocktaking" listed below.
b) If stocktaking not attended by an

internal auditor then:
i. Review with management the

overall results of the inventory, the
way in which it was carried out and
any particular problems involved.
ii. Scrutinize the stock sheets for

completeness and signature by the
counters and obtain explanations
for any very large stocks.
iii. Ascertain that adequate control was

exercised over the issue and return
of stock count sheets and check the
integrity of the numerical
sequences.
iv. Review the results of recounts and

enquire into material differences,
disclosed note, the follow-up
action taken and the reason for the
differences.
v. Test check adjustments of stock

record quantities and financial
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stock cards to actual physical
counts ensuring that such
adjustments are approved by a
responsible official.
vi. Check that proper cut-off

procedures were observed during
the count.
vii. Scrutinize the stock count sheets

for old, damaged or obsolete items.
viii. If results of the inventory

considered unsatisfactory then
undertake test counts, particularly
of items where material differences
disclosed.
2 Review stocktaking instructions. Ensure

that:
 the instructions are timely and clear;
 Counting involves the simultaneous

use of two staff, one person being
independent of stock recording
functions, the other being conversant
with the nature and type of stock;
 Clear rules about stock movements

during the stock taking are set out and
ideally movements should be stopped
for the duration of the counts.
3 Attend and observe the stocktaking

procedures.
i) Ensure that:
appropriate procedures have been
followed to identify and count all
stocks;
note is being taken of any apparently
damaged stocks;
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stock movements are controlled so that
the risk of double counting, or non -
counting, is minimized.
ii)Take details of the last stock
movements before the count for
latter's cut - off testing purposes, that
is, last store issue voucher and goods
receiving notes.
iii)Perform a sample of test counts and

compare results to office counts.
iv) Ensure that all stock count sheets are

returned after stocktaking (typically
sheets will be prenumbered with a
log of their issue to named
individuals, marked off on their
return).
4 Review periodic reconciliation, if any, of

stock records with counts. Reperform the
period end reconciliation.
5 Follow-up any obsolete or defective items

noted at stocktaking and ensure that
appropriate measures are taken.

Date
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Appendix VIII
INTERNAL CONTROL QUESTIONNAIRE FOR FIXED ASSETS
Date
Key Control Questionnaire Yes/ N.A. Assessment

No
Records
1 Are fixed asset registers or similar

records maintained detailing the cost,
supplier, date of purchase, location of
each individual asset and identifying
each asset by number which also
appears on the asset itself?
2 Are these records maintained by person

other than those responsible for the
custody of the physical properties?
Existence and Title

3 Are fixed assets subject to adequate
physical safeguards?
4 Are fixed assets adequately covered by

insurance (for vehicles only)?
5 Are physical inventories of fixed assets

taken periodically or annually, by or
under the supervision of employees not
responsible for physical custody and
reconciled with records?
6 Is adequate follow-up action taken by

management in respect of assets
reported as missing or damaged?
7 Are documents of title kept in safe

custody and controlled by register?
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Key Control Questionnaire Yes/ N.A. Assessment

No
Additions
8 Is all purchase of fixed assets are in
line with the budget?
9 Is expenditure in excess of the approved

budget submitted to the supervising
authority for approval?
10 Is there an adequate procedure for

ensuring that all fixed assets ordered are
received?
Disposal
11 Is written authorization of management
obtained for disposals of fixed assets?
12 Are there written procedures as to how

such disposals shall be effected e.g.,
sales by public tender?
13 Are there adequate procedures to ensure

that the accounts department is
promptly informed of all fixed assets
sold or scrapped?
14 Is the cannibalization of vehicles or

other fixed assets for spare parts
specifically prohibited without the
express written authorization of
management?
15 Do procedures exist for canceling

insurance coverage in respect of vehicle
that is disposed?

Date
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Appendix IX
AUDIT PROGRAM FOR FIXED ASSETS
Ser Cross Performed ()

No. Procedures Ref. Not performed(X) Signature Date
A. Summary and Records

1 Obtain a fixed asset list and:
a) Check quantities against the list
including its location.
b) Agree opening balances with prior
year working paper or audited
accounts.
c) Agree ending balances against year-
end count.
d) Agree movements (change in lists of
fixed assets) with totals of
supporting schedules of additions
and disposals.
2 Review results of the physical
inventories of fixed assets, if any, and
enquire into differences noted.
3 Undertake test of physical existence for
selected assets.
4 Inspect evidence of title deed for motor
vehicles, as necessary, and ensure
details included in the permanent file.
5 Review property insurance coverage

(for motor vehicles) as to its adequacy.
6 Select a sample of assets from the fixed

asset register and verify that these items
physically exist at the period end.
7 By physical inspection, select a sample

of fixed assets and confirm that they are
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Ser Cross Performed ()

No. Procedures Ref. Not performed(X) Signature Date
recorded in the fixed asset register.
8 Review management’s procedures to
identify idle or obsolete fixed assets
B. Additions
9 Vouch selected additions with approved
authorizations; supplier’s invoices;
receiving reports; and evidence of title.
10 Compare purchase of fixed assets during

the period with budget authorizations
and examine appropriate approval for
cost over-runs.
11 Check propriety of classification of

fixed asset additions during the period.
12 Select a sample of additions form the

fixed asset register and agree to:
i) authorizing documentation (e.g.
minutes of senior management
meetings, expenditure plans and
budgets, approved purchase order);
ii) purchase invoice;
iii) physical inspection of the asset.
C. Disposals
13 Ensure authorization for disposal of the
assets concerned has been obtained.
14 Verify that sales procedures such as
public tenders; sealed offers, etc., have
been compiled with and vouch sales
proceeds with documentary evidence.
15 Ascertain that specific approval has
been given for the cannibalization of
any fixed assets for spare parts.

Date
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Appendix X

FOR CREDITORS
Budget Year/period under audit
Date
Ser. Description Yes/

No. No N.A. Assessment
Credit Administration
1 Are there control accounts or ledger for
creditors, the different classifications of
creditors, maintained independently of the
subsidiary ledger accounts?
2 Are creditors’ accounts regularly
reviewed by a responsible official?
3 Are cut-off procedures adequate to ensure
that the liability is reflected in the
accounts for all unpaid good received
prior to the year-end?
4 Does the office regularly declare and
settle taxes payable in accordance with
government regulations?
5 Are procedures adequate to ensure that all
unpaid and known but undetermined,
liabilities are taken up in the accounts of
the year to which they relate?

Date
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Appendix XI
AUDIT PROGRAMME FOR CREDITORS

Performed ()
Description Cross Not performed Signature Date
Ref. (X)
Examination of schedule of creditors
1 Obtain schedule of creditors balances, and
a) Compare the balances as shown in the
schedule with those in the ledger accounts.
b) Check the total of the schedule of creditors.
c) Check casts.
2 Scrutinize creditors subsidiary ledger accounts
for apparent correctness and vouch large and
unusual items as necessary.
3 Scrutinize control account and verify and
unusual entries or adjustments.
4 Check balances with creditor's statement and
enquire into any difference, if any.
5 Check after-date settlement of creditors
balances; enquire into accounts not settled and
investigate any over payments of balances
outstanding at year end.
6 Scrutinize selected creditors accounts for
confirmation and follow up on any disputed
amounts.
7 Cut-off
a) Match goods receiving reports for the last
few days of the year and first few days of
the following year with related supplier's
invoices to ensure that invoices recorded in
the period in which goods are received.
b) Check that invoices recorded during the
year relate entirely to goods received within
that year.
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Performed ()
Description Cross Not performed Signature Date
Ref. (X)
c) Examine after date invoices to ensure that
such invoices do not relate to deliveries
effected before the year end.
d) Review the register of suppliers’ invoices to
ascertain that all invoices received have
matched with the related purchase orders
and goods receiving reports.
e) Vouch accounts written-off during the
period for proper authorizations inspect
correspondence with customers and lawyers.

Date ___________
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Appendix XII
INTERNAL CONTROL QUESTIONNAIRE FOR

PURCHASES
Date
Ser. Key control questionnaire Yes/ N.A. Assessment

No. No
1 Are all procurement carried out according
to the procurement guideline of
COWASH?
2 Are all methods of procurement
(proforma invoice, open tender or direct
procurement) approved in advance by
appropriate authority?
3 Is a bid security taken for those tenders
which require bid security?
4 Is tender invited from more than one
supplier for open tender procurement (on
the basis of a clear- cut specification of
items)?
5 Is at least three proforma invoices
collected from suppliers for such type of
procurement?
6 Are all bid documents always include:
▪an invitation of tender
▪Instruction to bidders
▪draft terms and conditions of contract
and;
▪other aspects.
7 When advisory service is required. Is
term of reference (TOR) prepared and
concerned expert used?
8 Is the tender committee organized, in the
entity in accordance with government or
COWASH procurement manual?
9 Are quotations opened at a specified time
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Ser. Key control questionnaire Yes/ N.A. Assessment

No. No
by the chairman of the tender committee
and in the presence of representatives of
the suppliers?
10 In case the lowest quotation is not
accepted, does the reason justified and
reported?
11 Is requisition approved and signed by an
authorized official?
12 Is requisition of goods made by the user
department?
13 Is a list of approved suppliers maintained
for each major item?
14 Does it contain appropriate remarks in
respect of suppliers who fail to comply
with terms of purchase orders?
15 Are purchase made from approved
suppliers only?
16 Are the stipulations regarding price,
specification of goods etc, in such
contracts clear and un ambiguous?
17 Is the quantity and amount indicating in
the invoice checked against the purchase
order?
18 Is every received goods supported by a
goods received note?
19 Is the correctness of price, quantity, total
amount, discount, suppliers name, etc
indicated in the invoice ascertained?
20 Is necessary follow-up made for long
outstanding items especially whose
payment has been made in advance?
ICQ completed and assessed by;

Internal auditor: Name Sign.
Date
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Appendix XIII
AUDIT PROGRAM FOR PURCHASES

Ser. Cross Performed ()
No. Procedures Ref. not performed(x) Signature Date
1 Ascertain the procurement is undertaken
according to the government or COWASH
procurement method.
2 Ascertain that open tender/bid has been publicly
invited.
3 Check whether all methods of procurement
approved in advance by appropriate authority
before procuring the goods/service.
4 Ascertain that a bid security has been taken
5 Inspect that the bid documents contain the
necessary formality-like an invitation of tender,
instruction of bidders, etc.
6 Check that purchase has been decided by tender
committee constituted in accordance with the
government/COWASH procurement manual.
7 In the event of not accepting the proposals of
tender committee, examine the reason of rejection
by head of the organization.
8 Ascertain that the quotations has been opened at a
specified time by the chairman of the tender
committee and in the presence of representatives
of the suppliers.
9 Check that required procedures regarding
quotations or tenders, including financial limits,
have been observed.
10 In the event of not accepting the lowest bidder
examines the reasons of tender committee for
opting for higher price(s).
11 Ascertain whether approved supplier list is

maintained.
12 Check that the purchase is made from approved
suppliers only.
13 Check that goods and services to which
transactions related were obtained and used in
conformity with plan and budget.
14 Review payment for goods and service with
special emphasis at the year-end for details of any
exceptional items
15 Check that the suppliers invoice attached with the
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payment voucher is original and agree with the
amount indicated in the purchase order.
16 Compare the amount of suppliers invoice with the
amount indicated in the payment voucher.
17 Check that the goods receiving note attached with
the payment voucher is signed by the receiving
clerk and counter signed by purchaser or deliverer
18 Check that the date and year indicated on the
goods received note is the same as those indicated
on the supplier's invoice.
19 Compare the type and quantity of goods indicated
in the goods received note with those in the
supplier's invoice.
20 Test follow-up procedures for cashing short
deliveries and claims for damaged or poor quality
goods, etc.

Date
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Paulos Basazenew
Appendix XIV
INTERNAL CONTROL QUESTIONNAIRE FOR

PAYROLL AND WAGE PAYMENT

Date
Ser Yes/ N.A Assessment
No
Key control questionnaire
No
1 Are time records maintained for staff?
2 Is the preparation of payroll performed by
accounts/payroll section?
3 Does the accounts section get proper
authorization from the personnel section
before any one is added to or deleted from the
payroll?
4 Is the staff involved in the preparation of
payroll notified on proper authorized forms
about transferred employees, changes in
salary, retirement & the like?
5 Are payrolls checked and reviewed by persons
other than those who prepared them?
6 Are Payroll approved by a responsible
official?
7 Are there controls to prevent or detect the
payment of salaries and wage being made to
other than the correct payee?
8 Are there controls to prevent or defect
employees being paid for work not done?
9 Are advances made to employees? Properly
followed up and collected in time?
10 Are personnel records kept only in the
personnel section?
11 Are unclaimed wages and salaries banked
intact if not claimed within a reasonable
period?
12 Are deductions other than statutory
deductions, only made against written
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Ser Yes/ N.A Assessment

No
Key control questionnaire
No
approval?
13 Do employees sign for the receipt of
wages/salaries?
14 Are there controls to prevent or detect
employees being paid for work not done?
15 Are there controls to prevent or detect wage
payment being made at the wrong rate or for
the wrong hours?
employees being paid allowances to which
they are not entitled?

Date
82
Paulos Basazenew
Appendix XV
AUDIT PROGRAM FOR PAYROLL AND WAGE PAYMENT
Budget Year/period under audit_________
Region/Woreda____________________________
1 Verify that the recruitment of temporary and
permanent employees is approved by the civil
service bureau/office or on the basis of an agreed
period of time.
2 Check that payrolls are signed by the accountant,
the paymaster and authorized by responsible
person at the time of payment.
3 Ensure that the net pay of any employee who is
absent is paid on his behalf to another person only
on presentation of written authorization (approved
by a responsible person) from the absentee.
4 Check and verify the adequacy and completeness
of time records.
5 Examine monthly payroll sheets are signed by
employees or transferred to their respective bank
accounts for receipt of salary.
6 Check payroll deduction against underlying
relevant documents.
7 Check payrolls as to arithmetic accuracy and
extensions to net pay.
8 Check that the names of pensioned, transferred and
dismissed employees are deleted from the payroll
and no payments are effected in their names.
10 In the event of transfer, retirement, dismissal and
death of any employee who had advances or loans
have been deducted from his/her salary.
11 Check the name of employees on the payroll list
against personnel files
12 Compare the gross salaries or rates of pay as
indicated on payroll with those in personnel files.
13 Review pattern of payroll across the year and
investigate any variations from normal pattern.
14 Ascertain that whether employment letter & salary
changes in the personnel files are duly approved
by an authorized official and filed accordingly.
Prepared by: Internal auditor: Name Sign. Date
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Appendix XVI
Internal Control Questionnaire
for Payments/Expenditures
Date
Ser. key control questionnaire Yes/ N.A. Assessment

No. No
1 Is there a procedure for receiving, recording,
custody and issue of cheques?
2 Are the signatories other than the custodians
of cheques?
3 Are cheques dated and recorded at the time
of preparation?
4 Are the cheques payment voucher and the
cheques prepared in the name of the payee?
5 Are signed cheques crossed before they are
issued?
6 Is there a control on the stock of unused
cheque books?
7 When cheque is cancelled is it “VOID” and
still maintained in the cheque stub?
8 Are the amounts and the purpose of
payments described on the cheques payment
voucher and the cheque stub?
9 Are cheques signed by at least two
signatories?
10 Are documents supporting the payment duly
verified and validated?
11 Do the signatories sign or put their initial on
the cheque stubs as well?
12 Are the existence and compliance of amount
limitations on the authority of signatories
duly vitrified?
13 Do all supporting documents of paid
vouchers bear the stamp "PAID”?
14 Are cheques and payment vouchers prepared
by personnel other than signatories?
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Ser. key control questionnaire Yes/ N.A. Assessment

No. No
15 Are bank transfers registered immediately?
16 Are supporting documents evidencing
payment attached to the payment vouchers?
17 Do cashiers sign on the payment vouchers to
ensure that the payments are effected
correctly?
payments being made to fictitious
employees or employees who have left?
ICQ completed and assessed by:

Internal auditor: Sign.
Date
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Paulos Basazenew
Appendix XVII
AUDIT PROGRAMME FOR PAYMENTS/EXPENDITURES


1 Verify that each payment voucher is

authorized by the signature of a competent
official
2 Check that the accountant, and the cashier
have singed on the appropriate payment
vouchers.
3 Ensure that the payee has signed on the
payment voucher or original receipts are
attached.
4 Check that all the payments made were
within the limits of authorization.
5 Verify that the cheque payments are
cosigned by two signatories.
6 Check all supporting documents and ensure
that they are all stamped "PAID".
7 Check details of the chequebook counterfoil
with those of the corresponding payment
vouchers.
8 Observe physical controls over the custody
and issuance of cheques and ascertain
appropriateness of segregation of duties.
9 Physically verify unissued cheques on
hand/issued cheques and correspond it with
bank reconciliation/bank statements or MFI
ledger.
10 Ensure that the expenditure code numbers
and account titles are indicated correctly on
both payment vouchers and register.
11 Verify that the cheque numbers are cross
referenced with the corresponding payment
vouchers
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12 Ascertain the accuracy of arithmetical

calculations of all payment vouchers.
13 Ensure that amounts on all the payment
vouchers are written both in words & figures.
14 Identify that all the payment vouchers are
transacted with in the budget year under
examination.
15 In the case of petty cash payments, if any,
check that the authorized spending limits
have not been exceeded.

Date_______________
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Appendix XVIII
INVESTMENT PROJECTS AUDIT PROGRAMME
Region and Wereda______________________________________________
Date
1 Obtain the plan of action of the specific period under

examination.
2 Obtain the activity or result of specific period under
examination.
3 Evaluate plan against activity result.
4 Enquire for the reason of the performance gap or the

difference between plan and result, if any.
5 Analyze the reason in detail.
6 Enquire what solution is proposed to solve the

performance gap in difference between plan and
result.
7 Analyze the proposed solution in detail.
8 If solution was not proposed then discuss with

Auditee to propose the solution.
9 Check whether the management is rigid or dynamic
about causes of variance and proposing the solution.
10 Check whether the management takes appropriate
actions to solve performance gap.
11 Make an audit opinion and recommendations and
discuss the issue with Auditee.
12 Check whether appropriate WASHCO project files
are kept or not and the file contains all documents
according to CMP Guideline.
13 Review investment projects in progress and obtain
explanations for projects not completed within a
reasonable time and ascertain that all completed
projects are transferred to the community and properly
handled.

Date_______________
88
Paulos Basazenew
Appendix XIX
BUDGET UTILIZATION AUDIT PROGRAMME
Region and Wereda______________________________________________
Date

1 Obtain the budget of specific period under

examination.
2 Obtain the result of activities of budget under
examination.
3 Examining the method used to prepare budget
such as zero basis budgeting, incremental
budgeting, project or activity based budgeting,
based upon trend analysis and etc.
4 Examine the difference between the budget and
actual.
5 Analyze the reason in detail
6 Enquire what solution is proposed to solve the
performance gap or difference between budget
and result.
7 Analyze the solution in detail.
8 If solution is not proposed discuss with the
Auditee about the reasonable solution.
9 Check whether the management will take
initiative to solve performance gab, budget
against result.
10 Make audit opinion and recommendation and
discuss with Auditee.

Date_______________
89
Paulos Basazenew
Appendix XX
SAMPLE OF INTERNAL AUDIT REPORT
Region and Woreda__________________________________________________________
Date
The Head of Public Body ________________
Name of Public Body __________________
Purpose Statement
1. Based on our periodic audit plan we conducted an audit of fixed assets of the public body to
ascertain the existence of effective internal control exercised thereon.
Scope Statement
2. Accordingly, we have verified the fixed asset register and the physical existence of fixed
assets to ascertain that all fixed assets of the public body were registered and also to check
the existence of all registered fixed assets.
Findings
3. We noted that the fixed asset register was not complete with respect to property
identification number, location, date of purchase and other relevant information. We further
noted that the fixed assets were not given identification numbers.
4.
5.
6.
7.
Conclusion
8. We are therefore unable to check the physical existence of the fixed assets which implies
that there is a weakness in the overall control exercised thereon.
Recommendation
9. We recommend that all relevant details such as property identification number, location and
other relevant information be recorded on the fixed asset register and identification number
be given to all fixed assets of the public body.
Signature
Name and Title (E.g. Head of the Internal Audit, Senior Internal Auditor, Internal Auditor)
Address
Date
90

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Paulos Basazenew

Financial Management Specialist

Community-Led Accelerated WASH (COWASH)

INTERNAL AUDIT GUIDELINE

Community-Led Accelerated WASH (COWASH)

The secondary objectives of an audit are generally taken to be as follows:-

II. AUDIT PLANNING

Good audit planning should include the following basic elements:

✓Background information: Brief outline of the audited body's activities,

✓Audit/examination areas: Certification requirements describing the scope of

✓Audit programmes: Audit programmes are prepared to serve as a guide for

✓Administrative arrangements and timetable: Any administrative

✓Staff allocation and responsibilities: This section enables appropriate

2.2. OBJECTIVES OF PLANNING

2.3. INTERNAL CONTROL SYSTEM

✓timely preparation of accurate financial and non-financial information;

1. Organizational Controls: Audited entities should have a plan of their organization,

4. Authorization and Approval: All implementing decisions and transactions should

6. Personnel Control: There should be procedures to ensure that personnel have

7. Supervision: Any system of internal control should include the supervision by

Inherent Limitations of Internal Control

Tools in Assessing Internal Control

2.4. AUDIT APPROACH

2.5 ANALYTICAL PROCEDURES

Analytical Procedures in Planning the Audit

2.6 AUDIT SAMPLING

2.7. AUDIT PROGRAMME

Transactions performed by organizations should fulfill the following audit assertions:

•Testimony from Auditee Management which would be in the form of responses to

Quality of Audit Evidence

III. AUDIT EXECUTION

Audit may be classified into 'transaction' and 'validation' audits.

4. Completeness - Have all assets and liabilities been fully recorded?

The use of Internal Control Questionnaires (ICQs)

3.2 AUDIT OF CASH AND BANK BALANCES (MFI BALANCES)

Internal Controls Over cash and Bank Balances

h)Cheque signatories should be restricted to the minimum practical number.

f)Investigate any significant reconciling items of an unusual nature;

3.3. AUDIT OF RECEIPTS

In designing his/her audit programme in respect of receipts, the internal auditor

a) all receipts are recorded correctly and completely;

c) Review reconciliation of subsidiary cash records with daily cash summaries;

3.4 AUDITS OF DEBTORS

b) Check any suspense accounts carefully;

d) Ensure that all prepayments are attributable either to services to be received in

3.5. AUDITS OF STOCKS

Stocks are taken to mean:

a) Arrangements for continuous stock taking where ever practicable; if not,

b) Planning and supervision of the whole process of inventory taking to be

c) Segregation of duties as between those in charge of the custody of stock and

d) Division of each stores into convenient sections for control purposes;

e) Procedures for the identification of slow-moving and obsolete stocks;

f) Procedures for investigation of major differences before physical count is

h) Cut-off procedures in regard to receipts and issues so as to ensure inclusion

i) Issue of detailed stock taking instructions in writing, incorporating source of

b) Recording of all such stock movements in the appropriate stores ledger

d) Periodic reconciliation of stores ledger balances with physically verified

3.6. AUDIT OF FIXED ASSETS

Internal Control over Fixed Assets

b)Tender or quotation procedures for selection of supplier(s);