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Internal Controls Manual

 Introduction

This guide was developed under the supervision of the Palestinian MicrofinanceNetwork (Sharakeh) and supported by the NGO Development Center (NDC) to assist member MFIs develop and strengthen their existing Internal Audit departments. This guide will also provide necessary tools to establish, properly document, maintain, and adhere to Internal Controls.

 MFIs management is responsible for ensuring that internal controls are established, properly documented, maintained and adhered to in each unit, department, division and Branch. All employees of the MFI are responsible for compliance with internal controls.

Contents

Introduction ........................................................................................................................................... 4

Definition of Internal Control ................................................................................................................... 4

What are the primary objectives of the internal control process? ............................................................ 4

Why Internal Controls and Internal Audit is Very Important in MFIs? ....................................................... 4

Fraud Triangle ........................................................................................................................................ 4

What are the 5 Components of Internal Controls? ................................................................................... 5

KEY CONCEPTS: ...................................................................................................................................... 8

What is the Difference between “Internal Audit” and “Internal Controls”? .............................................. 8

What is Risk Management and how does it relate to Internal Audit and Internal Controls? ...................... 9

What are the six steps to Risk Management? .......................................................................................... 9

What are the Roles and Responsibilities for Risk Management through the organizational Structure? ... 11

Why is the risk management a never ending process? ........................................................................... 11

What are the most Common Risks that the MFIs face at the Branch Level? ........................................... 12

What are the common Risk Management Practices that MFIs use? ....................................................... 12

The Internal Control Process .................................................................................................................. 13

What are the three steps involved in the internal control process? ....................................................... 13

How to select Cost-effective Controls? .................................................................................................. 14

Example on selecting Cost – Effective Controls: ..................................................................................... 14

How to integrate those Controls into Operations? ................................................................................. 14

How to test the effectiveness of Internal Controls? ............................................................................... 15

How to Develop an Audit Plan? ............................................................................................................. 16

What are the main elements of the audit Plan? ..................................................................................... 16

The Branch Audit .................................................................................................................................. 18

Step-by-step process to review the ten most common areas: ................................................................ 18

1- Cash.............................................................................................................................................. 18

2- Loans ............................................................................................................................................ 20

3- Provisions ..................................................................................................................................... 26

4- Write-offs ..................................................................................................................................... 27

5- Savings ......................................................................................................................................... 28

6- Transfers ...................................................................................................................................... 30

7- Computer Systems ......................................................................................................................... 30

8- Fixed Assets .................................................................................................................................. 31

9- Interest Rate Setting ...................................................................................................................... 32

10- Financial Statements .................................................................................................................. 32

11- Client Visits ............................................................................................................................... 33

Audit Reporting .................................................................................................................................... 39

Appendix I: ........................................................................................................................................... 40

Appendix II – Control Activities: ............................................................................................................. 76

Appendix III – Controls Worksheet......................................................................................................... 84

 

 

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