Property & Supply

Management System
(PSMS)
Seminar
October 5, 2015
Professional Development Office
Professional and Institutional Development Sector
Commission on Audit

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 Session on
Internal Control
Concepts

by:

Dir. LORNA D. CABOCHAN

Information Technology Office
Systems and Technical Services Sector
COMMISSION ON AUDIT

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 Session Objectives
• At the end of the session, the
participants should be able to
understand basic principles on
internal controls and relate these
controls on the processes involved
on property and supply
management.

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 Agenda
• Revisiting the legal bases for Internal
Controls
• Definition and Types of Controls
• General Objectives of Internal Controls
• General and Specific IC Standards
• Limitations of Internal Controls
• Definition of Internal Controls
• Components of ICS
• Roles in ICS
• Some Specific Controls on PSMS
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 Revisiting the legal bases
for internal control
• RA No. 3456 – “An Act Providing for
the Creation, Organization and
Operation of Internal Audit Services
in all Departments, Bureaus and
Offices in the National Government”
or the “Internal Auditing Act of
1962”.
– which shall assist management to achieve an
efficient and effective fiscal administration
and performance of agency affairs and
functions.
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 Revisiting the legal bases for
internal control
• RA No. 4177 – An Act to Amend Sections
Two, Three and Four of RA No. 3456 known
as the “Internal Auditing Act”

• Administrative Order No. 278 –

“Directing the Strengthening of the Internal
Control Systems of Government Offices,
Agencies, GOCCs, including GFIs and LGUs,
in their Operations” (April 28, 1992)

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6
 Revisiting the legal bases
for internal control
• Administrative Order No. 70
(Strengthening of the Internal Control
Systems of Government Offices,
Agencies, Government-Owned and/or
Controlled Corporations, Including
Government Financial Institutions, State
Universities and Colleges and Local
Government Units) dated April 14, 2003,
reiterated the authority for the creation
of the IAS/IAU and its functions.
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 Revisiting the legal bases for
internal control
• Section 124 of PD 1445 – “It shall be
the direct responsibility of the agency
head to install, implement and monitor a
sound system of internal control”.
• DBM Circulars Nos. 2004-04, 2008-05
• DBM Circular Letter No. 2008-08
(National Guidelines on Internal Control
Systems)

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8
 How do you
define
CONTROL ???

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 Definition of Control
The INTOSAI defines internal control
as “an integral process that
– is effected by an entity’s management
and personnel, and is designed to
address risks. It provides reasonable
assurance that in pursuit of the entity's
mission and the achievement of the
objectives.

Source: INTOSAI
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 Definition of Control
It provides reasonable assurance that in
pursuit of the entity's mission, the following
general objectives are achieved:
 executing orderly, ethical, economical, efficient
and effective operations;
 fulfilling accountability obligations;
 complying with applicable laws and
regulations;
 safeguarding resources against loss, misuse
and damage.
Source: INTOSAI

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 Definition of Control
“an integral component of an organization’s
management that provides reasonable
assurance that the following objectives are
being achieved:
– effectiveness and efficiency of operations,
– reliability of financial reporting, and
– compliance with applicable laws and
regulations.”

Source: United States Government Accountability Office

(USGAO)

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What is COSO?
Committee of Sponsoring
Organization (COSO)
 voluntary private sector organization dedicated
to improving the quality of financial reporting
through business ethics, effective internal
controls, and corporate governance.

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 Definition of Control
(COSO)
“…a process…effected by an entity’s Board of
Directors, management and other
personnel…designed to provide management
reasonable assurance regarding the achievement
of objectives in the following categories:
– Effectiveness and efficiency of operations
– Reliability of financial reporting
– Compliance with laws and regulations

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 Internal Control as an
Integral Process
• is a series of actions that occur
throughout an entity’s operations on
an on-going basis.
• intertwined with an entity’s activities
and built into its infrastructure as an
integral part of the essence of an
organization.
Source: NGICS

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 Internal Control is
Management Control
• Management utilizes internal controls to
regulate and guide its operations.
• Internal control requires the participation
and involvement of the agency head,
officials and personnel at all levels,
• Obtain reasonable assurance that an
agency’s mandate and sectoral goals are
achieved efficiently, effectively and
economically.
Source: NGICS

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 Concept of Reasonable
Assurance
• indicates the importance of
IC not
absolute
understanding the limitations
of IC
• cost of an organization’s IC
should not exceed the
benefits expected to be
obtained

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 Types of Controls
1. Preventive Controls
– are designed to
prevent the adverse
actions or risk from
occurring

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 Types of Controls
2. Detective Controls – are
designed to detect an error
or adverse event after it
occurs but within a
reasonable time to permit
correction and through
awareness of the problem,
help prevents other errors
from occurring

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 Types of Controls
3. Corrective Controls –
are designed to identify
a problem and bring it
to management’s
attention for resolution
and correction

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 General objectives of internal
controls in the public sector

• Safeguard assets;
• Check accuracy and reliability of
accounting data;
• Ensure economical, efficient and
effective operations;
• Comply with laws and regulations;
and
• Adhere to managerial policies.

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 General Standards of Internal
Control
• Personnel competence
• Control techniques
• Reasonable assurance and cost

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 Specific Standards
• Documentation for ICS policies,
procedures and accountability for
resources and financial transactions
• Recording of transactions in accordance
with generally accepted accounting
standards
• Authorization and execution of
transactions within the limits of their
authority

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 Specific Standards
• Segregation of incompatible functions
• Qualified and continuous supervision
• Physical control and access to agency
resources
• Presence of appraisal activity
• Prompt resolution of audit findings

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 Consequences of
weak/poor internal
controls

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 Consequences of Poor
Internal Controls
• Errors in financial
and other forms of
information or
inaccurate financial
information
normally leads to
poor decision-
making

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Consequences of Poor Internal
Controls
• Irregularities, waste and fraudulent
transactions cannot be readily
detected
• Programs/projects do not address
the needs, demands and priorities

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 INHERENT
LIMITATIONS
OF
INTERNAL
CONTROLS

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 Limitations of Internal
Controls

• Internal control
must be attained
at reasonable
cost.

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 Limitations of Internal
Controls

• Organizational
changes may
render internal
control systems
and manuals
obsolete.

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 Limitations of Internal Controls

Strong internal controls

are still subject to human
fallibility, such as :
 Misunderstanding of
instructions
 mistakes in
judgement
 personal
carelessness

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 Limitations of Internal Controls

Distraction,
personal problems
or fatigue on the
part of the person
responsible
for performing a
control
procedure

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 Limitations of Internal Controls
Just do this
Huwag! Maliit and10% sa iyo
I think ayaw mo pa?
yan!! that’s OK.

Collusion among
individuals,
circumventing control
procedures whose
effectiveness depends
on segregation of
duties.

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 Limitations of Internal Controls
No, just provide
funds for this.
Sagot ko lahat.

Management
override of
certain control
policies and
procedures

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 Internal Control
Components

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Adapted from INTOSAI

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 1. Control Environment
• the scope and coverage of an
organization’s internal control system
which impacts on its structural and
operational framework
• foundation for all other components of
control
• a cross-functional network of
organizations and sectors that influence
the control consciousness not only of
the management and personnel of an
agency but also the public and
stakeholders
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 1. Control Environment
• Includes the informal, and often
intangible, soft controls, such as ethics,
integrity, management practices,
discipline and commitment to competence.
• It also includes laws, rules, regulations
and managerial policies currently in place
to support good governance and
accountability.

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 Control Environment

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39
 2. Risk Assessment
• overall process of risk identification, analysis and
evaluation to ascertain existing and potential risks
and determine the appropriate response that may
affect the successful achievement of agency
objectives.

• the process of identifying and managing pertinent

risks to allow organizations to achieve its
objectives

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 What is RISK ?

• is the possibility of harm

or loss
• refers to the factors,
events or exposures, both
external and internal, that
threaten the achievement
of objectives

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 What factors affect
Risks?!!!
1. Ethical Climate maintained by management
higher ethics = lower risk
2. Competency, adequacy, and integrity of
personnel
overworked or undertrained = more errors
unethical personnel = more irregularities
3. Adequacy and effectiveness of the system of
internal control
more effective ICS = lower opportunity for
errors and irregularities

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 What factors affect
Risks?!!!
4. Degree of regulation
higher regulation = more risk of non-
compliance

5. Impact customers have on the operations

greater the impact = higher the risk of
negative publicity or financial loss

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 3. CONTROL ACTIVITIES

- are the policies and

procedures established to
address risks and to achieve
the entity’s objectives.
- promote actions that
address/mitigate the risks that
face the entity.

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 CONTROL ACTIVITIES
A C A
V U O o
A T M C
L H C
O
P
I
D R L U
I I E R
T Z T
Y A A
T E
I N C
O E Y
N
S
S

THE V-A-C-A OF ICS

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 *** authorization control ***
-- is concerned
with validity
objective of
control by
ensuring that
only legitimate
and appropriate
transactions are
processed.

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 *** control over physical movement ***
--ensures that
goods are
moved only on
the basis of
valid
authorizations,
appropriately
verified as to
description,
condition and
quantity, and
accurately
recorded
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 *** matching/comparison control ***

--ensures that
transactions
vs are executed
in accordance
w/ prescribed
procedures.
It includes
comparing
two
independent
documents.

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 *** check of calculations, footings, extensions ***

-ensures the
accuracy of
arithmetical
computations in
transaction
documents,
reports and
records.

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 *** processing/recording
completeness control ***

-provides reasonable
2015-05 assurance that all
and only valid
transactions are
processed and
recorded thru:
•sequential
numbering
•use of control
registers
•control over
unmatched
documents
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 *** processing/recording
completeness control ***

-using control accounts in the GL to

ensure that any additions from detailed
records (SL) cannot be made without
detection.
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 *** RECONCILIATION CONTROL ***

-ensures that accounts with detailed

records are reconciled periodically.

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 *** AGREEMENT WITH THIRD PARTIES ***

-ensures that periodic agreement of

recorded balances with statement received
from third parties are regularly conducted.

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 *** verification of physical
existence of assets ***
PRNO. 123
LOC: AO
INVENTORY LIST
PRNO. 125
LOC: FO PRNO. 123

PRNO. 125

PRNO. 192
PRNO. 129
LOC: FO

-ensures the periodic agreement of

recorded accountabilities with physical
existence of assets.
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 Controls that are designed to
ensure continued and proper
operation of basic controls and
safeguarding of assets, namely:

– Segregation of incompatible
functions
– Supervisory Control
– Custodial Control

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 4. INFORMATION AND
COMMUNICATION
• Vital in attaining the
control objectives. They
go hand in hand and cut
across all other internal
control components.

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 4. INFORMATION AND
COMMUNICATION
• Relevant information
must be communicated
throughout the
agency, as well as to
its network of
organizations and
sectors.

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 5. Monitoring
Monitoring of the internal
control system is necessary
to help ensure that internal
control systems remain
attuned to the changes in
objectives, environment,
resources and risks.

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 Monitoring
• Internal control systems need to be
monitored – a process that assesses the
quality of the control systems' performance
over time.
• Monitoring of internal control systems is
accomplished through
– ongoing monitoring activities;
– separate evaluations; or
– a combination of both.

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 Head of Agency
- develop, install &
maintain;
- evolve a system
of evaluation; and
- implement appropriate
corrective action.

Section 124. Installation. It shall be the direct responsibility of

the agency head to install, implement and monitor a sound
system of internal control.” (Presidential Decree (PD) No.
1445, the “Government Auditing Code of the Philippines,” as
amended, 11 June 1978.)
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Internal Auditor

- monitor compliance
to LRRs;

-evaluate existing ICS; and

- identify irregularities.

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 COA Resident Auditor

- ensure installation
of ICS;
-ensure compliance
to LRRs; and
- evaluate existing ICS to
determine N E T.

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 EMPLOYEES

BEING CONTROL
CONSCIOUS IN THE
PERFORMANCE OF THEIR
DAY-TO-DAY TASKS

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 What are some basic
INTERNAL CONTROLS
over Property and Supply
Management?

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 Property and Supply
Management Cycle

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 Some internal
controls on the
Procurement
Process

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 ACQUISITION - PROCUREMENT
The Purchasing Department should have
established written policies on acquisition of
goods and services guided by RA 9184 enacted
on July 22, 2002, effectivity date on January 26,
2003 and its IRRs on Oct. 8, 2003
Well-defined job description
Properly authorized and w/in APP
Satisfactory quality at the lowest price
Proper delegation of responsibilities and
authorization to determine proper segregation
of duties and functions. (procurement,
receiving & payment)
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 PROCUREMENT

Quantities ordered correspond with the

quantities invoiced and received
Purchases of furniture and equipment
are not for stock purposes
Purchases of S/M/E should be through
competitive bidding, except as otherwise
provided
 Purchases of S/M/E parts should not
exceed 3 mos. Requirements except in
anticipation
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 PROCUREMENT
Checking delivered goods/items as
to quantity and in conformity with
specifications before acceptance
Conduct inspection of delivered
goods or services rendered under the
supervision of qualified personnel
Payments to suppliers should be
properly approved, in form of a check
whenever practicable

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 RECEIPT, STORAGE and
ISSUANCE
Adequate storage and protected
from unauthorized access
Issuance should be based on duly
approved PR & issue vouchers
Reports of goods received and
issued should be prepared
Supplies and Equipment should be
properly tagged
Records should be checked
periodically thru
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 In Summary….

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 Role of Internal Control to
Public Accountability
It is any activity that increases the
degree of public accountability.

PUBLIC ACCOUNTABILITY

EFFECTIVE & COMPLIANCE RELIABLE

EFFICIENT WITH LAWS & FINANCIAL
OPERATIONS REGULATIONS REPORTS

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 Any

Question???

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 WORKSHOP on INTERNAL
CONTROLS
CASE: SEGREGATION OF DUTIES

INSTRUCTIONS
As the newly designated head of the
Property Office of your agency, you are to
determine the proper segregation of
duties pertaining to following activities
into compatible and incompatible before
assigning the same to your staff.

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Requests for supplies and
receives delivered supplies

Receives delivered items from

supplier and inspects

Accepts the inspected items

and issues to the requisitioner
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Obtains quotations from 3
bonafide suppliers and receives
the delivered items from the
winning supplier

Receives the inspected items and

maintains Stock/Property Cards

Custody of materials and supplies

and maintains BIN cards
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Receives delivered items from
supplier and prepares DV for
payment

Issues materials and supplies and

prepares the monthly Report on
Materials and Supplies Issued

Maintains Stock/Property Cards

and conducts physical inventory

Process PAR and maintains PAR

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 “Let us build islands of
INTEGRITY
in the
ocean of corruption”.

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 END of the SESSION!!!

THANK YOU VERY MUCH!!!

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