Inspectorate of State Corporations
REPUBLIC OF KENYA
______
MANAGEMENT AUDIT MANUAL
OFFICE OF THE INSPECTOR-GENERAL (CORPORATIONS)
OFFICE OF THE DEPUTY PRESIDENT
October, 2015
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TABLE OF CONTENTS
ACRONYMS
CHAPTER 1
1.0BACKGROUND
1.1Introduction
1.2Overview of the Inspectorate
1.2.1Mandate and Functions
1.2.2Vision
1.2.3Mission
1.2.4Motto
1.2.5Core Values
1.3Background to Management Audits in the Inspectorate
1.4Objectives of the Manual
1.5Definition of Management Auditing
1.6Types of Management Audits
1.6.1Comprehensive Audit
1.6.2Special Management Audit
1.6.3Investigative Audit
1.6.4Routine Inspection
1.7Scope of the Audits
(a)Finance
(b)Human Resource Management
(c)Procurement Function
(d)Technical/Professional Function
(e)General Administration Function
(f)Governance
CHAPTER 2
2.0INSPECTORATE’S MANAGEMENT AUDIT STANDARDS
2.1Policy Statement
2.2Category of Standards
2.2.1Inspectorate’s Attribute Standards (IAS)
IAS 1:Objectivity and Independence
IAS 2:Purpose, Authority and Responsibility
IAS 3:Professionalism
IAS 4:Transparency and Accountability
IAS 5:Quality
2.3Inspectorate’s Performance Standards (IPS)
IPS 1:Managing the Audit Activities
IPS 2:Resource Management
IPS 3:Policies and Procedures
IPS 4:Establishment of Control Systems
IPS 5:Scope of Work
IPS 6:Assignment and Work Plan
IPS 7:Accomplishment of Goals and Objectives
CHAPTER 3
3.0INSPECTORATE OF STATE CORPORATIONS MANAGEMENT AUDIT PROCESS
3.1Policy Statement
3.2Steps in Comprehensive, Special and Investigative Audits
3.2.1Development of Terms of Reference
3.2.2Constitution of the Audit Team
3.2.3Developing a Work Plan
3.2.4Conducting the Audit
3.2.5Data Analysis
3.2.6Development of an Interim Report
3.2.7Exit Meetings
3.2.8Final Report Writing
3.2.9Communication of Findings
3.2.10 Submission of the Report
3.2.11 Follow up of Audit Reports
3.3Steps in Routine Inspections
CHAPTER 4
4.0CODE OF CONDUCT FOR THE AUDIT/INSPECTION TEAM
4.1Policy Statement
4.2Principles of Ethical Conduct
(i)Integrity
(ii)Objectivity
(iii)Confidentiality
(iv)Professionalism
(v)Transparency and Accountability
(vi)Teamwork
(vii)Punctuality and Timeliness
CHAPTER 5
5.0CONCLUSION
5.1Authority and Responsibilities
5.1.1The Inspector-General (Corporations)
5.1.2The Senior Deputy Inspector-General (Corporations) in charge of Corporate Governance
5.1.3Management Audit Committee
5.1.4ISC Staff
5.2 Review of the Manual
5.2.1Effective Date
ACRONYMS
KACC:Kenya Anti-Corruption Commission
LPO:Local Purchase Order
LSO:Local Service Order
S3:Stock Control Card
S10:Official Quotation Form
S11:Counter Requisition and Issue Voucher
S13:Counter Receipt Voucher
S33:Official Business Questionnaire
SCAC:State Corporations Advisory Committee
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CHAPTER 1
1.0BACKGROUND
1.1Introduction
Prudent management of State Corporations’ resources is crucial for the achievement of National goals and objectives. In view of this, auditing of management systems, procedures and processes is key in ensuring that corporations:
(i)Are effectively managed;
(ii)Comply with laws, rules and regulations;and
(iii)Efficiently utilize available resources.
The Office of the Inspector-General (Corporations) recognizes the important role of management auditing as spelt out in Section 19 of the State Corporations Act, Cap 446, Laws of Kenya. In this regard, the Office of the Inspector-General has taken several measures to develop the skills and competencies of its officers and professionalized its management audit function. The development of this Audit Manual, therefore, will enhance the Auditing function and act as a guide to future management audits.
1.2Overview of theOffice of the Inspector-General (Corporations)
The Inspectorate of State Corporations was established as Inspectorate of Statutory Boards in 1966 in the then Ministry of Agriculture and Animal Husbandry. It has evolved over time to become the current Office of the Inspector-General (Corporations) which was established under the State Corporations Act, Cap 446, Laws of Kenya in 1986.
1.2.1Mandate and Functions
The mandate of theOffice of the Inspector-General (Corporations) is spelt out in Section 18 of the State Corporations Act, Cap 446 and the Legal Notice No. 93 (Performance Contracting Regulations) of 2004 which introduced Performance Contracting in the State Corporations.
The functions of the Inspectorate are:-
- Advise the Government on all matters affecting the effective running of State Corporations;
- Report periodically to the relevant arms of Government on management practices within any State Corporation;
- Report to the Controller and Auditor-General any cases where moneys appropriated by Parliament are not being applied by State Corporations for the purposes for which they were appropriated;
- Conduct special investigations of any State Corporations on behalf of the State Corporations Advisory Committee and the Controller and Auditor-General; and
- Undertake surcharge action against any person who incurs or authorizes irregular expenditure of State Corporation funds or any person who through negligence or misconduct causes loss of funds to the State Corporation.
Legal Notice No. 93 of 2004 expanded the mandate to include:-
- Evaluate actual results of operations and management by State Corporations on the basis of the agreed performance targets;
- Determine methods for evaluating performance in State Corporations on the basis of specified and agreed targets;
1.2.2Vision
To be the leading oversight agency in the region.
1.2.3Mission
To continuously improve public service delivery through promotion of good corporate governance in state corporations
1.2.4Motto
“An eye for excellence” - “Jicho la Ukamilifu”
1.2.5Core Values
The fundamental core values of the Office of the Inspector-General (Corporations) are:-
Integrity andImpartiality
Professionalism
Customer Focus
Team Spirit
Efficiency and Effectiveness
1.3Background to Management Audits in the Office of the Inspector-General (Corporations)
Prior to 1990, most of the State Corporations were viable as evidenced by the number of blue chipState Corporations then. The Inspectorate then played a key role in auditing and advising the Government on the effective management and desired policies to enhance performance of the State Corporations. This, however, changed in the 1990s, when most of the State Corporations were exempted from the State Corporations Act and the technical capacity of the Inspectorate was reduced from thirty (30) senior technical officers to only five (5).
In 2002, wide-ranging amendments were effected to the State Corporations Act through the statute (Miscellaneous Amendment) Act 2002 whereby State Corporations were no longer exempted from the provisions of the State Corporations Act. Consequently, the Office of the Inspector-General was strengthened in 2003 by recruiting additional technical officers, as a result of which the performance of State Corporations gradually improved. It is against this background that a key functional area on promotion of good Corporate Governance was established in 2010 with the responsibility of carrying out routine inspections and management audits in State Corporations.
1.4Objectives of the Manual
The main objectives of this Manual are to;
(i)provide professional standards for Inspectors in management auditingand reporting
(ii)provide guidelines, methodology and techniques to Inspectors for effective auditing.
(iii)define responsibilities of the Inspector-General and respective Inspectors for quality auditing process.
(iv)provide a code of ethics for Inspectors when carrying out management audits and
(v)streamline and strengthen the Auditing function to enhance recognition and appreciation by all stakeholders.
1.5Definition of Management Auditing
For the purpose of this manual, management auditing is the process of examining, reviewing and evaluating a State Corporation’s books of accounts, policy documents/manuals, systems, procedures and practices to ensure efficient and effective management; compliance with rules and regulations and prudent utilization of available resources. This entails identifying strengths and weaknesses of the entire managerial systems and giving advice/corrective action(s) in support of the State Corporation’s vision, mission and objectives.
1.6Types of Management Audits
There are four (4) types of Management Audits:-
(i)Comprehensive Management Audit
(ii)Special Management Audit
(iii)Investigative Audit
(iv)Routine Inspection
The above audits may be Programmed or Adhoc. Programmed audits are identified at the beginning of a financial year while Adhoc audits are done on need basis.
1.6.1Comprehensive Audit
Comprehensive management audit involves auditing the entire managerial functions of a State Corporation. For the purpose of this audit manual, the functions will include governance, finance, human resources, procurement, technical/professional and general administration.
1.6.2Special Management Audit
Special management audit involves one to a maximum of three functions of an organization.
1.6.3Investigative Audit
An Investigative audit is occasioned by an identified irregularity or allegations of irregularities on specific issue(s) in a given State Corporation.
1.6.4Routine Inspection
Routine Inspection involves monitoring of day to day operations of a State Corporation.
1.7Scope of the Audits
The scope of management audit is wide and covers all the functional areas of a State Corporation which include:-
(a)Finance
(i)Books of accounts
(ii)Asset management
(iii)Financial policies and procedures
(iv)Budget and budgetary control
(v)Working capital management
(vi)Long term liability management
(b)Human Resource Management
(i)Skills and competencies
(ii)Working environment
(iii)Performance management
(iv)Reward/remuneration management
(v)Succession planning
(vi)Training and development
(vii)Deployment
(viii)Recruitment and selection
(ix)Human resource information systems
(x)Employee relations
(xi)Human resource policies and procedures
(c)Procurement Function
(i)Compliance with Public Procurement and Disposal Act, 2005; and Public Procurement Regulations of 2006
(ii)Procurement plan and budget
(iii)Composition and operationalization of the various committees established under the Public Procurement and Disposal Act, 2005
(iv)Disposal of idle Assets
(v)Physical verification of procured Assets
(vi)Verification of pre-qualified suppliers
(vii)Utilization of procurement documents e.g. LSO, LPO, S13, S10, S11 & S33
(viii)Study of the minutes of the various committees
(d)Technical/Professional Function
(i)Compliance with Mandate as provided for by the enabling legislation
(ii)Development and compliance with the Strategic Plan
(iii)Policy documents relating to the core business of the State Corporation
(iv)Compliance and linkage with the National policies
(e)General Administration Function
(i)Fleet management
(ii)Work environment
(iii)Security of Institution’s Assets
(iv)Registry and record management
(f)Governance
(i)Appointments and terms of service for the Board
(ii)Skills and competencies of the Board members
(iii)Composition and operationalization of the Board committees
(iv)Separation of powers
(v)Board’s understanding of the Mandate, Vision, Missionand Core functions of the Organization
(vi)Remuneration of Board of Directors
(vii)Quality of Board and committees’ minutes
(viii)Attendance and commitment to Board and committee meetings
(ix)Organizational structure
CHAPTER 2
2.0OFFICE OF THE INSPECTOR-GENERAL’S MANAGEMENT AUDIT STANDARDS
2.1Policy Statement
The development and adoption of the Management Audit Standards is a strategic decision taken by the Office of the Inspector-General (Corporations) and all Inspectors are required to adhere to the standards.
These standards are our norms, criteria, benchmarks, principles and values against which the management audits by theOffice of the Inspector-General (Corporations) will be evaluated, measured and tested for objectivity and quality.
2.2Category of Standards
The standards are in two categories namely attribute and performance standards.
2.2.1Inspectorate’sAttribute Standards (IAS)
Attribute standards will address the characteristics of the Office of the Inspector-General (Corporations) and the Inspectors carrying the management audit activities.
The attribute standards are:-
IAS 1:Objectivity and Independence
The Inspectors shall be objective and independent in performing management audits. They shall embrace an impartial professional judgment and make recommendations devoid of conflict of interest.
IAS 2:Purpose, Authority and Responsibility
The Inspector-General shall clearly state the purpose, give authority and define responsibilities of the Inspectors carrying out an audit.
IAS 3:Professionalism
The Inspectors shall carry out the audit with professionalism and due professional care. The Inspector-General (Corporations) will ensure that a team constituted for an audit possesses the right knowledge, skills and other competencies needed for carrying out the audit.
IAS 4:Transparency and Accountability
The Inspectors will carry out audits in a transparent and accountable manner; ensuring that accessed information and documents are limited to authorized individuals only and are in safe custody.
IAS 5:Quality
The Inspectors will ensure continuoushigh quality servicein the management audit process.
2.3Inspectorate’s Performance Standards (IPS)
Inspectorate’s performance standards describe the nature of management audits and provide quality criteria against which the performance of the Inspectors in relation to auditing may be evaluated.
IPS 1:Managing the Audit Activities
The Office of the Inspector-General (Corporations) shall ensure that the audit activity is effectively and efficiently managed so as to add value to the audit reports produced. This will be achieved through effective planning; examining and evaluating information; communication; coordination and report writing.
IPS 2:Resource Management
The Inspectors shall ensure that the resources provided for management audits are appropriately and effectively utilized to achieve the desired objectives.
IPS 3:Policies and Procedures
The Inspector-General shall guide the audit activity to ensure consistency and compliance with official policies, laws, rules and regulations.
IPS 4:Establishment of Control Systems
The Inspector General will ensure that, arising from the management audits, State Corporations develop, improve and maintain control systems for prudent management of resources.
IPS 5:Scope of Work
The Inspector-General shall ensure that the scope of work for each Inspector is sufficient to address the objectives specified in the terms of reference.
IPS 6:Assignment and Work Plan
Each Inspection team shall develop a work plan for each audit for approval by the Inspector-General before embarking on the exercise.
IPS 7:Accomplishment of Goals and Objectives
Each audit team shall review the planned activities to ascertain that results are consistent with the terms of reference and that operations or programs were carried out as planned.
CHAPTER 3
3.0INSPECTORATE OF STATE CORPORATIONS MANAGEMENT AUDIT PROCESS
3.1Policy Statement
All management audits shall be carried out in an orderly, systematic and efficient manner in line with the set attribute and performance standards.
3.2Steps in Comprehensive, Special and Investigative Audits
The Office of the Inspector-General prescribes the under listed steps to be followed by the Inspectors:-
(i)Development of Terms of Reference
(ii)Developing a work plan
(iii)Conducting Audit
(iv)Analyzing data
(v)Report writing
(vi)Forwarding reports to respective Agencies
(vii)Follow up
3.2.1Development of Terms of Reference
The need to carry out a Management Audit may arise from the Inspector-General, desk officer in charge of a State Corporation; or external requests from other stakeholders.
The desk officer will develop terms of reference which will be submitted to the Inspector-General for approval.
3.2.2Constitution of the Audit Team
The Inspector-General (Corporations) will constitute an audit team comprising of officers with the appropriatemix of skills and competencies sufficient to accomplish the task at hand.
3.2.3Developing a Work Plan
The Audit team will develop a work plan detailing the assignment to be carried out; establishing the required resources; setting out relative priorities of the assignment; assigning each team member his/her area of specialization; and setting the timeframe. The work plan will be submitted to the Inspector-General for approval.
3.2.4Conducting the Audit
This entails identifying, gathering, analyzing data, evaluating and compiling a report through a systematic and objective process.
The following steps will be used in conducting the Audit:-
(i)Introductory meeting with management of a State Corporation and identifying the contact person/liaison officer.
(ii)Identifying appropriate office accommodation tools and transport.
(iii)Determining suitable methodologies and instruments of gathering data such as observation; interviews; questionnaires; study of underlying documents; suggestion boxes; and site visits.
(iv)Applying the methodologies identified with the following steps;
(a)Studying the processes and procedures.
(b)Identifying key issues arising from the existing processes and procedures.
(c)Obtaining additional information from the employees through interviews, questionnaires and suggestion boxes.
(d)Site visits for verification of assets and ongoing projects.
(e)Interviewing the key people, relevant to the Audit; these may include the Board, employees and other stakeholders. The interviews may be conducted at the Office of the Inspector-General, the premises of the State Corporations or at projectsites.
3.2.5Data Analysis
Analyzing data will involve;
(i)Compiling the data; interpretation, making observations/findings and drawing conclusions.
(ii)Identifying supporting documents and evidence which must be assembled, documented and properly kept in safe custody. These documents will form the annextures to the report and must therefore be referenced and arranged for retrieval. They should be neat, understandable, relevant, logically arranged, and numbered.
3.2.6Development of an Interim Report
The Audit team will develop an interim report forthe Inspector-General based on the findings in order to assess whether the terms of reference have been fully addressed. The interim report may be oral or in written form.
3.2.7Exit Meetings
The purpose of exit meetings is to highlight to the State Corporations the issues that require urgent attention by management; clarify any pressing issues and handing over the office and other materials that are in the possession of the audit team.
3.2.8Final Report Writing
The Audit team will prepare the final report taking into consideration all the findings, gaps in the interim report; and input/outcome of the exit meeting.
The final report will comprise:-
(i)Executive Summary
(ii)Chapter One:Introduction
- Background
- Terms of Reference
- Methodology
- Governance Structure
(iii)Subsequent Chapters
Subsequent chapters will be determined by the scope as outlined in Section 1.6 of this Manual or as per the terms of references for the Special/Investigative Audit.
Every chapter will contain:-
- Background information
- Observations/findings
- Recommendations
iv)Emerging Issues
If there are any emerging issues, not covered under the terms of reference, they will be covered as the last chapter of the report.
3.2.9Communication of Findings
The team will submit the final report to the Inspector-General together with drafts transmittal letters to relevant agencies.
3.2.10Submission of the Report
The Inspector-General will transmit the reports to the relevant Agencies which may include the State Corporations, parent Ministry, Auditor General, State Corporations Advisory Committee (SCAC) and Kenya Anti Corruption Commission (KACC) among others.
3.2.11Follow up of Audit Reports
The Inspector-General may direct the Management Audit Committee to follow up on the implementation of the recommendations contained in audit reports.