Proposal for an Internal Audit Model for a Public Institution

Internal auditing is an independent and objective assurance and consulting activity; it is intended to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Public pharmacy institutions represent a public good for the entire national economy, as they ensure the production and sale of both medicines and orthopaedic aids to the entire country. Based on the findings reached through the development of the audit model, I believe that internal audit in the public sector is very much needed in small public institutions, as it establishes greater internal controls and more rapidly eliminates deficiencies and ambiguities in operations. Furthermore, internal audit also functions in an advisory capacity, not merely a corrective one.

Problem

Internal auditing is an independent and objective assurance and consulting activity; it is intended to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Internal audit activity is carried out in diverse legal and cultural environments and within organisations which vary in purpose, size and structure; it is performed by persons within organisations or outside them.

Whilst these differences may affect the practice of internal auditing in each environment, conformance with the International Standards for the Professional Practice of Internal Auditing is essential in meeting the responsibilities of internal auditors. If laws or other regulations prevent internal auditors from conforming with certain parts of the Standards, their practice must conform with all other parts of the Standards and appropriate disclosure must be made (source: International Standards for the Professional Practice of Internal Auditing).

Solution and Method

Public pharmacy institutions represent a public good for the entire national economy, as they ensure the production and sale of both medicines and orthopaedic aids to the entire country. Despite operating in the market as a seller of medicines and orthopaedic aids, they cannot conduct business like the rest of the market economy, as they are restricted in this by the state through its regulations. State involvement, however, also means a certain security for public pharmacy institutions, as on the other hand they cannot fail because they are financed by the state.

Precisely because they are financed by the state, a need arises to verify the designated use of public funds. The public institution fulfils this need with the help of internal audit. The principal task of internal audit is verification, but above all continuous examination of the organisation's operations.

Verification whether internal controls function correctly, whether they are consistent in identifying irregularities, potential deficiencies and proposing measures to improve operations.

Results

Based on the findings reached through the development of the audit model, I believe that internal audit in the public sector is very much needed in small public institutions, as it establishes greater internal controls and more rapidly eliminates deficiencies and ambiguities in operations. Furthermore, internal audit also functions in an advisory capacity, not merely a corrective one. With the introduction of internal audit, the risks that arise in operations are also reduced.

Risks are associated with failure to achieve business objectives, disruption of business processes, inaccuracy of data and the possibility of abuse. From the above, it is possible to conclude that her assertion that audit is very much needed in smaller institutions holds true, as smaller and larger errors occur in operations which could also be fatal for the institution. A problem that arises in smaller public institutions is also the financing of internal audit, as such a small institution with four employees cannot afford an employed auditor or expert in this field.

For such internal audit, institutions must usually secure funds themselves, which is very limited given the revenues from services in the market. Due to the rapid changes in regulations and the adoption of new laws, internal auditing should not be merely a one-off task, but regular verification of compliance of operations with legal regulations and standards. In Slovenia, internal audit is developing rapidly.

The law requires mandatory internal audit in banks, insurance companies and financial institutions. Due to accession to the European Union, it is necessary to introduce internal audit also in state services, ministries and larger municipalities. Various scandals have reinforced the recognition that internal audit services must be established to prevent bankruptcies, embezzlements, connections between management and politics, and to strengthen confidence in financial statements.

Her proposal is that the founder, in their case the municipality, should organise internal audit for all its institutions in parallel with the internal audit of the municipality. This would also make the review of internal controls and connections between institutions and the municipality more comprehensive and effective. This would eliminate potential inaccuracy in the transmission of data between the municipality and institutions and reconcile the balances of assets and liabilities to sources of assets, which are held as assets under management in institutions owned by the municipality.

Of course, the municipality would have to provide an expert in the field of municipal operations and in the field of institutional operations. Municipalities prepare their statements on a cash flow basis and maintain documentation on an accrual basis only for record-keeping purposes. Institutions prepare their statements on an accrual basis, whilst they maintain documentation on a cash flow basis only for record-keeping purposes.

However, by internal auditors acquiring knowledge in both fields, they would also open up a new market niche for potential companies engaged in internal audit in public institutions.