Internal Audit and Control - Toolkit

Risk analysis and risk management strategies are critical to building and ensuring sustainable microfinance institutions. Operating risks are among the primary risks to address because they are internal, and are to a large part within the realm of management’s direct influence and control. This toolkit presents an overview of the issues that pose risks to MFIs in their operations.

A strong internal control system is one of the best mitigation strategies for managing internal operational risks in an MFI. The toolkit provides an overview of internal control systems, including the control environment, the accounting system, and special control procedures. Concepts of the risk management feedback loop are discussed, and activities and tools provided to help MFI managers identify their operational risks and take deliberate steps in managing them. Tools are also provided to help participants, managers and auditors assess the strengths and weaknesses of internal control systems. Three areas of preventive controls are highlighted – human resource policies and systems, policies and procedures, and management information systems. By building strong staff and systems, MFIs limit the possibilities for error and misstatement, and strengthen their capacity to expand and grow. Prevention strategies are more effective and efficient than the effort and cost of recovering from mis-information, losses, and other difficulties. The Internal Audit function encompasses the detective controls of the risk management strategy and is part and parcel of the internal control system. Internal audits conduct tests, observations and analysis to determine whether policies and procedures are being followed, the impact of non- compliance, whether financial reports are reliable, and whether there are other risks that threaten the strength and viability of the institution. Tools and resources for conducting, reporting, and following up internal audit recommendations are included in the toolkit to provide suggestions and guidance. However, it is recommended that all of the tools and resources be edited and adapted for the individual and specific needs of MFIs and Self Help Groups.

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