Internal Audit Procedure in Education Industry

Risk Assessment and Internal Controls

According to standard on Internal Audit (SIA) 130, ‘Risk Management’ states that the role of an internal auditor in relation to risk management is to provide assurance to management for the effectiveness of risk management.

Some common risks in educational institution are as follow:

Regulatory Risk: These risks usually arise due to non-compliance with various laws, regulations and standards that are necessary to govern educational institutions. Regulatory risks can vary based on various factors such as:- type of Institution (schools, colleges, universities, etc.), the geographic location, specific regulatory environment, etc.

Institution wise risk: A certain type of risk that affects the institution e.g. there is a lack of information due to enrollment growth, additional capital requirements, and unavailability of funds for operational activities, high turnover of key staff, parental reputational risk, significant financial issues, competition, etc.

Reputational Risk: Damage that occurs to an organisation when it fails to meet the expectation of stakeholders i.e, anything that can possibly harm the perceptions of public regarding the organisation for e.g, it may includes poor administration practices, decreased funding, lack of motivation amongst staff, rise in complaints from students or low academic result.

Intellectual Property Risk: Intellectual property risk refers to the analysis of what an institution needs to be prepared while deciding the protection of intellectual property.

The products of faculty, staff, and student research and scholarship at colleges and universities are the most important sources of intellectual property (IP).

Cybersecurity Risk:Related to loss of confidentiality, integrity, or loss of information, data or control systems and reflect the potential adverse impacts to organisational operations and assets.

Information Technology and its Controls:

The objectives and scopes of internal auditing in the education industry remains the same as for the IT environment. However, the internal control system and procedure might get affected by the changes due to computer processing, storage, retrieval and communication of financial information, etc.

An Internal auditor should consider the following aspects in an information technology environment:

• The degree to which the IT environment is being used to compile, record, process and analyse information.
• Determining the availability of data, source documents and computer files.
• The complexity of each computerised processing in significant applications.

Management Control Aspects

Main source of revenue in any educational institution is from the students. The control of student’s and records is the key control mechanism for ensuring that the revenue is recorded completely and correctly.

Budgetary control:- The budgetary control serves as a tool for controlling and planning an organisation's finances.Budgetary control also means pre approval of expenses.

Another crucial aspect to be taken in account in preparation of budgets is the provision contained in section 11 of the Income Tax Act, 1961, which requires an institution to utilise a prescribed percentage of its funds for charitable purposes so as to be eligible for exemption from income tax.

The lapse of funds would result in taxation on the unused portion.

Statutory and Legal Compliance in Education Industry

Framework of compliance refers to the whole structure, systems and processes put in place to organise the various compliance activities and to integrate them seamlessly into the organisation.

Non-compliance with law, in the case of educational institutions, could be non-compliance with the terms and conditions under which affiliations, registrations,etc. were granted to the entity to operate as an educational institution.

The regulatory environment in India is designed to ensure that educational institutions are managed solely by non-profit organisations.Non-compliance with these laws can result in serious consequences, such as the withdrawal of affiliations, loss of tax benefits, and financial penalties.

Furthermore, failure to comply with these laws can result in financial penalties, legal action, and even the closure of the institution.

Expenses Management and Controls

To prevent fraud and errors, an internal auditor examines the internal controls for payments to ensure their adequateness. The auditor will examine the procedures for authorization, record and document maintenance, asset accountability, and independent checks.

Some key points to remember while verification:-

• Examining the sequence of cheques issued during the specified period
• Review unusual items in the cash book or cash payment summary sheets.
• Assess the overall reasonableness of the recorded payment through appropriate analytical procedures.
• Examining the financial statements to determine if the payments have been properly classified and disclosed under the appropriate account heads.

During auditing, certain expenses are considered:

• Operational Expenses - includes costs related to daily activities and functions such as faculty maintenance, utilities instructional materials, and administrative services.
• Educational Resources - expenses related to textbooks, mid-day meals, digital learning platforms, laboratory equipment, teaching aids, technology, infrastructure and curriculum development.
• Administration Expenses - encompasses salaries of non - teaching staff, office supplies, software licensing, facility upkeeps, insurance and communication costs. These expenditures facilitate administrative operations, support student services and manage records.
• Technology Expenses - associated with integrating and maintaining technology solutions for learning. The expenditures include hardware (computers, tablets, etc.), software (educational applications, management systems), networking infrastructure, cybersecurity measures and IT support services.
• Marketing and recruitment - This covers costs involved in promoting educational programs and attracting students. These include expenditures on advertising campaigns, digital marketing efforts, print materials, events and promotional materials.
• Scholarship and financial aid - In education these expenses cover scholarship grants and other financial aid packages provided to eligible students based on merits, needs or specific criteria.

Revenue Assessment in Education Industry

The systems and procedures relating to generation of revenue include authority to fix fee structure, offer scholarships/fees and concessions and other terms of collection, an Internal Auditor should evaluate the system of internal control relating to revenue in an educational institution, particularly following aspects:

Receipt book: A receipt must be issued in lieu of the payment received to prevent fraud, as it provides a record for the transaction.

Billing Control: The system of billing should be secure and efficient in educational institutions and should ensure that bills are raised to each and every student at the end of the term.

Discount/ Scholarships: The educational institution may develop a policy that allows for discounts for poor students or scholarships for deserving students.

Verification of records: The Internal Auditor subsequently verifies the accuracy and completeness of revenue records. This includes examining selected entries in the receipt records, as well as supporting documentation such as students enrollment records and scholarship approval letters.

Tuition fees: The major revenue generation in educational institutions is contributed by tuition fees collected from students. The total tuition fee collected by students can be verified by verifying the number of students on the roll.

Registration fees: Registration fees are typically lower than tuition fees but it still represents a significant source of revenue. The Internal auditor should ensure that registration fees are being collected in accordance with the institution's policies.

Fines: Educational institutions may charge fines for late payments, lost books, and other infractions. The auditor should ensure that these payments are being collected in a fair and consistent manner.

Canteen Income: In order to verify the canteen income in internal audit procedures, an internal auditor must ensure the following aspects:

• Records maintained for canteen operations to support financial statements and agreements in case of a canteen running by an outsider
• Compliance with laws and regulations applicable for operation of canteen, for example, The Prevention of Food Adulteration Act & Rules, 1954, The Shops and Establishment Act 1948, The Central/State Goods and Service Tax Act 2017, etc.
• Examining the allocation of expenses such as equipment depreciation, rental charges, breakage, theft, spoilage and administrative expenses.

Fund Balances

An institution may have different fund balances. The internal auditing aspects to be kept in mind in respect of each of these elaborated as under:

• Restricted Funds: Restricted funds are those that have been donated or granted with specific restrictions on how they can be used. The internal auditor should ensure that these funds are being used in accordance with the restrictions
• Designated Funds: Designated fund represents appropriation made by an institution with the purpose of building funds for specific purposes. The Internal Auditor may evaluate on the basis of evidence about appropriation made with the purpose for which it was done.
• Loans and Borrowings: The borrowings of an educational institution consist of the term loans taken for construction of buildings, infrastructure facilities, acquisition of plant and machinery, furniture,etc.
• Fees received in advance: Fees received in advance are those that have been collected from students or other customers in advance of the provision of services. The internal auditor should ensure that these fees are being properly accounted for and that they are not being used for unauthorised purposes.
• Unutilised Grants: In the case, when the received grant failed to meet the designated purpose then it may get refunded. In such instances, the internal auditor may obtain the original letter and its specifications. The accounting treatment will be based on the method used by the educational institution when receiving income if the grant is refundable.

Reporting of Frauds, Errors and Irregularities and Illegal Acts

Some common types of frauds, errors, irregularities and illegal acts are commonly found in educational institution:-

• Charging fees from students, where not allowed.
• Plagiarism - The internet can be a source of restricted data, intellectual property rights violations, and critical information leakage, such as examination papers, course papers, essays, or research notes.
• Selling question papers and answers by employees, faculty, publisher, etc.
• Professional misconduct, educational malpractices including inappropriate change in institution’s curriculum, misuse of institution’s resources and deliberate falsification of records.
• Misappropriation of assets.
• Improper use of granted money or misuse of government funding.
• Double billing-error of charging students twice for fees of a year.
• The accounting treatment will be based on the method used by the educational institution when receiving income if the grant is refundable.