I chose the topic of my paper for the following two main reasons. First, in my country Latvia up to now no significant research has been carried out on the possibilities of developing a local government audit system. Likewise, no legal regulation exists for the setup, function, and co-ordination of such a system. And second, discussion of my findings and my conclusions with a broader international audience will hopefully contribute to the development of more harmonised all-European policies in this field. In Latvia, internal audit has been functioning since the year 1999. The 4th of December 2002, when the Law On Internal Audit came into force, was the starting point of internal audit function in the public sector, namely, the ministries and the central government agencies. However, this law does not refer to the local governments, except in cases when transactions are carried out with project funds financed by European Union's programmes. Debate on the necessity of local governments' internal audit in Latvia has been going on since the year 2003 when at the international conference "Audit 2003" the idea was expressed that internal audit could be instrumental in improving the competitive ability of any local government. Of the 118 local governments in Latvia, currently only 17 have internal audit units. Is it good, or is it bad? I have made my research, and I can convincingly argue in favour of the conclusion that internal audit in local governments is able to fully incorporate with control and monitoring systems, fulfil all tasks set by local tax-payers, and help local policy makers and management achieve their aims in due time. But the current course of events shows that local governments in Latvia do not pay enough attention to internal audit, largely due to scarce financial resources.
