audit report on the annual financial report of zubin...

REPUBLIKA E KOSOVËS / REPUBLIKA KOSOVA / REPUBLIC OF KOSOVA

ZYRA KOMBËTARE E AUDITIMIT

NACIONALNA KANCELARIJA REVIZIJE NATIONAL AUDIT OFFICE

Document No: 22.25.1-2016-08

AUDIT REPORT

ON THE ANNUAL FINANCIAL REPORT OF ZUBIN POTOK

MUNICIPALITY FOR

THE YEAR ENDED 31 DECEMBER 2016

Prishtina, June 2017

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The National Audit Office of the Republic of Kosovo is the highest

institution of economic and financial control which, according to the

Constitution and domestic laws, enjoys functional, financial and

operational independence. The National Audit Office undertakes

regularity and performance audits and is accountable to the Assembly

of Kosovo.

Our Mission is to contribute to sound financial management in the

public administration. We perform audits in line with internationally

recognized public sector auditing standards and good European

practices.

The reports of the National Audit Office directly promote

accountability of public institutions as they provide a base for holding

managers’ of individual budget organisations to account. We are thus

building confidence in the spending of public funds and playing an

active role in securing taxpayers’ and other stakeholders’ interests in

enhancing public accountability.

The Auditor General has decided on the audit opinion on the Annual

Financial Statements of Zubin Potok municipality in consultation with

the Assistant Auditor General, Qerkin Morina who supervised the

audit.

The opinion and report issued are a result of the audit carried out by

Xhevat Seferi (Team Leader) and Milos Petrovic and Nebojsa Ristic

(Team Members) under the management of the Head of Audit

Department Zuke Zuka.

NATIONAL AUDIT OFFICE-St. Musine Kokollari, No. 87, Prishtina 10000, Kosova Tel: +381(0) 38 60 60/1011

http://zka-rks.org

http://zka-rks.org/

ZYRA KOMBËTARE E AUDITIMIT - NACIONALNA KANCELARIJA REVIZIJE - NATIONAL AUDIT OFFICE

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TABLE OF CONTENTS

Executive Summary ................................................................................................................... 4

1 Annual Financial Statements and other External Reporting Obligations ................. 6

2 Governance ....................................................................................................................... 10

3 Financial Management and Control ............................................................................. 15

Annex I: Audit Approach and Methodology ...................................................................... 24

Annex II: Explanation of the different types of opinion applied by NAO ...................... 25

Annex III: Prior Year Recommendations ............................................................................. 27

Annex IV: Letter of confirmation .......................................................................................... 32


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Executive Summary

Introduction

This report summarises the key s arising from our audit of the 2016 Annual Financial Report of

Zubin Potok Municipality, which determines the Opinion given by the Auditor General. The

examination of the 2016 financial statements was undertaken in accordance with the International

Standards on Supreme Audit Institutions. Our approach included such tests and procedures as we

deemed necessary to arrive at an opinion on the financial statements. The applied audit approach

is set out in our External Audit Plan1 dated 05/12/2016.

Our audit focus (detailed in Annex 1) has been on:

The level of work undertaken by the National Audit Office to complete the 2016 audit is a direct

reflection of the quality of internal controls implemented by the Management of the Municipality.

Opinion of the Auditor General

Unmodified Opinion with emphasis of the matter

In on our opinion, the Annual Financial Statements for the year ended on 31st of December 2016

present a true and fair view in all material aspects.

Emphasis of matter

As emphasis of the matter we would like to mention the fact that:

The Municipality did not register and disclose assets purchased in and inherited from previous

years in the Annual Financial Statements. In addition, purchased assets during 2016 were not

presented either, although there were investments in capital projects;

Planning and payment of salaries in the amount of €77,033 for 160 employees recruited within

the project “Reconstruction of local road network”, from the category of Capital Investments (

code 31910, Advance for investments), was misclassified; and

Files, i.e. employment contracts for at least 30 employees of the municipal administration have

not been updated. The municipality did not provide new contracts for employees who had

employment contracts since UNMIK administration.

For more information, see chapter 1.1 of this Report.

Annex II explains the different types of Opinions applied by the National Audit Office.

1 The term External Audit Plan replaces the term Audit Planning Memorandum

The Annual Financial Statements

GovernanceFinancial Management

and Control


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We would like to thank the Mayor and his staff for the cooperation during the audit process.

Key Conclusions and Recommendations

Response of the Mayor

The Mayor has taken into account and is reconciled with the detailed audit findings and

conclusions, and is committed to address all recommendations given.

Furthermore Mayor is committed to:

Review Audit Report at the Municipal Assembly; and

by the end of January 2018, to discuss in the Municipal Assembly the progress regarding the

implementation of the Action Plan on Audit Recommendations, before the PFV 2017 have

been submitted to the Ministry of Finance.

Emphasis of the Matter in the audit opinion reflects the shortcomings in

controls, due to inadequate classification of expenditures as a result of inappropriate planning, personnel

management, asset recording and disclosure.

The Mayor should analyse the reasons for Emphasis of Matter in 2016 and

identify the necessary actions in order to enable appropriate management of

expenditures, personnel and a true and fair presentation of assets for 2017 ( see

chapter 1.1.).

The process of preparation of AFS draft was not managed well, which has

resulted with several financial shortcomings and identified

defficiencies during the audit. The neccessary adjustments were done

only after our suggestions.

The Mayor should ensure that preparation process of AFS draft 2017

includes a formal and effective menagement review and that AFS

statement is signed once all neccessary actions are implemented ( see sub-

chapter for AFS 1.2).

Governance arrangements related to accountibility, self-assessment and risk

management, implementation of recommendations as well as

management reporting are weak. The municipality does not have strategic

and operational plans. Also, the activity of Internal Audit Unit was not

established in order to support the developemtns on this area.

The Mayor should ensure that issues deriving from the general governance field be adressed with responsibility and added attention ( see issues 2-6).

Planning and budget execution is at low level and there are shortcomings in

financial systems, including: procurement, capital investments,

wages and salaries, subsidies, as well as planing and execution of own source

revenues.

The Mayor should apply a detailed assessment of underlined areas in this report in order to identify reasons on

emerged shortcomings as well as neccessary actions towards adressing

them ( see chapter 3).


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1 Annual Financial Statements and other External

Reporting Obligations

Introduction

Our review of the Annual Financial Statements (AFS) considers both compliance with the reporting

framework and the quality and accuracy of information recorded in the AFS. We also consider the

Declaration made by the Chief Executive Officer and Chief Financial Officer when the draft AFS are

submitted to the Ministry of Finance.

The declaration regarding presentation of the AFS incorporates a number of assertions relating to

compliance with the reporting framework and the quality of information within the AFS. These

declarations are intended to provide the Government with the assurance that all relevant

information has been provided to ensure that a comprehensive audit can be undertaken.

1.1 Audit Opinion

Unqualified opinion with emphasis of the matter

We have conducted the audit in accordance with International Standards on Supreme Audit

Institutions (ISSAIs). According to these standards, our responsibilities are described below in the

section 'Auditor's Responsibilities for Audit of Financial Statements'. According to the ethical

requirements which are relevant to our audit of the annual financial statements of Budget

Organizations in Kosovo, the NAO is independent from the Municipality, whereas other ethical

responsibilities are fulfilled in accordance with these requirements. We believe that the received

audit evidence are sufficient and appropriate in providing basis for the opinion.

In our opinion, the Annual Financial Statements for the year ended on 31st of December 2016 present

a true and fair view in all material respects in accordance with International Public Sector

Accounting Standards (cash based Accounting), Law no.03/L-048 on Public Finance Management

and Accountability (as amended and supplemented) and Regulation no.01/2017 on Annual

Financial Reporting of Budget Organisations by the Ministry of Finance.

Basis for the opinion

We conducted the audit in accordance with International Standards of Supreme Audit Institutions

(ISSAIs). Our responsibilities under those standards are further described in the Auditor’s

Responsibilities for the Audit of the AFS section of our report. We believe that the obtained audit

evidence is sufficient and appropriate to provide a basis for the opinion.


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Emphasis of the matter

We draw your attention to the fact that:

The Municipality did not register and disclose in AFS, the assets purchased in and inherited

from previous years and those purchased during 2016. The Municipality has still taken no

action for the previous year’s recommendation regarding the registration and evaluation of

municipal property (buildings and other immovable property ), and other investments in

infrastructure and equipment over the past years. In addition , assets purchased during 2016

were not presented either, even though investments in capital projects were €777,409;

For the project funded by the Development Fund for the northern municipalities of Kosovo,

"Reconstruction of the Municipality local road network" worth €426,2324, the Municipality

has published a vacancy announcement for 160 employees for cleaning and maintenance of

roads based on the Mayor's decision dated on 07.01.2016. After the recruitment process, on

20.07.2016, the Municipality has signed employment contracts valid from 01.08.2016 until

31.01.2018. The total amount of monthly payment planned for 18 months was €289,644,

while for five (5) months since the start of the project €77,033 were paid for salaries. The

planning and payment of these salaries was carried out from the category on capital

investments (code 31910 Advance for investments), therefore, payments as such were

misclassified. The amount classified in wrong economic codes was also approved with the

Annual Budget Tables 2016; and

Files, i.e. Employments Contracts of at least 30 employees of the municipal administration

were not updated. The municipality did not provide new contracts for employees who work

since the UNMIK administration.

Responsibility of Management and Those Charged with Governance and AFS

The Management of Zubin Potok Municipality is responsible for the preparation and fair

presentation of financial statements in accordance with International Public Sector Accounting

Standards – Financial Reporting under the Modified Cash based Accounting and for such internal

control as management determines is necessary to enable the preparation of financial statements

that are free from material misstatement, whether due to fraud or error. This includes the

application of Law number 03/L-048 on Public Finance Management and Accountability (as

amended and supplemented).

The Mayor is responsible to ensure oversight of the Municipalities financial reporting process.

Auditor General’s Responsibility for the Audit of the AFS

Our responsibility is to express an opinion on the AFS based on our audit. We conducted our audit

in accordance with ISSAIs. These standards require that we comply with ethical requirements and

plan and perform the audit to obtain reasonable assurance about whether the financial statements

are free from material misstatements.


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Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in

accordance with ISSAIs will always detect a material misstatement when it exists. Misstatements

can arise from fraud or error and are considered material if, individually or in the aggregate, they

could influence the decisions taken on the basis of these AFS.

An audit involves performing procedures to obtain evidence about the financial records and

disclosures in the AFS. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement in the AFS, whether due to fraud or error. In

making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation of the financial statements in order to design audit procedures that are appropriate in

the entity’s circumstances, but not for the purpose of expressing an opinion on the effectiveness of

the entity’s internal control.

An audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of accounting estimates made by Management, as well as evaluating the

presentation of the financial statements.

1.2 Compliance with AFS and other reporting requirements

Zubin Potok Municipality is required to comply with a specified reporting framework and other

reporting requirements. We considered:

Compliance with MoF Regulation No.01/2017 on the Annual Financial Reporting of Budget

Organisations;

Requirements of LPFMA No. 03/ L-048, as amended and supplemented);

Budgetary requirements of the Law on Budget of Kosova No; 05/L-071, as amended and

supplemented with Law No: 05/L-109 for budget review;

Compliance with Financial Rule No.01/2013 and 02/2013;

Action Plan on addressing the recommendations;

Requirements of Financial Management and Control (FMC) procedures;

Other requirements for budgetary reporting, such are: quarterly reports, including also the

nine-month statements in due time ; Operational reports (performance); and

Draft plan and final procurement plan in due time.


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In the context of the AFS, issues related to the reporting framework were not addressed when

preparing the draft financial statements, and as a result we have identified the following non-

compliance:

Article 13. Statement of Cash Receipts and Payments;

Article 14 The Report on Budget Execution; and

Errors in disclosure and note section: Articles 14.6, 15, 19, 21, 22, 24, 25, 26 and 28.

After our suggestions the errors have been rectified, except the section on disclosure of

information in Article 19 of AFS on disclosure of assets.

DECLARATION BY MUNICIPALITY MANAGEMENT

Given the above - the Declaration made by the Chief Administrative Officer and Chief Financial

Officer when the draft AFS are submitted to the Ministry of Finance can be considered to be correct

given, except the disclosure of data on assets.

In the context of other external reporting requirements we have no issues to raise.

1.3 Recommendations for the first part of the report

Recommendation 1 The Mayor should ensure that an analysis is conducted to determine the

causes of emphasis of matter. Actions should be taken to systematically

address the underlying causes in order to avoid errors in payments with

wrong codes, staff management and correct evaluation of capital assets. The

statement given by Chief Administrative Officer and Chief Financial Officer

should not be signed, only if all necessary actions are applied in AFS draft.


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2 Governance

Introduction

Effective governance arrangements are fundamental to Municipality for successfully managing the

challenges it faces and ensuring that service delivery is optimised for the benefit of taxpayers and

other service users.

A key tool supporting effective Governance is the implementation of audit recommendations as this

demonstrates that Management are seeking to develop existing processes and controls. Similarly

the self-assessment checklist completed by all Budget Organisations provides a framework for

developing enhanced Governance arrangements. It is important that the answers provided by an

individual budget organisation are supported by appropriate evidence.

The remainder of our review of governance arrangements reflects a consideration of:

those areas of Governance Arrangements where significant improvements are required and

where we believe that our recommendations can generate positive improvements including

consideration of the Internal Audit system; and

areas of Financial Management and Control identified through our audit work including

specific work directed at compliance s in key income and expenditure systems (these areas

are considered in Section 3 of this report).

Overall Governance Conclusion

Good governance procedures require the implementation and monitoring of strategic and

operational activities in effective manner. We have identified that self-assessment checklist was not

completed by the Municipality. Moreover, even the other arrangements that would support

governance development, such as the effective response to audit recommendations and the

establishment of an internal audit system, have not been completed.

Additionally, even in terms of compliance with legislation, our audit has revealed the existence of

some weaknesses/shortcomings in expenditure management, non-implementation of civil service

rules by the staff and weaknesses/shortcomings in revenue management.


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2.1 Progress in the Implementation of Prior Year

Recommendations

Our Audit Report on AFS of Zubin Potok Municipality for the year 2015 resulted in 14 key

recommendations. The management prepared an Action Plan stating how all recommendations will

be addressed.

The Audit Report was not discussed at Municipal Assembly, as it was recommended in the report

of the previous year.

At the end of our 2016 audit, three ( 3) recommendations have been implemented; one ( 1)

recommendation was in the process of implementation, and ten ( 10) were not addressed at all by

the management; For a more thorough description of the recommendations and how they are

addressed, see Annex III.

Issue 2 - Addressing Prior Year Audit Recommendations – High Priority

Finding From the abovementioned paragraph it is noticed that only 1/3 of the

recommendations were implemented or were in the process of being

implemented, while the majority of them were not addressed at all by the

management. This is due to the fact that the Municipality did not pay enough

attention to the issues raised by the audit on implementing the

recommendations of the Auditor General.

Risk The negligence and failure to fully implement recommendations from

municipal management has resulted particularly in:

Poor quality of internal reporting and activities to senior management;

and

Weaknesses in implementation of procurement regulations, civil

service rules by the staff, management of subsidies, assets, and

weaknesses in revenue management.

Recommendation 2 The Mayor should strengthen the control and accountability measures to the

individuals in charge of fully addressing the recommendations, so that the

actions foreseen in the action plan are implemented, and from them receive

regular reports on the progress made in implementing the recommendations.

In order to improve the process, the reports on progress of the

implementation of recommendations should be reviewed quarterly and

establish without any delay the accountability mechanism.


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2.2 Self-Assessment Checklist of FMC components

The Ministry of Finance has produced a detailed self-assessment checklist for Budget Organisations

to support effective governance arrangements. We have noticed that filling of the FMC self-

assessment checklist was not completed and submitted to the Ministry. In this regard, we have

summarized below all our findings.

Issue 3 – Self Assessment Checklist – High Priority

Finding As a result of our review, we found that:

The municipal self-assessment checklist was not completed by the

management of the Municipality, and this confirms that the risk

management systems were not yet functional. This is because the

initial steps have not been taken in this area;

Effective monitoring processes, comprehensive development plan

and other operational plans were not established; and

The links between the procurement plan and the budget and drafting

of adequate reports on a regular basis have not been established.

This is a result of the lack of clarity of the management related to the

importance of this checklist and who is the responsible officer using these

mechanisms to support operational improvements.

Risk Poor governance arrangements weaken strategic and operational processes

and reduce the quality of services provided to citizens due to inefficient and

ineffective activities.

Recommendation 3 The Mayor should ensure the appropriate actions are taken towards

completion of the self-assessment checklist, and proactive addressing of areas

with weaknesses. Subsequently , a mechanism should be applied in order to

confirm the accuracy of the checklist and provide supporting documentation.


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2.3 Specific Governance Reviews

Our work on specific areas of governance arrangements has been informed by our audit planning

which considered the context within which Municipality operates and the challenges that it faces.

2.3.1 Setting of Strategic Objectives

All budget organizations are obliged to prepare and follow strategic plans at the organization level,

such as; The Strategy on Local Economic Development, Strategy on Local Rural Development,

Strategy on Tourism Development, the Strategic Plan for the Development of Pre-University

Education, the Maintenance Plan for Public Spaces, Municipal Development Plan, Urban

Regulatory Plan, etc.

Issue 4 – The lack of Strategic Plans- High Priority

Finding The Municipality has established an overall strategy of objectives and other

operational plans, but it lacks clear responsibilities for the coordination and

development of the strategic plan which would include the strategy cost

estimation and of other operational plans as well.

Risk The lack of a general development strategy and other development plans

makes it impossible to monitor and measure the achievement of long-term

and annual objectives, which is one of the essential conditions of good

governance.

Recommendation 4 The Mayor should ensure the drafting of a general development strategy, as

well as draft an action plan for monitoring the results in the achievement of

objective and establish effective oversight functions.

2.3.2 Management Reporting and Accountability

A range of internal controls are applied by Management to ensure that financial systems and

operational activities operate as intended. It is important that these include appropriate reporting

to management to enable an effective and timely response to identified operational problems.

Although, the audit has identified the following issues;

Issue 5 – Weaknesses in Management Controls – High Priority

Finding Our review of management controls implemented in the Municipality's main

financial system has revealed weaknesses at different levels of control. As

such, overall control arrangements require strengthening, in particular with

regard to: financial reporting on expenditures and revenues, budget planning

and execution, staff management, registrations and reporting of outstanding

assets and liabilities.


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Risk Poor quality of management controls reduces the ability to react in timely

manner and actively manage the Municipality activities and to successfully

cope with the existing challenges. This can result in an unplanned deficit or

surplus and delay the actions needed to address them. In addition, this can

have a negative impact towards the revenues collection at the expected level.

Similarly, it may result in providing non-qualitative services to citizens.

Recommendation 5 The Mayor should ensure that a review has been carried out to determine the

appropriate form of designing management controls , financial and

operational reporting to senior management, in order to support effective

management of the activity and to ensure that an appropriate solution is put

in place within the following months.

2.4 Internal Audit System

Budgetary organizations are obliged to ensure that its activities and processes are subject to internal

audit. An adequate audit system helps management in identifying weaknesses in financial

management and municipal controls. This contributes towards the improvement of internal

controls, achievement of objectives and improvement of the services provided by the Municipality.

Issue 6 – Non- establishment of IAU – High Priority

Finding The Municipality did not manage yet to provide internal audit services, and

these services were not performed by the Municipality nor were they covered

by any other organization. This is because the municipal management did

not pay enough attention to the internal audit and improvement of municipal

activities.

Risk The lack of regular internal audit reviews may affect in the continuation of

weaknesses recurrence in key internal control systems. In addition, the

management may not be able to identify weaknesses of controls and react in

timely manner for their elimination.

Recommendation 6 The Mayor should consider recruiting an internal auditor who through a

comprehensive working program would incorporate the financial and other

risks of the Municipality and assess the effectiveness of internal control. In

addition, we suggest establishing an effective Audit Committee which should

review in critical manner the plans and outcomes of internal audit.


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3 Financial Management and Control

Introduction

Our work on Financial Management and Control outside of the areas of Governance referred to

above reflects the detailed work undertaken on Revenue and Expenditure Systems. As part of this

we consider Budget management, Procurement and Human Resources , and Assets and Liabilities.

Financial Management and Control Conclusion

For the Municipality, the planning and budget execution, especially for the category of capital

investments, remains very challenging. In the context of financial systems, controls over a range of

spending areas, revenue planning and collection, personnel management, subsidies, and asset

management require further improvements.

3.1 Budget Planning and Execution

We have considered the collected revenues, sources of budgetary funds, spending of funds by

economic categories. This is highlighted in the following tables:

Table 1. Own source revenues ( in €)

Description Initial

Budget Final

Budget 2016

Receipts 2015

Receipts 2014

Receipts

Collected Revenues from Municipality

42,888 50,000 2,495 1,403 1,205

Police fines 0 0 6,538 5,128 7,475

Court fines 0 0 95 0 0

Total own source revenues 42,888 50,000 9,128 6,531 8,680

The planned own source revenues were €50,000, while only €9,128 were collected, of which only

€2,495 were revenues collected from the Municipality, while the rest were revenues collected from

police and court fines. The total revenue of the Municipality reflects the execution of budgetary

projections at 18%. The low collection of own source revenues indicates poor performance and non-

serious engagement by the management of the Municipality. Regardless of the transfer of revenues

from previous years (€6,882) and collection during the current year (€9,128), the Municipality did

not spent all these revenues, and the same were carried forward in the following year.


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Table 2. Sources of budgetary Funds (in €)

Description Initial

Budget Final

Budget2 2016

Outturn 2015

Outturn 2014

Outturn

Sources of Funds 1,861,976 2,459,026 1,686,669 1,094,590 1,924,662

Government Grant -Budget 1,819,088 1,413,612 928,982 1,074,850 1,908,736

Carried forward from previous year3 –

0 6,882 0 11,400 8,694

Own Source Revenues4 42,888 50,000 0 0 0

Domestic Donations 0 988,532 757,687 0 0

External Donations 0 0 0 8,340 7,232

The change of the final budget compared to the initial budget (€597,050) is as a result of collection

of funds from the Development Fund (€988,532), the increase of the budget for own source revenues

for 2016 (€7,112), the collection of carried forward revenues (€6,882) and reductions in Government

Grant (€405,476).

In 2016, the Municipality has used 69% of the final budget, with an improvement of 19% compared

to 2015. However, budget execution remains at an unsatisfactory level, and below we have provided

the explanations given for the current position.

Table 3. Spending of funds by economic categories - (in €)

Description Initial

Budget Final

Budget 2016

Outturn 2015

Outturn 2014

Outturn

Spending of funds by economic categories

1,861,976 2,459,026 1,686,669 1,978,111 1,868,731

Wages and Salaries 1,619,000 738,149 662,770 1,003,883 826,771

Goods and Services 101,021 235,744 205,931 96,827 80,614

Utilities 20,000 0 0 4,597 5,435

Subsidies and Transfers 20,000 40,560 40,560 9,936 5,000

Capital Investments 101,955 1,444,573 777,409 862,868 950,911

Explanations for changes in budget categories are given below:

The budget for Capital Investment increased to €1,342,618 as a result of the implementation

of the Trust Development Fund and external donations. Despite the increase in the budget

for capital expenditures, during the year, only 54% of the budget was spent. The Program

2 Final budget – the budget approved by the assembly which was subsequently adjusted for by the Ministry of Finance. 3 Own Source Revenues unspent in previous year carried forward into the current year. 4 Receipts used by the entity for financing its own budget.


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for Public Investments includes on-going projects from the previous year as well as new

projects for the current year. However, the progress of project execution was not at the

expected level;

The Wages and Salaries budget cut of €880,851 was as a result of non-payment of salaries5

in the Education and Health sector;

In the category of Goods and Services, the final budget compared to the initial budget was

increased by €134,723 from the government grant and was executed at 87%; and

The budget for Subsidies and Transfers was increased from the government grant for €20,560

and it was spent 100%.

Issue 7 – Budget Execution – High Priority

Finding The budget execution was not at the expected level. While a part of the

surplus was out of Municipality control , and a large part of the expenditures

were made in the last three months of the year (€874,982). This has happened

due to poor and ungrounded planning in clear objectives. Poor budget

performance is mainly seen in capital investments. The revenue planning

may be overestimated, while collection and their utilization is too low.

Finding Inadequate budget planning and its low execution will result in failure to

achieve the organization's objectives as well as loss of credibility to potential

citizens and potential donors.

Recommendation 7 The Mayor should ensure monitoring of budget performance in systematic

manner on monthly basis and through this review to identify and address

obstacles in executing the budget at intended level. In areas where initial

budget planning is inaccurate, should be fully reflected in the final budget

position. In addition, expenditure planning should be made in accordance

with the accounting plan of economic codes divided by category.

5 The payment of salaries for employees in the education sector still remains undefined, until decision taken by the

municipality.


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3.1.1 Revenues

The revenues generated by the Municipality in 2016 were €2,495 (not counting court and police

fines). Sources of direct collection of own source revenues are limited to these categories:

administrative fees and taxes on birth, marriage and death certificates. The Municipality is not

applying yet the legal requirements for property tax, construction permits, utilization of public

property etc.

Since the Municipality does not issue any invoices on taxes and fees, it does not possess receivables

account and does not keep records on them. Upon submission of the certificate request, fees for

issuing various certificates are cash payments through the cashier.

Issue 8 – The lack of internal regulations for taxes, fees and charges - High priority

Finding The Municipality still does not have an internal regulation approved by the

Municipal Assembly for taxes, fees and charges for the services provided to

its citizens. As a result of the lack of this regulation, we have identified the

following issues:

The Municipality is not implementing the Law on Property Tax and

the Law on Construction, as two main sources of revenue.

Consequently, it did not generate income from property tax,

construction permits, use of public property by citizens or on other

grounds. Therefore, the level of own source revenues collection is

symbolic; and

The collected revenues of administrative taxes are not regularly

deposited into bank accounts, while records are kept manually.

Risk Failure to comply with laws and regulations on collection of property taxes,

construction permit fees and other taxes and fees by the municipal

management, reflects an ignorant approach of the management towards

applying the legal requirements in this area. This increases the risk of non-

compliance with applicable laws and reduces own source revenues, as well

as the ability to finance projects from this source of revenue.

Recommendation 8 The Mayor should initiate without delay the drafting of an internal regulation

on taxes, fees and charges of citizens for public available services, and the

same should be approved by the Municipal Assembly. Additionally, ensure

the implementation of the Law on Property Tax and Construction Tax, which

primarily aims to implement minimum legal requirements and increase the

quality of services for the citizens of the Municipality.


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3.1.2 Wages and Salaries

Wages and Salaries are paid through a centralized system. Key controls confirming the accuracy

and completeness of the payments are: (a) Checking payments each month, by updating and signing

the payroll list, (b) Checking any possible changes that may appear on the forms, (c) Reviewing of

the budget for that category and the reconciliation with the Treasury. The final budget for wages

and salaries in 2016 was €738,149, of which €662,770 were spent.

Issue 9 – The shortcomings in Staff Management - High Priority

Finding Management did not effectively implement the existing controls, as required

by current law and regulations. Due to ineffective controls, staff management

is associated with the following shortcomings:

The management has not managed yet to establish an organisational

structure, systematise job positions and reconcile the needs and

budget of the Municipality. This led to some job positions remaining

vacant; and

Due to the absence of a personnel manager, during 2016 the personnel

files were incomplete. This reflects a lack of clear HR staff specifics

related to the implementation of AI requirements as part of their job

descriptions.

Risk The lack of staff organizational structure and failure to appoint the human

resources manager does not provide assurance on the internal organisation

of the Municipality, assignment of tasks and the adaptability of the job

positions, in non-completion and maintaining the staff files, and in non-

updating the payrolls on monthly basis.

Recommendation 9 The Mayor should ensure that appropriate actions are taken to address issues

referred to above as an urgent matter, for the establishment of municipal

organizational structure, and that key job positions are covered with

adequate staff along with updating of the staff files , in order to ensure

quality in human resource management.

3.1.3 Goods and Services and Utilities

The final budget for goods and services as well as municipal utilities in 2016 was €235,744. Of these,

€205,931 were spent. They relate to provision of supplies with equipment and inventory, office

supplies, contractual services, derivate etc.

We have no recommendations in this area.


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3.1.4 Subsidies and Transfers

The final budget for Subsidies and Transfers is mainly allocated to public entities, non-public

entities and individual beneficiaries. Examples of subsidies are; sport subsidies , social assistance,

subsidies in agriculture, etc. For the year 2016 the Municipality collected the amount of €40,560,

which was used (100%).

Issue 10 – The management of subsidy allocation - High priority

Finding The Municipality has adopted a regulation for granting subsidies, although,

there was no criteria observed on the form of their granting and utilization.

In addition , the beneficiaries of subsidies do not submit feedback reports to

the Municipality in order to confirm that the subsidy is spent for the purposes

for which it was dedicated.

Risk Non-implementation of the regulation on granting subsidies and not

reporting their beneficiaries to the Municipality, increases the risk of granting

subsidies without criteria and based on different interests, as well as in failing

to achieve purposes for which it was dedicated.

Recommendation 10 The Mayor should ensure the implementation of the regulation on the

allocation of subsidies and that no subsidy is granted in contradiction with

the criteria prescribed in the regulation. Additionally, mechanisms on how to

monitor and manage subsidies should be clearly defined. The controls on

subsidy allocation should be strengthened in order to ensure effective

monitoring of funds utilization allocated from the municipal budget.


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3.1.5 Capital Investments

The final budget for capital investments in 2016 was €1,444,573, of which €777,409 were spent,

mainly for: investments in construction of road infrastructure, investments in health facilities,

cultural sports facilities etc. The Municipality has financed its projects from the special development

fund (€757,687) and from the Government grant (€19,722).

Issue 11 – The lack of procurement plan - High priority

Finding The implementation of procurement guidelines was not achieved due to lack

of effective management oversight and poor spending planning. The

Municipality did not prepare and approve a procurement plan for 2016 as

required by Law No. 04 / L-042 on Public Procurement in Kosovo6.

Risk Failure to carry out procurement planning, affects the project management

and in not meeting the goals of the Municipality, resulting in emergency

procurement and division of procurement requirements which are mainly

the same or interconnected.

Recommendation 11 The Mayor should add internal controls in order to ensure that the Law and

procurement guidelines are implemented, respectively to ensure that the

annual procurement plan is completed and submitted in due time in

accordance with the established rules.

6 Article 8.1 less than sixty (60) days prior to the start of each fiscal year, every contracting authority should prepare

and submit to Procurement Central Agency a procurement plan prepared in advance in writing, which will identify in details all supplies, services and works, in order to be procured during the mentioned fiscal year by the contracting authority.


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3.2 Assets

3.2.1 Capital and Non Capital Assets

Asset management is an important part of financial management and control in the public sector. A

sound asset management required the Municipality to have a comprehensive view of assets, control

and management procedures and constantly update the changes in its registers. Capital assets are

all assets owned by the Municipality with a cost over €1,000, while non-capital assets are worth less

than €1,000.

Issue 12 – Weaknesses in Asset Management - High Priority

Finding The Municipality, although this year has appointed an official for asset

identification and registration, has not taken yet any action regarding the

management of assets over €1,000 nor for e-assets. The Municipality did not

establish the appropriate commissions for asset valuation and inventory.

Risk Poor asset management results in non-identification, existence and failure

of fair and factual presentation of assets. In addition, this situation increases

the risk of loss, alienation or even mismanagement of assets.

Recommendation 12 The Mayor should ensure that within a reasonable period of time to establish

commissions for asset valuation and inventory. These commissions should

carry out a fair and complete registration of all properties owned by the

Municipality, and monitor the evaluation results. Also, in order to have

accurate stock records, all incoming/outgoing movable properties of under

€1,000 should be recorded through e-asset system.

3.2.2 Handling of Cash and Cash Equivalents

Petty cash is a small fund of money which is kept under the care and control of the budget

organization, department or smaller budget units depending on budget allocations and is used to

cover small value expenses (up to €100). The Municipality during 2016 has spent €5,000 for this

purpose.

Recommendations

We have no recommendations in this area.


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3.3 Outstanding Liabilities

The Municipality did not submit a list of unpaid liabilities to suppliers at the end of 2016.

Issue 13 - Poor management of liabilities - Medium Priority

Finding During 2016, the Municipality did not report on monthly basis the financial

liabilities to MoF, as required by financial rule No. 02/2013 on Reporting of

Unpaid Liabilities from Budget Organization. The Municipality does not

maintain a protocol book for the receipt of invoices.

The Municipality at the end of the year, did not disclose any unpaid invoices

at the end of 2016, however, during the review of the payments made in the

first four months of 2017 we found out that four bills belonging to the

previous year were not disclosed and were paid in the following year. The

value of these invoices was €1,195. This is because the managers of the

directorates did not understand the need for full consolidation and accurate

reporting on monthly basis of outstanding liabilities to MF.

Risk Weak financial controls for unpaid municipal liabilities, non-regular monthly

reporting of liabilities, or the application of financial rules, as well as entry

into obligations at the end of the year, may result in unplanned payments

from next year's budget or with double payments.

Recommendation 13 The Mayor should strengthen controls over the receipt of invoices and their

payment within the legal deadline in order to ensure that the finance

department will establish an effective system and that all outstanding

invoices will be completely and accurately reported and as such to be

disclosed in the AFS of Municipality.

This report is a translation from the Albanian original version. In case of discrepancies, Albanian

version shall prevail.


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Annex I: Audit Approach and Methodology

The responsibilities placed on the Auditor and Those Charged with Governance are detailed in the

Opinion set out in Section 1.2 of this report.

While a key output of our work is the audit opinion this report reflects the totality of our work with

specific focus also on Governance s including Financial Management and Control. The latter is

informed by our extensive, risk based, compliance audit programme.

The Executive Summary is intended to highlight the key finding of the audit and the key action that

the Mayor should ensure are taken to address identified management/control weaknesses.

The detailed report provides an extensive summary of our audit finding with emphasis on

determining the cause audit findings and providing appropriate recommendations to address

these. For completeness we have included s identified at the interim audit where they remain

relevant. Our findings are defined as:

High Priority - s which if not addressed may result in a material weakness in internal control and

where action will offer the potential for improvements to the efficiency and effectiveness of internal

controls; and

Medium Priority - s which may not result in a material weakness but where action will also offer

the potential for significant improvements to the efficiency and effectiveness of internal controls.

Findings considered low priority were reported separately to finance staff .

Our procedures included a review of the internal controls and accounting systems and associated

substantive testing and associated governance arrangements only to the extent considered

necessary for the effective performance of the audit. Audit findings should not be regarded as

representing a comprehensive statement of all the weaknesses which exist, or all improvements

which could be made to the systems and procedures operated.


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Annex II: Explanation of the different types of opinion

applied by NAO

(extract from ISSAI 200)

Form of opinion

147. The auditor should express an unmodified opinion if it is concluded that the financial

statements are prepared, in all material respects, in accordance with the applicable financial

framework.

If the auditor concludes that, based on the audit evidence obtained, the financial statements as a

whole are not free from material misstatement, or is unable to obtain sufficient appropriate audit

evidence to conclude that the financial statements as a whole are free from material misstatement,

the auditor should modify the opinion in the auditor’s report in accordance with the section on

“Determining the type of modification to the auditor’s opinion”.

148. If financial statements prepared in accordance with the requirements of a fair presentation

framework do not achieve fair presentation, the auditor should discuss the matter with the

management and, depending on the requirements of the applicable financial reporting framework

and how the matter is resolved, determine whether it is necessary to modify the audit opinion.

Modifications to the opinion in the auditor’s report

151. The auditor should modify the opinion in the auditor's report if it is concluded that, based on

the audit evidence obtained, the financial statements as a whole are not free from material

misstatement, or if the auditor was unable to obtain sufficient appropriate audit evidence to

conclude that the financial statements as a whole are free from material misstatement. Auditors may

three types of modified opinions: a qualified opinion, an adverse opinion and a disclaimer of

opinion.

Determining the type of modification to the auditor’s opinion

152. The decision regarding which type of modified opinion is appropriate depends upon:

The nature of the matter giving rise to the modification – that is, whether the financial

statements are materially misstated or, in the event that it was impossible to obtain sufficient

appropriate audit evidence, may be materially misstated; and

The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter

on the financial statements.

153. The auditor should express a qualified opinion if: (1) having obtained sufficient appropriate

audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are

material, but not pervasive, to the financial statements; or (2) the auditor was unable to obtain


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sufficient appropriate audit evidence on which to base an opinion, but concludes that the effects on

the financial statements of any undetected misstatements could be material but not pervasive.

154. The auditor should express an adverse opinion if, having obtained sufficient appropriate audit

evidence, the auditor concludes that misstatements, individually or in the aggregate, are both

material and pervasive to the financial statements.

155. The auditor should disclaim an opinion if, having been unable to obtain sufficient appropriate

audit evidence on which to base the opinion, the auditor concludes that the effects on the financial

statements of any undetected misstatements could be both material and pervasive. If, after accepting

the engagement, the auditor becomes aware that management has imposed a limitation on the audit

scope that the auditor considers likely to result in the need to express a qualified opinion or to

disclaim an opinion on the financial statements, the auditor should request that management

remove the limitation.

156. If expressing a modified audit opinion, the auditor should also modify the heading to

correspond with the type of opinion expressed. ISSAI 170519 provides additional guidance on the

specific language to use when expressing a modified opinion and describing the auditor’s

responsibility. It also includes illustrative examples of reports.

Emphasis of Matter paragraphs and Other Matters paragraphs in the auditor’s report

157. If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed

in the financial statements that is of such importance that it is fundamental to their understanding

of the financial statements, but there is sufficient appropriate evidence that the matter is not

materially misstated in the financial statements, the auditor should include an Emphasis of Matter

paragraph in the auditor’s report. Emphasis of Matter paragraphs should only refer to information

presented or disclosed in the financial statements.

158. An Emphasis of Matter paragraph should:

be included immediately after the opinion;

use the Heading “Emphasis of Matter” or another appropriate heading;

include a clear reference to the matter being emphasised and indicate where the relevant

disclosures that fully describe the matter can be found in the financial statements; and

indicate that the auditor’s opinion is not modified in respect of the matter emphasised.

159. If the auditor considers it necessary to communicate a matter, other than those that are

presented or disclosed in the financial statements, which, in the auditor’s judgement, is relevant to

users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, and provided

this is not prohibited by law or regulation, this should be done in a paragraph with the heading

“Other Matter,” or another appropriate heading. This paragraph should appear immediately after

the opinion and any Emphasis of Matter paragraph.


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Annex III: Prior Year Recommendations

Audit Component Recommendation given Implemented Under implementation Not implemented

1.5. Financial statements

Recommendation 1 - The Mayor should ensure that an analysis is undertaken to

determine the causes for Modification of Opinion. Action should be taken to address the underlying causes in a systematic and pragmatic manner in order to eliminate errors in the AFS for 2016, and to ensure complete recording and disclosure of municipal assets.

Recommendation 2- The Mayor should ensure that effective processes are in place to confirm that the 2016 AFS production plan formally addresses all compliance issues. This should also include the review of the draft AFS by the management, with specific focus on high-risk areas and/or areas where errors have been identified in previous years. The Declaration made by the CAO and CFO should not be submitted unless all necessary checks have been applied to the draft AFS.

Recommendation 1 is implemented, after AFS were corrected in majority, apart from the underlined issues.

Recommendation 2 is implemented.

2.3 Prior Year Recommendations

Recommendation 3: The Mayor should ensure that within 30 days from the finalisation of this report draws up an action plan wherein specific measures and actions needed to address given recommendations are set out. The plan also needs to determine the staff responsible and the deadlines within which appropriate action will be taken, with the key focus on the areas that contain a higher degree of risk. A continuous process of monitoring should also be part of this plan.

No measures were taken, only three recommendation was fully implemented, one(1) recommendations were in the process of implementation and ten (10) were not yet addressed.


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2.4 Self-Assessment Checklist

Recommendation 4: The Mayor should ensure that the self-assessment checklist for 2016 will be completed and submitted to the MoF. Prior submitting it to MoF it needs to be reviewed and answers provided confirmed. The Mayor should also initiate activities for preparation of a municipal strategy, which should be ready for implementation starting from 2017. This strategy should be accompanied by a cost that corresponds to municipal resources and effective mechanisms that ensure its implementation and achievement of results.

No measures were taken because the Municipality has not completed self-assessment checklist.

2.5.1 Municipal consolidation

Recommendation 5: The Mayor has to analyse the reasons behind the setback in the internal consolidation process of the Municipality, and ensure that weaknesses identified are addressed within 2016.

The recommendation was partially implemented only with regards to the trainings of municipal officials for their certification in expenditure domain, in order that expenditure process is managed by the Municipality itself.

2.5.2 Risk Assessment

Recommendation 6: The Mayor should ensure that identification, risk assessment and measures to reduce the risk to an acceptable level are reviewed at the highest levels of management. Furthermore, the Mayor should ensure that the risk management responsibility is directly delegated to a director, who in coordination with Heads of Units will manage this process and report on risks on regular basis.

No measures were taken. The Municipality does not yet have a list of risks, as well as a plan for managing and reducing risks at acceptable levels.


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2.5.3 Management Reporting

Recommendation 7: The Mayor should ensure that a review is implemented to determine the format of financial reporting to the senior management which is required to support effective business management and to ensure that an appropriate solution is in place by the end of 2016.

No measures were taken. The Municipality still has weak financial reporting on expenditures and revenues to the high level management.

2.6 Internal Audit System

Recommendation 8: The Mayor should consider alternatives in order to ensure that operational and financial activities are subject to the internal audit, which would serve as an important management support in achievement of objectives in a more effective manner and in providing better quality services. In addition, the Mayor has to establish the Audit Committee which would critically review plans and results of the internal audit.

No measures were taken. The Municipality has not yet managed to establish the Internal Audit Unit as well as the Audit Committee.

3.3 Budget Planning and Execution

Recommendation 9: The Mayor should ensure that budget performance is systematically monitored on monthly basis, and that this review identifies and address barriers that hinder execution of the budget at the planned level. Revenue projections should be based on proper analysis over the potential sources.

When initial budget assumptions are inaccurate, it should be fully reflected in the final budget and in the future budgetary requests.

No measures were taken, because the municipality still has poor performance of budget execution.


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3.4 Procurement

Weaknesses in consortium contracts

Recommendation 10: The Mayor should determine why the tender criteria have not been met and ensure that controls over the evaluation of tender criteria are operational and effective. The Mayor should strengthen controls in order to ensure that all commission members make objective and professional tender evaluation.

The recommendation was implemented.

3.5.1 Remunerations (wages and salaries)

Recommendation 11: The Mayor should analyse the reasons behind delays in appointing regular officials in the administration, and to ensure that these positions are filled by the end of 2016. The Mayor should ensure establishment of controls over staff management in order to prevent potential errors and financial losses of the Municipality and to provide necessary services to citizens.

No measures were taken, because the municipality in 2016 still do not have a Personnel Manager, and staff management controls have not yet been established.

3.5.2 Subsidies and transfers

Recommendation 12: The Mayor has to review controls over the granting of subsidies so that is ensured complete implementation of the internal regulation, and effective monitoring over the use of funds granted out of the municipal budget, in order to ensure achievement of Municipality’s objectives. The files of subsidies should be completed with all required documentation and evidence.

No measures were taken. The internal regulation has not been implemented with regard to the effective monitoring of the use of funds.


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3.6 Revenues (including own source revenues)

Recommendation 13: The Mayor has to initiate immediately drafting of a regulation on taxes, fees and charges and the same submitted in the Municipal Assembly for approval. We would suggest cooperating with other municipalities that can serve as a good example in this area and use best practices to facilitate the entire process. In addition, the Mayor should ensure that all types of taxes and fees in this regulation are implemented just like in other municipalities. The Mayor should monitor this process constantly in order to ensure implementation of legal requirements.

No measures were taken because still have not initiated a draft regulation on taxes, fees and charges. Also, the Municipality is not collecting all types of taxes and fees.

3.7 Capital and Non Capital Assets

Recommendation 14: The Mayor has to address urgently the process of asset recording. The first step regarding this should be appointment of an assets officer and then proceed with identification and recording of municipal assets in the accounting register. The annual inventory of assets available should be conducted on an annual basis and in accordance with the Financial Rule 02/2013 on Assets Management. Furthermore, should be drawn clear guidelines in order to control the use of public assets,specifically including vehicles, computer equipment, telephones, business premises, and public spaces.

No measures were taken. The Municipality has not appointed officer for recording of assets and did not take any action with regard to asset management.

Number of recommendations 3 1 10


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Annex IV: Letter of confirmation

LETTER OF CONFIRMATION

For having agreed on the Auditor General’s findings of 2016 and implementation of

recommendations:

To: National Audit Office Venue and date: 24.05.2017

Honoured,

We hereby confirm that:

We have received the draft audit report of the National Audit Office on the 2016 Annual

Financial Statements of the Municipality of Zubin Potok, hereinafter referred to as the

Report;

Agree on the findings and recommendations and I have no comment on the content of the

Report; and

Within 30 days from receiving the final report, I will submit the action plan on

implementation of recommendations including the deadlines and responsible staff for their

implementation.

Mayor:

Stevan Vulovic


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