AUDITING

l Systematic process of objectively obtaining and evaluating evidence » Regarding assertions about economic

actions and events;» To ascertain the degree of

correspondence between those assertions and established criteria; and

» Communicating the results to interested users (AAA)

Purpose of an Audit

To provide certain degree of assurance that the activities reviewed (financial statements, operations, management practices, etc.) have been performed in accordance with applicable standards or practices.

Standards on Auditing

l Either:International Standards on Auditing, issued

by IFAC (International Federation of Accountants)

l or:Standards for Government Auditors, issued

by INTOSAI (International Organization of Supreme Audit Institutions)

AUDIT COMPLIANCE

TYPES OF AUDITS

l Financial

lCompliance

lOperational

FINANCIAL AUDITS

l The Implementing Organization’s Financial Statements

l Project Financial Statements

l Statements of Expenditures (SOEs)

l Special Bank Account (SA)

Implementing Organization’s Financial Statements

Overall objective is to express an opinion on fairness of statements

Phases:l Understanding the Organizationl Evaluating Internal Controlsl Testing Financial Statement

Balances

Understanding the Organization

l Nature of the Organization’s Activities

l Organization’s Backgroundl Significant Trends and

Relationshipsl Staff Appraisal Report (SAR)l Loan Agreementl Other Documents Pertaining to the

Project

Evaluating Internal Controls

l Purpose: To determine the audit tests required for forming an opinion

l How much Reliance on internal controls?l Extent of Validation?

» Tests of Compliance» Tests of Transactions

4Not an endorsement of the overall adequacy of the internal control system

Testing the Balances

lPurpose: To determine if information is fairly presented

l Examples:» Observation of Inventory-taking» Verification of Fixed Assets» Direct Verification with Third Parties

4Level of Testing Might Depend on Results from Prior Phases

Audit of Project Financial Statements

l Overall Objectives» Statements fairly presented?

– For the period– Cumulatively

l Disbursements made in accordance with:» Loan agreement» SAR

l Fair presentation of balance sheets, especially assets

Audit of Project F/S (cont.)

lSimilar to the audit process for the entity’s financial statements, except: » Greater emphasis on inspection of valid

supporting documentation » Additional steps, such as physical

observation of significant items, to substantiate the validity of expenditures reported.

Audits of SOEs

Primary objective is to ascertain that individual expenditures reported in the SOEs are:l Fully supported by proper

documentation in fileslProperly authorized and eligiblelAppropriately accounted for

Audits of SOEs...Continued

l Why?» Because withdrawal requests are

not supported by documentation submitted to the Bank

l Effect?» Results of audit are basis for

determining whether to continue use of SOEs, or if adjustment must be made on subsequent claims

Audits of Special Accounts

Primary objectives are to verify that:

l SA financial statements are fairly presented, and

l disbursements from SAs are proper and in accordance with the respective loan agreements

Audits of Special Accounts(cont.)

l Auditors should:» Review the SA records maintained by

the Implementing Institution» Review the SA bank statements» Reconcile (including tracking of in-

transit items)» Directly confirm balances with Bank» Examine treatment and disclosure of

interest earned on SA

Audits of Adjustment Loans

l Primary focus is on the adequacy of procedures used to prepare customs or similar certificates.

l Limited to examining certificates on which SOEs have been based and determining reliability of the procedures applied in verifying or issuing such certificates

Audits of Adjustment Loans(cont.)

l Important issues:» TOR must satisfy financial covenants» Documentation must not have been used to

justify another adjustment loan» Claims must be properly documented» Negative list items must be verified» Cut-off dates must be verified

Requirements for Auditors

l Adherence to principles of integrity, objectivity, independence and confidentially

l Adequate and Competent Staffl Work performed by personnel who have

technical training and proficiencyl Proper direction and supervision of work

(includes quality control)

Selection of Auditors

l Preferably independent auditors who meet ISA criteria and are members of bodies affiliated with IFAC

l Government audit institutions should subcontract with audit firms until equivalent independence and technical competence is achieved. The Bank can help them to meet this goal

Determining Auditor Acceptability

l TM should consult with an accounting professional and consider the following:» Evidence of independence» Qualifications and experience of key

personnel» Time and personnel reqs. of the audit» Experience with:

– Bank projects– Operations similar to the project

» Peer review, quality control, CPE requirements of the firm

Government Auditors

lUsually the “Supreme Audit Institution (SAI)”lShould:

» Report to legislature, rather than executive branch of government

» Have statutory authority» Preferably be a member of INTOSAI, and

meet corresponding standards

ContralorGeneral

Private Sector Auditors

l Independent auditors who meet ISA criteria and are members of bodies affiliated with IFAC

l Duly licensed to practice the professionl Competent staff and adequate facilitiesl Preferably affiliated with an international

firm that provides adequate guidance and quality control

Appointing the Auditor

l The borrower appoints the auditor, but only after the Bank has expressed the acceptability of the auditor proposed.

l The auditor should be appointed well before the beginning of the fiscal year. Preferably there should be a multi-year contract.

Terms of Reference (TOR)

l Provide guidance for the audit and format of the audit report

l Should not restrict the auditor’s obligations with respect to legislation, regulation, and auditing standards» In the event of poor performance, auditors

should not be able to claim that TOR requirements prevented them from doing professional work

l Guidelines & Sample: Annexes 18-19

Additional Guidance

l “Suggested Minimum Guidelines and Terms of Reference for the Planning and Execution of External Audits of Borrowers, Executing Agencies and Operations Financed by the World Bank”

l FM-600 Summarizes Requirements stated in FM-100, FM-200 and FM-300

Contract or Engagement Letter

l All engagements with audit firms should be supported by a contract

l Contract should specifically incorporate theTORs

l Engagement letters are prepared by auditors and should not substitute either theTORs or the contract

l Audits by Government Auditors should at least be supported by acceptable TORs

Auditors’ Opinions

l Written upon completion of the audit of the institution/project financial statements» Should contain separate SOE paragraph if

they are used in the project

l Types of Audit Opinions» Unqualified» Qualified» Adverse» Disclaimer of opinion

l Samples: Annex XXI

Opinions Required (Project)l Project Financial Statements (Sources and

Applications of Funds, Accumulated Investments, Supplementary Information)

l Certificates of Expenditures for period auditedl Special Accountl Compliancel Internal Control Structurel Disclosure of Audit Procedures

Management Letter

l Is a report on the internal controls and operating procedures of the institutionlMust address:

» Any subjects which the project managers and the auditor had previously agreed should be discussed

» All other matters that the auditor judges to be worthy of management’s attention

Financing of Audit Costs

l Normally financed by Borrower if part of its normal operating expenditures» Exceptions must be approved by the RVP

l May be included in project budget if costs are incremental because of project nature

l Audits performed by government auditors should not be financed by the Bank

Report Submission

lAudited financial statements should be submitted within six months from the end of implementing institution’s fiscal year» Or sooner if agreed upon by the Bank and

the borrower