Auditingpresentation

AUDITING

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

Either:

International Standards on Auditing, issued by IFAC (International Federation of Accountants)

or:

Standards for Government Auditors, issued by INTOSAI (International Organization of Supreme Audit Institutions)

AUDIT COMPLIANCE

TYPES OF AUDITS

Financial

Compliance

Operational

FINANCIAL AUDITS

The Implementing Organization’s Financial Statements

Project Financial Statements

Statements of Expenditures (SOEs)

Special Bank Account (SA)

Implementing Organization’s Financial

StatementsOverall objective is to express an

opinion on fairness of statements

Phases: Understanding the Organization Evaluating Internal Controls Testing Financial Statement

Balances

Understanding the Organization

Nature of the Organization’s Activities

Organization’s Background Significant Trends and

Relationships Staff Appraisal Report (SAR) Loan Agreement Other Documents Pertaining to the

Project

Evaluating Internal Controls

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

How much Reliance on internal controls? Extent of Validation?

» Tests of Compliance» Tests of Transactions

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

Testing the Balances

Purpose: To determine if information is fairly presented

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

Level of Testing Might Depend on Results from Prior Phases

Audit of Project Financial Statements

Overall Objectives» Statements fairly presented?

– For the period– Cumulatively

Disbursements made in accordance with:» Loan agreement» SAR

Fair presentation of balance sheets, especially assets

Audit of Project F/S (cont.)

Similar 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:

Fully supported by proper documentation in files

Properly authorized and eligible Appropriately accounted for

Audits of SOEs...Continued

Why?» Because withdrawal requests are

not supported by documentation submitted to the Bank

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:

SA financial statements are fairly presented, and

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

Audits of Special Accounts

(cont.)

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

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

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.)

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

Adherence to principles of integrity, objectivity, independence and confidentially

Adequate and Competent Staff Work performed by personnel who have

technical training and proficiency Proper direction and supervision of work

(includes quality control)

Selection of Auditors

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

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

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

Usually the “Supreme Audit Institution (SAI)”

Should:» 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

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

Duly licensed to practice the profession Competent staff and adequate facilities Preferably affiliated with an international

firm that provides adequate guidance and quality control

Appointing the Auditor

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

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)

Provide guidance for the audit and format of the audit report

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

Guidelines & Sample: Annexes 18-19

Additional Guidance

“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”

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

Contract or Engagement Letter

All engagements with audit firms should be supported by a contract

Contract should specifically incorporate the TORs

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

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

Auditors’ Opinions

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

they are used in the project Types of Audit Opinions

» Unqualified» Qualified» Adverse» Disclaimer of opinion

Samples: Annex XXI

Opinions Required (Project)

Project Financial Statements (Sources and Applications of Funds, Accumulated Investments, Supplementary Information)

Certificates of Expenditures for period audited Special Account Compliance Internal Control Structure Disclosure of Audit Procedures

Management Letter

Is a report on the internal controls and operating procedures of the institution

Must 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

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

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

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

Report Submission

Audited 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