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
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
l
Compliance
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 Organization l Evaluating Internal Controls
l Testing Financial Statement
Understanding the Organization
l Nature of the Organization’s
Activities
l Organization’s Background l Significant Trends and
Relationships
l Staff Appraisal Report (SAR) l Loan Agreement
l Other Documents Pertaining to the
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
4
Not an endorsement of the overall
Testing the Balances
l
Purpose: To determine if
information is fairly presented
l Examples:
» Observation of Inventory-taking
» Verification of Fixed Assets
» Direct Verification with Third Parties
4
Level of Testing Might Depend on
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,
Audit of Project F/S (cont.)
l
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:
l
Fully supported by proper
documentation in files
l
Properly authorized and eligible
lAppropriately 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
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
Requirements for Auditors
l Adherence to principles of integrity,
objectivity, independence and confidentially
l Adequate and Competent Staff
l Work performed by personnel who have
technical training and proficiency
l Proper direction and supervision of work
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
l
Usually the “Supreme Audit
Institution (SAI)”
l
Should:
» Report to legislature, rather than executive branch of government
» Have statutory authority
» Preferably be a member of INTOSAI, and meet corresponding standards
Contralor General
Private Sector Auditors
l Independent auditors who meet ISA
criteria and are members of bodies affiliated with IFAC
l Duly licensed to practice the profession l Competent staff and adequate facilities l 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
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
Contract or Engagement Letter
l All engagements with audit firms should be
supported by a contract
l Contract should specifically incorporate the
TORs
l Engagement letters are prepared by
auditors and should not substitute either the TORs or the contract
l Audits by Government Auditors should at
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
Opinions Required (Project)
l Project Financial Statements (Sources and
Applications of Funds, Accumulated
Investments, Supplementary Information)
l Certificates of Expenditures for period audited l Special Account
l Compliance
l Internal Control Structure
Management Letter
l
Is a report on the internal controls
and operating procedures of the
institution
l
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
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
l
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