Auditing presentation

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  • 1. 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)
  • 2. 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.
  • 3. Standards on Auditing 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) l
  • 4. AUDIT COMPLIANCE TYPES OF AUDITS l Financial l Compliance l Operational
  • 5. FINANCIAL AUDITS l The Implementing Organization’s Financial Statements l Project Financial Statements l Statements of Expenditures (SOEs) l Special Bank Account (SA)
  • 6. 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 Balances
  • 7. Understanding the Organization 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 Project l
  • 8. 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? » » 4 Not Tests of Compliance Tests of Transactions an endorsement of the overall adequacy of the internal control system
  • 9. 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 Results from Prior Phases
  • 10. 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
  • 11. 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.
  • 12. 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 l Appropriately accounted for
  • 13. 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
  • 14. Audits of Special Accounts Primary objectives are to verify that: SA financial statements are fairly presented, and l disbursements from SAs are proper and in accordance with the respective loan agreements l
  • 15. 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 intransit items) » Directly confirm balances with Bank » Examine treatment and disclosure of interest earned on SA
  • 16. Audits of Adjustment Loans 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 l
  • 17. 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
  • 18. Requirements for Auditors 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 (includes quality control) l
  • 19. Selection of Auditors 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 l
  • 20. 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
  • 21. Government Auditors l Usually the “Supreme Audit Institution (SAI)” l Should: Contralor General » Report to legislature, rather than executive branch of government » Have statutory authority » Preferably be a member of INTOSAI, and meet corresponding standards
  • 22. Private Sector Auditors 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 l
  • 23. Appointing the Auditor 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. l
  • 24. Terms of Reference (TOR) 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 l » 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
  • 25. 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” l FM-600 Summarizes Requirements stated in FM-100, FM-200 and FM-300 l
  • 26. Contract or Engagement Letter 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 least be supported by acceptable TORs l
  • 27. 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
  • 28. Opinions Required (Project) 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 l Disclosure of Audit Procedures l
  • 29. 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
  • 30. Financing of Audit Costs l 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 l Audits performed by government auditors should not be financed by the Bank l
  • 31. 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