AUDITINGSystematic process of objectivelyobtaining and evaluating evidence» Regarding assertions about economic  actions a...
Purpose of an AuditTo provide certain degree of assurance that the activities reviewed (financial statements, operations, ...
Standards on AuditingEither:International Standards on Auditing, issuedby IFAC (International Federation ofAccountants)or:...
AUDIT COMPLIANCE    TYPES OF AUDITSFinancialComplianceOperational
FINANCIAL AUDITSThe Implementing Organization’sFinancial StatementsProject Financial StatementsStatements of Expenditures ...
Implementing Organization’s    Financial StatementsOverall objective is to express an opinion on fairness of statementsPha...
Understanding the Organization      Nature of the Organization’s      Activities      Organization’s Background      Signi...
Evaluating Internal ControlsPurpose: To determine the audit testsrequired for forming an opinionHow much Reliance on inter...
Testing the BalancesPurpose: To determine ifinformation is fairly presentedExamples:» Observation of Inventory-taking» Ver...
Audit of Project Financial         StatementsOverall Objectives» Statements fairly presented?   – For the period   – Cumul...
Audit of Project F/S (cont.)Similar to the audit process for theentity’s financial statements,except:» Greater emphasis on...
Audits of SOEsPrimary objective is to ascertain that individual expenditures reported in the SOEs are: Fully supported by ...
Audits of SOEs       ...ContinuedWhy?» Because withdrawal requests are  not supported by documentation  submitted to the B...
Audits of Special AccountsPrimary objectives are to verify that:  SA financial statements are fairly  presented, and  disb...
Audits of Special Accounts               (cont.)Auditors should: » Review the SA records maintained by   the Implementing ...
Audits of Adjustment LoansPrimary focus is on the adequacy ofprocedures used to prepare customs orsimilar certificates.Lim...
Audits of Adjustment Loans           (cont.)Important issues:» TOR must satisfy financial covenants» Documentation must no...
Requirements for AuditorsAdherence to principles of integrity,objectivity, independence andconfidentiallyAdequate and Comp...
Selection of AuditorsPreferably independent auditors whomeet ISA criteria and are members ofbodies affiliated with IFACGov...
Determining Auditor       AcceptabilityTM should consult with an accountingprofessional and consider the following:» Evide...
Government AuditorsUsually the “Supreme AuditInstitution (SAI)”                                         ContralorShould:  ...
Private Sector AuditorsIndependent auditors who meet ISAcriteria and are members of bodiesaffiliated with IFACDuly license...
Appointing the AuditorThe borrower appoints the auditor, butonly after the Bank has expressed theacceptability of the audi...
Terms of Reference (TOR)Provide guidance for the audit andformat of the audit reportShould not restrict the auditor’soblig...
Additional Guidance“Suggested Minimum Guidelines and Termsof Reference for the Planning and Executionof External Audits of...
Contract or Engagement LetterAll engagements with audit firms should besupported by a contractContract should specifically...
Auditors’ OpinionsWritten upon completion of the audit ofthe institution/project financial statements» Should contain sepa...
Opinions Required (Project)Project Financial Statements (Sources andApplications of Funds, AccumulatedInvestments, Supplem...
Management LetterIs a report on the internal controlsand operating procedures of theinstitutionMust address:» Any subjects...
Financing of Audit CostsNormally financed by Borrower if part ofits normal operating expenditures» Exceptions must be appr...
Report SubmissionAudited financial statements shouldbe submitted within six months fromthe end of implementing institution...
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Auditingpresentation

  1. 1. AUDITINGSystematic process of objectivelyobtaining 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. 2. Purpose of an AuditTo 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. 3. Standards on AuditingEither:International Standards on Auditing, issuedby IFAC (International Federation ofAccountants)or:Standards for Government Auditors, issuedby INTOSAI (International Organization ofSupreme Audit Institutions)
  4. 4. AUDIT COMPLIANCE TYPES OF AUDITSFinancialComplianceOperational
  5. 5. FINANCIAL AUDITSThe Implementing Organization’sFinancial StatementsProject Financial StatementsStatements of Expenditures (SOEs)Special Bank Account (SA)
  6. 6. Implementing Organization’s Financial StatementsOverall objective is to express an opinion on fairness of statementsPhases: Understanding the Organization Evaluating Internal Controls Testing Financial Statement Balances
  7. 7. 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
  8. 8. Evaluating Internal ControlsPurpose: To determine the audit testsrequired for forming an opinionHow much Reliance on internal controls?Extent of Validation?» Tests of Compliance» Tests of TransactionsNot an endorsement of the overalladequacy of the internal control system
  9. 9. Testing the BalancesPurpose: To determine ifinformation is fairly presentedExamples:» Observation of Inventory-taking» Verification of Fixed Assets» Direct Verification with Third PartiesLevel of Testing Might Depend onResults from Prior Phases
  10. 10. Audit of Project Financial StatementsOverall Objectives» Statements fairly presented? – For the period – CumulativelyDisbursements made in accordance with:» Loan agreement» SARFair presentation of balance sheets,especially assets
  11. 11. Audit of Project F/S (cont.)Similar to the audit process for theentity’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. 12. Audits of SOEsPrimary 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
  13. 13. Audits of SOEs ...ContinuedWhy?» Because withdrawal requests are not supported by documentation submitted to the BankEffect?» Results of audit are basis for determining whether to continue use of SOEs, or if adjustment must be made on subsequent claims
  14. 14. Audits of Special AccountsPrimary 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
  15. 15. 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
  16. 16. Audits of Adjustment LoansPrimary focus is on the adequacy ofprocedures used to prepare customs orsimilar certificates.Limited to examining certificates onwhich SOEs have been based anddetermining reliability of the proceduresapplied in verifying or issuing suchcertificates
  17. 17. 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
  18. 18. Requirements for AuditorsAdherence to principles of integrity,objectivity, independence andconfidentiallyAdequate and Competent StaffWork performed by personnel who havetechnical training and proficiencyProper direction and supervision of work(includes quality control)
  19. 19. Selection of AuditorsPreferably independent auditors whomeet ISA criteria and are members ofbodies affiliated with IFACGovernment audit institutions shouldsubcontract with audit firms untilequivalent independence and technicalcompetence is achieved. The Bank canhelp them to meet this goal
  20. 20. Determining Auditor AcceptabilityTM should consult with an accountingprofessional 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
  21. 21. Government AuditorsUsually the “Supreme AuditInstitution (SAI)” ContralorShould: General» Report to legislature, rather than executive branch of government» Have statutory authority» Preferably be a member of INTOSAI, and meet corresponding standards
  22. 22. Private Sector AuditorsIndependent auditors who meet ISAcriteria and are members of bodiesaffiliated with IFACDuly licensed to practice the professionCompetent staff and adequate facilitiesPreferably affiliated with an internationalfirm that provides adequate guidanceand quality control
  23. 23. Appointing the AuditorThe borrower appoints the auditor, butonly after the Bank has expressed theacceptability of the auditor proposed.The auditor should be appointed wellbefore the beginning of the fiscal year.Preferably there should be a multi-yearcontract.
  24. 24. Terms of Reference (TOR)Provide guidance for the audit andformat of the audit reportShould not restrict the auditor’sobligations 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 workGuidelines & Sample: Annexes 18-19
  25. 25. Additional Guidance“Suggested Minimum Guidelines and Termsof Reference for the Planning and Executionof External Audits of Borrowers, ExecutingAgencies and Operations Financed by theWorld Bank”FM-600 Summarizes Requirements statedin FM-100, FM-200 and FM-300
  26. 26. Contract or Engagement LetterAll engagements with audit firms should besupported by a contractContract should specifically incorporate theTORsEngagement letters are prepared byauditors and should not substitute either theTORs or the contractAudits by Government Auditors should atleast be supported by acceptable TORs
  27. 27. Auditors’ OpinionsWritten upon completion of the audit ofthe institution/project financial statements» Should contain separate SOE paragraph if they are used in the projectTypes of Audit Opinions» Unqualified» Qualified» Adverse» Disclaimer of opinionSamples: Annex XXI
  28. 28. Opinions Required (Project)Project Financial Statements (Sources andApplications of Funds, AccumulatedInvestments, Supplementary Information)Certificates of Expenditures for periodauditedSpecial AccountComplianceInternal Control StructureDisclosure of Audit Procedures
  29. 29. Management LetterIs a report on the internal controlsand operating procedures of theinstitutionMust 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. 30. Financing of Audit CostsNormally financed by Borrower if part ofits normal operating expenditures» Exceptions must be approved by the RVPMay be included in project budget ifcosts are incremental because of projectnatureAudits performed by governmentauditors should not be financed by theBank
  31. 31. Report SubmissionAudited financial statements shouldbe submitted within six months fromthe end of implementing institution’sfiscal year» Or sooner if agreed upon by the Bank and the borrower

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