External Audit

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East and Southern Africia, External Audit

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External Audit

  1. 1. External Audit Dec 2010
  2. 2. Audit Ex post review of the books of account, financial statements, records of transactions & financial systems Examines the adequacy of accounting systems & procedures, capacity to maintain appropriate accounts & documentation of project/ grant expenditures Definition Provides credibility & assurance of accountability Verifies compliance with financial matters in loan covenants Identifies weaknesses in internal controls / financial systems & makes recommendations thereon Underlying objectives Annual Due at IFAD normally six months after year end Frequency
  3. 3. Types of Audit Financial Statements Audit Auditor expresses his opinion on the financial statements of the project Compliance Audit Auditor verifies compliance with internal rules, regulations, procedures and processes laid down by Management Operational Audit Thorough examination of the project’s management techniques & performance. Study of all functional areas, identifying implementation issues & recommending remedial actions to improve efficiency & effectiveness of operations Mandatory in IFAD projects
  4. 4. Audit Roles Borrower/ grantee Prepares TOR, manages auditor selection process (if relevant) and appoints auditor Submits annual financial statements Implements remedial action External Auditor Performs audit work including 3 audit reports/opinions Indicates ineligible expenditures/ irregularities Provides management letter IFAD Provides no objection to TOR & appointment of auditor following assessment of capacity Monitors timely submission and review of audit reports Follows up on remedial action Applies sanctions/ other remedies if relevant, including suspension of disbursements and/or cancellation of financing balance
  5. 5. Audit Requirements per Financing Agreement/ LTB Section 5.02 (a) of the Financing Agreement: the time limit for appointment of auditors for 1st year (usually within 90 days of effectiveness) & for subsequent years (within 90 days of start of year) Section 5.02 (b) of the Financing Agreement: the audit report should be submitted to the Fund within 6 months of fiscal year end. It also lays down the specific opinions to be expressed by the auditors - SoEs and operation of Special Account. It also states that the auditors must submit a Management Letter which identifies weaknesses in internal controls and remedial measures for the same Section 6.04 of the Financing Agreement: if the Borrower fails to submit the audit report within the time limit prescribed in Section 5.02 (b) & is unlikely to do so within a reasonable time in the view of the Fund, the Fund can engage independent auditors to conduct the audit Section 6.01 : non submission of audit report within 12 months gives the Fund the right to suspend disbursements (NB: under the new general conditions, this is also the case for unsatisfactory audit reports)
  6. 6. Section 9.03 (a) of the General Conditions requires the financial statements including Special Account Statement & Statements of Expenditure to be audited according to generally accepted auditing principles Section 9.03 (b) of the General Conditions requires the auditor to address: Adequacy of accounting & internal control systems to monitor expenditure and other financial transactions Adequacy of accounting & internal control systems to safeguard project assets Adequacy of documentation maintained for relevant transactions Section 10.04 of the General Conditions requires the Borrower & the project party to cooperate fully with auditors in case of audit initiated by the Fund Audit Requirements per Financing Agreement/ LTB
  7. 7. Scope and Objectives of Audit Auditors acceptable to the Fund must be appointed in a fair, timely and transparent manner to conduct the audit of the project’s financial management systems for the 1st year of the project & every year thereafter (note: the obligation for the 1 st year audit may be waived by the Fund if reasonable (e.g. no disbursements, etc) The audit should include the audit opinion on the financial statements , compliance audit report on compliance with loan covenants and a management letter . Operational audit may be insisted upon by the Fund if it deems fit Should be conducted according to acceptable auditing standards (usually deemed to be International Standards on Auditing standards (ISA) or national standards , if acceptable), if not, extent of deviation there from must be reported.
  8. 8. External Auditor – Who Performs? I ndependent external professional I n certain countries, mandatory to be National Audit Office (NAO)/ Supreme Audit Institution; if not, private sector firm to be agreed with IFAD Who performs? Professional audit package contains opinions provided: Project Financial statements Use of Special account(s) in compliance with financing agreement Eligibility of expenditures included in WAs/ SOEs Management letter on internal controls & systems Reporting of ineligible expenditures External auditor outputs
  9. 9. External Auditor – Basis of work Basis of work Auditing standards: Provide guidance on the objectives and general principles governing an audit of financial statements Comprise a set of systematic guidelines used by auditors when conducting audits, ensuring the accuracy, consistency & verifiability of auditors' actions & reports Various Generally Accepted Auditing Standards (GAAS) frameworks exist IFAD’s projects are generally required to use International Standards of Auditing (ISA) / International Organization of Supreme Audit Institutions (INTOSAI) National standards may be used if agreed with IFAD The auditing standards applied should be specified in the auditor’s opinion
  10. 10. Financial Statement Audit verifies Whether the financial statements are prepared according to internationally recognized accounting principles ( IFRS/ IPSAS) or acceptable national standards consistently over a reasonable period Whether expenditure is eligible per provisions of the financing agreement Whether the accounting & financial statements & records are accurate Whether individual expenses aggregating to the totals reflected in SoEs are properly approved, classified, supported by documentary evidence & are eligible under the financing agreement. If ineligible expenses are found, the Fund may review the eligibility of the Borrower to use the SoE mechanism: the Borrower may be asked to reimburse the Special account to the extent of ineligible expenditure
  11. 11. Financial Statement Audit verifies Whether the Special Account mechanism is operated properly, the SA is correctly reconciled, if the withdrawals from the SA are properly authorized Whether the year end financing balance is reconciled with IFAD’s records Whether the project has adequate internal and accounting controls to record & report financial transactions in a timely & accurate manner & to safeguard project assets. Whether the internal audit system is commensurate with the size & complexity of the project Whether the project assets physically exist are in good working order & are held in the name of the project Any other matter which the Fund may specifically ask the auditors to report on, whether included in the Financing Agreement or not
  12. 12. Audit Reports – Contents The report should follow a set format: Paragraph 1: sets out audit work performed. Identifies respective responsibilities of the auditor & auditee Paragraph 2: details the scope of audit work , provides a general description of the nature of the work, examples of procedures performed, any limitations the audit faced based on the nature of the work. This paragraph also states that the audit was performed in accordance with the GAAS of reference Paragraph 3: states the auditor’s opinion on the financial statements , i.e., whether free of material misstatement (i.e. important and significant errors), show a true and fair view of the operating results, financial position & cash flows of the auditee and whether they are in accordance with the stated accounting principles of reference The auditor may also add additional information to the report if deemed necessary without changing the overall opinion of the report
  13. 13. Audit Reports – Opinions There are 4 different standard types: Unqualified Opinion/“Clean” opinion report* Qualified Opinion/“Except for” Opinion ** Adverse Opinion report *** Disclaimer of Opinion report *** * In some cases the clean audit opinion issued is not entirely consistent with audit findings in the financial data, management letter or IFAD’s findings in supervisory activities ** Potentially not acceptable to IFAD – IFAD’s audit standards foresee that an unqualified opinion should be received for all its projects, programmes & grants. A qualified opinion may be accepted only if there is evidence of a time-bound workplan to implement changes or if the qualification does not impinge on IFAD’s fiduciary responsibilities *** Not acceptable to IFAD. Financial statements to be re-done and re-audited
  14. 14. 1. Unqualified Opinion/“Clean” opinion This is regarded as the equivalent of a “clean bill of health” to a patient 2. Qualified Opinion/“Except for” Opinion There are 2 types of qualification: Single deviation from GAAP – at least one area of the accounts does not conform to GAAP but the rest of the financial statements are fairly presented, e.g. incorrect depreciation expense Limitation of scope - the auditor could not audit one or more areas of the financial statements. For example, the auditor was not able to observe and test an entity’s inventories The qualified report states the financial statements are fairly presented with a certain exception. An explanatory paragraph explains the reasons for the qualification 3. Adverse Opinion report The financial statements do not conform to GAAP. It is the opposite of an unqualified opinion; the data is materially incorrect, unreliable, and inaccurate 4. Disclaimer of Opinion report This Opinion is rare; issued when the auditor could not form an opinion, as he cannot complete the audit work due to various reasons, such as significant scope limitations Audit Reports – Opinions
  15. 15. Management Letter Should accompany audit report Should identify weaknesses , if any, of the internal controls and recommend corrective action. Management must reply in writing within 30 days Management response should indicate agreement/ disagreement with auditor & must contain a time bound action plan to address the issue(s)
  16. 16. Audit – Responsibilities of PMU Prepare auditor’s TOR and obtain IFAD no-objection Ensure mandatory data is included in financial statements (as per IFAD Reporting Guidelines) Submit the financial statements to IFAD 3 months after the end of the FY I FAD will provide comments on missing/unclear items that can be corrected by the PCU, rather than make it an issue of audit report review If in doubt, ask IFAD!
  17. 17. Audit – Responsibilities of IFAD Monitor timeliness of audit report submission Check auditor’s compliance with TOR , including all 3 audit opinions & management letter If report is qualified, consider seriousness of qualifications , & if immediate action is required Suspension of disbursements may occur if: Untimely submission of reports (180 days from due date) Non compliance with IFAD standards (e.g. qualified accounts without satisfactory action plan)
  18. 18. Selection & Appointment of Auditors Usually through a competitive process usually from 3-6 qualified firms Should be on the basis of technical and financial evaluation Should have past experience & satisfactory performance in similar assignments Should produce satisfactory references Should give a declaration that the neither the firm nor the staff have any conflict of interest in accepting the assignment Should deploy staff with adequate qualifications & experience Should not be appointed for any other assignment – management consultancy, internal auditor, accounting, consultancy, etc Should be able to able to undertake the assignment with complete independence – no relationship with project party or other related party
  19. 19. Contents of Audit Engagement Letter Description of the project, the finance and parties thereto Description of financial statements and samples thereof Stipulation regarding use of acceptable auditing standards Availability of books , records, documents and personnel during audit Tenure of the appointment - two or more fiscal years (subject to satisfactory performance in previous year) Follow up on prior year issues Contents of audit report & specific opinions to be provided. Deadline for submission of audit report Deliverables, outputs and opinions Submission of audit program, staffing plan & audit proposal Submission of Management Letter
  20. 20. Responsibilities of the Auditor Submit a proposal outlining audit methodology, staffing plan, audit programme & audit fees Express audit opinions as per ToR Provide a Management Letter as per ToR Provide an IFAD official language translation of the audit report in case the report is in the local language
  21. 21. Follow up of audit recommendations Follow up of audit recommendations is as important as conducting the audit The Project Party should have a system for following up compliance with audit recommendations in a timely manner A Log of Audit Observations must be prepared The log must record each audit observation & the validation by the auditor that corrective action has been taken Should be updated periodically and submitted to Supervision Missions Follow up status must be reviewed by the Project Coordinator/ IFAD/ Internal Auditor/ External Auditor periodically
  22. 22. Status of audits For each project, a status of audits must be prepared as per the following format Should be updated regularly and submitted to Supervision Missions Audit Report for the Period Due Date Submitted by Auditors on Submitted by IFAD on Remarks
  23. 23. Audit Review Form/Checklist Iterative tool, prepared by IFAD for implementation support Increased importance due to renewed emphasis on fiduciary responsibilities under direct supervision Analyses completeness and reasonableness of: financial statements audit opinions audit work performed Lists major follow up action to be performed by project May require action plan to be prepared Updated format to be launched with new audit report tracking system (ARTS)
  24. 24. Thank You

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