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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
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