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)
 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

l Operational
 FINANCIAL AUDITS
l The Implementing Organizations
Financial Statements
l Project Financial Statements
l Statements of Expenditures (SOEs)
l Special Bank Account (SA)
Implementing Organizations
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
Understanding the Organization

l Nature of the Organizations

Activities
l Organizations Background
l Significant Trends and
Relationships
l Staff Appraisal Report (SAR)
l Loan Agreement
l Other Documents Pertaining to the
Project
 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 Notan endorsement of the overall
adequacy of the internal control system
 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
 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
 Audit of Project F/S (cont.)

l Similar to the audit process for the

entitys 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
l Appropriately 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
certificates
 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
 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
(includes quality control)
 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)
Contralor
l Should: General

Report to legislature, rather than executive

branch of government
Have statutory authority
Preferably be a member of INTOSAI, and
meet corresponding standards
 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 auditors
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
l Guidelines & Sample: Annexes 18-19
 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
FM-100, FM-200 and FM-300
 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
least be supported by acceptable TORs
 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
 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
l Disclosure of Audit Procedures
 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 managements 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 institutions
fiscal year
Or sooner if agreed upon by the Bank and
the borrower