AUDITING

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.
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AUDITING AUDITINGq 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) PurposeofanAuditTo 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. StandardsonAuditingq Either: International Standards on Auditing, issued by IFAC (International Federation of Accountants)q or: Standards for Government Auditors, issued by INTOSAI (International Organization of Supreme Audit Institutions) AUDITCOMPLIANCE TYPES OF AUDITSq Financialq Complianceq Operational FINANCIALAUDITSq The Implementing Organization’s Financial Statementsq Project Financial Statementsq Statements of Expenditures (SOEs)q Special Bank Account (SA)ImplementingOrganization’s FinancialStatementsOverall objective is to express an opinion on fairness of statementsPhases:q Understanding the Organizationq Evaluating Internal Controlsq Testing Financial Statement BalancesUnderstandingtheOrganization q Nature of the Organization’s Activities q Organization’s Background q Significant Trends and Relationships q Staff Appraisal Report (SAR) q Loan Agreement q Other Documents Pertaining to the Project EvaluatingInternalControlsq Purpose: To determine the audit tests required for forming an opinionq How much Reliance on internal controls?q Extent of Validation? » Tests of Compliance » Tests of Transactions Not an endorsement of the overall adequacy of the internal control system TestingtheBalancesq Purpose: To determine if information is fairly presentedq Examples: » Observation of Inventory-taking » Verification of Fixed Assets » Direct Verification with Third Parties Level of Testing Might Depend on Results from Prior Phases AuditofProjectFinancial Statementsq Overall Objectives » Statements fairly presented? – For the period – Cumulativelyq Disbursements made in accordance with: » Loan agreement » SARq Fair presentation of balance sheets, especially assets AuditofProjectF/S(cont.)q 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. AuditsofSOEsPrimary objective is to ascertain that individual expenditures reported in the SOEs are:q Fully supported by proper documentation in filesq Properly authorized and eligibleq Appropriately accounted for AuditsofSOEs ...Continuedq Why? » Because withdrawal requests are not supported by documentation submitted to the Bankq Effect? » Results of audit are basis for determining whether to continue use of SOEs, or if adjustment must be made on subsequent claims AuditsofSpecialAccountsPrimary objectives are to verify that:q SA financial statements are fairly presented, andq disbursements from SAs are proper and in accordance with the respective loan agreements AuditsofSpecialAccounts (cont.)q 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 AuditsofAdjustmentLoansq Primary focus is on the adequacy of procedures used to prepare customs or similar certificates.q Limited to examining certificates on which SOEs have been based and determining reliability of the procedures applied in verifying or issuing such certificates AuditsofAdjustmentLoans (cont.)q 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 RequirementsforAuditorsq Adherence to principles of integrity, objectivity, independence and confidentiallyq Adequate and Competent Staffq Work performed by personnel who have technical training and proficiencyq Proper direction and supervision of work (includes quality control) SelectionofAuditorsq Preferably independent auditors who meet ISA criteria and are members of bodies affiliated with IFACq 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 DeterminingAuditor Acceptabilityq 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