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.
AUDITING
q 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
q 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)
AUDIT COMPLIANCE
TYPES OF AUDITS
q Financial
q Compliance
q Operational
FINANCIAL AUDITS
q The Implementing Organization’s
Financial Statements
q Project Financial Statements
q Statements of Expenditures (SOEs)
q Special Bank Account (SA)
Implementing Organization’s
Financial Statements
Overall objective is to express an
opinion on fairness of statements
Phases:
q Understanding the Organization
q Evaluating Internal Controls
q Testing Financial Statement
Balances
Understanding the Organization
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
Evaluating Internal Controls
q Purpose: To determine the audit tests
required for forming an opinion
q 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
Testing the Balances
q Purpose: To determine if information
is fairly presented
q 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
q Overall Objectives
» Statements fairly presented?
– For the period
– Cumulatively
q Disbursements made in accordance with:
» Loan agreement
» SAR
q Fair presentation of balance sheets,
especially assets
Audit of Project F/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.
Audits of SOEs
Primary objective is to ascertain that
individual expenditures reported in
the SOEs are:
q Fully supported by proper
documentation in files
q Properly authorized and eligible
q Appropriately accounted for
Audits of SOEs
...Continued
q Why?
» Because withdrawal requests are
not supported by documentation
submitted to the Bank
q 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:
q SA financial statements are fairly
presented, and
q disbursements from SAs are proper and
in accordance with the respective loan
agreements
Audits of Special Accounts
(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
Audits of Adjustment Loans
q 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
Audits of Adjustment Loans
(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
Requirements for Auditors
q Adherence to principles of integrity,
objectivity, independence and
confidentially
q Adequate and Competent Staff
q Work performed by personnel who have
technical training and proficiency
q Proper direction and supervision of work
(includes quality control)
Selection of Auditors
q Preferably independent auditors who
meet ISA criteria and are members of
bodies affiliated with IFAC
q 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
q 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
