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Financial Management and Analysis of Projects : 5. Reporting and Auditing : 5.4. Auditing Standards and Auditor Engagement
5.4.3. Auditing Procedures
5.4.3.1. The audit is intended to
provide an ex post review of the EA's financial statements,
financial systems, records, transactions, and operations, performed
by professional accountants. It is intended to provide assurances
of accountability, give creditability to the financial statements
and other management reports, identify weaknesses in internal controls
and financial systems, and make recommendations for improvements.
5.4.3.2. The auditor should obtain
an understanding of the project and the entity being audited, including
the contents of the RRP, legal agreements, and these Guidelines.
In addition the following guidance is available from the: (i) ADB
Loan Disbursements Handbook, (ii) ADB sample bidding documents
for competitive bidding under international competitive bidding
procedures, and (iii) ADB Procurement Handbook.
5.4.3.3. The extent of an auditor's
review of the accounting records depends on the systems of accounts
and of internal checks and controls used by the entity being examined.
As an example, an auditor will need to examine, and where necessary,
test: (i) the organizational procedures for making financial decisions,
budgeting, and authorizing expenditures; (ii) the design, management,
and operation of the accounting system; (iii) the effectiveness
of related systems and procedures such as inventory control and
data processing; (iv) the efficiency of the systems of internal
control and of internal audit; (v) all financial transactions, and
verify year end balances, including an appropriate degree of physical
verification; (vi) compliance with IASs and any other applicable
accounting standards, including the adequacy of disclosures; (vii)
subsequent events and their possible effect on the financial statements;
(viii) overall comparators of actual costs and achievements against
budgets and planned indicators, obtaining, and reporting adequate
explanations for significant variations; (ix) test compliance with
loan covenants and ADB's requirements for project management;
and (x) the adequacy and competence of accounting staff. In the
light of their findings, auditors should normally test the financial
transactions of the organization against such documentary or other
evidence as maybe necessary to enable them to be satisfied as to
the authenticity and correctness of the transactions, their complete
and proper entry in the books of account, and their effect on financial
performance and status.
5.4.3.4. The timeliness and accuracy
of the recording of assets and liabilities and of the methods of
their valuation should be reviewed by the auditors, particularly
for projects executed by government departments, for which asset
recording typically is not a routine requirement. In addition they
should be satisfied as to the methods of regularly determining their
existence, ownership and appropriate valuation, including, where
necessary, physical inspection by the auditor. Examples of items
to be addressed include: (i) land, buildings, machinery, and equipment,
including methods of provision for depreciation, if such provision
is applicable to the accounting procedures for the project or EA
under audit; (ii) inventories, including appropriate accounting
for obsolescence, spoilage, or losses; (iii) receivables, including
provisions for bad and doubtful debts; (iv) cash and bank balances;
(v) investments; (vi) amounts due to third parties (long-term and
short-term loans and suppliers' accounts payable); and (vii) insurance
coverage, particularly of project components.
5.4.3.5. Where appropriate, an auditor
should examine such items as capital commitments and treatment of
contingent liabilities, the effects of currency devaluation or revaluation
on foreign currency transactions, and events occurring after the
date of preparation of the balance sheet.
5.4.3.6. Circumstances beyond the
control of an auditor and the EA may sometimes make it impossible
to carry out all preferred auditing procedures, at least in full;
in such cases, auditors should satisfy themselves by alternative
procedures that are practicable and reasonable in the circumstances.
However, there are two important auditing procedures which should
be carried out: (i) direct correspondence with debtors and creditors
on a substantial test basis by an auditor, to confirm sums due to,
and payable by, the EA under audit; and (ii) observation by the
auditor of physical inventory taken by the client. Specific disclosure
should be made of the reasons for noncompliance in cases where these
procedures are not carried out, and whether satisfactory alternative
procedures were employed.
5.4.3.7. Any country-specific variations
in accounting standards and practices that are adopted by the borrower,
and are known by the auditor to differ substantially from IAS, should
be disclosed. Any significant effects on the financial performance
or status of the project, as a result of not conforming to IASs,
should be disclosed.19
Examples of such variations and their effects on reported financial
results that should be disclosed are any overstatements of assets
and understatements of liabilities that may be sanctioned by local
laws; accounting on a cash basis or on a basis other than historical
costs; recognition and equalization of income over several accounting
periods; omission of certain gains or losses in determination of
net income; the use of “reserve” accounting when full
details of movements in, and realized profits on, reserves may not
be revealed; and the treatment of foreign exchange profits or losses
in a manner that does not disclose their impact.
5.4.3.8. The auditor should review
the periodic PMR for each year and compare them with the financial
statements of the fiscal year. ADB requires the auditor to report
any differences, particularly any ineligible expenditure against
which ADB may have disbursed, recommending actions necessary to
avoid recurrences.
5.4.3.9. The audit of SOEs (where
required) should be included as a part of the overall audit of the
project. However, ADB requires that particular attention be paid
to the internal control systems and the verification of documents
relating to SOE expenditures, not only to ascertain proper financial
accountability, but also that expenditures are eligible for inclusion
in the project. ADB requires a special reference in the auditor's
opinion with respect to the SOE portion of the audit.
5.4.3.10. ADB also requires an audit
of the Imprest Account, which may be separate, or included as a
part of the overall audit of the project. This audit is limited
to the transactions of the Imprest Accounts, as the audit of the
expenditures reimbursed or paid directly from the Imprest Accounts
are to be audited as a part of the project audit, with appropriate
review of the in-transit items. Where the audits of the imprest
accounts are self-standing, a special purpose audit opinion is required.
Where the audit forms a part of that of the project, a separate
reference to the imprest account audit should be included in the
auditor's opinion.
_________________________
19
Financial Analysts have discretion to agree alternative
arrangements (see paragraph 2.4.3).
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5.4.4. Auditor Selection and Appointment |
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