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Financial Management and Analysis of Projects :
7. Knowledge Management
Auditor Terms Of Reference: Annual Project Accounts
ENTITY NAME: XYZ
AUDIT OF ANNUAL PROJECT ACCOUNTS (APA)
AUDITOR TERMS OF REFERENCE
Guidance: This template is
appropriate for an APA audit. It should be completed—by the borrower,
EA or PPTA consultants—and provided to ADB for comments before fact
finding. This template can be applied to the audit of either a revenue-earning
or non-revenue-earning project.
Introduction
Guidance: Briefly describe
the audit assignment. Specify whether the engagement is for one
or more financial years. A longer period (e.g., 3–5 years) will
enable the auditor to become familiar with the entity. The actual
contract should allow for termination for inadequate performance,
but not for issuing a qualified, adverse or disclaimer opinion.
The management of XYZ requires
an auditor to carry out the following audit services for the [X]
years ended 31 December 20xx:
·
An audit of the Annual Project Accounts (APA) for
each of the loan projects listed below (see terms and definitions).
This letter describes the assignment
scope and terms and invites you to submit a proposal for delivery
of these services.
General Background
Guidance: Briefly describe
the supervising agency and the EA. Describe the project in the context
of its contribution to achievement of the EA’s economic goals. The
auditor must understand the "purpose for which the funds are
intended" in the context of the broad project objectives as
well as in terms of the specific project budget.
Guidance: Briefly summarize
relevant accounting and financial management practices. Various
diagnostic reports are available that describe accounting and financial
management practices (e.g., ADB Diagnostic Studies of Accounting
and Auditing, World Bank Country Financial Accountability Assessments).
Emphasis should be placed on issues raised and risks identified
in these reports.
Employing Authority
or Entity
Guidance: The details
of the proposed contractor of the auditor’s services should be provided.
If the contractor is acting on behalf of, or is part of, a larger
authority or entity, this should be disclosed, to assist prospective
auditors to determine their independence.
The audit services will be contracted
by:
Delivery of Opinions
and Reports
Guidance: The required
opinions and documents should be clearly specified, together with
delivery timeframes
The auditor will provide the following
opinions and reports to management (with copies to ADB), in accordance
with the following timeframes:
·
Audit Opinion on the Annual Project Accounts of:
o
Loan xxx
o
Loan xxx
·
Management Letter on the following projects:
o
Loan xxx
o
Loan xxx
All reports must be provided in the English language.
Objectives
Guidance: Specify the audit’s objectives.
The objective of the APA audit
(see terms and definitions) is to enable the auditor to express
an opinion on the financial position of each of the loan projects
listed below (see terms and definitions), for the year ending 31
December 20xx, and on the funds received and expenditures for the
year then ended.
Guidance: This paragraph
should be applied where it is referred to in the loan agreement.
Separate opinions on the eligibility
of claims made in Statements of Expenditure (SOE) and on the Imprest
Account Statement are also required.
Description of Materials
and Timing of Delivery
Guidance: The form
of the APA and supporting documentation that will be supplied to
the auditor, and on which they are to give an opinion and a report,
should be specified. In practice, the form and content of APA will
vary among countries and projects. For instance, the APA may comprise
a Statement of Receipts and Payments only on project transactions.
Other schedules may include cumulative work-in-progress, assets
and inventories, and a summarized bank reconciliation. The estimated
time of providing these documents to the auditor should be stated
(e.g., 1 month after financial year-end). This schedule helps the
auditee and the auditor plan for the accounts-preparation and the
audit process.
The Annual Project Accounts (APA)
(see terms and definitions) and supporting documentation will be
provided to the auditor on the following estimated dates:
Audit Scope
Guidance: The scope
of the audit should be sufficiently clear to properly define what
is expected of the auditor, but should not restrict the audit procedures
or the techniques the auditor may wish to use to form an opinion.
This section will not generally have to be customized to a particular
audit situation. The list of issues outlined in this section is
not exhaustive, nor should all matters be addressed in every project.
The scope and detail of an audit are likely to be unique for each
project.
Auditing Standards and Program. The audit will be carried out
in accordance with the agreed auditing standards (see terms and
definitions), including professional or general standards, standards
of fieldwork, and reporting standards.
The audit program will consider
the risk of material misstatements resulting from fraud or error.
It should include procedures that are designed to provide reasonable
assurance that material misstatements (if any) are detected.
Accounting Policies and Changes. The auditor should comment on
the project’s accounting policies, and confirm the extent to which
the agreed project accounting policies (see terms and definitions)
have been applied. In particular, the auditor should note the impact
on the APA arising from any material deviations from the agreed
accounting standards. The auditor should also comment on any accounting
policy changes, either during a financial year, or from one year
to another.
Imprest Account (or Special Account). The Imprest Account reflects:
(i) deposits and replenishment received from financiers, (ii) payments
substantiated by withdrawal applications, and (iii) the remaining
balance at financial year-end. The auditor will examine whether
the Imprest Account has been maintained in accordance with the provisions
of the relevant financing agreements.
The auditor must form an opinion
on whether the Imprest Account was used in compliance with required
procedures (e.g., those of ADB), and the fairness of the presentation
of Imprest Account activity and the year-end balance. The auditor
should examine the eligibility and correctness of financial transactions
during the period under review, account balances at the end of the
period, the operation and use of the Imprest Account in accordance
with the financing agreement, and the adequacy of internal controls
for this particular disbursement mechanism.
Statements of Expenditures (SOE). The auditor
will audit all SOEs used as the basis for the submission of credit
withdrawal applications to ADB. These expenditures should be compared
for project eligibility with the relevant financing agreements (and
with reference to the RRP and other project documents for guidance
when considered necessary). Where ineligible expenditures are identified
as having been included in withdrawal applications and reimbursed
against, these should be separately noted by the auditor. The annual
audit report should include a separate paragraph commenting on the
accuracy and propriety of expenditures withdrawn under SOE procedures,
and the extent to which ADB can rely on those SOEs as a basis for
credit disbursement. Annexed to the APA should be a schedule listing
individual SOE withdrawal applications by specific reference number
and amount.
Compliance with Financial Covenants. The auditor will confirm
compliance with each financial covenant contained in the project
legal documents (see terms and definitions). Where present, the
auditor should indicate the extent of any noncompliance by comparing
required and actual performance measurements for each financial
covenant with the financial year concerned.
Compliance with Financial Assurances. The auditor will confirm
compliance with all financial assurances contained in the project
legal documents (see terms and definitions). Where present, the
auditor should indicate the extent of any non-compliance by comparing
required and actual performance of the borrower in respect of these
ADB requirements for the financial year concerned.
Use of Funds for the Purpose Intended. The auditor will confirm,
or otherwise, that:
·
All external funds have been used in accordance with
the relevant financing agreements covering each project, with due
attention to economy and efficiency, and only for the purpose for
which the financing was provided.
·
Counterpart funds have been provided and used in accordance
with the relevant financing arrangements and only for the purpose
for which the financing was provided. and
·
Goods and services financed have been procured in
accordance with the relevant financing agreements.
Record Keeping. The auditor will pay particular attention
to whether all necessary supporting documents, records, and accounts
have been kept in respect of all project activities, with clear
linkages between the accounting records and the APA. This will include:
(i) computation and recalculation, including checking the mathematical
accuracy of estimates, accounts, or records; (ii) reconciliation,
including reconciling related accounts to each other, subsidiary
records to primary records and internal records to external documents;
(iii) physical observation, including inspecting or counting tangible
assets, such as materials, inventory, land buildings, property,
or equipment; (iv) confirmation, including directly confirming balances
or transactions with external third parties, such as cash balances,
accounts receivable, or accounts payable; (v) sampling, including
vouching or examining supporting documentation to determine if balances
are properly stated; and (vi) tracing, including tracing journal
postings, subsidiary ledger balances, and other details to corresponding
general ledger accounts or trial balances.
Internal Control Systems. The auditor will assess the adequacy
of the project financial management systems, including internal
controls, including whether: (i) proper authorizations are obtained
and documented before transactions are entered into; (ii) accuracy
and consistency are achieved in recording, classifying, summarizing,
and reporting transactions; (iii) reconciliations with internal
and external evidence are performed on a timely basis by the appropriate
level of management; (iv) balances can be confirmed with external
parties; (v) adequate documentation and an audit trail is retained
to support transactions; (vi) transactions are allowable under the
agreements governing the project; (vii) errors and omissions are
detected and corrected by project personnel in the normal course
of their duties, and management is informed of recurring problems
or weaknesses; (viii) management does not override the normal procedures
and the internal control structure; and (ix) assets are property
accounted for, safeguarded and can be physically inspected.
Management Letters
On conclusion of the audit, the
auditor will prepare a management letter for each of the audited
projects, detailing:
·
Any material weaknesses in the accounting and internal
control systems that were identified during the audit, including those regarding SOEs and Imprest Accounts
(if applicable);
·
Recommendations to rectify identified weaknesses;
·
Status of significant matters raised in previous management
letters;
·
Practical recommendations on the steps that could
be taken to become materially compliant with the agreed project
accounting policies (see terms and definitions), together with a
time frame for making these changes;
·
The degree of compliance with each of the financial
covenants in the Loan Agreement and recommendations for improvement;
·
Matters that have come to the auditor’s attention
during the course of the audit which have a significant impact on
project implementation ;
·
Any other matters that the auditor considers should
be brought to the attention of the project’s management; and
·
Significant matters that the auditor considers should
be brought to ADB’s attention.
Statement of Access
The auditor will have full and
complete access, at all reasonable times, to all records and documents
including books of account, legal agreements, bank records, invoices,
and any other information associated with the project and deemed
necessary by the auditor.
The auditor will be provided with
full cooperation by all employees of [XYZ] and the project-implementing
units, whose activities involve, or may be reflected in, the annual
financial statements. The auditor will be assured rights of access
to banks and depositories, consultants, contractors, and other persons
or firms hired by the employer.
Independence
The auditor will be impartial
and independent from any aspects of management or financial interest
in the entity under audit. In particular, the auditor should be
independent of the control of the entity. The auditor should not,
during the period covered by the audit, be employed by, or serve
as director for, or have any financial or close business relationship
with the entity. The auditor should not have any close personal
relationships with any senior participant in the management of the
entity. The auditor must disclose any issues or relationships that
might compromise their independence.
Auditor and Audit Staff
Competence
The auditor must be authorized
to practice in the country and be capable of applying the agreed
auditing standards (see terms and definitions). The auditor should
have adequate staff, with appropriate professional qualifications
and suitable experience, including experience in auditing the accounts
of entities comparable in nature, size, and complexity with the
entity whose audit they are to undertake.
To this end, the auditor is required
to provide curriculum vitae (CV) of the auditors who will provide
the opinions and reports, together with the CVs of managers, supervisors,
and key personnel likely to be involved in the audit work. These
CVs should include details of audits carried out by these staff,
including ongoing assignments.
Submission of Proposal
and Work Plan
You are invited to submit a proposal
and a work plan to provide the audit services described in this
letter. Proposals should address, among other things:
·
The extent (if any) that you would not conform to
the agreed auditing standards (see terms and definitions) and indicate
any alternative standards to which you may (be required to) conform.
·
Whether the audit would be conducted as a completed
audit (i.e., will the auditors carry out their audit after financial
year-end, when the books of account are, or are being, closed).
·
Whether an audit carried out after financial year-end
would be supplemented by one or more interim audits during a financial
year. The principal purpose is to test ongoing systems and internal
controls, and to relieve pressure on the staff of the entity and
on the auditor at year-end.
·
The manner in which the auditor proposes to address
any statutory requirements relating to audit (e.g., certifications
relating to shareholders’ equity required under the companies’ act)
or to which they may be implicitly bound by contractual obligations
of the employer (e.g., ADB auditing requirements, Statements of
Expenditure, Imprest Accounts).
·
Procedural requirements for certain verification procedures
(e.g., checking of stocks, inventories, assets, etc.).
·
Specific actions required on the part of the employer
(e.g., access to computer systems and records, disclosures).
·
Discussions before signing the opinion and report
on any matters arising from the audit, and with whom these discussions
would be held.
·
The timetable for provision of opinions and reports.
Terms and Definitions
This section defines the terms
used in this document.
Annual Project Accounts
(APA)
Guidance: The Annual
Project Accounts (APA) may comprise a Statement of Receipts and
Payments (Cash Flow Statement). This template is specifically intended
for audits of these types of APA. Other schedules of value or cumulative
work-in-progress, assets and inventories and a summarized reconciled
bank statement are to be attached. Project reporting requirements
will usually be specified in the RRP and in the loan agreements.
The component parts of the APA should be specified in this section.
The Annual Project Accounts (APA)
comprise:
[Option A: Generally IAS-compliant
Accrual-based Financial Statements]:
·
Statement of Accounting Policies,
·
Statement of Financial Performance (or income statement),
·
Statement of Financial Position (or balance sheet),
·
Statement of Movements in Equity,
·
Statement of Cash Flows,
·
Notes to the Financial Statements, and
·
Other Information (Specify).
[Option B: Other Financial Reports]:
·
Statement of Accounting/Financial Policies,
·
Statement of Income/Cash Receipts,
·
Statement of Expenses/Cash Payments,
·
Statement of Cash Flows/Cash Receipts and Payments,
·
Statement of Uses of Funds by Project Activity,
·
Notes to the Financial Statements, and
·
Other Information (Specify).
Guidance: The APA should
include: (a) a summary of funds received showing ADB funds, any
cofinancing and counterpart funds separately; (b) a summary of expenditures
shown under the main project components and by main categories of
expenditures (as referenced in loan and appraisal documentation)
for the year ending 31 December 20xx and cumulative expenditures
on the Project to date; and (c) statement of fund balance as of
31 December 20xx.
Loan Projects
Guidance: List the
loan projects that will be audited. Provide brief details and attach
relevant documents.
Annual Project Accounts (APA)
and supporting documentation will be provided for the following
loan projects financed by the Asian Development Bank (ADB) [and
IDA, EBRD, etc]:
·
Loan xxxx
·
Loan xxxx; and
·
Loan xxxx.
Agreed Project Accounting
Policies
Guidance: The project
accounting policies that govern APA preparation will normally be
agreed and documented in the RRP and loan agreement. Choose the
appropriate option.
“Agreed project accounting policies”
with regards to preparation of Annual Project Accounts, means
·
[Option A: Cash-based International Public Sector
Accounting Standards] the cash-based International Public Sector
Accounting Standard (IPSAS) promulgated by the International Federation
of Accountants (IFAC).
·
[Option B: Accrual-based International Public Sector
Accounting Standards] the accrual-based International Public Sector
Accounting Standards (IPSASs) promulgated by the International Federation
of Accountants (IFAC).
·
[Option C: International Accounting Standards] the
International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB) (also known as international
accounting standards).
·
[Option D: National Accounting Standards] the accounting
standards issued by [national authority].
·
[Option E: Modified National Accounting Standards]
the accounting standards issued by [national authority], with the
following modifications and/or additional disclosures:
·
[Option F: Specific Government Accounting Standards]
describe these standards.
Agreed Auditing Standards
Guidance: The agreed
auditing standards will normally be documented in the RRP and loan
agreement. Choose the appropriate option.
“Agreed auditing standards” means
·
[Option A: International Standards on Auditing] the
International Standards on Auditing (ISA) promulgated by the International
Auditing and Assurance Standards Board (IAASB).
·
[Option B: INTOSAI Auditing Standards] the auditing
standards promulgated by the International Organization of Supreme
Audit Institutions (INTOSAI).
·
[Option C: National Auditing Standards] the auditing
standards promulgated by [national authority].
Financial Covenants
Applicable to Projects
Guidance: The financial
covenants that are applicable to projects will be included in loan
agreements. This section should list, describe and fully reference
all applicable financial covenants.
The following financial covenants
have been agreed for the following projects:
Financial Assurances
Applicable to Projects
Guidance: The financial
assurances that are applicable to the EA—such as a commitment to
employ suitably-qualified accounting personnel—will be included
in project legal documents. This section should list, describe and
fully reference all applicable financial assurances.
The following financial assurances,
regarding the following projects, have been given:
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