Auditing Contracts & Projects

Tagarira Mutenga, Associate Director Risk Advisory

IIA Workshop 16 June 2016, Monomotapa Hotel

 Presentation outline
 Understanding contracts &projects
 Why audit contracts & projects
 Internal Audit’s role in projects management
 Contracts- scope and audit approach
 Projects- scope and audit approach
 About the presenter

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 Understanding Contracts & Projects
• What are Contracts-
An endeavour designed to produce a unique product, service or
result within a defined period, constrained by funding or deliverable
to bring about change or add value.

• What are Projects-

Agreement between two parties to establish, regulate or extinguish
a legal relationship between the said parties to produce obligations
or other effects on either party.
Types-

Contracts Projects
 Construction contracts  Construction projects
 Supplier contracts  Capital projects
 Service contracts  EPCM projects

 Lumpsum contract
 Item rate contract
 Lumpsum and schedule contract
 Cost plus fixed fee contract
 Cost plus percentage of cost contract
 Special contracts

© 2010 EYGM Limited. All Rights Reserved.

 Context - Why audit contracts & projects?

• Significant activities in most organisations due to:-

 value,
 time to complete,
 impact , and
 implications to business strategy.

• Impact of audit of capital projects

 Proactive controls during development rather than post implementation
 Enhanced risk management
 Improved chances of success

• The need to protect the VALUE of a contract after signing.

 Guard against revenue leakage/cost overruns
 Scope screep & quality failures
 Damage to business
 Poor knowledge transfer
 Loss of bargaining power

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 Internal Audit Role in Contracts & Projects Management

Provide Executive Management, the Audit Committee and the Board

with independent assurance over:
the adequacy and effectiveness of
management controls;
the achievement of defined cost / benefits
to the desired quality and on time; and
alignment with strategic intent of an
organisation

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CONTRACTS
Contract Life Cycle
Contract themes
Why could the monitoring of contract implementation turn out to be a
failure?
 Selection of contractors and contract negotiation: End users are not involved in the
specifications, service providers are not always vetted for solvency, the contract content,
specifications, requirements, timing and working locations are not understood and documented in
detail
 Contract negotiation: Duration of the contract negotiation process is protracted and inability to
control the complexity of the contract.
 Ongoing client-supplier relationship management: Failure to define agree, use, manage and
maintain open communication between all parties.
 Ongoing contract performance management: High reliance on service provider, customer do not
define, agree, document and monitor: contract stages, phases, steps, milestones, gateway review
points, critical success factors and key performance indicators.
 Detailed payment formulae and invoicing and payment mechanisms: Failure to agree payment
formulae to address normal and exceptional circumstances relating to price, time and materials , ad-
hoc charges, penalties, damages and recoverable costs..
Contract Management Cycle: Considerations
 Benefits and costs are
quantified?
 Responsibilities are clearly
defined and agreed?
 The method and charges for
services
 Clearly define services and
their deliverables
 Performance Measures
 Future customer needs?
 Customer satisfaction?
 Efficiency?
 Eliminating aspects of the
service that are no longer
required?
 Use of new technologies that are
cheaper and more effective?
 Changes in procedures
 Changes in the interface between
the customer and provider
organisations?
Does the terms of the contract
include amongst others:
 An agreed level of service?
 Pricing mechanisms?
 Provider incentives?
 Contract timetable?
 Means to measure
performance?
Communication routes?
Contract Contract  Escalation procedures
initiation negotiation  Change control
procedures?
 Agreed exit strategy?
 Agreed break options?
 Adequate capacity to deliver?
 Are “revenue leakage”
Contract Contract verifications conducted
 Orders have different payment
renewal implementation terms?
 Are order details accurately
recorded ?
 Are deliveries timely ?
 Is the quality correct?
 Visibility of collections and
control over liquidity?
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Key factual questions to consider in audit
planning
 Categories of contracts, (strategic, operational etc.)
 Which areas of the business have contracts?
 How many contracts does your company have?
 How many different types of contracts does your company
use?
 What policies and procedures are in place to manage
contracts?
 Who reviews and signs contracts once completed?
 How are contracts recorded within the company?
 How many of your contracts would you consider financially
material?
PROJECTS
 Why projects fail?
 Lack of clear links between the project and
organisation’s key strategic priorities
 Hazy measures of success
 Lack of clear senior ownership and
leadership
 Lack of effective engagement with
stakeholders
 Lack of skills and proven approach to project
management and risk management
 Too complex and lack of definition
 Unreliable feasibility studies
 Lack of understanding with suppliers
 Lack of effective project team implementation
 Lack of funding/budget constraints
 Technical misfit
 Poor risk management

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 The key issues to watch in projects

Quality

Time Cost

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 Capital Projects Audit Scope
1. Project Governance
2. Project Scope Management
3. Project Time Management
4. Project Cost Management
5. Project Quality Management
6. Project Risk Management
7. Project Human Resources Management
8. Project Communications Management
9. Project Procurement Management
10. Project Closure

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 Detailed essentials of Project Audits
• Project Governance
 Project Charter- Project Steering Committee, Records Maintenance
 Key roles and responsibilities/ structures
 Project alignment with corporate strategy
 Project Plan
 Stage approvals

• Project Scope, Objectives & Solution

 Scope definition
 Work Breakdown structures
 Scope control mechanisms
 Feasibility studies
 Definition of solution.

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 Detailed essentials (cont’d)
• Time Management
 Activities documentation
 Activity sequencing
 Duration estimation and work scheduling
 Time control
 Variance analysis

• Project Cost Management

 Cost estimation and budgeting
 Cost accumulation
 Cost accounting
 Cost reporting
 Cost controls
 Evaluation and approval of Payment Certificates

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 Essentials (cont’d)
• Project Risk Management
 Risk identification
 Risk assessment
 Risk escalation
 Risk response management
 Risk monitoring and control
 Agreed risk management methodology
 Risk tools- Risk Log/ Risk Registers

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 Essentials (cont’d)
• Project Human Resources Management
 HR Planning
 Team management
 Skills assessment and resourcing
 Performance management

• Project Communications and Stakeholders Engagement

 Stakeholders identification
 Stakeholders concerns closure/feedback
 Key contacts
 Communication strategy- timeliness & responsibilities

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 Essentials (cont’d)
• Project Procurement Management
 Contracting ( main & sub-contractors)
 Supplier selection/ Tender adjudication
 Supplier relationship management
 Contracts administration
 Interaction between procurement and finance functions
 Bill of quantities

• Project Closure
 Benefits
 Evaluation of initial target against results
 Materials on site
 Transfer to Business-as-usual mode

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 Approach to Auditing of Projects
The Project Life Cycle Approach:
 From initiation/idea generation to closure.
 Scheduled audits as the project progresses
 Strategy to provide assurance at major stages, i.e at
such completion of phases, annual cycles, level of
expenditures etc.

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 Audit of the Project Lifecycle
Key
Ideas High level
Project Concept Detailed Build, test Benefits
generation Implement
phases evaluation design design and fix tracking

Key essentials
Risk based approach depending on the stage of the audit
Different types and stages of auditing the lifecycle
Project/Programme Governance
Project/Programme Management
Business Benefits
Workstream, Programme or Project Deliverables

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 Fieldwork
 Review the design of control mechanisms
 Test the controls to see that they are working;
 May also involve an element of substantive work, confirming the
effective operation of controls
 Tools may include-
• Questionnaires,
• Interviews,
• Review of Records,
• Examination of documentation, and
• Re-computations among others.
–

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 Reporting rating for project lifecycle
audits
Off Audit results indicate that assurance cannot be
Track placed upon the adequacy and operation of the risk
of Project delivery failure. The Project is not likely
to deliver the expected benefits within the
sanctioned timeframe and cost budget to the
desired quality.
At Audit results indicate that limited assurance can be
Risk placed on the adequacy and operation of Project
delivery failure. The Project is currently at risk of
not delivering the expected benefits within the
sanctioned timeframe and cost budget to the
desired quality.
On Audit results indicate that reasonable assurance can
Track be placed on the adequacy and operation of the risk
of Project delivery failure.

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 About the presenter
• Tagarira Mutenga is an Associate Director Manager , Risk Advisory,
with Ernst and Young Zimbabwe.
• He holds a BSc degree in Applied Accounting, FCIS, FCCA, MBA,
and a Diploma in Town Planning

The views discussed herein are those of the author, and do not
represent Ernst and Young.

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