April 2012

External Audit

Audit
Definition

Ex post review of the books of account, financial statements, records of

transactions & financial systems
Examines the adequacy of accounting systems & procedures, capacity
to maintain appropriate accounts & documentation of project/ grant
expenditures

Underlying
objectives

Provides credibility & assurance of accountability

Verifies compliance with financial matters in loan covenants

Identifies weaknesses in internal controls/ financial systems & makes
recommendations thereon

Frequency

Annual
Due at IFAD normally six months after year end
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Types of Audit

Financial Statements
Audit

Auditor expresses his opinion on the

financial statements of the project
Mandatory in IFAD projects

Compliance Audit

Operational Audit

Auditor verifies compliance with internal

rules, regulations, procedures and
processes laid down by Management
Thorough examination of the projects
management techniques & performance.
Study of all functional areas, identifying
implementation issues & recommending
remedial actions to improve efficiency &
effectiveness of operations
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Audit Roles
Borrower/
grantee

External
Auditor

Prepares TOR, manages auditor

selection process (if relevant)
and appoints auditor
Submits annual financial
statements
Implements remedial action

Performs audit work including 3

audit reports/opinions
Indicates ineligible
expenditures/ irregularities
Provides management letter
IFAD

Provides no objection to TOR & appointment of auditor following

assessment of capacity
Monitors timely submission and review of audit reports
Follows up on remedial action
Applies sanctions/ other remedies if relevant, including suspension of
disbursements and/or cancellation of financing balance
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Audit Requirements per General Conditions

Section 9.03 (a) of the General Conditions requires annual audit of project
accounts with auditing standards acceptable to the fund

Section 9.03 (b) of the General Conditions requires the borrower/recipient

the submission of the audit report to IFAD within six months after FY end

Section 10.04 of the General Conditions requires the Borrower & the project
party to cooperate fully with auditors in case of audit initiated by the Fund

Details of the project audit cycle contained in IFAD guidelines on project

audits

Scope and Objectives of Audit

Auditors acceptable to the Fund must be appointed in a fair, timely and

transparent manner to conduct the audit of the projects financial
management systems for the 1st year of the project & every year thereafter
(note: the obligation for the 1st year audit may be waived by the Fund if reasonable
(e.g. no disbursements, etc)

The audit should include the audit opinion on the financial statements,
compliance audit report on compliance with loan covenants and a
management letter. Operational audit may be insisted upon by the Fund
if it deems fit

Should be conducted according to acceptable auditing standards (usually

deemed to be International Standards on Auditing standards (ISA) or
INTOSAI standards or national standards, if acceptable), if not, extent of
deviation from there must be reported.
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External Auditor Who Performs?

Who
Who performs?
performs?

Independent external professional

In certain countries, mandatory to be National Audit

Office (NAO)/ Supreme Audit Institution; if not, private
sector firm to be agreed with IFAD

External auditor
outputs
Professional audit package contains opinions provided:

o
o
o

Project Financial statements

Use of Special designated account(s) in compliance with financing
agreement
Eligibility of expenditures included in WAs/ SOEs

Management letter on internal controls & systems

Reporting of ineligible expenditures
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External Auditor Basis of work

Basis of work

Auditing standards:

Provide guidance on the objectives and general principles governing an audit of

financial statements

Comprise a set of systematic guidelines used by auditors when conducting

audits, ensuring the accuracy, consistency & verifiability of auditors' actions &
reports

Various Generally Accepted Auditing Standards (GAAS) frameworks exist

IFADs projects are generally required to use International Standards of

Auditing (ISA)/ International Organization of Supreme Audit Institutions
(INTOSAI)

National standards may be used if agreed with IFAD

The auditing standards applied should be specified in the auditors
opinion

Financial Statement Audit verifies

Whether the financial statements are prepared according to internationally
recognized accounting principles (IFRS/ IPSAS) or acceptable national
standards consistently over a reasonable period

Whether expenditure is eligible per provisions of the financing agreement

Whether the accounting & financial statements & records are accurate
Whether individual expenses aggregating to the totals reflected in SoEs are
properly approved, classified, supported by documentary evidence &
are eligible under the financing agreement. If ineligible expenses are found,
the Fund may review the eligibility of the Borrower to use the SoE
mechanism: the Borrower may be asked to reimburse the Special account to
the extent of ineligible expenditure

Financial Statement Audit verifies

Whether the Special/designated Account mechanism is operated
properly, the SA /DA is correctly reconciled, if the withdrawals from the SA /
DA are properly authorized

Whether the year end financing balance is reconciled with IFADs

records

Whether the project has adequate internal and accounting controls to

record & report financial transactions in a timely & accurate manner & to
safeguard project assets. Whether the internal audit system is
commensurate with the size & complexity of the project

Whether the project assets physically exist are in good working order
& are held in the name of the project

Any other matter which the Fund may specifically ask the auditors to
report on, whether included in the Financing Agreement or not
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Audit Reports Contents

The report should follow a set format:

Paragraph 1: sets out audit work performed. Identifies

respective

responsibilities of the auditor & auditee

Paragraph 2: details the scope of audit work, provides a general description

of the nature of the work, examples of procedures performed, any limitations the audit
faced based on the nature of the work. This paragraph also states that the audit was
performed in accordance with the GAAS of reference

Paragraph 3: states the auditors opinion on the financial statements,

i.e., whether free of material misstatement (i.e. important and significant errors), show
a true and fair view of the operating results, financial position & cash flows of the
auditee and whether they are in accordance with the stated accounting principles of
reference

The auditor may also add additional information to the report

if deemed necessary without changing the overall opinion of
the report
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Audit Reports Opinions

There are 4 different standard types:

1. Unqualified Opinion/Clean opinion report*

2. Qualified Opinion/Except for Opinion**
3. Adverse Opinion report***
4. Disclaimer of Opinion report***
*

In some cases the clean audit opinion issued is not entirely consistent with audit findings
in the financial data, management letter or IFADs findings in supervisory activities

**

Potentially not acceptable to IFAD IFADs audit standards foresee that an unqualified
opinion should be received for all its projects, programmes & grants. A qualified opinion
may be accepted only if there is evidence of a time-bound workplan to implement changes
or if the qualification does not impinge on IFADs fiduciary responsibilities

*** Not acceptable to IFAD. Financial statements to be re-done and re-audited

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Audit Reports Opinions (1)

1.
Unqualified
opinion

Opinion/Clean

This is regarded as the equivalent of a clean bill of health to a patient

1a. Unqualified Opinion/Emphasis on

matter

This is not a qualification of the financial statements but it is meant to

draw the attention of the readers of the financial statements either on:
-An information relevant for the interpretation of the financial statements
(such as an uncertainty relating to the future outcome of exceptional
litigation or regulatory action )
-An information not disclosed in the financial statements that is important
to understand the audit, the auditors responsibilities or the auditors
report (such as a major catastrophe that has had, or continues to have, a
significant effect on the entitys financial position)

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Audit Reports Opinions (2)

2. Qualified Opinion

There are 2 types of qualification:

Single deviation from GAAP/ Except for at least one area of the accounts does
not conform to GAAP but the rest of the financial statements are fairly presented,
e.g. incorrect depreciation expense
Limitation of scope - the auditor could not audit one or more areas of the financial
statements. For example, the auditor was not able to observe and test an entitys
inventories
Usually a qualified opinion indicates that the financial statements are fairly
presented except for some material but not pervasive error.

3. Adverse Opinion report

The financial statements do not conform to GAAP. It is the opposite of an

unqualified opinion; In this case the financial statements present both
material and pervasive errors

4. Disclaimer of Opinion report

This Opinion is rare; issued when the auditor could not form an opinion, as
he cannot complete the audit work due to various reasons, such as
significant scope limitations

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Management Letter

Should accompany audit report

Should identify weaknesses, if any, of the internal controls

and recommend corrective action.

Management must reply in writing within 30 days

Management response should indicate

agreement/ disagreement with auditor & must
contain a time bound action plan to address the
issue(s)

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Audit Responsibilities of PMU

Prepare auditors TOR and obtain IFAD no-objection

Ensure mandatory data is included in financial statements

Submit the financial statements to IFAD 4 months after the end of the
FY

IFAD will provide comments on missing/unclear items that can be

corrected by the PCU, rather than make it an issue of audit report review

If in doubt, ask IFAD!

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Audit Responsibilities of IFAD

Monitor timeliness of audit report submission

Check auditors compliance with TOR, including all 3 audit opinions &
management letter

If report is qualified, consider seriousness of qualifications, & if

immediate action is required

Suspension of disbursements may occur if:

Untimely submission of reports

(180 days from due date)

Non compliance with IFAD standards

(e.g. qualified accounts without satisfactory action plan)

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Selection & Appointment of Auditors

Usually through a competitive process usually from 3-6 qualified firms

Should produce satisfactory references

Should deploy staff with adequate qualifications & experience

Should be able to able to undertake the assignment with complete

independence no relationship with project party or other related party

Should be on the basis of technical and financial evaluation

Should have past experience & satisfactory performance in similar
assignments

Should give a declaration that the neither the firm nor the staff have any
conflict of interest in accepting the assignment

Should not be appointed for any other assignment management

consultancy, internal auditor, accounting, consultancy, etc

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Contents of Audit Engagement Letter

Description of the project, the finance and parties thereto

Description of financial statements and samples thereof
Stipulation regarding use of acceptable auditing standards
Availability of books, records, documents and personnel during audit
Tenure of the appointment - two or more fiscal years (subject to satisfactory
performance in previous year)

Follow up on prior year issues

Contents of audit report & specific opinions to be provided.
Deadline for submission of audit report
Deliverables, outputs and opinions
Submission of audit program, staffing plan & audit proposal
Submission of Management Letter
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Responsibilities of the Auditor

Submit a proposal outlining audit methodology, staffing plan, audit

programme & audit fees

Express audit opinions as per ToR

Provide a Management Letter as per ToR

Provide an IFAD official language translation of the audit report in

case the report is in the local language

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Follow up of audit recommendations

Follow up of audit recommendations is as important as conducting the

audit

The Project Party should have a system for following up compliance

with audit recommendations in a timely manner

A Log of Audit Observations must be prepared

The log must record each audit observation & the validation by the
auditor that corrective action has been taken

Should be updated periodically and submitted to Supervision Missions

Follow up status must be reviewed by the Project Coordinator/ IFAD/

Internal Auditor/ External Auditor periodically

Log of Audit
Obs ervations

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Status of audits

For each project, a status of audits must be prepared as per the following
format
Audit Report for the
Period

Due Date

Submitted by
Auditors on

Submitted by
IFAD on

Remarks

Should be updated regularly and submitted to Supervision Missions

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Desk review of audit reports - 1

- Fulfilment by the auditor of all audit requirements
specified in TORs
- Whether all financial reporting requirements have been
met (including SA reconciliation, use of SOE procedure,
financial performance of project, inventory of assets,
accounting & audit standards used, compliance with
procurement procedures)
- Review of the adequacy of internal control mechanisms
(accounting system, segregation of duties, etc.)
- Qualifications or other significant points in auditors report
- Suggest an action plan to address main weaknesses
identified in internal control system
- Follow-up on actions noted in previous years Desk
Reviews

Desk review of audit reports - 2

- Overall financial reporting & auditors performance are assessed
to be used as one criteria for classification of project at risk
(with direct impact on disbursement, supervision intensity,
upgrade design report of project by ensuring audit weaknesses
are addressed with pragmatic solutions)
- Current risk assessment methodology uses traffic light
indicators (red, yellow, green)
- Desk review findings, as per IFAD requirements, are used to
report on annual basis to Audit Committee, support regional
divisions for preparation of Annual Portfolio Performance
Review, etc.
- Inform IFAD Investigation Office where irregularities such as
fraud & corruption are identified by auditors, or where desk
review raises serious concerns in relation to possible fraud &
corruption

Audit Review Form/Checklist

ARTS is an aIterative tool, prepared by IFAD for implementation support

Increased importance due to renewed emphasis on fiduciary

responsibilities under direct supervision

Analyses completeness and reasonableness of:

financial statements
audit opinions
audit work performed

Lists major follow up action to be performed by project

May require action plan to be prepared

Updated format launched with new audit report tracking system (ARTS)

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Project Audits - Challenges

Periodic audits by independent auditor

Delays in recruitment of auditors

Acceptable audit standards

Audit TOR consistent with complexity of project

Impossibility to produce audit report due to delays in

preparing financial statements

Poor quality or incomplete Audit reports (not including

opinion on FS, SOEs, special account, management letter)

No review of previous years recommendations in audit report

No follow-up on plan of action by PMU

Late submission of audit report (risk of suspension)

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