This document provides an overview of auditing, including the purpose and types of audits. It discusses financial audits in depth, covering auditing an organization's financial statements, project financial statements, statements of expenditures, and special bank accounts. It also addresses standards, requirements for auditors, selecting auditors, terms of reference, management letters, and financing audit costs. The overall purpose of an audit is to provide assurance that activities have been performed according to applicable standards by obtaining and evaluating evidence.

1. AUDITING
l
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)

2. 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.

3. Standards on Auditing
Either:
International Standards on Auditing, issued
by IFAC (International Federation of
Accountants)
l or:
Standards for Government Auditors, issued
by INTOSAI (International Organization of
Supreme Audit Institutions)
l

4. AUDIT COMPLIANCE
TYPES OF AUDITS
l Financial
l Compliance
l Operational

5. FINANCIAL AUDITS
l
The Implementing Organization’s
Financial Statements
l
Project Financial Statements
l
Statements of Expenditures (SOEs)
l
Special Bank Account (SA)

6. Implementing Organization’s
Financial Statements
Overall objective is to express an
opinion on fairness of
statements
Phases:
l Understanding the Organization
l Evaluating Internal Controls
l Testing Financial Statement
Balances

7. Understanding the Organization
Nature of the Organization’s
Activities
l Organization’s Background
l Significant Trends and
Relationships
l Staff Appraisal Report (SAR)
l Loan Agreement
l Other Documents Pertaining to the
Project
l

8. Evaluating Internal Controls
l Purpose:
To determine the audit tests
required for forming an opinion
l How much Reliance on internal controls?
l Extent of Validation?
»
»
4 Not
Tests of Compliance
Tests of Transactions
an endorsement of the overall
adequacy of the internal control system

9. Testing the Balances
l Purpose:
To determine if
information is fairly presented
l
Examples:
» Observation of Inventory-taking
» Verification of Fixed Assets
» Direct Verification with Third Parties
4 Level
of Testing Might Depend on
Results from Prior Phases

10. Audit of Project Financial
Statements
l
Overall Objectives
» Statements fairly presented?
– For the period
– Cumulatively
l
Disbursements made in accordance with:
» Loan agreement
» SAR
l
Fair presentation of balance sheets,
especially assets

11. Audit of Project F/S (cont.)
l 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.

12. Audits of SOEs
Primary objective is to ascertain that
individual expenditures reported in
the SOEs are:
l Fully supported by proper
documentation in files
l Properly authorized and eligible
l Appropriately accounted for

13. Audits of SOEs
...Continued
l
Why?
» Because withdrawal requests are
not supported by documentation
submitted to the Bank
l
Effect?
» Results of audit are basis for
determining whether to continue
use of SOEs, or if adjustment must
be made on subsequent claims

14. Audits of Special Accounts
Primary objectives are to verify that:
SA financial statements are fairly
presented, and
l disbursements from SAs are proper and
in accordance with the respective loan
agreements
l

15. Audits of Special Accounts
(cont.)
l
Auditors should:
» Review the SA records maintained by
the Implementing Institution
» Review the SA bank statements
» Reconcile (including tracking of intransit items)
» Directly confirm balances with Bank
» Examine treatment and disclosure of
interest earned on SA

16. Audits of Adjustment Loans
Primary focus is on the adequacy of
procedures used to prepare customs or
similar certificates.
l Limited to examining certificates on
which SOEs have been based and
determining reliability of the procedures
applied in verifying or issuing such
certificates
l

17. Audits of Adjustment Loans
(cont.)
l
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

18. Requirements for Auditors
Adherence to principles of integrity,
objectivity, independence and
confidentially
l Adequate and Competent Staff
l Work performed by personnel who have
technical training and proficiency
l Proper direction and supervision of work
(includes quality control)
l

19. Selection of Auditors
Preferably independent auditors who
meet ISA criteria and are members of
bodies affiliated with IFAC
l 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
l

20. Determining Auditor
Acceptability
l
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
requirements of the firm

21. Government Auditors
l Usually
the “Supreme Audit
Institution (SAI)”
l Should:
Contralor
General
» Report to legislature, rather than executive
branch of government
» Have statutory authority
» Preferably be a member of INTOSAI, and
meet corresponding standards

22. Private Sector Auditors
Independent auditors who meet ISA
criteria and are members of bodies
affiliated with IFAC
l Duly licensed to practice the profession
l Competent staff and adequate facilities
l Preferably affiliated with an international
firm that provides adequate guidance
and quality control
l

23. Appointing the Auditor
The borrower appoints the auditor, but
only after the Bank has expressed the
acceptability of the auditor proposed.
l The auditor should be appointed well
before the beginning of the fiscal year.
Preferably there should be a multi-year
contract.
l

24. Terms of Reference (TOR)
Provide guidance for the audit and format
of the audit report
l Should not restrict the auditor’s
obligations with respect to legislation,
regulation, and auditing standards
l
» In the event of poor performance, auditors
should not be able to claim that TOR
requirements prevented them from doing
professional work
l
Guidelines & Sample: Annexes 18-19

25. Additional Guidance
“Suggested Minimum Guidelines and Terms
of Reference for the Planning and Execution
of External Audits of Borrowers, Executing
Agencies and Operations Financed by the
World Bank”
l FM-600 Summarizes Requirements stated in
FM-100, FM-200 and FM-300
l

26. Contract or Engagement Letter
All engagements with audit firms should be
supported by a contract
l Contract should specifically incorporate the
TORs
l Engagement letters are prepared by
auditors and should not substitute either the
TORs or the contract
l Audits by Government Auditors should at
least be supported by acceptable TORs
l

27. Auditors’ Opinions
l
Written upon completion of the audit of
the institution/project financial statements
» Should contain separate SOE paragraph if
they are used in the project
l
Types of Audit Opinions
» Unqualified
» Qualified
» Adverse
» Disclaimer of opinion
l
Samples: Annex XXI

28. Opinions Required (Project)
Project Financial Statements (Sources and
Applications of Funds, Accumulated
Investments, Supplementary Information)
l Certificates of Expenditures for period audited
l Special Account
l Compliance
l Internal Control Structure
l Disclosure of Audit Procedures
l

29. Management Letter
l Is
a report on the internal controls
and operating procedures of the
institution
l Must address:
» Any subjects which the project managers
and the auditor had previously agreed
should be discussed
» All other matters that the auditor judges to
be worthy of management’s attention

30. Financing of Audit Costs
l
Normally financed by Borrower if part of
its normal operating expenditures
» Exceptions must be approved by the RVP
May be included in project budget if
costs are incremental because of project
nature
l Audits performed by government
auditors should not be financed by the
Bank
l

31. Report Submission
l Audited
financial statements should
be submitted within six months from
the end of implementing institution’s
fiscal year
» Or sooner if agreed upon by the Bank and
the borrower