ADF Field Audit Guidelines.pdf

Revised November

FIELD AUDIT GUIDELINES FOR GRANTS AND COOPERATIVE AGREEMENTS

Internal Control Division African Development Foundation 1400 "Eye" Street, NW, 10 th Floor

Washington, DC 20005

USADF Field Audit Guidelines For Grants and Cooperative Agreements

I. BACKGROUND

The African Development Foundation is a US Government Corporation created by Congress in

1980. The Foundation's headquarters is in Washington, DC and it currently has field offices in more than a dozen sub-Saharan African countries. It became operational in 1984.

The Foundation's mandate is to:

Strengthen the bonds of friendship between the peoples of America and Africa;

Expand opportunities for participation by African people in their own community development; and

Encourage the creation and growth of grassroots development institutions that are sensitive and responsive to the economic and social development needs of the urban and rural poor.

In pursuing its mandate, ADF adopts the philosophy of participatory development; that is, the development activities that the Foundation funds are designed by grassroots groups and organizations, based on needs and priorities, as defined by the communities themselves.

In each country where the Foundation is active, an accord is signed with the government allowing the Foundation to work directly with grassroots groups rather than through government entities. Funds to implement projects are disbursed directly to the implementing group which may be a community association, an NGO, a cooperative, or any other organization that represents the interest of grassroots people.

ADF consists of the headquarters staff in Washington DC, and a Country Representative (Rep) in each country where ADF operates. In addition, in each of the countries of operation, ADF maintains an office headed by a Partner, through a cooperative agreement. The Partner is experienced in community-based development and is a national of the country. The Partner is responsible for informing communities about the Foundation and its mandate, and it is through the Partner that communities and community-based groups channel their proposed project ideas to ADF/Washington. In instances where community groups require technical assistance or training in order to successfully carry out their projects, monies are provided in the project budget to allow project implementers to identify and contract with African professionals to provide the necessary technical assistance. The Partner is available to assist groups in the identification of appropriate technical assistance providers.

The ADF Field Audit Guidelines are to be used by independent auditors in performing recipient-contracted audits required by ADF agreements with non-U.S. recipient organizations. These organizations are referred to as "recipients" or "foreign recipients" throughout these Guidelines.

"Agreements" or "awards" are defined as ADF-funded grants, contracts, and cooperative agreements. The Guidelines also provide guidance to the recipients in selecting independent auditors to perform the audits.

ADF's field audit program relies on the services of independent audit firms in the host countries.

Audits must be performed by firms certified by the USAID Regional Inspector General (RIG) as eligible to perform audits of USAID (and therefore ADF) agreements to the extent possible. If an approved audit firm cannot be used because such firms did not respond to an RFP or because costs were prohibitive, this must be documented.

The financial audits contracted to the in-country independent audit firms are coordinated directly from the Foundation headquarters by the Internal Audit Division (IAD) and the ADF Procurement. All contracts with the in-country audit firms are signed with ADF/Washington, and the Contracting Officer negotiates the terms of reference, payment conditions and costs for each audit task order directly with the audit firm tasked with the audit. Notwithstanding the acceptable audits performed by in-country auditors, ADF reserves the right to conduct audits using its own staff, in circumstances deemed necessary.

Applicability

ADF grant agreements and cooperative agreements require that an audit be performed once in the lifetime of the grant if the grant is more than $50,000. Audits must be performed in accordance with these Guidelines.

Audit Costs and Sanctions

Recipients may charge to the ADF agreements all costs for performing the specific audit of their

ADF-funded programs. As no audit costs may be charged to an ADF agreement if audits are not performed in accordance with these Guidelines, it is incumbent upon the auditor to produce a final product that meets this requirement.

ADF will consider appropriate sanctions against a recipient in the event of continued inability or unwillingness to have an audit performed in accordance with these Guidelines. Sanctions could include suspension of disbursements to the recipient until a satisfactory audit is performed.

Compliance with Auditing Standards

ADF is aware that some independent auditors contracted by foreign recipients initially may not fully comply with these Guidelines because of a lack of technical knowledge and experience in using

U.S. Government Auditing Standards. ADF will assess and consider this lack of institutional capability when accepting or rejecting reports based on QCRs. ADF may allow exceptions to compliance with U.S. Government Auditing Standards and these Guidelines provided that: (a) audit reports are determined to be reliable, and (b) any deviations from U.S. Government Auditing

Standards, such as noncompliance with internal and external quality control review programs and continuing education requirements, are clearly stated in the report as scope limitations.

II. SELECTION OF INDEPENDENT AUDITORS

ADF requires that the independent auditors selected to perform audits are on the USAID RIG’s list of approved audit firms.

Audits of ADF funds provided to nongovernmental recipients are to be performed by independent audit firms and must be performed in accordance with U.S. Government Auditing

Standards.

Recipients must ensure that all records are available to the independent auditors, all accounting entries and adjustments are made, and all other necessary steps are taken to enable the auditors to complete their work.

Audits should begin before the close of a fiscal year, since initiating audits after the close of a fiscal year could hinder timely audit reporting and may unduly restrict the scope of certain audit procedures. ADF recommends that independent audits be contracted well in advance of the fiscal year close so that interim audit work, if necessary, can be performed during the year. This practice could also result in reduced audit costs.

Audit Firms

The IAD must approve the audit firm prior to execution of the audit services contract. The preferred procedure is for ADF to obtain proposals and select an audit firm from the list of firms determined to be eligible by the RIG. Audit cost cannot be a controlling factor in the selection.

In determining acceptability of proposed audit firms, the RIG will give first priority to firms that have partnership agreements with firms located in the United States. Audit firms who have authority to use the letterhead and sign audit reports in the name of a U.S. audit firm are required to do so. The RIG will give second priority to affiliates or representatives of firms located in the

United States that are subject to standard audit quality control procedures and reviews. Local firms that are not affiliated with firms located in the United States may be accepted when there is a high degree of assurance of professional quality based upon prior experience with an international organization or other acceptable client assurance.

All selected audit firms should meet or make satisfactory efforts toward meeting the continuing education requirements (CPE) and internal and external peer review requirements in accordance with U.S. Government Auditing Standards. RIGs may remove firms that fail to meet this objective from the list of auditors eligible to perform audits of USAID agreements. RIGs may periodically remove firms on any of the approved lists that have not performed any audits under these

Guidelines for a period of four years. Inactive firms need to be removed from the list of approved firms periodically because audit staff, procedures, training programs, and affiliations change over time.

It is the responsibility of contracted audit firms to perform audits pursuant to these Guidelines and to present audit reports in a timely manner. If ADF rejects the work of an audit firm due to noncompliance with these Guidelines, the audit costs may not be charged to the ADF agreement until such time as ADF finds the report to be acceptable.

III. AUDIT OBJECTIVES

The financial audit must include the following: (i) a specific audit of the grantee’s ADF projects;

and where applicable, (ii) and should also include audit of the grantee’s organization-wide general purpose financial statements (balance sheet, income statement, and cash flow statement) if requested by ADF Washington. Starting in FY 2009 ADF will solicit for audits for ADF Partner cooperative agreements. Partners with more than one client will solicit for organizational-wide audits, to include balance sheet, income statement, and cash flow statement if the Partner was authorized to use indirect provisional costs rates, from OIG approved audit firms which shall be performed in accordance with U.S. Government Auditing Standards (yellow book). ADF’s internal audit will review the draft Partner audit reports prior to being finalized.

The fund accountability statement is the basic financial statement to be audited that presents the recipient’s revenue, costs incurred, cash balance of funds provided by ADF, and commodities and technical assistance directly procured by ADF for the grantee’s use. The fund accountability statement should be reconciled to the general purpose financial statements by a note to the financial statements or the fund accountability statement. Part IV of these Guidelines illustrates a typical fund accountability statement.

Formal reviews will be conducted of Enterprise Development Investments (EDIs) that the monitoring and evaluation system indicates may not be in compliance with the grant agreement.

The review will examine the compliance with the terms of the grant agreement, including use of funds disbursed.

A. Audit of ADF Funds

Unless otherwise noted, an audit of ADF grant funds must be performed in accordance with

Chapters 3, 4, and 5 of U.S. Government Auditing Standards (“Yellow Book,” revised 2011);

hereinafter referred to as U.S. Government Auditing Standards) issued by the Comptroller General of the United States and generally accepted auditing standards adopted by the American Institute of

Certified Public Accountants (AICPA), which have been incorporated into U.S. Government

Auditing Standards by reference. The specific objectives of the audit of the ADF funds are to:

• express an opinion on whether the fund accountability statement for the ADF-funded programs presents fairly, in all material respects, revenues received, costs incurred, and commodities and technical assistance directly procured by ADF for the period audited in conformity with the terms of the agreements and generally accepted accounting principles or other comprehensive basis of accounting (including the cash receipts and disbursements basis and modifications of the cash basis).

• evaluate and obtain a sufficient understanding of the grantee's internal control structure related to the ADF-funded programs, assess control risk, and identify significant deficiencies, including material internal control structure weaknesses. This evaluation should include the internal control related to cost-sharing contributions, if applicable.

• perform tests to determine whether the grantee complied, in all material respects, with agreement terms and applicable laws and regulations related to ADF-funded programs. All material instances of noncompliance and all illegal acts that have occurred or are likely to have occurred should be identified. Such tests should include the compliance requirements related to required community re-investment contributions; and

• (where applicable) determine if the grantee has taken adequate corrective action on prior audit report recommendations.

Auditors must design audit steps and procedures in accordance with U.S. Government Auditing

Standards to provide reasonable assurance of detecting situations or transactions in which irregularities or illegal acts have occurred or are likely to have occurred. If such evidence exists, the auditors must contact the ADF Washington and should exercise due professional care in pursuing indications of possible irregularities and illegal acts so as not to interfere with potential future investigations or legal proceedings.

In determining grantee’s compliance with laws and regulations, U.S. Government auditing standards require auditors to design audit steps and procedures to provide reasonable assurance of detecting errors, irregularities, abuse, or illegal acts that could (i) have a direct (or indirect) and material effect on grantee financial representations, or the results of financial related audits, or (ii) significantly affect the audit objectives. Auditors should also exercise (i) due care in planning, performing, and evaluating the results of audit procedures, and (ii) a proper degree of professional skepticism to achieve reasonable assurance that material unlawful activities or improper practices are detected.

Auditors commonly complete their audit work after reviewing grantee records and financial reports at the grantee project site. Depending on the volume of transactions to review and/or other areas outlined in the audit award, the audit site visit may last from two to five days.

Auditors will provide a table of audit findings and preliminary recommendations at the exit conference. Auditors will discuss their preliminary findings with grantees in an exit conference before returning to their office to complete a draft audit report. Auditors shall present at the exit conference a table of findings and recommendations. The draft report will be sent to the ADF Washington, the grantee, and the ADF in-country Representative and Partner. ADF Washington shall review the draft audit report with the grantee’s comments incorporated (within 30 days of fieldwork ending). Upon review of draft report to ensure compliance, ADF Washington shall authorize the auditors to finalize the audit report and send to ADF/Washington for review and payment of their services and expenses as agreed upon in the Task Order.

The IAD will conduct Quality Control Reviews (QCRs) of the working papers for a selected sample of the audits. These reviews will determine whether audit work was performed in accordance with these Guidelines. The IAD will notify the recipient and the independent auditors of the results of these reviews. Financial Officers at the ADF Country Representative Office shall (i) report on the progress of project audit field work; (ii) provide a quality review to be submitted to the ADF internal auditor on the audit work papers provided at the exit conference that discuss audit findings; and (iii) provide the ADF internal auditor information to ensure timely follow-up action on findings.

B. Audit of Financial Statements

A financial audit of the grantee’s financial statements on an organization-wide basis must be submitted to ADF together with the audit of the ADF funds if ADF Washington specifically requests such an audit. The audit must be performed in accordance with (“Yellow Book,” revised

2011; hereinafter referred to as U.S. Government Auditing Standards). The objective of this audit is to express an opinion on whether those statements present fairly, in all material respects, the grantee’s financial position at year-end, and the results of its operations and cash flows for the year ended, in accordance with generally accepted accounting principles.

Note:

Standard working papers must be developed for the audit and retained for a period of three years after the date of issuance of the audit report unless notified otherwise by ADF. The audit working papers shall be made available upon request to ADF, or to the USAID Inspector General, as part of a quality review, to resolve audit findings, or to carry out oversight responsibilities access to working papers include the right to obtain copies, as is reasonable and necessary.

The auditors must institute adequate quality control procedures to ensure that sufficient competent evidential matter is obtained through inspection, observation, inquiries, and confirmation to afford a reasonable basis for an opinion on the financial statements audited.

While auditors may use their own established standard procedures for ensuring quality control, those procedures must, at a minimum, ensure that:

Audit reports and supporting working papers are reviewed by a supervisor;

All quantities and monetary amounts involving calculations are footed and cross-footed;

and All factual statements, numbers, conclusions and monetary amounts are cross-indexed to supporting working papers.

IV. SCOPE OF AUDIT

Auditors should use the following steps as the basis for preparing their audit programs and their review. The audit steps provided by ADF are not considered all-inclusive or restrictive in nature and do not relieve the auditor from exercising due professional care and judgment. The audit steps should be modified to fit local conditions and specific program design, implementation procedures, and agreement provisions that may vary from program to program. Any limitations in the scope of work must be communicated as soon as possible to the point of contact in ADF

Washington.

A. Pre-Audit Steps

The auditors should review the following grant documents considered necessary to perform the audit:

1. The agreements between ADF and the grantee.

3. Contracts and subcontracts with third parties, if any.

4. The budgets, implementation letters, and written procedures approved by ADF.

5. All project financial and progress reports; organizational charts; accounting systems descriptions; organizational policies and procedures.

B. Fund Accountability Statement

The auditors must examine the fund accountability statement for the project including the budgeted amounts by category and major items; the revenues received from ADF for the period covered by the audit; the costs reported by the grantee as incurred during that period; and the commodities and technical assistance directly procured by ADF for the grantee's use. The fund accountability statement must include all ADF grant funds identified by each specific project. The revenues received from ADF less the costs incurred, after considering any reconciling items, must reconcile with the balance of cash-on-hand or in bank accounts. The fund accountability statement should not include community reinvestment contributions provided from the grantee's own funds or in-kind.

However, where applicable, a separate schedule must be included and examined to determine whether community reinvestment contributions were provided and accounted for in accordance with the terms of the agreements. Moreover, starting in FY 2009 ADF requests the auditor to determine if there is substantial doubt that the Partner will be able to continue as a viable concern over the coming years.

The auditors may prepare or assist the grantee in preparing the fund accountability statement from the books and records maintained by the grantee, but the grantee must accept responsibility for the statement's accuracy before the audit commences.

The opinion on the fund accountability statement must comply with Statement on Auditing

Standard (SAS) No. 62 (AU623). The fund accountability statement must separately identify those revenues and costs applicable to the specific ADF agreement. The audit must evaluate program implementation actions and accomplishments to determine whether specific costs incurred are allowable, allocable, and reasonable under the agreement terms, and to identify areas where irregularities and illegal acts have occurred or are likely to have occurred as a result of inadequate controls. At a minimum, the auditors must

1. review costs billed to and reimbursed by ADF and costs incurred but pending reimbursement by ADF, identifying and quantifying any questioned costs. All costs that are not supported with adequate documentation or are not in accordance with the agreement terms must be reported as questioned.

Questioned costs must be presented in the fund accountability statement in two separate categories: (a) ineligible costs that are explicitly questioned because they are unreasonable;

prohibited by the agreements or applicable laws and regulations; or not program related; and

(b) unsupported costs that are not supported with adequate documentation or did not have required prior approvals or authorizations. All questioned costs resulting from instances of noncompliance with agreement terms and applicable laws and regulations must be included as findings in the report on compliance. Also, the notes to the fund accountability statement must briefly describe the questioned costs and must be cross-referenced to the corresponding findings in the report on compliance.

2. review general and program ledgers to determine whether costs incurred were properly recorded. Reconcile direct costs billed to and reimbursed by ADF to the general ledgers.

3. review the procedures used to control the funds, including their channeling to contracted financial institutions or other implementing entities. Review the bank accounts and the controls on those bank accounts. Perform positive confirmation of balances, as necessary.

4. determine whether advances of funds were justified with documentation, including reconciliations of funds advanced, disbursed, and available. The auditors must ensure that all funding received by the grantee from ADF was appropriately recorded in the grantee's accounting records and that those records were periodically reconciled with information provided by ADF.

5. determine whether program income and reimbursements, if any, representing recoveries of costs, were recorded as income or as credits to program cost accounts. If any revenue was earned by the grantee from program funding, the amounts must be questioned in the fund accountability statement if not used to further the project's objectives.

6. review procurement procedures to determine whether sound commercial practices including competition were used, reasonable prices were obtained, and adequate controls were in place over the qualities and quantities received.

7. review travel and transportation charges to determine whether they were adequately supported and approved. Travel charges that are not supported with adequate documentation or not in accordance with agreements and regulations must be questioned in the fund accountability statement.

8. review commodities (e.g., supplies, materials, vehicles, equipment, etc.) procured by the grantee as well as those directly procured by ADF for the grantee's use. Determine whether:

(a) commodities were accounted for; (b) control procedures exist and have been placed in operation to adequately safeguard the commodities; and (c) commodities were used for their intended purposes in accordance with the agreements. As part of the procedures to determine if commodities were used for intended purposes, the auditors should perform end-use reviews for an appropriate sample of all commodities based on the control risk assessment. End-use reviews may include project site visits to verify that commodities exist or were used for intended purposes and in accordance with the terms of the agreements. The cost of commodities unaccounted for or not used in accordance with the agreements must be questioned in the fund accountability statement.

9. (where applicable) review technical assistance and services procured by the grantee as well as those procured directly by ADF for the grantee. The auditors should determine whether technical assistance and services were: (a) adequately supported by the grantee as required by the terms of the agreements; and (b) properly accounted for. The cost of all technical assistance and services unaccounted for or not used in accordance with the agreements must be questioned in the fund accountability statement.

C. Internal Control Structure

The auditors must review and evaluate the grantee's internal control structure related to the ADF project to obtain a sufficient understanding of the design of relevant control policies and procedures and whether those policies and procedures have been placed in operation. The U.S. Government

Accountability Office’s Standards for Internal Control in the Federal Government (GAO/AIMD-

00-21.3.1; 1999) may prove helpful in assessing recipient internal control. The internal control structure must be documented in the working papers.

Auditors must then prepare the report required by these Guidelines, identifying any significant deficiencies or material weaknesses in the design or operation of the internal control structure, and any significant deficiencies considered to be material weaknesses. Material weaknesses are significant deficiencies in which the design or operation of the specific internal control structure elements do not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the fund accountability statement may occur and not be detected in a timely manner by management performing its normal functions. Significant deficiencies, including material weaknesses, must be set forth in the report as "findings.” Significant deficiencies involve matters coming to the auditor’s attention relating to significant deficiencies in the design or operation of internal control that, in the auditor’s judgment, could adversely affect the grantee’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the fund accountability statement. Non-significant deficiencies (or control deficiencies) that are not significant deficiencies or material weaknesses should be reported in a separate management letter to the grantee and referred to in the report on the internal control structure.

The major internal control components to be studied and evaluated include, but are not limited to, the controls related to each revenue and expense account on the fund accountability statement. The auditors must:

a. Obtain a sufficient understanding of internal control to plan the audit and to determine the nature, timing and extent of tests to be performed.

b. Assess inherent risk and control risk, and determine the detection risk (sometimes referered to as combined risk). Inherent risk is the susceptibility of an assertion, such as an account balance, to a material misstatement assuming there are no related internal control policies or procedures.

Control risk is the risk that a material misstatement that could occur in an assertion will not be prevented or detected in a timely manner by the entity’s internal control policies or procedures.

Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion. Detection risk is based upon the effectiveness of an auditing procedure and the auditor’s application of that procedure.

c. Summarize the risk assessments for each assertion in a working paper. The risk assessments should consider the following broad categories under which each assertion should be classified:

(a) existence or occurrence; (b) completeness; (c) rights and obligations; (d) valuation or allocation; and (e) presentation and disclosure. At a minimum, the working papers should identify the name of the account or assertion, the account balance or the amount represented by the assertion, the assessed level of inherent risk (high, moderate, or low), the assessed level of control risk (high, moderate, or low), the combined risk (high, moderate, or low), and a description of the nature, timing and extent of the tests performed based on the combined risk.

These summary working papers should be cross-indexed to the supporting working papers that contain the detailed analysis of the fieldwork. If control risk is evaluated at less than the maximum level (high), then the basis for the auditor’s conclusion must be documented in the working papers.

c.1 If the auditors assess control risk at the maximum level for assertions related to material account balances, transaction classes, and disclosure components of financial statements when such assertions are significantly dependent upon computerized information systems, the auditors must document in the working papers the basis for such conclusions by addressing (i) the ineffectiveness of the design and/or operation of controls, or (ii) the reasons why it would be inefficient to test the controls.

d. Evaluate the control environment, the adequacy of the accounting systems, and control procedures. Emphasize the policies and procedures that pertain to the recipient’s ability to record, process, summarize, and report financial data consistent with the assertions embodied in each account of the fund accountability statement. This should include, but not be limited to, the control systems for:

d.1 Ensuring that charges to the program are proper and supported.

d.2 Managing cash on hand and in bank accounts.

d.3 Procuring goods and services.

d.4 Managing inventory and receiving functions.

d.5 Managing personnel functions such as timekeeping, salaries and benefits.

d.6 Managing and disposing of commodities (such as supplies, materials, vehicles, equipment, food products, tools, etc.) purchased either by the recipient or directly by ADF.

d.7 Ensuring compliance with agreement terms and applicable laws and regulations that collectively have a material impact on the fund accountability statement. The results of this evaluation should be contained in the working paper section described in these Guidelines and presented in the compliance report.

e. Include in the study and evaluation other policies and procedures that may be relevant if they pertain to data the auditors use in applying auditing procedures. This may include, for example, policies and procedures that pertain to non-financial data that the auditors use in analytical procedures.

In fulfilling the audit requirement relating to an understanding of internal control and assessing the level of control risk, the auditor must follow, at a minimum, the guidance contained in AICPA SAS Nos. 109 (AU 314), entitled Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, 115 (AU 325), entitled

Communicating Internal Control Related Matters Identified in an Audit, and 74 (AU801) entitled Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance.

D. Compliance with Agreement Terms and Applicable Laws and Regulations

In fulfilling the audit requirement to determine compliance with agreement terms and applicable laws and regulations related to ADF programs, the auditors must, at a minimum, follow guidance contained in AICPA SAS No. 74 (AU801) entitled Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance.

The auditor's report on compliance must set forth as findings all material instances of noncompliance with terms of the grant agreement. Nonmaterial instances of noncompliance should be included in a separate management letter to the grantee and referred to in the report on compliance.

The auditor’s report should include all conclusions that a fraud or illegal act either has occurred or is likely to have occurred. In reporting material fraud, illegal acts, or other noncompliance, the auditors must place their findings in proper perspective. To give the reader a basis for judging the prevalence and consequences of these conditions, the instances identified should be related to the universe or the number of cases examined and is quantified in terms of U.S. dollars, if appropriate.

In presenting material fraud, illegal acts, or other noncompliance, auditors must follow the reporting standards contained in Chapter 5 of U.S. Government Auditing Standards. Auditors may provide less extensive disclosure of fraud and illegal acts that are not material in either a quantitative or qualitative sense. Chapter 4 of U.S. Government Auditing Standards discusses factors that may influence auditors’ materiality judgments. If the auditors conclude that sufficient evidence of fraud or illegal acts exists, they must contact ADF and exercise due professional care in pursuing indications of possible fraud and illegal acts to avoid interfering with potential future investigations or legal proceedings.

In planning and conducting the tests of compliance the auditors must:

1. Identify the agreement terms and pertinent laws and regulations and determine which of those, if not observed, could have a direct and material effect on the fund accountability statement.

a. List all standard and program-specific provisions contained in the agreements that cumulatively, if not observed, could have a direct and material effect on the fund accountability statement.

b. Assess the inherent and control risk that material noncompliance could occur for each of the compliance requirements listed in paragraph a, above.

c. Determine the nature, timing and extent of audit steps and procedures to test for errors, fraud, and illegal acts that provide reasonable assurance of detecting both intentional and unintentional instances of noncompliance with agreement terms and applicable laws and regulations that could have a material effect on the fund accountability statement. This should be based on the risk assessment described in paragraph b, above.

d. Prepare a summary working paper that identifies each of the specific compliance requirements included in the review, the results of the inherent, control and combined

(detection) risk assessments for each compliance requirement, the audit steps used to test for compliance with each of the requirements based on the risk assessment, and the results of the compliance testing for each requirement. The summary working paper should be cross-indexed to detailed working papers that support the facts and conclusions contained in the summary working paper.

2. determine if payments have been made in accordance with agreement terms and applicable laws and regulations.

3. determine if funds have been expended for purposes not authorized or not in accordance with applicable agreement terms. If so, the auditors must question these costs in the fund accountability statement.

4. identify any costs not considered appropriate, classifying and explaining why these costs are questioned.

5. determine whether any commodities directly procured by ADF are unaccounted for or have not been used for their intended purposes in accordance with the agreements. If so, the cost of such commodities should be questioned.

6. determine whether any technical assistance directly procured by ADF is unaccounted for or has not been used for its intended purpose in accordance with the agreements. If so, the cost of such technical assistance should be questioned.

7. determine whether the grantee’s financial reports and claims for advances and reimbursement contain information that is supported by the books and records.

In addition, the auditor must

1. Review previous audits of the project, if any.

2. Review the accounting system maintained by the Grantee to account for project funds and advise if the system provides an adequate basis for the preparation of the financial reports required by ADF. Examine the accounting records and ascertain that

a. they provide an accurate and complete record of funds received from

ADF/Washington

b. the accounting records show correct and accurate recording of expenditures by line items as contained in the grant agreement and current approved budget, with over-expenditures reported and supported by authorization from ADF/Washington;

c. in each instance where a check was issued to make a payment for goods and services, the amounts indicated on the checks reconcile with the amounts listed on the bank statement, and the expenditures journal.

3. Examine grantee records in order to

a. reconcile funds received information (bank statements, credit advices, and Funds Received Journal) with disbursement information provided by ADF/Washington.

Variances between these sources will be described in an appendix to the final audit report.

b. review the Expenditures Journal and compare this information with grantee submitted

Financial Reports;

c. establish whether the grantee has reasonable internal controls over the safeguarding and expenditure of project funds. Internal controls include

i. assigning clearly defined responsibility to competent personnel to receive and disburse funds;

ii. requiring prior approval of expenditures by an appropriate individual in authority over the grant project;

iii. supporting expenditures by appropriate documentary evidence such as contractual documents, invoices, receiving reports of supplies or equipment purchased;

iv. having a reasonable method of verifying that work or travel was performed in the case of payments made to individuals for wages, salaries or travel.

v. reconciling bank accounts used for grant transactions on a monthly basis. (Note:

Grantees are normally provided funds to cover bank fees/charges, including sufficient amounts to pay for regular bank statements and credit/debit advices.)

d. determine if disbursements are made for the grant project in cash rather than by check, that the cash fund is adequately safeguarded from the control of a single authorized individual. Some of these expenditures should be randomly reviewed to determine whether or not sufficient documentation or justification has been provided for the cash purchases.

4. Review of expenditures

a. Review the grant agreement with all amendments for the grant period being examined

b. Determine whether recorded expenditures meet the needs of the project in regards to the project description and budgetary guidelines, and any subsequent amendments and/or budget shifts.

c. Verify the accuracy of the amounts reported for significant expenditures.

d. Physically verify that items of significant value have been purchased and/or built. For items of lesser value, on a random basis ascertain that the asset is identifiable as grantee property, being used for the grant project, being reasonably protected and cared for, and recorded in some manner, such as on an assets register or accounting control, so that the grantee can account for all individual items of assets.

e. Distribute the total expenditures into the respective budget categories and line items provided in the grant agreement. If any expenditure appears not to apply to the budget categories or line items, the expenditure should be reported as a separate category, pending detailed examination.

f. Select a random sample of transactions for testing. Effort should be made to use statistical sampling plan where practical. (Note: All purchases that exceed USD $3,000, including third party payments and construction payments, need to be subjected to 100% review.

E. Other Audit Responsibilities

The auditors must perform the following steps:

1. Hold entrance and exit conferences with the recipient. The cognizant ADF Country Program

Coordinator and ADF Partner should be notified of these conferences in order that they may attend. The audit firm shall provide a table of audit findings and preliminary recommendations and present to the grantee, ADF Partner and ADF Country Program

Coordinator (CPC) staff as part of the exit conference.

2. During the planning stages of an audit, communicate information to the auditee regarding the nature and extent of planned testing and reporting on compliance with laws and regulations and internal control over financial reporting. Such communication should state that the auditors do not plan to provide opinions on compliance with laws and regulations and internal control over financial reporting.

Written communication is preferred. Auditors should document the communication in the working papers.

The auditors only express an opinion on the fund accountability statement and general purpose

3. Institute quality control procedures to ensure that sufficient competent evidence is obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. While auditors may use their standard procedures for ensuring quality control, those procedures must, at a minimum, ensure that:

a. Audit reports and supporting working papers are reviewed by an auditor, preferably at the partner level, who was not involved in the audit. This review must be documented.

b. All quantities and monetary amounts involving calculations are footed and cross-footed.

c. All factual statements, numbers, conclusions and monetary amounts are cross-indexed to supporting working papers.

4. Ascertain whether the recipient ensured that audits of its subrecipients were performed to ensure accountability for ADF funds passed through to subrecipients. If subrecipient audit requirements were not met, the auditors should disclose this in the fund accountability statement and consider qualifying their opinion.

5. Obtain a management representation letter in accordance with AICPA SAS No. 85 (AU333) signed by the recipient’s management. *See Example 4 for an illustrative management representation letter.

V. AUDIT REPORTS

Note: The final audit report will be issued in English.

The auditors should submit to ADF/Washington one copy of the audit report in English electronically in word (format (soft copy), a signed copy in pdf format or by mail along with a copy of the Management Letter. In some countries or locales it is necessary to issue a second language version, e.g. French, Portuguese, etc. for the grantee, Partner, and ADF in-country

Representative. The report should contain:

A. A title page, table of contents and a transmittal letter and a summary which includes: (1) a background section with a general description of the ADF programs audited, the period covered, the program objectives, and a clear identification of all entities mentioned in the report, (2) the objectives and scope of the financial audit and a clear explanation of the procedures performed and the scope limitations, if any; (3) a brief summary of the audit results on the fund accountability statement, questionable costs, internal control structure, compliance with agreement terms and applicable laws and regulations, and, if applicable, the grantee’s general purpose financial statements on an organizational-wide basis; and (5) a brief summary of the grantee's management comments regarding its views on the audit and review results and findings.

B. The auditor's report on the fund accountability statement, identifying any questioned costs not fully supported with adequate records or not eligible under the terms of the agreements. The financial statements, if applicable.

report must be in conformance with Chapter 5 U.S. Government Auditing Standards and must include:

1. The auditor's opinion on whether the fund accountability statement presents fairly, in all material respects, program revenues, costs incurred, and commodities/technical assistance directly procured by ADF for the year then ended in accordance with the terms of the agreements and in conformity with generally accepted accounting principles or other basis of accounting. This opinion must clearly state that the audit was performed in accordance with

U.S. Government Auditing Standards. Any deviations from these standards, such as noncompliance with the requirements for continuing professional education and external quality control reviews, must be disclosed.

2. The fund accountability statement identifying the program revenues, costs incurred, and commodities/technical assistance directly procured by ADF for the fiscal year. The statement must also identify questioned costs not considered eligible for reimbursement and unsupported, if any, including the cost of any commodities and technical assistance directly procured by

ADF that are unaccounted for or not used in accordance with agreement terms.

All questioned costs must be included as findings in the report on compliance. Also, questioned costs must be briefly described in the notes to the fund accountability statement and must be cross-referenced to the corresponding findings in the report on compliance.

3. Notes to the fund accountability statement, including a summary of the significant accounting policies, explanation of the most important items of the statements, the exchange rates during the audit period and foreign currency restrictions, if any.

C. The auditor’s report on the understanding of the grantee's internal control structure related to

ADF-funded program. The auditor's report must include as a minimum: (1) the scope of the auditor's work in obtaining an understanding of the internal control structure and in assessing reporting in Chapter 5 of U.S. Government Auditing Standards. Non-significant deficiencies should be communicated to the grantee in a separate management letter, which should be referred to in the report on the internal control structure and sent with the audit report.

The control risk, and; (2) the significant deficiencies, including the identification of material weaknesses in the grantee's internal control structure. Significant deficiencies must be described in a separate section. This report must be made in conformance with SAS No. 60 and the standards for reporting in Chapter 5 of U.S. Government Auditing Standards.

D. The auditor's report on the grantee's compliance with agreement terms and applicable laws and regulations related to ADF-funded programs. The report must follow the guidance in

SAS 74. Material instances of noncompliance must be reported and discussed in the related findings. Nonmaterial instances of noncompliance should be communicated to the grantee in a separate management letter, which should be sent with the audit report. All material questioned costs resulting from instance of noncompliance must be included as findings in the report on compliance. Also, the notes to the fund accountability statement that describe both material and immaterial questioned costs must be cross-referenced to any corresponding findings in the report on compliance.

1. The auditor’s report must include all conclusions, based on evidence obtained, that an irregularity or illegal act either has occurred or is likely to have occurred. This report must include identification of all questioned costs, if any, as a result of irregularities or illegal acts, without regard to whether the conditions giving rise to the questioned costs have been corrected and whether the grantee does or does not agree with the findings and questioned costs.

2. In reporting material irregularities, illegal acts, or other noncompliance, the auditors must place their findings in proper perspective. To give the reader a basis for judging the prevalence and consequences of these conditions, the instances identified should be related to the universe or the number of cases examined and should be quantified in terms of local currency, or U.S dollar value, if appropriate. In presenting material irregularities, illegal acts, or other noncompliance, auditors must follow the reporting standards as stipulated in Chapter

5 of U.S. Government Auditing Standards. Auditors may provide less extensive disclosure of irregularities and illegal acts that are not material in either a quantitative or qualitative sense.

Chapter 4 of U.S. Government Auditing Standards provides guidance concerning factors that may influence auditors’ materiality judgments. If the auditors conclude that sufficient evidence of fraud or illegal acts exist, they must contact ADF and exercise due professional care in pursuing indications of possible fraud and illegal acts so as not to interfere with potential future investigations or legal proceedings.

E. The findings contained in the reports on internal controls and compliance related to ADF-funded programs must include a description of the condition (what is) and criteria (what should be).

The cause (why it happened) and effect (what harm was caused by not complying with the criteria) must be included in the findings if they can be easily determined. In addition, the findings must contain an auditor’s actionable recommendation that corrects the cause and the condition, as applicable. It is recognized that material internal control weaknesses and noncompliance found by the auditors might not always have all of these elements fully developed, given the scope and objectives of the specific audit. The auditors must, however, at least identify the condition, criteria and possible effect to enable management to determine the effect and cause. This will help management take timely and proper corrective action.

F. Findings, which involve monetary effect, must:

• be quantified and included as questioned costs in the fund accountability statement and the

Auditor’s Report on Compliance,

• be reported without regard to whether the conditions giving rise to them were corrected,

• be reported whether the grantee does or does not agree with the findings or questioned costs, and

• contain enough relevant information to expedite the audit resolution process (i.e., number of items tested, size of the universe, error rate, monetary value, etc.).

G. The reports must so contain, after each recommendation,…