Attachment H Financial Audits.pdf

ATTACHMENT H

STANDARD STATEMENT OF WORK FOR FINANCIAL AUDITS OF NON-U.S.

ORGANIZATIONS (3/4/2019)

I. BACKGROUND

On [date], the U.S. Agency for International Development (USAID), [Operating Unit] (Operating Unit) approved the [program name and number] (program), which provided [amount in U.S.

Dollars] in [loan/grant] funds to [name of recipient] (recipient) for [describe the time period of the award and in general terms the purposes of the program and the principal line items and amounts budgeted, including cost sharing contributions, direct payments and all related financial information of the program, as applicable].

[If recipient activities are financed by more than one program, include a similar paragraph for each program.] [Include a brief history of the recipient, its principal purposes and goals, location(s) of activities to be audited, location(s) of accounting records and management.] [The purpose of including complete data on the recipient/subrecipient and the program(s) involved is to provide the auditor with all necessary information for them to properly estimate their audit fees.]

II. TITLE

Audit of the Fund Accountability Statement (or Audit of Financial Statements). In the case of closeout audits, the title must specify that it is a closeout audit, as in: Closeout Audit of the USAID Resources Managed by [name of recipient] Under Program [program number and name] for the period from [date] to [date].

III. OBJECTIVES

The objective of this engagement is to conduct a financial audit of the USAID resources managed by the recipient/sub recipient under program [program number and name] from [date] to [date] in accordance with:

USAID Financial Audit Guide for Foreign Organizations (hereafter Guide);

U.S. Generally Accepted Government Auditing Standards33 (GAGAS or the Yellow Book); hereafter referred to as GAGAS, issued by the Comptroller General of the United States Government Accountability Office; and, as applicable;

International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB), in conjunction with GAGAS; and

The International Standards of Supreme Audit Institutions (ISSAIs) issued by the International Organization of Supreme Audit Institutions (INTOSAI) for public-sector audits, in conjunction with

GAGAS.

The financial audit must include a specific audit of all the recipient’s USAID-funded programs. The fund accountability statement is the basic financial statement to be audited when indirect cost rates are not used. All amounts in the financial audit report must be stated in U.S. dollars. The auditors should indicate the exchange rate(s) used in the notes to the fund accountability statement.

A. Audit of USAID Funds Auditors must design steps and procedures in accordance with GAGAS. A financial audit of the funds provided by USAID must be performed in accordance with GAGAS, or other approved standards where applicable, and accordingly includes such tests of the accounting records as deemed necessary under the circumstances. The specific objectives of the audit of the USAID funds are to:

Express an opinion on whether the fund accountability statement for the USAID-funded awards presents fairly in all material respects in relation to the recipient’s financial statements as a whole, and in revenues received, costs incurred, and commodities and technical assistance directly procured by USAID for the period audited in conformity with the terms of the agreements and generally accepted accounting principles.

Evaluate and obtain a sufficient understanding of the recipient's internal controls related to the USAID-funded programs, assess control risk, and identify reportable conditions, including material internal control weaknesses. This evaluation must include the internal controls related to required cost-sharing contributions.

Perform tests to determine whether the recipient complied, in all material respects, with agreement terms (including cost-sharing/matching contributions, if applicable) and applicable laws and regulations related to USAID-funded programs. All material instances of noncompliance and all illegal acts that have occurred or are likely to have occurred must be identified. Such tests must include the compliance requirements related to any required cost-sharing contributions.

In addition, if applicable: Determine if the recipient has taken adequate corrective action on prior audit report recommendations.

Review cost-sharing/matching contributions to determine whether cost-sharing/matching contributions were provided and accounted for by the recipient in accordance with the terms of the agreements. The auditors will review the cost-sharing/matching table to determine if the computation is fairly presented in accordance with the basis of accounting used by the recipient to prepare the schedule. The auditors should question all cost-sharing/matching contributions that are either ineligible or unsupported costs.

Perform an audit of the indirect cost rate(s) if the recipient has been authorized to charge indirect costs to USAID using provisional rates. If so, the fund accountability statement should be reconciled to the USAID funds included in the general purpose financial statements by a note to the fund accountability statement. If the recipient does not have a USAID authorized indirect cost rate, this fact must be disclosed in the report.

The audit of the general purpose financial statements must be performed in accordance with GAGAS. The objective of this audit is to express an opinion on whether the general purpose financial statements present fairly, in all material respects, the results of its operations for the year then ended, in conformity with generally accepted accounting principles.

IV. AUDIT SCOPE

The auditor must use the following steps as the basis for preparing audit programs. They are not all-inclusive or restrictive in nature and do not relieve the auditor from exercising due professional care and judgment. The steps must be modified to fit local conditions and specific program design, implementation procedures, and agreement provisions, which may vary from program to program.

Any limitations in the scope of work must be communicated as soon as possible to the USAID cognizant Operating Unit.

A. Pre-Audit Document Review

Following is a list of documents applicable to different USAID programs. The auditor must review the applicable documents considered necessary to perform the audit:

1. The agreement between USAID and the recipient.

2. The sub-agreements between the recipient and other implementing entities, as applicable.

3. Contracts and subcontracts with third parties, if any

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

5. USAID Automated Directives System Chapter 636, Program Funded Advances.

6. 2 CFR 200 Subpart F on audit and 2 CFR 700 on Cost Principles.

7. Federal Acquisition Regulation (FAR), Part 31, Contract Cost Principles and Procedures.

8. USAID Acquisition Regulation (AIDAR), which supplement the FAR.

9. Mandatory Standard Provisions for Non-U.S. Nongovernmental Grantees (ADS Chapter 303, Grants and Cooperative Agreements to Non-Governmental Organizations).

10. Standard Provisions Annex for Agreements with Foreign Governments (ADS Chapter 350, Grants to Foreign Governments).

11. All program financial and progress reports; charts of accounts, organizational charts;

accounting systems descriptions; procurement policies and procedures; and receipt, warehousing and distribution procedures for materials, as necessary to successfully complete the required work.

12. Any previous audits, financial reviews, etc., that directly relate to the objectives of the audit.

B. Fund Accountability Statement The auditor must examine the fund accountability statement for USAID programs including the budgeted amounts by category and major items; the revenues received from USAID for the period covered by the audit; the costs reported by the recipient as incurred during that period; and the commodities and technical assistance directly procured by USAID for the recipient's use. The fund accountability statement must include all USAID funds identified by each specific program or agreement. The revenues received from USAID 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 must not include cost-sharing/matching contributions provided from the recipient's own funds or in-kind.

The audit firm may not prepare or assist the recipient in preparing the fund accountability statement when the same audit firm will then perform an audit. If a third party prepares or assists the recipient in preparing the fund accountability statement from the books and records maintained by the recipient, then the recipient must accept the responsibility for the statement’s accuracy before the audit commences.

The fund accountability statement must separately identify those revenues and costs applicable to each specific USAID 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 applicable cost principles, and to identify areas where fraud and illegal acts have occurred or are likely to have occurred as a result of inadequate internal control.

At a minimum, the auditors must:

1. Review direct and indirect costs billed to and reimbursed by USAID and costs incurred but pending reimbursement by USAID, 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 that are pending reimbursement by USAID must be identified in the notes to the fund accountability statement as not (yet) reimbursed by

USAID.

2. Questioned costs must be presented in the fund accountability statement in two separate categories. Ineligible costs are costs that are explicitly questioned because they are unreasonable, prohibited by the agreements or applicable laws and regulations, or not program related. In addition, if a recipient was required to place USAID funds in an interest-bearing account but did not, then the imputed interest that would have been earned is also classified as an ineligible cost.

Unsupported costs 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 any corresponding findings in the report on compliance.

3. Review general and program ledgers to determine whether costs incurred were properly recorded. Reconcile direct costs billed to, and reimbursed by, USAID to the program and general ledgers.

4. 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.

5. 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 recipient from USAID was appropriately recorded in the recipient's accounting records and that those records were periodically reconciled with information provided by USAID.

6. Determine whether program income was added to funds used to further eligible project or program objectives, to finance the non-federal share of the project or program, or deducted from program costs, in accordance with USAID regulations, other implementing guidance, or the terms and conditions of the award.

7. 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.

8. Review direct salary charges to determine whether salary rates are reasonable for that position, in accordance with those approved by USAID when USAID approval is required, and supported by appropriate payroll records. Determine if overtime is charged to the program and whether it is allowable under the terms of the agreements. Determine whether allowances and fringe benefits received by employees are in accordance with the agreements and applicable laws and regulations. The auditors must question unallowable salary charges in the fund accountability statement.

9. Review travel and transportation charges to determine whether they are 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.

10. Review commodities (e.g., supplies, materials, vehicles, equipment, food products, tools, etc.)

procured by the recipient as well as those directly procured by USAID for the recipient's use. The auditors must determine whether commodities exist or were used for their intended purposes in accordance with the terms of the agreements, and whether control procedures exist and have been placed in operation to adequately safeguard the commodities. As part of the procedures to determine if commodities were used for intended purposes, the auditors must perform end-use reviews for an appropriate sample of all commodities based on the control risk assessment (see section IV.D. “Internal Controls of this Statement of Work”). End-use reviews would normally include site visits to verify that commodities exist or were used for their intended purposes in accordance with the terms of the agreements. When conducting end-use reviews, the auditors must ensure that commodities are marked in accordance with grant or contract requirements. The cost of all commodities whose existence or proper use in accordance with the terms of the agreements cannot be verified and must be questioned in the fund accountability statement.

(The auditor should determine the cost of commodities based on supporting documentation available from the recipient or USAID, as appropriate).

11. Review technical assistance and services procured by the recipient. The auditors must determine whether technical assistance and services were used for their intended purposes in accordance with the terms of the agreements. The cost of technical assistance and services not properly used in accordance with the terms of the agreements must be questioned in the fund accountability statement.

If the recipient contracted the technical assistance and services through a U.S. contractor, the auditors are still responsible for determining whether technical assistance and services were used for their intended purposes in accordance with the terms of the agreements. However, the auditors are not responsible for performing additional audit steps for the costs incurred under the technical assistance and services agreements, if either USAID or a cognizant U.S.

Government agency is responsible for contracting for audits of these costs.

12.For final closeout audits, review unliquidated advances to the recipient and pending reimbursements by USAID. Ensure that the recipient has returned any excess cash to USAID.

Also, ensure that all assets (inventories, fixed assets, commodities, etc.) procured with program funds were disposed of in accordance with the terms of the agreements. The auditors must determine whether an annex to the fund accountability statement showing the balances and details of final inventories of nonexpendable property acquired under the agreements is presented accurately in all material respects in relation to the financial statements. This inventory must indicate which items were titled to the U.S. Government and which were titled to other entities.

These closeout audit procedures must be performed for any award that expires during the period audited.

The fund accountability statement must separately disclose the financial information (revenues, costs, commodities and technical assistance) for each agreement, and must identify the USAID Operating Unit that provided funding for each agreement. Questioned costs and internal control and compliance findings of any audits of sub recipients must be reported in the recipient’s financial audit using the same treatment and procedures as the recipient’s own questioned costs and findings.

The auditors must generally express a single opinion on the fund accountability statement that includes more than one agreement with USAID. Auditors must not express separate opinions on fund accountability statements of each agreement or program unless specifically requested to do so by the USAID Operating Unit.

C. Cost-Sharing/Matching Contribution Schedule USAID awards may require contributions by the recipient. USAID and recipient awards may establish a life-of-project budget or an annual budget for the cost-sharing/matching contributions.

In either case, the review consists principally of inquiries of recipient personnel and analytical procedures applied to financial data supporting the cost-sharing/matching contribution table.

For an agreement with a life-of-project budget for cost-sharing/matching contributions, it is not possible to determine whether the contributions have been made as required until the agreement ends. Nonetheless, USAID and the recipient need reliable information to monitor actual cost-sharing/matching contributions throughout the life of the agreement.

The auditors will review the cost-sharing/matching contributions schedule to determine if the schedule is fairly presented in accordance with the basis of accounting used by the recipient to prepare the schedule. The auditors must question all cost-sharing/matching contributions that are either ineligible or unsupported costs. An ineligible cost is unreasonable, prohibited by the agreements or applicable laws and regulations, or not program related. An unsupported cost lacks adequate documentation or does not have required prior approvals or authorizations. All questioned costs must be briefly described in the notes to the cost sharing/matching contributions.

In addition, material questioned costs must be included as findings in the report on compliance.

Notes to the cost-sharing/matching contributions schedule must be cross-referenced to the corresponding findings in the report on compliance. Also, significant deficiencies in internal control related to cost-sharing/matching contributions must be set forth as findings in the report on internal control. In addition, for closeout audits, the auditors will review the cost-sharing/matching contributions schedule to determine if the recipients provided such contributions in accordance with the terms of the agreement. If actual contributions were less than budgeted contributions, the shortfall will be identified in the appropriate column of the cost sharing/matching contributions schedule.

D. Internal Controls The auditors must review and evaluate the recipient's internal controls related to USAID programs 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 auditor's understanding of the internal controls must be documented in the audit documentation files.

Auditors must prepare the report required by the Guide, identifying any significant deficiencies or material weaknesses in the design or operation of internal control. A material weakness is a deficiency, or combination of deficiencies, in internal controls, such hat there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness but that is important enough to merit attention by those charged with governance. Any significant deficiencies or material weaknesses must be set forth in the report as “findings”. Any other matters related to internal controls – such as suggestions for improving operational or administrative efficiency, effectiveness, or control deficiencies that are not significant 30 deficiencies or material weaknesses

– may be reported in a separate management letter to the recipient and referred to in the report on internal control. A copy of the management letter should be provided to the USAID Operating Unit along with the audit report.

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:

1. Obtain an understanding of the design of the internal control related to USAID programs and determine whether they have been placed in operation.

2. Assess inherent risk, control risk, and determine the detection risk. Inherent risk is the susceptibility of an assertion, such as an account balance, to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there are no related controls. Control risk is the risk that a material misstatement (either individually or when aggregated with other misstatements) could occur in a relevant assertion and will not be prevented or detected on a timely basis by the entity's internal controls. 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.

3. Summarize the risk assessments for each assertion in the audit documentation file. The risk assessments must 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 audit documentation files must 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, extent, and timing of the tests performed based on the combined risk. These summary audit documentation files must be cross-indexed to the supporting audit documentation files 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 audit documentation files.

4. Evaluate the control environment, the adequacy of the accounting systems, and control procedures. Emphasis must be placed on 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 evaluation must include, but not be limited to, the control systems for:

a. Ensuring that charges to the program are proper and supported;

b. Managing cash on hand and in bank accounts;

c. Procuring goods and services;

d. Managing inventory and receiving functions;

e. Managing personnel functions such as timekeeping, salaries, and benefits;

f. Managing and disposing of commodities (such as vehicles, equipment, and tools, as well as other commodities) purchased either by the program or directly by USAID; and

g. 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 must be contained in the audit documentation section described in section IV.E. of this Statement of Work and presented in the compliance report.

5. Evaluate internal control established to ensure compliance with cost sharing/matching contribution requirements, if applicable, including both provision and management of the contributions.

6. 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 auditor uses in analytical procedures.

E. 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 USAID programs, the auditors must follow the reporting standards contained in GAGAS for reporting on compliance which incorporate the AICPA Professional Standards. The auditor's report on compliance must set forth as findings all material instances of noncompliance, defined as instances that could have a direct and material effect on the fund accountability statement, and/or the financial statements, as applicable. Nonmaterial instances of noncompliance must be included in a separate management letter to the recipient and referred to in the report on compliance. A copy of the management letter should be provided to the cognizant USAID Operating Unit along with the audit report.

The auditor's report must include relevant information about identified or suspected fraud based on sufficient, appropriate evidence obtained that a fraud or illegal act either has occurred or is likely to have occurred. In reporting material fraud, illegal acts, and abuse or other noncompliance, the auditors must place their findings in proper perspective. In presenting material irregularities, illegal acts, or other noncompliance, auditors must follow the reporting standards contained in GAGAS. If the auditors conclude that sufficient evidence of any known or likely fraud or illegal acts exists, regardless of whether material to the financial statements, they must contact the USAID cognizant

Operating Unit or OIG 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. The auditors must:

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;

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; and

d. Prepare a summary audit documentation file that adequately identifies each of the specific compliance requirements included in the review, the results of the inherent, control and (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 document should be cross-indexed to detail audit documentation that support the facts and conclusions contained in the summary document.

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 auditor must identify these costs as questioned in the fund accountability statement.

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

5. Determine whether commodities, whether directly procured by the recipient or directly procured by USAID for the recipient’s use, exist or were used for their intended purposes in accordance with the agreements. Ensure that commodities are marked in accordance with grant or contract requirements. If not, the cost of such commodities must be questioned.

6. Determine whether any technical assistance and services, whether procured by the recipient or directly procured by USAID for the recipient’s use, were used for their intended purposes in accordance with the agreements. If not, the cost of such technical assistance and services must be questioned.

7. Determine if the amount of cost-sharing/matching funds was calculated and accounted for as required by the agreements or applicable cost principles.

8. Determine if the cost-sharing/matching funds were provided according to the terms of the agreements and quantify any shortfalls.

9. Determine whether those who received services and benefits were eligible to receive them.

10. Determine whether the recipient's financial reports (including those on the status of cost-sharing contributions) and claims for advances and reimbursement contain information that is supported by the books and records.

11. Determine whether the recipient held advances of USAID funds in interest-bearing accounts, and whether the recipient remitted to USAID any interest earned on those advances, with the exception of up to $500 a year that the recipient may retain for administrative expenses. If the recipient was required to place USAID funds in an interest-bearing bank account but did not, then the auditor should determine the amount of interest that was foregone by the recipient, and this amount should be classified as ineligible costs.

F. Follow-Up on Prior Audit Recommendations If applicable, the auditors must review the status of actions taken on findings and recommendations reported in prior audits of USAID-funded programs. Auditors should evaluate whether the audited entity has taken appropriate corrective action and prepare a Summary Schedule of Prior Audit Findings (SSPAF) to address findings and recommendations from previous engagements that could have a material effect on the financial statements as per 2 CFR 200.511.

When planning the audit, auditors should ask management of the audited entity to identify previous audits, attestation engagements, financial reviews, and other studies that directly relate to the objectives of the audit, including whether related recommendations have been implemented.

Auditors should use this information in assessing risk and determining the nature, timing, and extent of current audit work, including determining the extent to which testing the implementation of the corrective actions is applicable to the current audit objectives. 34

The auditors must describe the scope of their work on prior audit recommendations in the summary section of the audit report. The auditors should refer to the most recent recipient audit report for the same award (for a follow-up audit) or other USAID awards (for an initial audit). When corrective action has not been taken and the deficiency remains unresolved for the current audit period, the auditors need to briefly describe the prior finding and status and show the page reference to where it is included in the current report. If there were no prior findings and recommendations, the auditors must include a note to that effect in this section of the audit report.

G. Indirect Cost Rates

The auditors must determine the actual indirect cost rates for the year if the recipient has used provisional rates to charge indirect costs to USAID. The audit of the indirect cost rates must include tests to determine whether the:

1. Distribution or allocation base includes all costs that benefited from indirect activities,

2. Distribution or allocation base is in compliance with the governing USAID Negotiated Indirect Cost Rate Agreement (NICRA), if applicable,

3. Indirect cost pool includes only costs authorized by the USAID agreements and applicable cost principles,

4. Indirect cost rates obtained by dividing the indirect cost pool by the base are accurately calculated, or

5. Costs included in this calculation reconcile with the total expenses shown in the recipient’s audited general purpose financial statements.

The results of the audit of the indirect cost rate must be presented in a schedule of computation of indirect cost rate. This schedule should contain: a listing of costs included in each indirect cost pool, a list of cost exclusions based on cost principles, the distribution base, and the calculation and the resultant indirect cost rate calculation. The costs in the schedule should reconcile with the total expenses shown in the recipient’s general purpose financial statement as per guidance from 2

CFR 200.

H. General Purpose Financial Statements Where indirect costs are authorized, an audit of the general purpose financial statements is needed to ensure sound financial management and provide reasonable assurance that all costs have been correctly included in the indirect cost rate calculation. Auditors should examine the recipient’s general purpose income statement on an organization-wide basis, balance sheet, and if applicable, the statement of cash flows. The objective of this audit is to express an opinion on whether those statements are presented fairly in all material respects in accordance with generally accepted accounting principles.

I. Other Audit Responsibilities

The auditors must perform the following steps:

1. Hold entrance and exit conferences with the recipient. The cognizant USAID Operating Unit must be notified of these conferences in order that USAID representatives may attend, if deemed necessary.

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 whether the auditors plan to provide opinions on compliance with laws and regulations and internal control over financial reporting. This communication should be in the form of an engagement letter.

3. Institute quality control procedures to ensure that sufficient appropriate evidence is obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the agreement (s) 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 audit documentation 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 audit documentation.

4. The auditor must ascertain, before preparing its proposal for the audit engagement (or if this is not possible, at the earliest opportunity during the engagement itself), whether the recipient ensured that audits of its sub recipients were performed to ensure accountability for USAID funds passed through to sub recipients. If sub recipient audit requirements were not met, the auditors should immediately notify the cognizant USAID Operating Unit and consider whether they can audit the sub recipient costs themselves. If, after consultation with the cognizant USAID Operating Unit, the auditors conclude that a restriction on the scope of the audit exists and the restriction cannot be removed, then the auditors should consider modifying their opinion and any costs that have not been audited as required must be questioned as unsupported costs.

5. Obtain a management representation letter. See Appendix 4 of the Guide for an illustrative management representation letter.

J. AUDIT REPORTS

The Auditor should submit to the USAID Mission RFMO Controller a portable document format (PDF) copy of the audit report in English, and a PDF copy of the report in the recipient country’s official language, if specifically requested in the task order by the Mission. The USAID mission will forward the report to RIG/Pretoria for processing. The format and content of the audit reports should closely follow the illustrative reports in Chapter 7 of the Guidelines. The audit report must specify the correct award number(s) of each award covered by the audit.

The report must contain: A. A title page, a table of contents, transmittal letter, and summary which includes:

(1) a background section with a general description of the USAID programs audited, the period covered, the program objectives, a clear identification of all entities mentioned in the report, a section on the follow-up of prior audit recommendations, and whether cost sharing/counterpart contributions were required during the period audited, and whether the recipient has a USAID9 “Closeout” audits must specify that are closeout audits on the title page. A closeout audit is an audit for an award that expired during the period audited.

Authorized provisional indirect cost rate;

(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, compliance with agreement terms and applicable laws and regulations, indirect cost rates, status of prior audit recommendations, and, if applicable, the recipient's general purpose financial statements on an organization-wide basis;

(4) a brief summary of the results of the review of cost sharing/counterpart contributions; and

(5) a brief summary of the recipient's management comments regarding their views on the audit and review results and findings. B. The auditor's report on the fund accountability statement, identifying any material questioned costs not fully supported with adequate records or not eligible under the terms of the agreement.

The report must be in conformance with the standards for reporting in Chapter 5 of 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 directly procured by USAID 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 or specific alternative standards if applicable (see paragraph 2.9.d of the Guidelines). Any deviations from these standards, such as noncompliance with the requirements for continuing professional education and external quality control reviews, must be disclosed (See Example 7.1.A of the Guidelines).

2. The fund accountability statement identifying the program revenues, costs incurred, and commodities and technical assistance directly procured by USAID 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 directly procured by USAID whose existence or proper use in accordance with agreements could not be verified. All material 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 both material and immaterial questioned costs and must be cross-referenced to any corresponding findings in the report on compliance (see Example 6.1 of the Guidelines). All questioned costs in the notes to the fund accountability statement must be stated in U.S. dollars. The U.S. dollar equivalent should be calculated at the exchange rate applicable at the time the local currency was disbursed to the recipient by USAID.

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.

K. A report on the auditor's review of the schedule of cost sharing/counterpart contributions.

The report must follow the guidance in the AICPA Statements on Standards for Attestation Engagements, Attestation Standard (AT) for review reports AT100.64.

The report must include: 1. A review report on the cost sharing/counterpart contribution schedule.

This review report must state that the review was conducted in accordance with AICPA standards.

It should also explain that a review is more limited in scope than an examination performed in accordance with AICPA standards, and state that an opinion on the schedule is not expressed.

The report must identify questioned costs related to the provision of, and accounting for, cost sharing/counterpart contribution fund, with a reference to the corresponding finding in the report on compliance if the questioned costs are material. The report must provide negative assurance with regard to the provision of, and accounting for, cost sharing/counterpart contributions for items not tested (see Examples 7.6.A through 7.6.D of the Guidelines).

2. The cost sharing/counterpart contributions schedule identifying questioned costs (see Examples 6.2.A and 6.2.B or the Guidelines). Cost-sharing contributions that are unreasonable, prohibited by the agreements or applicable laws and regulations, or not program related are ineligible. Cost sharing/counterpart contributions that lack adequate documentation or do not have required prior approvals or authorizations are unsupported.

3. The cost sharing/counterpart contributions schedule identifying the budgeted amounts required by the agreements,10 the amounts actually provided, and any cost-sharing/counterpart contributions shortfalls (see Example 6.2.B of the Guidelines).

4. Notes to the cost sharing/counterpart contributions schedule that briefly explain the basis for questioned costs and shortfalls, if applicable. The notes must be cross-referenced to the corresponding findings, if the questioned costs are material, in the report on compliance.

L. The auditor's report on internal control.

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 and in assessing the control risk, and;

(2) the significant deficiencies including the identification of material weaknesses in the recipient's internal control. Significant deficiencies must be described in a separate section (see paragraphs

5.2 through 5.4 of the Guidelines). 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. Any other matters related to internal control – such as suggestions for improving operational or administrative efficiency or internal control, or control deficiencies that are not significant deficiencies or material weaknesses – may be communicated through a separate management letter that should be referred to in the report on internal control and sent with the audit report (see Examples 7.2.A and 7.2.B of the Guidelines).

M. The auditor's report on the recipient's compliance with agreement terms and applicable laws and regulations related to USAID-funded programs.

The report must follow the guidance in SAS No. 117. Material instances of noncompliance must be described in a separate section (see paragraphs 5.2 through 5.4 of the Guidelines). Nonmaterial instances of noncompliance must be communicated to the recipient in a separate management letter that should be sent with the audit report (see Examples 7.3.A and 7.3.B of the Guidelines).

All material questioned costs resulting from instances of noncompliance must be included as findings in the report on compliance. Also, the notes to the fund accountability statement that describe both material 10 This step is required for audits of agreements that present cost sharing/counterpart contribution budgets on an annual basis and for closeout audits of awards that present cost sharing/counterpart contribution budgets on a life-of-project basis. See paragraphs

4.12 and 4.13 of the Guidelines 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 a fraud or illegal act either has occurred or is likely to have occurred. This report must include an identification of all questioned costs, if any, as a result of fraud or illegal acts, without regard to whether the conditions giving rise to the questioned costs have been corrected and whether the recipient does or does not agree with the findings and questioned costs. Abuse that is material, either quantitatively or qualitatively must also be reported.11 2. 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 extent seriousness 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. dollar value, 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 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 the cognizant USAID Mission and RIG/Pretoria 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. F. The schedule of computation of indirect cost rate (see Example 6.3 of the Guidelines) and the auditor's report on the schedule of computation of indirect cost rate. This should be a separate report prepared in accordance with guidance set forth in SAS No. 29. (AU551), (see Example 7.4 of the Guidelines).

N. The recipient's general purpose financial statements on an organization-wide basis and the auditor's report on them. These statements and the report on them only apply to recipients with an indirect cost rate that needs to be audited, unless the mission specifically requests that the statements be audited. The findings contained in the reports on internal control and compliance related to USAID funded programs must include a description of the condition (what is) and the 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. In addition, the findings must contain an 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 11 Abuse involves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances. Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate. Abuse does not necessarily involve fraud, violation of laws, regulations, or provisions of a contract or grant. If during the course of the audit, auditors become aware of abuse that could be quantitatively or qualitatively material to the financial statements, auditors should apply on the financial statements or other financial data significant to the audit objectives. After performing additional work, auditors may discover that the abuse represents potential fraud or illegal acts. Because the determination of abuse is subjective, auditors are not required to provide reasonable assurance of detecting abuse.

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 cause. This will help management take timely and proper corrective action. Firms are expected to exercise independent judgment throughout the audit engagement, including in reporting on questioned costs. Indications of a lack of independence may result in removal of firms from the list of firms eligible to conduct audits of USAID funds. Findings that involve monetary effect must: 1. Be quantified and included as questioned costs in the fund accountability statement, the Auditor’s Report on Compliance, and cost sharing/counterpart contributions schedule (cross-referenced). 2. Be reported without regard to whether the conditions giving rise to them were corrected. 3.