Attachment No. 1 - Revised SOW.pdf

STANDARD STATEMENT OF WORK FOR FINANCIAL AUDITS OF COSTS INCURRED IN AFGHANISTAN BY

U.S. ORGANIZATIONS CONTRACTED BY

THE U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

AUDIT OF COSTS INCURRED IN AFGHANISTAN

BY CONTRACTOR UNDER THE TRADE AND ACCESSION FACILITATION FOR AFGHANISTAN (TAFA), FOR

THE PERIOD FROM NOVEMBER 18, 2009 THROUGH DECEMBER 31, 2011.

I. BACKGROUND

On November 18, 2009 the U.S. Agency for International Development (USAID), mission to Afghanistan approved the Trade and Accession Facilitation for Afghanistan (TAFA) project under Cost-Plus Fixed Fee contract to Contractor. The total estimated cost plus fixed fee for the base period and four optional years is $63,962,156, and the purpose is to improve the trade environment for Afghanistan, thereby fostering increased investment, exports, and market-based employment opportunities.

Recognizing trade’s essential role for stimulating investment and creating critical employment opportunities, USAID/Afghanistan approved the concept paper for Trade and Accession Facilitation for Afghanistan (TAFA) project in November 2007. The TAFA Project was to build on USAID’s substantial investments to date in the areas of trade policy and customs reform and modernization.

The project was to result in the Afghan Government’s improved capacity to negotiate and implement regional and international trade agreements and progress toward World Trade Organization (WTO) accession; increased cooperation on trade and customs issues within the region; increased transparency and reduced obstacles to trade, including areas such as customs, transport/transit, and border crossing operations; increased customs revenue collection returning to the Central Treasury; increased investment, exports, and market –based opportunities;

improved ranking on the World Bank’s trading across borders indicator as part of the annual Doing Business survey;

and increased public understanding of and support for a liberal trade regime. The project was to also take advantage of opportunities for civ-mil cooperation, particularly at border crossing points and leverage military resources, particularly for operating in less secure environment.

The proposed TAFA project was to contribute to the Mission’s Strategic Objective (SO) 05, for “A Thriving Licit Economy led by the private sector,” and specifically support IR 5.4 Enhanced Participation in Global Trade and Investment; as well as F Framework Program Area 4.2 Trade and Investment, program element 4.2.1 Trade and Investment enabling Environment, and program sub-elements 4.2.1.2 Trade Liberalization and Agreements, 4.2.1.3 Trade Facilitation.

Period of Performance of TAFA Project: The contract effective date is November 18, 2009 and ends on November 17, 2012.

The cumulative obligations and expenditures for the agreement as of December 31, 2011, 2011 are detailed below:

Cumulative Obligations: $ 54,078,347 Cumulative Disbursements: $ 37,241,544 Balance (undisbursed amount): $16,836,803

The fiscal year end is December 31.

This program was managed through USAID/Afghanistan’s Office of Economic Growth (OEG).

The contractor is required to track costs both by CLINS and by yearly expenditures.

II. TITLE

Audit the Costs Incurred in Afghanistan (Costs incurred in Afghanistan can be defined as costs that were delivered or incurred locally by the implementing partner/sub-recipient even if paid in or from the U.S.) by the Contractor. under the TAFA project, for the period from November 18, 2009 through December 31, 2011.

III. OBJECTIVES

The objective of this engagement is to conduct a financial audit of the USAID resources managed by the recipient under Expansion of TAFA in Afghanistan project from November 18, 2009 to December 31, 2011 in accordance with U.S. Government Auditing Standards issued by the U.S. Government Accountability Office (July 2007 revision) and the USAID Office of Inspector General Guidelines for Financial Audits Contracted by Foreign Recipients (Guidelines) dated February 20091. The audit will cover all costs incurred in Afghanistan during this period. Costs incurred in Afghanistan can be defined as costs that were delivered or incurred locally by the implementing partner/sub-recipient even if paid in or from the U.S. Costs incurred or delivered in Afghanistan include, but are not limited to, the following: local goods and services, sub-awards, labor (U.S., third country, and local staff directly charged to the project), travel, office space, and lodging. An example of what is not included is a negotiated indirect cost rate agreement at the prime implementing partner’s headquarters.

A schedule of costs incurred in Afghanistan is the basic financial statement to be audited that presents the recipients’ costs incurred in Afghanistan by budget line item. All currency amounts must be stated in U.S. dollars. The auditors should indicate the exchange rate(s) used in the notes to the schedule of costs incurred in Afghanistan.

A. Audit of USAID Funds

The specific objectives of the audit of costs incurred in Afghanistan are to:

Express an opinion on whether the schedule of costs incurred in Afghanistan under the USAID-funded program presents fairly, in all material respects, the costs incurred in Afghanistan, and commodities directly procured by USAID 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 the recipient’s internal control related to the USAID-funded program, assess control risk, and identify significant deficiencies including material weaknesses.

Perform tests to determine whether the recipient complied, in all material respects, with agreement terms and applicable laws and regulations related to the USAID-funded program. All material instances of noncompliance and all illegal acts that have occurred or are likely to have occurred must be identified.

Determine if the recipient has taken adequate corrective action on prior audit report recommendations or other assessment recommendations.

Auditors must design audit steps and procedures in accordance with U.S. Government Auditing Standards, Chapter 4, to provide reasonable assurance of detecting situations or transactions in which fraud or illegal acts have occurred or are likely to have occurred. If such evidence exists, the auditors must contact the USAID Office of Inspector General (OIG) in Afghanistan and should 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.

IV. AUDIT SCOPE

Although the Guidelines were issued for the purpose of financial audits of foreign recipients, the procedures and examples illustrated in the document are applicable to this audit.

The auditor should use the following steps as the basis for preparing the audit program. They are not considered all-inclusive or restrictive in nature and do not relieve the auditor from exercising due professional care and judgment.

The steps should 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/Afghanistan and OIG/Afghanistan office.

A. Pre-Audit Steps

Following is a list of documents that may be applicable to different USAID programs. The auditor should review documents that are applicable to the program(s) under audit:

1. The agreements 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 and written procedures approved by USAID.

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

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

7. All program financial and progress reports; and 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.

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

B. Schedule of Costs Incurred in Afghanistan

The auditor must examine the schedule of costs incurred in Afghanistan by budgeted line item under the USAID program including the budgeted amounts by category and major items; local costs reported by the recipient as incurred in Afghanistan during that period; and the commodities directly procured by USAID for the recipient's use.

All costs incurred in Afghanistan under the USAID program must be included in the schedule of costs incurred in Afghanistan, and the schedule should identify the USAID program(s) or agreement(s) that the costs relate to.

The opinion on the schedule of costs incurred in Afghanistan must comply with the Statement on Auditing Standard SAS No. 62 (AU623). The schedule of costs incurred in Afghanistan must separately identify those 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 schedule of costs incurred in Afghanistan as not reimbursed by USAID.

Questioned costs must be presented in two separate categories. Ineligible 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 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 schedule of costs incurred in Afghanistan must briefly describe both material and immaterial questioned costs and must be cross-referenced to any 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, USAID to the program and general ledgers.

3. Review procedures used to control funds, including funds channeled to intermediate 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 recipient from USAID was appropriately recorded in the recipient's accounting records and that those records were periodically reconciled with information provided by USAID.

5. 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.

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 direct salary charges to determine whether salary rates were 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 was charged to the program and whether it is allowable under the terms of the agreements. Determine whether allowances and fringe benefits received by employees were in accordance with the agreements and applicable laws and regulations. Determine if there were any reclassifications or reorganizations of employees from indirect to direct charges. The auditors must question unallowable salary charges.

8. 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.

9. Review commodities (such as supplies, materials, vehicles, equipment, food products, tools, etc.) whether procured by the recipient or directly procured by USAID for the recipient's use. The auditors should 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 should perform end-use reviews for an appropriate sample of all commodities based on the control risk assessment. End-use reviews may include site visits to verify that commodities exist or were used for their intended purposes in accordance with the terms of the agreements. The cost of all commodities whose existence or proper use in accordance with the agreements cannot be verified must be questioned. (The auditor should determine the cost of commodities based on supporting documentation available from the recipient or USAID, as appropriate.)

10. Review technical assistance and services awarded by the recipient (includes contracts, grants, and cooperative agreements). The auditors should 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 terms of the agreements must be questioned.

a. If technical assistance and services were obtained from a sub-award using a cost-reimbursement-type contract, the auditors must perform additional audit steps on those costs to verify that they are reasonable, allowable, and allocable, unless the recipient has separately contracted for an audit of the costs. All of the audit steps in paragraphs 1 through 12 in this section should be performed to provide a basis for determining if costs incurred are allowable, allocable, reasonable, and supported under the agreement terms.

b. If the technical assistance and services were obtained from a sub-award that has been or will be separately audited, 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.

11. Perform tests to determine if any false claims or statements had been made. One method for detection of false statements is through the examination of source documents. False claims include falsified contractor qualifications, false certifications or assurances, false records or invoices, invoices from nonexistent companies, claims made in duplicate or altered invoices, billing for fictitious employees, billing for goods and services not provided, fictitious transactions, falsified documents, and inflated costs or substitution of cheaper goods. Red flags include the following:

Failure to produce documents in a timely manner.

Failure to respond to inquiries in a timely manner.

Inadequacies in reporting requirements.

Failure to have an adequate information gathering and retrieval system.

Altered or missing documents.

Photocopied or duplicate documents.

Failure to have adequate supporting documentation for reports and summary data.

If red flags are identified, the auditor should select a larger sample of source documents for examination. As part of this examination, review should be made back to the source of the document (for example, actual verification of source documents with the vendor).

Specific audit tests should be designed and implemented to validate the existence and authenticity of a sample of employees and vendors.

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.

C. Internal Controls

The auditors must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. In obtaining this understanding, the auditor must understand the design of the internal control related to USAID program and determine whether they 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 must be described in the audit documentation.

The auditors must prepare the report required by the Guidelines, 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 control, such that 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 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" (see paragraph 5.1.d of the Guidelines). 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 reported in a separate management letter to the recipient and referred to in the report on internal control.

The major internal control components to be studied and evaluated include, but are not limited to, the controls related to each expense account on the schedule of costs incurred in Afghanistan. The auditors must:

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

2. Assess inherent risk and control risk, and determine 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 there are no related controls. Control risk is the risk that a misstatement that could occur in a relevant assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected on a timely basis by the entity's internal control. 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 a single document included in the audit documentation. The risk assessments should consider the following broad categories under which each assertion should be classified: (a) classes of transactions and events for the period under audit (occurrence, completeness, accuracy, cutoff, and classification), (b) account balances at the period end (existence, rights, obligations, completeness, valuation, and allocation), and (c) presentation and disclosure (occurrence, rights, obligations, completeness, classification, understandability, accuracy, and valuation).

At a minimum, the audit documentation 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, extent, and timing of the tests performed based on the combined risk.

Summary audit documentation should be cross-indexed to the supporting audit documentation that contains 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 described in the audit documentation.

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 describe in the audit documentation 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.

4. 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 schedule of costs incurred in Afghanistan. This should 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 supplies, materials, vehicles, equipment, food products, tools, etc.) purchased either by the recipient or directly by USAID;

g. ensuring compliance with agreement terms and applicable laws and regulations that collectively have a material impact on the schedule of costs incurred in Afghanistan. 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. Include in the study and evaluation other policies and procedures that may be relevant if they pertain to data the auditor uses 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.

In fulfilling the audit requirement relating to an understanding of the 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 the USAID program, the auditors must, at a minimum, follow guidance contained in AICPA SAS No. 117 (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, defined as instances that could have a direct and material effect on the schedule of costs incurred in Afghanistan. Nonmaterial instances of noncompliance should be included in a separate management letter to the recipient 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 should 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. Chapter 4 of U.S. Government Auditing Standards discusses factors that may influence auditors’ materiality judgments. If the auditor concludes that sufficient evidence of fraud or illegal acts exists, they must contact the OIG/Afghanistan office 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 schedule of costs incurred in Afghanistan. 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 schedule of costs incurred in Afghanistan;

b. assess the inherent and control risk that material noncompliance could occur for each of the compliance requirements listed in 1.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 schedule of costs incurred in Afghanistan. This must be based on the risk assessment in 1.b. above.

d. prepare a single summary in the audit documentation that 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 detailed audit documentation that adequately supports 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 question these costs.

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 terms of the agreements. If not, the cost of such commodities must be questioned.

6. Determine whether any technical assistance and services procured by the recipient 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 whether those who received services and benefits were eligible to receive them.

8. Determine whether the recipient's financial reports and claims for advances and reimbursement contain information that is supported by the books and records.

9. 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 $250 a year that the recipient may retain for administrative expenses. If the recipient was required to place USAID advances 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.

E. Follow-Up on Prior Audit Recommendations

The auditors must review the status of actions taken on findings and recommendations reported in prior audits of the USAID-funded program. Paragraph 4.09 of the U.S. Government Auditing Standards states: "Auditors should evaluate whether the audited entity has taken appropriate corrective action to address findings and recommendations from previous engagements that could have a material effect on the financial statements. 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.”

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 contracted 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.

F. Other Audit Responsibilities

The auditors must perform the following steps:

1. Hold entrance and exit conferences with the recipient. USAID/Afghanistan and OIG/Afghanistan shall 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 that the auditors do not 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 financial statements under audit. While auditors may use their standard procedures for ensuring quality control, those procedures must, at a minimum, ensure that:

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;

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 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 (see paragraph 1.6 of the Guidelines). If sub-recipient audit requirements were not met, the auditors should immediately notify OIG/Afghanistan and USAID/Afghanistan and consider whether they can audit the sub-recipient costs themselves. If, after consultation with OIG/Afghanistan and USAID/Afghanistan 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 in accordance with AICPA SAS No. 85 (AU333) signed by the recipient's management. See Example 4.1 of the Guidelines for an illustrative management representation letter.

V. AUDIT REPORTS

The recipient must submit to OIG/Afghanistan and USAID/Afghanistan a portable document format (PDF) copy of the audit report in English (and a PDF copy of the report in the country’s official language, if considered appropriate). .

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,2 table of contents, transmittal letter, and summary which includes: (1) a background section with a general description of the USAID program 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 the recipient has a USAID-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 schedule of costs incurred in Afghanistan, questionable costs, internal control, compliance with agreement terms and applicable laws and regulations, status of prior audit recommendations; and (4) a brief summary of the recipient's management comments regarding its views on the audit and review results and findings.

B. The auditor's report on the schedule of costs incurred in Afghanistan, 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 the U.S. Government Auditing Standards and must include:

1. The auditor's opinion on whether the schedule of costs incurred in Afghanistan presents fairly, in all material respects, costs incurred in Afghanistan, 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 schedule of costs incurred in Afghanistan identifying the costs incurred in Afghanistan, and commodities directly procured by USAID for the fiscal year. The schedule 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 schedule of costs incurred in Afghanistan 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 schedule of costs incurred in Afghanistan must be stated in U.S.

dollars. The U.S. dollar equivalent must be calculated at the exchange rate applicable at the time the local currency was disbursed to the recipient by USAID.

3. Notes to the schedule of costs incurred in Afghanistan, 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 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, Closeout audits must specify they are closeout audits on the title page. A closeout audit is an audit for an award that expired during the period audited.

and; (2) the significant deficiencies, including the identification of material weaknesses in the recipient's internal controls. 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 controls and sent with the audit report (see Examples 7.2.A and 7.2.B of the Guidelines).

D. The auditor's report on the recipient's compliance with agreement terms and applicable laws and regulations related to USAID-funded program. The report must follow the guidance in SAS No. 74.

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 should 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 schedule of costs incurred in Afghanistan that describe both material and immaterial questioned costs must be cross-referenced to any corresponding findings in the report on compliance.

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.3

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 and seriousness of these conditions, the instances identified must 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 USAID OIG/Afghanistan Office 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 schedule of computation of any local indirect cost rates (see Example 6.3 of the Guidelines) and the auditor's report on the schedule of computation of local indirect cost rates. 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).

F. The findings contained in the reports on internal control and compliance related to USAID-funded program 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. In addition, the findings must contain a recommendation that corrects the

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 audit procedures specifically directed to ascertain the potential effect 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.

cause and the condition, as applicable. It is recognized that material internal control weaknesses and noncompliance found by the auditors may not always have all of these elements fully developed, given the scope and objectives 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 and take timely and proper corrective action.

G. 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 which involve monetary effect must:

1. Be quantified and included as questioned costs in the schedule of costs incurred in Afghanistan, the

Auditor’s Report on Compliance.

2. Be reported without regard to whether the conditions giving rise to them were corrected.

3. Be reported whether the recipient does or does not agree with the findings or questioned costs.

4. Contain enough relevant information to expedite the audit resolution process (e.g., number of items tested, size of the universe, error rate, corresponding U.S. dollar amounts, etc.).

The reports must also contain, after each recommendation, pertinent views of responsible recipient officials concerning the auditor's findings and actions taken by the recipient to implement the recommendations. If possible, the auditor should obtain written comments. When the auditors disagree with management comments opposing the findings, conclusions or recommendations, they should explain their reasons following the comments. Conversely, the auditors should modify their report if they find the comments valid.

Any evidence of fraud, or illegal acts that have occurred or are likely to have occurred must be included in a separate written report if deemed necessary by OIG/Afghanistan. This report must include an identification of all questioned costs as a result of fraud or illegal acts, without regard to whether the conditions giving rise to the questioned costs have been corrected or whether the recipient does or does not agree with the findings and questioned costs.