April 2012
External Audit
Ex post review of the books of account, financial statements, records of
transactions & financial systems
Examines the adequacy of accounting systems & procedures, capacity
to maintain appropriate accounts & documentation of project/ grant
Underlying objectives
Provides credibility & assurance of accountability
Verifies compliance with financial matters in loan covenants
Identifies weaknesses in internal controls/ financial systems & makes
recommendations thereon
Due at IFAD normally six months after year end
Types of Audit
Financial Statements Audit
Auditor expresses his opinion on the financial
statements of the project
Mandatory in IFAD projects
Compliance Audit
Operational Audit
Auditor verifies compliance with internal rules,
regulations, procedures and processes laid down by
Thorough examination of the project’s management
techniques & performance. Study of all functional
areas, identifying implementation issues &
recommending remedial actions to improve
efficiency & effectiveness of operations
Audit Roles
Borrower/ grantee
External Auditor
• Prepares TOR, manages auditor
selection process (if relevant) and
appoints auditor
• Performs audit work including 3 audit
• Submits annual financial statements
• Indicates ineligible expenditures/
• Implements remedial action
• Provides management letter
• Provides no objection to TOR & appointment of auditor following assessment of
• Monitors timely submission and review of audit reports
• Follows up on remedial action
• Applies sanctions/ other remedies if relevant, including suspension of disbursements
and/or cancellation of financing balance
Audit Requirements per General Conditions
Section 9.03 (a) of the General Conditions requires annual audit of project
accounts with auditing standards acceptable to the fund
Section 9.03 (b) of the General Conditions requires the borrower/recipient
the submission of the audit report to IFAD within six months after FY end
Section 10.04 of the General Conditions requires the Borrower & the project
party to cooperate fully with auditors in case of audit initiated by the Fund
Details of the project audit cycle contained in “IFAD guidelines on project
Scope and Objectives of Audit
Auditors acceptable to the Fund must be appointed in a fair, timely and
transparent manner to conduct the audit of the project’s financial
management systems for the 1st year of the project & every year thereafter
(note: the obligation for the 1st year audit may be waived by the Fund if reasonable
(e.g. no disbursements, etc)
The audit should include the audit opinion on the financial statements,
compliance audit report on compliance with loan covenants and a
management letter. Operational audit may be insisted upon by the Fund
if it deems fit
Should be conducted according to acceptable auditing standards (usually
deemed to be International Standards on Auditing standards (ISA) or
INTOSAI standards or national standards, if acceptable), if not, extent of
deviation from there must be reported.
External Auditor – Who Performs?
Who performs?
Independent external professional
In certain countries, mandatory to be National Audit
Office (NAO)/ Supreme Audit Institution; if not, private
sector firm to be agreed with IFAD
External auditor outputs
Professional audit package contains opinions provided:
Project Financial statements
Use of Special designated account(s) in compliance with financing
Eligibility of expenditures included in WAs/ SOEs
Management letter on internal controls & systems
Reporting of ineligible expenditures
External Auditor – Basis of work
Basis of work
Auditing standards:
Provide guidance on the objectives and general principles governing an audit of
financial statements
Comprise a set of systematic guidelines used by auditors when conducting
audits, ensuring the accuracy, consistency & verifiability of auditors' actions &
Various Generally Accepted Auditing Standards (GAAS) frameworks exist
IFAD’s projects are generally required to use International Standards of
Auditing (ISA)/ International Organization of Supreme Audit Institutions
National standards may be used if agreed with IFAD
The auditing standards applied should be specified in the auditor’s
Financial Statement Audit verifies
 Whether the financial statements are prepared according to internationally
recognized accounting principles (IFRS/ IPSAS) or acceptable national
standards consistently over a reasonable period
 Whether expenditure is eligible per provisions of the financing agreement
 Whether the accounting & financial statements & records are accurate
 Whether individual expenses aggregating to the totals reflected in SoEs are
properly approved, classified, supported by documentary evidence &
are eligible under the financing agreement. If ineligible expenses are found,
the Fund may review the eligibility of the Borrower to use the SoE
mechanism: the Borrower may be asked to reimburse the Special account to
the extent of ineligible expenditure
Financial Statement Audit verifies
 Whether the Special/designated Account mechanism is operated
properly, the SA /DA is correctly reconciled, if the withdrawals from the SA /
DA are properly authorized
 Whether the year end financing balance is reconciled with IFAD’s
 Whether the project has adequate internal and accounting controls to
record & report financial transactions in a timely & accurate manner & to
safeguard project assets. Whether the internal audit system is
commensurate with the size & complexity of the project
 Whether the project assets physically exist are in good working order
& are held in the name of the project
 Any other matter which the Fund may specifically ask the auditors to
report on, whether included in the Financing Agreement or not
Audit Reports – Contents
The report should follow a set format:
 Paragraph 1: sets out audit work performed. Identifies
respective responsibilities of the auditor & auditee
 Paragraph 2: details the scope of audit work, provides a general description
of the nature of the work, examples of procedures performed, any limitations the audit
faced based on the nature of the work. This paragraph also states that the audit was
performed in accordance with the GAAS of reference
 Paragraph 3: states the auditor’s opinion on the financial statements,
i.e., whether free of material misstatement (i.e. important and significant errors), show
a true and fair view of the operating results, financial position & cash flows of the
auditee and whether they are in accordance with the stated accounting principles of
The auditor may also add additional information to the report if deemed
necessary without changing the overall opinion of the report
Audit Reports – Opinions
There are 4 different standard types:
1. Unqualified Opinion/“Clean” opinion report*
2. Qualified Opinion/“Except for” Opinion**
3. Adverse Opinion report***
4. Disclaimer of Opinion report***
In some cases the clean audit opinion issued is not entirely consistent with audit findings in
the financial data, management letter or IFAD’s findings in supervisory activities
Potentially not acceptable to IFAD – IFAD’s audit standards foresee that an unqualified
opinion should be received for all its projects, programmes & grants. A qualified opinion
may be accepted only if there is evidence of a time-bound workplan to implement changes
or if the qualification does not impinge on IFAD’s fiduciary responsibilities
*** Not acceptable to IFAD. Financial statements to be re-done and re-audited
Audit Reports – Opinions (1)
1. Unqualified Opinion/“Clean” opinion
This is regarded as the equivalent of a “clean bill of health” to a patient
1a. Unqualified Opinion/Emphasis on matter
This is not a qualification of the financial statements but it is meant to draw the attention of
the readers of the financial statements either on:
-An information relevant for the interpretation of the financial statements (such as an
uncertainty relating to the future outcome of exceptional litigation or regulatory action )
-An information not disclosed in the financial statements that is important to understand
the audit, the auditor’s responsibilities or the auditor’s report (such as a major catastrophe
that has had, or continues to have, a significant effect on the entity’s financial position)
Audit Reports – Opinions (2)
2. Qualified Opinion
There are 2 types of qualification:
•Single deviation from GAAP/ “Except for” – at least one area of the accounts does not conform to GAAP
but the rest of the financial statements are fairly presented, e.g. incorrect depreciation expense
•Limitation of scope - the auditor could not audit one or more areas of the financial statements. For
example, the auditor was not able to observe and test an entity’s inventories
Usually a qualified opinion indicates that the financial statements are fairly presented except for some
material but not pervasive error.
3. Adverse Opinion report
The financial statements do not conform to GAAP. It is the opposite of an unqualified opinion;
In this case the financial statements present both material and pervasive errors
4. Disclaimer of Opinion report
This Opinion is rare; issued when the auditor could not form an opinion, as he cannot
complete the audit work due to various reasons, such as significant scope limitations
Management Letter
Should accompany audit report
Should identify weaknesses, if any, of the internal controls
and recommend corrective action.
Management must reply in writing within 30 days
Management response should indicate
agreement/ disagreement with auditor & must
contain a time bound action plan to address the
Audit – Responsibilities of PMU
Prepare auditor’s TOR and obtain IFAD no-objection
Ensure mandatory data is included in financial statements
Submit the financial statements to IFAD 4 months after the end of the
IFAD will provide comments on missing/unclear items that can be
corrected by the PCU, rather than make it an issue of audit report review
If in doubt, ask IFAD!
Audit – Responsibilities of IFAD
Monitor timeliness of audit report submission
Check auditor’s compliance with TOR, including all 3 audit opinions &
management letter
If report is qualified, consider seriousness of qualifications, & if
immediate action is required
Suspension of disbursements may occur if:
Untimely submission of reports
(180 days from due date)
Non compliance with IFAD standards
(e.g. qualified accounts without satisfactory action plan)
Selection & Appointment of Auditors
Usually through a competitive process usually from 3-6 qualified firms
Should produce satisfactory references
Should deploy staff with adequate qualifications & experience
Should be able to able to undertake the assignment with complete
independence – no relationship with project party or other related party
Should be on the basis of technical and financial evaluation
Should have past experience & satisfactory performance in similar
Should give a declaration that the neither the firm nor the staff have any
conflict of interest in accepting the assignment
Should not be appointed for any other assignment – management
consultancy, internal auditor, accounting, consultancy, etc
Contents of Audit Engagement Letter
Description of the project, the finance and parties thereto
Description of financial statements and samples thereof
Stipulation regarding use of acceptable auditing standards
Availability of books, records, documents and personnel during audit
Tenure of the appointment - two or more fiscal years (subject to satisfactory
performance in previous year)
Follow up on prior year issues
Contents of audit report & specific opinions to be provided.
Deadline for submission of audit report
Deliverables, outputs and opinions
Submission of audit program, staffing plan & audit proposal
Submission of Management Letter
Responsibilities of the Auditor
Submit a proposal outlining audit methodology, staffing plan, audit
programme & audit fees
Express audit opinions as per ToR
Provide a Management Letter as per ToR
Provide an IFAD official language translation of the audit report in
case the report is in the local language
Follow up of audit recommendations
Follow up of audit recommendations is as important as conducting the
The Project Party should have a system for following up compliance
with audit recommendations in a timely manner
A Log of Audit Observations must be prepared
The log must record each audit observation & the validation by the
auditor that corrective action has been taken
Should be updated periodically and submitted to Supervision Missions
Follow up status must be reviewed by the Project Coordinator/ IFAD/
Internal Auditor/ External Auditor periodically
Status of audits
For each project, a status of audits must be prepared as per the following
Audit Report for the
Due Date
Submitted by
Auditors on
Submitted by
Should be updated regularly and submitted to Supervision Missions
Desk review of audit reports - 1
- Fulfilment by the auditor of all audit requirements specified in TORs
- Whether all financial reporting requirements have been met (including
SA reconciliation, use of SOE procedure, financial performance of
project, inventory of assets, accounting & audit standards used,
compliance with procurement procedures)
- Review of the adequacy of internal control mechanisms (accounting
system, segregation of duties, etc.)
- Qualifications or other significant points in auditor’s report
- Suggest an action plan to address main weaknesses identified in
internal control system
- Follow-up on actions noted in previous year’s Desk Reviews
Desk review of audit reports - 2
- Overall financial reporting & auditor’s performance are assessed – to
be used as one criteria for classification of project at risk (with direct
impact on disbursement, supervision intensity, upgrade design report
of project by ensuring audit weaknesses are addressed with pragmatic
- Current risk assessment methodology uses traffic light indicators (red,
yellow, green)
- Desk review findings, as per IFAD requirements, are used to report on
annual basis to Audit Committee, support regional divisions for
preparation of Annual Portfolio Performance Review, etc.
- Inform IFAD Investigation Office where irregularities such as fraud &
corruption are identified by auditors, or where desk review raises
serious concerns in relation to possible fraud & corruption
Audit Review Form/Checklist
ARTS is an aIterative tool, prepared by IFAD for implementation support
Increased importance due to renewed emphasis on fiduciary
responsibilities under direct supervision
Analyses completeness and reasonableness of:
financial statements
audit opinions
audit work performed
Lists major follow up action to be performed by project
May require action plan to be prepared
Updated format launched with new audit report tracking system (ARTS)
Project Audits - Challenges
• Periodic audits by independent auditor
• Delays in recruitment of auditors
• Acceptable audit standards
• Audit TOR consistent with complexity of project
• Impossibility to produce audit report due to delays in preparing financial
• Poor quality or incomplete Audit reports (not including opinion on FS,
SOEs, special account, management letter)
• No review of previous year’s recommendations in audit report
• No follow-up on plan of action by PMU
• Late submission of audit report (risk of suspension)