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FINANCIAL MANAGEMENT MANUAL FOR MAP PROJECTS ANNEXES

Annex 1 A

Financial Management Self Assessment Questionnaire for Category A Organizations

Name of Organization:

Assessment completed by: Date:

Bank Review/Assessment completed by: Date:

Note: If there is more than one implementing entity, a Questionnaire should be completed for each en-tity

Topic Yes No N/A Review* Remarks/Comments1.Implementing Entity1.1 What is the legal status/registra-tion of the entity?1.2 Has the entity implemented a Bank-financed project in the past?1.3 What are the statutory reporting requirements for the entity?1.4 Is the governing body for the pro-ject independent?1.5 Is the organizational structure ap-propriate for the needs of the project ?

Risk Assessment (Implementing En-tity)

H S M N

2. Funds Flow Yes No N/A Review*2.1 Describe the funds flow arrange-ments, including a chart and explana-tion of the flow of funds from the World Bank, government, and other financiers.

2.2. Are the arrangements to transfer the proceeds of the loan (from the government / ministry of finance) to the entity satisfactory?

2.3 Have there been major problems in the past in receipt of funds by the entity?2.4 In which bank will the Special Ac-count be opened?2.5 Does the PIU have experience in the management of disbursements from the World Bank?

2.7 Does the entity have/need a capa-city to manage foreign exchange risks?2.8 How are the counterpart funds ac-cessed?

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2.9 How are payments made from the counterpart funds?2.10 If part of the project is implemen-ted by communities or NGOs, does PIU have the necessary reporting and monitoring features built into its sys-tems to track the use of project pro-ceeds by such agencies?2.11 Are the beneficiaries required to contribute to project costs? If benefi-ciaries have an option to contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution?

Risk Assessment (Funds Flow) H S M N

3. Staffing Yes No N/A Review*3.1 What is the organizational struc-ture of the accounting department? At-tach an organization chart.3.2 Identify the accounts staff, includ-ing job title, responsibilities, educa-tional background and professional experience. Attach job descriptions and CVs of key accounting staff.

3.3 Is the project finance and accounts function staffed adequately?

3.4 Is the finance and accounts staff adequately qualified and experienced?

3.5 Is the project accounts and finance staff trained in Bank procedures?

3.6 What is the duration of the con-tract with the finance and accounts staff?3.7 Indicate key positions not contrac-ted yet, and the estimated date of ap-pointment.

3.10 Does the project have written po-sition descriptions that clearly define duties, responsibilities, lines of super-vision, and limits of authority for all of the officers, managers, and staff ?3.11 At what frequency is the staff transferred?3.12 What is training policy for the finance and accounting staff?

Risk Assessment (Staffing) H S M N

4. Accounting Policies and Proced-ures

Yes No N/A Review*

4.1 Does the entity have an accounting system that allows for the proper re-

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cording of project financial transac-tions, including the allocation of ex-penditures in accordance with the re-spective components, disbursement categories, and sources of funds? Will the project use the entity accounting system?

4.2 Are controls in place concerning the preparation and approval of trans-actions, ensuring that all transactions are correctly made and adequately ex-plained?4.3 Is the chart of accounts adequate to properly account for and report on project activities and disbursement categories?4.4 Are cost allocations to the various funding sources made accurately and in accordance with established agree-ments?4.5 Are the General Ledger and subsi-diary ledgers reconciled and in bal-ance?

4.6 Are all accounting and supporting documents retained on a permanent basis in a defined system that allows authorized users easy access?

Segregation of Duties

4.7 Are the following functional re-sponsibilities performed by different units or persons: (a) authorization to execute a transaction; (b) recording of the transaction; and (c) custody of as-sets involved in the transaction?

4.8 Are the functions of ordering, re-ceiving, accounting for, and paying for goods and services appropriately segregated?

4.9 Are bank reconciliations prepared by someone other than those who make or approve payments?

Budgeting System4.10 Do the budgets lay down phys-ical and financial targets? 4.11 Are budgets prepared for all sig-nificant activities in sufficient detail to provide a meaningful tool with which to monitor subsequent performance?4.12 Are actual expenditures com-pared to the budget with reasonable frequency, and explanations required

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for significant variations from the budget?4.13 Are approvals for variations from the budget required in advance or after the fact?

4.14 Who is responsible for prepara-tion and approval of budgets?

4.15 Are procedures in place to plan project activities, collect information from the units in charge of the differ-ent components, and prepare the budgets?4.16 Are the project plans and budgets of project activities realistic, based on valid assumptions, and developed by knowledgeable individuals ?

Payments4.17 Do invoice processing proced-ures provide for:Copies of purchase orders and re-ceiving reports to be obtained directly from issuing departments?Comparison of invoice quantities, prices, and terms, with those indicated on the purchase order and with records of goods actually received?Comparison of invoice quantities with those indicated on the receiving reports?Checking the accuracy of calcula-tions?4.18 Are all invoices stamped PAID, dated, reviewed and approved, and clearly marked for account code as-signment? 4.19 Do controls exist for the prepara-tion of the payroll and are changes to the payroll properly authorized?

Policies And Procedures

4.20 What is the basis of accounting (e.g., cash, accrual)?

4.21 What accounting standards are followed?

4.22 Does the project have an ad-equate policies and procedures manual to guide activities and ensure staff ac-countability?

4.23 Is the accounting policy and pro-cedure manual updated for the project activities?4.24 Do procedures exist to ensure

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that only authorized persons can alter or establish a new accounting prin-ciple, policy, or procedure to be used by the entity?4.25 Are there written policies and procedures covering all routine finan-cial management and related adminis-trative activities?4.26 Do policies and procedures clearly define conflict of interest and related party transactions (real and apparent) and provide safeguards to protect the organization from them?

4.27 Are manuals distributed to appro-priate personnel?

Cash and Bank

4.28 Are there any project bank ac-counts opened yet?

4.29 Indicate names and positions of authorized signatories in the bank ac-counts.4.30 Does the project maintain an ad-equate, up-to-date cash book, record-ing receipts and payments?

4.31 Do controls exist for the collec-tion, timely deposit, and recording of receipts at each collection location?4.32 Are bank and cash reconciled on a monthly basis?4.33 Are all unusual items on the bank reconciliation reviewed and approved by a responsible official?

4.34 Are all receipts deposited on a timely basis?

Safeguard over Assets

4.35 Is there a system of adequate safeguards to protect assets from fraud, waste, and abuse?4.36 Are subsidiary records of fixed assets and stocks kept up to date and reconciled with control accounts?

4.38 Are there periodic physical in-ventories of fixed assets and stocks?

4.39 Are assets sufficiently covered by insurance policies?

Other Offices and Implementing En-tities4.40 Are there any other regional of-

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fices or executing entities participating in implementation?4.41 Has the project established con-trols and procedures for flow of funds, financial information, accountability, and audits in relation to the other of-fices or entities?

4.42 Does information among the dif-ferent offices/implementing agencies flow in an accurate and timely fash-ion?

4.43 Are periodic reconciliations per-formed among the different offices/implementing agencies?

Other4.44 Has the project advised employ-ees, beneficiaries, and other recipients to whom to report if they suspect fraud, waste, or misuse of project re-sources or property?

Risk Assessment (Accounting Policies and Procedures)

H S M N

5. Internal Audit Yes No N/A Review*5.1 Is there a internal audit department in the entity?5.2 What are the qualifications and ex-perience of audit department staff? 5.3 To whom does the internal auditor report?5.4 Will the internal audit department include the project in its work pro-gram?

5.5 Are actions taken on the internal audit findings?

Risk Assessment (Internal Audit) H S M N

6. External Audit Yes No N/A Review*6.1 Is the entity financial statement audited regularly by an independent auditor? Who is the auditor?

6.2 Are there any delays in audit of the entity? When are the audit reports issued?6.3 Is the audit of the entity conducted according to the International Stand-ards on Auditing?

6.4 Were there any major accountabil-ity issues brought out in the audit re-

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port of the past three years?

6.5 Will the entity auditor audit the project accounts or will a separate auditor be appointed to audit the pro-ject financial statements?

6.6 Are there any recommendations made by the auditors in prior audit re-ports or management letters that have not yet been implemented?

6.7 Is the project subject to any kind of audit from an independent govern-mental entity (e.g., the supreme audit institution) in addition to the external audit?6.8 Has the project prepared accept-able terms of reference for an annual project audit?

Risk Assessment (External Audit) H S M N

7. Reporting and Monitoring Yes No N/A Review*7.1 Are financial statements prepared for the entity? In accordance with which accounting standards?

7.2 Are financial statements prepared for the implementing unit?

7.3 What is the frequency of prepara-tion of financial statements? Are the reports prepared in a timely fashion so as to useful to management for de-cision making? 7.4 Does the reporting system need to be adapted to report on the project components?

7.5 Does the reporting system have the capacity to link the financial in-formation with the project's physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce the risk that the physical data may not synchronize with the financial data?

7.6 Does the project have established financial management reporting re-sponsibilities that specify what reports are to be prepared, what they are to contain, and how they are to be used?7.7 Are financial management reports used by management?7.8 Do the financial reports compare actual expenditures with budgeted and programmed allocations?

7.9 Are financial reports prepared dir-ectly by the automated accounting

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system or are they prepared by spread-sheets or some other means?

Risk Assessment (Monitoring and Re-porting)

H S M N

8.Information Systems Yes No N/A Review*8.1 Is the financial management sys-tem computerized?8.2 Can the system produce the neces-sary project financial reports?8.3 Is the staff adequately trained to maintain the system?8.4 Does the management organiza-tion and processing system safeguard the confidentiality, integrity, and availability of the data?

Risk Assessment (Monitoring and Re-porting)

H S M N

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Annex 1 B

Financial Management Assessment Questionnaire for Category B Organizations

Project:

Self-Assessment completed by: Date:

Bank Review/Assessment completed by: Date:

Note: If there is more than one implementing entity, a Questionnaire should be completed for each en-tity

Topic Yes No N/A Review* Remarks/Comments1.Implementing Entity1.1 What is the legal status/regis-tration of the entity?1.2 Has the entity been involved with a Bank-financed project in the past?

1.3 What are the reporting require-ments for the entity?

1.4 Is the organizational structure appropriate for the needs of the project ?

Risk Assessment (Implementing Entity)

H S M N

2. Funds Flow Yes No N/A Review*2.1 Describe the funds flow ar-rangements from the Category A organization.

2.2. Does the entity have a bank account with an acceptable foinan-cial institution and are the arrange-ments to transfer project funds sat-isfactory?2.3 Have there been major prob-lems in the past in receipt of funds by the entity?

2.4 In which bank will the project account be opened?

2.5 Does the entity have experi-ence in the management of dis-bursements from the World Bank financed projects

2.6 Does the organization have the necessary reporting and monitoring features built into its systems to track the use of project proceeds?

2.7 Are proper guidelines formu-lated to record and value in-kind

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contributions by communities?

Risk Assessment (Funds Flow) H S M N

3. Staffing Yes No N/A Review*3.1 Does the organization have an accounting department? 3.2 Identify the accounts staff, in-cluding job title, responsibilities, educational background and pro-fessional experience.3.3 Is the accounts function staffed adequately?3.4 Is the accounts staff adequately qualified?3.5 What is the duration of the contract with the accounts staff?3.6 What is training policy for the accounting staff?

Risk Assessment (Staffing) H S M N

4. Accounting Policies and Pro-cedures

Yes No N/A Review*

4.1 Does the entity have an ac-counting system that allows for the proper recording of project finan-cial transactions?4.2 Are controls in place concern-ing the preparation and approval of transactions?

4.3 Is the chart of accounts ad-equate to properly account for and report on project activities and dis-bursement categories?

4.4 Are all accounting and support-ing documents retained on a per-manent basis in a defined system that allows authorized users easy access? 4.5 Are internal control procedures adequate?4.6 What is the basis of accounting (e.g., cash, accrual)?4.7 What accounting standards are followed?4.8 Does the organization have an financial management manual to guide activities and ensure staff ac-countability and are these distrib-uted to appropriate personnel?

4.9 Does the organization maintain an adequate, up-to-date cash book?

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4.10 Do controls exist for the col-lection, timely deposit, and record-ing of receipts at each collection location?4.11 Are bank and cash reconciled on a monthly basis?4.12 Is there a system of adequate safeguards to protect assets from fraud, waste, and abuse?

Risk Assessment (Accounting Policies and Procedures)

H S M N

5. External Audit Yes No N/A Review*5.1 Is the entity financial statement audited regularly by an independ-ent auditor? Who is the auditor?5.2 When are the audit reports is-sued?5.3 Is the audit of the entity con-ducted according to the Interna-tional Standards on Auditing?

5.4 Were there any major account-ability issues brought out in the audit report of the past three years?5.5 Will the entity auditor audit the project accounts or will the NAS auditor be appointed to audit the project financial statements?5.6 Are there any recommenda-tions made by the auditors in prior audit reports or management letters that have not yet been implemen-ted?

5.7 Is the project subject to any kind of audit from an independent governmental entity (e.g., the su-preme audit institution) in addition to the external audit?

Risk Assessment (External Audit) H S M N

6. Reporting and Monitoring Yes No N/A Review*6.1 Are financial statements pre-pared for the entity? In accordance with which accounting standards?6.2 What is the frequency of pre-paration of financial statements? Are the reports prepared in a timely? 6.3 Does the reporting system need to be adapted to report on the pro-ject components?

6.4 Does the reporting system have

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the capacity to link the financial information with the project's physical progress?

6.5 Does the project have estab-lished financial management re-porting responsibilities that specify what reports are to be prepared, what they are to contain, and how they are to be used?

6.6 Are financial management re-ports used by management?

6.7 Do the financial reports com-pare actual expenditures with budget?6.8 Are financial reports prepared directly by the automated account-ing system or are they prepared by spreadsheets or some other means?

Risk Assessment (Monitoring and Reporting)

H S M N

7.Information Systems Yes No N/A Review*7.1 Is the financial management system computerized?7.2 Can the system produce the ne-cessary project financial reports?7.3 Is the staff adequately trained to maintain the system?7.4 Does the management organiz-ation and processing system safe-guard the confidentiality, integrity, and availability of the data?

Risk Assessment (Monitoring and Reporting)

H S M N

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Annex 2

Terms of Reference for the Financial Management Agency of the HIV/AIDS Community Initiative Account

A. Background

The Government of Kenya has obtained assistance from the International Development Agency (IDA) in financing the Kenya HIV/AIDS Disaster Response Project. The project contributes to the partnership against HIV/AIDS in Kenya by supporting the Government’s program as articulated in the National HIV/AIDS Strategic Plan. The purpose of this program is to reduce the spread of HIV/AIDS, to mitigate the socio-economic impact of the disease, and to increase access to care and support for people infected or affected by the HIV/AIDS epidemic in Kenya. The National HIV/AIDS Strategic Plan is the reference for both the program and the project.

For the specific purpose of involving civil society organizations, the private sector and re-search institutions in the national response to the HIV/AIDS epidemic, and making financial resources under the project available to these organizations, the National AIDS Control Council (NACC) will establish an HIV/AIDS Community Initiative Account. Resources advanced by the NACC to this Ac-count will be used for the financing of sub-projects to be proposed and implemented by civil society organizations after approval by the NACC Secretariat or its decentralized entities at provincial, dis-trict or constituency level (PACCs, DACCs and CACCs). Allocations of resources among the various organizations underline the strong priority that will be given to community driven local initiatives. Initiatives with a national or regional coverage, private sector activities and research will only receive modest support.

The HIV/AIDS Community Initiative Account will contribute to the improvement of the wel-fare of communities by increasing their access to financial and human resources to prevent further spread of HIV and to address the impact of the epidemic on individuals and households. The sub-pro-jects will be identified, prepared, implemented, managed and maintained by beneficiary communities or organizations. The responsibility for operation and maintenance of the sub-projects will depend on the nature of the sub-project, but is likely to be that of the community and supporting Community Based Organizations, Non-Governmental Organizations and Religious Organizations.

The HIV/AIDS Community Initiative Account will respond to demands for sub-projects, which aim to address the prevention of HIV infection or the problems related to the impact of HIV/AIDS on those infected or affected. These may include:

activities aimed at behavior modeling or behavior change. Examples include peer programs, formal and informal education programs for out-of-school children, con-dom promotion;

social support to those affected by HIV/AIDS, including orphans. Assistance to or-phans in the form of psychosocial support, school fees, school uniforms, health care, food, and shelter are among the anticipated activities;

training programs for community volunteers and support to training for counselors and home based care-givers, procurement of supplies for home based care such as gloves and essential medical supplies;

support to organizations of people who are HIV positive or affected by the epidemic, seed funding to start income generating activities, establish patient support centers.

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The NACC is a newly established parastatal, mandated to lead, co-ordinate and monitor the national, multi-sectoral response to the HIV/AIDS epidemic. In view of the anticipated volume of sub-projects to be supported, the need for rapid disbursement of the funds, the limited experience of NACC admin-istering sub-projects, and the need for the highest degree of transparency and accountability, the NACC, in consultation with the Office of the President, the Ministry of Finance, and the International Development Association, intends to seek local and international expertise to implement the financial management responsibilities of the HIV/AIDS Community Initiative Account. Proposals will be sought from a short-list of qualified local and international firms.

The successful bidder will set-up and manage the Financial Management Agency (FMA) for the HIV/AIDS Community Initiative Account. This agency will be responsible for the disbursement and accounting of funds made available to organizations implementing sub-projects. The FMA will also provide a procurement specialist for the first year of the project to work closely with the procurement officer of the NACC Secretariat.

The NACC Secretariat will monitor the execution of the contract with the successful bidder and the performance of the Financial Management Agency will be reviewed periodically and during the regular external audit of NACC.

Organizations implementing sub-projects will be grouped into two:

Category 1 will report directly to the Financial Management Agency and will consist of those

1. presenting financial proposal in excess of US $15,000 that are reviewed and approved by PACCs or NACC

2. presenting financial proposals of up to US$ 15,000 that are reviewed and approved by DACCs or CACCs, but whose financial management capability is confirmed adequate.

Category 2 will report through a facilitating NGO and will consist of those presenting financial pro-posals of up to US$ 15,000 and whose financial management capacity is considered inadequate. The FMA will not deal directly with CBOs reporting through a facilitating NGO. It will be the responsib-ility of the facilitating NGO to manage and train them appropriately.

The NACC Secretariat and the decentralized entities of NACC will be responsible for the review and approval of proposals submitted by implementing organizations, according to the value of the proposal submitted and as reflected in the table below.

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Approval of Work-programs and Budgets for National, Regional, Local and Private Initiat-ives

Initiative Cate-Gory

Proposal ValueIn US $

Detailed Review and Approval By

To be ap-proved within

1. Local Initia-tives

1.1 Up-to 5,000 CACC 2 weeks

1.2 From 5,001 to 15,000

DACC 2 weeks

1.3 From 15,001 to 25,000

PACC 3 weeks

1.4 From 25,001 to 100,000

NACC 4 weeks

1.5 Above 100,000 NACC in con-sultation with the World Bank

4 weeks

2. National, Re-gional, Re-search and Private Sector Initiatives

2.1 Up-to 100,000 NACC 4 weeks

2.2 Above 100,000 NACC in con-sultation with the World Bank

4 weeks

The threshold of proposals for both local and national initiatives to be funded through the HIV/AIDS Community Initiative Account is US$200,000.

All costs associated with setting up and operating the Financial Management Agency will be defined by the bidders and should be included in the Financial Proposal. The bidders will have com-plete responsibility for identifying and hiring all local and international staff deemed necessary to ful-fil the responsibilities of the FMA. The Agency will be managed by a qualified and experienced senior professional with experience in the design and implementation of an appropriate financial man-agement and internal control system for projects of this nature. Additional staff of accountants and other professionals will be required as necessary to assist with disbursement, accounting, expenditure reviews, reporting, expenditure forecasts, internal control and sub-project issues. An illustrative list of professional for the FMA is presented in these ToRs, however the specific staffing arrangements for the Agency are at the discretion of the consultant firm bidding on these services.

The remaining pages outline in greater detail the Terms of Reference for the Financial Manage-ment Agency; required qualifications of mandatory and recommended staff; and the timing, duration, and duty post for the Agency’s staff.

B. Overall Responsibilities

The Financial Management Agency will support the National AIDS Control Council in all as-pects of financial management, disbursement and accounting related to the operations of the HIV/AIDS Community Initiative Account. The Agency will be responsible for the following:

1. Develop appropriate financial procedures in line with the directions spelled out in the Operational Manual for the HIV/AIDS Community Initiative Account; implement and enforce an adequate control system; and provide training and support to NGOs.

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2. Design and set up a computerized financial management system for the adequate capture, analy-sis, and reporting of financial information in an accurate and timely fashion for all the funds ad-vanced to the Agency by NACC for which the FMA will have full responsibility. The system should be designed to be able to segregate all disbursements and accounts by implementing insti-tution, by geographic location (province, district, constituency, location and village), by type of implementing institution, by categories of expenditure, and by area of interest (prevention, care and support, capacity building, other).

3. Review all disbursement requests submitted by implementing and facilitating organizations and ensure propriety and eligibility.

4. Open and maintain a local currency HIV/AIDS Community Initiative Account, complete monthly reconciliation reports, and prepare monthly and quarterly reports of disbursements and accounts.

5. Document accounting and reporting procedures for implementing and facilitating organizations.

6. Effect payments to appropriate implementing and facilitating organizations upon authorization by NACC (CACC, DACC, PACC) and verification of the availability of funds, according to the pro-cedures outlined in the Operational Manual of the HIV/AIDS Community Initiative Account.

7. Ensure that all payment documentation is in order and in accordance with any special require-ments of NACC or IDA.

8. Monitor utilization of payments made to implementing and facilitating organizations and monitor actual expenditures against budgets and disbursements.

9. Maintain up-to-date accounting records and ledgers and record all financial transactions pertain-ing to the HIV/AIDS Community Initiative Account.

10. Prepare appropriate applications for replenishment of the HIV/AIDS Community Initiative Ac-count, to be submitted to NACC with quarterly financial reports of disbursements and accounts, and disbursement forecasts for the next quarter.

11. Facilitate any and all financial reviews of the funds and accounts under the authority of the Min-istry of Finance, including periodic audits and financial reviews by the Auditor General, or inde-pendent accounting agencies as appointed by the Auditor General.

12. Ensure that a proper internal control system is in place to achieve accountability at all levels.

13. Review financial management capacity of implementing or facilitating organizations that have submitted approved proposals with a value in excess of US$15,000. If deemed appropriate and necessary, provide training in financial management to these organizations.

14. Receive and examine financial reports from implementing and facilitating organizations.

15. Conduct periodic spot checks of implementing and facilitating organizations to ensure that ade-quate financial management controls are enforced.

16. On a sample basis conduct financial audits of implementing organizations receiving up to US$25,000, either directly or by subcontracting an audit firm. Ensure other implementing or fa-cilitating organizations submit audited accounts as specified in the respective funding agreements.

17. During the first year of operations, provide technical assistance to NACC to process procurements of goods, works, and services, in accordance with World Bank guidelines.

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18. Receive and review independent audit reports from those implementing organizations receiving more than $25,000.

19. During the first year of operations, provide training in procurement for NACC staff.

20. During the first year of operations, elaborate simplified procurement guidelines for community based programs.

21. During the first year of operations, provide training for district based staff in procurement accord-ing to accepted, simplifies procurement guidelines at that level.

C. Reporting Responsibilities

The Financial Agency will be an autonomous body that provides services for, and reports to, the National AIDS Control Council. The Agency will ensure that all financial management functions required to operationalize the HIV/AIDS Community Initiative Account are carried out in accordance with international standards and according to the guidelines described in the Operational Manual for the HIV/AIDS Community Initiative Account. The Manager of the Agency will report to the Director of the NACC Secretariat for all the funds advanced by NACC to the HIV/AIDS Community Initiative Account.

The Agency will be responsible for the following reports:

1. Monthly disbursement reports, number of proposals reviewed, value of proposals reviewed and remaining balance.

2. Quarterly consolidated reports of disbursements and accounts, and disbursement forecasts for the next quarter.

3. Quarterly reports on number of proposals funded and total value of disbursements effected, by ge-ographic location (province, district, constituency, location and village), by type of implementing institution (not-for-profit non-government organization; community based organization, religious organization, for profit organization, facilitating NGO, research institution) , by categories of ex-penditure (goods, services, civil works, personnel emoluments, other recurrent expenditure), and by area of interest (prevention, care and support, capacity building, other).

4. Additional operational manuals, procedural guidelines and ad hoc reports as may be reasonably requested by NACC.

5. Performance against agreed upon performance criteria.

D. Resource Management Responsibilities

It is estimated that the Agency will have responsibility for overseeing the management of up to US$30 million. Of this total, approximately US$27.9 million will finance sub-projects at the local (village to district) level implemented by partner organizations at that level. These activities will be financed through sub-project financing agreements ranging from US$5,000 to US$25,000 in value. The remaining US$2.1 million will go toward the financing of proposals submitted by research insti-tutions (US$0.6 million), the corporate sector (US$0.3 million), and to civil society organizations with a regional or national coverage (US$1.2 million), The proposed review, approval and financial mech-anisms for these sub-projects is discussed in detail in the Operational Manual for the HIV/AIDS Com-munity Initiative Account.

E. Performance Criteria

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The following performance criteria will be used to assess the performance of the Agency at regular intervals and based upon which the contract with the Agency can be continued or terminated:

1. timeliness of disbursement after reception of approved proposals and interim reports2. timeliness and quality of assistance provided to implementing organizations3. timeliness of audit report (i.e., sample audits of implementing organizations) submissions4. number and content of issues arising in the annual audit or periodic review of the FMA5. timeliness of submission of monthly and quarterly reports6. the quality of monthly and quarterly reports

F. Key Staff

Key staff of the Agency will include:

1. a Financial Management Specialist as the Program Manager2. an Accounting Manager3. an Internal Control Officer4. a Disbursement Officer5. a Procurement Specialist (for the first year only)

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Annex 3

Sample Terms of Reference for Financial Management Agency1

The Financial Management Agency (FMA) will support the National AIDS Control Council in all aspects of financial management, disbursement and accounting related to the operations of the HIV/AIDS Community Initiative Account. The Agency will be responsible for the following:

1. Develop appropriate financial procedures in line with directions spelled out in the Opera-tions Manual for the HIV/AIDS Community Initiative Account and the National AIDS Councils (NAC) Financial Manuals; implement and enforce an adequate control system; and provide training and support to Non Government Organizations.

2. Design and set up a computerised financial management system for the adequate capture, analysis, and reporting of financial information in an ac curate and timely fashion for all the funds advanced to the FMA by NAC for which the FMA will have full responsibility. The system should be designed to segregate all disbursement accounts by implementing institution, by geographic location (province, district, constituency, location, and village), categories of expenditure, and by area of interest (prevention, care and support, capacity building, and others).

3. Verify all disbursement requests submitted by implementing and facilitating organiza-tions and ensure propriety and eligibility.

4. Open and maintain a local currency HIV/AIDS Community Initiative Account, complete and submit monthly reconciliation reports, and prepare monthly and quarterly reports of disbursement and accounts.

5. Document accounting and reporting procedures for implementing and facilitating organ-izations in manual and electronic form.

6. Effect payments to appropriate implementing and facilitating organizations upon author-isation by NAC and verification of the availability of funds, according to to the proced-ures outlined in the Operational Manual of the HIV/AIDS Community Initiative Account.

7. Ensure that all payment documentation is in order and in accordance with any special re-quirements of NAC or the International Development Association (IDA).

8. Monitor utilisation of payments made to implementing and facilitating organizations and actual expenditures against budgets and disbursements.

9. Maintain up-to-date accounting records, ledgers and record all financial transactions per-taining to the HIV/AIDS Community Initiative Account.

10. Prepare appropriate applications for replenishment of the HIV/AIDS Community Initiat-ive Account, to be submitted to the NAC with quarterly financial reports of disbursements and accounts, and disbursement forecasts for the next quarter.

11. Facilitate any and all financial reviews of the funds and accounts under the authority of the Minister of Finance, including periodic audits and financial reviews of the Auditor General, or independent accounting agencies as appointed by the Auditor General.

1 Source: Kenyan Financial management Procedures Manual dated September 2002

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12. Ensure that a proper internal control system is in place to achieve accountability at all levels.

13. review financial management capacity of implementing or facilitating organizations that have submitted approved proposals with a value in excess of Kshs. 1.2 million (about $US16,000). If deemed appropriate or necessary, provide training in financial manage-ment to these organizations.

14. Receive and examine financial reports from implementing and facilitating organizations.

15. Conduct periodic spot checks of implementing and facilitating organizations to ensure that adequate financial management controls are enforced.

16. On a sample basis conduct financial audits of implementing organizations receiving up to Kshs. 1.9 million (about $US 25,000) by subcontracting an audit firm. Ensure other im-plementing or facilitating organizations submit audited accounts as specified in the re-spective funding agreements.

17. During the first year of operations, provide technical assistance to CACC’s to process procurement of goods, works and services in accordance with World Bank Guidelines.

18. Receive and review independent audit reports from those implementing organizations re-ceiving more than Kshs. 1.9 million.

19. During the first year of operations, provide training in procurement for CACC’s.

20. During the first year of operations, elaborate simplified procurement guidelines for com-munity based programs.

21. During the first year of operations, provide training for district based staff in procurement according to accepted, simplified procurement guidelines at that level.

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Annex 4

Sample Internal Control Procedures

Accountable Documents Control

The objective of accountable documents control is to maintain a simple, permanent record of the purchase, issue, return, and ultimate disposal of all accountable documents.

Basic Controls Cheques, purchase orders, receipts and credit notes can be used to commit theft if they fall into the wrong hands. Thus, a high degree of security is required, with only limited access by staff to the books and boxes in use. New stocks should be held in a strong room and a designated person should be control their issue. Books and boxes in this category currently in use must be secured overnight and must not be left on unattended desks during working hours. A reliable member of staff who is not responsible for stationery use should control of new stationery. Storage should be in a locked stationery storeroom and not in an office cupboard.

Cancelled Cheques Where a cheque is cancelled due to an error (manual) or misprint (computer generated), the cheque will be cancelled using two diagonal lines across the whole face, with the word “cancelled” inserted between the lines. The signature portion at the bottom right of the cheque should be cut away neatly and destroyed. Additionally:

(i) The cash book payment voucher which is identified by the cheque number, must be cancelled also in the same way. A new voucher will be required to effect payment us-ing the replacement cheque number.

(ii) Where a manual cheque book is in use, cancelled cheques must be filed away immedi-ately and not retained in the cheque books.

Cancellation of all other numbered stationery It is possible to commit fraud by the manipulation of purchase orders, receipts, invoices, credit notes, and goods received vouchers, partic-ularly where these are shown as cancelled but the cancelled copy is missing. Therefore:

(i) Where a purchase order is cancelled, all copies must be stapled together and filed away in a file created for that purpose. The order must be cancelled diagonally as with cheque cancellation above.

(ii) The cancellation of receipts, invoices, credit notes, and goods received vouchers must be signed by a senior staff member, with carbon imprint on all copies.

(iii) The use of correcting fluids should not permitted by any staff, and physical checks must be made periodically to ensure that this stricture is enforced.

Storage of used, numbered stationery Insofar as possible, officers using accountable docu-ments should never have more than one book or box of pre-printed forms of any one type in their pos-session at any time. To obtain a new book or box, the last one must be returned for retention or be fully accounted for to the issuing officer.

Numbering To assist overall control, particularly at the NAS/NAC center, all boxes of numbered stationery should be sequentially numbered in ink at the top, using a separate sequence for each type of record. In addition:

(i) The cover should be endorsed with the first and last numbers of the documents inside.(ii) Both of operations should be carried out by the officer receiving the stationery from

the commercial printer.(iii) Users should endorse the front cover with start and completion dates, to speed sub-

sequent research.

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Register A bound book should be used to record the initial ordering, receiving, issue, and subsequent return of fast/file copies to the person controlling stationery issues.

Cash Controls- Bank Reconciliations

At least every month, the responsible officer must compare the bank statement entries with the corresponding month’s entries in the cash book. Entries on the bank statement not yet entered in the cash book must be so entered that they do not appear as reconciling items more than once. All other differences must be followed up and cleared. The financial controller must review the reconcili-ation and indicate this by signing and dating the reconciliation.

Cash- Cheque Payments

For accounting purposes, cash payments are deemed to include cheques, bank drafts, and transfers of funds out of the project’s bank account. Payments follow a World Bank approved pro-curement process.

Objective of Cash Payment Control The objective of a sound system of internal control over cash payments is that disbursements from bank accounts should be made only in respect of valid transactions.

FMA Role Where a Financial Management Agent (FMA) is part of the structure, dis-bursements to participating projects and implementing agents and partners will be made by the FMA, following agreed processes. The controls featured below apply to payments by the NAC/NAS to its own suppliers and service providers, as well as to the payments made to the FMA.

Basic Controls The features of internal control over cash payments are:

(i) Preparation of cheques and bank transfers Cheques and bank transfers should only be prepared on the basis of evidence that the transactions are valid (for instance, authorized invoices, approved payrolls, and authorized creditors payments).

(ii) Comparison of disbursement records All cheques and bank drafts should be com-pared in detail with transactions processed through the bank accounts as evidenced by the bank statements (for instance, as part of the bank reconciliation procedures).

In order to establish that all cash payments are in respect of valid transactions and have been

properly accounted for by proper entries in the cash book, the procedures outlined in the following paragraphs should be applied:

Unissued Cheques The supply of unissued cheques should be properly safeguarded against unauthorized access. They should be kept under strict control in a strong room under the con-trol of a senior official who must maintain a register of unused cheque forms/cheque books. The re-gister must show a record of the cheque forms/books received from the printers and those issued to the officer responsible for issuing cheques. All numbers issued must be accounted for, and the follow-ing procedures followed:

(i) An officer, other than the one who has custody over the unissued cheques, must mon-itor the status of the cheque forms and books.

(ii) Cheques and bank transfers must be prepared by persons other than those who initi-ated or approved any documents giving rise to a disbursement (for instance, in the case of purchases and payroll).

Cheque Invoices Cheques should only be drawn against a properly authorized cheque payment voucher supported by a valid invoice or other acceptable proof of debt. The invoice should be stamped with a processing stamp showing the following:

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(i) Local purchase order number A copy of the order should be attached to the invoice, and the two matched. The order must be authorized only by a person designated to make out and sign orders.

(ii) Allocation Allocation must be clearly stated. Cheque signatories should only sign cheques when the payment voucher clearly indicates the ledger account code for the payment.

(iii) Checked Items The sections for “checked by” and “passed by” are extremely import-ant and should only be completed when the person signing the allocation stamp is sat-isfied that the right goods/service have been supplied, the cost is in accordance with that shown on the order, and, where applicable, the costs and extensions have been correctly calculated. The invoice should be passed for payment only after the signat-ory is satisfied that all these requirements have been met and that the allocation is cor-rect.

(iv) Cancelled Items All vouchers should be stamped “Cancelled - Cheque No…..” after processing to ensure that they are not re-presented for payment.

Civil Works Contracts Civil works contracts will be awarded in accordance with World Bank guidelines, and the payments will be based on authorized completion certificates. The re-sponsible person should also approve payment of any retention amount due to contractors. The con-tract details and the corresponding disbursements must be captured in the contract account in the gen-eral ledger in the currency of disbursement.

Filling-in cheques The cheque should be made out in the full name of the supplier (without abbreviations) for the exact amount authorized on the cheque payment voucher. The cheque number and payee should be entered on the cheque payment voucher. Any blank spaces on the lines for the payee and the amount should be blocked to avoid any additions to these lines after the signa-ture.

Pre-Printed Controls Cheque should be pre-printed with “Account payee only--Not Nego-tiable,” to avoid the possibility of loss to the project if the cheques are misappropriated. Bearer or cash cheques, and the signing of blank cheques, must be prohibited.

Cheque Signatures Cheques must be signed by two duly authorized officials. The pro-ject could have up to six signatories, divided into say two panels, where any member of one panel can sign with a member from another panel. The one panel must consist of the program/executive dir-ector, the financial controller, and the accountant, while the other panel can be made up of other senior managers. In addition:

(i) The signatories must carefully examine all supporting documentation relating to the cheque payment to satisfy themselves that the payment is for a valid transaction. The signatories must ensure the supporting documentation has been stamped “cancelled” with the relevant cheque number to prevent resubmission in support of additional pay-ments.

(ii) Where practical to do so, signed cheques should be dispatched by a person other than the preparer. Where suppliers physically collect cheques, this must be acknowledged by a signature in the “Cheque Collections” register, which indicates not only payment cheque details, but also the date and details of the person collecting the cheque.

Incoming Invoice Register An “Incoming Invoice” register must be maintained to record all invoices received. This register must be updated with the payment details of the cheque, once it has been signed.

Entry into Cash Book The computerized accounting system will automatically post the cheque (if printed out of the system) in the cash book.

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Filing and Checking Bank statements and paid cheques (or images) received from the bank must be delivered to the financial controller for examination before being handed over to the ac-countant for use in the bank reconciliation process. The financial controller must examine the cheques for evidence of renegotiation (change of payee), and must follow up where this occurs.

Cash Controls- Petty Cash Payments

A sound system of internal control over petty cash is important because disbursements should be made only for valid transactions, and these transactions should be accurately entered in the ac-counting records.

Basic Controls Three features of internal control are used to achieve these objectives:

(i) Petty cash must be kept on the imprest system. In this system the cashier is advanced a float of cash of a fixed amount that is replenished regularly by the amount of pay-ments made and on production of paid expense vouchers.

(ii) The cash in hand plus the paid expenses vouchers due for reimbursement should al-ways be equal to the amount of the float.

(iii) When the float is replenished, the relevant accounting record for petty cash and vouchers should be produced to the signatories of the reimbursement cheque, who should initial the accounting record concerned as evidence of approval of the reim-bursement.

Expenditure from Petty Cash Payments should be made only on the production of prop-erly completed and, where appropriate, authorized vouchers. These should be cancelled immediately to prevent their further use. This control is facilitated by numbering the vouchers sequentially at the time they are presented for payment. Generally, large items should not be paid through petty cash or similar funds and a limit should be imposed on the amount for any one payment.

Entering Transactions in the Accounting Records The coding or classification of expenditure for posting to the nominal ledger should be checked by the accountant, and should apply the following procedures:

(i) The arithmetical accuracy of the summaries of expenditure of petty cash used as a basis for making the general ledger entries should be checked before input into the general ledger.

(ii) The balance in the petty cash book must be checked against the balance in the nom-inal ledger at the end of each month.

(iii) After checking the coding expense summaries and the general ledger balance, the ac-countant – or his nominated alternate – should sign and date the actual petty cash book to indicate that this procedure has been followed.

Overall Control of Funds The first overall control feature to be applied is to ensure that fund balances are kept at reasonable amounts in relation to the level of expenditure. Other critical control features include the following:

(i) Imprest or similar funds should not be under the control of persons who have access to non-imprest funds.

(ii) Funds should be verified periodically and reconciled with the general ledger control account by a person other than the custodian. All funds in the custody of the same person should be verified at the same time.

(iii) While cash counts should take place regularly, the actual time and day of the count should be varied; the unpredictability of monitoring enhances its effectiveness.

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(iv) Under no circumstances should any amounts be receipted into petty cash funds other than reimbursements under imprest.

Cash Controls- Receipts

Project funds derive from the Bank, the borrower’s contribution, other donors, and sales re-ceipts in cases where the project sells certain items (e.g., subsidized drugs). The guiding control prin-ciples to control receipts are that :

(i) An incoming cheque register is maintained to record all cheques received by the per-son(s) receiving/opening mail.

(ii) All receipts must be banked intact in the shortest possible time.(iii) Funds received from different donors must be accounted for separately, with a Source

and Uses of Funds statement produced for each donor at the end of the reporting period.

Replenishment of Special Accounts Special accounts are replenished in accordance with Bank guidelines.

Contracts

It is critical to ensure that only persons who have the authority to do so enter into agreements contractually binding the project.

Contract Review All contracts that purport to bind the project must be vetted by the project’s legal advisors before being signed by the designated officer to ensure that, from a legal standpoint, the project’s interests are not prejudiced.

Contract Copies A copy of every contract should be lodged with the project’s finan-cial controller for permanent reference.

Distinction Between a Contract and a Normal Purchase Order Although the policy stated above is relatively simple, there are some grey areas – especially concerning the point at which a nor-mal purchase order becomes a contract. Four factors must be borne in mind in this regard:

(i) Minor items such as a service contract on a photocopier need not be referred the law-yers.

(ii) On the other hand, it is important that an expert scrutinize any material binding agree-ment properly.

(iii) Any “standard” type of contract form produced by another party, that one might be asked to sign, has been written by, and for the benefit of, that party.

(iv) When in doubt, purchase orders and contracts should be referred to the project’s fin-ancial controller, who will decide whether the matter needs to be reviewed by law-yers.

As a rough guideline, any arrangement whereby the project incurs obligations other than simply to pay for goods or services, should be considered prima facie a contract, and subject to the guidance contained above in the Contract Review paragraph above.

Standard Contracts The project must engage its legal advisors to prepare a full range of standard contracts for use both by participating projects and the NAC.

Fixed Assets

Procurement of all assets must follow World Bank guidelines.

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Fixed assets purchased by and for the NAC/NAS Fixed assets purchased by and for the use of the NAC itself must be retained in the NAC’s books and be depreciated.

Fixed assets purchased with NAC/NAS Funds by Category B and C organizationsFixed assets purchased with NAC/NAS funds by implementing partners should be expensed directly and not carried on the books of the NAC/NAS. However, a program assets register must be main-tained by the category B or C organization for those higher value items whose cost exceeds an agreed threshold. This facilitates a level of physical control. The assets register should detail (a) location, (b) asset number, (c) asset type and description, (d) date of purchase, (e) cost, (f) information on applic-able donor, (g) date of first use, (h) depreciation rate, and (i) date and proceeds of disposal. The re-gister must be regularly reconciled to the general ledger fixed assets account.

Filing- Control of Old Records

The NAC will maintain the following records for the project:

(i) General File The signed loan agreement, the appraisal report, the list of authorized signatures, the categories of expenditure, and correspondence relating to the project should be kept in this file.

(ii) Method File Copies of disbursement applications submitted to the Bank should be kept in this file.

(iii) Other Files In addition, the following files should be maintained by the NAC:a. Separate files in respect of petty cash vouchers for respective financial years.b. Supporting documents for statements of expenditure, to be filed by application num-

ber to allow for easy access.c. All other used stationery must be sequentially filed and retained for at least the ap-

plicable minimum retention period.

Payroll

All project staff must be paid by the project. The payroll must be maintained by the NAC/NAS, and the following controls must be applied:

(i) All employee details are to be maintained on a payroll master file, which record de-tails such as engagement date, current salary, allowances, and salary review and re-view history.

(ii) All amendments to the payroll master file must be approved by the executive director and documented prior to entry on the payroll.

(iii) The financial controller will approve the payroll before payment.(iv) All deductions from the payroll on behalf of staff for contribution to social security,

income tax, medical insurance, and similar deductions must be promptly paid to the respective institutions concerned.

(v) Salaries for all staff (including temporary staff) must be paid by direct deposit into staff members’ bank accounts. Only where this is not possible will the practice of writing cheques to staff be adopted. In extreme cases, staff may be paid in cash. Any unpaid salary cash must be stored in a secure safe for no longer than a week. If it still remains unpaid after that period, it must be re-banked immediately.

Travel Expenses

The words “expense account” or “expense claim” cover any instance whereby an employee has to account for monies advanced to him or her by the project, or where he or she has incurred ex-penditure on behalf of the project that is not covered by an official purchase order.

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Objectives The accounting objectives of monitoring travel expenses are to ensure that (a) expense claims are submitted on time, (b) all funds are properly accounted for, and (c) no funds are spent without proper authorization.

Method of Operation The intention is to ensure that all cash advanced and expenditure so incurred will be automatically debited to an “expenses recoverable” account, and that this account will only be cleared out to the relevant ledger expense accounts by way of an authorized expense claim. Expenses recoverable accounts should be in the form of global (rather than individual) accounts in the nominal ledgers.

Advances All advances should be debited to the expenses recoverable account. The only exception to this rule is for advances from petty cash that are not for travel or entertainment, and which are outstanding for less than 24 hours and are covered by a purchase order; such advances may be debited direct to expenses.

Payments via creditors or cheque payments The creditors clerk will be instructed to debit the expenses recoverable account for all hotel, restaurant, and related expenses in the name of the per-son incurring the expense.

Direct debits to the project bank account These debits, which are usually in the form of travellers` cheques and the related bank charge, will be debited directly to the expenses recoverable account, again in the name of the person spending.

Clearing the expenses recoverable account The expenses recoverable account can only be cleared by credits arising from returned cash via the cash book or by an authorized expense claim. No other method of clearance is acceptable unless authorized by the financial controller.

Expense claims: time of submission Expense claims should be submitted no later than the second working day after the expense has been incurred or the employee returns to work, whichever occurs earlier. The principle involved is that all outstanding claims must be processed as soon as pos-sible and that no further advance will be considered until the previous one is cleared.

Expense claims: authorization Departmental managers are the lowest rank of authority per-mitted to authorize an expense. Accordingly, all employees will submit their claims to their respective managers for approval. Project executive directors authorize the claims of all managers, though they may delegate this authority to the financial controller. Under no circumstances may managers, other than the financial controller, authorize the claims of one another.

Contents of Claims Wherever possible, all claims should be substantiated by vouchers. This applies particularly to claims for hotel accommodation, food in hotels and restaurants, transport tickets, and petrol. All claims should reflect the following guidance:

(i) No claims should be made in respect of incidental small expenses, such as gratuities/tips. Instead, such expenses, as well as other incidentals, should be covered by a per diem allowance, to be claimed for each day claimants are away, including the day they leave and the day they return.

(ii) On long trips only, it is permissible to claim for laundry expenses, but laundry and dry cleaning expenses incurred on the claimant’s return should not be claimed.

(iii) Although a certain amount of latitude will be exercised by people responsible for au-thorizing claims, this is an area where strict discipline is essential. Employees of de-velopment projects should cost conscious when travelling.

Travel Claims Record keeping All travel claims should be compiled in triplicate on a stand-ard claim form. The person authorizing the expenditure should sign all copies. The top copy should be filed, with all relevant vouchers stapled neatly to it, in the appropriate journal file with other

27


journal vouchers. The second copy should be filed in the accounts department in alphabetical order (in date order within the alphabetical order). The third copy remains fast, in the Expense/Travel Claims Book.

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Annex 5

Project Internal Control Checklist

A project internal control checklist which may be used by management as a guide for assess-ing the adequacy of the NAC/NAS internal control system is detailed below. The checklist is inten-ded to serve as a guide. The first part is on the Control Environment and the second is on the Ac-counting System.

A Control Environment

The control environment should be assessed considering each of the following areas:

(i) Effectiveness of organizational structure. Is structure adequate, enabling NAC/NAS to monitor and control activities?

(ii) Board Management/Key Staff. Are these competent and is there sufficient coverage in key functions? Is there an independent board which is involved in monitoring the decisions and activities of management thus reducing the likelihood of unauthorized acts?

(iii) Budgets. Are strategic plans/budgets realistic and based on reasonable assumptions?(iv) Project Management Reports/Annual Reports. Does Management have sufficient re-

liable and relevant information produced on a timely basis to effectively monitor its activities?

(v) Adequate policies and procedures. Does the NAC/NAS have an adequate policies and procedures manual used to control activities and to ensure staff accountability? What measures has the NAC/NAS taken to control the possibility of fraud?

(vi) Risk of misstated accounts. Does the NAC/NAS have a review/approval process prior to submitting FMRs? To what extent are the FMRs used as a management re-porting tool?

(vii) Effectiveness of external auditors. Does the project have an effective and independ-ent auditor familiar with Bank requirements and with a good track record in working with the Bank?

B Accounting System

This check list addresses the accounting system of the project. The questions are designed to identify (i) the accounting controls which exist; and (ii) the risk of loss through undetected error or fraud. They can be used to identify issues for inclusion in action plans for improvement of project manage-ment systems.

General

(i) Does the entity have adequate written statements and explanations of its accounting policies and procedures such as:a. A chart of accounts?b. A specification of accounting records, accounting procedures and the required

supporting documentation?c. Assignment of responsibilities and delegation of authority, including specified

powers of authorization?d. Documentation and approval requirements for recording transactions and mak-

ing journal entries?(ii) Are accounting policy and procedure manuals updated as necessary?(iii) Are manuals distributed to appropriate personnel?

29


(iv) Do procedures exist to ensure that only authorized persons can alter or establish a new accounting principle, policy, or procedure to be used by the entity?

(v) Are controls in place concerning the preparation and approval of journal entries, en-suring that journal entries are correctly made and adequately explained?

(vi) Do all journal entries adequately identify the accounts in which accounting entries are to be made?

Bank and Cash balances

(i) Does the project maintain an adequate, up to date cashbook, recording receipts and payments?

(ii) Are all receipts deposited on a timely basis?(iii) Do controls exist for the collection, timely deposit, and recording of receipts at each

collection location?(iv) Do procedures exist for disbursement approval and for the signing of payment

orders/checks?(v) Are those who authorize payments appropriately controlled?(vi) Are checks paid/posted/delivered promptly?(vii) Are bank accounts properly authorized and opened with authorized banks and in ac-

cordance with Bank requirements?(viii) Do procedures exist for effective checks such as:

a. Comparison of payment orders/checks with disbursement records?b. Examination of actual signatures and endorsements with those authorized?c. Numerical sequence of payment orders/checks?d. Reconciliation of general ledger and other accounts?e. Comparison between bank statements and accounting records regarding

amounts and dates of sums received?f. Checking the calculations of the columns and rows of cashbooks, and reconcil-

ing the balances on the cashbook and bank statements at regular intervals?(ix) Are all unusual reconciling items reviewed and approved by a responsible official?(x) Are checks outstanding for a considerable time, periodically reviewed?

Procurement and Payables

For the Bank’s detailed procurement requirements see Procurement under IBRD Loans and IDA Credits, January 1995, and Selection and Employment of Consultants by World Bank Borrowers, January 1997.

(i) Are purchases of goods and services initiated by properly authorized requisitions bearing the approval of designated officials?

(ii) Are requisitions pre-numbered and are those numbers controlled?(iii) Are adequate procedures in place to ensure that procurement follows Bank require-

ments and the Loan Agreement?(iv) Are orders specific in terms of quality, quantity and description?(v) Are there procedures to ensure that goods are recorded as they are delivered to the

project or to its beneficiaries?(vi) Do invoice processing procedures provide for:

a. Copies of purchase orders and receiving reports to be obtained directly from is-suing departments?

b. Comparison of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received?

c. Comparison of invoice quantities with those indicated on the receiving reports?d. Checking the accuracy of calculations?

(vii) Are amounts payable according to the accounting records compared regularly with the sums appearing in statements from suppliers?

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Employee Compensation Salaries and Wages

(i) Do controls exist for the preparation of the payroll and are changes to the payroll properly authorized?

(ii) Are payroll rosters reviewed and approved by management, before disbursements are made?

(iii) Are gross pay and deductions from pay reviewed independently for reasonableness?(iv) Are payroll advances to officials and employees prohibited or subject to appropriate

review?(v) Are there adequate procedures to ensure that payroll deductions are correct and that

the sums deducted are paid by the entity to the appropriate authority?

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Annex 6

Sample Financial Monitoring Reports

Please lift these from - Financial Monitoring Reports: Guidelines to Staff- Annex A Sample 3, pages 1 to 7. Note, this is the same as the reference in the GOM

32


Annex 7Category B and Category C Organization Reporting Documents

Annex 7aCommunity Initiative Account2- Proposed Budget for Category B Organization for the period ……………………………….

PROGRAM THEMES

ACCOUNT

Prevention & Advocacy

Treatment Continuum of Care & Sup-

port

Mitigation of the Socio-eco-nomic Impact

Monitoring, Evaluation &

Research

1 Awareness & publicityImplementing organization 2 World AIDS Day

3 Medical supplies4 Food supplements5 Support: Orphans6 Support: Others affected

National Province District 7 Nursing care8 Seminar & Workshop expenses9 Training expenses10 Counselling

Constituency Location Village 11 Travel & accommodation12 Activity grants13 Revolving funds14 Consultancy

Fund requirements Currency

15 Facilitator costs

Advance required 16 Staff costsAnticipated other needs 17 Furniture, fittings & equipment- end 1st Quarter 18 Rent & rates- end 2nd Quarter 19 Communications costs- end 3rd Quarter 20 Motor vehicle running- end 4th Quarter 21 Printing & stationery

22 Courier & postageBanking details for deposit of funds

23 Repairs & maintenance

24 Office expenses

2 Accumulation of certain Category C organisation budgets and budget for Category B organisation

33


25 Power/water/security1st signature …………… ……… 26 Bank charges2nd signature …………… ……… Total

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Annex 7bCommunity Initiative Account Proposed Budget3 for Category C Organization for the period……………………………………….

THEME

Account



port



Research





Fund requirements Currency


Advance required 16 Staff costsAnticipated other needs 17 Furniture, fittings & equipment- end 1st Quarter 18 Rent & rates- end 2nd Quarter 19 Communications costs- end 3rd Quarter 20 Motor vehicle running- end 4th Quarter 21 Printing & stationery

22 Courier & postageBanking details for deposit of funds or

23 Repairs & maintenance

other arrangements 24 Office expenses25 Power/water/security

1st signature …………… ……… 26 Bank charges2nd signature …………… ……… Total

3 Unnecessary and inappropriate accounts and themes are blocked form the standard table to suit the specific Category C organisation

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Annex 7cCommunity Initiative Account Statement of Expenditure for Category B Organization for Fund Replenishment

THEME

ACCOUNT



port



Research





Summary movement of funds 15 Facilitator costs16 Staff costs

Currency 17 Furniture, fittings & equipmentFunds brought forward 18 Rent & ratesFunds received this quarter 19 Communications costsExpenditure as detailed 20 Motor vehicle runningFunds carried forward (1) 21 Printing & stationeryActual Bank balance (2) 22 Courier & postageDifference (1 minus 2)* 23 Repairs & maintenance* explain difference 24 Office expenses1st signature …………… ……… 25 Power/water/security2nd signature …………… ……… 26 Bank charges

Total

Annex 7d

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Community Initiative Account Statement of Expenditure for Category C Organization for Fund Replenishment



port



Research





Summary movement of funds 15 Facilitator costs16 Staff costs

Currency 17 Furniture, fittings & equipmentFunds brought forward 18 Rent & ratesFunds received this quarter 19 Communications costsExpenditure as detailed 20 Motor vehicle runningFunds carried forward (1) 21 Printing & stationeryActual Bank balance (2) 22 Courier & postageDifference (1 minus 2)* 23 Repairs & maintenance* explain difference 24 Office expenses

25 Power/water/security1st signature …………… ……… 26 Bank charges2nd signature …………… ……… Total

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Annex 7eCommunity Initiative Account Sub-project Financial Completion Report

THEME

ACCOUNTPrevention & Ad-

vocacyTreatment Con-

tinuum of Care & Support

Mitigation of the So-cio-economic Impact

Monitoring, Evaluation & Research

Budget Actual Budget Actual Budget Actual



National Province District 7 Nursing care8 Seminar expenses9 Training expenses10 Counselling


Funding summary Currency


Advance provided 16 Staff costsOther funds received from NAS 17 Furniture, & equipmentTotal funds provided 18 Rent & rates

19 Communications costsTotal sub-project cost 20 Motor vehicle runningBalance returned/owing 21 Printing & stationery

22 Courier & postage23 Repairs & maintenance24 Office expenses25 Power/water/security

1st signature …………… ……… 26 Bank charges2nd signature …………… ……… Total

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Annex 8

Reconciliation of Project Bank Account

Reconciliation of Project Account

For the period January 1 2002 to February 28, 2002Bank account number xxxxxxxxxxxxxBank name xxxxxxxxxxxxxBranch xxxxxxxxxxxxx

Currency xxxxxxxxxxxxx

Ending balance from previous statement xxxxxxxxx

Add- NAC/NAS replenishments since previous statement xxxxxxxxx- Interest credited to account in period xxxxxxxxxTotal receipts xxxxxxxxx

Total funds available xxxxxxxxx

Deduct- Payments by intermediary for goods and services xxxxxxxxx- Payments to communities xxxxxxxxx- Intermediary operating costs xxxxxxxxx- Local bank service charges xxxxxxxxxTotal payments xxxxxxxxx

End balance as at (mm/dd/yy) xxxxxxxxx

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Annex 9

Sample income statement and balance sheet

Please lift these from FARAH- Financial Accounting Reporting and Auditing Handbook- First edition- Janu-ary 1995- Annex XXII- pages 95 to 102 inclusive

40

Annex 10

Key Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements. The presentation of these elements in the balance sheet and the income statement involves a process of sub-classification. Elements may be classified by their nature or function in the business of the enterprise in order to display information in the manner most useful to users for purposes of making economic decisions.

Financial Position--The Balance SheetThe elements directly related to the measurements of financial positions are assets, liabilities, and equity.

These are defined as follows: An asset is a resource controlled by the enterprise as a result of past events and from which future economic be-

nefits are expected to flow to the enterprise. A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to

result in an outflow from the enterprise of resources embodying economic benefits. Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

Classification of items in the balance sheet should be made in such a way as to be meaningful to the users of the financial statements. The following represent some typical items which should be considered for separate dis-closure in the balance sheet: segregation of current assets and current liabilities from long-term assets and long-term liabilities current assets might include cash, marketable securities, receivable, and inventories current liabilities might include bank loans and overdrafts, the short-term portion of long-term liabilities, and

payables

long-term liabilities might include the long-term portion of loans, provisions, deferred taxes, and deferred income equity might include the various classes of share capital, paid in capital, revaluation surplus, reserves, and re-

tained earnings.

Cash Flow StatementInformation about the cash flows of an enterprise is useful in providing users of financial statements with a

basis to asses the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to util-ize those cash flows. It also enhances the comparability of the reporting of operating performance by different enter-prises because it eliminates the effects of using different accounting treatments for the same transactions and events.

The cash flow statement should report cash flows during the period classified by operating investing and fin-ancing activities. Further discussion of each of these classes of cash flows appears below:

1. Operating Activities The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability of the enterprise, pay dividends and make new investments without recourse to external sources of finan-cing. Examples of cash flows from operating activities are: cash receipts from the sale of goods and the rendering of services cash receipts from royalties, fees, commissions, and other revenues cash payments to suppliers for goods and ser-

vices cash payments to and on behalf of employees cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities, and other policy

benefits cash payments or refunds of income taxes unless they can be specifically identified with financing and investing

activities cash receipts and payments from contract held for dealing or trading purposes

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2. Investing Activities The separate disclosure of cash flows arising from investing activities is important because the cash flow represents the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are: cash payments to acquire and cash receipts from sales of property, plant and equipment, intangibles, and other

long-term assets cash payments to acquire and cash receipts from sales of equity or debt instruments of other enterprises and in-

terest in joint ventures cash advances and loans made to other parties cash receipts from the repayment of advances and loans made to other parties cash payments and cash receipts from futures contracts, forward contracts, option contracts, and swap contracts.3. Financing Activities The separate disclosure of cash flows arising from financing activities is important be-cause it is useful in predicting claims on future cash flows by providers of capital to the enterprise. Examples of cash flows arising from financing activities are: cash proceeds from issuing shares or other equity instruments cash payments to owners to acquire or redeem the enterprise shares cash proceeds from issuing debentures, loans, notes, bonds, mortgages, or other short or long-term borrowing cash repayments of amounts borrowed cash payments by a lessee for the reduction of the outstanding liability relating to a finance leaseFinancial Performance--The Income Statement

Profit is frequently used as a measure of performance or as a basis for other measures, such as return on in-vestment or earning per share. The elements directly related to the measurement of profit are income and expenses: these are defined as follows: Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of

assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distribution to equity participants.

Income and expenses may be presented in the income statement in different ways so as to provide information that is relevant for economic decision-making. For example, it is common practice to distinguish between those items that arise in the course of the ordinary activities of the enterprise and those that do not. Items which should be disclosed in the income statement include, but are not limited to: sales or other operating revenue depreciation interest income income from investments taxes on income unusual charges significant intercompany transactions net income

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Annex 11

Accounting Software Evaluation Checklist

Section I: General Project Information

A. Name of Project evaluating and/or using the software

B. Project ID # C. Loan # (a)

D. Country

E. Sector

F. Managing Division

G.Financial Management Specialist affiliated with Pro-ject (b)

H. Task Team Leader I. Client Contact

Notes (a) May be more than one loan number per project. (b) If project does not have a Financial Management Specialist, indicate N/A.

Section II: Project Accounting Software Checklist

A. Name of software

B. Vendor Contact Information

Name

Address

Phone

Fax

Email

C.Cost of software (if applicable, indicate cost per module & customization cost)

D.Was this software selected for use? (Yes or No)

E. Checklist of Standard Requirements

1. FUNCTIONALITY

C/NC* Requirement YES NO N/A CommentsC a.

Multi-currency

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C b. User friendly (e.g. windows driven)

C c.Not cost prohibitive (identify cost in Section II. C. above)

C d. Ability to account under differ-ent bases of accounting (cash, modified cash, modified ac-crual, accrual)

e. Capacity to track the following data:

C i. Actual C ii. Budget C iii. Forecast C iv. Life of Project per PAD C f. Year 2000 issue has been ad-

dressed C g. Ability to track/link to Physical

Performance Indicators (e.g. units of output or contract com-pletion status) as required by project

C h. User manual/documentation available

C i. Ability to track and search by specific transaction references (e.g. check #'s, P.O. #'s, direct payments, voucher #'s, etc.)

C j. Includes a fixed asset/inventory management registry

NC k. Dual charts of account (ability to track in accordance with or link to local reporting systems as well as Bank requirements)

NC l. Multiple location installation and consolidation ability

NC m. Ability to file reports electron-ically to Bank

NC n. Ability to export data (e.g. to Excel, ASCII file, etc.)

NC o. Ability to track and report on multiple projects

NC p. Experience with World Bank projects

NC q. Multi-language NC r. Capacity to interface with gov-

ernment financial management systems

2. REPORTING

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C/NC* Requirement YES NO N/A CommentsC a. Ability to track and report on

flexible reporting cycles (e.g. month, quarter, calendar year, fiscal year, project cumulative, etc.)

C b. Ability to track and report by project funder

C c. Ability to track and report by loan agreement category

C d. Ability to track and report by project component

C e. Ability to generate LACI PMR report formats with a clear audit trail (e.g. no additional revi-sions needed in a spreadsheet which would modify an audit trail)

C f. Ability to generate reports for previous periods (e.g. lost re-port)

C g. Capacity to customize reports 3. SECURITY

C/NC* Requirement YES NO N/A CommentsC a. Internal security features ad-

equate (e.g. cannot delete pos-ted transactions, controlled ac-cess, password protection)

C b.Security includes back-up and system maintenance procedures

C c. Security includes self-dia-gnostic checks to ensure integ-rity

4. SUPPORT

C/NC* Requirement YES NO N/A Comments a. Support readily available for: C

i. Technical issues C ii. Training

5. PROCUREMENT ADMINISTRATION

C/NC*Require-

ment YES NO N/A CommentsNC a. Capacity to track and report on

procurement information:

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i. by procurement procedure (NCB, ICB, LS, etc.)

ii. by contract iii. by source of supply iv. by status (e.g. committed,

completed, etc.)

6. GENERAL COMMENTS

C/NC*Require-

ment YES NO N/A Comments

a. Would you recommend this soft-ware for use by other Bank pro-jects?

b. Would you recommend this soft-ware to be presented at a Bank sponsored vendor software sem-inar?

c. Comments: (e.g. hardware re-quirements, frequency of training needed, amount of customization needed, to meet project specific requirements, etc.)

Name(s) of Evaluator(s): Division of Evaluator(s): Date of Evaluation: * Please note that these features have been evaluated and deemed critical/non-critical (C/NC) as a starting refer-ence; however, each project would need to review and evaluate these features based on their specific needs and revise as needed.

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Annex 12

Examples of transaction descriptions and corresponding input documents

The documents used to input financial data into the accounting system and the related transactions are shown below.

Transaction Description Input DocumentCheque Payments-General Payments VoucherCheque Payments-Imprest Imprest Application FormAccounting for Imprest Personal Expense FormClaiming Mileage Mileage Claim FormPetty Cash Payments Petty Cash Book JournalTransfer of funds to NAC Units etc. Transfer FormCorrections, Bank Charges Adjustments JournalAccrued Expenses Reversing JournalFixed Assets Additions Fixed Assets Journal Fixed Assets Depreciation Fixed Assets JournalFixed Assets Disposal Fixed Assets JournalPayroll Expenditure Payroll JournalBudget-Expenditure Excel Import Journal Budget-Income Journal VoucherReceipt of Funds Official ReceiptUpdate Chart of Accounts Master File Amendment FormUpdate the procedures manual Procedures Change Request form

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Annex 13

Notes for the Construction of MAP Program Chart of Accounts

Major classifications of accounting data are income, expenditure, assets, liabilities and capital. Within each major classification, further classification occurs. The necessary level of detailed classification depends on the nature of the accounting entity and the needs of users of accounting information. A chart of accounts provides a lo-gical structure according to which accounting transactions will be sorted. It determines the limits for reporting finan-cial information. For Bank-funded projects, a minimum requirement is to report by major disbursement category: works, goods, consultants’ services and other. It is also necessary to be able to present expenditure by project com-ponent. The chart of accounts reflects these and other information gathering and reporting considerations.

The chart of accounts for a Bank-assisted project should be designed to capture sources and uses of funds, and assets and liabilities in sufficient detail to satisfy reporting requirements. Sources of actual funds and in-kind payments will include the Bank, government, co-financiers, and community groups. Uses of funds will cover total expenditures, further broken down into useful categories (such as by project components, activities, and location). They may also be broken down to reflect expenditures by source of funds. For each transaction, balancing debit and credit entries are required.

The chart of accounts provides a logical means of aggregation of each set of related transactions. Once the account structure has been defined, the actual codes to be used may be established. For most projects, the chart of accounts and related accounting procedures should be formalized in a manual of accounts (see below).

Coding schemes are needed to implement charts of accounts and are essential in a computer environment. They are usually in numeric form: 99-999-999-999… with each set of digits representing a different type of ac-count. For example, the first two digits might represent the budget unit (e.g. a line ministry), the next set of digits, the source of funds (e.g. the IDA credit number), the next three, the objects of expenditure (in case of expenditure ac-counts), and so on. It is not possible to stipulate or recommend a chart of accounts for MAP projects in a manual such as this because this will depend on the computer system and software selected by the NAS and the degree of de-tail perceived to be required.

However, by way of example, one NAC/NAS has developed an account code system with four segments. These are: (a) segment 1- which identifies the account type such as income, expenditure, assets, liabilities; (b) seg-ment 2- which identifies the priority areas which have been identified in the strategic plan including, for example, prevention, treatment and continuing care, monitoring and evaluation, management and coordination; (c) segment 3- the main account code (and perhaps sub-code) which includes detailed expense items; and (d) segment 4- the ac-counting unit or cost centres which may include the NAC, the NAS, particular NGOs, government ministries, and in-dividual or clusters of community based organizations.

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Annex 14

Items To Be Addressed In The Community Financing Agreements

From a fiduciary management perspective, the financing agreement with Category C organizations (com-munity groups) should address the following topics.

1. Legal status of the community

2. Scope of activities covered, including timeframe

3. Amount of the funding

4. Community contributions

5. Financial and progress reporting requirements

6. Terms and conditions of payments to the community groups including lump sum payments and actual cost payments

7. Timing of payments to the community groups

8. Financial management requirements of the community group

9. Simple procurement plan

10. Roles and responsibilities of all parties including supervision and monitoring, through implementation and including the operation and maintenance of the investment after completion of the project.

11. Statement that if the financing is on a lump sum basis, the community accepts responsibility for the agreed on output, bearing the costs of overruns (if practicable) and the use of any surplus funds.

12. Dispute resolution and termination procedures

13. Remedial action and sanctions

14. Simple procedures for amending the agreement

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Annex 15

Community Contribution Worksheet4

Name of Community: …………………………………………………………………….

Name or description of sub-project ………………………………………………………..

Theme & Account Unit Standard price/unit

Units to be provided

Sub-total (col. 3 x col. 4)

Grand total (sum of col. 5)

(1) (2) (3) (4) (5)

Prevention & Ad-vocacy

Direct labour Per day $3Distribution of con-doms

Per 100 condoms

$5

Organizing meetings Meeting $10Total

Care & support

Nursing care Per day $5Other labour Per day $3Provision of food 10 kg bags

of maize$10

Construct trench 1 meter $1Total

Grand total

4 Please note that this example is not held to be complete. Each project should amend the layout, content, and standard costs ac-cording to its needs and local prices. Costs should be prepared in local currency

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Annex 16

Key Points To Consider To Mitigate Risk In Community Subprojects

As noted in the main section of the text, NAC/NAS should ensure that the risks associated with community projects are mitigated by clear transparent rules and other methods for empowering and training communities to exer-cise fiduciary control their leaders, as well as by suitable internal control procedures. The mitigation system should be simple and effective. Key points to consider are:

1. No individual should be able to initiate, authorise, execute, or record a transaction without the active in-volvement of someone else.

2. Risks of loss, leakage, fraud, inaccuracy, or mistake should be identified at all levels, carefully assessed, and measures put in place to eliminate or minimise them.

3. Measures should normally not cost more than the possible loss that could result from their absence.

4. The measures should not unduly slow the flow of funds or project implementation.

5. Fiduciary management supervision at the community level should be integrated with monitoring and evaluation to ensure a close link between technical/progress reporting and financial reporting, as a way to support the validity of expenditures.

6. Accountability should be built into the local governance system and at the community level using the many accountability mechanism already being piloted in a large number of projects. These include; community participation, public announcement of community activities and funds received and spent, use of local languages for all community records and their communication to the next higher level, elec-tion of project management committees, putting all information into the public domain in open meetings and posting key in public places in the most common local language even where illiteracy is high.

7. Internal audits of community organizations should be encouraged.

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Annex 17

Summary Of Standards For The Professional Practice Of Internal Auditing

These five standards for the professional practice of internal auditing may be summarised as follows.

(i) Independence- Internal auditors should be independent of the activities they audit and the organiza-tional status of the internal auditing department should be sufficient to permit the accomplishment of its audit responsibilities.

(ii) Professional proficiency- These standards recognise that both the Internal Audit Department and the individual auditor should posses the knowledge, skills, and disciplines to carry out audit responsibil-ities. The relevant standards for the individual auditor include; compliance with standards of con-duct, human relations and communications skills, and continued professional education.

(iii) Scope of work- The scope of internal audit work should encompass the examination and evaluation of the adequacy and effectiveness of the organization’s internal control and the quality of perform-ance in carrying out assigned responsibilities. Specific standards for the scope of work includes: (a) reliability and integrity of information; (b) compliance with policies, plans, procedures, laws and reg-ulations; (c) safeguarding of assets; (d) economical and efficient use of resources; and (e) accom-plishment of established objectives and goals for operations or programs. The last two (d and e) re-late to operational audits.

(iv) Performance of audit work- Standards for the performance of audit work cover the specific areas of: (a) planning the audit work; (b) examining and evaluating information; (c) communicating results; and (d) following up on work to ensure that appropriate actions have been taken.

(v) Managing the Internal Audit Department- These standards deal with the Director of the Audit Department’s responsibilities to manage the department and they include: (a) purpose, authority and responsibility; (b) planning; (c) policies and procedures; (d) personnel management and development; (e) external auditors; (f) quality assurance.

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Annex 18

Phases For Conducting Operational Audits

While methodology for conducting an operational audit varies between organizations it typically involves the following phases or tasks.

(i) Proposal and familiarisation- auditor to gain an understanding of the organizations objectives and to review background information such as activities performed, types of controls implemented, organiz-ational structure, and the position of the organizational unit and its interfaces in the overall organiza-tion. Additionally, auditor to review quantified data, including management and other reports, to identify trends and possible problem areas.

(ii) Preliminary survey- preliminary assessment of the activity being assessed, operation observed and questions put to operational management. Information on financial and statistical data, plans and budgets and other measurement and reporting systems. The primary objective is to obtain an over-view of the operation and some indication of the specific activities that may warrant a detailed re-view later during the audit.

(iii) Preliminary review- limited tests are made to assess the validity of views and impressions from earlier phase. The activity or functional areas to be reviewed in depth will be identified and the cri-teria against which performance will be assessed are established. Phase culminates in the formula-tion and design of a detailed work program and the techniques to be used.

(iv) Detailed examination- establishes the currency, completeness and accuracy of data. The overall ob-jective is to determine the areas that require management attention. Tests may be directed to determ-ine:a. if goals and objectives are being obtained within authorised budgetsb. if essential and reliable information is available on a timely basis and if it is being usedc. if costs of the activity are in line with the benefits being achievedd. if the operational activity is achieving the intended resultse. if the activity is continuing to meet the target need for which it was establishedf. if there is a continuing need for the activity

(v) Developing and reviewing audit findings- prior to evaluating operational performance it is necessary to define the operational standards or criteria for appraisal. The auditor to ensure that standards are realistic, the units of measurement can be determined objectively, and those standards are acceptable to management and other employees. Standards can be obtained from the organization itself and other similar organizations and they include: (a) a listing of objectives; (b) goals; (c) plans; (d) budgets; (e) past performance records; (f) policies; (g) procedures; and (h) conditionalities. The aud-itors role is to make a judgement about how well a particular procedure has been complied with, how efficient a given operational activity is being carried out, or how effective is the overall performance of that activity. After all elements of the findings have been evaluated the auditor must discuss the findings with management. A draft report can be provided and the auditor should allow sufficient time to allow the organization to respond to findings.

(vi) Reporting- the formal means of reporting findings to management. Report all elements of each find-ing and include the organizations comments and corrective action taken.

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(vii) Post audit follow up- ascertains whether recommendations contained in the audit report have been acted upon. Follow up should also include the collection of feedback on the effectiveness and diffi-culties of implementing recommendations.

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Annex 19

OP 10.02August 1997

These policies were prepared for use by World Bank staff and are not necessarily a complete treatment of the sub-ject.

Financial ManagementOP / BP 10.02

Note: OP and BP 10.02 have been revised to include auditing standards for noncommercial entities. They replace the versions dated July 1996. Annexes A, B and C of BP 10.02 are not being replaced. These documents are complemented by Guidelines: Financial Reporting and Auditing of Projects Financed by the World Bank (Washington, D.C.: World Bank, 1982) and by the Financial Accounting, Reporting, and Auditing Handbook (Washington, D.C.: World Bank, 1995). Questions on these documents may be addressed to the Financial Adviser, LOADR.

Financial Management1. Under projects financed by the Bank,1 the borrower and the project implementing entities maintain financial man-agement systems—including accounting, financial reporting, and auditing systems—adequate to ensure that they can provide to the Bank accurate and timely information regarding project resources and expenditures.

Accounting2. Accounting information submitted to the Bank by all commercial, industrial, and business entities, whether in the public or the private sector, must adhere to accounting standards acceptable to the Bank.2 Accounting information submitted by entities other than commercial, industrial, and business entities must adhere to an appropriately de -signed format acceptable to the Bank. When project implementation begins, the borrower and the project implement-ing entities must have in place accounting and internal control systems that accord with such accounting standards or agreed format and that (a) reliably record and report all assets and liabilities and financial transactions of the project and, as appropriate, the entity, including those transactions involving the use of Bank funds; and (b) provide suffi-cient financial information for managing and monitoring project activities.

Financial Reporting3. Project legal agreements normally require the borrower and the project implementing entities to provide to the Bank, within 6 months after the end of each fiscal year (including the fiscal year of the final Bank disbursement),3 annual audited financial statements of the project that are acceptable to the Bank.4 The Bank also requires audited financial statements of any revenue-earning borrower or project implementing entity if (a) its financial viability is vi -tal to project success, or (b) one of the project objectives is to improve its institutional capability. In addition, the Bank may require submission of the interim unaudited statements used for project managing and monitoring pur -poses.

Auditing4. The Bank requires the borrower and the project implementing entities to have the required financial statements for each year audited in accordance with standards on auditing that are acceptable to the Bank.5 An audit of such finan-cial statements includes (a) an assessment of the adequacy of accounting and internal control systems to monitor ex -penditures and other financial transactions and ensure safe custody of project-financed assets; (b) a determination as to whether the borrower and project implementing entities have maintained adequate documentation on all relevant

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transactions; and (c) verification that expenditures submitted to the Bank are eligible for financing, and identification of any ineligible expenditures.

5. The borrower and the project implementing entities ensure that an independent auditor acceptable to the Bank6 is appointed in sufficient time to carry out its responsibilities, including a review of the financial management systems at the beginning of project implementation and periodically thereafter.

Special Accounts and Statements of Expenditure

6. When the Bank agrees with the borrower on the use of a special account (SA) and/or statements of expenditure (SOEs), it requires the borrower to show a summary of SA activities and/or a summary of SOE disbursements in the annual audited financial statements of the project that it provides to the Bank.7 The SA and SOEs are addressed sep-arately in the auditor's opinion.8

7. For adjustment operations not governed by simplified disbursement procedures,9 the Bank requires an acceptable audit report on any disbursements based on SOEs before it disburses subsequent tranches.

Failure to Submit Acceptable Audited Financial Statements

8. If (a) the required audited financial statements are not received by the due date, (b) the auditor's opinion indicates deficiencies in the accounting and internal controls (including ineligible expenditures) or in the reliability of the fin-ancial statements, or (c) the Bank considers the scope or quality of the audit to be unacceptable, the Bank takes the following actions: until acceptable audited financial statements are received or a remedial action plan is agreed, the Bank normally does not extend the closing date on the loan and normally delays negotiations or Board presentation of any new loans benefiting the defaulting entity.10 Exceptions to this policy may be made with the authorization of the Vice President and Controller and the Regional vice president.

9. If within 4 months after the due date the Bank does not receive acceptable audited financial statements, the Bank normally discontinues the use of the SOE procedure; if the Bank does not receive acceptable audited SA financial statements, it normally withholds replenishment of the SA.11 After 9 months following the due date, the Bank may suspend all disbursements on that loan. If the audited financial statements reveal major deficiencies in internal con -trols, including inadequate evidence that funds have been used for eligible expenditures, the Bank may suspend dis-bursements on that loan until it is satisfied that the borrower and the project implementing entities have taken ad -equate remedial action.12

Intermediary Operations10. For financial intermediary operations,13 the Bank requires the intermediary to ensure that the subborrowers have accounting and internal controls (and, where required, auditing arrangements) adequate to provide the financial in -formation on implementation performance required by the agreements between the intermediary and the subborrow-ers.

Financing of Audit Costs11. The costs of annual audits are normally excluded from calculations of project costs and Bank financing. How-ever, if the costs of annual audits are incremental costs, they may be included in project costs and Bank financing; in such cases, a separate reference is made to these audits in the project description and in the definition of incremental operating costs in the withdrawal schedule.

____________

1. "Bank" includes IDA; "loans" refers to all funds administered by the Bank, including credits, Project Preparation Fa-cility advances, Institutional Development Fund grants, and project-related trust and other funds; "legal agreements" in-cludes Loan, Development Credit, Project, and Grant Agreements; and "audited financial statements" includes both the

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financial statements and the auditor's report on them.2. The International Accounting Standards, published annually by the International Accounting Standards Committee and widely adopted by the accounting profession, is an example of accounting standards that are acceptable to the Bank. (At the issuance of OP and BP 10.02, the latest version is dated 1995.)3. If in a given country a longer period is usual, the country department should develop a plan to reduce the period to 6 months by the end of FY98.4. The Bank does not routinely require an audit of the borrower's deposit account under an adjustment loan, but it re-serves the right to do so.5. For audits of commercial, industrial, and business entities, the International Standards on Auditing, published annu-ally by the International Federation of Accountants and widely adopted by the accounting profession, is an example of standards on auditing that are acceptable to the Bank. (At the issuance of OP and BP 10.02, the latest version is dated 1995.) For entities other than commercial, industrial, and business entities, whose audits are carried out by Supreme Audit Institutions, the Auditing Standards issued by the International Organization of Supreme Audit Institutions (June 1992) is an example of standards that are acceptable to the Bank.6. Guidance on the selection, acceptability, and appointment of an auditor is available in the Financial Accounting, Re-porting, and Auditing Handbook (FARAH), Chapter V, paras. 21-28.7. If the administration of the SA is completely separate from that of the project, the Loan Agreement may provide for a separate SA financial statement and audit.8. Sample auditor's opinions on an SA and SOEs are available in FARAH, Annex XXI.9. See the Board paper Simplifying Disbursements under Structural and Sectoral Adjustment Loans and Credits, R95-225(Rev.), December 12, 1995.10. In this paragraph, "entity" means the autonomous project implementing entity or the member country's agency or department that is in noncompliance, not the member country as a whole.11. See OP 12.20, Special Accounts.12. Suspension of disbursements is discussed in OP / BP 13.40.13. For financial intermediaries, see OP/BP 8.30, Financial Sector Operations (forthcoming).

...........................

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Annex 20

Terms of reference to review government accounting and auditing arrangements

Please lift these from FARAH- Financial Accounting Reporting and Auditing Handbook- First edition- Janu-ary 1995- Annex XX- pages 145 to 148 inclusive

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Annex 21

Guidelines For AuditorsTerms Of Reference And Engagement Letter

1. Normally, the Bank approves the terms of reference (TOR) of the auditor to be engaged by a borrower or project entity. Preferably staff should not be involved in the drafting of the TOR, though there is no objection to staff members giving advice to the borrower based on these guidelines.

2. The guidelines should not be regarded as universally applicable to audits of Bank projects or project entities. Staff should select those components they consider appropriate for a particular audit engagement and add relevant matters that are not in the guidelines. This relates only to the appointment of auditors to carry out an audit of an or-ganization's financial statements, project financial statements, adjustment operations, statements of expenditure (SOEs), and special accounts (SAs). It is not intended for any special reviews, investigation, or consulting work.

3. Terms of reference for an Auditor The form and content of the TOR may vary for each project, and some aspects may be included in an en-

gagement latter. In general, it should include the points outlined below.

4. Summary of Contents of TOR/Engagement Letter

a) Description of the employing authority or entity,

b) Delivery of audit report,

c) Description and timing of the financial statements and other material to be provided by the management for the audit,

d) the fact that the audit should be carried out in accordance with international standards on auditing,

e) "management letter,"

f) statement of access to records and personnel available to the auditor,

g) submission of proposal and work plan by the auditor.

5. Detailed Contents to be Included in the TOR/Engagement Letter

a) The TOR should describe the institution engaging the auditor and whether it is acting on behalf of, or is a constituent part of, a larger determining his/her independence and the scope of work.

b) Both a legal and a general description of the entity should be provided in sufficient detail to enable the aud-itor to understand fully the nature and objective of the entity. The following additional information would be helpful:

(i) organizational charts;

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(ii) names of senior managers;(iii) name and qualification of the person(s) responsible for financial management, accounting, and internal audit;(iv) name and address of any existing external auditor;(v) data processing facilities in use; and(vi) a copy of the latest financial statements (where available).

c) The auditor should be invited to:(i) submit a proposal for the audit of the financial statements(i.e., financial statements of the executing entity, adjustment operations, project financial statements, SOEs,

SAs, or a combination of the above);

(ii) deliver an opinion based on the scope and detail of the audit of such statements; and

(iii) provide a "management letter" describing the improvements needed, if any, in the accounting and internal control systems of the entity and the proper use of re-

sources.

The TOR/Engagement Letter should specify whether the engagement is for more fiscal years (or for another specified period).

d) While the auditor is responsible for forming and expressing opinions on the financial statements, the respons-ibility for their preparation lies with the management of the entity. Therefore, the form of the annual financial state-ments and supporting documentation that will be supplied to the auditor should be specified. The estimated time for the provision of these documents to the auditor should be given (e.g., two months after the close of the fiscal year).

e) The scope and detail of the audit should be clearly explained so an auditor can determine if there are require-ments beyond those of a routine audit. Below are examples of typical requirements:

(i) The audit should be carried out in accordance with international standards on auditing. The auditor should indicate the extent (if any) to which the examination would not conform to those standards.

(ii) The auditor should comment on and confirm the extent to which generally accepted accounting principles have been and are being consistently applied. The auditor should indicate any material differences from international accounting standards, where relevant, and their effect on the annual financial statements.

(iii) Statement of Expenditures (SOEs)

The auditor should be required to verify SOEs with accounting records, supporting documentation, and phys-ical inspection of work done, or goods and services acquired. He/she should also establish (with reference to the dis-bursement letter) that expenditures claimed for reimbursement are eligible for financing under the Loan Agreement.

(iv) Special Account (SA)

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The auditor should be required to verify the correctness of SA financial transactions, including the reconcili-ation of receipts with payments by the Bank, the fund balances, and the operation and use of SAs in accordance with the Loan Agreement.

Management Letter

The management letter should include comments and recommendations for improvements to the borrower's financial and administrative systems and controls, as well as remarks on other matters to which the management's at-tention should be drawn. To supplement the management letter, the auditor may be asked to conduct a special re-view of one or more of the following :

A. economy, efficiency, and effectiveness in the use of resources;B. achievement of the planned results of the project;C. legal/financial obligations and commitments of the entity and extent of compliance or noncompliance;D. specific systems (e.g., improvements in accounting and data processing operations that may be under devel-opment) on which the auditor's comments are necessary to ensure accuracy, efficiency, and proper controls; andE. any other activities on which an auditor may report.

6. Other Aspects Related to the Audit Engagement

a) The selected auditor should be asked to prepare an engagement letter (see Annex XX). In countries where an auditor's specific obligations are provided for by law, this step may not be necessary, but such a letter would still be informative for the borrower. To help avoid misunderstandings, it is in the interest of both the auditor and the bor-rower that the auditor send the engagement letter before the engagement commences. The form and content of the audit engagement letter may vary for each client, but it should generally include reference to the matters addressed in this annex. In addition, it should:

(i) State management's responsibility for specifying the timing and nature of financial statements, and disclosing requirements or other information that is expected to be provided under the audit arrangements.

(ii) Establish a timetable for providing the audit opinion and reports.

(iii) Estimate staff time and audit fees as an indication of the intensity of the audit effort and the level of staff en-gaged on the assignment.

b) On recurring audits, the auditor should not be asked to issue a new engagement letter each year. However, the following factors could call for a new letter:

(i) any indication that the client misunderstands the objective and scope of the audit,(ii) any revised or special terms of the engagement,(iii) a recent change of management,(iv) a significant change in the nature or size of the client's business, and

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(v) legal requirements.

7. The reporting package to be provided by the auditor would normally comprise

a) the annual financial statement of the implementing organization (where required), of the project including SOEs and the SA;

b) an opinion by the auditor acceptable to the Bank on (i) the required financial statements, (ii) a separate refer-ence in the above opinion on the audit of the special account in accordance with the stipulations of the legal docu-ments, and (iii) a separate reference in the above opinion on withdrawals from the loan account on the basis of SOEs in accordance with the Legal Agreements:

c) a management letter; and

d) where required in the TOR, the status of compliance with the legal covenants.

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Annex 22

Sample Terms Of Reference For The Audit Of Project Financial Statements

ObjectiveThe objective of the audit of the Project Financial Statement (PFS) is to enable the auditor to express a pro-

fessional opinion on the financial position of [________] project at the end of each fiscal year and of the funds re-ceived and expenditures for the accounting period ended mm/dd/yy, as reported by the PFS, [as well as an opinion on the Statement of Expenditures].

The project accounts (books of account) provide the basis for preparation of the PFS and are established to reflect the financial transactions in respect of the project, as maintained by the project implementing agency [__________].

ScopeThe audit will be carried out in accordance with International Standards of Auditing, and will include such

tests and controls as the auditor considers necessary under the circumstances. In conducting the audit, special atten-tion should be paid to the following:

(a) All external funds have been used in accordance with the conditions of the relevant financing agreements, with due attention to economy and efficiency, and only for the purposes for which the financing was provided. Rel-evant financing agreements are (--------name of loan agreement);(b) Counterpart funds have been provided and used in accordance with the relevant financing agreements, with due attention to economy and efficiency, and only for the purposes for which they were provided;(c) Goods and services financed have been procured in accordance with the relevant financing agreement;(d) All necessary supporting documents, records, and accounts have been kept in respect of all project ventures [including expenditures reported via SOEs or SAs]. Clear linkages should exist between the books of account and re-ports presented to the Bank.(e) Where Special Accounts have been used, they have been maintained in accordance with the provisions of the relevant financing agreement(f) The project accounts have been prepared in accordance with consistently applied International Accounting Standards and give a true and fair view of the financial situation of the project at mm/dd/yy and of resources and ex-penditures for the year ended on that date.

Project Financial StatementsThe Project Financial Statements should include

(a) a Summary of Funds received, showing the World Bank, project funds from other donors, and counterpart funds separately;(b) a Summary of Expenditures shown under the main project headings and by main categories of expenditures, both for the current fiscal year and accumulated to date; and(c) a Balance Sheet showing Accumulated Funds of the Project, bank balances, other assets of the project, and liabilities, if any.

As an annex to the Project Financial Statements, the auditor should prepare a reconciliation between the amounts shown as “received by the project from the World Bank” and that shown as being disbursed by the Bank. As part of that reconciliation, the auditor should indicate the mechanism for the disbursement, i.e. Special Accounts, Statements of Expenditures, or direct reimbursement,

Statements of Expenditures

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In addition to the audit of the PFS, the auditor is required to audit all SOEs used as the basis for the submis-sion of withdrawal applications. The auditor should apply such tests and controls as the auditor considers necessary under the circumstances. These expenditures should be carefully compared for project eligibility with the relevant financing agreements, and with reference to the Staff Appraisal Report for guidance when considered necessary. Where ineligible expenditures are identified as having been included in withdrawal applications and reimbursed against, these should be separately noted by the auditor. Annexed to the Project Financial Statements should be a schedule listing individual SOE withdrawal applications by specific reference number and amount. The total with-drawals under the SOE procedure should be part of the overall reconciliation of Bank disbursements described above.

Special AccountsIn conjunction with the audit of the Project Financial Statements, the auditor is also required to audit the

activities of the Special Accounts associated with the Project. The Special Accounts usually comprise· deposits and replenishments received from the Bank· payments substantiated by withdrawal applications· interest that may be earned from the balances and which belong to the borrower; and· the remaining balances at the end of each fiscal year.

The auditor must form an opinion as to the degree of compliance with the Bank’s procedures and the balance of the Special Account at year-end. The audit should examine the eligibility and correctness of financial transactions during the period under review and fund balances at the end of such a period, the operation and use of the SA in ac-cordance with the financing agreement, and the adequacy of internal controls for this type of disbursement mechan-ism.

For this project, the Special Accounts are referred to in [cite references] of the relevant financing agreements. Special Accounts statements and the auditor’s report should with the Project Financial Statements.

Audit OpinionBesides a primary opinion on the Project Financial Statements, the annual audit report of the Project Ac-

counts should include a separate paragraph commenting on the accuracy and propriety of expenditures withdrawn under SOE procedures and the extent to which the Bank can rely on SOEs as a basis for loan disbursement. The fin-ancial statements, including the audit report, should be received by the Bank no later than [three to six] months after the end of the accounting period to which the audit refers. The auditor should submit the report to the borrower’s designated agent rather than to any staff member of the project entity. The agent should then promptly forward two copies of the audited accounts and report to the Bank.

Management LetterIn addition to the audit reports, the auditor will prepare a “management letter,” in which the auditor will:

(a) give comments and observations on the accounting records, systems, and controls that were examined during the course of the audit;(b) identify specific deficiencies and areas of weakness in systems and controls and make recommendation for their improvement;(c) report on the degree of compliance of each of the financial covenants on the financing agreement and give comments, if any, on internal and external matters affecting such compliance;(d) communicate matters that have come to attention during the audit which might have a significant impact on the implementation of the project; and(e) bring to the borrower’s attention any other matters that the auditors considers pertinent.

GeneralThe auditor should be given access to all legal documents, correspondence, and any other information associ-

ated with the project and deemed necessary by the auditor. Confirmation should also be obtained of amounts dis-bursed and outstanding at the Bank [and of amounts disbursed under [specify other donor, loan or grant, if any]. Bank Task Managers can assist in obtaining these confirmations.

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It is highly desirable that the auditor become familiar with a copy of the Bank’s Guidelines on Financial Re-porting and Auditing of Projects Financed by the World Bank, which summarizes the Bank’s financial reporting and auditing requirements. The auditor should also be familiar with the Bank’s Disbursement Manual. Both documents will be provided by the Task Manager.

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Annex 23

Sample Auditor Management Letter

Dear:We have audited the financial statements of the (company name) for the year ending mm/yy and have issued

our report date mm/yy. In planning and performing our audit of (company name), we considered its internal account-ing control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal accounting control structure. We noted no matters involving the internal accounting control structure and its operation that we consider to be material weaknesses in ac-cordance with the standards referred to above.

This report is comprised of three sections. Section I contains recommendations related to certain improve-ments in the existing systems and procedures noted in the current year. Section II contains prior year recommenda-tions which have not yet been fully implemented. Section III contains prior year recommendations which have been fully resolved (managements’ comments would be noted following each recommendation).

This report is intended solely for the information and use of management and others within the organization and should not be used for any other purpose.During this year’s audit we note that the (company name) has addressed most of the recommendations included in our prior year report. With respect to our current and carryover recommendations, we suggest that an implementa-tion timetable continue to be prepared and approved by appropriate management.

Yours very truly,

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Annex 24

Questionnaire to Assess Private Auditors

Basic Information

Legal name of Auditor or Audit Firm(s):

Audit Law Registration Number:

Date of commencing Audit Practice:

Street Address:

Postal Address:

Telephone (with area code):

Telefax/Telex Number:

Address and Telephones of

Branches (if any):

Name/Address of Foreign Affiliations (if any:

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OUTLINE OF THE AUDIT FIRM

1. State the legal nature of the Audit Firm (sole proprietor, partnership etc.)

2. State the total number of auditors (excluding support staff) who are owners or employees of the Firm. Indicate how many of these are licensed auditors.

3. Indicate which of the following services are provided by the Firm and show approximate share of each service to the Firm’s total Fee Income.

% of Total

Fee Income

Auditing

Accounting

Other share

TOTAL 100%

4. For EACH licensed auditor who is an owner/employee, provide a separate attachment with their names and a brief summary of their qualifications and experience, including

1) academic education and qualifications

2) memberships of professional audit or accounting associations

3) details of audit and accounting work experience, including any work experience outside the Country

4) written and spoken fluency in English or other languages

5. Does the firm have any association or affiliation with any other professional firm such as au-ditors, accountants, consultants or lawyers, either in the Country or abroad? If so, please supply details.

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INDEPENDENCE

6. Are any of the individuals listed above (or spouses or close relatives) employed by any level of Government or Legislative Body or Public Agency? If so, please supply details.

7. If a potential client -- the agency executing a World Bank-financed project -- proposed your firm for consideration as auditors for the project, would you be prepared to provide written confirmation (at that time) that the Firm has no conflict of interest or lack of independence in accepting appointment as an auditor.

YES/NO

8. Confirm that, should your Firm be appointed auditor to a World Bank-financed project, you would allow World Bank staff to carry out a quality assurance review of the audit working papers support-ing any Audit Report issued.

YES/NO

AUDIT PRACTICE

9. Attach (separately) a list of the Firm’s major current and past clients (particularly any interna-tional or joint venture clients) and state the type of service (audit, consulting advice, accountancy) provided to each client.

10. Have you performed any audits jointly with international audit firms? If so, please provide details.

11. Are you willing to conduct audits jointly, under the general direction of an international audit and accounting firm?

YES/NO

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12. State briefly the basis on which you determine fees charged to clients for professional services that you provide.

AUDIT STANDARDS AND PROCEDURES

13. State whether the Firm is aware of internationally accepted auditing and accounting standards, and of local accounting rules?

YES/NO

14. How do the Firm’s audit procedures and methods ensure that these auditing and accounting standards are complied with? State briefly.

15. Are the Firm’s audit procedures and methods recorded in a manual or similar document?

YES/NO

If not, how are audit staff trained in auditing and accounting concepts? Also, how is day-to-day guidance in audit techniques provided to them?

16. State briefly how the work of employees is supervised.

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17. State briefly the internal procedures you employ to assure internal quality of work and service, such as a second review (for quality assurance) within the Firm, consultation with experts, or review of work by external parties.

18. Should the World Bank wish to consider you for selection as auditor to World Bank-financed projects, would you permit World Bank representatives to review the Firm’s audit procedures and method?

YES/NO

GENERAL

19. Attach copies of any references from clients, any brochures, or other promotional material de-scribing your Firm.

List below the headings and number of pages of any attachments that you have enclosed with this question-naire.

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Annex 25

Sample Auditors Engagement Letter

(usually prepared by the auditor)To the Board of Directors or the appropriate representative of senior management:

You have requested that we audit (insert names of financial statements) as of and for the year ending..................................................We are pleased to confirm our acceptance and our understanding in this en-gagement by means of this letter. Our audit will be made in accordance with applicable authoritative pronounce-ments in [name of country] with the objective of our expressing an opinion on the financial statements.In forming our opinion on the financial statements, we will perform sufficient tests to obtain reasonable assurance as to whether the information contained in the underlying accounting records and other source data is reliable and suffi-cient as the basis for the preparation of the financial statements. We will also decide whether the information is properly communicated in the financial statements.Because of the test nature and other inherent limitation of an audit, together with the inherent limitations of any sys-tem of internal control, there is an unavoidable risk that even some material misstatements may remain undiscovered.In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in internal control which come to our notice.May we remind you that the responsibility for the preparation of financial statements including adequate disclosure is that of management. This includes the maintenance of adequate accounting records and internal controls, the selec-tion and application of accounting policies, and the safeguarding of the assets. As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit.We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit.Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement plus direct out-of-pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required.

This letter will be effective for future years unless it is terminated, amended or superseded.Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements.

XYZ & Co.Note: Additional items may be included in accordance with the Guidelines for TOR and Engagement Letters -- An-nex XVIII.

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Annex 26

Sample Unqualified Audit Report

Addressee5

Introductory ParagraphWe have audited the accompanying [indicate names of each financial statement] of the XYZ Company as of

December 31, 19XX [indicate any other additional years necessary] for the year(s) then ended. These financial state-ments are the responsibility of [identify Borrower]. Our responsibility is to express an opinion on these financial state-ments based on our audit.

Scope ParagraphWe conducted our audit in accordance with International Standards on Auditing. Those Standards require that

we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fin-ancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Opinion ParagraphIn our opinion, the financial statements give a true and fair view of the financial position of the XYZ Company

as of December 31, 19XX, and of the results of its operations and its cash flows for the year then ended in accordance with [indicate International Accounting Standards or relevant national standards].

[Name and Address of Audit Firm][Date - Completion Date of Audit]

5 The auditor's report should be appropriately addressed as required by the circumstances of the engagement and local regulations.

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MODEL AUDIT REPORTUnqualified Opinion

(for Project Financial Statement including SOE)

Addressee6

Introductory ParagraphWe have audited the accompanying financial statements of the [__________] Project [financed under World

Bank Loan No.______/IDA as of December 31, 19XX [indicate any other additional years necessary] for the year(s) then ended. Our responsibility is to express an opinion on these financial statements based on our audit.

Scope ParagraphWe conducted our audit in accordance with International Standards on Auditing [or relevant national standards

or practices, and/or World Bank guidelines]. Those Standards and/or World Bank guidelines require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by manage-ment, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Opinion ParagraphIn our opinion, the financial statements give a true and fair view of the Sources and Application of Funds7 of

________________Project for the year ended December 31, 19XX, in accordance with [indicate International Ac-counting Standards or relevant national standards. Add “financial position” at December 31, 19XX where a balance sheet is required.]

In addition, (a) with respect to SOEs, adequate supporting documentation has been maintained to support claims to the World Bank for reimbursements of expenditures incurred; and (b) which expenditures are eligible for fin-ancing under the Loan/Credit Agreement [Ln/Cr. ______________].


6 The auditor's report should be appropriately addressed as required by the circumstances of the engagement and local regula-tions.

7 12 A “Source and Application of Funds” statement is always required for each project. A balance sheet is also required where the project has assets and liabilities.

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MODEL AUDIT REPORTUnqualified Opinion(Special Account)

Addressee8

Introductory ParagraphWe have audited the accompanying [Sources and Application of Funds] of the “Special Ac-

count” of the _________________Project (Loan/Cr. No. _______) for the year ended December 31, 19XX. Our responsibility is to express an opinion on the financial statements of the Special Account based on our audit.

Scope ParagraphWe conducted our audit in accordance with International Standards on Auditing [or relevant na-

tional standards or practices, and/or World Bank guidelines for Special Accounts]. Those Standards and World Bank guidelines require that we plan and perform the audit to obtain reasonable assurance that the Special Account financial statement is free of material misstatement. We believe that our audit provides a reasonable basis for our opinion.

Opinion ParagraphIn our opinion, the financial statements of the Special Account give a true and fair view of the

financial position of the Special Account as of the ______________Project (Loan/Cr. No. ______) December 31, 19XX, for the year then ended in accordance with International Accounting Standards [or relevant national standards and World Bank guidelines], and of the Sources and Application of Funds..


8 13 The auditor's report should be appropriately addressed as required by the circumstances of the engagement and local regulations.

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