The NPO (Non-Profit Organization) “European Neighborhood Council” (hereinafter simply “ENC”) and NGO “Kyrgyz Branch of the Internet Society” (hereinafter simply ISOC) announces a REQUEST FOR EXPRESSION OF INTEREST FOR AUDIT of the project “Promotion of Equal Economic Opportunities and Resilience of Youth” in the Kyrgyz Republic (Sanarip insan (Digital Citizen)), funded by the European Union Contract No EIDHR/2021/426-258. Applications of participants must be sent by 12:00 pm July 22, 2022, to the email address: [email protected]
TERMS OF REFERENCE (“TOR”)
FINANCIAL AUDIT
(According to agreed procedures of interaction)
Valid for evaluating the financial statements of local non-governmental organizations, appraisal of mandated projects or contribution agreements.
Fundamental Principles
1.1. The financial audit of the project (“Financial Audit”) will be carried out by an independent auditor (“Auditor”) who has the required level of professional knowledge and experience and in accordance with generally accepted international auditing standards.
1.2. The auditor must meet one of the following conditions:
Be a member of a national accounting or auditing organization or institution, which in turn is a member of the International Federation of Accountants (IFAC).
Be a member of a national accounting or audit organization or institution. If this organization is not a member of IFAC, the Auditor undertakes to conduct a financial audit in accordance with the standards and ethical norms of the IFAC set out in this TOR.
The auditor is registered as an official auditor in the public register of a public oversight body in a Member State in accordance with the principles of public oversight set out in Directive 2006/43/EC of the European Parliament and of the Council (this applies to auditors and audit firms based in a Member State EU).
The auditor is registered as an official auditor in the public register of a public oversight body in a third country, and this register is subject to the principles of public control set out in the legislation of the country concerned (this applies to auditors and audit firms that are located in a third country).”
1.3. This Terms of Reference (“TOR”) defines the auditor’s mandate in connection with the financial audit of projects/cooperation programs/implementing partner (“Partner”) funded by the European Union office. Financial audit is based on professional requirements and guidelines governing the professional activities to be carried out by the auditor in relation to agreed procedures for interaction.
1.4. When planning, conducting and submitting a financial audit report, the auditor must take due account of the following audit and other standards adopted by international professional organizations:
ISA – International Standards on Auditing,
IFAC – International Federation of Accountants.
In addition, the auditor should take into account relevant local accounting standards as well as local accounting and reporting laws in force in the country in which the financial audit is being conducted.
Principles of financial audit
The auditor needs to plan, conduct and report on the financial audit in order to form a professional judgment on the following matters related to the activities and organization of the partner:
2.1 Principles of order (financial regularity);
2.2 Existence, adequacy and effectiveness of the internal control system (ICS);
2.3 Compliance with the objectives of the project and compliance with the terms of the contract;
2.4 Efficiency of doing business and efficient use of financial resources.
Documents for reference
The following documents and materials should be considered by the auditor as the basis for conducting a financial audit:
Project/programme: A cooperation agreement regarding a project or partner organization; Project documentation / Terms of Reference (TOR);
Budgets, financing plans, project operational plans; Project management procedures;
Any other documents related to the project / program.
Accounting: Accounting documentation subject to financial audit;
Financial and operational reports relating to the project/programme.
Auditor: This Terms of Reference and the corresponding mandate to conduct a financial audit;
Previous internal and external audit reports of the partner;
Any other information requested from the partner by the auditor.
Financial audit planning
The auditor should plan the financial audit adequately and well in advance and ensure that the financial audit is performed to the highest professional standard in an economical and efficient manner and within the agreed time frame.
Based on the information obtained during the planning stage, including its assessment of audit risk, the auditor should determine:
the types of transactions to be considered and the method of audit (complete method or random sampling method
);
types of physical inspection and sites to be selected;
the number of scheduled visits.
The auditor undertakes to ensure continuity in the approach of the financial audit and audit of the team, even if there are changes in the list of group leaders compared to the previous period.
Place of financial analysis
The financial audit will be conducted within the project environment (administrative premises and/or remote, if applicable).
Management’s presentation of full disclosure
The auditor should obtain a management representation letter, signed by the management of the entity being audited, confirming:
a) recognizing the responsibility of the organization for the maintenance of accounts and financial documents, for their correctness, completeness, fairness, presentation of real facts, in accordance with the objectives of the project, reference documents (project description, contracts, budgets, etc.) and national legislation;
b) making available to the auditor all accounting books, supporting and other documents, minutes and any other relevant information necessary for consideration;
c) completeness of information about property and inventory.
d) completeness of information on the received and expected financing, as well as on own funds for the project under review in the period under review.
e) the availability of any information and explanations, whether orally or in writing, that the auditor may need to fulfill his or her mandate.
f) in the case of contributions to local NGOs, the application certifies the completeness of information relating to the received, expected or own financing of the project under review in the period under review and necessary for the audit of the organization’s consolidated financial statements. Consolidated financial statements, including the balance sheet and profit and loss statement of the project, must be attached to the declaration and are an integral part of it. This declaration must be included in the financial audit report.
Detailed financial audit procedures
The auditor should apply appropriate audit procedures to form professional judgment on the following matters. These procedures, applied all or selectively, may include: control, verification, evaluation, audit, interview, analysis and other audit methods. When choosing an audit procedure, the auditor takes into account the results of his assessment of audit risk (at the planning stage and during the audit).
Accordingly, he must identify and perform appropriate audit tasks in order to obtain an overall understanding of the above aspects before he evaluates individual findings and makes a final independent audit decision.
The auditor may choose and apply any other audit procedures that he deems necessary for the professional conduct of a financial audit.
Upon receipt of the financial audit report, ENC and ISOC or any third party designated by the European Union reserves the right to request other audit procedures chosen to cope with a change in the circumstances of the project or partner organization.
Examples of possible audit procedures are:
7.1 Principles of orderliness (financial regularity) – Principle 2.1.
Questions related to the project:
a) authority/approval of expenditures and validity of supporting documents;
b) details of funds received from the project and comparison with information provided by donors;
c) the physical existence and movement of inventory items representing project property (fixed assets, inventory items, current assets);
d) allocation of costs in accordance with the approved budget(s);
e) compliance of local contracts with local applicable laws;
f) identifying and implementing observations, adjustments and recommendations resulting from previous financial audit reports.
Questions related to accounting:
a) the arithmetic accuracy of accounts, supporting documents and financial statements and reports;
b) correctness of accounting records;
c) the timeliness of recording economic events and transactions in the general ledger;
d) consistency of financial statements and information with the general ledger;
e) the adequacy and correctness of receipts and the completeness of the recording of receipts;
f) valuation of receivables and advances; justification of overdue / unpaid amounts exceeding the period of 1 month;
g) reconciliation of cash balances at the cash desk and in the bank with the general ledger;
h) identifying and implementing observations, adjustments and recommendations resulting from previous financial audit reports and/or the auditor’s report.
7.2 Existence, adequacy and effectiveness of an internal control system (ICS) – Principle 2.2
a) the adequacy of the internal organization (structures, functions, tasks, authorities, responsibilities, methods, procedures, distribution of responsibilities, etc.),
b) the effectiveness of project procedures, financial accounting and reporting,
c) complydenial of applicable laws, rules and regulations,
d) ensuring the physical safety of property,
e) prevention of accounting errors and financial fraud,
f) the adequacy and completeness of the information and financial reporting system.
7.3 Compliance with the objectives of the project and compliance with the terms of the contract – Principle 2.3.
a) Compliance of transactions, expenses and receipts with the main project documents (project description, program of activities, contracts, terms of reference, budgets, etc.);
b) verification that the goods procured with the allocated funds are used for the defined purposes and are still available or have been sold/sold in accordance with the procedures defined in the project agreement/contract;
c) verification of compliance with the provisions of the project agreement/contract;
d) checking that expenditures are in line with agreed budgets. Analysis of variances between budgeted and actual expenditures and justification for major budget changes (+/- 10% of budget).
7.4. Economic conduct of business and efficient use of financial resources – Principle 2.4
a) appropriate use of financial resources for the activity, as stipulated in the project agreement, consultant/executor contract and terms of reference, and ensuring an appropriate level of costs and benefits;
b) the existence and application of adequate measures within the framework of the internal control system (ICS) in connection with the use of allocated funds;
c) the application of control procedures to the various activities of the project. In particular, a clear delineation of responsibilities for vital functions and processes, such as making commitments, resolving and recording expenses, reconciling cash at the cash desk and in banks, tracking long-overdue receivables and payables, physical control of inventory, etc.;
d) alignment of expenditures with agreed budget items;
e) reasonable explanation and adequate documentation by project management of any deviations of actual costs from the agreed budget;
f) the existence of adequate tendering and procurement procedures, for example, optimal cost-benefit ratio for goods and services, alignment of the offer price with local practices and cost levels;
g) confirmation that prices and tariffs are subject to regular review and that the accounting system complies with the requirements for management tools, in particular with regard to cost analysis;
h) consideration and justification of expenses of local and foreign experts/consultants (rent, travel expenses, accommodation, wages, etc.);
i) review and justification of the costs of local staff (wages accrued, social and pension contributions, income tax, etc.);
j) availability of a vehicle usage log and verification that private use of vehicles has been billed and paid;
k) verifying that private use of mobile and landline telephones by employees has been billed and paid.
7.5. Conclusions and recommendations
In his financial audit report, the auditor should:
explain and quantify any adjustments and/or reclassifications of records; as well as
formulate recommendations for improving the internal control system (ICS), as well as the project and accounting procedures.
Final meeting
After the completion of the financial audit, but before leaving the project or partner office, the auditor should hold a final meeting with those responsible for managing the project/programme, as well as those responsible for record keeping and reporting. The meeting should review the results of the project audit, discuss serious shortcomings in the project, administrative and financial management (including shortcomings of individual employees), and propose recommendations for improving project management, accounting procedures and the internal control system (ICS).
The content of the discussions at the closing meeting is summarized in writing and signed by the representative of the implementing partner and the head of the audit team. This protocol shall be attached to the audit report (see 9.1.13).
Financial audit report
The financial audit report should directly comply with the general principles applicable to audit work, as indicated in paragraph 2 above.
The principle of order (financial regularity) and the existence of an internal control system must be positively confirmed by the auditor.
Aspects of the adequacy and effectiveness of the internal control system, compliance with the objectives of the project and compliance with the terms of the contract and the economy of doing business and the efficient use of financial resources, should be expressed in the so-called “negative confirmation” based on the performed audit activities.
We expect the following item to be included in the report:
“As a result of our audit, we have found nothing that leads us to believe that:
– system of internal control (ICS) is not organized properly;
– the execution of the project does not meet the objectives of the project and does not adhere to the terms of the contract;
“Doing business is not economical and financial resources are not used efficiently.”
In his financial audit report, the auditor should consider the following questions and present the report in the following structure:
9.1 Content and structure of the financial audit report
9.1.1 the auditor’s opinion (in particular, the decision 4 of the general principles stated above in paragraph 2;
9.1.2 Name of the project and partners, including. subcontractor(s);
9.1.3 Brief description of relevant information about the partners (history, management, accounting system, internal control system, activities not related to the project funded by the European Union, etc.);
9.1.4 The period covered by the financial audit;
9.1.5 Date and place of review, name of the audit firm, deviations from the original audit program;
9.1.6 Description of the review procedures applied and conclusions regarding the financial information to be audited.
balance sheet;
report about incomes and material losses;
a list of proposed adjustments and reclassifications;
other questions.
9.1.7 analysis of the report on funds received from the European Union;
9.1.8 analysis of the report on funds received from other donors, if any;
9.1.9 recommendations on project management, accounting procedures and internal control system (ICS);
9.1.10 comments regarding compliance with the project agreement/contract and terms of reference;
9.1.11 comparison of the project budget, including comments on major changes;
9.1.12 a list of inventory and fixed assets acquired under the project during the reporting period;
9.1.13 the minutes of the final meeting, as indicated in paragraph 8 above;
9.1.14 Letter of representation from the management of the organization being audited for full disclosure of information, as described in paragraph 6 above.
9.2. Currency and language of the financial audit report
The financial information contained in the financial audit report must be expressed in the currency provided for in this agreement. The financial audit report and all other documents attached to the report must be submitted in English.
9.3. Signature
The financial audit report must be signed by the auditor’s representative, as well as by the head of the audit team.
Place and date:
NOTE: The period of the audit is agreed by the parties – the Customer and the Contractor. The preliminary time frame for the event is October 2022. The exact dates will be announced later.
