TERMS OF REFERENCE FOR THE AUDIT OF PROJECT FINANCIAL STATEMENTS

Objective:

The objective of the audit of the Project Financial Statement (PFS) is to enable the auditor to express a professional opinion on the financial position of Technical Education Quality Improvement Programme (TEQIP) project at the end of each fiscal year and of the funds received and expenditures for the accounting period ending 2007-08, as reported by PFS [as well as an opinion on the Statement of Expenditure].

The project accounts (books of account) provide the basis for preparation of the PFS and to reflect the financial transactions in respect of the project, as maintained by the project-implementing agency i.e. State Project Implementation Unit (SPFU)

Scope:

The 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 attention 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. Relevant 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 thy 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 dept in respect of all project ventures [ including expenditures reported via SOEs or SAs ]. Clear linkages should exist between the books of account and reports 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 benn prepared in accordance with consistently applied International Accounting Standards and give a true and fair view of the financial situation of the project mm/dd/yy and of resources and expenditures for the year ended on that date.

Project Financial Statements:

The 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 form 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.

The 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 form 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.

In addition to the audit of the PFS, the auditor is required to audit all SOEs used as the basis for the submission 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 identifies 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 withdrawals under the SOE procedure should be part of the overall reconciliation of Bank disbursements described above.

Special Accounts:

In 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 form 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 Bank's procedures and the balance of the Special Account at year-end. The audit should examine the eligibility and correctness of financial transaction during the period under REVIEW and fund balances at the end of such a period, the operation and use of the SA in accordance with the financing agreement, and the adequacy of internal controls for this type of disbursement mechanism.

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 Opinion:

Besides a primary opinion on the Project Financial Statements, the annual audit report of the Project Accounts 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 financial statement, 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 Letter:

In 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.

General:

The auditor should be given access to all legal documents, correspondence, and any other information associated with the project and deemed necessary by the auditor. Confirmation should also be obtained of amounts disbursed 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.

It is highly desirable that the auditor becomes familiar with a copy of the Bank's Guidelines on Financial Reporting 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.