AUDIT REPORT ON THE ANNUAL FINANCIAL REPORT OF THE MUNICIPALITY OF VITIA FOR THE YEAR ENDED 31 DECEMBER 2016

Transcription

1 REPUBLIKA E KOSOVËS / REPUBLIKA KOSOVA / REPUBLIC OF KOSOVA ZYRA KOMBËTARE E AUDITIMIT NACIONALNA KANCELARIJA REVIZIJE NATIONAL AUDIT OFFICE Document No: AUDIT REPORT ON THE ANNUAL FINANCIAL REPORT OF THE MUNICIPALITY OF VITIA FOR THE YEAR ENDED 31 DECEMBER 2016 Prishtina, june 2017

2 The National Audit Office of the Republic of Kosovo is the highest institution of economic and financial control which, according to the Constitution and domestic laws, enjoys functional, financial and operational independence. The National Audit Office undertakes regularity and performance audits and is accountable to the Assembly of Kosovo. Our Mission is to contribute to sound financial management in the public administration. We perform audits in line with internationally recognized public sector auditing standards and good European practices. The reports of the National Audit Office directly promote accountability of public institutions as they provide a base for holding managers of individual budget organisations to account. We are thus building confidence in the spending of public funds and playing an active role in securing taxpayers and other stakeholders interests in enhancing public accountability. The Auditor General has decided on the audit opinion on the Annual Financial Statements of the Municipality of Vitia, in consultation with the Assistant Auditor General, Qerkin Morina, who supervised the audit. The opinion and report issued are a result of the audit carried out by Enver Ramadani (Team Leader) and Donjetë Dreshaj, Naim Neziri (team members) under the management of the Audit Director Fatlinda Ramosaj. NATIONAL AUDIT OFFICE-St. Musine Kokollari, No. 87, Prishtina 10000, Kosova Tel: +381(0) /

3 TABLE OF CONTENTS Executive Summary Annual Financial Statements and other External Reporting Obligations Governance Financial Management and Control ANNEX I: Audit Approach and Methodology Annex II: Explanation of the different types of opinion applied by NAO Annex III: Prior Year Recommendations Annex IV: Letter of confirmation

4 Executive Summary Introduction This report summarises the key issues arising from our audit of the 2016 Annual Financial Report of the Municipality of Vitia, which determines the Opinion given by the Auditor General. The examination of the 2016 financial statements was undertaken in accordance with the International Standards on Supreme Audit Institutions. Our approach included such tests and procedures, as we deemed necessary to arrive at an opinion on the financial statements. The applied audit approach is set out in our External Audit Plan 1 dated Our audit focus has been on: The Annual Financial Statements Governance Financial Management and Control For more details see Annex 1. The level of work undertaken by the National Audit Office to complete the 2016 audit is a direct reflection of the quality of internal controls implemented by the Management of the Municipality of Vitia. Opinion of the Auditor General Unmodified Opinion In our opinion the Annual Financial Statements present a true and fair view in all material aspects. For more, please refer to Section 1.1 of this report. Annex II explains the different types of Opinions applied by the National Audit Office. We would like to thank the Mayor and his staff for cooperation during the audit process. 1 The term External Audit Plan replaces the term Audit Planning Memorandum 4

5 Key Conclusions and Recommendations The AFS production process was accompanied by a number of errors. The Mayor should ensure that the 2017 AFS production process incorporates a formal and effective management review with the AFS declaration only signed after all necessary actions have been applied (see chapter 1.2) Failure to assess risks, lack of a strategic plan and failure to implement prior year audit recommendations pose a hindrance in improvement of the organisation The Mayor should implement a rigorous process to ensure that the process of implementation of prior audit year recommendations, strategic plan are actively addressed and that key progresses are reported to management on monthly basis. (see issues 2,3 and 4) Governance arrangements related to accountability, and mangement reporting are insufficient. In addition, implementation of recommendations given by Internal Audit is at a low level. The Mayor should ensure that Governance arrangements are critically reviwed to ensure appropriate changes are made to improve accounability arrangennts and management reporting, and to pay greater attention to implementaion of IAU (see issues 5 and 6) Although internal controls are effective in some areas - weaknesses have been identified in classification of expenses, monitoring of subsidies, reporting on progress of capital investments and procurement system. The Mayor should implement a detailed assessment of areas of concern highlighted in this report to identify reasons for weaknesses and action needed to address these (See issues 7,8,11,13,15 and 17) Mayor s Response The Mayor has considered the detailed audit findings and conclusions in this report and has committed to address all given recommendations. In addition, the Mayor is committed to: discuss the audit report in the Municipal Assembly; and By the end of January 2018, he shall discus in the Municipal Assembly about the progress in the implementation of audit recommendations Action Plan before the annual financial statements of 2017 are submitted to the Ministry of Finance For more, please see Annex IV. 5

6 1 Annual Financial Statements and other External Reporting Obligations Introduction Our review of the Annual Financial Statements (AFS) considers both compliance with the reporting framework and the quality and accuracy of information recorded in the AFS. We also consider the Declaration made by the Chief Administrative Officer and Chief Financial Officer when the AFS are submitted to the Ministry of Finance. The declaration regarding presentation of the AFS incorporates a number of assertions relating to compliance with the reporting framework and the quality of information within the AFS. These declarations are intended to provide the Government with the assurance that all relevant information has been provided to ensure that a comprehensive audit can be undertaken. 1.1 Audit Opinion Unmodified Opinion We have audited the AFS of the Municipality of Vitia for the year ended on 31st of December 2016, which comprise of the Statement of Cash Receipts and Payments, Budget Execution Statement and the Explanatory Notes of the Financial Statements. In our opinion, the Annual Financial Statements for the year ended on 31 st of December 2016 present a true and fair view in all material respects in accordance with International Public Sector Accounting Standards (cash based Accounting), Law no.03/l-048 on Public Finance Management and Accountability and Regulation no.01/2017 on Annual Financial Reporting of Budget Organisations issued by the Ministry of Finance. Basis for the opinion We conducted the audit in accordance with International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the AFS section of our report. We believe that the obtained audit evidence is sufficient and appropriate to provide a basis for the opinion. Responsibility of Management and Those Charged with Governance and AFS The Mayor of Municipality of Vitia is responsible for the preparation and fair presentation of financial statements in accordance with International Public Sector Accounting Standards Financial Reporting under the Modified Cash based Accounting and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. This includes the application of Law number 03/L-048 on Public Finance Management and Accountability. 6

7 The Mayor of the Municipality of Vitia is responsible to ensure oversight of Municipality s financial reporting process. Auditor General s Responsibility for the Audit of the AFS Our responsibility is to express an opinion on the AFS based on our audit. We conducted our audit in accordance with ISSAIs. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAIs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could influence the decisions taken on the basis of these AFS. An audit involves performing procedures to obtain evidence about the financial records and disclosures in the AFS. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement in the AFS, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of the financial statements in order to design audit procedures that are appropriate in the entity s circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the presentation of the financial statements. 7

8 1.2 Compliance with AFS and other reporting requirements Municipality of Vitia is required to comply with a specified reporting framework and other reporting requirements. We considered: Compliance with MoF Regulation no.01/2017 on Annual Financial Reporting of Budget Organisations; Requirements of LPFMA no. 03/L-048, as amended and supplemented; Compliance with Financial Rule no.01/2013; Compliance with Financial Rule no.02/2013; Action Plan on implementation of recommendations; Requirements of Financial Management and Control (FMC) procedures. Whether the AFS have been prepared within the timeframe and submitted to MoF; Whether the draft and final procurement plan were submitted on time; and Whether the Municipality had prepared and submitted regular quarterly reports to the Municipal Assembly and one copy to the MoF. In the draft AFS were needed some financial adjustments and have given some suggestions to improve their quality, as follows: In the explanatory Note 2 the amount of 12,000 was incorrectly presented at the assigned revenue, while it should have been presented at designated donor grants. The Municipality has considered our suggestion and the error has been corrected, while in the final AFS remain errors that relate to: In the Budget Execution Report Article 14, Note 2, the Final Budget should increase by 7,550. The change should also be done in Article 29 of the Law No. 03/L-048, in the category of salaries where instead of 260,000 should have been 267,550; Assets were understated by 30,000, where inventory purchases from MLGA were not recorded and presented; As a result of incorrect classification, goods and services were overstated by 7,910, while causing understatement of subsidies and transfers for the same amount; and Accounts receivable from property tax in the AFS have been understated by 6,900. 8

9 DECLARATION BY THE MANAGEMENT OF THE MUNICIPALITY Given the above - the Declaration made by the Chief Administrative Officer and Chief Financial Officer when the draft AFS are submitted to the Ministry of Finance can be considered to be incorrect given the material errors and other issues identified during the audit. 1.3 Recommendations for the first part of the report Related to abovementioned issue we are giving a recommendation: Recommendation 1 The Mayor should ensure that are taken actions in order to eliminate errors presented in the AFS. In addition, should ensure that effective processes are in place to confirm that the plan for drafting 2017 AFS addresses all issues raised in the report and that the Declaration made by the Chief Administrative Officer and Chief Financial Officer should not be submitted unless all necessary checks have been applied to the draft AFS. 9

10 2 Governance Introduction Effective governance arrangements are fundamental to Municipality for successfully managing the challenges it faces and ensuring that service delivery is optimised for the benefit of taxpayers and other service users. A key tool supporting effective Governance is the implementation of audit recommendations as this demonstrates that Management are seeking to develop existing processes and controls. Similarly, the self-assessment checklist completed by all Budget Organisations provides a framework for developing enhanced Governance arrangements. It is important that the answers provided by an individual budget organisation are supported by appropriate evidence. The remainder of our review of governance arrangements reflects a consideration of: those areas of Governance Arrangements where significant improvements are required and where we believe that our recommendations can generate positive improvements including consideration of the Internal Audit system; and areas of Financial Management and Control identified through our audit work including specific work directed at compliance issues in key income and expenditure systems (these areas are considered in Section 3 of this report). Overall Governance Conclusion There are a number of governance weaknesses within Municipality particularly related to accountability, risk management and the quality of management reporting. One of key elements of effective governance is implementation of recommendations given by the external audit. This year s audit has revealed that the level of previous year s recommendations implemented was low, as only two out of 18 recommendations were fully implemented. The Municipality has not presented risks register, which is a requirement of procedure number four of the Treasury document Financial Management and Control. The self-assessment checklist completed by the Municipality only partially recognises this situation. Other arrangements which would support the development of governance such as an effective response to audit recommendations are not in place. The Municipality had not reviewed and completed a special strategic plan, after the separation of Municipality of Kllokot from Vitia, but remained with a joined plan for both municipalities for a period of

11 The Municipality in 2016 has spent 98% of the final budget with an improvement of 2% compared to the prior year. This shows a positive trend in budget performance. However, in terms of compliance with legislation, our audit has revealed some weaknesses that mainly relate to low level of implementation of audit recommendations (external and internal audit), and nonadherence to the regulation on subsidies and procurement. 2.1 Progress in the Implementation of Prior Year Recommendations Our Audit Report on the 2014 AFS of Municipality resulted in 17 key recommendations. Municipality had prepared an Action Plan stating how all recommendations will be implemented. The audit report of was discussed in the Municipal Assembly. At the end of our 2016 audit, one recommendation has been implemented; 12 are in the process of implementation, and four have not been addressed yet. For a more thorough description of the recommendations and how they are addressed, see Annex III. Issue 2 - Addressing Prior Year Audit Recommendations High Priority Finding Risk Only one previous year s recommendation has been implemented, while most of them were in the process of implementation. This is because the Municipality does not have a formal process to manage and monitor the way that the AG s recommendations are implemented. The continued weakness of management and other controls in key financial systems have resulted in: Errors in presentation of AFS Lack of list of risks and non-updated strategic plan; Lack of information related to third parties; Challenges in management of Accounts Receivable and lack of a strategy for their management; and Fulfilment of obligations, namely carrying out payments to EOs within legal deadlines. Recommendation 2 The Mayor should establish and implement specific accountability mechanisms over all responsible persons in charge of implementation of recommendations. After receiving this report, we suggest preparation of an updated action plan on implementation of this year s and prior year s recommendations, wherein are clearly defined the timeframes, actions and persons responsible for implementation of this plan. In addition, a monitoring process should also be implemented. 11

12 2.2 Self-Assessment Checklist of FMC components The Ministry of Finance has produced a detailed self-assessment checklist for Budget Organisations to support effective governance arrangements. For all audits, we undertook we have tested the quality of FMC self-assessment submissions made to the Ministry by assessing one key question in each component of the checklist and summarised our findings below. This is not intended to give a commentary on the quality of the whole self-assessment questionnaire submission but will provide a snapshot across a number of key questions to support the Ministry of Finance in its attempts to increase the effectiveness of the process and develop the FMC system as a whole. Issue 3 Self Assessment Checklist High Priority Finding As part of our audit we have considered key questions related to the five components of the self-assessment checklist. For the questions considered we found that: 1. The Self-Assessment questionnaire completed by Municipality acknowledged that required risk management systems were not yet functional; and 2. Current strategic plan is joint with the Municipality of Kllokot and not specific on Vitia, and are not calculated accompanied costs. Risk Poor governance arrangements weaken strategic and operational processes and reduce the quality of services provided to citizens through inefficient and ineffective activities. Recommendation 3 The Mayor should ensure completion of the list of potential risks which would negatively affect achievement of Municipality s objectives, and update a separate strategic plan for the Municipality of Vitia, by calculating all accompanying costs for its implementation. We suggest that the final review of the self-assessment questionnaire is done by the internal audit. 12

13 2.3 Specific Governance Reviews Our work on specific areas of governance arrangements has been informed by our audit planning which considered the context within which Municipality operates and the challenges that it faces Setting of Strategic Objectives All Budget Organisations are obliged to prepare and submit organisation level strategic plans such as: Urban Plans, Spatial Plans, Emergency Operations Plans, Anti-Corruption Strategic Plans, Regional Development Strategy etc. Issue 4 Lack of a comprehensive strategic plan High Priority Finding Risk The Municipality had not updated and completed a comprehensive development strategic plan for There is only one joint strategic plan with Kllokot, which is not specific to vision, mission and objectives of Vitia. In addition, it has not clarified responsibilities for coordination and development of the strategic plan, and it does not include strategy cost figures. Failure to update the strategic plan and assign responsibilities on implementation of the strategy makes it impossible to follow-up fulfilment of objectives in view of Municipality s vision as one of the essential conditions of good governance. Recommendation 4 The Mayor should ensure that the strategic plan is updated based on the needs of the Municipality and are clarified responsibilities for coordination and development of the strategic plan, by appointing persons responsible, and request drafting of an action plan to monitor achievement of objectives sot that are established effective oversight functions Management Reporting and Accountability A number of internal controls are applied by Management to ensure that financial systems and operational activities operate as intended. It is important that these include appropriate reporting to management to enable an effective and timely response to identified operational problems. To ensure effective management of activities is required an effective consolidation process and timely reporting. 13

14 Issue 5 Weaknesses in Management Controls High Priority Finding Risk Our review of management controls applied to Municipality s key financial system highlighted weaknesses in control systems. As such, overall governance arrangements require strengthening, in particular related to: preparation of the AFS, capital investments reporting, and procurement procedures. Similarly, operational goals are not managed in a systematic manner. Poor quality of financial reporting and activity to senior management can reduce management s ability to proactively manage operations of Municipality and undermines effective budgetary and operational control. Similarly, it may result in poor quality service delivery. Recommendation 5 The Mayor should ensure that is carried out a review to determine the format of operational reporting to senior management which is required to support effective business management - and ensure that an appropriate solution is in place. 2.4 Internal Audit System The Internal Audit Unit (IAU) consists of the Director of IA and one auditor. Within the year were carried eight out of nine planned audits, which focused on: municipal revenues per units, procurement, expenses from health, expense procedures for goods and services, management of human resources in Directorate of Education and assets management. Issue 6 Implementation of IAU recommendations High Priority Finding The recommendations given by the IAU for 2016 suffered implementation setbacks, as only 25% of recommendations given were fully implemented. This shows that the management has not taken sufficient actions to recognise and maximise benefits of the internal audit or to seek assurance on effective functioning of internal controls. Risk The low level of implementation of IAU recommendations will have a negative impact on effective functioning of internal controls and poses a risk for repetition of same shortcomings. Recommendation 6 To gain maximum benefit from the internal audit activity, the Mayor should review actions taken by the management related to implementation of internal audit recommendations, and to request from all respective sectors to implement recommendations at the maximum level. 14

15 3 Financial Management and Control Introduction Our work on Financial Management and Control outside of the areas of Governance referred to above reflects the detailed work undertaken on Revenue and Expenditure Systems. As part of this, we consider Budget management, Procurement and Human Resources issues, and Assets and Liabilities. Financial Management and Control Conclusion Assets management, monitoring of subsidies and weaknesses in procurement remain the most highlighted areas where regulations have not been implemented, which resulted in poor value for money. The area in which more improvements are needed is the budget execution in the category of Subsidies. 3.1 Budget Planning and Execution We have considered the sources of budgetary funds, spending of funds by economic categories. This is highlighted in the following tables: Table 1. Own Source Revenues Description Initial Budget Final Budget 2016 Receipts 2015 Receipts 2014 Receipts Own Source Revenues 939, , , , ,565 From the table we see that receipts during 2016 were 954,560, while the planned amount was 939,500. Within these revenues are revenues from the central level such as traffic fines, fines from court and the Forest Agency in the amount of 167,747. The table shows a high performance in the area of revenues where you see that the initial plan was exceeded by 1.6%, while in absolute values by over 22% more than in the previous year. 15

16 Table 2. Sources of budgetary Funds (in ) Description Initial Budget Final Budget Outturn 2015 Outturn 2014 Outturn Sources of Funds 9,487,984 10,174,872 9,997,117 10,205,713 9,674,521 Government Grant - Budget Carried forward from previous year 3 8,548,484 8,913,781 8,903,175 6,709,184 8,823, , , ,113 81,629 Own Source Revenues 4 939, , , , ,485 Domestic Donations - 4,893 4, , ,412 External Donations - 175, ,317 2,161,158 - The final budget is higher than the initial budget by 686,888. This increase is a result of Domestic and External Donations, revenues carried forward from the previous year, and the increase after the budget review in line with Government Decisions. In 2016 the Municipality has spent 98% of the final budget, with an improvement of 2% compared to The final budget compared to the initial budget had increased by 686,888. This increase includes changes from the Government Grant, where there was an increase to cover the minus of salaries under the Government s Decision in the amount of 268,350, increase of subsidies and transfers by 8,204, capital expenditures by 94,939, while the budget for Goods and Services was reduced by 6,197. In this increase are included own source revenues carried forward from 2015 in the amount of 141,643 and Donor Designated Grants in the amount of 179,948. Table 3. Spending of funds by economic categories - (in ) Description Spending of funds by economic categories Initial Budget Final Budget 2016 Outturn 2015 Outturn 2014 Outturn 9,487,984 10,174,871 9,997,117 10,205,713 9,674,521 Wages and Salaries 6,677,482 6,964,782 6,890,048 6,709,184 6,133,481 Goods and Services 899,991 1,016, , , ,497 Utilities 200, , , , ,420 Subsidies and Transfers 197, , , , ,150 Capital Investments 1,511,937 1,769, ,599 2,161,158 2,443,973 2 Final budget the budget approved by the assembly which was subsequently adjusted for by the Ministry of Finance. 3 Own Source Revenues unspent in previous year carried forward into the current year. 4 Receipts used by the entity for financing its own budget. 16

17 Despite the budget increase for subsidies and transfers during the year, only 73% of the budget was spent. Issue 7 Budget Execution High Priority Finding Risk From the category of Subsidies and Transfers remained unspent the amount of 60,364. Most of these funds were planned to be spent on award of scholarships to students for the academic year , but they were not spent as verification procedures of students that receive scholarships from the University were not developed. Due to inadequate budget planning and its low execution in the category of Subsidies and Transfers has resulted in a limited number of beneficiaries from this category, and were not achieved organisation s objectives, in terms of providing assistance to persons in need. Recommendation 7 The Mayor should ensure that budget performance is systematically monitored on a monthly basis, and that this review identifies and addresses the barriers that hinder implementation of the budget at the planned level Revenues The Municipality in 2016 had planned to collect 939,500, while were collected 954,560, or about 1.6% over planning. The main own source revenues for the Municipality of Vitia are property tax, construction permits, administrative fees, vehicle registration fees and other revenues. Despite the level of execution, our review has identified weaknesses that relate to property tax as follows: Issue 8 - Property Tax - High Priority Finding Risk According to AI 03/2011 on Gathering and Registration of Information on the Property and Taxpayer, the Municipality is obligated every year to make on-site verification for 1/3 of registered properties. The Municipality for 2016 has managed to verify 2,262 out of 15,452 of existing properties, or only 15%. Failure to verify existing properties can result in insufficient information on current taxable property, and in lowering of revenues from property tax. Recommendation 8 The Mayor should ensure a functional plan and sufficient staff to meet legal requirements and verify changes in the status of properties so that tax charges are applied based on updated data. 17

18 3.1.2 Wages and Salaries Wages and Salaries are paid through a centralised system. Controls that operate locally by the Municipality relate to: checking of payments by signing of payroll lists; verification of potential changes that may appear between forms; budget review for this category and reconciliations with the Treasury. The final budget for wages and salaries for 2016 was 6,964,782, while were spent 6,890,048, or 99% of the budget. Issue 9 Personnel files High Priority Finding Risk In 20 cases, the Municipality had not managed to complete personnel files. Files were missing work experience as required under the Government Decision dated on work experience, Clause 2.3 Due to lack of data on work experience could not have been done correct calculations of salaries. Carrying out payments without adequate evidence poses a risk for the Municipality as it may suffer financial losses by carrying out additional payments for work experience without a basis, alternatively, not pay for work experience to those that actually have it. Recommendation 9 The Mayor should ensure that the personnel within the shortest timeframe provides relevant experience confirmations on work experience, and that personnel files are completed as required under applicable rules, and that payments are carried out in a documented manner. 18

19 3.1.3 Goods and Services and Utilities The final budget for goods and services (including utilities) in 2016 was 1,216,79, while were spent 1,173,149 or 96% of the budget. They relate to maintenance and repairs (18%), utilities (17%), contracted services 15%, fuel and wood 14%, and other items in smaller amounts. Based on the report available, contracts signed for this category amount to 860,887. Shortcomings identified are: Issue 10 Special Service Contracts - Medium Priority Finding Risk The number of persons engaged with special services contracts in the Municipality of Vitia for 2016 was 44. We have tested 10 samples and noticed that the Municipality has not withheld income tax as required under the law on personal income, Article 37 and 38. Failure to withhold income tax to persons engaged through special service contracts poses a risk for the Municipality as it may be subject to penalties by tax authorities. Recommendation 10 The Mayor should ensure that persons are engaged with special service contracts only in cases when there are specific requirements, and that income tax is withheld in compliance with applicable legislation. Issue 11 classification in incorrect codes High Priority Finding Risk While testing payments we found overvaluation of goods and services in three (3) cases in the total amount of 7,910. This amount should have gone through subsidies as it has to do with subsidising of sports clubs and one women association. Inadequate classification of expenditures presents incorrect statement of expenditures, and when errors are material, Municipality s AFS may be subject to modified opinion or emphasis of matter. Recommendation 11 The Mayor should ensure that are implemented effective controls during the process of planning and execution of payments, expenditures are classified into adequate categories and that such cases are not repeated. 19

20 3.1.4 Subsidies and Transfers The final budget for subsidies and transfers was 223,367, and were spent in ,003. They were used for subsidising sports clubs, agriculture equipment, current health assistance, employment of the poor in cooperation with donors etc. Shortcomings identified were presented below: Issue 12- Failure to apply the regulation on subsidies - Medium Priority Finding Under the regulation on award of aid (Article 2), relevant committee proposes to the Mayor before awarding subsidies. We have found that out of six samples tested, in three of them we have not found such proposal, despite this, the Mayor had awarded subsidies in three cases, the amount of which was 1,690. In another case, on , the Mayor had decided to award subsidies to the Association Local Action Group in Vitia in the amount of 8,204 on behalf of implementation of project Skills for rural employment. Under the Regulation on award of current assistance, Article 4 stipulates that the Mayor may allocate current assistance up to 5,000. Risk Failure to apply provisions of the internal regulation on award of subsidies poses a risk of awarding subsidies in a subjective manner, and current assistance provided to undeserving persons, and reduces the possibility of awarding subsidies to other persons in need. Recommendation 12 The Mayor should ensure that upon awarding subsidies to consistency apply all provisions of the regulation Capital Investments The final budget for capital investments was 1,769,92, while was spent entirely. They relate to construction of roads, pavements and sewerage by 68%, buildings (school, health, buildings) with 22%, land and renovations of rivers by 2%. Capital investments and their impact on the AFS, see section 1.1 of this report. 20

21 Issue 13 Failure to report on the progress of capital investments progress - Medium Priority Finding Risk Article 45.4 of the LPFMA states that The mayor of a municipality shall prepare and submit to the municipal assembly quarterly reports covering the fiscal year through the end of the quarter just concluded. Such reports shall be submitted by the mayor to the municipal assembly, and a copy thereof submitted to the Minister, within thirty (30) days from the end of each quarter and then published by the mayor on the municipality s website. The Municipality has not fulfilled this requirement. Failure to report on capital investments progress to the MoF indicates of insufficient monitoring over these investments, and is in disagreement with requirements of the LPFMA and the capital investments program. Recommendation 13 The Mayor should ensure that reporting of capital investments to the MoF will be done quarterly in accordance with LPFMA requirements, by relying on sufficient evidence over their progress Common Issues on Goods and Services and Capital Investments The following common issues relate to Goods and Services and Capital Investments: Issue 14 - Shortcomings in procurement procedures - Medium Priority Finding While examining selected Dossiers we have found the following shortcomings: In the framework contract for a three year period for the project Asphalting of the road Devaje-Radivojce, the performance security was only valid for three months, and did not cover the entire contract period; and In the contract for the project Construction of the sidewalk from the Orthodox church up to the Kabash ramp, was not specified the duration of the contract. Risk Signing contracts without meeting all preconditions and failure to follow consistently procurement procedures and relevant guidelines can result in implementation of contracts in disagreement with required standards. Recommendation 14 The Mayor should ensure undertaking of an internal review to determine why procurement requirements have not been addressed in all procurement cases, and exercise additional controls to ensure that weaknesses identified will be eliminated in the future. 21

22 3.2 Assets Capital and Non Capital Assets Even though the Municipality has taken steps to improve reporting on its assets, there are still some shortcomings related to management of municipal assets and the recommendations of previous year were addressed only partially. Issue 15 - Lack of supporting documentation - Medium Priority Finding Risk Four schools (three primary and one secondary) financed by the MEST were recorded as capital assets in the accounting registers without the supporting documentation, but only based on an sent by the MEST officials. Current value of these schools was 2,478,038, and these schools are in use since The Municipality has constantly requested the MEST to submit the documentation to transfer ownership of these schools, but until the time of our audit, this issue was not been resolved. Recording capital assets in the KFMIS system without the supporting documentation on transfer of ownership, poses a risk as the recorded property may not be technically completed, and ownership not determined. Recommendation 15 The Mayor should resolve the ownership issue of these schools and obtain the supporting documentation from MEST in order to confirm appropriate recording of these schools. Issue 16 Failure to record donated assets - High Priority Finding Risk The MLGA had purchased inventory for the Municipality of Vitia in the amount of 30,000. Municipality stored these assets in the library hall within the House of Culture. These assets were not recorded as non-financial assets in the KFMIS. The fact that these assets were not recorded was not noticed by the inventory committee for annual recording of assets. Failure to record non-financial assets in the assets registers does not present the true value of assets owned, and may expose assets to the risk of loss or misuse. Recommendation 16 The Mayor should ensure that all assets are recorded in the accounting register and ensure that all assets are included in the inventory process at the end of the year by the relevant committees. 22

23 Issue 17 - Lack of approval of internal rules and procedures for non-financial assets - Medium Priority Finding Risk During the audit we have identified that the Chief Administrative Officer had not drafted and approved internal rules and procedures for the recording, preservation and disposal of non-financial assets. Due to lack of approval of rules and procedures poses a risk, as officials may not be completely informed of their responsibilities over the nonfinancial assets that they own and oversee which could be misused and used without authorisation. Recommendation 17 The Mayor should approve internal rules and procedures on non-financial assets, as foreseen under the Regulation on Management of Non-Financial Assets no.02/2013 Article 4, paragraph Receivables The Municipality of Vitia has presented Accounts Receivable in the amount of 1,922,000, out of which 1,592,000 are from property tax, 314,000 from business licenses, and 15,000 from rent. Compared to the previous year these Accounts have decreased by 81,000. The only reason why they have decreased is due to property tax, while the rent from use of public spaces has increased by 2,000 and business licenses have remained the same. The Municipality had made progress only on property tax, therefore collection of all accounts receivable continues to remain a challenge for the Municipality in the coming years. When it comes to business licenses, they have remained the same as the Municipality is in the process of forgiving this amount. Issue 18 Understatement of accounts receivable - Medium Priority Finding Risk Accounts Receivable from property tax presented in the AFS were understated by 6,900. The total declared in the AFS for property tax is 1,592,000 while the amount from the protax report is 1,598,912. Understating AR poses a risk where the basis for collection may be inaccurate and debtors avoid meeting liabilities, which after a while can result in uncollectible debts. Recommendation 18 The Mayor has to ensure that is conducted a detailed and accurate control of AR. In order for reports to be reliable and accurate should increase the cooperation with the property tax department within the MoF. 23

24 3.3 Outstanding Liabilities Outstanding liabilities owed to suppliers at the end of 2016 were 169,000, while in 2015 they were 152,000, namely with an increase of 17,000. The area of outstanding liabilities is the share that the Municipality has not managed to pay over the years and have been declared at the end of the year. We do not have recommendations in this area. This report is a translation from the Albanian original version. In case of discrepancies, Albanian version shall prevail. 24

25 ANNEX I: Audit Approach and Methodology The responsibilities placed on the Auditor and Those Charged with Governance are detailed in the Opinion set out in Section 1.2 of this report. While a key output of our work is the audit opinion this report reflects the totality of our work with specific focus also on Governance Issues including Financial Management and Control. The latter is informed by our extensive, risk based, compliance audit programme. The Executive Summary is intended to highlight the key finding of the audit and the key action that the Mayor should ensure are taken to address identified management/control weaknesses. The detailed report provides an extensive summary of our audit finding with emphasis on determining the cause audit findings and providing appropriate recommendations to address these. For completeness we have included issues identified at the interim audit where they remain relevant. Our findings are defined as: High Priority - issues which if not addressed may result in a material weakness in internal control and where action will offer the potential for improvements to the efficiency and effectiveness of internal controls; and Medium Priority - issues which may not result in a material weakness but where action will also offer the potential for significant improvements to the efficiency and effectiveness of internal controls. Findings considered low priority were reported separately to finance staff. Our procedures included a review of the internal controls and accounting systems and associated substantive testing and associated governance arrangements only to the extent considered necessary for the effective performance of the audit. Audit findings should not be regarded as representing a comprehensive statement of all the weaknesses which exist, or all improvements which could be made to the systems and procedures operated. 25

26 Annex II: Explanation of the different types of opinion applied by NAO (extract from ISSAI 200) Form of opinion 147. The auditor should express an unmodified opinion if it is concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial framework. If the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement, or is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, the auditor should modify the opinion in the auditor s report in accordance with the section on Determining the type of modification to the auditor s opinion If financial statements prepared in accordance with the requirements of a fair presentation framework do not achieve fair presentation, the auditor should discuss the matter with the management and, depending on the requirements of the applicable financial reporting framework and how the matter is resolved, determine whether it is necessary to modify the audit opinion. Modifications to the opinion in the auditor s report 151. The auditor should modify the opinion in the auditor's report if it is concluded that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement, or if the auditor was unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. Auditors may issue three types of modified opinions: a qualified opinion, an adverse opinion and a disclaimer of opinion. Determining the type of modification to the auditor s opinion 152. The decision regarding which type of modified opinion is appropriate depends upon: The nature of the matter giving rise to the modification that is, whether the financial statements are materially misstated or, in the event that it was impossible to obtain sufficient appropriate audit evidence, may be materially misstated; and The auditor s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements The auditor should express a qualified opinion if: (1) having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are 26

27 material, but not pervasive, to the financial statements; or (2) the auditor was unable to obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that the effects on the financial statements of any undetected misstatements could be material but not pervasive The auditor should express an adverse opinion if, having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements The auditor should disclaim an opinion if, having been unable to obtain sufficient appropriate audit evidence on which to base the opinion, the auditor concludes that the effects on the financial statements of any undetected misstatements could be both material and pervasive. If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the audit scope that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor should request that management remove the limitation If expressing a modified audit opinion, the auditor should also modify the heading to correspond with the type of opinion expressed. ISSAI provides additional guidance on the specific language to use when expressing a modified opinion and describing the auditor s responsibility. It also includes illustrative examples of reports. Emphasis of Matter paragraphs and Other Matters paragraphs in the auditor s report 157. If the auditor considers it necessary to draw users attention to a matter presented or disclosed in the financial statements that is of such importance that it is fundamental to their understanding of the financial statements, but there is sufficient appropriate evidence that the matter is not materially misstated in the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor s report. Emphasis of Matter paragraphs should only refer to information presented or disclosed in the financial statements An Emphasis of Matter paragraph should: be included immediately after the opinion; use the Heading Emphasis of Matter or another appropriate heading; include a clear reference to the matter being emphasised and indicate where the relevant disclosures that fully describe the matter can be found in the financial statements; and indicate that the auditor s opinion is not modified in respect of the matter emphasised If the auditor considers it necessary to communicate a matter, other than those that are presented or disclosed in the financial statements, which, in the auditor s judgement, is relevant to users understanding of the audit, the auditor s responsibilities or the auditor s report, and provided this is not prohibited by law or regulation, this should be done in a paragraph with the heading Other Matter, or another appropriate heading. This paragraph should appear immediately after the opinion and any Emphasis of Matter paragraph. 27

28 Annex III: Prior Year Recommendations Audit Component 1.5 Recommendations 1.5 Recommendations Recommendation given Implemented Under implementation Not implemented High priority - The Mayor should ensure that an analysis has been made to determine the reasons for the qualified audit opinion and emphasis of matter paragraph. Action must be taken to address material weaknesses in a systematic and pragmatic order to mitigate those weaknesses as disclosed in the basis for qualified opinion paragraph. High priority The Mayor should take appropriate action to ensure full regulatory compliance of the process of preparation of annual financial statements (AFS). The Declaration made by the Mayor and Chief Financial Officer when the AFS are submitted to the Government should only be signed after a comprehensive management review has been undertaken on the content and accuracy of the AFS. Was done recording of nonfinancial assets in the KFMIS. There is a detailed register of assets over 1,000, but evidence of the Ministry is still missing in order to transfer ownership of four schools constructed by the MEST Assets of the new Municipality building donated by the MLGA in 2012 in the amount of 30,000, were not recorded. 28

29 2.3 Prior Year Recommendations 2.4 The selfassessment checklist of MF 2.5 Specific Governance issues Risk Management The Mayor should revise entirely Action Plan to address the recommendations of This plan should specify a reasonable time frame of implementation, responsible staff and mode of application, being initially focused on areas of high importance i.e. where material weaknesses were identified. Progress against the plan should be monitored directly by the Mayor. The Mayor should ensure that the selfassessment checklist is completed with objectivity and documented in order to identify the weaknesses and mitigated appropriately as required by the Ministry of Finance of the Republic of Kosovo. The Mayor should ensure that a review of the existing requirements of accountability and reporting of municipal departments and ensure improved arrangements to achieve specific targets within a year. The Mayor should ensure that procedure and systems of risk management are established and operational. Furthermore, the responsibility for risk management is delegated directly to a relevant director and provides monthly reporting on the implementation of the requirements in this field and the risks are being managed. The action plan on recommendations of 2015 has been drafted, but their implementation is not complete. Assessments of some of the workers were missing for 2016 Lack of plan on monitoring of objectives set out during the year. The list of risk management is missing. 29