Republic of Montenegro STATE AUDITORS INSTITUTION ANNUAL REPORT

Transcription

1 Republic of Montenegro STATE AUDITORS INSTITUTION SAI No.: /07 ANNUAL REPORT on performed audits and activities of the State Auditors Institution of Montenegro for period October October 2007 Podgorica, October 2007

2 TABLE OF CONTENTS PAGE I INTRODUCTION General remarks Annual audit plan Realisation of Resolutions of the Parliament of the Republic of Montenegro adopted on the account of the audit of the Annual Financial Statement of the Budget of the Republic of Montenegro for Report on expenditures of State Auditors Institution for II REALISED AUDITS IN General remarks on realised audits in Report on Audit of the Annual Financial Statement of the Budget of the Republic of Montenegro for Lawful cause, objective and subject of audit of the Annual Financial Statement of the Budget of the Republic of Montenegro for Scope and procedure of audit Scope of audit Procedure of audit System of records and realisation of the Budget Accounting system Realisation of the Budget of the Republic of Montenegro for Report on cash flows Collection of tax revenues Budgetary receipts Taxes, excises and customs Personal income tax Corporate tax Capital income tax Value added tax Excises Tax on international trade and transactions Other taxes Duties Other revenues of the Republic Receipts from credit repayments, donations, loans and credits Expenditures of the Budget of the Republic Gross salaries of employees Current maintenance Transfers to institutions, individuals, non-government sector and public sector Capital expenditures Permanent and current budgetary reserve Cash payment State property Findings and recommendations Opinion Statements from individual audits Statement from the Report on audit of financial reports of Health Insurance Fund of the Republic for Statement from the report on audit of the Annual fiscal statement of the budget of the municipality Kolašin for Statement from the report on audit of the Annual fiscal statement of the budget of municipality Ulcinj for III OTHER ACTIVITIES OF THE STATE AUDITORS INSTITUTION Cooperation with the Parliament of the Republic of Montenegro- participation in the public debate on Draft of the Constitution of the Republic of Montenegro Harmonisation of the Law on State Auditors Institution with international audit standards... 79

3 3. Relation of the Institution with the Government of the Republic of Montenegro and other governmental bodies International co-operation Human resources management Information system...83 IV PLANNED ACTIVITIES OF THE INSTITUTION AND FINAL REMARKS The Senate of the State Auditors Institution, pursuant the Article 38 and in relation with the Articles 18 and 19 of the Law on State Auditors Institution ( Official gazette of the Republic of Montenegro No. 28/04, 27/06 and 78/06), has adopted at the session held on 18 th October 2007: ANNUAL REPORT on Performed Audits and Activities of the State Auditors Institution for Period October October 2007 I INTRODUCTION 1. GENERAL REMARKS State Auditors Institution (hereinafter: the Institution) performs its activity based on the Law on State Auditors Institution (hereinafter: the Law), as the substantive and independent governmental body. Pursuant the Law, the Institution has the assignment to examine the regularity (lawfulness), functionality and efficiency of the operations in bodies and organizations which are managing the budget and property of the state and units of the local selfgovernment, funds, Central Bank of Montenegro and other legal entities in which the state is a shareholder. Institution performs audit in order to provide important information on management of budget, property and economic affairs, legal acting of audited entities, promotion of their capability for successful completion of assignments and prevention of mistakes. Institution provides professional assistance to the Parliament and the Government of the Republic of Montenegro and other governmental institutions in the decision making process within its competence. Institution, in accordance with the Article 18 and 19 of the Law, reports to the Parliament and the Government until the end of October by submitting the Annual report, which specially contains: Evaluation of whether the amounts presented in the Annual financial statement of the Budget of the Republic correspond to the amounts stated in records; Evaluation of whether the controlled revenues, expenditures and property were properly documented in accordance with regulation and general standards;

4 Important cases in which regulations and rules on budget and economic affairs of the country were not obeyed, and Remarks to noticed deficiencies with audited entities and recommended measures. Furthermore, in the procedure of drafting of the Annual Financial Statement of the Budget of the Republic, the Institution reports to the Parliament on the audit of the Annual Financial Statement, which enables the Parliament, to make decisions on suggested measures and term for their implementation, based on the important facts from the Annual report. 2. ANNUAL AUDIT PLAN Institution independently makes decisions on audited entities, subject, scope and type of audit, time and manner of performing of audit, by adoption of the Annual Audit Plan until 10 th January for current year. During 2006, problems in functioning of the Senate- the fact that all members of the Senate were not elected, have limited the work of Institution in full its capacity. On the initiative of other members of Senate, the Parliament has adopted necessary law amendments and supplements, at the end of last year, which caused not only the increase of the number of Senate members and therefore its completion, but also the improvement of the selection of special professional and other conditions necessary for election of the member of the Senate of the Institution. At the first Session of the Senate held in 2007, Annual Audit Plan and the plan of future activities aiming strengthening of the role and importance of the Institution were adopted in the statutory term. Audit Plan for 2007, stipulates not only the Annual Financial Statement of the Budget of the Republic of Montenegro for 2006, but also the audits of the following entities: Health Insurance Fund of the Republic of Montenegro; Municipality Kolašin; Municipality Ulcinj; Ministry of Culture, Sports and Media. The plan was realised in total, while for next year a significant growth of number the audits and the realisation of new types of audits with audited entities is expected. Institution has realised on the day of the adoption of the Annual report Annual Audit Plan for 2007, in the manner that all audits planned for first three quarters were realised and Final reports of the Board of Directors competent for performance of audits were drafted, while the audit of the Ministry of Culture, Sports and Media, planned for the IV quarter, is ongoing and will be performed in the planned period until the 25 th of December.

5 With regards to above mentioned, Annual report of the Institution encompasses realised audits and activities in the period from October 2006 until October 2007: Annual Financial Statement of the Budget of the Republic of Montenegro for 2006; Financial reports of the Health Insurance Fund of the Republic for 2006; Annual Financial Statement of the Budget of the Municipality Ulcinj for 2005; Annual Financial Statement of the Budget of the Municipality Kolašin for 2006, Reports and statements on performed audits are integral part of the Annual report. Also, activities planned in the section II of the mentioned Activity Plan of the Senate in 2007 have been realised, such as: Realisation of lawfully determined competences of the State Auditors Institution in the sphere of expressing views on realisation of the Budget and the rational usage of funds which are given to audited entities for usage, in accordance with the Article 4 of the Law, condition of the state property, borrowing and guarantees given during the year and giving of recommendations for amendments and supplements of the Law in case the conclusion is reached that the existing laws are producing or can produce negative consequences and are not leading to planned results. Training programmes and further professional strengthening and completion of the Institution. Constitutional and normative organisation of the State Auditors Institution, making of the auditing standards and enactments of the Institution. Accession of the State Auditors Institution of Montenegro into the full membership of the world association of supreme state auditing courts- institutions at the XIX Congress of the INTOSAI-a. 3. REALISATION OF RESOLUTIONS OF THE PARLIAMENT OF THE REPUBLIC OF MONTENEGRO, ADOPTED ON THE OCCASION OF THE AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF THE BUDGET OF THE REPUBLIC OF MONTENEGRO FOR 2005 Parliament of the Republic of Montenegro, at the Session held on 22 nd of November 2006, on the suggestion of the Board for Economy, Finance and Budget has adopted based on Recommendations of the Institution contained in the Annual report for 2006, Resolutions in seven basic points regarding promotion of public finances and public sector, and in relation with the performed audit of the Annual Financial Statement of the Budget of the Republic of Montenegro for Institution has performed subsequent control of the realisation of Resolutions of the Parliament and has requested opinion from the Ministry of Finance. Institution found that the Resolutions of the Parliament were mostly obeyed and recommendations were applied. Review of realised Resolutions of the Parliament of the Republic of Montenegro and undertaken measures regarding these Resolutions: 1. In accordance with Resolutions of the Parliament of the Republic of Montenegro, Ministry of Finance has enacted the Rule Book on Tax Book-Keeping ("Official

6 gazette of the Republic of Montenegro", No. 81/06) which regulates the way of book-keeping records on taxes, contributions, compensations and other public revenues, way and deadlines for drafting of the annual financial tax statement, deadlines for booking of book changes and way of keeping of book-keeping records and documentation. 2. Report was made on analysis of contracts on rent of the business premises by Republic bodies and regarding that the Government was submitted the Draft Decision on criterions and conditions for demarcation of costs between the Republic and units of local self-government based on use of business premises by Republic bodies, which was used for legal and linguistic harmonisation of existing Decision with valid regulations adopted by the Government at the Session held on 26 th April 2007 ( Official gazette of the Republic of Montenegro No. 27/07). The Administration for Joint Services of the Republic Bodies is the body which, after the adoption of the mentioned Decision, reconsiders individual contracts on rent of business premises and is continuously working on providing business premises which should be owned by the Republic, and it would contribute to the unburdening of the Budget, on this ground. The Administration for Joint Services of the Republic Bodies is also the body which, in cooperation with the Real-Estate Administration, identifies the property of former social-political organisations and suggests to the Government the bylaw which would determine the way and procedure of giving of the state property for use to the parliamentary parties. 3. Sector for Internal Audit of the Ministry of Finance, during 2006, performed audit on earmarked usage of budgetary funds in 2005, and in spending units which have implemented the programme budget and given recommendations for consistent application of legal provisions and earmarked usage of funds. Also, for drafting of the Annual Financial Statement of the Budget of the Republic for 2006, Ministry of Finance has requested from all beneficiaries of the Budget of the Republic to submit the reports on realised activities during 2006, and for beneficiaries of the programme budget the report on realisation of the programme objectives and assignments. 4. Ministry of Finance- State Treasury has submitted to all beneficiaries of the Budget of the Republic the Directions which refers to deadlines of reception of final transactions, closing of the ledger of the Treasury and making of annual financial statements of spending units, thus warning them that the main officer for finance is obliged to compare accounting data of its spending unit with data from the Ledger of the Treasury and to notify State Treasury on eventual corrections, and that the deadline for adjustment of data is 31 st January of the current year for previous year. Great number of beneficiaries of the Budget of the Republic is directly involved in the SAP system and has every day insight into the realised transactions in the ledger of the Treasury, and reports are sent to other beneficiaries upon their requests.

7 5. Records of call in arrears in the ledger of the Treasury is being realised at the level of yearly budget of planned funds, and in spending units to the level of undertakings which, according to the Article 31 of the Budget Law, are realised in next fiscal year. For consideration of the total account of call in arrears at the end of the fiscal year, data shown in the annual financial statement are based on data submitted by spending units which have made lists of call in arrears. 6. Ministry of Finance has requested from spending units to obey the obligation of inventory and obligation of listing and submitting of the inventory listing with the situation on 31 st December Inventory with situation on 31 st December 2005 was submitted by almost all spending units. 7. Records on payments by economic classification in the ledger of the Treasury are made according to planned funds in the Annual budget so that the recommendation which refers to the records of payments by execution of court warrants from the current budgetary reserve was not realised, because it is from the point of view of the Ministry of Finance, contrary to the Article 33 of the Budget Law, based on which the funds from the reserve are used only for emergencies and unforeseen expenditures during the fiscal year. 4. REPORT ON EXPENDITURES OF THE STATE AUDITORS INSTITUTION Senate of the Institution, in accordance with the Article 38 of the Law and Rule Book on way of preparation, drafting and submitting of annual financial reports and statements of the budget, of budgetary beneficiaries and extra-budgetary funds, has determined the Annual Financial Statement (annual financial report) of the State Auditors Institution for With the Budget Law for 2006, funds earmarked for the Institution amounted ,98 EUR, while the Institution has realised ,54 EUR, or 73,47 %, of planned funds. Furthermore, the Institution has realised also the funds from current budgetary reserve for payment of the meal allowance and cash-grants to the amount of 4.686,24 EUR and through donation of the GTZ has provided the equipment valuable to the amount of ,97 EUR, so that the total spending for 2006 amounted ,75 EUR. TOTAL SPENDING ,75 EUR SOURCES OF FINANCING: Budget of the Republic of Montenegro for position 520 SAI ,54 Current budgetary reserve 4.686,24 Donations ,97

8 Structure of the spending of the SAI for 2006: -Salaries of employees ,14 -Other personal income 8.885,00 -Expenses for material and services ,64 -Capital expenditures ,97 Capital expenditures- donations In 2006, there was no procurement of non-financial property from the funds of the Budget of the Republic of Montenegro for However, in 2006, based on donations of the GTZ, equipment was acquired to the value of ,97, which was noticed also in the Report on the Inventory for 2006, such as: office furniture 6.700,50, printing equipment 1.439,47, equipment computers ,00, other equipment 1.833,00. Call in arrears in 2006 Total call in arrears of the Institution for 2006, amounted 1.743,51, and 82% pf it referred to the bills for telephone phone services and spent electricity for December Inventory in 2006 Commission for inventory submitted the Report on performed inventory listing of the State Auditors Institution on 31 st December Total listed value of the property of the State Auditors Institution is ,98. II 2007 REALISED AUDITS FOR PERIOD OCTOBER OCTOBER 1. GENERAL REMARKS Annual Financial Statement of the Budget of the Republic of Montenegro for 2006 Audit of the Annual Financial Statement of the Budget of the Republic of Montenegro for 2006 represents the most important audit, respecting the fact that the Budget represents the framework of the public spending of the Republic and that the audit of the Annual Financial Statement of the Budget is lawfully determined obligation, which is performed by the State Auditors Institution in every fiscal year. By its circumference, which in 2006 amounted 587,38 mil., Budget of the Republic of Montenegro represents the most significant institution in the public spending system. In

9 accordance with the lawfully constituted obligation and importance of this system, State Auditors Institution has performed the audit of the Annual Financial Statement of the Budget of the Republic of Montenegro for Performed audit mostly refers to the audit of regularities, and it was performed in accordance with the international audit standards and procedures stipulated by the Law. State Auditors Institution has provided the overall report which publishes the most important audit results, confirms the accuracy of data presented in the annual financial statement and sublimes the most important findings and proposal of recommendations and measures is given, aiming the improvement of records and more efficient organisation of the public spending system. During the audit procedure of the Annual Financial Statement of the Budget of the Republic of Montenegro for 2006, Ministry of Finance has submitted report on realisation of measures and recommendations adopted anent the audit of the annual financial statement of the Budget of the Republic of Montenegro for Financial reports of the Health Insurance Fund of the Republic for 2006 Financing of the health protection in the Republic of Montenegro represents very important part of the public spending, taking into account the fact that the turnover shown in the Fund for 2006, amounted ,04 and that this system represents one of the most important pillars of the health protection of citizens. In accordance with the scope of public spending which is related to the financing system of the health protection provided by the Fund, State Auditors Institution has expanded the objectives and scope of audit. Namely, by audit of the financial reports of the Health Insurance Fund of the Republic for 2006, an overall systematic overview was given, which shows not only flaws in the part of regularity, but also the flaws in efficiency of the functioning of the health protection financing. Audit of the Fund for 2006, has given the expected results. Suggested measures in the part of synchronisation of functioning of the health system and more efficient records, create conditions in the Fund that through more efficient cash management savings are provided to the level of 3,5 to 4 mil.. Usefulness of this audit is, beside the acceptance of suggested measures, the Fund has already taken specific steps on removal of noticed mistakes. It is important to emphasise that the audit performed in this way was enabled by the quality and accurate records of the Fund, and a high level of responsibility and cooperativeness of professional services in the Fund. Audit of financial reports of the Health Insurance Fund of the Republic by the State Auditors Institution was done by the method based on the sample, so it is not possible to encompass all the possible flaws which can occur in the part of efficiency of functioning of the system. However, observed possibilities of savings through more efficient cash management

10 and standing of the Fund regarding findings of the audit, leads to the conclusion that the Institution will improve the efficiency and quality of the functioning of the system in the following period. Annual Financial Statements of Municipalities Kolašin for 2006 and Ulcinj for 2005 With audits of Annual Financial Statements of Budgets of Municipalities the Institution has performed the control of consistent application of the Budget Law, Law on Local Self-Government Financing, Directions on Treasury Operations and other laws and bylaws and international standards, which refer to regulation of the local self-government financing. With the audit of the annual financial statement of municipalities we are controlling whether the revenues, expenditures, property and liabilities shown in the annual financial statement, are supported by the correct documentation, if the payments during the fiscal year are realised outside the expenditures approved by the budget, way of presenting of deficit and are the internal controls established which are to provide legal operations of the local self-government bodies. Based on the realised audits of the annual financial statement of the budget of municipality, SAI has identified some omissions which refer to: - system of the financial reporting; -organisational structure and - functioning of the internal controls. Aiming the improvement of work in local self-government bodies regarding obeying of operations legality and improvement of efficiency of the functioning of the system of municipality budget, SAI has given some recommendations which are the integral part of this report, in reports on audit of the annual financial statement of controlled municipalities.

11 REPORT ON AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF THE BUDGET OF THE REPUBLIC OF MONTENEGRO FOR LAWFUL CAUSE, OBJECTIVE AND SUBJECT OF THE AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF THE BUDGET OF THE REPUBLIC OF MONTENEGRO FOR 2006 Lawful cause Based on the Article 4 and 9 of the Law on State Auditors Institution (»Official gazette of the Republic of Montenegro«No. 28/04, 27/06 and 78/06 hereinafter: the Law on State Auditors Institution) and Article 51 of the Budget Law, (»Official gazette of the Republic of Montenegro«No. 40/01,44/01, and 71/05, and in accordance with the International Audit Standards (INTOSAI) and Annual Audit Plan for 2007, the audit of the annual financial statement of the Budget of the Republic of Montenegro for 2006 was performed. Reasons for performing of the audit Audit is being performed for providing of important information related to the checking of the regularities of obeying of rules in revenues collection, completion of tasks, booking and documenting of realised transactions, reporting and management of financial and non-financial property and liabilities. Objective Basic objective of audit is collection of sufficient and adequate evidence for reporting on significant facts which refer to regularity (lawfulness) of work of competent persons in beneficiaries of the budgetary funds and objectivity of shown public revenues and public expenditures in the Draft Annual Financial Statement of the Budget of the Republic of Montenegro for 2006 (hereinafter: Annual Financial Statement). Subject Subject of the audit is the Annual financial statement made in accordance with the Article 51 of the Budget Law and Articles 1, 2, 3 and 4 of the Rule book on unique classification of the statements for Budget of the Republic, budgets of extra-budgetary funds and budgets of municipalities («Official gazette of the Republic of Montenegro» No. 35/05, 37/05 and 81/05) and Article 6 of the Rule book on way of preparation, drafting and submitting of financial reports of the budget, extra budgetary funds and units of local self-government («Official gazette of the Republic of Montenegro«No. 03/06) and in accordance with that, data and reports were controlled on: Initial and final account of the Consolidated account of the Treasury; Realised deviations when compared to the planned amounts; Loans taken;

12 Expenditures of budgetary reserve (permanent and current reserve); Guarantees given during the fiscal year; National debt. AUDIT PLANNING In accordance with the international auditing standards (INTOSAI), audit was planned to be performed well, efficiently and economically in the given period of time. Aiming that, the concept and detailed audit plan was made, in which the main objectives and main questions of the audit of the annual financial statement were determined. Audit plan determines the dynamics of performing of audit, and the range of already collected information, or of those which are to be collected based on documentation and other data in the State Treasury and in other beneficiaries of the budgetary funds. 2. SCOPE AND PROCEDURE OF AUDIT 2.1. Scope of the audit Audit of the Annual financial statement encompasses not only documentation and reports which are controlled in the Ministry of Finance- State Treasury as competent body for preparation and drafting of the Draft Annual financial statement of the budget of the Republic in accordance with the Budget Law- but also the individual financial reports, records and documentation per spending units aiming checking of supporting of realised transactions with adequate documents. Audit of individual annual financial statements is based on the control of obeying of regulations which refer to procedures of issuance and forming of documentation, book keeping and harmonisation with the main book which is being kept in the State Treasury. Audit was performed based on samples in following spending units: 1 Republic of Montenegro, Ministry of Finance 2 Republic of Montenegro Ministry of Interior Affairs 3 Republic of Montenegro, Ministry of Culture 4 Republic of Montenegro, Ministry Labour and Social Welfare 5 Republic of Montenegro, Ministry of Maritime Affairs, Transportation and Telecommunication 6 Republic of Montenegro, Ministry of Education and Science 7 Republic of Montenegro, Ministry of Defence 8 Republic of Montenegro, Administration of Justice 9 Republic of Montenegro, Pension and Disability Insurance Fund (Transfers) 10 The Administration for Joint Services of the Republic Bodies 2.2. Audit Procedure Audit of the annual financial statement was performed in accordance with the International Audit Standards (INTOSAI), and it includes analysis of evidences based on samples which are used for confirmation of shown data and information from the annual

13 financial statement. The audit also includes evaluation of the applied book keeping principles, and disclosure of data in accordance with the international audit standards for public sector. In the procedure of audit performing, special attention is given to the process of collection of data which enable expressing of opinion on reality and objectivity of total receipts and expenditures shown in annual financial statement. 3. SYSTEM OF RECORDS AND REALISATION OF THE BUDGET 3.1. ACCOUNTING SYSTEM Accounting system of the Budget of the Republic of Montenegro is organised on the cash base in accordance with the provision of the Budget Law, Rule book on way of preparation, drafting and submitting of the annual financial statements of the budget, extra budgetary funds and units of local self-government ( Official gazette of the Republic of Montenegro No. 03/06), Directions on State Treasury Operations ( Official gazette of the Republic of Montenegro No. 64/01) and International Accounting Standards for Public Sector. Accounting system is based on records in the ledger of the Treasury, which is being kept in the Ministry of Finance and book-keepings which are made per spending units. Spending units based on their records on expenditures (payments) and receipts at the end of the year make annual financial report which is submitted to the Ministry of Finance- State Treasury by 31 st March of the current year for previous year. Ledger of the State Treasury and financial reports of spending units represent documental foundation for drafting of the annual financial statement. The following facts were determined with the audit: -57 spending units were obliged to submit annual financial reports to the Ministry of Finance- State Treasury. All spending units have submitted financial reports for 2006.on time to the Ministry of Finance- State Treasury By comparing of data shown in annual financial reports and data shown in the ledger of the Treasury, it was determined that accordance was realised between total expenditures and realised in spending units and expenditures kept in the ledger of the Ministry of Finance- State Treasury. However, it was determined with the control that the structure of expenditures shown in some of spending units does not amount to the planned budgetary spending. Spending units have made payments which do not correspond to the allocations shown in the budget, and it is necessary to increase the budgetary discipline and to demand from spending units to do authorised spending, with increase of the efficiency by preventive intern control by the Ministry of Finance Realisation of the Budget of the Republic of Montenegro for 2006

14 In the Draft Law on Annual Financial Statement of the Budget of the Republic of Montenegro in the Article 1 the following account was shown: I Funds transferred from 2005 year 50,976, II Receipts 587,388, direct revenues 562,698, non-refundable aids from abroad 44, Loans taken(borrowings and credits) 9,045, Revenues from sold property 6,287, Receipts from credit repayments 9,313, III Expenditures 580,054, Expenses 451,980, Loans given (lending and credits) 6,692, Repayment of given guarantees 1,050, Credit repayment 38,346, Expenditures of budgetary reserve 27,204, Payment of liabilities from previous years 54,778, IV Deposits 58,311, REVIEW OF TRENDS OF DEPOSISTS, RECEIPTS AND EXPENDITURES Description Fiscal years Deposits at the beginning of year 28,311, ,705, ,374, ,976, Total receipts during the year 414,556, ,907, ,023, ,388, Total expenditures during the year -427,162, ,239, ,420, ,054, Deposits at the end of the year 15,705, ,374, ,976, ,311, Account shown in the Article 1 of the Annual financial statement was compared to the cash flow trends in 2006, aiming analytic interpretation of the shown cash, and verification of the account accuracy of realised cash transactions. Cash flows with shown state of the deposit are harmonised with the report of the Central Bank of Montenegro and commercial banks, so that data shown in the Article 1 of the Annual financial statement confirms derived cash flows made on stipulated forms Report on cash flows Pursuant the Rule Book on way of preparation, drafting and submitting of financial reports of the budget, extra budgetary funds and units of local self-government («Official gazette of the Republic of Montenegro» No. 03/06) hereinafter Rule book, way of preparation, drafting and submitting of annual financial reports of the Budget of the Republic of Montenegro is stipulated. Pursuant the Article 6 of the Rule book, obligation of the Budget of Republic is stipulated to prepare the annual financial report based on International Accounting Standards for Public Sector, and in accordance with the forms stipulated by the Rule book. Financial reports of the Budget of the Republic, in accordance with the Rule book, are being made on stipulated forms:

15 1 Report on cash flows I economic classification, 2 Report on cash flow II functional classification, 3 Report on consolidated public spending, 4 Report on call in arrears. Report on cash flow shows the difference between the receipts and expenditures per earmarked structure for fiscal period of one year. Report on cash flows which is given on the page 108 of the Commentary of the Draft Law on Annual Financial Statement of the Budget of the Republic of Montenegro for 2006, methodologically does not correspond to stipulated reports in the Rule book. Aiming regular presentation of trend of cash flows in the Budget of the Republic, and in accordance with the stated Rule book, and for the verification of the account accuracy of realised transactions (receipts and expenditures) by the Ministry of Finance- State Treasury, State Auditors Institution has made reports on cash flows on stipulated forms based on data from the Draft of Annual Financial Statement of the Republic of Montenegro, such as: 1 Report on cash flows I- economic classification 2 Report on cash flows II- functional classification 3 Report on consolidated public spending (1) REPORT ON CASH FLOWS I- ECONOMIC CLASSIFICATION Ordinal Cash flow-economic classification Plan Realisation in the comparable period of previous year Realisation in the stated period current year RECEIPTS 1 Current revenues ( ) Taxes , , , Contributions 1.3 Duties , , , Compensations , , , Other revenues , , ,97 2 Receipts from credit repayment 0, , ,52 3 Donations and transfers , , , Donations , , , Transfers I Total receipts (1+2+3) , , ,61 EXPENDITURES 4 Current expenditures , , , Gross salaries and contributions payable by employer , , , Other personal income , , , Material and service expenses , , , Current maintenance , , , Interests , , , Rent , , , Subsidies , , , Other expenditures , , ,24 5 Transfers for social security , , , Rights from the sphere of social security , , ,17

16 5.2 Funds for redundancies , , , Rights from the sphere of Pension and 0,00 0,00 disability insurance 5.4 Other rights from the sphere of health security 5.5 Other rights from the sphere of health insurance 0, ,00 0,00 0,00 0,00 6 Transfers to institutions, individuals, nongovernmental and public sector , ,13 7 Loans and credits , , ,28 8 Payment of guarantees , , ,44 9 Repayment of liabilities from previous , , ,10 period 10 Reserve , , ,31 II TOTAL EXPENDITURES ( ) , , ,57 III NET CASH FLOW (I-II) , , ,04 Cash flow based on investments 11 Receipts from sale on non-financial property 0, ,08 12 Receipts from sale of financial property , , ,64 13 Capital expenditures , , ,20 IV Net cash flow based on investments ( ) , , ,48 Cash flow based on financing 14 Loans and credits , , ,85 15 Credit repayments , , ,16 V Net cash flow based on financing (14-15) , , ,31 VI Increase/reduction of cash (III+IV+V) , , ,25 VII Cash at the beginning of the period , ,57 VIII Cash at the end of the period (VI+VII) , ,82 Total realised direct revenues, receipts from credit repayments and donations in 2006 amount ,61, while total expenditures amount ,57, so that total realised revenues based on taxes, duties, compensations and other direct revenues are ,04 higher than expenditures (current expenditures, transfers for social protection, transfers to institutions, individuals, non-government and public sector, loans and credits, payment of guarantees, repayment of liabilities from previous years and reserves- current and permanent). With the control of expenditures it was determined that the receipts from the sale of non financial and financial property amounted ,72, while for capital expenditures ,20 was spent, so that on the grounds of cash transactions in the part of investing the missing amount of ,48 was realised. During 2006, loans and credits which were paid to the budget amounted ,85 and at the same time credit repayment was realised to the amount of ,16, so the negative cash flow was realised on the base of financing to the amount of ,31. Missing financing sources based on capital expenditures to the amount of ,48 and based on financing to the amount of ,31 were covered from the credit balance realised in current budgetary transactions, after which there were

17 remaining funds to the amount of ,87. This amount, enlarged for initial account of the state deposits, which belong to the Budget of the Republic of Montenegro to the amount of ,57 on resulted in cash assets to the amount of ,03 on Cash to the amount of ,03 was confirmed by the State Auditors Institution and the following amounts were confirmed: Bank Central Bank of Montenegro 47,901, ,755, Crnogorska Komercijalna banka 297, , Podgoricka banka 1,756, ,413, Montenegro banka 20, Atlasmont banka 982, , Hipotekarna banka 18, , TOTAL: 50,976, ,311, Discrepancy Change in the account of deposits by years was also reconciliated and shown in the following table: ACCOUNT AND CHANGES OF DEPOSITS Description Fiscal years (EUR) Deposits at the beginning of the year , , ,00 Total receipts during the year , , ,00 Total expenditures during the year , , ,00 Deposits at the end of the year , , ,00 Aiming consideration of the realisation of the budgetary policy for last 4 years we give the overview of spent budgetary funds with financing sources for period from 2002 to Year Total realised expenditures Growth index of expenditures with base 2002 Sources of financing- realisation Direct revenues Growth index of revenues with base 2002 credits Donations ,195, ,532, ,680, ,452, ,323, ,649, , ,182, , , ,00 Presented data indicate faster growth of direct revenues when compared to expenditures- direct revenues have grown for 116% in 2006 when compared to 2002 and expenditures for 75%. Also, in observed period there is a tendency of fall of credit borrowings and donations. PRESENTED RECEIPTS AND EXPENDITURES BY FUNCTIONAL CLASSIFICATION

18 REPORT ON CASH FLOWS II functional classification Ordinal CASH FLOW-FUNCTIONAL Plan CLASIFICATION Realisation in comparable period previous year Realisation in stated period current year RECEIPTS 1 Current revenues ( ) , , , Taxes , , , Contributions 1.3 Duties , , , Compensations , , , Other revenues , , ,97 2 Receipts from credit repayment 0, , ,52 3 Donations and transfers , , , Donations , , , Transfers I Total receipts (1+2+3) , , ,61 EXPENDITURES 4 General public services , , ,34 5 Defence , , ,67 6 Public safety , , ,57 7 Economic affairs , , ,36 8 Environment protection , ,36 9 Community affairs and residence , , ,64 10 Health , , ,70 11 Sports, culture and religion , , ,14 12 Education , , ,16 13 Social protection , , ,63 II Total expenditures ( ) , , ,57 III Net cash flow (I-II) ,80 (43.351,13) ,04 Cash flow based on investing 14 Receipts from sale of non-financial property 0, ,08 15 Receipts from sale of financial property , , ,64 16 Capital expenditures , , ,20 IV NET CASH FLOW BASED ON INVESTING , , ,48 ( ) Cash flow based on investing 17 Loans and credits , , ,85 18 Credit repayment V NET CASH FLOW BASED ON FINANCING , , ,31 (17-18) VI Increase/reduction of cash (III+IV+V) , , ,25 VII Cash at the beginning of period , , ,57 VIII Cash at the end of period (VI+VII) -1, , ,82 Based on data presented in the Report on Cash Flows II by functional classification, we can reach the conclusion that the share of taxes in the total realise receipts in 2006 amounted ,51 or 87,30% of realised receipts. When compared to the previous year tax revenues have increased for about ,00 or 26,50%. Budgetary revenues were mostly formed from basic sources of financing, which proves the fact that stability of financing of public spending from the budget of the Republic was reached and that need for public borrowing was reduced, and that importing activity is being increased, considering the significant growth of revenues based on VAT collected from import. Realised public revenues were spent for financing of following areas of public

19 spending: general public services, defence, public safety, economic affairs, environment protection, affairs community and residence, health, sports, culture and religion, education and social protection. Largest expenditures were spent on financing of general public services, defence and public safety. Financing of general public services refers to financing of expenditures of legislative and executive bodies, financial and fiscal operations, foreign affairs, public debt, transfers in general between different levels of government and similar public services. Financing of general public services has a share of ,34 or 25,38% in total realised expenditures of the Republic in When compared to the previous year, expenditures for general public services were increased for ,75 or 5,3%. Expenditures for social protection in the total realised expenditures from the Budget of the Republic have a share of 20,72% or in the absolute amount it was paid Expenditures for social insurance, social welfare etc. belong here. The largest sphere of these expenditures refers to expenditures based on transfers to the Pension and Disability Insurance Fund, expenditures for needs from competences of the Ministry of Labour and Social Welfare and transfers to the Employment Agency. When compared to the previous year, expenditures for social welfare have increased for about ,90 or 137,67%, due to reclassification by functional classification. For defence was spent 36,442, or 7,14% of total realised expenditures. For these purposes, 10,26% or ,36 was spent less than last year. Expenses for public safety refer to police authorities, courts and prison services. For this area ,57 or 15,32% was spent from total realised revenues. When compared to the previous year, expenditures for these services increased for ,07 or 19%. Report on consolidated public spending for 2006, is shown in the following table: (5) REPORT ON CONSOLIDATED PUBLIC SPENDING account Description Plan Realisation in comparable period last year Realisation of the stated period current year by annual financial statement 7 Receipts 513,850, ,050, ,011, Current revenues 492,654, ,109, ,698, Taxes 437,147, ,767, ,381, Personal income tax 70,376, ,085, ,493, Corporate tax 16,043, ,292, ,681, Property tax 2,458, ,567, ,371, Value added tax 225,866, ,382, ,156, Excises 77,544, ,600, ,376, Tax on international trade and transactions 41,518, ,095, ,766, Other revenues of the Republic 3,339, ,744, ,535, Duties 10,548, ,846, ,900, Administrative duties 8,643, ,218, ,506, Court fees 1,680, ,589, ,027, Residence taxes 200, , ,979.02

20 7136 Other duties 24, , , Compensations 10,832, ,882, ,868, Fees for usage of goods of common interest 1,179, , ,274, Fees for usage of natural resources 2,951, ,104, ,521, Ecological fees 1,800, ,300, ,902, Games of chance fees 1,745, ,565, ,406, Road fees 1,756, ,00 5,372, Other compensations 1,398, ,00 2,391, Other revenues 34,126, ,612, ,548, Yields on capital 3,276, ,967, ,551, Penalties and divested property benefits 7,968, ,605, Revenues made by authorities and their activities 1,421, ,978, ,888, Self-contribution 7155 Other revenues (collection of tax claims from 21,459, ,666, ,502, previous periods) 73 Receipts from credit repayment and funds 21,195, ,941, ,313, transferred from previous year 731 Receipts from credit repayments 0,00 1,941, ,313, Funds transferred from previous year 21,195, ,00 0,00 4 EXPENDITURES 519,679, ,395, ,707, Current expenditures 262,897, ,891, ,159, Gross salaries and contributions payable by 161,425, ,931, ,589, employer 4111 Net salaries 92,524, ,370, ,942, Income tax 20,070, ,815, ,100, Contributions payable by employee 23,377, ,501, ,785, Contributions payable by employer 22,399, ,645, ,833, Municipal surtax 3,054, ,598, ,927, Other personal income 8,360, ,263, ,164, Material and service expenses 48,666, ,741, ,271, Current maintenance 19,151, ,646, ,844, Interests 14,177, ,615, ,367, Rent 2,580, ,810, ,429, Subsidies 6,076, ,333, ,072, Other expenditures 2,459, ,549, ,419, Transfers for social security 38,673, ,964, ,425, Rights from the field of social security 34,323, ,683, ,076, Funds for redundancies 4,350, ,280, ,349, Transfers to institutions, individuals and nongovernment 120,503, ,004, ,770, sector Transfers to public institutions 24,667, ,319, ,580, Transfers to non-government institutions 3,125, ,090, Transfers to individuals 11,926, ,854, ,849, Transfers to the Pension and Disability Insurance 66,205, ,881, ,018, Fund 4315 Transfers to Health Insurance Fund of the Republic 6,935, ,891, ,935, Transfers to the Employment Agency 5,570, ,622, ,570, Transfers to municipalities 1,833,000,00 2,434, ,726, Transfers to public enterprises 240, ,00 0,00 44 Capital expenditures 35,634, ,802, ,625, Capital expenditures 35,634, ,802, ,625, Loans and credits 6,713, ,455, ,692, repayment of guarantees 2,000, ,531, ,050, Repayment of liabilities from previous period 24,024, ,645, ,778, Reserve 29,232, ,099, ,204, DEFICIT / SURPLUS -5,828, ,344, ,304, Financing 5,828, ,344, ,304, Domestic financing -4,750, ,979, ,086, Loans and credits from domestic sources 0,00 8,858, , Debt repayment 4,750, ,838, ,086, Foreign financing 3,578, , ,170, Credits and securities -1,924, ,882, ,214, Loans and credits from foreign sources 5,108, ,303, ,045, Debt repayment 7,033, ,186, ,260, Donations 5,503, ,499, , Income from sale of property 7,000, ,309, ,287, Transfers 0.00 Increase (-)/reduction of deposit (+) ,602, ,334,859.87

21 Remark: Report on consolidated public spending refers only to the Budget of the Republic of Montenegro for Report on consolidated public spending indicates realised deficit or surplus for Pursuant the Article 16 of the Budget Law, cash surplus or deficit represents the difference of receipts and expenditures, whereas the receipts are reduced for loans, received transfers, donations and receipts from sale of the property, and expenditures for repayment of the capital amount in country and abroad based on debt caused by taking of credits or securities issue. Starting from this legal solution State Auditors Institution has determined budgetary surplus for 2006, based on data shown in the Draft Law on Annual Financial Statement of the Budget of the Republic for 2006, by using of methodology which is stipulated by the Rule book on preparation, drafting and submitting of financial reports of the budget, extra budgetary funds and units of local selfgovernment: 1. Receipts- account ,18 EUR 2. Loans and credits from foreign sources- account ,85 EUR 3. Revenues from sale of property- account ,72 EUR Reduced receipts ( ) ,34 EUR 1. Expenditures- account ,93 EUR 2. Debt repayment from domestic sources- account ,22 EUR 3. Debt repayment from foreign sources- account ,94 EUR Reduced expenditures (1-2-3) ,77 EUR Presented surplus in 2006 amounts ,57 EUR ( ,34 EUR ,77 EUR). Ministry of Finance has shown surplus for 2006, in the Commentary of the Annual Financial Statement to the amount of ,67. Presented surplus, according to the commentary of the Ministry of Finance, derived in accordance with recommendations and suggestions of the International Monetary fund s representative Collection of tax revenues Central Bank of Montenegro submits individual statements on daily changes per payers: to Tax Administration from the group of accounts 820, to Customs Administration from the group of accounts 805, Ministry of Interior Affairs from the group of accounts 825, State Treasury from the group of accounts 832. Tax Administration, Customs Administration and Ministry of Internal Affairs after th identification of the type perform transfer of funds from clearing accounts to the Central account of the State Treasury with simultaneous submitting of the Declaration of the Receiver on the structure of public revenues by eco codes and by municipalities. The audit of the Budget encompassed also comparison of data, on realised income recorded in the State Treasury with data on data on person giving the Declaration of the Receiver i.e. Tax Administration, Customs Administration and Ministry of Internal Affairs.

22 With all receivers of income clearing of the account is being performed every day by wiring except in case when the income can not be identified. It was determined by checking that unidentified revenues which were not cleared every day do not represent materially significant amount. Tax Administration did not make the tax annual financial statement in accordance with the Article 6 paragraph 1 item 13 of the Law on Tax administration (»Official gazette of the Republic of Montenegro«No. 65/01, 80/04 and 29/05) and the Rule book on Tax Book-Keeping published by the Ministry of Finance (»Official gazette of the Republic of Montenegro«, No 81/06). However, Tax Administration has performed confirmation of collected revenues by the document No /107 from , shown in the Draft Law on Annual Financial Statement of the Budget of the Republic fro 2006 by the Ministry of Finance. This confirmed accuracy of presented data by the Tax Administration, but as for 2005 the Institution still insists on drafting of tax annual financial statement whose form and contents are stipulated by the mentioned Rule book Budgetary receipts Pursuant the Article 9 of the Budget Law («Official gazette of the Republic of Montenegro«No. 40/01, 44/01 and 71/05) receipts of the Budget of the Republic of Montenegro encompass: 1) Current revenues (taxes, contributions, duties, compensations and other revenues); 2) Receipts from the property sale; 3) Receipts from credit repayments; 4) Donations and transfers; 5) Loans and credits (domestic and foreign); 6) Other revenues, in accordance with the Law. Receipts of the Budget of the Republic of Montenegro for 2006 were realised to the amount of ,18 and are 10,52% higher than planned by the Budget of the Republic of Montenegro for 2006, and are 1% higher than realised in Structure of realised receipts is given in the following table and graph: Table and graph show that in the structure of receipts on 2006, taxes have the largest share of 85,02% while in 2005 this revenue amounted 67,94%. Description Realised Planned Taxes , ,87 Duties , ,97 Other revenues of the Republic , ,73 Yields on capital , ,87 Receipts from repayment of given credits , ,82 Revenues from sold property , ,00 Donations , ,00 Loans and credits , ,00 TOTAL: , ,26

23 Porezi- taxes; Takse- duties; Ostali republicki prihodi-other revenues of the Republic; prihodi od kapitala- yields on capital; primici od povracaja datih kredita- receipts from repayment of given credits; prihodi od prodate imovine- revenues from sold property; donacije- donations; pozajmice i krediti- loans and credits Competent bodies in the system of collection of direct public revenues (taxes, duties and compensations) in Montenegro are Tax Administration, Customs Administration, Ministry of Internal Affairs and Administration of Justice. In the Budget of the Republic of Montenegro, Customs Administration has collected direct revenues to the amount of ,00, Tax Administration ,20, Ministry of Internal Affairs ,33 and Administration of Justice ,69. Difference between realised and planned receipts for 2006, is presented in the following table: account Receipts by economic classification Planned in 2006 Realised in 2006 Less realised More realised (3-4) 6 (4-3) 7111 Personal income tax , , , Corporate tax , , , Property tax , , , Value added tax , , , Excises , , , Tax on international trade and transactions , , , Other taxes of the Republic , , , Administrative duties , , , Court fees , , , Residence taxes , , , Other duties ,58 0, , Fees for usage of goods of common , , ,76 interest 7142 Fees for usage of natural resources , , , Ecological fees , , , Games of chance fees , , , Road fees , , , Other compensations , , , Yields on capital , , , Penalties and divested property benefits , , , Revenues made by authorities and their , , ,53 activities 7155 Other revenues , , , Revenues from sale of property , , Sale of real-estates , , Sale of capital assets 1.400, , Sale of stocks 1.675, , Sale of shares , , ,12

24 7222 Sale of other securities , , Receipts from credit repayments given to , ,34 other levels of government 7312 Receipts from credits to public enterprises , , Receipts from credits to government , ,39 institutions 7314 Receipts from credits to natural persons , , Funds transferred from previous year ,02 0, , Current donations , , , Loans and credits from domestic sources 0, Loans and credits from foreign sources , , ,85 TOTAL: , , , ,39 Table showing realised differences between planned and realised receipts shows less realised receipts than planned in corporate tax to the amount of ,60, excises to the amount of ,49, administrative duties ,40, other revenues to the amount of ,43, funds transferred from previous years to the amount of ,82 and current donations ,73. Revenue item which refers to transferred funds from previous year was not realistically planned, because the realisation of direct revenues over planned amounts provided that the total amount of budgetary spending was financed from direct revenues. Donations were not realised according to the planned structure and when compared to plan they were realised 0,8%. Most positive deviation in 2006 in realisation of revenues was achieved in value added tax to the amount of ,81 or 20,94% higher, tax on international trade and transactions to the amount of ,44 or 36,73% higher and property tax to the amount of ,80 or 199,81%. Comparative overview of realised receipts for 2006 and 2005 by economic classification is shown in the following table: account Receipts by economic classification Realised in 2006 Realised in 2005 Index realised 2006/ Personal income tax , ,33 108, Corporate tax , ,31 59, Property tax , ,91 287, Value added tax , ,33 141, Excises , ,35 110, Tax on international trade and transactions , ,00 138, Other taxes of the Republic , ,00 121, Administrative duties , ,91 143, Court fees , ,42 379, Residence taxes , , , Fees for usage of goods of common , , ,12 interest 7142 Fees for usage of natural resources , ,38 386, Ecological fees , ,20 61, Games of chance fees , ,99 261, Road fees , ,12 343, Other compensations ,38 0, Yields on capital ,67 0, Penalties and divested property benefits , ,59 153, Revenues made by authorities and their ,17 0,00 activities 7155 Other revenues , ,53 135, Revenues from sale of property , ,90 110,22

25 7211 Sale of real-estates ,70 0, Sale of capital assets 1.400,00 0, Sale of stocks 1.075,01 0, Sale of shares , ,00 0, Sale of other securities ,06 0, Receipts from credit repayments given to , ,32 20,21 other levels of government 7312 Receipts from credits to public enterprises ,57 0, Receipts from credits to government ,39 0,00 institutions 7314 Receipts from credits to natural persons ,22 0, Funds transferred from previous year 0,00 0, Current donations , ,00 1, Loans and credits from domestic sources 0, ,00 0, Loans and credits from foreign sources , ,00 273,77 TOTAL: , ,48 101,10 Table of realised receipts in 2006 and 2005 shows the change of structure of realised receipts in 2006 when compared to Direct revenues increased in 2006: value added tax for 41%, tax on international trade for 38%, while other receipts (sale of shares, donations, loans and credits) were reduced to minimum when compared to 2005 and previous years Taxes, excises and customs Tax revenues (taxes, excises and customs) represent the most important part of receipts of the Budget of the Republic of Montenegro for 2006 and were realised to the amount of ,51 and are higher than plan for 14,23%, or absolutely shown they are higher than the planned amount for ,64. Revenues from taxes, excises and customs in the total realised receipts of the Budget of the Republic of Montenegro fro 2006 have a share of 85,02% Personal income tax Revenues from the personal income tax in 2006 were realised to the amount of ,82 and are higher than the planned amount for 4,91%. Overview of realised revenues is given in the following table by type of personal income tax with the structure shown in percents and share in total receipts: Personal income tax Amount Structure% Share in other receipts% Individual income tax for employees with legal persons 61,303, % 10.44% Personal income tax (part belonging to the budget) 2,352, % 0.40% Tax from individual income of employees with natural persons 136, % 0.02% Tax on other personal income 4,850, ,69% 0.83% Tax on revenue from independent activity on real income 184, % 0.03% Tax on revenue from independent activity in lump amount , % 0.19% Tax on revenue from property and property rights , % 0.23% Tax on yields on capital , % 0.13% Tax on capital gain , % 0.00% Tax on income by annual application , % 0.06% TOTAL: , % 12.34%

26 Corporate tax Revenues based on corporative tax for 2006 were realised to the amount of ,08, which is ,60 or 24,65% less than the planned amount. In the structure of total receipts corporate tax has the share in 2006 of 2,16%, (in 2005 the share of this tax in total receipts amounted 3,66%) and their structure is shown in the following table: Corporate tax amount Structure% share in total receipts% Corporate tax of the resident legal person , % 1.99% Corporate tax of the non-resident legal person , % 0.00% Tax by rebate on dividend and share in profit , % 0.09% Tax by rebate on authors compensations, interests 466, % 0.08% and other Total: , % 2.16% Non-realisation of the plan of the corporate tax in 2006, and the reduction of share of this tax in total receipts when compared to 2005, indicates that there is a need for making the analysis of causes which led to this state Capital turnover tax Revenues based on capital turnover tax for 2006 were realised to the amount of ,86 which is 199,81% higher than the planned amount, or ,80. In the structure of total receipts capital turnover tax has a share of 1,26%. Capital turnover tax Amount Structure % Share in total receipts % Property tax (indebtedness until ) % 0.02% Capital turnover tax , % 1.24% Total: , % 1.26% Value added tax Revenues based on value added tax were realised in 2006 to the amount of ,05 and are 21% higher than planned amount, i.e. 41,25 % higher than in In the structure of total receipts VAT has a share of 46,50%. Value added tax Amount Structure% Share in receipts% Value added tax in the country , % 3.75% Tax on turnover of products , % 0.02% Tax on turnover of services , % 0.02% Value added tax on import % 41.86% Value added tax on services of foreign persons , % 0.89% Total: , % 46.50% Excises

27 Excises were in 2006 collected in the total amount of ,18 out of which ,46 goes to the excises in production and to excises on import goes ,72. When compared to plan, excises were realised less for 6,67% or for the amount of ,49. Excises in production Revenues based on excises in production in 2006 were realised to the amount of ,46 which is 24,82% less than in The structure of excises in production is presented in the following overview. Excises in production Amount Structure% Share in total receipts% Excises on other mineral oil, their derivates and substitutes , % 0.19% Excises on alcohol and alcoholic beverages , % 1.05% Excise duties on tobacco products , % 0.03% Total: , % 1.27% Import duties Revenues based on import duties in 2006, were realised to the amount of ,72 which is 16,61% higher than in Structure of excises upon import is given in the following table: Excises upon import Amount Structure% Share in total receipts% Duties on leaded petrol super 98- duties storehouse , % 1.88% Duties on unleaded petrol 95- duties storehouse , % 2.26% Duties on diesel fuel D2 and eco diesel- duties storehouse , % 4.74% Excise duties on other mineral oils, their derivates and , % 0.45% substitutes-duties storehouse Excise duties on tobacco products- duties storehouse , % 0.06% Duties on unleaded petrol , % 0.06% Duties on diesel fuel D2 and eco fuel ,01 1,03% 0.11% Excises duties on other mineral oils, their derivates and , % 0.61% substitutes Excises on alcohol and alcoholic beverages , % 0.27% Excise duties on tobacco products , % 0.01% Excise duties on imported cigarettes , % 0.61% TOTAL: , % 11.05% Tax on international trade and transaction In 2006, revenues based on taxes on international trade and transactions were realised to the amount of ,62 which is ,44 higher than the planned amount and in the structure of total realised receipts this revenue has a share of 9,66% (in 2005, share of this revenue amounted 7,07%).

28 Tax on international trade and transactions Amount Structure% Share in total receipts% Customs , % 7.04% Customs duties , % 0.48% Customs for services of customs office , % 1.75% Special fee upon import of agricultural and , % 0.39% alimentary products Total: , % 9.66% Other taxes Revenues from other taxes for 2006 were realised to the amount of ,87 and are 21% higher than planned, or absolutely shown for ,87. Structure of other taxes is given in the following table: Other taxes of the Republic Amount Structure% Share in total receipts% Special tax on turnover of used motor vehicles, vessels, aeroplanes and aircrafts , % 0.13% Tax on usage of motor vehicles and other goods , % 0.05% Tax on insurance premiums , % 0.15% Total: , % 0.77% Duties Revenues based on duties in 2006, were realised to the amount of ,19 which is higher than planned amount of in percents for 32,07%. The highest increase of revenues based on duties of 258,64% was realised based on court fees, while on the base of administrative duties it was collected less when compared than the planned amount for 13,16%. Revenues based on duties, by sorts and structure of share, are presented in the following table: Duties Amount Structure% Share in total receipts% Administrative duties of the Republic , % 1.28% Court fees , % 1.03% Residence duties , % 0.06% Total: , % 2.37% Other revenues of the Republic Income from other revenues of the Republic for 2006, was realised to the amount of ,12 which is 9,91% higher than the planned amount, or absolutely shown it was realised for ,14 more than planned. Other revenues of the Republic Amount Structure% Share in total receipts% Compensations , % 3.04%

29 Yields on capital , % 1.12% Revenues from activities of governmental bodies , % 0.66% Cash penalties and property divested benefits , % 1.29% Other revenues of the Republic , % 2.30% Total: , % 0.41% Revenues from compensations were realised from compensations for usage of goods of common interests to the amount of ,23, compensations for usage of natural goods to the amount of ,44, ecologic compensation ,47, compensation for organisation of games of chance ,76, roads compensations ,17 and other compensations to the amount of ,38. In other revenues of the Republic, the biggest share goes to collected taxes which matured in previous years to the amount of ,00 other revenues of the Ministry of Interior Affairs to the amount of ,60 and revenues from successions Ministry of Finance to the amount of , Receipts from credit repayments, donations, loans and credits Receipts from credit repayments, donations, loan and credits in 2006 had been planned to the amount of ,00, and were realised to the amount of ,64. In the following table, by economic classification, an overview is given of planned and realised receipts on 2006 and Economic Receipts by economic Planned in Realised in Realised in Index realised/ Index realised Difference classification classification planned 2006/ =(5/3) 100 7=(5/4) =(5-3) 7311 Receipts from credit repayment , ,34 20, ,34 given to other levels of government 7312 Receipts from credit repayment , ,57 given to public enterprises 7313 Receipts from credit repayment , ,39 given to other institutions 7314 Receipts from credit repayment given to natural persons , , Current donations , , ,27 0,80 1, , Loans and credits from domestic sources , Loans and credits from foreign sources , , ,85 177,07 273, ,85 TOTAL , , ,64 173,42 110, ,64 Receipts from payment repayment given to public enterprises in 2006 amount ,57. They were mostly realised from repayments of credits given to HTP Ulcinjska rivijera to the amount of ,83. given to natural persons in 2006 amount ,22. Credits given to natural persons in previous years were provided by means of commercial banks, based on self-employment credits from Employment Agency. Government of the Republic of

30 Montenegro has assumed claims of commercial banks, made contract on debt rescheduling with natural persons, credit beneficiaries, and overview of annuities with maturity periods. Donations Receipts from non-refundable aid (donations) in 2006 were planned to the amount of ,00, and were realised to the amount of ,27. Donation was approved by World Bank for preparation of the project Integral management of eco-system Skadar lake to the amount of ,00. Realisation of donations to the amount of ,27 indicates the need for re-examining reasons for non-fulfilment of the plan of donations and the structure and relations with donors. Loans and credits from foreign sources- inflows of funds based on credits and loans taken from foreign sources in 2006 amount ,85 and are 77,07% higher than planned, or ,85, or when compared to realisation in 2005 for 173,77% i.e ,85. In the following table an overview of taken loans and credits from foreign sources is given: Creditor Structure of the World bank credit Amount Foreign credit from European Community (SAC-II tranche ,92 IDA- World Bank Foreign credit (WB-Pension Disability Insurance) ,48 Foreign credit (World Bank- Health Insurance) ,37 Foreign credit (World Bank- Education) ,74 Credit from Treasury bills ,34 TOTAL ,85 Credit approved by International Development Association IDA- World Bank, has approved credit for the programme on structural adjustment of Montenegrin economy to the amount of ,00 SDR (special drawing rights). In 2006, through Central Bank of Montenegro, where the depositary account in EUR was open, funds were paid to the amount of ,92. Credit approved by IDA- World Bank, amount ,59 refers to indebtedness in World Bank (World Bank Affiliation). Stated funds are programme credits which refer to investments with permanent assignment such as: promotion of health protection, promotion of pension administration and reforms of the education system. Credits from Treasury bills Inflow of funds from the liquidity account, as net surplus of issuance of Treasury bills in 2006 amounts ,34. In accordance with the Article 10 of the Budget Law, expenditures encompass:

31 1) current expenditures; 2) transfers for social protection; 3) transfers to individuals, non-government and public sector; 4) capital expenditures for procurement and investment maintenance of financial and non-financial property; 5) given loans and credits; 6) repayment of debts, guarantees and liabilities from previous years; 7) other payments in accordance with the Law. By audit of shown expenditures of the Budget of the Republic of Montenegro, it was confirmed that the expenditures for 2006 were shown to the amount of ,93. Realised expenditures for 9,30% are higher than planned, and 6.74% higher than those realised in Plan of expenditures of the Budget was determined by the Law on Budget of the Republic of Montenegro for 2006 ( Official gazette of the Republic of Montenegro,No.77/05). At the beginning of November 2006, Parliament of the Republic of Montenegro has adopted the Law Amending and Supplementing the Law on Budget of the Republic for 2006, ( Official gazette of the Republic of Montenegro, No.70/06), which increased the budgetary spending for or 2,41%. Structure of planned and realised expenditures with relative and absolute deviations by economic and organizational classification is shown in the following graph and table: Planirani izdaci- planned expenditures Ostvareni izdaci- realised expenditures account Receipts by economic classification Planned in 2006 Realised in 2006 Non-realisation of the budget (less) Overrun of plan (higher) (for 4<3) 6(for 4>3) 4111 Net salaries 92,524, ,942, , Personal income tax 20,070, ,100, , Contributions payable by employee 23,377, ,785, , Contributions payable by employer 22,399, ,833, , Municipal surtax 3,054, ,927, , Meal allowance 3,932, ,908, , Recourse 1,777, ,774, , Compensation for housing and separate 213, , , living 4125 Compensation for transport 2, , Severance pays 4, , , Compensation for members of the 450, , parliament 4129 Other compensations 1,980, ,834, , Costs for material 8,019, ,081, ,241.78

32 4132 Costs for business trip 3,994, ,682, , Costs for representation 307, , , Costs for energy 7,610, ,028, , Costs for phone services 2,735, ,097, , Costs for post services 507, , , Bank services and course deficit 130, , , Transfer services 17, , Contracted services 25,342, ,535, ,807, Current maintenance of public infrastructure 16,216, ,213, , Current maintenance of buildings 1,743, ,601, , Current maintenance of equipment 1,191, ,029, , Interests to residents 100, ,052, ,952, Interests to non-residents 14,077, ,314, ,236, Rent of object 2,204,, ,063, , Rent of equipment 367, , , Rent of land 8, , , Subsidies for production and services 6,076, ,072, , Communal compensations 625, , , Duties 2, , Other 1,831, ,826, , Child allowances 3,310,538,50 3,307, , Disabled veterans care 7,525, ,506, , Financial securing of family 10,304, ,303, , Maternity leave 6,689, ,562, , Social care 3,166, ,160, , Food for children in preschool institutions 505, , Allowance to proteges in institutions 2,500, ,442, , Other rights from sphere of social protection 322, , , Severance pay for redundancies 4,350, ,349,563, Transfer to public institutions 24,667, ,580, , Transfer to NGOs, political parties and 3,125, ,090, , associations 4313 Transfers to individuals 11,926, ,849, , Transfer to the Pension and Disability 66,205, ,018, , Insurance Fund of the Republic 4315 Transfer to the Health Insurance fund of the 6,935, ,935, Republic 4316 Transfer to the Employment Agency 5,570, ,570, Transfers to municipalities 1,833, ,726, , Transfers to public enterprises 240, , Expenditures for infrastructure of common 7,218, ,094, , interest 4412 Expenditures for local infrastructure 4,319, ,319, Expenditures for buildings 10,415, ,998, ,417, Expenditures for equipment 6,982, ,780, ,202, Expenditures for investment maintenance 6,075, ,942, , Expenditures for stocks 622, ,942, , Loans and credits to non-financial 3,500, ,491, , institutions 4513 Loans and credits 1,466, ,454, , Other loans and credits 1,747, ,747, Repayment of securities and credits to 4,750, ,284, ,534, residents 4612 Repayment of securities and credits to nonresidents 7,033, ,260, ,226, Repayment of guarantees in the country 1,000, , , Repayment of guarantees abroad 1,000, , , Repayment of liabilities 24,024, ,581, ,556, Current budgetary reserve 22,779, ,796, ,982, Permanent budgetary reserve 6,452, ,407, ,954.59

33 TOTAL: 531,462, ,054, ,914, ,506, Net difference: 48,592, The following table shows the relation between realised expenditures in 2006 when compared to 2005 account Receipts by economic classification Realised in 2006 Realised in 2005 Index realised 2006/ Net salaries 91,942, ,370, Personal income tax 19,100, ,815, Contributions payable by employee 22,785, ,501, Contributions payable by employer 21,833, ,645, Municipal surtax 2,927, ,598, Meal allowance 3,908, ,843, Recourse 1,774, ,376, Compensation for housing and separate 193, ,048, living 4125 Compensation for transport 2, Severance pays 1, Compensation for members of the 450, , parliament 4129 Other compensations 1,834, , Costs for material 7,081, ,606, Costs for business trip 3,682, ,200, Costs for representation 288, Costs for energy 7,028, ,711, Costs for phone services 2,097, ,146, Costs for post services 434, , Bank services and course deficit 105, Transfer services 16, Contracted services 22,535, ,373, Current maintenance of public 16,213, , infrastructure 4142 Current maintenance of buildings 1,601, ,297, Current maintenance of equipment 1,029, ,236, Interests to residents 3,052, ,534, Interests to non-residents 19,314, ,081, Rent of object 2,063, ,781, Rent of equipment 360, Rent of land 6, , Subsidies for production and services 6,072, ,333, Communal compensations 589, Duties 2, Other 1,826, ,549, Child allowances 3,307, ,696, Disabled veterans care 7,506, ,518, Financial securing of family 10,302, ,856, Maternity leave 6,562, ,135, Social care 3,160, ,557, Food for children in preschool institutions 505, , Allowance to proteges in institutions 2,442, ,517, Other rights from sphere of social 290, ,908, protection 4222 Severance pay for redundancies 4,349, ,280, Transfer to public institutions 24,580, Transfer to NGOs, political parties and associations 3,090, ,319,

34 4313 Transfers to individuals 11,849, ,854, Transfer to the Pension and Disability 66,018, ,881, Insurance Fund of the Republic 4315 Transfer to the Health Insurance fund of 6,935, ,891, the Republic 4316 Transfer to the Employment Agency 5,570, ,622, Transfers to municipalities 1,726, ,434, Transfers to public enterprises Expenditures for infrastructure of 7,094, , common interest 4412 Expenditures for local infrastructure 4,319, Expenditures for buildings 8,998, ,211, Expenditures for equipment 4,780, ,104, Expenditures for investment 5,942, ,698, maintenance 4417 Expenditures for stocks 490, Loans and credits to non-financial 3,491, ,580, institutions 4513 Loans and credits 1,454, ,875, Other loans and credits 1,747, Repayment of securities and credits to 38,284, ,838, residents 4612 Repayment of securities and credits to 14,260, ,186, non-residents 4621 Repayment of guarantees in the country 766, Repayment of guarantees abroad 284, ,531, Repayment of liabilities 40,581, ,645, Current budgetary reserve 20,796, ,252, Permanent budgetary reserve 6,407, , TOTAL: 580,054, ,420, EXPENDITURES SHOWN BY SPENDING UNITS Organisational unit Name Expenditures by spending units Realised in 2006 Planned in 2006 Nonrealisation of the budget Overrun of the plan (more) class For2<3 5 For 2>3 01 President of the Republic of Montenegro , , ,44 02 Parliament of the Republic of Montenegro , , ,49 03 Government of the Republic of Montenegro , , ,45 04 Constitutional Court of the Republic of Montenegro , , ,74 05 Montenegrin Academy of Science and Arts , , ,69 06 Protocol of the Republic , , ,80 07 Ministry of Finance , , ,29 08 Ministry of Education and Science , , ,48 09 Ministry of Labour and Social Welfare , , ,02 10 Ministry of Internal Affairs , , ,99 11 Ministry of Maritime Affairs, Transport and , , ,60 Telecommunications 12 Ministry of Agriculture, Forestry and Water , , ,41 Management 13 Ministry of Justice , , ,20 14 Misdemeanour bodies , , ,52 15 Office of Prosecutor , , ,30 16 Judiciary , , ,20 17 Ministry of Economy , , ,36 18 Ministry of Tourism , , ,46 1 Amount on account 4141 current maintenance of public infrastructure in 2005 is shown based on realised reclassification.

35 19 Ministry of Culture and Media , , ,04 20 Ministry of Health , , ,40 21 Ministry of foreign affairs , , ,71 22 Agency for Anti-Corruption Initiative , ,06 913,18 23 Ministry of Economy-Market Inspection of the , , ,96 Republic 24 Ministry for Environmental Protection , , ,03 25 Directorate for Sports and Youth , , ,61 27 Ministry for Human and Minority Protection , , ,83 28 Administration for Joint Services of the Republic , , ,94 Bodies 29 Directorate for Public Works , , ,35 30 Tax Administration , ,86 31 Customs Administration , , ,51 34 Secretariat for Legislation , , ,98 35 Secretariat for Development , , ,02 36 Directorate for development of small and mediumsize , , ,15 enterprises 37 Real-Estates Directorate , , ,79 38 Hydrological and Meteorological Service , , ,21 39 Statistical Office of the Republic of Montenegro , , ,59 40 ZAMTES , , ,73 41 Montenegro Seismological Observatory , , ,18 42 Agency for restructuring of economy and foreign , , ,86 investments 43 Commissariat for Refugees , , ,87 44 State Archives of Montenegro , , ,90 45 Institution for effectuation of criminal , , ,38 sanctions and notaries 47 Ministry of Defence , , ,21 48 Pension and Disability Insurance Fund , ,61 0,00 49 Other beneficiaries of the budget , , ,74 50 Ministry for foreign international relations , , ,28 51 Education and Teacher Training Agency , , ,31 52 State Auditors Institution , , ,44 53 Protector of Human Rights and Freedoms , , ,11 54 Administration for Prevention of Money Laundering , , ,15 56 Commission for Conflict of Interest , , ,78 57 Compensation Fund , ,91 0,00 58 Maritime Safety Department , , ,03 59 National Tourism Organisation of Montenegro , , ,31 60 Directorate for Animal Health , , ,37 61 Human Resources Management Authority , , ,85 62 Court of Serbia and Montenegro , , ,60 63 Directorate for Forestry , ,00 0,00 64 Directorate for Water Management , , ,61 66 Directorate for Traffic , , ,39 67 Agency for National Safety , , ,40 68 Tobacco Agency , , ,80 69 Employment Agency , ,00 0,00 Total: , , , ,29 Net difference: ,68 In presented expenditures, overruns were noticed in the Ministry of Finance to the amount of ,29. Overruns mostly refer to payments of interests and capital sums based on debt of the country and guarantees given by the county. Overruns based on expenditures were realised in accordance with the Article 43 of the Budget Law, which gives the authority to the Government of the Republic of Montenegro to illimitably pays from consolidated account of the Treasury for liabilities based on interests, capital sums and guarantees given by the country, in accordance with conditions and periods contracted by the Government.

36 Gross salaries of employees Expenditures based on gross salaries of employees were realised to the amount of ,21 or 98,24% of the plan. Net salaries, taxes and contributions for social insurance participate with 27,34% in total expenditures in 2006 and are individually the largest expenditure of the budget. Taxes are determined in accordance with the Law on Personal Income Tax ( Official gazette of the Republic of Montenegro, No. 65/01 and 12/02) and with the Decree on Determining of the Amount which is Exempted from the Personal Income Tax ( Official gazette of the Republic of Montenegro, 63/02, 69/02, 04/04.) and depending of the amount of the gross salary and determined scales on which a tax is calculated by rates of 0%, 15%, 19% and 21%. We mention that the Parliament of the Republic of Montenegro has adopted on , Law Amending and Supplementing the Law on Personal Income Tax which introduced the unique tax rate of 9%, except for 2007 and 2008m where the stipulated tax rate is 15%, and for 2009 it is 12%. Contributions are determined in accordance with the Law on Contributions for Social Insurance (»Official gazette of the Republic of Montenegro«No. 32/93, 03/94, 17/94, 42/94, 01/95,13/96, 45/98, 65/01, 54/03, 39/04 and 29/05) according to the following rates: Contributions for Pension and Disability Insurance payable by employee 12% and payable by employer 9.60%, contributions for health insurance payable by employee 7.50% and payable by employer 6.00%, and contribution for unemployment insurance payable by employee 0.5% and payable by employer 0.5%. OVERVIEW OF GROSS SALARIES WHEN COMPARED TO PLAN AND THEIR SHARE IN EXPENDITURES Structure of gross salaries Planned in 2006 Realised in 2006 Share in gross salaries (%) Share in total expenditures (%) Net salaries , ,18 57,97% 15,85% Personal income tax , ,95 12,04% 3,29% Contributions for social insurance , ,90 28,14% 7,69% Tax surtax , , % 0.50% Gross salaries of employees , ,21 100,00% 27,34% OVERVIEW OF THE STRUCTURE OF GROSS SALARY Structure of gross salaries Realised in 2006 Realised in 2005 Index 2006/2005 Net salaries ,290, , Personal income tax , , Contributions for social insurance , , Tax surtax , , Gross salaries of employees , , Current maintenance Table overview of realisation of current maintenance when compared to plan Description Plan 2006 Realisation 2006 Index realisation/plan =4/3

37 1 Current maintenance of public infrastructure , ,70 99,97 2 Current maintenance of buildings , ,45 91,91 3 Current maintenance of equipment , ,43 86,48 TOTAL , ,58 98,40 In 2006, payments from the budget amounted ,58, which is 1,60% less than planned amount. Biggest beneficiaries of these budgetary funds are: Public Roads Directorate to the amount of ,90 and Ministry for Maritime Affairs, Transportation and Telecommunication to the amount of ,00. By programme for maintenance of the railway infrastructure ,00 was spent. Record on harmonised liabilities and realised payments for 2006 was signed between the Ministry of Finance and Ministry of Maritime, Transportation and Telecommunication on Expenditures for interests Expenditures based on interests to residents and nonresidents for 2006, were planned to the amount of ,64, and realised to the amount of ,43, which is 57,76% higher than planned or for ,79. Expenditures based on interests are shown in the following table: Economic classification Position Planned in 2006 Realised in 2005 Realised in 2006 Index realised/planned Index realised 2006/2005 Difference realised/planned =(5/3) 100 9=(5/4) =(5-3) 4151 Interests to residents , , , , , Interests to non-residents , , ,96 137,20 113, ,32 TOTAL: , , ,43 157,76 108, ,79 Interests to residents Expenditures based on interests to residents (domestic creditors) including bank commissions amount ,47 and are higher than planned expenditures on this ground for ,47, while when compared to realised expenditures in 2005, they are lower for ,36. Structure of expenditures based on interest to residents is shown in the following table: Description Amount Repayment of interests on credits ,46 Repayment of interests on Treasury Bills ,92 Repayment of interests for credits of the Health Insurance Fund of the Republic ,98 Repayment of interest on guarantees in the country ,54 Commission on repayments of credits given to residents ,68 Commission of the bank (for other services) ,89 Total: ,47 Repayment of interests on credits In 2006 based on repayment of interests on credits it was paid ,46 : On programme on water supply of coastal municipalities and Municipality Cetinje to the amount of ,74. Payment of interests on contracts on ensuring of credit lines for support of the Programme Legalisation of existing and opening of new jobs. In 2006, based on subsidies of interests on credits for stated period was paid ,40, to commercial

38 banks: Montenegro banka ,80 Podgorička banka ,91 Atlasmont banka ,91 Crnogorska komercijalna banka ,78 Total: ,40 Repayment of interest by Protocol No /1 from , on way of payment of debt which Government of the Republic of Montenegro owes to the Central Bank of Montenegro to the amount of ,13. In 2006, based on this debt ,25 was paid based on interests. Repayment of interest on taken credits to the amount of ,24 was realised in the way that enterprises ( Lipa-Cetinje, Obnova, GP Crna Gora Nikšić, Fidija Podgorica etc.), in order to collect their claims from the Directorate for Public Works, with approval of the Ministry of Finance, taken credits in business banks, and the Ministry of Finance has assumed the obligation for repayment of credits.. Repayment of interests on Treasury Bills In 2006, based on interests on Treasury bills ,92 was paid. Repayment of interests on credits of the Health Insurance Fund of the Republic The Government of the Republic of Montenegro, at the Session held on 12. October 2006, upon request of the Health Insurance fund of the Republic, has adopted a Resolution No which testifies that the Ministry of Finance assumes credit indebtedness of the Health Insurance Fund of the Republic by concluded contracts on short-term credits in commercial banks to the amount of ,20. Repayment of interests based on guarantees in the country In 2006, for interests on guarantees in the country it was paid ,54. Interest refers to the credit indebtedness, for given guarantees of the Government of the Republic of Montenegro, Radio Television of Montenegro in business banks for rent of the satellite station and satellite capacities for covering of the whole territory of Europe. Commission of banks for payment of interests to residents - Expenditures based on paid commissions of banks and compensations, for interests to residents amounted ,68 : Description Amount Central Bank of the Republic of Montenegro ,52 National Bank of Serbia ,67

39 Montenegro banka ,85 Podgoricka banka ,30 Niksicka banka 2.428,71 Compensation to the Privatisation Council 1% of the sale of state ,50 Unidentified amount 7.068,16 TOTAL ,89 Interests to non-residents (to foreign creditors)- expenditures based on credit repayments to non-residents for 2006 were planned to the amount of ,64. Realised expenditures based on interests repayments to non-residents in 2006 amount ,96 and are higher than planned for 37,20% or for ,32. These expenditures are higher in 2006 when compared to 2005 for ,67 or for 13,07%. In the following table an overview is given of expenditures based on interests to nonresidents. Creditor Amount European Investment Bank ,48 International Finance Corporation ,00 European Community ,71 International Bank for Reconstruction and Development ,75 Paris Club-members ,47 AY Bank LTD London ,60 Vovlo Truck Corporation Sweden ,00 CEB- Council of Europe Bank ,80 EBRD-European Bank for Reconstruction and Development ,40 KfW- Credit bank for Reconstruction Germany ,87 KfW- Credit bank for Reconstruction Germany ,38 Commission and other expenditures of indebtedness ,50 TOTAL: ,96 Overview of expenditures based on commission and other expenditures of indebtedness is given in the following table: Name of the Bank Amount Commission to Narodna Banka Srbije 4.386,66 Commission to the Central Bank of the Republic of Montenegro 7.249,21 Costs for servicing of loans by IDA conditions ,97 Commission for Electric Power Industry (0.25%) 4.475,00 Commission for Monte broker 1.419,19 Commission for credit from KfW (0.25%) ,34 Commission for credit from EBRD 4.515,13 Commission on resolution 5.500,00 TOTAL: ,50 Expenditures for loans and credits, repayments of credits and repayments of guarantees Expenditures for loans and credits, repayment of credits and repayments of guarantees

40 in 2006 amounted ,96 and are higher than the planned amount for 230%. When compared to 2005 they are lower for 44,81% or ,44. Economic Position classificati on 4511 Loans and credits to non finance institutions 4611 Repayment of securities and credits to residents 4612 Repayment of securities and credits to non-residents 4621 Repayment of guarantees in country 4622 Repayment of guarantees abroad Planned for 2006 Realised in 2005 Realised in 2006 Index realised/ planned Index realised 2006/2005 Difference realised/ planned , , ,00 99,74 103,28 (9.000,00) , , ,58 805,99 43, , , ,94 202,76 257, , , , ,68 76, , , ,76 28,43 ( ,32) TOTAL: , , ,96 330,30 55, ,96 In the following table an overview of credits and loans given to non-financial institutions in 2006 to the amount of ,00. Description Amount Obod Cetinje ,00 Coal Mine Ivangrad Berane ,00 Radoje Dakic Podgorica ,00 Corporation Velimir Jakic Pljevlja ,00 Printing office Obod Cetinje ,00 Imako Bijelo Polje ,00 Regional water-supply Crnogorsko Primorje ,15 AD Staklenici Podgorica ,00 Nova Beranka Berane , Decembar Podgorica ,85 Montena Modern Shoes ,00 Total: ,00 To the enterprise Obod Cetinje in 2006 credits were given to the amount of ,00 (based on several contracts). Credits were granted as short-term loans for overcoming of business problems, with time of repayment of six months from the day of transfer of funds and with calculation of interests by comfort method with rate of 4% annually. Given loans and credits to other enterprises were granted based on programme of restructuring of enterprises, with repayment period until the end of bankruptcy procedure without calculated interest. Repayment of securities and credits given to residents Expenditures for repayment of securities and credits and (call in arrears) in 2006, amounted ,58 and are higher than planned for 705,99% or for ,50. Structure of repayment of securities and credits to residents is given in the following table: DESCRIPTION Amount

41 Repayment of capital sum on credits ,60 Repayment of capital sum on Treasury Bills ,41 Payment of social aid and call in arrears ,41 Decisions of the cabinet of the Government of the Republic of Montenegro ,00 Repayments on assumed debts ,07 Given credits ,90 Repayment of capital sum for credits of the Health Insurance fund of the Republic ,19 TOTAL ,58 In the Draft Law on Annual Financial Statement of the Budget of the Republic of Montenegro for 2006, on position Repayment of securities and credits to residents the amount of ,22 is shown. Difference between the ledger of the Treasury and Draft Law on Annual Financial Statement amounts ,36. However, liabilities from previous years, position 4630, in the ledger of the Treasury are shown to the amount of ,74, and in the Draft of Annual Financial Statement ,10, which means that the difference to the amount of ,36 corresponds the difference on the account 4611 Repayment of securities and credits to residents. Repayment of securities on Treasury Bills on the base of repayment of capital sum on Treasury Bills ,41 was paid. DESCRIPTION AMOUNT Repayment of capital sum on 182-day Treasury Bills ,11 Repayment of capital sum on 91-day Treasury Bills ,73 Repayment of capital sum on 56-day Treasury Bills ,57 TOTAL ,41 Account of debt on the base of Treasury Bills on amounted ,00, with maturity period as shown in the following table: Maturity period Issuance of Treasury Bills Amount day Treasury Bills , day Treasury Bills , day Treasury Bills , day Treasury Bills , day Treasury Bills ,00 TTOTAL ,00 Payment of social aid and outstanding allowances From the position of repayment of securities and credits to residents, based on the Decision of the Government from the Session held on , social compensations were paid to the amount of ,78. Payment of compensations refers to outstanding compensations from In the following table an overview was given of paid social allowances by types of compensations. OPIS AMOUNT Financial securing of family ,20 Child allowance ,00

42 Maternity leave ,58 Social care ,00 Personal disability allowance ,50 Unemployed persons in the Employment Agency ,98 Trainees in the Employment Agency ,40 MOB-financial ensuring of soldiers ,12 TOTAL ,78 From the position of repayment of securities and credits to residents, based on the Decision of the Government from the Session held on , call in arrears were paid to the Ministry of Internal Affairs to the amount of ,63. Call in arrears refer to calculated compensations based on additional night, overtime work and work in days of state or religious holidays of employees in the Ministry of Internal Affairs from 2001 until Also, from this position the expenditures were paid for credits given to non-financial institutions to the amount of ,90. Repayment of capital sum for credits of the Health insurance Fund of the Republic- The Government of the Republic of Montenegro, at the Session held on 12. October 2006, upon request of the Health Insurance Fund of the Republic, has passed a Resolution No with which the Ministry of Finance assumes the credit indebtedness of the Health Insurance Fund of the Republic based on signed contracts on short-term credits in commercial banks to the amount of ,20. On stated Resolution of the Government the amount of ,19 was paid. Repayment of securities and credits to non-residents- Expenditures based on repayment of securities and credits to non-residents (payments on foreign credits) in 2006 were planned to the amount of ,00. Their share in total budgetary expenditures is 2,46%. Realised expenditures based on repayment of foreign debt in 2006 amounted ,94 and are 102,76% higher than planned or ,94 higher than planned. These expenditures are higher in 2006 than in 2005 for ,32 or for 157,81%. Overview of credit repayment to non-residents is given in the following table: CREDITOR AMOUNT Volvo Truck Corporation ,00 IFC- International Finance Corporation ,43 Bank Handlowy Warszawie ,55 IBRD- International Bank for Reconstruction and Development ,86 AY Bank LTD London ,92 CEB- Council of Europe Bank ,34 Paris Club- Members ,13 EBRD- European Bank for Reconstruction and Development ,42 Fiesta Investments LTD ,00 Export Bank Czech Republic ,00 KfW- Credit Bank for Reconstruction Germany ,29 TOTAL: ,94 Repayment of guarantees in the country In 2006, based on expenditures for repayment of guarantees in the country ,68 was paid. These expenditures refer

43 to granted guarantees of the Government for credit indebtedness of the Radio Television of Montenegro in business bank, for rent of satellite station and satellite capacities for covering of the whole area of Europe. Repayment of guarantees abroad Funds approved for Project on Improvement of the Water supply of the Montenegrin Coast and Cetinje contract No.9259 from , concluded between the Credit Bank for Reconstruction KfW and public enterprise for water-supply Crnogorsko primorje to the amount of ,00 DEM, or ,81 (with course 1,95583). Credit is being repaid from until In 2006, two instalments were paid to the amount of ,76. Given guarantees and counter-guarantees for foreign credits in 2006, published in Official gazette of the Republic of Montenegro and are shown in the following overview: Ordin Creditor al numb er 1 Government of the Republic of France Loan amount in mill. EUR Project 8,47 Reconstruction and expending of the electric power network in Montenegro 2 European Investment Bank 9,00 Project on rehabilitation of roads and bridges in Montenegro 3 German Bank for Reconstruction 10,00 Project on Water supply and liquid waste disposal in the Coastal areaphase II 4 European Community 2,50 Given counter-guarantees to Serbia and Montenegro 5 European Investment Bank 5,00 Project A- water and sewerage in Montenegro 6 Austrian credit 4,10 Project on procurement of equipment for Clinical Centre and other health institutions Published in Official gazette of RoM 39/06 10 th June 22 nd June 39/06 39/06 26 th June Transfers to institutions, individuals, non-government and public sector Funds for these purposes in 2006, were paid to the amount of ,13 or when compared to the plan- they are lower for 1% and in the absolute amount of ,49. In the following table an overview of paid transfers, and share in total expenditures in the budget for 2006 is given Transfers from the Budget Amount Share in expenditures for transfers Share in total expenditures in the Budget % Transfers to public institutions ,89 20,52% 4,24% Transfers to NGO, political parties, parties and associations ,24 2,58% 0,53% Transfers to individuals ,54% 9,89% 2,04%

44 Transfer to the Pension and Disability Insurance Fund Transfer to the Health Insurance Fund of the Republic Transfer to the Employment Agency of Montenegro ,80 55,12% 11,38% ,00 5,79% 1,20% ,00 4,65% 0,96% Transfers to municipalities ,66 1,44% 0,30% TOTAL ,13 100,00% 20,65%. Beside the Pension and Disability Fund of the Republic, Health Insurance Fund of the Republic and Employment Agency, beneficiaries of budgetary transfers are also public institutions and bodies, and among them the largest beneficiaries are University of Montenegro ,96, Ministry of Education and Science- Centre for Vocational training ,49, Ministry of Defence ,69, Directorate for Forests ,00 and Compensation Fund ,91. In the procedure of audit State Auditors Institution has requested confirmation for paid transfers to the Pension and Disability Insurance Fund of the Republic, Health Insurance Fund of the Republic and Employment Agency. Based on received confirmations it was stated that paid funds based on transfers correspond to records kept in the Budget, except for the Health Insurance Fund of the Republic, which shown discrepancy of Discrepancy refers to the paid equipment for protection from the possible bird flu epidemic which was paid based on request for payment of the Ministry of Health, and accordance was not given by the Health Insurance Fund Capital expenditures Capital expenditures were realised to the total amount of ,20 which is 11.25% less than the planned amount, or in absolute amount for ,11. In the following table, and overview of the structure of capital expenditures is given. Capital expenditures Realised in 2006 Share in capital expenditures Costs for infrastructure of common interest ,46 22,43% 1,22% Costs for local infrastructure ,0 13,66% 0,74% Expenditures for buildings ,17 28,45% 1,55% Costs for equipment ,14 15,12% 0,82% Expenditures for investment maintenance ,98 18,79% 1,02% Expenditures for stocks ,45 1,55% 0,08% Total: ,20 100,00% 5,45% Share in total expenditures of the Budget %

45 Izdaci za opremu- costs for equipment; izdaci za investiciono odrzavanje-costs for investment maintenance; izdaci za zalihe-expenditures for stocks; izdaci za infrastrukturu od opsteg znacaja-costs for infrastructure of common interest; izdaci za lokalnu infrastrukturu-costs for local infrastructure; izdaci za gradjevinske objekte- expenditures for buildings It was established with the control that on the account of capital expenditures of the Ministry of Maritime Affairs, Transportation and Telecommunication expenditure was booked on to the amount of ,76 and ,15, and which represents payment for deposit in the Crnogorska Komercijalna Banka, for securing of funds for procurement of equipment. Transferred funds to the business bank by the Ministry of Maritime Affairs, Transportation and Telecommunication should be used for payments to suppliers the latest by Not paying of undertakings until of current year defies the Article 36 of the Budget Law, which stipulates that the allocated funds to spending units can be used until 31 st December of fiscal year, an the Article 45 of Guidelines for the Work of State Treasury which regulates that the proposal for spending which leads to the direct spending of state funds, is previously filed as undertaking from available budgetary funds. Because of this, it is necessary for Ministry of Finance State Treasury in case of forming of deposits, which should already be filed as expenditure, to prolong the fiscal year and effectuate authorised payments. Overview of capital expenditures by spending units is given in the following table: Name of the spending unit Capital expenditures Individual share in Planned Realised realisation in % Parliament of the Republic of Montenegro 120, , % Government of the Republic of Montenegro 923, , % Constitutional Court 2, , % Montenegrin Academy of Science and Arts 28, , % Protocol of the Republic 4, , % Ministry of Finance 72, , % Ministry of Education and Science 1,566, ,564, % Ministry of Labour and Social Welfare 500, , % Ministry of Internal Affairs 2,317, ,317, % Ministry of Maritime Affairs, Transportation and 1,200, ,199, % Telecommunication Ministry of Agriculture, Forestry and Water 1,522, ,522, % Management Ministry of Justice 38, , % Misdemeanour bodies 11, , % Office of the Prosecutor 15, , % Judiciary 100, , % Ministry of Economy 342, , % Ministry of Tourism 20, , % Ministry of Culture and Media 554, , % Ministry of Health 1,669, , %

46 Ministry of Foreign Affairs 10, , % Ministry of Economy- Market Inspection of the 40, , % Republic Ministry of Environmental Protection 149, , % Ministry for Human and Minority Rights 16, , % Administration for Joint Services of the Republic 3,968, ,829, % Bodies Directorate for Public Works 7,780, ,779, % Tax Administration 40, , % Customs Administration 379, , % Secretariat for Legislation 10, , % Secretariat for Development 510, , % Real-Estate Administration 779, , % Hydrological and Meteorological Service 170, , % Statistical Office of the Republic of Montenegro 90, , % ZAMTES 23, , % Montenegro Seismological Observatory 20, , % Commissariat for Refugees 2, , % State Archives of Montenegro 50, , % Institution for effectuation of criminal sanctions and 1,719, , % notaries Ministry of Defence 561, , % Ministry of International Economic Relations 11, , % Education and Teacher Training Agency 5, , % Protector of Human Rights and Freedoms 2, , % Administration for Prevention of Money Laundering 22, , % Commission for Conflict of Interest 25, , % Maritime Safety Department 218, , % The Human Resources Management Authority 50, , % Court of Serbia and Montenegro 5, , % State Directorate for Water Management 739, , % Directorate for Traffic 6,200, ,194, % Agency for National Safety 1,030, , % TOTAL: 35,634, ,625, % Permanent and current budgetary reserves Ministry of Finance in sense of the Article 13 of the Law on Budget of the Republic of Montenegro for 2006 («Official gazette of the Republic of Montenegro» No. 77/05 and 70/06) with previous approval of the Government, decides on usage of funds of permanent and current budgetary reserve which are planned for financing of emergent, unplanned and insufficiently planned expenditures of budget beneficiaries during the year. Pursuant to the Article 13 of the Law on Budget of the Republic of Montenegro for 2006, funds of the current budgetary reserve were planned for following purposes: 1 Meal allowance to the amount of ,13 2 Funds for needs of Judiciary ,00 3 Funds for needs of Office of prosecutor ,00 4 Funds for needs of misdemeanour bodies ,00

47 5 Funds for needs of Constitutional Court ,00 6 Funds for payment of union membership fees, funds of solidarity and for emergent and unplanned expenditures ,44 Usage of funds of permanent and current reserves Difference between planned and realised budgetary reserve: Name Plan 2006 Realised 2006 Difference % from the plan =2-3 5=4/2 Current budgetary reserve , , , Permanent budgetary reserve , , ,59-0,70 Total budgetary reserves , , ,21-6,94 Planned funds of current budgetary reserve fro 2006 amounted ,40. They were used to the amount of ,78, which is ,62 less than planned or for 8,70%. In the following table an overview of realised expenditures of current and permanent budgetary reserves in 2005 and 2006 are given in Name Realised 2005 Realised 2006 Difference (3-2) %=4/ Current budgetary reserve , , ,50 27,96 Permanent budgetary reserve , , ,93 656,64 Total budgetary reserves , , ,33 59,09 Funds of current budgetary reserve were spent for following purposes: Ordinal number Description Amount 1 Medical treatment ,50 2 Improvement of the financial situation ,00 3 Education ,00 4 Legal persons ,45 5 Governmental bodies ,31 6 Other ,52 TOTAL ,78 Funds of current budgetary reserve for needs of governmental bodies to the amount of ,31 refer to payments based on missing funds for: 1 Meal allowance to the amount of ,50, 2 Recourse to the amount of ,89, 3 Missing funds for work of governmental bodies to the amount of ,32, used by the following Governmental bodies: President of the Republic of Montenegro ,73 Parliament of the Republic of Montenegro ,52

48 Government of the Republic of Montenegro ,20 Constitutional Court ,22 Montenegrin Academy of Science and Arts ,84 Ministry of Education ,97 Misdemeanour bodies ,35 Office of Prosecutor ,35 Judiciary ,93 Ministry of Economy ,42 Ministry of Tourism ,58 Ministry of Culture ,31 Ministry of Health ,43 Ministry of Foreign Affairs ,15 Secretariat for Sports ,00 Department for Public Revenues ,00 Ministry of Finance ,00 Tax Administration ,00 Secretariat for Development ,77 Statistical Office of the Republic of Montenegro ,48 Ministry for Economic International Relations ,88 Human Resources Management Authority ,32 State Directorate for Water Management ,81 Agency for National Safety ,50 Other Governmental bodies ,56 Permanent budgetary reserve Permanent budgetary reserve were planned for 2006 to the amount of ,12 and were used to the amount of ,53 or less than planned for ,59 or 0,70%. Funds of permanent budgetary reserve in 2006 were spent for financing of planned activities, such as: Ordinal number Purpose of funds Amount % of share 1 Referendum ,00 63,94 2 Parliamentary elections ,53 36,06 TOTAL ,53 100,00 Based on performed control, using the method of random sample, State Auditors Institution has determined that payments of funds of permanent budgetary reserve in 2006 were performed based on Resolutions of the Republic of Government of Montenegro. It was observed during the audit of current budgetary reserve that the part of current reserve had been used for balancing of the range and structure of expenditures which exceeded the planned limit. Although it was legally provided possibility, we find the usage of current budgetary reserve for stated purposes opposing the basic purpose of usage of

49 reserves. We think that this way of usage of current budgetary reserve creates possibility for usage of funds of current reserves for covering of overrun of the budget. In that sense it is necessary to limit the usage of current reserves and to adjust the planning with real needs of spending units Cash payment In 2006, from the Main account of the Treasury cash was paid for spending units to the amount of ,29. The highest among of cash payments refers to payments of costs for business trips ,48 or 30,60%, contract services ,51 or 15,80%, costs for material to the amount of ,49 or 10.57% and salaries to employees to the amount of ,93 or 4,92%. Procedure regarding cash payments from the State Treasury are regulated in Articles 318 to 341 of Guidelines for Work of the State Treasury (»Official gazette of the Republic of Montenegro«No. 64/01) and Decree on compensations and other income of Civil Servants and State Employees (»Official gazette of the Republic of Montenegro«24/05,42/05 and 79/06). In the Ministry of Finance- State Treasury it is necessary to improve the control of claims for cash payments, because the officer for authorisation in the State Treasury pursuant the Article 64 has the right and is obliged to demand from spending unit to provide the supporting documentation, related to the claim for payment, which verifies the credibility of the submitted claim. In the Ministry of Finance, registry is not being kept accurately in which the data are kept on issued and their authorised advance deposits. Claims for budgetary spending and payment in the Ministry of Finance- State Treasury are being signed by only one person- officer of the Treasury for authorisation. However, in the form which is integral part of the Guidelines for Work of the Treasury it is stipulated that the claim for budgetary spending and payment are signed by two persons: officer of the Treasury for authorisation and officer of Treasury for payment. Minister of Finance pursuant the Article 14, of the Guidelines for Work of the State Treasury should appoint officer for authorisation, who is, in sense of the Article 63 of the stated Guidelines, to check if the claim for payment is regularly filled in, certified and approved by the authorised officers for finance in the spending unit, if the claim for payment is recorded in the ledger of the Treasury, of there are sufficient allocated funds for relevant budget item, which are available for the spending unit for realisation of payments and if there is enough money at the state bank account for realisation of the payment. It was determined with the control that in some cases officers in spending units, which have taken special cash advance payment do not authorise un accordance with the Article 333 of the Guidelines for Work of the State Treasury and Article 10 of the Decree on Compensations and Other Income of Civil Servants and State Employees within 3 days by notes, invoices, receipts or other credible documentation State property

50 Pursuant the Article 20 of the Law on Property of the Republic of Montenegro («Official gazette of the Republic of Montenegro» No. 44/99), governmental bodies, units of local self-government and organisations which perform public service and use public property are obliged to keep records on account and movement of that property in accordance with the Law. Contents and way of keeping records on state property stipulates the Government (Article 20, paragraph 2 of the Law). Article 23 of the Law stipulates the obligation of the Government, i.e. of the competent body of the unit of the local self-government, to submit the report on condition of the state property which it uses, along with the annual financial statement of the budget. Article 54, paragraph 1 item 15 of the Budget law stipulates the obligation of the Ministry of Finance- State Treasury to keep records on state property. Keeping of records on state property is not additionally regulated by bylaws and there are no adequate records on non-financial property and reporting system. 4. FINDINGS AND RECOMMENDATIONS 4.1. By comparison of data shown in annual financial reports and data shown in the ledger of the Treasury, it is determined that correspondence was realised between total expenditures which were realised in spending units and expenditures which are booked in the ledger of the Ministry of Finance- State Treasury. However, the control has determined that the structure of expenses which is presented in some spending units does not correspond to the planned budgetary spending. It is necessary for spending units, which have made payments that do not correspond to shown purposes, to increase in the following period fiscal discipline and to intendedly use planned funds, with increase of efficiency by way of preventive and internal control of the Ministry of Finance The audit procedure shown that financial reports of the Budget of the Republic for 2006 were not drafted in accordance with the Rule Book on way of preparation, drafting and submitting of annual financial reports and statements of the budget, extra-budgetary funds and units of local self-government. Pursuant the Rule Book, it is necessary to draft financial reports of the Budget of the Republic in stipulated forms: 1 Report on cash flows I- economic classification, 2 Report on cash flows II- functional classification 3 Report on consolidated public spending 4 Report on call in arrears 4.3. Surplus in the Annual financial statement of the Budget of the Republic of Montenegro for 2006 is shown, according to interpretation of the Ministry of Finance, in accordance with recommendations of the International Monetary Fund. Cash deficit or surplus needs to be determined in accordance with the Budget Law and stipulated methodology in the Rule Book on way of preparation, drafting and submitting of annual financial reports and statements of the budget, extra-budgetary funds and units

51 of the local self-government It was determined with the audit that the Tax Administration did nod make Annual tax financial statement in accordance with applicable regulations. Tax Administration is to make annual tax financial statement after the end of fiscal year, on stipulated form and to submit it to the Ministry of Finance in the statutory term until 31 st March, pursuant the Rule Book on Tax Book-keeping It was determined with the audit that a mistake has been made during the year in correct book-keeping of some budgetary items, which resulted at the end of the fiscal year with discrepancies between these items- accounts which were booked in the ledger of the Treasury and statement shown in the Draft of annual financial statement of the Budget of the Republic for It is necessary that the bookings in the ledger of the Treasury during the year are performed in accordance with the Rule Book on unique classification of the statements for Budget of the Republic, budgets of extra-budgetary funds and budgets of municipalities 4.6. It was determined with the audit (in one case) that with bookings of payments of transfers to the Health Insurance Fund of the Republic, payment burdening Fund was entered, for which the Fund did not give its accordance, but the claim for payment was given from the competent ministry. It is necessary for the payments of transfers to be approved only with accordance of the end user, in this case it is the Health Insurance Fund Officer for authorisation in the Ministry of Finance- State Treasury pursuant the Article 64, should use the right to provide from spending units following documentation, related to the claim for payment, which will support the credibility of the submitted claim. In the Ministry of Finance registry, in which the data on issued and authorised advance payments are recorded, is not being accurately kept. It is necessary that the Ministry of Finance- State Treasury applies in total regulations stipulated by the Guidelines for Work of the State Treasury, and to have the claim with budgetary spending and payment signed by two officers of the Treasury for authorisation and for payment. It was determined with the control that in some cases, officers which have taken the special cash advance payment do not authorise un accordance with the Article 333 of the Guidelines for Work of the State Treasury and Article 10 of the Decree on Compensations and Other Income of Civil Servants and State Employees. It is necessary to congruously apply the Guidelines for Work of the State Treasury and the Decree on Compensations and Other Income of Civil Servants and State Employees

52 regarding the payment of special advance payments, and authorisation of the taken advance payments It is necessary to re-examine causes of non-execution of the plan of donations and in accordance with that to re-examine the structure and relation with donors It is necessary to make the sample analysis of the cause for non-execution of the plan for collection of profit tax and its reduction in the share in total receipts in 2006, and for non-execution of plan for excises in production It was determined with the control that, on the account capital expenditures in the Ministry of Maritime Affairs, Transportation and Telecommunication on , expenditure was entered to the amount of ,76 and ,15, and which represents payment for deposit in Crnogorska komercijalna banka, for securing of funds for procurement of equipment. Transfer of funs into business bank for securing following payments is contrary to the Article 36 of the Budget Law, which stipulates that the funds allocated to spending units can be used until 31 st December of the fiscal year, and to the Article 45 of the Guidelines for Work of the State Treasury, which regulates that proposal for spending which leads to the direct spending of the money of the Republic, has to be previously recorded as the contracted liability from available budgetary funds. It is necessary for the Ministry of Finance- State Treasury to prolong the fiscal year and to realise the earmarked payments in case of forming of deposits which have already been recorded as expenditures, and are not justified based on contracted liabilities by the end of the fiscal year. If the Ministry if Finance-State Treasury does not provide realisation of funds in the prolonged fiscal year, than for the amount of reserved funds expenditures will be cancelled, and the deposit will be increased During the audit procedure it was determined that there are no bylaws on way of keeping records on state property, and adequate records of non-financial property and the reporting system. It is necessary for the Article 20 of the Law on the Property of the Republic of Montenegro to adopt bylaws which are in accordance with the International Accounting Standards for public sector, which refer to establishment of adequate records of non-material property and providing of adequate reporting system. 5. OPINION Audit of the Annual financial statement of the Budget of the Republic of Montenegro for 2006, was performed by the State auditors from the State Auditors Institution, in accordance with the Law on State Auditors Institution and International Accounting Standards (INTOSAI). Audit of regularity of the Annual financial statement reflects in the evaluation whether the amounts given in the Annual financial statement of the Budget of

53 the Republic of Montenegro correspond to the amounts stated in the records and whether the controlled revenues and expenditures are regularly documented. The audit was performed by the method of random sample, which is used for confirmation of amounts and information in the Annual financial statement of the Budget of the Republic of Montenegro for 2006, and for evaluation of applied accounting principles- International Accounting Standards for Public Sector, harmonisation with legislation and publishing of information in the Annual financial statement of the Budget of the Republic of Montenegro for We believe that the audit which we have performed provides reasonable base for our opinion. According to the opinion of the State Auditors Institution, Annual financial statement of the Budget of the Republic of Montenegro for 2006, by significant material aspects gives truthful and objective preview of shown receipts and expenditures on the cash base. Furthermore, there are no materially significant deviations in application of applicable regulations, and we have pointed to these deviations, irregularities and mistakes through analysis and recommendations of the State Auditors Institution. The audit has disclosed a part of data which were not mentioned in comments of the Annual financial statement of the Budget of the Republic of Montenegro for 2006, which provided significant adequate range and quality of information on all relevant and materially relevant segments related to spending of budgetary funds of the Republic of Montenegro.

54 3. STATEMENTS FROM INDIVIDUAL AUDITS 1. STATEMENT FROM THE REPORTS ON AUDIT OF FINANCIAL STATEMENT OF THE HEALTH INSURANCE FUND OF THE REPUBLIC FOR 2006 Lawful cause for performance of the audit- Pursuant the Article 4 of the Law on State Auditors Institution 2 and Decision of the Board of Directors on audit of financial reports of the Health Insurance Fund of the Republic 3, audit was performed of Financial Statements of the Health Insurance Fund of the Republic for Audit was performed in accordance with the Law on State Auditors Institution, Guidelines for Work of State Auditors Institution 4, Rule Book of the State Auditors Institution 5 and International Auditing Standards for Public Sector (INTOSAI). Objective of the audit Objective of the audit in financial reports of the Health Insurance fund of the Republic on , is the audit of harmonisation of operations of the Fund with laws and other regulations whose application significantly reflects to the financial reports. Main objective of the audit refers to the substantiality of financial reports in the accounting period in the part of truthfulness, objectivity and harmonisation with valid accounting standards and principles, and of harmonisation of operations of the Fund with the Law on Health Insurance 6, Law on Health Protection 7 and Law on Public Procurement 8. Objective of audit is observed as: 1. Regularity of financial reports 2. Regularity of operations. 2 Official gazette of the Republic of Montenegro, No.28/04 from SRI-SR 123 No.: from 14. September Official gazette of the Republic of Montenegro, No.2/05 from Official gazette of the Republic of Montenegro, No.2/05 from Official gazette of the Republic of Montenegro, No.39/04 from ; 23/05 from ; 29/05 from Official gazette of the Republic of Montenegro, No.39/04 from the Official gazette of the Republic of Montenegro, No.

55 Final objective of the audit is presenting of opinion on truthfulness and credibility of financial reports of the Health Insurance Fund of the Republic for health insurance and regularities (lawfulness) of realisation of the Financial plan for Subject of the audit Subject of audit are Financial reports of the Health Insurance Fund of the Republic for health insurance for Pursuant the Rule Book on way of preparation, drafting and submitting of annual financial reports and statements of the budget, extra-budgetary funds and units of local self-government 9, Health Insurance Fund of the Republic is obliged to submit to the Ministry of Finance the annual financial reports on forms 1,2,4,5 and these are: 1. Report on cash flows I- economic classification. 2. Report on cash flows II- functional classification. 3. Report on call in arrears. 4. Report on consolidated public spending. Planning of the audit- Audit was planned and performed in accordance with International Auditing Standards (INTOSAI). In accordance with the standards the audit was planned and performed in a way which allows us to ensure that financial reports do not encompass wrong, materially significant assertions. Audit includes examining of arguments based on checking of samples which are used for confirmation of amounts and positions published in financial reports. Audit also includes evaluation of applied financial principles, of evaluations which were made by the management, and estimation of presented financial reports, which gives the audit presenting reasonable base for expressing opinion. 1. Activities of the Health Insurance Fund of the Republic Health Insurance Fund of the Republic of Montenegro (hereinafter: the Fund) is the organisation which performs public authorisations in the sphere of rights and obligations from health protection and health insurance. Fund acts as legal person, with rights, obligations and responsibilities determined by the Law on Health Insurance and Statute of the Fund. 10 Health Insurance Fund of the Republic was established in accordance with 9 Official gazette of the Republic of Montenegro, No. 03/06 from Statute of the Health Insurance Fund of the Republic was adopted at the session of the board of directors of the Health Insurance Fund on

56 provisions of the Law on Social Activities, based on Resolution on Establishment of the Health Insurance Fund of the Republic, which was adopted on With Law Amending and Supplementing the Law on Social Activities, provisions regarding establishment and competences of extra-budgetary funds were erased, and competences of the Fund were regulated by provisions of the Law on Health Protection 12 and the Law on Health Insurance 13. Pursuant the applicable regulations the Fund was enlisted in the Central Registry of the Commercial Court under the register number /03, and on , change of data was registered. Registered office of the Health Insurance Fund of the Republic is in Vaka Đurovića Street in Podgorica. Bodies of the Health Insurance Fund are the Board of Directors and the Director. Board of directors is the managing body of the Fund. Members of the Board are appointed and acquitted of duty by the Government. Executive body of the Fund is the Director of the Fund. Director of the Fund is appointed and acquitted of duty, based on vacancy notice by the Board of Directors, with previous approval of the Government. Director is responsible for legitimacy of operations of the Fund. He is responsible for his work and the work of the Fund to the Board of Directors. In the time of performance of audit, responsible person is Ramo Bralić. Main activities and assignments of the Fund are to provide: o conduction of health protection and performance of health services, o rights for health protection and other rights from the sphere of social insurance o funds and other conditions for harmonised work of health institutions. 2. System of records System of records of the Health Insurance Fund of the Republic is organised on a modified accounting system according to which the expenditures, independently of payments, are admitted based on occurrence of business event in the related reporting period, and revenues are recorded based on cash transactions in the reporting period. System of records does not support totally accounting basis in the sphere of 11 Official gazette of the Republic of Montenegro No.19/90, 25/90 12 Official gazette of the Republic of Montenegro, No. 39/04 from Official gazette of the Republic of Montenegro, No.39/04 from , No.23/05 from and 29/05 from

57 expenditures 14, because the amount of the amortisation, in accordance with the Rule Book, is directly burdening its own capital and it does not represent integral part of calculated expenses. This way the Fund has increased results of operating activities in 2006, for the amount of unexpressed amortisation. Non-financial property, short-term and long-term liabilities, capital and determining of the results of operating activities are also booked in business records of the Fund. Liabilities to the public health institutions which are assumed by the Health Fund, during the accounting year, are booked at the balance sheet, and expenditures are shown as a balance to occurred liabilities. Records do not provide quality data for timely updating of cash flows, so the Fund does not posses sufficiently precise picture of the level of realised cash deficit and possibility for more efficient cash management. Public health institutions apply accounting system for determination of revenues and expenditures and results of operating activities. Transactions conduct in a unique way as in enterprises and are booked in the same way. Non-financial property, financial property, liabilities, capital and determining of the results of operation activities, revenues and expenditures are being booked in business records of public health institutions. The Fund combines financial reports of public health institutions on cash and accounting basis, whose basic purpose is compensation of mutual liabilities and claims, and informing of the Government, Ministry of Finance, management body of the Fund on expediency of usage of public revenues in the sphere of organisation and providing of public health services. We also think that financial reports of the Fund must be regularly published and available to public eye through electronic and written media. Health Insurance Fund of the Republic keeps business records in accordance with the Rule Book on accounting and account plan of the budget and extra-budgetary funds 15 wich was put out of force by application of the Rule Book on Unique Classification of the Statements of the Budget of the Republic, extra-budgetary funds and budgets of municipalities. By memorandum of the Ministry of Finance 16 the consent was given for the Health Insurance Fund of the Republic to apply the existing account framework and to keep the existing records and to initiate amendments and supplements of the new Rule Book on unique classification, which would enable the Fund to keep records by current system. It was determined during the audit that amendment and supplement of the stated Rule Book was not realised besides its application. 14 This system of records is harmonised with the Rule Book used by the Fund in its records, so the text does not imply the possible irregularities. 15 Official gazette of the Republic of Montenegro, No. 04/03 16 No /1 from

58 3. Cash flows It was determined by the insight in the turnover of commercial accounts of the Fund in business banks, that the cash balance on U amounted ,49. Initial cash balance represents addition of deposits at sight to the amount of ,02 and term deposits to the amount of ,47, which is reduced for ,00 as collateral funds in Crnogorska komercijalna banka. Term deposits were in: Crnogorska komercijalna banka to the amount of ,78, Podgorička banka ,00 and Montenegro banka ,47. Inflow of funds in 2006 amounted ,55 and outflow ,20, so that the cash balance on amounted , Presented cash flows include foreign credit to the amount of ,00, which was used for procurement of equipment for public health institutions, which has not yet been booked as turnover transaction on commercial accounts of the Fund and represents non-cash transaction in CASH FLOWS Ordinal DESCRIPTION TURNOVER DEBIT TURNOVER CREDIT number 1 Cash on ,49 2 Turnover of the debit side consolidated ,55 3 Turnover of the credit side consolidated ,20 4 Cash on , , ,04 Promet duguje-turnover debit; promet potrazuje-turnover credit Analytics of cash transactions in 2006 is shown in the following table: ACCOUNT TURNOVER- CASH FLOWS Deposits/cash at the , ,77 Current expenditures 17 According to the Draft Law on Annual financial statement of the Budget of the Republic of Montenegro for 2006, page 110 of commentary on the Law it is said that the cash deposits of the Health Insurance fund of the Republic are expressed in 1000 to the amount of 3.499,00 EUR. This is significantly different from the statement determined by audit and confirmations of commercial banks which confirmed that the Fund disposes of cash deposits, expressed in 1000, to the amount 2.322,89 EUR

59 beginning of the period Contributions for health insurance and other revenues Contributions for health insurance of pensioners Contributions for health insurance of unemployed persons , ,00 Loans and credits , ,32 Capital expenditures , ,82 Repayment to domestic sources of financing Revenues from the Budget , ,84 Cash at the end of accounting period Loans and credit ,00 0,29 Mistakes TOTAL TURNOVER , ,04 TOTAL TURNOVER Turnover of the debit side amounted ,04 and is equal to the turnover of the credit side in 2006, with negligible mistake of 0,29. Inflow of funds was provided with the payment of contributions for health insurance to the amount of ,93, contributions for health insurance of pensioners to the amount of ,85, contributions for health insurance of unemployed persons to the amount of ,09, transfers of the Budget ,65 and loans and credits to the amount of ,00, which were provided from domestic sources to the amount of ,00 and foreign sources to the amount of ,00. Outflow of funds based on current expenditures amounted ,77, loans and given credits ,00 and repayments to domestic sources of financing ,82. If the cash flows are reduced for the amount of non-cash transactions, than the turnover level is reduced but the final cash balance is not changed on as shown in the following table: ACCOUNT TURNOVER- CASH FLOWS Deposits/cash at the , ,77 Current expenditures beginning of the period Contributions for health , ,00 Loans and credits insurance and other revenues Contributions for health , ,32 Capital expenditures insurance of pensioners Contributions for health insurance of unemployed , ,82 Repayment to domestic sources of financing persons Revenues from the Budget , ,84 Cash at the end of accounting period Loans and credit ,00 0,29 Mistakes TOTAL TURNOVER , ,04 TOTAL TURNOVER 4. Report on cash flows Pursuant the Article 5 of the Rule Book on way of preparation, drafting and submitting of annual financial reports and statements of the budget, extra-budgetary funds, and units of local self-government, Health Insurance Fund of the Republic has the obligation to submit to Ministry of Finance the Report on Cash Flows (form RCF-1) and the Report on Cash Flows (form RCF 2). Furthermore, the Fund is obliged to make and submit to the Ministry of Finance Consolidated annual financial report which will include public health institutions which are in the public health system. Deadline for submitting of

60 financial reports to the Ministry of Finance is 31. March of the current year for previous year. The Fund has made stipulated reports, which were taken by the State Auditors Institution during the audit, and these are the reports: Report on Cash Flows I- economic classification; Report on Cash Flows II- functional classification; Report on Consolidated Public Spending and Report on Call in Arrears. Pursuant the Article 12 of the Statute of the Fund of the Republic, Board of Directors adopts annual and six-month reports on financial transactions with the report on audit of annual financial statement- financial reports. Statement of receipts and expenditures was compared with trend of cash flows on 2006, aiming analytical interpretations of the presented cash and verification of accounting accuracy of realised cash transactions. Ordinal Number Cash flow- economic classification Planned in 2006 Realisation in 2006 Realisation in 2005 Index realised/planned Receipts 1 Current revenues 105,043, ,173, ,840, ( ) 1.1 Taxes 1.2 Contributions 103,690, ,592, ,009, Duties 1.4 Compensations 1.5 Other revenues 1,353, , , Inflows from interests 95,914 2 Receipts from credit repayment 40, , Donations and transfers 7,050, ,841, ,695, Donations 3.2 Transfers 7,050, ,841, ,695, I Total receipts (1+2+3) 112,093, ,055, ,564, Expenditures 4 Current expenditures 3,763, ,062, ,949, Gross salaries and contributions 1,092, ,133, ,050, payable by employer 4.2 Other personal income 159, , Costs for material and services 2,139, ,240, ,462, Current maintenance 132, , Interests 240, , , Rent 123, Subsidies 4.8 Other expenditures 5 Transfers for social protection 13,629, ,479, ,083, Rights from the sphere of social protection 5.2 Funds for redundancies 5.3 Rights from the sphere of pension and disability insurance 5.4 Other rights from the sphere of health 9,108, ,828,

61 protection 5.5 Other rights from the sphere of health 4,520, ,651, ,083, insurance 6 Transfers to institutions, individuals, 91,233, ,776, ,480, non-government and government sector 7 Loans and credits 137, , II Total expenditures ( ) 108,627, ,455, ,553, III Net cash flow (I-II) 3,465, ,599, , Cash flow based on investments 11 Receipts from sale of non-financial property 12 Receipts from sale of financial property 13 Capital expenditures 3,465, ,506, , IV Net cash flow based on investments ( ) (3,465,694.00) -5,506, , Cash flow based on financing 14 Loans and credits 10,808, ,600, Credit repayments 7,421, ,846, V Net cash flow based on financing (14-3,387, , ) VI Increase/reduction of cash (III+IV+V) -519,683,00-419, VII Cash at the beginning of period 2,842, ,261, VIII Cash at the end of the period (VI+VII) 2,322, ,842, Report on cash flows was prepared by the Fund based on data presented in the gross account. Shown account of the deposits at the end of the year was harmonised with the account in business banks, which they affirmed by their confirmations. Comparison of turnover of debit and credit side of commercial accounts in business banks with RCF form made by the Fund for 2006, was realised by the audit. It was determined by the control that the turnover shown in the RCF form was lower for ,95 or only 0,4 % of the turnover shown in commercial accounts based on data from the gross account. Responsible person in the Fund informed us that the stated amount is the result of transactions which increase the turnover and have neutral effect on receipts and expenditures of the Fund. Cash and cash equivalents on day Name of the business bank Cash holdings on Cash holdings on Difference accounts accounts Crnogorska komercijalna banka 565, ,139, , Hipotekarna banka 2, , , Atlasmont banka 557, , , Podgoricka banka 390, , , Hipotekarna banka- foreign currency account Hipotekarna banka- foreign currency account 2, , Crnogorska komercijalna banka- foreign 3, , , currency account Podgoricka banka- foreign currency account 12, , VAL 987 EUR Montenegro banka- foreign currency account 1, , Crnogorska komercijalna banka- foreign 4, , currency account main treasury 2, , Montenegro banka- other short-term placing 11, , Crnogorska komercijalna banka-deposit 688, ,025.00

62 Podgoricka banka-deposit 600, , TOTAL 2,842, ,322, , Cash at sight, which is located in business banks and cash in the treasury are shown in the previous table. Funds on term deposit to the amount of ,00 are not included in the Report on Cash Flows as cash at the end of the period (because of the repayment period), but are booked as collateral funds and represent part of the consolidated account, and are intended for acquiring of short-term loans for covering of non-liquidity. According to the report on cash flows, realised inflows, without loans on , amounted ,00 and current expenditures, without repayment of capital sum and capital expenditures, amount ,00, so that the cash inflow based on current transactions is positive and amounts ,00. Total receipts do not include extra extraordinary income to the amount of 4.152,45 because it does not represent cash flows, while the income from repayment of given credits to the amount of ,00 is included. In the gross account this amount is shown through the change of the structure of assets, by means of reduction of claims and increase of the amount of deposit, and the same amount was shown by the Fund as the inflow on the cash basis in the RCF form. Receipts also include inflows from contributions based on realised compensations to the amount of ,72, which means that 13,41% of total realised revenues was realised. Net cash flow based on investments amounts ,00. Cash flow based on investments includes the procurement of medical equipment for needs of public health institutions to the amount of ,00 which was financed from foreign credits of Erste Bank from Austria, related costs of procurement (VAT and customs) to the amount of ,66. The amount of ,66 was effectuated by adjustment of mutual liabilities and claims from the Health Insurance Fund, Pension and Disability insurance fund of the Republic and Budget of the Republic of Montenegro in accordance with Resolution of the Government of the Republic of Montenegro No from Beside the mentioned, payments were realised for non-financial property which refer to equipment of the Fund to the amount of ,66 and purchase and construction of apartments to the amount of ,00. Net cash flow based on financing amounts ,00. Inflows based on taken credits in the reporting period amount ,00, out of which ,00 refers to credit from business banks in the country, and to foreign credits from Erste Bank Austria ,00 which is shown as inflow of funds based on financing. These funds were not recorded through accounts in business banks, but the stated bank paid funds to foreign supplier based on submitted invoices for delivered equipment. By Resolution of the Government of the Republic of Montenegro No from compensation was performed of mutual liabilities and claims of the Government of the Republic of Montenegro and Health Insurance Fund of the Republic to the amount of ,07. This Resolution reduces the liabilities of the Fund based

63 on the indebtedness in commercial banks to the amount of ,20 assumed by the Government of the Republic of Montenegro. Report on cash flows shows that capital expenditures were financed, partly from surplus of funds realised in current transactions, inflow based on taken credits and cash at the beginning of the period. Fund possesses certain number of open accounts in business banks, through which in 2006 there was no turnover and we suggest that the Fund should close accounts in commercial banks which do not serve to performing of financial transactions in the health system. 5. Cash deficit Cash deficit of the Fund in 2006 amounts ,48 and derived from data shown in the following table: Ordinal number Description Cash flows over the account 1 Contributions for health insurance 86,239, Contributions for health insurance of employees 49,258, Contributions for health insurance of employees in economy 24,736, Contributions for health insurance of employees in economy- 6,089, compensations Contributions for health insurance of employees in noneconomy 15,280, Contributions for health insurance of employees in noneconomy- 701, compensations Contributions for health insurance of employees in private 2,272, enterprises Contributions for new employees 178, Contributions for health insurance payable by employer 36,121, Contributions for health insurance payable by employer in 24,033, economy Contributions for health insurance payable by employer in noneconomy 12,088, Contributions for health insurance from copy rights 29, Contributions for health insurance of farmers 198, Revenues based on interests and penalties 75, Other revenues 555, I Total revenues 86,239, Current expenditures 116,318, Gross salaries of employees and contributions payable by 1,133, employer 2.2 Other personal income 179, Costs for material and services 2,070, Current maintenance 173, Interests 211, Podgoricka banka 63, Pljevaljska banka ad Pljevlja 6, Atlasmont banka 31, Crnogorska komercijalna banka 89, Delta banka ad Beograd 16, Share of cash exchange rate band 4, Indebtedness costs 169, Commission costs paid to Podgoricka banka 13, Commission costs paid to Pljevaljska banka 2, Commission costs paid to Atlasmont banka 14, Commission costs paid to Crnogorska komercijalna banka 31, Other indebtedness costs 108, Deficit in exchange differential 0.00

64 2.8 Rent 123, Other expenditures Transfers for social protection 16,479, Other rights from sphere of social protection 10,828, Other rights from sphere of health insurance 5,651, Transfers to institutions, individuals, non-government and 95,776, public sector Transfers to public health institutions 95,776, Medical services 64,767, Investments in public health institutions 3,578, Medications 27,430, Loans and credits 137, Capital expenditures 5,506, Buildings and construction objects 216, Purchase of business premises 57, Apartments for business needs 159, Equipment 4,462, Equipment from foreign countries 4,108, Equipment in the country 354, Related costs of procurement 827, II Total expenditures 121,962, III Cash deficit without received transfers -35,723, Sources for covering of the deficit from transfers 31,816, Contributions for health insurance of pensioners 24,654, Contributions for health insurance of unemployed persons 320, Revenues from the Budget 6,841, Unexplained amounts and mistakes 0.29 IV Cash deficit after receiving of transfers -3,906, Sources for covering of deficit after receiving of transfers 3,906, Domestic financing -721, Loans and credits from domestic sources of financing 6,700, Podgoricka banka Pljevaljska banka ad Pljevlja 600, Atlasmont banka 2,500, Crnogorska komercijalna banka 3,700, Delta banka ad Beograd Unknown Repayment to domestic sources of financing 7,421, Podgoricka banka 1,300, Pljevaljska banka ad Pljevlja 500, Atlasmont banka 1,762, Crnogorska komercijalna banka 3,233, Delta banka ad Beograd 625, Foreign financing 4,108, Loans and credits from foreign countries 4,108, Repayment of foreign credits Deposits/cash at the beginning of the period 2,842, Podgoricka banka 1,003, Pljevaljska banka ad Pljevlja Atlasmont banka 557, Crnogorska komercijalna banka 1,260, Delta banka ad Beograd Hipotekarna banka 4,395, Montenegro banka 13, Treasury 2, Unexplained Increase/reduction of cash 519, Podgoricka banka 101, Pljevaljska banka ad Pljevlja Atlasmont banka 345, Crnogorska komercijalna banka 65, Delta banka ad Beograd Hipotekarna banka -4, Montenegro banka 11, Treasury Unexplained Cash at the end of the period 2,322, Podgoricka banka 902, Pljevaljska banka ad Pljevlja Atlasmont banka 211,809.30

65 9.4 Crnogorska komercijalna banka 1,195, Delta banka ad Beograd Hipotekarna banka 8, Montenegro banka 1, Treasury 2, Unexplained 0.00 Cash deficit after the received transfers DESCRIPTION AMOUNT Deficit before ,13 transfers Transfers to the ,59 Health insurance fund Difference ,54 Cash deficit of the Fund before received transfers amounts ,13, which is covered: by transfers of the Pension and Disability Insurance through contributions for health insurance of pensioners to the amount of ,85 ; transfers from the Employment Agency of the Republic through contributions for health insurance of unemployed persons to the amount of and transfers from the Budget of the Republic of Montenegro to the amount of ,65. After received transfers, cash deficit of the Fund amounts ,54 AMOUNT Difference of uncovered deficit after the received transfers amounts ,54 18 and is caused by the foreign credit of Erste Bank to the amount of ,00 which was used for financing of procurement of equipment for public health institutions. Namely, cash flow of the Fund in 2006 shows that additional sources of financing were provided to the amount of ,16 such as: o Foreign credits ,00 o Reduction of deposits ,65 These sources of financing were used for covering of deficit and reduction of debt to commercial banks: o Cash deficit ,83 o Reduction of debts to domestic banks ,82 6. Modified cash deficit Modified cash deficit represents the addition of cash deficit and net increase of liabilities during fiscal year. Net increase of liabilities of the Fund in 2006 amounted ,00 which is shown in the following table: Ordin Description Account of liabilities Account of liabilities al on on It is stated in the Draft Law on Annual Financial Statement of the Budget of the Republic of Montenegro for 2006, on page 139 of Comments, that transfers to the Fund were paid to the amount of ,00

66 1 Liabilities for current expenditures ( ) 696, , Liabilities for gross salaries and contributions payable by employer Liabilities for other personal income 1.3 Liabilities for other current expenditures 696, , Liabilities by transfers for social protection 2,319, ,854, Liabilities for transfers to institutions, individuals by foreign credits 9,431, ,612, Account of liabilities at the end of accounting period ( ) 12,448, ,855, If the cash deficit to the amount of ,54 increases for the amount of net increase of liabilities to the amount of ,00 we come to the modified cash deficit to the amount of ,54. MODIFIED CASH DEFICIT neto povecanje neizmirenih obaveza-net increase of call in arrears gotovinski deficit- cash deficit 7. Consolidated spending The audit for 2006 did not include control of regularity of presented cash flows in public health institutions, but the control was performed of accounting accuracy of data on consolidated cash flows in 2006, and it is shown in the following table: CONSOLIDATED CASH FLOWS IN 2006 RECEIPTS OF THE SECTOR DESCRIPTION Health insurance Health hospitals Health institute Montefarm TOTAL fund treatment centers Revenues from the real 86,239, ,371, ,587, ,412, ,633, ,244, sector Taxes Contributions 85,409, ,409, Other revenues 830, ,371, ,587, ,412, ,633, ,835, Expenditures 26,186, ,777, ,075, ,519, ,257, ,816, Current expenditures 20,679, ,166, ,225, ,519, ,218, ,809, Extra-budgetary expenditures Capital expenditures 5,506, , ,850, , ,007, Surplus/deficit 60,053, ,406, ,487, ,106, ,623, ,572,205.25

67 TRANSFERS Transfers Central budget of outside the the Government 6,841, ,841, health Pension and 24,654, ,654, Fund system Disability Insurance Fund Health Insurance Fund Employment Agency 320, , Local selfgovernment Total receipts 31,816, I Net transfers outside the 31,816, ,816, Fund system Transfers Health Insurance ,364, ,399, ,208, ,804, ,776, in the Health Fund Health Treatment Fund system centres Hospitals Health Institute Montefarm Total receipts ,364, ,399, ,208, ,804, ,776, II net transfers in the Fund -95,776, ,364, ,399, ,208, ,804, system Available funds 22,279, ,735, ,986, ,620, ,438, ,060, Surplus/deficit -3,906, , , , , ,756, Sources for deficit financing 3,906, , , , , ,756, Credits 3,387, , , , ,463, Domestic credits -721, , , , , Foreign credits 4,108, ,108, Donations , , , Financial property 519, , , , , , Issue of the loan , Deposits/cash 519, , , , , , Sale of non-financial property , , , Data in the table correspond to data presented by the Fund in consolidated public spending. Deficit level which includes donations amounts ,06, and if we exclude transfers based on donations to the amount of ,00 deficit amounts ,06. Public health institutions, Health Institute and Public Pharmaceutical institution Montefarm have realised their own revenues to the amount of ,00 in following amounts: Public health institutions keep these revenues at the account and use them for financing

68 of their activities during the accounting period. Larger part of expenditures in the public health institutions is financed from the transfers provided by the Fund based on inflows from abroad fro health protection of employees, pensioners and unemployed persons. Consolidated data on financing of the health system in Montenegro show that it is necessary to organise more efficient cash management and to gradually reduce differences of paid advance payments by the Fund and paid expenditures by public health institutions. 8. Balance sheet and Income Statement of the Fund for 2006 Balance sheet of the Fund for 2005 and 2006, is shown based on data from gross balance which represented the starting report for control and testing of data in the audit procedure of real and cash flows. Balance account derived from data presented in the gross balance for 2006 is presented in the following table: BALANCE SHEET OF THE HEALTH INSURANCE FUND FOR 2006 AND 2005 DESCRIPTION I ASSETS 22,165, ,266, Non-financial property 9,084, ,253, Fixed assets 5,164, ,968, Land 2,735, ,735, Non-financial property in construction 130, , Common investments into fixed assets 1,054, ,071, Financial property 13,080, ,013, Claims 457, , Cash 1,542, ,322, Short-term placement 7,502, ,202, Advance payments 3,578, ,843, Prepaid expenses ,108, II LIABILITIES 22,165, ,266, Liabilities 30,968, ,762, Liabilities on domestic credits 4,125, ,403, Liabilities on foreign credits ,108, Liabilities based on salaries 1, , Liabilities to Medical chambers and Board of directors 10, , Liabilities to suppliers 22,145, ,148, Liabilities to public health institutions 11, , Accrued costs 4,674, ,082, Net financial results -8,803, ,495, Own sources of funds -8,464, ,121, Increase of own sources -2,444, , Other capital 213, , Surplus/lack of revenues from the previous period -15,036, ,480, The accuracy of data shown in the balance sheet was confirmed by the audit, with deviations which could not significantly change validity of conclusions which were reached during the audit procedure of accuracy. Data show the following: o Net increase of assets to the amount of ,83 was financed by payment of liabilities to the amount of ,01 and from net increase of results to the amount of ,92. Ordinal number DESCRIPTION +/- 1.1 Liabilities , Net increase/reduction of the value of capital ,32 TOTAL ASSETS ,33

69 Addition of difference of net financial property and net liabilities to the amount of ,97 and net increase of non-financial property equals shown results of business activities: Ordinal number DESCRIPTION +/- 1.1 Difference financial property and liabilities , Non-financial property ,95 TOTAL ASSETS ,32 Comparison of data from the Balance sheet and Income Statement was realised by the accuracy audit, and received results show that net change of capital value corresponds to the result to the amount of ,32 in BALANCE SHEET OF ECONOMIC FLOWS Ordinal DESCRIPTION number 1.1 Revenues of the Fund 106,447, ,018, Contributions for health insurance 96,992, ,583, Revenues based on interests and penalties 95, , Other revenues 3,662, , Favourable currency differentials , Transfers of the Budget 5,695, ,841, Expenditures of the Fund 108,892, ,367, Direct costs of the Fund 3,651, ,774, Invoiced realisation of public health institutions 91,665, ,095, Advance payments to public health institutions 3,560, ,773, Other expenditures 9,854, ,562, Health treatment centre ,031, Health protection by conventions 160, , Business performances -2,444, , Depreciation of non-financial assets 343, Net result 308, Increase/reduction of non-financial assets 168, Increase/reduction of financial assets 7,932, Increase/reduction of liabilities 7,793, Net increase of results 308, As already mentioned, amortisation is not integral part of expenditures. For the amount of accounted amortisation, and written-off fixed assets, the Fund has directly reduced net value of the capital. However, by including of reduced value of property (amortisation + written-off non-financial property) the business performance to the amount of ,46 comes to the amount shown in the balance sheet to the amount of ,46. Revenues are booked on the cash basis with the relatively small deviations are identical with the presented inflow statement in the RCF form for Expenditures in the previous table were reclassified to the basic lines, which are used to provide easy survey of expenditures on basic aggregates which refer to the functioning of the system of the health protection through the Fund. Expenditures referring to the Fund are separated, to invoiced realisation of public health institutions, pilot projects of health treatment centres, prepaid advance payments in 2006, (the Fund

70 presents them as expenditures of the current period) and health protection by conventions. Other expenditures refer to refundment, orthopaedic aids, travel costs and treatment in foreign countries and other fixed costs payable by the Fund beside invoiced realisation by public health institutions. Our opinion is that other expenditures should be clearly reclassified in the future period by the way of financing in order to get the clear picture on which part of share as the accounting category is assumed by the Fund during the accounting period. If the invoiced realisation of public health institutions and Public pharmaceutical institution Montefarm is compared with the account of liabilities presented in the balance sheet, which were confirmed as true by the audit, we come to the derived statement in 2006, which is identical to documentations which is submitted to the audit for consideration. Data and findings of the audit were systemised in the following table 19 : DESCRIPTION Balance Changes Balance Liabilities based on invoiced realisation from public 9,612, , ,820, health institutions Increase of liabilities 76,424, Reduction of liabilities 77,217, Liabilities to Montefarm 9,431, , ,297, Increase of liabilities 11,669, Reduction of liabilities 10,804, LIABILITIES FROM JOINT ACTIVITIES 19,043, , ,117, Other suppliers 3,101, , ,031, Liabilities to public health institutions 11, , Liabilities based on salaries 1, , Liabilities to medical commissions and Board of 10, , , directors LIABILITIES FROM CURRENT OPERATIONS 3,124, (74,661.67) 3,050, Accrued costs 3,560, ,212, ,773, Increase of invoiced realisation 7,773, Reduction of invoiced realisation 3,560, Other accrued costs 1,113, , ,308, ACCRUED COSTS 4,674,720,25 4,407, ,082, TOTAL 26,843, ,406, ,250, Invoiced realisation of public health institutions in 2006, amounted ,83 and with the initial debt balance from 2005 amounts ,70. Liabilities on invoiced realisation at the end of the year were closed through advance payments to the amount of ,23, so that the balance account to public health institutions and Montefarm at the end of 2006 amounted ,47, out of which over 50% of debt or ,79 refers to Montefarm. If we add to the advance payments prepaid advance to the amount of ,25 we get the total amount of advance payments to the amount of ,41 in It is necessary for the Fund to systemise the total debt balance by public institutions and in the following period, through more rigid control of advance payments to adopt the program which will gradually reduce the debt to public institutions and provide more rational cash use. The programme should be established based on consolidated 19 Data do not include liabilities based on credit indebtedness in 2006

71 plan which will be adopted by the Fund for 2007, through the medium-term strategy for development and reform of the financing of the Fund. 9. Opinion with draft recommendations and measures In accordance with the findings determined in the audit procedure and presented through the Report on Audit of Financial Reports of the Health Insurance Fund of the Republic for 2006, State Auditors Institution has given opinion with draft recommendations and measures, and here we present the most important parts: Health Insurance Fund (hereinafter: the Fund) has quality structured electronic data base, which provided relevant information for efficient audit procedure and preparation of analytical foundation for the drafting of Minutes and Report. Cooperation of responsible persons and employees in the Fund with the State Auditors Institution represents important factor which contributed to the quality of made Minutes and Report. The Audit, mostly confirmed validity of financial reports of the Fund, therewith, we consider it necessary to point at the elements which could affect efficiency and quality of reporting, and the activities of the Fund in the next period. In accordance with comments and presented reserves, measures and recommendations are suggested, which we find to be useful for the Fund, and to the efficient consolidation of the public spending system in the following years. It was determined by the audit that cash flows, mostly, correspond to the balance shown in the gross balance sheet. Namely, initial balance sheet of the cash and realised revenues in 2006, reduced for payments in the same period, give cash which is confirmed by the commercial banks through which the Fund makes cash transactions. As for cash flows, the Institution expresses reserves in opinion: By the audit procedure, comparison was performed of turnover of debit and credit side of commercial accounts by business banks with INT (Report on Cash Flows) form which was made by the Fund for It was determined by the control that the turnover expressed in the form INT is lower for ,95 or only 0,4 % from the turnover presented in commercial account based on data from the gross balance sheet. Responsible person in the Fund has informed the Institution that the stated amount is the result of transactions which increase the turnover and have neutral effect to receipts and expenditures of the Fund. We think that the stated amount is not materially significant, when it comes to financial reports of the Fund and that statements of responsible persons are correct. In accordance with that it is suggested that the Fund should make analytical recapitalisation in the part referring to the cash transactions and to state in the special addendum the reasons for this

72 deviation. The Fund possesses certain number of open accounts in business banks, through which in 2006 there was no turnover and we suggest that the Fund should close accounts in commercial banks which do not serve to performing of financial transactions in the health system. Beside the accounting accuracy of data in financial reports (Report on Cash Flows I - economic classification, Report on Cash Flows II- functional classification, Report on Consolidated Public Spending and Report on Call in Arrears) the Fund does not possess with sufficiently quality statistical base for reclassification of data in RCF (Report on Cash Flows) forms, so the analytics is partially imprecise. We suggest to the Fund in the next period, beside the records in its possession, to regularly classify payments in accordance with the economic classification which is stipulated by the Rule Book on unique classification for the Budget of the Republic, budgets of extra-budgetary funds and budgets of municipalities. We also think that the Financial reports of the Fund must be regularly published and available to public through the electronic and written media. The audit 2006 did not encompass the regularity control of presented cash flows in public health institutions, and only the control of accounting accuracy of data on consolidated cash flows was performed. Regularity audit in presenting of consolidated data shows that data were presented in form which respects basic principles and rules of consolidation. Aiming more efficient cash management and gradual reduction of liabilities to public health institutions we think it is necessary for the Fund to take the following steps: -To base the advance payments of transfers on documentation, which proves accuracy of accounting amounts, - To establish the functioning of the internal control which will at least once a month compare advance payments by purposes by the Fund with real payments in the public health institutions. - To perform gradual adjusting of the advance payments level by the Fund to the invoiced realisation of public health institutions. - to perform the systematisation of public debt by public health institutions, to provide more efficient control of advance payments and to adopt the Programme, which will be used for gradual reduction of debt to public health institutions.

73 - The Programme should be based on consolidated plan which would be adopted by the Fund for 2007, through medium-term strategy for development and reform of the financing of the Fund. Beside the previously mentioned weaknesses, aiming the improvement of the activities of the Fund needs: o to form adequate documentation which would be used for authorisation of spending fuel, telephone bills and other costs. o To ensure the authorisation of costs by individual accounts for taken amounts of fuel and other expenditures, with clear internal rules on rights on spending. o To have the Service for Planning and Analysis monitor the realisation of planned expenditures by all classifications, not only on the levels of health protection, but also by expenditures planned for operations of the Fund. Data reached by the audit procedure served to the Institution for publishing of data, which were presented in the balance sheet and income statement forms and analytically explained by each materially significant amount. In that way, we have come to the reasonable belief that: o Data were objectively presented and their checking by different classification statements is consistent. o Data of the Fund referring to the materially significant statements are based on legally stipulated documentation, and the Fund has during 2006 worked in accordance with regulations regulating its operations. o With previously stated reserves, we consider that the financial reports of the Fund were made in the form which does not have materially significant wrong statements, and that objectivity and accuracy of data was provided which represents the good base for decision making, realisation and acceptance of recommendations expressed in the Report. o Institution found it necessary to point to mistakes which were not in the direct competences of the Fund, but which can affect the quality of the briefing system in the sphere of public finances and in accordance with that has suggested assuming of adequate measures. Pursuant the Draft Law on Annual Financial Statement of the Budget of the Republic of Montenegro for 2006 on page 110 of commentary of the Law it is stated that the cash deposits of the Health Insurance Fund of the Republic, expressed in thousands, amount 3.499,00. This amount significantly differs from the account determined by the audit and confirmations of commercial banks which confirmed that the Fund possesses cash

74 deposits, expressed in thousands to the amount of 2.322,89. We find it necessary for the Fund to harmonise the account with the Ministry of Finance in order to avoid discrepancies with stated amounts during the Debate on the Law on Annual Financial Statement of the Budget of the Republic of Montenegro for We should add that the Draft Law on Annual Financial Statement of the Republic of Montenegro for 2006, on page 139 of commentary, it is stated that transfers of the Fund were paid to the amount of ,00 and they are different from data presented in records of the Fund. Determined difference is not materially significant but like data on cash deposits leads to the conclusion that it is necessary for the Ministry of Finance and the Fund to periodically harmonise statements of liabilities and claims, and the cash statement aiming avoiding discrepancies of data and doubts in their accuracy. Institution thinks it is necessary to assuming the following measure: to harmonise differences before Debate on the Law on Annual Financial Statement of the Budget of the Republic of Montenegro for 2006 in the Parliament of the Republic of Montenegro. 10. Undertaken measures of the Health Insurance Fund of the Republic Board of Directors of the Health Insurance Fund of the Republic, at the session held on , is familiar with the Report on Audit of Financial Reports of the Health Insurance Fund of the Republic for 2006 and opinion with draft recommendations and measures. Regarding expressed reserve in opinion and given recommendations and measures in the Report; the Fund has informed the State Auditors Institution on undertaken measures on realisation of given recommendations and measures: 1. Regarding the expressed reserve in opinion that the turnover of debit and credit side of commercial accounts by business banks does not correspond to the turnover shown in the RCF made by the Fund for 2006, in addition we give you specification of non-cash transactions, which explains the deviation to the amount of ,95 such as: Revenues from Pension and Disability Insurance Fund Beograd (collected based on contract on debt assumption) to the total amount of ,72 : -contract No from , to the amount of ,79 contract no from , to the amount of ,55 contract No from , to the amount of ,38 Revenues from the Pension and Disability Insurance Fund (by contract on settlement of liabilities per contra No.63/1) Tax Administration- Harbour Bar to the amount of ,55 Booked and cancelled compensations which did not go through the account to the amount of 2.747,55. Other to the amount of ,13.

75 2. Gradual adjustment of the level of advance payments to invoiced realisation: - Board of Directors of the Health Insurance Fund of the Republic, at the session held on , has adopted the Resolution on increase of prices for health services provided by health institutions which are financed from funds of the Health Insurance Fund of the Republic. In this way the disproportion between advance payments by the Fund and invoiced revenues by public health institutions will be reduced. - Proposal of criterion for conclusion of contracts with providers of health services in the primary health protection was determined, which is a presumption for conclusion of contracts, and was forwarded to the Ministry of Health to further procedure for adoption; - Within the Project on Promotion of the Primary Protection System, a new way of financing and new model of payment in the primary health protection is being introduced (there is ongoing Pilot project Health Treatment Centre Podgorica and Pilot project in Health Treatment Centres Rožaje, Danilovgrad and Tivat), - There is an ongoing procedure of selection of consulting agency for optimisation of the secondary and tertiary level of health protection, which implies making of service packages, normatives and standards and defining of new models of payment for secondary and tertiary level of the health protection; 3. Programme for debt reduction to public health institutions: mentioned in the previous paragraph will define more clearly relations between providers of health services and the Fund, which should lead to the gradual debt reduction to public health institutions. 4. Forming of adequate documentation for authorisation of spending of fuel and telephone bills: aiming more rational spending of telephone impulses and reduction of costs for these purposes, director of the Fund has made a Resolution on determination of limits in spending of telephone impulse for all cordless phone numbers and mobile telephone numbers in the telephone exchange of the Fund and in the regional units of the Fund. Also, the Director of the Fund has made a Resolution which appoints persons which have right to provide fuel for use of official vehicles and Direction on records of trip orders for use of official vehicles and authorisation of fuel costs; 2. STATEMENT FROM REPORT ON AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF THE BUDGET OF THE MUNICIPALITY KOLAŠIN FOR 2006 Audit of the Annual financial statement of the Budget of the Municipality Kolašin was performed by authorised auditors of the State Auditors Institution, and in accordance with the Law on State Auditors Institution and International Auditing Standards (INTOSAI). These regulations stipulate that the audit is planned and performed in the way which allows us to make sure that the amounts given in the Draft Resolution on Annual financial statement of the Budget of Municipality Kolašin for 2006, correspond to amounts stated in records, and whether the controlled revenues and expenditures were correctly documented.

76 The audit includes checking of evidences based on samples which confirm amounts and information in the Draft Resolution on Annual financial statement of the Budget of Municipality Kolašin for 2006, and evaluation of applied accounting principles- International standards for public sector, harmonisation with legal regulations and publishing of information in the Draft Resolution on Annual financial statement of the Budget of Municipality Kolašin for In the Draft Resolution on Annual financial statement of the Budget of Municipality Kolašin for 2006, the following account of budget performance was determined: 1 Receipts ,01 2 Expenditures ,12 3 Unallocated receipts on ,89 It was determined by the audit that the Budget of the Municipality Kolašin in 2006 was financed from own sources and joint revenues with ,01 or 90,4% from the subventions from the Budget of the Republic with ,00 or 7,6% and credits ,00 or 2,0%.. Current expenditures in 2006 were realised in 2006 to the amount of ,79 Capital expenditures in 2006, according to the Draft Resolution on Annual financial statement of the Budget of Municipality were presented to the amount of ,73. Transfers to institutions, individuals, non-government and public sector were presented in 2006 to the amount of ,96. Loans and credits in 2006, amounted ,45. Expenditures based on repayments from previous years amounted ,93, and expenditures from reserves in 2006 amounted ,00. Municipality Kolašin finished fiscal year 2006 with shown deficit to the amount of ,33. Report on Cash Flows I- economic classification Ordinal number REPORT ON CASH FLOWS I- economic classification Year 2006 Month Realisation in the stated period next year Cash flow- economic classification Plan Realisation in the comparable period last year RECEIPTS 1 Current revenues ( ) , , , Taxes , , , Contributions 1.3 Duties , , , Compensations , , , Other revenues , , ,85 2 Receipts from repayment of credits

77 3 Donations and transfers , , , Donations 3.2 Transfers , , ,00 I TOTAL RECEIPTS (1+2+3) , , ,11 EXPENDITURES 4 Current expenditures , , , Gross salaries and contributions payable by , , ,95 employer 4.2 Other personal income , , , Costs for material and services , , , Current maintenance , , , Interests , , , Rent 4.7 Subsidies 4.8 Other expenditures 1.212, , ,29 5 Transfers for health protection Rights from the sphere of health protection 5.2 Funds for redundancies 5.3 Rights from the sphere of pension and disability insurance 5.4 Other rights from the sphere of health protection 5.5 Other rights from the sphere of health insurance 6 Transfers to institutions, individuals, nongovernmental and public sector , , ,96 7 Loans and credits 8 Repayment of guarantees 9 Repayment of liabilities from previous period , , ,93 10 Reserves , ,00 II TOTAL EXPENDITURES ( ) , , ,68 III Net cash flow (I-II) , , ,57 Cash flow based on investments 11 Receipts from the sale of non-financial property , , ,67 12 Receipts from the sale of financial property 13 Capital expenditures , , ,99 IV Net cash flow based on investments ( ) , , ,68 Cash flow based on financing 14 Loans and credits , , ,00 15 Repayment of credits , , ,45 V Net cash flow based on financing (14-15) , , ,45 VI Increase/reduction of cash (III+IV+V) 0 133, ,66 VII Cash at the beginning of the period 133,23 133,23 VIII Cash at the end of the period (VI+VII) 133,23 133, ,89 EVALUATIONS AND RECOMMENDATIONS GIVEN WITH THE REPORT ON AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF THE BUDGET OF THE MUNICIPALITY KOLAŠIN FOR 2006 According to the opinion of the State Auditors Institution, Draft Annual Financial Statement of the Budget of Municipality Kolašin for 200, by significantly material aspects, gives truthful and objective overview of presented receipts and expenditures on cash basis. In the Report, State Auditors Institution has pointed at certain mistakes which should be

78 corrected, so that on the occasion of adoption of the Annual financial statement of the budget of Municipality Kolašin for 2006, local self-government bodies have informed Municipal Assembly that they have acted in accordance with recommendations of the State Auditors Institution. By removal of noticed shortfalls and by implementation of given recommendations, local self-government bodies will lead to the improvement of their activities in the system of accounting records, financial reporting, system of internal procedures and controls and to the general approach of responsible persons in local selfgovernment bodies towards state accounting, financial issues and reporting. Recommendations which stem from the Audit of the Annual Financial Statement of the Budget of Municipality Kolašin for 2006, are mostly related to obeying of the validity of operations relative to state property management, use of budgetary reserves, accounting records and financial reporting, which cause the more efficient functioning of the system of the Municipal Budget, and therefore we emphasise the following: 1. it is recommended to Municipality to increase the efficiency of the tax service regarding collection of revenues, and to provide adequate and accurate records on all tax-payers of Municipality, pursuant the Law in Tax Administration. 2. it is recommended to the Municipality, to perform the presentation of financial reports and presentation of deficit and surplus in accordance with the Rule Book on way of preparation, drafting and submitting of financial reports of the budget, extra-budgetary funds and units of local self-governments ( Official gazette of the Republic of Montenegro, No.3/06) at the stipulated form: - Report on Consolidated Public Spending 3. It is recommended to the Municipality, pursuant the Law on Public Procurement, to appoint the officer who will also be authorised for performance of all public procurement (works, goods and services). 4. It is recommended to the Municipality to consistently apply the Law on Public Procurement and other legislations regulating this area, in obeying of procedure for procurement of goods, services and ceding of works. 5. It is recommended to the Municipality to provide recording of all transactions in business books, based on credible and complete accounting documentation pursuant the Rule book on unique classification of statements for the Budget of the Republic, budgets of extra-budgetary funds and budgets of municipalities. 6. It is recommended to the Municipality to use the funds determined by the budget pursuant the Article 37 of the Law on the Budget of the Republic of Montenegro and the Resolution on the Budget of Municipality by approved dynamics and for purposes within the funds provided by the budget. 7. It is recommended to the Municipality Kolašin to provide the analytic bookkeeping of records pursuant the Rule Book on Unique Classification of Statements

79 for the Budget of the Republic, budgets of extra-budgetary funds and budgets of municipalities, and the Rule Book on classification of material and non-material property by groups and methods for determination of the amortisation of budgetary and extra-budgetary beneficiaries. 8. It is recommended to the Municipality Kolašin, aiming regular harmonisation of the state of the registry of real-estates with the real-estate registry of the Real- Estate Administration, to perform the connecting of its computer system with the computer system of the Real-Estate Administration, for securing the accurate data base. 9. It is recommended to the Municipality, to ensure in selling of property, application of provisions of the Law on Property of the Republic of Montenegro, Law on Construction Land, Law on Basis of the Property Legal Rights and bylaws adopted based on above mentioned Laws. ACTIONS OF THE MUNICIPALITY KOLAŠIN ON RECOMMENDATIONS OF THE STATE AUDITORS INSTITUTION Municipality Kolašin has informed the State Auditors Institution, while expressing their comments on results of the annual financial statement of the budget of Municipality, that it accepts the given recommendations aiming improvement of management of the government property, revenues and expenditures and that it accepts assuming of measures for their realisation.

80 3. STATEMENT FROM THE REPORT ON AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF MUNICIPALITY ULCINJ FOR 2005 Audit of the Annual Financial Statement of the Budget of Municipality Ulcinj was performed by authorised auditors from the State Auditors Institution, and in accordance with the International Auditing Standards (INTOSAI). These standards stipulate that the audit is planned and performed in the way which allows us to make sure that the Draft Resolution on Annual Financial Statement of the Budget of Municipality Ulcinj for 2005 does not contain wrong, untrue information of material significance. Audit includes checking of evidences based on samples, which are used for confirmation of amounts and information in the Draft Resolution on Annual Financial Statement of the Budget of Municipality Ulcinj for 2005, and evaluation of applied accounting principles- International Accounting Standards for public sector, harmonisation with legal regulations and publishing of information in the Draft Resolution on Annual Financial Statement of the Budget of Ulcinj for In the Proposal of the Annual Financial Statement of the Budget of the Municipality Ulcinj for 2005, the following realisations of the budget are given: -Receipts ,59 -Expenditures ,06. It was determined by the audit that the Proposal of the Annual Financial Statement of the Budget of the Municipality does not contain the funds transferred from previous year and the balance of deposits at the end of the period. The following general data were determined during the audit of the Annual Financial Statement of the Budget of Municipality Ulcinj for 2005: planned Realised Realisation in % Receipts , ,90 66,46% Expenditures , ,69 66,96% By the Resolution on the Budget of Municipality of Ulcinj for 2005 ( Official gazette of the Republic of Montenegro municipal regulations No.17 from ) receipts were planned to the amount of ,00 out of which ,90 was realised, or percentage of realisation was 66,46%. Expenditures were planned to the amount of ,00 and the realisation amounted ,69 or 66,96%. In cases when during the fiscal year it comes to reduction of planned revenues or

81 reduction of expenditures, change of the Budget is being performed by procedure stipulated for its adoption. Municipality Ulcinj did not perform the revision of the budget, even though during the fiscal year a significant reduction of planned revenues occurred, i.e. higher discrepancy between plan and realisation, which is contrary to the Article 45 of the Law on Local Self-Government Financing. According to the Draft Resolution on Annual Financial Statement of the Budget of Municipality Ulcinj for 2005, Budget of Municipality Ulcinj was financed from its own sources with ,96, from common revenues with ,47, from subventions ,16 and from revenues from domestic debits with ,00. Data indicate that the expenditures of the Budget of Municipality Ulcinj were mostly financed from own revenues 68,73%, than from subventions from the Budget of the Republic 13,76%, common revenues 10,73% and revenues from domestic debits 6,78%. Data on sources of financing in 2005 and their structure are shown in the following table and graph: Ordinal number Description Amount in Structure in % 1 Own revenues ,96 68,73% 2 Common revenues ,47 10,73% 3 Subventions from the Budget of the Republic ,16 13,76% 4 Revenues from domestic debits ,00 6,78% 5 TOTAL: ,59 100,00% Sopstveni prihodi-own revenues; zajednicki prihodi-common revenues; dotacije iz budzeta Republike- subventions from the Budget of the Republic; Primanja od domacih zaduzivanja-revenues from domestic debit EVALUATIONS AND RECOMMENDATIONS GIVEN WITH THE REPORT ON AUDIT OF THE ANNUAL FINANCIAL STATEMENT OF THE BUDGET OF THE MUNICIPALITY ULCINJ FOR 2005 Certain irregularities and mistakes were discovered by the audit of the Annual