REPUBLIC OF KOSOVA OFFICE OF THE AUDITOR GENERAL

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REPUBLIC OF KOSOVA Document No: 24.17.1-2013-08 AUDIT REPORT ON THE FINANCIAL STATEMENTS OF THE KOSOVO JUDICIAL INSTITUTE FOR THE YEAR ENDED 31 DECEMBER 2013 Prishtina, June 2014

The Office of the Auditor General undertakes both Regularity and Performance Audits. The Auditor General Lage Olofsson, is the head of the Office of the Auditor General which employs around 145 staff. The Auditor General and the Office of the Auditor General shall be independent and certifies around 90 Annual Financial Statements each year, while undertaking other forms of audits. Our Mission is to Contribute to sound financial management in public administration. We shall perform quality audits in line with internationally recognized public sector auditing standards and good European practices. We shall build confidence in the spending of public funds. We shall play an active role in securing taxpayers and other stakeholders interests in enhancing public accountability The reports produced by the Office of the Auditor General directly promote accountability as they provide a base for holding managers of individual budget organisations to account. The Auditor General has decided on the audit opinion and report on the Annual Financial Statements of the Kosovo Judicial Institute in consultation with the Assistant Auditor General Ibrahim Gjylderen, who supervised the audit. The opinion and report issued are a result of the audit carried out under the management of the Audit Director, Valbon Bytyqi, supported by Shehrije Shala (Team Leader), and Veton Misiri -St. Musine Kokollari, No. 16, Prishtina 10000, Kosova Tel.: +381(0) 38 25 35 /121/262-FAX: +381(0) 38 2535 122 /219 http://oag-rks.org/ 2

TABLE OF CONTENTS Executive Summary... 4 1 Audit Scope and methodology... 6 2 Annual Financial Statements and Other External Reporting Obligations... 7 3 Prior Year Recommendations... 9 4 Financial Management and Control... 10 Annex I: Explanation of the different types of opinion applied by the OAG... 17 Annex II: Prior year recommendations... 20 3

Executive Summary Introduction This report summarises the key findings from our audit of the 2013 Annual Financial Statements which determine the Opinion given by the Auditor General. I would like to thank the President of the Kosovo Judicial Institute and his staff for their assistance during the audit process. The examination of the 2013 annual financial statements was undertaken in accordance with the internationally recognised Public Sector auditing standards (ISSAIs). Our approach included such tests and procedures as we deemed necessary to arrive at an opinion on the financial statements. The approach taken is set out in our Audit Planning Memorandum dated 13.12.2013. Our audit focus has been on: Compliance with the reporting framework and the significant risks to the Annual Financial Statement highlighted in the Audit Planning Memorandum; The response to our 2012 and earlier recommendations; and The Financial Management and Internal Control of the Kosovo Judicial Institute (including budget execution and Internal Audit). The level of work undertaken by the Office of the Auditor General to complete the 2013 audit is a direct reflection of the quality of the internal controls implemented by management. Opinion Annex I explains the different types of Opinions applied by the Office of the Auditor General. The Auditor General s opinion is: The Annual Financial Statements present a true and fair view in all material aspects. (ISSAI 200 Unmodified Opinion). 4

Overall Conclusion Our overall conclusion based on the detailed sections of this report is that: The management of Kosovo Judicial Institute had designed a good system of internal control and financial management. Effective controls have provided for a budget management in accordance with proper principles of financial management. The Kosovo Judicial Institute has addressed all our recommendations given in the audit report for 2012. This shows their willingness to improve controls continuously. Despite the progress made, further improvements are needed in some areas. Areas for further improvement and development remain payments certification process. We have no high priority issue to report in this part. Management s Response 2013 audit The management has agreed with our audit findings and they have committed to address our recommendations. 5

1 Audit Scope and methodology It is the responsibility of Kosovo Judicial Institute (KJI) to prepare Annual Financial Statements (AFS) under the International Public Sector Accounting Standards (IPSAS) for Financial Reporting under the Cash Basis for Accounting and other specific requirements. The Office of the Auditor General (OAG) is responsible for carrying out a Regularity Audit, which involves the examination and evaluation of the AFS and other financial records and expression of opinions on: Whether the AFS give a true and fair view of the accounts and financial affairs for the audit period; Whether the financial records, systems and transactions comply with applicable laws and regulations; The appropriateness of internal controls and internal audit functions; and All matters arising from or relating to the audit. We have considered the extent to which management controls can be relied upon when determining the overall testing required to provide the necessary level of evidence to support the opinion of the Auditor General (AG) and the focus of our audit. The following sections provide a more detailed summary of our audit finding with emphasis on observations and recommendations in each area of review. An assessment of how the Management have addressed recommendations made in the report on 2012 may be found in Annex II. For completeness we have included issues identified at the interim audit where they remain relevant. Our findings are defined as: High Priority - issues which may result in a material weakness in internal control and where action will offer the potential for improvements to the efficiency and effectiveness of internal controls; and Medium Priority - issues which may not result in a material weakness but where action will also offer the potential for improvements to the efficiency and effectiveness of internal controls. Our procedures included a review of the internal controls and accounting systems and procedures only to the extent considered necessary for the effective performance of the audit. Audit findings should not be regarded as representing a comprehensive statement of all the weaknesses which exist, or all improvements which could be made to the systems and procedures operated. Findings considered low priority will be reported separately to finance staff. 6

2 Annual Financial Statements and Other External Reporting Obligations Our review of the AFS considers both compliance with the reporting framework and the accuracy of the information recorded in the financial statements. We also consider the Declaration made by the Chief Administrative Officer and Chief Financial Officer when the draft AFS are submitted to the Government. The declaration regarding presentation of the AFS incorporates a number of assertions relating to compliance with the reporting framework and the quality of information within the financial statements. A number of the declarations are intended to provide assurance to the Government that all relevant information has been provided to ensure that a comprehensive audit can be undertaken. The KJI has managed to submit all reports required under the applicable legal framework in time. The AFS have met all International Public Sector Accounting Standards (IPSAS) for Financial Reporting under the Cash Basis for Accounting and the Financial Rule 03/2013. They provided complete and accurate information on events and presented transactions. 2.1 Audit Opinion Unmodified Opinion 1 In our opinion the Annual Financial Statements present a true and fair view in all material aspects (ISSAI 200 Unmodified Opinion). 1 The term unmodified opinion is equivalent with the term unqualified opinion used in the previous version of Annual Report. The new terminology is in compliance with new standards of INTOSAI (ISSAI 200). For more information please refer to Annex I. 7

2.2 Compliance with AFS reporting requirements The AFS are required to comply with a specified reporting framework. We considered: Compliance with Ministry of Finance Regulation (MoF) no. 03/2013 on Annual Financial Statements of Budget Organisations; Requirements of the Law no. 03/L-048 on Public Finance Management and Accountability as amended and supplemented; and Requirements of Regulation 01/2013/MoF Spending of public funds, and Regulation of MoF no. 02/2013 on Management of non-financial assets of budget organisations. We have no issues to raise on these requirements. 2.3 Compliance with other external reporting requirements KJI is required to address the following external reporting obligations other than producing AFS such as: Budget request; Quarterly reports including nine month financial statements; Annual reports; Draft and final procurement plan; Reports on outstanding liabilities; Reports on internal controls, including the self-assessment report; Action plan for implementation of recommendations; and Inventorying and recording assets. All external reporting requirement were met in time by the KJI. 8

3 Prior Year Recommendations Overall Conclusion The KJI has shown willingness to address all recommendation given in the 2012 audit report. We encourage the management to undertake appropriate actions and measures to address the recommendations of this year as well. Our Audit Report on the 2012 AFS of KJI resulted in four recommendations. The KJI had prepared an Action Plan stating how the recommendation will be addressed. During our audit of 2013 AFS, we noticed that the KJI had fully addressed this recommendation. For a more thorough description of the recommendations and how they are addressed, see Annex II. Recommendations We have no recommendations in this area. 9

4 Financial Management and Control 4.1 Overall Conclusion Our audit approach is focused on understanding and evaluating the actions taken by management to secure effective financial management and control and the results thereof. For individual financial systems we seek to identify the level at which actual controls operate. This may, for example, be monitoring activity undertaken by senior management or lower level operational controls. We consider that controls are well designed, have been implemented as planned and operate effectively. This requires an assessment of structures, processes and accountability lines introduced by management. The management of Kosovo Judicial Institute has designed a good system of internal control and financial management. Effective controls have provided for a budget management in accordance with proper principles of financial management. Despite the progress made, further improvements are needed in some areas. Areas for further improvement and development remain payments certification process. 4.2 Budget Planning and Execution We have considered the source of budget funds for KJI, spending of funds by economic categories and revenues collected. This is highlighted in the following tables: Table 1 Sources of budget Funds - outturn against the budget (in ) Initial Budget Final Budget 2 2013 Outturn 2012 Outturn 2011 Outturn Sources of Funds 534,835 552,066 462,963 481,839 603,847 Government Grant - Budget 526,089 526,089 437,350 441,475 578,965 External Donations 8,746 25,977 25,613 40,364 24,882 The final budget is larger than the initial budget by 17,231. This is as a result of external donations. 2 Final budget the budget approved by the assembly, which was subsequently adjusted for by the Ministry of Finance. 10

In 2013 the KJI has spent 83% of the final budget or 462,963, which is an underspending of 3% compared to 2012 (86% of the budget was spent). Table 2. Spending of funds by economic categories - outturn against the budget (in ) Spending of funds broken down by economic categories Initial Budget Final Budget 2013 Outturn 2012 Outturn 2011 Outturn 534,835 552,066 462,963 481,839 603,847 Wages and Salaries 156,923 156,923 151,568 151,955 137,805 Goods and Services 367,912 381,643 297,897 313,406 456,312 Utilities 10,000 13,500 13,498 16,478 9,730 Explanations of changes in budget categories are given as follows: Broken down in economic categories, we see a good budget implementation of 97% in the category of Wages and Salaries, and Utilities by nearly 100%. The category of Goods and Services with lower budget implementation of 78% is an exception to that. The main reason for lower budget implementation in this category was due to the failure to implement the initial training program for the fifth generation of candidates who aim to be future judges and prosecutors. This program was planned to be implemented during the first quarter of 2013, but the Kosovo Judicial Council (KJC) and the Kosovo Prosecutorial Council (KPC), even after the continuous request of the KJI, were late in determining the needed number of candidates for training. In addition, the KJI sent the lists of candidates for verification to the KJC and KPC, yet these two institutions were late in their verification. Due to delays by the abovementioned institutions, this training was organised in December 2013. This has made it impossible to have the training in line the plan and unquestionably had a direct impact on budget implementation of this category. The same situation regarding the budget spending in this category has taken place in previous years as well. 11

4.3 Revenues (External Donations) The total donations budget for 2013 was in the amount 25,977, whilst 25,631 or approximately 99% were spent (the amount of 8,747 was carried forward, while 17,230 was from the donation received during 2013 by the UNWOMEN). These donations were for training purposes. We conclude that KJI has managed external donations in accordance with the relevant agreement. Recommendations We have no recommendations in this area. 4.4 Expenditures 4.4.1 Procurement During 2013, the KJI signed 24 contracts. We tested 14 contracts that amounted to 142,985 or over 48% of the total spending for Goods and Services. In addition, we tested 29 payments in the amount of 50,037 of purchases made through procurement procedures. We conclude that the KJI has managed to establish functional controls over the management of procurement processes, including their development and execution, with exception to procedures for payment processing. 12

Issue 1 Shortcomings during the certification process payments - Medium Priority Finding Our work has included examination of some payment orders to verify the regularity of payment certification process. These tests have identified some technical errors which have occurred due to lack of controls over these processes: The contract Maintenance and repair of technological equipment, had expired on April 26, 2013. Even after its expiration the KJI in the following processed cases had continued to incorrectly attach the old contract. This was noticed in the payment of 538, which was carried out in June 2013; Based on the Decision No. 02/2013 dated January 25, 2013 by the President of the Managing Board compensation for committee members for drafting and evaluating the preparatory exam (committee) was defined in the amount of 100 a day. In regard to the case that relates to intellectual services in the amount of 400 the list of signatures concerning the exam held was missing. These documents existed in other departments, but were not attached to payments; In the case for official lunches in the amount of 532 the payments were made only based on the invoice issued, without any additional documentation proving that costs had incurred (request, the purpose of spending and participants); and In the contract Accommodation and hotel reservations for training in Peja we noticed that expenditures were not incurred in accordance with the technical specification of the contract. This was noticed in the invoice with no. 0030/03/2013H, with a value of 2,073. Risk Certifying expenditures without contract and departure from verification procedures, increases the risk of irregular payments, which can result in ineffective use of public funds. Recommendation 1 The President of the Managing Board should ensure that the payments certification function independently verifies the entire documentation and that payments are certified only after all legal requirements are met. 13

4.4.2 Non Procurement Expenditure For purchases which are not processed through procurement procedures, we tested 13 payments in the amount of 28,876. Expenses relating to utilities, rent expenses, travel expenses, management of advances, and various expenses were included in this category. We have not encountered any irregularities that need to be reported. Recommendation We have no recommendations in this area. 4.4.3 Remunerations (Wages and Salaries) The KJI for 2013 for this category planned the budget in the amount of 156,923, whilst 151,568 were spent. Our tests have included development of recruitment process, compliance of salary payments to employment contracts, including the base of multipliers, annual performance assessment, and maintenance of personnel files. We may conclude that KJI has established good controls over the area of Remunerations (Wages and Salaries), with exception to the following. 14

Issue 2 The Certifying Officer position was exercised by different persons within the institution - Medium Priority Finding Despite the fact that the Certifying Officer position is an important position in the hierarchy of internal control, the KJI does not have this position its structure yet. This position was exercised by different persons within the institution (up to April 18, 2013 was manned by the Program Coordinator, and by the Personnel Officer afterwards). Due to lack of controls over this process we have identified some irregularities during the execution of payments. Risk As a result of not manning the position of the Certifying Officer, the monitoring over the processing of payments was weak, thus posing a risk of improper payments being made, which have a direct impact on achievement of value for money spent. Recommendation 2 The President of the Managing Board in cooperation with the Director General should take immediate measures to include the position of the Certifying Officer in their administrative structure. Through this position, the Director General may closely monitor the payments execution process. 4.5 Assets and liabilities 4.5.1 Capital and non capital assets According to the accounting register (KFMIS), the value of capital assets over 1000 was 29,135, whilst the value of non-capital assets under 1000 was 26,309. We reviewed whether the assets registration process and recordkeeping was in compliance with the requirements of MoF Regulation no. 02/2013 on the Management of Non Financial Assets of Budget Organisations. In addition, we have verified whether the assets registered in the asset registers are physically present. We may conclude that we have not come across any irregularities that need to be reported. Asset Officer has constantly updated assets, therefore he owns a complete and correct assets register. Assets inventory was carried out at the end of the year. 15

Recommendations We have no recommendations in this area. 4.5.2 Handling of debts In 2013, KJI reported outstanding liabilities in compliance with the requirements of the Financial Regulation no. 02/2013/MoF on the Reporting of Outstanding Liabilities of Budget Organisations. The statement of outstanding liabilities to suppliers at the end of 2013 was 2,812. These liabilities are carried forward to be paid in 2014. The remaining liabilities are mainly from invoices received in the send half of December 2013 and beginning of 2014. Recommendations We have no recommendations in this area. 4.6 Internal Audit System According to the requirements set out in the AI No 23/2009 on the Establishment of the Internal Audit Unit (IAU), the KJI does not meet the requirements for establishment of this unit. However, the KJI can use internal audit services from some other entity. Last time when the internal audit was carried out in the KJI was in 2010. In this report we will not give a recommendation, as we wait for the Kosovo Assembly to provide a solution for audit coverage for other same institutions that do not meet the criteria set out under the AI 23/2009. Recommendations We have no recommendations in this area. 16

Annex I: Explanation of the different types of opinion applied by the OAG (extract from ISSAI 200) Form of opinion 147. The auditor should express an unmodified opinion if it is concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial framework. If the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement, or is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, the auditor should modify the opinion in the auditor s report in accordance with the section on Determining the type of modification to the auditor s opinion. 148. If financial statements prepared in accordance with the requirements of a fair presentation framework do not achieve fair presentation, the auditor should discuss the matter with the management and, depending on the requirements of the applicable financial reporting framework and how the matter is resolved, determine whether it is necessary to modify the audit opinion. Modifications to the opinion in the auditor s report 151. The auditor should modify the opinion in the auditor's report if it is concluded that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement, or if the auditor was unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. Auditors may issue three types of modified opinions: a qualified opinion, an adverse opinion and a disclaimer of opinion. 17

Determining the type of modification to the auditor s opinion 152. The decision regarding which type of modified opinion is appropriate depends upon: The nature of the matter giving rise to the modification that is, whether the financial statements are materially misstated or, in the event that it was impossible to obtain sufficient appropriate audit evidence, may be materially misstated; and The auditor s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. 153. The auditor should express a qualified opinion if: (1) having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (2) the auditor was unable to obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that the effects on the financial statements of any undetected misstatements could be material but not pervasive. 154. The auditor should express an adverse opinion if, having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. 155. The auditor should disclaim an opinion if, having been unable to obtain sufficient appropriate audit evidence on which to base the opinion, the auditor concludes that the effects on the financial statements of any undetected misstatements could be both material and pervasive. If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the audit scope that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor should request that management remove the limitation. 156. If expressing a modified audit opinion, the auditor should also modify the heading to correspond with the type of opinion expressed. ISSAI 170519 provides additional guidance on the specific language to use when expressing a modified opinion and describing the auditor s responsibility. It also includes illustrative examples of reports. 18

Emphasis of Matter paragraphs and Other Matters paragraphs in the auditor s report 157. If the auditor considers it necessary to draw users attention to a matter presented or disclosed in the financial statements that is of such importance that it is fundamental to their understanding of the financial statements, but there is sufficient appropriate evidence that the matter is not materially misstated in the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor s report. Emphasis of Matter paragraphs should only refer to information presented or disclosed in the financial statements. 158. An Emphasis of Matter paragraph should: be included immediately after the opinion; use the Heading Emphasis of Matter or another appropriate heading; include a clear reference to the matter being emphasised and indicate where the relevant disclosures that fully describe the matter can be found in the financial statements; and indicate that the auditor s opinion is not modified in respect of the matter emphasised. 159. If the auditor considers it necessary to communicate a matter, other than those that are presented or disclosed in the financial statements, which, in the auditor s judgement, is relevant to users understanding of the audit, the auditor s responsibilities or the auditor s report, and provided this is not prohibited by law or regulation, this should be done in a paragraph with the heading Other Matter, or another appropriate heading. This paragraph should appear immediately after the opinion and any Emphasis of Matter paragraph. 19

Annex II: Prior year recommendations Audit Component Recommendation given Recommendation fully addressed 2.2. Quality and Accuracy of Information Presented in the Annual Financial Statements Ensure that the AFS preparation plan for 2013, includes a detailed management's review of the draft accounts before they are submitted to the Government of Kosovo. 4.5.1. Procurement Increase controls in the planning of purchases in order to avoid unnecessary requests during purchases. As part of this process, the Management should ensure that accountability and responsibility measures on the performance of the procurement official and of the evaluation committees are strengthened. 4.5.1. Procurement Provide a permanent process of informing unsuccessful EO. It will develop transparency and competition during purchases. 4.5.1. Procurement Ensure increased attention to controls during the tender evaluation process, in order to enable awarding to meritorious EO. Yes Yes Yes Yes Partly addressed Not addressed 20