THE GLOBAL FUND to Fight AIDS, Tuberculosis and Malaria Guidelines for Annual Audits of Program Financial Statements Table of Contents 1. Introduction 2. Operational Policies and Practices 3. Follow-up on Audit Findings 4. Roles and Responsibilities Annex 1: Specimen Guidelines for Terms of Reference for Audit of Global Fund- Supported Programs Appendix 1: Qualifications of an Auditor Appendix 2: Sample Audit Report for Public Sector Entity Part 1: Introduction 1. A core component of the Global Fund s fiduciary framework is the audit of Principal Recipients (PRs) and sub-recipient program financial statements. In accordance with the relevant sections of the Grant Agreement, the expenditures of a Principal Recipient and sub-recipients are required to be externally audited on an annual basis. The Global Fund does not require a consolidated financial statement of the PR and sub-recipient receipts and expenditures for audit purposes. 2. The key features of the Organization for Economic Cooperation and Development (OECD) Development Assistance Committee (DAC) Task Force on Donor Practices Good Practice Reference Paper on Reporting on Financial Aspects and Auditing form the foundation of the Global Fund s audit policy framework. These key features include: A single annual external audit of the program financial statements fulfills all Global Fund requirements for Principal Recipient audits (i.e., a separate report on the bank account or periodic Disbursement Requests and Progress Updates is not required) Guidelines for Audit of Program Financial Statements July 1, 2003 1 /12
The specimen guidelines Terms of Reference developed by the OECD DAC harmonization work are suggested for use by the PR in developing external audit Terms of Reference (see Annex 1), Where the Global Fund co-finances a program with other donors (e.g., as part of a SWAp arrangement), a single audit report covering all program expenditures is acceptable as long as the Global Fund grant and expenditures for program purposes can be clearly identified, Audit reports are due within six months of the end of a PR s fiscal year, While applicable international audit standards should be used for conducting the audit, national standards are acceptable where these are consistent with the international standards in all material respects. 3. For the exceptional cases where multilateral organizations assume the role of Principal Recipients, the audit policies of these organizations will apply. Note: The Principal Recipient audit is separate from any audit or inspection that may be performed by the Global Fund or other parties pursuant to the Grant Agreement. Part 2: Operational Policies and Practices 4. Auditor Selection As part of the Financial Management and Systems Assessment performed by a Local Fund Agent (LFA) prior to the signing of a Grant Agreement between the Global Fund and a Principal Recipient, the LFA reviews the PR s selected auditor and advises the Global Fund on the acceptability of that auditor. The Global Fund decides whether to accept the auditor. It is the Global Fund s general policy that if a PR s existing auditor is acceptable to other donors, that auditor will be acceptable also to the Fund. In cases in which a PR does not have experience with donor-financed projects or the existing auditor is not acceptable to other donors, the LFA will advise the Global Fund on the acceptability of the auditor. Note 1 of the OECD/DAC Good Practice Reference Paper on Reporting on Financial Aspects and Auditing provides guidance on determining the acceptability of an auditor. 5. In most cases, the same auditor who performs the annual audit of a Principal Recipient will also be the auditor for the Global Fund program so that a single, comprehensive audit can be performed. For public sector entities, this may be the country s Supreme Audit Institution. 6. The preferred approach is that the auditor is selected by a Principal Recipient prior to Grant Agreement signing. If this is not the case, the selection of the auditor should be done within the first six months of program implementation. 7. Audit Terms of Reference To assist a Principal Recipient in engaging the auditor, specimen guidelines for audit Terms of Reference are provided in Annex 1. The Local Fund Agent reviews the PR s audit Terms of Reference and advises the Global Fund on the acceptability of the Terms of Reference. Guidelines for Audit of Program Financial Statements July 1, 2003 2 /12
8. Due Date The audit report, including the management letter noting deficiencies in the PR s internal controls, should be received by the Global Fund from a Principal Recipient within six months after the end of the PR s fiscal year. The Local Fund Agent receives the audit report on behalf of the Global Fund. 9. Audit Fees The fees normally associated with the regular annual audit of the entire financial statements of a Principal Recipient which would be incurred regardless of the Global Fund grant are not financed by the Global Fund. Actual incremental audit fees associated with fulfilling the Global Fund audit requirements may be financed through the grant. 10. Format and Content of Audited Financial Statement The format of the annual Statement of Sources and Uses of Funds (Cash Flow Statement) of the program should typically be derived from a Principal Recipient s normal reporting systems. The Statement of Sources and Uses of Funds provided as an appendix to the periodic Disbursement Requests and Progress Updates should be in the same format and content as the annual financial statement. An audit of a PR s overall financial statements without specification of the program sources and uses of funds is not adequate. 11. Programs with Co-Financing Program financial statements should cover the entire program, regardless of the financing source. In such cases, a single audit report covering the entire program, including all sources of funds, is acceptable, as long as the Global Fund grant and expenditures for program purposes can be clearly identified. 12. Sub-recipients The annual audit of a Principal Recipient should cover the PR s receipts and expenditures, not a consolidated financial statement of the PR and subrecipient receipts and expenditures. As part of its monitoring of grants to subrecipients, a Principal Recipient must require all sub-recipient programs to be audited using an approach that is similar to the Global Fund s Guidelines for Audit of Program Financial Statements. The PR must provide the Global Fund with a plan of how the audits of the sub-recipients will be carried out. The audits of the sub-recipients are submitted to the PR, who forwards a copy of these audit reports to the Local Fund Agent. The LFA, as part of its monitoring of PR implementation, reviews the PR s audit policies and implementation of those policies. Part 3: Follow-up on Audit Findings 13. As part of its monitoring of grant implementation by a Principal Recipient, the Local Fund Agent receives and reviews the PR s audit report and management letter. The LFA also receives and reviews the audit reports of sub-recipients as forwarded by the PR. Where the audit findings identify capacity building needs or inappropriate expenditures financed by the Global Fund, the LFA recommends remedial actions to the Global Fund. Audit findings and recommendations will be discussed with the PR. PRs are encouraged to engage their development partners or other sources to assist in fulfilling necessary improvements in internal controls and other capacity building needs. Guidelines for Audit of Program Financial Statements July 1, 2003 3 /12
14. If the internal control deficiencies or other audit findings are significant, resulting in a Principal Recipient not being able to demonstrate accountable use of the grant proceeds, future disbursements and/or financing by the Global Fund may be reduced, halted or made contingent upon correction of the deficiencies. The Local Fund Agent reviews the PR s progress in implementing the audit recommendations as part of its ongoing monitoring function. 15. Where the audit identifies inappropriate expenditures financed by the Global Fund, the Fund, in accordance with the Grant Agreement, may request a refund from the Principal Recipient of the amount of the inappropriate expenditures. Part 4: Roles and Responsibilities 16. A Principal Recipient engages the auditor using Terms of References, facilitates the carrying out of the audit, and submits the audit report to the Global Fund (through the Local Fund Agent). The PR responds to and implements audit findings and recommendations, as appropriate. Where the PR makes grants to subrecipients, the PR is responsible for developing and implementing an adequate audit plan for the sub-recipient program expenditures. The PR forwards the audit reports received from sub-recipients to the LFA. 17. The Local Fund Agent reviews the acceptability of the auditor, the Terms of Reference and the Principal Recipient s sub-recipient audit plan. When the audit reports are received from the PR, the LFA reviews the audit findings and recommendations, and advises the Global Fund on potentially necessary actions. The LFA also reviews the audit reports of sub-recipients, as received from the PR. As part of its monitoring activities, the LFA reviews the PR s implementation of the audit findings and recommendations. 18. The Global Fund decides on the acceptability of the auditor, Terms of Reference and sub-recipient audit plan and on appropriate remedial actions in response to audit findings and recommendations. Guidelines for Audit of Program Financial Statements July 1, 2003 4 /12
Annex 1: Specimen Guidelines for Terms of Reference for Audits of Global Fund-Supported Programs This document is based on the Specimen Terms of Reference (TOR) for Donor- Supported Projects and Sector Programs developed by the Organization for Economic Cooperation and Development Development Assistance Committee (OECD-DAC) on Financial Harmonization and is intended to provide guidance to the Principal Recipient (PR), Local Fund Agent (LFA) and the Global Fund in agreeing on audit Terms of Reference for Global Fund-supported programs. Those TOR components that are considered appropriate for a particular program should be selected, inappropriate items omitted, and additional matters included, where considered necessary. Appendix 1 to this Specimen Guidelines for Terms of Reference for Audits of Global Fund-Supported Programs describes the qualifications of the auditor and may help in the process of selecting auditors. Appendix 2 is a sample special purpose audit report for a public sector entity. July 1, 2003 5 /12
Part 1: Background 1. The background section of the audit TOR should include a brief summary of the Principal Recipient s (PR) accounting and financial management practices. There should be a broad description of the program in the context of its contribution to achieving the goals of the PR. The auditor should understand the "purpose for which the funds are intended" in the context of program objectives as well as in terms of the specific budget for the program. 2. Financial statements of the Principal Recipient that provide sufficient disclosure of the receipts and disbursements of the program and of relevant information in the notes to the financial statements should normally meet the needs of the Global Fund. Where financial statements do not provide this information, a separate special purpose financial statement with a special purpose audit report would be expected. This would normally take the form of a Statement of Sources and Uses of Funds (Cash Flow Statement). Part 2: The Principal Recipient (PR) 3. This section should contain a description of the Principal Recipient including the physical address, phone numbers, fax numbers, web sites and general e-mail addresses. A brief summary of the financial management assessment of the program PR should be included, together with a reference that the full financial management assessment would be available to the auditor. Other details could include: An organization chart A list of senior officers together with their contact details A list of the contact persons responsible for accounting, financial management and internal audit together with phone numbers and email addresses A description of the program including the program budget by major expenditure categories and the sources of all funding for the program. A statement that any program assessment or appraisal reports (if applicable) would be available to the auditor should be included. Part 3: Accounting Standards 4. This section should include a description of the accounting standards followed for the program and whether they are consistent with the Principal Recipient s accounting standards. Any deviations from standard accounting practices should be specified. Any deviations between the actual accounting standards applied and international practice as embodied in either International Accounting Standards (IAS) published by the International Accounting Standards Board or the draft International Public Sector Accounting Standards (IPSAS) on Cash Accounting July 1, 2003 6 /12
published by the Public Sector Committee (PSC) of the International Federation of Accountants may also be described. Part 4: Reporting Standards 5. The usual format of reporting for a non-revenue program is a Statement of Sources and Uses of Funds (Cash Flow Statement). The format of the accounting report should be provided. The format should include a list of funding sources to be reported separately as well as a list of the categories for uses of funds for reporting purposes. These uses of funds categories should normally be the same as those used by the Principal Recipient for its regular reporting, and should be the same as those used in the Statement of Sources and Uses of Funds (Cash Flow Statement) provided as an annex to the Principal Recipient s periodic Disbursement Requests. 6. The Statement of Sources and Uses of Funds (Cash Flow Statement) format should normally include the current reporting period compared with the annual budget and accumulative figures from the commencement of the program compared with the total program budget. 7. The date by which the program accountants will prepare a draft Statement of Sources and Uses of Funds (Cash Flow Statement) together with the agreed supporting schedules should be specified. Audited special purpose financial statements should be issued within about four to six months after the end of the fiscal period and need to be received by the Global Fund within six months after the end of the fiscal period. Part 5: Available Facilities 8. There should be a description of the nature and the location of all records belonging to the program. This list should specify those records kept at the Principal Recipient's headquarters and those that are located at other offices. If computers are used to record transactions relating to the program a description of the computer specifications needs to be provided together with a description of the operating software. 9. The TOR should state that the auditor would have full and complete access at any time to all records and documents (including books of account, legal agreements, minutes of committee meetings, bank records, invoices and contracts etc.) and all employees of the entity. The auditor should be advised that he/she has a right of access to banks and depositories, consultants, contractors and other persons or firms engaged by the program management. If an auditor may not have unrestricted access to any records, person or location during the course of the audit, this restriction should be clearly defined, with reasons, in the TOR. Part 6: Audit Scope Part 6.1: Scope of Work July 1, 2003 7 /12
10. The scope of the audit should be sufficiently clear to properly define what is expected of the auditor but not in any way restrict the audit procedures or techniques the auditor may wish to use to form an opinion. It should specify at least the following: A definition of the entity or the portion of an entity that is subject to audit, The audit will be carried out in accordance with either ISA 1 or INTOSAI 2 auditing standards The audit period covered will include the current reporting period. Issues relevant for the accumulative reporting period (from inception of the program) will rely upon the audit work of previous auditors, if necessary through communication with them. Sufficient audit evidence will be gathered to substantiate in all material respects the accuracy of the information contained in supporting schedules attached to the Statement of Sources and Uses of Funds (Cash Flow Statement). 11. The TOR should require the auditor to state in the audit report if the audit was not in conformity with any of the above and indicate the alternative standards or procedures followed. 12. The scope section of the TOR should clearly indicate whether the auditor is expected to issue an opinion on the implementing agency's compliance with any specific covenants. This section should specifically state: The auditor is not an arbitrator in any disagreements between the PR and the Global Fund, The covenant(s) for which an opinion will be issued, by a very specific reference to the Grant Agreement section(s) and paragraph number(s), 13. A copy of the Grant Agreement between the PR and the Global Fund will be provided to the auditor. Copies of all correspondence between the PR and the Global Fund relating to compliance, calculation of compliance or interpretation of definitions used in the covenants will be provided. Part 6.2: The Audit Report 14. The TOR should clearly indicate expected content of the auditor s opinion. This would include at least the following: That it is a special purpose report and its intended use, Accounting standards that have been applied and indicate the effect of any deviations from those standards, The audit standards that were applied (either INTOSAI standards, ISAs, or national standards that comply with one of these in all material respects, The period covered by the opinion, 1. 2. International Standards of Auditing (ISA) published by the International Auditing Practices Committee of the International Federation of Accountants International Organization of Supreme Audit Institutions July 1, 2003 8 /12
Whether the specified Statement of Sources and Uses of Funds (Cash Flow Statement) and supporting schedules present fairly the cash receipts and disbursements for the program and that the funds were utilized for the purposes defined by the funding agreement(s). 15. This section should also indicate the due date for submission of a draft audit report and the signed audit report to the management of the program. Part 6.3: The Management Letter 16. The TOR should specify that the auditor will submit a management letter at the completion of the audit. Guidance should be provided regarding the topics/issues to be covered in the management letter. At least the following topics/issues should be included: An assessment of the program's internal control system with equal emphasis on (i) the effectiveness of the system in providing the program management with useful and timely information for the proper management of the program and (ii) the general effectiveness of the internal control system in protecting the assets and resources of the program. A description of any specific internal control weaknesses noted in the financial management of the program and the audit procedures followed to address or compensate for the weaknesses. Recommendations to resolve/eliminate the internal control weaknesses noted should be included. July 1, 2003 9 /12
Appendix 1: Qualifications of an Auditor 1. The TOR should state that the auditor must be completely impartial and independent from all aspects of management or financial interests in the entity being audited or those of its implementing/supervising agency or directly related entities. The auditor should not, during the period covered by the audit nor during the undertaking of the audit, be employed by, serve as director for, or have any financial or close business relationships with any senior participant in the management of the entity. It may be appropriate to remind an auditor of any existing statutory requirements relating to independence and to require an auditor to disclose any relationship that might possibly compromise his/her independence. 2. The auditor should be experienced in applying either ISA or INTOSAI audit standards, whichever is applicable for this audit. The auditor must employ adequate staff with appropriate professional qualifications and suitable experience with ISA or INTOSAI standards, including experience in auditing the accounts of entities comparable in size and complexity to the entity being audited. 3. Curriculum Vitae (CVs) should be provided to the client by the principal of the firm of auditors who would be responsible for signing the opinion, together with the CVs of managers, supervisors and key personnel proposed as part of the audit team. It would be appropriate to indicate required/minimum professional qualifications necessary for the senior auditors/principals responsible for the audit. CVs should include details on audits carried out by the applicable staff, including ongoing assignments indicating capability and capacity to undertake the audit. July 1, 2003 10 /12
Appendix 2: Sample Audit Report for Public Sector Entity Auditor's report to: The Director, ABC Program Ministry of Health of the Government of XYZ We have audited the accompanying special purpose Cash Flow Statement of the ABC Program for the year ended 31 December, 20XX and cumulatively since inception of the program. This statement is the responsibility of the ABC Program management. Our responsibility is to express an opinion on the accompanying statement based on our audit. We conducted our audit in accordance with (either International Standards on Auditing promulgated by the International Federation of Accountants or Auditing Standards promulgated by the International Organization of Supreme Audit Institutions). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall statement presentation. We believe our audit provides a reasonable basis for our opinion. The ABC Program management's policy is to prepare the accompanying statements on the cash receipts and disbursements basis in conformity with (either International Public Sector Accounting Standard for Cash Accounting or the National Accounting Law of 19XX of XYZ Country). On this basis cash receipts are recognized when received and cash expenditures are recognized when paid rather than when incurred. In our opinion, the accompanying statement referred to above gives a true and fair view of (or presents fairly, in all material respects) the cash receipts and disbursements of the program during the year ended 31 December 20XX and cumulatively since inception of the program in accordance with (either International Public Sector Accounting Standard XX or the National Accounting law of 19XX of XYZ Country), described in Note X. Our audits were conducted for the purpose of forming an opinion on the special purpose financial statement taken as a whole. [Use the following section as required] The accompanying special purpose Schedule of Funding Source Reconciliation and Schedule of Major Contractual Amounts Outstanding as at 31 December 20XX and 20XY, are presented for purposes of additional analyses and are not required parts of the special purpose financial statement. Such information has been subjected to the auditing procedures applied in the audits of the special purpose financial statements and in our opinion is fairly stated in all material respects in relation to the special purpose financial statements taken as a whole. This report is intended solely for the information and use of the Global Fund to Fight AIDS, Tuberculosis and Malaria, and the Government of XYZ Country as funding July 1, 2003 11 /12
agencies of the ABC Program and for submission to these funding agencies and should not be used for any other purpose. Date AUDITOR'S SIGNATURE July 1, 2003 12 /12