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ADB Grant 0133-CAM: Public Financial
Management in Rural Development
Ministries (Component 1)
Decentralization and De-concentration:Financial
Management for Externally Financial Decentralized and
De-concentrated Project in Kingdom of Cambodia
Management Reports, Records,
Day 3: Oct. 27, 2010:
Internal and External Audit
ADB Grant No.0133-CAM/Component
1
1: PFMRD
Day 3
Management Records, Internal and
External Audit
Content
MANAGEMENT
REPORT INTERNAL EXTERNAL
& AUDIT AUDIT
RECORDS
ADB Grant No.0133-CAM/Component 1: PFMRD 2
MANAGEMENT RECORDS
ADB Grant No.0133-CAM/Component 1: PFMRD 3
Overview
Three types of financial management
Financial management reports are required to be produced by
reports provide the EA/IA to support effective monitoring
important information of the project’s financial position and
to the Project progress and to support sound
Management and to management decision making. These are:
external users on the
progress of project
implementation, and
the financial status of Management reports
the project.
Quarterly Financial
Management Reports
Annual Financial
Statements
ADB Grant No.0133-CAM/Component 1: PFMRD 4
Overview
• The MEF and ADB/WB and other donors use
the project’s financial management reports
and annual financial statements to monitor
the financial performance of the project and
to identify issues which require attention and
management action.
• The annual financial statements also provide
assurance that the financial resources of the
project are being properly used for project
purposes and are being properly managed
accordance with the project’s agreements.
ADB Grant No.0133-CAM/Component
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1: PFMRD
Example of FMR
ADB Grant No.0133-CAM/Component 1: PFMRD 6
Example of FMR (cont’d)
ADB Grant No.0133-CAM/Component 1: PFMRD 7
Internal Financial Management Reports
Imprest/Special Account reconciliation.
The following reports,
together with the Accumulated project expenditures by
project’s month-end category.
trial balance, must be Statement of loan disbursement and
prepared and status of category balance.
submitted to
MEF-DIC: Accumulated disbursements by category.
Accumulated contracts awarded by category.
The formats of all of the above forms are shown in Section 19 of the FMM.
ADB Grant No.0133-CAM/Component 1: PFMRD 8
Internal Financial Management Reports
• Annual Budgets are based on the project annual work
and procurement plans. Regular financial management
reports must be prepared showing actual financial
performance compared to budget, and the variations to
budgets.
• Variations to plans, when analysed and reported,
enable management to monitor progress and make
decisions on project implementation and related issues.
• Analysis of variations to budgets should include:
identification of the reasons for deviations;
implications of the variations; and
forecasts of the estimated revenue and expenditure
based on the actual financial performance to date.
ADB Grant No.0133-CAM/Component 1: PFMRD 9
Internal Financial Management Reports
• Reports may also be required to monitor compliance
with the financial policies and procedures of the project.
Examples include:
List of Outstanding Advances (yet to be liquidated)
Outstanding Withdrawal Applications
ADB Grant No.0133-CAM/Component 1: PFMRD 10
Example of Bank reconciliation
Balance per bank statement, 30/09/05 $1,112.30
Add: Cheques paid in, recorded in the cash book, but not yet 208.20
credited to the account by bank
Less: Cheques paid by the company but not yet presented to the (425.35)
bank for settlement
Corrected ending balance, 30/09/05 895.15 When the
reconciliation is
Balance per cash book, 30/09/05 $805.15 complete, these
Add: Correction of undercast amounts should be
90.00 the same
Corrected ending balance, 30/09/05 895.15
ADB Grant No.0133-CAM/Component 1: PFMRD 11
Example Project Disb. by Category
ADB Grant No.0133-CAM/Component 1: PFMRD 12
External Financial Management Reports
EAs/IAs are required to submit financial management
reports each quarter of the financial year within
45 days for the World Bank and 30 days for the ADB
after the end of the quarter.
The Financial Management Reports that are required
to be submitted will be agreed by the ADB/WB
and other donors with the EAs/IAs during project
appraisal and negotiation.
The requirements will be set out in the project
agreements.
ADB Grant No.0133-CAM/Component 1: PFMRD 13
Annual Financial Statements
Responsibility for the Financial Statements
• The EA/IA and Project Management are responsible
for preparing and issuing the annual financial
statements for the project.
Principles of Financial Reporting
• The following fundamental principles must apply to
all interim and annual financial statements on
projects issued by the Government (as the
borrower).............
ADB Grant No.0133-CAM/Component 1: PFMRD 14
Annual Financial Statements:
fundamental principles
• Disclosure of full accountability for all funds of the
Government, ADB/WB, and other donors.
• Compliance with loan covenants and ADB/WB requirements
for project management.
• Adequate disclosure of all material information.
• A fair presentation in all material aspects of the financial
performance and status of the project, and where applicable
of the EA.
• A clear statement on the accounting policies and standards
adopted in preparing the financial statements. The format of
the financial statements of the project must be agreed
between the ADB/WB and EA/IA.
ADB Grant No.0133-CAM/Component 1: PFMRD 15
Record Management
Content
Security and
Safe Keeping
Overview Project file
of financial
records
ADB Grant No.0133-CAM/Component
ADB Grant No.0133-CAM/Component 1:
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1:PFMRD
PFMRD
Overview
• It is the responsibility of the EA /IA and the project
management team to ensure that there is proper record
management and security of information for projects.
The records management policies, systems and
procedures should be defined in the project’s
implementation manuals.
• In particular, the records management for financial and
procurements records must be clearly documented in
the respective Procurement and Finance Manuals of
the project.
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Project File
• A Project File is required to be maintained by the
project management responsible for the project in a
safe and secure location.
• This is a permanent file and the project manager is
responsible for ensuring its continued currency,
relevance and security.
ADB Grant No.0133-CAM/Component
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Project File (cont’d)
A project file must contain:
• all information gathered during fact-finding, appraisal
and supervision of a project.
• This material is required to provide staff and
management with continuous access to regularly
updated information related to a project, its background,
and on the executing agency and various institutions of
government whose decisions are likely to have an impact
on its performance during implementation and
subsequent operation of the project.
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Project File (cont’d)
• A project file must contain:
• all key data including maps of the project area(s),
organization structures of government, including the
various agencies involved in the project; details of
original and amended economic and financial policy
decisions which would affect the project and the EAs; the
assumptions and basic calculations used for financial
analysis, for financial performance indicators and for
design of financial covenants.
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Project File (cont’d)
• A project file must contain:
• copies of all computing software applications used in
compiling data, including basic programming data and
macros for software such as MS Excel which may be used
to develop project-specific programs and analyses.
• The back up files are to be stored in a location separate
from the storage of the original files.
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Project File (cont’d)
• A project file must contain:
For purposes of disbursement records and supporting
documents, copies of contracts, suppliers’ invoices,
statements of accounts, official receipts must be stored
in fire-proof cabinets in a safe location.
These must be retained for at least two years from the
completion of the last audit of the project by external
auditors.
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Security and Safe Keeping of financial records
• In accordance with the Cambodian general practice,
financial records are required to be kept at least 10
years.
• All relevant documents such as contracts, financial
reports, bank documents
• business registration and licenses must be kept in a safe
place or fireproof cabinets.
• The Head of the EA is responsible for ensuring that all
records pertaining to the Project upon its completion
must be kept in a safe and secure place.
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Security and Safe Keeping of financial records
(cont’d)
Contracts and Agreements:
• Must be readily available in agency’s place of operation.
Originals must be filed in fireproof cabinets.
Payment Vouchers and Supporting documents:
• Must be filed in a separate binder numerically by month
and year.
• Payment Vouchers must be filed separately from Receipt
Vouchers.
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1: PFMRD
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Security and Safe Keeping of financial records
(cont’d)
• Vendor Invoices/Purchase Orders and other documents:
These documents should be attached to the payment
vouchers and filed accordingly.
• Official Receipts and Bank Receipt Journals:
Must be filed in separate files in receipt number order by
month and year.
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Security and Safe Keeping of financial records
(cont’d)
• Advance Requests:
Must be filed in the advances folder with separate sections
for outstanding advances and acquitted (liquidated)
advances.
• Bank Account Authorised Signatories:
Original signature documents must be held in fireproof
safe, with control over access and copying.
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Security and Safe Keeping of financial records
(cont’d)
• Bank Statements and Reconciliations: Must be filed in
date order with separate files for each bank account.
Must be held securely in fireproof location.
• Financial Management Reports: Must be filed in date
order.
• Annual Financial Statements and Audit Reports: Original
signed statements and audit reports must be held
securely in fireproof safe.
ADB Grant No.0133-CAM/Component
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Security and Safe Keeping of financial records
(cont’d)
• Bank Statements and Reconciliations: Must be filed in
date order with separate files for each bank account.
Must be held securely in fireproof location.
• Financial Management Reports: Must be filed in date
order.
• Annual Financial Statements and Audit Reports: Original
signed statements and audit reports must be held
securely in fireproof safe.
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Internal Audit
• Regrettably at the present time no decentralized or de-
concentrated project has a functioning internal audit set
up. It is therefore imperative that priority be accorded to
setting up satisfactory internal auditing arrangements for
all decentralized and de-concentrated projects in the
Kingdom of Cambodia.
• The Audit Law, promulgated by Royal Decree No.
CS/RKM/1300/10 (10 March 2000), requires all line
Ministries responsible for implementing externally
assisted projects to establish an independent internal
audit unit. This unit must be adequately staffed with
qualified and experienced staff.
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1: PFMRD
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Internal Audit (cont’d)
• As part of the financial management arrangements for
the project, EAs/IAs should ensure that the organization’s
Internal Audit Unit carries out regular reviews of the
internal control processes, systems, and procedures of
the project, and that the audit findings are reported to
the Head of the EA/IA, the Project Management, and the
MEF.
• The internal audit findings and reports must also be
made available to the National Audit Authority (NAA),
and external auditors of the project.
ADB Grant No.0133-CAM/Component
1: PFMRD
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Internal Audit (cont’d)
The Internal Auditors should work closely with the Project
Management Team/EAs/IAs, to support and ensure that
project’s operations are carried out in accordance with
the relevant agreements, and are transparent, fair,
cost efficient, and effective
The Project Management Team/EAs/IAs should agree the
objectives, scope and frequency of audits with the Internal
Auditors
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Internal Audit (cont’d)
• The Internal Auditor must report to the highest level of
the EA/IA Management.
• In the project context the Internal Auditor should report
to the Head of the EA/IA and to the Project Director.
• With regards to internal audits, the Cambodian law on
Audit requires that all Ministries dealing with externally
assisted projects must have an internal audit unit.
Internal audit is a key element of the organizational
system of internal controls.
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Scope of Audit
All central and provincial operations/activities of the
project
• Funds (donor and counterparts funds) are being used in
accordance with Loan/Credit/Grant Agreements and only
for the purposes of the project.
• Goods and services are being procured in accordance
with the relevant ADB/WB or other donors procurement
guidelines and Government regulations.
• Review the adequacy and effectiveness of internal
controls and make recommendations for improving
systems and tools.
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Scope of Audit (Cont’d)
All central and provincial operations/activities of the
project
• Carry out regular review and monitoring of financial
management and procurement functions, to ensure
compliance with the relevant policies, procedures and
practices and appropriateness of system of the project.
• Verify payments for provincial and commune activities to
ensure appropriateness of documents and transaction.
• Undertake random visits to assess the adherence of the
established procedures at all levels, particularly provincial
and commune level and to ensure physical existence of
project assets and results.
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1: PFMRD
Scope of Audit (Cont’d)
All central and provincial operations/activities of the
project
• Review eligibility and appropriateness of the project
expenditures incurred at the provincial and commune
levels as well as to provide basic technical services (as
required) for the proper recording and maintenance of
project accounts at that level.
• Randomly review procurement transactions to ensure
procurement transactions have been procured in
accordance with the applicable procedures, the deliveries
of goods, works and services are in accordance with
contract quantities and quality.
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Scope of Audit (Cont’d)
All central and provincial operations/activities of the
project
• There is proper control and safeguarding of cash and
portable assets.
• Compliance with the Financial Management Manual and
its supplements, and also compliance with all the
Regulations on Financial Management for Use with
ADB/WB and other Donor Funded Projects.
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Scope of Audit (Cont’d)
All central and provincial operations/activities of the
project
• Review of the fixed assets procured, including verification
through physical checks of inventoryand ascertain
whether the vehicles and other equipment are
appropriately identified as being funded under ADB/WB
assistance, such as project logo on vehicles. Also, to
ascertain whether such assets are being utilized in
accordance with the relevant Loan/Credit/Grant
Agreement.
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External or Independent Audit
• These audits must be carried out by independent auditors, to
an acceptable standard by auditors acceptable to the
ADB/WB.
• With regards to standards, ADB/WB will normally only accept
the International Standard of auditing (ISA) developed by the
IFAC or the INTOSAI standards.
• WB/ADB always requires that the external auditors prepare a
management letter and a copy of this must be submitted to
the ADB/WB together with the Audited Financial Statements.
• The method of selection of External auditors are also covered
in this section.
• Sample Terms of reference both for Audit of an EA and for
Projects accounts only are provided in ADB/WB Guidelines .
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External or Independents Audit (cont’d)
An independent opinion formed on the financial
statements
An audit includes:
Assessing whether accounting and internal
control systems are adequate
Determining whether adequate documentation
has been maintained
Confirming that expenditures submitted to
ADB/WB are eligible for financing and
identifying any ineligible expenditures
Examining compliance with loan covenants and
other ADB/WB project management
requirementsADB Grant No.0133-CAM/Component
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Audit Selection and Appointment
Although borrowers are responsible for auditor selection,
appointment and performance …… auditors must be
acceptable to ADB/WB
ADB/WB will ask borrowers to remove unacceptable
restrictions, or otherwise arrange for an acceptable audit
to be carried out
ADB/WB wishes to be informed by a borrower of an
ongoing or proposed appointment of an auditor, who
should meet required standards in terms of
independence, experience and competence. More
specifically, ADB/WB will indicate the acceptability of an
of a No.0133-CAM/Component
auditor in the formADB Grant“no objection”
1: PFMRD
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Auditor Engagement
Auditors should be :
Impartial and independent
Well-established and reputable
Able to demonstrate experience in auditing similar
entities or projects
Audit work should be assigned to personnel who have
suitable professional and technical training and proficiency
ADB/WB requires that auditor appointments be made in a
timely manner …
… and prefers to review a list of auditors and indicate
those who may not meet our criteria
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Acceptability of Auditors
ADB/WB expects auditors to act independently …
… but where this is just not possible, we expect auditors to
distance themselves from decision making and
management
Auditors must be able to commence work at project start-up
ADB/WB will accept government auditors for revenue-
earning projects on the basis of a capacity review
Borrowers should monitor auditor performance
Auditor appointmentsGrant No.0133-CAM/Componentsuitable period
ADB
should be for a
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Auditor Terms of Reference (TOR)
The TOR prepared for each audit must be acceptable to
ADB/WB The TOR should not restrict auditor
independence or limit their ability to meet other obligations
A Management Letter is always required
To clarify expectations, ADB/WB recommends that
contracts or audit engagement letters be prepared
ADB/WB requires government auditors to be independent,
competent and to have suitable capacity consequently,
ADB/WB may sometimes request audits to be conducted
by private auditors
ADB Grant No.0133-CAM/Component
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Audit Reports
Contents of Auditor‟s Report (ISA 700) :
Title
Addressee
Introductory paragraph: identification of the financial
statements audited / statement of management and
auditor responsibilities
Scope paragraph: Nature of an audit / Reference to
auditing standards / Description of work performed
Opinion paragraph containing expression of opinion on the
financial statements
Also, Date of Report / Auditor‟s address / Auditor‟s
signature
ADB Grant No.0133-CAM/Component
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Audit Reports
Unmodified Modified
No effect Effect on
on opinion opinion
Emphasis of matter
Limitation on Disagreement
scope
Slide 45
Basic Unqualified Report
Title
Addressee
INDEPENDENT AUDITOR'S REPORT
(APPROPRIATE ADDRESSEE)
Report on the Financial Statements
We have audited the accompanying financial statements
of ABC Company, which comprise the balance sheet as
at December 31, 20X1, and the income statement,
statement of changes in equity and cash flow statement
for the year then ended, and a summary of the significant
accounting policies and other explanatory notes.
Introductory Financial
paragraph statements
audited
Slide 46
Basic Unqualified Report (cont’d)
Equivalent obtained is sufficient
We believe that the audit evidence we haveterms
and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements give a true and fair view of
paragraph
("or present fairly, in all material respects,") the financial position of
Opinion
ABC Company as of December 31, 20X1, and of its financial
performance and cash flows for the year then ended in accordance
with International Financial Reporting Standards.
Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor's report will vary
depending on the nature of the auditor's other reporting
responsibilities.]
AUDITOR
Date: Auditor‟s
Address: signature
Slide 47
Modified Auditors’ Reports
Matters that Matters that
do not affect do affect the
the auditor’s auditor’s
opinion opinion
Emphasis of matter Qualified opinion
Disclaimer of opinion
Adverse opinion
Slide 48
Matters that do affect the opinion
MATERIAL PERVASIVE
Limitation Qualified
„Except for‟ Disclaimer
on scope
Qualified
Disagreement Adverse
„Except for‟
Slide 49
Reports to management
•Primary purpose
– to inform management of weaknesses in systems
•Must state
– only covers weaknesses that have come to
auditor’s attention during audit – other weaknesses
may exist
– only for use by management
Slide 50
Presenting control weaknesses
Present system ( Weakness)
During the course of our work we discovered that it was the
practice of the stores to order certain goods form X Co orally
without preparing either a purchase requisition or purchase
order.
Implication
There is therefore the possibility of liabilities being set up for
unauthorised items and at a non-competitive price.
Recommendation
We recommend that the buying department should be
responsible for such orders and, if they are placed orally, an official
order should be raised as confirmation.
Slide 51
Example of Audit report
Slide 52
Example of Audit report
Slide 53
