Office of Audit and Investigations RBEC Regional Operations Managers Workshop Kiev, 16 October 2008

1. Office of Audit and InvestigationsRBEC Regional Operations Managers WorkshopKiev, 16 October 2008 NIM/NGO Audits - Basic Requirements Antoine Khoury, Deputy Director, Audit Maria Palermo, NIM/NGO Unit

2. NIM/NGO Audits and the UN Board of Auditors • Where UNDP transfers responsibility for managing UNDP resources to third parties, governments or NGOs, UNDP must receive assurance as to whether the resources are being properly used. • This assurance is achieved through monitoring and evaluation, of which the annual audit exercise is one important component. • The UN Board of Auditors carefully reviews the results of the annual audit exercise in order to establish and report to the Executive Board whether UNDP is obtaining sufficient assurance on the use of its resources. • An unfavorable assessment from the UN Board of Auditors could put at risk donors’ confidence and, ultimately, the level of contributions to UNDP.

3. Risk based approach to audit • Focus UNDP’s efforts and attention on higher risk areas and, at the same time, promote an improvement in the administration, quality and outcome of the NIM/NGO audit. • The better the outcome, quality and administration of the NIM/NGO audits in a given country office, the lower the number of awards that will need to be audited. • Risk model is based on an NIM/NGO audit risk rank that is determined by OAI and assigned to each country. The NIM/NGO risk rank is based on four quantitative factors and four qualitative factors as follows:

4. Risk based approach to audit(Cont’d.) Risk Factors • Quantitative • Net financial impact of the qualified audit opinions • Percentage of financial impact of qualifications over CDR amount • Result of assessment of NIM/NGO audit reports • Outstanding NIM/NGO advances over 180 days

5. Risk based approach to audit(Cont’d.) Risk Factors • Qualitative • Worldwide Governance Indicator – World Bank • Results of recent OAPR investigation • Result of assessment of NIM/NGO audit scope • Result of assessment of NIM/NGO audit exercise

6. Risk based approach to audit(Cont’d.) • Each of the factors mentioned above is assessed independently and assigned a value depending on the risk on a scale from 1 to 3. • The risk-based approach to NIM/NGO audits implies that the lower the NIM/NGO audit risk rank for a country office, the higher the threshold for the selection of awards to be audited in a given year and, consequently, the lower the number of awards that will need to be audited.

7. Risk based approach to audit(Cont’d.) The following are the thresholds for audit: • Low Risk $600,000 • Medium Risk $300,000 • High Risk $100,000

8. Country Offices - Responsibilities Country Offices must ensure the following: • Process for selection of NIM/NGO auditors is done well in advance of the annual audit exercise – e.g. November • Liaise with project management to provide necessary documentation and assistance to NIM auditors – January/February • Audit services are adequately provided as specified in the TOR • CDRs are duly signed by: the Implementing Partners and the country office and signed and stamped by the Auditors and attached to the audit reports • Ensure all audit reports quantify the net financial impact on the audit opinion page and clearly identify the reasons for the qualification

9. Country Offices – Responsibilities (Cont’d.) • Audit Reports and certified CDRs are submitted to OAPR by 30 April each year Note:New - - IFI audit reports must also be submitted by 30 April each year. • Certified Prior year Follow-up Action Plans to be submitted by 30 April each year • Current year Follow-up Action Plans to be submitted by 30 May each year

10. Specimen Terms of Reference (TOR) • Provideguidancefortheauditservicesrequiredforaudits of National implementation (NIM)/Non-Government Organizations (NGO) project awards • Explain the additional requirements in the audit services, as well as the areas to be covered in the Audit Report and the Management Letter.

11. Audit Services Required – Certification and Opinions • Auditorsmust: • Certify, sign and stamp • Express anopinion • Quantifythefinancialimpact in $ amounts • Indicatereason(s) forquantification Oneach of thefollowingstatements: • Statement of Expenditure (CDR) • Statement of Cash Position • Statement of Assets and Equipment

12. Audit Services Required – Risks and Risk Severity Auditors must indicate: Risks associated with each finding, and Categorize findings by risk severity, as follows:

13. Audit Services Required – Findings and Possible Causes Classification of Possible Causes of the audit findings:

14. Audit Report – Minimum Requirements • Auditor’s opinion • Indicate that it is a special purpose report and its intended use • Audit standards that were applied (ISA, international audit standards) • Period covered by the opinion • Scope limitation for transactions that are responsibility of UNDP or a UN agency and the amount • Whether the CDR for the period is adequately and fairly presented – opinion to be clear and quantified • Whether the Statement of Assets and Equipment is fairly and adequately presented • Whether the Statement of Cash Position reported by the project is fairly and adequately presented

15. Standard Scope of Audit The scope must cover the overall management of the project’s implementation, monitoring and supervision, by covering the following areas: • Human resources • Financial management • Procurement • Asset Management • Project progress • Record keeping systems • Management Structure

16. Audit opinions - Definitions Note: For audit opinions other than “Unqualified”, the auditors must indicate the total amount of the financial impact on the expenditures

17. Review of NIM/NGO audits Areas and Issues • Review of project progress and timeliness in relation to progress milestones and planned completion date • Assessment of the project’s internal control system • Description of any specific internal control weaknesses – recommendations to resolve/eliminate should be included • Categorization of audit findings by risk severity • Classification of possible causes of the audit findings • Comments on the implementation status of previous audits recommendations • Management comments/response – from project and CO management

18. OAI Review Process - Objectives IMPLEMENTING PARTNERS • Enhance Accountability and transparency • Assurance on control and governance structure • Planning tool NIM/NGO AUDITORS UNDP/ COUNTRY OFFICE MANAGEMENT UNDP SENIORMANAGEMENT UN BOARD OF AUDIT Regional Directors / Resident Representatives OAI - REGIONAL AUDIT CENTERS (RAC)

19. NIM/NGO Audits Review Process Structure of OAI Review - Reports to COs B C D A Audit opinions and net financial impact Assessment of the results of audit observations Assessment of the quality of auditors’ work Assessment of Country Office performance in organizing the NIM/NGO audits

20. NIM/NGO Audits Review Process Structure of OAI Review - Reports to COs (Cont’d.) • The review being conducted by OAI covers four areas: • “Net financial Impact” - this measures the net financial impact of the qualifications rendered by the auditors as a percentage of the CDRs expenditure. The net financial impact is the sum of all over and understatements of expenditure for each award. Once the net financial impact of each award is obtained, these amounts are consolidated to arrive at a net figure (over or understatement) for the country office. These net amounts are then assessed in absolute terms (i.e. ignoring the sign of the financial impact (overstatement or understatement). Above 2% of the CDR expenditure is rated as “Unsatisfactory”, between 1% and 2% is rated as “Partially Satisfactory” and below 1% is “Satisfactory”. • “Audit outcome” – OAI reviews the audit findings contained in the audit reports, including the risks involved, their severity, and their possible impact on the overall management and implementation of NIM/NGO project awards. This aspect pertains to the NIM/NGO project management. • “Audit scope” – OAI reviews the adequacy of audit coverage in NGO/NEX audit reports based on the minimum requirements set out in the terms of reference given to NIM/NGO auditors. This aspect pertains to the local external auditor of the NIM/NGO project award. • “Audit administration” – OAI reviews how the NGO/NEX audit exercise was performed. This aspect pertains to the country office management which administered the audit exercise.

21. NIM/NGO Audits Review Process – Ratings

22. Results of Assessment of FY 2007 Audits

23. Results of Assessment of FY 2007 Audits (Cont’d)

24. Results of Assessment of FY 2007 Audits (Cont’d)

25. Results of Assessment of FY 2007 Audits (Cont’d) • Financial management issues include: (a) differences in balances between bank accounts and cash books (b) payments made without appropriate approval (c) weakness of financial management systems to monitor and manage project expenditures (d) differences in expenditures between project records, Atlas and combined delivery reports. • Issues regarding project progress and rate of delivery include: (a) absence of project reports (b) incorrect classification of projects in NIM/NGO/DEX (c) non-compliance with execution deadlines (d) lack of management and steering committee meetings to monitor and evaluate the project progress.

26. Harmonized Approach to Cash Transfers (HACT) • The HACT audit approach may be applied for those offices who have fully implemented HACT for the 12 months of the year under audit. A country office is considered to have fully implemented HACT if all of the following five criteria are satisfied: • A macro-assessment has been duly completed in accordance with the HACT Guidelines; • A 100 % micro-assessment has been duly completed in accordance with the HACT Guidelines; • There is agreement on HACT implementation with the government either in the CPAPs or through exchange of letters; 4) An audit plan of implementing partners has been properly developed and implementation mechanisms agreed upon; and

27. Harmonized Approach to Cash Transfers (HACT) (Cont’d.) • 5) HACT has been in full effect for all of the year under audit, i.e. 12 months. • Country offices who satisfy the above five criteria should provide OAPR with the following : a) A written advice that HACT has been fully implemented for the 12 months of the year under audit and that the HACT audit approach will be implemented in lieu of the NGO/NEX audit approach described in this document; and b) A copy of the documents to support that HACT has been fully implemented for the 12 months of the year under audit: (i) a copy of the macro-assessment report; (ii) a copy of the micro-assessment report(s); (iii) a copy of a written agreement with the Government to implement HACT; and (iv) a copy of the audit plan that has been developed.

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