ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1)

1. 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 Day 3: Oct. 27, 2010: Management Reports, Records, Internal and External Audit ADB Grant No.0133-CAM/Component 1: PFMRD

2. Day 3 Management Records, Internal and External Audit Content ADB Grant No.0133-CAM/Component 1: PFMRD

3. MANAGEMENT RECORDS ADB Grant No.0133-CAM/Component 1: PFMRD 3

4. Overview ADB Grant No.0133-CAM/Component 1: PFMRD 4

5. 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 1: PFMRD

6. Example of FMR ADB Grant No.0133-CAM/Component 1: PFMRD 6

7. Example of FMR (cont’d) ADB Grant No.0133-CAM/Component 1: PFMRD 7

8. Internal Financial Management Reports 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

9. 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

10. 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

11. Example of Bank reconciliation ADB Grant No.0133-CAM/Component 1: PFMRD 11

12. Example Project Disb. by Category ADB Grant No.0133-CAM/Component 1: PFMRD 12

13. 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

14. 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

15. 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

16. Record Management Content ADB Grant No.0133-CAM/Component 1: PFMRD ADB Grant No.0133-CAM/Component 1: PFMRD

17. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 17

18. 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 1: PFMRD 18

19. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 19

20. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 20

21. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 21

22. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 22

23. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 23

24. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 24

25. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 25

26. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 26

27. 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 1: PFMRD 27

28. 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 1: PFMRD 28

29. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 29

30. 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 30

31. 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 ADB Grant No.0133-CAM/Component 1: PFMRD 31

32. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 32

33. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 33

34. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 34

35. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 35

36. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 36

37. 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. ADB Grant No.0133-CAM/Component 1: PFMRD 37

38. 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 . ADB Grant No.0133-CAM/Component 1: PFMRD 38

39. 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 requirements ADB Grant No.0133-CAM/Component 1: PFMRD 39

40. 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 auditor in the form of a “no objection” ADB Grant No.0133-CAM/Component 1: PFMRD 40

41. 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 ADB Grant No.0133-CAM/Component 1: PFMRD 41

42. 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 appointments should be for a suitable period ADB Grant No.0133-CAM/Component 1: PFMRD 42

43. 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 1: PFMRD 43

44. 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 1: PFMRD 44

45. No effect on opinion Effect on opinion Emphasis of matter Limitation on scope Disagreement Audit Reports Unmodified Modified

46. Title Addressee Financial statements audited Introductory paragraph Basic Unqualified Report 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.

47. Equivalent terms Opinion paragraph Auditor’s signature Basic Unqualified Report (cont’d) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In our opinion, the financial statements give a true and fair view of ("or present fairly, in all material respects,") the financial position of 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: Address:

48. Modified Auditors’ Reports Matters that do not affect the auditor’s opinion Matters that do affect the auditor’s opinion Emphasis of matter • Qualified opinion • Disclaimer of opinion • Adverse opinion

49. Level Type Matters that do affect the opinion MATERIAL PERVASIVE Qualified‘Except for’ Limitation on scope Disclaimer Qualified‘Except for’ Disagreement Adverse

50. 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