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This section is a general overview designed to provide support and guidance
to program officers and their supervisors on an essential control: monitoring.
It is aims to clarify when and how the audit function can support the proper
management and administration of transfer programs. Consult with your local
audit professionals to obtain more detailed guidance related to this section.
Most of what is said about risk management in Section 7 applies to this
section.
A transfer agreement implies that public funds will go to individuals, groups
or organizations. Departments are accountable for the proper handling of these
funds by their employees and their proper use by the recipient. Effective
monitoring by program officers can cover the latter. Audits can provide
assurance on both.
Although all audits must follow basic standards, there are two basic levels
of assurance that auditors can provide in their reports and the depth and scope
of their investigations may vary from engagement to engagement.
- A higher, although not absolute, level of assurance is provided by
designing procedures so that in the internal auditor's professional
judgment, the risk of inappropriate conclusion is reduced to a lower level
through procedures such as inspection, observation, enquiry, confirmation,
computation, analysis and discussions. This translates into higher costs and
more time required to complete an audit.
- A more moderate level of assurance is provided by designing procedures so
that, in the internal auditor's professional judgement, the risk of an
inappropriate conclusion is reduced to a more moderate level through
procedures that are normally limited to enquiry, analysis and discussion.
9.1.1 Assessing program management
With regards to grants, contributions or other types of transfer programs,
the main role of audits is to provide an opinion on the program's management
and, eventually, make recommendations for improvement. This is done by
objectively examining evidence and independently assessing management control
framework and practices. Auditors can also assess risk management and practices,
information used for decision making, and reporting practices.
With unconditional transfers, such as grants, audit is limited to the
recipient's selection, approval process and eligibility. With conditional
transfers such as contributions, the audit should also examine the recipient's
respect of the agreement's terms and conditions and of the milestones as
specified in the agreement.
Although audits can be conducted on individual contribution projects and
recipients under certain circumstances, they should not replace regular
financial and operational monitoring. Both, the audit of recipients as well as
financial and operational monitoring, are responsibilities of program
management.
Essentially, the audit of a conditional or unconditional transfer program
systematically assesses the program's management and control framework. More
specifically, the auditors will determine whether:
- the essential policies and guidelines that must be complied with, the
procedures that must be followed, the quality of work, operational
efficiency and effectiveness, and the expected output and program outcome
have been clearly defined and communicated;
- the indicators covering the above, such as error rates, cost per unit and
speed of processing, are in place;
- management and staff have proper knowledge and skills to perform their
duties;
- essential administrative, financial and operational controls are in place
and are effective; and
- program managers receive timely, reliable and complete information on
program management and administration.
9.2.1 General
Strictly from a process point of view, the monitoring and the auditing of
individual contribution agreements have a lot in common. In both cases, the
objective is to ensure that the agreement's terms and conditions are respected
and the expenses claimed are eligible and allowable.
The main differences are the depth, coverage, impartiality and the adherence
by auditors to strict professional standards. For that reason, the word
"audit" should be reserved for engagements conducted by auditors.
Monitoring is generally conducted by the program officer responsible for the
project; consequently, it only covers the recipient's activities. In contrast,
an audit will generally review the activities of both the project officer and
the recipient. When the monitoring is conducted by the officer responsible for
the project, this person may not have the same degree of impartiality as an
independent auditor. Finally, whether auditors are providing a higher or more
moderate level of assurance, they must adhere to strict audit standards that may
not be justified in an operational or financial monitoring exercise.
9.2.2 Monitoring by program officers
Program officers are expected to monitor regularly the progress and
activities of recipients of contributions or other conditional transfers.
Monitoring is a crucial element of a transfer program control framework.
Monitoring can be operational and/or financial. In the first case, it
involves conducting interviews and reviewing documents to ensure that the
recipient meets and continues to meet the terms and conditions and reaches the
milestones specified in the contribution agreement. In the second case, the
monitoring officer will examine claims to ensure that costs and expenses claimed
for reimbursement correspond to the eligible costs and expenditures listed in
the agreement and do not exceed the maximum authorized for each category. The
officer will examine supporting evidence of cost and spending, such as invoices
and payrolls, to ensure that they have actually been incurred during the period
for which the claim is made and are directly related to the agreement. If the
applicant has an obligation to contribute in kind or financially to the project,
this should be monitored as well.
9.2.3 Audit of individual transfer agreements
Audits for individual transfer agreements can be conducted at the two levels
discussed above: higher and more moderate. In the first case, the auditors will
generally spend several days on-site reviewing and analysing the beneficiary's
financial and operational records to determine if all the agreement's terms and
conditions have been met. In the second case, the auditors may limit their
review to one or two areas, such as quality of service or purchase of equipment,
or to a few selected financial claims presented by the recipient.
- Attest audits are a particular type of audit that usually fall into the
high level of assurance category. They are generally conducted by
"external" auditors who apply strict financial audit criteria to
provide an opinion on the financial statements related to the agreement.
This opinion, when favourable, is generally summarized in a sentence such as
"the financial statements present fairly, in all material respects, the
financial position of ...(the recipient)...at...(date)." In general,
these audits will not cover the appropriateness of expenses or their
compliance with the agreement's terms and conditions.
- Forensic audits are essentially high-assurance audits that follow specific
rules and criteria to gather facts and evidence to ensure the findings and
conclusions would meet the requirements of a court of justice in case of
judicial proceedings. Forensic audits are generally restricted to situations
where fraud is suspected.
Unconditional transfer agreements such as grants do not require monitoring
since there are no conditions to be met after the payment, but managers should
ensure adequate control over the selection, approval and payment process. Grant
agreements can be audited mainly to ensure the recipients meet the applicable
eligibility criteria.
A transfer agreement may stipulate that the recipient will in turn sign
sub-agreements with one or more non-governmental organizations to deliver the
funds and reach the milestones stipulated in the first agreement, called the
master agreement. In master agreements, the department must have the right to
monitor and audit the recipient. The right to audit the ultimate recipient
should also be included in the sub-agreements whenever practical.
Even though the department retains the right to monitor and audit the
ultimate recipient, it should not necessarily engage in these activities unless
there are compelling reasons to do so, such as an increase in the risk level or
the recipient's failure to exercise due diligence. Whenever possible, the
responsibility for monitoring and auditing the ultimate recipient should be left
with the recipient who remains accountable for the sub-agreement's terms and
conditions.
The recipient should demonstrate to the departmental project officer's
satisfaction that a management and control framework has been put in place to
ensure the ultimate recipient respects the sub-agreement's terms and conditions.
The recipient should manage sub-agreements with the same diligence and
responsibility that the department expects for its agreement.
However, the department's internal audit group may be asked to audit the
recipient to provide assurance that this is the case. That would require access
to the books, records and/or premises of the ultimate recipient and/or the
beneficiaries.
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Best Practices Annex-A checklist has been developed by Western
Economique Diversification (WD) for audit and evaluation file review.
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