audit instructions for partner organisations

8/6/2019 Audit Instructions for Partner Organisations

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Audit Instructionsfor Partner Organisations

/Valid since 1 January 2005(revised in June 2007)

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Contents

The audit instructions consist of five sections:

1. Introduction

2. Auditor and audit requirements

3. Member Organisation requirements

4. Partner Organisation requirements

5. Appendices

5.1 Audit Certificate

5.2 Audit Memorandum

5.3 Checklist, “Assessment of Partner Organisation's financial management”

5.4 Checklist, “Assessment of auditor”

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1. Introduction

1.1 Purpose

Prepared by the Swedish Mission Council (SMC), these audit instructions are intended for use by Partner Organisations with which SMC’s Member Organisations cooperate on an internationalbasis and to which SMC provides funds from Sida, the Swedish International DevelopmentCooperation Agency. These instructions specify the requirements and guidelines for the audit of Sida-sourced funds provided by SMC’s Member Organisations, as stipulated in the agreementsentered into with the respective Partner Organisations. These auditing instructions are based onSida’s auditing guidelines for organisations and their auditors. The audit instructions areapplicable for granted funds as of 2005 regarding development, information and humanitarian

efforts, as well as for volunteer and trainee grants.

1.2 Definitions

Member Organisation is the term for the organisations which are members of SMC. SMC, whichfurther distributes Sida funds to these Member Organisations, is responsible for signing co-operation agreements with these Member Organisations before the granted funds can bereleased.

The Member Organisations cooperate with Partner Organisations in their international work. AMember Organisation which further distributes Sida funds to a Partner Organisation is obliged to

sign a co-operation agreement with the Partner Organisation, for each individual contribution,before the granted funds can be released.

A Progress Report must be compiled annually for all current initiatives, financed with Sida funds, which have been completed but for which a Final Report has not yet been submitted. TheProgress Report briefly outlines the initiative as it relates to the agreed budget/plan of activities.

The Progress Report must be drawn up using SMC’s template for Progress Reports and theMember Organisation must provide the report at the date stipulated in the agreement with theMember Organisation. Audit Certificates and Audit Memoranda are not usually required forProgress Reports. However, there are two exceptions to this, namely

1. In the case of initiatives running for a period of longer than three years, an AuditCertificate is required to accompany the Progress Report every three years

2. In the case of an extension, in which the initiative will run for a total period of longerthan three years. The audit should then take place after two years in order to avoid aninterruption to the initiative. SMC will require an Audit Certificate and AuditMemorandum before the extension can be approved.

A Final Report is the concluding report for initiatives financed with Sida funds. The Final Reportpresents the initiative as set out in SMC’s template for Final Reports. The Final Report, with

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appended Audit Certificate and Audit Memorandum for grants of ≥ TSEK 200 shall be providedto SMC by the date stipulated in the agreement with the Member Organisation.

An Auditor’s Report is a statement issued by an auditor regarding compliance with the statutes orapplicable laws regulating an organisation. An Auditor’s Report is provided for the audit of theoperations of the entire organisation. In an auditor's report, the auditor makes a statement on

whether the annual report, in all material aspects, has been prepared in accordance withapplicable law and thereby presents a true and fair view of the organisation’s profit and financialposition according to the International Financial Reporting Standards. The auditor also makes astatement concerning whether discharge from liability can be approved, that is to say, whetherany member of the organisation’s management has taken any action or been responsible for any negligence that can result in liability for damages to the organisation.

An Audit Certificate (see Appendix 5.1) is a certificate issued by an auditor providing information

in excess of statutory requirements. The Certificate includes a description of the object and scopeof the audit as well as the auditor’s opinion. An Audit Certificate is to be included together withall Final Reports and certain Progress Reports (see the section on Progress Reports, above),regardless of the size of the grant.

For all grants ≥ TSEK 200, an Audit Memorandum (see Appendix 5.2) shall be included with theFinal Report. The Audit Memorandum sets out the content and scope of the audit, the results of the review of the audit of the Partner Organisation, plus important observations which theauditor is to report to the Partner Organisation’s board of directors. In the event that the PartnerOrganisation in turn passes on the grant to a Partner Organisation further down the line, the

Audit Memorandum shall also include the result of the review of the Partner Organisation’s

internal control regarding the audit further down the line, as well as the Partner Organisation’sassessment of its Partner Organisation’s financial management.

AGREEMENTDrawn up betweenMember and Partner

Organisation for eachindividual grant

Member Organisation

Partner Organisation

PROGRESS REPORTSubmitted in accordance

with agreement withMember Organisation

Audit Certificate and Audit Memorandumincluded

- every third year- upon extension

Grant < TSEK 200 Audit Certificate included

Grant > TSEK 200 Audit Certificate and Audit memorandum included

CO-OPERATION AGREEMENTDrawn up between SMCand Member Organisation

FINAL REPORTSubmitted according to

agreement with MemberOrganisation

Member Organisation

SMC

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2. Auditor and audit requirements

2.1 What is an audit?

An audit is comprised of the review and assessment of the accounting and administration of theoperations from a position of professional scepticism and results in an independent opinionregarding such assessment. The aim of the audit is to allow the auditor to submit an Auditor’sReport. The auditor shall review the annual report, book-keeping and administration of management in order to be able to make a statement in the Auditor’s Report.

In the Auditor’s Report, the auditor makes a statement regarding the financial reporting for theentire organisation and regarding the administration of the board of directors and management.

In the Audit Certificate, the auditor makes a statement regarding a specific financial report oraudit assignment with a particular purpose. In the Audit Certificate, in accordance with Appendix5.1, the auditor makes a statement following the conclusion of the audit of a Progress or FinalReport on whether the Progress/Final Report has been prepared in accordance with the relevantagreement and submits an opinion on whether the report should be accepted.

The Auditor shall take those measures in the audit that he or she, in the circumstances, deemsnecessary in order to submit an Audit Report/Certificate. The auditor obtains audit evidence,

which refers to the information the auditor gathers in order to arrive at the conclusions forming the basis of the Auditor’s Report/Certificate. This audit evidence can consist of accounting records and other source documents. Audit sampling means that the auditor conducts random

testing and reviews less than 100 % of the items included in a statement. In this manner, theauditor can evaluate and reach conclusions regarding the entire documentation from which thesample was taken. A professionally sceptical attitude means that the auditor critically andinquiringly assesses the validity of the obtained evidence. The sufficiency and appropriateness of the evidence is of great significance. Sufficiency is measured by the quantity of evidence, whileappropriateness is measured by the quality of the evidence.

The auditor shall observe generally accepted auditing standards and the ethical rules governing auditors’ professional responsibilities. The ethical rules include independence, integrity,objectivity, professional competence and care, confidentiality and professional conduct.

The auditor must be independent and shall conduct his or her work with impartiality andobjectivity. Those relying on an auditor must be able to feel confident that the auditor does nothave other interests. The auditor shall carefully observe the disqualification rules and pay attention to various threats against independence. These can include, for example, that theauditor has financial or other interests in the review object, that the auditor has strong personalrelations with the review object or that the auditor risks being affected by outside influences.

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2.2 Materiality and risk

The principles of materiality and risk are to guide the auditor’s determination of the focus andscope of the audit. The auditor’s work must target areas in which there may be a risk of materialerror.

Auditing rests on well thought-out planning. The basis for carefully-prepared planning is that theauditor obtains good knowledge of the organisation, its activities and the quality of the internalcontrol of the organisation's management. All organisations are different and shall be reviewedon the basis of their specific circumstances. The audit starts with the auditor gathering an amountof internal and external information regarding, for example, the organisation and its management,operations, financial situation, competencies, financial functions and IT. On the basis of thiscollected information, the auditor then plans the review, so that it can be directed towards thoseareas in which the auditor deems that the risk of material errors, together with the risk of thesegoing unnoticed by the internal control system, is greatest. The degree of materiality depends onthe size of the entry or error and on the circumstances surrounding the omission or error.

2.3 Generally accepted auditing standards

In Sweden, there exists a framework legislation enjoining auditors to observe generally acceptedauditing standards in their audits. Within this framework, it is the duty of the Swedishaccountants’ organisations and the Supervisory Board of Public Accountants to further developgenerally accepted standards and provide closer guidance through the issuance of recommendations and statements.

The international trend has been for individual countries to become increasingly dependent upon,and increasingly influenced by, one another, a phenomenon that also applies to the area of auditing. The need for financial information to be presented in a uniform manner is increasing.

The international accountants’ organisation IFAC (International Federation of Accountants) andits audit committee IAASB (International Auditing and Assurance Standards Board) have thestated aim of having their audit standard ISA become the generally-accepted standard for auditing across the entire world.

2.4 Internal control

Internal control is defined as “a process by which the Partner Organisation’s board of directors, management and other personnel establish, with reasonable certainty, that the Partner Organisation’s objectives are being met in the following areas:

• The operation’s fitness as regards purpose and efficiency

• The reliability of the financial reports

• Compliance with applicable laws and regulations”

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Internal control refers to the guidelines and procedures introduced by management with theintention of contributing to the high quality of the accounting records as well as preventing theoccurrence of errors and impropriety. Good internal control promotes security and efficiency and

ensures that operating resources are used in the manner that the board of directors andmanagement of the organisation intend. Among other things, the following all contribute to goodinternal control.

• That the assignment of responsibilities is well-considered. One individual should not, forexample, be able to perform, report and approve a transaction. All staff shall be aware of

which duties and responsibilities they have, for example via approval order and work andprocedural descriptions.

• That reporting and governance systems are appropriate. Accounting records shall beadapted for the operations and provide the right information at the right time.

• That various controls are built into systems and procedures. Controls are intended toensure completeness (that all transactions are included), accuracy (that all transactions arerecorded in the correct manner) and that only approved transactions are fulfilled.

• That the organisation’s management follows up and analyses the results of operations onan ongoing basis.

2.5 Requirement that an audit be executed by a qualified auditor

The size of the grant determines the requirements of the audit. The audit must be undertaken by a qualified auditor in the case of grants of SEK 200,000 and above. This limit refers to the agreed

upon amount of the grant, not the amount which is actually distributed. If the PartnerOrganisation receives several grants, each grant must be assessed individually. For grants below SEK 200,000, the audit may be undertaken by an elected auditor. However, there is nothing tostop the individual Member Organisation implementing more stringent requirements as regardsthe audit of its own operations. Neither is there anything to stop a Member Organisation fromimplementing more stringent requirements on a Partner Organisation.

In Sweden the term “qualified auditor ” refers to a certified/authorised public accountant orapproved public accountant. For auditing of operations in Partner Organisations, “qualifiedauditor” refers to a level of expertise equivalent to a Swedish qualified auditor. In order todetermine the level of expertise, an assessment is required of the auditor’s local licence or

certification, as well as an assessment of the auditor’s training and experience. See Appendix 5:4.

2.6 Auditor and audit requirements

2.6.1 The auditor’s responsibilities regarding grants of less than SEK 200,000 are

• to issue an Audit Certificate (see Appendix 5.1) regarding the Partner Organisation’sProgress/Final Report on the basis of his or her audit, according to Point 4.1.2, in

which the auditor issues a statement on the Progress/Final Report.

• to sign the Final Report’s financial records

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The auditor’s responsibilities regarding grants greater than SEK 200,000 are

• to issue an Audit Certificate (see Appendix 5.1) regarding the Partner Organisation’s

Progress/Final Report on the basis of his or her audit, according to point 4.1.1. In the Audit Certificate, the auditor makes a statement regarding

o the Progress/Final Report’s conformity with the agreement

o the Progress/Final Report’s financial statements in their entirety

o the part of the activity report that can be related to the financial statements

If the Partner Organisation passes on the grant to Partner Organisations furtherdown the line, the Audit Certificate shall also describe

o the Partner Organisation’s control of auditing further down the line

• to issue an Audit Memorandum (see Appendix 5.2) regarding the Partner Organisation’sProgress/Final Report. In the Audit Memorandum, the auditor makes a statementregarding

o the emphasis and scope of the audit

o the result of the review of the audit of the Partner Organisation

o material findings within the operations to which the report refers

If the Partner Organisation passes on the grant to Partner Organisations furtherdown the line, the Audit Memorandum shall also describe

o the result of the review of the Partner Organisation’s internal control regarding auditing further down the line, as well as

o the Partner Organisation’s assessment of its Partner Organisation’s financialmanagement

• to sign the Final Report’s financial records

2.6.3 The auditor's responsibilities regarding trainee and volunteer grants

Trainee grants shall be audited after the end of the trainee period and volunteer grants shall beaudited after the end of every approved volunteer period. In normal cases, volunteer grants

with a duration of 28 months are approved. Following this, grants can be approved foradditional 12 month periods. Consequently, audits take place after 28 months and then on anannual basis.

The auditing of trainee and volunteer grants shall be revised and reported in the same manneras other initiatives, according to Points 2.6.1 and 2.6.2 above.

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3. Member Organisation requirements

Member Organisations are responsible for

• communicating SMC’s auditing requirements to Partner Organisations

• assessing Partner Organisations’ internal control and financial management

• checking auditing further down the line. This means that the Member Organisation mustensure, to a reasonable degree, that the audit does not include any significant deficienciesat any stage.

3.1 The Member Organisations’ responsibility for the assessment of

materiality and risk regarding the Partner OrganisationIn order to ensure that auditing further down the line complies with SMC’s requirements, theMember Organisation should perform an assessment of materiality and risk with reference to thePartner Organisation. This assessment should be performed in connection with thecommencement of the initiative. The following points should be observed.

1. Assessment of the Partner Organisation’s internal control. See Point 2.4

2. Assessment of the Partner Organisation’s financial management, with reference to (see Appendix 5.3):

a. Current recording b. Accounting system

c. Internal control and administration

d. Legal entity

e. Personnel

3. Assessment of the Partner Organisation’s auditor. See Appendix 5.4.

4. Assessment of materiality and risk and subsequent adaptation of procedures andmonitoring. The larger the risk is deemed to be, the greater the resources the MemberOrganisation should invest in monitoring and checking the Partner Organisation.

Assessment can be undertaken with regard to:

a. The size of the grant . The larger the amount of the grant, the greater the resourcesthe Member Organisation should invest in monitoring and checking the PartnerOrganisation.

b. The risk that errors or irregularities could occur . The greater the degree to which theMember Organisation believes that there may be a risk of errors or irregularities,the greater the resources the Member Organisation should invest in monitoring and assessing the Partner Organisation.

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c. Risk of corruption . Certain of the environments in which Partner Organisationsoperate are inclined towards corruption, which implies that the risk of irregularities is relatively large. It is important that the Partner Organisation’s

auditor takes this into account in executing the audit.

d. The risk that the audit does not meet the stipulated requirements . An extra focus should beplaced on countries in which the standard of auditing is difficult to establish oroften low.

e. New partners .

5. During assessment and in connection with Member Organisations’ visits to PartnerOrganisations, monitoring of the Partner Organisation’s financial management andauditors should be included as an obvious element.

6. Checking that Audit Certificates are included with Progress and Final Reports, in

accordance with agreements.7. Checking that Audit Memoranda are included with Progress and Final Reports, in

accordance with agreements.

8. Assessment of Audit Certificates and Audit Memoranda. Reading and analysis.

9. Annual assessments of Partner Organisations’ complete annual reports and AuditReports.

Checks performed should be documented.

3.2 The Member Organisation’s responsibility for assessment of the Partner

Organisation's financial management and auditor

Responsibility for the assessment of the Partner Organisation’s financial management and itsauditors rests with the Member Organisation. The Member Organisation’s control of the PartnerOrganisation’s financial management and auditors should be executed before any agreement issigned and should also be included as a natural part of any visits to the Partner Organisation. It isof the greatest importance that the auditor be active during the entire period of the initiative.

Two checklists have been prepared as aids to assessment. See Appendices 5.3 and 5.4. It isincumbent upon the Member Organisation to ensure that staff has sufficient financialcompetence to carry out the assessments referred to above.

3.3 Member Organisation’s responsibility regarding core funding

In the case of organisational aid, or “core funding”, it is often impossible to differentiate betweenindividual grants. Here, the Member Organisation should demand the Partner Organisation’scomplete annual financial statement and accompanying Auditor’s Report, i.e. a report on theentire organisation’s operations and finances. The requirements and guidelines of theseinstructions should be observed, where applicable. The size of the grant from the MemberOrganisation should be clearly discernable in the financial reporting. Furthermore, financialreporting should take place on the basis of the various budget items stated in the application.

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3.4 Member organisations’ responsibilities in co-financed projects

In the case of co-financed projects with a number of donors, the Member Organisation shouldstrive to co-ordinate the reporting and auditing requirements with the other donors. This meansthat the Member Organisation must be flexible in its requirements to a certain extent. Co-ordination may relate to reporting intervals, the determination of the reports to be audited andthe layout of the Audit Certificate, for example. However, the requirements and guidelines of these instructions should be considered. The size of the grant from the Member Organisationshould be clearly discernable in the financial reporting. Furthermore, financial reporting shouldtake place on the basis of the various budget items stated in the application.

3.5 Information that the Member Organisation shall disclose to the PartnerOrganisation

These audit instructions refer to generally accepted auditing standards and international practice. They have also been translated into French, Spanish and Portuguese. It is the responsibility of theMember Organisation to provide the “Audit Instructions for Partner Organisations” furtherdown the line, as well as to ensure that the Partner Organisation has, in turn, provided them to itsauditor and that the auditor has understood the substance of the instructions.

3.6 Requirement for unbroken chain of Audit Certificates and Audit Memoranda for grants > TSEK 200

The Member Organisation is responsible for ensuring the existence of an unbroken chain of Audit Certificates and Audit Memoranda for grants ≥ TSEK 200. An unbroken chain of AuditCertificates is required for grants in amounts less than TSEK 200.

Swedish Mission Council

Audit Certificate with Audit Memorandum

Grant

Member Organisation


Grant



Grant




4. Partner Organisation requirements

4.1 Information that the Partner Organisation shall disclose to its auditor

4.1.1 For grants ≥ TSEK 200

• Progress and Final Reports regarding agreed grants ≥ TSEK 200 shall be audited by aqualified auditor.

• The auditor is to provide an Audit Certificate regarding the Progress and Final Reports which the Partner Organisation has submitted, as agreed.

• The Partner Organisation’s auditor is to receive guidelines as to the content of the Audit

Certificate, see Appendix 5.1.

• The Partner Organisation’s auditor is to receive guidelines as to the content of the AuditMemorandum, see Appendix 5.2.

• The Partner Organisation’s auditor shall submit an Audit Memorandum regarding

o the scope of the audit,

o the result of the review of the audit of the Partner Organisation

o significant findings within the operations referred to by the report.

If the Partner Organisation passes on the grant to Partner Organisations furtherdown the line, the Audit Memorandum shall also describe

o the result of the review of the Partner Organisation’s internal control regarding auditing further down the line, as well as

o the Partner Organisation's assessment of its Partner Organisation’s financialmanagement

• In addition to the audit which the auditor carries out in line with generally acceptedauditing standards, the auditor must specifically assess that

a. the Partner Organisation’s Progress and Final Reports to the Member Organisationcomply with the cooperation agreement between the Member Organisation and thePartner Organisation and have been prepared in accordance with SMC’s template forFinal Reports

b. the grant funds are kept separately in a separate bank account

c. the financial reporting in the Final Report is carried out in accordance with anapproved budget and contains explanations of any deviations

d. explanations of any budget deviations are not contradicted in other portions of thereport or by other information of which the auditor is aware

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e. the reporting against budget agrees with the accounts and consequently provides atrue and fair view

f. the final financial accounting on page 1 of the Final Report is complete and correctg. the Partner Organisation has internal provisions for procurement that correspond

with Sida’s “Procurement provisions for private organisations” as well as verifying that the organisation complies with these in its procurement

h. The Final Report has been signed by an authorised individual within the PartnerOrganisation

As the Partner Organisation provides the grant to Partner Organisations further downthe line, the auditor shall also control that

i. the Partner Organisation has signed agreements with Partner Organisations further

down the linej. the conditions of the agreement dealing with auditing are complied with and that the

agreement between the Partner Organisation and Partner Organisations further downthe line include those terms and conditions that shall be further communicated to thePartner Organisations according to the Member Organisation’s agreement with SMC

4.1.2 For grants < TSEK 200

• The Progress and Final Reports regarding agreed grants of less than SEK 200,000 may beaudited by an elected auditor

•

The auditor is to provide an Audit Certificate regarding the Progress and Final Reports which the Partner Organisation has submitted, as agreed

• The Partner Organisation’s auditor is to receive guidelines as to the content of the AuditCertificate, see Appendix 5.1.

• The elected auditor shall perform all audit steps according to points 4.1.1 a-j above.

• However, in order to complete the audit, several detailed audit steps must be executed. As support for elected auditors, the checklist below describes the audit steps whichshould normally be included. Further steps may be necessary. The elected auditor shouldcheck that

a. the operations which the Member Organisation is reporting have actually been carried out

b. payment has been made to the Partner Organisation in accordance with thefinancial reporting

c. the Partner Organisation for an operation financed by SMC funds undertakesreliable asset management, and correct and complete accounting, and that allfinancial transactions are entered in the accounts on an ongoing basis

d. where appropriate, cash and bank balances agree with the amount entered inthe accounts

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audit instructions for partner organisations

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