Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 11 IV. AUDIT SCOPE The OAG has conducted an audit of the financial statements of the Municipality of Ferizaj as of and for the year ended 31 December 2007. The Municipality works under regulation of self government of Municipalities in Kosovo 2000/45 UNMIK Regulation no 2006/54, 2007/30 and the statute of Municipality. The primary audit objective was to enable the OAG to express an opinion on whether the Municipality’s financial statements, presented in Annex I, give a true and fair view of the revenues and expenses during the year ended 31 December 2007 in accordance with the International Public Sector Accounting Standards (IPSAS) for “Financial Reporting under the Cash Basis of Accounting.” The International Public Sector Accounting Standards Board of the International Federation of Accountants (IFAC) is responsible for issuing IPSAS. The accuracy and completeness of the financial statements and accompanying notes contained in Annex I are the responsibility of the Municipalities management. Our audit of the Municipality’s financial statements as of and for the year ending 31 December 2007 was conducted in accordance with international standards on auditing (ISA) issued by the International Auditing and Assurance Standards Board. The Board functions as an international standards setting body under the auspices of IFAC. The ISAs establish the international framework within which the OAG is to perform its work and covers matters such as general principles and responsibilities, risk assessments and responses to assessed risks, audit evidence, relying on the work of others, and audit conclusions and reporting. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 12 V. AUDIT OPINION Basis for Disclaimer opinion The summary of the significant issues identified through our audit procedures that led us toward disclaiming of our audit opinion is provided further within this section. Our findings and recommendations are discussed in full details in the Section VII: Key audit findings and recommendations. A. Accounting and financial reporting process 1. The Municipality’s financial statements provided in the Annex to this report are incomplete in terms of their form and content as prescribed by the relevant provisions established by the authorities. Therefore we were not able to obtain reasonable assurance over the completeness and hence regulatory compliance of the financial information provided in the Municipality’s financial statements as of and for the year ended 31 December 2007. 2. The amounts of municipality’s revenues for the year ended 31 December 2007 as reported in the financial statements are not reconciled with the related data provided from the Treasury Department of the Ministry of Economy and Finance. Therefore, we were not able to obtain reasonable assurance over the completeness and accuracy of the municipality’ revenues for the year ended 31 December 2007. 3. Furthermore, non-reconciled differences exist between the closing balance of unspent revenues as shown in the 2006 financial statements and the opening balance in 2007. As a result, we were unable to satisfy ourselves with the accuracy of the municipality’s financial records relating to the total funds available for the year ended 31 December 2007. 4. The municipality does not maintain separate register for its fixed assets. In addition there is no evidence of performing verification of physical existence of the assets as of 31 December 2007 and no reconciliation of municipality’s books to physical count has been made. Therefore, we were not able to satisfy ourselves with the completeness and accuracy of the municipality’s financial records related to its fixed assets; 5. The Municipality’s management has not performed revenue reconciliation between the data as accounted for in its system and those as disclosed in its annual financial statements. Hence, we were not able to obtain reasonable assurance over the completeness and accuracy of the municipality’ revenues for the year ended 31 December 2007; This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 13 B. Design and operating effectiveness of internal controls 6. Furthermore and based on our procedures we found that Municipality failed to establish effective procedures in its procurement department related to management of supply contracts, then payments to suppliers and keeping records for its outstanding liabilities toward the suppliers. As disclosed in more details in section VII, due to non-existence of such procedures, there is risk of over payment or failure to settle the contracted liabilities. 7. Based on the results of our audit procedures we found material weaknesses in design and operating effectiveness of the municipality’s internal controls particularly in respect of missing sufficient appropriate authorization process related to expenditures for vehicles fuel consumption, repairs and maintenance. Therefore we were not able to obtain reasonable assurance for the validity of such expenses recognized in the municipality’s financial statements for the year ended 31 December 2007. C. Compliance with laws and regulations 8. Following cases of non - compliance with the applicable laws and regulations, which are fully discussed further within the Section VII: Key audit findings and recommendations, are considered to be of particular significance: - non-compliance with the contracted terms and conditions; - tender procedures for procurement goods and services not in accordance with the rules and regulations; - own source revenues collected in cash, not deposited in bank Considering the above, various legal actions and claims may be asserted in the future and hence there is a risk of additional fines and penalties to be imposed against the municipality. At the date of issuance of this report the outcome of these matters cannot be determined with sufficient reliability and no adequate disclosures for contingent liabilities has been made in the financial statements for the year ended 31 December 2007. Disclaimer of opinion Due to the existence of multiple material uncertainties and significance of the matters discussed in the preceding paragraphs, we are not in the position to and we do not express an opinion on the Municipality’s financial statements in accordance with the IPSAS “Financial Reporting under the Cash Basis of Accounting” as of and for the year 31 December 2007. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 14 VI. AUDIT APPROACH Our audit of the Municipality’s financial statements for the year ending 31 December 2007 was conducted in accordance with International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board. The Board functions as an international standards setting body under the auspices of IFAC. The ISAs establish the international framework within which the OAG is to perform its work and covers matters such as general principles and responsibilities, risk assessments and responses to assessed risks, audit evidence, relying on the work of others, and audit conclusions and reporting. In order to fulfill our responsibilities, we: • Reviewed the Municipality’s financial statements against the approved budget for 2007; • Determined whether the Municipality’s financial statements were prepared in accordance with IPSAS “Financial Reporting under the Cash Basis of Accounting”; • Undertook extensive substantive testing of financial transactions; • Used a combination of judgment and random sampling to select transactions for testing; • Relied on a combination of interviews, analytical reviews, document reviews, and physical verification to assess the validity and propriety of financial transactions; Our findings and conclusions are based upon the documentation and other information and explanations provided to us during the course of our audit work. It is possible that additional information existed but was not provided to us and, if provided, might have altered our findings. With respect to the OAG’s audit opinion on the Municipality financial statement, the ISAs set out specific criteria that govern the type opinion that can be rendered. Audit opinions can be unqualified, qualified, adverse or a disclaimer of opinion. For example, the OAG may not be able to express an unqualified opinion when either of the following circumstances exist and, in the OAG’s judgment, the effect of the matter is or may be material to the financial statements: (a) There is a limitation on the scope of the auditor’s work; or (b) There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures. The circumstance described in (a) could lead to a qualified opinion or a disclaimer of opinion. The circumstances described in (b) could lead to a qualified opinion or an adverse opinion. A qualified opinion will generally be expressed when the OAG concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 15 limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A disclaimer of opinion will be expressed when the possible effect of a limitation on scope is so material and pervasive that the OAG has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements. An adverse opinion will be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the OAG concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 16 VII. KEY AUDIT FINDINGS AND RECOMMANDATIONS Our audit focused on reviewing the presentation and disclosures in the financial statements and performing substantive testing to confirm accuracy and validity of financial transaction. The following are the key audit findings and recommendations resulting from our audit of the Municipality financial statements. The Municipality if any are in Annex 2. A. Accounting and financial reporting process Finding # 1 The Municipality’s financial statements provided in the Annex to this report are incomplete in terms of their form and content as prescribed by the relevant provisions established by the authorities as such they are not in compliance with the requirements of Section 41: Final Report on the budget from the Law on Public financial management and accountability no. 2003/2, which prescribes the exact format and content of the Municipality’s financial statements. Recommendation We recommend to the Management of the municipality full implementation of the related provision in respect of the preparation of its annual financial statements. Finding # 2 Based on our examinations we identified that the regular reconciliation of revenues between data acquired from Ministry of Finance and Economy and those disclosed in municipality’s financial statements have not been performed. The differences noted in terms of sources of revenue data are as follows: 1. in Administration department difference is in the amount of EUR 2,509, 2. in Finance department difference is in the amount of EUR (28,664), 3. in Inspection department difference is in the amount of EUR 6,010, 4. in Economy department difference is in the amount of EUR 11,255, 5. in Geodesy and Cadastre department difference is in the amount of EUR 2,226, and 6. in Urbanization department difference in the amount of EUR 6,695. In addition there are un-reconciled differences between the reported revenues in the annual municipality report and revenues sub-ledgers in following Departments: 1. in Administration department difference is in the amount of EUR (3,679), 2. in Budget and Finance department difference is in the amount of EUR (28,664), 3. in Inspection department difference is in the amount of EUR (6,249), 4. in Economy department difference is in the amount of EUR 29,864, 5. in Geodesy and Cadastre difference is in the amount of EUR 2,226, and 6. in Urbanization department difference is in the amount of EUR 6,695. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 17 Recommendation We recommend to the management frequent reconciliation of its financial data. This will insure timely correction of possible mistakes in capturing and processing of the relevant financial transactions as well as valid and accurate financial information for the users of the municipality’s financial reports. Finding # 3 Based on the audit procedures performed, we identified that the accumulated unspent revenues from 2006, were incorrectly transferred from the previous year, leading to incorrectly stated total funds available for the current year. Difference in the amount of EUR 333,000 exists between the closing balance of unspent revenues in 2006 and the opening balance in 2007 Recommendation We recommend the Municipality to reconcile the transferred unspent revenues from the previous year with the transferred revenues from the current year. Finding # 4 Based on the audit procedures performed we identified that the reconciliation of revenue collected from traffic fines and court penalties between the municipality’s financial statements and those as recorded in the municipality’s accounting system was not exercised, so that there is difference between the above sources of information in the amount of EUR 719,000. Recommendation The Municipality should reconcile the revenues collected as of 31 December 2007 between the municipality’s financial statements and the municipality’s accounting evidence at least on a monthly basis. This will reduce the errors and differences for collections between departments. It will also help in obtaining more accurate future budget projections. Finding # 5 The municipality does not maintain separate register for its fixed assets. In addition there is no evidence of performing verification of physical existence of the assets as of 31 December 2007 and no reconciliation of municipality’s books to physical count has been made. Recommendation We recommend management to design and implement adequate procedures that would require: - Detailed property record for each fixed asset - Property identification number to be assigned and affixed to each asset - Capitalization policy under which disbursements less than a specified Euro amount would be expensed. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 18 In addition and as a minimum, a property ledger should contain the following information for each fixed asset: - Acquisition date - Location - Number assigned by the municipality (tag number) - Serial number - Description and function - Cost basis - Details of depreciation, including methods of computation for both tax and financial reporting purposes - Anticipated useful life - Maintenance cost subsequent to the date of acquisition - Date of disposal - Financing source - Expense voucher reference number (CPO #). Furthermore and in order to provide adequate safeguarding of its assets, the management of the municipality has to perform regular and at least on an annual basis, physical verification of all property items. Related accounting records have to be reconciled with the results of such physical counts. B. Design and operating effectiveness of internal control Finding #6 During our inspection of source documents into procurement department we found that the procurement officer could not provide us with accurate, updated information about details of procurement contractors, payments made to them as well as details of outstanding contracted liabilities broken down by supplier. Recommendation Procurement officer should keep sufficiently detailed records for procurements contracted, invoices received and paid during the year as well as outstanding amounts of liabilities per supplier. This will mitigate the risk of double payments or failure in settlement of contracted liabilities. Finding # 7 Based on our inspection of certain expenditures related to vehicles fuel consumption, repairs and maintenance, we found that the municipality lacks significantly in implementation of sufficient appropriate authorization procedures. The related source documents subject to our inspection did not contain evidence of approval for their eligibility from assigned authorized person. Furthermore, municipality does not maintain separate register for cars, fuel consumption, travel distances, mileage for each car. Finding # 8 Furthermore and based on our inspection of certain financial transactions in the geodesy department we were not provided with supporting source documents for the CPO no. 24070492 amounting EUR 1,000. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 19 Recommendation We recommend the management to strictly implement authorization of all source documents related to financial transactions by assigning of appropriate persons and complying with the requirement for proper segregation of duties. Furthermore, sufficient appropriate monitoring procedures have to be implemented which will assure adequate control over expenditures. C. Compliance with laws and regulations Finding # 9 By inspection of source documentation related to the tender procedure for building of road Talinovc i Muhaxhereve we found certain irregularities. The contracted work should have been completed on 92 days starting at least 7 days after signing the contract. However the contract was delayed for seven months and was completed on January 2008. According to the contract terms and conditions if works specified in the contract are not completed in the contracted terms than the OE will be charged with 0,01% per day of the contracted value. Based on our examinations, we found that penalties for the delay of the project have not been charged. Recommendation We recommend the Municipality’s management to strictly follow its contracted conditions and charge penalties for non-completion of the work on timely basis. Furthermore, the management should closely monitor the project implementation to ensure that the work is being accomplished as agreed. Finding # 10 By inspection of source evidence related to the procurement procedure for Infrastructure of Talinovc i Muhaxhereve amounting EUR 178,678 we found the following: - Wining bidder “Mali and Art” - Kacanik did not settled tax administration liabilities as required and list of equipment submitted for building purposes was dated from 2005. - Nevertheless, the rest six companies which participated on the tender were eliminated for the similar reasons. Owing to our findings as above we consider that according to the regulations, this tender must be canceled. Recommendation The Municipality should establish sufficient adequate control procedures for effective monitoring over the compliance with the applicable laws and regulations, especially the requirements of the Law on Public Procurement (PPL) 2003/17 Article 57.3 and 30A.4. Finding #11 Based on our inspection of own source revenues in the Health Department, we found that the collected participation from patients has not been deposited on bank’ account on a daily basis. Regulation No. 2003/17, section 13.3 and 13.4 I 13.5 require collected cash to be deposited in a bank within 2 days. This is trial version www.adultpdf.com Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 20 Recommendation We recommend the Municipality’s Management to deposit all cash collected from various services into a bank account within 2 days, as required under section 13.3 and 13.4 I 13.5 of the Regulation No. 2003/17 for adopting a Law on Public Financial Management and Responsibilities. This is trial version www.adultpdf.com . Financial Audit Municipality of Ferizaj for the year ended 31 December 2007 11 IV. AUDIT SCOPE The OAG has conducted an audit of the financial statements of the Municipality of Ferizaj. Municipality s financial statements as of and for the year ended 31 December 2007. 2. The amounts of municipality s revenues for the year ended 31 December 2007 as reported in the financial statements. Municipality of Ferizaj for the year ended 31 December 2007 14 VI. AUDIT APPROACH Our audit of the Municipality s financial statements for the year ending 31 December 2007 was conducted