1. Knowledge Management 1Introduction

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The Terms of Reference for Auditors

1.17.1The following sample Terms of Reference for Auditors (TOR) is an extract from Chapter 5: Financial Reporting and Auditing (pages 81 – 84) of the following OECD publication: Harmonising Donor Practices for Effective Aid Delivery, Good Practice Papers, A DAC Reference Document, OECD 2003 (see section 7.7, of this Chapter of these Guidelines).

Specimen Terms of Reference for External Auditors of Donor-supported

Projects and Sector Programmes

Audit responsibilities

This “Specimen Terms of Reference (TOR) for Donor-Supported Projects and Sector Programmes” is intended to provide guidance to the staff of governments and donors in agreeing terms of reference for donor-supported activities. It should not be seen as universally applicable to all donor-supported projects. Those components that are considered appropriate for a particular project should be selected, inappropriate items omitted, and additional matters included, where considered necessary.


The background section of the TOR should include a brief summary of government accounting and financial management practices. It should include a general description of the supervising agency (often a Ministry of the Government or Department within a Ministry) and the executing agency (often a department or division within a Ministry) and should include a statement of their economic goals. There should be a broad description of the project in the context of its contribution to achieving the goals of the executing agency. The auditor should understand the “purpose for which the funds are intended” in the context of project objectives as well as in terms of the specific budget for the project.

Financial statements of the executing agency that provide sufficient disclosure of the receipts and disbursements of the project and of relevant information in the notes to the financial statements should normally meet the needs of donors. Where financial statements do not provide this information, a separate special purpose financial statement with a special purpose audit report would be expected. This would normally take the form of a Cash Flow Statement, prepared on the cash basis of accounting. This TOR is directed to the audit of special purpose financial statements.

The executing agency

This section should contain a description of the executing agency including the physical address, phone numbers, fax numbers, web sites and general e-mail addresses. A summary of the financial management assessment of the project executing agency should be included, together with a reference that the full financial management assessment would be available to the auditor. Other details would include:

  • An organisation chart.

  • A list of senior officers together with their contact details.

  • A list of the contact persons responsible for accounting, financial management and internal audit together with phone numbers and email addresses.

  • A description of the project including the project budget by major expenditure categories and the sources of all funding for the project.

  • A statement that the project appraisal report (if applicable) would be available to the auditor should be included.

Accounting standards

This section should include a description of the accounting standards followed for the project and whether they are consistent with the government’s accounting standards. Any deviations from standard government accounting practices should be specified. Any deviations between the actual accounting standards applied and international practice as embodied in either International Accounting Standards (IAS) published by the International Accounting Standards Board or the draft International Public Sector Accounting Standards (IPSAS) on Cash Accounting published by the Public Sector Committee (PSC) of the International Federation of Accountants may also be described.

Reporting standards

The usual format of reporting for a non-revenue project is a Cash Flow Statement. The format of the accounting report should be provided. The format should include a list of funding sources to be reported separately as well as a list, agreed during the funding agreement negotiations, of the expenditure categories for reporting purposes.

The Cash Flow Statement format should normally include the current reporting period compared with the annual budget and accumulative figures from the commencement of the project compared with the total project budget.

The date by which the project accountants will prepare a draft Cash Flow Statement together with the agreed supporting schedules should be specified. Audited special purpose financial statements should be issued within about four to six months after the end of the fiscal period.

Available facilities

There should be a description of the nature and the location of all records belonging to the project. This list should specify those records kept at the executing agency’s headquarters and those that are located at other offices. If computers are used to record transactions relating to the project a description of the computer specifications needs to be provided together with a description of the operating software.

The TOR should state that the auditor would have full and complete access at any time to all records and documents (including books of account, legal agreements, minutes of committee meetings, bank records, invoices and contracts etc.) and all employees of the entity. The auditor should be advised that he/she has a right of access to banks and depositories, consultants, contractors and other persons or firms engaged by the programme/project management. If an auditor may not have unrestricted access to any records, person or location during the course of the audit, this restriction should be clearly defined, with reasons, in the TOR.

Audit scope

Scope of work

The scope of the audit should be sufficiently clear to properly define what is expected of the auditor but not in any way restrict the audit procedures or techniques the auditor may wish to use to form an opinion. It should specify at least the following:

  • A definition of the entity or the portion of an entity that is subject to audit.

  • The audit will be carried out in accordance with either ISA4 or INTOSAI5 auditing standards.

  • The audit period covered will include the current reporting period. Issues relevant for the accumulative reporting period (from inception of the project) will rely upon the audit work of previous auditors, if necessary through communication with them.

  • Sufficient audit evidence will be gathered to substantiate in all material respects the accuracy of the information contained in supporting schedules attached to the Cash Flow Statement.

  • If Statements of Expenditures (SOEs) were used to fund disbursements, the scope of the audit will include a sufficient sample of such disbursements to determine whether funds disbursed through SOEs were used for the purposes defined by the funding agreement.

  • If a special/imprest bank account is used in conjunction with the SOEs, the scope of the audit will include gathering sufficient evidence to determine that the balance indicated as being on hand in the records is represented by unencumbered cash in a bank account.

The TOR should require the auditor to state in the audit report if the audit was not in conformity with any of the above and indicate the alternative standards or procedures followed.

The audit report

The TOR should clearly indicate expected content of the auditor’s opinion. This would include at least the following:

  • That it is a special purpose report and its intended use.

  • Accounting standards that have been applied and indicate the effect of any deviations from those standards.

  • The audit standards that were applied (either INTOSAI standards, ISAs, or national standards that comply with one of these in all material respects.

  • The period covered by the opinion.

  • Whether the specified Cash Flow Statement and supporting schedules present fairly the cash receipts and disbursements for the project and that the funds were used for the purposes defined by the funding agreement(s).

This section should also indicate the due date for submission of a draft audit report and the signed audit report to the management of the project, as well as the due date for the submission of the signed audit report to the donors for compliance with the funding agreement.

Compliance with funding agreement covenants

Traditionally compliance with covenants referred to meeting technically defined financial targets, such as debt service coverage in revenue producing projects. Increasingly funding agreements of programme/projects which are not revenue earning contain specific performance targets. These are sometimes specified by a time bound action plan such as the date of the introduction of a double entry accounting system or implementation of a system of internal controls. In other cases there may be a broader action plan with specific dates to achieve a specific set of actions. In some cases funds releases are tied to meeting these targets. In other cases specific quantifiable targets such as the construction of specified numbers of rural health clinics or the provision of specific or “at least” numbers of inoculations against infectious diseases are covenanted. Some grant and loan covenants are too nebulous to be subject to audit.

The scope section of the TOR should clearly indicate whether the auditor is expected to issue an opinion on the implementing agency’s compliance with any specific covenants. This section should specifically state:

  • The auditor is not an arbitrator in any disagreements between the borrower and lender(s).

  • The covenant(s) for which an opinion will be issued, by a very specific reference to the funding agreement section(s) and paragraph number(s).

  • A copy of the funding agreement will be provided to the auditor.

  • Copies of all correspondence between the government and the funding agency/agencies relating to compliance, calculation of compliance or interpretation of definitions used in the covenants will be provided.

Management letter

The TOR should specify that the auditor will submit a management letter at the completion of the audit. Guidance should be provided regarding the topics/issues to be covered in the management letter. At least the following topics/issues should be included:

  • A general review of programme/project progress and timeliness in relation to progress milestones and the planned completion date, both of which should be stated in the programme/project document. This is not intended to address whether there has been compliance with specific covenants relating to specific performance criteria or outputs. However general compliance with broad covenants such as implementing the programme/project with economy and efficiency might be commented upon but not with the legal force of an audit opinion.

  • An assessment of the programme/project’s internal control system with equal emphasis on i) the effectiveness of the system in providing the programme/project management with useful and timely information for the proper management of the programme/project and ii) the general effectiveness of the internal control system in protecting the assets and resources of the programme/project.

  • A description of any specific internal control weaknesses noted in the financial management of the programme/project and the audit procedures followed to address or compensate for the weaknesses. Recommendations to resolve/eliminate the internal control weaknesses noted should be included.

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