INTERNATIONAL BALKAN UNIVERSITY

Ivan IGNJATOV, PhD

CSA, CFF, CFE, CMC, ToT, ISO 27001/37001/9001
Assistant General IPA Auditor
Audit objectives:

 Auditors organize and perform different type of audits

(S/A, A/O, F/A) in order to verify:

 Effective and efficient functioning of the established

internal control system

 Reliability of the financial information in the Annual

Financial Statements

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Internal controls system:

 Includes a set of rules, policies, and procedures an

organization implements to provide direction, increase
efficiency and strengthen adherence to policies.

 The internal control structure of a company consists of

the policies and procedures established to provide
reasonable assurance that specific entity objectives will
be achieved.

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System Audits
(effectiveness and efficiency of the MCSS)

 System audits represent test of the controls in all the

bodies that form a system in order to gain sufficient
evidence on existence and operating effectiveness of the
MCSS and their compliance with the underlying legal
requirements
(i.e. accreditation criteria, Law, Regulation, MoP)
System Audits
(effectiveness and efficiency of the MCSS)

 During the system audits:

 tests of fulfillment of the internal control requirements are

performed, as well as

 tests of compliance of controls with the foreseen working

procedures.

 Depending on the risk assessment approach, all internal

control requirements or selected ones can be tested.

100% audit test not recommended – use sampling

 System Audits
(effectiveness and efficiency of the MCSS)

 The overall objective of the system audits is to give an

opinion on:

 the conformity of the MCSS with the any other legal

agreements and Regulations;

 whether the MCSS – designed to contribute to the

production of reliable statements of expenditure, and
therefore to help to ensure, inter alia, the legality and
regularity of the transactions underlying those statements
– were operated effectively (and efficiently);
System Audits
(effectiveness and efficiency of the MCSS)

 Performed through use of standard audit techniques:

• Interviews,
• Working papers,
• Checklists,
• Questionnaires,
• Reconciliation,
• Confirmations,
• Clarifications,
• Re-performance, etc. 7
System Audits
(effectiveness and efficiency of the MCSS)

 Working paper serves as the single most important tool

during the performance of system audits. Made for each
process/area/body, and composed of:

• Basic information
• Description of tests (found in the Ckeck List)
• Description of design and situation/status identified
• Conclusion, referenced with criteria (law, regulation, MoP)
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System Audits
(effectiveness and efficiency of the MCSS)

 A separate conclusion is provided for each process

based on:

 findings identified during the tests of design, and

operating effectiveness on one side, and

 deficiencies identified during the tests of controls.

System Audits
(effectiveness and efficiency of the MCSS)

 The conclusion is made in such a way to place each

process in one of the four categories on:

 Each audited area / process

 Each audited body

 The assessment of the MCSS, for the annual reporting

purposes
Audit of operation (legality and regularity)

 The objectives of the audits of operations are to verify that:

 the operation meets the selection criteria and has been

implemented in accordance with the approval decision
and fulfils any applicable conditions concerning its
functionality and use or the objectives to be attained;
 the expenditure declared corresponds to the accounting
records and supporting documents held by the
beneficiary;
 the expenditure declared by the beneficiary is in
compliance with rules, regulations;
Audit of operation (legality and regularity)
 The audit trail recorded - actually exists in practice

 the appropriate mechanisms are in place to ensure the

maintenance of an adequate, updated and sufficient audit
trail.
 Audits of operations are performed on a specific
programme or several programmes,

 Main instrument for establishing the error rate.

 Performed usually after system audits.

Audit of operation (legality and regularity)

 Programmes to be audited for legality and regularity of

expenditure are identified during the annual risk
assessment excercise.

 The exact operations (contracts) to be audited are

determined at the audit engagement planning stage.

 Sampling approach: statistical or non-statistical

 Contracts for which interim and final payments have been

declared („real expenditure”).
 Audit of operation (legality and regularity)

 Results from the S/A are the main principle as well as the first
step in establishing the sample for A/O.
 The exact sample size is also affected by auditors’
professional judgement
(example for EU funds)
Assurance Recommended % of Recommended % of
Category
obtained operations declared expenditure

1 High 5% 10% or more

2 Medium-high 10% 20% or more
3 Medium-low 20% 30% or more

4 Low 30% 40% or more

Audit of operation (legality and regularity)
 Substantive testing, reconciliation, clarifications, …
 Checklist:
 Understanding of operation,

 Compliance with regulations,

 Public procurement,

 Audit trail,
 Reconciliations (invoices, payment claims, recoveries,
Request for funds from donors (EC), Declaration of
Expenditure, project objectives),
 Irregularities and errors

 Cross referenced (to evidence, audit findings, etc)

Approach to auditing Accounting information

 Accounting evidence is subject to audit in the

framework of the system audit and audit of operations.

 The main aim is providing reasonable assurance that

accounting records and financial status reports,
statements of expenditure and other relevant financial
statements relating to the operations are reliable and
present fairly the financial position, results of
operations and cash flow.
System audit - accounting

 During the system audit Auditor performs test of controls

in the process of accounting where he evaluates the
operating effectiveness of controls in preventing or
detecting and correcting material misstatements.

 The focus of the auditor is on the key controls

respectively whether they are operating as it is
prescribed in the respective procedure
Audit of Operation

• During the A/O all operations/ projects for which is

declared expenditure shall be comprised in the population
for sample.

• Auditor performs substantive analytical procedures and

test of details of transactions, account balances,
expenditure, contracts etc.

• Auditor verifies the existence of the proper audit trail.

 CASE STUDY

WHICH ARE THE MOST COMMON

WEAKNESSES IN ACCOUNTING PROCESS

(group discussion)
Weaknesses / Risks in Accounting process

• Username / Password Policy (sharing / not changing

regularly);

• Inappropriate segregation of duties;

• Untimely entering data in the accounting system (MIS)

• Recording of accounting events and transactions in excel

sheets allows changing the data and making corrections
which are not visible;

• Lack of audit trail for any corrections (authorization,

time of correction,…)
Weaknesses / Risks in Accounting process

• Four eyes principle not followed;

• Accounting system does not have automatic control

if letter is entered instead of number (“o” instead “0”)

• The Journal and the General Ledger do not generate

reports directly/ automatically from Accounting
Sysytem;

• The accounting procedure for recording data are not in

accordance with manuals of Procedures (MoP).
Location of Errors:

It is not the duty of the auditor to identify the errors

but

in the process of verifying accounts,

he may discover the errors in the accounts
Audit objectives:

The following objectives are supplementary to the main

objective of auditing

 Detection and prevention of errors:

Errors are mistakes committed unintentionally because

of ignorance, carelessness.
Audit objectives:

 Errors are of many types:

 Errors of Omission: These are the errors which arise

when transaction is recorded in the books of accounts
either partially or not recorded at all.

 Errors of Commission: When incorrect entries are

made in the books of accounts either wholly or partially.
(wrong entries, wrong calculations)
Audit objectives:

 Compensating Errors: when two/more mistakes are

committed which counter balances each other.
(if the amount is wrongly debited by 100 less and wrongly
credited by 100)

 Error of Principle: These are the errors committed by

not properly following the accounting principles. These
arise mainly due to the lack of knowledge of accounting.

 Clerical Errors: A clerical error is one which arises on

account of ignorance, carelessness, etc.
ADVANTAGES OF AUDIT:

Errors, irregularities and possible frauds are discovered

and corrected quickly.

The chances of “possible fraud” are reduced.

The workers will be careful in their work.

Continuous audits acts as a valuable morale check on

the staff.

Final audit becomes easier and faster.

It increases the efficiency and accuracy in the accounts.

 ADVANTAGES OF AUDIT:

 Audited accounts are detected as an authentic record of

transaction.

 Increases the morale of the staff and thus it prevents frauds

and errors.

 Because of his expertise the auditor may advise on various

matters to his clients. (audit recommendations)
 ADVANTAGES OF AUDIT:

 An auditor acts as a trustee of his shareholders / he

safeguards their financial interest.

 Audit Report helps in management decision making

process.

 Auditing safeguards the interest of owners, creditors,

investors, and workers.
Auditing and Accounting - REMEMBER

 Accounting is continuous; focuses on accurately

recording and preparing all financial transactions and
statements.

 Auditing is independent; focuses on critical evaluation

of financial statements and providing an unbiased opinion
on their accuracy.
Auditing and Accounting - REMEMBER

 However, they also complement each other in some

respects.

- Accountants can learn from professional knowledge of an

auditor; and implement the best practices in their
accounting work.

- Auditor may get help from the accountants for a thorough

knowledge of the accounting system of an organization
and technical aspects of the business.
Thank you for your
attention!!!
Q&A