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TABLE OF CONTENTS Chapter 1: Purpose of Audit Guidelines .......................................................... 1 BACKGROUND.............................................................................................................................................. 1APPLICABILITY ............................................................................................................................................. 1RESPONSIBILITIES OF USAID MISSIONS AND THE OIG .................................................................................. 2AUDIT COSTS AND SANCTIONS ..................................................................................................................... 3COMPLIANCE WITH AUDITING STANDARDS..................................................................................................... 3MULTIPLE AGREEMENTS AND SUBRECIPIENTS ............................................................................................... 4 Chapter 2: Selection of Independent Auditors ................................................. 6 AUDIT FIRMS ............................................................................................................................................... 6GOVERNMENT SUPREME AUDIT INSTITUTIONS............................................................................................... 7 Chapter 3: Audit Objectives ........................................................................... 10 AUDIT OF USAID FUNDS............................................................................................................................ 10REVIEW OF COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE ...................................................... 11AUDIT OF GENERAL PURPOSE FINANCIAL STATEMENTS ............................................................................... 11 Chapter 4: Audit Scope .................................................................................. 12 PRE-AUDIT STEPS ..................................................................................................................................... 12FUND ACCOUNTABILITY STATEMENT ........................................................................................................... 12COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE ........................................................................ 16AGREEMENT WITH LIFE-OF-PROJECT COST SHARING/COUNTERPART CONTRIBUTION BUDGET ...................... 16AGREEMENT WITH ANNUAL COST SHARING/COUNTERPART CONTRIBUTION BUDGET .................................... 17INTERNAL CONTROL ................................................................................................................................... 17COMPLIANCE WITH AGREEMENT TERMS AND APPLICABLE LAWS AND REGULATIONS ..................................... 19FOLLOW-UP ON PRIOR AUDIT RECOMMENDATIONS ..................................................................................... 21GENERAL PURPOSE FINANCIAL STATEMENTS .............................................................................................. 22INDIRECT COST RATES............................................................................................................................... 22OTHER AUDIT RESPONSIBILITIES ................................................................................................................ 22REFERENCE MATERIALS............................................................................................................................. 23EXAMPLE 4.1 - ILLUSTRATIVE MANAGEMENT REPRESENTATION LETTER ....................................................... 27 Chapter 5: Audit Reports................................................................................ 29 Chapter 6: Illustrative Fund Accountability Statement, Cost-SharingSchedules, and Schedule of Computation of Indirect Cost Rate .................. 33 EXAMPLE 6.1 - ILLUSTRATIVE FUND ACCOUNTABILITY STATEMENT ............................................................... 33EXAMPLE 6.2.A - ILLUSTRATIVE COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE FOR AGREEMENTS WITH LIFE-OF-PROJECT COST SHARING/COUNTERPART CONTRIBUTIONBUDGETS THAT HAVE NOT YET ENDED ...................................................................................................... 36EXAMPLE 6.2.B - ILLUSTRATIVE COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE FOR CLOSE-OUT AUDITS OF AWARDS WITH LIFE-OF-PROJECT COST SHARING/COUNTERPART CONTRIBUTION BUDGETS, AND AUDITS OF AWARDS WITH ANNUAL COST SHARING/COUNTERPARTCONTRIBUTION BUDGETS ........................................................................................................................... 37EXAMPLE 6.3 - ILLUSTRATIVE SCHEDULE OF COMPUTATION OF INDIRECT COST RATE ................................... 39 Chapter 7: Illustrative Reports........................................................................ 40 EXAMPLE 7.1.A - ILLUSTRATIVE AUDITOR'S REPORT ON A FUND ACCOUNTABILITY STATEMENTWITH AN UNQUALIFIED OPINION ................................................................................................................. 40 EXAMPLE 7.1.B - ILLUSTRATIVE AUDITOR'S REPORT ON A FUND ACCOUNTABILITY STATEMENTWITH A QUALIFIED OPINION ........................................................................................................................ 42EXAMPLE 7.2.A - ILLUSTRATIVE AUDITOR'S REPORT ON INTERNAL CONTROL WITH NO SIGNIFICANTDEFICIENCIES NOTED ................................................................................................................................ 44EXAMPLE 7.2.B - ILLUSTRATIVE AUDITOR'S REPORT ON INTERNAL CONTROL WITH SIGNIFICANTDEFICIENCIES NOTED ................................................................................................................................ 45EXAMPLE 7.3.A - ILLUSTRATIVE AUDITOR'S REPORT ON COMPLIANCE WITH NO MATERIALNONCOMPLIANCE NOTED ........................................................................................................................... 47EXAMPLE 7.3.B - ILLUSTRATIVE AUDITOR'S REPORT ON COMPLIANCE WITH MATERIALNONCOMPLIANCE NOTED ........................................................................................................................... 49EXAMPLE 7.4 – ILLUSTRATIVE REPORT ON SCHEDULE OF COMPUTATION OF INDIRECT COST RATE ............... 51EXAMPLE 7.5 – ILLUSTRATIVE UNQUALIFIED OPINION ON THE GENERAL PURPOSE FINANCIALSTATEMENTS OF THE RECIPIENT ORGANIZATION AS A WHOLE...................................................................... 52EXAMPLE 7.6.A - ILLUSTRATIVE AUDITOR’S REPORT ON THE COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE FOR AGREEMENTS WITH LIFE-OF-PROJECT COST SHARING/COUNTERPART CONTRIBUTION BUDGETS THAT HAVE NOT YET ENDED, WITH NO SIGNIFICANT ISSUES NOTED ..................... 53EXAMPLE 7.6.B - ILLUSTRATIVE AUDITOR’S REPORT ON THE COST SHARING/COUNTERPARTCONTRIBUTIONS SCHEDULE FOR AGREEMENTS WITH LIFE-OF-PROJECT COST SHARING/COUNTERPARTCONTRIBUTION BUDGETS THAT HAVE NOT YET ENDED, WITH SIGNIFICANT ISSUES NOTED ........................... 54EXAMPLE 7.6.C - ILLUSTRATIVE AUDITOR’S REPORT ON THE COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE FOR CLOSE-OUT AUDITS OF AGREEMENTS WITH LIFE-OF-PROJECT COST SHARING/COUNTERPART CONTRIBUTION BUDGETS, AND AUDITS OF AGREEMENTS WITH ANNUALCOST SHARING/COUNTERPART CONTRIBUTION BUDGETS, WITH NO SIGNIFICANT ISSUES NOTED .................. 56EXAMPLE 7.6.D - ILLUSTRATIVE AUDITOR’S REPORT ON THE COST SHARING/COUNTERPART CONTRIBUTIONS SCHEDULE FOR CLOSE-OUT AUDITS OF AGREEMENTS WITH LIFE-OF-PROJECT COST SHARING/COUNTERPART CONTRIBUTION BUDGETS, AND AUDITS OF AGREEMENTS WITHANNUAL COST SHARING/COUNTERPART CONTRIBUTION BUDGETS, WITH SIGNIFICANT ISSUES NOTED .......... 57 Chapter 8: Outline of an Illustrative Statement of Work for RecipientContracted Audits ........................................................................................... 59 Chapter 9: Model Audit Agreement with Supreme Audit Institutions ............ 61 Chapter 10: Request for a Technical Proposal for Qualification of PublicAccounting Firms............................................................................................ 63 Chapter 11: USAID Inspector General Contact Information ......................... 68 RIG OFFICES ADDRESSES AND PHONE NUMBERS ....................................................................................... 68WASHINGTON OIG ADDRESS AND PHONE NUMBERS ................................................................................... 69INSPECTOR GENERAL HOTLINE FOR REPORTING FRAUD, WASTE AND ABUSE ............................................... 69 Chapter 1: Purpose of Audit Guidelines * An asterisk indicates that the adjacent information is new or revised. Background 1.1 * The U.S. Agency for International Development (USAID) administers foreign economic development and humanitarian assistance programs on behalf of the United States Government. 1.2 * USAID consists of a central headquarters staff in the United States and a number of overseas missions and offices. It provides assistance to both non-U.S. nongovernmental and non-U.S. governmental organizations through programs managed by its missions (and, on an exception basis, by headquarters offices). 1.3 The Guidelines for Financial Audits Contracted by Foreign Recipients (Guidelines) are to be used by independent auditors in performing recipient-contracted audits required by USAID agreements with non-U.S. recipient organizations. These organizations are referred to as "recipients" or "foreign recipients" throughout these Guidelines. "Agreements" or "awards" are defined as USAID-funded grants, contracts, cooperative agreements, and loans. The Guidelines also provide guidance to recipients in selecting independent auditors to perform the audits. 1.4 USAID agreements with foreign recipients require them to contract independent auditors acceptable to the USAID Office of Inspector General (OIG) to perform financial audits of the funds provided under the agreements. Such audits are in accordance with the Inspector General Act of1978, as amended. The OIG reserves the right to conduct audits using its own staff, notwithstanding acceptable audits performed by other auditors, in cases where special accountability needs are identified. Applicability 1.5 * USAID agreements with foreign governments and foreign nonprofit organizations require that a recipient-contracted audit be performed annually in accordance with these Guidelines when the recipient expends $300,000 or more in USAID awards in its fiscal year. USAID missions must assess risk at least annually to determine when financial audits of foreign for profit organizations are required. In addition to these annual audit requirements, a close-out audit must be performed for all awards in excess of $500,000. As a general rule, annual incurred cost audits are acceptable as fulfilling the close-out audit requirement. Even when a recipient-contracted audit is not required, if the mission determines that an audit must be performed, the audit report must be submitted to the cognizant Regional Inspector General (RIG) office for review and issuance. 1.6 For subrecipients expending $300,000 or more in USAID awards in their fiscal year, USAID standard audit provisions require that recipients ensure that audits of subrecipients are performed annually in accordance with these Guidelines. 1.7 Food donation agreements under the U.S. Public Law 480 Title II and Title III programs also require recipient-contracted audits of foreign recipients if the recipient expends $300,000 or more in USAID awards in its fiscal year. In addition, agreements for cash transfers and sector assistance may include recipient-contracted audit requirements. Such audits must be performed in accordance with these Guidelines to the extent that the Guidelines do not conflict with the agreement provisions. Endowment or trust funds created out of USAID awards, fixed-price contracts, and fixed-obligation grants do not require audits under these Guidelines, but may be undertaken at the request of the mission. Responsibilities of USAID Missions and the OIG 1.8 * USAID missions monitor and ensure submission of required recipient-contracted audit reports. 1.9 The USAID Regional Inspectors General (RIGs) monitor the quality of such audits. Each USAID Regional Inspector General (RIG) must maintain a list of independent auditors eligible to perform audits of USAID agreements. 1.10 * The list of eligible audit firms is divided into two categories: regular and conditional. 1.11 * Firms in the “regular” category are eligible to audit any USAID award. 1.12 * Firms in the “conditional” category are limited to auditing specific awards or recipients, and must comply with any other restrictions imposed by the cognizant RIG. For example, the cognizant RIG may conditionally authorize the use of audit firms that have not developed the capability to fully comply with U.S. Government Auditing Standards, provided that the auditors use other acceptable auditing standards. It is expected that such audit firms will make satisfactory efforts to fully comply with U.S. Government Auditing Standards within a reasonable period of time. Also, local firms may be conditionally accepted when they are the regular auditors of a recipient's general purpose financial statements and are recommended by the USAID mission. The recommendation may be based on prior experience, other acceptable assurance, or a pre- qualification review by USAID. Conditionally accepted firms must be separately approved for each recipient they audit under these Guidelines. 1.13 * Unless otherwise noted, recipient-contracted audits must be conducted in accordance with Chapters 3, 4, and 5 of U.S. Government Auditing Standards ("Yellow Book"; hereafter referred to as U.S. Government Auditing Standards) issued by the Comptroller General of the United States and generally accepted auditing standards adopted by the American Institute of Certified Public Accountants (AICPA), which have been incorporated into U.S. Government Auditing Standards by reference. If recipient-contracted auditors have questions on audit matters, they should contact the appropriate RIG. If the auditors have questions concerning the program(s) under audit, or need to confirm the amounts disbursed to the recipient by USAID, they should contact the cognizant USAID mission. 1.14 * USAID ensures that audit agreements between recipients and independent auditors contain a standard statement of work containing all the requirements of these Guidelines. Accordingly, recipients must send all draft audit contracts to the cognizant USAID mission for approval prior to finalization. One annual audit must cover all USAID funding to a recipient. Recipients that have funding agreements with more than one USAID mission must send their audit contracts for approval to the nearest USAID mission with which they have an agreement. This USAID mission will act as the designated cognizant mission, unless the recipient is otherwise directed by USAID. 1.15 The draft audit contract submitted by the recipient to the cognizant USAID mission must indicate which USAID agreements will be covered by the audit. The designated cognizant mission will coordinate the audit efforts with any other USAID missions that have agreements with the recipient. The USAID mission will provide the independent auditors with data regarding any USAID direct procurements for use by the recipient and will confirm to the auditors the amounts disbursed (advances and reimbursements) to the recipient. The cognizant USAID mission will be responsible for distributing audit reports to the other USAID missions and resolving a recipient's organization- wide internal control and compliance deficiencies. Each USAID mission will also be responsible for acting upon findings and recommendations applicable to its agreements with the recipient. 1.16 Recipients must submit final audit reports to the cognizant USAID mission, who will forward final reports to the RIG for review and release. The cognizant RIG must receive the audit report no later than nine months after the end of the audited period. 1.17 The RIG will conduct quality control reviews (QCRs) of the audit documentation for a selected sample of the audits. These reviews will determine whether audit work was performed in accordance with these Guidelines. The RIG will notify USAID, the recipient, and the independent auditors of the results of these reviews. Audit Costs and Sanctions 1.18 Recipients may charge to the USAID agreements all costs for performing the specific audit of their USAID-funded programs. The costs to be charged to the USAID agreements for auditing the recipient's general purpose financial statements, if requested by USAID, will be a matter for negotiation between USAID and the recipient (see paragraph 3.5 of these Guidelines). As no audit costs may be charged to a USAID agreement if audits are not performed in accordance with these Guidelines, it is incumbent upon the auditor to produce a final product that meets this requirement. 1.19 USAID will consider appropriate sanctions against a recipient in the event of continued inability or unwillingness to have an audit performed in accordance with these Guidelines. Sanctions could include suspension of disbursements to the recipient until a satisfactory audit is performed. The RIG will refer independent auditors to appropriate regulators, professional authorities, and U.S.-affiliated firms for significant inadequacies or repeated instances of substandard performance. Auditors submitting unacceptable work may be removed from the list of firms that are eligible to perform audits under the recipient-contracted audit program (see paragraph 2.8 of these Guidelines). In addition, audit firms that do not provide timely responses to questions raised by the USAID mission or the RIG may be removed from the list of eligible audit firms. Compliance with Auditing Standards 1.20 USAID is aware that some independent auditors contracted by foreign recipients initially may not fully comply with these Guidelines because of a lack of technical knowledge and experience in using U.S. Government Auditing Standards. The RIG will assess and consider this lack of institutional capability when accepting or rejecting reports based on QCRs. The RIG may allow exceptions to compliance with U.S. Government Auditing Standards and these Guidelines provided that: (a) audit reports are determined to be reliable, and (b) any deviations from U.S. Government Auditing Standards, such as noncompliance with internal and external quality control review programs and continuing education requirements, are clearly stated in the report as scope limitations (see paragraph 5.1.b.1 and Chapter 7 of these Guidelines). 1.21 Independent auditors are responsible for upgrading their audit capabilities. Nevertheless, USAID missions and the RIG will consider providing technical assistance to independent auditors when requested. The RIG may remove from the list of eligible firms any independent auditors that do not make adequate progress in upgrading their audit capabilities to comply with U.S. Government Auditing Standards. Multiple Agreements and Subrecipients 1.22 Some recipients may receive direct assistance funding from USAID under more than one agreement and also indirect assistance from USAID as a subrecipient from either foreign or U.S. recipients. Under such circumstances, a recipient must have one annual recipient-contracted audit performed that would cover all USAID funding to the recipient from all sources. The recipient should contract only one audit firm to perform the annual audit. 1.23 * A foreign nonprofit organization that is only a subrecipient of a U.S. recipient organization must adhere to the USAID Standard Provisions for Non-U.S. Nongovernmental Grantees, which require annual audits as outlined in paragraph 1.5 above. When a foreign recipient of direct USAID assistance is a subrecipient of a U.S. recipient organization, in addition to receiving funds directly from USAID as a recipient organization, the annual audit performed in accordance with these Guidelines must include the funding passed through by the U.S. recipient organization. If the foreign recipient also receives assistance from other donors, consideration should be given to including the other donors' assistance in the USAID audit, provided an agreement and cost-sharing arrangement can be negotiated with the other donors. 1.24 * A U.S. subrecipient that expends $500,000 or more in USAID awards in its fiscal year is subject to U.S. Office of Management and Budget Circular A-133 audit requirements and will not require a separate recipient-contracted audit. (This page intentionally left blank.) Chapter 2: Selection of Independent Auditors 2.1 This chapter provides guidance to recipients for selecting independent auditors acceptable toUSAID. 2.2 Audits of USAID funds provided to nongovernmental recipients are to be performed by independent audit firms in accordance with U.S. Government Auditing Standards. Audits of governmental recipients are to be performed either by independent audit firms in accordance with U.S. Government Auditing Standards or by the government's Supreme Audit Institution (SAI) in accordance with U.S. Government Auditing Standards, auditing standards promulgated by the International Organization of Supreme Audit Institutions (INTOSAI), or auditing guidelines of the International Auditing Practices Committee of the International Federation of Accountants (IFAC). 2.3 Recipients must ensure that all records are available to the independent auditors, all accounting entries and adjustments are made, and all other necessary steps are taken to enable the auditors to complete their work. The cognizant RIG must receive the audit report no later than nine months after the end of the audited period. To this end, interim audit work is likely to be needed except in the case of recipients with few transactions. 2.4 * Audits should begin before the close of a fiscal year, since initiating audits after the close of a fiscal year could hinder timely audit reporting and may restrict the scope of certain audit procedures, leading to additional questioned costs. The OIG recommends that independent audits be contracted well in advance of the fiscal year close so that necessary interim audit work can be performed during the year. This practice could also result in reduced audit costs, to the degree that it helps audit firms accomplish their work more efficiently and distribute their workload throughout the year. Chapter 8 of these Guidelines presents an outline of an illustrative statement of work to be included in recipient-contracted audit agreements. Audit Firms 2.5 * The cognizant USAID mission must approve the recipient’s selection of an audit firm from the list of eligible audit firms maintained by the cognizant RIG, prior to execution of the audit services contract. The preferred procedure is for the recipient to obtain proposals and select an audit firm from the list of firms determined to be eligible by the RIG. The selection may be based on factors such as firms’ past performance in terms of quality and timeliness (including preparing audit reports in English), independence from the organization to be audited, the experience and credentials of firm staff proposed to participate in the audit, the availability of firm staff to accomplish audits within required timeframes, and cost. However, audit cost cannot be a controlling factor in the selection. Before selecting an audit firm, the recipient must request references from independent sources that can provide information on firms’ past performance. These sources must include the cognizant USAID mission and RIG. After the recipient selects the audit firm, it must submit 2.6 In determining acceptability of proposed audit firms, the RIG will give first priority to firms that have partnership agreements with firms located in the United States. Audit firms who have authority to use the letterhead and sign audit reports in the name of a U.S. audit firm are required to do so. The RIG will give second priority to affiliates or representatives of firms located in the United States that are subject to standard audit quality control procedures and reviews. Local firms that are not affiliated with firms located in the United States may be accepted when there is a high degree of assurance of professional quality based upon prior experience with an international organization or other acceptable assurance. Usually, and at the discretion of the cognizant RIG, the RIG will perform a quality control review (QCR) before the firm is included in the list of eligible firms. If the firm changes its partnership agreement or affiliation, its eligibility to perform USAID audits may need to be reevaluated. 2.7 * All selected audit firms should meet or make satisfactory efforts toward meeting the continuing education requirements (CPE) and internal and external peer review requirements in accordance with U.S. Government Auditing Standards. RIGs may remove firms that fail to meet this objective from the list of auditors eligible to perform audits of USAID agreements. RIGs may periodically remove firms that have not performed any audits under these Guidelines for a period of four years. Inactive firms need to be removed from the list of eligible firms periodically because audit staff, procedures, training programs, and affiliations change over time. However, RIGs will give firms an opportunity to update their information before removing them from the list or give firms an opportunity to update their information to apply to be reinstated on the list. 2.8 It is the responsibility of recipient-contracted audit firms to perform audits pursuant to these Guidelines and to present audit reports in a timely manner. If the RIG returns the work of an audit firm for revision due to noncompliance with these Guidelines, the audit costs may not be charged to USAID until such time as the OIG finds the report to be acceptable. Moreover, audit costs to be paid by USAID are limited to the amount specified in the draft audit contract approved by the USAID mission (see paragraph 1.14) unless USAID subsequently agrees to an increase. Any additional costs incurred in correcting deficient audit reports will not be reimbursed by USAID unless USAID agrees to reimburse additional costs. Should the audit firm fail to make its report acceptable, either a different recipient-contracted audit firm or the RIG must perform another audit. In such case, the audit firm will not be considered acceptable to perform future audits until the RIG determines that it has undergone an external quality control review, implemented the resultant recommendations, and is capable of substantially improved performance. In addition, at the RIG’s discretion, the RIG might send a letter to the audit regulatory body in the country where the audit was performed. Government Supreme Audit Institutions 2.9 The recipient country's principal government audit agency, often referred to as its "Supreme Audit Institution" (SAI), may audit governmental recipients under these Guidelines. However, SAIs will only be accepted to audit USAID funds if the RIG determines that the SAI a. Is in fact and appearance independent of the government recipient organizations to be audited and the executive branch of the government, and substantially meets the independence requirements set forth in U.S. Government Auditing Standards. b. Does not participate in any way in pre-control, contract or transaction approval, check signing, or other activity that is incompatible with the audit function. c. Maintains a professionally prepared and competent staff of duly qualified and licensed certified public accountants, or equivalent, experienced in the performance of financial audits and appropriately supervised by more experienced auditors. d. Complies with U.S. Government Auditing Standards, auditing standards promulgated by the International Organization of Supreme Audit Institutions (INTOSAI), or auditing guidelines of the International Auditing Practices Committee of the International Federation of Accountants (IFAC). e. Maintains a continuing program of staff training and professional development for its audit staff. 2.10 The OIG encourages SAIs to develop their own auditing manuals and audit quality control systems and to participate in an external quality control review program. USAID will consider assisting SAIs if they manifest a desire to perform professional quality audits of USAID-financed activities and the recipient government places a high priority upon this function. 2.11 * SAIs that do not fully meet the criteria—described in 2.9.c, 2.9.d, and 2.9.e above—may be accepted by the RIG if they agree to use acceptable auditing standards and to be closely supervised by the RIG, until the RIG believes such supervision is no longer needed. SAIs that are accepted by the USAID mission and the RIG must: a. Perform audits pursuant to these Guidelines. b. Present their audit reports in a timely manner. c. Sign an agreement with the USAID mission and the RIG to perform audits of governmental recipients in accordance with these Guidelines. 2.12 A model audit agreement is presented in Chapter 9 of these Guidelines. This agreement takes the place of a contract that would be signed between an independent audit firm and a recipient. The agreement must include a statement of work that will require the SAI to use specific acceptable auditing standards and to provide the reports required by these Guidelines, including the report on the fund accountability statement for the USAID funds, the report on internal control related to the USAID-funded programs, and the report on compliance with agreement terms and applicable laws and regulations related to the USAID-funded programs. 2.13 In the event that an SAI demonstrates continued inability or unwillingness to perform audit work in compliance with these Guidelines, USAID will not accept its work until the RIG determines that the SAI has undergone an external quality control review, implemented the resultant recommendations, and is capable of substantially improving its pe
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