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Hands-on training for Audit Companies

How to improve quality of expenditure verification reports

Agenda

• Introduction

• Expenditure verifications - ToR

• Conclusion

• EVR submitted by grant beneficiary of EU grants are essential to certify that:

all funds are managed in line with sound financial management

Respect all rules and regulations.

Share best practices

Ensure common understanding of ToR

Improve quality of EVR

*Discussion will be based on 2012 GC and Grant contract Annexes

Purpose of the training

Article 15.3. of General Conditions

Payment requests shall be accompanied by an

expenditure verification report in the conditions described under 15.7.

Expenditure verification: when?

Expenditure verification vs audit

► Main differences

Audit (ISA 700) Expenditure verification (ISRS 4400)

Audit opinion report Report of factual findings

Reasonable assurance No assurance expressed / No opinion

The auditor uses professional

judgement to design type, nature and extent of testing

The auditor uses professional skills and

carries out agreed-upon procedures

Audit report is public The Report may be used only by the

parties concerned

Agenda

• Introduction


• Conclusion

Main procedures to carry out an EV 1.Obtain an understanding of the terms and conditions of the Grant Contracts – General Conditions change depending on the year of signature

2.Verify that the Financial Report complies with the conditions in Article 2 of GC (cover the action as a whole, respect model of Annex VI…)

3.Reconcile the financial report with the Beneficiary's Accounting system (Article 16.1)

4.Analytical review of the expenditure headings

5.Verify that the budget in the Financial Report corresponds with the budget of the Grant contract (+ any

amendments)

Most relevant Articles of General Conditions • General and administrative

Provisions

Article 2 – Obligation to provide information and financial and narrative reports

Article 6 – EU visibility

Article 9 – Amendment of the contract

Article 11 – Extension and suspension

• Financial Provisions

Article 14 – Eligible costs

Article 15 – Payment and interest on late payment

Article 16 – Accounts and technical and financial checks

Article 17 – Final amount of the grant

Procedures to verify Selected Expenditure

3.1. Eligibility of Costs The Auditor verifies, for each expenditure item selected, the

eligibility criteria set out below:

(1)Costs actually incurred

(2)Cut-off - Implementation period

(3)Budget

(4)Necessary

(5)Records

(6)Justified

(7)Valuation

(8)Classification

(9)Compliance with Procurement, Nationality and Origin Rules

1. Costs actually incurred The Auditor verifies

-> expenditure for a selected item was actually incurred by and pertains to the Beneficiary/partners.

Auditor verifies

1. supporting documents (e.g. invoices, contracts) and proof of payment.

2. proof of work done, goods received or services rendered (= incurred costs)

3. verifies the existence of assets (if applicable)


Findings

the beneficiary reports based on the estimated costs:

X Budget estimates (Annex III unit costs) are

not costs actually incurred

V Only real costs incurred (invoiced and paid)

2. The financial report charges as incurred costs advance payment for works

X advance payment is considered as incurred (no

deliverables)

V are considered as incurred when receivables

are accepted (interim and final payment)

GC Art 14.1 a)

Costs are incurred during the implementation of the Action as specified in Article 2 of SC

Exception : final reports, expenditure verification and evaluation of the Action

Exp. Verif. TOR

The Auditor verifies that the expenditure for a selected item was incurred during the

implementation period of the Action.

2. Cut off


13

Time

Contract Execution Period

Action Implementation Period

Contract

Signature

Agreed date to start the

action

End of action Final Payment

Records to be kept for 7 years

Contract Modifications : rider ?

Implementation Period and

Execution Period

ALL work done, goods received or services rendered

EXCEPTION : costs related to

final reports, expenditure

verification and evaluation of

the Action

Findings

• Work contracts finalized one month after the contract implementation period and final invoice paid after the contract implementation period.

X The costs must be incurred strictly during the implementation period

=> work done, goods received or services rendered

V invoices can be paid after the implementation period provided that the deliverables are accepted within the implementation period.

Always check

submission of reports/studies (services)

the provisional acceptance (works)

the delivery date (supplies)

GC Art 14.1 b)

Eligible costs must be indicated in the estimated overall budget of the Action

Exp. Verif. TOR

The Auditor verifies that the expenditure for a selected item was indicated in the Action budget.

The auditors must verify the budget and the budget justification sheet (narrative explanation of the budget breakdown – Worsheet2)

3. Budget


Flexibility

GC Art 9.2

transfer between items within the same main budget heading (incl. cancel or add new item)

OR transfer between main budget headings involving a variation of 15% or less of original heading amount

Conditions :

-> inform in writing without delay the Contracting Authority accordingly

-> does not affect the basic purpose of the Action (operational justification required)

-> beyond 15%, an formal amendment to the contract is required.

No flexibility under the headings for administrative costs (BL 10) and the contingency reserve (BL 8).

GC Art 14.1 c)

Eligible costs must be necessary for the implementation of the Action

Exp. Verif. TOR

The Auditor verifies whether it is plausible that the expenditure was

necessary for the implementation of the Action

had to be incurred for the contracted activities of the Action by

examining the nature of the expenditure with supporting

documents

How ? Read the narrative report and asks question to the

beneficiary.


4. Necessary

Findings The detailed list of expenditure charges on the action the costs of the "Christmas party".

X It is not a necessary cost for the implementation of a development project

X EU Tax payers money - Not in line with the sound financial management

Backstopping HR positions from headquarters are charged part time on the action

X There is no timesheet nor direct input of the person on the action => to be

covered by indirect / Administrative costs (i.e.payroll management of staff

training)

V There are timesheets documenting the input of the HQ staff on the project

activities in the field and the costs charged are based on the actual time spent

as per the timesheets.

(ie. Expert in nutrition coming for ad hoc mission of support in the field).

GC Art 14.1 d)

Eligible costs are:

- identifiable

- verifiable

- recorded in the accounting records of the Beneficiary according to:

• Applicable accounting standards of the country of Benef

• Usual cost accounting practices of the Benef


5. Records

Exp. Verif. TOR

The Auditor verifies that expenditure for a selected item is

-> recorded in the Beneficiary's accounting system

-> in accordance with the applicable accounting standards of the country where the Beneficiary is established

-> the Beneficiary's usual cost accounting practices.

Findings

A grant beneficiary submits an expenditure verification report (no detailed list of expenditure). The CoA selects the transaction for a transaction verification:

X The grant beneficiary is unable to provide the detailed list of

expenditure for the CoA sampling exercise

? How was the expendiure verification performed ?

Risk: all costs related to the action maybe declared ineligible

V The detailed list of expenditures matches perfectly the financial

report (breakdown by Budget heading) and is detailed at the supporting

document level (one line in the detailed list = one invoice)

GC Art 14.1 e)

Eligible costs must be reasonable, justified and comply with the requirements of sound financial management, in particular regarding economy and efficiency.

6. Justified


Exp. Verif. TOR

The Auditor verifies that

-> expenditures are substantiated by evidence

=> notably the supporting documents listed under GC Article 16.3 and 16.2 access to documents and on spot checks

(see section 1 of Annex 2B, Guidelines for Specific Procedures to be performed)

Supporting documents listed under GC Article 16.3

* Accounting records (general ledger, sub ledgers and payroll accounts)

* Proof of procurement procedures (bids and evaluation reports)

* Proof of commitments (contracts and order forms)

* Proof of delivery of services (reports, time sheets, proof of attending seminars, conferences and training courses )

* Proof of receipt of goods (delivery slips from suppliers)

* Proof of completion of works (acceptance certificates)

* Proof of purchase (invoices and receipts)

* Proof of payment (bank statements, debit notices, proof of settlement by the contractor)

Supporting documents listed under GC Article 16.3

* Proof that taxes and/or VAT paid cannot actually be reclaimed

* For fuel and oil expenses (Logbook, maintenance etc.)

* Staff and payroll records : contracts, salary statements, time sheets and bbreakdown details of remuneration paid :

Local staff : gross salary, social security charges, insurance and net salary

For HQ staff : analyses and breakdowns of expenditure per month of actual work; assessed on the basis of unit prices per verifiable block of time worked and broken down into gross salary, social security charges, insurance and net salary

Findings

Subgrants are paid in cash by the EU grant beneficiary

X There are no receipts signed by the subgrantee but internal invoices.

V Receipts are signed by the third party recipient of the subgrant and

records on deliverables have been kept (final report accepted)

A driver is working for several projects (shared position) in the local office an NGO, the full salary is charged on the EU project.

X There are no timesheets kept neither a weekly allocation of the driver

tasks nor a clear job description.

V Actual costs charged are based on actual time spent on the action as recorded in timesheets clearly refering to EU project activities.

There are internal rules defining the allocation of the time of the driver

among the different projects managed by the NGO.

Exp. Verif. TOR


• 1) the monetary value of a selected expenditure item agrees with underlying documents

• (e.g. invoices, salary statements)

• 2) that correct exchange rates are used where applicable.


7. Valuation

Exchange rate

GC Art 15.8 Any conversion into euro of the real costs borne in other currencies shall be done at the rate made up by the average of the rates published in InforEuro for the months covered by the relevant report, unless otherwise provided in the Special Conditions.

Finding Incorrect exchange rate is applied when converting costs incurred in local

currency into EUR

Exp. Verif. TOR

The Auditor examines the nature of the expenditure for a selected item and verifies that the expenditure item has been classified under the correct (sub)heading of the Financial Report.


8. Classification

The financial reports under Human resources the costs of an external expert

X The experts (consultants) are service providers and are subject to the

procurement rules

(implementing contracts not Human resources)

Exception : In house consultant (BUT cumulative conditions)

V the auditor identifies the incorrect budget classification of the external

experts costs, clarifies with the EU grant beneficiary and reports the

finding.

Findings

9. Compliance with Procurement, Nationality and Origin Rules

Exp. Verif. TOR

Where applicable the Auditor examines

-> which procurement, nationality and origin rules apply for a certain expenditure.

-> whether the expenditure was incurred in accordance with such rules by examining the underlying documents

-> issues of non-compliance with procurement rules

=> the auditor determines the financial impact in terms of ineligible expenditure.

Procurement documentation : risk indicators listed in Annex 2B


CIR : common rules and procedures for the implementation of the Union's instruments for financing external action

* Regulation (EU) N°236/2014 of the European Parliament of the Council of 11th March 2014.

* new nationality and origin rules to follow during grant implementation (including ongoing contracts).

=> the changes in eligibility are more favourable to the beneficiaries.

CIR : when the value of the supplies to be purchased is below 100 000 euros per purchase, the supplies do not have to originate from an eligible country (full untying)

References

1. CIR - RULES ON PARTICIPATION IN PROCUREMENT PROCEDURES AND GRANTS

2. External communication from EuropeAid Legal

service dated 24 June 2014

Procurement rules

If implementation of the Action involves the conclusion of contracts by the Beneficiary, the contract-award

procedures set out in Annex IV shall apply.

General Principles Contract award procedures:

BEST VALUE FOR MONEY = the contract must be awarded to the technically compliant tender being the most economically advantageous one (ie, the tender offering the best price-quality ratio);

following the principles of transparency and fair competition for potential contractors and taking care to avoid any conflicts of interest;

must comply with the rules set out in Annex IV which includes rules of origin;

In the event of failure to comply with the above rules, expenditure on the operations in question is not eligible for Community financing;

The EC will carry out ex post checks on Beneficiaries' compliance with the rules.

Annex IV: Procurement procedures

• Service contracts

• Contract value > € 200 000

International restricted tender procedure following publication of a procurement notice

• Contract value < € 200 000

Consultation in writing of at least 3 suppliers

No publication required

• Contract value < €10 000

Single tender


• Supply contracts

• Contract value > € 150 000

International open tender procedure following publication of a procurement notice

• Contract value between €60 000 and € 150 000

Open tender procedure published locally


At least 3 suppliers


Single tender


• Works contracts

• Contract value > €5 000 000

International open tender procedure following publication of a procurement notice

• Contract value between €300 000 and €5 000 000

Open tender procedure published locally

• Contract value < 300 000

Consultation in writing of at least 3 contractors

No publication required


Single tender


• Other important aspects

• Process should be documented

The Beneficiary should be able to show how they have managed the entire process

Loss of documents may lead to costs being declared ineligible

• Contract must be signed during the correct period

the contract may not be awarded outside of the official implementation period

• Rule of origin must be followed

• No slicing

• No conflict of interest

Definition of eligible costs ( Article 14.1):

• Real Costs incurred by the beneficiary

• During implementation of action

• Indicated in the estimated budget

• Necessary for implementing action

• Identifiable + verifiable

• Compliant with accounting standards

• Reasonable and justified

3.2 Eligibility of direct costs

Human resources:

• Actual gross salaries incl social security charges and other remuneration related costs

• It concerns staff from Beneficiary and/or partners

• Costs must not exceed those normally born by the Beneficiary and/or partners

• No fees accepted! (see in-house consultants)

3.2 Eligibility of direct costs Direct costs (Art 14.2)

Human resources – HQ staff

• As a general rule to be covered under indirect costs

•However, they can be charged as direct costs if:

• They relate to the achievement of Action's results

• Time allocation of HQ staff is proven to be necessary for the project (a simple % is not acceptable)


Human resources – "in-house consultants"

• They work on the basis of a service contract

• They can be considered as personnel costs if:

• The Benef has a contract to engage the consultant linked to the action

• The Consultant works under instructions/supervision of the Benef

• The Consultant works in the Benef premises

• The output of the work belongs to the Benef

• Costs of employing the Consultant are reasonable

• Travel and subsistence costs directly paid by Benef

• The Consultant uses the Benef infrastructure

Procurement rules Annex IV do not apply


Human resources – Subsistence costs

• Per diems:

• Cover accommodation, meals and local travel within the place of mission

• Requires an overnight stay away from the base of operations

• Must not exceed the rates at the time of contract signature and those normally borne by the Benef


Travel

• international travel: from home to place of mission – flights in economic class

• local travel: outside place of mission/ within the country


Equipment:

• Use of own equipment

• Running costs are charged as direct costs (electricity, manteinance…)

• Cost of use (depreciation)is considered within indirect costs but could be accepted as direct for the period when the equipment is used for the action, if:


Use of own equipment:

• Accepted because of concrete situation

• No transfer to final beneficiary or local authority is foreseen

• Such use is more effective than the purchase of equipment

• Costs are not higher than the ones in local market

• Equipment is in good condition and suitable

• It does not imply double-financing

• Pass test of eligible costs (Art 14.1 of GC)

No RENTAL FEES can be charged!


Equipment:

• Verify that the procurement rules of Annex IV are respected

• Verify that the rule of origin is respected

• If applicable, verify that transfer of ownership of equipment is done


Local office, utilities and consumables:

• Shared costs:

• Benef to provide explanation on cost allocation system

• The cost allocation system must be:

Based on the Benef standard practice

Applied consistently with all donors and projects

Be necessary and linked to the action

Provisions/estimates approaches do not represent real costs


Other costs and services:

• Sub-contracting:

It may only cover a limited portion of the action and shall respect the contract-award procedures in Annex IV.

• Sub-granting:

The maximum amount of a sub-grant shall be limited to EUR 10.000 per third party while the total amount which may be awarded as sub-grants to third parties shall be limited to EUR 100.000


Sub-granting: - Specified in Special Conditions - The DoA must include: List of different activities Definition of persons or categories of persons Criteria for awarding ideally, criteria for payment (unconditional transfer or conditional transfer) The auditor must examine and verify that the above

conditions are met for each sub-grant

Which of the following can be considered eligible for a grant financed by EU:

cost of bank transactions cost of EVR credits to third parties

cost of translation provision for reserve

currency exchange losses

cost of financial guarantee purchase of land or buildings (real estate)

cost of electricity for the part of building used to implement the project

debts and provisions for losses

security cost of the building for the part used to implement the project

costs covered by another action; administrative and management cost

cost of new computers to be used only by the project staff

insurance cost maintenance cost

interest owed rent

Eligible or ineligible?

Which of the following can be considered eligible for a grant financed by EU?

cost of bank transactions cost of EVR credits to third parties

cost of translation provision for reserve

currency exchange losses

cost of financial guarantee purchase of land or buildings (real estate)

cost of electricity for the part of building used to implement the project debts and provisions for losses

security cost of the building for the part used to implement the project

costs covered by another action; administrative and management cost

cost of new computers to be used only by the project staff insurance cost

maintenance cost

interest owed rent

Eligible or ineligible?

3.3 Provision for Contingency Reserve (GC 14.3)

Exp. Verif. TOR


-> the provision for contingency reserve (heading 8 Financial Report) does not exceed 5% of the direct eligible costs of the Action.

-> Use of contingency : the Beneficiary has obtained prior written authorisation of the Contracting Authority.

-> Justification : exceptional / unforeseen circumstances

3.4. Administrative costs GC Art 14.4

* A fixed percentage not exceeding the percentage laid down in SC Art. 3

* cannot exceed 7%

* calculated based on the total amount of direct eligible costs of the Action

* indirect costs to cover the administrative overheads incurred by the Beneficiary for the Action

* does not need to be supported by accounting documents.

* Indirect costs are eligible provided that they do not include costs assigned to another heading of the budget of this Contract

Exp. Verif. TOR

The Auditor verifies that the indirect costs to cover the administrative overheads (heading 10 Financial Report) do not exceed 7% of the total amount of eligible direct costs of the Action.

3.5 Contributions in kind GC Art 14.5

Any contributions in kind :

• must be listed separately at Annex III

• do not represent actual expenditure

• are not eligible costs (unless specified SC)

• may not be treated as co-financing by the Beneficiary.

• BUT if the Description of the Action foresees the contributions in kind, such contributions have to be provided.

Exp. Verif. TOR

The Auditor verifies that costs in the Financial Report do not include contributions in kind. Contributions in kind are not eligible costs.

Finding

The building in which the offices of the NGO are hosted belongs to the NGO

which charges a rental cost to the action.

X The rental costs are not actually incurred by the entity=> against the non

profit rule.

V The budget of the action is not earmarking rental costs for the office because it

was indeed an in kind contribution to be provided by the entity, such in kind must

be provided.

The cost of maintenance of the office may be charged on the action based on a

repartition key between projects (headcounts / square meters occupied)

3.6 & 3.7 Ineligible costs and Accepted costs (VAT)

Taxes – Legal Framework:

CONTRACTS

FINANCING AGREEMENT

FRAMEWORK AGREEMENT

LEGAL

BASIS


Indirect taxes – possible situations under DCI/EIDHR:

1. 1. Contracts signed before November 2010:

2. Indirect Taxes are NOT eligible and CANNOT be considered as co-financing

3. 2. Contracts signed following a call for proposals launched between November 2010 and January 2012:

4. Non refundable taxes are NOT eligible but may be considered as co-financing from the grant Benericiary

(Accepted costs) => they must be reported separately in the financial report


Indirect taxes – possible situations under DCI/EIDHR:

1. 3. Calls after 31/12/2011:

2. Non refundable taxes can be eligible and considered as co-financing provided that:

• It is foreseen in the Call for proposals

• The related Financing Agreement does not exclude the financing of taxes

• The beneficiary proves that they are not reimbursed nor exempted

(real cost)


Indirect taxes – requirements:

1. The grant Benef is required to prove that the incurred indirect taxes cannot be reclaimed or no exemption:

• Official document from the competent tax authority stating that

the entity is not eligible

• Entity's annual accounts completed if necessary, for example by an extract of the national VAT tax law

• Declaration of honour from the entityt + expert statement

3.8 Revenues of the Action (GC 15.6) Exp. Verif. TOR

The Auditor examines revenues including :

• funding received from other donor (check updated source of funding Annex III at Final payment)

• other revenue generated by the Beneficiary in the context of the Action

• Bank interest earned (pre-fin > 250.000 EUR)

-> For this purpose the Auditor inquires with the Beneficiary and examines documentation obtained from the Beneficiary.

-> The Auditor is not expected to examine the completeness of the revenues reported.

Non profit rule

GC Art 17.3

The Beneficiary accepts that the grant can under no circumstances result in a profit for itself and that it must be limited to the amount required to balance income and expenditure for the Action.

•

When the subsidised action generates a surplus (profit), the Contracting Authority recovers the

surplus pro racta, of the EU contribution to the financing of the approved eligible costs.

Main document to calculate non-profit: UPDATE SOURCE OF FINANCING

Annex 2B Guidelines for Specific Procedures to be performed

From the specific procedures and the terms and conditions of the contract (2B.2) , the auditor selects the expenditures (2B.3) applies techniques (e.g. enquire, analyse, re-compute, compare, observe, inspect) to obtain verification evidences (2B.1), ensure the coverage ratio (2B.4) and draw up the report of factual findings (Annex 3), exceptions and potential impacts (2B.5).


2B.1 Verification Evidence

- Identifiable, verifiable and recorded in the BENEF's accounting records + GC 14.1d, 16.1, 16.2, 16.3 (a list of the types and nature of evidence).

- Available in original documentary form.

• - Preferably be obtained from independent external sources

• - Subjected to control and approval + obtained by the auditor

2B.2 Understanding of the contract and its annexes.


2B.3 Selecting Expenditure for Verification

Direct costs: Headings 1 – 6

Based on detailed list of expenditures reconciled with FR

2B.4 Verification Coverage of Expenditure

- Ensures the overall ECR (verified/reported ratio) of 65% if

an exception rate is <= 10%.

- Continues to verify until ECR >= 85% if the exception rate > 10%.

- Ensures the ECR for each heading and subheading is >=10%


2B.5 Procedures to verify selected Expenditure

Carries out 3.1 – 3.7 as per 2A of ToR

Quantifies the amount of exception and potential impact

- Specific guidance for procurement risk indicators

(inconsistencies in the dates & sequences of documents, similarities in offers of candidates, inconsistencies in the selection and award decision, privileged relationship, risks of irregularities.)

- Specific guidance for contribution in kind

Agenda

• Introduction


• Conclusion

Most common audit findings to be avoided: • Not actual: Advance, forecast, commitment, are not actual expenditures

• Not supported: inadequate or absence of supporting documents

• Not incurred during the implementation period: expenditure incurred outside the implementation period

• Non respect of annex IV: non respect of procurement rules and rules of origin

• Not budgeted: expenditures that are not reported in the budget of the action

• Not necessary, reasonable or justified: non necessary, not sound financial management or un-related expenditures

• Not identifiable or not valued: not recorded in the books or for an approximate/unknown value

• Expenditure includes VAT

Errors frequently met Group discussion

As per article 2.2 of the Grant Contract, the implementation

period of the project started on 1 June 2012. Expenditure

concerning the purchase of office equipment, the advertisement for a vacancy and salaries were incurred for the project in April and May 2012.

Are the expenses eligible?

Article 14.1 of Annex II of the Grant Contract foresees that “Eligible costs are … incurred during the implementation of

the action as specified in article 2 of the Special Conditions with the exception of costs relating to final reports and expenditure verification”.


Are the expenses eligible?

The entity has procured 223 pieces of radio for community people for which there was no budget line.

This expense has been booked under the budget line “supply of medicines”. There was no provision for the procurement of radio sets in the original budget of the

Action.


Article 14.1 of Annex II of the Grant Contract foresees that “Eligible costs are … have to be indicated in the

estimated budget of the Action”.


Conclusion

Key messages:

• Understanding of the context of the grant

• Knowledge of the applicable rules and regulations ( special conditions, general conditions…)

• Analysis and reconciliation of the financial report

• Include statements in the report that prove that verifications have been carried out even if no findings found

• Be careful with cost allocation system

• Verify eligibility of the indirect taxes on a case-by-case basis

Useful information • Financial Management Toolkit for recipients of EU funds

for external actions.

Module 1: Internal Controls

Module 2: Documentation, Filing and Record Keeping

Module 3: Procurement

Module 4: Asset Management

Module 5: Payroll and Time Management

Module 6: Cash and Bank Management

Module 7: Accounting

Module 8: Financial Reporting

• User implementation Guide for Grants

Questions ?

THANK YOU !

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