Message of Auditor General for English Version of the Audit Manual

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CONTENTS Message of Auditor General for English Version of the Audit Manual for World Bank Projects Preface for Chinese Auditing Institutions Section 1 Guiding Principles Section 2 The Basic Framework Section 3 Structure Section 4 Scope of Use Section 5 Instructions for Use Section 6 Preparation of the Manual Chapter 1a Audits of World Bank Loans in China Section 1 Auditing Procedures Section 2 Audit Quality Control Section 3 Division of Auditing Responsibilities Chapter 1b General Overview of World Bank Loans Section 1 The World Bank Section 2 Characteristics of World Bank Loans Section 3 Types of World Bank Loans Chapter 2 Audit Preparation Section 1 Obtaining a Basic Understanding of the Project Entity Section 2 Preliminary Analytical Review Section 3 Evaluating the Materiality Level Section 4 Audit Risk Analysis Section 5 Preparing and Reviewing the Audit Program Chapter 3 Testing of Internal Controls Section 1 Review of the Internal Controls Section 2 Internal Control Compliance Testing Chapter 4 Substantive Testing Section I Substantive tests of the Application of Fund Accounts Section 2 Substantive Tests of Sources of Fund Accounts Section 3 Substantive Testing of Other Accounts Chapter 5 Financial Statement Audits Section 1 Overview of Financial Statement Audits Section 2 Audits of Balance Sheets

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Section 3 Audits of the Summary of Sources and Uses of Funds by Project Component

Section 4 Audit of the Statement of Implementation of Loan (Credit) Agreements Section 5 Audit of Special Account Statements Section 6 Audit of Consolidated Financial Statements Chapter 6 Audit Report Section 1 Steps in Preparing Audit Reports Section 2 Form, Content, and Reporting Requirements for the Audit Report

Message of Auditor General for English Version

Of the Audit Manual for World Bank Loan Projects

In order to standardize audit practice on World Bank loan projects, ensure high audit quality and prevent audit risks, the National Audit Office of P. R. China compiled The Audit Manual for World Bank Loan Projects in the year 2000. The purpose behind this Manual was to summarize best audit practices of World Bank loan projects based on the experiences of Chinese audit institutions in past decade.

The Manual is consistent with requirements of the World Bank and Chinese government for sound management of World Bank Loan Projects, their accounting and auditing. It also draws upon internationally accepted audit methodologies and skills. Users of the Manual would benefit from three of its qualities.

(1) It is based on leading expertise and advanced audit methodologies. The audit methods recommended in the Manual include risk analysis, materiality assessment, analytic procedures, internal control review and other advanced audit theory and methodologies;

(2) It is intuitive and easy to use. The Manual incorporates many single procedures into a coherent framework. Auditors will find several useful audit procedures for each specific account and practical sample working papers.

(3) The Manual’s coverage is broad and comprehensive. Although it was prepared to audit World Bank loan projects, its audit procedures and skills are applicable to multilateral projects financed by other institutions.

The Manual embraces Chinese laws and regulations applicable to World Bank loan projects, which are commonly found in Loan Agreements, Purchases and Payment Guidance. The Manual helps us to meet the audit requirements embodied in Chinese audit law, applicable international audit standards and special requirements of the World Bank.

With the support of World Bank and assistance from Mr. Jose R Oyola, expert of the Governmental Accountability Office of United States, the English version of The Audit Manual for World Bank Loan Projects is now offered to all of the INTOSAI community. I am convinced that the Manual will contribute to a deeper understanding by multilateral lending organizations and INTOSAI members of the audit work performed by Chinese audit institutions.

I sincerely hope that our audit experience would benefit all INTOSAI members, enhance their audit capacity and lead to the adoption of best audit practices of multilateral loan projects. Our mutual experience would benefit us all.

Li Jinhua (signature) Auditor General National Audit Office of P.R. China

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PREFACE This Audit Manual for World Bank Financed Projects (the Audit Manual) has been prepared to standardize the auditing of World Bank financed projects by auditing institutions, to safeguard audit quality, and to guard against audit risks.

Section 1 Guiding Principles The Audit Manual shall not only be rooted in practice, but also go beyond that to guide practice. The guiding principles used for preparing the Audit Manual have been these: to summarize the auditing experience of World Bank financed projects over the past more than 10 years, taking into consideration new developments in the management, accounting, and auditing of World Bank financed projects in both China and the rest of the world, and to apply advanced international audit techniques and methodologies so that the Audit Manual will achieve dual integration, practicability, and an appropriate leading role. A. Dual Integration World Bank financed projects are audited in conformity with provisions of the Auditing Law at the request of the World Bank, and the Audit Manual is designed to provide solutions for dual integration. In terms of audit bases, the Audit Manual integrates not only Chinese laws and regulations concerning the management of World Bank financed projects, but also the requirements of the World Bank’s loan agreements, procurement guidelines, and payment guidelines. In terms of audit standards, the Audit Manual integrates not only Chinese auditing laws and regulations, but also the requirements of the World Bank’s audit guidelines and loan agreements. In terms of audit reports, the Audit Manual satisfies not only the needs of strict law enforcement and performance of supervision obligations, but also the needs for creating conditions for project implementation and for providing assurance and evaluation of project special purpose financial statements and project implementation. B. Practicability Focusing on audit objectives, the Audit Manual provides alternative solutions for what is to be done and how to go about the work, as well as indicating the follow-up actions in auditing at each stage, according to project audit processes. For example, to obtain a basic understanding of the auditee at the audit preparation stage, the Audit Manual explains why, what, and how things are done, and also indicates the documentation methods entailed in the agreement. As for the achievement of a certain audit objective, the Audit Manual provides fairly complete audit procedures, which may help guide and standardize auditing practices, improve auditing efficiency, and reduce audit risks caused by the insufficient experience of auditors.

C. An Appropriate Leading Role The Audit Manual plays an appropriate leading role in integrating practical auditing experience

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in China and advanced world auditing techniques and methodologies. For example, audit risk analysis is applied to the formulation of audit programs, and substantive tests are based on the evaluation of internal controls, with the improvement of the auditing environment, these thoughts and methods will surely be spread and popularized. Section 2 The Basic Framework The overall objectives of the auditing of World Bank financed projects included in the Audit Manual are the following three interrelated issues: to express an opinion on the financial statements of project entities; to carry out supervision of revenues, expenditures, and project construction activities of project entities; and to express an evaluative opinion on compliance with national laws and regulations, applicable provisions of the loan agreement of the World Bank, and internal controls. The three issues may be summarized as auditing for the truthfulness, legality, and effectiveness of financial statements for, and project implementation of, World Bank financed projects in conformity with the requirements of the Auditing Law. Centering on the above-mentioned objectives and using system-based auditing, the Audit Manual, on the basis of evaluation of the internal controls of the auditee, identifies substantive test procedures, scope, and time limits, and classifies World Bank financed project audits into three stages: preparation, implementation, and reporting. The main tasks at the preparation stage include achieving a basic understanding of the auditee (including internal controls), a preliminary analytical review of financial statements and other information obtained, a determination of the level of materiality, an analysis of audit risks, the formulation of a plan for systemic auditing, and the preparation of an overall audit program with appropriate specific audit programs. Audit tasks at the implementation stage include review of audit working papers, consolidation of audit information, formation of audit opinions, preparation of a trial balance, exchange of views with the auditee, a summary of the audit, and the preparation and issuing of the auditor’s report and audit decision letter. The overall design concept and basic framework of the Audit Manual are shown in the following diagram.

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Yes

Understand the business of the project entity (including internal controls).

Perform the preliminary analytical review.

Determine planning materiality.

Assess the audit risk. Develop the audit program.

Rely on internalcontrols?

Test of internal controls

Internal controls are effective as assumed.

Certain level of substantive testing Detailed substantive

test

Review audit working papers. Conclude audit results. Evaluate audit results and form auditor’s opinion. Prepare the try balance. Communicate with the auditee. Prepare audit-summary memorandum. Engagement reporting.

Modify the audit program

Planning

Audit objectives Issue auditor’s opinion on the project’s special purpose financial

statements; Supervise the financial transactions and project implementation

by the project entity; Assess compliance with State laws and regulations, the loan

agreement, and internal controls over financial reporting.

Implem

entation R

eporting

No, or small size project entity

No

Perform financial statements review

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Section 3 Structure The Audit Manual deals with World Bank financed projects, centering on audits of the special purpose financial statements of project entities and loan project implementation. According to the above-mentioned design concept and basic framework, combined with the audit content, audit steps and methods are described specifically. In terms of layout, audit working papers are mainly used to reflect audit objectives, content, and methods. This Audit Manual is composed of text and appendices, the text consisting of six chapters. Chapter I provides general information on the characteristics, procedures, quality controls, and division of responsibility of World Bank financed project audits. Chapters II to VI cover audit content, objectives, procedures, and methods in the form of audit working papers at each of the three stages of audit preparation, implementation, and completion, as prescribed in the audit procedures. Chapter II involves audit preparation, which deals with work to be conducted at the preparation stage. Chapter III is concerned with testing and evaluation of internal controls, based on business cycles featuring World Bank financed projects, describing the content of each business cycle and related documents, in the meantime covering the internal control questionnaire of the cycles, compliance test procedure forms, and compliance test records forms. Chapter IV deals with substantive testing, providing audit procedure forms, examination forms, and other standardized audit working papers for each statement item, in addition to brief descriptions of the audit content and objectives involved. [Comment on chapter V is missing.] Chapter VI deals with auditing reports, mainly elaborating on work to be done at the audit reporting stage, especially on standardizing the writing method and format of audit report. The appendices are mainly designed for the beginner in World Bank financed project audits and contain an introduction to World Bank financed projects, the accounting system, a sample of an audit report, audit working paper samples, and an index or list of various forms.

Section 4 Scope of Use This Audit Manual is prepared for the auditing of special purpose financial statements for, and project implementation of, World Bank financed projects. As for projects financed by other international financial organizations, such as the ADB or the Agricultural Development Foundation, which are subject to requirements and management that are quite similar to those of the World Bank, and in the case of unified administration by the Ministry of Finance, the Audit Manual can be referred to based on specific circumstances. As for profit-making projects, the World Bank usually requires that the financial statements be audited for implementing agencies, in addition to project-specific, special purpose financial statements and project implementation. As the agencies implementing World Bank financed projects involve too many industries for the Audit Manual to cover, the Audit Manual for relevant industries shall be referred to in audit.

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Section 5 Instructions for Use The Audit Manual falls below the Auditing Law and audit standards in the overall system composed of auditing standards and auditing techniques and methodologies. It provides a program of guidance, without general binding force, and is to be used in a flexible manner, based on specific circumstances. A. The Use of the Audit Manual and Professional Judgment Auditing is by nature highly professional. Selection of audit procedures, auditing methods, and determination of the focus of an audit, even decisions about auditing matters, all involve the professional judgment of auditors. This Audit Manual is designed only to provide a reference for auditing practices under normal circumstances by summarizing general rules, while the content of a construction project, its size, the management mode, and the accounting differ from one to another World Bank financed project, as problems involving the same amount of funding have entirely different meanings in World Bank financed projects. Thus, auditors must make professional judgments based on the actual conditions of auditee in accordance with the basic requirements of auditing regulations and standards. For example, when internal controls cannot be relied upon, or the auditee is not large in size and involves a small volume of business transactions, a combination of compliance tests and substantive tests apply. In practice, professional judgments must be made to determine whether internal controls can be relied on or not. B. Due Diligence and Professional Sensitivity Due diligence and professional sensitivity are critical factors in successful auditing. Auditors must remain highly sensitive to abnormal phenomena and data to discover problems that are deeply hidden. On the other hand, when minor problems are discovered in an audit, whether ignored or subject to further investigation, based on the amounts or the seriousness thereof, auditors must handle these with due diligence. Maintaining due diligence and professional sensitivity is a specialized technical matter that combines auditing experience and personal ability, for which the Audit Manual cannot provide detailed instructions. C. Basic Understanding of Project Entities

This Audit Manual advances recommendations related to the what and how of acquiring a basic understanding of project entities based on initial audits. The auditee database must be set up on the basis of a basic understanding of the entity, and then maintained and updated regularly, which will help cut the auditing work load dramatically. In that way, auditors will need to understand only the latest changes and developments, so that repetitive work can be avoided on the occasion of each audit. D. Analytical Review Analytical review is vital to effective definition of the audit focus and to improving auditing effectiveness. It can not only help auditors define other auditing procedures, methods, and timing at the audit preparation stage, but it can also be used directly in procedures regarding substantive

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testing, at the audit implementation stage, to collect evidence relevant to the balances and amounts of accounts; in the meantime, it can be also used for final review of the overall appropriateness of financial statements audited at the audit reporting stage. Although this Audit Manual describes analytical review only at the audit preparation stage, that does not preclude using analytical review at other stages. On the contrary, the Audit Manual suggests that auditors use analytical review procedures broadly and gradually standardize and enhance them. E. The Audit Program The audit program serves as not only a powerful tool to guide auditors in collecting sufficient and appropriate audit evidence at reasonable cost, but also as an effective tool to guide the conduct of audits in a stepped manner to assure audit progress. In the meantime, it is an effective means to distinguish between the audit team and the audit institution in terms of liabilities, and to assess the performance of each member of audit team. In the conduct of World Bank financed projects, the Audit Manual is to be referred to in formulating an overall audit program and specific audit programs prior to auditing and during implementation following the audit program during the course of audit, so as to avoid disconnection between the audit program and audit implementation. F. Testing and Evaluation of Internal Controls As an independent auditing procedure, testing and evaluation of internal controls are not required for all World Bank financed projects. However, as the World Bank shows great concern about the compliance of project entities with the loan agreement and its other provisions, auditors must combine the content of compliance testing and the substantive testing of statement items when the internal controls of an auditee cannot be relied upon, namely, when independent testing and evaluation of internal controls are not performed. G. Audit Procedures Whether in compliance testing of the business cycle or substantive testing of statement items, the Audit Manual provides various audit procedures in the form of procedure forms, but that does not necessarily mean that each loan project has to follow the procedures fully. Some of the procedures are absolutely necessary, while the others may be used or not based on the specific conditions of the auditee. H. Audit Timing This Audit Manual is prepared in accordance with audit processes, but some audit processes are not defined with strict time limits, so auditors must implement certain audit formalities and select appropriate timing based on specific conditions. For example, formalities for testing and evaluation of internal controls and certain substantive testing (i.e. stock taking and confirmation) may not necessarily be carried out after the accounting year draws to an end; auditing institutions may choose to conduct internal control investigations and carry out testing in the second half of the prior year or in some other appropriate time period and perform stock taking and confirmation at the end of the audit year.

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I. Audit Working Papers This Audit Manual provides a large number of samples audit working papers designed to standardize auditing practices and improve audit effectiveness, which are to be used based on the specific conditions of the auditee rather than simply to be copied. As far as testing and evaluation of internal controls are concerned, if testing and evaluation of a relevant business cycle are performed, relevant questionnaires, compliance testing procedure forms, summaries of compliance testing, and test records for relevant controls must be made available, but the format of the first three types of audit working papers must be relatively unified, while test records for relevant controls can be designed in a flexible manner based on specific conditions. As for substantive testing, auditing procedure forms, examination forms, and checklists must be used for each statement item, the format of auditing procedures form, and examination forms must be relatively unified, while checklists can be designed and prepared in a flexible manner based on specific conditions. The audit working paper samples in the Audit Manual are not all those for World Bank financed projects; other additional audit working papers can be designed and prepared as necessary.

This Audit Manual provides space for index numbers for each audit working paper, but does not discuss the serial number of audit working papers (index number) and its system specifically. Audit working papers are prepared with reference to the Audit Manual by adhering to the principles of science, reasonableness, and easy access, in the form of cross-indexing and notes, to reflect the reconciliation interrelation among audit working papers, so as to present the whole auditing process. Section 6 Preparation of the Manual The development of this Audit Manual was a sub-project of the Government Foreign Fund Audit Capacity Enhancement Assistance Project, financed by the World Bank. It was also one of the research subjects on the basic technical construction of the “people, law, and technology” construction planning project identified by the National Audit Office of the People’s Republic of China. It took nearly two years to develop and prepare, and revise many times, and finalize the Audit Manual on the basis of soliciting opinions widely from experts in various fields, field investigations, training and trial use. The Audit Manual has been prepared thanks to the support and leadership of the Auditor General and Deputy Auditors General of the National Audit Office of the People’s Republic of China.

The Research Team for the Audit Manual for World Bank Financed Projects

February 2000

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Chapter 1a – Audits of World Bank Loans in China Page 1 of 18

Chapter Ia Audits of World Bank Loans in China World Bank loans are utilized by China as an important component of foreign funds. For more than ten years, Chinese auditing institutions have always conducted audits of World Bank financed projects. An overview is provided here to cover auditing procedures, audit quality control, and division of responsibilities related to World Bank financed projects. Section 1 Auditing Procedures From the perspective of annual auditing procedures, the auditing of World Bank financed projects includes a preparation stage, an implementation stage, and a completion stage. Auditing tasks must be arranged prior to the initial annual audit. A. Arrangements for Project Auditing Tasks The Ministry of Finance represents the Chinese government when entering into loan agreements with the World Bank, and it re-lends the loans to government ministries, national enterprises, or local governments. The National Audit Office makes auditing arrangements after obtaining loan agreements and other relevant documents forwarded by the Ministry of Finance, this according to the form of project loan re-lending, the fiscal and financial relationship of subordination, and the location of project implementing entities. National projects located in Beijing are audited by the National Audit Office. Any projects located in Beijing and having project implementing entities located in Beijing shall be audited by the Foreign Fund Utilization Audit Department of the National Audit Office, by an assigned auditing bureau, or even by its local resident auditing offices under special circumstances. Any projects located in Beijing and having sub-project implementing entities located outside Beijing shall be audited by the local resident auditing offices or by local auditing offices after being authorized thereby according to the location of the projects. National projects located outside Beijing are audited by local resident auditing offices of the National Audit Office, and any special projects of this kind may be audited by local auditing offices after being authorized by the National Audit Office. If project implementing entities involve multiple jurisdictions of local resident auditing offices of the National Audit Office, sub-projects shall be audited by the local resident auditing offices where the sub-projects are located; if audit findings or audit reports need to be consolidated, the National Audit Office shall coordinate and designate its local resident auditing offices subject to consolidation; its local resident auditing offices responsible for audits of sub-projects shall submit audit findings on sub-projects to its local resident auditing office responsible for consolidation.

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Local projects are to be audited by local auditing offices after being so authorized by the National Audit Office. Any projects involving only cities directly under state planning are to be audited by auditing offices of the cities after being so authorized. Any provincial projects involving cities directly under state planning shall be audited only by provincial auditing offices after being so authorized. Audits of the projects of cities directly under state planning are to be arranged by the auditing offices of the cities at their discretion. Any projects with cities directly under state planning parallel to provinces shall be audited by provincial auditing offices and the auditing bureaus of the cities, after being so authorized separately, but copies of the authorization documents granted to the cities shall be sent to provincial auditing offices.

As for joint central and local projects, auditing arrangements or authorization shall be made generally based on the proportions of the project investments. If central investments are dominant, local resident auditing offices of the National Audit Office shall be designated for auditing purposes; on the contrary, local auditing offices shall be authorized for auditing purposes. Audit notices shall be issued when the above-mentioned auditing tasks are vested in auditing bureaus dispatched by the National Audit Office or its local resident offices; authorization notices shall be issued when local auditing offices are authorized to conduct audits of World Bank financed projects. The audit notices or authorization notices shall mainly contain: the project name, the project implementing entities (auditees), the agencies in charge of projects, the loan agreement number, the dates of signature for loan agreements, the effective dates of loan agreements, the term for project implementation, the total amount of the loans, the total investment in the projects, the term of audit, namely the starting and ending years in which audit reports are to be issued, the auditing institutions and the date of audit reports issued (refer to sample for specific formats and content).

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Example of Authorized Audit Notice:

National Audit Office Notice Concerning an Authorized Audit of the China Energy Conservation Promotion Project Financed by the World Bank

To SD Provincial Audit Office: This is to authorize your office to conduct an audit of the China Energy Conservation Promotion Project financed by the World Bank from the years 2000 in accordance with the provisions of Article 28 of the Auditing Law of the People’s Republic of China and the Loan Agreement entered into between the Chinese government and the IBRD, and to issue the audit report in both Chinese and English versions, and to make auditing decisions. The first audit report in Chinese and English versions is to be issued by your office after review and approval by the Foreign Fund Utilization Audit Department of the National Audit Office. Audit findings shall be submitted to the National Audit Office in a timely manner after the completion of the audit each year. Appendix: Authorized Audit of Project Schedule

National Audit Office of the People’s Republic of China (seal) December 1, 1999

Appendix to Authorized Audit Notice:

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Authorized Audit of the Project Schedule Entity: SD Provincial Audit Office Project name China Energy Conservation Promotion

Project Loan agreement number 4304-CHA Lender IBRD Date of signature for project June 26, 2000 Effective date of project September 26, 2000 Amount of loan US$21 million Agency in charge of project State Economic and Trade Commission Project implementing entity SD Provincial Office of Finance, SD

Provincial Energy Management Co. Term of project implementation 2000-2008 Starting and ending years of project audit

2001-2009 (ending year of audit may be brought forward or postponed depending on project implementation)

Auditing Institution SD Provincial Audit Office Auditing institution issuing audit Report in Chinese and English Versions

SD Provincial Audit Office

Deadline for issuing audit report in Chinese and English versions

June 30 of each year

Notes

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It takes a long time to implement and audit World Bank financed projects. Project auditing is authorized once and is valid for a long time, until the year following the termination of project withdrawals. In the case of special circumstances, the National Audit Office may change its authorization (arrangements) as deemed necessary. After the Ministry of Finance receives the loan agreement and project agreement, the Foreign Fund Utilization Audit Department of the National Audit Office may prepare a program to determine whether it will conduct a direct audit itself or arrange for audit bureaus dispatched by the National Audit Office or its local resident auditing offices to conduct the audit, or authorize local auditing offices to conduct the audit, to be submitted to the leaders in charge for approval. Final arrangements shall be made in the name of the National Audit Office. Local auditing offices may delegate part of their work to auditing bureaus at the municipal and county levels based on actual needs and possibilities of the auditing work. Provincial auditing institutions may include World Bank financed projects in their annual auditing work plan based on the above-mentioned arrangements. B. Project Auditing Preparations According to audit task arrangements and the annual audit work plan, the auditing institution is to make appropriate auditing preparations prior to the audit of the project.

1. Formation of the Audit Team Prior to audit of project, audit team shall be formed composed of a number of auditors who are professional and competent, by appointing a team leader. As it takes a number of years to audit World Bank financed projects, and an auditor shall be appointed to be chief auditor for each audit project on the basis of continuity.

2. Pre-audit Investigation and Training Audit team shall perform investigation prior to audit of project, and gain a basic understanding of project entity to be audited so as to assure that audit program is prepared and audit conducted in a selective and practical manner.

Training shall be provided to help auditors understand audit basis, audit requirements, audit content and focus. Training may cover applicable Chinese laws and regulations, relevant requirements of the World Bank, accounting procedures and methods used by auditee, project audit program prepared by audit team as well as necessary audit techniques and methods.

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3. Preparation of the Project Audit Program Auditors are to prepare detailed project audit programs based on training and investigation findings. In actual practice, audit programs can be prepared at the same time that audit investigations and training are conducted. A project audit program is specific planning for the whole process of auditing, including the content of the audit, the audit focus, the audit procedures, the assignment of personnel, progress over time, and audit quality controls.

4. Delivery of the Audit Notice Audit institutions must send an audit notice to the auditee prior to conducting an audit. The audit notice is to be delivered to the auditee at least three days before the audit team is sent to the auditee to begin the audit, so that the auditee can make proper preparations. The audit notice must contain the name of the auditee, the audit scope, the audit method, the term of audit, and the names of the audit team leader and auditors involved, as well as information to be supplied and the work to be done by the auditee (refer to sample for specific formats and content).

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Example of an Audit Notice:

National Audit Office Notice of an Audit of Revenues and Expenditures for 2000 of the World Bank Financed Scientific and Technological

Development Project under the Ministry of XX To the Ministry of XX: We have decided to send an audit team to conduct an audit of revenues and expenditures for the year 2000 and project implementation of the World Bank Financed Scientific and Technological Development Project managed by the Department of Science and Technology of your ministry since May 4, 2001, in accordance with the provisions of Article 25 of the Auditing Law of the People’s Republic of China, which we may trace to previous years or extend to an audit of other relevant entities. You are required to cooperate and provide relevant information and the necessary working conditions. Audit team leader: XXX Audit team members: XXX XXX XXX

National Audit Office of the People’s Republic of China (seal) April 20, 2001

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If the audit has to be conducted several times within the year, the audit notice delivered before the audit team is sent to auditee to begin the audit shall indicate the requirement for a continuous audit. In the conduct of a continuous audit, the auditee shall be contacted using other forms based on specific circumstances. C. Project Audit Implementation The audit team implements project audits according to the audit notice and project auditing program. Audit implementation involves three stages, namely, investigation of internal controls, compliance testing, and substantive testing.

1. Investigation of internal controls Investigation of internal controls has two aspects: first, investigation of management departments and the management system, consisting of an investigation of the control environment (investigation of management departments except accounting departments and the management system) and investigation of the accounting system; and second, investigation of internal controls on various business cycles. Investigation of internal controls can be conducted using flow charts, questionnaires, and written descriptions. Investigations of internal controls are not conducted each year. As for new projects, the investigation must be conducted in a careful and comprehensive manner, so as to achieve understanding of new projects. As for old projects, a preliminary understanding is sought first; if only minor changes are found in internal controls within project implementing entities, the investigation may be conducted during the following year, rather than the current year, or partially each year. Investigation of internal controls can be implemented at either the implementation stage or the preparation stage.

2. Compliance testing Compliance testing is checking, using certain auditing methods, the operation of business activities and the relevant internal controls to determine the procedures, scope, and timing of substantive testing. Compliance testing is usually conducted based on business cycles using a sampling method. The Audit Manual classifies the business cycle representing the characteristics of World Bank financed projects in five categories: the business cycle of application for reimbursement and withdrawal, the business cycle of procurement and payment, the business cycle of inventories, the business cycle of project construction, and the business cycle of project fund receipts and disbursements.

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3. Substantive testing Depending on the audit content and focus identified through compliance testing, substantive testing based on compliance testing is to verify the account balances of all financial statement items, so as to determine whether the balances can be confirmed through examination, stock taking, observation, inquiry and confirmation, computation, and analytical review. Substantive testing can be conducted by either business cycle or financial statement items, or a combination of the two.

4. Completion of project audit At the audit completion stage, adequate but isolated audit evidence and audit working papers obtained at the audit implementation stage shall be consolidated, sorted out, analyzed, and evaluated, so as to draw audit conclusions and issue the audit report. The following tasks are to be accomplished at the audit completion stage:

• Sorting out of audit working papers As auditors examine different transactions according to their respective assignments, the content of audit working papers are quite diverse rather than systematic. Thus, the content of audit working papers must be sorted out, reviewed, and consolidated by eliminating the portion thereof that is irrelevant to the audit objectives and audit conclusions, while the remaining portion is subject to further classification and consolidation.

• Analyzing the nature of the problems and forming an audit opinion After the audit working papers are sorted out and checked, a careful analysis must be conducted of the nature of the questioned amounts discovered through the audit and their impact on financial statements and the type of audit opinion initially determined. Any material problems and issues which the audit team is not sure of are to be submitted to their auditing institution for instructions.

• Exchanging views with auditee After the evidence obtained and the audit working papers are consolidated and have lead to the formation of an initial audit opinion, views must be exchanged with the auditee in oral or written form.

• Summarizing the auditing work

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Audit program implementation and the treatment of significant auditing matters shall be summarized prior to preparation of the audit report.

3. Preparing and issuing the audit report The audit report is a written document which reflects the results of the auditing work and expresses the audit opinion. The audit report is to be prepared and issued after the completing the above-mentioned work

• Preparation of the audit report Auditing of World Bank financed projects is designed to perform the functions of supervision, attestation, and evaluation, so the audit report is different not only from the audit attestation report issued by public auditing organizations but also from the audit report in its general sense issued by auditing institutions. The audit report on World Bank financed projects must meet the need of supervision, attestation, and evaluation. Audit reports drafted by an audit team shall be approved by the auditing institution. It contains the following four basic sections:

o The auditor’s opinion on financial statements, including project- specific, special purpose financial statements;

o Financial statements and notes to the financial statements; o A summary of questioned costs; o Compliance with national regulations and the loan agreement,

and evaluation of internal controls. Compared with audit reports issued by auditing institutions, generally, the audit report submitted by the audit team also contains four basic sections, but in greater detail.

• Delivery procedures for the audit report The audit report produced by the audit team is to be signed by the audit team leader, the opinion of the auditee is to be requested, and the report is to be submitted to the auditing institution. After the audit report is approved, the auditing institution is to issue the audit report to the auditee. Return receipt shall be obtained when audit report is delivered to auditee. Audit report required by the World Bank shall be submitted by auditee. When local resident audit office of the National Audit Office or local audit office issue audit report for the first time to be submitted to the World Bank in the case of new projects, the audit report shall be first submitted to the National Audit Office for approval and then sent to project entity by the local resident audit office or local audit office.

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• Issuing of the audit decision and audit recommendation letters

In the case of noncompliance with national laws or regulations, the auditing institution shall issue not only the audit report, but also an audit decision or audit recommendation letters.

• Documentation The last part of the project audit is documentation according to relevant provisions. Section 2 Audit Quality Control Audit quality control refers to activities of organizing, guiding, supervising, and examining the establishment, implementation, results, and report of audit tasks by the auditing institution using scientific organizational means and technical methods, according to certain requirements or standards, and self-disciplined behavior on the part of the auditing institution and auditors. It plays an important role in improving audit quality and performing audit functions better. Total quality control is implemented in the auditing of World Bank financed projects by taking the following principal measures: A. Staffing the Audit Team with Competent Auditors Auditing of World Bank financed projects is highly policy-related and technical, requiring highly competent auditors, who should have high standards of professional ethics, be familiar with applicable laws and regulations, understand internationally accepted auditing standards, international practices, and the requirements of the World Bank, as well as have a good command of English and be computer literate. From the perspective of project distribution, World Bank financed projects involve numerous industries in the national economy, such as industry, agriculture, forestry, education, public health, etc., and the auditing of a project may involve finance, accounting, management, and works. Therefore, the audit team must be staffed with competent auditors who can meet the above-mentioned conditions and auditing requirements so as to ensure that the audit will be of high quality. B. Enhancing the Professional Skills of Auditors Auditors must study hard, work hard, and accumulate practical experience so as to improve the professional skills required for auditing; auditing institutions must also provide various forms and channels of on-the-job training and continuing education, and create favorable opportunities and conditions for auditors by means of job rotation and exchanges.

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C. Establishing an Audit Quality Responsibility and Classification System

Audit quality classification control means that the tasks of every staff during the course of audit will be subject to corresponding follow-up scrutiny. Thus, a classification quality control network is to be established to define clearly the responsibilities of the auditors, the chief auditor, the audit team leader, and the issuer of the audit quality control report, so as to set rules for auditors to comply with, establish a clear division of responsibilities, and achieve timely communication and discussions on problems discovered through the audit. Even if problems arise from a particular link in the audit, the person responsible can be located as soon as possible based on the division of responsibilities. D. Establishing an Audit Approval and Review System An audit approval and review system must be established for audits of World Bank financed projects.

1. Audit program review and approval system After the audit program is prepared by the audit team, it is reviewed by the audit team leader and approved by the head of the department within which the audit team works; material matters may be implemented only after approval by a responsible leader of the auditing institution. The audit team conducting the audit may not find the audit program compatible with actual needs and may make adjustments to the audit program and seek approval based on specific circumstances.

2. Audit evidence review system Evidence collected by auditors in the field audit is to be reviewed by the audit team leader and then sent to the auditee for signature and seal. Auditors shall check the audit evidence with which the auditee disagrees and obtain new evidence if errors and deviation arise. The audit team shall evaluate the objectivity, relevance, adequacy, and legality of audit evidence prior to preparation of the audit report. After the completion of the field audit, audit evidence is to be consolidated and a list of audit attestation materials prepared, and these are to be signed by both the audit team leader and the person who prepares the list, for unified use and custody.

3. Audit working papers review system Audit working papers shall be subject to a strict review system at different levels. Any inappropriate audit working papers shall be returned for completion or updating, so as to meet requirements. The audit team leader must review the audit working papers prepared by the auditors in the course of implementing the audit; the head of

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department within which auditing team works is to review important audit working papers prior to preparation of the audit report; and before the audit report is submitted to leaders of the auditing institution for approval, important audit working papers shall be reviewed by a specialized review department and official. Review officers shall document their review and express a review opinion in written document, which must bear a signature. As deemed necessary, auditors may complete and revise audit working papers based on the review opinion.

4. Audit report review system The audit report is to be discussed by the audit team, reviewed and finalized by the audit team leader, and discussed with the auditee. The head of the department within which audit team is working shall review the audit report submitted in light of the pinion of the auditee, put forward a written and signed review opinion, and may require auditors to make revision as deemed necessary. The review department or official of the auditing institution shall conduct a review before the leaders of the auditing institution review the audit report submitted by the audit team, the audit report is issued in the name of the auditing institution, and the audit decision letter is issued.

5. System of professional guidance, supervision, and examination The auditing institution shall conduct an examination by qualified and experienced auditors through a sampling of the quality of the work at key links in the course of the audit, for example, to determine whether the staffing is reasonable; whether the time arrangements are appropriate; whether the evidence obtained is objective, relevant, adequate, and legal; whether the audit working papers and audit report are standardized; and whether the audit recommendations are practical. While the examination is conducted, the audit team shall be assisted in finding solutions to problems encountered in the audit, so that the auditing institution will perform functions of supervision and examination as well as of guidance and assistance. Section 3 Division of Auditing Responsibilities Audit responsibility refers to the responsibility of auditors in the conduct of the audit and the liability to be borne by the auditors due to work errors. There are many factors that may influence audit responsibility, but attention shall be paid to the division of the following responsibilities in the course of audit: A. The Accounting Responsibility of the Auditee and the Auditing

Responsibility of the Auditing Institution The accounting responsibility of the auditee means that the auditee shall be

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responsible for the truthfulness and completeness of accounting information and other relevant information that it provides to the audit team. The audit responsibility of the auditing institution means that the auditing institution shall be responsible for the truthfulness and legality of the audit report and the audit decision letter that is issued. The accounting responsibility of the auditee and the audit responsibility of the auditing institution are completely different responsibilities. The audit responsibility of the auditing institution cannot substitute for, diminish, or immunize the accounting responsibility of the auditee. Similarly, the accounting responsibility of the auditee cannot substitute for, diminish, or immunize the audit responsibility of the auditing institution. The auditee shall be directly liable for its mistakes, fraud, misfeasance, and irregularities. Auditors may detect material mistakes, fraud, misfeasance, and irregularities so long as they strictly comply with professional standards and requirements, maintain due diligence, and implement the necessary auditing procedures. Due to inherent restrictions on audit testing and internal controls within the auditee, auditors cannot be expected to discover and expose all misstatements and omissions, but it does not mean that the audit institution shall not be liable for any misstatements or omissions which are not discovered; the key is to determine whether the reasons discovered are caused by errors of the auditors or the auditing institution themselves. Auditors shall be responsible for any serious negligence or fraudulence that may arise from the audit process. In the current audit environment in China, especially in the auditing of World Bank financed projects, auditors may encounter such a situation as this: the auditee is saddled with weak basic accounting work, incomplete accounting information, poorly qualified accounting personnel, and the inability to prepare financial statements that are compatible with the requirements in a timely manner, and they may also think that the auditing institution is obliged to assist them in setting up accounts and preparing statements, and then assume full responsibility for the audited statements. And a number of auditing institutions and auditors often do some accounting work that should have been completed by the auditee, in the hope of assisting the auditee to solve practical difficulties. This practice may make it difficult to distinguish between accounting responsibility and audit responsibility, and it also disregards the fundamental objectives of the audit and influences audit quality, if auditors are concentrating on accounting work, due to the constraints on audit time and costs. Therefore, auditors must be urged to put an end to this practice in the actual work. In order to define the accounting responsibility of the auditee and the auditing responsibility of the auditing institution, a commitment system may be introduced in the course of the audit, namely, when the audit team is sent to auditee to begin the audit, the audit team may require the auditee to make a written commitment to its accounting responsibility in the form of a management representation letter, so as to provide a basis for defining the accounting responsibility of the auditee’s management, and also contribute to protecting the auditors and the auditing institution. Although the

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written commitment is made by the auditee, the audit team may draft the management representation letter in advance, which can be handed over to the auditee’s management when the audit team is sent to the auditee to begin the audit, requiring the management to submit the letter, signed and sealed, at the end of the field audit. Generally speaking, the written commitment of the auditee, namely the management representation letter, shall contain the following statements:

• Financial statements have been prepared in accordance with applicable accounting standards and accounting regulations; the management of the project entity shall be responsible for the fairness, legality, and completeness of financial statements.

• All financial and accounting information has been made available to the audit team.

• Important documents and minutes of meeting have been provided to the audit team.

• Except for problems discovered through the audit, there are no acts of malfeasance, irregularities, fraud, or violations of the loan agreement.

• Except for problems discovered through the audit, there are no significant uncertain matters.

Please refer to the sample for the format and content of the management representation letter (eliminated or changed as deemed necessary).

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Example of a Management Representation Letter:

Management Representation Letter (Name of audit institution): In connection with your audit of the accounts of the project (specify) as of December 31, XXXX (specify), for the purpose of expressing an opinion, we confirm, to the best of our knowledge and belief, the following representations made to you during audit: 1. We are responsible for the fair, legal, and complete representation of financial statements prepared in conformity with Chinese accounting standards, accounting regulations, and the loan agreement. 2. We believe that this entity has established a sound internal control system to meet the requirements for preparing financial statements correctly in conformity with Chinese accounting standards, accounting regulations, and the loan agreement. We have no knowledge of any allegations of malfeasance involving management or employees who have significant roles in the internal control system or of other employees who have a material effect on financial statements. 3. We have made available to you all the financial information, documentary evidence, and minutes of meetings. We have no knowledge of any possible violations of accounting standards, accounting regulations, or the loan agreement. 4. All transactions for the current year have been recorded in the accounting information. 5. As of the date of this representation letter, we have no knowledge of matters that may have a material effect on financial statements, or have greatly changed or influenced, or may greatly change or influence project implementation, in spite of having no effect on financial statements. 6. No events have occurred subsequent to the date of the financial statements that would require making adjustments to the financial statements.

Auditee (seal) Signature of Legal Representative:

Date:

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B. Division of Audit Responsibilities within Auditing Institutions Auditing responsibilities are to be assigned at different levels within the auditing institutions.

1. The responsibility of the auditors The responsibility of auditors mainly refers to obtaining evidence that can reflect the auditee’s financial position, operating results, cash flow, and project implementation in a comprehensive and objective manner according to a specific project audit program, and reporting the evidence to the audit team truthfully. Auditors shall be responsible for the objectiveness, relevance, adequacy, and legality of audit evidence, and shall prepare audit working papers in conformity with requirements.

2. The responsibility of the audit team leader The responsibility of the audit team leader refers to assigning work to each auditor, breaking down audit tasks, reviewing evidence obtained by the auditors and the audit working papers prepared, taking responsibility for the quality of the field audit, and reporting to his or her department truthfully.

3. The responsibility of the audit department The auditing of World Bank financed projects is generally conducted by foreign fund utilization auditing departments of auditing institutions at all levels. The auditing department is responsible for reviewing the audit team’s audit report and the material evidence attached, including the audit working papers, determining whether the audit report is submitted to leaders or requiring the audit team to complete or make amendments thereto.

4. The responsibility of the specialized review department or full-time review official

After review by the auditing department within which the audit team works, and before the auditing institution approves and issues the audit report and audit decision letter, the audit report drafted by the audit team must be reviewed again by the specialized review department or full-time review official, who shall take responsibility for review results.

5. The responsibility of the auditing institution specifically implementing audit tasks

The responsibility of the auditing institution specifically implementing audit tasks involves accomplishment of various auditing tasks, providing assurance as to policy,

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capital, personnel, and other matters, approving the audit reports submitted by foreign fund utilization auditing departments, issuing the audit reports and audit decision letters, reporting audit results truthfully to auditing institutions at a higher level and the government at their same level, and disclosing audit results truthfully to the World Bank.

6. The responsibility of the auditing institution at the next higher level which authorizes audit

While the auditing of World Bank financed projects is the responsibility of an authorized audit, the higher level auditing institution which grants the audit authorization shall guide, supervise, and examine the lower level audit institution professionally and pay attention to organizing, coordinating, guiding, supervising, and examining the lower level audit institution professionally, especially when the audit report must be consolidated and issued, and the audit decision letter be issued, and shall take responsibility for the final audit report and audit decision letter. Audit quality control and division of auditing responsibilities are closely related. Audit quality can be guaranteed only so long as responsibilities at various links are in place.

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Chapter I – Overview WB Loans Page 1 of 25

Chapter I An Overview of World Bank Loans Section 1 The World Bank The World Bank is a worldwide, inter-governmental, international financial institution headquartered in Washington, D.C., the capital of the United States, and the name refers, broadly, to the World Bank Group. The World Bank Group consists of five member institutions: the International Bank for Reconstruction and Development, the International Development Association, the International Finance Corporation, the International Center for the Settlement of Investment Disputes, and the Multilateral Investment Agency. The International Bank for Reconstruction and Development (IBRD) provides medium and long-term loans to developing countries at interest rates that are lower than market rates. The International Development Association (IDA) provides long-term, interest-free loans to the poorest developing countries. The International Finance Corporation promotes private sector growth in developing countries by working closely with private investors and by investing in commercial enterprises. These three financial institutions have combined to pursue the goal of providing loans and technical assistance to its developing member countries, so as to help improve their productivity and facilitate economic development and social progress.

The Multilateral Investment Agency is a non-financial institution designed to help its developing member countries create a favorable investment environment, so as to attract foreign investment more effectively for their economic development. It offers foreign investors in developing countries insurance against noncommercial risk and consulting services for trade promotion. The International Center for the Settlement of Investment Disputes is also a non-financial institution designed to provide facilities for settling disputes between foreign investors and their host countries, so as to encourage more international investment in its developing member countries.

Among the above-mentioned five institutions, the IBRD and the IDA are relevant to this manual, so their loans and relevant information are the focus of what follows. Section 2 Characteristics of World Bank Loans

Compared with foreign government loans and foreign commercial bank loans, World Bank loans may be characterized as follows: A. Lending only to Member Countries The World Bank provides loans only to the governments of its member countries or to

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public or private institutions guaranteed by the governments or central banks of its member countries, that is, the legal representatives of its member countries. B. Lending Mainly to Middle- and Low-income Developing Counties. Income classification is based on per capita GDP. Specific classification and quantitative limits may vary from period to period. C. Lending Only to Member Countries with Repayment Capability The IBRD and the IDA are both development institutions designed to promote the development of member countries through lending to middle- and low-income countries. However, as financial institutions, they must make sure that loans granted can be fully recovered. Thus, the IBRD grants loans at fairly low interest rates, while the IDA provides interest-free credits, charging only commitment fees and commissions, while clearly specifying in the loan (credit) agreement that loans (credits) will be fully repaid. D. Lending for Specific Projects

World Bank loans are generally project loans and are used for projects considered to be top priority by the borrowing country. In addition, under special circumstances, the World Bank also provides non-project loans for finance sector adjustment and economic structure adjustment in the borrowing country. E. Lending for Projects that Cannot be Financed from Other Sources by

Satisfying Reasonable Conditions The World Bank provides loans only to specific projects of middle- and low-income member countries, but it may not agree to lend for projects, even when they are economically and technically feasible and deemed worthy of priority. Specific projects in member countries may not be financed by the World Bank if other sources of funds are available under what the World Bank considers to be reasonable conditions in current market conditions at the time that projects are identified. F. Financing of Only 30% to 50% of a Project’s Total Costs Generally speaking, a large-scale project construction may be financed in both foreign currencies and domestic currencies. The World Bank does not finance 100% of a specific project’s total costs, but usually provides a portion of the project’s financing to cover the foreign exchange needs, usually about 30% to 40% of the total costs, and even up to 50% in the case of individual projects. As for the domestic currency disbursement needed for project construction, the World Bank can provide a portion of the financing only under very special circumstances, while the remainder is to be

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financed by the borrowing country. G. Lending with Long Terms of Maturity Generally speaking, World Bank loans carry relatively long terms of maturity or terms for repayment, which may vary slightly depending on the bank, the International Bank for Reconstruction and Development or the IDA, and the terms may be adjusted according to specific circumstances, per-capita GDP, and inflation. H. Low-interest and Interest-free Loans World Bank loans are fairly preferential in terms of financing costs. More than two-thirds of the IBRD loans are raised through bond issues, so loans are granted at an interest rate linked to the market interest rate. Since 1982, floating interest rates have been adopted. Interest rates are set by adding 0.5 to the average cost of borrowed funds, and then adjusted biannually. As the bank itself has a substantial amount of funds of its own, which protect the bank from borrowing when market interest rates are too high or are fluctuating dramatically, and its net assets (capital stock and reserves provided by member countries) are exempt from the payment of dividends, thus its lending rates may be lower than market interest rates. However, interest is imposed on lending in the end, so the IBRD loans are called hard loans. As for loans committed but unpaid, a 0.75% commitment fee is charged. This rate is relatively lower than that for general commercial loans. IDA credits are purely preferential loans, and interest-free during the whole time the loan is held, and are thus called soft loans. The portion withdrawn is subject to a 0.75% annual commission fee, while the portion committed but not withdrawn is subject to a 0.5% annual commitment fee. The IDA may exempt its borrowers from the commitment fee in the case of good performance. I. Loans are Made in US dollars, while Credit is Granted in SDR The borrowing country must bear the risks of exchange rate fluctuations. IBRD loans and IDA credits are granted differently, the former in US dollars and the latter in SDR, and any withdrawals from the IBRD are converted to US dollars, regardless of currency, according to the exchange rate on the current day. The borrowing country must repay the principal and interest thereon in the same currency. Similarly, any withdrawals from the IDA are converted to SDR, regardless of currency, according to the exchange rate on the current day. The borrowing country must repay the principal and interest thereon in only three types of currency: US dollars, British pounds, or French francs. The use of US dollars or SDR leads to the same final result, namely that the risks of exchange rate fluctuations are borne by the borrowing country. J. Complicated and Time-consuming Loan Formalities

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World Bank loan projects go through several stages of project identification, preparation, appraisal, negotiation, and evaluation. Generally, it takes one and a half to two years from project identification to commencement of implementation, and the formalities are complicated. The project implementation period varies from project to project depending on its size. During the process of project implementation, World Bank loans are not appropriated to the project entity all once, but are charged to the current account of the borrowing country as commitment fee, and then gradually paid out until completion of the project by means of direct payment, special account statement, and statement of expenses, with the borrowing country making withdrawal applications. Fund movement, contrary to withdrawal, namely repayment of interest and principal, occurs with project implementation and completion. The terms of borrowings could last for 50 years in some cases. Some of the said 10 characteristics are sometimes also principles governing World Bank loans. According to this measurement, the World Bank may also refuse to grant loans due to the following reasons: the project proposed by the applying country may not be a top priority for the economic development of the country, or it may be inappropriate, excessively large, or poorly prepared; or the applying country can obtain funds for the project from other sources under reasonable conditions; or the applying country has poor capacity for or unreliable prospects for loan repayment; or the applying country may have proposed a project beyond the scope of World Bank loan projects. These four reasons shall be confirmed by the World Bank. Section 3 Types of World Bank loans On the basis of these characteristics, World Bank loans are designed to provide financing for specific projects. In addition, there are also non-project loans, which tend to rise. By combining both of them, the categories of World Bank loans can be further distinguished as follows: A. Specific Investment Loans Specific investment loans refer to specific project loans. This category is the mainstay of the World Bank loans, covering mostly agriculture, rural development, education, industry, energy, transportation, water supply, and urban development. The purposes of specific project loans are to create new production-type assets, to train talent, to increase output, and to ensure adequate maintenance. This category of loans is evaluated and supervised by the staff of the World Bank. B. Sector Adjustment Loans Sector loans are primarily granted to one or even several sectors, rather than to

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individual or specific projects. This category of loans can be further classified into the following three types:

1. Sector investment loans and maintenance loans The World Bank provides this category of loans to relatively strong business organizations especially in middle-income countries, so as to improve sector policy and investment priorities to enhance the capability of the borrowing country in formulating and implementing investment plans. This category of loans is evaluated and supervised by competent departments of the borrowing country in keeping with standards agreed upon between the borrowing country and the World Bank. At present, this category of loans is mostly utilized by the transportation sector.

2. Intermediate financial institution loans The meaning of so-called intermediate financial institution loans is that the World Bank first grants loans to financial institutions and these separately re-lend the loans for various sub-projects. Re-lending by intermediate financial institutions is usually conducted within a specific scope, or for specific sectors, such as the agricultural industry or manufacturing industries composed of several specific sectors, thus, intermediate financial institution loans also belong to sector loans. Identification of sub-projects, determination, evaluation, and supervision of interest rates on re-lending are conducted by intermediate financial institutions in keeping with standards agreed upon between these and the World Bank. China’s investment banks and agricultural banks, etc. have utilized this category of loans so far.

3. Sector adjustment loans This category of loans is a type of loan between sector investment loans and maintenance loans and the following type of loan: structural adjustment loans. This category of loan can be chosen when the World Bank believes that the borrowing country has weak enforcement capability or its overall economic management and policy reform competency or the size of the national economy are not favorable to structural adjustment. That is to say, loans are provided for the overall policy and system reform of a certain sector. Sector adjustment loans are usually designed to provide foreign exchange for imports of that sector, and the beneficiaries are to be selected in advance according to standards agreed upon between the two parties involved. C. Structural Adjustment Loans This category of loan involves more sectors and exerts more influence than the previous category of loan, sector adjustment loans. The loans are designed to assist the borrowing country in comprehensive adjustment reforms in the macro-economy,

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sector economy, and structural system. The main purposes of the loans are these: first, to assist the borrowing country in conducting economic policy and system reform, raising the utilization efficiency of funds and resources, and reducing the balance of payments deficit from the perspective of economic structure; second, to assist the borrowing country in making adjustments to the economic structure and development patterns, so as to adapt to changes in the world economic situation; third, to provide freely convertible foreign exchange to the borrowing country, so that it can import the necessary raw materials and parts for the purpose of maintaining and recovering economic growth, and absorbing foreign investment. The World Bank has established more detailed provisions for the use of structural adjustment loans. First, the prerequisites for utilizing this category of loans shall be huge balance of payments deficits suffered or faced due to economic structure problems, which can be hardly reversed in the short run. Second, the government of the borrowing country shall, by acting in an official capacity, negotiate with the World Bank, formulate a package of reform and adjustment plans, including import policy, investment plans, and system organization, and work out long-term and short-term measures and objectives. Third, the adjustment plan shall be carried out under the supervision of the World Bank and subject to regular examination. If the borrowing country fails to comply with established plan and objectives, the World Bank may suspend loan payments. D. Technical Assistance Loans The World Bank provides technical assistance loans to enhance the capability of the competent agencies of the borrowing country to work out development policies and prepare specific investment projects. This category of loans can be classified into the following two types:

1. Technical assistance loans for specific projects This type of loan is to provide loans for specific projects, designed to provide foreign exchange funds for technical and economic consulting.

2. Technical assistance loans provided to analyze and address organizational or policy issues

This type of loan is not necessarily linked to specific projects, but is designed to provide foreign exchange funds to address relatively macroscopic issues, such as a national economic plan and macro-economic management policies and measures. E. Emergency Reconstruction Loans This is a category of loan provided by the World Bank to address specific emergencies,

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so as to assist member countries in dealing with natural disasters or the impact of other disasters. China used this category of loan for the Daxinganling Fire and the North China earthquake. F. Co-Financing The so-called co-financing means that the World Bank and other parties outside the borrowing country jointly provide loans for World Bank financed projects. Co-financing may either refer to loans granted by the World Bank and other lenders to different parts of the project, or to financing jointly provided by other agencies recommended and mobilized by the World Bank. The other party or other sources of loans can be one of the following three alternatives: first, official loans, such as government loans, loans from foreign-aid agencies affiliated with the government, and loans from multilateral financial institutions, etc.; second, export credits; third, loans from commercial banks or private financial institutions. Specific methods of co-financing can be adopted either in conformity with their own relevant provisions or by combining the World Bank loans and other loans.

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G. Establishment Procedures for World Bank Financed Projects The management of World Bank financed projects has turned into a set of tight, scientific procedures, classified into the following six steps: identification of projects, preparation of projects, appraisal of projects, negotiation of projects, implementation of projects, and evaluation of projects. These six steps actually fall into three stages, namely project establishment, implementation and evaluation. The six steps or three stages can be classified into three aspects in terms of funds, namely loan commitment, loan withdrawal, and loan (principal and interest) repayment, of which the last two aspects may overlap. Setting aside implementation and evaluation for the moment (including loan withdrawal and repayment), at the first stage of management of World Bank financed projects – the stage of project establishment – the basic procedures are as follows, from the perspective of contacts between China and the World Bank: H. Making a Project Proposal In accordance with national long-term planning and applicable requirements of the World Bank, competent departments of the State Council, the Chinese Cabinet, and local governments make a project proposal for use of World Bank loans, to be submitted to the National Commission on Development and Reform. Proper attention is to be paid to the priorities for World Bank loans while the project proposal is drafted: poverty relief in various regions of developing countries; assistance to middle-income, debt-ridden nations through policy development and loans; linking environmental problems to major policies and the business of the World Bank; and implementation of an action plan designed to improve the role of the World Bank in the private sector of developing countries. By focusing on these priorities, proposed projects will be identified as aligned with the following principles: in compliance with the investment principles and policies of the World Bank; in harmony with the overall development plans or objectives of major sectors of the country; priority projects needed by the country as a whole; and projects considered appropriate by both the World Bank and China. Project proposals based on these principles shall be deemed favorable for further attention by the National Commission on Development and Reform and hopefully acceptance by the World Bank in the future. I. Identification of the Project List Based on the same idea as above, the National Commission on Development and Reform may conduct investigation and research, pursue comprehensive balancing, and identify priority projects meeting the requirements of China and the World Bank to include them on the list of World Bank financed projects (3-5 years), to be

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submitted to the State Council for approval. J. Identification of Annual Alternative Projects According to the project list approved by the State Council, the Ministry of Finance shall invite the World Bank’s officials to conduct a preliminary inspection and express an opinion on whether the projects are acceptable and a priority. K. Preparation of Project Project preparation may start with the annual alternative projects identified. Project preparation covers three areas: personnel preparation; establishment of a project executing agency and engagement of consultants; and fund preparation, self-financing or application for financial assistance (including application for World Bank technical cooperation credits, and financial assistance from FAO, UNESCO, WHO, UNIDO and UNDP); a feasibility study, of which the third aspect is of major work, and generally includes four steps: identification of investment opportunities (opportunity study); preliminary identification of projects (preliminary feasibility study); analysis and identification of projects (feasibility study); and final selection of projects and feasibility reports. Whatever steps are taken, consideration shall be given to the feasibility of the project, which is a common property among them, including technical feasibility, feasibility of the organizational system, economic feasibility, financial feasibility, and social feasibility. The feasibility study shall be conducted mainly by the borrower. However, the World Bank may also be involved in the process to some extent, playing a supporting role: to provide necessary technical guidance and financial assistance to the project entity for preparations; to assist the borrower in working in line with the requirements and standards of the World Bank; to correct and solve any incorrect or inappropriate matters during the preparation of the project. L. Appraisal of the Project On the basis of the feasibility study, namely the pre-appraisal by the borrower, officials of the World Bank perform a project appraisal. Prior to formal appraisal, if the project is large and complex, or the feasibility report (pre-appraisal report) is not sound and careful enough, the World Bank may also do a pre-appraisal. Pre-appraisal or appraisal covers four major areas: technology, organization, economy, and finance. Among them, financial appraisal mainly covers: arrangements for World Bank loans and domestic counterpart funds needed for the project; design of an accounting system and accounting report for the project (especially projects generating revenues); recovery of project investments, etc. If the results of the appraisal are considered compatible with the loan provisions of the World Bank, the officials of the World Bank assigned to conduct appraisals may prepare a “green report” on the feasibility study as a loan notice.

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M. Negotiation of the Project The stage of project negotiation may start after the World Bank and the Chinese side (the Ministry of Finance, the National Commission on Development and Reform, project entities, etc.) are satisfied with the project appraisal. Prior to negotiation, the World Bank provides a draft of the loan agreement and sends an invitation, and the Chinese side may send a 4- or 5-person delegation for negotiation represented by the Ministry of Finance, the National Commission on Development and Reform, and the project entities. The negotiation is to be based on the loan agreement of the IBRD, the credit agreement of the IDA, the project agreement, the feasibility study report, and the outline for negotiation. Negotiation mainly covers the amount of the loans, the term of the loans, the method of repayment, the assurance measures for project implementation, as well as the rights, obligations, and responsibilities of the World Bank. Negotiation may eventually lead to the definition of the rights, obligations, and responsibilities of each party and the drafting of a loan agreement and credit agreement as well as other legal documents. N. Signing of the Agreement After the loan agreement and the credit agreement have been drafted through negotiation, both the World Bank and the Chinese side are to review and finalize the loan (credit) agreement. The World Bank submits the agreement to its executive board for approval, while the Chinese side seeks approval from the State Council; then both sides send authorized representatives to sign the agreement. As the World Bank is headquartered in Washington D.C., the capital of the United States, the Chinese side usually authorizes its ambassador to the United States to sign the loan (credit) agreement. O. Entry-into-effect of the Agreement The signing of the loan (credit) agreement refers only to the commitment made by the World Bank for loans, rather than the entry-into-effect of the loan (credit) agreement, while the loan (credit) agreement sets definite provisions concerning the effective date of the agreement. It usually takes two to three months from the signing of the agreement until the entry-into-effect. During this period, preparations have to be made for actual implementation of the project. From the perspective of the World Bank, efforts are to be made in the following area: notification of the plan for examination of project implementation by project officers of the borrowing country; assistance to project officers of the borrowing country in understanding various procedures which they will need to understand and comply with during the course of project implementation (including loan payment procedures, etc.); discussion of issues related to the project implementation report with the project entity, so as to provide necessary information; determining the way of contracts between each other. In the meantime,

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the work to be done by the borrowing country is as follows: to open a project account with the World Bank’s bureau of loans; to organize and staff the project with technical, economic, and management experts, and to work out project implementation plans and time and progress arrangements; to understand the work plan of the World Bank’s project officers and the working procedures of the World Bank; to advertise for the project in the UN’s United Development Forum Journal, China Daily, and the People’s Daily (overseas edition), if international bidding is deemed necessary. After these matters have been attended to, once the agreement enters into effect, the project is formally established and it enters the implementation or investment stage. P. Domestic Re-lending of World Bank Loans World Bank loans are mainly granted to specific projects, namely project entities, but as the World Bank does not lend directly to project entities, the loan (credit) agreement is entered into with the government of the borrowing country. In China, the Ministry of Finance, as the legal representative of the Chinese government, enters into the agreement with the World Bank to obtain loans. The Ministry of Finance of China is a debtor of the World Bank. Since World Bank loans are mainly project-specific loans, to provide financing for particular projects, it is neither necessary nor possible for the Ministry of Finance to engage directly in project management and construction. Thus, internally, the Ministry of Finance not only serves as a creditor, but also re-lends the World Bank loans to the project entity. This type of re-lending involves different organizations, and loans are not re-lent once only but are subject to further re-lending. Additionally, the terms and conditions of re-lending (such as amounts, terms, interest rates, and repayment of re-lent loans) may not be consistent with the original terms and conditions of loans. Q. Re-lending Recipients Externally, the Ministry of Finance, as a window on utilizing the World Bank loans, is responsible for daily contacts, negotiation, and executing agreements with the World Bank, as well as repayment of principal and interest. Usually, the Ministry of Finance first re-lends loans to various ministries in charge, provincial-level local governments, or specialized banks, which may then re-lend the loans that have been re-lent to their affiliate agencies or project entities. In summary, the Ministry of Finance re-lends loans to the following three types of objects:

1. “Vertical” Re-lending The Ministry of Finance re-lends the World Bank loans to various ministries in charge, such as the Ministry of Education, the Ministry of Agriculture, the Ministry of Communications, and the Ministry of Railways. The specialized ministries, as overall project executing agencies, are in charge of sub-project executing entities nationwide. Sub-project agencies may be dispersed in a number of provinces across the country.

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As the overall project executing agencies, the various ministries concerned may re-lend the loans to sub-project entities as deemed necessary, and are responsible for collecting principal and interest to be turned over to the Ministry of Finance in a consolidated form. During the initial period of utilizing the World Bank loans in China, most projects follow this “vertical” re-lending method, which plays a positive role in implementing national policy, achieving a reasonable layout of productive forces, and enhancing technological management.

2. “Horizontal” Re-lending The Ministry of Finance re-lends the World Bank loans to relevant provincial-level local governments. Leading groups and project offices are established by provincial-level local governments to be responsible for project implementation. If projects are located in many provinces, provincial-level local governments establish a re-lending relationship with the Ministry of Finance, respectively; under the provincial level, if projects involve several cities, prefectures, counties, or specific executing entities, the provincial-level governments usually re-lend the loans to lower-level governments or specific executing entities. The provincial-level local governments utilizing the re-lent loans are held responsible for repayment of principal and interest. With economic system reforms, and especially fiscal system reforms, World Bank financed projects launched in recent years have followed the “horizontal” re-lending method. This re-lending method contributes greatly to vesting more responsibility in localities, creating conditions to speed up project construction, and taking responsibility for repayment of principal and interest.

3. Intermediate Financial Re-lending The Ministry of Finance re-lends the World Bank loans to relevant financial institutions, such as the Industrial and Commercial Bank of China, the China Agriculture Bank, etc., which then re-lends the re-lent loans to enterprises or project entities. “Vertical” re-lending and “horizontal” re-lending are only applicable to cases involving a small number of project entities; otherwise, management difficulties may arise. When China’s SMEs utilize World Bank loans, if the “vertical” re-lending method is used, distribution industries may be subject to constraints; if “horizontal” re-lending method is adopted, loans may not spread readily to other regions. However, this is different for financial institutions, whose branches are widely dispersed and whose services cover several industries. Thus, intermediate financial institution re-lending is more favorable to SMEs in terms of utilizing World Bank loans. Furthermore, financial institutions, which are different from the various ministries or local governments, do not perform administrative but fully commercial functions, which are more superior to the other two methods in regard to the utilization of loans and assurance of repayment of principal and interest. The three re-lending methods indicated above apply to the Ministry of Finance, while the ultimate recipients of re-lending are project entities or enterprises.

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R. Re-lending Conditions Re-lending by the Ministry of Finance, “vertical” and “horizontal” re-lending, and re-lending by intermediate financial institutions all involve the amount, term, interest rate, and commitment of re-lent loan fees, repayment of principal and interest for loans re-lent, and exchange gains and losses from loans re-lent. However, these conditions may be subject to different agreements between creditors and borrowers. Re-lending by the Ministry of Finance can be described as follows:

1. Amount of Loans Re-lent The Ministry of Finance, as a creditor, re-lends the loans obtained from the World Bank as a debtor, and determines the amount of re-lent loans in three ways: first, in the case of full re-lending, as for projects whose components are defined, the Ministry of Finance re-lends the original amount of the loans granted by the World Bank and authorizes the project entity to open accounts directly with the World Bank, to seek reimbursement, and to make withdrawals. Second, in the case of fully distributed re-lending, as for technical cooperation credits and special credits, the Ministry of Finance, as the first-level project executing agency, borrows the full amount of funds, then distributes the funds to the government departments or entities concerned as previously agreed upon after application for funds is made. Opening an account with the World Bank, reimbursements, and withdrawals are direct responsibilities of the Ministry of Finance. Third, in the case of partial re-lending, some policy adjustment loans are partially re-lent by the Ministry of Finance, with the remainder retained as national foreign exchange reserve for centralized use. In this circumstance, the portion re-lent and the portion retained shall be the responsibility of the project entities and the Ministry of Finance, respectively, in terms of withdrawal and reimbursement. No matter what the circumstances, the original currency of the World Bank loans shall be matched, that is, re-lending of the IBRD loans will be in US dollars, and re-lending of IDA credits will be in SDR. However, fully distributed re-lending is an exception, since the Ministry of Finance acts as the overall project executing agency, and the loans distributed to the government departments or entities concerned will be in US dollars. After a project is implemented, if the loans are not fully used, the surplus is to be cancelled and refunded to the World Bank.

2. Terms of Re-lending The World Bank has made some adjustments to the terms of loans granted to China in recent years, while the Ministry of Finance has also changed the terms of loans re-lent in recent years. Overall, during the initial period of utilizing World Bank loans in China, the World Bank has granted loans to China with relatively long terms of

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maturity, especially in the case of hard loans, and the Ministry of Finance adopts the same term for re-lent loans as that of World Bank loans. At present, the term of World Bank loans is generally set as follows: 20 years for hard loans (including a grace period of 5 years) and 35 years for soft loans (including a grace period of 10 years). In consideration of factors such as the construction period and economic benefits, the Ministry of Finance classifies the terms of re-lent loans in four types: 20 years for projects with long construction periods and relatively modest economic benefits (including a grace period of 5 years) and 10-15 years for projects with short construction periods and relatively good economic benefits (including a grace period of 3 years). With regard to technological transformation funds and agricultural planting and aquatic breeding projects that are subject to loans re-lent by intermediate financial institutions, the terms of loans is fixed by the intermediate financial institutions based on project investment payback. Funds provided through technical cooperation credits are repaid within the first two years after completion of project.

3. Interest Rates on Re-lending The loans provided by the World Bank to China fall into two categories: soft loans and hard loans. Hard loans are IBRD loans, which charge interest rates, while soft loans are IDA loans, which are interest-free and charge only commission fees at an annual rate of 0.75% on the portion of the loans withdrawn but not repaid. The Ministry of Finance seeks an overall balance between the hard loan interest rates and the soft loan commission fees imposed on different projects, and it works out new interest rates on re-lending based on the breakeven principle and balancing conditions as a whole. That is to say, as far as individual projects are concerned, the Ministry of Finance may gain or lose. The Ministry of Finance may determine interest rates on re-lending by giving full consideration to the following main factors: the proportion of soft loans granted by the World Bank, the number of projects which can absorb hard loans for the current year (neither borrow hard loans nor obtain soft loans); exchange rate risks caused by the monetary pooling system adopted by the World Bank and SDR; the requirements of the World Bank as to re-lending, national industrial policy, and industrial structure, as well as the economic level and income status at the project sites. Overall balancing in consideration of these factors can only lead to “an interest rate for one project,” that is to say, a new interest rate on re-lending is to be applied to loans made for one new project. This interest rate is different from both interest rates on loans re-lent to other projects for the same year and interest rates on loans re-lent to previous projects of a similar type.

4. Commission Fees According to the provisions of the World Bank (and also international practice in the banking sector), loans committed but not withdrawn shall be subject to a commitment fee. The commitment fee set by the World Bank may float within a range of 0.25% to 0.75% for hard loans and 0 to 0.5% for soft loans. As a development agency, the

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World Bank does not aim to yield profit, and it has been operating very well in recent years with a slight surplus, so the existing commitment fee for hard loans is temporarily set at 0.25%, while that for soft loans is set at 0. From the perspective of the Ministry of Finance, the recipients of re-lent loans are also required to pay commitment fees at a rate set based mainly on, but different from, the commitment fee collected by the World Bank, which may vary among different projects subject to re-lending. Once the rate of the commitment fee for re-lending is finally set, the rate remains unchanged during the period of project implementation. At present, although the World Bank cuts and even immunizes commitment fees, since the Ministry of Finance suffers losses as a whole from re-lending the World Bank loans, the Ministry still charges a commitment fee at the rate of the commitment fee for re-lending set in order to urge project entities to speed up the progress of utilizing the World Bank loans.

4. Repayment of Principal and Interest as well as Exchange Rate Losses and Gains

World Bank loans are all foreign exchange loans to be repaid using foreign exchange for both principal and interest. As a debtor of the World Bank, the Ministry of Finance is responsible for the repayment thereof with foreign exchange in a timely manner. As a creditor, the Ministry of Finance considers sources of foreign exchange to be used for the repayment thereof and undertakes exchange rate losses and gains while re-lending World Bank loans. The overall principle to be followed is this: for all projects earning foreign exchange, project entities repay principal, interest, and commitment fees with foreign exchange; for projects that do not earn foreign exchange, project entities repay principal, interest, and commitment fee in RMB. Since the World Bank adopts monetary pooling system and SDR, exchange rate losses and gains may arise during the process from withdrawal to repayment of principle, interest, and commitment fees. When re-lending World Bank loans, the Ministry of Finance introduces a principle by which the recipients of re-lent loans bear exchange rate losses and gains. With further re-lending by government departments in charge, local governments, and intermediate financial institutions, exchange rate losses and gains for most projects are borne by project entities, but some provinces adopt a method of charging risk fees, in which all project entities jointly bear the losses and gains, such that the gap (losses) is filled by provincial-level governments in a centralized manner. S. Re-lending Formalities Re-lending is a part of the work done by China to apply World Bank loans and also a specific step in utilizing the World Bank loans. Whether in the selection of re-lending recipients or in the identification of re-lending conditions, certain procedures have to be followed and a series of formalities observed.

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In relation to the established procedures of World Bank financed projects, the Ministry of Finance identifies re-lending recipients and agrees to re-lending conditions with the recipients, even at the stages of project preparation and appraisal, according to the projects reported to the National Commission on Development and Reform. During this stage, project preparations are to be made by the re-lending recipients, and the World Bank does an appraisal of re-lending recipients and re-lending conditions. As long as various factors, including re-lending recipients and re-lending conditions, are considered satisfactory by the World Bank, the negotiation stage may start. The Ministry of Finance and re-lending recipients draft re-lending agreements after appropriate negotiation of re-lending conditions. After the World Bank loan (credit) agreement is signed, the Ministry of Finance and the re-lending recipients go through the formalities of signing re-lending agreements and clearly defining the rights, responsibilities, and obligations of both parties. If the relevant specialized ministries of the State Council or provincial-level local governments, rather than specific project entities, distribute loans to affiliated enterprises or government departments, relevant ministries and provincial-level local governments are to consult with loan project entities in regard to distributing re-lent loans or re-lending and enter into agreements on the distribution of re-lent loans or re-lending. As far as intermediate financial institutions are concerned, banks are not users of loans, thus, intermediate financial institutions are to enter into re-lending agreements with loan project entities after entering into re-lending agreements with the Ministry of Finance. T. Counterpart Funds for World Bank Financed Projects World Bank financed projects are not wholly financed from World Bank loans, which constitute only a part of the funds needed for the projects. Of the total funds needed, the World Bank loans usually account for 30 to 40%, and up to 50% of individual projects, while the remainder must be raised domestically, namely through domestic counterpart funds. U. Channels of Counterpart Funds There are usually four types of channel for counterpart funds for World Bank financed projects:

1. Budgetary Investment by Central Finance

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World Bank financed projects are all projects urgently needed for development or construction that are compatible with national development planning; domestic construction funds are not sufficient, so World Bank loans are utilized. In addition to World Bank loans partially used to meet the need for project construction funds, partial counterpart funds are allocated from the central finance budget depending on the nature of the projects and in view of China’s existing fiscal system.

2. Banks Provide Credits World Bank financed projects are usually large in size and involve substantial investment, while there are a large number of projects in urgent need of construction funds which cannot be fully financed from the national budget. Furthermore, in order to enhance the liability for fund application and to improve investment returns, domestic funds are also to be used with care. Thus, bank credits are much better than budgetary investment in terms of investment effectiveness. As far as China’s investment channels and management modes in recent years are concerned, consideration has been given to the superiority of bank credits, and banks are able to provide a portion of domestic counterpart funds for World Bank financed projects. In practice, almost all state-owned banks are involved in providing counterpart funds for all the World Bank financed projects to some extent.

3. Arrangements Made by Local Governments World Bank financed projects must be located in certain places, and even proposed central government projects have a bearing on local interests. Thus, in view of the difficulty of national budgetary investment and bank financing, the local governments of project sites are accountable for and also interested in arranging a portion of the investments in the projects. This amounts to co-financing by both the central government and local governments. In addition, insofar as the fiscal system and the actual need for project construction are concerned, some projects are of a regional nature and benefit localities, construction funds are also to be provided by the localities, when local governments are capable of arranging investments, therefore, in recent years there has been a large array of local projects financed through counterpart funds arranged by local governments.

4. Self-financing by Project Entities There are also two types of projects financed through World Bank loans, not including entirely new construction and newly-established construction entities or project implementation entities: first, World Bank financed projects themselves that are entirely newly-constructed projects, but for which the project implementation entities undertaking the construction have other business, such as electric power companies, bureaus of communications, port authorities, mining bureaus, etc., whose normal business operations are quite profitable. Second, World Bank financed projects which

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are themselves not purely newly-constructed projects, but are renovation and transformation projects of old enterprises, this being especially the case of numerous industrial credit projects, which generate considerable profit from their normal business operations. In these two sets of circumstances, project entities are willing to, and able to, raise counterpart funds by themselves in utilizing the World Bank loans.

5. Commitment to Raise Counterpart Funds What has been described above are only four possible channels of counterpart funds. For any specific project, the channel used to provide counterpart funds shall be negotiated at the project preparation stage, an agreement be entered into, and a commitment made.

• Counterpart funds to be raised at the project preparation stage At the project preparation stage, coupled with the feasibility study and report released thereon, not only the expenses for the preparation stage shall be raised, but also arrangements shall be made for the domestic counterpart funds necessary for projects under construction. This not only serves as the prerequisite for appraisal, negotiation, and conclusion of the loan (credit) agreement of the World Bank, but also provides important assurance for the smooth progress of projects in the future. The Ministry of Finance regards adequate raising of counterpart funds in a timely manner as a prerequisite for selection of project entities and the provision of re-lent funds while negotiating with re-lending recipients. World Bank loans shall not be provided to government departments, local governments, or project entities which fail to raise counterpart funds.

• Commitment shall be made in the form of an agreement to provide counterpart funds

Whether government departments, local governments, or project entities can raise counterpart funds or not shall be subject not only to a verbal commitment, but also to a written description. At the project preparation stage, the Ministry of Finance must hold adequate discussions with entities that have made a commitment to contributing funds as to the total amount, method, and timing of fund contribution, as well as the rights, obligations, and fault liabilities of each party; all related parties are to enter into a written agreement, based on a full understanding, study, and research into the credit status of all fund contributors and national macroscopic policies, that will serve as the legal basis for future fund contribution and fault treatment.

6. Allocation of Counterpart Funds No matter through what channels, commitments made for financing of counterpart funds are only a prerequisite for utilizing World Bank loans for project construction.

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Once the loan (credit) agreement enters into effect, and project construction commences, it is critical that counterpart funds be adequately allocated in a timely manner.

• Counterpart funds must figure in the annual investment plan Commitment for project funds through various relevant channels at the project preparation stage is only overall financing planning. As for each year, arrangements are to be made in the plan. The plan covers a fairly long period from project preparation, through commencement of project implementation, to project completion, whether funds needed by project itself, various channels of financing committed or not, may be largely different from the initial plan. On the one hand, various channels of committed funds contribution shall put forward possible plan for fund contribution according to initial commitment agreement and actual fund availability. Through negotiation among various parties, annual counterpart fund plan shall be drafted under the prerequisite of adherence to the commitment agreement and giving full consideration to actual conditions. In order to provide assurance for project construction progress, those who fail to perform the commitment agreement shall be held liable and make compensation for subsequent losses.

• Counterpart funds shall be virtually allocated in line with the annual investment plan

Preparation of the annual plan for counterpart funds is just one step forward compared with the commitment agreement, the funds shall be fully allocated in a timely manner to meet actual need. In particular, counterpart funds arranged through national budgetary investment, bank credits and local governments shall not be just a plan, but be allocated to project entities according to actual time and amount of disbursement for project construction. Some projects involve large size, many layers, regional dispersion, even if counterpart funds are allocated to project entities (higher level), the funds may not be allocated to specific implementation entities due to time delay, or even be withheld. If these circumstances occur, the responsible party shall be held liable for any failure to allocate the funds as planned, or in a timely manner, or inadequately.

• Counterpart funds shall be virtually spent on projects As the World Bank loans are provided to specific projects, counterpart funds are certainly funds used for specific projects. The commitment made at the preparation stage, and the plan and arrangements made at the implementation stage and allocation of funds adequately in a timely manner, all serve one purpose, namely earmarking, to meet fund need of project construction. But in reality, one the one hand, there are inadequate counterpart funds, on the other hand, counterpart funds are retained or diverted for other purposes. Inadequacy of counterpart funds is mainly caused by tight

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national budgetary investment, reduced scale of bank credits, the incapacity of local governments and project entities to provide financing, as well as adjusted components of project construction, price hikes of goods and investment estimates on the low side. However, counterpart funds are retained or diverted for other purposes due to poorly developed investment agencies, investment mismanagement and external environment. Thus, it is important to earmark the funds financially, to give a sound, correct and true presentation from the perspective of accounting, and to enhance supervision and even punish faults and irregularities from the perspective of audit. Section 4 How Projects Are Managed – Inside the World Bank As already discussed above, the projects the Bank finances are conceived and supervised according to a well-documented project cycle. Many documents are produced as part of the project cycle that can be valuable sources of information for interested stakeholders. Below is a step-by-step guide to the project cycle from the perspective inside the World Bank, the documents that are produced as part of the process, and how to access them.

Source: World Bank website (www.worldbank.org), in http://siteresources.worldbank.org/OPPORTUNITIES/Images/projectcycle-ar03_big.gif

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How the Process Begins: Poverty Reduction and Country Assistance Strategies

The Bank recognizes that many past assistance efforts, including some of its own, failed because the agenda was driven by donors rather than by the governments it was trying to assist. Under its current development policy, the Bank helps governments take the lead in preparing and implementing development strategies in the belief that programs that are owned by the country, with widespread stakeholder support, have a greater chance of success.

In low-income countries, the Bank uses the Poverty Reduction Strategy (PRS) approach which involves widespread consultation and consensus building on how to boost development. Under this process, a national poverty reduction strategy is prepared by the country, creating a framework for donors to better co-ordinate and align their programs behind national priorities. The government consults a wide cross-section of local groups and combines this with an extensive analysis of poverty in the country's society and its economic situation. The government determines its own priorities from this process and produces targets for reducing poverty over a three to five year period. These are outlined in a Poverty Reduction Strategy Paper (PRSP). The Bank and other aid agencies then align their assistance efforts with the country's own strategy - a proven way of improving development effectiveness.

The Bank's blueprint for its work with a country is based on a Country Assistance Strategy (CAS) which, in the case of low income countries, is derived from the priorities contained in the country's Poverty Reduction Strategy Paper. The CAS is produced in co-operation with the government and interested stakeholders. The preparation of the CAS may draw on analytical work conducted by the Bank or other parties on a wide range of economic and social sectors, such as health, education, agriculture, public expenditure and budgeting, fiscal management, or procurement, among others.

The Identification Phase

The Bank's Country Assistance Strategy (CAS) forms the blueprint for its assistance to a country. In low-income countries, the CAS is based on the priorities identified in the country's Poverty Reduction Strategy Paper (as outlined above). The goals outlined in the CAS guide the priorities of the Bank's lending program and are a useful source of information for interested stakeholders and businesses wishing to identify potential future areas of Bank lending. During the identification phase, Bank teams work with the government to identify projects which can be funded as part of the agreed development objectives. Once a project has been identified, the Bank team creates a Project Concept Note (PCN) which is an internal document of four to five pages that outlines the basic elements of the project, its proposed objective, likely risks, alternative scenarios to conducting the project, and a likely timetable for the project approval process.

Useful public documents

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The Project Information Document (PID) is prepared after an internal review of the PCN and is released publicly through the Bank's InfoShop. It is usually four to five pages long and contains the information mentioned above - the objective, a brief description, etc. It also contains the name of the World Bank Task Manager or Team Lead who is supervising the project, a useful contact for companies interested in bidding for work on the project. The PID is an essential resource for tailoring bidding documents to the project concerned.

The Integrated Safeguards Data Sheet (ISDS) is also prepared for the first time after the project's first formal review and made available publicly. It identifies key issues under the World Bank's safeguard policies for environmental and social issues, and provides information about how they will be addressed during project preparation.

The Preparation Phase

This part of the process is driven by the country that the Bank is working with and can take anything from a few months to three years, depending on the complexity of the project being proposed. The Bank plays a supporting role, offering analysis and advice where requested. During this period, the technical, institutional, economic, environmental and financial issues facing the project will be studied and addressed - including whether there are alternative methods for achieving the same objectives. An assessment is required of projects proposed for Bank financing to help ensure that they are environmentally sound and sustainable (Environmental Assessment). The scope of the Environmental Assessment depends on the scope, scale and potential impact of the project.

Useful public documents An Environmental Assessment Report (EA) analyzes the likely environmental impact of a planned project and steps to mitigate possible harm. An Indigenous Peoples Development Plan identifies potentially adverse effects on the health, productive resources, economies, and cultures of indigenous peoples. The Environmental Action Plan - describes the major environmental concerns of a country, identifies the main causes of problems, and formulates policies and concrete actions to deal with the problems.

The Appraisal Phase

The Bank is responsible for this part of the process. Bank staff reviews the work done during identification and preparation, often spending three to four weeks in the client country. They prepare for bank management either Project Appraisal Documents (investment projects) or Program Documents (for adjustment operations) and the Financial Management team assesses the financial aspects of the project. The PID is updated during this phase. These documents are released to the public after the project is approved (see below).

The Negotiation and Approval Phase

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After Bank staff members have appraised the proposed project, the Bank and the country that is seeking to borrow the funds, negotiate on its final shape. Both sides come to an agreement on the terms and conditions of the loan. Then the Project Appraisal Document (PAD) or the Program Document (PGD), along with the Memorandum of the President and legal documents are submitted to the Bank's Board of Executive Directors for approval. The appropriate documents are also submitted for final clearance by the borrowing government which may involve ratification by a council of ministers or a country's legislature. Following approval by both parties, the loan agreement is formally signed by their representatives. Once this has occurred, the loan or credit is declared effective, or ready for disbursement, after the relevant conditions are met, and the agreement is made available to the public.

Useful public documents The Project Appraisal Document (PAD) presents all the information the Board needs to approve Bank financing of the proposal. Before 1999, this document was called the Staff Appraisal Report. The Program Document (PGD) describes adjustment lending operations, and sets out the Bank's appraisal and assessment of the feasibility and justification for the program.

The Technical Annex supplements a Memorandum and Recommendation of the President for freestanding technical assistance loans, which do not require Project Appraisal Documents.

The Implementation and Supervision Phase

The implementation of the project is the responsibility of the borrowing country, while the Bank is responsible for supervision. Once the loan is approved, the borrowing government, with technical assistance from the Bank, prepares the specifications and evaluates bids for the procurement of goods and services for the project. The Bank reviews this activity to ensure that its procurement guidelines have been followed. If they have, the funds will be disbursed. The Bank's Financial Management Team maintains an oversight of the financial management of the project including periodically requiring audited financial statements.

Useful public document Report on the Status of Projects in Execution provides a very brief summary of all projects that were active during the previous fiscal year. Previously an internal communication to the Board of Executive Directors, the SOPE Report now is available to the public. Projects that closed during the fiscal year are no longer included in the SOPE, since their Implementation Completion Reports are also publicly disclosed.

The Implementation Completion Report At the end of the loan disbursement period (anywhere from 1-10 years), a completion report identifying accomplishments, problems, and lessons learned is submitted to the Bank Board of Executive Directors for information purposes.

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Useful public document Implementation Completion Reports review the results and assess an operation on completion of each loan financed by the Bank. Operational staff prepare these self-evaluations for every completed project.

The Evaluation Phase

Following the completion of a project, the Bank's Operations Evaluation Department conducts an audit to measure its outcome against the original objectives. The audit entails a review of the project completion report and preparation of a separate report. Both reports are then submitted to the executive directors and the borrower. They are not released to the public.

Useful public documents Project Performance Assessment Reports rate project outcomes (taking into account relevance, efficacy, and efficiency), sustainability of results, and the institutional development impact. One in four completed projects (or about 70 a year) is chosen for a Project Performance Assessment Report, which takes Operations and Evaluation Department staff about six weeks to produce and normally includes a visit to the project in the borrowing country.

Impact Evaluation Reports assess the economic worth of projects and the long-term effects on people and the environment. These "second looks" at projects are performed five to eight years after the close of loan disbursements.

Inspection Panel Reports review claims by affected parties that the Bank failed to follow its operational policies and procedures with respect to the design, appraisal and/or implementation of a Bank-financed operation.

Projects may be dropped at any point in the project cycle from preparation to approval. For these projects, which never achieve active status, Project Information Documents, described above, are effectively the final documents.

See also Measuring Results.

Additional Information

• The Monthly Operational Summary discloses the status of projects in the World Bank's lending pipeline from the point they are identified to the time the loan or credit agreement supporting them is signed.

• The Infoshop provides an explanation of the Project Cycle and related documents.

• The Bank's Latin America and Caribbean section has prepared its own description of the Project Cycle, along with relevant links and check lists associated with different stages

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• The Business Opportunities site provides advice on how businesses wishing to bid on Bank-financed projects can interact with the Project Cycle.

• A glossary of project documents.

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Chapter II – Audit Preparation Page 1 of 29

Chapter II Audit Preparation

With regard to World Bank financed projects subject to direct audit, auditing institutions at all levels must make overall arrangements based on their specific conditions. Adequate preparations are to be made prior to implementation of any project audit. At the audit preparation stage, the audit team shall obtain a basic understanding of the project entity, conduct an analytical review, determine the materiality level, analyze audit risks, and finally plan the project audit by formulating an audit program. Section 1 Obtaining a Basic Understanding of the Project Entity After accepting an audit task, the audit team shall obtain a basic understanding of the project entity, including the project background, project management, and project construction, as well the audit of the previous year, so as to determine issues which may have a material effect on project-specific, special purpose financial statements, project implementation, and auditing work.

A. The What and How of Gaining an Understanding

1. Project Background To understand the project background, the audit team shall obtain the following documents: the loan agreement, project agreement, re-lending agreement, project evaluation report, correspondence (including letters of payment), memos concerning project implementation, and approval documents concerning project establishment, which shall be preserved permanently for reference. The audit team shall obtain these documents prior to the audit, and gain a thorough understanding of project objectives, content, construction arrangements, and the requirements of various parties for the project financial audit.

2. Project Management Information pertaining to project management includes the project management system, the organizational structure, the control environment, the accounting system and financial management measures, and the accounting method, as well as other matters concerning the soundness and operations of the internal controls system. The audit team may gain an understanding of the above-mentioned matters by using previous audit information, discussions with the project entity and the department in charge of the project, obtaining relevant information from the project entity, and requiring the project entity to complete internal control questionnaires. The information obtained by the audit team shall be used as written records for permanent preservation.

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3. Project Construction

Information pertaining to project construction includes the main content and objectives of project construction, the progress and achievements of project construction, the project funds in place, and significant project events during the year of the audit. The audit team may gain an understanding of project construction in many ways, for example, by interviewing the relevant managerial personnel of the project entity, reviewing relevant documents (i.e. special-purpose, financial statements during the year of audit, goods procurement contracts being fulfilled and works construction contracts), and making field visits to project construction sites.

4. Audit during the Previous Year If an auditing institution conducted an audit of the project entity during the previous year, the audit team must review the audit documentation of the previous year, paying attention to audit findings, including the type of auditor’s opinion, major problems discovered, significant adjustment items, and implementation of audit discretion and sanctions.

B. Consideration given to the Information gathered in Preparing the Audit Program

The audit team shall give a full consideration to the impact of the information gathered on the audit program, and also pay attention to the following factors:

1. Project objectives and requirements for financial auditing Project objectives and the requirements of the World Bank for project financial auditing may have a direct bearing on the audit scope and standards to be complied with in the audit.

2. The size of the construction project and its degree of complexity The larger the size of construction projects and the more regions the construction project involves, and the more complex the construction project process is, the more arduous the audit workload becomes.

3. Internal management of the project entity The strength or weakness of the internal management system within the project entity may affect auditing procedures and methods.

4. Audit during the previous year

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If the project entity to be audited changes slightly during the current year, the audit program during the previous year can be used as an important reference. The current status of important adjustment items and problems discovered during the previous year shall be included in the audit program as specialized audit content during the current year; in the meantime, consideration shall be given to the possible occurrence of the issues of a similar nature during the current year.

C. Audit Working Papers Developed for a Basic Understanding of the Project Entity

The basic information on the project entity is to be recorded in audit working papers in a certain format, or to be provided by the project entity in a certain format. Audit working papers developed on a basic understanding of the project entity include project information, relevant requirements for financial auditing, the form of basic information pertaining to the project entity, pre-audit investigation records, and a questionnaire on internal controls within the project entity. Please refer to Form 2-1 through Form 2-4 and the relevant content of Chapter III for the specific formats.

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Form 2-1 Reference Number:

(Name of Auditing Institution) Project Information and Relevant Requirements for the Financial Audit

Audit Period________ Name of Project: Project Implementing Entity: I. Describe briefly the project’s overall objectives, specific objectives, scope, sources of funds, and expected achievements, as well as project beneficiaries: __________________________________________________________________________________________________________________________________________________________________________________________ II. Describe briefly relevant accounting and financial requirements in the loan agreement: __________________________________________________________________________________________________________________________________________________________________________________________ III. Describe briefly the loan agreement, re-lending agreement, audit guidelines, and the manual of the World Bank, and audit requirements of the Auditing Institution at a higher level: _______________________________________________________________________________________________________________________________________________________________________________________________________________ Auditor: Date of Audit: Review officer: Date of review:

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Form 2-2 Reference Number: (Name of Auditing Institution)

Basic Information Pertaining to the Project Entity Audit Period____________

Project Name: Project Implementing Entity: Name of project

Loan/credit

number

Beginning and

ending dates

Type of project Department

in charge of

project

Name of project

(implementing)

entity

Legal representative

or responsible

person

SDR USD RMB

World Bank loans Foreign funds

Free counterpart Domestic funds

Compensated counterpart

Project

estimates

Total

SDR USD RMB

WB loans Foreign funds

ADB loans

Free counterpart Domestic funds

Compensated counterpart

Accumulated

project funds

in place

Total

Project objectives

Content of project

implementation

Audits in previous

years

Others

Auditor: Date of audit: Review officer: Date of review:

Notes: 1. Fill in the first line in conformity with relevant loan agreements. 2. Fill in “Type of project” with the corresponding industry. 3. Fill in “Department in charge of project” with the full name of the department in charge of the project at the same level. 4. Fill in “Name of project entity” with the full name of the project implementing entity. 5. Fill in “Project estimates” according to the evaluation report or project agreement; provide additional explanations in the case of adjustments. 6. Fill in “Project funds in place” according to the financial statements for the current year.

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7. Fill in other items based on actual information.

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Form 2-3 Reference Number: (Name of Auditing Institution) Questionnaire on the Basic Information on the

Computer-Assisted Accounting System Audit Period_________ Name of Project: Project Implementing Entity:

Equipment manufacturer Hardware information

Equipment series/type

Name of operating system

Name of application software

Software information

Source

Program revision and user Person who writes or revises program

Person who prints the

subsidiary ledger (list names of

persons who print various

subsidiary ledgers)

Applications Person who enters

vouchers (list

names of persons

who enter various

types of

vouchers)

Person who prints the general

ledger

Balance sheet Summary of sources and uses

of funds by project component

Person who prints

statements

Special account

statement

Statement of implementation of

loan (credit) agreement

Verification method for entering journal entries

Has computer system failure occurred, or are there any severe

errors in accounting data treatment? Were reasons for the failure or

delay found?

Have there been any significant changes in the computer system

during the current year? (If yes, please list the changes.)

Auditor: Date of audit: Review officer: Date of review:

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Pre-Audit Investigation Records Form Name of Project: Project Implementing Entity:

Investigation items

Investigation record:

Investigation conclusion:

Auditor: Date of Audit: Review Officer: Date of Review:

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Understanding the project entity is a process of colleting, evaluating, and using information on a continuous and cumulative basis. The auditing institution and auditors shall pay attention to accumulation and updating of the basic information gathered and to establishing regular contacts with the project entity. The auditing institution shall establish a project entity database, so as to collect and update the basic information pertaining to the project entity, the data obtained and reported during the audit, as well as the comprehensive data related to the auditing work.

Section 2 Preliminary Analytical Review

After a basic understanding of the project entity is obtained, an analytical review shall be conducted of the information obtained. The analytical review is to analyze, by auditor, significant ratios and trends reflecting the economic activities of the project entity, aiming at achieving a better understanding of the construction project to be audited, discovering unusual relationships in the data, making judgments on key areas of the audit and audit risks. At the audit preparation stage, the extent and scope of the analytical review depends on the size and complexity of the project to be audited and the reliability of the information, as well as the judgment of the auditors. Generally speaking, based on the information gathered, the audit team shall conduct horizontal analysis of line items, comparative analysis of project funds actually in place against the plan, and appropriately comparative analyses of project investments completed and the project progress image.

A. Horizontal Analysis of Line Items

By comparing the current balances of all balance sheet items with those of the previous year, increased or decreased ratios can be calculated. As for line items with an increase or decrease in ratios exceeding certain criteria, the project entity shall be urged to provide explanations. Unless reasonable explanations can be given, these can be identified as audit foci in the audit program.

2. Comparative analysis of counterpart funds in place

The amount of funds in place presented in project statements is compared with that of funds in place as planned, to determine whether the funds are in fact in place. If funds are not found to be in place, the project entity is obliged to provide explanations. Unless reasonable explanations can be given, these can be identified as audit foci in the audit program.

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3. Comparative analysis of investments completed and the project progress image

Investments completed and presented in project statements are compared with the project progress image, so as to conduct preliminary evaluation of the appropriateness of project investments. As the project progress image can be indicated in terms of physical quantities, investments presented in the statement in terms of units of physical quantity can be compared with investments set in the project evaluation report, and if a large gap is found, it must be regarded as a high-risk area, subject to special attention in the audit.

4. Analytical review of working papers

The process and results of the analytical review are to be documented to develop audit working papers as a basis for preparing the audit program. The analytical review audit working papers include horizontal analysis of line items, analysis of funds in place, and comparative analysis of investments completed and the project progress image. Please refer to Form 2-5 through Form 2-7 for specific formats and content.

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Analysis of Counterpart Funds in Place Audit Period_________ Name of Project: Project Implementing Entity:

Sources of funds Annual plan funds in place

Actual annual funds in place

Actual annual % of plan

Reason for planned funds unpaid

Free counterpart 1 2 3 Compensated counterpart

1 2 3

Total Auditor: Date of Audit: Review Officer: Date of Review: .

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Comparative Analysis of Investments Completed and the Project Progress Image

Audit Period_________ Name of Project: Project Implementing Entity:

Overall objectives Cumulative Annual plan Actual annual

Quant Amount Unit

quantity

and

amount

Quant Amount Unit

quantity

and

amount

Quant Amount Unit

quantity

and

amount

Quant Amount Unit

quantity

and

amount

Notes Project

activities

Auditor: Date of Audit: Review Officer: Date of Review: Notes: Reasons for large differences between actual annual unit quantity and amounts and planned figures or target figures.

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Comparative Analysis of Investments Completed and the Project Progress Image

Audit Period_________ Name of Project: Project Implementing Entity:

Decreases or increases Line items Beginning balance

(audited)

①

Ending balance

(unaudited)

②

Amount

③=②-①

%

④=③/①

Notes

Auditor: Date of Audit: Review Officer: Date of Review: Notes: Any financial line items with increases or decreases of more than 10% in the ratio appearing in the Notes column must be analyzed and explained.

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Section 3 Evaluating the Materiality Level

Materiality can be defined as the magnitude of an omission or misstatement in accounting information in the financial statements of the project entity that, in the light of surrounding circumstances, make it probable that the judgment or decision of statement users would be influenced by the omission or misstatement. It is the “critical point” at which misstatement or omission contained in financial statements could influence the interpretation of financial statements by statement users, and based on which wrong judgments could be made as a result. The materiality level is an important factor that may have an effect on auditing evidence. The lower the materiality level is, the more the auditing evidence that has to be collected; the higher the materiality level is, the less the auditing evidence that has to be collected. The materiality level is judged preliminarily in preparing the audit program, so as to determine appropriately what auditing evidence is necessary, and to identify further auditing procedures and methods.

A. Factors to be Considered in Making Preliminary Judgments on the Materiality Level

Auditors shall consider the following factors comprehensively, and make preliminary judgments on materiality levels in combination with their auditing experience.

1. The materiality level determined in the previous year The materiality level of the project entity in the previous year may be used as an important basis for determining the materiality level for the current year. In accordance with the materiality level, by taking into consideration changes in the project entity to be audited, the materiality level for the current year can be amended.

2. Requirements as to relevant regulations or clauses in agreements With regard to line items and disclosure matters subject to special requirements of relevant laws or clauses in agreements, such as withdrawals and uses of World Bank loan funds, the materiality level shall be determined as strictly as possible.

3. The size and content of the construction project to be audited Projects on different scales may have different materiality levels. The absolute value of the materiality level of larger projects is larger than that of small projects, but with smaller relative value than that of small projects. The content of construction projects may also have en effect on the materiality level; for agricultural, public health and educational projects, which involve a wide range of aspects and complex circumstances, the materiality level shall be determined as strictly as possible.

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4. Results of the internal control evaluation

If internal control is quite sound and highly reliable, higher materiality levels may be determined, and vice versa.

5. The sensitivity of statement users to line items Different financial line items have different degrees of sensitivity to statement users. Auditors shall pay close attention to the sensitive areas for statement users, determining the materiality level as strictly as possible.

6. The nature and numbers of matters questioned The materiality level can be considered both quantitatively and qualitatively. In the case of matters of a serious nature, such as making a fraudulent application for World Bank loans, embezzling or retaining project funds, scalping project materials, as well as matters questioned because of repeated occurrence, regardless of the amounts involved, shall be regarded as significant matters subject to special attention, and a lower materiality level shall be determined, and vice versa.

B. Preliminary Evaluation of the Materiality Level

The materiality level can be evaluated preliminarily at two levels: financial statements and accounts.

1. The materiality level at the financial statement level As the primary objective of World Bank financed projects is to express an opinion on project-specific, special purpose financial statements, top priority shall be given to the materiality level at a financial statement level, as only by doing so can an overall opinion be expressed on financial statements. The materiality levels for special purpose financial statements may vary from one project to another. So the professional judgment of auditors shall be used fully to deal with specific project circumstances. Under general circumstances, the materiality level can be fixed at 3%-5% of the investments completed during the current year.

2. The materiality level at the account level As information provided by financial statements is derived from various accounts, auditors can draw conclusions as to the overall legality, fairness, and consistency of financial statements only by verifying all accounts. Thus, consideration shall also be given to the materiality level at the account level. In determining the materiality level at the account level, the nature of various accounts or transactions, as well as the

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possibility of misstatement or omission, shall be taken into consideration, with regard to important accounts or transactions, the materiality level shall be determined as strictly as possible. The materiality level at the statement level can be first determined, and then amended by taking into consideration various factors in a comprehensive manner.

C. Working Papers for Preliminary Evaluation of the Materiality Level

Working papers shall be prepared to document the preliminary evaluation of the materiality level. Please refer to Form 2-8 for specific formats.

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Evaluation Form of Materiality Level Audit Period_________

Name of Project: Project Implementing Entity: Item Amount Materiality amount and

proportion preliminarily determined

Amended materiality amount and proportion

Notes

Current-year investments completed on balance sheet

Statement items

Auditor: Date of Audit: Review Officer: Date of Review: Notes: 1. Line items: List substantial or important items in special purpose financial statements. 2. Amount: Fill in total uses of funds and corresponding balances of various line items at the end of audit period. 3. Materiality amount and proportion preliminarily determined: Determine materiality levels for all accounts or account balances in the form of amount or proportion in accordance with all information gathered at the audit preparation stage and analysis thereof by auditors. 4. Amended materiality amount and proportion: If the materiality level changes with implemented audit work, fill in amended materiality level. 5. Notes: Explain reasons for amending the materiality level.

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Section 4 Audit Risk Analysis Audit risk is the possibility of expressing an inappropriate opinion or issuing an inappropriate audit decision letter after the audit is completed. In order to control audit risks to a certain level, audit risks are to be analyzed and the corresponding audit program prepared at the preparation stage. Audit risk analysis includes determining acceptable audit risks, analyzing inherent risk, evaluating control risk, and identifying detection risk.

A. Determining Acceptable Audit Risks

World Bank financed projects are generally too complex and too large to audit thoroughly; while attestation audits of financial statements does not require 100% assurance as to audited matters, only a sampling audit can be conducted on the basis of testing the internal control system, which provides reasonable assurance, to a certain extent, as to exposing material misstatements or omissions existing in audited financial statements. “To a certain extent” means acceptable audit risks. Audit risks recommended by The Audit Manual for World Bank Financed Projects are 5%-10%.

1. Analyzing inherent risk

Inherent risk is the susceptibility of a certain account and other accounts (or certain type of business transactions and other business transactions) to material misstatement or omission, assuming that there are no related internal controls. It exists independently of the auditing process and is related to the size and characteristics of construction projects, the nature of the business, or the competence and moral character of staff. And the audit of World Bank financed projects involves a relatively high inherent risk. In order to reduce auditing costs, professional judgment must be used for analysis and reasonable evaluation.

2. Analyzing inherent risk related to the statement level The following matters are to be considered in analyzing inherent risk related to the statement level:

• The moral conduct and capability of managerial personnel The higher degree of good faith of managerial personnel, the lower the inherent risk, and vice versa. The more experienced and competent the managerial personnel, the higher the inherent risk, and vice versa.

• Changes in managerial personnel

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The more frequently managerial personnel, especially financial personnel, change, the higher the inherent risk, and vice versa.

• Unusual pressure experienced by managerial personnel

The greater the unusual pressure (such as inadequate project construction funds to be audited, counterpart funds not in place in a timely manner, or external intervention) that managerial personnel experience, the higher the inherent risk, and vice versa.

4. The nature of the business

The more complex the nature of the business, the higher the inherent risk, and vice versa.

5. Environmental factors that may affect the auditee’s industry For example, macro-control, capital shortage, changes in demand, and other unfavorable factors, may result in higher inherent risk within the auditee.

6. Analyzing inherent risk related to accounts or business The following issues are to be taken into consideration in analyzing inherent risk related to accounts or business:

a. Financial line items are vulnerable to misstatement With regard to World Bank financed projects, the following accounts are vulnerable to misstatement: construction work investments, prepaid expenses, other receivables, other payables, World Bank loans and project appropriations, all usually involve high inherent risk.

• Material transactions and the complexity of matters requiring expert appraisal For example, highly uncertain matters to be appraised by experts and contributions in labor which are subject to complex calculations usually involve fairly high levels of inherent risk.

• Use of estimation and judgment in determining account balances For example, account balances of material cost variances and allocation of deferred investment and contingent losses are determined by accounting personnel using estimation and judgment to a large extent, and this involves a high probability of errors and relatively high inherent risk.

• Assets vulnerable to loss or misappropriation

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For example, cash, marketable securities, and goods and equipment subject to centralized procurement, and distribution at different levels and by long-distance transport are highly liquid, vulnerable to loss or misappropriation, and so involve relatively high inherent risk.

• Unusual and complex transactions during or close to the end of the accounting period

For example, unusually substantial construction work investments and a great volume of business transactions confirmed immediately before the end of the accounting year probably mean that the auditee has made intentional adjustments to construction results and financial positions, involving relatively high inherent risk.

• Transactions and matters vulnerable to omission in normal accounting procedures

For example, interest and expenses receivable and payable and exchange gains vulnerable to omission in normal accounting treatment procedures may involve relatively high inherent risk. B. Estimating Inherent Risk Based on comprehensive analysis of the above factors, professional judgment must be used to estimate the inherent risk level at the statement level and for each statement item. Currently, if the auditing institution has not established standards or guidelines of inherent risk evaluation, there is no specific model of inherent risk estimation. General international prices: even if the general situation is good, with little possibility of material mistakes, the inherent risk level is higher than 50%; so long as a certain indication shows possible material mistakes, inherent risk must be set at 100%. We may refer to this practice subsequently.

C. Preliminarily Evaluation of Control of Risk and Designing Compliance Testing Procedures

In order to achieve the audit objectives and improve audit efficiency, the preliminary evaluation of control risk and design of compliance testing procedures shall be conducted at the audit preparation stage. Control risk is the possibility that material misstatement or omission that could occur in a certain account and other accounts (or certain types of business activities and other business activities) will not be prevented, detected, or corrected by internal controls. After understanding the internal control system within the auditee and evaluating the inherent risk, auditors must preliminarily evaluate the control risk involved in certain specific audit objectives (the completeness of records, the correction of balances or amount valuation, the adequacy

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of disclosure) of all material accounts or business categories and design compliance procedures accordingly.

1. Preliminary evaluation of control risk The purpose of a preliminary evaluation of control risk is to determine in a preliminary fashion whether the internal control system within the auditee is sound and effective or involves fairly high control risk, thus providing a basis for preparing the audit program. In the preliminary evaluation of relevant control risks within the auditee, if the auditee was audited during the previous year, the evaluation can be performed by referring to the previous evaluation results in combination with current investigations; in the conduct of an audit of a new entity, investigations are to be conducted of the control environment of the auditee, and appropriate testing and evaluation shall be performed of the control environment and the relevant internal control system. A moderate principle shall be followed in evaluation, control risk better be overestimated than underestimated. In order to gather adequate and appropriate evidence, to keep audit risk at acceptable levels, when it is difficult to evaluate the effectiveness of internal controls due to failure of internal controls within the auditee, or when it is not intended to implement compliance testing procedures due to loss of confidence in the internal controls within the auditee, control risks shall be rated high. The preliminary evaluation of control risk based on the moderate principle does not mean that control risk shall be rated high. When relevant controls within the auditee can prevent, detect, or correct material misstatements or omissions, or internal controls can be relied upon, subject to intended compliance testing, control risk shall not be rated high. The above discussion deals with qualitative evaluation. In actual practice, quantitative evaluation can be preformed using Form 2-9 as the basis of qualitative evaluation, so as to satisfy the need for audit sampling.

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Form 2-9 Reference Number: Comparison Between Control Risk and the Scope

and Sampling Size of Compliance Testing

Control risk Control risk coefficient

Scope and sampling size of compliance testing

High level 100% No compliance testing Medium level 50% Medium scope, medium sample size Low level 10% Large scope, large sample size

2. Designing the procedures and scope of compliance testing Compliance testing procedures are not necessarily especially designed for the audit programs of all audit projects. When internal controls within the auditee exist, or when relevant internal controls exist but are not found to be operating effectively, and when the compliance testing workload is more than the substantial testing workload reduced through compliance testing, testing of compliance with national laws and regulations, as well as with the loan agreement and other provisions of the World Bank by the project entity may be integrated into the substantial testing of line items, instead of designing special compliance testing procedures. Special compliance testing procedures shall be designed and implemented to evaluate control risk further. Alternative compliance testing procedures include the following types:

• Examination of vouchers that reflect business activities Vouchers related to business activities are examined (for example, to see whether business or matters of goods procurement, application for reimbursement and withdrawals are appropriately authorized and approved) to obtain evidence as to the effective operation of internal controls.

• Inquiry and field observation of the operations of internal controls, without skipping any audit trials

For example, according to internal control provisions, valuable and staple stocks are to be warehoused and received with purchasing personnel, warehouse managerial personnel, and financial personnel present, whether this practice is implemented or not while the stocks are actually received usually leaves behind no trace for audit. Under this circumstance, by means of inquiry and field observation, a judgment can be made as to whether relevant control provisions are being met.

• Implementing relevant internal control procedures again For example, the reconciliation of bank deposit balances shall be prepared again to examine whether the financial personnel of the auditee compares and reconciles the bank deposit journal with the bank statement on a regular basis.

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The scope and size of compliance testing shall be determined by relevant internal control level preliminary evaluation (see Form 2-9). Generally speaking, the lower the control risk level preliminarily evaluated, the more the evidence to be obtained as to internal controls appropriately designed and operating effectively. If auditors fail to obtain adequate evidence to support control risk level evaluation compliance testing procedures, internal control evaluations shall be amended, and adjustments shall be made to relevant substantial testing procedures and scope.

D. Determining Detection Risk, Designing the Procedures and Scope of Substantial Testing

1. Determining detection risk Detection risk is the possibility that material misstatement or omission that could occur in a certain account and other accounts (or certain types of business activities and other business activities) will not be detected by substantial testing. It is the only risk among the audit risk factors that can be controlled by auditors. Under the circumstances of given acceptable audit risk, detection risk, and inherent risk, control risks are reversely interrelated. After acceptable audit risk, inherent risk, and control risk of audited matters have been subjected to appropriate evaluation, detection risk can be calculated and determined using the following audit risk model (formula and Form 2-10).

Acceptable audit risk Detection risk = -- ------------------------ Inherent risk x control risk

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Relationship model amount three factors of audit risks

Evaluation of control risk High Medium Low

Evaluation of inherent risk

Acceptable detection risk High Lowest Fairly low Medium Medium Fairly low Medium Fairly high Low Medium Fairly high Highest

2. Designing the procedures and scope of substantial test The purpose of determining acceptable detection risk is to design the procedures and scope of substantial testing. There are major alternative substantial testing procedures as follows:

• Business testing Business testing is designed for the current line-item amounts of the auditee, aimed at determining whether business activities comply with national laws and regulations and applicable provisions of the World Bank; whether business activities are properly approved, correctly recorded in the subsidiary ledger, and correctly carried forward into the general ledger and relevant line items.

• Analytical review Analytical review helps not only to determine the audit focus at the planning stage, but also to gather evidence related to account amounts and balances directly as substantial testing procedures at the audit implementation stage.

• Balance testing The purpose of balance testing is to determine the ending balances of all general ledgers of financial statements. Confirmation of the balances of accounts receivable with debtors, physical counts, and review of the bank statement, belong to balance testing. Balance testing is critical and the last link in gathering audit evidence. Business testing, analytical review, and balance testing are mainly designed for the amounts of financial statements. In particular, business testing focuses on checking amounts accounted for in the subsidiary ledger and the general ledger; analytical review focuses on business and the overall reasonableness of general ledger balances; while balance testing focuses on checking of the ending balances of all general ledgers. In the conduct of the audit, corresponding substantial testing procedures can

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be selected according to the detection risk level determined. Similarly, the scope of substantial testing, namely the sample size of sampling audit in substantial testing and the quantity of audit evidence obtained may rest with the detection risk level determined. Generally speaking, the higher the detection risk of relevant projects or businesses, the smaller the sample to be chosen and the less the audit evidence to be gathered, and vice versa. The relationship between an acceptable detection risk level and the procedures and scope of substantial testing is shown in Form 2-11.

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Relationship Between Detection Risk and the Procedures and Scope of Substantial Testing

Substantial testing Acceptable detection risk

Procedures Scope

High Focusing on analytical review and business testing

Smaller sample and less evidence

Medium Comprehensive application of analytical review, business testing and balance testing

Moderate size sample and amount of evidence

Low Focusing on balance testing Larger sample and more evidence

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Section 5 Preparing and Reviewing the Audit Program

The audit program includes the overall audit program and specific audit programs. The overall audit program is planning of the expected scope and implementation method of the audit, and a comprehensive program involving the basic working content of the whole process, from accepting audit tasks to issuing the audit report. The specific audit program is detailed planning and description of audit procedures and methods needed to implement the overall audit program, formulated in accordance with the overall audit program.

A. The Overall Audit Program

1. Preparation of the overall audit program Based on the information colleted prior to preparation of the audit program, the audit team may obtain a basic understanding of the project to be audited and prepare the overall audit program. The overall audit program shall contain the following matters: the basis for preparation of the audit program; the name and basic information of the project entity to be audited; the audit objectives; the audit scope, the content and focus; the audit work progress and time arrangements; the audit team leader and members, and the assignment of responsibilities among them, as well as other relevant matters. The overall audit program is to be prepared by the audit team, with the audit team leader taking the overall responsibility. The audit program shall be recorded in the working papers. Please refer to Form 2-12 for the format of the overall audit program.

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Form 2-12 Reference Number: (Name of Auditing Institution) Overall Audit Program

Audit Period________ Name of project Audit method Name of project implementing entity Basis for preparation Basic information pertaining to the project entity: Audit objectives, scope, content, and focus: Work progress and time arrangements: The audit team leader and members:

Assignment of responsibilities: Prepared by: Date: Approved by department head: Date: Approved by leader in charge: Date:

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2. Review of the overall audit program The audit program prepared shall be reviewed and approved by the head of the department within which the audit team works, and material matters shall be reviewed and approved by the head of auditing institution. The review of the overall audit program shall focus on the audit objectives; the audit scope and focus; the determination of audit areas; the progress over time; and the selection and assignment of the audit team members.

3. Specific audit programs

Specific audit programs shall be prepared according to the overall audit program, provide detailed planning and description of specific procedures adopted in reviewing matters (the business cycle and line items).

4. Preparation of specific audit programs

• Content of specific audit programs Specific audit programs shall contain audit objectives, procedures, implementing personnel, and the date of specific audit projects. It is generally indicated by preparing the audit procedures form.

• Preparation of a specific audit program The specific audit program shall be prepared by the audit team, with the audit team leader taking the overall responsibility. This manual provides compliance testing procedure forms for all business cycles and auditing procedures forms for all line items, so that the audit team may select applicable audit procedures, make appropriate additions and eliminations, propose audit implementation personnel and dates of implementation, and set up specific audit programs, based on specific conditions of the project to be audited.

• Review of a specific audit program Specific review covers whether key audit areas identified by the overall audit program are represented; whether the specific audit program complies with applicable provisions; and the orientation and effectiveness of audit procedures. Audit programs cover the whole process of auditing, during which amendments and revisions may be made based on specific conditions. Revisions and complements to audit program shall be approved and recorded in audit working papers.

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Chapter III (Part 1) – Internal Controls Page 1 of 34

Chapter III (Part 1) Testing of Internal Controls

Testing of the internal controls consists of three steps:

• Reviewing the project entity’s internal controls, and evaluating their completeness and reasonableness, and determining the procedure, extent, and timing of the compliance testing;

• Performing the compliance testing to assure validity of the internal controls that have been applied;

• Assessing the degree of reliability of the internal controls, i.e., assessing the risk, and determining the procedure, extent, and timing of substantive testing.

In an audit of a World Bank financed project, the first step is generally carried out in the audit preparation phase. The second and the third steps are performed in combination with the substantive testing in the audit implementation phase.

Section 1 Review of the Internal Controls Review of the internal controls includes examination of the control environment, the accounting system, and every transaction cycle. The review of internal controls is done by examining questionnaires, flowcharts, narratives, etc., the choice of which is subject to specific conditions. Only the questionnaire is provided here. The questionnaire approach is a method by which auditors use a standardized form which is pre-designed to conduct investigations and inquiries. The form is to be filled out either by the project entity or by the auditors based on their understanding of the conditions following the interviews with project management, or by the auditors based on the minutes of their meetings with the management. The content of the questionnaire is determined by the audit team. On the basis of the forms provided in this guide, the audit team can add or cut in consideration of the circumstances of the project entity. The review or testing of the internal controls is not needed for project entities under audit that are small in size and simple in transactions, and the audit is to proceed directly to substantive testing. Furthermore, review or testing is not needed if the examination of the control environment concludes that there are no internal controls in the project entity or the control environment is not good. Through review and understanding of the internal controls and, on the basis thereof, their completeness and reasonableness are to be appraised preliminarily, and the procedures, extent, and timing of compliance testing are to be determined and existing

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significant deficiencies recorded. The preliminary appraisal is a task that requires a strong professional approach and relies on the professional judgment of the auditors. The conclusion of the appraisal shall be expressed either as high, medium, or low as to degree of reliability, or otherwise expressed. A. Review of the control environment and accounting system In order to ensure the completeness of the organizational structure and policies and the existence of an accounting system in the project entity, a preliminary assessment of the internal controls is to be performed to determine whether review and testing of the internal controls for every transaction cycle is needed. For the working papers related to the control environment and accounting system questionnaires, refer to Table 3-1 through Table 3-4.

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Table 3-1 Reference:

(Name of Auditing Firm) Conclusion regarding the Review of Internal Controls, the Control

Environment, and the Accounting System

Audit Period＿＿＿＿

Project Name: Project Implementing Entity:

Control Procedure # Content

Strong Weak Comments

1 Policymaking and Management

2 Organization

3 Management Policy

4 Staffing

5 Information System

6 Internal Audit

7 Accounting Organization and

Personnel

8 Finance and Accounting Policy and

Principles

9 Accounting Computerization

Preliminary Assessment

Conclusion (Opinion on next testing of

transaction cycle)

Auditor: Audit Date: Reviewer: Review Date:

* This form shall be filled in on the basis of questionnaires on internal controls and the accounting system.

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(Name of Auditing Firm) Control Environment Questionnaire

Audit Period＿＿＿


Topic Yes No N/A Comments

1. Policy-making and Management

(1) Does senior management attach importance to and obtain an

understanding of the internal controls (meeting with person in charge of

the project entity)? (2) Does senior management make decisions on significant financial

activities in the aggregate?

(3) Does the person in charge of the project entity review and analyze

the financial statements independently?

(4) Does the person in charge of the project entity pay attention to

out-of-control situations in project construction, management, and

finance and take timely emergency measures to restore normality?

(5) Is there approval from the person in charge of the project entity for

any changes in the accounting system and internal controls

environment?

2. Organization

(1) Is the organizational structure complete? (Obtain the organization

chart.)

(2) Are there formal job descriptions that clearly set out the duties and

responsibilities of the departments? (Obtain the description of the job

responsibility system.)

(3) Is the internal checking system adequately taken into account, and

are the duties of authorization, implementation, and recording clearly

segregated?

3. Management Policy

(1) Is there a feasible study and financial review system for significant

investment and procurement?

(2) Is there a system of financial responsibilities and a mechanism for

rewards and punishments on the basis of performance review?

(3) Is there a system of centralized management of funds?

(4) Is there a budget plan and proper approval for disbursement?

(5) Are there physical inventories at regular intervals?

(6) Is there a physical inventory of fixed assets at least once a year?

(7) Is there an insurance system for the key assets of the project?

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4. Staffing

(1) Do management personnel have the necessary knowledge and

professional competence?

(2) Is the training necessary for the above personnel to meet their

assigned responsibilities and a system of regular training and rotation of

duties?

5． Information System (1) Is the budget plan prepared by the project entity for each significant

event?

(2) Is the reporting system with respect to the information on accounting

and relevant transactions complete?

(3) Is the accounting, statistical, and transaction information used by the

person in charge of the project entity to control and assess business

activities?

6. Internal Audit

(1) Is there an internal auditing department?

(2) Is the internal auditing department independent from other

functional departments?

(3) Does the internal controls auditor take responsibility for monitoring

and inspecting compliance with accounting principles and transaction

cycles?

(4) Has an internal audit been performed during the reporting period?

(Obtain a copy of internal audit report.)

(5) Does the internal audit department work effectively?

7 Other External Supervision

(1) Is the project under supervision by a special inspector? If yes, obtain

the relevant information.

(2) Is the project under supervision by a special inspector of the key

construction project? If yes, obtain the relevant information.

(3) Is there engagement with certified accountants for financial

statements, audit reports, and assets evaluation? If yes, obtain the

relevant report.

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(Name of Auditing Firm)

Accounting System Questionnaire

Audit Period______



1． Accounting Organization and Personnel

(1) Is the accounting organization independent?

(2) Is the accounting organization structure complete?

(3) Are there enough accounting personnel?

(4) Is the internal checking system adequately thought out, and are the

duties for authorization, implementation, and recording clearly

distinguished?

(5) Is the cashier restricted from access to the sales, expenses, credits,

account recording, reviewing, and account book keeping?

(6) Are the accountants adequately trained before the assignment?

(7) Is there a hand-over procedure when the accountant resigns or shifts

change?

(8) Is there a high attrition rate for accounting personnel? Have key

employee resigned or been fired?

2． Finance and Accounting Policies and Principles

(1) Are relevant accounting principles issued by the finance authority

and executed?

(2) Is there a proper accounting manual prepared by the project entity?

(If yes, obtain a copy.)

(3) Are any significant changes in finance and accounting principles

approved by the relevant authorities?

(4) Have there been significant changes in finance and accounting

principles during the current fiscal year? (If yes, please list.)

3. Accounting Management

(1) Is it notebook style for bank journals and cash journals?

(2) Is there a reference book for marketable securities and notes

receivable (payables)?

(3) Have all original receipts been reviewed by the checkers and

relevant managers?

(4) Is there an approval system for receivables and disbursements? (If

yes, obtain a copy.)

(5) Is there person especially assigned to keep the key and password of

the locked cash box?

(6) Are the blank checks and chop kept by persons especially assigned

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separately?

(7) Is the general ledger of fixed assets reconciled with the fixed assets

reference book yearly?

(8) Is the general ledger of inventory reconciled with the subsidiary

ledger of the inventory management department monthly?

(9) Is the aging of accounts receivable being analyzed, and are the

accounts receivable being pressed for payment and written off

periodically? Is the information and the manual of accounting policies

distributed to relevant personnel?

(10) Are there complete safety facilities for keeping general ledgers and

relevant records (in a safe place with fire-proof, water-proof, and

insurance facilities)?

4． Changes of Accounting System Control

(1) Have there been significant changes in the functions, organization,

and division of the internal duties of the accounting department? (If yes,

list the changes.)

(2) Were there any key problems found in the accounting system during

the previous year’s audit? (If yes, list the problems.)

(3) Have there been significant changes in the control of the accounting

system? (If yes, list the content of the changes.)


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Table 3－4 Reference:

(Name of Auditing Firm) Internal Controls Questionnaire regarding the Computerized Accounting System

Audit Period



1 Is the computerized accounting system software purchased

copyrighted?

2 Are there personnel capable of software maintenance and

support?

3 Is there self-developed software approved by an entity at a

higher level and appraised by experts?

4 Has the software been approved by finance authorities before

being brought into use?

5 Is there a transition period during which the computerized

accounting system and manual accounting system are run

simultaneously before the system is brought into use?

6 Is the deviation being recorded during the transition period?

7 Has any program been modified since official deployment of

the computerized accounting system?

8 Are there appropriate texts documenting system modifications

and their impact?

9 Has the modification of system programs been approved by the

finance authorities?

10 Has the modification of system programs been approved by the

finance authorities?

11 Are accountants and operators restricted from access to system

program files?

12 Are there clear management policies for system operation?

(For example, application development and maintenance

procedures.) Are they executed effectively, with a clear

definition of roles and responsibilities?

13 Is there a person especially assigned to system inputs and

modifications?

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14 Is the system operator adequately trained to handle the

following points while operating the system?

(1) potential problems

(2) input requirements and correct voucher formats

(3) output requirements

15 Are responsibilities for system design separated from those for

system operation?

16 Is the system operator restricted from authorization of

transactions and dealing with original receipts?

17 Can the system be accessed only by the person knowing the

password?

18 Can network users access the system beyond their level of

permitted access?

19 Is the password changed periodically or occasionally?

20 Are the passwords of network users confidential?

21 Are the logs of the operating system set up to record system

operations properly?

22 Is there a person especially assigned to check the system

operating logs periodically?

23 Is there a general ledger in the computerized accounting

system reconciled with that of the manual accounting system?

24 Are there any control measures for access to the transactions

that must be reviewed and approved by the person in charge

when inputting?

25 Are responsibilities for preparing and reviewing vouchers

separated from those for system administration?

26 Is there a proper control system to ensure the effectiveness and

reliability of vouchers that are prepared manually?

27 Is there a double check for input data?

28 Are there proper control measures to check the correctness of

input data?

29 Does the system record the data changes automatically?

30 Are subsidiary ledgers printed out and archived monthly (or

full page)?

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31 Are the output documents kept by the especially assigned

person?

32 Are there proper review procedures for the output of financial

statements?

33 Is hardware setup done properly to ensure that the system will

work well?

34 Is there the necessary equipment for the machine room, such as

air-conditioners, dust-proof appliances?

35 Is the machine room set up separately?

36 Is there proper fire-proof equipment and measures in place to

prevent the machine room and equipment from catching fire?

37 Is there water-proof equipment and measures in place to

prevent the machine room and equipment from flooding?

38 Is there lightening-safe equipment and measures in place to

prevent the machine room and equipment from the effects of

lightening?

39 Is there reliable grounding for equipment for safety?

40 Are there voltage regulators and UPS equipment for the

computer system?

41 Are there periodical checks and tests for hardware?

42 Are there any necessary safety measures to ensure that only

authorized personnel can enter the machine room?

43 Are disks from outside the machine room restricted?

44 Is there anti-virus software such as virus killer disks with

continuous version updating?

45 Are there proper system backup disks and recovery procedures

established?

46 Is system data backed up periodically?

47 Are there more than two copies of data files backed up?

48 Are multiple data backup disks kept in a safe place, far from

the machine room?

49 Are there inside and outside labels on data disks?

50 Are the data and system backup disks kept by a person

especially assigned?


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B. Review Of Internal Controls for Transaction Cycles In order to understand whether the internal control systems exist for every transaction of project entity, and to assess their completeness and reasonableness, then determine the procedure, extent, and timing of compliance testing. On the basis of the control environment and accounting system review, the internal controls review for the transaction cycles is to be performed. In the light of the features of World Bank financed projects, the transaction cycles are categorized into 5 types: the withdrawals and claims transaction cycle, the procurement and payables transaction cycle, inventory transaction cycle, the civil works construction transaction cycle, and the cash receipts and disbursement transaction cycle. For the standard working papers of the internal control questionnaires for the transaction cycles, refer to Table 3-5 thorough Table 3-9.

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(Name of Auditing Firm) Internal Control Questionnaire for the Withdrawals and Claims Transaction Cycle

Audit Period＿＿＿＿＿



Planning Management

1. Is there a withdrawals and claims plan for the next year prepared in accordance

with relevant rules and regulations?

2. Has the withdrawal and claims plan been approved by the authorized person

before being submitted to the finance authorities or the project entity at a higher

level?

3. Has the plan been prepared on the basis of the World Bank evaluation report

and the construction project progress plan?

4. Are there proper measures to ensure the implementation of the plan?

Withdrawal and Claims

1. Do withdrawals and claims comply with the progress plan?

2. Is the procedure for withdrawals and claims accomplished in a timely fashion?

3. Is there a person especially assigned to handle the withdrawals and claims of

the entity?

4. Are there valid receipts attached to withdrawals applications in accordance

with the rules and regulations?

5. Is there a person especially assigned to review and summarize the withdrawals

applications of the entity and its subsidiaries?

6. Have the withdrawals applications been signed by the debtor’s representative

and chopped when submitting?

Replenishments and Disbursements 1. Have the withdrawal amounts that should be paid from the World Bank loan

been appropriated from special accounts to the application entity after withdrawal

applications have been reviewed and confirmed to have no mistakes?

2. Are loan replenishments appropriated to subsidiaries or project entities in a

timely fashion?

3. Is there a person especially assigned to review the amount before appropriating

loan replenishments to the entity?

Debt and Accounting Treatment

1. Have “Appropriation Notices” and “Debt Notices” been issued by the finance

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authorities when appropriating the loan to the entity?

2. Has debt been recorded in a timely fashion in keeping with “Payment Notices”

of the World Bank, or “Appropriation Notices” and “Debt Notices” of the finance

authority after receiving the loan of the replenishment, refund, or direct payment?

3. Has the account balance of the World Bank loan in the entity’s book been reviewed and reconciled with that of the finance authority or all the statements from the World Bank periodically?

� Review conclusion (to be filled out only by the auditor):

1. Through review and simple testing, the degree of reliability of internal controls for this transaction cycle is

considered to be: high ( ) medium ( ) low ( )

2. Are additional compliance tests needed for this transaction cycle? Yes ( ) No ( )

Auditor: Audit Date: Auditee: Auditee Date:

Reviewer: Review Date:

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Table3-6 Reference: (Name of Auditing Firm)

Internal Control Questionnaire for the Procurement and Payment Transaction Cycle

Audit Period＿＿＿＿＿＿ Project Name: Audit Implementing Entity:


General Information

1． Are responsibilities for the requisitioning, purchasing, and receiving

functions separated from the invoice processing, accounts payable, and general

ledger functions?

2． Are responsibilities for the purchasing function separated from the

requisitioning and receiving functions?

3． Are responsibilities for the invoice processing and accounts payable

functions separated from the general ledger functions?

4． Are responsibilities for the disbursement preparation and disbursement

approval functions separated from those for recording cash disbursements and

general ledger entries?

5． Are responsibilities for the disbursement approval function separated

from those for the disbursement preparation function?

6． Are responsibilities for entries in the cash disbursement records

separated from those for general ledger entries?

Requisitioning: 1． Does the project implementing entity carry out the procurement plan or

submit the requisitions to the relevant project entity in accordance with the

feasibility study approved and procurement yearly plan?

2． Are requisitions reviewed and approved by the designated officials in

charge of procurement content, method, and amount?

3． Are requisitions pre-numbered, and are those numbers controlled by the

project implementing entity and project entity?

4． Is the appropriation to be charged indicated on the purchase requisition

by the entity requesting the purchase?

Purchasing

1． Has the purchasing order been approved?

2． Do approval procedures exist for purchase orders and contract issuance?

3． Are purchase prices periodically reviewed by a responsible employee

independent of the purchasing department?

4． Are purchase orders and contracts issued under numerical or some other

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suitable control?

5． Are relevant World Bank purchasing rules and regulations followed

when procurement occurs with World Bank financing?

6． Are an adequate number of price quotations obtained before placing

orders that are not subject to competitive bidding?

7． Is splitting orders prohibited to avoid higher levels of approval?

8．Are price lists and other appropriate records of price quotations

maintained by the purchasing department?

9． Is a record of suppliers who have not met quality or other performance

standards maintained by the purchasing department?

10． Is an adequate record of open purchase orders and agreements

maintained?

11． Are purchases made for the accommodation of employees prohibited or

adequately controlled?

12． Are changes to contracts or purchase orders subject to the same

controls and approvals procedures as those in the original agreement?

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Receiving

1． Are receiving reports prepared for all purchased goods and transferred

from the purchasing department of the entity at a higher level?

2． Do procedures exist for the filing of claims against carriers or vendors

for shortages or damaged materials, or for reporting to the purchasing

department of the entity at a higher level?

3． Are steps taken to ensure that goods received are accurately counted

and examined?

4． Are goods received compared with purchasing contracts or purchase

orders that are submitted to the entity at a higher level?

5． Is the receiving report pre-numbered?

6． Is a technical representative assigned to monitor and evaluate the

contractor’s performance, and to approve the receipt of services with respect to

procurement of special purpose materials or facilities?

7． If a receiving department is not used, do adequate procedures exist to

ensure that goods for which payment is made have been received and checked

to see that they meet quality standards by someone other than the individual

approving payment?

Invoice processing, payment, and accounting treatment

1. With regard to invoices received, reviewed, and checked as

follows:

(1) Is they compared with the receiving report?

(2) Are invoice quantities, prices, and terms compared with those

indicated on the purchase order?

(3) Is the accuracy of calculations of sub-totals and totals checked?

2． Are payables confirmed or payments made only after invoices and

relevant documents are reviewed and approved?

3． Are payments reviewed and approved by the designated officials?

4． Does the accounting department maintain a current list of those

authorized to approve expenditures?

5． Is proper accounting treatment done for goods received?

6． With regard to the bundles procurements, when the project entity or

implementing entity makes the accounting records: (1) Is the accounting record made only on the basis of relevant receiving

reports and debt splitting notices from the entity at a higher level?

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(2) Are the receiving reports and debt splitting notice compared with

purchasing order?

�Conclusion: (to be filled out only by the auditor) 1. Through review and simple testing, the degree of reliability of internal controls for this transaction cycle is



Auditor: Audit Date: Informant: Checking Date:


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Internal Control Questionnaire for the Inventory Transaction Cycle




Receiving

1． Are receiving reports prepared for all purchased goods or transferred

goods by the entity at a higher level?

2． Do procedures exist for the filing of claims against carriers or vendors

for shortages or damaged materials, or for reporting to the entity at a higher

level?

3． Are steps taken to ensure that goods received are accurately counted and

examined?

4．Are goods received compared with purchasing contracts or purchase

orders submitted to the entity at a higher level?

5． Is the receiving report pre-numbered?

6． Is a technical representative assigned to monitor and evaluate contractor

performance and approve receipt of services with respect to procurements of

special purpose materials or facilities?

7． If a receiving department is not used, do adequate procedures exist to

ensure that goods for which payment is made have been received and meet

quality standards and are checked by someone other than the individual

approving payment?

6． Are assets registers set up for equipment purchased or received and

compared with warehouse records periodically?

Keeping

1．Are perpetual inventory system records provided for all inventories?

2．Is there separation and identification of inventory into different categories

and classes, and samples or tags to be used?

3． Are there physical inventory counts periodically?

4． Is inventory gain and loss recorded in an accounting book after

approval?

5． Are obsolete and damaged inventories appropriately disposed of?

6． Is there an especially assigned warehouse keeper?

7． Are there adequate safeguard measures?

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8． Are responsibility for inventory receiving and delivery separated from

account recording functions?

7． Is the warehouse inventory receiving and delivery record compared

with the relevant accounting record periodically?

Delivering

1． Are goods delivered to the subsidiary project entities and the

implementing entity according to the project construction plan or used for project

construction purposes?

2． Are clauses in loan agreements, project agreements, or loan transfer

agreements followed in delivery of goods?

3． Is delivery timely?

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4． Is a usage notice issued after goods delivery has been reviewed and

approved?

5． Are go-off checking measures applied in delivery?

6． Are inventory receiving and delivery reports prepared monthly and

summarized in the current month’s “goods receiving notes” and “goods

delivery notes” (transferred notes or usage notes)?

7． Are authorization and approval obtained for determination and change

in inventory valuation methods?

8． If the inventory was purchased with a World Bank loan,

(1) Are the delivered goods the same as those in the purchasing order

submitted by the subsidiary entity?

(2) Are there debt splitting notices when goods are delivered to a

subsidiary entity?

(3) Do subsidiary entities make account records according to the debt

splitting notice?

Sales

1．Are goods that cannot meet project requirements sold?

2．If goods that cannot meet the project needs are sold, whether

(1) approval is obtained from the provincial finance authority or a higher

level.

(2) approval is obtained from the World Bank.

(3) tax is paid according to the rules and regulations and make up tariff

for imported goods.

(4) measures exist to ensure that income from selling goods is used for the

original purpose required.

�Conclusion (to be filled out only by the auditor): 1. Through review and simple testing, the degree of reliability of internal controls for this transaction cycle is considered

to be: high ( ) medium ( ) low ( )




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Table3-8 Reference:


Internal Control Questionnaire for the Civil Works Construction Transaction Cycle

Audit Period:＿＿＿＿＿

Project Name Project Implementing Entity


Responsibilities of Project Legal Person

1． Is there a project legal person set up in accordance with state

laws?

2． Is the organizational structure complete?

3． Is a relevant management system instituted?

4． Are procedures defined in relevant state laws on elementary

construction projects that are financed by World Bank loans executed

strictly when the proprietor initiates the project?

5． Are construction quality and safety monitoring procedures

applied by relevant local authorities before the beginning of the project?

6 Are financial general rules and regulations, accounting standards,

and relevant financial principles carried out for project financial

management and accounting?

Project Initiation

1．Are project initiating procedures eligible and complete?

(1) Have a feasibility study and project proposal been prepared?

(2) Are authorization procedures for a feasibility study in compliance

with state rules (the state planning committee in charge of the

authorization of feasibility studies for large and medium projects, the

State Department in charge of those for key or special projects)?

(3) Have the design tasks been completed?

(4) Have the design tasks prepared after the approval of the

feasibility study and project proposal been approved by the relevant state

authorities?

(5) Is there evidence to support changes in the approved project

proposal, feasibility study, and design tasks? Are the foresaid documents

reported and approved accordingly if there are key changes?

(6) Does the project implementation entity delegate design tasks to a

design entity after approval of design tasks (with respect to large projects,

the general layout and design must be prepared, including the layout of

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ground utilization, overall arrangement, and design blue prints of main

buildings)?

(7) Is preliminary design prepared in accordance with the

requirements of design tasks and the general layout design? Is a detailed

and accurate total budget worked out?

(8) Has the preliminary design been approved by the relevant state

authorities?

(9) Has the preliminary design been finished as a whole before the

project start? Are there any cases of designing and construction being

carried out simultaneously? (10) Has the budget been adjusted according to the preparation

method, rationing, and standards of national rules and regulations

prepared by a qualified entity? Have the budgetary adjustments been

approved by relevant state authorities?

(11) Has the application for the construction project been submitted

to the local construction administration authority or to the organization

authorized by aforesaid authority for approval? Has a working license

been obtained from the construction authority before starting the project?

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(12) Is the project included in the yearly elementary construction plan issued by the entity at a higher level? 2．Are project detail components in accordance with budget requirements authorized by the state authorities? (1) Do any components not belong in the budget? (2) Are there any cases of exceeding the budget (non-subjective cause)? (3) Are there any cases of expanding the construction scale and standards arbitrarily?

(4) Is there any man-made loss and waste? Design 1． Is the design entity qualified? Has the “Delegation of Design Contract” been signed with the design entity? 2． Has the design entity carried out the design on the basis of the scale, standards, and components of the feasibility study and design tasks? Does the design achieve the depth of the requirements of state rules and regulations? 3． Are design changes adjusted during the construction work phase, in accordance with the procedures set out in national rules and regulations?

4． Is the design fee charged by the design entity in keeping with state rules and regulations? Tendering and Bidding: Domestic Tendering 1． General Information (1) Are the design, construction and installation, engineering supervision, main equipment and materials supplying, contractor and tendering agency of a main job on state large/medium scale project determined through public tendering, except for special confidential requirements or State Department requirements? (2) Are there any restrictions on area, departments, or industries in inviting public tendering? (3) Are the choices of tendering method in compliance with the rules and regulations? (4) Is the amount of the bidding bond reasonable?

(5) Has the project implementing entity retained a qualified lawyer as a consultant to provide professional advice on relevant rendering documents and contracts with respect to a project with large tendering value?

2． Tendering (1) Has the tender application been submitted to the tendering and bidding administrative organization? (2) Have tendering documents and base prices been examined and approved by the tendering and bidding administrative organization? (3) Are there any contents in the tendering documents that aim at or exclude another potential bidding entity? (4) Have tendering advertisements or tendering invitations been issued?

(5) Has a tendering notice been published in more than one nation-wide newspaper?

(6) Have the contents or additional requirements changed or been added arbitrarily by the tendering entity after tendering documents were issued?

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(7) Is the period from the date of issue of the tendering documents to

the bidding ending date compliant with the state rules and regulations (no

less than 15 days for small scale projects, and no less than 30 days for

medium or large scale projects)?

(8) Are there any procedures to review the bidding entity’s

qualifications and to inform the applicants of the results?

(9) Are the tendering documents, design drawings, and technical

information distributed to qualified bidding entities?

(10) Has the project entity organized a visit to the construction site

for the bidding entities and Q&A sessions as to tendering documents?

(11) Is the summary of questions and answers submitted to the

tendering and bidding administrative body, which are approved and

documented, also given to the bidding entities with written documents? (12) Have appraisal teams been set up, and the method of appraisal and determination established?

3． Base Price

(1) Has the base price been prepared for public tendering?

(2) Does construction project entity set the base price independently?

Is there any intervention from other authorities or entities? (3) Is the base price prepared based on the design drawings and relevant information with reference to state technical and economic standards?

(4) Does the base price consist of costs, profits, and taxes and fall

within the approved budget (or modified budget)?

(5) Does the base price favor competition and construction quality? (6) Is the policy of one base price for one project complied with?

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(7) Has the base price been reviewed and approved by the

tendering and bidding administrative organization?

(8) Are authorized base prices sealed until the opening of the

bids?

(9) Is the contract price put on record in the tendering and bidding

administrative organization with regard to negotiation bidding?

4． Opening of Bids, Appraisal, Letting of Bids

(1) Is the bidding hosted by the project entity open and are

investors, tender entities, state authorities, and other relevant entities

informed?

(2) Is an appraisal committee established for assessment of the

bidding by the project construction entity?

(3) Is the constitution of the appraisal committee reasonable

(including representatives from the project construction entity, main

investors, the tender and bid agency, and the involved professionals in

techniques, economics, and the law, in which the total number of

members is over 5, and further, the ratio of involved professionals must

be no less than two thirds)?

(4) Do any advantages and disadvantages exist among the

committee members and the bidders?

(5) Are the principles of equality, competition, fairness, and

reasonableness applied to decide on the successful bidder through

appraising the quoted price, the schedule of the construction project,

the quantity of main materials used, the construction blue print, quality

assurance, and credit standing?

(6) Is the time limit between the opening of the bidding and the

letting of the bid in accord with state rules and regulations (no more

than 10 days for small scale projects, no more than 30 days for large

scale projects, which can be extended in special cases)?

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(7) After a decision on the successful bidder, does the tendering

entity send the notice to the successful bidder within 7 days, meanwhile

sending a copy to other bidders and the tendering and bidding

administrative organization as well?

(8) Do the unsuccessful bidders return the tendering documents

and relevant information after receiving the notice?

(9) Does the tendering entity return the bid guarantee fund to

unsuccessful bidders in a timely fashion?

(10) Does the successful bidder sign the contract to undertake the

project with the construction entity within the time limits set by state

rules and regulations (30 days after the successful bid notice is issued)?

5． Does the successful bidder meet the following criteria, primarily

those that follow?

(1) Does the bidder have a quality certificate, as required by the

tendering documents, and is the bidder an independent corporate

entity?

(2) Has the bidder undertaken relevant tasks on similar

construction projects before, with outstanding achievement and

fulfillment of the contract?

(3) Is the bidder in good financial condition, without any

circumstances such as being taken over or bankruptcy, or involving

closing, halting, merging, or transferring status?

(4) Does the bidder have a record of contract fraud or any other

severe financial violation of laws within the preceding 3 years?

(5) Does the bidder have a good safety record and no severe

project quality or construction safety accidents in recent years?

DRAFT



Tendering and Bidding: International Tendering

1． General Information

(1) Have “World Bank financed project procurement management

provisional rules” issued by the Ministry of Finance and have procurement

guidelines set by the World Bank been observed in purchasing equipment

and in civil works construction using a World Bank loan?

(2) Is the selection of the tendering method (international competitive

tender, limited international tender, international quotation procurement) in

accord with the requirements of the World Bank?

2． International Tendering Agency

(1) Does the project owner, in terms of the rules and regulations, send

the invitation to all qualified entities that are certified to undertake

international tendering transactions?

(2) Is the qualification of an international tendering agency authorized

by the International Trade and Economic Cooperation Ministry and the State

Planning Committee?

(3) Do procedures exist to choose the best international tendering

agency?

(4) Does the project owner report to the Ministry of Finance for review

and approval after the international tendering agency has been chosen?

(5) Does the project entity sign the “Entrusting Agreement” with the

tendering agency after getting approval from the Ministry of Finance?

(6) Is the entrusting of the tendering agency finished before the

project initial assessment team arrives in China?

3． International tendering documents

(1) Has the latest version of the “World Bank Financed Project

Tendering Procurement Template,” which is modified and published by the

Ministry of Finance, been adopted to prepare the commercial part of

international tendering documents?

(2) Are the tendering documents submitted to the World Bank through

the tendering agency after approval from the relevant state authority?

(3) Do project entity and tendering agencies modify the approved

documents arbitrarily?

(4) Are the preliminary qualification review documents submitted to the

relevant authorities according to the submission procedures with regard to

tendering procurement, if a preliminary qualification review of bidders is

necessary?

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4． Proclamation and Announcement

With regard to a contract value over 10 million Yuan, in

accordance with the rules and regulations of the World Bank

“Procurement Guidelines,” are tendering announcements or preliminary

qualification review announcements published in the “development trade

newspaper” of U.N. and in one or more major technical magazines,

newspapers, or trade publications that are issued worldwide?

5． Opening of Bid

Is the bid opened in accordance with the time and place of

tendering proclamation?

6． Appraisal of Bid

(1) Is appraisal carried out in accordance with the principles and

procedures defined in the “Appraisal Report Format”?

(2) Is the appraisal report prepared on the basis of the “Appraisal

Report Format” and submitted to the state appraisal committee?

(3) Is the appraisal report submitted to the World Bank for review

and approval by the tendering agency, after the project entity and

tendering agency receive the “Notice of Preliminary Appraisal

Conclusion” from the state appraisal committee?

(4) Is a successful bid notice issued after approval by the World

Bank?

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Civil Works Construction Contracts and Outsourcing

1． Is the contractor the construction entity determined through the

tendering and bidding procedure?

2． Has the outsourcing entity signed the project contract with the

contractor in accordance with the law?

3． Are the clauses of the construction contract compliant with those

in the “Construction Project Execution Contract Example

Documentation,” and are the contents of the contract consistent with that

of tendering and bidding?

4 ． Was the negotiated draft contract been submitted to the

construction administrative authority for review and approval by the

outsourcing entity before the construction contract was signed?

5． Is the alteration or rescission of the contract compliant with state

rules and regulations and put in the record for reference by the original

administrative authority?

6．Is the resolution of disputations and dissensions expressed in

terms of negotiation procedures and methods? 7． Are the authorization and responsibility of the engineering supervision entity in the construction contract consistent with those in the engineering supervision delegation contract? 8． Are there any cases in which the construction entity separates project components and distributes them to several subcontractors? 9．Is the main job of the construction project executed by the chief contractor, if the chief contract system is in use? 10． Subcontracting

(1) Are there any cases of the construction entity separating project components and distributing them to several subcontractors?

(2) Are there engagement clauses in the contract and approval by the construction entity when the chief contractor distributes part of the construction tasks to qualified subcontractors? (3) Are there any cases in which the chief contractor has distributed part of the construction tasks to unlicensed or unqualified sub-contractors? (4) Are there any cases in which the sub-contractor has distributed construction tasks to a lower level sub-contractor? 11． Are there any cases in which the government authorities have intervened with the outsourcing entity to distribute contracts to an appointed contractor?

12． Does the proprietor take any measures to monitor the execution of the contract (by means of accrediting representative officials or supervision engineers)?

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13． Do any other entities or individuals intervene illegally in the

signing and execution of construction contracts?

14． Is alteration of the content of the contract in compliance with

appointments of the contract?

15． Is there any conflict between the general contract and the

sub-contract? Are responsibilities, rights, and benefits defined for each

party?

16． Do settlement procedures of the construction comply with the

rules and regulations of the contract?

Engineering Supervision

1． Is the engineering supervision entity qualified and the best of the

candidates?

2 ． Has the construction entity signed the written engineering

supervision delegation contract with a qualified engineering supervision

entity?

3． Does the contract adopt the “Construction Supervision Contract”

template? 4． Is the engineering supervision team instituted by the engineering supervision entity according to the supervision transactions (usually the engineering supervision team consists of a chief supervision engineer, a supervision engineer, and other supervision staff)?

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5． Is the engineering supervision team on site?

6． Does the construction entity inform the construction execution

entity in written form about the appointed engineering supervision entity,

supervision content, and extent of supervision authority before the

execution of engineering supervision?

7 ． Does chief supervision engineer inform the entity under

supervision in written form about the extent of authority of the

supervision engineer?

8．Does the engineering supervision entity operate according to the

principle of “fair, independent, self-determination”?

9． Are there any cases in which the engineering supervision entity

has transferred tasks to another entity?

10． Are there any membership advantages and disadvantages

between the engineering supervision entity and the construction

contractor?

11． Are there any membership advantages and disadvantages

between the engineering supervision entity and the materials and

equipment suppliers?

12． Are engineering supervision procedures complete and eligible?

(1) Is the construction engineering supervision plan prepared?

(2) Are detailed engineering supervision working procedures

prepared according to construction progress and the different professions?

(3) Does the execution of engineering supervision comply with the

detailed supervision working procedures?

(4) Does the engineering supervision entity participate in acceptance

checks of preliminary completion of the construction and sign the

advisements?

(5) Does the engineering supervision entity provide the supervision

archives to the construction entity after completion of supervision?

� Conclusion (to be filled out only by auditor) 1. Through review and simple testing, the degree of reliability of internal controls for this transaction cycle is





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Internal Control Questionnaire for the Project Cash Receipts and Disbursement Transaction Cycle

Audit Period ______



General Information

1．Separation of responsibilities and duties

(1) Are responsibilities for maintaining the cash receipt and

disbursement subsidiary ledger separated from those for maintaining the

general ledger?

(2) Are responsibilities for cash disbursement, disbursement approval

functions, and recording functions separated?

(3) Are responsibilities for cash disbursement functions separated from

material allocation and delivery functions?

2． Are the accounting of cash receipts and disbursement in keeping

with relevant rules and regulations?

3． Are review and approval procedures and original documents of cash

receipt and disbursement complete?

Cash Receipts

1． Do control procedures exist for recording cash receipts, including

cash (bank), materials objectives, contributions in labor, etc.? Are

responsibilities for withdrawals, review, approvals, and recording properly

separated with regard to cash receipts for World Bank loan withdrawals and

claims?

2． Are cash receipts for World Bank loans recorded promptly after the

relevant documents have been obtained?

3． Are there approved documents and plans regarding domestic

counterpart fund total amounts, sources of funds, and yearly receipt status

that are in keeping with project agreements and assessment reports?

4．Are cash receipts of domestic counterpart funds recorded promptly

after the relevant documents have been obtained?

5． Are the component, quantity, and price of contributions in labor

consistent with the requirements of assessment reports and the execution

plan?

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6． Are responsibilities for calculation, validation, and recording

functions of contributions in labor cash receipts separate?

7． Are there supporting documents, such as rosters, labor working

orders, labor contracts, for cash receipt calculation of contributions in

labor?

8． Are other project cash receipts, such as grants and material

grants recorded in the total cash receipts, for which the ledgers are set up

separately? Is total amount of the subsidiary ledger consistent with that of

the general ledger?

Cash Disbursement

1． Do procedures exist for cash disbursement authorization and

approval that are in keeping with the rules and regulations?

2． Are cash disbursements of World Bank loans recorded

promptly?

3． Is the World Bank loan being used for its stated purpose?

4． Are cash disbursements of domestic counterpart funds recorded

promptly?

5． Are domestic counterpart funds used for their stated purpose?

6．Comparing the appropriation of domestic counterpart funds with

the plan, are the domestic counterpart funds appropriated adequately and

in a timely fashion? And are accounting checks carried out for actual

appropriation of counterpart funds at year end?

7．Are responsibilities for calculation, validation, and recording

functions separated for the disbursement of labor compensation

functions?

8． Are there supporting documents, such as rosters, labor working

orders, and labor contracts, for disbursement calculations of labor

compensation?

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9． Are the components, quantity, and price of the disbursement of labor

compensation consistent with the requirements of the assessment report and

execution plan?

10． World bank loan interest disbursement

(1) Is the calculation of interest disbursement in keeping with the loan

agreement or loan transfer agreement?

(2) Is interest disbursement during the construction phase recorded in

project disbursement promptly, according to the amounts on the World Bank

payment requisitions or on the financing authority payment requisitions?

11 World Bank Loan Commitment Fee Disbursement

(1) Is the calculation in keeping with the loan agreement or loan transfer

agreement?

(2) Is the commitment fee disbursement recorded in a timely fashion in

the project disbursement account, according to the amount on the World Bank

payment requisitions or on the financing authority payment requisitions?

(3) Is interest disbursement or commitment fee disbursement deducted

when receiving refunded commitment fees?

12．Domestic compensated counterpart fund interest disbursement

(1) Is the calculation in keeping with the loan contract (agreement)?

(2) Are interest disbursements during the construction phase paid

correctly according to the interest calculation statement? And are they recorded

in the project disbursement account in a timely fashion?

13． Is the disbursement of the loan refund reservation used for its stated

purpose?

14． Are loan refund reservations recorded in a timely fashion?

�Conclusion: (to be filled out only by the auditor)

1. Through review and simple testing, the degree of reliability of the internal controls for this transaction cycle is





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Chapter III (Part 2) Internal Control Compliance Testing

Compliance testing is an audit program which tests via some audit approaches whether operation of the project entity complies with its relevant internal control system, with the purpose of evaluating the validity of the internal control system. In view of audit features of World Bank financed project, the compliance testing shall primarily adopt the following two approaches: a) transaction testing, a testing where the examination carried out in accordance with the prescribed procedure on several chosen transactions of typicality to test whether control measures on the chosen transactions are in compliance with regulations and are seriously taken, against which judgement is made on compliance validity of the control measure; b) function testing, a testing where the examination is carried out on a specific program within a specific control at its various periods upon the same transactions to clarify whether the program functions appropriately in the audit period. The transaction cycle of World Bank financed project includes withdrawing and claming, procurement and payment, inventory, project construction, cash and disbursement, and etc. This Practice Guide sets out ways and means of the compliance testing on all the aforesaid transaction cycles and the audit team shall adjust in the context of the circumstances of the project entity and the team’s own judgement.

After the compliance testing, auditors shall provide further opinions in accordance with the testing results on the credibility of the internal control. Auditors shall adjust the substantive testing audit program, extent and time that are originally planned provided the opinions conflict with the initial ones. 3.2.1. Withdraw and Claim Transaction Cycle Compliance Testing （一）Withdraw and Claim Transaction Cycle World Bank Loan runs different from commercial banks loans. After the loan agreement becomes effective, the loan is not directed right away to the borrower for disposition, but withdrawn by way of claim step by step during the agreement period. In order to assure that the loan will be made the prescribed use of, World Bank shall open an account under the name of the borrower once the loan agreement takes effect and record the loan as debit in the opened account’s ledger. In line with the regulated procedure, borrowers have to withdraw against adequate supporting document from the account. Only after the claim is reviewed qualified, shall the World Bank disburse the fund to the borrower and record as credit in the account’s ledger. The claiming procedures can be gone through either by the entity (the project implementing entity or the project head office set up by the project entity at higher level), or by financing authority (Financial Ministry of PRC or financial authorities at provincial level.) The specifics are set out in the loan agreement of each project. Generally speaking, it’s the one who manage the special account that goes through the claiming procedures in World Bank. The transaction cycle of withdraw and claim involves various operations and procedures by the project entity, including compiling project expenditures, claiming

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from project entity at higher-level or financial authorities or even World Bank, and withdrawing the loaned fund. The primary procedures of withdraw and claim transaction cycle are illustrated herewith by taking the withdraw and claim by financial authorities as an example. 1、Submit the annual planning of withdraw and claim

This transaction cycle starts with making the annual planning of withdraw and claim. Each project shall make its plan in accordance with World Bank’s assessment report for the project, the tendering procurement plan and annual project development plan and shall submit and seek higher authorities’ approval of the withdraw and claim plan for next year, which is based on expenditure categories and payment approaches. For those whose withdrawal and claim falls under the competency of Financing Ministry, and project head office at provincial (regional) level shall make its next-year withdraw and claim plan, which is based on the aggregation of its sub-offices’ next year plans, and submit the plan, after it is signed and chopped by the financial authorities at provincial (regional) level to financing authority by end of November each year.

2、Withdraw and claim Project implementing entity or head offices shall withdraw and claim in line with actual practices and related procedures prescribed by the World Bank. They shall fill in withdrawing application form , abstract forms or expenditure statement and apply to higher-level offices or financial authorities after attaching supporting documents and obtaining peer financing authority’s approval and chop for assurance. In the end, it is financing authorities at provincial level or financial ministry who run through the procedures within the World Bank for withdraw and claim. For those project the financial ministry is responsible for, their provincial head office shall compile and make the withdrawal application for the claim up to RMB50,000.00 or within the last 5 days every month; Project’s regional or municipal offices shall compile and make the application for claim up to RMB150,000,00 or within the last 10 days each month; Project’s provincial offices (central governmental offices) shall fill in withdrawal forms and apply to the provincial financing authorities (financial ministry) for claim up to RMB500,000.00 or within the last 15 days each month. 3、Fund Replenishment and Disbursement

Within five working days, financing authorities (financial ministry or bureau) shall review and check the application forms submitted by subordinate financial authorities or other withdraw organizations, confirm the loan amount that the World Bank should disburse, and then get it transferred from the special account to the applicant organizations. Upon receiving the loan refund, the financing authorities shall also,

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within five working days, get it allocated to subordinate financial organizations or project implementing entities. Under the terms of direct payment or special commitment, the World Bank shall disburse the loan directly to suppliers or consultant specialists, fund replenishment not involved.

4、Debt and Accounting Treatment After reviewing and approving application forms, financing authorities (financial ministry or bureau) shall return one slip of the form for the withdraw entity to record it as notice of withdraw; and write the debt notice in accordance with the what the World Bank recording in US currency or special withdraw rights (payment notice), after receiving the actual refund, repay or direct pay, and pass the notice to withdraw entities for purpose of book recording. For procurement or consultancy expenditures involving more than one withdraw entities, project management entity shall also provide expenditure splitting list to the financing authorities. In the context of World Bank’s replenishment or disbursement as well as the expenditure splitting, financing authorities issue the withdraw notice and debt notice to subordinate authorities, which shall compose project withdraw notice upon receiving the withdraw for the project office to pass to project implementing entities to record in accounting system. （二）Primary documents of withdraw and claim transaction cycle

Compliance testing of withdraw and claim transaction cycle involves a serial of documents and records, which vary with claiming natures and withdrawing approaches. 1、Withdrawing application form It is written document which project entities (project office) or financing authority prepare to obtain withdraw from superior financial authority, administrative authority or the World Bank. Detailed payment instructions shall be explicitly illustrated in the form.

2、Abstract form It summarizes in forms withdrawal for goods, civil works construction and consultancy for those single entry contract value exceeding expenditure statements limit.

3、Statement of Expenditure It summarizes in forms withdrawal for goods, civil works construction, consultancy,

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domestic training and trips, or others for those single entry contract value within limits. 4、Notice of non-objection opinions

It is written document issued by the World Bank to reflect that it has no objection as to procurement or employing consultancy specialists after reviewing what should be pre-audited in procurement and consultancy services.

5、Procurement contract It is legal document, signed between suppliers, consultancy specialists and construction entities and set out two parties’ rights and obligations. 6、Invoice It evidences the types, quantity and amount of the goods and services received. 7、Construction progress report It reports on the work load and pricing (shall be signed by supervision engineers). 8、Disbursement Notice It is written document issued by the World Bank to evidence the amount of the loan that it has replenished or disbursed to borrowers. 9、Withdraw notice and debt splitting notice As set out earlier. 10、Others Withdraw and claim involves other documents, including international assignment approvals, overseas travel expenditure budget, letter of credit, and etc. （三）Withdraw and claim transaction cycle testing procedure and testing workpapers Auditors carry out compliance testing whose procedure could be selected from the compliance testing procedures for the internal control of withdraw and claim transaction cycle and record the testing proceedings and results in the audit workpapers. The workpapers for the testing of withdraw and claim transaction cycle include testing procedures, summarizing workpapers and testing records for withdraw application form, statement of expenditures and fund replenishment and appropriation , details of which could be referred to table 3-10 - table 3-14.

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Table 3-10 Reference

(Name of Audit Firm)

Internal Control of Withdraw and Claim Transaction Cycle Compliance Testing Procedure

Audit period＿＿＿＿＿

Project Name：

Project Implementing Entity：

Focus Testing Procedure Comment

s

W/P

Ref.

Plan Management

1． Understand whether project entity applies plan management for withdraw

and claim, through observation, inquiry and other methods.

2． Obtain project entity’s current year withdraw and claim plan together with

the planning notes and compare with the withdraw plan and the World Bank’s

disbursement notice, which are attached to loan agreement, to check:

（1）Whether withdraw plan is based on the World Bank’s assessment report,

tendering and procurement plan, as well as the annual construction plan;

（2）Whether expenditure classification and payment methods attached to the

withdraw plan are in compliance with related provisions in the withdraw plan and

disbursement notice attached to the loan agreement;

（3）Whether document evidencing approval is available with the withdraw

plan.

Withdraw and Claim

1． Through inquiry and observation, obtain the understanding concerning

whether incompatible duties such as preparing summary, reviewing summary, final

approving of claiming and etc are segregated.

2． Obtain project entity’s withdraw application for period under audit and

compare with the withdraw plan and the World Bank’s disbursement notice, to

check:

（1）whether applied expenditure classification and withdraw proportion are in

compliance with the provision in disbursement notice;

（2）whether the filling of the application form is accurate;

（3）whether the evidencing document attached to the application form is

complete and compliant with the rules and regulations of the World Bank and

Financial Ministry. It is prescribed that different document supports different

withdraw approaches.

�Whether two copies of contracts and World Bank’s non-objection notice of

procurement or consultancy specialists are prepared for the procurement and

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consultancy services which need to be pre-audited by the World Bank.

�Whether summarizing form, two copies of contract, invoice and one copy of

the verification letter for transportation and production place are prepared for the

withdrawing whose single entry contract value exceeds what statement of

expenditure limits. Whether two executed contracts and application letter are

prepared if credit note is applied for. And whether two executed contracts and three

credit notes are attached if special commitment is applied for;

�Whether summarizing form, two copies of contract, invoice and copy of

project construction settlement are prepared for the withdrawing for civil works

construction whose single entry contract value exceeds what the statement of

expenditure limits;

◆ Whether summarizing form, two copies of contract and copy of invoice

are prepared for the withdrawing for consultancy services whose single entry contract

value exceeds what the statement of expenditure limits;

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s

W/P

Ref.

�whether statement of expenditure and project progress report which includes

workload and pricing and signed by supervision engineer are prepared for the

withdrawing for self-managed construction;

�whether approval for international assignment, overseas travel budget, business

trip or training outline, invitation letter, copy of approval on the plan are prepared for

the withdrawing for overseas business trip or training;

�Whether one SOE form is prepared for the withdrawing for the single entry

contract value below SOE limits.

（4）Review whether the applied withdrawing amount in the application form is

consistent with the claimed amount in relevant supporting documents.

（5）Compare the dates of submitting the withdrawing application by the project

entity with the date by subordinate entity, and to review whether the withdraw and

claim procedure is gone through on a timely basis.

3．Select certain samples of withdrawing applications and their supporting

claiming documents, and to review whether withdrawing support document is

authentic.

（1）check whether it is authentic by means of examining documents are complete

in nature, and other approaches;

（2）ascertain whether copies in supporting documents are consistent with the

originals;

（3）ascertain whether there are any cases that suppliers in invoices or contracts are

justifiable with goods or services provided;

（4）check whether account record are consistent with actual withdrawing for civil

works construction by looking into the actual progress and comparing it with the

claimed size;

（5）Ascertain whether authorized debt representatives sign claims, only copies

available without originals, by subordinate withdrawing entity, and to record in the

audit workpapers with regard to the claims which are either in large amount or auditors

hold of risk of being unauthentic;

4．check whether the expenditures of applicant withdrawing are in compliance

with World Bank’s requirements:

（1）Through looking into the dates in contract, receipts or other supporting

documents, ascertain whether the expenditure date is eligible and up to standard;

Except for expenditures which can be traced back or pre-paid according to loan

agreement, expenditures before the effective date or after loan account closing

determined in the loan agreement are invalid

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（2）For expenditures where originating date differs great with the approval date of

the application, auditors shall trace back to earlier similar claims to examine whether

there exists duplicate claims to the World Bank;

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s

W/P

Ref.

（3）Through looking into payer name in receipt, beneficiaries in contract and letter

of credit, ascertain whether expenditures belong to project;

（4）Through looking into the details in receipts or other documents, ascertain

whether the claims are made for appropriate expenditures, which are agreed by the

World Bank;

In accordance with relevant World Bank rules and regulations, land acquisition

expense, various taxes, insurance and miscellaneous freight fees paid in RMB, and

deposit above 15 percentages shall not apply for disbursement in World Bank loan.

（5）Compare the contents in withdraw application form with the accounting records

of the project entity, to check whether there are any cases that are inconsistent.

5． With regard to the claims by statement of expenditure, e.g. if other

withdrawers’ statement of expenditure are summarised too, shall be recorded to be

verified till audits of the withdrawing entities; if expense is for its entity only, all

original supporting documents shall be obtained, all testing procedures set out in

Provision 3 and 4 shall be applied, existence of practices where contract value above

limits are separated into several invoices shall be checked.

Withdrawing by statement of expenditure shall be deemed unqualified for which

the expenditures exceed limit.

Loan Replenishment and Disbursement

Obtain accounting and supporting documents for appropriation of loan.

1． Check whether the appropriation of loan to withdrawing entity is upon the

self-made disbursement notice, and the notice is prepared on the basis of verification of

withdrawers’ claims, further, it is signed by proper authorized person.

2．Compare bank’s remittance date in bank statements with the claiming date as

well as the date receiving the replenishment, of appropriation of loan, and to ascertain

whether the appropriation of loan to withdrawer is overdue.

3． Compare the amount of appropriation of loan with Review and claimed

amount, to ascertain whether the loan is deducted.

Debt and Accounting Treatment

1． Compare “disbursement notice”, “withdrawal notice”, reconciliation statement

of financing authorities with related accounting records, to ascertain whether they are

recorded timely.

2．Compare reconciliation statements from World Bank or financing authorities

with relevant debt records, and to ascertain whether there are any cases that fund has

been in place but without relevant debt recorded.

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Auditor: Audit Date: Reviewer: Review Date

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Internal control of withdraw and claim transaction cycle compliance testing workpapers

――Summarizing Workpapers


Project Name


#. Proceeding record of testing W/P Ref.

Testing

Conclusion

Auditor Audit Date Reviewer Review Date

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――Testing records of withdrawing application form


Project Name:

Project Implementing Entity:

Verification Comments #. Date Amount of Withdrawal

1 2 3 4 5

Directives for filling the “Verification” column

1． Applied expenditure classification and disbursement

proportion is in compliance with the rules and

regulations in disbursement notice.

2． Filling of the withdrawal application form is accurate.

3． Supporting document prepared for withdrawal

application is complete and compliant with relevant

rules and regulations of World Bank and financing

authorities.

4． Amount set out in withdrawal application form is

consistent with the claimed amount in supporting

document.

5． The date of submitting application form is close to the

date of withdrawal application by subordinate entities.

(Please tick √ in corresponding blanks for positive

opinions; × for negative opinions; N/A for not-applicable.)

Pertinent testing notes and conclusions:


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――Testing records of statement of expenditure

Audit period＿＿＿＿＿＿

Project Name:

Project Implementing entity:

Verification Comments # Date

Expense

Type

Claim

proportion

Claimed

amount 1 2 3 4 5 6

Directives for filling the “Verification” column

1． Expenditure type and claiming proportion is in

compliance with relevant rules and regulations in

disbursement notice.

2． Occurring time of expenditures is consistent with

requirements.

3． There’s no duplicate claiming to the World Bank.

4． Expenses belong to this project.

5． Claimed expenditures are consistent with World

Bank’s requirements.

6． Being consistent with pertinent accounting records.


opinions; × for negative opinions; N/A for

not-applicable.)


Auditor Audit Date Reviewer: Review Date

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―― Testing records of appropriation or replenishment


Project Name


Accounting Record

(World Bank Loan) Verification Comment

s Applic

ation

No.

Appli

ed

Amou

nt

Applic

ation

Date

Replenish

ment

(Appropria

tion)

Amount

Replenish

ment

(Appropria

tion) Date

Voucher

No.

Amount

1 2 3 4 5

Directives for filling “Verification” column

1．The fund is replenished (appropriated) to withdrawing entity timely.

2．Amount and time of the replenishment (appropriation) is consistent with

relevant records in bank statements.

3．Replenishment (appropriation) is approved.

4．The amount of replenishment is consistent with the applied amount.

5．Replenishment (appropriation) is consistent with accounting records.

(Please tick √ in corresponding blanks for positive opinions; × for negative

opinions; N/A for not-applicable.)



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3.2.2 Procurement and Payment Transaction Cycle Compliance Testing

（一）procurement and payment transaction cycle Procurement and payment transaction cycle includes proposing procurement plan, tendering, issuing purchase listings, signing contract, verifying goods (or services), confirming debts, and other links. During the course of procurement, not only shall the project entity abide by related domestic laws and regulations and project entity’s internal management policies, but also its procurement funded with World Bank’s loan funds shall observe provisions prescribed in World Bank’s procurement guide.

1． Propose procurement plan

In accordance with financial ministry’s related regulations, project entity’s overall procurement plan or listing shall be approved by State Planning Committee and project entity’s annual procurement plan or listing shall be submitted, reviewed and written confirmed by local or provincial financing authorities. Therefore, project entity or its management shall work out or summarize its procurement plan for next year according to the overall procurement plan and pertinent provisions set out in World Bank’s loan agreement and obtain due approvals from relevant financing authorities.

2． Adopt appropriate approach to carry out the procurement In accordance with pertinent regulations from World Bank and financial ministry, project entity shall opt for international competitive tendering, limited international tendering, domestic competitive tendering, direct procurement by international inquiring and direct procurement by domestic inquiring in context of procurement scope and other specifics. International competitive tendering is broadly recommended by World Bank, other approaches limited. Among those, international limited tendering only suits conditions a) with small contract value; b) with limited suppliers; or c) where it’s proved that it’s right not to adopt international competitive tendering. Domestic tendering only suits conditions a) with small bidding value; b)with scattered construction venues or probably long durations; c)where construction is labor intensive in nature; and d) where domestic procurement price is lower than international market. Inquiring procurement only applies to goods directly delivered in low value or to goods with standard price. Only to the following five circumstances all direct procurements apply: a) existing contract which is acknowledged by World Bank is extended; b) in order to fit with existing equipment, increase of order from original suppliers is justified by standardization of equipment or accessories; c) equipment in need is monopolized in nature and can only be acquired form a single source; d) there’s special conditions, e.g. natural disaster. No matter which procurement approach to be adopted, procurement shall abide by World Bank’s Procurement Guide and Temporary Provisions to Regulate World Bank’s Loan Agreement Procurement which is promulgated by financial ministry and State Import and Export Office for Equipment. 3． Special consideration for bundled procurement

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Most of World Bank financed projects, especially some non-business projects, span over several project provinces and have many project implementing entities. As such, the projects have uniform objectives and uniform requirement for goods. In order to avoid being uneconomical resulted from scattered procurement, many projects adopt bundle procurement, i.e. procurement led by project superior authority (project offices at provincial or central level). If adopting bundled procurement, responsible authority shall draft purchase listings in context of overall plan and cascade to project unit to confirm prior to the commencement of procurement; upon confirmation, the superior authority shall make a tentative planning and submit to financing authorities at due level for approval. Most bundled procurement led by project superior authority adopts international competitive tendering. Procured goods are either directly delivered by suppliers to project entity or checked by superior authority before acceptance and allocated to different units. Since bundled procurement involves many links, auditors shall pay special attention to compatibleness of the procedures for making the procurement plan, timeliness of delivering goods, as well as the suitableness of the goods.

（二）Major documents in procurement and payment transaction cycle 1．Procurement listing

It is also called procurement plan, illustrating names of the goods and services, approaches, value and time arrangement of the procurement on annual basis.

2． Purchase application Written purchase application worked out by project’s authorized persons for goods and services.

3． Purchase order Record used to write down names, sorts, quantity and other details of the goods and services that project entity plans to procurement.

4． Ordering contract Formal document defining explicit quantity, sorts, qualification, quality, deliver date, payment conditions and other rights and obligations for other parties.

5． Acceptance note Record, with names, types, quantity and other details of goods, is to confirm receiving tangible assets.

6． Official invoice Record the confirming types, quantity, price and date of goods of services that are received.

7． Payment note It includes cash payment receipt and bank remittance statement.

8． Others Include inventory, equipment investment, construction in progress, fixed assets, long-term loan, cash in bank, and relevant general and subsidiary ledgers.

（三） Testing Procedure and workpapers for procurement and payment transaction cycle

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Auditors shall select from compliance testing procedures for procurement and payment transaction cycle to carry out the testing and record down the proceedings and findings of the testing in the audit workpapers. Testing workpapers of the procurement and payment transaction cycle include testing procedures, testing workpapers and testing records, details of which can be referred to table 3-15 -- table 3-17.

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Procurement and payment transaction cycle compliance testing Procedure

Audit Period＿＿＿＿＿＿

Project Name


Focus Testing Procedures Comments W/P Ref.

General Information 1．Ascertain whether responsibility are adequately segregated through inquiry and observation 2．Ascertain whether responsibilities are segregated by selecting certain samples of order forms from procurement department’s archives.

Requisitioning 1．Select certain samples of order forms from procurement department’s archives, in the context of feasibility study and annual procurement plan, to check:

（1）Whether they are consistent with feasibility study and annual procurement plan;

（2）Whether purchase applications are attached and these applications are approved by the designated person;

（3）Whether they are reviewed and approved. 2．Whether the selected forms are consistent with the copy of procurement listings in accounting and checking functions; 3．Whether order forms are prenumbered.

Purchasing 1．Select certain samples of goods receiving records,

（1）To examine related original documents to understand whether proper approval by authorized person are obtained before the commencement of the procurement;

（2）To confirm whether purchasing contract or order form is attached to goods receiving record, and to check whether there are review evidences by relevant persons in charge. 2．Obtain a recent procurement registration form to check whether evidence of checking by person in charge is in place. 3．Obtain certain samples of files on procurement in World Bank loan,

（1）In comparison with the World Bank procurement guide and pertinent financial ministry’s regulations, to check whether procurement approaches selected to carry out are accordant with the rules and regulations;

（2）To examine whether procurement contract is approved by World Bank for withdrawing by way of direct disbursement by World Bank or commitment withdrawal;

（3）To examine whether the original documents attached to the vouchers is qualified for claims to World Bank in replenishment approach and with value exceeding SOE limit;

（4）With regard to the claims by means of SOE, to check all original documents to ascertain procurement of goods and services is concurrent with project and is authentic.

Receiving

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1．Obtain receiving report, to check the evidences of goods delivery.

Ascertain whether control procedures are strictly carried out and details of

name, qualification, module, quantity, quality, price and etc are verified.

2．Examine quality control report or other documents, to verify the results

of the quality checking by entity under audit on received goods.

3．With regard to the purchased equipment, check warehouse records

against asset registration book.

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Focus Testing Procedures Comments W/P Ref.

4．As to goods transferred from project entity at higher level, examine

transfer listing and related debt splitting form, and to ascertain costs are

appropriately recorded.

5．Examine original documents for purchased goods to assure that costs are

appropriately recorded

Invoice processing, payment and accounting treatment

1． Select certain amount of payment vouchers

（1）To check whether attached original documents are complete;

（2）To examine whether authorized signature is in payment documents;

（3）To examine the written-off evidences (e.g. chopped as paid) of

attached original documents (e.g. invoices).

（4）With regard to replenishment from World Bank loan, in comparison

with pertinent debt records, to examine whether proper accounting treatment is

carried out,

2．Through observation and inquiry, ascertain that the keeper of blank

checks is independent from controller of the chops.

3．Select several signed checks from check book, and to examine:

（1）Evidence of review and approval by authorized person before signing;

（2）Inconsistency, if any, through comparing check amount and amount

showing on delivery note and invoices.


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Internal control of procurement and payment transaction cycle compliance testing workpapers

Summarizing workpapers

Audit Period ＿＿＿＿

Project Name:


No. Proceeding records of testing W/P Ref.

testing

conclusions


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Table 3-17 Reference: (Name of Audit Firm)

Internal control of procurement and payment transaction cycle compliance testing workpapers ――Testing record

Audit Period _____________ Project Name: Project Implementing Entity:

Purchase Contract Purchase Invoices Goods Receiving Notes and Receiving Report Accounting Voucher

Verification Date Serial No. Verification Date Serial No. Verification Date Serial No. Verification No. No. of Purchase Contract Name of Suppliers Date Name of Goods Module Quantity Price Amount

1 2 3 4 5 6 7 8 9 10 11 12

Directives for filling the “Verification” column: 1. Whether responsibilities for checking, keeping, paying and accounting are segregated. 2. Whether procurement contract is approved by authorized person. 3. Whether procurement contract is consistent with purchase application form. 4. Whether unit price in invoice is consistent with that in purchase contract. 5. Whether product name and quantity in invoices are consistent with those in purchase contract. 6. Whether amount in invoice is consistent with that in purchase contract. 7. Whether goods receiving note is attached with receiving report, in which product name, quality and quantity are consistent with those in purchase contract and invoices. 8. Whether goods receiving note is signed by keepers and handlers. 9. Whether amount in invoices is consistent with that in payment settlement documents. 10.Whether payment vouchers are signed by handlers and supervisors. 11.Whether receipt amount is correctly recorded in purchasing account(equipment, inventory) and payable (bank and cash) account. 12．Whether accounting disposition of tax is appropriate. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)

Pertinent Testing Notes and Conclusions:


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3.2.3 Inventory Transaction Cycle Compliance Testing （一）Inventory transaction cycle

Inventory transaction cycle starts with procurement, spans over allocation, transfer and end with formative project construction expenditures. It is closely connected to transaction cycles of procurement and payment, civil works construction. And it is composed of purchasing, receiving, transferring and allocation, and etc.

（二）Major documents in inventory transaction cycle: 1． Purchase application form 2． Order form 3． Receiving report 4． Allocation or usage documents 5． Inventory subsidiary ledger 6． Inventory physical count report

（三）Inventory transaction cycle testing procedures and workpapers Auditors select compliance testing procedures in the context of compliance testing procedures for inventory transaction cycle, and to record testing proceedings and results in workpapers. Workpapers for inventory transaction cycle compliance testing include testing procedures, workpapers and testing record form, details of which can be referred to table 3-18 – table 3-20.

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Internal Control of Inventory Transaction Cycle Compliance Testing Procedure


Project Name

Project Implementing Entity

Focus Testing Procedure Comments W/P Ref.

Acceptance

1．Obtain goods acceptance report and examine record of goods receiving.

Ascertain whether acceptance procedures are strictly carried out for goods

warehousing and details of product name, specification, type, quantity, quality

and price are verified.

2．Review quality inspection report or other documents, to ascertain whether

project entity checks quality of the received goods.

3．With regard to self-purchased goods, warehousing record shall be

compared with assets register.

4．With regard to goods transferred from project office at higher level,

review relevant transfer listings and debt splitting form, and to ascertain costs are

properly recorded.

5．With regard to purchased goods, review original documents, to assure that

costs are properly recorded.

Keeping

1．In connection to inventory physical counts, check whether classification,

placement and storage of goods are in good conditions.

2．Obtain warehouse machine account, to check whether goods, temporarily

kept and stored, are separately listed.

3．Review the serial numbers of prenumbered goods receiving notes and

delivery notes, to ascertain whether they are used in order.

4 ． Obtain inventory-taking form, to check the execution status of

inventory-taking at regular intervals.

5．Obtain records for inventory gain, loss and disposal, to check whether

they are approved timely in accordance with the rules and regulations.

Allocation or Usage

1．Review assets register, to ascertain whether there are any cases that

allocation shall be made to subordinate project entity or implementing entity but

not for long time.

2．Extract the breakdown of materials transferred to subordinate project

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entity or implementing entity from the inventory subsidiary ledger or assets

register, and to carry out the following steps:

（1）Through checking allocation record and date, ascertain whether the

allocation and transfer are made timely.

（2）Review whether confirmations of receiving goods from subordinate

project entity or implementing entity are kept; if not, check when carries out audit

for subordinate project entity, or notify audit firm of subordinate project entity.

3．With regard to goods procured by using World Bank loan, obtain debt

splitting note or use notices related to project office, and to ascertain:

（1）Whether debt splitting is reasonable and accurate.

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Focus Testing procedure Comments W/P

Ref.

（2）Whether debt splitting is made timely, and is acknowledged and

accepted by subordinate project office or implementing entity.

4．Select certain items from “construction in progress” or “project

expenditure” accounts, which are transferred from inventory, and to carry out the

following steps:

（1）Through checking usage notes, ascertain whether inventory is used in

project and in accordance with the rules and regulations.

（2）Through review the breakdown of inventory records, ascertain whether

costs are properly transferred out.

（3）Compare records of inventory transferred out with relevant accounts,

such as “construction in progress”, “project expenditures”, to ascertain whether

all inventory transferred-out are timely recorded.

Sale

Obtain selling application, selling approval documents, goods delivery notes,

invoices and other relevant documents from project implementing entity or

project office, and to ascertain:

1．The causes of selling.

2．Selling quantity and earning.

3．The existence of funds resulted from selling the goods.


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9Table 3-19 Reference:


Internal Control of Inventory Transaction Cycle Compliance Testing Workpaper

――― Summarizing Workpapers


Project Name:


# Proceeding records of testing W/P Ref.

Testing

Conclusion

s


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Internal Control of Inventory Transaction Cycle Compliance Testing Workpaper

――― Testing Record Audit Period＿＿＿＿


Acceptance Report Goods Receiving Notes and Inventory Keeping Goods Delivery Notes Accounting Vouchers

Verification Date Serial No Placement Verification Date Serial No. Verification Date Serial No. Verification #. Acceptance No. Supplier Name Date Product Name Specification quantity Price Amount

1 ２３４ 5 6 7 8 9 10 11

Directives for filling “verification” column 1．Acceptance checking is carried out before goods receiving. 2．The content of acceptance report is consistent with that of purchase contract. 3．Unit price in invoice is consistent with that in purchase contract. 4．Goods receiving note is signed by keepers and handlers. 5．Inventory is safe kept and there’re policies of regular inventory physical counts in place. 6．The content of goods delivery note is consistent with relevant usage or allocation forms. 7．Goods delivery note, allocation form or usage form is signed by approver, keeper and handlers. 8．Pricing is proper and debt splitting is reasonable. 9．Accounting treatment is carried out timely and relevant original documents attached. 10．Policies of regular account reconciliation between warehouse and transaction departments are in place. 11．Inventory machine account is in place and it shall be checked against accounting records on a regular basis. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)

Pertinent Testing Notes and Conclusions


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3.2.4 Civil Works Construction Transaction Cycle Compliance Testing （一） Civil Works Construction Transaction Cycle

Civil works construction transaction cycle of the World Bank financed project includes setup of project legal person, construction tendering and bidding, engineering supervision, prepayment and settlement of construction fee, and other control links. 1． Setup of project legal person (proprietor) At current stage, system of legal person being responsible is in place in state infrastructural construction. Proprietor is responsible for the whole course of the project, including feasibility studying, project designing, budgeting, annual construction planning, construction organizing, acceptance checking after construction completion, manufacturing preparation, operation after construction completion and paying back loan and interest. The large-scale construction project in World Bank financed project shall adopt this system.

2． Construction tendering and bidding It is economic behavior between proprietors and contractors for procuring goods or construction project.

3． Engineering Supervision The state starts the execution of engineering supervision system since 1998. During the course of construction project, supervision engineer is charged with responsibilities of monitoring and evaluating the construction quality in terms of relevant construction administration laws, and technology and economy standards.

4． Prepayment and settlement of construction fund With regard to outsourced construction, project entities shall prepay certain construction fund to construction entity according to the regulations of contract. Construction entity shall fill in Construction Advance Voucher for the prepayment, and calculate the completed construction value in accordance with actual work completed current month (or work finished by phases) and prices and fees quoted in engineering outline and budget when dealing with the construction settlement. Project entities transact the settlement according to Monthly Report on Work Completed and Construction Settlement Voucher that are prepared by construction entity. （二）Major documents in civil works construction transaction cycle include: 1． Project Initiating Report 2． Articles of project legal person 3． Annual investment plan 4． Project design document 5． Budgetary plan approved by relevant authorities 6． Documents of tendering and bidding 7． Construction contract of contracting and outsourcing 8． Construction fund settlement form

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（三）Civil works construction transaction cycle testing procedure and workpapers

Carry out the compliance testing according to internal control of construction transaction cycle compliance testing procedure, and record the testing procedures and results in audit workpapers. Workpapers for civil works construction transaction cycles testing includes testing procedure, testing workpapers and testing record form, details of which are referred to table 3-21 -- 3-29.

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Civil Works Construction Transaction Cycle Compliance Testing Procedure

Audit Period：＿＿＿＿＿

Project Name:


Focus Testing Procedure Comments W/P

Ref.

Responsibilities of project legal person

1．Obtain project entities’ business license, article of association and etc to ascertain

whether system of legal person is in place.

2．Obtain project entities’ organization chart, to check whether organization

structure is sound and complete.

3．Obtain project entities’ management regulations, to ascertain whether it’s sound

and complete.

4．Check project investors’ fulfillment of responsibilities (testing shall focus on the

examination of application of project capitalization system and to check whether it’s

carried out)

（1）Compare corporate article of association with project initiating report, to check

whether committed capital is in place timely and completely;

（2）Through reviewing capital verification report by certified accountants and

relevant accounting vouchers, to check whether forms of capital which is in place

conform to relevant state rules and regulations;

（3）Extend the inspection to investors’ financial documents, to check whether

sources of capitals are qualified and eligible, and whether there are illegitimate cases that

loan, borrowed capitals, illegal funding or securities are faked as capitals.

5．Check proprietor’s fulfillment of responsibilities (testing is focused on project

quality, duration, cost and benefit).

（1）In accordance with annual state investment plan, approved project design

document, World Bank’s project assessment report and loan agreement, monitor

budgetary control and fund use, and to assure the construction content conforms to

design and budget, without constructions beyond design, scope and standard.

（2）In the context of approved feasible study and World Bank loan agreement,

check construction period and focus on construction progress, and to discover lag-behind

conditions of construction progress, further, to analyze the causes if any.

（3）Review proprietor’s internal control system, especially systems of project

finance, procurement and construction management, to carry out auditing on proprietor’s

organization and management of designing, construction management, and engineering

supervision in terms of completeness of systems and coherence of procedures. Through

analyzing loses and wastes in construction, disclose the control status of construction

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organization and quality, therefore, to analyze the causes and clarify responsibilities.

（4）Through auditing of financial documents in preparation and trial phase of

production as well as reviewing relevant operation documents, check project

construction’s economical objectives, production capabilities, formation of state-owned

assets and investment benefits, and to analyze links between benefits of World Bank

financed project and project implementing entity’s profits and loses, further, and to focus

on project’s repaying capacities, especially refunds of World Bank loan and interest.

Project Initiating Procedure

1．Obtain feasible study, project proposal, design tasks, preliminary design and

design budget approved by relevant authorities, to check whether project initiating

procedures are eligible, and approval procedures are complete.

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Ref.

2．In comparison with the budget approved by state authorities, check Infrastructure

Investment Catalogue and Project Progress Catalogue to discover whether there’re any of

the following issues: a) items beyond budget; b) items exceeding budget; c) arbitrary

enlargement of construction scale and standard.

Designing

1．Review tendering and bidding documents, and to check whether construction

design entity is selected via tendering and bidding.

2．Examine qualification certificates of design entity, and to check whether design

entity possesses qualifications required by the project.

3．Examine Designing Contract, and to check whether designs are consistent with

project feasible study, scale, standard and content prescribed in design tasks, further,

reach the design depth regulated by the state.

4．Review documentation and information related to design alteration, and to check

whether the alterations are in compliance with procedures prescribed by the state.

5．In comparison state-regulated fee standard, check payment vouchers and other

financial documents, to examine whether design fees are conforming to standards

regulated by the state.

Tendering and bidding – domestic tendering

1． Tendering

Obtain a complete package of tendering and bidding documents project design,

construction, installation, engineering supervision, main equipment, material supplies

and tendering agency related to main job of construction project, and to carry out the

following steps:

（1）Obtain internal control policies of construction entity and carry out testing on

them. a)with regard to construction projects with large tendering value or by

international tendering, legal opinions, provided by lawyers, on tendering document and

contracts shall be provided by project entities; b)Through reviewing tendering document,

check whether tendering procedures are published transparently; c)Review bidders’

qualification examination documents provided by proprietor, such as the main job design

of construction project, construction and installation, engineering supervision and

supplies of major equipments and materials, to check the completeness of qualification

examination records, the compliance of checking procedures and authenticity of the

content.

（2）Review tendering approval documents, and to check whether tendering items,

including the main job design of construction project, construction and installation,

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engineering supervision, supplies of major equipments and materials, and etc, are

submitted to industry supervision authorities or local planning committee in membership

relation for approval and filing prior to the commencement of the tendering.

（3）Review tendering proclamation, check tendering procedure, investigate the

entities participated in the tendering, and to examine whether the tendering is limited by

factors, such as region, department or industry; whether there’s any case that collude one

certain bidder during tendering and bidding to prejudice against the other bidders;

whether there’re market monopoly and dismembering the outsourced project components

relying on the industry privilege, and whether there’re requisites inherent with tendering

and bidding, where contracted entities are required to purchase materials and equipments

from designated producers, further, where contracted entities are required to sign

contract with bidder capital.

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Ref.

2． Base Price

Obtain base price, and carry out the following steps:

（1）In comparison with technical qualifications set out in tendering instructions by

national or local construction authorities, check whether base price preparation is in

compliance with relevant state regulations, provisions and policies, and there’s any case

that collude one certain bidder during tendering and bidding to prejudice against the

other bidders.

（2）In the context of market demands and supplies as well as pertinent state

regulations, review the initial design and budget that is approved, and check whether the

content, price and construction period are eligible, and whether there’re any cases of

expanded scale and stretched standards.

（3）Review confidentiality system and inquire pertinent persons, and to check

whether the confidentiality system of base price is complete and effective.

3. Opening of bid, appraisal and determination

Obtain a complete package of information related to bid opening, appraisal and

determination, including bidding appraisal report, bid proposal, bid opening record,

remarks of bidding appraisal committee, successful bid notice and etc, and carry out

the following testing:

（1）Check whether procedures of construction project are eligible and compliant with

the rules and regulations: a)whether opening of bid is hosted by construction entity, and

investors, bidding parties, government authorities and representatives of other pertinent

entities are invited to attend; b)whether bid appraisal committee is organized, and

committee members’ qualification, number and working procedures are accordant with

the rules and regulations; c)whether bid winner is optimized from the candidates

recommended by the appraisal committee; d)whether all bidding results (including

appraisal approach and method) are copied to and filed in industry authorities and

provincial planning committee according to membership relations; e)whether written

contract is signed within due period between construction entity and bid winner. Bid

appraisal and determination of large-scale project shall be submitted to, and approved by

State Council.

（2）Obtain qualification certificates of the bid winner and check: a)whether the bid

winner has certificate requested by tendering documents and is an independent legal

entity; b)Whether the bid winner undertakes similar construction projects before and has

good performance and record of contract fulfillment; c)whether finance status is in good

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condition when making the bidding; d)whether ever committed any severe economical

crimes such as cheating for winning contracts within three years prior to bidding;

e)whether good safety record is obtained within several years prior to bidding, and there

is no severe quality and safety accident within bidding year.

（3）Obtain receiving and returning vouchers for bidding guarantee fund, and to

check whether financial treatment on bidding guarantee fund is proper and eligible.

（4）In comparison with the budget approved by relevant authorities, check whether

construction standard, content and contract price are within limits prescribed in initial

design and budgetary documents; With regard to those beyond limits, to check whether

the agreement, from authorities approving original design and budget, is obtained prior

to signing of the bidding contract.

（5）Obtain notary documents, and to check whether construction project with large

bidding value or by international tendering get notary authorities involved during

opening of bid and signing of bid winning contract.

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Ref.

Tendering and Bidding – international tendering

Obtain a complete package of information related to international tendering and bidding,

and carry out the following testing:

1．Whether equipment procurement and civil works construction by use of World

Bank loan are accorded with World Bank Loan Procurement Temporary Provisions and

World Bank Procurement Guide, and method selected for tendering is accordant with

World Bank’s requirement.

2 ． Whether international tendering agency has qualification approved by

International Trade and Economy Cooperation Ministry and State Planning Committee

for undertaking international tendering transactions; whether set-up of tendering agency

is optimized according to certain procedures; whether proprietor’s selection of tendering

agency are submitted to, and approved by financing authorities.

3 ． Obtain procurement listings of World Bank financed project, bundled

procurement plans/listings of local authorities and central ministries, to ascertain whether

they are consistent with official documents approved by State Planning Committee.

4．Obtain tendering and procurement documents of World Bank financed project, to

check whether procedures for approval, publication and qualification verification are

eligible.

5．Obtain bid appraisal report, to check whether policies and approaches adopted

and preparation of appraisal report are eligible, and submitted to State Appraisal

Committee.

Civil Works Construction Contracting and Outsourcing

1．Obtain relevant regulations on construction contract management system, to

ascertain through inquiry and observation:

（1）Whether contracts are managed by department or individual specially assigned.

（2）Whether approval procedures of signing contracts are coherent and complete.

（3）Whether supervision system for contract execution is sound and effective.

（4）Whether settlement procedure of contract value is eligible.

（5）Whether settlements of contract disputes are rules abide-able following strictly

given procedures.

2．Obtain construction contracts, and to carry out the following testing:

（1）Check whether contract provisions are legitimate, and there are any clauses

that violate the rules and laws, and regulations of contract signing; whether both parties

to the construction contract are eligible, and possess corresponding qualifications and

capacities to fulfill the contracts; whether there’re any clauses in contract that infringe

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state, society or third party’s interest.

（2）Check whether contract clauses are complete, and prerequisites of contracts are

in place, further, the contents of contract are detailed and accurate.

（3） In comparison with industry or regional standards constituted by relevant

authorities, check whether construction quality standards prescribed by contracts are

consistent with aforesaid standards, and whether checking and acceptance procedures for

techniques and qualities of materials, equipment and constructions are prescribed in

contracts, further, whether contractor organizes the construction strictly conforming to

requirements of construction contract and industry formalities.

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Ref.

（4）In comparison with feasible study, project assessment report and budget, check

whether construction period prescribed in contract are accorded with requirements.

（5）Check whether construction cost is determined under guidance by certain

quota or eligible fee standards, and under reasonable negotiations between tendering and

bidding parties, further, adjusted timely in accordance with contract.

（6）Extend reviews to contractors, to ascertain whether there are any cases of

subcontracting. If yes, to check whether it is agreed by project entity, or other agreements

are prescribed in construction contract, and subcontract are signed; and whether

contractor assigns qualified resident personnel on site of subcontractor, to manage and

supervise the execution of subcontract to assure the quality and construction period of

subcontracted construction.

3．Settlement of construction cost

Obtain supporting documents of settlements, and to check:

（1）Whether attached vouchers are complete and consistent with settlement

approaches prescribed in contract.

（2）Whether construction cost settlements are reviewed before occurrences.

（3）Whether payment vouchers are consistent with attached supporting documents,

and the amounts are accordant each other.

（4）With regard to settlement in foreign currency, in comparison with terms and

conditions on foreign currency, interests and payment procedure set out in international

tendering and bidding contract, ascertain whether settlements are eligible.


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Internal Control of Civil Works Construction Transaction Cycle Compliance Testing Workpapers

―― Summarizing workpapers

Audit Period _______

Project Name


# Proceeding Record of Testing W/P Ref.

testing

conclusio

n


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Table 3－23 Reference

（Name of Audit Firm）


―― Project Initiating Testing Record

Audit period＿＿＿＿

Project Name

Project Implementing Entity

Verification Notes # Project Name

1 2 3 4 5 6 7 8

Directives for filling “verification” column

1．Feasible study has been undertaken

2． Project proposal is in place

3．Feasible study has been submitted to and

approved by State Planning Committee and feasible

study of large-scale or special projects has been

submitted to and approved by State Department.

4．Initial design has been submitted to and approved

by relevant state authorities.

5．Adjustment of budge has been submitted to and

approved by state authorities.

6．Any component does not belong to the budget.

7 ． There’s no circumstance where budget is

exceeded.

8．Construction project has been included in annual

plan.



not-applicable.)

Pertinent Testing Notes and conclusions


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Table3－24 Reference：



―― Design Testing Record


Project Name：



1 2 3 4 5


1． Through tendering and bidding, choose the best

design entity.

2． Design entity carries out the design on the basis

of the scale, standards and components of feasible study

and design tasks. The design achieves the depth of the

requirements of state rules and regulations. 3 ． The design alterations adjusted during construction working phase are in accordance with procedures regulated by the state.

4．The design fee is charged by the design entity

accorded with state rules and regulations.

5．The design entity is qualified. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)

Pertinent testing notes and conclusion:


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Table3－25 Reference:



――Domestic Tendering Testing Record


Project Name：


Verification Notes #

Civil Works or

Procurement Name Tendering Method

1 2 3 4 5


1． The tendering method is reasonable.

2． The tendering procedures are accordant with the

rules and regulations.

3． The base price is prepared accorded with the

rules and regulations.

4． There is qualification review for the tendering

entities.

5．Opening of bid, appraisal and determination are

fair and reasonable. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)

Relevant testing notes and conclusion:


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―― International Tendering Testing Record


Project Name：



Civil Works or

Procurement Name Tendering Method

1 2 3 4 5

Directives for filling “verification column” 1． The selection of international tendering agency is reasonable. 2． The tendering method is reasonable and approved by the world bank. 3． The procurement plan is approved by state authorities. 4． The tendering procedures are eligible. 5．Opening of bid, appraisal and determination is fair and eligible. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)



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Table 3－27 Reference：



―― Construction Contracting and Outsourcing Testing Record


Project Name：


Verification Notes # Project Name Contract Amount

1 2 3 4 5 6


1．Contractor is selected through tendering.

2．Construction entity signs the contract with the

contractor accorded with the laws.

3．The construction entity does not dismember the

project components to subcontractor.

4．The chief contractor finishes construction of

main body independently, and does not transfer the

construction task to the other contractor illegally.

5．Subcontractor does not transfer the construction

task to the lower level contractor.

6．Both the chief contractor and subcontractor are

qualified.



not-applicable.)



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Internal Control of Civil Works Construction Compliance Testing Workpapers

―― Contract Execution Testing Record


Project Name：



Contract

Name Contract Amount

1 2 3 4 5

Directives for filling the “verification” column 1．Party b in the contract is determined through tendering. 2．Content in signed contract is consistent with that of tendering. 3．Contract alteration and cancellation are dealt according to legal procedures. 4．Arguments and disputes on contract during contract execution are resolve in terms of agreed procedures and approaches. 5．Settlement of contract cost is eligible. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)



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Testing record for Engineering Supervision


Project Name：



Engineering Supervision

Entity 1 2 3 4 5


1 ． Whether engineering supervision entity is

optimally selected in accordance with procedures and

state regulation.

2．Engineering supervision organization has been on

site.

3．The policies of fairness, independence and

responsibilities are adopted by engineering supervision

entity.

4．Engineering supervision entity is independent.

5．Engineering supervision procedures are complete

and eligible. (Please tick √ in corresponding blanks for positive opinions; × for negative opinions; N/A for not-applicable.)



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3.2.5 Fund Receipts and Disbursements Transaction Cycle Compliance Testing

（一）Fund Receipts and Disbursement Transaction Cycle Every transaction cycles is involved in fund receipts and disbursement more or less

because fund receipts and disbursements impenetrate every transaction cycles. It is not easy to find out the mistakes of fund receipts and disbursements through above transaction cycles compliance testing, therefore, the separate compliance testing is necessary for fund receipts and disbursements transaction cycles.

（二）The key documents of fund receipts and disbursements include:

Receipts voucher, payment voucher, bank statements, bank receipts statements, bank payment notices, check, and balance reconciliations. （三）Fund receipts and disbursements transaction cycle testing procedures and audit workpapers The auditor can select proper procedures from internal control of fund receipts and disbursements compliance testing procedures, and to record the course of testing and conclusion in audit workpapers. The audit workpapers of fund receipts and disbursements include testing procedures, testing audit workpapers and testing record forms. Refer to table 3-30—table 3-33.

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Internal Control of Fund Receipts and Disbursements Compliance Testing Procedure


Project Name：



Ref.

General Information 1． Select receipts and disbursements vouchers in certain quantity, and to ascertain: （1）Whether the accounting treatment is compliant with the rules and regulations.

（2）Whether the administrative and approval procedures are coherent, and the original documents are complete and eligible.

Receipts Select receipts vouchers in certain quantity, check: 1． Whether the date and amounts in the receipts vouchers are consistent with those in bank receipts statements. 2． Whether receipts vouchers are consistent with the bank statements 3． Whether the amount of world bank loan is consistent with that in world bank disbursement notice (subsidiary project entity shall check whether fund of world bank loan is consistent with that in statements or debt splitting notice which are sent by higher level project entity) 4． Check whether date and amount of appropriation of fund by local government and united investor are accordant with the terms prescribed in agreement or contract. 5．Through checking supporting documents, such as roster, labor working order, labor contract, ascertain whether the amount, ratio and procedure of labor compensating are consistent with the terms prescribed in loan agreement. 6． Obtain bank loan contract, relevant documents of bond fund issuing, and to check whether the bank loan and bond fund issuing are authorized and approved by relevant authorities, further, check whether the bank loan amount and bond fund income are accordant with those of relevant contract. 7． Obtain relevant donation agreements, to check whether other income of project is recorded in the total income of the project. Disbursements Select payment vouchers in certain quantity, to check: 1． Whether the authorization and approval of payment are compliant with the rules and regulations. 2．Whether payment vouchers are consistent with the subsidiary ledgers of construction payable, equipment payable, and etc. 3．Whether the payment vouchers are consistent with bank statements 4． Whether the fund disbursements are accordant with project purpose, the fund is used in accordance with requirements of loan agreement and project goal. 5． Whether the actual payment is consistent with amount on purchase

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invoice, construction settlement invoice. If events exist such as material prepaid, construction prepaid and guarantee deposit, the amount shall be consistent with that after deduction. Others 1． Select bank balance reconciliation of certain period, to validate whether it is prepared and reviewed monthly. 2． Select bank deposit journal of certain period, and to compare with bank statements. 3． Check whether the foreign currency conversion method is compliant with relevant rules and regulations, further, is consistent with that of previous year.


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Internal Control of Fund Receipts and Disbursements Compliance Testing Audit Workpapers

―― Summarizing Audit Workpapers

Audit Period＿＿＿＿＿＿

Project Name：


# Proceeding Record of Testing Ref.

Testing

Conclusion


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Internal Control of Fund Receipts and Disbursements Compliance Testing Workpaper

――Fund Receipts Testing Record


Project Name： Project Implementing Entity：

Fund Receipts Verification

# Date Voucher No. Transaction Content Cash Bank Labor Compensating Others Received Amount Notes

Directives of filling “verification” column:

1． The amount and date of bank deposit voucher are consistent with those of bank receipts.

2． The receipts of cash and bank deposit have been recorded in cash and bank journals.

3． The bank journal is consistent with bank statements.

4． Cash receipts vouchers are consistent with cash, bank deposit, fund by labor and other relevant vouchers.

5． The content of fund receipts vouchers is consistent with corresponding account subsidiary ledger.

6． The accounting on various fund receipts is accurate.

Please mark √ in corresponding blank for positive opinion, mark X for negative opinion, N/A for not applicable）。

evant Testing Notes and Conclusion：


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Internal Control of Cash Receipts and Disbursements Compliance Testing Workpaper

――Fund Disbursements Testing


Project Name： Project Implementing Entity：

Disbursement Method Verification # Date

Voucher

No.

Transaction

Content Cash Bank Labor compensating Others Disbursement Amount

1 2 3 4 5 6 7 8 Notes

Directives of filling “verification” column:

1． The reviewer shall sign on fund disbursement vouchers.

2． The original documents are legal official invoices or receipts.

3． The amount and content in original documents are consistent with those of fund disbursement descriptions.

4． The amounts of cash and bank deposit are consistent with those recorded in cash and bank journals.

5． The payment vouchers are consistent with bank statements.

6． Fund payment vouchers are consistent with cash, bank deposit, fund by labor, and other relevant vouchers.

7． The content of fund disbursement vouchers is consistent with subsidiary ledger of corresponding accounts.

8． The accounting on various fund disbursements is accurate.

（Please mark √ in corresponding blank for positive opinion, mark X for negative opinion, N/A for not applicable）。

Relevant Testing Notes and Conclusion：


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Chapter IV – Substantive Testing Page 1 of 142

Chapter IV Substantive Testing

Substantive testing is the process of obtaining evidence in support of transactions and balances in the accounts of the World Bank financed project. The nature, timing, and extent of substantive testing depend on the results of compliance tests and the professional judgment of the auditor concerning audit risk and materiality. As explained in Chapter III, internal control testing is used to assess whether control risk is below a maximum level. If internal control testing is not used, then the auditor has to rely primarily on substantive testing. The auditor should use the combination of least costly audit procedures to gather sufficient evidence to express an audit opinion. Substantive testing is carried out by means of checking, physical examinations, observation, inquiry and confirmation, calculations, and analytical reviews. In World Bank financed projects substantive testing is generally carried out by testing both the transaction cycles and the financial statement accounts.

This guide offers detailed audit programs for testing different financial statement accounts, and provides audit adjustment forms for every financial statement account and other standardized working papers. The auditor must decide what steps, if any, shall be deleted, and whether other steps are to be added with respect to specific circumstances. Audit adjustment forms are to be prepared for each account in the financial statements. In the forms it is usual to write the unaudited amount, the adjustment amount based on substantive testing, and the correct audited amount. In addition, any violations of national law, policy, loan agreements, and World Bank rules and regulations are to be recorded clearly. Finally, the audit conclusion is to be prepared. The audit adjustment forms must be supported by relevant audit working papers. The working papers, in which the audit execution details are recorded, must reflect the audit method applied, the testing process, and the results. The sources of the external audit evidence are to be noted. Relevant audit working papers must be cross-referenced to reflect the causes and effects.

Section 1 Substantive Testing of the Application of Fund Accounts

The application of fund accounts in special purpose financial statements of World Bank financed projects includes expenditure, investment loan receivables, appropriation of investment loans, equipment (inventory), cash and bank, prepayments to suppliers and accounts receivable, marketable securities, and fixed assets.

A. Substantive Testing of Project Expenditures Project expenditures consist of construction expenditures and other expenditures at the end of the period. Project construction expenditures include fixed assets transferred and construction in progress. Other expenditures reflect all expenditures except the construction expenditures at the end of the period.

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1. Audit Objectives

The audit objectives regarding project expenditures are as follows:

• Completeness Project expenditures reflected in the financial statements are recorded completely.

• Accuracy Project expenditures are calculated on the basis of reliable vouchers. The amounts reflected in the financial statements must be consistent with those in account books and vouchers.

• Existence or occurrence Project expenditures reflected in the financial statements must exist physically as the accumulated construction expenditures and other expenditures.

• Presentation and disclosure In keeping with accounting standards, project expenditures reflected in the financial statements and notes to the financial statements are to be properly classified and adequately disclosed.

2. The Audit Program This guide provides audit program designs for seven project expenditure accounts: fixed assets transferred, civil works construction investment, equipment investment, investment deferred, other investment, construction expenditures to be disposed, and investments transferred out. Refer to Table 4-1 and Table 4-3 through Table 4-8.

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3. Audit working papers For project expenditure working papers, refer to Table 4-1 through Table 4-9.

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Table 4-1 Reference Number:

(Name of the Auditing Firm)

F i x e d A s s e t s Tr a n s f e r re d A u d i t p ro g r a m

Audi t Pe r iod ____


Audit Program Comments W/P Ref.

1. Obtain or prepare the breakdown of the fixed assets transferred, and check: (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) the deviations from the above tests, and analyze those deviations in conjunction with inspection of the detailed transactions. 2. According to the fixed assets transferred subsidiary ledger, obtain all the documents for fixed assets transferred in addition in the current year, including the completion report, the engineering supervision report, the acceptance report, the assets transferred statement, etc. Check that the quality of fixed assets transferred meets the criteria for delivery and that the delivery procedure is complete and eligible. 3. Obtain the assets transferred statement, and check the following: (1) whether the assets components are consistent with those from previous construction in progress. (2) whether the book amounts for each asset are consistent with those in the relevant final amounts for construction in progress.

(3) whether they are consistent with the general and subsidiary ledger of construction in progress. 4. Obtain the final construction documents and review the correctness of the valuation of the fixed assets transferred costs in comparison with the subsidiary ledger of civil works construction, equipment investment, investment deferred, and other investments. (1) The cost of the fixed assets, such as houses and buildings, pipelines and circuits, includes construction costs and investments deferred to be amortized. (2) The cost of fixed assets, such as power equipment and production equipment, includes acquisition costs of equipment to be installed, the installing cost, the production cost of equipment foundations and prop, or the heating power boiler and other special power boiler construction costs, and investment deferred to be amortized.

(3) The cost of vehicles and other equipment that do not require installation, instruments, implements, furniture, and current assets is only calculated on the acquisition cost, excluding investment deferred. (4) The cost of intangible assets and deferred assets is calculated according to the actual cost of acquisition or occurrence, excluding investment deferred. (5) The cost of working livestock, basic domestic birds, and forest trees includes the actual acquisition cost plus raising costs and investment deferred to be amortized. 5. If the investment loan system is used, review whether fixed assets transferred built with investment loans are written off when new account books are set up at the beginning of the year.

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6. Check whether the fixed assets transferred are adequately disclosed and properly classified in the financial statements and notes to the financial statements.


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Fixed Assets Transferred Inspect ion Form

Audi t Pe r iod ＿＿＿

Project Name: Project Implementing Entity: Currency Unit:

# Name

Standards

Type Book value

Book quantity

Actual quantity

Book value reconciled with actual

Fair valuation

Proper authorization Ownership Comments

Audit Notes:

Note: For columns 1 to 4, use “√” for Yes, “X” for No, and “N/A” for Not Applicable.

Audit Conclusion:


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C i v i l Wo r k s C o n s t r u c t i o n A u d i t P ro g r a m

Audi t Pe r iod ＿＿＿＿



1. Obtain or prepare the breakdown for the civil works construction, and check: (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers.

(2) whether the closing balance is consistent with the amounts in the financial statements,

general ledger, and subsidiary ledger.

(3) that the deviations from the above tests are recorded, and analyze those deviations in

conjunction with inspection of the detailed transactions.

2. In compliance with relevant accounting principles, check whether the account setting of “civil

works construction investment” is proper and reasonable. And check whether the subsidiary

ledgers are set up in accordance with the account setting requirements listed in the project

assessment report, and that the third level subsidiary ledgers are set up in accordance with the

payment categories of the World Bank as well.

3. Obtain project original budgetary specifications, yearly investment plans, and all relevant

contracts and agreements related to the civil works construction, so as to understand the

construction payment settlement method, materials supply method, total contract value, materials

prepaid, quality guarantee fund, etc., and check the following:

(1) whether the addition of civil works construction in the current year is proper and eligible.

• whether the contents of civil works construction done belong in scope of the project

budget

• whether the vouchers recording the additions are attached with the “interim payment

certificate,” “construction payment settlement invoice,” or other original documents

supporting the occurrences

• whether the additions are reconciled with those recorded in the attached documents.

(2) whether deductions or transfers out of civil works construction investment in the current

year are accurate and eligible • with regard to those moved to fixed assets transferred, and check whether they have

been approved and the administrative procedures completed.

• check whether the amounts transferred out are accurate and have been reconciled with the relevant records of the final completion settlement list.

4. Obtain the project settlement statements, the payment vouchers, and the guaranteed funds

receipts, etc., and check whether the settlement of construction funds, the disbursement of

materials prepaid, the retention of the quality guarantee funds are in compliance with the rules and

regulations of the civil works construction contract.

5. In terms of the progress in audit execution, select samples of the progress image for several

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sub-projects and check whether they are reconciled with the investment progress presented in the

account books.

6. Check whether the civil works construction investments reflected in the financial statements

and notes to the financial statements are properly classified and adequately disclosed.


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Equipment Investment Audit Program

Audit Period ＿＿＿


Audit Program Comments W/P Ref

1. Obtain or prepare the breakdown for the equipment investment, and check

(1) whether the opening balance is consistent with the records in the previous year’s financial

statements or relevant audit working papers.

(2) whether the closing balance is consistent with the amount in the financial statements, the

general ledger, and the subsidiary ledger.

(3) that the deviations from the above tests have been recorded, then analyze those deviations

in conjunction with inspection of the detailed transactions.

2. In comparison with the budgetary specifications, review whether the equipment, tools, and

instruments belong within the scope of the project budget.

3. In compliance with relevant accounting principles, check whether the setting of the “equipment

investment” account is proper and reasonable. And check whether the subsidiary ledgers are set

up in accordance with the account setting requirement listed in the project assessment report, and

that the third level subsidiary ledgers are set up in accordance with the payment categories of the

World Bank as well.

4. Select the samples of the vouchers and attached original documents and check

(1) whether the equipment invoices attached to the procurement vouchers, the World Bank

payment notices, and other documents on the equipment that does not require installation, tools,

instruments, and appliances are complete and whether the values in the documents are accurate,

and that the contents are in keeping with the records in the subsidiary ledger.

(2) whether the physical unpacking inspections are carried out for those moved to equipment

investment, and the “goods receiving notes” have been prepared.

(3) whether the equipment which must be installed is recorded according to the delivery

notes and is in keeping with the following three criteria: (a) the foundations and fixed mounting of

the equipment have been prepared, (b) the essential drawings for equipment installation have been

prepared, and (c) the equipment is on-site and the physical unpacking inspections have been

completed.

(4) With regard to the equipment investment transferred out or deducted in the current year,

check whether transferred-outs are approved, and have undergone a complete series of

administrative procedures, and that the amount transferred out is correct and the same as appears

in the record of the completion statement.

5. Obtain the equipment purchase contracts, review and check whether the equipment arrived on

time, whether it was prepaid, whether the equipment quality is sufficient for retention, and

whether equipment payments have complied with those in the contracts.

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6. Select certain construction samples and ascertain whether the equipment exists and is consistent

with what is recorded in the accounting books.

7. Verify whether the equipment investment is adequately disclosed and properly classified in the

financial report and notes to the financial statements.


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I n v e s t m e n t D e f e r re d A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the investment deferred, and check

(1) whether the opening balance is consistent with the records in the previous year’s

financial statements or relevant audit working papers.

(2) whether the closing balance is consistent with the amount in the financial

statements, general ledger, and subsidiary ledger.

(3) that the deviations from the above tests are recorded, then analyze those

deviations in conjunction with inspection of the detailed transactions.

2. In compliance with relevant accounting principles, review whether the account setting

of “investment deferred” is proper and reasonable, and check whether the subsidiary

ledgers are set up in terms of the account setting requirements listed in the project

assessment report, and that the third level subsidiary ledgers are set up according to the

payment categories. At the same time, check that the different components of investments

deferred are set up in the subsidiary ledger of items and recorded in the assistant account

book.

3. Select certain samples of the vouchers, with the original documents attached, in

compliance with relevant financial and accounting policy, in order to check:

(1) whether the investment deferred recorded in the book is eligible and exists

physically.

(2) whether the proper approvals and authorizations are provided when the

amortizations of investments deferred are transferred out. And check whether the amounts

of transferred-outs are correct and that the amortization ratios are in keeping with the

given percentage and comply with relevant records in the completion settlement report.

4. Check whether the investment deferred is properly classified and adequately disclosed

in the financial statements and notes to the financial statements.


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Other Investment Audit Program




1. Obtain or prepare the breakdown of other investments and check


financial statements or the relevant audit working papers.

(2) whether the closing balance is consistent with the amount in the financial statements,

the general ledger, and the subsidiary ledger.

(3) that the deviations from above tests are recorded, then analyze the deviations in

conjunction with an inspection of the detailed transactions.

2. In keeping with the relevant accounting principles, review whether the account setting of

“other investment” is proper and reasonable, and check whether subsidiary ledgers are set up in

terms of the account setting requirements listed in the project assessment report, and that the

third level subsidiary ledger is set up according to the payment categories.

3. Select certain samples of the vouchers, with the original documents attached, in keeping with

the relevant financial and accounting principles, and check

(1) whether the original documents are complete and authentic.

(2) whether the additions to other investment in the current year belong within the scope

of project expenditures.

(3) whether other investments transferred out in the current year have been approved and

that the administrative procedures are complete, and also whether the valuation is correctly

recorded in accordance with the records of the relevant completion settlements and the “fixed

assets transferred” account.

4. Check whether other investment is adequately disclosed and properly classified in the

financial statements and notes to the financial statements.


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Table 4-7 Reference Number :


C o n s t r u c t i o n E x p e n d i t u r e s t o b e D i s p o s e d A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the construction expenditures to be disposed, and

check




statements, general ledger, and subsidiary ledgers.

(3) that the deviations from the above tests are recorded, then analyze those deviations

in conjunction with inspection on the detailed transactions.

2. In comparison with the relevant accounting principles, review whether the account setting

of “other investment” is proper and reasonable and check whether subsidiary ledgers are set

up in terms of the account setting requirements listed in the project assessment report, and

the third level subsidiary ledgers are set up according to the payment categories.

3. Select certain samples of the vouchers and attached original documents to compare with

the relevant financial and accounting principles, to check


(2) whether the approvals are obtained before the investment additions are transferred

in, which are not used for assets, and that the records are consistent with those in the “civil

works construction” account. Also check whether the accounting standards are followed,

debiting the “project appropriation fund” and crediting “construction expenditures to be

disposed.”

(3) whether the construction expenditures to be disposed are written off at the beginning

of the next year, and that the records are in accord with corresponding accounts, such as the

“project appropriation fund.”

4. Check whether the construction expenditures to be disposed are adequately disclosed and

properly classified in the financial statements and notes to the financial statements.


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I nvestments Transferred-out Audit Program




1. Obtain or prepare the breakdown of the investments transferred out and check





(3) that the deviations from the above tests are properly recorded, then analyze those


2. In comparison with the relevant accounting principles, review the appropriateness and

reasonableness of the account setting of “investment transferred out,” and check whether

subsidiary ledgers are set up in terms of the account setting requirements listed in the project

assessment report, and the third level subsidiary ledgers are set up according to the payment

categories.

3. Select certain samples of the vouchers and attached original documents to compare with

the relevant financing and accounting principles, and check


(2) whether the additions of the investments transferred out in current year do not

belong to the project implementing entity, and whether the recorded amounts are correct and

reconciled with the corresponding records in “civil works construction.”

(3) whether the previous year’s closing balance written off in the current year is

accurate.

4. Check whether the investment transferred out is adequately disclosed and properly

classified in the financial statements and notes to the financial statements.


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Project Expenditures Audit Adjustment Form



Unaudited Amount Audited

amount at prior year

end Item Amount

Adjustment (+/-) W/P Ref. Audited Amount

Amount in financial statement:

Subsidiary ledger:

Fixed assets transferred:

Civil works construction investment:

Equipment investment:

Investment deferred:

Other investment:

Construction expenditures to be

disposed

Investment transferred out:

Total

Abstract of Questions

Audit Conclusion


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B. Substantive testing of investment loan receivables

Investment loan receivables reflect the value of fixed assets transferred to the project entity, which implements the system of infrastructural construction investment loan, derived from the infrastructural construction investment loan refunded by the manufacturing entity. The project entity shall debit this account and credit “construction expenditures to be offset” (in the meanwhile, it shall debit ”fixed assets transferred” and credit ”civil works construction,” “equipment investment,” “investment deferred,” and “other investment”) when transferring the purchased or constructed completion assets to the manufacturing entity. The project entity shall debit “foreign loans” or “domestic loans” and credit this account when receiving notice of investment loan refunding by the manufacturing entity. The project entity shall debit “foreign loans” or “domestic loans” and credit this account, in the meanwhile debiting “infrastructural construction revenue payable” and “total responsibility construction surplus payable,” and credit “bank” when refunding the construction investment loan by use of infrastructural construction revenues and total responsibility construction surpluses. Furthermore, the manufacturing entity must be informed to make relevant accounting records.

1. Audit objectives The audit objectives for investment loan receivables are these:

• Completeness

Investment loan receivables shall be reflected in the financial statements for the project entity engaging in infrastructural construction investment loans when the fixed assets are transferred.

• Accuracy

Investment loan receivables shall be calculated on the basis of actual fixed assets transferred. The amount in the financial statements is to be consistent with relevant accounting records, such as the vouchers and accounting books.

• Existence or occurrence

Investment loan receivables in the financial statements are really the amounts of the fixed assets transferred to the manufacturing entity.

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• Correctness of accounting treatment and calculation

The accounting treatment and calculation of the additions to and deductions from investment loan receivables are to be in accord with the accounting policies published by Ministry of Finance.

• Presentation and disclosure

In accordance with accounting standards, investment loan receivables are to be properly classified and adequately disclosed in the financial statements and notes to the financial statements.

2. The audit program For the investment loan receivables audit program, refer to the audit program Table 4-10.

3. Audit working papers For the investment loan receivables audit working papers and audit adjustment form, refer to Table 4-10 through Table 4-11.

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I n v e s t m e n t L o a n R e c e i v a b l e A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the investment loan receivables, then check





(3) that the deviations from the above tests are recorded, then analyze those deviations in

conjunction with inspection of the detailed transactions.

2. In comparison with the project initiating documents, review whether the system of

infrastructural construction investment loans is carried out by the project entity under audit.

3. Obtain the subsidiary ledger of the investment loan receivable, then check

(1) whether the additions to the debit side are the same as the amounts of the fixed assets

transferred in the current year and are consistent with the records of corresponding accounts,

such as “construction expenditure to be offset,” “fixed assets transferred,” and “civil works

construction investment.”

(2) whether the attached original documents on the deductions in the current year are

complete and the infrastructural construction investment loan notices that are returned by the

manufacturing entity are attached as supporting documents, and that the amount of the

deductions is consistent with that refunded. If the construction entity refunds the infrastructural

construction investment loan by means of infrastructural construction revenue and the total

responsibility construction surplus, examine whether the amounts of the deductions are

consistent with the payments of the infrastructural construction investment loan, then check

whether they are in accord with the records in the corresponding accounts, such as

infrastructural construction earnings payables and infrastructural construction total

responsibility surpluses.

4. Check whether investment loan receivables are properly classified and adequately disclosed

in the financial statements and notes to the financial statements.


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Investment Loan Receivable Audit Adjustment Form



Unaudited Amount Audited Amount at prior year end Item Amount


Amount in

financial

statement:

Subsidiary Ledger:

Total

Abstract of Questions

Audit Conclusion


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C. Substantive testing of appropriation investment loans

Appropriation investment loans reflect construction investment loans and investment loan interest amortized and appropriated to the subsidiary project entity by the authorities at a higher level which implement the “borrow and refund in total” system as to construction investment loans.

1. Audit objectives The audit objectives are the following:

• Completeness

The entire appropriation investment loan is recorded in the financial statements of the project entity at a higher level.

• Accuracy

The appropriation investment loan is recorded in accordance with the actual amounts of the appropriation and amortization. And the amounts are accurate.


The actual amounts of the appropriation and amortization in the financial statements of the project entity verifiably exist at a higher level.


According to accounting standards, appropriation investment loans are properly classified and adequately disclosed in the financial statements and notes to the financial statements. B. The Audit Program For the appropriation investment loan audit program, refer to Table 4-12. C. Audit Working Papers For audit working papers, including audit programs and audit adjustment forms, refer to Table 4-12 through Table 4-13.

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A p p r o p r i a t i o n I n v e s t m e n t L o a n A u d i t P r o g r a m



Audit program Comments W/P Ref.

1. Obtain or prepare the breakdown of the appropriation investment loan, then check







2. In comparison with relevant contracts and agreements, check whether the project entity has

used the “borrow and refund in total” system for infrastructural construction investment loans.

3. Compare the total amount of the appropriation investment loan with the project entity’s records

and check whether they are consistent. If not, investigate the reason and create a record

accordingly.

4. Obtain the summarizing financial statements prepared by the project entity to verify whether

the account balances have been written off with the corresponding accounts of the subsidiary

entities (refer to the summarizing financial statements audit programs).

5. Obtain the subsidiary ledger of appropriation investment loans to select certain samples of the

vouchers and attached original documents, then check

(1) whether relevant supporting documents are complete, such as bank payments, investment

loan interest notes, and check whether the content is consistent among them and the calculations

correct.

(2) whether the additions in the current year are authentic and correct and have been

reconciled with the records in corresponding accounts, such as “cash in bank,” “domestic loans,”

and “investments deferred.” (3) whether the deductions in current year are authentic and eligible and have been

reconciled with the records in corresponding accounts, such as “cash in bank” and “domestic

loans.”

6. Verify whether the appropriation investment loan is properly classified and adequately

disclosed in the financial statements and notes to the financial statements. (If summarizing

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financial statements are provided, there should be no balance in this account.)


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Appropriation Investment Loan Audit Adjustment Form



Unaudited amount Audited amount at prior year end

Item Amount Adjustment (+/-) W/P Ref Audited amount

Amount in

financial statement

Subsidiary ledger:

Appropriation

investment loan:

Appropriation

investment loan

interest:

Total

Abstract of Question

Audit Conclusion


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B. Substantive Testing of Foreign Loan and Counterpart Funds Transferred Foreign loan funds transferred reflect the foreign loan transferred from the project entity at a higher level to the subsidiary project entity (including replenishment funds and goods and services purchased through public bidding). The subsidiary ledger of this account is to be set up in terms of subsidiary entities, and calculated according to the foreign loan payment categories. The account balance is to be written off with corresponding accounts, such as “foreign loans” in the subsidiary entities when preparing the summarizing financial statements. Counterpart funds transferred reflects the counterpart funds transferred from the project entity at a higher level to the subsidiary entities (including the appropriation of finance budget, self-financing funds, imported equipment funds transferred, equipment transferred, and grants). The account balance is to be written off with corresponding accounts, such as “appropriation of funds,” in the subsidiary entities when preparing the summarizing financial statement.

1. Audit objectives The audit objectives of foreign loan and counterpart funds transferred are these:

• Existence and occurrence

Foreign loans and counterpart funds transferred reflected in the balance sheet shall really be appropriated to the subsidiary entity.

• Completeness

All the transactions of the foreign loan and counterpart funds transferred are documented in the accounting records.

• Accuracy

The amounts of the foreign loan and counterpart funds transferred must be accurate.


In accordance with accounting standards, foreign loan and counterpart funds transferred are to be properly classified and adequately disclosed in the financial statements and notes to the financial statements.

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2. The Audit Program For foreign loan and counterpart funds transferred audit programs, refer to Table 4-14.

3. Audit Working Papers For the audit working papers for foreign loan and counterpart funds transferred, including the audit program and the audit adjustment form, see Table 4-14 through Table 4-15.

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F o r e i g n L o a n a n d C o u n t e r p a r t F u n d s Tr a n s f e r r e d A u d i t p r o g r a m




1. Obtain or prepare the breakdown of the foreign loan appropriation and counterpart funds

transferred, then check






deviations in conjunction with an inspection on the detailed transactions.

2. Obtain summarizing financial statements prepared by the project entity under audit, verify

whether the account balances have been written off the corresponding accounts of the subsidiary

entities, such as “foreign loan” and “appropriation funds” (refer to the summarizing financial

statements audit programs).

3. Obtain the subsidiary ledger of foreign loan and domestic counterpart funds, select certain

samples of the vouchers and attached original documents, then check

(1) whether supporting documents (for example, the bank payment, debt splitting, material

transferred statements) are complete and the contents recorded in these documents are consistent,

and also that the calculations are correct.

(2) whether the additions in the current year are correct and verifiably exist and are

reconciled with the records of corresponding account, such as “cash in bank.”

(3) whether the deductions in the current year are correct and verifiably exist and have been

reconciled with the records of corresponding accounts, such as “cash in bank” and “domestic

loan.”

(4) the foreign loan transferred in comparison with relevant agreements, contracts, and

applications for withdrawal of subsidiary entities, and check whether they are eligible and

consistent. (5) the counterpart funds transferred in comparison with the project initiating documents,

such as project appraisal, to see whether the counterpart funds have been transferred to subsidiary

entities sufficiently and in a timely fashion.

4. Check whether the foreign loan and counterpart funds are properly classified and adequately

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disclosed in the financial statements and notes to the financial statements. (If summarizing

financial statements are provided, this account should not exist.)


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Foreign Loan and Counterpart Funds Transferred Audit Adjustment Form



Unaudited amount Audited amount at prior

year end Item Amount

Adjustment W/P Ref. Audited Amount

Amount in

financial statement

Foreign Loan

Transferred:

Counterpart Funds

Transferred:

Total

Abstract of Questions:

Audit Conclusion:


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C. Substantive Testing of Equipment (Inventory)

Equipment (inventory) reflects the actual cost of goods on hand, in transit, and in progress at the period end, including various materials, equipment, low-valued matters, etc., however, excluding the actual cost of equipment and tools and apparatus that do not require installation in stock.

1. Audit objectives The audit objectives for equipment (inventory) are these:

• Completeness

All equipment reflected in the balance sheet must be completely recorded.

• Accuracy

The valuations of equipment receiving and delivery are correct. The amounts on the balance sheet are consistent with those in relevant accounting records. The proper authorizations have been provided with all stock-taking losses, damaged, and disposed of equipment.


The equipment reflected in the balance sheet verifiably exists.


In accordance with accounting standards, the equipment reflected in the financial statements and notes to the financial statements is properly classified and adequately disclosed.

2. The audit program For the equipment (inventory) audit program, refer to Table 4-16.

3. Audit working papers

For equipment (inventory) audit working papers, including the audit program and audit adjustment forms, see Table 4-16 through table 4-20.

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Table 4-16 Reference Number: (Name of Auditing Firm)

E q u i p m e n t ( I n v e n t o r y ) A u d i t P r o g r a m Audi t Program＿＿＿＿



1. Obtain or prepare the breakdown of the equipment (inventory) and check: (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers.


general ledger, and subsidiary ledger. (3) that deviations from above tests are properly recorded, then analyze those deviations in conjunction with inspection on the detailed transactions. 2. Perform physical counts or sample physical counts for equipment (inventory) (see the equipment (inventory) physical audit program). 3. If the project loan is not being used by a standalone entity, pay attention to and check whether the equipment (inventory) is kept and accounted separately from other equipment (inventory) of the project entity under audit during physical counts and sample physical counts. 4. Observe the quality and status of the equipment (inventory) during the physical counts and sample physical counts and obtain the professional advice of technical engineers, accounting staff, and warehouse keepers. 5. In accordance with the degree of reliability of the physical audit, choose the key equipment (inventory) and carry out a sampling or complete physical audit on the chosen key equipment (inventory), then deduce the equipment (inventory) quantities at financial statements dates retrospectively. 6. Through inquiry and observation, get to understand the insurance and safeguards procedures for the equipment (inventory) and create the records accordingly.

7. Select certain samples of the equipment (inventory) to check whether the valuations of the equipment (inventory ) are correct and eligible (1) by checking the supplier’s invoices and purchasing contracts, checking whether the prices are correct, and ascertaining whether all expenses related to purchasing (e.g. freight, storage fees) are recorded in the “material purchasing” account. (2) by recalculation, check whether the valuation methods are consistent through the period under audit. If there is any change, ascertain whether the changes were approved in accordance with the rules and regulations.

(3) on the condition that the equipment (inventory) is evaluated by the plan cost, by the recalculation method or some other method, check whether the recorded and written-off amounts in the “material cost discrepancy” account are correct. Also pay attention to whether there are any allocation methods to change the material cost discrepancy discretionarily, or any cases of transferring discrepancy that are not in line with the facts or are even absent.

8. In conjunction with compliance testing, select certain samples of the equipment (inventory), to obtain relevant vouchers and original documents of “material purchasing,” “equipment,” and “material in stock,” then carry out the auditing steps as follows:

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(1) with regard to the addition of the equipment (inventory), trace the purchase orders, contacts, vouchers, and acceptance reports through the whole procedure from the acceptance test to warehousing and ascertain whether they are authentic and correct, and find out whether there are any events of purchasing on discount, returns, indemnity for damage, or exchange. (2) with regard to the deductions or equipment (inventory) transferred out, check the original documents of the materials and equipment (for example, the usage statements, delivery notes, and allocation statements) and verify whether the documents are complete, the contents authentic, the specific procedures finished, and the valuations accurate, and then pay attention to whether there are any cases of selling off materials and equipment.

9. Check whether the equipment (inventory) reflected in the financial statements and notes to the financial statements is properly classified and adequately disclosed.


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Equipment (Inventory) Sample Checking Statement

Checking Date: month/day/year


Warehouse Name: Accompanied by: Currency Unit:

Book record Unrecorded amount (received, delivery) Balance Physical count

record Sample checked

Record Discrepancies

Stock in Stock out

Inventory name and

type

Unit Price Quant. Amount

Quant. Amt. Quant. Amt.

Quant. Amt. Quant. Amt. Quant. Amt. Quant. Amt.

Quality (normal, obsolete, damaged)

1 2 3 4 5=3×4 6 7=3×6 8 9=3×8 10=4+6-

8

11=5+

7-9

12 13=3×

12

14 15=3×14 16=14-

10

17=15

-11

Total

Sample checking summary

Sample checked amount: Book total amount: Sample ratio:

Correct amount: Sample correct ratio:

Audit Notes


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E q u i p m e n t ( I n v e n t o r y ) P h y s i c a l A u d i t P r o g r a m



Audi t Program Comments W/P Ref .

1. Understand the scope and timing of the physical audit to determine whether all inventories

are within the scope of the examination and focus on how the entity under audit verifies the

existence and occurrence of the excluded inventories.

2. Check whether the written checking procedure instructions have been distributed to every

staff member attending the audit and obtain one copy of that: check whether the written

instructions are reviewed and approved by a managing official who is independent from the

warehouse keeper and inventory recording management team.

3. Inspect and inquire whether the preparation meeting for the inventory physical audit is

done with the attendance of the examination participants, and check whether potential

problems during the audit are discussed.

4. Obtain the list of names of staff engaged in the physical audit, and check whether the

examination is carried out with the monitoring of management personnel who are

independent from the warehouse keeper and inventory recording management team. The

following personnel are included in the examination team: (1) personnel who are familiar

with different types of inventory or have special knowledge regarding the nature and quality

of different types of the inventory, (2) personnel who come from other departments never

involved in the keeping, moving, or recording of the inventory on a daily basis.

5. Check whether the proper measures are taken to ensure that all the examination records

have been collected (for example, the inventory examination lists and cards with serial

numbers especially printed in advance) and carry out registration for the distribution and

collection of those lists and cards, and check the sequence of the serial numbers on the lists

and cards after examining them.

6. Observe whether the physical counts, weighing, and measuring are actually carried out by

the examination staff.

7. Check whether adequate measures are taken to ensure that all the inventories on the

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examination list have been counted, and counted only once.

8. Check that adequate measures have been taken to ensure that the receiving notes and

delivery notes of the inventories are correctly recorded in the subsidiary ledger and general

ledger when the physical examination is finished.

9. Select certain samples of the single inventory items (if appropriate, choose expensive

items) to carry out the physical counts, and compare the quantity of the sampling results with

that of the results from the physical audit team of the entity under audit.

10. Prepare audit working papers and develop the audit conclusion on the basis of the above

audit work.


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E q u i p m e n t ( C u r r e n t A s s e t s ) L o s s e s i n S u s p e n s e A u d i t P r o g r a m

Audi t Pe r iod



1. Obtain or prepare the breakdown of the current assets gains, losses, or damage, and check:

(1) whether the total amount is accurate.

(2) whether the amount is consistent with that in the subsidiary ledger and general

ledger.

(3) whether the name, type, quantity, price, and amount are recorded for the gains,

losses, and damaged materials.

2. By inquiring of the person responsible and the relevant authorities, or reviewing relevant

supporting documents, find out the causes of gains, losses, and damage.

3. Select certain samples from the subsidiary ledger of “equipment losses in suspense” and

obtain relevant vouchers and attached original documents, then check

(1) whether there is a series of approval procedures for transferred-in and written-off

equipment.

(2) whether the residual value of the material, the insurance that is taken back, and the

compensation from the person held responsible are deducted from the amounts of the

transferred-in and written-off equipment.

(3) With regard to the items in long-team suspense not treated in the accounting, find

out the causes and ask the entity under audit to give the necessary explanations and make the

adjustment accordingly.

(4) whether the relevant accounting treatment is correct.

4. Check whether the equipment (current assets) losses in suspense reflected in the financial

statements and notes to the financial statements are properly classified and adequately

disclosed.


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Equipment (Inventory) Audit Adjustment Form


Project Name : Project Implementing Entity: Currency Unit:

Unaudited Amount Audit Amount at prior year end Item Amount

Adjustment W/P Ref

Audited Amount

Amount in financial

statement:

Subsidiary ledger:

Equipment purchasing:

Equipment in Stock:

Materials in Stock:

Equipment losses in

suspense:

Total


Audit Conclusion


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D. Substantive Testing of Cash And Bank

Cash and bank reflect the total amount of cash on hand, bank settlement account deposits, special account bank deposits out of the residential city, bank draft deposits, bank promissory note deposits, cash in transit, and letters of credit deposited at the end of the period.

1. Audit objectives The audit objectives in regard to cash and bank are these:

• Ownership

Cash and bank reflected on the balance sheet must belong to the project entity.


The recorded cash and bank must verifiably exist.

• Completeness

Cash and bank are to be completely recorded in relevant vouchers, account books, and financial statements.

• Accuracy

The amounts of cash and bank must be accurately confirmed, summarized, and recorded. The amounts on the financial statements must be consistent with those in the accounting records.


In accordance with accounting standards, cash and bank must be properly classified and adequately disclosed in the financial statements and in the notes to the financial statements.

2. The Audit Program For cash and bank audit programs, refer to Table 4-21.

• Audit working papers

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Cash and bank audit working papers, including the cash and bank audit program, audit adjustment forms, cash on hand, physical counts checklist, bank deposit balance breakdown, bank confirmation, cash and bank checklist, refer to Table 4-21 through Table 4-27.

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C a s h a n d B a n k A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the cash, bank, and other cash and bank, then check (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers.



(3) that deviations from the above tests are properly recorded, then analyze those deviations


2. Select certain samples of the records of the cash journal, obtain relevant vouchers and attached original documents, and perform the following auditing steps: (1) examine the descriptions in the cash journal and vouchers and check whether the cash receiving and disbursement are legitimate; examine the corresponding accounts, and check whether the account treatments of cash receiving and disbursement are correct; examine the time sequence of the cash journal, and check whether the records are out of time order purposely to cover up problems. (2) compare the vouchers with the attached original documents and check whether the content, quantity, price, and amount are consistent. (3) review the external evidence of the cash disbursements: according to the key elements that must be provided with the original documents, check whether the entity indicated on the receipts verifiably exists and whether the numbers on the receipts are continuous or close together for in the case of receipts from the same entity, and check whether the entity chop, tax chop, and chops for both sides are clear and well marked and the amount clear, and whether there are alteration marks for all the handwriting, including the name, date, price, quantity, and amounts; also check whether the review procedures are complete as to the external original documents. (4) review the handwritten vouchers for cash disbursements and compare the relevant disbursement statements with the accounting records, and check whether the disbursements meet with the rules and regulations, and that the administrative procedures are complete and that the payees verifiably exist. (5) review the external original evidence for the cash receipt, and check whether the title of the external documents is consistent with that of the project entity and that the contents are related to the project entity’s transactions, and check whether the description, date, price, quantity, and amount have been altered. (6) Review the handwritten cash receipt vouchers, and check whether the receipt stubs are pre-numbered in sequence, whether the cancellation receipts are chopped with “cancellation” marks, and the dates of receipts are close together or far apart, and check whether the title, date, and descriptions have been altered.

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3. Monitor the cash physical count, or review the actual cash amounts, and compare these with the balance of the cash journal. (1) organize the cash physical counts. before office opening or after office closing, ask the cashier to seal up for temporary keeping all the cash in the safe and to fill out the “cashier’s statement,” and examine the cash occasionally. (2) monitor the cash physical count on site. when the accountant in charge and the auditor are on the scene, the cashier should count the cash and fill out the records; the auditor is to monitor cash physical counts and check them, if necessary. (3) review and sign the “cash physical count checklist”; the cashier is to fill out the “cash physical count checklist” after the cash examination; keep the “cash physical count checklist” among the working papers, which must be signed by the auditor, the accountant in charge, and the cashier. 4. Select certain samples of the bank accounting records and obtain the relevant vouchers and attached original documents, and carry out the following auditing steps: (1) examine the descriptions and amounts and check whether the bank receiving and disbursements are legitimate; examine the corresponding accounts and check whether the accounting treatment of bank receiving and disbursements is correct; examine the time sequence of the bank receiving journal and check whether the records are made out of sequence purposefully to cover up problems. (2) compare the vouchers with the attached original documents and check whether the content, quantity, price, and total amount are reconciled. (3) authenticate the truth or falsity of the original documents. 5. Prepare the breakdown of the bank account balance and select certain samples of bank account balances to compare with the bank statements, and check whether they are consistent. If not, the auditor, based on his or her professional judgment, must determine whether to do an examination of the bank reconciliation statements prepared by the entity under audit. (1) If the examination is based on the bank reconciliation statements prepared by the entity under audit, the auditor must check the bank statements and bank journal, item by item, and in terms of the accounting information, such as check receiving records, check stubs, and reference books, also check the un-arrival amounts, including those that the project entity received but were not received by bank, paid by the project entity but not paid by the bank, received by the bank but not by the project entity, and paid by the bank but not by the project entity, and then adjust the balance.

(2) The auditor shall prepare the bank reconciliation statement, if the examination is not based on the one prepared by the entity under audit. The detailed methods are these: the first step is to ask the entity under audit to record all the vouchers of bank receipt and disbursement for the account and to work out the balance; the second step is to obtain the bank statements from the bank of the entity under audit; the third step is to analyze and summarize the un-arrival amounts, including those the project entity received but the bank did not, the project entity paid but the bank did not, the bank received but the project entity did not, the and bank paid but the project entity did not, in terms of the bank journal, bank statement, check receiving record, check stubs, and reference book; and last, prepare the bank reconciliation statement and adjust the balances.

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Audit program Comments W/P ref

6. Mail the “bank confirmation” for all the bank accounts opened by the entity under audit (including bank accounts outside of the residential city, bank draft deposits, and bank promissory note deposits), and check the year end balances. 7. Check the details on fixed deposits over one year and deposits that have limitations, for certain purposes only, and create that record. 8. Obtain the accounting books of the foreign currency bank deposit journal, foreign cash journal, foreign currency creditor’s rights, foreign currency debtor’s rights, fixed assets, civil works investments, and investments deferred, and carry out the following examinations: (1) By double checking, verify whether the foreign currency is converted to the recording currency by using the exchange rate on day of the occurrence or on the first day of current month. And check whether the foreign currency balance of cash, bank, credit, and debt are converted to recording currency with the standard month end exchange rate. (2) Review the profit and loss statement and verify the correctness of computations on exchange gain or loss. And check whether the exchange gain or loss is recorded in the “investment deferred” account or other relevant account in accordance with the rules and regulations. (3) In comparing the relevant vouchers and original documents, check whether transactions in foreign currency comply with state rules and regulations. 9. Select certain samples of the material bank receipts and disbursement vouchers, from several days before or after of the financial statement date, to test whether the records were made within the correct accounting period. 10. Check whether the cash and bank are properly classified and adequately disclosed in the financial statements and notes to the financial statements.


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C a s h o n H a n d P h y s i c a l C o u n t C h e c k l i s t

Project Name: Project Implementing Entity: Date:

Verification Checklist Actual Record

RMB (Yuan) USD Item Line RMB USD Yuan

Face amount (Yuan) Number Amount Number Amount

Book balance of last day 1 Receipt amount unrecorded on check cash day

2

Disbursement amount unrecorded on check cash day

3

Book balance 4＝1＋2-3

Actual balance 5

Discrepancy between book balance and actual balance

6＝4-5

Discrepancy analysis

Total cash disbursement between financial statement and check cash date (+)

Total cash receipts between financial statement date and check cash date (-)

Cash balance on financial statement date

Exchange rate on financial statement date

Trace to book record balance on financial statement

Recording currency amount converted from foreign currency balance on financial statement date

Total Total

Adjustment

Audited amount

Adjustment entry

Audit Conclusion

Accountant in charge: Cashier: Auditor: Reviewer:

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Cash and Bank Checklist (Samples of Material Amount, Receipts and

Disbursements Before and After Financial Statement Date)



Verification

Date Voucher number Transaction description Correspond

ing account Amount 1 2 3 4 5

Remarks

Instructions for filling in the verification column

1. The contents of the original documents are complete.

2. There was proper authorization and approval.

3. The accounting treatment is accurate.

4. It is related to the project.

5. The transactions are legitimate.

(If these agree with the transaction content being checked,

mark √ in the relevant “checking content” column; if not,

mark X; if not applicable, mark N/A)

Audit Notes


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Bank Reconciliation Statement



Bank Name: Bank Account: Currency Unit:

Item Amount Comments

Bank statements balance

Add: received by project entity, but not accounted by bank

1.

2.

Deduct: paid by project entity, but not accounted by bank

1.

2.

Bank statement balance after adjustment

Project entity bank journal balance

Add: received by bank, but not accounted by project entity

1. Interest income

2.

Deduct: paid by bank, but not accounted by project entity

1.

2.

Project entity bank journal balance after adjustment

Signature of accountant: Signature of accountant in charge:

Adjustment Entry:

Explanation:


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Breakdown of Bank Deposit Balance



(√) Supporting evidence Journal recording currency # Bank

name Bank

account Curren

cy Journal balance Bank

statement Reconciliation

Other

Balance after

adjustment Exchange Rate

Amt. Notes

1

2

3

Total

Adjustment Entries:


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Bank Confirmation

To: (Bank)

For the purposes of our annual (name of entity under audit) audit performed by (auditing firm name), according to the

relevant rules and regulations of International Auditing Standards and the Government Auditing Standards of the People’s

Republic of China, this confirmation aims to show the following information on bank deposits and loans in relation to your

bank. The amounts below are the book balances of the entity under audit as of (month/day/year). If you agree with the

balance as recorded in your book, please confirm by signing in the “Above balance is correct” section at the foot of this page.

If you disagree with the balance, please confirm by signing in the box “I disagree with the above balance” section and

provide details of the difference on the reverse side of this confirmation form. Please mail this confirmation back to (auditing

firm) as soon as possible but before month/day at the address below.

Bank account Nature Balance Notes

Auditing Firm (official seal) Month/Day/Year

The above balance is correct.

Sign and Chop Date:

I disagree with the above balance. Remarks:

Sign and Chop Date:

Address: Postal code: Contactor: Tel. No.:

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Cash and Bank Audit Adjustment Form



Unaudited Amount Audited amount at prior



Amount in Financial

Statement

Subsidiary Ledger:

Cash:

Bank deposit:

Special Account

Bank Deposit:

Other Cash and

Bank:

Total


Audit Conclusion:


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E. Substantive testing of prepaid and receivables

The total of prepaid and receivables reflects all prepaid and receivables at period end, including materials prepaid, project construction prepaid, equipment prepaid, World Bank loan interest receivable, World Bank loan promissory receivables, World Bank application funds receivable, notes receivable, compensated equipment, and construction receivables, and other receivables.

1. Audit objectives

The audit objectives of prepaid and receivables are the following:

• Completeness

All prepaid and receivable must be recorded in the financial statements.

• Existence and ownership

The prepaid and receivables reflected in the financial statements must be the project entity’s transactions that have taken place. The project entity owns the legal creditor’s rights.

• Accuracy

All accounting valuations, computerizations, and recording of the prepaid and receivables must be accurate.


According to the requirements of accounting standards, prepaid and receivables must be properly classified and adequately disclosed in the financial statements and notes to the financial statements. 2. The audit program Prepaid and receivables include three audit programs: the prepaid audit program, the interest and fees receivable audit program, and the compensated equipment and construction receivables and other receivables audit program. For the details, refer to the relevant audit programs, Table 4-28 through Table 4-31).

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3. Audit working papers For prepaid and receivables audit working papers, including relevant audit programs, prepaid and receivables audit adjustment forms, prepaid and receivables balance breakdowns, and the prepaid and receivables checklist, please refer to Table 4-28 through Table 4-31).

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P re p a i d A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the prepaid and check (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) that the deviations from the above tests are properly recorded, then analyze those deviations in conjunction with inspection of the detailed transactions. (4) that the possibility of recall is checked, using aging analysis and focusing on long-term items in suspense. 2. From the breakdown above, select the material items for which you must check whether they exist: (1) Send confirmation. (2) Prepare the confirmation statistical statement according to the confirmation replies. (3) Investigate the causes for the amounts that are inconsistent with the confirmations received then create the record and make adjustments. (4) Send confirmations again to those who do not reply. If the reply is still not available, check relevant contracts and agreements to determine the existence or occurrence of the creditor’s rights. 3. Select samples of the accounts for which the prepaid debtor and the payables creditor have the same name, review whether there are duplicate payments for the same transaction, or duplicate recording in prepaid and payables accounts, for a clear bill. If so, make the adjustments accordingly. 4. Check the image progress; verify whether the payments are based on the progress of project construction. 5. As to items that balance on the credit side, investigate and find the cause, then make the reclassification adjustment, if necessary. 6. With respect to long-term items in suspense, investigate and find the cause, then create a detailed record. 7. Select certain samples from the subsidiary ledger, obtain relevant vouchers and original documents, and carry out the following auditing steps:

(1) Review the descriptions and amounts to check whether the prepaid transactions are legitimate.

(2) Compare the vouchers with the original receipts attached to check whether the content, quantity, price, and amount are consistent.

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(3) Select certain samples of materials prepaid, construction prepaid, equipment prepaid, and check whether supporting documents are in place (such as contracts, agreements). (4) Following the contract and agreement, materials prepaid and project construction prepaid are deducted, step by step. (5) Select certain samples to check whether the deductions (write-offs) for equipment prepaid matches equipment transferred to stock. 8. Check whether prepaid is properly classified and adequately disclosed in the financial statements and notes to the financial statements.


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I n t e re s t a n d F e e s R e c e i v a b l e A u d i t P ro g r a m




1. Obtain or prepare the breakdown of the interest and fees receivable, then check





(3) that the deviations from the above tests is properly recorded, then analyze those


(4) Perform an analytical review and compare the interest and fees receivable with

relevant loan transfer amounts, then investigate the causes of unusual cases, focusing on

investigating cases identified in the next auditing step.

2. Review whether the amounts of the interest and fees receivable are consistent with those

in the accounts of the subsidiary entity, and if there are discrepancies, investigate the cause

and make proper adjustments.

3. With respect to long-term items in suspense, investigate the cause and create a detailed

record.

4. Select certain samples from the subsidiary ledger, obtain relevant vouchers and original

documents, and carry out the following auditing steps:

(1) Review the descriptions and amounts, and check whether the interest and fees receivable transactions are legitimate.

(2) Compare the vouchers with the attached original documents and check whether the

content, quantity, price, and amount are consistent.

(3) Review the interest and fees receivable statements to check whether the base values

of the interest and fees accrued are consistent with those in the creditor’s rights account, and

that the interest rates and fees rate comply with relevant loan agreements and loan transfer

agreements.

5. Check whether the interest and fees receivable are properly classified and adequately

disclosed in the financial statements and notes to the financial statements.


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C o m p e n s a t e d E q u i p m e n t Tr a n s f e r R e c e i v a b l e s , P r o j e c t C o n s t r u c t i o n

R e c e i v a b l e s , a n d O t h e r R e c e i v a b l e s A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the compensated equipment transfer receivable, project

construction receivable, and other receivables, and check





(3) that the deviations from the above tests are properly recorded, then analyze those deviations


(4) ascertain the possibility or occurrence of bad debts with respect to long-term receivables in

suspense, and focus on these in the next auditing step using aging analysis.

2. From the breakdown above, select important items whose existence you must check:

(1) Send confirmations.

(2) Prepare the confirmation statistical statement according to the confirmations received.

(3) Investigate the cause for the items in which the amounts are inconsistent with those in the

confirmations received, then create the records and make adjustments.

(4) Send the confirmations again to those who have not replied. If the reply is still not

available, check relevant contracts and agreements to determine the existence or occurrence of

creditor’s rights.

3. Check whether the items recorded as bad debt losses comply with relevant rules and regulations

and that the approval procedures have been completed.

4. Investigate the cause of items with a balance on the credit side and make reclassification

adjustments, if necessary.

5. Select certain samples from the subsidiary ledger, and obtain relevant vouchers and original


(1) Review descriptions and amounts, check whether the transactions related to other

receivables are legitimate, and ascertain whether there are any cases of lending out the project

funds.

(2) Compare the vouchers with their attached original documents, and check whether the


(3) With regard to the compensated equipment transferred and project construction

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receivables, check whether there is adequate supporting evidence for the accounting record, and

whether there are material delivery notes, construction final settlement payments, and asset

transferal statements attached, and whether the records are consistent with those in corresponding

accounts, such as “equipment in stock,” “materials in stock,” and “civil works construction

investment.”

6. Check whether the compensated equipment transferred and project construction receivables and

other receivables are properly classified and adequately disclosed in the financial statements and

notes to the financial statements.


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N o t e s R e c e i v a b l e A u d i t P r o g r a m

Audi t Pe r iod____



1. Obtain or prepare the breakdown of the notes receivable (list the note’s category, number,

issue date, face amount, date due, payee’s name, interest rate, etc.), and check







2. Carry out the physical counts on notes receivable in stock without informing the entity under

audit in advance, and compare the actual amounts with the balances in the “notes receivable

register book,” item by item, and also prepare the “notes receivable verification statements.”

During the physical counts, pay attention to whether the contents of notes receivable are

complete, and whether the signature and chop are true or false, being careful in regard to notes

receivable that have gone unrecorded.

3. Select certain samples from the subsidiary ledger, obtain the relevant vouchers and original


(1) Review the descriptions and amounts and check whether the exchanges of the

equipment and materials with external entities in relation to notes receivable have been

approved and that the equipment and materials are unnecessary for the project, and ascertain

whether there are any cases of project materials being sold off.

(2) Compare the vouchers with their attached original documents and check whether the


(3) In comparison with the “notes receivable register book,” check whether the notes are

recorded completely and in a timely fashion when they are received and that the records are

consistent with those of corresponding accounts, such as “materials in stock,” and whether the

notes are written off when they expire and the entity receives the bank deposit, and that the

records are consistent with those of corresponding accounts, such as the “bank deposit

account.”

4. With respect to notes receivable on which interest is to be paid, according to the records in

the “notes receivable register book,” re-calculate the interest accrued and compare the results

with the records of the “investment deferred” account.

5. With respect to notes receivable accepted, obtain the original documents, according to

records in the “notes receivable register book,” to check whether all accepted amounts have

been recorded in a timely fashion and are consistent with relevant records in the “bank deposit”

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account.

With respect to overdue notes receivables, review the original documents, such as sales

invoices, sales contracts, and check the existence of the transactions. With respect to notes

receivable that are not paid due to refusal or incapacity, check whether they are transferred

from the “notes receivable” account to the “account receivables” account.

6. Check whether the notes receivable are properly classified and adequately disclosed in the

financial statements and notes to the financial statements. Check whether the commercial

acceptances that have been discounted are reflected in the supplementary notes of the

discounted commercial acceptance at the bottom of the financial statements.


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Audit (Receivables / Payables) Confirmation

Re:

For the purposes of our annual (name of entity under audit) audit performed by (auditing firm name), according to the

relevant rules and regulations of International Auditing Standards and the Government Auditing Standards of the People’s

Republic of China, this confirmation aims to show the following information in relation to your company. The amounts

below are the book balance of the entity under audit as of month/day/year. If you agree with the balance, as recorded in your

books, please confirm by signing in the “The above balance is correct” space at the foot of this page. If you disagree with the

balance, please confirm by signing in the box “I disagree with the above balance” space and provide details about the

difference. Please mail this confirmation back to (auditing firm) as soon as possible but before month/day at the address

below. (This is only for auditing purposes. It is not a request for payment.)

Currency Unit:

Account Name Subsidiary Account Debit Balance Credit Balance Notes

Although you may have settled the balance after the date mentioned above, please return the confirmation to our auditors.

Auditing Firm (Official Seal)

Month/day/year

The above balance is correct.

Chop Date:

I disagree with the above balance.

Chop Date:

Address: Postal code: Tel. no.:

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A l t e r n a t i v e P r o c e d u r e s f o r U n r e c e i v e d R e c e i v a b l e s C o n f i r m a t i o n

A u d i t P r o g r a m _ _ _ _ _


Debit Receivable Components

Debtor Name Date Voucher

number Amt. Whether

received by the end of audit date

Content

Invoice number or

other voucher

Amt. Causes for

delayed payment

Audit Opinion

Total


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R e c e i v a b l e s C o n f i r m a t i o n S t a t e m e n t s

A u d i t P e r i o d _ _ _


Confirmation Summary Received Unreceived Audit opinion

Amount confirmed Amount confirmed after adjustment

#

Purpose for samples selected

Entity name

Closing balance

Whether received or not

Confirmed directly

Confirmed after adjustment

Amount in suspense Others

Amount confirmed by alternative procedures

Unconfirmed amount

Total Value:

Number of samples of receivables: Total number selected: Total number of confirmations received:

Number confirmed by confirmation: Total number of receivables recorded:

Total amount of receivables at end of period: Proportion of samples amount:

Amount confirmed by alternative procedures:

Proportion of sample number: Samples amount proportion on total amount at end of period:

Purpose: A. Material amount B. Unusual C. Long-aging D. Randomly


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Prepaid and Receivable Balance Breakdown



Closing balance Aging Debtor name

Transaction description

Opening balance Original Rmb. Less than

1 year 1-2 years 2-3 years More than

3 years

Notes

Total

Instructions for preparation of this form:

Audit conclusion


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Prepaid and Receivables Checklist

Audit Period _________


Verification Date

Voucher

# Description

Corresponding

account Amount

1 2 3 4 5 6 Notes

Instructions for filling in the verification column

1、The contents of the original documents are complete.

2、The prepaid complies with the contracts and agreements.

3、The deductions on the prepaid are timely and accurate.

4、The accounting treatments are correct.

5、There are duplicate payments.

6、There is authorization and approval.

(If you agree with the transaction content, mark √ in the

relevant “checking content” column; if not, mark X; if not

applicable, mark N/A.)

Audit Notes:


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Prepaid and Receivable Audit Adjustment Form



Unaudited Amount Audited Amount at prior



Amount in Financial Statement

Subsidiary Ledger:

World Bank Loan Interest

Receivables

World Bank Loan Commitment Fee

Receivables

World Bank Loan Application of

Fund Receivables

Materials Prepaid

Construction Prepaid

Equipment Prepaid

Compensated equipment transferred

out and construction receivables

Other receivables

Total


Audit Conclusion:


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F. Substantive testing of marketable securities

Marketable Securities are securities, such as state treasure bonds and enterprise bonds, purchased by the project entity.

1. Audit Objectives The audit objectives in regard to marketable securities are these:


The marketable securities verifiably exist. The actual amounts of the marketable securities are consistent with those in the accounting records.

• Accuracy

The marketable securities transactions are treated properly, and are narrated properly in the financial statements. The securities interest are calculated correctly.

• Ownership

The project entity has the ownership of the marketable securities.


According to the accounting standards, ascertain that the marketable securities are properly classified and adequately disclosed in the financial statements and notes to the financial statements.

2. The Audit Program The marketable securities audit program refers to audit program (table4-38).

3. Audit Working papers

For the marketable securities audit working papers, including the marketable securities audit program, marketable securities audit adjustment form, and marketable securities checklist,

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refer to Table 4-38 through Table 4-40.

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M a r k e t a b l e S e c u r i t i e s A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the marketable securities, and to check (1) whether the opening balance is consistent with the records in the previous year financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) To record the deviations from above tests, and analyze those deviations in conjunction with inspection on the detailed transactions. 2. Monitor the physical counts of the marketable securities in stock. Perform the physical counts on marketable securities in stock with the accountant in charge of the project entity, and prepare “marketable securities in stock counts list”, and to list the name, quantity, face value and acquisition cost of the marketable securities in comparison with relevant account balance. If there are discrepancies, investigate the causes and make the record or proper adjustment.

If the physical counts are carried out after the closing date, in terms of the count’s result, and the additions and deductions between the count date and the closing date, calculate reversely the marketable securities balance at the account closing date. 3. Check Entrusting Marketable Securities. If the project entity entrust the security company or trust company to keep the marketable securities, check the supporting documents related to the securities keeping, if necessary, send confirmation to relevant companies, and to require the companies to give exact information about the type, quantity and value of marketable securities that belong to the entity under audit, on the basis of which, to ascertain whether the marketable securities verifiably exist. 4. Select certain samples, and obtain the original documents related to the occurrence of the marketable securities transactions, and to carry out the following auditing steps: (1) Through reviewing the meeting minutes or the decisions made by the entity under audit related to the purchase and sale of the marketable securities, ascertain whether the transactions are approved within current period. (2) With respect to the marketable securities purchased in current period, check whether the sources of fund are compliant with relevant state rules and regulations (3) Examine the additions and deductions of the marketable securities within the period under audit, and to check whether relevant original documents are authentic and complete. 5. Perform the following auditing steps to check the status of the marketable securities realization.

(1) Understand the status of marketable securities realization, and make the record. (2) Ascertain whether there are marketable securities that belong to the long term investment, and to make proper explanation and adjustment.

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6. Examine whether the marketable securities gain or loss are calculated correctly, and to compare with corresponding accounts. 7. Check whether the marketable securities are properly classified and adequately disclosed in the financial statements and notes to the financial statement.


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Marketable Securities Checklist



Verification Notes Date Voucher

# Transaction content Corresponding account Amount 1 2 3 4

Instructions for filling in the verification column:

1. .The content of original receipts are complete.

2. .Authorized and approved.

3. .The accounting treatments are correct.

4. .The profit or loss are calculated correctly and recorded in the

refund reserves.

(If you agree with the transaction content under verification, mark √ in

the relevant “checking content” column: if not, mark X; if not

applicable, mark N/A.)

Audit Notes:


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Marketable Securities Audit Adjustment Form



Unaudited Amount Audited amount at

prior year end Item Amount

Adjustment (+/-) W/P Ref. Audited amount

Amount in Financial

Statement

Subsidiary Ledger:

total


Audit Conclusion:


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F. Substantive Testing of Fixed Assets Fixed assets consist of all kinds of such assets utilized by the project entity itself, concerning the accounts, such as the fixed assets original value, accumulated depreciation, fixed assets net value, fixed assets pending disposal, and fixed assets losses in suspense.

1. Audit objectives The audit objectives for fixed assets are the following:

• Completeness

All transactions related to the fixed assets utilized by the project entity itself, such as additions, reductions, and depreciation of fixed assets are recorded in the financial statements.

• Accuracy

The amounts of addition, reduction, and depreciation of fixed assets and maintenance are to be recorded accurately.

• Existence and occurrence

Addition, reduction, and depreciation of fixed assets reflected in the financial statements are the changes in the fixed assets of the project entity.


In keeping with accounting standards, the fixed assets utilized by the project entity itself must be properly classified and adequately disclosed in the financial statements and notes to the financial statements.

2. The audit program For fixed assets audit programs, including the fixed assets audit program, the accumulated depreciation audit program, the fixed assets pending disposal audit program, and the fixed asset losses in suspense audit program, refer to Table 4-41.


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For the fixed assets audit working papers, including fixed assets, accumulated depreciation, fixed assets pending disposal, and fixed asset losses in suspense audit programs, as well as audit adjustment forms and an accumulated depreciation checklist, refer to Table 4-41 through Table 4-43.

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F i x e d A s s e t s , A c c u m u l a t e d D e p re c i a t i o n , F i x e d A s s e t s P e n d i n g D i s p o s a l , F i x e d A s s e t L o s s e s i n S u s p e n s e A u d i t P r o g r a m s

Audi t Pe r iod _____



1. Obtain or prepare the classified summaries of the fixed assets and accumulated depreciation, and the breakdown of the fixed assets pending disposal and fixed asset losses in suspense, and check (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) that the deviations from the above tests are properly recorded, then analyze those deviations in conjunction with inspection of the detailed transactions. 2. Select some samples from the fixed assets subsidiary ledger, and carry out the following auditing steps: (1) Check whether the records in the subsidiary ledger are consistent with those on the fixed assets registry card. (2) Through the physical fixed asset counts, ascertain whether the fixed assets verifiably exist. 3. Select certain items from the fixed asset subsidiary ledger and obtain the relevant vouchers and attached original documents, and perform the following auditing steps: (1) Compare the vouchers with the attached original documents and check whether the content, quantity, price, and amount are consistent. (2) With respect to additions to the fixed assets in the current year, in comparison with the original documents, check whether the valuations are correct, the vouchers are complete, and administrative procedures are complete. (3) With respect to fixed asset reductions in the current year, check the original documents attached, verify that an authorized official has approved them and whether they have been recorded correctly and in a timely fashion. 4. Understand the depreciation policy of fixed assets, comparing it with the book record of fixed assets depreciation, then calculate and review whether the current year depreciation accrued is correct. 5. Select certain samples of the “fixed assets pending disposal” subsidiary ledger, obtain the relevant vouchers and attached original documents, check whether a proper reason is given and there has been authorization and approval for fixed assets disposal, and also whether the valuation is correct. 6. Through inquiry among assigned staff and relevant departments, or by consulting supporting documents, investigate the cause of loss, gain, or damage. 7. Select certain samples of the “fixed asset losses in suspense” subsidiary ledger, obtain the relevant vouchers and original documents attached, and then determine (1) whether to undertake a complete series of administrative procedures for fixed assets

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transferred in or written off. (2) whether the residual value, insurance, and compensation have been deducted from the amount of fixed assets transferred in or written off. (3) With respect to long-term items in suspense, investigate the cause and give the necessary explanations or make the necessary adjustments. (4) whether relevant accounting treatment is correct. 8. Check whether fixed assets, accumulated depreciation, fixed assets pending disposal, and fixed asset loss in suspense are properly classified and adequately disclosed in the financial statements and notes to the financial statements.


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Fixed Asset Checklist


Project Name: Entity under Audit: Currency Unit:

# Name Standards Serial number

Original book value

Book quantity

Actual quantity

Book should be reconciled with actual

Fair valuation

Complete procedures Notes

Audit Directives:

Audit Conclusion:


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Fixed Assets Audit Adjustment Form



Unaudited Amount Audited Amount Audited Amount at

prior year end Item Amount Adjustment (+/-) W/P Ref.

Amount in financial

statement:

Subsidiary ledger:

Fixed assets, cost

Accumulated

depreciation

Fixed assets pending

disposal

Fixed asset losses in

suspense

Total


Audit conclusion:


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Section 2 Substantive Testing of Sources of Fund Accounts

Sources of fund accounts in special purpose financial statements for World Bank financed projects include project appropriation funds, project capital and capital surplus, project loans, appropriation of investment loans, bond funds, construction expenditures to be offset, accounts payable, other payables, appropriation of funds, retained earnings, etc. A. Substantive Testing of Project Appropriation Funding Total project appropriation funding consists of variable appropriations received, including the central and local finance budget appropriation, the local authority, and the project entity’s own financing, the fund by labor, etc., as domestic counterpart financing.

1. Audit Objectives The audit objectives in regard to project appropriation funds are mainly these:

• Completeness

Appropriations reflected on the balance sheet must be complete and correct in accordance with rules and regulations.


Project appropriation account balances reflected in the financial statement must not include any fabrication of appropriation amounts or overstated account balances.

• Accuracy

The contents of accounting vouchers and original documents related to appropriation transactions must be accurate and consistent with the relevant subsidiary ledger, general ledger and financial statement.


In keeping with accounting standards, project appropriation funds in the financial statements and

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notes to the financial statements must be properly classified and adequately disclosed. • The audit program

Refer to the Project Appropriation Fund Audit Program, Table 4-44.

2. Audit Working Papers For project appropriation fund audit working papers, including project appropriation fund audit programs and project appropriation fund audit adjustment forms, see Table 4-44 through Table 4-45.

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P ro j e c t A p p r o p r i a t i o n F u n d i n g A u d i t P r o g r a m

Audi t Pe r iod _________



1. Obtain or prepare the breakdown of the project appropriation funding, and check (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) that the deviations from the above tests are properly recorded, then analyze those deviations in conjunction with inspection of the detailed transactions. 2. Review the project initiating documents, including the loan agreement (or loan transfer agreement), the contract, and the project assessment report to understand the requirements on the sources of project appropriation funding. Check the appropriation of funding, self-financing funding, and contributions in labor allocated adequately and in a timely fashion by comparison with the general ledger and subsidiary ledger, and look for the reasons for inconsistent cases, which are to be analyzed and recorded. 3. Obtain the project appropriation funding subsidiary ledger and select certain vouchers with the attached original documents, then perform the following auditing steps: (1) Review the descriptions and amounts in the subsidiary ledger and vouchers and check whether there are any unusual items. (2) Check the vouchers against their attached original documents and inspect the completeness of the original documents and the consistency between the vouchers and their original documents as to description, quantity, price, and amount. (3) In relation to the appropriation of funds by leading organizations at all levels, the bank receiving notice must be reviewed, with which the journals of the corresponding bank account are to be compared, and check the existence or occurrence of the allocation of funds. (4) With regard to contributions in labor, in conjunction with the compliance testing of cash receipts and the disbursements transaction cycle, check that the accounting evidence is verifiable, exists and is adequate. Also check

• whether the supporting documents are enclosed, for example the roster, labor working orders, and labor contracts.

• by examining signatures or other evidence in the enclosed supporting documents, whether fraudulent documents have been prepared to replace the contributions in labor, and check whether ratios have been overstated for use in calculations in comparison with loan agreements.

(5) With regard to the injection of self-financing funding, check the attached supporting documents to determine whether they verifiably exist and are accurate.

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4. Concerning debit items in the subsidiary ledger, check the vouchers and original documents to determine whether the project appropriations that are written off and transferred comply with the rules and regulations and that the procedures have been completes, and whether there are any cases of illicit withdrawals. 5. Check to see that the project appropriation funds reflected in the financial statements and notes to the financial statements are properly classified and adequately disclosed.


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Project Appropriation Funding Audit Adjustment Form



Unaudited amount Audited amount at

prior year end Item Amount


Amount in financial

statement:

Subsidiary Ledger:

Finance budget

appropriation

Local authorities

appropriation of funds

Self-financing funding by

the project entity

Total


Audit conclusion:


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B. Substantive Testing of Project Capital and Capital Surplus

Project capital reflects the closing balance for the project capital of the project entity received from investors by means of investment appropriations. Project capital surplus reflects the capital surplus obtained by the profitable entity, including the differences in the investment exceeding the registered capital and grants received by means of donations, etc.

1. Audit Objectives The audit objectives in regard to project capital and capital surplus are the following:

• Completeness Project capital and capital surplus must be completely recorded in the financial statement.

• Existence or occurrence The project capital reflected in the financial statements must be ascertained to be an appropriation from the investors, and the capital surplus must really exist.

• Accuracy All accounts and records regarding project capital and capital surplus are to be accurate.

• Ending date The project capital and capital surplus are to be recorded in the correct accounting period.

• Presentation and disclosure The project capital and capital surplus reflected in the financial statements and notes to the financial statements must be properly classified and adequately disclosed.

2. The Audit Program

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Refer to the project capital audit program and capital surplus audit programs, Table 4-46 through Table 4-47.


For audit working papers for project capital and capital surplus, including the project capital audit program, capital surplus audit program, and project capital and capital surplus audit adjustment forms, refer to Table 4-46 through Table 4-48.

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P ro j e c t C a p i t a l A u d i t P r o g r a m



A u d i t P r o g r a m C o m m e n t s W / P R e f .

1. Obtain or prepare the breakdown of project capital and check (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) that the deviations from the above tests is properly recorded, then analyze those deviations in conjunction with inspection of the detailed transactions. 2. Review the project initiating documents, including the loan agreement (or loan transfer agreement), the contract, and the project assessment report, to understand the requirements of project appropriation funding from investors and check the appropriation of funding, self-financing funding, and contributions in labor allocated adequately and in a timely fashion in comparison with the general ledger and subsidiary ledger. Then investigate the causes of inconsistent cases, which are to be analyzed and recorded. 3. Perform the following auditing steps and check the existence or occurrence of the injection of project capital: (1) with regard to the project capital certified by the legally authorized investment verification organization, obtain the capital verification certificate, and check whether the project capital us accurate and consistent with the accounting records. (2) with regard to the project entities whose project capital has not been verified by the legally authorized investment verification organization, check

• whether the financial contribution method and currency are eligible. • whether the injected cash has been deposited in bank accounts and the bank

receiving notices have been received. • whether the injected properties have been evaluated by a legally authorized

entity, or their quality appraised, and the acceptance checks completed, and that the investors own the injected properties.

• whether intangible assets are injected with their corresponding certificates, and that the take-over procedures are completed regarding relevant technical documents.

• whether the exchange rate applied is eligible if the project capital is injected in foreign currency.

4. In comparison with the project capital subsidiary ledger, as to additions or deductions in current year, obtain relevant vouchers and their original documents, and carry out the following auditing steps:

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(1) Review the descriptions and amounts in the subsidiary ledger and vouchers, and check whether there are any unusual items. (2) Compare the vouchers with their original documents and check whether the attached original documents are complete, as well as whether the content, quantity, price, and amount are consistent with those in the vouchers. (3) With regard to additions in current year, check the existence and validity of the original documents in comparison with the subsidiary ledgers for bank, fixed assets, equipment (inventory), intangible assets, etc. (4) With regard to deductions, or written-off and transferred items in the current year, check the attached original documents to find out the causes for the reduction or the write-off and transfer, and also determine whether they are eligible and the procedures have been completed, as well as whether there are any cases of illicit withdrawals from project capital. 5. Check whether the project capital reflected in the financial statements and notes to the financial statements is properly classified and adequately disclosed.


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C a p i t a l S u r p l u s A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the project capital surplus and check







2. In comparison with the project capital surplus subsidiary ledger, as to the additions and

deductions in current year, obtain relevant vouchers and their original documents, and to carry

out the following auditing steps:

(1) Review the descriptions and amounts in subsidiary ledger and the vouchers, and to

check whether there are any unusual items.

(2) Compare the vouchers with their original documents, and to check whether the

attached original documents are complete, further the content, the quantity, the price and the

amount of which are consistent with those in the vouchers.

(3) With regard to the capital surplus derived from the donations,

• by reviewing the attached hand-over lists, check whether the hand-over procedures

are complete.

• by reviewing the original documents, such as the bank receiving notice and invoices,

check that the amounts recorded for the account are accurate. As to donations in

foreign currency, the foreign currency conversion is to be examined for correctness.

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(4) With regard to the capital surplus derived from capital premiums, check whether the

capital surplus is derived from acquiring new investors and that the accounting amounts are

calculated in terms of the difference by which the actual contribution amounts exceed the

registered capital.

(5) With regard to the capital surplus derived from the difference from foreign currency

conversion, check whether the selection of exchange rates is in keeping with the rules and

regulations defined in the contracts, agreements, or accounting principles, and that the

calculation of the exchange rate difference for the capital conversion is accurate, and also

whether the accounting treatment is correct.

(6) With regard to debit amounts, by checking the original documents, ascertain whether

project capital written off and used complies with the rules and regulations, and that the

procedures are complete.

3. Check whether the project capital surplus reflected in the financial statements and notes to

the financial statements is properly classified and adequately disclosed.


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Project Capital and Capital Surplus Audit Adjustment Form



Unaudited Amount Audited amount at prior year end Item Amount


Amount in financial

statement:

Subsidiary ledger:

Project Capital

Capital Surplus

Total


Audit Conclusion:


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C. Substantive Testing of Project Loans

Project loans consist of various borrowings of project construction investment loans and other loans to implement the project plan, including foreign loans (World Bank loans), domestic loans, and other loans.

1. Audit Objectives

The audit objectives for project loans are these:

• Completeness Transactions of project investment loans and other loans must be recorded in the accounting books and reflected completely in the financial statements.

• Accuracy Project loan transactions are to be accurately classified, recorded, summarized, and reflected in the financial statements.

• Existence or occurrence Project loan transactions recorded in the accounting books must be real and verifiably exist on the balance sheet.

• Rights and obligations The use of project loans is to be in accordance with the rules and regulations. Loans and interest are to be paid on schedule.

• Presentation and disclosure In keeping with accounting standards, loan transactions, with their relevant important events, are to be properly classified and recorded in the accounting books. Moreover, they must be properly classified and adequately disclosed in the financial statements and notes to the financial

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statements.

2. The Audit Program For the project loan audit program, including foreign loan audit programs, domestic loan audit programs, and other loan audit programs, refer to Table 4-49 through Table 4-51.

3. Audit Working Papers

For project loan working papers, including relevant audit programs, project loan audit adjustment forms, and a project loan checklist, refer to Table 4-49 through Table 4-52.

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F o r e i g n L o a n A u d i t P r o g r a m



A u d i t P r o g r a m C o m m e n t s W / P R e f .

1. Review the “loan/credit agreement” and “loan transfer agreement” and understand the

loan amount, the loan purpose, the terms and conditions, the loan date, the payment

period, the loan interest rate, the commitment charge rate, etc.

2. Obtain or prepare the breakdown of the foreign loan and check

(1) whether the opening balance is consistent with the records in the previous year’ s




(3) that the deviations from the above tests are properly recorded and analyze those

deviations in conjunction with inspection of the detailed transactions. 3. In comparison with the World Bank loan subsidiary ledger, and in conjunction with the withdrawals and claims transaction cycle compliance testing, obtain the relevant vouchers and attached original documents and carry out the following auditing steps: (1) Review the descriptions and amounts in the subsidiary ledger and the vouchers,

and check whether there are any unusual items.

(2) Compare the vouchers with the original documents and check whether the

attached original documents are complete, then check that the content, quantity, price, and

amount are consistent with those in the vouchers.

(3) Compare the increased original currency amounts of the World Bank loan in the

World Bank loan foreign currency subsidiary ledger with World Bank’s payment notices

and monthly payment report in the current year, or with the original documents of the

project entity at a higher level (for example, appropriation notices, bank receiving notices,

debt splitting, etc.) check whether they are consistent. If there are any cases of differences,

look for the causes and list the relevant adjustment items. At the same time, check whether

the conversions according to the RMB exchange rate at period end are correct.

(4) Compare the deductions of the original currency amounts of the World Bank loan

in the World Bank loan foreign currency subsidiary ledger with the bank payment notices

and payment statements of the financing authority or project entity at a higher level, then

verify whether the World Bank loan refund amounts are accurate.

4. As to the World Bank loan withdrawn from World Bank by the project entity

responsible for World Bank withdrawals and claims, compare these with the claim

information of the subsidiary project entities and check whether the appropriations to the

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subsidiary project entities are timely and also whether the amounts are consistent. If there

are any differences, look for the causes and take notes.

5. In the case that the project entity has other foreign loans besides the World Bank loan,

perform the checks according to steps 3 and 4 above.

6. Check whether the foreign loans reflected in the financial statements and notes to the

financial statements are properly classified and adequately disclosed.


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D o m e s t i c L o a n ( P r o j e c t I n v e s t m e n t L o a n ) A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the domestic loan and check:





(3) That the deviations from the above tests are properly recorded, then analyze those

deviations in conjunction with inspection on the detailed transactions.

2. Select certain samples, and to send confirmations to the banks involved to ascertain

whether the loan amounts reflected in the domestic loan verifiably exist and are accurate.

3. In comparison with the domestic loan subsidiary ledger as to the additions and

deductions in current year, obtain the relevant vouchers and attached original documents,

and carry out the following auditing steps:

(1) Review the descriptions and amounts in subsidiary ledger and the vouchers and

check whether there are any unusual items.


attached original documents are complete, and also that the content, quantity, price, and


(3) With regard to the additions to long term loans within the current year, obtain the

loan agreement, then check the content, authorization, and approval to understand the loan

amount, the terms and conditions, the loan date, the refund period, and the loan interest

rate, and check these against the corresponding accounts, such as “cash in bank.”

(4) With regard to the deductions from long term loans within the current year, check

to see whether the refund amounts are eligible and verifiably exist or have occurred.

4. With regard to the accumulated domestic loan carried forward from the previous year, in

conjunction with prior year audit working papers, check whether payments are overdue

but not being paid or an extension is being processed for the overdue loan.

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5. Obtain correlative interest payment documents and to recheck whether the recorded

loan interest is accurate in comparison with the records of the domestic loan subsidiary

ledger and interrelated loan agreement terms, and then check whether the accounting

treatment is accurate in comparison with the records of the corresponding accounts (for

example, “investment deferred,” “cash in bank,” etc.

6. Check whether the domestic loans reflected in the financial statements and notes to the



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O t h e r L o a n A u d i t P r o g r a m



Audi t P rogram Comments W/P Ref .

1. Obtain or prepare the breakdown of the other loans and check:







2. Select certain samples, send confirmations to the banks and financing authorities

involved, then check and test whether the loan amounts reflected in other loans verifiably

exist and are accurate.

3. In comparison with the other loan subsidiary ledger, as to the additions and deductions

in the current year, obtain the relevant vouchers and original documents, then carry out the

following auditing steps:

(1) Review the descriptions and amounts in the subsidiary ledger and the vouchers,

and check whether there are any unusual items.


attached original documents are complete, then check that the content, quantity, price, and

the amount are consistent with those in the vouchers.

(3) With regard to additions to other loans within the current year, obtain the loan

agreement, check the content, authorization, and approval status to understand the loan

amount, the terms and conditions, the loan date, the refund period, and the loan interest

rate, and also check these against the corresponding accounts (for example, “cash in

bank”).

(4) With regard to deductions from other loans within current year, check and verify

whether the refund amounts are eligible and verifiably exist or have occurred.

(5) If the loan capital is in foreign currency, check whether all the bookkeeping

exchange rates are accurate, the conversions at period end are carried out according to the

state foreign exchange rate at period end, and the loss or gain of exchange is recorded in

the “investment deferred” account.

4. Check the correlative terms in the loan agreement and ascertain whether there are

payments overdue but not being paid or whether an extension is being processed for

overdue loans.

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5. Obtain correlative interest payment documents and recheck whether the loan interest

recorded is accurate in comparison with the records of the domestic loan subsidiary ledger

and interrelated loan agreement terms, and check whether the accounting treatment is

accurate in comparison with the records of the corresponding accounts (for example,

“investment deferred,” “cash in bank,” etc.).

6. Check whether the other loans reflected in the financial statements and notes to the

financial statements are adequately disclosed.


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Project Loan Checklist



Verification

Date Voucher # Content Corresponding account Amount

1 2 3 4 5 Notes

Instructions for filling in the verification column:

1． The content of original receipts is complete.

2． Authorized.

3． The accounting treatment is correct.

4. The loan agreement is in place..

5. The vouchers are consistent with the original documents.

(Please check whether the result is in keeping with the above and mark

the corresponding columns: √ - agrees; X - does not agree; N/A-not

applicable).

Audit Notes:


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Project Loan Audit Adjustment Form



Unaudited Amount Audited amount at prior



Amount in

Financial

Statement

Subsidiary ledger:

World Bank Loan:

Domestic Loans:

Other Loans:

Total


Audit Conclusion:


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D. Substantive Testing of Appropriation of Investment Loans

Appropriation of investment loans consists of the project investment loans appropriated and the project investment loan interest to be amortized by the project entity at a higher level, in keeping with the project entities executing the “borrow and refund in total” policy.

1. Audit objectives The audit objectives in regard to appropriation of investment loan include the following:

• Completeness Appropriation of investment loans must all be reflected in the financial statements.

• Existence or occurrence Appropriation of investment loans recorded in the accounting books must verifiably exist.

• Accuracy Appropriation of investment loans must have been recorded in keeping with the actual appropriation and the amortized amounts by the project entity at a higher level.

• Presentation and disclosure In keeping with accounting standards, appropriation of investment loans reflected in the financial statements and notes to the financial statements are properly classified and adequately disclosed.


Refer to the appropriation of investment loan audit program, Table 4-54.


For the audit working papers for appropriation of investment loans, including the appropriation of investment loan audit program and the audit adjustment form, refer to Table 4-54 through

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Table 4-55.

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A p p r o p r i a t i o n o f I n v e s t m e n t L o a n A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the appropriation of investment loans, and check







2. In comparison with correlative contracts and agreements, check whether the project

entity has executed the “borrow and refund in total” policy for infrastructural construction

investment loans.

3. Obtain the summarizing financial statements prepared by the project entity and

ascertain whether the balance of this account has been written off with that of the

corresponding account by the project entity at a higher level during summary (refer to the

summarizing financial statement audit program).

4. Obtain the appropriation in the investment loan subsidiary ledger and select certain

samples of the vouchers and attached original documents, then carry out the following

auditing steps:

(1) Check whether the supporting documents enclosed with the vouchers are

complete, include bank payment statements, investment loan interest splitting, etc., and

whether the contents are consistent and the calculations accurate.

(2) Check whether the additions within the current year verifiably exist and are

accurate, which must be consistent with the records of corresponding accounts (for

example, “cash in bank,” “domestic loan,” “World Bank loan,” “investment deferred,”

etc.).

(3) Check whether the deductions within the current year verifiably exist and are

eligible and consistent with the infrastructural construction income and total responsibility

construction surplus that are turned in to the project entity at a higher level to repay the

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investment loan.

(4) With regard to the “borrow and refund in total” system for the World Bank loan

appropriated by the entity at a higher level than that of the subsidiary project entity, check

whether they are consistent and comply with the rules and regulations by comparing them

with relevant agreements, contracts and the project entity’s withdrawal applications.

5. Check whether the appropriation of investment loans reflected in the financial statement

and notes to the financial statements are properly classified and adequately disclosed (if

the financial statements are the summarizing financial statements, the account shall have a

balance of zero).


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Appropriation of Investment Loan Audit Adjustment Form



Unaudited Amount Audited amount at prior year end Item Amount


Amount in financial

statement:

Subsidiary Ledger:

Total


Audit Conclusion:


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E. Substantive Testing of Bond Funds

Bond funds consist of bond funds in use for project construction appropriated from a manufacturing entity and bond interest payable (including bond capital and bond interest which should be recorded in project costs).

1. Audit Objectives The audit objectives in regard to bond funds include the following:

• Accuracy Bond funds must be accurately recorded and reflected in the financial statements.

• Existence or occurrence Bond funds recorded in the book must be real and verifiably exist on the balance sheet.

• Rights and obligations

The use of bond funds must be in accordance with the rules and regulations. Bond capital and interest are to be repaid on schedule.

• Presentation and disclosure In keeping with accounting standards, bond funds are to be properly classified and adequately disclosed in the financial statements and notes to the financial statements.

2. The Audit Program Refer to the bond fund audit program, Table 4-56.


For the audit working papers for bond funds, including the bond fund audit program and audit adjustment forms, refer to Table 4-56 through Table 4-57.

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B o n d F u n d A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the bond funds and check





(3) that the deviations from the above tests are recorded, then analyze those deviations in

conjunction with inspection on the detailed transactions.

2. Obtain the project initiating documents, such as the project assessment report, etc., and the

documents and contracts related to the issuing of the bonds by the manufacturing enterprise,

then check whether the issuing of the bonds has been approved and agreed to by the relevant

authorities, and understand the rules and regulations related to the use of the bond funds in

project construction, the bond term, the interest rate, etc.

3. Check the records in the bond funds general ledger and subsidiary ledger and check whether

the manufacturing enterprise has appropriated the bond fund raised for the project entity wholly

and in a timely manner.

4. As to the additions within the current year, obtain relevant vouchers and attached original

documents, then carry out the following auditing steps:

(1) Compare the vouchers with the original documents and check whether the attached

original documents are complete and the content, quantity, price, and amount are consistent

with those in the vouchers

(2) If the additions belong to bond capital, check whether they are in keeping with the

rules and regulations of the relevant bond issuing approval document, and if they are consistent

with the records in the bank receiving notices and corresponding “cash in bank” account. If

they belong to bond interest paid, recalculate and check whether the interest recorded is eligible

and consistent with the records of the corresponding “investment deferred” account by

comparing them with the articles of the bond issue.

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5. Check whether the construction costs have been deducted from the interest income by

depositing the bond funds in banks in keeping with the rules and regulations, and check

whether the records are consistent between the “cash in bank” account and the “investment

deferred” account.

6. In conjunction with the audit of the application of funds accounts, check whether the bond

funds are used in accordance with the rules and regulations.

7. Check whether the bond funds reflected in the financial statements and notes to the financial

statements are properly classified and adequately disclosed.


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Bond Fund Audit Adjustment Form



Unaudited amount Audited amount at prior year end Item Amount


Amount in

financial

statement:

Subsidiary Ledger:

Bond Capital:

Bond Interest:

Total


Audit Conclusion:


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F. Substantive Testing of Construction Expenditures to be Offset Construction expenditures to be offset, which are special provision accounts of the project entity executing the investment loan system, consist of the fixed assets transferred to be offset, which have been transferred to the manufacturing entity.

1. Audit objectives The audit objectives in regard to construction expenditures to be offset are the following:

• Completeness Construction expenditures to be offset are to be reflected in the financial statements, once the project construction investment loan is lent to the construction subcontractor. The fixed assets transferred are to be offset in the current accounting period, transferred to the manufacturing entity, and recorded and listed in the financial statements.

• Accuracy the amount of construction expenditures to be offset reflected in the financial statements are consistent with that of in accounting book and calculated on the basis of actual occurrence of the investment loan transferred.

• Existence or occurrence Construction expenditures to be offset and reflected in financial statement must verifiably exist.

2. The Audit Program Refer to the construction expenditures to be offset audit program, Table 4-58.


For audit working papers for construction expenditures to be offset, including the construction expenditures to be offset audit program and the audit adjustment form, refer to Table 4-58 through Table 4-59.

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C o n s t r u c t i o n E x p e n d i t u r e s t o b e O f f s e t A u d i t P ro g r a m

Aud i t Per iod ＿＿＿＿



1. Obtain or prepare the breakdown of the construction expenditures to be offset and check







2. In comparison with the project initiating documents, check whether the project entity has

executed the infrastructural construction investment loan system.

3. Obtain the subsidiary ledger of construction expenditures to be offset in comparison with the

“fixed assets transferred” account to check whether the additions on the credit side are

consistent with the fixed assets transferred derived from the investment loan within the current

year; and check whether the fixed assets transferred derived from the investment loan are

written off when setting up the new ledger at the beginning of the current year.

4. Check whether the construction expenditures to be offset reflected in the financial statements



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Construction Expenditures to be Offset Audit Adjustment Form





Amount in

financial

statement:

Subsidiary Ledger:

Total


Audit Conclusion:


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G. Substantive Testing of Payables

Payables reflect various payables at year end, including equipment payables, construction payables, compensated equipment and construction payables, World Bank loan interest payables, World Bank loan commitment fees payable, World Bank loan application of funds payable, notes payable, welfare payables, and other payables.

1. Audit Objectives

The audit objectives in regard to payables are the following:

• Completeness Payables during the period under audit are to be completely recorded and listed in the financial statements.

• Accuracy The valuation, calculation, and recording of payables must be accurate.

• Existence or occurrence Payable transactions recorded must verifiably exist and be part of the project entity‘s debts.

• Presentation and disclosure In accordance with accounting standards, payables reflected in financial statement must be properly classified, described, and disclosed.

2. Audit Program

For the payable audit programs, including equipment payables, construction payables, compensated equipment and construction payables, payroll and welfare payables, interest payables, notes payable, and other payables, refer to the following five tables.


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For the payable audit working papers, including the relevant audit programs and audit adjustment forms, refer to Table 4-60 though Table 4-67.

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(Name of Auditing Firm) E q u i p m e n t P a y a b l e s , C o n s t r u c t i o n P a y a b l e s , C o m p e n s a t e d

E q u i p m e n t a n d C o n s t r u c t i o n P a y a b l e s A u d i t P r o g r a m Audi t Pe r iod ＿＿＿＿


Aud i t Program Comments W/P Ref .

1. Obtain or prepare the breakdowns of the equipment payables, construction payables, and compensated equipment and construction payables, then check (1) whether the opening balance is consistent with the records in the previous year’s financial statements or relevant audit working papers. (2) whether the closing balance is consistent with the amount in the financial statements, general ledger, and subsidiary ledger. (3) that the deviations from the above tests are properly recorded, then analyze those deviations in conjunction with inspection on the detailed transactions. (4) that an analytical review is performed on aging analysis of equipment payables, construction payables, and compensated equipment and construction payables. 2. Select certain samples from the accounts below for confirmation and check whether the balances are correct: (1) Long-term accounts in suspense. (2) Accounts with the balance on the debit side.

(3) Accounts in which the creditor is a key supplier. (4) Accounts in which transaction content is unusual.

3. On the basis of confirmation replies, make the analysis. With regard to those that have gone unanswered, send the confirmation again or carry out alternative auditing procedures to verify the existence and accuracy of the debt. (1) Check the subsidiary ledgers for equipment payables, construction payables, compensated equipment and construction payables, as well as the bank journal book after the balance sheet date and verify whether those payables have been paid accordingly. (2) Check the original documents of transactions, such as acceptance checking forms, purchasing orders, and purchasing contracts. 4. Select certain samples of subsidiary ledgers of equipment payables, construction payables, and compensated equipment and constructions and obtain the relevant vouchers and attached original documents, then perform the following auditing steps: (1) Review the descriptions and amounts in the subsidiary ledgers and vouchers and check whether there are unusual items. (2) Compare the vouchers with the original documents and check whether the attached original documents are complete, and also check that the content, quantity, price, and amount are consistent with those in the vouchers. (3) Check whether the records of equipment payables, construction payables, and compensated equipment and construction payables are supported adequately and enclosed

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with the invoice, acceptance checking and receiving notes, construction settlement invoices, and asset transfer statements, and make sure that they comply with the records in the corresponding accounts -- “equipment in stock,” “materials in stock,” and “civil works construction investment.” 5. Check whether there is a debit balance in the subsidiary ledgers for equipment payables and construction payables, and if so look for the reasons and determine whether reclassification is necessary. 6. Check whether equipment payables and construction payables reflected in the financial statements and notes to the financial statements are properly classified and adequately disclosed.


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P a y r o l l P a y a b l e a n d We l f a r e P a y a b l e A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the payroll payables and welfare payables and check


financial statements or relevant audit working papers


general ledger, and subsidiary ledger


deviations in conjunction with inspection of the detailed transactions

(4) that an analytical review is performed to check whether there are unusual

fluctuations in payroll in the year under audit, and if so, investigate the causes and create a

record.

2. Select certain samples from the payroll payables and welfare payables subsidiary ledgers

and obtain the relevant vouchers and original receipts attached, the to carry out the following

auditing procedures:

(1) Review the descriptions and amounts in the subsidiary ledger and vouchers, then

check whether there are unusual items.


original documents are complete, and also check that the content, quantity, price, and amount

are consistent with those in the vouchers.

(3) In comparison with salary standards and working records of the Human Resources

Department, review whether the calculations of the salaries, bonuses, and allowances comply

with relevant rules and regulations and the evidence is adequate.

(4) Check whether the salary distribution record has been authorized and approved and

whether there are signatures of the receivers.

(5) Check whether the relevant amounts (such as housing funds, retirement pensions,

individual income taxes) have been deducted according to the rules and regulations.

(6) Review whether the accrued standards of welfare payables in the current year

comply with the relevant rules and regulations and the accrued amounts are calculated

accurately.

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(7) In comparison with the relevant rules and regulations of welfare usage, check the

original documents on the debit side to verify whether it is used for the stated purpose.

3. Compare the accumulated amounts on the credit side of the payroll payables and welfare

payables with the relevant accounting records of the costs and expenditures and check

whether they are consistent.

4. Check whether payroll payables and welfare payables reflected in the financial statements



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I n t e r e s t a n d F e e s P a y a b l e A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the interest and fees payable and check




general ledger, and subsidiary ledger



(4) that an analytical review is performed and interest and fees payable are compared with

the amounts of loans and loans transferred, and with respect to unusual conditions, investigate

the causes and focus on them in next auditing step.

2. Review whether the summarizing interest and fees payable of the subsidiary entity are

consistent with interest and fees receivable of the entity at a higher level, and if there are

discrepancies, investigate the causes to make the proper adjustments.

3. Check whether the interest and fees are paid to the entity at a higher level in a timely manner

and whether to undertake a complete series of administrative procedures. With respect to long-

term in suspense, investigate the causes and create a detailed record.


documents, and perform the following auditing steps:

(1) Review the descriptions and amounts and check whether interest and fees payable

transactions are compliant with the rules and regulations.



(3) Review the interest and fees payable calculation statements and check whether the

accrued base of interest and fees is consistent with that of the relevant debtor accounts, whether

interest and fee rates are consistent with the loan agreements and loan transferred agreements,

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and that the calculation is correct.

5. Check whether interest and fees payable reflected in the financial statements and notes to the



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N o t e s P a y a b l e A u d i t P r o g r a m

Audi t Pe r iod ____



1. Obtain or prepare the breakdown of the notes payable (refer to attached table) and check







2. Select certain samples from the breakdown and send confirmations to the note holders to

ascertain whether the note amounts are accurate.

3. Select certain samples from the subsidiary ledger, obtain the related vouchers and original


(1) Review the descriptions and amounts and check whether the transactions for material

purchasing and settlement of construction related to notes payable comply with the rules and

regulations.


original documents are complete, and check that the content, quantity, price, and amount are

consistent with those in the vouchers.

(3) By comparing them with the “notes payables reference book,” check whether the notes

issued are recorded completely and in a timely fashion and whether the references are

consistent with the records of the corresponding accounts – “equipment purchasing,” “civil

works construction investment,” etc., and check whether the notes payable are written off after

payment at maturity, and check whether the references are consistent with the corresponding

account – “cash in bank.”

4. With regard to the notes payable on which interest must be paid, recalculate the accrued

interest in terms of the records in the “notes payables reference book” and compare this with

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the relevant records in the “investment deferred” account.

5. With regard to overdue notes payable but not paid, investigate the reasons.

6. Check whether the notes payable reflected in the financial statements and notes to the

financial statements are properly classified and adequately disclosed. Check whether the

mortgaged commercial acceptance bills of exchange reflected in the financial statements and

notes to the financial statements are properly classified and adequately disclosed.


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Payables Balance Breakdown

Audit Period _____


Mortgage Issuing entity

Type of notes

Transaction description

Contract interest rate Due date

Name Amount

Face amount Notes

Total

Information Provider: Auditor: Audit Date: Reviewer: Review Date:

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O t h e r P a y a b l e A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the other payable, then check







(4) that an aging analysis is performed with respect to long-term in suspense, then

investigate the causes and focus on them in the next auditing step.

2. From the breakdown above, select material items to check their existence.

(1) Send confirmations.

(2) Prepare the statistical statements according to the confirmation replies.

(3) If the amount is not agreed to in the confirmation replies, investigate the causes and

create the record and make the adjustments.

(4) Send the confirmation again for those that have gone unanswered. If there is still no

feedback, check the relevant contract and agreement to determine the existence of the debt.

3. With respect to a balance on the debit side, investigate the causes and reclassify, if necessary.


documents, and perform the following auditing steps:

(1) Review descriptions and amounts and check whether the other payables transactions

are legitimate.

(2) Compare the vouchers with the original documents and check whether the content,

quantity, price, and amount are consistent.

5. Check whether other payables in the financial statements and notes to the financial


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Payable Balance Breakdown



Closing balance Aging Creditor name

Transaction abstract

Opening balance Original

currency RMB Less than 1

year 1-2 years

2-3 years

More than 3 years

Notes

Total


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Payables Audit Adjustment Form



Unaudited Amount Audited

amount at prior year

end Item Amount


Amount in the financial

statement:

Subsidiary ledger:

Equipment payables:

Construction payables:

Compensated equipment and

construction payables:

World Bank Loan interest

payables:

World Bank commitment fee

payables:

World Bank Loan application of

fund payables:

Welfare payables:

Payroll payables:

Notes payables:

Other payables:

Total


Audit Conclusion:


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H. Substantive testing of other payables

Other payables consist of various taxes that are due but not paid, infrastructural construction income, total responsibility construction surplus, and other funds.

1. The audit objective

The audit objectives in regard to other payables are these:

• Completeness Other payables are to be completely recorded and listed in the financial statements.

• Existence or occurrence Other payables listed in account book must verifiably exist.

• Accuracy Valuation, calculation, and recording for other payables must be accurate.


In keeping with accounting standards, other payables reflected in financial statement must be properly disclosed.

2. Audit Program Refer to the other payables audit program, Table 4-68.


For other payables audit working papers, including the other payables audit program and audit adjustment forms, refer to Table 4-68 through Table 4-70.

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O t h e r P a y a b l e s A u d i t P r o g r a m




1. Obtain the breakdown of the other payables and check







2. Obtain the taxes payable subsidiary ledger and carry out the following auditing steps:

(1) In conjunction with relevant transactions of the project entity within the current year,

check whether the project entity has paid all types of taxes in accordance with the rules and

regulations (for example, land holding taxes, farmland use taxes, investment direction

adjustment taxes, stamp taxes, etc.).

(2) Select certain samples and obtain the relevant vouchers and original documents, then

recalculate and check whether the calculation of the tax amounts is accurate and that the tax

payments are made in a timely fashion and are consistent with the records of the corresponding

accounts (for example, “investment deferred,” “cash in bank,” etc.).

3. With regard to project entities executing the project investment using the total responsibility

construction system, obtain the relevant responsibility contracts and understand corresponding

rules and regulations of total responsibility construction surplus distribution, and then recheck

whether the received surplus is calculated in accordance with the rules and regulations by

comparing it with the “construction surplus payable” subsidiary ledger and the relevant

vouchers and original documents. Also ascertain whether the construction surpluses payable to

the higher level are turned in a timely manner and whether the accounting treatment is accurate.

4. Obtain the subsidiary ledger of infrastructural construction income payables and check

whether the calculation of all types of infrastructural construction income, which include that

received during construction to be turned in to the higher level, is accurate and that the nature

of the income is explicit and consistent with the records in the corresponding accounts (for

example, “materials in stock,” “cash in bank,” etc.).

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5. Select certain samples from the infrastructural construction income payables subsidiary

ledger, obtain the relevant vouchers and original documents, then carry out the following

auditing steps:

(1) Review the descriptions and amounts and check whether the occurrences of transactions

of infrastructural construction income payables are legitimate.


attached original documents are complete, and also check that the content, quantity, price, and


6. Check whether the other payables reflected in the financial statements and notes to the



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Total Other Payables Audit Adjustment Form





Amount in financial

statements

subsidiary ledger:

Tax payables:

Infrastructural

construction income

payables:

Responsibility

construction surplus

payables:

Other payables:

Total


Audit Conclusion:


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I. Substantive Testing of Appropriation of Funds

Appropriation of funds refers to the project entity’s use of funds for organizing and managing infrastructural construction activities that derive from investment entities (superior authorities or entities).

1. Audit Objectives

The audit objectives in regard to appropriation of funds are the following:

• Completeness Appropriation of fund is to be completely reflected in the financial statements.

• Existence or occurrence Appropriation of funds recorded in the accounting books must verifiably exist.

• Accuracy Appropriation of funds must be recorded in accordance with the actual amounts appropriated from a superior entity.

. 2. The Audit Program

Refer to the appropriation of funds audit program, Table 4-70.


For appropriation of funds audit working papers, including the appropriation of funds audit program and audit adjustment forms, refer to Table 4-70 through Table 4-71.

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A p p r o p r i a t i o n o f F u n d s A u d i t P r o g r a m




1. Obtain or prepare the breakdown of the appropriation of funds and check







2. Review the project initiating documents, including the loan agreements, loan transfer

agreements, project assessment reports etc., in comparison with the records in the appropriation

of funds subsidiary ledger, then check whether the appropriation of funds is consistent with the

related agreements and contracts.

3. Obtain the appropriation of funds subsidiary ledger, select certain samples, and obtain the

relevant vouchers and original documents, then carry out the following auditing steps:


original documents are complete, and also check that the content, quantity, price, and amount of

are consistent with those in the vouchers.

(2) With regard to the additions within the current year, check whether the bank receiving

notices, bank payment notices, or asset allocation documents are enclosed, and that they are

consistent with the records of the corresponding accounts (for example, “fixed assets,” “cash in

bank,” etc.).

4. Check whether the appropriations of funds reflected in the financial statements and notes to

the financial statements are properly classified and adequately disclosed.


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Appropriation of Funds Audit Adjustment Form




Adjustment(+/-) W/P Ref. Audited Amount

Amount in Financial

Statements:

Subsidiary Ledger:

Total


Audit Conclusion:


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J. Substantive Testing of Retained Earnings

Retained earnings reflect all types of retained earnings used by the project entity, including trail-run earnings, the material transfer net, the counterclaim and nonperformance net, loan switching interest deviation, and infrastructural construction income, and total responsibility construction surplus in accordance with the rules and regulations.

1. Audit objectives

The audit objective in relation to retained earnings are these:

• Completeness The retained earnings are to be completely recorded in the financial statements.

• Accuracy Retained earnings calculations and recording must be accurate.


Retained earnings reflected in the financial statements must verifiably exist.

• Presentation and disclosure In keeping with accounting standards, retained earnings reflected in the financial statements are to be properly disclosed.

2. The audit program

Refer to the retained earnings audit program, Table 4-72.


For the retained earnings audit working papers, including the retained earnings audit program and audit adjustment forms, refer to Table 4-72 through Table 4-73.

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R e t a i n e d E a r n i n g s A u d i t P r o g r a m




1. Obtain or prepare the breakdowns of each type of retained earnings, then check







2. Obtain the retained earnings subsidiary ledger, in conjunction with the project entity’s

transactions within current year, and check whether the records of retained earnings are

complete, and test situations in which retained earnings have been transferred to current

accounts.

3. Select certain samples from the retained earnings subsidiary ledger and obtain relevant

vouchers and original documents, then carry out the following auditing steps:

(1) Review the descriptions and amounts and check whether occurrences of transactions

of retained earnings comply with the rules and regulations.


attached original documents are complete, and also check that the content, quantity, price,

and amount are consistent with those in the vouchers..

(3) With regard to the earnings obtained within the current year, in comparison with the

rules and regulations defined in the relevant trial-run documents, material transfer records,

loan transfer agreements, etc., recheck the accuracy of the calculations.

(4) With regard to the funds that have actually been used and transferred, check their

existence and eligibility in conjunction with the original documents.

4. Check whether the retained earnings reflected in the financial statements and notes to the



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Retained Earnings Audit Adjustment Form





Amount in financial

statement:

Subsidiary Ledger:

Total


Audit Conclusion:


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Section 3 Substantive Testing of Other Accounts

In addition to the above, the auditors should take other substantive tests into account, for example, subsequent events, loss contingencies, and statements of expenditures (SOE). Using information provided by the project implementing entities, interviews with management and relevant personnel, or consolidated analysis of the documentation as to contracts, policies, and original documents, etc., auditors can discover related events which are not found out through the auditing of certain financial statement items. Record the information obtained in the audit working papers and consider the effect on proper disclosure in the audit report. In general, there is no standard working paper available for this, due to the complicated circumstances of the different entities. In this case, it is the responsibility of the auditors to prepare audit working papers according to the particular circumstances.

A. Substantive testing of subsequent events

Subsequent events are events or transactions that have occurred between the balance sheet date and the last day of fieldwork and extending to the financial statement issue date that may require adjustment to, or disclosure in, the financial statements being reported. Considering the nature of the subsequent events, this can be divided into two categories: one has an impact on the financial statements directly; the other may have an impact on future transactions activities or valuations. For the first kind of events, in general, the auditor can get exact information before issuing the financial statements; therefore, this kind of event can be treated as a necessary adjustment event, and adjusted as are accounting items normally. It must be disclosed in the notes to the financial statements if the information provided late and it is impossible to make an overall adjustment to the financial statements. For the second kind of event, it must be disclosed in the notes to the financial statements, because it will have a serious impact on the entity’s future financial situation. If possible, include an estimate of the impact on its finances, too.

1. Audit Objectives

The audit objectives in regard to subsequent events are these:

• Determine whether significant events have occurred and have an impact on the financial statements of the current year after closing day.

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• Evaluate whether subsequent events are adequately disclosed in notes to the financial statements.


Refer to the subsequent event audit program, Table 4-74.


For subsequent event audit working papers, including the subsequent events audit program and audit adjustment forms, refer to Table 4-74 through Table 4-75.

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S u b s e q u e n t E v e n t A u d i t P r o g r a m




1. Through inquiry among project management, ascertain whether there have been

subsequent events in the project entity. Such inquiry includes the following:

(1) Project the current status that the accounting treatment has recorded based on

the data.

(2) Ascertain whether unusual accounting adjustments have been made or are

going to be made.

(3) Ascertain whether there have been losses in assets and project construction

due to unavoidable forces.

(4) Ascertain whether there have been new assurances, loans, or commitments.

2. In conjunction with the closing balance audit, review subsequent events, focusing

on material receipts and subsequent disbursements.

3. Recheck internal financial statements and other relevant management reports

prepared after the closing date and investigate whether the financial commitments

exist or other material events should be considered.

4. Recheck relevant accounting records after closing date and ascertain the existence

of relevant transactions and transaction content in the accounting period under audit.

5. Check the meeting minutes issued by the entity under audit after the closing date,

focusing on subsequent events that have had an impact on special purpose financial

statements and the project implementation status.

6. Inquire into declaration letters about subsequent events from the entity under audit

or from the lawyer of the entity.

7. Verify whether the subsequent events in the financial statements and notes to the


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Subsequent Event Audit Adjustment Form



Period Checking Records W/P Ref

From audit period end to last

day of fieldwork

From last day of fieldwork to

audit report issue date

Audit Conclusion:


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K. Substantive Tests of Contingency Contingency is an existing condition, situation, or set of circumstances that will ultimately be resolved when one or more future events either occur or fail to occur. Contingencies may take the form of gain or loss contingencies. Loss contingency must be adequately disclosed in notes to the financial statements, no matter the range of probability according to conservative policy. In contrast, it is usually not required that gain contingency be so disclosed. There are two types of loss contingencies: direct loss contingencies and indirect loss contingencies. The former refers to possible or potential loss stemming from the project entity directly, including outstanding litigation, outstanding claims for compensation, and tax disputes. The later refers to possible or potential loss stemming from third parties, such as acceptance of notes receivable.

1. Audit Objectives The audit objectives in regard to contingencies are these:

• To determine whether loss contingencies exist after the closing day.

• To evaluate whether loss contingencies are properly disclosed in notes to the financial statements.


Refer to the loss contingencies audit program, Table 4-76.

3. Audit Working Papers Refer to loss contingencies audit program and audit adjustment form (Table 4-76 - Table 4-77).

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L o s s C o n t i n g e n c y A u d i t P r o g r a m




1. Inquire among project management for the policies and working procedures related to the

assessment and control of loss contingencies.

2. Inquire in the project entity for explanation and assessment of the following:

(1) The project entity’s management representation letter, in which guarantees against all

loss contingencies are reflected in accordance with correlative rules and regulations of

accounting standards and the accounting system.

(2) All extant documents and vouchers of the project entity related to loss contingency.

(3) The current correspondence between the project entity and the banks, in which the

receivable pledge against a loan, the endorsements, and the warrants for other debts are to be

found.

3. Send confirmations to the corporation counsel and lawyer to obtain the amount of their legal

expenses as of the financial statement date, along with those up to their reply date. By

reviewing the invoices and explanations, check whether there are undisclosed loss

contingencies.

4. Inquire in the entity under audit about major legal proceedings from prior to or after the

account closing date.

5. Inquire about the declaration letter of the entity under audit regarding contingency loss.

6. Check whether contingency losses in the financial statements and notes to the financial



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Loss Contingency Audit Adjustment Form



# Record Checking Process W/P Ref.

Audit Conclusion


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L. Substantive Testing of Statements of Expenditure (SOE Forms)

Since 1984, World Bank has modified its usual requirements for documenting disbursements by using statements of expenditure (SOEs) to simplify the withdrawal and claims procedures when expenditure amounts are small and documentation is voluminous. Under the Statement of Expenditure (SOE) method, the borrower forwards to the World Bank an application for reimbursement of payments already made with a value below certain defined limits (the conditions are usually set out in the loan documentation), using an Application for Withdrawal with SOE forms as the only supporting documentation. The Bank requires the auditor to perform detailed auditing of all SOEs within the period under audit in accordance with the World Bank’s rules and regulations to ensure that the use of loans complies with the terms defined in the loan agreement.

1. Audit Objectives The audit objectives in regard to statements of expenditure are these:

• Disbursements are reviewed and approved by the supervisor and accurate and proper supporting documentation is to be attached.

• The use of disbursements conforms to those defined in the loan agreement.

• The accounting practices in regard to disbursements are in accordance with the rules and

regulations.

2. The Audit Program The auditors must audit SOEs in conjunction with compliance testing for the withdrawal and claims transaction cycle for which proper audit programs are to be selected. Disqualified disbursements and amounts that lack supporting evidence must be recorded and summarized during the tests.

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Chapter 5 – Substantive Testing Page 1 of 34

Chapter V Financial Statement Audit

While substantive testing involves the auditing of specific items in financial statements, this chapter deals with overall auditing of financial statements. Financial statements for World Bank financed projects are classified as operative and non-operative. Operative projects cover the financial statements of the auditee and special purpose financial statements for projects, while non-operative projects cover only special purpose financial statements for projects. Please refer to other auditing guidelines for financial statement auditing of auditees. Section 1 Overview of Financial Statement Audits Special purpose financial statements for World Bank financed projects are written documents prepared by the auditee on the basis of accounting information to present and report the ending project financial position, project progress, and implementation of the loan agreement, and is composed mainly of the project Balance Sheet, Summary of Sources and Uses of Funds by Project Component, Statement of Implementation of Loan (Credit) Agreement, Special Account Statement, and notes to financial statements. The objectives, content and special considerations of financial statements are outlined as follows:

A. The Objectives of Financial Statement Audits

In order to satisfy most of the needs of statement users, such as the World Bank and project authorities in charge, the audit procedures provided in this chapter are to be followed, so as to provide reasonable assurance of the legality, fairness and consistency of the financial statements prepared.

• Legality

Legality in regard to financial statements means that project entities are to prepare financial statements in accordance with national laws and regulations, accounting standards, relevant accounting regulations, and pertinent provisions of the World Bank; they are to disclose relevant items in notes to the financial statements; and they are to observe the structure, items, and content of financial statements as provided.

• Fairness Fairness in regard to financial statements means that financial statements are to present project financial positions, construction progress and receipts and disbursement of project funds fairly, in all material aspects; and accounting transactions occurring during the accounting period are to be reflected in the financial

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statements, without missing or concealing any business or accounting transactions.

• Consistency

Consistency in regard to financial statements means that project entities must prepare financial statements that are consistent in accounting measurements and completion methods, so that various statements and items in any corresponding relationship can be reconciled.

B. The Content of Financial Statement Audits

Financial statement audits shall focus on both the form and appearance and the intrinsic quality, in keeping with Chinese laws and regulations, accounting standards, relevant accounting regulations, and pertinent requirements of the World Bank.

1. The form and appearance of audits

The form and appearance of audits mainly involves completeness as to the types of statements, standardization of formats, soundness of content, regularity of completion methods, statement of data in a form that allows comparison between two periods, correctness of data calculation in the statement and reconciliation of relationships between statements, consistency between statements and accounts, adequate disclosure of major accounting policies, and material line items and business transactions requiring explanations to be dealt with in notes to the financial statements.

2. The intrinsic quality of audits The intrinsic quality of audit mainly concerns

• The regularity and legality of accounting treatments Full attention is to be paid to ascertaining whether illegal or irregular accounting treatment exists, such as transactions not entered into accounts, confusing various spending limits and entries in accounts with false information; determining whether receipts and disbursements presented in financial statements and relevant economic activities comply with the laws and regulations.

• The truth and fairness of the statements Financial statements must truly and fairly present the financial position and operating results of projects based on true business transactions.

• The appropriateness of the amounts for line items

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As all financial line items have their own specific meanings, with large or small amounts following regular patterns, auditors shall pay attention to inappropriate changes in the amounts of financial line items.

• Consistency between applicable accounting principles and the accounting methods adopted.

Accounting principles and accounting methods must be consistent with those in previous years or otherwise explained in statements.

C. Special Considerations in Financial Statement Audits

An Auditor’s Opinion may help improve the reliability of financial statements, but can neither ensure that each balance of financial statements is fairly presented nor provide assurance that project funds have not been misused, or that policies, procedures, controls, and financial positions examined will not change in the future. In the audit of Special Purpose Financial Statements for World Bank financed projects, the following issues shall be given special consideration: fair presentation of the sources and uses of funds for the project in Special Purpose Financial Statements; compliance with conditions for loan withdrawals, and appropriate use of World Bank loan funds; compliance with the loan agreements and other agreements in project procurement, financial provisions, environmental protection, and insurance. Section 2 Audits of Balance Sheets A Balance Sheet reflects, in a summary manner, the uses and sources of funds at the end of a project report period and can be used to examine increases or decreases in an auditee’s uses and sources of funds, as well as its mutual corresponding relationships, and to analyze and assess the utilization effectiveness of project construction funds.

1. The format and content of balance sheets

The structure of balance sheets fall into two parts: uses of funds and sources of funds, the former having 8 items and the latter 10 items. The auditee not applicable to capital construction investment loan shall not use two statement accounts: “investment loan receivable”, “capital construction expenditures to be offset”. The auditee not applicable to “unified borrowing and unified repayment” shall not use two statement accounts: “appropriation of investment loan”, “investment loan appropriated”. Fixed assets presented in this statement are only the fixed assets purchased and built by auditee specially for project management, while fixed assets delivered for use after the investment and completion of project are reflected in “fixed assets transferred”. The format of the Balance Sheet is shown in Table 5-1.

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Balance Sheet As of month/day/year

Project Name: Project Implementing Entity: Uses of funds Line

no.

Beginning

balance

Ending

balance

Sources of funds Line

no.

Beginning

balance

Ending

balance

I. Total project

expenditures

1 I. Total project

appropriation

funds

26

1. Fixed assets

transferred

2

2. Construction

expenditures to be

disposed

3

II. Project capital

and capital

surplus

27

3. Investments

transferred out

4

Grants

4. Construction in

progress

III. Total project

loan

28

II. Investment loan

receivables:

5

1. Total project

investment loan

29

World Bank

investment

loan receivables

6

(1) Foreign loan

30

III. Appropriation of

investment loan

7

IDA 31

IBRD 32

IV. Equipment 8 Technical

cooperation

33

Equipment

losses in suspense

9

Co-financing 34

V. Total cash and

bank

10 (2) Domestic

loan

35

1. Cash in bank 11 2. Other loan 36

Special account 12 IV. Investment

loan

appropriated

37

2. Cash on hand 13 World Bank

loan

38

VI. Total prepaid

and receivables

14 V. Bond fund 39

World Bank

loan interest

15

VI. Construction

expenditure to be

40

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receivable offset

Uses of funds Line

no.

Beginning

balance

Ending

balance

Sources of funds Line

no.

Beginning

balance

Ending

balance

World Bank loan

commitment fees

receivable

16

VII. Total

payables

41

World Bank

loan service

fees receivable

17

World Bank

loan interest

payables

42

VII. Marketable

securities

18 World Bank

loan commitment

fees payable

43

VIII. Total fixed

assets

19 World Bank

loan service

fees payable

44

Fixed assets, cost 20 VIII. Other

payables

45

Less: Accumulated

depreciation

21 IX. Appropriation

of funds

46

Fixed assets, net 22 X. Retained

earnings

47

Fixed assets pending

disposal

23

Fixed assets losses

in suspense

24

Total use of funds 25 Total sources of

funds

48

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2. Audit procedures for balance sheets

Audit Procedures for Balance Sheets are shown in Table 5-2. As auditing of various items for Balance Sheets has been discussed especially in relevant chapters, audit procedures provided herein are mainly designed for accounting transfers and statement preparation.

3. Audit working papers for balance sheets

The audit working papers for the Balance Sheet includes the Balance Sheet audit procedure forms and examination and approval forms, Form 5-2 through Form 5-3.

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(Name of Auditing Institution) Balance Sheet Audit Procedure Form

Audit Period ______ Project Name: Project Implementing Agency:

Audit procedures Implementation explanations

Audit working paper reference number

1. Compare the notes to the financial statements for the current year and those for the previous year, sample relevant accounting records, determine whether the accounting policies followed and accounting methods adopted in preparing statements are consistent with those in the previous year.

2. In contrast to audited financial statements

for the previous year, determine whether the beginning balances of statements are consistent with the ending balances for the previous year; if an inconsistency occurs, the reason must be found out and requires the auditee to explain in notes to the financial statements.

3. In contrast to business records related to

asset management and works construction, determine whether financial statements are appropriate on the whole and sound in content.

4. To examine accounts and statements,

determine whether all line items are consistent with the auditee’s general ledger and subsidiary ledger, and statements submitted by all sub-project entities.

5. Determine whether all line items are

presented in statements in a correct manner. 6. Determine whether the Balance Sheet is

reconcilable with other statements in a

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correct manner. Specifically, determine

(1) whether the ending balances of “World Bank Loan” and “Domestic Loan” on the Balance Sheet conform to corresponding items in the Summary of Sources and Uses of Funds by Project Component.

(2) whether the ending balance of “Construction in Progress” on the Balance Sheet conforms to “Construction in Progress” in the Summary of Sources and Uses of Funds by Project Component.

(3) whether the ending balance of “Other Expenditures” on the Balance Sheet conforms to that in Summary of Sources and Uses of Funds by Project Component.

(4) whether the difference between the ending balance and the beginning balance of “World Bank Loan” on the Balance Sheet conforms to “Current-year Withdrawals” in the Statement of Implementation of Credit Agreement; and whether the ending balance in the former conforms to “Cumulative Withdrawals” in the latter.

(5) Whether the sum of “Project Appropriation” and “Project Capital and Project Capital Surplus” conforms to “Counterpart Financing” in the Statement of Implementation of Credit Agreement.

(6) whether changes in the beginning balances and ending balances of receivables, payables, Cash and Bank and other accounts on the Balance sheet (any other accounts except World Bank loans, counterpart financing, receivables, payables, and Cash and Bank) conform to corresponding items in the Statement of Implementation of Credit Agreement.

(7) whether the balance of “Special

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Account” under “Cash in Bank” conforms to the ending balance in the Special Account Statement.

7. Using market exchange rates quoted by the state at the end of year, determine whether foreign currencies in financial statements have been converted in a correct manner and in accordance with regulations.

8. Determine whether the sub-totals and totals in financial statements are calculated in a correct manner; and whether uses of funds and sources of funds are balanced.

Audited by: Audit Date: Reviewed by: Date of Review:

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Balance Sheet Examination and Approval Form Audit Period _________

Project Name: Project Implementing Agency: Unit: Items Unexamined

balances for

previous year

Beginning

balance for

current

year

Diffe-

rence

Examined

beginning

balance for

current

year

Unexamined

ending

balance

(RMB)

Adjust--

ments

(+/-)

Examined

ending

balance

Uses of funds

I. Total project

expenditures

1. Fixed assets

transferred

2. Construction

expenditures to be

disposed

3. Investments

transferred out

4. Construction in

progress

II. Investment

loan receivables

World Bank

investment

loan receivable

III. Appropriation

of investment

loan

IV. Equipment

Equipment

Losses in

suspense

V. Total cash and

bank

1. Cash in bank

Special account

2. Cash on hand

VI. Total prepaid

and receivables

Line Items Unexamined

balances for

Beginning

balance for

Diffe-

rence

Examined

beginning

Unexamined

ending

Adjust--

ments

Examined

ending

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previous year current

year

balance for

current

year

balance

(RMB)

(+/-) balance

World Bank

loan interest

receivable

World Bank

loan

commitment

fees receivable

World Bank

loan service

fees receivable

VII. Marketable

securities

VIII. Total fixed

assets

Fixed assets, cost

Accumulated

depreciation

Fixed assets, net

Fixed assets

pending disposal

Fixed asset losses

in suspense

Total use of funds

Sources of funds

I. Total project

appropriation

funds

II. Project capital

and capital

surplus

Grants

III. Total project

loan

1. Total project

investment loan

Line items Unexamined

ending

balance for

previous year

Beginning

balance for

current

year

Diffe-

rence

Examined

beginning

balance for

current

year

Unexamined

ending

balance

(RMB)

Adjust--

ments

(+/-)

Examined

ending

balance

(1) Foreign loan

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IDA

IBRD

Technical

cooperation

Co-financing

(2) Domestic loan

2. Other loan

IV. Invest loan

appropriated

World Bank

loan

V. Bond Fund

VI. Construction

expenditure to be

offset

VII. Total

payables

World Bank

loan interest

payable

World Bank

loan commitment

fees payable

World Bank

loan service

fees payable

VIII. Other

payables

IX. Appropriation

of funds

X. Retained

earnings

Total sources of

funds

Abstract of

problems

Abstract of

problems

Audit conclusion:

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Audited by: Date of Audit: Examined by: Date of Examination:

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Section 3 Audit of the Summary of Sources and Uses of Funds by Project Component

The Summary of Sources and Uses of Funds by Project Component is the statement that comprehensively reflects the project entity’s current period sources and uses of funds, as well as project construction progress. This statement deals with current period sources and uses of project funds, project construction progress, and fulfillment of project construction objectives.

A. The format and content of the Summary of Sources and Uses of Funds by Project Component

The Summary of Sources and Uses of Funds by Project Component has two different parts. The first part reflects the project entity’s current period sources and uses of funds, while the second part reflects the cumulative project construction funds appropriated, self-financed and borrowed, from the inception of the project to the end of this year, as well as uses thereof. The first part of the Summary reflects current period amounts and cumulative amounts by Sources of Funds, Uses of Funds, and the discrepancies between the two. The Sources of Funds column is to be reflected by categories according to different channels, in particular, Current Period World Bank Loans shall match “Current Period Withdrawals’ in the statement of implementation of the credit agreement; Cumulative Amounts Completed shall match “Cumulative Withdrawals” in the statement of implementation of the credit agreement and “Foreign Loan” on the balance sheet. Counterpart funds consist of Project Appropriation, Project Capital and Capital Surplus, Project Investment Loans–Domestic Loans, Appropriation of Investment Loans (not including the World Bank Loan) and Bond Funds, its cumulative amount shall match the sum of the corresponding columns of the balance sheet. The uses of funds column shall be stated according to project component listed in the project evaluation documents. The Difference column is mainly used for interpreting the difference between the above-mentioned Sources of Funds and Uses of Funds, including Change in Receivables, Change in Payables, Change in Cash and Bank, and changes in other accounts, and its amounts are to match the discrepancies between beginning balances and ending balances of relevant items on the balance sheet. The second part of the Summary reflects the project entity’s uses of cumulative capital construction funds appropriated and borrowed from the inception of the project to the end of the current accounting period. The Summary falls into two columns: Project Component and Project Expenditures. Project Component is to be stated according to the project components listed in the project evaluation documents and match the items listed under the column “Uses of Funds” in the first part. Project Expenditures includes Cumulative Amount, Assets Transferred, Works in Progress,

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and others. In particular, total Works in Progress is to match corresponding columns on the balance sheet. The format of the Summary of Sources and Uses of Funds by Project Component is shown in Form 5-4.

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Form 5-4 (01) Reference Number:

Summary of Sources and Uses of Funds by Project Component For the Period Ended month/day/year

Project Name: Preparation Entity: Unit: RMB Yuan Current Period Cumulative

Current year budget Current

period actual

Current

period %

completed

Life of

PAD

Cumulative

actual

Cumulative

%

completed

Total sources

of funds

I. World Bank Loan

1. IDA

2. IBRD

3. Grants

4. Co-financing

II. Counterpart financing

(Note 1)

1.

2.

3.

Total uses of funds

(by project component)

(Note 2)

Difference

1. Change in receivables

2. Change in payables

3. Change in cash and

bank

4. Other

Note 1: By sources of funds or nature.

Note 2: Uses of funds are listed by selecting large items from project component in evaluation report.

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Form 5-4 (02) Reference Number:

Summary of Sources and Uses of Funds by Project Component For the Period Ended month/day/year

Project Name: Preparation Entity: Unit: RMB Yuan

Project Expenditures

Assets Transferred

Project

component Cumulative

amount Fixed

assets

Current

assets

Intangible

assets

Deferred

assets

Works in

progress

Other

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B. Auditing procedures for the Summary of Sources and Uses of Funds by Project Component

Auditing procedures of the Summary of Sources and Uses of Funds by Project Component are shown in Form 5-5. As separate chapters deal with auditing of all line items thereof, auditing procedures provided herein are mainly designed for posting accounts and preparing statements.

C. Audit working papers for the Summary of Sources and Uses of Funds by Project Component

Audit working papers for the Summary of Sources and Uses of Funds by Project Component include the auditing procedures and examination and approval forms for the Summary of Sources and Uses of Funds by Project Component, Form 5-5 through Form 5-6.

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Summary of Sources and Uses of Funds by Project Component Audit Period _________


Auditing procedures Explanation of implementation

Auditing working papers reference number

1. Ascertain whether the accounting policies followed in statements and accounting methods selected conform to those of the previous year, by comparing current year and previous year notes to financial statements and examining accounting records on a sampling basis. 2. Ascertain whether the beginning balances of statements conform to the ending balances of the previous year in contrast to audited financial statements of the previous year; if discrepancies arise, reasons must be found, and the auditee is to be urged to explain in the notes to financial statements. 3. Examine the overall reasonableness of statements and completeness of content thereof in contrast to project evaluation reports and business records of assets management, works construction, and application for reimbursements and withdrawals. 4. Ascertain whether project construction content, and amounts of estimates conform to the World Bank loan agreements and estimates approved by the departments concerned. 5. Examine whether all line items conform to the auditee’s general ledger and subsidiary ledger and statements submitted by sub-project entities. 6. Examine whether the statement can be reconciled with other statements (see Item 6 of the Audit Procedures for Balance Sheet Form). 7. Review whether sub-totals and totals of statements have been correctly calculated.

Auditor: Date of Audit: Review Personnel: Date of Review:

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Examination and Approval Form of Summary of Sources and Uses of Funds by Project Component

Audit Period _______ Project Name: Project Implementing Entity:

Line items

Unexamined

balance for

previous

year

Beginning

balance

for

current

year

Diffe-

rence

Examined

beginning

balance

for

current

year

Unexamined

ending

balance

(RMB)

Adjust-

ments

(+/-)

Examined

ending

balance

Project Loan:

(Appropriation)

World Bank Loan

Domestic Loan

Bond Fund

State Appropriation

Joint Appropriation

Self-financing

Project expenditures:

Fixed assets transferred

Construction investment

Equipment investment

Deferred investment

Other investments

Other expenditures

Abstract of problems:

Audit conclusion:


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Section 4 Audit of the Statement of Implementation of Loan (Credit) Agreements

The Statement of Implementation of Loan (Credit) Agreement reflects the current year and cumulative withdrawals on World Bank loans by the auditee, which provides appropriate information concerning loan withdrawal progress.

A. The format and content of the Statement of Implementation of Loan (Credit) Agreement

The Statement of Implementation of Loan (Credit) Agreement consists of four items: Category, Loan Agreement, Current-year Withdrawals, and Cumulative Withdrawals. Category reflects the content of loan withdrawals, generally classified into civil works, goods, consulting services and training, unallocated and special accounts. Loan Amount reflects contractual amounts of World Bank loans utilized by the auditee. Current-year Withdrawals reflect the auditee’s current year utilization of World Bank loan funds. Cumulative Withdrawals reflect the auditee’s cumulative utilization of World Bank loan funds from the inception of the project to the end of the current accounting period. Special Accounts shall be stated in the column of Cumulative Withdrawals, with the ending net amounts advanced to Special Accounts (the discrepancies between the amount advanced by the World Bank and the total amount recovered by the World Bank) rather than the ending balance of Special Account. The format of the Statement of Implementation of Loan (Credit) Agreement is shown in Form 5-7.

B. Auditing procedures for the Statement of Implementation of Loan (Credit) Agreement

The basic purpose of the Statement of Implementation of Loan (Credit) Agreement audit is to verify withdrawals by ascertaining whether withdrawals are supported by adequate documents, properly authorized, and conform to the loan agreement. The Auditing Procedures for the Statement of Implementation of Loan (Credit) Agreement Form is shown in Form 5-8.

C. Audit working papers for the Statement of Implementation of Loan (Credit) Agreement

The audit working papers for the Statement of Implementation of Loan (Credit) Agreement Form include the Audit Procedures Form for the Statement of Implementation of Loan (Credit) Agreement and the Examination and Approval Form for the Statement of Implementation of Loan (Credit) Agreement, Form 5-8 through Form 5-9.

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Statement of Implementation of Loan (Credit) Agreement For the Period Ended month/day/year

Project Name: Preparation Entity: Unit: USD

Current year withdrawals Cumulative withdrawals Category Loan (Credit)

amount (USD) USD RMB USD RMB

1. Civil works

(1)

(2)

(3)

2. Goods

(1)

(2)

(3)

3. Consulting services and

training

(1)

(2)

(3)

4. Unallocated

(1)

(2)

5. Special account

Total

Additional Information: 1.Cumulative IBRD loan funds written off, USD _____. Including: current-year IBRD loan funds written off, USD _____. 2. Cumulative IBRD loan funds repaid, USD ____. Including: current-year IBRD loan funds repaid, USD _____. 3. Advance to Special Account, USD ____, equivalent to RMB Yuan _____. 4. Exchange rates: USD1 = RMB Yuan _____. 5. Current-period ending advance to the Special Account.

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Audit Procedures Form of Statement of Implementation of Loan (Credit) Agreement

Audit Period _________ Project Name: Project Implementing Entity:

Audit procedures

Explanation of implementation

Audit working papers ref. No.

1. Ascertain whether the accounting policies followed in statements and accounting methods selected conform to those of the previous year by comparing current year and previous year notes to financial statements and examining relevant accounting records on a sampling basis. 2. Ascertain whether the beginning balances of statements conform to the ending balances of the previous year in contrast to audited financial statements of the previous year; if discrepancies arise, reasons must be found, and the auditee is to be urged to explain in the notes to financial statements. 3. Examine whether the statement can be reconciled with other statements: (1) The column of Cumulative Withdrawals in Special Account of this statement shall conform to Outstanding Amount Advanced to the Special Account at month/day/year of Part B of the Special Account Statement. (2) Refer to Item 6 of the Audit Procedures Form of the Balance Sheet for other reconciliation relationships. 4. In contrasting the loan agreement to the subsidiary ledger of extended borrowings, examine: (1) whether Project Category and Loan Amount conform to the loan agreement. (2) whether Current Year Withdrawals, Cumulative Withdrawals, and Cumulative Loan (Credit) Funds in the additional information conform to the subsidiary ledger of “Project Investment Loans–World Bank Loans. 5. Examine whether Cumulative Withdrawals conform to the World Bank’s monthly disbursement report on the project for December. If discrepancies arise, a list of discrepancy items shall be obtained or prepared, to confirm World Bank transfers concerning whether these discrepancy projects have been received in a timely fashion and the accounting treatment has been done accordingly. 6. Obtain the market exchange rates released by the state

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at the end of year to check whether foreign currencies in financial statements are correctly converted and exchange rates used in conformity with the regulations. 7. Review whether the sub-totals and totals of the Review Statement have been correctly calculated. Auditor: Date of Audit: Review Personnel: Date of Review:

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Examination and Approval Form for the Statement of Implementation of Loan (Credit) Agreement

Audit Period _________ Project Name: Project Implementing Entity: Line Items

Unexamined

balance for

previous

year

Beginning

balance for

current

year

Diffe-

rence

Examined

beginning

balance for

current

year

Unexamined

ending

balance

(RMB)

Adjust-

ments

(+/-)

Examined

ending

balance

Abstract of problems:

Audit conclusion:


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Section 5 Audit of Special Account Statements

The Special Account is a special account set up by borrower with a local bank, through which the World Bank transfers funds to borrowers in advance of project disbursements. The sources of the funds in the Account generally include the World Bank initial deposit and subsequent replenishments; the uses of funds are in the form of either direct disbursements from the Special Account or reimbursements to the borrower for disbursements already made; other activities in the account could include interest on outstanding balances and bank charges. In order to make sure that the project entity uses the Special Account in conformity with the regulations and the funds advanced by the World Bank are used for specified purposes, applicable accounting regulations and the World Bank require the project entity (the project entity which manages the Special Account) to prepare the Special Account Statement, so as to reflect current year receipts and disbursements, as well as the reconciliation of the Special Account.

A. The Format and Content of the Special Account Statement

Special Account Statement consists of Part A and Part B. Part A reflects account activity for the current period; while Part B reflects account reconciliation for the current period. Special Account Statement shall be stated according to relevant records of Special Account journal, giving consideration to reconciliation and corresponding relationships among line items. The format of Special Account Statement is shown in Form 5-10.

B. Auditing Procedures for the Special Account Statement

The auditing objective of the Special Account Statement is to verify the truthfulness and regularity of Special Account withdrawals, expenditures, and balances. The Special Account Statement audit shall be focused on

1. whether Special Account funds are withdrawn for unspecified uses for temporary reasons and then transferred back into the account.

2. whether the Special Account Statement conforms to the World Bank transfers, monthly disbursement report, and capital in transit report at the end of the reporting period.

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Form 5-10 Reference Number: (Name of Auditing Institution) Special Account Statement For the period ended month/day/year

Project Name: Depository Bank /Account No.: Project Implementing Entity: Currency: Item Amount Part A: Account activity for the period Beginning balance Add: Total amount deposited by World Bank Total interest earned this period if deposited in Special Account Total amount refunded to cover ineligible expenditures Deduct: Total amount withdrawn Total service charges if not included in above amount withdrawn Ending balance Part B: Account Reconciliation 1. Amount advanced by World Bank Deduct: 2. Total amount recovered by World Bank 3. Outstanding amount advanced to the Special Account at month/day/year 4. Ending balance of Special Account at month/day/year Add: 5. Amount claimed but not yet credited at month/day/year Application No.: Amount: _____________ ________

6. Amount withdrawn but not yet claimed 7. Cumulative service charges Deduct: 8. Interest earned 9. Total advance to Special Account accounted for at month/day/year

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Audit Procedures Form for the Special Account Statement Audit Period ___________


Audit procedures

Explanation of implementation

Audit working papers

reference no. 1. Ascertain whether the beginning balances of the statements conform to the ending balances of the previous year in contrast to audit working papers of the previous year; if discrepancies arise, reasons must be found, and the auditee is to be urged to explain in the notes to financial statements. 2. Examine whether the statement is correctly reconciled by implementing the following auditing procedures: (1) Examine compliance with the Balance Sheet, Summary of Sources and Uses of Funds by Project Component, and Statement of Implementation of Loan (Credit) Agreement (refer to auditing procedures for the balance sheet). (2) Examine whether the Special Statement itself has correct reconciliation relationships. 3. Ascertain whether ending balances are correct in contrast to bank statements, World Bank transfers, subsidiary of advance to Special Statement.

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(Name of Audit Institution)

Special Account Statements Adjustment Form

Audit Period____________________ Project Name: Project Implementing Entity: Line Item

Unexamined Balance for Previous year

Beginning Balance for current year

Diffe- rence

Unexamined beginning balance for current year

Examined ending balance (RMB)

Adjust- ments

Examined ending balance

Abstract of problems: Audit conclusion: Auditor: Date of Audit: Review Personnel: Date of Review:

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Section 6 Audit of Consolidated Financial Statements The World Bank loans are mainly granted to specific projects, after having entered into agreement with the World Bank for obtaining loans, the Ministry of Finance, as the legal representative of the Chinese government, usually relends loans to various ministries in charge, provincial-level local governments or state-owned banks, which may relend the loans to their affiliated agencies or project entities. The project office for the World Bank loans is usually established by ministries in charge, provincial-level local governments, to oversee project implementation under its jurisdiction in a unified manner and to prepare consolidated financial statements at each level, while consolidated financial statements submitted to the World Bank shall be prepared by the project offices under ministries in charge, provincial-level local governments. The project offices under ministries in charge or provincial-level local governments shall prepare consolidated financial statements in accordance with statements at their own levels and financial statements of their affiliated sub-project entities. I. The Format and Content of Consolidated Financial Statements Consolidated financial statements consist of consolidated Balance Sheet of Project, Summary of Sources and Uses of Funds by Project Component, Statement of Implementation of Loan (Credit) Agreement, whose formats and content are the same as those of similar financial statements of individual project entity. II. Audit Procedures for Consolidated Financial Statements Audit procedures of consolidated financial statements are shown in Form 5-13. III. Audit Workpapers of Consolidated Financial Statements Audit workpapers of consolidated financial statements mainly include Audit Program for Consolidated Financial Statements, as shown in Form 5-13.

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Form 5-13 Reference Number: (Name of Audit Institution)

Audit Program for Consolidated Financial Statements

Audit Period_________ Project Name: Project Implementing Entity: Audit procedures

Explanation of implementation

Audit workpapers Reference number

1. Examine whether the scope of statement consolidation is appropriate by obtaining project agreement, relending agreement and documents related to statement submission and consolidation. 2. Ascertain whether procedures and methods for statement consolidation conform to regulations by obtaining workpapers of consolidated statements. 3. Ascertain whether hedging items and amounts are correct by obtaining or preparing list of hedging items. (List of hedging items shall include the following items: Appropriation of Investment Loan vs Investment Loan Appropriated; World Bank Loan Interest Receivable, World Bank Loan Commitment Fee Receivable, Uses of Funds Receivable vs World Bank Loan Interest Payable, World Bank Loan Commitment Fee Payable, Uses of Funds Payable; Project Expenditures vs Project Appropriation Funds as well as other transactions within the entity) 4. Audit reports prepared by audit institutions at lower levels shall be carefully reviewed to ensure appropriate consolidation of financial statements of affiliated project entities and financial statements at the same levels, giving consideration to the following matters: (1) Main problems existing in projects and adjustments to statements. (2) Non-compliance with applicable accounting policies. (3) Type of Auditor’s Opinion on financial statements of affiliated project entities.

Auditor: Date of Audit: Review personnel: Date of Review:

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Section 7 Audit of Notes to Financial Statements Notes to financial statements refer to explanation of relevant line items in financial statements, act as a supplement to financial statements, mainly designed to further explain items that can not be included into financial statements or are not adequately disclosed, for the purpose of better understanding of financial statements. I. The Format and Content of Notes to Financial Statements Notes to financial statements of the World Bank financed projects are mainly in written form, consisting of accounting policies, explanation of line items in financial statements, disclosure of material matters, description of project implementation. II. Audit Procedures for Notes to Financial Statements Audit Procedures for Notes to Financial Statements are shown in Form 5-14. III. Audit Workpapers of Notes to Financial Statements Audit workpapers of Notes to Financial Statements consist of Audit Procedures Form for the Notes to Financial Statements, Audit Procedures Form for Financial Statements, as shown in 5-14.

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(Name of Audit Institution)

Audit Program for Notes to Financial Statements

Audit Period_________

Project Name: Project Implementing Entity: Audit Procedures Explanation

of implement- tation

Audit workpapers Reference number

1. Ascertain whether notes to financial statements are complete and appropriate, specifically include the following items in accordance with relevant documents released by the Ministry of Finance: (1) major accounting policies; (2) explanation of line items in financial statements; (3) disclosure of material matters: promised matters, contingent

matters, subsequent matters and associated transactions; (4) explanation of project implementation includes: project

works, implementation of loan (credit) agreement, allocation and use of counterpart funds, the Special Account Statement disbursements and replenishments, bidding purchase disbursements, sources and custody of funds in the loan repayment reserve account, repayment of the World Bank loans, exchange rate and exchange rate risk losses and gains.

(5) significant issues in other financial accounting to be explained.

2. Examine the correctness of notes to financial statements based on compliance tests and substantive tests. 3. Ascertain whether explanations in notes to financial statements comply with other line items in financial statements.


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Chapter 6 – Audit Report Page 1 of 40

Chapter VI The Audit Report

Preparing and issuing audit reports are two key tasks and the final result of a World Bank Loan Project Audit. There are two parts to this chapter: first, the steps in preparing audit reports, and second, the format, contents, and reporting requirements for audit reports.

Section 1 Steps in Preparing Audit Reports Audit reporting initiates once substantive testing is completed. The steps in preparing audit reports usually include a review of working papers, summarization of audit evidence, consideration of materiality, formulation of an opinion, testing of trial balances, communicating with the project entity, reaching audit conclusions, and drafting the audit report. A. Undertaking final review of the working papers Working papers are the basis of audit reporting. Therefore, the first step is to carry out a final review of working papers and make them more rational and systematic.

1. Working paper review matters During the working paper review, the following matters must be taken into consideration: • The reviewer must be a supervisor or an auditor at the same rank as the field

auditor. The reviewer must be an experienced professional, familiar with the subjects of the working papers.

• The review is to be done with clear objectives. As the review is not simply a repetition of the field audit, it has its distinctive checkpoints and objectives. The key points include (1) whether the formulation of the working papers meets relevant standards, (2) whether the audit methodology is properly used, (3) whether the documents referenced are true and reliable, (4) whether audit evidence collected is sufficient and rational, (5) whether professional judgments are well grounded, (6) whether relevant laws and regulations have been correctly quoted, and (7) whether audit conclusions are reasonable.

• The reviewer is to record his/her work and present a written review opinion. The review records and opinions are complementary to the field working papers and serve as a source for the final audit conclusions. Review opinions and records can either be incorporated into the reviewed working papers or documented separately.

• The reviewer can ask the field auditor questions and consider and document

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relevant doubtful questions in the working papers. When the reviewer believes there are questions in the working papers that need further clarification, he/she can ask the field auditor to reconsider these questions in a timely manner and formulate additional working papers.

• All reviewers must sign and date the reviews they do. The signatures must not only mark the work done, but help to clarify responsibility between the auditor and reviewer.

2. Documenting review of the working papers

During the review process, if the reviewer finds any questions unclear or without sufficient supporting evidence, he/she can ask the field auditor to perform additional audit procedures. The reviewer’s work is to be recorded properly for follow-up and implementation. Once a doubtful problem is put forward, the reviewer’s opinion is to be filled in on the Review Form for Working Papers (see Form 6-1) and reported to the field auditor for supplementary auditing. The field auditor is to record the results of additional auditing on the Review Form and present it to the reviewer for further examination. The review of working papers is not intended to amend original working papers. It cannot alter or replace an original working paper; instead, it only documents the review opinions on the Review Form.

3. Summarization of Audit Materials

Once the working papers have been reviewed, all audit materials shall then be summarized in order to categorize and analyze differences and irregularities found through the audits. • Aggregation of audit differences All accounting misconduct or errors must have been documented as items on the audit adjustment form during fieldwork. Therefore, an aggregation of audit differences is actually a summing up and categorization of all adjustment items according to the materiality of these differences (including the nature, amount, and impact on financial statements of these differences or errors). The adjustment items above the materiality level should be corroborated in the Summary Form for Material Adjustments and the items below the materiality level should go into the Summary Form for Ordinary Adjustments.

Since an adjustment is to be recorded in both debit and credit journals, the aggregation should be made without conflict between the two audit adjustment forms and cannot be calculated repeatedly. The Summary Form for Material Adjustments covers all adjustment items with

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individual attributes above the materiality level. If the audited entity refuses to adjust material items, the auditor’s opinion may be altered. See Form 6-2 for the Summary Form for Material Adjustment Items.

The Summary Form for Ordinary Adjustments summarizes the adjustments below the materiality level. Because these items do not have a significant influence on financial statements, the auditor’s opinion will usually not be changed, no matter whether the entity makes amendments or not. See Form 6-3 for the Summary Form for Ordinary Adjustments. • Formulating the Summary of Problems Found During fieldwork, while auditing the entity’s business cycles and financial statements, the auditor may detect irregular activities against applicable state laws and regulations or loan agreements that have occurred in the business process, or the auditor may discover weak points in the entity’s internal control system. All these problems or deficiencies must be recorded in the working papers for compliance testing or on audit adjustment forms during the audit. While in the reporting stage, all such problems found are summarized on the Summary of Problems Found Form. And depending on the nature of the deficiency and the amounts involved, these problems may be further categorized on four sub-forms, namely, the Summary of Questioned and Unsupported Costs, Summary of Irregularities under State Laws, Summary of Irregularity under Loan Agreements, and Summary of Internal Control Deficiencies.

Summary of Problems Found

Based on the working papers prepared through compliance testing and the audit adjustment form for substantive testing, the doubtful problems are analyzed and entered on the Summary of Problems Found, with the nature, amount, related regulations, and supporting explanations attached. See Form 6-4 for the Summary of Problems Found.

Summary of Questioned and Unsupported Costs

Once questioned or unsupported project expenditures found, if World Bank loans are involved, the Summary of Questioned and Unsupported Costs is to be prepared. There are two sections in the summary: the main form and additional explanations, Form 6-5 (1) and Form 6-2 (2). The following points are to be taken into consideration in filling them out. • Only questioned or unsupported expenditures involving World Bank loans

occurring in the reporting period are to be included. Expenditures that are not related to the World Bank or occurred in previous years must not be included;

• Questioned costs refer to money spent against loan agreements and World

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Bank stipulations. The major clue is reimbursement with false documents or other documents not related to the project.

• Unsupported costs refer to expenditures lacking sufficient, persuasive, or pertinent supporting evidence. Common signs include lack of sufficient supporting evidence or procedures;

• All the problems found by audit must be reported truthfully in the spirit of materiality. In addition, explanations must be provided, including reasons, related standards, the impact on the project, whether reimbursement was made or not, audit recommendations, and corrections made by the entity.

• All doubtful expenditures paid through special accounts or not yet reimbursed by the World Bank shall also be included on the form.

Summary of Irregularities under State Laws and Regulations, Form 6-6

This summary covers all irregularities under state laws and regulations. For for-profit projects, this summary includes both irregularities relating to project implementation and problems relating to other business performed by the entity. For non-profit projects, only irregularities relating to the project are examined

. The Summary of Irregularities under State Laws and Regulations is usually prepared by analyzing the Summary of Problems Found. Similarly, the explanations also include reasons, related standards, the impact on the project, concurrent situations, audit recommendations, and corrections made by the entity.

Summary of Problems under Loan Agreements

This summary covers problems under loan agreements and World Bank stipulations. But only the problems involving large amounts or problems that may significantly hinder project objectives are to be filled in. Common misconduct includes the sale of materials or equipment purchased with World Bank loans, misappropriation or out-lending of project funds, delays in World Bank reimbursement, delays in counterpart financing, misuse of reimbursed funds, overstatement or understatement of counterpart funds, late appropriation of counterparts funds, unreasonable refinancing, violations against loan agreements on fund allocations to sub-projects and labor costs, tardiness in construction, losses and waste, low-efficiency of projects, low quality of construction, discrepancy between real construction and plans;

Problems listed on the two previous summary forms should not be repeated in this summary. See Form 6-7 for the Summary of Problems under World Bank Loan Agreements. This summary is to be filled according to the working papers made during compliance testing. Necessary explanations are to be given, including reasons, related standards, the impact on the project, concurrent situations, audit

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recommendations, and corrections made by the entity.

Summary of Internal Control Deficiencies Internal control deficiencies are weak points in the internal control system that may affect the fairness of financial statements, implementation of the project, or fulfillment of certain project objectives. Normally it includes weakness of financial management, ineffectiveness of accounting staffs, improper accounting treatment, lack of independent accounts, lack of timely reconciliation, failure to separate conflicting duties, lack of overall budgetary estimates, delay of fund allocation, delay of reimbursement, insufficient grounds for entry, ineffective control of inventory procurement, conflicts between procurement and project implementation, overstock, lack of proper construction monitoring, technological lags, ambiguous duties, delay of project wrap-up, deviations between investment plans and real progress, etc. See Form 6-8 for the Summary of Internal Control Deficiencies. The form is to be filled out according to the working papers made during compliance testing. Necessary explanations are to be given, including reasons, related standards, the impact on the project, concurrent situations, audit recommendations, and corrections made by the entity. B. Judgment as to Materiality Level and Decisions on Audit Opinions After summarizing the problems found, the auditor is to evaluate the audit findings and effects on the audit report according to the level of materiality. The level of materiality at final evaluation may differ from the level of materiality set in the preliminary stage of the audit. If the former is substantially lower than the latter, it is proper to re-evaluate whether the auditing procedures are sufficient. If they are not sufficient, the auditor must extend or conduct additional tests. In evaluating problems, the auditor must include those errors or omissions that have been found but remain unadjusted (usually reflected in the Summary of Ordinary Adjustments) to check whether these errors may significantly affect financial statements. If the aggregation of unadjusted errors or omissions is above the materiality level, the auditor must consider extending substantive testing or ask the entity to adjust its financial statements. If the unadjusted errors or omissions are still above the materiality level, even after extended substantive testing is conducted, or if the audited entity refuses to adjust its errors, the auditor must then express a qualified or adverse auditor’s opinion. In the evaluation audit findings, the auditor is to decide whether it is necessary to

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disclose problems found, according to the amount and their seriousness and in light of the principle of materiality.

C. Preparation of the Trail Balance The main objective of World Bank loan audits is to express opinions as to the financial statements attached to the audit report. The financial statements attached to the audit report are different from the original financial statements provided by the entity at an earlier stage of audit. These financial statements have been audited and properly adjusted. The formulation of the trail balance is actually the process of corroborating material adjustment journals and making amendments to the entity’s original statements. In practice, the trail balance can be prepared according to various financial statements. The format of the trail balance can be seen in the audit adjustment form.

D. Communicating with the audited entity Having summarized and evaluated the problems and reached preliminary audit opinions, the auditor shall then communicate with the audited entity on the following matters:

• Items that must be adjusted by the entity Once agreed to, these items must be adjusted or corrected by the entity. If the audited entity refuses to adjust them, then the auditor may consider withholding an unqualified auditor’s opinion.

• Items that need to be disclosed These items may not link directly to the entity’s financial statements, but they are against state laws and regulations, or loan agreements and World Bank stipulations. The need for disclosure should be considered depending on the materiality.

• Items that need to be improved These items are the problems caused by improper accounting treatment or deficiencies in internal controls. The auditor should communicate with the entity on the items and ask the entity to correct them in a timely fashion. When communicating with the entity, the auditor should record the process and results of communication and make this record the basis of his/her audit opinion. See Form 6-10 for the Form for Communicating with the Entity.

E. Reaching Audit Conclusions

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Before the audit report is drafted, the auditor is required to summarize all his/her auditing work. It is a process in which conclusions are drawn on implementation of audit plans and treatment of material matters, as well as summarizing experience or lessons for future audits. See the Form 6-10 for the format of audit conclusions. F. Drafting the Audit Report Having come to the audit conclusions, the audit team then prepares a draft audit report on the audit findings using standard technical terms and in keeping with international auditing standards, Chinese government auditing standards, and World Bank audit manuals. See Part II for the content, format, and reporting requirements for audit reports. G.. Signing and Issuing the Audit Report The draft report prepared by the audit team should be signed by the team leader after communicating with the entity. Then the draft report is to be submitted to the Auditing Institution which has sent the team. The draft report is formalized as the Audit Report (as the Letter of Audit Opinion) after being confirmed by the dispatching auditing institution, and it is issued in the name of the auditing institution. No other Letter of Audit Opinion is issued in this case. If the entity has engaged in misconduct under state economic laws or regulations and the audit recommendations have been made accordingly, the Auditing Institution must issue the Audit Decisions in a separate Letter of Audit Opinion.

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Records of Review on Working Papers Audit Period __

Project Name: Project Entity:

Reviews Implementation Ref. no. Questions Results

Comments from former reviewer

Reviewer: Date:

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(Name of Auditing Institution) Summary of Material Adjustments

Audit Period _____ Project Name: Project Entity:

Adjusted journals Balance sheet

Debit Credit

Item

Ref.

No.

R

e

a

s

o

n

s

t

o

a

d

j

u

s

t

P

ri

m

a

r

y

S

e

c

o

n

d

a

r

y

Pr

i

m

ar

y

S

e

c

o

n

d

a

r

y

Debit Credit

Opinions

of entity

Total

Auditor: Date of Audit: Reviewer: Date of Review:

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(Name of Auditing Institution) Summary of Ordinary Adjustments

Audit Period __ Project Name: Project Entity:

Adjusted journals Balance Sheet Debit Credit

Item

Ref. No.

Reasons to

adjust

Primary

Secondary

Primary

S ec on dary

Debit Credit

Opinions of

entity

Total


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(Name of Auditing Institution) Summary of Problems Found

Audit Period __ Project Name: Project Entity: Unit:

Main problems found It

e

m

Ref.

no. Contents Irregular

amount

Stipulations

violated

Opini

ons

Legal basis

for

opinions

Feedback from the

entity

Total

Notes:

Comments:


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Form 6-5 (1) Reference Number: (Name of Auditing Institution)

Summary of Questioned and Unsupported Costs Audit Period __

Project Name: Project Entity: Unit:

1 2

1

*

2

3 4 3*2 4*2 Reference no.

Total questioned

costs

World Bank financed

questioned costs Project

disbursem

ent by cost

category

X

X

A

m

o

u

n

t

World

Bank

perce

nt

T

o

t

a

l

Inel

igib

l e

Unsup

ported

Ineligibl

e

Uns

upp

orte

d

I

n

e

l i

g

i

b

l

e

Uns

upp

orte

d

Equipment

Consultant

services

and

training

Transporta

tion

Equipment

maintenan

ce

Project

manageme

nt

General

and

administra

tive

Salaries

Other

Total


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Form 6-5 (2) Reference Number: (Name of Auditing Institution)

Summary of Questioned and Unsupported Costs (Narrative) Audit Period __

Project Name: Project Entity: Unit:

Item no. Amount (RMB yuan)

Explanations

Questioned costs

1 Reasons Standards violated Effects on project Concurrent situation and whether disbursed by the

World Bank Recommendations Feedback from the entity and future solutions

2

3 。。

Unsupported

1

2

3


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(Name of Auditing Institution) Summary of Questions under State Laws and Regulations


Item no. Amount Explanations

1 Facts Reasons Effects Recommendations Feedback from the entity

2

3


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(Name of Auditing Institution) Summary of Questions under the Loan Agreements


Item no. Amount Explanations


2

3


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(Name of Auditing Institution) Summary of Internal Control Deficiencies

Audit Period __ Project Name: Project Entity: Item no. Amount Explanations


2

3


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(Name of Auditing Institution) Records of Communication with the Project Entity

Audit Period __ Project Name: Project Entity: Working Period: From __ to __ Participants from Auditing Institution: Participants from entity Name: Position: Name: Position:

Problems found and opinions of treatment

Opinions after communicating with the entity


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(Name of Auditing Institution) Conclusions Made by the Audit Team

Date: ___ Project Name: Project Entity:

Team leader

Chief auditor

Members

Estimated Time for field work Real 1. Introduction to the project 2. Audit objectives and scope 3. Implementation of audit plan 4. Preliminary audit 5. Compliance testing and problems found 6. Substantive testing and problems found 7. Communications with the entity 8. Treatment for material problems 9. Recommendations for the next year Team Leader:

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Section 2 The Format, Content, and Reporting Requirements of the Audit Report

The audit report for World Bank loan project audits is the written document by which audit teams or institutions express their conclusions or audit opinions on the audited financial statements and the implementation results of projects. A. The Cover Page, Table of Contents, Content, and Order of the Audit

Report The audit report needs a cover page, a table of contents, and proper binding. If the report needs to be submitted to the World Bank through the audited entity, the bilingual paragraph-to-paragraph format shall be adopted with Chinese first and English second.

1. Cover Page The cover page of the audit report issued by the audit team must read as follows: Audit Report, project name, project reference number, project implementing entity, and corresponding fiscal year. The cover page of an audit report issued by an auditing institution must read as follows: Audit Report (the Letter of Audit Opinion), reference number (or file number) of the audit report, project name, project number, project implementing entity, fiscal year and the name of the issuing auditing institution, etc.

2. Table of Contents

The table of contents indicates the content of the audit report and the page numbers. Tables of contents in audit reports issued by an audit team and by the auditing institution should be consistent with each other.

3. Content

The content of audit reports issued by the audit team should be consistent with that issued by the auditing institution overall. Basically, there should be four parts, namely, the Auditor’s Opinion; financial statements and notes; the Summary of Questioned and Unsupported Costs and notes; and Opinions on Compliance with Applicable Provisions of State Laws and Regulations, the Loan Agreement and International Controls on Financial Reporting. Among these, parts 1, 2, and 4 must be part of any audit report, while part 3 may be included, depending on specific circumstances.

B. The Auditor’s Opinion

The auditor’s opinion is the opinion given by auditing institutions or audit teams

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after completing the necessary audit procedures according to relevant international auditing standards and Chinese government auditing standards. According to World Bank Loan agreements, if the audit is carried out aiming at the overall situation of the implementing entity, the audit opinion is to be given as to both general purpose financial statements and project-orientated special purpose financial statements (these usually apply only to for-profit projects). If the audit is conducted on the project alone, the opinion is limited to special purpose financial statements only (these normally apply to non-profit projects). To simplify, only special purpose financial statements are dealt with here, as an example to illustrate the elements, types of auditor’s opinions, and how to these should be correctly expressed.

1. Elements of the auditor’s opinion

The auditor’s opinion has a single, standard format, including these elements:

• The title

No matter whether the audit report is issued by audit teams or institutions, the single title is this: Auditor’s Opinion.

• The addressee

The addressee of audit team’ report is the Auditing Institutions dispatching the team while the addressee of Auditing Institution’ report is the audited entity. The full name of audited entity should be used and no initials or shortened names are allowed.

• The scope

The scope of the audit team’s report and that of institution’s report are similar and indicate the audit scope, the accountant’s responsibility, the auditor’s responsibility, the audit basis, the key auditing procedures, and the accounting policies adopted by the audited entity, etc.

• The name of the audited financial statements, the reporting date and

periods, etc.

The standard wording is, “We have audited the accompanying Balance Sheet as of December 31, XXXX, and the Income Statement for the year then ended, as well as the Summary of Sources and Uses of Funds by Project Component, the Statement on Implementation of the Loan Agreement, and the project special purpose financial statements (from Page X to Page X ).”

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• Accountant’s responsibility and auditors’ responsibility.

Auditors’ opinions should clearly distinguish the accountant’s responsibility to the audited entity and the auditor’s responsibility to the auditing institution in the section on scope. The standard expression is, “These statements are the responsibility of your management. Our responsibility is to express an opinion on the accompanying financial statements based on our audits.”

• The basis of the audit

In the section on scope, the audit report should clearly state the principles that the auditor has followed. The standard expression is, “We have conducted our audit in accordance with International Auditing Standards and the Government Auditing Standards of the People’s Republic of China.”

• Key audit procedures performed In the section on scope, the key audit procedures should also be indicated. The standard expression is, “An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management and also evaluating the overall presentation statement. We believe our audits provide a reasonable basis for our opinion.”

• Accounting policies adopted by the audited entity The accounting policies adopted by the entity should also be indicated in the audit report with this standard expression, “Your policy is to prepare the accompanying financial statements in keeping with the accounting standards of the Chinese system and with the requirements of the project loan agreement.”

• The auditor’s opinion

For special purpose financial statements, the auditor’s opinion is often given using the phrase, “In our opinion…” which indicates that a clear opinion will be followed by “as to”

a) whether the preparation of financial statements meets the requirements of Chinese accounting standards, accounting systems, and related regulations.

b) whether the financial statements present fairly, in all material respects, the financial position of the entity, the operational results, and the funds received and disbursed during the year then ended.

c) whether the accounting policies and treatment abide by the principle

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of consistency. When the auditor issues an opinion as “qualified, adverse, or unable to form an opinion,” a paragraph of explanation should be added between the sections on scope and the auditor’s opinion. In this paragraph, clear reasons should be given for why the opinion is qualified, and, if possible, the effects on financial statements.

Even if an unqualified opinion is given, the explanatory paragraph can also be added, if necessary, to clarify important matters. This paragraph is often started with, “We also note that….”

• The Audit of the Statements of Expenditure and Auditor’s Opinion The World Bank attaches great importance to reimbursement of loan funds through the Statement of Expenditure. Therefore, regardless of whether the project entity received reimbursement through the Statement of Expenditure in the corresponding year or not, a special paragraph must be prepared to issue an opinion on the Statement of Expenditures.

When Statements of Expenditure are involved, the standard expression is, “We also examined the Statements of Expenditure, No. XX to No. XX, submitted to the World Bank during the year. In our opinion, the Statements of Expenditure do/do not comply with the project loan agreement and can/cannot serve as the basis for loan withdrawals.” If the project entities do not use the statement of expenditure in the course of the year, the expression is, “Because your office did not disburse from the World Bank through statements of expenditure, we do not express an opinion on the Statements of Expenditures.”

• The Audit of the Implementation of the Financial Covenants and Auditor’s Opinion

For those projects with financial covenants stipulated in the project agreements, the auditor must express his/her opinion in a separate paragraph on the implementation of financial covenants. The standard wording is, “We examined the implementation of the financial covenants stipulated in the terms XX of the project agreement, the financial ratio stipulated reached XXX. They did/did not all meet the requirements of the project agreement.”

• Concluding paragraph The concluding paragraph is to indicate the relationship between the auditor’s opinion and the following three parts of the audit report. The wording is usually this, “The audit report consists of the Auditor’s Opinion and three more parts thereafter: Financial Statements and Notes to the Financial Statements; the Summary of

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Questioned and Unsupported Costs; and Compliance with State Laws and Regulations, the Applicable Provisions of the Loan Agreement and Internal Control over Financial Reporting.” If the Summary of Questioned and Unsupported Costs is not included, then the expression should be amended accordingly.

• The signature

The auditor’s opinion issued by the audit team is signed by the team in the signature of the team leader, while the opinion issued by the auditing institution is sealed or signed by the institution. The audit report submitted to the World Bank through the audited entity should include the printed English title of the auditing institution and be sealed with a Chinese business seal.

• The date

The date for the audit team’s opinion is the day when it is signed by the team leader, while the date for the institution’s opinion is the day when it is signed by the responsible official of the auditing institution.

• The address of the auditing institution

The address for both the team’s opinion and the institution’s opinion are in same format, including a detailed address, postcode, phone numbers, and fax numbers.

2. The types of auditor’s opinion

Depending on the circumstances, there are basically four types of auditor’s opinion: unqualified, qualified, adverse, and unable to form an opinion.

• Unqualified opinion An unqualified opinion can be issued when the financial statements or special purpose financial statements provided by the audited entity meet the following criteria:

a) Financial statements meet the requirements of Chinese accounting standards, accounting systems, and related regulations;

b) Financial statements present fairly, in all material respects, the financial position of the entity, the operational results, and the funds received and disbursed during the year then ended;

c) Accounting treatments abide by the principle of consistency; d) The audit team completed all planned auditing procedures in accordance

with international auditing standards and Chinese government auditing standards, and the auditing work was not interfered with or disturbed;

e) No adjustable item remains unadjusted.

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There are further two varieties of unqualified opinion. One is a standard unqualified opinion and the other is unqualified with an emphasis on matter that calls for an additional paragraph for emphasis. The matters that deserve emphasis are as follows:

a) Material uncertainty. When the possible occurrence of a disclosed material assumption is great, emphasis should be placed on materiality to indicate uncertain matters.

b) Exceptional items that do not follow standard practice. If financial statements disclose any exceptional items that are not standard practice, and if the auditor believes it to be reasonable, the emphasis on materiality should be added to illustrate the nature of new changes.

c) Emphasis on particular issues. Under some circumstances, if the auditing institution wants to draw attention to a certain item, the paragraph for emphasis can be added accordingly.

d) Issues relating to the work of other auditors. If the auditing institution has used another auditor’s work during the auditing process, and if it is unable to review that work, or the part reviewed by other auditors exerts a significant influence on the financial statements, the paragraph for emphasis should be added to explain the auditing work done by other auditors.

See Form 6-11 and Form 6-12 for examples of unqualified opinions and unqualified opinion with an emphasis on materiality.

• Qualified Opinion

A qualified opinion is given when the financial statements or special purpose financial statements are fair in their presentation overall matter, but when the following concerns exist:

a) some material accounting treatment or financial item does not abide by state accounting laws or regulations and the audited entity refuses to adjust those items;

b) due to the limitations of the scope of the audit, audit evidence required by international audit standards and Chinese audit regulations is not gathered;

c) some accounting treatments are contradictory to the principle of consistency.

When a qualified opinion is issued, it must have an explanatory paragraph before the section of opinions to give the reasons. Accordingly, in the opinion paragraph, standard professional language is used, “Except for above-mentioned problems…” or “Except for the issue of effects raised by the above question…” or

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“Except for above unclear circumstances….” See Form 6-13 for the sample report for a qualified opinion.

• Adverse Opinion An adverse opinion is expressed when the financial statements or special purpose financial statements are characterized by the following situations:

a) accounting treatments seriously violate state accounting laws or regulations and the audited entity refuses to adjust those items;

b) the financial statements seriously misrepresent the financial position of the entity, the operational results, and the funds received and disbursed during the year then ended;

When an adverse opinion is issued, there must be a paragraph before the opinion section to explain the reasons why a negative opinion is being given. Accordingly, when expressing the opinion, standard professional language is used, “Because of the material effects of the matter disclosed…” or “Because of the effects of the matter referred to in the previous paragraph….” See Form 6-14 for the sample report of an adverse opinion.

• Unable to form an opinion

An “unable to form an opinion” result is issued when the auditor is unable to form an opinion due to the difficulty of access to necessary auditing evidence caused by serious hindrance by the entity or other serious circumstances. When the auditor refuses to express an opinion, there must be a paragraph before the opinion section to explain the reasons for this. Accordingly, in the expression of opinion, standard professional language is used, “Because of the existence of limitations on the scope…” or “Because it is not possible to implement necessary procedures…” and “we are unable to express an opinion….” In keeping with this, the scope section is modified to, “We have audited special purpose financial statement No. XXX of the World Bank loan project. The following statements are the responsibility of your entity.” See Form 6-15 for the sample report for “Unable to form an opinion.”

3. Steps for determining the type of opinion properly In order to determine the proper audit opinion, three steps should be followed: Check to see if the deviations from a standard unqualified opinion exist. The standard unqualified opinion is one without any additional explanations or

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emphasis. There are three reasons for a qualified opinion:

1) There have been limitations on the scope of the audit; 2) The financial statements violate Chinese accounting standards, the accounting system, or financial regulations; 3) The audit has lacked independence.

There are four reasons for giving an unqualified opinion with an emphasis on materiality:

1) The entity did not consistently abide by Chinese accounting standards, the accounting system, and financial regulations;

2) Uncertainty factors affect the financial statements; 3) For emphasis on a particular matter; 4) The work of other auditors is involved.

Once the fieldwork has been completed, the audit team must decide if there are deviations from the standard unqualified opinion; this is done by reviewing the working papers. If there is no deviation, then the unqualified opinion is given; if they do exist, the auditor should follow the following steps:

• Judging the materiality of deviations

If deviations are found, the auditor must analyze the potential impact of the deviation on the financial statements. In the case of limitations in the scope of the audit and violations of accounting standards, the auditor must make professional judgments to decide whether the deviation is “not material,” “material,” or “scientifically material.” For other situations, except when there is a lack independence in the audit, the auditor need only decide whether the deviations are material or not.

• Selecting a proper audit opinion depends on the materiality of the deviations

Having completed the two previous steps, the auditor should then select a proper auditor opinion according to the checklist for an unqualified opinion (see Form 6-16) and the checklist for an unqualified opinion with an emphasis on materiality (see Form 6-17). Please refer to the sample audit report attached for the detailed format and content of the various opinions. C. Financial Statements and Notes to Financial Statements

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The financial statements attached to the audit report are not the original statements and notes provided by the entity at the beginning of audit. They are the statements audited by the audit team and adjusted by the entity.

The attached financial statements fall into two categories: for-profit projects and non-profit projects. For for-profit projects, the main statements include the balance sheet, income statement, and cash flow statements, while the attached statements are the balance sheet for the project, the summary of sources and uses of funds by project component, the statement on implementation of the loan agreement, and the special account statement, which shows the implementation of the project. For non-profit projects, the main statements are the balance sheet, summary of sources and uses of funds by project component, statement on implementation of the loan agreement, and special account statement. The notes to the financial statements should be attached, giving explanations for particular key items in the statements or issues that need to be disclosed as provided for in the loan agreement. When necessary, the implementation of the project should also be reported in the notes.

The audited entity is responsible for preparing the financial statements according to certain types, content, and format stipulated by MOF or loan agreements. The Auditing Institution and its audit team conduct audits only on these statements and are to be responsible for the truthfulness and compliance of their auditor’s opinion.

1. Summary of Questioned and Unsupported Costs and Notes

During the audit process, if the auditor finds that there are questioned and unsupported costs in World Bank loan disbursement, he/she must make a professional judgment on the matter and take detailed notes, item by item, according to the principle of materiality. These notes can also serve as part of audit report. Please refer to Part 1 on the format, content, and due care components of the Summary Report on Questioned and Unsupported Costs.

2. The Auditor’s Report on compliance with the Applicable Provisions of State Laws and Regulations and the Loan Agreement, and on Internal Controls on Financial Reporting

Comments in this regard are in fact an appendix to the Auditor’s Opinion, which aims to disclose whether project implementation or the business (applying only to for-profit projects) abide by the applicable provisions of state laws and regulations and loan agreements, and whether the internal control system has any material deficiency.

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Opinions in this regard consist of two elements: the title and text.

• The title

Both reports, issued by the audit team and the auditing institution, use a single title: “Auditor’s Report on Compliance with the Applicable Provisions of State Laws and Regulations and the Loan Agreement, and on Internal Controls on Financial Reporting.”

• The text

There are two sections to the text: the auditing objectives and the nature of the opinions. It should be clearly stated that the purpose of World Bank loan project audits is to express an auditor’s opinion on the financial statements, and the opinion on compliance is to reflect what the auditor found in regard to material violations of applicable state laws and regulations and the loan agreement, as well as significant deficiencies in the internal control system. The wording is normally as follows:

“We have audited your entity’s financial statements as of December 31, XXXX in keeping with International Auditing Standards and the Government Auditing Standards of the People’s Republic of China. We have expressed our Auditor’s Opinion on the above financial statements.”

“As part of obtaining reasonable assurance that the financial statements of your entity are free of material misstatements, we performed tests of your entity’s compliance with applicable provisions of state laws and regulations, the loan agreement, and internal control. We have found non-compliance with state laws and regulations and weaknesses in internal controls in the following areas.”

Among the particular problems are violations of state laws and regulations or loan agreements and specific deficiencies, their impact and the reasons that they exist, audit opinions and recommendations, feedback, and solutions adopted by the audited entity. The auditor must make choices in dealing with all the problems that violate state laws and regulations and loan agreements and to correct internal control deficiencies found during the auditing process. For those problems that require disclosure, the audit report must describe the facts found, indicate the laws or regulations violated, analyze the reasons, disclose the effects, give comments and/or recommendations, and explain the solutions adopted by the audited entity.

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As to the extent of disclosure, the explanation in the audit team’s report must be in full detail because some violations may involve a letter of audit decision. In the auditing institution’s report, the disclosure may be a simple but exact statement. The order of importance is as follows: problems violating the applicable state laws or regulations, problems constituting violations of both state laws and the loan agreements or other documents of the World Bank, issues that violate loan the agreement and other documents of the World Bank, then problems related to internal control deficiencies. For particular problems within each category, they are to be listed according to materiality and the amounts involved. As the violations against loan agreements and other World Bank documents is to have been illustrated in the Summary of Questioned and Unsupported Costs mentioned above, there is no need to elaborate here.

• Reporting Requirements

In order to ensure the quality of audit reports and reduce inherent audit risks, the audit reports prepared by the audit team and auditing institutions must meet the following requirements:

1) As the audit report is the final bearer of the audit objectives, its elements must be integrated, its opinions correct, its evidence fully-supported and its contents right.

2) The audit report is a unified document and should be free of any conflict among the various sections.

3) The auditor’s opinion only pertains to special financial statements and should not include comments on compliance with applicable state laws and regulations, loan agreements, or internal controls on financial reporting, which require separate expression in the fourth part of the Audit Report. Only if there is non-compliance affecting fair presentation in the financial statements, is there mention of violations in “materiality emphasis” paragraphs to illustrate the opinions given.

4) Nor is opinion on compliance with the Applicable Provisions of State Laws and Regulations and the Loan Agreement, and on Internal Controls on Financial Reporting an isolated element. Instead, it is the expression of an opinion after an overall review of the financial statements and problems that are found through the necessary auditing procedures and in accordance with pertinent auditing standards.

5) The audit team or auditing institution shall be responsible for the truthfulness and legality of its opinions on compliance with applicable state laws and regulations and on internal controls on financial reporting.

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Form 6-11 Reference Number: Sample of a Standard Unqualified Audit Report

AUDITOR’S OPINION

To the Agricultural Development Office of XX Province: We have audited the accompanying Balance Sheet as of December 31, 1999, and the Statement of Implementation of the Loan Agreement, the Special Account Statement, and the special purpose financial statements of the Agricultural Development Project (9999-CHA) being implemented by your office. These statements are the responsibility of your management. Our responsibility is to express an opinion on the accompanying financial statements based on our audits. We have conducted our audit in accordance with International Auditing Standards and the Government Auditing Standards of the People’s Republic of China. These standards require that we plan and perform the audit to obtain reasonable assurance that the above financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management and evaluating the overall statement presentation. We believe our audits provide a reasonable basis for our opinion.

Your policy is to prepare the accompanying financial statements in accordance with Chinese Accounting Standards and the requirements of the Agricultural Development Project Loan Agreement (Loan No. 9999-CHA, effective June 1, 1998). In our opinion, the special purpose financial statements identified in the previous paragraph present fairly, in all material respects, the financial position of your project as of December 31, 1999, the operational results during the year then ended, and the balances of funds received and disbursed for the year ended December 31, 1999, in conformity with the accounting standards described above. We have also examined Statements of Expenditure numbers 06-10 submitted to the World Bank during the year. In our opinion, the Statement of Expenditures complies with the project loan agreement and can serve as the basis for loan withdrawals.

The audit report consists of the Auditor’s Opinion and three more parts: Financial Statements and Notes to the Financial Statements, Summary of Questioned and Unsupported Costs by Disbursement Category and the Narrative thereof, and Compliance with State Laws and Regulations, Applicable Provisions of the Loan Agreement and Internal Controls on Financial Reporting.

Signature of team leader or seal of auditing institution Date: Address:

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Form 6-12 Reference Number: Sample of an Unqualified Opinion with an Emphasis on Materiality

AUDITOR’S OPINION

To the Agricultural Development Office of XX Province: We have audited the accompanying Balance Sheet as of December 31, 1999, the Statement of Implementation of the Loan Agreement, the Special Account Statement, and special purpose financial statements of the Agricultural Development Project (9999-CHA) being implemented by your office. These statements are the responsibility of your management. Our responsibility is to express an opinion on the accompanying financial statements based on our audits. We have conducted our audit in accordance with International Auditing Standards and the Government Auditing Standards of the People’s Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance that the above financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management and evaluating the overall statement presentation. We believe our audits provide a reasonable basis for our opinion. Your policy is to prepare the accompanying financial statements in accordance with Chinese Accounting Standards and the requirements of the Agricultural Development Project Loan Agreement (Loan No. 9999-CHA, effective June 1, 1998). In our opinion, the special purpose financial statements identified in the previous paragraph present fairly, in all material respects, the financial position of your project as of December 31, 1999, the operational results during the year then ended, and balances of funds received and disbursed for the year ended December 31,1999, in conformity with the accounting standards described above. We have also examined Statements of Expenditure numbers 06-10 submitted to the World Bank during the year. In our opinion, the Statement of Expenditures complies with the project loan agreement and can serve as the basis for loan withdrawals.

We also noticed that your office had sped up project construction in the second half of 1999. The special purpose financial statements showed that a large margin increase occurred in completed project investment, equipment investment, project appropriation, and World Bank loans.

The audit report consists of the Auditor’s Opinion and three more parts: Financial Statements and Notes to the Financial Statements, Summary of Questioned and Unsupported Costs by Disbursement Category and the Narrative thereof, Compliance with State Laws and Regulations, Applicable Provisions of the Loan Agreement, and Internal Controls on Financial Reporting. Signature of team leader or seal of auditing institution Date:

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Address:

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Former 6-13 Sample of a Qualified Opinion Reference Number:

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AUDITOR’S OPINION To the Agricultural Development Office of XX Province: We have audited the accompanying Balance Sheet as of December 31, 1999, and the Statement of Implementation of Loan the Agreement, the Special Account Statement, and the special purpose financial statements of the Agricultural Development Project (9999-CHA) being implemented by your office. These statements are the responsibility of your management. Our responsibility is to express an opinion on the accompanying financial statements based on our audits.

We have conducted our audit in accordance with International Auditing Standards and the Government Auditing Standards of the People’s Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance that the above financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management and evaluating the overall statement presentation. We believe our audits provide a reasonable basis for our opinion.

Your policy is to prepare the accompanying financial statements in accordance with Chinese Accounting Standards and the requirements of the Agricultural Development Project Loan Agreement (Loan No. 9999-CHA, effective June 1, 1998). Through the audit, we found that your office had overstated the expenditures on project construction and received disbursement in the amount of 1.8m RMB yuan from the World Bank using false documents (for details, see the Summary of Questioned and Unsupported Costs by Disbursement Category and the Narrative thereof), which is not in conformity with the accounting standards described above. Except for the effects exercised by the above matter on the special purpose financial statements, in our opinion, the special purpose financial statements identified in the first paragraph present fairly, in all material respects, the financial position of the project as of December 31, 1999, and the results of its operations, and the balance of the funds received and disbursed for the year ended December 31, 1999 in conformity with the accounting standards described above. We also examined Statements of Expenditure numbers 06-10 submitted to the World Bank during the year. In our opinion, except for the false supporting evidence of application for withdrawal No. 8, which cannot serve as a source of disbursement, all other Statements of Expenditures comply with the project loan agreement and can serve as basis for loan withdrawals.

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The audit report consists of the Auditor’s Opinion and three more parts: Financial Statements and Notes to the Financial Statements, Summary of Questioned and Unsupported Costs by Disbursement Category and the Narrative thereof, Compliance with State Laws and Regulations, and the Applicable Provisions of the Loan Agreement, and Internal Controls on Financial Reporting. Signature of team leader or seal of auditing institution Date: Address:

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Form 6-14 Sample of an Adverse Opinion Reference Number:

AUDITOR’S OPINION

To the Agricultural Development Office of XX Province: We have audited the accompanying Balance Sheet as of December 31, 1999, and the Statement of Implementation of the Loan Agreement, the Special Account Statement, and the special purpose financial statements of the Agricultural Development Project (9999-CHA) being implemented by your office. These statements are the responsibility of your management. Our responsibility is to express an opinion on the accompanying financial statements based on our audits.

We have conducted our audit in accordance with International Auditing Standards and the Government Auditing Standards of the People’s Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance that the above financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management and evaluating the overall statement presentation. We believe our audits provide a reasonable basis for our opinion.

Your policy is to prepare the accompanying financial statements in accordance with Chinese Accounting Standards and the requirements of the Agricultural Development Project Loan Agreement (Loan No. 9999-CHA, effective June 1, 1998). The special purpose financial statements provided by your office had overstated counterpart financing and project expenditures in the amount of 36m RMB yuan respectively. We have asked your office to make amendments, but they have refused. Due to the significant effects exercised by the above matters, in our opinion, the special purpose financial statements identified in the first paragraph cannot present fairly, in all material respects, the financial position of the project as of December 31, 1999, and the results of its operations and balance of the funds received and disbursed for the year ended December 31, 1999, and it is not in conformity with the accounting standards described above. We have also examined the Statements of Expenditures numbers 06-10 submitted to the World Bank during the year. In our opinion, the Statements of Expenditures comply with the project loan agreement and can serve as the basis for loan withdrawals.

The audit report consists of the Auditor’s Opinion and three more parts: Financial Statements and Notes to the Financial Statements, Summary of Questioned and Unsupported Costs by Disbursement Category and the Narrative thereof, Compliance with State Laws and Regulations, the Applicable Provisions of the Loan Agreement ,and Internal Controls over Financial Reporting.

Signature of team leader or seal of auditing institution Date:

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Address: Form 6-15 Sample of Unable to Form an Opinion Reference Number:

AUDITOR’S OPINION

To the Agricultural Development Office of XX Province: We have audited the accompanying Balance Sheet as of December 31, 1999, and the Statement of Implementation of Loan Agreement, the Special Account Statement, and the special purpose financial statements of the Agricultural Development Project (9999-CHA) being implemented by your office. These statements are the responsibility of your management. Our responsibility is to express an opinion on the accompanying financial statements based on our audits.

Your policy is to prepare the accompanying financial statements in accordance with Chinese Accounting Standards and the requirements of the Agricultural Development Project Loan Agreement ( Loan No. 9999-CHA, effect on June 1,1998). The special purpose financial statements provided by your office consolidate the financial statements of 28 sub-project entities, among which 20 sub-project entities cannot provide sufficient supporting evidence. Therefore, we are unable to carry out the proper procedures and so cannot determine whether the financial reports of these sub-project entities are fair or not.

Because of the significant effect imposed by the matters in the previous paragraph, we do not express an opinion as to whether the special purpose financial statements identified in the first paragraph are in conformity with the accounting standards described above, or whether these special purpose financial statements present fairly the financial position of your project as of December 31, 1999, the operational results during the year then ended, and the balances of the funds received and disbursed for the year ended December 31, 1999. Because your office did not disburse from the World Bank through statements of expenditure, we do not express opinion on the Statements of Expenditure.

The audit report consists of the Auditor’s Opinion and three more parts: Financial Statements and Notes to the Financial Statements, Summary of Questioned and Unsupported Costs by Disbursement Category and the Narrative thereof, Compliance with State Laws and Regulations, the Applicable Provisions of the Loan Agreement, and Internal Controls on Financial Reporting.

Signature of team leader or seal of auditing institution Date: Address:

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( Name of the Auditing Institution) Checklist for Deviation from Unqualified Opinion

Audit Period _______ Project Name: Project Entity:

Materiality Three circumstances of

deviation from

unqualified opinion Not material

Material, but do

not affect fair

presentation

Very material and do

affect fair

presentation

1. Limitation of audit

scope

Unqualified

opinion

Qualified

(qualifying

scope and

opinion)

Unable to form an

opinion

2. Preparation of

statements violates

state accounting

standards

Unqualified

opinion

Qualified

(qualifying

opinion)

Adverse Opinion

3. Lack of audit

independence

Unable to form an opinion (no matter the materiality)


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Form 6-1 7 Reference Number:

( Name of the Auditing Institution)

Checklist for Unqualified Opinion with Emphasis on Materiality Audit Period _______

Project Name: Project Entity: Materiality Four circumstances

emphasizing materiality Not material Material

Accounting principles not

consistently applied

Unqualified opinion Unqualified opinion (with

explanatory paragraph)

Uncertainty affects the

financial statements audited


paragraph of explanation)

Emphasis on particular

materiality



Use of work by other auditors Unqualified opinion Unqualified opinion (with



Message of Auditor General for English Version of the Audit Manual

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