Conducting an external audit of a grant-funded project
What are we describing?
Przypadek dotyczy przeprowadzonego przez nas, na zlecenie jednego z muzeów – Beneficjentów wsparcia UE – audytu zewnętrznego współfinansowanego projektu.
What did the next steps of implementation look like?
- Interview the board of directors, identify those responsible in management, accounting and internal audit.
- Sprawdzenie formalnych zagadnień dot. dokumentacji – kompletność, opisy itd.
- Identifying the population of accounting documents.
- Determination of significance, confidence, and reliability indices and sampling method MUS.
- Verification of documents from the selected group, comparing dates, amounts, accounting accounts, entries in records and derived documents.
- Summary of verification, creation of conclusions, audit report and list of audit recommendations.
What did we check?
The scope of the audit included:
- Verification of compliance with the guidelines on: entering, describing and storing documentation, conducting proceedings, completeness of documents, as well as implementation of post-inspection recommendations made during previous audits.
- Inspection of all financial documentation (e.g. invoices, payment orders, booking orders, entries in records, etc.) collected during 4 years of investment implementation, in particular the conformity of posting of amounts and compliance with the definition of eligible expenditure and expenditure actually incurred. At the moment of the audit the whole documentation amounted to 357 individual accounting documents.
A significant audit challenge was the selection of a reliable sample of accounting records.
The entire accounting documentation consisted of 357 individual accounting documents. However, checking the invoices themselves also required verifying the corresponding data in the rest of the documentation, i.e. transfers, booked amounts, contracts or orders, among others.
Thus, the total the population was over 32,000 (!) individual data. Why so much? We invite you to read the detailed description below the table.
A detailed description of the problem and its solution.
The accounting and financial audit covered all the documentation collected during the 4 years of project implementation - population of 357 individual accounting documents. Each contained data and information requiring verification.
Thus, the population of 357 invoices was the base, multiplied by individual data that needed verification:
- Invoice subject, net, vat and gross unit and invoice price and payment term compared with contractual data. This means an increase in the number of information by 8 times.
- Assuming that each invoice means an outgoing or incoming transfer (in the case of an adjustment), the current amount of information will increase 3 times - about the timing of the transfer and its amount.
- Then you need to verify the accounting data: the amounts posted, the accounting account numbers, the depreciation rate used, the entries in the fixed asset register or in the inventory of intangible assets. This represents another 4-fold increase in information..
Even checking only the most important things listed above, verification mere 357 documents means check and compare (357 * 8 * 3 * 4) more than 34,200 data.
How to reduce the population without losing credibility? MUS Method.
The challenge was to sample the documentation in a way that ensured the reliability of the conclusions drawn.
An appropriate method, used in similar cases, is the one described in the European Commission's document titled "The European Union's policy for the protection of the environment". EGESIF_16-0014-00 dated 20/01/2017 sampling method based on monetary unit „MUS (monetary-unit sampling)”. In this method, the probability of selecting an item for inspection is directly proportional to its size expressed in units, e.g. in PLN. This means a simple relationship - the larger the item, the greater the chance that it will be selected for inspection. The selection of these elements is made by drawing lots of the units that comprise them. The use of this method is particularly appropriate in financial audits. The method was applied as follows:
- Calculating the interval size by dividing the population size determined in the monetary unit by the required sample size,
- drawing the starting point,
- making a sample selection for control by measuring the interval value on cumulatively added payments,
- elements (e.g., transactions) in which expenditures were selected from the unit population were included in the sample for audit.
The starting point was set at 364,128.78 (using the "RAND" function of Excell) and the sampling interval at 926,744.78 PLN. Based on the numbering of the accounting evidence accepted in the payment applications, the population size of PLN 55,604,686.99 was determined - from which documents with a total value of about 52.5% of the total population equal to 188 documents (18 048 data) were drawn.
In 2016, we did not have tools based on Business Intelligence methods that could be used to:
- Downloading data from the ERP system,
- Create relational databases that link documents,
- comparison of the desired data listed above with a simple "if equal" condition.
This would have significantly expedited the process and provided a high degree of comparison reliability. It was also impossible to further reduce the sample - according to audit guidelines and fiscal regulations, going below the established thresholds (materiality, confidence, reliability) is equivalent to declaring the audit performed invalid and the whole procedure should be performed again, according to the guidelines of the contracting Authority.
The result of the audit was a positive assessment of the facility and the correctness of the data. Despite selecting such a large sample of documents, no irregularities, incorrect accounting methods or other results requiring additional analysis were found.
Glossary of case-specific definitions
- MUS (monetary-unit sampling) - The method is used to select the sample in cases of tests of factual correctness or searching for document anomalies, for a population characterized by high variability, and when accounting values and variability show a positive correlation (units with higher values will show larger errors). It provides a high level of detection and probability that all valid documents in the population will be included in the test group.
- Threshold of significance (materiality) - determines the tolerance limit for errors and irregularities found during the audit of the sample. The materiality threshold is assumed to determine the maximum permissible error, i.e. the error that the auditor is prepared to accept and at the same time be able to conclude that the audit objective has been achieved. The materiality threshold is determined by the auditor on the basis of professional judgement - a 5% significance threshold was assumed in the case under analysis.
- Poziom ufności – is the auditor's confidence in the consistency of the sampling result with the actual error rate in the population - for the audited project 95% confidence level assumed.
- Coefficient of reliability - i.e. the coefficient corresponding to a specified value of the confidence level, calculated on the basis of the probability calculus - equal to 3.0 in the audited project. (with low inherent risk).
- Precision - is the interval in which the sampling result will fall with a probability specified by the confidence level. For the purpose of the study, a 5% precision level was assumed.