FINANCIAL AUDIT THE MUNICIPALITY OF FERIZAJ FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007_part2 docx

Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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IV. AUDIT SCOPE

The OAG has conducted an audit of the financial statements of the Municipality of Ferizaj as
of and for the year ended 31 December 2007. The Municipality works under regulation of self
government of Municipalities in Kosovo 2000/45 UNMIK Regulation no 2006/54, 2007/30
and the statute of Municipality.

The primary audit objective was to enable the OAG to express an opinion on whether the
Municipality’s financial statements, presented in Annex I, give a true and fair view of the
revenues and expenses during the year ended 31 December 2007 in accordance with the
International Public Sector Accounting Standards (IPSAS) for “Financial Reporting under the
Cash Basis of Accounting.” The International Public Sector Accounting Standards Board of
the International Federation of Accountants (IFAC) is responsible for issuing IPSAS. The
accuracy and completeness of the financial statements and accompanying notes contained in
Annex I are the responsibility of the Municipalities management.

Our audit of the Municipality’s financial statements as of and for the year ending 31
December 2007 was conducted in accordance with international standards on auditing (ISA)
issued by the International Auditing and Assurance Standards Board. The Board functions as
an international standards setting body under the auspices of IFAC. The ISAs establish the
international framework within which the OAG is to perform its work and covers matters
such as general principles and responsibilities, risk assessments and responses to assessed
risks, audit evidence, relying on the work of others, and audit conclusions and reporting.

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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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V. AUDIT OPINION

Basis for Disclaimer opinion
The summary of the significant issues identified through our audit procedures that led us
toward disclaiming of our audit opinion is provided further within this section. Our findings
and recommendations are discussed in full details in the Section VII: Key audit findings and
recommendations.

A. Accounting and financial reporting process

1. The Municipality’s financial statements provided in the Annex to this report are
incomplete in terms of their form and content as prescribed by the relevant
provisions established by the authorities. Therefore we were not able to obtain

reasonable assurance over the completeness and hence regulatory compliance of
the financial information provided in the Municipality’s financial statements as of
and for the year ended 31 December 2007.

2. The amounts of municipality’s revenues for the year ended 31 December 2007 as
reported in the financial statements are not reconciled with the related data
provided from the Treasury Department of the Ministry of Economy and Finance.
Therefore, we were not able to obtain reasonable assurance over the completeness
and accuracy of the municipality’ revenues for the year ended 31 December 2007.

3. Furthermore, non-reconciled differences exist between the closing balance of
unspent revenues as shown in the 2006 financial statements and the opening
balance in 2007. As a result, we were unable to satisfy ourselves with the accuracy
of the municipality’s financial records relating to the total funds available for the
year ended 31 December 2007.

4. The municipality does not maintain separate register for its fixed assets. In
addition there is no evidence of performing verification of physical existence of
the assets as of 31 December 2007 and no reconciliation of municipality’s books to
physical count has been made. Therefore, we were not able to satisfy ourselves
with the completeness and accuracy of the municipality’s financial records related
to its fixed assets;

5. The Municipality’s management has not performed revenue reconciliation
between the data as accounted for in its system and those as disclosed in its annual
financial statements. Hence, we were not able to obtain reasonable assurance over
the completeness and accuracy of the municipality’ revenues for the year ended 31
December 2007;

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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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B. Design and operating effectiveness of internal controls

6. Furthermore and based on our procedures we found that Municipality failed to
establish effective procedures in its procurement department related to
management of supply contracts, then payments to suppliers and keeping records
for its outstanding liabilities toward the suppliers. As disclosed in more details in
section VII, due to non-existence of such procedures, there is risk of over payment
or failure to settle the contracted liabilities.

7. Based on the results of our audit procedures we found material weaknesses in
design and operating effectiveness of the municipality’s internal controls
particularly in respect of missing sufficient appropriate authorization process
related to expenditures for vehicles fuel consumption, repairs and maintenance.
Therefore we were not able to obtain reasonable assurance for the validity of such
expenses recognized in the municipality’s financial statements for the year ended
31 December 2007.

C. Compliance with laws and regulations

8. Following cases of non - compliance with the applicable laws and regulations,
which are fully discussed further within the Section VII: Key audit findings and
recommendations, are considered to be of particular significance:
- non-compliance with the contracted terms and conditions;
- tender procedures for procurement goods and services not in
accordance with the rules and regulations;
- own source revenues collected in cash, not deposited in bank

Considering the above, various legal actions and claims may be asserted in the
future and hence there is a risk of additional fines and penalties to be imposed
against the municipality. At the date of issuance of this report the outcome of these
matters cannot be determined with sufficient reliability and no adequate
disclosures for contingent liabilities has been made in the financial statements for
the year ended 31 December 2007.


Disclaimer of opinion
Due to the existence of multiple material uncertainties and significance of the matters
discussed in the preceding paragraphs, we are not in the position to and we do not express an
opinion on the Municipality’s financial statements in accordance with the IPSAS “Financial
Reporting under the Cash Basis of Accounting” as of and for the year 31 December 2007.

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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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VI. AUDIT APPROACH

Our audit of the Municipality’s financial statements for the year ending 31 December 2007
was conducted in accordance with International Standards on Auditing (ISA) issued by the
International Auditing and Assurance Standards Board. The Board functions as an
international standards setting body under the auspices of IFAC. The ISAs establish the
international framework within which the OAG is to perform its work and covers matters
such as general principles and responsibilities, risk assessments and responses to assessed
risks, audit evidence, relying on the work of others, and audit conclusions and reporting.

In order to fulfill our responsibilities, we:

• Reviewed the Municipality’s financial statements against the approved budget for
2007;

• Determined whether the Municipality’s financial statements were prepared in
accordance with IPSAS “Financial Reporting under the Cash Basis of Accounting”;

• Undertook extensive substantive testing of financial transactions;

• Used a combination of judgment and random sampling to select transactions for

testing;

• Relied on a combination of interviews, analytical reviews, document reviews, and
physical verification to assess the validity and propriety of financial transactions;

Our findings and conclusions are based upon the documentation and other information and
explanations provided to us during the course of our audit work. It is possible that additional
information existed but was not provided to us and, if provided, might have altered our
findings.

With respect to the OAG’s audit opinion on the Municipality financial statement, the ISAs set
out specific criteria that govern the type opinion that can be rendered. Audit opinions can be
unqualified, qualified, adverse or a disclaimer of opinion. For example, the OAG may not be
able to express an unqualified opinion when either of the following circumstances exist and,
in the OAG’s judgment, the effect of the matter is or may be material to the financial
statements:

(a) There is a limitation on the scope of the auditor’s work; or

(b) There is a disagreement with management regarding the acceptability of the accounting
policies selected, the method of their application or the adequacy of financial statement
disclosures.

The circumstance described in (a) could lead to a qualified opinion or a disclaimer of opinion.
The circumstances described in (b) could lead to a qualified opinion or an adverse opinion.

A qualified opinion will generally be expressed when the OAG concludes that an unqualified
opinion cannot be expressed but that the effect of any disagreement with management, or
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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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limitation on scope is not so material and pervasive as to require an adverse opinion or a
disclaimer of opinion.

A disclaimer of opinion will be expressed when the possible effect of a limitation on scope is
so material and pervasive that the OAG has not been able to obtain sufficient appropriate
audit evidence and accordingly is unable to express an opinion on the financial statements.

An adverse opinion will be expressed when the effect of a disagreement is so material and
pervasive to the financial statements that the OAG concludes that a qualification of the report
is not adequate to disclose the misleading or incomplete nature of the financial statements.
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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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VII. KEY AUDIT FINDINGS AND RECOMMANDATIONS

Our audit focused on reviewing the presentation and disclosures in the financial statements
and performing substantive testing to confirm accuracy and validity of financial transaction.

The following are the key audit findings and recommendations resulting from our audit of the
Municipality financial statements. The Municipality if any are in Annex 2.

A. Accounting and financial reporting process

Finding # 1
The Municipality’s financial statements provided in the Annex to this report are
incomplete in terms of their form and content as prescribed by the relevant provisions
established by the authorities as such they are not in compliance with the requirements
of Section 41: Final Report on the budget from the Law on Public financial
management and accountability no. 2003/2, which prescribes the exact format and
content of the Municipality’s financial statements.

Recommendation
We recommend to the Management of the municipality full implementation of the
related provision in respect of the preparation of its annual financial statements.

Finding # 2
Based on our examinations we identified that the regular reconciliation of revenues
between data acquired from Ministry of Finance and Economy and those disclosed in
municipality’s financial statements have not been performed. The differences noted in
terms of sources of revenue data are as follows:
1. in Administration department difference is in the amount of EUR 2,509,
2. in Finance department difference is in the amount of EUR (28,664),
3. in Inspection department difference is in the amount of EUR 6,010,
4. in Economy department difference is in the amount of EUR 11,255,
5. in Geodesy and Cadastre department difference is in the amount of EUR
2,226, and
6. in Urbanization department difference in the amount of EUR 6,695.

In addition there are un-reconciled differences between the reported revenues in the
annual municipality report and revenues sub-ledgers in following Departments:
1. in Administration department difference is in the amount of EUR (3,679),

2. in Budget and Finance department difference is in the amount of EUR
(28,664),
3. in Inspection department difference is in the amount of EUR (6,249),
4. in Economy department difference is in the amount of EUR 29,864,
5. in Geodesy and Cadastre difference is in the amount of EUR 2,226, and
6. in Urbanization department difference is in the amount of EUR 6,695.




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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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Recommendation
We recommend to the management frequent reconciliation of its financial data. This
will insure timely correction of possible mistakes in capturing and processing of the
relevant financial transactions as well as valid and accurate financial information for
the users of the municipality’s financial reports.

Finding # 3
Based on the audit procedures performed, we identified that the accumulated unspent
revenues from 2006, were incorrectly transferred from the previous year, leading to
incorrectly stated total funds available for the current year. Difference in the amount
of EUR 333,000 exists between the closing balance of unspent revenues in 2006 and
the opening balance in 2007

Recommendation
We recommend the Municipality to reconcile the transferred unspent revenues from
the previous year with the transferred revenues from the current year.

Finding # 4
Based on the audit procedures performed we identified that the reconciliation of
revenue collected from traffic fines and court penalties between the municipality’s
financial statements and those as recorded in the municipality’s accounting system
was not exercised, so that there is difference between the above sources of information
in the amount of EUR 719,000.

Recommendation
The Municipality should reconcile the revenues collected as of 31 December 2007
between the municipality’s financial statements and the municipality’s accounting
evidence at least on a monthly basis. This will reduce the errors and differences for
collections between departments. It will also help in obtaining more accurate future
budget projections.

Finding # 5
The municipality does not maintain separate register for its fixed assets. In addition
there is no evidence of performing verification of physical existence of the assets as of
31 December 2007 and no reconciliation of municipality’s books to physical count has
been made.

Recommendation
We recommend management to design and implement adequate procedures that would
require:

- Detailed property record for each fixed asset
- Property identification number to be assigned and affixed to each asset

- Capitalization policy under which disbursements less than a specified Euro amount
would be expensed.



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Financial Audit
Municipality of Ferizaj for the year ended 31 December 2007


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In addition and as a minimum, a property ledger should contain the following
information for each fixed asset:
- Acquisition date
- Location
- Number assigned by the municipality (tag number)
- Serial number
- Description and function
- Cost basis
- Details of depreciation, including methods of computation for both tax and
financial reporting purposes
- Anticipated useful life
- Maintenance cost subsequent to the date of acquisition
- Date of disposal
- Financing source
- Expense voucher reference number (CPO #).

Furthermore and in order to provide adequate safeguarding of its assets, the
management of the municipality has to perform regular and at least on an annual basis,

physical verification of all property items. Related accounting records have to be
reconciled with the results of such physical counts.

B. Design and operating effectiveness of internal control

Finding #6
During our inspection of source documents into procurement department we found
that the procurement officer could not provide us with accurate, updated information
about details of procurement contractors, payments made to them as well as details of
outstanding contracted liabilities broken down by supplier.

Recommendation
Procurement officer should keep sufficiently detailed records for procurements
contracted, invoices received and paid during the year as well as outstanding amounts
of liabilities per supplier. This will mitigate the risk of double payments or failure in
settlement of contracted liabilities.

Finding # 7
Based on our inspection of certain expenditures related to vehicles fuel consumption,
repairs and maintenance, we found that the municipality lacks significantly in
implementation of sufficient appropriate authorization procedures. The related source
documents subject to our inspection did not contain evidence of approval for their
eligibility from assigned authorized person. Furthermore, municipality does not
maintain separate register for cars, fuel consumption, travel distances, mileage for
each car.

Finding # 8
Furthermore and based on our inspection of certain financial transactions in the
geodesy department we were not provided with supporting source documents for the
CPO no. 24070492 amounting EUR 1,000.

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Recommendation
We recommend the management to strictly implement authorization of all source
documents related to financial transactions by assigning of appropriate persons and
complying with the requirement for proper segregation of duties.
Furthermore, sufficient appropriate monitoring procedures have to be implemented
which will assure adequate control over expenditures.

C. Compliance with laws and regulations

Finding # 9
By inspection of source documentation related to the tender procedure for building of
road Talinovc i Muhaxhereve we found certain irregularities. The contracted work
should have been completed on 92 days starting at least 7 days after signing the
contract. However the contract was delayed for seven months and was completed on
January 2008. According to the contract terms and conditions if works specified in the
contract are not completed in the contracted terms than the OE will be charged with
0,01% per day of the contracted value. Based on our examinations, we found that
penalties for the delay of the project have not been charged.

Recommendation
We recommend the Municipality’s management to strictly follow its contracted

conditions and charge penalties for non-completion of the work on timely basis.
Furthermore, the management should closely monitor the project implementation to
ensure that the work is being accomplished as agreed.

Finding # 10
By inspection of source evidence related to the procurement procedure for
Infrastructure of Talinovc i Muhaxhereve amounting EUR 178,678 we found the
following:
- Wining bidder “Mali and Art” - Kacanik did not settled tax administration
liabilities as required and list of equipment submitted for building purposes was
dated from 2005.
- Nevertheless, the rest six companies which participated on the tender were
eliminated for the similar reasons.
Owing to our findings as above we consider that according to the regulations, this
tender must be canceled.

Recommendation
The Municipality should establish sufficient adequate control procedures for effective
monitoring over the compliance with the applicable laws and regulations, especially
the requirements of the Law on Public Procurement (PPL) 2003/17 Article 57.3 and
30A.4.

Finding #11
Based on our inspection of own source revenues in the Health Department, we found
that the collected participation from patients has not been deposited on bank’ account
on a daily basis. Regulation No. 2003/17, section 13.3 and 13.4 I 13.5 require
collected cash to be deposited in a bank within 2 days.
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Recommendation
We recommend the Municipality’s Management to deposit all cash collected from
various services into a bank account within 2 days, as required under section 13.3 and
13.4 I 13.5 of the Regulation No. 2003/17 for adopting a Law on Public Financial
Management and Responsibilities.

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