Financial Audit Municipality of Istog for the year ended 31 December pot

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




11
4.4f)

Item, “Business meals”, Economic Operator “Trofta”. OAG noted
that procurement procedures began before the funds were
committed. This is non compliant with Law on Public Financial
Management No. 2003/2, Law on Public Procurement No. 2003/17.
We recommend that Procurement Office
should not initiate any procurement activity
when funds are not committed.

4.4g)

Item, “Renovation of Municipal Assembly
Building” Value of Contract: 71,587+7,158€ funded by three
donors: GTZ, Ministry of Local Government and Istog
Municipality.
• The amount funded by the Municipality was not done in
compliance with the contract, where after decision No.01:Zyrt./06
reached by the Procurement Manager on amending Point 10 of the
Contract, so that payment in the amount of 22,587.61 € is made
after the final report on completed works in accordance with the
dynamic plan of work activities, payments was made before work
was completely finished. • Execution security deadline for the
economic operator expired on 16.01/2007, whereby acceptance of

final works was done on 14.03/2007.
• File is not ordered at all and many unnecessary documents have
been included in the file, which make the Auditor’s job more
difficult.
We recommend the Istog Municipal Assembly,
Procurement Office in particular, to utilize
public money in conformity with Law on
Public Procurement 2003/17; comply with the
Contract signed with Economic Operator, and
complete and systemize folders.

4.4h)

In reviewing the item “heating fuel supply for Main
Family Health Centre” we have noticed the followings:
• Heating Fuel supply made without the request’s approval by the
authorizing officer, whereas this request was approved by CEO
three months after the delivery of goods.
• Order form and goods receiving report are signed five months
upon the receipt of goods.
• The received invoices do not contain neither price per unit nor the
total value in Euro for the supplied goods. In addition, the invoicing
is made 5 months after the receipt of goods. Invoicing by the
company is made in such manner where the company had issued a
single invoice with different prices for the same unit due to price
fluctuation during different time period.
The Municipality is recommended to observe
supply procedures in al levels. In addition the
Municipality shall establish the internal control
in order to prevent these irregularities.

Also, Law No. 2003/2 on Public Financial
Management and Accountability shall be
complied with.

4.4i)

In contract “Construction of houses for non- Albanian
Communities “ it has been noticed that:
There is no decision on the establishment of works’ acceptance
commission.
Criteria for contract’s execution security of 10% have not been
fully satisfied.
Commission for acceptance of goods reports that contract has not
been fully implemented, it’s been reported about some minor
deficiencies.
We recommend that Municipality should in the
future avoid signing contracts unless economic
operator meets all criteria and ensure that Law
on Procurement No.2003/17 is complied with.

5 Subsidies and Transfers


5a)





5.b)

Subsidizing project,” Transport of pupils of primary
school“ for organizing basketball tournament “Demush Mavraj“
The amount of this subsidy was 250Euros. Beneficiaries of this
subsidy do not possess register on the number of pupils transported
to thus justify incurred expenditures Subsidizing project “

Organizing Skiing Classes” of the Director for Culture, Youth
and Sport”.
The amount for this subsidy was 2,170 Euros. During the
examination it was noted that the Procurement Office in awarding
contract did not apply procurement procedures and economic
operators have not been provided with the request for the contract’s
price quotation. Beneficiaries to this subsidy were 31 pupils from
several schools in Istog, whereby a three-day stay in Brezovica was
also included. The following have been subsidized:
- Stay in the hotel – sleeping, food, three full meals
We recommend that Municipality should:
Ensure in the future to maintain records on the
number of beneficiaries of subsidies and
transfers.
Procurement Office should not select an
economic operator without applying
procurement procedures, and it should ensure
compliance with Law on Procurement 2003/17.

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

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- Use of ski lift
- Use of ski equipment.

6 Asset Management


6a)















6b)

Istog Municipality has appointed one logistics officer and one
officer for receiving goods in accordance with Administrative

Instruction 2005/11 on the Management and Recording of
Government Assets. During 2006 a Commission for Asset
Evaluation has been established on 31.05.2006 by the CEO. The
duty of this commission was to evaluate all assets that are under the
control of the budgetary organization, evaluate damaged or
defective assets as well as requests for the alienation of assets.
During its work evaluation commission due to the absence of
necessary documentation was not able to make:
- An evaluation of old roads (it has no basis to begin evaluating
them)
- An evaluation of land (no evaluation of land has been made)
- An evaluation of old canalizations


Istog Municipality had no depot for reserve material in 2006.
Municipality is supplied with material directly from the economic
operator. Firstly tender is advertised in the beginning of the year,
and then the winning company provides supplies of expendable
material during the entire year based on the Departments requests.
- It should urgently appoint a commission for
evaluating immovable property
- Commission should be professionally trained
to be able to make objective evaluation of
assets value.
- Basic assets should be recorded in the
accounting system
- Evaluation Commission should as soon as
possible finish its work in evaluating all
Municipality’s assets and simultaneously
prepare a final report in relation to this

evaluation
- We recommend Istog Municipality to provide
a depot for maintaining material and inventory.
It is not a good practice for a Company to
provide supplies of material and inventory
during the entire year; instead material should
be purchased and maintained in the depot.
6.1 Vehicle Management


6.1a)

Municipality does not have any officer responsible for the auto
park. This responsibility is dealt by the Director of Administration,
who has no data on the kilometers each vehicle has passed and how
much liters of fuel they spent during 2006. During the testing
conducted it was noted that the acting chief of Municipality’s auto
park did not comply with Administrative Instruction 07/2006,
respectively Sections 6.1, 6.2, and 6.3, in regard to filling in of the
form of the request for use of vehicle as set out in the Annex 3 of
this instruction, which includes the number of kilometers at the
moment of departure and return, itinerary and purpose of trip,
names traveling officers and signature of person using vehicle. A
sample of 20 invoices has been tested in the Main Family Health
Centre, where it has been noted that several trip Order Forms lack
the information on the purpose of the trip, names of officers
traveling, itinerary and signature of persons using vehicle.

Municipality should establish the auto park
unit responsible for the management of

Municipality’s vehicles in accordance with AI
No. 07/2006, which sets out how vehicles in
Kosovo Government institutions should be
used, covering use of vehicles, maintenance,
servicing, reporting and responsibilities
regarding the use of vehicles.
-Procedures should be drawn up about the way
vehicles should be used, specifying also the
limit of vehicle expenditures allowed.
-When Municipality’s vehicles are used, all
procedures covering requests for driving
services, and approval for using them should
be applied.
- Each time Municipality’s vehicles are used,
Trip Sheet should be filled in including number
of kilometers at the moment of departure and
return, itinerary and purpose of trip, names of
officers traveling and signatures of persons
using vehicle.








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Financial Audit

Municipality of Istog 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 Istog
for the period ending 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 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 Istog for the year ended 31 December 2007




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V. AUDIT OPINION

Basis for Disclaimer of 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 amounts of municipality’s revenues for the year ended 31 December 2007
are not reconciled with the related data provided from the Treasury
Department of the Ministry of Economy and Finance. Hence, we were not
able to obtain reasonable assurance over the completeness and accuracy of the
municipality’ revenues and expenses for the year ended 31 December 2007.

2. Regarding the various taxes such as: annual tax on property, annual tax for
Business License, annual participation for scholarships, rent for using
municipality’ property etc. the Municipality does not maintain sub ledger of
debtors. This has resulted in the lack of records on own source revenue.
Therefore, we were not able to satisfy ourselves with the completeness and
accuracy of the municipality’s financial records related to its own source
revenue.

3. The Municipality’s assets are not presented into the financial statements as
required by the administrative instruction 2007/08 issued by the Treasury Unit
within MEF. Additionally, the municipality does not maintain separate
register for its fixed assets as required by the Administrative instruction

2005/11. Moreover, there is no evidence of performing verification of
physical existence of the assets as of 31 December 2007. Therefore, we were
not able to satisfy ourselves with the completeness and accuracy of the
municipality’s financial records related to its fixed assets.


B. Design and operating effectiveness of internal controls
4. 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, 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.

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5. In addition and by inspection of goods received and goods invoiced we found
that no control procedures exist. The regulative request approval from
separate commission on each receipt of goods procured, the value of each
exceed EUR 100.

C. Compliance with laws and regulations

6. 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-allowable cash receipts for certain revenues;
- non-compliance with the Administrative Instruction 2007/08;
- non-compliance with the administrative Instruction no AKK 2006/01;
- differences between contracted and actually purchased goods and services
in terms of their prices and quantities;
- non-compliance with procurement laws.

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 Istog 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 ISA’s 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 financial statements against the approved budget for
2007;

• Determined whether the Municipality 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:




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Financial Audit
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(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 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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VII. KEY AUDIT FINDING AND RECOMMENDATIONS


The following are the key audit findings and recommendations resulting from our audit
of the Municipality financial statements. Management comments concerning the finding
and recommendation follow each section along with our evaluation of management’s
comments. The Municipality comments will be included in full as Annex 2.

A. Accounting and financial reporting process
Finding # 1

Based on the audit procedures performed we identified that the reconciliation
of revenue data between the Treasury Department with Ministry of Economy
and Finance and the municipality’s financial data was not exercised.
- Revenue from Administration department consists of fee participation on
tender, birth, death, marriage and other certificates. For those services we
were not provided with analytical ledger from the revenues collected as of
31 December 2007.
- In the Department for Economy, there is a difference in the amount EUR
2,587 between the clients sub ledger from revenues earned from issued
work license and the free balance.
- In the department for Geodesy, Cadastre and Property a difference in the
amount of EUR 19,905 occurs between the data obtained from the clients
sub ledger regarding revenues earned from property registration, property
transfers, filed measurement activities, registration of real estate etc. and
the free balance.
- Also, in the Department for Urbanization, a difference in the amount of
EUR 27,947 occurs between the data obtained from the clients sub ledger
regarding revenues from construction licenses and uses of public property
and the free balance.

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 # 2

The municipality does not maintain separate sub ledgers of debtors regarding
the various taxes such as: annually tax on property, annual tax for Business

License, annual participation for scholarships, rent for using municipality’
property etc. Without proper records of debtors, the municipality is unable to
prepare reliable and accurate budget as well as collect its own source revenues
on a timely basis.


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Recommendation
We recommend the Municipality to maintain separate registers of its debtors.
This information could significantly improve management of revenues in the
process of budgeting and collection of assets. Management would also benefit
by having billing and collection information on a real time basis.

Finding # 3

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.

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

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B. Design and operating effectiveness of internal controls
Finding #4

The municipalities’ internal audit department operates without any plan for
the year 2007. The municipality has no established audit committee designed
to deal with internal audit issues and implementation of recommendations.
This issues increase the risk of having unaudited areas and minimizes the
reliance on the internal audit work by the management and internal auditors.

Recommendation
We recommend the Internal Auditor to prepare an audit plan for the following
year and to obtain approval from the Management of the Municipality.
We recommend the Management of the municipality to prepare an action plan
with deadlines in order to implement the internal auditor’s recommendations.
In relation with this, we recommend the Management of the municipality to
establish an audit committee which will hold the management responsible for
implementation of the recommendations given by the internal auditor.

Finding # 5
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 process.
The related source documents subject to our inspection did not contain
evidence of approval for their eligibility from assigned authorized person.

Finding # 6
In addition and by inspection of goods received and goods invoiced we found
that no control procedures exist. The regulative requests approval from
separate commission on each receipt of goods procured, the value of each
exceed EUR 100.

Finding # 7
Furthermore, by inspection of some expenditure, we found that no control
procedures exist over phone expenditures. There are no limits placed over the
use of the telephone lines as requested by the Kosovo Government instruction
U/A 08/2006, and where it is strictly specified the staff who may have access
to mobile phones.

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.

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