FINANCIAL AUDIT ON THE FINANCIAL STATEMENTS KLINA MUNICIPALITY FOR THE YEAR ENDED 31 DECEMBER 2007 _part2 doc

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


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period of time, for the sake of tendering
the building which would be used, 24%
of the building from top to bottom will
pertain to the Municipality, while the
rest 76% will pertain to the construction
company.
The uncertainty of giving the contract is
that the building area and the part of the
land that has been given for this
building, has not been accurately
determined with the contract.
There is no approval of this tender from
higher authorities, for issuing of leasing
of the land.
section 44.2 municipality and take
corrective actions.

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Financial Audit
Municipality of Klina 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 Klina 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 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 Klina 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 Municipality’s financial statements provided in the Annex to this report are
incomplete and as such not in compliance with the applicable laws and regulations.
Therefore we were not able to obtain reasonable assurance over the appropriateness
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 expenses 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. Hence, we
were not able to obtain reasonable assurance over the completeness and accuracy of
the municipality’ expenses for the year ended 31 December 2007.

3. The municipality does not maintain separate register for its fixed assets in all
departments. In addition 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.

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 procedures implemented in recording of expenditures per category and
economic code. Therefore we were not able to obtain reasonable assurance for the

validity of the expenses recognized in the municipality’s financial statements for the
year ended 31 December 2007.

5. 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 to lack of procedures for reconciliation of revenues recorded in accounting
department and other departments. Therefore we were not able to obtain reasonable
assurance for the completeness and accuracy of the municipality’ revenues
recognized in the municipality’s financial statements for the year ended 31 December
2007.

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


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6. In addition and related to controls established over monitoring of the collection of
revenues from property tax we found that such controls do not provide for efficient
and timely collection of property tax.

7. Furthermore and based on our procedures we found that Municipality lacks
significantly in implementation of adequate procedures to efficiently control its
liabilities toward its suppliers. As disclosed in more details in section VII and due to
the non-existence of such controls, there are cases of over double payments to
suppliers.

C. Compliance with laws and regulations

8. Based on our inspection of issuance of construction licenses in Urbanism Department
we found certificates where fees where not changed according to the municipality’s
regulation approved on date 28.07.2006 and 31.05.2007. Instead in those cases which
are discussed in more details in Section VII: Key audit findings and recommendations
the municipality used fees determined in the previous internal Municipality regulation
dated 03.05.2002.

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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Municipality of Klina 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”;

• Compared the Municipality’s financial statement with Free Balance report issued by
treasury department in Ministry of Finance for completeness.

• 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.
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Municipality of Klina for the year ended 31 December 2007


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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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Municipality of Klina for the year ended 31 December 2007


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VII. KEY AUDIT FINDINGS AND RECOMMANDATIONS

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


A. Accounting and financial reporting process

Finding # 1
The Municipality’s financial statements provided in the Annex I 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 the audit procedures performed we identified differences between the
amounts of expenditures reported in the notes of the municipality’s financial statements
report and those acquired from the Treasury Department of the Ministry of Economy
and Finance.

Finding # 3
The municipality has reported grant revenue for the year ended 31 December
2007 in the amount of EUR 911,000, while according to data obtained from
Treasury Department of the Ministry of Economy and Finance, grant revenue
amounts EUR 792,000. As explained to us by the responsible person, the
difference amounts EUR 119,000 is due to the revenues allocated from Grant
which are not included in the data provided from the Treasury Department of the
Ministry of Economy.

Finding # 4
Furthermore with inspection of revenues related to operations of the municipality
health department we noted that the donation from UNDP in the amount of EUR
24,000 is not included in municipality’ own financial data.

Recommendation
We recommend to the management frequent reconciliation of its financial data with
those from the relevant institutions, such as Treasury Department in the Ministry of
Economy and Finance. 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.
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Finding # 5
The municipality does not maintain separate register for its fixed assets in all
departments. In addition 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.

B. Design and operating effectiveness of internal controls

Finding # 6
The municipality does not implement on a regular basis any procedures of recalculation
of financial data from different sources, so that differences exist between the accounting
department data and those registered within various other departments.



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Municipality of Klina for the year ended 31 December 2007


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Finding # 7
The municipality accounting department did not develop and implemented adequate
procedures to efficiently control the collection status of its fees from issuance of business
licenses as well as the collection status of property tax revenues. Based on our evaluation
of the related internal control procedures we found that the accounting department does
not maintain adequate, sufficiently, detailed, sub ledgers, registers of its tax payers.

Recommendation
We recommend that controls over the billing and collection function be reviewed and
polices and procedures be introduced and documented to ensure all revenue is billed,
collected and banked and that the independent checks are adequately documented.
The departments of municipality should at least on monthly basis reconcile the revenues
earned with accounting department. This will reduce the errors and differences for
collections between department and accounting; it will also help in more accurate future
budget projection.
Finding # 8
Based on inspection of source document related to expenditures for sponsorship and we
found several cases where payments are exercised without existence of related documents
and there no information regarding of recipients of funds granted.

Following payments were processed without sponsorship agreements and
information regarding the recipients:

1. CPO #29070159 related to Public entity and culture – football club, in the amount of
EUR 1,911 and date of payment 22.03.2007.

2. On CPO #29070259 related to sponsorship for organizing folklore festival, in the
amount of EUR 2,000 and date of payment 18.05.2007.

3. CPO #29070526 Public entity and culture – football club, in the amount of EUR 1,000
and date of payment 07.09.2007.

Recommendation
We recommend to the management all sponsoring financial transactions to be exercised
based on original source documentation such as request for sponsoring and contract and
all transfers made based on the contract for activity, to be executed through bank
accounts.








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Finding # 9
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.

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.


Finding # 10

Based on our examination of source evidence related to expenditures and payments for
electricity we found that owing to lack of adequate and frequent control certain electricity
invoices originally amounting EUR 46,467, instead of amount of EUR 51,353. Moreover
such error has been discovered after one year of the date of invoices, i.e. errors in
December 2005 and January and February 2006 invoices were discovered during 2007.
In general, the municipality does not implement any procedures of the quantities of
electricity spent and stated into the invoices, nor matches its payments to related invoices.

Recommendation
The municipality should:
-Review carefully all invoices received and especially for utilities to avoid any mistakes
made from related companies, double payment or overpayment;
-Expenditure records must be maintained in more detailed level, in order to enable each
amount shown in the financial report to be traced to supporting documentation. Each
transaction has to be recorded separately, showing transaction date, description, amount
and respective expenditure code at minimum.

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