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

- 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

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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- 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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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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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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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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(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

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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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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