FINAL AUDIT REPORT -GJILANI 2007 ENGLISH
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FINAL AUDIT REPORT -GJILANI 2007 ENGLISH

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REPUBLIKA E KOSOVËS/REPUBLIKA KOSOVA/REPUBLIC OF KOSOVA ZYRA E AUDITORIT GJENERAL/KANCELARIJA GENERALNOG REVIZORA/OFFICE OF THE AUDITOR GENERAL No. of document 22.18.1-2007-08 FINAL AUDIT REPORT ON THE FINANCIAL STATEMENTS OF GJILAN MUNICIPALITY FOR THE YEAR ENDED 31 DECEMBER 2007 Pristine, October 2008 Table of Contents I. Executive Summary II. Introduction III. Status of Prior Years Recommendations IV. Audit Scope V. Audit Opinion VI. Audit Approach VII. Key Audit Findings and Recommendations Annex I. Financial Statements of Gjilan Municipality for the year ended 31 December 2007 2 OFFICE OF THE AUDITOR GENERAL · GAZMEND ZAJMI No 59 · PRISHTINA 10000 PHONE +381 (0)38 2535 121/217/221· FAX: +381 (0) 38 2535 122 List of Abbreviations AG Auditor General AI Administrative Instruction IAU Internal Audit Unit IFAC International Federation of Accountants IPSAS International Public Sector Accounting Standards MAGJ Municipal Assembly of ...

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        REPUBLIKA E KOSOVËS/REPUBLIKA KOSOVA/REPUBLIC OF KOSOVA ZYRA E AUDITORIT GJENERAL/KANCELARIJA GENERALNOG REVIZORA/OFFICE OF THE AUDITOR GENERAL                                                                                                   No. of document 22.18.1-2007-08  
   
 
FINAL AUDIT REPORT ON THE
FINANCIAL STATEMENTS OF GJILAN MUNICIPALITY
FOR THE YEAR ENDED 31 DECEMBER 2007 
                    Pristine, October 2008
 
Table of Contents  I. Executive Summary  II. Introduction  III. Status of Prior Years Recommendations  IV. Audit Scope  V. Audit Opinion  VI. Audit Approach  VII. Key Audit Findings and Recommendations     Annex  I. Financial Statements of Gjilan Municipality for the year ended 31 December 2007      
 
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List of Abbreviations
  AG Auditor General  AI Administrative Instruction  IAU Internal Audit Unit  IFAC International Federation of Accountants  IPSAS International Public Sector Accounting Standards  MAGJ Municipal Assembly of Gjilan  MFHC Main Family Health Centre  OAG Office of the Auditor General  SRSG Special Representative of the Secretary General  UNMIK United Nations Mission in Kosovo                                                                      !"! #$                                                                                                                                                                                                                        
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I. Executive Summary  The Office of the Auditor General (OAG) has carried out an audit of the Financial Statements of the Municipal Assembly of Gjilan (MAGJ) for the year ended 31 December 2007.  In our opinion, the financial statements do not present a true and fair view, in all material respects, of the financial position of the Municipality of Gjilan as of 31 December 2007, and the results of its operations for the year then ended in accordance with the International Public Sector Accounting Standards for “Financial Reporting under the Cash Basis of Accounting”.  Our audit was carried out in accordance with international auditing standards issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants and included such tests and procedures as we deemed necessary to arrive at an opinion on the financial statements.  The audit of financial statements identified weaknesses in the following areas which need to be addressed immediately in order to improve the effectiveness and efficiency of the organization.   1. Financial Statements  2. Revenue  3. Wages and Salaries  4. Goods and Services  5. Procurement  6. Subsidies and Transfers  7. Capital Investment  8. Internal Audit  9. Asset Management;  10. Vehicle Management.  To address the weaknesses reported we provide ten sets of recommendations that are designed to improve the current situation within the municipality.                     !"! 4  #$       
 
II. Introduction  UNMIK Regulation 2002/18, dated 4 October 2002, established the Office of the Auditor General (OAG) in Kosova. According to Section 3.2 of this regulation, the Auditor General (AG) is, among other things, required to conduct an annual regularity audit of all institutions in Kosova that are either publicly owned or receive funding from, or provide dividends or other non tax revenue to, the Kosovo Consolidated Budget. Section 1 of this regulation defines a regularity audit as an attestation of financial accountability involving examination and evaluation of financial statements and other financial records and expression of opinions on:   the financial statements give a true and fair view of the accounts and financialWhether affairs for the audit period;   Whether the financial records, systems and transactions comply with applicable statutes and regulations;   The appropriateness of internal control and internal audit functions;   The probity and propriety of administrative decisions taken within the audited institution or entity; and   arising from or relating to the audit.All matters  Based on Section 47.1 of Law No.03/L-048 on Public Financial Management and Accountability – Auditor General shall prepare and submit to the Assembly a report on the financial statements of budget organizations and public undertakings for the pervious fiscal year. If the budget organization is a municipality, the report shall also be provided to the concerned municipal assembly. This report shall provide the Auditor General’s opinion on whether or not the financial statements give a true and fair view of the finances of such budget organizations and public undertakings.    According to Section 3.3 of Law No.03/L-075 on the Establishment of the Office of the Auditor General of Kosovo and Audit Office of Kosovo, the Auditor General shall provide to the Assembly a report of the Regularity Audit of Kosovo Consolidated Budget not alter than 31 August of the year following the audit period.  III. Status of Prior Years Recommendations  Our report on the audit of the 2006 financial statement made 11 recommendations. Of these, 2 have been partially implemented whilst 9 remain outstanding.  The failure to fully implement our recommendations is a cause for concern and a strong indication that previously reported weaknesses still exist.  
                  !"!5 #$       
 
IV. Audit Scope  The OAG audited the financial statements of the Municipal Assembly of Gjilan (MAGJ) for the year ended 31 December 2007.  The primary objective of our audit was to enable the OAG to express an opinion on whether the MAGJ financial statements, presented in Annex I, give a true and fair view of the revenues and expenses during the year ended 31 December 2007, and whether they are prepared in accordance with the International Public Sector Accounting Standards (IPSAS) for ”Financial Reporting under the Cash Basis of Accounting”.  This IPSAS was issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants (IFAC). The accurateness and completeness of financial statements and explanatory notes presented in Annex 1 are the responsibility of the MLGA Management.  V. Audit Opinion  In our opinion, the financial statements produced by MAGJ do not present a true and fair view, in all material respects, of the financial position of the MAGJ as of 31 December 2007, and the results of its operations for the year then ended, in accordance with the International Public Sector Accounting Standards for “Financial Reporting under the Cash Basis of Accounting”.  Substantive testing disclosed errors and omissions that materially affect the presentation of the financial statements. We report non compliance with laws and regulations that also adversely affects the accuracy and completeness of the financial statements. Finally, MAGJ did not prepare its financial statements in accordance with IPSAS requirements.  We report serious deficiencies in the system of internal control which in our opinion, reduces the effectiveness and efficiency of the organization in the achievement of its objectives.  Major internal control weaknesses and instances of noncompliance are described in Section VII of this report.  VI. Audit Approach  Our audit of the MAGJ 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.                   ! !"6  #$       
 
Our audit was planned and performed during the period 7thto 29th In order to fulfillJuly 2008. our responsibilities, we:   statements against the approved budget for 2007;  financialReviewed the MAGJ   the MAGJ financial statements were prepared in accordance withDetermined whether 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;   Established materiality levels of 5 percent for uncertainties and 3 percent for errors as a threshold for assisting in determining the type opinion to render on the financial statements;   interviews, analytical reviews, document reviews, andRelied on a combination of physical verification to assess the validity and propriety of financial transactions;   the MAGJ Internal Audit Unit toAssessed the independence and quality of work of determine if their work could be relied upon for our audit purposes;  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 MAGJ financial statements, 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 exists 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 limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.                   "! !7 #$       
 
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.  VII. Key Audit Findings and Recommendations  1. Financial Statements  Financial statements should be prepared by each independent entity based on its own accounting records and in such a manner that the statements demonstrate accountability and transparency in the use of government monies. Their format requires additional disclosures in the form of notes to provide supplementary information to users.  Law No. 2003/2 “Public Financial Management and Accountability” regulates the preparation and reconciliation of financial statements of all budget organizations.  To comply with Law No. 2003/2 requires that:   The Chief Financial Officer of a budget organization shall within thirty days after the conclusion of each fiscal year, provide to the Director of Treasury (i) a copy of the financial statements (ii) a confirmation that the financial statements are a true and accurate presentation of the finances and financial transactions for the year.  The Director of Treasury shall, within ninety days after the end of each fiscal year (i) reconcile the financial accounts received with the fiscal accounts and cash balances and (ii) provide the financial accounts for all budget organizations to the Auditor General for auditing.  These financial statements should be prepared based on the accounting records that should be maintained for each budget organization as defined by Law No. 2003/2 as follows:   Receipts of the budget organization  The outstanding liabilities of the budget organization  The assets of the budget organization  poirtaoisn prAp  Adjustments to appropriations  Appropriations that have been made available to the budget organization for expenditure by means of allocated funds notices  funds of the budget organization have been recorded asThe extent to which allocated committed funds  Actual expenditures made.                    !"!8  #$       
 
The financial statements should be prepared in accordance with the AI 2007/08.  Findings  In our opinion the 2007 Financial Statements are inaccurate as they contain wrong or incomplete information for Revenues and Outstanding Liabilities at the end of the year. At the end of 2006 liabilities of approximatelywere outstanding and these were not reported in the notes to10,000 the financial statements. We report our findings on Revenues in a separate section of this report.  Conclusion  The absence of complete information on outstanding liabilities and a failure to report these at the year end has an adverse impact on the presentation and accuracy of the financial statements.  Recommendation 1  In accordance with AI/2007/08 the Municipality should reports all outstanding liabilities in its  notes to the financial statements. 2. Revenue  Findings  The reported value of own source revenues in the 2007 financial statements was1,954,154.  In our opinion the accuracy of the own revenue figure in the financial statements is suspect and unverifiable by audit testing procedures. We provide the following examples to support this finding.   that information for own revenues in the financial statements for 2007 isOur audit reports misleading due to the fact that the closing balance as at 31st December 2006 was whilst the opening balance in the 2007 financial statements was597,391.75, 593,092.14, a difference of4,299.61. Thereno note to the accounts explaining the reason for this is difference.  Comment by the Municipality  The first sentence under page 10 states that own source revenues presented in the 2007 financial ststemnst are misleading and do not match for 4,299.61 and that there is no note to the accounts explaining the reason for this difference. This can not stand because we have obtained a note signed by the Treasury Director showing the amount of revenues from court fines being rescinded because those revenue amounts belong to Municipality of Novobrdo (those are indirect revenues which are not collected and accessed directly by the Municipalities, but only informed through a report issued by the Secretariat of Court Council. The evidence for that is copy of note issued by MEF No.146/12 dated on 09.03.2007. This is strong evidence which invalidates the auditor’s writings.                   !"!9 #$       
 
OAG response on entity’s comment  If those funds were collected by the MEF it should have been disclosed into the financial statements which is not the case. Also, the strong evidence that you refer regarding the invalidation of auditor’s finding can not stand, because the note does not indicate the amount of your revenues collected from court fines before being collected by the MEF, and therefore our conclusion and recommendation remains unchanged.   municipality was unable to provide information on reported revenues ofThe 45,339 by the Directorate of Public Services because it did not maintain records showing the sources of these revenues. The OAG therefore was not able to confirm the accuracy of these revenues.   Revenues of However171,231 were reported as collected by the Urbanism Directorate. we were only able to confirm the collection of136,666 of this total. We were advised that the balance could be confirmed from records kept by the Office of Public Relations – Service to Citizens. However, this Office failed to provide us with the information needed to confirm the balance remaining.   The Municipality’s Department for Geodesy, Cadastre and Property budgeted to collect own revenues of actual reported revenue collected was The90,000 in 2007.97,624 or 108 % of the budget. This excess of7,624 is misleading as it includes revenues due from previous years. This previous years dues should have been clearly identified as a not to the financial statements.   Gjilan Municipality does not have an effective internal control system for managing municipal property and the collection of rent for these properties. This is evidenced by the following:  o It does not have complete records of all properties owned by the council o Some publicly owned property is being rent without a valid contract. o When public properties become available for rent by the council they are not being advertised via a public notice. o We found instances where rent had not been paid to the municipality in line with the contract requirements. o for arrears of rent as requiredLimited action has been taken to terminate contracts by Section 5 of the contract.   The municipality’s Directorate for budget and finance reported revenues of the family health centre of163,251.50, whereas the source documents at the family health centre reported revenues of164,409. We were did not receive any explanation for this difference of1,158. Revenues from issuance of medical certifications for driving license were collected in cash even the fees exceeded 10 euro. Apart of this, we found cases where the transfer of cash collected into the banks account was delayed for more than 3 months.                    "!!10 #$       
 
 The law requires that any payment for property tax exceeding10 must be transacted using a bank transfer. We report that contrary to this, the municipality was accepting revenues in excess of this amount in cash.   The law requires that any payment for exceeding10 must be transacted using a bank transfer. We report that contrary to this, the main family health centre was accepting revenues in excess of this amount in cash. In addition we found instances where cash was not being deposited in the bank for up to three-months.  Conclusion  There is a lack of internal controls over a range of revenues which may result in inaccurate reporting in the financial statements. These internal control weaknesses increase the risk of errors and irregularities in the management and collection of municipal revenues.  Recommendation 2  The municipality must:   up to date records for all own source revenue to ensureMaintain complete, accurate and accurate reporting in the financial statements.   Record all revenues to the correct economic codes established by the Treasury Department and carry out monthly reconciliations between departmental data, bank records and the Treasury Department main ledger. Any differences identified should be resolved.   When public properties become available for let ensure that public notices are issued as required by the law.   records for outstanding liabilities so that their value and duration ofMaintain complete  is known.    Maintain complete, accurate and up to date records for all statistical and other relevant information applying to revenue related transactions;  Ensure that all revenues are banked on a daily basis and that payments over10 are processed  through the bank.  Comment by the Municipality  In general your recommendation is acceptable even such recommendation was implemented partially by our organization. The findings preceded recommendation no.2 (Section 1, 2, 4 and 5 of recommendations) can not stand because we reconcile on daily basis with Free Balance System and continuously have available accurate records which are presented as well in the financial statements.                    !"!11  #$     