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A-133 audit - A special purpose audit required for certain grant recipients of USAID. Details can be found at http://www.whitehouse.gov/omb/circulars/a133/a133.html
Accrual- Basis Accounting - A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid.
Adverse Opinion - An adverse opinion is expressed if the basis of accounting is unacceptable and distorts the financial reporting of the MFI. If auditors discover circumstances during the course of the audit that make them question whether they can issue an unqualified opinion, they should always discuss those circumstances with the client before issuing the opinion, in order to determine whether it is possible to rectify the problem.
Agreed-Upon Procedures - Agreed-upon procedures are used when a client retains an external auditor to perform specific tests and procedures and report on the results. Examples might include special reviews of loan portfolio or internal control systems. In performing agreed-upon procedures, the auditor provides no opinion, certification, or assurance that the assertions being made in the financial statements are free from material misstatement. The users of reports based on agreed-upon procedures must draw their own conclusions on the results of the tests reported. For example, an external auditor could be asked to look at a certain number of MFI loan files and document which of the required forms are in the files. The auditor would report on the selection and the results of the procedures performed but would not provide a formal opinion with conclusions drawn from the results of the procedures.
An illustrative Agreed Upon Procedures to test the loan portfolio delinquency report and compliance loan policies and procedures can be found at: http://www.cgap.org/assets/images/Annexd.doc
Audit - A review of an entity's financial statements, records, transactions, and operations, performed by professional accountants to lend credibility to financial statements and other management reports, ensure accountability for donor funds, and / or identify weaknesses in internal controls and systems.
Audit Committee - In larger or more sophisticated MFIs, the board may find it useful to appoint an audit committee whose oversight extends not only to external audits, but also to internal audits, internal controls, and external reporting. Ideally, an audit committee is composed of three to five non-management directors and, as needed, outsiders with accounting and financial expertise. In smaller MFIs the audit "committee" may be a single director with financial expertise and audit experience who takes the lead in exercising the board's audit oversight responsibility.
Depending on the MFI's size and its needs, an audit committee's oversight role might include:
- Overseeing General Conduct
- Review management's risk assessment practices
- Establish and monitor compliance with a corporate code of conduct
- Monitor procedures for compliance with government regulations
- Review the findings of audits or examinations conducted by other agencies
- Discuss disagreements between internal or external auditors and management
- Inquire about the external auditors' opinion on the competence of financial and accounting personnel and the internal auditors.
- Overseeing Internal Control Structure
- Review the adequacy of internal control structures over financial reporting
- Oversee the company's internal controls for safeguarding its assets
- Discuss with the internal auditors and independent auditors the review of the company's electronic data processing procedures.
- Overseeing the Internal Auditors
- Evaluate the internal auditors' objectivity
- Review the internal auditors' work and assess their performance
- Ensure that the internal auditors' involvement in auditing the financial reporting process is well-coordinated with the work of the external auditors.
- Overseeing Financial Reporting
- Evaluate the external auditors' independence
- Review the accounting firm's latest peer review
- Develop the terms of reference for the external audit
- Recommend the appointment of the external auditors
- Review the external auditors' performance and fee arrangements
- Review the external auditors' proposed scope and plan for the annual audit
- Review audit results with the external auditors and management
- Evaluate whether the financial statements are consistent with known information
- Review significant financial statement variances from budget and prior years
- Review the management letter prepared by the external auditors'
Audit Evidence (evidential matter) - Includes written and electronic information (such as checks, records of electronic fund transfers, invoices, contracts, and other information) that permits the auditor to reach conclusions through reasoning.
Audit failures - Instances where the auditor said that the financial statements were fairly stated when in fact, they were not.
Audit Opinion Letter - A signed representation by an auditor as to the reliability and fairness of a set of financial statements. It is usually presented at the beginning of an audit report.
Audit Plan - Audit planning is developing an overall strategy for the expected conduct and scope of the audit. The nature, extent, and timing of planning varies with the size and complexity of the entity, experience with the entity, and knowledge of the entity's business.
Audit Report - a signed, written document which presents the purpose, scope, and results of the audit. Results of the audit may include findings, conclusions (opinions), and recommendations.
An illustrative Audit Report and Financial Statements test can be found at: http://www.cgap.org/assets/images/Annexg.doc
Audit Risk - A combination of the risk that material errors will occur in the accounting process and the risk the errors will not be discovered by audit tests. Audit risk includes uncertainties due to sampling (sampling risk) and to other factors (non-sampling risk).
Audit Schedules - Audit schedules are the information formats developed by the external auditors to guide the MFI in the preparation of particular information presented in a particular manner that facilitates the audit. These should always be completed by the MFI prior to the start of the audit.
Audit Scope - Refers to the activities covered by an internal audit. Audit scope includes, where appropriate: Audit objectives; Nature and extent of auditing procedures performed; Time period audited; and Related activities not audited in order to delineate the boundaries of the audit.
Audit Senior - The audit senior is typically a 3-7 year experienced audit veteran, who is responsible for the day-to-day administration of audit activities. S/he typically leads a team of 1-3 other auditors who perform tasks based on their experience level.
Auditing Standards - Auditing standards provide minimum guidance for the auditor that helps determine the extent of audit steps and procedures that should be applied to fulfill the audit objective. They are the criteria or yardsticks against which the quality of the audit results are evaluated. MFIs and donors should be commissioning audits that meet international standards of auditing. Further information on audit and accounting standards is provided at: http://www.cgap.org/assets/images/Annexb.doc
Auditor - An accountant usually certified by a national professional association of accountants, if one exists in the MFI's country, or certified by another country's recognized national association of accountants. MFIs will often work with Internal Auditors and External Auditors.
Balance sheet - A summary showing an institution's financial position at a given point in time. It presents the institution's stock of assets (such as cash, investments, loan portfolio, or fixed assets), liabilities, (such as loans or accounts payable) and equity capital (net worth: the difference between assets and liabilities).
Best Practices - Best practices are the generally understood operational characteristics of MFIs, which have been successful in terms of high repayment rates, significant outreach, and progress towards surplus generation.
Cash flow statement (sources and uses of funds) - A summary of an institution's cash inflows and outflows during the course of the reporting period.
Certified Public Accountant (CPA) - CPAs are uniquely qualified to report on the financial statements based on education (normally a four year degree), having passed a rigorous examination testing their knowledge, maintaining relevance through a minimum amount of additional education per year, and through a peer review process where other CPAs critique the work of the audit firm.
Chart of accounts - A framework (list of account categories) that structures the classification and recording of accounting transactions.
Compilations - A compilation uses accounting expertise to collect, classify, and summarize information. This process reduces detailed data to a manageable and understandable form without testing the assertions contained in the information. Unlike an audit, compilations do not enable the accountant to express any assurance on the financial information.
Compilations may still benefit users by providing a professional classification of financial data.
Concessionary Debt - Concessionary debt is borrowing by an organisation that carries softer than market terms. These beneficial terms may relate to interest rates, loan duration, or other terms. When interest rates are lower than market the difference is often added back into an institutions expenses as part of the subsidy cost in an off balance sheet transaction. Durational concessions often result in the loan being treated as capital.
Confirmations - Balances held with, as well as loans borrowed from, banks and others require formal confirmation by them directly to the auditors so that the auditors can be sure that the amounts reported by the MFI agree with those balances reported by the third party. Donor disbursements during the period are also confirmed. Bank audits would also use this method to confirm MFI client balances. These are notoriously problematic (not the least because MFI clients do not trust the confidentiality of such a formal process) and are not recommended for MFI audits.
Control Environment - The attitude, awareness, and actions of the board, management, owners, and others about the importance of control. This includes integrity and ethical rules, commitment to competence, board or audit committee participation, organisational structure, assignment of authority and responsibility, and human resource policies and practices.
Control Policies and Procedures - Control activities are the policies and procedures that help ensure management directives are carried out. Those pertinent to an audit include performance reviews, information processing, physical controls, and segregation of duties.
Control Risk - The risk that material error in a balance or transaction class will not be prevented or detected on a timely basis by internal controls.
Credit risk - This is the risk that a counter-party to a financial transaction will fail to perform according to the terms and conditions of the contract (default), thus causing the asset holder to suffer a financial loss.
Defalcation - The misuse or embezzlement of funds.
Deficiency - An internal control shortcoming or opportunity to strengthen internal controls.
Detection Risk - The risk audit procedures will lead to a conclusion that material error does not exist when in fact such error does exist.
Disclosures - Disclosure statements are found in the notes to the financial statements. These are an integral part of the audit report and provide details of the activity in certain accounts, as well as accounting policies and procedures used by the institution in compiling the financial statements. Click the icon for the CGAP Recommended Disclosure Guidelines ( )
Engagement Letter - The engagement letter documents and confirms the auditor's acceptance of the appointment, the objective and scope of the audit, the extent of the auditor's responsibilities to the client and the form of any reports.
An illustrative Engagement Letter can be found at: http://www.cgap.org/assets/images/Annexe.doc
Environmental risk - The impact environmental events such as storms, hurricanes, and floods can have on the market conditions of an MFI. More than commercial banks lending to generally more sustainable corporate clients, microfinance institutions lend to micro-entrepreneurs whose businesses are highly vulnerable to dramatic changes in weather conditions, as many cases have shown in Latin America and Asia.
External Audit - An audit conducted by an individual of firm that is independent of the company being audited. These independent auditors audit the books of a company generally once per year (see Interim Audit) after the completion of the company's fiscal year. Their role is to give an opinion of the financials statement's reflection of the status and operations of the company being audited. Based on what they witness during the audit they will also produce, for management and board utilization, a management letter. Although a financial statement audit is the most common type of external audit, external auditors may also conduct special purpose audits which might include; performing specific tests and procedures and reporting on the results, a less intensive review (donors commonly request such a review), and compilations.
External Auditor - An auditor, usually working for an audit firm, that is completely independent of the company it is auditing. External auditors should always be certified by a professional association of accountants, and should be selected by, and report to, the MFI's board of directors.
Fiduciary risk - The financial impact of all governance and operational risks on the contractual expectations of investors, donors, and/or shareholders.
Financial assets (or liabilities) - Cash held and assets or liabilities to be received or paid in fixed or determinable amounts of money. Cash, financial investments, and loan portfolio are financial assets; buildings, land, and equipment are not.
Financial Statements - Formal financial reports that an institution prepares to inform management, the board, investors, donors, bankers, and others of the status of the institution. These generally include the Balance Sheet, Statement of Operations, and Cash Flow Statements. Because of the broad reliance on these documents, it is imperative that readers believe them to be credible. Assessing credibility of these reports is a primary function of an audit. An illustrative Audit Report and Financial Statements test can be found at: http://www.cgap.org/assets/images/Annexg.doc
Findings - Pertinent statements of fact. Audit findings emerge by a process of comparing what should be with what is.
Fixed-fee contract - A contract method often used with external auditors providing for a single fee covering the completion of the TOR. If the audit firm uncovers items that require additional time the auditor will then approach the MFI client and discuss the issues and any fee increases that will accompany their resolution before going forward. This provides better control to the MFI and protects it from the surprise of an over-budget bill after the audit is over.
Fraud -Fraud is the intentional concealment of facts for either private or organisational gain.
Generally accepted accounting principles (GAAP) - GAAP is a term that broadly defines the body of principles that govern the accounting for financial transactions underlying the set of financial statements. Generally accepted principles are derived from a variety of sources, including promulgations of the regulatory and industry accounting bodies. Other sources include the general body of accounting literature consisting of textbooks, articles, papers, etc. Thus, these principles can be, and often are, at least somewhat unique from country to country.
Grace period - An initial period of time after the disbursement of a loan during which the borrower is not required to pay principal, or principal and interest.
Grants - In the MFI context grants are contribution from donors (bilateral, multilateral, foundations, individuals and others) to be used in the operations of the MFI. These can be provided to cover operational costs, as loan portfolio, fixed asset capital, or even reserve capital - all of which are treated in a special manner for accounting purposes. Grants can be either restricted (covering a specific agreed upon expenditure or reserve), or unrestricted (for any use deemed responsible by management according to objectives provided to the donor). Grants are only repayable in the case of a serious breach in the contract between donor and MFI and even then depend on the specifics of the contract.
Immaterial - Of no importance. Something in financial statements that will not change decisions of investors.
Income statement (profit-and-loss statement, operations statement) - A summary showing income, expenses, and net profit or loss (the difference between income and expense) for a period of time, for instance January 1 - December 31, 20xx.
Independent - In all matters relating to the assignment, independence in mental attitude is to be maintained by the auditors. Independence means freedom from bias, which is possible even when auditing one's own business (independence in fact). However, it is equally important that the auditor be independent in appearance (that others believe the auditor is independent).
Indicators - Financial and operational ratios measuring performance which allow peer group comparisons and reveal strengths or weakness of behaviors or practices. Indicators act as prompters or flag-raisers outlining patterns of potential or probable risks. Although far from being sufficient to detect operational risks likely to endanger the state of the MFI, meaningful indicators, associated with high frequency reporting, will generally provide enough advanced warning to contain major risk factors.
Inherent Limitation - The potential effectiveness of an entity's internal control is subject to inherent limitations. Human fallibility, collusion, and management override are examples.
Inherent Risk - The susceptibility of a balance or transaction class to error that could be material, when aggregated with other errors, assuming no related internal controls.
In-Kind Donation or Subsidy - Goods and/ or services that the MFI uses in the conduct of its business but does not pay for because they are being provided by a donor or other third parties.
Input Control - Computer controls designed to provide reasonable assurance that transactions are properly authorized before processed by the computer, accurately converted to machine-readable form and recorded in the computer, that data files and transactions are not lost, added, duplicated or improperly changed, and that incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely basis.
Insider Loans (related-party loans) - Loans made to a person who is in a position of influence within the lending institution, or to someone else connected with such a person. Such loans raise conflict-of-interest issues.
Interest rate risk - This is the risk of loss due to the sensitivity of earnings to future movements in interest rates. It includes income risk (the risk of loss arising when movements in borrowing and lending rates are not perfectly synchronized under mismatched asset/liability positions) and investment risk (the risk that the market value of a financial instruments will decline over time as a result of changes in exchange or interest rates). For MFIs, the maturity mismatch is more obvious if long term funding is not subsidized and interest rates on loan portfolio start falling below a certain threshold.
Interim Audit -An audit conducted during the fiscal year usually as a means of minimizing the work and time involved in concluding the audit after the fiscal year. An MFI might have an interim audit covering the first nine months of the fiscal year so that at the end of the fiscal year most of the auditing will focus on the last three months of the fiscal year thus allowing for a comprehensive audit and early completion of the audit reports. An interim audit does not usually yield any formal reports from the external auditors.
Internal Audit - Internal Auditing is an independent appraisal function established within an organisation to examine and evaluate its activities as a service to the organisation. The objective of internal auditing is to assist members of the organisation in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed. The audit objective includes promoting effective control at reasonable cost. Occasionally an MFI may contract an external auditor or firm to conduct its internal audit function.
Internal Auditor - An auditor who works directly for a company auditing its activities throughout the year. Internal auditors of MFIs are often not certified auditors, though they usually have significant accounting experience. They should report directly to the board of directors of the MFI. Additional guidance relating to Internal Auditor Standards can be found on the IIA website ( )
Internal Control Questionnaire - A list of questions about the existing internal control system to be answered (with answers such as yes, no, or not applicable) during audit fieldwork. The questionnaire becomes part of the audit working papers used to document the auditor's understanding of the client's internal controls.
Internal Control Weakness - A defect in the design or operation of internal controls. A material weakness is a reportable condition that does not reduce to a relatively low level the risk that employees in the normal course of their duties would not detect material errors or fraud in a timely manner.
Internal Controls - Policies and procedures designed to provide reasonable assurance that specific entity objectives will be achieved. It consists of: the control environment, risk assessment, control activities, information and communications, and monitoring.
A discussion of internal controls for financial institutions is provided by the Federal Deposit Insurance Corporation at http://www.fdic.gov/regulations/safety/manual/98IRC.htm
International Accounting Standards (IAS) - International Accounting Standards are the principles that govern the accounting for financial transactions among those nations that elect to be governed by them. These standards are formalized by the International Accounting Standards Committee in an effort to achieve convergence in the accounting principles that are used by businesses and other organisations for financial reporting around the world. This, in turn, improves the ability of investors, creditors, governments, and others to make informed resource allocation and policy decisions.
For more information on International Accounting Standards, see: http://www.iasc.org.uk/
International Standards on Auditing (ISAs) - National standards on auditing and related services published in many countries differ in form and content. The International Auditing Practices Committee (IAPC) takes cognizance of such documents and differences, and, in the light of such knowledge, issues ISAs, which are intended for international acceptance. ISAs are to be applied in the audit of financial statements and to the to the audit of other information and to related services.
An IFAC member survey carried out in 1998 indicated that 34 countries use IFAC's International Standards on Auditing (ISAs) as their national standards, and a further 35 countries use them without significant modification. Utilization is sure to increase as more countries recognize the need for universal auditing standards.
For more information, see: http://www.ifac.org/Guidance/index.tmpl
Lapping - A scheme to cover an embezzlement by using payments made by one customer to reduce the receivables balance of another customer.
Loan loss Provision expense - An expense recorded in the income (profit-and-loss) statement to reflect an increase in the probability of losses due to uncollected loans.
Loan Loss Reserve - An amount set-aside in the balance sheet to recognize probable future loan losses so that the true value of the loan portfolio is fairly stated. The reserve is increased by additional loan loss provision expense, and reduced by write-off of uncollectable loans on the balance sheet.
Loan portfolio - The asset composed of the loans which borrowers owe to the MFI. The amount of the loan portfolio is the total unpaid principal balance of such loans.
Management letter - The management letter is a detailed letter from the auditors that is usually addressed to the board of directors or its audit committee. It presents weaknesses identified during the audit and offers recommendations to address them. It is customary for the auditor to obtain management's responses to a draft of the management letter, and to consider these responses before preparing the final document.
The board and management of the MFI should discuss the comments provided by the auditor in the management letter and develop an action plan after reviewing the recommendations.
Even a well-run MFI will inevitably have a number of areas where, by accident or design, standard controls and procedures are not followed. The fact that the management letter contains a number of observations and recommendations does not necessarily mean that financial management is weak or that the control system is in a dangerous state. Rather, readers must appraise the significance of each item.
The management of MFIs sometimes has sound business reasons for departing from controls or procedures that are standard in other businesses. Management, boards, and donors should give serious consideration to the contents of the auditor's management letter-but they should never automatically assume that every recommendation must be implemented.
An illustrative management letter can be found at: http://www.cgap.org/assets/images/Annh.doc
Management Representation Letter - A letter addressed to the auditor, signed by the client's chief executive office and chief financial officer. During an audit, management makes many representations to the auditor. Written representations from management in the letter confirm oral representations given to the auditor, document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding.
An illustrative Management Representation Letter can be found at: http://www.cgap.org/assets/images/ANNEXF.DOC
Market risk - Risks stemming essentially from the market or exogenous factors. One major debate has been whether MFIs were vulnerable or not to economic cycles. One school of thought claims that the main characteristics of MFIs (widespread pool of mini-debtors, very little debt concentration, no bank borrowing, economy of survival market) insulate the industry from economic boom and bust cycles to which commercial banks are so vulnerable. The Triodos-Doen Foundation, a Dutch fund managed by the Triodos Bank, reports in its annual report that "during times of economic crisis, micro-businesses continue to repay their loans, often in contrast to bigger companies. In countries such as Russia, Indonesia and Columbia, the quality of the portfolio of microcredit institutions remains good despite (or, perhaps sometimes, thanks to) the crisis." The contrarian view claims that MFIs are exposed to the same economic cycles as financial institutions, as the Asian crisis has demonstrated in Indonesia. MFIs are not meant to serve the "below poverty line" market niche of $1 income per day or less.
Material Weakness - A condition in which internal controls do not reduce to a relatively low level the risk that material errors or fraud may occur and not be detected in a timely period by employees in the normal course of their duties.
Misappropriate - To embezzle or appropriate dishonestly for one's own use.
Negative Assurance - A statement of what the CPA does not know as opposed to a statement as to what the CPA believes (positive assurance). A statement that the CPA was "not aware of material modifications that should be made to financial statements for them to conform with generally accepted accounting principles" is negative assurance used in review reports.
Negative Confirmation Request - The negative form of accounts receivable confirmation asks the client's customer to respond only if the customer disagrees with the balance determined by the client. The positive form asks the customer to respond whether the customer agrees or disagrees with the client's receivable balance. The negative form is used when controls over receivables are strong and accounts receivable consists of many accounts with small balances. The positive form is used when controls are weak or there are fewer, but larger, accounts.
Notes to Financial Statements - Explanatory information considered an integral part of the financial statements.
Objectivity - The internal auditors' objectivity depends on the organisational status of the internal audit function, whether the internal auditor has direct access and reports regularly to the board, the audit committee, or owner-manager, and who oversees internal auditor employment decisions..
Operational (income, expense, profit, or loss) - Stemming from an institution's core business, as opposed to "non-operational" items, such as donations, which are not produced by the business activity and which may not recur in the future.
Outstanding - Remaining to be paid. An outstanding loan is a loan that has been disbursed but neither paid in full nor written off. Outstanding portfolio is the unpaid principal balance of all loans owed to the lender.
Positive Assurance - A statement as what the CPA believes is positive assurance. An example is an opinion that the financial statements are presented fairly in conformity with generally accepted accounting principles. The opposite is negative assurance, which is a statement about what the CPA does not know. A statement that the CPA was "not aware of material modifications that should be made to financial statements for them to conform with generally accepted accounting principles" is negative assurance used in review reports.
Positive Confirmation (positive request) - The positive form of receivables confirmation asks the customer to respond whether the customer agrees or disagrees with the client's reported receivable balance. The negative form of accounts receivable confirmation asks the client's customer to respond only if the customer disagrees with the balance determined by the client. The negative form is used when controls over receivables are strong and accounts receivable consists of many accounts with small balances. The positive form is used when controls are weak or there are fewer, but larger, accounts.
Predecessor Auditor - The auditor of a client for a prior year who no longer audits that client.
Prepayment - Payment of a loan in advance of the payment schedule in the loan contract.
Qualified Opinion - In certain circumstances the auditor may choose to render a qualified opinion. A qualification typically stems from a limitation on the scope of the auditor's work or a disagreement with management regarding the acceptability of accounting treatment or the adequacy of financial statement disclosures. The auditor should be guided by ISA 700, which states that:
A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed, but 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.
Qualitative - Relating to the quality of a trait, as opposed to quantitative, which means expressed as a number.
Quantitative (quantitatively) - Expressed as a number, as opposed to qualitative measurement.
Rating - A rating is not an audit and the rating process does not entail the audit of an MFI's financial records. "The rating process goes beyond financial ratio analysis. The starting point for analysis is an examination of the environment in which a company operates. As such, the financial system of the country is a major consideration." Ratings express a clearly defined evaluation on the level of risk involved against a widely accepted and meaningful scale. Ratings are based on audited data, generally for a five-year period but in the MFI world, more commonly on three years. Analysis of the audited financials begins by reviewing the auditor's opinion and the summary of accounting principles. This opinion can be qualified or unqualified. Generally however, the rating process is a top-down looking first at the market environment, the regulatory context and the competitive setting in which an institution operates. Then the ownership will be examined closely and the legal status of the rated subject will be examined before a full review of operations is carried out.
Reasonable Assurance (in audit report) - An auditor works within economic limits. The audit opinion, to be economically useful, must be formed in a reasonable time and at reasonable cost. The auditor must decide, exercising professional judgment, whether evidence available within limits of time and cost is sufficient to justify an opinion.
Reasonable Assurance (in internal control) - An internal control, no matter how well designed and operated, can not guarantee that an entity's objectives will be met because of inherent limitations in all internal controls systems.
Refinancing - Paying off a client's problem loan by means of issuing a new loan to the client, often with fresh money disbursed and/or a capitalization of the unpaid interest on the prior loan.*
Related Parties - are those with whom the client has a relationship that might destroy the self-interest of one of the parties (accounting is based on measurement of arm's length transactions). Related parties include affiliates of the client, principle owners, management (decision makers who control business policy) and members of their immediate families.
Reliable (reliability) - Different types of audit evidence provide different degrees of assurance to the auditor. When evidence can be obtained from independent sources outside an entity, it provides greater assurance of reliability for an independent audit than that secured solely in the entity. More effective internal controls provide more assurance about reliability of the accounting data and financial statements. The independent auditor's direct personal knowledge, obtained through physical examination, observation, computation, and inspection, is more persuasive than information obtained indirectly.
Renegotiation - A change in the terms of a loan in response to a client's inability to pay it on time. The most common forms of renegotiation are rescheduling and refinancing.
Repayment Rates - For MFIs repayment rates are calculated as:
Loan payments due and paid this period
Loan payments due this period
This is commonly referred to as the Qualitative Repayment Rate. Some MFIs use a less accurate calculation, referred to as the Quantitative Repayment Rate, calculated as:
Loan payments paid this period
Loan payments due this period
Rescheduling - Extending or otherwise easing the originally agreed payment schedule of a problem loan by amending the original loan contract.
Reviews - A review of financial statements requires less work than an audit. The review consists mainly of inquiry and analytical procedures, and does not provide all the evidence that would be required in an audit. Auditors are not required to provide positive assurance that the statements are fairly presented. Instead, auditors are required to state whether their procedures have revealed any cause to believe that the financial statements were not prepared in accordance with an identified financial reporting framework. A review provides moderate assurance that the assertions being made in the financial statements are free from material misstatement, while an audit provides higher-though not absolute-assurance of reliability.
Sample Size - The number of population items selected when a sample is drawn from a population.
Segment reporting - Reporting which separates the financial results of two or more distinct activities or lines of business conducted by a single institution.
Segregation of Duties - means assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. Segregation of duties reduces the opportunities for one person to both perpetrate and conceal errors or fraud.
Soft (or concessionary) loan - A loan, typically from a donor agency or government, whose interest rate is less than the MFI could have obtained from commercial sources.
Special Purpose Audits - International Standards on Auditing (ISA) provide that special purpose audits may be called for in certain situations:
- Where financial statements are prepared in accordance with a comprehensive basis of accounting other than International Accounting Standards (IAS) or national standards
- Where an audit is required only for specific accounts or items in a financial statement
- Where an audit is required to assess compliance with contractual arrangements
- Where an audit is of summarized financial statements.
Specific risk - The "risk of Risk" involving a specific MFI and has nothing to do with market or external risk. Specific risk cover a wide range of endogenous operational factors coagulating to trigger credit and fiduciary risks. The Dutch Triodos bank comments that "financial institutions often have problems attracting and keeping qualified personnel. Much attention needs to be given to education and training. Triodos-Doen tries to assess these risks accurately on the basis of its knowledge and experience of the sector."
Subsequent Events - affect the client and occur between the balance sheet date and issuance of the audit report. Some such events provide additional evidence about conditions that existed at the balance sheet date, such as the bankruptcy of a customer with a history of financial difficulty. The financial statements are adjusted to reflect this evidence. Evidence about conditions that did not exist at the balance sheet date, such as fire that destroyed the client's plant after the balance sheet date, may be so significant as to require disclosure. General conditions, such as a war, do not require disclosure, even if they have a major impact on financial statements. Such items are public knowledge.
Subsidiary Ledger - The detailed information which totals to the balance in the general ledger account. The total of all customer accounts receivable included in the subsidiary ledger of accounts receivable is the balance in the general ledger accounts receivable account.
Substantive Test - tests of detailed activities and transactions, or analytical review tests, designed to obtain audit evidence on the completeness, accuracy, or existence of those activities or transactions during the audit period.
Terms of Reference - The Terms of Reference are specific to the type of audit. The TOR defines exactly what the Board of Directors expects of the auditors. It is used to guide the auditors in developing their proposal, to guide the audit process itself,
The TOR should include:
- Background of the institution
- Information on the Audit Committee (when appropriate)
- The audit objective
- The Scope of the Audit
- Details on what will be provided to the auditors and what they will have access to in conducting the audit
- Information on prior year audits
- Output requirements:
- An audit opinion
- A management letter
- Details of any agreed upon procedures
- Details of the timing of the audit
- Requirements for communications with the audit committee
- A pre-proposal survey
- Details of additional information required from the audit firm
- Information about how the proposals will be scored
Often, reasonably well-completed TORs are developed, auditors provide proposals based on them, and the audit begins. Unfortunately, at this point quite frequently, the TOR is put aside and the auditors simply revert to their common regulatory audit. Arguably, the most important part of the TOR is the follow-up. It is critical that the Board or its Audit Committee monitor the satisfaction of the TOR.
An indicative External Audit Terms of Reference can be found at: http://www.cgap.org/assets/images/Annexc.doc
Test of Controls - (tests of the operating effectiveness of internal controls) Auditors evaluate the design of controls, and then determine if the controls are in operation. In order to rely on the controls they must also obtain evidence as to whether the controls are operating effectively.
Trial Balance - A listing of all account balances; provides a means of testing whether total debits equal total credits for all accounts.
Unqualified Audit - An unqualified opinion indicates the auditor's satisfaction in all material respects with the following matters, in accordance with the auditor's terms of reference:
- The financial information has been prepared using acceptable accounting policies, which have been consistently applied
- The financial information complies with relevant regulations and statutory requirements
- The view presented by the financial information taken as a whole is consistent with the auditor's knowledge of the business of the entity or agency
- There is adequate disclosure of all material matters relevant to the proper presentation of the financial information
- Additional requirements that may have been requested in the terms of reference have been met.
Vouch - Prove accuracy of accounting entries by tracing to supporting documents.
Voucher - A document in support of an expenditure. The signature of an appropriate official on the voucher is authorization for the treasurer to issue a check.
Working Papers - Records kept by the auditor of procedures applied, tests performed, information obtained, and pertinent conclusions reached in the engagement. Working papers provide the principal support for the auditor's report and aid the auditor in the conduct and supervision of the audit.
Write-off - The elimination of an uncollectable loan amount from the loan portfolio in the balance sheet.
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Audit Discussion