The Use of Different Types of Audits in Bank-financed Projects A guidance note for project teams and clients By Douglas I. Graham

Outline of Presentation Purpose of the Guidance Note and Target group Why now? Trends increasing use of different types of audits Terminology and definitions Descriptions of audit types Integrating into risk management

Purpose of the Guidance Note To introduce non-financial specialists to the topic; and provide an overview of when and how different types of audits are being used by: Presenting the different types of audit with examples of their use (see boxes); Describing their advantages and disadvantages; Describing how they might be integrated into risk management processes.

Increased use of Other Audit Types Reflecting Changes in the Bank’s portfolio and policies More Decentralized Operations, e.g. CCTs and CDDs. Greater Awareness of Fragile and Conflict-Affected Situations. Developments in Information and Communications Technology coupled with Increased Public Access to Information. Increased Awareness of Non-Financial Audit Issues such as physical verification of outputs. Going forward, the recently set deadline to eliminate poverty will require the Bank to take more risks – hence the need for better mitigating measures, including greater use of different types of audits.

Terminology and Definitions; Good Governance and Accountability Broad General definition: audits describe activities which promote good governance by holding institutions accountable for their actions through the independent verification of expenditures, processes and outputs, in accordance with principles of transparency, accountability and participation. Some Audits have Global definitions: financial audits, performance audits, compliance audits and internal audits. Other Audits have more Flexible definitions: technical audits, social audits. And yet other Audits Serve Specific Purposes: e.g. environmental audits, and forensic audits.

When to use Different Types of Audits Occasionally different types of audits may replace financial audits, e.g. OBA. More commonly, they complement financial audits, providing additional assurance by enabling expenditures, activities or outputs to be verified more accurately, including in high risk situations(e.g. high volume/low value transactions) and low audit capacity situations (e.g. Fragile and Conflict-Affected situations). Link to: Audit chessboard:

Integrating Audits into Risk Management Processes Emphasis on results highlights main risk as non-achievement of PDOs Has to be balanced against risk of funds not being used for intended purposes This places greater stress on risk management processes Which can be strengthened by integrating different types of audit High Country risks can be mitigated by complementing financial audits with: performance audits to optimize efficiency; compliance audits, especially independent procurement reviews; strengthened internal audit arrangements to ensure satisfactory internal controls; technical audits by IVAs to check the quality of deliverables; and social audits to improve service delivery, especially in Fragile & Conflict- Affected Situations. Sector and Project risks vary according to sector and project, for example: Centrally managed infrastructure projects can benefit from technical audits, to verify the quality of deliverables, and user feedback. In decentralized operations with high volumes of small transactions to multiple beneficiaries, social accountability measures improve risk management processes.

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