Supreme Audit Office Government of Islamic Republic of Afghanistal INDEPENDENT AUDITORS' REPORT To The President of the Government of Islamic Republic of Afghanistan. Report on the Financial Statements 1. We have audited the accompanying statements of Cash Receipts and Payments (the "Financial Statements") of the Second Public Financial Management Reform Project (PFMR-l), bearing World Bank Project ID number P120427, comprising Grant Agreement number TF-10024 (hereinafter referred to as the "Project") for the year ended 30 Qaws of Solar Year 1394 (22 December 2014 to 21 December 2015), and a summary of significant accounting policies and other explanatory notes. Scope of Audit 2. Total Payments of USD 18.76 million for the year ended 30 Qaws of Solar Year 1394 (22 December 2014 to 21 December 2015) in the accompanying statements of Cash Receipts and Payments (the "Financial Statements") include payments of USD 3.85 million towards the Support and Capacity Building in the Supreme Audit Office (SAO) which comprises one of the components of the Project. The expenditures relating to this component are outside the scope of our audit and as such have not been audited. The audit opinion provided herein only pertains to the remaining expenditures that have been audited by us. The Ministry of Finance's Responsibility for the Financial Statements 3. The Ministry of Finance (the "Ministry") is responsible for preparation and fair presentation of the Financial Statements in accordance with International Public Sector Accounting Standard "Financial Reporting under the Cash Basis of Accounting." This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements which are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Page 1 of 3 4. The Ministry's policy is to prepare the accompanying financial statements on cash receipts and payments basis. On this basis revenue is recognized when received rather than when earned, and expenses when paid rather than when incurred. Auditor's Responsibility 5. Our responsibility is to express an opinion on these Financial Statements based on our audit. We conducted our audit in accordance with the International Organisation of Supreme Audit Institutions (INTOSAI) standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable rance on whether the financial statements are free of material misstatement. 6. An audit involves performing procedures to obtain sufficient and/p 4rZlaT.Jdvt evidence about the amounts and disclosures in the financial statement e pr4 r selected depend on the auditor's judgement, including the assessmeh of the S'r material misstatement of the financial statements, whether due to fraud o r1 m i the risk assessments, internal control relevant to the entity's preparation a r t of financial statements is considered in order to design audit procedurbs that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of internal controls. An audit also includes evaluating the appropriateness of accounting policies used, the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the financial statements. 7. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion 8. In our opinion, the Financial Statements present fairly, in all material respects, cash receipts and payments of the Second Public Financial Management Reform Project (PFMR-ll), bearing World Bank Project ID number P120427, for the year ended 30 Qaws of Solar Year 1394 (22 December 2014 to 21 December 2015) in accordance with International Public Sector Accounting Standard "Financial Reporting under the Cash Basis of Accounting." Report on Compliance The Ministry of Finance's Responsibility for Compliance 9. In addition to the responsibility for the preparation and presentation of the financial statements described above, the Ministry of Finance is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the following grant agreement (hereinafter referred to as the "Financing Agreement"): "Afghanistan Reconstruction Trust Fund Grant Agreement Number TF-10024 dated August 9, 2011 entered into between the Islamic Republic of Afghanistan and the International Development Association acting as administrator of Afghanistan Reconstruction Trust Fund, as amended, for the provision of Seventy Three Million United States Dollars (USD 73,000,000) funding to the Project." Page 2 ofr3 Auditor's Responsibility on Compliance 10. In addition to the responsibility to express an opinion on the financial statements described above, our responsibility includes expressing an opinion on whether the activities, financial transactions and information reflected in the financial statements are, in all material respects, in compliance with Financing Agreement. This responsibility includes performing procedures to obtain audit evidence about whether all cash payments and receipts are in compliance with the terms and conditions of Financing AgreementSuch procedures include the assessment of the risks of material non-compliance. 11. We believe that the audit evidence we have obtained is sufficient a t provide a basis for our opinion on compliance. Opinion on Compliance 12. In our opinion, in all material respects, the activities, financial r k rc ai4 information reflected in the financial statements are in compliance with lrs d conditions of Financing Agreement. Other Matters - Restriction on Use 13. As indicated above, the statements of cash receipts and payments are prepared in accordance with the International Public Sector Accounting Standard "Financial Reporting under the Cash Basis of Accounting" and may not suit another purpose. 14. This report including our opinion is intended solely for the information and use of the President of the Islamic Republic of Afghanistan and the International Development Association and should not be used for any other purpose. We do not accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come. Other Matters - Internal Control Deficiencies 15. During the audit of the financial statements, we noted certain weaknesses in internal controls and other operational matters which have been disclosed to the Ministry in the Management Letter. These observati mendations, all of which have been discussed with the Ministry, intended to improve nternal control or result in other operating efficiencies. Mohammad Sharif Sharifi Aud or General of Afghanistan Supreme Audit Office Kabul, Afghanistan June 2016 Page 3 ol 3 Islamic Republic of Afghanistan Second Public Financial Management Reform Project World Bank Reference: Project ID P120427; Grant ID 10024 Financial Statements for the year ended 30t' Qaws 1394 (21t December, 2015) Second Public Financial Management Reform Pr World Bank Reference: Project ID P120427; Grant ID 10024 STATEMENT OF CASH RECEIPTS AND PAYMENTS FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) 1394 1393 Cumulative Receipts/ Receipts/ To Date Payments Payments Controlled Controlled by entity by entity USD USD USD RECEIPTS/byett byett __ ___ Initial Advance - 7,000,000 Replenishments 16,389,413 16,074,241 58,566,332 Reimbursements -- 629,778 Taxes deducted but not transferred 12,597 (55,705) 12,597 Temporary Loan from Government's fund 300,000 (600,000) 300,000 TOTAL RECEIPTS 16,702,010 15,418,536 66,508,707 PAYMENTS Disbursement Category: Goods, Non-Consulting Servcies, Consultants' Services, 18,759,466 14,056,600 66,466,033 Incremental Operating Costs & Training and Workshops - other than Supreme Audit Office Bank Charges 175 250 850 TOTAL PAYMENTS 18,759,641 14,056,850 66,466,883 EXCESS OF RECEIPTS OVER PAYMENTS (2,057,631) 1,361,686 41,824 Taminat (Net) 37,640 (2,475) 37,816 Increase/(Decrease) in Cash & Cash Equivalents (2,019,991) 1,359,210 79,641 Cash and Cash Equivalents at the beginning of the year 2,099,632 740,421 increase/l(Decrease) in Cash & Cash Equivalents (2,019,991) 1,359,210 Cash and Cash Equivalents at the end of the year 79,641 2,099,632 The accompanying notes form an integral part of this financial statement. M. Mustafa Mastoor Deputy Minister for Finance Ministry of Finance, Islamic Republic of Afgharflstan Dated: June 7, 2016 Second Public Financial Management Reform Project World Bank Reference: Project ID P120427; Grant ID 10024 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) 1) LEGAL STATUS AND ACTIVITY a) The Second Public Financial Management Reform Project was setup to stren then public financial management through effective procurement, treasury and audit structur ajY4eyms in line with sound financial management standards of monitoring, reporting and c b) The project consists of the following parts: i) Procurement Reform: ii) Public Financial Management Reform; iii) Audit Reform and Performance; iv) Reform Management. c) The project is funded by a grant bearing reference number 10024 from the Afghanistan Reconstruction Trust Fund in the amount of US Dollars 60,000,000 which was signed in August 2011. The amount of grant was later on increased to US Dollars 73,000,000. d) The significant terms and conditions that determine or affect the availability of the funding assistance are primarily the presentation of the eligible expenditures to donor within the period as per and in accordance with the financing agreement. e) These financial statements of the Project have been prepared in accordance with the requirements of the Grant Agreement signed between the Government of the Islamic Republic of Afghanistan and the International Development Association acting as an administrator for the Afghanistan Reconstruction Trust Fund. 2) SIGNIFICANT ACCOUNTING POLICIES a) Basis of Preparation The financial statements are prepared under the historical cost convention and in accordance with Cash Basis IPSAS - Financial Reporting under the Cash Basis of Accounting issued by International Federation of Accountants (IFAC). b) Payments Payments made from Special Account are recognised in the financial statements based on the date the cheque is issued and direct payments by World Bank are recognised on the date on which the withdrawal application for the payment is submitted to the World Bank. However, cheques or withdrawal applications that were ultimately rejected by the bank or the World Bank are reversed in the reporting period. c) Reporting Currency The reporting currency is US Dollars. Since US Dollars is the principal disbursement currency of the donor, the financial statements are not prepared in the Afghani which is the currency of Afghanistan. Second Public Financial Management Reform Pro World Bank Reference: Project ID P120427; Grant ID 10024 d) Currency translations Transactions in currencies other than the reporting currency are transt t ito US Dollar at the rate of exchange at which the transaction is actually executed. 3) NOTES TO ACCOUNTS a) Receipts These represent grants and aid received during the period. Y b) Initial Advance Initial advance represents the advance given by the World Bank into the designated account of the project, c) Bank Charges The Ministry of Finance has negotiated with Da Afghanistan Bank that bank charges will not be charged on the transactions in the US Dollar Special bank account of the grant, Bank Charges may be levied by intermediary banks on deposits into the Special Account and balances returned to the World Bank. d) Taminat The amount of Taminat reported in the FS represents net flow arising from deduction/repayment of security deposit (retention money) during the reporting period. e) Appendices The accompanying appendices from Al to A5 provide additional information and analysis and form an integral part of these notes, except as indicated otherwise. f) Others These Financial Statements are originally prepared in English and then translated into Dari. In the event of any inconsistency between the English and Dari versions, the English version shall be considered to be correct. World Bank Reference: Project ID P120427; Grant ID 10024 APPENDIX Al SUMMARY OF WITHDRAWAL APPLICATIONS FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) Application Description Number Amount USD USD DA-A 36 2,905,682 DA-A 35 1,765,302 DA-A 34 548,366 DA-A 33 3,155,686 DA-A 32 4,109,406 DA-A 31 2,497,272 DA-A 30 1,407,700 DA-A 30t Second Public Financial Management Reform Project World Bank Reference: Project ID P120427; Grant ID 10024 APPENDIX A2 US DOLLAR SPECIAL ACCOUNT SUMMARY FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) Account No: 27414 Depository Bank Da Afghanistan Bank DepostoryBankKabul Address: USD Opening Balance as per Bank Statement 2,061,596 Add: J Replenishments 16,389,413 Temporary loan from government sources 300,000 Receipts against prior years' dues 39,275 Total Additions 16,728,688 Deduct: Payments for Project Expenditure 18,707,857 Refunds not deposited in this account 11,757 Bank Charges Total Deductions 18,719,789 Closing Balance as per Bank Statement as on 30 QAWS 1394 (21 DECEMBER 2015) 70,495 Second Public Financial Management Reform Project World Bank Reference: Project ID P1.20427; Grant ID 10024 APPENDIX A3 US DOLLAR SPECIAL ACCOUNT RECONCILIATION FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) Account No: 27414 Depository Bank: Da Afghanistan Bank Address: Kabul USD USD Closing Balance as per Bank Statement as on 30 QAWS 1394 (21 DECEMBER 2015) 0495 Add: - Refunds not depoisted into this account 11,757 Less: Refunds incorrectly deposited into this account (2,611) Closing Balance as per Receipts and Payments Statement as o QAWS 1394 (21 DECEMBER 2015) 79,641 Second Public Financial Management Reform Project World Bank Reference: Project ID P120427; Grant ID 10024 APPENDIX A4 COMPONENT-WISE DISBURSEMENTS FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) 1393 Actual 1394 Actual Cumulative To Project Component USD USD U9D Procurment Reform 4,504,538 3,791,110 18,781,977 Financial Management Reform 4,985,520 9,262,949 28,722,488 Audit Reform and Performanc 1,093,752 1,470,135 Supreme Audit Office (see not be w) 3,054,499 3,849,004 Reform Management 418,291 386,268 1,737,418 Bank Charges 4 250 850 140680 18,759,641 66,466,883 311,054,499_ Note: The expenditures for Supreme Audit Office (SAO), who is the implementing agency for one of the components of the project, are separately disclosed beginning FY 1392. Prior to being seperately reported, the expenditures for SAO were included in the 'Audit Reform and Performance' component. The cumulative figures of disbursements for the 'Audit Reform and Performance' component though, represent the total amount of expenditures including the expenditures for SAO, Second Public Financial Management Reform Pro ec World Bank Reference: Project ID P120427; Grant ID 10024 Appendix AS STATEMENT OF ESTIMATED GRANT AMOUNT FOR THE YEAR ENDED 30 QAWS 1394 (21 DECEMBER 2015) (Mernorandum Statement - not an integral part of the Financial Statements) Amount in currency of commitment Amount of Grant USD 73000,000 Amount disbursed by World Bank untill the end of 13941 USD 66196,111 Undisbursed Balance USD 6,803,889 In reporting currency Amount disbursed by World Bank untill the end of 13942 USD 66,196,111 Equivalent US Dollars for undisbursed amount USD 6,803,889 Total estimated amount of Grant Funds available USD 73,000,000 Net Cumulative Expenditure as per the Statement of Cash Receipts & Payments USD 66,416,470 1, Actual amounts of total disbursement made by the World Bank since the beginning of the project as available from Client Connection.