LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) IMPLEMENTED BY LAGOS WATER CORPORATION SPECIAL PURPOSE FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31, 2016 EXTERNAL AUDITORS OLABISI FAYOMBO AND COMPANY (CHARTERED ACCOUNTANTS) 152, OBAFEMI AWOLOWO WAY IKEJA, LAGOS STATE LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) Table of Contents General Information Objectives of the Project Summary of Significant Accounting Policies 3-5 Auditors* Independent Opinion 6-7 Statement of Financial Position 8 Statement of Income & Expenditure 9 10 Statement Cash Flov 11 Accumulated Contract Costs Statement of Cash Position 12 13 Notes to the Accounts 14 Special Account Statement 1 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) 1. General Information 1.1 The Project The letter Agreement No. CREDIT NUMBER - CNG 1007 01 L was concluded on November 26. 2012 between the Ministry of Finance of the Federal Republic of Nigeria on behalf of Lagos State Govemiment and Agence Francaise De Developpement. according to which AFD, acting as administrator of the grant funds under the rehabilitation and network expansion of piped water network in Lagos State. The grant is provided for the purpose of implementation to improve the reliability of xater supply produced by the water treatment works in Lagos State. The closing date of the financing under AFD CREDIT NUMBER - CNG 1007 01 L shall remain for so long as any amount is outstanding under the agreement. Contribution from the [Laos State Government under this Credit facility is only for tax payments under the projects. 2 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) 1.2 Project Objectives Th1le objective, otithe project areas follwos as established in the Project Underlining Agreement: 1. To improve the reliability of water supply produced bythe k ater treatment Works in Lagos State. 2, To increase access to piped water network in the state 3. To improve the commercial viability of the urban utilities in the state The project consists of the following parts: A. Rehabilitation and Network expansion B. Public Private Partnership Development C. Service Sustainability and Project Management 1). Policy Reform and Institutional L3 Project Budget and Financing The Project is being financed 100% by Agency Francaise De Developpement exclusive of taxes. 1.4 Project Implementation The Project is being implemented by Lagos State Water Corporation under Lagos State Government. The Address of LSWC is Water House, lJora Police, ljora, Lagos. 2.0 Summary of Significant Accounting Policies 2.? Preparation and Presentation of Financial Statements The Special-Purpose Financial Statements are prepared in accordance with the International Public Sector Accounting Standards: Financial Reporting Under the Cash Basis of Accounting (IIISAS-C~ash Basis), issued by the International Public Sector Accounting Standards (1PSAS)) within the International Federation of Accountants (IFAC) and presented in accordance nith Financial Manual fbr World Bank Financed Investment Operations (March 2010): RNI 3 - Financial Reporting and Auditing. The principal accounting policies applied in the preparation of these Special Purpose Financial Statements are as set out below. Trhese policies have been consistently applied to all the periods presented. 3 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) 2.2 Cash Basis of Accounting Project financing is recognised as a source of project funds when the cash is received. Project expenditures are recognised as a use of funds when the payments are made. 2.3 Reporting Currency 2.3.1 Functional and presentation currency The reporting currency of these Special-Purpose Financial Statements is Nigeria Naira (N). Except as otherwise indicated, financial information presented in Nigeria Naira (N) has been rounded to the nearest thousand. 2.3.2 Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognised in gain or loss. Transfers to Drawdown account and expenditures are converted into Nigeria Naira based on the exchange rate defined by the Central Bank of Nigeria at the dates of the transactions. The effect of exchange rate changes on cash held on local currency is reported as separate line item in the statement of cash receipts and payments. 2.4 Taxes Taxes are paid in accordance with the tax regulations of the Federal Republic of Nigeria. 2.5 Budget Expenditure is created based on actual accumulated expenditures for the last period plus updated procurement plans for the reporting period. 3.0 Income This represents net amount of Interest Income on AFD Special Accounts and gross amount received from sale of bid documents. 4 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) 4.0 Accumulated Contract Costs Accumulated contract costs represent costs incurred to date on civil construction and rehabilitation work, material and equipments including fees of consulting services provided by the Consultants employed for the purpose of the Project. Expenditures are summarised b\ actual for the period and accumulated to date. 5 21abisilFavWIT (CHARTERED ACCOUNTANTS, LAWYERS, AND TAX PRACTIONERS) 152, Awolowo Way, Ikeja, Lagos, Nigeria. 08083144777, 08035153254, 09082576007, 09082576003, 017454630. INDEPENDENT AUDITORS'REPORT FOR THE YEAR ENDED DECEMBER 31, 2016 To the Management of Lagos Water Corporation We have audited the accompanying special purpose financial statements of the Second national Urban Water Sector Reform Project (Hereafter: the Agence Francaise De Developpernent) financed by AFD CREDIT NUMBER - CNG 1007 01 L and implemented by Lagos State Water Corporation, which comprise the statement of cash receipts and payments, and statement of uses of funds by project activity for the year ended December 31. 2016 and a summary of significant accounting policies and other explanatory notes. iManagement's Responsibility for the Special Purpose Financial Statements The ManaLement of Lagos Water Corporation is responsible for the preparation and fair presentation of these Special Purpose Financial Statements in accordance with International Public Sector Accounting Standards: Financial Reporting Under Cash Basis of Accountinu, (IPSAS-Cash Basis) issued by the International Public Sector Accounting Standards Board (IPSASB) within the International Federation of Accountants (IFAC), and Financial Management Manual for World Bank Financed Investment Operations (WB Guidelines), and for such internal control as management determines is necessary to enable the preparation of these Special Purpose Financial Statements that are free from material misstatements, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these Financial Statements based on our audit. We conducted our audit in accordance w ith International Standards on Auditing that is generally accepted. Those standards require that we comply w.ith ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disCosures in the Financial Statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the F inancial Statements, wvhether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entit's preparation of Financial Statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Project Implementation Committee, as w\ell as evaluating the overall presentation of the Financial Statements. 6 -, - ---- - We believe that the audit evidence wc have obtained is sufficient and appropriate to provide a basis for our audit opinion. As follows: Opinion In our opinion, 1. T-he Special Purpose Financial Statements present fairly in all material respeets the cash receipt and payments of the projeet for the year ended December 31, 2016 in accordance vith IPSAS-Cash Basis and World Bank related guidelines 2. lunds have been used in accordance with the conditions of the AFD CREDEF NUMBER - CNG 1007 01 L dated November 26, 2012 between the Agence Francaise De Developpement and Federal Goxernment of Nigeria on behalf of Lacos State Government for the implementation of Lagos Water Corporation, and Agence Francaise De Developpement related guidelines, \vith due attention to economy and efficiency, and only for the purposes for which the financing was provided 3. Supporting documents, records and accounts have been maintained to support elaiims for reimbursement of expenditures incurred. Expenditures ineluded in the withdrawal applications and reimbursed against are eligible for financing under the credit agreement 4. The designated accounts used have been maintained in accordance wýith the provision of CREDIT NUMBFR - CNG 1007 01 L and Agence Francalse De Developpement related guidelines Mav 15, Olabisi FaN-ombo & Co. 2017 Chartered Accountants IAN0002550 7 PATNR:OaisFaoýMkCAC4AXb$LLOaslOlsiaCMTCFCÅMILDLEEFCF1 ..IENLnve LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT AGENCE FRANCAISE DE DEVELOPPEMENT SPECIAL-PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER, 2016 STATEMENT OF FINANCIAL POSITION 2016 2015 Non Current Assets NOTES =N= 000 =N= 000 Accumulated Contract Costs 1 2.611,691 132.134 2,611,691 1,132.134 Current Assets Special Account 2 1,085,010 36,807 Counterpart Fund Account 2 35,586 130,680 Drawdown Account 2 978 1,121,574 167,487 Total Assets 3,733,265 1,299,621 Capital Funds Agence Francaise De Development Fund 4 2974,122 1,009,124 Lagos State Water Corporation Contribution 5 148,816 148.816 Accumulated Fund 6 610.327 141.681 3,733,265 1,299,621 The Financial Statements and notes on pages 11-13 were approved by the Proe-t Implementation Committee on . 2017 and signed on its behalf by: .................................... M anaging Director/C.E.O. Engr. Muminu Badnius . ....; . ..~...... Project Accountant Mr. Aro Ibrahee m The accounting policies on page 7 and notes on pages 11-13 form an integral part of these Financial Statements. 8 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT AGENCE FRANCAISE DE DEVELOPPEMENT SPECIAL-PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR END)EDl 31ST D)ECEINBER, 2016 STATEMENT OF INCOME AND) EXPENDITURE 2016 2015 N= 000 =N= 000 Income80 Sales of Bidding Documents 800 Interest Income 10.778 4,260 Exchange Gains 573,536 84,634 Other Income 1,069 585,383 89,694 Less: Operating~ Expenses Bank Charges 6.491 3.319 Withholding Tax on Interest Income 1,078 426 Tax Payments (VAT and WHT) 95,168 14.322 Contigency Expenses 13,955 Incremental Operating Costs 14,000 4,092 116,737 36,114 Surplus/(Deficit) for the Year 468,646 53,580 The accounting policies on page 7 and notes on pages 11-13 form an integral part of these Financial Statements, 9 LA4UJUi WALA X U XJK IVIN SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT AGENCE FRANCAISE DE DEVELOPPEMENT SPECIAL-PURPOSE PROJE(:T FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER, 2016 CASH FLOW STATEMENT 2016 2015 =N= 000 =N= 000 Cash flow from operatinLg activities Surplus for the Year 468,646 53,580 Operating income before working capital changes 468,646 53,580 Cash-flow From Financinf_ Activities Project Expenditure 1.479,557) (1,132,134) AED Contribution 1,964,998 LWC Contribution - - Changes in Cash & Cash Equivalent 954,087 (1,078,554) Cash & Cash Equivalent at the Beginning of the period 167,487 1.246.041 Changes in Cash & Cash equivalent 954,087 (1.078,554) Cash & cash Equivalent at the end of the period 1,121,574 167,487 Represented By: Cash at Bank as at the end of the year 1,121,574 167,487 The accounting policies on page 7 and notes on pages 11-13 form an integral part of these Financial Statements. 10 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT AGENCE FRANCAISE DE DEVELOPPEMENT SPECIAL-PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER, 2016 NOTES TO THE ACCOUNTS NOTE I ACCUMULATED CONTRACT COST CONSULTANCY WORKS SERVICES TOTAL =N=000 =N=000 =N=000 Cost at 1st January, 2016 1,058.466 73.668 1,132.134 Addition during the year 1.352,088 127,469 1,479,557 Cost at 31st December, 2016 2,410,554 201,137 2,611,691 Balance at 31st December, 2016 24,554 201,137 2, 611,691 Balance at 31st December, 2015 1058,466 73,668 1,132.134 Accumulated contract costs represent costs incurred to date on civil construction and rehabilitation work, material and equipments including fees of consulting services provided by the Consultants employed for the purpose of the Project. Expenditures are summarised by actual for the period and accumulated to date. 11 LAGOS WATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT AGENCE FRANCAISE DE DEVELOPPEMENT NOTESTO TH E ACCOUNT S SPECIAL-PURPOSE PROJECT FINANCIAL STATEMENTS FOR TIIE YEAR ENDED 31ST DECEMBER, 2016 NOTES 1O OTIE ACCOIUNTS (Continued) NOTE 2 STATEMENT OF CASH POSITION IDA SPECIAL COUNTERPA RT DRAWDOWN ACCOUNT FUND ACCOUNT TOTAL 1771507180 1771387489 1771441499 =N=000 =N=000 =N=000 =N=000 Balance as at January 1, 2016 36.807 130.680 167,487 ADD WORLD BANK REPLENISHMENTS Deposit from AFL) 1,96-,998 - 1,964,998 Total Interest Earnings 10,778 -0- 0778 E xchange Gain 573.536 - - 573.536 ADD JVC 1GR (Oter Inconie 78 991 L,069 2,586,119 130,758 991 2.717,868 DEDUCT DI RECT PAYNI ENTS F OR: Works 1,352.088 - 1,352,088 (onsultants Services 127,469 - 127,469 Inerenental Operating Costs 14,000 - 14,000 1 ax Pa yments (VAL &W I T 95.168 - 95. l 68 TOTAJ, SERVICE CIHARGES Withholding Tax on Credit Interest 1L078 - - 1,078 Bank Chares 6474 4 13 6,491 1,501.109 95,172 13 1.596,294 Balance at 31st December, 2016 1.085,010 35,586 978 1 , 1 2 1 , 5 7 4 2.1 Project payments have been compared and agreed to Bank Financing shown in the Project Financial Statements 2.2 Special Account has been treated as part olthe Project Financial Statements since ii is the Bank Account of the Project 12 AGOSTVATER CORPORATION SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT A.GENCE FRANCAISE DE DEVELOPPEMENT SPEC IAL-PURPOSF PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER, 2016 NO(TES'l'OTIIE ACCOU NTS (CoititIed) uS$ 2016 2015 NOTE =N=000 =N=000 3 9ECONCI ION OF PROJECT SPECIAL 6CCO NT ,095764 Balance at January 1.2016 187,308.79 36,807 World Bank Replenishments 9.999,989 1,964,998 - Total Interest Earnings 43,560.00 11,159 4,260 Exchange Difference 573.536 84634 10,230,858 2,586,500 1.184,658 L ess ,4.860 5,3620.5 Transfer to Drawdown Account ,440,286.00 354,836 269,955 Direct Payments to Contractors and Consultan 5,198,253.00 1,139,102 874,152 Bank Charges 3 3.744 6,670,53400 1,501490 1,147,851 Balance as at December 31. 2016 3,560,323.79 1,085010 36,807 4 Aenee Franaise e Development Fund24 1,00924 Balance As At January 1, 2016 World Bank Replenishments through IDA Special Account 1,964,998 - 2,974,122 1,009,124 This represents the naira equivalent of the total fitnds received up to the end of December, 2015 from Agence Francaise De Development 5 Laaos State Water Corwation Contribution Balance As At January 1, 2016 l4U16 148.816 Lagos State Government Replenishment ___-------_- Balance as at December 31, 2016 148,816 148816 This represents the cummulative antount received from the L.agos State Water Corporation into Counterpart Fund Account 6 Accumulated Fund Balance brought forward 141.681 88.101 Surplusit Deficit) for the Year 468,646 11,680 Balance carried forward 610,321 141,681 13 AGOS VAT ER CORPORA T ION SECOND NATIONAIL URBAN WATER SECTOR RFFORM PROJECT AGENCE FRANCAISE DE DIVELOPPEMENT SPECIAL-PURPOSE PROJECT FINANCIAL STATEN TINÄS FOR TIlE YEAR ENDED 31ST DECEMBER, 2016 STATEMIENT OF SPECIAL ACCOUNT Depository Bank Agence Francaise De Devcloppement Address No 3, Udi Ilils Street, Off Aso Driie, Maitama, Abuja Credit Number CNG 1007 01 1 Currency Converted to Naira IDA SPECIAL ACCOUNT 1771507180 =N=000 Balance as at January 120 16 36.807 ADD WORLD BANK REPL ENISIINlENTiS Deposit from AFD 1,964,998 Total Inerest Earnings 10,778 Exchangc Gain 573,536 2,586,119 IEDUC DIRECT PAN ENTS FOR: Works 152.088 consultants Servics 127.469 Incremental Operatng CostS 14.000 TOTAL SERVICE ClARG;ES Withholding 'ix on Credit Interest 1.078 Bank Chargpcs 6,474 1,501,109 Balance at 31st December, 2016 1,085,010 Proicet payrents havc been compared and agreed to Bank Financing shown in the Projct Financial Statements Special Account has been treated as part of the Project Financial Staternents since it is the Bank Account of the Proict 14 SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) 001 IMPLEMENTED BY LAGOS WATER CORPORATION SPECIAL PURPOSE MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2016 EXTERNAL AUDITORS OLABISI FAYOMBO AND COMPANY (CHARTERED ACCOUNTANTS) 152, OBAFEMI AWOLOWO WAY IKEJA, LAGOS STATE Olabisi Fayombo & Co. (CHARTERED ACCOUNTANTS, LAWYERS, AND TAX PRACTIONERS) 152, Awolowo Way, Ikeja, Lagos, Nigeria. 08083144777, 08035153254,09082576007,09082576003,017454630. May 26,2017 The Managing Director/CEO Lagos Water Corporation Ijora Police Ijora Lagos Dear Sir, AUDITORS' OBSERVATIONS AND CO1MENTS ON THE SPECIAL PURPOSE FINANCIAL STATEMENT FOR TJE YEAR ENDE) 31ST DECEMRER. 2016 We have audited the Project's special purpose financial statements of the Second national Urban 'Water . Sector Reform Project (H-tereafter: the Agence Francaise De Developpement) financed by AFD CREDIT NUN4BER - CNG 1007 01 L and implemented by Lagos State Water Corporation, which comprise the statement of cash receipts and payments, and statement of usCs of funds by project activity for the year ended December 31, 2016 and a summary of significant accounting policies and other explanatory notes. NOTE TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS Appropriate notes in respect of the Project's policies have been incorporated into the Financial Statements. Kindly confirm that our understanding of these policies is in order, and that our wording of the rest of the Notes is acceptable to -the %nagernent of the Project. LETTER OF REPRESENTATION In compliance with the requirements of International Public Sector Accounting Standards (IISASB) within the International Federation of Accountants (IFAC) and presented in accordance with Financial Manual for World Bank Financed Investnent Operations (March 2010): RM 3 - Financial Reporting and Auditing., we require a letter of representation to be assured of your agrcement with the information and opinion given to the examination of your Special-Purpose Financial Statements for the vear ended 31st December, 2016. AFD CREDIT NUMBER - CNG 1007 01 L - p;- r 1T [ ((7 *LGOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) OBJECTIVES OF THIS REPORT The objectives of the report include the following: i. To assist Nanagement in improving the Project's present system and also put ri4ht, matters that may otherwise affect the reliability of your financial records and statements. ii. To enable us give our comments on the accounting system and internal control system of the Project, iii. To enable us to bring to the attention of Management, areas of weakness that nigbt lead to material errors or even frauds in future. iv. To enable us communicate to your management, matters that may impact on future audits in compliance with professional guidelines EXECUTIVE SUMMARY We have completed the audit of the Project's Special-Purpose Financial Statements for the year ended 3 1 st December, 2016. In planning and performing our audit, we considered the Project's internal control structure in order to determine our auditing procedures for the purpose of expressing an opinion on the Financial Statements and to provide assUrance on the effectiveness of internal control structure. It is the responsibility of the Project Imp'ementation Committee to ensure that the Project establishes and maintains a proper internal control structure. For emphasis, ive have presented a description of this responsibility, its objectives and inherent limitations in this Domestic Letter. PROFESSIONAL COMPETENCE We have prepared the Special-Purpose Financial Statements in such a manner that all items prior to this period, have been treated in accordance acceptable standard of accounting practice and in agreement with International Public Sector Accounting Standards, It must be appreciated that the matters dealt with in this letter came to light during the conduct of our normal audit procedures which are designed primarily to enable us express our opinion on the Special-Purpose financial statements of the Project and therefore cannot be expected to include all possible improvements in the systei of accounting and internal control which a more extensive examination might reveal. During the course of our audit, we maintained close contact with your officers and briefed them of our findings and recommendations as and whcn they arose. This report has been prepared solely for the use by the designated representatives on the Project. No responsibility to any third party is accepted as the report has not been prepared and is not intended, for any other purpose. SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) We seize this opportunity to express our appreciation for the co-operation and assistance we received from both Management and the Project's Unit in the course of our audit exercise. We oblige to give any assistance you may require in implementing our recommendations. Yours faithfullV. FOR: OLABISI FAYOMBO & Co. (Chartered Chief Accountants) OGUNSOLA OLUSINA PARTNER 4 SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NUMBER - CNG 1007 01 L) CORPORATE GOVERNANCE ISSUES We submitted that: 1. The Project's status and mandate should he properly defined II. True business philosophy should drive the Project's operations; by tailoring the Project's expenses towards direct revenue boost of the Lagos Water Corporation Ill. Sources and Uses of Fund should be tabled to reflect actuaL budgyet and variance on both Financing and Expenditures activities so that the Project's activities will be further summarised beyond SAR Special Account Report MANAGEMENT'S RESPONSIBILITY, THE OBJECTIVES AND LI MITATIONS OF THE ACCOUNTING AND INTERNAL CONTROL STRUCTURE l3roject Implementation Committee's responsibility The Project Implementation Committee is responsible for the designing of the Accounting and Internal Control Structure and overseeing the effectiveness and adequacy vhile management implements same. In planning this resporisibility, estimates and judgnents, Management is required to assess the expected benefits and related costs of internal control policies and procedures. Objectives The objectives of well properly staffed Accounting and Internal Control Structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorised use or disposition and that transactions are executed in accordance with Management's authorisation policy and recorded properly to permit the preparation of the Special-Purpose Financial Statements in accordance with General ly Accepted Accounting Principles (GAAP). Limitations Due to inherent limitations in any Accounting and Internal Control Structure. errors or irregularities may occur and not be detected. Also, projection of any evaluation of the structure to futuire periods is subject to the risk that procedures may become inadequate because of changes in conditions or the effectiveness of the design and operation of policies, and procedures may deteriorate. The major limitations are: a) Controls usually provide reasonable rather than absolute assurance that their objectives will be accomplished. This is primarily because the cost of an internal control should not exceed the benefits expected to be derived from it. b) The effectiveness of the controls is ultimately dependent on the people operating them. c) Any control designed to ensure the execution and recording of transactions may be ineffective against errors or irregularities perpetrated by Management. Management can normally override controls because of their authority in establishir them. d) Pro ceduies may become inadequate due to changes in conditions and compliance with procedures may therefore deteriorate. SECOND NATIONAL URBAN WATER SECTOR REFORM PROJECT (AGENCE FRANCAISE DE DEVELOPPEMENT) SPECIAL PURPOSE MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2016 (CREDIT NU MBER - CNG 1007 01 L) Issues for Consideration STATING MANAGEMENT'S AND THE AJDTOR'S RESPONSIB1LIY AGENCE PRANCAISE DE DEVELOPPETMENT CREDIT NUMBER - CNG 1007 01 L requires that.the auditor's report state that management is responsible for the preparation and the fair presentation of the financial statements in accordance with the applicable financial reporting framework and that this responsibility includes: (a) maintaining internal control-relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; (b) selecting and-applying appropriate accounting policies that are consistent with the applicable financial reporting framework; and (c) making accounting estimates that are reasonable in the circumstances. AGENCE FRANCAISE DE DEVELOPPEMENT CREDIT NUMBER - CNG 1007 01 L requiresthat the auditor's report include a statement that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. The auditor's report should describe the scope of the audit by stating that the audit was conducted in accordance with ISAs and explain that those standards require that the auditor plan and perform the audit to obtain reasonable, but not absolute, assurance whether the financial statements are free from material misstatement, whether due to fraud or error. The Credit Facility Agreement requires that the auditor's report include a statement of the responsibility of the Project's management and the responsibility of the auditor. Recommendation: This report's recommendation is in agreement with revised ISA 800 which provides for tlh followin!to be included in the auditor's report on other historical tinancial information: (a) Identification of the responsible party and a description of the responsible party's responsibility for: (i) In the case of other historical financial information prepared for the special purpose, determining that the applicable financial reporting framework is acceptable in the light of the other engagement circumstances. includina the needs of the intended users; (ii) Preparing and presenting the other historical financial information in accordance with the applicable financial reporting framework; (ii) Designing, implementing and maintaining internal control relevant to the preparation and presentation of the other historical financial information that is free from material misstatement. whether due to fraud or error; 6