A cost rejected by a donor does not disappear. It moves onto the organisation's own funds, and it weighs on the appraisal of the next grant. That is what makes this engagement different from an ordinary audit: the stake is not only the opinion, it is budgetary and immediate.
Which assumes the engagement you commissioned is the one your agreement actually requires. That is where it starts.
01Three engagements, three frameworks
This distinction shapes the entire subject, and it is regularly glossed over — including by firms that claim to work "under International Standards on Auditing" while describing a performance analysis, which those standards do not govern.
| Engagement | Framework | What the practitioner issues |
|---|---|---|
| Audit of the project's financial statements | International auditing standards, including those applying to special purpose frameworks and to single financial statements or specific elements | An opinion, carrying reasonable assurance |
| Expenditure verification under agreed-upon procedures | The international standard on agreed-upon procedures engagements | A report of factual findings. No opinion, no assurance: the practitioner performs the procedures set out in the ToR and reports what was found |
| Project evaluation | The donor's own evaluation methodology — relevance, effectiveness, efficiency, impact, sustainability | An evaluation report. This is neither an audit nor an engagement reserved to a professional accountant |
The most expensive confusion
An organisation that commissions an "audit" where its agreement requires an expenditure verification under agreed-upon procedures receives a report the donor will not accept: wrong format, wrong type of conclusion, procedures that do not match the terms of reference. The engagement has to be redone, at the organisation's expense, usually past the deadline.
The reverse also happens: a report of factual findings delivered where an audit opinion was expected. In both cases the failure is not technical but contractual — and it is prevented by reading the agreement before approaching firms.
02The terms of reference govern everything
In this type of engagement the practitioner does not have the latitude of a statutory audit. The terms of reference annexed to the funding agreement set the scope, the procedures, the format of the report and sometimes the sample sizes. They override the firm's habits.
Six things to establish before any engagement letter is signed:
- The exact nature of the engagement — audit, agreed-upon procedures, or something else.
- The period covered, and how costs incurred before or after it are treated.
- The scope: the project alone or the whole entity? One component or all of them?
- The donor's eligibility rules, which coincide neither with tax deductibility nor with accounting rules.
- The report format, often prescribed, sometimes down to the table templates.
- The qualification required of the signatory: several donors require membership of a recognised professional body.
A firm that accepts the engagement without having read the terms of reference exposes you. The first deliverable of a serious practitioner is a critical reading of the ToR — and sometimes the question that saves you a problem: "are you sure this is what your agreement requires?"
03Eight common grounds for rejection
In order of frequency in the files we see, this is what turns a real and useful cost into a rejected one.
- Outside the period. A cost incurred before the eligibility date or after closure, even by a few days.
- Undocumented competitive process. The supplier may well have been the best offer, but nothing proves it: no consultation, no comparison, no written decision.
- Budget line exceeded or non-existent. The cost is genuine but matches no authorised heading, or exceeds its ceiling without an amendment.
- No cost allocation basis. A cost shared across several projects, charged in full to one of them, with no documented allocation key.
- Unsupported staff time. Salaries charged to the project without timesheets, or with sheets signed after the fact.
- Ineligible taxes. Depending on the agreement, certain taxes are not covered; including them means their amount is rejected.
- Incorrect currency conversion. An exchange rate applied differently from the rule set in the agreement.
- Insufficient supporting documentation. A purchase order without an invoice, an invoice without proof of payment, or missing evidence that the service was delivered.
The lesson is consistent: eligibility cannot be demonstrated after the event. A perfectly legitimate cost becomes unrecoverable if the audit trail was not built at the moment it was incurred.
04The records the auditor will request
| Category | What is expected |
|---|---|
| Contractual framework | Funding agreement and annexes, amendments, approved budget and its revisions, terms of reference for the engagement. |
| Project accounting | Cost accounting isolating the project, trial balance, general ledger for the accounts concerned, bank reconciliations for the dedicated account. |
| Expenditure | Invoices, proof of payment, evidence of delivery, procurement files, service contracts. |
| Staff | Contracts, payslips, timesheets, social security filings, allocation keys between projects. |
| Travel | Mission orders, transport and accommodation receipts, rates applied, mission reports. |
| Cash and currency | Statements for the dedicated account, exchange rates applied and their source, tracking of advances and their clearance. |
The dedicated bank account is not a formality
Many agreements require a separate account for the project. Where funds pass through the organisation's general account, reconstruction becomes slow, expensive in fees, and fragile in front of the donor. It is one of the few requirements whose breach is visible immediately — and it sets the tone for how the auditor approaches the rest of the file.
05Independence: what disqualifies a firm
Donors pay close attention to this, and an organisation can find itself blocked late in the process.
- The firm that keeps the project's accounts cannot audit them. Reviewing one's own work creates a self-review threat, incompatible with the independence required.
- The firm that designed the procedures or configured the cost accounting system is in a comparable position.
- Personal or financial ties with the organisation or its officers must be disclosed.
- The signatory's qualification is frequently specified: membership of a recognised professional body, which the donor can verify.
Our position: where we keep an organisation's accounts, we do not audit its funded projects, and we say so before the question arises. It is the same principle that separates bookkeeping from statutory audit.
An agreement to read before commissioning the engagement?
We review your terms of reference and tell you which engagement they actually require, in what format and to what timetable, before any commitment.
06How the engagement runs
- Reading the terms of reference and the agreement. Establishing the engagement type, scope, expected format and delivery date.
- Engagement letter. It states the applicable framework, the agreed-upon procedures where relevant, the limitations of the engagement and the organisation's obligations.
- Document request. A structured list sent in advance, with a deadline. This step determines the overall duration more than any other.
- Fieldwork. Reconciliations, sample or full testing depending on the ToR, eligibility checks, review of procurement procedures.
- Clearance meeting. Findings are presented before the report is finalised: the organisation can still produce missing documents while the report is unissued.
- Report. Issued in the prescribed format, within the agreement's deadline.
Step five saves more costs than any other. A document found before the report is issued avoids a rejection; found afterwards, it is of no use. Insist that this step appears in the timetable.
Duration depends on the volume of expenditure, the number of components and above all the condition of the file provided. A complete, structured file takes a few weeks; a file that has to be reconstructed takes considerably longer.
07What the report contains
| Element | Purpose |
|---|---|
| Statement of framework and scope | Establishes the nature of the engagement and what it does not cover. |
| Project financial statements or expenditure schedule | Presents the amounts submitted, by budget heading. |
| Opinion or factual findings | Depending on the engagement type. The two are not interchangeable. |
| Ineligible expenditure identified | Amount, ground and document reference. This is the part the donor reads first. |
| Internal control observations | Weaknesses identified and recommendations, usually in a separate management letter. |
A useful report ranks its findings and quantifies the amounts concerned. A report that lists without ranking forces the donor to do that work — and it will not be done in your favour.
08Getting ready: what is decided at project start
Most of an audit's outcome is determined when the agreement is signed, not when the project ends. Seven decisions to take in the first month.
- Open the dedicated bank account if the agreement requires one, before the first disbursement.
- Configure cost accounting to isolate the project, and its components where the budget distinguishes them.
- Translate the budget into a chart of accounts, heading by heading, so that monitoring matches the reporting format expected.
- Write the procurement procedure in line with the donor's thresholds, and apply it from the first consultation.
- Introduce timesheets and allocation keys as soon as the first staff member is assigned.
- Set the currency conversion rule in line with the agreement, and apply it without exception.
- Identify the audit engagement required and its deadline, so it can be budgeted and scheduled.
These seven points are matters of accounting organisation and take a few days to set up at the outset. Reconstructed at the end of a project, they cost ten times more — where they remain possible at all.
This preparatory work falls under our accounting and reporting services; the audit itself falls under our audit services, assigned to a separate team where both engagements concern the same organisation.