ANNEX VII Special Conditions Grant Contract (BUDG and EDF) – Expenditure Verification
TERMS OF REFERENCE FOR AN EXPENDITURE
VERIFICATION OF A GRANT CONTRACT
- EXTERNAL ACTIONS OF THE EUROPEAN COMMUNITY - HOW TO USE THIS TERMS OF REFERENCE MODEL? All text highlighted in yellow in this ToR model and its annex 1 and 2 is for instruction only and beneficiaries of grant contracts should remove it after use. The parts of the ToR presented in <……..> (e.g.
The following are the terms of reference („ToR‟) on which <name of the Beneficiary> „the Beneficiary‟ agrees to engage <name of the audit firm> „the Auditor‟ to perform an expenditure
verification and to report in connection with a European Community financed grant contract for
external actions concerning <title of the action and number of the grant contract> (the „Grant Contract‟). Where in these ToR the „Contracting Authority‟ is mentioned this refers to <the European Commission or name of another contracting authority> which has signed the Grant Contract with the
Beneficiary and is providing the grant funding. The Contracting Authority is not a party to this
1.1 Responsibilities of the Parties to the Engagement
„The Beneficiary’ refers to the organisation that is receiving the grant funding and that has signed the
Grant Contract with the Contracting Authority.
? The Beneficiary is responsible for providing a Financial Report for the action financed by the
Grant Contract which complies with the terms and conditions of the Grant Contract and for
ensuring that this Financial Report can be reconciled to the Beneficiary‟s accounting and
bookkeeping system and to the underlying accounts and records. The Beneficiary is
responsible for providing sufficient and adequate information, both financial and non-financial,
in support of the Financial Report.
? The Beneficiary accepts that the ability of the Auditor to perform the procedures required by
this engagement effectively depends upon the Beneficiary, and as the case may be his partners,
providing full and free access to the Beneficiary‟s staff and its accounting and bookkeeping
system and underlying accounts and records.
? „The Auditor’ is responsible for performing the agreed-upon procedures as specified in these
ToR, and for submitting a report of factual findings to the Beneficiary. „Auditor’ refers to the
audit firm contracted for this engagement and in particular to the partner or other person in the
audit firm who is responsible for the engagement and for the report that is issued on behalf of
the firm, and who has the appropriate authority from a professional, legal or regulatory body.
By agreeing these ToR the Auditor confirms that he/she meets at least one of the following conditions:
? The Auditor and/or the firm is a member of a national accounting or auditing body or
institution which in turn is member of the International Federation of Accountants (IFAC).
? The Auditor and/or the firm is a member of a national accounting or auditing body or
institution. Although this organisation is not member of the IFAC, the Auditor commits
him/herself to undertake this engagement in accordance with the IFAC standards and ethics
set out in these ToR.
? The Auditor and/or the firm is registered as a statutory auditor in the public register of a public
oversight body in an EU member state in accordance with the principles of public oversight
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set out in Directive 2006/43/EC of the European Parliament and of the Council (this applies to
auditors and audit firms based in an EU member state)1.
? The Auditor and/or the firm is registered as a statutory auditor in the public register of a public
oversight body in a third country and this register is subject to principles of public oversight as
set out in the legislation of the country concerned (this applies to auditors and audit firms
based in a third country).
1.2 Subject of the Engagement
The subject of this engagement is the
Report in connection with the Grant Contract for the period covering
yyyy> and the action entitled
1.3 Reason for the Engagement
The Beneficiary is required to submit to the Contracting Authority an expenditure verification report
produced by an external auditor in support of the payment requested by the Beneficiary under Article
15 of the General Conditions of the Grant Contract. The Authorising Officer of the Commission
requires this report as he makes the payment of expenditure requested by the Beneficiary conditional
on the factual findings of this report.
1.4 Engagement Type and Objective
This expenditure verification is an engagement to perform certain agreed-upon procedures with regard
to the Financial Report for the Grant Contract. The objective of this expenditure verification is for the
Auditor to carry out the specific procedures listed in Annex 2A to these ToR and to submit to the
Beneficiary a report of factual findings with regard to the specific verification procedures performed.
Verification means that the Auditor examines the factual information in the Financial Report of the
Beneficiary and compares it with the terms and conditions of the Grant Contract. As this engagement
is not an assurance engagement the Auditor does not provide an audit opinion and expresses no
assurance. The Contracting Authority assesses for itself the factual findings reported by the Auditor
and draws its own conclusions from these factual findings.
1.5 Standards and Ethics
The Auditor shall undertake this engagement in accordance with:
- the International Standard on Related Services („ISRS‟) 4400 Engagements to perform Agreed-
upon Procedures regarding Financial Information as promulgated by the IFAC;
- the Code of Ethics for Professional Accountants issued by the IFAC. Although ISRS 4400
provides that independence is not a requirement for agreed-upon procedures engagements, the
Contracting Authority requires that the Auditor is independent from the Beneficiary and complies
with the independence requirements of the Code of Ethics for Professional Accountants.
1 Directive 2006/43 of the European Parliament and of the Council of 17 May 2006 on statutory audits of
annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and
repealing Council Directive 84/253 EEC.
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1.6 Procedures, Evidence and Documentation
The Auditor plans the work so that an effective expenditure verification can be performed. The
Auditor performs the procedures listed in Annex 2A of these ToR („Listing of specific procedures to be performed‟) and applies the guidelines in Annex 2B (Guidelines for specific procedures to be
performed). The evidence to be used for performing the procedures in Annex 2A is all financial and
non-financial information which makes it possible to examine the expenditure claimed by the
Beneficiary in the Financial Report. The Auditor uses the evidence obtained from these procedures as
the basis for the report of factual findings. The Auditor documents matters which are important in
providing evidence to support the report of factual findings, and evidence that the work was carried
out in accordance with ISRS 4400 and these ToR.
The report on this expenditure verification should describe the purpose, the agreed-upon procedures
and the factual findings of the engagement in sufficient detail in order to enable the Beneficiary and
the Contracting Authority to understand the nature and extent of the procedures performed by the
Auditor and the factual findings reported by the Auditor.
The use of the Model Report for an Expenditure Verification of an EC Grant Contract in Annex 3 of
these ToR is compulsory. This report should be provided by the Auditor to <name of the Beneficiary> within
1.8 Other Terms
The fee for this engagement shall be <fee amount and currency>
a fixed fee for the engagement or otherwise. The Beneficiary and the Auditor may want to agree
specific terms if the Auditor needs to extend verification coverage from 65% to 85%. The Beneficiary
should specify any reimbursable expenses and allowances (e.g. travelling, other) agreed with the
Auditor and whether VAT and/or other relevant taxes are included in the fees/expenses.>
[The Beneficiary and the Auditor can use this section to agree any other specific terms]
Annex 1 nformation about the Grant Contract
Annex 2A Listing of specific procedures to be performed
Annex 2B Guidelines for specific procedures to be performed
Annex 3 Model report for an expenditure verification of an EC grant contract
For the Beneficiary: For the Auditor:
Signature Signature <name and capacity> <name and capacity> <date> <date>
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Annex 1 Information about the Grant Contract
[Annex to be completed by the Beneficiary]
Information about the Grant Contract
Reference number and date of the < Contracting Authority‟s reference of the Grant Contract> Grant Contract
Grant contract title
Beneficiary < full name and address of the Beneficiary as per the Grant Contract> Budget line Contract < Contracting Authority reference of the budget line and Commission reference where
the Contracting Authority is not the Commission > Legal basis for the Contract
Start date of the Action
End date of the Action
Total cost of the Action <amount in Art. 3.1 of the Special Conditions of the Grant Contract> Grant maximum amount <amount in Art. 3.2 of the Special Conditions of the Grant Contract> Total amount received to date by < Total amount received as per dd.mm.yyyy>
the Beneficiary from Contracting
Total amount of the < provide the total amount requested for payment as per Annex V of the General payment request Conditions for Grant Contracts (Request for payment for a grant contract European
Community external actions) >
Contracting Authority <Provide the name, position/title, phone and E-mail of the contact person at the
Contracting Authority. To be completed only if the Contracting Authority is not the
European Commission < provide the name, position/title, phone and E-mail of the contact person in the
Delegation of the Commission in the country concerned, or if applicable at
Auditor < Name and address of the audit firm and names/positions of the auditors>
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Annex 2A Listing of Specific Procedures to be performed
[This Annex is a standard listing of specific procedures to be performed and it shall not be modified]
1 General Procedures
1.1 Terms and Conditions of the Grant Contract
The Auditor obtains an understanding of the terms and conditions of the Grant Contract by reviewing
the Grant Contract and its annexes and other relevant information, and by inquiry of the Beneficiary.
The Auditor obtains a copy of the original Grant Contract (signed by the Beneficiary and the
Contracting Authority) with its annexes. The Auditor obtains and reviews the Report (which includes
a narrative and a financial section) as per Article 2.1 of the General Conditions.
1.2 Financial Report for the Grant Contract
The Auditor verifies that the Financial Report complies with the following conditions of Article 2 of
the General Conditions the Grant Contract:
- The Financial Report must conform to the model in Annex VI of the Grant Contract;
- The Financial Report should cover the Action as a whole, regardless of which part of it is financed by the
- The Financial Report should be drawn up in the language of the Grant Contract;
- The proof of the transfers of ownership of equipment, vehicles and supplies (Article 7.3 of the General
Conditions of the Grant Contract) should be annexed to the final Financial Report.
1.3 Rules for Accounting and Record keeping
The Auditor examines – when performing the procedures listed in this Annex - whether the
Beneficiary has complied with the following rules for accounting and record keeping of Article 16 of
the General Conditions the Grant Contract:
- The accounts kept by the Beneficiary for the implementation of the Action must be accurate and up-to-date;
- The Beneficiary must have a double-entry book-keeping system;
- The accounts and expenditure relating to the Action must be easily identifiable and verifiable;
- The accounts must provide details of interest accrued on funds paid by the Contracting Authority.
1.4 Reconciling the Financial Report to the Beneficiary's Accounting System and
The Auditor reconciles the information in the Financial Report to the Beneficiary‟s accounting system
and records (e.g. trial balance, general ledger accounts, sub ledgers etc.) (See Article 16.1).
1.5 Exchange Rates
The Auditor verifies that amounts of expenditure incurred in a currency other than the Euro have been
converted at the exchange rate which is made up of the average of the rates published in InforEuro for
the months covered by the Financial Report, unless otherwise provided in the Special Conditions of
the Grant Contract (Article 15.9 of the General Conditions)
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2 Procedures to verify conformity of Expenditure with the Budget and Analytical
2.1 Budget of the Grant Contract
The Auditor carries out an analytical review of the expenditure headings in the Financial Report. The Auditor verifies that the budget in the Financial Report corresponds with the budget of the Grant Contract (authenticity and authorisation of the initial budget) and that the expenditure incurred was indicated in the budget of the Grant Contract.
2.2 Amendments to the Budget of the Grant Contract
The Auditor verifies whether there have been amendments to the budget of the Grant Contract. Where this is the case the Auditor verifies that the Beneficiary has:
- requested an amendment to budget and obtained an addendum to the Grant Contract if such an
addendum was required (Article 9.1 of the General Conditions). - informed the Contracting Authority about the amendment in case the amendment was limited
(Article 9.2 of the General Conditions) and an addendum to the Grant Contract was not required.
3 Procedures to verify selected Expenditure
3.1 Eligibility of Costs
The Auditor verifies, for each expenditure item selected, the eligibility criteria set out below. (1) Costs actually incurred (Article 14.1)
The Auditor verifies that the expenditure for a selected item was actually incurred by and pertains to the Beneficiary. For this purpose the Auditor examines supporting documents (e.g. invoices, contracts) and proof of payment. The Auditor also examines proof of work done, goods received or services rendered and he/she verifies the existence of assets if applicable.
(2) Cut-off - Implementation period (Article 14.1a)
The Auditor verifies that the expenditure for a selected item was incurred during the implementation period of the Action.
(3) Budget (Article 14.1b)
The Auditor verifies that the expenditure for a selected item was indicated in the Action budget. (4) Necessary (Article 14.1c)
The Auditor verifies whether it is plausible that the expenditure for a selected item was necessary for the implementation of the Action and that it had to be incurred for the contracted activities of the Action by examining the nature of the expenditure with supporting documents.
(5) Records (Article 14.1d)
The Auditor verifies that expenditure for a selected item is recorded in the Beneficiary's accounting system and was recorded in accordance with the applicable accounting standards of the country where the Beneficiary is established and the Beneficiary's usual cost accounting practices. 2008 Page 6 of 18
The Auditor verifies that expenditure for a selected item is substantiated by evidence (see section 1 of Annex 2B, Guidelines for Specific Procedures to be performed) and notably the supporting documents as specified in Article 16.2 and 16.3 of the General Conditions of the Grant Contract. (6) Justified (Article 14.1e) (7) Valuation
The Auditor verifies that the monetary value of a selected expenditure item agrees with underlying documents (e.g. invoices, salary statements) and that correct exchange rates are used where applicable. (8) Classification
The Auditor examines the nature of the expenditure for a selected item and verifies that the expenditure item has been classified under the correct (sub)heading of the Financial Report. (9) Compliance with Procurement, Nationality and Origin Rules
Where applicable the Auditor examines which procurement, nationality and origin rules apply for a certain expenditure (sub)heading, a class of expenditure items or an expenditure item. The Auditor verifies whether the expenditure was incurred in accordance with such rules by examining the underlying documents of the procurement and purchase process. Where the Auditor finds issues of non-compliance with procurement rules, he/she reports the nature of such events as well as their financial impact in terms of ineligible expenditure. When examining procurement documentation the Auditor takes into account the risk indicators listed in Annex 2B and he/she reports, if applicable, which of these indicators were found.
3.2 Eligibility of Direct Costs (Article 14.2)
If the expenditure for a selected item is recorded under one of the direct costs headings 1 to 6 of the
Financial Report, the Auditor verifies that this type of expenditure is covered by the direct costs as defined in Article 14.2 by examining the nature of the expenditure items concerned. 3.3 Provision for Contingency Reserve (Article 14.3)
The Auditor verifies that the provision for contingency reserve (heading 8 Financial Report) does not exceed 5% of the direct eligible costs of the Action and that the Beneficiary has obtained prior written authorisation of the Contracting Authority for the use of this contingency reserve. 3.4 Administrative costs (Article 14.4)
The Auditor verifies that the indirect costs to cover the administrative overheads (heading 10 Financial Report) do not exceed 7% of the total amount of eligible direct costs of the Action.
3.5 Contributions in kind (Article 14.5)
The Auditor verifies that costs in the Financial Report do not include contributions in kind. Contributions in kind are not eligible costs.
3.6 Non-eligible costs (Article 14.6)
The Auditor verifies that the expenditure for a selected item does not concern a non-eligible cost as described in Article 14.6 of the General Conditions. The Auditor verifies whether expenditure includes certain taxes, including VAT. If this is the case the Auditor verifies whether the Beneficiary (or, where 2008 Page 7 of 18
applicable the partners) cannot reclaim these taxes and whether the applicable regulations, rules and
practices in the country concerned allow the coverage of these taxes in the expenditure.
3.7 Revenues of the Action
The Auditor examines whether revenues which should be attributed to the Action (including inter alia
grants and funding received from other donors and other revenue generated by the Beneficiary in the
context of the Action such as for example interest earned) have been allocated to the Action and
disclosed in the Financial Report. For this purpose the Auditor inquires with the Beneficiary and
examines documentation obtained from the Beneficiary. The Auditor is not expected to examine the
completeness of the revenues reported.
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Annex 2B Guidelines for Specific Procedures to be performed
[This Annex provides standard guidelines for the specific procedures to be performed and these guidelines shall not be
1 Verification Evidence
When performing the specific procedures listed in Annex 2A the Auditor may apply techniques such
as inquiry and analysis, (re)computation, comparison, other clerical accuracy checks, observation,
inspection of records and documents, inspection of assets and obtaining confirmations.
The Auditor obtains verification evidence from these procedures to draw up his report of factual
findings. Verification evidence is all information used by the Auditor in arriving at the factual findings
and it includes the information contained in the accounting records underlying the Financial Report
and other information (financial and non-financial).
The contractual requirements that relate to verification evidence are:
? Expenditure should be identifiable, verifiable and recorded in the accounting records of the
Beneficiary (Article 14.1.d) of the General Conditions of the Grant Contract);
? Expenditure must be easily identifiable and verifiable and traced to and within the
Beneficiary‟s accounting and bookkeeping systems (Article 16.1 of the General Conditions);
? The Beneficiary will allow any external auditor to carry out verifications on the basis of
supporting documents for the accounts, accounting documents and any other document
relevant to the financing of the Action. The Beneficiary gives access to all documents and
databases concerning the technical and financial management of the Action (Article 16.2 of
the General Conditions);
? Article 16.3 of the General Conditions of the Grant Contract provides a list of the types and
nature of evidence that the Auditor will often find in expenditure verifications. Moreover, for the purpose of the procedures listed in Annex 2A, evidence:
? Must be available in documentary form, whether paper, electronic or other medium (e.g. a
written record of a meeting is more reliable than an oral presentation of the matters discussed);
? Must be available in the form of original documents rather than photocopies or facsimiles;
? Should preferably be obtained from independent sources outside the entity (an original
suppliers invoice or contract is more reliable than an internally approved receipt note);
? Which is generated internally is more reliable if it has been subject to control and approval;
? Obtained directly by the Auditor (e.g. inspection of assets) is more reliable than evidence
obtained indirectly (e.g. inquiry about the asset).
If the Auditor finds that the above criteria for evidence are not sufficiently met, he/she should detail
this in the factual findings.
2 Obtaining an understanding of the terms and conditions of the Grant Contract
(Annex 2A - procedure 1.1)
The Auditor obtains an understanding of the terms and conditions of the Grant Contract and he/she
should pay particular attention to Annex I of the Grant Contract, which contains the Description of the
Action, Annex II (General Conditions) and Annex IV, which provides rules for procurement
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(including nationality and origin rules) by grant beneficiaries in the context of EC external actions.
Failure to comply with these rules makes expenditure ineligible for Community financing. These
procurement rules apply to all grant contracts but depending on the legal basis for the Grant Contract
(e.g. TACIS, ALA, Food Aid and Development Co-operation Instrument) nationality and origin rules
may vary. The Auditor ensures with the Beneficiary that the applicable nationality and origin rules are
identified and understood. Applicable rules of nationality and origin are set out, for each legal basis, in 2Annex A2 to the Practical Guide to contract procedures for external actions of the European Communities.
If the Auditor finds that the terms and conditions to be verified are not sufficiently clear he should
request clarification from the Beneficiary. 3 Selecting Expenditure for Verification (Annex 2A - procedures 3.1 – 3.7)
The expenditure claimed by the Beneficiary in the Financial Report is presented under the following
expenditure headings: 1 Human Resources, 2 Travel, 3 Equipment and Supplies, 4 Local office, 5
Other costs, services, 6 Other, 8Provision for contingency reserve and 10 Administrative costs.
Expenditure headings 1 to 6 represent direct costs of the Action. Expenditure headings can be broken down into expenditure subheadings such as for example 1.1 Salaries.
Expenditure subheadings can be broken down into individual expenditure items or classes of
expenditure items with the same or similar characteristics. The form and nature of the supporting
evidence (e.g. a payment, a contract, an invoice etc) and the way expenditure is recorded (i.e. journal
entries) vary with the type and nature of the expenditure and the underlying actions or transactions.
However, in all cases expenditure items should reflect the accounting (or financial) value of
underlying actions or transactions no matter the type and nature of the action or transaction concerned.
Value should be the principal factor used by the Auditor to select expenditure items or classes of
expenditure items for verification. The Auditor selects high value expenditure items to ensure an
appropriate coverage of expenditure.
4 Verification Coverage of Expenditure (Annex 2A - procedures 3.1 – 3.7)
The Auditor applies the principles and criteria set out below when planning and performing the
specific verification procedures for selected expenditure in Annex 2A (procedures 3.1 – 3.7).
Verification by the Auditor and verification coverage of expenditure items does not necessarily mean a
complete and exhaustive verification of all the expenditure items that are included in a specific expenditure heading or subheading. The Auditor should ensure a systematic and representative
verification. Depending on certain conditions (see further below) the Auditor may obtain sufficient
verification results for an expenditure heading or subheading by looking at a limited number of
selected expenditure items.
The Auditor may apply statistical sampling techniques for the verification of one or more expenditure
headings or subheadings of the Financial Report. The Auditor examines whether „populations‟ (i.e. expenditure subheadings or classes of expenditure items within expenditure subheadings) are suitable
and sufficiently large (i.e. are made up of large numbers of items) for effective statistical sampling.
If applicable the Auditor should explain in the report of factual findings for which headings or
subheadings of the Financial Report sampling has been applied, the method used, the results obtained
and whether the sample is representative.
The Expenditure Coverage Ratio („ECR‟) represents the total amount of expenditure verified by the
Auditor expressed as a percentage of the total amount of expenditure reported by the Beneficiary in
2 Practical Guide (applicable for Budget and EDF) and annexes for Budget and EDF
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