What does the audit of a grant mean?
For national and directly managed EU grants, an audit of the funding is mandatory above certain thresholds. In a grant audit the auditor first has to understand the grant agreement and the details of the call. The donor usually sets out in detail the criteria against which the auditor has to review the financial report.
One thing is worth making clear: this is not an audit of the company’s full annual financial statements. The review covers only the financial reporting of the project, confirming that the costs charged to the grant are real, relate to the project, and comply with the grant agreement.
Grant audits in English
The documentation, the conditions and the reporting of directly managed EU funds, and of Swiss and Norwegian funds, are often in English. The auditor has to interpret the donor’s criteria, the Terms of Reference, in English and issue the report in English. This is where we are strong: we regularly carry out grant audits where the entire financial reporting and all the communication run in English. It is no accident that other audit firms send their clients to us in cases like these.
Which grants usually require an audit?
The audit requirement is not set by a general threshold but by the given call for proposals and the grant agreement, so it differs from project to project. It typically comes up on larger national and directly managed EU projects, but the precise condition is always determined by the specific scheme. If you are not sure whether your project needs one, send us your grant agreement and we will tell you.
When does the grant audit start?
Many organisations only realise after winning the funding, at the point of signing the agreement, how demanding the administrative conditions are for a successful financial report. It is worth starting the preparation early and setting up the records required by the agreement. Some of these cannot be produced retrospectively, so it is worth talking to an expert about them before the project begins.
In other words, the auditor should not be left to the very end of the project. The report is tied to the closing of the project, but the preparation and the correct set-up of the records have to start much earlier.
What you need to prepare, and how the process works
The review needs the documents supporting the financial report of the project: the grant agreement and its annexes, the invoices and completion certificates relating to the project, the bank documents proving payment, the employment and time records supporting the payroll costs, and the records of the costs allocated to the project.
The process is usually built up like this: first we study the grant agreement and the criteria set by the donor, then we go through the financial report and its supporting documents item by item, and finally we prepare the audit report in the format required by the donor. Most of the work can be carried out online, on the basis of electronic documents.
The most common errors in grant reporting
These are the errors we meet most often during a grant audit:
- the employment and time records supporting payroll costs are incomplete and do not back up the costs claimed,
- the costs claimed do not relate to the project, or do not qualify as eligible costs,
- the applicant does not hold the documents needed for a cost claimed,
- overheads are allocated in a way that does not follow the rules of the scheme.
Most of these can be prevented if the records are built up in line with the agreement from the start of the project. That is another reason to talk to the auditor early.
Requirements towards the auditor of a grant
The auditor of a grant is generally required to be independent of the supported organisation. Among other things this means that the auditor may not take part in putting the grant documentation together.
During the review the auditor has to perform the work programme defined by the donor, referred to for EU funds as the Terms of Reference (ToR). In the report, in the prescribed format, the auditor gives an opinion on whether the financial report is, in all material respects, covered by expenditure that was incurred and properly supported, and whether the income of the project was used under the conditions of the agreement. The prescribed methodology is not mandatory for EU funds only: on grants the auditor has to work in accordance with the relevant auditing standards. The review of grant expenditure is typically carried out under ISRS 4400 on agreed-upon procedures engagements. As an indication of our professional standing, the mandatory continuing education material of the Hungarian Chamber of Auditors on this subject was written by one of our colleagues.
Grant audits at MGI-BPO
Besides national and directly managed EU grants, we have also audited funding from the Swiss and Norwegian funds. Based on our experience and references, we take on grant audits from projects of a few hundred million forints up to billion-forint programmes.