Q& A: The Fundamentals of Grant Auditing
Below we’ve included some basic questions and answers about the fundamentals of grant audits. These are aimed to give a good overview of the area whilst not being specific to one single funding organisation. For more project-specific information, why not subscribe to our Knowledge Base?
Where do I start?
When you are awarded funding for a project, ensure you read the grant agreement or contract carefully from start to finish to ascertain whether your project costs require an audit or certification. Most funding organisations cross-refer to specific guidance around what costs they consider eligible or ineligible to claim.
What is an audit?
An audit is an independent financial inspection and examination of a project’s accounts. The auditor will review the project’s accounts in accordance with the specific terms and conditions of the relevant contract. The auditor will then produce a report which will state whether the expenditure reported conforms with their terms and conditions; this is usually in a format prescribed by the grant agreement. This report is sent to the funding organisation as part of the reporting process.
Does our project need an audit?
Consult the relevant terms and conditions of your grant agreement or contract, this will stipulate whether an audit is required and how the audit should be completed. Most funding organisations allow the cost of an audit to be incorporated into the budget of the project, so be sure to read all the relevant documents relating to your funding call to ensure you include any audit costs within your application.
Who can do the audit?
Most funding organisations require that an audit is completed by a Registered Auditor, who is qualified to carry out audits in accordance with relevant national legislation. Specific criteria will be set out in the project’s grant agreement or contract.
Some funding organisations allow a beneficiary to use their internal audit service to complete grant audits, but this is only allowable if the beneficiary can demonstrate, without doubt, that the internal audit service is sufficiently independent from the project itself.
Can I use my local statutory auditor to complete a grant audit?
The short answer is yes, you can; there are no issues in using your existing annual accounts statutory auditor to complete a grant audit. However, most statutory auditors will not have the specialist knowledge required and may not accept the grant audit engagement. Therefore you may find it preferable and more efficient to employ an auditor who is fully conversant with the rules and nuances of grant auditing. LEES have an expert team dedicated to Grant Audits, and we work not only across the UK, but also further afield.
When is an audit required?
An audit is usually required on a periodic basis. In some cases, it can be when a certain threshold of expenditure has been reached (e.g. €325,000 of direct costs on EU Horizon:2020 projects). In others, it can be with the final report of the project. Some funding organisations (e.g the EU’s INTERREG programme) require an audit every time a claim is made.
What timetable do grant auditors work to?
It is important to engage a grant auditor a few weeks before your deadline for submission of documents. Funding organisations often set deadlines for audit reports at around two to three months after the end of a financial period. It typically takes approximately two weeks, from start to finish, to complete a grant audit engagement; however this is heavily dependent on the size and complexity of the audit.
Many clients maintain an audit timetable with predetermined dates that have been agreed by the auditor and the client. At LEES, we monitor our clients’ grants and remind them if we think an audit might be coming up. We are also flexible with our clients, ensuring that we have the capacity to schedule last minute grant audits that may have caught a client by surprise!
Where will the audit be completed?
The audit will usually be completed on-site at the beneficiary in order to gain access to original documentation, allowing for queries to be addressed more quickly and directly. For some funding organisations, the on-site audit is a mandatory requirement; however this is not always the case. LEES always conduct audits on-site where possible, but we are also able to accommodate any remote audit requests where an on-site audit is not practical.
Where do we find an auditor?
A Registered Auditor is easy to track down via the Register of Statutory Auditors, but you are likely to require a firm who are highly experienced and specialised in grant audits to ensure the turn-around is as smooth as possible. LEES’ experience is second to none in this sector, as we conduct over 250 grant audit engagements per year.
Do we have to follow procurement rules?
Yes, you will be required to follow your organisation’s internal procurement rules at the very least. If you are allowed to claim audit costs on your project, ensure that you follow any rules regarding procurement and tendering for services as laid out in the project’s grant agreement or contract. LEES are happy to provide fixed, written quotes for individual grant audits or contracted periods of service.
How do we engage an auditor?
An auditor can be engaged to perform a specific audit, or a range of audits over a specified contract time period. The Terms of Engagement and fee will be agreed via an Engagement Letter before any work commences.
How do we select an auditor?
You will likely require a grant auditor that has the following attributes:
- Professional Qualifications
- Sector Experience
- Value for Money
- Continuity of Staff and Experience
- Service Delivery
At LEES we are confident that we fulfill all these criteria. We pride ourselves in being independent, but on your side.
How much will the audit cost?
This is entirely dependent on the type of grant audit required, combined with the volume of work required in performing the audit. Most grant audits take around two to three working days to complete from planning to completion. Typically, fee quotes are based on a fixed day rate. Contact us for a competitive quote today.
Can we recover the cost of the audit?
Most funders do allow the cost of a grant audit to be claimed as part of eligible project costs. Be sure to check the terms and conditions of the project’s contract thoroughly to ascertain if this is the case.
How do we prepare for the audit?
After the Engagement has been agreed, we will request the specific claims that need auditing and a breakdown of costs that reconciles to these claims. We will then select an appropriate sample based on the specific terms and conditions of the grant. Note that some funders (e.g. INTERREG) require all expenditure to be certified, and we are therefore required to test 100% of the costs claimed.
At LEES, we always disclose our sample selection at least one week before the scheduled fieldwork. We also provide all our clients with a programme-specific audit deliverable checklist, which states the exact documentation we require from you in order to complete the audit fieldwork.
This way, there are no surprises by the time we arrive to conduct the on-site audit fieldwork; meaning we can complete our work efficiently, accurately, and in a timely manner.
What will auditors check?
Specific procedures and checks are often specified in detail by respective funding organisations. As a general guide, grant auditors expect to see the following documentation at audit:
- Gross monthly payroll costs per employee and on-costs
- Time records or other method proving allocation to project
- Employment contracts for personnel working on the project
- Original invoices
- Evidence of authorisation and allocation to the project
- Tendering documentation if applicable
- Expenses claims and subsequent receipts
- Evidence of how travel claims are relevant to the delivery of the project
- Evidence that the beneficiary’s internal procurement and expenses procedures and rules have been adhered to
- Evidence of payment
- Evidence of a fully auditable indirect cost methodology based on actual costs incurred
Grant auditors will also seek to understand and scrutinise financial systems and procedures in place at a beneficiary.
How will the auditor report?
The auditor will report their findings in an official format prescribed by the project’s source of funding. This is typically in the form of a report in which the auditor determines whether, in their opinion, the claims made are in accordance with the terms and conditions of the grant. The report is sent to the beneficiary for them to submit it along with their narrative reports to the funding organisation. Additionally, grant auditors will detail their findings and queries on a schedule for the client’s own internal records. This allows the client to keep track of all the issues identified and resolved as part of the audit process.
At LEES we always issue draft reports to our clients for approval before submitting them, to ensure that there are no surprises anywhere along the way.
What happens if the auditor identifies errors?
Errors that are identified can be dealt with in two ways. It depends on the funder and their terms and conditions as to which way is appropriate:
1.) The auditor declares errors as exceptions in the audit report. This is where the auditor states that the beneficiary has made claims in accordance with the funding organisation’s terms and conditions “except for….”.
2.) The beneficiary may choose to adjust their claims based on the errors identified during the audit. If the beneficiary makes amendments to their claims based on the audit findings the auditor will issue a report which is free from exceptions.
What are audit error rates?
Audit error rates are the sum of the errors identified at audit expressed as a percentage of the total expenditure declared to the funding source.
Some funding organisations stipulate that if audit errors exceed a certain threshold (e.g. 2% of expenditure declared), the sample must be expanded in order to reduce the risk of ineligible expenditure.
Funding organisations often complete high-level, programme-wide audits. If error rates for the funding programme as a whole exceed a tolerable level, the organisation will often take steps to ensure beneficiaries are claiming expenditure correctly. This could include steps such as the suspension of claim payments.
Who are EC Auditors and how are they different to Independent Auditors?
The European Commission conducts audits across its beneficiaries to ensure that eligibility rules are being followed. EC auditors carry out ex-post or “Second Level Control” audits (audits on expenditure that has already been claimed), so it is important that beneficiaries keep all project documentation until well after the end of the project. The European Commission has a well-developed audit strategy as part of its Framework Programme, the aim of which is to reduce error rates to a tolerable level.
At LEES, we offer free assistance with second level control audits to our clients. We can meet with the EC auditors, allow access to our audit files and working papers, and assist with any queries that may arise. We can and will support you throughout the process.
Do auditors offer pre-award consultancy services?
Given that grant auditors are necessarily independent from the projects they audit, it would be unethical to assist with the financial planning and costing of grant applications. When we are not engaged as auditors, LEES offer expert advice and consultancy services on grant administration, costing and financial planning. When we are engaged as grant auditors, we can recommend a highly experienced, independent consultant to help you.