ANNEX C

Illustrative Terms of Reference

for a Financial Statement Audit
Readers are cautioned against using the following example as a template. The terms of reference for any audit
should be tailored to the engagement.
1. Introduction
1.1 The board of directors of Aspire FI invites !our firm to submit technical and financial proposals for audit of Aspire
FI. "roposals are invited for t#o assi$nments% one coverin$ an annual financial statement audit and one coverin$
a$reed&upon procedures. The proposal could form the basis for future ne$otiations and ultimatel! a contract bet#een
!our firm and Aspire FI. The contract #ould initiall! cover a three&!ear period'fiscal 1(()% 1((*% and 1((+.
1., The contracts for these assi$nments ma! be rene#able upon their completion for a further period% or advertised a$ain% at
the discretion of Aspire FI.
1.- The cost of preparin$ a proposal and conductin$ the pre&proposal surve! or an! meetin$s for oral presentations shall be
borne b! !our firm% re$ardless of the conduct or outcome of the solicitation process. "roposals must offer services for
the total re.uirements/ proposals offerin$ onl! part of the services #ill be re0ected.
1.1 At an! time before the submission of proposals% Aspire FI ma!% #hether at its o#n initiative or in response to a
clarification re.uested b! an invited offeror% modif! the solicitation documents b! amendment. The amendment #ill be
conve!ed in #ritin$ or b! cable% tele2% or facsimile to all invited offerors and #ill be bindin$ on them. Aspire FI ma!%
at its discretion% e2tend the deadline for submission of proposals.
1.3 All proposals must remain valid and open for acceptance for a period of ninet! 4(56 calendar da!s after the date
specified for receipt of proposals.
2. Background
,.1 Aspire FI #as founded in 1(*3. Aspire has e2panded its operations to include 1- branches in 1(()% #ith branches in
remote rural areas. Further details about Aspire7s operations% includin$ a cop! of the previous !ear7s unaudited
financial statements% are provided in attachment A.
,., Aspire has an audit committee headed b! an outside director. 8ur audit committee #ill dele$ate to the director of finance
responsibilit! for da!&to&da! interface #ith the e2ternal auditor and #ill suppl! the e2ternal auditor #ith necessar!
information.
3. Objective of the external audit
-.1 The ob0ective of the e2ternal audit of Aspire FI7s financial statements is to enable the auditor to e2press a professional
opinion on the financial position of Aspire FI at the end of the three fiscal !ears 41(()% 1((*% and 1((+6 and on the
funds received and e2penditures for the accountin$ period ended -1 9ecember for each fiscal !ear.
4. Scope of the external audit
1.1 The e2ternal audit #ill be carried out in accordance #ith International Standards on Auditin$ 4ISAs6 :or the
countr!7s auditin$ standards;% and #ill include such tests and controls as the auditor considers necessar! under
the circumstances.
1., The auditor should pa! special attention to <e! account balances% particularl! the loan portfolio and loan loss
provisions% cash and e.uivalents% and fund balances.
1.- =iven Aspire7s lar$e number of loans% the auditor is encoura$ed to use statistical samplin$ methods to ensure that a
representative sample is tested.
1.1 As part of the audit process% the auditor should visit a representative number of branches each !ear. It is e2pected that the
auditor #ill have visited all branches in a t#o&!ear period.
1.3 For the purposes of testin$% the auditor is re.uired to visit a representative number of clients.
5. !e of "#$% handbook
3.1 The auditor must become familiar #ith both volumes and the anne2es of External Audits of Microfinance Institutions: A
Handboo! produced b! the Consultative =roup to Assist the "oorest% >ashin$ton% 9.C.% #hich covers <e! issues
relevant to the audit of microfinance institutions. Aspire FI #ill provide copies of the handboo< to interested bidders
at their re.uest. The auditor will be re"uired! before executing the engagement agreement! to specify in writing any
ma#or elements of the handboo$s guidance that the auditor does not belie%e should be implemented due to issues of
practicality! cost! or conflicting authoritati%e guidance.
&. 'inancial !tate(ent! and other infor(ation
).1 Aspire prepares its financial statements accordin$ to :specif!; accountin$ standards. Aspire #ill provide
to the e2ternal auditor the follo#in$ financial statements/
1 Income statement
2 ?alance sheet
3 Cash&flo# statement.
)., The financial statements of Aspire will be prepared in conformity with the re"uirements of attachment &
'identical to annex A of this handboo(. )hile the accuracy of the information re"uested in this attachment!
and the reasonableness of procedures used to deri%e it! are primarily the responsibility of management! the
auditor$s re%iew and opinion will extend to all of the disclosures re"uired in that attachment! whether they
appear in the main body of the financial statements or in the notes to those statements.
).- The auditor #ill be $iven access to all le$al documents% correspondence% and an! other information associated
#ith Aspire FI and deemed necessar! b! the auditor.
). %rior *ear audit!
*.1 Aspire FI has not been audited in previous !ears. Thus it is crucial that the e2ternal auditor closel! e2amine all
the openin$ balances for this fiscal !ear.
+. $udit opinion
+.1 The e2ternal auditor is re.uired to provide an opinion on the financial statements of Aspire FI in accordance #ith
ISAs.
,. -anage(ent letter
(.1 In addition to the audit report and opinion% the auditor #ill be re.uired to prepare a mana$ement letter. In the
mana$ement letter the auditor should/
4 Comment on the accountin$ records% s!stems% and controls that #ere e2amined durin$ the audit% includin$
but not limited to s!stems for handlin$ and recordin$ cash@ adherence to policies and procedures in the loan
approval and disbursal process@ se$re$ation of duties in loan and cash areas@ procedures for loan loss
provisions@ proper recordin$ and cut&off of pa!ables and accruals@ and so on.
5 Comment on other specific s!stems and processes% such as the administration s!stem and mana$ement
information s!stem% particularl! at the branch level.
6 Recommend improvements #here specific #ea<nesses are identified in an! of the above s!stems and
controls.
7 Communicate an! other matters identified durin$ the audit that mi$ht si$nificantl! affect the future
implementation of Aspire FI7s function% or that the auditor considers pertinent.
8 Comment specificall! on the appropriateness% and consistenc! of application% of policies for loan loss provisionin$%
loan #rite&offs% allocation of indirect costs bet#een financial and nonfinancial services% and% #here applicable%
cessation and reversal of accrued but unpaid interest on nonperformin$ loans.
1.. $greed/upon procedure!
15.1 In addition to the financial statement audit% the e2ternal auditor is re.uired to perform the a$reed&upon
procedures specified in attachment C :perhaps developed alon$ the lines of anne2 9 of this handboo<; and
submit a separate report.
11. 0i(ing of the audit
11.1 The audit report and opinion% the mana$ement letter% and the report on a$reed&upon procedures should be
received b! Aspire FI no later than t#o months after the end of the accountin$ period to #hich the audit
refers. The auditor should submit the report to Aspire FI7s audit committee.
12. "o((unication! 1ith the audit co((ittee
1,.1 The selected auditor #ill be re.uired to present their audit approach and planned audit pro$ram to the audit
committee before commencin$ the en$a$ement.
1,., The audit partner and mana$er #ill be re.uired to attend all meetin$s of the audit committee.
1,.- If e2ternal auditors discover an! errors% irre$ularities% or fraudulent acts durin$ their #or<% the! are re.uired to
communicate these immediatel! to the audit committee.
13. %re/propo!al !urve*
1-.1 "rospective bidders must conduct a pre&proposal surve! at their o#n cost. A team from the audit firm should spend a
minimum of t#o full da!s at head.uarters revie#in$ <e! s!stems and processes% as #ell as visit one or more branches.
The impressions and findin$ from this surve! should be incorporated into the audit proposal.
14. $dditional infor(ation and propo!al !tructure
11.1 "roposals must incorporate the follo#in$ information% be or$aniAed into the four sections indicated% and be no more
than :provide number; pa$es in len$th.
11., *nderstanding of the wor. 9emonstrate understandin$ of the FI industr!% Aspire FI% and the nature of the #or<.
11.- Audit approach. 9escribe the proposed approach% timin$ of tas<s% and .ualit! control procedures.
11.1 Audit team. For each member of the audit team% describe roles in the en$a$ement and appro2imate level of effort. For
each licensed auditor proposed for this en$a$ement% provide a separate attachment #ith name and brief summar! of
.ualifications and e2perience% includin$/
9 Education and .ualifications
10 emberships in professional audit or accountin$ associations
11 9etails of audit and accountin$ #or< e2perience% includin$ e2perience in microfinance
12 >ritten and spo<en fluenc! in En$lish or other lan$ua$es.
11.3 +irm experience. "rovide the follo#in$ information at a minimum/
13 ,escription. State the le$al nature of the firm 4sole proprietorship% partnership6. State the total number of
auditors 4e2cludin$ support staff6 #ho are o#ners or emplo!ees of the firm. Indicate ho# man! of these are
licensed auditors. Indicate services provided b! the firm and the appro2imate percenta$e of auditin$ services
in the firm7s total fee income. State #hether the firm has an! association or affiliation #ith an! other
professional firm as auditors% accountants% consultants% or la#!ers% either in the countr! or abroad. If so%
provide details.
14 Microfinance experience. 9iscuss the firm7s commitment to servin$ the microfinance industr! and
e2perience #ith microfinance audits.
15 +inancial institutions experience. 9iscuss the firm7s e2perience #ith financial institution audits.
16 Independence of the firm. State #hether an! of the individuals listed above 4or spouses or close relatives6 are
emplo!ed b!% serve as a director of% or have an! financial or business relationship #ith Aspire FI. If so%
provide details.
17 Audit practice. Attach a separate list of the firm7s main clients 4particularl! an! microfinance institutions%
financial institutions% or nonprofit service or$aniAations6 in the past five !ears. Specif! the t!pe of service
4auditin$% consultin$% accountin$6 provided to each client. State #hether the firm has performed audits 0ointl!
#ith international audit firms. If so% provide details.
18 Audit standards and procedures. State #hether the firm adheres to international auditin$ standards and local
auditin$ standards. 9escribe ho# the firm7s audit procedures and methods ensure that these standards are follo#ed.
State #hether the firm7s audit procedures and methods are recorded in a manual or similar document. State briefl!
ho# emplo!ees are supervised. State briefl! the internal procedures used to ensure hi$h&.ualit! #or< and services.
15. Oral pre!entation
13.1 As part of the proposal process% the three bidders #ith the hi$hest scores #ill be invited to present their proposal in
person to the audit committee% and to respond to .uestions from the committee. In the proposal% bidders should discuss
their availabilit! and #illin$ness to ma<e such a presentation. All members of the proposed audit team #ill be re.uired
to attend the proposal presentation.
1&. 'ee!
1).1 Each bidder is re.uired to submit a separate cost proposal for this en$a$ement under separate cover. A separate cost
proposal is also re.uired for the a$reed&upon procedures. The format for the cost proposal is provided in attachment 9.
1). Sub(i!!ion and deadline!
1*.1 The technical proposal and cost proposal should be submitted to Aspire FI no later than :provide date;.
1*., All proposals and correspondence should be addressed to/
Audit committee
Aspire FI
Street address
1*.- "roposals should be mailed or sent b! courier.
1+.%ropo!al !coring
1+.1 No mathematical #ei$htin$ #ill be used in scorin$ proposals.
$ttach(ent $
2etail! about $!pire3! operation!
Cop! of previous !ear7s unaudited financial statements
$ttach(ent B
4e5uire(ent! for content and preparation of finanical !tate(ent!
:See anne2 A of this handboo<;
$ttach(ent "
$greed/upon procedure!
:"erhaps developed alon$ the lines of anne2 9 of this handboo<;
$ttach(ent 2
'or(at for the co!t propo!al
1. Fees
Bourl!
"osition Bours rate Cost

"artner
Senior mana$er
ana$er
Senior accountant
Staff
Total
,. E2penses
Travel
"er diem
Communications
Report production
8ther
Total

-. Total