ORi D BANK PRJECT AR EDED21 DECEMBER 207 Supreme Audit Office Government of Islamic Republic of Afghanistan Auditor's Report Date: 4 December, 20 18 HE Minister of Finance, Government of Islamic Republic of Afghanistan Kabul Independent Auditors' Report on the Financial Statements We have audited the accompanying statements of Cash Receipts and Payments (the "Financial Statements") of the Recurrent and Capital Expenditures Grant (ARTF RC) Project bearing World Bank Project ID number P091258 financed under Grant Number TF-50577 (hereinafter referred to as the -Projecf") for the financial year ended 30 Qavs of Solar Year 1396 (21 December 2016 to 21 December 2017). and a summary o significant accounting policies and other explanatory notes forming part of the Financia Statements. The .Ministry of Finance's Responsibility for the Financial Statements and Compliance with Grant Agreement The Ministry of Finance (the "Ministry) is responsible for preparation and fair presentation of the Financial Statements in accordance with International Public Sector Accounting Standard "Financial Reporting under the Cash Basis of Accountng. This responsibility includes designing. implementing and maintaining internal control relevant to the preparation and fair presentation of the financial state n,wfry which are free from material misstatement. whether due to fraud or error; select* J applying appropriate accounting policies; and making accounting estimate ydasonable i the circumstances. .D. In addition, the Ministry is also responsible for ensur J te actities figancial transactions and information reflected in the financial sta its are in cornpihne with the Project's Grant Agreement. The Grant Agreement Nun*er TF-50577 datedMay 13 2002 respectively entered into between the Islamic Republic of AfghanisiAd and thc Page I of 3 International Development Association for the provision of USD 4,795,421.009 funding to the Project. Auditor's Responsibility 4, Our responsibility is to express an opinion on these Financial Statements based on our audit. We have conducted audit of the financial statements, project operations and related internal controls in accordance with International Standards of Supreme Audit Institutions ("ISSAls"). Those Standards require that SAO comply with ethical regulations and plan and perform the audit to obtain reasonable assurance of the financial statements being free from material misstatement. Those standards require that SAO express its opinion on whcther the financial statements present fairly, in all material respects, the cash receipts and payments of the project. 5. In addition to the responsibility to express an opinion on the financial statements described above- our responsibility includes expressing an opinion on whether the activities, financial transactions and information reflected in the financial statements are, in all material respects- in compliance with the Project's Grant Agreement. This responsibility includes performing procedures to obtain audit evidence about whether all payments and receipts are in compliance with the terms and conditions of Grant Agreement. 6. An audit involves performing procedures to obtain reasonable and appropriate audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. in making the risk assessments, internal controls relevant to the entity's preparation and presentation of financial statements are considered in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of internal controls. An audit also includes evaluating the appropriateness of accoUnting policies used, the reasonableness of accounting estimates made by managrement, as well as evaluating the presentation of the financial statements. 7. We believe that the audit evidence we have obtained is reasonable and appropriate to provide a basis for our opinion. Opinion 8, In our opinion the Financial Statements present fairly. in all material respects. cash receipts and payments of the Recurrent and Capital Expenditures Grant (ARTF RC) Project bearing World Bank Project ID number P09 1258 financed under Grant Number TF-50577 for the financial year ended 30 Qaws of Solar Year 1396,0 1 December 2016 to 21 December 2017) in accordance with International Putiiq Lctor Accountin Standard *Financial Reporting under the Cash Basis of Accoun)(4-1. 9. In our opinion, in all material respects, the activities, (uncial transactions information reflected in the financial statements are in compipa ce,with the teins a I conditions of Pro ject's Grant Agreement. 1 Page 2 of3 10. Management Letter. attached to this Audit Report, highlights areas of improvement in financial management including compliance with financial covenants of the Grant Agreements and of results of its operations for the financial year ended 30 Qaws of Solar Year 1396 (21 December 2016 to 21 December 2017). These observations and recommendations have been communicated to and discussed with the Project and are intended to improve internal controls and result in other operating efficiencies of the Projecti. Dr. hammad Sharif Sharifi Aud oA ral of Afghanistan dupreme Audit Office Kabul, Afghanistan P 3 Pa 3 of 3 Islamic Republic of Afghanistan ARTF Recurrent Costs Support Grant to the Government of the Islamic Republic of Afghanistan World Bank Project ID : P091258 ARTF Grant No. : TF 050577 Financial Statements for the Financial Year ended 30th Qaws 1396 (21 December, 2017) ARTF Recurrent Cost Support Grant TF 50577 Statement of Sources and Uses of Grant Funds for the Financial Year 1396 (21 December 2017) Ref 1396 1395 1396 1395 Actual Actual Cumulative Cumulative US$ US$ US$ US$ Source of Funds ARTF Grant Initial Advance received in DA B.1 - - 50,000,000 50,000,000 Direct Payments B.2 - - 21,705,689 21,705,689 SOE Reimbursements B.1 502,460,289 424,863,550 4,639,292,583 4,136,832,294 Total Receipts B.3 502,460,289 424,863,550 4,710,998,272 4,208,537,983 Uses of Funds Transfers to TSA Account C 502,460,289 424,863,550 4,689,292,583 4,186,832,294 (recurrent and capital expenditures) D irect P ay m ents - 2 1,705,689 2 1,705,689 Total Uses 502,460,289 424,863,550 4,710,998,272 4,208,537,983 The accompanying notes form an integral part of these Financial Statements Mohammad Khalid Payenda Deputy Minister for Finance Ministry of Finance, Islamic Republic of Afghanistan Place. Kabul, Afghanistan Date 26 November 2018 ARTF Recurrent Budget Support Grant - TF 50577 (World Bank Reference: Project ID P091258) SIGNIFICANT ACCOUNTING POLICIES & NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 QAWS 1396 (21 DECEMBER 2017) 1) LEGAL STATUS AND ACTIVITY a) The ARTF Recurrent and Capital Costs Grant agreement was signed on 13 May 2002 to support Afghanistan's' Reconstruction program by funding eligible recurrent and capital expenditures of the Government of Afghanistan. b) The components covered by the grant include: Category 1(a) Recurrent costs Recurrent costs refer to expenditures in the operating budget of the Government of Islamic Republic of Afghanistan (GoIRA). These include wages, benefits and other payments for civil servants, pension payments, debt service obligations, including the pa flnt of interest, fees and other charges, and operation and maintenance costs, but excadi,nc military and paramilitary expenditure and police related expenditure. Category 1(b) Capital costs Capital costs refers to expenditure for capital goods, including, qthout limitation, office furniture and equipment, as set forth in the GoIRA budget, but ug: military and paramilitary expenditure and police related expenditure. c) The initial grant from the Afghanistan Reconstruction Trust FuNd (ARTF) was USD 40,000,000 Through successive amendments, the grant allocations have been increased to USD 4,795,421,009 as at the end of FY 1396 (21 Dec, 2017) of which USD 490000,000Nas added to grant allocations during FY 1396. USD 84,422,737 remained undisbursed as at the end of FY1 396. d) Expenditure submitted for reimbursement from the grant is assessed for eligibility based on eligibility criteria detailed in Schedule 1 of the ARTF Grant Agreement 50577, the Fiduciary Standards that became effective on Mizan 1, 1382 and the amended Fiduciary Standards effective Jadi 1, 1383. Expenditures that are deemed ineligible have been excluded from the financial statements. e) These financial statements are for the Project P091258, funded by the grant(s) as specified in para 1(c) and are prepared by the Ministry of Finance, Government of Islamic Republic of Afghanistan f) These financial statements of the Project have been prepared in accordance with the requirement of the financing agreement signed between the government of the Islamic Republic of Afghanistan and the International Development Association in May 2002. 2) SIGNIFICANT ACCOUNTING POLICIES a) Basis of Preparation The financial statements are prepared using the historical cost convention and on cash basis of accounting. b) Receipts Amounts received in the Special Account of the grant, maintained with the Da Afghanistan Bank (DAB) are recognised and recorded on the date of credit by the DAB. c) Payments Payments are recognised on the date of transfer of funds from the Special Account to the Treasury Single Account (TSA). 3) NOTES TO THE FINANCIAL STATEMENTS a) Initial Advance An amount of USD 50,000,000 was received by the Government of Islamic Republic of Afghanistan (GoIRA) from ARTF in FY 1381 as initial advance. This amount is outstanding at the end of the financial year for which these statements have been prepared (FY 1396) and constitutes a debt of the GoIRA. This amount may be subject to repayment upon cessation of the grant. b) Reporting Currency The reporting currency is US Dollar. c) Currency Translations Transactions in currencies other than the reporting currency are translated into US Dollars at the rate of exchange at which the transaction is executed. d) Statement of Expenditure (SOE) Statements of Expenditure are used by the Ministry of Finance to state and report the expenditure under the ARTF grant agreement 50577 during a certain period. These statements are monitored by the ARTF appointed Monitoring Agents (MA) and sent to the World Bank (Grant Administrator) which uses them for authorising disbursement tranches from the grant funds to the Designated Special Account maintained at 'Da Afghanistan Bank'(DAB). e) Debt Servicing During the financial year no loan repayments were made out of the grant funds. f) Authorisation Date These Financial Statements are authorised by the Deputy Minister for Finance, Ministry of Finance or any official acting on his behalf who has been so authorised to act on the date endorsed on the Statement of Cash Receipts and Payments. g) Appendices The accompanying appendices provide additional information and analysis and form an integral part of these notes, except as indicated otherwise. h) Others These Financial Statements are originally prepared in English and thert1ansmated into Dari. In the event of any inconsistency between the English and Dan version .e'Eqglish version shall be considered correct. Appendix 1.1 ARTF Recurrent Cost Support Grant TF 50577 Category wise Statement of Eligible Expenditures submitted in SoE's for the Financial Year 1396 (21 December 2017) Ref 1396 1395 1396 1395 Actual Actual Cumulative Cumulative US$ us$ US$ us$ Uses of funds by Categories Salaries B.1 889,877,428 837,084,961 7,306,176,419 6,416,298,991 Other Recurrent Expenditure B. 1 329,020,454 303,785,941 2,088,192,778 1,759,172,324 Other Recurrent Expenditure (direct payment) B-3 13,741,094 13,741,094 Debt Servicing B.3 - - 7,964,596 7,964,596 Total Recurrent Expenditure 1,218,897,882 1,140,870,902 9,416,074,888 8,197,177,006 Deduction Ineligibile Expenditure identified by (292,878,237) (342,851,518) (292,878,237) Monitoring Agent Ineligible Expenditure identified during Audit - (17,359,456) Total Category 1 Expenditure 926,019,645 780,659,928 9,123,196,651 8,197,177,006 Total Grant Funds (as amended) 490,000,000 370,000,000 4,795,421,009 4,305,421,009 Expenditure above budget cap 436,019,645 410,659,928 4,327,775,642 3,891,755,997 NOTES 1 Ineligible expenditure amounting to US$ 292,878,237, pertaining to FY1 396, identified by the Monitoring Agent for FY 1396 has been deducted from the total submitted expenditure of FY 1396. 2 Ineligible expenditure pertaining to FY1395, identified by the SAO auditors after completion of the audit for FY 1395, has been deducted from the cumulative eligible expenditures while preparing the Financial Statements for FY 1396. 3 Cumulative figures for FY 1395 eligible expenditure is on net basis (after deduction of identified ineligibilities) -~~~ -- --- Appendix 1.2 ARTF Recurrent Cost Support Grant TF 50577 Statement reconciling Grant Ceiling and Financing for the Financial Year 1396 (21 December 2017) Ref Cumulative as at Cumulative as at 30 Qaws 1396 30 Qaws 1395 US$ US$ Financing Disbursements under grant ARTF 50577 C 4,710,998,272 4,208,537,983 Total Financing 4,710,998,272 4,208,537,983 Eligible Expenditure Ceiling of Expenditure eligible for financing under ARTF 50577 4,795,421,009 4,305,421,009 Total avaibale grant 4,795,421,009 4,305,421,009 Balance available in Grant (undisbursed) 84,422,737 96,883,026 Appendix A.1 ARTF Recurrent Cost Support Grant TF 50577 Summary of Special Account transactions for the Financial Year 1396 (21 December 2017) Grant Account TF050577 - Afghanistan Reconstruction Trust Fund Recurrent Cost Window Period FY 1396 (1 Jadi 1395 to 30 Qaws 1396) Account No 26081 Depository Bank Da Afghanistan Bank Currency US$ Ref US$ Opening Balance 1 Jadi, 1395 - Add: Replenishments from ARTF Grant # 50577 B.1 502,460,289 Total Inflows 502,460,289 Deduct: Transfer to TSA USD account 502,460,289 Transfer to Treasury Single Account 600100 - Total Outflows 502,460,289 Closing Balance as at 30 Qaws 1396 - Appendix B.1 ARTF Recurrent Cost Support Grant TF 50577 SoE and Replenishments Schedule for the Financial Year 1396 (21 December 2017) SoE Application Number SoE Expenditure Category 1 - Total Application Replenished by Initial advance Category 1 - Category 1 - O&M Investments SoE I Payroll Uss US$ US$ US$ US$ US$1 Cumulative Total 1395 50,000,000 6,579,590,829 1,955,427,244 664,216 8,535,682,289 4,136,832,294 Deduction Ineligiblities - 165G (1395) (155,424,248) (187,427,270) (342,851,518) Additional ineligibility (7,867,590) (9,491,866) (17,359,456) (1395 SAO Audit) Adjusted Total 1395 50,000,000 6,416,298,991 1,758,508,108 664,216 8,175,471,315 4,136,832,294 SOE Submissions - 1396 App. 165 C&D 95,000,000 - App. 165E - 5,000,000 App. 165F - - - 189,530,000 - App. 166 58,551,137 9,828,029 68,379,166 18,750,000 App. 166A - - - 38,316,176 App. 166B - - - 3,250,000 App. 167 107,440,275 20,232,811 127,673,086 37,500,000 App. 167A - - - 3,000,000 App. 1678 - 18,750,000 App. 167C - - - 47,212,113 App. 168 619,930,820 302,947,111 922,877,931 46,152,000 App. 168E 103,955,196 (3,987,497) 99,967,699 - Total 1396 889,877,428 329,020,454 - 1,218,897,882 502,460,289 Cumulative Total 1396 50,000,000 7,306,176,419 2,087,528,562 664,216 9,394,369,197 4,639,292,583 Note: Application No 168E, representing final SoE for FY 1396, containing eligible expenditures pertaining to FY 1396 and the deduction for MA identified ineligibilities for FY 1396, has been submitted during FY 1397. The application does not have any impact on the overall disbusrements from the grant account, in the absence of breakup of inegibilities identified by the audit for FY 1395 (USD 17,359,456), the inelgible expenditure has been allocated to the payroll and O&M category in the same ratio as the ineligibility value identified by the MA for the same period i.e in the ratio 155 187 Appendix B.2 ARTF Recurrent Cost Support Grant TF 50577 Direct Payments Schedule for the Financial Year 1396 (21 December 2017) Category 1 Category 1 Total Total Paid/ Debt Servicing Investments Replenished US$ US$ US$ US$ Cumulative total FY1395 7,964,595 13,741,094 21,705,689 21,705,689 Direct payments in FY1396 - - - - Cumulative Total FY1396 7,964,595 13,741,094 21,705,689 21,705,689 . . . . . . . Appendix B.3 ARTF Recurrent Cost Support Grant TF 50577 Schedule of Eligible Expenditures and Disbursements for the Financial Year 1396 (21 December 2017) Eligible Expenditres Disbursement Category 1 Category I Category I Category I Category 1 Total Payroll 0 & M Debt Service Investments Total Disbursed US$ US$ US$ US$ US$ US$ SOE procedures (cumulative) 7,306,176,419 2,087,528,562 - 664,216 9,394,369,198 4,639,292,583 Initial Advance 50,000,000 Direct Payments (cumulative) - - 7,964,595 13,741,094 21,705,689 21,705,689 Total 7,306,176,419 2,087,528,562 7,964,595 14,405,310 9,416,074,887 4,710,998,272 Appendix C ARTF Recurrent Cost Support Grant TF 50577 Reconciliation of SoE Disbursements and Grant Summary for the Financial Year 1396 (21 December 2017) Ref Category 1 US$ Grant Budget as at 1 Jadi, 1395 4,305,421,009 Increase during FY 1396 490,000,000 Total ARTF Grant Budget 4,795,421,009 Disbursements during FY 1396 Application 165 C&D (FY1 395) 95,000,000 Application 165E (FY 1395) 5,000,000 Application 165F (FY1395) 189,530,000 Application 166 18,750,000 Application 166A 38,316,176 Application 166B 3,250,000 Application 167 37,500,000 Application 167A 3,000,000 Application 167B 18,750,000 Application 167C 47,212,113 Application 168 46,152,000 Total Disbursed in 1396 502,460,289 Total Disbursed in Previous Periods 4,208,537,983 Cumulative total disbursed B3 4,710,998,272 Calculated remaining Balance 84,422,737