I I INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS OF THE FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) FOR THE YEAR ENDED 7 JULY 2017 I I I.0ocrabc I/ I4x 0 2 JAN 2G19 GLOSSARY OF TERMS DBE Development Bank of Ethiopia EIB European Investment Bank FESMMIDA Federal Small and Medium Manufacturing Industries Development Agency IDA International Development Association NBE National Bank of Ethiopia PMI Project Management Unit PIU Project Implementation Unit PFI Participating Financial Institutions SMEFP Small and Medium Enterprise Finance Project SME Small and Medium Enterprise I0rb I0Z I0 .O. Box 1608 Addis Ababa Ethiopia Chartered Certified Accountants and Authorized Auditors Tel: +251 115 527666/67 off PP# @ + Fax: +251 115 528384 www.hst-et.com 24 December 2018 W/ro Yemenzwork Girefie Project Implementation Unit Coordinator, Federal Small and Medium Manufacturing Industries Development Agency, Addis Ababa, Ethiopia Dear W/ro Yemenzwork, INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS OF THE FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION We have now completed the audit of the above project funded by the International Development Association and are pleased to present our findings thereon. Should you require to discuss any of the issues mentioned in this report, please do not hesitate to contact us. We wish to thank the staff and management of the project for the cooperation and courtesies accorded to us during the audit. t Yours f Partr Partners: Tekeste Gebru: Solomon Gizaw: Getu Jernaneh: Yonas Harun: Solomon Melaku I FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 TABLE OF CONTENTS Pages I PART 1 INTRODUCTION 1.1 Background 4 1.2 Project Description 4 1.3 Audit Objectives 4 1.4 Audit Scope 4 1.5 Audit Methodology 5-6 1.6 Results of the Audit 6 PART 2 STATEMENT OF MANAGEMENT'S FINANCIAL REPORTING RESPONSIBILITIES 7 PART 3 INDEPENDENT AUDITORS' REPORT ON THE SPECIAL PURPOSE FINANCIAL STATEMENTS 3.1 Independent Auditors' Report 8-9 3.2 Statement of Income and Expenditure 10 3.3 Statement of Financial Position 11 3.4 Notes to the Financial Statements 12 PART 4 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL 4.1 Independent Auditors' Report 13 PART 5 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE 5.1 Independent Auditors' Report 14 I3 I3 FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 1. INTRODUCTION 1.1 Background The Federal Democratic Republic of Ethiopia (FDRE) and the International Development Association made an agreement on 15t June 2016 to implement a program entitled 'increase access to finance for eligible Small and Medium Enterprise in Ethiopia based on eligible criteria (P148447)' Grant No. IDA 57930. The International Development Association has agreed to provide SDR 5,068,000 for the project. 1.2 Project description The objective of the project is to increase access to finance for eligible Small and Medium Enterprise in Ethiopia based on eligible criteria. The project consists of the following components: 1. Financial services to SMEs: establishment and operation of a credit facility providing access to finance for: (a) working capital, leasing finance and investment finance for Participating Financial Institutions (PFIs) which in turn on-lend to eligible SMEs; and leasing finance for eligible SMEs. 2. Enabling Environment for SMEs Finance: supporting the improvement of an enabling environment for facilitating SMEs financing through, inter alia: (a) supporting the creation of centralized electronic collateral registry to support both the lending and leasing business; and (b) supporting a diagnostic review on insolvency and debtor/creditor regime aiming to analyse and identify key bottlenecks to SME lending. 3. Business development services to SMEs: supporting SMEs through the provision of tailored business development services to address constraints on the demand side. 4. Project management, communication and impact evaluation: (a) strengthening the capacity of the PIU (Project Implementation Unit) in MOI and the PMT (Project Management Team) in DBE in implementing their respective parts of the project; (b) expanding outreach and understanding of the project among targeted beneficiaries and other stakeholders and carrying out of a program of public information disclosure about the project and dissemination of results, lessons learned and good practices; and (c) carrying out impact evaluation of the project. A project Management team (PMT) will be established in Development Bank of Ethiopia (DBE) with the direct responsibility of managing the credit facility under component 1. A project implementation Unit (PIU) will be established in the FESMMIDA with the mandate of overall project coordination and direct responsibility of component 2,3 and 4. National Bank of Ethiopia (NBE) will assign a focal person that will act as the key technical reference of the PIU for component 2. At the regional level, FESMMIDA offices will serve for marketing the project and coordinating SMEFP's services to clients. 1.3 Audit objectives The objective of the audit is to express an opinion on the financial statements for the project for the year ended 7 July 2017. The audit includes but not limited to the following tasks: 1.4 Audit scope The audit scope required us to carry out sufficient audit steps and procedures to ensure that the audit objectives were met for the year ended 7 July 2017. Details of the steps and procedures are given below. 4 FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 1. INTRODUCTION (continued) 1.5 Audit Methodology We conducted the audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the statement of income and expenditure is free from material misstatement. 1.5.1 Internal controls We evaluated the Project's significant internal controls to obtain a sufficient understanding of the design of relevant controls, policies and procedures and whether they have been in operation during the period under review. 1.5.2 Compliance with agreement terms and applicable laws and regulations We reviewed, assessed and reported on compliance with the terms and conditions of the agreement. 1.5.3 Representations by grantees We obtained specific written representations from management. 1.5.4 Contractual obligations a) We appraised relevant documents such as agreement between the Federal Democratic Republic of Ethiopia and the International Development Association as well as documents concerning rights and obligations with a view to providing a comprehensive appraisal of the Project; b) we verified compliance of project expenditures with relevant terms of agreements as well as all the applicable rules; c) we verified compliance of the recipient with the terms and conditions of the agreement with the donor; and d) we ensured timely submission of interim unaudited financial reports for the Project as stipulated in the agreement. 1.5.5 Receipts and disbursements We verified compliance with the disbursements and procurement procedures set up for the Project. 1.5.6 Implementation a) We examined whether the expenditures are classified in accordance with the budget; b) we reviewed bank statements and accounts of the recipient and other relevant books of accounts and assessed whether they show a complete view of the income received and expenditure incurred in accordance with generally accepted principles; c) we verified and confirmed that all commitments are genuine, with the relevant agreements disclosed within the financial records and are for the pursuance of agreed Project objectives; d) we examined a representative sample of payments transactions of and within the Project including accuracy and completeness of records; and e) we verified individual Project accounts and gave an opinion and/ or advice regarding the manner they are operated. 5 FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 1. INTRODUCTION (continued) 1.5 Audit Methodology (continued) 1.5.7 Other income sources a) Established whether other income generated by the Project, such as interest, in-kind/local contributions, exchange gains, etc. have been used in furtherance of the Project's objectives. b) Verified that contributions made towards project activities were made and used in accordance with relevant agreement. 1.6 Results of the audit 1.6.1 Summary of results by audit objectives (a) Reach an opinion as to the validity of the statement of income and expenditure. In our opinion, the financial statement referred to above show a true and fair view of the source and use of funds in accordance with the accounting policies set out on note 3.4 and in conformity with the grant agreement. (b) Report on the financial management and internal controls findings We reviewed the internal control structure and concluded that the system was adequate to meet the needs of the program. We have not observed significant deficiency on the internal control of the Project. (c) Report on the compliance with agreement terms and applicable laws and regulations. The results of our tests disclosed no instances of non-compliance as discussed in Section 5.1 of this report. I I ** 6 I FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 2 STATEMENT OF MANAGEMENT'S FINANCIAL REPORTING RESPONSIBILITIES The management of the Federal Small and Medium Manufacturing Industries Development Agency (FESMMIDA) are responsible for preparing the financial statements for each financial period which gives a true and fair view of the state of affairs of the financial position as at the end of the period and of the Project's operating results for that period. Management is required to ensure the Project keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Project. They are also responsible for safeguarding the assets of project. The management of the FESMMIDA accept responsibility for the financial statements which has been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with the accounting polices stated in note 3.4 to the financial statements and in the manner required by the accounting policies of the Project and for such internal controls as the management determine are necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. The management of FESMMIDA are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Project and of the results of its activities. The management of FESMMIDA further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of the financial statements, as well as adequate systems of internal financial control. The management certify that, to the best of their knowledge, the information furnished to the auditors for the purpose of the audit was correct and is an accurate presentation of the Project's financial transactions. Yemenzwork Glirefle sMEFP Ipwt Unit Coordinato W/r Yem nzwork Girefie Enedeg Zegeye Pro ect Implementation Unit Coordinator Financial Management Specialist I &A 4 I I 7 7 PO. Box 1608 Addis Ababa Ethiopia Chartered Certified Accountants and Authorized Auditors Tel: +251 115 527666/67 Fax: +251 115 528384 www.hst-et.com FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 3.1 INDEPENDENT AUDITORS' REPORT Opinion We have audited the accompanying financial statements of SMEFP (P148447) GRANT No. IDA 57930, funded by the International Development Association (IDA) set out from page 10-12, which comprise the Statement of Financial Position as at 7 July 2017, the Statement of Income and Expenditure for the year then ended and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements show a true and fair view of the financial position of the Project as at 7 July 2017, and its statement of income and expenditure for the year then ended in accordance with the financial reporting provisions the accounting policies as set out in note 3.4. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Organisation in accordance with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Managements' Responsibilities for the Financial Statements Management are responsible for the preparation and fair presentation of the financial statements in accordance with the financial reporting provisions the accounting policies as set out in note 3.4. of this report and for such internal control as management determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibilities for the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Partners: Tekeste Gehru: Solomon Gizaw: Getu Jemaneh: Yonas Harun: Solomon Melaku FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 Auditors' Responsibilities for the Financial Statements (continued) As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Project's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit The enga e f rtR@r on the audit resulting in this independent auditors' report is Yonas Harun. Pa n Iegi 24 December 018 HST General Partnership, Chartered Certified Accountants and Authorized Auditors (Auditors' of SMEFP) Addis Ababa, Ethiopia 9 FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 3.2 STATEMENT OF INCOME AND EXPENDITURE FOR THE YEAR ENDED 7 JULY 2017 I 2017 Notes ETB Income Cash received from IDA 3.4.5 11,287,550 Gain from foreign exchange transactions 223,590 11,511,140 Expenditure 3.4.6 576,505 Surplus for the year 10,934,635 Fund balance at 8 July 2016 - Fund balance at 7 July 2017 10,934,635 I I 10 I FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 3.3 STATEMENT OF FINANCIAL POSITION AS AT 7 JULY 2017 7 July 2017 Notes ETB Assets 49 Cash and bank balances 3.4.7 10,936,131 Total assets 10,936,131 Liabilities and fund balance Withholding tax Payable 176 VAT payable 1,320 Fund balance 10,934,635 Total Liabilities and fund balance 10,936,131 The financial statements on page 10-12 were d by the Project's management on 24 December 2018 and sined on its beozt*06 W/ro Ye n irefie Enedeg Zegeye Project I e tation unit Coordinator Financial Management Specialist 11L I U I FEDERAL SMALL AND MEDIUM MANUFACTURING INDUSTRIES DEVELOPMENT AGENCY (FESMMIDA), SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE YEAR ENDED 7 JULY 2017 3.4 NOTES TO THE FINANCIAL STATEMENTS 3.4.1 Basis of preparation The financial statements have been prepared on a modified cash basis i.e. Cash receipts and disbursements modified to accrue for outstanding payables and receivables. 3.4.2 Income and expenditure recognition Income and expenditure are recognized on a modified cash basis of accounting, i.e., Income is recognized when cash is received, and expenditures are recognized when incurred. 3.4.3 Foreign currency transactions Cash receipts and payments arising from transactions are recorded in the income statements at the exchange rates prevailing on the dates the transactions take place. Monetary items denominated in in functional currencies (ETB) and or other currencies are retranslated in to the reporting currency, at the balance sheet date using the closing rate, differences that arise due to exchange rate fluctuations being recognized as gain or loss. 3.4.4 Currency The financial statements are presented in Ethiopian Birr (ETB). 3.4.5 Cash received from IDA Amount received Amount received USD ETB Transfer from IDA 500,000 11,287,550 3.4.6 Expenditure 2017 ETB Salary and pension 521,850 Advertising 48,635 Bank service charge 5,649 Stationery and office supplies 371 576,505 3.4.7 Cash and bank balances Bank account No. Bank name 2017 ETB 0100401300010 National Bank of Ethiopia (USD) 9,251,560 0100401040045 Natignal Bank of Ethiopia (ETB) C_1,684,571 Ik