MANAGEMENT LETTER DRAFT

ACCELERATING INVESTMENT AND INFRASTRUCTURE IN NEPAL

(AIIN-APPIIC)
INCLUDING FUND DISBURSED TO IBN FROM AIIN-APPIIC

FOR THE PERIOD

18 DECEMBER 2015 TO 31 DECEMBER 2016

Submitted by:
T R Upadhya & Co.,
Chartered Accountants

Date Issued: 14 March 2017

This document contains 11 pages
TABLE OF CONTENTS

Transmittal Letter
1. Executive Summary...................................................................................................4

1.1 Background of the project 4

1.2 Objective and scope of the work 4

1.3 Audit results 4

1.4 Status of prior period audit recommendations 5

1.5 Period of review 5

1.6 Acknowledgement 5

2. Detailed Observations and Recommendations........................................................5

2.1 AiiN-APPIIC 5

2.1.1 Insufficient documentary evidence 5

2.1.2 Taxes not withheld 6

2.1.3 Employment contract not updated 6

2.2 Fund disbursed by AiiN-APPIIC to IBN 8

2.2.1 Policies and Procedures 8

2.2.2 Insufficient/Inappropriate Documentary Evidence 9

2.2.3 Income Tax Matters 10

2.2.3 Procurement of goods and services 12

2.2.4 Human Resources Related 12

1. Executive Summary...................................................................................................4

1.1 Background of the project 4

1.2 Objective and scope of the work 4

1.3 Methodology 4

1.4 Audit results 4

1.5 Status of prior period audit recommendations 4

1.6 Period of review 4

1.7 Acknowledgement 4

2. Detailed Observations and Recommendations........................................................5

2.2 AiiN-APPIIC 5

2.1.1 Insufficient documentary evidence 5

2.1.2 6Taxes not withheld 6

2.1.3 Employment contract not updated 7

2.2 Fund disbursed by AiiN-APPIIC to IBN 8

2.2.1 Policies and Procedures 8

2.2.2 9Insufficient/Inappropriate Documentary Evidence 9

2.2.3 Income Tax Matters 11

2.2.3 Procurement of goods and services 13

2.2.4 Human Resources Related 14

Annexure 1: Insufficient/Inappropriate documentary evidence

Roger Guinery
Team Leader
AiiN-APIIC
Manbhawan, Lalitpur
Nepal

165 March 2017

Dear Mr Guinery,

Draft Management Letter

We are pleased to inform that we have completed the audit of AiiN-APPIIC (also including audit
of funds disbursed to IBN from AiiN- APPIIC) for the period of 18 December 2015 to
31 December 2016 and submit the draft management letter.

During our audit we noted certain matters involving the systems of internal control and other
operational matters, which are presented herein for your consideration. These observations and
our recommendations, all of which have been discussed with the appropriate members of the
management, are intended to improve the systems of internal control or enhance operating
efficiencies and are presented in this letter.

You are kindly requested to provide written responses to the observations and recommendations
so that it can be incorporated in the final management letter.

You should be aware that our audit procedures are designed primarily to review the
expenditure and disbursement related to AiiN-APPIIC (also including audit of funds
disbursed to IBN from AiiN-APPIIC) and, therefore, our communication do not include all
possible improvements in internal control that a specific review of all accounting systems
might determine, nor do we comment on the prevailing effectiveness of the controls.

We would like to take this opportunity to thank management and staffs for their cooperation
during the course of the audit.

Yours truly,

Shashi Satyal
Managing Partner
1. Executive Summary

[1.1] Background of the project

AiiN-APPIIC was a UK Aid funded program and was started in 2015. The memorandum of
understanding was signed between the government of the United Kingdom of Great Britain and
Northern Ireland acting through the Department for International Development (“DFID”) and
Government of Nepal (“GON”) on 16 April 2015. DFID has made available the fund in the form
of financial and technical cooperation for Accelerating Investment and Infrastructure in Nepal.
The programme will support the development of a range of mega infrastructure projects including
financing the technical skills to ensure that the projects are completed.

1.1[1.2] Objective and scope of the work

The objective of the work is expressing the opinion on the financial statement prepared by AiiN-
APPIIC. The audit is conducted in accordance with Nepal Standard on Auditing (NSA). The
procedures selected depend on the auditor’s judgment, including the assessment of material
misstatement. An audit includes examining on a test basis, evidence supporting the accounting
principles used and estimates made by the management.

Because of the inherent limitations of an audit, together with the inherent limitations of internal
control, an unavoidable risk exists that some material misstatements caused by fraud or error may
not be detected, even though the audit is properly planned and performed in accordance with
NSAs

1.2[1.3] Audit results

Financial statements

Findings of the audit of the AiiN-APPIC (including fund disbursed to IBN) is summarized as
below:

Policies and procedures not formulated

The policies and procedures are not updated on a timely basis to incorporate the necessary
changes which may create ambiguity in the operation of the organisation.

TDS not deducted and deposited timely

TDS has not been deducted on some instances as required by the provision of the Income Tax Act
and in some instances the TDS has not been deposited on time

Expenses not supported by the proper documentary evidences

Several instances were noted where the expenses were not supported by the sufficient and
adequate documentary evidence to ensure the eligibility of the expenses.

Human Resource related

 Employment contracts of the employees have not been updated and the personal files of the staffs
have not been properly maintained to keep the personal and professional details of the staffs .
Further on computing the remuneration tax allowance has not been considered as a part of payroll.

[1.4] Status of prior period audit recommendations

This is the first audit of the project hence there were no recommendations to follow up on and
report in the current audit.

1.3[1.5] Period of review

The review of the expenditure was carried for the period of 18 December 2015 to 31 December
2016.

1.4[1.6] Acknowledgement

We take this opportunity to express our gratitude for the assistance given to us by the
management and staff during the course of our review.

2. Detailed Observations and Recommendations

2.1 AiiN-APPIIC

2.1.1 Insufficient documentary evidence

Observation

On review of the expenditure on sample basis, it was noted that some of the expenses were not
substantiated with adequate and/or appropriate supporting. Instances noted are tabulated below:

Amount
Date Particulars Remarks
(Rs)
Per diem payment slip and cash
Per diem payment to Smita Biswas
29.1.2016 36,000 voucher not approved by Team
from 24 Jan - 04 Feb 2016.
Leader.
Amount paid to Index Furniture
16.3.2016 Nepal for supply of office furniture 155,600 Quotations not obtained.
via Ch# 7920185
Amount paid to Cloud Tech Solutions
for Purchase of Cyberoom CR15iNG,
28.3.2016 111,305 Quotations not obtained.
Unify AP LR and Link Basic 6U
cabinet Rack via ch#7920194.
Snacks expenses for meeting
Document evidencing the
29.7.2016 organized by National Public section 1,800
meeting not obtained.
specialist held at APPIIC office
 Amount
Date Particulars Remarks
(Rs)
Four-night subsistence allowance and
hotel costs reimbursement for Only receipt of payment. Invoice
29.11.201
Biratnagar-Dhankuta and Pokhara- 52,115 of Rs 12,000 not obtained from
6
Parbat trip to Purna Kadariya, John Lake View Resort.
Cox and David Entwinstle.

Recommendation

The management is recommended to ensure that expenses incurred should be substantiated by

sufficient and appropriate documentary evidences in order to ensure the adherence and eligibility
of the expenses.

Management Comment

2.1.2 Taxes not withheld

Observation

Section 88 of Income Tax Act 2002 requires taxes to be withheld on payment of services with
VAT invoice and non-VAT invoice at the rate of 1.5% and 15%, respectively and at the rate 10%
in case of rent.

Section 89 requires mandatory withholding of taxes at the rate of 1.5% on contractual payments
exceeding Rs 50,000. However, following instances were noted where taxes were not withheld at
the time of payment made by AiiN-APPIIC:

Amount Taxes not

Date Particulars
(Rs) Withheld
Amount paid for Structural Evaluation of Suite
17.2.2016 252,000 3,345
Homes Pvt Ltd; via ch#792017.
Accommodation bill payment to Shaligram
17.2.2016 122,214 1,622
Apartment via ch#7920172.
Accommodation bill payment to Hotel Himalaya via
18.2.2016 648,345 8,607
ch#7920175.
Amount paid to Index Furniture for supply of office
16.3.2016 155,600 2,065
furniture via Ch# 7920185.
Amount paid to G4S Security for office security
16.3.2016 45,419 602
service for the month of Feb 2016 via ch#7920186.
 Amount Taxes not
Date Particulars
(Rs) Withheld
Amount paid to Cloud Tech Solutions to Purchase of
28.3.2016 Cyberoom CR15iNG, Unify AP LR and Link Basic 111,305 1,477
6U cabinet Rack via ch#7920194.

Recommendation

The management is recommended to withhold taxes at the specified rates and deposit the same
with the tax authorities to avoid interest and fines applicable under section 118 of the Income Tax
Act.

Where possible and if there is continuity in business relationship with the vendors, the amount
paid in excess to the vendors on account of non withholding of taxes should be adjusted with the
future invoices and recovered so that there is no financial impact.

Management Comment

2.1.3 Employment contract not updated

Observation

On review of the employment agreements of the AiiN-APPIIC staff on a sample basis, it was
noted that the employment contract of Raj Kumar Maharjan and Nikita Gurung has been executed
with Rural Access Program (RAP3) instead of with AiiN-APPIIC.

The employees have been working on the basis of same contract was neither issued in the name of
AiiN-APPIIC or any arrangements of secondment from RAP3 was documented.

Recommendation

The management is recommended to update the employment contract in the name of AiiN-
APPIIC to enforce the terms and conditions mentioned on the contract.

Management Comment
2.2 Fund disbursed by AiiN-APPIIC to IBN

2.2.1 Policies and Procedures

Observation

On review of the policies and procedures of the operations of AiiN-APPIIC related to funding of
IBN transactions the following were noted:

 The policies and procedures for the operations of the transactions were continued from the
support being provided by the previous service provider and had not yet been updated with
the change in the service provider and the current context of operations in IBN. In the
absence of a revision to address the changed operating environment ambiguity may persist
resulting in efficient operations.

 IBN financial operating policies and procedures states that the monthly reconciliation of bank
with details of issued cheque shall be attached to monthly expenses report submitted to the
fund manager. It was noted that IBN management does not have practice to prepare monthly
bank reconciliation statement and report as required. Reconciliations are prepared on a _
basis currently. Absence of regular reporting of bank reconciliation may not permit the fund
manager to detect unusual transactions, if any, which may result in financial loss.

Recommendation

The management is recommended to:

 Update the policies and procedures in the changed context so that the necessary changes are
incorporated which will help to guide the smooth operation of the organisation.

 prepare the bank reconciliation statement on a monthly basis and report to the fund manager
with status of the funds and outstanding cheques.

Management Comment
2.2.2 Insufficient/Inappropriate Documentary Evidence

Observation

On review of the expenditure, it was observed that some of the expenses were not substantiated
with adequate and/or appropriate supporting. In absence of the sufficient and appropriate
supporting the authenticity and eligibility of the expenses incurred could not be established. The
details of the matters observed are presented in the Annexure 1:

V. Amount
Date Particulars Remarks
No. (Rs)
Expenses incurred for purchasing Procurement requisition
5 12.1.2016 43,212
consumables for the month of Jan 2016. form not obtained.
Advance issued to Srijana Bhattarai to
Travel advance form not
23 5.2.2016 monitor and facilitate the disclosure 226,800
approved.
event organized by SAPDC.
Payment made to Jaya Travels for air
Procurement requisition
25 11.2.2016 tickets of Mr Prabhakar Ghimire and 51,465
form not attached
Amar Shahi during their West Seti trip.
Advance settled by Gaurab Basnyat
Voucher not approved.
after completing his Trip to Dhalkebar
Settlement form and
89 30.3.2016 for transmission infrastructure where 29,800
field report not
surplus amount Rs 1,374 deposited to
approved.
IBN bank account.
Advance settled by Ghanashyam Ojha
Advance settlement
after completing travel to Surkhet to
form not approved.
discuss security mechanism for the
101 8.4.2016 33,808 Acknowledgement copy
security of Upper Karnali Hydropower
of Vehicle rent payment
Project. Excess amount Rs 33,808
not obtained.
being refunded to him.
Procurement requisition
Payment made to Unique International
form not attached.
138 23.5.2016 Traders for the purchase of paper 7,797
Approval for purchase
towels for May 2016.
not obtained.
Advance settled by Irina Rajbhandary
Daily allowance
after completion of travel to Hongshi
176 27.6.2016 276,400 acknowledgement
Shivam site Nawalparasi with
receipt not obtained.
parliamentarians for site inspection.
Advance settled by Nepal
Administrative Staff College after Document evidencing
conducting 5 days training on project 1,087,62 the expenditure could
197 15.7.2016
development agreement implementation 5 not obtained as required
where remaining amount of Rs.217,525 by contract.
reimbursed.
Payment made to Ujyalo Multimedia Agreement paper with
Pvt Ltd for broadcasting of radio Ujyalo Multimedia.
203 19.7.2017 303,744
program "sambriddi ko lagi sanjhedari" Feedback report from
for the month of May 2016. audience.
209 24.7.2017 Advance settled by Anish Lal Pradhan 6,500 Cheque issued in the
after purchasing hard disk. name of staff for
purchasing Hard disk
 V. Amount
Date Particulars Remarks
No. (Rs)
instead of Vendor.
Cheque issued in the name of Merina
24.10.201 Recipient’s signature
276 Pandey to pay for overtime of support 34,746
7 missing
staff for Sep 2016.
Advance issued in the name of Ashish
Gajurel for a field trip to Hetauda to
assess ropeways that connects
28.12.201 Travel Advance form
334 Kathmandu and Hetauda. Team 49,400
6 not obtained.
comprises of 8 members in total
including 5 from IBN and 3 external
members.
Advance settlement
Advance settled by Ganesh Acharya
28.12.201 form not approved.
338 after completing travel to Khandbari for 144,500
6 Voucher not approved
financial awareness training program.
by Sr. Manager.
Advance settled by Merina Pandey after
28.12.201 Advance Settlement
350 purchasing consumable items for Dec 41,741
6 form not maintained
2016.

Recommendation

The management is recommended to ensure that expenses incurred should be substantiated by

adequate documents in order to ensure the adherence and eligibility of the expenses.

Management Comment
2.2.3 Income Tax Matters

Observation

On review of the compliance with provisions of the Income Tax Act, 2002, the following
noncompliances were noted:

 Section 88 requires TDS to be withheld on payment of services with VAT invoice and Non-
VAT invoice at the rate of 1.5% and 15%, respectively and at the rate 10% in case of rent.
However, following instances was noted where taxes were not withheld at the time of
payment made by IBN.

Amount Tax amount

V. No. Date Particulars
(Rs) not withheld
Payment made to Yes Designers for
designing and printing info graphics and
205 21.7.2017 booklets to conduct finance literacy 84,750 1,125
sessions at Arun 3 and Upper Karnali
project areas.
Payment made to Indreni Banquet Pvt Ltd
for interaction event on ISWM project
275 24.10.2017 36,725 487
conducted by IBN under solid waste
management project.

 Section 90(4) requires withholding agent to deposit withholding taxes (TDS) withheld within
25 days of the following month on which such withholding was made. However, few
instances were noted where TDS was not withheld at the time of payment was tabulated as
follow:

Amount Withhold Payment

V. No. Particulars TDS
(Rs) Date Date
Payment made to Terrain
Nepal Travel and Tours Pvt
227 146,900 1,950 23.5.2073 23.7.2073
Ltd for vehicle rental for the
month of Aug 2016.
Payment made to Om
Networks Pvt. Ltd for the
163 71,190 890 31.2.2073 31.3.2073
purchase of 8 port normal
switch for IBN office.

 As per contract with the employees, contracted employee will be entitled to the additional
benefits in addition to the agreed monthly remuneration. These additional benefits should
form part of monthly remuneration as per Income Tax Act 2002 at the time of calculation of
withholding tax. However, on calculation of the remuneration tax of the employees IBN does
not consider the amount of allowance as a part of the remuneration which results in revenue
loss to the Government of Nepal.

 Withholding taxes on remuneration relating to 1% Social Security Tax Code (11211) and the
balance under Remuneration Tax Code (11112) was incorrectly deposited under the
remuneration tax code 11112.
Recommendation

The management is recommended to:

 withhold the requisite amount of TDS and deposit to avoid fines and penalties applicable
under section 118 of the Income Tax Act.

 comply with the provisions of Income Tax Act, 2002 and compute the amount of TDS as per
the stated provision

 deposit the total tax on remuneration in social security tax code and remuneration tax code
from now onwards and adjust the amount deposited earlier as required by tax laws.

Management Comment
2.2.3 Procurement of goods and services

Observation

The following matters were observed on review of the procurement of goods and services made
forom funds disbursed to IBN:

 The policy of the IBN has permitted to obtain the verbal quotations for procurement of a
practice of obtaining 3 verbal price quotations and prepare comparison sheet for purchase of
goods and services up to Rs 100,000. In absence of the written quotations documentary
evidence could not be provided in case of the review by the external parties. Non
documenting the details of the quotes obtained through telephone increases the risk of
manipulation in the quotes obtained by the staff.

 There is a practice of providing staff advance for the purpose of purchase of the office
consumables instead of incurring the expenses related to office consumables through petty
cash maintained by the organization or making direct payment by check to the vendor for the
value of consumables procured. The practice of procuring goods through staff advances
increases the risk of misuse of funds by the staff.

Recommendation

The management is recommended to:

 update the policy of the IBN to obtain the written quotations from vendors for procurements
of goods and services and ensure that documentary evidences could be produced at the time
of requirement. obtain the written quotations from the vendors for making the price
comparison so that the expenses could be substantiated by the documentary evidence.

 make direct payment by check to the vendor for the value of consumables procured.

Management Comment
2.2.4 Human Resources Related

Observation

On review of the human resource department of the organisation, it was noted that the
organisation does not have the practice of maintaining the personal files of the staff assigned to
IBN to keep the track of the academic and professional records along with other personal and
official details.

Additionally, it was noted that cheques of operational bank account have been issued for the HR
related activities when separate accounts are kept for transactions relating to HR and operations.
Some instances noted are as follows:

V. Amount
Date Budget Head Particulars
No. (Rs)
Payment of insurance premium for medical
23.11.201 and GPA of new staff Kshatra Bahadur
305 Staff 82,922
6 Bhandari and Sugam Tandukar for Premier
Insurance (Co) Nepal Limited.
Insurance premium paid to Premier
Insurance for medical and accidental
272 4.10.2016 Staff 1,383,836
insurance of IBN staff from Oct 2016 to
mid July 2017.
Fitness expense incurred by Irina
218 11.8.2016 Staff Rajbhandary as per the staff contract 15,600
benefit terms from Jan to June 2016.
Payment of insurance premium for medical
127 2.5.2016 Staff and GPA of new staff Subhanu Khanal and 73,224
Suvechha Nepal to Premier Insurance Ltd.

Recommendation

The management is recommended to:

 maintain personal files of the employees and update regularly with the records to keep the
track on the employee details.

 Properly segregate the payments relating to HR and other operational transactions through the
correct bank accounts maintained for the purpose.

Management Comment
Annexure 1: Insufficient/Inappropriate documentary evidence

V. Amount
Date Particulars Remarks
No. (Rs)
Expenses incurred for purchasing Procurement requisition
5 12.1.2016 43,212
consumables for the month of Jan 2016. form not obtained.
Advance issued to Srijana Bhattarai to
Travel advance form not
23 5.2.2016 monitor and facilitate the disclosure 226,800
approved.
event organized by SAPDC.
Payment made to Jaya Travels for air
Procurement requisition
25 11.2.2016 tickets of Mr Prabhakar Ghimire and 51,465
form not attached
Amar Shahi during their West Seti trip.
Advance settled by Gaurab Basnyat
Voucher not approved.
after completing his Trip to Dhalkebar
Settlement form and
89 30.3.2016 for transmission infrastructure where 29,800
field report not
surplus amount Rs 1,374 deposited to
approved.
IBN bank account.
Advance settled by Ghanashyam Ojha
Advance settlement
after completing travel to Surkhet to
form not approved.
discuss security mechanism for the
101 8.4.2016 33,808 Acknowledgement copy
security of Upper Karnali Hydropower
of Vehicle rent payment
Project. Excess amount Rs 33,808
not obtained.
being refunded to him.
Procurement requisition
Payment made to Unique International
form not attached.
138 23.5.2016 Traders for the purchase of paper 7,797
Approval for purchase
towels for May 2016.
not obtained.
Advance settled by Irina Rajbhandary
Daily allowance
after completion of travel to Hongshi
176 27.6.2016 276,400 acknowledgement
Shivam site Nawalparasi with
receipt not obtained.
parliamentarians for site inspection.
Advance settled by Nepal
Administrative Staff College after Document evidencing
conducting 5 days training on project 1,087,62 the expenditure could
197 15.7.2016
development agreement implementation 5 not obtained as required
where remaining amount of Rs.217,525 by contract.
reimbursed.
Payment made to Ujyalo Multimedia Agreement paper with
Pvt Ltd for broadcasting of radio Ujyalo Multimedia.
203 19.7.2017 303,744
program "sambriddi ko lagi sanjhedari" Feedback report from
for the month of May 2016. audience not available.
Cheque issued in the
Advance settled by Anish Lal Pradhan name of staff for
209 24.7.2017 6,500
after purchasing hard disk. purchasing Hard disk
instead of Vendor.
Cheque issued in the name of Merina
24.10.201 Recipient’s signature
276 Pandey to pay for overtime of support 34,746
7 missing
staff for Sep 2016.
334 28.12.201 Advance issued in the name of Ashish 49,400 Travel Advance form
6 Gajurel for a field trip to Hetauda to not obtained.
assess ropeways that connects
Kathmandu and Hetauda. Team
comprises of 8 members in total
V. Amount
Date Particulars Remarks
No. (Rs)
including 5 from IBN and 3 external
members.
Advance settlement
Advance settled by Ganesh Acharya
28.12.201 form not approved.
338 after completing travel to Khandbari for 144,500
6 Voucher not approved
financial awareness training program.
by Sr. Manager.
Advance settled by Merina Pandey after
28.12.201 Advance Settlement
350 purchasing consumable items for Dec 41,741
6 form not maintained
2016.