Audits of UN Agency Projects: HACT, Micro-Assessment, Spot Checks and Scheduled Audits

United Nations agencies, in particular UNDP, UNICEF, UNFPA and the World Food Programme (WFP), are among the largest sources of funding for Ukrainian civil society and charitable organisations. All of them work with implementing partners under a common set of rules known as HACT (Harmonized Approach to Cash Transfers). If your organisation receives or plans to receive funds from any of these agencies, you will go through a micro-assessment, spot checks and, above a certain funding level, a scheduled audit.

This article explains how the HACT system is structured, what is checked at each stage, which documents you should have ready and how to prepare so that a review does not end with a refund request. It was prepared by the team of MK Audit: we have worked with donor-funded projects for over 20 years, are a member of the DFK International network and issue reports in Ukrainian and English.

What HACT is and how it works

HACT was introduced by UN agencies in 2005 and revised in 2014. The logic is simple: instead of each agency checking a partner separately under its own rules, UNDP, UNICEF, UNFPA and WFP apply a single risk assessment methodology and may plan assurance activities jointly. The level of scrutiny depends on two factors: the partner’s risk rating and the amount of cash transferred. The higher the risk and the larger the amount, the more frequent and deeper the checks.

The framework has three building blocks:

• Assessments. A macro-assessment of the country’s public financial management system and a micro-assessment of each implementing partner.
• Assurance activities. Spot checks, programmatic monitoring, scheduled audits and special audits.
• Capacity development. Training for the partner and an action plan to address identified weaknesses.

Funds reach the partner in one of three ways: a direct cash transfer of an advance, direct payment by the agency to the partner’s suppliers, or reimbursement of expenses already incurred. The key document in every case is the FACE form (Funding Authorization and Certificate of Expenditures), which the partner uses both to request an advance and to report on expenditures. FACE data is what spot checks and audits examine.

Micro-assessment: where it all begins

A micro-assessment is carried out before cooperation starts or at the beginning of a programme cycle, as a rule for partners expected to receive a significant amount of cash transfers from UN agencies within a year. The exact financial threshold is set in the HACT framework; check the current value with the agency. The assessment is performed by an independent audit firm engaged by the agency, using a standard questionnaire. The outcome is a risk rating: low, moderate, significant or high.

The questionnaire covers seven areas:

1. Implementing partner overview: legal status, founding documents, history, previous experience with UN agencies.
2. Programme management: planning, results monitoring, reporting.
3. Organisational structure and staffing: segregation of duties, qualifications of finance staff, staff turnover, job descriptions.
4. Accounting policies and procedures: bookkeeping, bank and cash operations, advance reports, authorisation of payments.
5. Fixed assets and inventory: recording, physical counts, safeguarding of donor-funded property.
6. Financial reporting and monitoring: timeliness of reports, budget control, results of previous audits.
7. Procurement and contract administration: written procedures, competitive selection of suppliers, prevention of conflicts of interest.

The overall score determines the rating, and the rating determines how often you will be checked and whether the agency will agree to large advances. Treat the micro-assessment as seriously as an audit: prepare written policies (accounting, procurement, anti-corruption), job descriptions and evidence of previous experience.

Spot checks: sample review of expenditures

A spot check is an on-site review in which an agency representative or an engaged auditor compares a sample of expenditures reported in FACE forms with supporting documents and accounting records. The purpose is to confirm that funds were used for the intended purpose, within the budget and with proper documentation. Frequency depends on the risk rating: a high-risk partner may be checked after every tranche, a low-risk partner usually once a year.

A spot check typically looks at whether:

• amounts in the FACE reconcile with the ledger and bank statements;
• each transaction is supported by a contract, invoice, delivery note or act, and a payment document;
• expenditures fit the approved budget and the project period;
• procurement procedures were followed;
• salaries and payroll taxes for project staff were calculated correctly;
• assets purchased with project funds are recorded.

The result is a report with findings. Expenditures that cannot be supported may be treated as ineligible, and the agency may request a refund or offset them against the next tranche.

Scheduled audit of a UN project

A scheduled audit is assigned to partners whose cumulative cash transfers during the programme cycle exceed the established threshold, and to partners with a high risk rating. The agency may also commission a special audit if irregularities are suspected. The audit is performed by an independent audit firm under the agency’s standard terms of reference.

A scheduled audit usually combines a financial audit of expenditures declared in FACE forms for the period and an internal control audit with findings graded by risk level. The auditor works under international standards: audits of financial information follow the International Standards on Auditing, while agreed-upon procedures engagements, including many spot checks, follow ISRS 4400. The output is an audit report with an opinion (unmodified, qualified, adverse or disclaimer) and a management letter with recommendations. The partner prepares an action plan for each finding, and the agency monitors its implementation.

Activity	Performed by	What is checked	Output
Micro-assessment	Independent auditor engaged by the agency	Partner’s management and control system	Risk rating
Spot check	Agency staff or auditor	Sample of FACE expenditures	Report with findings
Scheduled audit	Independent audit firm	All expenditures for the period and internal controls	Audit report with an opinion
Special audit	Independent audit firm	Specific transactions at the agency’s request	Report of factual findings

How to prepare your documents

The best audit preparation starts on the first day of the project, not a week before the auditor arrives. Make sure the following is in order:

• the agreement with the agency, the approved budget and all budget revision letters;
• all FACE forms with signatures and supporting calculations;
• statements of the dedicated project bank account and the cash book;
• contracts, invoices, acts, delivery notes and payment documents for every transaction;
• HR records: orders, employment contracts, timesheets allocating time between projects, payroll registers, proof of tax payments;
• procurement files: requests for quotations, offers received, comparison tables, selection minutes;
• travel documents, the project asset register and inventory count reports;
• programme reports and evidence of activities (participant lists, photos, handouts).

We also recommend setting up analytical accounting by project and budget line so that the project trial balance reconciles with the FACE without manual adjustments. This is the most common source of discrepancies we see during grant audits. If you do not have an accountant experienced in donor projects, consider accounting services for non-profit organisations: we keep the books so that they meet agency requirements from day one.

Typical audit findings

• expenditures without supporting documents or with documents lacking mandatory details;
• expenditures outside the budget or project period, or budget line overruns without written approval;
• procurement without competitive procedures or without justification of the supplier selected;
• project salaries without timesheets, or an employee’s total allocation exceeding 100% across projects;
• differences between the FACE, the ledger and bank statements;
• incorrect translation of foreign currency transactions or unrecorded exchange differences;
• no asset register and no transfer acts for equipment after project completion.

Most of these findings can be prevented by regular internal reconciliation and a quarterly review of documents. If you are expecting a spot check or a scheduled audit, MK Audit can perform a pre-audit review in a format close to the agency’s requirements and point out weak spots before the external auditor arrives.

Need an audit of a UN-funded project or help preparing for a micro-assessment? Leave a request: after reviewing the assignment we will send a commercial proposal and reply within 1 day.