INSTRUCTION ON METHODOLOGY ON PERFORMING FINANCIAL AUDIT AND REGULARITY AUDIT ( Official Gazette of MN, no. 07/15 from 17 th February 2015)

On the basis of Article 38 item 1 point 4 of the Law on the State Audit Institution ( Official Gazette of Republic of Montenegro, no. 28/04, 27/06, 78/06, Official Gazette of Montenegro, no. 17/07, 73/10, 40/11, 31/14), the Senate of the State Audit Institution passes, at its session held on 26 th January 2015, the INSTRUCTION ON METHODOLOGY ON PERFORMING FINANCIAL AUDIT AND REGULARITY AUDIT ( Official Gazette of MN, no. 07/15 from 17 th February 2015) I BASIC PROVISIONS Subject of the Instruction Article 1 The Instruction shall in detail regulate rules and procedures of the work of the State audit institution (hereinafter: the Institution) on performing financial audit and regularity audit in audit entities defined in Article 4 of the Law on State audit institution of Montenegro. The Instruction performs public sector audit in accordance with the Law on State audit institution, Rules of Procedure of the State audit institution and III level of the Framework of the International standards of supreme audit institutions (ISSAI). Objective of public-sector auditing Article 2 The objective of public-sector auditing is to ensure independent, objective and reliable information on management of the budget, assets and economic business, legal operation by audited entities and economy, efficiency and effectiveness of the operation of the audited entities with aim to improving their activities. Types of public-sector audit Article 3 The Institution shall perform financial audit, regularity audit and performance audit in line with Article 5 of the Law on State audit institution. The Institution may also conduct other types of the audits incorporating aspects of financial audit, regularity audit and/or performance audit, respecting auditing standards. Objective of financial audit Article 4 The objective of financial audit is to express an opinion on: 1) whether the financial statements are prepared, in all material aspects, in accordance with applicable financial reporting framework or 2) whether the financial statements, in all material aspects, are presented on a fair and objective manner in accordance with given framework. 1

Objective of regularity audit Article 5 The objective of regularity audit is to express an opinion on whether the financial and other activities of audited entity, in all material aspects, are in compliance with relevant laws, other regulations and acts identified as criteria for a given audit. II GENERAL PRINCIPLES OF PUBLIC-SECTOR AUDIT Ethics and independence Article 6 The Institution shall conduct its audits respecting the principles of integrity, independence, objectivity, impartiality, confidentiality and professional competence defined in the INTOSAI Code of Ethics and Code of Ethics of the Institution. Professional judgment, professional skepticism and due care Article 7 The Institution performs audits by applying professional judgment, professional skepticism and due care. Professional judgment implies the application of collective knowledge, skills and experience to the audit process. The state auditor should apply a level of professional skepticism when planning and assessing the sufficiency and appropriateness of evidence obtained throughout the audit. Due care means the state auditor should plan and conduct audits in a diligent manner. Quality control Article 8 The Institution shall ensure audit quality control system in accordance with the Rules of Procedures of the SAI and Guidelines on audit quality control. The system of quality control of audits includes responsibilities, rules and procedures for ensuring quality of performing audits within the Institution. Engagement of external expert Article 9 The institution, during the audit, may engage external expert with the aim of performing specific tasks from its scope of competence, if auditing requires particular specialized knowledge, which is not at the disposal of the Institution. The external expert is obliged to perform tasks in proper manner referred to in the Paragraph 1 of this Article, to submit identified findings and conclusions within prescribed deadline and is responsible for the quality of performed work. The Auditing Board may add in the audit report in which parts it uses the findings of external expert and is responsible for identified findings which shall be published. 2

Use of the work of internal auditors Article 10 The state auditor uses the work of internal auditor, if the state auditor determines the internal audit function is relevant to performing the audit procedures. The state auditor should perform necessary audit procedures to assess the adequacy of the work of the internal auditor. Article 11 The state auditors may use the results of the work of internal auditors in: 1) planning phase and drafting a Detailed audit plan, during determining control risk, defining sample, determining duration of audit and scope of substantive procedures; 2) phase of conducting audit in a way that it uses the reports of internal auditors with aim to provide audit evidence significant for conducting audit and thus it decreases time and scope of audit work; 3) reporting phase in a way that findings and previous conclusions of internal auditors may serve in the reporting phase or while forming auditor opinion. Article 12 The state auditor shall assess the quality of internal audit, document its weaknesses, its causes, detect irregularities and give recommendations for their elimination within audit minute. Documentation Article 13 The audit documentations shall be kept and saved with aim to ensure documenting and understanding of the audit procedures performed, results of the procedures performed, audit evidence and findings obtained in support of the opinions and recommendations given in the audit report. The audit documentation represents a basis for performing procedures of audit quality control. Article 14 The audit documentation consists of: planning documents, minutes of the Auditing Board, audit minutes, audit reports (preliminary and final audit report), correspondence letters, working papers and other acts and documents which are used or provided during the audit process. The working papers represent a documentary basis for drafting Detailed audit plan and audit minute. The working papers include all information and documents, which state auditor creates during the audit process. The state auditor is obliged to document all working papers and other documents on basis of which the detailed audit plan is drafted before submitting it. The state auditor is obliged to document all working papers and other documents on basis of which he drafted the audit minute before submitting it. Article 15 The audit documentation shall be kept and saved in two types of audit files: current and permanent file. 3

The current audit file shall include all documents provided and used in the audit process and it shall be saved three years from the day of completion of a given audit. The permanent audit file shall include: decision on performing an audit, Detailed audit plan, audit minutes, minutes of competent Auditing Board, preliminary and final audit report, audited entity s opinion on preliminary audit report, correspondence letters with audited entity and report on implementation of audit recommendations by audited entity and it shall be saved ten years from the day of completion of a given audit. Article 16 The state auditor or responsible person of the sector shall keep and save audit documentation in the audit file and ensure to keep record of all documents in timely manner within the audit file. The audit documentation may be saved in electronic or paper form. Audit evidence Article 17 Audit evidence is all of the information and documents used by the state auditor to arrive at audit conclusions and audit opinion. The audit evidence should be sufficient and appropriate. Sufficiency is a measure of the quantity of evidence, while appropriateness relates to the quality of evidence its relevance and reliability. In case of the auditor s assessment of risk is higher in the audit process, the more sufficient, reliable and relevant audit evidence needs to be obtained. Article 18 When the state auditor evaluates audit evidence pursuant to Article 17 of this Instruction, the auditor uses especially professional judgment and exercises professional skepticism. While obtaining audit evidence, the state auditor uses following methods: inspection, observation, inquiry, external confirmation, analytical procedures and other relevant procedures. III AUDIT PROCESS Article 19 The audit process consists of four main phases: 1) Planning of an audit; 2) Conducting of an audit; 3) Reporting on audit results; and 4) Following up implementation of recommendations given in the reports of the Institution. Annual audit plan Article 20 The audit of annual final budget account is a legally prescribed obligation of the Institution. The basic criteria in the procedure of proposing and selecting of audits for the Annual audit plan of the Institution are following: 1) If the audit entity was audited in the previous period by the Institution; 4

2) Amount of public resources of the audit entity; 3) Results of previous audits performed and the level of implementation of audit recommendations; 4) Information on work of the audit entity from the Parliament, Government or other state authorities, local self-government units and other entities which indicate the need to control the audit entity; 5) Information on work of the audit entity from other sources (means of public information, civil sector, letters of citizens etc.); 6) Significance of the audit theme from perspective of public interest. Apart from these criteria, other criteria also may be used, which the proposer is obliged to state and elaborate. PLANNING OF AN AUDIT Article 21 The planning of an audit is performed with aim to reduce audit risk to an acceptably low level from reaching wrong conclusions in relation to defined subject matter of the audit. Planning of an audit includes: 1) preparatory phase of planning of an audit and 2) drafting a Detailed audit plan. Article 22 With regard to planning and conducting financial audit and regularity audit, the Institution applies a methodology in accordance with ISSAI standards for preliminary determining of risk, materiality and audit sample. If the auditor considers that methodology is not applicable to the given audit, the auditor is obliged to assess risk, materiality and audit sampling method by applying professional judgment. PREPARATORY PHASE OF PLANNING AN AUDIT Article 23 In accordance with the Decision on performing an individual audit, the member or members of audit team shall start with the preparatory phase of auditing in line with the tasks given by the Head of Sector. The Preparatory phase shall include: 1) to identify and assess material risks through understanding the entity and its environment, including its internal financial control system; 2) to determine materiality; 3) to design audit procedures regarding the nature, timing and extent of the audit work to be performed in response to the risks identified. Communication Article 24 The procedure of auditing shall start by adopting the decision on performing audit, about which the audited entity shall be informed in the written form. 5

The management of audited entity shall be informed on procedures and activities which will be performed during the audit process as well as on criteria identified for performing regularity audit. The announcement on commencement of the audit apart from the basic information on audit also shall include list of the documentations which audited entity is obliged to submit to the Institution. The announcement may be communicated to other entities which are covered in the given audit or possess documents or information vital for performing audit. Article 25 The competent Auditing Board should establish adequate communication with audited entity with aim to understand the work of the Institution, types of audits, objectives and procedures of a given audit. The communication may be held in written form or by organizing a meeting with the audited entity at which participates the leader of Auditing Board and members of audit team. Identifying and assessing audit risk Article 26 The audit risk is the risk that the audit opinion may be inappropriate. The audit risk shall be assessed when: 1) obtaining understanding of the audited entity and designing the audit procedures; 2) carrying out audit procedures and 3) evaluating the results of the audit procedures carried out. Article 27 The components of audit risk are: inherent risk, control risk and detection risk. Article 28 While planning financial audit, the risks of material misstatements to the financial statements shall be identified and assessed as well as the risks of material misstatement at the financial statement level and the level of transactions, so as to provide understanding of audited entity and its environment, including its internal financial control system. Article 29 While planning regularity audit, it shall be identified and assessed the risks of material non-compliance with laws, regulations and other acts identified as criteria for a given audit. Article 30 Assessed risks shall serve as a basis for planning and conducting audit procedures, due to suspected fraud or respond to fraud identified during the audit. Understanding audit entity and its environment Article 31 The understanding audit entity and its environment is to obtain sufficient and adequate information to help the auditor in planning and conducting an audit in an effective manner. 6

Information about the audited entity may be obtained from different sources: 1) laws and other regulations related to the audited entity; 2) regulations governing the operations of the audited entity, management, organization and accounting policies; 3) annual and other financial statements of the audited entity; 4) planning documents and reports on operations of the audited entity; 5) reports on previous audits performed by the Institution, internal or private audit; 6) internal documents regulating organizational structure and management of the audited entity; 7) internal acts, minutes and other acts of the management of the audited entity; 8) other resources provided in the audit process. Identifying and assessing an inherent risk Article 32 The inherent risk is assessed on the basis of understanding of the activities of the audited entity. On the basis of preliminary assessment of inherent risk by the state auditor and/or the head of Division, head of Division or head of the sector shall make a preliminary assessment of inherent risk at overall audit level in order to identify risk areas for the audit that must be taken into account when planning and carrying out audit procedures. The inherent risk is assessed as Low, Medium or High. Understanding internal financial control system Article 33 Internal financial control system means all policies and procedures adopted by the audited entity s management, to help them in achieving their business objectives. Internal financial control system consists of five interrelated components: control environment, risk assessment, control activities, information and communication and monitoring. The state auditor and/or head of division obtain an understanding of internal financial control system on the basis of the questionnaire or other audit procedures for each internal control components. The assessment of internal financial control system is a matter for the state auditor's professional judgment as to whether a control, individually or in combination with others, is relevant in relation to audit objective. Article 34 In order to understand the operation of an internal financial control system, "walkthrough tests" may be carried out on a small number of transactions. If the preliminary assessment shows that internal financial control system are expected to be effective and consistent and state auditor plans to rely on operating effectiveness of controls, the state auditor shall plan the tests of control. If the preliminary assessment shows that internal financial control system does not fulfill applicable requirements, the state auditor shall not rely on its operating and thus shall not perform the tests of control. 7

Identifying and assessing a control risk Article 35 The control risk is assessed on evaluation of the reliability of the entity s internal financial control system of the audited entity. Control risk is the risk that the established entity s internal financial control system will fail to prevent material deviations, or to detect and correct them on a timely basis and in adequate manner. The assessment of control risk may be Low, Medium or High. Article 36 On the basis of preliminary assessment of control risk by the state auditor and/or head of division, the head of division or head of Sector shall make a preliminary assessment of control risk at overall audit level in order to identify risk areas for the audit that must be taken into account when planning and carrying out audit procedures. Setting detection risk Article 37 Detection risk is the risk that the state auditor will not detect a material misstatement and non-compliance in the audit process of the audited entity. Detection risk is set as a relation (quotient) of audit risk and multiplication of inherent and control risk. Detection risk may be reduced by carrying out more audit procedures, as this affords a greater probability for detecting material misstatements and non-compliances. Determining materiality Article 38 Materiality may be assessed during: 1) planning, to assess material risks and determine the nature, timing and extent of audit procedures; 2) conducting of an audit, when evaluating misstatements and non-compliances and considering new information that may require planned procedures to be revised, and 3) reporting, when establishing factual state; reaching conclusions and forming an audit opinion. Materiality may be quantitative and qualitative. Article 39 In planning phase of financial audit, materiality shall be assessed for the financial statements as a whole. The materiality level or levels may be also defined which should be applied to the classes of transactions, account balances or disclosures, misstatements of amounts less than materiality for the financial statements as a whole may reasonably be expected to influence the decisions of users on the basis of the financial statements. 8

Article 40 In planning phase of the regularity audit, apart from other, it shall be assessed if possible non-compliance cases in the work of the audited entity may influence on decisions of the intended users. Documenting the preparatory phase of planning an audit Article 41 The state auditor shall document key elements for understanding the audited entity and its environment, its internal financial control system and assessed risks, materiality levels and changes made thereto during the audit. Designing audit procedures Article 42 Audit procedures are designed based on the assessed risk, in order to: 1) carry out an appropriate audit procedures; 2) obtain sufficient, relevant and reliable audit evidence and 3) reach the appropriate confidence level to support audit conclusions. Article 43 For financial audit the audit procedures shall be planned to address the assessed risks of material misstatement at the level of the financial statement as a whole and at the level of transactions. Article 44 For regularity audit, the audit procedures shall be planned to address the assessed risks of non-compliances with laws, regulations and other acts identified as criteria of a given audit. Article 45 The audit procedures consist of: test of controls and substantive procedures. Substantive procedures include both tests of details and substantive analysis of classes of transactions, account balances and disclosures. For financial audit the auditor designs substantive procedures for each material classes, account balances or disclosures, regardless of the assessed risks of material misstatement. Audit sampling Article 46 The methods of sampling shall be used while performing audit procedures. The sampling may be statistical or non-statistical sampling and in a given audit: 1) the sample size should be determined which is sufficient to reduce the sampling risk on acceptably low level; 2) a sample should be chosen that is representative in relation to the population. 9

Article 47 Sampling risk is the risk that the state auditor s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. DRAFTING A DETAILED AUDIT PLAN Article 48 After having performed the activities in the preliminary planning phase of audit and submitted working documents by the audit team competent for conducting the given audit, the Head of Sector drafts a Proposal detailed audit plan and submits it to competent Auditing Board for adoption. On the proposal of the head of the Sector, the Auditing Board may revise a detailed audit plan, if any material matters, which are not covered by detailed audit plan, arise during the audit process. CONDUCTING AN AUDIT Article 49 The conducting phase consists of the work of state auditor while: 1) carrying out planned audit procedures (substantive procedures and tests of control) that were defined in the Detailed audit plan with aim to obtain sufficient, relevant and reliable audit evidence; 2) evaluating the audit evidence (evaluating results of performed audit procedures). Article 50 When the tests of controls shows that internal financial control system is not found to have operated effectively, the state auditor should inform the head of sector to revise the audit approach and increase the extent of substantive testing to be performed. Article 51 Evaluating the results of performed audit procedures requires professional judgment, as the state auditor should understand the nature and cause of the errors and consider both the quantitative aspects and the qualitative aspects of misstatements or non-compliance. Evaluating misstatements Article 52 The state auditor should keep a record of all misstatements and instances of noncompliance identified during the audit. Misstatements and instances of non-compliance should be evaluated for materiality, individually and in aggregate, to determine what effect they may have on the opinion to be given in the auditor s report. Article 53 The state auditor is obliged to inform the audited entity on a timely basis about all misstatements and instances of non-compliance observed during the course of the audit. 10

If the audited entity does not act in accordance with the given suggestions by state auditor, the one is obliged to record all material misstatements and non-compliance cases in the audit minutes. Audit minute Article 54 The state auditor is obliged to draw up and submit the audit minute to the head of the sector or head of division in order to check if all activities envisaged by the detailed audit plan are presented in the audit minute. Audit minute represents a documentary basis for drawing up Preliminary audit report. Audit minute is an internal act signed by state auditor, achieved and saved in the permanent audit file. Article 55 If the audit minute is not drafted in accordance with the elements from the detailed audit plan, or the one is not drafted on the basis of reliable or sufficient audit evidence, the head of sector or head of division requests to the state auditor to revise the one within the prescribed deadline. If the state auditor, during the process of performing audit, finds circumstances or facts which are not envisaged by Detailed audit plan, but which assesses as necessary to be presented, the state auditor states them in the audit minute by adding an appropriate note. plan. Article 56 The audit minute should consist of following main elements: 1) general part (title, date, the name of audited entity, subject of matter and scope of audit, audit methods, parts of Detailed audit plan for which the state auditor is responsible for, signature of the state auditor); 2) established factual state, parts of Detailed audit plan for a given audit; 3) Conclusions on identified irregularities with proposed recommendations. The audit minute may also contain other elements in accordance with the detailed audit Article 57 The audit minute should be drafted on precise, concise and unbiased manner, free from unnecessary description, supported by evidence and it shall be submitted within prescribed deadline. Article 58 The state auditor is obliged to submit the audit minute enclosed with all performed tests of control and substantive procedures, documents and evidence, as well as other working papers, acts or documents on which the audit minute is drafted with aim to document performed audit activities and presented data and conclusions. The enclosed documents referred to in paragraph 1 of this Law may be delivered in electronic or paper form and saved in the current audit file. Article 59 11

The audit minute, approved by the head of Sector is submitted to the Leader of Auditing Board, who holds discussion with the head of sector in order to determine all elements significant for preliminary reporting phase and afterwards it is documented in the archive and submitted to other member of the Auditing Board. If the Leader of Auditing Board does not have any additional suggestions or remarks, the state auditor documents the audit minute in the archive of the Institution and the one is delivered to: members of the competent Auditing Board, head of sector and the person responsible for keeping audit file for a given audit. Upon submission of the audit minute, other member of the Auditing Board may request to hold a session of the Auditing Board in case he believes that all activities prescribed by detailed audit plan were not carried out, quality control procedures not respected or due to other circumstances due to which he believes that audit minute should be the matter of consideration at the session of the Auditing Board. Article 60 The state auditor is responsible for quality of the audit minute, and head of sector is responsible for ensuring quality control of audit minute, which shall be recorded in appropriate check lists. Article 61 The state auditor shall not be allowed to make known in public the data and knowledge he has gained in the audit procedure. Consideration of subsequent events Article 62 The state auditor evaluates events and facts occurring after preparing financial statements of the audit entity, and which by its nature, requiring a disclosure, or to be noted in the audit report. The state auditor evaluates subsequent events and facts which became known after completion of performing audit and he records it with a special note in the audit minute. AUDIT OF GROUP FINANCIAL STATEMENTS Article 63 The audit of Annual final budget state account is performed in accordance with the fundamental requirements for performing audit of group financial statements. Group represents all the components whose financial information is included in the group financial statements. Component is an entity or business activity for which group or component management prepares financial information that should be included in the group financial statements. Article 64 The state auditors engaged to audit group financial statements should obtain sufficient appropriate audit evidence regarding the financial information of all components and the consolidation process to express an opinion as to whether the group financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. 12

Article 65 The state audit for a component that is significant due to its individual financial significance to the group, the auditor shall perform an audit of the financial information of the component using component materiality. Article 66 The state auditor for a component that is significant because it is likely to include significant risks of material misstatement of the group financial statements due to its specific nature or circumstances, the auditor shall perform one or more of the following: 1) An audit of the financial information of the component using component materiality. 2) An audit of one or more account balances, classes of transactions or disclosures relating to the likely significant risks of material misstatement of the group financial statements. 3) Specified audit procedures relating to the likely significant risks of material misstatement of the group financial statements. In the case of components that are not significant, the group audit team should perform analytical procedures at group level. REPORTING Article 67 The audit results are presented in the audit report. The audit report should be easy to understand, free from vagueness or ambiguity and complete. The audit report should be objective and fair, only including information which is supported by sufficient and appropriate audit evidence. The reporting phase consists of: Article 68 1) Drafting, proposing and adoption of the Preliminary audit report; 2) Procedure of the view expressed by audited entity on Preliminary audit report and response of the competent Auditing Board to its opinion; 3) Drafting, proposing, adoption and publishing the Final audit report. Article 69 The audit report, in principle, consists of three main parts: 1) General part; 2) Established factual state; 3) Opinion and recommendations, which are presented at the beginning of the audit report. Apart from these parts, if the competent Auditing Board considers it necessary, the audit report may also consist of other elements (Implementation of recommendations given in the audit report). Article 70 The General part of the audit report, in principle, consists of: 13

1) Legal basis for performing audit; 2) General information on audited entity; 3) Objective, subject of matter, type and scope of audit; 4) Criteria of audit (for compliance audit); 5) Timing for performing audit. Article 71 The part Established factual state of the audit report includes results of the audit derived from the audit minutes of the state auditors drafted in accordance with the detailed audit plan. The facts, conclusions and findings included in the audit report should be documented and elaborated with sufficient and appropriate audit evidence. Article 72 The part Opinion and recommendations of the audit report, in principle consists of: 1) Preamble consisting of legal basis for expressing opinion, composition of the Auditing Board, date of adoption of the audit report and type of the audit report (preliminary or final audit report); 2) Responsibility of the management of the audited entity for financial statements; 3) Responsibility of the Institution for expressing audit opinion; 4) Basis for expressing audit opinion; 5) Audit opinion; 6) Recommendations pointing out the related key irregularities and deficiencies. If the competent Auditing Board considers it should wait for the view expressed by the audit entity s opinion on given audit, the Preliminary audit report does not have to include an expressed audit opinion. Expressing audit opinion Article 73 In financial audit, based on an evaluation of the identified irregularities and audit evidence obtained, the auditor opinion is formed as to: 1) whether the financial statements are prepared, in all material aspects, in accordance with applicable financial reporting framework or 2) whether the financial statements, in all material aspects, are presented on a fair and objective manner. Article 74 In regularity audit, based on an evaluation of the identified irregularities and audit evidence obtained, the auditor opinion is formed as to: 1) whether the financial and other activities of audited entity, in all material aspects, are in compliance with relevant laws, other regulations and acts identified as criteria for given audit. If the regularity audit is performed with the financial audit, it gives an opinion on financial audit and a separate opinion on regularity audit. 14

Types of audit opinions Article 75 In audit report, it may be issued four types of the audit opinion: unqualified, qualified, adverse and disclaimer of an audit opinion. Unqualified opinion Article 76 In financial audit, the competent Auditing Board shall express an unqualified opinion if it is concluded that the financial statements are prepared, in all material aspects, in accordance with applicable financial reporting framework or the financial statements, in all material aspects, are presented on a fair and objective manner in accordance with that framework. In regularity audit, the competent Auditing Board shall express an unqualified opinion if it is concluded that the financial or other activities of audited entity, in all material aspects, are in compliance with relevant laws, other regulations and acts identified as criteria. Qualified opinion Article 77 In financial audit, the competent Auditing Board shall express a qualified opinion if: 1) having obtained sufficient appropriate audit evidence, the state auditor concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or 2) the state auditor was unable to obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that the effects on the financial statements of any undetected misstatements could be material but not pervasive. Article 78 In regularity audit, the competent Auditing Board shall express a qualified opinion is expressed if: 1) having obtained sufficient appropriate audit evidence, the state auditor concludes that instances of non-compliance are material, but not pervasive; or 2) the state auditor was unable to obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that the possible effects of any undetected instances of non-compliance, could be material but not pervasive. Adverse opinion Article 79 In financial audit, the competent Auditing Board shall express an adverse opinion when the state auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. Article 80 In regularity audit, the competent Auditing Board shall express an adverse opinion when the state auditor, having obtained sufficient appropriate audit evidence, concludes that instances of non-compliance, individually or in the aggregate, have both material and pervasive effect. 15

Disclaimer of an opinion Article 81 In financial audit, the competent Auditing Board shall express a disclaimer of opinion if, the state auditor, having been unable to obtain sufficient appropriate audit evidence on which to base the opinion, concludes that the effects on the financial statements of any undetected misstatements could be both material and pervasive. In regularity audit, the competent Auditing Board shall express a disclaimer of opinion if, the state auditor, having been unable to obtain sufficient appropriate audit evidence on which to base the opinion, concludes that the possible effects of any undetected instances of noncompliance, could be both material and pervasive. Scope limitation Article 82 Scope limitation means that state auditor is unable of gathering sufficient, appropriate evidence. The auditor s inability to obtain sufficient appropriate audit evidence may arise from: 1) Circumstances beyond the control of the entity; 2) Circumstances relating to the nature or timing of the auditor s work; and 3) Limitations imposed by management. An inability to perform a specific procedure does not constitute a limitation on the scope of the audit if the state auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures. Emphasis of Matter paragraph and Other Matters paragraphs in the auditor s report Article 83 When it is necessary to draw users attention to a matter that is of such importance that it is fundamental to their understanding of the financial statements, but which is not materially misstated in the financial statements, it should be included an Emphasis of Matter paragraph in the auditor s report., which is included immediately after expressed opinion. When it is necessary to communicate a matter, which is not presented or disclosed in the financial statement, but which is relevant to users understanding of the audit, it should add in a separate paragraph of the audit report with the heading Other Matter. FOLLOW UP OF THE IMPLEMENTATION OF AUDIT RECOMMENDATIONS GIVEN IN THE AUDIT REPORT Article 84 The competent Auditing Board in the Final audit report determines the deadline in which the audited entity is obliged to submit to the Institution Report on performed activities in relation to given audit recommendations. The competent Auditing Board may request from the audited entity to submit the plan of the activities for implementation of given audit recommendations which should include: measures, the responsible for performing the activities, and deadlines. Article 85 The Leader of the competent Auditing Board shall follow up the activities taken by the audited entity in relation to given audit recommendations with aim to check: 16

1) Whether the audited entity implemented given audit recommendations on timely basis; 2) Accuracy of the report on performed activities in relation to given audit recommendations. Activity 86 The Leader of the competent Auditing Board may request to the state auditor to check the accuracy of the information provided in the report on performed activities in relation to given audit recommendations to the audited entity and to draft a separate audit minute. The plan of the activities for implementation of given audit recommendations, report on performed activities in relation to given audit recommendations as well as the minute of the state auditor on performed control of the accuracy are consistent part of the audit file. Article 87 In case the minute of performed control by the state auditor shows that audited entity has not acted in accordance with the recommendations given in the audit report, the Leader of the competent Auditing Board: 1) in the case of less implemented audit recommendations or partly implemented audit recommendations or audit recommendations of less significance, may inform the audited entity on their non-fulfillment in written form and define a new deadline for their implementation; 2) in case of greater number of unrealized or partly realized audit recommendations or recommendations of higher importance, may propose to the Senate of the Institution to include in the Annual audit plan the audit of implementation of audit recommendations by audited entity follow up audit. Article 88 The subject matter of the follow up audit may be all recommendations of the audit report or only the ones which were not or were partly implemented by audited entity. The final follow up audit shall be published at the web site of the Institution in accordance with the rules for publishing final audit reports. IV FINAL AND TRANSITIONAL PROVISIONS Article 89 The Senate of the Institution may decide or request to draft a special professional literature (manuals, guidelines) which shall be used in the audit process and in accordance with this Instruction. Article 90 The previous Instruction on methodology of the work of the State audit institution ( Official Gazette of Republic of Montenegro, No 02/05) shall not be valid upon the presented Instruction entry into force. The Instruction shall enter into force upon the eighth day from the day of announcement in the «Official Gazette of Montenegro». No: 4011-06-77 Podgorica, 26 th January 2015 PRESIDENT OF SENATE Milan Dabović, PhD 17