EU project audit – how to prepare?

An EU project audit requires, above all, organising the documentation, checking that expenditure complies with the grant agreement, preparing evidence that tasks have been carried out and verifying whether the project has been implemented in line with the schedule, budget, eligibility rules and information and promotion obligations. The beneficiary should not treat an audit as a one-off event, but as part of the entire project implementation process.

The earlier documents are compiled and described in a logical way, the lower the risk of financial corrections, additional explanations and problems in settling the grant.

What does an EU project audit involve?

An EU project audit involves checking whether public funds have been used for their intended purpose, in line with the programme rules and the terms of the grant agreement. In practice, this means analysing documents, financial data, the way contractors were selected, the physical implementation of the investment and the achievement of the expected results.

In the case of investment projects, an audit may also include an inspection of the project site. Auditors may check whether the machinery, equipment, installations, IT systems or furnishings purchased are actually located at the beneficiary's premises, are marked in accordance with the programme requirements and are used for the purposes indicated in the grant application.

In advisory, training, R&D or digitalisation projects, substantive documentation may be more important: reports, acceptance reports, attendance lists, work results, confirmations of services performed, licences, technical documentation, analyses, models, expert opinions or implementation results.

What are the most common types of EU project audits?

An EU project audit does not always look the same. The scope of the audit depends on the programme, the value of the project, the type of expenditure, the stage of implementation and the risks identified by the institution.

Audit of project documentation

Most often, a beneficiary encounters a documentation audit as part of the verification of payment claims. The institution then checks whether the expenditure submitted for reimbursement or settlement is eligible, correctly annotated, paid and consistent with the approved budget.

The following may be verified in particular:

• invoices, bills and other accounting documents,
• confirmations of transfers or payment,
• contracts with contractors,
• acceptance reports,
• documents from procurement procedures,
• confirmations of delivery, installation or commissioning,
• the project accounting records,
• annotations on accounting documents,
• documents confirming the achievement of indicators,
• information and promotion documentation.

On-site inspection at the project location

An on-site inspection involves directly checking the implementation of the project at the beneficiary's premises. It may cover the company's registered office, the investment site, a farm, a medical facility, a production plant, the project office or another location indicated in the grant application.

During an on-site inspection, the institution may check:

• whether the investment has actually been carried out,
• whether the assets purchased are available and used in line with the project objective,
• whether the paper and electronic documentation is complete,
• whether the project is correctly marked,
• whether the data in the payment claim correspond to the actual situation,
• whether there has been double financing of expenditure,
• whether the obligations arising from the grant agreement are being met.

Ad hoc audit

An ad hoc audit may be carried out when the institution has specific doubts about the implementation of the project. The reason may be, for example, reports of irregularities, discrepancies in documents, delays, unusual changes in the budget, problems with procurement procedures or objections raised during the settlement of a payment claim.

In the case of an ad hoc audit, the beneficiary should act with particular care. It is necessary not only to make the required documents available, but also to prepare consistent explanations of the reasons for the discrepancies.

Audit during the project durability period

Some projects are subject to a durability obligation. This means that, after the project ends, the beneficiary must for a specified period maintain the effects of the investment, the way the purchased assets are used and the conditions set out in the grant agreement.

During the durability period, the institution may check whether:

• the project continues to operate as intended,
• the fixed assets purchased have not been sold, disposed of or relocated in breach of the agreement,
• the activity covered by the project is being continued,
• there has been no substantial change affecting the nature of the project,
• the beneficiary retains the required documentation,
• the result indicators are maintained, if this follows from the project documentation.

When does the beneficiary find out about an audit?

In many cases, the beneficiary receives notice of a planned audit in advance. In the notice, the institution usually specifies the date of the audit, its scope, the composition of the audit team and the documents to be prepared.

This does not mean, however, that the documentation can be put in order only after receiving information about the audit. In practice, this is too late to reconstruct the full history of the project. If the beneficiary has not kept documentation on an ongoing basis, preparing for the audit may reveal gaps that cannot be quickly remedied – for example, missing acceptance reports, incomplete justifications for the selection of contractors, incorrect invoice annotations or no evidence that a service was performed.

The safest approach is to keep audit documentation from the first day of project implementation.

How to prepare documents for an EU project audit?

Preparing documents for an audit should start by comparing three basic sources: the grant application, the grant agreement and the actual course of the project. It is between these elements that discrepancies most often arise.

Checking the consistency of the project with the grant application

The beneficiary should verify whether the project has been implemented within the scope described in the application. This applies not only to the main costs, but also to the objectives, indicators, deadlines, locations, target groups, technical parameters and the business rationale.

It is worth checking in particular:

• whether the goods and services purchased correspond to the description in the application,
• whether the technical parameters are not significantly different from those declared,
• whether the implementation dates fall within the schedule,
• whether the physical scope has not been reduced without the institution's consent,
• whether the output and result indicators have been achieved,
• whether changes to the project have been notified, if required by the agreement.

If changes occurred in the project, you should prepare documents confirming their approval or a justification of why a given change did not require the institution's consent.

Organising the financial documentation

Financial documentation is one of the most important areas of an audit. Every item of expenditure submitted for settlement should have a clear audit trail – from the budget line, through the selection of the contractor, the contract, the invoice, acceptance and payment, to its entry in the accounting records.

For each item of expenditure, it is worth preparing a separate set of documents:

• the item in the project budget,
• a document confirming the selection of the contractor,
• a contract, purchase order or commission,
• an invoice or equivalent accounting document,
• proof of payment,
• an acceptance report or other evidence of performance,
• a document confirming delivery, installation, commissioning or implementation,
• the accounting annotation of the document,
• confirmation that the expenditure has been entered in the project accounting records.

Consistency of amounts, dates and contractor names is particularly important. Even minor discrepancies may result in the need to provide explanations.

Verifying the eligibility of expenditure

Not every item of expenditure incurred in a project is automatically eligible. Expenditure should be consistent with the programme, the agreement, the budget, the eligibility rules and the project objective. It should also be reasonable, properly documented and actually incurred.

Before an audit, you should check:

• whether the expenditure falls within the eligibility period,
• whether it concerns an approved cost category,
• whether it was incurred by an eligible entity,
• whether it is necessary for the implementation of the project,
• whether it has not been financed from another public source,
• whether it has been properly documented,
• whether it was paid in accordance with the programme requirements.

Audit of procurement and contractor selection

One of the most common risk areas in EU projects is procurement. The institution may check whether the beneficiary correctly estimated the contract value, applied the appropriate contractor selection procedure, ensured fair competition and did not split the contract in order to avoid more stringent procedures.

In EU projects, the following are of particular importance:

• correct estimation of the contract value,
• an up-to-date analysis of market prices,
• a proper description of the subject of the contract,
• no provisions restricting competition,
• documented comparison of bids,
• correct use of the Baza Konkurencyjności, if required,
• transparent bid evaluation criteria,
• selection of the contractor in accordance with the established rules,
• no conflict of interest,
• consistency of the contract with the contractor with the terms of the request for quotation.

Errors in procurement may lead to financial corrections, which is why the documentation of contractor selection should be complete and logical. It is worth keeping not only bids and reports, but also confirmations of the publication of requests, correspondence with contractors, clarifications of the content of requests, notes on the estimation of the contract value and justifications for the selection.

How to prepare for an on-site inspection?

An on-site inspection requires preparing not only documents, but also the people responsible for the project. It is worth agreeing in advance who will represent the beneficiary, who is responsible for the financial part, who for the substantive part and who for technical or investment matters.

Before an on-site inspection, it is worth carrying out an internal review of the project:

• check that the purchased devices and equipment are located at the project site,
• make sure that the fixed assets are available for inspection,
• prepare documents confirming their purchase, acceptance and commissioning,
• check the markings informing about the funding,
• prepare access to systems, licences, applications or electronic documentation,
• verify that the actual situation corresponds to the description in the application,
• prepare a person who will be able to explain how the purchases are used.

If the project involved construction works, renewable energy (RES) installations, the modernisation of premises, the purchase of a production line or the implementation of an IT system, it is also worth preparing technical documentation, reports, photographs, warranty documents, acceptance documents and any administrative decisions.

The most common errors detected during EU project audits

Problems during audits do not always result from a deliberate breach of the rules. Very often, they are the result of a lack of system, poor organisation of documents or an incomplete understanding of the beneficiary's obligations.

The most common mistakes include:

• incomplete documentation of contractor selection,
• an invoice inconsistent with the approved budget,
• no acceptance report or confirmation that a service was performed,
• an invoice annotation that does not allow the expenditure to be attributed to the project,
• payment made after the eligibility deadline,
• purchase of equipment with different parameters from those indicated in the application,
• no consent for a significant change to the project,
• failure to achieve indicators,
• no documents confirming the promotion of the project,
• storing documentation in a way that prevents quick verification,
• discrepancies between the schedule, the budget and actual implementation,
• no explanations for changes in prices, deadlines or physical scope.

The greatest risk arises when the beneficiary cannot demonstrate the link between the expenditure and the project objective. An invoice and a transfer confirmation alone are not always sufficient. The institution may expect evidence that the purchase was needed, was actually carried out and serves the implementation of the project.

How to respond to questions from the audit body?

Answers to the auditors' questions should be factual, consistent and based on documents. You should not give intuitive or unverified explanations, or explanations that contradict earlier project documentation.

A good response to a request or question from the institution should include:

• a reference to the specific question,
• a description of the facts,
• an indication of the documents supporting the beneficiary's position,
• an explanation of the reasons for any discrepancies,
• an indication of whether the change was notified to the institution,
• a clear summary of the position.

If the audit concerns a larger project, it is worth preparing a table of explanations. One column can show the institution's question, the second the beneficiary's answer, the third the supporting documents and the fourth the location of the documents in the attachments.

Is it worth preparing an internal checklist for an EU project audit?

Yes. An internal checklist is one of the simplest tools for reducing risk. It makes it possible to check whether the project is ready for an audit even before the institution's visit or before documents are sent.

A sample pre-audit checklist may include:

• the grant agreement together with annexes,
• the current grant application,
• physical and financial schedule,
• the approved project budget,
• payment claims and correspondence with the institution,
• invoices and proof of payment,
• accounting documents and the project records,
• procurement documentation and documentation of the estimation of contract values,
• contracts with contractors,
• acceptance reports,
• documents confirming delivery and commissioning,
• photographs, reports, analyses, expert opinions or other project results,
• documents relating to project promotion,
• documents confirming the achievement of indicators,
• a register of changes to the project,
• correspondence concerning the institution's consents.

A well-prepared checklist should be tailored to the specific programme. Different documents will be relevant in a project for a manufacturing company, in a project for a farmer, in a project for a medical facility and in an R&D project.

What consequences can a negative audit result have?

If the institution finds irregularities, it may require the beneficiary to provide explanations, supplement the documentation, implement corrective action or repay part of the funds. In more serious cases, financial corrections are possible, as well as a reduction of eligible expenditure, refusal of reimbursement, termination of the agreement or an obligation to repay the funding.

The consequences depend on the type of breach, its impact on the project and the rules of the given programme. The absence of a single document that can be supplemented will be assessed differently from the selection of a contractor in breach of competitiveness or a purchase inconsistent with the project objective.

Documents concerning audits and the correction of irregularities are published on the European Funds Portal.

How to reduce the risk of problems during an audit?

The best preparation for an audit begins at the project planning stage. Already when preparing the application, it is worth thinking about how purchases, indicators, results and the use of funding will later be documented.

The risk can be reduced by:

• planning the budget realistically,
• describing costs precisely in the application,
• avoiding inflated or poorly justified expenditure,
• properly documenting the selection of contractors,
• annotating invoices on an ongoing basis,
• keeping separate accounting records for the project,
• archiving correspondence with the institution,
• notifying significant changes before they are introduced,
• monitoring indicators regularly,
• preparing acceptance documents for each item of expenditure,
• checking promotion obligations,
• periodic audits of the project documentation.

For larger investments, it is worth using advisory support not only at the audit stage, but already during project implementation and settlement. This applies in particular to high-value projects, projects with many contractors, construction investments, projects involving State aid and undertakings requiring the application of the competitiveness principle.

EU project audit and grant settlement

Audit and grant settlement are closely linked. Correct settlement requires not only demonstrating the costs incurred, but also proving that the project has been implemented as planned. That is why audit documentation should be prepared in parallel with the documentation for payment claims.

If the beneficiary plans to submit a final payment claim, it should first check whether it has a complete set of documents confirming the completion of the project. Gaps at this stage may delay the payment of funds or result in requests for explanations.

In the event of doubts concerning the eligibility of costs, how to annotate invoices, the preparation of procurement documents or responses to the institution's questions, you can make use of grant advisory services.

When is it worth consulting on the project before an audit?

A consultation before an audit is particularly justified when the project has undergone changes, delays, problems with contractors, budget shifts, incomplete documentation or doubts concerning the eligibility of expenditure.

It is worth consulting on the project if:

• the beneficiary has received notice of an audit,
• the institution has requested additional explanations,
• there were differences between the application and the actual situation,
• the contractor, physical scope or purchase parameters were changed,
• the project included larger contracts,
• some documents were prepared after the fact,
• there is a risk of the indicators not being achieved,
• the beneficiary is not sure whether the documentation is complete.

In such a situation, it is worth putting the documents in order, preparing arguments and checking whether the answers for the institution are consistent with the application, the agreement and previous correspondence. The scope of such support is described on the page Support during project audits and evaluations.

Have you received notice of an audit, or would you like to check whether your project is ready? We invite you to an individual analysis.Contact an expert