Part 3: Non-standard audit reports issued
- Introduction
- Why are we reporting this information?
- What is a non-standard audit report?
- Non-standard audit reports issued for balance dates between 1 July 2003 and 30 June 2004
- Non-standard audit reports issued for balance dates before 1 July 2003 (audits in arrears)
Introduction
3.1
We report in this part on the non-standard audit reports issued on the annual
financial statements of entities that are part of the Crown reporting entity and
other public entities not within the local government portfolio.1
3.2
This article covers non-standard audit reports issued during the period 1 July
2003 to 31 December 2004 on entities’ financial statements for:
- balance dates between 1 July 2003 and 30 June 2004; and
- balance dates before 1 July 2003 (audits in arrears).
3.3
Last year, we reported our intention to name the public entities for which we
issued a non-standard audit report from this year onwards. Accordingly, all
entities falling into the first category above have been named, but not those
in the second category. From next year, we will name all public entities.
Why are we reporting this information?
3.4
An audit report is addressed to the readers of an entity’s financial statements.
However, all public entities are ultimately accountable to Parliament. We therefore
consider it important to draw Parliament’s attention to the range of matters that
give rise to non-standard audit reports.
3.5
In each case, the issues underlying a non-standard audit report have been drawn to
the attention of the entity and discussed with its governing body.
What is a non-standard audit report?
3.6
A non-standard audit report2 is one that contains:
- a qualified audit opinion; and/or
- an explanatory paragraph.
3.7
The auditor expresses a qualified audit opinion because of a disagreement or
a limitation on scope. The type of opinion will be either an “adverse” opinion
(explained in paragraph 3.10), or a “disclaimer of opinion” (paragraph 3.12),
or an “except-for” opinion (paragraph 3.13).
3.8
The auditor will include an explanatory paragraph (see paragraphs 3.14-3.15)
in the audit report in order to draw attention to:
- a breach of law; or
- a fundamental uncertainty.
3.9
An explanatory paragraph is included in the audit report in such a way that
it cannot be mistaken for a qualification of the opinion.
“Adverse” opinion
3.10
An “adverse” opinion is expressed when there is disagreement between the
auditor and the entity about the treatment or disclosure of a matter in the
financial statements and, in the auditor’s judgement, the treatment or disclosure
is so material or pervasive that the statements are seriously misleading.
3.11
Expression of an “adverse” opinion represents the most serious type of non-standard audit report.
“Disclaimer of opinion”
3.12
A “disclaimer of opinion” is expressed when the possible effect of a limitation
on the scope of the auditor’s examination is so material or pervasive that
the auditor has not been able to obtain sufficient evidence to support, and
accordingly is unable to express, an opinion on the financial report.
“Except-for” opinion
3.13
An “except-for” opinion is expressed when the auditor concludes that either:
- the possible effect of a limitation on the scope of the auditor’s examination is, or may be, material but is not so significant as to require a “disclaimer of opinion” – in which case the opinion is qualified by using the words “except for the effects of any adjustments that might have been found necessary” had the limitation not affected the evidence available to the auditor; or
- the effect of the treatment or disclosure of a matter with which the auditor disagrees is, or may be, material but is not, in the auditor’s judgement, so significant as to require an “adverse” opinion – in which case the opinion is qualified by using the words “except for the effects of” the matter giving rise to the disagreement.
Explanatory paragraph
3.14
In certain circumstances, it may be appropriate for the auditor to include in the audit report additional comment, by way of an explanatory paragraph, to draw attention to a matter that is regarded as relevant to a proper understanding of the basis of opinion on the financial report.
3.15
For example, it could be relevant to draw attention to the entity having breached its statutory obligations, or to a fundamental uncertainty that might make the going concern assumption inappropriate. The most common type of non-standard audit report tends to include an explanatory paragraph.
Non-standard audit reports issued for balance dates between 1 July 2003 and 30 June 2004
3.16
The table on the next page outlines the nature of the non-standard audit reports issued for balance dates between 1 July 2003 and 30 June 2004.
Full “adverse” opinions
| Name of Entity | Financial Statements Period Ended | Reason for Opinion |
|---|---|---|
| New Zealand Railways Corporation | 30 June 2004 | We disagreed with the recognition of provisions for claims and litigation relating to the previous operations of the business. In our opinion, these provisions did not constitute a liability of the Corporation. |
| Queen Elizabeth II Army Memorial Museum | 30 June 2004 | The Board did not recognise the museum collection assets it owns; nor the associated depreciation expense in its financial statements. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment (FRS-3), which requires museum collection assets not previously recognised to be recognised at fair value and depreciated. In addition, we were unable to verify some material revenues due to limited control over those revenues. We also reported that we were unable to express an opinion as to whether the comparative information in the Statements of Financial Performance and Position was fairly stated, due to a qualification expressed on the prior year’s financial statements. |
| RNZAF Museum Trust Board | 30 June 2004 | The Board did not recognise the museum collection assets it owns; nor the associated depreciation expense in its financial statements. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment (FRS-3), which requires museum collection assets not previously recognised to be recognised at fair value and depreciated. We also reported that, if it were not for the departure from FRS-3, the financial statements would have fairly reflected the Board’s financial position, results of operations and cash flows. |
Partial “adverse” opinions
| Name of Entity | Financial Statements Period Ended | Reason for Opinion |
|---|---|---|
| Christchurch Polytechnic Institute of Technology and Group | 31 December 2003 | We issued an unqualified opinion on the parent entity’s financial statements. However, we disagreed with the Council’s decision not to prepare consolidated financial statements. In our opinion, this was a departure from Financial Reporting Standard No. 37: Consolidating Investments in Subsidiaries. |
| Broadcast Communications Limited | 30 June 2004 | We disagreed with the Board of Directors’ decision to recognise a fundamental error relating to a payment made in 2000 under a non-compete settlement agreement that had the effect of writing down the non-compete asset. In our opinion, this decision was incorrect and mis-stated the company’s Statement of Financial Performance and Statement of Financial Position. We issued an unqualified opinion on the company’s statement of cash flows. |
Partial “disclaimers of opinion”
| Name of Entity | Financial Statements Period Ended | Reason for Opinion |
|---|---|---|
| Morrinsville College Educational Trust | 31 December 2003 | The financial statements of the Trust had not previously been audited. We were therefore unable to form an opinion as to whether the Statement of Financial Performance was fairly stated. We also did not give an opinion about the comparative information. However, in our opinion, the financial position of the Trust was fairly stated. |
“Except-for” opinions
| Name of Entity | Financial Statements Period Ended | Reason for Opinion |
|---|---|---|
| Ministry for the Environment | 30 June 2004 | We disagreed with the Ministry’s decision not to recognise its non-departmental land in the 2003 comparative information. In our opinion, this was a departure from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment. |
| Transmission Holdings Limited and Group | 30 June 2004 | We disagreed with the write-down of the non-compete settlement asset of Broadcast Communications Limited, a subsidiary of Transmission Holdings Limited (THL), and the recognition of goodwill by the THL Group. In our opinion, this decision was incorrect and mis-stated the financial statements. |
| Ngati Whakaue Education Endowment Trust Board | 31 December 2003 | We disagreed with land being recorded at the value used for rating purposes. In our opinion, this was a departure from Statement of Standard Accounting Practice No. 17: Accounting for Investment Properties and Properties Intended for Sale. |
| New Zealand Army Singapore Fund | 31 December 2003 | The financial statements of the Fund had not previously been audited. We therefore did not form an opinion about the comparative information. The lack of assurance about the comparative information meant that adjustments may have been necessary for the Statement of Financial Performance to be fairly stated. However, in our opinion, the financial position of the Fund was fairly stated. |
| RNZAF Sports Association | 30 June 2004 | The financial statements of the Association had not previously been audited. We therefore did not form an opinion about the comparative information. The lack of assurance about the comparative information meant that adjustments may have been necessary for the Statement of Financial Performance to be fairly stated. However, in our opinion, the financial position of the Association was fairly stated. |
| Auckland District Health Board Charitable Trust | 30 June 2004 | We were unable to verify certain revenue because of limited control over the receipt of this revenue. |
| He Huarahi Tamariki Charitable Trust | 31 December 2003 | We were unable to verify certain revenue because of limited control over the receipt of this revenue. |
| McAlister Holdings Limited3 | 31 December 2003 | We were unable to verify certain revenue because of limited control over the receipt of this revenue. |
Explanatory paragraphs
| Name of Entity | Financial Statements Period Ended | Reason for Opinion |
|---|---|---|
| Northland Polytechnic and Group | 31 December 2003 | We highlighted that the validity of the going concern assumption depended on the results of a strategic review of the Polytechnic. |
| Auckland College of Education and Group | 31 December 2003 | We drew attention to the uncertainty over the future status of the College as an entity. The validity of the going concern assumption depended on the Minister of Education’s decision on the proposal to amalgamate the College into the University of Auckland. |
| Western Institute of Technology at Taranaki and Group | 31 December 2003 | We highlighted that the going concern assumption depended on the continuing financial support of the Crown and/or the Institute’s bankers. |
| Treaty of Waitangi Fisheries Commission and Group | 30 September 2003 | We drew attention to the uncertainty over the future status of the Commission as an entity. The validity of the going concern assumption depended on the outcome of the Maori Fisheries Bill, which was at that time being considered by Parliament. If enacted, the Bill would result in the Commission being dissolved and its activities being vested in a new corporate structure. |
| Building Industry Authority | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Authority was to be disestablished on 30 November 2004. We also highlighted the uncertainty over the outcome of litigation on the weathertightness of buildings. |
| Pacific Education Centre | 31 December 2003 | We drew attention to a note in the financial statements regarding the Centre’s financial difficulties, its business recovery plan, and the support provided by stakeholders. |
| Department for Courts | 30 September 2003 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Department was to be merged with the Ministry of Justice on 1 October 2003. |
| Manukau Pacific Markets Limited | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the company was winding down its operations. |
| Transfund New Zealand | 31 December 2003 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the entity was to be disestablished on 30 November 2004. |
| TP Holdings Limited4 | 31 December 2003 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the company was to be liquidated within 12 months. |
| Casino Control Authority | 30 June 2004 and 29 September 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Authority was required to be dissolved 3 months from 1 July 2004. |
| Land Transport Safety Authority | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Authority was to be disestablished on 30 November 2004. |
Non-standard audit reports issued for balance dates before 1 July 2003 (audits in arrears)
3.17
In June 2004, we reported on the non-standard audit reports issued during the
period 1 July 2002 to 31 March 2004. The following table updates and outlines
the number and nature of non-standard audit reports issued during the period
1 July 2003 to 31 December 2004 for balance dates before 1 July 2003.
Full “adverse” opinions
| Class of Entity | No. of Entities | Reason for Opinion |
|---|---|---|
| State Owned Enterprise |
1 | We disagreed with the recognition of provisions for claims and litigation relating to the previous operations of the business. In our opinion, these provisions did not constitute a liability of the entity. |
Partial “adverse” opinions
| Class of Entity | No. of Entities | Reason for Opinion |
|---|---|---|
| Education – Polytechnic |
1 | We issued an unqualified opinion on the parent entity’s financial statements. However, we disagreed with the Council of the Polytechnic not preparing consolidated financial statements. In our opinion, this was a departure from Financial Reporting Standard No. 37: Consolidating Investments in Subsidiaries. |
Partial “disclaimers of opinion”
| Class of Entity | No. of Entities | Reason for Opinion |
|---|---|---|
| State Owned Enterprise Subsidiary | 1 | The financial statements of the company had not previously been audited. We were therefore unable to form an opinion as to whether the comparative information in the Statement of Financial Performance was fairly stated. |
| Statutory Body Subsidiary | 2 | The financial statements of the entity had not previously been audited. We were therefore unable to form an opinion as to whether the Statement of Financial Performance was fairly stated. We also did not give an opinion about the comparative information. However, in our opinion, the financial position of the entity was fairly stated. |
“Except-for” opinions
| Class of Entity | No. of Entities | Reason for Opinion |
|---|---|---|
| Government Department5 | 1 | We disagreed with the Department’s valuation of visitor assets. We also disagreed with the fact that the Department did not recognise fencing assets and the associated depreciation expense and capital charge in the prior year’s comparative information. In our opinion, the matters on which we disagreed were departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment. |
| Government Department5 | 1 | We disagreed with the Department’s decision not to recognise its non-departmental land and any associated liabilities. In our opinion, this was a departure from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment and Financial Reporting Standard No. 15: Provisions, Contingent Liabilities and Contingent Assets respectively. |
| Maori Trust Board | 1 | We were unable to confirm the value of the Board’s fixed assets as it did not revalue them in accordance with Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment. We were also unable to confirm the value of the Board’s investment property as it did not revalue its investment properties in accordance with Statement of Standard Accounting Practice No. 17: Accounting for Investment Properties and Properties Intended for Sale. |
| Maori Trust Board | 3 | We disagreed with the Board not consolidating a subsidiary in the group financial statements. In our opinion, this was a departure from Statement of Standard Accounting Practice No. 8: Accounting for Business Combinations. |
| Maori Trust Board | 1 | We were unable to confirm the value of an investment held by the Board, and were unable to satisfy ourselves as to this balance by other audit procedures. |
| District Health Board Subsidiary | 2 | We were unable to verify certain revenue because of limited control over the receipt of this revenue. |
| Health – Health Miscellaneous | 1 | We were unable to verify certain revenue because of limited control over the receipt of this revenue. |
| Education – University and Wananga Subsidiary | 1 | We were unable to verify certain revenue because of limited control over the receipt of this revenue. |
| Education – Other Crown Entity | 1 | The entity did not complete a Statement of Intent for the year as required by the Public Finance Act 1989. As there were no formal performance targets, we were unable to assess the entity’s service performance. |
| Statutory Body Subsidiary | 1 | The financial statements of this entity had not previously been audited. We therefore did not form an opinion about the comparative information. The lack of assurance about the comparative information meant that adjustments may have been necessary for the Statement of Financial Performance to be fairly stated. However, in our opinion, the financial position of the entity was fairly stated. |
Explanatory paragraphs
| Class of Entity | No. of Entities | Reason for Opinion |
|---|---|---|
| Government Department6 | 2 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements. |
| Crown Entity | 2 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements. |
| Crown Entity Subsidiary | 1 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements. |
| District Health Board Subsidiary | 2 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements. |
| Education – Polytechnic Subsidiary | 1 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements. |
| Education – Other Crown Entity |
2 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements. |
| Statutory Body | 1 | We drew attention to the uncertainty over the future status of the entity. The validity of the going concern assumption on which the financial statements are prepared depended on both the potential outcome of litigation and the potential dissolution of the entity. |
| Statutory Body Subsidiary | 8 | We drew attention to the uncertainty over the future status of the entity. |
1: We report separately on entities that are within the local government portfolio, in our yearly report on the results of audits for that sector.
2: A non-standard audit report is issued in accordance with the Institute of Chartered Accountants of New Zealand Auditing Standard No. 702: The Audit Report on an Attest Audit (AS-702).
3: Subsidiary of Te Whare Wananga o Awanuiarangi.
4: Subsidiary of the Western Institute of Technology.
5: Audit reports covered the year ended 30 June 2003.
6: Audit reports covered the year ended 30 June 2003.
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