Part 7: Non-standard audit reports issued in 2007

Central government: Results of the 2006/07 audits.

7.01
In this Part, we report on the non-standard audit reports issued during the 2007 calendar year on the annual financial statements of public entities within our central government portfolio of audits.1 We report on school boards of trustees separately from the other public entities.2

Why are we reporting this information?

7.02
An audit report is addressed to the readers of an entity’s financial statements. However, all public entities are ultimately accountable to Parliament for their use of public money and their use of any statutory powers or other authority given to them by Parliament. Therefore, we consider it important to draw Parliament’s attention to the matters that give rise to non-standard audit reports.

7.03
In each case, the issues underlying a non-standard audit report are drawn to the attention of the entity and discussed with its governing body, or chief executive in the case of a government department.

What is a non-standard audit report?

7.04
A non-standard audit report3 is one that contains:

  • a qualified opinion; and/or
  • an explanatory paragraph.

7.05
An auditor expresses a qualified opinion because of:

  • a disagreement between the auditor and the entity about the treatment or disclosure of a matter in the financial statements; or
  • a limitation in scope because the auditor has been unable to obtain enough evidence to support, and accordingly is unable to express, an opinion on the financial statements or a part of the financial statements.

7.06
There are three types of qualified opinion:

  • an "adverse" opinion (see paragraph 7.10);
  • a "disclaimer of opinion" (see paragraph 7.15); and
  • an "except-for" opinion (see paragraph 7.18).

7.07
The auditor will include an explanatory paragraph (see paragraph 7.23) in the audit report to emphasise a matter such as:

  • a breach of law; or
  • a fundamental uncertainty.

7.08
Auditors are required to ensure that an explanatory paragraph is included in the audit report in such a way that it cannot be mistaken for a qualified opinion.

7.09
Figure 5 outlines the decisions to be made when considering the appropriate form of audit report.

Adverse opinions

7.10
An adverse opinion is expressed when the auditor and the entity disagree 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 report is seriously misleading.

7.11
An adverse opinion is the most serious type of non-standard audit report.

7.12
During 2007, adverse opinions were expressed for three public entities:

  • Queen Elizabeth II Army Memorial Museum;
  • RNZAF Museum Trust Board; and
  • Royal New Zealand Navy Museum Trust Incorporated.

7.13
Appendix 2 sets out the details of the adverse opinions.

7.14
We are pleased to report that it was not necessary for adverse opinions to be issued on any school boards’ financial statements in the 2007 calendar year.

Disclaimers of opinion

7.15
A disclaimer of opinion is expressed when the scope of an auditor’s examination is limited, and the possible effect of that limitation is so material or pervasive that the auditor has not been able to obtain enough evidence to support an opinion on the financial statements. The auditor is accordingly unable to express an opinion on the financial statements or on part of it.

7.16
During 2007, a disclaimer of opinion was expressed for one public entity – the Pacific Islands Polynesian Education Foundation. Appendix 2 sets out the details of the disclaimer of opinion.

7.17
We are pleased to report that it was not necessary for disclaimers of opinion to be issued on any school boards’ financial statements in the 2007 calendar year.

Figure 5
Deciding on the appropriate form of audit report

Figure 5: Deciding on the appropriate form of audit report.

Except-for opinions

7.18
An except-for opinion is expressed when the auditor reaches one or both of the following conclusions:

  • The possible effect of a limitation in the scope of the auditor's examination is (or may be) material but is not significant enough to require a disclaimer of opinion. 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.
  • 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, significant enough to require an adverse opinion. The opinion is qualified by using the words “except for the effects of” the matter giving rise to the disagreement.

7.19
An except-for opinion can be expressed when the auditor concludes that a breach of statutory obligations has occurred and that the breach is material to the reader's understanding of the financial statements. An example of this is where a Crown entity has breached the requirements of the Crown Entities Act 2004 because it has not included budgeted figures in its financial statements.

7.20
During 2007, except-for opinions were expressed for 13 public entities:

  • Te Wānanga O Aotearoa Te Kuratini O Nga Waka;
  • MO1 Limited (a subsidiary of Te Wānanga O Aotearoa Te Kuratini O Nga Waka);
  • Victoria University of Wellington and Group;
  • Christchurch Polytechnic Institute of Technology and Group;
  • Christchurch College of Education;
  • New Zealand Centre for Reproductive Medicine Limited (a company jointly Controlled by the University of Otago and Canterbury District Health Board);
  • Delta S Technologies Limited (an indirect subsidiary of the University of Otago);
  • Ngati Whakaue Education Endowment Trust Board;
  • Ivey Hall and Memorial Hall 125th Anniversary Appeal Gifting Trust (a trust controlled by Lincoln University);
  • Ivey Hall and Memorial Hall 125th Anniversary Appeal Taxable Activity Trust (a trust controlled by Lincoln University);
  • Creative Campus Enterprises Limited (a subsidiary of Massey University);
  • Three Harbours Health Foundation (a trust controlled by Waitemata District Health Board); and
  • Wilson Home Trust (a trust controlled by Waitemata District Health Board).

7.21
Except-for opinions were expressed for the financial statements of 31 schools:

  • Coastal Taranaki School;
  • Glenfield Primary School;
  • Hamilton Boys’ High School;
  • Henderson Intermediate School;
  • Henderson North School;
  • Kohia Terrace School;
  • Kopane School;
  • Mangorei School;
  • Mansell Senior School;
  • Marist School (Herne Bay);
  • Mornington School;
  • Orauta School;
  • Orewa Primary School;
  • Sacred Heart College (Auckland);
  • St Dominic’s College (Henderson);
  • St John’s College (Hillcrest);
  • St Matthew’s School (Marton);
  • St Michael’s School (Remuera);
  • Stanhope Road School;
  • Stanmore Bay School;
  • Taumarunui High School and Community Trust;
  • Te Kura Kaupapa Māori O Te Rito;
  • Te Kura Kaupapa Māori O Wairarapa;
  • Te Kura O Te Whakarewarewa;
  • Te Tino O Pourangi;
  • Wakaaranga School;
  • Wanganui City College;
  • Wellington East Girls’ College;
  • Wellington Girls’ College;
  • Whanganui Awa School; and
  • Woodford House.

7.22
Appendix 2 sets out the details of the except-for opinions. In some cases, an audit opinion was qualified for more than one reason.

Explanatory paragraphs

7.23
In certain circumstances, it may be appropriate for the auditor to include additional comments in the audit report. Through an explanatory paragraph, the auditor emphasises a matter that they consider relevant to a reader’s proper understanding of an entity’s financial statements.

7.24
For example, an explanatory paragraph could draw attention to an entity having breached its statutory obligations for matters that may affect or influence a reader’s understanding of the entity’s financial statements. In this situation, the audit report would normally draw attention to the breach only if the entity had not clearly disclosed the breach in its financial statements.

7.25
During 2007, explanatory paragraphs were included in the audit reports for 21 public entities:

  • Northland Polytechnic and Group;
  • Counties Manukau District Health Board and Group;
  • New Zealand Institute for Crop and Food Research Limited;
  • GraceLinc Limited (a subsidiary of New Zealand Institute for Crop and Food Research Limited);
  • NIWA Natural Solutions Limited (a subsidiary of National Institute of Water and Atmospheric Research Limited);
  • Air New Zealand Associated Companies (Australia) Limited (a subsidiary of Air New Zealand Limited);
  • Ansett Australia and Air New Zealand Engineering Services Limited (a subsidiary of Air New Zealand Limited);
  • Air New Zealand Travel Business Limited (a subsidiary of Air New Zealand Limited);
  • Eagle Air Maintenance Limited (a subsidiary of Air New Zealand Limited);
  • Enzedair Tours Limited (a subsidiary of Air New Zealand Limited);
  • Jetaffair Holidays Limited (a subsidiary of Air New Zealand Limited);
  • Tasman Empire Airways (1965) Limited (a subsidiary of Air New Zealand Limited);
  • Travelseekers International Limited (a subsidiary of Air New Zealand Limited);
  • Zeal 320 Limited (a subsidiary of Air New Zealand Limited);
  • Carter Observatory Board;
  • Association of Colleges of Education in New Zealand;
  • Te Arawa Maori Trust Board;
  • Southland Provincial Patriotic Council;
  • Open Mind Journals Limited (a subsidiary of The Open Polytechnic of New Zealand);
  • East City Community Education; and
  • Manukau Health Trust Limited (a subsidiary of Counties Manukau District Health Board).

Explanatory paragraphs for schools – breaches of the law

7.26
Some explanatory paragraphs concern a breach of law. In most cases, boards have a choice of disclosing a breach of law in their financial statements. Where a board decides to make a voluntary disclosure, we would not normally include an explanatory paragraph in the audit report unless we felt the matter was important enough to warrant it.

7.27
We are not listing each school for which an explanatory paragraph was included in its audit report. Because of the number of non-standard audit reports in each category, we are instead reporting the types of explanatory paragraphs that were issued and the number of schools that received each type.

7.28
There were seven major types of explanatory paragraphs included by auditors for breaches of law:

  • not reporting by 31 May 2007 (79 schools);
  • not including the required variation statement (3 schools);
  • unapproved expenditure by integrated schools on capital works (22 schools);
  • borrowing without approval (14 schools);
  • investing in non-approved institutions (8 schools);
  • payments in advance to staff (16 schools); and
  • enrolling international students without signing the Code of Practice for Pastoral Care for International Students (2 schools).

7.29
Appendix 2 includes more information on these types of breaches.

Explanatory paragraphs for schools – emphasis of matters

7.30
There were three main types of matters emphasised by auditors in explanatory paragraphs:

  • school closures (6 schools);
  • serious financial difficulties (17 schools); and
  • a change of proprietor and no Integration Agreement (6 schools).

7.31
Auditors emphasised matters for other reasons for twelve schools. Appendix 2 contains more information on the other reasons and on the types of emphasised matters.

1: We report separately on entities within the local government portfolio, in our yearly report on the results of audits for that sector.

2: There are about 2450 state schools governed by boards of trustees, which are made up of members of the local community (usually parents of children attending the school). The board of each school is a Crown entity in its own right and, as such, is obliged to prepare annual financial statements in accordance with “generally accepted accounting practice”.

3: 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.

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