Part 4: Non-standard audit reports issued in 2008

Central government: Results of the 2007/08 audits.

4.1
In this Part, we report on the non-standard audit reports issued during the 2008 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?

4.2
An audit report is addressed to the readers of an entity’s financial statements. 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.

4.3
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.

What is a non-standard audit report?

4.4
A non-standard audit report3 is one that contains:

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

4.5
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.

4.6
There are three types of qualified opinion:

4.7
The auditor will include an explanatory paragraph (see paragraph 4.23) in the audit report to emphasise a matter such as:

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

4.8
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.

4.9
Figure 5 sets out the decisions an auditor has to make when considering the appropriate form of audit report.

Adverse opinions

4.10
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 financial statements are seriously misleading.

4.11
An adverse opinion is the most serious type of non-standard audit report.

4.12
During 2008, adverse opinions were expressed for three non-school public entities:

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

4.13
The Appendix sets out the details of these adverse opinions.

4.14
We are pleased to report that it was not necessary for us to issue adverse opinions on any school boards’ financial statements in the 2008 calendar year.

Disclaimers of opinion

4.15
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 as a whole or on part of them.

4.16
During 2008, a disclaimer of opinion was expressed for one school – Te Kura Kaupapa Maori O Ruamata. The Appendix sets out the details of the disclaimer of opinion.

4.17
We are pleased to report that it was not necessary for us to issue disclaimers of opinion on any non-school public entity’s financial statements in the central government portfolios in the 2008 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

4.18
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.

4.19
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 a Crown entity breaching the requirements of the Crown Entities Act 2004 by not including budgeted figures in its financial statements.

4.20
During 2008, except-for opinions were expressed for 12 non-school public entities:

  • Auckland District Health Board and Group;
  • Christchurch Polytechnic Institute of Technology and Group;
  • Massey University and Group;
  • UCOL International Limited (a subsidiary of Universal College of Learning);
  • Ngati Whakue Educational Endowment Trust Board;
  • Massey Ventures Limited and Group (a subsidiary of Massey University; for financial statement years ended 30 June 2005 to 30 June 2007);
  • Te Wānanga o Aotearoa Te Kuratini o Ngā Waka;
  • MO1 Limited (a subsidiary of Te Wānanga o Aotearoa Te Kuratini o Ngā Waka);
  • 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);
  • Wilson Home Trust (a subsidiary of Waitemata District Health Board); and
  • Creative Campus Enterprises Limited (a subsidiary of Massey University).

4.21
During 2008, except-for opinions were expressed for the financial statements of 29 schools:

  • Remuera Primary School;
  • Wellington Girls’ College;
  • New Plymouth Girls’ High School;
  • Wanganui City College;
  • Mornington School;
  • Te Wharekura Rakaumangamanga;
  • St Peter’s College (Epsom);
  • Wellington East Girls’ College;
  • St Joseph’s School (Upper Hutt);
  • Sacred Heart School (Thorndon);
  • Huntly West School;
  • Mansell Senior School;
  • Salford School (for financial statement years ended 31 December 2006 and 2007);
  • Kaingaroa Forest School;
  • Whareorino School
  • Kiwitahi School
  • Piopio Primary School
  • Karoro School
  • Waihi East School
  • Taumarunui High School and Community Trust
  • Te Kura O Otangarei School
  • Te Whanau A Apanui Area School
  • Piri Piri School
  • Brandon Intermediate School
  • Whanganui Awa School
  • St Matthew’s School (Marton)
  • St Mary’s School (Cambridge)
  • St Joseph’s Primary School (Opotiki); and
  • Carmel College.

4.22
The Appendix sets out the details of these except-for opinions. In some cases, the audit opinion was qualified for more than one reason.

Explanatory paragraphs

4.23
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.

4.24
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. In most cases, entities choose to disclose a breach in their financial statements.

4.25
During 2008, there were five main types of matters emphasised by auditors of non-school public entities in explanatory paragraphs.

4.26
The first type of matter is funding for a capital appropriation that was not recognised as an equity transaction. The audit opinion for the University of Auckland included such an explanatory paragraph.

4.27
The second type of matter is fundamental uncertainty about the validity of the “going concern” assumption. Entities whose audit reports included such an explanatory paragraph include:

  • Capital and Coast District Health Board
  • New Zealand Institute for Crop and Food Research Limited
  • GraceLinc Limited (a subsidiary of New Zealand Institute for Crop and Food Research Limited); and
  • Western Institute of Technology at Taranaki and Group.

4.28
The third type of matter is financial statements appropriately prepared on the “going concern” assumption because the financial statements contained appropriate disclosures about the use of the “going concern” assumption. Entities whose audit reports included such an explanatory paragraph include:

  • Aupouri Maori Trust Board
  • Cardiff Holdings No.1 Limited (a subsidiary of Genesis Power Limited)
  • Cardiff Holdings No.2 Limited (a subsidiary of Genesis Power Limited)
  • GP No.1 Limited (a subsidiary of Genesis Power Limited)
  • GP No.2 Limited (a subsidiary of Genesis Power Limited)
  • Kupe Holdings Limited (a subsidiary of Genesis Power Limited)
  • Air New Zealand Consulting Limited (a subsidiary of Air New Zealand Limited); and
  • NIWA Natural Solutions Limited (a subsidiary of National Institute of Water and Atmospheric Research Limited) for the year ended 30 June 2007.

4.29
The fourth type of matter is where the “going concern” assumption was appropriately not used because organisations were disestablished. Entities whose audit reports included such an explanatory paragraph include:

  • NIWA Natural Solutions Limited (a subsidiary of National Institute of Water and Atmospheric Research Limited) for the year ended 30 June 2008
  • Architects Education and Registration Board
  • Dunedin College of Education
  • Iso-Trace Limited
  • Ngai Tahu Ancillary Claims Trust; and
  • Transit New Zealand.

4.30
The fifth type of matter is not including budget figures in the financial statements. Entities whose audit reports included such an explanatory paragraph include:

  • Immune Solutions Limited (a subsidiary of University of Otago); and
  • Southland District Health Board.

4.31
There were no breaches of law noted in the audit reports of non-school public entities.

Schools

4.32
Because of the number of non-standard audit reports in each category, we are not listing each school for which an explanatory paragraph was included in its audit report. We are instead reporting the types of explanatory paragraphs that were issued and the number of schools that received each type.

4.33
There were two main types of matters emphasised by auditors in explanatory paragraphs:

  • serious financial difficulties (22 schools); and
  • school closures (7 schools).

4.34
There were six major types of explanatory paragraphs included by auditors for breaches of law:

  • expenditure on capital works on proprietor’s land (88 schools)
  • not reporting by 31 May 2008 (76 schools)
  • not having a 10-year property plan (11 schools)
  • not including the required variation statement (9 schools)
  • borrowing without approval (6 schools); and
  • investing in non-approved institutions (5 schools).

4.35
Most schools disclose breaches of law in their financial statements. Therefore, the above figures should not be taken as a picture of compliance generally.

4.36
In addition, auditors emphasised matters for other reasons for nine schools.

4.37
The Appendix contains more information about the explanatory paragraphs that were included in audit reports.

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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