Part 3: Non-standard audit reports issued in 2009

Local government: Results of the 2008/09 audits.

3.1
In this Part, we report on the non-standard audit reports issued during the 2009 calendar year on the financial statements of entities within the local government portfolio of audits.16

Why are we reporting this information?

3.2
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.

3.3
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.

What is a non-standard audit report?

3.4
A non-standard audit report17 is one that contains:

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

3.5
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.

3.6
There are three types of qualified opinions:

3.7
The auditor will include an explanatory paragraph (see paragraphs 3.21-3.22) in the audit report to emphasise a matter such as:

  • a breach of law;
  • a fundamental uncertainty; or
  • a significant judgement affecting the financial statements.

3.8
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.

3.9
Figure 5 outlines the decisions to be made when considering the appropriate form of audit report.

Adverse opinions

3.10
An adverse opinion is the most serious type of non-standard audit report.

3.11
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.

3.12
During 2009, adverse opinions were expressed for eight entities. In this and the following sections, where an entity is directly or indirectly controlled by one or more city or district councils, we have listed the councils in footnotes:

  • Far North Regional Museum Trust (for financial years ended 30 June 2007 and 30 June 2008);18
  • The Canterbury Museum Trust Board;
  • The Museum of Transport and Technology Board;
  • Otago Museum Trust Board;
  • Southland Museum and Art Gallery Trust Board Incorporated;19
  • Hawarden Licensing Trust;
  • Charleston Goldfields Hall Board; and
  • Millerton Hall Board.

3.13
The Appendix sets out the details of the adverse opinions.

Figure 5
Deciding on the appropriate form of audit report

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

Disclaimers of opinion

3.14
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.

3.15
During 2009, a disclaimer of opinion was expressed for Winton Racecourse Reserve Trustees.

3.16
The Appendix sets out the details of the disclaimer of opinion.

Except-for opinions

3.17
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 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.

3.18
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 local authority subsidiary has breached the requirements of the Local Government Act 2002 because it has not prepared a statement of intent. The subsidiary is therefore unable to prepare performance information that reflects its achievements measured against performance targets.

3.19
During 2009, except-for opinions were expressed for 19 entities:

  • Auckland Regional Transport Network Limited;20, 21
  • Manukau Building Consultants Limited;22
  • Safer Papakura Trust;23
  • Invercargill City Council;
  • Invercargill City Holdings Limited;24
  • Wanganui Incorporated;25
  • West Coast Snowflake Limited (for financial years ended 31 March 2008 and 31 March 2009);
  • Village Pool Charitable Trust;26
  • Tauranga City Venues Limited;27
  • Te Kauwhata Licensing Trust (for financial years ended 31 March 2006 and 31 March 2007);
  • Queenstown National Bank Events Centre Trust;28
  • Varroa Agency Incorporated;
  • Westland Holdings Limited (for financial years ended 30 June 2007 and 30 June 2008);29
  • Lakes Engineering Limited;30
  • Pemberton Construction Limited;31
  • Whangarei Art Museum Management Group;32
  • Newtons Coachways (1993) Limited;33
  • Canterbury Economic Development Company Limited; and
  • Manawatu Community Trust.34

3.20
The Appendix sets out the details of the except-for opinions. In some cases, the audit opinion was qualified for more than one reason.

Explanatory paragraphs

3.21
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.

3.22
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.

3.23
During 2009, there were eight main types of matters emphasised by auditors in explanatory paragraphs. The first two types – with a total of 38 non-standard opinions – relate to the reforms of the governance arrangements in Auckland.

Auckland governance reform

3.24
The first type of matter is financial statements of the eight local authorities appropriately prepared on a dissolution basis35 and referring to the new local government structure for the Auckland region:

  • Auckland Regional Council;
  • Auckland City Council;
  • Franklin District Council;
  • Manukau City Council;
  • North Shore City Council;
  • Papakura District Council;
  • Rodney District Council; and
  • Waitakere City Council.

3.25
The second type of matter is financial statements of 30 subsidiaries of Auckland local authorities referring to the new local government structure for the Auckland region:

  • Auckland Regional Council's subsidiaries:
    • Auckland Regional Transport Authority;
    • Auckland Regional Holdings Limited; and
    • Ports of Auckland Limited.
  • Auckland City Council's subsidiaries:
    • ARTNL Britomart Limited;
    • Westhaven Marina Limited;
    • Westhaven (Marina Extension) Trust;
    • Westhaven (Existing Marina) Trust;
    • Downtown Marinas Limited;
    • Metrowater;
    • Metrowater Community Trust;
    • Auckland City Water Limited; and
    • Aotea Centre Board of Management.
  • Manukau City Council's subsidiaries:
    • Manukau City Investments Limited;
    • Te Puru Community Charitable Trust;
    • Waste Disposal Services;
    • Manukau Water Limited;
    • Manukau Leisure Services Limited;
    • Tomorrow's Manukau Properties Limited;
    • Tomorrow's Manukau Properties (Flat Bush) Limited; and
    • Manukau City Council Sinking Fund Commissioners.
  • North Shore City Council's subsidiaries:
    • NSC Holdings Limited;
    • Enterprise North Shore Trust;
    • North Shore Heritage Trust;
    • The North Shore City Performing Arts Centre Management Board Trust; and
    • North Shore Promotions New Zealand Limited.
  • Rodney District Council's subsidiary:
    • Rodney Properties Limited.
  • Waitakere City Council's subsidiaries:
    • Waitakere City Holdings Limited;
    • Waitakere Properties Limited; and
    • Waitakere Enterprise Trust Board.
  • Subsidiary jointly owned by six local authorities:
    • Watercare Services Limited.

Other explanatory paragraphs

3.26
The third type of matter is serious financial difficulties faced by the entities. Entities whose audit reports included such explanatory paragraphs were:

  • Waitomo District Council; and
  • Inframax Construction Limited.36

3.27
The fourth type of matter is disclosure of the depreciation of buildings and improvements over a 60-year period when the lease on these buildings was for only 20 years with a renewal right of 20 years. Pakuranga Arts and Cultural Trust37 was the only entity whose audit report included such an explanatory paragraph.

3.28
The fifth type of matter is fundamental uncertainty about the validity of the "going concern" assumption. Entities whose audit reports included such an explanatory paragraph were:

  • Central Plains Water Trust;38
  • Westroads Limited;39
  • Westroads Greymouth Limited;39 and
  • Westland Holdings Limited.39

3.29
The sixth 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 were:

  • New Zealand Mutual Liability RiskPool;
  • Timaru District Promotions Trust;40 and
  • S C Aoraki Development Trust.40

3.30
The seventh type of matter is where the going concern assumption was appropriately not used because the entities had been disestablished. Entities whose audit reports included such explanatory paragraphs were:

  • Hurunui Holdings Limited;41
  • Hawke's Bay Airport Authority;42
  • Taupo District Economic Development Advisory Board; 43
  • Ngā Tapuwae Community Facilities Trust;44
  • Forever Beech Limited (for financial years ended 30 June 2008 and 30 June 2009);
  • North Shore City Council Sinking Fund Commissioners;
  • The Hutt City Council Sinking Fund Commissioners;
  • Waitakere City Council Sinking Fund Commissioners;
  • Dunedin City Council Sinking Fund Commissioners;
  • Bay of Plenty Regional Council Sinking Fund Commissioners;
  • Proudly Papakura Trust;45 and
  • TTCF West Auckland Limited.

3.31
The eighth type of matter is where breaches of statutory obligations were disclosed in the audit reports. Entities whose audit reports included such explanatory paragraphs were:

  • Riccarton Bush Trustees;46
  • Te Kohaka o Tuhaitara Trust;47
  • Whakatane Airport Authority;48
  • Balfour Cemetery Trust (for statement of accounts covering two years ended 31 March 2008); and
  • North Shore Domain and North Harbour Stadium Trust Board (for financial years ended 28 February 2007 and 29 February 2008).49

3.32
The Appendix contains more information about the explanatory paragraphs that were included in the audit reports.

16: The local government portfolio of audits includes regional, city, and district councils, licensing trusts, airports, council-controlled organisations, council-controlled trading organisations, energy companies, port companies, and Sinking Fund Commissioners. We report separately on entities within the central government portfolio in our yearly report on the results of audits for that sector.

17: A non-standard audit report is issued in accordance with the New Zealand Institute of Chartered Accountants Auditing Standard No. 702: The Audit Report on an Attest Audit.

18: Far North District Council.

19: Gore District Council, Invercargill City Council, and Southland District Council.

20: Auckland City Council.

21: The audit report also included an explanatory paragraph that referred to the new local government structure for the Auckland region.

22: Manukau City Council.

23: Papakura District Council.

24: Invercargill City Council.

25: Wanganui District Council.

26: Hastings District Council.

27: Tauranga City Council.

28: Queenstown-Lakes District Council.

29: Westland District Council.

30: Queenstown-Lakes District Council.

31: Waikato District Council.

32: Whangarei District Council.

33: Dunedin City Council.

34: Manawatu District Council.

35: Similar disclosures referring to the new local government structure for the Auckland region were made in the summary audit reports of the local authorities. Such disclosures may have been included in the audit reports of debenture trust deeds and sinking funds where these were issued.

36: Waitomo District Council.

37: Manukau City Council.

38: Selwyn District Council.

39: Westland District Council.

40: Timaru District Council.

41: Hurunui District Council.

42: Hastings District Council and Napier City Council.

43: Taupo District Council.

44: Manukau City Council.

45: Papakura District Council.

46: Christchurch City Council.

47: Waimakariri District Council.

48: Whakatane District Council.

49: North Shore City Council.

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