Part 6: Non-standard audit reports issued in 2010

Central government: Results of the 2009/10 audits (volume 1).

6.1
In this Part, we report on the non-standard audit reports issued on the financial statements of public entities within our central government portfolio of audits during the ten months ended 31 October 2010.15 We issued 3024 audit reports within our central government portfolio within that time, 212 of which were non-standard.

6.2
The financial statements of school boards of trustees are part of our central government portfolio of audits.16 In the following text, we discuss schools separately from the other public entities.

Why we report this information

6.3
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.

6.4
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?

6.5
A non-standard audit report17 is one that contains:

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

6.6
The introduction of New Zealand equivalents to International Auditing Standards will change the terminology used to describe types of non-standard audit reports. Future non-standard audit report articles will use the new terminology.

6.7
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 appropriate evidence to support, and accordingly is unable to express, an opinion on the financial statements or a part of the financial statements.

6.8
There are three types of qualified opinion:

6.9
The auditor will include an explanatory paragraph (see paragraphs 6.25-6.26) in the audit report to draw attention to matters such as:

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

6.10
Auditors have to include an explanatory paragraph in the audit report in such a way that it cannot be mistaken for a qualified opinion.

6.11
Figure 14 outlines the decisions that an auditor has to make when considering the appropriate form of the audit report.

Figure 14
Deciding on the appropriate form of the audit report

Figure 14.

Note: This flowchart is based on the requirements of the Institute of Chartered Accountants of New Zealand Auditing Standard No. 702: The Audit Report on an Attest Audit. We have not based it on the International Standard on Auditing (New Zealand) because that standard applies to audits of financial statements for periods beginning on or after 1 October 2009.

Adverse opinions

6.12
An adverse opinion is the most serious type of non-standard audit report.

6.13
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.

6.14
During 2010, we expressed an adverse opinion for two public entities:

  • Royal New Zealand Navy Museum Trust Incorporated; and
  • RNZAF Museum Trust Board.

6.15
The Appendix sets out the details of the adverse opinions.

6.16
We are pleased to report that it was not necessary for us to express an adverse opinion on any school boards' financial statements in the 2010 calendar year.

Disclaimers of opinion

6.17
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 appropriate 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.

6.18
During 2010, a disclaimer of opinion was expressed for one school – Te Kura Kaupapa Māori o Ruamata – for two years ended 31 December 2006 and 31 December 2007. The Appendix sets out the details of the disclaimer of opinion.

6.19
We are pleased to report that it was not necessary for us to express a disclaimer of opinion on any non-school public entity's financial statements in the central government portfolio in 2010.

Except-for opinions

6.20
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.

6.21
An except-for opinion is also 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.

6.22
During 2010, we expressed except-for opinions on the financial statements or performance information of the following 11 non-school public entities:

  • New Zealand Fire Service Commission;
  • Christchurch Polytechnic Institute of Technology and Group;
  • Wellington Institute of Technology;
  • UCOL International Limited (a subsidiary of Universal College of Learning, or UCOL);
  • Massey Ventures Limited and Group (a subsidiary of Massey University);
  • Whitireia Performing Arts Company Limited (a subsidiary of Whitireia Community Polytechnic);
  • Ivey Hall and Memorial Hall 125th Anniversary Appeal Taxable Activity Trust (a trust controlled by Lincoln University);
  • Ivey Hall and Memorial Hall 125th Anniversary Appeal Gifting Trust (a trust controlled by Lincoln University);
  • Wilson Home Trust (a trust for which the Waitemata District Health Board is the sole and permanent trustee);
  • Auckland DHB Charitable Trust (a trust controlled by Auckland District Health Board); and
  • Gisborne Laundry Services (associated with Tairawhiti District Health Board).

6.23
We also expressed except-for opinions on the financial statements of the following 38 schools:

  • Wellington Girls' College;
  • New Plymouth Girls' High School;
  • Te Wharekura o Rakaumangamanga;
  • Wanganui City College;
  • Wellington East Girls' College;
  • Puni School;
  • Hato Paora College (two years ended 31 December 2008 and 31 December 2009);
  • Saint Peter's College (Palmerston North);
  • Pakuranga Health Camp School;
  • Mayfield Primary School;
  • Tirohia School (two years ended 31 December 2008 and 31 December 2009);
  • Birchville School;
  • Devon Intermediate School;
  • Freyberg Community School;
  • Hokitika School;
  • Kiwitahi School;
  • Makauri School;
  • Mangapapa School;
  • Motu School;
  • Ohuka School;
  • Red Beach School;
  • Saint Joseph's Catholic School (Paeroa);
  • Tangowahine School;
  • Taumarunui High School & Community Trust;
  • Te Kura Kaupapa Māori o Te Rawhiti Roa;
  • Te Kura Kaupapa Māori o Takapau;
  • Tongariro Area School;
  • Upper Hutt School;
  • Weber School;
  • Whatatutu School;
  • Moanataiari School;
  • Woodstock School;
  • Te Kura Kaupapa Māori o Waiuku (year ended 31 December 2008);
  • Ross Intermediate;
  • Allenvale Special School and Resource Centre;
  • Taikura Rudolf Steiner School;
  • Parkside Christian SDA School; and
  • Te Tipua School.

6.24
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

6.25
In certain circumstances, it may be appropriate for the auditor to include additional comments in the audit report. The auditor draws attention to a matter that they consider relevant to a reader's proper understanding of an entity's financial statements through an explanatory paragraph.

6.26
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.

6.27
During 2010, we used six main types of explanatory paragraphs for non-school public entities.

6.28
The first type of explanatory paragraph related to funding from a capital appropriation that was not recognised as an equity transaction. The audit opinion for the University of Auckland and Group included such an explanatory paragraph.

6.29
The second type of explanatory paragraph related to the existence of a high degree of uncertainty about the value of unlisted mortgage-backed securities that could have a material effect on the statement of financial performance and the statement of financial position. The audit opinion for the Public Trust and Group included such an explanatory paragraph.

6.30
The third type of explanatory paragraph related to the reduction made by a Board to the valuation of buildings carried out by an independent valuer that was not material to the financial statements as a whole. The audit opinion for MidCentral District Health Board and Group included such an explanatory paragraph.

6.31
The fourth type of explanatory paragraph related to serious financial difficulties faced by the entity. The audit opinion for Whanganui District Health Board included such an explanatory paragraph.

6.32
The fifth type of explanatory paragraph related to financial statements being appropriately prepared on the "going concern" assumption because the financial statements contained appropriate disclosures about the use of the going concern assumption. The audit opinion for Tairawhiti Polytechnic included such an explanatory paragraph.

6.33
The sixth type of explanatory paragraph related to the "going concern" assumption being appropriately not used because entities were disestablished or expected to be disestablished in the near future. The following entities' audit reports included such an explanatory paragraph:

  • Archives New Zealand;
  • Electoral Commission;
  • Electricity Commission;
  • Environmental Risk Management Authority;
  • Foundation for Research, Science and Technology;
  • Ministry of Research, Science and Technology;
  • New Zealand Food Safety Authority;
  • Securities Commission;
  • National Library of New Zealand;
  • Otago District Health Board;
  • Southland District Health Board;
  • New Zealand School of Fisheries Limited (a subsidiary of Nelson Marlborough Institute of Technology);
  • The Nelson Academy Limited (a subsidiary of Nelson Marlborough Institute of Technology);
  • Nelson Marlborough Institute of Technology International Limited (a subsidiary of Nelson Marlborough Institute of Technology);
  • iPredict Limited and Group (a subsidiary of Victoria University of Wellington);
  • Predictions Clearing Limited (a subsidiary of Victoria University of Wellington);
  • MVLONE Limited (a subsidiary of Massey University);
  • MVLTWO Limited (a subsidiary of Massey University);
  • Public Trust Investment Funds Balanced Income Fund (a fund of Public Trust);
  • Public Trust Group Investment Funds (PTIF) – Feeder Funds (a fund of Public Trust);
  • Public Trust Group Investment Funds (GIF) – Investing Funds (a fund of Public Trust);
  • Woodville Windfarm Limited (a subsidiary of Meridian Energy);
  • Bay of Plenty Provincial Patriotic Council; and
  • Southland Provincial Patriotic Council.

Schools

6.34
Because of the number of explanatory paragraphs included in audit reports for schools, we are not listing each school separately. We have instead reported the types of explanatory paragraphs that were issued and the number of schools that received each type.

6.35
There were seven main types of explanatory paragraphs:

  • breaches of law for not reporting by 31 May 2010 (42 schools);
  • closures of entities (four schools and 23 transport networks, which are public entities controlled by schools);
  • serious financial difficulties (19 schools);
  • breaches of law for borrowing above the permitted limit without approval (14 schools);
  • breaches of law for not having a 10-year property plan (eight schools);
  • breaches of law for not submitting financial statements for audit by 31 March 2010 (eight schools); and
  • breaches of law for not including the required analysis of variance reports (six schools).

6.36
In addition, we emphasised matters in explanatory paragraphs for other reasons for 29 schools.

6.37
Many of the explanatory paragraphs included in audit reports for schools relate to breaches of law. We report on breaches of law if schools do not disclose the breaches of law in their financial statements. As it happens, most schools disclose breaches of law in their financial statements. Therefore, the list of audit reports that refer to breaches is not a complete list of the breaches of law by schools – there were many more breaches than we report.

6.38
The Appendix contains more information about the explanatory paragraphs that were included in audit reports.

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

16: 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 and, as such, is obliged to prepare annual financial statements in accordance with generally accepted accounting practice.

17: 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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