Part 4: Non-standard audit reports issued

Central government: Results of the 2010/11 audits (Volume 1).

4.1
We issued 551 audit reports for public entities in our central government portfolio during the year ended 31 October 2011 (excluding entities in our education portfolio).9 Of these, 480 audit reports were standard. In this Part, we report on the 71 non-standard audit reports that were issued on the financial and non-financial information of those entities.

Why we report this information

4.2
An audit report is addressed to the readers of an entity's financial and non-financial information. 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.

4.3
In each instance, 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 and the responsible Minister, where relevant.

What is a non-standard audit report?

4.4
A non-standard audit report10 is one that contains:

  • a modified opinion; and/or
  • an "emphasis of matter" or an "other matter" paragraph.

4.5
The auditors we appoint to audit public entities will express a modified opinion because of:

  • a misstatement about the treatment or disclosure of a matter in the financial and/or non-financial information; or
  • a limitation in scope because the appointed auditor has been unable to obtain sufficient appropriate evidence to support, and accordingly is unable to express, an opinion on the financial and/or non-financial information or a part of the financial and/or non-financial information.

 

4.6
There are three types of modified opinion:

4.7
The appointed auditor will include an "emphasis of matter" paragraph (see paragraph 4.22) or "other matter" paragraph (see paragraph 4.34) in the audit report to draw attention to matters such as:

  • fundamental uncertainties;
  • breaches of law; or
  • concerns about probity or financial prudence.

4.8
The appointed auditor has to include an "emphasis of matter" paragraph or an "other matter" paragraph in the audit report in such a way that it cannot be mistaken for a modified opinion.

4.9
Figure 1 outlines the decisions that an appointed auditor has to make when considering the appropriate form of the audit report.

Adverse opinions

4.10
An adverse opinion is the most serious type of non-standard audit report.

4.11
An adverse opinion is expressed when the appointed auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial and/or non-financial information.

4.12
During 2011, we expressed an adverse opinion for two public entities that did not recognise their museum collection assets nor the associated depreciation expense:

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

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

Disclaimers of opinion

4.14
A disclaimer of opinion is expressed when the appointed auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion (that is, a limitation in scope), and the appointed auditor concludes that the possible effects on the financial and/or non-financial information of undetected misstatements, if any, could be both material and pervasive.

Figure 1
Deciding on the appropriate form of the audit report

Figure 1 - Deciding on the appropriate form of the audit report.

Note: This flowchart is based on the requirements of the New Zealand equivalents to the International Standards on Auditing: No. 700: Forming an Opinion and Reporting on Financial Statements; No. 705: Modifications to the Opinion in the Independent Auditor's Report; and No. 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report.

4.15
A disclaimer of opinion is also expressed when, in extremely rare circumstances involving multiple uncertainties, the appointed auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements and/or non-financial performance information because of the potential interaction of the uncertainties and their possible cumulative effect on the financial and/or non-financial information.

4.16
We are pleased to report that it was not necessary for us to express a disclaimer of opinion on the financial and/or non-financial information of any entity in the central government portfolio covered by this report.

Qualified opinions

4.17
A qualified opinion is expressed when the appointed auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in aggregate, are material, but not pervasive, to the financial and/or non-financial information.

4.18
A qualified opinion is also expressed when the appointed auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the appointed auditor concludes that the possible effects on the financial and/or non-financial information of undetected misstatements, if any, could be material but not pervasive.

4.19
Also, a qualified opinion is expressed when the appointed auditor concludes that a breach of statutory obligations has occurred and that the breach is material to the reader's understanding of the financial and/or non-financial information. 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.

4.20
During 2011, we expressed qualified opinions on the financial or non-financial information of the following 11 public entities covered by this report:

  • Southern District Health Board (two months ended 30 June 2010);
  • Ngati Whakue Education Endowment Trust Board (two years ended 31 December 2009 and 31 December 2010);
  • Counties Manukau District Health Board;
  • Tauranga Moana Māori Trust Board;
  • New Zealand Māori Arts and Craft Institute;
  • New Zealand Post Recycle Centre Limited (a subsidiary of New Zealand Post Limited);
  • Wilson Home Trust (a trust for which Waitemata District Health Board is the sole and permanent trustee);
  • Auckland DHB Charitable Trust (a trust controlled by Auckland District Health Board, for two years ended 30 June 2010 and 30 June 2011);
  • Three Harbours Health Foundation (Waitemata District Health Board);
  • Gisborne Laundry Services (associated with Tairawhiti District Health Board); and
  • The Māori Trustee and Group.

4.21
The Appendix sets out the details of the qualified opinions. In some instances, the audit opinion was qualified for more than one reason.

"Emphasis of matter" paragraphs

4.22
In certain circumstances, it may be appropriate for the appointed auditor to include additional comments in the audit report to draw readers' attention to a matter that, in the appointed auditor's professional judgement, is fundamental to their understanding of the financial and/or non-financial information. The additional comments will be included in the audit report in an "emphasis of matter" paragraph, provided the appointed auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial and/or non-financial information.

4.23
During 2011, we used nine main types of "emphasis of matter" paragraphs for the public entities covered by this report.

4.24
The first type of "emphasis of matter" paragraph related to the uncertainties associated with the Canterbury earthquakes. Audit reports that included such "emphasis of matter" paragraphs were issued for:

  • Financial Statements of the Government of New Zealand;
  • the Earthquake Commission;
  • AMI Insurance Limited and Group;
  • Canterbury Earthquake Recovery Authority;11 and
  • Department of Internal Affairs.

4.25
The second type of "emphasis of matter" paragraph related to the existence of a high degree of uncertainty about the value of unlisted investments that could have a material effect on the statement of financial performance and the statement of financial position. The audit reports for Public Trust and Group and the New Zealand Venture Investment Fund Limited and Group, and each of its subsidiaries, included such an "emphasis of matter" paragraph.

4.26
The third type of "emphasis of matter" 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 report for MidCentral District Health Board and Group included such an "emphasis of matter" paragraph.

4.27
The fourth type of "emphasis of matter" paragraph related to serious financial difficulties faced by the entity. The audit reports for Whanganui District Health Board and Spring Creek Mining Company (a subsidiary of Solid Energy New Zealand Limited) included such an "emphasis of matter" paragraph.

4.28
The fifth type of "emphasis of matter" paragraph related to the uncertainty about the delivery of office functions in future. The audit report for the Dental Council included such an "emphasis of matter" paragraph.

4.29
The sixth type of "emphasis of matter" paragraph related to the change in the nature of the entity's operations including the transfer of certain assets to a charitable trust. The audit report for Tuhoe-Waikaremoana Māori Trust Board and Group included such an "emphasis of matter" paragraph.

4.30
The seventh type of "emphasis of matter" paragraph related to the uncertainties associated with the Department of Building and Housing's provision for the Weathertight Services Financial Assistance Package in its non-departmental schedule of liabilities.

4.31
The eighth type of "emphasis of matter" 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 following public entities' audit reports included such an "emphasis of matter" paragraph:

  • Cardiff Holdings No. 1 Limited (a subsidiary of Genesis Power Limited);
  • Cardiff Holdings No. 2 Limited (a subsidiary of Genesis Power Limited);
  • Kupe Holdings 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);
  • GP No. 4 Limited (a subsidiary of Genesis Power Limited); and
  • GP No. 5 Limited (a subsidiary of Genesis Power Limited).

4.32
The ninth type of "emphasis of matter" paragraph related to the "going concern" assumption being appropriately not used because public entities were disestablished or expected to be disestablished in the near future. The following public entities' audit reports included such an "emphasis of matter" paragraph:

  • Archives New Zealand;
  • Electricity Commission;
  • Foundation for Research, Science and Technology;
  • Ministry of Research, Science and Technology;
  • Securities Commission;
  • National Library of New Zealand;
  • Ministry of Fisheries;
  • Crown Health Financing Agency;
  • Environmental Risk Management Authority;
  • Legal Services Agency (two years ended 30 June 2010 and 30 June 2011);
  • Health Sponsorship Council;
  • Auckland Transition Agency;
  • Charities Commission;
  • Mental Health Commission;
  • Alcohol Advisory Council of New Zealand;
  • Meat Biologics Research Consortium (Meat Biologics Consortia Limited, a consortium of Massey University, AgResearch, and IRL BIOSOL Limited);
  • Scion Australasia Limited (a subsidiary of New Zealand Forest Research Institute Limited);
  • PIBDT Ownership Limited;
  • Manukau Pacific Markets Limited (a subsidiary of PIBDT Ownership Limited);
  • Southmarkets Limited (a subsidiary of PIBDT Ownership Limited);
  • Public Trust Investment Funds Balanced Income Fund;
  • Public Trust Investment Funds;
  • Ngai Tahu Ancillary Claims Trust (two years ended 30 June 2010 and 30 June 2011);
  • Taranaki Provincial Patriotic Council (three years ended 30 September 2008, 30 September 2009, and 30 September 2010); and
  • Electoral Commission (three months ended 30 September 2010).

4.33
The Appendix contains more information about the "emphasis of matter" paragraphs that were included in audit reports.

"Other matter" paragraphs

4.34
In certain circumstances, it may be appropriate for the appointed auditor to communicate a matter that is not adequately presented or disclosed in the financial and/or non-financial information because, in the appointed auditor's professional judgement, the matter is relevant to readers' understanding of the financial and/or non-financial information. The additional comments will be included in the audit report in an "other matter" or a similarly titled paragraph.

4.35
There were no "other matter" paragraphs in the audit reports of the public entities covered by this report.

9: We decided to report separately on non-standard audit reports that we issued on schools and tertiary education institutions. These are included in our report Education sector: Results of the 2010/11 audits. Also, we report separately on entities in the local government portfolio in our yearly report on the results of those audits.

10: A non-standard audit report is issued in accordance with the requirements of the New Zealand equivalents to the International Standards on Auditing: No. 705: Modifications to the Opinion in the Independent Auditor's Report and/or No. 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report.

11: Only CERA's statements of appropriations were audited because a full annual report was not required for the period from 29 March 2011, when it was established, to 30 June 2011.

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