Part 4: Providing assurance: Our annual audits

Annual Plan 2011/12.

Each public entity is required to prepare and report its annual financial statements and, in many instances, to report on its service performance. The Auditor-General has a statutory duty to audit the information that these entities must report, as set out in the legislation applying to each entity. These independent annual audits play an essential role in the stewardship of public resources and corporate governance of public services, and account for about 87% of our annual expenditure.

An annual audit aims to provide assurance to the public about whether a public entity's financial statements (and, as required, any other information, such as performance statements, that is required to be audited):

  • complies with a recognised framework, usually generally accepted accounting practice; and
  • fairly reflects the public entity's performance and position.

The audit opinion sums up the auditor's view on the reliability of the audited information. In 2011/12, we expect to provide audit opinions on more than 3900 financial statements, 400 performance statements, and the long-term plans of 78 local authorities.

Alongside the assurance provided to the public, the additional benefit of an annual audit is the assurance that we provide to managers and governors of public entities about significant matters arising from the audit. We do this by preparing management reports for each public entity, to detail our key findings and recommendations, and to give managers and governors an insight into how well their entity's management systems and controls are working. A management report can also include our views on a public entity's policies, practices, and risk management.

As well as auditing the information that is required to be audited, we also assess the public entity's compliance with its main statutory obligations.

Forming an audit opinion on financial and performance statements and their accompanying notes requires the auditor to examine the underlying accounts and records, including the systems and processes used to generate this information. In Figure 2, we give examples of auditing standards that set out what the auditor is expected to do and consider during an annual audit.

Figure 2
Examples of what an auditor is required to do and consider during an annual audit

  1. The auditor has a responsibility to identify and assess the risks of material misstatement in the financial statements, through understanding the entity and its environment, including the entity's internal control.

    (Auditing Standard 315 (ISA (NZ) 315): Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment, paragraph 1).

    The auditor has a responsibility to design and implement responses to the risks of material misstatement identified and assessed by the auditor in accordance with ISA (NZ) 315 in an audit of financial statements.

    Auditing Standard 330 (ISA (NZ) 330): The Auditor's Responses to Assessed Risks, paragraph 1).
  1. The auditor shall, when carrying out the annual audit of the financial and non-financial information of a public entity, take into account the need to maintain alertness and awareness for any indication that:
    1. the public entity has not applied its resources effectively or efficiently;
    2. waste has occurred, either by the public entity itself or as a result of action or inaction on the part of the public entity; or
    3. there has been an act or omission that shows or appears to show a lack of probity or financial prudence on the part of the public entity or one or more of its members, office holders, or employees.
    (Auditor-General's Auditing Standard 3 (AG-3): Effectiveness and efficiency, waste and a lack of probity or financial prudence, paragraph 8).
  1. The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements.

    (Auditing Standard 250 (ISA (NZ) 250): Consideration of Laws and Regulations in an Audit of Financial Statements, paragraph 13).

We adopt a risk-based approach to gathering and assessing audit evidence, as required by auditing standards. This includes considering both the risk that a balance or disclosure is inherently likely to be wrong and the risk that each public entity's systems of internal control will fail to pick up significant errors. To address these risks, we look for evidence that balances, results, and disclosures are not materially misstated. The results of our auditing work, including our understanding of the public entity and its internal control systems, is collated on completion of the audits of the public entities in each significant category (such as government departments, local authorities, and tertiary education institutions). Co-ordinating the audit results between public entities in each category then lets us draw out and report on overall high-level results, and any systemic issues.

Reporting to Parliament on the results of annual audits

The Public Audit Act 2001 requires us to report results of our annual audits to Parliament. We report those results in two different ways. We report on a number of individual audits of central government entities through the advice we provide select committees during the annual financial review process, and we report on the overall and high level results of our central and local government annual audits in two or more reports each year.

Our reports to Parliament on the results of annual audits routinely comment on:

  • the effectiveness of public entities' internal controls;
  • the timeliness of financial reporting by public entities; and
  • other matters of interest about public entities.

As part of the process of carrying out audits, we often advise auditors about specific matters we want them to consider for particular categories of public entities. Matters of interest that may be reported on in 2011/12 include:

  • Performance information: In recent years there has been impetus to improve the quality of public entities' externally reported performance information. The Auditor-General's revised auditing standard for auditing performance information has contributed to this impetus. There are challenges for us in implementing that standard. Our challenges include how we maintain independence and give advice, how we build confidence for this work, and how we report. We have made good progress in the last couple of years on improving the quality of audit work on public entities' performance statements. In future we need to increase our focus on public entities use of performance and financial information to support good decision-making and cost-effectiveness. We have asked our auditors applying the revised auditing standard to continue to focus on carrying out good quality audits of performance information.
  • Governance and management in times of change: There have been a number of structural and non-structural changes in the public sector to improve effectiveness and efficiency. The structural changes range from consolidating Government agencies to setting up the new Auckland Council and its controlled organisations. Examples of non-structural changes include increased use of shared services and partnering arrangements. Good governance and management is one of the key controls in an entity, and it is important that this is maintained, particularly in times of change. We have asked our auditors of entities affected by such changes to identify, assess, and report risks to the control environment, including governance and management controls, so that the necessary action can be taken to mitigate these risks.
  • Management of capital assets: Some parts of the public sector have substantial asset holdings. We have asked our auditors to continue their focus around the systems and controls for the management of capital assets in those sectors where capital assets are most significant.
  • Disclosure of underlying profit: In some of the commercially focused public entities, there is a trend to disclose not only profit as required under International Financial Reporting Standards, but also the underlying profit. This was reported in our report Central government: Results of the 2009/10 audits (Volume 1). We have asked our auditors of those entities affected, to consider the appropriateness and transparency of underlying profit disclosures.
  • Emissions Trading Scheme: The issues associated with emissions are technical in nature and usually involve significant amounts of money. We plan to provide guidance to auditors and public entities in 2011/12, which should help them deal with emission trading scheme issues in future. Also, we have asked our auditors of local authorities to look at how local authorities are measuring and managing emissions.
  • Fraud: In carrying out annual audits, our auditors have a professional obligation to assess fraud risk factors and to respond appropriately to that assessment. Public entities are responsible for advising auditors of any actual, suspected, or alleged fraud affecting the entity to allow auditors to assess risk factors. Alongside our planned report on our survey of fraud in the public sector, we have asked our auditors to check that public entities have a fraud policy in place, that the entity's managers and employees know about the policy, and that they know the content of the policy.
  • Sensitive expenditure: The appropriate use of public money continues to be subject to significant public scrutiny. In previous years, auditors have:
    • worked to ensure that all public entities had suitable sensitive expenditure policies in place;
    • reviewed transactions relating to sensitive expenditure for compliance with the entity's policies; and
    • reported any issues or concerns to management.

We expect that entities will have addressed any issues that were outlined in their previous year's management report and, where relevant, to have updated their policies to reflect the principles in Controlling sensitive expenditure: Guidelines for public entities, which we published in February 2007. We have asked our auditors to confirm that any such issues have been addressed and that public entities are appropriately dealing with sensitive expenditure.

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