Part 4: Non-standard audit reports issued

Education sector: Results of the 2010/11 audits.

4.1
We issued 2614 audit reports for entities in our education portfolio17 during the year ended 31 October 2011.18 Of these, 2451 were standard audit reports. In this Part, we discuss the 163 non-standard audit reports issued on the financial and non-financial information of those entities.

4.2
We did not need to issue the most serious form of non-standard audit report (an adverse opinion) for any education entities during the year. We issued one "disclaimer of opinion" for a school, which is the next most serious form of non-standard audit report, and issued 25 qualified opinions in our audit reports on a range of entities (schools and others).

4.3
More commonly, auditors included explanatory paragraphs in the audit reports to draw the readers' attention to different matters, such as financial difficulties, potential closures, or breaches of the law.

Why we report this information

4.4
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.

4.5
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.

What is a non-standard audit report?

4.6
A non-standard audit report19 is one that contains:

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

4.7
The auditors who we appoint to audit education entities 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.

4.8
There are three types of modified opinion:

4.9
The appointed auditor will include an "emphasis of matter" paragraph (see paragraph 4.22) or an "other matter" paragraph (see paragraph 4.30) in the audit report to draw attention to matters such as:

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

4.10
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.

Adverse opinions

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

4.12
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.

4.13
We did not express an adverse opinion on the financial statements or non-financial performance information of any entities in our education portfolio.

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.

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
During 2011, a disclaimer of opinion was expressed for one school – Te Wharekura O Te Rau Aroha – for the two years ended 31 December 2008 and 31 December 2009. Appendix 4 sets out the details of these disclaimers of opinion.

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
In addition, 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 and/or non-financial information of 25 entities in the education portfolio:

  • Whitireia Performing Arts Company Limited (a subsidiary of Whitireia Community Polytechnic);
  • 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);
  • Wellington Girls' College;
  • Wanganui City College;
  • Manawatu College;
  • Wellington East Girls' College;
  • Fraser Community Childcare Society Incorporated (two years ended 31 December 2008 and 31 December 2009);
  • Edendale School (Auckland);
  • Pakuranga Health Camp School;
  • Puriri School;
  • Putorino School;
  • Red Beach School;
  • Riverslea School;
  • Taumarunui High School and Community Trust;
  • Te Kura O Waharoa (two years ended 31 December 2009 and 31 December 2010);
  • Tongariro Area School;
  • Paeroa Central School;
  • Te Kura Kaupapa Māori O Ruamata (year ended 31 December 2008);
  • Kutarere School;
  • Tomahawk School;
  • Hunterville School;
  • Tokoroa East School;
  • Allenvale Special School & Resource Centre; and
  • Corstorphine School.

4.21
Appendix 4 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 a reader's 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 two main types of "emphasis of matter" paragraphs for education entities other than schools.

4.24
The first type of "emphasis of matter" paragraph related to funding from a capital appropriation that was not recognised as an equity transaction. The audit report for the University of Auckland and Group included such a paragraph.

4.25
The second type of "emphasis of matter" 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 a paragraph:

  • Telford Rural Polytechnic;
  • iPredict Limited and Group (a subsidiary of Victoria University of Wellington);
  • Predictions Clearing Limited (a subsidiary of Victoria University of Wellington);
  • Weltec Connect Limited (a subsidiary of Wellington Institute of Technology); and
  • Tai Poutini International Limited and Group (a subsidiary of Tai Poutini Polytechnic).

School boards

4.26
Because of the number of "emphasis of matter" paragraphs included in audit reports for schools, we have not listed each school separately. We have instead reported the types of "emphasis of matter" paragraphs that were issued and the number of schools that received each type.

4.27
There were three main types of "emphasis of matter" paragraphs:

  • serious financial difficulties (32 schools);
  • closures of schools (13 schools); and
  • potential closure of schools (eight schools).

4.28
Also, we included "emphasis of matter" paragraphs in eight schools' audit reports for other reasons.

4.29
Appendix 4 contains more information about the "emphasis of matter" paragraphs that were included in audit reports.

"Other matter" paragraphs

4.30
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 similarly titled paragraph.

4.31
There were six major types of "other matter" paragraphs included in audit reports for schools, which were for breaches of law:

  • not reporting by 31 May 2011 (54 schools);
  • not submitting financial statements for audit by 31 March 2011 (11 schools);
  • borrowing above the permitted limit without approval (nine schools);
  • not having a 10-year property plan (eight schools);
  • making loans to third parties (six schools); and
  • making loans to staff (four schools).

4.32
Most schools disclose breaches of law in their financial statements, and if they do so then we do not normally include an "other matter" paragraph in the audit report. Therefore, this list of breaches is not a complete list of the breaches of law by schools – there were many more breaches of law by schools than we have shown here.

4.33
Also, we included "other matter" paragraphs for other breaches of law for 11 schools.

4.34
Appendix 4 contains more information about the "other matter" paragraphs that we included in audit reports.

17: There are about 2460 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 required to prepare annual financial statements in keeping with generally accepted accounting practice. The other entities are mostly tertiary education institutions and their subsidiaries.

18: We report separately on non-education entities in the central government portfolio and the local government portfolio in our yearly reports on the results of audits for those portfolios.

19: Appendix 3 describes how an auditor determines the most appropriate form of audit report. A non-standard audit report is issued in keeping with International Standard on Auditing (New Zealand) 705: Modifications to the Opinion in the Independent Auditor's Report and/or International Standard on Auditing (New Zealand) 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report.

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