Part 9: Non-standard audit reports

Local government: Results of the 2010/11 audits.

9.1
During the year ended 31 December 2011, we issued 642 audit reports for public entities in the local government sector.41 Of these, 517 audit reports were standard. In this Part, we discuss the 125 non-standard audit reports that we issued on the financial and non-financial information of those entities.

Why we report this information

9.2
An audit report is addressed to 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 that Parliament gives them. Therefore, we consider it important to draw Parliament's attention to the matters that give rise to non-standard audit reports.

9.3
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.

What is a non-standard audit report?

9.4
A non-standard audit report42 contains:

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

9.5
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 enough appropriate evidence to support, and so 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.

9.6
There are three types of modified opinion:

9.7
The appointed auditor will include an "emphasis of matter" paragraph (see paragraph 9.34) or "other matter" paragraph (see paragraph 9.48) in the audit report to draw attention to matters such as:

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

9.8
The appointed auditor must include an "emphasis of matter" paragraph or an "other matter" paragraph in the audit report in such a way that readers cannot mistake it for a modified opinion.

9.9
Figure 17 outlines the decisions that an appointed auditor has to make when considering the appropriate form of the audit report.

Adverse opinions

9.10
An adverse opinion is the most serious type of non-standard audit report.

9.11
An adverse opinion is expressed when the appointed auditor, having got enough appropriate audit evidence, concludes that misstatements, individually or in aggregate, are both material and pervasive to the financial and/or non-financial information.

9.12
During 2011, we expressed an adverse opinion on the financial or non-financial information of seven public entities.

9.13
In a breach of the financial reporting standards, four entities did not recognise their collection assets or the associated depreciation expense from their financial statements:

  • Southland Museum and Art Gallery Trust Board Incorporated (an entity associated with Gore District Council, Invercargill City Council, and Southland District Council);
  • Far North Regional Museum Trust (a trust controlled by Far North District Council);
  • Otago Museum Trust Board; and
  • Pukaki Trust.

9.14
Three entities did not report performance information that reflected the entity's achievements measured against its performance targets, reporting that the Local Government Act 2002 requires:

  • Crops for Southland Incorporated Society (an entity associated with Gore District Council, Invercargill City Council, and Southland District Council);
  • New Zealand Food Innovation (Manukau) Limited (a subsidiary of Auckland Council); and
  • Dunedin (New Zealand) Masters Games Trust (a trust controlled by Dunedin City Council).

9.15
Appendix 2 sets out the details of these adverse opinions.

Figure 17
Deciding on the appropriate form of the audit report

Figure 17: Deciding on the appropriate form of the audit report

Note: This flowchart is based on the requirements of 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.

Disclaimers of opinion

9.16
A disclaimer of opinion is expressed when the appointed auditor cannot get enough appropriate audit evidence on which to base the opinion (a limitation in scope), and concludes that the possible effects on the financial and/or non-financial information of undetected misstatements, if any, could be material and pervasive.

9.17
A disclaimer of opinion is expressed when, in extremely rare circumstances involving multiple uncertainties, the appointed auditor concludes that, despite having obtained enough 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 information because of the potential interaction of the uncertainties and their possible cumulative effect on the financial and/or non-financial information.

9.18
During 2011, we expressed disclaimers of opinion on the financial or non-financial information of eight public entities.

9.19
As a result of the Canterbury earthquakes, we could not form an opinion about the financial statements (other than the cash-flow statement) for the Christchurch City Council and group, and Tuam Limited (a subsidiary of Christchurch City Council).

9.20
We were unable to form an opinion on some or all of the balances in the financial statements of six entities because we could not get appropriate audit evidence to confirm those balances:

  • Curries Proprietary Limited (a subsidiary of Christchurch City Council);
  • Whatitiri Domain Board (year ended 30 June 2008);
  • Ongarue Hall Society Incorporated (year ended 30 June 2006);
  • Oakura Reserve Board (five years ended 30 June 2004, 30 June 2005, 30 June 2006, 30 June 2007, and 30 June 2008);
  • Ohingaiti Cemetery (year ended 31 March 2010); and
  • Hawea Cemetery Trust (four years ended 31 March 2007, 31 March 2008, 31 March 2009, and 31 March 2010).

9.21
Appendix 2 sets out the details of these disclaimers of opinion.

Qualified opinions

9.22
A qualified opinion is expressed when the appointed auditor, having enough appropriate audit evidence, concludes that misstatements, individually or in aggregate, are material, but not pervasive, to the financial and/or non-financial information.

9.23
A qualified opinion is expressed when the appointed auditor cannot get enough appropriate audit evidence on which to base the opinion, but concludes that the possible effects on the financial and/or non-financial information of undetected misstatements, if any, could be material but not pervasive.

9.24
In addition, a qualified opinion is expressed when the appointed auditor concludes that a breach of statutory obligations has happened and that the breach is material to the reader's understanding of the financial and/or non-financial information.

9.25
During 2011, we expressed qualified opinions on the financial or non-financial information of 27 public entities.

9.26
Tauranga Art Gallery Trust (a trust of Tauranga City Council) did not recognise its art works at fair value. This is a departure from NZ IAS 16: Property, Plant and Equipment.

9.27
Mt Wellington Licensing Trust and Group did not prepare group financial statements to consolidate the financial statements of its subsidiary. This is a departure from NZ IAS 27: Consolidated and Separate Financial Statements.

9.28
Our audit of Waimakariri District Council and group was limited because we could not get enough evidence to confirm certain balances and effects of the Canterbury earthquakes. Our "limitation of scope" opinion affected the service performance information reported in the annual report.

9.29
For Grey District Council, we could not get enough appropriate evidence to support reported performance of a particular performance measure.

9.30
The comparative information for Manukau Building Consultants Limited (a subsidiary of Manukau City Council) was limited because, for the year ended June 2009, we were unable to determine the effect of an adjustment made to regulatory fee income between 2008 and 2009.

9.31
We referred reader's attention to the disclosures of Manukau Buildings Consultants Limited and Auckland Regional Transport Network Limited and group (a subsidiary of Auckland City Council) that their financial statements were prepared on a dissolution basis.

9.32
In a departure from the Local Government Act 2002, the following three entities did not report performance information that reflected their achievements against performance targets:

  • Auckland Regional Transport Network Limited and group (a subsidiary of Auckland City Council);
  • Te Ahu Charitable Trust (a trust of Far North District Council); and
  • Kaikoura Enhancement Trust and group (Kaikoura District Council).

9.33
For 19 entities, we could not get enough assurance about the completeness of revenue and/or expenditure (see Appendix 2).

"Emphasis of matter" paragraphs

9.34
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 the 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 enough appropriate audit evidence that the matter is not materially misstated in the financial and/or non-financial information.

9.35
During 2011, we used 11 main types of "emphasis of matter" paragraphs for the public entities that we cover in this report.

9.36
The first type of "emphasis of matter" paragraph drew attention to the dissolution basis being used appropriately when public entities were dissolved and their functions, duties, and powers were transferred to Auckland Council on 1 November 2010. The following public entities' audit reports included such "emphasis of matter" paragraphs:

  • Auckland City Council and group;
  • Auckland Regional Council and group;
  • Manukau City Council and group;
  • North Shore City Council and group;
  • Papakura District Council and group;
  • Rodney District Council and group;
  • Waitakere City Council and group;
  • Franklin District Council;
  • Aotea Centre Board of Management (a subsidiary of Auckland City Council);
  • ARTNL Britomart Limited (a subsidiary of Auckland City Council);
  • Auckland Tourism and Visitors Trust (a trust of Auckland City Council);
  • Metrowater Limited and group (a subsidiary of Auckland City Council);
  • Sea + City Projects Limited (a subsidiary of Auckland City Council);
  • Tomorrow's Manukau Properties (Flat Bush) Limited (a subsidiary of Auckland City Council);
  • Tomorrow's Manukau Properties Limited and group (a subsidiary of Auckland City Council);
  • Auckland Regional Holdings and group (a subsidiary of Auckland Regional Council);
  • Auckland Regional Transport Authority (a subsidiary of Auckland Regional Council);
  • Manukau Leisure Services Limited (a subsidiary of Manukau City Council);
  • Manukau Water Limited (a subsidiary of Manukau City Council);
  • Manukau Enterprise and Employment Trust (a trust of Manukau City Council);
  • NSC Holdings Limited (a subsidiary of North Shore City Council);
  • Enterprise North Shore Trust (a trust of North Shore City Council);
  • Rodney Properties Limited (a subsidiary of Rodney District Council);
  • Waitakere City Holdings Limited and group (a subsidiary of Waitakere City Council);
  • Waitakere Enterprise Trust Board (a trust of Waitakere City Council);
  • Waitakere Properties Limited (a subsidiary of Waitakere City Council); and
  • Franklin Art, Culture and Library Trust (a trust of Franklin District Council).

9.37
The second type of "emphasis of matter" paragraph drew attention to the disclosures about the new local government structure for Auckland. The following public entities' audit reports included such "emphasis of matter" paragraphs:

  • City of Manukau Education Trust (a trust of Manukau City Council);
  • Manukau Beautification Charitable Trust (a trust of Manukau City Council); and
  • Pakuranga Arts and Cultural Trust (a trust of Manukau City Council).

9.38
The third type of "emphasis of matter" paragraph drew attention to fundamental uncertainties about the validity of the "going concern" assumption. The following public entities' audit reports included such "emphasis of matter" paragraphs:

  • Central Plains Water Trust (a trust established by Selwyn District Council and Christchurch City Council);
  • Ruawhata Public Hall Board (three years ended 30 June 2008, 30 June 2009, and 30 June 2010;
  • Grow Wellington Limited and group (a subsidiary of Greater Wellington Regional Council); and
  • Creative HQ Limited (a subsidiary of Greater Wellington Regional Council).

9.39
The fourth type of "emphasis of matter" paragraph drew attention to uncertainties about outstanding claims provision and reinsurance, and the appropriateness of the going concern assumption. The audit report of New Zealand Mutual Liability Riskpool included such an "emphasis of matter" paragraph.

9.40
The fifth type of "emphasis of matter" paragraph drew attention to the financial difficulties of the local authority resulting from a material uncertainty on its subsidiary's ability to continue as a going concern because of the downturn in the road-building industry. The audit reports of Waitomo District Council and its subsidiary, Inframax Construction Limited, included such "emphasis of matter" paragraphs.

9.41
The sixth 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 soon. The following public entities' audit reports included such "emphasis of matter" paragraphs:

  • Bay Broadband Limited;
  • Cranberries New Zealand Limited;
  • Dunedin Transport Limited (formerly Citibus Limited) (a subsidiary of Dunedin City Council);
  • Forever Beech Limited;
  • St James Theatre Charitable Trust and group (a trust of Wellington City Council);
  • St James Theatre Limited (a subsidiary of Wellington City Council);
  • Whangarei Tourism Trust (a trust of Whangarei District Council);
  • Mana Taverns Limited;
  • Local Government Industry Training Organisation;
  • Southland Flood Relief Fund;
  • The Trusts Charitable Foundation Incorporated; and
  • Rangitikei Mayoral Relief Trust (a trust of Rangitikei District Council).

9.42
The seventh type of "emphasis of matter" paragraph drew attention to the effects of the Canterbury earthquakes on the financial and non-financial performance. The audit report for Orion New Zealand Limited and group (a subsidiary of Christchurch City Council) included such an "emphasis of matter" paragraph.

9.43
The eighth type of "emphasis of matter" paragraph drew attention to the enhanced performance measures and targets adopted by the entity. The audit report for Central Otago District Council included such an "emphasis of matter" paragraph.

9.44
The ninth type of "emphasis of matter" paragraph drew attention to the provision that a Board recognised for unseen repairs and maintenance that did not meet the definition of a liability but that was not material to the financial statements as whole. The audit report for South Port New Zealand Limited and group (a subsidiary of Environment Southland) included such an "emphasis of matter" paragraph.

9.45
The tenth type of "emphasis of matter" paragraph drew attention to the absence of a statement of performance because the entity is inactive. The following public entities' audit reports included such "emphasis of matter" paragraphs:

  • Dunedin Venues Limited (a subsidiary of Dunedin City Council – two years ended 30 June 2010 and 30 June 2011);
  • Novus Contracting Limited (a subsidiary of South Taranaki District Council); and
  • Waikato District Community Wellbeing Trust (a trust of Waikato District Council – one-month period ended 30 June 2010 and year ended 30 June 2011).

9.46
The eleventh type of "emphasis of matter" paragraph drew attention to a breach of statutory obligation that was disclosed by the entity in its financial statements. The audit report of North Shore Domain and North Harbour Stadium Trust Board (a trust of North Shore City Council) included such an "emphasis of matter" paragraph.

9.47
Appendix 2 contains more information about the "emphasis of matter" paragraphs that were included in audit reports.

"Other matter" paragraphs

9.48
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.

9.49
There were no "other matter" paragraphs in the audit reports of the public entities that we cover in this report.

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