Part 3: Non-standard audit reports issued

Central government: Results of the 2012/13 audits (Volume 2).

3.1
In this Part, we detail the nature of the 112 non-standard audit reports that we issued during the year ended 31 December 2013.

Unmodified opinions with "emphasis of matter" paragraphs

3.2
A standard audit report is issued when an auditor is able to reasonably conclude that the information is free from material misstatement and is presented in accordance with generally accepted accounting principles. It is not a guarantee that there are no misstatements present within the information, regardless of their size or significance. The opinion provides only reasonable assurance about the information that is within the scope of the engagement. It not indicative of a positive assessment of the entity's overall activities.

3.3
An unmodified opinion with an "emphasis of matter" paragraph is used when the auditor is largely satisfied that the financial and service performance information is fairly reflected in the financial statements but the reader's attention needs to be drawn to certain matters.

3.4
The following section summarises the matters that led to some public entities receiving audit reports that included unmodified opinions but also included "emphasis of matter" paragraphs.

Novopay

3.5
We drew attention to disclosures in the Ministry of Education's financial statements about:

  • the significant issues that arose when the new payroll service, Novopay, went live in August 2012;
  • the Ministry not achieving its service performance target for accurately calculating payments to teachers;
  • the uncertainty of a claim that has been lodged in the High Court alleging breach of statutory duty due to the Novopay service failures; and
  • the uncertainty about when and how much of the salary overpayments to teachers would be recovered.

Canterbury earthquakes

3.6
We drew attention to disclosures about the effects of the Canterbury earthquakes that resulted in uncertainties involved in estimating the insurance claim liability of the Earthquake Commission (EQC).

3.7
For EQC, we confirmed that, for the year ended 30 June 2013, the going-concern assumption had been appropriately used.

3.8
We drew attention to disclosures about the effects of the Canterbury earthquakes that resulted in uncertainties involved in estimating the insurance claims liability and reinsurance receivables for Southern Response Earthquake Services Limited.

3.9
We also drew attention to disclosures in Canterbury Earthquake Recovery Authority's financial statements about:

  • the uncertainty associated with the Government's share of local authority costs in response to the earthquakes and its share for restoring local authority water infrastructure damaged by the earthquakes; and
  • the uncertainties involved in estimating the Government's offer to purchase properties in the Christchurch residential red zone.

3.10
We also drew attention to disclosures in the University of Canterbury's financial statements for the year ended 31 December 2012 about:

  • the impairment estimates for buildings damaged in the earthquakes, the significance of the estimates, and the inherent uncertainties in the information on which the estimates have been based; and
  • the going-concern assumption being appropriately used in preparing the financial statements and the relevant factors that the Council considered.

Solid Energy New Zealand Limited's capital restructure and assumptions about coal prices

3.11
We drew attention to disclosures in the financial statements for Solid Energy New Zealand Limited and its group about:

  • the financial statements being prepared using the going-concern assumption;
  • the company and group restructuring its business and agreeing to a capital restructure with its shareholder, the Crown, and a number of its principal bank creditors (this happened after the balance date, and the final settlement and documentation were expected to be finalised during October 2013); and
  • the material uncertainty about future coal prices that will determine the group's ability to generate enough cash to repay or refinance its debt when that debt falls due. This uncertainty arises because of the assumptions used in the discounted cash flow projections for the Stockton mine and the sensitivity of that assumption.

3.12
We also drew attention to disclosures in the financial statements of the subsidiaries of Solid Energy New Zealand Limited about the financial statements being appropriately prepared using the going-concern assumption. Some of the matters disclosed were about:

  • the parent and group being able to fund the company and not require repayment until the company was able to do so;
  • the company being a guarantor under a new capital restructure of the group, which was being challenged by one of the principal bank creditors; and
  • the material uncertainty about future coal prices that would determine the group's ability, in the absence of selling assets, to generate enough cash to repay or refinance debt when it falls due.

3.13
The subsidiaries are:

  • Solid Energy Land Holdings Limited;
  • Solid Energy Renewable Fuels Limited; and
  • Spring Creek Mining Company.

3.14
We also drew attention to disclosures in the financial statements of Biodiesel New Zealand Limited about:

  • the financial statements being appropriately prepared not using the going-concern assumption because the parent company ceased operating during the year;
  • a capital restructure (after the balance date) where the company is a guarantor and which is being challenged by one of the principal bank creditors; and
  • the material uncertainty about future coal prices that would determine the group's ability, in the absence of selling assets, to generate enough cash to repay or refinance debt when it falls due.

3.15
We also drew attention to disclosures in the financial statements of Spring Creek Mine Holdings Limited about:

  • a capital restructure (after the balance date) where the company is a guarantor and which was being challenged by one of the principal bank creditors; and
  • the material uncertainty about future coal prices that would determine the group's ability, in the absence of selling assets, to generate enough cash to repay or refinance debt when it falls due.

Capital contributions from the Crown

3.16
We drew attention to the accounting treatment used by the University of Auckland for Partnerships for Excellence funding. In our view, this funding should have been recognised as equity. (The Crown has an in-substance ownership interest in the University, and the University was given the funds as a capital contribution to increase the capability of the University.)

Uncertainties arising from, or from the prospect of, structural change

3.17
Both planned and actual structural changes create uncertainties that need to be considered in reading the financial and service performance statements of the organisations undergoing change.

3.18
We drew attention to the uncertainties arising from structural changes or expected future changes for Tuhoe-Waikaremoana Māori Trust Board for the year ended 31 March 2012. We drew attention to the uncertainty about the outcome of a transfer of certain assets to a separate charitable trust, which depends on the Trust Board obtaining the approval of the High Court.

3.19
We included "emphasis of matter" paragraphs that drew attention to disclosures about the appropriate use of the going-concern assumption and an impending decision about the future of the company in the audit reports of:

  • AgResearch (Meat Biologics Consortia) Limited (a subsidiary of AgResearch Limited) for the year ended 30 June 2013; and
  • Kiwi Innovation Network Limited (a consortium of universities and CRIs) for the year ended 31 December 2012.

3.20
In our audit reports for the 16 health regulatory authorities and the two secretariats in 2012/13, we drew attention to uncertainty about the delivery of office functions of authorities because of a proposal to combine their secretariats and office functions. We will discuss this further in our forthcoming report on audit results for the health sector.

Uncertainties over aspects of the entity's obligations

3.21
We drew attention to uncertainties about tax on the profits of New Zealand Institute of Highway Technology Limited (a subsidiary of Western Institute of Technology at Taranaki) for the year ended 31 December 2012. It was not clear whether the company was liable for income tax on its profits since 2008 and what the company was doing to remedy the situation.

3.22
We drew attention to the uncertainties faced by Polytechnics International New Zealand Limited for the year ended 31 December 2012. There was uncertainty about a contractual dispute over project costs and recoveries for a client in Saudi Arabia. The dispute might result in the company providing a performance bond in favour of this client.

Not using the going-concern assumption to prepare financial statements

3.23
In a number of audits, we drew attention to the fact that entities had, appropriately, not used the going-concern assumption. Entities did this because they had been disestablished or were expected to be disestablished in the near future. The following public entities' audit reports included such an "emphasis of matter" paragraph:

  • Paraco Technology Limited (a subsidiary of AgResearch Limited);
  • Ngai Tahu Ancillary Claims Trust;
  • Canterprise Nominees Limited (a subsidiary of University of Canterbury) for the year ended 31 December 2012;
  • Canterprise Trustees (No. 2) Limited (a subsidiary of University of Canterbury) for the year ended 31 December 2012;
  • Canterprise Trustees ArcActive Limited (a subsidiary of University of Canterbury) for the year ended 31 December 2012;
  • iPredict Limited and Group (a subsidiary of Victoria University of Wellington) for the year ended 31 December 2012;
  • Predictions Clearing Limited (a subsidiary of Victoria University of Wellington) for the year ended 31 December 2012;
  • Unitec Recreation Trust (a trust controlled by Unitec Institute of Technology) for the year ended 31 December 2012;
  • iLink Apps Limited (a subsidiary of University of Waikato) for the year ended 31 December 2012;
  • South Island Shared Service Agency Limited (shared by Canterbury District Health Board, Nelson Marlborough District Health Board, South Canterbury District Health Board, and West Coast District Health Board) for the year ended 30 June 2013;
  • District Health Boards New Zealand Incorporated for the year ended 30 June 2012;
  • Manukau Health Trust (a trust controlled by the Counties Manukau District Health Board) for the year ended 30 June 2013;
  • Aupouri Māori Trust Board and Group, for the years ended 30 June 2008, 30 June 2009, 30 June 2010, and 30 June 2011;
  • Tuhoe-Waikaremoana Māori Trust Board for the year ended 31 March 2013;
  • Road Safety Trust for the period ended 31 May 2013;
  • Electricity Corporation of New Zealand;
  • Learning State Limited (disestablished on 8 March 2013);
  • Learning Media Limited and Group;
  • Air Post Limited (a subsidiary of New Zealand Post Limited);
  • Public Trust Group Investment Funds – Australian Equity Fund (No 8), New Zealand Cash Fund (No 9) and International Equity Fund (No 10) – for the year ended 15 March 2013;
  • Public Trust Group Investment Funds – New Zealand and Australian Equities Investment Fund (No 67) and International Equities Investment Fund (No 68) – for the year ended 31 March 2013; and
  • Balanced Income Funds (Public Trust Investment Fund No 13) for the year ended 31 March 2013.

Uncertainties about the value of investments

3.24
Uncertainties about the value of unlisted investments can have a material (that is, big enough to make a difference worth noting) effect on the statement of financial performance and the statement of financial position.

3.25
For University of Otago Holdings Limited and Group and a subsidiary, Otago Innovation Limited and Group (all subsidiaries of Otago University), we included an "emphasis of matter" paragraph drawing attention to the uncertainties in measuring the fair value of investments. The uncertainties are to do with the forecast future cash flows of an investment.

3.26
For New Zealand Venture Investment Fund Limited and Group and for a subsidiary, NZVIF Investments Limited, we included an "emphasis of matter" paragraph drawing attention to the uncertainties in measuring the fair value of unlisted venture capital investments. These uncertainties could, in turn, create uncertainties about the carrying amount of related-party loans recorded in the parent entity's financial statements.

3.27
For Public Trust and Group, we included an "emphasis of matter" paragraph drawing attention to the uncertainty in measuring the value of unlisted mortgaged backed securities due to the absence of an active, liquid market and quoted market prices. This uncertainty could have a material effect on the statement of profit and loss and statement of financial position.

Modified opinions

Adverse opinions

3.28
During 2013, we issued an adverse opinion for two public entities that did not recognise their museum collection assets nor the associated depreciation expense that is a requirement of generally accepted accounting practice. The two public entities were:

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

Qualified opinions

3.29
We also issued qualified opinions on the financial or the service performance information of 13 public entities.

3.30
A qualified opinion is issued if there is a disagreement with the treatment or disclosure of an issue in the financial statements or when we cannot get enough audit evidence about an issue.

3.31
We issued a qualified opinion on the Ministry of Health's statement of service performance for the year ended 30 June 2013 because we could not get enough assurance about some significant service performance measures (including the six national health targets) that were provided by the DHBs and are aggregated by the Ministry in its annual report. This was because no annual reporting by DHBs, nor their respective audits, had been completed at the time we completed our audit of the Ministry.

3.32
We issued a qualified opinion because we disagreed with the accounting treatment used by the New Zealand Vice Chancellors Committee for the year ended 30 June 2012. We disagreed with the Committee not preparing group financial statements to consolidate the financial statements of its controlled entity, the New Zealand Universities Academic Audit Unit.

3.33
We issued a qualified opinion because we disagreed with the accounting treatment used by Ngati Whakaue Education Endowment Trust Board (for the year ended 31 December 2012). We disagreed with how the Trust recognised the value of land because the accounting treatment departed from generally accepted accounting practice.

3.34
We issued a qualified opinion for Te Tumu Paeroa (the Māori Trustee and Group) for the year ended 31 March 2013 because we were unable to confirm the financial information for an associated company. This was because the associated company has a balance date of 31 July, which is three months after the Te Tumu Paeroa balance date. The equity accounted financial statements for the associated company included unaudited information for the eight month period from 1 August 2011 to 31 March 2012.

3.35
We issued a qualified audit report for New Zealand Fire Service Commission, related to its comparative performance information. Industrial action by fire fighters in 2011 and 2012 meant that data was not collected for some performance measures. This affected the performance data reported for the year ended 30 June 2012, and the comparative performance data for the year ended 30 June 2013.

3.36
We issued a qualified audit report for Massey Ventures Limited and Group for the year ended 31 December 2012 because we could not verify that the financial information about the company's associates is properly recorded and disclosed in the financial statements. The associates, which are not public entities within the Auditor-General's mandate, are not audited. This was a decision made by the company's shareholders.

3.37
We issued a qualified audit report for WaikatoLink Limited and Group for the years ended 31 December 2010 and 31 December 2011 because we could not verify that the financial information about the company's associate, ZyGEM Corporation, for the years ended 31 March 2010 and 31 March 2011 is properly recorded and disclosed in the financial statements. The associate is not a public entity within the Auditor-General's mandate, and its audit is yet to be completed.

3.38
We issued a qualified audit report for Tairawhiti Laundry Services Limited, which is a subsidiary of Tairawhiti District Health Board, for the years ended 30 June 2009, 30 June 2010, 30 June 2011, and 30 June 2012. We could not get enough assurance about the completeness of the revenue of an associate of Tairawhiti Laundry Services Limited or its investment in that associate.

3.39
We issued a qualified opinion for New Zealand Māori Arts and Craft Institute. Our audit was limited in relation to comparative information because, for the year ended 31 March 2012, we were unable to get assurance about completeness of revenue. The Institute implemented systems and procedures to provide assurance that its revenue was properly recorded for the year ended 31 March 2013.

3.40
We issued qualified opinions for the following entities because we could not get enough assurance to confirm that their revenue information was complete:

  • New Zealand Post Recycle Centre Limited (a subsidiary of New Zealand Post Limited);
  • Ivey Hall and Memorial Hall 125th Anniversary Appeal Gifting Trust (a trust controlled by Lincoln University);9 and
  • Ivey Hall and Memorial Hall 125th Anniversary Appeal Taxable Activity Trust (a trust controlled by Lincoln University).

3.41
We issued a qualified opinion for Te Tapuae O Rehua Limited for the year ended 31 December 2010 because we could not get enough assurance about the completeness of expenditure information, including payroll information. The accounting records were in areas cordoned off and inaccessible after the Canterbury earthquakes.

Reasons for the greater number of non-standard audit reports issued in 2012/13

3.42
Overall, there has been an increase in non-standard audit reports issued in 2012/13 compared to 2011/12.

3.43
There has been a minor increase in the number of non-standard audit reports issued in the tertiary sector because some TEI subsidiaries were disestablished in 2012 or expected to be disestablished. We previously reported the audit results for TEIs and Rural Education Activities Programmes separately in an education report.

3.44
We issued non-standard audit reports for all DHBs as a result of limited assurance on performance information for the year ended 30 June 2013.

3.45
Within the overall increase, there was a decrease in the number of non-standard audit reports for some Crown entities, because there were fewer disestablishments during 2012/13.

8: There were no "other matter" paragraphs included in the 2012/13 audit reports for central government agencies.

9: Audits for the years ended 31 December 2011 and 31 December 2012.

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