Part 3: The audit reports we issued in 2017

3.1
In this Part, we discuss the audit reports we issued.

3.2
During 2017, we issued 375 audit reports on the financial statements and performance information of local authorities, their subsidiaries, and entities associated with, or related to, local authorities (see Figure 7).

3.3
Through these audit reports, we inform readers of public entities' financial statements and performance information about the reliability of that information.

Figure 7
Audit reports issued on local authorities and subsidiaries, and entities associated with, or related to, local authorities

* During 2017, we issued Carterton District Council with qualified opinions for 2016/17 and 2015/16.
** We sometimes issue more than one audit report for an entity if unfinished audits from previous years are completed during the same year.

3.4
Of the 375 audit reports, 359 included unmodified opinions. This means that we had no concerns about the information reported, although we drew attention to important disclosures in 47 of those audit reports. The remaining 16 audit reports contained modified opinions. This means that either we disagreed with how the entity reported information or we could not get the evidence that we needed.

3.5
Appendix 2 summarises the matters included in the non-standard audit reports that we issued.

Natural hazard events and audit reports

3.6
The November 2016 earthquake demonstrated, yet again, how dramatic, disruptive, and expensive these kinds of natural hazard events can be. Although local authorities can plan for and try to mitigate the risks of natural hazards, they cannot predict where and when they will occur.

3.7
Kaikōura District Council and Hurunui District Council received non-standard audit reports because of the effects of, and uncertainties from, the November 2016 earthquake. Despite the challenges these local authorities faced during the 2016/17 financial reporting period, we provided assurance for a significant proportion of the information reported. (See paragraphs 3.16 and 3.24, and Appendix 2.)

3.8
For several other local authorities, the November 2016 earthquake damaged assets and caused disruption and delays to projects. Without modifying our audit opinion, we drew attention to disclosures in Marlborough District Council's annual report about earthquake-related uncertainties. (See Appendix 2.)

3.9
CentrePort Limited Group's assets suffered significant damage from the earthquake, seriously affecting the company's ability to operate. Without modifying our opinion for CentrePort Limited Group, we drew attention to earthquake-related uncertainties. Because they are shareholders, Greater Wellington Regional Council and Manawatu-Wanganui Regional Council (and several of CentrePort Limited Group's subsidiaries) also received "emphasis of matter" paragraphs relating to their financial statements in their audit reports. (See Appendix 2.)

3.10
In 2016/17, Christchurch City Council was able to resolve the last of its 2010/11 earthquake-related accounting and audit issues. Christchurch City Council still received a modified audit report in 2016/17, but this was limited to the previous year's comparative figures. This reflects the time it takes to determine the full effects of damage from a significant event. (See paragraph 3.26 and Appendix 2.)

3.11
Several local authorities were badly affected by floods, including at Edgecumbe in Whakatane District and South Dunedin.

3.12
Such events are an important reminder to local authorities to (re)assess the risks they face, especially to community safety and critical assets. To be able to respond well to emergency situations and move towards recovery, local authorities need to invest in governance arrangements and put in place operational and risk assessment plans before events and disasters occur. These plans should include what local authorities need to do to educate their communities, build resilience, put in place continuity measures, and how to consider insurance cover.

Disclaimers of opinion

3.13
Sometimes we cannot obtain the evidence we need from an entity. This lack of evidence can fundamentally affect our view of the entity's financial statements and performance information.

3.14
This usually occurs when the entity is dealing with circumstances outside its control, such as responding to natural disasters. In such situations, we issue a disclaimer of opinion. This means that we do not have the evidence to form an opinion on the financial statements and/or performance information.

3.15
In 2017, we issued two disclaimers of opinion for Kaikōura District Council and Titanium Park Joint Venture,⁸ a council-controlled organisation of Hamilton City Council.

3.16
We were unable to obtain enough evidence about the service performance information for Kaikōura District Council. This was because the November 2016 earthquake prevented the Council from collecting information about the delivery and management of services. The significant lack of information about the delivery and management of services meant that we could not provide assurance on the statement of service performance in Kaikōura District Council's annual report.

3.17
Titanium Park Joint Venture could not give us enough evidence to support the value of a development property that was included in the financial statements. Because of the significance of the development property to the financial statements, we could not provide assurance on the financial statements.

Adverse opinions

3.18
Sometimes we disagree with the way an entity applies accounting standards, and the effect of what we disagree about is fundamental to the financial statements or performance information.

3.19
In 2017, we issued adverse opinions for Canterbury Museum Trust Board for 2015/16 and 2016/17.

3.20
The Museum's collection assets are integral to what it does. However, Canterbury Museum Trust Board does not recognise these assets or the associated depreciation expense in its financial statements.

3.21
Canterbury Museum Trust Board is of the view that all of its collection assets cannot be reliably measured. In 2017, we worked with Canterbury Museum Trust Board to try to better understand its reasons for having this view. Although we were not persuaded, we gave guidance to the Museum that set out what additional information it could provide to us to support its view that collection assets cannot be reliably measured.

3.22
Otago Museum Trust Board is also of the view that some collection assets cannot be reliably measured. We also worked with the Board to better understand its view. We continued to disagree with Board's view. However, because only some collection assets had not been valued, we did not consider our disagreement to be fundamental. Therefore, we issued a qualified opinion for Otago Museum Trust Board for 2016/17.

Qualified opinions

3.23
We qualify our audit opinion when either an aspect of an entity's financial statements or performance information does not comply with accounting standards or the entity cannot provide us with the necessary information to support it. In 2017, we qualified 12 opinions.

3.24
Six of the qualified opinions were for local authorities, three of which concerned uncertainties in their financial statements and/or performance information. As mentioned above, we were unable to get enough evidence from Hurunui District Council to confirm the values, losses, or write-offs of assets damaged in the November 2016 earthquake.

3.25
For Carterton District Council,⁹ we could not rely on its underlying systems for reporting performance information. For Hawke's Bay Regional Council, there was not enough evidence of the impairment of development expenditure for the Ruataniwha Water Storage Scheme.

3.26
Two of the qualified opinions were for previous years' comparative information in the 2016/17 financial statements and/or performance information (that is, for 2015/16) – Christchurch City Council because of earthquake legacy issues, and Manawatu District Council because the auditor was not able to get enough appropriate audit evidence about the completeness of some response-times information reported in the statement of service performance.

3.27
Appendix 2 sets out the reasons for these qualifications.

Unmodified audit opinions with "emphasis of matter" paragraphs

3.28
Sometimes, public entities report matters in their financial statements and performance information that are important enough that we draw attention to them in our audit report. In 2017, 47 sets of financial statements contained information that required an "emphasis of matter" paragraph in our audit report.

3.29
For example, the November 2016 earthquake caused significant damage to several entities' assets. The uncertainties about the extent of this damage affected how the assets were valued and how much insurance the entities would receive. The financial statements contained disclosures about these uncertainties, which are important to understanding the financial statements. So, we drew attention to the disclosures.

3.30
If an entity has decided to cease operations, it will affect the way that financial statements are prepared and how assets are valued. The financial statements will need to contain disclosures about this. These disclosures are also important to understanding the financial statements. We normally draw attention to disclosures about ceasing to operate.

8: Our opinion for Titanium Park Joint Venture for the year ended 30 June 2016 was issued on 11 August 2017.

9: For both 2015/16 and 2016/17.