Note 1: Statement of accounting policies

Reporting entity

The Controller and Auditor-General is a corporation sole established by section 10(1) of the Public Audit Act 2001, is an Office of Parliament for the purposes of the Public Finance Act 1989, and is domiciled and operates in New Zealand. The relevant legislation governing the Office's operations is the Public Audit Act 2001. The Office's ultimate parent is the New Zealand Crown.

Our primary objective is to provide independent assurance to Parliament and the public about how public organisations are performing, through auditing public organisations, carrying out performance audits, providing reports and advice to Parliament, and carrying out inquiries and other special studies.

We have designated ourselves as a public benefit entity (PBE) for financial reporting purposes.

Our financial statements are for the year ended 30 June 2021 and were authorised for issue by the Controller and Auditor-General on 28 September 2021.

Basis of preparation

The financial statements have been prepared on a going concern basis, and the accounting policies have been applied consistently throughout the year.

Statement of compliance

The financial statements of the Office have been prepared in keeping with the requirements of the Public Finance Act 1989, which include the requirement to comply with New Zealand generally accepted accounting practice (NZ GAAP) and Treasury Instructions.

The financial statements have been prepared in keeping with Tier 1 PBE Standards.

These financial statements comply with PBE Financial Reporting Standards (FRS).

Presentation currency and rounding

The financial statements are presented in New Zealand dollars, and all values are rounded to the nearest thousand dollars ($000).

Standards issued and not yet effective and not early adopted

Standards and amendments issued but not yet effective, which have not been early adopted and which are relevant to the Office, are:

Amendment to PBE IPSAS 2: Cash Flow Statements

An amendment to PBE IPSAS 2 requires entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, include both changes arising from cash flows and non-cash changes. This amendment is effective for the year ending 30 June 2022, with early adoption permitted. This amendment will result in additional disclosures. We did not adopt the amendment early.

PBE IPSAS 41: Financial Instruments

PBE IPSAS 41 replaces PBE IFRS 9: Financial Instruments and is effective for the year ending 30 June 2023, with early adoption permitted. Although the Office has not assessed the effect of the new standard, it does not expect any significant changes as the requirements of PBE IPSAS 41 are similar to those contained in PBE IFRS 9. We do not intend to adopt the standard early.

PBE FRS 48: Service Performance Reporting

PBE FRS 48 establishes requirements for selection and presentation of service performance information and is effective for the year ending 30 June 2023, with earlier adoption permitted. Previously, there has been no PBE standard dealing solely with performance reporting. We have not yet assessed the effect of the new standard and do not intend to adopt the standard early.

Budget and forecast figures

The forecast financial statements (Main Estimates 2021/22) have been prepared as required by the Public Finance Act 1989 to communicate forecast financial information for accountability purposes. The budget and forecast figures (all Estimates information) are unaudited and have been prepared using the accounting policies adopted in preparing these financial statements.

2020/21 Main Estimates and Supplementary Estimates

The 2020/21 Main Estimate forecast financial statements are consistent with the forecasts published in Budget 2020, and in the Office's 2019/20 annual report.

The 2020/21 Supplementary Estimates forecast financial statements are based on the updated forecasts published in Budget 2021.

2021/22 Main Estimates

The 2021/22 Main Estimate forecast financial statements are consistent with the forecasts published in Budget 2021. They have been prepared in keeping with PBE FRS 42: Prospective Financial Statements and comply with that standard.

The 2021/22 forecast financial statements were approved for issue by the Auditor-General on 6 April 2021. The Auditor-General is responsible for the forecast financial statements, including the appropriateness of the assumptions underlying them and all other required disclosures.

Although we regularly update our forecasts, updated forecast financial statements for the year ending 30 June 2022 will not be published.

Significant assumptions used in preparing the forecast financial statements

The forecast figures contained in these financial statements reflect the Office's purpose and activities and are based on a number of assumptions on what might occur during 2021/22. The forecast figures have been compiled on the basis of existing government policies and after the Auditor-General consulted with the Speaker and the Officers of Parliament Committee.

The main assumptions, which were adopted as at 6 April 2021, were as follows:

  • The Auditor-General's portfolio of entities will remain substantially the same as for the previous year.
  • The Office will continue to deliver the range of products currently provided and will also be in a position to deliver new products, or existing products in new ways, to cope with changing demands.
  • The balance of activity associated with inquiries and with advice to Parliament and others will continue to vary because of increases in demand.
  • The Auditor-General will continue to use audit expertise from Audit New Zealand and contracted audit service providers.
  • Forecast personnel costs are based on expected staff numbers necessary to deliver the work of the Office, incorporating remuneration rates that are based on current costs adjusted for anticipated market changes.
  • Operating costs are based on estimates of costs that will be incurred under the Office's current operating model, with small allowances for price increases.
  • Forecast capital expenditure and depreciation are based on planned replacement of motor vehicles and IT equipment, plus continued investment in developing the Office's software programs.

The actual financial results achieved for 2021/22 are likely to vary from the forecast information presented, and the variations might be material. There are likely to be flow-on effects from Covid-19, including demand and supply impacts on the audit profession generally, which is likely to put pressure on the completion of audits in the short term and might reduce the forecasts of revenue and expenditure in 2021/22.

Summary of significant accounting policies

Significant accounting policies are included in the notes to which they relate.

Significant accounting policies that do not relate to a specific note are outlined below.

Goods and Services Tax

All items in the financial statements are presented exclusive of Goods and Services Tax (GST), except for receivables and payables, which are presented on a GST-inclusive basis. Where GST is not recoverable as input tax, it is recognised as part of the related asset or expense.

The net amount of GST recoverable from, or payable to, the Inland Revenue Department (Inland Revenue) is included as part of receivables or payables in the Statement of financial position.

The net GST paid to or received from Inland Revenue, including the GST relating to investing and financing activities, is classified as a net operating cash flow in the Statement of cash flows.

Commitments and contingencies are disclosed exclusive of GST.

Income tax

We are exempted from paying income tax by section 43 of the Public Audit Act 2001. Accordingly, no charge for income tax has been provided for.

Output cost allocation

We have determined the cost of outputs using allocations as outlined below.

Direct costs are those costs directly attributable to a single output. Direct costs that can readily be identified with a single output are assigned directly to the relevant output class. For example, the cost of audits carried out by contracted audit service providers is charged directly to output class: Audit and Assurance Services RDA.

Indirect costs are those costs that cannot be identified in an economically feasible manner with a specific output. These costs include: corporate services costs, variable costs such as travel, and operating overheads such as property costs, depreciation, and capital charges. Indirect costs are allocated according to the time charged to a particular activity.

In 2020/21, we reviewed our cost allocation approach for allocating indirect costs. Previously, team overheads within the Office were allocated to each output based on the total direct time charged to a project by all teams across the Office. We noted that a more accurate and improved approach was to charge team overheads by the direct time charged by each team to each project.

The impact of the above change was to transfer $0.391m of costs from the Audit and Assurance Services Revenue Dependent Appropriation to the Statutory Auditor Function Multi-Category Appropriation.

There have been no other changes in cost allocation policies since the date of the last audited financial statements.

Critical accounting estimates and assumptions

In preparing these financial statements, estimates and assumptions have been made about the future. These estimates and assumptions might differ from the subsequent actual results. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next financial year are:

  • Audit fee revenue, work in progress, and income in advance – see Notes 3, 9, and 12.
  • Depreciation and amortisation – see Notes 10 and 11.
  • Retirement leave – see Note 14.

Effects of Covid-19

On 11 March 2020, the World Health Organisation declared the outbreak of the Covid-19 pandemic, and two weeks later the New Zealand Government declared a State of National Emergency. Since that time, the country and certain regions within it have entered several lockdowns and the Government has imposed stricter border conditions.

Covid-19 significantly affected the ability of public organisations and our auditors to complete their work within the statutory reporting deadlines, due to inefficiencies of working remotely and additional audit work required. Parliament passed legislation on 5 August 2020 to extend the statutory reporting time frames by up to two months for organisations with 30 June 2020 balance dates that reported under the Crown Entities Act 2004, Crown Research Institutes Act 1992, Local Government Act 2002, Public Finance Act 1989, and State-Owned Enterprises Act 1986.

Covid-19 continues to significantly affect many organisations in New Zealand, including ours, particularly with stricter border conditions and reduced global mobility.

There is now a shortage of auditors across New Zealand and Australia. Normally, the audit profession relies on bringing in auditors from overseas to manage the workload. With global mobility restrictions, there is a limited supply of auditors in both the public and private sectors. Compounding this are auditor retention challenges. A tight labour market for qualified finance staff means that auditors are being actively sought for other positions.

The impact of the auditor shortage has been particularly acute for Audit New Zealand, our in-house audit service provider. Audit New Zealand relies on both recruitment from overseas and on short-term engagements of auditors from New Zealand private audit firms during its busy period.

Auditors are also experiencing extended high workloads – from an extremely busy 2020 due to Covid-19, and a busy first half of 2021 with the audits of councils' long-term plans and their associated consultation documents.

For these reasons, Parliament passed further legislation in July 2021 to extend by two months the statutory reporting time frames in the Crown Entities Act 2004 and the Local Government Act 2002. The extensions apply to Crown entities and organisations listed in Schedules 4 and 4A of the Public Finance Act 1989 and local authorities and council-controlled organisations with 30 June balance dates.

The above factors affected Audit New Zealand's ability to progress the 2021 June audits in addition to the audits of long-term plans prepared by councils. This resulted in a lower surplus in the memorandum account than budgeted.

The Office continued to monitor the cash position and cash injections were not ultimately required.

We also considered the possible effect on trade receivables and formed the view that no impairment needed to be recognised.


Expenses yet to be incurred on non-cancellable contracts that have been entered into on or before balance date are disclosed as commitments to the extent that there are equally unperformed obligations.

Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising that option to cancel are included in the Statement of commitments at the value of that penalty or exit cost.