Part 2: Our audit of the Government’s financial statements

Observations from our central government audits: 2021/22.

2.1
Our audit report on the Government’s financial statements provides independent assurance that the financial statements present fairly the Government’s financial performance and position. Confidence in the reliability of this information allows Parliament, the public, and the international community to confidently scrutinise the Government’s financial performance and position.

2.2
Our audit report included an unmodified opinion and a description of the key audit matters arising during the audit. Each year we review whether the previous year’s key audit matters remain relevant and consider any new matters that should be included in the audit report.

2.3
The key audit matters included in our audit report on the Government’s financial statements for the year ended 30 June 2022 were:

2.4
Overall, we were satisfied that the balances and disclosures in the Government’s financial statements about these matters were reasonable and appropriate.

Entitlements under the Holidays Act 2003

2.5
The provision for employee entitlements in the Government’s financial statements includes $2.1 billion for amounts owing to employees who have been paid less than their legal entitlements under the Holidays Act 2003.

2.6
We have reported this as a key audit matter since 2018 and progress on this complex matter has been slow. Some employees are still being paid incorrect amounts when leave is taken or paid out.

2.7
Many public and private sector organisations have had challenges in interpreting the Holidays Act 2003 and paying employees amounts that comply with the legislation. Since this issue was first identified, many organisations have calculated the historical amounts owing, paid these to staff, and fixed systems so that staff are subsequently paid at the correct rates. However, two significant parts of the public sector, health and education, have not yet achieved this.

2.8
Applying the legislation to complex employment arrangements requires a good understanding of both the legislation and employees’ contractual terms. It often requires judgement, and negotiation and agreement with employee representatives.

2.9
This provision is for those public organisations that have not yet finished determining the amounts they owe to staff but have been able to make a sufficiently reliable estimate. For some of these organisations, there is significant uncertainty in estimating the final amounts owed and the time frame for resolution and payment.

2.10
The provision for former district health boards is $1.7 billion. This provision is based on work done over several years that involved selecting a small sample of former and current employees, applying assumptions, and calculating a provision by extrapolating the result over the known population.

2.11
The liability for two former district health boards was recalculated this year based on a revised, nationally agreed approach. The recalculation was prepared by a professional firm engaged specifically to carry out the calculations based on agreed assumptions.

2.12
As outlined in the Government’s financial statements, if an obligation cannot be reasonably measured at 30 June 2022, disclosure is made of an unquantified contingent liability.

2.13
For the organisations most significantly affected, we considered the progress made during the year in resolving the payroll calculation issues. In some key areas, such as in the health and education sectors, only limited progress had been made.

2.14
We reviewed the changes in the provision since the previous year and considered the adequacy of support for any significant movements.

2.15
For the former district health board’s revised calculations, we:

  • obtained an understanding of the changes made to methodology, assumptions, and sample sizes compared to the previous estimate, and the updated employee information; and
  • considered the expertise of the professional firm engaged to undertake the calculations.

2.16
We also considered whether the effect of the two former district health boards’ recalculations, if applied to the provisions of the other former district health boards, might result in a materially different overall provision.

2.17
For those organisations in the education sector that have a contingent liability rather than a provision, we assessed management’s judgement and support for not being able to reliably estimate the liability.

2.18
We reviewed the disclosures about the provision and contingent liability for compliance with relevant financial reporting standards.

2.19
As a result of the audit work, we are satisfied that the provision for entitlements under the Holidays Act 2003 at 30 June 2022 is reasonable and that where a liability cannot be reliably measured, the contingent liability disclosures are appropriate.

The Government’s response to climate change

2.20
The Government declared a climate emergency and has committed to emissions reductions targets, by international treaty, domestic legislation, or policy announcement.

Obligations arising from emissions reduction targets

2.21
As disclosed in the Government’s financial statements, the Government has not recognised any liabilities in relation to its commitments to achieve its carbon targets, including its updated Paris Agreement commitment to reduce net greenhouse emissions to 50% below gross 2005 levels by 2030.

2.22
To meet its international commitments, New Zealand will need to reduce its domestic emissions and purchase carbon credits from international markets. The amount of carbon credits required will depend on the extent of domestic emissions reductions. The cost of the carbon credits will depend on carbon prices at the time.

2.23
There is no financial reporting standard that explicitly sets out whether or how nations should recognise their carbon reduction commitments in their financial statements. Determining at what point a liability should be recognised requires judgement.

2.24
We reviewed the Treasury’s assessment of whether a liability should be recognised for committed emissions reductions targets. The Treasury’s assessment noted that there is no enforceable obligation in the Paris Agreement and, unlike the Kyoto Protocol (for which a liability was recognised), there is no settlement mechanism.

2.25
We considered whether the nature of the Paris Agreement meant a liability should be recognised. It is challenging determining whether the Government has an obligation that should be recognised as a liability. The matter requires judgement and consideration of factors such as the ability of the Government to modify or change the obligation before it must be met.

2.26
We reviewed the annual financial statements of other governments to see whether they had recognised a liability for their Paris Agreement commitments.

2.27
As a result of the audit work, we are satisfied that not recognising a liability for the Government’s emissions reductions targets is, at this time, a reasonable interpretation of the financial reporting standards and that the disclosures are appropriate.

Emissions Trading Scheme liability

2.28
As outlined in the Government’s financial statements, the New Zealand Emissions Trading Scheme liability was $11.3 billion at 30 June 2022. This liability represents the quantity of New Zealand Units on issue at the prevailing market price.

2.29
Administering and accounting for the Emissions Trading Scheme presents a significant audit risk due to its public interest, its accounting impact, and the degree of judgement and inherent uncertainty involved.

2.30
Under the accounting policy for the Emissions Trading Scheme, a liability (and related expense) is recognised for the carbon units issued (for example, to foresters for carbon sequestration from forest growth) and a reduction in the liability and revenue for carbon units surrendered to meet emissions obligations. This has a significant impact on the Government’s financial statements.

2.31
Because the Emissions Trading Scheme operates according to the calendar year, an estimate is required to be made for carbon emissions and sequestration that occurs in January to June of the financial year. These estimates require significant judgement and are subject to high levels of inherent uncertainty.

2.32
A significant estimate is the amount of carbon sequestration by post-1989 forests for which carbon units have been earned but an emissions return has not yet been submitted. As post-1989 foresters are required to submit a mandatory return only once every five years, the accrual for post-1989 forest growth is significant and based on forecast forest growth over the period.

2.33
We reviewed the governance and co-operation arrangements in place between the agencies with administrative responsibilities for parts of the Emissions Trading Scheme. We updated our understanding of the Emissions Trading Scheme systems and processes. We tested key controls over Emissions Trading Scheme registrations and return processing, including both carbon unit surrenders and allocations.

2.34
We carried out substantive analytical procedures over Emissions Trading Scheme revenue and expenditure and tested reconciliations between the Emissions Trading Scheme systems. We reviewed the appropriateness of the methodology, data, and assumptions used to estimate Emissions Trading Scheme accruals. We confirmed the carbon unit price at 30 June 2022 to market price information.

2.35
As a result of the audit work, we are satisfied that the Emissions Trading Scheme liability at 30 June 2022 is reasonable and that the disclosures are appropriate.

Calculating the value of tax revenue from other persons and companies

2.36
The Government recognised other persons tax revenue of $11.1 billion and companies tax revenue of $20.0 billion.

2.37
Tax revenue for the year from other persons and companies was estimated because the final income tax owed for a year is known only when a tax return is filed. Filing could happen more than a year after the end of the tax year.

2.38
The estimation process relies on macro-economic forecasts about how the economy will perform. It also relies on assumptions about how these macroeconomic forecasts relate to taxable profits.

2.39
As a result of the Covid-19 pandemic and other matters affecting the economy, there is increased uncertainty about how the New Zealand economy will perform. Therefore, judgements were made about the performance of the economy, and they were used to estimate tax revenue.

2.40
Estimating tax revenue is inherently uncertain and judgement is used to estimate the:

  • performance of the New Zealand and global economy and how it relates to tax revenue;
  • amount of tax to be collected from provisional taxpayers who have not yet filed their final tax return; and
  • amount of tax revenue where payments have been received but no provisional or final tax return has been filed.

2.41
We reviewed the systems, processes, and controls for receiving and reviewing provisional and final tax returns, tax assessments, and tax revenue. This included understanding Inland Revenue’s information technology system used to manage tax.

2.42
We tested the underlying data used in the tax revenue estimation models to confirm that it was relevant and used appropriately. We reviewed the main judgements and assumptions applied in the models and considered the sensitivity of the models to changes in assumptions.

2.43
We used independent economic experts to assess the main assumptions about the future (such as economic growth), which could cause a material adjustment to tax revenue from other persons and companies.

2.44
We were satisfied with the ongoing appropriateness of net operating surplus as a macro-economic indicator to estimate tax revenue from other persons and companies.

2.45
We reviewed any changes in tax policy in terms of the likely impact on tax revenue recognition. We also:

  • carried out a retrospective review of the 2021 tax estimation to tax return information received from taxpayers to assess the robustness of the methodology used to estimate tax revenue;
  • reviewed the accounting adjustments to tax revenue processed by Inland Revenue;
  • reviewed the year-end procedures and testing carried out by Inland Revenue for significant taxpayers, and any adjustments arising from this review by Inland Revenue; and
  • reviewed the relevant disclosures.

2.46
As a result of the audit work, we are satisfied that other persons’ tax revenue and companies tax revenue for the year ended 30 June 2022 are reasonable and that the disclosures are appropriate.

Valuing property, plant, and equipment

2.47
The Government owns property, plant, and equipment with a carrying value of $249.2 billion at 30 June 2022.

2.48
Revaluations are carried out regularly, or when there is a material difference between fair value and carrying value. Considerable judgement is needed in determining the valuation approaches and assumptions for some of these assets.

2.49
Valuers have considered the impact of prevailing economic conditions on the significant estimates and judgements applied in the valuation process, such as the effect of interest rates and inflation on market values and replacement costs.

2.50
For assets valued using the optimised depreciated replacement cost approach, supply chain disruptions and labour supply constraints have caused increases in construction costs, which affected valuations. Valuers have needed to assess the extent to which these cost changes are short-term or ongoing and need to be taken into account for cost-based valuations.

2.51
The property, plant, and equipment identified below needed significant judgements and assumptions to determine their fair value.

Land

2.52
Land was valued at $84.7 billion at 30 June 2022.

2.53
The land portfolio included in the Government’s financial statements is used for different purposes. Different valuation approaches have been applied that take into consideration the highest and best use of the land. It requires judgement to determine the most appropriate approach to take.

2.54
Approaches used include market-based sales evidence, rateable valuations of adjacent land, and sales indices.

2.55
The highly judgemental and subjective nature of the valuations coupled with the significance of the asset class in the Government’s financial statements results in this being a significant audit focus.

2.56
We assessed the appropriateness of the valuation approach applied by independent valuers or the public organisations themselves.

2.57
We confirmed the competence, capabilities, and objectivity of the independent valuers, considered the valuers’ main assumptions, and tested that information provided to the independent valuers was consistent with the information held by organisations.

2.58
We considered and discussed with valuers how economic and property market conditions had affected their valuation and how legislative change that would allow for more intensive development in some urban areas had been considered.

2.59
Where organisations used an index to confirm that there has been no material movement in their land values or as a basis for recording a valuation movement, we assessed the appropriateness of the index used to other external data sources and compared the retrospective accuracy of indices applied in previous periods.

2.60
As a result of the audit work, we are satisfied that the value of land at 30 June 2022 is reasonable and that the disclosures are appropriate.

State highways

2.61
The state highways (excluding land) were valued at $51.9 billion at 30 June 2022 by an independent valuer.

2.62
The value of the state highways cannot be measured precisely due to the unique nature of the state highway network. Significant estimates and assumptions are made, including assumptions about quantities and rates used to construct the state highways, the remaining useful life of the assets, and the unit costs to apply. Changes to the underlying estimates and assumptions can cause a material movement in the valuation of the state highways.

2.63
We examined how the state highways are valued, the significant estimates and assumptions used, and their reasonableness. We confirmed the competence, capabilities, and objectivity of the valuer, considered the valuer’s main assumptions, and assessed the valuation procedures. We considered whether there were any limitations placed on the valuer and whether centrally calculated rates applied to the valuation were appropriate.

2.64
We confirmed that key controls were operating over the systems and processes used to record costs and other asset information about the state highways.

2.65
We considered how the valuer took the current economic environment into account, including the judgements applied in assessing whether recent cost increases are temporary or reflect sustainable market conditions that need to be taken into account in assessing replacement cost rates.

2.66
As a result of the audit work, we are satisfied that the value of the state highways at 30 June 2022 is reasonable and that the disclosures are appropriate.

Electricity generation assets

2.67
Electricity generation assets were valued at $19.0 billion at 30 June 2022.

2.68
Valuing electricity generation assets is complicated and relies on significant assumptions about the future prices of electricity, generation costs, generation capacity, and demand. Each of these assumptions affects the others.

2.69
These assumptions are sensitive to small changes that can have a significant effect on the value of electricity generation assets.

2.70
We examined how electricity generation assets are valued. We confirmed the competence, capabilities, and objectivity of the valuers, tested their procedures for carrying out the valuations (including the information they used), and considered their main assumptions and judgements.

2.71
We considered the reasonableness of valuation approaches and assumptions. We tested the sensitivity of the main assumptions to confirm that they were reasonable.

2.72
We compared the forecast prices of electricity to the expected longer-term wholesale prices and market data, where it was available.

2.73
We considered how the valuers took the current economic environment into account in the valuations and the effect of any estimation uncertainties on the final valuations of electricity generation assets.

2.74
We also considered whether the valuers took into account the future of the New Zealand Aluminium Smelter at Tiwai Point in determining their valuation assumptions.

2.75
As a result of the audit work, we are satisfied that the value of electricity generation assets at 30 June 2022 is reasonable and that the disclosures are appropriate.

Valuing financial assets where market data is not available

2.76
The financial statements included financial assets that were valued using significant non-observable inputs (that is, where market data is not available) of $22.7 billion at 30 June 2022.

2.77
These financial assets include loans (including student loans, discussed below), investments, and deposits.

2.78
When there is no quoted market price for a financial asset, the value of the asset is estimated using an appropriate technique, such as a valuation model. These models are usually complex, using inputs from market data when available. Otherwise, inputs are derived from non-market data, which requires greater judgement.

2.79
Based on a sample of investments, we reviewed the valuation techniques and tested the controls and inputs used to determine the value of financial assets where market data is not available.

2.80
Taking into account the nature of the selected financial assets, the valuation techniques adopted, and the uncertainties in determining values, we:

  • tested the relevant internal controls over data entered into financial systems for these assets;
  • assessed valuation approaches applied where a fund manager carries out the valuation;
  • compared the fair value of financial assets to independent information and investigated any significant differences; and
  • assessed the appropriateness of the inputs used in the valuation where market data is not available.

2.81
As a result of the audit work, we are satisfied that the value of financial assets where market data is not available at 30 June 2022 is reasonable and that the disclosures are appropriate.

Student loans

2.82
The Government had advanced student loans with a value of $9.2 billion as at 30 June 2022.

2.83
Student loans are measured using actuarial and predictive models, which reflect current student loan policy and macro-economic assumptions.

2.84
The value is sensitive to changes in several assumptions, including future income levels, repayment behaviour, inflation, and discount rates.

2.85
There is also uncertainty about how Covid-19 and other matters affecting the economy might affect student loan repayments.

2.86
For student loans, we:

  • tested a sample of student loan applications during the year to ensure that loans were correctly paid out;
  • tested the internal controls over student loans entered into financial systems and actuarial models used by the valuer;
  • checked that the underlying information used in the valuation was correctly extracted from the system;
  • used an independent expert to review the main assumptions in the student loans model, including a review of the cash flow forecasts, and the risk-free discount rate and risk premium used to determine the fair value of loans, and adjustments for employment and overseas non-compliance;
  • assessed the controls and valuation approaches applied by the valuer and tested the operational effectiveness of controls over the valuation model;
  • carried out a retrospective review of the actual repayments of student loans in previous years against prior year cash flow forecasts to consider whether there was any estimation bias; and
  • reviewed the relevant disclosures.

2.87
As a result of the audit work, we are satisfied that the value of student loans at 30 June 2022 is reasonable and that the disclosures are appropriate.

Valuing insurance liabilities and superannuation liabilities

2.88
The Government has significant liabilities from Accident Compensation Corporation (ACC) insurance claims and public servants’ superannuation entitlements at 30 June 2022.

2.89
Estimating the values of these liabilities is complicated, and there are inherent uncertainties in the valuations.

2.90
The calculations use risk-free discount rates information and consumer price index (CPI) assumptions, which are made publicly available by the Treasury.

2.91
We engaged an independent expert to consider the appropriateness of the Treasury’s risk-free discount rates and CPI assumptions. This included assessing the:

  • appropriateness of the methodology, including the reasonableness of the Treasury’s conclusions related to the ongoing reviews of selected aspects of the methodology;
  • application of the methodology in determining the risk-free discount rates and CPI assumptions; and
  • accuracy of the calculations.

2.92
As a result of the audit work, we are satisfied that the risk-free discount rates and CPI assumptions are appropriate for use in valuing these liabilities at 30 June 2022.

Accident Compensation Corporation’s outstanding claims liability

2.93
The outstanding claims liability of ACC has been valued at $50.3 billion at 30 June 2022 by an independent actuary.

2.94
Assumptions used to determine the value of the outstanding claims liability include:

  • the discount rate used to get a present value of expected claims payments;
  • the risk margin for the inherent uncertainty in the estimate of the present value of expected claims payments;
  • the effects of inflation and innovation on future medical costs; and
  • how long it will take people to recover (length of rehabilitation) from injuries.

2.95
Assumptions are closely linked and cannot be viewed in isolation. Changes in assumptions can have a large effect on the value of the outstanding claims liability (and the gain or loss that is recognised).

2.96
We examined how ACC’s outstanding claims liability is valued. We confirmed the competence, capabilities, and objectivity of the actuary, and tested their procedures.

2.97
We assessed the reasonableness of the methodology applied. We confirmed compliance of the accounting treatment with the relevant accounting standards. We also reviewed ACC’s main assumptions about each significant type of claim to see whether these were appropriate. The impact of Covid-19 on these assumptions and estimation uncertainties was considered minimal.

2.98
We tested the systems and controls and, in particular, tested the process for recording claims.

2.99
We tested the main assumptions by considering past claims. We assessed the reasonableness of forecasts that differed from past experience by looking at the evidence supporting the forecasts.

2.100
We engaged an actuary to review the scope, approach, and reasonableness of the estimated liability.

2.101
We tested the reconciliations of the underlying claims data with ACC’s systems, examined the sensitivity analysis for movements in the main assumptions, and reviewed the related financial statement disclosures.

2.102
As a result of the audit work, we are satisfied that ACC’s outstanding claims liability at 30 June 2022 is reasonable and that the disclosures are appropriate.

Government Superannuation Fund’s unfunded liability

2.103
The Government’s unfunded liability for public servants’ superannuation entitlements for past and current members of the Government Superannuation Fund (the Fund) has been valued at $8.8 billion at 30 June 2022 by an independent actuary.

2.104
The value of the unfunded liability is sensitive to the value of the Fund’s assets, expected rates of salary increases for members of the Fund, demographic assumptions, and estimated inflation and discount rates. The Fund’s assets, which are mainly shares and bonds, are traded in markets. Changes in the prices of these shares and bonds affect the amount of the unfunded liability.

2.105
The assumptions are closely linked and cannot be viewed in isolation. Changes in assumptions can have a significant effect on the value of the unfunded liability.

2.106
We examined how the Government’s unfunded liability for public servants’ superannuation entitlements is valued. We confirmed the competence, capabilities, and objectivity of the actuary, and tested their procedures.

2.107
We engaged an actuary to review the procedures used to value the unfunded liability and to review the main assumptions and judgements, including the expected rates of salary increases, against external benchmarks.

2.108
We tested the main controls that ensure that membership data used in the actuary’s valuation is complete and accurate.

2.109
We tested the design and implementation of key controls over investments. We obtained an understanding of the valuation techniques and inputs used by the respective fund managers to value the investments and tested a sample of investments carried at fair value. The values of the funds were reconciled to the latest valuation reports. Any movements between the last valuation date and the year-end data were checked against supporting documentation.

2.110
As a result of the audit work, we are satisfied that the Government’s unfunded liability for public servants’ superannuation entitlements at 30 June 2022 is reasonable and that the disclosures are appropriate.

Other audit matters

Electricity network assets

2.111
The electricity network assets comprising the national grid are currently recorded at cost, which differs from the valuation approach in the rest of the sector. As with the rail network assets, we have accepted a different valuation approach at an entity and Government financial statements level.

2.112
We are comfortable that a revaluation approach for this asset class is not necessary in the financial statements for broader consistency with the other major assets classes as generally accepted accounting practice (GAAP) does not require this, nor does GAAP require disclosure of the fair value of property, plant, and equipment if it is carried under the cost model. Further, it was noted that depreciated cost is similar to the fair value for the electricity distribution network.

Emissions Trading Scheme

2.113
The valuation of the Government’s liability in relation to the Emissions Trading Scheme presents a risk due to its public interest, its accounting impact, the degree of judgement involved, and inherent uncertainty due to the myriad of governance and co-operation agreements in place between agencies.

2.114
This matter has now been treated as a key audit matter in the audit report and, as a result of the audit work, we were satisfied that the Emissions Trading Scheme values are fairly stated in the Government’s financial statements.

Reform programmes

2.115
In October 2021, the Government announced it would introduce legislation to establish four publicly owned water services entities to take over responsibilities for service delivery and infrastructure from local authorities from 1 July 2024. The impact of these reforms, once legislated, is likely to mean that neither the Crown nor local authorities will control the water services entities.

2.116
At this stage we do not consider these reforms to have any effect on the Government’s financial statements.

Management of spending against appropriations

2.117
The Statement of Unappropriated Expenditure, included in the Government’s financial statements, is an important summary of all unappropriated expenditure incurred in the financial year.

2.118
The number of instances of unappropriated expenditure was 12 in both 2020/21 and 2021/22. A number of these breaches were due to technical issues (including the manner in which appropriations were set up), lack of appropriate approvals, or incorrect accounting treatment.

2.119
In our view, the instances of unappropriated expenditure reflect a lack of knowledge about how to manage appropriations in the public sector and in some finance teams. We are concerned that the constitutional significance of appropriations is not well understood.

2.120
We also note that the Public Service Act 2020 makes provision for functional leadership and governance structure across public organisations. This will affect which organisations are responsible for spending within appropriations.

2.121
We reviewed the controller function reports prepared by the Treasury’s Central Controller Team and ensured that all unappropriated expenditure identified in these reports is reported in the Statement of Unappropriated Expenditure.

2.122
We confirmed with the Central Controller Team that the final listing of unappropriated expenditure is correctly reported in the Statement of Unappropriated Expenditure.

2.123
We confirmed the completeness and accuracy of actual unappropriated expenditure directly with the Appointed Auditors of the relevant public organisations.

2.124
We confirmed with the Appointed Auditors of organisations that had disclosed no unappropriated expenditure in the Statement of Unappropriated Expenditure that no unappropriated expenditure has been incurred.

2.125
We identified no areas of concern.

2.126
As a result of the audit work, we are satisfied that the Statement of Unappropriated Expenditure is accurate, complete, and consistent with what is reported in the individual public organisations’ own annual reports.

Ongoing improvement in note disclosures

2.127
One benefit of the significant amount of work completed last year to understand the impact of Covid-19 on the Government’s financial statements was the improvements made to the note disclosures about key assumptions and judgements. In 2019, the disclosures about the state highway valuation were also enhanced. These enhanced disclosures greatly assist the readers of the Government’s financial statements to understand the basis and risks inherent in this valuation process.

2.128
Other complex disclosures in the Government’s financial statements would benefit from a similar detailed consideration.

2.129
We reviewed the note disclosures in the Government’s financial statements to ensure that they conveyed the appropriate information to readers in a way that is accessible and adds to the overall understanding of the financial statements. We also reviewed the Covid-19 commentary and disclosures to ensure that it was relevant and understandable to the readers of the financial statements and focused on key assumptions and judgements.

2.130
We noted an improvement in the disclosure about ACC claims insurance liability. We also noted that the Government’s financial statements introduced a separate note on the Emissions Trading Scheme.

2.131
As a result of the audit work, we are satisfied with the progress that has been made with the note disclosures, although we note that further improvements can be made.

City Rail Link Limited

2.132
City Rail Link Limited (CRL Limited) is a Crown entity (in the Public Finance Act, a schedule 4A entity) jointly owned by the Crown and Auckland Council that was established to lead the development of the City Rail Link in Auckland. Final ownership of specific City Rail Link assets is yet to be agreed on.

2.133
From 2019/20 onwards, assets started to transfer from CRL Limited to Auckland Council (and in turn to Auckland Transport) or KiwiRail. Further asset transfers occurred in 2021/22. When decisions are made about final ownership of the assets, there could be challenging technical accounting treatment and appropriation implications.

2.134
It is also important to consider whether there are any indicators of impairment in the Crown’s investment in CRL Limited. As a result of the agreements with Auckland Council, CRL Limited is continuing to report as a joint venture in the Government’s financial statements and is, therefore, equity accounted. We are satisfied that this is adequately disclosed in the Government’s financial statements.

2.135
During the year, CRL Limited received claims from the primary contractor (the Link Alliance) for Covid-19-related costs. These claims are subject to an independent review before negotiation between the parties. Any settlement has the potential to increase the Crown’s contribution to the project.

2.136
As a result of the audit work, we are satisfied that this is adequately disclosed as a contingent liability at 30 June 2022.

Commentary

2.137
The commentary on the Government’s financial statements (the commentary) is not covered by our audit opinion, but it does help tell the story of the Government’s performance and forms a substantial part of the Government’s financial statements as a whole.

2.138
The commentary should reflect the financial performance of the Government reporting entity and focus primarily on information within the Government’s financial statements.

2.139
This year’s commentary focused on the Government’s fiscal strategy, key fiscal measures, financial statement summary, and the impacts of Covid-19.

2.140
We have reviewed the commentary and concluded that it provides a balanced view on the Government’s financial statements, with a focus on the overall financial performance (as opposed to previous years, where the focus was on the Core Crown segment).

Management override of internal controls

2.141
There is an inherent risk in every organisation of fraud resulting from management override of internal controls. People in management positions are in a unique position to perpetrate fraud because of their ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Auditing standards require us to treat this as a risk on every audit.

2.142
We examined the controls for collecting financial information from public organisations included in the Government Reporting Entity and the adjustments to that information for consolidation purposes. We tested the appropriateness of journal entries, and other adjustments made in the preparation of the Government’s financial statements, by reviewing journals and disclosures.

2.143
We reviewed significant accounting estimates for bias and engaged specialists to assist with those reviews, where appropriate. We were satisfied that the Government’s financial statements were not materially misstated due to management override of controls.