Part 2: Strengthening our core assurance role

The public audit system supports public organisations to report relevant and reliable information about their finances and performance. Robust and transparent reporting allows public organisations to describe what they are doing well and what they can improve. In turn, this allows Parliament and the public to hold these organisations to account for that performance.

Given the criticality of the public audit system to public accountability, we must ensure that there is a sustainable and fit-for-purpose system for carrying out audit and assurance work for organisations under the mandate of the Auditor-General. This includes:

• providing auditing standards, guidance, and advice to our appointed auditors;
• carrying out quality assurance reviews to ensure that auditing standards are met; and
• ensuring that the public audit system is positioned well to respond to future challenges and expectations for public sector audits and changes in the audit profession.

Our priorities for 2023/24 are set out below.

1. Strengthening the public audit system

Many issues are affecting the long-term sustainability of the public audit system. There are pressures caused by a global auditor shortage and fewer people studying accountancy-related subjects in New Zealand universities, ongoing challenges arising from the Covid-19 pandemic, and increasing expectations on auditors (such as increasing audit complexity and quality management expectations). Changes to the wider operating environment are also adding to the pressure on public organisations and on our auditors.

Our expectations of audit service providers

Each year we issue "audit briefs" to our audit service providers. Audit briefs set out what auditors should focus on when doing the annual audits of different types of public organisations. They are our main tool for communicating the Auditor-General's expectations of auditors and for sharing the information that auditors need when preparing for an audit.

We also use audit briefs to provide information about significant matters, such as reforms, and how these should be dealt with in the audit, as well as to request any specific work that is outside the normal scope of the audit to support our discretionary work.

In 2023/24, annual audits will have a particular focus on performance reporting. We describe later in this annual plan the work we will do to improve performance reporting though our annual audits. It includes assessing whether public organisations comply with new performance reporting standards.

Public sector reforms and new audit methodologies

Ongoing public sector reforms in the health sector and for water services have resulted in new responsibilities for the Auditor-General. These represent both a challenge and an opportunity for increasing the impact of our audit work.

The Pae Ora (Healthy Futures) Act 2022 created two agencies to replace the 20 district health boards: Te Whatu Ora – Health New Zealand and Te Aka Whai Ora – Māori Health Authority. The fundamental nature of the changes, and the scale of Te Whatu Ora, will have implications for how we approach our audits in the health sector, including how we consider risks and how we can best add value.

We also have statutory responsibilities for auditing Te Pae Tata, the New Zealand Health Plan, including auditing the reporting against the Interim Health Plan for 2022/23 and 2023/24. Te Pae Tata is intended to provide a three-year plan for the delivery of publicly funded health services. To provide Parliament and the public with assurance on Te Pae Tata, we need a new audit methodology for what is significant, high-profile, important, and complex work.

Reforms to water services will lead to the creation of several new entities that will be responsible for water supply and wastewater and stormwater services. If there are no changes to the accountability requirements in the Water Services Entities Act 2022, the new water services entities will be required to prepare several accountability documents. These include a statement of intent, an infrastructure strategy, and a consumer engagement strategy.

The Auditor-General will be required to audit these documents. Because these will be new types of audits, we will need appropriate audit methodologies, plans, and resources in place.

Planned work: Audit readiness for public sector reforms, including new audit methodologies

In 2023/24, we will deliver on our new responsibility of auditing the New Zealand Health Plan and prepare for new audit requirements that will come from reforms to water services (subject to amendments to the Water Services Entities Act 2022). We will need to: scope and plan the audits, considering the financial and service delivery aspects of these complex sectors; develop an audit approach for carrying out the audits; and train audit staff. We will develop a methodology for meeting new audit requirements for the health plan. We will also have a particular interest in the performance reporting of these new entities. Establishing a clear and coherent performance framework at the outset will allow Parliament and the public to understand how the reforms have affected performance in these critical sectors. We will start preparing for audit engagements with the new water services entities. The final form of the water reforms will be clearer after amendments to the Water Services Entities Act 2022 are enacted. We will monitor the situation and determine the implications for the audits of the new entities and the audits of councils' 2024-34 long-term plans. Our audit approach will be designed to provide assurance that water infrastructure assets, and associated debt and any other liabilities, are transferred from councils to the new entities using appropriate accounting assumptions and approaches.

Schools' accountability

Schools' financial statements have become more complicated over time because of changes in financial reporting standards and the Ministry of Education's reporting requirements.

Schools need to be publicly accountable in a way that is cost-effective. In 2022/23, we worked with the Ministry of Education to prepare terms of reference that would help the Ministry develop a work programme on the future of schools' financial reporting. We are supporting the Ministry to identify, where appropriate, opportunities to improve schools' financial reporting, including the audit process.

Planned work: Supporting the Ministry of Education's review of school accountability

The Ministry of Education will lead the future of financial reporting work programme for schools, with us supporting the work. We will: participate, where appropriate, and lead projects in our areas of responsibility, including work related to realising audit efficiencies in school audits; manage the collection and sharing of any information held by school auditors as needed to support the programme; and be an active member, where appropriate, on the group set up by the Ministry of Education to advise on the work programme as it progresses.

Climate-related reporting

Reporting on climate-related information is evolving. It is also of deep public interest. We expect public organisations to report climate-related information that is relevant, reliable, and transparent. Our assurance work, where mandated, will further support this.

The Financial Markets Conduct Act 2013 requires entities that meet the "climate reporting entity" definition to prepare and report a Climate Statement.⁴ The first Climate Statements are required in 2024. The Financial Markets Conduct Act also requires, from 2025, the greenhouse gas metrics in those Climate Statements to be independently assured. Under this Act, the Auditor-General is the assurance provider for climate reporting entities that are public organisations.

We are preparing for the work we will need to do to audit Climate Statements. We will focus on our current obligations for auditing climate-related measures, such as greenhouse gas emissions, in a public organisation's audited performance information.

Planned work: Readiness for climate reporting by public organisations

In 2023/24, we will continue our climate-related reporting work to ensure that we are well positioned for the new climate reporting entity assurance requirements from 2025. We will also continue to complete high-quality audits of climate-related information in public organisations' performance information. This work includes: influencing regulators and those developing standards to make sure that climate reporting and assurance standards (and guidance) are fit for purpose for all entities, including public benefit entities; building capacity and capability so that we are able to carry out the required assurance work; preparing and delivering technical advice and guidance to support auditors; and ensuring high-quality audits for greenhouse gas emissions measures that are already being reported on by some public organisations in their audited performance information.

Audit operations

Our system for managing our annual audit portfolio and communicating with our appointed auditors has not kept up with our changing needs. To support the effective allocation and management of our annual audits, this system will be replaced in 2023/24.

Planned work: Audit contract management system upgrade

In 2023/24, we will be implementing new technology for managing our annual audit portfolio and communicating with appointed auditors. This work includes: completing the development and user acceptance testing for the new system; developing training and practice aid materials for users to ensure that the roll-out of the new system is successful; and migrating the data from the old systems to the new system.

Our auditors charge audit fees to public organisations. Those fees must be reasonable and cover the full scope of a public sector audit. Typically, fees are negotiated for a three-year period, with different sectors due for negotiation each year.

Planned work: Audit fee reviews of key sectors

We will be carrying out detailed analysis to ensure that audit fees are reasonable and reflect the work required to carry out audits. The contracts for auditing local government organisations are due for negotiation in 2023. We will also negotiate contracts for audits of councils' long-term plans in 2023/24. The contracts for school audits are due for negotiation in 2024. Later in 2024, we will start our analysis of central government audit fees, which are due for negotiation in 2025.

2. Positioning Audit New Zealand for the future

In 2022/23, we reviewed Audit New Zealand. The review looked at opportunities to ensure the long-term sustainability of Audit New Zealand and maximise the benefits of our investment in new technology for audit delivery and practice management.

In 2023/24, we will begin implementing the findings of this review.

In 2023/24, Audit New Zealand will also begin to replace its online audit management tool. This tool is used to record evidence that supports the audit report on public organisations' annual financial statements and performance information.

Over time, we expect the new audit tool to make aspects of audits easier to manage by providing a more efficient structure to perform audits, better workflow, and improved audit quality. It will also support more comprehensive risk assessments, which will improve audit efficiency. The tool should also be more secure, stable, and reliable than the current one. The replacement tool has been chosen and is being phased in.

Planned work: Focus on practice management and implementing the new audit tool

In 2023/24, we will make improvements to the way Audit New Zealand carries out its work with a focus on practice management alongside the implementation of a new audit tool. This work includes: transitioning audits carried out between 2023 to 2025 into the new tool while ensuring that audit quality is maintained; change management for our users to achieve a smooth and efficient transition to the new tool; implementing identified practice management and efficiency initiatives; and preparing to bring audit work back to Audit New Zealand by reallocating appropriate audits from other audit service providers.

Addressing deferred audit work

The effects of the Covid-19 pandemic have meant that some audits have been deferred in recent years. This has been unavoidable due to border restrictions and the shortage of auditors affecting the profession in New Zealand and worldwide.

In 2021/22, most audits of large public organisations were completed on time. In 2023/24, we intend to complete audits within normal statutory reporting deadlines (in line with audit completion rates before the Covid-19 pandemic).

Compared with other jurisdictions, this is a significant achievement. In 2022, the National Audit Office in the United Kingdom completed only 53% of its audits on time. It expects to return to pre-pandemic time frames in mid-2024.

Border restrictions have been eased which has allowed audit firms to recruit experienced auditors from overseas. We have also reallocated some audits across our audit service providers to ensure that there is sufficient capacity to deliver quality audits on a timely basis. Audit firms are also aiming to increase the continuity of audit staff, which will support audit efficiency over time.

Significant public sector reforms and severe weather events have also affected the ability of many public sector organisations to prepare for their audit. We will continue to work with affected public sector organisations to ensure that audits are carried out as efficiently as possible.

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4: See section 461O of the Financial Markets Conduct Act 2013 for the meaning of "climate reporting entity".