Part 6: Non-standard audit reports issued in 2010

Local government: Results of the 2009/10 audits.

6.1
In this Part, we report on the non-standard audit reports issued on the financial statements of entities within the local government portfolio of audits11 during the 2010 calendar year.

6.2
We explain why we discuss this information, and what a non-standard audit report is, before discussing the:

  • adverse opinions;
  • disclaimer of opinions;
  • except-for opinions; and
  • explanatory paragraphs.

Summary

6.3
We issued 712 audit reports within our local government portfolio during the 2010 calendar year, 92 of which were non-standard.

6.4
We have been increasing the use of explanatory paragraphs in our audit reports. An explanatory paragraph causes a non-standard audit report, but does not represent a qualification to our opinion. Rather, it draws the reader's attention to a matter of significance that, from our perspective, is particularly relevant to the information provided by the local government.

6.5
We will continue to monitor and report on entities where there is fundamental uncertainty over the "going concern" assumption used in the preparation of financial statements. The audit opinions of some of the local authority subsidiaries reflected this issue (see paragraphs 6.38 and 6.39).

Why we report this information

6.6
An audit report is addressed to the readers of an entity's financial statements. However, all public entities are ultimately accountable to Parliament for their use of public money and their use of any statutory powers or other authority given to them by Parliament. Therefore, we consider it important to draw Parliament's attention to the matters that give rise to non-standard audit reports.

6.7
In each case, the issues underlying a non-standard audit report are drawn to the attention of the entity and discussed with its governing body.

What is a non-standard audit report?

6.8
A non-standard audit report12 is one that contains:

  • a qualified opinion; and/or
  • an explanatory paragraph.

6.9
The introduction of New Zealand equivalents to International Auditing Standards will change the terminology used to describe types of non-standard audit reports. Future non-standard audit report articles will use the new terminology.

6.10
An auditor expresses a qualified opinion because of:

  • a disagreement between the auditor and the entity about the treatment or disclosure of a matter in the financial statements; or
  • a limitation in scope because the auditor has been unable to obtain enough appropriate evidence to support, and accordingly is unable to express, an opinion on the financial statements or a part of the financial statements.

6.11
There are three types of qualified opinion:

6.12
The auditor will include an explanatory paragraph (see paragraphs 6.30-6.31) in the audit report to draw attention to matters such as:

  • a breach of law; or
  • a fundamental uncertainty.

6.13
Auditors have to include an explanatory paragraph in the audit report in such a way that it cannot be mistaken for a qualified opinion.

6.14
Figure 5 outlines the decisions that an auditor has to make when considering the appropriate form of the audit report.

Figure 5
Deciding on the appropriate form of the audit report

Figure 5: Deciding on the appropriate form of the audit report.

Note: This flowchart is based on the requirements of the New Zealand Institute of Chartered Accountants Auditing Standard No. 702: The Audit Report on an Attest Audit. We have not based it on the International Standard on Auditing (New Zealand) because that standard applies to audits of financial statements for periods beginning on or after 1 October 2009.

Adverse opinions

6.15
An adverse opinion is the most serious type of non-standard audit report.

6.16
An adverse opinion is expressed when the auditor and the entity disagree about the treatment or disclosure of a matter in the financial statements, and, in the auditor's judgement, the treatment or disclosure is so material or pervasive that the financial statements are seriously misleading.

6.17
During 2010, we expressed an adverse opinion for four public entities:

  • the Canterbury Museum Trust Board;
  • Otago Museum Trust Board;
  • Southland Museum and Art Gallery Trust Board Incorporated (an entity associated with Gore District Council, Invercargill City Council, and Southland District Council); and
  • Pukaki Trust (for the years ended 30 June 2006, 30 June 2007, 30 June 2008, and 30 June 2009).

6.18
These entities have not recognised their collection assets or the associated depreciation expense in their financial statements. This is a breach of financial reporting standards. For a number of years, these entities have expressed concern with assigning financial values and useful lives to collection assets that are intended to be maintained for hundreds of years. Because of their concerns, we do not anticipate any change to how the entities account for their collection assets.

6.19
The Appendix sets out the details of the adverse opinions.

Disclaimers of opinion

6.20
A disclaimer of opinion is expressed when the scope of an auditor's examination is limited, and the possible effect of that limitation is so material or pervasive that the auditor has not been able to obtain enough appropriate evidence to support an opinion on the financial statements. The auditor is accordingly unable to express an opinion on the financial statements or on part of it.

6.21
During 2010, we expressed a disclaimer of opinion for Ohingaiti Cemetery for the year ended 31 March 2004.

6.22
The qualified audit opinion expressed for Ohingaiti Cemetery was the result of the auditor not being able to verify that revenue and payments recorded in the statement of accounts were properly incurred or correctly classified.

6.23
We note that some Cemetery Trusts have received an except-for opinion because the auditor could verify only some aspects of their statements of accounts. Many cemetery trustees are in arrears in preparing their annual statements of accounts. Because of this, audit reports have not been issued, which is a concern – there is no assurance that funds held for managing cemeteries are correctly accounted for.

6.24
The Appendix sets out the details of the disclaimer of opinion.

Except-for opinions

6.25
An except-for opinion is expressed when the auditor reaches one or both of the following conclusions:

  • The possible effect of a limitation in the scope of the auditor's examination is (or may be) material but is not significant enough to require a disclaimer of opinion. The opinion is qualified by using the words "except for the effects of any adjustments that might have been found necessary" had the limitation not affected the evidence available to the auditor.
  • The effect of the treatment or disclosure of a matter with which the auditor disagrees is (or may be) material but is not, in the auditor's judgement, significant enough to require an adverse opinion. The opinion is qualified by using the words "except for the effects of" the matter giving rise to the disagreement.

6.26
An except-for opinion is also expressed when the auditor concludes that a breach of statutory obligations has occurred and that the breach is material to the reader's understanding of the financial statements. An example of this is where a local authority subsidiary has breached the requirements of the Local Government Act 2002 because it has not prepared a statement of intent. The subsidiary is therefore unable to prepare performance information that reflects its achievements measured against performance targets.

6.27
During 2010, we expressed except-for opinions on the financial statements or performance information of the following public entities:

  • Carterton District Council;
  • Grey District Council;
  • South Wairarapa District Council;
  • Invercargill City Council;
  • Invercargill City Holdings Limited and group (a subsidiary of Invercargill City Council);
  • Sarjeant Gallery Trust Board;
  • Chatham Islands Electricity Limited;
  • Chatham Islands Management Limited;
  • Te Kauwhata Licensing Trust;
  • Ruakaka Reserve Board (three years ended 30 June 2006, 30 June 2007, and 30 June 2008);
  • East Otago Community Sports and Cultural Centre Trust (a trust controlled by Dunedin City Council);
  • Blackstone Hill Cemetery Trust (three years ended 31 March 2007, 31 March 2008, and 31 March 2009);
  • Coates Memorial Church Board (three years ended 30 June 2006, 30 June 2007, and 30 June 2008);
  • Tauranga City Investments Limited and group (a subsidiary of Tauranga City Council);
  • Tauranga City Aquatics Limited (a subsidiary of Tauranga City Council);
  • Tauranga City Venues Limited (a subsidiary of Tauranga City Council);
  • Waipu Cove Reserve Board (three years ended 30 June 2006, 30 June 2007, and 30 June 2008);
  • Ohingaiti Cemetery (three years ended 31 March 2005, 31 March 2006, and 31 March 2007);
  • Mangungu Cemetery;
  • Papakaio Cemetery Trustees;
  • Dunedin (New Zealand) Masters Games Trust (a trust controlled by Dunedin City Council);
  • Crops for Southland Incorporated Society (an entity associated with Gore District Council, Invercargill City Council, and Southland District Council) (two years ended 30 June 2009 and 30 June 2010);
  • Independent Roadmarkers Taranaki Limited (a subsidiary of Waitomo District Council);
  • Mackenzie Tourism and Development Trust (a trust controlled by Mackenzie District Council);
  • Newtons Coachways (1993) Limited (a subsidiary of Dunedin City Council);
  • Safer Papakura Trust (a trust controlled by the former Papakura District Council);
  • Titanium Park Joint Venture (a joint venture associated with Hamilton City Council, Waipa District Council, Waikato District Council, Matamata-Piako District Council, and Otorohanga District Council);
  • Titanium Park Limited (a company associated with Hamilton City Council, Waipa District Council, Waikato District Council, Matamata-Piako District Council, and Otorohanga District Council); and
  • Whangarei District Council Mayoral Disaster Relief Fund Trust (a trust controlled by Whangarei District Council) (two years ended 30 June 2008 and 30 June 2009).

6.28
The except-for opinions expressed for Carterton, Grey, and South Wairarapa District Councils reflected a limitation on the audit of performance information. The auditor was not able to obtain enough audit evidence to support aspects of the actual service performance for the year. We discuss our work on service performance reporting by local authorities in Article 4 in Section 2.

6.29
The Appendix sets out the details of the except-for opinions. In some cases, the audit opinion was qualified for more than one reason.

Explanatory paragraphs

6.30
In certain circumstances, it may be appropriate for the auditor to include additional comments in the audit report. The auditor draws attention to a matter that they consider relevant to a reader's proper understanding of an entity's financial statements or service performance information through an explanatory paragraph.

6.31
For example, an explanatory paragraph could draw attention to an entity having breached its statutory obligations for matters that may affect or influence a reader's understanding of the entity's financial statements. In this situation, the audit report would normally draw attention to the breach only if the entity had not clearly disclosed the breach in its financial statements.

6.32
During 2010, we used nine main types of explanatory paragraphs for entities within the local government portfolio.

6.33
The first type of explanatory paragraph related to the reporting of performance information for the current year against an appropriately revised performance framework, compared to the framework in the 2009-19 long-term council community plan that contained a qualified opinion. The audit opinions for the Central Otago District Council and Tararua District Council included such explanatory paragraphs.

6.34
The second type of explanatory paragraph related to disclosures about the new local government structure for the Auckland region. The audit opinions for North Shore Events Centre Trust Board and Events Centre Enterprises (entities controlled by North Shore City Council) included such explanatory paragraphs.

6.35
The third type of explanatory paragraph related to serious financial difficulties faced by the entity. The audit opinion for Waitomo District Council and group included such an explanatory paragraph.

6.36
The fourth type of explanatory paragraph related to the requirement for additional financing to complete a stadium redevelopment. The audit opinion for Eden Park Trust Board included such an explanatory paragraph.

6.37
The fifth type of explanatory paragraph related to a provision recognised by a Board for unseen repairs and maintenance that did not meet the definition of a liability but that was not material to the financial statements as a whole. The audit opinion for South Port New Zealand Limited and group (a subsidiary of Environment Southland) included such an explanatory paragraph.

6.38
The sixth type of explanatory paragraph related to fundamental uncertainty about the validity of the "going concern" assumption. The following entities' audit reports included such an explanatory paragraph:

  • TDC Holdings Limited and group (a subsidiary of Tararua District Council);
  • Infracon Limited (a subsidiary of Tararua District Council and an entity in which Central Hawke's Bay District Council has a minority interest);
  • Central Plains Water Trust (a trust established by Selwyn District Council and Christchurch City Council);
  • Ferguson Brothers Limited (a subsidiary of Selwyn District Council);
  • Inframax Construction Limited (a subsidiary of Waitomo District Council);
  • St James Theatre Charitable Trust (a subsidiary of Wellington City Council); and
  • St James Theatre Limited (a subsidiary of Wellington City Council).

6.39
These local authority subsidiaries have an effect on their shareholder in that local authorities often need to provide them with financial support. In some instances, providing financial support can affect a local authority's funding decisions about other services. In the longer term, this can affect the level of service that a local authority can provide to its community.

6.40
The seventh type of explanatory paragraph related to the "going concern" assumption being appropriately used to prepare the financial statements because the entity was able to levy members to cover shortfalls in equity. The audit opinion for New Zealand Mutual Liability Riskpool included such an explanatory paragraph.

6.41
The eighth type of explanatory paragraph related to the "going concern" assumption being appropriately not used because entities were disestablished or expected to be disestablished in the near future. The following entities' audit reports included such an explanatory paragraph:

  • Hurunui Holdings Limited (a subsidiary of Hurunui District Council);
  • Forever Beech Limited;
  • Forever Holdings Limited;
  • Mana Tavern Limited;
  • KB Irrigation Limited (a subsidiary of Selwyn District Council);
  • Selwyn Plantation Board Limited (a subsidiary of Selwyn District Council);
  • Paragon Oil Limited;
  • Port Westland Limited (two years ended 30 June 2008 and 30 June 2009);
  • Puhoi Cemetery Board (three years ended 31 March 2007, 31 March 2008, and 31 March 2009);
  • Rangitikei Mayoral Relief Trust (a trust controlled by Rangitikei District Council);
  • Eastern Bay of Plenty Mayoral Disaster Relief Fund Trust;
  • Tauranga Moana Heritage Trust (a trust controlled by Tauranga City Council);
  • Manukau City Council Sinking Fund Commissioners; and
  • Tauranga City Council Sinking Fund Commissioners.

6.42
The ninth type of explanatory paragraph related to breaches of statutory obligations that were not disclosed by the entities themselves in their financial statements. The following entities' audit reports included such explanatory paragraphs:

  • Greater Wellington Rail Limited (a subsidiary of Greater Wellington Regional Council);
  • Hamilton Properties Limited (a subsidiary of Hamilton City Council);
  • Port Investments Limited and group (a subsidiary of Greater Wellington Regional Council);
  • Pringle House Limited (a subsidiary of Greater Wellington Regional Council);
  • Yarrow Stadium Trust (a trust controlled by New Plymouth District Council);
  • Titanium Park Limited (a company associated with Hamilton City Council, Waipa District Council, Waikato District Council, Matamata-Piako District Council, and Otorohanga District Council);
  • The North Shore Domain and North Harbour Stadium Trust Board (a trust controlled by North Shore City Council);
  • Whakatane Airport Authority (a joint venture associated with Whakatane District Council); and
  • Mangere Cemetery Board.

6.43
The Appendix contains more information about the explanatory paragraphs that were included in audit reports.

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