Part 3: Non-standard Audit Reports Issued

Central government: results of the 2002-03 audits.

Why are we reporting this information?
What is a non-standard audit report?
Summary of the non-standard audit reports issued

3.1
Last year, we reported on the non-standard audit reports issued on the annual financial reports of entities that are part of the Crown reporting entity, and other public entities not within the local government portfolio. We have not this year named the public entities for which we issued a non-standard audit report, but it is our intention to do so next year.

3.2
This article covers non-standard audit reports issued during the period 1 July 2002 to 31 March 2004, and outlines the nature of those reports.

Why Are We Reporting This Information?

3.3
An audit report is addressed to the readers of an entity's financial report. However, all public entities are in one sense or another creatures of statute and, therefore, are also accountable to Parliament. We consider it important to draw Parliament's attention to the range of matters that give rise to non-standard audit reports.

3.4
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?

3.5
A non-standard audit report¹ is one that contains:

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

3.6
The auditor expresses a qualified audit opinion because of a disagreement or a limitation on scope. The type of opinion will be either an "adverse" opinion (see paragraphs 3.09-3.10), or a "disclaimer of opinion" (see paragraph 3.11), or an "except-for" opinion (see paragraph 3.12).

3.7
The auditor will include an explanatory paragraph (see paragraphs 3.13-3.14) in the audit report in order to draw attention to:

a breach of law; or
a fundamental uncertainty.

3.8
An explanatory paragraph is included in the audit report in such a way that it cannot be mistaken for a qualification of the opinion.

"Adverse" Opinion

3.9
An "adverse" opinion is expressed when there is disagreement between the auditor and the entity about the treatment or disclosure of a matter in the financial report and, in the auditor's judgement, the treatment or disclosure is so material or pervasive that the report is seriously misleading.

3.10
Expression of an "adverse" opinion represents the most serious type of non-standard audit report.

"Disclaimer of Opinion"

3.11
A "disclaimer of opinion" is expressed when the possible effect of a limitation on the scope of the auditor's examination is so material or pervasive that the auditor has not been able to obtain sufficient evidence to support, and accordingly is unable to express, an opinion on the financial report.

"Except-For" Opinion

3.12
An "except-for" opinion is expressed when the auditor concludes that either:

the possible effect of a limitation on the scope of the auditor's examination is, or may be, material but is not so significant as to require a "disclaimer of opinion" in which case 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; or
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, so significant as to require an "adverse" opinion in which case the opinion is qualified by using the words "except for the effects of" the matter giving rise to the disagreement.

Explanatory Paragraph

3.13
In certain circumstances, it may be appropriate for the auditor to include in the audit report additional comment, by way of an explanatory paragraph, to draw attention to a matter that is regarded as relevant to a proper understanding of the basis of opinion on the financial report.

3.14
For example, it could be relevant to draw attention to the entity having breached its statutory obligations, or to a fundamental uncertainty which might make the going concern assumption inappropriate.

Summary of the Non-Standard Audit Reports Issued

The following table outlines the number and nature of non-standard audit reports issued during the period 1 July 2002 to 31 March 2004.

"Adverse" Opinions

Class of Entity	No. of Entities	Reason for Opinion
State-owned Enterprise	1²	We disagreed with the accounting treatment of provisions for claims and litigation relating to previous operations of the business. These provisions did not constitute a liability and were departures from generally accepted accounting practice.
Â	Â	We disagreed with the going concern basis being used to prepare the financial statements because a decision had been made to close the main operating activity of a subsidiary entity. We also reported that had the going concern assumption been appropriate, the financial statements would have fairly reflected the financial position of the entity and the results of its operations.
Â	Â	We disagreed with the going concern basis being used to prepare the financial statements because a decision had been made to close the main operating activity of the entity. We also reported that, had the going concern assumption been appropriate, the financial statements would have fairly reflected the financial position of the entity and the results of its operations.
Â	Â	We disagreed with the going concern basis being used to prepare the financial report because the entity was unable to continue as a going concern without continuing financial support from its parent entity, and the parent entity had not committed itself to providing this support.

"Full Disclaimers of Opinion"

Class of Entity	No. of Entities	Reason for Opinion
Education - University and Wananga Subsidiary	1	We were unable to form an opinion on whether the financial statements were fairly stated because there was no reliable financial information about the financial performance or financial position of the entity's associate.

"Partial Disclaimers of Opinion"

Class of Entity	No. of Entities	Reason for Opinion
Statutory Body Subsidiary	23	We were unable to form an opinion as to whether the Statement of Financial Performance was fairly stated because the financial statements of the entity had not previously been audited. The Statement of Financial Position, in our opinion, was fairly stated.
Statutory Body Subsidiary	6	We were unable to form an opinion as to whether the Statement of Financial Performance was fairly stated because the financial statements of the entity had not previously been audited. The Statement of Financial Position, in our opinion, was fairly stated. In addition, we drew attention to uncertainties surrounding the going concern assumption. The validity of the going concern assumption was dependent on the continued financial support of the parent entity.

"Except-For" Opinions

Class of Entity	No. of Entities	Reason for Opinion
Government Department	1	We disagreed with the Department's non recognition of its land holdings on behalf of the Crown and any associated liabilities in its non-departmental schedules. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment (FRS-3) and Financial Reporting Standard No. 15: Provisions, Contingent Liabilities and Contingent Assets.
Government Department	1³	We disagreed with the Department's valuation of visitor assets, as the valuation did not take into account the effect of removal and/or reduction in service level of these assets on their remaining lives and rates of depreciation. In addition, the Department did not recognise fencing assets and the associated depreciation expense and capital charge in the financial statements, as required by FRS-3.
Health - District Health Board	1	We disagreed with the Board's valuation of its buildings because the revaluation was not at component level as required by FRS-3.
Health - District Health Board Subsidiary	2⁴	We were unable to verify revenue from donations because of limited control over those revenues.
Health - Health Miscellaneous	1	We were unable to verify revenue from donations because of limited control over those revenues.
Māori Trust Board	1⁵	The Board did not consolidate the results of operations and cashflows or financial position of its subsidiary. This was a departure from Statement of Accounting Practice No. 8: Accounting for Business Combinations.
Māori Trust Board	1⁶	We were unable to obtain confirmation of the valuation of an investment.
Māori Trust Board Subsidiary⁷	2	We disagreed with the accounting treatment of a provision for screening and immunisation services. The provision did not constitute a liability and was a departure from generally accepted accounting practice.
Education - University and Wananga Subsidiary	1	We were unable to verify liquor revenue because of limited control over the receipt of this revenue.
Education - Rural Education Activities Programme (REAP)	1	We were unable to obtain independent confirmation or sufficient audit evidence to satisfy ourselves as to the accuracy of the figures presented in the Statement of Service Performance.
Education - REAP	1	We were unable to locate some of the accounting records, and some funds were misappropriated during the year. As a result, we were unable to establish with certainty the amount of the misappropriated funds, and were unable to obtain sufficient evidence to substantiate certain revenue items.
Education - REAP	1	The Executive Committee did not provide budgeted figures in the Statement of Financial Position (breaching a requirement of the Education Act 1989).
Education - Other Crown Entity	1	The entity had not completed a Statement of Intent for the year, as required by the Public Finance Act 1989. As there were no formal performance targets, we were unable to assess the entity's service performance.
Education - Miscellaneous	1⁸	We disagreed with the valuation of certain land. The valuation was not in accordance with Statement of Standard Accounting Practice No. 17: Accounting for Investment Properties and Properties Intended for Sale, which requires investment property to be valued at net current value.
Statutory Body	1	We were unable to verify revenues from door-to-door collections because of limited controls over those revenues.
Government Department	2⁹	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Education - Polytechnic	1¹⁰	We drew attention to uncertainties surrounding the going concern assumption. The validity of the going concern assumption was dependent on the successful conclusion of the Council's ongoing negotiations with its banker for borrowing.
Education - Polytechnic	1¹¹	We drew attention to the fact that the going concern assumption depended on the continuing financial support of the Crown.
Education - Polytechnic	1	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.* In addition, the Council had not complied with the State Sector Act 1988 by not obtaining concurrence from the State Services Commissioner to pay a lump sum payment to the Chief Executive Officer. In our opinion, this payment was unlawful.
Education - College of Education	1	We highlighted that the validity of the going concern assumption depended on the nature of a proposal for the College to amalgamate with another TEI.
Statutory Body	1¹²	We drew attention to the uncertainty about the future status of the entity.
Statutory Body	1	We drew attention to the uncertainty about the future status of the entity. The validity of the going concern assumption depended on both the potential outcome of litigation and the potential dissolution of the entity, which are both fundamental uncertainties.
Crown Entity	3¹³	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Crown Entity - Subsidiary	1	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Health - District Health Board Subsidiary	5¹⁴	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Education - Polytechnic	1	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Education - Polytechnic Subsidiary	2	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Education - Other Crown Entity	3¹⁵	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Education - Miscellaneous	1	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Statutory Body	1	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*
Producer Board	2	We drew attention to the fact that the going concern basis had not been used in preparing the financial report.*

*Justified, because in each case the entity was ceasing to exist.

1: A non-standard audit report is issued in accordance with the Institute of Chartered Accountants of New Zealand Auditing Standard No. 702: The Audit Report on an Attest Audit (AS-702).

2: For financial reports for two years.

3: For financial reports for two years. The qualification for the second year related only to the comparative information shown.

4: In one case, for financial reports for two years.

5: For financial reports for three years.

6: For financial reports for two years.

7: Subsidiaries of Māori Trust Boards are not public entities under the Public Audit Act 2001. In this case, the Auditor-General accepted appointment as the entity's auditor under section 19 of the Act.