Auditor-General s Auditing Standards 2017

Transcription

1 B.28(AS) Auditor-General s Auditing Standards 2017 Presented to the House of Representatives under section 23(1) of the Public Audit Act 2001 March 2017 ISBN

2 Preface Section 23(1) of the Public Audit Act 2001 requires me as Auditor-General to publish (by way of a report to the House of Representatives) the auditing standards that I apply (or intend to apply) to the conduct of audits and inquiries and the provision of other auditing services under Part 3 of the Act. Section 23(2) of the Act requires me to publish those standards at least once every three years. I introduce the 2017 edition of the Auditor-General s Auditing Standards with a discussion about the role of the Auditor-General and the special nature of public sector auditing. Martin Matthews Controller and Auditor-General 23 March

3 Contents Page 1 The Auditor-General Public sector auditing About the Auditor-General s Auditing Standards 3-8 Figures 1 Relationship between the Auditor-General s Auditing Standards and the XRB s professional, ethical, auditing and assurance standards Relationship between the applicable XRB standards, and the Auditor-General s Auditing Standards, and the provisions of the Public Audit Act The Auditor-General s Auditing Standards

4 1 The Auditor-General In New Zealand, Parliament authorises all government spending and is the source of the statutory powers that public entities have. Public sector organisations are therefore accountable to Parliament for their use of the public resources and powers that Parliament gives them. As part of this accountability, Parliament seeks assurance from the Auditor- General that public entities are operating and accounting for their performance in the way Parliament intended. It is not the role of the Auditor-General to question the policies of the Government or local authorities. Under the Public Audit Act 2001, the Auditor-General is the auditor of all public entities, which includes the Crown, government departments, local authorities, and statutory boards and other public bodies. In carrying out audit and assurance work, the Auditor-General seeks the following outcome: The audit and assurance work carried out on behalf of the Auditor-General improves the performance of, and the public s trust in, the public sector. The Auditor-General s role is to give Parliament and New Zealanders confidence that the public sector is effective, efficient and accountable. To be effective and credible in this role, the Auditor-General must be independent of executive government. To ensure independence: the Auditor-General is appointed by the Governor-General on the recommendation of the House of Representatives; the Auditor-General reports directly to the House of Representatives (and has the power to report to anyone else); the Auditor-General s salary is payable under a permanent authority from Parliament and does not require the approval of the Government; and the Auditor-General makes requests for funding directly to the House of Representatives (rather than through the Executive) after which the House recommends the sum required to the Governor-General for inclusion in an Appropriation Bill. 1 For more information about the role of the Auditor-General, and the type of work they do, see our publication About the Auditor-General at oag.govt.nz 1 Section 26E, Public Finance Act

5 2 Public sector auditing In seeking to achieve the outcome of improving the performance of, and the public s trust in, the public sector, the Auditor-General carries out a range of work. A lot of this work is designed to give assurance that public entities are presenting fairly the results of their activities in their annual reports. Other work is designed to show whether: - public entities are carrying out their activities effectively and efficiently; - public entities are complying with their statutory obligations; - waste is occurring, or is likely to occur in the future, as a consequence of any act or omission of a public entity; - there is indication of, or appearance of, a lack of probity as a result of any act or omission by a public entity or by one or more of its members, office holders, and employees; and/or - there is indication of, or appearance of, a lack of financial prudence as a result of any act or omission by a public entity or by one or more of its members, office holders, and employees. The routine audit processes that give effect to these matters are supplemented by: - other auditing services, which the Auditor-General may, with the agreement of a public entity, perform for that entity, being any services of a kind that it is reasonable and appropriate for an auditor to perform (under section 17 of the Public Audit Act 2001); and - inquiries, which the Auditor-General may carry out into any matter concerning a public entity s use of its resources (under section 18 of the Public Audit Act 2001). The appropriate identification, scoping, investigation, and reporting of audits, other auditing services, and inquiries is underpinned by the Auditor-General s Auditing Standards and is facilitated by various processes carried out within the Office of the Auditor-General and by Audit Service Providers on behalf of the Auditor-General. The main types of public sector audit The Public Audit Act identifies two main types of audit: - the financial report audit (sections 15 and 19); and - the performance audit (section 16). A financial report audit is an audit of the financial statements, accounts, and other information that a public entity is required to have audited by the Auditor-General. Some public entities are required to report on both their financial results and the measures that enable an 3-5

6 assessment to be made of their performance. Therefore, a financial report audit may include an audit of both financial and performance information. A performance audit is performed at the discretion of the Auditor-General. It can be performed in respect of one or more public entities, and can examine matters of: - effectiveness and efficiency; - compliance with statutory obligations; - waste; - probity; and - financial prudence. For practical purposes, when we carry out a financial report audit, we also maintain an awareness of matters that may be relevant to our performance audit function. We have termed the combination of the financial report audit and maintaining an awareness of performance audit matters as the annual audit. An annual audit, therefore, aims to report whether a public entity s financial statements, performance information, and any other information that is required to be audited: - complies with a recognised framework, usually generally accepted accounting practice (GAAP); and - presents fairly, in all material respects, the entity s performance and position. Any performance audit matters identified during an annual audit may be reported to other parties, or publicly, at the discretion of the Auditor-General. From time to time, the Auditor-General may carry out other types of audit (through legislation or at the Auditor-General s discretion). An example of another type of public sector audit is the audits of long-term plans under the Local Government Act Reporting on the results of audits The Auditor-General has broad powers to report on matters arising from audits, and reports in a range of ways. For all annual audits, the audit report expresses our opinion on, and accompanies, the published financial and, where relevant, performance information for every public entity or public entity group. In addition, the knowledge we have from carrying out annual audits is used from time to time for reporting to Parliament more broadly on the results of audits for entities or groups of entities. We also use that knowledge to assist select committees with their scrutiny of public entities. 3-6

7 Independence Section 9 of the Public Audit Act 2001 says that the Auditor-General and, implicitly, all those who work for the Auditor-General must act independently in the performance of all the Auditor-General s functions, duties, and powers. Independence in this context includes the professional independence of an auditor, but also means: - being free from direction by the Government, any entities we audit, or Parliament; - having our own powers of access to information; and - being free to report on any matter arising out of the performance or exercise of his functions, duties, and powers, that the Auditor-General considers it appropriate to report on. To recognise the fundamental importance of independence, the Auditor-General has prepared an additional statement (over and above the independence requirements that apply to all assurance practitioners who are required to apply the External Reporting Board s professional, ethical, auditing, and assurance standards) that regulates the independence of auditors who carry out audits, inquiries, and other auditing services on the Auditor-General s behalf. 3-7

8 3 About the Auditor-General s Auditing Standards Basis of the Standards The Auditor-General s Auditing Standards (the Standards) are based on the standards issued by the External Reporting Board (the XRB) that apply to assurance practitioners who carry out audits in New Zealand. The Standards are aligned, as shown in Figure 1, to the: - professional and ethical standards issued by the XRB; and - auditing and assurance standards issued by the XRB. Meeting public sector needs However, the professional and ethical standards and the auditing and assurance standards of the XRB do not always take full account of the particular scope and nature of public sector audits (for example, there is currently no standard issued by the XRB on the audit of performance reports). Therefore, we create our own standards, which take two forms: - Auditor-General s Statements that add to professional, ethical, auditing, and assurance standards issued by the XRB on particular topics; and - Auditor-General s Standards that specify standards to be observed on topics for which there is no equivalent XRB standard. We create the Statements and Standards in consultation with Appointed Auditors and, where appropriate, other interested parties. How the Standards are applied We use the Standards when carrying out all annual audits and work other than the annual audit, under the Public Audit Act We require all staff and Appointed Auditors and their staff to comply with the relevant professional, ethical, auditing, and assurance standards issued by the XRB, and our own statements and specific standards which collectively form the Standards. The applicability of the Auditor-General s Auditing Standards varies depending on the type of work being carried out, as defined in the Act. Figure 2 shows how the Standards apply to each of the Auditor- General s four statutory functions as the auditor of all public entities. Figure 3 lists the individual standards and statements that we have created. 3-8

9 Figure 1: Relationship between the Auditor-General s Auditing Standards and the XRB s professional, ethical, auditing and assurance standards 3-9

10 Figure 2: Relationship between the applicable XRB standards, and the Auditor-General s Auditing Standards, and the provisions of the Public Audit Act 2001 Note: Y = The standard applies. N = The standard does not apply. XRB standards 2 Auditor- General s Statements or Standards Name of Statement or Standard Financial report audit Performance audit Other auditing services Inquiries NZAuASB Glossary of Terms (EG Au4) AG Glossary of Terms* PES 1 (Revised) 3 AG PES 1 * (Revised) PES 3 4 (Amended) AG PES 3* (Amended) Glossary of terms Y Y Y Y Code of Ethics for Assurance Practitioners Y Y Y Y Quality control Y Y Y Y - AG-5* - AG-6* ISA (NZ) 200 ISA (NZ) 210 AG ISA (NZ) 200 AG ISA (NZ) 210 ISA (NZ) Performance audits, other auditing services, and other work carried out by or on behalf of the Auditor-General Inquiries carried out by or on behalf of the Auditor- General Overall objective of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing (New Zealand) The terms of audit engagements Quality control for an audit of financial statements N Y Y N N N N Y Y N N N Y N N N Y N N N ISA (NZ) Audit documentation Y N N N ISA (NZ) 240 ISA (NZ) 250 ISA (NZ) 260 (Revised) AG ISA (NZ) 240 AG ISA (NZ) 250 AG ISA (NZ) 260 (Revised) ^ ISA (NZ) ISA (NZ) 300 ISA (NZ) 315 (Revised) AG ISA (NZ) 300 AG ISA (NZ) 315 (Revised) The auditor s responsibilities relating to fraud in an annual audit Consideration of laws and regulations Communication with those charged with governance Communicating deficiencies in internal control Y N N N Y N N N Y N N N Y N N N Planning the annual audit Y N N N Identifying and assessing the risks of material Y N N N 2 The XRB standards are available at 3 All individuals carrying out audits, inquiries, and other work on behalf of the Auditor-General are expected to comply with PES 1 (Revised). 4 The XRB standard, PES 3 (Amended), applies to the management of accounting firms and to individual professional assurance engagements carried out in New Zealand. We expect individuals and the firms to which they belong to comply with PES 3 (Amended) when carrying out audits and other work on behalf of the Auditor-General. 3-10

11 XRB standards 2 Auditor- General s Statements or Standards Name of Statement or Standard Financial report audit Performance audit Other auditing services Inquiries ISA (NZ) 320 ISA (NZ) 330 AG ISA (NZ) 320 AG ISA (NZ) 330 ISA (NZ) ISA (NZ) 450 AG ISA (NZ) 450 misstatement through understanding the entity and its environment Materiality in planning and performing an annual audit The auditor s responses to assessed risks Audit considerations relating to an entity using a service organisation Evaluation of misstatements identified during the annual audit Y N N N Y N N N Y N N N Y N N N ISA (NZ) Audit evidence Y N N N ISA (NZ) Audit evidence - specific considerations for selected items Y N N N ISA (NZ) External confirmations Y N N N ISA (NZ) Initial audit engagements - opening balances Y N N N ISA (NZ) Analytical procedures Y N N N ISA (NZ) Audit sampling Y N N N ISA (NZ) Auditing accounting estimates Y N N N ISA (NZ) Related parties Y N N N ISA (NZ) Subsequent events Y N N N ISA (NZ) 570 (Revised) ISA (NZ) 580 ISA (NZ) 600 ISA (NZ) 610 (Revised 2013) AG ISA (NZ) 570 (Revised) ^ AG ISA (NZ) 580 ^ AG ISA (NZ) 600 ISA (NZ) ISA (NZ) 700 (Revised) - AG ISA (NZ) 700 (Revised) ^ Going concern Y N N N Written representations Y N N N Special considerations - audits of group financial and performance information (including the work of component auditors) Using the work of internal auditors Using the work of an expert Forming an opinion and reporting on financial and performance information Y N N N Y N N N Y N N N Y N N N ISA (NZ) 701 ISA (NZ) 705 (Revised) ISA (NZ) 706 (Revised) AG ISA (NZ) 701 ^ AG ISA (NZ) 705 (Revised)^ AG ISA (NZ) 706 (Revised)^ Communicating key audit matters in the independent auditor s report Modifications to the opinion in the independent auditor s report Emphasis of matter and other matter paragraphs in the independent auditor s report Y N N N Y N N N Y N N N 3-11

12 XRB standards 2 Auditor- General s Statements or Standards Name of Statement or Standard Financial report audit Performance audit Other auditing services Inquiries ISA (NZ) Comparative information Y N N N ISA (NZ) 720 (Revised) ISA (NZ) 800 (Revised) ISA (NZ) 805 (Revised) AG ISA (NZ) 810 (Revised) AG ISA (NZ) 810 (Revised)^ The auditor's responsibilities relating to other information Audits of financial statements prepared in accordance with special purpose frameworks Audits of single financial statements and specific elements, accounts or items of a financial statement Engagements to report on summary financial and non-financial information Y N N N Y N N N Y N N N Y N N N - AG-1 Reporting to the OAG Y N N N - AG AG-3 AG-4 The appropriation audit and the controller function The auditor s approach to issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence The audit of performance reports Y N N N Y N N N Y N N N ^ For balance dates ending on or after 15 December * Applies from 1 April For audits of financial statements and/or performance information for reporting periods beginning on, or after, 1 April

13 Figure 3: The Auditor-General s Auditing Standards Note: The page numbers follow the numbering format used in the material provided to Appointed Auditors. Reference Title Page Glossary of terms * ^ Glossary of terms AG PES 1 (Revised) * ^ Code of Ethics for Assurance Practitioners AG PES 3 (Amended) * ^ Quality control AG-5 * Performance audits, other auditing services, and other work carried out by or on behalf of the Auditor-General AG-6 * Inquiries carried out by or on behalf of the Auditor-General AG ISA (NZ) 200 ^ Overall objective of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing (New Zealand) AG ISA (NZ) 210 ^ The terms of audit engagements AG ISA (NZ) 240 ^ The auditor s responsibilities relating to fraud in an annual audit AG ISA (NZ) 250 ^ Consideration of laws and regulations AG ISA (NZ) 260 (Revised) ^ Communication with those charged with governance AG ISA (NZ) 300 ^ Planning the annual audit AG ISA (NZ) 315 (Revised) ^ Identifying and assessing the risks of material misstatement through understanding the entity and its environment AG ISA (NZ) 320 ^ Materiality in planning and performing an annual audit AG ISA (NZ) 330 ^ The auditor s responses to assessed risks AG ISA (NZ) 450 ^ Evaluation of misstatements identified during the annual audit AG ISA (NZ) 570 (Revised) ^ Going concern AG ISA (NZ) 580 ^ Written representations AG ISA (NZ) 600 AG ISA (NZ) 700 (Revised) AG ISA (NZ) 701 ^ AG ISA (NZ) 705 (Revised) AG ISA (NZ) 706 AG ISA (NZ) 810 (Revised) ^ ^ ^ ^ ^ Special considerations Audits of group financial and performance information (including the work of component auditors) Forming an opinion and reporting on financial and nonfinancial information Communicating key audit matters in the independent auditor s report Modifications to the opinion in the independent auditor s report Emphasis of matter paragraphs and other matter paragraphs in the independent auditor s report Engagements to report on summary financial and nonfinancial information AG-1 ^ Reporting to the OAG AG-2 ^ The appropriation audit and the controller function AG-3 ^ The auditor s approach to issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence AG-4 ^ The audit of performance reports * The Auditor-General s standard or statement applies to engagements other than the annual audit. ^ The Auditor-General s standard or statement applies to the annual audit. 3-13

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130 AG ISA (NZ) 240 Fraud AG ISA (NZ) 240 THE AUDITOR-GENERAL S STATEMENT ON THE AUDITOR S RESPONSIBILITIES RELATING TO FRAUD IN AN ANNUAL AUDIT Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Evaluation of fraud risk factors Reporting fraud to the OAG Reporting fraud in the audit report Reporting fraud to third parties Release of information Application and other explanatory material Background Reporting fraud to the OAG Reporting fraud in the audit report Reporting fraud to third parties Appendix 1 Examples of fraud risk factors Issued 03/17 Office of the Auditor-General

131 AG ISA (NZ) 240 Fraud Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 240: The Auditor s Responsibilities Relating to Fraud in an Audit of Financial Statements (ISA (NZ) 240); 1 and (b) provides additional guidance to reflect the public sector perspective. 2. The Auditor-General s requirements and application material in this Statement specifically refer to fraud. For convenience, this Statement uses the term fraud as an umbrella term for the range of possible offences involving dishonesty or deception. For the avoidance of doubt, fraud includes bribery or corruption. This Statement adopts the definition of fraud set down in paragraph 11(a) of ISA (NZ) 240, which states: Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. 3. The question of whether a criminal offence has been committed may only be finally determined following a decision by a court of law. As a consequence, the Appointed Auditor will normally be concerned with suspected, rather than proven, fraud. 2 Application 4. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 240, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 240 exists, the requirements of this Statement shall prevail. 5. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. 2 This Statement contains background information on the scope of this Statement in paragraphs A1 to A13. Issued 03/17 Office of the Auditor-General

132 AG ISA (NZ) 240 Fraud 6. This Statement applies to all suspected or actual fraud that the Appointed Auditor becomes aware of, regardless of materiality and irrespective of whether they involve money or other property of the public entity (including intangible resources such as information and intellectual property). Objectives 7. The objectives of the Appointed Auditor are to: (a) identify and assess the risks of material misstatement of the financial and performance information due to fraud; (b) obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and (c) respond appropriately to fraud or suspected fraud during the annual audit, including: (i) assessing the adequacy of policies and procedures put in place by the public entity to prevent and detect fraud, and to report any deficiencies to management and those charged with governance; (ii) reporting suspected or actual fraud to the OAG; and (iii) assessing whether the public entity has responded appropriately to suspected or actual fraud in keeping with the expectations of this Statement, and to report any deficiencies to management and those charged with governance. Definitions 8. For the purpose of this Auditor-General s Auditing Statement, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Issued 03/17 Office of the Auditor-General

133 AG ISA (NZ) 240 Fraud Requirements Evaluation of fraud risk factors 9. The Appointed Auditor shall evaluate the public entity s fraud risk factors. The Appointed Auditor s evaluation shall take account of the results of procedures carried out in keeping with ISA (NZ) 240, together with a consideration of any fraud risk factors identified by the OAG in the audit brief, including examples of fraud risk factors relating to the public sector in Appendix The Appointed Auditor shall, as part of evaluating fraud risk factors, assess whether the public entity has proper arrangements for the prevention and detection of fraud and what the public entity would do if a suspected or actual fraud was discovered. 11. The Appointed Auditor shall report to management and those charged with governance on areas where the prevention and detection of fraud could be improved. Reporting fraud to the OAG 12. For all instances of suspected or actual fraud, the Appointed Auditor shall: (a) inform the OAG immediately that there is an indication that fraud may exist; (b) report to the OAG the details of the suspected fraud or actual fraud so that the OAG can identify any fraud risk factors; and (c) provide other relevant information. Immediately inform the OAG when there is an indication that fraud may exist 13. The Appointed Auditor shall immediately inform the OAG, through the fraud notification return in the Audit Status Database s external interface (the ASD Online), when they become aware of the possible existence of fraud. The contact person in the OAG for all fraud questions is the Assistant Auditor-General Accounting and Auditing Policy. (See paragraphs A14 - A15) 14. If, as a result of a misstatement resulting from suspected or actual fraud, the Appointed Auditor encounters exceptional circumstances that bring into question the Appointed Auditor s ability to continue performing the annual audit, the Appointed Auditor shall immediately advise the OAG. 15. Where a suspected or actual fraud is detected by the Appointed Auditor during the annual audit, the Appointed Auditor shall not communicate the existence of that Issued 03/17 Office of the Auditor-General

134 AG ISA (NZ) 240 Fraud suspected or actual fraud detected during the annual audit to the public entity without first informing and consulting the OAG. (See paragraph A16) 16. Where the Appointed Auditor becomes aware of a suspected or actual fraud through informants or a third party, the Appointed Auditor shall not communicate to the public entity the existence of that suspected or actual fraud without first informing and consulting the OAG. (See paragraph A17) 17. Where the Appointed Auditor is advised of a suspected or actual fraud by those charged with governance and/or management of a public entity, the Appointed Auditor shall carry out enquiries to ensure that the appropriate level of management or, where appropriate, those charged with governance have been, or will be, informed of the fraud. 18. Where the circumstances of the public entity make it impracticable for the Appointed Auditor to immediately inform the OAG of each suspected or actual fraud, the Appointed Auditor shall agree on alternative arrangements with the Assistant Auditor- General Accounting and Auditing Policy. (See paragraph A18) The Protected Disclosures Act If an employee approaches the Appointed Auditor to disclose a fraud under the Protected Disclosures Act 2000, the Appointed Auditor shall direct the employee to follow the public entity s internal procedure for protected disclosures, to the extent that the Protected Disclosures Act 2000 requires. If the employee does not follow the public entity s internal procedure, the employee s disclosure may not be protected under the Protected Disclosures Act If the Appointed Auditor is uncertain about whether the circumstances require the internal procedure to be followed, the Appointed Auditor shall seek advice from the OAG (Assistant Auditor-General Legal). (See paragraph A19) Reporting the details of fraud to the OAG 20. The Appointed Auditor shall keep the OAG informed of any significant developments relating to a suspected or actual fraud following the immediate notification to the OAG. 21. Once the details of suspected or actual fraud are known, the Appointed Auditor shall update the fraud notification return in the ASD Online by outlining the matters relevant Issued 03/17 Office of the Auditor-General

135 AG ISA (NZ) 240 Fraud to the particular circumstances of the suspected or actual fraud. The updated return will be used by the OAG to identify any fraud risk factors. Reporting fraud in the audit report 22. The Appointed Auditor shall obtain approval from the OAG before issuing an audit report that contains a modification, an emphasis of matter paragraph, or an other matter paragraph, as a consequence of a suspected or actual fraud. (See paragraph A20) Reporting fraud to third parties 23. Reporting of any suspected or actual fraud (or any other matters surrounding a fraud) to third parties shall be carried out by the OAG directly. (See paragraphs A21 - A22) Release of information 24. The Appointed Auditor shall not release information to third parties unless prior written approval is obtained from the OAG. Any enquiries or requests for information (including any audit-related correspondence, audit evidential working papers/files, associated documentation, or management reports) from such agencies as the Police, Serious Fraud Office, Inland Revenue Department, Privacy Commissioner, or Ombudsmen should be referred to the OAG, which will then advise on the course of action to be taken. *** Application and other explanatory material Background A1. This Statement recognises that: - the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management (outlined in paragraph 4 of ISA (NZ) 240); and - an Appointed Auditor carrying out an annual audit in keeping with the Auditor- General s Auditing Standards is responsible for obtaining reasonable assurance that the financial and performance information taken as a whole is free from material misstatement, whether caused by fraud or error. However, owing to the inherent limitations of an audit, there is an unavoidable risk that Issued 03/17 Office of the Auditor-General

136 AG ISA (NZ) 240 Fraud some material misstatements of the financial and performance information may not be detected, even though the audit is properly planned and performed in keeping with the Auditor-General s Auditing Standards. A2. Fraud, by its nature, always attracts a great deal of interest irrespective of the scale of the fraud. Invariably, questions are asked about how the fraud took place and whether the controls designed to stop fraudulent activity were operating effectively. In the public sector, the interest in fraud is heightened because public funds are involved, and because those individuals entrusted with public funds are expected to exhibit the highest standards of honesty and integrity. A3. The Auditor-General plays a role in assessing the risk of material fraud and, when a fraud does occur, considering whether appropriate standards of accountability and disclosure are applied by those responsible for public entity resources. A4. The OAG needs to be kept informed of all frauds involving the resources of public entities. There are a number of reasons for this, including: - to ensure that, where appropriate, the proper regulatory or enforcement authorities have been informed; - to ensure that the effect of the fraud on the financial and performance information is systematically assessed, and that there is appropriate reporting and disclosure of the fraud in the financial and performance information and, if necessary, the audit report; - understanding whether management and those charged with governance have given appropriate consideration to preventing further offending; - the need to be alerted to any limitations or circumstances that occur that could affect the Appointed Auditor s professional indemnity insurance over the period of the engagement, or circumstances that could lead to a potential claim against the Appointed Auditor or the Auditor-General; and - the general expectation that the OAG is informed of frauds committed in the public sector, which can reflect on the reputation of the Auditor-General. A5. The responsibility for the prevention and detection of fraud rests with public entity management through the implementation and continued operation of adequate internal control systems. A6. The Auditor-General expects that every public entity should formally address the matter of fraud, and formulate an appropriate policy on how to minimise it and, if it occurs, how it will be dealt with. Issued 03/17 Office of the Auditor-General

137 AG ISA (NZ) 240 Fraud A7. A fraud policy should include, as a minimum, these key elements: - A system for undertaking regular reviews of transactions, activities, or locations that may be susceptible to fraud. - Specifications for fully documenting what happened in a fraud and how it is to be managed. - The means for ensuring that every individual suspected of committing fraud (whether they are an employee or someone external to the entity) is dealt with consistently and fairly. - The principle that recovery of the lost money or other property will be pursued wherever practicable and appropriate. A8. Management of a public entity needs to be clear about its attitude towards fraud and make its employees and those who transact with the entity aware of that attitude, including an awareness of the consequences of transgressing. The only satisfactory way of communicating that attitude within the entity is by issuing a formal statement of policies and procedures to everyone in the entity. A9. Management and those charged with governance must also consider the public sector context when deciding how to respond to a suspected fraud. The perception of how fraud and other types of criminal or corrupt activity are dealt with in the public sector is an important part of maintaining the public s trust in the public sector. A10. In any context, a range of factors have to be balanced when deciding whether to refer suspected offending to law enforcement agencies. These may include the scale and nature of the wrongdoing, the likelihood of conviction, the time and cost of enforcement action relative to the wrongdoing, how long ago the events took place, the attitude and situation of the alleged offender, and any reparation that has been made. A11. In the public sector, additional weight also needs to be given to: - the need to maintain, and to be seen to maintain, the highest possible standards of honesty and integrity; - the fact that the public sector is entrusted with taxpayer and ratepayer funds; - the importance of transparency and accountability for the use of public funds; and - the risk of a perception that matters are being swept under the carpet. A12. In effect this means that the threshold for referring a matter to law enforcement agencies is likely to be lower than it might be in other organisations. It may not be sufficient for suspected fraud or other wrongdoing to be resolved through an Issued 03/17 Office of the Auditor-General

138 AG ISA (NZ) 240 Fraud employment settlement. It can be important for an independent and transparent decision to be made on whether prosecution is appropriate. A13. The Auditor-General s policy is that the management of public entities should consider carefully whether to refer a suspected fraud to law enforcement agencies in every case, taking into account their public sector context. If management or those charged with governance do not consider reporting a suspected fraud, the Auditor- General will consider doing so. Reporting fraud to the OAG (See paragraphs 13-18) Immediately inform the OAG when there is an indication that fraud may exist A14. When an Appointed Auditor becomes aware of a suspected or actual fraud involving the resources of a public entity, it is imperative that the OAG be notified immediately so that the OAG and the Appointed Auditor can agree on the course of action to be followed to ensure that the matter is appropriately addressed. A15. Once the OAG is informed of the possible existence of a fraud, the OAG and the Appointed Auditor (through discussion and mutual agreement) will: - consider the potential effect on the financial and performance information and, if the fraud could have a material effect, plan any appropriate modified or additional audit procedures; - establish the means by which the fraud is to be communicated to the public entity s management (if they are unaware of the fraud) and, if necessary, to any third parties (see paragraphs 41 to 43 of ISA (NZ) 240); - establish the accounting and disclosure requirements for the financial and performance information; and - agree on any additional information that cannot be included in the fraud notification return to be reported to the OAG. A16. If those persons ultimately responsible for the overall direction of the public entity may be implicated in the fraud, the OAG shall determine what reporting action will be taken. If legal advice is required, this will be sought directly by the OAG. (See paragraph A65 of ISA (NZ) 240) A17. In some circumstances, the Appointed Auditor may have no alternative but to inform the entity s management of a fraud detected during the annual audit before informing and consulting with the OAG. For example, this may be necessary if there is an immediate need to protect accounting records and associated information. Issued 03/17 Office of the Auditor-General

139 AG ISA (NZ) 240 Fraud A18. A few public entities experience a significant number of frauds of low monetary value. For example, public entities responsible for the payment of benefits regularly encounter situations where beneficiaries have deliberately misrepresented their circumstances to claim benefits to which they are not entitled. In this situation, it may be impracticable for the Appointed Auditor to inform the OAG each time they become aware of a new fraud. As a result, the OAG and the Appointed Auditor will agree a practical arrangement, so that they are kept informed of frauds, with the management of the public entity. The arrangements will only be agreed on a case-by-case basis. The Protected Disclosures Act 2000 A19. If the public entity does not have an internal procedure for protected disclosures, the Appointed Auditor should advise the employee to make the disclosure to the head of the public entity. If the employee believes that the head of the entity is or may be involved in the fraud, or that the disclosure of the fraud is urgent, or that other exceptional circumstances exist, the Appointed Auditor should contact the Assistant Auditor-General Legal for advice. Reporting fraud in the audit report (See paragraph 21) A20. If the Appointed Auditor is unable to confirm or dispel a suspicion that a fraud has occurred, the Appointed Auditor may need to seek legal advice before rendering any opinion on the financial and performance information for the annual audit. If legal advice is required, this will be sought directly by the OAG. Reporting fraud to third parties (See paragraphs 22-23) A21. The public entity should consider whether to report fraud to the appropriate law enforcement agency, although this will not limit the Auditor-General also considering whether to do so for the purpose of protecting the interests of the public. A22. If a third party requests information on a fraud or a suspected fraud, and it is necessary to obtain a legal opinion on whether it is appropriate to release that information, the OAG will obtain that legal opinion. (See paragraph 43 of ISA (NZ) 240) Issued 03/17 Office of the Auditor-General

140 AG ISA (NZ) 240 Fraud Appendix 1 Examples of fraud risk factors The fraud risk factors identified in this appendix are examples of such factors that may be faced by the Appointed Auditor in a broad range of situations. The examples below are in addition to the equivalent appendix in ISA (NZ) 240 and take into account public sector considerations. It is possible that one or more fraud risk factors may be present in any particular public entity. Further detail on sector-specific fraud risk factors may be summarised in applicable audit briefs. 1 Fraud may arise where management or those charged with governance use their position to obtain or procure a pecuniary benefit. Management or those charged with governance may over-ride internal controls, particularly where there is little or no segregation of duties or independent checks or authorisations and approvals of transactions. In this situation, there may not be adequate oversight over decisionmaking processes or full or adequate disclosure of related party transactions. A common example of this is where an entity makes a significant procurement that may involve contracting with related parties and where the related party relationship is deliberately concealed. 2 Fraud may arise where there is a misuse of information. An example may be a public sector employee who uses their knowledge of a benefits payments system to defeat or suppress internal controls to facilitate payments of fraudulent benefits to themselves or their family or friends. 3 Fraud may arise where an individual with authority to spend funds also establishes the budget for the activity. This creates the opportunity to make provision for fraudulent payments in the budget, and therefore enable fraudulent payments to be made during the period of the budget without arousing suspicion by way of actual expenditure exceeding the budget. 4 Fraud may arise where an individual with the authority to spend funds also has the authority to code payments in the accounting system. This creates the opportunity to allocate fraudulent payments to an under-utilised budgetary code and therefore reduce the risk of detection. Issued 03/17 Office of the Auditor-General

141 AG ISA (NZ) 240 Fraud 5 Fraud may arise where an individual has the authority to commit the public entity to discretionary expenditure, including travel, accommodation, or entertainment, and that discretionary expenditure provides personal benefits to the individual. Issued 03/17 Office of the Auditor-General

142 AG ISA (NZ) 250 Consideration of laws and regulations AG ISA (NZ) 250 THE AUDITOR-GENERAL S STATEMENT ON CONSIDERATION OF LAWS AND REGULATIONS 1 Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Determining those laws and regulations which, if breached, may be material Determining the audit approach to laws and regulations When non-compliance is identified Application and other explanatory material Determining the audit approach to laws and regulations When non-compliance is identified Appendix 1 Decision tree for determining the audit approach to laws and regulations Appendix 2 Decision tree for reporting non-compliance in the audit report This statement is under review and is likely to be updated later in Issued 03/17 Office of the Auditor-General

143 AG ISA (NZ) 250 Consideration of laws and regulations Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 250: Consideration of Laws and Regulations in an Audit of Financial Statements (ISA (NZ) 250); 2 and (b) establishes additional requirements and provides associated guidance to reflect the public sector perspective. 2. This Statement and the equivalent auditing standard on which it is based reflect the requirements for considering laws and regulations when carrying out an annual audit. Application 3. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 250, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 250 exists, the requirements of this Statement shall prevail. 4. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April There are specific issues of compliance with laws and regulations for the Appointed Auditor to consider when auditing appropriations in government departments (including planning, carrying out fieldwork, and reporting). For further guidance, the Appointed Auditor is to refer to AG-2: The appropriation audit and the controller function and/or the applicable audit brief. Objectives 6. The objectives of the Appointed Auditor are to: 2 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

144 AG ISA (NZ) 250 Consideration of laws and regulations (a) (b) (c) (d) (e) obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial and performance information; perform specified audit procedures to help identify instances of noncompliance with those laws and regulations that, if they are not complied with, do not have a direct effect on the determination of material amounts and disclosures in the financial and performance information, but are material because compliance may be fundamental to the operating aspects of the entity; perform specified audit procedures to help identify instances of noncompliance with those laws and regulations that do not have a direct effect on the determination of material amounts and disclosures in the financial and performance information and are not fundamental to the operating aspects of the entity, but which may still be material because the entity operates in the public sector; remain alert during the annual audit for any possible material non-compliance with other laws or regulations, although they may not have been originally identified as relevant during audit planning; and report appropriately on non-compliance with laws and regulations identified during the audit. Definitions 7. For the purpose of this Auditor-General s auditing statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Determining those laws and regulations which, if breached, may be material 8. The Appointed Auditor shall use their judgement when determining which laws and regulations may give rise to material non-compliance, in keeping with the objective in paragraph 6(c) of this Statement. As part of meeting the objective in paragraph 6(c), the Issued 03/17 Office of the Auditor-General

145 AG ISA (NZ) 250 Consideration of laws and regulations Appointed Auditor shall consider whether there is an instance or pattern of noncompliance with laws and regulations, which may be considered material if it: (a) undermines basic accountability arrangements (for example, non-compliance with reporting obligations, or fundamental weaknesses in internal control, or failure to keep proper accounting records); (b) is outside the statutory powers of the public entity; (c) represents a significant abuse or misuse of powers delegated by Parliament (for example, payments to management or those charged with governance in excess of authorities granted); (d) calls into question the probity of a major part or all of the public entity; (e) relates to an activity that could be of significant interest to the public; or (f) could be seen to disadvantage the public (for example, through actual or opportunity cost to the taxpayer or ratepayer). Determining the audit approach to laws and regulations (See paragraphs A1 - A2 and Appendix 1) 9. In the public sector the Appointed Auditor shall, as part of meeting the requirements of paragraph 12 of ISA (NZ) 250: (a) gain an understanding of any specific laws and regulations that apply to the public entity; (b) familiarise themselves with advice from the OAG, including the applicable audit brief; (c) maintain a general awareness of current events by monitoring: (i) the results of any Parliamentary scrutiny of the public entity or the sector in which it operates; (ii) the outcome of any reviews by government agencies; (iii) the outcome of any court proceedings; (iv) comments in the media; and (d) monitor the development of any new legislative requirements that are likely to affect the public entity. 10. The Appointed Auditor shall plan and perform audit procedures in keeping with paragraph 13 of ISA (NZ) 250 to obtain reasonable assurance that the entity has complied with the categories of laws and regulations specified in paragraph 6 (a) of this Statement. 11. The Appointed Auditor shall follow any advice from the OAG, including the applicable audit brief, when carrying out audit procedures relating to the categories of laws and regulations specified in paragraphs 6 (b) and (c) of this Statement. Where there is no Issued 03/17 Office of the Auditor-General

146 AG ISA (NZ) 250 Consideration of laws and regulations advice from the OAG, the Appointed Auditor shall, as a minimum, carry out the audit procedures in paragraph 14 of ISA (NZ) As part of obtaining an understanding of the legal and regulatory framework, in keeping with paragraph 9 above and paragraph 12 in ISA (NZ) 250, the following matters shall be documented in the audit working papers: (a) a description of the legal and regulatory framework applicable to the entity and the industry or sector in which it operates; (b) a description of how the entity complies with that framework; (c) the specific laws and regulations within each of the three categories of laws and regulations as specified in paragraphs 6(a), (b), and (c) of this Statement; and (d) the audit procedures that the auditor plans to perform to assess compliance with the specific laws and regulations within each of the three categories of laws and regulations as specified in paragraphs 6(a), (b), and (c) of this Statement. 13. In meeting the requirements of paragraph 15 of ISA (NZ) 250, the Appointed Auditor shall remain alert during the annual audit for any possible material non-compliance with other laws or regulations, although they may not have been originally identified as relevant during audit planning. When non-compliance is identified 14. The Appointed Auditor shall not provide opinions (in a legal sense) on a public entity s compliance with laws and regulations. Nothing in the Auditor-General s responsibility to consider laws and regulations in the annual audit, including references to certain laws and regulations disclosed in the audit report or the management letter, should be misconstrued as the auditor providing a legal opinion on the entity's compliance with relevant laws and regulations. (See paragraph A3) 15. The Appointed Auditor shall not report a public entity s non-compliance with laws and regulations to any responsible Minister or to Parliament. The OAG is responsible for making these decisions and shall consider factors such as the frequency or pattern of non-compliance, and the effects of non-compliance, when making its decision. Communication with any Minister about instances of material non-compliance with laws and regulations that arise during the year shall be done directly by the OAG, in consultation with the Appointed Auditor. Issued 03/17 Office of the Auditor-General

147 AG ISA (NZ) 250 Consideration of laws and regulations 16. If there is uncertainty about the nature of non-compliance with laws and regulations, the Appointed Auditor shall request and obtain the public entity s view, which may include any legal advice it has obtained, before consulting the OAG. Immediate reporting of certain types of non-compliance to the OAG 17. The Appointed Auditor shall immediately tell the OAG about any non-compliance with laws and regulations that: (a) is material, and for which the OAG has not provided guidance; (b) calls into question the ethics or behaviour of management and/or those charged with governance or where fraud is suspected; or (c) where management and/or those charged with governance are suspected of being involved in any deliberate non-compliance with a law or regulation. (Paragraphs A4 - A5) Reporting instances of non-compliance 18. The Appointed Auditor shall report instances of material non-compliance with laws and regulations that arise during the year to the appropriate level of management or those charged with governance as soon as the non-compliance comes to the Appointed Auditor s attention. 19. The Appointed Auditor shall immediately inform the appropriate level of management of any non-compliance that is of such a nature that it can be remedied or repaired (for example, illegal investments). This provides management with the opportunity to take prompt action to correct any non-compliance. 20. In addition to the reporting requirements of paragraph 22 of ISA (NZ) 250, the Appointed Auditor shall report in the management letter (to the appropriate level of management or those charged with governance) any concerns they have about the integrity of internal control or other deficiencies that affect the ability of the public entity to monitor its compliance with laws and regulations. 21. All instances of a public entity's non-compliance with laws and regulations identified during the annual audit shall be reported to the OAG in the document summarising the audit conclusions. (Paragraph A6) Issued 03/17 Office of the Auditor-General

148 AG ISA (NZ) 250 Consideration of laws and regulations Reporting non-compliance in the audit report The Appointed Auditor shall follow any directions issued by the OAG on reporting non-compliance in the audit report. 23. Non-compliance that has a pervasive effect on the financial and performance information 4 shall be referred by the Appointed Auditor to the OAG Accounting and Auditing Policy team. The OAG Accounting and Auditing Policy team may request the Appointed Auditor to prepare a submission to the Auditor-General s Opinions Review Committee (the ORC). 24. The Appointed Auditor shall follow any directions issued by the OAG covering how any non-compliance is to be reported in the audit report. 25. If the OAG has not issued any directions covering how the non-compliance is to be reported in the audit report, the Appointed Auditor shall consult the OAG Accounting and Auditing Policy team about the appropriate audit report to issue when they identify noncompliance in keeping with paragraph 6(b) to 6(d) of this Statement. *** Application and other explanatory material Determining the audit approach to laws and regulations (Paragraphs 9-13) A1. The nature and extent of audit procedures is to be determined by the Appointed Auditor, after considering the likelihood and the effect of non-compliance and any advice from the OAG, including the applicable audit brief. Types of audit procedures that might be considered include: - enquiring of management about any instances of non-compliance, or any new or unusual activities/transactions (for example, new ventures, tax-based or investment transactions) carried out during the year, and reviewing those activities/transactions; - reviewing minutes of management meetings or the public entity's internal compliance reports, as applicable; - reviewing systems and practices designed to monitor and report on compliance, or with compliance requirements embedded in them, and the adequacy of the 3 Appendix 2 is a decision tree for reporting non-compliance in the audit report. 4 In keeping with the objectives in paragraphs 6(a) and (b) in this statement and the requirements in AG ISA (NZ) 700 and AG ISA (NZ) 705. Issued 03/17 Office of the Auditor-General

149 AG ISA (NZ) 250 Consideration of laws and regulations public entity's policies and procedures governing compliance with relevant statutory obligations; - performing random or risk-based transaction tests that incorporate the element of checking for compliance with laws and regulations; and - performing substantive tests of particular laws and regulations (such as those laws and regulations specifying the determination of material amounts and disclosures in the financial and performance information). A2. Audit procedures may be substantive in nature or place reliance, where appropriate, on the systems and practices designed to control and monitor compliance, or on both. If a substantive approach is taken, Appointed Auditors should apply audit procedures that provide a reasonable opportunity of detecting instances of material non-compliance. However, the Appointed Auditor is not expected to review every transaction of the public entity to be satisfied that compliance with laws and regulations has occurred. Typically, substantive procedures will be directed to testing material year-end balances for the purposes of determining their fair presentation and whether they comply with those laws and regulations identified under paragraphs 6 (a), 6 (b) and 6 (c) where non-compliance may be material. For example, confirming whether an investment is lawful. If the focus is primarily on the systems and practices, audit procedures should be designed to assess the effectiveness of internal control, including the internal control environment, established by management to minimise the occurrence of noncompliance. When non-compliance is identified (Paragraphs 13-26) A3. The OAG, in consultation with the Appointed Auditor, may also write directly to the Chief Executive or governing body in certain circumstances when non-compliance is identified. Immediate reporting of certain non-compliance to the OAG A4. Assessment of non-compliance requires professional judgement and may need to be based on legal advice. If there is uncertainty about the fact of non-compliance with laws and regulations, the public entity should first be asked for its view, which may include reviewing any legal advice the entity has obtained. 5 The Appointed Auditor is to consider that advice against any existing guidance provided by the OAG. If the OAG has not 5 Note that the entity cannot be compelled to give Appointed Auditors or the OAG its legal advice. However, if an entity refuses to provide legal advice to the Appointed Auditor or to the OAG, this amounts to a limitation in scope and may result in a modification of the audit report. Issued 03/17 Office of the Auditor-General

150 AG ISA (NZ) 250 Consideration of laws and regulations provided any existing guidance, the Appointed Auditor should consult with the OAG. The OAG will then provide the Appointed Auditor with the necessary direction and will determine, as appropriate, the need to report the non-compliance to external parties. A5. The Appointed Auditor is required to immediately advise the OAG when management and/or those charged with governance are involved in non-compliance; this is so the OAG can lead any response to the requirements contained in paragraphs 24 and 28 of ISA (NZ) 250. Reporting instances of non-compliance to the OAG A6. Formal reports made to management on compliance with laws and regulations may be appended to the document summarising the audit conclusions. However, the essential action is to give the OAG an account of all non-compliance with laws and regulations identified at the same time that the audit report and the annual report are issued. Issued 03/17 Office of the Auditor-General

151 AG ISA (NZ) 250 Consideration of laws and regulations Appendix 1 Decision tree for determining the audit approach to laws and regulations START Has the OAG issued a specific policy or other guidance? Y Follow the specific policy or guidance. N Would the laws and regulations be generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial and performance information? (Para 6(a)) Y Obtain sufficient appropriate audit evidence regarding compliance. (Para 10) N Would the laws and regulations be material because compliance may be fundamental to the operating aspects of the entity? (Para 6(b)) Y Follow any advice from the OAG, including the applicable audit brief. As a minimum, perform audit procedures to help identify material instances of non-compliance. (Para 11) N Would the laws and regulations be material because the entity operates in the public sector? (Para 6(c)) Y Follow any advice from the OAG, including the applicable audit brief. As a minimum, perform audit procedures to help identify material instances of non-compliance. (Para 11) N Remain alert for any possible noncompliance with the laws and regulations that may be material. END Issued 03/17 Office of the Auditor-General

152 AG ISA (NZ) 250 Consideration of laws and regulations Appendix 2 Decision tree for reporting non-compliance in the audit report START Has the OAG provided direction on how the non-compliance is to be reported in the audit report? Y Follow the OAG's direction (Para 22) N END Is there any doubt about whether an instance of non-compliance should be included in the audit report? Y Consult the OAG (Para 25) N END Does the non-compliance have a direct effect on the determination of material amounts and disclosures in the financial and performance information? (Para 6(a)) Y N Is the non-compliance material because compliance may be fundamental to the operating aspects of the entity? (Para 6(b)) Y Does the non-compliance have a pervasive effect on the financial and performance information? Y Refer to the OAG Accounting and Auditing Policy team. Referral to the OAG Opinions Review Committee may be necessary. (Para 23) END N Is the non-compliance material because the entity operates in the public sector? (Para 6(c)) Y Follow any advice from the OAG, including the applicable audit brief. Otherwise refer to the OAG Accounting and Auditing Policy team. (Para 24) N Follow any advice from the OAG, including the applicable audit brief. Otherwise refer to the OAG Accounting and Auditing Policy team. (Para 24) END N END Has the entity disclosed the noncompliance in the financial and performance information? Y Follow any advice from the OAG, including the applicable audit brief. Otherwise refer to the OAG Accounting and Auditing Policy team. (Para 24) N END Follow any advice from the OAG, including the applicable audit brief. Otherwise refer to the OAG Accounting and Auditing Policy team. (Para 24) END Issued 03/17 Office of the Auditor-General

153 AG ISA (NZ) 260 (Revised) Communication with those charged with governance AG ISA (NZ) 260 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Requirement to prepare a written management letter Requirement to inform those charged with governance of all reports issued Precautions in respect of draft versions of the management letter Requests for access to versions of the management letter Application and other explanatory material Requirement to prepare a written management letter Precautions in respect of draft versions of the management letter Issued 03/17 Office of the Auditor-General

154 AG ISA (NZ) 260 (Revised) Communication with those charged with governance Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 260 (Revised): Communication with Those Charged with Governance (ISA (NZ) 260); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 260, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 260 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December Objectives 4. The objectives of the Appointed Auditor are to: (a) communicate clearly with those charged with governance the responsibilities of the Appointed Auditor in relation to the annual audit (including the aspects of auditing public sector entities) and an overview of the planned scope and timing of the annual audit; 2 (b) obtain from those charged with governance information relevant to the annual audit; 3 (c) provide those charged with governance with timely observations arising from the annual audit including areas for improving financial and other management systems; and 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. 2 This objective is consistent with the applicable objectives and requirements in AG ISA (NZ) 210: The terms of audit engagements. 3 This objective is consistent with the applicable objectives and requirements in AG ISA (NZ) 580: Written representations. Issued 03/17 Office of the Auditor-General

155 AG ISA (NZ) 260 (Revised) Communication with those charged with governance (d) Definitions promote effective two-way communication between the Appointed Auditor and those charged with governance. 5. For the purpose of this Auditor-General s Auditing Statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Requirement to prepare a written management letter 6. The Appointed Auditor shall personally communicate the significant matters arising from the audit in writing, to those charged with governance or, where authorised by those charged with governance, to the audit committee of the public entity. Where there are no significant matters to raise, the Appointed Auditor shall report that fact in writing to those charged with governance or the audit committee. (See paragraph A1) 7. The Appointed Auditor shall ensure that the management letter includes the date it is signed. Requirement to inform those charged with governance of all reports issued 8. Reports to those charged with governance or the audit committee of the public entity shall refer to the other reports issued by the Appointed Auditor to other persons or bodies within the public entity and the nature of the matters included in those reports. Precautions in respect of draft versions of the management letter 9. The Appointed Auditor shall mark as DRAFT each page of a draft version of the audit management letter. (See paragraph A2) 10. The Appointed Auditor shall ensure management and those charged with governance are aware of the importance of preserving the confidentiality of draft versions of the management letter. (See paragraphs A2 - A6) Issued 03/17 Office of the Auditor-General

156 AG ISA (NZ) 260 (Revised) Communication with those charged with governance Requests for access to versions of the management letter 11. The Appointed Auditor shall refer requests for any version of the management letter from a third party to the Assistant Auditor-General - Legal at the OAG. *** Application and other explanatory material Requirement to prepare a written management letter (See paragraph 6) A1. In many public entities, those charged with governance have a collective responsibility for governance. Those charged with governance may assign some of their responsibilities to an audit committee. In other public entities, such as government departments, there is no governing body as such, but there are other persons who fulfil the governance role (for example, the chief executive or a committee of management). Precautions in respect of draft versions of the management letter (See paragraphs 9-10) A2. Usually a draft management letter is issued when the Appointed Auditor considers it is appropriate to obtain comments from management before release of the management letter to those charged with governance. Draft versions of the management letter are a critical part of the audit process. By their nature, they may contain information that is factually inaccurate. It is therefore essential that each page of a draft version of the audit management letter is marked with the word DRAFT. A3. The Appointed auditor should advise management and those charged with governance that draft management letters are provided to them on a confidential basis to enable them to provide comment to the Appointed Auditor on whether the management letters are factually correct, and fair and balanced. The preservation of the confidentiality of draft management letters enables appropriate changes to be made in keeping with the principles of natural justice and also ensures that inaccurate or unfair information is not made public. The Appointed Auditor should also ensure that management and those charged with governance are aware that preserving the confidentiality of the draft management letters is important in the interests of ensuring open communication between the Appointed Auditor and management or those charged with governance. Issued 03/17 Office of the Auditor-General

157 AG ISA (NZ) 260 (Revised) Communication with those charged with governance A4. Where an entity is subject to the Official Information Act 1982 or the Local Government Official Information and Meetings Act 1987, any correspondence with that entity may be required to be released under those Acts, this can include draft and final management letters sent by the auditor. If the entity receives a request for release of such documents it is required to consider whether it is appropriate to release them taking into account the statutory requirements, including any applicable withholding grounds. The entity may consult the auditor about their views about whether the documents should be released. If this occurs, please contact the Assistant Auditor-General Legal for assistance. A5. The precautions about draft versions of the management letter apply to all management letters issued to individuals in a public entity irrespective of whether the individuals represent management or those charged with governance. Issued 03/17 Office of the Auditor-General

158 AG ISA (NZ) 300 Planning the annual audit AG ISA (NZ) 300 THE AUDITOR-GENERAL S STATEMENT ON PLANNING THE ANNUAL AUDIT Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Preliminary engagement activities Planning activities including the use of audit briefs Nature of the public entity s objectives to be taken into account in audit planning Application and Other Explanatory Material Planning activities including the use of audit briefs Nature of the public entity s objectives to be taken into account in audit planning Issued 03/17 Office of the Auditor-General

159 AG ISA (NZ) 300 Planning the annual audit Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 300: Planning an Audit of Financial Statements (ISA (NZ) 300); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 300, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 300 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Objectives 4. The objectives of the Appointed Auditor are to: (a) plan the annual audit so that it will be performed in accordance with the Auditor-General s Auditing Standards and in an effective and efficient manner; and (b) ensure that the audit plan takes account of the need for the auditor to maintain an awareness of whether the public entity is: (i) applying its resources effectively and efficiently; (ii) minimising waste; (iii) conducting its business with due regard to probity; and (iv) acting in a financially prudent manner. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

160 AG ISA (NZ) 300 Planning the annual audit Definitions 5. For the purpose of this Auditor-General s auditing statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Preliminary engagement activities 6. The Appointed Auditor shall take into account the acceptance and continuance procedures outlined in AG PES 3 (Amended) when complying with the requirements in paragraph 6(a) of ISA (NZ) 300. Planning activities including the use of audit briefs 7. The Appointed Auditor shall incorporate the requirements of the OAG, including information and instructions contained in the applicable audit brief, into their overall audit strategy and audit plan in meeting the requirements of paragraphs 8 and 9 of ISA (NZ) 300. (See paragraphs A1 - A5) 8. The Appointed Auditor shall consider the relevant public sector perspective when developing their overall audit strategy and audit plan in accordance with the requirements of paragraphs 8 and 9 in ISA (NZ) 300. Some of that perspective may be included in the following standards and statements: (a) AG-2: The appropriation audit and the controller function; (b) AG-3: The auditor s approach to issues of effectiveness and efficiency, waste and a lack of probity or financial prudence; (c) AG-4: The audit of performance reports; (d) AG ISA (NZ) 250: Consideration of laws and regulations; (e) AG ISA (NZ) 315: Identifying and assessing the risks of material misstatement through understanding the entity and its environment; or (f) AG ISA (NZ) 320: Materiality in planning and performing an annual audit. 9. The Appointed Auditor shall personally approve the overall audit strategy. Issued 03/17 Office of the Auditor-General

161 AG ISA (NZ) 300 Planning the annual audit Nature of the public entity s objectives to be taken into account in audit planning 10. Paragraphs 8 and 9 of ISA (NZ) 300 prescribe procedures to be performed in establishing the overall audit strategy and audit plan. In identifying the characteristics of the engagement that define its scope (as per paragraph 8(a) of ISA (NZ) 300), the Appointed Auditor shall establish the purpose of the public entity, in particular whether it primarily provides goods or services for community or social benefit or whether it has commercial objectives as its primary purpose. (See paragraphs A6 - A8) *** Application and Other Explanatory Material Planning activities including the use of audit briefs (See paragraph 7) A1. Although the Auditor-General is the auditor of every public entity under section 14(1) of the Public Audit Act 2001 (the Act), the Auditor-General is personally unable to plan every annual audit of every public entity. This is why the Auditor-General appoints auditors to carry out those annual audits. A2. The Auditor-General has approved the approach outlined in paragraphs A3 to A5 below to ensure that the expectations in the Act are incorporated into all planning activities carried out for every annual audit of every public entity. The approach is intended to ensure that the requirements of paragraphs 6 to 11 of ISA (NZ) 300 appropriately reflect the public sector perspective. A3. In the rare situation where the Auditor-General plans to sign the audit report, the Auditor-General will meet all of the requirements of paragraph 6 to 11 of ISA (NZ) 300, including approving the overall audit strategy. A4. In the most common situation, where an Appointed Auditor signs the audit report on behalf of the Auditor-General, the Appointed Auditor will meet the requirements of paragraphs 6 to 11 of ISA (NZ) 300 by incorporating the instructions of the OAG. The instructions of the OAG are normally provided to the Appointed Auditor in the form of an audit brief. A5. Each audit brief will be based on audit planning that is carried out by the OAG. Each audit brief may contain: Issued 03/17 Office of the Auditor-General

162 AG ISA (NZ) 300 Planning the annual audit - those factors identified by the OAG that would be significant in directing the audit team s effort, including specific instructions; or - those factors identified by the OAG that the Appointed Auditor should consider as part of understanding the entity and its environment, in keeping with the requirements of ISA (NZ) 315 and AG ISA (NZ) 315, including any general or specific guidance on the nature and purpose of public entities, and/or on any sensitivities or risks to be considered in designing the audit approach. Nature of the public entity s objectives to be taken into account in audit planning (See paragraph 10) A6. As a general rule, the purpose of public entities will be set out in any enabling legislation, or elaborated in other government, governing body, or internal policy statements, or founding documents. These documents will set out the fundamental objectives of the public entity, and also how it will be resourced to achieve these objectives. A7. The primary purpose of most public entities is the provision of goods and services, often called "public services". In these entities, the primary audit focus is on whether the entity has in fact provided the goods and services in keeping with Parliament's intentions. In this situation, the Appointed Auditor will need to consider targeting their audit effort to the expenditure streams and any associated performance information of the public entity. Most of these types of public entities are primarily funded by means of grants from taxpayers or ratepayers funds. A8. For those public entities that are self-funding (to a significant extent or totally) through trading activities, the audit focus may be more on the Statement of Financial Position, with secondary consideration of revenue and expenditure streams. Examples of these types of public entities are commonly referred to as the "commercial" sector, including State-owned enterprises and council-controlled trading organisations. Issued 03/17 Office of the Auditor-General

163 AG ISA (NZ) 315 (Revised) Understanding the entity and its environment AG ISA (NZ) 315 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Understanding the entity s internal control Appendix 1 Examples of conditions and events that may indicate risks of material misstatement in the financial and performance information Issued 03/17 Office of the Auditor-General

164 AG ISA (NZ) 315 (Revised) Understanding the entity and its environment Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 315 (Revised): Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment (ISA (NZ) 315); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 315, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 315 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Objectives 4. The objectives of the Appointed Auditor are to: (a) identify and assess the risks of material misstatement, whether due to fraud or error, in the financial statements and performance information at the assertion level, through understanding the entity and its environment, including the entity s internal control, and thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement; (b) maintain alertness and awareness for, and if necessary assess, risks that the public entity may not: (i) apply its resources effectively and efficiently; (ii) minimise waste; (iii) conduct its business with due regard to probity; and (iv) act in a financially prudent manner. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

165 AG ISA (NZ) 315 (Revised) Understanding the entity and its environment (c) obtain, for public entities identified by the OAG, to the level necessary, an understanding of internal control in a public entity that may be used by the OAG to report matters to Parliament on the quality of the internal control in public entities, at an individual, sector, or national level. Definitions 5. For the purpose of this Auditor-General s auditing statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Understanding the entity s internal control 6. As well as the requirements in paragraph 12 of ISA (NZ) 315 (Revised), the Appointed Auditor shall consider, where it is appropriate, whether: (a) there is a long-term planning process that results in credible long-term business and strategic plans; (b) planning processes involve the specification of both financial and performance information that is appropriate both for managing the public entity and reporting externally; (c) there is forecast financial and performance information that is consistent with the public entity's business or strategic plans; (d) the forecast financial and performance information has been compiled with input from those charged with governance and appropriate levels of management; and (e) the forecast financial and performance information is detailed enough to enable effective and frequent monitoring of actual performance against it. 7. Also, in addition to the requirements in paragraph 12 of ISA (NZ) 315 (Revised), the Appointed Auditor shall remain alert for and aware of risks that the public entity may not take appropriate account of the public sector factors that are the focus of AG-3: The auditor s approach to issues of effectiveness and efficiency, waste and a lack of probity or financial prudence and AG ISA (NZ) 250: Consideration of laws and Issued 03/17 Office of the Auditor-General

166 AG ISA (NZ) 315 (Revised) Understanding the entity and its environment regulations. This may involve considering whether the entity s internal control provides assurance that the entity has: (a) applied its resources effectively and efficiently; (b) complied with its statutory obligations; (c) minimised waste; (d) conducted its business with due regard to probity; and (e) acted in a financially prudent manner. 8. As well as the requirements in paragraph 15 of ISA (NZ) 315 (Revised), the Appointed Auditor shall consider, where it is appropriate, whether the public entity has appropriate risk management policies and procedures to manage risks, including political issues, demographic trends, and natural disasters. 9. In keeping with paragraph 11(d) of ISA (NZ) 315 (Revised), the Appointed Auditor shall take into account the additional examples of conditions and events that may indicate risks of material misstatement in Appendix The Appointed Auditor shall, if relevant to gaining an understanding of the public entity, consider the findings from any other work of the OAG (such as performance audits, inquiries, or audits of Long-Term Plans) or any external reviews. External reviews may include: (a) the involvement of external parties such as industry associations, Ministers, and control agencies (such as the Treasury and the State Services Commission) and the extent to which this involvement affects internal control; or (b) any other external influences that affect the Appointed Auditor s understanding of internal control, such as industry influences; and (c) the findings of any external reviews conducted on the public entity that may influence the Appointed Auditor s understanding of any aspect of internal control. 11. The Appointed Auditor shall immediately report the findings of any substantial or significant external reviews of the activities of the public entity to the OAG. Issued 03/17 Office of the Auditor-General

167 AG ISA (NZ) 315 (Revised) Understanding the entity and its environment Appendix 1 Examples of conditions and events that may indicate risks of material misstatement in the financial and performance information The following are examples of conditions and events that may indicate risks of material misstatement for public entities. The examples are additional to those in Appendix 2 of ISA (NZ) 315 (Revised). They include: - major changes to existing programmes; - new legislation and regulations or directives; - new programmes, products or services; - new performance measures; - new systems for recording financial and performance information; - political decisions such as relocation of operations; - increased public expectations; - matters of high public interest, which may lead to expectations to meet targets; - changes in ownership arrangements; - changes in political leadership; - public private partnerships; - outsourcing of government activities; - higher than normal expectations to meet budget; - budget overspending due to weak budgetary controls; - programmes without sufficient allocated resources and funding; - indications of non-compliance with statutory obligations; - indications of a lack of effectiveness or efficiency, waste, a lack or probity or financial prudence; and - operations subject to special investigations. Issued 03/17 Office of the Auditor-General

168 AG ISA (NZ) 320 Materiality in planning and performing an annual audit AG ISA (NZ) 320 THE AUDITOR-GENERAL S STATEMENT ON MATERIALITY IN PLANNING AND PERFORMING AN ANNUAL AUDIT Contents Page Introduction Scope of this Statement Application Objective Definitions Requirements Materiality to be applied to the annual audit of financial and performance information Additional requirement to consider issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence Appointed Auditors to comply with other OAG instructions on materiality Determining an appropriate materiality base for the financial information as a whole Application and other explanatory material Materiality to be applied to the annual audit of financial and performance information (See paragraph 6) Issued 03/17 Office of the Auditor-General

169 AG ISA (NZ) 320 Materiality in planning and performing an annual audit Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 320: Materiality in Planning and Performing an Audit (ISA (NZ) 320) 1 ; and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 320, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 320 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Objective 4. The objective of the Appointed Auditor is to apply the concept of materiality appropriately, and to reflect the public sector perspective in planning and performing the annual audit. Definitions 5. For the purpose of this Auditor-General s Auditing Statement, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); (b) in the Auditor-General s Glossary of Terms; and 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

170 AG ISA (NZ) 320 Materiality in planning and performing an annual audit (c) in the following term. Material means, for the purposes of forming an opinion on a public entity s financial and performance information, a statement, omission, fact, or item of such a nature or amount that its disclosure, or the method of treating it, given full consideration of the circumstances applying at the time the financial and performance information is completed, that could reasonably be expected to influence readers overall understanding of the financial statements and performance information in making decisions or assessments about the stewardship and allocation of resources, and the performance of the public entity. Requirements Materiality to be applied to the annual audit of financial and performance information 6. The Appointed Auditor shall consider whether a statement, omission, fact, or item is material when planning and performing the annual audit of the financial and performance information prepared by an entity. The consideration of materiality by the Appointed Auditor shall be taken from several perspectives as follows: (a) The Appointed Auditor shall apply the general definition of material, in paragraph 5 of this statement, as the overall test of whether a statement, omission, fact, or item is material when planning and performing the annual audit of an entity s financial and performance information. (b) If an entity prepares performance reports for audit, the Appointed Auditor shall apply the materiality requirements of AG-4: The audit of performance reports. (c) In considering the laws and regulations that apply to an entity, the Appointed Auditor shall also apply the materiality requirements of ISA (NZ) 250: Consideration of Laws and Regulations and take into account the considerations in paragraph 8 of the accompanying Auditor-General s Statement AG ISA (NZ) 250. (d) If a public entity receives a Parliamentary appropriation on behalf of a Minister, the Appointed Auditor shall apply the materiality requirements of AG-2: The appropriation audit and the controller function. (See paragraphs A1 A3) Issued 03/17 Office of the Auditor-General

171 AG ISA (NZ) 320 Materiality in planning and performing an annual audit Additional requirement to consider issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence 7. Regardless of the requirements in paragraph 6 of this Statement, the Appointed Auditor shall maintain an alertness and awareness of issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence when planning and performing the annual audit. Such alertness and awareness shall be maintained for the purpose of reporting such issues to the OAG. 8. The Appointed Auditor shall specifically maintain an alertness and awareness of such issues and, should an issue come to their attention, form an initial view as to whether to report the issue to the OAG. Issues that are clearly trivial or inconsequential are not required to be reported to the OAG. 9. The Appointed Auditor shall refer to AG-3: The auditor s approach to issues of effectiveness and efficiency, waste and a lack of probity or financial prudence for further requirements and guidance. Appointed Auditors to comply with other OAG instructions on materiality 10. The Appointed Auditor shall, as a minimum, comply with any materiality considerations specified in instructions by the OAG. Irrespective of any materiality considerations specified by the OAG, the Appointed Auditor shall apply a lower materiality limit if this is necessary to achieve the objective of this Statement. Determining an appropriate materiality base for the financial information as a whole 11. The Appointed Auditor shall, when setting materiality for the financial information, take into account the activities of the public entity. For example: (a) For public entities whose purpose is primarily to provide public benefits, the focus is likely to be on the quality of its expenditure. In this instance, gross expenditure might be an appropriate base for determining the level of financial materiality. (b) For public entities whose primary purpose is the pursuit of commercial objectives, a financial materiality that is consistent with that entity s commercial objectives would be more appropriate. *** Issued 03/17 Office of the Auditor-General

172 AG ISA (NZ) 320 Materiality in planning and performing an annual audit Application and other explanatory material Materiality to be applied to the annual audit of financial and performance information (See paragraph 6) Limitations in the definition of materiality in the New Zealand financial reporting framework A1. The financial reporting framework in New Zealand defines materiality. In New Zealand, New Zealand International Accounting Standard 1 (NZ IAS 1) states: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. NZ IAS 1 includes the following additional guidance in respect of public benefit entities: Material. In addition to the definition of Material given in paragraph 7, omissions or misstatements of items are material if they could, individually or collectively, influence the decisions or assessments of users made on the basis of the financial statements. Public benefit entities are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders. A2. For the purposes of annual audits, the statement about materiality in NZ IAS 1 is too narrow for the following reasons: (a) Limiting the definition to "omissions or misstatements" effectively excludes concerns identified by the auditor around financial management behaviour that would not directly impact on the fair presentation (or truth and fairness) of the financial and performance information. An example of financial management behaviour that would be material to users but which would not necessarily result in an omission or misstatement of the financial and performance information would be when entity management had invested unlawfully or without authority. In this instance the financial and performance Issued 03/17 Office of the Auditor-General

173 AG ISA (NZ) 320 Materiality in planning and performing an annual audit (b) information may fairly present the investment, although the investment is unlawful or unauthorised. Limiting the definition to "economic decisions of users" also fails to recognise that users may choose to make decisions other than economic decisions, such as changing the governing body where they have the power to do so. In the public sector many users do not have the power to make economic decisions and must therefore resort to other action, such as voting for a change in their elected representatives. Auditing in the public sector places greater emphasis on the qualitative aspects (the nature) of materiality A3. Paragraph A3 of ISA (NZ) 320 describes matters to consider when determining materiality levels in the public sector. When determining whether a particular class of transactions, account balance, disclosure, or other assertion that is part of the financial and performance information is material by virtue of its nature, the Appointed Auditor should take into account qualitative aspects such as: (a) The context in which the matter appears, for example if the matter is also subject to compliance with authorities, legislation, or regulations, or if law or regulation prohibits overspending of public funds, regardless of the amounts involved. (b) The needs of the various stakeholders and how they use the financial and performance information. (c) The nature of the transactions that are considered sensitive to users of the financial and performance information. (d) Public expectations and public interest, including emphasis placed on the particular matter by Parliament or other elected representatives, including the necessity of certain disclosures. (e) The need for legislative oversight and regulation in a particular area. (f) The need for openness and transparency. Issued 03/17 Office of the Auditor-General

174 AG ISA (NZ) 330 The auditor s responses to assessed risks AG ISA (NZ) 330 THE AUDITOR-GENERAL S STATEMENT ON THE AUDITOR S RESPONSES TO ASSESSED RISKS Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Maintaining an awareness of public sector matters during the annual audit Issued 03/17 Office of the Auditor-General

175 AG ISA (NZ) 330 The auditor s responses to assessed risks Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 330: The Auditor s Responses to Assessed Risks (ISA (NZ) 330); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 330, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 330 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Objectives 4. The objectives of the Appointed Auditor are to: (a) obtain sufficient appropriate audit evidence about the assessed risks of material misstatement in the financial and performance information, through designing and implementing appropriate responses to those risks in keeping with the requirements in ISA (NZ) 330; (b) maintain an awareness of, and report to the OAG, any additional matters identified during the audit that may be significant in the context of the public sector; and (c) respond to any specific directions, instructions, or requirements issued by the OAG, which may be issued from time to time. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

176 AG ISA (NZ) 330 The auditor s responses to assessed risks Definitions 5. For the purpose of this Auditor-General s Auditing Statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Maintaining an awareness of public sector matters during the annual audit 6. In keeping with the objective in paragraphs 4(b) and (c) above, the Appointed Auditor shall maintain an awareness of, and report to the OAG, any additional matters identified during the annual audit that may be significant in the context of the public sector. In particular, the Appointed Auditor shall: (a) apply the requirements for annual audits that are outlined in: (i) AG ISA (NZ) 250: Consideration of laws and regulations; (ii) AG-3: The auditor s approach to issues of effectiveness and efficiency, waste and a lack of probity or financial prudence; and (iii) AG-4: The audit of performance reports. (b) apply the specific public sector factors where they are applicable to aspects of the audit work to be carried out that are outlined in AG-2: The appropriation audit and the controller function; and (c) apply, where applicable, any requirements that may be specified in directives from the OAG, such as audit briefs. Issued 03/17 Office of the Auditor-General

177 AG ISA (NZ) 450 Evaluation of misstatements AG ISA (NZ) 450 THE AUDITOR-GENERAL S STATEMENT ON EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE ANNUAL AUDIT Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Evaluating the effect of uncorrected misstatements Evaluating issues of non-compliance with laws and regulations Evaluating issues of effectiveness and efficiency, waste, or a lack of probity or financial prudence Issued 03/17 Office of the Auditor-General

178 AG ISA (NZ) 450 Evaluation of misstatements Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 450: Evaluation of Misstatements Identified During the Audit (ISA (NZ) 450); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 450, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 200 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Objectives 4. The objectives of the Appointed Auditor are to: (a) evaluate the effect of identified misstatements on the annual audit in keeping with the requirements of ISA (NZ) 450; (b) evaluate the effect of uncorrected misstatements, if any, on the financial and performance information; (c) evaluate the effect of any identified non-compliance with laws and regulations; and (d) evaluate any matters of effectiveness and efficiency, waste, or a lack of probity or financial prudence identified during the audit. Definitions 5. For the purpose of this Auditor-General s auditing statement the defined terms have the meanings attributed: 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

179 AG ISA (NZ) 450 Evaluation of misstatements (a) (b) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and in the Auditor-General s Glossary of Terms. Requirements Evaluating the effect of uncorrected misstatements 6. In complying with paragraph 10 of ISA (NZ) 450, the Appointed Auditor shall, prior to evaluating the effect of uncorrected misstatements confirm, when reassessing materiality determined in keeping with AG ISA (NZ) 320, whether materiality remains appropriate given the public entity s actual results. Evaluating issues of non-compliance with laws and regulations 7. The Appointed Auditor shall evaluate, in consultation with the OAG if necessary, any issues of non-compliance with statutory obligations that were identified during the annual audit. Such evaluation is primarily to determine whether further audit procedures are necessary and/or how the additional matters identified during the annual audit should be reported. For further guidance refer to AG ISA (NZ) 250: Consideration of laws and regulations. Evaluating issues of effectiveness and efficiency, waste, or a lack of probity or financial prudence 8. The Appointed Auditor shall evaluate, in consultation with the OAG if necessary, any issues of effectiveness and efficiency, waste, or a lack of probity or financial prudence that were identified during the annual audit. Such evaluation is primarily to determine whether further audit procedures are necessary and/or how the additional matters identified during the annual audit should be reported. Issued 03/17 Office of the Auditor-General

180 AG ISA (NZ) 570 (Revised) Going Concern AG ISA (NZ) 570 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON GOING CONCERN Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Financial statements and performance information not prepared using the going concern basis of accounting Audit reports to be referred to the OAG before they are issued Where a public entity is reliant on a letter of support Management reporting Application and other explanatory material Where a public entity is reliant on a letter of support Issued 03/17 Office of the Auditor-General

181 AG ISA (NZ) 570 (Revised) Going Concern Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 570 (Revised): Going Concern (ISA (NZ) 570) 1 ; and (b) provides additional guidance to reflect the public sector perspective. 2. The Appointed Auditor cannot assume that because an entity is operating in the public sector, the Government will automatically support the entity should it run into financial difficulties. When assessing the validity of the going concern basis of accounting in relation to a public entity, the Appointed Auditor needs to ask the question: Without government or other external assistance over and above that provided to fund normal operations (including the need to invoke statutory processes to amend an entity s ability to levy or rate), will the entity be able to continue operating for at least one year (or for the foreseeable future) from the date of the approval of the financial statements? 3. From time to time public entities run into financial difficulties. Such difficulties usually mean that, without additional Government support, the entity would have to cease operating or be unable to continue to meet its statutory functions. Application 4. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 570, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 570 exists, the requirements of this Statement shall prevail. 5. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December Objectives 6. The objectives of the Appointed Auditor are to: (a) obtain sufficient appropriate audit evidence, and conclude on, the appropriateness of the use of the going concern basis of accounting in the preparation and presentation of the financial and performance information; 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

182 AG ISA (NZ) 570 (Revised) Going Concern (b) (c) conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the public entity s ability to continue as a going concern; and report in accordance with this statement, and ISA (NZ) 570 (Revised). Definitions 7. For the purpose of this Auditor-General s Auditing Statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Financial statements and performance information not prepared using the going concern basis of accounting 8. Where the financial statements have been prepared on a basis other than on a going concern basis, the Appointed Auditor shall consider if the other basis is appropriate in the specific circumstances, and if the financial statements contain the necessary disclosures. In these circumstances the Appointed Auditor shall not issue a modified opinion. However, the audit report shall include, when setting out the basis of the opinion, an emphasis of matter paragraph that describes the other basis of preparation and shall refer to the relevant disclosures in the financial statements. 9. The Appointed Auditor shall refer their proposed audit report to the Accounting and Auditing Policy team where there are material errors in the application of an alternative or non-going concern basis of preparation, such as where the valuation of assets and/or liabilities in financial statements that have been prepared on an alternative or non-going concern basis are materially misstated. Issued 03/17 Office of the Auditor-General

183 AG ISA (NZ) 570 (Revised) Going Concern Audit reports to be referred to the OAG before they are issued 10. The Appointed Auditor shall consult with the Accounting and Auditing Policy team in the OAG when they have doubt over the validity of the going concern basis of accounting. Specifically, the Accounting and Auditing Policy team should be consulted: - where the Appointed Auditor disagrees with the use of the going concern basis of accounting or there is inadequate disclosure about the going concern basis of accounting; - where the Appointed Auditor is unable to obtain sufficient audit evidence to support the use of the going concern basis of accounting; and - where the Appointed Auditor has identified uncertainities over the use of the going concern basis of accounting which are outside the control of management and those charged with governance. 11. The Accounting and Auditing Policy team will request the Appointed Auditor to prepare a submission 2 to the Auditor-General s Opinions Review Committee (the ORC) for the circumstances in paragraph 10 above, unless there is clear precedent supporting the proposed audit report. Where a public entity is reliant on a letter of support 12. Where the entity s use of the going concern basis of accounting is dependent on a letter of support, the Appointed Auditor shall ensure the letter of support is sufficient to justify the use of the going concern basis of accounting. (See paragraphs A1 A2) 13. The Appointed Auditor shall consult the OAG about the possible inclusion of an emphasis of matter paragraph, or an other matter paragraph in the auditor s report: - when the entity has received a letter of support for the first time; - when the entity s financial difficulties have substantially worsened compared to the prior year, or are expected to substantially worsen in the foreseeable future; and/or - when it may be in the public interest for the audit report to draw attention to the existence of the letter of support because the entity is significant (for example, a district health board). 2 Submissions to the OAG Opinions Review Committee on going concern issues should consider whether the financial statements adequately reflect all expenses and obligations of the entity, whether the levels of equity and working capital are reasonable and sustainable, whether the entity has the ability to pay its debts as they fall due, whether the entity is subject to capital expenditure or other financial commitments, whether the entity has a realistic budget, whether those charged with governance acknowledtge the seriousness of the financial situation of the entity and are taking achievable actions to resolve the entity s financial difficulties. Issued 03/17 Office of the Auditor-General

184 AG ISA (NZ) 570 (Revised) Going Concern Management reporting 14. If the Appointed Auditor has seriously considered the validity of the going concern basis of accounting, the issue shall be addressed in the management letter to those charged with governance. *** Application and other explanatory material Where a public entity is reliant on a letter of support (See paragraph 12) A1. The Appointed Auditor should consider the following matters as part of ensuring the letter of support can justify the use of the going concern basis of accounting: - whether the entity providing the letter of support has the authority to provide the support 3 ; - whether the letter of support has been signed by a person with appropriate delegated authority to provide such support; - whether the entity or entities that will be providing support have the ability to cover the obligations of the entity receiving the support; and - whether the financial statements and performance information adequately disclose the fact that the entity has received the letter of support and whether the disclosures adequately refer to any conditions or other matters contained in the letter of support 4. A2. Where a letter of support has been obtained by an entity, the Appointed Auditor should ensure that appropriate reference to this fact, and any other related matters is included in the document that summarises the audit conclusions and/or the management letter. 3 For example, Local Authorities that issue letters of support to council controlled trading organisations are limited by the restrictions in sections 62 and 63 of the Local Government Act At a minimum Appointed Auditors should be considering the requirements of paragraphs 25 and 26 of NZ IAS 1, and paragraphs 38 to 41 of PBE IPSAS 1. Issued 03/17 Office of the Auditor-General

185 AG ISA (NZ) 580 Written representations AG ISA (NZ) 580 THE AUDITOR-GENERAL S STATEMENT ON WRITTEN REPRESENTATIONS Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Content of representations Signatories of representations Doubt as to the reliability of written representations Requested written representations not provided Appendix 1 Illustrative representation letter for a non-company Appendix 2 Illustrative website publication representation Appendix 3 Illustrative going concern representation where doubt exists as to the use of the going concern basis of accounting Issued 03/17 Office of the Auditor-General

186 AG ISA (NZ) 580 Written representations Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 580: Written Representations (ISA (NZ) 580); 1 (b) provides additional guidance to reflect the public sector perspective; and (c) provides sample written representation templates for the Appointed Auditor to use. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 580, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 580 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December Objectives 4. The objectives of the Appointed Auditor are to: (a) obtain written representations from those charged with governance 2 confirming that they believe that they have fulfilled the fundamental responsibilities that constitute the premise on which an audit is conducted; (b) support other audit evidence relevant to the financial and performance information or specific assertions in that information - by means of written representations or required by other ISAs (NZ), or by the Auditor-General s auditing standards and statements; and (c) respond appropriately to written representations provided by those charged with governance, or if those charged with governance do not provide the written representations requested by the Appointed Auditor. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. 2 For entities with no formal governance body, such as departments, the Chief Executive may provide the representations. Issued 03/17 Office of the Auditor-General

187 AG ISA (NZ) 580 Written representations Definitions 5. For the purpose of this Auditor-General s Auditing Statement, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Content of representations 6. The written representation letter from a public entity shall, as a minimum: (a) address all the issues included in the sample written representation letters, except where they are not applicable in the circumstances; and (b) be consistent with the intent and meaning of the representations requested in the sample written representation letters. Appendix 1 contains an illustrative written representation letter. Additional sample written representation letters, based on the requirements in this Statement and on the requirements contained in ISA (NZ) 580, may be provided by the OAG. 7. The Appointed Auditor shall supplement the wording of the written representation letter by requesting additional representations on material matters that are specific to the public entity subject to audit. Some examples of additional representations that may need to be requested include: (a) a specific representation covering the publication of the audited financial and performance information and the related audit report on a website (in Appendix 2); and (b) an illustrative example of a going concern representation where there is an indication that the going concern basis of accounting may be in doubt (in Appendix 3). Signatories of representations 8. The Appointed Auditor shall request written representations from those charged with governance with appropriate responsibilities for the financial and performance information. Issued 03/17 Office of the Auditor-General

188 AG ISA (NZ) 580 Written representations The written representation letter may be countersigned by the Chief Executive Officer and other relevant personnel, such as the Chief Financial Officer. Doubt as to the reliability of written representations 9. If, in meeting the requirements of paragraphs 16 and 18 of ISA (NZ) 580, the Appointed Auditor concludes that the written representations are not reliable, the Appointed Auditor shall refer the matter to the OAG. The OAG, in consultation with the Appointed Auditor, shall determine the effect on the audit report together with any other reporting actions. Requested written representations not provided 10. If, in meeting the requirements of paragraph 19 of ISA (NZ) 580, the Appointed Auditor is unable to obtain the requested written representations, the Appointed Auditor shall refer the matter to the OAG. The OAG, in consultation with the Appointed Auditor, shall determine the effect on the audit opinion together with any other reporting actions. *** Issued 03/17 Office of the Auditor-General

189 AG ISA (NZ) 580 Written representations Appendix 1 Illustrative representation letter for a non-company The following illustrative letter, which is based on the requirements in AG ISA (NZ) 580 and ISA (NZ) 580, is not to be considered as an all-inclusive list of issues to be addressed in the written representation letter sought from those charged with governance. In all cases where this illustrative representation letter is used, the contents of the letter should be reviewed for their relevance and appropriateness, and additions or deletions made to it where considered necessary. It is assumed in this illustration that: - the entity is required to prepare financial statements and a statement of performance; 3 and - the financial statements and the statement of performance have been prepared using a fair presentation framework. [Date] [Appointed Auditor] [Audit Service Provider] [Address 1] [TOWN or CITY] [Public entity letterhead] REPRESENTATION LETTER FOR THE YEAR ENDED [DD MM 20XX] This representation letter is provided in connection with your audit, carried out on behalf of the Auditor-General, of the financial statements and statement of performance of [Name of public entity] for the year ended [DD MM 20XX] for the purpose of expressing an independent opinion about whether: The financial statements: - present fairly, in all material respects: - the financial position as at [DD MM 20XX]; and - the financial performance and cash flows for the year then ended; and - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. The statement of performance: - presents fairly, in all material respects, the performance for the year ended [DD MM 20XX], including: - the performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - the actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. We understand that your audit was carried out in accordance with the Auditing Standards issued by the Auditor- General, which incorporate the International Standards on Auditing (New Zealand). 3 The Appointed Auditor should ensure that the references to the statements that have been audited in the representation letter are consistent with the statements in the audit report where an opinion is provided. Issued 03/17 Office of the Auditor-General

190 AG ISA (NZ) 580 Written representations [We understand that because you will be issuing a non-standard audit report, the Auditor-General has the responsibility to refer to that audit report in a report to Parliament in accordance with section 20 of the Public Audit Act 2001.] 4 General representations To the best of our knowledge and belief: - the resources, activities, [and entities] under our control have been operating effectively and efficiently; - we have complied with our statutory obligations including laws, regulations, and contractual requirements; - we have carried out our decisions and actions with due regard to minimising waste; - we have met Parliament s and the public s expectations of appropriate standards of behaviour in the public sector (that is, we have carried out our decisions and actions with due regard to probity); and - any decisions or actions have been taken with due regard to financial prudence. We also acknowledge that we have responsibility for designing, implementing, and maintaining internal control (to the extent that is reasonably practical given the size of [Name of public entity]) to prevent and detect fraud (a requirement of paragraph NZ40.1(a) in ISA (NZ) 240). Representations on the financial statements and the statement of performance We confirm that all transactions have been recorded in the accounting records and are reflected in the financial statements and statement of performance, and that, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves: - we have fulfilled our responsibilities for preparing and presenting the financial statements and the statement of performance as required by [specify the statutory or other requirements for the preparation of the financial statements and statement of performance] and, in particular, that: The financial statements: - present fairly, in all material respects: - the financial position as at [DD MM 20XX]; and - the financial performance and cash flows for the year then ended; and - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. The statement of performance: - presents fairly, in all material respects, the performance for the year ended [DD MM 20XX], including: - the performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - the actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. - we believe the significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable (a requirement of paragraph NZ22.1 in ISA (NZ) 540); - we have appropriately accounted for and disclosed the related party relationships and transactions in the financial statements (a requirement of paragraph NZ26.1(b) in ISA (NZ) 550); - we have adjusted or disclosed all events subsequent to the date of the financial statements and the statement of performance that require adjustment or disclosure (a requirement of paragraph NZ9.1 in ISA (NZ) 560); and - we believe the effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements and statement of performance as a whole. A list of the uncorrected misstatements is attached to this representation letter (a requirement of paragraph NZ14.1 in ISA (NZ) 450). - we have disclosed all known actual or possible litigation and claims whose effects should be considered when preparing the financial statements. Where applicable, such litigation and claims have been accounted for and disclosed in accordance with [the applicable financial reporting framework] (a requirement of paragraph NZ12.1 in ISA (NZ) 501). - [Any other matters that the Appointed Auditor may consider appropriate.] Representations about the provision of information We confirm that, to the best of our knowledge and belief, having made such enquiries as we considered necessary for the purpose of appropriately informing ourselves: 4 This wording is optional and should only be included in the representation letter if the Appointed Auditor will be issuing a non-standard audit report. Issued 03/17 Office of the Auditor-General

191 AG ISA (NZ) 580 Written representations - we have provided you with: - all information, such as records and documentation, and other matters that are relevant to preparing and presenting the financial statements and the statement of performance; and - unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence. - we have disclosed to you the results of our assessment of the risk that the financial statements and statement of performance may be materially misstated as a result of fraud (a requirement of paragraph NZ40.1(b) in ISA (NZ) 240); - we have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves: - management; - employees who have significant roles in internal control; or - others where the fraud could have a material effect on the financial statements and the statement of performance (a requirement of paragraph NZ40.1(c) in ISA (NZ) 240). - we have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affecting the entity s financial statements and statement of performance communicated by employees, former employees, analysts, regulators, or others (a requirement of paragraph NZ40.1(d) in ISA (NZ) 240); - we have disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements and the statement of performance (a requirement of paragraph NZ17.1 in ISA (NZ) 250 (Revised)); - [we have provided you with all the other documents ( other information ) which will accompany the financial statements and the performance information which are consistent with one another, and the other information does not contain any material misstatements.] 5 - we have disclosed the identity of the related parties, all of their relationships, and all of their transactions of which we are aware (a requirement of paragraph NZ26.1(a) in ISA (NZ) 550); and - [Any other matters that the Appointed Auditor may consider appropriate] Going concern basis of accounting 6 We confirm that, to the best of our knowledge and belief, the [Name of public entity] has adequate resources to continue operations at its current level for the foreseeable future. For this reason, the [Governing body] continues to adopt the going concern basis of accounting in preparing the financial statements and the statement of performance for the year ended [DD MM 20XX]. We have reached this conclusion after making enquiries and having regard to circumstances that we consider likely to affect the [Name of public entity] during the period of one year from [date of signing the financial statements and the statement of performance], and to circumstances that we know will occur after that date which could affect the validity of the going concern basis of accounting. [Insert details of key considerations (for example, operating and cash flow forecasts, forecast borrowing requirements, commitments, and contingencies).] We consider that the financial statements and the statement of performance adequately disclose the circumstances, and any uncertainties, surrounding the adoption of the going concern basis of accounting by the [Name of public entity]. Throughout the year, the [Name of public entity] has complied with the requirements of its banking arrangements, debenture trust deeds, or negative pledge agreements, including those relating to its net tangible assets ratios (a requirement of paragraph 16(e) in ISA (NZ) 570). The representations in this letter are made at your request, and to supplement information obtained by you from the records of the [Name of public entity] and to confirm information given to you orally. Yours faithfully Chairperson Chief Executive 5 Include this text in the representation letter is the entity is including all other information in the annual report. However, if the other information is not available when you issue your audit report, include the following text instead: [we will provide you with the final version of the following documents which will accompany the financial statements and the performance information by [date], which is before the annual report is issued, and we confirm that the information contained in these documents will be consistent with the financial statements and the performance information, and will not contain any material misstatements: - [list documents to be provided]] 6 If there is any doubt about the validity of the going concern basis of accounting, the going concern section in this representation letter should be replaced with the going concern representation in Appendix 3. Issued 03/17 Office of the Auditor-General

192 AG ISA (NZ) 580 Written representations Appendix 2 Illustrative website publication representation The following is an illustration of an additional representation that can be included in the representation letter when the entity intends publishing its audited financial statements and statement of performance and the related audit report on a website. Publication of the financial statements [and statement of performance] and related audit report on a website - The [Governing body] accepts that it is responsible for the electronic presentation of the audited financial statements [and statement of performance]. - The electronic version of the audited financial statements [and statement of performance] and the related audit report presented on the website are the same as the final signed version of the audited financial statements [and statement of performance] and audit report. - We have clearly differentiated between audited and unaudited information on the website and understand the risk of potential misrepresentation without appropriate controls. - We have assessed the security controls over audited financial [and performance] information and the related audit report, and are satisfied that procedures are adequate to ensure the integrity of the information provided. - Where the audit report on the full financial statements [and statement of performance] is provided on a website, the financial statements [and statement of performance] are also provided in full. Issued 03/17 Office of the Auditor-General

193 AG ISA (NZ) 580 Written representations Appendix 3 Illustrative going concern representation where doubt exists as to the use of the going concern basis of accounting Going concern basis of accounting The considered view of the [Governing body] is that, after making enquiries, the [Governing body] has a reasonable expectation that the [Name of public entity] has adequate resources to continue operations for the foreseeable future. For this reason, the [Governing body] continues to adopt the going concern basis of accounting in preparing the financial statements and the statement of performance for the year ended [DD MM 20XX]. The [Governing body] has reached this conclusion having regard to circumstances that it considers likely to affect the [Name of public entity] during the period of one year from [date of signing the financial statements and the statement of performance], and to circumstances that it knows will occur after that date which could affect the validity of the going concern basis of accounting. The key considerations are set out below. Operating and cash flow forecasts The [Governing body] has considered forecast information relating to operational viability and cash flow requirements. The [Governing body] is satisfied that there will be enough cash flows generated from operating activities to meet the investing and financing cash flow requirements of the [Name of public entity]. Borrowing covenants and forecast borrowing requirements Throughout the year, the [Name of public entity] has conformed with the requirements of its banking arrangements, debenture trust deeds, or negative pledge agreements, including those relating to its net tangible assets ratios. The forecasts for the next [ ] months prepared by the [Governing body] show that the available borrowing facilities exceed the peak borrowing requirements by a margin of [$amount]. Furthermore, the forecast borrowing requirements can be met without breaching covenants or other borrowing restrictions. Commitments The [Name of public entity] has commitments that are analysed as follows: $000 Relating to existing activities: Fixed assets contracted Fixed assets budgeted but not contracted Relating to expansion: Fixed assets contracted Fixed assets budgeted but not contracted Total xx xx xx xx xx xx xxx The commitments for existing activities will be incurred in the next [ ] months and will be met out of established facilities. The commitments for future expansion will start to be incurred in [ ] months time and will be met partly out of existing facilities and partly out of new funds. [Note X] to the financial statements also shows lease commitments. These are to meet existing needs and will be met out of current funds. Contingencies [Note X] to the financial statements and the statement of performance explains the [Name of public entity] s contingencies. As stated, the [Governing body] does not consider that provision for these items is necessary and has not therefore arranged funding to meet the liability should the contingency be realised. The [Governing body] does not consider that the contingency affects the appropriateness of the going concern basis of accounting in preparing the financial statements and the statement of performance for the year ended [DD MM 20XX]. [or alternatively] [Note X] to the financial statements and the statement of performance states that the [Name of public entity] has no contingencies as at [date]. The [Governing body] is not aware of any undisclosed contingencies that would affect the appropriateness of the going concern basis of accounting in preparing the financial statements and the statement of performance for the year ended [date]. Issued 03/17 Office of the Auditor-General

194 AG ISA (NZ) 580 Written representations Disclosure We consider that the financial statements and the statement of performance adequately disclose the circumstances, and any uncertainties, surrounding the adoption of the going concern basis of accounting by the [Name of public entity]. Issued 03/17 Office of the Auditor-General

195 AG ISA (NZ) 600 Audits of groups AG ISA (NZ) 600 THE AUDITOR-GENERAL S STATEMENT ON SPECIAL CONSIDERATIONS - AUDITS OF GROUP FINANCIAL AND PERFORMANCE INFORMATION (INCLUDING THE WORK OF COMPONENT AUDITORS) Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements When components are public entities When components are not public entities When there are difficulties with the audit of a group Issued 03/17 Office of the Auditor-General

196 AG ISA (NZ) 600 Audits of groups Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement applies to group audits where the parent is a public entity in New Zealand, and: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 600: Special Considerations Audits of Group Financial Statements (ISA (NZ) 600); 1 and (b) provides additional guidance to reflect the public sector perspective. 2. This Statement clarifies the extent to which the requirements in ISA (NZ) 600 apply to the annual audits of public entity groups, which is illustrated in Figure 1. Clarity is needed because: (a) ISA (NZ) 600 does not apply to the audits of public entity groups (where all the entities in the group are public entities) because all public entities are audited by one auditor, the Auditor-General; and (b) ISA (NZ) 600 does apply to the audits of some public entity groups, where; - a New Zealand domiciled component is not a public entity; and - a public entity group includes a component domiciled in an overseas jurisdiction (that may be controlled or not controlled). 3. A controlled entity domiciled in an overseas jurisdiction (subsequently referred as a controlled overseas component) is not a public entity. 2 Nonetheless, those charged with governance and the management of the parent public entity are expected to ensure that a controlled overseas component operates with regard to the principles of probity and financial prudence, operates effectively and efficiently, complies with statutory obligations, and minimises waste. As a result, it is expected that the Group Appointed Auditor will, as part of meeting the requirements contained in AG-3, request component auditors to maintain the same level of awareness and alertness for issues or risks as outlined in AG-3: The auditor s approach to issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. 2 This definition reflects the general principle of statutory interpretation that legislation does not have extraterritorial effect, unless the legislation expressly says that it does, or that extended application is necessary to achieve the purpose of the legislation. The Public Audit Act does not meet these criteria. Issued 03/17 Office of the Auditor-General

197 AG ISA (NZ) 600 Audits of groups Application 4. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 600, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 600 exists, the requirements of this Statement shall prevail. 5. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Objectives The Group Appointed Auditor s objective when a component is a public entity 6. The objective of the Group Appointed Auditor is to: (a) work co-operatively with Component Appointed Auditors of all components that are public entities, as if the Group and Component Appointed Auditors are part of the same audit firm, rather than complying with all of the requirements of ISA (NZ) 600; and (b) obtain sufficient and appropriate audit evidence to form an opinion on the group financial and performance information. The Component Appointed Auditor s objective when a component is a public entity 7. The objective of the Component Appointed Auditor is to work co-operatively with the Group Appointed Auditor, as if the Group and Component Appointed Auditors are part of the same audit firm, to enable the Group Appointed Auditor to obtain sufficient and appropriate audit evidence to form an opinion on the group financial and performance information. The Group Appointed Auditor s objective when a component is not a public entity 8. The objective of the Group Appointed Auditor is to work with the component auditors of all non-public entity components in accordance with the requirements of ISA (NZ) 600, and the alternative requirements contained in this Statement, in order to obtain Issued 03/17 Office of the Auditor-General

198 AG ISA (NZ) 600 Audits of groups sufficient and appropriate audit evidence to form an opinion on the group financial and performance information. The Group Appointed Auditor s objective when a component is a controlled overseas component 9. In addition to the objective in paragraph 8, the objective of the Group Appointed Auditor is to ensure that AG-3 is appropriately applied to the audit of the Group, including controlled overseas components. Definitions 10. For the purpose of this Auditor-General s Auditing Statement, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); (b) in the Auditor-General s Glossary of Terms; and (c) in the list below. Component Appointed Auditor Component auditor Component that is a public entity Component that is not a public entity means the auditor appointed by the Auditor-General, who carries out the annual audit of a subsidiary or component which is a public entity, on behalf of the Auditor-General. means, as defined in ISA (NZ) 600, an auditor who, at the request of the group engagement team, performs work on the financial and performance information related to a component for the Group audit. means a subsidiary or component of a public entity (or entities) and is a public entity as defined in the Public Audit Act means a subsidiary or component of a public entity (or entities) and is not a public entity as defined in the Public Audit Act This may include: (a) a controlled overseas component; or (b) a component that is not controlled by a public entity (or entities) and is domiciled either in New Issued 03/17 Office of the Auditor-General

199 AG ISA (NZ) 600 Audits of groups Zealand or an overseas jurisdiction. Group Appointed Auditor means the auditor appointed by the Auditor-General who carries out the annual audit of the public entity group, on behalf of the Auditor-General. Figure 1 Scope and application of this Statement to each component within a public entity group Y START Is the Group Appointed Auditor auditing a public entity that controls a component that is based in New Zealand? N In this situation the component is a public entity, which means the Group Appointed Auditor shall comply with paragraphs 11 and 12 of this Statement. Y Is the Group Appointed Auditor auditing a public entity that has an interest in a component but does not control it (whether or not the uncontrolled component is domiciled in New Zealand or an overseas jurisdiction)? N In this situation the component is not a public entity, which means the Group Appointed Auditor shall comply with paragraph 13 of this Statement. Is the Group Appointed Auditor auditing a public entity that controls a component that is domiciled in an overseas jurisdiction? Y N In this situation the component is not a public entity, which means the Group Appointed Auditor shall comply with paragraphs 14, 15 and 16 of this Statement. END Requirements When components are public entities 11. In developing the overall audit strategies and audit plans for the group in accordance with the requirements in AG ISA (NZ) 300, 3 the Group Appointed Auditor shall work with Component Appointed Auditors as if they are part of the same audit firm to obtain sufficient and appropriate audit evidence in the most efficient way to be able to form an opinion on the group financial and performance information. To do this, the Group Appointed Auditor shall have regard to the requirements contained in ISA (NZ) 600, but take into account the Auditor-General s processes and standards that apply to the work of Component Appointed Auditors, including: (a) Taking account of the engagement acceptance and continuance requirements in AG PES 3 (Amended): Quality control, instead of meeting the 3 Paragraphs 8 and 9 in AG ISA (NZ) 300 requires all Appointed Auditors to consider the relevant public sector perspective when developing their overall audit strategy and audit plan. Issued 03/17 Office of the Auditor-General

200 AG ISA (NZ) 600 Audits of groups (b) (c) (d) (e) (f) requirements of paragraphs 12 to 13 of ISA (NZ) 600 on acceptance and continuance. Taking account of the requirements in AG ISA (NZ) 210: The terms of the audit engagement to confirm the terms of the audit engagement, instead of meeting the requirement of paragraph 14 of ISA (NZ) 600 on agreeing the terms of audit engagement. Taking account of the requirements in AG ISA (NZ) 300: Planning the annual audit to incorporate the information and instructions contained in the applicable audit brief in their overall audit strategy and audit plan, in addition to the requirements of paragraphs 17 and 18 of ISA (NZ) 600. In meeting this requirement the Group Appointed Auditor may need to understand the information and instructions outlined in the applicable audit brief used by Component Appointed Auditors and work with them in their audit planning procedures. Taking account of the fact that Component Appointed Auditors are required to comply with the ethical and independence requirements in AG PES 1 (Revised): Code of ethics for assurance practitioners, instead of meeting the requirements of paragraphs 19(a), 40(b), and 41(a) of ISA (NZ) 600, on obtaining confirmation, that Component Appointed Auditors will comply with ethical and independence requirements. Taking account of the fact that Component Appointed Auditors are required to comply with the professional competence requirements in AG PES 3, instead of meeting the requirement of 19(b) (also reflected in paragraph 4) of ISA (NZ) 600, on obtaining confirmation that Component Appointed Auditors will comply with professional competence requirements. Taking account of the requirements in AG ISA (NZ) 320: Materiality in planning and performing an annual audit, when meeting the requirements of paragraphs 21, 22, and 23 of ISA (NZ) In meeting the requirements of paragraph 11 of this statement, the Group Appointed Auditor may, in rare circumstances, need to review the audit files of a Component Appointed Auditor. In this situation the Component Appointed Auditor shall provide access to the Group Appointed Auditor. When components are not public entities The component is not a public entity 13. The Group Appointed Auditor shall carry out their audit in accordance with the requirements of ISA (NZ) 600 but shall comply with the engagement acceptance and Issued 03/17 Office of the Auditor-General

201 AG ISA (NZ) 600 Audits of groups continuance requirements in AG PES-3 (Amended) instead of meeting the requirements of paragraphs 12 to 13 of ISA (NZ) 600 on acceptance and continuance for group audits. 4 The component is a controlled overseas component 14. In addition to the requirement in paragraph 13, the Group Appointed Auditor shall request the component auditor to appropriately consider and report to the Group Appointed Auditor on any issues or risks required to be identified under AG-3. This will normally require the Group Appointed Auditor to add additional material to the instructions sent to the component auditor to ensure that they appropriately consider and report any issue or risk required to be identified under AG Where this approach is not possible, the Group Appointed Auditor may need to assess whether those charged with governance of the parent public entity actively monitor compliance with AG-3 issues and risks within the controlled overseas component, and determine if any additional auditing procedures and/or reporting is necessary. 16. The Group Appointed Auditor shall report AG-3 issues and risks raised by the component auditor, in keeping with the requirements contained in AG-3. When there are difficulties with the audit of a group 17. Group or Component Appointed Auditors shall immediately contact the Assistant Auditor-General Accounting and Auditing Policy, if they: (a) have any difficulties in applying this Statement; (b) identify that the work of a Group Appointed Auditor, Component Appointed Auditor, or component auditor may be insufficient, in accordance with paragraph 43 in ISA (NZ) 600; or (c) are considering communicating with management or those charged with governance concerns about the quality of the component auditor s work, in accordance with paragraph 49(c) in ISA (NZ) AG-3 does not apply to uncontrolled components because these entities are not public entities as defined in the Public Audit Act Issued 03/17 Office of the Auditor-General

202 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion AG ISA (NZ) 700 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON FORMING AN OPINION AND REPORTING ON FINANCIAL AND PERFORMANCE INFORMATION Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Presentation of findings arising from the annual audit Expression of the opinion Use of template audit reports issued by the OAG Signing of audit reports Dating of audit reports Independence and the disclosure of relationships with, or interests in, the public entity in the audit report Audit reports to be referred to the OAG Translation of audit reports Reporting to the OAG Application and other explanatory material Presentation of findings arising from the annual audit Expression of the opinion Use of template audit reports issued by the OAG Dating of audit reports Independence and the disclosure of relationships with, or interests in, the public entity in the audit report Translation of audit reports Appendix 1 The Auditor-General s Opinions Review Committee (ORC) Appendix 2 Unmodified model audit report for a public entity applying a fair presentation framework Appendix 3 Unmodified model audit report for a public entity applying a compliance framework Issued 03/17 Office of the Auditor-General

203 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 700 (Revised): Forming an Opinion and Reporting on Financial Statements (ISA (NZ) 700); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 700, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 700 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December The Auditor-General determines the standard format and wording for audit reports on the financial and performance information required to be prepared by public entities for audit. In doing so, the Auditor-General takes into account the objectives and requirements of the International Standards on Auditing (New Zealand) that are relevant to the audits of public entities, 2 together with the requirements of the Public Audit Act 2001, to ensure appropriate reporting to readers. Objectives 5. The objectives of the Appointed Auditor are to: (a) form an opinion on the financial and performance information presented by the entity that is required to be audited, based on an evaluation of the conclusions drawn from the audit evidence obtained; and 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. 2 Paragraph 18 of ISA (NZ) 200. Issued 03/17 Office of the Auditor-General

204 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion (b) (c) report any other material matters in the audit report; and express that opinion clearly through a written report. Definitions 6. For the purpose of this Auditor-General s Auditing Statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Presentation of findings arising from the annual audit 7. Audit reports issued on behalf of the Auditor-General shall present the findings of the annual audit at the beginning of the audit report. (See paragraphs A1 A2) Expression of the opinion 8. Audit opinions issued by, or on behalf of, the Auditor-General on financial and performance information presented in accordance with a fair presentation framework, shall be expressed in the form of a dual opinion that separately opines on: (a) (b) the fair presentation of the audited material; and whether the audited material complies with generally accepted accounting practice in New Zealand and has been prepared in accordance with [the applicable financial reporting framework]. (See paragraphs A2 A5) 9. The audit opinion contained in audit reports issued by, or on behalf of, the Auditor- General on financial and performance information presented in accordance with a fair presentation framework, shall use the words present fairly, in all material respects. 10. Audit opinions issued by, or on behalf of, the Auditor-General on financial and performance information presented in accordance with a compliance framework (such as a non-gaap standard), shall be expressed using the words: Issued 03/17 Office of the Auditor-General

205 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion In our opinion, the accompanying financial statements and performance information have been prepared, in all material respects, in accordance with [the applicable financial reporting framework] (See paragraph A6) Use of template audit reports issued by the OAG 11. The Appointed Auditor shall use audit report templates issued by the OAG as the basis for all audit reports signed on behalf of the Auditor-General. The Appointed Auditor shall consult with the OAG on any departures (other than those that are trivial or inconsequential) from the format or style of any audit report template issued by the OAG. (See paragraph A7 and Appendices 2 and 3) Signing of audit reports 12. All audit reports, except those audit reports where the Auditor-General directs otherwise, shall be personally signed by the Appointed Auditor. However, the Auditor- General reserves the right to sign any audit report after giving due notice to the Appointed Auditor. Dating of audit reports 13. In addition to paragraph 49 of ISA (NZ) 700 (Revised), the audit report shall not be dated before: (a) the date on which the statement of responsibility or equivalent statement is signed; or (b) the date of the written representation, as required by AG ISA (NZ) 580 and ISA (NZ) 580. (See paragraph A8). Independence and the disclosure of relationships with, or interests in, the public entity in the audit report 14. The Appointed Auditor shall disclose in the Independence section of the audit report whether their Audit Service Provider (ASP) has any relationship with or interests in the public entity. (See paragraphs A9 A12). Issued 03/17 Office of the Auditor-General

206 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Audit reports to be referred to the OAG (See Appendix 1) 15. The Appointed Auditor shall consult with the Accounting and Auditing Policy team before issuing an audit report: (a) (b) (c) if the Appointed Auditor seriously considers issuing an audit report containing: (i) an emphasis of matter or other matter paragraph in relation to an uncertainty over the use of the going concern assumption; (ii) an emphasis of matter or other matter paragraph in relation to a matter of efficiency and effectiveness, waste, or a lack of probity or financial prudence; (iii) a disclaimer of opinion; or (iv) an adverse opinion. if the Appointed Auditor seriously considers including an emphasis of matter or other matter paragraph in that audit report where the OAG has not provided direction or guidance; or if there is a technical matter related to that audit report that the Appointed Auditor is unsure about. 16. The Accounting and Auditing Policy team will request the Appointed Auditor to prepare a submission to the Auditor-General s Opinions Review Committee (the ORC) for the circumstances in paragraph 15 above, unless there is clear precedent supporting the proposed audit report. (See paragraphs 1.8 and 1.9 of Appendix 1). Translation of audit reports Translation of audit reports into Mori 17. is an official language of New Zealand. An audit report in Mori shall be provided by the Appointed Auditor if requested by the entity s management. (See paragraphs A13 A15) 18. If an audit report in English shall also be provided. Translation of audit reports into another language 19. If the Appointed Auditor is requested to provide an audit report in a language that is not an official language of New Zealand (such as Niuean or Tokelaun), they shall contact the OAG for a translated audit report if that is deemed necessary. Issued 03/17 Office of the Auditor-General

207 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion 20. If an Appointed Auditor issues an audit report in a language other than English, an audit report in English shall also be provided. Reporting to the OAG 21. The Appointed Auditor shall forward to the OAG a copy of all audit reports issued, in keeping with the requirements set out in AG-1: Reporting to the OAG. *** Application and other explanatory material Presentation of findings arising from the annual audit (See paragraph 7) A1. Paragraph 43 of ISA (NZ) 700 (Revised) requires the auditor s report to clearly separate the results of the audit of the financial statements and performance information from the auditor s findings on other legal and regulatory requirements. Under paragraph 43, the auditor s findings on other legal and regulatory requirements are required to be reported in a separate section of the auditor s report following the components of the auditor s report on the audit of the financial statements and performance information. The Auditor-General has departed from the requirements of paragraph 43 of ISA (NZ) 700 (Revised) by requiring all findings arising from the audit to be reported at the beginning of the audit report. This means that auditors reports issued by, or on behalf of, the Auditor-General will report the auditor s opinion at the beginning of the audit report together with any other material findings arising from the annual audit. The findings will be categorised under separate sub-headings depending on their nature at the beginning of the auditor s report. A2. The Auditor-General presents the auditor s opinion, and other findings arising from the audit, at the beginning of the audit report because this is the information that is of most importance to the reader of the auditor s report. Expression of the opinion (See paragraphs 8 10) A3. Paragraph 25 of ISA (NZ) 700 (Revised) requires the auditor s opinion on financial statements prepared in accordance with a fair presentation framework to use one of the following phrases, which are regarded as being equivalent: (a) In our opinion, the accompanying financial statements present fairly, in all material respects, [ ] in accordance with [the applicable financial reporting Issued 03/17 Office of the Auditor-General

208 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion (b) framework]; or In our opinion, the accompanying financial statements give a true and fair view of [ ] in accordance with [the applicable financial reporting framework]. A4. The Auditor-General has departed from the requirements of paragraph 25 of ISA (NZ) 700 (Revised) by requiring audit opinions issued by, or on behalf of, the Auditor- General on financial and performance information presented in accordance with a fair presentation framework to be expressed in the form of a dual opinion. The dual opinion separately opines on: (a) the fair presentation of the audited material; and (b) whether the audited material complies with generally accepted accounting practice in New Zealand and has been prepared in accordance with [the applicable financial reporting framework]. A5. The Auditor-General has adopted the dual opinion approach because: (a) preparation of the financial statements and performance information in accordance with [the applicable financial reporting framework] does not automatically mean that the audited information is fairly presented; and (b) [the applicable financial reporting framework] does not adequately address some important aspects of financial statements and performance information in the public sector. The most prominent omission is in the area of performance reporting. A6. An example of a compliance framework in New Zealand is Public Benefit Entity Simple Format Reporting Cash (Public Sector). Use of template audit reports issued by the OAG (See paragraph 11) A7. Example audit reports are provided in this statement, AG ISA (NZ) 705 (Revised), AG ISA (NZ) 706 (Revised), on the Auditor s Homepage, and in other directions issued by the OAG from time to time. Dating of audit reports (See paragraph 13) A8. The financial and performance information on which the Appointed Auditor has issued the audit report may be included in a subsequently published annual report. Sometimes the annual report will be formally approved after the date that the financial and performance information was approved. The date of the audit report does not normally need to be changed solely because the date that the annual report was Issued 03/17 Office of the Auditor-General

209 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion approved is after the date that the financial and performance information was approved. Independence and the disclosure of relationships with, or interests in, the public entity in the audit report (See paragraph 14) A9. Where the ASP does not have a relationship with, or interests in, the entity (other than as auditor) the audit report should include a disclosure in the Independence section that states: We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. Other than the audit, we have no relationship with, or interests in, the [entity type]. A10. AG PES 1 (Revised) permits the Appointed Auditor to distinguish between assurance engagements and other engagements when reporting any other work in the audit report. Appointed Auditors are requested to pay particular attention to the disclosures made by the public entity in the note to the accounts that discloses the fees paid to the auditor. The note is required to fully describe the nature of the other services carried out by the ASP. Ideally the disclosure should separately distinguish fees earned from assurance engagements from fees earned from non-assurance engagements. A11. Whether or not an Appointed Auditor makes a distinction between assurance work and non-assurance work in the audit report is at their discretion. If the ASP has carried out engagements for the entity in addition to the annual audit, and the Appointed Auditor decides not to distinguish between assurance engagements and non-assurance engagements in the audit report, the audit report may simply state: In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type]. A12. If the Appointed Auditor wishes to distinguish between assurance and non-assurance engagements in the audit report, they should report this using the following reporting format: Issued 03/17 Office of the Auditor-General

210 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion In addition to the audit, we have carried out an assurance engagement in the area of [insert description of engagement]. We have also carried out a non-assurance engagement in the area of [insert description of engagement]. These engagements are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type]. Translation of audit reports Translation of audit reports into Mori (See paragraph 17) A13. The Mori Language Act 1987 established Mori as an official language of New Zealand. Although the Mori Language Act 1987 enhances and promotes the use of Mori, it does not require documents and reports to be written in Mori. If the annual written A14. Some public entities may request the audit report to be issued in Mori. A Mori translation of the audit report can be provided by the OAG on request. A15. The Auditor-General provides practical support where an entity requires an audit report in Mori. Mori translations of standard unqualified audit reports are included in some sections of the Auditors Homepage. Where a standard audit report in Mori is not provided by the OAG, or the wording is non-standard (that is, it includes additional wording such as an emphasis of matter paragraph or an other matter paragraph or is modified), the Accounting and Auditing Policy Group will arrange for the Mori translation to be completed and will meet the costs of the translation. Issued 03/17 Office of the Auditor-General

211 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Appendix 1 The Auditor-General s Opinions Review Committee (ORC) 1.1 The objectives of the Auditor-General s ORC are to: - manage audit risk; - provide assurance as to the consistency of non-standard audit reports; and - ensure a consistent approach to major accounting and auditing policy issues. Membership of the ORC 1.2 The ORC comprises the following members: - the Assistant Auditor-General Accounting and Auditing Policy as Chair; - the Auditor-General; - the relevant Sector Manager; and - the Assistant Auditor-General Legal. 1.3 A designated representative can be substituted for any of the above members. 1.4 The ORC will be convened as and when required by the Assistant Auditor-General Accounting and Auditing Policy. The Appointed Auditor may be asked to attend or be available. 1.5 A quorum comprises the Assistant Auditor-General Accounting and Auditing Policy, the Auditor-General, the Assistant Auditor-General Legal, and the relevant Sector Manager. Appointed Auditor procedures 1.6 It is preferable that issues be referred to the ORC as early as possible. This may be before the financial and performance information is prepared for audit; for example, an issue may become apparent at the planning stage. 1.7 If the Appointed Auditor is uncertain as to whether or not a matter should be referred to the ORC, the Appointed Auditor should approach the Accounting and Auditing Policy Group for advice. 1.8 The following information shall be submitted by the Appointed Auditor to the ORC at least three working days before a decision is required: - ORC checklist (see the end of this Appendix). Until all items required by the ORC are received by the Accounting and Auditing Policy Group, the submission will not be considered. Issued 03/17 Office of the Auditor-General

212 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion - A copy of the financial and performance information for annual audit that has been audited (or is required to be audited). If the financial and performance information for annual audit is not available, the latest available information should be provided to enable the issue to be considered in perspective. - Outline of the issue(s) that may require a non-standard audit report. If there is more than one issue, each issue should be addressed separately, including the background, audit concerns, and the effect on the financial and performance information. - Technical support for the Appointed Auditor s opinion. Technical support includes financial reporting and auditing standards, other guidance issued by relevant statutory and professional bodies, direction and advice from the OAG, legislation, and any other relevant technical guidance as appropriate. - The entity's view on the issue(s). The issue(s) and the potential effect on the audit report shall be discussed, where appropriate, with the entity (at no lower than chief executive level), and its position shall be clearly documented. If the entity disagrees with the Appointed Auditor s opinion, the rationale and any technical support for the entity's view shall be provided. The onus is on the entity to produce whatever technical support it believes is necessary to justify its position. This support may range from seeking an opinion from its own advisors to the Appointed Auditor simply recording (and considering the reasonableness of) the entity's rationale. The Auditor-General does not require the entity to obtain and pay for technical advice to support its position. - A copy of the recommended audit report. 1.9 If the Appointed Auditor has seriously considered the validity of the going concern assumption, the following information (in addition to the information specified above) shall be provided in the Appointed Auditor s submission to the ORC: - consideration of the requirements of AG ISA (NZ) 570 (Revised); - a budget for the next year; - year-to-date financial and performance information; - analysis of the entity s working capital position and its ability to meet its obligations as they fall due (this will normally include projected cash flow information); and - any other information relevant to the assessment of the going concern assumption (for example, in the case of schools, historical and projected roll information). Issued 03/17 Office of the Auditor-General

213 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Procedures within the OAG 1.10 The ORC submission shall be referred to a member of the Accounting and Auditing Policy Group, who will be responsible for checking for precedents, researching the technical issues, and preparing a "technical report" for the ORC The ORC shall meet, discuss the submission and technical report, and reach and document a consensus of opinion. This will usually be done within three days of having received the complete ORC submission. If a consensus is not reached, then the Auditor-General shall decide The ORC may, in addition to determining the wording of the audit report, decide to carry out any one or any combination of the following: - request the Appointed Auditor to include a comment in the management letter; - raise the issue in a letter from the Sector Manager or Auditor-General to the governing body; - inform any Responsible Minister, Ministry, or department of the issue; - inform any other body (for example, a regulator) as appropriate; and - report to Parliament. The above list is not definitive. It indicates the types of action beyond the audit report that the ORC may take in relation to audit findings. Other action shall only be taken after consultation with the Appointed Auditor. Notification of decisions to the Appointed Auditor 1.13 The Appointed Auditor will usually be advised in writing of the ORC's decision. If the ORC s decision differs from the Appointed Auditor s recommendation, an explanation and reasons will be given If an issue is of wider application, a general policy directive may be provided to the Appointed Auditor and other parties Where the Appointed Auditor disagrees with the decision made by the ORC and is unwilling to sign the audit report, the Appointed Auditor shall advise the Accounting and Auditing Policy Group. The report shall then be signed by the Auditor-General or a designated representative. This situation is highly unusual, and every effort will be made to reconcile the positions of the Appointed Auditor and the ORC before such action is taken. Issued 03/17 Office of the Auditor-General

214 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion 1.16 The Auditor-General accepts full responsibility for any implications that may arise on those matters reflected in audit reports signed by the Auditor-General (or a designated representative) that depart from the audit report recommended by the Appointed Auditor. Issued 03/17 Office of the Auditor-General

215 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion OAG ORC CHECKLIST Public entity Name Balance Date Information included in submission to ORC Included For all submissions to the ORC: Copy of financial and performance information (including accounting policies Yes No and notes). Outline of the issue(s). Yes No Reference to technical support (that is, the appropriate financial reporting and Yes No auditing standards). View of the entity on the issue and the proposed audit report. Yes No Copy of the recommended audit report. Yes No For submissions with issues of going concern A budget for the next year. Yes No Year-to-date financial and performance information. Yes No Analysis of working capital position and ability to meet obligations as they fall Yes No due. (This should include projected cash flow information.) Any other relevant details (for example, in the case of schools, historical and projected roll information). Yes No Copy of the recommended audit report on summary financial and performance information? Yes No Appointed Auditor Date Issued 03/17 Office of the Auditor-General

216 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Appendix 2 Unmodified model audit report for a public entity applying a fair presentation framework The following audit report is for an entity, which is not a FMC reporting entity (under the Financial Markets Conduct Act 2013), that is required to report performance information in a statement of performance. Unmodified model audit report Fair presentation framework ISA (NZ) 700 (Revised) requirements and corresponding OAG policies [Firm s letterhead] The audit report shall be printed on the letterhead of the auditing firm. INDEPENDENT AUDITOR S REPORT Paragraph 21 of ISA (NZ) 700 (Revised) requires that the auditor s report shall have a title that clearly indicates that it is the report of an independent auditor. TO THE [READERS]OF [NAME OF ENTITY] S Paragraph 22 of ISA (NZ) 700 (Revised) requires that the auditor s report shall be addressed, as appropriate, based on the circumstances of the engagement. Unless an exemption has been specifically provided for by the OAG, all audit reports issued by the Auditor-General shall be addressed to the readers because public entities are accountable to a wide constituency and the Auditor-General has broad responsibilities to report to this constituency. Individual exceptions may include situations where there is a minority private sector interest in the entity. For example, where the entity is a joint venture and one of the partners is from the private sector, then the audit report shall be addressed to the joint venturers. Where an audit report is addressed to a party other than to the readers, the audit report will normally include the following wording: TO THE [SHAREHOLDERS/JOINT VENTURERS/PARTNERS] OF [NAME OF ENTITY] FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The terminology used to describe the accountability statements shall be the same as that used by the public entity provided it appropriately describes the material that has been audited. The balance date is normally determined by legislation or by the governing body within the constraints of any legislation. The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. The Public Audit Act 2001 (section 32) deals with the appointment of auditors. The Auditor-General may from time to time appoint in writing a suitable person or body to act as an auditor on the Auditor-General s behalf. Opinion Paragraph 23 of ISA (NZ) 700 (Revised) requires that the auditor s report shall include the auditor s opinion, and shall have the heading Opinion. We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise 3 the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive Paragraph 24 of ISA (NZ) 700 (Revised) requires that the Opinion section of the auditor s report shall also: - identify the entity whose financial statements have been audited; - state that the financial statements have been audited; 3 Ensure that the names that are used in the financial statements and performance information are replicated in the audit report. Issued 03/17 Office of the Auditor-General

217 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include accounting policies and other explanatory information]; and - the statement of performance 3 of the [entity type] on pages [ ] to [ ]. - identify the title of each statement that comprises the financial statements; - refer to the notes, including the summary of significant accounting policies; and - specify the date or period covered by each financial statement comprising the financial statements. For the reasons set out in paragraphs A1 and A2, the results of the audit of the performance information are included in the Opinion section of the auditor s report. Identification of audited information by page number will assist readers to identify the information to which the audit report refers. In our opinion: - the financial statements of the [entity type] on pages [ ] to [ ]: A dual opinion is included in audit reports issued by, or on behalf of, the Auditor-General. Refer to paragraphs A3 to A5 of this statement for the reasons for including the dual opinion. - present fairly, in all material respects: - its financial position as at [DD MM 20XX]; and - its financial performance and cash flows for the year then ended; - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. - the statement of performance of the [entity type] on pages [ ] to [ ]: - presents fairly, in all material respects, the [entity type] s performance for the year ended [DD MM 20XX], including: The audit opinion on the performance information shall be expressed using the same terms used to express the opinion on the financial statements. The term present fairly, in all material respects is used when expressing the opinions on both the financial statements and on the performance information. - its performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - its actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. Our audit was completed on [Date]. This is the date at which our opinion is expressed. In addition to paragraph 49 of ISA (NZ) 700 (Revised), the audit report shall not be dated before: - the date on which the statement of responsibility or equivalent statement is signed; or - the date of the written representation, as required by AG ISA (NZ) 580 and ISA (NZ) 580. The Appointed Auditor, in normal circumstances, shall not sign and date the audit report until all other information (other than the audited financial and performance information) that will be included in the entity s annual report has been received and considered by the auditor in accordance with ISA (NZ) 720 (Revised). The basis for our opinion is explained below. In addition, we outline the responsibilities of the Audit reports issued by, or on behalf of, the Auditor-General shall include a separate section under the Issued 03/17 Office of the Auditor-General

218 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. heading Independence. This is a departure from paragraphs 28(c), NZ28(c), NZ28.1, and NZ40(b)(1) of ISA (NZ) 700 (Revised) that require statements about the auditor s independence to be included under the headings Basis for Opinion and Auditor s Responsibilities for the Audit of the Financial Statements. The Auditor-General is specifically required to act independently under section 9 of the Public Audit Act The heightened expectation that the Auditor-General must act, and be seen to act, independently, combined with the recognition that independence is fundamental to the Auditor- General has led the Auditor-General to raising the prominence of independence by including a separate section under the heading Independence. Basis for opinion We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. The Basis for Opinion section complies with the requirements of paragraph 28(a), (b), and (d) of ISA (NZ) 700 (Revised). This section also complies with the requirement in paragraph 28(c) of ISA (NZ) 700 (Revised) for the auditor to state that they have fulfilled their other ethical responsibilities (in addition to the independence requirements) under the relevant ethical requirements. Because assertion of compliance with the auditor s independence requirements is made under the Independence heading of the audit report, the requirement for the auditor to assert compliance with their other ethical responsibilities is needed. This requirement is encompassed in the statement We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards which encompasses the auditor s other ethical responsibilities. The required statements about independence under paragraphs 28(c), NZ28(c), and NZ28.1 have been included under a separate Independence heading. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. Paragraphs 33 to 36 of ISA (NZ) 700 (Revised) specify the matters to be included in the auditor s report under the heading Responsibilities of Those Charged with Governance for the Financial Statements. The wording of this section of the model audit report complies with paragraphs 33 to 36 of ISA (NZ) 700 (Revised), having been amended for the public sector. The audit report shall refer to the relevant legislation requiring the governing body to prepare the financial statements. It is not necessary to make reference to specific sections within the relevant legislation. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Paragraphs 37 to 42 of ISA (NZ) 700 (Revised) specify the content requirements of the section of the auditor s report with the heading Auditor s Responsibilities for the Audit of the Financial Statements. Our objectives are to obtain reasonable assurance about whether the financial statements and Paragraph 38(a) of ISA (NZ) 700 (Revised) requires the auditor s report to state that the objectives of Issued 03/17 Office of the Auditor-General

219 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts or disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. the auditor are to obtain reasonable assurance about whether the financial statements, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes the auditor s opinion. Paragraph 38(b) of ISA (NZ) 700 (Revised) requires the auditor s report to state that reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (NZ) will always detect a material misstatement when it exists. All audit reports issued by, or on behalf of, the Auditor-General include a statement that describes what is meant by the term misstatement. Paragraph 38(c) of ISA (NZ) 700 (Revised) requires the auditor s report to state that misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Because the audit report is addressed to readers, decisions will not be limited to economic decision, hence the change to refer to decisions of readers. For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations]. We did not evaluate the security and controls over the electronic publication of the financial statements and the statement of performance. Public entities are often required to include budget information for the period subject to audit in their financial statements and performance information. The purpose of the statement in the audit report is to clarify the extent of work carried out on budget information. All audit reports issued by, or on behalf of the Auditor-General include a statement that the auditor is not responsible for evaluating the security and controls over the electronic publication of the audited information. The primary reason for this statement is that audited information is often published by public entities in electronic form, and may also be included on one or more websites. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance; - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we Paragraph 39(a) of ISA (NZ) 700 (Revised) requires the auditor s report to state as part of an audit in accordance with the ISAs (NZ), the auditor exercises professional judgement and maintains professional scepticism throughout the audit. Paragraph 39(b)(i) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to identify and assess the risks of material misstatement, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for the auditor s opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Paragraph 39(b)(ii) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Paragraph 39(b)(iii) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Audit reports issued by, or on behalf of, the Auditor-General that express an opinion on performance information describe that the auditor evaluates the appropriateness of the reported performance information within the entity s framework for reporting its performance. Paragraph 39(b)(iv) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to conclude on the appropriateness of management s use of the going concern basis of accounting. Issued 03/17 Office of the Auditor-General

220 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. - We evaluate the overall presentation, structure and content of the financial statements and the statement of performance, including the disclosures, and whether the financial statements and the statement of performance represent the underlying transactions and events in a manner that achieves fair presentation. Paragraph 39(b)(v) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Paragraph 39(c) of ISA (NZ) 700 (Revised) requires the auditor s report of a group to state the auditor s responsibilities are to obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements, that the auditor is responsible for the direction, supervision and performance of the group audit, and that the auditor remains solely responsible for the audit opinion. Only include for a group audit - We obtain sufficient appropriate audit evidence regarding the financial statements and the statement of performance of the entities or business activities within the Group to express an opinion on the consolidated financial statements and the consolidated statement of performance. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibilities arises from the Public Audit Act Paragraph 40(a) of ISA (NZ) 700 (Revised) requires the auditor s report to state that the auditor communicates to those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit. For the annual audit of a public entity, reference should be made to the Public Audit Act 2001 in every audit report. Other Information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [XX to YY], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Paragraph 32 of ISA (NZ) 700 (Revised) requires the auditor to report in accordance with ISA (NZ) 720 (Revised). ISA (NZ) 720 (Revised) acknowledges the possibility that the other information may not be available before the audit has been completed, and specifies the audit report requirements in this situation. Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of Paragraphs 28(c), NZ28(c), and NZ28.1 require statements to be made in the auditor s report, under the Basis for Opinion heading, about the auditor s independence. The statements required are: Issued 03/17 Office of the Auditor-General

221 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] 28(c) That the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit NZ28(c) In New Zealand, the statement required by paragraph 28(c) shall refer to Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. NZ28.1 The existence of any relationship (other than that of auditor) which the auditor has with, or any interests which the auditor has in, the entity. In audit reports issued by, or on behalf of, the Auditor-General the required statements about independence under paragraphs 28(c), NZ28(c), and NZ28.1 are included under a separate Independence heading. [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Paragraph NZ46.1 of ISA (NZ) 700 (Revised) requires that the name of the engagement partner shall be included in the auditor s report on financial statements of FMC entities considered to have a higher level of public accountability. The Auditor-General requires the name of the Appointed Auditor to be included in the audit reports of all entities, followed by the name of the firm of the Appointed Auditor. Paragraph 47 of ISA (NZ) 700 (Revised) requires that the auditor s report shall be signed. The Auditor-General requires the signature of the Appointed Auditor. If the Appointed Auditor wants to include the signature of the Audit Firm, this may be included alongside the signature of the Appointed Auditor as follows: [Signature of Appointed Auditor] [Signature of Auditing Firm] Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Refer to paragraph 12 of this Statement for requirements on signing the audit report. Paragraph 48 of ISA (NZ) 700 (Revised) requires that the auditor s report shall name the location where the auditor practises. Issued 03/17 Office of the Auditor-General

222 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Appendix 3 Unmodified model audit report for a public entity applying a compliance framework The following audit report is for an entity, which is not a FMC reporting entity (under the Financial Markets Conduct Act 2013), that is required to report performance information in a statement of performance. Unmodified model audit report Compliance Framework ISA (NZ) 700 (Revised) requirements and corresponding OAG policies [Firm s letterhead] The audit report shall be printed on the letterhead of the auditing firm. INDEPENDENT AUDITOR S REPORT Paragraph 21 of ISA (NZ) 700 (Revised) requires that the auditor s report shall have a title that clearly indicates that it is the report of an independent auditor. TO THE [READERS] OF [NAME OF ENTITY] S Paragraph 22 of ISA (NZ) 700 (Revised) requires that the auditor s report shall be addressed, as appropriate, based on the circumstances of the engagement. Unless an exemption has been specifically provided for by the OAG, all audit reports issued by the Auditor-General shall be addressed to the readers because public entities are accountable to a wide constituency and the Auditor-General has broad responsibilities to report to this constituency. Individual exceptions may include situations where there is a minority private sector interest in the entity. For example, where the entity is a joint venture and one of the partners is from the private sector, then the audit report shall be addressed to the joint venturers. Where an audit report is addressed to a party other than to the readers, the audit report will normally include the following wording: TO THE [SHAREHOLDERS/JOINT VENTURERS/PARTNERS] OF [NAME OF ENTITY] FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The terminology used to describe the accountability statements shall be the same as that used by the public entity provided it appropriately describes the material that has been audited. The balance date is normally determined by legislation or by the governing body within the constraints of any legislation. The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. The Public Audit Act 2001 (section 32) deals with the appointment of auditors. The Auditor-General may from time to time appoint in writing a suitable person or body to act as an auditor on the Auditor-General s behalf. Opinion Paragraph 23 of ISA (NZ) 700 (Revised) requires that the auditor s report shall include the auditor s opinion, and shall have the heading Opinion. We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise 4 the Paragraph 24 of ISA (NZ) 700 (Revised) requires that the Opinion section of the auditor s report shall also: - identify the entity whose financial statements have been audited; 4 Ensure that the names that are used in the financial statements and performance information are replicated in the audit report. Issued 03/17 Office of the Auditor-General

223 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements, that include accounting policies and other explanatory information]; and - the statement of performance 3 of the [entity type] on pages [ ] to [ ]. - state that the financial statements have been audited; - identify the title of each statement that comprises the financial statements; - refer to the notes, including the summary of significant accounting policies; and - specify the date or period covered by each financial statement comprising the financial statements. Identification of audited information by page number will assist readers to identify the information to which the audit report refers. In our opinion the financial statements and the statement of performance of the [entity type] have been prepared, in all material respects, in accordance with [the applicable financial reporting framework]. When financial statements and performance information have been prepared in accordance with a compliance framework the auditor is not required to assess the fair presentation of those statements. As a result, a dual opinion is not expressed for financial statements and performance information prepared in accordance with a compliance framework. Our audit was completed on [Date]. This is the date at which our opinion is expressed. In addition to paragraph 49 of ISA (NZ) 700 (Revised), the audit report shall not be dated before: - the date on which the statement of responsibility or equivalent statement is signed; or - the date of the written representation, as required by AG ISA (NZ) 580 and ISA (NZ) 580. The Appointed Auditor, in normal circumstances, shall not sign and date the audit report until all other information (other than the audited financial and performance information) that will be included in the entity s annual report has been received and considered by the auditor in accordance with ISA (NZ) 720 (Revised). The basis for our opinion is explained below. In addition, we outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. Audit reports issued by, or on behalf of, the Auditor-General shall include a separate section under the heading Independence. This is a departure from paragraphs 28(c), NZ28(c), NZ28.1 and NZ40(b)(1) of ISA (NZ) 700 (Revised) that require statements about the auditor s independence to be included under the headings Basis for Opinion and Auditor s Responsibilities for the Audit of the Financial Statements. The Auditor-General is specifically required to act independently under section 9 of the Public Audit Act The heightened expectation that the Auditor-General must act, and be seen to act, independently, combined with the recognition that independence is fundamental to the Auditor- General has led the Auditor-General to raising the prominence of independence by including a separate section under the heading Independence. Basis for opinion We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. The Basis for Opinion section complies with the requirements of paragraph 28(a), (b), and (d) of ISA (NZ) 700 (Revised). This section also complies with the requirement in paragraph 28(c) of ISA (NZ) 700 (Revised) for the auditor to state that they have fulfilled their other ethical responsibilities (in addition to the independence requirements) under the relevant ethical requirements. Because assertion of compliance with the auditor s independence requirements is made under the Independence heading of the audit report, the requirement for the auditor to assert compliance with their other ethical responsibilities is needed. This requirement is encompassed in the statement We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards which encompasses the auditor s other ethical responsibilities. The required statements about independence under paragraphs 28(c), NZ28(c) and NZ28.1 have been included under a separate Independence heading. Issued 03/17 Office of the Auditor-General

224 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for the preparation of the financial statements and the statement of performance in accordance with [the applicable financial reporting framework]. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. Paragraphs 33 to 36 of ISA (NZ) 700 (Revised) specify the matters to be included in the auditor s report under the heading Responsibilities of Those Charged with Governance for the Financial Statements. The wording of this section of the model audit report complies with paragraphs 33 to 36 of ISA (NZ) 700 (Revised), having been amended to reflect the public sector context. The audit report shall refer to the relevant legislation requiring the governing body to prepare the financial statements. It is not necessary to make reference to specific sections within the relevant legislation. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Paragraphs 37 to 42 of ISA (NZ) 700 (Revised) specify the content requirements of the section of the auditor s report with the heading Auditor s Responsibilities for the Audit of the Financial Statements. Our objectives are to obtain reasonable assurance about whether the financial statements and the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts and disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. Paragraph 38(a) of ISA (NZ) 700 (Revised) requires the auditor s report to state that the objectives of the auditor are to obtain reasonable assurance about whether the financial statements, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes the auditor s opinion. Paragraph 38(b) of ISA (NZ) 700 (Revised) requires the auditor s report to state that reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (NZ) will always detect a material misstatement when it exists. All audit reports issued by, or on behalf of, the Auditor-General include a statement that describes what is meant by the term material misstatement. Paragraph 38(c) of ISA (NZ) 700 (Revised) requires the auditor s report to state that misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Because the audit report is addressed to readers, decisions will not be limited to economic decision, hence the change to refer to decisions of readers. [For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations].] We did not evaluate the security and controls over the electronic publication of the financial statements and the statement of performance. Public entities are often required to include budget information for the period subject to audit in their financial statements and performance information. The purpose of the statement in the audit report is to clarify the extent of work carried out on budget information. This text should only be included in the audit report when the financial statements and the statement of performance include budget information. All audit reports issued by, or on behalf of the Auditor-General include a statement that the auditor is Issued 03/17 Office of the Auditor-General

225 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion not responsible for evaluating the security and controls over the electronic publication of the audited information. The primary reason for this statement is that audited information is often published by public entities in electronic form, and may also be included on one or more websites. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance; - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. Paragraph 39(a) of ISA (NZ) 700 (Revised) requires the auditor s report to state as part of an audit in accordance with the ISAs (NZ), the auditor exercises professional judgement and maintains professional scepticism throughout the audit. Paragraph 39(b)(i) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to identify and assess the risks of material misstatement, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for the auditor s opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Paragraph 39(b)(ii) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Paragraph 39(b)(iii) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Audit reports issued by, or on behalf of, the Auditor-General that express an opinion on performance information describe that the auditor evaluates the appropriateness of the reported performance information within the entity s framework for reporting its performance. Paragraph 39(b)(iv) of ISA (NZ) 700 (Revised) requires the auditor s report to describe the auditor s responsibility to conclude on the appropriateness of management s use of the going concern basis of accounting. Paragraph 39(c) of ISA (NZ) 700 (Revised) requires the auditor s report of a group to state the auditor s responsibilities are to obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements, that the auditor is responsible for the direction, supervision and performance of the group audit, and that the auditor remains solely responsible for the audit opinion. We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibility arises from the Public Audit Act Paragraph 40(a) of ISA (NZ) 700 (Revised) requires the auditor s report to state that the auditor communicates to those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit. For the annual audit of a public entity, reference should be made to the Public Audit Act 2001 in every audit report. Other Information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [XX to YY], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Paragraph 32 of ISA (NZ) 700 (Revised) requires the auditor to report in accordance with ISA (NZ) 720 (Revised). ISA (NZ) 720 (Revised) acknowledges the possibility that the other information may not be available before the audit has been completed, and specifies the audit report requirements in this situation. Issued 03/17 Office of the Auditor-General

226 AG ISA (NZ) 700 (Revised) Forming and reporting an opinion Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board.. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] Paragraphs 28(c), NZ28(c) and NZ28.1 require statements to be made in the auditor s report, under the Basis for Opinion heading, about the auditor s independence. The statements required are: 28(c) That the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit NZ28(c) In New Zealand, the statement required by paragraph 28(c) shall refer to Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. NZ28.1 The existence of any relationship (other than that of auditor) which the auditor has with, or any interests which the auditor has in, the entity. In audit reports issued by, or on behalf of, the Auditor-General the required statements about independence under paragraphs 28(c), NZ28(c) and NZ28.1 are included under a separate Independence heading. [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Paragraph NZ46.1 of ISA (NZ) 700 (Revised) requires that the name of the engagement partner shall be included in the auditor s report on financial statements of FMC entities considered to have a higher level of public accountability. The Auditor-General requires the name of the Appointed Auditor to be included in the audit reports of all entities, followed by the name of the firm of the Appointed Auditor. Paragraph 47 of ISA (NZ) 700 (Revised) requires that the auditor s report shall be signed. The Auditor-General requires the signature of the Appointed Auditor. If the Appointed Auditor wants to include the signature of the Audit Firm, this may be included alongside the signature of the Appointed Auditor as follows: [Signature of Appointed Auditor] [Signature of Auditing Firm] Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Refer to paragraph 12 of this Statement for requirements on signing the audit report. Paragraph 48 of ISA (NZ) 700 (Revised) requires that the auditor s report shall name the location where the auditor practises. Issued 03/17 Office of the Auditor-General

227 AG ISA (NZ) 701 Key audit matters AG ISA (NZ) 701 THE AUDITOR-GENERAL S STATEMENT ON COMMUNICATIING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR S REPORT Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Determining key audit matters Application and Other Explanatory Material Determining key audit matters Issued 03/17 Office of the Auditor-General

228 AG ISA (NZ) 701 Key audit matters Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 701: Communicating Key Audit Matters in the Independent Auditor s Report (ISA (NZ) 701); 1 and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General where they are communicating key audit matters in the audit report. This Statement requires compliance with all of the requirements of ISA (NZ) 701, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 701 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December Objectives 4. The objectives of the Appointed Auditor are to determine key audit matters and, having formed an opinion on the financial statements and, where applicable, performance information, communicate those matters by describing them in the auditor s report. 2 Definitions 5. For the purpose of this Auditor-General s Auditing Statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and performance information. 2 The objective should be read in addition to the objectives in AG ISA (NZ) 700. Issued 03/17 Office of the Auditor-General

229 AG ISA (NZ) 701 Key audit matters Requirements Determining key audit matters 6. Appointed Auditors of public entities that are public benefit entities, whose primary purpose is to provide goods and/or services to New Zealand citizens, shall also apply the requirements in paragraphs 9 and 10 of ISA (NZ) 701 to performance information that is reported, or should be reported, by the public entity. (See paragraph A1) *** Application and Other Explanatory Material Determining key audit matters (See paragraph 6) A1. The purpose of public entities that are public benefit entities is to provide goods and/or services in the public interest. Where the audit report of a public entity, which is also a public benefit entity, will include key audit matters the Appointed Auditor will need to consider the application of the requirements of paragraphs 9 and 10 of ISA (NZ) 701 to both financial and performance information. In doing so, Appointed Auditors should consider consulting with the OAG Sector Manager about the key audit matters that are proposed to be reported. Issued 03/17 Office of the Auditor-General

230 AG ISA (NZ) 705 (Revised) Modifications to the opinion AG ISA (NZ) 705 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR S REPORT Contents Page Introduction Scope of this Statement Application Objective Definitions Requirements Authority for Appointed Auditors to issue modified audit reports without prior OAG approval Matters to consider when preparing a modified audit report Audit reports to be referred to the OAG before they are issued Reporting modified audit reports to the OAG Application and other explanatory material Appendix 1 Examples of modified audit reports Issued 03/17 Office of the Auditor-General

231 AG ISA (NZ) 705 (Revised) Modifications to the opinion Introduction Scope of this Statement 1. This Auditor General s Auditing Statement sets out the Auditor-General s requirements for issuing modified audit reports, and provides examples of modified audit reports (in Appendix 1) that are based on the requirements of: (a) AG ISA (NZ) 700 (Revised): Forming an Opinion and Reporting on Financial and Performance Information; and (b) ISA (NZ) 705 (Revised): Modifications to the Opinion in the Independent Auditor s Report (ISA (NZ) 705). 1 Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 705, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 705 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December Objective 4. The objective of the Appointed Auditor is to express clearly an appropriately modified opinion on the financial and performance information that is necessary when: (a) the Appointed Auditor concludes, based on the audit evidence obtained, that the financial and performance information as a whole is not free from material misstatement; or (b) the Appointed Auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial and performance information as a whole is free from material misstatement. 5. In meeting the objective in paragraph 4, the Appointed Auditor shall make reasonable endeavours to provide assurance on those aspects of the financial and performance 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

232 AG ISA (NZ) 705 (Revised) Modifications to the opinion information where such assurance can be readily provided. For example, the Appointed Auditor is often able to provide assurance on the statement of cash flows, whilst being unable to form an unmodified opinion on other aspects of an entity s financial and performance information. Definitions 6. For the purpose of this Auditor-General s Auditing Statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Authority for Appointed Auditors to issue modified audit reports without prior OAG approval 7. Unless there is an instruction from the OAG, Appointed Auditors are authorised to issue modified audit reports without prior OAG approval unless the misstatement giving rise to the modification is, or may be, pervasive to the reported financial and performance information. This authority does not preclude the Appointed Auditor from seeking advice from the OAG prior to issuing a modified audit report. 8. Where the misstatement giving rise to the modification is, or may be, pervasive to the reported financial and performance information, Appointed Auditors shall refer the matter to the Accounting and Auditing Policy team at the OAG in accordance with paragraph 15 in AG ISA (NZ) 700. Matters to consider when preparing a modified audit report 9. When preparing a modified audit report, the Appointed Auditor shall ensure that they apply any requirements: (a) issued by the OAG in respect of particular audits or sectors; (b) contained in AG ISA (NZ) 700 (Revised) particularly when serious consideration is given to issuing a modified audit report that is required to be Issued 03/17 Office of the Auditor-General

233 AG ISA (NZ) 705 (Revised) Modifications to the opinion (c) referred to the Accounting and Auditing Policy team at the OAG for approval before it is issued; and contained in AG ISA (NZ) 705 (Revised) and ISA (NZ) 705 (Revised). 10. In addition to the requirements in paragraph 9, Appointed Auditors shall refer to the example modified audit reports in Appendix 1 for guidance on presentation and format. (See paragraph A1) Audit reports to be referred to the OAG before they are issued 11. In certain circumstances where the auditor proposes to issue a modified audit report, the Appointed Auditor shall refer the audit report to the Accounting and Auditing Policy team at the OAG before the audit report is issued. This requirement usually arises when the Appointed Auditor seriously considers issuing a modified audit report because of a matter that is potentially pervasive to the reported financial and performance information. The procedures for referring such audit reports to the OAG are specified in AG ISA (NZ) 700 (Revised). 12. Other instances where modified audit reports are required to be referred to the Accounting and Auditing Policy team at the OAG for approval before they are issued may be advised to Appointed Auditors through audit briefs or other instructions. Reporting modified audit reports to the OAG 13. The Appointed Auditor shall forward to the OAG a copy of all audit reports issued, including modified audit reports, in keeping with the requirements set out in AG-1: Reporting to the OAG. Application and other explanatory material A1. In formatting a modified audit report, the desired outcome is an audit report that clearly reports the findings from the audit to the readers. This should usually be able to be achieved by following the requirements of ISA (NZ) 705 (Revised). However, if the formatting requirements of ISA (NZ) 705 (Revised) limit the clear communication of audit findings, Appointed Auditors may present their findings using a different format. In doing so, Appointed Auditors are requested to consult with the Accounting and Auditing Policy team at the OAG before issuing the modified audit report. Issued 03/17 Office of the Auditor-General

234 AG ISA (NZ) 705 (Revised) Modifications to the opinion Appendix 1 Examples of modified audit reports 1.1 There are four examples of modified audit reports in this Appendix. The examples have been prepared to assist Appointed Auditors in presenting and formatting a modified audit report. 1.2 The examples are all based on a public entity that has prepared financial and performance information in accordance with a fair presentation framework. The examples are: Example 1. A qualified opinion where the Appointed Auditor has obtained sufficient appropriate audit evidence and concludes that misstatements, individually or in the aggregate, are material but not pervasive. Nature of the matter giving rise to the modification The financial and performance information is materially misstated Inability to obtain sufficient appropriate audit evidence Auditor s judgement about the pervasiveness of the effects or possible effects on the financial and performance information Material but not pervasive Material and pervasive Qualified opinion Adverse opinion Qualified opinion Disclaimer of opinion Example 2. A qualified opinion when the Appointed Auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion and concludes that the possible effects of undetected misstatements, if any, could be material but not pervasive. Nature of the matter giving rise to the modification The financial and performance information is materially misstated Inability to obtain sufficient appropriate audit evidence Auditor s judgement about the pervasiveness of the effects or possible effects on the financial and performance information Material but not pervasive Material and pervasive Qualified opinion Adverse opinion Qualified opinion Disclaimer of opinion Issued 03/17 Office of the Auditor-General

235 AG ISA (NZ) 705 (Revised) Modifications to the opinion Example 3. An adverse opinion where the Appointed Auditor has obtained sufficient appropriate audit evidence and concludes that misstatements, individually or in the aggregate, are both material and pervasive. Nature of the matter giving rise to the modification The financial and performance information is materially misstated Inability to obtain sufficient appropriate audit evidence Auditor s judgement about the pervasiveness of the effects or possible effects on the financial and performance information Material but not pervasive Material and pervasive Qualified opinion Adverse opinion Qualified opinion Disclaimer of opinion Example 4. A disclaimer of opinion when the Appointed Auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion, and concludes that the possible effects of undetected misstatements, if any, could be both material and pervasive. Nature of the matter giving rise to the modification The financial and performance information is materially misstated Inability to obtain sufficient appropriate audit evidence Auditor s judgement about the pervasiveness of the effects or possible effects on the financial and performance information Material but not pervasive Material and pervasive Qualified opinion Adverse opinion Qualified opinion Disclaimer of opinion Issued 03/17 Office of the Auditor-General

236 AG ISA (NZ) 705 (Revised) Modifications to the opinion Example 1 Qualification Disagreement Material but not pervasive Non-disclosure of related party transactions [Firm s letterhead] INDEPENDENT AUDITOR S REPORT TO THE [READERS] OF [NAME OF ENTITY] S FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that included accounting policies and other explanatory information]; and - the statement of performance of the [entity type] on pages [ ] to [ ]. Qualified opinion Qualified opinion on the financial statements Non-disclosure of related party transactions In our opinion, except for the matter described in the Basis for our qualified opinion section of our report, the financial statements of the [entity type] on pages [ ] to [ ]: - present fairly, in all material respects: - its financial position as at [DD MM 20XX]; and - its financial performance and cash flows for the year then ended; and - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. Unmodified opinion on the statement of performance In our opinion, the statement of performance of the [entity type] on pages [ ] to [ ]: - presents fairly, in all material respects, the [entity type] s performance for the year ended [DD MM 20XX], including: - its performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - its actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. Our audit of the financial statements and the statement of performance was completed on [Date]. This is the date at which our qualified opinion is expressed. The basis for our qualified opinion is explained below. In addition, we outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. Basis for our qualified opinion The [entity type] has not provided us with evidence that the other remuneration and compensation paid to key management personnel and to close members of key management personnel has been charged to the [entity type] on normal commercial terms. If other remuneration and compensation of this nature is not charged on normal commercial terms, [entity type] is required to disclose the total amount of other remuneration and compensation paid to key management personnel and to close members of key management personnel in accordance with Public Benefit Entity International Public Sector Accounting Standard 20: Related Party Disclosures. Issued 03/17 Office of the Auditor-General

237 AG ISA (NZ) 705 (Revised) Modifications to the opinion We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Our objectives are to obtain reasonable assurance about whether the financial statements and the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts and disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations]. We did not evaluate the security and controls over the electronic publication of the financial statements and the statement of performance. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance. - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. Issued 03/17 Office of the Auditor-General

238 AG ISA (NZ) 705 (Revised) Modifications to the opinion - We evaluate the overall presentation, structure and content of the financial statements and the statement of performance, including the disclosures, and whether the financial statements and the statement of performance represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibilities arise from the Public Audit Act Other information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [ ] to [ ], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Issued 03/17 Office of the Auditor-General

239 AG ISA (NZ) 705 (Revised) Modifications to the opinion Example 2 Qualification Uncertainty Material but not pervasive Limited control over revenue [Firm s letterhead] INDEPENDENT AUDITOR S REPORT TO THE [READERS] OF [NAME OF ENTITY] S FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include accounting policies and other explanatory information]; and - the statement of performance of the [entity type] on pages [ ] to [ ]. Qualified opinion Qualified opinion on the financial statements Limited control over door-to-door collections revenue In our opinion, except for the matter described in the Basis for our qualified opinion section of our report, the financial statements of the [entity type] on pages [ ] to [ ]: - present fairly, in all material respects: - its financial position as at [DD MM 20XX]; and - its financial performance and cash flows for the year then ended; and - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. Unmodified opinion on the statement of performance In our opinion, the statement of performance of the [entity type] on pages [ ] to [ ]: - presents fairly, in all material respects, the [entity type] s performance for the year ended [DD MM 20XX], including: - its performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - its actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. Our audit of the financial statements and the statement of performance was completed on [Date]. This is the date at which our qualified opinion is expressed. The basis for our qualified opinion is explained below. In addition, we outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. Basis for our qualified opinion Prior to being recorded, control over the receipt of door-to-door collections revenue is limited. Door-to-door collections revenue is disclosed in Note Z to the financial statements as $[xxx] ([20XX-1]: $[yyy]). There are no satisfactory audit procedures that we could adopt to confirm independently that the revenue for all door-to-door collections had been properly recorded. We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Issued 03/17 Office of the Auditor-General

240 AG ISA (NZ) 705 (Revised) Modifications to the opinion Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Our objectives are to obtain reasonable assurance about whether the financial statements and the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts and disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations]. We did not evaluate the security and controls over the electronic publication of the financial statements and the statement of performance. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance. - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. - We evaluate the overall presentation, structure and content of the financial statements and the statement of performance, including the disclosures, and whether the financial statements and the statement of performance represent the underlying transactions and events in a manner that achieves fair presentation. Issued 03/17 Office of the Auditor-General

241 AG ISA (NZ) 705 (Revised) Modifications to the opinion We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibilities arise from the Public Audit Act Other information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [ ] to [ ], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Issued 03/17 Office of the Auditor-General

242 AG ISA (NZ) 705 (Revised) Modifications to the opinion Example 3 Adverse Disagreement - Material and pervasive Nonrecognition of heritage assets [Firm s letterhead] INDEPENDENT AUDITOR S REPORT TO THE [READERS] OF [NAME OF ENTITY] S FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include accounting policies and other explanatory information]; and - the statement of performance of the [entity type] on pages [ ] to [ ]. Adverse opinion Adverse opinion on the financial statements Non-recognition of heritage assets In our opinion, because of the significance of the matter discussed in the Basis for our adverse opinion section of our report, the financial statements of the [entity type] on pages [ ] to [ ]: - do not present fairly, in all material respects: - its financial position as at [DD MM 20XX]; and - its financial performance for the year then ended; and - do not comply with generally accepted accounting practice in New Zealand and have not been prepared in accordance with [the applicable financial reporting framework]. Unmodified opinion on the cash flows and statement of performance In our opinion the statement of cash flows on page [ ]: - presents fairly, in all material respects, the cash flows for the year ended [DD MM 20XX]; and - complies with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. In our opinion the statement of performance of the [entity type] on pages [ ] to [ ]: - presents fairly, in all material respects, the [entity type] s performance for the year ended [DD MM 20XX], including: - its performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - its actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. Our audit of the financial statements and the statement of performance was completed on [Date]. This is the date at which our adverse opinion is expressed. The basis for our adverse opinion is explained below. In addition, we outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. Issued 03/17 Office of the Auditor-General

243 AG ISA (NZ) 705 (Revised) Modifications to the opinion Basis for our adverse opinion The [entity type] has not recognised its heritage assets in the statement of financial position, nor the associated depreciation expense in the statement of comprehensive revenue and expense. This is a departure from Public Benefit Entity International Public Sector Accounting Standard 17: Property, Plant and Equipment that generally requires assets to be recognised and depreciated during their useful lives. Because heritage assets make up a substantial proportion of the [entity type] s total assets the effect of their omission from the financial statements is pervasive, resulting in the financial statements being fundamentally misleading. We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse opinion. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Our objectives are to obtain reasonable assurance about whether the financial statements and the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts and disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations]. We did not evaluate the security and controls over the electronic publication of the financial statements and the statement of performance. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance. - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or Issued 03/17 Office of the Auditor-General

244 AG ISA (NZ) 705 (Revised) Modifications to the opinion conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. - We evaluate the overall presentation, structure and content of the financial statements and the statement of performance, including the disclosures, and whether the financial statements and the statement of performance represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibility arises from the Public Audit Act Other information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [ ] to [ ], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Issued 03/17 Office of the Auditor-General

245 AG ISA (NZ) 705 (Revised) Modifications to the opinion Example 4 Disclaimer Uncertainty Material and pervasive Loss of accounting records [Firm s letterhead] INDEPENDENT AUDITOR S REPORT TO THE [READERS] OF [NAME OF ENTITY] S FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. Disclaimer of opinion We are required to audit: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include significant accounting policies and other explanatory information]; and - the statement of performance of the [entity type] on pages [ ] to [ ]. We do not express an opinion on the financial statements and the statement of performance of the [entity type]. Because of the significance of the matter described in the Basis for our disclaimer of opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements and the statement of performance. The date of our disclaimer of opinion is [Date]. We outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, and we explain our independence. Basis for our disclaimer of opinion As stated in note [ ] on page [ ], a fire at the [entity type] s head office destroyed many of the accounting records that form the basis for the preparation of the financial statements and the statement of performance. As a consequence, we were unable to obtain sufficient appropriate audit evidence that would have allowed us to form an audit opinion. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Our responsibility is to: - carry out an audit of the [entity type] s financial statements and statement of performance in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the Issued 03/17 Office of the Auditor-General

246 AG ISA (NZ) 705 (Revised) Modifications to the opinion International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board; and - issue an auditor s report. However, because of the matters described in the Basis for our disclaimer of opinion section of our report, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements and the statement of performance. Our responsibilities arise from the Public Audit Act Our independence and other ethical responsibilities We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. We have also fulfilled our other ethical responsibilities in accordance with Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [We have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than in our capacity as auditor and these engagements, we have no relationship with, or interests in, the [entity type].] [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Issued 03/17 Office of the Auditor-General

247 AG ISA (NZ) 706 (Revised) Emphasis of matter paragraphs and other matter paragraphs AG ISA (NZ) 706 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN THE INDEPENDENT AUDITOR S REPORT Contents Page Introduction Scope of this Statement Application Objective Definitions Requirements Authority for Appointed Auditors to issue audit reports including emphasis of matter and/or other matter paragraphs without prior OAG approval Matters to consider when preparing an audit report containing an emphasis of matter or other matter paragraph Audit reports to be referred to the OAG before they are issued Reporting audit reports containing an emphasis of matter or other matter paragraph to the OAG Application and other explanatory material Appendix 1 Examples of emphasis of matter and other matter paragraphs Issued 03/17 Office of the Auditor-General

248 AG ISA (NZ) 706 (Revised) Emphasis of matter paragraphs and other matter paragraphs Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement sets out the Auditor-General s requirements for issuing audit reports that contain emphasis of matter or other matter paragraphs. Also, it provides examples (in Appendix 1) of emphasis of matter and other matter paragraphs that are based on the requirements of: (a) AG ISA (NZ) 700 (Revised): Forming an opinion and reporting on financial and performance information; and (b) ISA (NZ) 706 (Revised): Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report (ISA (NZ) 706). 1 Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 706, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 706 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December Objective 4. The objective of the Appointed Auditor, having formed an opinion on the financial and performance information, is to draw readers attention, when in the Appointed Auditor s judgement it is necessary to do so, by way of clear additional communication in the auditor s report, to: (a) a matter, although appropriately presented or disclosed in the financial and performance information, that is of such importance it is fundamental to a reader s understanding of the financial and performance information; and/or (b) as appropriate, any other matter that is relevant to a reader s understanding of the annual audit, the Auditor-General s responsibilities, or the auditor s report. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

249 AG ISA (NZ) 706 (Revised) Emphasis of matter paragraphs and other matter paragraphs 5. The availability of emphasis of matter and/or other matter paragraphs is a particularly important means of reporting significant matters in the context of audits carried out by, or on behalf of, the Auditor-General. For example, Appointed Auditors may draw attention to matters of interest in the audit report, such as non-compliance with legislation relating to a matter of financial management or accountability, or to an instance of spending that, in the opinion of the Appointed Auditor, is wasteful. Definitions 6. For the purpose of this Auditor-General s Auditing Statement, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements Authority for Appointed Auditors to issue audit reports including emphasis of matter and/or other matter paragraphs without prior OAG approval 7. Appointed Auditors are authorised to issue audit reports that include emphasis of matter and/or other matter paragraphs without prior OAG approval in the following circumstances: - where financial statements and performance information has been appropriately prepared on a basis of accounting, other than the going concern basis of accounting, and where the auditor draws attention to the other basis of accounting in the auditor s report; and/or - where prior authorisation has been provided by the OAG in an audit brief or other authority. Matters to consider when preparing an audit report containing an emphasis of matter or other matter paragraph 8. As a general principle Appointed Auditors shall position emphasis of matter or other matter paragraphs towards the beginning of the audit report. Where the auditor s Issued 03/17 Office of the Auditor-General

250 AG ISA (NZ) 706 (Revised) Emphasis of matter paragraphs and other matter paragraphs opinion is unmodified, the emphasis of matter or other matter paragraph will usually be positioned immediately after the Opinion section. Where the auditor s opinion has been modified, the emphasis of matter or other matter paragraph will usually be positioned immediately after the Basis for [modification] section. 9. When preparing an audit report containing an emphasis of matter or other matter paragraph, the Appointed Auditor shall ensure that they apply any requirements: (a) issued by the OAG in respect of particular audits or sectors; (b) in AG ISA (NZ) 700 (Revised) if the Appointed Auditor seriously considers including an emphasis of matter or other matter paragraph in an audit report where the OAG has not provided any direction or guidance; (c) in AG ISA (NZ) 706 (Revised) and ISA (NZ) 706 (Revised). 10. In addition to the requirements in paragraph 9, Appointed Auditors shall refer to the example audit reports in Appendix 1 for guidance on presentation and format. Audit reports to be referred to the OAG before they are issued 11. The Appointed Auditor shall refer the audit report to the Accounting and Auditing Policy team at the OAG for prior OAG approval, when the Appointed Auditor seriously considers including an emphasis of matter or other matter paragraph in an audit report. The procedures for referring such audit reports to the OAG are specified in AG ISA (NZ) 700 (Revised). Reporting audit reports containing an emphasis of matter or other matter paragraph to the OAG 12. The Appointed Auditor shall forward to the OAG a copy of all audit reports issued (including audit reports containing an emphasis of matter or other matter paragraph), in keeping with the requirements set out in AG-1: Reporting to the OAG. *** Application and other explanatory material A1. Paragraph 9(a) of ISA (NZ) 706 (Revised) requires the auditor to include a heading that includes the term Emphasis of Matter whenever the auditor includes an emphasis of matter paragraph in the auditor s report. For audit reports issued by, or on behalf of, the Auditor-General the inclusion of a heading that includes the term Issued 03/17 Office of the Auditor-General

251 AG ISA (NZ) 706 (Revised) Emphasis of matter paragraphs and other matter paragraphs Emphasis of Matter does not clearly convey the nature of the matter to readers of the audit report, and is not a requirement of this statement. Issued 03/17 Office of the Auditor-General

252 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs Appendix 1 Examples of emphasis of matter and other matter paragraphs This appendix contains two example audit reports. The examples are intended to provide guidance on the formatting of audit reports that include an emphasis of matter and other matter paragraph. Example 1 shows the positioning of an emphasis of matter paragraph and an other matter paragraph when the auditor is issuing an unmodified audit opinion. In this instance the emphasis of matter paragraph draws readers attention to a note that discloses why the public entity has appropriately prepared the financial statements and performance information using a disestablishment basis of accounting. In addition, because the public entity has not prepared its financial statements and performance information within the statutory deadline, and has not disclosed this breach of law, the auditor has drawn readers attention to this matter by way of an other matter paragraph. Example 2 shows the positioning of an emphasis of matter paragraph and an other matter paragraph when the auditor is issuing a modified audit opinion. In this instance the emphasis of matter paragraph draws readers attention to a note that discloses that a third party has initiated legal proceedings against it; a matter that, in the auditor s judgement, is fundamental to the readers understanding of the financial statements and performance information. In addition, the auditor wishes to draw readers attention to expenditure incurred by the public entity that the auditor considers to be wasteful by way of an other matter paragraph. Issued 03/17 Office of the Auditor-General

253 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs Example 1 Auditor s report: Unmodified audit opinion with emphasis of matter and other matter paragraphs [Firm s letterhead] INDEPENDENT AUDITOR S REPORT TO THE [READERS] OF [NAME OF ENTITY] S FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. Opinion We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise 2 the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include accounting policies and other explanatory information]; and - the statement of performance 3 of the [entity type] on pages [ ] to [ ]. In our opinion: - the financial statements of the [entity type] on pages [ ] to [ ], which have been prepared on a disestablishment basis: - present fairly, in all material respects: - its financial position as at [DD MM 20XX]; and - its financial performance and cash flows for the year then ended; and - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. - the statement of performance of the [entity type] on pages [ ] to [ ], which has been prepared on a disestablishment basis: - presents fairly, in all material respects, the [entity type] s performance for the year ended [DD MM 20XX], including: - its performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - its actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. Our audit was completed on [Date]. This is the date at which our opinion is expressed. The basis for our opinion is explained below, and we draw your attention to other matters. In addition, we outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. The financial statements and the statement of performance are appropriately prepared on a disestablishment basis 2 Ensure that the names that are used in the financial statements and performance information are replicated in the audit report. Issued 03/17 Office of the Auditor-General

254 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs Without modifying our opinion, we considered the accounting policy on page [ ], about the financial statements and statement of performance being prepared on a disestablishment basis. We consider the disestablishment basis of accounting to be appropriate as the [entity type] closed on [date]. The [entity type] did not report within its statutory reporting deadline Without modifying our opinion, we draw attention to the fact that the [entity type] did not comply with [relevant Act of Parliament], which requires the [Governing body] to provide its audited financial statements and statement of performance to [name of recipient] by [date]. Basis for opinion We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and statement of performance Our objectives are to obtain reasonable assurance about whether the financial statements and the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts and disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations]. We did not evaluate the security and controls over the electronic publication of the financial statements and statement of performance. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance. Issued 03/17 Office of the Auditor-General

255 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. - We evaluate the overall presentation, structure and content of the financial statements and the statement of performance, including the disclosures, and whether the financial statements and the statement of performance represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibilities arise from the Public Audit Act Other Information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [ ] to [ ], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board.. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Issued 03/17 Office of the Auditor-General

256 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs Example 2 Auditor s report: Modified audit opinion with emphasis of matter and other matter paragraphs [Firm s letterhead] INDEPENDENT AUDITOR S REPORT TO THE [READERS] OF [NAME OF ENTITY] S FINANCIAL STATEMENTS AND STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [DD MM 20XX] The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the financial statements and statement of performance of the [entity type] on his behalf. We have audited: - the financial statements of the [entity type] on pages [ ] to [ ], that comprise the [statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include accounting policies and other explanatory information]; and - the statement of performance of the [entity type] on pages [ ] to [ ]. Qualified opinion Qualified opinion on the financial statements Non disclosure of related party transactions In our opinion, except for the matter described in the Basis for our qualified opinion section of our report, the financial statements of the [entity type] on pages [ ] to [ ]: - present fairly, in all material respects: - its financial position as at [DD MM 20XX]; and - its financial performance and cash flows for the year then ended; and - comply with generally accepted accounting practice in New Zealand in accordance with [the applicable financial reporting framework]. Unmodified opinion on the statement of performance In our opinion, the statement of performance of the [entity type] on pages [ ] to [ ]: - presents fairly, in all material respects, the [entity type] s performance for the year ended [DD MM 20XX], including: - its performance achievements as compared with forecasts included in the statement of performance expectations for the financial year; and - its actual revenue and expenses as compared with the forecasts included in the statement of performance expectations for the financial year. - complies with generally accepted accounting practice in New Zealand. Our audit of the financial statements and the statement of performance was completed on [Date]. This is the date at which our qualified opinion is expressed. The basis for our qualified opinion is explained below, and we draw your attention to other matters. In addition, we outline the responsibilities of the [Governing body] and our responsibilities relating to the financial statements and the statement of performance, we comment on other information, and we explain our independence. Basis for our qualified opinion The [entity type] has not provided us with evidence that the other remuneration and compensation paid to key management personnel and to close members of key management personnel has been charged to the [entity type] on normal commercial terms. If other remuneration and compensation of this nature is not charged on normal commercial terms, [entity type] is required to disclose the total amount of other remuneration and compensation paid to key management personnel and to close members of key management personnel in accordance with Public Benefit Entity International Public Sector Accounting Standard 20: Related Party Disclosures. Issued 03/17 Office of the Auditor-General

257 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs We carried out our audit in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report. We have fulfilled our responsibilities in accordance with the Auditor-General s Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Legal proceedings have been brought against the [entity type] We draw your attention to the disclosure in note [ ] on page [ ] of the financial statements, which outline that legal proceedings have been brought against the [entity type] by [name of third party]. Our opinion is not modified in respect of this matter. The [entity type] has incurred expenditure that is considered to be wasteful During the year the [entity type] incurred entertainment expenditure for staff of [$xxx]. The entertainment expenditure is included in the expenditure category administration expenses of [$yyy] in the statement of comprehensive income. As the [entity type] was unable to demonstrate that the entertainment expenditure had a justifiable business purpose, we concluded that the expenditure was wasteful. Our opinion is not modified in respect of this matter. Responsibilities of the [Governing body] for the financial statements and the statement of performance The [Governing body] is responsible on behalf of the [entity type] for preparing financial statements and a statement of performance that are fairly presented and that comply with generally accepted accounting practice in New Zealand. The [Governing body] is responsible for such internal control as it determines is necessary to enable it to prepare financial statements and a statement of performance that are free from material misstatement, whether due to fraud or error. In preparing the financial statements and the statement of performance, the [Governing body] is responsible on behalf of the [entity type] for assessing the [entity type] s ability to continue as a going concern. The [Governing body] is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the [Governing body] intends to liquidate the [entity type] or to cease operations, or has no realistic alternative but to do so. The [Governing body] s responsibilities arise from the [Name of relevant Act(s)]. Responsibilities of the auditor for the audit of the financial statements and the statement of performance Our objectives are to obtain reasonable assurance about whether the financial statements and the statement of performance, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General s Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts and disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers taken on the basis of these financial statements and statement of performance. For the budget information reported in the financial statements and the statement of performance, our procedures were limited to checking that the information agreed to the [entity type] s [statement of performance expectations]. We did not evaluate the security and controls over the electronic publication of the financial statements and the statement of performance. As part of an audit in accordance with the Auditor-General s Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also: - We identify and assess the risks of material misstatement of the financial statements and the statement of performance, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the [entity type] s internal control. - We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the [Governing body]. Issued 03/17 Office of the Auditor-General

258 AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs - We evaluate the appropriateness of the reported performance information within the [entity type] s framework for reporting its performance. - We conclude on the appropriateness of the use of the going concern basis of accounting by the [Governing body] and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the [entity type] s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements and the statement of performance or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the [entity type] to cease to continue as a going concern. - We evaluate the overall presentation, structure and content of the financial statements and the statement of performance, including the disclosures, and whether the financial statements and the statement of performance represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the [Governing body] regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Our responsibilities arise from the Public Audit Act Other information The [Governing body] is responsible for the other information. The other information comprises the information included on pages [ ] to [ ], but does not include the financial statements and the statement of performance, and our auditor s report thereon. Our opinion on the financial statements and the statement of performance does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the financial statements and the statement of performance, our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the financial statements and the statement of performance or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Independence We are independent of the [entity type] in accordance with the independence requirements of the Auditor-General s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board. Other than the audit, we have no relationship with, or interests in, the [entity type]. Or [In addition to the audit, we have carried out engagements in the areas of [insert description of engagements], which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the [entity type].] [Signature of Appointed Auditor] [Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand Issued 03/17 Office of the Auditor-General

259 AG ISA (NZ) 810 (Revised) Summary financial and performance information AG ISA (NZ) 810 (REVISED) THE AUDITOR-GENERAL S STATEMENT ON ENGAGEMENTS TO REPORT ON SUMMARY FINANCIAL AND PERFORMANCE INFORMATION Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Procedures on the summary financial and performance information to be carried out as part of the annual audit on behalf of the Auditor-General Use of template audit reports issued by the OAG Signing of summary audit reports Modifications to summary audit reports Reporting to the OAG Application and other explanatory material Signing of summary audit reports Appendix 1 Model summary audit report for a public entity applying a fair presentation framework Issued 03/17 Office of the Auditor-General

260 AG ISA (NZ) 810 (Revised) Summary financial and performance information Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (NZ) 810 (Revised): Engagements to Report on Summary Financial Statements (ISA (NZ) 810); 1 and (b) provides additional requirements and guidance to reflect the public sector perspective and covers all summaries of financial and performance information that are audited on behalf of the Auditor-General. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. This Statement requires compliance with all of the requirements of ISA (NZ) 810, except to the extent that this Statement provides otherwise. Where a conflict between this Statement and ISA (NZ) 810 exists, the requirements of this Statement shall prevail. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods ending on or after 15 December The Auditor-General will determine the standard format and wording for public entity audit reports issued on summary financial and performance information. In doing so, the Auditor-General will be cognisant of the objectives and requirements of ISA (NZ) 810 (Revised) to ensure appropriate reporting for readers. A model summary audit report is included in this statement and may also be included in other directives issued by the OAG from time to time. Objectives 5. The objectives of the Appointed Auditor are to: (a) form an opinion on the summary financial and performance information based on an evaluation of the conclusions drawn from the evidence obtained; and (b) clearly express that opinion through a written report that also describes the basis for that opinion. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical performance information. Issued 03/17 Office of the Auditor-General

261 AG ISA (NZ) 810 (Revised) Summary financial and performance information Definitions 6. For the purpose of this Auditor-General s Auditing Statement, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); (b) in the Auditor-General s Glossary of Terms; and (c) in the following term. Summary financial and performance information means the financial and performance information that is derived from the full financial and performance information contained in the annual report of a public entity, but that contains less detail than the annual report while still providing a structured representation consistent with that provided in the annual report. Requirements Procedures on the summary financial and performance information to be carried out as part of the annual audit on behalf of the Auditor-General 7. The Appointed Auditor shall carry out audit procedures on the summary financial and performance information as part of the annual audit, and the summary audit report shall be signed on behalf of the Auditor-General. Use of template audit reports issued by the OAG 8. The Appointed Auditor shall use audit report templates issued by the OAG as the basis for all audit reports issued on summary financial and performance information. A template is contained in Appendix 1. Other directions may be issued by the OAG from time to time. 9. The Appointed Auditor shall consult with the OAG on any significant departures from any audit report template, or other direction, issued by the OAG. Issued 03/17 Office of the Auditor-General

262 AG ISA (NZ) 810 (Revised) Summary financial and performance information Signing of summary audit reports 10. All summary audit reports, except those where the Auditor-General directs otherwise, shall be personally signed by the Appointed Auditor. However, the Auditor-General reserves the right to sign any summary audit report after giving due notice to the Appointed Auditor. (See paragraph A1) Modifications to summary audit reports 11. The Appointed Auditor shall consult with the Accounting and Auditing Policy team before issuing a summary audit report if the Appointed Auditor seriously considers issuing a summary audit report when they conclude that the summary financial and performance information: (a) has not been derived from the full financial and performance information; and/or (b) is not consistent, in all material respects, with the full financial and performance information, in accordance with FRS-43: Summary Financial Statements, or PBE FRS-43: Summary Financial Statements, as appropriate. 12. The Accounting and Auditing Policy team will request the Appointed Auditor to prepare a submission to the Auditor-General s Opinions Review Committee (the ORC) for the circumstances in paragraph 11 above, unless there is clear precedent supporting the issue of the proposed audit report. Reporting to the OAG 13. The Appointed Auditor shall forward to the OAG a copy of all summary audit reports issued, in keeping with the requirements set out in AG-1: Reporting to the OAG. Application and other explanatory material *** Signing of summary audit reports (See paragraph 10) A1. The Auditor-General or designated representative may sign a summary audit report instead of the Appointed Auditor if the Appointed Auditor is unwilling to sign the summary audit report because they have been directed to use particular wording with which they disagree. Issued 03/17 Office of the Auditor-General

263 AG ISA (NZ) 810 (Revised) Summary financial and performance information Appendix 1 Model summary audit report for a public entity applying a fair presentation framework The following summary audit report is for an entity, which is not a FMC reporting entity (under the Financial Markets Conduct Act 2013), that is required to report performance information in a statement of performance. Title and addressee section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies [Firm s letterhead] The audit report shall be printed on the letterhead of the auditing firm. INDEPENDENT AUDITOR S REPORT Paragraph NZ16.1(a) of ISA (NZ) 810 (Revised) requires a title clearly indicating it as the report of an independent auditor. TO THE READERS OF [NAME OF ENTITY] S SUMMARY FINANCIAL STATEMENTS AND SUMMARY STATEMENT OF PERFORMANCE FOR THE YEAR ENDED [XX MM 20XX] Paragraph NZ16.1(b) of ISA (NZ) 810 (Revised) requires the auditor s report to have an addressee. Unless an exemption has been specifically provided for by the OAG, all audit reports issued by the Auditor-General shall be addressed to the readers because public entities are accountable to a wide constituency and the Auditor-General has broad responsibilities to report to this constituency. Individual exceptions may include situations where there is a minority private sector interest in the entity. For example, where the entity is a joint venture and one of the partners is from the private sector, then the audit report shall be addressed to the joint venturers. Where an audit report is addressed to a party other than to the readers, the audit report will normally include the following wording: TO THE [SHAREHOLDERS/JOINT VENTURERS/PARTNERS] OF [NAME OF ENTITY] Issued 03/17 Office of the Auditor-General

264 AG ISA (NZ) 810 (Revised) Summary financial and performance information Opinion section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies Opinion The summary financial statements and the summary statement of performance of the [name of entity] on pages [ ] to [ ], that comprise 2 the summary [statement of financial position] as at [XX MM 20XX], the [summary statement of comprehensive income, summary statement of changes in equity, summary statement of cash flows, and the summary statement of performance] for the year ended on that date, and related notes, are derived from the full financial statements and the full statement of performance for the year ended [XX MM 20XX] that we have audited. Paragraph NZ16.1(c) of ISA (NZ) 810 (Revised) requires the identification of the summary financial statements on which the auditor is reporting, including the title of each statement included in the summary financial statements. In our opinion, the summary financial statements and the summary statement of performance are Paragraph NZ16.1(e) of ISA (NZ) 810 (Revised) requires a clear expression of an opinion. consistent, in all material respects, with the full financial statements and the full statement of performance for the year ended [XX MM 20XX], in accordance with [FRS-43: Summary Financial Statements/ PBE FRS-43: Summary Financial Statements] issued by the New Zealand Accounting Standards Board. 2 Ensure that the names that are used in the financial statements and performance information are replicated in the audit report. Issued 03/17 Office of the Auditor-General

265 AG ISA (NZ) 810 (Revised) Summary financial and performance information Limitations section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies Summary Financial Statements and Summary Statement of Performance The summary financial statements and the summary statement of performance do not contain all the disclosures required by generally accepted practice in New Zealand. Reading the summary financial statements and the summary statement of performance and the auditor s report thereon, therefore, is not a substitute for reading the full financial statements and the full statement of performance and the auditor s report thereon. Paragraph NZ16.1(f) of ISA (NZ) 810 (Revised) requires a statement indicating that the summary financial statements do not contain all the disclosures required by the financial reporting framework applied in the preparation of the audited financial statements, and that reading the summary financial statements and the auditor s report thereon is not a substitute for reading the audited financial statements and the auditor s report thereon. The summary financial statements and the summary statement of performance do not reflect the effects of events that occurred subsequent to the date of our auditor s report on the full financial statements and the full statement of performance. Paragraph NZ16.1(g) of ISA (NZ) 810 (Revised) states that the auditor s report on the summary financial statements may be dated later than the date of the auditor s report on the audited financial statements. In such cases, the auditor s report on the summary financial statements shall state that the summary financial statements and audited financial statements do not reflect the effects of events that occurred subsequent to the date of the auditor s report on the audited financial statements. Reference to the full financial statements and the full statement of performance, and report thereon section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies The full financial statements and the full statement of performance and our audit report thereon We expressed an unmodified audit opinion on the full financial statements and the full statement of performance for the year ended [XX MM 20XX] in our auditor s report dated [XX MM 20XX]. Paragraph NZ 16.1(d) of ISA (NZ) 810 (Revised) requires identification of the audited financial statements. Issued 03/17 Office of the Auditor-General

266 AG ISA (NZ) 810 (Revised) Summary financial and performance information [Governing body] s responsibilities section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies [Governing body] s responsibility for the summary financial statements and the summary statement of performance The [Governing body] is responsible on behalf of the [name of entity] for the preparation of the summary financial statements and the summary statement of performance in accordance with [FRS-43: Summary Financial Statements/ PBE FRS-43: Summary Financial Statements]. Paragraph NZ16.1(i) of ISA (NZ) 810 (Revised) requires a description of those charged with governance s responsibility for the summary financial statements, explaining that those charged with governance are responsible for the preparation of the summary financial statements in accordance with the applied criteria. Auditor s responsibilities section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies Auditor s responsibility Our responsibility is to express an opinion on whether the summary financial statements and the summary statement of performance are consistent, in all material respects, with the full audited financial statements and statement of performance of [name of entity], based on our procedures, which were carried out in accordance with the Auditor-General s Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Paragraph NZ16.1(j) of ISA (NZ) 810 (Revised) requires a statement that the auditor is responsible for expressing an opinion, based on the auditor s procedures conducted in accordance with ISA (NZ) 810 (Revised), on whether the summary financial statements are consistent, in all material respects, with [or are a fair summary of] the audited financial statements. Other than in our capacity as auditor, we have no relationship with, or interests in [name of entity]. Paragraph NZ16.2 of ISA (NZ) 810 (Revised) requires a statement as to the existence of any relationship (other than that of auditor) which the auditor has with, or any interests which the auditor has in, the entity. Issued 03/17 Office of the Auditor-General

267 AG ISA (NZ) 810 (Revised) Summary financial and performance information Signature section of the summary audit report ISA (NZ) 810 (Revised) requirements and corresponding OAG policies [Signature of Appointed Auditor] [Name of Appointed Auditor], [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand [Date] Paragraph NZ16.1(k) of ISA (NZ) 810 (Revised) requires the auditor s signature. The Auditor- General requires the signature of the Appointed Auditor. If the Appointed Auditor wants to include the signature of the audit firm this can be included alongside the signature of the Appointed Auditor as follows: [Signature of Appointed Auditor] [Signature of Auditing Firm] Name of Appointed Auditor] [Name of Auditing Firm] On behalf of the Auditor-General [City], New Zealand [Date] Paragraph NZ16.1(l) of ISA (NZ) 810 (Revised) requires the auditor s address. Paragraph NZ16.1(m) of ISA (NZ) 810 (Revised) requires the date of the auditor s report. Issued 03/17 Office of the Auditor-General

268 AG-1 Reporting to the OAG AUDITOR-GENERAL S AUDITING STANDARD 1 REPORTING TO THE OAG Contents Page Introduction Scope of this Standard Application Background Objectives Definitions Requirements Appendix 1 Immediate reporting Appendix 2 Reporting the results of the annual audit Appendix 3 Reporting on engagements other than the annual audit Appendix 4 Reporting biannually on events or situations that could lead to a potential claim Issued 03/17 Office of the Auditor-General

269 AG-1 Reporting to the OAG Introduction Scope of this Standard 1. This Auditor-General s Auditing Standard establishes the Auditor-General s requirements for reporting to the OAG. Application 2. Compliance with this Standard is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Audit briefs, or any other direct correspondence to the Appointed Auditor, may require specific information (either information required by, or in addition to, this Standard) to be returned to the OAG on specified dates. This information shall be returned to the OAG by the date specified in that audit brief or other direct correspondence. Background 5. The effectiveness of the Auditor-General is largely dependent on the Appointed Auditor keeping the OAG informed of significant issues affecting public entities in a timely manner. The Appointed Auditor is the Auditor-General's "eyes and ears" on the ground and is expected to freely communicate to the OAG any significant information including that of a sensitive or confidential nature. 6. The reporting requirements outlined in this Standard are the minimum requirements, and the Appointed Auditor should not feel constrained in communicating any issues to the OAG as the minimum requirements are intended to ensure that the Auditor- General is: (a) adequately apprised, in a timely way, of significant matters related to the annual audit in respect of the public entities; (b) able to plan and ensure that the requisite audit activities are carried out through the annual audit or engagements other than the annual audit, on a timely basis; and (c) able to monitor the Appointed Auditor s performance. Issued 03/17 Office of the Auditor-General

270 AG-1 Reporting to the OAG Objectives 7. The objectives of the Appointed Auditor are to: (a) immediately report to the OAG the occurrence of any of the significant issues identified in Appendix 1; (b) formally report the results of annual audits to the OAG as outlined in Appendix 2; (c) formally report the results of engagements other than the annual audit to the OAG as outlined in Appendix 3; and (d) provide certifications, where appropriate, on behalf of their Audit Service Provider (ASP), declaring the circumstances or occurrence of any events or situations that could lead to a potential claim against the ASP or the Auditor- General as outlined in Appendix 4. Definitions 8. For the purpose of this Auditor-General s Auditing Standard, the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); and (b) in the Auditor-General s Glossary of Terms. Requirements 9. The OAG s reporting requirements are classified into a number of different categories, each with different reporting deadlines and information that shall be sent to the OAG. The Appointed Auditor shall report to the OAG in keeping with the requirements outlined in each of the following Appendices: (a) Appendix 1: Immediate reporting; (b) Appendix 2: Reporting the results of the annual audit; (c) Appendix 3: Reporting on engagements other than the annual audit; and (d) Appendix 4: Reporting biannually on events or situations that could lead to a potential claim. Issued 03/17 Office of the Auditor-General

271 AG-1 Reporting to the OAG Appendix 1 Appendix 1 Immediate reporting This appendix covers the following topics: Introduction Advising the OAG about public-entity-specific issues Advising the OAG about professional indemnity insurance issues Making submissions to the Auditor-General s Opinions Review Committee Notifying the OAG about significant changes to public entities Introduction A1.1 Immediate reporting covers those situations where an issue is of such significance or risk that the Appointed Auditor shall advise the OAG about it as soon as it comes to their attention. Examples of immediate reporting fall into five categories: - where an ASP or an Appointed Auditor has identified a breach, or there is reason to believe that a breach may arise in the future, of the independence requirements of AG PES 1 (Revised): Code of ethics for assurance practitioners; - where any public-entity-specific issues arise that are considered significant, including certain non-compliance with laws and regulations, the existence of fraud or suspected fraud, and/or any issues surrounding effectiveness and efficiency, waste, or a lack of probity or financial prudence; - where any limitations or material circumstances occur that could affect the ASP s professional indemnity insurance over the period of the engagement, or circumstances that could lead to a potential claim against the ASP or the Auditor-General; - where the Appointed Auditor makes a submission to the Auditor-General s Opinions Review Committee (the ORC); and - where the Appointed Auditor identifies any significant changes to a public entity such as: - an entity has been established that is a public entity; - a public entity has been disestablished or ceased operating; - an existing entity has become a public entity; or - an existing entity has ceased being a public entity. Advising the OAG about public-entity-specific issues A1.2 The Appointed Auditor shall immediately inform the OAG about the following publicentity-specific issues: Issued 03/17 Office of the Auditor-General

272 AG-1 Reporting to the OAG Appendix 1 - Where the acceptance and continuance procedures carried out by the Appointed Auditor before planning the annual audit, as required by AG PES 3, indicate the presence of circumstances and/or risks that would have caused the engagement to be declined. The Appointed Auditor shall contact the Assistant Auditor-General Accounting and Auditing Policy. - Details of all suspected or actual fraud. Guidance is provided in AG ISA (NZ) 240: The auditor s responsibilities relating to fraud in an annual audit. - Any information that is requested by a third party that was obtained while carrying out work on behalf of the Auditor-General (guidance is provided in AG PES 1 (Revised)). The Appointed Auditor shall contact the Assistant Auditor- General Legal. - Details of any significant issues of effectiveness and efficiency, waste, or a lack of probity or financial prudence. Guidance is provided in AG-3: The auditor s approach to issues of effectiveness and efficiency, waste, and lack of probity or financial prudence. The Appointed Auditor shall contact either the Assistant Auditor-General Parliamentary Group or the Assistant Auditor- General Local Government. - Details or information of any non-compliance with laws and regulations that: - is material, and for which the OAG has not provided guidance; - calls into question the ethics or behaviour of management and/or those charged with governance or where fraud is suspected; or - where management and/or those charged with governance are suspected of being involved in any deliberate non-compliance with a law or regulation. Guidance is provided in AG ISA (NZ) 250: Consideration of laws and regulations. The Appointed Auditor shall contact either the Assistant Auditor- General Accounting and Auditing Policy or the Assistant Auditor-General Legal. - Details of the findings of any substantial or significant external reviews conducted over the activities of the public entity. The Appointed Auditor shall contact either the Assistant Auditor-General Parliamentary Group or the Assistant Auditor-General Local Government. - For government departments, details of any actual or potential breach of an appropriation or expenditure incurred not for lawful purposes. Guidance is provided in AG-2: The appropriation audit and the controller function. The Appointed Auditor shall contact the Assistant Auditor-General Parliamentary Group. - Details of any other issue that is likely to have national or parliamentary implications or has implications for the local community that are so Issued 03/17 Office of the Auditor-General

273 AG-1 Reporting to the OAG Appendix 1 significant that it is likely to attract the attention of the media. Guidance is provided in AG PES 1 (Revised). The Appointed Auditor shall contact either the Assistant Auditor-General Parliamentary Group or the Assistant Auditor- General Local Government. - Details of any news media enquiries that the Appointed Auditor should refer to the OAG. Guidance is provided in AG PES 1 (Revised). The Appointed Auditor shall contact either the Assistant Auditor-General Parliamentary Group or the Assistant Auditor-General Local Government. - Any other matters specified in the other time-bound categories of information that, because of their sensitivity, should be reported to the OAG earlier. An example would be where the entity is exhibiting early warning signs that if, individually or in combination, are left unchecked would be likely to cause a failure in the entity s ability to meet its objectives or functions. The Appointed Auditor shall contact either the Assistant Auditor-General Parliamentary Group or the Assistant Auditor-General Local Government. - Details of any prior period error that is material. The Appointed Auditor shall contact the Assistant Auditor-General Accounting and Auditing Policy. - When a Group or Component Appointed Auditor has difficulties applying the requirements of AG ISA (NZ) 600. In this situation the Group or Component Appointed Auditor shall contact the Assistant Auditor-General Accounting and Auditing Policy. - When a Group or a Component Appointed Auditor identifies that the work of a Group Appointed Auditor, a Component Appointed Auditor, or a component auditor may be insufficient in accordance with paragraph 43 in ISA (NZ) 600. In this situation the Group or Component Appointed Auditor shall contact the Assistant Auditor-General Accounting and Auditing Policy. - Where a Group Appointed Auditor is considering communicating with management, or those charged with governance, concerns about the quality of a component auditor s work in accordance with paragraph 49(c) in ISA (NZ) 600. In this situation the Group or Component Appointed Auditor shall contact the Assistant Auditor-General Accounting and Auditing Policy. - Where the Appointed Auditor has concerns about the performance report of the public entity, including whether the Appointed Auditor is concerned about the appropriateness of the content or the verification of the content of the performance report. Guidance is provided in AG-4: The audit of performance reports. Issued 03/17 Office of the Auditor-General

274 AG-1 Reporting to the OAG Appendix 1 Advising the OAG about professional indemnity insurance issues A1.3 The Appointed Auditor shall immediately inform the Assistant Auditor-General Legal about any limitations or material circumstances that occur that could affect the ASP s professional indemnity insurance over the period of the engagement, or circumstances that could lead to a potential claim against the ASP or the Auditor-General. These could include (but are not limited to): - details of any limitations or circumstances that could reduce the level of cover; - details of limitations or circumstances that could cause the insurance policy to be defective or voidable by the insurers; - details of limitations or circumstances that could cause the policy coverage to be no longer effective during the period of the engagement with the Auditor- General; - details of circumstances that materially affect the insurance policy excess (or any related self-insurance or personal coverage arrangements) that could reduce or limit the effectiveness of cover; - details of any claim made against the Auditor-General or ASP (when acting for the Auditor-General) received by the ASP; or - details, after becoming aware, of information or knowledge that could give rise to a claim against the Auditor-General or ASP (as an agent for the Auditor- General), including: - details of frauds or suspected frauds identified in the public entity; - details of possible litigation arising out of any sale, takeover, or capital restructuring of the public entity; - details of failure of public entity investees or major debtors; - details of receipt of notice from, or information as to any intention by, another party to claim against the Auditor-General or the ASP (either verbally or in writing); and - details of the discovery of reasonable cause to suspect any dishonest fraudulent or malicious act(s) or omission(s) of any past or present ASP(s), Appointed Auditor, or staff employed by the ASP that have been associated with the audit of the public entity. Making submissions to the Auditor-General s Opinions Review Committee A1.4 The Appointed Auditor shall comply with the requirements of AG ISA (NZ) 700 that require certain matters to be referred to the OAG Accounting and Auditing Policy team that may need to be reported in the auditor s report. Depending on their severity, such matters may require approval from the ORC. Issued 03/17 Office of the Auditor-General

275 AG-1 Reporting to the OAG Appendix 1 Notifying the OAG about significant changes to public entities A1.5 The Appointed Auditor shall immediately notify the OAG about significant changes to a public entity through the ASD Online (ASD Online is the external interface of the Audit Status Database ASD see A2.2). These changes could include: - details of an entity that has been established which is a public entity (using the new entity button in the entity screen); - details of a public entity that has or is ceasing operations or is being disestablished (using the entity ceasing button in the entity screen); - details of changes in management or those charged with governance (in the officer details panel in the entity screen); or - details of changes in public entity address details (in the contact details panel in the entity screen). Issued 03/17 Office of the Auditor-General

276 AG-1 Reporting to the OAG Appendix 2 Appendix 2 Reporting the results of the annual audit This appendix covers the following topics: Introduction Reporting completed annual audits Documents summarising the audit conclusions Introduction A2.1 This Appendix covers the formal reporting obligations of the Appointed Auditor to the OAG immediately following the issue of the audit report(s) signed by the Appointed Auditor on behalf of the Auditor-General. The formal reporting obligations apply where the engagement(s) are being carried out in keeping with the requirements of the Audit Engagement Agreement (otherwise known as the annual audit contract). Reporting completed annual audits A2.2 The Auditor-General manages the audit completion returns of all public entities through the Audit Status Database (the ASD). The ASD is an internal database that allows the Appointed Auditor and their delegates (for example, audit managers and administration staff) to enter information relating to an audit directly into the ASD. The ASD has an external interface called the ASD Online. A2.3 The Appointed Auditor shall use the ASD Online to report the results of all completed annual audits. Annual audits that are due are listed in each Appointed Auditor s individual portfolio list. A2.4 The Appointed Auditor shall use their address and a password to access the ASD Online. The Appointed Auditor can request a password through the ASD Online login screen if they have forgotten their previous one. The Appointed Auditor may change their password at any time. A2.5 The Appointed Auditor shall input the date of the audit report in the ASD Online within 24 hours of issuing the audit report. A2.6 The ASD Online updates the Appointed Auditor s portfolio list when each audit completion return is entered and also outlines the reporting requirements for each public entity. The portfolio list will identify and list what information needs to be sent to the OAG and when. The information needs are usually driven off the sector requirements listed in the applicable audit brief and is reflected in the ASD. Issued 03/17 Office of the Auditor-General

277 AG-1 Reporting to the OAG Appendix 2 A2.7 The audit completion return shall be sent to the OAG within the timeframes listed in paragraph A2.6. We recommend that the Appointed Auditor keep a copy of the audit return on each individual audit file. A2.8 Further guidance on using the ASD Online is contained in each applicable audit brief. Documents summarising the audit conclusions A2.9 The Appointed Auditor shall complete a document that summarises the audit conclusions for each annual audit. Audit briefs detail when the use of an OAG template is mandatory. In all other cases, its use is optional. A2.10 The Appointed Auditor shall ensure that they use the correct template as provided by the OAG, which meets the OAG s specific reporting requirements. A2.11 The Appointed Auditor shall not make the document that summarises the audit conclusions available to the public entity for review or comment or clearance. 1 A2.12 Appointed Auditors shall ensure that each document that summarises the audit conclusions covers the misstatements, audit issues, and areas of interest or risks identified during the annual audit along with the audit response. 1 The document that summarises the audit conclusions is part of the audit file and covered by the disclosure requirements of section 30 of the Public Audit Act Issued 03/17 Office of the Auditor-General

278 AG-1 Reporting to the OAG Appendix 3 Appendix 3 Reporting on engagements other than the annual audit This appendix covers the following topics: Introduction Accepting and reporting on engagements of possible media or political interest or of a sensitive nature Reporting on performance audits, inquiries and other work (other than the annual audit) Introduction A3.1 For the purposes of reporting on engagements other than the annual audit, other work engagements means all other work that has been carried out by staff of the Auditor-General or by an ASP in relation to a public entity (audited by the ASP). Other work excludes annual audits, performance audits, and inquiries. A3.2 The Appointed Auditor shall ensure that they follow the requirements of AG PES 1 (Revised): Code of ethics for assurance providers when carrying out engagements other than the annual audit. AG PES 1 (Revised) includes a requirement to consult with the OAG before accepting any engagement other than the annual audit where uncertainty exists about an independence matter. Accepting and reporting on engagements of possible media or political interest or of a sensitive nature A3.3 Acceptance of, and reporting on, engagements of possible media or political interest or of a sensitive nature, requires careful consultation with the OAG. The requirements covering this category of engagements are set out in AG PES 1 (Revised). These requirements include: - consulting with the OAG before accepting any engagement; - sending a copy of the draft report to the relevant OAG sector manager for clearance before the report is sent to the public entity; and - sending a copy of the final report to the OAG Database Administrator within 24 hours of signing the report. Reporting on performance audits, inquiries, and other work (other than the annual audit) A3.4 The Appointed Auditor shall provide the following information through the ASD Online as part of reporting completed annual audits: - a copy of the report issued for the engagement; Issued 03/17 Office of the Auditor-General

279 AG-1 Reporting to the OAG Appendix 3 - if applicable, a copy of the information on which the report has been issued for example, if there is a report prepared by the entity on which the ASP has issued an opinion; - a description of the engagement; - the name of the engagement partner or director; - the actual fee for the engagement for the period covered by the annual audit; - a reconciliation of the fees paid to the auditor for engagements other than the annual audit (as disclosed to the OAG in accordance with this standard) to the fees paid to the auditor for engagements other than the annual audit (as disclosed in the entity s financial statements); - whether the report was signed on behalf of the Auditor-General; and - whether the engagement was an assurance engagement based on the OAG s definition of an assurance engagement in AG PES 1 (Revised). Issued 03/17 Office of the Auditor-General

280 AG-1 Reporting to the OAG Appendix 4 Appendix 4 Reporting biannually on events or situations that could lead to a potential claim A4.1 ASPs shall send to the OAG, biannually in May and November each year, a certification declaring the circumstances or occurrence of any events or situations that could lead to a potential claim against the ASP or the Auditor-General. A4.2 This certificate should confirm the advice previously supplied by the ASP to the OAG at the time the circumstances, events, or situations occurred. A4.3 A copy of the certification is not included in this Standard because the OAG will send a copy of the appropriate certification for each biannual period to each Appointed Auditor before each due date. The reporting requirements and contact details for each certification is outlined on the certification. Issued 03/17 Office of the Auditor-General

281 AG-2 The appropriation audit and the controller function AUDITOR-GENERAL S AUDITING STANDARD 2 THE APPROPRIATION AUDIT AND THE CONTROLLER FUNCTION Contents Page Introduction Scope of this Standard Application Objectives Definitions Requirements Planning Fieldwork Reporting Application and other explanatory material Planning Fieldwork Reporting Appendix 1 Background Appendix 2 The appropriation process Appendix 3 Key requirements of the Public Finance Act Issued 03/17 Office of the Auditor-General

282 AG-2 The appropriation audit and the controller function Introduction Scope of this Standard 1. This Auditor-General s Auditing Standard establishes the Auditor-General s requirements in relation to the audit of appropriations made by Parliament and the particular function of the Controller. Application 2. Compliance with this Standard is mandatory for Appointed Auditors who audit appropriations administered by departments. 3. This Statement applies to audits of appropriations for periods beginning on or after 1 April Objectives 4. The objectives of the Appointed Auditor are to audit the appropriations administered by departments, as required by section 15(2) of the Public Audit Act 2001, by: (a) assessing whether the department has appropriate internal control to: (i) enable effective monitoring of expenditure against appropriation or other statutory authority; and (ii) provide reasonable assurance that the Public Finance Act 1989 (PFA) and any other legislation relating to appropriations has been complied with; and (b) obtaining sufficient and appropriate audit evidence to provide reasonable assurance about whether expenses and capital expenditure have been incurred as expressly authorised by an appropriation or other statutory authority; (c) forming a conclusion about whether the expenses and capital expenditure are properly disclosed in the department s external accountability document(s) and comply with the requirements of the PFA; and (d) reporting as required by this Standard. Issued 03/17 Office of the Auditor-General

283 AG-2 The appropriation audit and the controller function Definitions 5. For the purpose of this Auditor-General s Auditing Standard, the defined terms have the meanings attributed in: (a) the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); (b) the Auditor-General s Glossary of Terms; and (c) the list below. Please note that these definitions are not necessarily the same as the definitions used in the PFA. Appropriation means an authorisation by Parliament, in an Appropriation Act, for the Crown or an Office of Parliament to incur expenses or capital expenditure up to a specified amount and for a specified scope and period. Appropriation administrator means the department or Office of Parliament that is identified as administering the appropriation. Breach of appropriation means expenditure incurred without, or in excess of, an appropriation and is not authorised by, or under any, other statutory authority. Class of outputs means a group of (usually similar) outputs combined for the purposes of appropriations. Commitments means future obligations on contracts that have been entered into at balance date. Department means any department that is responsible for administering a vote under the PFA, and includes an Office of Parliament. Estimates means a statement in any form (usually the Estimates of Appropriations) that describes and supports the appropriations being sought in the first Appropriation Bill that relates to a financial year, and contains the information referred to in section 14 of the PFA. Issued 03/17 Office of the Auditor-General

284 AG-2 The appropriation audit and the controller function FSG means the annual financial statements of the Government of New Zealand. Imprest Supply Act is an Act of Parliament that gives general authority to the Crown to spend public money and incur expenses and capital expenditure for the day-to-day business of government up to a specified amount, in advance of an appropriation. Office of Parliament means the Parliamentary Commissioner for the Environment (and that Commissioner s office), the Office of the Ombudsmen but, for the purposes of this Standard, does not include the Office of the Controller and Auditor-General. Other authority or other statutory authority means authority to incur expenses or capital expenditure, or to spend public money, by or under an Act of Parliament. It includes a permanent legislative authority in another Act, authority under sections 26A and 26B of the PFA, and the authority provided by Imprest Supply Acts. Outputs means the goods or services that are produced by the public entity. The term refers only to the goods and services produced for third parties; it excludes goods and services consumed within the reporting entity (such as services provided by legal, research, HR, and IT functions to other functional areas within the same entity, which are often referred to as internal outputs ). 1 Public money means all money received by the Crown, including the proceeds of all loans raised on behalf of the Crown and any other money that the Minister of Finance or the Secretary to the Treasury directs to be paid into a Crown bank account or departmental bank account, and any money held by an Office of Parliament. It does not include money held in trust as trust money, or 1 The Local Government Act 2002 uses the term activity to refer to goods and services. The term outputs is used in this Standard to refer to goods and services, and the term activity carries its common meaning. Issued 03/17 Office of the Auditor-General

285 AG-2 The appropriation audit and the controller function money received and held by Crown entities. Statements of expenses and capital expenditure means the information on the use of the appropriations a department administers, any spending without an appropriation or other authority, and any capital injections that a department must provide in its annual report under section 45A of the PFA. Supplementary estimates means a statement in any form that is presented to the House of Representatives in support of an Appropriation Bill, other than the first relating to a financial year, seeking additional appropriations. Unauthorised expenditure means expenses or capital expenditure not authorised by an appropriation or any other authority (such as section 26B of the PFA or an Imprest Supply Act). Uncorrected misstatement means a deliberate or unintentional misstatement or error, in the financial statements or statements of appropriations, including the omission of an amount or disclosure or a misclassification of an amount that has not been corrected. Unappropriated expenditure means the expenses or capital expenditure that are incurred: - without an appropriation; - beyond the amount of an appropriation; - for a purpose outside the scope of the appropriation (subject to the rules relating to transfers between appropriations); or - after the appropriation has lapsed. Vote means an appropriation or grouping of appropriations that is the responsibility of a designated Minister or Ministers and administered by a department, or the responsibility of the Speaker and administered by an Office of Parliament, the Office of the Clerk of the House, or the Parliamentary Service. Issued 03/17 Office of the Auditor-General

286 AG-2 The appropriation audit and the controller function Requirements Planning 6. The Appointed Auditor shall plan the appropriation audit in conjunction with the annual audit to ensure the objectives of the appropriation audit are met. (See paragraphs A1 - A13) Understanding the appropriation process 7. The Appointed Auditor shall obtain an understanding of the appropriation process relevant to carrying out the appropriation audit. (See paragraph A14) Assessment of internal control 8. The Appointed Auditor shall obtain an understanding, and assess the adequacy, of the internal control design and implementation by a department to enable effective monitoring of expenditure against appropriations or other statutory authority. In performing this assessment, the Appointed Auditor shall consider if there are adequate controls in place to ensure that: (a) (b) (c) (d) expenses and capital expenditure incurred are for lawful purposes; expenses and capital expenditure incurred are within the scope, amount, and period of an appropriation; expenses and capital expenditure incurred are in accordance with financial delegations; and the procedures for cost allocation to all appropriation types are reasonable. (See paragraphs A15 - A16) 9. If a department is administering an appropriation that other departments are also using, the Appointed Auditor shall assess the adequacy of the controls that support the administering department s (known as the appropriation administrator ) monitoring of the use of the appropriation by others. (See paragraphs A17 - A18) Reporting on the adequacy of the department s internal control 10. After assessing whether the department has appropriate internal control to: (a) enable effective monitoring of expenditure against appropriation or other statutory authority; and Issued 03/17 Office of the Auditor-General

287 AG-2 The appropriation audit and the controller function (b) provide assurance that the PFA and any other legislation relating to appropriations have been complied with; the Appointed Auditor shall report any significant internal control deficiencies, or matters where internal control could be improved, in a management letter to the department. Scope considerations 11. The Appointed Auditor s consideration of the scope of expenses and capital expenditure shall include a review of the adequacy of the scope descriptions of appropriations administered by the department. (See paragraphs A19 - A21) Consideration of key legislative requirements and supporting guidance 12. The Appointed Auditor shall ensure that the audit approach includes audit procedures that will provide reasonable assurance that key requirements of the PFA, the Treasury Instructions, and any applicable Cabinet Office circulars have been complied with. The Appointed Auditor needs to remain alert throughout both the annual audit and the appropriation audit for any concerns in relation to unappropriated expenditure, including that arising from the scope of appropriations and/or the designation of expenses as remeasurements. 13. The Appointed Auditor shall assess, in accordance with section 4(1) of the PFA, whether expenses and capital expenditure have been incurred without the express authority of an appropriation or other statutory authority. 14. The Appointed Auditor shall assess whether expenditure treated as a significant remeasurement of an asset or a liability is classified correctly and completely in accordance with the PFA and the Treasury guidance. Incorrect classification of expenses as a re-measurement represents a significant risk in the appropriation audit because an expense that arises from a re-measurement of an asset or a liability does not require an appropriation or other statutory authority (see section 4(2) of the PFA). Any issues related to re-measurements should be referred to the Assistant Auditor- General Accounting and Auditing Policy for advice. 15. The Appointed Auditor shall assess whether expenses or capital expenditure have been incurred, not only in keeping with an appropriation but also with the legal capacity and authority of the department to engage in the activity concerned. (See paragraphs A22 - A23) Issued 03/17 Office of the Auditor-General

288 AG-2 The appropriation audit and the controller function 16. The Appointed Auditor shall obtain sufficient and appropriate audit evidence to satisfy themselves that the department has complied with section 26A of the PFA. Section 26A regulates the transfer of resources between output expense appropriations. (See paragraph A24) 17. The Appointed Auditor shall sight the approval by the Minister 2 where an appropriation has been exceeded, as permitted under section 26B of the PFA. 3 (See paragraph A25) 18. The Appointed Auditor shall assess, in accordance with section 26D and 45A of the PFA, whether expenditure incurred without, or in excess of, an appropriation is properly disclosed in the Statement of Expenses and Capital Expenditure Incurred Without, or in Excess of, Appropriation or Other Authority. 4 All such expenditure shall be reported regardless of the amounts involved. 19. The Appointed Auditor shall assess, in accordance with section 45A of the PFA, whether actual expenses and capital expenditure against each appropriation administered by a department and, where applicable, each category of expenses or non-departmental capital expenditure included in a multi-category appropriation administered by a department, is properly disclosed in the Statement of Budgeted and Actual Expenses and Capital Expenditure Incurred Against Appropriations The Appointed Auditor shall obtain sufficient and appropriate audit evidence to satisfy themselves that the department has complied with the requirements in the Treasury Instructions and any applicable Cabinet Office circular in respect of alterations of resource allocations. (See paragraphs A26 - A28) Documentation the overall audit strategy and audit plan 21. The overall audit strategy and audit plan described in ISA (NZ) 300 shall document: (a) the objectives to be met for both the annual audit and the appropriation audit; and (b) how those objectives are to be met. 2 Minister is defined in section 2 of the PFA. 3 Section 26B of the PFA states that the Minister may, in that financial year or not later than 3 months after the end of that financial year, approve in respect of that appropriation up to the greater of: (a) an amount not exceeding $10,000; or (b) 2% of the total amount appropriated for that appropriation. 4 Required by section 45A(c) of the PFA. 5 Required by section 45A(a) of the PFA. Issued 03/17 Office of the Auditor-General

289 AG-2 The appropriation audit and the controller function Fieldwork 22. The Appointed Auditor shall carry out fieldwork to meet the objectives of the appropriation audit, as described in paragraph 4. (See paragraphs A29 A31) 23. During the appropriation audit, the Appointed Auditor shall be alert to the possibility that appropriations or other statutory authorities are being managed to maintain future baselines or to avoid reporting a surplus, or that an appropriation or other authority has been breached or may be breached in the future. The Appointed Auditor shall also consider whether a breach of an appropriation or other statutory authority may be concealed. The following situations may indicate an actual or potential breach of an appropriation or other statutory authority: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) poor budgetary systems and procedures; inadequate systems and procedures for monitoring performance against appropriations (and the general principle of legality (see Appendix 1)); a breakdown of systems and procedures for monitoring performance against appropriations and other statutory authorities during the year; poorly developed cost allocation systems, or inadequate procedures for cost allocations to each appropriation type; changes in the basis of cost allocation during, or at the end of, the year; miscoding of activities or large expenditure items between appropriations or other statutory authorities; misclassification of operating expenses as capital expenditure, or vice versa; incorrectly assessing an expense to be a re-measurement or failing to treat it as a re-measurement when it should be; unauthorised transfers between output expense appropriations; netting of expenses against revenue or vice versa; large or unusual balance date adjustments; allocating expenses and/or capital expenditure to the incorrect reporting period; and unusual payments or trends, higher than expected expense patterns, or unusual or inconsistent expense recognition. Evidential requirements 24. The Appointed Auditor shall ensure that sufficient and appropriate audit evidence is obtained through the performance of audit procedures to enable reasonable conclusions to be drawn as to whether the requirements of appropriations and other statutory authorities have been adhered to. Issued 03/17 Office of the Auditor-General

290 AG-2 The appropriation audit and the controller function Appointed Auditor s Responsibilities for the OAG Controller Report 25. The Appointed Auditor shall, on receipt of the monthly OAG Controller report, review the report and follow up on any issues arising that relate to the departments they deal with. The Central Controller Team may contact the Appointed Auditor during the course of carrying out the monthly procedures to follow up any issues relating to departments they audit. Assessment of errors 26. The Appointed Auditor shall assess all uncorrected misstatements noted during both the annual audit and appropriation audit in terms of their effect on: (a) each individual appropriation or other statutory authority; and (b) the financial statements of the department. 27. Where errors are identified that lead to an appropriation being exceeded, the Appointed Auditor shall ask that these errors are corrected and, where the correction of an error (or errors) results in spending outside the bounds of an appropriation, they shall ask that it is reported in the department's Statement of Expenses and Capital Expenditure Incurred Without, or in Excess of, Appropriation or Other Authority under section 45A(c) of the PFA, irrespective of its size. Where the Appointed Auditor has any concerns about the accuracy or completeness of the department s reporting of unappropriated expenditure, this shall also be reported to the engagement director responsible for the audit of the Financial Statements of the Government (FSG). Disclosure of unappropriated or unauthorised expenditure 28. The Appointed Auditor shall ensure that the financial statements of each department fully disclose any unappropriated or unauthorised expenditure, in keeping with the statutory reporting requirements of the PFA. Documentation forming a conclusion 29. The Appointed Auditor shall form a conclusion about whether the objectives of the appropriation audit (as specified in paragraph 4) have been met. Issued 03/17 Office of the Auditor-General

291 AG-2 The appropriation audit and the controller function Reporting 30. The Appointed Auditor shall report any significant issues that arise from the appropriation audit to both the department and the OAG. Normally, the Appointed Auditor will report such issues to the Central Controller Team in the OAG and the relevant OAG sector manager. Where the Appointed Auditor considers that a department has incurred unplanned or unnecessary expenditure for the purposes of maintaining future baselines or avoiding reporting a surplus, they shall discuss their concerns with the department. If the concerns remain, the Appointed Auditor shall raise them with the OAG normally with the Central Controller Team and the the relevant OAG sector manager. Such matters shall also be reported in the management letter to the department. 31. Communication with any Minister will be done directly by the OAG in consultation with the Appointed Auditor. Reporting to Parliament will be done by the OAG. (See paragraphs A32 - A33) 32. The Appointed Auditor shall report to the OAG and to the engagement director responsible for the audit of the FSG, in keeping with instructions specified in the government departments audit brief each year. Reporting unappropriated or unauthorised spending during the year (See paragraphs A34 - A40) 33. The Appointed Auditor shall immediately advise the Central Controller Team in the OAG where unappropriated or unauthorised spending is likely to occur, or has occurred, or where any unlawful action has been identified (irrespective of whether the spending is material in terms of the annual audit of the statements prepared by a department and that are covered by our audit report). Where the Appointed Auditor is uncertain about whether unappropriated or unauthorised spending has actually occurred or is likely to occur, they shall clarify the situation with the department and, if necessary, seek advice from the Central Controller Team in the OAG. 34. In addition to immediately advising the Central Controller Team in the OAG, the Appointed Auditor shall also take the following actions: (a) immediately raise the matter with the Chief Executive of the department; and (b) advise the department to: (i) immediately inform its Minister in writing; (ii) immediately contact its Treasury Vote Analyst; and (iii) seek authority either from the Minister of Finance or from Cabinet to incur expenses or capital expenditure under imprest supply, and Issued 03/17 Office of the Auditor-General

292 AG-2 The appropriation audit and the controller function have the amounts included in the next Appropriation Bill and (if appropriate) the Supplementary Estimates. 35. If the Appointed Auditor becomes aware of expenses or capital expenditure that is being applied for a purpose whose lawfulness is questionable, the Appointed Auditor shall: (a) ascertain the nature and extent of the possible legal issue, with the benefit of legal advice from the OAG as necessary; (b) ask the department to seek a legal opinion on the matter; (c) ask the OAG to review the opinion (in the case of a dispute between the department and the OAG, the OAG may seek its own external legal advice); and (d) inform the Chief Executive if external legal advice is being sought, and invite them to discuss the matter with the responsible Minister. Where the department has not taken immediate action on actual or likely spending that is unappropriated or unauthorised, the OAG will formally write to the Chief Executive and the responsible Minister (in consultation with the Appointed Auditor). Reporting on audit results 36. The Appointed Auditor shall issue an unmodified opinion as a result of their annual audit if there is unappropriated or unauthorised spending that is properly disclosed in the statements prepared by a department, and that are covered by our audit report (subject to there being no other matters requiring a modification of the audit opinion). In certain circumstances, it may be appropriate for the Appointed Auditor to consider including an emphasis of matter paragraph in the audit report to draw readers attention to the disclosure of the unappropriated expenditure. Guidance should be sought from the Assistant Auditor-General Accounting and Auditing Policy if such an action is contemplated. 37. The Appointed Auditor shall issue a modified opinion referring to the disagreement over the disclosure of unappropriated or unauthorised spending where the department has not properly disclosed the issue. Where the Appointed Auditor considers issuing a modified opinion, they shall, before issuing that opinion, consult with the Assistant Auditor-General Accounting and Auditing Policy at the OAG. 38. Where the Appointed Auditor considers that there are material uncorrected misstatements in the Statement of Expenses and Capital Expenditure (under section 45A of the PFA) that do not, however, involve unappropriated or unauthorised spending, they shall follow their normal procedures for considering whether to issue a modified Issued 03/17 Office of the Auditor-General

293 AG-2 The appropriation audit and the controller function opinion referring to the disagreement over the disclosure of a material error, where the department has not properly corrected that error. 39. If the Appointed Auditor seriously considers issuing an adverse opinion or a disclaimer of opinion on the financial statements or the Statement of Expenses and Capital Expenditure (under section 45A of the PFA), they shall make a submission to the Opinions Review Committee of the OAG in keeping with AG ISA (NZ) 700 (Revised). 40. Any concerns that the Appointed Auditor has regarding manipulation of appropriations, integrity of systems, or other deficiencies that may affect the ability of the department to effectively monitor its performance against an appropriation or other statutory authority, shall be included in the management letter to the department. *** Application and other explanatory material Planning (See paragraphs 6-21) A1. The appropriation audit should be planned in conjunction with the annual audit of the department. The Appointed Auditor should consider where efficiencies can be obtained, and which objectives of the appropriation audit can be met concurrently with the performance of the annual audit. A2. When the Appointed Auditor carries out the audit of a department, they are simultaneously carrying out two different, but closely related audits being: - the annual audit; and - the appropriation audit. A3. The primary purpose of the annual audit is to form an opinion on the reliability of the statements prepared by a department, and that are covered by our audit report. The auditor s opinion is reported to the readers of this information in the form of an audit report, and is supported by a body of evidence that is required to provide reasonable assurance. The auditor s report is expressed using the term present fairly, in all material respects (or an equivalent term) and that implicitly means the reported information is evaluated as to whether it is materially misstated. Establishing a materiality base and level is fundamental to the annual audit. A4. The appropriation audit, carried out under section 15(2) of the Public Audit Act 2001, and in accordance with this standard, is carried out in conjunction with the annual Issued 03/17 Office of the Auditor-General

294 AG-2 The appropriation audit and the controller function audit. Appointed Auditors are not required to provide greater assurance about expenses or capital expenditure charged against an appropriation under this standard other than the reasonable assurance standard required for the annual audit. A5. Appointed Auditors are therefore not required to establish a separate materiality base and level for the audit of appropriations under this standard. The application of materiality is confined to the assessment of errors as part of the appropriation audit. A6. The approach to the audit of appropriations under this standard is based on the assessment of risks associated with each appropriation, in terms of what could go wrong. What could go wrong, in an appropriation audit context, includes: - expenses or capital expenditure are incurred without an appropriation; - expenses or capital expenditure are incurred beyond the amount of an appropriation; - expenses or capital expenditure are incurred for a purpose outside the scope of the appropriation (subject to the rules relating to transfers between appropriations); - expenses or capital expenditure are incurred after the appropriation has lapsed; - expenses or capital expenditure are incorrectly charged to the wrong appropriation; - expenses or capital expenditure are offset against revenue; - expenses or capital expenditure are incorrectly classified as a remeasurement; - frivolous and/or wasteful expenses or capital expenditure are incurred to utilise an unspent appropriation; - year-end adjustments are made to manipulate the amounts allocated against appropriations; - false expenses or capital expenditure are included and purport to reflect valid expenditure against an appropriation; - the basis for calculating overheads to an appropriation is unreasonable; and - the overheads allocated to an appropriation are incorrect. A7. Having identified what could go wrong, Appointed Auditors should then assess the risk that an individual appropriation could be misstated. This assessment will be based on the Appointed Auditor s accumulated knowledge of previous annual audits and appropriation audits of the department, including: - prior years knowledge, including errors in previous years; - the inherent nature of the appropriation; - the integrity of management; and Issued 03/17 Office of the Auditor-General

295 AG-2 The appropriation audit and the controller function - potential year-end pressures and incentives. A8. Where the Appointed Auditor assesses the risk to be significant that an individual appropriation could be misstated, they should then assess: - the adequacy of the entity s control systems and procedures to monitor the appropriation; - the likely impact of the work of the Central Controller Team to mitigate this risk; - the impact of work planned to be carried out on the annual audit; and - the impact of any errors found to date, during both the annual audit and appropriation audit. A9. The Appointed Auditor should apply this knowledge to assess whether: - sufficient and appropriate audit evidence can be obtained to form a conclusion about whether expenses and capital expenditure will be incurred as expressly authorised by an appropriation or other statutory authority; and - the department will properly disclose expenses and capital expenditure as required by the PFA. A10. If the Appointed Auditor assesses that sufficient and appropriate audit evidence can be obtained, and that the department will properly disclose expenses and capital expenditure as required by the PFA (the assessment described in paragraph A9), the Appointed Auditor should then determine if any additional audit work is required, over and above the work carried out to achieve the objectives of the annual audit, to form a conclusion about whether: - sufficient and appropriate audit evidence was obtained to form a conclusion on whether expenses and capital expenditure have been incurred as expressly authorised by an appropriation or other statutory authority; and - the department has properly disclosed expenses and capital expenditure as required by the PFA. A11. The Appointed Auditor should consider the use of efficient audit techniques, such as analytical review procedures, in carrying out the appropriation audit. Where possible, reliance should be placed on the system of internal control for monitoring performance against an appropriation or other statutory authority. A12. An important aspect of the work to satisfy the appropriation audit is the need to document all errors found during both the annual audit and the appropriation audit, and to assess the impact of those errors for the purposes of identifying unappropriated expenditure. Issued 03/17 Office of the Auditor-General

296 AG-2 The appropriation audit and the controller function A13. All errors need to be assessed in light of the impact of the errors on the disclosures required by the PFA particularly the disclosures relating to unappropriated expenditure to be included in the statements prepared by a department and that are covered by our audit report. Where the correction of an error (or errors) will give rise to unappropriated expenditure, the error is considered to be material for the appropriation audit. Understanding the appropriation process A14. Each year the Government puts forward its spending proposals for the coming financial year in the Budget (usually in May). It formally presents its proposed budget to Parliament in the form of a Bill called the Appropriation (Main Estimates) Bill, along with various explanatory documents. The Bill sets out estimates of what will be spent under each ministerial portfolio in general, every ministerial portfolio has a corresponding Vote in the budget (for example, Vote Health sets out all the spending in that portfolio area). Each Vote is made up of a number of more specific appropriations, which are descriptions of a particular area of activity and the spending approval sought for that area. Each appropriation has to set out: - the maximum amount of spending being approved; - the scope (that is, what the money can be used for); and - the date on which the appropriation lapses (most appropriations last for one year). Once Parliament has considered and approved the Bill, it becomes law and controls Government spending. In general, any spending outside what has been approved in this Act of Parliament will be unlawful. However, the system does recognise the need for some flexibility to respond to changing events: - A second Bill during the financial year (the Appropriation (Supplementary Estimates) Bill) allows the Government to update the initial estimates in the budget and get approval for those changes. - The PFA includes several mechanisms for approving minor changes to the spending authorities approved by Parliament. - A series of Imprest Supply Acts during each year also give the Government a general authority to spend up to a specified amount, subject to later inclusion in an Appropriation Act. Issued 03/17 Office of the Auditor-General

297 AG-2 The appropriation audit and the controller function To understand more about the appropriation process, the Appointed Auditor should be familiar with the following documents: - the PFA; - Treasury Instructions and Minister of Finance Instructions (issued under sections 80 and 80A of the PFA) that outline the operational procedures to be followed so that the requirements of the PFA are complied with; - other legislation that affects the functions and powers of the department, and that may also contain other statutory authorities; - Treasury circulars and guidance; - Cabinet Office circulars; - information contained within this Standard in particular, Appendices 1, 2, and 3; and - relevant sections of the audit brief for Government departments. Assessment of internal control A15. Appropriations are made and reported against on an accrual basis. Furthermore, the full cost of activities, including overhead costs, must be reported against the appropriation or other authority to which the activity relates. Departments must have appropriate control systems and procedures so that they can adequately monitor their expenses and capital expenditure against an appropriation or other statutory authority. A16. The ability of a department to adequately monitor performance against an appropriation or other statutory authority is largely dependent on the quality of its accountability structures and processes. As a minimum, these structures and processes should have the following attributes: - a clear accountability framework established by the responsible Minister, and achieved through the Minister's relationship with the Chief Executive, and clear delegations within the department for effective budgeting, monitoring, and reporting of performance against appropriations and other statutory authorities; - a budget for each appropriation or other statutory authority that has been prepared on a reasonable and transparent basis; - a process to ensure expenditure cannot be committed: - in advance of an Imprest Supply Act (before an Appropriation Act has been passed); or - in excess of the amount, or outside the scope, or outside the period of an appropriation or other statutory authority; and Issued 03/17 Office of the Auditor-General

298 AG-2 The appropriation audit and the controller function - processes that ensure that all incurred and committed expenditure is identified and allocated to the correct appropriation or other statutory authority this includes the need for an effective accounting system that records commitments as they arise, and the consistent application of appropriately based cost allocation systems. A17. In legal terms, all appropriations are to the Crown as a whole (that is, the Government collectively). However, to ensure clear responsibility and accountability, every appropriation has a single appropriation administrator responsible for managing the appropriation, and reporting to Parliament at the end of the year on how it has been used. It is possible for departments to incur expenses against an appropriation administered by another department, with prior approval. In such circumstances, the appropriation administrator needs to have controls in place to ensure that it is able to monitor and report fully on the use of appropriations of this nature described as administration and use appropriations. A18. In carrying out the appropriation audit of an appropriation administrator, the Appointed Auditor will need to obtain sufficient and appropriate evidence that the control systems and procedures within both the appropriation administrator and the other department(s) adequately monitor expenses and/or capital expenditure against the appropriation. In doing so, the Appointed Auditor may need to obtain confirmation from the Appointed Auditor(s) of the other department(s) on the adequacy of the control systems and procedures of the other department(s) to monitor expenses and/or capital expenditure charged to the appropriation. Scope considerations A19. The Appointed Auditor should consider the scope of appropriations early and throughout the audit work. One opportunity to consider scope is around the time of the production of the Estimates of Appropriations for the following year. The scope description of appropriations should be sufficiently specific so that the wording acts as an effective constraint against non-authorised activity, while not inappropriately constraining activity intended to be authorised. A20. If the scope of an appropriation is unclear on its face, other sources of information for example, the more detailed descriptions of purpose contained in the commentary in the Estimates, or information in Cabinet papers explaining the underlying policy can assist in understanding it (it may be necessary to refer to Treasury guidance on the scope of Appropriations as required). However, it is important to note that the Estimates are not themselves part of the Appropriation Act except to the extent that Issued 03/17 Office of the Auditor-General

299 AG-2 The appropriation audit and the controller function the Act expressly incorporates them. Ultimately, the interpretation of the scope of an appropriation is a legal question. The legal team in the OAG is available to provide advice. A21. Where concerns about the quality of the scope descriptions are noted, the Appointed Auditor should refer the matter to the Central Controller Team in the OAG for advice. If these concerns remain, having received advice from the Central Controller Team, the Appointed Auditor should discuss these concerns as early as possible with the department involved. Where the department does not propose to make any changes, the concerns should be reported in the document summarising the audit conclusions and in the management letter to the department. Consideration of key legislative requirements and supporting material A22. A list of the key requirements of the PFA relevant to the appropriation audit are contained in Appendix 3. A23. To be lawful, expenses or capital expenditure must be incurred not only in keeping with an appropriation, but also with the legal capacity and authority of the department to engage in the activity concerned. Most activity by Government departments relies on the general legal capacity of the Crown at common law, and so there are few legal constraints on the department s capacity. However, some departments do still have legislation that defines their functions and, therefore, constrains their general legal capacity. The Appointed Auditor should seek legal advice, if necessary, from the Assistant Auditor-General Legal. A24. Section 26A of the PFA requires any transfer of resources between classes of outputs to be approved by Order in Council. In order to obtain sufficient and appropriate audit evidence to satisfy themselves that the department has complied with section 26A of the PFA, the Appointed Auditor may select a sample of approvals of transfers of resources between classes of outputs that have been approved by Order in Council. A25. Section 26B of the PFA allows that the Minister 6 may approve expenses or capital expenditure to be incurred in excess of existing appropriation (within limits). Note that section 26B is only operable during the last three months of any financial year and the first three months of the following financial year. 6 Minister is defined in section 2 of the PFA. Issued 03/17 Office of the Auditor-General

300 AG-2 The appropriation audit and the controller function A26. The imprest supply and supplementary estimates processes allow further flexibility for the Government to alter resource allocations while maintaining parliamentary scrutiny. A27. The processes to alter resource allocations are outlined in the Treasury Instructions, as well as any applicable Cabinet Office circular. The broad approach is that after the passing of the first Appropriation Act for the financial year, the prior approval of Cabinet is required: - for an appropriation of any expenditure of public money or incurring of expenses or liabilities that are not in the main Estimates; - to include these appropriations in the next Supplementary Estimates; and - to meet such expenses or capital expenditure from imprest supply. A28. Cabinet may approve delegations through Cabinet Office circulars to allow Ministers, usually the Minister of Finance and the relevant Vote Minister (Joint Ministers), to approve certain technical changes to appropriations. In obtaining sufficient and appropriate audit evidence to satisfy themselves that the department has complied with the requirements in the Treasury Instructions and any applicable Cabinet Office circular in respect of alterations of resource allocations, the Appointed Auditor may select a sample of approvals made by Cabinet. Fieldwork (See paragraphs 22-29) A29. The Appointed Auditor should ensure that the appropriation audit is performed in conjunction with the annual audit of the department. A30. The Appointed Auditor should determine the precise timing of audit work needed to fulfil the requirements of the appropriation audit, having regard to the following factors: - the risk that the amount of an appropriation or other statutory authority may be exceeded, or that expenses or capital expenditure may be incurred, or public money spent, on unplanned or unnecessary items to maintain future baselines or to avoid reporting a surplus; and - the reporting deadlines specified in the relevant audit brief. A31. One of the requirements of the appropriation audit is that the Central Controller Team in the OAG is to be notified immediately if unappropriated or unauthorised spending has occurred, or is likely to occur. Given that expenditure is likely to be approaching Issued 03/17 Office of the Auditor-General

301 AG-2 The appropriation audit and the controller function the limit of appropriations towards the end of the financial year, the Appointed Auditor's focus on appropriation in the last three months of the financial year is crucial. However, unappropriated or unauthorised spending can occur at any time during the year. Reporting (See paragraphs 30-40) A32. Any audit communication with Ministers will be done by the OAG. This also applies to reports to the responsible Minister arising from the annual audit of a department. A33. The Auditor-General may direct a Minister to report to the House of Representatives in cases involving unlawful expenses under section 65Z of the PFA. Alternatively, the Auditor-General may choose to report matters arising from the appropriation audit and the Controller function under section 30 of the Public Audit Act Reporting unappropriated and unauthorised spending during the year A34. It is imperative that the Appointed Auditor acts as soon as they become aware that a particular appropriation or other statutory authority is likely to be breached (whether in terms of amount, scope, or period). A35. If the actions outlined in paragraph 34(b) do not occur, the OAG (in consultation with the Appointed Auditor) will write first to the Chief Executive and, once acknowledged, to the responsible Minister. The letter to the Chief Executive will indicate that: - once there is unappropriated or unauthorised spending, no further expenditure may be incurred under that appropriation or authority until an approval has been obtained; and - until an approval is obtained, there should be no funding of any further disbursements from the Crown or departmental bank account in respect of that appropriation or other statutory authority. A36. This letter will be copied to the Treasury, and referred to the Auditor-General s designated officer responsible for the Controller function. A37. If authority is not obtained at this stage, the Auditor-General may invoke the power to direct the Minister, Treasury, or department to stop payments from the relevant bank account and/or (where unappropriated or unauthorised spending has already occurred) direct the responsible Minister to report to the House. Issued 03/17 Office of the Auditor-General

302 AG-2 The appropriation audit and the controller function A38. Once the necessary legal opinion has been received, and if it confirms the lack of legal authority, the OAG will inform the Chief Executive of the need to remedy the matter. A39. The OAG will notify the Treasury of the question about the lawfulness of the activity and specify the proposed course of action. A40. The Auditor-General may invoke the power to direct the Minister, Treasury, or the department concerned to stop payments from the relevant bank account under section 65ZA of the PFA. The Auditor-General may also direct the Minister to report to the House under section 65Z of the PFA. Issued 03/17 Office of the Auditor-General

303 AG-2 The appropriation audit and the controller function Appendix 1 Background 1. The Public Finance Amendment Act 2004 amended section 15 of the Public Audit Act 2001 to ensure that the appropriation audit is an explicit statutory responsibility of the Auditor-General. Section 15(2) of the Public Audit Act 2001 states: In the case of an audit of a department (within the meaning of section 2(1) of the Public Finance Act 1989) or an Office of Parliament, the Auditor-General must also audit the appropriations administered by the department or Office. 2. The Auditor-General is required to provide independent assurance to Parliament that expenses and capital expenditure of departments have been incurred for purposes that are lawful and within the scope, amount, and period of the appropriation or other authority, and that, where this is not the case, the matter is appropriately dealt with. 3. The Auditor-General discharges this responsibility to Parliament through the conduct of the appropriation audit and the Controller function. 4. The appropriation audit and the Controller function are closely inter-related. The appropriation audit is an important and essential pre-requisite to the effective discharge of the Controller responsibilities. Public financial management principles 5. Public expenditure is governed by two important principles, those of: - appropriation; and - the general principle of legality. The principle of appropriation 6. The system of appropriations, as defined in the Public Finance Act 1989, is how Parliament authorises the Executive to spend public money. Under this system, expenses and capital expenditure by departments and Offices of Parliament can only be incurred if they are authorised by an appropriation or other statutory authority. 7. There are three elements to an appropriation. These are: - the maximum amount of expenses or capital expenditure that can be incurred; Issued 03/17 Office of the Auditor-General

304 AG-2 The appropriation audit and the controller function - the scope (that is, what the amount can be used for); and - the date on which the appropriation lapses (which is the end of the financial year to which the Appropriation Act relates, unless a longer period not exceeding five years is specified). These elements are set out in sections 8 to 10 of the PFA. 8. Unappropriated expenditure occurs when expenses or capital expenditure are incurred: - without an appropriation; - beyond the amount of an appropriation; - for a purpose outside the scope of the appropriation (subject to the rules relating to transfers between appropriations); or - after the appropriation has lapsed. 9. Parliament takes unappropriated expenditure very seriously. This is reflected in the requirement in section 26D of the PFA for departments or Offices of Parliament to report unappropriated expenditure separately (irrespective of its dollar value) in their financial statements, and for unappropriated expenditure to be reported in the FSG. In addition, the Minister of Finance shall present a report to the House of Representatives setting out responsible Ministers explanations for each instance of unappropriated expenditure. 10. However, the system includes mechanisms to enable some spending to be authorised outside the bounds of, or in advance of, a parliamentary appropriation. As a result, there will always be some spending that is authorised, but has not been appropriated, and must be reported to Parliament and formally confirmed or validated retrospectively. It is therefore important to distinguish between spending that is: - not covered by an appropriation, but authorised in advance under sections 26A or 26B or an Imprest Supply Act; or - not covered by an appropriation and not authorised in advance under any mechanism. 11. All of these situations must be reported, but only those in the second category are breaches in the sense of lacking any kind of proper authority. Issued 03/17 Office of the Auditor-General

305 AG-2 The appropriation audit and the controller function Re-measurements 12. The PFA makes provision for re-measurements. 7 These are financial transactions that are defined so as to be excluded from the meaning of expenses used in the PFA, and therefore, unlike other expenses, do not require an appropriation. An example of a remeasurement is the movement arising from the revaluation of land and buildings. Other statutory authority 13. Parliament may also authorise expenses or capital expenditure to be incurred by some other form of statutory authority (described in this Standard as a statutory authority or other statutory authority ). One example is an Imprest Supply Act. Another is what is known as Permanent Legislation Authority (PLA). A PLA typically authorises resources to be committed by a particular entity, or for a particular activity, without further appropriation or without further authority. The aim is often to insulate the particular cost from immediate political control. A well-known example is the payment of judicial salaries. Permanently authorising these payments provides additional protection for the independence of the judiciary and the separation of powers (see section 9A of the Judicature Act 1908). 14. Unlike appropriations, a PLA may be expressed in either accrual or cash terms. Those expressed in cash terms typically authorise the spending of public money (that is, money received by the Crown and money held by an Office of Parliament see section 2 of the PFA for the full definition). Other examples of PLAs are: - section 6(c) of the PFA, which provides for the repayment of debt of the Crown or an Office of Parliament; - section 65ZH of the PFA, which provides permanent legislative authority for payment of expenses incurred in connection with: expenses in respect of money borrowed by the Crown; expenses in respect of securities; expenses relating to derivative instruments of the Crown; expenses relating to investment; and 7 Re-measurements as defined in the PFA: (a) means revisions of prices or estimates that result from revised expectations of future economic benefits or obligations that change the carrying amount of assets or liabilities; but (b) does not include: (i) revisions that result from transactions or events that give rise to the initial recognition of assets or liabilities in the reporting period; or (ii) revisions that result from transactions or events directly attributable to actions or decisions taken by the Crown; or (iii) expenses that arise from the consumption of assets during the reporting period; or (iv) interest income or interest expenses. Issued 03/17 Office of the Auditor-General

306 AG-2 The appropriation audit and the controller function - section 24 of the Crown Proceedings Act 1950, which provides for amounts owing as a result of a Court judgment to be paid immediately. 15. Section 6 of the PFA contains an important other statutory authority, which authorises a department or Office of Parliament to spend public money to meet expenses or capital expenditure incurred in keeping with appropriations that is, section 6 links the spending of public money to appropriations. Types of appropriation 16. Section 7A of the PFA describes seven categories of activity, expenses, or expenditure for which a separate type of appropriation must be made. These categories are known as appropriation types. They are: - each category of output expenses; - each category of benefits or related expenses; - each category of borrowing expenses; - each category of other expenses; - each category of capital expenditure; - expenses and capital expenditure to be incurred by each intelligence and security department; and - multi-category appropriations, made up of two or more categories of output expenses, other expenses, and non-departmental capital expenditure. 17. All expenses and capital expenditure incurred in any financial year must be allocated to one of the types of appropriation described in section 7A of the PFA, within a Vote specified in an Appropriation Act. 18. The scope limitation on output expenses means that unused output expense appropriations cannot be diverted for another purpose (except in certain limited circumstances that are set out in section 26A of the PFA). The general principle of legality 19. As well as being authorised by an appropriation or other authority, all spending by the Crown must also be generally lawful. Limits on the capacity of the Crown or individual departments usually relate either to legal capacity (the types of transactions that the department is authorised to carry out) or purpose (the types of activities that the department can engage in). Issued 03/17 Office of the Auditor-General

307 AG-2 The appropriation audit and the controller function 20. There are not many legal limits on departments capacity or purpose under current legislation. - As part of the Crown, all departments have general legal capacity, subject to the limits on engaging in some transactions in Part 6 of the PFA (such as borrowing, issuing securities etc). - Only a small number of departments have governing legislation that defines their purpose and functions, and therefore creates limits on what they can spend money on. 21. It is now rare for an issue to arise about whether departmental spending is legal in this general sense. When it does arise, it is usually a complex question requiring specialist legal advice. Auditors should refer such questions to the Assistant Auditor-General Legal for assistance. Imprest supply 22. Imprest supply is a statutory mechanism that allows Parliament to provide the Government with the authority to incur expenses or capital expenditure in advance of appropriation by way of an Appropriation Act. 23. Imprest supply is required because the first Appropriation Bill for the year is not normally passed before the beginning of the financial year, and because the changing nature of government activities and unexpected demands means it is impossible to adequately foresee all future expenses and capital expenditure. 24. Cabinet must authorise every use of imprest supply by the Crown. Cabinet Committees and Ministers do not have the authority to approve expenditure under imprest supply, unless Cabinet specifically delegates the authority to them through a Cabinet Office circular. For Offices of Parliament, approval of the proposed expenditure by the Officers of Parliament Committee, along with a recommendation to include the changes in the Supplementary Estimates, is enough. Parliamentary authority must subsequently be sought through the Supplementary Estimates of Appropriation. 25. For a judicial comment on the breadth of an imprest authority, see the case of Archives and Records Association v Blakeley [2000] 1 NZLR 607. Issued 03/17 Office of the Auditor-General

308 AG-2 The appropriation audit and the controller function The Controller function 26. The Controller function is a key constitutional check. This function is exercised by the Controller and Auditor-General under sections 65Y to 65ZA of the PFA (reproduced in Appendix 3) and section 15(2) of the Public Audit Act 2001 (reproduced in Appendix 1). 27. The main features of the Controller function are: - Departments provide information to the Treasury about the expenses and capital expenditure incurred against the authority available. The Treasury collates and monitors this information throughout the year. - The Treasury supplies monthly 8 reports to the Controller, to enable the Controller to examine whether expenses and capital expenditure have been incurred in keeping with appropriation or other authority (section 65Y of the PFA). - The Central Controller Team 9 reviews the monthly monitoring reports from the Treasury on a global year-to-date basis and operates the Controller function using standard procedures The Controller can direct a Minister to report to the House in a case where the Controller has reason to believe that any expenditure that has been incurred is unlawful or not within the scope, amount, or period of any appropriation or other authority (section 65Z of the PFA). - The Controller can stop payments from a Crown bank account or a departmental bank account, to prevent money being paid out of the account that may be applied for a purpose that is not lawful or not within the scope, amount, or period of any appropriation or other statutory authority (section 65ZA of the PFA). Monthly statements 28. The Treasury s monthly reports under section 65Y of the PFA must record: - all actual expenses and capital expenditure incurred against an appropriation, or other authority, by or under an Act; and - all actual expenses and capital expenditure incurred in excess of, or without, an appropriation, or other authority, by or under an Act. 8 Monthly reporting is not required for July and August. 9 The Central Controller Team is a central team from the OAG and Audit New Zealand, assisted by Appointed Auditors conducting appropriation audits of departments. 10 The joint understanding and expectations about the role and procedures associated with the Controller function are set out in the Memorandum of Understanding between the Controller and Auditor-General and the Secretary to the Treasury. Issued 03/17 Office of the Auditor-General

309 AG-2 The appropriation audit and the controller function 29. Each report must also, in respect of each appropriation or other authority, set out the balance between: - the amount of expenses and capital expenditure authorised to be incurred; and - the amount that was actually incurred. Note that the reference to authority includes a reference to an authority in advance of an appropriation. Issued 03/17 Office of the Auditor-General

310 AG-2 The appropriation audit and the controller function Appendix 2 The appropriation process The appropriation process is an annual cycle of events based around the government s financial year, which runs from 1 July to 30 June. Rules The rules governing the process can be found in: - the PFA, which: - stipulates the form and limits of appropriations and the key parts of the timetable; and - requires the Crown to publish certain fiscal information at particular times; - Treasury Instructions and Minister of Finance Instructions, issued under sections 80 and 80A of the PFA, which outline the operational procedures to be followed by departments (including Offices of Parliament), so that the requirements of the PFA are complied with; - the Standing Orders of the House of Representatives, which supplement the statutory timetable provisions and set the rules by which the House and its committees discharge their responsibilities in the process; and - Cabinet rules. Key stages The key stages of the appropriation process are: 1. Publication, by 31 March, of a Budget Policy Statement under the PFA containing (among other things) the Government s broad strategic priorities for the forthcoming Budget. 2. Introduction and enactment, before 30 June, of the first Imprest Supply Bill to give the Government supply from the expiry of the current year s appropriations until the enactment of the first Appropriation Act for the new financial year. 3. Presentation of the Budget and the Estimates to the House, and introduction of the Appropriation (Estimates) Bill, followed by select committee consideration (this must happen before 31 July, but current practice is for the Budget and Estimates to be presented at the same time as the first Imprest Supply Bill). 4. Completion of the Estimates debate, followed by enactment of the Appropriation (Estimates) Act by which Parliament appropriates public money to the Crown. Each appropriation is administered by a government department. A further Imprest Supply Act is passed at the same time. 5. A second Appropriation Bill, supported by Supplementary Estimates, is introduced in the second half of the financial year. Its usual purposes are to allow the Government to commit more resources than initially sought and to alter the uses to which existing appropriations can be put (this Bill is sometimes updated by a Supplementary Order Paper just before the end of the financial year to incorporate the Final Supplementary Estimates, ensuring that the Government does not commit resources in excess of those statutorily allowed. This procedure has not, however, been required in recent years). Issued 03/17 Office of the Auditor-General

311 AG-2 The appropriation audit and the controller function 6. The Supplementary Estimates are considered by the Finance and Expenditure Committee. After the Committee has reported back to the House, there is a further debate following which the Bill is enacted in the form of the Appropriation (Supplementary Estimates) Act. It is usually enacted at the end of the financial year. 7. Reporting by Chief Executives of their department's actual expenditure against each appropriation for which they have been given responsibility by the responsible Minister together with separate reporting on any unappropriated expenditure. 8. Scrutiny by the House and select committees by way of annual reviews A final Appropriation Bill is introduced following the completion of annual reviews. This validates the previous year's unappropriated expenditure, expenses, and liabilities. These amounts are reported to Parliament in the Financial Statements of the Government and in a report by the Minister of Finance accompanying the Bill, which in due course is enacted as the Appropriation (Confirmation and Validation) Act. 12 Imprest Supply With the enactment of an Appropriation Act, all previous Imprest Supply Acts are repealed and the expenditure authority is included in the Appropriation Act. However, to introduce flexibility, another Imprest Supply Act is passed giving the Government authority to spend in advance of appropriations. The effect of this procedure is that the Government has imprest supply authority, up to the dollar limit stipulated in the current Imprest Supply Act, at all times. 11 Previously called financial reviews. 12 Previously called the Appropriation (Financial Review) Act. Issued 03/17 Office of the Auditor-General

312 AG-2 The appropriation audit and the controller function Summary of timetable The timetable set out below illustrates the timing of the appropriation process as required by the PFA. It reflects the statutory position regarding Appropriation Bills and current practice regarding imprest supply, and recognises that the Budget process precedes the introduction of Appropriation Bills by several months. TIMING OF THE APPROPRIATION PROCESS (as required by the Public Finance Act 1989 and Standing Orders) Period Event Supply By 31 March Budget Policy Statement Before 1 July Introduction and passing of Imprest Supply Act (No. 1) 1 July Financial year starts By 31 July Budget: Introduction of Appropriation Estimates Bill July/August/September Select Committee examination of the Estimates must be completed by 30 September October Parliamentary debate on the Budget Imprest By 31 October Pass Appropriation Act (No. 1) Pass Imprest Supply Act (No. 2) Appropriation Imprest March Pass Imprest Supply Act (No. 3) Imprest By 31 May Introduce Appropriation (Supplementary Estimates) Bill June If required, introduce and pass Final Supplementary Estimates Appropriation Pass Appropriation (Final Supplementary Estimates) Bill By March Introduce and pass Appropriation (Confirmation and Validation) Bill Issued 03/17 Office of the Auditor-General

313 AG-2 The appropriation audit and the controller function Appendix 3 Key requirements of the Public Finance Act 1989 Key requirements in relation to appropriations 4 Expenses or capital expenditure must not be incurred unless in accordance with appropriation or statutory authority (1) The Crown or an Office of Parliament must not incur expenses or capital expenditure, except as expressly authorised by an appropriation, or other authority, by or under an Act. (2) In this section, expense does not include an expense that results from (a) a re-measurement 13 of an asset or a liability; or (b) an operating loss incurred by (i) a Crown entity named or described in the Crown Entities Act 2004; or (ia) a Schedule 4 organisation; or (ii) a Schedule 4A Company; or (iia) a mixed ownership model company listed in Schedule 5; or (iii) a State enterprise named in Schedule 1 of the State-Owned Enterprises Act 1986; or (iv) the Reserve Bank of New Zealand; or (v) any other entity whose financial statements must be consolidated into the financial statements of the Government to comply with generally accepted accounting practice. 4A Authority to incur expenses or capital expenditure under Imprest Supply Act (1) The authority given by an Imprest Supply Act to incur expenses or capital expenditure in a financial year in advance of appropriation is an authority under an Act for the purposes of sections 4(1) and 26C(1). (2) However, subsection (1) does not apply unless an appropriation for the expenses or capital expenditure is made before the end of the financial year. 5 Public money must not be spent unless in accordance with statutory authority The Crown or an Office of Parliament must not spend public money, except as expressly authorised by or under an Act (including this Act). 6 Authority to spend public money Public money may be spent, without further authority than this section, for the purpose of (a) meeting expenses or capital expenditure incurred in accordance with an appropriation or other authority by or under an Act; and 13 Re-measurements as defined in the PFA: (a) means revisions of prices or estimates that result from revised expectations of future economic benefits or obligations that change the carrying amount of assets or liabilities; but (b) does not include: (i) revisions that result from transactions or events that give rise to the initial recognition of assets or liabilities in the reporting period; or (ii) revisions that result from transactions or events directly attributable to actions or decisions taken by the Crown; or (iii) expenses that arise from the consumption of assets during the reporting period; or (iv) interest income or interest expenses. Issued 03/17 Office of the Auditor-General

314 AG-2 The appropriation audit and the controller function (b) (c) (d) the payment of goods and services tax in relation to those expenses or capital expenditure; and the repayment of debt of the Crown or an Office of Parliament; and the settlement of liabilities of the Crown or an Office of Parliament. 7 Expenses and capital expenditure must be allocated to appropriation type All expenses and capital expenditure to be incurred in any financial year must be allocated to one of the appropriation types set out in section 7A(1) within a Vote specified in an Appropriation Act. 7A Appropriation types (1) An appropriation must be an appropriation for (a) 1 category of output expenses; or (b) 1 category of benefits or related expenses; or (c) 1 category of borrowing expenses; or (d) 1 category of other expenses; or (e) 1 category of capital expenditure; or (f) expenses and capital expenditure to be incurred by an intelligence and security department; or (g) 2 or more categories of 1 or more of the following: (i) output expenses: (ii) other expenses: (iii) non-departmental capital expenditure. (2) For the purposes of this section, (a) a category of output expenses must not include both departmental and non-departmental expenses; and (b) a category of other expenses must not include both departmental and non-departmental expenses; and (c) a category of capital expenditure must not include both departmental and non-departmental capital expenditure. 7B Requirements for multi-category appropriations A multi-category appropriation described in section 7A(1)(g) (a) must be approved by the Minister; and (b) must include only categories of expenses or non-departmental capital expenditure that contribute to a single overarching purpose. 7C Responsibility for, and administration and use of, appropriations (1) An appropriation is made to the Crown or an Office of Parliament. (2) In the case of an appropriation made to the Crown, (a) a Minister (the appropriation Minister) is responsible for the appropriation; and (b) the appropriation must be administered by 1 department (the appropriation administrator) on behalf of the appropriation Minister; and Issued 03/17 Office of the Auditor-General

315 AG-2 The appropriation audit and the controller function (c) if the appropriation is an appropriation for departmental expenses or a multi-category appropriation, any other department may incur expenses against the appropriation (i) at the direction of the appropriation Minister; or (ii) with the agreement of the appropriation administrator. (3) Despite subsection (2)(a), the Speaker is responsible for any appropriation administered by the Office of the Clerk of the House of Representatives or the Parliamentary Service. (4) In the case of an appropriation made to an Office of Parliament, (a) the Speaker is responsible for the appropriation; and (b) the appropriation must be administered by that Office of Parliament. 8 Appropriation limited by amount The authority to incur expenses or capital expenditure provided by an appropriation under an Appropriation Act (a) is limited to the amount specified for the appropriation by or under that Act; and (b) may not be exceeded (except as provided for in section 25 or section 26A or section 26B). 9 Appropriation limited by scope (1) The authority to incur expenses or capital expenditure provided by an appropriation (a) is limited to the scope of the appropriation; and (b) may not be used for any other purpose. (2) For the purposes of subsection (1), (a) the scope of a multi-category appropriation is the scope of each of the individual categories of expenses or non-departmental capital expenditure included in that appropriation; and (b) any variation made by the Minister of the terms and conditions of a capital injection to any entity referred to in section 27(3)(a) to (f) does not change the scope or purpose of that capital injection. 10 Appropriation limited by period (1) The authority to incur expenses or capital expenditure provided by an appropriation under an Appropriation Act lapses at the end of the financial year to which the Act relates. (2) However, if an Appropriation Act provides that the authority to incur expenses or capital expenditure applies for more than 1 financial year, that authority (a) lapses at the end of the period specified in the Act; and (b) continues in force until the end of the period specified despite the repeal of the Act, unless the authority is expressly varied, revoked, or replaced by an authority in another Appropriation Act. (3) Despite subsection (2), the authority to incur expenses or capital expenditure must not apply for more than 5 financial years. Issued 03/17 Office of the Auditor-General

316 AG-2 The appropriation audit and the controller function 11 Expenses or payments authorised other than by Appropriation Act (1) If an Act (other than an Appropriation Act) expressly provides for payments to be appropriated by or under that Act, any expense or capital expenditure incurred that gives rise to the need for those payments may be incurred without further appropriation than this section. (2) Each expense or capital expenditure incurred in accordance with an appropriation, or other authority, by or under an Act (other than an Appropriation Act) must be managed and accounted for in the same manner as expenses or capital expenditure incurred in accordance with an Appropriation Act. 65ZH Permanent legislative authority for payment of certain expenses (1) Any expenses incurred in connection with any of the following matters may be incurred without further appropriation, and must be paid without further authority, than this section: Expenses in respect of money borrowed by the Crown (a) negotiating the borrowing of money by the Crown: (b) undertaking, managing, servicing, converting, or repaying borrowing described in paragraph (a): Expenses in respect of securities (c) issuing a public security in respect of the Crown: (d) executing, redeeming, or varying a public security described in paragraph (c): Expenses relating to derivative transactions of the Crown (e) negotiating a derivative transaction of the Crown: (f) managing, servicing, or making payments under a derivative transaction described in paragraph (e): Expenses relating to investment (g) negotiating an investment referred to in section 65I: (h) placing, managing, servicing, or converting an investment referred to in section 65I. (2) In this section, expenses (a) includes (i) duties, taxes, premiums, bonuses, fees, interests, and commissions; and (ii) any expenses incurred on personnel and equipment necessary in connection with the matters set out in subsection (1); but (b) does not include expenses incurred in connection with (i) money borrowed by the Crown under a hire purchase agreement, a finance lease agreement, or any agreement that is of the same nature as or a substantially similar nature to either of those agreements; or (ii) a guarantee or an indemnity on behalf of or in the name of the Crown given under this Act or any other enactment. Issued 03/17 Office of the Auditor-General

317 AG-2 The appropriation audit and the controller function The Controller Function 65Y. Treasury must report on all expenses and capital expenditure incurred with or without appropriation or other statutory authority (1) The Treasury must, within the time required under subsection (3), prepare and submit to the Auditor-General a report that sets out (a) all actual expenses and capital expenditure incurred against an appropriation, or other authority, by or under an Act; and (b) all actual expenses and capital expenditure incurred in excess of, or without, an appropriation, or other authority, by or under an Act. (2) The report must also set out, for each appropriation, or other authority, by or under an Act, the balance between (a) the amount of expenses and capital expenditure authorised to be incurred; and (b) the amount that was actually incurred. (3) The time required is 3 working days after the Treasury receives the information from departments that is required for the preparation of the monthly Financial Statements of the Government reporting entity under section 31A. (4) To avoid doubt, this section does not limit the powers of the Auditor-General, under Part 4 of the Public Audit Act 2001, to access information from a public entity or any person. (5) In this section, a reference to authority includes a reference to an authority in advance of an appropriation. (6) In this section and sections 65Z and 65ZA, a reference to the Auditor-General is a reference to the Auditor-General in his or her capacity as Controller and Auditor-General. 65Z. Auditor-General may direct Ministers to report to House of Representatives in cases involving unlawful expenses, etc (1) The Auditor-General may direct a Minister to report to the House of Representatives if the Auditor- General has reason to believe that expenses or capital expenditure for which that Minister is responsible have been incurred for a purpose that (a) is not within the scope, amount, or period of any appropriation, or other authority, by or under an Act; or (b) is, for any other reason, unlawful. (2) The report must set out the following details: (a) the nature and extent of any alleged breach of the appropriation or other authority that the Auditor-General has reason to believe has occurred; and (b) the events that gave rise to the alleged breach; and (c) the remedial action taken or proposed to be taken to correct the breach and prevent its recurrence. (3) If the Minister is of the opinion that there has not been a breach, the report (a) must set out the details specified in subsection (2)(a) and (b); and (b) must also state Issued 03/17 Office of the Auditor-General

318 AG-2 The appropriation audit and the controller function (i) that the Minister is of that opinion; and (ii) the Minister's reasons for that opinion. (4) The Minister responsible for the expenses or capital expenditure must (a) comply with the direction within 20 working days after receiving it; or (b) if Parliament is not in session, (i) publish the information required by subsection (2) or, as the case may be, subsection (3) in the Gazette within 20 working days after receiving the direction; and (ii) present the information to the House as soon as possible after the commencement of the next session of Parliament; or (c) if the direction is made after the end of the financial year, (i) comply with the direction by including the information required by subsection (2) or, as the case may be, subsection (3) in the report under section 26C; or (ii) comply with the direction within 20 working days after receiving it. 65ZA. Auditor-General may stop payments out of Bank Accounts (1) This section applies if the Auditor-General has reason to believe that any money to be paid out of a Crown Bank Account or a Departmental Bank Account may be applied for a purpose that (a) is not within the scope, amount, or period of any appropriation, or other authority, by or under an Act; or (b) is, for any other reason, unlawful. (2) If this section applies, the Auditor-General may direct the Minister, the Treasury or, as the case may be, the department concerned to stop payments out of that Crown Bank Account or Departmental Bank Account. Issued 03/17 Office of the Auditor-General

319 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence AUDITOR-GENERAL S AUDITING STANDARD 3 THE AUDITOR S APPROACH TO ISSUES OF EFFECTIVENESS AND EFFICIENCY, WASTE, AND A LACK OF PROBITY OR FINANCIAL PRUDENCE Contents Page Introduction Scope of this Standard Application Background Objectives Definitions Requirements Considerations to take into account when being alert and aware Maintaining alertness for and awareness of issues and risks Reporting instances of effectiveness and efficiency, waste, or a lack of probity or financial prudence Auditing sensitive expenditure Reporting issues of sensitive expenditure Separate engagements on sensitive expenditure Application and Other Explanatory Material Maintaining alertness for and awareness of issues and risks Reporting instances of effectiveness and efficiency, waste, or a lack of probity or financial prudence Auditing sensitive expenditure Reporting issues of sensitive expenditure Issued 03/17 Office of the Auditor-General

320 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence Introduction Scope of this Standard 1. This Auditor-General s Auditing Standard establishes the Auditor-General s requirements on annual audits in relation to issues of effectiveness and efficiency, waste, and a lack of probity or financial prudence. Application 2. Compliance with this Standard is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. 3. This Statement applies to audits of financial statements and/or performance information which has been prepared for reporting periods beginning on or after 1 April Background 4. While carrying out the annual audit, the Appointed Auditor is expected to keep in mind the overall role and concerns of the Auditor-General as specified in the Public Audit Act 2001 (the Act), and also public and parliamentary expectations of the Auditor- General as they emerge over time. 5. There is overlap between the content of this Standard and other Standards and Statements. This overlap arises because this Standard requires the Appointed Auditor to maintain alertness for, and awareness of, matters that may be of interest to the Auditor-General, even though they may not affect the Appointed Auditor s responsibility to form an opinion on the financial and performance information. Objectives 6. The objectives of the Appointed Auditor, in carrying out the annual audit, are to: (a) maintain alertness for, and awareness of, issues and risks related to the Auditor-General s concerns over effectiveness and efficiency, waste, and a lack of probity or financial prudence; (b) plan and audit areas of sensitive expenditure; and (c) report in an appropriate manner on any matters identified in (a) and (b) above. Issued 03/17 Office of the Auditor-General

321 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence Definitions 7. For the purpose of this Auditor-General s Auditing Standard the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance Standards Board (the NZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the New Zealand public sector differs from the NZAuASB glossary, the New Zealand public sector definition shall prevail); (b) in the Auditor-General s Glossary of Terms; and (c) in the following term. Sensitive expenditure means expenditure by a public entity that provides, has the potential to provide, or has the perceived potential to provide, a private benefit to an individual staff member of a public entity that is additional to the business benefit to the entity of the expenditure. It also includes expenditure by a public entity that could be considered unusual for the entity s purpose and/or functions. Requirements Considerations to take into account when being alert and aware 8. The Appointed Auditor shall, when carrying out the annual audit of the financial and performance information of a public entity, take into account the need to maintain alertness and awareness for any indication that: (a) the public entity has not applied its resources effectively or efficiently; (b) waste has occurred, either by the public entity itself or as a result of action or inaction on the part of the public entity; or (c) there has been an act or omission that shows or appears to show a lack of probity or financial prudence on the part of the public entity or one or more of its members, office holders, or employees. Maintaining alertness for and awareness of issues and risks 9. As part of developing the overall audit strategy and audit plan, the Appointed Auditor shall ensure that they maintain alertness and awareness for issues and risks related to effectiveness and efficiency, waste, and a lack of probity or financial prudence. (See paragraphs A1 - A3) Issued 03/17 Office of the Auditor-General

322 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence 10. The Appointed Auditor shall ensure that their overall audit strategy and audit plan reflects any guidance on issues or risks identified by the OAG in the applicable audit brief. 11. The Appointed Auditor shall document the processes used to ensure that they have maintained alertness for, and awareness of, issues and risks of effectiveness and efficiency, waste, and a lack of probity or financial prudence. 12. In carrying out the annual audit, the Appointed Auditor shall note that the Act permits an examination of effectiveness and efficiency as long as that examination takes into account any applicable government or local authority policy. Reporting instances of effectiveness and efficiency, waste, or a lack of probity or financial prudence 13. The Appointed Auditor shall immediately advise the OAG if they identify an instance of effectiveness and efficiency, waste, or a lack of probity or financial prudence. The Appointed Auditor, in consultation with the OAG, shall then decide what further steps shall be taken, if any, to address the issue. 14. The Appointed Auditor shall formally report to the OAG on issues and risks related to effectiveness and efficiency, waste, and a lack of probity or financial prudence identified during the annual audit as part of reporting the results of the annual audit. 15. As part of advising the OAG in paragraph 13, the Appointed Auditor in consultation with the OAG shall determine the appropriate external reporting action to be taken. External reporting actions may include: (a) reporting in the audit report; (b) reporting to management or those charged with governance in the management letter; and/or (c) reporting to another party. (See paragraphs A4 - A5) Auditing sensitive expenditure 16. The Appointed Auditor shall follow any directions that are issued by the OAG to audit specific areas or types of sensitive expenditure. 17. The Appointed Auditor shall audit sensitive expenditure irrespective of whether the OAG issues any directions, although the Appointed Auditor shall apply their judgement in determining what sensitive expenditure is to be examined. The Issued 03/17 Office of the Auditor-General

323 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence Appointed Auditor shall do this by having regard to the Auditor-General s concerns over effectiveness and efficiency, waste, and a lack of probity or financial prudence as well as their understanding of the entity and its environment, including its internal control. 18. The Appointed Auditor shall take into account the results of any external reviews or a consideration of any risk factors that may have been identified by the OAG. 19. The Appointed Auditor shall ensure that their overall audit strategy and audit plan clearly document the types of sensitive expenditure to be examined and the nature, timing, and extent of the audit testing to be carried out. (See paragraph A6) 20. In meeting the requirements of paragraph 19, the Appointed Auditor shall audit areas of sensitive expenditure by obtaining an understanding of the attitude of management and those charged with governance towards sensitive expenditure, assessing the public entity s policies against current good practice, and performing tests on a sample of expenditure to evaluate whether the public entity has complied with its policies and that the expenditure: (a) has a justifiable business purpose; (b) preserves impartiality; (c) has been made with integrity; (d) is moderate and conservative, having regard to the circumstances; (e) has been made transparently; and (f) is appropriate in all respects. (See paragraph A7) Reporting issues of sensitive expenditure 21. If the Appointed Auditor identifies an issue of sensitive expenditure, they shall immediately advise the OAG. As part of advising the OAG, the Appointed Auditor shall specifically consider whether the sensitive expenditure should be publicly reported in the audit report. 22. If the issue raises the potential that a fraud has been committed, the Appointed Auditor shall follow the specific requirements and guidance in AG ISA (NZ) 240: The auditor s responsibilities relating to fraud in an annual audit. 23. The Appointed Auditor shall report separately on sensitive expenditure issues, including any assessments made as to the appropriateness of the public entity s policies where deficiencies were noted in those policies that were identified during the annual audit: (a) to the OAG, normally as part of reporting the results of the annual audit; and Issued 03/17 Office of the Auditor-General

324 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence (b) to management or those charged with governance in the management letter. Separate engagements on sensitive expenditure 24. A public entity, or another party, may request an Audit Service Provider (ASP) to carry out a separate engagement on sensitive expenditure. Where there is possible media or political interest in the engagement subject matter, or the matter is generally of a sensitive nature, the ASP shall consult with the relevant OAG sector manager before accepting the engagement or finalising the terms of reference. ASPs should refer to AG PES 1 (Revised): Code of ethics for assurance practitioners for further guidance surrounding the acceptance and reporting of engagements of this nature. (See paragraph A8) *** Application and other explanatory material Maintaining alertness for and awareness of issues and risks (See paragraphs 9-12) A1. It is not the role of the Auditor-General to set standards, or to make judgements in the absence of generally accepted understanding of what is allowable practice or behaviour. However, where the Auditor-General identifies an absence of standards and a need for guidance as a result of issues that have arisen during audits of public entities, the Auditor-General may issue a good practice guide that outlines the principles applicable for appropriate practice or behaviour. The Appointed Auditor should maintain alertness for and awareness of: - any accepted standards promulgated by third parties; and - any applicable good practice guides that may be issued by the Auditor- General. A2. Existing standards of conduct which have substantive authority in New Zealand for various aspects of public entity behaviour include: - the State Sector Act 1988, which, among other things, places a responsibility on chief executives of public entities subject to the Act to operate "good employer" principles and to ensure that all employees maintain proper standards of integrity, conduct, and concern for the public interest; - the Local Authorities (Members' Interests) Act 1968, which regulates the behaviour of members of some public entities in relation to contracts in which the members are concerned and interested and when voting on matters in which they have a pecuniary interest ; Issued 03/17 Office of the Auditor-General

325 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence - State Services Commission publications, including codes of conduct or board appointment and induction guidelines ; - the ethical standards and guidelines of professional bodies, as relevant; - any government policy statements on behaviour, such as Cabinet Minutes or Cabinet Office Circulars; - financial reporting standards, which require the disclosure of related party relationships, transactions, and balances; - the Companies Act 1993, which requires directors interests to be disclosed in an interests register that is available for inspection by shareholders; and - the Local Government Act 2002, which requires the remuneration of chief executives to be disclosed in the financial statements. A3. The Appointed Auditor should, when maintaining alertness and awareness of the standards expected of public entities, consider the following: - whether the public entity has acquired resources in an economical manner, with due regard to probity; - whether the public entity has applied its resources in an effective and efficient manner, and there is no evidence waste has occurred; and - whether employees and members of the public entity have acted with proper regard to probity and financial prudence. Reporting instances of effectiveness and efficiency, waste, or a lack of probity or financial prudence (See paragraphs 13-15) A4. One aspect of advising and/or consulting with the OAG will be about whether it is appropriate to report the matter in the audit report and, if so, whether to include an emphasis of matter or other matter paragraph in the audit report. A5. If a significant issue is identified, the following steps should be taken: - brief the Assistant Auditor-General Parliamentary Group or the Assistant Auditor-General Local Government immediately on any significant issues of effectiveness and efficiency, waste, and lack of probity or financial prudence; and - agree with the Assistant Auditor-General Parliamentary Group or the Assistant Auditor-General Local Government the next steps (if any) to be taken. Auditing sensitive expenditure (See paragraphs 19-20) A6. As part of developing the audit strategy and audit plan, the Appointed Auditor needs to understand the purpose of the public entity and the likely extent to which sensitive Issued 03/17 Office of the Auditor-General

326 AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence expenditure may be incurred to achieve its purpose. Such an understanding will assist the Appointed Auditor in determining the nature, timing, and extent of audit procedures to be carried out. The Appointed Auditor should also consider the appropriateness of the public entity s sensitive expenditure policies as part of sensitive expenditure testing. A7. There are a number of areas of spending that are likely to generate significant interest with stakeholders and other interested parties because of their sensitive nature. The Appointed Auditor is expected to have a high-level understanding of the overall expenditure of each of these areas, and of the likelihood of impropriety. Sensitive expenditure may include: - board and senior management pay, travel, and expenses; - management of large contracts; - tendering processes used for large dollar value purchases; - payments to or from related parties; and - payments to or from other countries, particularly those with a history of different ethical standards or where bribery is more prevalent. Reporting issues of sensitive expenditure (See paragraph 24) A8. If the sensitive expenditure issue reasonably falls within the scope of the annual audit, further action might involve: - pursuing the issue within the existing audit engagement agreement; - obtaining agreement with the public entity for both the performance and funding of a specific extension of the audit scope; or - obtaining approval from the OAG for undertaking and funding the extension of the audit scope. Issued 03/17 Office of the Auditor-General

327 AG-4 The audit of performance reports AUDITOR-GENERAL S AUDITING STANDARD 4 THE AUDIT OF PERFORMANCE REPORTS Contents Page Introduction Scope of this Standard Application Objectives Definitions Requirements Planning for the audit of the performance report Assessing the forecast performance report Auditing the performance report Application and other explanatory material Planning for the audit of the performance report Assessing the forecast performance report Auditing the performance report Issued 03/17 Office of the Auditor-General

328 AG-4 The audit of performance reports Introduction Scope of this Standard 1. This Auditor-General s Auditing Standard establishes the Auditor-General s requirements for when an Appointed Auditor is expressing an opinion on a performance report where a public entity is required to, or elects to, prepare performance information and have it audited. 2. Performance reports are normally prepared in conjunction with financial statements and, when presented with other information, where relevant, they constitute a general purpose financial report (see figure 1 below). The objective of a general purpose financial report is to convey a coherent picture about a public entity s performance and position. Figure 1 What constitutes a general purpose financial report 3. It is common for performance information to be included in a public entity s general purpose financial report 1 and be subject to audit as part of the annual audit. This set of information is usually intended to satisfy the public entity s statutory, regulatory, or 1 A general purpose financial report is often referred to as an annual report. Issued 03/17 Office of the Auditor-General