The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust. Period ended 30 September 2015 31 July 2016 Geri Daly Engagement lead T 0117 305 7741 E geri.n.daly@uk.gt.com David Johnson Engagement Manager T 0117 305 7727 E david.a.johnson@uk.gt.com Nick Slack In Charge Auditor T 0117 305 7840 E nick.slack@uk.gt.com 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016
Contents Section Page 1. Executive summary 3 2. Audit of the accounts 5 3. Grant Thornton in Health 11 Appendices A Reports issued and fees 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 2
Executive summary Purpose of this letter Our Annual Audit Letter (Letter) summarises the key findings arising from the work that we have carried out at Torbay and Southern Devon Health and Care NHS Trust (the Trust) for the period ending 30 September 2015. This is being reported to the Torbay and South Devon NHS Foundation Trust as the successor organisation who acquired the Trust services This Letter is intended to provide a commentary on the results of our work to the Trust and its external stakeholders, and to highlight issues that we wish to draw to the attention of the public. In preparing this letter, we have followed the National Audit Office (NAO)'s Code of Audit Practice and Auditor Guidance Note (AGN) 07 'Auditor Reporting'. Our work Financial statements opinion We gave an unqualified opinion on the Trust's financial statements on 27 May 2016. We included an emphasis of matter paragraph in our report on the Trust's financial statements to draw attention to the note which explains the impact of the planned dissolution of the Trust and the transfer of its services to South Devon Healthcare NHS Foundation Trust now Torbay and South Devon NHS Foundation Trust. This does not affect our opinion that the statements give a true and fair view of the Trust's financial position and its income and expenditure for the year. We reported the detailed findings from our audit work to the Trust's Audit Committee as those charged with governance in our Audit Findings Report on 25 May 2016 Our responsibilities We have carried out our audit in accordance with the NAO's Code of Audit Practice, which reflects the requirements of the Local Audit and Accountability Act 2014 (the Act). Our key responsibilities are to: give an opinion on the Trust's financial statements (section two) assess the Trust's arrangements for securing economy, efficiency and effectiveness in its use of resources (the value for money conclusion) (section three). In our audit of the Trust's financial statements, we comply with International Standards on Auditing (UK and Ireland) (ISAs) and other guidance issued by the NAO. 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 3
Consolidation template We also reported on the consistency of the consolidation schedules submitted to the Department of Health with the audited financial statements. We concluded that these were consistent Use of statutory powers We did not identify any matters which required us to exercise our additional statutory powers. Certificate We certify that we have completed the audit of the accounts of Torbay and Southern Devon Health and Care NHS Trust in accordance with the requirements of the Code of Audit Practice. Working with the Trust We would like to record our appreciation for the assistance and co-operation provided to us during our audit by the Trust's and the Torbay and South Devon NHS Foundation Trust staff. Grant Thornton UK LLP July 2016 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 4
Audit of the accounts Our audit approach Materiality In our audit of the Trust's financial statements, we use the concept of materiality to determine the nature, timing and extent of our work, and in evaluating the results of our work. We define materiality as the size of the misstatement in the financial statements that would lead a reasonably knowledgeable person to change or influence their economic decisions. We determined materiality for our audit of the Trust's accounts to be 1,478,000, which is 2% of the Trust's gross revenue expenditure. We used this benchmark as in our view, users of the Trust's financial statements are most interested in where it has spent the income it made in the year. We also set a lower level of specific materiality for certain areas such as cash, senior officer remuneration, auditor s remuneration and related party transactions. We set a lower threshold of 74,000, above which we reported errors to the Audit Committee in our Audit Findings Report. The scope of our audit Our audit involves obtaining enough evidence about the amounts and disclosures in the financial statements to give reasonable assurance that they are free from material misstatement, whether caused by fraud or error. This includes assessing whether: the Trust's accounting policies are appropriate, have been consistently applied and adequately disclosed; significant accounting estimates made by management are reasonable; and the overall presentation of the financial statements gives a true and fair view. We also read the annual report to check it is consistent with our understanding of the Trust and with the accounts on which we give our opinion. We carry out our audit in line with ISAs (UK and Ireland) and the NAO Code of Audit Practice. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach was based on a thorough understanding of the Trust's business and is risk based. We identified key risks and set out overleaf the work we performed in response to these risks and the results of this work. 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 5
Audit of the accounts Audit opinion We gave an unqualified opinion on the Trust's financial statements on 27 May 2016, in advance of the national deadline. The Trust made the accounts available for audit in line with the national timetable for submission, and provided a good set of working papers to support them. The finance team responded promptly and efficiently to our queries during the course of the audit. Annual Governance Statement and Annual Report We are also required to review the Trust's Annual Governance Statement and Annual Report. It provided these on a timely basis with the draft accounts with supporting evidence The key messages arising from our audit of the Trusts financial statements are: The Trust posted a deficit position in the accounts having previously forecast a surplus at month 5. This was a variance of approximately 2.3m Disclosure of the PFI asset relating to Dawlish Community hospital has been reviewed and has been reclassified as a finance lease in line with the appropriate accounting standards There were a number of presentational adjustments made to ensure consistency throughout the accounts, although these had no impact on the overall accounts The Trust staff have been extremely helpful throughout an extended period of audit time. Issues arising from the audit of the accounts We reported the key issues from our audit to the Trusts Audit Committee on 25 May 2016. In addition to the key audit risks reported above, we identified that the Trust had incorrectly accrued for post year expenditure and not included it in the statement of accounts. The Foundation Trust have noted this issue. 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 6
Audit of the accounts These are the risks which had the greatest impact on our overall strategy and where we focused more of our work. Risks identified in our audit plan The revenue cycles (healthcare and non-healthcare) include fraudulent transactions Under ISA (UK&I) 240 there is a presumed risk that revenue may be misstated due to the improper recognition of revenue. Management override of controls Under ISA (UK&I) 240 there is a presumed risk that management will over-ride controls. This risk is present in all entities. How we responded to the risk As part of our audit work we have completed; Documenting our understanding of management's controls over revenue recognition Review and testing of revenue recognition policies Testing of material revenue streams for healthcare and non-healthcare Reconciliation of significant NHS and Non NHS contract income to contracts Review of reasonableness of any significant contractual adjustments through the agreement of balances exercise We did not identify any issues to report As part of audit work we have completed: review of entity controls including walkthrough of journal controls testing of journals entries review of accounting estimates, judgements and decisions made by management review of unusual significant transactions We did not identify any issues to report Healthcare revenues Contractual adjustments with commissioning bodies not adequate As part of our audit work we have completed Review of significant accounting estimates / contractual adjustments/ accrued healthcare income For significant income contracts with commissioning bodies, review of the reconciliation of income to contract Review of adequacy of any provision for bad debts Agreement of balances with commissioners and other public sector bodies We did not identify any issues to report 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 7
Audit of the accounts These are the risks which had the greatest impact on our overall strategy and where we focused more of our work. Risks identified in our audit plan Social Care Revenues Accounting for contract arrangement with commissioning bodies /social care clients not consistent with terms Contractual adjustments with commissioning bodies/social care clients not adequate Employee remuneration Employee remuneration accruals understated (Remuneration expenses not correct) How we responded to the risk As part of our audit work we have completed Review of significant accounting estimates/ contractual adjustments / accrued Social Care Income For significant income contracts with commissioning bodies, review of the reconciliation of income to contract Review of the adequacy of any provision for bad debts Substantive testing of healthcare revenues including significant contracts We did not identify any issues to report As part of our audit work we have completed: Trend analysis to identify unusual movements for the six months Substantive testing of employee remuneration including agreeing transactions in the ledger to the payroll details such as contracts of employment Agreement of disclosures in the accounts to information per the Greenbury disclosures Review and agreement of the remuneration report to disclosures within the accounts During our audit testing on agreement of the Remuneration report back to the disclosures within the accounts and supporting records we identified an incorrect disclosure of pension benefit for one Director 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 8
Audit of the accounts These are the risks which had the greatest impact on our overall strategy and where we focused more of our work. Risks identified in our audit plan Operating Expenses Creditors understated or not recorded in the correct period (Operating expenses understated) Social Care expenditure Creditors understated or not recorded in the correct period (Social Care expenses understated) PFI Disclosure As part of the transfer of assets a PFI arrangement for Dawlish Community Hospital has been reviewed and the applicable accounting treatment considered How we responded to the risk As part of our audit work we have completed: Review of year end control account reconciliations Updating our understanding of the accruals process Review for unrecorded liabilities, testing of payments made after the year end Substantive testing of transactions through testing a sample of operating expenses Substantive testing of accruals Testing of unrecorded liabilities identified two post year end payments that had not been accrued for. Extrapolation of the error identified a non material error and therefore no adjustment has been required. Review by the Torbay and South Devon NHS Foundation Trust identified a number of year end adjustments that resulted in a 2.3m movement from the forecast outturn position at month 6. These have been adjusted in the final statement of accounts and are reflected in the deficit figure. Testing of the adjustments concluded that they were appropriate and correctly disclosed in the statement of accounts. As part of our audit work we have completed: Review of year end control account reconciliations Updating our understanding of the accruals process Review for unrecorded liabilities, testing of payments made after year end Substantive testing of transactions through testing of a sample of operating expenses in the period We did not identify any issues to report A review of the PFI agreement for Dawlish Community hospital considered the appropriateness of the disclosure within the statement of accounts. Review of the accounting treatment under IFRIC4 identified that this was a specialised asset and should be disclosed as a finance lease. This conclusion was reached due to the present value of the minimum lease payments accounting for approximately 97% of the fair value. Testing of cash flows and review of PFI arrangements identified that disclosure as a finance lease was the appropriate accounting treatment and should be disclosed within the statement of accounts as such 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 9
Audit of the accounts These are the risks which had the greatest impact on our overall strategy and where we focused more of our work. Risks identified in our audit plan PFI Valuation As part of the transfer if assets the PFI valuation for Dawlish Community Hospital has been reviewed and the applicable accounting treatment considered How we responded to the risk The Trust currently operate Dawlish Community Hospital under a PFI lease that runs until June 2024. At the cessation of the lease the Trust has no residual interest in the asset. The asset valuation for Dawlish Community Hospital has been reviewed by the District Valuer who has confirmed that it is a reasonable approach to value the asset as though it was 9 years from the end of its remaining life representing the remaining service potential of the asset to the Trust. This has reduced the asset valuation to 0.7 million in the statement of accounts. As per discussion with the DV and further review of the methodology applied it is considered that this is a reasonable approach to valuation of the asset 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 10
Grant Thornton in Health We are proud of our position as the largest supplier of external audit services to the NHS and the contribution we make to the challenges it faces. Here are some of our credentials showing how we deliver on this responsibility. Our client base and delivery We are the largest supplier of external audit services to the NHS We audit over 120 NHS organisations 99% of 2015/16 audit reports were issued by the national deadline Our clients scored us 8 out of 10 or higher Our connections We meet regularly with and second people to the Department of Health, CQC, NHS Improvement and NHS England We work closely with local government and blue light services We work with the Think Tanks and legal firms to develop workshops and good practice We provide thought leadership, seminars and training to support our clients and to provide solutions. In 2016 we issued reports on Mental Health Collaboration, and NHS governance and finance. We will publish reviews on the Future of Primary Care and on NHS commercial structures later this year. Our quality We fully meet the criteria for appointment as external auditors. Our audit approach complies with the NAO's Code of Audit Practice, and International Standards on Auditing. We are fully compliant with ethical standards. We have passed all external quality inspections including QAD and AQRT. Our support for the sector We are sponsors for HFMA and work with the provider faculty, mental health faculty and commissioning faculty. We regularly speak at HFMA events to share best practice and solutions. We provide auditor briefings into what is happening with department policy, sector regulation, and at other NHS organisations to help support our clients. We provide Key Issues Bulletins that summarise what is happening in the sector. We hold regular 'free to access' financial reporting and other training sessions for finance staff to ensure they have the latest technical guidance. Our technical support We are members of all of the key NAO, ICAEW, and HFMA technical forums. We have specialists leads for Public Sector Audit quality and Public Sector technical. We provide national technical guidance on emerging auditing, financial reporting and ethical areas. Local teams are supported on information technology by specialist IT auditors. We use specialist audit software to identify and assess audit risk. Our people We have over 30 engagement leads accredited by ICAEW to issue NHS audit reports. We have over 300 public sector specialists. We invest heavily in our people including technical and personal development training. We invest in the future of the public sector and employ over 80 Public Sector trainee accountants. 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016
Appendix A: Reports issued and fees We confirm below our final fees charged for the audit and confirm there were no fees for the provision of non audit services. Fees Planned Actual fees 2014/15 fees Statutory audit 24,525 24,525 54,500 Total fees 24,525 24,525 54,500 Reports issued Report Date issued Audit Plan 30 November 2015 Audit Findings Report 25 May 2016 Annual Audit Letter 31 July 2016 2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016 12
2016 Grant Thornton UK LLP The Annual Audit Letter for Torbay and Southern Devon Health and Care NHS Trust 31 July 2016