The Audit Findings for the Police and Crime Commissioner for Cheshire and the Chief Constable of Cheshire Police

The Audit Findings for the Police and Crime Commissioner for Cheshire and the Chief Constable of Cheshire Police Year ended 31 March 2014 25 September 2014 This version of the report is a draft. Its contents and subject matter remain under review and its contents may change and be expanded as part of the finalisation of the report. Mick Waite Engagement Lead T 0161 234 6347 E mick.j.waite@uk.gt.com Helen Stevenson Audit Manager T 0161 234 6354 E helen.l.stevenson@uk.gt.com Dave Catherall Executive T 0161 214 6395 E dave.a.catherall@uk.gt.com

The contents of this report relate only to those matters which came to our attention during the conduct of our normal audit procedures which are designed primarily for the purpose of expressing our opinion on the financial statements. Our audit is not designed to test all internal controls or identify all areas of control weakness. However, where, as part of our testing, we identify any control weaknesses, we will report these to you. In consequence, our work cannot be relied upon to disclose defalcations or other irregularities, or to include all possible improvements in internal control that a more extensive special examination might identify. We do not accept any responsibility for any loss occasioned to any third party acting, or refraining from acting on the basis of the content of this report, as this report was not prepared for, nor intended for, any other purpose. 2

Contents Section Page 1. Executive summary 5 2. Audit findings 10 3. Value for Money 26 4. Fees, non audit services and independence 29 5. Communication of audit matters 31 Appendices A Action Plan B Audit opinion PCC and CC 3

Section 1: Executive summary 01. Executive summary 02. Audit findings We anticipate providing an unqualified opinion on the financial statements, and an unqualified value for money conclusion. 03. Value for Money 04. Fees, non audit services and independence 05. Communication of audit matters

Executive summary Executive summary Purpose of this report This report highlights the key matters arising from our audits of the Police and Crime Commissioner for Cheshire's (PCC) and the Chief Constable for Cheshire Police's (CC) financial statements for the year ended 31 March 2014. It is also used to report our audit findings to management and those charged with governance (via the Ethics and Audit Committee) in accordance with the requirements of International Standard on Auditing (ISA) 260. Under the Audit Commission's Code of Audit Practice we are required to report whether, in our opinion, the PCC's and CC's financial statements present a true and fair view of the financial position, their expenditure and income for the year and whether they have been properly prepared in accordance with the CIPFA Code of Practice on Local Authority Accounting. We are also required to reach a formal conclusion on whether the PCC and CC have put in place proper arrangements to secure economy, efficiency and effectiveness in their use of resources (the Value for Money conclusion). The audits of the PCC and CC's accounts are separate statutory audits, subject to separate audit appointments by the Audit Commission. In view of the shared financial systems and accounts production arrangements, and the existence of a joint Ethics and Audit Committee, we have produced a report covering the outcomes of both audits. Throughout, we have clarified whether our comments relate to the PCC, the CC or both. Introduction In completing our audit we have not had to alter or change our planned approach, which we communicated to you in our Audit Plan dated 19 March 2014. Our audit is substantially complete although we are finalising our testing in the following areas: review of the final version of the financial statements; completion of the Whole of Government Accounts review; obtaining and reviewing the management letter of representation, and updating our post balance sheet events review, to the date of signing the opinion. We received draft financial statements and accompanying working papers at the start of our audit, in accordance with the agreed timetable. As discussed at the Ethics and Audit Committee meeting on 18 September we have now finalised our testing on pensions payments and found these to be materially correct. We also subsequently discussed the findings from the audit with the PCC and CC and propose an unqualified opinion. 5

Executive summary Executive summary Key issues arising from our audit of the Police and Crime Commissioner's Accounts Financial statements opinion As at 25 September 2014, and subject to the completion of the outstanding work described above, we expect to issue an unqualified opinion on the PCC's financial statements including the group accounting statements which consolidate the financial activities of the Chief Constable. The Group financial statements submitted for audit showed gross expenditure of 194m, total income from services of 24m and net liabilities of 1.658bn. During the audit we identified a number of adjustments in the financial statements. The net effect of these adjustments on the Group's reported financial position is to increase the general fund balance by 497k and overall useable reserves by 3.462m. Officers also made some changes to improve the presentation of the financial statements as a result of the audit. These issues are set out in more detail on page 10. The PCC's staff provided good quality working papers at the start of the audit and finance staff were available throughout the audit to answer our questions promptly and provided additional information in a timely manner. Further details are set out in section 2 of this report. Value for money (VFM) conclusion We are pleased to report that, based on our review of the PCC's arrangements to secure economy, efficiency and effectiveness in its use of resources, we propose to give an unqualified VFM conclusion. Overall our work highlighted that the PCC has satisfactory arrangements in place to secure financial resilience, and proper arrangements in place for challenging how it secures economy, efficiency and effectiveness. The PCC continues to show good planning, management and control of finances, and successfully realised 8.2m of revenue expenditure savings in 2013/14. The medium term financial plan 2014-18 identifies a potential savings requirement of 34.3m, although funding assumptions for 2016/17 and 2017/18 are not yet certain. There are clear challenges to meet this budget gap and to meet the PCC's statutory responsibilities. While the scale of the financial challenge ahead remains significant, there is good evidence of financial resilience in the PCC's arrangements Further detail of our work on VFM is set out in section 3 of this report. Whole of Government Accounts (WGA) We will complete our work in respect of the Whole of Government Accounts in accordance with the national timetable. 6

Executive summary Executive summary Key issues arising from our audit of the Chief Constable's Accounts Financial statements opinion As at 25 September 2014, and subject to the completion of the outstanding work described above, we expect to issue an unqualified opinion on the CC's financial statements. We have not identified any adjustments affecting the CC's reported financial position. Officers have made some adjustments to improve the presentation of the financial statements as a result of the audit. The key messages arising from our audit of the CC's financial statements are: The CC updated the presentation of the 2013/14 accounts to reflect the accountancy profession's views on the content of the Chief Constable's accounts. The CC's staff provided high quality working papers at the start of the audit Finance staff were available throughout the audit to answer our questions promptly and provided additional information in a timely manner. We have included further details of our audit findings in section 2 of this report. Value for money (VFM) conclusion We are pleased to report that, based on our review of the CC's arrangements to secure economy, efficiency and effectiveness in their use of resources, we propose to give an unqualified VFM conclusion. Overall our work highlighted that the CC has satisfactory arrangements in place to secure financial resilience, and proper arrangements in place for challenging how it secures economy, efficiency and effectiveness. In 2013/14 the CC has maintained a focus on improving operational performance at the same time as making further significant efficiency savings. Recorded crime has continued to fall in Cheshire, and in the last 12 months it has fallen at a faster rate than in the rest of England and Wales. There have been recent changes in senior management, including at Chief Constable and Deputy Chief Constable levels. The constabulary has demonstrated that it has had, and will continue to have, the leadership capacity and capability to introduce required organisational change to maximise visible frontline policing whilst reducing overall officer numbers and achieving savings. Further detail of our work on VFM is set out in section 3 of this report. 7

Executive summary Controls The PCC's and the CC's management is responsible for the identification, assessment, management and monitoring of risk, and for developing, operating and monitoring the system of internal control. Our audit is not designed to test all internal controls or identify all areas of control weakness. However, where, as part of our testing, we identify any control weaknesses, we report these to the PCC and to the CC. During the audit year we identified control weaknesses for the review of payroll change information and also in the accuracy of some pensions payments and supporting documentation. Payroll During 2012/13 errors arose in the processing of certain payroll changes which led to a number of required payroll adjustments. We reported these issues last year and recommended that the PCC continue to embed improvements to control measures to reduce the risk of errors in processing payroll changes.. Our follow up work this year noted that police staff did not complete the agreed 100% checks on changes to payroll data as they had problems with identifying all change data arising. We also found from our audit testing that there were gaps in supporting documentation for some of the changes, including additional responsibility payments and maternity/paternity changes. Police pensions payments From looking at a sample of police pensions reconciliation data, the PCC identified a number of underpayments ( 130k) and overpayments ( 212k) of police pensions. The PCC is putting these right and has made a repayment to the Home Office for pensions top up grant previously received. In completing our audit of police pensions data as part of our final accounts work we also identified similar issues and other areas where errors occurred. We also found that the PCC did not always have readily available and robust employee records to support pension payments made. We are satisfied from the work carried out that these control weaknesses did not lead to material misstatements in the accounts. The detailed issues arising and our recommendations are set out further on pages 22 and 23. The way forward We have discussed and agreed matters arising from our audit of the financial statements and value for money with the PCC and the CC, and with the PCC's Chief Finance Officer and the CC's Director of Finance and IT. Looking forward, the challenge for the PCC and CC in 2014/15 will be to maintain the efficiency and effectiveness of police services in the context of the budget challenges and statutory responsibilities. Acknowledgment We would like to take this opportunity to record our appreciation for the assistance provided by the finance team and other staff during our audit. 8

Section 2: Audit findings 01. Executive summary 02. Audit findings We are expecting to issue an unqualified opinion on the financial statements. 03. Value for Money 04. Fees, non audit services and independence 05. Communication of audit matters

Audit findings Audit findings Changes to Audit Plan In this section of the report we present our findings in respect of our audit of the PCC's and CC's financial statements. This includes our conclusions in respect of the significant audit risks (see page 12) and other audit risks (see pages 13 and 14 ) we reported to the PCC and the CC in our Audit Plan that was received by the Joint Audit Committee on 19 March 2014. We have not made any changes to our Audit Plan reported to you. Audit opinion Pending completion of the outstanding audit work summarised on page 5 we expect to issue by 30 September 2014, an unqualified opinion on both the PCC's financial statements, including the group accounting statements, and the Chief Constable's financial statements, including the police officer pension fund accounting statements. Key findings The PCC and CC's finance teams submitted the financial statements for audit ahead of the statutory deadline of 30 June 2014. The draft accounts were prepared to a good standard and were supported by robust working papers. Our audit work identified a number of presentational issues requiring some significant changes to the accounts, most notable of these were: The PCC and Group accounts are now presented as one joint document with one audit opinion The CC's accounts now correctly include the police pension fund account The PCC has revised the IAS 19 employee benefits entries to reflect the required changes in the 2013/14 Code. This includes revised terminology, additional disclosures, and restatement of prior years The PCC had included a provision of 2.965m for additional pension fund contribution to meet a shortfall in rates for the next 3 years. The PCC accounts were amended to correct this to a useable reserve Debtors and creditors were both increased by 4.471m to show the gross amounts, rather than netting them off The PCC had included a contingent asset of 497k for a VAT refund. This was subsequently received in June 14 and the PCC accounts now show the sum as a debtor as at 31 March 14. The overall impact of these adjustments on the Group's reported financial position is to increase the general fund balance by 497k and useable reserves by 3.462m. As last year, we received good co-operation from officers and we would like to record our thanks for their professional and timely approach to the audit and to our requests for additional information. 10

Audit findings Accounting changes arising from the Police Reform and Social Responsibility Act 2012 This has been a challenging two years for Police Finance Teams who have needed to invest considerable time and effort preparing separate financial statements for the PCC and for the Chief Constable which reflect developing local governance and working arrangements and emerging accounting guidance. We recognise this has not been an easy task. As part of the audit of the accounts last year we reported that the status of the Chief Constable (CC) accounts in 2012/13 was that it was not classed as a local authority in respect of the statutory override for Police Pension liabilities. The Police Reform and Social Responsibility Act 2011(Transitional Provision) Order 2013 (SI 2013/2319) now recognises that S21 and 22 of the LG Act 2003 apply to relevant transactions of the CC as if it were a local authority from 1 April 2013. The PCC and CC changed their accounting policy for financial reporting comparability in the 2013/14 accounts so that the relevant prior year comparative figures were adjusted as if the statutory override had applied in 2012/13. The changes are disclosed in full in the PCC and CC's accounts and we are satisfied that the disclosures are reasonable.

Audit findings Audit findings against significant risks "Significant risks often relate to significant non-routine transactions and judgmental matters. Non-routine transactions are transactions that are unusual, either due to size or nature, and that therefore occur infrequently. Judgmental matters may include the development of accounting estimates for which there is significant measurement uncertainty" (ISA 315). In this section we detail our response to the significant risks of material misstatement which we identified in the Audit Plan. As we noted in our plan, there are two presumed significant risks which are applicable to all audits under auditing standards. Risks identified in our audit plan Work completed Assurance gained and issues arising 1. Improper revenue recognition Under ISA 240 there is a presumed risk that revenue may be misstated due to improper recognition 2. Management override of controls Under ISA 240 there is a presumed risk of management over-ride of controls We considered whether the presumed risk of fraud due to improper recognition of revenue applied for the audit of Cheshire Police and Crime Commissioner and the Chief Constable's accounts. Most of the PCC Group's revenues are from government grants or from Council Tax precepts which are predictable in timing and value. As the levels of other revenues are not material in 2013/14, we have concluded that the presumed risk can be rebutted and so is not relevant to our 2013/14 audit. We have undertaken and completed the following: o o o review and testing of revenue recognition policies; review of unusual significant transactions; and testing of material revenue streams. review of accounting estimates, judgements and decisions made by management. testing of journals entries. review of accounting estimates, judgements and decisions made by management. review of unusual significant transactions. PCC and Chief Constable audits Our audit work has not identified any issues in respect of revenue recognition.. PCC and Chief Constable audits Our audit work has not identified any evidence of management override of controls. In particular the findings of our review of journal controls and testing of journal entries has not identified any significant issues. We set out later in this section of the report our work and findings on key accounting estimates and judgements. 12

Audit findings Audit findings against other risks In this section we detail our response to the other risks of material misstatement which we identified in the Audit Plan. Recommendations, together with management responses, are attached at Appendix A. Transaction cycle Description of risk Work completed Assurance gained & issues arising Employee remuneration Employee remuneration accrual understated PCC and Chief Constable audits We have undertaken the following work in relation to this risk: PCC and Chief Constable audits Our audit work has not identified any significant issues in relation to the risk identified. documented our understanding of processes and key controls over the transaction cycle. walkthrough of the key controls to assess the whether those controls are designed effectively. substantive testing of employee remuneration including: o Analytical procedure to determine whether movements in salaries and other pay related costs are reasonable and materially correct o Attribute testing on a sample of pay costs. o Agreement of related disclosures to the payroll system or other appropriate source document. Property, plant & equipment PPE activity not valid or Revaluation measurement not correct PCC audit We have undertaken the following work in relation to this risk: documented our understanding of processes and key controls over the transaction cycle. undertaken walkthrough of the key controls to assess the whether those controls are designed effectively. substantive testing of the property, plant and equipment valuation. review of the Valuer used by the Authority as an expert. substantive test of depreciation PCC audit Revaluation The PCC did not complete a full revaluation on all assets this year within the same class 'simultaneously' as required by the CIPFA Code of Practice on Local Authority Accounting (The Code). We refer to this point in more detail on page 18. The PCC engaged an external valuer to carry out a full desktop revaluation on all properties. The next full revaluation is due in 2015/16. Our testing has agreed the valuations reported in the accounts to the supporting schedule supplied by the valuer. This resulted in an overall gain of 1.142m. The valuations have been correctly applied and a reliable estimate of the carrying value of PPE has been included in the accounts. 14

Audit findings Audit findings against other risks. Transaction cycle Description of risk Work completed Assurance gained & issues arising Pension Benefits payable Benefits improperly computed/ Claims liability understated. PCC and Chief Constable audits We have undertaken the following work in relation to this risk: documented our understanding of processes and key controls over the transaction cycle. PCC and Chief Constable audit Our review of the outputs of pension scheme actuaries found that the resulting accounting entries affecting the pensions liability and pensions reserve were consistent with the figures reported by the actuary. undertaken walkthrough of the key controls to assess the whether those controls are designed effectively. Substantive testing of pension payments. Our audit work identified the following issues: We sample tested pensions payments to check the accuracy of payments as supported by source data. Our testing identified some errors in pension calculations. Most of these errors had already been identified by prior investigation work completed by the PCC on pensions payments. We did identify some other areas where there were errors in the calculations. We also concluded from checking to source data that there is a lack of robust supporting HR evidence for some pension payments made. Officers are addressing calculation errors arising and putting in place actions to prevent further problems in future. 15

Audit findings Accounting policies, estimates & judgements In this section we report on our consideration of accounting policies, in particular revenue recognition policies, and key estimates and judgements made and included with the Police and Crime Commissioner's and the Chief Constable's financial statements. Accounting area Relevant to? PCC/CC Both Summary of policy Comments Assessment Revenue recognition PCC The PCC has adopted the accounting policies in accordance with the Code of Practice on Local Authority Accounting The policies for revenue recognition are included in note 1 Accounting Policies and Principles All income is received by the PCC and all expenditure is paid by the PCC. We have reviewed the accounting policies against the requirements of the Code of Practice on Local Authority Accounting (The Code). The approach to accounting for income is robust and in accordance with current guidance Disclosure of the revenue recognition policy is adequate The revenue recognition policies of the PCC and CC are appropriate to the accounting framework and are adequately disclosed. Our audit testing has not identified any areas of concerns in respect of revenue recognition Green Cost recognition Both The accounts include appropriate policies for cost recognition and intra-group adjustments Costs are recognised in the Chief Constable s Accounts to reflect the Commissioner s resources consumed in the direction and control of day-to-day policing at the request of the Chief Constable We have reviewed the policies against the requirements of the Code and are satisfied these are appropriate to the PCC's and CC's circumstances and that adequate disclosures have been made in the financial statements. We are also satisfied that the policies reflects the arrangements for the PCC to fund the Chief Constable's operations and that this does form the basis of the intra-group adjustment Green Assessment Marginal accounting policy which could potentially attract attention from regulators Accounting policy appropriate and disclosures sufficient Accounting policy appropriate but scope for improved disclosure 16

Audit findings Accounting policies, estimates & judgements In this section we report on our consideration of accounting policies, in particular revenue recognition policies, and key estimates and judgements made and included with the Police and Crime Commissioner's and the Chief Constable's financial statements. Accounting area Judgements and estimates PPE Relevant to? PCC/CC Both Summary of policy Comments Assessment PCC PCC Key estimates and judgements include the classification, valuation, impairment and useful life of property, plant and equipment. Note 10 to the PCC accounts sets out the authority s programme of revaluations. This shows that the last full valuation was carried out in 2010/11 with the next valuation due 2015/16. A full desktop exercise was completed as at 31 March 2014. This approach is similar to many other bodies, and we are satisfied that the carrying amount of Property, Plant and Equipment (based on these valuations) does not differ materially from the fair value at 31 March 2014. In our view, however, this five yearly rolling programme does not strictly meet the Code s requirement in paragraph 4.1.2.35 to value items within a class of property, plant and equipment simultaneously. This paragraph of the Code, which is based on IAS 16 Property, Plant and Equipment, does permit a class of assets to be revalued on a rolling basis provided that: - the revaluation of the class of assets is completed within a short period - the revaluations are kept up to date PCC audit Valuations This approach is similar to many other bodies and we are satisfied that the carrying value of Property, Plant and Equipment (based on these valuations) does not differ materially from the fair value at 31 March 2014. The valuer has provided relevant assurances in this respect. These are supported by the application of national indices relating to property value movements in recent years. The PCC may wish to consider an alternative approach to valuations to achieve full compliance with the requirements of the Code as currently stated. Depreciation Our examination of a sample of depreciation calculations found some errors in the formula which did not calculate depreciation in line with the PCC's accounting policy. These arose when: assets were nearing the end of useful economic life and the asset was not written down to a nil value the calculation had been done on a gross cost, rather than net book value. Finance staff reviewed the calculations in detail and we are satisfied there is no material impact on the depreciation figure included in the accounts. However this is an area that finance staff will revisit in future to ensure all calculations are fully in line with the PCC's stated policy. Green Assessment Marginal accounting policy which could potentially attract attention from regulators Accounting policy appropriate and disclosures sufficient Accounting policy appropriate but scope for improved disclosure 18

Audit findings Adjusted misstatements Police and Crime Commissioner Group accounts A number of adjustments to the draft financial statements have been identified during the audit process. We are required to report all misstatements to the PCC, and whether or not the financial statements have been adjusted by management. The table below summarises the adjustments arising from the audit of the PCC's accounts which management have agreed to amend for. The PCC is also required to prepare group accounts consolidating the activities of the PCC and Chief Constable entity financial statements. Adjustments to the group accounts are included here. Impact of adjusted misstatements All adjusted misstatements are set out below along with the impact on the key statements and the reported financial position. Detail Comprehensive Income and Expenditure Account '000 Balance Sheet '000 Impact on total net expenditure '000 1 Group BS short term debtors and creditors restated to show these as gross values Dr ST debtors - 4,471 Cr ST creditors - 4,471 2 Group BS recognition of a debtor for a VAT refund Cr Income 497 Dr ST debtors 497 Cr General fund 497 3 Group BS provision for additional pensions contributions reclassified as a reserve 4 Group BS correct classification within unusable reserves Cr Expenditure 2,965 Dr LT Provisions 2.965m Cr Useable reserves 2.965m Dr Capital adjustment account 5,363 Cr Revaluation Reserve 5,363 Cr Useable reserves 2,965 Overall impact Cr 3,462 0 Cr 3,462 19

Audit findings Adjusted misstatements Chief Constable Accounts A number of adjustments to the draft financial statements have been identified during the audit process. We are required to report all misstatements to those charged with governance, whether or not the financial statements have been adjusted by management. The table below summarises the adjustments arising from the audit which have been processed by management. Impact of adjusted misstatements All adjusted misstatements are set out below along with the impact on the key statements and the reported financial position. Detail Comprehensive Income and Expenditure Account '000 Balance Sheet '000 Impact on total net expenditure 000 1 CC CIES provision for additional pensions contributions reclassified as a reserve in the Group BS (CC element) Cr Expenditure in cost of services Dr Funding from the PCC 2,925 2,925 Overall impact 0 0 0 20

Audit findings Misclassifications & disclosure changes The table below provides details of misclassification and disclosure changes identified during the audit which have been made in the final set of financial statements. Adjustment type Account balance (Group) Impact on the financial statements 1 Disclosure Note 35 IAS 19 Employee Benefits comparators restated with additional disclosures also added on actuarial assumptions. This is in line with the revised standard for 2013/14. 2 Disclosure Note 13 Financial instruments reclassification of entries within the note. 3 Disclosure Note 26 Senior and Police Officer emoluments - updated disclosures to include all categories of emoluments in line with Code requirements. 4 Disclosure Notes 15 and 18 Local Authority debtors and creditors revised to analyse into the correct classification within the note 5 Disclosure Various Other various changes in notes, cross references and figures to ensure consistency of disclosure and corrected values 21

Audit findings Internal controls Our audit included consideration of internal controls relevant to the preparation of the financial statements 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 internal control. The matters reported here are limited to those deficiencies that we have identified during the course of our audit and that we have concluded are of sufficient importance to merit being reported to the PCC and to the Chief Constable via you in accordance with auditing standards. These and other recommendations, together with management responses, are included in the action plan attached at Appendix A. Assessment Relevant to? PCC/CC/ Both Issue and risk Recommendation 1. Amber Both Payroll change data The PCC recognised and took action on identified control weaknesses in the processing of changes to payroll data during 2012/13. These control failings led to a number of required payroll adjustments last year, for example overpayments resulting from secondments and other changes in posts. The PCC and CC need to: continue to embed improvements to control measures to reduce the risk of errors in processing payroll changes maintain readily available HR records with a minimum set of information to support all changes to payroll data ensure all change information is authorised During 2013/14 we followed up the issues reported and actions implemented the previous year and found: police staff were not checking 100% payroll change data as per their internal control due to difficulties in establishing the population of change information gaps in supporting documentation for some of the changes; for example additional responsibility payments and approval for maternity/paternity changes 22

Internal controls Assessment Relevant to? PCC/CC/ Both Issue and risk Recommendation 2 Amber CC Pension payments The PCC identified a number of under and overpayments of pensions payments from an examination of a sample of pensions reconciliation data. This resulted in a net repayment of 60k to the Home Office. The Pensions Group should consider the impact of the findings during 2013/14 and assess what extra work is required to establish robust arrangements for: the accurate processing of pensions payments maintaining readily available HR records with a minimum set of information to support payments being made. In completing our audit of pensions data as part of our final accounts work we also identified similar issues and other areas where errors occurred. In addition we found a lack of robust supporting HR evidence for pension payments being made. We understand that the PCC has set up a Pensions Group. This is tasked with looking into these matters and establishing proportionate and appropriate controls for processing and supporting pension payments made. IT controls As part of our planned programme of work, our information system specialist team undertook a high level review of the general IT control environment at the PCC and CC. This was undertaken as part of the review of the internal controls system. We are pleased to report that no significant issue arose from our work.

Audit findings Other communication requirements We set out below details of other matters which we are required by auditing standards to communicate to those charged with governance via the Audit Committee. Issue Commentary 1. Matters in relation to fraud We have previously discussed the risk of fraud with the Audit Committee. We have not been made aware of any incidents in the period and no other issues have been identified during the course of our audit procedures. 2. Matters in relation to laws and regulations We are not aware of any significant incidences of non-compliance with relevant laws and regulations. 3. Written representations A standard letter of representation has been requested from the PCC and from the CC. 4. Disclosures Our review found no material omissions in the financial statements. 5. Matters in relation to related parties We are not aware of any related party transactions which have not been disclosed. 6. Going concern Our work has not identified any reason to challenge the PCC's and the CC's decisions to prepare the financial statements on a going concern basis. 24

Section 3: Value for Money 01. Executive summary We propose to give an unqualified VFM conclusion 02. Audit findings 03. Value for Money 04. Fees, non audit services and independence 05. Communication of audit matters

Value for Money Value for Money Value for money conclusion We are required under Section 5 of the Audit Commission Act 1998 to satisfy ourselves that the PCC and CC have made proper arrangements for securing economy, efficiency and effectiveness in their use of resources. We are also required by the Audit Commission s Code of Audit Practice to report any matters that prevent us being satisfied that the audited bodies have put in place such arrangements. The VFM conclusion is based on the following two criteria specified by the Audit Commission: The PCC and CC both have proper arrangements in place for securing financial resilience. The PCC and CC both have proper arrangements for challenging how it secures economy, efficiency and effectiveness. Our audit approach involves the completion of an initial risk assessment against a series of key criteria. In undertaking this initial assessment we took account of the key issues facing the PCC and CC, including the significant financial challenge of balancing service delivery against available resources at a time of reducing budgets. We did not identify any residual risks that needed to be addressed through specific local work Key VFM findings for the PCC and CC The main matters to note from our VFM conclusion work are: Securing financial resilience The majority of the spending by the PCC is on setting a financial budget for the Chief Constable. The PCC Group is considered to be in a sound financial position at this time. The PCC has general fund and earmarked reserves of 23.566 million which are considered adequate to meet anticipated funding pressures going forward.. The PCC realised additional revenue savings of 8.0m in 2013/14, mainly due to specific decisions not to recruit into vacancies to anticipate future savings requirements. This planned approach is to help support continuing medium term financial challenges and enable the CC to deliver services in line with the Police and Crime Plan's objectives despite the significant cuts in funding. The Commissioner maintains a four year Medium Term Financial Strategy (MTFS) with the focus continuing to be on maintaining and where possible improving performance, whilst managing down costs to meet reduced funding levels. Currently the MTFS covers the 2014-18 period and the financial scenario indicates potential savings required of 34.3m although funding assumptions for 2016/17 and 2017/18 are less certain. The Strategy contains the Commissioner s response to addressing the financial challenges, whilst preserving front line and neighbourhood services through efficiency savings. 26

Value for Money Value for Money Key VFM findings Challenging economy, efficiency and effectiveness We have reviewed whether the PCC has prioritised its resources to take account of the tighter constraints it is required to operate within and whether it has achieved cost reductions and improved productivity and efficiencies. The work has included: Review of the 2013/14 budget setting process and the MTFS; Examining governance arrangements; and Considering the findings of HMIC The main matters to note from our VFM conclusion work are: The PCC and CC continue to respond effectively to meeting the challenges of on-going reductions in central government funding. We took assurance from the work of HMIC who commented in their report on Policing In Adversity issued in July 2014 that Cheshire Constabulary has made good progress in saving money and has made strenuous efforts to make savings in areas that limit the impact on frontline policing. They concluded that the constabulary is well placed to continue providing effective policing and to face future financial challenges. HMIC also found that the way the constabulary manages change is a real strength. The CC has maintained a focus on improving operational performance at the same time as making further significant efficiency savings during 2013/14. Operational performance is monitored against the PCC's policing objectives within the Police and Crime Plan 2013-16. The PCC considers performance against key measures at quarterly Scrutiny meetings which are held in public. HMIC reported that recorded crime has continued to fall in Cheshire over the spending review period, and in the last 12 months it has fallen at a faster rate than in the rest of England and Wales. Overall VFM conclusion On the basis of our work, and having regard to the guidance on the specified criteria published by the Audit Commission, we are satisfied that in all significant respects the PCC and CC put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2014. The CC has worked with the PCC to establish effective scrutiny and governance arrangements. The PCC and CC have now established a joint independent ethics and audit committee as a key part of the governance framework. This offers effective challenge to reports presented, including audit and risk management arrangements 27

Section 4: Fees, non audit services and independence 01. Executive summary 02. Audit findings There are no significant facts or matters that impact on our independence as auditors 03. Value for Money 04. Fees, non audit services and independence 05. Communication of audit matters

Fees, non audit services and independence Fees, non audit services and independence We confirm below our final fees charged for the audits and confirm there were no fees for the provision of non audit services. Fees Police and Crime Commissioner Audit Per Audit plan Actual fees 45,100 45,100 Chief Constable Audit 20,000 20,000 Total audit fees 65,100 65,100 Fees for other services Service Fees n/a nil Independence and ethics We confirm that there are no significant facts or matters that impact on our independence as auditors that we are required or wish to draw to your attention. We have complied with the Auditing Practices Board's Ethical Standards and therefore we confirm that we are independent and are able to express an objective opinion on each of the financial statements. We confirm that we have implemented policies and procedures to meet the requirements of the Auditing Practices Board's Ethical Standards. 29

Section 5: Communication of audit matters 01. Executive summary 02. Audit findings 03. Value for Money We have delivered out audit in accordance with planned timescales and the requirements of Auditing Standards. We expect to give our opinions by the statutory deadlines. 04. Fees, non audit services and independence 05. Communication of audit matters

Communication of audit matters Communication of audit matters to those charged with governance International Standard on Auditing (ISA) 260, as well as other ISAs, prescribe matters which we are required to communicate with those charged with governance, and which we set out in the table opposite. The Audit Plan outlined our audit strategy and plan to deliver the audit, while this Audit Findings report presents the key issues and other matters arising from the audit, together with an explanation as to how these have been resolved. Our communication plan Respective responsibilities of auditor and management/those charged with governance Overview of the planned scope and timing of the audit. Form, timing and expected general content of communications Audit Plan Audit Findings Respective responsibilities The Audit Findings Report has been prepared in the context of the Statement of Responsibilities of Auditors and Audited Bodies issued by the Audit Commission (www.audit-commission.gov.uk). We have been appointed as the PCC and CC's independent external auditors by the Audit Commission, the body responsible for appointing external auditors to local public bodies in England. As external auditors, we have a broad remit covering finance and governance matters. Our annual work programme is set in accordance with the Code of Audit Practice ('the Code') issued by the Audit Commission and includes nationally prescribed and locally determined work. Our work considers the PCC and CC's key risks when reaching our conclusions under the Code. It is the responsibility of the PCC and CC to ensure that proper arrangements are in place for the conduct of its business, and that public money is safeguarded and properly accounted for. We have considered how the PCC and CC are fulfilling these responsibilities. Views about the qualitative aspects of the entity's accounting and financial reporting practices, significant matters and issues arising during the audit and written representations that have been sought Confirmation of independence and objectivity A statement that we have complied with relevant ethical requirements regarding independence, relationships and other matters which might be thought to bear on independence. Details of non-audit work performed by Grant Thornton UK LLP and network firms, together with fees charged Details of safeguards applied to threats to independence Material weaknesses in internal control identified during the audit Identification or suspicion of fraud involving management and/or others which results in material misstatement of the financial statements Compliance with laws and regulations Expected auditor's report Uncorrected misstatements Significant matters arising in connection with related parties Significant matters in relation to going concern 31

Appendices Appendices 32

Appendices Appendix A: Action plan for the Police and Crime Commissioner and Chief Constable Priority High - Significant effect on control system Medium - Effect on control system Low - Best practice Rec No. Recommendation Priority Management response Implementation date & responsibility 1 Payroll changes The PCC and CC need to: continue to embed improvements to control measures to reduce the risk of errors in processing payroll changes H Agreed, revised control processes being implemented and checks carried out by Internal Audit. 1 Oct 2014 Dir. of Finance/ Head of MFSS maintain readily available HR records with a minimum set of information to support all changes to payroll data. Ensure all payroll change information is authorised 2 Pensions payments The PCC Pensions Group should consider the impact of the findings during 2013/14 and assess what extra work is required to establish robust arrangements for: the accurate processing of pensions payments H Agreed, pension working group now instigated and a revised governance framework is being produced. Internal Audit to support and check. 1 Jan 2015 Dir. of Finance/ Head of MFSS/ HR Retained maintaining readily available HR records with a minimum set of information to support payments being made 3 Asset revaluations The PCC may wish to consider an alternative approach to its rolling programme of valuations to achieve full compliance with the requirements of the code as currently stated. L Current programme is compliant per paragraph 4.1.2.35 on page 100 of the 2013/14 code n/a 33

Appendices Appendix B: Audit opinion for the Group and the Police and Crime Commissioner for Cheshire We anticipate we will provide the Group and the Police and Crime Commissioner for Cheshire with an unmodified audit report INDEPENDENT AUDITOR'S REPORT TO THE POLICE AND CRIME COMMISSIONER FOR CHESHIRE Opinion on the financial statements We have audited the financial statements for the Police and Crime Commissioner for Cheshire for the year ended 31 March 2014 under the Audit Commission Act 1998. The financial statements comprise the Police and Crime Commissioner Single Entity and Group Movement in Reserves Statement, the Police and Crime Commissioner Single Entity and Group Comprehensive Income and Expenditure Statement, the Police and Crime Commissioner Single Entity and Group Balance Sheet, the Police and Crime Commissioner Single Entity and Group Cash Flow Statement and the related notes and include the police pension fund financial statements comprising the Pension Fund Account, the Net Assets Statement and the related notes 35 and 36. The financial reporting framework that has been applied in their preparation is applicable law and the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2013/14. This report is made solely to the Police and Crime Commissioner for Cheshire in accordance with Part II of the Audit Commission Act 1998 and for no other purpose, as set out in paragraph 48 of the Statement of Responsibilities of Auditors and Audited Bodies published by the Audit Commission in March 2010. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Police and Crime Commissioner for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Chief Finance Officer and auditor As explained more fully in the Statement of the Chief Finance Officer s Responsibilities, the Chief Finance Officer is responsible for the preparation of the Statement of Accounts, which includes the financial statements, in accordance with proper practices as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom, and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Police and Crime Commissioner Single Entity and Group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Chief Finance Officer; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the explanatory foreword to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the financial position of the Police and Crime Commissioner for Cheshire as at 31 March 2014 and of its expenditure and income for the year then ended; give a true and fair view of the financial position of the Group as at 31 March 2014 and of its expenditure and income for the year then ended; and have been properly prepared in accordance with the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2013/14 and applicable law. Opinion on other matters In our opinion, the information given in the explanatory foreword for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we report by exception We report to you if: in our opinion the annual governance statement does not reflect compliance with Delivering Good Governance in Local Government: a Framework published by CIPFA/SOLACE in June 2007; we issue a report in the public interest under section 8 of the Audit Commission Act 1998; we designate under section 11 of the Audit Commission Act 1998 any recommendation as one that requires the Police and Crime Commissioner to consider it at a public meeting and to decide what action to take in response; or we exercise any other special powers of the auditor under the Audit Commission Act 1998. We have nothing to report in these respects. 35

Appendices Appendix B: Audit opinion for the Group and the Police and Crime Commissioner for Cheshire Conclusion on the Police and Crime Commissioner's arrangements for securing economy, efficiency and effectiveness in the use of resources Respective responsibilities of the Police and Crime Commissioner and the auditor The Police and Crime Commissioner is responsible for putting in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources, to ensure proper stewardship and governance, and to review regularly the adequacy and effectiveness of these arrangements. We are required under Section 5 of the Audit Commission Act 1998 to satisfy ourselves that the Police and Crime Commissioner has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. The Code of Audit Practice issued by the Audit Commission requires us to report to you our conclusion relating to proper arrangements, having regard to relevant criteria specified by the Audit Commission. Conclusion On the basis of our work, having regard to the guidance on the specified criteria published by the Audit Commission in October 2013, we are satisfied that, in all significant respects, the Police and Crime Commissioner for Cheshire put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ended 31 March 2014. Certificate We certify that we have completed the audit of the financial statements of the Police and Crime Commissioner for Cheshire in accordance with the requirements of the Audit Commission Act 1998 and the Code of Audit Practice issued by the Audit Commission. We report if significant matters have come to our attention which prevent us from concluding that the Police and Crime Commissioner has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources. We are not required to consider, nor have we considered, whether all aspects of the Police and Crime Commissioner s arrangements for securing economy, efficiency and effectiveness in its use of resources are operating effectively. Scope of the review of arrangements for securing economy, efficiency and effectiveness in the use of resources We have undertaken our audit in accordance with the Code of Audit Practice, having regard to the guidance on the specified criteria, published by the Audit Commission in October 2013, as to whether the Police and Crime Commissioner has proper arrangements for: securing financial resilience; and challenging how it secures economy, efficiency and effectiveness. The Audit Commission has determined these two criteria as those necessary for us to consider under the Code of Audit Practice in satisfying ourselves whether the Police and Crime Commissioner put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources for the year ended 31 March 2014. We planned our work in accordance with the Code of Audit Practice. Based on our risk assessment, we undertook such work as we considered necessary to form a view on whether, in all significant respects, the Police and Crime Commissioner had put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources. Mick Waite Engagement Lead for and on behalf of Grant Thornton UK LLP, Appointed Auditor 4 Hardman Square Spinningfields Manchester M3 3EB 26 September 2014 36

Appendices Appendix B: Audit opinion for the Chief Constable of Cheshire Police We anticipate we will provide the Chief Constable of Cheshire Police with an unmodified audit report INDEPENDENT AUDITOR S REPORT TO THE CHIEF CONSTABLE OF CHESHIRE POLICE Opinion on the financial statements We have audited the financial statements of the Chief Constable for Cheshire Police for the year ended 31 March 2014 under the Audit Commission Act 1998. The financial statements comprise the Movement in Reserves Statement, the Comprehensive Income and Expenditure Statement, the Balance Sheet, the Cash Flow Statement and the related notes and include the police pension fund financial statements comprising the Fund Account, the Net Assets Statement and the related notes 14 and 15. The financial reporting framework that has been applied in their preparation is applicable law and the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2013/14. This report is made solely to the Chief Constable for Cheshire Police in accordance with Part II of the Audit Commission Act 1998 and for no other purpose, as set out in paragraph 48 of the Statement of Responsibilities of Auditors and Audited Bodies published by the Audit Commission in March 2010. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Chief Constable for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Chief Finance Officer and auditor As explained more fully in the Statement of the Chief Finance Officer s Responsibilities, the Chief Finance Officer is responsible for the preparation of the Statement of Accounts, which includes the financial statements, in accordance with proper practices as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom, and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Chief Constable's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Director of Finance and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the explanatory foreword to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the financial position of the Chief Constable for Cheshire Police as at 31 March 2014 and of its expenditure and income for the year then ended; and have been properly prepared in accordance with the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2013/14 and applicable law. Opinion on other matters In our opinion, the information given in the explanatory foreword for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we report by exception We report to you if: in our opinion the annual governance statement does not reflect compliance with Delivering Good Governance in Local Government: a Framework published by CIPFA/SOLACE in June 2007; we issue a report in the public interest under section 8 of the Audit Commission Act 1998; we designate under section 11 of the Audit Commission Act 1998 any recommendation as one that requires the Chief Constable to consider it at a public meeting and to decide what action to take in response; or we exercise any other special powers of the auditor under the Audit Commission Act 1998. We have nothing to report in these respects. Conclusion on the Chief Constable s arrangements for securing economy, efficiency and effectiveness in the use of resources Respective responsibilities of the Chief Constable and the auditor The Chief Constable is responsible for putting in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources, to ensure proper stewardship and governance, and to review regularly the adequacy and effectiveness of these arrangements. 37

Appendices Appendix B: Audit opinion for the Chief Constable of Cheshire Police We are required under Section 5 of the Audit Commission Act 1998 to satisfy ourselves that the Chief Constable has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. The Code of Audit Practice issued by the Audit Commission requires us to report to you our conclusion relating to proper arrangements, having regard to relevant criteria specified by the Audit Commission. We report if significant matters have come to our attention which prevent us from concluding that the Chief Constable has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources. We are not required to consider, nor have we considered, whether all aspects of the Chief Constable s arrangements for securing economy, efficiency and effectiveness in its use of resources are operating effectively. Scope of the review of arrangements for securing economy, efficiency and effectiveness in the use of resources We have undertaken our audit in accordance with the Code of Audit Practice, having regard to the guidance on the specified criteria, published by the Audit Commission in October 2013, as to whether the Chief Constable has proper arrangements for: securing financial resilience; and challenging how it secures economy, efficiency and effectiveness. The Audit Commission has determined these two criteria as those necessary for us to consider under the Code of Audit Practice in satisfying ourselves whether the Chief Constable put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources for the year ended 31 March 2014. We planned our work in accordance with the Code of Audit Practice. Based on our risk assessment, we undertook such work as we considered necessary to form a view on whether, in all significant respects, the Chief Constable had put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources. Conclusion On the basis of our work, having regard to the guidance on the specified criteria published by the Audit Commission in October 2013, we are satisfied that, in all significant respects, the Chief Constable for Cheshire Police put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ended 31 March 2014. Certificate We certify that we have completed the audit of the financial statements of the Chief Constable for Cheshire Police in accordance with the requirements of the Audit Commission Act 1998 and the Code of Audit Practice issued by the Audit Commission. Mick Waite Engagement Lead for and on behalf of Grant Thornton UK LLP, Appointed Auditor 4 Hardman Square Spinningfields Manchester M3 3EB 26 September 2014 38

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