ERNST & YOUNG 2017/18 ENGAGEMENT LETTER AND AUDIT PLAN

AUDIT AND RISK COMMITTEE 5 MARCH 2018 ERNST & YOUNG 2017/18 ENGAGEMENT LETTER AND AUDIT PLAN PURPOSE The purpose of this report is to receive and note the Audit Engagement Letter and the proposed audit plan from Ernst & Young (EY) for the 2017/18 Annual Report. RECOMMENDATION That the Audit and Risk Committee: 1. Receive and confirm the Audit Engagement Letter and the proposed audit plan. BACKGROUND 1. Our external auditors have provided their engagement letter and draft audit plan for the 2017/18 Annual Report. The engagement letter was signed in April 2017 for the three year period 2017-2019. 2. The terms of reference for the Audit and Risk Committee include the responsibility to confirm the terms of the appointment and engagement, including the nature and scope of the audit, timetable and fees, with the external auditor. 3. There are no operating implications beyond the normal annual report process and the cost of the audit is budgeted. ATTACHMENTS PCC Audit Proposal Letter 2017-19 #4620546 2018 Audit Plan #5513313 Report prepared by: Report approved by: Nigel Mooney MANAGER INTERNAL AUDIT Roy Baker GENERAL MANAGER CORPORATE SERVICES AND CHIEF FINANCIAL OFFICER 14

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Porirua City Council Audit Plan for the year ending 30 June 2018 Issued to the Audit and Risk Committee: 5 March 2018 21

Home Audit summary Areas of audit focus Appendices Dear Members of the Audit and Risk Committee We are pleased to present our Audit Plan ( Plan ) for the audit of Porirua City Council ( Council or PCC ) for the year ending 30 June 2018. This Plan outlines the scope of our services, identifies Ernst & Young ( EY ) professionals that will serve you and presents our understanding of some key considerations that will affect the audit. Our audit is designed to express an audit opinion on the 30 June 2018 financial statements, service performance information and information included in the Annual Report in compliance with the Local Government Act and Prudence Regulations 2014. Our Plan has been prepared based on our understanding of the Council s operations and the sector it operates in. We have considered, and will continue to consider Council s current and emerging business risks, assess those that could materially affect the financial statements and service performance reporting and align our procedures accordingly. The Plan will be responsive to your needs and will maximise audit effectiveness so we can deliver the high quality audit you expect. Our commitment to quality will be reflected in every aspect of our work. If you have any questions or comments, please contact me on 027 4899 410. We look forward to discussing our Plan with you at the Audit and Risk Committee meeting on 5 March 2018. Yours faithfully Contents Audit summary 3 Areas of audit focus 4 Appendices 10 Grant Taylor Partner 2 Audit Plan for the year ending 30 June 2018 Porirua City Council 22

Audit summary Areas of focus Our overall risk assessment for Council s audit remains unchanged from prior years. We consider the overall management control environment to be effective to support accurate reporting of financial position and performance information. Additional risks may emerge over the course of the audit. These factors will be considered in our reporting to you and the design of our audit procedures. We welcome the Committee s input on our approach and areas of audit focus. Infrastructure and other assets Page 4 Rates and other revenue Page 5 Provisions Page 6 Employee entitlements Page 7 Public debt and derivatives Page 7 Non-financial performance information Page 8 Sector themes Page 8 Fraud risk and IT control environment Page 9 Audit fees Our agreed fees for the 2018 Audit are: $ 000s FY18 actual Audit fees and disbursements 172,732 OAG overhead contribution 13,100 Total audit fees 185,832 Audit scope Our audit will be conducted to provide reasonable assurance that the financial statements and performance reporting information for the year ending 30 June 2018 are free of material misstatement. We conduct our audit in accordance with the Auditor General s auditing standards which incorporate International Standards on Auditing (New Zealand). Your EY team Grant Taylor will continue as your audit partner and will be supported by Gemma Pascall as audit manager. Materiality Planning materiality 2% of forecast annual expenditure ($82,887,000) $1,650,000 Reporting threshold for audit adjustments $82,500 Engagement execution and reporting We have agreed timing for the 2018 audit with management. The key milestones are: Interim audit visit commencing 7 May 2018. Final audit visit commencing 13 August 2018. Reporting the results of the audit to the Committee 10 September 2018. Issue audit report 14 September 2018. 3 Audit Plan for the year ending 30 June 2018 Porirua City Council 23

Areas of audit focus 1 Infrastructure and Other Assets PCC s largest assets, judgemental revaluation process Carrying value of property, plant and equipment Carrying value as at 31 December 2017: $1,297m Key judgments Use of independent valuation experts to estimate fair values of infrastructure assets. Consideration of useful lives of assets and depreciation rates. Relevant accounting standards: PBE IPSAS: 17 Property, Plant and Equipment PBE IPSAS 16: Investment Property PBE IFRS 5: Non-current assets held for sale and discontinued operations Our audit response: Assets revalued during the year Infrastructure assets are carried at fair value and dominate Council s balance sheet. Assets are revalued on a 2 year cycle. For 30 June 2018, Council has revalued its 3 water infrastructure assets to a fair value of $348m. The valuation is carried out as at 31 December 2017. Due to significance of the infrastructure assets, any misclassification of maintenance and/or capital expenditure or inappropriateness of depreciation rates could generate a material adjustment to the financial statements. The valuations are required to be conducted in line with the appropriate accounting standard namely PBE IPSAS 17 and the valuers should be suitably qualified and independent of the Council. We will review the key inputs to the valuation reports to assess whether these are reasonable and relevant to Council s circumstances. We will obtain assurance that the valuation results are appropriately recognised in the financial statements. Other aspects of infrastructure assets Other significant aspects of our work relating to infrastructure assets includes considering Capital Work-In-Progress and the fair value of Vested Assets. On a sample basis we will obtain assurance that any capitalised additions are consistent with the capitalisation criteria under PBE IPSAS 17. We will consider the integrity of the depreciation amounts on the various classes of infrastructure assets, with placing a particular attention on the assets that are revalued during the year. We will review whether the depreciation rates are appropriately reflected in the fixed assets register following the valuation. Investment Properties Council carries investment properties at fair value. The valuations for investment properties to fair value are conducted on an annual basis in accordance with PBE IPSAS 16. We will review the annual revaluation of investment properties in consideration of PBE IPSAS 16. With regards to the external valuations, we will review the integrity of the data provided to the expert. We will carry out appropriate procedures to allow reliance on their work, such as obtaining reliance letters from the independent valuers engaged by Council. Properties Held For Sale Council continues to consider disposal of a number of its properties that are surplus to requirements and recognised $289k worth of properties as held for sale at 30 June 2017. Council holds investment property which may be reclassified as held for sale depending on Council s intentions and marketing activities regarding the property (2017 carrying value of investment properties: $16.1m). We will assess the classification and valuation of assets held for sale in consideration of any Council decision to sell and market properties. We will check that the disclosures are in accordance with the requirements of PBE IPSAS 16 and PBE IFRS 5. 4 Audit Plan for the year ending 30 June 2018 Porirua City Council 24

2 Rates and other revenue legislatively complex, largest revenue source 2018 forecasts: Rates Income: $59.79m Fees and charges: $18.95m Subsidies and grants: $16.18m Relevant accounting standards: PBE IPSAS: 9 Revenue from Exchange Transactions PBE IPSAS 23: Revenue from Non-Exchange Transactions Rates Income Rates are the primary source of funding for Council. In the local authority context, failure to comply with rating law and the associated consultation requirements can create significant risks to the integrity of rates revenue. The requirement for there to be consistency between the rates resolution, the Funding Impact Statement for that year, and the Revenue and Financing Policy in the LTP is fundamental. This thread links community consultation to the rates levied by Council. We will consider the procedures PCC has in place to ensure the rates strike is in compliance with the Local Government Rating Act and confirm that the rates struck are being invoiced accordingly. We will test the accuracy of the use of underlying valuation information (as prepared by Quotable Value) and integrity of the rates debtor management system along with a review of the level of provisioning against the rates debtors overdue. Fees and charges Council collects a variety of fees and charges for the provision of specific services. Significant fees and charges relate to: Council owned operations such as Library, Martaka museum and Cannons Creek Pool. Te Rauparaha Arena services Building compliance Resource consent Water supply. We will update our understanding of significant fees and charges and related collection processes. We will testing a sample of fees to ensure that the fees are recorded appropriately given the nature and timing of the services provided. We will also consider the collectability and provisioning of year end outstanding receivables balances. Subsidies and grants Transport projects and maintenance undertaken by Council are eligible to receive funding from New Zealand Transport Agency ( NZTA ). The funding must be applied for and granted prior to the project or programmed years work being undertaken. NZTA has approved a 54% budget for funding of Transmission Gully link roads capital expenditure. We will perform procedures to obtain assurance that the income from subsidies is consistent with our expectations and understanding of the expenditure being incurred, including subsidies related to Transmission Gully. We will review outstanding NZTA claims at balance date with a particular emphasis on understanding with emphasis on us understanding the specific contracts and other documentation supporting variations to funding. 5 Audit Plan for the year ending 30 June 2018 Porirua City Council 25

3 Provisions Estimation uncertainty Carrying value of provisions Landfill aftercare provision carrying value as at 31 December 2017: $8.83m Leaky homes provision: $3.5m Key judgments Use of estimates to determine uncertain future obligations. Relevant accounting standards: PBE IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets Landfill aftercare provision Council records a landfill after care provision related to the Spicer Valley Landfill. The carrying value of the landfill aftercare provision as at 31 December 2017 is $8.83 million. During 2017, Council reassessed and changed the useful live of the landfill from 2022 to 2030 in light of the resource consent that is available to operate the landfill until 2030. The provision for closure costs is determined by calculating the present value of the estimated future cash flows relating to closing the landfill and the necessary aftercare costs. Assumptions used in the calculation of the landfill aftercare provision, such as interest rates and useful lives of the landfill, could be subject to significant fluctuation. We will review the movements in the provision for future costs based on recent Council cost experience. We will test the assumptions and discounting of values associated with the landfill provision and ensure disclosures in the financial statements are in line with PBE IPSAS 19. Provision for leaky homes Council has had a number of claims lodged against it in respect of leaky homes in the region. Council was aware of three claims as at 30 June 2017 with an estimate provision of $3.5 million. We will review the level of provisioning for leaky home claims and the treatment of costs incurred to settle historical leaky home claims and whether the cost implications would impact current provisioning levels. We will also review disclosures of contingent liabilities. 6 Audit Plan for the year ending 30 June 2018 Porirua City Council 26

4 Employee Entitlements Annual forecast staff cost $25.5m Carrying value of Employee Entitlements Employee leave balances as at 31 December 2017: 1.17m Relevant accounting standards: PBE IPSAS 25: Employee Benefits Employee Entitlements As in prior years we plan to test and rely on management controls operating over payroll and recording of employee entitlements. Over and above our routine procedures related to employee entitlement balances we will continue to monitor progress being made by PCC to address historic Holidays Act 2003 compliance. We will review the required disclosures in relation to any severance payments in the annual report. 5 Public Debt and Derivatives Carrying value of Public Debt Carrying value as at 31 December 2017: 67.62m Relevant accounting standards: PBE IPSAS: 28 Financial Instruments: Presentation PBE IPSAS: 29 Financial Instruments: Recognition and Measurement PBE IPSAS: 30 Financial Instruments: Disclosures Public Debt Council accesses to debt through the Local Government Funding Authority (LGFA). Council has debt covenant compliance obligations. Council is also a guarantor of the LGFA total debt and the financial reporting standards require the Council to recognise a fair value of the guarantee liability. The Council is responsible for preparing Reporting Certificates to the Trustee in accordance with the requirements of the Trust Deed. We will obtain an understanding of any changes in the debt facility agreements during the year and the obligations and implications of receiving funding through the LGFA. We will review the process for managing draw-downs and give consideration to the classification of the debt between long-term and short-term. We will ensure debt position is in line with the Council s Long Term Plan and check Council s compliance with the reporting requirements and debt covenants. We have been engaged to perform a limited assurance engagement in addition to the statutory audit over the preparation of the debenture trust reporting certificate in accordance with the requirements of clause 12.2.6 of the Trust Deed. Derivatives Council maintain a portfolio of interest rate swaps to manage the exposure to interest rate fluctuations. These swaps are carried at fair value. We will confirm derivative positions in place at year-end and consider revaluing a sample of contracts for appropriateness and review disclosures associated with the debt and swap positions. 7 Audit Plan for the year ending 30 June 2018 Porirua City Council 27

6 Non-financial performance information Non-financial reporting As at December 2017, 80% of performance measures are on track, 1% requires attention and 19% are categorised as critical. Our audit opinion on the service performance report covers compliance with generally accepted accounting practice, and whether or not the service performance report fairly reflects Council s actual service performance for the period. The performance framework is currently being re-assessed as a part of the 2018/2038 LTP. This will be reflected in Council s 2018 Annual Report. During FY17, Council achieved its targets for 76 of the 101 measures. The reported measures also included the mandatory DIA Local Government non-financial performance measures. There is a risk of inadequacy of reporting systems to monitor performance with the potential of failure to adequately report the provision of core utility services to the public. We will review the Statement of Service Performance to determine whether the measures that have been reported on are in line with the 2018-2038 Long Term Plan and whether outputs have been achieved where stipulated. We will assess the completeness and adequacy of performance monitoring procedures. We will also assess the completeness and effectiveness of the performance framework utilised at an outcome level and provide feedback on the overall annual report and the summary annual report. 7 Sector Themes Local Authority Audit Themes Sector specific areas of focus Part of reporting obligations to Parliament under the Public Finance Act Areas of Focus The Office of the Auditor General each year outlines certain areas of focus to be considered during the audit process. Based on our 2017 audit and the latest audit brief, released on 20 December 2017, areas with relevance to our audit include: Asset Management Elected members remuneration and allowances Fraud risks Disclosure of severance payments Compliance with rating laws Sensitive expenditure Compliance with laws and regulations Financial Reporting and Prudence Regulations Non-financial performance measures We will perform the following procedures to address these matters: Obtain an understanding of the quality of asset management practices. Review management s policies and procedures surrounding fraud detection and prevention and remain alert to fraud indicators throughout the performance of our audit procedures, including the completion of our controls testing surrounding the expenditure and payroll process. Review policies and procedures surrounding legislative compliance, including the compliance with rating laws. We will hold discussions with management in relation to risk management in this area. Sensitive expenditure testing on a judgmental basis. Review the adequacy of disclosures in the annual report relating to severance payments and elected members remuneration and allowances. We will specifically audit each prudence benchmark and ensure there is consistency of reporting against planned measures and the financial information underlying the financial statements. 8 Audit Plan for the year ending 30 June 2018 Porirua City Council 28

8 Fraud risk that management may override controls IT control environment The primary responsibility for the prevention and detection of fraud and error rests with those charged with the governance and management of PCC. Our responsibility as the external auditor is to consider the risk of fraud and the factors that are associated with it so as to provide reasonable assurance that the financial statements and service performance information are free from material misstatement resulting from fraud. Professional standards require us to perform certain procedures designed to address the risks of fraud, including the risk of management override. IT general controls In conducting our work we intend to place reliance on a number of the IT systems across Council, based on the significant accounts supported by these systems. Evaluating IT general controls ( ITGCs ) is an integral part of our audit in assessing the controls that underpin financially significant systems and support the confidentiality, integrity and availability of information processing. Our evaluation of ITGCs focuses on two key areas: We will inform the Assurance and Risk Committee and management should we become aware of any actual or suspected instances of fraud as a result of our audit. Area Procurement Planned procedures Update our understanding of PCC s procurement policy and tendering processes. Examine a sample of tenders for compliance with PCC s policy and good practice. Area Access to programs and data Change management Description Controls are in place to determine that only authorised persons have access to data and applications (including programs, tables, and related resources) and that they can perform only specifically authorised functions Controls are in place to determine that only appropriately authorised, tested, and approved changes are made to applications, interfaces, databases, and operating systems Journal entries Significant transactions and valuation judgements Testing the operating effectiveness over journal entries and post-closing adjustments Examining manual journal entries assessed to be of high risk. Examining the accounting for significant transactions or valuations Based on our prior year testing, discussions with management and a preliminary review of your IT environment we have outlined below a summary of our expected reliance on the key IT systems that underpin your significant accounting processes: Business process Change management Logical access Fi 2018 2017 2018 2017 Finance One E.g. Financial statement close, accounts receivable, accounts payable In scope for 2018 IT general controls procedures Full reliance, controls were designed and operated effectively during the audit period 9 Audit Plan for the year ending 30 June 2018 Porirua City Council 29

Appendix A: Other required communications Matter Required Communication Reference Terms of engagement Confirmation by the Mayor of acceptance of terms of engagement Engagement letter Planning and audit approach Communication of the planned scope and timing of the audit including any limitations Audit Plan Significant audit findings Our view about the significant qualitative aspects of accounting practices including accounting policies, accounting estimates and financial statement disclosures Significant difficulties, if any, encountered during the audit Significant matters, if any, arising from the audit that were discussed with management Written representations that we are seeking Expected modifications, if any, to the audit report Other matters if any, significant to the oversight of the financial reporting process Misstatements Uncorrected misstatements and their effect on our audit opinion The effect of uncorrected misstatements related to prior periods A request that any uncorrected misstatement be corrected In writing, corrected misstatements that are significant Fraud Enquiries of the Committee to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the Council Any fraud that we have identified or information we have obtained that indicates that a fraud may exist A discussion of any other matters related to fraud Related parties Significant matters arising during the audit in connection with Council s related parties including, when applicable: Non-disclosure by management; Inappropriate authorisation and approval of transactions; Disagreement over disclosures; Non-compliance with laws and regulations; and Difficulty in identifying the party that ultimately controls Council. External communications Management s refusal for us to request confirmations Inability to obtain relevant and reliable audit evidence from other procedures Audit Closing Report Audit Closing Report To be discussed with the Committee and management No significant matters identified No matters noted Consideration of laws and regulations Audit findings regarding non-compliance where the non-compliance is material and believed to be intentional Enquiry of the Committee into possible instances of non-compliance with laws and regulations that may have a material effect on the financial statements that the Committee may be aware of To be discussed with the Committee 10 Audit Plan for the year ending 30 June 2018 Porirua City Council 30

Appendix A (Continued) Matter Required Communication Reference Independence A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence; All relationships and other matters between the firm, network firms, and Council that, in the auditor s professional judgement, may reasonably be thought to bear on independence; and During the year, we have been appointed by the Office of the Auditor-General to carry out an audit of Council s Long Term Plan. The audit fee for the LTP audit is $110k. The appointment is in compliance with the OAG s independence requirements. The related safeguards have been applied to eliminate identified threats to independence or reduce them to an acceptable level. Going concern Events or conditions identified that may cast significant doubt on Council's ability to continue as a going concern, including: Whether the events or conditions constitute a material uncertainty; Whether the use of the going concern assumption is appropriate in the preparation and presentation of the financial statements; and The adequacy of related disclosures in the financial statements. Audit Plan and Audit Closing Report Audit Closing Report Control findings Significant deficiencies in internal controls identified during the audit Audit Closing Report 11 Audit Plan for the year ending 30 June 2018 Porirua City Council 31

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