The table below details entity level issues and risks that may impact this year’s audit and how the audit team will respond to them.
Issues or risk Exposure Audit response
Asset management risk and fair value assessment of Infrastructure, Property Plant and Equipment.
The Council controls and is responsible for the maintenance and renewal of significant, complex infrastructure assets (including roads, drainage and
earthworks).
The Council needs to satisfy itself that the carrying value of Infrastructure, Property Plant and Equipment materially reflect fair value.
This creates risks associated with the proper recognition and recording of assets, and with ensuring that asset valuations remain appropriate.
Asset valuations involve complex methodology and judgement therefore the risk of misstatement increases. Indexation of assets is not a valuation technique. Indexes are an indicator that assets may not be at fair value and require a full valuation. An index is only one input into a valuation model, together with other inputs like condition
assessment and review of useful lives.
We will focus on the effectiveness and reliability of management’s process for determining and agreeing fair value of assets and the methodology used to establish fair values and useful lives for depreciation.
We will review asset management /maintenance plans to determine the impact on remaining useful lives and any indicators of impairment.
Asset valuations are inherently complex and susceptible to misstatement. Misstatements can arise from:
} providing the valuer with incorrect instructions } the valuer not complying with
accounting standards } the valuer applying
inappropriate rates to
determine the replacement cost Management will need to assess for any
material movement in fair value as at 30 June 2017 for all asset categories not subject to revaluation. We understand that no asset classes are subject to a full comprehensive revaluation during 2016-17.
Investment properties are subject to a full independent valuation every three years;
with a desktop valuation performed in other years.
No assessment of changes in fair value for assets not subject to revaluation.
For assets not subject to a comprehensive valuation, the audit team will review management’s fair value assessment in the intervening years as part of our audit procedures.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
Making a difference through audit excellence.
Issues or risk Exposure Audit response
Developer Contributions
Most councils' planning approvals for urban re-development require developers to contribute to, or provide for, public open space areas including footpaths, channelling and roads.
For councils with high population growth, such contributions represent material items of revenue.
There is a risk that developer contributions/gifted assets are not:
} recognised when the council obtains control of the contributed assets
} recorded in the correct period } recorded as revenue at the fair
value of the non-monetary contribution
We will review systems for capturing and recording developer and other contributions accurately in a timely manner.
We will perform cut-off testing directed to the identification of any material unrecorded non-cash contributions.
Capital expenditure
The total budgeted Capital expenditure for the 30 June 2017 financial period is
$114million including the following major, individually significant projects:
} Caddies Creek Reserve – District Park - $11m
} Poole Road upgrade - $10m } Road Bridge – Arnold Ave (Drainage
Land) - $6.5m
} Balmoral Road Res, Playing fields, Courts - $4.7m
Large capital works programs create heightened financial reporting risks, such as the Council:
} not correctly allocating costs between recurrent and capital } not capitalising completed
assets on a timely basis to the fixed asset register
} not adequately allocating capital costs into separate, identifiable assets in the asset register
} not removing the replaced assets from the Council’s fixed asset register.
These risks can result in significant financial reporting misstatements.
For a sample of projects, the audit team will:
} review the Council’s allocation process between recurrent and capital costs } review the Council’s
componentisation of the project costs into separate assets } examine the timeliness
of asset additions to the fixed asset register } ensure replaced assets
are removed from the asset register.
We will review the process for capitalising
work-in-progress.
We will review and test the basis for identifying and classifying capital and maintenance expenditure.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
Making a difference through audit excellence.
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Issues or risk Exposure Audit response
Procurement and contract management risk It is estimated that the Council spends over $65 million each year to procure goods and services. The Council also enters into a large variety of contracts.
If there is a lack of probity, accountability or transparency in procurement operations, this increases the risk of:
} unauthorised purchases } corruption and /or fraudulent
behaviour
} value for money will not be achieved
} non-compliance with the Local Government Act 1993 and the Local Government General Regulations.
If contracts are not managed appropriately, this increases the risk of service delivery failure,
unapproved scope variations and potential legal disputes.
We will gain an understanding of the Council’s procedures around procurement and contract management.
We will review tendering procedures to identify any probity and related party issues.
Related Parties Disclosure AASB 2015–6 ‘Amendments to Australian Accounting Standards’
extended related party disclosures to not- for-profit entities.
For 30 June 2017, financial statements onwards councils must disclose:
} key management personnel remuneration
} related party relationships } related party transactions and
outstanding balances (including commitments).
Comparative information is not required on initial adoption.
Council should:
} familiarise themselves with the new requirements
} review their current systems’ ability to identify and capture related parties } develop a Related Parties policy that
defines the parameters for capturing related party transactions, and the level of disclosure and reporting required to comply with AASB 124.
Risk of non-compliance with the new requirements of AASB 124
‘Related Parties’.
Audit will obtain an understanding of the Council’s systems and processes to capture related party transactions. We will then audit the related party disclosures to determine whether the Council has materially complied with AASB 124 Related Parties
The significance of the issues and risks may change and new developments may emerge during the audit. Your audit team will inform you of significant new matters as they arise and the likely impact on the audit.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
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A U DIT A PPR O A CH
The audit approach for the general purpose financial statements is based on our understanding of the issues, new developments and key risks that may impact the financial statements. We have performed a preliminary risk assessment of the financial statement line items taking into consideration: }complex calculations }significant judgement when applying relevant accounting principles }significant accounting estimates }complex or non-routine transactions }manual intervention in systems and processes for data collection and processing }industry or economic environments }other external circumstances and regulatory developments. The risk assessment and planned audit approach for the financial statement line items are detailed below. These may change if new issues emerge during the audit. The audit team will inform you of significant matters impacting the audit as they are identified. We welcome your feedback on this risk assessment and planned audit approach. Audit Risk Assessment High The financial statement line item requires special audit consideration as to the nature, timing or extent of testing because there is a strong likelihood of material misstatement. ModerateThe financial statement line item requires some additional audit consideration as to the nature, timing or extent of testing because there is some likelihood of material misstatement. LowThe financial statement line item requires normal audit consideration as to the nature, timing or extent of testing because there is little likelihood of material misstatement.AUDIT COMMITTEE MEETING 15 AUGUST, 2017
7 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach More controls testingMore substantive testing Income Statement Rates and Annual ChargesThe Council’s revenue from rates is based on the value of the properties and is recognised when the Council obtains control over the receipts. Control is obtained at the commencement of the rating year as it is an enforceable debt linked to the rateable property or, where earlier, upon receipt of the rates. The Council receives annual charges for providing domestic waste management services, stormwater management services and for the structures laid in public place. There is an inherent risk of error from: }failure to charge for rates }mistakes in calculating the correct rates and annual charges }failure to record proceeds from rates and annual charges through error and / or misappropriation of receipts }rates and annual charges being recorded in the incorrect accounting period. Australian Auditing Standards require the auditor to presume there is a significant risk of fraud relating to revenue recognition. However, we will rebut this presumption for rates and annual charges.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
8 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach User Charges and FeesThe Council receives user charges and fees for childcare services, renting community hall, leaseback fee on council vehicles, parking fees and sports field hire. The revenue from user charges and fees is recognised when the service has been provided, the payment is received, or when the penalty has been applied, whichever occurs first. There is an inherent risk of error from: }failure to record user charges and fees }mistakes in calculating the correct rate for user charges and fees }failure to record proceeds from fees and charges through error and / or misappropriation of receipts }revenue being recorded in the incorrect accounting period. Australian Auditing Standards require the auditor to presume there is a risk of fraud relating to revenue recognition. Consequently, a higher level of work is performed with respect to the Council’s revenue recognition policies and cut-off to ensure transactions are recognised appropriately. Interest and Investment Revenue The Council receives interest on cash at bank and investments which include short-term and long-term deposits, negotiable certificate of deposits, floating rate notes and mortgage backed securities. Interest is also charged on overdue rates and annual charges.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
9 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Interest income is accounted for using the effective interest rate at the date the interest is earned. There is an inherent risk of error from: }inaccurate calculation of interest income }interest and investment revenue being recorded in the incorrect accounting period }misappropriation of receipts. Australian Auditing Standards require the auditor to presume there is a significant risk of fraud relating to revenue recognition. However, but we will rebut this presumption for interest and investment revenue Other Revenue The Council generates other revenue from rental income from investments and council properties, parking and other fines, external work and sale of art galleries, recycling materials. Other income is recognised when the payment is due, the value of the payment is notified or the payment is received, whichever occurs first. There is an inherent risk of error from: }incorrect calculation of other revenue }misappropriation of receipts }other revenue being recorded in the wrong accounting period.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
10 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Australian Auditing Standards require the auditor to presume there is a risk of fraud relating to revenue recognition. Consequently, a higher level of work is performed with respect to the Council’s revenue recognition policies and cut-off to ensure transactions are recognised appropriately. Grants and Contributions provided for Operating Purposes
The Council receives operating purpose grant funding from the Commonwealth and NSW State Government. The grants are either for a general purpose or specific purposes which includes childcare, transport (roads and Bridges funding), cultural services, library, etc. These grants are normally recognised upon receipt of cash. There is an inherent risk of error from: }grant expenses being incurred before approval }validity of accrued expenses }grant expenses being recorded in the incorrect accounting period }grant funding conditions not being appropriately reviewed }misappropriation or misuse of funds. Australian Auditing Standards require the auditor to presume there is a risk of fraud relating to revenue recognition. Consequently, a higher level of work is performed with respect to the Council’s revenue recognition policies and cut-off to ensure transactions are recognised appropriately.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
11 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Grants and Contributions provided for Capital Purposes
The Council receives Development Contributions under Section 94 of the Environmental Planning and Assessment Act 1979 towards provision or improvement of amenities or services. These contributions are recognised as income upon physical receipt by Council. The Council also receives capital grants and contributions in the form of dedicated/gifted assets, roads and bridges. Revenue is recognised when the Council obtains control over the assets comprising the receipt. There is an inherent risk of error from: }misappropriation or misuse of funds }funding conditions not being appropriately reviewed }grant expenses being recorded in the incorrect accounting period }inappropriate use of development contributions }transfer of restricted funds to general purpose funds. Australian Auditing Standards require the auditor to presume there is a risk of fraud relating to revenue recognition. Consequently, a higher level of work is performed with respect to the Council’s revenue recognition policies and cut-off to ensure transactions are recognised appropriately.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
12 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Other IncomeCouncil’s other income comprises of the net gain on sale of fixed assets and net gain on share of interests in joint venture and associates using the equity method. Employee Benefits and On-Costs Council incurs employee related expenses for council services staff. These expenses include costs incidental to employment, such as superannuation, workers compensation insurance premiums, fringe benefits tax and training costs. There are inherent risks associated with employee expenses including: }inaccurate calculations or recording of employee expenses }failure by supervisors to approve employee timesheets which increases the risk of staff claiming, and being paid for, hours not worked }time worked that is not processed timely, could result in expenses being recorded in the incorrect period }salary overpayment errors.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
13 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Materials and ContractsMaterials and contracts costs comprise direct materials, direct labour (contractors and consultancy costs) and an appropriate proportion of variable and fixed overhead expenditure. It also includes operating lease payments, auditor remuneration and legal expenses specific to planning and development. The Audit team will focus on selected controls around the procurement and payments process, testing whether the delegation limits in Technology One match the employees approved financial delegations in the delegations manual. Our audit procedures will also include substantive testing given the financial statement line item is considered material.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
14 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Depreciation and Amortisation The Council records depreciation on its infrastructure, property, plant and equipment using the straight line method. The Council is required to re-assess the useful life of its depreciable assets on an annual basis. There is an inherent risks associated with depreciation and amortisation expenses, including: }Depreciation and amortisation rates are not appropriately applied. }Depreciation and amortisation are not properly calculated. }Invalid depreciation and amortisation charges relating to fictitious assets, or assets that have been disposed of. }Depreciation and amortisation charges not being recorded. There is a heightened risk due to the specialised nature and complexity in estimating the useful life of the Council’s assets. The Audit team will be performing substantive testing to obtain reasonable assurance over the financial statement line item.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
15 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Other Expenses The Council incurs significant expenditure to operate its business, meet its objectives and maintain its assets. These expenses include donations, contributions and assistance to other organizations, insurance, street lighting, electricity and heating and other expenses. There are inherent risks of fraud and error from: }expenses being incurred before approval }expenses being recorded in the wrong accounting period }expenses of a non-business nature being incurred }items being expensed that are capital in nature }validity of accrued expense. The Audit team will be performing substantive testing to obtain reasonable assurance over the financial statement line item.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
16 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Statement of Financial Position Cash and Cash Equivalents The Council holds cash in bank accounts and short term deposits. There is an inherent risk of error and misappropriation in cash and cash equivalents from: }uncleared reconciling items }incorrect classification of investments in cash equivalents. Independent confirmations of all cash balances will be obtained at 30 June 2017. We will review bank reconciliations at 30 June 2017. InvestmentsCouncil has invested in long term deposits, negotiable certificate of deposits, floating rate notes and mortgage backed securities. There is a risk of incorrect classification of investments between short term and/or long term. Independent confirmations of all investments will be obtained at 30 June 2017.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
17 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach ReceivablesThe Council records receivables against rates and annual charges, user charges and fees, accrued revenues and GST. There is an inherent risk of error from: }doubtful debts not being appropriately impaired }debts being recorded in the wrong accounting period. }suspense accounts not being reviewed and cleared. The Audit team will be performing substantive testing to obtain reasonable assurance over the financial statement line item.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
18 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Infrastructure, Property, Plant and Equipment
The Council’sproperty consists of land, buildings, infrastructure, and plant and equipment. It carries property at fair value less accumulated depreciation. There is an inherent risk of error from: }expenditure of a capital nature not being recorded }repairs and maintenance expenditure being incorrectly classified as property }completed assets not being transferred to the fixed asset register }planned significant property disposals not being assessed against the AASB 5 ‘Held for Sale’ criteria }financial statement disclosures not meeting the requirements of Australian Accounting Standards including fair value hierarchy }incorrect fair valuation assumptions, and management judgements }incorrect recording of valuation adjustments (increments / decrements) }uncleared reconciling items on the fixed assets reconciliation. There is a heightened risk for this financial statement line item given the size and complexity of the assets managed by the Council as well as the magnitude of the capital works program.
AUDIT COMMITTEE MEETING 15 AUGUST, 2017
19 Financial statement line item/disclosure
Potential riskAudit team’s analysisAudit approach Investment PropertyThe Council carries its investment property at fair value. A comprehensive revaluation was performed in 2016. The Council advised that no comprehensive fair valuation will be performed in the current year. PayablesThe Council records significant payables and accruals for goods and services– operating expenditure, payments received in advance and security bonds, deposits and retentions. There is an inherent risk of error from: }unrecorded liabilities }suspense accounts not being reviewed and cleared }use of old standing purchase orders }payables recorded in the wrong period }inaccurate estimation of the outstanding accrual at year end }income in advance received may not be transferred to revenue in the correct accounting period.