Audit Summary Report
March 2007
Accounts Audit
Memorandum
Hertfordshire County Council
Audit 2005/2006
External audit is an essential element in the process of accountability for public
money and makes an important contribution to the stewardship of public resources
and the corporate governance of public services.
Audit in the public sector is underpinned by three fundamental principles:
•
auditors are appointed independently from the bodies being audited;
•
the scope of auditors' work is extended to cover not only the audit of financial
statements but also value for money and the conduct of public business; and
•
auditors may report aspects of their work widely to the public and other key
stakeholders.
The duties and powers of auditors appointed by the Audit Commission are set out in
the Audit Commission Act 1998 and the Local Government Act 1999 and the
Commission's statutory Code of Audit Practice. Under the Code of Audit Practice,
appointed auditors are also required to comply with the current professional
standards issued by the independent Auditing Practices Board.
Appointed auditors act quite separately from the Commission and in meeting their
statutory responsibilities are required to exercise their professional judgement
independently of both the Commission and the audited body.
Status of our reports to the Council
The Statement of Responsibilities of Auditors and Audited Bodies issued by the
Audit Commission explains the respective responsibilities of auditors and of the
audited body. Reports prepared by appointed auditors are addressed to
non-executive members or officers. They are prepared for the sole use of the
audited body. Auditors accept no responsibility to:
•
any member or officer in their individual capacity; or
•
any third party.
Copies of this report
If you require further copies of this report, or a copy in large print, in Braille,
on tape, or in a language other than English, please call 0845 056 0566.
© Audit Commission 2006
For further information on the work of the Commission please contact:
Audit Commission, 1st Floor, Millbank Tower, Millbank, London SW1P 4HQ
Tel: 020 7828 1212 Fax: 020 7976 6187 Textphone (minicom): 020 7630 0421
www.audit-commission.gov.uk
Accounts Audit Memorandum │ Contents 3
Contents
Summary Report
4
Introduction
4
Background
4
Audit approach
4
Main conclusions
5
The way forward
8
Appendix 1 – Action Plan
9
Hertfordshire County Council
4 Accounts Audit Memorandum │ Summary Report
Summary Report
Introduction
1
Our accounts audit is carried out in accordance with the Audit Commission Act
1998 and the Code of Audit Practice. Our work is designed to give an opinion on
your financial statements as to whether:
•
the financial statements present fairly, in accordance with applicable laws and
regulations and the Statement of Recommended Practice on Local Authority
Accounting in the United Kingdom 2005, the financial position of the Authority
as at 31 March 2006 and its income and expenditure for the year then ended;
and
•
the pension fund accounts present fairly, in accordance with the Statement of
Recommended Practice on Local Authority Accounting in the United Kingdom
2005, the financial transactions of the Pension Fund during the year ended
31 March 2006, and the amount and disposition of the fund’s assets and
liabilities as at 31 March 2006, other than liabilities to pay pensions and other
benefits after the end of the scheme year.
Background
2
The audit of the financial accounts represents a significant proportion of the total
audit time. We plan our audit to provide you with an opinion on your statements of
account while assisting you to improve the quality and accuracy of your accounts.
Audit approach
3
We have carried out our audit of the 2005/06 financial statements having regard
to the newly introduced International Standards on Auditing as applied in the UK
and Ireland (ISA+).
4
As part of this approach we have carried out a full audit risk assessment in order
to target our audit work to areas of most risk. Our pre-statement work, in
accordance with ISA+ 315, required us to document how transactions flow
through the information systems from initiation to appearing in the financial
accounts for all material balances. These have been identified as:
•
General Ledger - SAP;
•
Education system - Biscuit;
•
Social Services system - JONK;
•
Highways system - HERMIS;
•
Culture, Environment and Planning system - WAMS;
•
Asset Management;
Hertfordshire County Council
Accounts Audit Memorandum │ Summary Report 5
•
Debtors;
•
Creditors;
•
Investments;
•
Payroll; and
•
Pensions administration system.
5
Our post-statement work concerned the statutory audit of the financial
statements. We also review whether the Statement on Internal Control (SIC) has
been presented in accordance with relevant requirements and report if it does not
meet these requirements or is misleading or inconsistent with our knowledge of
the Council.
6
In order to minimise the overall audit effort, we aim to rely on the work of Internal
Audit where possible. However, the respective roles of Internal and External Audit
differ, and although fulfilling the role expected, their work may not always cover
all of systems documentation of key controls that are relevant to our approach.
We continue to work with Internal Audit to ensure an integrated approach.
Main conclusions
Pre-statement Audit
7
From our documentation and initial walkthrough of the material information
systems, we identified that the design and key controls are sufficient to prevent
and detect material misstatement of the accounts.
8
Where relevant we relied on the work of Internal Audit, Where work had been
undertaken on key controls, we reviewed their findings and took account of these
in our risk based planning and detailed testing. We have not repeated Internal
Audit findings and recommendation in this report, but will follow up action taken
as part of our 2006/07 pre-statement work.
Post-statement audit
9
10
The draft statements of account were provided on 5 June 2006, significantly in
advance of the earlier deadline for the closedown of the accounts. Our poststatement visit commenced on 12 June 2006. We issued an unqualified opinion
on 30 September 2006, following the adoption of the revised accounts and
receipt of the Letter of Representation signed by the Director of Finance and the
Chairman of the Audit Committee (on behalf of those charged with governance).
The material adjustments made to the accounts were reported in our Annual
Governance Report. The majority of these arose due to the fact that the
closedown timetable necessitates the production of the draft accounts on the
basis of estimates in a number of areas. These adjustments were identified by
officers in advance of the audit process.
Hertfordshire County Council
6 Accounts Audit Memorandum │ Summary Report
11
We also reported in our Annual Governance Report, the unadjusted
misstatements in the financial statements, relating to the Council's calculation of
'Adjustment A'. We are currently working with officers to ensure that the
accounting treatment of these entries is fully reviewed, corrected figures are
provided for the 2006/07 audit and the necessary adjustments made for future
years.
Working papers
12
Although there have been improvements in the working papers provided to
support the accounts, further improvements need to be made, particularly at a
departmental level. A working paper requirement checklist was agreed with the
Council, along with a timetable for their production. However, not all working
papers were provided within the agreed timescales and in particular the lack of
analytical review information resulted in increased audit testing.
13
Analytical review is a form of reasonableness test on the accounts. Without
reasonableness tests, much more extensive audit testing of transactions is
required. Figures should be compared with what was budgeted/expected and the
corresponding figure for the previous year. Explanations are then required for any
significant variances to demonstrate that these are not due to, for example,
coding errors.
14
The working papers were put on the network in a shared file, which greatly
improved ease of access, however these were not clearly referenced to the
working paper checklist and increased audit time was spent identifying which
working paper supported which figure in the accounts.
15
These issues have already been raised in our report to those charged with
governance and the Council are working to ensure that the requirements are met
in future years. Councils are also scored on their performance in producing their
accounts and the working papers to support them. The standard referred to in the
Use of Resource's Key Line of Enquiry (KLoE) is that comprehensive working
papers supporting the accounts were provided at the start of the audit to the
standard specified by the auditor. We were unable to pass the Council on this
KLoE for the 2006 assessment.
Journals
16
As reported in our Annual Governance Report, journal transactions processed
through the general ledger (SAP) system are not subject to independent review
or authorisation and supporting documentation was found to be limited. This is a
potential control weakness which could result in unauthorised movements
between account codes or input errors. Although all material journals tested were
found to be in line with expectations, the control weakness could expose the
Council to additional risks.
17
Although not material, we did identify that infrastructure capital charges were
overstated by £30k in the accounts, due to a journal being incorrectly posted on
the ledger.
Hertfordshire County Council
Accounts Audit Memorandum │ Summary Report 7
Fixed assets
18
The asset register is only updated as part of the year-end accounts processes
and is not reconciled to the corporate database of properties and buildings held
by Hertfordshire Property. It may save time in the closedown process if the asset
register was updated and reconciled on a regular basis during the year.
19
As part of our audit of fixed assets, we review and test material additions included
within 'Assets under Construction' (AUC). However, the only listing which could
be provided included all capital expenditure for the year, rather than expenditure
purely relating to AUC. This made sample selection confusing and increased the
time taken to undertake the audit testing.
Related party transactions
20
As part of our audit of the accounts we are required to review for completeness
the information identifying material related party transactions, and to be 'alert' for
evidence of undisclosed material related party transactions (ISA+ 550). We also
obtain written confirmation of representations from management on the
completeness of related party information and the adequacy of the disclosures
(ISA+ 580).
21
Part of this disclosure relates to Members and Chief Officers, who have been
advised of the requirements and the need for disclosure. From the information
received no material transactions involving Members and Chief Officers during
the year were identified. However, only 49 per cent of declarations were received
from Members and 14 per cent of responses from Chief Officers were still
outstanding at the time of audit. In order to ensure completeness of the
disclosure, the Council need to ensure that all declarations are received.
Debtor and creditor accounts
22
We identified that debtor and creditor accounts do not agree to the ledger
balances and are manually grossed up for presentation in the accounts. This
created difficulties in verifying some debtor and creditor figures reported in the
financial statements.
23
This is due to Work Breakdown Structures (WBSs) being set up with incorrect
codes, leading to the debtors settling to creditor accounts and vice versa. As part
of the production of the financial statements a detailed review of the WBSs was
undertaken in order to report an accurate position of debtor and creditor
balances, which aided us immensely. However, this is time consuming for officers
and is inherently open to misstatement and error.
24
Our substantive audit work on the creditors account balance identified that a
figure of £804k, included within the manual creditors balance relating to the east
resettlement project, should have been classified as a long term creditor as the
money is not expected to be received within 12 months of the balance sheet date.
Hertfordshire County Council
8 Accounts Audit Memorandum │ Summary Report
Whole of Government Accounts (WGA)
25
This was the first year that the auditor was responsible for issuing a report on the
consistency of the Authority's consolidation pack with the statutory financial
statements. Receipt of the consolidation pack for audit was delayed due to
difficulties in extracting an analysis of counter-party transactions from the General
Ledger. This was further complicated by a number of revenue items being posted
to balance sheet codes. A manual exercise was undertaken to identify any
material counter party transaction included within these codes and we accepted
this as a reasonable approach. However, this analysis wasn't exhaustive and still
leaves the potential for misstatement.
Pooled Budgets
26
The Joint Commissioning Pooled Budget (JCPB) agreement, although revised
and effective from 1 March 2005 was not signed by all parties until February
2006. Also, the agreement does not contain any financial information and no
formal Service Level Agreement is in place for these arrangements. To allow
budgets to be finalised and assist the reliability of budgetary control, agreement
of contributions should be obtained before the start of the financial year and the
need for any variations discussed and agreed as they arise.
27
The Integrated Community Equipment Service (ICES) agreement was also not
signed by all partners for 2005/06. This was last signed in 2004 and although the
agreement has not changed, this should be reviewed at least annually and
contributions agreed. There have also been difficulties in reaching a resolution
with partners on the accounting treatment of an overspend on ICES
commissioned services.
Pension fund accounts
28
Only minor errors were identified with the pension fund accounts, the main
changes to the accounts were as a result of presentational changes in the
Statement of Recommended Practice (SORP).
The way forward
29
Our recommendations are detailed in the Action Plan at Appendix 1. Addressing
the issues raised will strengthen the arrangements surrounding the production
and audit of the financial statements.
Hertfordshire County Council
Accounts Audit Memorandum │ Appendix 1 – Action Plan 9
Appendix 1 – Action Plan
Page Recommendation
no.
Priority Responsibility
1 = Low
2 = Med
3 = High
Agreed
Comments
Date
3
Corporate
Accountancy Group
Yes
HCC's response setting out correcting entries was
sent to the Audit Commission on 24 January 2007.
Entries and MRP based on revised CFR and
Adjustment A have also been reflected in SAP in
January 2007.
Actioned.
Finance Managers
Yes
Specific reference has been made to working
papers in the corporate closure timetable. Working
paper templates with guidance has been made
available on the accounts closure section of
Connect. Audit Commission to attend March
Finance Manger meeting to further highlight the
working papers issue.
July 2007
No
Comments made when this issue was raised in the
Governance report stand. The process for
authorisation of the staff who can carry out the
journals and the budget monitoring process are
considered sufficient controls.
Yes
This issue will be considered as part of the
proposed implementation of the asset accounting
module of SAP. This timing of this is dependant on
the implementation of the Integrated Asset
Management System by Herts Property.
General
6
Ensure the unadjusted misstatements
outlined in the Annual Governance Report
are fully reviewed and the necessary
amendments are made for the 2006/07
accounts.
Working papers
6
Comprehensive working papers supporting 3
the accounts should be provided within
agreed timescales, be clearly identifiable
and cross referenced to the requirements
checklist, including detailed analytical
review on both gross and net costs across
all services.
Journals
6
3
Ensure the controls surrounding the input
and authorisation of journals, particularly
for material amounts, are such that there is
sufficient independent authorisation or
review and adequate documentation to
support the entry.
Fixed Assets
7
The asset register should be updated and
reconciled to the corporate database by
Hertfordshire Property on a regular basis
throughout the year.
2
SHARP team for
implementation.
Corporate
Accountancy Group
for ongoing
reconciliations.
Hertfordshire County Council
10 Accounts Audit Memorandum │ Appendix 1 – Action Plan
Page Recommendation
no.
Priority Responsibility
1 = Low
2 = Med
3 = High
Agreed
Comments
Date
7
1
Corporate
Accountancy Group
Yes
When the list was provided during the 2005/06
audit, the information about which assets were
operational had not been received from the
valuers. In 2006/07 a revised list showing the split
between AUC and operational assets will be
provided once the relevant information is received.
August
2007
2
Corporate
Accountancy Group
Yes
The Finance Director will remind Chief Officers of
the importance of this. The Assistant County
Secretary will be contacted to remind members of
the need to complete and return the form.
Ongoing
Debtors and creditor balances per the
ledger should continue to be reviewed in
detail to minimise the risk of misstatement
and ensure a clear audit trail to the figures
in the financial statements.
Training should continue to be given to
officers on setting up WBS codes.
2
SHARP team for
training
Yes
Ongoing
WBS training sessions have been given by the
SHARP team to all staff with access to set up
WBSs. Only way to correct existing problem on
settlement is to set up new a WBS and transfer the
balance from existing problem WBS. Corporate
Accountancy have agreed to amend these
manually.
Classification of creditors between long
and short term should be fully reviewed.
1
A detailed listing of additions broken down
by asset type should be provided for audit.
Related Party Transactions
7
All member and officer declarations,
including nil declarations, should be
collected and filed appropriately.
Debtor and creditor accounts
7
7
Corporate
Accountancy Group
for on-going manual
corrections
Yes
Corporate
Accountancy Group
& Finance Managers
This will be part of the 2006/07 closure information
requested from service finance staff.
July 2007
Corporate Accountancy will review materiality of
such amounts when collating WGA return.
September
2007
WGA
8
Further analysis should be undertaken to
quantify Counter-party revenue
transactions coded to the balance sheet.
Hertfordshire County Council
2
Corporate
Accountancy Group
Yes
Accounts Audit Memorandum │ Appendix 1 – Action Plan 11
Page Recommendation
no.
Priority Responsibility
1 = Low
2 = Med
3 = High
Agreed
Comments
Date
Yes
It is accepted that contributions and SLAs should
be agreed prior to the start of the financial year,
although in practice some of these are outside of
County Council control. However the
reconfiguration of Herts PCTs may assist in
agreeing their contributions in a more timely way.
Ongoing
Pooled Budgets
8
Budget contributions (income) and service 3
level agreements (expenditure) should be
agreed and confirmed in writing prior to the
start of the financial year to which they
relate. Any variations should also be
confirmed in writing as they arise.
Ralph Paddock
Hertfordshire County Council