The Audit Plan – template user guide
Contents
1. 10 11 12 13 14 19 20 21 Purpose The purpose of this report is to contribute towards the effective two way communication between auditors and the Council s Audit and Procurement Committee as those charged with governance The report covers some important areas of the auditor risk assessment where we are required to make inquiries of the Audit and Procurement Committee under auditing standards Background Under International Standards on Auditing UK and Ireland SA UK amp T auditors have specific responsibilities to communicate with the Audit and Procurement Committee ISA UK amp I emphasise the importance of two way communication between the auditor and the Audit and Procurement Committee and also specify matters that should be communicated This two way communication assists both the auditor and the Audit and Procurement Committee in understanding matters relating to the audit and developing a constructive working relationship It also enables the auditor to obtain information relevant to the audit from the Audit and Procurement Committee and supports the Audit and Procurement Committee in fulfilling its responsibilities in relation to the financial reporting process Communication As part of our risk assessment procedures we are required to obtain an understanding of management processes and the Audit and Procurement Committee s oversight of the following areas fraud e laws and regulations e going concern accounti2. Grant Thornton Informing the audit risk assessment for Coventry City Council Year ended 31 March 2014 7 April 2014 John Gregory Engagement Lead T 0121 232 5333 E john gregory uk gt com Simon Turner Audit Manager T 0121 232 5273 E simon a turner uk gt com Paul Harvey Executive T 0121 232 5329 E paul m harvey uk gt com The contents of this report relate only to the matters which have come to our attention which we believe need to be reported to you as part of our audit process It is not a comprehensive record of all the relevant matters which may be subject to change and in particular we cannot be held responsible to you for reporting all of the risks which may affect your business or any weaknesses in your internal controls This report has been prepared solely for your benefit and should not be quoted in whole or in part without our prior written consent 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 Contents Section Purpose Fraud Fraud risk assessment Laws and regulations Impact of laws and regulations Going concern Going concern considerations Estimates Estimate considerations Related parties Related party considerations 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Page
3. that the financial statements are free from material misstatement due to fraud or error taking into account the appropriate legal and regulatory framework As part of our risk assessment procedures we are required to make inquiries of management and the Audit and Procurement Committee as to whether the entity is in compliance with laws and regulations Where we become aware of information of non compliance or suspected non compliance we need to gain an understanding of the non compliance and the possible effect on the financial statements Risk assessment questions have been set out below together with responses from management 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Impact of laws and regulations Question What arrangements does the Council have in place to prevent and detect non compliance with laws and regulations How does management gain assurance that all relevant laws and regulations have been complied with How is the Audit and Procurement Committee provided with assurance that all relevant laws and regulations have been complied with Have there been any instances of non compliance or suspected non compliance with laws and regulations since 1 April 2013 or earlier with an on going impact on the 2013 14 financial statements What arrangements does the Council have in place to identify evaluate and account for litigation or claims Is there any actual or potential litigation or claims that
4. the risk areas and what mitigating actions have been taken Are there any areas where there is a potential for override of controls or inappropriate influence over the financial reporting process for example because of undue pressure to achieve financial targets Are there any areas where there is a potential for misreporting override of controls or inappropriate influence over the financial reporting process 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Management response The work of Internal Audit is primarily focused on helping the Council manage the risks it is facing including the possibility of fraudulent activity These are monitored through the reports and the follow up process In addition the Council has an auditor dedicated to corporate fraud and a Housing Benefit Fraud Team who focus on all aspects of fraud including awareness proactive exercises looking at either fraud prevention and or detection and investigations The Council has a number of policies e g Anti Fraud Theft and Corruption Strategy Anti Money Laundering Policy Confidential Reporting whistleblowing Policy Financial Regulations Codes of Conduct These outline the responsibilities and channels for raising concerns and issues and also the approach to be taken The Internal Audit Plan also includes planned work on counter fraud and it is also implicit in audit work programmes Frauds have been reported to the Executive
5. to the brand under which the Grant Thornton member firms operate and refer to one or more member firms as the context requires Grant Thornton International and the member firms are not a worldwide partnership Services are delivered independently by member firms which are not responsible for the services or activities of one another Grant Thornton International does not provide services to clients grant thornton co uk
6. would affect the financial statements Have there been any reports from other regulatory bodies such as HM Revenues and Customs which indicate non compliance 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Management response Verification of compliance with laws and regulations is implicit in many internal audit work programmes Instances of non compliance ate brought to the attention of management through the standard reporting process The Council also has an in house legal team which works with service departments in ensuring that the Council complies with laws and regulations See above Following on from the above the Audit and Procurement Committee within their quarterly reports receive summaries of Internal Audit reports where the level of assurance is either none or limited This would include where relevant issues around non compliance with law and regulations Not aware of any instances of non compliance with laws and regulations Information from legal team and year end declaration from Directors and departments on contingent liabilities which specifically refer to legal disputes No significant pending issues There have not been any reports from other regulators that indicate non compliance Going concern Issue Matters in relation to going concern ISA UK amp 1 570 covers auditor responsibilities in the audit of financial statements relating to management s use of the going conce
7. Director Resources through his direct reporting lines The details of these frauds have also been reported to the Audit and Procurement Committee in both public and private fraud reports during 2013 14 Overall the Internal Audit and Risk Manager s view is that the Council s internal control environment is generally effective in mitigating against the risk of fraud However when incidents occur action taken includes reviewing controls and where appropriate making improvements The Council s performance management framework is based around targets so there is an expectation that both financial and operational targets are met Pressure or incentives are not applied to deliver targets No the auditing and financial monitoring controls in place would flag such issues up and there are no significant examples over recent reporting periods Fraud risk assessment Question How does the Audit and Procurement Committee exercise oversight over management s processes for identifying and responding to risks of fraud What arrangements are in place to report fraud issues and risks to the Audit and Procurement Committee How does the Council communicate and encourage ethical behaviour of its staff and contractors How do you encourage staff to report their concerns about fraud Have any significant issues been reported Are you aware of any related party relationships or transactions that could give rise to risks of fraud Are you aware of
8. ability to continue as a going concern Is management awate of the existence of other events or conditions that may cast doubt on the Council s ability to continue as a going concern Are arrangements in place to report the going concern assessment to the Audit and Procurement Committee Are the financial assumptions e g future levels of income and expenditure consistent with the Council s Business Plan and the financial information provided to the Council throughout the year 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Management response Going concern is considered on an annual basis as part of the preparation of the financial statements This review considers key areas that impact on the Council s ability to continue as a going concern e g financial resilience contingent liabilities budgets and medium term financial forecasts There are no events or conditions that impact on the Council s ability to continue as a going concern The Audit and Procurement Committee receives the Statement of Accounts annually for approval and this includes a summary of the assessment Yes the budget assumptions feed through into the medium term financial forecast on a consistent basis Going concern considerations Question Are the implications of statutory or policy changes appropriately reflected in the Business Plan financial forecasts and report on going concern Have there been any significant is
9. any instances of actual suspected or alleged fraud either within the Council as a whole or within specific departments since 1 April 2013 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Management response The Audit amp Procurement Committee receives reports on a six monthly basis covering the work of both the Corporate Fraud and Benefit Fraud Teams in respect of fraud activity Whilst the nature of the work of the two services varies it covers similar activities such as fraud awareness proactive exercises including data matching exercises and investigations Additionally the Committee receives private reports on significant frauds that have occurred during the year A key element in the Council s corporate fraud work is raising awareness in respect of what is acceptable behaviour as well as encouraging officers to report concerns to relevant managers Internal Audit Whilst it is acknowledged that this continues to be an area for development relevant guidance has been produced and communicated including A Manager s Guide to Fraud Awareness aimed at assisting Council managers in both identifying and responding to fraud in their area e An Employees Guide to Fraud Awareness which provides a reference guide for employees to quickly obtain information relating to fraud when it is relevant e A summary of the key elements of the Code of Conduct for Employees focusing on reinforcing the standards and beha
10. are also Income amp Expenditure Statement reviewed by corporate in the year that the Council finance for becomes aware of the obligation reasonableness and are measured at the best estimate at the balance sheet date of the expenditure required to settle the obligation taking into account relevant risks and uncertainties 2014 Grant Thornton UK LLP Informing the risk assessment April 14 A A hange in Underlying assumptions S accounting Assessment of degree of uncertainty memhodin Consideration of alternative estimates year Consistent proportion used across aged debt as per No the Code Estimated settlements are reviewed at the end of No each financial year where it becomes less than probable that a transfer of economic benefits will now be required or a lower settlement than anticipated is made the provision is reversed and credited back to the relevant service Where some or all of the payment required to settle a provision is expected to be recovered from another party e g from an insurance claim this is only recognised as income for the relevant service if it is virtually certain that reimbursement will be received by the Council Estimate considerations Estimate Accruals Investments in companies valuations Controls used to Use of an Method identify estimates expert Finance team collate accruals of Review of the No expenditure and income Activity procurement system is accou
11. des considering the arrangements management has put in place with regard to fraud risks including e assessment that the financial statements could be materially misstated due to fraud process for identifying and responding to risks of fraud including any identified specific risks communication with the Audit and Procurement Committee regarding its processes for identifying and responding to risks of fraud communication to employees regarding business practices and ethical behaviour We need to understand how the Audit and Procurement Committee oversees the above processes We are also required to make inquiries of both management and the Audit and Procurement Committee as to their knowledge of any actual suspected or alleged fraud These areas have been set out in the fraud risk assessment questions below together with responses from the Council s management 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Fraud risk assessment Question Has the Council assessed the risk of material misstatement in the financial statements due to fraud What are the results of this process What processes does the Council have in place to identify and respond to risks of fraud Have any specific fraud risks or areas with a high risk of fraud been identified and what has been done to mitigate these risks Are internal controls including segregation of duties in place and operating effectively If not where are
12. he following as related parties to local government bodies entities that directly or indirectly through one or more intermediaries control or are controlled by the Council i e subsidiaries associates joint ventures in which the Council is a venturer an entity that has an interest in the Council that gives it significant influence over the Council key officers and close members of the family of key officers post employment benefit plan pension fund for the benefit of employees of the Council or of any entity that is a related party of the Council The Code notes that in considering materiality regard should be had to the definition of materiality which requires materiality to be judged from the viewpoint of both the Council and the related party ISA UK amp I 550 requires us to review your procedures for identifying related party transactions and obtain an understanding of the controls that you have established to identify such transactions We will also carry out testing to ensure the related party transaction disclosures you make in the financial statements are complete and accurate 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Related party considerations Question Who are the Council s related parties What are the controls in place to identify account for and disclose related party transactions and relationships 2014 Grant Thornton UK LLP Informing the risk assessment Apri
13. ility the liability is the lower of and payments over the de guidance to accounted for using the policies applied generally the fair value of the asset or minimus level to ensure the supportlease to such assets subject to depreciation being present value of the lease is categorised correctly classifications charged over the lease term if this is shorter than 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Estimate considerations Non adjusting S151 Officer makes the Managers notify the 151 This would be This would be considered on individual N A events events assessment If the event is Officer considered on circumstances after the BS date indicative of conditions that individual arose after the balance sheet date circumstances then this is an unadjusting event For these events only a note to the accounts is included identifying the nature of the event and where possible estimates of the financial effect Allocation of The finance team apportion All support service No Apportionment bases are reviewed each year to No overhead costs central support costs to services cost centres are allocated ensure that they remain appropriate and equitable using specified bases as detailed according to the agreed in supporting analysis principles Pension liability The Council is an admitted body Payroll data is provided to Consulting As disclosed in the actuary s report Complex No to the West Midla
14. l 14 Management response This will be determined as part of the preparation of the financial statements A number of arrangements are in place for identifying the nature of a related party and reported value including m maintenance of a register of interests for members a register for pecuniary interests in contracts for officers and senior managers requiring disclosure of related party transactions E annual return from senior managers officers requiring confirmation that they have read and understood the declaration requirements and stating details of any known related party interests m review of in year income and expenditure transactions with known identified related parties from prior year or known history m review of related information with subsidiaries companies and joint ventures e g accounts m review of the accounts payable and receivable systems and identification of amounts paid to from assisted or voluntary organisation m review of year end debtor and creditor positions in relation to the related parties identified m review of minutes of decision making meetings to identify any member declarations and therefore related parties GrantThornton 2014 Grant Thornton UK LLP All rights reserved Grant Thornton means Grant Thornton UK LLP a limited liability partnership Grant Thornton is a member firm of Grant Thornton International Ltd Grant Thornton International References to Grant Thornton are
15. management identifies the transactions events and conditions that give rise to the need for an accounting estimate e how management actually make the estimates including the control procedures in place to minimise the risk of misstatement We need to be aware of all estimates that the Council use as part of their accounts preparation These are set out overleaf 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Estimate considerations Property plant amp Depreciation is provided for Consistent application of Use of RICS The length of the life is determined at the point of No equipment all fixed assets with a finite depreciation method across all valuer for acquisition or revaluation depreciation useful life on a straight line assets buildings Major components are depreciated separately basis Other assets in line with the Council s accounting policies Estimated The following asset Specific asset lives applied to Use RICS valuer The method makes some generalisations For No remaining useful categories have general asset buildings for buildings example building lives would vary depending on lives of PPE lives the construction materials used This life would be Buildings range Consistent asset lives applied Other assets recorded in accordance with RICS valuation Equipment vehicles to each asset category considered by e Plant the Corporate Detailed information is included in the value
16. mingham Airport valuation based on business plan and forecasted income expenditure Estimate considerations Estimate Group company asset valuations Long term obligations under PFI schemes Method Use of Controls used to an identify estimates expert PPE assets of group companies2010 11 valuations reviewed Yes are te valued to fair value to comply with IFRS Valuations have been undertaken by management s experts in 2010 11 and will be revisited in 2013 14 for Coventry amp Solihull Waste Disposal Company These are reviewed to ensure that there are no impairments that affect the valuations The Council controls the setvices and residual interest in its PFI contracts and therefore has assessed these arrangements under IFRIC 12 Service Concessions recognising the assets used to deliver the services on the Council s balance sheet along with a corresponding liability 2014 Grant Thornton UK LLP Informing the risk assessment April 14 by corporate finance team to ensure that they are still applicable Use of management expert for Coventry amp Solihull Waste Disposal Company The Council s IFRIC 12 working model is used to calculate the relevant IFRIC 12 accounting entries It is a model developed by Grant Thornton and figures have been input by the Council s Special Projects Finance department The accounts have been prepared by the Council s Corporate Finance departmen
17. nds the actuary actuary judgements including the discount rate used rate at Authorities Pension Fund The Management reconcile which salaries are projected to increase changes in administering authority this estimate of retirement ages mortality rates and expected Wolverhampton City Council contributions to the returns on pension fund assets engage the actuary who provides actuals paid out in the the estimate of the pension year liability 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Estimate considerations Estimate Bad debt provision Provisions for liabilities Controls used to Use of an Method identify estimates expert A provision is estimated based on Budget holders review No the likelihood of the debts being bad debt provisions collected by the departmental before the departmental finance teams return is submitted to corporate finance Provisions are made where an Equal pay provisionis No event has taken place that gives reviewed by senior the Council a legal or constructive officers for obligation that probably requires reasonableness settlement by a transfer of economic benefits or service Provisions from potential and a reliable estimate departments are can be made of the amount of the reviewed by budget obligation Provisions are charged holdets prior to as an expense to the appropriate submission to corporate service line in the Consolidated finance They
18. ng estimates e related party transactions This report includes a series of questions on each of these areas and the response we have received from the Council s management The Audit and Procurement Committee should consider whether these responses are consistent with its understanding and whether there are any further comments it wishes to make 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Fraud Issue Matters in relation to fraud ISA UK amp 240 covers auditors responsibilities relating to fraud in an audit of financial statements The primary responsibility to prevent and detect fraud rests with both the Audit and Procurement Committee and management Management with the oversight of the Audit and Procurement Committee needs to ensure a strong emphasis on fraud prevention and deterrence and encourage a culture of honest and ethical behaviour As part of its oversight the Audit and Procurement Committee should consider the potential for override of controls and inappropriate influence over the financial reporting process As auditor we are responsible for obtaining reasonable assurance that the financial statements are free from material misstatement due to fraud or error We are required to maintain professional scepticism throughout the audit considering the potential for management override of controls As part of our audit risk assessment procedures we are required to consider risks of fraud This inclu
19. nted for in the financial where goods have been year that it takes place not when received but not paid for money is paid or received Requests of departmental finance teams to identify any other goods or services received or provided but not paid for Estimates are made based on Valuations are prepared Birmingham the use of accepted valuation by corporate finance Airport and models These are prepared by excluding Birmingham Coventry amp the Council based on the Airport and Coventry Solihull Waste audited financial statements of amp Solihull Waste Disposal the companies Disposal Company Company These are subject to investment is Birmingham Airport and review by another reviewed by Coventry amp Solihull Waste member of corporate BDO Disposal Company valuations to finance be prepared by Solihull MBC Birmingham Airport and reviewed by an expert and Coventry amp Solihull Waste Disposal Company valuations will be based on the external valuation 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Change in accounting Assessment of degree of uncertainty method in Underlying assumptions Consideration of alternative estimates year Accruals for income and expenditure often based No on known values Whete accruals are estimated the latest available information is used In house valuations place weightings on the share No percentage and potential resale value of the shares Bir
20. r s e Infrastructure Capital Team report for each asset The asset live is then recorded in the asset register 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Estimate considerations minimum lease payments Payments are split between the finance charge and the element that reduces the liability as a finance lease or an operating lease Calculations supported by lease documents the asset s estimated useful life where ownership of the asset does not transfer to the Council at the end of the lease period Impairments Assets are assessed at the Assets are assessed External RICS Valuations are made in line with RICS guidance No year end for any indication at each year end as to whether valuer reliance on expert that an asset may be there is any indication that an impaired Where indications asset may be impaired Other assets exist and any possible considered by differences are estimated to This assessment is made by Corporate be material the recoverable the valuer for land and Capital Team amount of the asset is buildings and corporate capital estimated and where this is team and other relevant less than the carrying officers for the asset type for amount of the asset an other assets impairment loss is recognised for the shortfall Finance lease At the inception of the lease Finance review contracts May obtain Assets recognised under finance leases are No liab
21. rn assumption in the financial statements The going concern assumption is a fundamental principle in the preparation of financial statements Under this assumption entities are viewed as continuing in business for the foreseeable future Assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business The code of practice on local authority accounting requires a Council s financial statements to be prepared on a going concern basis Although the Council is not subject to the same future trading uncertainties as private sector entities consideration of the key features of the going concern provides an indication of the Council s financial resilience As auditor we are responsible for considering the appropriateness of use of the going concern assumption in preparing the financial statements and to consider whether there are material uncertainties about the Council s ability to continue as a going concern that need to be disclosed in the financial statements We discuss the going concern assumption with management and review the Council s financial and operating performance Going concern considerations have been set out below and management has provided its response 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Going concern considerations Question Does the Council have procedures in place to assess the Council s
22. sues raised with the Audit and Procurement Committee during the year which could cast doubts on the assumptions made Examples include adverse comments raised by internal and external audit regarding financial performance or significant weaknesses in systems of financial control Does a review of available financial information identify any adverse financial indicators including negative cash flow If so what action is being taken to improve financial performance Does the Council have sufficient staff in post with the appropriate skills and experience particularly at senior manager level to ensure the delivery of the Council s objectives If not what action is being taken to obtain those skills 2014 Grant Thornton UK LLP Informing the risk assessment April 14 Management response Yes the main changes currently relate to Welfare Reform and the local retention of Business Rates and both areas have been assessed and whilst they create challenges they do not affect the future viability of the Council No significant issues raised No the quarterly monitoring reports continue to indicate an outturn within budget Yes Estimates Issue Matters in relation to accounting estimates ISA UK amp I 540 covers auditor responsibilities relating to estimates in an audit of financial statements Local authorities use estimates in the preparation of their financial statements We need to obtain an understanding of e how
23. t None Underlying assumptions Change n accounting Assessment of degree of uncertainty method in Consideration of alternative estimates year Assumptions on whether market circumstances have No changed since the formal valuations in 2010 11 The initial recognition of the asset liability is based on No costs within the operator s financial model and the embedded finance lease repayments are estimated by deducting service and lifecycle costs from the Unitary Charge There is also a future obligation s disclosure requirement for IFRIC 12 arrangements in which the unitary charge is divided between service and lifecycle costs and lease capital and interest elements The finance lease aspect is based on the model described above and the unitary charge service charge and lifecycle costs are based on assumptions about the future inflation rates Related parties Issue Matters in relation to related parties ISA UK amp I 550 covers auditor responsibilities relating to related party transactions Many related party transactions are in the normal course of business and may not carry a higher risk of material misstatement However in some circumstances the nature of the relationships and transaction may give rise to higher risks For local government bodies the Code of Practice on Local Authority Accounting in the United Kingdom the Code requires compliance with IAS 24 related party disclosures The Code identifies t
24. viours expected of Council employees e A e learning tool has also been developed to support fraud awareness and is included in the Council s e learning system The Council has a Whistleblowing Policy which is widely communicated and clarifies what type of concerns should be reported No significant issues have been reported during 2013 14 No Mitigation takes place through controls that exist within the Council s payment process e g segregation of duties Also senior officers are required to make a declaration of interest around any potential conflicts which they may come into contact with as part of their job Management action is then required to mitigate against the conflict arising Yes frauds have been reported to the Executive Director Resources through his direct reporting lines The details of these frauds have also been reported to the Audit and Procurement Committee in both public and private fraud reports during 2013 14 Laws and regulations Issue Matters in relation to laws and regulations ISA UK amp 1 250 requires us to consider the impact of laws and regulations in an audit of the financial statements Management with the oversight of the Audit and Procurement Committee is responsible for ensuring that the Council s operations are conducted in accordance with laws and regulations including those that determine amounts in the financial statements As auditor we are responsible for obtaining reasonable assurance
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